IonQ, Inc. 10-Q

Item 2. Management’s Discussion and Analysis of Financial Condition and Results of Operations This Quarterly Report on Form 10-Q contains statements that may constitute “forward-looking statements” within the meaning of Section 27A of the Securities Act of 1933, as amended (the “Securities Act”), and Section 21E of the Securities Exchange Act of 1934, as amended (the “Exchange Act”), that involve substantial risks and uncertainties. All statements contained in this Quarterly Report other than statements of historical fact, including statements regarding our future results of operations and financial position, our business strategy and plans, and our objectives for future operations, are forward-looking statements. The words “believes,” “expects,” “intends,” “estimates,” “projects,” “anticipates,” “will,” “plan,” “may,” “should,” or similar language are intended to identify forward-looking statements. It is routine for our internal projections and expectations to change throughout the year, and any forward-looking statements based upon these projections or expectations may change prior to the end of the next quarter or year. Readers of this Quarterly Report are cautioned not to place undue reliance on any such forward-looking statements. As a result of a number of known and unknown risks and uncertainties, our actual results or performance may be materially different from those expressed or implied by these forward-looking statements. Risks and uncertainties are identified under “Risk Factors” in Item 1A herein and in our other filings with the Securities and exchange Commission (the “SEC”). The impact of COVID-19 may also exacerbate these risks, any of which could have a material effect on us. All forward-looking statements included herein are made only as of the date hereof. Unless otherwise required by law, we do not undertake, and specifically disclaim, any obligation to update any forward-looking statement, whether as a result of new information, future events, or otherwise after the date of such statement. You should read the following discussion and analysis of our financial condition and results of operations together with our unaudited condensed consolidated financial statements and related notes included elsewhere in this Form 10-Q, and our audited consolidated financial statements and related notes for the year ended December 31, 2020 included in our final proxy statement/prospectus filed with the SEC on August 12, 2021. Unless the context otherwise requires, the terms “IonQ,” “Legacy IonQ” “we,” “us,” “our” and similar terms refer to IonQ Quantum, Inc. prior to the consummation of the Business Combination and IonQ, Inc. and its wholly owned subsidiary, IonQ Quantum, Inc., after the consummation of the Business Combination. References to “dMY” refer to the predecessor company prior to the consummation of the Business Combination. Overview We are developing quantum computers designed to solve the world’s most complex problems, and transform business, society, and the planet for the better. We believe that our proprietary technology, our architecture, and the technology exclusively available to us through license agreements will offer us advantages both in terms of research and development, as well as the commercial value of our intended product offerings. We sell access to a quantum computer with 11 qubits, and we are in the process of researching and developing technologies for quantum computers with increasing computational capabilities. We currently make access to our quantum computers available via three major cloud platforms, Amazon Web Services’ (AWS) Amazon Bracket, Microsoft’s Azure Quantum, and Google’s Cloud Marketplace, and to select customers via our own cloud service. We are still in the early stages of generating revenue with our 11-qubit quantum computer. We have incurred significant operating losses since our inception. Our net losses were $32.1 million for the nine months ended September 30, 2021, and we expect to continue to incur significant losses for the foreseeable future. As of September 30, 2021, we had an accumulated deficit of $71.7 million. We expect to continue to incur losses for the foreseeable future as we prioritize reaching the technical milestones necessary to achieve increasingly higher number of stable qubits and higher levels of fidelity than that which presently exists—prerequisites for quantum computing to reach broad quantum advantage. The Merger Agreement and Public Company Costs On March 7, 2021, Legacy IonQ, dMY and Ion Trap Acquisition Inc. (the “Merger Sub”) entered into an Agreement and Plan of Merger (the “Merger Agreement”). Pursuant to the Merger Agreement, at the closing, the Merger Sub was merged with and into Legacy IonQ, with Legacy IonQ continuing as the surviving corporation following the merger, being a wholly owned subsidiary of dMY and the separate corporate existence of the Merger Sub ceased. Commensurate with the Business Combination, dMY changed its name to IonQ, Inc. and Legacy IonQ changed its name to IonQ Quantum, Inc. IonQ became the successor registrant with the SEC, meaning that Legacy IonQ’s financial statements for previous periods will be disclosed in the registrant’s future periodic reports filed with the SEC. 22 Table of Contents While the legal acquirer in the Merger Agreement is dMY, for financial accounting and reporting purposes under accounting principles generally accepted in the United States of America (“U.S. GAAP”), Legacy IonQ is the accounting acquirer and the merger is accounted for as a “reverse recapitalization” (i.e., a capital transaction involving the issuance of stock by dMY for the stock of Legacy IonQ). A reverse recapitalization does not result in a new basis of accounting, and the financial statements of the Company represent the continuation of the financial statements of Legacy IonQ in many respects. Under this method of accounting, dMY is treated as the “acquired” company for financial reporting purposes. Upon the closing of the merger and the concurrent private placement of 34,500,000 shares of common stock (the “PIPE”), the most significant change in our financial position and results of operations was an increase in cash (as compared to our balance sheet as of June 30, 2021) of approximately $560 million, which included $345 million in gross proceeds from the PIPE. As a result of the merger, Legacy IonQ is the successor to an SEC registrant and is listed on the NYSE, which will require IonQ to hire additional personnel and implement procedures and processes to address public company regulatory requirements and customary practices. We expect to incur additional annual expenses as a public company for, among other things, directors’ and officers’ liability insurance, director fees and additional internal and external accounting, legal and administrative resources, including increased audit and legal fees. Third Quarter Business Highlights • Industry benchmarking by the Quantum Economic Development Consortium, a third-party industry group, demonstrated the superior power of IonQ hardware compared to key competitors. • First team globally to show fault-tolerant error correction in practice in a peer-reviewed paper published in Nature , alongside researchers from Duke University, the University of Maryland and the Georgia Institute of Technology. • Debuted the industry’s first Reconfigurable Multicore Quantum Architecture, creating a path to scale quantum computers with potentially hundreds of qubits on one chip. • A partnership with The University of Maryland to create the National Quantum Lab at Maryland (Q-Lab), the nation’s first user facility that enables hands-on access to a commercial-grade quantum computer. • Announced partnerships and collaborations with leading organizations such as Accenture, Goldman Sachs, Fidelity Center for Applied Research and GE Research. • Continued our hiring of world-class talent with key positions filled by Tom Jones as Chief People Officer (Blue Origin, Microsoft, Honeywell), Ariel Braunstein as Senior Vice President of Product Management (Google, Lytro, Cisco), and Dean Kassmann as Vice President of Research and Development (Blue Origin, Amazon). Impact of COVID-19 on Our Business In March 2020, the COVID-19 outbreak was declared a pandemic by the World Health Organization. There are many uncertainties regarding the ongoing pandemic, and we are closely monitoring its impact on all aspects of our business, including how it impacts our employees, suppliers, vendors, and business partners. The pandemic has resulted in government authorities implementing numerous measures to try to contain the virus, such as travel bans and restrictions, quarantines, stay-at-home or shelter-in-place orders, and business shutdowns. These measures may adversely impact our employees and operations and the operations of suppliers and business partners. In addition, various aspects of our business cannot be conducted remotely. These measures by government authorities may continue to remain in place for a significant period of time and could adversely affect our development plans, sales and marketing activities, and business operations. The evolution of the virus is unpredictable at this point and any resurgence may slow down our ability to develop our quantum computing program. The ongoing COVID-19 pandemic could limit the ability of suppliers and business partners to perform, including third-party suppliers’ ability to provide components and materials. We may also experience an increase in the cost of raw materials. The full impact of the COVID-19 pandemic continues to evolve. As such, the full magnitude of the pandemic’s effect on our financial condition, liquidity and future results of operations is uncertain. Management continues to actively monitor our financial condition, liquidity, operations, suppliers, industry, and workforce. Key Components of Results of Operations Revenue We have generated limited revenues since our inception. We derive revenue from providing access to QCaaS and professional services related to co-developing algorithms on our quantum computing systems. In arrangements with the cloud service providers, the cloud service provider is considered the customer and we do not have any contractual relationships with the cloud service providers’ end users. We have determined that our QCaaS contracts represent a combined, stand-ready performance obligation to provide access to our quantum computing systems and revenue is recognized based on our customers’ usage. For contracts with a fixed transaction price to provide stand-ready QCaaS access, the fixed fee is recognized as QCaaS subscription-based revenues on a straight-line basis over the access period. 23 Table of Contents Operating Costs and Expenses Cost of revenue Cost of revenue primarily consists of expenses related to delivering our services, including personnel-related expenses, allocated facility and other costs for customer facing functions, and costs associated with maintaining the cloud on which the QCaaS resides beginning in the period that QCaaS revenue generating activities began. Personnel-related expenses include salaries, benefits, and stock-based compensation. Cost of revenue excludes depreciation and amortization related to our quantum computing systems and related software. Research and development Research and development expenses consist of personnel-related expenses, including salaries, benefits and stock-based compensation, and allocated facility and other costs for IonQ’s research and development functions. Unlike a standard computer, design and development efforts continue throughout the useful life of our quantum computing systems to ensure proper calibration and optimal functionality. Research and development expenses also include purchased hardware and software costs related to quantum computing systems constructed for research purposes that are not probable of providing future economic benefit and have no alternate future use as well as costs associated with third-party research and development arrangements. Sales and marketing Sales and marketing expenses consist of personnel-related expenses, including salaries, benefits and stock-based compensation, costs for direct advertising, marketing and promotional expenditures and allocated facility and other costs for our sales and marketing functions. We expect to continue to make the necessary sales and marketing investments to enable us to increase our market penetration and expand our customer base. General and administrative General and administrative expenses consist of personnel-related expenses, including salaries, benefits and stock-based compensation, and allocated facility and other costs for our corporate, executive, finance, and other administrative functions. General and administrative expenses also include expenses for outside professional services, including legal, auditing and accounting services, recruitment expenses, travel expenses and certain non-income taxes, insurance, and other administrative expenses. We expect our general and administrative expenses to increase for the foreseeable future as we scale headcount with the growth of our business, and as a result of operating as a public company, including compliance with the rules and regulations of the SEC, legal, audit, additional insurance expenses, investor relations activities, and other administrative and professional services. As a result, we expect that our general and administrative expenses will increase in absolute dollars but may fluctuate as a percentage of total revenue over time. Depreciation and Amortization Depreciation and amortization expense results from depreciation and amortization of our property and equipment and intangible assets that is recognized over their estimated lives. Offering costs associated with warrants Offering costs associated with warrants consist of transaction costs that have been allocated to the public and private warrants and were expensed upon consummation of the Business Combination on September 30, 2021 based on the relative fair value of the equity issued and the liability-classified warrants. Other income Other income consists of income earned on our money market funds included in cash and cash equivalents. 24 Table of Contents Results of Operations The following table sets forth our statements of operations data for each of the periods indicated: Three Months Ended September 30, Nine Months Ended September 30, 2021 2020 2021 2020 (in thousands) Revenue $ 233 $ — $ 451 $ — Costs and expenses: Cost of revenue (excluding depreciation and amortization) (1) 234 57 742 57 Research and development (1) 6,180 2,339 15,311 7,643 Sales and marketing (1) 1,286 81 2,384 263 General and administrative (1) 2,461 727 8,321 1,840 Depreciation and amortization 596 372 1,543 995 Total operating costs and expenses 10,757 3,576 28,301 10,798 Loss from operations (10,524 ) (3,576 ) (27,850 ) (10,798 ) Offering costs associated with warrants (4,259 ) — (4,259 ) — Other income 2 11 7 305 Loss before benefit for income taxes (14,781 ) (3,565 ) (32,102 ) (10,493 ) Benefit for income taxes — — — — Net loss $ (14,781 ) $ (3,565 ) $ (32,102 ) $ (10,493 ) (1) Cost of revenue, research and development, sales and marketing, and general and administrative expenses for the periods include stock-based compensation expense as follows: Three Months Ended September 30, Nine Months Ended September 30, 2021 2020 2021 2020 (in thousands) Cost of revenue $ 15 $ — $ 46 $ — Research and development 1,181 76 2,351 349 Sales and marketing 22 — 47 — General and administrative 837 105 3,485 332 25 Table of Contents Comparison of the Three Months Ended September 30, 2021 and 2020 Revenue Three Months Ended September 30, $ Change % Change 2021 2020 (in thousands) Revenue $ 233 $ — $ 233 100 % Revenue increased by $0.2 million, or 100%, to $0.2 million for the three months ended September 30, 2021 from zero for the three months ended September 30, 2020. The increase was primarily driven by three new revenue contracts under which we provided services during the three months ended September 30, 2021. Cost of revenue Three Months Ended September 30, $ Change % Change 2021 2020 (in thousands) Cost of revenue (excluding depreciation and amortization) $ 234 $ 57 $ 177 311 % Cost of revenue increased by $0.2 million, or 311%, to $0.2 million for the three months ended September 30, 2021 from $0.1 million for the three months ended September 30, 2020. The increase was driven by the increase in costs to service active contracts for the three months ended September 30, 2021. Research and development Three Months Ended September 30, $ Change % Change 2021 2020 (in thousands) Research and development $ 6,180 $ 2,339 $ 3,841 164 % Research and development expenses increased by $3.8 million, or 164%, to $6.2 million for the three months ended September 30, 2021 from $2.3 million for the three months ended September 30, 2020. The increase was primarily driven by a $2.1 million increase in payroll-related expenses, including stock-based compensation of $1.1 million, as a result of increased headcount, $0.5 million increase in materials, supplies and equipment costs, $0.3 million increase in amortization of the Duke and UMD arrangements, and $0.7 million increase in miscellaneous other research and development expenses. Sales and marketing Three Months Ended September 30, $ Change % Change 2021 2020 (in thousands) Sales and marketing $ 1,286 $ 81 $ 1,205 1488 % Sales and marketing expenses increased by $1.2 million, or 1488%, to $1.3 million for the three months ended September 30, 2021 from $0.1 million for the three months ended September 30, 2020. The increase was primarily due to increased costs to promote our cloud service offerings and other marketing initiatives of approximately $0.7 million and an increase of $0.4 million of payroll-related expenses as a result of increased headcount. 26 Table of Contents General and administrative Three Months Ended September 30, $ Change % Change 2021 2020 (in thousands) General and administrative $ 2,461 $ 727 $ 1,734 239 % General and administrative expenses increased by $1.7 million, or 239%, to $2.5 million for the three months ended September 30, 2021 from $0.7 million for the three months ended September 30, 2020. The increase was primarily driven by an increase of $1.4 million in payroll-related expenses, including an increase in stock-based compensation of $0.7 million, due to increased headcount to support the growth of our business, and an increase of $0.2 million in legal fees. Depreciation and amortization Three Months Ended September 30, $ Change % Change 2021 2020 (in thousands) Depreciation and amortization $ 596 $ 372 $ 224 60 % Depreciation and amortization expenses increased by $0.2 million, or 60%, to $0.6 million for the three months ended September 30, 2021 from $0.4 million for the three months ended September 30, 2020. The increase was primarily driven by an increase of $0.1 million due to amortization of capitalized internally developed software and an increase of $0.1 million in depreciation expense associated with capitalized quantum computing system costs. Offering costs associated with warrants Three Months Ended September 30, $ Change % Change 2021 2020 (in thousands) Offering costs associated with warrants $ 4,259 $ — $ 4,259 100 % In connection with the Business Combination, $4.3 million of transaction costs were allocated and expensed related to the liability-classified public and private warrants. 27 Table of Contents Other income Three Months Ended September 30, $ Change % Change 2021 2020 (in thousands) Other income $ 2 $ 11 $ (9 ) (82 )% Other income was consistent for the three months ended September 30, 2021, compared to the three months ended September 30, 2020. Comparison of the Nine Months Ended September 30, 2021 and 2020 Revenue Nine Months Ended September 30, $ Change % Change 2021 2020 (in thousands) Revenue $ 451 $ — $ 451 100 % Revenue increased by $0.5 million, or 100%, to $0.5 million for the nine months ended September 30, 2021 from zero for the nine months ended September 30, 2020. The increase was primarily driven by four new revenue contracts under which we provided services during the nine months ended September 30, 2021. Cost of revenue Nine Months Ended September 30, $ Change % Change 2021 2020 (in thousands) Cost of revenue (excluding depreciation and amortization) $ 742 $ 57 $ 685 1202 % Cost of revenue increased by $0.7 million, or 1202%, to $0.7 million for the nine months ended September 30, 2021 from $0.1 million for the nine months ended September 30, 2020. The increase was driven by the increase in costs to service active contracts for the nine months ended September 30, 2021. Research and development Nine Months Ended September 30, $ Change % Change 2021 2020 (in thousands) Research and development $ 15,311 $ 7,643 $ 7,668 100 % Research and development expense increased by $7.7 million, or 100%, to $15.3 million for the nine months ended September 30, 2021 from $7.6 million for the nine months ended September 30, 2020. The increase was primarily driven by a $3.8 million increase in payroll-related expenses, including stock-based compensation of $2.0 million, as a result of increased headcount, $1.2 million increase due to amortization of the Duke and UMD arrangements, $0.5 million increase in materials, supplies and equipment costs, and $1.5 million increase in miscellaneous other research and development expenses. 28 Table of Contents Sales and marketing Nine Months Ended September 30, $ Change % Change 2021 2020 (in thousands) Sales and marketing $ 2,384 $ 263 $ 2,121 806 % Sales and marketing expense increased by $2.1 million, or 806%, to $2.4 million for the nine months ended September 30, 2021 from $0.3 million for the nine months ended September 30, 2020. The increase was primarily due to increased costs to promote our cloud service offerings and other marketing initiatives of approximately $1.1 million and an increase of $0.6 million of payroll-related expenses as a result of increased headcount. General and administrative Nine Months Ended September 30, $ Change % Change 2021 2020 (in thousands) General and administrative $ 8,321 $ 1,840 $ 6,481 352 % General and administrative expenses increased by $6.5 million, or 352%, to $8.3 million for the nine months ended September 30, 2021 from $1.8 million for the nine months ended September 30, 2020. The increase was primarily driven by an increase of $4.7 million in payroll-related expenses including an increase in stock-based compensation of $3.2 million, due to increased headcount to support the growth of our business, an increase of $0.9 million in auditing and accounting fees, an increase of $0.8 million in legal fees, and an increase of $0.6 million in rent and utilities costs due to expansion of headquarters office space in the fourth quarter of 2020. These increases are offset by decreases in other general and administrative miscellaneous expenses. Depreciation and amortization Nine Months Ended September 30, $ Change % Change 2021 2020 (in thousands) Depreciation and amortization $ 1,543 $ 995 $ 548 55 % Depreciation and amortization expenses increased by $0.5 million, or 55%, to $1.5 million for the nine months ended September 30, 2021 from $1.0 million for the nine months ended September 30, 2020. The increase was primarily driven by an increase of $0.3 million due to amortization of capitalized internally developed software and an increase of $0.1 million in depreciation expense associated with capitalized quantum computing system costs. Offering costs associated with warrants Nine Months Ended September 30, $ Change % Change 2021 2020 (in thousands) Offering costs associated with warrants $ 4,259 $ — $ 4,259 100 % In connection with the Business Combination, $4.3 million of transaction costs were allocated and expensed related to the liability-classified public and private warrants. 29 Table of Contents Other income Nine Months Ended September 30, $ Change % Change 2021 2020 (in thousands) Other income $ 7 $ 305 $ (298 ) (98 )% Other income decreased by $0.3 million, or 98%, to zero for the nine months ended September 30, 2021 from $0.3 million for the nine months ended September 30, 2020. The decrease was due to a $0.2 million decrease in short-term dividend income. Liquidity and Capital Resources As of September 30, 2021, we had cash and cash equivalents of $587.3 million. We believe that our cash and cash equivalents as of September 30, 2021 will be sufficient to meet our working capital and capital expenditure needs for the next 12 months. We expect our principal sources of liquidity will continue to be our cash and cash equivalents and any additional capital we may obtain through additional equity or debt financings. Our future capital requirements will depend on many factors, including investments in growth and technology. We may in the future enter into arrangements to acquire or invest in complementary businesses, services, and technologies which may require us to seek additional equity or debt financing. Our primary uses of cash are to fund our operations as we continue to grow our business. We will require a significant amount of cash for expenditures as we invest in ongoing research and development and commercialize our product. Until such time as we can generate significant revenue from sales of our QCaaS, if ever, we expect to finance our operations through cash and cash equivalents as well as equity or debt financings or other capital sources, including potential collaborations and other similar arrangements. However, we may be unable to raise additional funds or enter into such other arrangements when needed on favorable terms or at all. To the extent that we raise additional capital through the sale of equity or convertible debt securities, the ownership interest of our stockholders will be or could be diluted, and the terms of these securities may include liquidation or other preferences that adversely affect the rights of our stockholders. Debt financing and equity financing, if available, may involve agreements that include covenants limiting or restricting our ability to take specific actions, such as incurring additional debt, making capital expenditures, or declaring dividends. If we raise funds through collaborations, or other similar arrangements with third parties, we may have to relinquish valuable rights to our quantum computing technology on terms that may not be favorable to us and/or may reduce the value of our common stock. If we are unable to raise additional funds through equity or debt financings when needed, we may be required to delay, limit, reduce or terminate our quantum computing development efforts. Our future capital requirements and the adequacy of available funds will depend on many factors, including those set forth in the section titled “ Risk Factors .” Cash flows The following table summarizes our cash flows for the period indicated: Nine Months Ended September 30, 2021 2020 (in thousands) Net cash used in operating activities $ (21,851 ) $ (8,322 ) Net cash used in investing activities $ (6,914 ) $ (9,091 ) Net cash provided by financing activities $ 579,939 $ 29 Cash flows from operating activities Our cash flows from operating activities are significantly affected by the growth of our business primarily related to research and development, sales and marketing, and general and administrative activities. Our operating cash flows are also affected by our working capital needs to support growth in personnel-related expenditures and fluctuations in accounts payable and other current assets and liabilities. Net cash used in operating activities during the nine months ended September 30, 2021 was $21.9 million, primarily resulting from a net loss of $32.1 million, adjusted for non-cash charges of $5.9 million in stock-based compensation, $4.3 million in offering costs associated with warrants, $1.2 million in costs associated with research and development arrangements, and $1.5 million in depreciation and amortization. The increase in net cash used in operations from the comparable prior year period was primarily related to our increased research and development activities and associated hiring of personnel to support the growth of our business, partially offset by an increase in accrued expenses primarily driven by legal fees related to the Business Combination and an increase in unearned revenue. 30 Table of Contents Net cash used in operating activities during the nine months ended September 30, 2020 was $8.3 million, primarily resulting from a net loss of $10.5 million, adjusted for non-cash charges of $1.0 million in depreciation and amortization and $0.7 million in stock based compensation. Cash flows from investing activities Net cash used in investing activities during the nine months ended September 30, 2021 was $6.9 million, primarily resulting from additions of $5.3 million to property and equipment related to the development of our quantum computing systems, $1.2 million of capitalized internal software development costs, and $0.4 million of intangible assets related to patents. Net cash used in investing activities during the nine months ended September 30, 2020 was $9.1 million, primarily resulting from additions of $8.0 million to property and equipment related to the development of our quantum computing systems, $0.8 million of capitalized internal software development costs, and $0.3 million of intangible assets related to patents. Cash flows from financing activities Net cash provided by financing activities during the nine months ended September 30, 2021 was $579.9 million primarily reflecting proceeds received from the Business Combination and the PIPE investment as well as cash received from the early exercise of stock options. Net cash provided by financing activities during the nine months ended September 30, 2020 was $0.03 million reflecting proceeds from stock options exercised. Contractual Obligations and Commitments The following table summarizes our contractual obligations and other commitments as of December 31, 2020 and September 30, 2021, and the years in which these obligations are due: As of December 31, 2020 Payments Due by Period Total Less than 1 Year 1-3 Years 3-5 Years More than 5 Years ( in thousands ) Contractual Obligations: Operating lease obligation (1) $ 7,544 $ 561 $ 1,315 $ 1,522 $ 4,146 Total $ 7,544 $ 561 $ 1,315 $ 1,522 $ 4,146 As of September 30, 2021 Payments Due by Period Total Less than 1 Year 1-3 Years 3-5 Years More than 5 Years ( in thousands ) Contractual Obligations: Operating lease obligation (1) $ 7,140 $ 639 $ 1,394 $ 1,556 $ 3,551 Total $ 7,140 $ 639 $ 1,394 $ 1,556 $ 3,551 (1) Includes future minimum payments for an operating lease of corporate office facilities. 31 Table of Contents Off-Balance Sheet Arrangements We did not have off-balance sheet arrangements during the periods presented, and do not currently have, any off-balance sheet financing arrangements or any relationships with unconsolidated entities or financial partnerships, including entities sometimes referred to as structured finance or special purpose entities, that were established for the purpose of facilitating off-balance sheet arrangements or other contractually narrow or limited purposes. Critical Accounting Policies and Significant Management Estimates Our consolidated financial statements included with our final proxy statement/prospectus filed with the SEC on August 12, 2021 have been prepared in accordance with U.S. GAAP. Preparation of these financial statements requires us to make estimates and assumptions that affect the reported amounts of assets and liabilities and the disclosure of contingent assets and liabilities. We also make estimates and assumptions on revenue generated and reported expenses incurred during the reporting periods. Our estimates are based on our historical experience and on various other factors that we believe are reasonable under the circumstances. The results of these estimates form the basis for making judgments about the carrying value of assets and liabilities that are not readily apparent from other sources. Actual results may differ from these estimates. While our significant accounting policies are described in the notes to our financial statements included in the registration statement filed with our final proxy statement/prospectus filed with the SEC on August 12, 2021, we believe the following critical accounting policies are most important to understanding and evaluating our reported financial results. Business Combination While the legal acquirer in the Merger Agreement is dMY, for financial accounting and reporting purposes under accounting principles generally accepted in the United States of America (“U.S. GAAP”), Legacy IonQ is the accounting acquirer and the merger is accounted for as a “reverse recapitalization” (i.e., a capital transaction involving the issuance of stock by dMY for the stock of Legacy IonQ). For accounting purposes, the Business Combination was treated as the equivalent of Legacy IonQ issuing stock for the net assets of dMY, accompanied by a recapitalization. The net assets of dMY are stated at historical cost, and no goodwill or other intangible assets were recorded. Because Legacy IonQ was deemed the accounting acquirer in the Business Combination, the historical financial statements of Legacy IonQ are the historical financial statements of the Company upon the consummation of the Business Combination. In accordance with guidance applicable to these circumstances, the equity structure has been retroactively restated in all comparative periods up to the Closing Date to reflect the number of shares of the Company’s common stock, $0.0001 par value per share, issued to Legacy IonQ’s stockholders in connection with the Business Combination. As such, the shares and corresponding capital amounts and earnings per share related to Legacy IonQ convertible redeemable preferred stock and warrants and Legacy IonQ common stock prior to the Business Combination have been retroactively restated as shares reflecting the exchange ratio established in the Business Combination. Legacy IonQ’s convertible redeemable preferred stock and warrants previously classified as mezzanine equity were retroactively adjusted, converted into common stock, and reclassified to permanent equity because of the reverse recapitalization. Capitalized internally developed software Capitalized internally developed software, which is included in intangible assets, net, consists of costs to purchase and develop internal-use software, which we use to provide services to our customers. The costs to purchase and develop internal-use software are capitalized from the time that the preliminary project stage is completed, and it is considered probable that the software will be used to perform the function intended, until the time the software is placed in service for its intended use. Any costs incurred during subsequent efforts to upgrade and enhance the functionality of the software are also capitalized. Once this software is ready for use as part of our service offerings, these costs are amortized on a straight-line basis over the estimated useful life of the software, which is typically assessed to be three years. Property and equipment, net Property and equipment, net is stated at cost less accumulated depreciation. Historical cost of fixed assets is the cost as of the date acquired. Prior to 2019, we built certain quantum computing systems solely for research and development purposes and these quantum computing systems were deemed to have no alternative future use. In 2019, we began to commercialize our quantum computing systems via the offering of QCaaS and quantum computing systems built thereafter were determined to provide a probable future economic benefit. As a result, hardware and labor costs associated with the building of such quantum computing systems were capitalized. Costs to maintain quantum computing systems are expensed as incurred. Depreciation and amortization are calculated using the straight-line method over the estimated useful life of two years for the quantum computing systems. Impairment of long-lived assets Long-lived assets, such as property and equipment, intangible assets and capitalized internally developed software are reviewed for impairment whenever events or changes in circumstances indicate that the carrying amount of an asset may not be recoverable. If circumstances require a long-lived asset or asset group be tested for possible impairment, we first compare undiscounted cash flows expected to be generated by that asset or asset group to its carrying amount. If the carrying amount of the long-lived asset or asset group is not recoverable on an undiscounted cash flow basis, an impairment is recognized to the extent the carrying amount of the underlying asset or asset group exceeds its fair value. No impairment loss was recognized for the three and nine months ended September 30, 2021 or 2020. 32 Table of Contents Revenue recognition We derive revenue from providing access to our QCaaS and professional services related to co-developing algorithms on the quantum computing systems. In arrangements with the cloud service providers, the cloud service provider is considered the customer and we do not have any contractual relationships with the cloud service providers’ end users. For these arrangements, revenue is recognized at the amount charged to the cloud service provider and does not reflect any mark-up to the end user. We apply the provisions of the Financial Accounting Standards Board (“FASB”) Accounting Standards Update (“ASU”), Revenue from Contracts with Customers (“ASC 606”), and all related applicable guidance. We have determined that our QCaaS contracts represent a combined, stand-ready performance obligation to provide access to our quantum computing systems together with related maintenance and support. The transaction price generally includes a variable fee based on usage of our quantum computing systems and may include a fixed fee for a minimum volume of usage to be made available over a defined period of access. Fixed fee arrangements may also include a variable component whereby customers pay an amount for usage over contractual minimums contained in the contracts. For contracts with a fixed transaction price to provide stand-ready QCaaS access, the fixed fee is recognized as QCaaS subscription-based revenues on a straight-line basis over the access period. Any variable fees for usage over the contractual minimums are estimated at contract inception and recognized ratably over the access period unless such variable usage fees are probable of reversal in future periods. In those instances, variable usage fees are included in the determination of the transaction consideration once known. For contracts without fixed fees, variable usage fees are billed and recognized during the period of such usage. For the three and nine months ended September 30, 2021, all revenue recognized by us was recognized based on transfer of service over time. There were no revenues recognized at a point in time. No revenue was recognized for the three and nine months ended September 30, 2020. We may enter into multiple contracts with a single counterparty at or near the same time. We will combine contracts and account for them as a single contract when one or more of the following criteria are met: (i) the contracts are negotiated as a package with a single commercial objective; (ii) consideration to be paid in one contract depends on the price or performance of the other contract; and (iii) goods or services promised are a single-performance obligation. In 2019, contemporaneous with a revenue arrangement, we executed an arrangement with the same counterparty for the issuance of a warrant to purchase shares of Legacy IonQ Series B-1 convertible redeemable preferred stock. Upon closing of the Business Combination, these warrants exercisable for Legacy IonQ Series B-1 preferred stock were assumed by the Company and converted into a warrant to purchase a number of shares of common stock. The warrant was evaluated and considered to represent consideration provided to a customer and as such, the recognition of the warrant expense is recorded as a reduction in revenue as revenue is earned under the contract. The Business Combination did not change this conclusion. For contractual arrangements where consideration is paid up-front, the transfer of the quantum computing services is completed at the discretion of the customer as the customer chooses to use the services starting from the date of contract inception. As such, the up-front payment of consideration does not represent a significant financing component. Warrant liabilities The Company evaluates its financial instruments to determine if such instruments are derivatives or contain features that qualify as embedded derivatives in accordance with ASC Topic 815, “Derivatives and Hedging.” For derivative financial instruments that are accounted for as liabilities, the derivative instrument is initially recorded at its fair value on the grant date and is then re-valued at each reporting date, with changes in the fair value reported in the statement of operations. The classification of derivative instruments, including whether such instruments should be recorded as liabilities or as equity, is evaluated at the end of each reporting period. The warrant liabilities are valued using observable inputs in the Black-Scholes valuation model. Inherent in the valuation are assumptions related to expected stock-price volatility, expected term, risk-free interest rate and dividend yield. The Company estimates the volatility of its common stock warrants based on implied volatility from the Company’s traded warrants and from historical volatility of select peer company’s common stock that matches the expected remaining life of the warrants. The risk-free interest rate is based on the U.S. Treasury zero-coupon yield curve on the grant date for a maturity similar to the expected remaining life of the warrants. The expected life of the warrants is assumed to be equivalent to their remaining contractual term. The dividend rate is based on the historical rate, which the Company anticipates remaining at zero. Customer warrants Our outstanding warrants to a customer are accounted for as non-employee share-based payments and have the same risks and rewards as the corresponding equity share ownership. The warrants are accounted for in accordance with ASC 718, Compensation – Stock Compensation , and are classified within permanent equity consistent with the underlying common shares. The warrants were valued using the Black-Scholes-Merton (“Black-Scholes”) option-pricing model which requires estimates of highly subjective assumptions including the fair value of the underlying stock (Legacy IonQ Series B-1 preferred stock prior to the Business Combination), risk-free interest rate, expected term which is based on the contractual life of the warrant shares, expected volatility and the dividend yield. The warrant expense is recorded as a reduction in revenue as revenue is earned under the arrangement with the customer. 33 Table of Contents Stock-based compensation We measure and record the expense related to stock-based payment awards based on the fair value of those awards as of the date of grant. We recognize stock-based compensation expense over the requisite service period of the individual grant, generally equal to the vesting period. The straight-line method is used to recognize stock-based compensation over the applicable period. We use the Black-Scholes option-pricing model to determine the fair value of stock awards and the estimated fair value for stock options. The Black-Scholes option-pricing model requires the use of subjective assumptions, which determine the fair value of share-based awards, including the fair value of our common stock, the option’s expected term, the price volatility of the underlying common stock, risk-free interest rates, and the expected dividend yield of the common stock. The assumptions used to determine the fair value of the stock awards represent management’s best estimates. These estimates involve inherent uncertainties and the application of management’s judgment. The assumptions are based on the following: • Expected Volatility . Expected volatility is based on the average historical stock price volatility of comparable publicly traded companies in our industry peer group, financial, and market capitalization data. • Risk-Free Interest Rate . Risk-free interest rates are based on the implied yields on actively traded non-inflation-indexed U.S. treasury securities with contract maturities equal to the expected term. • Dividend Yield . We used an expected dividend yield of zero. We have never declared or paid any cash dividends on our common stock, and we do not plan to pay cash dividends on our common stock in the foreseeable future. • Expected Term . We have estimated the expected term of our employee awards using the SAB Topic 14 Simplified Method allowed by the FASB and SEC, as it has limited historical exercise data to provide a reasonable basis upon which to otherwise estimate the expected term. Certain of our options began vesting prior to the grant date, in which case we use the remaining vesting term at the grant date in the expected term calculation. • Fair Value of Common Stock. For grants prior to the Business Combination, given the historical absence of an active market for our common stock, we obtained a valuation from a third-party appraisal firm to assist in our determination of the fair value of common stock as of the grant date. No grants have been issued subsequent to the Business Combination. • Forfeitures . We record forfeitures as they occur. If any assumptions used in the Black-Scholes option-pricing model change significantly, stock option compensation expense for future awards may differ materially compared with the expense for awards granted previously. Equity valuations The fair value of our equity instruments has historically been determined based upon information available at the time of grant. Given the absence of a public trading market for our capital stock at the time of grant for awards granted prior to the Business Combination, and in accordance with the American Institute of Certified Public Accountants Practice Aid, Valuation of Privately Held Company Equity Securities Issued as Compensation , our management exercised reasonable judgment and considered numerous objective and subjective factors to determine the best estimate of the fair value of our equity instruments at each grant date. These factors included: • contemporaneous valuations performed at periodic intervals by independent, third-party specialists; • our actual operating and financial performance; 34 Table of Contents • our current business conditions and projections; • our progress on research and development efforts; • our stage of development; • the prices, preferences, and privileges of shares of our convertible preferred stock relative to shares of common stock; • likelihood of achieving a liquidity event for the underlying equity instruments, such as a business combination, given prevailing market conditions; • lack of marketability of our common stock; and • macroeconomic conditions. The fair value of each share of common stock underlying stock-based awards after the closing of the Business Combination is based on the closing price of our common stock as reported by the NYSE on the date of grant. Recently Issued and Adopted Accounting Standards See Note 2, Summary of Significant Accounting Policies, in the notes to our condensed consolidated financial statements included in Part I, Item I of this Quarterly Report on Form 10-Q for a discussion of recent accounting pronouncements. Quantitative and Qualitative Disclosures about Market Risk Interest rate risk We had cash and cash equivalents of $587.3 million as of September 30, 2021. We hold our cash and cash equivalents for working capital purposes. Our cash and cash equivalents are held in cash deposits and money market funds. Due to the short-term nature of these instruments, we believe that we do not have any material exposure to changes in the fair value of our cash and cash equivalents due to changes in interest rates. Declines in interest rates, however, would reduce our future interest income. The effect of a hypothetical 10% change in interest rates would not have a material impact on IonQ’s financial statements. 35 Table of Contents Concentration of Credit Risk We deposit our cash with financial institutions, and, at times, such balances may exceed federally insured limits. Management believes the financial institutions that hold our cash and cash equivalents are financially sound and, accordingly, minimal credit risk exists with respect to cash and cash equivalents. Emerging Growth Company and Smaller Reporting Company Status Section 102(b)(1) of the JOBS Act exempts emerging growth companies from being required to comply with new or revised financial accounting standards until private companies are required to comply with the new or revised financial accounting standards. The JOBS Act provides that a company can choose not to take advantage of the extended transition period and comply with the requirements that apply to non-emerging growth companies, and any such election to not take advantage of the extended transition period is irrevocable. During the extended transition period, it may be difficult or impossible to compare our financial results with the financial results of another public company that complies with public company effective dates for accounting standard updates because of the potential differences in accounting standards used. We will remain an emerging growth company until the earliest of (i) December 31, 2025, (ii) the last day of the fiscal year in which the Company has total annual gross revenue of at least $1.07 billion, (iii) the last day of the fiscal year in which the Company is deemed to be a large accelerated filer, which means the market value of the Company’s common stock that is held by non-affiliates exceeds $700.0 million as of the prior June 30th or (iv) the date on which the Company has issued more than $1.0 billion in non-convertible debt securities during the prior three-year period. We are also a smaller reporting company as defined in the Exchange Act. We may continue to be a smaller reporting company even after we are no longer an emerging growth company. We may take advantage of certain of the scaled disclosures available to smaller reporting companies and will be able to take advantage of these scaled disclosures for so long as (i) our voting and non-voting common stock held by nonaffiliates is less than $250.0 million measured on the last business day of our second fiscal quarter or (ii) our annual revenue is less than $100.0 million during the most recently completed fiscal year and our voting and non-voting common stock held by non-affiliates is less than $700.0 million measured on the last business day of our second fiscal quarter. 36 Table of Contents Item 3. Quantitative and Qualitative Disclosures About Market Risk Not applicable for smaller reporting companies.