A D-Wave 2X quantum computer in the Quantum Artificial Intelligence Laboratory (QuAIL) at NASA Ames Research Center in Mountain View, California.Stephen Lam/Reuters
D-Wave Quantum Inc.’s QBTS-N US$50-million financing deal with its largest investor requires the quantum computing pioneer to seek permissions and likely financial aid from Ottawa to access most of the funds.
The Burnaby, B.C., company revealed on Apr. 14 that it had secured US$50-million in financing from Public Sector Pension Investment Board, which owns 46.7 per cent of its stock, apparently easing an imminent liquidity crunch. The announcement came as D-Wave unveiled a disappointing 2023 forecast for the second time in eight months.
The financing is crucial for D-Wave, which ended 2022 with US$7.1-million in cash after using US$45.2-million to fund operations that year. The company forecast it would generate US$12-million to US$13-million in revenue in 2023 – below analyst forecasts – and that its operating loss could be worse than its US$48-million loss in 2022.
Since its stock fell below US$1 a share in February – from US$10 last August – it has been prohibited from accessing a US$150-million equity line of credit from Chicago’s Lincoln Park Capital. Up to that point D-Wave had issued 15.1 million shares to Lincoln Park – 11.8 per cent of stock outstanding – for US$19.9-million. Lincoln Park is limited to holding 9.9 per cent of D-Wave at any time and has sold most shares received.
Quantum computing star D-Wave faces cash crunch, investors say
D-Wave shared few details when it announced the PSP financing other than saying it would receive US$15-million upfront, and two more payments of US$15-million and US$20-million this year from the Montreal-based pension giant.
However, in its annual report, published later in the month, D-Wave revealed PSP has put several tough conditions on the deal. D-Wave disclosed the financing would rank as senior debt and bear interest of 10 per cent payable in cash, or 11 per cent in kind, added to the principal. D-Wave said the first US$15-million gives it a “two-month cash runway,” leaving it a month short of the July 12 date of the second US$15-million tranche. If D-Wave raises further funds from Lincoln Park, it must promptly repay PSP, plus a 10-per-cent premium.
To get the next US$15-million in July, D-Wave must give PSP what is known as security interest in the intellectual property (IP) funded by a 2020 $40-million conditionally repayable loan through the federal government’s Strategic Innovation Fund. In other words, PSP is asking for a claim on rights to D-Wave’s most recent developments should the company fail. PSP also requires an IP valuation report and board-approved operating budget through 2027.
Under the terms of the government loan, D-Wave is required to own the government-funded IP and those patents must remain in Canada for its duration. But Innovation Minister François-Philippe Champagne can consent to transfer security interest in the IP to a third party. Laurie Bouchard, a spokeswoman for the minister, said a request from D-Wave to do so “is currently under review.”
While PSP is Canadian, it might not be under the same constraints as D-Wave is under the terms of the government loan if the minister consents. That could create a complex situation for the government, which launched a national quantum strategy in January prominently featuring D-Wave, the most commercially advanced quantum company.
If the minister doesn’t consent, D-Wave won’t get the second payment. But if he does, it would make it easier for a foreign buyer to purchase the assets should they be obtained by PSP – at odds with the goal of building homegrown global quantum giants.
D-Wave faces another challenge in securing the final US$20-million from PSP, set for Oct. 16: It must raise at least US$25-million in non-dilutive financing to get it, meaning that it cannot sell any equity or instrument that converts into equity. It could either raise straight debt that doesn’t convert into equity – a tough challenge for a loss-making company in a nascent industry – or secure more aid from the government, which has funded D-Wave in the past.
A spokeswoman for PSP referred all questions to D-Wave. A D-Wave spokesman responded to questions saying “all available information can be found” in regulatory filings.
D-Wave has spent 24 years developing machines that draw computing power from the quantum effects of subatomic particles, which it has said will one day outperform the world’s most powerful computers. It had 67 corporate clients last year including Mastercard and BASF, which used its services to solve complex optimization problems such as employee scheduling. Rival quantum computers won’t be able to do that for years. Meanwhile, D-Wave is still in the early days of building a business and demand for quantum computing as a whole.
The company has been hit by other challenges this month; some long-time investors sold after a lockup lifted in February, pushing the stock below US$1 and leading to warning by the New York Stock Exchange it could delist the shares. D-Wave also restated its 2022 third-quarter financial statements because of several accounting errors.