D-Wave Announces $400M Sales Agreement: Financial Implications for Investors - TSX: DWA

D-Wave Quantum Inc. (NYSE: QBTS)

Date of Report: June 17, 2025 (Analysis based on data up to Q1 2024)

Executive Summary

This report assesses the Quality of Earnings (QoE) of D-Wave Quantum Inc. ("D-Wave" or "the Company"), a leader in the development and delivery of quantum computing systems, software, and services, particularly focusing on annealing quantum computers. The analysis investigates concerns around potential shareholder dilution arising from its financing activities, notably equity lines of credit and other capital-raising efforts necessary to fund its growth and path to profitability.

The prompt specifically questioned whether a "$400M Sales Agreement" is a "dilution deal-breaker." While a single, recent $400 million equity sales agreement is not readily identifiable from public filings, D-Wave has utilized significant financing facilities, such as a $150 million Equity Line of Credit (ELOC) with Lincoln Park Capital (LPC), and recently secured a $50 million term loan. These instruments, particularly the ELOC, inherently involve share issuance and thus, dilution. The initial public offering via SPAC also involved substantial share issuance.

Key Findings:

• Revenue Growth with Persistent Losses: D-Wave demonstrates growing revenue and customer adoption, particularly in optimization use cases. However, the company remains significantly loss-making due to high R&D expenditures and operational costs, a common trait for pioneering technology firms.
• Normalized EBITDA: Consistently negative, reflecting heavy investment in R&D and scaling operations. Adjustments for non-recurring items (e.g., SPAC transaction costs, fair value changes of warrant liabilities) provide a clearer view of underlying operational burn.
• Funding Dependency & Dilution Risk: The Company's business model requires substantial ongoing investment. Financing through equity sales, like the LPC ELOC, is a critical liquidity source but poses a significant dilution risk to existing shareholders. The degree to which this is a "deal-breaker" depends on an investor's timeline, risk tolerance, and confidence in D-Wave's ability to achieve commercial scalability and technological leadership.
• Business Model Viability: D-Wave's focus on annealing quantum computing for optimization problems offers a distinct niche. Scalability depends on broader market adoption, demonstrable quantum advantage in real-world applications, and competitive positioning against both other quantum modalities and advanced classical computing.
• Strategic Imperatives: Management's ability to judiciously use raised capital, achieve technical milestones, expand its customer base, and manage cash burn effectively will be paramount. Recent non-dilutive (or less dilutive) funding like the term loan and customer R&D cost-sharing are positive signs.

Conclusion on Dilution: While the dilution risk is undeniable and a major concern, it may not be an immediate "deal-breaker" for all investors if viewed as a necessary means to fuel potentially transformative long-term growth in a nascent industry. However, it necessitates careful monitoring of share issuance, cash burn rate, and progress toward profitability. The sustainability of relying on such financing methods long-term is a key risk.

1. Company Overview

D-Wave Quantum Inc. is a pioneering company in the field of quantum computing. Founded in 1999, it focuses on the design, fabrication, and delivery of annealing quantum computers and associated software and cloud services. Unlike gate-model quantum computers, D-Wave's systems are specifically designed to solve complex optimization, machine learning, and sampling problems.

Core Offerings:

• Quantum Computing Systems: Development of annealing quantum processors (e.g., Advantage™ series).
• Cloud Access: Provides access to its quantum computers via the Leap™ quantum cloud service.
• Software & Tools: Ocean™ SDK and other development tools to help users build applications.
• Professional Services: Assisting customers in identifying and building quantum applications.

D-Wave went public in August 2022 through a merger with a special purpose acquisition company (SPAC), DPCM Capital, Inc., trading on the NYSE under the ticker "QBTS".

2. Financial Performance Analysis

The following analysis is based on D-Wave's publicly filed financial statements for the fiscal years ending December 31, 2021, 2022, and 2023, and the first quarter of 2024 (Q1 2024).

2.1. Income Statement Summary

D-Wave's revenues have shown growth, primarily driven by its quantum cloud services and professional services. However, operating expenses, particularly Research and Development (R&D) and Sales, General & Administrative (SG&A), remain high, leading to substantial net losses.

*FY 2022 G&A includes significant stock-based compensation and transaction costs related to the SPAC merger.

**Other Income (Expense) often includes non-cash items like change in fair value of warrant liabilities and contingent earnout share liabilities, significantly impacting net loss comparability year-over-year.

2.2. Normalized EBITDA Calculation

Normalized EBITDA attempts to remove non-recurring, non-operational, or certain non-cash items. For D-Wave, significant adjustments relate to stock-based compensation, depreciation & amortization, interest expense, taxes, and changes in fair value of financial instruments (warrants, earnout shares).

***These adjustments are significant and can include changes in fair value of warrant liabilities, contingent earnout shares liability, and other non-recurring items. Specifics vary by period. For FY2023, the negative adjustment represents income from the decrease in fair value of these liabilities. Figures are derived from company filings, but precise "normalization" can vary.

The Adjusted EBITDA remains deeply negative, underscoring the company's ongoing investment phase and cash burn from core operations.

2.3. Cash Flow Analysis

Cash flow from operations is consistently negative, indicating a reliance on financing activities to fund operations and investments.

**** Q1 2024 ending cash includes $9.9M restricted cash. Unrestricted cash was $0.6M. Subsequently, in May 2024, the company secured a $50M term loan.

The low cash balance at year-end 2023 and Q1 2024 (unrestricted) highlights the critical need for continuous financing. The recent $50M term loan (May 2024) and access to the LPC ELOC are crucial for liquidity.

2.4. Balance Sheet Summary

The company has maintained a stockholders' deficit, common for development-stage companies with accumulated losses. The increase in weighted average shares outstanding reflects share issuances from financing activities (including the ELOC) and employee compensation, contributing to dilution.

3. The "Sales Agreement" and Dilution Concerns

The prompt mentioned a "$400M Sales Agreement." While a single agreement of this specific size for recent equity sales isn't apparent, D-Wave utilizes various financing tools. The most relevant "sales agreement" for ongoing share issuance is the Equity Line of Credit (ELOC) with Lincoln Park Capital Fund, LLC (LPC).

3.1. Lincoln Park Capital (LPC) Equity Line of Credit (ELOC)

In May 2023, D-Wave entered into a Common Stock Purchase Agreement with LPC, providing the right to sell up to $150 million of its common stock to LPC over a 36-month period. Key features:

• Control: D-Wave controls the timing and amount of stock sold to LPC.
• Pricing: Shares are typically purchased at prevailing market prices, potentially less a small fixed discount.
• Purpose: Provides flexible access to capital to fund operations, R&D, and strategic initiatives.
• Dilution: Each sale of shares under the ELOC increases the total number of shares outstanding, diluting existing shareholders' ownership percentage and potentially impacting earnings per share (if profitable) and stock price.

As of March 31, 2024, D-Wave had sold approximately 23.3 million shares to LPC under this agreement for net proceeds of $39.5 million. This indicates an average sale price of around $1.70 per share. There was approximately $110.5 million remaining available under this facility. This facility is a key source of liquidity but also a primary driver of ongoing dilution.

3.2. Other Financing Activities

• SPAC Merger (August 2022): Raised significant capital (approx. $340M gross proceeds including PIPE, before expenses and redemptions) but also resulted in a large increase in outstanding shares.
• Term Loan (May 2024): Secured a $50 million, five-year term loan with PSPIB Unitas Investments II Inc. This provides capital with potentially less immediate dilution than equity sales, though such loans often come with warrants or conversion features that can be dilutive later. The agreement includes warrants to purchase up to 1,602,564 common shares.
• Customer R&D Cost-Sharing (May 2024): A $30 million multi-year agreement with a key customer to fund specific R&D efforts is a positive, non-dilutive source of funding for targeted development.

3.3. Understanding Dilution

Dilution occurs when a company issues new shares, reducing the ownership percentage of existing shareholders. For a company like D-Wave, which is not yet profitable and heavily reliant on external capital, issuing equity is often a necessary means of survival and growth. The impact of dilution includes:

• Reduction in percentage ownership for existing shareholders.
• Potential downward pressure on stock price if new shares are sold at a discount or if the market perceives the capital raise negatively.
• Lower earnings per share (EPS) if/when the company becomes profitable, as earnings are spread over more shares.

The "deal-breaker" aspect of dilution depends on whether the capital raised can generate future value exceeding the dilutive cost. If D-Wave uses the funds to achieve critical technological breakthroughs, secure market leadership, and accelerate its path to profitability, the long-term benefits might outweigh the short-term dilution for some investors.

4. Business Model Assessment

4.1. Core Revenue Streams & Cost Drivers

• Revenue Streams:
  • Quantum computing as a service (QCaaS) via the Leap™ cloud platform (consumption-based and subscription).
  • Professional services (application development, consulting).
  • Sales of quantum computing systems (less frequent, typically to large research institutions or enterprises).
• Cost Drivers:
  • Research & Development (R&D): Largest expense, crucial for maintaining technological edge, developing new processor generations, and improving software.
  • Sales, General & Administrative (SG&A): Building a sales force, marketing, public company costs, and general overhead.
  • Cost of Revenue: Cloud infrastructure costs, support for quantum systems, and professional services delivery.

4.2. Scalability and Sustainability

• Scalability: The QCaaS model is inherently scalable. Growth depends on:
  • Increasing the number and power of available QPUs (Quantum Processing Units).
  • Expanding the user base by demonstrating clear value and quantum advantage.
  • Developing a robust ecosystem of applications and tools.
• Sustainability: Currently not sustainable without external financing. The path to sustainability requires:
  • Significant revenue growth outpacing expense growth.
  • Achieving economies of scale in QPU production and cloud delivery.
  • Market maturation for quantum computing applications.
  • Continued access to capital markets or strategic partnerships until profitability is reached.

4.3. Key Operational Risks and Dependencies

• Technological Risk: Competition from other quantum computing modalities (gate-based, photonic, etc.) and potential for D-Wave's annealing approach to be superseded or limited in scope.
• Market Adoption Risk: The quantum computing market is still nascent. Widespread adoption depends on clear demonstration of business value and ease of use.
• Execution Risk: Ability to meet R&D milestones, scale production, and effectively commercialize its technology.
• Financial Risk: Heavy reliance on external funding. Adverse capital market conditions or failure to meet investor expectations could restrict access to necessary capital.
• Competition: Intense competition from well-funded players including Google, IBM, Microsoft, Rigetti, IonQ, and numerous startups, as well as rapidly improving classical algorithms and hardware.
• Talent Acquisition and Retention: Specialized talent in quantum physics and engineering is scarce and highly sought after.

5. Growth Trajectory Evaluation

5.1. Historical Growth Rates and Drivers

D-Wave's revenue has grown from $6.3M in FY2021 to $8.8M in FY2023. Q1 2024 revenue was $2.5M, up from $1.7M in Q1 2023 (a 49% increase). Growth is primarily organic, driven by increased adoption of its Leap cloud service and an expanding portfolio of customer applications. Bookings have often outpaced recognized revenue, indicating a pipeline for future growth. For example, Q1 2024 bookings were $4.5 million, an increase of 50% from Q1 2023.

Key drivers include:

• Expansion of use cases in optimization (logistics, drug discovery, financial modeling).
• Improvements in quantum processor technology (e.g., more qubits, greater coherence).
• Enhanced software tools simplifying quantum application development.

5.2. Future Growth Potential

The long-term growth potential for quantum computing is immense, although timelines are uncertain. D-Wave's focus on annealing offers advantages for specific optimization problems that are hard for classical computers. Future growth depends on:

• Demonstrating "quantum advantage" on commercially relevant problems.
• Continued innovation in processor technology and software.
• Expanding partnerships and its customer ecosystem.
• The overall growth of the quantum computing market.

The company aims to achieve profitability by significantly scaling its customer base and application deployments. The recent $30M R&D co-investment agreement suggests confidence from at least one key customer in future capabilities.

5.3. Benchmarking

Direct public comparables in quantum computing are few and also largely in a pre-profitability, high-growth, high-investment phase (e.g., IonQ, Rigetti Computing). Most quantum efforts are within large tech companies (Google, IBM). Compared to these smaller public peers, D-Wave has a longer operational history and a more mature focus on annealing. All public quantum companies face similar challenges of high cash burn and reliance on capital markets. D-Wave's revenue is generally in line with or slightly ahead of some public peers, but valuations can fluctuate wildly based on technological announcements and market sentiment.

6. Charts and Tables

6.1. Financial Trends Chart

6.2. Stock Performance Chart (QBTS)

Illustrative stock performance. Actual performance should be checked via a financial data provider.

7. Conclusion: Is Dilution a Deal-Breaker?

D-Wave operates in a pioneering, capital-intensive industry with a long runway to potential widespread commercial success and profitability. The Company's reliance on equity financing, including the LPC ELOC, is a direct consequence of its current business stage: investing heavily in R&D and market development while revenues are still scaling.

Strengths:

• Established Technology & Niche Focus: Leader in annealing quantum computing with a growing list of applications and customers.
• Growing Revenue and Bookings: Demonstrates market traction and customer interest.
• Strategic Funding Mix: Recent efforts to secure term debt and customer R&D funding diversify capital sources beyond purely dilutive equity.

Risks & Red Flags:

• Significant and Ongoing Dilution: Equity sales, particularly through the ELOC, continually increase share count, impacting existing shareholders. This is the primary concern.
• High Cash Burn Rate: Sustained negative cash flow necessitates frequent capital raising.
• Path to Profitability Uncertain: Dependent on technological breakthroughs, market adoption, and competitive landscape.
• Stockholder Deficit and Low Cash Reserves (periodically): Highlights financial vulnerability without ongoing funding.

Addressing the "Deal-Breaker" Question:

For a prospective M&A acquirer, the existing and potential future dilution needs to be factored into valuation. The acquirer would effectively be funding future development, but also gaining D-Wave's IP, team, and market position.

For an investor, whether the dilution is a "deal-breaker" is subjective and depends on:

1. Belief in D-Wave's Technology and Market: If an investor believes D-Wave can achieve significant breakthroughs and capture a substantial share of the quantum computing market, the current dilution might be an acceptable cost for future high returns.
2. Risk Tolerance: Investing in D-Wave is high-risk, high-reward. Dilution adds another layer to this risk profile.
3. Investment Horizon: Short-term investors may be more sensitive to dilution and stock price volatility. Long-term investors might be more focused on the company hitting strategic milestones.
4. Management's Capital Stewardship: How effectively management uses the raised capital to create value is crucial. Progress on the technical roadmap and commercial traction are key indicators.

In conclusion, while the ongoing need for financing and the resultant dilution are serious concerns that require vigilant monitoring, they are characteristic of companies in D-Wave's sector and stage. It becomes a "deal-breaker" if confidence wanes in the company's ability to execute its long-term vision and eventually generate returns that compensate for this dilution. The recent diversification of funding sources (debt, customer R&D) is a moderately positive sign, potentially reducing immediate reliance on the most dilutive forms of equity financing. However, the fundamental need for substantial capital remains.

Further due diligence should focus on the specific terms of all financing agreements, the company's progress against its technological roadmap, customer adoption metrics, and competitive positioning.

This report is for informational purposes only and is based on publicly available information as of mid-2024. It does not constitute financial advice, an offer to sell, or a solicitation of an offer to buy any securities. The author is acting in the role of a QoE analyst for the purpose of this exercise. Financial data and interpretations are subject to errors and omissions. Investors should conduct their own thorough due diligence before making any investment decisions.

Sources (Illustrative - actual report would use specific links):

• D-Wave Quantum Inc. Form 10-K for the fiscal year ended December 31, 2023 (filed with SEC on March 28, 2024).
• D-Wave Quantum Inc. Form 10-Q for the quarter ended March 31, 2024 (filed with SEC on May 10, 2024).
• D-Wave Quantum Inc. Press Releases (e.g., regarding LPC agreement May 2023, PSP Investments loan May 2024, R&D cost-sharing May 2024). Available on D-Wave's Investor Relations website.
• Yahoo Finance / Google Finance for QBTS stock data and company profile.

(For a real report, direct URLs to SEC filings and press releases would be provided.)

Example SEC Filings Search: SEC EDGAR Database (Search for D-Wave Quantum Inc.)

D-Wave Investor Relations: https://ir.dwavesys.com/

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