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This Management's Discussion and Analysis of Financial Condition and Results of
Operations section should be read in conjunction with the consolidated financial
statements and notes thereto included elsewhere in this Annual Report on Form
10-K. This discussion and analysis contains forward-looking statements, such as
statements of our plans, objectives, expectations and intentions. Any statements
that are not statements of historical fact are forward-looking statements. When
used, the words "believe," "plan," "intend," "anticipate," "target," "estimate,"
"expect," "will," "continue," "project," and the like, and/or future tense or
conditional constructions ("will," "may," "could," "should," etc.), or similar
expressions, identify certain of these forward-looking statements. These
forward-looking statements are subject to risks and uncertainties, including
those we describe under "Risk Factors" and elsewhere in this Annual Report on
Form 10-K that could cause actual results or events to differ materially from
those expressed or implied by the forward-looking statements. Our actual results
and the timing of events could differ materially from those anticipated in these
forward-looking statements as a result of a variety of factors.
For purposes of this discussion, “Rigetti,” “the Company,” “we,” “us” or “our”
refer to Rigetti Computing, Inc. and its subsidiaries unless the context
otherwise requires.
Overview
On March 2, 2022 (the "Closing Date"), we consummated the transactions
contemplated by that certain Agreement and Plan of Merger dated as of October 6,
2021, as amended on December 23, 2021 and January 10, 2022 (as amended, the
"Merger Agreement"), by and among Supernova Partners Acquisition Company II,
Ltd., a Cayman Islands exempted company ("Supernova"), Supernova Merger Sub,
Inc., a Delaware corporation and a direct wholly owned subsidiary of Supernova
(the "First Merger Sub"), Supernova Romeo Merger Sub, LLC, a Delaware limited
liability company and a direct wholly owned subsidiary of Supernova (the "Second
Merger Sub"), and Rigetti Holdings, Inc., a Delaware corporation ("Legacy
Rigetti"). As contemplated by the Merger Agreement, on March 1, 2022 Supernova
was domesticated as a Delaware corporation and changed its name to "Rigetti
Computing, Inc." (the "Domestication"). On the Closing Date, (i) First Merger
Sub merged with and into Legacy Rigetti, the separate corporate existence of
First Merger Sub ceased and Legacy Rigetti survived as a wholly owned subsidiary
of Rigetti Computing, Inc. (the "Surviving Corporation" and, such merger, the
"First Merger"), and (ii) immediately following the First Merger, the Surviving
Corporation merged with and into the Second Merger Sub, the separate corporate
existence of the Surviving Corporation ceased and Second Merger Sub survived as
a wholly owned subsidiary of Rigetti Computing, Inc. and changed its name to
"Rigetti Intermediate LLC" (such merger transaction, the "Second Merger" and,
together with the First Merger, the "Merger", and, collectively with the
Domestication, the "PIPE Financing" (as defined below) and the other
transactions contemplated by the Merger Agreement, the "Business Combination").
The closing of the Business Combination is herein referred to as "the Closing."
We build quantum computers and the superconducting quantum processors that power
them. We believe quantum computing represents one of the most transformative
emerging capabilities in the world today. By leveraging quantum mechanics, we
believe our quantum computers process information in fundamentally new, more
powerful ways than classical computers. When scaled, it is anticipated that
these systems will be poised to solve problems of staggering computational
complexity at unprecedented speed.
With the goal of unlocking this opportunity, we have developed the world's first
multi-chip quantum processor for scalable quantum computing systems. We believe
that this patented and patent pending, modular chip architecture is the building
block for new generations of quantum processors that we expect to achieve a
clear advantage over classical computers. Our long-term business model centers
on revenue generated from quantum computing systems made accessible via the
cloud in the form of Quantum Computing as a Service ("QCaaS') products. However,
the substantial majority of our revenues are derived from development contracts,
and we anticipate this market opportunity will exist for at least the next
several years as we work to ramp up our QCaaS business. Additionally, we are
working to further develop a revenue stream and forging important customer
relationships by entering into technology development contracts with various
partners.
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We are a vertically integrated company. We own and operate Fab-1, a dedicated and integrated laboratory and manufacturing facility, through which we own the means of producing our breakthrough multi-chip quantum processor technology. We leverage our chips through a full-stack product development approach, from quantum chip design and manufacturing through cloud delivery. We believe this full-stack development approach offers both the fastest and lowest risk path to building commercially valuable quantum computers. We have been generating revenue since 2018 through partnerships with government agencies and commercial organizations; however, we have not yet generated profits. We have incurred significant operating losses since inception. Our net losses were $71.5 million and $38.2 million for the year ended December 31, 2022, and 11 months ended December 31, 2021, respectively. We expect to continue to incur additional losses for the foreseeable future as we invest in research development and infrastructure in line with our long-term business strategy. As of December 31, 2022, we had an accumulated deficit of $278.7 million. Based on our estimates and current business plan, we expect that we will need to obtain additional capital by late 2024 or early 2025 in order to continue our research and development efforts and achieve our business objectives. There is no assurance that additional financing will be available. If we are unable to raise additional funding when needed, we may be required to delay, limit or substantially reduce our quantum computing development efforts. In February 2023, we announced an updated business strategy, including revisions to our technology roadmap. In connection with this updated strategy, we have implemented a workforce reduction in order to focus the organization and our resources on nearer-term strategic priorities. In March 2023, we further refined our business strategy after internally deploying Ankaa-1, our 84-qubit system delivering denser qubit spacing and tunable couplers, within our company for testing. We plan to concentrate on refining the performance of Ankaa-1. Upon the anticipated external launch of the Ankaa-1 84-qubit system, which is expected to be to select customers, we plan to continue efforts to improve the performance of the system with the goal of reaching at least 98% 2-qubit gate fidelity to support the anticipated Ankaa-2 84-qubit system. We then plan to launch the anticipated Ankaa-2 84 qubit system, continuing to work to improve performance with the goal of reaching at least 99% gate fidelity on Ankaa-2. If these targets are achieved, we plan to shift focus to scaling to develop Lyra, an anticipated 336-qubit system. We believe that this business plan should enable us to concentrate our software application development strategy on what we believe to be the highest likelihood applications for demonstrating nearer term narrow quantum advantage. The reduction in workforce impacted approximately 50 employees or 28% of our workforce. We began implementing activities with respect to the revised business plan and reduction in workforce in February 2023. Affected employees were offered separation benefits, including severance payments and temporary healthcare coverage assistance. We currently expect to incur restructuring charges of approximately $1.4 million for severance payments and temporary healthcare coverage for effected employees. Such restructuring charges are expected to be incurred and recorded in the first quarter of 2023.
The Business Combination and PIPE Financing
On October 6, 2021, SNII entered into the Merger Agreement by and among
Supernova, First Merger Sub, Second Merger Sub, and Legacy Rigetti. On March 2,
2022, the Business Combination was consummated. While the legal acquirer in the
Merger Agreement was Supernova, for financial accounting and reporting purposes
under United States generally accepted accounting principles ("U.S. GAAP"),
Rigetti was the accounting acquirer and the Merger was accounted for as a
"reverse recapitalization." A reverse recapitalization does not result in a new
basis of accounting, and financial statements of Rigetti represent the
continuation of the financial statements of Legacy Rigetti in many respects.
Under this method of accounting, Supernova was treated as the "acquired" company
for financial reporting purposes. For accounting purposes, Rigetti was deemed to
be the accounting acquirer in the transaction and, consequently, the transaction
was treated as a recapitalization of Rigetti (i.e., a capital transaction
involving the issuance of stock by Supernova for the stock of Rigetti).
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As a result of the Business Combination, all of the shares of Legacy Rigetti
Common Stock outstanding immediately prior to the Closing (including Legacy
Rigetti Common Stock resulting from the Legacy Rigetti preferred stock
conversion) were converted into the right to receive an aggregate of 78,959,579
shares of our Common Stock, par value $0.0001 per share ("Common Stock").
Additionally, each issued and outstanding share of Supernova Class A and Class B
Common Stock held by Supernova automatically converted to 20,209,462 shares of
Common Stock (of which 3,059,273 shares are subject to vesting under certain
conditions). Upon consummation of the Business Combination, the most significant
change in our reported financial position and results of operations was an
increase in cash of $205.0 million (as compared to Rigetti's balance sheet at
December 31, 2021), including $225.6 million of proceeds from the Business
Combination and PIPE Financing net of transaction costs incurred by us of
$20.6 million.
Additional direct and incremental transaction costs were also incurred by
Rigetti in connection with the Business Combination. Generally, costs (e.g.,
SPAC shares) are recorded as a reduction to additional paid-in capital. Costs
allocated to liability-classified instruments that are subsequently measured at
fair value through earnings (e.g., certain SPAC warrants) are expensed.
Rigetti's transaction costs totaled $20.6 million, of which $19.7 million was
allocated to equity-classified instruments and recorded as a reduction to
additional paid-in capital, and the remaining $0.9 million was allocated to
liability-classified instruments that are subsequently measured at fair value
through earnings and recognized as expense in the consolidated statements of
operations during the year ended December 31, 2022.
As a result of the Business Combination, we became subject to the reporting
requirements under the Securities Exchange Act of 1934, as amended, and listing
standards of the Nasdaq Capital Market, which has and will necessitate us to
hire additional personnel and implement procedures and processes to address such
public company requirements. We expect to incur additional ongoing 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.
Our future results of consolidated operations and financial position may not be
comparable to historical results as a result of the Business Combination.
Macroeconomic Considerations
Unfavorable conditions in the economy in the United States and abroad may negatively affect the growth of our business and our results of operations. For example, macroeconomic events, including the COVID-19 pandemic, rising inflation, the U.S. Federal Reserve raising interest rates, the Russia-Ukraine war, and recent bank failures have led to economic uncertainty globally. The effect of macroeconomic conditions may not be fully reflected in our results of operations until future periods. If, however, economic uncertainty increases or the global economy worsens, our business, financial condition and results of operations may be harmed. For further discussion of the potential impacts of macroeconomic events on our business, financial condition, and operating results, see the section titled "Risk Factors," including the risk factor titled "Unstable market and economic conditions have had and may continue to have serious adverse consequences on our business, financial condition and share price."
Specifically, the COVID-19 pandemic has limited and could further limit the
ability of suppliers and business partners to perform, including third-party
suppliers’ ability to provide components, services and materials. We have
experienced and may experience further increases in the cost of raw materials.
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Furthermore, during the year ended December 31, 2022, we experienced supply chain challenges, which we largely attribute to the COVID-19 pandemic and the general disruptions resulting from the ongoing conflict between Ukraine and Russia and related sanctions, as well as increases in costs of component parts, labor and raw materials, which we largely attribute to rising inflation and high demand as a result of restricted supply. We expect these increased costs to remain high as the COVID-19 pandemic, the Ukraine-Russia conflict and their respective effects persist. As global economic conditions recover from the COVID-19 pandemic, the Ukraine-Russia conflict and the related sanctions, business activity may not recover as quickly as anticipated, and it is not possible at this time to estimate the long-term impact that these and related events could have on our business, as the impact will depend on future developments, which are highly uncertain and cannot be predicted. For instance, product demand may be reduced due to an economic recession, a decrease in corporate capital expenditures, prolonged unemployment, rising inflation and interest rates, labor shortages, reduction in consumer confidence, adverse geopolitical and macroeconomic events, or any similar negative economic condition. In addition, global economic conditions have been worsening, with disruptions to, and volatility and uncertainty in, the credit and financial markets in the U.S. and worldwide resulting from the effects of COVID-19 and increases in inflation, interest rates and recent and potential future disruptions in access to bank deposits or lending commitments due to bank failures. If these conditions persist and deepen, we could experience an inability to access additional capital or our liquidity could otherwise be impacted. If we are unable to raise capital when needed or on attractive terms, we would be forced to delay, reduce or eliminate our research and development programs and other efforts. However, like many other companies, we are taking actions to monitor our operations to account for the increases in cost of capital. Specifically, this includes efforts to enhance our operational efficiency, maximize our R&D spend through strategic collaborations, and being highly selective in hiring top-tier talent.
Change in Fiscal Year
In October 2021, the board of directors of Legacy Rigetti (the "Legacy Rigetti Board") approved a change in fiscal year end from January 31 to December 31, effective December 31, 2021. As a result of this change, our fiscal year begins on January 1 and ends on December 31 of each year, starting on January 1, 2022. For fiscal year 2021, this covers a period of 11 months starting from February 1, 2021 and ending on December 31, 2021. See below "Result of Operations" regarding comparability of prior periods relating to the change in fiscal year.
Key Components of Results of Operations
Revenue
We generate revenue through our development contracts, as well as from our QCaaS
offerings and other services including training and provision of quantum
computing components. Development contracts are generally multi-year,
non-recurring arrangements pursuant to which we provide professional services
regarding collaborative research in practical applications of quantum computing
to technology and business problems within the customer's industry or
organization and assists the customer in developing quantum algorithms and
applications to assist customers in areas of business interest. QCaaS revenue is
recognized on a ratable basis over the contract term or on a usage basis, which
generally ranges from three months to two years. Revenue related to development
contracts and other services is recognized as the related milestones are
completed or over time, as the work required to complete milestones deemed
probable of being met is completed. Revenue related to the sale of custom
quantum computing components is recognized at a point in time upon acceptance by
the customer.
Cost of Revenue
Cost of revenue consists primarily of all direct and indirect cost associated
with providing QCaaS offerings and development contracts and other services,
including employee salaries and related taxes, bonuses, and benefit costs of
program management and personnel associated with the delivery of goods and
services to customers and sub-contract costs for work performed by third
parties. Cost of revenue also includes an allocation of facility costs,
depreciation and amortization directly related to providing the QCaaS offerings
and development contracts and other services. Cost of revenue is expected to
increase with any growth in revenues as we expand our operations, enhance our
service offerings and expand our customer base.
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Operating Expenses
Our operating expenses consist of sales and marketing, general and
administrative and research and development expenses.
Research and Development
Research and development costs are expensed as incurred. Research and
development expenses include compensation, employee benefits, stock-based
compensation, outside consultant fees, facility costs, depreciation and
amortization, materials and components purchased for research and development.
We expect research and development expenses to increase as we invest in the
enhancement of our product offerings. We do not currently capitalize any
research and development expenditures.
Sales and Marketing
Sales and marketing expenses consist primarily of compensation including stock-based compensation, employee benefits, outside consultant's fees, travel and marketing promotion costs. We expect selling and marketing expenses to increase after we achieve narrow and broad quantum advantage, and subsequently enhance our service offerings, expand our customer base, and implement new marketing strategies.
General and Administrative
General and administrative expenses include compensation, employee benefits,
stock-based compensation, insurance, facility costs), professional service fees,
and other general overhead costs other than those associated with providing
QCaaS offerings and development contracts and other services. We expect our
general and administrative expenses to increase as we continue to grow our
business. We also expect to incur additional expenses as a result of operating
as a public company.
Provision for Income Taxes
Income taxes are accounted for under the asset and liability method. Deferred
tax assets and liabilities are recognized for the future tax consequences
attributable to differences between the financial statement carrying amounts of
existing assets and liabilities and their respective tax bases and operating
loss and tax credit carryforwards. Deferred tax assets and liabilities are
measured using enacted tax rates expected to apply to taxable income in the
years in which those temporary differences are expected to be recovered or
settled. The effect on deferred tax assets and liabilities of a change in tax
rates is recognized in income in the period that includes the enactment date. A
valuation allowance is recorded for deferred tax assets if it is more likely
than not that some portion or all of the deferred tax assets will not be
realized. We have recorded a full valuation allowance against our deferred tax
assets.
Results of Operations
As described above in "-Change in Fiscal Year," the board of Legacy Rigetti
changed the fiscal year from January 1 to December 31, effective December 31,
2021. Accordingly, the fiscal year ended December 31, 2021 covers a period of 11
months from February 1, 2021 to December 31, 2021 ("fiscal year 2021").
Financial statements for the fiscal year ended December 31, 2022 include the 12
months ended December 31, 2022 ("fiscal year 2022").
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The comparability of our results of operations for fiscal year 2022 with fiscal year 2021 is affected by the change in fiscal year since fiscal year 2021 includes an 11-month period versus a 12-month period for fiscal year 2022. For comparability purposes, to supplement the discussion of our historical results of operations for fiscal year 2022 and comparative period in 2021, we have included a discussion of unaudited supplemental recast information for the 12 months ended December 31, 2021. The unaudited supplemental recast information for the 12-month period ended December 31, 2021 includes historical consolidated results of operations for fiscal year 2021 and one month of results of operations for January 2021.
All dollar amounts in tables, except share and per share amounts, are presented
in thousands unless otherwise noted.
Year ended December 31, 2022 compared to 11 months ended December 31, 2021 and
Supplemental Information - Year ended December 31, 2022 compared to Unaudited 12
months ended December 31, 2021
The following tables set forth our results of operations for fiscal year 2022
compared to fiscal year 2021 and supplemental information comparing fiscal year
2022 to the unaudited 12 month period ended December 31, 2021:
Fiscal Year Supplemental Information
Year Ended Year Ended
December 31, 2022 December 31, 2022
11 Months versus 12 Months versus
Year Ended Ended 11 Months Ended Year Ended Ended 12 Months Ended
December 31, December 31, December 31, 2021 December 31, December 31, December 31, 2021
2022 2021 $ Change % Change 2022 2021 $ Change % Change
(unaudited) (unaudited) (unaudited)
Revenue: $ 13,102 $ 8,196 $ 4,906 60 % $ 13,102 $ 8,633 $ 4,469 52 %
Cost of revenue 2,873 1,623 1,250 77 % 2,873 1,770 1,103 62 %
Total gross profit 10,229 6,573 3,656 56 % 10,229 6,863 3,366 49 %
Operating expenses:
Research and development 59,952 26,928 33,024 123 % 59,952 28,798 31,154 108 %
Sales and marketing 6,348 2,475 3,873 156 % 6,348 2,557 3,791 148 %
General and administrative 47,632 11,299 36,333 322 % 47,632 13,094 34,538 264 %
Goodwill impairment 5,377 - 5,377 nm * 5,377 - 5,377 nm *
Total operating expenses 119,309 40,702 78,607 193 % 119,309 44,449 74,860 168 %
Loss from operations (109,080 ) (34,129 ) (74,951 ) 220 % (109,080 ) (37,586 ) (71,494 ) 190 %
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Fiscal Year Supplemental Information
Year Ended Year Ended
December 31, 2022 December 31, 2022
11 Months versus 12 Months versus
Year Ended Ended 11 Months Ended Year Ended Ended 12 Months Ended
December 31, December 31, December 31, 2021 December 31, December 31, December 31, 2021
2022 2021 $ Change % Change 2022 2021 $ Change % Change
(unaudited) (unaudited) (unaudited)
Other (expense) income, net:
Interest expense $ (5,286 ) $ (2,465 ) $ (2,821 ) 114 % $ (5,286 ) $ (2,465 ) $ (2,821 ) 114 %
Interest income 2,433 10 2,423 nm * 2,433 11 2,422 nm *
Change in fair value of derivative
warrant liabilities 22,132 (1,664 ) 23,796 nm * 22,132 (1,664 ) 23,796 nm *
Change in fair value of earn-out
liability 19,207 - 19,207 nm * 19,207 - 19,207 nm *
Transaction cost (927 ) - (927 ) nm * (927 ) - (927 ) nm *
Other income (expense) - 7 (7 ) -100 % - (23 ) 23 -100 %
Total other income (expense), net 37,559 (4,112 ) 41,671 37,559 (4,141 )
41,700
Net loss before provision for income taxes (71,521 ) (38,241 ) (33,280 ) (71,521 ) (41,727 ) (29,794 ) Provision for income taxes - - - - - - Net loss $ (71,521 ) $ (38,241 ) $ (33,280 ) $ (71,521 ) $ (41,727 ) $ (29,794 ) *nm - not meaningful Revenue
Year ended December 31, 2022 vs. 11 months ended December 31, 2021
Revenue increased $4.9 million, or 60%, to $13.1 million for the year ended
December 31, 2022, up from $8.2 million for the 11 months ended December 31,
2021. The period over period increase was attributable to a $5.3 million
increase in revenue from extension of three government contracts into year-two
and year-three phases, a $0.7 million increase from a non-governmental QCaaS
customer, and other increases in revenue from existing projects totaling
$0.4 million. These increases were offset in part by a $0.9 million decrease in
revenue from a U.S. government contract that is nearing completion and a
$0.6 million decrease in revenue from other customers.
Our development contracts are fixed price milestone or cost share-based
contracts and the timing and amounts of revenue recognized in each quarter vary
based on the delivery of the associated milestones and/or work performed. We
expect to continue to generate the majority of our revenue from development
contracts over at least the next several years and that revenue will vary in
timing and size as we work to ramp up our QCaaS business for the longer term.
There may be some near-term reduction in revenue as we align to our new strategy
announced in February 2023.
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Supplemental Information – Year ended December 31, 2022 vs. Unaudited 12 months
ended December 31, 2021
Revenue increased $4.5 million, or 52%, to $13.1 million for the year ended December 31, 2022, up from $8.6 million for the unaudited 12 months ended December 31, 2021. The period over period increase was primarily attributable to the reasons discussed in the section above, offset in part by one more month of activity in the 2021 comparison period. We earned $0.4 million of revenue in January 2021 which was included in the unaudited 12 months ended December 31, 2021. Cost of Revenue
Year ended December 31, 2022 vs. 11 months ended December 31, 2021
Cost of revenue increased by $1.3 million, or 77%, to $2.9 million for the year ended December 31, 2022, as compared to $1.6 million for the 11 months ended December 31, 2021. The increase was mainly attributable to an increase in employee-related costs of $0.4 million and subcontractor costs of $0.9 million associated with specific projects and collaborative development contract services work with government agencies. We expect subcontractor costs to increase and employee-related costs to decline in the near term as a result of the reorganization efforts, including the reduction in workforce, that we announced in February 2023. In addition, we have incurred and may continue to incur increased costs associated with equipment, system components and labor due to current global economic conditions, including inflation, labor shortages and supply conditions.
Supplemental Information – Year ended December 31, 2022 vs. Unaudited 12 months
ended December 31, 2021
Cost of revenue increased by $1.1 million, or 62%, to $2.9 million for the year ended December 31, 2022, as compared to $1.8 million for the unaudited 12 months ended December 31, 2021. The increase was mainly attributable to the reasons described in the section above and one more month in the 2021 comparison period. We incurred $0.2 million of employee-related costs in January 2021 which was included in the unaudited 12 month periods ended December 31, 2021.
Operating Expenses
Research and Development Expenses
Year ended December 31, 2022 vs. 11 months ended December 31, 2021
Research and development expenses increased by $33.0 million, or 123%, to
$60.0 million for the year ended December 31, 2022, from $26.9 million for the
11 months ended December 31, 2021. The period over period increase was primarily
attributable to the following factors and one less month of activity in the 2021
comparison period:
• a $22.6 million increase in employee-related costs for the year ended
December 31, 2022 due to an increase in headcount and resulting wage
increase of $9.5 million, a $13.1 million increase in stock-based
compensation expense, which includes annual refresh grants of restricted
stock to employees in the year ended December 31, 2022 and a one-time
cumulative recognition of previously deferred stock-based compensation
expense of $1.6 million related to the satisfaction of the liquidity
condition with respect to outstanding stock units recognized as a result
of the close of the Business Combination in March 2022.
• a $7.4 million increase associated with the ongoing and expanded
investment in research and development efforts, including a $3.5 million
increase in software subscription costs, a $2.0 million increase in
depreciation, a $0.9 million increase in equipment spares and materials
costs, a $0.3 million increase in other costs, a $0.4 million increase in
other expenses relates to travel and meal costs, and a $0.3 million
increase in consultant fees.
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• a $3.0 million increase in facility costs, including a $1.3 million
one-time catch up for electricity usage at our Berkeley facility from
February 2019 to December 31, 2021, which was an out-of-period
adjustment; additional electricity usage of $0.7 million, and an increase
in operating lease expense of $1.0 million due to an expansion of office
space.
We expect research and development expenses to remain consistent during the next
two years as a result of anticipated increase in expenses as we shift our focus
to further developing the Ankaa-1 84-qubit system and improving performance with
the anticipated Ankaa-2 84-qubit system, offset by our reorganization efforts
announced in February 2023. Thereafter our plan is to shift to development of
the anticipated Lyra 336-qubit system, working towards the goal of achieving
narrow quantum advantage. We expect research and development expenses to
increase as and if we near the point of achieving narrow quantum advantage. Our
ability to limit research and development costs in the nearer term will be
impacted by increasing costs for labor, including stock-based compensation
expenses in order to attract and retain qualified personnel, equipment and
component costs impacted by the current macroeconomic environment, including
supply chain constraints, and labor shortages.
Supplemental Information – Year ended December 31, 2022 vs. Unaudited 12 months
ended December 31, 2021
Research and development expenses increased by $31.2 million, or 108%, to $60.0 million for the year ended December 31, 2022, from $28.8 million for the unaudited 12 months ended December 31, 2021. The increase was primarily attributable to the reasons discussed in the section above and one more month of expenses included in the 2021 comparison period specifically related to the following:
• $1.6 million of employee-related costs, including $1.4 million for wages
and $0.2 million for stock-based compensation expense. • $0.2 million of depreciation expense.
Sales and Marketing Expenses
Year ended December 31, 2022 vs. 11 months ended December 31, 2021
Sales and marketing increased $3.9 million, or 156%, to $6.3 million for the year ended December 31, 2022, from $2.5 million for the 11 months ended December 31, 2021. The period over period increase was primarily attributable to a $0.8 million increase in employee related costs, a $2.0 million increase in stock-based compensation of which $0.4 million was related to the satisfaction of the liquidity condition with respect to outstanding stock units recognized as a result of the close of the Business Combination in March 2022, a $1.1 million increase for consultants and other spending for sales development activities. We expect selling and marketing expenses to marginally decrease or stay consistent during the next few years due to the reduction in workforce we implemented in February 2023 and other cost control efforts. We expect sales and marketing expenses to increase if and when we near the point of narrow quantum advantage.
Supplemental Information Year ended December 31, 2022 vs. Unaudited 12 months
ended December 31, 2021
Sales and marketing increased $3.8 million, or 148%, to $6.3 million for the
year ended December 31, 2022, from $2.6 million for the unaudited 12 months
ended December 31, 2021. The increase was primarily driven by the reasons
discussed in the section above and one more month of activity in the 2021
comparison period.
General and Administrative Expenses
Year ended December 31, 2022 vs. 11 months ended December 31, 2021
General and administrative expenses increased by $36.3 million, or 322%, to
$47.6 million for the year ended December 31, 2022, from $11.3 million for the
11 months ended December 31, 2021.
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The increase was attributable to the following factors:
• a $27.9 million increase in stock-based compensation expense, including
a one-time cumulative recognition of previously deferred stock-based
compensation expense of $6.9 million related to the satisfaction of the
liquidity condition with respect to outstanding stock units recognized as
a result of the closing of the Business Combination.
• a $7.8 million increase in other expenses, including $4.6 million in
legal and accounting costs related to public company reporting
requirements, investor relation costs, other software acquisition costs,
and a $3.2 million increase in consultant costs.
• a $2.7 million increase for directors’ and officers’ insurance and other
office expenses attributable to a return to in-person office work related
to the Covid-19 pandemic;
• a $1.8 million increase for transaction bonuses awarded to employees in
recognition of the closing of the Business Combination,
• a $1.8 million increase in employee related costs as a result of
operating as a public company and the build out of our information
security team, including higher executive salaries and increased
headcount.
• a $0.5 million increase in depreciation expense.
These costs were partially offset by the gain in change in fair value of our
Forward Warrant Agreement of $5.8 million which was entered into with Ampere in
October 2021 as part of our strategic collaboration agreement.
We expect general and administrative expenses to decrease or stay consistent
during the next few years due to the reduction in workforce we implemented in
February 2023 and other efforts to control costs.
Supplemental Information – Year ended December 31, 2022 vs. Unaudited 12 months
ended December 31, 2021
General and administrative expenses increased by $34.5 million, or 264%, to $47.6 million for the year ended December 31, 2022, from $13.1 million for the unaudited 12 months ended December 31, 2021. The increase was attributable to the reasons described in the section above and one more month of activity in the 2021 comparison period.
The Company incurred the following costs totaling $1.8 million in January 2021
which were included in the unaudited 12 months ended December 31, 2021:
• $0.5 million in other expenses including legal and accounting costs
related to private company financing initiatives, audit, third party
consulting services, preparing the company to go public and other
software acquisition costs;
• $0.5 million in employee related costs;
• $0.3 million in other costs attributable to return to office work;
• $0.2 million in depreciation;
• $0.1 million in stock-based compensation expense.
• $0.2 million in other costs
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Goodwill impairment
Year ended December 31, 2022 vs. 11 months ended December 31, 2021
Goodwill impairment increased by $5.4 million for the year ended December 31, 2022, when compared to the 11 months ended December 31, 2021. We test for goodwill impairment on the first of November each year and at interim dates when indicators of impairment exist. When assessing goodwill for possible impairment, we first consider qualitative factors, including but not limited to macroeconomic conditions, industry and market considerations, our overall performance and events directly affecting us. It was noted during our annual goodwill impairment assessment on November 1, 2022 that the Company had experienced a sustained decline in stock price, however, we determined at that time that our goodwill was not impaired. Subsequently, our stock price continued to decline, resulting in a triggering event that required us to evaluate goodwill for possible impairment as of December 31, 2022. After adjusting the Company's stock market capitalization for a control premium based on market comparable transactions, we determined that the fair value of the Company was less than its carrying value or stockholder's equity, resulting in a non-cash goodwill impairment charge of $5.4 million for the year ended December 31, 2022.
Supplemental Information – Year ended December 31, 2022 vs. Unaudited 12 months
ended December 31, 2021
As the goodwill impairment occurred during the year ended December 31, 2022, the increase in impairment during the year ended December 31, 2022 as compared to the unaudited 12 months ended December 31, 2021 is related to the matter described in the above section.
Other Income (Expense), net
Interest Expense
Year ended December 31, 2022 vs. 11 months ended December 31, 2021
Interest expense was $5.3 million and $2.5 million for the year ended
December 31, 2022 and the 11 months ended December 31, 2021, respectively. The
increase in expense was a result of the Loan Agreement we entered into with
Trinity Capital Inc. ("Trinity") in March 2021 (as amended from time to time,
the "Loan Agreement"). The period over period increase was a combination of the
Federal Reserve increasing interest rates in response to inflation and a longer
interest period during the year ended December 31, 2022. For the year ended
December 31, 2022, interest expense was based on the overall borrowings under
the Loan Agreement of $32.0 million with higher interest rates. For the 11
months ended December 31, 2021 interest expense reflected lower borrowings and
interest rates, with borrowings ranging from $12.0 to $27.0 million.
Supplemental Information – Year ended December 31, 2022 vs. Unaudited 12 months
ended December 31, 2021
The increase in interest expense during the year ended December 31, 2022 as compared to the unaudited 12 months ended December 31, 2021 is related to the matter described in the above section. As the Loan Agreement was entered into in March 2021, no interest costs were incurred in January 2021.
Interest Income
Year ended December 31, 2022 vs. 11 months ended December 31, 2021
Interest income was $2.4 million and virtually nil for the year ended
December 31, 2022, and the 11 months ended December 31, 2021, respectively. The
increase in interest income was a result of the available-for-sales investments
we hold and the increase in interest rates on deposits due to Federal Reserve
rate increases. As of December 31, 2022, investment securities in our Trust
Account consisted of $36.3 million in money market funds, $58.2 million in
United States Treasury securities, $3.6 million in corporate bonds and
$23.1 million in commercial paper. We earned interest on such investments. We
did not hold available-for-sales investments and did not earn interest on such
investments during the 11 months ended December 31, 2021.
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Supplemental Information – Year ended December 31, 2022 vs. Unaudited 12 months
ended December 31, 2021
The period over period increase was attributable to the reasons explained in the section above and one more month of interest income recognized in the unaudited 12 months ended December 31, 2021.
Change in Fair Value of Warrant Liabilities
A discussion of change in fair value of warranty liabilities is included in Note
13 to our consolidated financial statements for the year ended December 31,
2022, included elsewhere in this Annual Report on Form 10-K.
Change in Fair Value of Earn-out Liability
A discussion of change in fair value of earn-out liability is included in Note 2, Sponsor Earn-Out Liability, to our consolidated financial statements for the year ended December 31, 2022, included elsewhere in this Annual Report on Form 10-K. Transaction Costs
Year ended December 31, 2022 vs. 11 months ended December 31, 2021
A portion of transaction costs arising from the Business Combination were allocated to liability-classified instruments that are subsequently measured at fair value through earnings. Transaction costs allocated to these instruments must be expensed as incurred. We incurred and expensed total transaction costs of $0.9 million allocated to liability-classified instruments for the year ended December 31, 2022. We did not incur any transaction costs for the 11 months ended December 31, 2021.
Supplemental Information – Year ended December 31, 2022 vs. Unaudited 12 months
ended December 31, 2021
As no transaction costs were incurred during the unaudited 12 months ended
December 31, 2021, the increase in transaction costs during the year ended
December 31, 2022 is related to the matter described in the section above.
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Liquidity and Capital Resources
We have incurred net losses since inception, and experienced negative cash flows
from operations. Prior to the Business Combination, we financed our operations
primarily through the issuance of preferred stock, warrants, convertible notes,
venture backed debt and revenues. During the year ended December 31, 2022, we
incurred a net loss of $71.5 million. As of December 31, 2022, we had an
accumulated deficit of $278.7 million, and we expect to incur additional losses
for the foreseeable future. In connection with the closing of the Business
Combination on March 2, 2022, we received net proceeds of $225.6 million. We
believe that our existing balances of cash, cash equivalents and marketable
securities should be sufficient to meet our anticipated operating cash needs for
at least the next 12 months, based on our current business plan, and
expectations and assumptions considering current macroeconomic conditions. Based
on our estimates and current business plan, we expect that we will need to
obtain additional capital by late 2024 or early 2025 in order to continue our
research and development efforts and achieve our business objectives. We cannot
be sure that additional financing will be available. If we are unable to raise
additional funding when needed, we may be required to delay, limit or
substantially reduce our quantum computing development efforts. We have based
these estimates on assumptions that may prove to be wrong and we could use our
available capital resources sooner than we currently expect, and future capital
requirements and the adequacy of available funds will depend on many factors,
including those described in the section titled "Risk Factors" in this Annual
Report on Form 10-K. Global economic conditions have been worsening, with
disruptions to, and volatility in, the credit and financial markets in the U.S.
and worldwide resulting from the continuing effects of COVID-19 pandemic,
disruptions in banking systems, international conflicts and otherwise. If these
conditions persist and deepen, we could experience an inability to access
additional capital or our liquidity could otherwise be impacted. If we are
unable to raise capital when needed or on attractive terms, we would be forced
to delay, reduce or eliminate our research and development programs and/or other
efforts. A recession or additional market corrections resulting from the impact
of the continuing effects of the COVID-19 pandemic and macroeconomic conditions
could materially affect our business and the value of our securities.
Our short-term cash requirements include capital expenditures for materials and
components for research and development and quantum computing fridges; working
capital requirements; and strategic collaborative arrangements and investments.
Our long-term requirements include expenditures for the planned expansion of our
quantum chip fabrication facility; planned development of multiple generations
of quantum processors; and anticipated additional investments to scale our QCaaS
offering.
We will require a significant amount of cash for expenditures as we invest in
ongoing research and development and business operations. Until such time as we
can generate significant revenue from sales of our development contracts and
other services, including our QCaaS offering, we expect to finance our cash
needs primarily through our Loan Agreement with Trinity, our arrangements with
Ampere, our committed equity financing with B. Riley, and other potential
securities financings or other capital sources, including development contract
revenue with government agencies and strategic partnerships. To the extent that
we raise additional capital through the sale of equity or convertible debt
securities, including through the use of our committed equity financing with B.
Riley, 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 common 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 are
unable to raise additional funds through equity or debt financings when needed,
we may be required to delay, limit, or substantially reduce 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" included in this Annual Report on Form 10-K.
In addition, actual sales, if any, of shares of our Common Stock to B. Riley
pursuant to the committed equity financing will depend on a variety of factors
to be determined by us from time to time, including, among other things, market
conditions, the trading price of our Common Stock and determinations by us as to
appropriate sources of funding for our business and operations. We cannot
guarantee the extent to which we may utilize the committed equity financing.
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Loan and Security Agreement
On March 10, 2021, we entered into the Loan Agreement with Trinity for term loans with a principal amount of $12.0 million, bearing an interest rate at the greater of 7.5% plus the prime rate published by the Wall Street Journal or 11.0%. In addition, we are required to pay a final payment fee equal to 2.75% of the aggregate amount of all term loan advances. The term loans under the Loan Agreement are secured by all of our assets. The Loan Agreement contains customary representations, warranties and covenants, but does not include any financial covenants. The negative covenants include restrictions on the ability to incur indebtedness, pay dividends, execute fundamental change transactions, and other specified actions. In connection with entry into the Loan Agreement, we issued a warrant to purchase shares of our Common Stock to Trinity. The Guarantor of the loan is Rigetti Holdings, Inc. and the loan is secured by substantially all of our assets. On May 18, 2021, we entered into a first amendment to the Loan Agreement, which modified certain financial covenants, including an additional good faith deposit of $20,000 and adding a tranche B to the Loan Agreement in an aggregate amount of $15.0 million, consisting of two advances of $8.0 million and $7.0 million each. In connection with such amendment, the maturity date was modified to be the date equal to 48 months from the first payment date of each specific cash advance. In connection with such amendment, we cancelled the initial warrants and issued a warrant to purchase 995,099 shares of our Common Stock. On October 21, 2021, we entered into a second amendment to the Loan Agreement, which modified the date requiring us to deliver evidence of completion of the PIPE transaction and execution of a definitive merger agreement with a special purpose acquisition company to October 31, 2021. Pursuant to the second amendment, the maturity date was modified to be the date equal to 48 months from the first payment date of each specific cash advance. Subject to an interest only period of 18 months following each specific cash advance date, the term loan incurs interest at the greater of a variable interest rate based on prime rate or 11% per annum, payable monthly. Interest-only payments are due monthly immediately following an advance for a period of 18 months and, beginning on the 19th month, principal and interest payments are due monthly. In January 2022, we entered into the third amendment to the Loan Agreement to increase the debt commitment by $5.0 million to $32.0 million. The amendment allows us to draw an additional $5.0 million immediately with an additional $8.0 million to be drawn at the sole discretion of the lender. We drew the additional $5.0 million upon signing the amendment. Other modifications per the amendment included an extension of the requirement to raise an additional $75.0 million of equity and a defined exit fee for the additional $5.0 million to be at 20% of the advanced funds under the amendment. In conjunction with the amendment, we also guaranteed payment of all monetary amounts owed and performance of all covenants, obligations and liabilities. As of December 31, 2022, the total principal amount outstanding under the Loan Agreement was approximately $30.7 million. We use borrowings under the Loan Agreement for working capital purposes.
The Loan Agreement is secured by a first-priority security interest in
substantially all of our assets. As of the date of this Annual Report on Form
10-K, we are in compliance with all covenants under the Loan Agreement.
Our cash commitments as of December 31, 2022 were primarily as follows:
Total Short-Term
Long-Term
Financing obligations $ 30,709 $ 9,491 $ 21,218
Estimated cash interest on financing
obligations 4,683 1,447 3,236
Operating lease obligations 12,839 2,422 10,417
Total $ 48,231 $ 13,360 $ 34,871
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Financing obligations consist of cash principal payments related to the Loan and Security Agreement and are presented gross. These balances on the consolidated balance sheet are presented net of issuance costs. Estimated cash interest on financing obligations are based on the interest rate on the Loan and Security Agreement as of February 2023 of 15.25%. Operating lease obligations consist of obligations under non-cancelable operating leases for our offices and facilities. The cash requirements in the table above are associated with contracts that are enforceable and legally binding and that specify all significant terms, including fixed or minimum services to be used, fixed, minimum or variable price provisions, and the approximate timing of the actions under the contracts. The table does not include obligations under agreements that we can cancel without a significant penalty.
Summary of Historical Cash Flows
The following table summarizes our cash flows for the periods indicated:
Fiscal Year Supplemental Information
Year Ended Year Ended
December 31, December 31,
11 Months 2022 versus 12 Months 2022 versus
Year Ended Ended 11 Months Ended Year Ended Ended 12 Months Ended
December 31, December 31, December 2021 December 31, December 31, December 2021
2022 2021 $ Change 2022 2021 $ Change
(Unaudited) (Unaudited)
Net cash used in operating
activities $ (62,689 ) $ (29,044 ) $ (33,645 ) $ (62,689 ) $ (30,642 ) $ (32,047 )
Net cash used in investing
activities (107,024 ) (7,008 ) (100,016 ) (107,024 ) (7,354 ) (99,670 )
Net cash provided by
financing activities 215,454 25,583 189,871 215,454 25,601 189,853
Cash Flows Used in Operating Activities
Our cash flows from operating activities are significantly affected by our ability to achieve significant growth to offset expenditures 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.
Year ended December 31, 2022 vs. 11 months ended December 31, 2021
Net cash used in operating activities increased by $33.6 million, or 116%, when comparing the year ended December 31, 2022 to the 11 months ended December 31, 2021. The increase in spending was primarily due to:
• an increase in headcount and payroll related costs of $20.8 million as a
result of investments in research and development efforts combined with
upgrading internal and external resources to operate as a public company
including a one-time bonus related to the business combination of
$2.1 million;
• a $6.3 million increase in legal and accounting costs related to enhanced
public reporting requirements, investor relation costs, and other
software acquisition costs;
• a $3.3 million prepayment of insurance premiums for directors and
officers liability insurance;
• $2.8 million in additional interest costs related to increased borrowing
amounts associated with the Loan Agreement; and
• transaction costs of $1.0 million incurred in connection with the closing
of the Business Combination.
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Net cash used in operating activities during the year ended December 31, 2022 was $62.7 million, resulting primarily from a net loss of $71.5 million, adjusted for non-cash charges of $11.2 million. These non-cash charges were partially offset by changes in operating assets and liabilities during the period. Changes in operating assets and liabilities accounted for $2.3 million of cash used in operations. The changes primarily consisted of an increase in accounts receivable of $4.7 million; an increase in prepaid and current assets of $1.1 million; a decrease in accounts payable of $0.7 million, and a decrease in other liabilities of $0.3 million; offset by an increase in accrued expenses and other current liabilities of $4.5 million. Net cash used in operating activities during the 11 months ended December 31, 2021 was $29.0 million, resulting primarily from a net loss of $38.2 million, adjusted for non-cash charges of $9.0 million. Changes in operating assets and liabilities accounted for $0.2 million of cash provided by operations, which primarily consisted of an increase in prepaid and current assets of $0.3 million; an increase in deferred revenue of $0.5 million, an increase in accounts receivable of $1.1 million, offset by an increase in accounts payable, accrued expenses and other liabilities of $1.1 million. In connection with the reorganization efforts announced in February 2023, we transitioned to a newly appointed CFO and CTO and are implementing a workforce reduction in order to focus the organization and its resources on nearer-term strategic priorities. As a result of the reorganization, we expect to incur costs related to management transition, and reduce operating expenses in activities outside of focus areas in the nearer term and prioritize cash resources.
Supplemental Information – Year ended December 31, 2022 vs. Unaudited 12 months
ended December 31, 2021
Net cash used in operating activities increased by $32.0 million, or 105%, when
comparing the year ended December 31, 2022 to the unaudited 12 months ended
December 31, 2021. The increase in spending was primarily due to reasons
explained in the section above.
Cash Flows Used in Investing Activities
Net cash used in investing activities during the year ended December 31, 2022
was $107.0 million, resulting from the addition of $22.7 million in property and
equipment and the addition of $84.3 million in available-for-sale securities.
Investments in property and equipment during this period relate primarily to
process computing equipment, quantum computing fridges, and development tools
for our chip fabrication facility. Investments in available-for-sale securities
consist of U.S Treasury securities, commercial paper, and corporate bonds that
have a maturity of one year or less.
Net cash used in investing activities during the 11 months ended December 31,
2021, and unaudited 12 months ended December 31, 2021 was $7.0 million and
$7.4 million, respectively, and is attributable to additions to property and
equipment.
Net cash used in investing activities during the year ended December 31, 2022,
increased by $100.0 million and $99.6 million compared to the 11 months and
unaudited 12 months ended December 31, 2021, respectively, largely as a result
of increased investment in available-for-sale securities and research and
development infrastructure, including additional investments for electricity
upgrades. Investments in our Fab 1 facility and quantum computing fridges will
continue to be made to the extent necessary to support our new strategic
direction referred to above.
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Cash Flows provided by Financing Activities
Net cash provided by financing activities during the year ended December 31, 2022 was $215.5 million, reflecting proceeds of $225.6 million from the Business Combination and PIPE Investment net of transaction costs, additional proceeds from the issuance of debt and warrants of $5.0 million associated with the Loan Agreement, less principal payments of $1.3 million, debt issuance costs and exit fees totaling $1.1 million; and proceeds from issuance of Common Stock upon exercise of stock options and warrants of $6.1 million. Net cash provided by financing activities was the same for the 11 months ended December 31, 2021 and unaudited 12 months ended December 31 2021 for a total of $25.6 million, mainly reflecting proceeds from the issuance of debt totaling $27.0 million less cash payments for debt issuance costs of $0.3 million, proceeds from issuance of Common Stock upon exercise of stock options and warrants for a total $0.3 million, and payment of deferred offering costs of $1.5 million. Net cash provided by financing activities during the year ended December 31, 2022 increased by $189.9 million as compared to both the 11 months and unaudited 12 months ended December 31, 2021, largely from the close of the Business Combination and PIPE Investment net of transaction costs, and additional proceeds from the issuance of debt and warrants during the year ended December 31, 2022. We expect to continue finance our cash needs primarily through our arrangements with Ampere, our committed equity financing with B. Riley, and other potential securities financings or capital sources.
Critical Accounting Policies and Estimates
This Management's Discussion and Analysis of Financial Condition and Results of Operations is based on our consolidated financial statements included in this Annual Report on Form 10-K, which 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 that affect revenue and expenses during the reporting periods. Our estimates are based on 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 consolidated financial statements for the year ended December 31, 2022, included elsewhere in this Annual Report on Form 10-K, we believe the following critical accounting policies and estimates are most important to understanding and evaluating our reported financial results.
Public and Private Warrants
Prior to the Business Combination, Supernova issued 4,450,000 private placement
warrants ("Private Warrants") and 8,625,000 public warrants ("Public Warrants"
and collectively, "Warrants"). Each whole warrant entitles the holder to
purchase one share of our Common Stock at a price of $11.50 per share, subject
to adjustments and will expire five years after the Merger or earlier upon
redemption or liquidation.
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The Private Warrants do not meet the derivative scope exception and are accounted for as derivative liabilities. Specifically, the Private Warrants contain provisions that cause the settlement amounts to be dependent upon the characteristics of the holder of the warrant which is not an input into the pricing of a fixed-for-fixed option on equity shares. Therefore, the Private Warrants are not considered indexed to our stock and should be classified as a liability. Since the Private Warrants meet the definition of a derivative, we recorded the Private Warrants as liabilities in the consolidated balance sheet at fair value upon the closing of the Business Combination, with subsequent changes in the fair value recognized in the consolidated statements of operations at each reporting date. The fair value of the Private Warrants was measured using the Black-Scholes option-pricing model at each measurement date. The Public Warrants also fail to meet the indexation guidance in ASC 815 and are accounted for as liabilities as the Public Warrants include a provision whereby in a scenario in which there is not an effective registration statement, the warrant holders have a cap, 0.361 shares of Common Stock per warrant (subject to adjustment), on the issuable number of shares in a cashless exercise. Subsequent to the separate listing and trading of the Public Warrants, the fair value of the Public Warrants has been measured based on the observable listed prices for such warrants and the fair value of the Private Warrants are measured using a Monte Carlo Pricing Model. On the consummation of the Business Combination, we recorded a liability related to the Private Warrants of $9.6 million, with an offsetting entry to additional paid-in capital. As of December 31, 2022, the fair value of the Private Warrants decreased to $1.1 million, with the gain on the change in fair value of derivative warrant liabilities recorded in the consolidated statements of operations for the year ended December 31, 2022. Similarly, on the consummation of the Business Combination, we recorded a liability related to the Public Warrants of $16.3 million, with an offsetting entry to additional paid-in capital. As of December 31, 2022, the fair value of the Public Warrants decreased to $0.7 million with the gain on the change in fair value of derivative warrant liabilities recorded in the consolidated statements of operations for the year ended December 31, 2022.
Other Derivative Warrant Liabilities
We currently do not use derivative instruments to hedge exposures to cash flow,
market, or foreign currency risks. We evaluate all of our financial instruments,
including issued stock purchase warrants, to determine if such instruments are
derivatives or contain features that qualify as embedded derivatives, pursuant
to ASC 815, "Derivatives and Hedging" ("ASC 815") at the initial recognition
date.
Other than the Public and Private Warrants noted above, we also issued a total
of 783,129 Common Stock warrants in conjunction with the Loan Agreement in 2021.
Such derivative warrant liabilities are classified as non-current as their
liquidation is not reasonably expected to require the use of current assets or
require the creation of current liabilities. We utilized the Black-Scholes model
to determine the inception date fair value of the warrants of approximately
$2.7 million which was recorded as part of Debt Issuance Cost. The outstanding
Common Stock warrants were subsequently remeasured at each reporting period
using the Black-Scholes model with the change in fair value recorded as a
component of other income in the Company's consolidated statements of
operations.
On June 2, 2022, the 783,129 Common Stock warrants that were issued in
connection with the Loan Agreement were exercised and the $6.4 million warrant
liability was reclassified to equity. We recorded a loss of $2.0 million from
the change in the fair value of the warrant liability for the year ended
December 31, 2022.
Earn-Out Liability
At Business Combination Closing, Supernova Sponsor subjected certain shares
("Sponsor Vesting Shares") of Common Stock held by Supernova Sponsor and its
permitted transferees (the "Sponsor Holders") to forfeiture and vesting as of
the Closing if thresholds related to the weighted average price of Common Stock
are not met for the duration of various specified consecutive day trading
periods during the five-year period following the Closing (the "Earn-out
Triggering Events"). Any such shares held by the Sponsor Holders that remain
unvested after the fifth anniversary of the Closing will be forfeited.
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The Sponsor Vesting Shares are accounted for as liability classified instruments because the Earn-Out Triggering Events that determine the number of Sponsor Vesting Shares to be earned back by the Sponsor Holders include outcomes that are not solely indexed to our Common Stock. The aggregate fair value of the Sponsor Vesting Shares at the time of the Business Combination Closing was estimated using a Monte Carlo simulation model and was determined to be $20.4 million. As of December 31, 2022, the Earn-Out Triggering Events were not achieved for any of the tranches, and as such, the Company adjusted the carrying amount of the liability to its estimated fair value of $1.2 million. The change in the fair value of $19.2 million is included in change in fair value of earn-out liability in the consolidated statements of operations for the year ended December 31, 2022.
Forward Warrant Agreement
In connection with the execution of the Merger Agreement in October 2021, we
entered into the Forward Warrant Agreement with Ampere for the purchase of a
warrant for an aggregate purchase price (including amounts from exercise) of
$10.0 million. The Forward Warrant Agreement provides for the issuance of a
warrant for the purchase of an aggregate of 1,000,000 shares of Common Stock at
an exercise price of $0.0001. The purchase of the warrant was conditioned upon,
among other things, the consummation of the Business Combination and the entry
into a collaboration agreement between Ampere and us. The collaboration
agreement was entered into in January 2022. Ampere was required to pay
$5.0 million to us no later than the later of (i) the Closing and (ii) June 30,
2022.
On June 30, 2022, pursuant to the Warrant Subscription Agreement, we issued the
warrant to Ampere upon receipt of an aggregate of $5.0 million (including the
exercise price), and upon such payment and issuance, 500,000 shares of our
Common Stock vested under the warrant and were immediately exercised by Ampere
pursuant to the terms of the warrant. Ampere is required to pay an additional
$5.0 million to us no later than the closing date of the listing of Ampere's
capital stock, provided that if the listing has not occurred by the second
anniversary of the warrant subscription agreement, Ampere is not obligated to
make the additional payment and we are not obligated to issue the warrants. The
warrant subscription agreement further provides that we will use commercially
reasonable efforts to file a registration statement to register the resale of
the shares issued or issuable pursuant to the warrant and upon such payment the
warrant will vest and be exercisable by Ampere with respect to 500,000 shares of
Common Stock pursuant to the terms of the warrant. We filed such registration
statement and it became effective in the year ended December 31, 2022.
We evaluated the Forward Warrant Agreement as a derivative in accordance with
the guidance of ASC 480, "Distinguishing Liabilities from Equity". We calculated
fair value of the Forward Warrant Agreement by using the Forward Contract
Pricing methodology at inception and at the end of December 31, 2022. The fair
value of the Forward Warrant Agreement was estimated based on the following key
inputs and assumptions 1) Assumed holding period 2) Related risk-free rate and
3) Likelihood of the outcome of the various contingencies specified in the
agreement. Based on these inputs and assumption, we calculated the fair value of
the Forward Warrant Agreement to be a $2.2 million derivative asset at
December 31, 2022 and a $0.2 million derivative liability at December 31, 2021.
We have included the derivative asset separately as a forward contract asset and
the derivative liability as a forward contract liability in the accompanying
consolidated balance sheets as of December 31, 2022 and December 31, 2021,
respectively. The change in fair value is recorded as part of general and
administrative expense in our consolidated statements of operations.
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Revenue Recognition
Revenue consists primarily of our contracts that provide access to Rigetti
quantum computing systems, collaborative research services, professional
services, and the sale of custom quantum computing components. Access to Rigetti
quantum computing systems can be purchased as a quantum computing subscription,
or on a usage basis for a specified quantity of hours. Revenue related to
subscription-based access to Rigetti quantum computing systems (i.e., quantum
computing subscriptions) is recognized on a ratable basis over the subscription
term, which can range from three months to two years. Revenue related to
usage-based access to Rigetti quantum computing systems is recognized over time
as the systems are accessed using an output method based on compute credit hours
expended. Revenue related to collaborative research services and professional
services is recognized over time based on completed milestones or hours or costs
incurred as appropriate. Revenue for partially completed milestones deemed
probable of being met is recognized using an input measure based on actual labor
hours incurred to date relative to total estimated labor hours needed to
complete the milestone. Revenue related to cost share contracts is recognized as
the reimbursable costs are incurred. For Fixed price Milestone based contracts,
revenue is recognized based on the input measure explained above as control is
expected to transfer over the time period a milestone is completed. Revenue
related to the sale of custom quantum computing components is recognized at a
point in time upon acceptance by the customer.
Our fixed fee development contracts vary in term from one to five years, with
the majority of such contracts having a term of 18 months to two years. When
establishing the pricing for our fixed fee arrangements, we determine the
pricing based on estimated costs to complete and expected margins taking into
account the scope of work outlined within the contract being evaluated and our
historical experience with similar services and contracts. Actual costs incurred
over the period in which these contracts are fulfilled could vary from these
estimates and therefore, these estimates are subject to uncertainty. On a
quarterly basis, management reviews the progress with respect to each contract
and its related milestones and evaluates whether any changes in estimates
exists. As a result of the quarterly reviews, revisions in the estimated effort
to complete the contract are reflected in the period in which the change is
identified. These revisions may impact the overall progress related to transfer
of control and therefore, result in either increases or decreases in revenues as
well as increase or decreases in fulfillment costs and contract margins. In
accordance, with ASC No. 250, Accounting Changes and Error Corrections, any
changes in estimates are reflected in our consolidated statements of operations
in the period in which the circumstances that give rise to the revision become
known to management. To date, we have not experienced any changes in estimates
that have had a material impact on our results from operations or financial
position.
When our contracts with customers contain multiple performance obligations, the
transaction price is allocated on a relative standalone selling price basis to
each performance obligation. We typically determine standalone selling price
based on observable selling prices of our products and services. In instances
where standalone selling price is not directly observable, standalone selling
price is determined using information that may include market conditions and
other observable inputs. Standalone selling price is typically established as a
range. In situations in which the stated contract price for a performance
obligation is outside of the applicable standalone selling price range and has a
different pattern of transfer to the customer than the other performance
obligations in the contract, we will reallocate the total transaction price to
each performance obligation based on the relative standalone selling price of
each.
The transaction price is the amount of consideration to which we expect to be
entitled in exchange for transferring goods and services to the customer.
Revenue is recorded based on the transaction price, which includes fixed
consideration and estimates of variable consideration. The amount of variable
consideration included in the transaction price is constrained and is included
only to the extent it is probable that a significant reversal of cumulative
revenue recognized will not occur when the uncertainty associated with the
variable consideration is subsequently resolved.
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Our contracts with customers may include renewal or other options at fixed prices. Determining whether such options are considered distinct performance obligations that provide the customer with a material right and therefore should be accounted for separately requires significant judgment. Judgment is required to determine the standalone selling price for each renewal option to determine whether the renewal pricing is reflective of standalone selling price or is reflective of a discount that would provide the customer with a material right. Based on our assessment of standalone selling prices, we determined that there were no significant material rights provided to our customers requiring separate recognition. Goodwill Impairment Review In December 2022, we tested our goodwill for impairment. See Note 5 - Goodwill of our consolidated financial statements for the year ended December 31, 2022 included elsewhere in this Annual Report on Form 10-K for additional information on how the impairment was measured. We have determined that the Company is a single reporting unit. As such, management estimated the fair value of the Company based on its market capitalization as of December 31, 2022, as adjusted for a control premium based on recent market comparable transactions.
Based on our analysis, we determined that the carrying value of the Company
(stockholder’s equity) exceeded its fair value. As a result, we recorded a
non-tax-deductible goodwill impairment charge of $5.4 million for the year ended
December 31, 2022.
Recently Issued Accounting Pronouncements
A description of recently issued accounting pronouncements that may potentially impact our financial position and results of operations is disclosed in Note 2 of our consolidated financial statements for the year ended December 31, 2022 included elsewhere in this Annual Report on Form 10-K.
Emerging Growth Company and Smaller Reporting Company Status
In April 2012, the JOBS Act was enacted. Section 107 of the JOBS Act provides
that an "emerging growth company" may take advantage of the extended transition
period provided in Section 7(a)(2)(B) of the Securities Act for complying with
new or revised accounting standards. Therefore, an emerging growth company can
delay the adoption of certain accounting standards until those standards would
otherwise apply to private companies. Following the Business Combination, we
still qualify as an emerging growth company and plan to take advantage of the
extended transition period that emerging growth company status permits. 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 under the JOBS Act until the earliest
of (a) December 31, 2026, the last day of our first fiscal year following the
fifth anniversary of the completion of SNII's initial public offering, (b) the
last date of our fiscal year in which we have total annual gross revenue of at
least $1.24 billion, (c) the date on which we are deemed to be a "large
accelerated filer" under the rules of the SEC with at least $700.0 million of
outstanding securities held by non-affiliates or (d) the date on which we have
issued more than $1.0 billion in non-convertible debt securities during the
previous three years.
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 the market value of our
voting and non-voting Common Stock held by non-affiliates is less than
$250.0 million measured on the last business day of our second fiscal quarter,
or our annual revenue is less than $100.0 million during the most recently
completed fiscal year and the market value of 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.
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