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spk01: Good day and thank you for standing by. Welcome to Regetti Computing third quarter 2023 financial results conference call. At this time, all participants are in a listen-only mode. After the speaker's presentation, there will be a question and answer session. To ask a question during the session, you will need to press star 1 1 on your telephone. You will then hear an automated message advising your hand is raised. To withdraw your question, please press star 1 1 again. Please be advised that today's conference is being recorded. I would now like to hand the conference over to your speaker today, Subodh Kulkarni. Please go ahead.
spk00: Subodh Kulkarni Good afternoon, and thank you for participating in DIGATI's earnings conference call covering the third quarter of 2023. Joining me today is Jeff Bertelsen, our CFO, who will review our results in some detail following my overview. Our CTO, David Rivas, is also here to participate in the Q&A session. We will be pleased to answer your questions at the conclusion of our remarks. We would like to point out that this call and Regatti's Q3 2023 press release contain forward-looking statements regarding current expectations, objectives, and underlying assumptions regarding our outlook and future operating results. These forward-looking statements are subject to a number of risks and uncertainties that could cause actual results to differ materially from those described and are discussed in more detail in our Form 10-K for the year ended December 31st, 2022, our Form 10-Q for the three and nine months ended September 30th, 2023, and our subsequent findings with the SEC and other findings with the Securities and Exchange Commission. We urge you to review these discussions of risk factors. Turning now to the business of third quarter of 2023, I'm pleased to report that we continue to grow our QPU system sales. In the third quarter of 2023, Rigetti expanded its QPU customer base, which is delivery of a nine-qubit quantum processing unit, QPU, to another premier national laboratory. This follows our first QPU sale in the second quarter of 2023 to Fermilab, in which we delivered a nine-qubit QPU as part of our partnership with the Superconducting Quantum Materials and Systems Center, SQMS. We were awarded a five-year indefinite delivery indefinite quantity IDIQ contract with the Air Force Research Lab AFRL Information Directorate to supply AFRL researchers with quantum foundry services. This contract allows AFRL to leverage Rigetti's fabrication and manufacturing capabilities to build customized quantum systems. Within the scope of the contract, we will be able to provide quantum integrated circuits, quantum limited amplifiers, cryogenic microwave components, and 9-qubit QPUs. This contract builds on the existing relationship between Rigetti and AFRL to harness our fabrication capabilities for quantum networking hardware research and development. We are thrilled that leading government agencies and national labs are beginning to choose the greatest established fabrication capabilities to advance their quantum computing research and development. By providing hands-on access to our QPUs, we believe that we are enabling greater progress towards narrow quantum advantage and quantum technology breakthroughs. I'm pleased to report that we were recently awarded a DARPA impact contract to advance quantum algorithms for solving combinatorial optimization problems. Our DARPA impact project seeks to develop a novel and efficient encoding of optimization problems onto qubits with the goal of enabling larger problems to be mapped to currently available NISQ era quantum computers. The project will specifically address scheduling problems which are among the best known and most pervasive types of combinatorial optimization problems across numerous industries as well as some of the most challenging to solve. Additionally, in October 2023, we were awarded an Innovate UK grant as part of the feasibility studies in quantum computing applications competition. Joining Rigeti in this work is HSBC, the quantum software lab based at the University of Edinburgh and the National Quantum Computing Center. Together, the consortium aims to enhance existing money laundering techniques by using quantum machine learning techniques with the goal of improving the performance of current state-of-the-art machine learning algorithms. On the technology front, we are continuing to work to improve the system performance of our fourth-generation chip architecture, which features a square lattice and tunable couplers to support our anticipated ANCA-2 84-qubit system. Our ANCA-2 84-qubit system is expected to be deployed and made available to external customers in the fourth quarter of 2023. We continue to make good progress with fidelity on our fourth-generation systems. We have achieved higher than 98% median 2-qubit fidelity with our 9-qubit system, 98% median 2-qubit fidelity with our 24-qubit system, and higher than 97% median 2-qubit fidelity with our ANCA-2 84-qubit system. Our plan continues to be to get to 98% median two-qubit fidelity with our ANCA 284-qubit system and over 99% median two-qubit fidelity in 2024. Thereafter, we intend to develop the 336-qubit LIRA system and to demonstrate MQA narrow quantum advantage in two to three years. And with that, I'll turn the call over to Jeff, who will review our third quarter 2023 financial performance.
spk02: Thanks, Subodh. Revenues in the third quarter of 2023 were $3.1 million compared to $2.8 million in the same period of 2022. Revenue variability is to be expected at this stage of the company's evolution given the variable nature of contract deliverables and timing with major government agencies. Gross margins in the third quarter of 2023 came in at 73%, up from gross margins in the third quarter of 2022 of 72%. On the expense side, total OPEX in the third quarter of 2023 was 19.1 million compared to 33.4 million in the same period in the prior year. The year-over-year decrease was primarily due to a 11.5 million reduction in stock compensation expense. Other decreases in the third quarter of 2023 included lower employee wages and benefit costs resulting from our February 2023 reduction in workforce. The non-cash change in the fair value of the forward agreement for the Ampere warrant increased G&A expense by $1.1 million in the third quarter of 2023. compared with a $387,000 reduction in G&A expense in third quarter of 2022. In the third quarter of 2023, stock compensation expense totaled $3.7 million, and depreciation and amortization expense totaled $2.1 million, compared to $15.1 million and $1.8 million in the third quarter of 2022, respectively. Operating loss for the third quarter of 2023 was $16.8 million compared to an operating loss of $31.3 million for the same period of 2022. Net loss for the third quarter of 2023 was $22.2 million or 17 cents per share compared to a net loss of $18.8 million or 16 cents per share for the same period of 2022. Net loss for the third quarter of 2023 was negatively impacted by the non-cash change in the fair value of the earn-out and derivative warrant liabilities of $1.7 million and $3.4 million respectively. Net loss for the third quarter of 2022 was favorably impacted by the non-cash change in the fair value of the earn-out and derivative warrant liabilities of $4.9 million and $8.1 million respectively. Cash, cash equivalents and available for sale investments totaled $110.2 million as of September 30, 2023, compared with $105.5 million as of June 30, 2023. During the third quarter of 2023, we raised $12.7 million from the sale of 6.3 million shares of common stock under our common stock purchase agreement with B. Riley. Based on our current operating plan and assuming no additional capital is raised in the three months ending December 31, 2023, we expect to have cash, cash equivalents, and available for sale securities of $88 to $94 million at the end of 2023. Thank you. We would now be happy to answer your questions.
spk01: As a reminder, to ask a question, please press star 11 on your telephone and wait for your name to be announced. To withdraw your question, please press star 11 again. Please stand by while we compile the Q&A roster. And our first question comes from Krish Sankar with TD Cowan. Your line is open.
spk04: Hi, thanks for taking my questions. This is Stephen calling on behalf of Krish. Yeah, the first question I had made first of all, I wanted to get some more details on the Air Force Research Lab contract win that you just highlighted. Any details you could provide on sort of the maybe long-term value of that contract and maybe how soon that some of the revenues might materialize for that, any kind of contingencies that it might be based on, whether it's technical or with the timing of when you might be supplying some of those sound components that you highlighted. That'd be great.
spk00: Sure. Thanks, Stephen. So as we described, the Air Force Research Lab contract is an IDIQ contract, which by definition means it's indefinite in its valuation. They give us broad guidelines on what all they expect, certainly foundry services, QPU, and affiliated services are included in the contract. It's hard to put a monetary value on it because by definition it's indefinite. Certainly AFRL is a huge organization committed to quantum computing. They get funding out of DOT. So we certainly expect it to be sizable, but we cannot quantify sitting here right now. Regarding monetization of the contract, that has already started. Dollars from that contract already in Q3, we definitely expect that value to increase in Q4 and in the subsequent quarters. Hopefully that answers your question.
spk04: Okay, it does. Thanks. And I guess another follow-up to sort of the QPU sales that you recognized in the last two quarters. Just kind of like big picture question is just given that, you know, there's a number of government agencies that are interested in purchasing QPs. And I think previously you said there's potential to sell more even going to next year. But just given the sizable investment that these government agencies need to make to support the superconducting modality system, you know, with the necessary infrastructure like additional refrigerators, I assume it's a long-term investment. So I guess, does this say anything Anything about these national labs and reviews on superconducting modalities versus, let's say, other competing modalities with respect to the maturity of superconducting or the scalability of it compared to the other modalities?
spk00: Sure. So superconducting modality certainly is one of the leading contenders for quantum computing, although there are other competitive modalities, as you know. Certainly, we believe superconducting modality has a huge advantage of scalability As you can already see, we are at 84 qubits. Other competitors in superconducting are in the similar range. So we certainly are significantly higher than other competitive modalities already, and we have the benefit of scaling up. Having said that, all of us are still significantly off the quantum advantage area. As we have said, we are about two to three years from demonstrating that quantum advantage. which means performance and or cost benefits compared to classical computing on many practical applications. The government organizations, both DOE, DOD, are committed to investing in different modalities. We will definitely benefit when they invest in superconducting. Regarding the QPU sales, in Q2, we sold our first QPU, and now we can disclose that was to the SQMS Center at Fermilab. In Q3, we shipped another QPU to another premier national lab. We cannot disclose the name right now. Hopefully, we'll be able to disclose that soon. But it's exciting. As far as we know, we are the only company that has actually sold a working quantum computer to any organization. And now we have done two in a row, first in Q2 and second in Q3. So it's a huge milestone for the company. We are super excited about it. We are proud of that accomplishment. The pipeline continues to build. We are talking to a number of customers, national labs, university researchers, and those kinds of organizations who have significant interest in getting an on-premise quantum computer. There's a lot of value in doing that. They can do hands-on research. They can get first-hand experience with how do you do not only computations with quantum computing, but also how do you optimize, how do you do algorithm developments, and so on. So there are many reasons why customers are interested in getting a quantum computer on-premise. The way we have enabled a nine-qubit quantum computer, it's a simple module that essentially gets plugged into an existing dilution refrigerator. And many national labs and university researchers have already purchased a dilution refrigerator. So for them, it's a relatively straightforward change to take off some components and put in our quantum computer, and they can be up and running fairly quickly. So it's a relatively simple process to get somebody enable it with a quantum computer and get them hands-on experience. And that's what we are focused on right now, besides the technology development part, of course.
spk04: Okay, perfect. Just a last question, if I could. I wanted to ask about your quantum cloud service. So I know it's still very early innings for your QCS business. I guess in terms of non-government cloud service revenues, it's still... I think just given your strategic shift in focus to fidelity rates and all the progress you've made so far this year, I guess, have you sensed any noticeable shift in commercial interest in using your QCS services, either from direct feedback from customers and maybe any indications from your ecosystem partners that you work with to deliver QCS services?
spk00: So, sure, for quantum service through the cloud, we obviously have relationships with AWS, Azure, as well as our own cloud, and also OR as well offers our quantum computer to select government organizations. Commercial interest is definitely there, but still relatively low compared to national labs and university researchers. And most likely it is because we are still away from quantum advantage. As we approach narrow quantum advantage in the next two to three years, we definitely expect commercial interest to soar, and that's where the potential explosive growth opportunity comes in, in two or three years from now. But as of today, most of the usage is from researchers and national labs and university researchers to dominate the usage of quantum computing today.
spk04: Great. Thank you so much, and nice job, Ankur.
spk00: Thank you, Steven.
spk01: One moment for our next question. Our next question comes from David Williams with the Benchmark Company. Your line is open.
spk03: Hey, Dylan. Good afternoon, and thanks for taking my question. Forgive me if this was asked or answered already. I'm a little late joining here. But just wanted to see if you could talk a little bit about the QPU cell you had previously. I know you mentioned another one. that you can't disclose. But just I guess if you could talk maybe about the inbound activity and anything you're seeing there that gives you optimism of additional sales in the future. Thank you.
spk00: So sure. Thanks, David. So we sold our first CPU in Q2, and as I mentioned earlier, as far as we know, that is the first time any company has sold a quantum computer to a customer, and that was to SQMS-centered formula. That happened in Q2 of this year. We sold another QPU in Q3 of this year to another premier national lab. We will hopefully be able to disclose the name soon. Pipeline for future QPU sales continues to build. We are talking to more than a dozen customers right now. Most of them are for 9 qubits. Some have expressed interest in 24 qubits, and one has expressed interest in even 84 qubits. Certainly, the price point goes up dramatically when you go from 9 qubits to 24 qubits to 84 qubits. Overall, we are very pleased with the reaction we are getting. for QPU, on-premise QPU specifically. And again, most of the applications are for where they can do anything from fundamental understanding of quantum computing to pulse shape optimization to algorithm development and many other applications that they can think of. So hopefully that answers your question.
spk03: No, no, that's very helpful. Thank you. And then maybe if you just kind of think about, you know, this opportunity as you go forward, it feels like you've got multiple revenue stream potentials here in terms of the processor and then also the quantum of the service. And you've made some really great progress. I have to commend you on just the efficiency that you've definitely instilled in getting the 84 out and everything you've been able to achieve there. So congrats on that. But I guess just if you could help us understand how you envision the business developing over time and if it's any different today, I guess, given some of this interest on the QBUs versus where you would have thought whenever you came in some time ago. Thank you.
spk00: Thanks, David. So as we have stated before, our fundamental strategy right now is to focus on technology development and improve our fidelity to 99% and then scale up to 336 qubits from there. As we mentioned in our press release right now, we are making QPUs. When we are talking 9-qubit QPUs, we are talking more than 98% closer to 99% fidelity. When we are dealing with 24-qubit, we are at about 98%. And when we are at 84-qubit, we are at about 97%. All these numbers are 2-qubit fidelity. And these are remarkably good numbers considering where we started the year. So our error rates have essentially been slashed by a factor of two, which is a huge accomplishment since I've been in the company. We'll continue to focus on that. That is the core mission and objective of the company is to improve the error rates because that's what gets you to the narrow quantum advantage. That's what enables the explosive growth opportunity. Having said that, in the meantime, we have latched onto this QPU sales opportunities for researchers who want to get their hands on and do experiments themselves. And as I mentioned, the nine qubit QPU is already close to 99%. So there are many practical things researchers can do and experiment with. And that's why I believe they're finding value and will continue to generate sales. But again, I don't want to Sales will hopefully continue to grow for QPU and quantum cloud as a service. Certainly exciting potential to keep growing sales in the near term. But again, we are not focused on that. Our focus is clearly on developing technology, getting us as fast as possible to narrow quantum advantage, and then go for the explosive growth opportunities that come after that.
spk04: Thank you very much.
spk00: Thank you, Devika.
spk01: And this concludes the question and answer session. I would like to turn the call back over to Dr. Kulkarni for closing remarks.
spk00: Thank you for your interest and questions. We look forward to updating you after our Q4 results. Thanks again.
spk01: And this concludes today's conference call. Thank you all for participating. You may now disconnect.
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