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D-Wave has fallen short of financial targets and only had a handful of buyers for its expensive, shed-sized computers.Reuters

One of Canada’s most heavily funded early stage technology companies, quantum computer developer D-Wave Systems, undertook a costly refinancing this year that wiped out most of the value of some long-time investors, including the U.S. Central Intelligence Agency’s venture capital arm, Amazon CEO Jeff Bezos and fund giant Fidelity Investments, according to public filings and three sources.

The US$40-million financing, including US$10-million from new investor NEC Corp., came as part of a capital restructuring that cut D-Wave’s valuation to less than US$170-million before the receipt of funds, down from about US$450-million, the sources familiar with the company said. The Globe and Mail is not disclosing their identities as they are not authorized to speak on the matter.

Existing investors who participated – including Montreal-based Public Sector Pension Investment Board (D-Wave’s top shareholder, with $100-million-plus invested to date), Business Development Bank of Canada and Goldman Sachs – maintained their relative stakes, limiting the writedown of their holdings. Those that didn’t, including the CIA’s In-Q-Tel arm, Mr. Bezos and Fidelity, saw their stakes significantly devalued, by upward of 85 per cent in some cases.

The funding was undertaken during a transformational year for Burnaby, B.C.-based D-Wave, the leader in a global race to develop computers whose chips draw their power by harnessing natural properties of subatomic particles to perform complex calculations faster than conventional computers.

Despite raising more than US$300-million from investors to date, D-Wave has fallen short of financial targets and only had a handful of buyers for its expensive, shed-sized computers, which were mainly used by researchers to tinker with cutting-edge technology. D-Wave has generated just more than US$75-million of customer contracts in its 21 years.

Meanwhile, newer quantum computer startups are attracting buzz and financing, while giants including IBM, Intel and Google continue to develop their own quantum computers.

This year, D-Wave promoted Silicon Valley veteran executive Alan Baratz to chief executive officer, replacing Vern Brownell, to step up efforts to commercialize its technology. It parted ways with several other top executives, including its chief financial officer and senior vice-president responsible for applications and technology. Long-time board members Steve Jurvetson, a Silicon Valley venture capitalist, and ex-Cisco executive Don Listwin also left.

Mr. Baratz has earned praise from investors for shifting D-Wave’s strategy away from selling computers, which listed for US$15-million, in favour of offering internet access to the machines. With the recent launch of its latest processor and updated software and service offerings, D-Wave says it can help companies solve real-world business problems and deliver business value.

“The company has never looked better," said Rick Nathan, managing director with Kensington Capital Partners, a D-Wave investor. "After all this time, it now feels like [D-Wave] has achieved real product market fit and is scaling with its customers. This is new, and as a long-time investor, it is great to see.”

But D-Wave is still not financially self-sustaining. It was on the verge of raising significant funds from a Chinese investor that backed out when Canadian authorities arrested a top executive of China’s Huawei Technologies in 2018. Existing investors subsequently injected US$30-million in 2019 to tide D-Wave over, but after it struggled to find new backers other than NEC, they stepped up again at the much reduced valuation.

D-Wave declined to comment. But evidence of the financial hit surfaced in recent public disclosures by some investors.

Regulatory filings from PenderFund Capital Management’s Working Opportunity Fund show D-Wave dropped to its 11th largest investment as of June 30 from its second-largest before. The fund didn’t say why, but separately disclosed it had cut the carrying value of one of its private holdings, likely D-Wave, by $22.6-million after the unidentified company did “a significant equity financing at a lower [valuation] level" than prior financings.

Fidelity’s annual report shows three funds that had invested $18.3-million in D-Wave valued their combined stakes at $3.1-million as of June 30, down 85.6 per cent from a year earlier. A Fidelity spokesman declined to comment.

Meanwhile, U.S. fund manager 180 Degree Capital cut the value of its D-Wave stake to US$1.2 million from US$7.7 million on Dec. 31. The U.S. fund manager paid US$5.7-million for its stake from 2008 to 2014. In a call with 180 Degree investors on Aug. 11, president Daniel Wolfe said the writedown “was directly related to a financing event that repriced the company.” Also, 180 Degree further revealed that D-Wave in April consolidated all outstanding shares into one class of preferred stock in a new holding company, DWSI Holdings Inc., and completed a 1-for-5 reverse stock split.

Mr. Wolfe said D-Wave “has not performed, and its value has dropped materially” and that “fundraising has been very difficult. Sales have been difficult.” But he added he was “very bullish” on Mr. Baratz’s ability “to lead [D-Wave] to the next level.”

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