What happened

Shares of Arqit Quantum (ARQQ 1.90%), which went public through a special purpose acquisition company (SPAC) in 2021 and tripled its share price in a matter of months (then saw it all go poof in the SPAC collapse), is having yet another bad day on Friday. Shares of the British quantum computing cybersecurity company tumbled 40.5% through 10:25 a.m. ET this morning.    

And Arqit has no one to blame but itself.

So what

This morning, Arqit announced that it has agreed to sell "several institutional investors" 10 million new shares of the company at $2 apiece, with attached rights to buy up to 7.5 million more shares (warrants) at the same exercise price.

Arqit noted that it expects to raise $20 million from the share offering, and potentially the cash gained could be closer to $35 million if the warrants are exercised. Of course, for that to happen, Arqit's new shareholders would have to decide it's a good idea to buy the extra 7.5 million shares at $2 a pop -- and right now, Arqit shares are trading closer to $1.50 each.

Now what

While an influx of cash is great, Arqit shareholders are nonetheless upset at the fact that their company, which only has about 123 million shares outstanding right now, is planning to dilute their stakes by as much as 13%. But why would Arqit decide it needed to raise cash today even at the cost of such steep dilution?

That's a very good question.

Although technically profitable according to generally accepted accounting principles (GAAP), and with nearly $50 million in the bank, Arqit nevertheless burned through $29.3 million in negative free cash flow last year. Investors probably should take Arqit's "profitability" with a few grains of salt because, while its claimed net income last year topped $65 million, Arqit's actual revenue that year was a paltry $7.2 million -- so something fishy's going on here.

Already in 2023, analysts are forecasting reported profits to dwindle to just $10.4 million, with continued negative free cash flow. And while earnings are assumed to start growing again in 2024, that assumption seems to depend on Arqit growing its revenue to a level 16.5 times what it collected in 2022.

If Arqit can accomplish that superhuman feat, then today's share issuance to raise cash may pay off. But if not then... not.