British cybersecurity company Arqit Quantum is facing an investigation from the US Securities and Exchange Commission over its merger with a special-purpose acquisition company last year, the company disclosed on 14 December.

Arqit saw its market value rise from $1.4bn to over $4.5bn soon after it completed the Spac merger — a form of public listing — in September 2021 as investors embraced the company and its projections of surging revenue and profits in the emerging sectors of digital security and advanced cryptography. Its shares have since fallen significantly amid a broad investor retreat from Spacs and young high-growth companies.

“Arqit is…cooperating with an SEC investigation relating to the business combination between Arqit and Centricus Acquisition, including by voluntarily producing documents,” the company, which seeks to offer solutions to security challenges posed by the advent of quantum computing, said in the filing. Arqit said the SEC told the company it was “a fact-finding inquiry.”

“This is a standard disclosure. If any further disclosure is required it will be done through the appropriate channels,” said an Arqit spokesman, adding that the company had secured new partnerships in the course of the year.

A spokesman for Centricus declined to comment. Further specifics about the SEC’s investigation couldn’t be learned. The SEC didn’t respond to a request for comment.

The 14 December disclosure came as part of a filing on Arqit’s annual results through 30 September, in which it said it had lower revenue than projected at the time of the Spac merger. Shares in the company fell more than 17% in 14 December’s trading.

The Wall Street Journal reported in April that Arqit had given investors an overly optimistic view of its future revenue and the readiness and workability of its signature encryption system, citing former employees, other people familiar with the company, and company documents.

The Journal‘s report said the company’s revenue at the time of its public listing consisted of a handful of government grants and small research contracts, and its signature product was an early-stage prototype unable to encrypt anything in practical use, according to the people. Arqit disputed that its encryption system was only a prototype at the company’s market debut.

The report also said that much of the company’s committed revenue wasn’t from its main product and that many clients it listed were giving Arqit research grants.

Arqit’s filing on 14 December with the SEC said it had many “project-based” clients with “uneven milestone payment profiles” rather than recurring revenue.

The company shifted how it categorised a contract with the European Space Agency. While it previously said it expected “revenue” from the contract, Arqit said it now considers the $12.8m received from ESA in fiscal year 2022 “other operating income,” in part because the satellite-design work Arqit is doing with the agency isn’t a “primary output” of the company.

Arqit’s chief revenue officer resigned in 2021 after raising concerns with Arqit’s chief executive that the company was overstating contracts and giving unrealistic revenue projections to potential investors, the Journal previously reported. In a 2021 presentation to investors, CEO David Williams said the company had $130m in committed revenue contracts, which he called “contracts where the revenues will definitely be delivered.”

The company reported less revenue and higher expenses than forecasts it gave investors before its public listing through a Spac merger in 2021.

It reported $7.2m in revenue in the fiscal year ending in September — which doesn’t include the European Space Agency funding — up from nearly zero in the 12 months through September 2021. Its 2021 forecasts, which were for calendar years rather than fiscal years, called for $32m in revenue in 2022 and $14m in 2021.

Arqit also disclosed multiple “material weaknesses” in internal controls and said its auditor had raised “critical audit matters” to management, one of which related to revenue recognition around the European Space Agency contract.

Arqit launched with the aim of future-proof communication systems from the danger of a quantum computer. Traditional encryption systems used to protect data as it is transmitted over the internet are in danger of attack from quantum computers, which can solve advanced mathematics underlying today’s encryption systems.

The company initially stated that it would launch satellites into space as part of its plan to secure communications systems. In its regulatory filing on 14 December, Arqit said it no longer needed to launch a satellite-based component of its proposed encryption due to “innovation in our technology,” adding that it would attempt to sell a satellite currently under construction.

The US government has invested heavily in post-quantum algorithms that can be adapted by existing networked systems rather than pursuing more speculative technologies like satellites to secure digital communication systems, such as those that Arqit and others are proposing. In September, the US National Security Agency announced that it would implement new quantum-proof algorithms on all national-security systems by 2035. The Biden White House has also instructed federal agencies to develop starting next year strategies to address post-quantum cryptography threats.

Arqit’s stock is down 79% this year.

Write to Eliot Brown at Eliot.Brown@wsj.com, Dustin Volz at dustin.volz@wsj.com and Byron Tau at byron.tau@wsj.com

This article was published by The Wall Street Journal, part of Dow Jones

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