Quantum Computing Inc. — Form 10-Q Summary
Business context and reporting period
Quantum Computing Inc. filed an unaudited Form 10-Q for the quarter and six months ended June 30, 2020. The company, formerly Innovative Beverage Group Holdings, is a development-stage technology company developing quantum-ready software, optimization applications, and software tools for financial services, logistics, healthcare, cybersecurity, artificial intelligence, and other markets.
The company reported no operating revenue and stated that it had not yet completed development and testing of products for sale or sold products or services to customers. Its stated initial commercial products include the Quantum Asset Allocator and the Mukai quantum application development platform.
Financial condition and results
| Metric | Three months ended June 30, 2020 | Three months ended June 30, 2019 | Six months ended June 30, 2020 | Six months ended June 30, 2019 |
|---|---|---|---|---|
| Revenue | $0 | $0 | $0 | $0 |
| Operating expenses | $917,556 | $1,982,982 | $2,655,949 | $2,566,121 |
| Net loss | $1,778,599 | $2,033,226 | $2,476,778 | $2,668,900 |
| Basic and diluted loss per share | $0.20 | $0.38 | $0.28 | $0.50 |
| Cash used in operating activities | Not separately provided | Not separately provided | $2,408,104 | $933,936 |
There was no gross profit or gross margin because revenue and cost of revenue were both zero. Six-month operating expenses included $680,356 of research and development, $298,871 of salaries, $299,105 of selling, general and administrative expenses, $140,212 of consulting expense, and $1,237,405 of stock-based compensation.
At June 30, 2020, cash and cash equivalents were $496,601, compared with $101,100 at December 31, 2019. Total assets were $530,879, while total liabilities were $3,523,844 and stockholders’ deficit was $2,992,965. Working capital deficit was $3,018,657, compared with $2,837,889 at year-end 2019.
Current liabilities included $1,672,055 of convertible promissory notes, $918,674 of derivative liabilities, $258,175 of loans payable, $289,569 of accounts payable, and $285,175 of accrued expenses. The company stated that it had no bank loans or lines of credit and no long-term debt obligations, although it had significant short-term and convertible debt obligations.
Material changes versus the prior comparable period
- Second-quarter operating expenses declined 54% to $917,556, primarily because stock-based compensation decreased by $1,262,445.
- Six-month operating expenses increased 3.5% to $2,655,949, principally because research and development expense increased by $383,908, partly offset by lower stock-based compensation.
- Six-month net loss decreased 7.2% to $2,476,778. The improvement reflected $432,500 of other income, including a legal settlement and a local government grant, partly offset by higher financing-related expenses.
- Operating cash use increased to $2,408,104 from $933,936 despite the lower reported net loss, while financing activities provided $2,806,863, primarily from debt, equity, and warrant-related financing.
- Shares outstanding increased to 8,911,190 at June 30, 2020 from 7,362,046 at December 31, 2019. The company reported 12,091,190 shares outstanding as of August 7, 2020.
- The company entered into financing arrangements with Oasis Capital, including a $563,055 convertible note issued for $500,000 and a warrant for 187,685 shares. It also obtained a $218,371 Paycheck Protection Program loan and raised $30,000 through short-term promissory notes.
Guidance, outlook, risks, and unusual items
Management anticipated completing beta testing of its financial application and beginning commercial sales and marketing in the third or fourth quarter of 2020. No quantitative revenue, earnings, or cash-flow guidance was provided.
Management stated that current capital and revenue are insufficient to fund planned expansion and that the company will continue to rely on debt and equity financing. The filing contains a going-concern disclosure: continued operations depend on obtaining additional capital or ultimately acquiring an entity that becomes profitable.
As of August 10, 2020, management reported approximately $345,149 of cash and approximately $8,795 in monthly lease and other mandatory payments, excluding payroll and ordinary operating expenses.
- COVID-19 could disrupt research and development, employee availability, customer and sales activity, and the company’s ability to raise capital.
- The Oasis note matures nine months after issuance, bears 8% interest, and includes conversion, prepayment penalty, and default provisions that could result in cash repayment or equity dilution.
- The PPP loan may be forgiven, but the company stated that no assurance exists that any or all of the loan will be forgiven.
- Financing transactions included variable or discounted conversion prices, warrant repricing, derivative liabilities, and potential future dilution.
- The company’s disclosure controls and procedures were assessed as not effective as of the end of the reporting period. No material changes to internal control over financial reporting were reported during the quarter.
- The company settled litigation related to the PASS security system in January 2020; the filing reported $432,500 of other income during the first six months, including legal settlement and grant-related amounts.
- Subsequent events included additional related-party note conversions and a July 2020 equity offering that raised $330,000 and issued 330,000 shares with warrants to purchase 165,000 shares.
Important facts for investors to verify
- Whether the Quantum Asset Allocator and Mukai products generate commercial revenue after the filing period.
- Available cash, monthly cash burn, and the company’s ability to obtain additional financing.
- Maturity, conversion terms, default provisions, and dilution potential of the Oasis note, other convertible notes, and outstanding warrants.
- Whether the PPP loan or other government funding was forgiven or remained payable.
- The status of the company’s ineffective disclosure controls and any remediation efforts.
- The accuracy and persistence of unusual income from legal settlements, grants, derivative revaluations, and financing transactions.
- The extent of dilution from subsequent equity issuances, note conversions, warrants, options, and related-party transactions.