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, 2019. The company, formerly Innovative Beverage Group Holdings, is a development-stage quantum-computing software company focused initially on financial optimization, cybersecurity, defense, manufacturing and related applications. It had not completed products or begun commercial sales.
The company plans to develop software for multiple quantum-computing platforms and may develop quantum simulators. Its intended business model includes cloud-based software licensing. The company is a smaller reporting company and non-accelerated filer.
Financial Results and Key Metrics
| Metric | Three Months Ended June 30, 2019 | Three Months Ended June 30, 2018 | Six Months Ended June 30, 2019 | Six Months Ended June 30, 2018 |
|---|---|---|---|---|
| Revenue | $0 | $0 | $0 | $0 |
| Operating expenses | $1.983 million | $0.400 million | $2.566 million | $0.699 million |
| Operating loss | $1.983 million | $0.400 million | $2.566 million | $0.699 million |
| Net loss | $2.033 million | $0.875 million | $2.669 million | $1.924 million |
| Loss per share | $0.38 | $0.80 | $0.50 | $1.76 |
| Operating cash flow | Not separately provided | Not separately provided | $(0.934) million | $(0.484) million |
There was no gross profit or gross margin because the company had no revenue. The six-month operating expense increase primarily reflected $1.559 million of stock-based compensation, higher research and development expense and higher consulting costs. Six-month interest expense was $109,823, while 2018 included a $1.225 million beneficial-conversion-feature expense that did not recur in 2019.
Cash and cash equivalents were $807,144 at June 30, 2019, compared with $1.767 million at December 31, 2018. The filing states that cash and equivalents were approximately $660,000 as of July 31, 2019. Current liabilities were $3.430 million, including $3.025 million of convertible promissory notes, $100,000 of related-party convertible notes, $207,545 of accrued expenses and $97,545 of accounts payable. Stockholders’ deficit was approximately $2.507 million.
The company reported total convertible promissory-note principal of $3.970 million, against which it had received $3.695 million in funds. The notes carry varying conversion terms; the $1.00 offering notes accrue interest at 8% annually. The company reported no bank loans, lines of credit or long-term debt obligations.
Material Changes Versus the Prior Comparable Period
- Revenue remained zero for both the quarter and six-month period.
- Quarterly operating expenses increased 395% to $1.983 million, driven principally by a $1.488 million increase in stock-based compensation.
- Six-month operating expenses increased 267% to $2.566 million, and the six-month net loss increased 39% to $2.669 million.
- Cash declined by approximately $960,000 during the first six months of 2019, compared with a $306,000 increase during the comparable 2018 period.
- Shares outstanding increased from 4,724,161 at December 31, 2018 to 5,299,161 at June 30, 2019, primarily from stock-based compensation, conversion of notes and shares issued under an anti-dilution provision.
- Stockholders’ deficit increased from approximately $1.517 million at year-end 2018 to approximately $2.507 million at June 30, 2019.
- The company adopted ASC 842 and recognized a minor lease-related adjustment; it was leasing office space month-to-month at June 30, 2019 and reported no current right-of-use asset or lease liability.
Guidance, Outlook, Risks, Contingencies and Unusual Items
No quantitative revenue, earnings or operating guidance was provided. Management described the company as a development-stage business with limited operations and stated that additional capital is being sought to finance operations.
The financial statements include a going-concern uncertainty. The company has generated no operating revenue, has an accumulated deficit of $23.049 million and depends on obtaining additional capital or acquiring an entity that becomes profitable. Management stated that the financial statements do not include adjustments that could result from these uncertainties.
- Management concluded that disclosure controls and procedures were not effective as of the period end. No material changes to internal control over financial reporting were reported during the quarter.
- The company is pursuing litigation against REMTCS, Richard Malinowski and Thomas Kelly concerning an allegedly nonfunctional cybersecurity system and related contractual and fiduciary claims. The company previously paid approximately $670,000 for the PASS system, which it determined was unusable and impaired. A motion to enforce a settlement was denied without prejudice pending additional discovery; a settlement conference had not yet been scheduled.
- The company expects to seek recovery of approximately $670,000 related to the PASS system, but the filing does not establish the likelihood or amount of recovery.
- In June 2019, the company issued 350,000 unrestricted shares to CNLT, LLC under a court-ordered anti-dilution provision.
- The company recognized $1.559 million of stock-based compensation for the six-month period, including $1.488 million in the second quarter. This was a significant noncash expense.
- Some related-party convertible notes may convert into common stock, creating additional dilution. A $100,000 subscription receivable and related convertible note are subject to repayment by December 31, 2019; if unpaid, the note is to be cancelled and no shares issued.
- The company stated that no material changes had occurred to the risk factors disclosed in its 2018 Form 10-K/A.
Important Facts for Investors to Verify
- Whether the company can raise sufficient capital to continue operations given zero revenue, negative operating cash flow and the stated going-concern uncertainty.
- The maturity, conversion prices, accrued interest and potential dilution associated with the approximately $3.970 million of convertible promissory notes.
- The status, collectability and expected timing of any recovery in the PASS-system litigation.
- The reason for the difference between the cash-flow statement’s reported $26,000 repayment of convertible notes and its presentation of net financing cash provided as zero.
- The effectiveness of remediation efforts for the company’s ineffective disclosure controls and procedures.
- Whether the company’s quantum-software development has produced commercially viable products, customer contracts, government grants or other revenue opportunities, none of which were reported for the period.