Quantum Computing Inc. 2020 Form 10-K Summary
Business context and reporting period
Quantum Computing Inc. filed its annual report for the fiscal year ended December 31, 2020. The filing is an annual report rather than a standalone fourth-quarter report; quarterly data for Q4 is not separately presented in the supplied text.
QCI is an early-stage development company focused on quantum-ready software applications and cloud-based tools, principally Qatalyst. Target markets include financial services, supply chain and logistics, pharmaceuticals, manufacturing, artificial intelligence, cybersecurity and government research. The company reported 15 full-time employees, five contract staff and seven technical advisors.
Financial performance and position
| Metric | 2020 | 2019 | Change or comment |
|---|---|---|---|
| Revenue | $0 | $0 | No commercial revenue recorded |
| Gross profit | $0 | $0 | No cost of revenue or gross margin |
| Operating expenses | $17.343 million | $2.548 million | Increase of $14.795 million, or 581% |
| Net loss | $24.734 million | $8.381 million | Increase of $16.353 million, or 195% |
| Loss per share | $0.88 | $1.14 | Basic and diluted loss per share |
| Cash used in operating activities | $11.541 million | $2.244 million | Higher cash burn |
| Cash and cash equivalents | $15.196 million | $0.101 million | Year-end cash increased by $15.095 million |
| Total assets | $15.268 million | $0.148 million | Substantial increase primarily from cash raised |
| Total liabilities | $0.693 million | $2.961 million | Decrease primarily from note conversions and repayments |
| Accumulated deficit | $53.495 million | $28.761 million | Increase of approximately $24.734 million |
Operating expense growth was driven primarily by $11.177 million of stock-based compensation, $1.683 million of consulting expense, $1.540 million of research and development, $2.160 million of other selling, general and administrative expense, $0.643 million of salaries and $0.141 million of related-party marketing expense.
Net other expense was $7.391 million, including $5.682 million of financing expense, $2.806 million of warrant expense, $0.227 million of promissory-note interest and $0.100 million related to a beneficial conversion feature. These costs were partially offset by $0.425 million of legal settlement income, $0.018 million of government grants and $0.981 million of derivative mark-to-market income.
Liquidity, capital structure and financing
- Since commencing operations under the QCI name in 2018, the company reported raising $17.226 million through private equity placements and $5.159 million through convertible promissory notes.
- At December 31, 2020, the company had $218,371 outstanding under a Paycheck Protection Program loan, no line of credit and no long-term debt obligations reported.
- The company reported $15.196 million of year-end cash and $14.296 million of cash and equivalents as of March 17, 2021.
- Financing activities generated $26.648 million of cash in 2020, including $27.938 million from stock issuance and $0.218 million of loan proceeds.
- Shares outstanding increased from 7.362 million at December 31, 2019 to 27.966 million at December 31, 2020, reflecting equity financing, debt conversions, shares issued for services and stock-based compensation.
- As of March 16–17, 2021, approximately 28.668 million common shares were outstanding. The company is authorized to issue 250 million common shares and 10 million preferred shares.
Material changes versus the prior comparable period
- The company remained pre-revenue, with $0 revenue in both 2020 and 2019.
- Operating expenses increased 581%, largely because stock-based compensation increased from $0.215 million to $11.177 million and other development and corporate expenses also increased.
- Net loss increased from $8.381 million to $24.734 million, while operating cash burn increased from $2.244 million to $11.541 million.
- Cash and total assets increased substantially as the company completed significant equity and other financing transactions.
- Total liabilities declined from $2.961 million to $0.693 million, principally because convertible notes were converted or repaid; the remaining reported debt was the $218,371 PPP loan.
- QCI entered into or completed multiple equity and convertible financing transactions, including the Oasis transactions, private placements at $1.00 and $2.50 per share, warrant exercises and conversions of outstanding notes.
- The company recognized $11.177 million of stock-based compensation and issued substantial restricted stock and other equity awards to employees, directors, consultants and advisors.
Guidance, outlook, commentary and risks
Management stated that it expected to begin generating revenue in 2021 after developing and releasing two products and moving into marketing and commercialization. The company also stated that it expected adequate financing for approximately 24–30 months at its then-current operating level, but acknowledged that additional capital could be required if growth exceeded expectations.
QCI highlighted Qatalyst integrations with Amazon Braket and access to quantum hardware from D-Wave, Rigetti, IonQ and IBM. It also described partnerships or teaming activities involving Splunk and government-funded quantum research opportunities. These opportunities remain subject to customer adoption, technical performance, funding availability and successful commercialization.
- The company has no revenue history under its current business and may never achieve profitability or commercial acceptance.
- The quantum-computing market is immature, highly competitive and subject to rapid technological change. Larger competitors may have substantially greater financial, technical, marketing and personnel resources.
- QCI depends on continued financing and may need additional equity or debt capital. Future financings may dilute existing shareholders.
- The company relies on key technical and executive personnel, including a chief financial officer who is an independent contractor and not a full-time employee.
- Technology, software defects, cybersecurity incidents, intellectual-property disputes and dependence on third-party cloud or quantum hardware providers could adversely affect operations.
- The company disclosed material weaknesses in internal control over financial reporting relating to insufficient segregation of duties, limited accounting personnel and expertise, limited policies and procedures, and inadequate levels of review for complex equity and debt transactions. Audit adjustments and disclosure revisions were required.
- The $218,371 PPP loan bears interest at 1% and the company expected to seek forgiveness, but stated that forgiveness of all or any portion was not assured.
- COVID-19 could negatively affect customer meetings, commercialization and the ability to raise capital; the filing states that the specific financial impact was not reasonably estimable.
- QCI reported no litigation currently expected to have a material adverse effect. A prior dispute involving the PASS security system was settled in January 2020, with $425,000 of legal settlement income recognized in 2020.
Important facts for investors to verify
- Whether QCI generated meaningful revenue after December 31, 2020 and whether Qatalyst achieved commercial customer adoption.
- Actual cash burn, remaining cash runway and the need for additional financing.
- The status and ultimate forgiveness of the PPP loan.
- Remediation of the disclosed material weaknesses and whether subsequent filings report effective internal controls.
- The extent of dilution from outstanding options, warrants, convertible securities and future equity financing.
- The economic substance and recurring nature of stock-based compensation, warrant expense and other financing-related charges.
- The terms and continuing obligations associated with related-party arrangements, including marketing services provided by JLS Ventures.
- The filing contains an inconsistency regarding accumulated deficit: the risk-factor section cites $53.469 million at December 31, 2020, while the audited balance sheet and statement of stockholders’ deficit report $53.495 million. The audited financial statements should be treated as the primary reference and the discrepancy should be verified.