Business Context and Reporting Period
Quantum Computing Inc. filed this unaudited Form 10-Q for the three months ended March 31, 2020. The company is a development-stage technology business focused on quantum-ready software, optimization applications, and related software platforms for financial services, cybersecurity, logistics, healthcare, and other markets. Its initial commercial products include the Quantum Asset Allocator and the Mukai quantum application development platform.
The company reported that its products remained in beta testing and that it had not yet generated revenue from product or service sales.
Financial Performance and Position
| Metric | Q1 2020 | Q1 2019 | Change |
|---|---|---|---|
| Revenue | $0 | $0 | No change |
| Operating expenses | $1.738 million | $583,139 | Up $1.155 million, or 198% |
| Operating loss | $1.738 million | $583,139 | Higher loss |
| Net loss | $698,179 | $635,673 | Loss increased $62,605 |
| Basic and diluted loss per share | $0.09 loss | $0.13 loss | Improved per-share loss, partly reflecting share issuance |
| Cash used in operating activities | $268,709 | $434,344 | Use decreased $165,635 |
| Cash and cash equivalents at period-end | $199,331 | $1.333 million | Lower year over year |
Operating expense growth was driven primarily by stock-based compensation of $1.012 million, compared with $71,250 in the prior-year quarter. Research and development expense increased to $344,682 from $151,290, while salaries increased to $164,823 from $115,646.
Other income and expense included a $425,000 legal settlement gain, $504,708 of derivative mark-to-market expense, $237,124 related to warrant repricing, $100,000 of beneficial conversion feature expense, and $26,644 of interest expense on promissory notes. These items materially affected the difference between the operating loss and net loss.
At March 31, 2020, total assets were $240,925, total liabilities were $2.446 million, and stockholders’ deficit was $2.205 million. Current liabilities included $1.449 million of convertible promissory notes, $476,022 of derivative liability, $213,497 of accrued expenses, and $207,453 of accounts payable. The working capital deficit was $2.205 million, compared with $2.812 million at December 31, 2019.
Financing activities provided $370,198 during the quarter, including $430,500 from stock issuance and a net $60,302 decrease related to convertible promissory notes. The company reported no bank loans or lines of credit and stated that it expects to continue relying on debt and equity financing.
Material Changes Versus the Prior Comparable Period
- Revenue remained zero because products had not yet entered commercial sales.
- Operating expenses increased 198%, primarily because of higher stock-based compensation, research and development, and salary expenses.
- Net loss increased modestly despite the $425,000 legal settlement gain and lower derivative-related expense relative to the prior-year period.
- Operating cash burn improved to $268,709 from $434,344, principally because of noncash stock-based compensation and derivative adjustments.
- Shares outstanding increased to 7,764,046 at March 31, 2020 from 7,362,046 at December 31, 2019; 7,934,917 shares were outstanding as of May 8, 2020.
- Auctus Fund conversions during January and February 2020 converted an aggregate $180,303 of principal, accrued interest, and fees into 120,000 common shares. Auctus also exercised 167,000 repriced warrants for $250,500.
Guidance, Outlook, Risks, Contingencies, and Unusual Items
Management stated that beta testing of its financial application had continued since August 2019. Commercial sales and marketing were anticipated to begin in the third or fourth quarter of 2020 after beta testing and the planned hiring of sales staff. The filing provides no quantified revenue or earnings guidance.
The financial statements include a going-concern uncertainty. The company has no operating revenue, an accumulated deficit of $29.459 million, limited cash, and a continuing need to raise capital or acquire a profitable business. Management stated that current capital and revenues are insufficient to fund expansion.
COVID-19 was identified as a potential risk to customer meetings, software-industry activity, and the company’s ability to raise capital. The filing states that the ultimate impact was not reasonably estimable as of March 31, 2020.
On May 6, 2020, after quarter-end, the company entered into a $500,000 purchase agreement with Oasis Capital for a $563,055 convertible promissory note and a warrant for 187,685 shares. The note bears 8% interest, matures nine months after issuance, and includes conversion and default provisions that could result in dilution or accelerated repayment.
Also on May 6, 2020, the company obtained a $218,371 Paycheck Protection Program loan at 1% interest, with a two-year maturity subject to any forgiveness. The company intended to use the proceeds for qualified payroll and operating expenses, but stated that forgiveness was not assured.
The company also entered into an equity purchase agreement under which Oasis may purchase up to $10 million of common stock, subject to conditions, at 90% of market price. The arrangement could provide liquidity but also create substantial dilution.
Management concluded that disclosure controls and procedures were not effective as of March 31, 2020. The filing states that there were no material changes to internal control over financial reporting during the quarter.
The company settled litigation related to its former PASS security system in January 2020 and recognized $425,000 of miscellaneous income from the settlement. Management reported no currently pending litigation expected to have a material adverse effect.
Important Facts for Investors to Verify
- Whether the Quantum Asset Allocator, Mukai, and other products progressed from beta testing to paying customers and generated revenue after March 31, 2020.
- The company’s ability to fund operations given zero revenue, the $2.205 million working capital deficit, and the going-concern disclosure.
- The terms, outstanding balances, conversion prices, maturity dates, and dilution effects of the Auctus, 2020 convertible notes, related-party notes, warrants, and derivative liability.
- Whether the Oasis convertible financing, equity purchase agreement, and PPP loan were completed as described and whether any PPP loan forgiveness was obtained.
- The extent of dilution from common-stock issuances, warrant exercises, inducement or commitment shares, and future equity financing.
- Remediation of the ineffective disclosure controls and procedures.
- The effect of COVID-19 on customer acquisition, product development, employee operations, and access to capital.
- The sustainability of reported results excluding noncash stock compensation, derivative remeasurement, warrant repricing, and the one-time legal settlement.