Quantum Computing Inc. quarterly report, Q3 FY2022

Quantum Computing Inc. — Q3 2022 Form 10-Q Summary

Business Context and Reporting Period

Quantum Computing Inc. filed an unaudited Form 10-Q for the quarter and nine months ended September 30, 2022. The company develops full-stack quantum computing solutions, including Qatalyst software, photonic quantum hardware, cloud-based quantum services, and professional services. The June 2022 acquisition of QPhoton expanded the company into quantum hardware, photonics, and related intellectual property.

Key Financial Metrics

Metric	Three Months Ended September 30, 2022	Nine Months Ended September 30, 2022	Comparable Prior Period
Revenue	$37,646	$134,370	$0
Gross profit	$12,755	$92,678	$0
Gross margin	34%	69%	Not meaningful
Operating expenses	$6.85 million	$18.44 million	$4.78 million and $12.50 million, respectively
Net loss	$7.57 million	$19.81 million	$4.78 million and $12.28 million, respectively
Loss per share	$0.22	$0.58	$0.16 and $0.42, respectively

All reported revenue was from professional services under multi-month commercial contracts; no product revenue was reported.
Cash and cash equivalents were $10.38 million at September 30, 2022, versus $16.74 million at December 31, 2021.
Net cash used in operating activities was $11.57 million for the nine months, compared with $4.86 million in the prior-year period.
Net cash used in investing activities was $86.24 million, primarily reflecting the QPhoton acquisition and acquired goodwill and intangible assets.
Net cash provided by financing activities was $91.45 million, including acquisition-related financing and debt proceeds.
Working capital declined to $7.17 million from $16.14 million at December 31, 2021.
Total assets increased to $95.32 million, including $59.13 million of goodwill and $23.72 million of intangible assets related primarily to the QPhoton transaction.
The balance sheet reported $535,684 of current loan obligations and $7.51 million of long-term loans, plus $11,465 of accrued long-term interest.

Material Changes Versus the Prior Comparable Period

Revenue began in 2022, but remained minimal relative to operating expenses.
Third-quarter operating expenses increased 43%, driven primarily by higher salaries, research and development, and other selling, general and administrative costs; stock-based compensation decreased.
Nine-month operating expenses increased 48%, including higher staffing, sales and marketing, research and development, consulting, and merger-related legal costs.
Third-quarter net loss increased 58%, while nine-month net loss increased 61%, reflecting higher operating costs and new preferred dividends, financing costs, and debt-related interest.
Common shares issued and outstanding increased to 33.90 million at September 30, 2022 from 29.16 million at December 31, 2021. The company also had 3.43 million preferred shares outstanding at quarter-end, before the subsequent Series B conversion.
QPhoton merger consideration included common stock, Series B preferred stock, and warrants. On October 17, 2022, 1,925,392 Series B preferred shares were converted into 19,253,920 common shares.

Guidance, Outlook, Risks, and Unusual Items

No quantified financial guidance was provided. Management expects near-term revenue to come from quantum subscriptions, cloud access, and professional services, with longer-term plans for hardware and on-premise systems.
Management planned additional EQC products beginning in 2023, a quantum photonic chip facility initiative, and commercial development of quantum networking products. These plans depend on customer adoption, technical execution, funding, and potential government incentives.
On September 23, 2022, the company issued an unsecured Streeterville Capital note with an initial principal amount of $8.25 million, 10% annual interest, an 18-month maturity, and a $750,000 original issue discount. The investor may redeem up to $750,000 monthly beginning six months after issuance, subject to the note terms.
Management disclosed approximately $8.56 million of cash as of November 11, 2022 and approximately $94,772 of monthly lease and other mandatory payments, excluding payroll and ordinary expenses. Continued operations depend on revenue growth and additional financing or capital resources.
Disclosure controls and procedures were deemed ineffective because the company lacked sufficient accounting staff for proper segregation of duties. Management stated that it had begun hiring additional administrative and accounting personnel.
BV Advisory Partners filed litigation concerning disputed QPhoton notes and later sought appraisal rights regarding its QPhoton shares. The company stated that it could not assess the potential impact of the appraisal demand and intends to defend the litigation.
The company identified continuing COVID-19 risks, including potential disruption to research and development, operations, sales, supplier deliveries, and financial results.
QPhoton’s Stevens Institute license requires future royalties of 3.5% of net sales of licensed products once commercialization or sublicensing begins; no royalties were owed as of September 30, 2022.

Important Facts for Investors to Verify

Whether professional-services revenue converts into recurring quantum-computing subscriptions or product sales.
The company’s cash runway given operating cash burn, substantial projected expenses, and the Streeterville note’s redemption rights.
The ultimate dilution from Series B conversion, merger warrants, Series A securities, employee awards, and any additional financing.
The valuation and impairment risk associated with $82.85 million of goodwill and intangible assets recorded after the QPhoton acquisition.
The potential financial and equity impact of BV Advisory’s litigation and appraisal demand.
Whether management remediates the ineffective disclosure controls and improves accounting staffing and segregation of duties.
Progress, funding requirements, and commercial feasibility of the proposed photonic chip facility and planned quantum products.