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, 2022. The company develops full-stack quantum computing systems, including Qatalyst software and quantum-computing hardware platforms. On June 16, 2022, the company completed its acquisition of QPhoton, Inc. in a stock-for-stock transaction; QPhoton shareholders were to receive approximately 49% of the combined entity.
Financial Results and Position
| Metric | Three Months Ended June 30, 2022 | Six Months Ended June 30, 2022 |
|---|---|---|
| Revenue | $65,484 | $96,724 |
| Cost of revenue | $5,233 | $16,800 |
| Gross profit | $60,251 | $79,924 |
| Gross margin | 92% | 83% |
| Operating expenses | $4,868,615 | $11,597,219 |
| Net loss | $5,104,576 | $12,238,268 |
| Loss per share | $0.17 | $0.42 |
- All reported revenue was from professional services; the filing reports no product revenue.
- Cash and cash equivalents were $6.74 million at June 30, 2022, compared with $16.74 million at December 31, 2021.
- Working capital declined to $5.95 million from $16.14 million at year-end 2021.
- Operating cash flow was negative $8.57 million for the six months, compared with negative $2.68 million in the prior-year period.
- Investing cash flow was negative $84.83 million, primarily reflecting the QPhoton merger and acquired goodwill and intangible assets.
- Financing cash flow was positive $83.40 million, principally related to the QPhoton acquisition accounting and preferred-stock original issue discount activity.
- Total assets increased to $91.88 million from $17.28 million, largely due to $59.13 million of goodwill and $25.22 million of intangible assets recognized in connection with the QPhoton transaction.
- Total liabilities were $1.30 million; the balance sheet reported no loans payable or convertible promissory notes. The company stated that it had no long-term debt obligations or lines of credit.
Material Changes Versus the Prior Comparable Period
- Revenue increased from zero to $65,484 for the quarter and from zero to $96,724 for the six-month period, reflecting the beginning of commercial services activity.
- Six-month operating expenses increased 50% to $11.60 million, driven by higher research and development, salaries and benefits, selling, general and administrative costs, consulting, and merger-related legal fees.
- Six-month net loss increased 63% to $12.24 million. The increase included higher operating expenses, $765,000 of additional preferred dividends and financing-cost expense, and the absence of the $218,371 PPP-loan forgiveness benefit recorded in 2021.
- The company’s cash balance decreased by approximately $10.0 million during the first six months, despite $83.40 million of reported financing cash inflows, because of operating uses and merger-related investing activity.
- Common shares outstanding increased modestly to 29.20 million at June 30, 2022 from 29.16 million at December 31, 2021. Additional shares, preferred stock, and warrants were issued or became issuable under the QPhoton merger consideration.
Outlook, Risks, Contingencies, and Unusual Items
- No quantitative revenue, earnings, or cash-flow guidance was provided. Management stated that future liquidity depends on expanding operations, generating revenue, market acceptance, and general economic conditions.
- Management reported approximately $5.92 million of cash as of July 31, 2022 and approximately $68,602 in monthly lease and other mandatory payments, excluding payroll, benefits, and ordinary expenses.
- The company’s disclosure controls and procedures were deemed ineffective because it lacked sufficient accounting personnel for proper segregation of duties. Management stated that it had begun hiring additional accounting and administrative staff.
- BV Advisory Partners disputed the amount of a cashier’s check tendered to settle QPhoton convertible notes. BV Advisory also indicated that it intended to seek appraisal rights for its former QPhoton shares. The company stated that it could not assess the potential impact of the appraisal demand.
- The company identified continuing COVID-19 risks, including potential effects on research and development, operations, sales, supplier deliveries, travel, and financial results.
- The company has not commercialized or sublicensed the Stevens Institute technology and therefore had no royalty obligation as of June 30, 2022.
- Subsequent to quarter-end, the company issued QPhoton merger consideration to Yuping Huang consisting of 4,699,786 common shares, 1,750,357 Series B preferred shares, and a warrant for 5,692,952 common shares. Stockholder approval was being sought for additional merger-related securities and governance matters.
Important Facts for Investors to Verify
- Verify the final share count, Series B preferred-stock issuances, warrant terms, and resulting dilution from the QPhoton merger.
- Review the status and potential financial impact of BV Advisory’s appraisal demand and disputed note settlement.
- Assess whether the company’s cash resources and operating cash burn are sufficient without additional capital raising.
- Evaluate the recoverability and impairment risk of the $84.35 million of goodwill and intangible assets recorded in connection with QPhoton.
- Monitor the transition from limited professional-services revenue to recurring product and software revenue.
- Review remediation of the ineffective disclosure controls and the company’s ability to maintain timely, accurate SEC reporting.
- Note that the filing text contains an unclear value in the liquidity discussion (“cash and equivalents of $on hand”); the clear balance-sheet cash value is $6.74 million at June 30, 2022.