Quantum Computing Inc. 2019 Q3 Form 10-Q Summary
Business context and reporting period
Quantum Computing Inc., formerly Innovative Beverage Group Holdings, Inc., is a development-stage company focused on quantum-computing software, initially targeting financial-services optimization and cybersecurity applications. The company reported its unaudited third quarter and nine-month results for the periods ended September 30, 2019. It had not begun selling products or services and generated no revenue.
Key financial metrics
| Metric | Three months ended September 30, 2019 | Nine months ended September 30, 2019 |
|---|---|---|
| Revenue | $0 | $0 |
| Net income (loss) | $770,305 | $(1,898,596) |
| Loss per share, basic and diluted | $0.10 | $(0.26) |
| Operating expenses | $(784,159) | $1,781,961 |
| Operating cash flow | Not separately provided for the quarter in the cash-flow statement | $(1,544,642) |
- Gross profit and gross margin were zero because the company had no revenue.
- Cash and cash equivalents were $308,397 at September 30, 2019, compared with $1,767,080 at December 31, 2018. Management reported cash of $519,216 as of November 6, 2019.
- Current assets were $315,774 and current liabilities were $265,448, producing working capital of $50,326, down from $1,646,657 at December 31, 2018.
- Total assets were $334,317, total liabilities were $1,374,448, and stockholders’ deficit was $1,040,131 at September 30, 2019.
- Convertible promissory notes totaled $1,009,000, excluding the $100,000 related-party convertible note. The company reported no bank loans, lines of credit, or long-term debt obligations.
- Research and development expense was $553,376 for the first nine months, compared with $155,421 in the prior-year period.
Material changes versus the prior comparable periods
- Third-quarter net income of $770,305 compared with a net loss of $27,005,729 in the prior-year quarter. The improvement was primarily attributable to substantially lower stock-based compensation and the absence of the prior-year beneficial-conversion-feature expense.
- Nine-month net loss declined to $1,898,596 from $28,929,787. The prior-year period included $24.2 million of stock-based compensation and $3.5 million of beneficial-conversion-feature expense.
- Third-quarter operating expenses were reported as negative $784,159, primarily reflecting a $1,343,866 reversal of previously recorded stock-based compensation after the company recouped and cancelled 266,640 shares from a former employee.
- Stockholders’ equity improved from a deficit of $1,516,946 at December 31, 2018 to a deficit of $1,040,131, despite continued losses, largely due to equity issuances and note conversions.
- In August 2019, the company converted $1,994,500 of convertible notes plus $124,997 of accrued interest into 2,119,525 restricted common shares and converted an additional $21,000 of notes into 210,000 shares. Shares outstanding increased to 7,362,046 from 4,724,161 at December 31, 2018.
- Cash used in operations increased to $1,544,642 for the first nine months from $1,151,815 in the prior-year period, despite the lower reported net loss.
Outlook, risks, contingencies, and unusual items
- Management provided no quantitative revenue, earnings, or operating guidance. The company remains in the development stage and expects to require additional capital.
- The filing includes a going-concern warning. Continuing operations depend on obtaining additional financing or acquiring an entity that becomes profitable; the financial statements contain no adjustments for the uncertainties associated with this condition.
- In October 2019, after the reporting date, the company issued Auctus Fund a $500,000 convertible note bearing 10% interest and maturing October 14, 2020, together with warrants for up to 1,125,000 shares. The note has a conversion price generally based on a discount to market price, subject to a stated floor that may be adjusted, and carries significant default and prepayment provisions.
- The company is pursuing quantum-computing software development and potential government grants and funding, but the filing does not establish a commercialization timeline or probability of success.
- The company filed litigation related to an unusable cybersecurity system and seeks recovery of approximately $670,000. A settlement conference was scheduled for November 2019; the ultimate recovery is uncertain.
- Management concluded that disclosure controls and procedures were not effective as of the filing date. No material changes to internal control over financial reporting were reported during the quarter.
- The company adopted ASC 842, ASC 2018-02, and ASC 2018-07 in 2019. Management stated that these changes had no material impact, other than a minor lease-related balance-sheet adjustment.
Important facts investors should verify
- Whether the company can secure sufficient additional financing to fund operations and avoid a going-concern failure.
- Whether and when the company can complete development, commercialize products, and generate recurring revenue.
- The terms, conversion mechanics, potential dilution, and default provisions of the Auctus note and warrants issued after quarter-end.
- The remaining convertible-note obligations, including the related-party note and potential future share issuance.
- The status and likely recovery from the cybersecurity-system litigation.
- The remediation plan and effectiveness of the company’s disclosure controls.
- The sustainability of reported third-quarter net income, which was materially affected by noncash stock-based compensation reversals and therefore does not demonstrate operating profitability.