Business Context and Reporting Period
Quantum Computing Inc. (Nasdaq: QUBT) filed this unaudited Form 10-Q for the quarter and nine months ended September 30, 2023. The company develops nanophotonic quantum computing, sensing, imaging, cybersecurity and related hardware and software following its June 2022 acquisition of QPhoton. Revenue remained primarily from professional services; management expected hardware sales to begin in the fourth quarter of 2023.
Key Financial Metrics
| Metric | Three Months Ended September 30, 2023 | Nine Months Ended September 30, 2023 |
|---|---|---|
| Revenue | $50,435 | $283,154 |
| Gross profit | $26,714 | $152,037 |
| Gross margin | 53% | 54% |
| Operating loss | $(7,667,517) | $(19,314,121) |
| Net loss | $(8,275,919) | $(21,424,504) |
| Basic loss per share | $(0.11) | $(0.29) |
| Cash used in operating activities | Not separately presented | $(14,635,011) |
- Cash and cash equivalents were $7.4 million at September 30, 2023, including $7.2 million in money market funds.
- Current assets were $8.1 million and current liabilities were $8.1 million, producing working capital of $20,589.
- Total assets were $89.3 million, including $64.9 million of goodwill and $12.1 million of net intangible assets.
- Total liabilities were $8.1 million. Short-term loans payable were $4.5 million, with no long-term loans payable reported at September 30, 2023.
- Investing cash outflows included $2.2 million for property and equipment and $500,000 of loans to millionways.
- Financing activities provided $19.4 million, primarily from $23.5 million of ATM equity proceeds, partly offset by debt repayments.
- Stock-based compensation was $5.9 million in operating expenses for the nine-month period and $8.1 million as a cash-flow adjustment.
Material Changes Versus the Prior Comparable Period
- Third-quarter revenue increased 34% to $50,435 from $37,646; nine-month revenue increased 111% to $283,154 from $134,370. All reported revenue was from services, with no product revenue.
- Third-quarter gross margin increased to 53% from 34%, while nine-month gross margin declined to 54% from 69% because of higher direct labor costs.
- Third-quarter operating expenses increased 12% to $7.7 million, and the quarterly net loss increased 9% to $8.3 million.
- Nine-month operating expenses increased 6% to $19.5 million, while the net loss increased 8% to $21.4 million. Higher research and development, compensation and financing costs outweighed revenue growth.
- Shares outstanding increased to 75.1 million from 56.0 million at December 31, 2022, primarily reflecting ATM sales and other equity issuances. The company sold 15.3 million shares through the ATM facility for gross proceeds of $23.5 million.
- Property and equipment increased to $3.0 million from $1.0 million, reflecting investments in computer hardware and laboratory equipment.
- Goodwill increased to $64.9 million from $59.1 million after purchase-price allocation adjustments, partly offset by a $3.8 million reduction related to forfeited QPhoton merger warrants.
Outlook, Liquidity, Risks and Unusual Items
- Management stated that additional financing is required to fund operations for the next 12 months and disclosed substantial doubt about the company’s ability to continue as a going concern.
- Management reported approximately $3.6 million of cash on hand as of November 10, 2023, compared with $7.4 million at September 30, 2023. Monthly lease and other mandatory payments were approximately $96,921, excluding payroll and ordinary expenses.
- The company had approximately $76.5 million available under its 2022 shelf registration and $26.5 million available under its amended ATM agreement at September 30, 2023. Future equity financing could materially dilute existing shareholders.
- The Streeterville note had an initial principal amount of $8.25 million. Streeterville had redeemed $4.75 million by September 30, 2023; cumulative redemptions reached $6.25 million by November 10, leaving reported principal and accrued interest payable of $2.8 million.
- The company is pursuing commercialization of quantum computing, remote sensing, imaging and cybersecurity products. Subsequent to quarter-end, it reported a landmine-detection demonstration and signed contracts for initial Reservoir Computer and Quantum Random Number Generator sales; these events were not reflected in third-quarter revenue.
- The company entered into a five-year cooperative research agreement with U.S. Special Operations Command and received a NASA-related subcontract award. The filing does not provide a clear revenue value for these arrangements.
- Material risks include continued losses and negative operating cash flow, dependence on additional financing, limited operating history and early commercialization, technology and market-acceptance risk, supply-chain dependence, competition, employee retention, and potential dilution.
- Legal matters include BV Advisory litigation concerning QPhoton notes and appraisal rights, a related New Jersey action, and a petition seeking appointment of a receiver based on alleged insolvency. The company disputes the claims; the filing states that potential impacts cannot presently be assessed or that no additional accrual is considered necessary.
- Disclosure controls and procedures were deemed ineffective as of September 30, 2023 because the company lacked sufficient accounting staff for proper segregation of duties.
- The filing contains a cash-flow presentation discrepancy: the consolidated cash-flow statement reports $14.635 million of operating cash use, while a liquidity footnote references $14.592 million.
Investor Verification Points
- Verify the company’s near-term financing needs, cash balance after November 10, 2023, and the availability and potential use of the shelf and ATM facilities.
- Assess whether reported initial hardware sales and government or commercial engagements convert into material, recurring revenue.
- Review the Streeterville note repayment terms, remaining balance, redemption rights and potential default provisions.
- Evaluate dilution from ATM issuances, preferred stock, warrants and 13.6 million outstanding options.
- Review the going-concern disclosure and whether operating cash burn can be reduced without impairing product development.
- Monitor BV Advisory litigation, the receiver petition and related appraisal claims for potential financial or corporate-governance consequences.
- Assess the effect of the ineffective disclosure controls and management’s remediation plans.