Business Context and Reporting Period
Quantum Computing Inc. (QCI), formerly Innovative Beverage Group Holdings, Inc., filed this unaudited Form 10-Q for the three months ended March 31, 2022. QCI develops quantum-computing software and applications, principally its Qatalyst platform, which is designed to simplify access to quantum and conventional computing resources for optimization problems.
The company reported 29,156,815 common shares outstanding as of May 19, 2022. Its common stock trades on Nasdaq under the symbol QUBT.
Key Financial Metrics
| Metric | Q1 2022 | Q1 2021 | Change |
|---|---|---|---|
| Revenue | $31,240 | $0 | New revenue generation |
| Cost of revenue | $11,568 | $0 | New cost base |
| Gross profit | $19,672 | $0 | 63% gross margin |
| Operating expenses | $6,728,603 | $3,393,129 | 98% increase |
| Loss from operations | $(6,708,931) | $(3,393,129) | Higher operating loss |
| Net loss | $(7,133,692) | $(3,391,746) | 110% increase in loss |
| Basic and diluted loss per share | $(0.24) | $(0.12) | Loss per share doubled |
| Cash used in operating activities | $(4,193,833) | $(1,506,431) | Higher cash burn |
| Cash used in investing activities | $(1,243,955) | $(4,043) | Primarily QPhoton loan |
| Cash provided by financing activities | $212,500 | $80,000 | Higher financing inflow |
| Ending cash and equivalents | $11,513,369 | $13,765,848 | 17% decrease |
Revenue consisted entirely of professional services under multi-month commercial contracts; no product revenue was reported. Operating expenses included $3.08 million of stock-based compensation, $1.12 million of salaries and benefits, $1.02 million of research and development, $1.14 million of other selling, general and administrative expense, and $371,000 of consulting expense.
At March 31, 2022, total assets were $13.30 million, total liabilities were $1.04 million, and stockholders’ equity was $12.27 million. Current assets were $13.25 million and current liabilities were $1.04 million, resulting in working capital of $12.21 million. The company reported no loans payable, convertible promissory notes, or long-term debt outstanding at quarter-end.
Material Changes Versus the Prior Comparable Period
- Revenue increased from zero to $31,240, reflecting the commencement of professional-services activity.
- Gross profit was $19,672, with a reported gross margin of approximately 63%.
- Operating expenses nearly doubled, primarily due to higher legal and investment-transaction costs, staffing and salary expense, stock-based compensation, research and development, and consulting costs.
- Stock-based compensation expense increased by approximately $1.10 million to $3.08 million and represented a significant portion of operating expenses.
- Net loss increased by $3.74 million to $7.13 million.
- Operating cash use increased by $2.69 million to $4.19 million.
- Investing cash use increased primarily because QCI loaned QPhoton $1.25 million under a February 2022 note purchase agreement.
- Working capital declined by approximately $3.93 million from December 31, 2021, mainly because of operating cash consumption and the QPhoton investment.
Guidance, Outlook, Risks, Contingencies, and Unusual Items
The filing does not provide quantitative revenue, earnings, or cash-flow guidance. Management described its strategy as developing production-ready quantum software, reducing the need for specialized quantum-programming expertise, supporting multiple quantum-processing-unit vendors, and expanding commercial and government use cases.
On February 18, 2022, QCI purchased a $1.25 million unsecured QPhoton note bearing 6% annual interest and maturing on the earlier of March 1, 2023, a QPhoton change of control, or an event of default. On April 1, 2022, QCI purchased a second $1.25 million QPhoton note. The filing subsequently disclosed that QCI and QPhoton entered into a merger agreement on May 19, 2022.
The proposed QPhoton transaction contemplated consideration consisting of 5,802,206 QCI common shares, 2,377,028 shares of Series B convertible preferred stock, and warrants to purchase up to 7,028,337 common shares. Closing was subject to conditions including stockholder approvals, required financial statements, appointment of a QPhoton designee, and a Delaware Court of Chancery order validating specified corporate acts. The agreement could be terminated under several circumstances, including failure to close by December 31, 2022 or failure to obtain the Section 205 order within the applicable period.
QCI stated that cash on hand was approximately $8.54 million as of April 30, 2022, compared with $11.51 million at March 31, 2022. It reported approximately $38,384 in monthly lease and other mandatory payments, excluding payroll, benefits, and ordinary operating expenses. Long-term liquidity depends on expanding operations, generating revenue, and obtaining additional financing if needed.
Management concluded that disclosure controls and procedures were not effective because the company lacked sufficient accounting staff to provide proper segregation of duties. QCI stated that it had begun hiring additional administrative and accounting personnel.
Principal risks include continued operating losses and cash burn, limited operating history and early-stage revenue, dependence on market acceptance of quantum-computing products and services, competition and technology development risk, reliance on key personnel, potential dilution from preferred stock and warrants, execution and closing risks associated with the QPhoton transaction, and possible disruption from COVID-19. The filing states that no material litigation was pending and that there were no material off-balance-sheet arrangements.
Important Facts for Investors to Verify
- Verify the sustainability and contractual quality of the initial $31,240 of professional-services revenue and whether recurring or product revenue has developed subsequently.
- Assess cash runway using the reported April 30 cash balance, ongoing operating cash burn, payroll and benefit costs, and any financing plans.
- Review the collectability, maturity, interest terms, and repayment or conversion status of the two $1.25 million QPhoton notes.
- Confirm the status, closing conditions, consideration, dilution, and termination provisions of the proposed QPhoton merger.
- Quantify potential dilution from the 1,545,459 Series A preferred shares, associated warrants, proposed Series B preferred shares, and QPhoton merger warrants.
- Evaluate the material weakness in disclosure controls, including whether accounting staffing and segregation-of-duties issues were remediated.
- Reconcile a property-and-equipment amount that appears inconsistent in the filing: the balance sheet reports $41,689 net, while Note 4 presents a December 31, 2021 net amount of $30,956 despite the balance sheet showing $41,348.
- Consider the limited revenue base relative to operating expenses and stock-based compensation, as well as the absence of quantitative management guidance.