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 nine months ended September 30, 2021. The company is a development-stage quantum-computing software provider focused on Qatalyst, quantum-ready applications, optimization solvers, and related cloud-based solutions. The company reported 29,156,815 common shares outstanding as of November 3, 2021.
QCI had not generated revenue through September 30, 2021. Management stated that it was focused on commercializing its products, sales and marketing activities, research and development, and partnerships, including relationships involving AWS Braket, quantum hardware providers, Splunk, and government-funded opportunities.
Financial Results and Liquidity
| Metric | Three Months Ended September 30, 2021 | Three Months Ended September 30, 2020 | Nine Months Ended September 30, 2021 | Nine Months Ended September 30, 2020 |
|---|---|---|---|---|
| Revenue | $0 | $0 | $0 | $0 |
| Operating expenses | $4.8 million | $8.7 million | $12.5 million | $11.3 million |
| Net loss | $4.8 million | $11.7 million | $12.3 million | $14.1 million |
| Basic and diluted loss per share | $0.16 | $0.68 | $0.42 | $0.82 |
| Cash used in operating activities | Not separately provided | Not separately provided | $4.9 million | $5.4 million |
- Gross profit and gross margin were zero because the company had no product or service sales.
- Nine-month operating expenses increased 10% year over year, primarily from higher salaries and benefits, research and development, and consulting costs. These increases were partly offset by lower stock-based compensation and other selling, general and administrative expenses.
- Third-quarter operating expenses declined 45% year over year, largely because of lower stock-based compensation, related-party marketing, legal and audit, and other SG&A expenses.
- Cash and cash equivalents were $10.4 million at September 30, 2021, compared with $15.2 million at December 31, 2020. Working capital was $10.3 million, down from $14.5 million.
- Total assets were $11.1 million and total liabilities were $0.8 million at September 30, 2021. The company reported no loans payable, convertible promissory notes, or derivative liabilities at period-end.
- Financing activities provided $111,567 during the first nine months of 2021, primarily from stock option and warrant exercises. Investing activities used $11,415.
- The company reported no bank line of credit and no long-term debt obligations. Management stated that monthly lease and other mandatory payments were approximately $8,129, excluding payroll, benefits, and ordinary expenses.
- The company recorded $218,371 of other income from forgiveness of its Paycheck Protection Program loan in June 2021.
The statement of cash flows reports $4.9 million of operating cash use for the nine months ended September 30, 2021 and $5.4 million for the comparable 2020 period. The MD&A contains an inconsistent reference to $8.7 million of operating cash use for the 2020 period; the filing text does not reconcile this discrepancy.
Material Changes Versus the Prior Comparable Period
- Revenue remained at zero for both the quarter and nine-month period.
- Third-quarter net loss improved by $6.9 million, or 59%, primarily because of lower operating expenses and the absence of substantial prior-year financing-related interest and derivative expenses.
- Nine-month net loss improved by $1.9 million, or 13%, despite higher operating expenses, primarily because 2021 did not include comparable prior-year derivative, warrant, and financing-related expenses.
- Stock-based compensation was $7.1 million for the first nine months of 2021, compared with $7.8 million in the prior-year period. The company also recognized $7.7 million of stock-based compensation in operating cash flow adjustments.
- Shares outstanding increased from 27,966,096 at December 31, 2020 to 29,156,815 at September 30, 2021, reflecting equity issued for cash, services, and option-related activity.
- In July 2021, the company agreed to pay Axis Partners $20,000 per month for three months and issue 15,000 common shares. It also issued 86,113 shares under a one-year business-development consulting agreement.
Guidance, Outlook, Risks, Contingencies, and Unusual Items
- The filing provides no quantified revenue, earnings, cash-flow, or profitability guidance.
- Management expects long-term liquidity to depend on expanding operations, generating revenue, market acceptance, additional financing, and general economic conditions. The company has not yet demonstrated commercial sales.
- Key business risks include uncertain market adoption of quantum computing, dependence on highly specialized personnel, evolving quantum hardware, competition, technology-development risk, and the need to convert research and partnerships into paying customers.
- COVID-19 could disrupt research and development, operations, sales activities, customer relationships, and the company’s ability to raise capital. Management stated that the financial impact was not reasonably estimable.
- The company had approximately $4.2 million of federal net operating loss carryforwards at September 30, 2021, fully offset by a valuation allowance. Management stated that prior ownership changes could substantially limit their future use.
- Management reported no material litigation and no material off-balance-sheet arrangements. The company stated that no material risk-factor changes existed other than the added COVID-19 risk disclosure.
- Disclosure controls and procedures were not effective because the company lacked sufficient accounting staff for proper segregation of duties. Management planned to hire additional administrative and accounting personnel.
- The company stated that it did not hold derivative instruments or engage in hedging activities as of the reporting date.
Important Facts for Investors to Verify
- Verify whether and when Qatalyst, solver, government, or partnership activities begin producing recurring commercial revenue.
- Reconcile the inconsistent 2020 operating-cash-flow figures in the MD&A and statement of cash flows.
- Assess cash runway against the company’s continuing operating losses, zero revenue, recurring expenses, and potential need for additional equity financing.
- Review the impact of stock-based compensation, consulting arrangements, warrant and option exercises, and future share issuance on dilution.
- Monitor remediation of the ineffective disclosure controls and the company’s staffing of accounting and finance functions.
- Evaluate the collectability and future utilization of net operating loss carryforwards given the company’s prior changes in control.