Business Context and Reporting Period
Quantum Computing Inc. filed this unaudited Form 10-Q for the quarter ended March 31, 2019. The company, formerly Innovative Beverage Group Holdings, is a development-stage business focused on quantum-computing software, initially targeting financial optimization, cybersecurity, defense, manufacturing, artificial intelligence, and related applications. The company had not yet commercialized products or services.
Financial Results and Position
| Metric | Q1 2019 | Q1 2018 / Period-End Comparison |
|---|---|---|
| Revenue | $0 | $0 |
| Gross profit | $0 | $0 |
| Operating expenses | $583,138 | $298,848 |
| Net loss | $635,673 | $1,048,848 |
| Basic and diluted loss per share | $0.13 loss | $1.06 loss |
| Cash used in operating activities | $434,344 | $48,520 |
| Cash and cash equivalents at March 31 | $1,332,735 | Not clearly provided for comparable period |
| Total liabilities at March 31 | $3,435,846 | $3,314,102 at December 31, 2018 |
| Stockholders’ deficit at March 31 | $2,081,369 | $1,516,946 deficit at December 31, 2018 |
Gross margin was not meaningful because the company had no revenue or cost of revenue. Net margin was also not meaningful because revenue was zero. Operating expenses consisted primarily of salaries of $115,646, consulting of $77,025, research and development of $151,290, stock-based compensation of $71,250, and other selling, general and administrative expenses of $167,927.
The company reported no investing cash flows and no financing cash flows in Q1 2019. Management stated that cash and equivalents were approximately $1.18 million as of May 9, 2019. Since commencing operations as Quantum Computing in February 2018, the company reported raising $75,000 through equity and $3,995,500 through convertible promissory notes. It had no bank loans or lines of credit and reported no long-term debt obligations, although current liabilities included $3,070,500 of convertible promissory notes and $100,000 of related-party convertible notes.
Material Changes Versus the Prior Comparable Period
- Revenue remained at $0 because the company had not completed development and testing of products and had not sold products or services.
- Operating expenses increased approximately 95.1%, or $284,291, primarily due to higher salaries, consulting, research and development, legal and audit costs, and stock-based compensation. The filing contains a minor inconsistency, reporting Q1 operating expenses as both $583,138 in the financial statements and $583,139 in MD&A.
- Net loss improved by $413,175, or 39.4%, principally because Q1 2018 included a $750,000 beneficial conversion feature expense. This improvement was partially offset by $55,410 of interest expense on promissory notes in Q1 2019.
- Cash used in operations increased substantially from $48,520 to $434,344.
- Shares outstanding increased from 4,724,161 at December 31, 2018 to 4,749,161 at March 31, 2019, reflecting the issuance of 25,000 restricted shares to Lyons Capital as compensation.
- The company adopted ASC 842 effective January 1, 2019, recognizing a small operating lease right-of-use asset and related liability. The filing states that the adoption had a minor balance-sheet impact.
Guidance, Outlook, Risks, Contingencies, and Unusual Items
- No quantitative revenue, profitability, or other formal guidance was provided. Management expects to continue developing quantum-computing software and pursuing government initiatives, grants, and funding opportunities.
- The financial statements include a going-concern uncertainty. The company has no operating revenue, an accumulated deficit of $21.0 million at March 31, 2019, and stated that continued operations depend on obtaining additional capital or ultimately acquiring an entity that becomes profitable.
- Management’s disclosure controls and procedures were determined to be ineffective as of the end of the quarter. Management reported no material changes in internal control over financial reporting during the quarter.
- The company filed a New Jersey lawsuit against REMTCS, Inc., Richard Malinowski, and Thomas Kelly seeking more than $670,000 related to the PASS security system and associated claims. The company believes it has strong grounds, but the matter may take time to resolve. The filing does not provide a clear assessment of potential recovery or timing.
- The company expects a $100,000 promissory note receivable to be paid by June 30, 2019. If paid, a related $100,000 convertible promissory note is expected to convert into company shares at $0.10 per share; if unpaid, the convertible note will be cancelled and no shares will be issued.
- Convertible notes create potential dilution. Related-party notes were convertible at $0.10 per share, while other notes included an 8% offering convertible at $1.00 per share. The filing states that certain notes are mandatorily convertible at maturity, while the timing and mechanics vary by instrument.
- The company recognized $71,250 of stock-based compensation in Q1 2019. Prior-period stock grants to management and technical personnel generated substantial compensation expense in 2018, partly reversed when shares were forfeited.
Important Facts for Investors to Verify
- Whether the company can obtain sufficient additional financing before its cash is exhausted, given zero revenue and operating cash burn of $434,344 in Q1.
- The terms, maturity dates, accrued interest, conversion rights, and potential dilution associated with the approximately $3.17 million of convertible notes shown as current liabilities.
- The status and likely recoverability of the more-than-$670,000 lawsuit related to the PASS system.
- Remediation plans and subsequent reporting regarding ineffective disclosure controls and procedures.
- Progress toward commercializing quantum-computing software, generating revenue, and obtaining government grants or customer contracts.
- The filing’s inconsistent presentation of Q1 operating expenses ($583,138 in the statement of operations versus $583,139 in MD&A) and the differing cash figures reported for March 31 and May 9, 2019.