Quantum Computing Inc. — Form 10-Q Summary
Reporting period: Three and nine months ended September 30, 2020; filed November 13, 2020. The company, formerly Innovative Beverage Group Holdings, Inc., is a development-stage technology company developing “quantum-ready” software, including the Mukai platform and related optimization, analytics, cybersecurity, and artificial-intelligence applications. The financial statements are unaudited and prepared under U.S. GAAP.
Financial Overview
| Metric | Three months ended September 30, 2020 | Three months ended September 30, 2019 | Nine months ended September 30, 2020 | Nine months ended September 30, 2019 |
|---|---|---|---|---|
| Revenue | $0 | $0 | $0 | $0 |
| Gross profit | $0 | $0 | $0 | $0 |
| Operating expenses | $8.68 million | $(0.78) million | $11.33 million | $1.78 million |
| Net income (loss) | $(11.66) million | $0.77 million | $(14.13) million | $(1.90) million |
| Loss per share | $(0.68) | $0.10 | $(0.82) | $(0.26) |
| Cash used in operating activities | Not provided for the quarter | Not provided for the quarter | $(5.45) million | $(1.54) million |
Balance Sheet and Liquidity
- Cash and cash equivalents were $3.98 million at September 30, 2020, compared with $101,100 at December 31, 2019. Management reported approximately $4.86 million of cash as of November 11, 2020.
- Total assets were $4.01 million, including $24,112 of net property and equipment.
- Total liabilities were $3.39 million, including a $1.15 million derivative liability, $1.47 million of convertible promissory notes, $258,371 of loans payable, and $80,000 of related-party convertible notes.
- Working capital improved to $596,112 from a deficit of $2.84 million at December 31, 2019, primarily because of equity financing and increased cash.
- Stockholders’ equity was $620,224 at September 30, 2020, compared with a deficit of $2.81 million at year-end 2019. Accumulated deficit increased to $42.90 million.
- Financing activities provided $9.33 million during the first nine months, substantially offsetting $5.45 million of operating cash use and $3,258 of investing cash use.
Material Changes Versus Prior Comparable Period
- The company continued to report no revenue because it had not completed development and testing of products for sale and had not sold products or services.
- Nine-month operating expenses increased by $9.55 million, or 536%, to $11.33 million. The principal driver was stock-based compensation of $7.80 million, compared with $214,885 in the prior-year period. Research and development expense increased to $967,376 from $553,376.
- Nine-month net loss increased by $12.24 million, or 644%, to $14.13 million. The increase reflected higher operating expenses and approximately $2.23 million of financing costs, $705,048 of derivative and warrant interest expense, and $100,000 of beneficial-conversion-feature expense.
- Third-quarter net loss was $11.66 million versus prior-year net income of $770,304. The third quarter included $6.56 million of stock-based compensation and approximately $2.95 million of derivative, warrant, and financing-related interest expense.
- Shares outstanding increased from 7.36 million at December 31, 2019 to 17.18 million at September 30, 2020. The increase resulted from equity financing, debt conversions, shares issued for services, and stock-based compensation.
- The company raised capital through common-stock offerings, convertible notes, warrant exercises, an Oasis financing arrangement, and a $218,371 Paycheck Protection Program loan. It also repaid the Auctus convertible note for approximately $462,691 in May 2020.
Guidance, Outlook, Risks, and Unusual Items
- Management described the company as development-stage and stated that current capital and revenue are insufficient to fund planned expansion. Continued operations depend on additional debt or equity financing, revenue generation, or acquiring an entity that becomes profitable.
- The filing contains no quantitative revenue or profitability guidance. Management expects to pursue commercialization of the Mukai platform, solver products, partnerships, and government-funded opportunities, but timing and commercial success remain uncertain.
- The company entered into an agreement with Oasis that could provide up to $10 million of future equity purchases, subject to conditions, registration effectiveness, trading-volume limits, and other contractual restrictions. The company also reported approximately $1.2 million raised through a separate $2.50-per-share equity offering by November 10, 2020.
- COVID-19 could disrupt research and development, customer and government-sales activities, employee availability, and the company’s ability to raise capital. The filing states that the ultimate impact was not reasonably estimable.
- The company received a $218,371 PPP loan and expected to seek forgiveness, but stated that no assurance exists that all or any portion will be forgiven.
- Convertible notes and warrants contain conversion, repricing, default, prepayment-penalty, and potential equity-settlement provisions. These instruments generated material derivative and financing expenses and may cause further dilution.
- Management concluded that disclosure controls and procedures were not effective as of the evaluation date. No material changes to internal control over financial reporting were reported during the quarter.
- The filing reports no material pending litigation. A prior dispute concerning the PASS security system was settled in January 2020.
- Related-party transactions included $97,603 of marketing services paid to an entity owned by a company director during the third quarter.
Most Important Facts to Verify
- Whether the company can begin generating recurring revenue from Mukai, QBSolv, government opportunities, or commercial partnerships.
- Remaining cash runway based on the reported cash balance, operating cash burn, payroll, financing obligations, and other mandatory monthly payments of approximately $8,795 before ordinary expenses.
- Status, maturity, conversion terms, and potential dilution from the convertible notes, derivative liability, warrants, and related-party instruments.
- Whether the PPP loan or any other government funding will be forgiven or become payable.
- Effect of the substantial stock issuances and stock-based compensation on future dilution and reported per-share results.
- Progress in remediating ineffective disclosure controls and procedures.
- Whether the company can obtain additional financing despite its accumulated deficit, absence of revenue, and going-concern uncertainty.