Quantum Computing Inc. 2019 Form 10-K Summary
Business context and reporting period
Quantum Computing Inc. (OTCQB: QUBT), formerly Innovative Beverage Group Holdings, Inc., reports for the fiscal year ended December 31, 2019. The filing is an annual report rather than a quarterly report, although the requested period is identified as 2019 Q4.
The Company is an early-stage development company focused on quantum-ready software, optimization applications and a software stack designed to operate on classical computers, quantum annealers and gate-model quantum computers. Its principal products are the Quantum Asset Allocator and the Mukai quantum application development platform. Initial target markets include financial services, with planned expansion into healthcare, pharmaceuticals, logistics, artificial intelligence and cybersecurity.
Financial results and liquidity
| Metric | FY 2019 | FY 2018 | Change |
|---|---|---|---|
| Revenue | $0 | $0 | No change |
| Gross profit | $0 | $0 | No change |
| Operating expenses | $2.548 million | $5.799 million | Down 56% |
| Net loss | $8.381 million | $10.507 million | Improved 20.2% |
| Loss per share | $1.14 | $2.22 | Improved |
| Cash used in operating activities | $2.244 million | $2.361 million | Improved modestly |
| Cash and cash equivalents at year-end | $101,100 | $1.767 million | Down $1.666 million |
| Total assets | $148,245 | $1.797 million | Down substantially |
| Total liabilities | $2.961 million | $3.314 million | Down $353,564 |
| Stockholders’ deficit | $2.812 million | $1.517 million | Deficit increased |
| Accumulated deficit | $28.761 million | $20.380 million | Increased $8.381 million |
There was no gross margin because the Company had not commenced commercial sales. Operating expenses declined primarily because stock-based compensation fell by approximately $3.967 million, partly offset by higher research and development, consulting, legal and audit costs.
The 2019 net loss included approximately $4.888 million of derivative and warrant expense, $803,335 of beneficial conversion feature expense and $151,185 of interest expense. The 2018 loss included approximately $3.996 million of beneficial conversion feature expense and a $625,333 asset impairment charge.
At December 31, 2019, the Company had $1.509 million of convertible promissory notes, $100,000 of related-party convertible notes and a $980,730 derivative liability. The filing states that the Company had no bank loans, lines of credit or long-term debt obligations. Cash on hand was $101,100 at year-end and $245,249 as of March 27, 2020.
Material changes versus the prior comparable period
- Revenue remained zero, as products were still in development, testing or early commercialization.
- Operating expenses fell 56%, primarily due to lower stock-based compensation.
- Research and development expense increased from $250,640 to $891,126.
- Net loss improved by $2.126 million, but the accumulated deficit increased to $28.761 million.
- Operating cash use improved slightly, but year-end cash declined from $1.767 million to $101,100.
- Common shares outstanding increased from 4,724,161 to 7,362,046, primarily reflecting conversions of convertible notes and other issuances.
- In August 2019, the Company converted approximately $2.016 million of convertible note principal plus accrued interest into 2,329,525 shares.
- In October 2019, the Company issued a $500,000 Auctus convertible note, together with warrants for up to 1,125,000 shares. The note bears 10% interest, matures in October 2020 and has conversion provisions based partly on future trading prices.
Guidance, outlook, risks and unusual items
Management expected to begin generating revenue in 2020. Financial application algorithms had been under development for approximately three quarters and were being tested with beta clients beginning in August 2019. Commercial sales and marketing were anticipated to begin in the third or fourth quarter of 2020 after beta testing.
The Mukai software stack was released in the fourth quarter of 2019 and was undergoing beta testing. Management stated that the platform was being marketed as a licensed service or through time-based access. The filing does not provide revenue guidance, bookings guidance or quantified profitability targets.
The financial statements and the auditor’s report include substantial doubt about the Company’s ability to continue as a going concern. Management stated that additional capital would be required and that available financing was expected to fund operations for approximately three to four months. Failure to obtain additional funding could require the Company to reduce or cease operations.
- The Company has no operating revenue, recurring losses and negative operating cash flow.
- Internal control over financial reporting was determined to be ineffective because of material weaknesses involving segregation of duties, limited accounting personnel, insufficient review procedures and accounting for complex equity and debt transactions.
- The Company operates in an immature, highly competitive and rapidly changing quantum-computing market, and commercialization and customer adoption remain uncertain.
- Technology, software-model, cybersecurity, intellectual-property, regulatory and key-personnel risks could materially affect results.
- Future equity issuances, note conversions, warrants and options could materially dilute existing stockholders. As of March 27, 2020, 4,566,465 shares were issuable upon conversion of convertible notes.
- The Company’s common stock trades on the OTCQB and is thinly traded, creating liquidity and price-volatility risks.
- The Company settled litigation involving REMTCS, Richard Malinowski and Thomas Kelly in January 2020. The filing states that no current litigation was expected to have a material adverse effect.
- Subsequent events included Auctus note conversions, a $100,000 convertible-note financing, a reduction of certain warrant exercise prices, issuance of 115,000 employee bonus shares and a technology alliance agreement with Splunk. The Splunk agreement involved research and development using Mukai and provided for no cash payments.
Most important facts for investors to verify
- Whether the Company has generated material revenue or customer commitments since December 31, 2019.
- Current cash, monthly cash burn and the amount and terms of financing completed after the filing date.
- The status, maturity, conversion and dilution impact of the Auctus note, related-party notes and other convertible securities.
- Whether the going-concern uncertainty has been resolved.
- Progress from beta testing to paying customers for Quantum Asset Allocator and Mukai.
- Whether the material weaknesses in internal control have been remediated.
- The financial and legal outcome of the REMTCS settlement and any related receivable or recovery.
- Current shares outstanding, warrants, options and other potentially dilutive securities.
- Whether the Company’s stated performance claims for its software have been independently validated and converted into commercial contracts.