Quantum Computing Inc. 2018 Form 10-K Summary
Business Context and Reporting Period
The filing covers the fiscal year ended December 31, 2018, with comparative 2017 information. Although labeled a Form 10-K, the Company stated it was not then subject to Exchange Act Sections 13 or 15(d) and filed the report voluntarily; SEC review was not assured.
Quantum Computing Inc. changed its name and domicile from Innovative Beverage Group Holdings, Inc. to a Delaware corporation in February 2018. It is an early-stage development company focused on quantum-computing software, quantum simulators, financial optimization, artificial intelligence, big data, and cybersecurity applications. The Company had four employees, six contract staff, five technical advisors, and two third-party development partners.
The Company had no completed products or customer services during 2018. Its initial financial applications were under development, with management targeting two beta customers for financial algorithms in the third quarter of 2019.
Financial Performance and Position
| Metric | 2018 | 2017 | Change or comment |
|---|---|---|---|
| Revenue | $0 | $0 | No products or services had been commercialized. |
| Gross profit | $0 | $0 | No cost of revenue or gross margin. |
| Operating expenses | $30.0 million in MD&A; $25.96 million in the audited statement | $175,000 | Material presentation inconsistency in the filing; management attributes the increase primarily to stock compensation and commencement of operations. |
| Net loss | $30.667 million | $175,000 | Loss increased by $30.492 million, or 17,424%. |
| Loss per share | $6.49 basic and diluted loss | $0.19 basic and diluted loss | Based on weighted-average shares of 4,724,161 in 2018 and 943,735 in 2017. |
| Cash flow from operations | $(2.409) million | $0 | Cash use was partly offset by non-cash stock compensation and beneficial-conversion-feature expense. |
| Capital expenditures | $7,014 cash outflow | $0 | Reported net property and equipment was $6,897 at year-end. |
| Cash and equivalents | $1.767 million at December 31, 2018 | $0 | Management separately reported $1.38 million at March 20, 2019. |
| Total liabilities | $3.314 million | $1,500 | Included $3.071 million of convertible promissory notes and $100,000 of related-party notes. |
| Stockholders’ deficit | $(1.517) million | $(1,500) | Accumulated deficit was reported as $40.540 million in the balance sheet note. |
The 2018 loss included $24.342 million of stock-based compensation, $3.996 million of beneficial conversion feature interest expense, $87,307 of accrued interest, and a $625,333 impairment charge. The stock compensation related primarily to 4.8 million shares granted to management and technical personnel; 4.0 million shares were subsequently cancelled after two managers resigned, but the filing states the accounting rules did not permit reversal of the expense.
Liquidity, Financing, and Debt
During 2018, the Company reported raising $75,000 through equity issuances and approximately $3.996 million in convertible promissory notes, although the financial statement notes state that total cash received for the notes was approximately $3.721 million. The Company had no bank loans or credit lines and stated it had no long-term debt obligations, but its balance sheet included $3.171 million of current convertible notes, including related-party obligations.
The Company disclosed substantial potential dilution from convertible notes. As of March 20, 2019, approximately 6.77 million shares were issuable upon conversion of outstanding convertible notes. The Company also had authorization for 250 million common shares and 10 million preferred shares.
Management stated that available financing was expected to support operations for approximately 8–10 months. The independent auditor included a going-concern emphasis, noting substantial doubt arising from significant operating losses. Management indicated that additional capital would be needed and that failure to obtain financing could require scaling back operations or ceasing business.
Material Changes Versus the Prior Comparable Period
- The Company transitioned from an inactive predecessor business to a quantum-computing development business in 2018.
- Revenue remained zero, while operating activity and expenses increased substantially.
- Net loss increased from $175,000 to $30.667 million, driven principally by non-cash stock compensation, conversion-feature expense, interest, and impairment.
- Cash increased from zero to $1.767 million at year-end, primarily from note and equity financings, while operating activities used $2.409 million.
- Shares outstanding increased from 943,735 at December 31, 2017 to 4,724,161 at December 31, 2018; 4,749,161 shares were outstanding as of March 20, 2019.
- The Company established its management and technical team, began product development, and pursued government and commercial opportunities.
- Disclosure controls and internal control over financial reporting were determined to be ineffective due to four identified material weaknesses, including insufficient documentation, limited accounting resources and segregation of duties, untimely communication of financial information, and inadequate documentation of control performance.
Guidance, Outlook, Risks, and Unusual Items
Management planned to develop a portfolio optimizer, yield-curve trading algorithms, quantum annealing or simulation capabilities, AI and big-data prototypes, and cybersecurity products. It expected financial-algorithm beta customers in the third quarter of 2019 and contemplated broader sales activity in 2020. No quantified revenue, earnings, margin, or cash-flow guidance was provided.
- The Company has no operating revenue, limited operating history, and no assurance that products will be completed, accepted by customers, or commercialized.
- Quantum computing technology remains immature, expensive, and highly competitive, with larger competitors including IBM, Google, Microsoft, D-Wave, Rigetti, and others.
- The Company depends on continued access to capital and may require additional equity or debt financing, potentially causing substantial dilution.
- Convertible notes, related-party obligations, and future equity issuances may materially dilute existing shareholders.
- The Company identified substantial doubt about its ability to continue as a going concern.
- A $670,000 security-system purchase from REMTC, a company owned by a former executive, was deemed unusable and impaired. The Company stated it expected to recover approximately $670,000, while also disclosing litigation against REMTC and former personnel seeking more than $670,000.
- Related-party matters include the Company’s assumption of liabilities associated with Convergent Risk Group, which is owned by CEO Robert Liscouski, and the issuance of convertible notes in connection with those liabilities.
- The common stock traded on the OTC Pink marketplace under QUBT, was described as thinly traded and a penny stock, and had a reported March 20, 2019 sale price of $4.05 per share.
Most Important Facts to Verify
- Reconcile the material discrepancy between the MD&A operating-expense figure of $30.667 million and the audited statement’s operating-expense figure of $25.959 million.
- Confirm the correct cash proceeds, principal balances, maturity dates, conversion prices, and related-party status of all convertible notes.
- Verify the Company’s actual post-year-end cash balance and its expected cash runway.
- Assess the going-concern disclosure and whether subsequent financing or revenue has reduced liquidity risk.
- Quantify fully diluted shares, including the approximately 6.77 million shares potentially issuable under convertible notes and any additional authorized securities.
- Review the status and collectability of the expected $670,000 recovery from REMTC and the related litigation.
- Evaluate remediation of the four material weaknesses in internal control over financial reporting.
- Verify whether the proposed beta-customer, government-contract, AI-partner, and product-development milestones were achieved after the filing date.
- Confirm the accounting treatment and economic impact of the $24.342 million stock-compensation charge, including the cancellation of 4.0 million granted shares.