Quantum Computing Inc. 2023 Form 10-K Summary
Business context and reporting period
Quantum Computing Inc. develops room-temperature, low-power quantum photonic computing, sensing, imaging and cybersecurity products. Its principal technology is Entropy Quantum Computing, supported by the Qatalyst software platform and products including quantum computers, reservoir computing devices, LiDAR, photonic vibrometers and quantum authentication solutions.
The filing is an annual report for the fiscal year ended December 31, 2023, filed April 1, 2024. It is not a quarterly filing for Q4 2023. QCi describes itself as a development-stage company with limited operations and revenue. It had 39 full-time employees and nine part-time contract staff at year-end, including 34 focused on product development.
Financial performance and liquidity
| Metric | 2023 | 2022 | Change |
|---|---|---|---|
| Revenue | $358,047 | $135,648 | Up 164% |
| Product revenue | $4,500 | $0 | New in 2023 |
| Service revenue | $353,547 | $135,648 | Up approximately 161% |
| Cost of revenue | $195,640 | $60,934 | Up 221% |
| Gross profit | $162,407 | $74,714 | Up 117% |
| Gross margin | 45% | 55% | Down 10 percentage points |
| Operating expenses | $27.4 million | $36.7 million | Down 25% |
| Operating loss | $27.2 million | $36.6 million | Improved $9.4 million |
| Net loss | $29.7 million | $38.6 million | Improved $8.9 million |
| Basic loss per share | $0.38 | $0.69 | Improved |
| Cash used in operating activities | $19.9 million | $17.2 million | Higher use of cash |
| Cash used in investing activities | $2.6 million | $2.2 million | Higher use of cash |
| Cash provided by financing activities | $19.3 million | $8.0 million | Higher financing inflow |
| Cash and cash equivalents at year-end | $2.1 million | $5.3 million | Down $3.2 million |
Revenue growth was driven primarily by short-term professional-services contracts with commercial and government customers. Management stated that customers are generally proceeding cautiously through small exploratory contracts. Cost of revenue increased faster than revenue, and the company attributed the margin decline largely to the revenue mix and the lack of a scaled, diversified product and channel base.
Operating expenses fell primarily because stock-based compensation declined to $8.7 million from $17.8 million. Research and development expense increased to $6.4 million from $4.6 million as QCi expanded its hardware commercialization capabilities.
At December 31, 2023, total assets were $78.7 million, including $60.4 million of goodwill and $11.4 million of net intangible assets. Current assets were $3.2 million and current liabilities were $4.6 million. The balance sheet reported a working-capital deficit of $1.4 million. The MD&A narrative contains an inconsistent reference to a $2.5 million deficit; investors should verify the correct figure against the audited balance sheet.
Year-end current debt was $2.5 million, with no long-term debt reported. The company had no line of credit. The Streeterville unsecured note, originally issued with $8.25 million of principal and a 10% interest rate, was fully repaid by March 1, 2024 after additional payments following year-end.
Material changes versus the prior comparable period
- Revenue increased by $222,399, but remained immaterial relative to operating expenses and cash burn.
- Product revenue began in 2023, although 99% of reported revenue still came from services.
- Gross margin declined from 55% to 45%.
- Operating expenses decreased by $9.3 million, mainly due to lower stock-based compensation and lower professional and selling expenses, partly offset by higher research and development spending.
- Net loss improved by 23%, but cash used in operations increased by $2.7 million.
- QCi raised $25.5 million net through its at-the-market equity facility, issuing 17.6 million common shares at an average price of approximately $1.45 per share.
- Capital spending on laboratory and production equipment was approximately $2.1 million. The company also loaned $500,000 to millionways, Inc. under notes bearing 10% interest and maturing in May 2024, subject to specified earlier repayment events.
- Common shares outstanding increased from 55.96 million at December 31, 2022 to 77.45 million at December 31, 2023, before reaching 91.36 million as of March 28, 2024.
- The company corrected its QPhoton purchase-price allocation during 2023, reducing recognized intangible assets and increasing goodwill. The filing states that the correction reduced 2023 net loss by approximately $1.6 million because of lower prior-period amortization.
Guidance, outlook, risks and unusual items
Management expects revenue to increase meaningfully in 2024 as the company emphasizes hardware sales, but the filing does not provide quantitative revenue, margin or earnings guidance. QCi launched its Dirac-3 quantum photonic computing machine in February 2024, with an initial price starting at $300,000, and expects to release additional products.
The company is building a thin-film lithium niobate chip manufacturing facility in Tempe, Arizona and may seek funding under the CHIPS Act and Department of Energy programs. The filing does not establish that such funding will be received.
- The company has incurred recurring losses since inception, has negative operating cash flow and an accumulated deficit of $149.7 million at year-end.
- Management and the auditor concluded that substantial doubt exists about QCi’s ability to continue as a going concern for the next twelve months. Additional financing is required, and future equity or debt financing could dilute shareholders or impose restrictive terms.
- The company operates in a nascent, highly competitive industry and has not produced its products at volume. Commercial adoption, quantum advantage, manufacturing scale, product reliability and cost targets remain uncertain.
- QCi depends on specialized suppliers, including suppliers in China, and faces supply-chain, trade, export-control and geopolitical risks.
- QCi reported material weaknesses in internal control over financial reporting involving segregation of duties, revenue recognition, written accounting policies and information-technology controls. Management is implementing remediation measures. The auditor did not provide an attestation opinion on internal controls because QCi is a smaller reporting company.
- Pending legal matters include BV Advisory litigation involving alleged appraisal rights, convertible notes and other claims, as well as a receiver petition concerning the company’s solvency and governance. The filing states that potential impacts cannot presently be assessed clearly.
- Effective February 1, 2024, William McGann became CEO and President, replacing Robert Liscouski, who remained Chairman. Liscouski’s separation arrangements included $400,000 of salary continuation, 168,000 shares of common stock and continued health coverage, subject to the agreement’s terms.
- In March 2024, QCi agreed to redeem all outstanding Series A preferred stock for $8.2 million through potentially 18 monthly payments. As of March 28, 2024, 82,783 shares had been redeemed for $455,307.
- As of March 28, 2024, QCi reported approximately $6.6 million of cash and had regained compliance with Nasdaq’s minimum bid-price requirement.
Most important facts for investors to verify
- Whether the company can secure sufficient financing to fund operations, debt and preferred-stock redemption obligations.
- The actual cash runway after the Streeterville repayment, preferred-stock redemption payments and ongoing operating cash burn.
- Whether the 2024 hardware strategy produces material product revenue rather than primarily exploratory services revenue.
- The status, commercial validation and delivery economics of Dirac-3 and other products under development.
- Progress in remediating the disclosed material weaknesses, particularly revenue-recognition and information-technology controls.
- The status and potential financial exposure of the BV Advisory litigation and receiver petition.
- The accuracy of the working-capital deficit discussion, which is inconsistent within the filing.
- Potential dilution from ATM equity issuance, outstanding options, warrants, preferred-stock conversion or redemption terms, and other equity-linked instruments.