Quantum Computing Inc. 10-Q Summary
Business Context and Reporting Period
Quantum Computing Inc. develops full-stack quantum computing systems, software, photonic hardware, quantum sensing, imaging, cybersecurity, and related professional services. Following its June 2022 merger with QPhoton, the Company offers room-temperature photonic quantum systems, including Entropy Quantum Computers, Qatalyst software, and quantum solutions services.
This unaudited Form 10-Q covers the three months ended March 31, 2023, compared with the three months ended March 31, 2022. The Company is a non-accelerated filer and smaller reporting company.
Key Financial Metrics
| Metric | Q1 2023 | Q1 2022 | Change |
|---|---|---|---|
| Revenue | $120,530 | $31,240 | +286% |
| Gross profit | $64,291 | $19,672 | +227% |
| Gross margin | 53% | 63% | Down 10 percentage points |
| Operating expenses | $7,851,801 | $6,728,603 | +17% |
| Operating loss | $(7,787,510) | $(6,708,931) | Loss increased |
| Net loss | $(8,506,139) | $(7,133,692) | Loss increased 19% |
| Basic loss per share | $(0.14) | $(0.24) | Improved per share due primarily to dilution |
| Cash used in operating activities | $(4,716,301) | $(4,193,833) | Use increased |
| Cash used in investing activities | $(378,754) | $(1,243,955) | Use decreased |
| Cash provided by financing activities | $6,551,455 | $212,500 | Primarily ATM equity issuance |
Revenue consisted entirely of services, principally professional services under multi-month government and commercial contracts. No product revenue was reported. The gross-margin decline reflected higher direct labor costs and more expensive technical skill sets.
Operating expenses increased because of higher staffing, research and development, hardware design and testing costs, and SG&A. These increases were partly offset by lower stock-based compensation, consulting costs, and merger-related legal expenses. Net other expense was $718,629, including interest on the Streeterville note, financing costs, and mandatory preferred dividends.
Balance Sheet, Debt, and Liquidity
- Cash and cash equivalents were $6.76 million at March 31, 2023, compared with $5.31 million at December 31, 2022.
- Current assets were $7.09 million and current liabilities were $12.57 million, producing a working-capital deficit of $5.48 million.
- Short-term loans payable were $8.29 million, largely reflecting the Streeterville unsecured promissory note. Long-term loans payable were approximately $4,000.
- Total liabilities were $12.58 million, compared with $14.40 million at year-end 2022.
- The Company sold 3.02 million common shares through its ATM facility for approximately $6.55 million of gross proceeds, at an average price of approximately $2.17 per share.
- The Company reported approximately $93.4 million of remaining capacity under its 2022 shelf and approximately $18.4 million available under the ATM facility; the filing’s wording regarding these availability amounts should be verified.
- Management stated that cash on hand was approximately $4.29 million as of May 9, 2023, and that monthly lease and other mandatory payments were approximately $104,772, excluding payroll and ordinary expenses.
The notes state that the working-capital deficit, accumulated deficit of $128.49 million, continuing losses, and operating cash usage raise substantial doubt about the Company’s ability to continue as a going concern for twelve months from issuance of the financial statements. Management expects to rely on financing, revenue growth, and eventual profitability, but provides no assurance that adequate financing or sales will be achieved.
Material Changes Versus the Prior Comparable Period
- Revenue increased substantially from $31,240 to $120,530, but remained small relative to operating costs.
- Gross margin declined from 63% to 53% as direct labor and technical delivery costs increased.
- Operating expenses rose 17%, and the net loss increased 19%.
- Operating cash burn increased by approximately $522,000.
- Financing shifted materially toward ATM equity issuance, which increased common shares outstanding from 55.96 million at December 31, 2022 to 60.50 million at March 31, 2023.
- Intangible assets declined to $20.72 million because of $1.50 million of quarterly amortization. Goodwill remained $59.13 million, with no impairment recognized.
- Stock-based compensation expense was $1.97 million in the income statement; the cash-flow statement shows $4.00 million of stock-based compensation adjustments, reflecting additional noncash equity compensation items.
Guidance, Outlook, Risks, and Unusual Items
The Company did not provide quantified financial guidance. Management expects near-term revenue to come from cloud access to quantum systems, subscriptions, professional services, and government programs, with longer-term plans involving hardware sales, on-premise systems, photonic chips, quantum imaging, cybersecurity, and sensing products.
- In April 2023, the Company launched cloud-based QRNG offerings and announced Reservoir Quantum Computing commercial availability.
- In May 2023, NASA-related work was expanded to include quantum machine-learning processing of LiDAR data. The filing states that further airborne or satellite applications remain contingent on successful testing and authorization.
- The Company plans to develop a U.S.-based quantum photonic chip fabrication facility, but acknowledges that construction may take several years and requires substantial funding.
- The Streeterville note had an initial principal amount of $8.25 million, bears 10% annual interest, and permits monthly redemptions. The Company reported cumulative redemptions of $1.0 million by May 11, 2023.
- On May 3, 2023, the Company issued 853,600 restricted shares to employees in lieu of cash performance bonuses.
- The Company disclosed litigation involving BV Advisory Partners concerning alleged breaches related to QPhoton notes and the merger, as well as a separate action brought by the Company and related parties. The potential financial impact was not estimable from the filing.
- Disclosure controls and procedures were determined to be ineffective because of insufficient accounting staff and inadequate segregation of duties. Management stated that it had begun hiring additional administrative and accounting personnel.
- The Company states that no material changes occurred to the risk factors previously disclosed in its 2022 Form 10-K. Key risks include substantial continuing losses, financing dependence, limited revenue, technology and commercialization risk, competition, dilution, debt obligations, litigation, and execution risk related to new products and facilities.
Important Facts for Investors to Verify
- Reconcile the cash balance discrepancy: the balance sheet reports $6.765 million at March 31, while MD&A cites $6.766 million.
- Confirm the remaining capacity under the 2022 shelf and ATM facility, because the note presents two potentially inconsistent availability figures.
- Review the Streeterville note’s redemption terms, maturity, default provisions, and the Company’s ability to fund required repayments.
- Assess the going-concern disclosure against post-quarter cash of approximately $4.29 million and the continuing quarterly cash burn.
- Evaluate dilution from ATM shares, preferred stock, options, warrants, employee compensation shares, and potential QPhoton merger consideration.
- Monitor whether professional-services revenue converts into recurring quantum-system subscriptions or product sales.
- Review the status and potential exposure of the BV Advisory litigation and appraisal proceeding.
- Assess remediation of ineffective disclosure controls and the adequacy of accounting staffing and segregation of duties.