Management’s discussion and analysis of
results of operations and financial condition (“MD&A”) is a supplement to the accompanying condensed financial statements
and provides additional information on Quantum Computing Inc.’s (“Quantum” or the “Company’) business, current
developments, financial condition, cash flows and results of operations.
When we say “we,” “us,”
“our,” “Company,” or “Quantum,” we mean Quantum Computing Inc.
At the present time, we are a development stage
company with limited operations. The Company plans to enter the market for high performance computers and software applications,
specifically focusing on what are known as “quantum computers”. The Company has assembled a team of experts in quantum computing
software technology and quantum mathematics, which will focus on the design and development of several quantum software applications targeting
solutions to non-deterministic polynomial applications. The Company’s development team has initially focused on addressing computational
problems in the financial services, supply chain and logistics management; pharmaceutical design, heavy manufacturing, and computer security (cyber)
market segments. The Company’s development team includes mathematicians, physicists, and software developers.
Results of Operations
Twelve Months Ended December 31, 2022 vs. December 31, 2021
Revenues
| | |
For the
Twelve Months Ended
December 31,
2022 | | |
For the
Twelve Months Ended
December 31,
2021 | | |
| |
| (In thousands) | |
Amount | | |
Mix | | |
Amount | | |
Mix | | |
Change | |
| Products | |
| 0 | | |
| 0 | % | |
| 0 | | |
| 0 | % | |
| 0 | % |
| | |
| | | |
| | | |
| | | |
| | | |
| | |
| Services | |
| 135,648 | | |
| 100 | % | |
| 0 | | |
| 0 | % | |
| 100 | % |
| Total | |
$ | 135,648 | | |
| 100 | % | |
$ | 0 | | |
| 100.0 | % | |
| 100 | % |
Revenues for the Twelve Months ended December
31, 2022 were $135,648 as compared with $0 for the comparable prior year period, a change of $135,648, or 100%. There is no revenue comparison
for the prior year period because the Company had not yet sold any products or services. All revenue in the current reporting period is
derived from professional services provided to multiple commercial and government customers under multi-month contracts. In 2022, QCI
continued to execute its business strategy to provide quantum-ready solutions for solving real-world problems. Much progress was
made toward this overarching objective, but the generation of revenue from customers has been slow to develop, in part due to the fact
that quantum computing is a cutting-edge technology for most potential customers, who are therefore proceeding cautiously with small,
exploratory contracts to better understand its applicability to their requirements. Accordingly, the Company has focused on providing
professional services to introduce customers to quantum-based solutions to their operating needs, and on customer education and building
customer awareness as a means to generating sales. The Company has completed its discovery and research phase and is now transitioning
towards commercialization. We have developed and released multiple products and are now in the process of marketing them. We expect revenues
to increase meaningfully in 2023 as we emphasize our hardware capability.
Cost of Revenues
Cost of revenues for the twelve months ended December
31, 2022 was $60,934 as compared with $0 for the comparable prior year period, a change of $60,934, or 100%. There is no cost of revenues
comparison for the prior year period because the Company had not yet sold any products or services. Cost of revenues for the current reporting
period consists primarily of salary expense.
Gross Margin
Gross margin for the twelve months ended December
31, 2022 was $74,714 as compared with $0 for the comparable prior year period, a change of $74,714, or 100%. There is no gross margin
comparison for the comparable prior year period because the Company had not yet sold any products or services in 2021.
Operating Expenses
Operating expenses for the twelve months ended
December 31, 2022 were $36,654,056 as compared with $17,130,093 for the comparable prior year period, an increase of $19,523,963 or 114%.
The increase in operating expenses is due in large part to a $1,837,856 increase in salary and benefits expense due to an increase in
the number and composition of staff following the QPhoton Merger, a $201,269 increase in consulting expenses, a $1,975,998 increase in
research and development expenses related primarily to hiring additional technical staff following the QPhoton Merger, a $8,360,122 increase
in stock-based compensation, largely related to hiring additional staff and the QPhoton Merger, and a $7,148,718 increase in other SG&A
costs compared with the comparable prior year period. The increase in other SG&A costs was largely due to increased legal, audit and
other fees associated with the QPhoton Merger.
Net Loss
Our net loss for the twelve months ended December
31, 2022 was $38,593,700 as compared with a net loss of $27,898,847 for the comparable prior year period, an increase of $10,694,853
or 38%. The increase in net loss is primarily due to the increase in operating expenses, noted above, as well as $1,782,545 increase
in interest expense related to preferred stock dividends, amortization of the Original Issue Discount for the Series A Convertible Preferred
Stock, financing costs and accrued interest on term loans, offset by a $10,715,799 decrease in interest expense related to the warrant
issuance that occurred in 2021. In addition, there was a decrease in other income of $178,860 in the current year, primarily related
to the forgiveness of the SBA PPP Loan in 2021.
Liquidity and Capital Resources
We fund our working capital with cash from investment.
Since commencing operations as Quantum Computing in February 2018, the Company has raised $27,759,904 through private placement of equity
and $12,633,000 through private placements of Convertible Promissory Notes and other debt for a total of $40,392,904 in new investment.
The Company has no lines of credit, and $535,684 and $8,250,000 in short and long-term debt obligations outstanding, respectively. We
believe that our current cash position and other available financing resources such as our ATM facility, coupled with our ongoing operating
activities, will provide sufficient liquidity to fund our business needs over the next twelve months and beyond. To the extent the sources
of capital described above are insufficient to meet our needs, we may also conduct additional public offerings of our securities, refinance
debt, dispose of certain assets to fund our operating activities, or draw on existing or new debt facilities.
The following table summarizes total current assets,
liabilities and working capital at December 31, 2022, compared to December 31, 2021:
| | |
December 31,
2022 | | |
December 31,
2021 | | |
Increase/(Decrease) | |
| Current Assets | |
$ | 5,587,647 | | |
$ | 17,221,654 | | |
$ | (11,634,007 | ) |
| Current Liabilities | |
$ | 6,545,320 | | |
$ | 1,082,298 | | |
$ | 5,436,022 | |
| Working Capital (Deficit) | |
$ | (957,673 | ) | |
$ | 16,139,357 | | |
$ | (17,097,030 | ) |
At December 31, 2022, we had a working capital
deficit of $957,673 as compared to working capital of $16,139,357 at December 31, 2021, a decrease of $17,097,030. The decrease in working
capital is primarily attributable to the use of cash to pay for operating expenses, capital investments, including the Note Purchase Agreement
with QPhoton, and the costs relating to the merger with QPhoton.
Our independent registered
public accounting firm included an explanatory paragraph in its report on our financial statements as of and for the year ended December
31, 2022, noting the existence of substantial doubt about our ability to continue as a going concern. This uncertainty arose from management’s
review of our results of operations and financial condition and its conclusion that, based on our operating plans, we did not have sufficient
existing working capital to sustain operations for a period of twelve months from the date of the issuance of these financial statements.
Net Cash
Net cash used in operating activities for the
twelve months ended December 31, 2022 and 2021 was $17,557,368 and $6,804,960, respectively. The net loss for the twelve months ended
December 31, 2022 and 2021, was $38,593,700 and $27,898,847, respectively.
Net cash used in investing activities for the
twelve months ended December 31, 2022 and 2021 were $2,227,257 and $40,584, respectively. The increase in investment in the current period
is primarily due to acquisition of laboratory equipment and the merger with QPhoton.
Net cash provided by financing activities for
the twelve months ended December 31, 2022 was $8,354,434 compared with $8,387,879 during the twelve months ended December 31, 2021. Cash
flows provided in financing activities during the twelve months ended December 31, 2022 were attributable to the amortization of the original
issue discount for the Series A Convertible Preferred stock, conversion of some shares of Series A Convertible Preferred stock to common
stock, the returned payoff of the BV Advisory loan, and the funds received from the Streeterville Unsecured Note. The cash flow provided
by financing activities during the period ended December 31, 2021 was primarily attributable to the issuance of Series A Convertible Preferred
stock, the issuance of common stock for the exercise of options and the exercise of warrants.
Previously, we have funded our operations primarily through the sale
of our equity (or equity linked) and debt securities. During the twelve months ended December 31, 2022, we have funded our operations
primarily through the use of cash on hand. As of March 28, 2023, we had cash on hand of approximately $7,423,898. We have approximately
$104,772 in monthly lease and other mandatory payments, not including payroll, employee benefits and ordinary expenses which are due monthly.
On a long-term basis, our liquidity is dependent
on continuation and expansion of operations and receipt of revenues. Demand for the products and services will be dependent on, among
other things, market acceptance of our products and services, the technology market in general, and general economic conditions, which
are cyclical in nature. In as much as a major portion of our activities will be the receipt of revenues from the sales of our products
and services, our business operations may be adversely affected by our competitors and prolonged recession periods.
Critical Accounting Policies
Basis of Presentation:
Our consolidated financial statements have been
prepared in accordance with accounting principles generally accepted in the United States (U.S. GAAP). These accounting principles require
us to make certain estimates, judgments and assumptions. We believe that the estimates, judgments and assumptions upon which we rely are
reasonably based upon information available to us at the time that these estimates, judgments and assumptions are made. These estimates,
judgments and assumptions can affect the reported amounts of assets and liabilities as of the date of the consolidated financial statements
as well as the reported amounts of revenues and expenses during the periods presented. Our consolidated financial statements would be
affected to the extent there are material differences between these estimates and actual results. In many cases, the accounting treatment
of a particular transaction is specifically dictated by GAAP and does not require management’s judgment in its application. There
are also areas in which management’s judgment in selecting any available alternative would not produce a materially different result.
We have identified the accounting policies below as critical to our business operations and the understanding of our results of operations.
Accounting Changes
Except for the changes discussed below, Quantum
has consistently applied the accounting policies to all periods presented in these consolidated financial statements. The Company has
evaluated all recently implemented accounting standards and concluded that none currently apply to the Company.
Use of Estimates:
These financial statements have been prepared
in accordance with generally accepted accounting principles in the United States of America. Certain of our accounting policies require
the application of significant judgment by our management, and such judgments are reflected in the amounts reported in our condensed consolidated
financial statements. Because a precise determination of assets and liabilities, and correspondingly revenues and expenses, depends on
future events, the preparation of financial statements for any period necessarily involves the use of estimates and assumption an example
being assumptions in valuation of stock options. Those estimates are based on our historical experience, terms of existing contracts,
our observance of market trends, information provided by our strategic partners and information available from other outside sources,
as appropriate. Actual results may differ significantly from the estimates contained in our condensed consolidated financial statements.
These financial statements have, in management’s opinion, been properly prepared within reasonable limits of materiality and within
the framework of the accounting policies summarized below.
Cash and Cash Equivalents
The Company’s policy is to present bank
balances under cash and cash equivalents, which at times, may exceed federally insured limits. The Company has not experienced any losses
in such accounts.
Revenue
The Company recognizes revenue in accordance with
ASC 606 – Revenue from Contracts with Customers. Revenue from time and materials-based contracts is recognized as the direct hours
worked during the period times the contractual hourly rate, plus direct materials and other direct costs as appropriate, plus negotiated
materials handling burdens, if any. Revenue from units-based contracts is recognized as the number of units delivered or performed during
the period times the contractual unit price. Revenue from fixed price contracts is recognized as work is performed with estimated profits
recorded on a percentage of completion basis. The Company has no cost reimbursement (“cost-plus”) type contracts at this time.
Off Balance Sheet Arrangements
During the twelve months ended December 31, 2022
and 2021, we did not engage in any material off-balance sheet activities or have any relationships or arrangements with unconsolidated
entities established for the purpose of facilitating off-balance sheet arrangements or other contractually narrow or limited purposes.
Further, we have not guaranteed any obligations of unconsolidated entities nor do we have any commitment or intent to provide additional
funding to any such entities.
Critical Accounting Estimates
We have identified the following critical accounting
estimates. An accounting estimate is “critical” if it (a) requires Company management to make assumptions about matters that
are highly uncertain at the time of the estimate, and also (b) Company management reasonably could have used different estimates in the
current period, or changes in the accounting estimate that are reasonably likely to occur from period to period, would have a material
impact on the presentation of the Company’s financial condition, changes in financial condition or results of operations.
The Company uses the Black-Scholes model to calculate
the fair value of stock options and derivatives. The Black-Scholes model, developed in 1973, is a differential equation which requires
five input variables, the strike price of an option, the current stock price, the time to expiration, the risk-free rate, and the volatility
of the Company common stock. The Black-Scholes model is widely used for pricing options but it does rely on certain assumptions about
the market which may not be correct over time. Specifically,
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No dividends are paid out during the life of the option. |
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Markets are random (i.e., market movements cannot be predicted). |
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There are no transaction costs in buying the option. |
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The risk-free rate and volatility of the underlying asset are known and constant. |
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The returns of the underlying asset are normally distributed. |
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The option is European and can only be exercised at the expiration date. |
To the extent that any of these assumptions is
not correct, that could result in the over or under pricing of the stock options involved. The assumption that the risk-free rate (the
Company uses the one-year US Treasury Bill rate as a proxy for the risk-free rate) can vary over time, and if the T-Bill rate varies substantially
over the life of the stock option that could affect the pricing. Similarly, the volatility of the Company’s common stock, also known
as the Beta, has moved within a limited range over the past year, but the volatility of any security can change over time, which would
affect the option pricing calculation. Another critical estimate relating to option pricing is the default rate, which means the estimate
of granted options that will either expire unexercised, or be forfeited, over the life of the stock options. If the Company’s estimate
of the default rate turns out to be substantially different from the actual, experienced default rate, that could result in over or under
estimating the total option expense.
The Black-Scholes model is not the only available
approach for pricing stock options, the Company could have used a Binomial pricing model or a Monte Carlo simulation model. However, there
is no assurance that either a Binomial or Monte Carlo pricing approach would be more accurate than the Black-Scholes model over time.
Moreover, both the Binomial model, which calculates the price of an option at each point in time during the option period, or the Monte
Carlo model, which simulates the possible movements in future stock prices and uses them to calculate the option value, rely on critical
assumptions. The Binomial model assumes that stock markets are perfectly efficient, which may not hold for all periods of time. The Monte
Carlo simulation model assumes changes in stock prices over time cannot be predicted from the historical trends (known as a “random
walk”), which also may not hold for all periods.
Another area of critical accounting estimates
involves determining the fair market value and useful life of the intangible assets acquired by the Company through the merger with QPhoton.
In the absence of market pricing for the intangible assets, the Company relied on comparison with similar transactions to arrive at estimates
of value as well as useful life. The Company will perform periodic assessments of the intangible assets for impairment, but if any of
the initial estimates are incorrect, that could result in a calculation of amortization expense that is too high or too low.
Operating Leases - ASC 842
On January 1, 2019, we adopted FASB Accounting
Standards Codification, or ASC, Topic 842, Leases (“ASC 842”) which requires the recognition of the right-of-use assets and
relating operating and finance lease liabilities on the balance sheet. Under ASC 842, all leases are required to be recorded on the balance
sheet and are classified as either operating leases or finance leases. The lease classification affects the expense recognition in the
income statement. Operating lease charges are recorded entirely in operating expenses. Finance lease charges are split, where amortization
of the right-of-use asset is recorded in operating expenses and an implied interest component is recorded in interest expense.
We lease substantially all our office space used
to conduct our business. For contracts entered into on or after the effective date, at the inception of a contract we assess whether the
contract is, or contains, a lease. Our assessment is based on (1) whether the contract involves the use of a distinct identified asset,
(2) whether we obtain the right to substantially all the economic benefit from the use of the asset throughout the period, and (3) whether
we have the right to direct the use of the asset. At inception of a lease, we allocate the consideration in the contract to each lease
component based on its relative stand-alone price to determine the lease payments.
Leases are classified as either finance leases
or operating leases. A lease is classified as a finance lease if any one of the following criteria are met: (1) the lease transfers ownership
of the asset by the end of the lease term, (2) the lease contains an option to purchase the asset that is reasonably certain to be exercised,
(3) the lease term is for a major part of the remaining useful life of the asset or (4) the present value of the lease payments equals
or exceeds substantially all of the fair value of the asset. A lease is classified as an operating lease if it does not meet any one of
these criteria. Substantially all our operating leases are comprised of office space leases and as of December 31, 2022 and 2021 we had
no finance leases.
For all leases at the lease commencement date,
a right-of-use asset and a lease liability are recognized. The right-of-use asset represents the right to use the leased asset for the
lease term. The lease liability represents the present value of the lease payments under the lease. The Company is currently leasing space
in four locations, Leesburg, VA, Arlington, VA, Minneapolis, MN and Hoboken, NJ, and we have recognized right-of-use assets and lease
liabilities accordingly.
The right-of-use asset is initially measured at
cost, which primarily comprises the initial amount of the lease liability, plus any initial direct costs incurred, consisting mainly of
brokerage commissions, less any lease incentives received. All right-of-use assets are reviewed for impairment. The lease liability is
initially measured at the present value of the lease payments, discounted using the interest rate implicit in the lease, or if that rate
cannot be readily determined, our secured incremental borrowing rate for the same term as the underlying lease. For our real estate and
other operating leases, we use our secured incremental borrowing rate. For our finance leases, we use the rate implicit in the lease or
our secured incremental borrowing rate if the implicit lease rate cannot be determined.
Lease payments included in the measurement of
the lease liability comprise the following: the fixed noncancelable lease payments, payments for optional renewal periods where it is
reasonably certain the renewal period will be exercised, and payments for early termination options unless it is reasonably certain the
lease will not be terminated early.
Lease expense for operating leases consists of
the lease payments plus any initial direct costs, primarily brokerage commissions, and is recognized on a straight-line basis over the
lease term.
Property and Equipment
Property and equipment are stated at cost or contributed
value. Depreciation of furniture, software and equipment is calculated using the straight-line method over their estimated useful lives,
and leasehold improvements are amortized on a straight-line basis over the shorter of their estimated useful lives or the lease term.
The cost and related accumulated depreciation of equipment retired or sold are removed from the accounts and any differences between the
undepreciated amount and the proceeds from the sale are recorded as a gain or loss on sale of equipment.
Net Loss Per Share:
Net loss per share is based on the weighted average
number of common shares and common shares equivalents outstanding during the period.
