QUANTUM COMPUTING INC. 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
When we say "we," "us," "our," "Company," or "Quantum," we mean
This section should be read in conjunction with other sections of this Quarterly Report, specifically, Selected Financial Statements and Supplementary Data.
This quarterly report on Form 10-Q and other reports filedQuantum Computing, Inc. (the "Company" "we", "our", and "us") from time to time with theU.S. Securities and Exchange Commission (the "SEC") contain or may contain forward-looking statements and information that are based upon beliefs of, and information currently available to, the Company's management as well as estimates and assumptions made by Company's management. Readers are cautioned not to place undue reliance on these forward-looking statements, which are only predictions and speak only as of the date hereof. When used in the filings, the words "anticipate," "believe," "estimate," "expect," "future," "intend," "plan," or the negative of these terms and similar expressions as they relate to the Company or the Company's management identify forward-looking statements. Such statements reflect the current view of the Company with respect to future events and are subject to risks, uncertainties, assumptions, and other factors, including the risks contained in the "Risk Factors" section of the Company's Annual Report on Form 10-K for the fiscal year endedDecember 31, 2020 , relating to the Company's industry, the Company's operations and results of operations, and any businesses that the Company may acquire. Should one or more of these risks or uncertainties materialize, or should the underlying assumptions prove incorrect, actual results may differ significantly from those anticipated, believed, estimated, expected, intended, or planned. Although the Company believes that the expectations reflected in the forward-looking statements are reasonable, the Company cannot guarantee future results, levels of activity, performance, or achievements. Except as required by applicable law, including the securities laws ofthe United States , the Company does not intend to update any of the forward-looking statements to conform these statements to actual results. Overview At the present time, we are a development stage company. The Company is currently developing "quantum ready" software applications and solutions for companies that want to leverage the promise of quantum computing. Independent of when quantum computing delivers compelling performance advantage over classic computing, the software tools and applications to accelerate real-world problems must be developed to deliver quantum computing's full promise. We specialize in quantum computer-ready software application, analytics, and tools, with a mission to deliver differentiated performance using non-quantum processors
in
the near-term.
Quantum computing is a fundamentally new paradigm compared with conventional
silicon-based computing, requiring a new and highly technical set of skills to
create the software that will drive quantum results. Organizations seeking to
gain advantage from the promise of quantum technology must acquire and develop
skills in quantum mechanics, mathematics and physics, and a deep knowledge of
the ever-changing quantum hardware. The pool of people with those skills today
is limited and in high demand.
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By reducing the barriers to adoption for commercial and government entities to use quantum computing technologies to solve their most complex problems, we believe our products will accelerate quantum technology adoption similar to the adoption curve that has been witnessed with artificial intelligence.
Products and Products in Development
QATALYST
The Company's primary offering is the Qatalyst platform. Qatalyst enables
developers to create and execute quantum-ready applications on classical
computers, while being ready to run on quantum computers where those systems
achieve performance advantage. Qatalyst performs the complex problem
transformations necessary to be executed on a variety of quantum platforms
today, and users can call upon the same Qatalyst APIs (Application Programming
Interfaces) to achieve optimization performance advantages on conventional
computers using our cloud-based solution.
Qatalyst is the only quantum acceleration platform available today, dramatically
reducing the time-to-quality results and the associated costs for both classical
and quantum computers. Unlike more common toolsets that require deep level
quantum expertise to build new quantum problems and workflows, Qatalyst is not a
tool kit, but a complete platform. It accelerates performance and results on
classic and quantum computers, with no additional quantum programming or quantum
computing expertise required. This is why it is unique in its approach to the
quantum computing industry. Instead of invoking a team of quantum specialists to
transform an optimization problem, a subject matter expert ("SME") or programmer
submits their current problem via a software API to the Qatalyst cloud-based
platform. Qatalyst manages the workflow, optimizations, and results, without any
further intervention by the user. Qatalyst provides a unique advantage to reduce
applications development risks and costs by eliminating the need for scarce
high-end quantum programmers.
Qatalyst is integrated with the Amazon Cloud BRAKET API, offering access to multiple Quantum Processing Units ("QPUs") including DWave, Rigetti, and IonQ. Qatalyst also integrates directly with IBM's QPUs.
By using Qatalyst, application developers can run their applications on any or all of the available QPUs by merely selecting which QPU they prefer to run on based on the desired performance results of the application. This is an enormous advantage over any other toolkit or platform in the market today. These advantages are significant not just for application developers but for any company that is considering using or exploring quantum computing technology
for business applications. Qatalyst also eliminates the need for the low-level hardware programming expertise required by toolkits. This programming is time consuming and must be updated constantly as QPUs evolve and change, resulting in significant development costs. Qatalyst automatically optimizes the same problem submitted by a SME for multiple Quantum and Classical Processors. The SME or programmer selects one, or many, processing resources and the problem will be submitted by Qatalyst. This is an enormous advantage over any tool set in the market today. These advantages are significant not just for application developers but for any company that is considering using or exploring quantum computing technology
for business applications. SOLVERS Built into Qatalyst are several solvers, primarily "QBSolv." QBSolv addresses time-bound optimization problems where the outcome is driven by a hard time constraint. QBSolv is a highly optimized classical application that has demonstrated significant performance advantages over current solvers in the market today. The QBsolv application expands the range of solution option outcomes for optimization problems, presenting organizations with the capability to make better decisions. Furthermore, because of QBSolv's performance advantages it is able to uncover new solution options for problems that are currently unattainable with today's solvers. It is important to note that our solvers deliver these performance advantages while running on today's conventional computers and will significantly improve performance as better QPU technology becomes available. To that end, the Company is beginning to seek marketing and distribution partnerships where our current solver technologies can be deployed to enable industry-specific application
performance.
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The Company is also working on software products to address community detection
to aid researchers in discovering correlations that may not have been imagined.
Community detection holds significant promise in pharmaceutical applications
such as evaluating client trial outcomes, and in epidemiology to enable
detection of common factors among a population.
In addition to commercial markets, the Company is pursuing a number of US government funded opportunities.
TheUS Government , through the National Quantum Initiative Act of 2018 (Public Law No: 115-368 - 12/21/2018) directed the President to implement a National Quantum Initiative Program to, among other things, establish the goals and priorities for a 10-year plan to accelerate the development of quantum information science and technology applications. (Sec. 103)The National Science and Technology Council shall establish a Subcommittee on Quantum Information Science, including membership from theNational Institute of Standards and Technology (NIST) and theNational Aeronautics and Space Administration (NASA), to guide program activities. (Sec. 104) The President must establish aNational Quantum Initiative Advisory Committee to advise the President and subcommittee on the program and trends and developments in quantum information science and technology. Significant government funding has been allocated for research initiatives including a recentDepartment of Energy initiative of$625 million over the next five years to establish two to five multidisciplinary Quantum Information Science (QIS) Research Centers in support of the National Quantum Initiative.The Quantum Economic Development Consortium (QED-C), a consortium of stakeholders that aims to enable and grow theU.S. quantum industry. QED-C was established with support from theNational Institute of Standards and Technology (NIST) as part of the Federal strategy for advancing quantum information science and as called for by the National Quantum Initiative Act enacted in 2018.Quantum Computing Inc. is one of the founding members of the QED-C. The Company is pursuing a number of research areas funded by the government that directly relate to its capabilities. To strengthen its technology base, the Company has entered into aTechnology Alliance Partnership agreement with Splunk, Inc. (NASDAQ: SPLK). The Company will partner with Splunk to do both fundamental and applied research and develop analytics that exploit conventional large-data cybersecurity stores and data-analytics workflows, combined with quantum-ready graph and constrained-optimization algorithms. These algorithms will initially be developed using the Company's Qatalyst software platform, which enables quantum-ready algorithms to execute on classical hardware and also to run without modification on QC hardware when ready. Once proofs of concept are completed, The Company and Splunk will develop new analytics with these algorithms in the Splunk data-analytics platform, to evaluate quantum analytics readiness on real-world data. The Splunk platform/toolkits help customers address challenging analytical problems via neural nets or custom algorithms, extensible toDeep Learning frameworks through an open source approach that incorporates existing and custom libraries. The initial efforts of our partnership with Splunk will focus on three key challenges; network security and dynamic logistics and scheduling. Results of Operations
Three Months Ended
Revenues
For the Three Months Ended For the Three Months Ended
September 30, September 30,
2021 2020
(In thousands) Amount Mix Amount Mix Change
Products 0 0 % 0 0 % 0 %
Services 0 0 % 0 0 % 0 %
Total $ 0 100.0 % $
0 100.0 % 0 %
Revenues for the three months endedSeptember 30, 2021 were$0 as compared with$0 for the comparable prior year period, a change of$0 , or 0%. The lack of revenue is due to the fact that the Company has not yet sold any products or services to any customers. The Company, having recently commercialized several of its initial products, is currently focusing on sales and marketing of such products and has hired additional employees and retained consultants to engage in sales and marketing efforts. 3 Cost of Revenues Cost of revenues for the three months endedSeptember 30, 2021 was$0 as compared with$0 for the comparable prior year period, a change of$0 or 0%. There was no cost of revenues recorded because the Company has not yet sold
any products or services. Gross Margin Gross margin for the three months endedSeptember 30, 2021 was$0 as compared with$0 for the comparable prior year period. There was no gross margin because the Company has not yet sold any products or services. Operating Expenses Operating expenses for the three months endedSeptember 30, 2021 were$4,779,988 as compared with$8,676,183 for the comparable prior year period, a decrease of$3,896,195 , or 45%. The decrease in operating expenses is due in large part to the$3,977,883 decrease in stock-based compensation, a$97,603 decrease in related party marketing expense, a$20,954 decrease in legal and audit expenses, and a$698,196 decrease in other sales, general and administrative (SG&A) expenses in the three months endedSeptember 30, 2021 compared with the comparable period in 2020. These decreases were offset in part by a$534,603 increase in salary expense due to changes in the number and composition of staff and a$326,037 increase in research and development expenses compared with
the comparable prior year period. Net Income (Loss) Our net loss for the three months endedSeptember 30, 2021 was$4,777,957 as compared with a net loss of$11,657,324 for the comparable prior year period, a decrease of$6,879,367 or 59%. The decrease in net loss is primarily due to the decrease in operating expenses, noted above, as well as a decrease of$2,981,141 in interest expense largely associated with the mark to market repricing of a convertible promissory note derivative, the granting of warrants, and repricing existing warrants, and other financing related expenses recorded in the prior year period compared to the current year period. The decrease in net loss was also affected by$2,031 in interest income, compared with interest income of$0 during the comparable prior year period.
Nine Months Ended
Revenues
For the Nine Months Ended For the Nine Months Ended
September 30, September 30,
2021 2020
(In thousands) Amount Mix Amount Mix Change
Products 0 0 % 0 0 % 0 %
Services 0 0 % 0 0 % 0 %
Total $ 0 100.0 % $
0 100.0 % 0 %
Revenues for the nine months ended September 30, 2021 were $0 as compared with
$0 for the comparable prior year period, a change of $0 , or 0%. The lack of
revenue is due to the fact that the Company has not yet sold any products or
services. The Company, having recently commercialized several of its initial
products, is currently focusing on sales and marketing of such products and has
hired additional employees and retained consultants to engage in sales andmarketing efforts. Cost of Revenues Cost of revenues for the nine months endedSeptember 30, 2021 was$0 as compared with$0 for the comparable prior year period, a change of$0 or 0%. There was no cost of revenues recorded because the Company has not yet sold any products
or services. Gross Margin Gross margin for the nine months endedSeptember 30, 2021 was$0 as compared with$0 for the comparable prior year period. There was no gross margin because the Company has not yet sold any products or services. 4 Operating Expenses Operating expenses for the nine months endedSeptember 30, 2021 were$12,501,818 as compared with$11,332,131 for the comparable prior year period, an increase of$1,169,687 or 10%. The increase in operating expenses is due in large part to the$989,771 increase in salary and benefit expenses resulting from changes in the number and composition of staff, an increase of$827,818 in research and development expenses and a$402,457 increase in consulting expenses during the first nine months of 2021, largely related to an increased focus on sales and marketing, compared with the comparable nine month period in 2020. The increase in operating expenses was offset in part by a$690,117 decrease in stock-based compensation expense, a$97,603 decrease in related party marketing and a$262,639 decrease in other SG&A expenses compared with the comparable period in 2020. Net Income (Loss) Our net loss for the nine months endedSeptember 30, 2021 was$12,278,422 as compared with a net loss of$14,134,102 for the comparable prior year period, a decrease of$1,855,680 or 13%. The decrease in net loss is primarily due to a decrease of$3,234,497 in interest expense largely associated with the mark to market repricing of a convertible promissory note derivative, replacing one derivative with another, the granting of warrants, repricing existing warrants, and other financing related expenses which were not incurred in the current nine month period. This decrease was offset in part by the increase in operating expenses, noted above, offset by$218,371 in other income associated with the forgiveness of the SBA PPP Loan, compared with$432,500 in other income from a legal settlement and a local government grant received in the comparable prior year period.
Liquidity and Capital Resources
Since commencing operations asQuantum Computing inFebruary 2018 , the Company has raised$19,259,904 through private placement of common stock and$5,133,000 through private placements of convertible promissory notes for a total of$24,392,904 . The Company has no bank lines of credit, and no long-term debt obligations. As ofSeptember 30, 2021 , the Company had cash and equivalents
of$10,433,082 on hand.
The following table summarizes total current assets, liabilities and working
capital at
September 30, December 31, Increase/
2021 2020 (Decrease)
Current Assets $ 11,046,265 $ 15,237,095 $ (4,190,830 )
Current Liabilities $ 775,815 $ 693,207 $ 82,608
Working Capital (Deficit) $ 10,270,450 $ 14,543,888 $ (4,273,438 ) AtSeptember 30, 2021 , we had working capital of$10,270,450 as compared to working capital of$14,543,888 atDecember 31, 2020 , a decrease of$4,273,438 . The decrease in working capital is primarily attributable to the use of cash to pay for operating expenses and capital investments, offset in part by$180,000 in new cash received from the exercise of options and warrants.Net Cash Net cash used in operating activities for the nine months endedSeptember 30, 2021 and 2020 was$4,863,392 and$8,684,386 , respectively. The net loss for the nine months endedSeptember 30, 2021 and 2020, was$12,278,422 and$14,134,102 , respectively. Net cash used in investing activities for the six months endedSeptember 30, 2021 and 2020 were$11,415 and$3,258 , respectively representing a$8,157 increase in investments for computer equipment and security deposits in 2021 compared with the first nine months of 2020. Net cash provided by financing activities for the nine months endedSeptember 30, 2021 was$111,567 and cash flows provided by financing activities in the same period of 2020 was$9,330,307 . Cash flows provided in financing activities during the first nine-month period in 2021 were primarily attributable to issuance of Common Stock for the exercise of options and the exercise of certain warrants. The cash flow provided by financing activities during the first nine months of 2020 were related to the sale of common stock and convertible promissory notes, the granting of warrants, the conversion of convertible promissory notes to common stock and the exercise of warrants to purchase common stock. 5
Previously, we have funded our operations primarily through the sale of our equity (or equity linked) and debt securities. During the first nine months of 2021, we have funded our operations through the use of cash on hand, coupled with funds received from the exercise of options and warrants. As ofOctober 31, 2021 , we had cash on hand of approximately$10,000,000 . We have approximately$8,129 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, our business operations may be adversely affected by our competitors and prolonged recession periods.
Critical Accounting Policies and Estimates
Our significant accounting policies are summarized below. 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. In applying these policies, our management uses judgment to determine the appropriate assumptions to be used in the determination of estimates. 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.
We have identified the accounting policies below as critical to our business operations and the understanding of our results of operations.
Use of Estimates:
These financial statements have been prepared in accordance with generally accepted accounting principles inthe United States of America . 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. Actual amounts may differ from these estimates. 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.
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.
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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. As permitted by ASC 842, we elected the adoption date of January 1, 2019 ,
which is the date of initial application. As a result, the consolidated balance
sheet prior to January 1, 2019 was not restated, continues to be reported under
ASC Topic 840, Leases ("ASC 840"), which did not require the recognition of
operating lease liabilities on the balance sheet, and is therefore not
comparative. 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. The expense recognition for operating leases and finance
leases under ASC 842 is substantially consistent with ASC 840. As a result,
there is no significant difference in our results of operations presented in our
consolidated income statement and consolidated statement of comprehensive income
for each period presented.
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 entered into prior to
January 1, 2019 are accounted for under ASC 840 and were not reassessed.
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,
2020 and September 30, 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 three locations, Leesburg, VA , Minneapolis, MN and Vancouver, BC , 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.
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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.
Off Balance Sheet Arrangements
During the nine months endedSeptember 30, 2021 and for fiscal 2020, 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.
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