Quantum Computing Inc.

Moat: 1/5

Understandability: 4/5

Balance Sheet Health: 2/5

Quantum Computing Inc. (QUBT) is a developmental stage company focused on quantum computing technology, offering proprietary software to enhance the performance of existing quantum computers. They are attempting to be a leader in the quantum space, a highly technical area with lots of innovation potential.

Investor Relations Previous Earnings Calls

The moat, understandability, and balance sheet health scores reflect a conservative evaluation to ensure a margin of safety in any assessment.

Quantum Computing Inc. focuses on developing and selling quantum software and applications for high-performance computing, primarily using its own proprietary photonic quantum technology.

Business Overview

QUBT is a young company with a unique focus on quantum computing. It is not producing its own computers but is attempting to develop solutions for optimizing quantum computers from other providers. Quantum computing is currently a fast-growing space with a lot of hype, but yet not yet a proven technology.

Revenue Distribution

  • Currently, QUBT derives almost all its revenues from providing professional services in quantum and advanced computing (e.g. licensing, technical consulting, quantum services).
  • The company does not yet have material revenue from the sale of its hardware and software products, but it is looking to focus on this long-term.

In their latest 10-Q for the period ended December 31, 2022, the company states revenue was only $241,000 and the cash and cash equivalents were around $2.6m at the end of the period, which shows a large gap between their income and liquidity. This highlights the fact that they are still in a developing phase. In their annual report for the year ending December 31, 2022, the company reported $0 in product revenue.

  • Quantum computing’s potential: The field is anticipated to revolutionize industries by solving complex problems intractable by classical computers. Currently the industry is early-stage, which provides a high growth opportunity for those that succeed but has also a higher risk.
  • Focus on software and applications: The high cost of quantum computers is a deterrent for companies. The focus on software allows companies to generate revenue without getting involved in manufacturing high-cost hardware.
  • Growing government and private interest: Increased investment is being directed toward quantum technologies with increased funding for research and development, as well as potential usage in government and industry applications.

Competitive Landscape

  • Intense competition: The sector is full of startups and larger companies like Google, IBM, and Microsoft, which are all competing for the same potential market. There is significant competition in the space and even if they had a moat it could be attacked easily.
  • Lack of a dominant player: The market is still very fragmented, without a clear leader, and with lots of uncertainty regarding which technology, or business model will win out.
  • Technological volatility: The field is characterized by rapid technological advancement that can quickly make a company’s technology and current offering obsolete. Therefore, companies are constantly in research and development for innovation in the field.

What Makes Quantum Computing Inc. Different?

  • Focus on photonic quantum computing: While most of the main players are using a superconducting and trapped-ion approach, QUBT uses photonics. Photonic quantum computing is claimed to be superior in terms of stability, lower temperatures, and scalability.
  • Proprietary software approach: Quantum Computing has a strong emphasis on developing software and application that can enhance the capabilities of existing quantum computers. This includes using their proprietary QUBT technology, a way for users to use algorithms by making use of the quantum circuit.
  • Partnerships and collaborations: They are partnering with established companies and research institutions to further develop their technology and create more marketability.

Financial Analysis

Profitability & Margins

  • QUBT is still very early in its revenue generation, where it is dependent on service revenues. QUBT’s service revenues have low margins at around 21.8% for the latest quarter, ending September 30th, 2023 and a net loss of 13.2m.
  • They are reliant on continued funding for the R&D that is needed for the long-term future, making the company’s value mostly dependent on future technologies and not so much on existing profitability.
  • A good point of concern is that they are making a lot of use of stock compensation in order to reduce cash outflow, which has a negative effect on shareholder equity.

As a consequence of high operating expenses and very little revenue, QUBT’s accumulated deficit was around 153.4m, as of June 30, 2023. This is a big red flag, as they have not yet achieved a revenue model that will give the company long-term stability.

Balance Sheet Health

  • Their current cash and cash equivalents stand at approximately 5.1 million as of September 30, 2023, which is a good start but it is still very low, given their current expense burn.
  • Their total assets sit at 70.4m and total liabilities sit at 13.9m. They don’t have a huge debt burden, which is a positive factor in this stage of development. However, the company has been raising money through convertible stock, preferred stock, and warrants, which dilute existing shareholders.
  • Their capital structure is also heavily dependent on external funding. Given the early stage, this is not unusual, but it highlights the risk involved in the company.
  • They have a very high current ratio of 4.33, mostly due to limited inventory and high liquid assets. While this is good in the short term, it also limits their long-term revenue potential for now.

The high reliance on the use of share-based compensation and the issuing of warrants dilutes existing shareholder’s equity. The high use of capital expenses over cash flow also implies that they will need more cash infusions in the future, making the current valuation highly dependent on a future successful product.

Recent Concerns and Controversies

  • QUBT has faced a legal battle against one of its founders and investors relating to an acquisition in early 2022. This has created uncertainty for the near future of the company.
  • In the latest 10-Q, management stated that there is a reasonable doubt regarding their ability to continue as a going concern. This is a huge red flag, as the company’s financials are not showing any sign of them reaching a point where they can generate sustainable revenues without relying on external funding.
  • The company has made a number of large acquisitions over the past few years, but the financial statements have not yet demonstrated that these have led to improvements in profitability.
  • There is a lack of clarity regarding the overall strategy of the company. They are working on a lot of initiatives and projects all at once. For investors, it is difficult to say which will have a higher chance of success, creating uncertainty.
  • In the most recent quarterly reports and annual reports, the company has been recognizing a large portion of revenues that are not derived from their own products or services. This makes it difficult to judge the efficacy of the offerings.
  • They are also recognizing significant gains on the sale of intangible assets, which implies that they are focusing on short-term fixes rather than long-term business solutions.
  • The company has gone through lots of management changes, which has led to an uncertainty of their operations.

Despite a difficult financial position, QUBT’s management is very optimistic about their future opportunities and is trying to put more emphasis on shareholder relations.

Moat Analysis

Moat Rating: 1/5

  • Lack of a sustainable competitive advantage: At this stage, QUBT does not have a sustainable moat because it has yet to establish itself in the market. It’s still very early in the quantum computing industry and the company is mainly working on improving other peoples technologies, with no clear revenue model for itself.
  • Low switching costs for customers: Given they are using other people’s quantum systems, they cannot create high switching costs for customers since any quantum technology provider can easily make use of their software.
  • Lack of pricing power: Since the company hasn’t established a brand or a superior product, they will also likely not have pricing power, making their long-term profitability uncertain.
  • Weak network effect: The company is not yet large enough to create network effects or other related forms of protection. Even if they have success, larger companies could always just replicate the same offerings at scale without worrying about the network.

While the company is working on new and exciting technology, it also has a very high risk of falling behind in development compared to larger companies like Google, Microsoft and IBM that are pouring significant sums in R&D.

Risks to the Moat

  • Technological disruption: Quantum computing is a field of rapid innovation. The company’s moat is tied to their proprietary photonic approach, implying they are vulnerable to being outperformed by another technology. Even small improvements from competitors or other emerging new technologies in the quantum field are a risk for their offerings.
  • Lack of sustained funding: Given the fact that QUBT is pre-profitability, future investment is required. This investment might not be available, especially in a scenario where the company has not achieved enough commercial traction.
  • Competition from bigger companies: Larger companies can quickly replicate the current efforts of QUBT with a lower risk profile, which creates a large risk in their future success and moat creation.

Business Resilience

  • Lack of profitability: The company is not yet profitable, and has very low recurring revenues, making their business and moat less resilient to unforeseen circumstances.
  • High reliance on external funding: The reliance on external sources of funding reduces their ability to control the direction and stability of the company, especially in times of distress.
  • High technology risk: Given their reliance on early stage and ever changing quantum computing, they are exposed to risks of disruption that can be detrimental.
  • Management execution: The lack of a clear strategy and constant management changes could lead to business instability.

The company’s business resilience is very low given all the aforementioned factors. They are still in an early stage of their lifecycle with no predictable business model yet, which makes their business very risky.

Understandability

Understandability: 4 / 5

  • The company’s focus is on a very technical and difficult sector in quantum computing, making it hard for non-technical investors to fully understand the space.
  • They have a very complicated business model which is different from the normal businesses, creating problems in understanding their sources of revenue and operations.
  • They have a high reliance on external funding and partnerships to grow, which is not something well-understood by everyone. However, the basic concepts of the company are somewhat easy to grasp and their core mission is easy to understand.

Balance Sheet Health

Balance Sheet Health: 2/5

  • While their liabilities are limited and the debt level is low, their cash and equivalents are also low compared to their cash burn, and they continue to dilute the shares of existing owners.
  • Given their low profitability, they have a high dependency on external funding.
  • The use of stock-based compensation is also a worrying factor which may affect their long-term future as an investment vehicle.

Overall, at this stage, it does not appear like the company’s balance sheet is in good health. There are multiple red flags and it will need significant improvements to reach a stable level.