Why Quantum Computing Inc. QUBT Is Not a Good Stock
Our recent piece on Robinhood pointed out how the company makes the majority of their money right now peddling extremely risky financial products to beginner investors (half of their client base). The company says that this is “democratizing the distribution of wealth,” but we beg to differ.
The single most important quality a financial services provider has is their integrity. The half of our audience who are experienced investors, many institutional, understand how easy newbie investors can be fleeced. We have a responsibility to point inexperienced investors in the right direction. Down the road, they will realize you helped them, and they will return the favor. It’s with this in mind that we’re going to cover a quantum computing company aptly called Quantum Computing Inc. (QUBT).
About Quantum Computing Inc. QUBT Stock
Last month, we sat down with our premium subscribers to talk about how we analyze stocks, particularly in how we look for red flags. There is no shortage of tech stocks out there to vet, so when we come across red flags, we walk away. We don’t invest in stocks with no revenues, or stocks with a market cap of less than a billion dollars. Quantum Computing Inc. is a $220 million stock with no revenues, so that should be the end of the story.
Turns out that Quantum Computing Inc., a company that just migrated from the over-the-counter (OTC) exchange to Nasdaq, is waving more red flags than a Chinese military parade. The remainder of this piece is simply highlighting information the company has willingly made available to the SEC in this latest 10-K filing which anyone can read for themselves. Why this company is worth $220 million is simply inexplicable when you consider that they have almost no assets aside from around $15 million in cash on their books.
Red Flags for QUBT Stock
We’ve spent what amounts to several hours reading the 10-K and pulling out red flags, some of which we’ve listed below. The more you dig into firms like this, the more red flags you’ll find.
Issuing Shares Like They’re Going Out of Style
The company is authorized to issue up to 250 million shares, and they’re off to a great start already. The speed at which they’re issuing shares to dilute existing shareholders is nothing short of remarkable.
- Dec 31st, 2018 – 4,724,161 shares outstanding
- Dec 31st, 2019 – 7,362,046 shares outstanding
- Dec 31st, 2020 – 27,966,096 shares outstanding
- March 17, 2021 – 28,667,925 shares outstanding
Some of you might not be familiar with the effects of dilution, so we’ll tease this out for you.
On December 31st, 2018, shares of QUBT closed at $2.85 per share for an implied market cap of around $13.46 million. Based on the number of outstanding shares today, those shares you held back then aren’t worth $2.85 a share. Instead, they’re worth about 47 cents a share because of dilution, having lost -83.5% of their value. So why on God’s green earth are shares trading at $7.62 per share instead?
Hiring Numerous Investor Relations Firms
Unsurprisingly, QUBT has been employing the services of investor relations firms by issuing shares left and right – over a million shares over the past several years.
- In March 2019 the Company issued 25,000 shares of common stock to Lyons Capital, LLC, an investor relations firm
- In June 2020 the Company issued 300,000 shares of common stock to Capital Market Access, LLC, an investor relations firm
- In September 2020 the Company issued 20,000 shares of common stock to Capital Market Access, LLC, an investor relations firm
- In December 2020 the Company issued 10,000 shares of common stock to Capital Market Access, LLC, an investor relations firm
- In January 2021 the Company issued 10,000 shares of common stock to Axis Partners, Inc., an investor relations firm
- In February 2021, the Company issued 10,000 shares as compensation to a consultant for investor relations services
- In February 2021 the Company issued options for 650,000 shares of common stock, vesting over twelve months, to two investor relations consultants pursuant to agreements the Company entered into in February 2021
At QUBT’s last closing price of $7.62 a share, that comes out to be about $7.8 million spent on investor relations firms. Anytime we see a company handing out shares so quickly to investor relations firms, that’s a huge red flag. It also may help explain why the company increased their outstanding shares over 6X in the past several years while still managing to increase the share price in the face of extreme dilution.
If you’re a company executive at a publicly traded firm, you’d probably never want to put yourself in a compromising position by appearing to scratch your own back. Or you can just say “screw it,” and list out all your suspicious interactions in the 10-K.
For Quantum Computing Inc., that starts back in 2018 when their Chief Technology Officer (at the time) decided they needed “a highly secure development environment and intra-company data management and communication system.” Fair enough, but instead of going out to the marketplace and looking for vendors to provide such a system, they paid $670,000 to “an entity wholly owned” by the CTO. If you think that’s bad, the dude then resigned, and months later they realized it “was unusable and therefore impaired, and wrote off the remaining undepreciated value.” They later took the guy to court, the outcome of which is unknown because they entered into an undisclosed settlement. As of their latest 10-Q, Quantum Computing Inc. has yet to replace their CTO, a critically important position for a technology company to have filled. (UPDATE 18/08/2021: Several people commented that a new CTO was announced in a 2019 press release, yet nowhere is the new CTO role or the CTO’s name mentioned in the latest 10-Q or 10-K. We can only presume that’s because the CTO is not an executive officer, which raises a big concern. Why is one of the most critically important functions for a technology company not an executive officer? It’s just another red flag of many.)
If you’re the CEO of a company, and you hire a CTO that does bull crap like that, why should we have any confidence in your ability to steer the ship? That question holds even more significance when you learn that the CEO also has his own “wholly owned entity,” and that there are even more cases of executives scratching their own backs.
Last year, QUBT paid “an entity wholly owned” by a member of the Company’s board of directors, $140,698 “to procure and manage advertising services.” This is the same fellow who in a previous life “ran a consulting business that provided investor relations, advisory services and capital raising solutions to small publicly traded companies.” Didn’t they learn the first time around that’s a bad idea?
More Red Flags
We haven’t even started talking about how these executives are loading themselves down with compensation and shares while diluting the crap out of their shareholders. We could easily write another 1,000 words as to why this firm should be avoided like the plague, but the question we’re asking instead is this. Why, when there are a multitude of other promising stocks out there to examine, would we want our analysts spending any more time shooting holes into this absolute dog of a stock?
As is always the case, people will come around to make snarky comments because we’re pointing out the truth they don’t want to hear. (We’re absolutely not claiming these people work for certain investor relations firms. We would never make that claim.) One of the things they always accuse us of is being short, or accuse of being paid to say bad things about someone (insert your own conspiracy theory here).
We’re investors, not speculators. We never short stocks for a reason best articulated by someone on Reddit who correctly stated, “we can stay retarded longer than you can stay solvent.” The stupidity of newbie investors almost always outweighs your margin limits. When you see stocks like Quantum Computing Inc., you don’t get involved with the whole hot mess, you just walk the other way.
Whether or not a company’s management team is incompetent or acting in a malicious manner is irrelevant. Just because the CEO of Quantum Computing previously resided over a firm that went bankrupt, or hired the world’s worst CTO in his present job, doesn’t mean he will necessarily continue failing.
Everyone involved in this firm is trying to do what every business must do – survive. They can’t be faulted for that. But in the long run, the outcome of companies like this is always the same. Long-term shareholders always become bag holders. We never invest in OTC stocks, even when they uplist to Nasdaq. Odds are, they’ll eventually end up right back where they came from.
Want to know what 30 tech stocks we own right now? Want to know which ones we think are too risky to hold? Become a Nanalyze Premium member and find out today!