Notes
to Financial Statements
June
30, 2019
(Unaudited)
Note
1 – Organization and Summary of Significant Accounting Policies:
Organization:
Quantum
Computing Inc., formerly known as Innovative Beverage Group Holdings, Inc. a Delaware corporation (the “Company”)
was the surviving entity as the result of a merger between Ticketcart, Inc. and Innovative Beverage Group, Inc., both Nevada corporations.
Innovative Beverage Group, Inc. was the surviving entity as the result of a merger between Kat-A-Tonic Distributing, Inc., a Texas
corporation and United European Holdings, Ltd., a Nevada Corporation.
History
Quantum
Computing Inc. (“QCI” or the “Company”), was incorporated in the State of Nevada on July 25, 2001 as Ticketcart,
Inc. Ticketcart’s original business plan involved in the sale of ink-jet cartridges online. Ticketcart offered remanufactured
and compatible cartridges for Hewlett-Packard, Epson, Lexmark, and Canon inkjet printers. On July 25, 2007, Ticketcart, Inc. acquired
Innovative Beverage Group, Inc. and changed its name to Innovative Beverage Group Holdings, Inc. (“IBGH”) to better
reflect its business operations at the time which was beverage distribution and product development. In 2013, IBGH ceased operations.
On May 22, 2017, one of IBGH’s shareholders, William Alessi (the “Plaintiff”), filed suit against the Company
alleging “(1) fraud; and (2) breach of fiduciary duties of care, loyalty and good faith to the Corporation’s shareholders.”
Mr. Alessi’s complaint alleged that the officers and directors of IBGH had abandoned it and allowed the Company’s
assets to be wasted, causing injury to the Company and its shareholders. Mr. Alessi sought damages of $30,000 for
each claim, plus reimbursement of filing costs of $1,000, and the appointment of a Receiver for the Company.
On
August 28, 2017, the North Carolina Court, Superior Court Division (the “North Carolina Court”), entered a default
judgment for Plaintiff and appointed an exclusive Receiver (the “Receiver”) over the Company. The default judgment
provided that Innovative Beverage Group Holdings, Inc. was (i) to issue to the Plaintiff 18,500,000 shares of free-trading stock
without registration under Section 3(a)(10) of the Securities Act of 1933, as amended, (ii) issue 100,000,000 shares of stock
to Innovative Beverage Group Holdings, Inc.’s treasury, and (iii) that the receivership be terminated upon any change of
control, and that any and all claims against Innovative Beverage Group Holdings, Inc. that were not submitted to the Receiver
as of September 16, 2017, were disallowed. On October 4, 2017 the Receiver filed Articles of Incorporation in North Carolina for
Innovative Beverage Group Holdings, Inc., a wholly-owned subsidiary of the Company, (“IBGH North Carolina”). On October
26, 2017, Innovative Beverage Group, redomiciled to North Carolina.
On
January 22, 2018, while the Company was in receivership, the Company (acting through the court-appointed receiver in her capacity
as CEO and sole Director of the Company) sold 500,000 shares (the “CRG Shares”) of its common stock to Convergent
Risk Group (“CRG”), an entity owned and operated by the Company’s Chief Executive Officer, Robert Liscouski,
for $155,000. On February 21, 2018, by written consent of the majority shareholder (Convergent Risk), Mr. Robert Liscouski (the
Chief Executive Officer of Convergent Risk) and Mr. Christopher Roberts were elected as members of the Company’s Board of
Directors. Mr. Liscouski was simultaneously elected as Chairman of the Board. The majority shareholder also directed the Company
to take the necessary action to change its domicile from North Carolina to Delaware and change its name to Quantum Computing Inc.
On February 21, 2018 the Company filed Articles of Conversion in North Carolina to convert the Company to a Delaware corporation
with the name changed to Quantum Computing Inc. On February 22, 2018 the Company filed a Certificate of Conversion in Delaware
to convert to a Delaware corporation with the name changed to Quantum Computing Inc. and re-domiciled to the state of Delaware
on February 23, 2018.
Business
Quantum
Computing Inc. (OTCQB: QUBT) is a technology company that is an emerging leader in the development of “quantum-ready”
software application and solutions for companies looking to leverage the capabilities of quantum computing and quantum computing-inspired
processing capabilities. We plan to leverage our collective expertise in finance, computing, mathematics, physics, and software
development to develop a suite of quantum software applications that may enable global industries to utilize quantum computers
and simulators to improve their processes, profitability, and security. We believe the quantum computer holds the potential to
disrupt several global industries, and may be one of the most significant technological advances in processing capability.
The
Company has adopted a “two-division” development strategy for quantum computing applications:
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Software
Applications to solve high value compute-intensive problems, and
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-
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Software
Stack that enables the Software Applications to run on a variety of quantum computers, including annealers and gate quantum
computers.
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The
initial focus for our Software Application division is the financial services sector. We anticipate other potential markets for
quantum computing applications include industries in the field of machine learning, logistics, healthcare, and cybersecurity.
We
intend to be a leading provider of software that run on quantum computers. we are focused on being an enabler – creating
software that will realize the advantages of advanced computing hardware for clients aiming to be “Quantum Ready”.
The
first commercial market for which we are developing a software product to be adopted is in the financial technology or “FinTech”
market, for which we are developing quantitative financial related products such as a financial portfolio optimizer. The portfolio
optimizer is designed to help financial advisors and investment managers allocate their capital across multiple asset classes
or investment options (stocks bonds, commodities, ETFs, etc.) so as to achieve the highest return with the lowest expected aggregate
risk. The finance industry has used quantitative finance software applications for several decades. However, existing products
have been limited in their performance due to the lack of computing power needed to solve the relevant classes of optimization
problems.
Our
longer-term software development plan targets the optimization problems known as NP-complete problems, which are a class
of mathematical problems that can in principle be solved by conventional computers but the solution requires time that grows exponentially
with the size of the problem. These NP-complete problems require complex calculations, which cannot currently be performed in
reasonable amounts of time for problem sizes relevant to many industrial uses using conventional computer systems. These problems
are intractable because of the inability of classical bit-based systems to handle combinatorial problems at scale. The recent
developments in quantum annealing and other quantum hardware suggests that these new technologies may soon deliver computational
benefit.
Additional
application markets we intend to explore beyond FinTech include Big Data, Artificial Intelligence, Healthcare, and Cybersecurity.
We believe these are natural markets for quantum computing, due to the immense computer power required to process large data sets,
which have experienced exponential growth in size and complexity in recent years. We are in the process of negotiating partnerships
with Artificial Intelligence and Big Data firms to develop algorithms to identify behavioral trends and characteristics based
on commercially available signals and geo-location data. We believe our focus and expertise have positioned the Company to pursue
contract opportunities in the US government and commercial sectors based on our experience in specific areas of counterterrorism
and behavioral analysis.
To
achieve these goals, we have assembled a team with deep expertise in financial services, quantitative and applied mathematics,
high-performance computing, quantum physics, and machine learning fields. We plan to file patents for new technology we may develop
over the coming months based on our current progress, but we cannot guarantee this timeline or that we will be awarded any such
patents in the future.
Business
Strategy
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 experienced engineers in super computing technology
and quantum mathematics, which will focus on design and development of several quantum software applications that target solutions
to problems including non-deterministic polynomial applications.
The
Company has hired physicists, applied mathematicians (algorithm developers) and software developers to support the technical team
in developing and designing quantum software applications. Applied mathematicians develop the algorithms and algorithm/software
developers design software solutions utilizing the algorithms provided to them by mathematicians. Software engineers test the
algorithm code to ensure reliable and accurate performance of the software product.
In
addition, the Company has retained outside leading industry experts from well-known institutions from the financial services industry
and leading financial institutions, and expects to retain additional advisors from cybersecurity firms and government agencies
to serve as technical advisors to the Company. We have formed an advisory board of additional subject matter experts, which is
expected to assist us to shape our business strategy and direction as well as work with us to establish our market approach. The
Company is also pursuing US Government initiatives in quantum computing and AI, including grants and funding, that are fostering
U.S. innovation in those domains.
The
Company does not currently intend to be a hardware manufacturer. However, due to the cutting-edge nature of quantum computing
and the high cost and limited availability of quantum computers, as well as limitations on the capabilities of existing quantum
simulators, we may find it necessary over the next two years to develop our own quantum simulators upon which we can develop and
test our quantum software products. If such development becomes necessary, our simulators are expected to emulate the characteristics
and capabilities of a quantum computer such as superposition and quantum entanglement. Our plan is to license our software as
a cloud-based service, but we are not ruling out selling turn-key hardware systems that would incorporate and support our own
quantum inspired computing solutions.
The
Company’s technical leadership intends to leverage industry expertise and innovative methods to develop quantum computer
application solutions capable of solving increasingly complex problems in a more rapid and thorough manner. The Company
will initially focus on addressing computational problems in the financial services, and cybersecurity quantum-secure encryption
markets, followed later by addressing problems in the AI and genetics marketplaces.
The
Company’s fiscal year end is December 31.
Basis
of Presentation:
The
accompanying Balance Sheet as of June 30, 2020, which was derived from audited financial statements, and the unaudited interim
financial statements of the Company have been prepared in accordance with U.S. GAAP for interim financial information, the instructions
to Form 10-Q and Article 10 of Regulation S-X. In the opinion of management, the accompanying unaudited, financial statements
contain all adjustments necessary to present fairly the financial position of the Company as of June 30, 2020, and the cash flows
and results of operations for the three and six months then ended. Such adjustments consisted only of normal recurring items.
The results of operations for the six months ended June 30 are not necessarily indicative of the results for the full year. Certain
information and footnote disclosures normally included in financial statements prepared in accordance with generally accepted
accounting principles have been condensed or omitted. The accounting policies followed by the Company are set forth in Note 1
to the Company’s consolidated financial statements contained in the Company’s 2019 Form 10-K, filed with Securities
and Exchange Commission, and it is suggested that these financial statements be read in conjunction therewith.
Accounting
Changes
Except
for the changes discussed below, Quantum has consistently applied the accounting policies to all periods presented in these unaudited
financial statements.
Use
of Estimates:
These
financial statements have been prepared in accordance with generally accepted accounting principles in the 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 is 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.
Note
2 – Federal Income Taxes:
The
Company has made no provision for income taxes because there have been no operations to date causing income for financial statements
or tax purposes.
The
Financial Accounting Standards Board (FASB) has issued Statement of Financial Accounting Standards Number 109 (“SFAS 109”).
“Accounting for Income Taxes”, which requires a change from the deferred method to the asset and liability method
of accounting for income taxes. Under the asset and liability method, deferred income taxes are recognized for the tax consequences
of “temporary differences” by applying enacted statutory tax rates applicable to future years to differences between
the financial statement carrying amounts and the tax basis of existing assets and liabilities.
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June 30,
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2020
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2019
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Net operating loss carry-forwards
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$
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1,916,401
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$
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939,829
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Valuation allowance
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(1,916,401
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)
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(939,829
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)
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Net deferred tax assets
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$
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-
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$
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-
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At
June 30, 2020, the Company had net operating loss carry forwards of approximately $1,916,401.
The
Company experienced a change in control during the 2018 calendar year and therefore no more than an insignificant portion of this
net operating allowance will ever be used against future taxable income.
On
March 27, 2020, the United States enacted the CARES Act as a response to the economic uncertainty resulting from COVID-19. The
CARES Act includes modifications for net operating loss carryovers and carrybacks, limitations of business interest expense for
tax, immediate refund of alternative minimum tax (AMT) credit carryovers as well as a technical correction to the Tax Cuts and
Jobs Act of 2017, referred to herein as the U.S. Tax Act, for qualified improvement property. The CARES Act also provides for
deferred payment of the employer portion of social security taxes through the end of 2020, with 50% of the deferred amount due
December 31, 2021 and the remaining 50% due December 31, 2022. As of June 30, 2020, the Company expects that the carryback of
NOL's will not have an impact on its current tax attributes.
Note
3 – Going Concern
The
Company’s financial statements have been prepared on the basis that it is a going concern, which contemplates the realization
of assets and the satisfaction of liabilities in the normal course of business.
The
Company has earned no revenue from operations in the six-month periods ended June 30, 2020 and 2019, and has an accumulated deficit
of $31,237,733 and $23,048,767 respectively. The Company’s ability to continue as a going concern is dependent upon its
ability to develop additional sources of capital or ultimately acquire an entity which the Company hopes will become profitable
at some time in the near future. The accompanying financial statements do not include any adjustments that might result from the
outcome of these uncertainties. Management is seeking additional capital to finance the operations of the Company.
Note
4 – Financial Accounting Developments:
Recently
Issued Accounting Pronouncements
From
time to time, new accounting pronouncements are issued by the FASB or other standard setting bodies that are adopted by the Company
as of the specified effective date. Unless otherwise discussed, we believe that the impact of recently issued standards that are
not yet effective will not have a material impact on our financial position or results of operations upon adoption.
Note
5 – Subscription Receivable
The
Company assumed a promissory note from one of the Initial Investors to Convergent Risk Group, LLC (see Note 9 – Related
Parties) in the amount of $100,000, which is payable by the Initial Investor on or before December 31, 2020. The promissory note
was issued in payment for a promissory note from Convergent to the Initial Investor, which has also been assumed by the Company
in exchange for a Convertible Promissory Note in the amount of $100,000, convertible to Company common shares at a conversion
price of $0.10 per share (see Note 9 – Subsequent Events).
Note
6 – Property and Equipment
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June 30,
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December 31,
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Classification
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2020
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2019
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Hardware & Equipment
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$
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31,610
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$
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28,353
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Software
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0
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0
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Total cost of property and equipment
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31,610
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28,353
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Accumulated depreciation
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5,918
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2,757
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Property and equipment, net
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$
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25,692
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$
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25,596
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The
Company made Property and Equipment acquisitions of $3,258 during the six months ended June 30, 2020. The Company depreciates
computer equipment over a period of five years.
Note
7 – Convertible Promissory Notes and Loans
In
March 2018 the Board authorized the Company to issue non-interest bearing convertible promissory notes at a conversion price of
$0.10 per share to the Initial Investors and others and $500,000 of these convertible notes have been issued, for which only $225,000
has been received by the Company in cash.
On
May 24, 2018 the Board authorized a private placement of convertible promissory notes in the aggregate amount up to $15,000,000
at a conversion price of $1.00 per share (the “Convertible Note Offering”). The Notes accrue interest at eight
percent (8%) per annum and are convertible into common stock of the Company at any time prior to or at the Maturity Date, twelve
months from the Issuance Date. In connection with the $1.00 Convertible Note Offering, the Company received funds of $3,495,500
as of December 31, 2018. The Board terminated the Convertible Note Offering in October, 2018.
In
total, the Company has issued convertible promissory notes of principal value $3,995,500, for which the Company has received a
total of $3,720,500 in funds.
The
convertible promissory notes were issued at different times during the year, and the difference between the conversion prices
of the notes and the fair market value of the Company’s common stock at the date of the investment, as measured by the closing
price on the OTC Markets, was recorded as a Beneficial Conversion Feature interest expense.
In
June 2019, the Company refunded $26,000 to a convertible promissory note investor. The accrued interest on that promissory note
was written off by agreement with the investor.
In
August 2019 the Company converted $1,994,500 principal amount of Convertible Promissory Notes convertible at $1.00 plus $124,997
of accrued interest into 2,119,525 restricted shares of common stock per the terms of the Convertible Note subscription agreements
the Company entered into in 2018 with 59 accredited investors. Accrued interest on the Notes was rounded up to the next whole
dollar so the Company did not issue fractional shares. Also, in August, the Company converted $21,000 principal amount of Convertible
Promissory Notes (non-interest bearing) convertible at $0.10 into 210,000 shares of common stock
In
October 2019 the Company entered into a Securities Purchase Agreement (the “SPA”), dated October 14, 2019 and effective
October 16, 2019 (the “Issuance Date”), by and between the Company and Auctus Fund, LLC, a Delaware limited liability
company (“Auctus”), pursuant to which Auctus purchased from the Company, for a purchase price of $500,000 (the “Purchase
Price”): (i) a Convertible Promissory Note in the principal amount of $500,000.00 (the “Auctus Note”); (ii)
a common stock purchase warrant permitting Auctus to purchase up to 500,000 shares of the Company’s common stock, par value
$0.0001 per share (the “Common Stock”), at an exercise price of $2.75 per share (the “First Warrant”);
(iii) a common stock purchase warrant permitting Auctus to purchase up to 350,000 shares of the Company’s Common Stock at
an exercise price of $3.75 per share (the “Second Warrant”); and (iv) a common stock purchase warrant permitting Auctus
to purchase up to 275,000 shares of the Company’s Common Stock at an exercise price of $4.75 per share (the “Third
Warrant” and together with the First Warrant and the Second Warrant, the “Warrants”, and together with the Note,
the “Securities”).
The
Auctus Note accrues interest at a rate of ten percent (10%) per annum and matures on October 14, 2020 (the “Maturity Date”).
If the Company prepays the Auctus Note, the Company shall pay all of the principal and interest, together with a prepayment penalty
ranging from 125% to 150% depending upon the date of such prepayment. The Auctus Note contains customary events of default (each
an “Event of Default”). If an Event of Default occurs, all outstanding obligations owing under the Auctus Note will
become immediately due and payable in cash or Common Stock at Auctus’ election. Any outstanding obligations owing under
the Auctus Note which is not paid when due shall bear interest at the rate of twenty four percent (24%) per annum.
The
Auctus Note is convertible into shares of the Company’s Common Stock, subject to the adjustments described therein. The
conversion price (the “Conversion Price”) shall equal the lesser of: (i) $1.50, and (ii) 50% multiplied by the lowest
trading price for the Common Stock during the twenty-five (25) trading day period ending on the latest complete trading day prior
to the conversion date (representing a discount rate of 50%). Notwithstanding anything contained in the Auctus Note to the contrary,
prior to the occurrence of an Event of Default, the Conversion Price shall not be less than $1.50 per share (the “Floor
Price”). The Floor Price is subject to adjustment at the six (6) and nine (9) month anniversary of the Issuance Date. In
the event that the Floor Price as of such dates is less than 70% multiplied by the volume weighted average price (VWAP) of the
Common Stock during the five (5) trading day period immediately prior to such dates, the Floor Price is adjusted to such lesser
amount.
Under
the terms of the SPA, subject to certain conditions, upon effectiveness of a registration statement on Form S-1 (the “Registration
Statement”) filed with the U.S. Securities and Exchange Commission (the “Commission”) registering all of the
shares of Common Stock underlying the Auctus Note and the Warrants, Auctus agreed to provide the Company with an additional investment
of up to $1,000,000 through the issuance of an additional note or notes, as applicable (the “Additional Notes” together
with the Note, the “Notes”).
The
Auctus Notes and Warrants were not registered under the Securities Act, but qualified for exemption under Section 4(a)(2) and/or
Regulation D of the Securities Act. The securities were exempt from registration under Section 4(a)(2) of the Securities Act because
the issuance of such securities by the Company did not involve a “public offering,” as defined in Section 4(a)(2)
of the Securities Act, due to the insubstantial number of persons involved in the transaction, size of the offering, manner of
the offering and number of securities offered. The Company did not undertake an offering in which it sold a high number of securities
to a high number of investors. In addition, the investor had the necessary investment intent as required by Section 4(a)(2) of
the Securities Act since the investor agreed to, and received, the securities bearing a legend stating that such securities are
restricted pursuant to Rule 144 of the Securities Act. This restriction ensures that these securities would not be immediately
redistributed into the market and therefore not be part of a “public offering.” Based on an analysis of the above
factors, the Company has met the requirements to qualify for exemption under Section 4(a)(2) of the Securities Act.
In
connection with the SPA, the Company entered into a Registration Rights Agreement (the “RRA”) pursuant to which it
committed (i) use its best efforts to file with the Commission the Registration Statement within ninety (90) days of the Issuance
Date; and (ii) have the Registration Statement declared effective by the Commission within one hundred fifty (150) days of the
Issuance Date. The Company filed a Registration Statement with the Commission in November 2019 and it was declared effective in
December 2019, registering 1,625,000 shares.
In
January 2020 the Auctus Fund LLC exercised its option to convert $21,305 of the principal of its Convertible Note and accrued
interest and fees of $8,695 (a total of $30,000) into 20,000 shares of the Company’s common stock. The principal balance
remaining on the Note following this conversion was $478,695.
In
February 2020 the Auctus Fund LLC exercised its option to convert $138,998 of the principal of its Convertible Note and accrued
interest and fees of $11,002 (a total of $150,000) into 100,000 shares of the Company’s common stock. The principal balance
remaining on the Note following this conversion was $339,698.
In
February 2020, the Company entered into an agreement with the Auctus Fund LLC to reduce the exercise price of the $2.75 per share
Warrants to $1.50 per share. No other changes were made to the terms of the Warrants or the Convertible Note held by the Auctus
Fund. In February, the Auctus Fund LLC exercised 167,000 warrants at $1.50 per share, resulting in total proceeds to the Company
of $250,500.
In
February 2020, the Board authorized a private placement of convertible promissory notes in the aggregate amount up to $5,000,000
at a conversion price of $1.50 per share (the “2020 Convertible Note Offering”). The Notes accrue interest at
eight percent (8%) per annum and are convertible into common stock of the Company at any time prior to or at the Maturity Date,
twelve months from the Issuance Date. In connection with the 2020 Convertible Note Offering, the Company has received funds
of $100,000 as of June 30, 2020. The Board closed the 2020 Convertible Note Offering to further investment in June 2020.
On
May 8, 2020 the Company repaid the outstanding principal balance of the Auctus convertible note, including accrued interest and
prepayment penalty interest, for a total of $462,691.
On
May 28, 2020, the Company entered into an agreement with Auctus Fund LLC to reduce the exercise price of the Amended First Warrants
from $1.50 per share to $1.00 per share, and to reduce the exercise price of the Second Warrants from $3.75 to $2.50 per share.
No other changes were made to the terms of the Warrants or the Convertible Note held by Auctus Fund. In May, Auctus Fund LLC exercised
50,000 warrants at $1.00 per share, resulting in total proceeds to the Company of $50,000. In June, Auctus Fund LLC exercised
183,000 warrants at $1.00 per share, resulting in total proceeds to the Company of $183,000.
Oasis
Securities Purchase Agreement
On
May 6, 2020 (the “Issuance Date”), Quantum Computing Inc., a Delaware corporation (the “Company”) entered
into a Securities Purchase Agreement (the “SPA”) by and between the Company and Oasis Capital, LLC, a Puerto Rico
limited liability company (“Oasis”), pursuant to which Oasis purchased from the Company, for a purchase price of $500,000
(the “Purchase Price”): (i) a Convertible Promissory Note in the principal amount of $563,055.00 (the “Note”);
and (ii) a common stock purchase warrant (the “Warrant” and together with the Note, the “Securities”)
permitting Oasis to purchase up to 187,685 shares of the Company’s common stock, par value $0.0001 per share (the “Common
Stock”), at an exercise price of $1.50 per share (the “Exercise Price”). The Company received the Purchase Price
on May 8, 2020.
The
Note accrues interest at a rate of eight percent (8%) per annum and matures on the nine (9) months anniversary of the Issuance
Date (the “Maturity Date”). In the event that the Company prepays the Note, the Company shall pay all of the principal
and interest, together with a prepayment penalty ranging from 105% to 135% depending upon the date of such prepayment. The Note
contains customary events of default (each an “Event of Default”). If an Event of Default occurs, all outstanding
obligations owing under the Note will become immediately due and payable in cash or Common Stock at Oasis’ election. Any
outstanding obligations owing under the Note which are not paid when due shall bear interest at the rate of eighteen percent (18%)
per annum.
The
Note is convertible into shares of the Company’s Common Stock, subject to the adjustments described therein. The conversion
price (the “Conversion Price”) per share shall be (i) $1.50 during the six month period immediately following the
Issuance Date, and (ii) after the six month period immediately following the Issue Date, the lower of: (a) $1.50, and (b) 70%
multiplied by the lowest volume weighted average price for the Common Stock during the twenty-five (25) trading day period ending
on the latest complete trading day prior to the conversion date (representing a discount rate of 30%).
The
Warrant is exercisable for a term of five-years from the date of issuance. The Warrants provide for cashless exercise to the extent
that there is no registration statement available for the underlying shares of Common Stock. Until such time as there no longer
an outstanding balance on the Note, if the Company shall, at any time while the Warrant is outstanding, sell any shares of Common
Stock or securities entitling any person or entity to acquire shares of Common Stock at a price per share that is less than the
Exercise Price (a “Dilutive Issuance”), than the Exercise Price shall be reduced to equal the Base Share Price (as
defined in the Warrant) and the number of shares of Common Stock issuable under the Warrant shall be increased such that the aggregate
exercise price payable under the Warrant, after taking into account the decrease in the exercise price, shall be equal to the
aggregate exercise price prior to such adjustment.
On
May 7, 2020, in connection with its entry into the Securities Purchase Agreement, the Company issued 37,537 Inducement Shares
(as defined in the Securities Purchase Agreement) to Oasis.
Oasis
Equity Purchase Agreement
On
May 6, 2020 (the “Execution Date”), the Company entered into an Equity Purchase Agreement (“Equity Purchase
Agreement”) and a Registration Rights Agreement (“Registration Rights Agreement”) with Oasis. Under the terms
of the Equity Purchase Agreement, Oasis agreed to purchase from the Company up to $10,000,000 of the Company’s Common Stock
upon effectiveness of a registration statement on Form S-1 (the “Registration Statement”) filed with the U.S. Securities
and Exchange Commission (the “Commission”) and subject to certain limitations and conditions set forth in the Equity
Purchase Agreement.
Following
effectiveness of the Registration Statement, and subject to certain limitations and conditions set forth in the Equity Purchase
Agreement, the Company shall have the discretion to deliver put notices to Oasis and Oasis will be obligated to purchase
shares of the Company’s Common Stock based on the investment amount specified in each put notice. The maximum amount that
the Company shall be entitled to put to Oasis in each put notice shall not exceed the lesser of $500,000 or two hundred and fifty
percent (250%) of the average daily trading volume of the Company’s Common Stock during the ten (10) trading days preceding
the put notice. Pursuant to the Equity Purchase Agreement, Oasis and its affiliates will not be permitted to purchase
and the Company may not put shares of the Company’s Common Stock to Oasis that would result in Oasis’s beneficial
ownership of the Company’s outstanding Common Stock exceeding 9.99%. The price of each put share shall be equal to ninety
percent (90%) of the Market Price (as defined in the Equity Purchase Agreement). Puts may be delivered by the Company to Oasis until
the earlier of (i) the date on which Oasis has purchased an aggregate of $10,000,000 worth of Common Stock under the terms of
the Equity Purchase Agreement; (ii) April 26, 2023; or (iii) written notice of termination delivered by the Company to Oasis,
subject to certain equity conditions set forth in the Equity Purchase Agreement.
On
May 7, 2020, in connection with its entry into the Equity Purchase Agreement and the Registration Rights Agreement, the Company
issued 133,334 Commitment Shares (as defined in the Equity Purchase Agreement) to Oasis.
The
Registration Rights Agreement provides that the Company shall (i) file with the Commission the Registration Statement by June
1, 2020; and (ii) use its best efforts to have the Registration Statement declared effective by the Commission at the earliest
possible date (and in any event, within sixty (60) days of the Execution Date). The Company filed the Registration Statement on
May 21, 2020, The Registration Statement went effective on June 3, 2020.
Paycheck
Protection Program Loan
On
May 6, 2020, Quantum Computing Inc. (the “Company”) executed an unsecured promissory note (the “Note”)
with BB&T/Truist Bank N.A. to evidence a loan to the Company in the amount of $218,371 under the Paycheck Protection Program
(the “PPP”) established under the Coronavirus Aid, Relief, and Economic Security Act (the “CARES Act”),
administered by the U.S. Small Business Administration (the "SBA").
In
accordance with the requirements of the CARES Act, the Company expects to use the proceeds from the loan exclusively for qualified
expenses under the PPP, including payroll costs, mortgage interest, rent and utility costs. Interest will accrue on the outstanding
balance of the Note at a rate of 1.00% per annum. The Company expects to apply for forgiveness of up to the entire amount of the
Note. Notwithstanding the Company’s eligibility to apply for forgiveness, no assurance can be given that the Company will
obtain forgiveness of all or any portion of the amounts due under the Note. The amount of forgiveness under the Note is calculated
in accordance with the requirements of the PPP, including the provisions of Section 1106 of the CARES Act, subject to limitations
and ongoing rule-making by the SBA and the maintenance of employee and compensation levels.
Subject
to any forgiveness granted under the PPP, the Note is scheduled to mature two years from the date of first disbursement under
the Note. The Note may be prepaid at any time prior to maturity with no prepayment penalties. The Note provides for customary
events of default, including, among others, those relating to failure to make payments, bankruptcy, and significant changes in
ownership. The occurrence of an event of default may result in the required immediate repayment of all amounts outstanding and/or
filing suit and obtaining judgment against the Company. The Company’s obligations under the Note are not secured by any
collateral or personal guarantees.
In
April 2020, the Company applied to the US Small Business Administration (the “SBA”) for a loan under the Economic
Injury Disaster Loan (EIDL) program. In May the SBA informed the Company that the EIDL loan application had been declined, but
that the SBA would provide a $10,000 forgivable advance under the EIDL program.
In
May 2020, the Company raised $30,000 from three stockholders in the form of short term, non-interest bearing, promissory notes,
each in the amount of $10,000. The promissory notes mature December 31, 2020 and the Company has the right to prepay the notes
prior to that date without penalty.
In
May 2020 the Company applied to the Loudoun County (Virginia) Economic Development Authority (the “SBA”) for a grant
under the COVID-19 Business Interruption Fund (BIF) program. In June the SBA informed the Company that the Company had been selected
for a BIF grant in the amount of $7,500.
Note
8 – Capital Stock:
On
March 1, 2018 the Board authorized the Company to raise up to $500,000 of equity capital at price of $0.40 per share of common
stock (the “Initial Raise”). In connection with the Initial Raise, the Company received subscriptions for $75,000,
and issued shares of restricted common stock pursuant to the Subscription Agreements. On September 5, 2018 the Board formally
concluded the Initial Raise and ceased accepting investments.
On
April 13, 2018, The Company’s board of directors authorized a 1:200 reverse stock split on the shares of the Company’s
common stock. Accordingly, all references to numbers of common shares and per-share data in the accompanying financial statements
have been adjusted to reflect the stock split on a retroactive basis. The Board and the majority stockholder also amended the
Company’s Articles of Incorporation to increase the authorized capital of the company to 260,000,000 shares, consisting
of 250,000,000 shares of common stock and 10,000,000 shares of preferred stock.
In
September 2018, the Company issued 4,800,000 shares of restricted common stock to key management and technical personnel, pursuant
to their respective employment agreements which were entered into and executed in July 2018 and made effective as of March 1,
2018, the date employment with the Company commenced. The Company recognized stock-based compensation expense of $24.2 million
in connection with the grants of stock to key management and technical personnel, pursuant to ASC 718. The expense amount was
calculated based on the closing price of the Company stock on the OTC Markets on the date the grants were executed. In November
2018, two of the key management employees resigned from the Company and returned all of their stock grants to the Company, for
a total of 4,000,000 shares. The return of the stock grants was treated as a forfeiture under ASC 718 and accordingly the Company
reversed $20.16 million of the stock-based compensation expense after the shares were returned to the Company and cancelled.
The
terms of the employee stock grants are spelled out in Restricted Stock Agreements and Lock Up Agreements (the “Stock Agreements”),
which the Company entered into with each employee. The Stock Agreements specify that the stock grants are subject to restrictions
spelled out in a restrictive legend, and that the grants vest in full upon the first date of employment. In addition, the
employee is also subject to the Lock Up Agreement for three years from the date of employment. The Lock Up Agreement precludes
the employee from selling, granting, lending, pledging, offering or in any way, directly or indirectly disposing of the shares
granted by the Company. Because one hundred percent (100%) of the shares vest on the first day of employment, the employee has
all of the rights of a shareholder including the ability to receive dividends and vote the shares. However, if the employee terminates
their employment prior to the third anniversary of his/her date of hire, the Company has a right to recoup a portion of the stock
grant. Specifically, the Company can recoup two thirds of the stock grant until the second anniversary date, and one third of
the stock grant between the second and third anniversary dates. After the third anniversary date, the Company has no further recoupment
rights.
To
properly account for the compensation expense associated with the stock grants under ASC 718, we first analyzed whether there
was a “requisite service period” associated with the stock grants. Because the shares vest immediately, we determined
that there was no requisite service period, and the employees received taxable compensation as of the date of grant. We also examined
whether there were conditions associated with the employee stock grants that would affect recording of compensation expense. We
determined that the Company’s recoupment or “clawback” right constitutes a contingent feature of a stock grant
such as a clawback feature that should be accounted for if, and when, the contingent event occurs, Moreover, while the company
has a legal right to recoup shares under certain conditions, in practice there are a number of procedural hurdles we would have
to overcome to actually get the shares back if the terminated employee does not voluntarily surrender the certificate, and there
is no guarantee we would succeed. Therefore, because the restricted stock grants vested in full upon the Effective Date, and the
clawback right is a contingent condition, in accordance with ASC 718 we determined that the full amount of the fair market value
of the shares should be recognized as compensation expense as of the date of the grant, rather than recognizing the stock based
compensation expense pro rata over the three year period of the contingent clawback feature.
In
October 2018 the Company converted $725,000 principal amount of Convertible Promissory Notes, plus $16,711 of accrued interest,
into 1,510,377 shares of common stock. The Company also issued 130,000 shares of common stock to CNLT, LLC, pursuant to the non-dilution
covenant directed by the 2017 North Carolina court order. The shares were issued under Section 3(a)(10) of the Securities Act.
In
December 2018 the Company converted $100,000 principal amount of Initial Investor promissory notes, plus accrued interest of $2,422,
into 1,002,422 shares of common stock.
In
March 2019 the Company issued 25,000 shares of common stock to Lyons Capital, LLC, an investor relations firm, as compensation
for services pursuant to the terms of an agreement the Company entered into with Lyons Capital in December 2018.
In
June 2019 the Company converted $20,000 principal amount of Convertible Promissory Notes into 200,000 shares of common stock.
The Company also issued 350,000 shares of common stock to CNLT, LLC, pursuant to the non-dilution covenant directed by the 2017
North Carolina court order. The shares were issued under Section 3(a)(10) of the Securities Act.
In
May 2019 the Company terminated an employee who had received a grant of 400,000 shares of restricted stock in September 2018 pursuant
to an employment agreement. In August 2019 the Company exercised its rights under the Restricted Stock Agreement to recoup a portion
of the original grant. The Company received back 266,640 shares of common stock from the former employee and the partial return
of the stock grant was treated as a forfeiture under ASC 718 and accordingly the Company reversed $1,343,866 of the stock-based
compensation expense previously recorded, after the shares were returned to the Company and cancelled. This is consistent with
ASC 718 and the Company’s prior practice, as detailed above.
In
August 2019 the Company converted $2,015,500 principal amount of Convertible Promissory Notes plus $124,997 of accrued interest
into 2,329,525 restricted shares of common stock.
In
June 2020, the Company entered into twelve month Lock Up – Leak Out agreements with fifty holders of approximately 2 million
shares of restricted stock in exchange for 443,273 incentive shares. Under the Lock Up-Leak Out agreements the stockholders are
precluded from selling, granting, lending, pledging, offering or in any way, directly or indirectly disposing of their shares
until June 11, 2021 and after that date they agreed to limit daily sales to no more than ten percent (10%) of the average daily
trading volume of the Company’s stock for the previous three trading days.
On
June 10, 2020 the Board authorized a private placement of common stock with fifty percent (50%) warrant coverage at an exercise
price of $2.00 in the aggregate amount up to $1,000,000 at a stock price of $1.00 per share (the “2020 Equity Offering”). In
connection with the 2020 Equity Offering, the Company received funds of $300,000 as of June 30,2020.
Note
9 – Related Party Transactions
Convergent
Risk Group, LLC
To
finance the acquisition of the control block of shares in IBGH, an investor group (the “Initial Investors.”), loaned
Convergent Risk Group, LLC (Convergent) $275,000, in exchange for Promissory Notes from Convergent (the “Promissory Notes”)
in the total amount of $275,000. Convergent, a Virginia limited liability company, is owned 100% by Mr. Robert Liscouski, who
is the CEO and currently the majority shareholder of the Company. To induce Mr. Liscouski to serve as CEO of the Company, the
Company assumed the “Promissory Notes” in the total amount of $275,000 and certain liabilities (the “Liabilities”).
The Liabilities and the Promissory Notes are collectively the “Convergent Liabilities.” The Convergent Liabilities
assumed by the Company were exchanged for Convertible Promissory Notes issued by the Company for $275,000 (the same amount that
Convergent had issued them for). The Convertible Promissory Notes accrue interest at eight percent (8%) per
annum and are convertible into common stock of the Company at a conversion price of $0.10 per share at any time prior to or at
August 10, 2019. The Company also assumed a promissory note from one of the Initial Investors to Convergent
in the amount of $100,000, which is payable on or before June 30, 2019. While the conversion of the Convertible Promissory
Notes is mandatory at the maturity date, August 10, 2020, the election to convert is at the option of the Initial Investor. The
Company has no obligation to repay the Initial Investors in cash. However, the conversion of the Convertible Promissory
Notes will result in dilution of other shareholders once the Initial Investors convert their notes into the Company’s common
stock.
REMTC,
Inc.
To
provide the Company with a highly secure development environment and intra-company data management and communication system, the
Company contracted with REMTC, Inc. (“REMTC”), an entity wholly owned by Richard Malinowski, who was the Company’s
Chief Technology and Operations Officer at the time, to acquire the necessary hardware and software, configure and install the
REMTC proprietary security system, known as “PASS.” The total cost of the PASS System was approximately $670,000 which
the Company paid to REMTC. In November 2018, Mr. Richard Malinowski informed the Company of his decision to resign as Chief Technology
and Operations Officer and the Board accepted his resignation and that of Mr. Thomas Kelly. The Company and REMTC have unwound
the PASS agreement and the Company expects to receive approximately $670,000 back from Mr. Malinowski and REMTC. The Company determined
that the PASS System was unusable and therefore impaired, and wrote off the remaining undepreciated value of the PASS system as
of December 31, 2018. In March 2019 the Company commenced litigation in New Jersey state court against REMTC, Mr. Malinowski and
Mr. Kelly to recover the cost of the PASS System. In January 2020 the Company entered into a settlement of its claims against
REMTC, Mr. Malinowski and Mr. Kelly and the litigation in New Jersey was dismissed.
Note
10 – Reclassifications:
Certain
reclassifications have been made to the prior period financial statements to conform to the current period financial statement
presentation. Specifically, the Beneficial Conversion Feature expense relating to the offering of Convertible Promissory Notes
in 2018 has been allocated to the periods in which the Promissory Notes were issued. These reclassifications had no effect on
net earnings or cash flows as previously reported for calendar year 2018.
Note
11 – Subsequent Events:
In
early 2020, an outbreak of the novel strain of coronavirus (COVID-19) emerged globally. In March 2020, the World Health Organization
declared the COVID-19 outbreak to be a global pandemic, which continues to spread throughout the United States. The COVID-19 has
significantly impacted the communities in which Company employees live and work. As a result, federal, state and local authorities
have issued mandates for social distancing and working from home to delay the spread of the coronavirus, resulting in an overall
decline in economic activity. The ultimate impact of COVID-19 on the Company is not reasonably estimable at this time. Management
is currently evaluating the recent introduction of the COVID-19 virus and the related government mandates, and their impact on
the software industry and has concluded that while it is reasonably possible that the virus and the associated government mandates
restricting activity could have a negative effect on the ability of the Company to meet with potential customers and to raise
additional capital, the specific impact is not readily determinable as of the date of these financial statements. The financial
statements do not include any adjustments that might result from the outcome of this uncertainty.
In
July 2020, the Company offset an invoice for business development and investor relations services performed under a consulting
agreement with one of the Initial Investors in the amount of $100,000, as payment in full of a promissory note from the Initial
Investor which was issued in payment for a promissory note from Convergent to the Initial Investor, which has also been assumed
by the Company in exchange for a Convertible Promissory Note in the amount of $100,000, convertible to Company common shares at
a conversion price of $0.10 per share. Accordingly, the Company’s Convertible Promissory Note held by this Initial Investor
has been deemed fully satisfied and the subscription receivable cancelled. Additionally, in July 2020, the Initial Investor converted
5,000 of its Promissory Note into 50,000 shares of common stock.
In
July 2020, one of the Company’s Initial Investors, and a member of the Board of Directors, converted their Promissory Note
in the amount of $100,000, convertible at $0.10 per share, into one million (1,000.000) shares of stock.
On
July 28, 2020, the Company consummated the initial closing of the 2020 Equity Offering, whereby the Company entered into a Subscription
Agreement (the “Subscription Agreement”) with two accredited investors (the “Investors”), pursuant to
which the Investors purchased shares of the Company’s common stock, par value $0.0001 per share, in the aggregate amount
of $330,000, for a total of 330,000 shares of Common Stock (the “Common Stock”), and Warrants to purchase 165,000
shares of Common Stock (the “Warrants”, and together with the Common Stock, the “Units”) at a purchase
price of $1.00 per Unit (the “Purchase Price”). Pursuant to the Subscription Agreements, each Investor is entitled
to 50% Warrant coverage, such that the Investors received one Warrant for every two shares of Common Stock purchased. The Warrants
are exercisable at a price of $2.00 per share, subject to adjustment from the date of issuance through July 28, 2025.
There
are no other events of a subsequent nature that in management’s opinion are reportable.