UNITED STATES

SECURITIES AND EXCHANGE COMMISSION

Washington, D.C. 20549

FORM 10-Q

☒ QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934

For the quarterly period ended: September 30, 2021

or

☐ TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934

For the transition period from __________ to __________

Commission File Number: 000-56015

QUANTUM COMPUTING INC.

(Exact name of registrant as specified in its charter)

215 Depot Court SE, Suite 215

Leesburg, VA 20175

(Address of principal executive offices)

(703) 436-2121

(Registrant’s telephone number, including area code)

Securities registered pursuant to Section 12(b) of the Act:

Indicate by check mark whether the registrant (1) has filed all reports required to be filed by section 13 or 15(d) of the Securities Exchange Act of 1934 during the preceding 12 months, and (2) has been subject to such filing requirements for the past 90 days.  Yes ☒    No ☐ 

Indicate by check mark whether the registrant has submitted electronically every Interactive Data File required to be submitted pursuant to Rule 405 of Regulation S-T (§232.405 of this chapter) during the preceding 12 months (or for such shorter period that the registrant was required to submit such files).  Yes ☒   No  ☐

Indicate by check mark whether the registrant is large accelerated filer, an accelerated filer, a non-accelerated filer, smaller reporting company, or an emerging growth company. See definition of “large accelerated filer,” “accelerated filer,” “smaller reporting company,” and “emerging growth company” in Rule 12b-2 of the Exchange Act:

If an emerging growth company, indicate by check mark if the registrant has elected not to use the extended transition period for complying with any new or revised financial accounting standards provided pursuant to Section 13(a) of the Exchange Act. ☐

Indicate by check mark whether the registrant is a shell company (as defined in Rule 12b-2 of the Exchange Act). Yes ☐   No ☒

As of November 3, 2021, there were 29,156,815 shares outstanding of the registrant’s common stock. 

QUANTUM COMPUTING INC.

TABLE OF CONTENTS

PART I – FINANCIAL INFORMATION

Item 1.  Financial Statements 

QUANTUM COMPUTING INC.

Index to the Financial Statements

(Unaudited)

QUANTUM COMPUTING INC.

Balance Sheets

(Unaudited)

The accompanying notes are an integral part of these Unaudited financial statements.

QUANTUM COMPUTING INC.

Statement of Operations

(Unaudited)

The accompanying notes are an integral part of these Unaudited financial statements.

QUANTUM COMPUTING INC.

Statement of Stockholders’ Deficit

For the Nine months Ended September 30, 2020

(Unaudited)

The accompanying notes are an integral part of these Unaudited financial statements.

QUANTUM COMPUTING INC.

Statement of Stockholders’ Deficit

For the Nine months Ended September 30, 2021

(Unaudited)

The accompanying notes are an integral part of these Unaudited financial statements.

QUANTUM COMPUTING INC.

Statement of Cash Flows

For the Nine Months Ended September 30, 2021 and 2020

(Unaudited)

The accompanying notes are an integral part of these financial statements.

QUANTUM COMPUTING INC.

Notes to Financial Statements

(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. In 2021 the Company established three wholly owned subsidiaries, Qubitech, Inc., Qubittech Federal, Inc. and Qubittech International, Inc., all of which are Delaware corporations. At this time there are no personnel, assets or liabilities associated with any of the subsidiaries.

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” or “Convergent Risk”), 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.

QUANTUM COMPUTING INC.

Notes to Financial Statements

(Unaudited)

Nature of Business

The Company is a developer of quantum computing software offering ready-to-run software for complex optimization computations. The Company was founded in 2018 by leaders in supercomputing, mathematics, and massively parallel programming to solve the enormous challenge with quantum computing in terms of the high cost and lengthy times required for quantum software development. While much of the market focuses on Quantum Processing Unit (QPU) hardware, QCI’s experts realized that the quantum marketplace and vendors were limiting access to quantum computers due to the complexity of programming them. At the present time, only a very limited number of highly specialized quantum experts are able to use software development toolkits (“SDKs”) to create these critical programs and applications.

The Company’s flagship software solution, Qatalyst, is the industry’s only quantum application accelerator. It ensures that today’s SMEs can continue to create and solve the complex computations demanded by organizations to optimize supply chains, logistics, emergency responses, clinical trials, and more. Qatalyst software masks the complexity of quantum programming via the Q API (Qatalyst Application Programming Interface), a powerful API comprised of six function calls for complex computations. Instead of spending months or years developing new applications and workflows requiring complex and extremely low-level coding, users or applications can submit a problem to Qatalyst after licensing the software, via the Q API. In practice, users have utilized Qatalyst’s simple API and familiar constructs to solve their first complex problem within a week, as compared to the 6-12 months or more associated with writing a single quantum software program using vendor toolkits.

The Company is focused on solving real-world problems with Qatalyst, including supply chain and logistics optimization and crisis management, as well as community detection opportunities such as drug discovery and fraud detection.

The Company is actively partnering with quantum computing leaders in both hardware and software. As an Amazon AWS partner, the Company uses the AWS Braket service to connect to multiple quantum computers, including Rigetti, DWave, and IonQ. The same problem can be submitted to any of these QPUs or classical processing units (CPUs) with no need for API call changes. Users seamlessly can submit the same problem to diverse quantum computers (QPUs) to determine which QPU will provide the best answers to their complex problem.

The Company believes that the development of real-world use cases, not just science projects, is critical to the forward momentum of quantum computing as a practical technology. To that end, the Company has created an internally funded program called QikStart. It will provide access to Qatalyst and cloud-based resources, experts, and funding to explore quantum applications to push the boundaries of quantum computing for delivering practical business results, right now. 

QUANTUM COMPUTING INC.

Notes to Financial Statements

(Unaudited)

Strategy

While the majority of the quantum computing market is focused on quantum computing hardware, the Company realized the traditional software development toolkit (“SDK”) approach to creating quantum computing software is poorly suited for non-quantum experts, given the completely new programming paradigm.

This represents a significant barrier to entry for companies looking to leverage novel quantum computing capabilities for their business needs. Utilizing quantum computers for real-world problems requires an abstract blend of a wide range of computing and non-computing expertise, including:

As one would expect given the dramatic differences in quantum computer hardware architectures currently under development, quantum software requires a dramatic shift from classic software. A user would have to literally have to create every single circuit, gate, algorithm, action and process in low level software. Moreover, the collective requirements imposed upon companies looking to utilize quantum computers can require a training period of a year or longer, even for a highly qualified subject matter expert. Consequently, the time, difficult and expense of hiring such a diverse and deeply knowledgeable team to create quantum applications and workflows limits any organization’s ability to move forward quickly with the power of quantum computing.

The Company’s strategic goals are as follows:

QUANTUM COMPUTING INC.

Notes to Financial Statements

(Unaudited)

The Company’s fiscal year end is December 31.

Basis of Presentation:

The accompanying Balance Sheet as of September 30, 2021, which was derived from audited financial statements, and the unaudited interim financial statements of the Company, has 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 September 30, 2021, and the cash flows and results of operations for the three and nine months then ended. Such adjustments consisted only of normal recurring items. The results of operations for the nine months ended September 30, 2021 are not necessarily indicative of the results for subsequent periods. Certain information and footnote disclosures normally included in financial statements prepared in accordance with generally accepted accounting principles have been condensed or omitted.

Accounting Changes

Except for the changes discussed below, Quantum has consistently applied the accounting policies to all periods presented in these unaudited financial statements. The Company has evaluated all recently implemented accounting standards and concluded that none currently apply to the Company.

Use of Estimates:

These financial statements have been prepared in accordance with generally accepted accounting principles in the United States of America. 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.

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.

QUANTUM COMPUTING INC.

Notes to Financial Statements

(Unaudited)

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.

Property and Equipment

Property and equipment are stated at cost or contributed value. Depreciation of furniture, software and equipment is calculated using the straight-line method over their estimated useful lives, and leasehold improvements are amortized on a straight-line basis over the shorter of their estimated useful lives or the lease term. The cost and related accumulated depreciation of equipment retired or sold are removed from the accounts and any differences between the undepreciated amount and the proceeds from the sale are recorded as a gain or loss on sale of equipment.

Net Loss Per Share:

Net loss per share is based on the weighted average number of common shares and common shares equivalents outstanding during the period.

QUANTUM COMPUTING INC.

Notes to Financial Statements

(Unaudited)

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.

At September 30, 2021, the Company had net operating loss carry forwards of approximately $4,185,540.

The Company experienced a change in control during the 2018, 2019 and 2020 calendar years and therefore no more than an insignificant portion of this net operating allowance will ever be used against future taxable income.

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. Subsequently, federal, state and local authorities 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 vaccines 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, and the Company has not recorded any reserves relating to potential COVID-19 financial impacts.

On March 27, 2020, the United States enacted the Coronavirus Aid, Relief, and Economic Security Act (the “CARES Act”), administered by the U.S. Small Business Administration (the “SBA”) as a response to the economic uncertainty resulting from COVID-19. Congress amended the CARES Act on December 27, 2020. The CARES Act established the Paycheck Protection Program (the “PPP”) to loan money to small businesses to enable them to continue to meet payroll obligations in the face of business interruptions and loss of revenue due to COVID-19 related restrictions. The CARES Act also includes modifications for net operating loss carryovers and carrybacks, limitations of business interest expense deductions, 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. As of September 30, 2021, the Company expects that the carryback of NOL’s will not have an impact on its current tax attributes.

The Company applied for a PPP loan in April 2020. On May 6, 2020, the Company executed an unsecured promissory note (the “Note”) with BB&T Bank to evidence a loan to the Company in the amount of $218,371 under the Paycheck Protection Program (the “PPP”) established under the CARES Act.

In accordance with the requirements of the CARES Act, the Company used the proceeds from the loan exclusively for qualified expenses under the PPP, including payroll costs and employee benefits. The Company applied for forgiveness of the entire PPP loan balance and in June 2021 the SBA informed the Company that the full balance of the PPP loan had been forgiven, along with accrued interest. Upon notification from the SBA that the PPP loan balance had been forgiven, the Company reclassified the loan balance to other income.

QUANTUM COMPUTING INC.

Notes to Financial Statements

(Unaudited)

Note 3 – 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. The Company has evaluated the recently implemented accounting standards and concluded that none currently apply to the Company.

Note 4 – Subscription Receivable

In 2018 the Company recorded a subscription receivable relating to a convertible promissory note from one of the Initial Investors (as defined below) in the amount of $100,000. During 2020, the Initial Investor converted the full $100,000 of his promissory note into 1,000,000 shares of common stock. The Company had no subscription receivable outstanding as of December 31, 2020.

Note 5 – Property and Equipment

The Company made Property and Equipment acquisitions of $8,306 during the Nine months ended September 30, 2021. The Company depreciates computer equipment over a period of five years.

Note 6 – Convertible Promissory Notes and Loans

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 were repaid by the Company prior to the December 31, 2020 maturity date.

In July 2020 the Company converted $100,000 principal amount of Convertible Promissory Notes convertible at $0.10 into 1,000,000 restricted shares of common stock per the terms of the Convertible Note subscription agreement the Company entered into in 2018 the accredited investor, currently a member of the Company’s Board of Directors.

In December 2020, two of the Company’s Initial Investors converted the remaining principal balance of their promissory notes, $159,000, into 1,590,000 shares of the Company’s common stock at $0.10 per share. In addition, one of the investors in the 2018 Convertible Note Offering converted the principal balance of his note plus accrued interest into 893,000 shares of the Company’s common stock.

QUANTUM COMPUTING INC.

Notes to Financial Statements

(Unaudited)

Auctus Securities Purchase Agreement

In October 2019 the Company entered into a Securities Purchase Agreement (the “Auctus 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, 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 Auctus Note, the “Auctus 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 Auctus 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”).

In connection with the Auctus 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 Auctus 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 Auctus Note following this conversion was $478,695.

QUANTUM COMPUTING INC.

Notes to Financial Statements

(Unaudited)

In February 2020 Auctus exercised its option to convert $138,998 of the principal of its 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 Auctus Note following this conversion was $339,698.

In February 2020, the Company entered into an agreement with Auctus 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 Auctus Note. Also in February 2020, Auctus exercised 167,000 warrants at $1.50 per share, resulting in total proceeds to the Company of $250,500.

On May 8, 2020 the Company repaid the outstanding principal balance of the Auctus Note, including accrued interest and prepayment penalty interest, for a total of $462,691.

On May 8, 2020, the Company entered into an agreement with Auctus 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 Auctus Warrants or the Auctus Note. In May 2020 Auctus exercised 50,000 warrants at $1.00 per share, resulting in total proceeds to the Company of $50,000. In June 2020, Auctus 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 “Oasis Issuance Date”) the Company entered into a Securities Purchase Agreement (the “Oasis 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: (i) a Convertible Promissory Note in the principal amount of $563,055.00 (the “Oasis Note”); and (ii) a common stock purchase warrant (the “Oasis Warrant” and together with the Oasis Note, the “Oasis Securities”) permitting Oasis to purchase up to 187,685 shares of the Company’s Common Stock, at an exercise price of $1.50 per share (the “Oasis Warrant Exercise Price”). The Company received gross proceeds of $500,000 on May 8, 2020.

The Oasis Note accrues interest at a rate of eight percent (8%) per annum and matures on the nine (9) months anniversary of the Oasis Issuance Date (the “Maturity Date”). In the event that the Company prepays the Oasis 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 Oasis Note contains customary events of default (each an “Event of Default”). If an Event of Default occurs, all outstanding obligations owing under the Oasis Note will become immediately due and payable in cash or Common Stock at Oasis’ election. Any outstanding obligations owing under the Oasis Note which are not paid when due shall bear interest at the rate of eighteen percent (18%) per annum.

The Oasis Note is convertible into shares of the Company’s Common Stock, subject to the adjustments described therein. The conversion price (the “Oasis Note Conversion Price”) per share shall be (i) $1.50 during the six month period immediately following the Oasis Issuance Date, and (ii) after the six month period immediately following the Oasis Issuance 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 Oasis Warrant is exercisable for a term of five-years from the date of issuance. The Oasis Warrant provides 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 Oasis Note, if the Company shall, at any time while the Oasis 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 Oasis Warrant Exercise Price (a “Dilutive Issuance”), than the Oasis Warrant Exercise Price shall be reduced to equal the Base Share Price (as defined in the Oasis Warrant) and the number of shares of Common Stock issuable under the Oasis Warrant shall be increased such that the aggregate exercise price payable under the Oasis 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 Oasis SPA, the Company issued 37,537 Inducement Shares (as defined in the Oasis SPA) to Oasis.

QUANTUM COMPUTING INC.

Notes to Financial Statements

(Unaudited)

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 had the discretion to deliver put notices to Oasis and Oasis was then 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 is 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. As of the date hereof, the Registration Statement is no longer effective and the Company is not utilizing 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.

In December 2020, Oasis converted the principal balance of its promissory note plus accrued interest into 596,869 shares of common stock. 

As of December 31, 2020, all of the Warrants held by Auctus and Oasis have been exercised, resulting in total proceeds to the Company of $1,458,500.

Paycheck Protection Program Loan

On May 6, 2020, the Company executed an unsecured promissory note (the “PPP Loan”) 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 used the proceeds from the PPP Loan exclusively for qualified expenses under the PPP, including payroll costs, mortgage interest, rent and utility costs. The Company applied for forgiveness of the entire PPP Loan balance, and in June 2021 the SBA informed the Company that the full balance of the PPP Loan had been forgiven, along with accrued interest. Upon notification from the SBA that the PPP Loan balance had been forgiven, the Company reclassified the PPP Loan balance to other income.

Note 7 – Capital Stock:

On July 13, 2021 the Company entered into a three-month agreement with Axis Partners, Inc., an investor relations firm, pursuant to which the firm will receive monthly payments of $20,000 and a grant of 15,000 shares of the Company’s common stock.

On July 14, 2021 the Company entered into a one year consulting agreement with a business development professional, pursuant to which the Company issued the consultant 86,113 shares of the Company’s common stock. These shares will vest at the rate of 5,000 shares per month over the term of the agreement.

Stock issuance pursuant to settlement agreement

In May 2021, the Company entered into settlement agreements with two former executives of Innovative Beverage Group Holdings, Inc. (IBGH), Mr. Peter Bianchi and Mr. Jan Bonner (collectively the “IBGH Executives”), pursuant to which the Company received a release from any and all claims or potential claims the IBGH Executives might have had against the Company, in exchange for facilitating the replacement of lost stock certificates in IBGH and the removal of any restrictions on transfer of the shares represented by said certificates.  The IBGH Executives each held the equivalent of 91,659 shares of stock in the Company, for a total of 183,318 shares.  In addition, the IBGH Executives agreed to a three week Leak Out agreement once the restrictions on their shares were removed. No new shares were issued as a result of the settlement agreements.

QUANTUM COMPUTING INC.

Notes to Financial Statements

(Unaudited)

Note 8 – 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.   All of the Initial Investors had converted their Convertible Promissory Notes into shares of the Company’s Common Stock as of December 31, 2020. 

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 9 – Employee Benefits:

The Company offers a health and welfare benefit plan to current full time employees that provides medical, dental, vision, life and disability benefits. The Company also offers a 401K retirement savings plan to all full time employees. There are no unpaid liabilities under the Company’s benefit plans, and the Company has no obligation to pay for post-retirement health and medical costs of retired employees.

Note 10 – Subsequent Events:

There are no other events of a subsequent nature that in management’s opinion are reportable.

Item 2. Management’s Discussion and Analysis of Financial Condition and Results of Operations,

Management’s discussion and analysis of results of operations and financial condition (“MD&A”) is a supplement to the accompanying condensed financial statements and provides additional information on Quantum Computing Inc.’s (“Quantum” or the “Company’) business, current developments, financial condition, cash flows and results of operations.

When we say “we,” “us,” “our,” “Company,” or “Quantum,” we mean Quantum Computing Inc.

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 filed Quantum Computing, Inc. (the “Company” “we”, “our”, and “us”) from time to time with the U.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 ended December 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 of the 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.

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.

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.

The US 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 the National Institute of Standards and Technology (NIST) and the National Aeronautics and Space Administration (NASA), to guide program activities. (Sec. 104) The President must establish a National 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 recent Department 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 the U.S. quantum industry. QED-C was established with support from the National 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 a Technology 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 to Deep 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 September 30, 2021 vs. September 30, 2020

Revenues

Revenues for the three 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 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.

Cost of Revenues

Cost of revenues for the three months ended September 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 ended September 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 ended September 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 ended September 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 ended September 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 September 30, 2021 vs. September 30, 2020

Revenues

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 and marketing efforts.

Cost of Revenues

Cost of revenues for the nine months ended September 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 ended September 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 nine months ended September 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 ended September 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 as Quantum Computing in February 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 of September 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, 2021, compared to December 31, 2020:

At September 30, 2021, we had working capital of $10,270,450 as compared to working capital of $14,543,888 at December 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 ended September 30, 2021 and 2020 was $4,863,392 and $8,684,386, respectively. The net loss for the nine months ended September 30, 2021 and 2020, was $12,278,422 and $14,134,102, respectively.

Net cash used in investing activities for the six months ended September 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 ended September 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.

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 of October 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 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 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.

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.

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 ended September 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.

Item 3. Quantitative and Qualitative Disclosures About Market Risk

We do not hold any derivative instruments and do not engage in any hedging activities.

Item 4. Controls and Procedures

(a) Evaluation of Disclosure Controls and Procedures

We maintain “disclosure controls and procedures,” as such term is defined in Rule 13a-15(e) under the Securities Exchange Act of 1934, as amended (the “Exchange Act”). In designing and evaluating our disclosure controls and procedures, our management recognized that disclosure controls and procedures, no matter how well conceived and operated, can provide only reasonable, not absolute, assurance that the objectives of disclosure controls and procedures are met. Additionally, in designing disclosure controls and procedures, our management necessarily was required to apply its judgment in evaluating the cost-benefit relationship of possible disclosure controls and procedures. The design of any disclosure controls and procedures also is based in part upon certain assumptions about the likelihood of future events, and there can be no assurance that any design will succeed in achieving its stated goals under all potential future conditions.

As of the end of the period covered by this Quarterly Report on Form 10-Q, we carried out an evaluation, under the supervision and with the participation of our management, including our Principal Executive Officer and our Principal Financial Officer, of the effectiveness of our disclosure controls and procedures as defined in Rule 13a-15(e) and 15d-15(e) of the Exchange Act.  Based on the controls evaluation, our Principal Executive Officer and Principal Financial Officer concluded that as of the date of their evaluation, our disclosure controls and procedures were not effective to provide reasonable assurance that (a) the information required to be disclosed by us in the reports that we file or submit under the Exchange Act is recorded, processed, summarized and reported within the time periods specified in the SEC’s rules and forms, and (b) such information is accumulated and communicated to our management, including our Chief Executive Officer and President and Chief Financial Officer, as appropriate, to allow timely decisions regarding required disclosure. Specifically, the Company does not have sufficient accounting staff to enable proper segregation of duties. The Company plans to hire additional administrative and accounting staff to address this deficiency in the near term.

(b) Changes in Internal Control over Financial Reporting

There were no changes in our internal control over financial reporting (as defined in Rule 13a-15(f) and Rule 15d-15(f) under the Exchange Act) during our most recent fiscal quarter that have materially affected, or are reasonably likely to materially affect, our internal control over financial reporting.

PART II – OTHER INFORMATION

Item 1. Legal Proceedings

We are not currently involved in any litigation that we believe could have a material adverse effect on our financial condition or results of operations. There is no action, suit, or proceeding by any court, public board, government agency, self-regulatory organization or body pending or, to the knowledge of the executive officers of our Company or our subsidiary, threatened against or affecting our Company, our common stock, our subsidiary or of our companies or our subsidiary’s officers or directors in their capacities as such, in which an adverse decision could have a material adverse effect.

Item 1A.  Risk Factors

We believe there are no changes that constitute material changes from the risk factors previously disclosed in our Annual Report on Form 10-K for the year ended December 31, 2020, filed with the SEC on March 18, 2021, other than the following:

We face risks related to Novel Coronavirus (COVID-19) which could significantly disrupt our research and development, operations, sales, and financial results.

Our business could be adversely impacted by the effects of the Novel Coronavirus (COVID-19). In addition to global macroeconomic effects, the Novel Coronavirus (COVID-19) outbreak and any other related adverse public health developments could cause disruption to our operations and sales activities. Our third-party distributors, and our customers have been and will be disrupted by worker absenteeism, quarantines and restrictions on employees’ ability to work, office and factory closures, disruptions to ports and other shipping infrastructure, border closures, or other travel or health-related restrictions which could adversely affect our business, operations and customer relationships. In addition, we have experienced and will experience disruptions to our business operations resulting from quarantines, self-isolations, or other movement and restrictions on the ability of our employees to perform their jobs that may impact our ability to develop, design, market and sell our products and services in a timely manner or meet required milestones or customer commitments.

Item 2. Unregistered Sales of Equity Securities and Use of Proceeds

On July 13, 2021 the Company entered into a three-month agreement with Axis Partners, Inc., an investor relations firm, pursuant to which the firm will receive monthly payments of $20,000 and a grant of 15,000 shares of the Company’s common stock.

On July 14, 2021 the Company entered into a one year consulting agreement with a business development professional, pursuant to which the Company issued the consultant 86,113 shares of the Company’s common stock. These shares will vest at the rate of 5,000 shares per month over the term of the agreement.

Item 3. Defaults upon Senior Securities

There has been no default in the payment of principal, interest, sinking or purchase fund installment, or any other material default, with respect to any indebtedness of the Company.

Item 4. Mine Safety Disclosures

Not Applicable.

Item 5. Other Information

There is no other information required to be disclosed under this item which has not been previously reported.

Item 6. Exhibits

SIGNATURES

Pursuant to the requirements of Section 13 or 15 (d) of the Securities Exchange Act of 1934, the registrant has duly caused this report on Form 10-Q to be signed on its behalf by the undersigned thereunto duly authorized.

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