Quarterly Report (10-q)

Date : 11/13/2019 @ 11:02AM
Source : Edgar (US Regulatory)
Stock : Quantum Computing Inc. (QUBT)
Quote : 2.45  0.0 (0.00%) @ 12:00AM

Quarterly Report (10-q)

 

 

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, 2019

 

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)

 

Delaware   82-4533053

(State or other jurisdiction 

of incorporation)

 

(IRS Employer

 Identification No.)

 

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:

 

Title of each class   Trading Symbol(s)   Name of each exchange on which registered
None   None   None

 

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:

 

Large accelerated filer  Accelerated filer 
Non-accelerated filer  Smaller Reporting Company 
Emerging growth company  ☐     

 

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 6, 2019, 2019, there were 7,362,046 shares outstanding of the registrant’s common stock. 

 

 

 

 

 

 

QUANTUM COMPUTING INC.

 

TABLE OF CONTENTS

 

    Page No.
PART I. FINANCIAL INFORMATION  
Item 1. Unaudited Balance Sheets as of September 30, 2019 and December 31, 2018 2
  Unaudited Statement of Operations for the Three and Nine Months Ended September 30, 2019 and 2018 3
  Unaudited Statement of Stockholders’ Deficit for the Nine Months Ended September 30, 2019 4
  Unaudited Statement of Cash Flows for the Nine Months Ended September 30, 2019 and 2018 6
  Notes to the Unaudited Financial Statements 7
     
Item 2. Management’s Discussion and Analysis of Financial Condition and Results of Operations 17
Item 3. Quantitative and Qualitative Disclosures About Market Risk 20
Item 4. Controls and Procedures 20
     
PART II.   OTHER INFORMATION  
     
Item 1. Legal Proceedings 21
Item 1A. Risk Factors 21
Item 2. Unregistered Sales of Equity Securities and Use of Proceeds 21
Item 3. Defaults Upon Senior Securities 21
Item 4. Mine Safety Disclosures 22
Item 5. Other Information 22
Item 6. Exhibits 22

 

i

 

 

PART I – FINANCIAL INFORMATION

 

Item 1.  Financial Statements 

  

QUANTUM COMPUTING INC.

(Formerly Innovative Beverage Group Holdings, Inc.)

Index to the Financial Statements

(Unaudited)

 

Description   Page
     
Unaudited Balance Sheets as of September 30, 2019 and December 31, 2018   2
Unaudited Statement of Operations for the Three  and Nine Months Ended September 30, 2019 and 2018   3
Unaudited Statement of Stockholders’ Deficit for the Nine Months Ended September 30, 2019   4
Unaudited Statement of Cash Flows for the Nine Months Ended September 30, 2019 and 2018   6
Notes to the Unaudited Financial Statements   7

 

1

 

 

QUANTUM COMPUTING INC.

(Formerly Innovative Beverage Group Holdings, Inc.)

Balance Sheets

(Unaudited)

 

    September 30,     December 31  
    2019     2018  
ASSETS            
             
Current assets            
Cash and cash equivalents   $ 308,397     $ 1,767,080  
Prepaid Expenses     7,377       23,179  
Lease right-of-use     -       -  
Fixed Assets (net of depreciation)     18,543       6,897  
Total assets   $ 334,317     $ 1,797,156  
                 
LIABILITIES AND STOCKHOLDERS’ EQUITY (DEFICIT)                
                 
Current liabilities                
Accounts payable   $ 161,893     $ 54,018  
Accrued Expenses     103,555       89,584  
Lease Liability     -       -  
Convertible promissory notes – related party     100,000       100,000  
Convertible promissory notes     1,009,000       3,070,500  
Total liabilities     1,374,448       3,314,102  
                 
Stockholders’ equity (deficit)                
Common stock, $0.0001 par value, 250,000,000 shares authorized; 7,362,046 and 4,724,161 shares issued and outstanding as of September 30, 2019 and December 31, 2018, respectively     736       472  
Additional paid-in capital     13,095,301       10,935,029  
APIC-Beneficial Conversion Feature in Equity     3,995,500       3,995,500  
APIC-Stock Based Compensation     4,246,794       4,031,920  
Subscription Receivable     (100,000 )     (100,000  
Accumulated deficit     (22,278,462 )     (20,379,867 )
Total stockholders’ equity (deficit)     (1,040,131 )     (1,516,946 )
Total liabilities and stockholders’ equity (deficit)   $ 334,317     $ 1,797,156  

 

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

  

2

 

 

QUANTUM COMPUTING INC.

(Formerly Innovative Beverage Group Holdings, Inc.)

Statement of Operations

(Unaudited)

 

    Nine Months Ended     Three Months Ended  
    September 30,     September 30,  
    2019     2018     2019     2018  
Total revenue   $ -     $ -     $ -     $ -  
Cost of revenue     -       -       -       -  
Gross profit                     -       -  
Salaries     352,380       523,456       120,653       242,133  
Consulting     254,052       233,232       80,090       104,113  
Research & Development     553,376       155,421       256,928       77,700  
Stock Based Compensation     214,884       24,192,000       (1,343,866 )     24,192,000  
Selling General & Administrative -Other     407,269       323,994       102,036       103,099  
Operating expenses     1,781,961       25,418,103       (784,159 )     24,719,045  
Loss from Operations     (1,781,961 )     (25,418,103 )     784,159       (24,719,045 )
Interest Income – Money Market     8,522       -       1,479       -  
Interest Expense – Promissory Notes     (125,157 )     (30,684 )     (15,333 )     (30,684 )
Interest Expense - Beneficial Conversion Feature     -       (3,481,000 )     -       (2,256,000 )
Asset Impairment Charge     -       -       -       -  
Other income (expense)     (116,635 )     (3,511,684 )     (13,854 )     (2,286,684 )
                                 
Federal income tax expense     -       -       -       -  
                                 
Net loss   $ (1,898,596 )   $ (28,929,787 )   $ 770,305     $ (27,005,729 )
                                 
Weighted average shares - basic and diluted     7,362,046       5,918,862       7,362,046       5,918,862  
Loss per share - basic and diluted   $ (0.26 )   $ (4.89 )   $ 0.10     $ (4.56 )

  

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

 

3

 

 

QUANTUM COMPUTING INC.

(Formerly Innovative Beverage Group Holdings, Inc.)

Statement of Stockholders’ Deficit

For the Nine Months Ended September 30, 2019

(Unaudited)

 

    Common Stock     Additional Paid     Accumulated        
    Shares     Amount     in Capital     Deficit     Total  
                               
BALANCES, December 31, 2018     4,724,161     $ 472     $ 18,862,449     $ (20,379,867 )   $ (1,516,946 )
                                         
Issuance of shares for cash     -       -       -       -       -  
Beneficial Conversion Feature     -       -       -       -       -  
Subscription Receivable     -       -       -       -       -  
Stock based compensation     25,000       3       71,247       -       71,250  
Net loss     -       -       -       (635,673 )     (635,673 )
BALANCES, March 31, 2019     4,749,161     $ 475     $ 18,933,696     $ (21,015,540 )   $ (2,081,369  
                                         
Issuance of shares for cash     200,000       20       19,980       -       20,000  
Beneficial Conversion Feature     -       -       -       -       -  
Subscription Receivable     -       -       -       -       -  
Stock based compensation     350,000       35       1,487,465       -       1,487,500  
Net loss     -       -       -       (2,033,227 )     (2,033,227 )
BALANCES, June 30, 2019     5,299,161     $ 530     $ 20,441,142     $ (23,048,767 )   $ (2,607,096 )
                                         
Issuance of shares for cash     2,239,525       233       2,140,293       -       2,140,526  
Beneficial Conversion Feature     -       -       -       -       -  
Subscription Receivable     -       -       -       -       -  
Stock based compensation     (266,640 )     (27 )     (1,343,839 )     -       (1,343,866 )
Net loss     -       -       -       770,305       770,305  
BALANCES, September 30, 2019     7,362,046     $ 736     $ 21,237,595     $ (22,278,462 )   $ (1,040,131 )

  

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

 

4

 

 

QUANTUM COMPUTING INC.

(Formerly Innovative Beverage Group Holdings, Inc.)

Statement of Stockholders’ Deficit

For the Nine Months Ended September 30, 2018

(Unaudited)

 

    Common Stock     Additional Paid     Accumulated        
    Shares     Amount     in Capital     Deficit     Total  
                               
BALANCES, December 31, 2017   $ 943,735     $ 94     $ 9,871,180     $ (9,872,774 )   $ (1,500 )
                                         
Issuance of shares for cash     50,000       5       19,995       -       20,000  
Beneficial Conversion Feature     -       -       750,000       -       750,000  
Subscription Receivable     -       -       (100,000 )     -       (100,000 )
Stock based compensation     -       -       -       -       -  
Net loss     -       -       -       (1,048,848 )     (1,048,848 )
BALANCES, March 31, 2018     993,735     $ 99     $ 10,541,175     $ (10,921,622 )   $ (380,348 )
                                         
Issuance of shares for cash     100,000       10       39,990       -       40,000  
Beneficial Conversion Feature     -       -       475,000       -       475,000  
Subscription Receivable     -       -       -       -       -  
Stock based compensation     -       -       -       -       -  
Net loss     -       -       -       (875,210 )     (875,210 )
BALANCES, June 30, 2018     1,093,735     $ 109     $ 11,056,165     $ (11,796,832 )   $ (740,558 )
                                         
Issuance of shares for cash     25,127       3       57,517       -       57,520  
Beneficial Conversion Feature     -       -       2,256,000       -       2,256,000  
Subscription Receivable     -       -       -       -       -  
Stock based compensation     4,800,000       480       24,144,000       -       24,144,480  
Net loss     -       -       -       (27,005,729 )     (27,005,729 )
BALANCES, September 30, 2018     5,918,862     $ 592     $ 37,513,682     $ (38,802,561 )   $ (1,288,287 )

 

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

 

5

 

 

QUANTUM COMPUTING INC.

(Formerly Innovative Beverage Group Holdings, Inc.)

Statement of Cash Flows

For the Nine Months Ended September 30, 2019 and 2018

(Unaudited)

 

    Nine Months Ended  
    September 30,  
    2019     2018  
CASH FLOWS FROM OPERATING ACTIVITIES            
Net loss   $ (1,898,596 )   $ (28,929,787 )
Adjustments to reconcile net income (loss) to net cash                
Prepaid Expenses     15,804       (1,692 )
Loan from Officer     -       100  
Depreciation     1,431       11,167  
Accrued Expenses     13,971       73,021  
Stock Based Compensation     214,874       24,144,000  
Accounts payable     107,875       70,376  
Beneficial Conversion Feature     -       3,481,000  
CASH USED IN OPERATING ACTIVITIES     (1,544,642 )     (1,151,815 )
                 
CASH FLOWS FROM INVESTING ACTIVITIES                
Fixed Assets – Computer Software and Equipment     (13,077 )     (670,000 )
CASH USED IN INVESTING ACTIVITIES     (13,077 )     (670,000 )
                 
CASH FLOWS FROM FINANCING ACTIVITIES                
Issuance (repayment/conversion) of Convertible Promissory Notes     (2,061,500 )     3,481,000  
Proceeds from stock issuance     2,160,536       118,000  
Note Receivable     -       (100,000 )
CASH PROVIDED BY FINANCING ACTIVITIES     99,036       3,499,000  
                 
Net increase (decrease) in cash     (1,458,683 )     1,677,185  
                 
Cash, beginning of period     1,767,080       -  
                 
Cash, end of period   $ 308,397     $ 1,677,185  
                 
SUPPLEMENTAL DISCLOSURES                
Cash paid for interest   $ -     $ -  
Cash paid for income taxes   $ -     $ -  
NON-CASH INVESTING ACTIVITES                
Subscription receivable created from issuance of note payable   $ -     $ 100,000  
                 
NON-CASH FINANCING ACTIVITES                
Note payable issued in exchange for a Subscription receivable     --       100,000  
Common stock issued for compensation     (214,874 )     24,144,000  
Convertible Promissory Notes issued as Compensation – related party   $ -     $ 175,000  
Conversion of Convertible Promissory Notes to Common Stock     (2,035,500 )        

 

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

 

6

 

 

QUANTUM COMPUTING INC.

(Formerly Innovative Beverage Group Holdings, Inc.)

Notes to Financial Statements

September 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. (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. to better reflect its business operations at the time which was beverage distribution and product development. In 2013, Innovative Beverage Group Holdings, Inc. ceased operations. On May 22, 2017, one of Innovative Beverage Group Holdings, Inc.’s. shareholders, a North Carolina resident (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.”   The 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.   Plaintiff 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. 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, Inc. redomiciled to North Carolina.

 

On January 22, 2018, while the Company was in receivership, 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

 

The Company’s business focuses on quantum computing software development. The Company intends to develop heterogeneous software that can run on the platforms that are under development by the quantum computer hardware industry. The Company’s initial focus will be on the financial services sector. Other potential markets for quantum computing include cybersecurity, artificial intelligence (“AI”), machine learning, genetics and pharmaceuticals. The Company intends to be a leading provider of software that can run on multiple quantum platforms.

 

Initially, the Company is focused on two main development efforts. First, we plan to focus on the development of quantitative financial related products such as financial portfolio optimization. The financial services industry has used quantitative financial software applications for several decades with some success. However, those existing products are limited in their performance due to the lack of computing power to solve these classes of optimization problems, which are known as “NP Complete Problems”. NP Complete Problems are a class of mathematical problems that can be solved in polynomial increments of time using a non-deterministic method. These NP Complete Problems require complex calculations, which cannot currently be performed in reasonable amounts of time using conventional, binary computer systems, with the exception of simple cases. These problems are intractable because of the inability of bit-based systems to handle complex non-deterministic problems. The recent developments in quantum annealing and other quantum hardware suggests that these problems will soon be solvable using these new technologies. The Company’s goal is to develop and implement quantum related algorithms to provide solutions to these NP Complete Problems in the area of financial optimization. Optimization algorithms are ideally suited to run on a class of quantum computers, known as “annealers,” that are currently becoming made available in the market by various manufacturers.

 

7

 

 

QUANTUM COMPUTING INC.

(Formerly Innovative Beverage Group Holdings, Inc.)

Notes to Financial Statements

September 30, 2019

(Unaudited)

 

The Company’s secondary market focus will be the field of cybersecurity, specifically encryption and decryption algorithms. Current encryption algorithms, such as DES (widely used in banking transactions), use codes based on the product of two very large prime numbers. To decrypt the message requires finding the factors of a very large number, which can be done with current computers, but takes unacceptably long amounts of time. The factorization process can be performed much more rapidly using algorithms running on a quantum computer. The other aspect of cybersecurity that we will work on is development of encryption algorithms that are either “quantum resistant”, i.e. difficult for quantum computer to crack, or “quantum based”, i.e., that use principals of quantum physics to create a quantum based code that is difficult for both conventional and quantum computers to break. Information security has a number of components, of which encryption is an important tool. Encryption is vital to e-commerce, banking, cellular communication, and protecting email, websites and online identities because unprotected data can be stolen and misused.

 

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. QCI 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.

 

8

 

 

QUANTUM COMPUTING INC.

(Formerly Innovative Beverage Group Holdings, Inc.)

Notes to Financial Statements

September 30, 2019

(Unaudited)

 

Basis of Presentation:

 

The accompanying Balance Sheet as of September 30, 2019, 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 September 30, 2019, and the cash flows and results of operations for the nine months then ended. Such adjustments consisted only of normal recurring items. The results of operations for the nine months ended September 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 2018 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.

 

Adoption of 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 required 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 adopted ASC 842 using a modified retrospective approach for all leases existing at January 1, 2019. The adoption of ASC 842 had a minor impact on our balance sheet. The most significant impact was the recognition of the operating lease right-of-use assets and the liability for operating leases. The accounting for finance leases (capital leases) was substantially unchanged. Accordingly, upon adoption, leases that were classified as operating leases under ASC 840 were classified as operating leases under ASC 842, and we recorded an adjustment of $2,491 to operating lease right-of-use asset and the related lease liability. The lease liability is based on the present value of the remaining minimum lease payments, determined under ASC 840, discounted using our incremental borrowing rate at the effective date of January 1, 2019. As permitted under ASC 842, we elected several practical expedients that permit us to not reassess (1) whether a contract is or contains a lease, (2) the classification of existing leases, and (3) whether previously capitalized costs continue to qualify as initial indirect costs. The application of the practical expedients did not have a significant impact on the measurement of the operating lease liability. As of December 31, 2018 and September 30, 2019 we had no finance leases.

 

The impact of the adoption of ASC 842 on the balance sheet at December 31, 2018 was:

 

    As Reported December 31,
2018
    Adoption of ASC 842 Increase (Decrease)     Revised Balance January 1,
2019
 
Other Current Assets     1,767,080               1,767,080  
Operating Lease right-of-use assets     -       2,491       2,491  
Total assets     1,797,156       2,491       1,799,647  
Other current liabilities     3,314,102               3,314,102  
Lease Liability-current     -       2,491       2,491  
Long-term Liabilities     -       -       -  
Total Liabilities and equity     1,797,156       2,491       1,799,647  

 

We lease substantially all our office space used to conduct our business. We adopted ASC 842 effective January 1, 2019. 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.

 

9

 

 

QUANTUM COMPUTING INC.

(Formerly Innovative Beverage Group Holdings, Inc.)

Notes to Financial Statements

September 30, 2019

(Unaudited)

 

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, 2018 and September 30, 2019 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 on a month-to-month basis while we evaluate alternatives for expansion facilities. Accordingly, no right-or-use asset or lease liability are currently recognized.

 

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.

 

Adoption of ASU 2018-02

 

On January 1, 2019, we adopted ASU 2018-02, Income Statement – Reporting Comprehensive Income: Reclassification of Certain Tax effects from Accumulated Other Comprehensive Income (“ASU 2018-02”), which requires the reclassification from accumulated other comprehensive income to retained earnings for the stranded tax effects arising from the reduction of the U.S. federal statutory income tax rate from 35% to 21%, effective January 1, 2018. ASU 2018-02 modifies ASC 740, Income Taxes (“ASC 740), which requires businesses to adjust the value of deferred tax assets and liabilities upon a change in the tax law. ASC 740 specifies that changes in tax assets and liabilities related to the tax rate change must be presented in earnings, even when the corresponding deferred taxes relate to items initially recognized in accumulated other comprehensive income such as pension adjustments, gains or losses on cash flow hedges, foreign currency translation adjustments and unrealized gains or losses on available-for-sale securities. The Company had no deferred tax assets or liabilities as of December 31, 2017, accordingly there were no stranded tax effects to reclassify and the adoption of ASU 2018-02 had no impact on the Company’s financial statements.

 

 Adoption of ASU 2018-07

 

On January 1, 2019, we adopted ASU 2018-07, Improvements to Nonemployee Share-Based Payment Accounting (“ASU 2018-07”), which aligns the accounting for share-based payments to nonemployees for goods and services with the requirements for accounting for share-based payments to employees under ASC 718 Compensation - Stock Compensation. ASU 2018-07 provides that nonemployee share-based payments are measured at the grant date at the fair value of the equity instruments to be provided to the nonemployee when the goods or services have been delivered. Prior to ASU 2018-07 nonemployee share-based payments were measured at the fair value of the consideration received or the fair value of the equity instruments issued, whichever could be more reliably measured.

 

We adopted ASU 2018-07 using a modified retrospective approach with a cumulative effect adjustment to retained earnings as of the implementation date for all nonemployee share-based payments that (1) have not been settled as of the adoption date and (2) nonemployee share-based payments for which a measurement date has not been established. We made no adjustment to retained earnings as a result of adopting ASU 2018-07.

 

10

 

 

QUANTUM COMPUTING INC.

(Formerly Innovative Beverage Group Holdings, Inc.)

Notes to Financial Statements

September 30, 2019

(Unaudited)

 

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.

 

11

 

 

QUANTUM COMPUTING INC.

(Formerly Innovative Beverage Group Holdings, Inc.)

Notes to Financial Statements

September 30, 2019

(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.

 

    September 30,  
    2019     2018  
Net operating loss carry-forwards   $ 1,088,955     $ 310,755  
Valuation allowance     (1,088,955 )     (310,755 )
Net deferred tax assets   $ -     $ -  

 

At September 30, 2019, the Company had net operating loss carry forwards of approximately $1,088,955.

 

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.

 

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 three-month periods ended September 30, 2019 and 2018, and has an accumulated deficit of $22,278,462 and $38,802,561 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.

 

12

 

 

QUANTUM COMPUTING INC.

(Formerly Innovative Beverage Group Holdings, Inc.)

Notes to Financial Statements

September 30, 2019

(Unaudited)

 

Note 5 – Subscription Receivable

 

The Company assumed a promissory note from one of its initial investors made to Convergent Risk Group, LLC, a private entity owned by our Chief Executive Officer, Robert Liscouski, in the amount of $100,000, which is payable on or before December 31, 2019. The promissory note was issued in payment for another promissory note from Convergent and issued in favor of the initial investor, which has also been assumed by the Company in exchange for a convertible promissory note issued by the Company to the initial investor in the amount of $100,000, convertible to Company common shares at a conversion price of $0.10 per share.. If the promissory note is paid in full on or before December 31, 2019, the Company’s Convertible Promissory Note will convert and shares will be issued. If the promissory note is not paid in full on or before December 31, 2019, the Company’s Convertible Promissory Note held by this investor will be cancelled, and no shares will be issued.

 

Note 6 – Property and Equipment

 

    September 30,     December 31,  
Classification   2019     2018  
Hardware & Equipment   $ 20,091     $ 7,014  
Software     0       0  
Total cost of property and equipment     20,091       7,014  
Accumulated depreciation     1,548       117  
Property and equipment, net   $ 18,543     $ 6,897  

 

The Company made Property and Equipment acquisitions of $13,077 during the nine months ended September 30, 2019. The Company depreciates computer equipment over a period of five years.

 

Note 7 – Convertible Promissory Notes

 

In March 2018 the Board authorized the Company to issue non-interest bearing convertible promissory notes (the “March Notes”) at a conversion price of $0.10 per share to the Initial Investors and others. The Company issued $500,000 of these convertible notes, for proceeds of $225,000 in cash.

 

On May 24, 2018 the Board authorized a private placement of convertible promissory notes (the “May Offering Notes” together with the March Notes, the “Notes”) in the aggregate amount of 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 twelve months from the issuance date (the “Maturity Date”).  In connection with the Convertible Note Offering, the Company received funds of $3,495,500. The Board terminated the Convertible Note Offering in October, 2018.

 

In total, the Company has issued Notes in the principal aggregate amount of $3,995,500, for which the Company has received a total of $3,720,500 in proceeds.

 

The 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 Note investor. The accrued interest on that 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.

  

Note 8 – Capital Stock:

 

On March 1, 2018 the board of directors (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 those certain Subscription Agreements. On September 5, 2018 the Board formally concluded the Initial Raise and ceased accepting investments.

 

13

 

 

QUANTUM COMPUTING INC.

(Formerly Innovative Beverage Group Holdings, Inc.)

Notes to Financial Statements

September 30, 2019

(Unaudited)

 

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, 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, 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 an aggregate principal amount of $725,000 of 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 a non-dilution covenant contained in a 2017 North Carolina court order. These 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 a non-dilution covenant contained in a 2017 North Carolina court order. The shares were issued under Section 3(a)(10) of the Securities Act.

 

14

 

 

QUANTUM COMPUTING INC.

(Formerly Innovative Beverage Group Holdings, Inc.)

Notes to Financial Statements

September 30, 2019

(Unaudited)

 

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 $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.

 

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 December 31, 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.

 

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.

 

15

 

 

QUANTUM COMPUTING INC.

(Formerly Innovative Beverage Group Holdings, Inc.)

Notes to Financial Statements

September 30, 2019

(Unaudited)

 

Note 11 – Subsequent Events:

 

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”).

 

In connection with the SPA, the Company entered into a Registration Rights Agreement (the “RRA”) pursuant to which it shall (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 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.

  

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

 

16

 

 

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.

 

Please see our Annual Form 10-K and Audited Financial Statements filed with SEC.GOV for the fiscal year ended December 31, 2018 for a complete description of our business and accounting practices.

 

Overview

 

At the present time, we are a development stage company with limited operations.  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 is assembling a team of experts in super computing technology and quantum mathematics, which will focus on the design and development of several quantum software applications targeting solutions to non-deterministic polynomial applications. The Company’s development team has initially focused on addressing computational problems in the financial services and computer security (cyber) market segments.  The Company’s development team includes world class mathematicians, physicists, and software developers. 

 

Critical Accounting Policies

 

Our significant accounting policies are summarized in Note 1 to our audited financial statements for the years ended December 31, 2018. 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.

 

Results of Operations

 

Three Months Ended September 30, 2019 vs. September 30,2018

 

Revenues

 

   

For the Three Months Ended

September 30, 2019

   

For the Three Months Ended

September 30, 2018

       
(In thousands)   Amount     Mix     Amount     Mix     Change  
                               
Products     0       0 %     0       0 %     0 %
Services     0       0 %     0       0 %     0 %
Total   $ 0       100.0 %   $ 0       100.0 %     0 %

 

Revenues for the three months ended September 30, 2019 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 completed the development and testing of any products for sale, or sold any products or services to any customers.

 

Cost of Revenues

 

Cost of revenues for the three months ended September 30, 2019 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 commenced marketing and selling products or services.

 

Gross Margin

 

Gross margin for the three months ended September 30, 2019 was $0 as compared with $0 for the comparable prior year period. There was no gross margin because the Company has not yet commenced marketing and selling products or services.

 

Operating Expenses

 

Operating expenses for the three months ended September 30, 2019 were ($784,159) as compared with $24,719,045 for the comparable prior year period, a decrease of $25,503,204. The decrease in operating expenses is due to a $25,535,866 decrease in stock based compensation expense, a $121,480 decrease in salaries and wages, a $24,023 decrease in consulting expenses, an $179,228 increase in research and development expenses a $12,784 decrease in legal and audit fees, and a $11,721 increase in other SG&A expenses compared to the comparable prior year period.

 

17

 

 

Net Income (Loss)

 

Our net income for the three months ended September 30, 2019 was $770,305 as compared with a net loss of $27,005,729 for the comparable prior year period, an increase of $27,776,034. The increase in net income is primarily due to a $25,535,866 decrease in stock based compensation expense, and a decrease of $2,981,000 in beneficial conversion feature expense that was incurred in connection with the offering of Convertible Promissory Notes in 2018 and the reversal of $1,343,866 of stock based compensation expense in the current period relating to the partial surrender of an employee stock grant made in 2018 and the implementation of a clawback provision in the employee stock grant, compared to the comparable prior year period.

 

Nine Months Ended September 30, 2019 vs. September 30, 2018

 

Revenues

   

For the Nine Months Ended

September 30, 2019

   

For the Nine Months Ended

September 30, 2018

       
(In thousands)   Amount     Mix     Amount     Mix     Change  
                               
Products     0       0 %     0       0 %     0 %
Services     0       0 %     0       0 %     0 %
Total   $ 0       100.0 %   $ 0       100.0 %     0 %

 

Revenues for the nine months ended September 30, 2019 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 completed the development and testing of any products for sale, or offered services to any customers.

 

Cost of Revenues

 

Cost of revenues for the nine months ended September 30, 2019 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 commenced marketing and selling products or services.

 

Gross Margin

 

Gross margin for the nine months ended September 30, 2019 was $0 as compared with $0 for the comparable prior year period. There was no gross margin because the Company has not yet commenced marketing and selling products or services.

 

Operating Expenses

 

Operating expenses for the nine months ended September 30, 2019 were $1,781,961 as compared with $25,418,103 for the comparable prior year period, a decrease of $23,636,142. The decrease in operating expenses is due to a $23,977,116 decrease in stock based compensation expenses, a $397,955 increase in research and development expenses, a $20,820 increase in consulting fees, a $96,786 increase in legal and audit fees compared to the comparable prior year period, and a $13,511 decrease in SG&A expenses compared to the comparable prior year period.

 

Net Loss

 

Our net loss for the nine months ended September 30, 2019 was $1,898,596 as compared with a net loss of $28,929,787 for the comparable prior year period, a decrease of $27,031,192. The decrease in net loss is primarily due to the decrease in operating expenses recorded in the current period compared to the comparable prior year period, as noted above, and the increase in accrued interest expense on the outstanding Convertible Promissory Notes of $94,473 in the current period compared with the comparable prior year period, which was offset by a decrease of $3,481,000 in beneficial conversion feature expense that was incurred in connection with the offering of Convertible Promissory Notes in 2018.

 

18

 

 

Liquidity and Capital Resources

 

Since commencing operations as Quantum Computing in February 2018, the Company has raised $75,000 through private placement of equity and $3,969,500 through private placements of Convertible Promissory Notes for a total of $4,544,500 in new investment. The Company has no bank loans or lines of credit, and no long term debt obligations. As of November 6, 2019 the Company had cash and equivalents of $519,216 on hand.

 

The following table summarizes total current assets, liabilities and working capital at September 30, 2019, compared to December 31, 2018:

 

    September 30,
2019
    December 31,
2018
    Increase/
(Decrease)
 
Current Assets   $ 315,774     $ 1,790,259     $ (1,474,485 )
Current Liabilities   $ 265,448     $ 143,602     $ 121,846  
Working Capital (Deficit)   $ 50,326     $ 1,646,657     $ (1,596,331 )

 

At September 30, 2019, we had working capital of $50,326 as compared to working capital of $1,646,657 at December 31, 2018, a decrease of $1,596,331. The change in working capital is primarily attributable to the use of cash in operations of the Company, including product development, sales and general and administrative expenses.

 

Net Cash

 

Net cash used in operating activities for the three months ended September 30, 2019 and 2018 was $610,668 and $492,614, respectively. The net loss for the nine months ended June 30, 2019 and 2018, was $(1,898,596) and $(28,929,787), respectively. 

  

Going Concern Analysis

 

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 three-month periods ended September 30, 2019 and 2018, and has an accumulated deficit of $22,278,462 and $38,802,561 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.

  

Critical Accounting Policies

 

Our significant accounting policies are summarized in Note 1 to our audited financial statements for the years ended December 31, 2018. 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.

 

Off Balance Sheet Arrangements

 

During the nine months ended September 30, 2019 or for fiscal 2019, 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.

 

19

 

 

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

 

(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.

 

20

 

 

PART II – OTHER INFORMATION

 

Item 1. Legal Proceedings

 

Other than as described below, there is no action, suit, proceeding, inquiry or investigation before or 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 any of our subsidiaries, threatened against or affecting our Company, our common stock, any of our subsidiaries or of our Company’s or our Company’s subsidiaries’ officers or directors in their capacities as such, in which an adverse decision could have a material adverse effect.

 

On March 13, 2019, Quantum Computing, Inc. (“Quantum”) filed a Complaint against REMTCS, Inc. (“REMTCS”), Richard Malinowski (“Malinowski”) and Thomas Kelly (“Kelly”).  REMTCS promotes itself as an expert in cyber-security.  Malinowski is the Founder and President of REMTCS.  Kelly is the General Manager and Head of Marketing and Communications of REMTCS.  On or about February 15, 2018, Quantum and Malinowski orally agreed that Quantum would employ Malinowski as Quantum’s Chief Technical and Operations Officer.  On the same day, Quantum and Kelly orally agreed that Kelly would provide financial and program management services in support of Malinowski and Quantum.  On or about March 1, 2018, Quantum and Kelly executed a written consulting agreement memorializing their prior oral agreement.  On or about July 23, 2018, Quantum and Malinowski executed a written employment contract memorializing their prior oral agreement.  On or about April 7, 2018, REMTCS – through Malinowski and Kelly – provided Quantum with a Proposal for the construction, manufacture, development and implementation of a cyber security system known as the PASS System.  Quantum accepted this proposal and thereby entered into a contract pertaining to the delivery of a cyber-security system.

 

The Complaint filed by Quantum includes causes of action for breach of contract, promissory estoppel and unjust enrichment pertaining to REMTCS’s failure to deliver a functioning cyber-security system and related failure to abide the terms of a settlement reached between Quantum and REMTCS.  The Complaint additionally includes causes of action of breach of contract and breach of fiduciary duty pertaining to Malinowski’s breach of his employment contract and of his fiduciary obligations as Quantum’s Chief Technical and Operations Officer.  The Complaint finally alleges that Kelly breached the consulting agreement entered into by and between Quantum and Kelly.

 

On May 30, 2019, Quantum filed a motion to enforce the above-referenced settlement agreement.  On or about July 26, 2019, the Court denied the motion, without prejudice, pending additional discovery.

 

The parties have scheduled a settlement conference to include all parties as well as a representative of REMTCS’s insurance carrier.  That conference is scheduled to take place in November 2019.

 

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/A for the year ended December 31, 2018, filed with the SEC on June 7, 2019. 

 

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

 

Other than described below, there were no unregistered sales of equity securities that were not otherwise disclosed in a current report on Form 8-K.

 

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.

 

Except where noted, all the securities discussed in this Part II, Item 2 were issued in reliance on the exemption under Section 4(a)(2) of the Securities Act.

 

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.

 

21

 

 

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

 

        Incorporated by    
Exhibit       Reference   Filed or Furnished
Number   Exhibit Description   Form     Exhibit   Filing Date   Herewith
                     
31.1   Certification of Chief Executive Officer pursuant to Rule 13a-14(a) or Rule 15d-14(a) of the Securities Exchange Act of 1934, as amended.               X
31.2   Certification of Chief Financial Officer pursuant to Rule 13a-14(a) or Rule 15d-14(a) of the Securities Exchange Act of 1934, as amended.               X
32.1   Certification of Chief Executive Officer pursuant to 18 U.S.C. 1350.               X
32.2   Certification of Chief Financial Officer pursuant to 18 U.S.C. 1350.               X
101.INS   XBRL Instance Document               X
101.SCH   XBRL Taxonomy Extension Schema Linkbase Document.               X
101.CAL   XBRL Taxonomy Calculation Linkbase Document.               X
101.DEF   XBRL Taxonomy Extension Definition Linkbase Document.               X
101.LAB   XBRL Taxonomy Label Linkbase Document.               X
101.PRE   XBRL Taxonomy Presentation Linkbase Document.               X

  

** Indicates a management contract or compensatory plan or arrangement.

  

22

 

 

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.

 

  QUANTUM COMPUTING INC.
     
Dated: November 12, 2019 By: /s/ Robert Liscouski
    Robert Liscouski
    Principal Executive Officer
     
  By: /s/ Christopher Roberts
    Christopher Roberts
    Principal Financial Officer and
Principal Accounting Officer

 

 

23

 

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