Notes to Consolidated Financial Statements
March 31, 2023
Note 1 – Nature of the Organization and Business
Corporate History
Quantum Computing, Inc. (“Quantum”
or the “Company”) was formed in the State of Nevada on July 25, 2001, under its prior name, Ticketcart, Inc. The Company redomiciled
to Delaware on February 22, 2018 and changed its name to Quantum Computing Inc. Effective July 20, 2018, the trading symbol for the Company’s
common stock, par value $0.0001, on the OTC Market changed from "IBGH” to “QUBT”. On July 15, 2021 the Company
uplisted to The NASDAQ Stock Market. On June 16, 2022, the Company merged with QPhoton, Inc., a developer of quantum photonic systems
and related technologies and applications.
Nature of Business
The Company is a developer of full stack quantum
computing systems, including hardware platforms and 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 software
solution, Qatalyst, enables subject matter experts (SMEs) to run existing software on quantum processing units without the need for specialized
programming with SDKs. As a result of the merger with QPhoton, Inc. in June 2022, the Company is now able to offer photonic quantum computing
systems and related services.
Liquidity
On October 28, 2022 the Company filed a shelf
registration statement on Form S-3 under the Securities Act of 1933, as amended (the “Securities Act”), which was declared
effective on November 8, 2022 (the “2022 shelf”). Under the 2022 Shelf at the time of effectiveness, the Company had the ability
to raise up to $100 million by selling common stock, preferred stock, debt securities, warrants and units. On December 5, 2022, the Company
entered into an At the Market Issuance Sales Agreement (the “ATM Agreement”) with Ascendiant Capital Markets, LLC (“Ascendiant”)
relating to the sale of its common stock, and incorporated the ATM Agreement into the 2022 Shelf by amendment that was declared effective
January 10, 2023.
Under the terms of the ATM Agreement, the Company
may, but is not obligated to, offer and sell, from time to time, shares of common stock having an aggregate offering price of up to $25
million through Ascendiant. Sales of common stock, if any, will be made by any method permitted that is deemed an ”at the market
offering” as defined in Rule 415 under the Securities Act. The Company intends to use any net proceeds from the sale of securities
for our operations and for other general corporate purposes, including, but not limited to, capital expenditures, general working capital,
and possible future acquisitions. There were 3,021,632 shares of common stock sold under the ATM Agreement during the three months ended
March 31, 2023 and no shares of common stock sold under the ATM Agreement during the three months ended March 31, 2022. As of March 31,
2023, the Company has utilized $6.6 million of the 2022 Shelf. The Company has approximately $93.4 million available under the 2022 Shelf
and $18.4 million available under the 2022 Shelf as of March 31, 2023.
QUANTUM COMPUTING INC.
Notes to Consolidated Financial Statements
March 31, 2023
Note 2 – Significant Accounting Policies:
Basis of Presentation and Principles of Consolidation:
The Company prepares its consolidated financial
statements in conformity with accounting principles generally accepted in the United States of America (“U.S. GAAP”) as determined
by the Financial Accounting Standards Board (“FASB”) Accounting Standards Codification (“ASC”), including ASC
810, Consolidation. The consolidated financial statements include the accounts of the Company and its controlled subsidiaries.
All intercompany transactions and balances have been eliminated in consolidation.
The Company’s fiscal year end is December 31.
The accompanying financial statements have been
prepared in conformity with U.S. GAAP, which contemplate continuation of the Company as a going concern for a period of one year from
the issuance of these financial statements. For the quarter ended March 31, 2023, the Company had $120,530 in revenues, a net loss
of $8,506,139 and had net cash used in operations of $4,716,301. Additionally, as of March 31, 2023, the Company had a working capital
deficit of $5,477,258 and an accumulated deficit of $128,493,920. It is management’s opinion that these conditions raise substantial
doubt about the Company’s ability to continue as a going concern for a period of twelve months from the date of these unaudited
financial statements. The financial statements do not include any adjustments to reflect the possible future effect on the recoverability
and classification of assets or the amounts and classifications of liabilities that may result from the outcome of this uncertainty.
Successful completion of the Company’s development
program and, ultimately, the attainment of profitable operations are dependent upon future events, including obtaining adequate financing
to fulfill its development activities, acceptance of the Company’s patent applications and ultimately achieving a level of sales
adequate to support the Company’s cost structure. However, there can be no assurances that the Company will be able to secure additional
equity investments or achieve an adequate sales level.
Cash and Cash Equivalents
Highly liquid investments with a maturity of three
months or less when purchased are considered to be cash equivalents. As of March 31, 2023, the Company had invested $5,780,468 in a highly
liquid money market fund managed by Morgan Stanley. The Company maintains the balance of its operating cash in deposit accounts with high
quality financial institutions which, at times, may exceed federally insured limits. The Company has not experienced any losses on these
deposits and believes it is not exposed to significant credit risk on cash.
Use of Estimates:
These financial statements have been prepared
in accordance with accounting principles generally accepted in the United States which requires management to make estimates and assumptions
that affect the reported amounts of assets and liabilities at the date of the financial statements, and the reported amounts of revenues
and expenses during the reporting period. Some of the more significant estimates required to be made by management include the determination
of reserves for accounts receivable, stockholders equity-based transactions and liquidity assessment. Actual results may differ from these
estimates.
QUANTUM COMPUTING INC.
Notes to Consolidated Financial Statements
March 31, 2023
Revenue
The Company recognizes revenue in accordance with
ASC 606 – Revenue from Contracts with Customers, by analyzing contracts with its customers using a five-step approach:
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Identify the contract |
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Identify the performance obligations |
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Determine the transaction price |
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Allocate the transaction price to the performance obligations |
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Recognize revenue when performance obligations are satisfied |
The Company recognized revenue in 2023 and in
2022 from contracts to perform professional services. Revenue from time and materials-based contracts is recognized as the direct hours
worked during the period times the contractual hourly rate, plus direct materials and other direct costs as appropriate, plus negotiated
materials handling burdens, if any. Revenue from units-based contracts is recognized as the number of units delivered or performed during
the period times the contractual unit price. Revenue from fixed price contracts is recognized as work is performed with estimated profits
recorded on a percentage of completion basis. The Company has no cost-plus type contracts at this time.
Accounts Receivable and Allowance for Doubtful
Accounts
Accounts receivable principally consists of amounts
due from customers for work performed on contracts. The Company records accounts receivable at their net realizable value. Periodically
the Company evaluates its accounts receivable to establish an allowance for doubtful accounts, when deemed necessary, based on the history
of past write-offs, collections and current credit conditions. During 2022 certain accounts receivable, attributable to a single customer,
were determined not to be collectible and management recorded an allowance for doubtful accounts and wrote off the uncollectible receivables
against that account. The accounts receivable as of March 31, 2023 and December 31, 2022 are considered fully collectible and thus management
has not recorded an allowance for doubtful accounts.
QUANTUM COMPUTING INC.
Notes to Consolidated Financial Statements
March 31, 2023
Operating Leases - ASC 842
The Company has 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. 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. 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 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, 2022 and 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 four locations, Arlington, VA, Leesburg, VA, Minneapolis, MN and Hoboken, NJ, 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.
Business Combinations
We account for business combinations under the
acquisition method of accounting. This method requires the recording of acquired assets and assumed liabilities at their acquisition
date fair values. The excess of the purchase price over the fair value of assets acquired and liabilities assumed is recorded as goodwill.
Results of operations related to business combinations are included prospectively beginning with the date of acquisition and transaction
costs related to business combinations are recorded withing general and administrative expenses.
QUANTUM COMPUTING INC.
Notes to Consolidated Financial Statements
March 31, 2023
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. Maintenance and repairs are charged
against expense as incurred.
Research and Development Costs
Research and development costs include costs directly
attributable to the conduct of research and development programs, including the cost of services provided by outside contractors, acquiring
work-in-progress intellectual property, development, and mandatory compliance fees and contractual obligations. All costs associated with
research and development are expensed as incurred.
Stock Based Compensation
The Company has adopted Accounting Standards Update
(“ASU”) No. 2018-07, Compensation-Stock Compensation (Topic 718): Improvements to Nonemployee Share-Based Payment Accounting.
ASU 2018-07 expands the scope of ASC 718, Share-Based Payment, to include share-based payment transactions for acquiring goods
and services from nonemployees. An entity should apply the requirements of ASC 718 to nonemployee awards except for specific guidance
on inputs to an option pricing model and the attribution of cost. ASU 2018-07 specifies that Topic 718 applies to all share-based payment
transactions in which a grantor acquires goods or services to be used or consumed in a grantor’s own operations by issuing share-based
payment awards, and that ASC 718 does not apply to share based payments used to effectively provide (1) financing to the issuer or (2)
awards granted in conjunction with selling goods or services to customers as part of a contract accounted for under ASC 606, Revenue
from Contracts with Customers
Stock-based compensation expense is recorded for
all option grants and awards of non-vested stock and recognized in the financial statements based on the grant date fair value of the
awards granted. Stock-based compensation is recognized as expense over the requisite service period, which generally represents the vesting
period. The Company calculates the fair value of stock options using the Black-Scholes option-pricing model at grant date. The Company
estimates a rate of forfeiture when recording stock option expense. The assumptions and estimates involved in the Black-Scholes model
require significant judgement and any changes could have a material impact in the determination of stock-based compensation expense
Earnings (Loss) Per Share:
Basic earnings (loss) per common share (“EPS”)
is based on the weighted average number of common shares outstanding during each period presented. Convertible securities, warrants, and
options to purchase common stock are included as common stock equivalents only when dilutive. The Company follows the provisions of ASC
260, Diluted Earnings per Share. In computing diluted EPS, basic EPS is adjusted for the assumed issuance of all potentially dilutive
securities. The dilutive effect of call options, warrants and share-based payment awards is calculated using the “treasury stock
method,” which assumes that the “proceeds” from the exercise of these instruments are used to purchase common shares
at the average market price for the period. The dilutive effect of traditional convertible debt and preferred stock is calculated using
the “if-converted method,” pursuant to which the securities are assumed to be converted at the beginning of the period, and
the resulting common shares are included in the denominator of the diluted EPS calculation for the entire period being presented.
QUANTUM COMPUTING INC.
Notes to Consolidated Financial Statements
March 31, 2023
Note 3 – Business Combinations
Merger with QPhoton, Inc.
On May 19, 2022, the Company, QPhoton, and Yuping
Huang, the principal stockholder of QPhoton (“Mr. Huang”), entered into an Agreement and Plan of Merger (the “Merger
Agreement”), pursuant to which the Company agreed to acquire QPhoton through a series of merger transactions (collectively with
the other transactions contemplated by the Merger Agreement, the “Transactions”). On June 16, 2022, all conditions precedent
having been met or waived by the Parties, the Company Closed the Transaction with QPhoton.
Pursuant to the Merger Agreement, immediately
following the closing of the Transactions contemplated by the Merger Agreement (the “Closing”), Merger Sub I (a wholly owned
subsidiary of the Company) merged with and into QPhoton, with QPhoton surviving the merger as a wholly-owned subsidiary of the Company,
immediately after which the surviving corporation merged with and into Merger Sub II (also a wholly owned subsidiary of the Company),
with Merger Sub II surviving the merger as a wholly-owned subsidiary of the Company (the “Surviving Company”). The merger
consideration to be paid to the stockholders of QPhoton (the “Merger Consideration”) consists of (i) 5,802,206 shares of the
Company’s common stock, par value $0.0001 per share (“Common Stock”), (ii) 2,377,028 shares of a new series of the Company’s
preferred stock, par value $0.0001 per share, to be designated Series B convertible preferred stock (“Series B Preferred Stock”),
and (iii) warrants to purchase up to 7,028,337 shares of Common Stock (the “Warrants”). Each share of Series B Preferred Stock
converts into ten (10) shares of the Company’s common stock. The Merger Consideration for stockholders Yuping Huang and Stevens
Institute of Technology was issued in 2022 and the remaining Merger Consideration for the other stockholder of QPhoton will be issued
upon presentation of certain required documents and surrender of their QPhoton shares.
Note Purchase Agreement – the Company
and QPhoton
On February 18, 2022, the Company entered into
a Note Purchase Agreement (the “Note Purchase Agreement”) with QPhoton, pursuant to which the Company agreed to loan money
to QPhoton using two unsecured promissory notes (each, a “Note”), each in the principal amount of $1,250,000, subject to the
terms and conditions of the Note Purchase Agreement. Also on February 18, 2022, pursuant to the terms of the Note Purchase Agreement,
the Company loaned the principal amount of $1,250,000 to QPhoton. On April 1, 2022, pursuant to the terms of the Note Purchase Agreement,
the Company loaned the principal amount of $1,250,000 to QPhoton, for a total loan under the two Notes of $2,500,000.
The Note Purchase Agreement contains customary
representations and warranties by QPhoton and the Company, as well as a “most favored nations” provision for the benefit of
the Company. The Notes issued under the Note Purchase Agreement, including the Notes issued on February 18, 2022 and April 1, 2022, provide
that the indebtedness evidenced by the applicable Note bears simple interest at the rate of 6% per annum (or 15% per annum during the
occurrence of an event of default, as defined in the Notes), and becomes due and payable in full on the earlier of (i) March 1, 2023,
subject to extension by one year at the option of QPhoton, (ii) a change of control (as defined in the Notes) of QPhoton or (iii) an event
of default. As a result of the merger, the Notes and accrued interest are eliminated through consolidation. However, the two Notes have
not been forgiven or converted to equity.
Note 4 – Intangible Assets and Goodwill
As a result of the merger with QPhoton, the Company has the following
amounts related to intangible assets:
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Intangible Assets as of: | | |
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Amortizable Intangible Assets | |
March 31, | | |
December 31, | | |
Amortizable |
| |
2023 | | |
2022 | | |
Life |
Customer relationships | |
$ | 10,000,000 | | |
$ | 10,000,000 | | |
3 years |
Non-compete agreement with founder | |
| 500,000 | | |
| 500,000 | | |
3 years |
Website domain name and trademark | |
| 1,000,000 | | |
| 1,000,000 | | |
5 years |
Employment agreements | |
| 2,250,000 | | |
| 2,250,000 | | |
2 years |
Technology and licensed patents | |
| 11,722,220 | | |
| 11,722,220 | | |
10 years |
Less: accumulated amortization | |
| (4,747,801 | ) | |
| (3,248,495 | ) | |
|
Net intangible assets | |
$ | 20,724,419 | | |
$ | 22,223,725 | | |
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QUANTUM COMPUTING INC.
Notes to Consolidated Financial Statements
March 31, 2023
The aggregate amortization expense of the Company’s intangible
assets for the periods ended March 31, 2023 and December 31, 2022 was $1,499,306 and $ 3,248,495, respectively. The Company expects future
amortization expense to be the following:
| |
Amortization | |
Balance of 2023 | |
$ | 3,726,850 | |
2024 | |
| 5,387,847 | |
2025 | |
| 2,976,389 | |
2026 | |
| 1,372,222 | |
2027 | |
| 1,263,889 | |
Thereafter (2028-2032) | |
| 5,226,156 | |
Total | |
$ | 22,223,725 | |
The Company recorded goodwill resulting from the
merger with QPhoton, calculated as the difference between the total purchase price and the value of tangible and intangible assets acquired
less the liabilities assumed. The Company recorded goodwill of $59,125,773.38 resulting from the QPhoton merger. The following table provides
a summary of the changes in goodwill for the periods ended March 31, 2023 and December 31, 2022:
| |
March 31, | | |
December 31, | |
| |
2022 | | |
2022 | |
Goodwill, at beginning of year | |
$ | 59,125,773 | | |
$ | - | |
Goodwill additions | |
| - | | |
| 59,125,773 | |
Goodwill deductions or impairment | |
| - | | |
| - | |
Goodwill, at end of year | |
$ | 59,125,773 | | |
$ | 59,125,773 | |
The Company tested the intangible assets and goodwill for impairment
as of December 31, 2022 and concluded there was no impairment of intangible assets or goodwill at that time. No events occurred during
the quarter ended March 31, 2023 that would trigger an impairment assessment.
Note 5 – Income Taxes:
The Company has made no provision for income taxes
because there has been no taxable income.
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.
| |
March 31, | |
| |
2023 | | |
2022 | |
Net operating loss carry-forwards | |
$ | 11,208,100 | | |
$ | 5,763,812 | |
Valuation allowance | |
| (11,208,100 | ) | |
| (5,763,812 | ) |
Net deferred tax assets | |
$ | - | | |
$ | - | |
At March 31, 2023, the Company had net operating
loss carry forwards of approximately $11,208,100.
Net operating loss carryforwards are subject to
limitations under Section 382 of the Internal Revenue Code and the Company anticipates that no more than an insignificant portion of this
net operating allowance will ever be used against future taxable income. FASB Codification ASC 740 requires changes in recognition and
measurement for uncertain tax positions. The Company has analyzed its tax positions and concluded that it is not aware of any uncertain
tax positions. If this conclusion changes, the Company will assess the impact of any such changes on its financial position and the results
of operations.
QUANTUM COMPUTING INC.
Notes to Consolidated Financial Statements
March 31, 2023
Note 6 – 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 7 – Property and Equipment
| |
March 31, | | |
December 31, | |
Classification | |
2023 | | |
2022 | |
Hardware & Equipment | |
$ | 1,385,988 | | |
$ | 1,026,829 | |
Software | |
| 38,484 | | |
| 18,889 | |
Total cost of property and equipment | |
| 1,424,471 | | |
| 1,045,718 | |
Accumulated depreciation | |
| 115,371 | | |
| 70,549 | |
Property and equipment, net | |
$ | 1,309,100 | | |
$ | 975,169 | |
The Company acquired $378,753 of Property and
Equipment during the three months ended March 31, 2023. It is the Company’s policy to capitalize purchases of property and equipment
with a cost of $2,500 or more that benefit future periods. The Company depreciates computer and laboratory equipment over a period of
five years and software over a period of three years. Maintenance and repairs are charged to operations when incurred. When property and
equipment are sold or otherwise disposed, the asset account and related accumulated depreciation and amortization accounts are relieved,
and any gain or loss is included in other income or expense.
Note 8 – Loans
Notes Payable – BV Advisory Partners,
LLC
As part of our business combination with QPhoton
in June 2022, we acquired a note payable to BV Advisory Partners, LLC. On March 1, 2021, QPhoton entered into a Note Purchase Agreement
with BV Advisory. Under the Note Purchase Agreement, on March 1, 2021, March 23, 2021 and July 9, 2021, QPhoton and BV Advisory, a related
party shareholder, entered into convertible promissory notes for $200,592, $150,000, and $150,000, respectively, for a total of $500,592
(the “BV Notes”). The BV Notes all bore interest at a rate of 6% per annum and matured 2 years from the grant date. However,
QPhoton only received approximately $375,000 in cash proceeds as $125,041 was paid by BV Advisory directly to The Trustees of the Stevens
Institute of Technology (“Stevens Institute”) on behalf of QPhoton, to satisfy QPhoton’s obligations to reimburse costs
incurred under the terms of their patent License agreement with the Stevens Institute.
QUANTUM COMPUTING INC.
Notes to Consolidated Financial Statements
March 31, 2023
On June 16, 2022 the
Company tendered a cashier’s check to BV Advisory in the amount of $535,68.44, representing the full principal balance of the BV
Notes and accrued interest through June 16, 2022. On July 14, 2022 BV Advisory returned the cashier’s check and disputed the calculation
of the amount paid to settle the BV Notes. The BV Notes and accrued interest are recorded as short-term liabilities. On August 15, 2022,
BV Advisory Partners, LLC (the “Plaintiff”) filed a complaint in the Court of Chancery of the State of Delaware naming the
Company and certain of its directors and officers (among others) as defendants (the “Lawsuit”). BV Advisory
Partners, LLC v. Quantum Computing Inc., et al., C.A. No. 2022-0719-VCG (Del. Ch.). The Plaintiff is seeking, among other relief,
monetary damages for an alleged breach of the Note Purchase Agreement between the Plaintiff and QPhoton, Inc., the predecessor in interest
to QPhoton, LLC, a wholly-owned subsidiary of the Company, as well as monetary damages for breach of an alleged binding letter of intent
among Barksdale Global Holdings, LLC, Inference Ventures, LLC and QPhoton, Inc. The Company believes that the Plaintiff’s
claims have no merit and intends to defend itself vigorously. The Company filed a motion to dismiss the complaint in December 2022,
and in March 2023 Plaintiff filed a second amended complaint. The Company filed a motion to dismiss the second amended complaint and at
this time that motion is under consideration. The Company does not believe it is necessary to accrue an amount in addition to the principal
and interest on the BV Notes, at this time.
Unsecured Promissory Note
On September 23, 2022, Quantum Computing Inc.
(the “Company”) entered into a note purchase agreement (the “NPA”) with Streeterville Capital, LLC (the “Investor”),
pursuant to which the Investor purchased an unsecured promissory note (the “Note” or the “Streeterville Unsecured Note”)
in the initial principal amount of $8,250,000. The Note bears interest at 10% per annum. The maturity date of the Note is 18 months from
the date of its issuance (the “Maturity Date”). The Note carries an original issue discount of $750,000, which is included
in the principal balance of the Note. If the Company elects to prepay the Note prior to the Maturity Date, it must pay to Investor 120%
of the portion of the Outstanding Balance the Company elects to prepay.
Beginning on the date that is six (6) months after
the issuance date of the Note, the Investor has the right to redeem up to $750,000 of the outstanding balance of the Note per month (“Redemption
Amount”) by providing written notice to the Company (“Redemption Notice”). Upon receipt of any Redemption Notice, the
Company shall pay the applicable Redemption Amount in cash to the Investor within three (3) trading days of the Company’s receipt
of such Redemption Notice. No prepayment premium shall be payable in respect of any Redemption Amount. To date the Investor has redeemed
$1,000,000 of the outstanding balance of the Note.
Pursuant to the terms of the NPA, the parties
provided customary representations and warranties to each other. Also, until amounts due under the Note are paid in full, the Company
agreed, among other things, to: (i) timely make all filings under the Securities Exchange Act of 1934, (ii) ensure the Common Stock continues
to be listed on the Nasdaq Capital Market (“Nasdaq”) (iii) ensure trading in Company’s Common Stock will not be suspended,
halted, chilled, frozen, reach zero bid or otherwise cease trading on Company’s principal trading market, (iv) ensure Company will
not make any Restricted Issuance (as defined in the Note) without Investor’s prior written consent, which consent may be granted
or withheld in Investor’s sole and absolute discretion, (v) ensure Company shall not enter into any agreement or otherwise agree
to any covenant, condition, or obligation that locks up, restricts in any way or otherwise prohibits Company from entering into certain
additional transactions with the Investor, and (vi) with the exception for Permitted Liens (as defined in the Note) ensure Company will
not pledge or grant a security interest in any of its assets without Investor’s prior written consent, which consent may be granted
on withheld in Investor’s sole and absolute discretion.
The Note sets forth certain standard events of
default (such event, an “Event of Default”) that generally, if uncured within seven (7) trading days, may result in the discretion
of the Investor in certain penalties under the terms of the Note. In this regard, upon an Event of Default, Investor may accelerate the
Note by written notice to the Company, with the outstanding balance becoming immediately due and payable in cash at the Mandatory Default
Amount (as defined in the Note). Additionally, upon written notice given by Investor to the Company, interest shall accrue on the Outstanding
Balance beginning on the date the applicable Event of Default occurred at an interest rate equal to the lesser of fifteen percent (15%)
per annum simple interest or the maximum rate permitted under applicable law upon an Event of Default.
QUANTUM COMPUTING INC.
Notes to Consolidated Financial Statements
March 31, 2023
Note 9 – Capital Stock:
Series A Convertible Preferred Offering
From November 10, 2021 through November 17, 2021,
the Company conducted a private placement offering (the “Private Placement”) pursuant to securities purchase agreements (the
“Purchase Agreements”) with 7 accredited investors (the “Investors”), whereby the Investors purchased from the
Company an aggregate of 1,545,459 shares of the Company’s newly created Series A Convertible Preferred Stock, par value $0.0001
per share (the “Series A Preferred Stock”) and warrants to purchase 1,545,459 shares of the Company’s common stock for
an aggregate purchase price of $8,500,000. The Private Placement was completed and closed to further investment on November 17, 2021.
The Series A Preferred Stock ranks senior to the
Company’s common stock with respect to the payment of dividends and liquidation rights. Each holder of Series A Preferred Stock
is entitled to receive, with respect to each share of Series A Preferred Stock then outstanding and held by such holder, dividends at
the rate of ten percent (10%) per annum (the “Preferred Dividends.”) The Company is obligated to pay the Preferred Dividends
quarterly, in arrears, within fifteen (15) days of the end of each quarter. The Company has the option to pay the Preferred Dividends
in cash or in Company Common Stock, at a price per share of Common Stock equal to the average of the Closing Sale Price of the Common
Stock for the five (5) Trading Days preceding the applicable Dividend Payment Date. The Preferred Dividends are accrued monthly, but not
compounded, and are recorded as interest expense, because the Preferred Dividends are mandatory and not declared at the discretion of
the Board of Directors.
The number of shares of Common Stock issuable
upon conversion of any share of Series A Preferred Stock pursuant shall be determined by dividing (x) the Conversion Amount of such share
of Series A Preferred Stock by (y) the Conversion Price (the “Conversion Rate”). Conversion Amount means, with respect to
each share of Series A Preferred Stock, as of the applicable date of determination, the sum of (1) the Stated Value thereof plus (2) any
accrued dividends. “Conversion Price” means, with respect to each share of Series A Preferred Stock, as of any Optional Conversion
Date, Mandatory Conversion Date or other date of determination, $5.50, subject to adjustment for stock splits, dividends, recapitalizations
and similar corporate events.
The Warrants are two-year warrants to purchase
shares of the Company’s Common Stock at an exercise price of $7.00 per share, subject to adjustment, and are exercisable at any
time on or after the date that is six (6) months following the issuance date. The Warrants provide for cashless exercise in the event
the underlying shares of common stock are not registered.
In connection with the Purchase Agreement, the
Company and the Investors entered into a registration rights agreement (the “Registration Rights Agreement”) pursuant to which
the Company agreed to file a registration statement to register the shares of the Company’s Common Stock underlying the Series A
Preferred Stock and Warrants within 180 days. Pursuant to the Registration Rights Agreement, the Investors received certain rights, including
but not limited to piggyback registration rights, providing that the holder be given notice of any proposed registration of securities
by the Company, and requiring that the Company register all or any portion of the registrable securities that the holders request to be
registered, in each case, subject to the terms and conditions of the Registration Rights Agreement.
QUANTUM COMPUTING INC.
Notes to Consolidated Financial Statements
March 31, 2023
On April 27, 2022 the Company filed a Resale Form
S-3 as required by the Registration Rights Agreement with the Preferred Investors, pursuant to which the Company agreed to file a registration
statement to register the shares of the Company’s Common Stock underlying the Series A Preferred Stock and Warrants within 180 days
from the Closing of the Preferred investment round. The Resale Form S-3 went effective on June 2, 2022.
On June 13, 2022, one of the investors in the
Series A Convertible Preferred financing round, Falcon Capital Partners, converted 45,455 shares of Series A Convertible Preferred stock
into 47,728 shares of the Company’s Common Stock.
On October 11, 2022 the Company issued 155,000
shares of common stock to seven employees and consultants in exchange for services rendered.
On January 20, 2023 the Company issued 750,000
shares of common stock to Draper, Inc. and 750,000 shares of common stock to Carriage House Capital, Inc. as compensation for services
rendered in support of the QPhoton merger.
On February 9, 2023, one of the investors in the
Series A Convertible Preferred financing round, Greenfield Children, LLC, converted 10,000 shares of Series A Convertible Preferred stock
plus accrued dividends into 11,096 shares of the Company’s Common Stock.
From January 19 through March 31, 2023, the Company
sold 3,021,632 shares of common stock through its At The Market (ATM) facility, managed by Ascendiant Capital, at an average price of
$2.17. The Company received gross proceeds of $6,551,456 and paid a fee of three percent (3%) to Ascendiant Capital.
Note 10 – Stock Based Compensation
Incentive Plans and
Options
The Company’s 2019 Equity and Incentive
Plan, as amended in 2021 (the “2019 Plan”) enabled the Company to grant incentive stock options or nonqualified stock options
and other equity awards to employees, directors and consultants of the Company up to a total of 3,000,000 shares of common stock. All
3,000,000 shares available for issue under the 2019 Plan have been issued.
On July 5, 2022, the Board of Directors adopted
the Company’s 2022. Equity and Incentive Plan (the “2022 Plan”) which provides for the issuance of up to 16,000,000
shares of the Company’s common stock. The 2022 Plan was approved by a majority of the shareholders in September 2022. As of March
31, 2023, a total of 7,565,767 shares were issued under the 2022 Plan.
The following table presents the assumptions used in the Black-Scholes
option-pricing model to determine the grant-date fair value of stock options granted:
| |
Three and Twelve
Months Ended | |
| |
March 31, – December 31 | |
| |
2023 | | |
2022 | |
Exercise price | |
$ | 1.35 – 1.84 | | |
$ | 5.20 – 12.72 | |
Risk-free interest rate | |
| 4.68 – 4.81 | % | |
| 0.04 – 0.08 | % |
Expected volatility | |
| 200 – 214 | % | |
| 390 – 415 | % |
Expected dividend yield | |
| 0 | % | |
| 0 | % |
Expected life of options (in years) | |
| 5.0 | | |
| 5.0 | |
The following table summarizes the Company’s option activity
since December 31, 2022:
| |
Weighted | | |
Weighted | | |
| |
| |
Average | | |
Average | | |
| |
| |
Number of | | |
Exercise | | |
Contractual | |
| |
Shares | | |
Price | | |
Term
| |
| |
| | |
| | |
(in years) | |
Outstanding as of December 31, 2022 | |
| 9,601,237 | | |
$ | 3.42 | | |
| 4.0 | |
Granted | |
| 592,500 | | |
| 1.84 | | |
| | |
Exercised | |
| - | | |
| - | | |
| | |
Forfeited | |
| - | | |
| - | | |
| | |
Outstanding as of March 31, 2023 | |
| 10,193,737 | | |
$ | 3.33 | | |
| 3.8 | |
Vested as of March 31, 2023 | |
| 6,899,569 | | |
$ | 3.35 | | |
| 3.8 | |
QUANTUM COMPUTING INC.
Notes to Consolidated Financial Statements
March 31, 2023
The following table summarizes the exercise price range as of March
31, 2023:
Exercise Price | | |
Outstanding Options | | |
Exercisable Options | |
$ | 1.00 | | |
| 408,970 | | |
| 329,320 | |
$ | 1.45 | | |
| 225,000 | | |
| 225,000 | |
$ | 1.67 | | |
| 50,000 | | |
| 13,332 | |
$ | 1.84 | | |
| 592,500 | | |
| 100,000 | |
$ | 1.95 | | |
| 280,000 | | |
| 280,000 | |
$ | 2.37 | | |
| 5,153,267 | | |
| 4,146,410 | |
$ | 2.40 | | |
| 1,062,500 | | |
| 420,817 | |
$ | 2.56 | | |
| 287,500 | | |
| 77,491 | |
$ | 2.61 | | |
| 150,000 | | |
| 80,558 | |
$ | 3.58 | | |
| 65,000 | | |
| 43,335 | |
$ | 3.98 | | |
| 66,000 | | |
| 44,002 | |
$ | 5.69 | | |
| 12,500 | | |
| 12,500 | |
$ | 5.70 | | |
| 25,000 | | |
| 8,332 | |
$ | 6.11 | | |
| 25,000 | | |
| 8,332 | |
$ | 6.49 | | |
| 52,500 | | |
| 17,496 | |
$ | 6.60 | | |
| 50,000 | | |
| 33,335 | |
$ | 6.70 | | |
| 200,000 | | |
| 66,660 | |
$ | 6.85 | | |
| 650,000 | | |
| 216,645 | |
$ | 7.00 | | |
| 18,000 | | |
| 5,999 | |
$ | 7.55 | | |
| 7,500 | | |
| 7,500 | |
$ | 8.85 | | |
| 100,000 | | |
| 66,670 | |
$ | 10.00 | | |
| 650,000 | | |
| 650,000 | |
$ | 11.51 | | |
| 50,000 | | |
| 33,335 | |
$ | 11.65 | | |
| 12,500 | | |
| 12,500 | |
| | | |
| 10,193,737 | | |
| 6,899,569 | |
The weighted average grant-date fair value of
stock options granted during the three and twelve months ended March 31, 2023 and December 31, 2022 and 2021 was $1.81 per share and $2.38
per share, respectively.
Stock-based compensation
The Company recorded stock-based compensation expense related to common
stock options and restricted common stock in the following expense categories of its consolidated statements of operations and comprehensive
loss:
| |
Three and Twelve
Months Ended | |
| |
March 31, 2023 | | |
December 31, 2022 | |
Research and development | |
| 728,181.00 | | |
| 2,758,465 | |
General and administrative | |
| 1,240,633.00 | | |
| 15,003,002 | |
Total stock-based compensation | |
$ | 1,968,814.00 | | |
$ | 17,761,467 | |
As of March 31, 2023, total unrecognized compensation
cost related to common stock options was $6.8 million, which is expected to be recognized over a period of 2.8 years.
Warrants
In connection with a restricted stock units offering
in June 2020, the Company issued warrants in August 2020 to purchase 171,000 shares of the Company’s common stock, at an exercise
price of $2.00. Those warrants are exercisable for five years from the date of issuance. In connection with an offering of Series A Convertible
Preferred stock in November 2021, the Company issued warrants to purchase 1,545,459 shares of the Company’s common stock at an exercise
price of $7.00. Those warrants are exercisable for two years from the date of issuance. In connection with the QPhoton merger on June
16, 2022, the Company issued warrants to purchase 6,325,503 shares of the Company’s common stock at an exercise price of $0.0001.
Those warrants are exercisable when and if stock options and warrants issued and outstanding as of June 15, 2022, are exercised. The following
table summarizes the warrants outstanding at March 31, 2023:
Issuance Date | |
Expiration Date | |
Exercise Price | | |
Issued | | |
Exercised | | |
Forfeited /
Canceled | | |
Warrants
Outstanding | |
August 18, 2020 | |
August 18, 2025 | |
$ | 2.00 | | |
| 171,000 | | |
| (150,000 | ) | |
| - | | |
| 21,000 | |
November 15, 2021 | |
November 15, 2023 | |
$ | 7.00 | | |
| 1,545,459 | | |
| - | | |
| - | | |
| 1,545,459 | |
June 16, 2022 | |
May 9, 2027 | |
$ | 0.0001 | | |
| 6,325,503 | | |
| - | | |
| (1,254,496 | ) | |
| 5,071,007 | |
QUANTUM COMPUTING INC.
Notes to Consolidated Financial Statements
March 31, 2023
Note 11 – Related Party Transactions
There were no related party transactions during
the three-month periods ended March 31, 2023 and March 31, 2022.
Note 12 – Operating Leases:
The Company leases space in four different locations,
Arlington, VA, Leesburg, VA, Hoboken, NJ and Minneapolis, MN, under lease agreements which expire at various dates through September 30,
2027. The Company’s leases do not provide an implicit rate, and therefore the Company uses its incremental borrowing rate as the
discount rate when measuring operating lease assets and liabilities. The incremental borrowing rate represents an estimate of the interest
rate the Company would incur at lease commencement to borrow an amount equal to the lease payments on a collateralized basis over the
term of a lease.
The table below reconciles the undiscounted future
minimum lease payments under these operating leases to the total operating lease liabilities recognized on the consolidated balance sheet
as of March 31, 2023:
Year | |
Lease
Payments
Due | |
Balance of 2023 | |
$ | 263,480 | |
2024 | |
$ | 343,652 | |
2025 | |
$ | 341,081 | |
2026 | |
$ | 349,608 | |
2027 | |
$ | 267,092 | |
Less: imputed Interest | |
$ | (347,074 | ) |
Present Value of operating lease liabilities | |
$ | 1,217,839 | |
Other information related to operating lease liabilities
consists of the following:
| |
Three and Twelve
Months Ended | |
| |
March 31, 2023 | | |
December 31, 2022 | |
| |
| | |
| |
Cash paid for operating lease liabilities | |
$ | 93,719 | | |
$ | 125,238 | |
Weighted average remaining lease term in years | |
| 4.4 | | |
| 4.7 | |
Weighted average discount rate | |
| 10 | % | |
| 10 | % |
Note 13 – License Agreement – Stevens Institute of Technology
Effective December 17, 2020, QPhoton signed a
License Agreement with the Stevens Institute. The License Agreement enables the Company to commercially use technology such as licensed
patents, licensed patent applications and licensed “Know-How”. QPhoton is also able to issue sublicenses for the technology
under the agreement. The agreement is effective until the later of: (i) the 30-year anniversary of the effective date, or (ii) the expiration
of the licensed patent or licensed patent application that is last to expire. As part of the merger of the Company and QPhoton, the Stevens
License Agreement was assigned to the Company.
QUANTUM COMPUTING INC.
Notes to Consolidated Financial Statements
March 31, 2023
During the term of the agreement and prior to
any commercialization or sublicensing of the technology by the Company, the Company shall be required to submit annual reports to the
Stevens Institute reporting on all research, development, and efforts toward commercialization and/or sublicensing made during the year.
Once any commercialization and/or sublicensing has been initiated, the Company shall deliver quarterly reports to the Stevens Institute
reporting on the revenue received by the Company, all sublicenses derived from the sale of licensed products, and the net sales price
associated with each transaction. The Company will be responsible for reimbursing Stevens for any costs associated with the prosecution
and maintenance of the licensed patents and licensed patent applications moving forward.
Consideration for the agreement
As consideration for the license and other rights
granted under the agreement, QPhoton agreed to pay the following: (i) $35,000 within 30 days of execution of the agreement, (ii) $28,000
within 30 days of each annual anniversary of the effective date, (iii) equity in the Company equivalent to nine percent of the membership
units of the Company within 30 days of the execution of the agreement, and (iv) royalties of 3.5% of the Net Sales Price of each licensed
product sold or licensed by the company during the quarter then-ended, for which it also received payment, concurrent with the delivery
of the relevant quarterly report.
As of March 31, 2023 the Company has begun to
commercialize some of the licensed technology pursuant to a subcontract to support NASA, and therefore expects to owe the Stevens Institute
royalties of 3.5% on that revenue.
Note 14 – Subsequent Events:
On April 4, 2023,
the Company appointed emerging and disruptive technologies specialist Lewis Shepherd to its Technical Advisory Board. Mr.
Shepherd combines over 30 years of experience within both Silicon Valley (VMware, Microsoft) and government service (U.S. Department of
Defense, Federal Communications Commission, Intelligence Committee of AFCEA International, Defense Intelligence Agency) addressing multiple
aspects of R&D innovation with specific focus over the last 10 or more years on artificial intelligence, machine learning, augmented
reality/virtual reality, data visualization, quantum computing, encryption, and cybersecurity.
Mr. Shepherd has joined the QCI Advisory Board to provide industry
advice, market intelligence, and QCI product visibility into his expansive network.
On April 6, 2023, the Company’s wholly
owned subsidiary, QI Solutions, which focuses on business with the federal government, joined the Center for Quantum Technologies (CQT)
as a non-traditional defense company that offers a suite of quantum services, ranging from quantum computing to quantum sensing, imaging,
and cybersecurity. CQT is a National Science Foundation sponsored initiative with engineers
and scientists from Purdue University, Indiana University, the University of Notre Dame, and Indiana University Purdue University –
Indianapolis. These four universities are joined by industry members Quantum Computing Inc.’s QI Solutions (QIS), the Air Force
Research Laboratory, Amazon Web Services, Eli Lilly, Cummins, Toyota, Northrup Grumman, and IBM Quantum to transfer foundational quantum
knowledge into novel quantum technologies that address industry and defense challenges.
On April 20, 2023, the Company expanded its commercially
available product line to include its reprogrammable and non-repeatable Quantum Random Number Generator (QRNG), a patented technology
that is crucial to mitigate security vulnerabilities and provides customers with trustworthy data. The
Company is offering QRNG capability through a cloud-based subscription on its website followed by an option to purchase the hardware,
which is a handheld cube-sized QRNG device, later in 2023.
On April 27, 2023, the Company expanded its commercially
available product line to include its Reservoir Quantum Computing (RQC). Via an MOU with AI company millionways, Inc., the
partnership will demonstrate the value of processing millionways’ AI algorithms through QCI’s existing RQC systems using audio
files to produce an emotional scoring capability. If the data processing project is successful, the companies will develop a joint
marketing and business development plan to pursue commercial opportunities.
On May 3, 2023 the Company issued 853,600 shares
of common stock to thirty-five (35) employees as payment in lieu of cash for 2022 performance bonuses (the “bonus shares”).
The bonus shares are restricted and will vest over a two-year period starting January 1, 2023.
From April 1, 2023 through May 11, 2023 the Company
has repaid 750,000 of principal and accrued interest on the Streeterville Note, for a cumulative redemption amount of $1,000,000.
On May 4, 2023, the Company received an expansion
to its subcontract award from SSAI to support NASA by using the Company’s reservoir quantum computer to remove solar background
noise from LiDAR image data sets using deep learning methods, specifically recurrent neural network algorithms. Under
the initial subcontract task, QCI will test and evaluate an existing LiDAR system designed to remotely measure the physical properties
of different types of snowpacks, including the density, particle size and depth. With the additional task, NASA expanded the contract
to include quantum machine learning processing of the data collected. Upon successful completion of this testing, NASA may authorize QCI
to proceed with airborne testing with the ultimate goal to use the quantum LiDAR units on satellites.
There are no other events of a subsequent nature
that in management’s opinion are reportable.