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.
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.
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.
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.
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.
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.
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.
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.
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.
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.