ITEM 1A. RISK FACTORS.
This Annual Report on
Form 10-K contains forward-looking statements that involve risks and uncertainties, such as statements of our objectives, expectations
and intentions. The cautionary statements made in this Annual Report on Form 10-K should be read as applicable to all forward-looking
statements wherever they appear in this report. Our actual results could differ materially from those discussed herein. Factors that
could cause or contribute to such differences include those discussed below, as well as those discussed elsewhere in this Annual Report
on Form 10-K.
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Risks Related to Our Business
WE
HAVE A LIMITED OPERATING HISTORY.
The Company was incorporated under the laws of
the State of Nevada on July 25, 2001 as Ticketcart, Inc. Ticketcart operated as a seller of ink-jet printer cartridges until July 2007,
when Ticketcart acquired Innovative Beverage Group, Inc. and changed the name of the business to Innovative Beverage Group Holdings,
Inc. (“IBGH”), IBGH operated as a producer and distributor of non-alcoholic beverages until it ceased operations in 2013.
A group of investors acquired control of IBGH in January 2018 and redomiciled the business to Delaware on February 22, 2018 under the
name Quantum Computing Inc. The Company has been engaged in developing and marketing quantum software products since it was redomiciled
to Delaware, but has not recorded any revenue from sales of products or services to date. Accordingly, the Company has a limited operating
history with which you can evaluate its business and prospects. An investor in the Company must consider its business and prospects in
light of the risks, uncertainties and difficulties frequently encountered by early-stage companies, including limited capital, delays
in product development, possible marketing and sales obstacles and delays, inability to gain customer and merchant acceptance or inability
to achieve significant distribution of our products and services to customers. The Company cannot be certain that it will successfully
address these risks. Its failure to address any of these risks could have a material adverse effect on its business.
WE ARE NOT PROFITABLE
AND MAY NEVER BE PROFITABLE.
To date, we have not yet recorded revenues from
the sale of our products. If we are unable to generate revenues, we will not be able to achieve and maintain profitability. Beyond this,
we may incur significant losses in the future for a number of reasons including other risks described in this document, and we may encounter
unforeseen expenses, difficulties, complications, delays and other unknown events. We incurred negative cash flows from operating activities
and recurring net losses in fiscal years 2021 and 2020. As of December 31, 2021 and 2020, our accumulated deficit was $81,394,081 and
$53,495,235, respectively.
Since inception through the present, we have
been dependent on raising capital to support our working capital needs. During this same period, we have recorded net accumulated losses
and are yet to achieve profitability. Our ability to achieve profitability depends upon many factors, including our ability to develop
and commercialize our products. There can be no assurance that we will ever achieve any significant revenues or profitable operations.
OUR
OPERATING EXPENSES EXCEED OUR REVENUES AND WILL LIKELY CONTINUE TO DO SO FOR THE FORESEEABLE FUTURE.
We are in an early stage of our development and
we have not generated any revenues to offset our operating expenses. Our operating expenses will likely continue to exceed our operating
income for the foreseeable future, until such time as we are able to monetize our brands and generate substantial revenues, particularly
as we undertake payment of the increased costs of operating as a public company.
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WE
WILL NEED ADDITIONAL CAPITAL, WHICH MAY BE DIFFICULT TO RAISE AS A RESULT OF OUR LIMITED OPERATING HISTORY OR ANY NUMBER OF OTHER REASONS.
We expect that we will have adequate financing
for the next 20-24 months at the current level of operations. However, in the event that we exceed our expected growth rate, we would
need to raise additional capital. There is no assurance that additional equity or debt financing will be available to us when needed,
on acceptable terms or even at all. Our limited operating history makes investor evaluation and an estimation of our future performance
substantially more difficult. As a result, investors may be unwilling to invest in us or such investment may be on terms or conditions
which are not acceptable. In the event that we are not able to secure financing, we may have to scale back our growth plans or cease
operations.
FAILURE TO IDENTIFY ERRORS IN THE QUANTITATIVE
MODELS WE UTILIZE TO MANAGE OUR BUSINESS COULD ADVERSELY IMPACT PRODUCT PERFORMANCE AND CLIENT RELATIONSHIPS.
We employ various quantitative models to manage
our business. Any errors in the underlying models or model assumptions could have unanticipated and adverse consequences on our business
and reputation.
WE MAY BE UNABLE TO DEVELOP NEW PRODUCTS
AND SERVICES AND THE DEVELOPMENT OF NEW PRODUCTS AND SERVICES MAY EXPOSE US TO ADDITIONAL COSTS OR OPERATIONAL RISK.
Our financial performance depends, in part, on
our ability to develop, market and manage new products and services. The development and introduction of new products and services require
continued innovative efforts and may require significant time and resources as well as ongoing support and investment. Substantial risk
and uncertainties are associated with the introduction of new products and services, including the implementation of new and appropriate
operational controls and procedures, shifting client and market preferences, the introduction of competing products or services and compliance
with regulatory requirements.
OUR
PROPRIETARY TECHNOLOGY MAY BE SUBJECT TO CLAIMS FOR INFRINGEMENT OR MISAPPROPRIATION OF INTELLECTUAL PROPERTY RIGHTS OF OTHERS, OR MAY
BE INFRINGED OR MISAPPROPRIATED BY OTHERS.
We rely, and may rely in the future, upon a combination
of license agreements, confidentiality policies and procedures, confidentiality provisions in employment agreements, confidentiality
agreements with third parties and technical security measures to maintain the confidentiality, exclusivity and trade secrecy of our proprietary
information. We also rely, and most likely will rely in the future, on trademark and copyright laws to protect our intellectual property
rights in the United States and abroad. Despite our protective measures and intellectual property rights, we may not be able to adequately
protect against theft, copying, reverse engineering, misappropriation, infringement or unauthorized use or disclosure of our intellectual
property, which could have an adverse effect on our competitive position.
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WE
MAY BECOME SUBJECT TO LEGAL PROCEEDINGS THAT COULD HAVE A MATERIAL ADVERSE IMPACT ON OUR FINANCIAL POSITION AND RESULTS OF OPERATIONS.
From time to time and in the ordinary course
of our business, we and certain of our subsidiaries may become involved in various legal proceedings. All such legal proceedings are
inherently unpredictable and, regardless of the merits of the claims, litigation may be expensive, time-consuming and disruptive to our
operations and distracting to management. If resolved against us, such legal proceedings could result in excessive verdicts, injunctive
relief or other equitable relief that may affect how we operate our business. Similarly, if we settle such legal proceedings, it may
affect how we operate our business. Future court decisions, alternative dispute resolution awards, business expansion or legislative
activity may increase our exposure to litigation and regulatory investigations. In some cases, substantial noneconomic remedies or punitive
damages may be sought. Although we maintain liability insurance coverage, there can be no assurance that such coverage will cover any
particular verdict, judgment or settlement that may be entered against us, that such coverage will prove to be adequate or that such
coverage will continue to remain available on acceptable terms, if at all. If we incur liability that exceeds our insurance coverage
or that is not within the scope of the coverage in legal proceedings brought against us, it could have an adverse effect on our business,
financial condition and results of operations.
WE
INTEND TO CONTINUE EXPLORING STRATEGIC BUSINESS ACQUISITIONS AND OTHER COMBINATIONS, WHICH ARE SUBJECT TO INHERENT RISKS.
In order to expand our solutions, services, and
grow our market and client base, we may continue to seek and complete strategic business acquisitions and other combinations that we
believe are complementary to our business. Acquisitions have inherent risks which may have a material adverse effect on our business,
financial condition, operating results or prospects, including, but not limited to: 1) failure to successfully integrate the business
and financial operations, services, intellectual property, solutions or personnel of an acquired business and to maintain uniform standard
controls, policies and procedures; 2) diversion of management’s attention from other business concerns; 3) entry into markets in
which we have little or no direct prior experience; 4) failure to achieve projected synergies and performance targets; 5) loss of clients
or key personnel; 6) incurrence of debt or assumption of known and unknown liabilities; 7) write-off of software development costs, goodwill,
client lists and amortization of expenses related to intangible assets; 8) dilutive issuances of equity securities; and, 9) accounting
deficiencies that could arise in connection with, or as a result of, the acquisition of an acquired company, including issues related
to internal control over financial reporting and the time and cost associated with remedying such deficiencies. If we fail to successfully
integrate acquired businesses or fail to implement our business strategies with respect to these acquisitions, we may not be able to
achieve projected results or support the amount of consideration paid for such acquired businesses.
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IF
WE ARE UNABLE TO MANAGE OUR GROWTH IN THE NEW MARKETS IN WHICH WE OFFER SOLUTIONS OR SERVICES, OUR BUSINESS AND FINANCIAL RESULTS COULD
SUFFER.
Our future financial results will depend in part
on our ability to profitably manage our business in the new markets that we enter. Difficulties in managing future growth in new markets
could have a significant negative impact on our business, financial condition and results of operations.
WE
RELY HEAVILY ON OUR MANAGEMENT, AND THE LOSS OF THEIR SERVICES COULD ADVERSELY AFFECT OUR BUSINESS.
Our success is highly dependent upon the continued
services of our management including our Chief Executive Officer, Robert Liscouski, our Chief Operating Officer, Mr. William McGann,
and our Chief Financial Officer, Mr. Christopher Roberts. The loss of Mr. Liscouski’s, Mr. McGann’s or Mr. Roberts’
services would have a material adverse effect on the Company and its business operations.
WE MAY NOT BE ABLE TO IMPLEMENT OUR GROWTH
AND MARKETING STRATEGY SUCCESSFULLY OR ON A TIMELY BASIS OR AT ALL.
Our future success depends, in large part, on
our ability to implement our growth strategy of expanding distribution and sales of our product and service portfolio, attracting new
consumers and introducing new product lines and product extensions.
Our sales and operating results will be adversely
affected if we fail to implement our growth strategy or if we invest resources in a growth strategy that ultimately proves unsuccessful.
CYBER SECURITY RISKS AND THE FAILURE TO
MAINTAIN THE INTEGRITY OF DATA BELONGING TO OUR COMPANY COULD EXPOSE US TO DATA LOSS, LITIGATION AND LIABILITY, AND OUR REPUTATION COULD
BE SIGNIFICANTLY HARMED.
We may from time to time collect and retain large
volumes of data relating to our business and from our customers for business purposes, including for transactional and promotional purposes,
and our various information technology systems enter, process, summarize and report such data. The integrity and protection of this data
is critical to our business. Maintaining compliance with the evolving regulations and requirements applicable to data security and information
privacy protection could be difficult and may increase our expenses. In addition, a penetrated or compromised data system or the intentional,
inadvertent or negligent release or disclosure of data could result in theft, loss or fraudulent or unlawful use of data relating to
our company or our employees, independent distributors or preferred customers, which could harm our reputation, disrupt our operations,
or result in remedial and other costs, fines or lawsuits.
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COMPUTER MALWARE, VIRUSES, HACKING, PHISHING
ATTACKS AND SPAMMING COULD HARM OUR BUSINESS AND RESULTS OF OPERATIONS.
Computer malware, viruses, physical or electronic
break-ins and similar disruptions could lead to interruption and delays in our services and operations and loss, misuse or theft of data.
Computer malware, viruses, computer hacking and phishing attacks against online networking platforms have become more prevalent and may
occur on our systems in the future.
Any attempts by hackers to disrupt our internal
systems, if successful, could harm our business, be expensive to remedy and damage our reputation or brand. Our network security business
disruption insurance may not be sufficient to cover significant expenses and losses related to direct attacks on our website or internal
systems. Efforts to prevent hackers from entering our computer systems are expensive to implement and may limit the functionality of
our services. Though it is difficult to determine what, if any, harm may directly result from any specific interruption or attack, any
failure to maintain performance, reliability, security and availability of our products and services and technical infrastructure may
harm our reputation, brand and our ability to attract customers. Any significant disruption to our website or internal computer systems
could result in a loss of customers and could adversely affect our business and results of operations.
We have previously experienced, and may in the
future experience, service disruptions, outages and other performance problems due to a variety of factors, including infrastructure
changes, third-party service providers, human or software errors and capacity constraints. If our software application is unavailable
when customers attempt to access it or it does not load as quickly as they expect, customers may seek other services.
Our platform functions on software that is highly
technical and complex and may now or in the future contain undetected errors, bugs, or vulnerabilities. Some errors in our software code
may only be discovered after the code has been deployed. Any errors, bugs, or vulnerabilities discovered in our code after deployment,
inability to identify the cause or causes of performance problems within an acceptable period of time or difficultly maintaining and
improving the performance of our platform, particularly during peak usage times, could result in damage to our reputation or brand, loss
of revenues, or liability for damages, any of which could adversely affect our business and financial results.
We expect to continue to make significant investments
to maintain and improve the availability of our platform and to enable rapid releases of new features and products. To the extent that
we do not effectively address capacity constraints, upgrade our systems as needed and continually develop our technology and network
architecture to accommodate actual and anticipated changes in technology, our business and operating results may be harmed.
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GROWING OUR CUSTOMER BASE DEPENDS UPON
THE EFFECTIVE OPERATION OF OUR APPLICATIONS WITH OPERATING SYSTEMS, NETWORKS AND STANDARDS THAT WE DO NOT CONTROL.
We will be dependent on the interoperability
of our applications with operating systems that we do not control, and any changes in such systems that degrade our potential products’
functionality or give preferential treatment to competitive products could adversely affect the usage of our applications on quantum
processing units. Additionally, in order to deliver high quality products, it is important that our products work well with a range of
quantum computers, conventional computers, systems, networks and standards that we do not control. We may not be successful in developing
relationships with key participants in the quantum computing industry or in developing products that operate effectively with these technologies,
systems, networks or standards.
WE MAY NEVER SUCCESSFULLY COMMERCIALIZE
ANY PRODUCTS.
We have invested a substantial amount of our
time and resources in developing various new products and computing technologies. Commercialization of these products will require additional
development, clinical evaluation, beta testing, significant marketing efforts and substantial additional investment before they can provide
us with any revenue. Despite our efforts, these products may not become commercially successful products for a number of reasons, including
but not limited to:
● our products or technologies may not prove to be effective in trials;
● we may experience delays in our development program;
● rapid technological change may make our products obsolete;
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THE MARKET OPPORTUNITY FOR OUR PRODUCTS
AND TECHNOLOGIES MAY NOT DEVELOP IN THE WAYS THAT WE ANTICIPATE.
The demand for our products and technologies
can change quickly and in ways that we may not anticipate because the market in which we operate is characterized by rapid, and sometimes
disruptive, technological developments, evolving industry standards, frequent new product introductions and enhancements, changes in
customer requirements and a limited ability to accurately forecast future customer orders. Our operating results may be adversely affected
if the market opportunity for our products and services does not develop in the ways that we anticipate or if other technologies or products
become more accepted or standard in our industry or disrupt our technologies and products.
WE FACE SIGNIFICANT COMPETITION AND MANY
OF OUR COMPETITORS ARE LARGER AND HAVE GREATER FINANCIAL AND OTHER RESOURCES THAN WE DO.
Some of our product offerings and technologies
compete and will compete with other similar products from our competitors. These competitive products could be marketed by well-established,
successful companies that possess greater financial, marketing, distributional, personnel and other resources than we possess. In certain
instances, competitors with greater financial resources also may be able to enter a market in direct competition with us offering attractive
marketing tools to encourage the sale of products that compete with our products or present cost features that our target end users may
find attractive.
OUR INABILITY TO PROTECT OUR INTELLECTUAL
PROPERTY COULD IMPAIR OUR COMPETITIVE ADVANTAGE, REDUCE OUR REVENUE, AND INCREASE OUR COSTS.
Our success and ability to compete depends and
will depend in part on our ability to obtain and maintain the proprietary aspects of our technologies and products. We intend to rely
on a combination of trade secrets, patents, copyrights, trademarks, confidentiality agreements, and other contractual provisions to protect
our intellectual property, but these measures may provide only limited protection. We may not always be able to enforce these agreements
and may fail to enter into any such agreement in every instance when appropriate. We may from time to time license from third party’s
their brands or certain technology used in and for our products. These third-party licenses are granted with restrictions; therefore,
such third-party technology may not remain available to us on terms beneficial to us. Our failure to enforce and protect our intellectual
property rights or obtain from third parties the right to use necessary technology could have a material adverse effect on our business,
operating results, and financial condition. In addition, the laws of some foreign countries do not protect proprietary rights as fully
as do the laws of the United States.
Patents may not issue from the patent applications
that we may file in the future. Our issued patents may be challenged, invalidated, or circumvented, and claims of our patents may not
be of sufficient scope or strength, or issued in the proper geographic regions, to provide meaningful protection or any commercial advantage.
We plan to register certain of our trademarks in the United States and other countries. We cannot assure you that we will obtain registrations
of principal or other trademarks in key markets in the future. Failure to obtain registrations could compromise our ability to protect
fully our trademarks and brands, and could increase the risk of challenge from third parties to our use of our trademarks and brands.
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WE MAY NOT BE ABLE TO PROTECT OUR SOURCE
CODE FROM COPYING IF THERE IS AN UNAUTHORIZED DISCLOSURE OF SOURCE CODE.
Source code, the detailed program commands for
our operating systems and other software programs, is critical to our business. Although we license portions of our application and operating
system source code to several licensees, we take significant measures to protect the secrecy of large portions of our source code. If
a significant portion of our source code leaks, we might lose future trade secret protection for that source code. It may become easier
for third parties to compete with our products by copying functionality, which could adversely affect our revenue and operating margins.
OUR FAILURE TO KEEP PACE WITH RAPID TECHNOLOGY
CHANGES COULD HAVE A NEGATIVE IMPACT ON OUR BUSINESS, FINANCIAL CONDITION AND FINANCIAL RESULTS.
The markets for our products and services are
characterized by rapid technological developments and frequent changes in customer requirements. We must continually improve the performance,
features and reliability of our products and services, particularly in response to competitive offerings, to keep pace with these developments.
We must ensure that our products and services address evolving operating environments, devices, industry trends, certifications and standards.
We also may need to develop products that are compatible with new operating systems while remaining compatible with existing, popular
operating systems. Our business could be harmed by our competitors announcing or introducing new products and services that could be
perceived by customers as superior to ours. We spend considerable resources on technology research and development, but our research
and development resources are more limited than many of our competitors.
Our failure to introduce new or enhanced products
on a timely basis, to keep pace with rapid industry, technological or market changes or to gain customer acceptance for our new and existing
products and services, could have a material adverse effect on our business, financial condition and financial results.
WE MAY FAIL TO RECRUIT AND RETAIN KEY PERSONNEL,
WHICH COULD IMPAIR OUR ABILITY TO MEET KEY OBJECTIVES.
Our success depends on our ability to attract
and retain highly-skilled technical, managerial, sales, and marketing personnel. Changes in key personnel may be disruptive to our business.
It could be difficult, time consuming and expensive to replace key personnel. Integrating new key personnel may be difficult and costly.
Volatility, lack of positive performance in our stock price or changes to our overall compensation program including our stock incentive
program may adversely affect our ability to retain key employees, many of whom are compensated, in part, based on the performance of
our stock price. The loss of services of any of our key personnel, the inability to retain and attract qualified personnel in the future
or delays in hiring required personnel could make it difficult to meet key objectives. Any of these impairments related to our key personnel
could negatively affect our business, financial condition and financial results.
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To remain competitive in our industries, we must
attract, motivate and retain highly skilled managerial, sales, marketing, consulting and technical personnel, including executives, consultants,
programmers and systems architects skilled in quantum computing, computing, and the technical environments in which our solutions, devices
and services are needed. Competition for such personnel in our industries is intense in both the United States and abroad. Our failure
to attract additional qualified personnel to meet our needs could have a material adverse effect on our prospects for long-term growth.
In addition, we invest significant time and expense in training our associates, which increases their value to clients and competitors
who may seek to recruit them and increases the cost of replacing them. Our success is dependent to a significant degree on the continued
contributions of key management, sales, marketing, consulting and technical personnel. The unexpected loss of key personnel could have
a material adverse impact on our business and results of operations, and could potentially inhibit development and delivery of our solutions,
devices and services and market share advances.
IF WE FAIL TO ESTABLISH AND MAINTAIN AN
EFFECTIVE SYSTEM OF INTERNAL CONTROL, WE MAY NOT BE ABLE TO REPORT OUR FINANCIAL RESULTS ACCURATELY OR PREVENT FRAUD. ANY INABILITY TO
REPORT AND FILE OUR FINANCIAL RESULTS ACCURATELY AND TIMELY COULD HARM OUR REPUTATION AND ADVERSELY IMPACT THE TRADING PRICE OF OUR COMMON
STOCK.
Effective internal control is necessary for us
to provide reliable financial reports and prevent fraud. If we cannot provide reliable financial reports or prevent fraud, we may not
be able to manage our business as effectively as we would if an effective control environment existed, and our business and reputation
with investors may be harmed. As a result, our small size and any current internal control deficiencies may adversely affect our financial
condition, results of operations and access to capital.
THE QUANTUM COMPUTING INDUSTRY IS IMMATURE
AND VOLATILE, AND IF IT DOES NOT DEVELOP, IF IT DEVELOPS MORE SLOWLY THAN WE EXPECT, IF IT ENCOUNTERS NEGATIVE PUBLICITY OR IF OUR SOLUTION
DOES NOT DRIVE COMMERCIAL ENGAGEMENT, THE GROWTH OF OUR BUSINESS WILL BE HARMED.
With respect to our quantum computing application
services, the quantum computing industry is relatively new and unproven, and it is uncertain whether it will achieve and sustain high
levels of demand, consumer acceptance and market adoption. Our success will depend to a substantial extent on the willingness of our
potential customers to use, and increase their utilization of, our solution, as well as on our ability to demonstrate the value of quantum
computing to their respective organization, government agencies, and other purchasers of quantum computing offerings. Negative publicity
concerning our solution or the quantum computing industry as a whole could limit market acceptance of our solution. If our clients and
partners do not perceive the benefits of our solution, or if our solution does not drive member engagement, then our market may not develop
at all, or it may develop more slowly than we expect. Similarly, individual and industry concerns or negative publicity regarding technophobic
views in the context of quantum computing could limit market acceptance of our quantum computing services. If any of these events occur,
it could have a material adverse effect on our business, financial condition or results of operations.
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RAPID TECHNOLOGICAL CHANGE IN OUR INDUSTRY
PRESENTS US WITH SIGNIFICANT RISKS AND CHALLENGES.
The quantum computing market is characterized
by rapid technological change, changing user requirements, uncertain product lifecycles and evolving industry standards. Our success
will depend on our ability to enhance our products and services with next-generation technologies and to develop or to acquire and market
new products and services to access new market segments. There is no guarantee that we will possess the resources, either financial or
personnel, for the research, design and development of new applications or services, or that we will be able to utilize these resources
successfully and avoid technological or market obsolescence. Further, there can be no assurance that technological advances by one or
more of our competitors or future competitors will not results in present or future applications and services becoming uncompetitive
or obsolete.
Risks Related to Our
Common Stock
OUR STOCK PRICE MAY BE VOLATILE OR MAY
DECLINE REGARDLESS OF OUR OPERATING PERFORMANCE, AND YOU MAY LOSE PART OR ALL OF YOUR INVESTMENT.
The market price of our common stock may fluctuate
widely in response to various factors, some of which are beyond our control, including:
● actions by competitors;
● actual or anticipated growth rates relative to our competitors;
● economic, legal and regulatory factors unrelated to our performance;
● speculation by the press or investment community regarding our business;
● litigation;
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● changes in key personnel; and
In addition, the stock markets, including the
over-the-counter markets where we are quoted, have experienced extreme price and volume fluctuations that have affected and continue
to affect the market prices of equity securities of many companies. These broad market fluctuations may materially affect our stock price,
regardless of our operating results. Furthermore, the market for our common stock historically has been limited and we cannot assure
you that a larger market will ever be developed or maintained. The price at which investors purchase shares of our common stock may not
be indicative of the price that will prevail in the trading market. Market fluctuations and volatility, as well as general economic,
market and political conditions, could reduce our market price. As a result, these factors may make it more difficult or impossible for
you to sell our common stock for a positive return on your investment. In the past, shareholders have instituted securities class action
litigation following periods of market volatility. If we were involved in securities litigation, we could incur substantial costs and
our resources and the attention of management could be diverted from our business.
FUTURE SALES OF SHARES OF OUR COMMON STOCK,
OR THE PERCEPTION IN THE PUBLIC MARKETS THAT THESE SALES MAY OCCUR, MAY DEPRESS OUR STOCK PRICE.
The market price of our common stock could decline
significantly as a result of sales of a large number of shares of our common stock. In addition, if our significant shareholders sell
a large number of shares, or if we issue a large number of shares, the market price of our stock could decline. Any issuance of additional
common stock by us in the future, or warrants or options to purchase our common stock, if exercised, would result in dilution to our
existing shareholders. Such issuances could be made at a price that reflects a discount or a premium to the then-current trading price
of our common stock. Moreover, the perception in the public market that shareholders might sell shares of our stock or that we could
make a significant issuance of additional common stock in the future could depress the market for our shares. These sales, or the perception
that these sales might occur, could depress the market price of our common stock or make it more difficult for us to sell equity securities
in the future at a time and at a price that we deem appropriate.
We have issued shares of common stock and convertible
notes which are convertible into shares of our common stock in connection with our private placements and certain employment, director
and consultant agreements. In addition, we issued shares of our common stock and convertible notes which are convertible into shares
of our common stock, in financing transactions and pursuant to employment agreements that are deemed to be “restricted securities,”
as that term is defined in Rule 144 promulgated under the Securities Act. From time to time, certain of our shareholders may be eligible
to sell all or some of their restricted shares of common stock by means of ordinary brokerage transactions in the open market pursuant
to Rule 144, subject to certain limitations. The resale pursuant to Rule 144 of shares acquired from us in private transactions could
cause our stock price to decline significantly.
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“PENNY STOCK” RULES MAY MAKE
BUYING OR SELLING OUR COMMON STOCK DIFFICULT.
If the market price for our common stock is below
$5.00 per share, trading in our common stock may be subject to the “penny stock” rules. The SEC has adopted regulations that
generally define a penny stock to be any equity security that has a market price of less than $5.00 per share, subject to certain exceptions.
These rules would require that any broker-dealer that would recommend our common stock to persons other than prior customers and accredited
investors, must, prior to the sale, make a special written suitability determination for the purchaser and receive the purchaser’s
written agreement to execute the transaction. Unless an exception is available, the regulations would require the delivery, prior to
any transaction involving a penny stock, of a disclosure schedule explaining the penny stock market and the risks associated with trading
in the penny stock market. In addition, broker-dealers must disclose commissions payable to both the broker-dealer and the registered
representative and current quotations for the securities they offer. The additional burdens imposed upon broker-dealers by such requirements
may discourage broker-dealers from effecting transactions in our common stock, which could severely limit the market price and liquidity
of our common stock.
SALES OF OUR CURRENTLY ISSUED AND OUTSTANDING
STOCK MAY BECOME FREELY TRADABLE PURSUANT TO RULE 144 AND MAY DILUTE THE MARKET FOR YOUR SHARES AND HAVE A DEPRESSIVE EFFECT ON THE PRICE
OF THE SHARES OF OUR COMMON STOCK.
A substantial minority of our outstanding shares
of common stock are “restricted securities” within the meaning of Rule 144 under the Securities Act. As restricted shares,
these shares may be resold only pursuant to an effective registration statement or under the requirements of Rule 144 or other applicable
exemptions from registration under the Act and as required under applicable state securities laws. Rule 144 provides in essence that
an Affiliate (as such term is defined in Rule 144(a)(1)) of an issuer who has held restricted securities for a period of at least six
months (one year after filing Form 10 information with the SEC for shell companies and former shell companies) may, under certain conditions,
sell every three months, in brokerage transactions, a number of shares that does not exceed the greater of 1% of a company’s outstanding
shares of common stock or the average weekly trading volume during the four calendar weeks prior to the sale. Rule 144 also permits,
under certain circumstances, the sale of securities, without any limitation, by a person who is not an Affiliate of the Company and who
has satisfied a one-year holding period. A sale under Rule 144 or under any other exemption from the Act, if available, or pursuant to
subsequent registrations of our shares of common stock, may have a depressive effect upon the price of our shares of common stock in
any active market that may develop.
POTENTIAL FUTURE FINANCINGS MAY DILUTE
THE HOLDINGS OF OUR CURRENT SHAREHOLDERS.
In order to provide capital for the operation
of our business, in the future we may enter into financing arrangements. These arrangements may involve the issuance of new shares of
common stock, preferred stock that is convertible into common stock, debt securities that are convertible into common stock or warrants
for the purchase of common stock. Any of these items could result in a material increase in the number of shares of common stock outstanding,
which would in turn result in a dilution of the ownership interests of existing common shareholders. In addition, these new securities
could contain provisions, such as priorities on distributions and voting rights, which could affect the value of our existing common
stock.
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WE CURRENTLY DO NOT INTEND TO PAY DIVIDENDS
ON OUR COMMON STOCK. AS A RESULT, YOUR ONLY OPPORTUNITY TO ACHIEVE A RETURN ON YOUR INVESTMENT IS IF THE PRICE OF OUR COMMON STOCK APPRECIATES.
We currently do not expect to declare or pay
dividends on our common stock. In addition, in the future we may enter into agreements that prohibit or restrict our ability to declare
or pay dividends on our common stock. As a result, your only opportunity to achieve a return on your investment will be if the market
price of our common stock appreciates and you sell your shares at a profit.
YOU MAY EXPERIENCE DILUTION OF YOUR OWNERSHIP
INTEREST DUE TO THE FUTURE ISSUANCE OF ADDITIONAL SHARES OF OUR COMMON STOCK.
We are in a capital-intensive business and we
do not have sufficient funds to finance the growth of our business or the costs of our development projects or to support our projected
capital expenditures indefinitely. As a result, we will very likely require additional funds from future equity or debt financings, including
tax equity financing transactions or sales of preferred shares or convertible debt, to complete the development of new projects and pay
the general and administrative costs of our business. We may in the future issue our previously authorized and unissued securities, resulting
in the dilution of the ownership interests of holders of our common stock. We are currently authorized to issue 250,000,000 shares of
common stock. The potential issuance of such additional shares of common stock or preferred stock or convertible debt may create downward
pressure on the trading price of our common stock. We may also issue additional shares of common stock or other securities that are convertible
into or exercisable for common stock in future public offerings or private placements for capital raising purposes or for other business
purposes. The future issuance of a substantial number of common shares into the public market, or the perception that such issuance could
occur, could adversely affect the prevailing market price of our common shares. A decline in the price of our common shares could make
it more difficult to raise funds through future offerings of our common shares or securities convertible into common shares.
FUTURE ISSUANCE OF OUR COMMON STOCK, PREFERRED
STOCK, OPTIONS AND WARRANTS COULD DILUTE THE INTERESTS OF EXISTING STOCKHOLDERS.
We may issue additional shares of our common
stock, preferred stock, options and warrants in the future. The issuance of a substantial amount of common stock, options and warrants
could have the effect of substantially diluting the interests of our current stockholders. In addition, the sale of a substantial amount
of common stock or preferred stock in the public market, or the exercise of a substantial number of warrants and options either in the
initial issuance or in a subsequent resale by the target company in an acquisition which received such common stock as consideration
or by investors who acquired such common stock in a private placement could have an adverse effect on the market price of our common
stock.
25
OUR EXECUTIVE OFFICERS AND DIRECTORS POSSESS
SIGNIFICANT VOTING POWER WITH RESPECT TO OUR COMMON STOCK, WHICH WILL LIMIT YOUR INFLUENCE ON CORPORATE MATTERS.
As of March 11, 2022, our directors and executive
officers collectively beneficially own approximately 15.8% of the shares of our common stock including the beneficial ownership of Mr.
Liscouski of 4.37% of the shares of our common stock.
As a result, our insiders have the ability to
significantly influence our management and affairs through the election and removal of our Board and all other matters requiring stockholder
approval, including any future merger, consolidation or sale of all or substantially all of our assets. This concentrated voting power
could discourage others from initiating any potential merger, takeover or other change-of-control transaction that may otherwise be beneficial
to our stockholders. Furthermore, this concentrated control will limit the practical effect of your influence over our business and affairs,
through any stockholder vote or otherwise. Any of these effects could depress the price of our common stock.
OUR ARTICLES OF INCORPORATION GRANTS OUR
BOARD THE POWER TO ISSUE ADDITIONAL SHARES OF COMMON AND PREFERRED SHARES AND TO DESIGNATE OTHER CLASSES OF PREFERRED SHARES, ALL WITHOUT
STOCKHOLDER APPROVAL.
Our authorized capital consists of 260,000,000
shares of capital stock of which 10,000,000 shares are authorized as preferred stock. Our Board, without any action by our stockholders,
may designate and issue shares of preferred stock in such series as it deems appropriate and establish the rights, preferences and privileges
of such shares, including dividends, liquidation and voting rights, provided it is consistent with Delaware law.
The rights of holders of our preferred stock
that may be issued could be superior to the rights of holders of our shares of common stock. The designation and issuance of shares of
capital stock having preferential rights could adversely affect other rights appurtenant to shares of our common stock. Furthermore,
any issuances of additional stock (common or preferred) will dilute the percentage of ownership interest of then-current holders of our
capital stock and may dilute our book value per share.
As of March 11, 2022, the Board has authorized
one class of 1,550,000 shares of Series A Convertible Preferred stock, par value $0.0001 per share, of which 1,545,459 shares are issued
and outstanding.
ITEM 1B. UNRESOLVED
STAFF COMMENTS.
Not applicable
26
ITEM 2. PROPERTIES.
We maintain our current
principal office at 215 Depot Court SE #215, Leesburg, VA 20175. Our telephone number at this office is (703) 436-2161. The Company leases
approximately 350 square feet under an annual lease in a multi-tenant facility that provides conference room space, 24/7 co-working space,
and other services on an as-needed basis in Leesburg, VA. The facility lease can be terminated upon 30 days written notice by the Company.
The Company also leases approximately 450 square feet under an annual lease in a multi-tenant facility that provides conference room
space, 24/7 co-working space, and other services on an as-needed basis in Minneapolis, MN, and subleases approximately 250 square feet
of office space in a multitenant building in Vancouver, British Columbia, Canada under an annual sublease agreement.
ITEM 3. LEGAL PROCEEDINGS.
We are not currently involved in any litigation
that we believe could have a material adverse effect on our financial condition or results of operations. There is no action, suit, or
proceeding by any court, public board, government agency, self-regulatory organization or body pending or, to the knowledge of the executive
officers of our Company or our subsidiaries, threatened against or affecting our Company, our common stock, our subsidiary or of our
companies or our subsidiary’s officers or directors in their capacities as such, in which an adverse decision could have a material
adverse effect.
ITEM 4. MINE SAFETY
DISCLOSURES.
Not applicable.
27
PART II
ITEM 5. MARKET FOR
REGISTRANT’S COMMON EQUITY, RELATED STOCKHOLDER MATTERS, AND ISSUER PURCHASES OF EQUITY SECURITIES.
Market Information
Our common stock is listed on the Nasdaq Capital
Market under the symbol “QUBT” and commenced trading since July 15, 2021.
Authorized Capital
The Company is authorized by its Certificate of
Incorporation to issue an aggregate of 250,000,000 shares of common stock, $0.0001 par value per share (the “Common Stock”),
and 10,000,000 shares of blank check preferred, of which 1,550,000 shares are designated as Series A Convertible Preferred Stock. As of
March 11, 2022, 2022, 29,156,815 shares of Common Stock were issued and outstanding and 1,545,459 shares of Series A Convertible Preferred
stock were issued and outstanding.
Holders of Common Equity
As of March 11, 2022, there were approximately
260 stockholders of record. Because shares of our common stock are held by depositaries, brokers and other nominees, the number of beneficial
holders of our shares is substantially larger than the number of stockholders of record.
Dividend Information
We have not paid any cash dividends to our holders
of common stock. The declaration of any future cash dividends is at the discretion of our board of directors and depends upon our earnings,
if any, our capital requirements and financial position, our general economic conditions, and other pertinent conditions. It is our present
intention not to pay any cash dividends in the foreseeable future, but rather to reinvest earnings, if any, in our business operations.
Unregistered Sales of Equity Securities and
Use of Proceeds
During the year ended December 31, 2021, we have
issued securities that were not registered under the Securities Act, all of which were previously disclosed in a Quarterly Report on
Form 10-Q or a Current Report on Form 8-K.
ITEM 6. [Reserved]
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ITEM 7. MANAGEMENT’S DISCUSSION AND
ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATION.
The following discussion and analysis of the
results of operations and financial condition for the years ended December 31, 2021 and 2020 should be read in conjunction with our consolidated
financial statements and the notes to those consolidated financial statements that are included elsewhere in this Annual Report. Our
discussion includes forward-looking statements based upon current expectations that involve risks and uncertainties, such as our plans,
objectives, expectations and intentions. Actual results and the timing of events could differ materially from those anticipated in these
forward-looking statements as a result of a number of factors. See “Forward-Looking Statements.”
Management’s discussion and analysis of
results of operations and financial condition (“MD&A”) is a supplement to the accompanying condensed financial statements
and provides additional information on Quantum Computing Inc.’s (“Quantum” or the “Company’) business,
current developments, financial condition, cash flows and results of operations.
When we say “we,” “us,”
“our,” “Company,” or “Quantum,” we mean Quantum Computing Inc.
Overview
At the present time,
we are a development stage company with limited operations. The Company plans to enter the market for high performance computers
and software applications, specifically focusing on what are known as “quantum computers”. The Company has assembled a team
of experts in quantum computing software technology and quantum mathematics, which will focus on the design and development of several
quantum software applications targeting solutions to non-deterministic polynomial applications. The Company’s development team
has initially focused on addressing computational problems in the financial services, supply chain and logistics management; pharmaceutical
design, heavy manufacturing, and computer security (cyber) market segments. The Company’s development team includes
mathematicians, physicists, and software developers.
Results of Operations
Twelve Months Ended December 31, 2021
vs. December 31, 2020
Revenues
(In thousands) Amount Mix Amount Mix Change
29
Revenues for the Twelve
Months ended December 31, 2021 were $0 as compared with $0 for the comparable prior year period, a change of $0, or 0%. In 2021, QCI
continued to execute its business strategy to provide quantum-ready solutions for solving real-world problems. Much progress was
made toward this overarching objective, but the generation of revenue from customers has been slower to develop. The lack of revenue
is due in part to the fact that quantum computing hardware is still emerging and only beginning to scale to levels that are closer to
solving important optimization problems at a commercial scale, and in part due to the fact that quantum computing is a novel idea for
most potential customers. Accordingly, the Company has focused on developing software technology to amplify the performance of existing
quantum hardware, and on customer education and building customer awareness as a precursor to generating sales. We have developed and
released two products and are now in the process of marketing and commercialization. We expect to generate revenue in 2022.
Cost of Revenues
Cost of revenues for
the twelve months ended December 31, 2021 was $0 as compared with $0 for the comparable prior year period, a change of $0 or 0%. There
was no cost of revenues recorded because the Company has not yet commenced generating revenue from sales of products or services.
Gross Margin
Gross margin for the
twelve months ended December 31, 2021 was $0 as compared with $0 for the comparable prior year period. There was no gross margin because
the Company has not yet commenced generating revenue from sales of products or services.
Operating Expenses
Operating expenses for
the twelve months ended December 31, 2021 were $17,130,093 as compared with $17,343,007 for the comparable prior year period, a decrease
of $212,914 or 1.23%. The decrease in operating expenses is due to a decrease in stock-based compensation expense of $1,775,766, a decrease
in consulting expense of $606,511, a decrease in legal expense of $169,889, and a decrease in other SG&A expense of $582,419 compared
to the comparable prior year period. These decreases were offset in part by an increase of $1,846,201 in salary expense and an increase
in R&D expense of $1,046,279, as the Company hired additional staff during the twelve months ended December 31, 2021 and reduced
its use of consultants compared with the prior year period.
Net Loss
Our net loss for the
twelve months ended December 31, 2021 was $27,898,847 as compared with a net loss of $24,734,280 for the comparable prior year period,
an increase of $3,164,567 or 12.8%. The increase in net loss is primarily due to an increase in interest expense of $3,160,703 relating
to the offering of Series A Convertible Preferred and Warrants, coupled with a decrease in other income of $225,749, incurred during
the twelve months ended December 31, 2021 compared with the prior year period.
30
Liquidity and Capital Resources
We fund our working capital with cash from investment.
Since commencing operations as Quantum Computing in February 2018, the Company has raised $27,759,904 through private placement of equity
and $5,133,000 through private placements of Convertible Promissory Notes for a total of $32,892,904 in new investment. The Company has
no lines of credit, and no long-term debt obligations outstanding. As of February 28, 2022, the Company had cash and equivalents of $13,229,380
on hand. We believe that our current cash position and other available financing resources, coupled with our ongoing operating activities,
will provide sufficient liquidity to fund our business needs over the next twelve months and beyond. To the extent the sources of capital
described above are insufficient to meet our needs, we may also conduct additional public offerings of our securities, refinance debt,
dispose of certain assets to fund our operating activities, or draw on existing or new debt facilities.
Critical Accounting
Policies
Basis of Presentation:
The accompanying audited Balance Sheet as of
December 31, 2021, and the audited 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 audited,
financial statements contain all adjustments necessary to present fairly the financial position of the Company as of December 31, 2021,
and the cash flows and results of operations for the three and twelve months then ended. Such adjustments consisted only of normal recurring
items. The results of operations for the twelve months ended December 31, 2021 are not necessarily indicative of the results for subsequent
periods.
Accounting Changes
Except for the changes discussed below, Quantum
has consistently applied the accounting policies to all periods presented in these unaudited financial statements. The Company has evaluated
all recently implemented accounting standards and concluded that none currently apply to the Company.
Use of Estimates:
These financial statements have been prepared
in accordance with generally accepted accounting principles in the United States of America. Because a precise determination of assets
and liabilities, and correspondingly revenues and expenses, depends on future events, the preparation of financial statements for any
period necessarily involves the use of estimates and assumption an example being assumptions in valuation of stock options. Actual amounts
may differ from these estimates. These financial statements have, in management’s opinion, been properly prepared within reasonable
limits of materiality and within the framework of the accounting policies summarized below.
31
Cash and Cash Equivalents
The Company’s policy is to present bank
balances under cash and cash equivalents, which at times, may exceed federally insured limits. The Company has not experienced any losses
in such accounts.
Operating Leases - ASC 842
On January 1, 2019, we adopted FASB Accounting
Standards Codification, or ASC, Topic 842, Leases (“ASC 842”) which requires the recognition of the right-of-use assets and
relating operating and finance lease liabilities on the balance sheet. 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.
We lease substantially all our office space used
to conduct our business. For contracts entered into on or after the effective date, at the inception of a contract we assess whether
the contract is, or contains, a lease. Our assessment is based on (1) whether the contract involves the use of a distinct identified
asset, (2) whether we obtain the right to substantially all the economic benefit from the use of the asset throughout the period, and
(3) whether we have the right to direct the use of the asset. At inception of a lease, we allocate the consideration in the contract
to each lease component based on its relative stand-alone price to determine the lease payments.
Leases 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, 2021 and 2020 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