QUANTUM COMPUTING INC. This quarterly report on Form 10-Q and other reports filedQuantum Computing, Inc. (the "Company" "we", "our", and "us") from time to time with theU.S. Securities and Exchange Commission (the "SEC") contain or may contain forward-looking statements and information that are based upon beliefs of, and information currently available to, the Company's management as well as estimates and assumptions made by Company's management. Readers are cautioned not to place undue reliance on these forward-looking statements, which are only predictions and speak only as of the date hereof. When used in the filings, the words "anticipate," "believe," "estimate," "expect," "future," "intend," "plan," or the negative of these terms and similar expressions as they relate to the Company or the Company's management identify forward-looking statements. Such statements reflect the current view of the Company with respect to future events and are subject to risks, uncertainties, assumptions, and other factors, including the risks contained in the "Risk Factors" section of the Company's Annual Report on Form 10-K for the fiscal year endedDecember 31, 2019 , relating to the Company's industry, the Company's operations and results of operations, and any businesses that the Company may acquire. Should one or more of these risks or uncertainties materialize, or should the underlying assumptions prove incorrect, actual results may differ significantly from those anticipated, believed, estimated, expected, intended, or planned. Although the Company believes that the expectations reflected in the forward-looking statements are reasonable, the Company cannot guarantee future results, levels of activity, performance, or achievements. Except as required by applicable law, including the securities laws ofthe United States , the Company does not intend to update any of the forward-looking statements to conform these statements to actual results. Our financial statements are prepared in accordance with accounting principles generally accepted inthe United States ("GAAP"). These accounting principles require us to make certain estimates, judgments and assumptions. We believe that the estimates, judgments and assumptions upon which we rely are reasonable based upon information available to us at the time that these estimates, judgments and assumptions are made. These estimates, judgments and assumptions can affect the reported amounts of assets and liabilities as of the date of the financial statements as well as the reported amounts of revenues and expenses during the periods presented. Our financial statements would be affected to the extent there are material differences between these estimates and actual results. In many cases, the accounting treatment of a particular transaction is specifically dictated by GAAP and does not require management's judgment in its application. There are also areas in which management's judgment in selecting any available alternative would not produce a materially different result. The following discussion should be read in conjunction with our financial statements and notes thereto appearing elsewhere in this report. Overview At the present time, we are a development stage company with limited operations. The Company is currently developing "quantum ready" software applications and solutions for companies that want to leverage the promise of quantum computing. We believe the quantum computer holds the potential to disrupt several global industries. Independent of when quantum computing delivers compelling performance advantage over classic computing, the software tools and applications to accelerate real-world problems must be developed to deliver quantum computing's full promise. We specialize in quantum computer-ready software application, analytics, and tools, with a mission to deliver differentiated performance using non-quantum processors in the near-term. We are leveraging our collective expertise in finance, computing, mathematics and physics to develop a suite of quantum software applications that may enable global industries to utilize quantum computers, quantum annealers and digital simulators to improve their processes, profitability, and security. We primarily focus on the quadratic unconstrained binary optimization (QUBO) formulation, which is equivalent to the Ising model implemented by hardware annealers, both non-quantum from Fujitsu and others and quantum fromD-Wave Systems , and also mappable to gate-model quantum processors. We have built a software stack that maps and optimizes problems in the QUBO form and then solves them powerfully on cloud-based processors. Our software is designed to be capable of running on both classic computers and on annealers such as D-Wave's quantum processor. We are also building applications and analytics that deliver the power of our software stack to high-value discrete optimization problems posed by financial, bio/pharma, and cybersecurity analysts. The advantages our software delivers can be faster time-to-solution to the same results, more-optimal solutions, or
multiple solutions.
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Products and Products in Development
Quantum Asset Allocator: We have released our first commercial product for the FinTech, or Financial Technology, market, the Quantum Asset Allocator (QAA). The target market for QAA is financial institutions who are currently addressing asset allocation problems but are looking for better tools with which to optimize portfolio performance. QAA is available both as a cloud-based software service and as an on-premises software-plus-hardware system. "Mukai" quantum application development platform: The Company recently released its "Mukai" quantum application development platform. Mukai can be used to solve extremely complex optimization problems, which are at the heart of some of the most difficult computing challenges in industry and government. Its software stack enables developers to create and execute quantum-ready applications on classic computers, while being ready to run on quantum computers when those systems can achieve performance advantages. Mukai uses highly-optimized parallel code, and is currently centered on the quadratic unconstrained binary optimization (QUBO) formulation well known to quantum annealing users.
The Company is currently working on software products to address, community detection (analysis for pharmaceutical applications and epidemiology), optimization of job shop scheduling, logistics, and dynamic route optimization for transportation systems. The Company is continuing to seek out difficult problems for which our technology may provide improvement over existing solutions.
Financial Application The Company is currently focused on a number of software application development efforts relating to finance. We are working with early users of our QAA product, to find related problems that are large and complex enough to benefit from quantum acceleration. The finance industry has used quantitative finance software applications for several decades. However, existing software applications have been limited in their performance due to the lack of computing power needed to solve the relevant classes of optimization problems.
We are continuing to develop software to address two classes of financial optimization problems: Asset allocation and Yield Curve Trades. For asset allocation, our target clients are the asset allocation departments of large funds, who we envision using our application to improve their allocation of capital into various asset classes.
Development of these algorithms has been on-going for the past four quarters and we have been working with beta clients for our financial application since August of 2019. Once client beta testing is completed we plan to hire sales staff to begin commercial sales and marketing anticipated to begin in the third or fourth quarter of 2020. Results of Operations
Three Months Ended
Revenues
For the Three Months For the Three Months
Ended June 30, 2020 Ended June 30, 2019 (In thousands) Amount Mix Amount Mix Change Products 0 0 % 0 0 % 0 % Services 0 0 % 0 0 % 0 % Total$ 0 100.0 %$ 0 100.0 % 0 % 20
Revenues for the three months endedJune 30, 2020 were$0 as compared with$0 for the comparable prior year period, a change of$0 , or 0%. The lack of revenue is due to the fact that the Company has not yet completed the development and testing of any products for sale, or sold any products or services to any customers. Cost of Revenues Cost of revenues for the three months endedJune 30, 2020 was$0 as compared with$0 for the comparable prior year period, a change of$0 or 0%. There was no cost of revenues recorded because the Company has not yet commenced marketing and selling products or services. Gross Margin
Gross margin for the three months ended
Operating Expenses Operating expenses for the three months endedJune 30, 2020 were$917,556 as compared with$1,982,982 for the comparable prior year period, a decrease of$1,065,425 , or 54%. The decrease in operating expenses is due in large part to the$1,262,445 decrease in stock-based compensation expense in the second quarter of 2020 compared with the comparable period in 2019. In addition, changes in the number and composition of staff resulted in a$17,965 increase in salary and benefit expenses, and a$190,515 increase in research and development expenses, offset in part by a$22,888 decrease in consulting fees, compared to the comparable prior year period. Net Income (Loss) Our net loss for the three months endedJune 30, 2020 was$1,778,599 as compared with a net loss of$2,033,226 for the comparable prior year period, a decrease of$254,627 or 12.5%. The decrease in net loss is primarily due to the decrease in operating expenses, offset by$814,131 in interest expense largely associated with the mark to market repricing of a convertible promissory note derivative, replacing one derivative with another, granting warrants, and repricing existing warrants, and other financing related expenses recorded in the current period compared to the comparable prior year period.
Six Months Ended
Revenues
For the Six Months Ended For the Six Months Ended
June 30, 2020 June 30, 2019 (In thousands) Amount Mix Amount Mix Change Products 0 0 % 0 0 % 0 % Services 0 0 % 0 0 % 0 % Total $ 0 100.0 % $ 0 100.0 % 0 %
Revenues for the Six months endedJune 30, 2020 were$0 as compared with$0 for the comparable prior year period, a change of$0 , or 0%. The lack of revenue is due to the fact that the Company has not yet completed the development and testing of any products for sale, or sold any products or services to any customers. Cost of Revenues
Cost of revenues for the Six months endedJune 30, 2020 was$0 as compared with$0 for the comparable prior year period, a change of$0 or 0%. There was no cost of revenues recorded because the Company has not yet commenced marketing and selling products or services. Gross Margin
Gross margin for the Six months ended
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Operating Expenses
Operating expenses for the Six months ended June 30, 2020 were $2,655,949 as
compared with $2,566,120 for the comparable prior year period, an increase of
$89,828 , or 3.5%. The increase in operating expenses is due in large part to the
$383,908 increase in research and development expenses, offset in part by a
$321,345 decrease in stock-based compensation expense in the first half of 2020
compared with the comparable period in 2019. In addition, changes in the number
and composition of staff resulted in a $67,144 increase in salary and benefit
expenses, and a $33,751 decrease in consulting expenses, coupled with an $11,400
decrease in audit fees, compared to the comparable prior year period.
Net Income (Loss)
Our net loss for the Six months ended June 30, 2020 was $2,476,778 as compared
with a net loss of $2,668,899 for the comparable prior year period, a decrease
of $192,122 or 7.2%. The decrease in net loss is primarily due to the increase
in operating expenses, noted above, offset by $432,500 in other income from a
legal settlement and a local government business grant, and a $143,533 increase
in interest expense largely associated with the mark to market repricing of a
convertible promissory note derivative, replacing one derivative with another,
granting warrants, and repricing existing warrants, and other financing related
expenses recorded in the current period compared to the comparable prior year
period.
Liquidity and Capital Resources
Since commencing operations asQuantum Computing inFebruary 2018 , the Company has raised$75,000 through private placement of equity and$5,341,055 through private placements of Convertible Promissory Notes for a total of$5,416,055 in new investment. The Company has no bank loans or lines of credit, and no long-term debt obligations. As ofJune 30, 2020 , the Company had cash and equivalents of$496,601 on hand.
The following table summarizes total current assets, liabilities and working
capital at
June 30, December 31,
2020 2019 Increase/(Decrease)
Current Assets $ 505,187 $ 122,649 $ 382,538
Current Liabilities $ 3,523,844 $ 2,960,538 $ (563,306 )Working Capital (Deficit)$ (3,018,657 ) $ (2,837,889 ) $
180,768 AtJune 30, 2020 , we had a working capital deficit of$3,018,657 as compared to working capital deficit of$2,837,889 atDecember 31, 2019 , an increase of$180,768 . The increase in working capital deficit is primarily attributable to an increase in accrued expenses and short-term loans resulting from deferring payments to some suppliers and obtaining new sources of debt financing.Net Cash Net cash used in operating activities for the six months endedJune 30, 2020 and 2019 was$2,408,104 and$933,936 , respectively. The net loss for the six months endedJune 30, 2020 and 2019, was$2,476,778 and$2,668,900 , respectively. Net cash used in investing activities for the six months endedJune 30, 2020 and 2019 were$3,258 and$ 0 , respectively representing a$3,258 increase in investments for computer equipment in 2020 compared with the first six months of 2019.
Net cash provided in financing activities for the six months endedJune 30, 2020 was$2,806,863 and cash flows provided (used) in the same period of 2019 was ($26,000 .) Cash flows provided in financing activities during the first six-month period in 2020 were primarily attributable to issuance of convertible notes, conversion of convertible notes to stock, and the exercise of warrants issued with those notes. The cash flow used in financing activities during the first six months of 2019 were related to the redemption of a convertible promissory note. 22
Previously, we have funded our operations primarily through the sale of our equity (or equity linked) and debt securities. During 2020, we have funded our operations through the sale of convertible debt securities and exercise of warrants issued in conjunction with convertible debt, and income from a legal settlement with REMTC. As ofAugust 10, 2020 , we had cash on hand of approximately$345,149 . We have approximately$8,795 in monthly lease and other mandatory payments, not including payroll and ordinary expenses which are due monthly. On a long-term basis, our liquidity is dependent on continuation and expansion of operations and receipt of revenues. Our current capital and revenues are not sufficient to fund such expansion and we will continue to rely on the sale of our debt and or equity securities to fund operations. Demand for the products and services will be dependent on, among other things, market acceptance of our products and services, the technology market in general, and general economic conditions, which are cyclical in nature. In as much as a major portion of our activities will be the receipt of revenues from the sales of our products, our business operations may be adversely affected by our competitors and prolonged recession periods. 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 six-month periods endedJune 30, 2020 and 2019, and has an accumulated deficit of$31,237,733 and$23,048,767 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.
Off Balance Sheet Arrangements
During the six months endedJune 30, 2020 or for fiscal 2019, we did not engage in any material off-balance sheet activities or have any relationships or arrangements with unconsolidated entities established for the purpose of facilitating off-balance sheet arrangements or other contractually narrow or limited purposes. Further, we have not guaranteed any obligations of unconsolidated entities nor do we have any commitment or intent to provide additional funding to any such entities.
Critical Accounting Policies and Estimates
We have identified the accounting policies below as critical to our business operations and the understanding of our results of operations.
Use of Estimates:
These financial statements have been prepared in accordance with generally accepted accounting principles inthe 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.
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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.
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