Quantum Computing (QUBT) 10-Q2023 Q1 Quarterly report

UNITED STATES

SECURITIES AND EXCHANGE COMMISSION

Washington, D.C. 20549

FORM 10-Q

☒ QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934

For the quarterly period ended: March 31, 2023

or

☐ TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934

For the transition period from __________ to __________

Commission File Number: 001-40615

QUANTUM COMPUTING INC.

(Exact name of registrant as specified in its charter)

215 Depot Court SE, Suite 215

Leesburg, VA 20175

(Address of principal executive offices)

(703) 436-2121

(Registrant’s telephone number, including area code)

Securities registered pursuant to Section 12(b) of the Act:

Indicate by check mark whether the registrant (1) has filed all reports required to be filed by section 13 or 15(d) of the Securities Exchange Act of 1934 during the preceding 12 months, and (2) has been subject to such filing requirements for the past 90 days. Yes ☒ No ☐

Indicate by check mark whether the registrant has submitted electronically every Interactive Data File required to be submitted pursuant to Rule 405 of Regulation S-T (§232.405 of this chapter) during the preceding 12 months (or for such shorter period that the registrant was required to submit such files). Yes ☒ No ☐

Indicate by check mark whether the registrant is large accelerated filer, an accelerated filer, a non-accelerated filer, smaller reporting company, or an emerging growth company. See definition of “large accelerated filer,” “accelerated filer,” “smaller reporting company,” and “emerging growth company” in Rule 12b-2 of the Exchange Act:

If an emerging growth company, indicate by check mark if the registrant has elected not to use the extended transition period for complying with any new or revised financial accounting standards provided pursuant to Section 13(a) of the Exchange Act. ☐

Indicate by check mark whether the registrant is a shell company (as defined in Rule 12b-2 of the Exchange Act). Yes ☐ No ☒

As of May 9, 2023, there were 61,512,111 shares outstanding of the registrant’s common stock.

QUANTUM COMPUTING INC.

TABLE OF CONTENTS

PART I - FINANCIAL INFORMATION

Item 1. Financial Statements

QUANTUM COMPUTING INC.

Index to the Consolidated Financial Statements

(Unaudited)

QUANTUM COMPUTING INC.

Consolidated Balance Sheets

(Unaudited)

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

QUANTUM COMPUTING INC.

Consolidated Statement of Operations

(Unaudited)

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

QUANTUM COMPUTING INC.

Consolidated Statement of Stockholders’ Equity

For the Three Months Ended March 31, 2022

(Unaudited)

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

QUANTUM COMPUTING INC.

Consolidated Statement of Stockholders’ Equity

For the Three Months Ended March 31, 2023

(Unaudited)

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

QUANTUM COMPUTING INC.

Consolidated Statements of Cash Flows

For the Three Months Ended March 31, 2023 and 2022

(Unaudited)

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

QUANTUM COMPUTING INC.

Notes to Consolidated Financial Statements

March 31, 2023

Note 1 – Nature of the Organization and Business

Corporate History

Quantum Computing, Inc. (“Quantum” or the “Company”) was formed in the State of Nevada on July 25, 2001, under its prior name, Ticketcart, Inc. The Company redomiciled to Delaware on February 22, 2018 and changed its name to Quantum Computing Inc. Effective July 20, 2018, the trading symbol for the Company’s common stock, par value $0.0001, on the OTC Market changed from "IBGH” to “QUBT”. On July 15, 2021 the Company uplisted to The NASDAQ Stock Market. On June 16, 2022, the Company merged with QPhoton, Inc., a developer of quantum photonic systems and related technologies and applications.

Nature of Business

The Company is a developer of full stack quantum computing systems, including hardware platforms and ready-to-run software for complex optimization computations. The Company was founded in 2018 by leaders in supercomputing, mathematics, and massively parallel programming to solve the enormous challenge with quantum computing in terms of the high cost and lengthy times required for quantum software development. While much of the market focuses on Quantum Processing Unit (QPU) hardware, QCI’s experts realized that the quantum marketplace and vendors were limiting access to quantum computers due to the complexity of programming them. At the present time, only a very limited number of highly specialized quantum experts are able to use software development toolkits (“SDKs”) to create these critical programs and applications. The Company’s software solution, Qatalyst, enables subject matter experts (SMEs) to run existing software on quantum processing units without the need for specialized programming with SDKs. As a result of the merger with QPhoton, Inc. in June 2022, the Company is now able to offer photonic quantum computing systems and related services.

Liquidity

On October 28, 2022 the Company filed a shelf registration statement on Form S-3 under the Securities Act of 1933, as amended (the “Securities Act”), which was declared effective on November 8, 2022 (the “2022 shelf”). Under the 2022 Shelf at the time of effectiveness, the Company had the ability to raise up to $100 million by selling common stock, preferred stock, debt securities, warrants and units. On December 5, 2022, the Company entered into an At the Market Issuance Sales Agreement (the “ATM Agreement”) with Ascendiant Capital Markets, LLC (“Ascendiant”) relating to the sale of its common stock, and incorporated the ATM Agreement into the 2022 Shelf by amendment that was declared effective January 10, 2023.

Under the terms of the ATM Agreement, the Company may, but is not obligated to, offer and sell, from time to time, shares of common stock having an aggregate offering price of up to $25 million through Ascendiant. Sales of common stock, if any, will be made by any method permitted that is deemed an ”at the market offering” as defined in Rule 415 under the Securities Act. The Company intends to use any net proceeds from the sale of securities for our operations and for other general corporate purposes, including, but not limited to, capital expenditures, general working capital, and possible future acquisitions. There were 3,021,632 shares of common stock sold under the ATM Agreement during the three months ended March 31, 2023 and no shares of common stock sold under the ATM Agreement during the three months ended March 31, 2022. As of March 31, 2023, the Company has utilized $6.6 million of the 2022 Shelf. The Company has approximately $93.4 million available under the 2022 Shelf and $18.4 million available under the 2022 Shelf as of March 31, 2023.

QUANTUM COMPUTING INC.

Notes to Consolidated Financial Statements

March 31, 2023

Note 2 – Significant Accounting Policies:

Basis of Presentation and Principles of Consolidation:

The Company prepares its consolidated financial statements in conformity with accounting principles generally accepted in the United States of America (“U.S. GAAP”) as determined by the Financial Accounting Standards Board (“FASB”) Accounting Standards Codification (“ASC”), including ASC 810, Consolidation. The consolidated financial statements include the accounts of the Company and its controlled subsidiaries. All intercompany transactions and balances have been eliminated in consolidation.

The Company’s fiscal year end is December 31.

The accompanying financial statements have been prepared in conformity with U.S. GAAP, which contemplate continuation of the Company as a going concern for a period of one year from the issuance of these financial statements. For the quarter ended March 31, 2023, the Company had $120,530 in revenues, a net loss of $8,506,139 and had net cash used in operations of $4,716,301. Additionally, as of March 31, 2023, the Company had a working capital deficit of $5,477,258 and an accumulated deficit of $128,493,920. It is management’s opinion that these conditions raise substantial doubt about the Company’s ability to continue as a going concern for a period of twelve months from the date of these unaudited financial statements. The financial statements do not include any adjustments to reflect the possible future effect on the recoverability and classification of assets or the amounts and classifications of liabilities that may result from the outcome of this uncertainty.

Successful completion of the Company’s development program and, ultimately, the attainment of profitable operations are dependent upon future events, including obtaining adequate financing to fulfill its development activities, acceptance of the Company’s patent applications and ultimately achieving a level of sales adequate to support the Company’s cost structure. However, there can be no assurances that the Company will be able to secure additional equity investments or achieve an adequate sales level.

Cash and Cash Equivalents

Highly liquid investments with a maturity of three months or less when purchased are considered to be cash equivalents. As of March 31, 2023, the Company had invested $5,780,468 in a highly liquid money market fund managed by Morgan Stanley. The Company maintains the balance of its operating cash in deposit accounts with high quality financial institutions which, at times, may exceed federally insured limits. The Company has not experienced any losses on these deposits and believes it is not exposed to significant credit risk on cash.

Use of Estimates:

These financial statements have been prepared in accordance with accounting principles generally accepted in the United States which requires management to make estimates and assumptions that affect the reported amounts of assets and liabilities at the date of the financial statements, and the reported amounts of revenues and expenses during the reporting period. Some of the more significant estimates required to be made by management include the determination of reserves for accounts receivable, stockholders equity-based transactions and liquidity assessment. Actual results may differ from these estimates.

QUANTUM COMPUTING INC.

Notes to Consolidated Financial Statements

March 31, 2023

Revenue

The Company recognizes revenue in accordance with ASC 606 – Revenue from Contracts with Customers, by analyzing contracts with its customers using a five-step approach:

The Company recognized revenue in 2023 and in 2022 from contracts to perform professional services. Revenue from time and materials-based contracts is recognized as the direct hours worked during the period times the contractual hourly rate, plus direct materials and other direct costs as appropriate, plus negotiated materials handling burdens, if any. Revenue from units-based contracts is recognized as the number of units delivered or performed during the period times the contractual unit price. Revenue from fixed price contracts is recognized as work is performed with estimated profits recorded on a percentage of completion basis. The Company has no cost-plus type contracts at this time.

Accounts Receivable and Allowance for Doubtful Accounts

Accounts receivable principally consists of amounts due from customers for work performed on contracts. The Company records accounts receivable at their net realizable value. Periodically the Company evaluates its accounts receivable to establish an allowance for doubtful accounts, when deemed necessary, based on the history of past write-offs, collections and current credit conditions. During 2022 certain accounts receivable, attributable to a single customer, were determined not to be collectible and management recorded an allowance for doubtful accounts and wrote off the uncollectible receivables against that account. The accounts receivable as of March 31, 2023 and December 31, 2022 are considered fully collectible and thus management has not recorded an allowance for doubtful accounts.

QUANTUM COMPUTING INC.

Notes to Consolidated Financial Statements

March 31, 2023

Operating Leases - ASC 842

The Company has adopted FASB Accounting Standards Codification, or ASC, Topic 842, Leases (“ASC 842”) which requires the recognition of the right-of-use assets and relating operating and finance lease liabilities on the balance sheet. Under ASC 842, all leases are required to be recorded on the balance sheet and are classified as either operating leases or finance leases. The lease classification affects the expense recognition in the income statement. Operating lease charges are recorded entirely in operating expenses. Finance lease charges are split, where amortization of the right-of-use asset is recorded in operating expenses and an implied interest component is recorded in interest expense. The expense recognition for operating leases and finance leases under ASC 842 is substantially consistent with ASC 840. As a result, there is no significant difference in our results of operations presented in our consolidated income statement and consolidated statement of comprehensive income for each period presented.

We lease substantially all our office space used to conduct our business. At the inception of a contract we assess whether the contract is, or contains, a lease. Our assessment is based on (1) whether the contract involves the use of a distinct identified asset, (2) whether we obtain the right to substantially all the economic benefit from the use of the asset throughout the period, and (3) whether we have the right to direct the use of the asset. At inception of a lease, we allocate the consideration in the contract to each lease component based on its relative stand-alone price to determine the lease payments.

Leases are classified as either finance leases or operating leases. A lease is classified as a finance lease if any one of the following criteria are met: (1) the lease transfers ownership of the asset by the end of the lease term, (2) the lease contains an option to purchase the asset that is reasonably certain to be exercised, (3) the lease term is for a major part of the remaining useful life of the asset or (4) the present value of the lease payments equals or exceeds substantially all of the fair value of the asset. A lease is classified as an operating lease if it does not meet any one of these criteria. Substantially all our operating leases are comprised of office space leases and as of December 31, 2022 and 2021 we had no finance leases.

For all leases at the lease commencement date, a right-of-use asset and a lease liability are recognized. The right-of-use asset represents the right to use the leased asset for the lease term. The lease liability represents the present value of the lease payments under the lease. The Company is currently leasing space in four locations, Arlington, VA, Leesburg, VA, Minneapolis, MN and Hoboken, NJ, and we have recognized right-of-use assets and lease liabilities accordingly. The right-of-use asset is initially measured at cost, which primarily comprises the initial amount of the lease liability, plus any initial direct costs incurred, consisting mainly of brokerage commissions, less any lease incentives received. All right-of-use assets are reviewed for impairment. The lease liability is initially measured at the present value of the lease payments, discounted using the interest rate implicit in the lease, or if that rate cannot be readily determined, our secured incremental borrowing rate for the same term as the underlying lease. For our real estate and other operating leases, we use our secured incremental borrowing rate. For our finance leases, we use the rate implicit in the lease or our secured incremental borrowing rate if the implicit lease rate cannot be determined.

Business Combinations

We account for business combinations under the acquisition method of accounting. This method requires the recording of acquired assets and assumed liabilities at their acquisition date fair values. The excess of the purchase price over the fair value of assets acquired and liabilities assumed is recorded as goodwill. Results of operations related to business combinations are included prospectively beginning with the date of acquisition and transaction costs related to business combinations are recorded withing general and administrative expenses.

QUANTUM COMPUTING INC.

Notes to Consolidated Financial Statements

March 31, 2023

Property and Equipment

Property and equipment are stated at cost or contributed value. Depreciation of furniture, software and equipment is calculated using the straight-line method over their estimated useful lives, and leasehold improvements are amortized on a straight-line basis over the shorter of their estimated useful lives or the lease term. The cost and related accumulated depreciation of equipment retired or sold are removed from the accounts and any differences between the undepreciated amount and the proceeds from the sale are recorded as a gain or loss on sale of equipment. Maintenance and repairs are charged against expense as incurred.

Research and Development Costs

Research and development costs include costs directly attributable to the conduct of research and development programs, including the cost of services provided by outside contractors, acquiring work-in-progress intellectual property, development, and mandatory compliance fees and contractual obligations. All costs associated with research and development are expensed as incurred.

Stock Based Compensation

The Company has adopted Accounting Standards Update (“ASU”) No. 2018-07, Compensation-Stock Compensation (Topic 718): Improvements to Nonemployee Share-Based Payment Accounting. ASU 2018-07 expands the scope of ASC 718, Share-Based Payment, to include share-based payment transactions for acquiring goods and services from nonemployees. An entity should apply the requirements of ASC 718 to nonemployee awards except for specific guidance on inputs to an option pricing model and the attribution of cost. ASU 2018-07 specifies that Topic 718 applies to all share-based payment transactions in which a grantor acquires goods or services to be used or consumed in a grantor’s own operations by issuing share-based payment awards, and that ASC 718 does not apply to share based payments used to effectively provide (1) financing to the issuer or (2) awards granted in conjunction with selling goods or services to customers as part of a contract accounted for under ASC 606, Revenue from Contracts with Customers

Stock-based compensation expense is recorded for all option grants and awards of non-vested stock and recognized in the financial statements based on the grant date fair value of the awards granted. Stock-based compensation is recognized as expense over the requisite service period, which generally represents the vesting period. The Company calculates the fair value of stock options using the Black-Scholes option-pricing model at grant date. The Company estimates a rate of forfeiture when recording stock option expense. The assumptions and estimates involved in the Black-Scholes model require significant judgement and any changes could have a material impact in the determination of stock-based compensation expense

Earnings (Loss) Per Share:

Basic earnings (loss) per common share (“EPS”) is based on the weighted average number of common shares outstanding during each period presented. Convertible securities, warrants, and options to purchase common stock are included as common stock equivalents only when dilutive. The Company follows the provisions of ASC 260, Diluted Earnings per Share. In computing diluted EPS, basic EPS is adjusted for the assumed issuance of all potentially dilutive securities. The dilutive effect of call options, warrants and share-based payment awards is calculated using the “treasury stock method,” which assumes that the “proceeds” from the exercise of these instruments are used to purchase common shares at the average market price for the period. The dilutive effect of traditional convertible debt and preferred stock is calculated using the “if-converted method,” pursuant to which the securities are assumed to be converted at the beginning of the period, and the resulting common shares are included in the denominator of the diluted EPS calculation for the entire period being presented.

QUANTUM COMPUTING INC.

Notes to Consolidated Financial Statements

March 31, 2023

Note 3 – Business Combinations

Merger with QPhoton, Inc.

On May 19, 2022, the Company, QPhoton, and Yuping Huang, the principal stockholder of QPhoton (“Mr. Huang”), entered into an Agreement and Plan of Merger (the “Merger Agreement”), pursuant to which the Company agreed to acquire QPhoton through a series of merger transactions (collectively with the other transactions contemplated by the Merger Agreement, the “Transactions”). On June 16, 2022, all conditions precedent having been met or waived by the Parties, the Company Closed the Transaction with QPhoton.

Pursuant to the Merger Agreement, immediately following the closing of the Transactions contemplated by the Merger Agreement (the “Closing”), Merger Sub I (a wholly owned subsidiary of the Company) merged with and into QPhoton, with QPhoton surviving the merger as a wholly-owned subsidiary of the Company, immediately after which the surviving corporation merged with and into Merger Sub II (also a wholly owned subsidiary of the Company), with Merger Sub II surviving the merger as a wholly-owned subsidiary of the Company (the “Surviving Company”). The merger consideration to be paid to the stockholders of QPhoton (the “Merger Consideration”) consists of (i) 5,802,206 shares of the Company’s common stock, par value $0.0001 per share (“Common Stock”), (ii) 2,377,028 shares of a new series of the Company’s preferred stock, par value $0.0001 per share, to be designated Series B convertible preferred stock (“Series B Preferred Stock”), and (iii) warrants to purchase up to 7,028,337 shares of Common Stock (the “Warrants”). Each share of Series B Preferred Stock converts into ten (10) shares of the Company’s common stock. The Merger Consideration for stockholders Yuping Huang and Stevens Institute of Technology was issued in 2022 and the remaining Merger Consideration for the other stockholder of QPhoton will be issued upon presentation of certain required documents and surrender of their QPhoton shares.

Note Purchase Agreement – the Company and QPhoton

On February 18, 2022, the Company entered into a Note Purchase Agreement (the “Note Purchase Agreement”) with QPhoton, pursuant to which the Company agreed to loan money to QPhoton using two unsecured promissory notes (each, a “Note”), each in the principal amount of $1,250,000, subject to the terms and conditions of the Note Purchase Agreement. Also on February 18, 2022, pursuant to the terms of the Note Purchase Agreement, the Company loaned the principal amount of $1,250,000 to QPhoton. On April 1, 2022, pursuant to the terms of the Note Purchase Agreement, the Company loaned the principal amount of $1,250,000 to QPhoton, for a total loan under the two Notes of $2,500,000.

The Note Purchase Agreement contains customary representations and warranties by QPhoton and the Company, as well as a “most favored nations” provision for the benefit of the Company. The Notes issued under the Note Purchase Agreement, including the Notes issued on February 18, 2022 and April 1, 2022, provide that the indebtedness evidenced by the applicable Note bears simple interest at the rate of 6% per annum (or 15% per annum during the occurrence of an event of default, as defined in the Notes), and becomes due and payable in full on the earlier of (i) March 1, 2023, subject to extension by one year at the option of QPhoton, (ii) a change of control (as defined in the Notes) of QPhoton or (iii) an event of default. As a result of the merger, the Notes and accrued interest are eliminated through consolidation. However, the two Notes have not been forgiven or converted to equity.

Note 4 – Intangible Assets and Goodwill

As a result of the merger with QPhoton, the Company has the following amounts related to intangible assets:

QUANTUM COMPUTING INC.

Notes to Consolidated Financial Statements

March 31, 2023

The aggregate amortization expense of the Company’s intangible assets for the periods ended March 31, 2023 and December 31, 2022 was $1,499,306 and $ 3,248,495, respectively. The Company expects future amortization expense to be the following:

The Company recorded goodwill resulting from the merger with QPhoton, calculated as the difference between the total purchase price and the value of tangible and intangible assets acquired less the liabilities assumed. The Company recorded goodwill of $59,125,773.38 resulting from the QPhoton merger. The following table provides a summary of the changes in goodwill for the periods ended March 31, 2023 and December 31, 2022:

The Company tested the intangible assets and goodwill for impairment as of December 31, 2022 and concluded there was no impairment of intangible assets or goodwill at that time. No events occurred during the quarter ended March 31, 2023 that would trigger an impairment assessment.

Note 5 – Income Taxes:

The Company has made no provision for income taxes because there has been no taxable income.

The Financial Accounting Standards Board (FASB) has issued Statement of Financial Accounting Standards Number 109 (“SFAS 109”). “Accounting for Income Taxes”, which requires a change from the deferred method to the asset and liability method of accounting for income taxes. Under the asset and liability method, deferred income taxes are recognized for the tax consequences of “temporary differences” by applying enacted statutory tax rates applicable to future years to differences between the financial statement carrying amounts and the tax basis of existing assets and liabilities.

At March 31, 2023, the Company had net operating loss carry forwards of approximately $11,208,100.

Net operating loss carryforwards are subject to limitations under Section 382 of the Internal Revenue Code and the Company anticipates that no more than an insignificant portion of this net operating allowance will ever be used against future taxable income. FASB Codification ASC 740 requires changes in recognition and measurement for uncertain tax positions. The Company has analyzed its tax positions and concluded that it is not aware of any uncertain tax positions. If this conclusion changes, the Company will assess the impact of any such changes on its financial position and the results of operations.

QUANTUM COMPUTING INC.

Notes to Consolidated Financial Statements

March 31, 2023

Note 6 – Financial Accounting Developments:

Recently Issued Accounting Pronouncements

From time to time, new accounting pronouncements are issued by the FASB or other standard setting bodies that are adopted by the Company as of the specified effective date. Unless otherwise discussed, we believe that the impact of recently issued standards that are not yet effective will not have a material impact on our financial position or results of operations upon adoption. The Company has evaluated the recently implemented accounting standards and concluded that none currently apply to the Company.

Note 7 – Property and Equipment

The Company acquired $378,753 of Property and Equipment during the three months ended March 31, 2023. It is the Company’s policy to capitalize purchases of property and equipment with a cost of $2,500 or more that benefit future periods. The Company depreciates computer and laboratory equipment over a period of five years and software over a period of three years. Maintenance and repairs are charged to operations when incurred. When property and equipment are sold or otherwise disposed, the asset account and related accumulated depreciation and amortization accounts are relieved, and any gain or loss is included in other income or expense.

Note 8 – Loans

Notes Payable – BV Advisory Partners, LLC

As part of our business combination with QPhoton in June 2022, we acquired a note payable to BV Advisory Partners, LLC. On March 1, 2021, QPhoton entered into a Note Purchase Agreement with BV Advisory. Under the Note Purchase Agreement, on March 1, 2021, March 23, 2021 and July 9, 2021, QPhoton and BV Advisory, a related party shareholder, entered into convertible promissory notes for $200,592, $150,000, and $150,000, respectively, for a total of $500,592 (the “BV Notes”). The BV Notes all bore interest at a rate of 6% per annum and matured 2 years from the grant date. However, QPhoton only received approximately $375,000 in cash proceeds as $125,041 was paid by BV Advisory directly to The Trustees of the Stevens Institute of Technology (“Stevens Institute”) on behalf of QPhoton, to satisfy QPhoton’s obligations to reimburse costs incurred under the terms of their patent License agreement with the Stevens Institute.

QUANTUM COMPUTING INC.

Notes to Consolidated Financial Statements

March 31, 2023

On June 16, 2022 the Company tendered a cashier’s check to BV Advisory in the amount of $535,68.44, representing the full principal balance of the BV Notes and accrued interest through June 16, 2022. On July 14, 2022 BV Advisory returned the cashier’s check and disputed the calculation of the amount paid to settle the BV Notes. The BV Notes and accrued interest are recorded as short-term liabilities. On August 15, 2022, BV Advisory Partners, LLC (the “Plaintiff”) filed a complaint in the Court of Chancery of the State of Delaware naming the Company and certain of its directors and officers (among others) as defendants (the “Lawsuit”).  BV Advisory Partners, LLC v. Quantum Computing Inc., et al., C.A. No. 2022-0719-VCG (Del. Ch.).  The Plaintiff is seeking, among other relief, monetary damages for an alleged breach of the Note Purchase Agreement between the Plaintiff and QPhoton, Inc., the predecessor in interest to QPhoton, LLC, a wholly-owned subsidiary of the Company, as well as monetary damages for breach of an alleged binding letter of intent among Barksdale Global Holdings, LLC, Inference Ventures, LLC and QPhoton, Inc.  The Company believes that the Plaintiff’s claims have no merit and intends to defend itself vigorously.  The Company filed a motion to dismiss the complaint in December 2022, and in March 2023 Plaintiff filed a second amended complaint. The Company filed a motion to dismiss the second amended complaint and at this time that motion is under consideration. The Company does not believe it is necessary to accrue an amount in addition to the principal and interest on the BV Notes, at this time.

Unsecured Promissory Note

On September 23, 2022, Quantum Computing Inc. (the “Company”) entered into a note purchase agreement (the “NPA”) with Streeterville Capital, LLC (the “Investor”), pursuant to which the Investor purchased an unsecured promissory note (the “Note” or the “Streeterville Unsecured Note”) in the initial principal amount of $8,250,000. The Note bears interest at 10% per annum. The maturity date of the Note is 18 months from the date of its issuance (the “Maturity Date”). The Note carries an original issue discount of $750,000, which is included in the principal balance of the Note. If the Company elects to prepay the Note prior to the Maturity Date, it must pay to Investor 120% of the portion of the Outstanding Balance the Company elects to prepay.

Beginning on the date that is six (6) months after the issuance date of the Note, the Investor has the right to redeem up to $750,000 of the outstanding balance of the Note per month (“Redemption Amount”) by providing written notice to the Company (“Redemption Notice”). Upon receipt of any Redemption Notice, the Company shall pay the applicable Redemption Amount in cash to the Investor within three (3) trading days of the Company’s receipt of such Redemption Notice. No prepayment premium shall be payable in respect of any Redemption Amount. To date the Investor has redeemed $1,000,000 of the outstanding balance of the Note.

Pursuant to the terms of the NPA, the parties provided customary representations and warranties to each other. Also, until amounts due under the Note are paid in full, the Company agreed, among other things, to: (i) timely make all filings under the Securities Exchange Act of 1934, (ii) ensure the Common Stock continues to be listed on the Nasdaq Capital Market (“Nasdaq”) (iii) ensure trading in Company’s Common Stock will not be suspended, halted, chilled, frozen, reach zero bid or otherwise cease trading on Company’s principal trading market, (iv) ensure Company will not make any Restricted Issuance (as defined in the Note) without Investor’s prior written consent, which consent may be granted or withheld in Investor’s sole and absolute discretion, (v) ensure Company shall not enter into any agreement or otherwise agree to any covenant, condition, or obligation that locks up, restricts in any way or otherwise prohibits Company from entering into certain additional transactions with the Investor, and (vi) with the exception for Permitted Liens (as defined in the Note) ensure Company will not pledge or grant a security interest in any of its assets without Investor’s prior written consent, which consent may be granted on withheld in Investor’s sole and absolute discretion.

The Note sets forth certain standard events of default (such event, an “Event of Default”) that generally, if uncured within seven (7) trading days, may result in the discretion of the Investor in certain penalties under the terms of the Note. In this regard, upon an Event of Default, Investor may accelerate the Note by written notice to the Company, with the outstanding balance becoming immediately due and payable in cash at the Mandatory Default Amount (as defined in the Note). Additionally, upon written notice given by Investor to the Company, interest shall accrue on the Outstanding Balance beginning on the date the applicable Event of Default occurred at an interest rate equal to the lesser of fifteen percent (15%) per annum simple interest or the maximum rate permitted under applicable law upon an Event of Default.

QUANTUM COMPUTING INC.

Notes to Consolidated Financial Statements

March 31, 2023

Note 9 – Capital Stock:

Series A Convertible Preferred Offering

From November 10, 2021 through November 17, 2021, the Company conducted a private placement offering (the “Private Placement”) pursuant to securities purchase agreements (the “Purchase Agreements”) with 7 accredited investors (the “Investors”), whereby the Investors purchased from the Company an aggregate of 1,545,459 shares of the Company’s newly created Series A Convertible Preferred Stock, par value $0.0001 per share (the “Series A Preferred Stock”) and warrants to purchase 1,545,459 shares of the Company’s common stock for an aggregate purchase price of $8,500,000. The Private Placement was completed and closed to further investment on November 17, 2021.

The Series A Preferred Stock ranks senior to the Company’s common stock with respect to the payment of dividends and liquidation rights. Each holder of Series A Preferred Stock is entitled to receive, with respect to each share of Series A Preferred Stock then outstanding and held by such holder, dividends at the rate of ten percent (10%) per annum (the “Preferred Dividends.”) The Company is obligated to pay the Preferred Dividends quarterly, in arrears, within fifteen (15) days of the end of each quarter. The Company has the option to pay the Preferred Dividends in cash or in Company Common Stock, at a price per share of Common Stock equal to the average of the Closing Sale Price of the Common Stock for the five (5) Trading Days preceding the applicable Dividend Payment Date. The Preferred Dividends are accrued monthly, but not compounded, and are recorded as interest expense, because the Preferred Dividends are mandatory and not declared at the discretion of the Board of Directors.

The number of shares of Common Stock issuable upon conversion of any share of Series A Preferred Stock pursuant shall be determined by dividing (x) the Conversion Amount of such share of Series A Preferred Stock by (y) the Conversion Price (the “Conversion Rate”). Conversion Amount means, with respect to each share of Series A Preferred Stock, as of the applicable date of determination, the sum of (1) the Stated Value thereof plus (2) any accrued dividends. “Conversion Price” means, with respect to each share of Series A Preferred Stock, as of any Optional Conversion Date, Mandatory Conversion Date or other date of determination, $5.50, subject to adjustment for stock splits, dividends, recapitalizations and similar corporate events.

The Warrants are two-year warrants to purchase shares of the Company’s Common Stock at an exercise price of $7.00 per share, subject to adjustment, and are exercisable at any time on or after the date that is six (6) months following the issuance date. The Warrants provide for cashless exercise in the event the underlying shares of common stock are not registered.

In connection with the Purchase Agreement, the Company and the Investors entered into a registration rights agreement (the “Registration Rights Agreement”) pursuant to which the Company agreed to file a registration statement to register the shares of the Company’s Common Stock underlying the Series A Preferred Stock and Warrants within 180 days. Pursuant to the Registration Rights Agreement, the Investors received certain rights, including but not limited to piggyback registration rights, providing that the holder be given notice of any proposed registration of securities by the Company, and requiring that the Company register all or any portion of the registrable securities that the holders request to be registered, in each case, subject to the terms and conditions of the Registration Rights Agreement.

QUANTUM COMPUTING INC.

Notes to Consolidated Financial Statements

March 31, 2023

On April 27, 2022 the Company filed a Resale Form S-3 as required by the Registration Rights Agreement with the Preferred Investors, pursuant to which the Company agreed to file a registration statement to register the shares of the Company’s Common Stock underlying the Series A Preferred Stock and Warrants within 180 days from the Closing of the Preferred investment round. The Resale Form S-3 went effective on June 2, 2022.

On June 13, 2022, one of the investors in the Series A Convertible Preferred financing round, Falcon Capital Partners, converted 45,455 shares of Series A Convertible Preferred stock into 47,728 shares of the Company’s Common Stock.

On October 11, 2022 the Company issued 155,000 shares of common stock to seven employees and consultants in exchange for services rendered.

On January 20, 2023 the Company issued 750,000 shares of common stock to Draper, Inc. and 750,000 shares of common stock to Carriage House Capital, Inc. as compensation for services rendered in support of the QPhoton merger.

On February 9, 2023, one of the investors in the Series A Convertible Preferred financing round, Greenfield Children, LLC, converted 10,000 shares of Series A Convertible Preferred stock plus accrued dividends into 11,096 shares of the Company’s Common Stock.

From January 19 through March 31, 2023, the Company sold 3,021,632 shares of common stock through its At The Market (ATM) facility, managed by Ascendiant Capital, at an average price of $2.17. The Company received gross proceeds of $6,551,456 and paid a fee of three percent (3%) to Ascendiant Capital.

Note 10 – Stock Based Compensation

Incentive Plans and Options

The Company’s 2019 Equity and Incentive Plan, as amended in 2021 (the “2019 Plan”) enabled the Company to grant incentive stock options or nonqualified stock options and other equity awards to employees, directors and consultants of the Company up to a total of 3,000,000 shares of common stock. All 3,000,000 shares available for issue under the 2019 Plan have been issued.

On July 5, 2022, the Board of Directors adopted the Company’s 2022. Equity and Incentive Plan (the “2022 Plan”) which provides for the issuance of up to 16,000,000 shares of the Company’s common stock. The 2022 Plan was approved by a majority of the shareholders in September 2022. As of March 31, 2023, a total of 7,565,767 shares were issued under the 2022 Plan.

The following table presents the assumptions used in the Black-Scholes option-pricing model to determine the grant-date fair value of stock options granted:

The following table summarizes the Company’s option activity since December 31, 2022:

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QUANTUM COMPUTING INC.

Notes to Consolidated Financial Statements

March 31, 2023

The following table summarizes the exercise price range as of March 31, 2023:

The weighted average grant-date fair value of stock options granted during the three and twelve months ended March 31, 2023 and December 31, 2022 and 2021 was $1.81 per share and $2.38 per share, respectively. 

Stock-based compensation

The Company recorded stock-based compensation expense related to common stock options and restricted common stock in the following expense categories of its consolidated statements of operations and comprehensive loss:

As of March 31, 2023, total unrecognized compensation cost related to common stock options was $6.8 million, which is expected to be recognized over a period of 2.8 years.

Warrants

In connection with a restricted stock units offering in June 2020, the Company issued warrants in August 2020 to purchase 171,000 shares of the Company’s common stock, at an exercise price of $2.00. Those warrants are exercisable for five years from the date of issuance. In connection with an offering of Series A Convertible Preferred stock in November 2021, the Company issued warrants to purchase 1,545,459 shares of the Company’s common stock at an exercise price of $7.00. Those warrants are exercisable for two years from the date of issuance. In connection with the QPhoton merger on June 16, 2022, the Company issued warrants to purchase 6,325,503 shares of the Company’s common stock at an exercise price of $0.0001. Those warrants are exercisable when and if stock options and warrants issued and outstanding as of June 15, 2022, are exercised. The following table summarizes the warrants outstanding at March 31, 2023:

QUANTUM COMPUTING INC.

Notes to Consolidated Financial Statements

March 31, 2023

Note 11 – Related Party Transactions

There were no related party transactions during the three-month periods ended March 31, 2023 and March 31, 2022. 

Note 12 – Operating Leases:

The Company leases space in four different locations, Arlington, VA, Leesburg, VA, Hoboken, NJ and Minneapolis, MN, under lease agreements which expire at various dates through September 30, 2027. The Company’s leases do not provide an implicit rate, and therefore the Company uses its incremental borrowing rate as the discount rate when measuring operating lease assets and liabilities. The incremental borrowing rate represents an estimate of the interest rate the Company would incur at lease commencement to borrow an amount equal to the lease payments on a collateralized basis over the term of a lease.

The table below reconciles the undiscounted future minimum lease payments under these operating leases to the total operating lease liabilities recognized on the consolidated balance sheet as of March 31, 2023:

Other information related to operating lease liabilities consists of the following:

Note 13 – License Agreement – Stevens Institute of Technology

Effective December 17, 2020, QPhoton signed a License Agreement with the Stevens Institute. The License Agreement enables the Company to commercially use technology such as licensed patents, licensed patent applications and licensed “Know-How”. QPhoton is also able to issue sublicenses for the technology under the agreement. The agreement is effective until the later of: (i) the 30-year anniversary of the effective date, or (ii) the expiration of the licensed patent or licensed patent application that is last to expire. As part of the merger of the Company and QPhoton, the Stevens License Agreement was assigned to the Company.

QUANTUM COMPUTING INC.

Notes to Consolidated Financial Statements

March 31, 2023

During the term of the agreement and prior to any commercialization or sublicensing of the technology by the Company, the Company shall be required to submit annual reports to the Stevens Institute reporting on all research, development, and efforts toward commercialization and/or sublicensing made during the year. Once any commercialization and/or sublicensing has been initiated, the Company shall deliver quarterly reports to the Stevens Institute reporting on the revenue received by the Company, all sublicenses derived from the sale of licensed products, and the net sales price associated with each transaction. The Company will be responsible for reimbursing Stevens for any costs associated with the prosecution and maintenance of the licensed patents and licensed patent applications moving forward.

Consideration for the agreement

As consideration for the license and other rights granted under the agreement, QPhoton agreed to pay the following: (i) $35,000 within 30 days of execution of the agreement, (ii) $28,000 within 30 days of each annual anniversary of the effective date, (iii) equity in the Company equivalent to nine percent of the membership units of the Company within 30 days of the execution of the agreement, and (iv) royalties of 3.5% of the Net Sales Price of each licensed product sold or licensed by the company during the quarter then-ended, for which it also received payment, concurrent with the delivery of the relevant quarterly report.

As of March 31, 2023 the Company has begun to commercialize some of the licensed technology pursuant to a subcontract to support NASA, and therefore expects to owe the Stevens Institute royalties of 3.5% on that revenue.

Note 14 – Subsequent Events:

On April 4, 2023, the Company appointed emerging and disruptive technologies specialist Lewis Shepherd to its Technical Advisory Board. Mr. Shepherd combines over 30 years of experience within both Silicon Valley (VMware, Microsoft) and government service (U.S. Department of Defense, Federal Communications Commission, Intelligence Committee of AFCEA International, Defense Intelligence Agency) addressing multiple aspects of R&D innovation with specific focus over the last 10 or more years on artificial intelligence, machine learning, augmented reality/virtual reality, data visualization, quantum computing, encryption, and cybersecurity. Mr. Shepherd has joined the QCI Advisory Board to provide industry advice, market intelligence, and QCI product visibility into his expansive network.

On April 6, 2023, the Company’s wholly owned subsidiary, QI Solutions, which focuses on business with the federal government, joined the Center for Quantum Technologies (CQT) as a non-traditional defense company that offers a suite of quantum services, ranging from quantum computing to quantum sensing, imaging, and cybersecurity. CQT is a National Science Foundation sponsored initiative with engineers and scientists from Purdue University, Indiana University, the University of Notre Dame, and Indiana University Purdue University – Indianapolis. These four universities are joined by industry members Quantum Computing Inc.’s QI Solutions (QIS), the Air Force Research Laboratory, Amazon Web Services, Eli Lilly, Cummins, Toyota, Northrup Grumman, and IBM Quantum to transfer foundational quantum knowledge into novel quantum technologies that address industry and defense challenges.

On April 20, 2023, the Company expanded its commercially available product line to include its reprogrammable and non-repeatable Quantum Random Number Generator (QRNG), a patented technology that is crucial to mitigate security vulnerabilities and provides customers with trustworthy data. The Company is offering QRNG capability through a cloud-based subscription on its website followed by an option to purchase the hardware, which is a handheld cube-sized QRNG device, later in 2023.

On April 27, 2023, the Company expanded its commercially available product line to include its Reservoir Quantum Computing (RQC). Via an MOU with AI company millionways, Inc., the partnership will demonstrate the value of processing millionways’ AI algorithms through QCI’s existing RQC systems using audio files to produce an emotional scoring capability.  If the data processing project is successful, the companies will develop a joint marketing and business development plan to pursue commercial opportunities. 

On May 3, 2023 the Company issued 853,600 shares of common stock to thirty-five (35) employees as payment in lieu of cash for 2022 performance bonuses (the “bonus shares”). The bonus shares are restricted and will vest over a two-year period starting January 1, 2023.

From April 1, 2023 through May 11, 2023 the Company has repaid 750,000 of principal and accrued interest on the Streeterville Note, for a cumulative redemption amount of $1,000,000.

On May 4, 2023, the Company received an expansion to its subcontract award from SSAI to support NASA by using the Company’s reservoir quantum computer to remove solar background noise from LiDAR image data sets using deep learning methods, specifically recurrent neural network algorithms. Under the initial subcontract task, QCI will test and evaluate an existing LiDAR system designed to remotely measure the physical properties of different types of snowpacks, including the density, particle size and depth. With the additional task, NASA expanded the contract to include quantum machine learning processing of the data collected. Upon successful completion of this testing, NASA may authorize QCI to proceed with airborne testing with the ultimate goal to use the quantum LiDAR units on satellites.

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

Item 2. Management’s Discussion and Analysis of Financial Condition and Results of Operations,

This quarterly report on Form 10-Q and other reports filed Quantum Computing, Inc. (the “Company” “we”, “our”, and “us”) from time to time with the U.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 ended December 31, 2022, 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 of the 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 in the 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

Quantum Computing Inc. is a full-stack quantum solutions company. Our mission is to be the democratizing force that brings quantum solutions to business, academia, government, and ultimately individual users. Our solutions enable subject matter experts (SMEs) and end users to get answers to critical business problems today, using the computing solutions that best deliver those results.

Since our formation in 2018, the Company has focused on providing software tools and applications for several commercially available quantum computers and we remain committed to that goal. However, following the June 2022 merger with QPhoton, Inc. (“QPhoton”) and its associated intellectual property and engineering team, the Company is now able to provide full-stack quantum information services.

The core of our quantum information services today is our Entropy Quantum Computing (EQC) technology. We have built room-temperature, photonic quantum information processing systems underpinned by a series of patented and patent pending technologies. We believe this will enable us to develop and produce multiple generations of quantum information processors with increasing computational power, capacity, and speed, as well as the eventual hardware miniaturization. Such systems are expected to deliver compelling performance advantages over classical computational machines and will eventually be able to solve complex problems more effectively and efficiently in terms of scalability, power consumption, and cost compared with current high-performance computing technology. Our technology, supported by professional services through our “Quantum Solutions” offering, helps our clients benefit from the technology today.

In addition, our leading-edge photonic technology and engineering teams will enable QCI to continue to enhance quantum LIDAR and sensing systems, imaging systems, quantum-secured network solutions, and photonic quantum chips. Several of these important technologies are already in early stages of commercialization.

Our short-term core business model is based on generating revenue from selling access to our advanced quantum data processing systems via the cloud, with the long-term model focused on selling desktop or rack-sized quantum devices and systems to commercial and individual users. We currently offer access to our quantum computing machines via our own in-house cloud service and plan to eventually offer access through other commercial service providers.

In the near term, we plan to generate revenue from our “Quantum Solutions” team, collaborating directly with customers to take them from problem formulation to solution. This end-to-end support empowers a spectrum of clientele, from users with little to no experience in quantum processing to advanced users capable of independent problem formulation and execution through the service.

The Company already produces its own lithium niobate nanophotonic circuits and has plans to scale production to meet projected demand. The Company has announced plans to construct and operate a new state-of-the-art quantum nanophotonics technology manufacturing and research center, which we believe could be the world’s first dedicated quantum-photonic chip manufacturer. The plan for the facility is to produce a range of lithium niobate nanophotonic circuits for internal use in our own product lines and for general sale in the market. This initiative is expected to benefit from the US CHIPS and Science Act of 2022 (the "CHIPS Act"), which allocates $52 billion for the revitalization and onshoring of semiconductor manufacturing in the U.S. The CHIPS Act funding includes $39 billion in manufacturing incentives and $13 billion to support new research and development.

QCI is focused on providing integrated quantum information gathering, transmission, and processing solutions, including both the user interface software and the quantum hardware. With our proprietary full-stack technologies that are designed using our solution-oriented system architectures, we believe we will have a competitive advantage in the market. With an integrated engineering team working across multiple quantum technology domains, we believe we are uniquely positioned to leverage our expertise in software, hardware, and nanophotonic circuits to develop quantum services and products, from quantum chip design and manufacturing through cloud delivery and eventually sales of hardware systems. We believe this full-stack development approach offers both the fastest and lowest risk path to building commercially valuable quantum machines.

Strategy

QCI’s strategy has evolved to become a full stack quantum solutions company, with products and services available in the market today. When QCI was formed several years ago, quantum computing was a fundamentally new paradigm compared with conventional computing, requiring a new and highly technical set of skills to create the hardware and software to drive quantum results. The pool of people with those skills is limited and in high demand. In addition, the predominant quantum computer programming approach, using one or more software development toolkits (“SDK’s”) to create a quantum computing program was and continues to be today, slow and costly, and therefore poorly suited for non-quantum experts attempting to solve real world problems. Moreover, many types of quantum computing hardware require delicate and expensive cryogenic isolation systems just to maintain stability, which makes it difficult for users to interact with quantum computing systems. While quantum computing is generally still used mainly at universities and laboratories for research and science experiments, a larger user community is emerging, demanding greater capabilities from quantum systems, leading to frustration and comparisons to the similar market characteristics faced by artificial intelligence in its early days – high expectations but low performance results.

QCI’s merger with QPhoton, combined with QCI’s significant IP work that culminated in the development of the Company’s Qatalyst software, enables the Company to offer room temperature quantum computation systems through cloud services today, as well as affordable, turn-key products in the future. This combination of quantum hardware and software will address the steep learning curve and highly particular skillsets generally associated with quantum information processing, which have historically represented significant barriers to adoption for companies and government entities looking to leverage novel quantum computing capabilities to solve problems.

Market Opportunity

For the past 45 years or so, silicon-based processor manufacturers have been able to double their processing power every 18 to 24 months, a phenomenon known in the computer industry as “Moore’s Law.” Recently, the computer processor industry has found it increasingly difficult to offer faster, more powerful processors due to fundamental physical effects limiting further size reduction of transistors, according to We’re not prepared for the end of Moore’s Law, MIT Technology Review, February 2020; https:// www.technologyreview.com/2020/02/24/905789/ (Information contained on, or that can be accessed through, this website is not incorporated by reference in this Quarterly Report, and you should not consider information on this website to be part of this Quarterly Report). Despite this progress in transistors and computing power, many of the world’s most important computational problems are still considered impractical to solve with classical computers of today and the foreseeable future.

With this in mind, quantum computing represents a potential alternative approach to the hard limits now being approached by conventional computers that utilize silicon-based processors. This is because quantum computers apply the properties of quantum physics to operate in a fundamentally different way. Classical computer chips use binary bits (ones and zeros) to represent information. Quantum computers utilize qubits, which leverage some of the properties of quantum physics to potentially process computations that would otherwise be intractably difficult using classical computers.

Research suggests that quantum computers may be ideally suited to run optimization algorithms, where further advancements in approaches and quantum computing hardware could result in computational benefit over currently used conventional systems. See Quantum Computing for Finance: Overview and Prospects, https://www.sciencedirect.com/science/article/pii/S2405428318300571 (Information contained on, or that can be accessed through, this website is not incorporated by reference in this Quarterly Report, and you should not consider information on this website to be part of this Quarterly Report). The ability to solve challenging computational problems in a reasonable period of time is of particular interest in compute-heavy fields that include, but are not limited to: big data, artificial intelligence, healthcare, and cybersecurity. We believe these are natural markets for quantum computing, due to the immense compute power required to process large data sets, which have experienced rapid growth in size and complexity in recent years.

Products and Products in Development

Qatalyst

QCI’s evolution into full-stack quantum computing company was enabled by the prior creation of its Qatalyst software. The Qatalyst development platform is QCI’s answer to the broader industry’s current approach to quantum software development, which relies on highly trained scientists working with SDK’s at the circuit level, which is analogous to programming in assembly language. Unlike SDK’s, which require deep level quantum expertise to create quantum workflows, Qatalyst is not a tool kit, but a complete platform. Qatalyst enables developers to create and execute quantum-ready applications on conventional computers, while also being ready to run on multiple quantum computers. Qatalyst performs the complex problem transformations necessary to be executed on a variety of quantum processor platforms today. Users can call upon the same Qatalyst APIs (Application Programming Interfaces) on conventional computers to achieve optimization performance advantages using our cloud-based solution. Qatalyst dramatically reduces the required time, and the associated costs, for obtaining results from both conventional and quantum computers. It accelerates performance and results on classic and quantum computers, with no additional quantum programming or quantum computing expertise required. Qatalyst manages the workflow, optimizations, and results, without any further intervention by the user. Qatalyst provides a unique advantage to reduce applications development risks and costs by eliminating the need for scarce high-end quantum programmers. Building a quantum program with an SDK is time consuming and the resulting program must be updated constantly as QPUs evolve and change, resulting in significant development costs. Qatalyst automatically optimizes the same problem submitted by a subject matter expert (“SME”) for multiple quantum and classical processors. With Qatalyst, users only have to learn to use six API calls, which can be learned in a day by most programmers. Instead of spending months or years developing new applications and workflows requiring complex and extremely low-level coding with SDKs, users, workflows or applications can immediately submit a problem to Qatalyst within a day, using the same familiar constructs they use right now, via the Qatalyst API. Users have utilized Qatalyst’s simple API and familiar constructs to solve their first complex problem within a week, as compared to the 6-12 months associated with quantum software toolkits.

Qatalyst integrates with our own Dirac-1 (EQC-1) and Dirac-2 (EQC-2) systems, and Qatalyst provides access to our QRNG-as-a-Service offering. Qatalyst is also integrated with the Amazon Web Services (AWS) cloud-based Braket service (“AWS Braket”), through which Qatalyst offers access to multiple Quantum Processing Units (“QPUs”) including Rigetti, Oxford Quantum Circuits and IonQ.By using Qatalyst, users can run their applications on any or all of the available QPUs by merely selecting which QPU they prefer to run on based on the desired performance results of the application.

In addition, Qatalyst contains QCI’s proprietary optimization problem solvers and QGraph and QAmplify tools. Qatalyst supports a variety of input formats for optimization problems to be solved on quantum computers including objective-and-constraints, Hamiltonian, and Quadratic Unconstrained Binary Optimization (QUBO) formats.  QGraph is a powerful transformation engine that enables SMEs to submit and analyze graph models as part of their complex optimizations. QGraph accepts familiar graph models and functions including Community Detection and Partitioning. QAmplify is a patented software technology that can expand the processing power of a quantum computer, primarily by spreading the problem over multiple small computers.

Entropy Quantum Computer

The core of QCI’s hardware offering is the Entropy Quantum Computer (EQC). The EQC leverages the principle of open quantum systems. The EQC differs substantially from today’s Noisy Intermediate Scale Quantum (NISQ) computers offered by most of our competitors. Quantum systems are naturally “open”, meaning, they inevitably interact with their surrounding environment. However, as a result of these interactions, the wavefunctions describing those systems collapse, at which point the quantum information is lost and the NISQ system “decoheres” which causes significant processing challenges for NISQ architectures.

The EQC works by coupling photonic states to their surrounding environment (the Entropy), including quantum fluctuations of the electromagnetic vacuum. This approach runs completely counter to those being developed with other atom / ion-based NISQ systems.

The quantum vacuum fluctuations are ubiquitous and can be used to capture every possible outcome in a very large system with many configurations, simultaneously, making the approach ideal for fast and accurate computations in optimization problems.

Today’s NISQ computers are designed to produce closed quantum systems in pristine quantum states that are isolated from the environment, but there is a significant engineering cost to protect quantum information from the environment to eliminate noise. This is why NISQ quantum computers usually require cryogenic cooling, pure vacuum, vibration isolation and electromagnetic shielding. Those requirements introduce high cost, complex maintenance, and ongoing stability issues.

Our EQC machines are not subject to those environmental isolation requirements and can function effectively in normal device settings (desktop or rack sizes, room temperature, battery-powered, turn-key, etc.). In addition to the Company’s announcement of Dirac 1, our first commercially-available EQC, QCI plans to release a series of additional EQC products later in 2023. This family of products will include next generations of EQC that further expand the scale and capabilities of the EQC to broader, larger, and more complex optimization problems. Developing this family of products will involve improving the size and capacity of the EQC machines by continuing to innovate in the number, quality and operational fidelity of the qubits. This will include developing technology that operates using quantum digits (“qudits”) instead of quantum bits (“qubits”). A qudit-based computer may prove better at tackling complex problems than qubit-based computers, and may allow more computational power with fewer components.

EQC Subscription Service

The combination of the Entropy Quantum Computer and Qatalyst has enabled QCI to launch its cloud-based quantum computing solutions on a subscription basis. Subscriptions are offered on an annual, quarterly, and proof of concept (short term) basis with discounts provided for multiyear commitments. Subscription prices are based on the expected usage from each customer. A dedicated system subscription (currently offered as the “Dirac Dedicated Subscription”), is also available that provides unlimited usage within the SLA included in our agreement. QCI anticipates that our subscription service will be competitive with the quantum computing subscription services offered by our competitors, such as IBM, IonQ and Quantinuum. However, we believe our subscription service will offer significant computational advantage that will differentiate it from our competitors.

The Dirac Dedicated Subscription will provide a customer with exclusive use of a Dirac EQC system from our datacenter without ever having to wait for other users to complete their work nor having to worry about the time it will take to solve their problem. QCI is also offering potential clients the opportunity to run problems on our EQC on an hourly-rate basis to demonstrate our computational value prior to entering into a longer subscription. Our Dirac Introductory Rate, which can be used for proof of concept evaluation, is an example of when this rate may apply.

Some companies utilize a per transaction-based model. Quantum computers typically use “shots” (a shot is a single processing submission or ‘run’) to measure usage on their machines and per shot models typically cost a small fraction of a cent for each shot. Most quantum problems require hundreds of thousands of shots. While the cost per shot is very low, the cost to solve a problem can quickly rise to hundreds or thousands of dollars.  AWS is one of the larger “per shot” providers utilizing their AWS Braket services for companies including IonQ, Rigetti, Oxford Quantum Circuits, and QuEra.

Usage of the Dirac EQC is done using a problem solution model, which is different from most other quantum computers. Rather than measure the number of shots made by our system; we solve the problem by finding the lowest ground state energy and measure the completion of the solution in the number of seconds or minutes it takes to complete solving the problem. While we anticipate that subscription sales will be the primary strategy moving forward, we have not ruled out providing a per usage based model by partnering with ‘per shot” providers such as AWS Braket and Strangeworks, and eventually sales of EQC hardware for on-premise implementation.

Initially the EQC subscription services are hosted at the Company’s data center in Hoboken, New Jersey. As usage grows, we may utilize other data centers including Amazon Web Services (AWS) for datacenter services. Many large computing and datacenter companies like, Google and Microsoft also sell access to third party Quantum Computers over their networks on a commission basis. While we are focused on selling subscriptions on Dirac in our own datacenter, there may be a time where we also provide subscriptions through Google, Microsoft, and Amazon through their Marketplaces.

In addition to shared subscription services and dedicated subscription services, we intend in the future to provide to customers an on-premise implementation of the Dirac EQC as customer demand grows and our service organization matures. There are multiple markets which will require this type of delivery including the United States Government, United States Military and European Financial Organizations, where European laws require customer data to be always be in the control of the financial institutions. There are only a few on premise implementations of quantum computers today and they require commitments of tens of millions of dollars. While pricing has not been determined for the Dirac on-premise implementation, we expect it will be very competitive with the few on-premise quantum implementations available today from other firms.

As a full stack quantum solutions provider, while selling subscriptions in some manner to Dirac EQCs will be the cornerstone of our business model, providing professional services or quantum solutions support will likely be needed in many cases, especially in the beginning of a customers’ quantum journey. We partner today with large management consulting companies as a way to scale our business and we expect that consulting partners will continue to grow in numbers and as a percentage of our customers. In addition, we plan to always provide a Quantum Solutions offering for customers that prefer to work directly with a full stack provider and customers who are using cutting edge technologies that may not have become supported yet by our consulting partners.

As we evolve the LiDAR and sensing systems, imaging systems, and quantum-secured networking technologies into products, the models described above will be evaluated to select the best pricing and routes to market for each new product. Some will likely use the existing direct sale model that we are using for Dirac, some may use an OEM model for inclusion in other companies’ products, and others may be sold through 1 or 2 tier distribution. Each product will be evaluated for the best route to market to maximize the shareholder value based upon their individual product attributes.

Quantum Photonic Applications

The merger with QPhoton has broadened the Company’s technology portfolio and enables us to develop a group of closely related products to EQC, based on our common core photonic technology. Products in development include:

Quantum Optical Chips

Optical chips will ultimately provide the greatest scalability and performance advantages for quantum information processing, sensing and imaging. The Company is actively working on the specification and design for a dedicated quantum optical chip fabrication facility to develop and produce Lithium Niobate optical chips (“Quantum Chips”) for quantum information processing and other single photon detection and sensing applications. The Company believes there is an opportunity to benefit from the recently authorized CHIPS Act and will take steps to establish a U.S.-based chip facility in 2023. The Company is evaluating multiple options for a facility site, as well as potential federal, state and regional funding incentives to help finance the project and advance quantum technology innovation. Construction of such a fabrication facility for the Quantum Chips may take several years and there is no assurance that the Company will be able to raise the necessary funding.

Quantum Imaging

One of the most exciting opportunities in development involves leveraging the ability to count single photons and filter their associated wave functions precisely to obtain optical imaging through otherwise opaque and dense materials. Quantum imaging has the potential to be a powerful supplement to modern reconstructed computerized tomography (CT) imaging applications, where tissue damage from high energy radiation can and needs to be avoided. Optical chips will ultimately provide the greatest scalability and performance advantages for quantum information processing, sensing and imaging. When all of the critical optical components can be “embedded” on a fully integrated chip, the efficiency and fidelity of the photonic quantum technologies will be fully realized. A prototype quantum imaging system has been built and is currently undergoing testing by the Company.

Cybersecurity – Quantum Networks and Quantum Authentication

The Cybersecurity field has been aware for some time of the potential threats and benefits of quantum computing resulting from the expectation that quantum computers will eventually have the capability to can “break” any of the currently utilized non-quantum-based encryption methods. However, effective cybersecurity goes well beyond encryption for protection. Effective cybersecurity requires a holistic approach to protecting the enterprise. The Company believes that our quantum computing capabilities may have applications in encryption. However, initially we are applying our quantum technologies to create secure transport layers (quantum networks) and endpoints (quantum authentication) which will contribute greatly to the cybersecurity domain, beyond encryption. QCI has several patents in the area of quantum-based technologies for protection of data at rest and in quantum private communication. QCI plans to begin commercial development of quantum networking products in 2023 and partnerships are actively being explored.

Quantum Remote Sensing – QLiDAR

Our Quantum LiDAR (“QLiDAR”) can see through dense fog and provide image fidelity at great distances and through difficult environments such as snow, ice, and water. Once again, by leveraging the power of quantum mechanics and single photon detection, LiDAR systems can be greatly enhanced in their ability to measure at improved resolution and distances as well as extend these photonic signals to applications in vibrometry for material stress analysis, particle size analysis, and potential remote sensing from aircraft, drones and even satellites. In January 2023, QCI’s federal contracting subsidiary, QI Solutions, received an award from NASA, through a subcontract from Science Systems Applications, Inc., to test its QLiDAR technology for remote measurement of the physical properties of different types of snowpacks including density, particle size and depth. We are also pursuing commercial development of QLiDAR applications and partnerships are actively being explored.

Quantum Random Number Generator – QRNG

Our patented Quantum Random Number Generator (“QRNG”) technology, which is capable of generating non-repeating number sequences, can generate truly random numbers of various probability densities and correlation properties to serve many different applications including security, modeling, and finance. The QCI QRNG data output includes quantum random numbers (QRNs) that are either binary or high-dimensional, and either independent of, or correlated with each other. As an additional feature, users of the QCI QRNG can configure the QRNG to obey either a uniform probability distribution or a specific non-uniform probability distribution appropriate for their specific application, such as Gaussian, Lorentzian, or other distributions that are important for data simulation and analysis. The Company began offering the first series of QRNG products through a cloud-based subscription beginning in April 2023, and plans to offer an option to purchase the hardware, which is a handheld cube-sized QRNG device, later in 2023.

Results of Operations

Three Months Ended March 31, 2023 vs. March 31, 2022

Revenues

Revenues for the three months ended March 31, 2023 were $120,530 as compared with $31,240 for the comparable prior year period, an increase of $89,290 or 286%. The increase in revenues is primarily due to changes in the number and size of active customer contracts and the level of effort performed on each one during the periods. Revenue in the current reporting period is derived from professional services provided to multiple government and commercial customers under multi-month contracts.

Cost of Revenues

Cost of revenues for the three months ended March 31, 2023 was $56,239 as compared with $11,568 for the comparable prior year period, an increase of $44,671 or 386%. The increase in cost of revenues is primarily due to the increase in direct labor expense required to perform on the contracts in the current quarter compared with the prior year period. Cost of revenues for the current reporting period consists primarily of salary expense.

Gross Margin

Gross margin for the three months ended March 31, 2023 was $64,291 or 53% as compared with $19,672 or 63% for the comparable prior year period, an increase of $44,619, or 227%. The increase in gross margin dollars is primarily due to the increase in gross revenue compared with the prior year period, and the decrease in gross margin percentage is primarily due to the increases in the amount of direct labor and the higher cost of the skill sets required to perform the contracted services in the current period.

Operating Expenses

Operating expenses for the three months ended March 31, 2023 were $7,851,801 as compared with $6,728,603 for the comparable prior year period, an increase of $1,123,198 or 17%. The increase in operating expenses is primarily due to the $337,406 increase in salary expense related to an increase in the number and composition of staff, an increase of $510,010 in research and development expenses related to cost of additional technical labor, parts and supplies needed to design and test new hardware products, and an increase of $1,532,612 in other SG&A expenses. These increases were offset in part by a $1,110,989 decrease in stock-based compensation related in large part to the decline in our stock price in the current period, a decrease of $145,841 in consultant and professional services expense driven in large part by an increasing use of full and part time employees, and by a decrease in legal expense of $530,204 related to work on the QPhoton merger in the prior year period.

Net Income (Loss)

Our net loss for the three months ended March 31, 2023 was $8,506,139 as compared with a net loss of $7,133,692 for the comparable prior year period, an increase of $1,372,447 or 19%. The increase in net loss is primarily due to the increase in operating expenses, noted above, as well as $718,629 in net interest expense related to the accrual of interest expense on the Streeterville Note, the amortization of the Original Issue Discount on the Streeterville Note and the Series A Convertible Preferred and Warrants recorded during the three months ended March 31, 2023 compared with net interest expense of $424,761 during the comparable prior year period relating to accrual of dividends and amortization of the Original Issue Discount on the Series A Convertible Preferred stock. This was offset in part by an increase of $20,981 in interest income earned in the three months ended March 31, 2023 due to use of the Morgan Stanley money market fund.

Liquidity and Capital Resources

Since commencing operations as Quantum Computing in February 2018, the Company has raised $34,311,359 through private placement of equity and $12,633,000 through private placements of Convertible Promissory Notes and other debt for a total of $46,944,359 in new investment. The Company has no lines of credit, and $8,287,969 in short -term debt obligations outstanding. The Company has an At The Market (ATM) facility, managed by Ascendiant Capital, with a ceiling of $25,000,000. As of March 31, 2023, the Company had cash and equivalents of $6,766,111 on hand.

The following table summarizes total current assets, liabilities and working capital at March 31, 2023, compared to December 31, 2022:

At March 31, 2023, we had a working capital deficit of $5,477,258 as compared to a working capital deficit of $957,673 at December 31, 2022, an increase in deficit of $3,531,105. The increase in working capital deficit is primarily due to the principal of the Streeterville Note becoming a current liability.

Net Cash

Net cash used in operating activities for the three months ended March 31, 2023 and 2022 were $4,716,302 and $4,193,833, respectively. The net losses for the three months ended March 31, 2023 and 2022, were $8,524,310 and $7,133,692, respectively.

Net cash used in investing activities for the three months ended March 31, 2023 and 2022 were $378,753 and $1,243,955, respectively. The decrease in investment in the current period is primarily due to a $1,250,000 investment related to the Note Purchase Agreement with QPhoton in February 2022. In the current period the Company invested $378,753 in computer and laboratory equipment, as well as some office furniture.

Net cash provided by financing activities for the three months ended March 31, 2023 and 2022 were $6,551,455 and $212,500, respectively. The cash flow provided in financing activities during the three months ended March 31, 2023 was primarily due to use of the ATM facility to sell common stock on the NASDAQ market.

During the first three months of 2023, we have funded our operations primarily through the sale of our equity securities and the use of cash on hand. As of May 9, 2023, we had cash on hand of approximately $4,290,208. We have approximately $104,772 in monthly lease and other mandatory payments, not including payroll, employee benefits 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. 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.

Critical Accounting Policies and Estimates

Certain of our accounting policies require the application of significant judgment by our management, and such judgments are reflected in the amounts reported in our condensed consolidated financial statements. In applying these policies, our management uses judgment to determine the appropriate assumptions to be used in the determination of estimates. Those estimates are based on our historical experience, terms of existing contracts, our observance of market trends, information provided by our strategic partners and information available from other outside sources, as appropriate. Actual results may differ significantly from the estimates contained in our condensed consolidated financial statements.

We have identified the accounting policies below as critical to our business operations and the understanding of our results of operations.

Revenue

The Company recognizes revenue in accordance with ASC 606 - Revenue from Contracts with Customers. Revenue from time and materials based contracts is recognized as the direct hours worked during the period times the contractual hourly rate, plus direct materials and other direct costs as appropriate, plus negotiated materials handling burdens, if any. Revenue from units-based contracts is recognized as the number of units delivered or performed during the period times the contractual unit price. Revenue from fixed price contracts is recognized as work is performed with estimated profits recorded on a percentage of completion basis. The Company has no cost reimbursement (“cost-plus”) type contracts at this time.

Off Balance Sheet Arrangements

During the three months ended March 31, 2023 and for fiscal 2022, 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.

Item 3. Quantitative and Qualitative Disclosures About Market Risk

We do not hold any derivative instruments and do not engage in any hedging activities.

Item 4. Controls and Procedures

(a) Evaluation of Disclosure Controls and Procedures

We maintain “disclosure controls and procedures,” as such term is defined in Rule 13a-15(e) under the Securities Exchange Act of 1934, as amended (the “Exchange Act”). In designing and evaluating our disclosure controls and procedures, our management recognized that disclosure controls and procedures, no matter how well conceived and operated, can provide only reasonable, not absolute, assurance that the objectives of disclosure controls and procedures are met. Additionally, in designing disclosure controls and procedures, our management necessarily was required to apply its judgment in evaluating the cost-benefit relationship of possible disclosure controls and procedures. The design of any disclosure controls and procedures also is based in part upon certain assumptions about the likelihood of future events, and there can be no assurance that any design will succeed in achieving its stated goals under all potential future conditions.

As of the end of the period covered by this Quarterly Report on Form 10-Q, we carried out an evaluation, under the supervision and with the participation of our management, including our Principal Executive Officer and our Principal Financial Officer, of the effectiveness of our disclosure controls and procedures as defined in Rule 13a-15(e) and 15d-15(e) of the Exchange Act. Based on the controls evaluation, our Principal Executive Officer and Principal Financial Officer concluded that as of the date of their evaluation, our disclosure controls and procedures were not effective to provide reasonable assurance that (a) the information required to be disclosed by us in the reports that we file or submit under the Exchange Act is recorded, processed, summarized and reported within the time periods specified in the SEC’s rules and forms, and (b) such information is accumulated and communicated to our management, including our Chief Executive Officer and President and Chief Financial Officer, as appropriate, to allow timely decisions regarding required disclosure. Specifically, the Company does not have sufficient accounting staff to enable proper segregation of duties. The Company has commenced hiring additional administrative and accounting staff to address this deficiency in the near term.

(b) Changes in Internal Control over Financial Reporting

There were no changes in our internal control over financial reporting (as defined in Rule 13a-15(f) and Rule 15d-15(f) under the Exchange Act) during our most recent fiscal quarter that have materially affected, or are reasonably likely to materially affect, our internal control over financial reporting.

PART II - OTHER INFORMATION

Item 1. Legal Proceedings

Except as listed below, 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.

BV Advisory Partners, LLC (“BV Advisory”) was a shareholder of QPhoton, Inc. (“QPhoton”) immediately prior to the Company’s acquisition of QPhoton. On October 13, 2022 BV Advisory filed a petition in Delaware Chancery Court seeking appraisal rights on the shares of Common Stock of QPhoton (which shares represented 10% of the shares of Common Stock of QPhoton outstanding immediately prior to the Company’s acquisition of QPhoton) pursuant to Section 262 of the General Corporation Law of the State of Delaware. The parties are currently engaged in discovery and the Company does not have sufficient information to assess the potential impact of the appraisal demand at this time.

In addition, on March 1, 2021, QPhoton entered into a Note Purchase Agreement with BV Advisory. Under the Note Purchase Agreement, on March 1, 2021, March 23, 2021 and July 9, 2021, QPhoton and BV Advisory, a related party shareholder, entered into convertible promissory notes for $200,592, $150,000, and $150,000, respectively, for a total of $500,592 (the “BV Notes”). The BV Notes all bore interest at a rate of 6% per annum and matured 2 years from the grant date.

On June 16, 2022 QPhoton tendered a cashier’s check to BV Advisory in the amount of $535,68.44, representing the full principal balance of the BV Notes and accrued interest through June 16, 2022. On July 14, 2022 BV Advisory returned the cashier’s check and disputed the calculation of the amount paid to settle the BV Notes.

On August 15, 2022, BV Advisory Partners, LLC (the “Plaintiff”) filed a complaint in the Court of Chancery of the State of Delaware naming the Company and certain of its directors and officers (among others) as defendants (the “Lawsuit”). BV Advisory Partners, LLC v. Quantum Computing Inc., et al., C.A. No. 2022-0719-VCG (Del. Ch.). The Plaintiff is seeking, among other relief, monetary damages for an alleged breach of the Note Purchase Agreement between the Plaintiff and QPhoton, Inc., the predecessor in interest to QPhoton, LLC, a wholly-owned subsidiary of the Company, as well as monetary damages for breach of an alleged binding letter of intent among Barksdale Global Holdings, LLC, Inference Ventures, LLC and QPhoton, Inc. The Company believes that the Plaintiff’s claims have no merit and intends to defend itself vigorously. Moreover, the Company believes that numerous alleged facts and characterizations set forth in the Plaintiff’s complaint are false, misleading and intentionally designed to damage the Company’s reputation, and the Company categorically rejects those alleged facts and characterizations. The Plaintiff’s key principal, Keith Barksdale, misrepresented his role with QPhoton, Inc. during the early stages of the Company’s negotiations with respect to the acquisition of QPhoton. The Company believes that Mr. Barksdale misrepresented his role in order to arrogate to Plaintiff and related parties undue consideration. The Company has filed a motion to dismiss the Lawsuit, and oral arguments are scheduled for July, 2023.

On December 30, 2022 the Company, QPhoton and Robert Liscouski (the “Quantum Plaintiffs”) filed suit in the Superior Court of New Jersey against Keith Barksdale, Michael Kotlarz, BV Advisory Partners, LLC (“BV”), Barksdale Global Holdings, LLC (“BGH”), Power Analytics Global Corporation (“PAG”), and Inference Ventures LLC (“Inference Ventures” and together with Barksdale, Kotlarz, BV, BGH, and PAG the “ BV Defendants”), alleging fraud, defamation, and conspiracy to defraud, seeking monetary and injunctive relief.   The BV Defendants have filed a motion to dismiss the complaint which the Quantum Plaintiffs have opposed. The Company does not have sufficient information at this time to assess the potential impact of the action against the BV Defendants at this time. 

Item 1A. Risk Factors

We believe there are no changes that constitute material changes from the risk factors previously disclosed in our Annual Report on Form 10-K for the year ended December 31, 2022, filed with the SEC on March 29, 2023.

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

None

Item 3. Defaults upon Senior Securities

There has been no default in the payment of principal, interest, sinking or purchase fund installment, or any other material default, with respect to any indebtedness of the Company.

Item 4. Mine Safety Disclosures

Not Applicable.

Item 5. Other Information

There is no other information required to be disclosed under this item which has not been previously reported.

Item 6. Exhibits

SIGNATURES

Pursuant to the requirements of Section 13 or 15 (d) of the Securities Exchange Act of 1934, the registrant has duly caused this report on Form 10-Q to be signed on its behalf by the undersigned thereunto duly authorized.

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