Quantum Computing Inc.

Notes to Consolidated Financial Statements

December 31, 2024

Note 1 – Nature of the Organization and Business

Corporate History

Quantum Computing Inc. (“QCi” or the “Company”) was formed in the State of Nevada on July 25, 2001, under its original name, Ticketcart, Inc., which was changed to Innovative Beverage Group Holdings, Inc. in 2009. 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 LLC. On June 16, 2022, the Company merged with QPhoton, Inc. (“QPhoton”), a developer of quantum photonic systems and related technologies and applications. The QPhoton Merger enabled us to develop hardware applications integrated with the Company’s software platform, Qatalyst, that existed before the QPhoton Merger.

Nature of Business

QCi is an American company utilizing integrated photonics and non-linear quantum optics to develop and deliver machines for quantum computing, reservoir computing, and remote sensing, imaging and cybersecurity applications based on patented and proprietary photonics technology. QCi’s products are designed to operate at room temperature and at very low power levels compared to other quantum systems currently available in the market, such as superconducting, ion-trap, or annealing architectures. Our core photonics technology enables the execution of a go-to-market strategy which emphasizes scalability, accessibility and affordability. Our quantum machines, supported by professional services through our “Quantum Solutions” offering, enable subject matter experts (SMEs) and end users to deliver critical business solutions involving highly complex optimization problems.

The leading application of our quantum offerings today is our Entropy Quantum Computing. Our longer-term product development plan is to migrate the EQC’s current design, as well as other product designs based on discrete components, to a set of optical integrated circuits (TFLN Optical Chips) built on TFLN wafers.

Liquidity

The accompanying consolidated financial statements have been prepared on a going concern basis, which contemplates the continuity of operations, the realization of assets, and the satisfaction of liabilities in the normal course of business. We have not achieved a level of sales adequate to support the Company’s cost structure. The Company has historically incurred losses and negative cash flows from operations. During the year ended December 31, 2024, the Company issued 49,679 shares of common stock for net proceeds of $106.8 million. Cash and cash equivalents on hand were $78.9 million as of December 31, 2024. As of December 31, 2024, the Company also had an accumulated deficit of $200.5 million and working capital of $74.6 million. In January 2025, the Company issued 8,163,266 shares of common stock for net proceeds of $93.3 million. As a result, the Company has adequate cash and cash equivalents on hand to meet its obligations over the next 12 months.

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 (the “FASB”), including ASC 810,Consolidation. The accompanying consolidated financial statements include the accounts of the Company and its wholly owned subsidiaries. All intercompany balances and transactions have been eliminated in consolidation. The Company’s fiscal year end is December 31.

Risk and Uncertainties

The Company is subject to certain risks and uncertainties and believes changes in any of the following areas could have a material adverse effect on the Company’s future consolidated financial position or consolidated results of operations or cash flows: new product development, including market receptivity; litigation or claims against the Company based on intellectual property, patent, product regulation or other factors; competition from other products; general economic conditions; the ability to attract and retain qualified employees; and, ultimately, to sustain profitable operations.

Reclassifications

Certain reclassifications have been made to the fiscal year 2023 consolidated financial statements to conform ot the fiscal year 2024 presentation. The reclassifications had no impact on net loss, total assets, total liabilities, or stockholders’ equity.

Use of Estimates

These consolidated financial statements have been prepared in accordance with U.S. GAAP, which requires management to make estimates and assumptions that affect the reported amounts of assets and liabilities at the date of the consolidated 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 valuation of goodwill and intangible assets, deferred tax assets, equity-based transactions and liquidity assessment. Actual results may differ from these estimates.

Segments

Our Chief Operating Decision Maker (“CODM”), the Chief Executive Officer, manages the Company’s business activities as a single operating and reportable segment at the consolidated level. Accordingly, our CODM uses consolidated net loss to measure segment profit or loss, allocate resources and assess performance. Further, the CODM reviews and utilizes natural expenses, such as employee wages and benefits at a consolidated level, to manage the Company’s operations and strategic growth initiatives. Other segment items include interest income, interest expense, deferred offering costs, changes in fair value of derivative warrant liabilities and other operational expenses which are reflected in the consolidated statements of operations.

Cash and Cash Equivalents

Highly liquid investments with a maturity of three months or less when purchased are considered to be cash equivalents. The Company maintains its cash in mutual funds and deposit and money market accounts with high quality financial institutions which, at times, may exceed federally insured limits. As of December 31, 2024 and December 31, 2023, the Company had $78.9 million and $960 thousand, respectively, in cash equivalents invested in mutual funds. The Company has not experienced any losses on these deposits and believes it is not exposed to significant credit risk on cash.

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 revenue the Company has recognized in the years ended December 31, 2024 and 2023 were primarily derived 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.

The Company includes depreciation and amortization expenses in manufacturing overhead, which is a component of cost of revenue. However, at the present time manufacturing overhead, including depreciation and amortization expense related to production equipment, is not material and the primary components of cost of revenue are direct labor and direct materials, with a small amount of shipping expenses.

The Company’s revenues consist of (in thousands):

The Company disaggregates revenue from contracts with customers based on the timing of transfer of goods or services to customers (point-in-time or over time) and geographic region based on the shipping location of the customer. The geographic regions that are tracked for the years ended December 31, 2024 and 2025 are the Americas and Europe.

Total net sales based on the disaggregation criteria described above are as follows (in thousands):

Accounts Receivable

Accounts receivable 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 a provision for credit losses, when deemed necessary, based on the history of past write-offs, collections and current credit conditions. The customer accounts receivable as of December 31, 2024 are considered not fully collectible and thus the Company has recorded a provision for credit losses of $3.5 thousand; the customer accounts receivable as of December 31, 2023 were considered fully collectible.

Provision for Credit Losses

The Company estimates losses on loans and other financial instruments in accordance with Accounting Standards Update (“ASU”) 2016-13, Measurement of Credit Losses on Financial Instruments. ASU 2016-13 introduces the current expected credit losses (“CECL”) methodology for estimating allowances for credit losses. The CECL framework requires the Company to measure all expected credit losses for financial assets held at the reporting date based on historical experience, current conditions and reasonable and supporting forecasts. Under CECL, the allowance for credit losses is measured as the difference between the financial asset’s cost basis and the net amount expected to be collected on the financial asset. CECL allows us to use information about past events including historical loan loss experience, current conditions, and reasonable and supportable forecasts to assess the collectability of the financial assets. The receivables for financial assets as of December 31, 2024 and 2023 are not considered fully collectible and thus management has recorded a provision for credit losses. See Note 9,Loan Receivable, for additional information.

Inventory

Inventory is stated at the lower of cost or net realizable value. Cost is determined on a standard cost basis which approximates actual cost on a first in-first out method. Lower of cost or net realizable value is evaluated by considering obsolescence, excessive levels of inventory, deterioration and other factors. Adjustments to reduce the cost of inventory to its net realizable value, if required, are made for estimated excess, obsolescence or impaired inventory and are charged to cost of revenue. Once the cost of the inventory is reduced, a new lower-cost basis for that inventory is established, and subsequent changes in facts and circumstances do not result in the restoration or increase in that newly established cost basis. Factors influencing these adjustments include changes in demand, product life cycle and development plans, component cost trends, product pricing, physical deterioration and quality issues. Revisions to these adjustments would be required if these factors differ from our estimates.

Operating Leases

The Company determines if an arrangement is a lease at inception. Operating lease right-of-use (“ROU”) assets are included in right-of-use assets, net on the consolidated balance sheets. The current and long-term components of operating lease liabilities are included in the current operating lease liabilities and non-current operating lease liabilities, respectively, on the consolidated balance sheets.

Operating lease ROU assets and operating lease liabilities are recognized based on the present value of the future minimum lease payments over the lease term. As most of the Company’s leases do not provide an implicit rate, the Company uses an incremental borrowing rate based on the information available at the commencement date in determining the present value of future payments. Certain leases may include options to extend or terminate the lease. Lease expense for minimum lease payments is recognized on a straight-line basis over the lease term. Leases with an initial term of 12 months or less are not recorded on the consolidated balance sheet. All of our operating leases are comprised of office space leases, and as of December 31, 2024 and 2023, we had no finance leases.

Business Combinations and Valuation of Goodwill

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.

The Company reviews goodwill for impairment on an annual basis or whenever events or changes in circumstances indicate the carrying value may not be recoverable. The Company performs an annual impairment test by comparing the fair value of a reporting unit with its carrying amount. An impairment charge should be recognized for the amount by which the carrying amount exceeds the reporting unit’s fair value; however, the loss recognized should not exceed the total amount of goodwill allocated to that reporting unit. In addition, income tax effects from any tax-deductible goodwill carrying amount of the reporting unit should be considered when measuring the goodwill impairment loss, if applicable. The Company has determined that it has a single reporting unit for purposes of performing its goodwill impairment test. As the Company uses the market approach to assess impairment, its common stock price is an important component of the fair value calculation. If the Company’s stock price continues to experience significant price and volume fluctuations, this will impact the fair value of the reporting unit and can lead to potential impairment in future periods. The Company performed its annual impairment test during the second quarter of fiscal 2024 and 2023 and determined that its goodwill was not impaired. As of December 31, 2024 and 2023, we had not identified any factors that indicated there was an impairment of our goodwill and determined that no additional impairment analysis was then required.

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.

Impairment of Long-Lived Assets

The Company has long-lived assets such as tangible property and equipment, identified intangible assets consisting of acquired patents and core technology. When events or changes in circumstances occur that could indicate the carrying value of long-lived assets may not be recoverable, the Company assesses recoverability by determining whether the undiscounted cash flows estimated to be generated by those assets are less than the carrying amounts of those assets. If the undiscounted cash flow is less, an impairment charge is recognized for the excess of the carrying amounts of these assets over the fair values. Fair values are determined by discounted future cash flows, appraisals or other methods.

During years ended December 31, 2024 and 2023, the Company did not record any impairment from long-lived assets.

Fair Value of Financial Instruments

The carrying amount of certain financial instruments held by the Company, such as cash equivalents, accounts receivable, contract assets and liabilities, accounts payable, and accrued and other current liabilities, approximate fair value due to their short maturities. The carrying amount of the liabilities for the convertible preferred stock warrants represent their fair value. The carrying amounts of the Company’s borrowings and lease liabilities approximate fair value due to the market interest rates that these obligations bear and interest rates currently available to the Company.

Fair value is defined as the exchange price that would be received for an asset or an exit price paid to transfer a liability in the principal or most advantageous market for the asset or liability in an orderly transaction between market participants on the measurement date. Valuation techniques used to measure fair value must maximize the use of observable inputs and minimize the use of unobservable inputs. The fair value hierarchy defines a three-level valuation hierarchy for disclosure of fair value measurements as follows:

The categorization of a financial instrument within the valuation hierarchy is based upon the lowest level of input that is significant to the fair value measurement. As of December 31, 2024 and 2023, the Company had $78.9 million of the $78.9 million cash and cash equivalents and $960 thousand of the $2.1 million cash and cash equivalents, respectively, in Level 1 assets, comprised of U.S. Government mutual funds, and $40.5 million andno carrying value, respectively, for Level 3 liabilities, which are comprised of derivative and warrant liabilities. See Note 10,Capital Stock, for a full discussion of the warrant liability.

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.

Software Development Costs

Software development costs incurred subsequent to the establishment of technological feasibility for software intended to be sold, licensed or otherwise marketed to customers will be capitalized, but development costs not meeting the criteria for capitalization are expensed as incurred. With respect to internal use software, the Company will capitalize such development costs incurred during the application development stage, but development costs incurred prior to that stage will be expensed as incurred. No amortization expense will be recorded until the software is ready for its intended use. To date, the Company has not incurred any material capitalizable software development costs.

Stock-based Compensation

Stock-based compensation expense for expected-to-vest awards is valued under the single-option approach and amortized on a straight-line basis, accounting for actual forfeitures as they occur. We utilize the Black Scholes pricing model in order to determine the fair value of stock-based option awards. The Black Scholes pricing model requires various highly subjective assumptions including volatility, expected option life, and risk-free interest rate. The assumptions used in calculating the fair value of share-based payment awards represent management’s best estimates. These estimates involve inherent uncertainties and the application of management judgment. If factors change and different assumptions are used, our stock-based compensation expense could be materially different in the future.

Income Taxes

The Company uses the asset and liability method of accounting for income taxes. Deferred tax assets and liabilities are recognized for the estimated future tax consequences attributable to differences between the carrying amounts of existing assets and liabilities and their respective tax bases. Deferred tax assets and liabilities are measured using enacted tax rates expected to apply to taxable income in the years in which those temporary differences are expected to be recovered or settled. Deferred tax expense or benefit is the result of changes in the deferred tax assets and liabilities. Valuation allowances are established when necessary to reduce deferred tax assets where, based upon the available evidence, management concludes that it is more-likely-than-not that the deferred tax assets will not be realized. Realization of deferred tax assets is also dependent upon future earnings, if any, the timing and amount of which are uncertain.

The Company records a liability for the uncertain tax positions taken or expected to be taken on the Company’s tax return when it is more-likely-than-not that the tax position might be challenged despite the Company’s belief that the tax return positions are fully supportable, and additional taxes will be due as a result. To the extent that the assessment of such tax positions changes, for example, based on the outcome of a tax audit, the change in estimate is recorded in the period in which the determination is made. The provision for income taxes includes the impact of provisions for uncertain tax positions.

Net Loss Per Share

Basic net loss per common share is computed by dividing net loss by the weighted average number of common shares outstanding during the period. Diluted net loss per common share is computed by dividing net loss attributable to common stockholders by the weighted average number of common shares outstanding, plus the number of additional common shares that would have been outstanding if the common share equivalents had been issued (computed using the “If-Converted” method), unless the effect of such issuances would have been anti-dilutive.

The following table sets forth the computation of basic and diluted loss per share (in thousands, except for per share data):

Net loss per share is based on the weighted average number of common shares and common share equivalents outstanding during the period.

In periods with a reported net loss, the effect of anti-dilutive stock options, unvested restricted common stock and warrants are excluded and diluted loss per share is equal to basic loss per share. Due to a net loss in the years ended December 31, 2024 and 2023, there were therefore no dilutive securities and hence basic and diluted loss per share were the same. The following is a summary of the weighted average common stock equivalents for the securities outstanding during the respective periods that have been excluded from the computation of diluted net loss per common share, as their effect would be anti-dilutive (in thousands):

As all potentially dilutive securities are anti-dilutive as of December 31, 2024 and 2023, diluted net loss per share is the same as basic net loss per share for each period.

Recently Adopted Accounting Standards

In November 2023, the FASB issued ASU No. 2023-07,Segment Reporting (Topic 280): Improvements to Reportable Segment Disclosures, which amends reportable segment requirements, primarily through enhanced disclosures about significant segment expenses, including for public entities that have a single reportable segment. The standard is effective for fiscal years beginning after December 15, 2023 and interim periods within fiscal years beginning December 15, 2024. The Company adopted ASU 2023-07 on January 1, 2024 and have made the necessary reportable segment disclosures (See Note 3, Segment Reporting).

Recently Issued Accounting Pronouncements Not Yet Adopted

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 consolidated financial position or results of operations upon adoption.

On December 14, 2023, the FASB issued ASU 2023-09,Income Taxes (Topic 740): Improvements to Income Tax Disclosures. Under ASU 2023-09, entities are required to uniformly classify and present greater disaggregation of information in the rate reconciliation and income taxes paid. ASU 2023-09 is intended to benefit users of our consolidated financial statements by improving transparency and decision usefulness of income tax disclosures. The new standard is effective for annual periods beginning after December 15, 2024. The Company does not expect the adoption of this new guidance to have a material impact on our consolidated financial statements and have decided not to early adopt ASU 2023-09.

Note 3 - Segment Reporting

The Company operates asone operating segment as its CODM reviews financial information on a consolidated basis for purposes of making operating decisions, allocating resources, and evaluating financial performance. In addition to consolidated net loss, our CODM reviews and utilizes natural expenses, such as employee wages and benefits at a consolidated level, to manage the Company’s operations and strategic growth initiatives. The following table presents segment information of revenue, significant expenses and net loss (in thousands):

Note 4 – Intangible Assets, net

As a result of the merger with QPhoton in June 2022, the Company has the following amounts related to intangible assets, net (in thousands):

The amortization expense of the Company’s intangible assets for both the years ended December 31, 2024 and 2023 was approximately $3.1 million. The Company expects future amortization expense to be the following (in thousands):

Note 5 – Income Taxes

The Company’s provision for income taxes differs from the amount determined by applying the applicable federal statutory tax rate to the loss before income taxes due to the valuation allowance for the net deferred income tax assets. A reconciliation of the U.S. statutory tax rate to our effective tax rate is presented below:

Income tax expense attributable to pretax loss from continuing operations differed from the amounts computed by applying the U.S. federal income tax rate of 21% to pretax loss from continuing operations as a result of both temporary and permanent differences in the U.S. GAAP vs tax treatment of certain types of expenses, including stock-based compensation, depreciation and amortization, research and development and meals and entertainment. Additionally, the Company’s policy is to account for interest and penalties as income tax expense. As of December 31, 2024, the Company had no interest related to unrecognized tax benefits, and no amounts for penalties related to unrecognized tax benefits were recognized in the provision for income taxes. We do not anticipate any significant change within twelve months of this reporting date.

As of December 31, 2024, the Company had federal and state net operating loss carryforwards of approximately $89 million and $7 million, respectively. All of the federal NOL carryforwards were generated during 2018 or later and will carryforward indefinitely but will be subject to 80% taxable income limitation beginning tax years after December 31, 2021, as provided by the Coronavirus Aid, Relief, and Economic Security (“CARES”) Act (PL 116-136). State net operating loss will begin to expire in 2043 for state tax purposes. Furthermore, the utilization of NOLs and tax credit carryforwards to offset future taxable income may be subject to an annual limitation as a result of ownership changes that have occurred previously or may occur in the future. Under Sections 382 and 383 of the Internal Revenue Code, a corporation that undergoes an ownership change may be subject to limitations on its ability to utilize its pre-change NOLs and other tax attributes otherwise available to offset future taxable income and/or tax liability. An ownership change is defined as a cumulative change of 50% or more in the ownership positions of certain stockholders during a rolling three-year period. The Company has determined that ownership changes have occurred, primarily driven by the Transactions, and hence the Company’s ability to use its NOLs or tax credit carryforwards may be restricted.

As of December 31, 2024, in addition to the $89.4 million in tax-effected NOL carryforwards, at an assumed tax rate of 30%, the significant components of the Company’s net deferred tax assets included stock-based compensation of $14 million, capitalized research and development expenditures of approximately $3 million. As of December 31, 2023, in addition to the $13 million in tax-effected NOL carryforwards, also at an assumed tax rate of 26%, the significant components of the Company’s net deferred tax assets included stock-based compensation of $11 million and capitalized research and development expenditures of approximately $2 million. The Company believes that it is more likely than not that the benefit from the net deferred tax assets will not be realized. Accordingly, it has provided a full valuation allowance on any potential deferred tax assets The valuation allowance increased by approximately $16 million for the period ended December 31, 2024. The provision for income taxes is not material in the years presented due to there being no taxable income.

The Company has federal R&D credit carryforwards of approximately $878 thousand. The Company has no state R&D credit carryforwards.

The Company files income tax returns in the U.S. federal jurisdiction and various state jurisdictions, with varying statutes of limitations. The tax years from inception through 2024 remain open to examination due to the carryover of unused net operating losses that are being carried forward for tax purposes.

Uncertain Tax Positions

The Company has unrecognized tax benefits related to research and development credit carryforwards. A full valuation allowance has been provided against the Company’s research and development credits. Therefore, any adjustments to these unrecognized tax benefits would be offset by corresponding adjustments to the valuation allowance, resulting in no impact on the consolidated balance sheet or statement of operations.

Note 6 – Property and Equipment, net

The Company’s property and equipment, net are primarily located at the Company’s leased facilities in Hoboken, NJ and Tempe, AZ and consist of (in thousands):

The approximate $6.0 million increase in property and equipment is primarily driven by purchases of laboratory equipment, as well as leasehold improvements, in establishing the AZ Chips Facility.

The Company began depreciating select property and equipment at the AZ Chips Facility as they were put in service during the year ended December 31, 2024, and recorded total depreciation expense of $694 thousand and $203 thousand during the years ended December 31, 2024 and 2023, respectively, using useful lives of the Company’s long-lived assets as follows:

$5.4 million of property and equipment have yet to be placed in service and have not started depreciating.

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. There were no significant gains or losses in the year ended December 31, 2024 and 2023, respectively.

Note 7 – Financial Liabilities

The Company has the following amounts related to financial liabilities (in thousands):

Additionally, the Company hasno and $14 thousand of accrued interest as of December 31, 2024 and 2023, respectively, which is included in Other Current Liabilities.

Secured Promissory Note

On August 6, 2024, the Company entered into a Securities Purchase Agreement (the “Secured SPA”) with Streeterville Capital, LLC (“Streeterville”), pursuant to which the Company issued and sold to Streeterville a Secured Convertible Promissory Note (the “Streeterville Convertible Note”) in the original principal amount of $8.25 million. The principal amount includes an original issue discount of $750 thousand. Streeterville paid $7.5 million in cash for the Streeterville Convertible Note. The Streeterville Convertible Note accrues interest at a rate of 10% per annum and has a maturity date of February 6, 2026, unless earlier prepaid, redeemed or accelerated in accordance with its terms prior to such date. The Company intends to use the net proceeds from the sale of the Streeterville Convertible Note primarily for general working capital purposes, including for (i) operations as the Company increases its sales and marketing efforts; (ii) capital expenditures in outfitting its chip fabrication facility in Tempe, AZ; and (iii) for any other planned or unplanned expenditures that might arise in support of the Company’s business plan. Ascendiant Capital Markets, LLC served as the placement agent on the transaction and received a fee of $450 thousand, and the Company recognized $55 thousand in other issuance costs, primarily for legal services. The Company repaid the Streeterville Convertible Note on November 18, 2024. As of December 31, 2024, there was no outstanding balance and the Company has no further obligations with respect to the Secured SPA or Streeterville Convertible Note.

Unsecured Promissory Note

On September 23, 2022, the Company entered into a note purchase agreement (the “Unsecured NPA”) with Streeterville Capital, LLC (“Streeterville”), pursuant to which Streeterville purchased an unsecured promissory note (the “Note” or the “Streeterville Unsecured Note”) in the initial principal amount of $8.25 million. The Streeterville Unsecured Note bore interest at 10% per annum. The maturity date of the Note was defined as 18 months from the date of its issuance (the “Maturity Date”). The Streeterville Unsecured Note carried an original issue discount of $750 thousand, which was included in the principal balance of the Note. If the Company had elected to prepay the Streeterville Unsecured Note prior to the Maturity Date, it would have paid to Streeterville 120% of the portion of the Outstanding Balance the Company would have elected to prepay. As of December 31, 2024, Streeterville has redeemed the full principal amount of the Unsecured NPA. There was an outstanding balance of $1.9 million as of December 31, 2023. As of December 31, 2024, there wasno outstanding balance and the Company has no further obligations with respect to the Unsecured NPA or Streeterville Unsecured Note.

Note Purchase Agreement – the Company and Wholly-Owned Subsidiary QPhoton

On February 18, 2022, the Company entered into a Note Purchase Agreement (the “QCi Note Purchase Agreement”) with QPhoton, pursuant to which the Company agreed to loan money to QPhoton using two unsecured promissory notes (each, a “QCi Note”), each in the principal amount of $1.25 million, subject to the terms and conditions of the QCi Note Purchase Agreement. Also, on February 18, 2022, pursuant to the terms of the QCi Note Purchase Agreement, the Company loaned the principal amount of $1.25 million to QPhoton. On April 1, 2022, pursuant to the terms of the QCi Note Purchase Agreement, the Company loaned the principal amount of $1.25 million to QPhoton, for a total loan under the two QCi Notes of $2.5 million.

The QCi 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 QCi Notes issued under the QCi Note Purchase Agreement, including the QCi Notes issued on February 18, 2022 and April 1, 2022, provide that the indebtedness evidenced by the applicable QCi 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 QCi 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 QCi Notes) of QPhoton or (iii) an event of default. As a result of the merger, the QCi Note and accrued interest is eliminated through consolidation. However, the two QCi Notes were not forgiven or converted to equity, remain outstanding under the terms and conditions of the QCi Note Purchase Agreement, and are eliminated for presentation purposes in these consolidated financial statements.

Note 8 – Contingencies

Indemnification Arrangements

We enter into standard indemnification arrangements in our ordinary course of business. Pursuant to these arrangements, we indemnify, hold harmless, and agree to reimburse the indemnified parties for losses suffered or incurred by the indemnified parties (generally our business partners or customers) in connection with any trade secret, copyright, patent or other intellectual property infringement claim by any third-party with respect to our products. The term of these indemnification agreements is generally perpetual any time after the execution of the agreement. The maximum potential amount of future payments we could be required to make under these agreements is not determinable. We have never incurred costs to defend lawsuits or settle claims related to these indemnification agreements. As a result, we believe the estimated fair value of these agreements is minimal.

We have entered into indemnification agreements with our directors and officers that may require us to indemnify our directors and officers against liabilities that may arise by reason of their status or service as directors or officers, other than liabilities arising from willful misconduct of a culpable nature. These agreements also require us to advance their expenses incurred as a result of any proceeding against them as to which they could be indemnified and to make good faith determination whether or not it is practicable for us to obtain directors and officers insurance. We currently have directors and officers liability insurance.

Legal Proceedings

From time to time, we may be involved in legal proceedings arising in the ordinary course of business. In general, management believes that ordinary course of business matters will not have a material adverse effect on our consolidated financial position or consolidated results of operations and are adequately covered by our liability insurance. However, it is possible that consolidated cash flows or results of operations could be materially affected in any particular period by the unfavorable resolution of one of more of these contingencies or because of the diversion of management’s attention and the incurrence of significant expenses.

See Part I, Item 3,Legal Proceedings, in this Form 10-K for additional details on the status of the following proceedings.

BV Advisory v. QCi Breach Lawsuit

At the time of the QPhoton Merger in June 2022, QPhoton had an outstanding balance of principal and interest due to BV Advisory based on a note purchase agreement that QPhoton had entered into with BV Advisory on March 1, 2021 (the “BV Note Purchase Agreement”). Accordingly, the Company has recorded an estimated payable (the “BV Advisory Payable”), recognized as other current liabilities on the consolidated financial statements, based on best available information in the amount of $536 thousand as of December 31, 2024 and 2023.

On August 16, 2022, BV Advisory filed a complaint Delaware Chancery Court naming the Company and certain of its directors and officers (among others) as defendants seeking, among other relief, monetary damages for an alleged breach of the BV Note Purchase Agreement. During the year ended December 31, 2024, BV Advisory’s other claims were dismissed by the Delaware Chancery Court and BV Advisory transferred its claim for breach of the BV Note Purchase Agreement to the Delaware Superior Court. The Company believes that BV Advisory’s claims have no merit and intends to defend itself vigorously. BV Advisory’s claims are not covered by the Company’s liability insurance, nor does the Company believe it is necessary to accrue an amount in addition to the BV Advisory Payable at this time.

BV Advisory v. QCi Appraisal Action

BV Advisory was purportedly a shareholder of QPhoton, Inc., the predecessor in interest to QPhoton, LLC, a wholly owned subsidiary of the Company (both referred to as “QPhoton” in this Legal Proceedings discussion). BV Advisory rejected the Merger Consideration (as defined below) and on October 13, 2022 filed a petition in the Delaware Chancery Court seeking appraisal of the shares of QPhoton it allegedly owned (which shares represented 10% of the shares of QPhoton outstanding immediately prior to the Company’s acquisition of QPhoton). The Appraisal Petition is currently pending in Delaware Chancery Court. The Company included BV Advisory’s purported ownership of QPhoton in the purchase price accounting for the QPhoton Merger.

The Company’s total purchase price of QPhoton was approximately $71.0 million, or $69.9 million net of cash acquired, consisting of Company common stock, Series B Preferred Stock and QPhoton Warrants (as defined below). While the total shares of the Company’s common stock on an as-converted basis offered in the QPhoton Merger was 36,600,823 (the “Merger Consideration”), the fair market valuation contemplated 31,299,417 of the shares, which assumed full conversion of the 2,377,028 shares of Series B Preferred Stock to common stock at the 10:1 ratio, and that only 1,726,931 of the warrants to purchase up to 7,028,337 shares of the Company’s common stock (the “QPhoton Warrants”) would eventually be exercised (specifically only the QPhoton Warrants for which the associated Company options and/or warrants had an exercise price at or below $2.27 at the time of the QPhoton Merger).

Accordingly, as of December 31, 2024 and 2023, the Company has neither issued 2,957,251 shares of the Company’s common stock on an as converted basis (the “Unissued QPhoton Shares”) nor 702,834 warrants to purchase shares of the Company’s common stock (the “Unissued QPhoton Warrants”) that were included in the Merger Consideration. The Unissued QPhoton Shares are included in the statement of stockholder’s equity as additional paid in capital as of as of December 31, 2024 and 2023, and the Unissued QPhoton Warrants have a carrying value of $40.5 million as a liability on the Company’s consolidated balance sheet as of December 31, 2024, andno carrying value as a liability on the Company’s consolidated balance sheet as of December 31, 2023.

QCi v. BV Advisory Injunction Lawsuit

On January 31, 2025, the Company filed a complaint in Delaware Chancery Court against BV Defendants (BV Advisory and its principal Keith Barksdale) asserting claims for defamation, breach of contract, conversion, aiding and abetting conversion, and misappropriation of trade secrets based on the BV Defendants’ unauthorized possession and dissemination of certain of the Company’s confidential and privileged documents. The Company seeks, among other relief, injunctive relief and damages. On February 11, 2025, the Court granted the Company’s motion for temporary restraining order and instructed the parties to negotiate an expedited case schedule. On February 13, 2025, the Court entered a stipulated case schedule that set a trial for April 8 and 9, 2025 on the Company’s claims for conversion, aiding and abetting conversion, and misappropriation of trade secrets. The parties are currently engaged in discovery. The Company does not believe it is necessary to accrue a litigation reserve at this time.

Securities Class Action Lawsuit

On February 25, 2025, a class action lawsuit was filed against the Company and certain of its current and past officers in the New Jersey District Court, by a plaintiff seeking to represent a class of all persons who purchased the Company’s securities between March 30, 2020 and January 15, 2025, alleging violations of Section 10(b) and 20(a) of the Securities Exchange Act of 1934. The complaint alleges that the Company made false and/or misleading statements and/or failed to disclose material information about the Company’s customers, contracts and business operations. To date, the New Jersey District Court has not certified a class or designated a lead plaintiff. The Company disputes the allegations in the complaint, intends to vigorously defend against the claims asserted, and does not believe it is necessary to accrue a litigation reserve at this time.

Arbitration over Stock Options

In February 2025, the Company entered into arbitrations with Former Consultants (two individuals) regarding forfeiture of stock options. The Company had issued stock options to the consultants in 2020 and 2021 and terminated the Former Consultants’ agreements in March 2024, at which time the Company informed the Former Consultants that any vested options had to be exercised within three months of the termination date, per the Company’s Equity and Incentive Plans. The Former Consultants did not exercise their vested options, and the options were duly forfeited. In December 2024, the Former Consultants claim that they still retain the right to exercise the options, which the Company has rejected. The Company believes these claims are without merit, intends to defend itself vigorously, and does not believe it is necessary to accrue a litigation reserve at this time.

Note 9 – Loan Receivable

On May 16, 2023, the Company entered into a Summary of Proposed Terms (the “Letter of Intent”) with millionways, Inc (“millionways”) to provide bridge loans to millionways and enter into due diligence to acquire up to 100% of the AI firm. On June 6, 2023, the Company entered into a note purchase agreement (the “MW Agreement”) with millionways, pursuant to which the Company agreed to purchase from millionways up to three unsecured promissory notes (each, a “MW Note”), in an aggregate principal amount of up to $2.0 million, subject to the terms and conditions of the MW Agreement. Also on June 6, 2023, pursuant to the terms of the MW Agreement, the Company purchased the MW Notes from millionways and loaned an aggregate principal amount of $500 thousand to millionways.

The MW Agreement contains customary representations and warranties by millionways and the Company, as well as a “most favored nations” provision for the benefit of the Company. The MW Notes issued under the MW Agreement, including the MW Notes issued on June 6, 2023, provide that the indebtedness evidenced by the applicable MW Note bears simple interest at the rate of 10% per annum (or 15% per annum during the occurrence of an event of default, as defined in the MW Notes), and becomes due and payable in full on the earlier of (i) May 16, 2024, (ii) a change of control (as defined in the MW Notes) of millionways, (iii) dollar-for-dollar prepayment for additional capital received through any vehicle from a third party or (iv) an event of default.

The Company reserved $558 thousand of the outstanding $558 thousand receivable as uncollectible based on credit risk in the consolidated financial statements as of December 31, 2024, however, as of March 18, 2025, is actively seeking collection of $658 thousand, including principal and interest.

Note 10 – Capital Stock

Authorized Classes of Stock

As of December, 2024, the Company’s Board of Directors has authorized two classes of preferred stock. The Board has authorized 1,550,000 shares of preferred stock as Series A preferred stock, par value $0.0001 per share, none of which are issued and outstanding at December 31, 2024, and 1,490,004 of which were issued and outstanding as of December 31, 2023. The Board has also authorized 3,079,864 shares of preferred stock as Series B preferred stock, par value $0.0001 per share, none of which are issued and outstanding at December 31, 2024 and 2023.

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 with 7 accredited investors (the “Series A Investors”), whereby the Series A 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 (the “Preferred Warrants”) for an aggregate purchase price of $8.5 million. The Private Placement was completed and closed to further investment on November 17, 2021.

The Series A Preferred Stock ranks senior to 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 10% per annum (the “Preferred Dividends.”) The Company is obligated to pay the Preferred Dividends quarterly, in arrears, within 15 days of the end of each quarter. The Company has the option to pay the Preferred Dividends in cash or in 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 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 the Company’s common stock issuable upon conversion of any share of Series A Preferred Stock shall be determined by dividing (x) the Conversion Amount of such share of Series A Preferred Stock by (y) the Conversion Price. “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 Preferred Warrants weretwo-year warrants to purchase shares of the Company’s common stock at an exercise price of $7.00 per share, subject to adjustment, were exercisable at any time on or after the date that was six months following the issuance date, and provided for cashless exercise in the event the underlying shares of the Company’s common stock are not registered. As of December 31, 2023, all of the Preferred Warrants had expired unexercised.

In connection with the Purchase Agreement, the Company and the Series A 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 Series A 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. On April 27, 2022 the Company filed a Registration Statement on Form S-3 to register the resale of the shares of common stock as required by the Registration Rights Agreement. The Form S-3 went effective on June 2, 2022.

On June 13, 2022, one of the Series A Investors, Falcon Capital Partners, converted 45,455 shares of Series A Preferred Stock into 47,728 shares of the Company’s common stock.

On February 9, 2023, one of the Series A Investors, Greenfield Children, LLC, converted 10,000 shares of Series A Preferred Stock plus accrued dividends into 11,096 shares of the Company’s common stock.

On March 19, 2024, the Company entered into a Redemption and Waiver Agreement (the “Series A Redemption Agreement”) with the current holders (the “Series A Holders”) of its Series A Preferred Stock. Accordingly, $8.125 million of additional paid in capital was reclassified from shareholders’ equity to mezzanine equity (the “Mezzanine Equity”) on the Company’s consolidated balance sheet in accordance with Accounting Series Release No. 268, Presentation in Financial Statements of “Redeemable Preferred Stocks”. The Mezzanine Equity was valued at the date of the Private Placement issuance. Pursuant to the Series A Redemption Agreement, the Company agreed to redeem all outstanding shares of the Series A Preferred Stock for an aggregate cash purchase price of $8,195,000, or $5.50 per share, at its sole discretion, in 18 monthly payments (each a “Monthly Redemption Threshold” payment), which may be accelerated at the Company’s sole discretion and which does not prevent the Series A Holders from converting outstanding shares of Series A Preferred Stock at a conversion price of $5.50 per share. In addition, the Series A Holders agreed to waive (the “Waivers”), on a month-by-month basis following each monthly payment, certain rights granted to them in (i) the Preferred Stock Certificate of Designation (the “Preferred Stock COD”), including for the accrual and payment of accrued and future dividends; and (ii) the Preferred Stock Securities Purchase Agreement (the “Preferred Stock SPA”). In the event the Company opts to not make a Monthly Redemption Threshold payment, the Waivers are forfeited and the terms revert to those detailed in the Preferred Stock COD and Preferred Stock SPA. During the year ended December 31, 2024, the Company redeemed 745,047 shares of Series A Preferred Stock for approximately $4.1 million in cash paid to the Series A Holders.

During November 2024 and December 2024, the Series A Holders converted 744,957 shares of Series A Preferred Stock into 744,957 shares of the Company’s common stock. As of December 31, 2024, there wereno shares of Series A Preferred Stock issued and outstanding and the Mezzanine Equity valuation was reduced to zero.

At-the-Market Facility

During the years ended December 31, 2024 and 2023, the Company sold 23,679,391 and 17,571,926 shares of common stock, respectively, through its At-The-Market (ATM) facility, managed by Ascendiant Capital Markets, LLC, at an average price of $1.21. The Company received net aggregate proceeds of $48.5 million, of which $23.8 million and $24.7 million, respectively, was received during the years ended December 31, 2024 and 2023.

Registered Direct Offering

On November 14, 2024, the Company entered into securities purchase agreements (the “November RDO SPAs”) for a registered direct offering (the “November RDO”) to sell an aggregate of 16 million shares of the Company’s common stock, par value $0.0001 per share, at a purchase price of $2.50 per share (the “November RDO Shares”), resulting in gross proceeds of $40 million, before deducting placement agent commissions and other offering expenses. On November 18, 2024, the Company completed the sale of the November RDO Shares and announced its intention to use the net proceeds from the November RDO for the repayment of debt, working capital, and general corporate purposes. Specifically, the Company used approximately $9.3 million of the gross proceeds to pay in full the Streeterville Convertible Note.

In conjunction with the November RDO SPAs, the Company also entered into a placement agency agreement with Titan Partners Group LLC (“Titan”), a division of American Capital Partners, LLC (the “November Placement Agent”) dated November 14, 2024, pursuant to which the November Placement Agent will act as the exclusive placement agent for the Company in connection with the November RDO. The Company agreed to pay the November Placement Agent a cash fee of 7.25% of the gross proceeds from the November RDO and to issue to the November Placement Agent (or its designees)800,000 five-year warrants representing 5% of the securities sold in the November RDO, which will be exercisable beginning on May 13, 2025, and have an initial exercise price per share of the Company’s common stock of $2.875. In addition, the Company agreed to reimburse the November Placement Agent for up to $100,000 of its fees and expenses in connection with the November RDO.

Registered Direct and Private Placement Offerings

On December 10, 2024, the Company entered into securities purchase agreements (the “December RDO SPAs”) for a registered direct offering (the “December RDO”), an aggregate of 1,540,000 shares of the Company’s common stock, par value $0.0001 per share, at a purchase price of $5.00 per share. Also on December 10, 2024, the Company entered into securities purchase agreements, pursuant to which the Company agreed to issue in a concurrent private placement (the “December Private Placement” and together with the December RDO, the “December SPAs”), an aggregate of 8,460,000 shares (the “December Placement Shares”) of common stock at a purchase price of $5.00 per share. The December SPAs closed on December 12, 2024. The December RDO resulted in gross proceeds of $7.7 million and the December Private Placement resulted in gross proceeds of $42.3 million, in each case before deducting placement agent commissions and other offering expenses. Furthermore, the Company filed a registration statement registering the resale of the December Placement Shares on December 20, 2024, which went effective January 6, 2025.

In conjunction with the December SPAs, the Company also entered into a placement agency agreement with Titan (the “December Placement Agent”), dated December 10, 2024, pursuant to which the December Placement Agent will act as the exclusive placement agent for the Company in connection with the December SPAs. The Company agreed to pay the December Placement Agent a cash fee of 7% of the gross proceeds from the December SPAs and to issue to the December Placement Agent (or its designees)500,000 five-year warrants (representing 5% of the securities sold in the Offerings), which will be exercisable beginning on June 8, 2025, and have an initial exercise price per share of the Company’s common stock of $5.75. In addition, the Company agreed to reimburse the December Placement Agent for up to $100,000 of its fees and expenses in connection with the December SPAs.

The combined amount of net proceeds raised from the ATM and RDOs was $106.8 million and $24.7 million for the years ended December 31, 2024 and 2023, respectively.

Warrants

The table below summarizes the warrants outstanding at December 31, 2024 (in thousands, except exercise prices):

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 forfive years from the date of issuance.

In connection with the QPhoton Merger on June 16, 2022, the Company issued 6.3 million warrants to purchase 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 by the Company and outstanding as of June 15, 2022 (the “Underlying Options”) are exercised. As of December 31, 2024, all of the QPhoton Warrants linked to the outstanding Underlying Options are expected to be exercised as the exercise prices of all the Underlying Options are below the closing stock price as of December 31, 2024. The 6.3 million issued warrants represent a portion of the 7.0 million warrants included in the Merger Consideration, having been received by two QPhoton shareholders. A third alleged shareholder rejected the Merger Consideration and commenced litigation, and to date that litigation has not been resolved and the associated 702,834 warrants have not been issued, of which 457,926 would have been canceled to date due to forfeitures of Underlying Options. See Part I, Item 3,Legal Proceedings, for additional information on the status of the litigation.

As of December 31, 2024, of the 6.3 million QPhoton Warrants issued, approximately 65% have been forfeited because the corresponding Underlying Options had expired or been forfeited. Further, as discussed in Note 2,Significant Accounting Policies – Fair Value of Financial Instruments, the QPhoton Warrants issued on June 16, 2022, are considered Level 3 liabilities for fair value measurement on the valuation hierarchy. In determining the fair market value of the QPhoton Warrants, the Company determines which underlying options and warrants are in-the-money or out-of-the-money at period end by comparing to the bid price of the Company’s common stock, then accounts for changes period-over-period by realizing a mark-to-market gain or loss for the period. Due to the difference between the exercise price and the market value of the Company's stock as of the balance sheet dates, the market value of the stock and the probability of the underlying options and warrants being exercised are the only significant inputs in the valuation of the warrant liability. Accordingly, the Company recognized a mark-to-market loss of $40.5 million and a mark-to-market gain of $528 thousand during the years ended December 31, 2024 and 2023, respectively. As of December 31, 2024, the QPhoton Warrants have a carrying value of $40.5 million as a liability on the Company’s consolidated balance sheet, an increase of $40.5 million as compared to the Company’s December 31, 2023 consolidated balance sheet, where the QPhoton Warrants had no carrying value as a liability on the Company’s consolidated balance sheet.

Note 11 – Stock-based Compensation

Incentive Plans

The Quantum Computing Inc. 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 3.0 million shares of common stock, all of which have been issued.

On July 5, 2022, the Board of Directors adopted the Quantum Computing Inc. 2022 Equity and Incentive Plan (the “2022 Plan”), which was approved by a majority of the shareholders in September 2022. The 2022 Plan initially provided for the issuance of up to 16 million shares of the Company’s common stock and includes provisions for annual automatic evergreen increases of 1,000,000 shares of common stock. As of December 31, 2024, the total number of shares of our common stock reserved for issuance under the 2022 Plan is 18 million and a total of 13 million shares and options were issued and outstanding under the 2022 Plan.

Options

The following table summarizes the Company’s option activity for the year ended December 31, 2024 (in thousands, except exercise price and contractual life data):

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 during the years ended December 31, 2024 and 2023:

The following table summarizes the exercise price range as of December 31, 2024 (in thousands):

The weighted average grant-date fair value of stock options granted during the years ended December 31, 2024 and 2023 was $0.92 per share and $1.38 per share, respectively. As of December 31, 2024, total unrecognized compensation cost related to common stock options was $3.1 million, which is expected to be recognized over a period of 3.0 years.

Restricted Stock

As of December 31, 2024, there were 1.3 million shares of the Company’s common stock issued and unvested that had been awarded as stock-based compensation under the 2022 Plan. The following table summarizes the Company’s activity for restricted stock tied to vesting schedules for the year ended December 31, 2024 (in thousands):

Stock-based compensation

The Company recognized stock-based compensation expense related to common stock options and restricted shares of common stock in the following expense categories of its consolidated statements of operations (in thousands):

For the years ended December 31, 2024 and 2023, the consolidated statement of stockholders’ equity was lower by $1.5 million and $33 thousand, respectively, as compared to the consolidated statement of cash flows for timing differences between award dates and the realization of stock-based compensation expense.

In terms of new issuances, the Company issued 995 thousand shares of the Company’s common stock to employees in the year ended December 31, 2024 (the “2024 SBC Awards), as compared to 2.3 million in the year ended December 31, 2023 (the “2023 SBC Awards”).

The 2024 SBC Awards included 218 thousand such shares issued to former executives per their respective employment and separation agreements (the “Separation Agreement Shares”) and 777 thousand such shares issued as performance and incentive awards, which included 727 thousand shares of the Company’s common stock issued to 30 employees as payment in lieu of cash for 2023 performance bonuses (the “2024 Performance Incentive Shares”) and 50 thousand shares of common stock as retention bonuses tofive employees identified as key technical staff (the “2024 Retention Incentive Shares”). The 2024 Performance Incentive Shares are restricted with the following vesting schedule: one-half vested on December 31, 2024 and one-half will vest on December 31, 2025. The 2024 Retention Incentive Shares are restricted and vested on December 31, 2024.

The Company recognized $197 thousand and $815 thousand, respectively, of stock-based compensation expense during the year ended December 31, 2024 in conjunction with the Separation Agreement Shares and 2024 Retention Incentive Shares, and does not expect future expense related to these issuances as they are fully vested. In conjunction with the 2024 Performance Incentive Shares, the Company recognized $244 thousand of stock-based compensation expense during the year ended December 31, 2024, and expects future expense related to these offerings to total $244 thousand in the year ending December 31, 2025.

The 2023 SBC Awards included 854 thousand shares of the Company’s common stock issued to 35 employees as payment in lieu of cash for 2022 performance bonuses (the “2023 Performance Incentive Shares”) and 1.5 million shares of the Company’s common stock as long-term incentive bonuses tofive employees identified as key technical staff (the “2023 Retention Incentive Shares”). The 2023 Performance Incentive Shares are restricted and vested in equal halves on each of December 31, 2023 and 2024. As of December 31, 2024, the Company canceled 23,600 of the issued shares that were forfeited by employees no longer with the Company and does not expect future expense related to these offerings as they are fully vested. The 2023 Retention Incentive Shares are restricted and vest annually in equal amounts over a five-year period as follows:20% vested or will vest on each December 31 of 2023, 2024, 2025, 2026 and 2027, subject to the grantee continuing to perform services for the Company in the capacity in which the grant was received on each applicable vesting date. In conjunction with the 2023 Performance Incentive Shares, the Company recognized $462 thousand of stock-based compensation expense during the year ended December 31, 2024 and does not expect future expense related to these offerings as they are fully vested. In conjunction with the 2023 Retention Incentive Shares, the Company recognized $533 thousand and $320 thousand, respectively, of stock-based compensation expense during the years ended December 31, 2024 and 2023, and expects future expense related to these offerings to total $1.3 million over the remaining vesting periods.

Stock-based compensation for services

The Company recognized $23 thousand and $284 thousand, respectively, during the years ended December 31, 2024 and 2023 in stock-based compensation for services in lieu of cash payments to certain consultants, including expenses for both shares issued and stock option awards granted. For the years ended December 31, 2024 and 2023, the statement of stockholders’ equity was higher by $114 thousand and $2.2 million, respectively, as compared to the statement of cash flows for timing differences between award dates and the realization of stock-based compensation for services expense.

In terms of issuances, the Company issued 142 thousand shares of the Company’s common stock to various consultants for market and media advisory services in the year ending December 31, 2024, as compared to 1.6 million shares of the Company’s common stock in the year ending December 31, 2023 (the “2023 Advisor Shares”). The Company issued 1.5 million of the 2023 Advisor Shares to a consultant who served as an advisor on the QPhoton Merger (the “QPhoton Advisor Shares”), comprised of 750 thousand such shares to Draper, Inc. and 750 thousand such shares to Carriage House Capital, Inc, and issued 75 thousand of the 2023 Advisor Shares to FMW Media Works as compensation for services rendered in support of marketing and communications. For the QPhoton Advisor Shares, the expense was recognized in 2022 at the time of the merger, though the shares were not awarded and issued until 2023.

Note 12 – Related Party Transactions

There were no related party transactions during the years ended December 31, 2024 and 2023.

Note 13 – Operating Leases

As of December 31, 2024, the Company has use of space in three different locations, Hoboken, NJ, Tempe, AZ, and Arlington, VA, under lease or membership agreements, which expire at various dates through November 30, 2028. The Company’s leases do not provide an implicit rate, and the rates implicit in our leases are not readily determinable. 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 Company’s leases all contain options to extend or renew the lease or membership term.

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 December 31, 2024 (in thousands):

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

Note 14 – License Agreement – Stevens Institute of Technology

Effective December 17 th, 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.

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 thousand within 30 days of execution of the agreement, (ii) $28 thousand within 30 days of each annual anniversary of the effective date, (iii) equity in the Company equivalent to 9.0% 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 December 31, 2024, the Company has begun to commercialize some of the licensed technology, though the Company has not recorded any related revenue and hence has not incurred any royalty expenses payable to the Stevens Institute.

Note 15 – Subsequent Events:

On January 7, 2025, the Company entered into securities purchase agreements (the “January SPAs”) pursuant to which the Company agreed to issue, in a private placement (the “January Private Placement”), an aggregate of 8,163,266 shares (the “January Placement Shares”) of the Company’s common stock, par value $0.0001 per share, at a purchase price of $12.25 per share. The January SPAs required the Company to file a registration statement registering the resale of the January Placement Shares by January 24, 2025. The Company’s Registration Statement on Form S-1 (File No. 333-284416), to register resale of the the shares sold in this offering was filed on January 22, 2025 and became effective on February 3, 2025. The January Private Placement resulted in gross proceeds of approximately $100 million before deducting placement agent commissions and other offering expenses. The closing of the January Private Placement took place on January 9, 2025, following the satisfaction of customary closing conditions.

Pursuant to the January SPAs, the Company has agreed not to issue, enter into any agreement to issue, or announce the issuance or proposed issuance of any shares of common stock or common stock equivalents, or file any registration statement or any amendment or supplement thereto, for a period of 75 days after the closing date of the January Private Placement, subject to certain customary exceptions, without the consent of the January SPAs purchasers and the January Placement Agent, as defined below.

The Company also entered into a placement agency agreement with Titan (the “January Placement Agent”), dated January 7, 2025, pursuant to which the January Placement Agent will act as the exclusive placement agent for the Company in connection with the January SPAs. The Company agreed to pay the January Placement Agent a cash fee of 6% of the gross proceeds from the January SPAs and to issue to the January Placement Agent (or its designees)326,531 five-year warrants (representing 4% of the securities sold in the Placement), which will be exercisable beginning on July 6, 2025, and have an initial exercise price per share of the Company’s common Stock of $14.0875. In addition, the Company agreed to reimburse the January Placement Agent for up to $100,000 of its fees and expenses in connection with the January SPAs.

As a condition of the January SPAs, the Company’s directors and executive officers entered into Lock-Up Agreements with the Company pursuant to which they agreed for a period of 60 days after the closing date of the January SPAs, subject to certain exceptions, not to directly or indirectly offer, sell, contract to sell, hypothecate, pledge or otherwise dispose of, directly or indirectly, or establish or increase a put equivalent position or liquidate or decrease a call equivalent position with respect to, any shares of the Company’s common stock or securities convertible, exchangeable or exercisable into the Company’s common stock, that they beneficially own, hold, or thereafter acquire, or make any demand for or exercise any right or cause to be filed a registration, including any amendments thereto, with respect to the registration of any the Company’s common stock or common stock equivalents or publicly disclose the intention to do any of the foregoing.

On January 28, 2025, the Delaware Chancery Court reassigned the BV Advisory appraisal action from Vice Chancellor Glasscock (following his retirement on January 15, 2025) to Vice Chancellor Bonnie David, effective as of that date.

On January 31, 2025, the Company filed a complaint in Delaware Chancery Court against BV Defendants (BV Advisory and its principal Keith Barksdale) asserting claims for defamation, breach of contract, conversion, aiding and abetting conversion, and misappropriation of trade secrets based on the BV Defendants’ unauthorized possession and dissemination of certain of the Company’s confidential and privileged documents. The Company seeks, among other relief, injunctive relief and damages. On February 11, 2025, the Court granted the Company’s motion for temporary restraining order and instructed the parties to negotiate an expedited case schedule. On February 13, 2025, the Court entered a stipulated case schedule that set a trial for April 8 and 9, 2025 on the Company’s claims for conversion, aiding and abetting conversion, and misappropriation of trade secrets.

On February 25, 2025, a class action lawsuit was filed against the Company and certain of its current and past officers in the New Jersey District Court, by a plaintiff seeking to represent a class of all persons who purchased the Company’s securities between March 30, 2020 and January 15, 2025, alleging violations of Section 10(b) and 20(a) of the Securities Exchange Act of 1934. The complaint alleges that the Company made false and/or misleading statements and/or failed to disclose material information about the Company’s customers, contracts and business operations. To date the New Jersey District Court has not certified a class or designated a lead plaintiff. The Company disputes the allegations in the complaint and intends to vigorously defend against the claims asserted.

In February 2025, the Company entered into arbitrations with two former consultants (two individuals) regarding forfeiture of stock options. The Company had issued stock options to the consultants in 2020 and 2021 and terminated the former consultants’ agreements in March 2024, at which time the Company informed the former consultants that any vested options had to be exercised within three months of the termination date, per the 2019 Plan and the 2022 Plan. The former consultants did not exercise their vested options, and the options were duly forfeited. In December 2024, the former consultants claimed that they still retained the right to exercise the options, which the Company rejected. The Company believes these claims are without merit and intends to defend itself vigorously.

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