QUBT Quantum Computing Inc

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: June 30, 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)

(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 (or for such shorter period that the registrant was required to file such reports), 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, a smaller reporting company, or an emerging growth company. See the definitions 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 August 10, 2023, there were 74,296,370 shares outstanding of the registrant’s common stock. 

QUANTUM COMPUTING INC.

TABLE OF CONTENTS

PART I – FINANCIAL INFORMATION

Item 1.  Consolidated Financial Statements 

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Index to the Consolidated Financial Statements

(Unaudited)

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Consolidated Balance Sheets

(Unaudited)

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

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Consolidated Statement of Operations

(Unaudited)

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

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Consolidated Statement of Stockholders’ Equity

For the Six Months Ended June 30, 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 Six Months Ended June 30, 2023

(Unaudited)

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

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Consolidated Statements of Cash Flows

For the Three Months Ended June 30, 2023 and 2022

(Unaudited)

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

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Notes to Consolidated Financial Statements

June 30, 2023

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Notes to Consolidated Financial Statements

June 30, 2023

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Notes to Consolidated Financial Statements

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Notes to Consolidated Financial Statements

June 30, 2023

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Notes to Consolidated Financial Statements

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Notes to Consolidated Financial Statements

June 30, 2023

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Notes to Consolidated Financial Statements

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Notes to Consolidated Financial Statements

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QUANTUM COMPUTING INC.

Notes to Consolidated Financial Statements

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Notes to Consolidated Financial Statements

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Notes to Consolidated Financial Statements

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Notes to Consolidated Financial Statements

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Notes to Consolidated Financial Statements

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Notes to Consolidated Financial Statements

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Notes to Consolidated Financial Statements

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Notes to Consolidated Financial Statements

June 30, 2023

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,” “QCi,” “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 consolidated 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 consolidated 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 nanophotonic-based quantum technology company. Our mission is to be the democratizing force that brings quantum solutions to business, academia, government, and ultimately individual users. Our quantum technologies enable end users to get answers to critical business problems today, using the quantum solutions that deliver solutions otherwise unavailable in the market.

The Company was formed in 2018, to focus on providing a software platform to connect end-users with several commercially available quantum computers. The growth of our business was dependent on the ability of those quantum computers to provide viable business solutions, which they were and still are, incapable of providing today. Consequently, in June 2022, the Company dramatically expanded the scope of its business through its merger with QPhoton, Inc. (“QPhoton”). By combining QPhoton’s quantum hardware intellectual property with QCi’s quantum software platform and its expertise in various quantum hardware platforms, the Company has transformed into is now able to provide full-stack innovative quantum solutions company providing quantum technologies ranging from quantum computing to quantum sensing, quantum imaging and quantum cyber security. QCi, with its breadth of quantum technologies, all based on its core photonic computing capability, is in a unique market position, to address multiple quantum technology market areas that few of its competitors can claim. Key to our competitive advantage over other quantum computing hardware is our ability to operate at room temperature with no expensive specialized cryogenic cooling, controlled noise and vibration free environments, while providing computational advantages unparalleled in the market.

The first and most productized of the Company’s technology today, the Dirac series, is the Company’s Entropy Quantum Computing (“EQC”). The Dirac series includes room-temperature, photonic quantum information processing systems underpinned by a series of patented and patent pending technologies.  We believe that this will enable us to develop and produce multiple generations of information processors with increasing computational power, capacity, and speed, as well as the hardware miniaturization that will exceed the computing capabilities of classical systems. Our product development goal is 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, benefits our clients by providing a cloud-based pathway to access and adopt quantum technologies.

The Company’s products are in early commercialization. Revenues to date have consisted entirely of professional services that utilize the Dirac-series computers, and we expect subscription and hardware sales to commence in the second half of 2023. 

In addition, our photonic technology and engineering teams are enabling QCi to continue to expand into adjacent markets and produce enhanced quantum LiDAR, vibrometry and sensing systems, imaging systems, quantum-secured network solutions, quantum cyber security and photonic quantum chips. Several of these technologies are already in early stages of commercialization.

While we are continuing to develop and evolve our technology, our short-term goals and core business model are based on generating revenue from selling access to our advanced quantum computing systems (via the cloud) as we develop commercial capabilities. As previously stated, we are developing commercial quantum imaging, sensing, and cybersecurity products that we are offering to both commercial and government clients. The Company’s near-term model is focused on selling desktop or rack-sized as well as portable quantum devices that will power hybrid computing systems that will create the combination of classical computing and quantum computing to deliver critical business solutions unavailable in the market today. Our long term product goal is to build laptop quantum computers, at price points that will make them affordable to computer users at every business level, not just the largest companies who can afford better technology. We currently offer access to our quantum computing machines via our own in-house cloud service and have begun the process to be able to take orders for select hardware and device products. Our plan is to also eventually offer access through other commercial service providers.

A central capability that will drive our entire product development is our quantum nanophotonic chip technology. The Company already produces its own lithium niobate nanophotonic circuits and has plans to scale production to meet the requirements of our product roadmap as well as projected demand for our technologies. As further discussed below, the Company has announced plans to construct and operate a new state-of-the-art quantum nanophotonics technology manufacturing and research center.

We are focused on providing integrated quantum information gathering, transmission, and processing solutions, including both the user interface software and the quantum hardware. With our proprietary nanophotonic quantum technologies designed using our solution-oriented system architectures, we believe that we will have a competitive advantage in the market. As an integrated engineering team that works across multiple quantum technology domains, we believe that we are well-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 that this full-stack development approach offers both the fastest and lowest risk path to building commercially valuable quantum machines.

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 will be with classical computers in 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, among others, big data, artificial intelligence, healthcare, and cybersecurity. We believe that these are natural markets for quantum computing, due to the immense compute power required to process large data sets.

However, quantum technologies (particularly QCi’s) reach far beyond computing. As previously stated, other existing technologies in domains such as imaging, sensing, and cybersecurity will greatly benefit from the advances of quantum science to bring better technologies in medicine, engineering, autonomous vehicles, and cyber security to protect the most sensitive national and commercial systems from quantum enabled attacks. These markets will likely out pace and out perform the computing market in the near term and likely for the foreseeable future.

Strategy

QCi’s strategy has evolved to become a nanophotonic quantum solutions company, regularly launching an increasing selection of products and services. When QCi was formed, 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, in high demand and expensive. In addition, the predominant quantum computer programming approach, using one or more software development toolkits (“SDKs”) to create a quantum computing program, was and continues to be, 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. Until recently, the use of quantum computing was generally limited to research and science experiments conducted at universities and laboratories. A larger user community is now emerging, demanding greater capabilities from quantum systems. QCi is helping to drive that shift in the market with its available computing technologies, and we believe that QCi is prepared to address this growing need.

QCi’s merger with QPhoton, combined with QCi’s significant intellectual property work that culminated in the development of Qatalyst software, enables the QCi to offer room temperature quantum computation systems through cloud services today and, we expect, will enable us to offer affordable, turn-key products in the future as well. 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 presented significant barriers to adoption for companies and government entities looking to leverage novel quantum computing capabilities to solve problems. We believe that QCi’s core proprietary photonic methodology offers:

In short, our core technology offers practical, cost-effective solutions that materially advance the computing capability available in the market. We leverage this core competency across our five product platforms that include:

Quantum Optical Chips – leveraged across all five product platforms and a key component to future product development

Nanophotonic chips will ultimately provide the greatest scalability and performance advantages for quantum information processing, sensing and imaging. We continue to develop our proprietary nanophotonic chip designs and are 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. With respect to building such a facility, QCi believes that we have an opportunity to benefit from the 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, During 2023, we began to take steps to establish a U.S.-based chip facility. We have submitted a letter of interest and are progressing in the grant application process. We have also identified an optimum site location in Arizona and have placed deposits to secure certain long-lead time equipment. Our plan for the facility is to produce a range of lithium niobate nanophotonic circuits (quantum chips) for use in our own products and for general sale in the market. QCi is prepared, however, to finance some or all of the required funding to build the facility, if necessary, and believes it has multiple sources to do so. Currently, QCi leases facilities to produce its own lithium niobate nanophotonic circuits and has secured additional capabilities to scale in order to meet anticipated future demand until our new fabrication facility is completed and operational, which could take up to two years to complete, depending on permitting and supply chain factors.

QCi’s ability to sell its innovative solutions in the market place would be enhanced by partners who represent significant experience and success in their respective domains. QCi has and is expanding its partner base to address opportunities in the federal government to include the Department of Defense as well as civilian federal government agencies, the commercial sector, to include major firms with successful business lines in the medical, civil engineering, and supply chain domains, among others.

The US Government recognizes that quantum technologies are essential to maintaining technology leadership in the world today. In order to fully support tremendous potential for our market-ready quantum solutions to this important market, QCi launched in February 2023 a wholly owned subsidiary, QI Solutions, Inc. (QiS), to deliver quantum products and services to the US government agencies and defense markets to best serve the unique requirements of this market. QiS is strategically headquartered in Arizona, a leading force in the field of optics whose government leaders are early champions of advanced photonic research, supporting strong research universities interested in exploring mission-ready quantum computing and related technologies.

We believe that our unique capabilities that can be adopted for immediate applications that are appropriate for multiple programs within various government departments and agencies and have already been engaged in discussions with a number of these entities, and anticipate that we could soon see our solutions utilized in a wide variety of boutique applications for our clients.

Products and Products in Development

Quantum Computing

QCi’s unique position in the marketplace is due to its core photonic computing capability which has transformed us into a full-stack innovative quantum solutions company. This core technology results in QCi’s ability to offer quantum technologies ranging from quantum computing to quantum sensing, quantum imaging and quantum cyber security. Addressing multiple quantum technology market areas that few of its competitors can claim.

Entropy Quantum Computer – Dirac Series

The core of QCi’s hardware offering is the EQC, which leverages the principle of open quantum systems. The EQC differs substantially from today’s Noisy Intermediate Scale Quantum (NISQ) computers, or gate model computers using superconducting or iontrap methods, 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. Due to the physical limitations imposed by the physics, today’s NISQ computers are required to be designed to produce closed quantum systems in pristine quantum states that are isolated from the environment. Consequently, 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.). Late in 2022, we announced our intention to launch the Dirac Series, a family of products that will include next generations of EQC that increasingly 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. These attributes of the Dirac series of computers make them more affordable to general business users than other quantum machines and thereby enable QCi to achieve its goal of “democratization”. To date QCi has released 2 computers within the Dirac series: Dirac-1 is our first available EQC which delivers solutions for binary optimization problems capable of using over 11,000 qubits; and Dirac-2 solves integer-based optimization problems encompassing over 1000 (n=64) qudits. Both Dirac-1 and Dirac-2 are able to process the highest number of variables and problem size available in quantum computing today. The Dirac-2 has already demonstrated its capacity to solve significantly large supply chain problems. We plan to release Dirac-3 in the second half of 2023.

EQC Business Model

The combination of the Entropy Quantum Computer and Qatalyst, our internally-developed software that acts as an interface pathway for external access, has enabled us to launch our 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.

Initially the EQC subscription services are hosted at the Company’s data center in 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 that 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.

Quantum Intelligence

Reservoir Computer

Launched June 2023, our first reservoir computing product is an edge device that is photonic-inspired, FPGA-based, and optimized for recurrent neural network applications. The Reservoir Computer (“RC”) hardware system has advantages over the more traditional software approaches to reservoir computing include significantly faster processing speeds, 80% - 95% less energy consumption, portable (size of power bank), affordable, and offering materially less training time. The RC delivers superior performance in time dependent tasks, such as chaotic time series prediction, radar signal classification, and speech recognition. The QCi Reservoir Computer’s advantage of being deployed at the edge of a computer network, allows data analysis to occur at the sensors or collection point, reducing latency, dependency on network connections, and allows for more real-time processing of data. To date, the market for reservoir computing has been limited due to computing cost and technical implementation complexities, which is expected to be practically eliminated with our reservoir computer. The QCi’s reservoir computer can address complex problems in fields such as natural language processing, weather prediction, financial analysis, drug discovery, optimization, autonomous driving, enhancement of LiDAR capabilities, and a material boost to performance (speed, accuracy and data processing volume), affordability, and power-savings to the AI industry.  Our current contract with NASA and collaboration with AI firm millionways, both of whom are the first to use the QCi RC, speak to QCi’s Reservoir Computer’s ability to solve complex machine learning problems across different application areas. We are accepting order for the RC now and will begin shipping during second half of 2023.

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. Importantly, we are actively engaged in multiple testing opportunities through a subcontract with NASA.

Quantum Photonic Vibrometer

Launched July 2023, the Quantum Photonic Vibrometer (“QPV”) is a proprietary, powerful instrument for remote vibration detection, sensing, and inspection.  This device is the first quantum accelerated photonics vibrometer available in the market today and offers significant advancements in sensitivity, speed, and resolution, capable of discerning for the first time, highly obscured and non-line-of-sight objects.  The first in the series of the QPV measures the vibration frequency of a remote target by utilizing fast-gated single photon counting to directly detect returning photons whose wavefunctions are dynamically modulated as they are reflected off the target. The QPV eliminates background noise and isolates the specific characteristics of a target object, enables the system to interrogate the material properties of a target at various depths and can provide both surface characteristics as well as volumetric information. Also, counting photons at a megahertz rate, important properties such as material composition and mechanical integrity can be determined within seconds and, depending on detection distance, with microwatt to milliwatt optical power. Working at an eye-safe wavelength, QPV can accurately characterize the vibration spectra of solid or liquid targets with vibration amplitude as small as 100 nanometers. The QPV can remotely sense through obscured media or around the corner where there is no line of sight, implying new capabilities in remote sensing, voice recognition, and ex vivo diagnostics.  

The QPV is much faster and more sensitive than other vibrometers currently available. It collects and delivers significantly more data and distinguishing characteristics on each target, such as material type or specific metal, distance and altitude, volume or size of the target, reconstruction of a voice or sound, as well as detection and tracking anomalies.  This level of information accuracy and detail can advance military, commercial and humanitarian applications in several known challenged areas today, including remote landmine detection, audio surveillance and remote voice retrieval, archeological mapping, material recognition from specific metals to plastics, metal fatigue and structural integrity of bridges, buildings, power plants, airplanes, and transportation fleets. The QPV is offered as a stand-alone device or can easily be integrated with other products for enhanced capabilities.

Subsequent versions will offer advances in remote sensing that reach significantly greater distances, minimize device footprint and weight, and optimize data gathering in increasingly challenging environmental conditions (underground, underwater and at high altitudes affixed to a drone, plane or space-based platforms).

Quantum 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. 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’s “Zero Trust” environment allows verification of transactions without disclosing sensitive information, providing privacy, and security in interactions and enabling trustless decentralized systems. “Zero Trust” is a cybersecurity approach that assumes no inherent trust in any user, device, or system, regardless of whether they are inside or outside the organization's network perimeter. Traditional security models typically operate under the assumption that anything inside the network is trustworthy. The core tenet of Zero Trust lies in not trusting anything and continually verifying inside out. This places a strong emphasis on authentication both inside and outside the network. However, reliance on cryptographic methods like the public-private key is problematic, even in the current state, as its security fundamentally relies on the intractable mathematical problem. QCi’s Zero Trust solution completely mitigates these risks. QCI has several patents in the area of quantum-based technologies for protection of data at rest and in quantum private communication. QCI has begun commercial development of quantum networking products in 2023 and partnerships are actively being explored. We believe our ability to address these issues in the marketplace provides QCi with significant competitive advantage over existing cyber security solutions.

Quantum Random Number Generator 

Our Quantum Random Number Generator (“QRNG”) contributes to more effective key production for encryption. Our patented 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 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 our 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. We 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.

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 internal testing.

Results of Operations

Three Months Ended June 30, 2023 and 2022

The following table summarizes the highlights of our financial performance for the three months ended June 30, 2023 and June 30, 2022 as well as the increase (decrease) and percentage changes, except those deemed not meaningful (“NM”), between the periods presented:

Revenues

Revenues for the three months ended June 30, 2023 were $112,190 compared to $65,484 for the comparable prior year period, an increase of $46,706 or 71%. 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, which consists of direct labor expenses, was $51,157 for the three months ended June 30, 2023 compared to $5,233 for the comparable prior year period, an increase of $45,924 or 878%. This increase 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 Profit/Gross Margin

Gross profit and gross margin for the three months ended June 30, 2023 was $61,033 and 54%, respectively, compared to $60,251 and 92%, respectively, for the comparable prior year period, an increase of $782 and 1%, respectively. The increase in gross profit is primarily due to the increase in gross revenue during the three months ended June 30, 2023 compared with the prior year period, and the decrease in gross margin 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 June 30, 2023 were $3,920,129 as compared with $4,868,615 for the comparable prior year period, a decrease of $948,486 or 19%. The decrease in operating expenses compared with the comparable prior year period is due in large part to the $2,405,639 decrease in other SG&A costs driven by reductions in legal expenses and adjustments to intangibles related to the QPhoton merger, the $72,350 decrease in consultant and professional services expense driven in large part by an increasing use of full and part time employees, offset by the $795,235 net increase in combined stock-based compensation and salary expenses, and the $734,268 increase in research and development expenses for additional technical labor, parts and supplies needed to design and test new hardware products.

Net Loss

Our net loss for the three months ended June 30, 2023 was $4,642,448 as compared with a net loss of $5,104,576 for the comparable prior year period, a decrease of $462,128 or 9%. The decrease in net loss is primarily due to the changes in operating expenses discussed above, offset in part by increased financing costs for the ATM that we began using in January 2023 and for the Streeterville Note that we issued in September 2022.

Six Months Ended June 30, 2023 and 2022

The following table summarizes the highlights of our financial performance for the three months ended June 30, 2023 and June 30, 2022 as well as the increase (decrease) and percentage changes, except those deemed not meaningful (“NM”), between the periods presented:

Revenues

Revenues for the six months ended June 30, 2023 were $232,719 compared to $96,724 for the comparable prior year period, an increase of $135,995 or 141%. 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 six months ended June 30, 2023 was $107,395 as compared with $16,800 for the comparable prior year period, an increase of $90,595 or 539%. 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 Profit/Gross Margin

Gross profit and gross margin for the six months ended June 30, 2023 was $125,324 and 54%, respectively, compared to $79,924 and 83%, respectively, for the comparable prior year period, an increase of $45,400 and 57%, respectively. The increase in gross profit is primarily due to the increase in gross revenue during the six months ended June 30, 2023 compared with the prior year period, and the decrease in gross margin 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 six months ended June 30, 2023 were $11,771,929 as compared with $11,597,219 for the comparable prior year period, an increase of $174,710 or 2%. The increase in operating expenses compared with the comparable prior year period is due in large part to the $1,244,277 increase in research and development expenses for additional technical labor, parts and supplies needed to design and test new hardware products, the net $19,584 increase in combined stock-based compensation and salary expenses, offset by the $870,924 decrease in other SG&A costs driven by reductions in legal expenses and adjustments in intangibles related to the QPhoton merger, and the $218,191 decrease in consultant and professional services expense driven in large part by an increasing use of full and part time employees.

Net Loss

Our net loss for the six months ended June 30, 2023 was $13,148,585 compared to a net loss of $12,238,268 for the comparable prior year period, an increase of $910,317 or 7%. The increase in net loss is primarily due to the changes in operating expenses discussed above, and the increased financing costs for the ATM that we began using in January 2023 and for the Streeterville Note that we issued in September 2022.

Liquidity and Capital Resources

Since commencing operations in February 2018, the Company has raised $42,427,995 through private and public placements of equity and $12,633,000 through private placements of convertible promissory notes and other debt for a total of $55,060,995 through June 30, 2023. The Company has no lines of credit and $6,375,427 in short-term debt obligations outstanding. As of June 30, 2023, the Company had cash and cash equivalents of $7,196,795.

The following table summarizes total current assets, liabilities and working capital at June 30, 2023, compared to December 31, 2022:

At June 30, 2023, the Company had a working capital deficit of $3,698,666 as compared to a working capital deficit of $957,673 at December 31, 2022. The increase in deficit of $2,740,993 is primarily due to the principal of the Streeterville Note becoming a current liability.

Cash Flows

Net cash used in operating activities for the six months ended June 30, 2023 and 2022 was $9,788,735 and $8,948,475, respectively, in each case primarily as a result of our net loss in each period offset by noncash adjustments for stock based compensation.

Net cash used in investing activities for the six months ended June 30, 2023 and 2022 was $1,089,948 and $1,366,139, respectively. Net cash used in investment activities related primarily to our purchase of $581,333 of computer hardware and laboratory equipment expenditures and our $500,000 investment in MW Notes during the six months ended June 30, 2023. For the period ended June 30, 2022, net cash used in investment activities was almost entirely attributable to our merger with QPhoton in June 2022.

Net cash provided by financing activities was $12,767,012 and $318,750 for the six months ended June 30, 2023 and 2022, respectively. Cash flows provided by financing activities during the six months ended June 30, 2023 were attributable to use of the ATM facility to sell shares of our common stock, offset by repayments on the Streeterville Note.  The cash provided by financing activities during the period ended June 30, 2022 was attributable to the amortization of the original issue discount for the outstanding shares of our Series A Convertible Preferred stock.

During the first six months of 2023, we have funded our operations primarily through the public sale of shares of our common stock and the use of cash on hand. As of August 10, 2023, we had cash on hand of approximately $10,064,864. We have approximately $78,627 in monthly lease and other mandatory payments, not including payroll, employee benefits and ordinary expenses that 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.

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. We recognize revenue from time and materials-based contracts 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 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.

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.  Based on such evaluation, our principal executive officer and principal financial officer concluded that as of June 30, 2023, 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.

(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 the Company or our subsidiaries, threatened against or affecting the Company, our common stock, our subsidiaries or our company’s or our subsidiaries’ officers or directors in their capacities as such, in which an adverse decision could have a material adverse effect on the Company.

BV Advisory Partners, LLC (“BV Advisory”) was a shareholder 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, the effective date of our acquisition of QPhoton, 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 to the Company and disputed the calculation of the amount QPhoton had paid it to settle the BV Notes.

On August 15, 2022, BV Advisory 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.). BV Advisory is seeking, among other relief, monetary damages for an alleged breach of the Note Purchase Agreement between BV Advisory and QPhoton, 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 BV Advisory’s claims have no merit and intends to defend itself vigorously. Moreover, the Company believes that numerous alleged facts and characterizations set forth in BV Advisory’s complaint are false, misleading and intentionally designed to damage the Company’s reputation, and the Company categorically rejects those alleged facts and characterizations. BV Advisory’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 October 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 filed a motion to dismiss the complaint on March 24, 2023 which the Quantum Plaintiffs opposed. On June 5, 2023 the Court issued an order dismissing one claim, and dismissing QPhoton as a plaintiff, but denying the rest of the BV Defendant’s motion. 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.

On July 27, 2023, BV Advisory Partners, LLC, and its chief executive officer, Keith Barksdale, alleged stockholders of and claimants against the Company, filed a petition in the Court of Chancery of the State of Delaware to appoint a receiver for the Company based on allegations that the Company is insolvent due to purported poor corporate governance and cash management. The petition also objects to the Company’s approach to raising capital. In a related motion, the petitioners also sought expedited treatment of the petition on July 28, 2023 under the presumption that they allegedly face a threat of irreparable harm. The Company strongly disagrees with the allegations in the Petition and considers these claims baseless and without merit. The Company intends to vigorously defend itself against these baseless allegations. Despite the disparaging comments regarding the Company’s management and financing strategies, petitioners acknowledge that the Company has valuable intellectual property and a bright commercial future, which they believe can only be realized through a receivership that Mr. Barksdale controls. Among many other issues, the Company opposes the petition in light of the fact that two of Mr. Barksdale’s own companies either filed for bankruptcy or were sold under Sheriff Auction within the last 12 months.

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

None

Item 6. Exhibits