SECURITIES
AND EXCHANGE COMMISSION
Washington,
D.C. 20549
Form
10-K
(Mark
One)
☒
Annual Report Pursuant to Section 13 or 15(d) of the Securities Exchange Act of 1934
For
the fiscal year ended December 31, 2022
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)
(State or other jurisdiction of incorporation) (IRS Employer Identification No.)
215
Depot Court SE, Suite 215
Leesburg,
VA20175
(Address
of principal executive offices)
(703)436-2121
(Registrant’s
telephone number, including area code)
Securities
registered pursuant to Section 12(b) of the Act:
Title of each class Trading Symbol(s) Name of each exchange on which registered
Common Stock, par value $.0001 QUBT The Nasdaq Capital Market
Indicate
by check mark if the registrant is a well-known seasoned issuer, as defined in Rule 405 of the Securities Act. Yes ☐ No
☒
Indicate
by check mark if the registrant is not required to file reports pursuant to Section 13 or 15(d) of the Act. Yes ☐ No
☒
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 during the preceding 12 months (or for such shorter period that registrant was required to submit and post such
files. Yes ☒ No ☐
Indicate
by check mark if disclosure of delinquent filers pursuant to Item 405 of Regulation S-K is not contained herein, and will not be contained,
to the best of registrant’s knowledge, in definitive proxy or information statements incorporated by reference in Part III of this
Form 10-K or any amendment to this Form 10-K. ☐
Indicate
by check mark whether the registrant is a 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. (Check one):
Large accelerated filer ☐ Accelerated filer ☐
Non-accelerated filer ☒ Smaller reporting company ☒
Emerging growth company ☐
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 has filed a report on and attestation to its management’s assessment of the effectiveness
of its internal control over financial reporting under Section 404(b) of the Sarbanes-Oxley Act (15 U.S.C. 7262(b)) by the registered
public accounting firm that prepared or issued its audit report. ☐
Indicate
by check mark whether the registrant is a shell company (as defined in Rule 12b-2 of the Exchange Act). Yes ☐ No ☒.
The
aggregate market value of the voting and non-voting common stock held by non-affiliates of the registrant as of June 30, 2022 was $59,860,396.26
based on the closing price of $2.38 per share of Quantum Computing, Inc. common stock as quoted on the NASDAQ Market on that date.
As of March 28, 2023, there were 60,496,062 shares of the registrant’s
common stock issued and outstanding.
Documents
Incorporated by Reference
N/A
TABLE
OF CONTENTS
PART I 1
ITEM 1. BUSINESS. 1
ITEM 1A. RISK FACTORS. 13
ITEM 1B. UNRESOLVED STAFF COMMENTS. 31
ITEM 2. PROPERTIES. 31
ITEM 3. LEGAL PROCEEDINGS. 31
ITEM 4. MINE SAFETY DISCLOSURES 32
ITEM 6. [RESERVED] 33
ITEM 7A. QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISK. 39
ITEM 8. FINANCIAL STATEMENTS AND SUPPLEMENTARY DATA. 39
ITEM 9A. CONTROLS AND PROCEDURES. 39
ITEM 9B. OTHER INFORMATION. 41
ITEM 9C DISCLOSURE REGARDING FOREIGN JURISDICTIONS THAT PREVENT INSPECTIONS. 41
PART III 42
ITEM 10. DIRECTORS, EXECUTIVE OFFICERS AND CORPORATE GOVERNANCE. 42
ITEM 11. EXECUTIVE COMPENSATION. 49
ITEM 14. PRINCIPAL ACCOUNTING FEES AND SERVICES 54
ITEM 15. EXHIBITS AND FINANCIAL STATEMENT SCHEDULES. 56
Introductory
Comments
Throughout
this Annual Report on Form 10-K, the terms “we,” “us,” “our,” “the Company,” “our
Company,” “QCI” and “QUBT,” refer to Quantum Computing, Inc., a Delaware corporation, and unless the context
indicates otherwise, also includes our wholly-owned subsidiary.
i
PART
I
FORWARD-LOOKING
STATEMENTS
This
Annual Report on Form 10-K contains forward-looking statements within the meaning of Section 27A of the Securities Act of 1933, as amended
(the “Securities Act”) and Section 21E of the Securities Exchange Act of 1934, as amended (the “Exchange Act”).
In some cases, forward-looking statements are identified by terms such as “may,” “will,” “should,”
“could,” “would,” “expects,” “plans,” “anticipates,” “believes,”
“estimates,” “projects,” “predicts,” “potential” and similar expressions intended to
identify forward-looking statements.
These
forward-looking statements are only predictions and involve known and unknown risks, uncertainties and other factors that may cause our
actual results, levels of activity, performance or achievements to be materially different from any future results, levels of activity,
performance or achievements, expressed or implied, by such forward-looking statements. Also, these forward-looking statements represent
our estimates and assumptions only as of the date of this Annual Report on Form 10-K. Except as otherwise required by law, we expressly
disclaim any obligation or undertaking to release publicly any updates or revisions to any forward-looking statement contained in this
Annual Report on Form 10-K to reflect any change in our expectations or any change in events, conditions or circumstances on which any
of our forward-looking statements are based. Factors that could cause or contribute to differences in our future financial and other
results include those discussed in the risk factors set forth in Part I, Item 1A of this Annual Report on Form 10-K as well as those
discussed elsewhere in this Annual Report on Form 10-K. We qualify all of our forward-looking statements by these cautionary statements.
ITEM
1. BUSINESS.
History
Quantum
Computing Inc.’s (“QCI” or the “Company”) predecessor company was incorporated in the State of Nevada on
July 25, 2001, as Ticketcart, Inc. Ticketcart’s original business plan involved in the sale of ink-jet cartridges online. Ticketcart
offered remanufactured and compatible cartridges for Hewlett-Packard, Epson, Lexmark, and Canon inkjet printers. On July 25, 2007, Ticketcart,
Inc. acquired Innovative Beverage Group, Inc. and changed its name to Innovative Beverage Group Holdings, Inc. (“IBGH”) to
better reflect its business operations at the time which was beverage distribution and product development. In 2013, IBGH ceased operations.
On May 22, 2017, one of IBGH’s shareholders, William Alessi (the “Plaintiff”), filed suit against the Company alleging
“(1) fraud; and (2) breach of fiduciary duties of care, loyalty and good faith to the Corporation’s shareholders.”
Mr. Alessi’s complaint alleged that the officers and directors of IBGH had abandoned it and allowed the Company’s assets
to be wasted, causing injury to the Company and its shareholders. Mr. Alessi sought damages of $30,000 for each claim, plus reimbursement
of filing costs of $1,000, and the appointment of a Receiver for IBGH.
On
August 28, 2017, the North Carolina Court, Superior Court Division (the “North Carolina Court”), entered a default judgment
for Plaintiff and appointed an exclusive Receiver (the “Receiver”) over IBGH. The default judgment provided that IBGH was
(i) to issue to the Plaintiff 18,500,000 shares of free-trading stock without registration under Section 3(a)(10) of the Securities Act
of 1933, as amended, (ii) issue 100,000,000 shares of stock to Innovative Beverage Group Holdings, Inc.’s treasury, and (iii) that
the receivership be terminated upon any change of control, and that any and all claims against IBGH that were not submitted to the Receiver
as of September 16, 2017, were disallowed. On October 4, 2017 the Receiver filed Articles of Incorporation in North Carolina for Innovative
Beverage Group Holdings, Inc., a wholly-owned subsidiary of the Company, (“IBGH North Carolina”). On October 26, 2017, Innovative
Beverage Group, Inc. redomiciled to North Carolina.
On
January 22, 2018, while IBGH was in receivership, IBGH (acting through the court-appointed receiver in her capacity as acting CEO and
sole Director of the Company) sold the 100,000,000 treasury shares (which became 500,000 shares of the Company common stock following
a reverse stock split) (the “IBGH Shares”) of its common stock to Convergent Risk Group (“CRG”, or “Convergent
Risk”), an entity owned and operated by Convergent Risk’s Chief Executive Officer, Robert Liscouski, for $155,000. This sale
gave CRG voting control of IBGH. On February 21, 2018, by written consent of the majority shareholder (Convergent Risk), Mr. Robert Liscouski
(the Chief Executive Officer of Convergent Risk) and Mr. Christopher Roberts were elected as members of the Company’s Board of
Directors. Mr. Liscouski was simultaneously elected as Chairman of the Board. The majority shareholder also directed the Company to take
the necessary action to change its domicile from North Carolina to Delaware and change its name to Quantum Computing Inc. On February
21, 2018, IBGH filed Articles of Conversion in North Carolina to convert the Company to a Delaware corporation with the name changed
to Quantum Computing Inc. On February 22, 2018, IBGH filed a Certificate of Conversion in Delaware to convert to a Delaware corporation
with the name changed to Quantum Computing Inc. and re-domiciled to the state of Delaware on February 23, 2018.
The
Computing Landscape and The End of Moore’s Law
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.
Quantum
computing is believed to be a potential solution to the hard limits now being approached by conventional computers that utilize silicon-based
processors. The date of practical relevance of quantum computers is hard to determine. We believe quantum availability has begun and
that conservatively quantum computers with gradually increasing performance will be introduced by multiple vendors over the course of
the next decade.
Additionally,
conventional computers are known to struggle with optimization problems known as NP-complete problems, which are a class
of mathematical problems that can, in principle, be solved by conventional computers, with that caveat that the time to solution will
grow exponentially with the size of the problem. These NP-complete problems require complex calculations, which cannot currently be performed
within any reasonable amount of time using conventional computer systems for problem sizes relevant to many industrial and government
applications. Research suggests that quantum computers may be ideally suited to solve optimization problems of this type.
The
Company
Quantum
Computing Inc. is a full-stack quantum solutions company. Our mission is to be the democratizing force that brings quantum solutions
to business, academia, government, and ultimately individual users. Our solutions enable subject matter experts (SMEs) and end users
to get answers to critical business problems today, using the computing solutions that best deliver those results.
Since
our formation in 2018, the Company has focused on providing software tools and applications for several commercially available quantum
computers and we remain committed to that goal. However, following the June 2022 merger with QPhoton, Inc. (“QPhoton”) and
its associated intellectual property and engineering team, the Company is now able to provide full-stack quantum information services.
The
core of our quantum information services today is our Entropy Quantum Computing (EQC) technology. We have built room-temperature, photonic
quantum information processing systems underpinned by a series of patented and patent pending technologies. We believe this will enable
us to develop and produce multiple generations of quantum information processors with increasing computational power, capacity, and speed,
as well as the eventual hardware miniaturization. Such systems are expected to deliver compelling performance advantages over classical
computational machines and will eventually be able to solve complex problems more effectively and efficiently in terms of scalability,
power consumption, and cost compared with current high-performance computing technology. Our technology, supported by professional services
through our “Quantum Solutions” offering, helps our clients benefit from the technology today.
In
addition, our leading-edge photonic technology and engineering teams will enable QCI to continue to enhance quantum LIDAR and sensing
systems, imaging systems, quantum-secured network solutions, and photonic quantum chips. Several of these important technologies are
already in early stages of commercialization.
Our
short-term core business model is based on generating revenue from selling access to our advanced quantum data processing systems via
the cloud, with the long-term model focused on selling desktop or rack-sized quantum devices and systems to commercial and individual
users. We currently offer access to our quantum computing machines via our own in-house cloud service and plan to eventually offer access
through other commercial service providers.
In
the near term, we plan to generate revenue from our “Quantum Solutions” team, collaborating directly with customers to take
them from problem formulation to solution. This end-to-end support empowers a spectrum of clientele, from users with little to no experience
in quantum processing to advanced users capable of independent problem formulation and execution through the service.
The
Company already produces its own lithium niobate nanophotonic circuits and has plans to scale production to meet projected demand. The
Company has announced plans to construct and operate a new state-of-the-art quantum nanophotonics technology manufacturing and research
center, which we believe could be the world’s first dedicated quantum-photonic chip manufacturer. The plan for the facility is
to produce a range of lithium niobate nanophotonic circuits for internal use in our own product lines and for general sale in the market.
This initiative is expected to benefit from the US CHIPS and Science Act of 2022 (the "CHIPS Act"), which allocates
$52 billion for the revitalization and onshoring of semiconductor manufacturing in the U.S. The CHIPS Act funding includes $39 billion
in manufacturing incentives and $13 billion to support new research and development.
QCI
is focused on providing integrated quantum information gathering, transmission, and processing solutions, including both the user interface
software and the quantum hardware. With our proprietary full-stack technologies that are designed using our solution-oriented system
architectures, we believe we will have a competitive advantage in the market. With an integrated engineering team working across multiple
quantum technology domains, we believe we are uniquely positioned to leverage our expertise in software, hardware, and nanophotonic circuits
to develop quantum services and products, from quantum chip design and manufacturing through cloud delivery and eventually sales of hardware
systems. We believe this full-stack development approach offers both the fastest and lowest risk path to building commercially valuable
quantum machines.
Our
Strategy
QCI’s
strategy has evolved to become a full stack quantum solutions company, with products and services available in the market today. When
QCI was formed several years ago, quantum computing was a fundamentally new paradigm compared with conventional computing, requiring
a new and highly technical set of skills to create the hardware and software to drive quantum results. The pool of people with those
skills is limited and in high demand. In addition, the predominant quantum computer programming approach, using one or more software
development toolkits (“SDK’s”) to create a quantum computing program was and continues to be today, slow and costly,
and therefore poorly suited for non-quantum experts attempting to solve real world problems. Moreover, many types of quantum computing
hardware require delicate and expensive cryogenic isolation systems just to maintain stability, which makes it difficult for users to
interact with quantum computing systems. While quantum computing is generally still used mainly at universities and laboratories for
research and science experiments, a larger user community is emerging, demanding greater capabilities from quantum systems, leading to
frustration and comparisons to the similar market characteristics faced by artificial intelligence in its early days – high expectations
but low performance results.
QCI’s
merger with QPhoton, combined with QCI’s significant IP work that culminated in the development of the Company’s Qatalyst
software, enables the Company to offer room temperature quantum computation systems through cloud services today, as well as affordable,
turn-key products in the future. This combination of quantum hardware and software will address the steep learning curve and highly particular
skillsets generally associated with quantum information processing, which have historically represented significant barriers to adoption
for companies and government entities looking to leverage novel quantum computing capabilities to solve problems.
Market
Opportunity
For
the past 45 years or so, silicon-based processor manufacturers have been able to double their processing power every 18 to 24 months,
a phenomenon known in the computer industry as “Moore’s Law.” Recently, the computer processor industry has found it
increasingly difficult to offer faster, more powerful processors due to fundamental physical effects limiting further size reduction
of transistors, according to We’re not prepared for the end of Moore’s Law, MIT Technology Review, February 2020;
https:// www.technologyreview.com/2020/02/24/905789/ (Information contained on, or that can be accessed through, this website is not
incorporated by reference in this Annual Report, and you should not consider information on this website to be part of this Annual Report).
Despite this progress in transistors and computing power, many of the world’s most important computational problems are still considered
impractical to solve with classical computers of today and the foreseeable future.
With
this in mind, quantum computing represents a potential alternative approach to the hard limits now being approached by conventional computers
that utilize silicon-based processors. This is because quantum computers apply the properties of quantum physics to operate in a fundamentally
different way. Classical computer chips use binary bits (ones and zeros) to represent information. Quantum computers utilize qubits,
which leverage some of the properties of quantum physics to potentially process computations that would otherwise be intractably difficult
using classical computers.
Research
suggests that quantum computers may be ideally suited to run optimization algorithms, where further advancements in approaches and quantum
computing hardware could result in computational benefit over currently used conventional systems. See Quantum Computing for Finance:
Overview and Prospects, https://www.sciencedirect.com/science/article/pii/S2405428318300571 (Information contained on, or that can
be accessed through, this website is not incorporated by reference in this Annual Report, and you should not consider information on
this website to be part of this Annual Report). The ability to solve challenging computational problems in a reasonable period
of time is of particular interest in compute-heavy fields that include, but are not limited to: big data, artificial intelligence, healthcare,
and cybersecurity. We believe these are natural markets for quantum computing, due to the immense compute power required to process large
data sets, which have experienced rapid growth in size and complexity in recent years.
Products
and Products in Development
Qatalyst
QCI’s
evolution into full-stack quantum computing company was enabled by the prior creation of its Qatalyst software. The Qatalyst development
platform is QCI’s answer to the broader industry’s current approach to quantum software development, which relies on highly
trained scientists working with SDK’s at the circuit level, which is analogous to programming in assembly language. Unlike SDK’s,
which require deep level quantum expertise to create quantum workflows, Qatalyst is not a tool kit, but a complete platform. Qatalyst
enables developers to create and execute quantum-ready applications on conventional computers, while also being ready to run on multiple
quantum computers. Qatalyst performs the complex problem transformations necessary to be executed on a variety of quantum processor platforms
today. Users can call upon the same Qatalyst APIs (Application Programming Interfaces) on conventional computers to achieve optimization
performance advantages using our cloud-based solution. Qatalyst dramatically reduces the required time, and the associated costs, for
obtaining results from both conventional and quantum computers. It accelerates performance and results on classic and quantum computers,
with no additional quantum programming or quantum computing expertise required. Qatalyst manages the workflow, optimizations, and results,
without any further intervention by the user. Qatalyst provides a unique advantage to reduce applications development risks and costs
by eliminating the need for scarce high-end quantum programmers. Building a quantum program with an SDK is time consuming and the resulting
program must be updated constantly as QPUs evolve and change, resulting in significant development costs. Qatalyst automatically optimizes
the same problem submitted by a subject matter expert (“SME”) for multiple quantum and classical processors. With Qatalyst,
users only have to learn to use six API calls, which can be learned in a day by most programmers. Instead of spending months or years
developing new applications and workflows requiring complex and extremely low-level coding with SDKs, users, workflows or applications
can immediately submit a problem to Qatalyst within a day, using the same familiar constructs they use right now, via the Qatalyst API.
Users have utilized Qatalyst’s simple API and familiar constructs to solve their first complex problem within a week, as compared
to the 6-12 months associated with quantum software toolkits.
Qatalyst
is integrated with the Amazon Web Services (AWS) cloud-based Braket service (“AWS Braket”), which offers access to multiple
Quantum Processing Units (“QPUs”) including Rigetti, Oxford Quantum Circuits and IonQ, QuEra, and Xanadu. Through AWS Braket
Qatalyst supports QPUs from Rigetti, Oxford Quantum Circuits and IonQ. Qatalyst also integrates with our own Dirac-1 (EQC-1) and Dirac-2
(EQC-2) systems. By using Qatalyst, users can run their applications on any or all of the available QPUs by merely selecting which QPU
they prefer to run on based on the desired performance results of the application.
In addition, Qatalyst contains QCI’s proprietary optimization
problem solvers and QGraph and QAmplify tools. Qatalyst supports a variety of input formats for optimization problems to be solved on
quantum computers including objective-and-constraints, Hamiltonian, and Quadratic Unconstrained Binary Optimization (QUBO) formats.
QGraph is a powerful transformation engine that enables SMEs to submit and analyze graph models as part of their complex optimizations.
QGraph accepts familiar graph models and functions including Community Detection and Partitioning. QAmplify is a patented software technology
that can expand the processing power of a quantum computer, primarily by spreading the problem over multiple small computers. QAmplify
is designed to work on gate model quantum computers as well as quantum annealers.
Entropy
Quantum Computer
The
core of QCI’s hardware offering is the Entropy Quantum Computer (EQC). The EQC leverages the principle of open quantum systems.
The EQC differs substantially from today’s Noisy Intermediate Scale Quantum (NISQ) computers offered by most of our competitors.
Quantum systems are naturally “open”, meaning, they inevitably interact with their surrounding environment. However, as a
result of these interactions, the wavefunctions describing those systems collapse, at which point the quantum information is lost and
the NISQ system “decoheres” which causes significant processing challenges for NISQ architectures.
The
EQC works by coupling photonic states to their surrounding environment (the Entropy), including quantum fluctuations of the electromagnetic
vacuum. This approach runs completely counter to those being developed with other atom / ion-based NISQ systems.
The
quantum vacuum fluctuations are ubiquitous and can be used to capture every possible outcome in a very large system with many configurations,
simultaneously, making the approach ideal for fast and accurate computations in optimization problems.
Today’s
NISQ computers are designed to produce closed quantum systems in pristine quantum states that are isolated from the environment, but
there is a significant engineering cost to protect quantum information from the environment to eliminate noise. This is why NISQ quantum
computers usually require cryogenic cooling, pure vacuum, vibration isolation and electromagnetic shielding. Those requirements introduce
high cost, complex maintenance, and ongoing stability issues.
Our
EQC machines are not subject to those environmental isolation requirements and can function effectively in normal device settings (desktop
or rack sizes, room temperature, battery-powered, turn-key, etc.). In addition to the Company’s announcement of Dirac 1, our first
commercially-available EQC, QCI plans to release a series of additional EQC products starting in 2023. This family of products will include
next generations of EQC that further expand the scale and capabilities of the EQC to broader, larger, and more complex optimization problems.
Developing this family of products will involve improving the size and capacity of the EQC machines by continuing to innovate in the
number, quality and operational fidelity of the qubits. This will include developing technology that operates using quantum digits (“qudits”)
instead of quantum bits (“qubits”). A qudit-based computer may prove better at tackling complex problems than qubit-based
computers, and may allow more computational power with fewer components.
EQC
Subscription Service
The
combination of the Entropy Quantum Computer and Qatalyst has enabled QCI to launch its cloud-based quantum computing solutions on a subscription
basis. Subscriptions are offered on an annual, quarterly, and proof of concept (short term) basis with discounts provided for multiyear
commitments. Subscription prices are based on the expected usage from each customer. A dedicated system subscription (currently
offered as the “Dirac Dedicated Subscription”), is also available that provides unlimited usage within the SLA
included in our agreement. QCI anticipates that our subscription service will be competitive with the quantum computing subscription
services offered by our competitors, such as IBM, IonQ and Quantinuum. However, we believe our subscription service will offer significant
computational advantage that will differentiate it from our competitors.
The
Dirac Dedicated Subscription will provide a customer with exclusive use of a Dirac EQC system from our datacenter without ever having
to wait for other users to complete their work nor having to worry about the time it will take to solve their problem. QCI is also offering
potential clients the opportunity to run problems on our EQC on an hourly-rate basis to demonstrate our computational value prior to
entering into a longer subscription. Our Dirac Introductory Rate, which can be used for proof of concept evaluation, is an example of
when this rate may apply.
Some
companies utilize a per transaction-based model. Quantum computers typically use “shots” (a shot is a single processing submission
or ‘run’) to measure usage on their machines and per shot models typically cost a small fraction of a cent for each shot.
Most quantum problems require hundreds of thousands of shots. While the cost per shot is very low, the cost to solve a problem can quickly
rise to hundreds or thousands of dollars. AWS is one of the larger “per shot” providers utilizing their AWS Braket
services for companies including IonQ, Rigetti, Oxford Quantum Circuits, and QuEra.
Usage
of the Dirac EQC is done using a problem solution model, which is different from most other quantum computers. Rather than measure the
number of shots made by our system; we solve the problem by finding the lowest ground state energy and measure the completion of the
solution in the number of seconds or minutes it takes to complete solving the problem. While subscription sales will be the primary strategy
moving forward – we have not ruled out providing a per usage based model by partnering with ‘per shot” providers such
as AWS Braket and Strangeworks.
Initially
the EQC subscription services are hosted at the Company’s data center in Hoboken, New Jersey. As usage grows, we may utilize other
data centers including Amazon Web Services (AWS) for datacenter services. Many large computing and datacenter companies like, Google
and Microsoft also sell access to third party Quantum Computers over their networks on a commission basis. While we are focused on selling
subscriptions on Dirac in our own datacenter, there may be a time where we also provide subscriptions through Google, Microsoft, and
Amazon through their Marketplaces.
In
addition to shared subscription services and dedicated subscription services, we intend in the future to provide to customers an on-premise
implementation of the Dirac EQC as customer demand grows and our service organization matures. There are multiple markets which will
require this type of delivery including the United States Government, United States Military and European Financial Organizations,
where European laws require customer data to be always be in the control of the financial institutions. There are only a few on
premise implementations of quantum computers today and they require commitments of tens of millions of dollars. While pricing has
not been determined for the Dirac on-premise implementation, we expect it will be very competitive with the few on-premise quantum implementations
available today from other firms.
As
a full stack quantum solutions provider, while selling subscriptions in some manner to Dirac EQCs will be the cornerstone of our
business model, providing professional services or quantum solutions support will likely be needed in many cases, especially
in the beginning of a customers’ quantum journey. We partner today with large management consulting companies as a way to scale
our business and we expect that consulting partners will continue to grow in numbers and as a percentage of our customers.
In addition, we plan to always provide a Quantum Solutions offering for customers that prefer to work directly with a full
stack provider and customers who are using cutting edge technologies that may not have become supported yet by our consulting
partners.
As
we evolve the LiDAR and sensing systems, imaging systems, and quantum-secured networking technologies into products, the models described
above will be evaluated to select the best pricing and routes to market for each new product. Some will likely use the existing direct
sale model that we are using for Dirac, some may use an OEM model for inclusion in other companies’ products, and others may
be sold through 1 or 2 tier distribution. Each product will be evaluated for the best route to market to maximize the shareholder
value based upon their individual product attributes.
Quantum
Photonic Applications
The
merger with QPhoton has broadened the Company’s technology portfolio and enables us to develop a group of closely related products
to EQC, based on our common core photonic technology. Products in development include:
Quantum
Optical Chips
Optical
chips will ultimately provide the greatest scalability and performance advantages for quantum information processing, sensing and imaging.
The Company is actively working on the specification and design for a dedicated quantum optical chip fabrication facility to develop
and produce Lithium Niobate optical chips (“Quantum Chips”) for quantum information processing and other single photon detection
and sensing applications. The Company believes there is an opportunity to benefit from the recently authorized CHIPS Act and will take
steps to establish a U.S.-based chip facility in 2023. The Company is evaluating multiple options for a facility site, as well as potential
federal, state and regional funding incentives to help finance the project and advance quantum technology innovation. Construction of
such a fabrication facility for the Quantum Chips may take several years and there is no assurance that the Company will be able to raise
the necessary funding
Quantum
Imaging
One
of the most exciting opportunities in development involves leveraging the ability to count single photons and filter their associated
wave functions precisely to obtain optical imaging through otherwise opaque and dense materials. Quantum imaging has the potential to
be a powerful supplement to modern reconstructed computerized tomography (CT) imaging applications, where tissue damage from high energy
radiation can and needs to be avoided. Optical chips will ultimately provide the greatest scalability and performance advantages for
quantum information processing, sensing and imaging. When all of the critical optical components can be “embedded” on a fully
integrated chip, the efficiency and fidelity of the photonic quantum technologies will be fully realized. A prototype quantum imaging
system has been built and is currently undergoing testing by the Company.
Cybersecurity
– Quantum Networks and Quantum Authentication
The
Cybersecurity field has been aware for some time of the potential threats and benefits of quantum computing resulting from the expectation
that quantum computers will eventually have the capability to can “break” any of the currently utilized non-quantum-based
encryption methods. However, effective cybersecurity goes well beyond encryption for protection. Effective cybersecurity requires a holistic
approach to protecting the enterprise. The Company believes that our quantum computing capabilities may have applications in encryption.
However, initially we are applying our quantum technologies to create secure transport layers (quantum networks) and endpoints (quantum
authentication) which will contribute greatly to the cybersecurity domain, beyond encryption. QCI has several patents in the area of
quantum-based technologies for protection of data at rest and in quantum private communication. QCI plans to begin commercial development
of quantum networking products in 2023 and partnerships are actively being explored.
Quantum
Remote Sensing – QLiDAR
Our
Quantum LiDAR (“QLiDAR”) can see through dense fog and provide image fidelity at great distances and through difficult environments
such as snow, ice, and water. Once again, by leveraging the power of quantum mechanics and single photon detection, LiDAR systems can
be greatly enhanced in their ability to measure at improved resolution and distances as well as extend these photonic signals to applications
in vibrometry for material stress analysis, particle size analysis, and potential remote sensing from aircraft, drones and even satellites.
QCI’s commercial development of QLiDAR applications commenced in early 2023 and partnerships are actively being explored.
Industry
Overview
We
operate in the large and global high-performance computing industry, which is comprised of hardware, software, and services for compute
intensive applications. The rapid adoption of technologies such as artificial intelligence, 3D imaging, and the Internet of Things (IoT),
have served to exponentially increase the generation of data, driving up the demand for high-performance computing. Estimates of the
size of this industry vary, but according to Grand View Research, the High-Performance computing market was valued at $39.1 billion in
2019 and is expected to reach a value of $53.6 billion by 2027, see Grand View Research - High Performance Computing Market Size Worth
$53.6 Billion By 2027, https://www.grandviewresearch.com/press-release/global-high-performance-computing-hpc-market (Information
contained on, or that can be accessed through, this website is not incorporated by reference in this Annual Report, and you should not
consider information on this website to be part of this Annual Report). The high-performance computing market is important for many industries,
including, but not limited to: IT, aerospace, healthcare, automotive, and e-commerce. Examples of compute intensive applications include
optimization, data management, analytics, and complex modeling. Quantum computing is expected to be relevant for similar verticals and
applications. According to a report from Allied Market Research, the global enterprise quantum computing market size was valued at $1.3
billion in 2020, and is projected to reach $18.3 billion by 2030, growing at a CAGR of 29.7% from 2021 to 2030, according to a published
report on the enterprise quantum computing market at https://www.alliedmarketresearch.com/enterprise-quantum-computing-market (Information
contained on, or that can be accessed through, this website is not incorporated by reference in this Annual Report, and you should not
consider information on this website to be part of this Annual Report). While the current quantum computing market comprises a fraction
of the broader High-Performance computing market, it is expected that quantum computers will unlock new applications that are unlikely
to be addressable by existing High-Performance computers comprised of leveraging classical processing units.
Quantum
computing is a nascent and rapidly developing technology ecosystem that has shown promise in delivering potentially disruptive computing
capabilities. We believe quantum computing’s immense compute capabilities qualify it as a subset of High-Performance Computing.
As quantum computing hardware continues to advance, we expect a corresponding growth in demand for software capable of leveraging the
compute capabilities of quantum computing hardware. We are developing quantum computing systems as well as hardware agnostic software
capable of delivering high-performance computing capabilities to various industries while mitigating dependency risks that may emerge
from a dominant quantum computing hardware vendor. As an early participant in this rapidly growing ecosystem, we believe we are well-positioned
to capture and drive a meaningful amount of this category growth. We believe there is further potential upside from quantum computing
and technology more broadly opening up new markets not captured in traditional high-performance computing market size estimates.
Competition
The
quantum computing industry is highly competitive and rapidly evolving, and will likely remain so for the foreseeable future. As this
industry continues to grow and mature, we expect a continued influx of new competitors, products, hardware advances, and new concepts
to emerge that can dramatically transform the industry and our business. Due to the high price point of quantum computing hardware today,
novel business models may emerge to adapt to consumer preferences in the high-performance computing industry. Our ability to evolve and
adapt rapidly over an extended period of time will be critical in remaining competitive. We perform a broad range of research and development
efforts to identify and position for the changing demands of future customers and users, industry trends, and competitive forces.
According
to research conducted by The Quantum Insider (https://thequantuminsider.com/data), there are over 700 companies working in various aspects
of quantum technology, with approximately 400 of these having a pure play focus on quantum computing, according to The Landscape of
the Quantum Start-up Ecosystem, October 18, 2022, https://epjquantumtechnology.springeropen.com/articles/10.1140/epjqt/s40507-022-00146-x
(Information contained on, or that can be accessed through, this website is not incorporated by reference in this Annual Report, and
you should not consider information on this website to be part of this Annual Report). In addition, The Quantum Insider has identified
approximately 400 quantum academic groups across many universities. These entities range in size from diversified global companies with
significant research and development resources such as IBM, Google, Intel, Microsoft, Honeywell and Amazon to recent market entrants
such as D-Wave Quantum, Rigetti Computing, IonQ, PsiQuantum, Xanadu and Infleqtion (formerly ColdQuanta), as well as smaller privately
funded development stage companies whose narrower product focuses may let them be more effective in deploying resources towards a specific
industry demand. In addition, we face competition from large research organizations funded by sovereign nations such as China, Russia,
Canada, Australia, the United Kingdom, and the European Union, and we believe additional countries will invest in quantum computing in
the future. We will continue to face competition from the existing high performance computing industry using classical (non-quantum)
computers.
We
believe competition in this market segment will intensify. Many of our competitors may have longer operating histories, significantly
greater financial, technical, product development and marketing resources, and greater name recognition. Our competitors could use
these resources to market or develop products or services that are more effective or less costly than any or all of our products or services.
Intellectual
Property
Our
intellectual property consists of patents, trademarks, and trade secrets. Our trade secrets consist of product formulas, research and
development, and unpatentable know-how, all of which we seek to protect, in part, by confidentiality agreements. To protect our intellectual
property, we rely on a combination of laws and regulations, as well as contractual restrictions. Federal trademark law protects our registered
trademarks. We also rely on the protection of laws regarding unregistered copyrights for certain content we create and trade secret laws
to protect our proprietary technology. To further protect our intellectual property, we enter into confidentiality agreements with our
executive officers and directors.
Trademarks
The
Company has one registered trademark, “QPhoton,” and has applied for four additional trademarks, all of which are being used
in commerce:
● QAmplify
● QGraph
● Qatalyst
● Dirac
Patents
The
Company has one granted United States patent.
Exclusive
License Agreement
QPhoton,
LLC has an exclusive license to seven patents issued to the Stevens Institute of Technology, pursuant to the license agreement by and
among the Company and The Trustees of The Stevens Institute of Technology (the “Licensor”), dated December 17, 2020. QPhoton,
LLC agreed to reimburse the Licensor for patent prosecution expenses in the amount of $125,041 and deliver to the Licensor an annual
report and quarterly report pursuant to the terms of the license agreement. As consideration for the license and other rights granted
under the license agreement, QPhoton, LLC agreed to pay the Licensor (i) $35,000 upon full execution of the license agreement, (ii) $28,000
each annual anniversary of the effective date of the license agreement, (iii) 9% of the membership units of QPhoton, LLC, and (iv) a
royalty of 3.5% of the net sales price of each license product sold or license by QPhoton, LLC and any affiliate and sublicensee. On
June 15, 2022, in anticipation of the closing of the QPhoton Merger (as defined below), the Licensor agreed to assign the license agreement
to the Company upon consummation of the QPhoton Merger.
Government
Regulation and Incentives
Financial
Algorithms
US
firms and FINRA members that use financial algorithms to conduct high frequency trading are subject to SEC and FINRA regulations that
govern their trading activities under long standing rules governing supervision and control practices to reduce the likelihood of market
disruptions and ensure effective communication between the firm’s compliance staff and its trading strategy personnel. Additional
regulation on financial algorithms has been proposed by the Commodity Futures Trading Commission (“CFTC”) aimed at limiting
the potential for financial algorithms and high frequency trading to disrupt markets. The proposed regulations would require firms using
such algorithms to implement pre-trade risk controls, limit self-trading and make the source code of the software programs available
to the government upon request. To the Company’s knowledge, these regulations, especially the mandatory source code disclosure
provisions, have been vigorously opposed by the industry and have not yet been implemented.
Encryption
The
U.S. government has historically tightly regulated the export of cryptographic technologies under the Arms Export Control Act and the
associated International Traffic in Arms regulations (ITAR) as a form of munition. The logic behind the export restrictions is that the
ability to secure information has great value to the military and intelligence agencies, and the US Government does not want those technologies
sold or distributed to foreign adversaries. These regulations were relaxed in 1996 by executive order, but restrictions are still in
place under the Export Administration Act that limit the export of some advanced encryption methods and technologies. Export of commercial
encryption products to certain designated countries and terrorist groups is restricted, as are exports of military quality encryption
technologies. Restrictions on encryption technology are in place in many other countries but the extent of regulation varies widely from
country to country. Domestically, encryption technology is largely unregulated but law enforcement, intelligence and investigative agencies
work closely with encryption technology developers to enable the US government to access encrypted data under certain conditions. We
believe that quantum encryption and decryption products can be marketed to U.S. government agencies but that export opportunities may
be limited. The National Security Agency (NSA) released the “Commercial National Security Algorithm Suite 2.0” (CNSA
2.0) Cybersecurity Advisory (CSA) to notify National Security Systems (NSS) owners, operators and vendors of the future quantum-resistant
(QR) algorithms requirements for NSS networks that contain or transfer classified information or are otherwise critical to military and
intelligence activities.
Incentives
In
December 2018, Congress passed, and President Trump signed, the National Quantum Initiative Act (the “Quantum Act”), which
was signed into law on December 21, 2018. The purpose of the Quantum Act is to “ensure the continued leadership of the United States
in quantum information science” and to develop a unified national strategy for researching quantum information science. The Quantum
Act authorizes a National Quantum Coordination Office inside the White House’s Office of Science and Technology Policy to
help coordinate research between agencies, serve as the federal point of contact and promote private commercialization of federal research
breakthroughs over the next decade. In addition, President Trump announced the formation of a National Quantum Initiative consisting
of key technology companies working in the field of quantum computing. The Company is a member of that Initiative and is also a member
of the Quantum Economic Development Council.
The
Quantum Act also authorized the creation of five National Quantum Information Science Research Centers within the Department of Energy
and research and education centers in the National Science Foundation. The Quantum Act also anticipated the eventual creation of industry
standards for QIS development, new research grant funding and increased collaboration with the private sector, to date those standards
and industry funding opportunities have not materialized.
In
August 2022 Congress passed, and President Biden signed, the Creating Helpful Incentives to Produce Semiconductors Act of 2022 (the
“CHIPS Act”). The CHIPS Act was designed to address the global computer chip shortage and attract chip manufacturing, and
innovation to the United States. The CHIPS Act is a $280 billion spending package aimed at encouraging the growth of the US-based semiconductor
industry. To assist in securing the domestic chip supply, the CHIPS Act provides $52.7 billion for American semiconductor research, development,
manufacturing, and workforce development. The Company is pursuing programs under the CHIPS Act as a potential avenue to finance a photonic
chip manufacturing facility.
Recent
Developments
QPhoton
Merger
On
May 19, 2022, the Company, Project Alpha Merger Sub I, Inc., a Delaware corporation (“Merger Sub I”), Project Alpha Merger
Sub II, LLC, a Delaware limited liability company (“Merger Sub II” and, together with Merger Sub I, the “Merger Subs”),
QPhoton, Inc., a Delaware corporation (“QPhoton”), and Yuping Huang, the principal stockholder of QPhoton (“Dr. Huang”),
entered into an Agreement and Plan of Merger (the “Merger Agreement”), pursuant to which the Company agreed to acquire QPhoton
through a series of merger transactions (collectively with the other transactions contemplated by the Merger Agreement, the “QPhoton
Merger”).
On
June 16, 2022, the Company, the Merger Subs, QPhoton and Dr. Huang, having met or waived all conditions precedent, consummated the closing
for the QPhoton Merger pursuant to the terms of the Merger Agreement (the “Closing”). At the Closing, Merger Sub I merged
with and into QPhoton, with QPhoton surviving the merger as a wholly-owned subsidiary of the Company, immediately after which QPhoton
merged with and into Merger Sub II, with Merger Sub II surviving the merger as a wholly-owned subsidiary of the Company (subsequently
renamed QPhoton LLC). The merger consideration paid to the stockholders of QPhoton (the “Merger Consideration”) consisted
of (i) 5,802,206 shares of Common Stock, (ii) 2,377,028 shares of Series B Preferred Stock, and (iii) warrants (the “Warrants”)
to purchase up to 7,028,337 shares of Common Stock.
In
connection with the QPhoton Merger, the Company and certain securityholders of QPhoton holding more than 50% of the outstanding shares
of QPhoton common stock (the “Key QPhoton Stockholders”) entered into a Stockholders Agreement (the “Stockholders Agreement”),
pursuant to which, among other things, following the Closing, (i) Dr. Huang (or, if Dr. Huang holds less than a majority of the shares
of Common Stock issued in the QPhoton Merger, the holders of a majority of the shares of Common Stock issued in the QPhoton Merger) is