ITEM 7. MANAGEMENT’S DISCUSSION AND ANALYSIS
OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS.
The following discussion and analysis of the
results of operations and financial condition for the years ended December 31, 2023 and 2022 should be read in conjunction with our consolidated
financial statements and the notes to those consolidated financial statements that are included elsewhere in this Annual Report. Our discussion
includes forward-looking statements based upon current expectations that involve risks and uncertainties, such as our plans, objectives,
expectations and intentions. Actual results and the timing of events could differ materially from those anticipated in these forward-looking
statements as a result of a number of factors. See “Forward-Looking Statements.”
You should read the following discussion and
analysis of our financial condition and results of operations together with our audited consolidated financial statements and related
notes included elsewhere in this Annual Report on Form 10-K,
When we say “we,” “us,”
“our,” “Company,” or “QCi,” we mean Quantum Computing Inc.
Overview
QCi is a development stage company with limited
operations and revenue. The Company is developing quantum machines for high-performance computing applications based on proprietary
photonics technology. QCi’s products are designed to operate at room temperature and low power at an affordable cost in the areas
of high-performance computing, sensing and imaging, and quantum cybersecurity. The Company has generated some revenue based on sales
of products and related services to date and is expanding its sales and marketing efforts. The Company’s development team includes
optical engineers, mathematicians, physicists, and software developers.
30
Results of Operations
Years Ended December 31, 2023 vs. December
31, 2022
Revenues
(In thousands) Amount Mix Amount Mix Change
Revenues for the year ended December 31, 2023
were $358,047 compared to $135,648 for the year ended December 31, 2022, an increase of $222,399, or 164%. Revenue was derived from sales
of hardware products and professional services in 2023, and solely from professional services in 2022, in each case provided to multiple
commercial and government customers under multi-month contracts; the year-over-year change was riven by increases in short-term contractual
service revenue. In 2023, QCi continued to execute its business strategy to provide quantum-ready solutions for solving real-world problems.
While we have made significant progress toward this overarching objective, the generation of revenue from customers has been slow to develop,
in part due to the fact that quantum computing is a cutting-edge technology for most potential customers, who are therefore proceeding
cautiously with small, exploratory contracts to better understand its applicability to their requirements. Accordingly, the Company has
focused on providing professional services to introduce customers to quantum-based solutions to their operating needs, and on customer
education and building customer awareness as a means to generating sales. The Company has completed its discovery and research phase and
is now transitioning towards commercialization. We have developed and released multiple products and are now in the process of marketing
them. We expect revenues to increase meaningfully in 2024 as we continue to emphasize our hardware capability.
Cost of Revenues
Cost of revenues, which consists of labor consumed
to fulfill our obligations under contractual service agreements as well as the component parts of finished goods sold, was $195,640 for
the year ended December 31, 2023 compared to $60,934 for the prior year, an increase of $134,706, or 221%. Cost of revenues for each of
the years ending December 31, 2023 and 2022 consists primarily of salary expense. The increase for 2023 was predominantly driven by the
execution of new government service contracts. Cost of revenue for these services was contractually structured and limited to the direct
salaries and actual hours worked to fulfill the work orders. Rates for these services remained materially unchanged year over year, with
contract volume being the driver of growth.
Gross Margin
Gross margin for the year ended December 31, 2023
was $162,407 compared to $74,714 for the prior year, an increase of $87,693, or 117%. On a percentage basis, gross margin was 45%, a decrease
of 10% year-over-year. The change was nearly entirely the result of the shift to contractual service revenue where the cost of goods sold
was defined under the terms of our general professional services obligation. Our lack of a scaled and distributed base of revenue generation
by product and sales channel can result in large swings in gross margin between reporting periods.
31
Operating Expenses
Operating expenses for the year ended December
31, 2023 were $27,383,684 compared to $36,654,056 for the year ended December 31, 2022, a decrease of $9,270,372 or 25%. The decrease
in operating expenses was almost entirely driven by a $9,038,701 decrease in stock-based compensation expenses, which was driven mainly
by higher value stock option awards in 2022 compared to 2023. Decreases of $1,399,208 in selling, general and administrative expenses,
primarily as a result of $574,428 through stream-lining of marketing activities and sales roles, and $704,975 in professional services,
primarily as a result of non-recurring legal expenses during 2022 related to the QPhoton Merger, also contributed to the decrease in operating
expenses during 2023 compared to the prior year. These decreases were partially offset by an increase in research and development spending
year-over-year of $1,885,909 driven by increased salary expenses as the Company expanded its capability to deliver commercialized hardware
products.
Net Loss
Our net loss for the year ended December 31, 2023
was $29,730,672 compared to a net loss of $38,593,700 for the prior year, a decrease of $8,863,029 or 23%. The decrease in net loss is
primarily due to the decrease in operating expenses, noted above, partially offset by $513,709 net increase in financing costs driven
by amortization of the $750,000 original issue discount included in the principal balance of the unsecured promissory note (the “Streeterville
Unsecured Note”) that we issued to Streeterville Capital, LLC in the initial principal amount of $8,250,000 in September 2022, which
bears interest at 10% per annum.
Liquidity and Capital Resources
We have incurred net losses and experienced negative
cash flows from operations since inception. To date, since February 2018, the Company has raised $57,424,924 through private placements
of equity and $12,633,000 through private placements of Convertible Promissory Notes and other debt for a total of $70,057,924 through
December 31, 2023. The Company has no lines of credit, and $2,496,480 in short-term debt obligations outstanding. We expect to incur additional
losses and higher operating expenses for the foreseeable future as we continue to invest in research and development and go-to-market
programs. We have determined that additional financing will be required to fund our operations for the next 12 months and our ability
to continue as a going concern is dependent upon obtaining additional capital and financing. As of December 31, 2023, the Company had
cash and cash equivalents of $2,059,285.
Our primary uses of cash are to fund our operations
as we continue to grow our business. We will require a significant amount of cash for expenditures as we invest in ongoing research and
development and non-linear quantum optical chips and fund business operations. Until such time as we can generate significant revenue
from sales or subscriptions of our hardware offerings, we expect to finance our cash needs through public and/or private equity and/or
debt financings or other capital sources, including but not limited to U.S. government grant and loan programs. However, we may be unable
to raise sufficient funds or enter into such other arrangements, when needed, on favorable terms, or at all. In particular, uncertain
and unfavorable conditions in the United States and global macroeconomic environment, including inflationary pressures, rising interest
rates, banking collapses, and financial and credit market fluctuations, could reduce our ability to access capital on favorable terms,
or at all. To the extent that we raise additional capital through the sale of equity or convertible debt securities, the ownership interest
of our stockholders will be, or could be, diluted, and the terms of these securities may include liquidation or other preferences that
adversely affect the rights of our common stockholders. Debt financing and equity financing, if available, may involve agreements that
include covenants limiting or restricting our ability to take specific actions, such as incurring additional debt, making capital expenditures
or declaring dividends. If we are unable to raise additional funds through equity or debt financings when needed, we may be required to
delay, limit, or substantially reduce our quantum computing development and go-to-market efforts.
The following table summarizes total current assets,
liabilities and working capital at December 31, 2023, compared to December 31, 2022:
32
At December 31, 2023, we had a working capital
deficit of $2,546,788 as compared to working capital of $409,29 at December 31, 2022, a decrease of $1,847,180. The decrease in working
capital is primarily attributable to the use of cash to pay for operating expenses and capital investments in property and equipment,
satisfaction of accrued expense liabilities and the Streeterville Unsecured Note becoming a current portion of long-term debt payable.
Our independent registered
public accounting firm included an explanatory paragraph in its report on our financial statements as of and for the year ended December
31, 2023, noting the existence of substantial doubt about our ability to continue as a going concern. This uncertainty arose from management’s
review of our results of operations and financial condition and its conclusion that, based on our operating plans, we did not have sufficient
existing working capital to sustain operations for a period of twelve months from the date of the issuance of these financial statements.
Cash Flows
Net cash used in operating activities for the
years ended December 31, 2023 and 2022 was $19,940,521 and $17,240,117, respectively, in each case primarily as a result of our net loss
in each year offset by noncash adjustments for stock-based compensation, depreciation of property, plant and equipment and amortization
of intangibles.
Net cash used in investing activities for the
years ended December 31, 2023 and 2022 was $2,617,990 and $2,225,758, respectively. Cash used in investing activities during the year
ended December 31, 2023 was attributable to acquisition of laboratory and production equipment for $2,117,990 and our $500,000 loan to
millionways, Inc (“millionways”). in June 2023. On June 6, 2023, the Company entered into a Note Purchase Agreement with millionways
pursuant to which the Company agreed to purchase from millionways up to three unsecured promissory in an aggregate principal amount of
up to $2,000,000, subject to the terms and conditions thereof. On June 6, 2023, the Company purchased the notes from millionways and loaned
it an aggregate principal amount of $500,000. This followed the Company’s entry into a Summary of Proposed Terms with millionways
on May 16, 2023, to provide bridge loans to millionways and enter into due diligence to acquire up to 100% of the AI firm.
Net cash provided by financing activities for
the year ended December 31, 2023 was $19,309,330 compared to $8,035,684 during the year ended December 31, 2022. Cash provided by financing
activities during the year ended December 31, 2023 was attributable to $25,496,364 received from the sale of shares of our common stock
through our At-The-Market (ATM) facility, managed by Ascendiant Capital Markets, LLC (net the 3% fee paid to Ascendiant Capital Markets,
LLC), partially offset by repayments of $6,187,034 on the Streeterville Unsecured Note. During the year ended December 31, 2022, cash
provided by financing activities was primarily attributable to the funds we received from the issuance of the Streeterville Unsecured
Note.
The Company has funded our operations primarily
through the sale of our equity (or equity linked) and debt securities. As of March 28, 2024, we had cash on hand of approximately $6,554,651.
We have approximately $74,977 in monthly lease and other mandatory payments, not including payroll, employee benefits and ordinary expenses
which are due monthly.
On a long-term basis, our liquidity is dependent
on continuation and expansion of operations and receipt of revenues. Demand for the products and services will be dependent on, among
other things, market acceptance of our products and services, the technology market in general, and general economic conditions, which
are cyclical in nature. In as much as a major portion of our activities will be the receipt of revenues from the sales of our products
and services, our business operations may be adversely affected by our competitors and prolonged recession periods.
33
Critical Accounting 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.
Fair Value of Options and Derivatives
The Company uses the Black-Scholes model to calculate
the fair value of stock options and derivatives. The Black-Scholes model, developed in 1973, is a differential equation which requires
five input variables, the strike price of an option, the current stock price, the time to expiration, the risk-free rate, and the volatility
of the Company common stock. The Black-Scholes model is widely used for pricing options but it does rely on certain assumptions about
the market which may not be correct over time. Specifically,
● No dividends are paid out during the life of the option.
● Markets are random (i.e., market movements cannot be predicted).
● There are no transaction costs in buying the option.
● The returns of the underlying asset are normally distributed.
● The option is European and can only be exercised at the expiration date.
To the extent that any of these assumptions is
not correct, that could result in the overpricing or underpricing of the stock options involved. The assumption that the risk-free rate
(the Company uses the one-year U.S. Treasury Bill rate as a proxy for the risk-free rate) can vary over time, and if the T-Bill rate varies
substantially over the life of the stock option that could affect the pricing. Similarly, the volatility of the Company’s common
stock, also known as the Beta, has moved within a limited range over the past year, but the volatility of any security can change over
time, which would affect the option pricing calculation. Another critical estimate relating to option pricing is the default rate, which
means the estimate of granted options that will either expire unexercised, or be forfeited, over the life of the stock options. If the
Company’s estimate of the default rate turns out to be substantially different from the actual, experienced default rate, that could
result in over- or under-estimating the total option expense.
The Black-Scholes model is not the only available
approach for pricing stock options, the Company could have used a Binomial pricing model or a Monte Carlo simulation model. However, there
is no assurance that either a Binomial or Monte Carlo pricing approach would be more accurate than the Black-Scholes model over time.
Moreover, both the Binomial model, which calculates the price of an option at each point in time during the option period, or the Monte
Carlo model, which simulates the possible movements in future stock prices and uses them to calculate the option value, rely on critical
assumptions. The Binomial model assumes that stock markets are perfectly efficient, which may not hold for all periods of time. The Monte
Carlo simulation model assumes changes in stock prices over time cannot be predicted from the historical trends (known as a “random
walk”), which also may not hold for all periods.
34
Fair Market Value and Useful Life of Intangible
Assets
Another area of critical accounting estimates
involves determining the fair market value and useful life of the intangible assets acquired by the Company through the merger with QPhoton.
In the absence of market pricing for the intangible assets, the Company relied on independent third-party appraisal experts and comparison
with similar transactions to arrive at estimates of value as well as useful life. The Company will perform periodic assessments of the
intangible assets for impairment, but if any of the initial estimates are incorrect, that could result in a calculation of amortization
expense that is too high or too low.
Legal and Other Contingencies
The outcomes of legal
proceedings and claims brought against us are subject to significant uncertainty. An estimated loss from a loss contingency such as a
legal proceeding or claim is accrued by a charge to income if it is probable that an asset has been impaired or a liability has been incurred
and the amount of the loss can be reasonably estimated. In determining whether a loss should be accrued we evaluate, among other factors,
the degree of probability of an unfavorable outcome and the ability to make a reasonable estimate of the amount of loss. Changes in these
factors could materially impact our consolidated financial statements.
ITEM 7A. QUANTITATIVE AND QUALITATIVE DISCLOSURES
ABOUT MARKET RISK.
Not applicable.
ITEM 8. FINANCIAL STATEMENTS AND SUPPLEMENTARY
DATA.
Our consolidated financial statements are contained
in pages F-1 through F-23 which appear at the end of this Annual Report on Form 10-K.
ITEM 9. CHANGES IN AND DISAGREEMENTS WITH ACCOUNTANTS
ON ACCOUNTING AND FINANCIAL DISCLOSURE.
None.
ITEM 9A. CONTROLS AND PROCEDURES.
Evaluation of Disclosure Controls and Procedures
We maintain “disclosure controls and procedures,”
as such term is defined in Rule 13a-15(e) under the Exchange Act. In designing and evaluating our disclosure controls and procedures,
our management recognized that disclosure controls and procedures, no matter how well designed 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 was necessarily required to apply its judgment in evaluating the cost-benefit relationship of possible
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 Annual
Report on Form 10-K, 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 December 31, 2023, our disclosure controls and procedures
were not effective to provide reasonable assurance that (i) 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 (ii) 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 disclosures. Specifically, the Company
does not have sufficient accounting staff to enable proper segregation of duties.
35
Report of Management on Internal Control over
Financial Reporting
We are responsible for establishing and maintaining
adequate internal control over financial reporting. The Company’s internal control over financial reporting is a process designed
by, or under the supervision of, our principal executive and principal financial officers and effected by our board of directors, management
and other personnel to provide reasonable assurance regarding the reliability of financial reporting and the preparation of financial
statements for external purposes in accordance with generally accepted accounting principles.
Because of its inherent limitations, internal
control over financial reporting may not prevent or detect misstatements. Projections of any evaluation of effectiveness to future periods
are subject to the risks that controls may become inadequate because of changes in conditions, or that the degree of compliance with the
policies or procedures may deteriorate.
Material Weakness in Internal Control over
Financial Reporting
We have assessed the effectiveness of our internal
control over financial reporting as of December 31, 2023. In making this assessment, we used the criteria set forth by the Committee of
Sponsoring Organizations of the Treadway Commission (COSO) in Internal Control-Integrated Framework (2013).
Based on this assessment, management has determined
that the Company’s internal control over financial reporting was not effective.
A material weakness,
as defined in the standards established by the Sarbanes-Oxley Act of 2002 (the “Sarbanes-Oxley Act”), is a deficiency, or
a combination of deficiencies, in internal control over financial reporting such that there is a reasonable possibility that a material
misstatement of our annual or interim financial statements will not be prevented or detected on a timely basis.
The ineffectiveness of
the Company’s internal control over financial reporting was due to the following material weaknesses which are indicative of many
small companies with small number of staff:
(i) inadequate segregation of duties consistent with control objectives;
(ii) inadequate controls related to revenue recognition;
36
Management’s Plan to Remediate the
Material Weakness
The Company has been
implementing and continues to implement measures designed to ensure that control deficiencies contributing to the material weaknesses
are remediated, such that these controls are designed, implemented, and operating effectively. The Company has formally documented its
procedures for many of the significant accounting and financial reporting processes, in addition to identifying and remediating design
deficiencies in its processes. The other remediation actions planned include:
(i) implementation of controls to ensure revenue is recognized upon shipment;
We are committed to maintaining
a strong internal control environment and believe that these remediation efforts will represent significant improvements in our control
environment. Our management will continue to monitor and evaluate the relevance of our risk-based approach and the effectiveness of our
internal controls and procedures over financial reporting on an ongoing basis and is committed to taking further action and implementing
additional enhancements or improvements, as necessary and as funds allow.
Management’s report
on internal control over financial reporting was not subject to attestation by the Company’s registered public accounting firm pursuant
to rules of the SEC that permit a Smaller Reporting Company to provide only Management’s report in this annual report, which may
increase the risk that weaknesses or deficiencies in our internal control over financial reporting go undetected.
Changes in Internal
Control over Financial Reporting
As discussed above, we
are implementing certain measures to remediate the material weaknesses identified in the design and operation of our internal control
over financial reporting. Other than those measures, there have been no changes in our internal control over financial reporting (as defined
in Rule 13a-15(f) and 15d-15(f) under the Exchange Act) during the fiscal quarter ended December 31, 2023 that materially affected our
internal control over financial reporting as of that date.
ITEM 9B. OTHER INFORMATION.
Rule 10b5-1 Trading
Plans
During the three months
ended December 31, 2023, none of our directors or officers (as defined in Rule 16a-1(f) of the Exchange Act) adopted, terminated or modified
the amount, pricing or timing provisions of a “Rule 10b5-1 trading arrangement” or “non-Rule 10b5-1 trading arrangement,”
as each term is defined in Item 408(c) of Regulation S-K.
ITEM 9C. DISCLOSURE REGARDING FOREIGN JURISDICTIONS
THAT PREVENT INSPECTIONS.
Not applicable.
37
PART III
ITEM 10. DIRECTORS, EXECUTIVE OFFICERS AND
CORPORATE GOVERNANCE.
Directors and Executive Officers
The following table contains information with
respect to our directors and executive officers. To the best of our knowledge, none of our directors or executive officers have an arrangement
or understanding with any other person pursuant to which he or she was selected as a director or officer. There are no family relationships
between any of our directors or executive officers. Directors serve one-year terms. Our executive officers are appointed by and serve
at the pleasure of the Board.
Name Current Age Position
Robert Liscouski (2) 69 Chairman of the Board of Directors
Dr. Yuping Huang 44 Chief Quantum Officer and Director
Dr. Carl Weimer 62 Director
Robert Fagenson 75 Director
Michael Turmelle 64 Director
(1) Dr. McGann was appointed Chief Executive Officer effective February 1, 2024.
(2) Mr. Liscouski was terminated as Chief Executive Officer January 31, 2024.
Dr. William J. McGann, Chief Executive Officer
and President
Dr. McGann, age 66, is the Company’s Chief
Executive Officer. He was appointed to this role effective February 1, 2024, having previously served as the Company’s Chief Technology
Officer and Chief Operations Officer since January 2022 and as a Director of the Company from September 2021 to December 2021. Prior to
joining Quantum Computing, Dr. McGann was the Chief Technology Officer for the Security, Detection and Automation business at Leidos Holdings,
Inc., a provider of technical services, primarily to the U.S. government, from May 2019 to January 2022. Dr. McGann has a strong, directed
passion for transforming credible science into practical technology solutions in solving some of the world’s greatest challenges.
Prior to joining Leidos, Dr. McGann held numerous business and technology leadership positions and roles including (a) Founder of the
first explosives trace detection company, Ion Track Instruments, (b) Chief Technology Officer for GE Security, (c) VP of Engineering for
United Technologies Fire and Security business, (d) CEO and board member of Implant Sciences Corp., and (e) Chief Technology Officer at
L3Harris Aviation Security and Detection business. Dr. McGann holds a Ph.D. in Chemical Physics from the University of Connecticut and
undergraduate degrees in Chemistry and Biology.
Christopher Boehmler, Chief Financial Officer
Mr. Chris Boehmler, age 45, has served as the
Company’s Chief Financial Officer since July 1, 2023. Mr. Boehmler joined the Company as Controller in March 2022. He combines over
15 years of experience in public and private corporate finance in senior management positions for technology-driven and financial institutions,
primarily at Bridgewater Associates, LP and Intelsat. During this time, he also led the finance functions for two start-ups where he was
instrumental in raising private equity and performing due diligence on acquisition targets. His financial expertise spans capital markets,
planning & analysis, accounting operations, management and regulatory reporting, financial systems integrations, and Sarbanes Oxley
Act financial risks & controls. He started his career working in the investment banking division of Credit Suisse First Boston, followed
by strategic management consulting for Booz Allen Hamilton. Mr. Boehmler has an undergraduate degree in Economics with a minor in Germanic
Studies from the University of Chicago.
Robert Liscouski, Chairman of the Board
Mr. Liscouski, age 69, is the Chairman of the
Board; he has served in this position since February 2018. From March 2018 through January 2024 Mr. Liscouski served as the Company’s
Chief Executive Officer and President. Prior to that Mr. Liscouski served as Chairman and Founder of Convergent Risk Group LLC, an enterprise
security risk management firm specializing in the convergence of physical and cyber risk, from January 2011 through May 2019 and as President
of Implant Sciences Corp., a public company that became a leader in the explosive trace detection industry culminating in the sale of
the technology to L3 Communications in January 2017. Mr. Liscouski is a proven security professional, thought leader and successful entrepreneur
with over 35 years of senior level security operational and company leadership experience in government and public and private companies.
38
Mr. Liscouski is a recognized security industry
leader in assessing, mitigating and managing physical and cybersecurity risk in private sector enterprises and state and federal government
agencies. Mr. Liscouski has extensive experience in leading innovative start up and turn around companies as well as building programs
for large government organizations and is recognized as a leader in identifying emerging security technologies. He serves as a “Trusted
Advisor” to senior officials within government and private sector, providing guidance in areas such as physical and cyber security,
crisis management, organizational development and strategic planning. Mr. Liscouski’s career has spanned local law enforcement,
senior government and private sector positions from operations to senior leadership and Boards of Directors. He served as a senior advisor
to the intelligence community and was appointed by President George W. Bush as the first Assistant Secretary for Infrastructure Protection
at the Department of Homeland Security. Mr. Liscouski is a founder and Chairman of the Board of the National Child Protection Task Force,
a 501(c)(3) charitable organization, and served on the Board of Clean Coal Technologies Inc. (CCTC) from 2019 until December 2020. He
received his Bachelor of Science degree in Criminal Justice from John Jay College and his MPA in Public Administration from the Kennedy
School of Government, Harvard University. Mr. Liscouski’s expertise in cybersecurity and technology innovation, as well as his leadership
experience in senior government positions and public and private businesses qualifies him to serve as a member of the Board and chairman
of the risk committee.
Dr. Yuping Huang, Chief Quantum Officer and
Director
Dr. Yuping Huang, age 44, is the Company’s
Chief Quantum Officer and a Director, and has held these positions since June 14, 2022. Dr. Huang has over 20 years of experience in
commercial and academic settings, with pioneering research in a wide spectrum of quantum physics, optics, and technology. Prior
to joining the Company, Dr. Yuping founded QPhoton, where he served as Chief Executive Officer from 2020 until its acquisition by the
Company in 2022. QPhoton was a development stage company commercializing quantum photonic technology and devices to provide innovative
and practical quantum solutions for critical challenges facing big data, cyber, remote sensing, and healthcare industries. Dr. Huang
worked as a postdoctoral fellow, a research faculty member, and principal investigator at Northwestern University from 2009-2014. In
2014 he joined the faculty of Stevens Institute of Technology, where he continues to serve. Dr. Huang is the founding director
of the Center for Quantum Science and Engineering and Gallagher Associate Professor of Physics at Stevens Institute of Technology.
He received a Bachelor of Science in modern physics from the University of Science and Technology of China in 2004 and a PhD in quantum
AMO physics in 2009 from Michigan State University. Dr. Huang’s expertise in quantum physics and optics and leadership experience
in quantum research qualifies him to serve as a member of the Board.
Dr. Carl Weimer, Director
Dr. Weimer, age 62, has been a director of the
Company since January 14, 2023. Dr. Weimer combines over 25 years of experience in the aerospace industry. Previously, he had been involved
in two companies in the aerospace industry, holding positions including Team Leader, Principal Investigator and Chief Technologist. From
1994 through 2000, Dr. Weimer was a Team Leader for Ophir Corporation, an aerospace optics company. From 2000 to 2018, he was a Team Leader
for Ball Aerospace & Technologies Corp., a spacecraft company, and in 2008 he was awarded a NASA Distinguished Public Service medal.
From 2018 to present, Dr. Weimer has been the Chief Technologist for the Ball Aerospace Civil Business Unit. In addition, from 2008 to
present, Dr. Weimer has been the Principal Investigator for the NASA Earth Science Technology Office, and he holds seven U.S. patents
in optical systems. Dr. Weimer received a Bachelor of Science degree from Harvey Mudd College (1984) and a Master of Science (1987) and
a PhD (1992) from Colorado State University, all in experimental Physics. Dr. Weimer’s expertise in advanced optics and leadership
experience in the aerospace industry qualifies him to serve as a member of the Board.
Robert Fagenson, Director
Mr. Fagenson, age 75, has been a director of the Company
since February 2021. Mr. Fagenson has served as a member of the board of directors of National Holdings Corporation (“NHC”),
a broker-dealer, since March 2012. He has served as vice chairman of the board of directors of NHC since September 2016. Mr. Fagenson
previously served as co-chief executive officer of NHC from January 3, 2017 to January 31, 2017, as chief executive officer and chairman
of the board of directors of NHC from December 2014 to September 2016, and as executive vice-chairman of the board of directors of NHC
from July 2012 to December 2014. Mr. Fagenson has been a branch owner at National Securities Corp, an operating company of NHC, since
2012, and president of Fagenson & Co., Inc., a family investment company, since 1982. Mr. Fagenson spent the majority of his career
at the New York Stock Exchange (“NYSE”), where he was managing partner of one of the exchange’s largest specialist firms.
While at the NYSE, Mr. Fagenson served as a governor on the trading floor and was elected to the NYSE board of directors in 1993, where
he served for six years, eventually becoming vice chairman of the NYSE board of directors from 1998 to 1999 and 2003 to 2004. Mr. Fagenson
has served as director of the New York City Police Museum since 2005 and as director of the Federal Law Enforcement Officers Association
Foundation since 2009. He has also served on the board of directors of Sigma Alpha Mu Foundation since 2011 and on the board of directors
of New York Edge since 2015. In addition, Mr. Fagenson served as the non-executive chairman of Document Security Systems, Inc. from 2012
to 2018 (NYSEMKT: DSS). He is currently a member of the alumni boards of the Whitman School of Business at Syracuse University. Mr. Fagenson
received his B.S. in Transportation Sciences & Finance from Syracuse University in 1970. Mr. Fagenson’s experience in the financial
services industry and in senior leadership positions qualifies him to serve as a member of the board and as chairman of the audit committee.
39
Michael Turmelle, Director
Mr. Turmelle, age 64, has been a director of the
Company since January 2022. Mr. Turmelle has served on the board of directors of Ideal Power Inc. since December 2017, and as chairman
of the Ideal Power board since 2021. From January 2018 through January 2024, Mr. Turmelle served as the Managing Director of Hayward Tyler,
a United Kingdom private equity-backed manufacturer and service provider of pumps and motors, which he joined in February 2015. Mr. Turmelle
also served on the boards of Hayward Tyler and Energy Steel (a Hayward Tyler subsidiary) from 2017 until January 2024. Hayward Tyler designs,
manufactures and services performance-critical electric motors and pumps to meet the most demanding of applications for the global energy
industry, as both an original equipment manufacturer supplier and trusted partner. Previously, Mr. Turmelle ran his own consulting company
working with start-ups and turn-arounds in the areas of renewable energy, medical and other advanced technologies. Mr. Turmelle has served
on numerous Board of Directors including the Board of Directors of Implant Sciences Corp., an explosive and narcotic trace detection company,
where he served as Chairman of the Board from 2015 to 2017. Mr. Turmelle was Chief Financial Officer and Chief Operating Officer and a
member of the Board of Directors of SatCon Technology Corp, a maker of energy management systems, from 1992 to 2005. Mr. Turmelle was
also on the Board of Directors of Beacon Power, a SatCon spin-off company dealing in flywheel energy storage, from 1996 to 2000. Mr. Turmelle
has a BA in Economics from Amherst College and is a graduate of General Electric’s Financial Management Program. Mr. Turmelle’s
experience as a public company director and executive as well as extensive experience in finance, business operations and technology,
qualifies him to serve as a member of the Board and as chairman of the compensation committee.
Family Relationships.
There are no family relationships between any
of our directors or executive officers.
Delinquent Section 16(a) Reports
Section 16(a) of the Exchange Act requires the
Company’s directors, executive officers and persons who beneficially own 10% or more of a class of securities registered under Section
12 of the Exchange Act to file reports of beneficial ownership and changes in beneficial ownership with the SEC. Directors, executive
officers and greater than 10% stockholders are required by the rules and regulations of the SEC to furnish the Company with copies of
all reports filed by them in compliance with Section 16(a).
Based solely upon a review of Forms 3 and 4 and
amendments thereto furnished to the Company during the fiscal year ended December 31, 2023, including those reports that we have filed
on behalf of our directors and Section 16 officers, no director, Section 16 officer, beneficial owner of more than 10% of the outstanding
common stock, or any other person subject to Section 16 of the Exchange Act, failed to file with the SEC on a timely basis during the
fiscal year ended December 31, 2023, except (i) as previously disclosed by the Company, (ii) Robert Liscouski filed a Form 4 on July 7,
2023, which was delinquent, in connection with his sale of common stock, the earliest of which occurred on November 25, 2022.
Code of Ethics
The Company currently maintains a code of ethics
that applies to all directors, officers, and employees. A copy of our code of ethics can be found on our website at www.quantumcomputinginc.com.
We expect that any amendments to such code, or any waivers of its requirements, will be disclosed on our website.
Board Composition and Director Independence
The Board consists of seven members, including
two vacant Board seats. The directors will serve until our next annual meeting of stockholders and until their successors are duly elected
and qualified. The Company defines “independent director” as that term is defined in Rule 5605(a)(2) of the Nasdaq listing
standards.
In making the determination of whether a member
of the board is independent, the Board considers, among other things, transactions and relationships between each director and his immediate
family and the Company, including those reported under the caption “Certain Relationships and Related-Party Transactions.”
The purpose of this review is to determine whether any such relationships or transactions are material and, therefore, inconsistent with
a determination that the directors are independent. On the basis of such review and its understanding of such relationships and transactions,
the Board affirmatively determined that Robert Fagenson, Michael Turmelle and Carl Weimer are qualified as independent and that they have
no material relationship with us that might interfere with his exercise of independent judgment.
Board Committees; Audit Committee Financial
Expert; Stockholder Nominations
The Board has established an audit
committee, a compensation committee and a nominating and corporate governance committee. Each committee has its own charter, which
is available on our website at www.quantumcomputing.com. Each of the Board committees has the composition and
responsibilities described below.
Members will serve on these committees until their
resignation or until otherwise determined by the Board.
Robert Fagenson, Carl Weimer and Michael Turmelle
are our independent directors.
40
The members of each committee are, as follows:
Audit Committee: Robert Fagenson, Michael Turmelle
and Carl Weimer, with Mr. Fagenson serving as the Chairman. The Board has determined the Mr. Fagenson is currently qualified as an “audit
committee financial expert,” as such term is defined in Item 407(d)(5) of Regulation S-K. Mr. Fagenson satisfies the heightened
standards for an independent director for audit committee purposes under Nasdaq’s listing rules.
Compensation Committee: Robert Fagenson and Michael
Turmelle. Mr. Turmelle serves as Compensation Committee Chairman.
Nominating and Corporate Governance Committee:
Robert Fagenson and Michael Turmelle. Mr. Turmelle serves as the interim Chairman of the Nominating and Corporate Governance Committee.
Involvement in Certain Legal Proceedings.
Our Chief Executive Officer, Dr. William McGann,
was the Chief Executive Officer of Implant Sciences Corporation, which filed a petition for bankruptcy on October 11, 2016 in the Delaware
Bankruptcy Court.
Our Board Chairman, Mr. Robert Liscouski, was
President of Implant Sciences Corporation, which filed a petition for bankruptcy on October 11, 2016 in the Delaware Bankruptcy Court.
With the exception of the foregoing, to the best
of our knowledge, none of our directors or executive officers has, during the past ten years:
41
ITEM 11. EXECUTIVE COMPENSATION
Summary Compensation Table
The following summary compensation table sets
forth all compensation awarded to, earned by, or paid to the named executive officers paid by us during the years ended December 31, 2023
and 2022.
2023 EXECUTIVE OFFICER COMPENSATION TABLE
— — — — — —
— — — — — —
— — — — — —
42
Employment Agreements and Change-in-Control
Provisions
Executive Employment Agreements
Dr. McGann Employment Agreement
We entered into an employment agreement with Dr.
William J. McGann, our Chief Executive Officer, on January 2, 2022. Dr. McGann’s employment agreement is for a term of three years
unless terminated earlier pursuant to its terms. Dr. McGann’s employment agreement provides for an annual base salary of $400,000,
subject to annual review and adjustment as determined by the Board or its compensation committee. Dr. McGann is also eligible to earn
an annual cash bonus in an amount of up to 37.5% of his base salary, subject to achieving certain performance milestones established and
approved by the Board. Pursuant to the agreement, Dr. McGann was granted options to purchase up to 535,000 shares of the Company’s
common stock, with one-third of the options vesting immediately upon grant and one-third vesting upon each of the first and second anniversary
of the date of grant.
Pursuant to the terms of his employment agreement,
the Company may terminate Dr. McGann’s employment with or without Cause, as defined in the agreement, and Dr. McGann may terminate
his employment with or without Good Reason, as defined in the agreement, upon written notice to the Company as set forth in the agreement.
Upon termination of Dr. McGann’s employment by the Company without Cause or by Dr. McGann for Good Reason, the Company shall continue
to pay Dr. McGann his then current monthly base salary for 12 months from the date of termination. The Company must also continue Dr.
McGann’s coverage under and its contributions to his health care, dental, and life insurance benefits for six months, unless he
is or becomes covered by an equivalent benefit, and pay him a pro rata portion of any bonus he has earned prior to his termination. In
addition, if the Company terminates Dr. McGann’s employment without Cause or he terminates his employment for Good Reason within
12 months after a Change of Control, as define in the agreement, or an acquisition, then the Company must pay to Dr. McGann an additional
sum equal to 12 months of his base salary.
As a full-time employee of the Company, Dr. McGann
is eligible to participate in all of the Company’s bonus and benefit programs.
Mr. Boehmler Employment Agreement
We entered into an employment agreement with Mr.
Christopher Boehmler, our Chief Financial Officer, dated as of June 26, 2023, pursuant to which Mr. Boehmler serves as our Chief
Financial Officer. The agreement provides for an indefinite term, that Mr. Boehmler’s employment is at-will, and that either the
Company or Mr. Boehmler can terminate his employment for any reason. Mr. Boehmler’s employment agreement provides for an annual
base salary of $300,000 per year, subject to annual review and adjustment as determined by the Board or its compensation committee. Under
his employment agreement, Mr. Boehmler is also eligible for an annual incentive bonus in the amount of up to 50% of his base salary, subject
to Mr. Boehmler achieving certain performance milestones established by the Board or its compensation committee, and, subject to
Board approval, an annual grant of options to purchase 125,000 shares of our common stock at an exercise price equal to 110% of the grant
date fair market value, one-third of which shall vest on the grant date and the remainder becoming exercisable in equal monthly installments
over the following three years. Pursuant to the agreement, Mr. Boehmler was issued options to purchase 300,000 shares of the Company’s
common stock in 2023, 100,000 of which vested on the grant date and 100,000 of which shall vest on each of the 12- and 24-month anniversary
of the grant date.
If the Company terminates Mr. Boehmler’s
employment without Cause, as defined in the agreement, or Mr. Boehmler terminates his employment for Good Reason, as defined in the agreement,
with 90 days prior notice to the Company and subject to his execution of a release in favor of the Company, the Company shall pay Mr.
Boehmler an amount equal to his then current monthly base salary for 12 months from the date of termination. The Company must also, subject
to his timely election of continuation coverage under COBRA, continue payment or reimbursement of 100% of Mr. Boehmler’s premiums
for such health insurance coverage for six months following his termination or until he becomes covered by an equivalent benefit, and
pay him a pro rata portion of any bonus he has earned prior to his termination. In addition, if the Company terminates Mr. Boehmler’s
employment without Cause or he terminates his employment for Good Reason within 12 months after a Change of Control, as define in the
agreement, then the Company must pay to Mr. Boehmler an additional sum equal to 12 months of his base salary.
As a full-time employee of the Company, Mr. Boehmler
is eligible to participate in all of the Company’s benefit programs.
Mr. Liscouski Employment Agreement
The Company and Mr. Robert Liscouski were parties
to an amended and restated employment agreement dated as of April 26, 2021, pursuant to which Mr. Liscouski served as our Chief Executive
Officer during the fiscal years ended December 31, 2022 and 2023 (the “Liscouski Employment Agreement”). The Liscouski Employment
Agreement provided for an initial term of three years and would be automatically renewed for consecutive one-year terms at the end of
the initial term unless terminated or either party provided notice of non-renewal to the other. The agreement provided that Mr. Liscouski
would receive an annual base salary of $400,000, subject to review and increases (but not decreases) by the Board or its compensation
committee and be eligible to earn a performance bonus of up to 50% of his base salary subject to his achieving certain performance milestones established by the Board. The agreement also provided that, beginning on the first anniversary thereof, Mr. Liscouski would
receive an annual grant of options to purchase 150,000 shares of our common stock at an exercise price equal to 110% of the grant date
fair market value, with one-third vesting on the date of grant and the remainder vesting in equal monthly installments thereafter. Pursuant
to the Liscouski Employment Agreement, Mr. Liscouski also received (i) options to purchase 250,000 shares of common stock of the Company
upon execution of the agreement and (ii) 250,000 options to purchase shares of common stock of the Company upon the Company’s listing
on Nasdaq.
43
In connection with the termination of Mr. Liscouski
employment as our Chief Executive Officer on January 31 2024, the Company and Mr. Liscouski entered into a Separation Agreement and General
Release. Pursuant to the separation agreement, the Company agreed to pay Mr. Liscouski $400,000, representing 12 months of his base salary,
on the Company’s regular payroll dates for 12 months following his termination, to grant him 168,000 shares of Company common stock,
and, subject to his timely election of continuation coverage under COBRA, to continue to pay or reimburse 100% of his premiums for such
health insurance coverage for 12 months following his termination or until he becomes covered by an equivalent benefit. The separation
agreement also provides that Mr. Liscouski’s unvested options and restricted stock grants vested as of his termination date.
We also entered into an agreement with Mr. Liscouski,
effective as of February 1, 2024, which provides that the Company will pay him a monthly fee of $12,500 for his service as a Director
of the Company (including as Chairman of the Board). Such monthly fee will be in lieu of the standard compensation we pay to our directors.
Outstanding Equity Awards at Fiscal Year
End
The following table sets forth information regarding
equity awards held by our named executive officers as of December 31, 2023:
Option Awards Stock Awards
Director Compensation
Except as provided below, the Company’s
independent directors each received compensation of $9,000 per quarter for their services as directors, plus an additional $4,000 per
quarter if they also served as a committee Chair, in fiscal year 2023.
44
ITEM 12. SECURITY OWNERSHIP OF CERTAIN BENEFICIAL
OWNERS AND MANAGEMENT AND RELATED STOCKHOLDER MATTERS.
The following table sets forth certain information
as of March 28, 2024 concerning the beneficial ownership of common stock for: (i) each director and director nominee, (ii) each named
executive officer as included in the Summary Compensation Table under “Executive Compensation” above, (iii) all executive
officers and directors as a group, and (iv) each person (including any “group” as that term is used in Section 13(d)(3) of
the Exchange Act) known by us to be the beneficial owner of 5% or more of our common stock. The address for each of the persons below
who are beneficial owners of 5% or more of our common stock is our corporate address at 5 Marine View Plaza, Suite 214, Hoboken, NJ 07030.
Beneficial ownership has been determined in accordance with the rules
of the SEC and is calculated based on 91,357,640 shares of our common stock issued and outstanding as of March 28, 2024. Shares of common
stock subject to options, warrants, preferred stock or other securities convertible into common stock that are currently exercisable or
convertible, or exercisable or convertible within 60 days of March 28, 2024, are deemed outstanding for computing the percentage of the
person holding the option, warrant, preferred stock, or convertible security but are not deemed outstanding for computing the percentage
of any other person. Under the SEC rules, a person is deemed to be a “beneficial owner” of a security if that person has or
shares “voting power,” which includes the power to vote or to direct the voting of such security, or “investment power,”
which includes the power to dispose of or to direct the disposition of such security. A person is also deemed to be a beneficial owner
of any securities of which that person has the right to acquire beneficial ownership within 60 days through the exercise of any stock
option, warrant or other right. Under these rules, more than one person may be deemed a beneficial owner of the same securities and a
person may be deemed to be a beneficial owner of securities as to which such person has no economic interest. Unless otherwise indicated,
each of the stockholders named in the table below, or his or her family members, has sole voting and investment power with respect to
such shares of our common stock.
Except as indicated by the footnotes below, we
believe, based on the information furnished to us, that the persons and entities named in the table below have sole voting and investment
power with respect to all shares of common stock that they beneficially own.
Named Executive Officers and Directors
William J. McGann, Chief Executive Officer (1) 3,232,100 3.29 %
Chris Boehmler, Chief Financial Officer (2) 226,978 0.23
All directors and officers as a group (8 persons) 32,246,157 32.81
5% or greater shareholders (none) 0 0
45
Changes in Control
We are not aware of any arrangements that may
result in “changes in control” as that term is defined by the provisions of Item 403(c) of Regulation S-K.
Equity Compensation Plan Information
On July 5, 2022, the Board adopted the 2022 Quantum
Computing Inc. Equity and Incentive Plan (the “Plan”), which provides for the issuance of up to 16,000,000 shares of the Company’s
common stock. The principal purpose of the Plan is to provide an incentive to designated employees, certain consultants and advisors who
perform services for us and non-employee directors to contribute to our growth by continuing to align the interests of participants with
the interests of our stockholders. The Plan was approved by a majority of the shareholders in September 2022.
The table below sets forth certain information
as of our fiscal year ended December 31, 2023 regarding the shares of our common stock available for grant or granted under our equity
compensation plan.
Equity compensation not approved by shareholders (1) 2,152,804 $ 6.53 -
ITEM 13. CERTAIN RELATIONSHIPS AND RELATED
TRANSACTIONS, AND DIRECTOR INDEPENDENCE.
The following is a summary of transactions since
January 1, 2023 to which we have been or will be a party in which the amount involved exceeded or will exceed $840,143 (one percent of