Item 1A. Risk Factors
Summary of Risk Factors
Our business is subject to numerous risks and uncertainties that you
should consider before investing in our common stock. Some of the principal risk factors that make an investment in the Company speculative
or risky are summarized as follows:
Risks Related to our Financial Condition and Status as an Early
Stage Company
• We will need additional capital to continue as a going concern.
• We may not be able to scale our business quickly enough to meet demand.
Risks Related to our Business and Industry
• We are highly dependent on our key employees.
• Our business is dependent on growing and retaining qualified personnel.
• Our estimate of market opportunities may prove to be inaccurate.
• We could fail to respond to rapid technological changes.
Risks Related to Competition
• Competitors may develop products and technologies that are superior to ours.
Risks Related to Intellectual Property
• We may face patent infringement and other intellectual property claims.
Risks Related to Government Regulation and Litigation
• We are potentially subject to governmental export and import control laws.
• We are exposed to risks associated with litigation and regulatory proceedings.
Risks Outside Our Specific Business
• Risks Relating to Ownership of our Common Stock
• The market price of our shares of Common Stock is subject to volatility.
• There is currently a limited trading market for the Company’s Common Stock.
• Due to our size, we have a limited management team.
• We do not currently intend to pay cash dividends on our Common Stock.
Investing in our Common Stock involves a high degree of risk. Investors
should carefully consider the following Risk Factors before deciding whether to invest in the Company. Additional risks and uncertainties
not presently known to us, or that we currently deem immaterial, may also impair our business operations or our financial condition. If
any of the events discussed in the Risk Factors below occur, our business, consolidated financial condition, results of operations or
prospects could be materially and adversely affected. In such case, the value and marketability of our securities could decline.
Risks Related to Zapata’s Financial Condition and Status as
an early-stage Company
We will need additional capital to continue as a going concern,
implement our business plan or respond to business opportunities or unforeseen circumstances and such financing may not be available.
Through October 31, 2025, we have funded our operations
primarily with proceeds from sales of preferred stock, promissory notes and warrants. Our continuation as a going concern is dependent
upon our ability to effect or continue to identify future debt or equity financing and generate profitable operations from our operations.
Management estimates needing to raise at least an additional $5 million to establish and continue operations over the next 12 months under
our current business plan. There can be no assurance that such capital will be available in sufficient amounts or on terms acceptable
to us. Further, the Company has not generated any revenue since September 2024, and does not expect to generate any revenue unless and
until it can re-commence material operations which will be dependent on our ability to raise sufficient capital. These factors raise substantial
doubt about our ability to continue as a going concern.
Our business plan also contemplates a substantial
scaling of Zapata across all departments, including science, software engineering, and product design, in order to launch multiple products
and/or offerings in a timely manner to obtain and preserve a competitive advantage. This scaling will require substantial capital at a
time when we project we will be operating at a loss and in which we have limited capital and other resources with which to execute our
business plan, and this process may take longer than we anticipate. Consequently, our expansion is limited in proportion to our growth
in revenue and available capital, as well as by our limited personnel and infrastructure. The capital required to sustain our business
during this period may be greater than anticipated. In addition, presently unforeseen opportunities or circumstances may require capital
beyond what we currently project. The period during which we expect to operate at a loss may be extended by circumstances beyond our control.
We may obtain additional financing through public
or private equity or debt financings (subject to the limitations under our outstanding agreements and debt instruments) that may result
in dilution to stockholders, the issuance of securities with priority as to liquidation and/or dividend and other rights more favorable
than the Common Stock, or the imposition of debt covenants and repayment obligations or other restrictions that may adversely affect our
business. For example, as of October 31, 2025, we have outstanding an aggregate principal amount of $4 million in secured promissory notes
(collectively, the “Secured Notes”). Included in the Secured Notes is a senior secured promissory note (in the aggregate principal
amount of $1 million the “Senior Secured Note”). This Senior Secured Note, among other things, converts at the option of the
holder at $8.50 per share of Common Stock and prohibits Legacy Zapata from issuing additional indebtedness and undertaking certain other
actions, subject to limited exceptions, which may prevent or limit us from raising further capital or engaging in strategic transactions
in the future. In addition, the other Secured Notes (the “2025 Notes”) have a total outstanding principal amount of $3 million,
mature on June 12, 2026 (subject to acceleration upon the occurrence of certain customary events of default or a change of control), and
bear 10% per annum interest. These 2025 Notes are convertible into shares of Common Stock at the option of the holder based on a conversion
price of $0.04 per share, subject to certain adjustments. These 2025 Notes convert automatically upon the Company’s completion of
a securities offering resulting in gross proceeds of at least $5 million. The Company also issued warrants to purchase a total of 37,500,000
shares of Common Stock to the investors of the 2025 Notes.
There is no guarantee that future financing will
be at financial terms equal to or more favorable than those described above or that our existing indebtedness will not limit or prevent
us from raising capital in the future, and we may need to enter into future equity or, if available, debt financing at significantly less
favorable terms. Our failure to raise capital as and when needed would have a negative impact on our financial condition and our ability
to pursue our business strategy.
We may also seek additional financing even if in
our view such additional financing is not required in order to take advantage of favorable market conditions or for strategic considerations.
There can be no assurance that additional financing will be available on favorable terms, or at all. The inability to obtain such additional
financing if needed may adversely affect our ability to operate at the levels necessary to execute our business plan or may force us into
bankruptcy.
We have a history of operating losses, which are expected to
continue for the foreseeable future.
We have incurred significant operating losses since
our inception. We incurred net losses of $38.2 million and $29.8 million during the years ended December 31, 2024 and 2023, respectively,
and we have a cumulative deficit since the formation of Legacy Zapata in November 2017 through December 31, 2024 of approximately $127.7
million. Since 2024, we have continued to incur net losses. We believe that we will continue to incur operating and net losses each quarter
at least for the foreseeable future. The size of future losses will depend on several factors, including the degree to which we seek to
establish and expand our scientific, product, software engineering, sales and other teams, and the revenue that we can generate from sales
of our quantum computing application development solutions. Our operating expenses have increased as a result of becoming a public company
and we expect that our expenses will continue to increase as we grow our business, including hiring and re-hiring personnel as we seek
to re-establish material operations as part of our ongoing restructuring efforts in 2025.
We are an early stage company with a limited operating history,
in a nascent industry, making it difficult to forecast future results.
We were founded in 2017 to develop and provide
software with related services and proprietary IP to utilize quantum math on classical and future quantum hardware. In late 2024, due
to financial difficulties we temporarily suspended our operations. In June 2025, following restructuring efforts and conversion of certain
outstanding indebtedness into equity, we shifted our business focus from artificial intelligence (AI) to quantum computing software and
solutions. Our ability to re-establish material operations and generate revenue will be dependent upon our ability to access sufficient
capital for such purpose. The market focus for our quantum computing application development solutions and the use of quantum math and
algorithms are nascent fields with uncertainty on future market uptake and in technological progress in the field.
There can be no assurance that we can or will meet
the challenges commonly faced by early stage companies, including the need to scale operations and to achieve and manage rapid growth.
A number of factors could cause our efforts to be adversely impacted, including any inability to raise the necessary capital needed to
re-establish material operations and pursue our business objectives, increased competition, lesser-than-expected growth or contraction
of our overall market, our inability to accurately forecast demand for our customer offerings, our inability to establish sales or other
partnerships with service firms, an inability to develop repeatable solutions, an inability to grow our team, or our failure, for any
reason, to capitalize on growth opportunities. We have encountered and will encounter risks and uncertainties frequently experienced by
early stage companies in rapidly changing industries, such as the risks and uncertainties described herein. We cannot provide assurance
that we can meet the challenges faced by all companies, including established companies, in rapidly changing or nascent industries. The
failure to address these challenges successfully or promptly could have a material adverse effect on our future operating results and
financial condition.
We may not be able to scale our business and quantum computing
application development solutions quickly enough to meet customer and market demand and to remain competitive in the market for quantum
computing application development solutions.
In order to establish and grow our business, we
will need to re-establish and scale material operations in every area from our existing start-up capacity. These challenges will require
that we:
• expand our customer-support services;
• increase our sales and marketing teams and efforts;
If we cannot successfully overcome these challenges
and manage the organizational growth required to do so, then our business, including our ability to establish and maintain a competitive
place in the market, financial condition, and profitability, may be materially adversely affected.
Our assets are pledged to the holders of the Secured Notes and
failure to repay obligations to these noteholders when due, or any other default events, will have a material adverse effect on our business
and could result in foreclosure on these assets.
In connection with the issuance of Secured Notes,
the Company entered into Security Agreements and an Intercreditor Agreement with Acquiom Agency Services LLC as collateral agent on behalf
of the noteholders (collectively, the “Security Agreement”). The Security Agreement creates a security interest in all of
the property of Zapata and its subsidiaries, subject to certain exceptions specified in the Security Agreement (the “Collateral”).
Pursuant to the Security Agreement, each of Zapata Computing, Inc. and Zapata Government Services, Inc. has agreed to guarantee the obligations
of the Company under the Security Agreement and the Secured Notes.
Upon the occurrence of an Event of Default under
the Security Agreement, the collateral agent will have certain rights under the Security Agreement, including the right to take control
of the Collateral and, in certain circumstances, sell the Collateral to cover obligations owed to the holders of the Secured Notes pursuant
to its terms. “Event of Default” under the Security Agreement means (i) any default of the terms, conditions or covenants
of the Security Agreement (after giving effect to any applicable grace or cure period) and any event of default under the Secured Notes,
which includes any failure to pay any principal or interest payment on the due date or any other payments required under the terms of
the Secured Notes, a breach of any other covenant under the Secured Notes, and entering into any voluntary or involuntary bankruptcy or
insolvency proceedings. Any such default would have a material adverse effect on Legacy Zapata’s and, by extension, our, business
and our stockholders could lose their entire investment in us.
If we fail to maintain an effective system of disclosure controls
and internal control over financial reporting, our ability to produce timely and accurate financial statements or comply with applicable
regulations could be impaired.
As a public company, we are subject to the reporting
requirements of the Exchange Act, the Sarbanes-Oxley Act, including regular attestations by management concerning its internal control
over financial reporting. Management may not be able to effectively and timely implement controls and procedures that adequately respond
to these increased regulatory compliance and reporting requirements. If we are not able to implement the additional requirements of Section
404 of the Sarbanes-Oxley Act (“Section 404”) in a timely manner or with adequate compliance, we may not be able to assess
whether our internal control over financial reporting is effective and may fail to provide timely and accurate financial information to
investors. This may subject us to adverse regulatory consequences and could harm investor confidence. We expect that the requirements
of these rules and regulations will continue to increase our legal, accounting, and financial compliance costs, make some activities more
difficult, time consuming, and costly, and place significant strain on our personnel, systems, and resources. We will need to hire additional
accounting and financial personnel in order to achieve these goals.
The Sarbanes-Oxley Act requires, among other things,
that we maintain effective disclosure controls and procedures and internal control over financial reporting. The controls required are
not currently in place; however, we are working to develop and refine our disclosure controls and other procedures that are designed to
ensure that information required to be disclosed by us in the reports that we will file with the SEC is recorded, processed, summarized,
and reported within the time periods specified in SEC rules and forms and that information required to be disclosed in reports under the
Exchange Act is accumulated and communicated to our principal executive and financial officers. We are also working to design and maintain
our internal control over financial reporting.
Our current controls and any new controls that
we develop may be inadequate because of changes in conditions in our business. In addition, changes in accounting principles or interpretations
could also challenge our internal controls and require that we establish new business processes, systems, and controls to accommodate
such changes. We have limited experience with implementing the systems and controls that will be necessary to operate as a public company,
as well as adopting changes in accounting principles or interpretations mandated by the relevant regulatory bodies. Additionally, if these
new systems, controls, or standards and the associated process changes do not give rise to the benefits that we expect or do not operate
as intended, it could adversely affect our financial reporting systems and processes, the effectiveness of internal control over financial
reporting, and/or our ability to produce timely and accurate financial reports. Moreover, our business may be harmed if we experience
problems with any new systems and controls, resulting in delayed implementation or increased costs to correct any issues.
Further, in addition to the material weaknesses
described in the Risk Factor which follows and elsewhere in this Report, weaknesses in our disclosure controls and internal control over
financial reporting may be discovered in the future. Any failure to develop or maintain effective controls or any difficulties encountered
in their implementation or improvement could harm our business or cause us to fail to meet our reporting obligations. That failure could
result in a restatement of our financial statements for prior periods. Any failure to implement and maintain effective internal control
over financial reporting could adversely affect the results of periodic management evaluations and annual independent registered public
accounting firm attestation reports regarding the effectiveness of our internal control over financial reporting. Those reports will eventually
be included in our periodic reports filed with the SEC. Ineffective disclosure controls or internal control over financial reporting could
also cause investors to lose confidence in our reported financial and other information, which would likely have a negative effect on
the trading price of our Common Stock.
Any failure to maintain effective disclosure controls
and internal control over financial reporting could harm our business and could cause a decline in the trading price of our Common Stock.
We have identified material weaknesses in our internal control
over financial reporting. If we are unable to remediate these weaknesses, identify additional material weaknesses in the future, or otherwise
fail to maintain an effective system of internal control over financial reporting, this may result in misstatements in our financial statements,
cause us to fail to meet periodic reporting obligations, or cause our access to capital markets to be impaired.
In connection with the preparation and audit of
our financial statements as of and for the year ended December 31, 2024, material weaknesses have been identified in its internal control
over financial reporting. A material weakness 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 annual or interim financial statements will not be prevented
or detected on a timely basis.
The material weaknesses we identified include:
These material weaknesses could result in a misstatement
of account balances or disclosures that would result in a material misstatement to our combined annual or interim financial statements
that would not be prevented or detected.
In an effort to remediate the material weaknesses,
we have retained an accounting consulting firm to provide additional depth and breadth to our technical accounting and financial reporting
capabilities. We intend to engage internal control consultants to assist us in performing a risk assessment to identify relevant risks
and specify needed objectives. With their assistance, we intend to formalize and communicate our policies and procedures surrounding our
financial close, financial reporting and other accounting processes, and to further develop and document necessary policies and procedures
regarding our internal control over financial reporting, such that we are able to perform a Section 404 analysis of our internal control
over financial reporting when and as required. We cannot assure that these measures will significantly improve or remediate the material
weaknesses described above. We also cannot assure that we have identified all or that we will not have additional material weaknesses
in the future. Accordingly, a material weakness may still exist when we report on the effectiveness of our internal control over financial
reporting for purposes of our management’s required attestation. Further, while we remain an emerging growth company, we will not
be required to include an attestation report on internal control over financial reporting issued by our independent registered public
accounting firm.
We have incurred and expect to incur additional
costs to remediate these control deficiencies, though there can be no assurance that our efforts will be successful or that we will avoid
potential future material weaknesses. If we are unable to successfully remediate our existing or any future material weaknesses in our
internal control over financial reporting, or if we identify any additional material weaknesses, the accuracy and timing of our financial
reporting may be adversely affected, we may be unable to maintain compliance with securities law requirements regarding timely filing
of periodic reports in addition to applicable stock exchange listing requirements, investors may lose confidence in our financial reporting,
and our stock price may decline as a result. We also could become subject to investigations by the SEC or other regulatory authorities.
Our ability to use existing or future net operating loss carryforwards
and other tax attributes may be limited.
We have incurred net operating losses (“NOLs”)
for tax purposes for each year since our incorporation and we expect to continue to operate at a loss for the foreseeable future. As of
December 31, 2024 we had a cumulative U.S. federal carryforward of approximately $68.8 million and a cumulative state NOL carryforward
of approximately $39.7 million. If not utilized, the state NOLs will expire at various dates through 2044. The U.S. federal NOLs generated
after 2017 can be carried forward indefinitely. Under the Code, the deductibility of the U.S. federal NOL carryforward as of December
31, 2024 and all future U.S. federal NOL carryforwards is limited to 80% of taxable income, limiting or delaying in part the use of NOL
carryforwards if and when we cease operating at a loss. We may potentially use these U.S. federal and state NOLs to offset taxable income
for U.S. federal and state income tax purposes. However, the use of these NOLs may be subject to numerous limitations under the Code and
under state tax laws. Among such limitations, Section 382 of the Code may limit the use of these NOLs in any year for U.S. federal income
tax purposes in the event of certain past or future changes in ownership of us or Legacy Zapata. An ownership change under Section 382
of the Code, referred to in this discussion as an ownership change, generally occurs if one or more stockholders or groups of stockholders
who own at least 5% of a company’s stock increase their ownership by more than 50 percentage points over their lowest ownership
percentage within a rolling three-year period. We have not conducted a Section 382 study to determine whether the use of our NOLs is impaired
under Section 382 of the Code as a result of any prior ownership change. We may have previously undergone one or more ownership changes.
An ownership change in respect of us also could be deemed to be an ownership change in respect of Legacy Zapata. The Merger, or future
issuances or sales of our securities, including certain transactions involving our securities that are outside of our control, could result
in ownership changes. Ownership changes that have occurred in the past or that may occur in the future could result in the imposition
of an annual limit under Section 382 of the Code on the amount of pre ownership change NOLs and other tax attributes that we or Legacy
Zapata could use to reduce our taxable income, potentially increasing or accelerating its liability for income taxes, and also potentially
causing those tax attributes to expire unused.
States may impose similar limitations on the use
of applicable NOLs. We have recorded a valuation allowance related to NOL carryforwards and other deferred tax assets due to the uncertainty
of the ultimate realization of the future benefits of those assets.
Any limitation on using NOLs, whether under Section
382 of the Code or otherwise under U.S. federal or state tax laws, could, depending on the extent of such limitation and the NOLs previously
used, result in Legacy Zapata or us retaining less cash after payment of U.S. federal and state income taxes in respect of any year in
which we have taxable income, rather than losses, than we would be entitled to retain if such NOLs were available as an offset against
such income for U.S. federal and state income tax reporting purposes, which could adversely impact our operating results.
Risks Related to our Business and Industry
Failure of quantum computing solutions in general and our quantum
computing application development solutions in particular to satisfy customer demands or to achieve increased market acceptance would
adversely affect our business, results of operations, financial condition, and growth prospects, and the current state of the quantum
computing industry is still new and rapidly evolving, so there is no guarantee that it will succeed.
When we re-commence material operations, we expect
to derive substantially all of our revenue from our quantum computing application development software and related services. Accordingly,
the market acceptance of quantum computing in general - and our quantum computing solutions in particular - is critical to our continued
success.
The market for quantum computing is still in its
early stages and is rapidly evolving. Adoption depends on customer awareness of the potential benefits of quantum computing over classical
methods, the continued progress of underlying hardware, and the availability of practical quantum algorithms and workflows. There is no
assurance that quantum computing will achieve large scale commercial viability or that customers will adopt our products at the rate or
in the manner we anticipate.
Demand for our solutions is affected by factors
largely beyond our control, including the pace of hardware advancement, competitive product introductions, data-security and regulatory
considerations, and general macroeconomic conditions. Further, the use of quantum technology is not widespread and is generally limited
to certain specific types of organizations and activities, and our prospective customer base will therefore be limited. We expect the
needs of our customers to continue to evolve and grow in complexity as the industry progresses toward fault-tolerant quantum computing.
To remain competitive, we must continually enhance the functionality, performance, and usability of our software and services to meet
these changing demands.
If the market fails to achieve broad acceptance
of quantum computing or our application development solutions do not meet with sufficient customer demand, or if we fail to keep pace
with rapid technological change, our business, operating results, and growth prospects could be materially and adversely affected.
While significant progress has been made in advancing
quantum hardware, the commercial utility of quantum computing remains largely unproven. As the technology is applied to new domains such
as chemistry, materials science, optimization, cryptography, and machine learning, it is possible that performance gains may be more limited
than current forecasts suggest. Techniques we or others develop could quickly become obsolete as new methods or architectures emerge.
Because many of our competitors are larger companies with greater resources, they may be able to incorporate new techniques or access
next-generation hardware more rapidly than we can.
There can also be no assurance that our analysis
of the eventual market need for quantum computing is correct. If our assessment proves inaccurate, the future value of our products and
services, our competitive position, and our profitability could be materially lower than we currently anticipate.
Our business plan could suffer if we are not able to establish
and grow contractual relationships with third parties or enter into certain important strategic partnerships, and if we are unable to
ensure that our quantum computing application development solutions interoperate with computing hardware or software that are developed
by others, we may become less competitive and our resulting operations may be harmed.
As a quantum computing application development
company, our solutions must provide our customers with the ability to use products of third parties, such as quantum processors and classical
computing resources, which we do not manufacture. The cost or availability of these dependencies could be adversely affected by a variety
of factors, including the transition to a clean energy economy, local and regional environmental regulations, and geopolitical disruptions.
Our quantum computing application development solutions must integrate with a variety of hardware and software platforms, and we need
to continuously modify and enhance our quantum and classical software libraries to adapt to changes in hardware and software technologies.
In particular, we have developed our quantum development frameworks to be able to easily integrate with key third-party applications,
including the applications of software providers that compete with us as well as our partners. In general, we are and will be subject
to standard terms and conditions of such providers and open source licenses, which govern the distribution, operation, and fees of such
software systems, and which are subject to change by such providers from time to time. Our business will be harmed if any provider of
such software systems:
• discontinues or limits our access to its software;
• changes or modifies its open source license;
• changes how information is accessed by us or our customers;
Third-party services and products are constantly
evolving, and we may not be able to modify our quantum computing application development solutions to assure their compatibility with
that of other third parties as they continue to develop or emerge in the future or we may not be able to make such modifications in a
timely and cost-effective manner. In addition, some of our competitors may be able to disrupt the operations or compatibility of our quantum
development frameworks with their products or services, or exert strong business influence on our ability to, and terms on which we, operate
our quantum computing application development solutions. Should any of our competitors modify their products or standards in a manner
that degrades the functionality of our quantum development frameworks or gives preferential treatment to our competitors or competitive
products, whether to enhance their competitive position or for any other reason, the interoperability of our quantum computing application
development solutions with these products could decrease and our business, results of operations, and financial condition would be harmed.
If we are not permitted or able to integrate with these and other third-party applications in the future, our business, results of operations,
and financial condition would be harmed.
Our business plan could suffer if we are not able to enter into
important strategic partnerships.
As part of our growth plans, we expect to expand,
sell to, with, and through partners, including developing repeatable solutions built with services firms, and developing partnerships
with hardware providers, system integrators and consulting services firms. However, our relationships with these partners may not result
in additional business. If we are unable to enter into beneficial and contractual strategic partnerships, or further its relationship
with existing partners, or is unable to do so on favorable terms, then its growth could be limited or delayed.
If we cannot manage our growth effectively, we may not become
profitable.
Businesses, including development stage companies
such as ours which often grow rapidly, tend to have difficulty managing their growth. If we are able to successfully market our products
and services, we will likely need to expand our management team and other key personnel by recruiting and employing experienced executives
and key employees and/or consultants capable of providing the necessary support.
As described elsewhere in this Report, we are in
the process of developing and/or pursuing business plans for relatively novel technology in an industry that remains in its infant stages,
and which involves a unique business model and would take substantial time and resources to execute and develop into a revenue generating
enterprise. We cannot assure you that our management will be able to manage our growth effectively or successfully. Our failure to meet
these challenges could cause us to lose money, and your investment could be lost.
We are highly dependent on our key employees.
Our ability to achieve our goals will depend heavily
on our Chief Executive Officer and key employees. In late 2024 and early 2025, most of our key personnel left the Company due to our financial
difficulties and suspension of operations. We have since re-hired three such individuals, and will need to re-hire and/or find suitable
replacement or supplemental personnel in order to commence material operations and execute on our business plan. The procurement and retention
of these key employees and consultants, together with additional key hires, is critical to the long-term success of the Company. All of
our personnel, including the are “at will” employees who could leave the Company to accept alternative employment at any time.
The more success we achieve serves to increase the risk that competitors, including large, well-established companies with far greater
resources, will seek to hire our employees, including key employees. The loss of any key employee, especially to a competitor, could have
a material adverse effect on our business, including by delaying the roll-out of products or diminishing the quantity or quality of our
scientific output. Further, our industry and operations are highly specialized, and the loss of key personnel would therefore impose substantial
challenges on us, and we may be unable to locate and hire suitable replacements on favorable terms or at all, and could lose competitive
advantages, market share, and the ability to operate as planned as a result of the loss of certain key personnel.
Our future success is also highly dependent on
locating and hiring highly qualified key employees, both to replace any losses of key employees, including following our previous reductions
in force, as well as to supplement our current employees. If we are unable to grant sufficient or competitive compensation, including
equity awards and bonuses, we may be unable to attract new or retain key employees.
The failure to attract and retain additional qualified personnel
or to maintain our company culture could harm our business and prevent us from executing our business strategy.
To execute our business strategy, we must attract
and retain highly qualified personnel. Competition for executives, data scientists, engineers, software developers, sales personnel, and
other key employees in our industry is intense. In particular, we compete with many other companies for employees with high levels of
expertise in quantum computing, computer science, mathematics, and enterprise software, as well as sales and operations professionals,
which are specialized fields with limited pools of qualified candidates with the knowledge, education, training and experience needed
to fill various roles that will be critical to our operations. As disclosed above, we will need to hire additional personnel to execute
our business plan. At times, we have experienced, and we may continue to experience, difficulty in hiring personnel who meet the demands
of our selection process and with appropriate qualifications, experience, or expertise, and we may not be able to fill positions as quickly
as desired, particularly in light of our previous reductions in workforce. Potential candidates may not perceive our compensation package,
including our equity awards, or our future prospects as favorably as employees hired in the past which may render recruiting and retaining
qualified individuals more difficult. In addition, our recruiting personnel, methodology, and approach may need to be altered to address
a changing candidate pool and profile. We may not be able to identify or implement such changes in a timely manner.
Many of the companies with which we compete for
experienced personnel have greater resources than we have, and some of these companies may offer more attractive compensation packages.
If the perceived value of our equity awards declines, or if the mix of equity and cash compensation that we offer is unattractive, it
may adversely affect our ability to recruit and retain highly skilled employees. Our ability to offer attractive compensation packages
to our current and prospective employees is limited by our limited capital resources and our reliance on equity compensation which may
be viewed as less attractive based on the prices and lack of liquidity of our Common Stock.
Additionally, laws and regulations, such as restrictive
immigration laws, or export control laws, may limit our ability to recruit internationally. We must also continue to retain and motivate
existing employees through our compensation practices, company culture, and career development opportunities.
Companies with greater resources than we have in
the past recruited or attempted to recruit our employees. If we cannot retain these employees, it may adversely affect our ability to
deliver on our quantum computing application development solutions. Furthermore, third-party offers to our employees of greater compensation
have in the past forced and may in the future force us to offer significant additional compensation, which may adversely impact our financial
performance, and we are limited in issuing equity by the number of shares reserved for issuance under our equity plans. Additionally,
continued high inflation, without regard to competition, may require us to increase compensation and failure to do so might impact our
employee retention. Such increases would also adversely impact our financial performance.
We believe that a critical component to our success
and our ability to retain our best people is our culture. As we continue to grow and develop a public company infrastructure, we may find
it difficult to maintain our company culture. If we fail to attract new personnel or to retain our current personnel, our business would
be harmed.
Our business is dependent on growing and retaining competitive
teams of sufficient size in the areas of algorithm development, product development, and software engineering; the failure to achieve
any one of these objectives could materially affect our business.
Our core business model is to develop and sell
software capable of delivering quantum computing application development solutions to enterprise customers at scale and services in connection
with such software. This requires a science team to develop algorithms, capable of addressing valuable problems using quantum techniques
and other mathematics. This requires a product development team that can describe software that not only is able to use the quantum techniques
developed by its team, but also is able to handle enterprise production issues at scale. It also requires a software engineering team
that can implement the product design through products that comply with the myriad legal and enterprise information technology (“IT”)
requirements and are robust enough to function in an enterprise production environment. Finally, these teams must have the capacity to
complete their respective tasks in time to be of value to the market.
The ability to hire the personnel required to execute
our business plan depends, in part, on the availability of qualified applicants, something which is beyond our control. Quantum information
processing is a relatively new field and are inherently difficult. Although the pool of qualified quantum scientists and software engineers
is growing, it is limited and competition for that talent is global and aggressive, pitting us against large, well-established companies
with larger financial resources than we have, as well as programs sponsored by foreign countries. In addition, limitations in or changes
to immigration and work permit laws and regulations or the administration or interpretation of those laws could impair our ability to
attract and retain highly qualified employees.
There is no assurance that we will be able to hire
and retain an adequate number of quantum scientists, product design specialists, and/or software engineers with the qualifications required
to execute our business plan. Our failure to build and maintain any one or more of these requisite teams could have a material adverse
effect on our future prospects.
Our estimate of market opportunities may prove to be inaccurate.
At present, there is no mature market for quantum
computing solutions. This creates significant uncertainty in determining the potential market for our quantum computing application development
solutions. For example, estimates on the current and potential total addressable market for quantum computing as an industry are based
on third-party estimates and our own internal judgment, both of which may be materially inaccurate. There can be no assurance that our
or third-party estimates of the potential total addressable market for quantum computing are correct, and such numbers do not account
for the substantially more limited service obtainable market for our quantum computing application development solutions. Additionally,
our market opportunities, future prospects, and future profitability will be materially lessened by delays in widespread enterprise adoption
of quantum computing, if enterprises adopt quantum computing at all, which would reduce the relevant total addressable market.
Our business depends on our ability to attract new customers
and on our existing customers purchasing additional subscriptions from us and/or renewing their existing subscriptions.
To establish material revenue following the suspension
of our operations and to increase our revenue, we must attract new customers. As an early stage company, we have limited experience with
sales and, in particular, sales to our target large enterprise customers. Our success will depend to a substantial extent on the level
of adoption of our quantum computing application development solutions. Quantum computing is a new and evolving industry, so the level
of adoption is uncertain. Numerous factors may impede our ability to add new customers, including but not limited to, our failure to compete
effectively against alternative products or services, to attract and effectively train new sales and marketing personnel, to develop relationships
with partners, to successfully innovate and deploy new applications and other solutions, to provide a quality customer experience and
customer services, including increasing our employee headcount to provide for additional service providers, or to ensure the effectiveness
of our marketing programs. If we are not able to attract customers, it will have a material adverse effect on our business, financial
condition and results of operations.
Our current quantum computing application development solutions,
as well as applications, features, and functionality that we may introduce in the future or that we offer but have not yet sold, may not
be widely accepted by our customers or may receive negative attention, each of which may lower our margins and harm our business.
Our ability to engage, retain, and increase our
base of customers and to establish and increase our revenue will depend on our ability to successfully market our existing quantum computing
application development solutions, as well as create new applications, features, and functionality. We may introduce significant changes
to our existing quantum computing application development solutions or develop and introduce new applications, including technologies
with which we have little or no prior development or operating experience. These new applications and updates, as well as our existing
solutions that we have marketed but not yet sold, may fail to engage, retain, and increase our base of customers or may suffer from lag
in adoption. New applications may initially suffer from performance and quality issues that may negatively impact our ability to market
and sell such applications to new and existing customers. The short- and long-term impact of any major change to our quantum computing
application development solutions, or the introduction of new applications or initial sales of our applications to enterprise customers,
is particularly difficult to predict. If new or enhanced applications fail to engage, retain, and increase our base of customers, we may
fail to generate sufficient revenue, operating margin, or other value to justify our investments in such applications, any of which may
harm our business.
If the market for our quantum computing application development
solutions fails to develop or grow as we expect, or if businesses fail to adopt our quantum computing application development solutions,
our business, operating results, and financial condition could be adversely affected.
It is difficult to predict customer adoption rates
and demand for our quantum computing application development solutions, the entry of competitive software, platforms and services. A substantial
majority of our revenue in past periods came from, and we expect future revenue will come from, sales of our subscription-based software
and related services, which we expect to continue for the foreseeable future if and when we re-commence sales of our products and services
which will depend on our ability to raise sufficient capital. We cannot be sure that the quantum computing market will continue to grow
or, even if it does grow, that businesses will adopt our quantum computing application development solutions. Our future success will
depend in large part on our ability to create a market for quantum computing application development solutions. Our ability to create
such a market depends on a number of factors, including the cost, performance, and perceived value associated with our quantum computing
application development solutions. Potential customers may have made significant investments in classical computing systems and may be
unwilling to invest in new platforms and applications, and may prefer to work with larger, more established companies that have entered
the broader quantum computing market. If the quantum computing market fails to develop or grows more slowly than we currently expect,
our business, operating results, and financial condition could be adversely affected.
Our business plan relies upon the adoption of our quantum computing
application development solutions by enterprise customers.
Our primary targeted customers are large enterprises
with intractable problems that require addressing at scale. The success of our business plan, therefore, materially depends upon our ability
to sell our quantum computing application development solutions to such large enterprise customers. Sales to such customers involve risks
that are different from or greater than risks involved in selling to smaller customers. Such risks include difficulties associated with
longer sales, product, evaluation, and implementation cycles; higher customer-tailored requests and greater bargaining power on the part
of the customer; and more intense competition from vendors who have been providing other software and services for years to the customer
and are embedded in the customer’s IT infrastructure. If we are not able to overcome these risks and successfully establish a meaningful
share of the enterprise market, then its business prospects and future profitability could suffer.
Our sales cycles are expected to be long and unpredictable, and
our sales efforts will require considerable time and expense.
Our results of operations may fluctuate, in part,
because of the complexity of customer problems that our quantum computing application development solutions address, the resource-intensive
nature of our sales efforts, the length and variability of the sales cycle for our offerings, and the difficulty in making short-term
adjustments to our operating expenses. The timing of our sales is difficult to predict. The length of our sales cycle, from initial evaluation
to payment for our subscriptions and related services can vary substantially from customer to customer and could extend over a number
of years for some customers. Our sales efforts are expected to involve educating our customers about the use, technical capabilities,
and benefits of our offerings. Customers often undertake a prolonged evaluation process. In addition, the size of potential customers
may lead to longer sales cycles. We may also face unexpected deployment challenges with large organizations or more complicated deployment
of our offerings. Large organizations may demand additional features, support services, and pricing concessions or require additional
security management or control features. Some organizations may also require an on-premise solution rather than a cloud solution, which
potentially requires additional implementation time and potentially a longer sales cycle. We may spend substantial time, effort and money
on sales efforts to large organizations without any assurance that our efforts will produce any sales. As a result, it is difficult to
predict exactly when, or even if, we will make a sale to a potential customer or if we can increase sales to existing customers.
Individual sales can be part of a long sales cycle,
which impacts our ability to plan and manage cash flows and margins. These large individual sales have, in some cases, occurred in quarters
subsequent to those we anticipated, or have not occurred at all. If our sales cycle lengthens or our substantial upfront investments do
not result in sufficient revenue to justify our investments, our operating results could be adversely affected. In addition, within each
quarter, it is difficult to project which month a deal will close. Therefore, it is difficult to determine whether we are achieving our
quarterly expectations and whether we will achieve annual expectations. We may fail to budget and manage costs and operating expenses
or anticipate working capital needs. Therefore, if expectations for our business are not accurate, we may not be able to adjust our cost
structure on a timely basis, and our margins and cash flows may differ from expectations.
If we fail to respond to rapid technological changes, extend
our quantum computing application development solutions, or develop new features and functionality, our ability to remain competitive
could be impaired.
The market for our quantum computing application
development solutions is characterized by rapid technological change, particularly since quantum computing is a new and evolving industry,
including frequent new hardware and software introductions and enhancements, changing customer demands, and evolving industry standards.
The introduction of software embodying new technologies can quickly make existing software obsolete and unmarketable. Quantum computing
is inherently complex, and it can take a long time and require significant research and development expenditures to develop and test new
or enhanced methods and solutions. The success of any enhancements or improvements to our existing quantum computing application development
solutions or any new applications depends on several factors, including timely completion, competitive pricing, adequate quality testing,
integration with existing technologies, and overall market acceptance, particularly as we provide custom solutions for specific use cases.
Any failure of our quantum computing application
development solutions to operate effectively with future infrastructure platforms and technologies could impact our ability to attain
new customers and generate revenue therefrom. If we are unable to respond to these changes in a timely and cost-effective manner, our
quantum computing application development solutions may become less marketable, less competitive, or obsolete, and our business may be
adversely affected.
The introduction of new quantum computing platforms
and applications by competitors or the development of entirely new technologies to replace existing offerings could make our quantum computing
application development solutions obsolete or adversely affect our business, results of operations, and financial condition. We may experience
difficulties with software development, design, or marketing that could delay or prevent our development, introduction, or implementation
of new quantum computing application development solutions, features, or capabilities, applying our existing quantum computing application
development solutions to new use cases. Any delays could result in adverse publicity, loss of revenue or market acceptance, or claims
by customers brought against us, all of which could harm our business.
Our business could be negatively impacted by delays in development
of our software platform.
We have plans, including raising sufficient capital
and obtaining adequate staffing and other resources, that we believe if successfully executed will result in the development of and continued
improvements to our software platform on a schedule that permits the execution of our business plan in a timely manner. Any delays in
platform design and engineering work required to accomplish this could result in corresponding delays in the implementation of our business
plan in the market. We are presently unaware of any outstanding design or engineering issues that cannot be resolved in the normal course,
but the failure to complete necessary components of or improvements to its platform in a timely manner would have a serious negative impact
on the company and might cause the company to fail.
Any failure to offer high-quality support services for our customers
may harm our relationships with our customers and, consequently, our business.
Once our quantum computing application development
solutions are deployed, customers will depend on our services teams to resolve technical and operational issues relating to our quantum
computing application development solutions. Our ability to provide effective support will largely be dependent on our ability to attract,
train, and retain qualified personnel with experience in interfacing with customers. If the number of our customers grows, this will put
additional pressure on our customer services teams. We may be unable to respond quickly enough to accommodate short-term increases in
customer demand for support. We also may be unable to modify the future, scope, and delivery of our support to compete with changes in
the services provided by our competitors. Increased customer demand for support services, without corresponding revenue, could increase
costs and negatively affect our operating results. In addition, if we experience increased customer demand for support, we may face increased
costs that may harm our results of operations. If our customer base expands, we will need to hire additional support staff to deliver
and support our quantum computing application development solutions, and our business may be harmed. Our ability to attract and retain
customers is highly dependent on our business reputation and on our ability to deliver value to customers. Any failure to deliver value,
or a perception that we do not deliver value for our customers, would harm our business.
Sales to government entities and highly regulated organizations
are subject to a number of challenges and risks.
We selectively pursue U.S. government contracts
as a complementary revenue source. We may also target highly regulated organizations. Sales to such entities are subject to a number of
challenges and risks. Selling to such entities can be highly competitive, expensive, and time consuming, often requiring significant upfront
time and expense without any assurance that these efforts will generate a sale. Government contracting requirements may change and in
doing so restrict our ability to sell into the government sector. Government demand and payment for our quantum computing application
development solutions may be affected by public sector budgetary cycles and funding authorizations, with funding reductions or delays
adversely affecting public sector demand for our quantum computing application development solutions.
Further, governmental and highly regulated entities
may demand contract terms that differ from our standard arrangements and may be less favorable than terms agreed with private sector customers.
Contracts with governmental entities may also include
preferential pricing terms, including, but not limited to, “most favored customer” pricing. In the event that we are successful
in being awarded a government contract, such award may be subject to appeals, disputes, or litigation, including but not limited to bid
protests by unsuccessful bidders.
As a government contractor or subcontractor, we
will be required to comply with laws, regulations, and contractual provisions relating to the formation, administration, and performance
of government contracts, which affect how we and our partners do business with government agencies. As a result of actual or perceived
noncompliance with government contracting laws, regulations, or contractual provisions, we may be subject to non-ordinary course audits
and internal investigations which may prove costly to our business financially, divert management time, or limit our ability to continue
selling our products and services to our government customers. These laws and regulations may impose other added costs on our business,
and failure to comply with these or other applicable regulations and requirements, including non-compliance in the past, could lead to
claims for damages from our channel partners, downward contract price adjustments or refund obligations, civil or criminal penalties,
and termination of contracts and suspension or debarment from government contracting for a period of time with government agencies. Any
such damages, penalties, disruption, or limitation in our ability to do business with a government would adversely impact, and could have
a material adverse effect on, our business, results of operations, financial condition, public perception and growth prospects.
Governmental and highly regulated entities may
have statutory, contractual, or other legal rights to terminate contracts with us or our partners for convenience or for other reasons.
Any such termination may adversely affect our ability to contract with other government customers as well as our reputation, business,
financial condition, and results of operations. All these factors can add further risk to business conducted with these customers. If
sales expected from a government entity or highly regulated organization for a particular quarter are not realized in that quarter or
at all, our business, financial condition, results of operations, and growth prospects could be materially and adversely affected.
Our success could be materially affected by problems with or
defects in the Orquestra platform or our other software offerings.
In addition to issues commonly facing all providers
of commercial software, the development of our quantum computing application development solutions involves converting novel, complex
scientific algorithms into software code. We may experience unintended design and/or implementation defects or other quality issues in
our software code. We may also experience defects in the products and services of third parties on which we rely to provide our products
and services, including third-party cloud providers. Problems can be caused by a variety of factors, including premature or failed introduction
of new products, vulnerabilities or defects in proprietary and open source software, human error or misconduct, design limitations, or
denial of service or other security-related incidents. We do not have a contractual right with our public cloud providers that will compensate
us for any losses due to availability interruptions in the public cloud.
Any defects in the Orquestra platform or other
software offerings, whether caused by defective design, defective coding, or defects introduced through third-party components; any disruptions
in our ability to provide our quantum computing application development solutions, including by means of public cloud; and/or any other
quality issues with our quantum computing application development solutions could affect our business reputation and brand, could cause
us to spend material amounts to address the defects, could cause material delays in the execution of our business plan, and could have
a material adverse effect on our business opportunities, revenue, and future profitability.
The pursuit of inorganic growth opportunities could result in
harm to our business.
We may pursue growth opportunities by acquiring
complementary businesses or other assets for strategic purposes, such as companies with products and services used in, complementary to,
or overlapping with our offerings; companies with an IP portfolio that could complement ours; companies with customer lists that could
shorten the sales cycle to significant customers. The pursuit of such strategic opportunities could be both expensive and distracting,
could have a significant impact on the company’s capital structure, and even if the transaction is completed as desired the results
may not be as predicted. To the extent such opportunities may arise, there can be no assurance that the pursuit of any such opportunities
will succeed and, if they fail, they could have a material adverse effect on our business and future profitability.
Risks Related to Competition
Competitors may develop products and technologies that are superior
to our quantum computing application development solutions.
Our business plan is based on the belief that the
value of our quantum computing application development solutions will be enhanced by delivering, in a single unified software platform,
the ability to: allow deployment in any desired environment; permit the development or implementation of applications and services that
are capable of data handling tasks, including processing data in a manner calculated to maximize the performance of quantum and hybrid
computing solutions, and leveraging AI to accelerate quantum application development. While we believe our approach is differentiated,
other companies are actively developing quantum software, benchmarking, and workflow tools that may overlap with or compete against ours.
Further, a prolonged delay in re-launching material operations and commencing sales will give our competitors a timing advantage to enter
and pursue market opportunities which we may have otherwise have had an opportunity to pursue, which delay and resulting disadvantage
will continue until we can raise sufficient capital and hire the necessary personnel to pursuant our business plan.
Many of our existing and potential competitors
have, or could have, substantial competitive advantages such as:
• wider geographic presence or greater access to larger customer bases;
• greater focus in specific geographies or industries;
• lower labor and research and development costs;
• larger and more mature intellectual property portfolios; and
There can be no guarantee that a competitor will
not develop a product superior to ours or one that is perceived by the market to be superior. Nor can there be any guarantee that a combination