Item 7. Management’s Discussion and Analysis of Financial
Condition and Results of Operations
You should read the following discussion and
analysis of our financial condition and results of operations together with our consolidated financial statements and the notes thereto
included elsewhere in this Annual Report on Form 10-K. Some of the information contained in this discussion and analysis or set forth
elsewhere in this Annual Report on Form 10-K, including information with respect to our plans and strategy for our business and related
financing, includes forward-looking statements that involve risks, uncertainties and assumptions. You should read the “Cautionary
Note Regarding Forward-Looking Statements” and “Risk Factors” sections of this Annual Report on Form 10-K, which describe
factors or events that could cause our actual results to differ materially from the results described in or implied by the forward-looking
statements contained in the following discussion and analysis. For periods prior to the closing of the Merger (as defined below), the
use of “our,” “we”, the “Company” and words of similar import in this Item 7 refer to Zapata Quantum,
Inc. (“Zapata”, or “Legacy Zapata”) or Andretti Acquisition Corp. (“AAC”), as the context requires.
Cautionary Note Regarding Forward-Looking Statements
This Report contains forward-looking statements,
including statements regarding our expectations for prospective future growth, operating results and financial condition, potential future
trends and developments within our industry and the U.S. and global economies generally, plans and expectations for our future business
plan and capital raising efforts, expectations and plans with respect to our products and services including the potential market for,
timing, features, and demand for such products and services, and liquidity and sources of capital. Forward-looking statements are prefaced
by words such as “anticipate,” “expect,” “plan,” “could,” “may,” “will,”
“should,” “would,” “intend,” “seem,” “potential,” “appear,” “continue,”
“future,” believe,” “estimate,” “forecast,” “project,” and similar words. We have
based these forward-looking statements largely on our current expectations and assumptions regarding our business, the economy and other
future conditions. Because forward-looking statements relate to the future, they are subject to inherent uncertainties, risks and changes
in circumstances that are difficult to predict. We caution you, therefore, against relying on any of these forward-looking statements.
Our actual results may differ materially from
those contemplated by the forward-looking statements for a variety of reasons, including, without limitation, the possibility that estimates,
projections and assumptions on which the forward-looking statements are based prove to be incorrect, our ability to raise the necessary
capital to re-establish material operations and generate revenue and the terms and timing of any related transactions, central bank interest
rates and future interest rate changes, the risks arising from the impact of inflation, tariffs, the deterioration of the labor market
of the United States, a recession which may result on the Company’s business, prospective customers, and on the national and global
economy, our ability to attract homeowners to our products and services, the potential for regulatory changes impacting quantum computing,
artificial intelligence, data privacy and other areas that impact the Company’s business, and the ability of us and third parties
on which we depend to comply with applicable regulatory requirements, the risk that software and technology infrastructure on which we
depend fail to perform as designed or intended, and the risks and uncertainties disclosed under Item 1A – Risk Factors contained
in this Report. Any forward-looking statement made by us in this presentation speaks only as of the date on which it is made. Factors
or events that could cause our actual results to differ may emerge from time to time, and it is not possible for us to predict all of
them. We undertake no obligation to publicly update any forward-looking statement, whether as a result of new information, future developments
or otherwise, except as may be required by law.
Forward Looking Statements
This Annual Report on Form 10-K contains forward-looking
statements. Statements regarding the potential combination and expectations regarding the combined business are “forward looking
statements.” In addition, words such as “estimates,” “expects,” “anticipates,” “assumes,”
“suggests,” “projects,” “forecasts,” “seeks,” “plans,” “possible,”
“potential,” “aims,” “intends,” “believes,” “seeks,” “may,” “might,”
“will,” “would,” “should,” “can”, “could,” “future,” “propose,”
“target,” “goal,” “objective,” “outlook” and variations of these words or similar expressions
(or the negative versions of such words or expressions) are intended to identify forward-looking statements. Generally, statements that
are not historical facts, including statements concerning possible or assumed future actions, business strategies, events or results of
operations, and any statements that refer to projections, forecasts or other characterizations of future events or circumstances, including
any underlying assumptions, are forward- looking statements. These forward-looking statements are not guarantees of future performance,
conditions or results, and involve a number of known and unknown risks, uncertainties, assumptions and other important factors, many of
which are outside the control of the parties, that could cause actual results or outcomes to differ materially from those discussed in
the forward-looking statements.
The forward-looking statements contained in this
Annual Report on Form 10-K are based on our current expectations and beliefs concerning future developments and their potential effects
on us. There can be no assurance that future developments affecting us will be those that we have anticipated. These forward-looking statements
involve a number of risks, uncertainties (some of which are beyond our control) or other assumptions that may cause actual results or
performance to be materially different from those expressed or implied by these forward-looking statements. These risks and uncertainties
include, but are not limited to, those factors described under the heading “Risk Factors” in this report. Should one or more
of these risks or uncertainties materialize, or should any of our assumptions prove incorrect, actual results may vary in material respects
from those projected in these forward-looking statements.
We undertake no obligation to update or revise
any forward-looking statements, whether as a result of new information, future events or otherwise, except as may be required under applicable
securities laws.
Overview
Zapata Quantum, Inc., formerly known as Zapata
Computing Holdings Inc., is a leading pure-play hardware-agnostic quantum software company. Following a strategic realignment in 2025,
the Company will deliver subscription-based solutions to efficiently deploy and accelerate the development of quantum and hybrid quantum-classical
computing applications. Founded in 2017 by researchers from a Harvard University Quantum Computing Lab, Zapata has built one of the industry’s
most robust intellectual property portfolios in quantum and hybrid quantum-classical computing and algorithmic methods, with over 60 patents,
granted and pending, developed over eight years.
Recent Developments
2025 Capital Raising and Restructuring Efforts
In late 2024 the Company voluntarily elected to
temporarily suspend its operations due to its limited capital resources and inability to access adequate liquidity to continue to fund
its operations and meet its outstanding debt obligations. In June 2025, the Company commenced debt restructuring and capital raising transactions
and the reinstatement of operations by (1) entering into exchange agreements with unsecured creditors pursuant to which such creditors
agreed to exchange outstanding obligations payable to them for common stock and certain rights related thereto, and (2) the Company sold
convertible notes and warrants for gross proceeds of $3 million. The Company has since been continuing efforts to negotiate and restructure
outstanding obligations and raise capital. In the furtherance of recommencing operations, the Company has also entered into advisory agreements
with third parties and agreed to compensate such parties in the form of equity and/or cash compensation. See Note 20, Subsequent Events
in the notes to the consolidated financial statements contained in this Annual Report.
Merger with Andretti Acquisition Corp. (“AAC”)
On March 28, 2024, we completed our planned business
combination with AAC, pursuant to which, among other things, Legacy Zapata became a wholly owned subsidiary of AAC (the “Merger”).
Immediately prior to the Merger, AAC filed an application for deregistration with the Cayman Islands Registrar of Companies, together
with the necessary accompanying documents, and filed a certificate of incorporation and a certificate of corporate domestication with
the Secretary of State of the State of Delaware, under which AAC was domesticated and continues as a Delaware corporation (the “Domestication”),
changing its name to Zapata Computing Holdings Inc. At the effective time of the Domestication, existing holders of ordinary shares of
AAC received 7,596,206 shares of our common stock in exchange for their Class A and Class B ordinary shares held immediately prior to
the Domestication.
Upon the closing of the Merger, holders of shares
of Legacy Zapata common stock and Legacy Zapata Convertible Preferred Stock received an aggregate of 17,696,425 shares of our common stock,
and holders of Legacy Zapata options received options to purchase an aggregate of 3,016,409 shares of our common stock, calculated in
accordance with the Business Combination Agreement by and among AAC, Legacy Zapata and Tigre Merger Sub, Inc., entered into on September
6, 2023 (the Business Combination Agreement”), by multiplying each share of Convertible Preferred Stock, Legacy Zapata common stock
(including shares underlying options) by 0.9141.
For accounting purposes, the Merger was accounted
for as a reverse recapitalization whereby Legacy Zapata was treated as the accounting acquirer and AAC was treated as the acquired company.
On April 1, 2024, in connection with the consummation of the Merger, our common stock was listed on the Nasdaq Global Market and our warrants
(the “Warrants”) were listed on the Nasdaq Capital Market under the new trading symbols “ZPTA” and “ZPTAW,”
respectively. Costs paid by us that were directly attributable to the Merger were $7.1 million and were treated as issuance costs and
netted against additional paid-in-capital in our consolidated balance sheets. Additionally, upon the consummation of the Merger, the holders
of certain outstanding senior secured promissory notes issued by Legacy Zapata pursuant to a Senior Secured Note Purchase Agreement (the
“Senior Secured Notes”) elected to convert the principal of their notes and accrued interest thereon into 3,257,876 shares
of our common stock (856,202 shares to related parties) in accordance with their terms, at a conversion price of $4.50 per share. Aggregate
principal and accrued interest of $2.2 million on the Senior Secured Notes remains outstanding as of December 31, 2024.
In connection with the closing of the Merger,
the following events occurred as discussed in more detail below:
Unvested Shares
Concurrently with the execution of the Business
Combination Agreement, AAC, Legacy Zapata, the Andretti Sponsor LLC (the “Sponsor”), Sol Verano Blocker 1 LLC (the “Sponsor
Co-Investor”) and certain key stockholders of the Sponsor entered into a sponsor support agreement. The Sponsor, the Sponsor Co-Investor,
key stockholders of the Sponsors and directors owned an aggregate of 5,750,000 Class B ordinary shares of AAC (the “Sponsor Shares”),
of which up to 1,423,500 Sponsor Shares were subject to certain vesting and forfeiture provisions as described in the sponsor support
agreement. At the closing of the Merger, 1,129,630 Sponsor Shares were determined to be unvested and are subject to forfeiture (the “Unvested
Shares”) (see Note 10 in our consolidated financial statements included elsewhere in this Annual Report).
Forward Purchase Agreement
On March 25, 2024, we entered into a Confirmation
of an OTC Equity Prepaid Forward Transaction (the “Forward Purchase Agreement”) with Sandia Investment Management LP, acting
on behalf of certain funds (collectively, “Sandia” or the “Seller”), pursuant to which Sandia purchased, prior
to the closing of the Merger, 1,000,000 shares of AAC’s Class A Ordinary Shares from third parties through a broker in the open
market (the “Recycled Shares”) and, concurrently with the closing of the Merger, 500,000 shares of our common stock at a purchase
price of $10.99 per share (the “Additional Shares”).
In April 2024, Sandia exercised their optional
early termination rights under the Forward Purchase Agreement, pursuant to which 250,000 shares were terminated and we received payments
totaling $2.5 million under the early termination obligation prescribed in the Forward Purchase Agreement.
On October 8, 2024, we received notice from Sandia
accelerating the Valuation Date to October 8, 2024. As a result, we became obligated to pay Sandia $2.4 million in cash or shares. In
June 2025, we settled our obligations under the Forward Purchase Agreement through the issuance of 6,591,000 shares of common stock to
Sandia. For additional information, refer to Note 7 in the consolidated financial statements included elsewhere in this Annual Report.
Advisory Agreements
On July 4, 2023, we entered into an engagement
letter with a third party, pursuant to which the third party acted as a capital markets advisor to AAC in connection with the Merger.
AAC agreed to pay the third party a fee of (i) $0.5 million in cash payable upon the closing of the Merger, plus (ii) $1.0 million in
shares of our common stock, payable 180 days after the closing of the Merger plus (iii) $1.0 million payable in either cash or shares
of our common stock, payable 270 calendar days following the completion of the Merger. On March 25, 2024, AAC and the third party entered
into an amendment to the engagement letter to settle the fee arrangement, such that there is no remaining payment obligation following
the Merger.
On September 13, 2023, we entered into an agreement
with an additional third party for advisory services to be provided in connection with the Merger. In March 2024, the payment terms of
the agreement were amended to provide for a fee of $1.3 million to be paid by the issuance of a Senior Secured Note with a principal amount
of $1.0 million and the remaining $0.3 million in six monthly installments in cash of $42 thousand per month commencing on May 15, 2024.
During the year ended December 31, 2024, we paid $0.2 million to the third party.
The Senior Secured Note issued to this third party
was a modified award issued subsequent to the initial date of grant. The incremental fair value of the Senior Secured Note immediately
preceding the award modification was recorded as a loss on issuance of senior secured notes within total other expense, net in the consolidated
statements of operations and comprehensive loss. The Senior Secured Note issued to the third party has the same terms as the Senior Secured
Notes issued to other noteholders. The third party did not convert the Senior Secured Note into shares of our common stock upon the Closing
of the Merger, and the Senior Secured Note remained outstanding at December 31, 2024.
On February 9, 2024, we entered into a capital
markets advisory agreement with a third party pursuant to which we agreed to pay the third party i) $0.3 million for capital markets advisory
services provided related to the Merger, and ii) $0.2 million for services provided related to the benefit of the holders of AAC and Legacy
Zapata securities. On March 27, 2024, we agreed to issue to the third party a Senior Secured Note in the principal aggregate amount of
$0.2 million immediately prior to the closing of the Merger in exchange for additional capital markets advisory services provided in connection
with the Merger. This Senior Secured Note was then converted into 33,333 shares of our common stock at the closing of the Merger. We recorded
a reduction of $0.5 million in additional paid-in capital on the consolidated balance sheet as a transaction cost in connection with the
capital markets advisory services provided. During the year ended December 31, 2024, in connection with the 33,333 shares issued for the
additional services, we recognized $0.2 million in general and administrative expense in the consolidated statements of operations and
comprehensive loss.
On February 9, 2024, we entered into an engagement
letter with an additional third party, as amended on February 27, 2024, pursuant to which the third party acted as a capital markets advisor
to us in connection with the Merger. We agreed to pay the third party a non-refundable cash fee of $1.8 million, payable by us in monthly
payments of $0.1 million commencing on the earlier of May 31, 2024 or the effectiveness of the Lincoln Park Registration Statement, until
the full advisory fee of $1.8 million has been paid (the “Term”), with $0.3 million of such payment waivable if we voluntarily
prepay $1.5 million to the third party prior to December 31, 2024. The Lincoln Park Registration Statement was declared effective on April
18, 2024. Notwithstanding the foregoing, we will pay the full $1.8 million upon consummation of a financing transaction with proceeds
of $15.0 million or more (not including sales under the Purchase Agreement or similar financing) during the Term. Upon the closing of
the Merger, we recognized $1.8 million as transaction costs, which we recorded as a reduction in additional paid-in capital. We also recorded
an obligation of $1.2 million to the third party in accrued expenses and other current liabilities within the consolidated balance sheet
as of December 31, 2024. During the year ended December 31, 2024, we paid $0.6 million to the third party.
In March 2024, Legacy Zapata entered into a placement
agent agreement to retain an additional third party for the purpose of raising up to $10.0 million, for a term of 60 days from the execution
of the placement agent agreement. Legacy Zapata agreed to pay a cash fee equal to 7.0% of the gross amount of cash proceeds (the “Financing
Proceeds”) received by Legacy Zapata from investors introduced by the third party directly to Legacy Zapata. The cash fee is payable
within 7 business days following Legacy Zapata’s receipt of proceeds from any investors introduced by the third party. In addition,
Legacy Zapata agreed to issue a number of shares of common stock equal to 3.0% of the Financing Proceeds divided by $4.50 upon the closing
of the Merger. In connection with the placement agent agreement, we made a cash payment of $0.1 million and issued 11,666 shares of common
stock upon the closing of the Merger.
Marketing Services Agreement
On February 9, 2024, prior to the Merger, AAC
entered into a marketing services agreement with a third party to promote investor engagement, pursuant to which we agreed to pay the
third party in shares of our common stock with a value of $0.3 million upon the closing of the Merger. In connection with our closing
of the Merger, we issued 30,706 shares of our common stock to the third party.
Enterprise Solution and Sponsorship Agreements with Andretti
Global
One of AAC’s affiliates, Andretti Autosport
Holding Company, LLC (f/k/a Andretti Autosport Holding Company, Inc.) (“Andretti Global”) has preexisting contractual relationships
with the Company. In February 2022, we entered into i) an enterprise solution subscription agreement and ii) a sponsorship agreement with
Andretti Global, both of which expire on December 31, 2024. During the years ended December 31, 2024 and 2023, we recorded $1.3 million
and $1.7 million in revenue, respectively, related to the enterprise solution subscription agreement. We also entered into a managed service
agreement with Andretti Global in October 2022, which expired on January 3, 2024. For the years ended December 31, 2024 and 2023, we recorded
$0 and $0.2 million, respectively, in revenue related to the managed service agreement. For the years ended December 31, 2024 and 2023,
we recorded $2.8 million and $2.8 million in sales and marketing expense related to the sponsorship agreement. The remaining committed
future payments under the sponsorship agreement at December 31, 2024 include $5.5 million in accounts payable at December 31, 2024. We
considered that these agreements were executed prior to the Business Combination Agreement and were not executed in contemplation of the
business combination. Accordingly, Andretti Global was not considered a related party prior to the consummation of the Merger with AAC.
On March 28, 2024, we entered into a sponsorship
agreement with Andretti Autosport 1, LLC, an affiliate of Andretti Global. The agreement expired on December 31, 2024. We are responsible
for payments under the sponsorship agreement totaling $1.0 million.
On March 28, 2024, we entered into an Order Form
under the February 2022 enterprise solution subscription agreement with Andretti Global. Pursuant to the agreement, Andretti Global agreed
to pay us a total of $1.0 million, subject to our payment of the sponsorship fee to Andretti Autosport 1, LLC. Following the Operational
Cessation, the agreement was terminated, and no payments were made.
Purchase Agreements with Lincoln Park
On December 19, 2023, we entered into a purchase
agreement (the “Purchase Agreement”) with Lincoln Park Capital Fund, LLC (“Lincoln Park”), pursuant to which Lincoln
Park agreed to purchase from us, at our option, an aggregate of up to $75.0 million of our common stock from time to time over a 36-month
period following the Commencement Date, subject to certain limitations contained in the Purchase Agreement including, but not limited
to, the filing and effectiveness of a registration statement (the “Lincoln Park Registration Statement”). In accordance with
the Purchase Agreement, we were required to pay Lincoln Park a commitment fee of $1.7 million (the “Commitment Fee”) as follows:
(i) on the business day prior to the filing of the Lincoln Park Registration Statement, $0.6 million in shares of our common stock and
(ii) we could elect to pay the remaining $1.1 million amount of the Commitment Fee in either cash or shares of our common stock, with
any shares issuable on the business day prior to the filing of the Lincoln Park Registration Statement and any cash due within 90 days
of the closing of the Merger. Shares issued as payment for the Commitment Fee are referred to herein as the “Commitment Shares.”
On April 12, 2024, we filed the Lincoln Park Registration
Statement, which covers the shares of our common stock that are issuable to Lincoln Park under the Purchase Agreement (including the Commitment
Shares). The Lincoln Park Registration Statement registered for resale up to 13,000,000 shares of common stock (inclusive of the Commitment
Shares) that have been or may be issued to Lincoln Park pursuant to the Purchase Agreement. On April 11, 2024, we issued 712,025 shares
of common stock to Lincoln Park as Commitment Shares at a price of $2.37 per share. As of December 31, 2024, we issued 10,378,780 shares
of common stock to Lincoln Park for aggregate proceeds of $7.7 million (excluding the Commitment Fee shares)
On August 13, 2024, we entered into a purchase
agreement (the “2024 Purchase Agreement”) with Lincoln Park, pursuant to which Lincoln Park agreed to purchase from us, at
our option, an aggregate of up to $10.0 million of shares of our common stock from time to time over a 24-month period upon the satisfaction
of certain conditions contained in the 2024 Purchase Agreement including, but not limited to, the filing and effectiveness of a registration
statement covering shares of common stock that are issuable to Lincoln Park under the 2024 Purchase Agreement. In accordance with the
2024 Purchase Agreement, we issued 500,000 shares of common stock to Lincoln Park as a Commitment Fee. In connection with the 2024 Purchase
Agreement, we also entered into a Registration Rights Agreement (the “2024 Registration Rights Agreement”) with Lincoln Park,
pursuant to which we will file a registration statement covering the shares of common stock that are issuable to Lincoln Park under the
2024 Purchase Agreement with the SEC within 15 business days following the date that the 2024 Registration Rights Agreement was executed.
We filed the Lincoln Park Registration Statement on September 3, 2024, which was declared effective on September 9, 2024. As of December
31, 2024, the we issued 2,700,000 shares of common stock to Lincoln Park under 2024 Purchase Agreement for aggregate proceeds of $0.9
million (excluding the Commitment Fee shares). In connection with the Operational Cessation described below, the Registration Statement
(which is a condition to transactions under the Purchase Agreement) is no longer effective.
2025 Capital Raising and Restructuring Efforts
In June 2025, the Company commenced debt restructuring
and capital raising transactions and the reinstatement of operations by (1) entering into exchange agreements with unsecured creditors
pursuant to which such creditors agreed to exchange outstanding obligations payable to them for common stock and certain rights related
thereto, and (2) the Company sold convertible notes and warrants for gross proceeds of $3 million. The Company has since been continuing
efforts to negotiate and restructure outstanding obligations and raise capital. In the furtherance of recommencing operations, the Company
has also entered into advisory agreements with third parties and agreed to compensate such parties in the form of equity and/or cash compensation.
See Note 20, Subsequent Events in the notes to the consolidated financial statements contained in this Annual Report.
Operational Cessation
On October 7, 2024, our board of directors approved
the cessation of our operations (the “Operational Cessation”) due to insufficient financial resources to continue funding
ongoing operations and meet existing obligations. In connection with the Operational Cessation, our board of directors approved the termination
of all our employees, except for a small number of employees retained to administer termination business activities, including Sumit Kapur,
our Chief Financial Officer. All such employees were terminated effective October 9, 2024. Following the Operational Cessation, we maintained
minimal day-to-day operations.
On October 25, 2024, trading of our common stock
and warrants was suspended and removed from the listing and registration on Nasdaq.
Operations Prior to Operational Cessation
Prior to the Operational Cessation, we offered
specialized generative AI solutions which used techniques inspired by quantum physics and were tailored to solving complex industrial
problems. These solutions combined software and related services and were subscription based. Our approach utilized mathematical techniques
from the quantum physics community to make computation more efficient and to create models that have other advantages over conventional
methods. Our primary target customers were enterprise organizations, which generally consist of large businesses that have high revenue,
the size and resources to dominate a specific market and a significant number of employees.
We had a suite of three subscription-based specialized
generative AI offerings that included software and software tools supported by services. These offerings consist of:
Restructuring Efforts
As noted above, since the Operational Cessation,
we have had minimal day-to-day operations. Management has since concentrated its efforts on restructuring activities aimed at restarting
certain aspects of its core business, including capital-raising activities to improve our capital structure and to support the anticipated
recommencement of business operations. For additional information regarding these restructuring activities, refer to Note 20 in the consolidated
financial statements included elsewhere in this Annual Report.
Since our inception through December 31, 2024,
we have financed our operations primarily through sales of our convertible preferred stock, par value $0.0001 per share (the “Convertible
Preferred Stock”) and common stock and with issuances of Senior Notes and Senior Secured Notes (each as defined below and, collectively,
the “Convertible Notes”). For the year ended December 31, 2024 we have incurred net losses of $38.1 million. As of December
31, 2024 and 2023, we had an accumulated deficit of $127.7 million and $89.5 million, respectively.
Our ability to continue as a going concern is
dependent upon our ability to raise capital through future equity or debt financing and generate profits from our operations. We are pursuing
all available options for funding, which include seeking public or private investments and funding through the sale of equity and debt
securities.
In 2025, we raised an aggregate of $3.0 million
through the issuance of Convertible Notes and $1.5 million through the sale of Series A Convertible Preferred Stock. The proceeds from
the Convertible Notes were used to repay one of our outstanding Senior Secured Notes. In addition, in 2025, we entered into conversion
agreements with certain creditors to settle approximately $9.2 million of liabilities through the issuance of shares of our common stock.
We also settled our obligation of $2.4 million under the Forward Purchase Agreement through the issuance of shares of the Company’s
common stock. These activities were undertaken as part of our ongoing efforts to improve the Company’s capital structure and provide
the liquidity necessary to support restarting certain aspects of our core business.
Although we believe that we will be able to continue
to raise funds through the sale of our securities to provide the additional funding needed to meet our obligations, the restructuring
activities aimed at restarting certain aspects of our core business will require substantial additional funding and there is no assurance
that we will be able to continue raising the additional capital necessary to continue operations and execute on our business plan.
These factors raise substantial doubt about our
ability to continue as a going concern.
The accompanying consolidated financial statements
have been prepared on a going concern basis, which contemplates the realization of assets and satisfaction of liabilities in the ordinary
course of business. The consolidated financial statements do not include any adjustments relating to the recoverability and classification
of recorded asset amounts or the amounts and classification of liabilities that might be necessary should we be unable to continue as
a going concern. We have evaluated whether there are certain conditions and events, considered in the aggregate, that raise substantial
doubt about our ability to continue as a going concern within one year after the date that the consolidated financial statements are issued.
We have incurred significant losses and negative cash flows from operations since the inception of Legacy Zapata in November 2017 and
expects to continue to incur losses and negative cash flows for the foreseeable future as we expand our penetration of the quantum computing
application development solutions market.
See “Liquidity and Capital Resources”
below for additional information.
Components of Our Results of Operations
Revenue
Our revenue is generated primarily from sales
of subscriptions to our software platform and related services. Subscriptions to our software platform are offered as stand-ready access
to our cloud environment on an annual or multi-year basis. We may also offer consulting services in the form of stand-ready scientific
and software engineering services, which are typically only offered in conjunction with our software platform. We evaluate our contracts
at inception to determine if the terms represent a single, combined performance obligation or multiple performance obligations.
Under our consulting contracts, our deliverables
may include integrated quantum, classical or hybrid quantum-classical computing solutions to our customers or to provide research and
development services regarding the potential benefits of these solutions to use cases specified by our customer. Our subscription-based
solutions consist of our commitment to provide access to our hosted software platform throughout the contract term along with stand-ready
scientific and software engineering services.
Revenue from subscriptions to our software platform
to date have only been sold as access to the platform in our hosted environment and are therefore recognized over the contract term on
a ratable basis, as the commitment represents a stand-ready performance obligation.
Revenue from consulting services is generally
recognized over the contract term as performance is completed on the performance obligations identified. Revenue from stand-ready scientific
and engineering services are recognized over the contract term on a ratable basis, as the obligation represents a stand-ready obligation.
From time to time, we may enter into arrangements
to build license applications that can be used in conjunction with our software platform. To date, the license application built has been
delivered as a perpetual license with associated post-contract support. We recognize the license at the time of deployment, and the related
post-contract support over the contracted service period on a ratable basis, as it is provided as a stand-ready service.
Our revenue recognition policies are discussed
below under the heading “Critical Accounting Policies and Significant Judgments and Estimates” and Note 2, “Summary
of Significant Accounting Policies” to our consolidated financial statements, included elsewhere in this Annual Report.
Cost of Revenue
Cost of revenue includes expenses related to supporting
product offerings. Our primary cost of revenue is personnel costs, including salaries and other personnel-related expense. Cost of revenue
also includes costs relating to our information technology and systems, including depreciation, network costs, data center maintenance,
database management and data processing costs. We allocate these overhead expenses based on headcount, and thus are reflected in cost
of revenue and each operating expense category.
Sales and Marketing
Sales and marketing expenses consist primarily
of personnel-related costs, including salaries and wages, benefits, commissions, bonuses and stock-based compensation expense for our
employees engaged in sales and sales support, business development, marketing, corporate partnerships, and customer service functions.
Sales and marketing expenses also include costs incurred for market research, tradeshows, branding, marketing, promotional expense, and
public relations, as well as facilities and other supporting overhead costs, including depreciation and amortization. Sales and marketing
expenses are primarily driven by investments in the growth of our business. We expect sales and marketing expenses, expressed as a percentage
of revenue, to vary from period to period for the foreseeable future.
Advertising expenses, which are included in sales
and marketing expense, primarily include promotional expenditures, and are expensed as incurred. The amounts incurred for advertising
expenses for the years ended December 31, 2024 and 2023 were $3.8 million and $2.8 million, respectively.
Research and Development
Research and development expenses consist primarily
of personnel-related costs, including salaries and wages, benefits, bonuses, and stock-based compensation expense for our scientists,
engineers and other employees engaged in the research and development of our products. In addition, research and development expenses
include third party software subscription costs, facilities and other supporting overhead costs, including depreciation and amortization.
Research and development costs are expensed as incurred.
General and Administrative Expenses
General and administrative expenses consist primarily
of personnel-related costs, including salaries and wages, bonuses, benefits, and stock-based compensation expense for our finance, legal,
information technology, human resources, and other administrative personnel. General and administrative expenses also include facilities
and supporting overhead costs, including depreciation and amortization, and external professional services.
Other Expense, Net
Other expense, net consists primarily of fair
value adjustments related to our Senior Secured Notes and derivative contract in connection with our Forward Purchase Agreement, loss
associated with amendments to capital markets advisory agreements, interest income, interest expense and foreign exchange gains and losses
from our international operations.
Income Taxes
For the years ended December 31, 2024 and 2023,
we recorded an income tax benefit and provision of $20 thousand and $20 thousand, respectively. These are related to income taxes from
our foreign operations with pre-tax income generated from intercompany activities. We recorded a full valuation allowance of our net deferred
tax asset position as of December 31, 2024 as we believe it was more likely than not that we would not be able to utilize our deferred
tax assets.
Results of Operations
Comparison of the Years Ended December 31, 2024 and 2023
The following table summarizes our results of
operations for the years ended December 31, 2024 and 2023:
Year Ended December 31,
(in thousands)
Operating expenses:
Other income (expense):
Interest expense (962 ) — (962 ) —
Extinguishment of senior notes — (6,864 )
Other (expense) income, net (1,903 ) 37 (1,940 ) NM **
Provision for income taxes (20 ) (20 ) — —
** Not meaningful
Revenue
Year Ended December 31,
(in thousands)
Revenue was $3.9 million for the year ended December
31, 2024, as compared to $5.7 million for the year ended December 31, 2023. The decrease of $1.8 million was primarily attributable to
the Operational Cessation and reductions associated with the completion of legacy contracts partially offset by increases from newly initiated
projects in 2024.
Cost of Revenue
Year Ended December 31,
(in thousands)
Cost of revenue was $3.2 million for the year
ended December 31, 2024, as compared to $4.6 million for the year ended December 31, 2023. The decrease of $1.4 million was primarily
attributable to the Operational Cessation and reductions associated with the completion of legacy contracts partially offset by increases
from newly initiated projects in 2024.
Operating Expenses
Sales and Marketing Expenses
Year Ended December 31,
(in thousands)
Sales and marketing expense was $7.1 million for
the year ended December 31, 2024, as compared to $5.9 million for the year ended December 31, 2023. The increase of $1.2 million was primarily
driven by a $1.0 million increase in costs related to a sponsorship agreement with Andretti Autosport 1, LLC, and a $0.2 million increase
in outbound marketing during 2024.
Research and Development Expenses
Year Ended December 31,
(in thousands)
Research and development expense was $4.4 million
for the year ended December 31, 2024, as compared to $5.9 million for the year ended December 31, 2023. The decrease of $1.5 million was
primarily driven by a decrease of $1.1 million in personnel costs related to research and development headcount reductions and $0.8 million
related to the Operational Cessation, partially offset by a $0.4 million increase in hosting charges incurred as a result of a collaborative
research agreement that commenced in 2024.
General and Administrative Expenses
Year Ended December 31,
(in thousands)
General and administrative expenses were $12.1
million for the year ended December 31, 2024, compared to $7.4 million for the year ended December 31, 2023. The increase of $4.7 million
was primarily attributable to costs associated with our transition from a private to a public entity. This includes a $2.6 million increase
in professional services, a $0.5 million increase in compensation to our board of directors, a $0.8 million increase in directors and
officers insurance premiums, and a $0.9 million of costs incurred related to the search and replacement of our general counsel and Chief
Financial Officer, and the hiring of our Chief Product Officer.
Other Expense, Net
Year Ended December 31,
(in thousands)
We recorded other expense, net of $15.1 million
for the year ended December 31, 2024, compared to $11.6 million for the year ended December 31, 2023. The increase in other expense, net
of $3.5 million resulted primarily from the loss on issuance of Senior Secured Notes of $9.8 million, a $4.9 million loss on issuance
of Forward Purchase Agreement, an increase of $1.8 million in transaction costs incurred related to the Lincoln Park Purchase Agreement,
and a $1.0 million increase in interest expense in connection with our Senior Secured Notes. These increases were partially offset from
the conversion of Senior Notes to Senior Secured Notes on December 22, 2023, which resulted in no income or loss related to the remeasurement
of the notes to fair value during 2024 compared to a $4.8 million loss on remeasurement of the notes to fair value during 2023, a $6.9
million loss on extinguishment of Senior Notes during 2023, and a $2.5 million change in fair value of the forward purchase agreement
derivative liability.
Provision for income taxes
The provision for income taxes was not material
during the year ended December 31, 2024 and 2023 and was related to our foreign operations.
Liquidity, Going Concern and Capital Resources
Since our inception, we have financed our operations
primarily with proceeds from sales of Convertible Preferred Stock and common stock and the issuance of Convertible Notes. As of December
31, 2024, we had cash and cash equivalents of $0.4 million, excluding our restricted cash. Since our inception through December 31, 2024,
we have sold 14,222,580 shares of our Convertible Preferred Stock for aggregate net proceeds of $64.7 million, received $14.5 million
from the issuance of Senior Notes and Senior Secured Notes and $8.6 million in proceeds under an equity line of credit. Our principal
use of cash is to fund our operations and platform development to support our growth.
As of November 30, 2025, we had approximately
$2,1 million in cash. We do not have sufficient capital to meet our working capital needs for the 12 months following the date we file
this Report.
Senior Secured Notes
In December 2023, prior to the Merger, we entered
into a Senior Secured Note Purchase Agreement, pursuant to which we agreed to issue and sell up to $14.4 million in aggregate principal
amount of Senior Secured Notes and offered to exchange our outstanding Senior Notes for Senior Secured Notes. All previously issued Senior
Notes were canceled in exchange for Senior Secured Notes with a principal amount equal to the principal amount of the Senior Notes of
$5.6 million plus accrued and unpaid interest of $0.6 million, through the date immediately prior to the exchange. We received gross proceeds
in cash of $8.9 million from the issuance of Senior Secured Notes, excluding funds received upon the issuance of Senior Notes. In addition,
we issued $1.1 million in aggregate principal amount of Senior Secured Notes to third party advisors in lieu of cash payment for services
related to the Merger.
The Senior Secured Notes bear interest at the
compound rate of 15% per annum and are convertible at the option of each noteholder in connection with the Merger at a conversion price
of (i) $4.50 per share at the closing of the Merger or (ii) $8.50 per share at any time after the closing of the Merger. The outstanding
principal amount of the Senior Secured Notes and all accrued but unpaid interest will be due and payable at the maturity date, December
15, 2026, unless otherwise converted. Upon the closing of the Merger, a portion of the aggregate outstanding Senior Secured Notes with
an aggregate principal amount of $14.2 million and associated accrued interest of $0.5 million were converted into shares of our common
stock and Senior Secured Notes with aggregate principal and accrued interest of $2.2 million remain outstanding as of December 31, 2024.
While any Senior Secured Notes are outstanding, we cannot incur additional indebtedness for borrowed funds, except additional Senior Secured
Notes, substantially similar notes or other debt instruments that are pari passu with or subordinate to the Senior Secured Notes.
Notes Payable – Related Parties
To finance transaction costs in connection with
the Merger, the sponsor of AAC and certain of AAC’s officers and directors made working capital loans (the “Notes Payable
– Related Party”) to AAC prior to the closing of the Merger. The Notes Payable – Related Party would either be repaid
upon the consummation of the Merger, without interest, or at AAC’s discretion, up to $1.5 million of such Notes Payable –
Related Party could be converted into Private Placement Warrants at a price of $1.00 per warrant on the date of the Merger (see Note 11
to our consolidated financial statements, included elsewhere in this Annual Report).
On March 28, 2024, the terms of the Notes Payable
– Related Party were amended, pursuant to which the outstanding principal balance plus the accrued interest of $2.6 million, which
was also due per its terms at the closing of the Merger was deferred and became due in monthly installments (including interest accruing
from the closing of the Merger through the payment date) for twelve months thereafter beginning thirty days following the effectiveness
of the Lincoln Park Registration Statement. The Lincoln Park Registration Statement was declared effective on April 18, 2024. Upon the
closing of the Merger, none of the note holders elected to exercise their option of converting their respective loans into warrants. The
Notes Payable – Related Party bear interest at a rate of 4.5% per annum. As of December 31, 2024, the outstanding balance of the
Notes Payable – Related Party was $1.9 million within our consolidated balance sheet.
Lincoln Park Purchase Agreement
On December 19, 2023, prior to the Merger, we
entered into a Purchase Agreement with Lincoln Park Capital Fund, LLC (“Lincoln Park”) pursuant to which Lincoln Park agreed
to purchase from us, an aggregate of up to $75.0 million of common stock from time to time over a 36-month period following the closing
of the Merger. In addition, we paid Lincoln Park a Commitment Fee through the issuance of 712,025 shares of common stock. In connection
with the Purchase Agreement, we also entered into a Registration Rights Agreement with Lincoln Park, pursuant to which we are obligated
to file the Lincoln Park Registration Statement that covers the shares of common stock that are issuable to Lincoln Park under the Purchase
Agreement (including the Commitment Shares) with the SEC within 45 days following the closing of the Merger. We filed the Lincoln Park
Registration Statement on April 12, 2024.
On August 13, 2024, we entered into the 2024 Purchase
Agreement with Lincoln Park pursuant to which Lincoln Park agreed to purchase from us, an aggregate of up to $10.0 million of shares of
common stock from time to time over a 24-month period upon the satisfaction of certain conditions contained in the 2024 Purchase Agreement
including, but not limited to, the filing and effectiveness of a registration statement covering shares of common stock that are issuable
to Lincoln Park under the 2024 Purchase Agreement. In accordance with the 2024 Purchase Agreement, we issued 500,000 shares of common
stock to Lincoln Park as a commitment fee. In connection with the 2024 Purchase Agreement, we also entered into the 2024 Registration
Rights Agreement with Lincoln Park, pursuant to which we will file a registration statement covering the shares of common stock that are
issuable to Lincoln Park under the 2024 Purchase Agreement with the SEC within 15 business days following the date that the 2024 Registration
Rights Agreement was executed. We filed the Lincoln Park Registration Statement on September 3, 2024, which was declared effective on
September 9, 2024. In connection with the Operational Cessation described above, the Registration Statement is no longer effective (which
is a condition to transactions under the Purchase Agreement).
See Recent Developments above for additional detail
on Lincoln Park Purchase Agreement.
Forward Purchase Agreement
On March 25, 2024, we entered into the Forward
Purchase Agreement with Sandia, pursuant to which Sandia purchased, from the open market, 1,000,000 Recycled Shares and 500,000 Additional
Shares, which represents the maximum number of shares subject to purchase under the Forward Purchase Agreement, subject to adjustment
as described below (the “Maximum Number of Shares”). The number of shares subject to the Forward Purchase Agreement (the “Number
of Shares”) is subject to reduction following a termination of the Forward Purchase Agreement with respect to such shares.
Pursuant to the Forward Purchase Agreement, at
the closing of the Merger, we prepaid to Sandia (the “Prepayment”), with respect to the Recycled Shares, with proceeds from
the trust account, a cash amount equal to the (x) product of the number of Recycled Shares and (y) $10.99 per share, totaling $11.0 million
which was paid at the closing of the Merger. With respect to the Additional Shares, a per share amount equal to $10.99 per share was netted
against the proceeds from the Additional Shares received from Sandia, resulting in no cash received or paid for the share issuance.
The reset price (the “Reset Price”)
was initially $10.00 per share and will be subject to reset on a monthly basis (each a “Reset Date”), with the first such
Reset Date occurring 180 days after the closing date of the Merger, to be greater of (a) $4.50 and (b) the 30-day volume weighted average
price of shares of our common stock immediately preceding such Reset Date. Except as described below, the Reset Price will be reduced
immediately to any lower price at which we close any agreement to sell or grants any right to reprice, or otherwise disposes of or issues
(or announces any offer, sale, grant or any option to purchase or other disposition of) any shares of our common stock or securities or
any of our subsidiaries convertible, exercisable or exchangeable into, or otherwise entitles the holder thereof to receive, shares of
our common stock or other securities (a “Dilutive Offering and, such reset, a Dilutive Offering Reset”).
In the event of a Dilutive Offering Reset, the
Maximum Number of Shares will be increased to an amount equal to the quotient of (i) 1,500,000 divided by (ii) the quotient of (a) the
price of such Dilutive Offering divided by (b) $10.00. In such event, Sandia has the right to purchase more Additional Shares, up to the
Maximum Number of Shares, for which we will be required to provide a cash prepayment to Sandia netted against the purchase price for such
shares, and such Additional Shares will be subject to the terms of the Forward Purchase Agreement.
To the extent Sandia does not early terminate
shares purchased under the Forward Purchase Agreement, as described below, the parties will settle the then-outstanding shares held by
Sandia upon the Valuation Date, such date being two years from the closing of the Merger, March 28, 2026, subject to acceleration under
certain circumstances, including the occurrence of a VWAP Trigger Event, defined as an event that occurs if the volume weighted average
price per share on any scheduled trading day, for any 20 trading days during a 30 consecutive trading day-period, is below $1.00 per share.
On the Cash Settlement Payment Date, which is the tenth business day following the last day of the valuation period commencing on the
Valuation Date, as described in the Forward Purchase Agreement (the “Valuation Period”), Sandia will pay to us a cash amount
equal to (A) the number of shares subject to the Forward Purchase Agreement as of the Valuation Date less the number of unregistered shares,
multiplied by (B) the volume-weighted average price over the Valuation Period (the “Settlement Amount”); provided, that if
the amount of the Settlement Amount Adjustment (as defined below) payable by us to Sandia is less than the Settlement Amount, then the
Settlement Amount Adjustment will be automatically netted from the Settlement Amount and any remaining amount paid in cash. We will pay
to Sandia on the Cash Settlement Payment Date an amount (the “Settlement Amount Adjustment”) equal to (1) the Number of Shares
as of the Valuation Date multiplied by $2.00 per share if the amount is to be paid in cash, or (2) if the Settlement Amount Adjustment
exceeds the Settlement Amount, the Counterparty may at its election pay the Settlement Amount Adjustment to Sandia in shares of our common
stock, in an amount equal to the product of the number of shares, including the Recycled Shares and the Additional Shares as of the Valuation
Date multiplied by $2.25; provided, that in certain circumstances as described in the Forward Purchase Agreement, including if a Delisting
Event (as defined in the Forward Purchase Agreement) occurs during the Valuation Period, such amount must be paid in cash.
In addition, during the term of the Forward Purchase
Agreement, Sandia may elect to terminate the transaction in whole or in part by providing a written notice to us, which will specify the
quantity by which the number of shares will be reduced (such election, an “Optional Early Termination” and, the shares subject
to the Optional Early Termination, the “Terminated Shares”). We shall be entitled to an amount from Sandia, equal to the product
of (x) the number of Terminated Shares and (y) the Reset Price, on the date of notice.
We determined that the Optional Early Termination
provision and the Variable Maturity Consideration, which is the amount of the Settlement Amount Adjustment in excess of the Settlement
Amount as defined above, within the Forward Purchase Agreement are considered as a freestanding financial instrument as the Optional Early
Termination and the Variable Maturity Consideration cannot be legally detachable and separately exercisable from each other and meet the
definition of a derivative. We recorded the initial value of the derivative as a loss on issuance of forward purchase agreement derivative
liability of $4.9 million in the consolidated statements of operations and comprehensive loss, included elsewhere in this Annual Report.
The change in fair value of the forward purchase agreement derivative liability of $2.5 million was recorded during the year ended December
31, 2024, in the consolidated statements of operations and comprehensive loss, included elsewhere in this Annual Report.
The Prepayment Amount is accounted for as a subscription
receivable and recorded as a reduction to equity to reflect the substance of the overall arrangement as a net repurchase of the Recycled
Shares and the Additional Shares. We recognized a subscription receivable of $11.0 million associated with the Recycled Shares as a reduction
to additional paid-in capital in our consolidated balance sheet, included elsewhere in this Annual Report, and a subscription receivable
associated with the Additional Shares was fully offset with the proceeds that Sandia paid for the purchase of these shares, resulting
in no cash received or paid for such share issuance.
In April 2024, Sandia elected to terminate the
transaction in part by exercising the Optional Early Termination provision under the Forward Purchase Agreement, pursuant to which 250,000
shares were terminated. We received payments totaling $2.5 million under the Optional Early Termination provision prescribed in the Forward
Purchase Agreement.
In addition, we reimbursed Sandia $0.1 million
at the closing of the Merger for reasonable out-of-pocket expenses for costs incurred in connection with the transaction, and $0.1 million
in expenses incurred in connection with the acquisition of the Recycled Shares. We will also pay to the third party a quarterly fee of
$5 thousand in consideration of certain legal and administrative obligations in connection with this transaction.
Under the Forward Purchase Agreement, Sandia had
the right to accelerate the Valuation Date upon the occurrence of a VWAP Trigger Event, defined as our common stock trading below $1.00
per share for 20 trading days within any 30 consecutive trading-day period. Following such an event, Sandia exercised this right and accelerated
the Valuation Date to October 8, 2024. Accordingly, we became obligated to pay Sandia $2.4 million in cash or shares. In June 2025, we
settled our obligation by issuing 6,591,000 shares of our common stock to Sandia. The Forward Purchase Agreement was thereafter terminated.
Cash Flows
The following table summarizes our sources and
uses of cash for each of the periods presented:
Year Ended December 31,
(in thousands)
Net cash used in operating activities $ (18,108 ) $ (14,763 )
Net cash used in investing activities (34 ) —
Net cash provided by financing activities 15,095 8,043
Operating Activities
Net cash used in operating activities was $18.1
million for the year ended December 31, 2024. The factors affecting our operating cash flows during this period were our net loss of $38.1
million, partially offset by a net change in our operating assets and liabilities of $3.8 million and non-cash charges of $16.3 million.
The non-cash charges primarily consisted of $9.8 million in the loss on issuance of Senior Secured Notes, $4.9 million in the loss on
the forward purchase contract, $2.0 million in equity line of credit commitment expense, $0.9 million in non-cash interest expense, $0.6
million in stock-based compensation expense, $0.2 million in non-cash vendor payments, $0.2 million in non-cash lease expense, $0.1 million
in depreciation and amortization expense and $0.1 million loss on fixed assets disposal, partially offset by $2.5 million in change in
fair value of forward purchase contract. The change in operating assets and liabilities was driven by a $7.1 million increase in accounts
payable, $2.4 million increase in Forward Purchase Agreement Settlement obligation and $0.1 million increase in deferred revenue, partially
offset by a $4.3 million decrease in accrued expenses and other current liabilities and other non-current liabilities, a $0.7 million
decrease in deferred legal fees, a $0.5 million increase in prepaid expenses and other current and non-current assets, a $0.3 million
decrease in operating lease liabilities and a $0.1 million increase in accounts receivable. The increase in accounts payable was primarily
due to higher transaction costs and the delayed vendor and sponsorship payments following the Operational Cessation in the fourth quarter
of 2024. The Forward Purchase Agreement Settlement obligation was related to the acceleration of the Valuation Date, requiring recognition
of $2.4 million liability in the fourth quarter of 2024. The increase in deferred revenue is due to the timing of billings related to
customer contracts and revenue recognition under customer contracts. The decrease in accrued expenses and other current liabilities and
other non-current liabilities was primarily reflects payments of legal and audit fees. The decrease in deferred legal fees resulted from
payments of fees. The increase in prepaid expenses and other current and non-current assets was primarily due to the timing of vendor
invoicing and payments for sponsorship fees. The decrease in operating lease liabilities resulted primarily from lease payments. The increase
in accounts receivable is due to the timing of billings and collections from customer contracts.
Net cash used in operating activities was $14.8
million for the year ended December 31, 2023. The factors affecting Legacy Zapata’s operating cash flows during this period were
its net loss of $29.7 million, partially offset by a net change in its operating assets and liabilities of $2.0 million and non-cash charges