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.
Overview
Zapata is a leading pure-play hardware-agnostic
quantum software company. Following a strategic realignment in 2025, the Company offers 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.
Zapata’s software platform for quantum computing
applications is based on our patented technology and supports a wide range of use cases in cryptography, pharmaceuticals, manufacturing,
materials discovery and defense. The Company is the only organization to have participated across all technical areas of the Defense Advanced
Research Projects Agency’s (“DARPA”)’s Quantum Benchmarking program and has worked with Fortune 500 enterprises
and government agencies to unlock the potential of quantum computing.
Following a period of broader AI exploration, the
Company undertook, in 2024 and 2025, a strategic realignment to refocus on its core quantum mission: developing the software and tooling
layer that enables enterprises, governments, and researchers to harness quantum computing for economically meaningful outcomes.
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 scaling 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.
Zapata’s hardware-agnostic approach and proprietary
technology address the “software bottleneck” that limits quantum adoption. The Company’s products - Orquestra, Bench-Q,
Quantum Graph, and Quantum Pilot - provide the infrastructure and workflow tools that connect problem discovery, algorithm design, and
hardware execution. These tools are supported by professional services, partnerships, and licensing programs that collectively form the
Company’s business model.
Recent Developments
Merger with Andretti Acquisition Corp. (“AAC”)
On March 28, 2024, we completed our business combination
with Andretti Acquisition Corp. (“AAC”), pursuant to which, among other things, Legacy Zapata became a wholly owned subsidiary
of AAC (the “Merger”). For accounting purposes, the Merger was accounted for as a reverse recapitalization whereby Legacy
Zapata was treated as the accounting acquirer and was treated as the acquired company. For additional information regarding the Merger,
refer to Note 3 in the consolidated financial statements included elsewhere in this Annual Report.
Forward Purchase Agreement
On March 25, 2024, we entered into the Forward
Purchase Agreement with Sandia Investment Management LP (“Sandia”), 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 satisfied our obligations under the Forward Purchase Agreement through the issuance of 6,591,000 shares of Common Stock
to Sandia.
For additional information regarding the Forward
Purchase Agreement, refer to Note 7 in the consolidated financial statements included elsewhere in this Annual Report.
Enterprise Solution and Sponsorship Agreements with Andretti Global
One of AAC’s affiliates, Andretti Autosport
Holding Company, LLC (“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 expired
on December 31, 2024. We considered that these agreements were executed prior to the business combination 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.
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. Our committed future payments
under the sponsorship agreement total $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.
For additional information regarding the Enterprise
Solution and Sponsorship Agreements with Andretti Global, refer to Note 18 in the consolidated financial statements included elsewhere
in this Annual Report.
Purchase Agreements with Lincoln Park
On December 19, 2023, we entered into a purchase
agreement (the “2023 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 2023 Purchase Agreement.
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. In connection with the Operational Cessation described below, the registration
statement in connection with the Purchase Agreement is no longer effective (which is a condition to transactions under the Purchase Agreement).
For additional information regarding the Purchase
Agreements with Lincoln Park, refer to Note 11 in the consolidated financial statements included elsewhere 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 delisted by 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.
Since our inception
through December 31, 2025, we have financed our operations primarily through sales of our Convertible Preferred Stock and Common Stock
and with issuances of Senior Notes, Senior Secured Notes and Convertible Notes. For the year ended December 31, 2025, we generated net
income of $9.3 million. As of December 31, 2025 and 2024, we had an accumulated deficit of $118.3 million and $127.7 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 or 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 $15.4 million of liabilities through the issuance of shares of our 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 historically was 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. We generated
no revenue in 2025.
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.
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, interest income,
interest expense and foreign exchange gains and losses from our international operations.
Income Taxes
For the years ended December 31, 2025 and 2024,
we recorded an income tax benefit and provision of $0 and $20,000, 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, 2025 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, 2025 and 2024
The following table summarizes our results of
operations for the years ended December 31, 2025 and 2024:
Year Ended December 31,
(in thousands)
Operating expenses:
Other income (expense):
Change in fair value and loss on issuance of notes — (9,776 ) (9,997 ) (100 )
Loss on extinguishment of senior secured notes (134 ) — (134 ) (100 )
Provision for income taxes — (20 ) 20 (100 )
** Not meaningful
Revenue
Revenue was $0 for the year ended December 31,
2025, as compared to $3.9 million for the year ended December 31, 2024 The decrease reflects the Operational Cessation.
Cost of Revenue
Cost of revenue was $0 for the year ended December
31, 2025, as compared to $3.2 million for the year ended December 31, 2024. The decrease reflects the Operational Cessation.
Operating Expenses
Sales and Marketing Expenses
Sales and marketing expense was $0.3 million for
the year ended December 31, 2025, as compared to $7.1 million for the year ended December 31, 2024. The decrease reflects the Operational
Cessation.
Research and Development Expenses
Research and development expense was $0.3 million
for the year ended December 31, 2025, as compared to $4.4 million for the year ended December 31, 2024. The decrease reflects the Operational
Cessation.
General and Administrative Expenses
General and administrative
expenses were $2.9 million for the year ended December 31, 2025, compared to $12.1 million for the year ended December 31, 2024. The decrease
of $9.2 million reflects the Operational Cessation. Expenses for the current period mainly consisted of insurance, software costs, salaries
and benefits for remaining personnel, and legal and professional fees, including $0.1 million of legal expenses related to our intellectual
property.
Loss From Operations
In the year ended December 31, 2025, we sustained
an operating loss of $3.4 million compared to $23.0 million in the prior year. The difference was due to the Operation Cessation.
Other Income (Expense), Net
Other income, net was $12.7 million for the year
ended December 31, 2025, compared to other expense, net of $15.1 million for the year ended December 31, 2024. The $27.8 million favorable
variance was primarily attributable to the nonrecurrence in the current period of the following prior period charges which were non-cash:
(i) $9.8 million loss related to the issuance of Senior Secured Notes, (ii) a $4.9 million loss on issuance of Forward Purchase Agreement,
and (iii) $1.8 million in transaction costs incurred related to the Lincoln Park Purchase Agreement, partially offset by a $2.4 million
gain resulting from the change in fair value of the Forward Purchase Agreement. Additionally, interest expense decreased by $0.5 million,
primarily due to the conversion of a majority of the Senior Notes to equity upon closing of the merger in the first quarter of 2024.
Other income, net for the year ended December
31, 2025 includes a $2.4 million gain on extinguishment of the Forward Purchase Agreement liability, a $9.1 million gain on extinguishment
of liabilities, a $1.9 million gain on forbearance agreement, partially offset by $0.5 million of interest expense, and a $0.1 million
loss on extinguishment of Senior Secured Note.
Provision for income taxes
There was no provision for income taxes during the year ended December
31, 2025. The provision for income taxes during the year ended December 31, 2024 was not material and was related to our foreign operations.
Liquidity 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, 2025, we had cash and cash equivalents of $1.7 million. Our principal use of cash is to fund our operations and platform development
to support our growth.
As of March 23, 2026, we had approximately $0.7
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 and our audit opinion contains going concern qualification.
Series A
In 2025, we raised $1.5 million through the sale
of Series A Convertible Preferred Stock.
Senior Secured Notes
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. 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.
In June 2025, we entered into a securities purchase
agreement with accredited investors pursuant to which we sold and issued secured Convertible Promissory Notes and warrants to purchase
37,500,000 shares of Common Stock (“Warrants”) for total gross proceeds of $3 million. The Convertible Promissory Notes bear
simple interest at a rate of 10.00% per annum and mature in June 2026, unless earlier converted or repaid in accordance with its terms.
Interest accrues daily based on a 360-day year and will not be paid in cash prior to maturity unless the Convertible Promissory Notes
are repaid before conversion.
Convertible Promissory Notes
In June 2025, we entered into a securities purchase
agreement with accredited investors pursuant to which we sold and issued secured Convertible Promissory Notes and warrants to purchase
37,500,000 shares of Common Stock (“Warrants”) for total gross proceeds of $3 million. The Convertible Promissory Notes bear
simple interest at a rate of 10.00% per annum and mature in June 2026, unless earlier converted or repaid in accordance with its terms.
Interest accrues daily based on a 360-day year and will not be paid in cash prior to maturity unless the Convertible Promissory Notes
are repaid before conversion.
The Convertible Promissory Notes are convertible
into 75,000,000 shares of our Common Stock at the option of the holder at any time prior to repayment. The conversion price is $0.04 per
share, subject to customary anti-dilution adjustments for stock splits, stock dividends, combinations, or recapitalizations. Upon conversion,
any unpaid accrued interest is automatically forgiven. As of December 31, 2025, the aggregate principal and accrued interest outstanding
under the Convertible Promissory Notes totaled $3.1 million.
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 $ (1,665 ) $ (18,108 )
Net cash used in investing activities — (34 )
Net cash provided by financing activities 3,018 15,095
Operating Activities
Net cash used in operating activities was $1.7
million for the year ended December 31, 2025. Operating cash flows reflected net income of $9.4 million and a $1.4 million net increase
in working capital, partially offset by $12.4 million in net non-cash charges. Changes in working capital were primarily driven
by a $1.0 million increase in accrued expenses and other current liabilities, and a $0.2 million increase in accounts payable. Non-cash
charges included $9.1 million gain on extinguishment of liabilities, a $2.4 million gain on extinguishment of Forward Purchase Agreement
settlement liability, and a $1.9 million gain on forbearance agreement, partially offset by $0.5 million in non-cash interest expense,
$0.3 million in stock-based compensation and $0.1 million loss on extinguishment of Senior Secured Note. As previously disclosed, we ceased
operations in October 2024, resulting in limited activities during the current period.
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.
Investing Activities
During the year ended December 31, 2025, we had
no investing activities.
During the year ended December 31, 2024, net cash
used in investing activities was $34,000, primarily consisting of purchases of property and equipment. The purchases of equipment
during these periods were primarily related to computer equipment purchases.
Financing Activities
Net cash provided by financing activities was
$3.0 million for the year ended December 31, 2025. This amount primarily reflects $2.9 million in net proceeds received from the issuance
of Convertible Promissory Notes, $1.4 million in net proceeds from the sale of Series-A Preferred Stock, partially offset by the repayment
of $1.3 million of Senior Secured Notes.
During the year ended December 31, 2024, net cash
provided by financing activities was $15.1 million, which consisted of $12.6 million in proceeds from the closing of the Merger, $6.0
million in proceeds received from the issuance of Senior Secured Notes, $8.6 million in proceeds from issuances of Common Stock under
the equity line of credit, $2.5 million in proceeds from the partial early termination of the Forward Purchase Agreement and $0.1 million
in proceeds from exercises of stock options, partially offset by the payment of $0.1 million debt discount, payment of $0.6 million of
notes payable to related parties, payment of $2.9 million of deferred offering costs and the prepayment of $11.0 million under the Forward
Purchase Agreement.
Off-Balance Sheet Financing Arrangements
We have no obligations, assets or liabilities
which would be considered off-balance sheet arrangements during the periods presented. Zapata and Legacy Zapata have not entered into
any off-balance sheet financing agreements, established any special purpose entities, guaranteed any debt or commitments of other entities,
or purchased any non-financial assets.
Collaborative Research Agreement
On February 12, 2024, the Company entered into a collaborative research agreement with a third party, pursuant to which the Company and the third party partnered to develop a quantum generative AI application and a hybrid solver over a three-month term. The Company led the development of the application. The third party also contributed $1,000 to the project in the form of a Senior Secured Note, which it did not elect to convert into the Company's Common Stock upon the Closing of the Merger, and which was repaid in June 2025. The collaborative research agreement was effectively terminated in October 2024 in connection with the Company's Operational Cessation.
Critical Accounting Policies and Significant Judgments and Estimates
Our management’s discussion and analysis
of our financial condition and results of operations is based on our consolidated financial statements, which have been prepared in accordance
with generally accepted accounting principles in the United States, or U.S. GAAP. The preparation of these consolidated financial statements
requires us to make estimates and assumptions that affect the reported amounts of assets and liabilities, the disclosures of contingent
assets and liabilities at the date of the consolidated financial statements and the reported amounts of revenues and expenses incurred
during the reporting periods. We base our estimates on historical experience, known trends and events, and various other factors that
we believe are reasonable under the circumstances, the results of which form the basis for making judgments about the carrying values
of assets and liabilities recorded revenues and expenses that are not readily apparent from other sources. We evaluate our estimates and
assumptions on an ongoing basis. Actual results may differ from these estimates.
While our significant accounting policies are
described in more detail in Note 2 to our consolidated financial statements included elsewhere in this Report, we believe that the following
accounting policies are those most critical to the judgments and estimates used in the preparation of our consolidated financial statements.
Revenue Recognition
In accordance with ASC 606, Revenue from Contracts
with Customers, we recognize revenue when we satisfy a performance obligation by transferring goods or services promised in a contract
to a customer, in an amount that reflects the consideration that we expect to receive in exchange for those goods or services.
We recognize revenue using the following steps:
(1) identification of the contract, or contracts with a customer, (2) identification of performance obligations in the contract, (3) determination
of the transaction price, (4) allocation of the transaction price to the performance obligations in the contract and (5) recognition of
revenue when or as we satisfy the performance obligations.
At contract inception, we assess the goods and
services promised in our contracts with customers and identify a performance obligation for each promise, implicit or explicit, to transfer
to the customer a good or service (or bundle of goods or services) that is distinct.
We currently earn revenue primarily from subscriptions
to our software platform and related services. Subscriptions to our software platform are currently offered as stand-ready access to our
cloud environment on an annual or multi-year basis. Our consulting services may result in either single or multiple performance obligations
based on the contractual terms. We may also offer services in the form of stand-ready scientific and software engineering services, which
are typically only offered in conjunction with the software platform. We evaluate our contracts at inception to determine if the promises
represent a single, combined performance obligation, or multiple performance obligations. We allocate the transaction price to the performance
obligations identified. Judgment is required to allocate the transaction price to each performance obligation. We utilize a stand-alone
selling price methodology based on observable or estimated prices for each performance obligation. We consider market conditions, entity-specific
factors, and information about the customer that is reasonably available to the entity when estimating stand-alone selling price for those
performance obligations without an observable selling price. Our contracts do not contain rights of return, and any variable consideration
as the result of service level agreements has been immaterial. We do not have other contractual terms that give rise to variable consideration.
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 promise represents a stand-ready performance obligation.
Revenue from consulting services is generally
recognized over time. Our contracts typically contain fixed-fee transaction prices. We determine and record a provision for loss contracts
at the contract level when the current estimate of total costs of the contract at completion exceeds the total consideration we expect
to receive. We have not recorded any provision for loss contracts at December 31, 2024. For consulting services, we measure progress toward
satisfaction of the performance obligation as the services are provided, and revenue is generally recognized based on the labor hours
expended over time. Through this method, we recognize revenue based on the actual labor hours incurred to date compared to the current
estimate of total labors hours to satisfy the performance obligation. This method requires periodic updates to the total estimated hours
to complete the contract, and these updates may include subjective assessments and judgments. We had limited contracts, where based on
our determination of the enforceability of payment terms, revenue was recognized at a point in time when payment became enforceable.
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.
Revenue from services sold in the form of stand-ready
scientific and software engineering services are recognized over the contract term on a ratable basis, as the obligation represent a stand-ready
obligation.
Our payment terms vary by contract and do not
contain significant financing components. Amounts collected in advance of revenue recognized are recorded as deferred revenue in the consolidated
balance sheets.
Areas of Judgment and Estimation
Our contracts with customers can include multiple
promises to transfer goods and services to the customer, which may be provided over one or more specified phases in the contract. Determining
whether promises and/or phases are distinct performance obligations that should be accounted for separately or not distinct within the
context of the contract and, thus, accounted for together, requires significant judgment. When customer contracts include promises for
multiple goods, services and/or phases, we determine whether the nature of our promise is to transfer (a) multiple promised goods, services
and/or phases or (b) a combined item that comprises multiple promised services and/or phases.
For consulting services performance obligations
that are satisfied over time, we measure progress toward satisfaction of the performance obligation as the services are provided, and
revenue is generally recognized based on the labor hours expended over time. Through this method, we recognize revenue based on the actual
labor hours incurred to date compared to the current estimate of total labors hours to satisfy the performance obligation. We believe
this method best reflects the transfer of control to the customer. This method requires periodic updates to the total estimated hours
to complete the contract, and these updates may include subjective assessments and judgments.
Significant estimates and assumptions are used
in the determination of the stand-alone selling price when multiple performance obligations are identified. We utilize a stand-alone selling
price methodology based on observable or estimated prices for each performance obligation. We consider market conditions, entity-specific
factors, and information about the customer that is reasonably available to the entity when estimating stand-alone selling price for those
performance obligations without an observable selling price. Actual results could differ from those estimates and such differences could
affect our financial position and results of operations.
Stock-Based Compensation Expense
We measure stock-based options granted to employees,
directors, and non-employees based on their fair value on the date of the grant using the Black-Scholes option-pricing model for stock
options. Compensation expense for those awards is recognized over the requisite service period, which is generally the vesting period
of the respective award. Compensation expense for awards to non-employees with service-based vesting conditions is recognized in the same
manner as if we had paid cash in exchange for the goods or services, which is generally the over the vesting period of the award. We use
the straight-line method to recognize the expense of awards with service-based vesting conditions. We account for forfeitures of stock-based
awards as they occur. As of December 31, 2025, all awards have service-based vesting conditions.
Determination of the Fair Value of Legacy Zapata Common Stock
The fair value of the Common Stock of Legacy Zapata
has been determined by management with consideration to a third-party valuation, which contemplates a broad range of factors, including
the illiquid nature of the investment in Legacy Zapata’s Common Stock, our historical financial performance and financial position,
our future prospects and opportunity for liquidity events, and recent sale and offer prices of common and Convertible Preferred Stock,
if any, in private transactions negotiated at arm’s length.
Senior Notes and Senior Secured Notes
Through December 31, 2024, we have issued $5.6
million in Senior Notes, all of which were canceled and, inclusive of interest of $0.6 million, exchanged for Senior Secured Notes on
December 22, 2023, and $10.0 million in Senior Secured Notes to certain lenders. We performed an analysis of all of the terms and features
of the Senior Notes and Senior Secured Notes. We elected the Fair Value Option to account for the Senior Notes as we identified embedded
derivatives, such as voluntary conversion upon qualified financing, automatic conversion upon a De-SPAC Transaction, defined as a business
combination between Legacy Zapata and a special purpose acquisition company, with or without a private investment in public equity (“PIPE”),
automatic conversion upon an initial public offering, repayment under a change of control event, and optional conversion under prepayment,
all of which would require bifurcation and separate accounting. The Senior Notes were remeasured at fair value at each balance sheet date
until they were converted to Senior Secured Notes in December 2023. Changes to the fair value of the Senior Notes was recorded in other
(expense) income, net in the consolidated statements of operations and comprehensive loss. We had also elected the option of combining
interest expense and the change in fair value as a single line item within the consolidated statements of operations and comprehensive
loss. The analysis of the fair value of the Senior Notes contained inherent assumptions related to the market interest rate, the probability
of alternate financing, change of control, initial public offering, De-SPAC Transaction with or without a PIPE, maturity extension, and
payment at original maturity. Due to the use of significant unobservable inputs, the overall fair value measurement of the Senior Notes
was classified as Level 3.
We account for our Senior Secured Note issued
to a third party for capital market advisory services in connection with the Merger as a stock-based award granted to non-employees and
measure the award based on the merger date fair value using the binomial lattice model. The award is marked to its redemption value, including
paid in-kind interest, if such value exceeds the fair value of the award at the merger date and each reporting period thereafter and we
will recognize the additional fair value amount over redemption value as necessary.
We account for our remaining Senior Secured Notes
at amortized cost, as they were issued at a substantial premium and do not qualify for the Fair Value Option. Legacy Zapata concluded
that the optional conversion feature was not required to be bifurcated or separately accounted for as a derivative. Costs related to the
issuance of the remaining Senior Secured Notes were recorded as a debt discount as a reduction of the carrying value of the notes and
amortized over the term of the notes and are recorded in other (expense) income, net within the consolidated statements of operations
and comprehensive loss using the effective interest method.
Upon the closing of the Merger, a portion of the
aggregate outstanding Senior Secured Notes converted into 3,257,876 shares of Common Stock (856,202 to related parties). Upon the conversion
of the Senior Secured Notes, the principal balance of the debt of $14.2 million and associated accrued interest of $0.5 million were converted,
resulting in an increase in Common Stock and additional paid-in capital of $14.7 million. Certain holders of the Senior Secured Notes,
holding $2.0 million in aggregate principal amount, did not convert their Senior Secured Notes into shares of Common Stock and are recognized
at amortized cost. As of December 31, 2024, the $2.2 million of aggregate principal and accrued interest on the outstanding Senior Secured
Notes did not include any associated costs that are being recorded as a debt discount and amortized over the remaining term of the outstanding
Senior Secured Notes.
Forward Purchase Agreement Derivative Liability
We utilized a Monte-Carlo simulation to value
the Forward Purchase Agreement derivative liability. We determined that the Forward Purchase Agreement contains (i) an Optional Early
Termination provision, and (ii) a Variable Maturity Consideration. The Optional Early Termination and the Variable Maturity Consideration,
as combined, are considered as a freestanding financial instrument and meet the definition of a derivative instrument. The fair value
of the forward purchase agreement derivative liability, consisting of the Optional Early Termination and the Variable Maturity Consideration,
was estimated using a Monte-Carlo Simulation in a risk-neutral framework. The fair value of the derivative liability was equal to the
difference between the fair value of the Forward Purchase Agreement and the amount of cash receivable at the two-year settlement date,
which was calculated as the present value of the initial reset price of $10.00 per share (as defined in the Forward Purchase Agreement)
discounted using the term-matched risk-free rate.
We recorded the initial value of the instrument
as a loss on issuance of forward purchase agreement derivative liability of $4.9 million in the consolidated statements of operations
and comprehensive loss. 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.
Recently Issued and Adopted Accounting Pronouncements
A description of recently issued accounting pronouncements
that may potentially impact our financial position and results of operations is disclosed in Note 2 to our consolidated financial statements,
which are included elsewhere in this Annual Report.
Emerging Growth Company Status
Zapata Quantum Inc. qualifies as an “emerging
growth company,” as defined in the Jumpstart Our Business Startups Act of 2012 (the “JOBS Act”). Pursuant to the JOBS
Act, an emerging growth company is provided the option to adopt new or revised accounting standards that may be issued by Financial Accounting
Standards Board (“FASB”) or the SEC either (i) within the same periods as those otherwise applicable to non-emerging growth
companies or (ii) within the same time periods as private companies. We intend to take advantage of the exemption for complying with new
or revised accounting standards within the same time periods as private companies. Accordingly, the information contained herein may be
different than the information you receive from other public companies. We also intend to take advantage of some of the reduced regulatory
and reporting requirements applicable to emerging growth companies pursuant to the JOBS Act so long as it qualifies as an emerging growth
company, including, but not limited to, not being required to comply with the auditor attestation requirements of Section 404(b) of the
Sarbanes-Oxley Act, reduced disclosure obligations regarding executive compensation and exemptions from the requirements of holding non-binding
advisory votes on executive compensation and golden parachute payments.
Item 7A. Quantitative and Qualitative Disclosures About Market
Risk
Not applicable to smaller reporting companies
Item 8. Financial Statements and Supplementary Data
INDEX TO FINANCIAL STATEMENTS
Report of Independent Registered Public Accounting Firm (PCAOB ID #572) F-1
Consolidated Balance Sheets as of December 31, 2025 and 2024 F-2
Notes to Consolidated Financial Statements F-6
REPORT OF INDEPENDENT REGISTERED PUBLIC ACCOUNTING
FIRM
To the Board of Directors and Stockholders
Zapata Quantum, Inc.
Boston, MA
Opinion on the Financial Statements
We have audited the accompanying balance sheets of Zapata Quantum,
Inc. (the “Company”) as of December 31, 2025 and 2024, the related statements of operations and comprehensive income (loss),
stockholders’ deficit, and cash flows for the years then ended and the related notes (collectively referred to as the “financial
statements”). In our opinion, the financial statements present fairly, in all material respects, the financial position of the Company
as of December 31, 2025 and 2024, and the results of its operations and its cash flows for the years then ended in conformity with accounting
principles generally accepted in the United States of America.
Going Concern
The accompanying financial statements have been prepared assuming that
the Company will continue as a going concern. As discussed in Note 1, the Company has had recurring losses from operations since inception,
incurred a net loss and used cash in operations during the year ended December 31, 2025, and had a stockholders’ deficiency as of that
date. These matters raise substantial doubt about the Company’s ability to continue as a going concern. Management’s plans
in regard to these matters are also described in Note 1 to the financial statements. These financial statements do not include any adjustments
that might result from the outcome of this uncertainty.
Basis for Opinion
These financial statements are the responsibility of the Company’s
management. Our responsibility is to express an opinion on the Company’s financial statements based on our audits. We are a public
accounting firm registered with the Public Accounting Oversight Board (United States) (“PCAOB”) and are required to be independent
with respect to the Company in accordance with the U.S. federal securities laws and the applicable rules and regulations of the Securities
and Exchange Commission and the PCAOB.
We conducted our audits in accordance with the standards of the PCAOB.
Those standards require that we plan and perform the audits to obtain reasonable assurance about whether the financial statements are
free of material misstatement, whether due to error or fraud. The Company is not required to have, nor were we engaged to perform, an
audit of its internal control over financial reporting. As part of our audits we are required to obtain an understanding of internal control
over financial reporting but not for the purpose of expressing an opinion on the effectiveness of the Company’s internal control
over financial reporting. Accordingly, we express no such opinion.
Our audits included performing procedures to assess the risks of material
misstatement, whether due to error or fraud, and performing procedures that respond to those risks. Such procedures included examining,
on a test basis, evidence regarding the amounts and disclosures in the financial statements. Our audits also included evaluating the accounting
principles used and significant estimates made by management, as well as evaluating the overall presentation of the financial statements.
We believe that our audits provide a reasonable basis for our opinion.
We have served as the Company’s auditor since 2025.
/s/ Weinberg & Company, P.A.
Los Angeles, CA
March 31, 2026
ZAPATA QUANTUM, INC.
CONSOLIDATED BALANCE SHEETS
(In thousands, except share and per share amounts)
Assets
Current assets:
Cash and cash equivalents $ 1,659 $ 359
Accounts receivable ($0 and $1,567 from related parties, respectively) — 1,595
Prepaid expenses and other current assets 181 229
Other non-current assets 432 550
Liabilities and Stockholders’ Deficit
Current liabilities:
Accrued expenses and other current liabilities 1,764 2,611
Deferred legal fees — 2,620
Forward purchase agreement settlement liability — 2,436
Convertible promissory notes, current ($300 to related parties) 3,133 —
Senior secured notes, current 1,273 —
Note payable - related party, current — 1,618
Senior secured notes — 2,237
Note payable - related party, non-current — 312
Commitments and contingencies (Note 9)
Stockholders’ deficit
Accumulated other comprehensive loss (162 ) (109 )
Total stockholders’ deficit (8,267 ) (23,473 )
Total liabilities and stockholders’ deficit $ 2,272 $ 2,733
The accompanying notes are an integral part of
these consolidated financial statements.
ZAPATA QUANTUM, INC.
CONSOLIDATED STATEMENTS OF OPERATIONS AND COMPREHENSIVE
INCOME (LOSS)
(In thousands, except share and per share amounts)
Year Ended December 31,
Revenue ($0 and $1,300 from related parties, respectively) $ — $ 3,876
Cost of revenue — 3,241
Gross profit — 635
Operating expenses:
Sales and marketing ($0 and $3,783 from related parties, respectively) 267 7,120
Other income (expense):
Loss on issuance of forward purchase agreement derivative liability — (4,935 )
Change in fair value of forward purchase agreement derivative liability — 2,499
Loss on issuance of senior secured notes — (9,776 )
Loss on extinguishment of senior secured notes (134 ) —
Gain on forbearance agreement 1,887 —
Other income (expense), net 48 (1,903 )
Net income (loss) before income taxes 9,336 (38,123 )
Provision for income taxes — (20 )
Foreign currency translation adjustment (53 ) (60 )
Comprehensive income (loss) $ 9,283 $ (38,203 )
The accompanying
notes are an integral part of these consolidated financial statements.
ZAPATA QUANTUM, INC.
CONSOLIDATED STATEMENTS OF STOCKHOLDERS’
DEFICIT
For the Years Ended December 31, 2025 and 2024
(In thousands, except share amounts)
Shares Amount Shares Amount Capital Loss Deficit Deficit
Loss on issuance of senior secured notes — — — — 9,776 — — 9,776
Vesting of restricted stock units — — 25,000 — — — — —
Stock-based compensation expense — — — — 561 — — 561
Cumulative translation adjustment — — — — — (60 ) — (60 )
Issuance of restricted stock units to officers — — 65,050,000 7 25 — — 32
Stock-based compensation expense — — — — 245 — — 245
Issuance of Series A Convertible Preferred Stock 15,000 — — — 1,436 — — 1,436
Issuance of Series C Convertible Preferred Stock 11,983 — — — 18 — — 18