Quantum Computing Inc. (QUBT) FY 2023 MD&A

ITEM 7. MANAGEMENT’S DISCUSSION AND ANALYSIS
OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS.

The following discussion and analysis of the
results of operations and financial condition for the years ended December 31, 2023 and 2022 should be read in conjunction with our consolidated
financial statements and the notes to those consolidated financial statements that are included elsewhere in this Annual Report. Our discussion
includes forward-looking statements based upon current expectations that involve risks and uncertainties, such as our plans, objectives,
expectations and intentions. Actual results and the timing of events could differ materially from those anticipated in these forward-looking
statements as a result of a number of factors. See “Forward-Looking Statements.”

You should read the following discussion and
analysis of our financial condition and results of operations together with our audited consolidated financial statements and related
notes included elsewhere in this Annual Report on Form 10-K,

When we say “we,” “us,”
“our,” “Company,” or “QCi,” we mean Quantum Computing Inc.

Overview

QCi is a development stage company with limited
operations and revenue.  The Company is developing quantum machines for high-performance computing applications based on proprietary
photonics technology. QCi’s products are designed to operate at room temperature and low power at an affordable cost in the areas
of high-performance computing, sensing and imaging, and quantum cybersecurity. The Company has generated some revenue based on sales
of products and related services to date and is expanding its sales and marketing efforts. The Company’s development team includes
optical engineers, mathematicians, physicists, and software developers.

30

Results of Operations

Years Ended December 31, 2023 vs. December
31, 2022

Revenues

Revenues for the year ended December 31, 2023
were $358,047 compared to $135,648 for the year ended December 31, 2022, an increase of $222,399, or 164%. Revenue was derived from sales
of hardware products and professional services in 2023, and solely from professional services in 2022, in each case provided to multiple
commercial and government customers under multi-month contracts; the year-over-year change was riven by increases in short-term contractual
service revenue. In 2023, QCi continued to execute its business strategy to provide quantum-ready solutions for solving real-world problems.
While we have made significant progress toward this overarching objective, the generation of revenue from customers has been slow to develop,
in part due to the fact that quantum computing is a cutting-edge technology for most potential customers, who are therefore proceeding
cautiously with small, exploratory contracts to better understand its applicability to their requirements. Accordingly, the Company has
focused on providing professional services to introduce customers to quantum-based solutions to their operating needs, and on customer
education and building customer awareness as a means to generating sales. The Company has completed its discovery and research phase and
is now transitioning towards commercialization. We have developed and released multiple products and are now in the process of marketing
them. We expect revenues to increase meaningfully in 2024 as we continue to emphasize our hardware capability.

Cost of Revenues

Cost of revenues, which consists of labor consumed
to fulfill our obligations under contractual service agreements as well as the component parts of finished goods sold, was $195,640 for
the year ended December 31, 2023 compared to $60,934 for the prior year, an increase of $134,706, or 221%. Cost of revenues for each of
the years ending December 31, 2023 and 2022 consists primarily of salary expense. The increase for 2023 was predominantly driven by the
execution of new government service contracts. Cost of revenue for these services was contractually structured and limited to the direct
salaries and actual hours worked to fulfill the work orders. Rates for these services remained materially unchanged year over year, with
contract volume being the driver of growth.

Gross Margin

Gross margin for the year ended December 31, 2023
was $162,407 compared to $74,714 for the prior year, an increase of $87,693, or 117%. On a percentage basis, gross margin was 45%, a decrease
of 10% year-over-year. The change was nearly entirely the result of the shift to contractual service revenue where the cost of goods sold
was defined under the terms of our general professional services obligation. Our lack of a scaled and distributed base of revenue generation
by product and sales channel can result in large swings in gross margin between reporting periods.

31

Operating Expenses

Operating expenses for the year ended December
31, 2023 were $27,383,684 compared to $36,654,056 for the year ended December 31, 2022, a decrease of $9,270,372 or 25%. The decrease
in operating expenses was almost entirely driven by a $9,038,701 decrease in stock-based compensation expenses, which was driven mainly
by higher value stock option awards in 2022 compared to 2023. Decreases of $1,399,208 in selling, general and administrative expenses,
primarily as a result of $574,428 through stream-lining of marketing activities and sales roles, and $704,975 in professional services,
primarily as a result of non-recurring legal expenses during 2022 related to the QPhoton Merger, also contributed to the decrease in operating
expenses during 2023 compared to the prior year. These decreases were partially offset by an increase in research and development spending
year-over-year of $1,885,909 driven by increased salary expenses as the Company expanded its capability to deliver commercialized hardware
products.

Net Loss

Our net loss for the year ended December 31, 2023
was $29,730,672 compared to a net loss of $38,593,700 for the prior year, a decrease of $8,863,029 or 23%. The decrease in net loss is
primarily due to the decrease in operating expenses, noted above, partially offset by $513,709 net increase in financing costs driven
by amortization of the $750,000 original issue discount included in the principal balance of the unsecured promissory note (the “Streeterville
Unsecured Note”) that we issued to Streeterville Capital, LLC in the initial principal amount of $8,250,000 in September 2022, which
bears interest at 10% per annum.

Liquidity and Capital Resources

We have incurred net losses and experienced negative
cash flows from operations since inception. To date, since February 2018, the Company has raised $57,424,924 through private placements
of equity and $12,633,000 through private placements of Convertible Promissory Notes and other debt for a total of $70,057,924 through
December 31, 2023. The Company has no lines of credit, and $2,496,480 in short-term debt obligations outstanding. We expect to incur additional
losses and higher operating expenses for the foreseeable future as we continue to invest in research and development and go-to-market
programs. We have determined that additional financing will be required to fund our operations for the next 12 months and our ability
to continue as a going concern is dependent upon obtaining additional capital and financing. As of December 31, 2023, the Company had
cash and cash equivalents of $2,059,285.

Our primary uses of cash are to fund our operations
as we continue to grow our business. We will require a significant amount of cash for expenditures as we invest in ongoing research and
development and non-linear quantum optical chips and fund business operations. Until such time as we can generate significant revenue
from sales or subscriptions of our hardware offerings, we expect to finance our cash needs through public and/or private equity and/or
debt financings or other capital sources, including but not limited to U.S. government grant and loan programs. However, we may be unable
to raise sufficient funds or enter into such other arrangements, when needed, on favorable terms, or at all. In particular, uncertain
and unfavorable conditions in the United States and global macroeconomic environment, including inflationary pressures, rising interest
rates, banking collapses, and financial and credit market fluctuations, could reduce our ability to access capital on favorable terms,
or at all. To the extent that we raise additional capital through the sale of equity or convertible debt securities, the ownership interest
of our stockholders will be, or could be, diluted, and the terms of these securities may include liquidation or other preferences that
adversely affect the rights of our common stockholders. Debt financing and equity financing, if available, may involve agreements that
include covenants limiting or restricting our ability to take specific actions, such as incurring additional debt, making capital expenditures
or declaring dividends. If we are unable to raise additional funds through equity or debt financings when needed, we may be required to
delay, limit, or substantially reduce our quantum computing development and go-to-market efforts.

The following table summarizes total current assets,
liabilities and working capital at December 31, 2023, compared to December 31, 2022:

32

At December 31, 2023, we had a working capital
deficit of $2,546,788 as compared to working capital of $409,29 at December 31, 2022, a decrease of $1,847,180. The decrease in working
capital is primarily attributable to the use of cash to pay for operating expenses and capital investments in property and equipment,
satisfaction of accrued expense liabilities and the Streeterville Unsecured Note becoming a current portion of long-term debt payable.

Our independent registered
public accounting firm included an explanatory paragraph in its report on our financial statements as of and for the year ended December
31, 2023, noting the existence of substantial doubt about our ability to continue as a going concern. This uncertainty arose from management’s
review of our results of operations and financial condition and its conclusion that, based on our operating plans, we did not have sufficient
existing working capital to sustain operations for a period of twelve months from the date of the issuance of these financial statements.

Cash Flows

Net cash used in operating activities for the
years ended December 31, 2023 and 2022 was $19,940,521 and $17,240,117, respectively, in each case primarily as a result of our net loss
in each year offset by noncash adjustments for stock-based compensation, depreciation of property, plant and equipment and amortization
of intangibles.

Net cash used in investing activities for the
years ended December 31, 2023 and 2022 was $2,617,990 and $2,225,758, respectively. Cash used in investing activities during the year
ended December 31, 2023 was attributable to acquisition of laboratory and production equipment for $2,117,990 and our $500,000 loan to
millionways, Inc (“millionways”). in June 2023. On June 6, 2023, the Company entered into a Note Purchase Agreement with millionways
pursuant to which the Company agreed to purchase from millionways up to three unsecured promissory in an aggregate principal amount of
up to $2,000,000, subject to the terms and conditions thereof. On June 6, 2023, the Company purchased the notes from millionways and loaned
it an aggregate principal amount of $500,000. This followed the Company’s entry into a Summary of Proposed Terms with millionways
on May 16, 2023, to provide bridge loans to millionways and enter into due diligence to acquire up to 100% of the AI firm.

Net cash provided by financing activities for
the year ended December 31, 2023 was $19,309,330 compared to $8,035,684 during the year ended December 31, 2022. Cash provided by financing
activities during the year ended December 31, 2023 was attributable to $25,496,364 received from the sale of shares of our common stock
through our At-The-Market (ATM) facility, managed by Ascendiant Capital Markets, LLC (net the 3% fee paid to Ascendiant Capital Markets,
LLC), partially offset by repayments of $6,187,034 on the Streeterville Unsecured Note. During the year ended December 31, 2022, cash
provided by financing activities was primarily attributable to the funds we received from the issuance of the Streeterville Unsecured
Note.

The Company has funded our operations primarily
through the sale of our equity (or equity linked) and debt securities. As of March 28, 2024, we had cash on hand of approximately $6,554,651.
We have approximately $74,977 in monthly lease and other mandatory payments, not including payroll, employee benefits and ordinary expenses
which are due monthly.

On a long-term basis, our liquidity is dependent
on continuation and expansion of operations and receipt of revenues. Demand for the products and services will be dependent on, among
other things, market acceptance of our products and services, the technology market in general, and general economic conditions, which
are cyclical in nature. In as much as a major portion of our activities will be the receipt of revenues from the sales of our products
and services, our business operations may be adversely affected by our competitors and prolonged recession periods.

33

Critical Accounting Estimates

Certain of our accounting policies require the
application of significant judgment by our management, and such judgments are reflected in the amounts reported in our condensed consolidated
financial statements. In applying these policies, our management uses judgment to determine the appropriate assumptions to be used in
the determination of estimates. Those estimates are based on our historical experience, terms of existing contracts, our observance of
market trends, information provided by our strategic partners and information available from other outside sources, as appropriate. Actual
results may differ significantly from the estimates contained in our condensed consolidated financial statements.

Fair Value of Options and Derivatives

The Company uses the Black-Scholes model to calculate
the fair value of stock options and derivatives. The Black-Scholes model, developed in 1973, is a differential equation which requires
five input variables, the strike price of an option, the current stock price, the time to expiration, the risk-free rate, and the volatility
of the Company common stock. The Black-Scholes model is widely used for pricing options but it does rely on certain assumptions about
the market which may not be correct over time. Specifically,

To the extent that any of these assumptions is
not correct, that could result in the overpricing or underpricing of the stock options involved. The assumption that the risk-free rate
(the Company uses the one-year U.S. Treasury Bill rate as a proxy for the risk-free rate) can vary over time, and if the T-Bill rate varies
substantially over the life of the stock option that could affect the pricing. Similarly, the volatility of the Company’s common
stock, also known as the Beta, has moved within a limited range over the past year, but the volatility of any security can change over
time, which would affect the option pricing calculation. Another critical estimate relating to option pricing is the default rate, which
means the estimate of granted options that will either expire unexercised, or be forfeited, over the life of the stock options. If the
Company’s estimate of the default rate turns out to be substantially different from the actual, experienced default rate, that could
result in over- or under-estimating the total option expense.

The Black-Scholes model is not the only available
approach for pricing stock options, the Company could have used a Binomial pricing model or a Monte Carlo simulation model. However, there
is no assurance that either a Binomial or Monte Carlo pricing approach would be more accurate than the Black-Scholes model over time.
Moreover, both the Binomial model, which calculates the price of an option at each point in time during the option period, or the Monte
Carlo model, which simulates the possible movements in future stock prices and uses them to calculate the option value, rely on critical
assumptions. The Binomial model assumes that stock markets are perfectly efficient, which may not hold for all periods of time. The Monte
Carlo simulation model assumes changes in stock prices over time cannot be predicted from the historical trends (known as a “random
walk”), which also may not hold for all periods.

34

Fair Market Value and Useful Life of Intangible
Assets

Another area of critical accounting estimates
involves determining the fair market value and useful life of the intangible assets acquired by the Company through the merger with QPhoton.
In the absence of market pricing for the intangible assets, the Company relied on independent third-party appraisal experts and comparison
with similar transactions to arrive at estimates of value as well as useful life. The Company will perform periodic assessments of the
intangible assets for impairment, but if any of the initial estimates are incorrect, that could result in a calculation of amortization
expense that is too high or too low.

Legal and Other Contingencies

The outcomes of legal
proceedings and claims brought against us are subject to significant uncertainty. An estimated loss from a loss contingency such as a
legal proceeding or claim is accrued by a charge to income if it is probable that an asset has been impaired or a liability has been incurred
and the amount of the loss can be reasonably estimated. In determining whether a loss should be accrued we evaluate, among other factors,
the degree of probability of an unfavorable outcome and the ability to make a reasonable estimate of the amount of loss. Changes in these
factors could materially impact our consolidated financial statements.