Quantum Computing Inc. (QUBT) FY 2024 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, 2024 and 2023 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,

Overview

QCi is a development stage company with limited operations and revenue.
The Company is developing quantum and ancillary non-quantum products 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.

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Results of Operations

Our results of operations for the years ended
December 31, 2024 and 2023 is as follows (in thousands, except percentages):

Revenues

The Company’s revenues during the years ended December 31, 2024
and 2023 consisted of (in thousands):

Revenues for the year ended December 31, 2024
were $373 thousand compared to $358 thousand for the year ended December 31, 2023, an increase of $15 thousand, or 4%. Revenue was derived
from sales of hardware products and professional services in 2024 and 2023, in each case provided to multiple commercial and government
customers under multi-month contracts. The year-over-year change was driven by changes in the number of, size of and level of effort performed
on active customer proof of concept and research and development services and customer hardware contracts. In 2024, the Company 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
and research and development offerings to introduce customers to quantum-based solutions to their operating needs as well as on customer
education and building customer awareness as a means to generating sales. We have developed and released multiple products, including
commercial and research and development offerings and foundry services for TFLN Optical Chips manufacturing that we are now in the process
of marketing. As a result, we expect product revenues to continue to increase going forward.

Cost of Revenues

Cost of revenues, which consists of direct labor
expenses, primarily salary costs for engineering and solutions staff delivering services, and other direct component costs for custom
hardware on research and development contracts, was $261 thousand for the year ended December 31, 2024, compared to $196 thousand for
the prior year, an increase of $65 thousand, or 33%. Cost of revenues for each of the years ended December 31, 2024 and 2023 consists
primarily of salary expense. The increase for 2024 was predominantly driven by the increases in direct labor expenses and other direct
costs required to perform on the contracts during 2024 compared to the prior year.

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Gross Margin

Gross margin for the year ended December 31, 2024
was $112 thousand compared to $162 thousand for the prior year, a decrease of $50 thousand, or 31%. On a percentage basis, gross margin
was 30%, a decrease of 15% year-over-year. The change was the result of a new custom hardware contract that had lower margins due to its
cost of revenues being comprised of other direct component costs in addition to direct labor expenses. Our lack of a scaled and distributed
base of revenue generation by product and sales channel can result in significant differences in gross margin between reporting periods.

Operating Expenses

Operating expenses of approximately $26.0 million
in 2024 decreased as compared to approximately $26.4 million in 2023 primarily as a result of a decrease in general and administrative
expenses, partially offset by an increase in research and development expenses, as set forth in the below tables (in thousands, except
percentages).

General and administrative expenses consist primarily
of compensation expenses for employees performing administrative functions, and professional fees incurred for legal, auditing and other
consulting services.

General and administrative expenses in 2024 decreased
$2.8 million or 27% compared with 2023 primarily due to lower employee- and advisor-related expenses, including stock-based compensation,
payroll, bonus and travel expenses, as well as lower legal fees and consulting services driven by changes made within and by the Company’s
management team, offset by increased audit fees driven by the Company retaining a new independent registered public accounting firm in
May 2024and such firm’s re-audit of the Company’s consolidated financial statements for the years ended December 31, 2023
and 2022.

Research and development expenses consist primarily
of compensation for employees that primarily engage in research and development efforts and fees for the development of hardware products
and supporting software. We focus the bulk of our research and development activities on the continued development of existing products
and the development of new offerings for emerging market opportunities.

Research and development expenses in 2024 increased
$2.4 million or 27% compared with 2023 primarily due to higher employee-related expenses, primarily as a result of higher stock-based
compensation and bonus expenses to incentivize and retain key technologists, as well as higher depreciation for long-lived laboratory
equipment, offset partially by lower professional and hosting services.

Selling and marketing expenses consist primarily
of employee compensation as well as customer lead generation activities, tradeshow participation, advertising and other marketing and
selling costs.

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Net selling and marketing expenses in 2024 were
largely unchanged as compared with 2023, with increases primarily due to higher stock-based compensation, offset by lower outsourced professional
services costs, related marketing program costs, and lower trade show and travel-related costs in 2024.

Non-operating Income (Expense)

The following table summarizes our non-operating
income (expense) for the years ended December 31, 2024 and 2023 (in thousands, except percentages).

Non-operating expense increased to $42.6 million
for 2024 compared to $779 thousand for 2023, primarily as the result of a $40.5 million decrease in the change in fair value of the derivative
liability for the QPhoton Warrants, as defined below, during 2024 compared to a $528 thousand increase in 2023.

The loss on change in value of warrant liability
is entirely comprised of mark-to-market adjustments for the QPhoton Warrants, as defined below in the accompanying notes to our consolidated
financial statements appearing elsewhere in this report, which had no carrying value as of December 31, 2023. Future mark-to-market adjustments
may result in continued losses if the price of the Company’s common stock increases above the closing bid price of $16.55 per share
at December 31, 2024; such adjustments may alternatively result in gains if the closing bid share price of the Company’s common
stock decreases. See Note 10, Capital Stock, in the accompanying notes to our consolidated financial statements appearing elsewhere
in this report for additional information on the QPhoton Warrants.

In addition, interest expense, net, which consists of interest on financial
liabilities and amortization of debt issuance costs, increased $128 thousand or 43% in 2024 compared to 2023, which increase was primarily
attributable to interest paid on the secured convertible promissory note in the original principal amount of $8.25 million that we issued
to Streeterville Capital, LLC in August 2024 (the “Streeterville Convertible Note”), which we paid in full as of December
31, 2024. See Note 7, Financial Liabilities, in the accompanying notes to our consolidated financial statements appearing elsewhere
in this report for additional information.

Liquidity and Capital Resources

We have incurred net losses and experienced negative
cash flows from operations since inception. Through December 31, 2024, the Company has raised $167.8 million through its issuance of common
stock and $20.1 million through its issuance of convertible promissory notes and other debt for a total of $187.9 million. The Company
has no lines of credit or 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. As of December 31, 2024, the
Company had cash and cash equivalents of $78.9 million.

Our primary uses of cash are to fund and invest
in our operations as we continue to grow our business. We will require a significant amount of cash for continued investment in our Foundry
Services offering, including but not limited to our AZ Chips Facility and any future-identified space for expansion, as well as ongoing
research and development for our non-linear quantum optical products and photonics chips. Until such time as we can generate significant
revenue from sales or subscriptions of our hardware offerings, we expect to finance our operating and investing needs through our cash
and cash equivalents and, equity and/or debt financings or other capital sources, including but not limited to U.S. government grant and
loan programs. We may, however, 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, bank failures, 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 product development and go-to-market efforts. There can be no
assurances that the Company will be able to secure additional equity and/or debt investments or achieve an adequate sales level. We believe,
however, that the Company’s existing cash and cash equivalents, together with any cash generated from operations and the proceeds
from any additional equity or debt issuances will be sufficient to meet the Company’s liquidity needs for at least the next 12 months.

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The following table summarizes total current assets,
liabilities and working capital at December 31, 2024, compared to December 31, 2023 (in thousands):

At December 31, 2024, we had working capital of
$74.6 million as compared to working capital deficit of $2.2 million at December 31, 2023, an increase of $76.8 million. The increase
in working capital is primarily attributable to an increase in cash from the net proceeds of our sales of 16 million shares of common
stock for an aggregate of $40 million in November 2024 and 10 million shares of common stock for an aggregate of $50 million in December
2024, and our issuance of 23.7 million shares of common stock for an aggregate of $23.8 million through the Company’s ATM, as defined
below, managed by Ascendiant Capital Markets, LLC during 2024, offset by the use of cash to pay for operating expenses and capital investments
in property and equipment. For more information on the November and December issuances, please see Note 10, Capital Stock, in the
accompanying notes to our consolidated financial statements appearing elsewhere in this report.

Cash Flows

The following table summarizes our cash flow for
the years ended December 31, 2024 and 2023 (in thousands):

Net cash used in operating activities for the
years ended December 31, 2024 and 2023 was $16.2 million and $18.3 million, respectively, in each case primarily as a result of our net
loss in each period offset by noncash adjustments for stock-based compensation, mark-to-market valuation adjustments on financial liabilities,
and depreciation and amortization.

Net cash used in investing activities for the
years ended December 31, 2024 and 2023 was $6.0 million and $2.6 million, respectively, and was attributable to our purchase of TFLN Optical
Chips manufacturing equipment for our AZ Chips Facility, as well as computer hardware and laboratory equipment. The increase in 2024 is
primarily due to the purchase of additional equipment in connection with establishing the AZ Chip Facility.

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Net cash provided by financing activities for
the years ended December 31, 2024 and 2023 was $99.1 million and $17.7 million, respectively. Cash flows provided by financing activities
during year ended December 31, 2024 were attributable to proceeds from our stock issuances in November and December 2024, and the proceeds
from our sale of shares of common stock pursuant to the ATM facility and our issuance of the Streeterville Convertible Note, partially
offset by repayments on the Streeterville Unsecured Note, as defined below, and the Streeterville Convertible Note as well as redemptions
of shares of Series A Preferred Stock.

On a long-term basis, our liquidity is dependent
on continuation and expansion of operations and receipt of revenues. Demand for the Company’s 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. As much revenues will be derived from the sales of our products and services, our business operations may
be adversely affected by the products and services offered by our competitors and any prolonged recession periods.

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 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 consolidated financial statements.

Fair Value of Stock-based Compensation

We recognize stock-based compensation expense
for all share-based payment awards in accordance with ASC 718, Compensation – Stock Compensation. Stock-based compensation
expense for expected-to-vest awards is valued under the single-option approach and amortized on a straight-line basis, accounting for
actual forfeitures as they occur. We utilize the Black-Scholes pricing model in order to determine the fair value of stock-based option
awards. The Black-Scholes pricing model requires various highly subjective assumptions including volatility, expected option life, and
risk-free interest rate. The assumptions used in calculating the fair value of share-based payment awards represent management’s
best estimates. These estimates involve inherent uncertainties and the application of management judgment. If factors change and different
assumptions are used, our stock-based compensation expense could be materially different in the future.

Fair Value of Warrant Liabilities and Derivatives

Determining the fair market value of the QPhoton Warrants, which were
included in the merger consideration paid to the stockholders of QPhoton (the “QPhoton Merger Consideration”), is a critical
accounting estimate. The QPhoton Warrants are comprised of warrants to purchase up to 7,028,337 shares of the Company’s common stock
at an exercise price of $0.0001 per share (the “QPhoton Warrants”) and are exercisable when and if stock options and warrants
issued by the Company and outstanding as of June 15, 2022 are exercised. The Merger Consideration for shareholders Yuping Huang and The
Trustees of the Stevens Institute of Technology was issued in 2022. A third alleged shareholder, BV Advisory, rejected the Merger Consideration
and commenced litigation in Delaware Chancery Court (see Note 8, Contingencies – Legal Proceedings, in this Form 10-K for
additional information and Item 3, Legal Proceedings, in this Form 10-K for a full discussion), and to date that litigation has
not been resolved. Accordingly, as of December 31, 2024 and 2023, we had only issued 6,325,503 of the QPhoton Warrants. In determining
the fair market value of the QPhoton Warrants, the Company determines which underlying options and warrants are in-the-money or out-of-the-money
at period end by comparing to the bid price of the Company’s common stock, then accounts for changes period-over-period by realizing
a mark-to-market gain or loss for the period.

An additional critical accounting estimates involves
determining the fair value of the conversion features ingerent in the Streeterville Convertible Note (the “Streeterville Derivative
Liability”), which involves inherent uncertainties and the application of management judgement. The Streeterville Derivative Liability
will be mark-to-market adjusted on a quarterly basis and accreted as interest expense while the Streeterville Convertible Note is outstanding.

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Fair Market Value and Useful Life of Intangible
Assets

Determining the fair market value and useful life
of the intangible assets acquired by the Company through the QPhoton Merger is another critical accounting estimate. 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.

Valuation Allowances for Deferred Taxes

Our income tax expense, deferred tax assets and
liabilities, and reserves for unrecognized tax benefits reflect management’s assessment of estimated current and future income taxes
to be paid. We are subject to income taxes in the United States. Significant judgments and estimates are required in determining the consolidated
income tax expense, deferred tax assets and liabilities and reserves for unrecognized tax benefits.

Deferred tax assets and liabilities arise from
temporary differences between the tax basis of assets and liabilities and their reported amounts in the consolidated financial statements,
which are expected to result in taxable or deductible amounts in the future. In evaluating our ability to recover our deferred tax assets
within the jurisdiction from which they arise, for all material jurisdictions, we consider all available positive and negative evidence,
including scheduled reversals of deferred tax balances, projected future taxable income, tax-planning strategies and results of recent
operations. In projecting future taxable income, we begin with historical results and incorporate assumptions about the amount of future
state, federal and foreign pretax operating income adjusted for items that do not have tax consequences. The assumptions about future
taxable income require significant judgment and are consistent with the plans and estimates we use to manage the underlying businesses.
In evaluating the objective evidence that historical results provide, we consider three years of cumulative operating results.

As of December 31, 2024,
we had federal and state net operating loss (“NOL”) carryforwards of approximately $89.4 million, or $19.6 million on a tax-effected
basis. We believe that it is more likely than not that the benefit from these NOL carryforwards will not be realized. Accordingly, we
have provided a full valuation allowance on any potential deferred tax assets relating to these NOL carryforwards. If our assumptions
change and we determine we will be able to realize these NOLs, the tax benefits relating to any reversal of the valuation allowance on
deferred tax assets as of December 31, 2024, will be accounted for as a reduction of income tax expense.

The calculation of our
tax liabilities involves evaluating uncertainties in the application of complex tax laws and regulations in a multitude of jurisdictions
across our global operations. ASC 740, Income Taxes, states that a tax benefit from an uncertain tax position may be recognized
when it is more likely than not that the position will be sustained upon examination, including the resolution of any related appeals
or litigation processes, on the basis of the technical merits.

We record unrecognized tax benefits as liabilities
in accordance with ASC 740 and adjust these liabilities when our judgment changes as a result of the evaluation of new information not
previously available. Because of the complexity of some of these uncertainties, the ultimate resolution may result in a tax payment that
is materially different from our current estimate of the unrecognized tax benefit liabilities. These differences will be reflected as
increases or decreases to income tax expense in the period in which new information is made available.

We believe that none of the unrecognized tax benefits
may be recognized by the end of 2024.

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.

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