Quantum Computing Inc. (QUBT) FY 2025 MD&A

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

The following discussion and analysis of our
financial condition and results of operations should be read in conjunction with our consolidated financial statements and related notes
included in this Annual Report on Form 10-K. This discussion contains forward-looking statements that involve risks and uncertainties.
Our actual results could differ materially from those anticipated in these forward-looking statements as a result of certain factors including,
but not limited to, those discussed under Item 1A, “Risk Factors.” The following analysis generally discusses 2025 and 2024
items and year-to-year comparisons between 2025 and 2024. Discussions of 2023 items and year-to-year comparisons between 2024 and 2023
that are not included in this Form 10-K can be found in “Management’s Discussion and Analysis of Financial Condition and Results
of Operations” in our Annual Report on Form 10-K for the fiscal year ended December 31, 2024 filed with the SEC on March 20, 2025.

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 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, technicians, mathematicians, physicists, and software developers.

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Recent Developments

On December 15, 2025, we entered into a Stock Purchase Agreement (the
“Stock Purchase Agreement”) with Luminar Technologies, Inc., a Delaware corporation (the “Seller”) and Luminar,
pursuant to which, subject to the terms and conditions set forth in the Stock Purchase Agreement, the Company agreed to acquire all of
the issued and outstanding shares of common stock of Luminar from the Seller (the “Luminar Acquisition”) for a total purchase
price of $110 million in cash (the “Purchase Price”). The Luminar Acquisition was completed on February 2, 2026. $11.0 million
of the Purchase Price was placed with an escrow agent in connection with the signing of the Stock Purchase Agreement. The escrowed amount
will remain with the escrow agent to cover certain limited indemnification obligations of the Seller pursuant to the Stock Purchase Agreement
until February 2, 2027.

The Seller, together with certain of its subsidiaries,
is a debtor in a voluntary Chapter 11 case before the United States Bankruptcy Court for the Southern District of Texas (the “Bankruptcy
Court”), which commenced on December 15, 2025. Luminar is not a debtor in such Chapter 11 case and is operating in the ordinary
course of business. Upon Bankruptcy Court approval, the Company was designated as the “stalking horse” bidder in connection
with a sale of Luminar under Section 363 of the Bankruptcy Code. The Luminar Acquisition was conducted through a Bankruptcy Court-supervised
process pursuant to Bankruptcy Court-approved bidding procedures and was subject to the receipt of higher or better offers from competing
bidders at an auction, approval of the sale by the Bankruptcy Court, and the satisfaction of certain conditions.

Key Factors Affecting Our Performance

Macroeconomic conditions, including inflation,
interest rates and currency fluctuations, have directly and indirectly impacted, and could in the future materially impact, the Company’s
results of operations and financial condition. Our business may be affected by disruptions or delays to the federal government budget.
We are subject to a lengthy product commercialization timeline and a lengthy sales cycle. Beginning in the second quarter of 2025, new
U.S. tariffs were announced, including additional tariffs on imports from China, India, Japan, South Korea, Taiwan, Vietnam and the EU,
among others. In response, several countries have imposed, or threatened to impose, reciprocal tariffs on imports from the U.S. and other
retaliatory measures. Various modifications to the U.S. tariffs have been announced and further changes could be made in the future, which
may include additional sector-based tariffs or other measures. Tariffs and other measures that are applied to the Company’s products
or their components can have a material adverse impact on the Company’s business, results of operations and financial condition,
including impacting the Company’s supply chain, components, pricing and gross margin. The ultimate impact remains uncertain and
will depend on several factors, including whether additional or incremental U.S. tariffs or other measures are announced or imposed, to
what extent other countries implement tariffs or other retaliatory measures in response, and the overall magnitude and duration of these
measures. Trade and other international disputes can have an adverse impact on the overall macroeconomic environment and result in shifts
and reductions in consumer spending and negative consumer sentiment for the Company’s products and services, all of which can further
adversely affect the Company’s business and results of operations.

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Results of Operations

Our results of operations for the years ended
December 31, 2025 and 2024 is as follows (in thousands, except percentages):

Revenues

The Company’s revenues during the years ended December 31, 2025
and 2024 consisted of (in thousands):

Revenues for the year ended December 31, 2025
were $682 thousand compared to $373 thousand for the year ended December 31, 2024, an increase of $309 thousand, or 83%. Revenue was derived
from sales of hardware products and professional services in 2025 and 2024, in each case provided to multiple commercial and government
customers under multi-month contracts. Product revenue increased substantially compared to 2024 due to successful sales of vibrometer
and quantum networking devices which were delivered during 2025. During 2025 we were able to sell more off the shelf products as opposed
to 2024 where we mostly provided services to create bespoke solutions for our customers. 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 2025, 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. The Company also started to recognize revenue for cloud-based access to the Dirac-3 quantum optimization system during
2025.

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Cost of Revenues

Cost of revenue,
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 $615 thousand for the year ended December 31, 2025, compared
to $261 thousand for the prior year, an increase of $354 thousand, or 136%. Cost of revenues for each of the years ended December 31,
2025 and 2024 consists primarily of salary expense. The increase for 2025 was primarily due to the increases in direct labor expenses
on R&D services contracts and custom hardware contracts, an increase in production overhead, and increased other direct costs (primarily
parts and materials) required to perform on the contracts during the 2025 compared to the prior year.

Gross Margin

Gross margin for the year ended December 31, 2025
was $67 thousand compared to $112 thousand for the prior year, a decrease of $45 thousand, or 40%. On a percentage basis, gross margin
was 10%, a decrease of 20% year-over-year. The decrease in gross margin was largely due to higher than anticipated direct labor expenses
required to complete the assembly and test of the first unit of a new hardware product. Cost information from the production of the first
unit will be used in adjusting pricing of subsequent product sales. 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. We anticipate product gross
margins will improve as we build additional units of each product.

Operating Expenses

Operating expenses of approximately $51.1 million
during the year ended December 31, 2025 increased as compared to approximately $26.0 million in 2024 primarily as a result of higher research
and development expenses, sales and marketing expenses and general and administrative expenses, as set forth in the below tables (in thousands,
except percentages).

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Research and development expenses consist primarily
of labor expenses for employees that primarily engage in research and development efforts and non-labor expenses 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 during the year ended December 31,
2025 increased $9.2 million or 81% compared with 2024 primarily due to higher headcount and related payroll costs, higher recurring lab
equipment and consumables costs, and higher depreciation for long-lived laboratory equipment, partially offset by lower hosting services
expenses and lower stock based compensation expense. The Company is aggressively pursuing its technology roadmap and has hired additional
scientists, engineers and technicians in order to accelerate the development of key technologies and products.

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

Sales and marketing expenses during the year ended
December 31, 2025 increased $1.6 million or 89% compared with 2024 primarily due to increases in the sales staff, higher tradeshow and
travel-related costs and increased marketing program costs. During the year ended December 31, 2025 the sales and marketing team participated
in 1or 2 conferences and trade shows per month, compared to 1 or 2 trade shows per quarter during 2024, including greater participation
in international quantum technology events, resulting in higher travel expenses.

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 during the
year ended December 31, 2025 increased $14.3 million or 111% compared with 2024 primarily due to higher employee and advisor-related expenses
relating to development and implementation of internal financial controls, expansion of accounting staff, increased recruiting fees and
legal expenses related to multiple financings, mergers and acquisition activity, and ongoing litigation.

Non-operating Income (Expense)

The following table summarizes our non-operating
income (expense) for the years ended December 31, 2025 and 2024 (in thousands, except percentages).

Interest and other income, net, during the year ended December 31,
2025 increased $20,295 or 4,798% compared with 2024 primarily due to the Company maintaining higher cash balances in mutual funds, deposit
and money market accounts, U.S. Treasuries and corporate bonds during as a result of the substantial amount of new funding the Company
raised in 2025.

Interest expense during the year ended December
31, 2025 decreased $2,431 or 97% compared with 2024 primarily due to a decrease of interest on financial liabilities as the related borrowings
were paid off during 2024. Interest expense during the year ended December 31, 2025 is related to late payroll tax filings.

Change in fair value of derivative and warrant liability during the
year ended December 31, 2025 increased $52,282 or 129% compared with 2024 as a result of the change in the fair value of the QPhoton Warrant
Liability (as defined below). The change in value of the warrant liability is a non-cash charge comprised of mark-to-market adjustments
for the QPhoton Warrants (as defined below). Future mark-to-market adjustments may result in losses if the Company’s stock price
increases above the Company’s closing bid price of $10.26 per share on December 31, 2025; such adjustments may alternatively result
in gains if the closing bid share price of the Company’s common stock decreases. See Note 12, Capital Stock, in the accompanying
notes to our consolidated financial statements appearing elsewhere in this report for additional information on the QPhoton Warrants

The loss on change in value of derivative 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 12, Capital Stock, in the accompanying notes to our consolidated financial statements appearing elsewhere in this report
for additional information on the QPhoton Warrants.

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Liquidity and Capital Resources

We have incurred net losses and experienced negative cash flows from
operations since inception. During the year ended December 31, 2025, the Company raised net proceeds of $1,475.1 million through the private
placement of equity. 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.
We also expect to incur additional integration and scaling costs associated with the LSI acquisition. As of December 31, 2025, the Company
had cash and cash equivalents of $737.9 million and short-term and long-term investments of $782.5 million.

We believe that our existing cash, cash equivalents
and investments will be sufficient to meet our working capital and capital expenditure needs for at least the next twelve months, although
we may choose to take advantage of opportunistic capital raising or refinancing transactions at any time.

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 future-identified space for expansion of our AZ Chips Facility, as well as the construction
or acquisition of a high-volume chip manufacturing facility, 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, 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.

The following table summarizes total current assets,
liabilities and working capital at December 31, 2025, compared to December 31, 2024 (in thousands):

At December 31, 2025, we had working capital of
$1,122.7 million as compared to working capital of $74.6 million at December 31, 2024, an increase of $1,048.0 million. The increase in
working capital is primarily attributable to an increase in cash and available-for-sale debt securities from the net proceeds of our sales
of our sales of 86.3 million shares of common stock for an aggregate of $1,475.1 million during 2025.

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 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.

Cash Flows

The following table summarizes our cash flow for
the years ended December 31, 2025 and 2024 (in thousands):

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Cash Flows from Operating Activities

Net cash used in operating activities for the years ended December
31, 2025 and 2024 was $30.3 million and $16.2 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 derivative liabilities, and depreciation
and amortization.

Cash Flows from Investing Activities

Net cash used in investing activities for the
years ended December 31, 2025 and 2024 was $788.3 million and $6.0 million, respectively, and was attributable to our purchase of computer
hardware, laboratory equipment and TFLN Chips manufacturing equipment, as well as the purchase of $1,197.9 million in available-for-sale-debt
securities offset by $376.3 million in proceeds from sales of available-for-sale-debt securities.

Cash Flows from Financing Activities

Net cash provided by financing activities for
the years ended December 31, 2025 and 2024 was $1,477.6 million and $99.1 million, respectively. Cash flows provided by financing activities
during year ended December 31, 2025 were primarily attributable to net proceeds from our stock issuances.

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 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 Derivative Liability

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 10, 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). That litigation was
resolved in 2025. Accordingly, as of December 31, 2025 and 2024, 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.

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An additional critical accounting estimates involves
determining the fair value of the conversion features inherent 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.
The Streeterville Convertible Note was paid off in 2024.

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, 2025,
we had federal and state net operating loss (“NOL”) carryforwards of approximately $158.1 million, or $27.1 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, 2025, 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.

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We believe that none of the unrecognized tax benefits may be recognized
by the end of 2026.

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.