Quantum Computing Inc.: Form 10-Q for the period ended Jun 30, 2026

The following discussion and analysis provides information that management believes is relevant to an assessment and understanding of our condensed consolidated results of operations and financial condition. You should read this discussion and analysis in conjunction with the unaudited condensed consolidated financial statements and notes thereto included elsewhere in this Quarterly Report on Form 10-Q. For additional context with which to understand our financial condition and results of operations, see the audited consolidated financial statements and accompanying notes contained therein as of December 31, 2025 and 2024 and related notes in the Company’s Annual Report on Form 10-K for the year ended December 31, 2025 as filed with the SEC on March 2, 2026. Certain amounts may not foot due to rounding. Certain information in this discussion and analysis or set forth elsewhere in this Quarterly Report on Form 10-Q contains forward-looking statements that involve numerous risks and uncertainties, including, but not limited to, those described under the sections entitled “Cautionary Note Regarding Forward-Looking Statements” and Part II, Item 1A. “Risk Factors” included in this Quarterly Report on Form 10-Q and under the heading “Risk Factors” in our Form 10-K. We assume no obligation to update any of these forward-looking statements. Actual results may differ materially from those contained in any forward-looking statements.

Business Overview

QCi is a growth stage company with expanding operations and revenue following the LSI, NuCrypt and NHanced acquisitions. The Company is developing and marketing quantum and ancillary non-quantum products for high-performance computing, artificial intelligence, networking and sensing applications based on proprietary quantum optics and photonics technology, as well as optical components including lasers and photo detectors. 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’s development team includes engineers, technicians, mathematicians, physicists, and software developers. Our go-to-market strategy emphasizes scalability, accessibility, and affordability, and is supported by a professional services offering to help customers implement applications in optimization, sensing, imaging, and cybersecurity.

QCi’s proprietary core technology is our integrated photonics approach, which allows us to condition, manipulate, and measure single and entangled photons (particles of light) and gives us the ability to exploit the non-linear capabilities of photons (our “Core Photonics Technology”). Our Entropy Quantum Computer (“EQC”) is a quantum application of our Core Photonics Technology, designed to solve complex optimization problems. EQC is based on a patent-pending methodology that uses controlled feedback through energy loss in a photonic loop architecture to drive photonic states to their least lossy configurations. The EQC’s involvement of the changing environment as an integral part of the system is in sharp contrast to competing quantum approaches, including superconducting, trapped-ion, and annealing architectures, which seek to establish stable quantum states by the complete elimination of environmental effects. As a result, the EQC can consume less power than these competing methods and operates at room temperature making it compatible with an ordinary server room environment. We anticipate that our EQC may enable us to develop and produce multiple generations of quantum machines with increasing computational power, scalability, and speed.

In addition to our EQC technology, we have leveraged QCi’s core photonics technology to demonstrate powerful quantum sensing use cases in LiDAR (light detection and ranging), a technology that uses pulsed laser light to measure distances to objects by calculating the time it takes for the reflected light to return, reservoir computing, a form of neural network that can be used in machine learning applications, and a quantum cyber solution, a method for highly secure communication within a network. Several of these technologies are in the early stages of commercialization and several are available to customers through our research and development offerings.

Our longer-term product development plan is to migrate product designs based on discrete components, including EQC’s current designs, to a set of optical integrated circuits built on wafers using a crystalline material called thin film lithium niobate (“TFLN”). The Company believes that TFLN is an excellent material for optical integrated circuit design, given its advantageous optical properties (linear, non-linear ferroelectric, and electro-optic) and its compatibility with silicon-based semiconductor fabrication methods. In March 2025, the Company substantially completed the buildout of its "state-of-the-art" TFLN chip research and development, prototyping and small-batch manufacturing facility in a leased space within Arizona State University’s Research Park in Tempe, Arizona (the “AZ Chips Facility”). Additional details about our Tempe, AZ and Hoboken, NJ facilities are discussed in Liquidity and Capital Resources in this report and in our 2025 Annual Report on Form 10-K. In addition, through the NHanced acquisition, the Company has launched another higher volume manufacturing facility, which we sometimes refer to as “FAB 2.”

As part of our long-term strategic plan to acquire complementary businesses, in February 2026, the Company acquired Luminar Semiconductor, Inc. (“LSI”). LSI provides products and services that leverage its advanced photonics semiconductor technologies. LSI designs chip-scale devices including laser diodes, semiconductor optical amplifiers, avalanche photodiodes, passive waveguides, photonic integrated circuits, and other related photonic chips, which are incorporated into products at various levels of integration by leveraging extensive in-house advanced photonic packaging technologies. The LSI integrated solutions include components, modules, subsystems, and systems that serve a broad set of customer requirements. Extensive design capabilities are complemented by an in-house III-V photonic semiconductor fabrication facility and photonics module manufacturing capabilities. These production resources are employed to deliver high performance, high reliability products to a growing number of customers in a wide array of industries that include aerospace and defense, sensing and instrumentation, and optical communications. Acquiring LSI provides QCi with advanced semiconductors and related components, as well as design, testing, manufacturing, and consulting services to industry, in particular for Aerospace and Defense applications. Through the acquisition of LSI, QCi has broadened its photonic chip design capability as well as its optical component and system design and optical packaging capabilities. LSI’s capabilities are highly synergistic with the QCi technology roadmap and support the integration of chip-scale devices such as laser diodes and photodetectors with QCi’s thin film lithium niobate photonic integrated circuit (“PIC”) platform. Collaborative efforts between the LSI and QCi technical teams are instrumental to delivering QCi’s photonic- and quantum-based system products.

The Company continued to add to its communications product options with the acquisition of NuCrypt in March 2026. This acquisition helps boost quantum communications as an important commercialization vertical within QCi’s broader quantum technology strategy. By integrating NuCrypt’s suite of quantum communications systems and products, QCi expects to advance its technology roadmap while extending its portfolio of quantum communications and quantum photonics solutions.

The acquisition of NHanced significantly enhances the Company's nanophotonics manufacturing and advanced packaging capabilities and strengthens QCi’s ability to execute its long-term growth strategy. With NHanced's proven fabrication assets and deep technical expertise, the Company expects to accelerate commercialization across all verticals and substantially advance the development and scaling of our TFLN photonic integrated circuit platform. The expanded manufacturing footprint increases production flexibility, enhances operational resilience and supports future revenue growth. NHanced's manufacturing facilities help accelerate the Company's path to commercial-scale production.

Key Factors Affecting Our Performance

This section discusses the primary operational and market drivers that we expect will influence our results of operations, liquidity, and capital resources.

The markets for high-performance conventional and quantum computing, photonics, and cloud-based services are dynamic and competitive. Aggregate demand for our solutions is correlated with macroeconomic and geopolitical conditions (including inflation, interest rates, currency fluctuations, trade policy and tariffs, and international conflicts), which can affect customer budgets, purchasing timelines, our supply chain, component availability and pricing, and gross margins. In the near term, under-utilization of production facilities is likely to depress gross margins and amortization of intangibles acquired in the LSI, NuCrypt and NHanced acquisitions will add to operating expenses.

Our future performance depends on advancing our EQC and thin-film lithium niobate photonic integrated circuit (PIC) platforms to commercial readiness, completing required hardware and systems testing, and readying supporting infrastructure. We operate with lengthy development, qualification, and sales cycles; our ability to convert research collaborations and pilot projects into production deployments and multi-year engagements will influence bookings, revenue trajectory, and margin. U.S. federal budget conditions and the timing of government grants and procurement for advanced computing, sensing, and defense applications may also affect demand and award timing. See Part II, Item 1A, "Risk Factors", for related risks, including dependence on certain suppliers and third-party manufacturers, significant cash requirements to fund product development and manufacturing capacity, and risks associated with integrating LSI, NuCrypt and NHanced and scaling our Arizona Chips Facility.

We rely on third-party manufacturers and a limited number of qualified suppliers for certain key components. Availability, quality, lead times, pricing, and our ability to scale internal and external manufacturing with robust quality systems will affect delivery schedules, cost of revenue, and margins. See Part II, Item 1A, “Risk Factors,” for additional discussion.

Our ability to attract, develop, and retain engineers, scientists, and other key personnel is critical to executing our roadmap. The integration of LSI, NuCrypt and NHanced, the scaling of our Arizona Chips Facility and the expansion of “FAB 2”

will require additional investment, and execution outcomes will influence product cost, time-to-market, and margin profile. See “Liquidity and Capital Resources.”

Compliance with U.S. export control and economic sanctions regimes and other applicable regulations may affect our addressable markets, supply chain, and operational timelines. See Part II, Item 1A, “Risk Factors,” and the Risk Factors in our 2025 Annual Report on Form 10-K.

Results of Operations

Our results of operations for the three and six months ended June 30, 2026 and 2025 are as follows (in thousands, except percentages, with non-meaningful percentage changes labeled as “NM”):

Revenue for the three months ended June 30, 2026 was $5.6 million compared to $61 thousand for the comparable prior year period, an increase of $5.5 million. Revenue for the six months ended June 30, 2026 was $9.2 million compared to $100 thousand for the comparable prior year period, an increase of $9.1 million. Acquisitions, including our LSI, NuCrypt and NHanced acquisitions, contributed $5.1 million and $8.6 million in total revenue during the three and six months ended June 30, 2026. Revenue for the six months ended June 30, 2026 without the acquisitions increased $0.6 million over the prior year.

Cost of Revenue

Cost of revenue was $6.7 million for the three months ended June 30, 2026, compared to $35 thousand for the comparable prior year period, an increase of $6.7 million. Cost of revenue was $11.1 million for the six months ended June 30, 2026, compared to $61 thousand for the comparable prior year period, an increase of $11.1 million. The increase was primarily due to the LSI, NuCrypt and NHanced acquisitions which added $6.5 million and $10.7 million in costs for the three and six months ended June 30, 2026. Cost of revenue without the acquisitions increased $0.4 million over the prior year.

Gross Profit (loss)

Gross profit (loss) for the three months ended June 30, 2026 was a loss of $1.2 million compared to $26 thousand for the comparable prior year period. Gross profit (loss) for the six months ended June 30, 2026 was a loss of $1.9 million compared to $39 thousand for the comparable prior year period. The decrease in gross profit (loss) was primarily due to the under-absorption of fixed costs due to lower production volumes at QCI, LSI and NHanced. We anticipate product gross profit (loss) will improve as production volumes recover. However, there can be no assurance that production volumes will increase as expected or that gross margins will approve.

Operating Expenses

Operating expenses for the three and six months ended June 30, 2026 increased by $11.7 million and $23.2 million compared to the three months and six months ended June 30, 2025. Acquisitions, including our LSI, NuCrypt and NHanced acquisitions, added $2.4 million and $4.3 million in total operating expenses for the three and six months ended June 30, 2026, respectively. The increase is further discussed below.

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 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 costs were $8.4 million and $15.4 million for the three and six months ended June 30, 2026 as compared to $6.0 million and $9.0 million for the three and six months ended June 30, 2025. Research and development expenses increased $2.5 million and $6.4 million for the three and six months ended June 30, 2026, respectively, as compared to the comparable prior year period. Acquisitions, including our LSI, NuCrypt and NHanced acquisitions, contributed $1.1 million and $1.8 million of the increase for the three and six months ended June 30, 2026, respectively. The remaining increase is 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 stock-based compensation expense. The Company 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 were $1.9 million and $3.5 million for the three and six months ended June 30, 2026 as compared to $0.7 million and $1.4 million for the three and six months ended June 30, 2025. Sales and marketing expenses increased 184% and 161% for the three and six months ended June 30, 2026, respectively as compared to the prior comparable period. Acquisitions added $0.5 million and $0.8 million of selling and marketing expenses for the three and six months ended June 30, 2026. The remaining increase is primarily due to increases in the sales staff, higher tradeshow and travel-related costs and increased marketing program costs.

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 were $11.5 million and $22.8 million for the three and six months ended June 30, 2026 as compared to $3.5 million and $8.2 million for the three and six months ended June 30, 2025. General and administrative expenses increased 224% and 178% for the three and six months ended June 30, 2026, compared to the comparable prior year period. Acquisitions added $0.9 million and $1.8 million for the three and six months ended June 30, 2026, respectively. The remaining increase is primarily due to acquisition-related transaction expenses ($7.3 million) and ongoing litigation ($0.1 million).

Non-operating Income (Expense)

Non-operating income (expense) includes interest and other income, interest expense and change in fair value of derivative liability.

Interest and other income was $13.0 million and $26.4 million for the three and six months ended June 30, 2026 and $1.8 million and $3.5 million for the three and six months ended June 30, 2025. Interest and other income increased $11.1 million and $22.9 million for the three and six months ended June 30, 2026, compared to the comparable prior year period. The increase in interest income was primarily due to the Company maintaining higher cash balances in mutual funds, deposit and money market accounts, U.S. Treasuries, U.S. agency securities, corporate debt securities, asset-backed securities and certificates of deposits in 2026 compared with the prior year periods.

Interest expense, net consists primarily of interest on financial liabilities, including payroll-related taxes.

The Company recognized a loss of $1.7 million during the three months ended June 30, 2026 and a gain of $1.5 million during the six months ended June 30, 2026 as a result of the change in fair value of the QPhoton Warrant liability. The change in value of the warrant liability is comprised of mark-to-market adjustments for the QPhoton Warrants. Future mark-to-market adjustments may result in losses if the Company’s stock price increases above the Company’s closing bid price of $9.70 per share on June 30, 2026.

Liquidity and Capital Resources.

We have incurred net losses and experienced negative cash flows from operations since inception. During the six months ended June 30, 2026, the Company raised $4.3 million through the issuance of stock. 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 June 30, 2026, the Company had cash and cash equivalents of $189.2 million and investments of $1.1 billion.

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 financing 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 TFLN chip contract manufacturing business run out of the AZ Chips Facility, or our Foundry Services offering, including but not limited to future-identified space for expansion of our AZ Chips 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 condensed consolidated current assets, liabilities and working capital at June 30, 2026, compared to December 31, 2025 (in thousands):

At June 30, 2026, we had working capital of $969.7 million as compared to working capital of $1.1 billion at December 31, 2025, a decrease of $152.9 million. The decrease in working capital is primarily attributable to the use of cash to finance acquisitions.

Cash Flows

The following table summarizes our cash flow for the six months ended June 30, 2026 and 2025 (in thousands).

Net cash used in operating activities for the six months ended June 30, 2026 was $23.3 million compared to $10.5 million for the same period in 2025. Cash used in the six months ended June 30, 2026 consisted of net loss of $15.8 million and a change in operating assets and liabilities of $(14.9) million partially offset by non-cash charges of $7.4 million. The non-cash charges consist of depreciation and amortization of $5.1 million and stock-based compensation of $3.0 million offset by the change in fair value of derivatives of $1.5 million.

Net cash used in investing activities for the six months ended June 30, 2026 and 2025 was $529.7 million and $2.8 million, respectively, and was attributable to net purchases of available for sale securities of $356.5 million, cash paid for acquisitions of $168.7 million and capital expenditures of $4.5 million.

Net cash provided by financing activities was $4.3 million and $283.1 million, respectively, for the six months ended June 30, 2026 and 2025. Cash flows provided by financing activities during the six months ended June 30, 2026 were attributable to net proceeds for our stock issuances.

On a long-term basis, our liquidity is dependent on the continuation and expansion of operations and receipt of revenues. Demand for our 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 most of our revenues will be from the sales of our products and services, our business operations may be adversely affected by the actions of our competitors and 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.

There have been no material changes to our critical accounting estimates since our Form 10-K for the year ended December 31, 2025, filed with the SEC on March 2, 2026 (the “2025 Form 10-K”).

There have been no material changes in market risks from the information presented in Part II, Item 7A. “Quantitative and Qualitative Disclosures About Market Risk,” in the 2025 Form 10-K.

Evaluation of Disclosure Controls and Procedures

We maintain “disclosure controls and procedures,” as such term is defined in Rule 13a-15(e) under the Securities Exchange Act of 1934, as amended (the “Exchange Act”). In designing and evaluating our disclosure controls and procedures, our management recognized that controls and procedures, no matter how well conceived and operated, can provide only reasonable, not absolute, assurance that the objectives of the controls are met. Management necessarily applied judgment in evaluating the cost-benefit relationship of possible controls and procedures. The design of any controls and procedures also is based in part upon certain assumptions about the likelihood of future events, and there can be no assurance that any design will succeed in achieving its stated goals under all potential future conditions.

As of the end of the period covered by this Quarterly Report on Form 10-Q, we carried out an evaluation, under the supervision and with the participation of our management, including our principal executive officer and our principal financial officer, of the effectiveness of our disclosure controls and procedures. Based on such evaluation, our principal executive officer and principal financial officer concluded that, as of June 30, 2026, our disclosure controls and procedures were not effective to provide reasonable assurance that (a) the information required to be disclosed by us in the reports that we file or submit under the Exchange Act is recorded, processed, summarized and reported within the time periods specified in the SEC’s rules and forms, and (b) such information is accumulated and communicated to our management, including our Chief Executive Officer and Chief Financial Officer, as appropriate, to allow timely decisions regarding required disclosure. The ineffectiveness of our disclosure controls and procedures was due to material weaknesses in our internal control over financial reporting described below.

Material Weakness in Internal Control over Financial Reporting

A “material weakness,” as defined in Rule 1-02(a)(4) of Regulation S-X, is a deficiency, or a combination of deficiencies, in internal control over financial reporting such that there is a reasonable possibility that a material misstatement of our annual or interim financial statements will not be prevented or detected on a timely basis.

The ineffectiveness of the Company’s internal control over financial reporting was due to the following material weaknesses:

• We did not design and maintain an effective control environment commensurate with our financial reporting requirements. During the period, we lacked a sufficient number of trained professionals with (i) an appropriate level of accounting knowledge, training and experience to appropriately analyze, record and disclose accounting matters timely and accurately, and (ii) an appropriate level of knowledge and experience to establish effective processes and controls. Additionally, limited personnel resulted in insufficient segregation of duties in our finance and accounting functions.
• The material weakness in the control environment contributed to additional material weaknesses: (i) we did not design and maintain an effective risk-assessment process at a precise enough level to identify new and evolving risks of material misstatement in our financial statements, including timely changes to existing controls or implementation of new controls to respond to changes in risk; and (ii) we did not design and maintain effective information technology general controls (“ITGCs”) for information systems that are relevant to the preparation of our financial statements. Specifically, we did not design and maintain: (a) user-access controls to ensure appropriate segregation of duties and to adequately restrict user and privileged access to financial applications, programs and data; (b) program change-management controls to ensure that IT program and data changes affecting financial IT applications and underlying accounting records are identified, tested, authorized and implemented appropriately; (c) computer-operations controls to ensure that data backups are authorized and monitored; and (d) controls to obtain, review and evaluate third-party service-organization reports and to implement complementary user-entity controls, as applicable.

These material weaknesses did not result in a material misstatement to the unaudited condensed consolidated financial statements included in this Quarterly Report on Form 10-Q. However, if not remediated, these material weaknesses could result in a material misstatement to our annual or quarterly consolidated financial statements that might not be prevented or detected on a timely basis.

Management’s Plan to Remediate the Material Weaknesses

The Company has been implementing and continues to implement measures designed to remediate the material weaknesses described above and to ensure that the related controls are designed, implemented and operating effectively. During 2025, we strengthened our accounting function through the hiring of five full-time accounting professionals, including a Controller and a Manager of Technical Accounting, to enhance oversight, technical expertise and execution of key financial reporting processes. In addition to identifying and remediating design deficiencies in our processes, we have formally documented procedures for significant accounting and financial reporting processes, including procedures addressing revenue recognition and segregation of duties.

During 2026, we plan to (i) further document and implement control procedures and control monitoring; (ii) identify and remediate gaps in our information-technology general controls related to security, user access, restricted access and change management; and (iii) design and implement risk-assessment processes to identify and address new and evolving risks associated with financial reporting. We are committed to maintaining a strong internal control environment and believe that these remediation efforts will represent significant improvements in our control environment. Management will continue to monitor and evaluate the effectiveness of internal control over financial reporting on an ongoing basis and will implement additional enhancements as necessary. We currently expect that these measures, once fully implemented and operational for a sufficient period of time and tested, will remediate the material weaknesses, which we aim to achieve by the end of 2026; however, the timing of remediation is subject to successful design, implementation and sustained operating effectiveness.

Changes in Internal Control over Financial Reporting

There were no changes in our internal control over financial reporting (as defined in Rule 13a-15(f) and Rule 15d-15(f) under the Exchange Act) during our most recent fiscal quarter that have materially affected, or are reasonably likely to materially affect, our internal control over financial reporting.

Other than the amended and additional risk factors set forth below, there were no material changes to the risk factors disclosed in Part II, Item 1A, Risk Factors of our Annual Report on the Form 10-K for the year ended December 31, 2025 as filed with the SEC on March 2, 2026.

The integration of LSI, NuCrypt and NHanced and the scaling of our Arizona thin-film lithium niobate facility and planned “FAB 2” present significant execution risks.

Realizing the anticipated benefits of the LSI, NuCrypt, and NHanced acquisitions and our capacity expansion depends on successful integration of technology, systems, processes and personnel; achieving required quality and reliability metrics; and timely scaling of production. Integration and scaling activities may divert management attention, require incremental capital, and lead to unanticipated costs and operational disruptions. We may encounter delays in technology transfers, tool installation and qualification, supply of specialty materials or components, facilities readiness, environmental health and safety permitting, and recruiting and retaining specialized photonics, packaging and operations talent. Failure to execute effectively could delay product and customer qualification milestones, constrain shipments, increase cost of revenue, compress margins, and negatively impact bookings, revenue growth and cash flows. Any of these factors could materially and adversely affect our business, financial condition and results of operations.

We depend on certain suppliers to source products. Failure to maintain our relationship with any of these suppliers, or a failure to replace any of these suppliers, could have a material adverse effect on our business, financial position, results of operations and cash flows.

We buy our products and supplies from companies that manufacture and source products from the United States and abroad. Our ability to develop and maintain relationships with qualified suppliers who can satisfy our standards for quality and delivery in a timely and efficient manner is a significant challenge. For certain photonic integrated circuits and related III-V components used in our devices, there are very few qualified suppliers, and in some cases a single source. Any failure to maintain our relationship with any of our key suppliers, or a failure to replace any such supplier that is lost, could have a material adverse effect on our business, financial position, results of operations and cash flows.

We may be required to replace a supplier if their products do not meet our quality or safety standards, or if the United States government imposes restrictions on trade with certain countries, such as China. In addition, our suppliers could discontinue selling products at any time for reasons that may or may not be in our control or the suppliers’ control, including shortages of raw materials, environmental and social supply chain issues, public health emergencies, labor disputes or weather conditions. Disruptions in transportation lines or geopolitical conditions including the ongoing war between Russia and Ukraine, the war between Israel and Hamas, the state of the military conflict between Israel and Hezbollah or an invasion of Taiwan by China, may also cause global supply chain issues that affect us or our suppliers. While we generally have multiple sources of supply, we do rely on a single supplier for materials in some cases. The loss of, or substantial decrease in the availability of, products from our suppliers, or the loss of a key supplier, temporarily or permanently, could result in a material shortage of products, which could lead to price escalations that we may be unable to offset by our prices to our customers. When supply chain issues are later resolved and prices return to normal levels, we may be required to reduce the prices at which we sell our products to our customers in order to remain competitive. In addition, even where these risks do not materialize, we may incur costs as we prepare contingency plans to address such risks. Our operating results and inventory levels could suffer if we are unable to promptly replace a supplier who is unwilling or unable to satisfy our requirements with a supplier providing similar products. In addition, our suppliers’ ability to deliver products may also be affected by raw material and commodity cost volatility or financing constraints caused by credit market conditions, which could materially and negatively impact our net sales and operating costs, at least until alternate sources of supply are arranged. Requalification of alternate suppliers can be lengthy and may require design changes, additional testing, and customer or regulatory re-approvals, which could delay or prevent product development or shipments and increase cost of revenue. Any delay or unavailability of key products required for our development activities in a timely or cost-effective manner could delay or prevent us from further developing our products and services on our expected timelines or at all and could materially harm our business.

We will require a significant amount of cash for expenditures as we invest in ongoing research and development and business operations and may need additional capital sooner than planned to pursue our business objectives and respond to business opportunities, challenges or unforeseen circumstances, and we cannot be sure that additional financing will be available. If we are unable to raise additional funding when needed, we may be required to delay, limit or substantially reduce our development efforts.

Our business and future plans for expansion are capital-intensive, and we will require additional capital for equipment and facilities for hardware manufacturing and optical chip fabrication. As we ramp thin-film lithium niobate optical chips and related device platforms, and as we expand internal and external manufacturing capacity, we expect near-term increases in operating expenses and pressure on gross margins during qualification and early production. The specific timing of cash inflows and outflows may fluctuate substantially from period to period. We will require a significant amount of cash for expenditures as we invest in ongoing research and development and business operations.

Our operating plan may change because of factors currently unknown, and we may need to seek additional funds sooner than planned, through public or private equity or debt financings or other sources. Such financings may result in dilution to stockholders, issuance of securities with priority as to liquidation and dividend and other rights more favorable than those of our common stock, imposition of debt covenants and repayment obligations or other restrictions that may adversely affect our business. Any funds we raise may not be sufficient to enable us to continue to implement our long-term business strategy. Further, our ability to raise additional capital may be adversely impacted by worsening global economic conditions and disruptions to and volatility in the credit and financial markets in the United States and worldwide resulting from disruptions in access to bank deposits or lending commitments due to bank failures, the ongoing war between Russia and Ukraine and the related sanctions imposed against Russia, and the war between Israel and Hamas, the state of the military conflict between Israel and Hezbollah and the related risk of a larger regional conflict. In addition, we may seek additional capital due to favorable market conditions or strategic considerations even if we believe that we have sufficient funds for current or future operating plans.

We may be unable to obtain additional financing on acceptable terms, or at all, and any such financing may be dilutive to existing stockholders. The inability to obtain financing when needed may make it more difficult for us to operate our business or implement our growth plans and we may be required to delay, limit or substantially reduce our quantum computing development efforts. Our ability to raise additional capital through the sale of securities could be significantly impacted by the resale of our securities by holders of our securities, which could result in a significant decline in the trading price of our securities and potentially hinder our ability to raise capital on terms that are acceptable to us or at all.

Our use of generative AI tools may pose risks to our proprietary software and systems and subject us to legal liability.

We use generative AI tools in our business, and we expect to use generative AI tools in the future, including to generate code and other materials incorporated into our products, proprietary software and systems, and for other internal and external uses. Generative AI refers to deep-learning models that can generate new data, such as text, images and other content, by analyzing and emulating existing data. Advanced generative AI tools, which may produce content indistinguishable from that generated by humans, are a relatively novel development, with benefits, risks and liabilities still unknown. Recent decisions of governmental entities and courts (such as the U.S. Copyright Office, U.S. Patent and Trademark Office and U.S. Court of Appeals for the Federal Circuit) interpret U.S. copyright and patent law as limited to protecting works and inventions created by human authors and inventors, respectively. We are therefore unlikely to be able to obtain U.S. copyright or patent protection for works or inventions wholly created by a generative AI tool, and our ability to obtain U.S. copyright and patent protection for source code, text, images, inventions, or other materials, which are developed with some use of generative AI tools, may be limited, if available at all. Likewise, the availability of such IP protections in other countries is unclear. In addition, we may have little or no insight into and no control over the content and materials used by vendors to train these generative AI tools. There is ongoing litigation over whether the use of copyrighted materials to train the AI models used in these tools is lawful, and the impact of decisions in such litigation on our use of generative AI tools is unknown. Additionally, our use of third-party generative AI tools to develop source code, text, images, inventions, or other materials may expose us to greater risks than utilizing contracted human developers, as third-party generative AI vendors typically do not provide warranties or indemnities with respect to the output generated by such generative AI tools, and generative AI tools may also hallucinate, providing output that appears correct but is erroneous.

Additionally, while we employ practices designed to evaluate, track and mitigate risk around our use of third-party generative AI tools, our use of such tools may inadvertently violate a third party’s rights, be non-compliant with the applicable terms of use or our other legal obligations, or result in a security or privacy risk or data leakage. Our use of this technology could result in additional compliance costs, regulatory investigations and actions, and lawsuits. For example, we may face claims from third parties claiming infringement of their intellectual property rights or mandatory compliance with open-source software or other license terms with respect to software or other materials or content we believed to be available for use and not subject to license terms or other third-party proprietary rights. Any of these claims could result in legal proceedings and could require us to purchase costly licenses, comply with the requirements of third-party licenses, or limit or cease using the implicated software or other materials or content, unless and until we can re-engineer such software, materials or content to avoid infringement or change the use of, or remove, the implicated third-party materials, which could reduce or eliminate the value of our technologies and services. Our use of generative AI tools to generate code may also present additional security risks because the generated source code may contain security vulnerabilities. Additionally, the vendors of these generative AI tools may fail to comply with their contractual obligations to us regarding the confidentiality or security of any data or other inputs provided to such vendor or outputs generated by their generative AI tools. Our sensitive information or that of our customers could be leaked, disclosed, or revealed as a result of or in connection with our employees’, personnel’s or vendors’ use of third-party generative AI technologies.

We and the third parties with whom we work are subject to stringent and evolving U.S. and foreign laws, regulations and rules, contractual obligations, industry standards, policies and other obligations related to data privacy and security. Our (or the third parties with whom we work) actual or perceived failure to comply with such obligations could lead to regulatory investigations or actions; litigation (including class claims) and mass arbitration demands; fines and penalties; disruptions of our business operations; reputational harm; loss of revenue or profits; loss of customers or sales; and other adverse business consequences.

In the ordinary course of business, we process personal data and sensitive information. Our data storage and processing activities, including the establishment and operation of future quantum data centers, may subject us to numerous privacy, data protection and security obligations, such as various laws, regulations, guidance, industry standards, external and internal privacy and security policies, contractual requirements and other obligations relating to data privacy, localization and security, both in the U.S. and in foreign jurisdictions. Laws and regulations governing privacy, data protection and data sovereignty are rapidly evolving, extensive, complex, and include inconsistencies and uncertainties that may conflict with other rules or our practices. Further, new laws, rules, and regulations could be enacted with which we are not familiar or with which our practices do not comply.

In the United States, federal, state and local governments have enacted numerous privacy and security laws, including data breach notification laws, personal data privacy laws, consumer protection laws (e.g., Section 5 of the Federal Trade Commission Act) and other similar laws. Numerous U.S. states have enacted comprehensive privacy laws that impose certain obligations on covered businesses, including providing specific disclosures in privacy notices and affording residents with certain rights concerning their personal data. As applicable, such rights may include the right to access, correct, or delete certain personal data, and to opt-out of certain data processing activities, such as targeted advertising, profiling and automated decision-making. The exercise of these rights may impact our business and ability to provide our products and services. Certain states also impose stricter requirements for processing certain personal data, including sensitive information, such as conducting data privacy impact assessments. These state laws allow for statutory fines for noncompliance. For example, the California Consumer Privacy Act of 2018, as amended by the California Privacy Rights Act (collectively, the “CCPA”) applies to personal data of California consumers, business representatives and employees who are California residents, and requires certain businesses to provide specific disclosures in privacy notices and honor requests of such individuals to exercise certain privacy rights. The CCPA provides for fines and allows private litigants affected by certain data breaches to recover significant statutory damages. Similar laws are being considered in several other states, as well as at the federal and local levels, and we expect more states to pass similar laws in the future.

Outside the United States, an increasing number of laws, regulations, industry standards and other obligations may govern privacy, data protection and security. For example, EU GDPR, UK GDPR, Australia’s Privacy Act, and China’s Personal Information Protection Law (“PIPL”) impose strict requirements for processing personal data. For example, under the GDPR, companies may face temporary or definitive bans on data processing and other corrective actions; fines of up to 20 million Euros under the EU GDPR, 17.5 million pounds sterling under the UK GDPR or, in each case, or 4% of annual global revenue, whichever is greater; or private litigation related to processing of personal data brought by classes of data subjects or consumer protection organizations authorized at law to represent their interests. Additionally, we also target customers in Asia and are or may become subject to new and emerging data protection and privacy regimes in Asia, including China’s PIPL, Japan’s Act on the Protection of Personal Information, and Singapore’s Personal Data Protection Act.

Our employees and personnel use generative AI technologies and/or automated decision-making technologies to perform their work, and the disclosure and use of personal information in generative AI technologies is subject to various privacy laws and privacy obligations. Governments have passed and are likely to pass additional laws regulating AI and/or automated decision-making technologies. Our use of this technology could result in additional compliance costs, regulatory investigations and actions, and lawsuits. If we are unable to use AI and/or automated decision-making technologies, it could make our business less efficient and result in competitive disadvantages. We use AI to assist us in making certain decisions, which is regulated by certain privacy laws. Due to inaccuracies or flaws in the inputs, outputs, or logic of the AI, the model could be biased and could lead us to make decisions that could bias certain individuals (or classes of individuals), and adversely impact their rights, employment and ability to obtain certain pricing, products, services or benefits. See “- Our use of generative AI tools may pose risks to our proprietary software and systems and subject us to legal liability.” above.

We may also become subject to new laws that regulate non-personal data. For example, the European Union’s Data Act imposes certain data and cloud service interoperability and switching obligations to enable users to switch between cloud service providers without undue delay or cost, as well as certain requirements concerning cross-border international transfers of, and governmental access to, non-personal data outside the European Economic Area (“EEA”). Depending on how this Act and any similar laws are implemented and interpreted, we may have to adapt our business practices, contractual arrangements and services to comply with such obligations.

In addition, we may be unable to transfer personal data from Europe and other jurisdictions to the United States or other countries due to data localization requirements or limitations on cross-border data flows. In the ordinary course of business, we transfer personal data from Europe and other jurisdictions to the United States or other countries. Europe and other jurisdictions have enacted laws requiring data to be localized or limiting the transfer of personal data to other countries. In particular, the EEA and the UK each has significantly restricted the transfer of personal data to the United States and other countries whose privacy laws it believes are inadequate. Other jurisdictions may adopt similarly stringent interpretations of their data localization and cross-border data transfer laws. Although various mechanisms may be used to transfer personal data from the EEA and UK to the United States in compliance with law, such as the EEA’s and UK’s respective standard contractual clauses, the EU-U.S. Data Privacy Framework, the UK extension to the EU-U.S. Data Privacy Framework, and the Swiss-U.S. Data Privacy Framework, these mechanisms are subject to legal challenges, and there is no assurance that we can satisfy or rely on these measures to lawfully transfer personal data to the United States. If there is no lawful manner for us to transfer personal data from the EEA, the UK, or other jurisdictions to the United States, or if the requirements for a legally-compliant transfer are too onerous, we could face significant adverse consequences, including the interruption or degradation of our operations, the need to relocate part of or all of our business or data processing activities to other jurisdictions at significant expense, increased exposure to regulatory actions, substantial fines and penalties, the inability to transfer data and work with partners, vendors and other third parties, and injunctions against our transferring or other processing of personal data necessary to operate our business. Additionally, companies that transfer personal data out of the EEA and UK to other jurisdictions, particularly to the United States, are subject to increased scrutiny from regulators, individual litigants, and activist groups. Some European regulators have ordered certain companies to suspend or permanently cease certain transfers of personal data out of Europe for allegedly violating the GDPR’s cross-border data transfer limitations. Regulators in other jurisdictions, including the United States, have also enacted and may, in the future, enact cross-border data restrictions.

In addition to privacy, data protection and security laws, we are contractually subject to data protection (including security) industry standards adopted by industry groups and may become subject to additional obligations in the future. We are also bound by other contractual obligations related to privacy, data protection and security, and our efforts to comply with such obligations may not be successful. For example, certain laws addressing privacy, data protection and security, such as the EU GDPR, Switzerland Federal Act on Data Protection, UK GDPR, Australia’s Privacy Act and CCPA, require our customers to impose specific contractual restrictions on their service providers. Additionally, some of our customers may require us to host personal data locally.

We publish privacy policies, marketing materials and other statements, such as compliance with certain certifications or self-regulatory principles, regarding privacy, data protection and security. Regulators are increasingly scrutinizing these statements, and if these policies, materials or statements are or are perceived to be deficient, lacking in transparency, deceptive, unfair or misrepresentative of our practices, we may be subject to investigation, enforcement actions by regulators, or other adverse consequences.

Obligations related to privacy, data protection and security are quickly changing, becoming increasingly stringent and creating regulatory uncertainty. Additionally, these obligations may be subject to differing applications and interpretations, which may be inconsistent or conflict among jurisdictions. Preparing for and complying with these obligations requires us to devote significant resources and may necessitate changes to our services, information technologies, systems and practices and to those of any third parties that process personal data on our behalf.

We have in the past failed, and may in the future, fail to achieve complete compliance with all of our privacy, data protection or security obligations, including contractual obligations with customers.

Moreover, despite our efforts, our personnel or third parties with whom we work may similarly not achieve compliance with such obligations, which could negatively impact our business operations. If we or third parties with whom we work do not fully comply with applicable privacy, data protection or security obligations, we could face significant consequences, including but not limited to: government enforcement actions (e.g., investigations, fines, penalties, audits, inspections and similar events); litigation (including class-action claims and claims arising under the Federal Civil False Claims Act (including treble damages and other penalties)); additional reporting requirements and/or oversight; contract terminations and orders to destroy or not use personal data. In particular, plaintiffs have become increasingly more active in bringing privacy-related claims against companies, including class claims and mass arbitration demands. Some of these claims allow for the recovery of statutory damages on a per violation basis, and, if viable, carry the potential for considerable statutory damages, depending on the volume of data and the number of violations. Any of these events could have a material adverse effect on our reputation, business or financial condition, including but not limited to: loss of customers; interruptions or stoppages in our business operations or data collection; limited ability to develop or commercialize our products; expenditure of time and resources to defend any claim or inquiry; adverse publicity; or substantial changes to our business model or operations.