Fabric.AI, Inc.

The following description of risk factors includes any material changes to, and supersedes the description of, risk factors associated with our business, financial condition and results of operations previously disclosed in “Item 1A. Risk Factors” of our Annual Report for the year ended December 31, 2025 on Form 10-K, as filed with the SEC on March 30, 2026. Our business, financial condition and operating results can be affected by a number of factors, whether currently known or unknown, including but not limited to those described below, any one or more of which could, directly or indirectly, cause our actual financial condition and operating results to vary materially from past, or from anticipated future, financial condition and operating results. Any of these factors, in whole or in part, could materially and adversely affect our business, financial condition, operating results and stock price.

The following discussion of risk factors contains forward-looking statements. These risk factors may be important to understanding other statements in this Form 10-Q. The following information should be read in conjunction with the unaudited condensed consolidated financial statements and related notes in Part I, Item 1, “Financial Statements” and Part I, Item 2, “Management’s Discussion and Analysis of Financial Condition and Results of Operations” of this Form 10-Q.

We are a development-stage company with no revenue from our semiconductor operations and a limited operating history in the AI semiconductor industry. There can be no assurance that we will successfully develop, commercialize, or achieve market acceptance of our technologies.

We commenced our strategic transition toward the design and development of fabless semiconductor technologies for AI data center infrastructure in April 2026. We have a limited operating history in the AI semiconductor industry, have not generated any revenue from our semiconductor operations, and have not yet completed a prototype of our initial product, the Neural I/o™ chip. Our ability to generate revenue will depend on our successful development and commercialization of our MicroLED-based optical interconnect technology, which is subject to significant technological, engineering, and manufacturing risks. There can be no assurance that we will be able to develop products that meet their intended performance specifications, manufacture them at commercially viable cost levels, or achieve market acceptance. If we are unable to successfully execute our semiconductor strategy, our business, financial condition, and results of operations could be materially and adversely affected.

We are substantially dependent on our collaboration with Kopin Corporation for the development and manufacturing of our semiconductor products. If our relationship with Kopin is disrupted or terminated, our business could be materially and adversely affected.

Our semiconductor strategy is substantially dependent on our collaboration with Kopin Corporation pursuant to the JDA dated April 27, 2026 and the related Commercial Supply Agreement. Kopin is the sole provider of the MicroLED technology that is foundational to our Neural I/o chip. Under the Supply Agreement, all products incorporating the project technology must be manufactured exclusively by or on behalf of Kopin, and we are required to purchase our entire requirements for products from Kopin, subject to limited exceptions for supply failure events. If Kopin is unable or unwilling to continue to perform under the JDA or Supply Agreement, experiences manufacturing difficulties, fails to meet quality or delivery requirements, or if the JDA or Supply Agreement is terminated for any reason, we may be unable to develop or commercialize our products on the timelines we anticipate, or at all. In the event of termination arising from our breach, failure to fund, or a bankruptcy event, Kopin has the right to continue to develop, use, and commercialize the project technology without restriction, and we have agreed to assign to Kopin all of our right, title, and interest in the project technology. Any disruption in our relationship with Kopin could have a material adverse effect on our business, financial condition, and results of operations.

Our MicroLED-based optical interconnect technology is at an early stage of development and may not achieve the performance characteristics or cost levels necessary for commercial viability.

Our initial product under development, the Neural I/o chip, is at an early stage of development. We have not yet completed a prototype, and there can be no assurance that the chip will achieve its intended performance specifications, including with respect to bandwidth, latency, and power efficiency. MicroLED-based optical interconnect technology for data center applications is a nascent technology, and we face significant technical challenges in developing a commercially viable product. The development process may take longer, cost more, or encounter more technical obstacles than we currently anticipate. Even if we successfully develop a working prototype, we may face additional challenges in scaling manufacturing, achieving acceptable yield rates, and reducing per-unit costs to levels that are competitive with incumbent copper-based and laser-based interconnect solutions. If we are unable to demonstrate the technological viability of our products or bring them to market in a timely manner, our business and prospects could be materially and adversely affected.

We face intense competition from established semiconductor companies with significantly greater resources, and our products may not be able to compete effectively.

The markets for AI infrastructure and data center interconnect technologies are intensely competitive and subject to rapid technological change. We face competition from established providers of copper-based and laser-based interconnect solutions, including large, diversified semiconductor companies and specialized optical interconnect providers, many of which have significantly greater financial, technical, manufacturing, marketing, and distribution resources than we do. Many of our potential competitors have longer operating histories, larger and more established customer bases, and more extensive research and development capabilities. We may also face competition from new entrants into the MicroLED interconnect space or from alternative technologies that we have not yet anticipated. If our competitors develop technologies that are superior to ours, or if they are able to bring competing products to market before us, our ability to achieve market acceptance could be significantly impaired, which would materially and adversely affect our business and results of operations.

We will require substantial additional capital to fund our semiconductor development activities, and there can be no assurance that such capital will be available on acceptable terms, or at all.

Our semiconductor development activities will require substantial capital investment. Pursuant to the JDA, we have agreed to pay Kopin up to $15,000,000 for the initial development of the project technology, and following a successful prototype demonstration, the parties expect to negotiate a production plan that may include an additional payment by us of approximately $15,000,000 to $25,000,000. In addition to our obligations under the JDA, we expect to incur significant costs related to research and development, personnel, equipment, and general corporate activities as we scale our operations. While we have raised significant funds through recent financing transactions, these funds may not be sufficient to fund our development activities through commercialization. If we are unable to raise additional capital when needed, we may be required to delay, reduce, or eliminate certain development programs, which could materially and adversely affect our business, financial condition, and prospects.

Our semiconductor products may be subject to export control restrictions and trade regulations that could limit our ability to sell products internationally or collaborate with foreign partners.

The design, development, and potential sale of semiconductor technologies for AI data center applications are subject to U.S. export control laws and regulations, including the Export Administration Regulations administered by the Bureau of Industry and Security and economic sanctions programs administered by the Office of Foreign Assets Control. The U.S. government has significantly expanded export controls applicable to advanced semiconductor technologies, AI-related hardware, and supercomputing components in recent years. If our products, once developed, are classified under export-controlled categories, we may be required to obtain licenses or authorizations prior to export, and certain destinations, entities, or end uses may be prohibited entirely. Changes to export control regulations, the Entity List, or the imposition of new sanctions could limit our ability to sell products in key international markets, restrict our ability to collaborate with foreign partners or contract manufacturers, or otherwise materially and adversely affect our business.

Environmental, health and safety (EHS) laws and regulations may expose us to liability, and such liability and compliance with these laws and regulations may adversely affect our business.

The semiconductor industry is subject to a variety of international, federal, state, local and non-U.S. laws and regulations governing pollution, environmental protection and occupational health and safety, including those relating to the release, storage, use, discharge, handling, generation, transportation, disposal, and labeling of, and human exposure to, hazardous and toxic materials, product composition, and the investigation and cleanup of contaminated sites, including sites we currently or formerly owned or operated, due to the release of hazardous materials, regardless of whether we caused such release. We are also required to obtain environmental permits from governmental authorities for some of our operations. We cannot be assured that we have been or will be at all times in complete compliance with such EHS laws, regulations and permits. Failure to comply with such EHS laws and regulations could subject us to civil or criminal costs, obligations, sanctions or property damage or personal injury claims, or suspension of our facilities’ operating permits.

Changes in EHS laws or regulations may require us to invest in costly equipment or make manufacturing process changes and may adversely affect the sourcing, supply and pricing of materials used in our products. We believe that our model of a fabless company minimizes those risks, although any such changes may require us to conduct careful audits of our vendors or even to replace vendors, which may involve costs in qualifying or making adjustments for the work with another vendor.

In the event of an incident involving hazardous materials, we could be liable for damages and such liability could exceed the amount of any liability insurance coverage and the resources of our business. In addition, in the event of the discovery of contaminants or the imposition of clean up obligations for which we are responsible, we may be required to take remedial or other measures which could have a material adverse effect on our business, financial condition and results of operations. In response to environmental concerns, some customers and government agencies impose requirements for the elimination and/or labeling of hazardous substances, such as lead (which is widely used in soldering connections in the process of semiconductor packaging and assembly), in electronic equipment, as well as requirements related to the take-back of products discarded by customers.

EHS laws and regulations have tended to become more stringent over time, causing a need to redesign technologies, imposing greater compliance costs and increasing risks and penalties associated with violations, which could seriously harm our business.

In addition, increasingly regulators, customers, investors, employees and other stakeholders are focusing on environmental, social and governance (ESG) matters and related disclosures. These changing rules, regulations and stakeholder expectations have resulted in, and are likely to continue to result in, increased general and administrative expenses and increased management time and attention spent complying with or meeting such regulations and expectations.

We have no full-time employees and rely heavily on consultants and contractors, which may limit our ability to execute our business strategy.

As of March 31, 2026, we had zero full-time employees and rely on consultants and contractors to supplement our capabilities. Our future success depends in significant part on our ability to attract, retain, and motivate qualified engineering, scientific, and management personnel. Competition for such personnel in the semiconductor industry is intense, and we may not be able to attract or retain the personnel necessary to execute our semiconductor development strategy. Our reliance on consultants and contractors may also create challenges related to intellectual property protection, continuity of institutional knowledge, and the consistent execution of our development programs. If we are unable to build and maintain an adequate team to support our operations, our business and results of operations could be materially and adversely affected.

Our fabless business model makes us dependent on third-party manufacturers, and our business may be adversely affected by supply chain disruptions, tariffs, or geopolitical risks.

We operate as a fabless semiconductor company and intend to outsource the fabrication and manufacturing of our chips to third-party contract manufacturers. This model makes us dependent on the manufacturing capacity, quality, and timeliness of our manufacturing partners. A significant portion of global semiconductor manufacturing capacity is concentrated in Asia, and trade tensions between the United States and certain countries have resulted in increased tariffs, export restrictions, and supply chain disruption risk. Changes in trade policy, the imposition of new or increased tariffs on semiconductor components or materials, or disruption of international supply chains could increase our costs, limit access to manufacturing partners, or delay product development and commercialization. Additionally, our dependence on Kopin as the exclusive manufacturer of products incorporating the project technology means that any disruption to Kopin’s manufacturing capabilities could directly and materially impact our ability to deliver products to customers.

Because we operate a fabless business model, we may not be eligible for certain U.S. government incentives and tax credits offered to promote domestic semiconductor production.

From time to time, governments may provide subsidies or make other investments that could give competitive advantages to certain semiconductor companies. For example, in 2022, the U.S. government passed the Creating Helpful Incentives to Produce Semiconductors & Sciences Act to provide $52.7 billion of funding to U.S.-based semiconductor companies to promote domestic production. Because we operate a fabless business model, we may not be eligible for such incentives from the U.S. government at this time.

We jointly own intellectual property developed under our collaboration with Kopin, and our dependence on Kopin’s existing intellectual property may limit our ability to independently commercialize our technology.

Intellectual property developed through our collaboration with Kopin is jointly owned by both companies. Our technology leverages Kopin’s patented bi-directional NeuralDisplay™ architecture, and we are dependent on Kopin’s existing intellectual property portfolio as a foundation for our product development. While Kopin has granted us a non-exclusive, royalty-free, worldwide license under its background technology for developing and commercializing the project technology, we do not have sole ownership or exclusive rights to much of the intellectual property underlying our products. If our relationship with Kopin deteriorates, or if Kopin’s intellectual property rights are challenged or invalidated by third parties, our ability to develop and commercialize our products could be materially impaired. Additionally, we may face claims of intellectual property infringement from third parties, particularly given the competitive nature of the semiconductor industry, and defending against such claims could be costly and time-consuming.

Holders of our shares of Series K Preferred Stock are entitled to certain payments under the Series K Certificate of Designations that may be paid in cash, which may require the expenditure of a substantial portion of our cash resources.

The holders of the Series K Preferred Stock are entitled to dividends of 7% per annum (“Dividends”), compounded each calendar quarter, which are payable in arrears on the first trading day of each calendar quarter (each, a “Dividend Date”), with the first Dividend Date being July 1, 2026, in cash out of funds legally available therefor; provided that a holder of the Series K Preferred Stock and the Company may mutually agree to convert any Dividends into shares of Common Stock at a price to be mutually determined by the Company and such holder, which shall not be less than the lower of (x) $0.502, which was 20% of the “Minimum Price” (as defined in Rule 5635 of the Nasdaq Stock Market) on the date of the Purchase Agreement and (y) 20% of the “Minimum Price” (as defined in Rule 5635 of the Nasdaq Stock Market) on the Stockholder Approval Date, in each case, subject to adjustment for stock splits, stock dividends, stock combinations, recapitalizations or other similar events, or, in any case, such lower amount as permitted, from time to time, by the Nasdaq Capital Market (the “Floor Price”). Upon the occurrence and during the continuance of a Triggering Event (as defined in the Series K Certificate of Designations), the Series K Preferred Stock accrue dividends at the rate of 15% per annum. In connection with a Triggering Event, each holder of Series K Preferred Stock will be able to require us to redeem in cash any or all of the holder’s Series K Preferred Stock at a premium set forth in the Series K Certificate of Designations. If such Triggering Event occurs, our financial condition and results of operations could be materially affected.

If we do not have sufficient cash resources to make these payments, we may need to raise additional equity or debt capital, and we cannot provide any assurance that we will be successful in doing so. If are unable to raise sufficient capital to meet our payment obligations, we may need to delay, reduce or eliminate certain research and development programs or other operations, sell some or all of our assets or merge with another entity. Our ability to make payments due to the holders of our Series K Preferred Stock using cash is also limited by the amount of cash we have on hand at the time such payments are due as well as certain provisions of the Delaware General Corporation Law.

The Series K Preferred Stock and the Series K Warrants contain certain anti-dilution provisions, which may dilute the interests of our stockholders, depress the price of our common stock, and make it difficult for us to raise additional capital.

Certain events, for example, a Stock Combination Event (as defined in each of the Series K Certificate of Designations and the Series K Warrants) may reduce the conversion price of the Series K Preferred Stock and the exercise price of the Series K Warrants, which in turn may lead to further dilution to the holders of our Common Stock. The Series K Warrants additionally contain anti-dilution provisions applicable to the exercise price. If in the future, while any of the Series K Warrants are outstanding, we may be required upon the occurrence of certain events, to adjust the exercise price of the Series K Warrants, and simultaneously with any adjustment to the exercise price, the number of shares of Common Stock that may be purchased upon exercise of the Series K Warrants shall be increased or decreased proportionately, so that after such adjustment the aggregate exercise price payable thereunder for the adjusted number of shares of Common Stock issuable upon exercise of the Series K Warrants shall be the same as the aggregate exercise price in effect immediately prior to such adjustment. Such adjustments can dilute the book value per share of Common Stock and reduce any proceeds we may receive from the exercise of the Series K Warrants. In addition, the perceived risk of dilution may cause our shareholders to be more inclined to sell their Common Stock, which may in turn depress the price of common shares regardless of our business performance. We may also find it more difficult to raise additional equity capital while any of the Series K Warrants and the Series K Preferred Stock remain outstanding.

The Series K Certificate of Designations contains restrictive covenants and terms that may make it difficult to procure additional financing and that may affect our financial condition and results of operations.

The Series K Certificate of Designations contains certain restrictive covenants including but not limited to: maintaining a minimum amount of unencumbered, unrestricted cash and cash equivalents on hand, until the date on which less than 1,050 shares of the Series I Preferred Stock are outstanding; restrictions on incurring any indebtedness until the date on which no shares of Series I Preferred Shares are outstanding, subject to certain exceptions; restrictions on directly or indirectly, redeeming, repurchasing or declaring or paying any cash dividend or distribution on any of our capital stock (other than as required by the Series K Certificate of Designations, the Series A Certificate of Designations, the Series H-7 Certificate of Designations, the Series I Certificate of Designations and Series J Certificate of Designations), and restrictions on directly or indirectly, permitting any of our indebtedness to mature or accelerate prior to the Maturity Date (as defined in the Series K Certificate of Designations). Additionally, the Series K Preferred Stock also contain certain purchase rights (the “Purchase Rights”) permitting the holders of the Series K Preferred Stock to acquire upon the terms applicable to such Purchase Rights, the aggregate Purchase Rights which such holder could have acquired if such holder had held the number of shares of Common Stock acquirable upon complete conversion of all of its shares of Series K Preferred Stock. These restrictive covenants may limit our flexibility in raising capital or incurring any indebtedness, which may have an adverse effect on our financial condition.

Under the Series K Purchase Agreement, we are subject to certain restrictive covenants that may make it difficult to procure additional financing.

The Series K Purchase Agreement contains, among others, the following restrictive covenants: (A) until ninety (90) days following the earlier of (x) the date on which this registration statement is declared effective or (y) the date on which the selling stockholders may sell their shares of Common Stock issuable upon conversion of the Series K Preferred Stock or upon exercise of the Series K Warrants without restriction pursuant to Rule 144 under the Securities Act, we may not issue, offer, sell, grant any option or right to purchase, or otherwise dispose of (or announce any issuance, offer, sale, grant of any option or right to purchase or other disposition of) any equity security or any equity-linked or related security, (B) until all of the Series K Warrants are no longer outstanding, we shall be prohibited from effecting or entering into an agreement to effect any subsequent placement involving a variable rate transaction, and (C) until the date in which no shares of Series K Preferred Stock remain outstanding, the Company must provide the holders of the shares of Series K Preferred Stock the opportunity to participate in any subsequent securities offerings by us.

If we require additional funding while these restrictive covenants remain in effect, we may be unable to effect a financing transaction on terms acceptable to us, or at all, while also remaining in compliance with the terms of the Series K Purchase Agreement, or we may be forced to seek a waiver from the investors party to the Series K Purchase Agreement, which such investors are not obligated to grant to us.

The Series J Preferred Stock and related anti-dilution provisions may result in significant dilution to our common stockholders and may limit our operational and financial flexibility.

Pursuant to the JDA, the Company agreed to issue to Kopin shares of Series J Preferred Stock constituting 19.9% of the pro forma fully-diluted outstanding shares of Common Stock, convertible at the Series J Conversion Price of $2.51 per share. The Series J Certificate of Designations provides that the Maximum Issuance (as defined in the Series J Certificate of Designations) shall be increased upon the occurrence of Dilutive Issuances or Dilutive Conversions by 0.1999 shares of Common Stock for each share of Common Stock issued in connection with such events, until adjustments have been made with respect to an aggregate of $50 million in such issuances. The Company has agreed to take all actions necessary to give full force and effect to these adjustment provisions, including through the issuance of additional shares of Series J Preferred Stock to Kopin. In addition, the Series J Preferred Stock accrues dividends at 6% per annum, payable semi-annually on each Dividend Payment Date, which may be paid as a PIK Dividend through the issuance of additional shares of Series J Preferred Stock having an aggregate stated value equal to the amount of the dividend then due, further increasing the number of shares of Common Stock issuable upon conversion. Without the prior express consent of the Required Holders, the Company may not, among other things, amend its Charter or Bylaws in ways that would adversely affect the Series J Preferred Stock, create or authorize new Senior Preferred Stock or Parity Stock, purchase or redeem Junior Stock, or pay dividends on Junior Stock. These protective provisions, together with the potential for significant dilution from anti-dilution adjustments and PIK Dividends, may restrict the Company’s ability to pursue certain corporate transactions or capital raising activities, depress the market price of the Company’s Common Stock, and make it more difficult for the Company to raise additional capital on favorable terms.