CPI AEROSTRUCTURES INC

In addition to other risks and uncertainties described in this Annual Report on Form 10-K, the following material risk factors should be carefully considered in evaluating our business because such factors may have a significant impact on our business, operating results, liquidity, and financial condition. As a result of the risk factors set forth below, actual results could differ materially from those projected in any forward-looking statements.

Risks Related to Our Business

We depend on government contracts for a significant portion of our revenues.

We are a supplier, either directly or as a subcontractor, to the U.S. Government and its agencies and a significant portion of our business depends on government contracts. If we are suspended or barred from contracting with the U.S. Government, if our relationship with individual federal agencies were impaired, or if the U.S. Government otherwise ceased doing business with us or significantly decreased the amount of business it does with us, our business, financial condition, and results of operations could be materially adversely affected.

We depend on a limited number of prime contractors and government customers for a significant portion of our revenue.

A significant portion of our revenues is derived from programs performed for a limited number of prime defense contractors and government customers. These significant customers – Raytheon, Sikorsky, Lockheed Martin, and the United States Air Force – constituted approximately 38%, 20%, 11% and 11%, respectively, of our 2025 revenue. Our revenues from these customers are diversified over several different A&D products, programs, and subsidiaries within these customers. However, any significant change in production rates by any of these customers would have a material effect on our results of operations, and cash flows. There can be no assurance that these customers will continue to purchase products from us at current levels, that we will retain these relationships, or that we will be able to establish comparable relationships with other customers if one or more of these customers reduces or terminates its business with us.

A significant portion of our revenue is derived from a limited number of aerospace and defense programs.

Production levels for specific aerospace or defense programs may vary due to changes in government funding, customer demand, program priorities or technical issues. If production levels for programs on which we depend are reduced or if those programs are delayed, terminated or experience lower demand, our revenues and results of operations could be adversely affected.

Our backlog may not be indicative of future revenue and may not result in realized revenue.

Our backlog represents the estimated value of expected future sales under existing contracts and purchase orders. However, backlog is not necessarily indicative of future revenue to be realized or the timing of such revenue. Production quantities and delivery schedules under existing programs may change, and customers may modify, delay or cancel orders. In addition, many of our contracts are subject to engineering changes, scope modifications, contract adjustments or requests for equitable adjustment, which may affect program scope, pricing or delivery schedules. As a result, the amounts included in backlog may change over time and may not be realized as revenue in the periods we expect or at all. In addition, a portion of our backlog relates to long-term production programs that may extend over several years. These programs are subject to changes in production rates, program requirements and other factors that may affect the timing and amount of revenue recognized. Backlog amounts may also reflect assumptions regarding production quantities, pricing, contract scope and other factors that may change over time. Changes in program requirements, production schedules, contract terms or customer demand could affect our ability to convert backlog into revenue and could adversely affect our results of operations and financial condition.

We may experience liquidity constraints if we are unable to finance working capital requirements associated with our contracts.

Our business requires significant working capital to support the production of complex aerospace and defense aerostructures and aerosystems. Under many of our contracts, we must incur costs for materials, labor and production activities before receiving corresponding customer payments. As a result, we may be required to finance inventory purchases, long-lead materials, engineering work and other production costs for extended periods before reimbursement through contract billings or milestone payments.

Our working capital requirements can vary significantly depending on, among other things, the timing of new program awards, the completion of mature programs, the ramp-up of new production programs, production schedules, changes in production rates on existing programs, inventory requirements and the payment terms with our customers and suppliers. In certain circumstances, customer payment terms may require us to fund production activities before receiving payment, while our suppliers may require shorter payment terms, deposits, price increases or other changes in commercial terms, which may significantly increase the amount of working capital required to support our operations.

In addition, many of our contracts are subject to engineering changes, scope modifications, customer-directed design changes or other contract adjustments. In some cases, we may be required to perform additional work or incur additional costs before the related pricing adjustments are finalized with the customer, including through requests for equitable adjustment or other contract modifications. The negotiation, approval and recovery of amounts associated with these adjustments may take significant time and may not align with the timing at which we incur the related costs which may require us to finance those costs for extended periods.

Our liquidity position may also be affected by the need to maintain inventory for production programs, including long-lead materials detail parts, and by changes in supplier pricing or payment terms. In addition, changes in production schedules, program delays or reductions in production rates by our customers may affect the timing of revenue recognition and cash receipts while we continue to incur production costs.

As a result of these factors, our cash flows from operations may fluctuate and may not always be sufficient to fund our working capital requirements. At times, our liquidity may become constrained, particularly if program changes, payment delays, supply chain disruptions, production rate changes or other operational factors increase our working capital needs, or if financing is not available to fund those requirements.

We currently rely in part on borrowings under our credit facility to support our working capital requirements, and our ability to access that financing may be critical to funding production activities prior to receiving customer payments. If our cash flows from operations and available borrowings are insufficient to meet our working capital needs, we may need to obtain additional financing or take other actions to manage liquidity. There can be no assurance that such financing would be available on acceptable terms, or at all. Any inability to adequately finance our working capital requirements could adversely affect our ability to execute our production programs, convert backlog into revenue, meet production schedules and satisfy our ongoing operating and contractual obligations. See “Risks Related to Our Indebtedness” below.

Our contracts with the U.S. Government and prime contractors are subject to audit and oversight, which could adversely affect our business.

Contracts involving the U.S. Government are subject to audit and oversight by governmental authorities, including the Defense Contract Audit Agency. These audits may review contract pricing, cost allowability and compliance with applicable procurement regulations. If costs are determined to be unallowable or improperly allocated, we may be required to repay amounts previously reimbursed or adjust future billings. Unfavorable audit findings or alleged noncompliance with procurement laws or regulations could also lead to contract disputes, penalties, suspension or debarment from government contracting, which could adversely affect our business, financial condition and results of operations.

We face risks relating to government contracts.

The funding of U.S. Government programs is subject to congressional budget authorization and appropriation processes. For many programs, the U.S. Congress appropriates funds on a fiscal year basis even though a program may extend over several fiscal years. Consequently, programs are often only partially funded initially and additional funds are committed only as Congress makes further appropriations. Appropriations are driven by numerous factors, including geopolitical events, macroeconomic conditions, the ability of the U.S. Government to enact relevant legislation, such as appropriations bills and continuing resolutions, the threat or existence of a government shutdown and potential downgrades of the United States’ credit rating, and changes in government priorities resulting from elections or changes in administration. We cannot predict the extent to which total funding and/or funding for individual programs will be included, increased or reduced in budgets approved by Congress or be included in the scope of separate supplemental appropriations. In the event that appropriations for any of our programs become unavailable, or are reduced or delayed, our contract or subcontract under such program may be terminated, including for convenience, or otherwise adjusted by the U.S. Government, which could have a material adverse effect on our future sales under such program and on our financial position, results of operations, and cash flows.

We also cannot predict the impact of potential changes in priorities due to military transformation and planning and/or the nature of war-related activity on existing, follow-on, or replacement programs. A shift of government priorities to programs in which we do not participate and/or reductions in funding for or the termination of programs in which we do participate, unless offset by other programs and opportunities, could have a material adverse effect on our financial position, results of operations, and cash flows.

In addition, the U.S. Government generally has the ability to terminate contracts, completely or in part, without prior notice, for convenience or for default based on performance. In the event of termination for the U.S. Government’s convenience, contractors are generally protected by provisions covering reimbursement for costs incurred on the contracts and profit on those costs but not the anticipated profit that would have been earned had the contract been completed. Termination by the U.S. Government of a contract for convenience could also result in the cancellation of future work on that program. Termination by the U.S. Government of a contract due to our default could require us to pay for re-procurement costs in excess of the original contract price, net of the value of work accepted from the original contract. Termination of a contract due to our default may expose us to liability and could have a material adverse effect on our ability to compete for contracts. Additionally, we are a subcontractor on some U.S. Government contracts. In these arrangements, the U.S. Government could terminate the prime contract for convenience or otherwise, without regard to our performance as a subcontractor. We can give no assurance that we would be awarded new U.S. Government contracts to offset the revenues lost as a result of the termination of any of our U.S. Government contracts.

We face risks associated with competing for and performing under competitively awarded contracts.

Many of our contracts are awarded through a competitive bidding process. In pursuing these opportunities, we must prepare bids and proposals based on estimates of costs, technical requirements and delivery schedules before the work is performed. As a result, we may encounter unforeseen technological difficulties, cost increases or performance challenges that could adversely affect contract profitability. In addition, we devote substantial time and resources to preparing bids and proposals for contracts that may ultimately not be awarded to us. Even when we are successful in obtaining a contract, the contract may not achieve the profitability we anticipated when the bid was submitted.

Further consolidation in the aerospace industry could adversely affect our business and financial results.

The A&D industry has experienced significant consolidation, including among our customers, competitors, and suppliers. While we believe we have positioned our Company to take advantage of opportunities to market to a broad customer base, which we believe will reduce the potential impact of industry consolidation, there can be no assurance that industry consolidation will not impact our business. Consolidation among our customers may result in delays in the awarding of new contracts and losses of existing business. Consolidation among our competitors may result in larger competitors with greater resources and market share, which could adversely affect our ability to compete successfully. Consolidation among our suppliers may result in fewer sources of supply and increased costs to us.

Due to fixed contract pricing, increasing contract costs exposes us to reduced profitability and the potential loss of future business.

Operating margin is adversely affected when contract costs that cannot be billed to customers are incurred. This cost growth can occur if estimates to complete a contract increase due to technical challenges or if initial estimates used for calculating the contract price were incorrect. The cost estimation process requires significant judgment and expertise. Reasons for cost growth may include unavailability and productivity of labor, the nature and complexity of the work to be performed, the effect of change orders, the availability and cost of materials, tariffs, inflationary pressures, the effect of any delays in performance, availability and timing of funding from the customer, natural disasters, pandemics, and the inability to recover any claims included in the estimates to complete. A significant increase in cost estimates on one or more programs could have a material adverse effect on our financial position or results of operations.

We use estimates when accounting for contracts. Changes in estimates may affect our profitability and our overall financial position.

We primarily recognize revenue from our contracts over the contractual period pursuant to ASC 606. Pursuant to ASC 606, revenue and gross profit are recognized as work is performed based on the relationship between actual costs incurred and total estimated costs at the completion of the contract. Recognized revenues that will not be billed under the terms of the contract until a later date are recorded on our consolidated balance sheet as an asset captioned “Contract assets.” Contracts where billings to date have exceeded recognized revenues are recorded on our consolidated balance sheet as a liability captioned “Contract liabilities.” Changes to the original estimates may be required during the term of the contract. Estimates are reviewed quarterly and the effect of any change in the estimated gross margin percentage for a contract is reflected in the consolidated financial statements for the period the change becomes known. ASC 606 requires the use of considerable estimates in determining revenues and profits and in assigning the amounts to accounting periods. As a result, there can be a significant disparity between earnings as reported and the cash actually received during any reporting period.

We continually evaluate all the issues related to the assumptions, risks and uncertainties inherent with the application of ASC 606; however, there is no assurance that our estimates will be accurate. If our estimates are not accurate or a contract is terminated, we will be forced to adjust revenue in later periods. These estimates and adjustments may also affect revenue recognition, contract assets and liabilities and cash receipts under our contracts, which could adversely affect our financial condition and results of operations.

We incur risks associated with new programs.

New programs with new technologies typically carry risks associated with design changes, development of new production tools, increased capital and funding commitments, ability to meet customer specifications, delivery schedules and unique contractual requirements, supplier performance, ability of the customer to meet its contractual obligations, and our ability to accurately estimate costs associated with such programs. In addition, any new program may not generate sufficient demand or may experience technological problems or significant delays in the regulatory or other certification or manufacturing and delivery schedule. If we were unable to perform our obligations under new programs to the customer’s satisfaction, if we were unable to manufacture products at our estimated costs, or if a new program in which we had made a significant investment was terminated or experienced weak demand, delays, or technological problems, then our business, financial condition and results of operations could be materially adversely affected. These risks include the potential for default, quality problems or inability to meet specifications, our inability to negotiate final pricing for program changes, the potential for low-margin or forward-loss contracts and the risk of writing off contract assets if they are deemed unrecoverable. In addition, beginning new work on existing programs also carries risk associated with the transfer of technology, knowledge, and tooling.

To perform on new programs, we may be required to expend upfront costs which may not have been negotiated in our selling price. Additionally, we may have made margin assumptions related to those costs, that in the case of significant program delays and/or program cancellations, or if we are not successful in negotiating favorable margin on scope changes, could cause us to experience margin degradation which may be material, for costs that are not recoverable. Such charges and the loss of up-front costs could have a material adverse effect on our financial condition and results of operations.

We depend on suppliers for materials, and services, and disruptions in our supply chain could adversely affect our ability to fulfill our contracts.

Our manufacturing operations rely on a network of suppliers that provide raw materials, detail parts, assemblies and specialized services used in our production processes. In some cases, these materials and services are obtained from a limited number of suppliers or require qualification by our customers. Disruptions in our supply chain, including supplier financial difficulties, production interruptions, labor shortages, transportation disruptions, or delays in the delivery of materials or services, could affect our ability to meet production schedules or fulfill contractual obligations. In addition, increases in the cost of materials may not always be recoverable under our contracts, particularly under firm fixed-price arrangements. Any such disruptions or cost increases could adversely affect our results of operations, financial condition and customer relationships.

If our subcontractors or suppliers fail to perform their contractual obligations, our contract performance, and our ability to obtain future business and our profitability could be materially and adversely impacted.

Most of our contracts involve subcontracts with other companies upon which we rely to perform a portion of the services that we must provide to our customers. There is a risk that we may have disputes with our subcontractors, including disputes regarding the quality and timeliness of work performed by the subcontractor, customer concerns about the subcontract, our failure to extend existing task orders or issue new task orders under a subcontract, our hiring of personnel of a subcontractor, or disputes concerning payment. A failure by one or more of our subcontractors to satisfactorily provide on a timely basis the agreed-upon supplies or perform the agreed-upon services may materially and adversely affect our ability to fulfill our obligations as the prime contractor. Subcontractor performance deficiencies could result in a customer suspending or limiting our ability to progress bill or terminate our contract for default. A prohibition on progress billing may have an adverse effect upon our cash flow and profitability and a default termination could expose us to liability and have a material adverse effect on our ability to compete for future contracts and orders.

We are subject to intense competition for the skilled technicians necessary to manufacture our products.

We are subject to intense competition for the services of skilled technicians necessary to manufacture our products. The demand for these individuals may increase as other manufacturers seek to bring to the U.S. manufacturing processes currently outsourced overseas. Continued inflationary pressures may increase our labor costs which could have a material adverse effect on our business, financial condition, and results of operations.

We may be unable to attract and retain personnel who are key to our operations.

Our success, among other things, is dependent on our ability to attract and retain highly qualified senior officers and employees at all levels. Competition for key personnel is intense. Our ability to attract and retain senior officers and experienced, top rate employees is dependent on several factors, including prevailing market conditions and compensation and benefit packages offered by companies competing for the same talent and our reputation in the industry. If our reputation is adversely affected, we may be unable to recruit, hire, and retain talented personnel. The inability to hire and retain these people may adversely affect our production operations and other aspects of our business.

Cybersecurity incidents, system failures and technological changes, including developments in machine learning and generative artificial intelligence, could adversely affect our business and operations.

Our operations depend on the reliability and security of our information technology systems and those of our suppliers, customers and third-party service providers. Cybersecurity threats and system failures could disrupt our operations, impair our ability to manufacture and deliver products, or compromise sensitive information related to our business, customers or suppliers. Cybersecurity threats continue to evolve and include, among other things, malicious software, phishing attacks, ransomware and other unauthorized attempts to access or disrupt information systems. These threats may originate from a variety of sources, including cybercriminals, nation-state actors, insiders or other third parties. Because the techniques used by attackers change frequently and may not be recognized until they are deployed, we may be unable to anticipate or prevent all such attacks.

In addition, our operations could be disrupted by failures of network, software or hardware systems, including failures affecting our systems or those of third-party service providers, as well as by natural disasters, power outages or other operational disruptions. Any cybersecurity incident or system failure could result in the loss or compromise of sensitive information, interruptions in our operations, delays in product delivery, remediation costs, regulatory scrutiny, litigation or reputational damage.

We also face risks associated with technological change, including the increasing use of machine learning and generative artificial intelligence technologies in business operations. The adoption of new technologies may introduce operational, cybersecurity, intellectual property, regulatory or reputational risks.

Although we implement cybersecurity and information technology safeguards designed to protect our systems and data, these measures may not be sufficient to prevent or mitigate all cybersecurity incidents or system disruptions. Any such events could materially adversely affect our business, financial condition and results of operations.

Product liability claims in excess of insurance could adversely affect our financial results and financial condition*.*

We face potential liability for property damage, personal injury, or death as a result of the failure of products designed or manufactured by us. Although we currently maintain product liability insurance (including aircraft product liability insurance), any material product liability not covered by insurance could have a material adverse effect on our financial condition, results of operations, and cash flows.

We are subject to strict governmental regulations relating to the environment, which could result in fines and remediation expenses in the event of non-compliance.

We are required to comply with extensive and frequently changing environmental regulations at the federal, state, and local levels. Among other things, these regulatory bodies impose restrictions to control air, soil, and water pollution, to protect against occupational exposure to chemicals and to require notification or reporting of the storage, use, and release of certain hazardous substances into the environment. This extensive regulatory framework imposes significant compliance burdens and risks on us. In addition, these regulations may impose liability for the cost of removal or remediation of certain hazardous substances released on or in our facilities without regard to whether we knew of, or caused, the release of such substances. Furthermore, we are required to provide a place of employment that is free from recognized and preventable hazards that are likely to cause serious physical harm to employees, provide notice to employees regarding the presence of hazardous chemicals and to train employees in the use of such substances. Our operations require the use of a limited amount of chemicals and other materials for painting and cleaning that are classified under applicable laws as hazardous chemicals and substances. If we are found not to comply with any of these rules, regulations, or permits, we may be subject to fines, remediation expenses, and the obligation to change our business practice, any of which could result in substantial costs that would adversely affect our business operations and financial condition.

We must maintain certain approvals, qualifications and certifications to manufacture products for our customers.

Our customers and regulatory authorities may require us to maintain certain approvals, qualifications or certifications to manufacture and supply assemblies used in aerospace and defense applications. These approvals may require ongoing compliance with quality, manufacturing and documentation standards. If we fail to maintain required approvals or certifications, or if we are unable to obtain approvals for new programs or products, we could lose existing business or be unable to compete for future opportunities.

We may be subject to fines and disqualification for non-compliance with Federal Aviation Administration regulations.

We are subject to regulation by the Federal Aviation Administration (“FAA”). The FAA prescribes standards and licensing requirements for aircraft and aircraft assemblies. We are subject to inspections by the FAA and may be subjected to fines and other penalties (including orders to cease production) for noncompliance with FAA regulations. Our failure to comply with applicable regulations could result in the termination of or our disqualification from some of our contracts, which could have a material adverse effect on our operations and financial condition.

We are presently classified as a small business and the loss of our small business status may adversely affect our ability to compete for government contracts.

We are presently classified as a small business under the North American Industry Classification Systems (“NAICS”) industry and product specific codes that are regulated in the U.S. by the Small Business Administration (“SBA”). We are not considered a small business under all NAICS codes. While we do not presently derive a substantial portion of our business from contracts that are set aside for small businesses, we are able to bid on small business set-aside contracts as well as contracts that are open to non-small business entities. As the NAICS codes are periodically revised, it is possible that we may lose our status as a small business. The loss of small business status would adversely affect our eligibility for special small business programs and limit our ability to collaborate with other business entities which are seeking to team with small business entities as may be required under a specific contract.

We are subject to the cyclical nature of the commercial aerospace industry, and any future downturn in the commercial aerospace industry or general economic conditions, including inflation could adversely impact the demand for our products.

Our business may be affected by certain characteristics and trends of the commercial aerospace industry or general economic conditions that affect our customers, such as the inflationary and interest rate environment in the U.S. and the resultant impacts on the supply chain, the labor market and the general economy, as well as fluctuations in the aerospace industry’s business cycle, varying fuel and labor costs, intense price competition and regulatory scrutiny, certain trends, including a possible decrease in aviation activity and a decrease in outsourcing by aircraft manufacturers, or the failure of projected market growth to materialize or continue. If these characteristics and trends adversely affect customers in the commercial aerospace industry, they may reduce the overall demand for our products.

Increased scrutiny from investors, regulators, customers and other stakeholders regarding environmental practices, sustainability initiatives and climate-related matters could expose us to additional costs and adversely affect our reputation, operations and stock price.

Certain investors, customers and other stakeholders have increased their focus on environmental practices, sustainability initiatives, climate-related matters, supply chain sourcing practices and other corporate responsibility considerations. Some investors may use sustainability or similar criteria to guide their investment strategies and, in some cases, may choose not to invest in us if they believe our policies relating to these matters are inadequate. In addition, regulatory authorities in the United States and other jurisdictions have proposed or adopted, and may in the future adopt, laws, regulations or disclosure requirements relating to environmental or climate-related matters that could increase our compliance costs or otherwise affect our operations.

The factors by which companies’ environmental practices, sustainability initiatives or similar matters are assessed may change. This could result in greater expectations of us and cause us to undertake costly initiatives to satisfy such new criteria. If we are unable to satisfy these evolving expectations, investors may view our policies relating to these matters as inadequate. We risk damage to our reputation if our practices or goals do not meet the standards or expectations of various stakeholders. In addition, if our competitors’ performance with respect to environmental practices, sustainability initiatives or similar matters is perceived to be greater than ours, potential or current investors may elect to invest in our competitors instead. Further, if we communicate initiatives or goals related to environmental practices, sustainability or climate-related matters, we could fail, or be perceived to have failed, to achieve such initiatives or goals. If we fail to satisfy the expectations of investors and other stakeholders, or our initiatives are not executed as planned, our reputation, employee retention, willingness of our customers and suppliers to do business with us, financial results and stock price could be materially and adversely affected.

Any lawsuit to which we are a party, regardless of merit, may result in an unfavorable judgment. We also may decide to settle lawsuits on unfavorable terms. Any such negative outcome could result in payments of substantial damages or fines, damage to our reputation or adverse changes to our business practices.

Any lawsuit to which we are a party, regardless of the merit of such lawsuit, may result in an unfavorable judgment. We also may decide to settle lawsuits on unfavorable terms. Any such negative outcome could result in payments of substantial damages or fines, damage to our reputation or adverse changes to our business practices. Defending against litigation is costly and time-consuming and could divert our management’s attention and our resources. Furthermore, during the course of litigation, there could be negative public announcements of the results of hearings, motions, or other interim proceedings or developments, which could have a negative effect on the market price of our common stock.

Risks Related to Global Events

Geopolitical conflicts, including the current escalation involving Iran, Israel and the United States, as well as terrorism and other global security threats, could adversely affect our business, financial condition and results of operations.

Geopolitical conflicts, terrorism, military actions and other global political crises may create significant uncertainties in U.S. and international business and financial markets, including the potential for rapid escalation of existing conflicts or the emergence of new regional conflicts. Recent developments in the Middle East, and Eastern Europe, tensions involving China and Taiwan, instability on the Korean Peninsula and other geopolitical developments, have contributed to increased geopolitical uncertainty and volatility in global markets.

Several factors associated, directly or indirectly, with actual or potential military conflicts, terrorism, perceived nuclear, biological, chemical or cyber threats and other geopolitical crises, and governmental responses thereto, may adversely affect the mix of products purchased by defense departments in the United States or other countries. A shift in defense budgets or procurement priorities toward programs, technologies or platforms that we do not support could reduce demand for our products and services and adversely affect our business, financial condition and results of operations.

Geopolitical conflicts and related governmental responses may also result in economic sanctions, export controls, trade restrictions, tariffs, disruptions in global shipping routes or increases in the cost or availability of raw materials and subassemblies used in our manufacturing processes. Although our supply chain predominantly consists of U.S.-based suppliers, increases in their manufacturing or sourcing costs may increase our own costs. Because many of our contracts are firm fixed-price contracts, increases in our costs may not be recoverable and could adversely affect our profitability.

We cannot predict the occurrence, scope, duration or consequences of geopolitical conflicts, terrorism, cyber incidents or other global crises, or the governmental responses thereto. Any such developments could materially adversely affect our business, financial condition and results of operations.

Risks Related to Our Internal Controls and Financial Reporting

If we fail to maintain effective internal control over financial reporting, our ability to accurately report our financial results could be adversely affected.

Effective internal control over financial reporting is necessary for us to provide reliable financial reports and prepare financial statements in accordance with U.S. GAAP. In prior periods, we identified material weaknesses in our internal control over financial reporting that required remediation. Although management implemented measures designed to remediate those material weaknesses and strengthen the Company’s internal control environment, there can be no assurance that those remediation efforts will continue to be effective or that additional control deficiencies or material weaknesses will not be identified in the future.

Maintaining effective internal control over financial reporting requires significant resources and ongoing management attention. Our internal controls may not prevent or detect all errors or misstatements, and deficiencies in our internal control over financial reporting could result in inaccurate financial reporting, delays in our reporting processes, regulatory scrutiny, loss of investor confidence or a decline in the market price of our common stock. If we are unable to maintain effective internal control over financial reporting, our business, financial condition and results of operations could be adversely affected**.**

Risks Related to Our Tax Attributes

Our ability to utilize our net operating loss carryforwards may be limited, which could reduce the value of these tax attributes and adversely affect our financial condition and results of operations.

As of December 31, 2025, we had approximately $68.2 million of federal net operating loss carryforwards (“NOLs”) and approximately $18.3 million of post-apportionment NOLs for state tax purposes. These tax attributes could reduce future taxable income and cash tax obligations; however, their value depends on our ability to generate sufficient taxable income in future periods.

Approximately $51.6 million of our federal NOLs arose prior to January 1, 2018 and will expire in varying amounts between 2034 and 2037 if not utilized. These NOLs may generally offset 100% of future taxable income for regular federal income tax purposes. Federal NOLs arising in 2018 and later years may generally be carried forward indefinitely but may offset no more than 80% of taxable income in any given year.

In addition, under Section 382 of the Internal Revenue Code, our ability to utilize our NOLs could be significantly limited if we experience an “ownership change,” generally defined as a cumulative change in ownership of more than 50% by certain shareholders over a three-year period. Future issuances of our common stock, including in connection with equity financings, equity incentive plans or other transactions, as well as shifts in ownership among existing shareholders, could contribute to such an ownership change. If an ownership change were to occur, the amount of taxable income that could be offset by our NOLs in any year could be substantially limited.

If we are unable to utilize our NOLs as anticipated, the benefit of these tax attributes could be reduced or eliminated, which could adversely affect our financial condition and results of operations.

Risks Related to Our Indebtedness

We are subject to financial covenants under the Loan and Security Agreement with Western Alliance Bank and a failure to comply with those covenants could result in a default that could materially adversely affect our liquidity and operations.

We are subject to financial and other covenants under our Loan and Security Agreement with Western Alliance Bank, dated December 12, 2025 (the “Loan and Security Agreement”). If we fail to comply with the covenants under the Loan and Security Agreement, Western Alliance Bank may declare a default and, among other remedies, could declare all amounts outstanding under the Loan and Security Agreement immediately due and payable and could foreclose against our collateral. If the indebtedness under the Loan and Security Agreement were accelerated following a default, we may not have sufficient cash or available financing to repay such indebtedness when due and may be unable to obtain alternative financing on acceptable terms, if at all. In the past, we obtained amendments to, and received waivers and consents relating to non-compliance with certain covenants under our prior credit facility with BankUnited, N.A. There can be no assurance that we will not fall out of compliance with the covenants under the Loan and Security Agreement in the future. If a default were to occur under the Loan and Security Agreement, we may be unable to secure outside financing, if needed, to fund ongoing operations and other capital needs. Any sources of financing that may be available to us could be at higher costs and may require us to satisfy more restrictive covenants, which could limit or restrict our operations, cash flows and earnings. We cannot ensure that additional financing would be available to us, or that it would be available in sufficient amounts to meet our needs or on satisfactory terms.

Our obligations under the Loan and Security Agreement are secured by a first priority security interest in substantially all of our assets, which could limit our financing flexibility and expose our assets to foreclosure in the event of a default.

Our obligations under the Loan and Security Agreement are secured by a first priority security interest in substantially all of our assets and the assets of the other loan parties under the agreement. As a result, if we were to default under the Loan and Security Agreement, Western Alliance Bank would have the right to foreclose upon and take possession of the collateral securing the loan. In addition, the existence of these security interests may limit our ability to incur additional indebtedness or obtain additional financing, as lenders may be unwilling to extend credit secured by assets that are already pledged as collateral. If our assets were foreclosed upon following a default, it could materially adversely affect our business, financial condition and results of operations.

The Loan and Security Agreement contains restrictions on our operations that may limit our business flexibility.

The Loan and Security Agreement contains covenants that restrict our ability to take certain actions without the consent of Western Alliance Bank. Among other things, these covenants limit our ability to sell or otherwise dispose of assets, incur additional indebtedness, create liens on our assets, make investments, pay dividends or other distributions, engage in mergers or acquisitions, enter into certain transactions with affiliates and make payments on subordinated debt. These restrictions could limit our ability to pursue certain business opportunities, respond to changes in our business or industry, or obtain additional financing. In addition, if we seek to take actions that are restricted under the Loan and Security Agreement, we may need to obtain the consent of Western Alliance Bank, which may not be granted. As a result, the covenants contained in the Loan and Security Agreement could restrict our ability to operate our business and pursue our business strategies.

Our cost of borrowing under the Loan and Security Agreement is based on a variable interest rate and increases in interest rates could negatively impact our profitability.

Interest rates under the Loan and Security Agreement are based on a variable interest rate. As a result, we have exposure to interest rate risk. Increases in interest rates increase our cost of borrowing and could adversely affect our profitability and cash flows. In addition, increases in interest rates could make it more difficult or more costly for us to refinance our existing indebtedness or obtain additional financing in the future.