{"url_path":"/sec/fabc/10-q/2026/item-1a","section_key":"item-1a","section_title":"Item 1A RISK FACTORS**","topic":"sec","document":{"doc_type":"10-Q","doc_date":"2026-05-15","source_url":"https://www.sec.gov/Archives/edgar/data/1086745/0001493152-26-023860-index.html","accession_number":"0001493152-26-023860","cik":"0001086745","ticker":"FABC","issuer_name":"Fabric.AI, Inc.","edgar_url":"https://www.sec.gov/Archives/edgar/data/1086745/0001493152-26-023860-index.html","primary_entity_key":"0001086745","primary_entity_name":"Fabric.AI, Inc."},"word_count":4083,"has_tables":true,"body_markdown":"**ITEM\n1A. RISK FACTORS**\n\n \n\nThe\nfollowing description of risk factors includes any material changes to, and supersedes the description of, risk factors associated with\nour business, financial condition and results of operations previously disclosed in “Item 1A. Risk Factors” of our Annual\nReport for the year ended December 31, 2025 on Form 10-K, as filed with the SEC on March 30, 2026. Our business, financial condition\nand operating results can be affected by a number of factors, whether currently known or unknown, including but not limited to those\ndescribed below, any one or more of which could, directly or indirectly, cause our actual financial condition and operating results to\nvary materially from past, or from anticipated future, financial condition and operating results. Any of these factors, in whole or in\npart, could materially and adversely affect our business, financial condition, operating results and stock price.\n\n \n\nThe\nfollowing discussion of risk factors contains forward-looking statements. These risk factors may be important to understanding other\nstatements in this Form 10-Q. The following information should be read in conjunction with the unaudited condensed consolidated financial\nstatements and related notes in Part I, Item 1, “Financial Statements” and Part I, Item 2, “Management’s Discussion\nand Analysis of Financial Condition and Results of Operations” of this Form 10-Q.\n\n \n\n25\n\n \n\n \n\n**We\nare a development-stage company with no revenue from our semiconductor operations and a limited operating history in the AI semiconductor\nindustry. There can be no assurance that we will successfully develop, commercialize, or achieve market acceptance of our technologies.**\n\n** **\n\nWe\ncommenced our strategic transition toward the design and development of fabless semiconductor technologies for AI data center infrastructure\nin April 2026. We have a limited operating history in the AI semiconductor industry, have not generated any revenue from our semiconductor\noperations, and have not yet completed a prototype of our initial product, the Neural I/o™ chip. Our ability to generate revenue\nwill depend on our successful development and commercialization of our MicroLED-based optical interconnect technology, which is subject\nto significant technological, engineering, and manufacturing risks. There can be no assurance that we will be able to develop products\nthat meet their intended performance specifications, manufacture them at commercially viable cost levels, or achieve market acceptance.\nIf we are unable to successfully execute our semiconductor strategy, our business, financial condition, and results of operations could\nbe materially and adversely affected.\n\n** **\n\n**We\nare substantially dependent on our collaboration with Kopin Corporation for the development and manufacturing of our semiconductor products.\nIf our relationship with Kopin is disrupted or terminated, our business could be materially and adversely affected.**\n\n \n\nOur\nsemiconductor strategy is substantially dependent on our collaboration with Kopin Corporation pursuant to the JDA dated April 27, 2026\nand the related Commercial Supply Agreement. Kopin is the sole provider of the MicroLED technology that is foundational to our Neural\nI/o chip. Under the Supply Agreement, all products incorporating the project technology must be manufactured exclusively by or on behalf\nof Kopin, and we are required to purchase our entire requirements for products from Kopin, subject to limited exceptions for supply failure\nevents. If Kopin is unable or unwilling to continue to perform under the JDA or Supply Agreement, experiences manufacturing difficulties,\nfails to meet quality or delivery requirements, or if the JDA or Supply Agreement is terminated for any reason, we may be unable to develop\nor commercialize our products on the timelines we anticipate, or at all. In the event of termination arising from our breach, failure\nto fund, or a bankruptcy event, Kopin has the right to continue to develop, use, and commercialize the project technology without restriction,\nand we have agreed to assign to Kopin all of our right, title, and interest in the project technology. Any disruption in our relationship\nwith Kopin could have a material adverse effect on our business, financial condition, and results of operations.\n\n** **\n\n**Our\nMicroLED-based optical interconnect technology is at an early stage of development and may not achieve the performance characteristics\nor cost levels necessary for commercial viability.**\n\n \n\nOur\ninitial product under development, the Neural I/o chip, is at an early stage of development. We have not yet completed a prototype, and\nthere can be no assurance that the chip will achieve its intended performance specifications, including with respect to bandwidth, latency,\nand power efficiency. MicroLED-based optical interconnect technology for data center applications is a nascent technology, and we face\nsignificant technical challenges in developing a commercially viable product. The development process may take longer, cost more, or\nencounter more technical obstacles than we currently anticipate. Even if we successfully develop a working prototype, we may face additional\nchallenges in scaling manufacturing, achieving acceptable yield rates, and reducing per-unit costs to levels that are competitive with\nincumbent copper-based and laser-based interconnect solutions. If we are unable to demonstrate the technological viability of our products\nor bring them to market in a timely manner, our business and prospects could be materially and adversely affected.\n\n** **\n\n**We\nface intense competition from established semiconductor companies with significantly greater resources, and our products may not be able\nto compete effectively.**\n\n \n\nThe\nmarkets for AI infrastructure and data center interconnect technologies are intensely competitive and subject to rapid technological\nchange. We face competition from established providers of copper-based and laser-based interconnect solutions, including large, diversified\nsemiconductor companies and specialized optical interconnect providers, many of which have significantly greater financial, technical,\nmanufacturing, marketing, and distribution resources than we do. Many of our potential competitors have longer operating histories, larger\nand more established customer bases, and more extensive research and development capabilities. We may also face competition from new\nentrants into the MicroLED interconnect space or from alternative technologies that we have not yet anticipated. If our competitors develop\ntechnologies that are superior to ours, or if they are able to bring competing products to market before us, our ability to achieve market\nacceptance could be significantly impaired, which would materially and adversely affect our business and results of operations.\n\n \n\n**We\nwill require substantial additional capital to fund our semiconductor development activities, and there can be no assurance that such\ncapital will be available on acceptable terms, or at all.**\n\n \n\nOur\nsemiconductor development activities will require substantial capital investment. Pursuant to the JDA, we have agreed to pay Kopin up\nto $15,000,000 for the initial development of the project technology, and following a successful prototype demonstration, the parties\nexpect to negotiate a production plan that may include an additional payment by us of approximately $15,000,000 to $25,000,000. In addition\nto our obligations under the JDA, we expect to incur significant costs related to research and development, personnel, equipment, and\ngeneral corporate activities as we scale our operations. While we have raised significant funds through recent financing transactions,\nthese funds may not be sufficient to fund our development activities through commercialization. If we are unable to raise additional\ncapital when needed, we may be required to delay, reduce, or eliminate certain development programs, which could materially and adversely\naffect our business, financial condition, and prospects.\n\n** **\n\n**Our\nsemiconductor products may be subject to export control restrictions and trade regulations that could limit our ability to sell products\ninternationally or collaborate with foreign partners.**\n\n \n\nThe\ndesign, development, and potential sale of semiconductor technologies for AI data center applications are subject to U.S. export control\nlaws and regulations, including the Export Administration Regulations administered by the Bureau of Industry and Security and economic\nsanctions programs administered by the Office of Foreign Assets Control. The U.S. government has significantly expanded export controls\napplicable to advanced semiconductor technologies, AI-related hardware, and supercomputing components in recent years. If our products,\nonce developed, are classified under export-controlled categories, we may be required to obtain licenses or authorizations prior to export,\nand certain destinations, entities, or end uses may be prohibited entirely. Changes to export control regulations, the Entity List, or\nthe imposition of new sanctions could limit our ability to sell products in key international markets, restrict our ability to collaborate\nwith foreign partners or contract manufacturers, or otherwise materially and adversely affect our business.\n\n \n\n26\n\n \n\n \n\n**Environmental,\nhealth and safety (EHS) laws and regulations may expose us to liability, and such liability and compliance with these laws and regulations\nmay adversely affect our business.**\n\n \n\nThe\nsemiconductor industry is subject to a variety of international, federal, state, local and non-U.S. laws and regulations governing pollution,\nenvironmental protection and occupational health and safety, including those relating to the release, storage, use, discharge, handling,\ngeneration, transportation, disposal, and labeling of, and human exposure to, hazardous and toxic materials, product composition, and\nthe investigation and cleanup of contaminated sites, including sites we currently or formerly owned or operated, due to the release of\nhazardous materials, regardless of whether we caused such release. We are also required to obtain environmental permits from governmental\nauthorities for some of our operations. We cannot be assured that we have been or will be at all times in complete compliance with such\nEHS laws, regulations and permits. Failure to comply with such EHS laws and regulations could subject us to civil or criminal costs,\nobligations, sanctions or property damage or personal injury claims, or suspension of our facilities’ operating permits.\n\n \n\nChanges\nin EHS laws or regulations may require us to invest in costly equipment or make manufacturing process changes and may adversely affect\nthe sourcing, supply and pricing of materials used in our products. We believe that our model of a fabless company minimizes those risks,\nalthough any such changes may require us to conduct careful audits of our vendors or even to replace vendors, which may involve costs\nin qualifying or making adjustments for the work with another vendor.\n\n \n\nIn\nthe event of an incident involving hazardous materials, we could be liable for damages and such liability could exceed the amount of\nany liability insurance coverage and the resources of our business. In addition, in the event of the discovery of contaminants or the\nimposition of clean up obligations for which we are responsible, we may be required to take remedial or other measures which could have\na material adverse effect on our business, financial condition and results of operations. In response to environmental concerns, some\ncustomers and government agencies impose requirements for the elimination and/or labeling of hazardous substances, such as lead (which\nis widely used in soldering connections in the process of semiconductor packaging and assembly), in electronic equipment, as well as\nrequirements related to the take-back of products discarded by customers.\n\n \n\nEHS\nlaws and regulations have tended to become more stringent over time, causing a need to redesign technologies, imposing greater compliance\ncosts and increasing risks and penalties associated with violations, which could seriously harm our business.\n\n \n\nIn\naddition, increasingly regulators, customers, investors, employees and other stakeholders are focusing on environmental, social and governance\n(ESG) matters and related disclosures. These changing rules, regulations and stakeholder expectations have resulted in, and are likely\nto continue to result in, increased general and administrative expenses and increased management time and attention spent complying with\nor meeting such regulations and expectations.\n\n** **\n\n**We\nhave no full-time employees and rely heavily on consultants and contractors, which may limit our ability to execute our business strategy.**\n\n \n\nAs\nof March 31, 2026, we had zero full-time employees and rely on consultants and contractors to supplement our capabilities. Our future\nsuccess depends in significant part on our ability to attract, retain, and motivate qualified engineering, scientific, and management\npersonnel. Competition for such personnel in the semiconductor industry is intense, and we may not be able to attract or retain the personnel\nnecessary to execute our semiconductor development strategy. Our reliance on consultants and contractors may also create challenges related\nto intellectual property protection, continuity of institutional knowledge, and the consistent execution of our development programs.\nIf we are unable to build and maintain an adequate team to support our operations, our business and results of operations could be materially\nand adversely affected.\n\n \n\n**Our\nfabless business model makes us dependent on third-party manufacturers, and our business may be adversely affected by supply chain disruptions,\ntariffs, or geopolitical risks.**\n\n \n\nWe\noperate as a fabless semiconductor company and intend to outsource the fabrication and manufacturing of our chips to third-party contract\nmanufacturers. This model makes us dependent on the manufacturing capacity, quality, and timeliness of our manufacturing partners. A\nsignificant portion of global semiconductor manufacturing capacity is concentrated in Asia, and trade tensions between the United States\nand certain countries have resulted in increased tariffs, export restrictions, and supply chain disruption risk. Changes in trade policy,\nthe imposition of new or increased tariffs on semiconductor components or materials, or disruption of international supply chains could\nincrease our costs, limit access to manufacturing partners, or delay product development and commercialization. Additionally, our dependence\non Kopin as the exclusive manufacturer of products incorporating the project technology means that any disruption to Kopin’s manufacturing\ncapabilities could directly and materially impact our ability to deliver products to customers.\n\n** **\n\n**Because\nwe operate a fabless business model, we may not be eligible for certain U.S. government incentives and tax credits offered to promote\ndomestic semiconductor production.**\n\n \n\nFrom\ntime to time, governments may provide subsidies or make other investments that could give competitive advantages to certain semiconductor\ncompanies. For example, in 2022, the U.S. government passed the Creating Helpful Incentives to Produce Semiconductors & Sciences\nAct to provide $52.7 billion of funding to U.S.-based semiconductor companies to promote domestic production. Because we operate a fabless\nbusiness model, we may not be eligible for such incentives from the U.S. government at this time.\n\n** **\n\n**We\njointly own intellectual property developed under our collaboration with Kopin, and our dependence on Kopin’s existing intellectual\nproperty may limit our ability to independently commercialize our technology.**\n\n \n\nIntellectual\nproperty developed through our collaboration with Kopin is jointly owned by both companies. Our technology leverages Kopin’s patented\nbi-directional NeuralDisplay™ architecture, and we are dependent on Kopin’s existing intellectual property portfolio as a\nfoundation for our product development. While Kopin has granted us a non-exclusive, royalty-free, worldwide license under its background\ntechnology for developing and commercializing the project technology, we do not have sole ownership or exclusive rights to much of the\nintellectual property underlying our products. If our relationship with Kopin deteriorates, or if Kopin’s intellectual property\nrights are challenged or invalidated by third parties, our ability to develop and commercialize our products could be materially impaired.\nAdditionally, we may face claims of intellectual property infringement from third parties, particularly given the competitive nature\nof the semiconductor industry, and defending against such claims could be costly and time-consuming.\n\n \n\n27\n\n \n\n \n\n**Holders\nof our shares of Series K Preferred Stock are entitled to certain payments under the Series K Certificate of Designations that may be\npaid in cash, which may require the expenditure of a substantial portion of our cash resources.**\n\n** **\n\nThe\nholders of the Series K Preferred Stock are entitled to dividends of 7% per annum (“Dividends”), compounded each calendar\nquarter, which are payable in arrears on the first trading day of each calendar quarter (each, a “Dividend Date”), with the\nfirst Dividend Date being July 1, 2026, in cash out of funds legally available therefor; provided that a holder of the Series K Preferred\nStock and the Company may mutually agree to convert any Dividends into shares of Common Stock at a price to be mutually determined by\nthe Company and such holder, which shall not be less than the lower of (x) $0.502, which was 20% of the “Minimum Price” (as\ndefined in Rule 5635 of the Nasdaq Stock Market) on the date of the Purchase Agreement and (y) 20% of the “Minimum Price”\n(as defined in Rule 5635 of the Nasdaq Stock Market) on the Stockholder Approval Date, in each case, subject to adjustment for stock\nsplits, stock dividends, stock combinations, recapitalizations or other similar events, or, in any case, such lower amount as permitted,\nfrom time to time, by the Nasdaq Capital Market (the “Floor Price”). Upon the occurrence and during the continuance of a\nTriggering Event (as defined in the Series K Certificate of Designations), the Series K Preferred Stock accrue dividends at the rate\nof 15% per annum. In connection with a Triggering Event, each holder of Series K Preferred Stock will be able to require us to redeem\nin cash any or all of the holder’s Series K Preferred Stock at a premium set forth in the Series K Certificate of Designations.\nIf such Triggering Event occurs, our financial condition and results of operations could be materially affected.\n\n \n\nIf\nwe do not have sufficient cash resources to make these payments, we may need to raise additional equity or debt capital, and we cannot\nprovide any assurance that we will be successful in doing so. If are unable to raise sufficient capital to meet our payment obligations,\nwe may need to delay, reduce or eliminate certain research and development programs or other operations, sell some or all of our assets\nor merge with another entity. Our ability to make payments due to the holders of our Series K Preferred Stock using cash is also limited\nby 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\nLaw.\n\n \n\n**The\nSeries K Preferred Stock and the Series K Warrants contain certain anti-dilution provisions, which may dilute the interests of our stockholders,\ndepress the price of our common stock, and make it difficult for us to raise additional capital.**\n\n** **\n\nCertain\nevents, for example, a Stock Combination Event (as defined in each of the Series K Certificate of Designations and the Series K Warrants)\nmay reduce the conversion price of the Series K Preferred Stock and the exercise price of the Series K Warrants, which in turn may lead\nto further dilution to the holders of our Common Stock. The Series K Warrants additionally contain anti-dilution provisions applicable\nto the exercise price. If in the future, while any of the Series K Warrants are outstanding, we may be required upon the occurrence of\ncertain events, to adjust the exercise price of the Series K Warrants, and simultaneously with any adjustment to the exercise price,\nthe number of shares of Common Stock that may be purchased upon exercise of the Series K Warrants shall be increased or decreased proportionately,\nso that after such adjustment the aggregate exercise price payable thereunder for the adjusted number of shares of Common Stock issuable\nupon exercise of the Series K Warrants shall be the same as the aggregate exercise price in effect immediately prior to such adjustment.\nSuch adjustments can dilute the book value per share of Common Stock and reduce any proceeds we may receive from the exercise of the\nSeries K Warrants. In addition, the perceived risk of dilution may cause our shareholders to be more inclined to sell their Common Stock,\nwhich may in turn depress the price of common shares regardless of our business performance. We may also find it more difficult to raise\nadditional equity capital while any of the Series K Warrants and the Series K Preferred Stock remain outstanding.\n\n \n\n**The\nSeries K Certificate of Designations contains restrictive covenants and terms that may make it difficult to procure additional financing\nand that may affect our financial condition and results of operations.**\n\n** **\n\nThe\nSeries K Certificate of Designations contains certain restrictive covenants including but not limited to: maintaining a minimum amount\nof unencumbered, unrestricted cash and cash equivalents on hand, until the date on which less than 1,050 shares of the Series I Preferred\nStock are outstanding; restrictions on incurring any indebtedness until the date on which no shares of Series I Preferred Shares are\noutstanding, subject to certain exceptions; restrictions on directly or indirectly, redeeming, repurchasing or declaring or paying any\ncash dividend or distribution on any of our capital stock (other than as required by the Series K Certificate of Designations, the Series\nA Certificate of Designations, the Series H-7 Certificate of Designations, the Series I Certificate of Designations and Series J Certificate\nof Designations), and restrictions on directly or indirectly, permitting any of our indebtedness to mature or accelerate prior to the\nMaturity Date (as defined in the Series K Certificate of Designations). Additionally, the Series K Preferred Stock also contain certain\npurchase rights (the “Purchase Rights”) permitting the holders of the Series K Preferred Stock to acquire upon the terms\napplicable to such Purchase Rights, the aggregate Purchase Rights which such holder could have acquired if such holder had held the number\nof shares of Common Stock acquirable upon complete conversion of all of its shares of Series K Preferred Stock. These restrictive covenants\nmay limit our flexibility in raising capital or incurring any indebtedness, which may have an adverse effect on our financial condition.\n\n \n\n**Under\nthe Series K Purchase Agreement, we are subject to certain restrictive covenants that may make it difficult to procure additional financing.**\n\n** **\n\nThe\nSeries K Purchase Agreement contains, among others, the following restrictive covenants: (A) until ninety (90) days following the earlier\nof (x) the date on which this registration statement is declared effective or (y) the date on which the selling stockholders may sell\ntheir shares of Common Stock issuable upon conversion of the Series K Preferred Stock or upon exercise of the Series K Warrants without\nrestriction pursuant to Rule 144 under the Securities Act, we may not issue, offer, sell, grant any option or right to purchase, or otherwise\ndispose of (or announce any issuance, offer, sale, grant of any option or right to purchase or other disposition of) any equity security\nor any equity-linked or related security, (B) until all of the Series K Warrants are no longer outstanding, we shall be prohibited from\neffecting or entering into an agreement to effect any subsequent placement involving a variable rate transaction, and (C) until the date\nin which no shares of Series K Preferred Stock remain outstanding, the Company must provide the holders of the shares of Series K Preferred\nStock the opportunity to participate in any subsequent securities offerings by us.\n\n \n\nIf\nwe require additional funding while these restrictive covenants remain in effect, we may be unable to effect a financing transaction\non terms acceptable to us, or at all, while also remaining in compliance with the terms of the Series K Purchase Agreement, or we may\nbe forced to seek a waiver from the investors party to the Series K Purchase Agreement, which such investors are not obligated to grant\nto us.\n\n \n\n**The\nSeries J Preferred Stock and related anti-dilution provisions may result in significant dilution to our common stockholders and may limit\nour operational and financial flexibility.**\n\n** **\n\nPursuant\nto the JDA, the Company agreed to issue to Kopin shares of Series J Preferred Stock constituting 19.9% of the pro forma fully-diluted\noutstanding shares of Common Stock, convertible at the Series J Conversion Price of $2.51 per share. The Series J Certificate of Designations\nprovides that the Maximum Issuance (as defined in the Series J Certificate of Designations) shall be increased upon the occurrence of\nDilutive Issuances or Dilutive Conversions by 0.1999 shares of Common Stock for each share of Common Stock issued in connection with\nsuch events, until adjustments have been made with respect to an aggregate of $50 million in such issuances. The Company has agreed to\ntake all actions necessary to give full force and effect to these adjustment provisions, including through the issuance of additional\nshares of Series J Preferred Stock to Kopin. In addition, the Series J Preferred Stock accrues dividends at 6% per annum, payable semi-annually\non each Dividend Payment Date, which may be paid as a PIK Dividend through the issuance of additional shares of Series J Preferred Stock\nhaving an aggregate stated value equal to the amount of the dividend then due, further increasing the number of shares of Common Stock\nissuable upon conversion. Without the prior express consent of the Required Holders, the Company may not, among other things, amend its\nCharter or Bylaws in ways that would adversely affect the Series J Preferred Stock, create or authorize new Senior Preferred Stock or\nParity Stock, purchase or redeem Junior Stock, or pay dividends on Junior Stock. These protective provisions, together with the potential\nfor significant dilution from anti-dilution adjustments and PIK Dividends, may restrict the Company’s ability to pursue certain\ncorporate transactions or capital raising activities, depress the market price of the Company’s Common Stock, and make it more\ndifficult for the Company to raise additional capital on favorable terms.\n\n \n\n28"}