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ITEM 7. MANAGEMENT’S DISCUSSION AND ANALYSIS

OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS.

The following discussion and analysis of our

financial condition and results of operations should be read in conjunction with our consolidated financial statements and related notes

included in this Annual Report on Form 10-K. This discussion contains forward-looking statements that involve risks and uncertainties.

Our actual results could differ materially from those anticipated in these forward-looking statements as a result of certain factors including,

but not limited to, those discussed under Item 1A, “Risk Factors.” The following analysis generally discusses 2025 and 2024

items and year-to-year comparisons between 2025 and 2024. Discussions of 2023 items and year-to-year comparisons between 2024 and 2023

that are not included in this Form 10-K can be found in “Management’s Discussion and Analysis of Financial Condition and Results

of Operations” in our Annual Report on Form 10-K for the fiscal year ended December 31, 2024 filed with the SEC on March 20, 2025.

Overview

QCi is a development stage company with limited

operations and revenue. The Company is developing quantum and ancillary non-quantum products for high-performance computing applications

based on proprietary photonics technology. QCi’s products are designed to operate at room temperature and low power at an affordable

cost in the areas of high-performance computing, sensing, and quantum cybersecurity. The Company has generated some revenue based on sales

of products and related services to date and is expanding its sales and marketing efforts. The Company’s development team includes

optical engineers, technicians, mathematicians, physicists, and software developers.

Recent Developments

On December 15, 2025, we entered into a Stock Purchase Agreement (the

“Stock Purchase Agreement”) with Luminar Technologies, Inc., a Delaware corporation (the “Seller”) and Luminar,

pursuant to which, subject to the terms and conditions set forth in the Stock Purchase Agreement, the Company agreed to acquire all of

the issued and outstanding shares of common stock of Luminar from the Seller (the “Luminar Acquisition”) for a total purchase

price of $110 million in cash (the “Purchase Price”). The Luminar Acquisition was completed on February 2, 2026. $11.0 million

of the Purchase Price was placed with an escrow agent in connection with the signing of the Stock Purchase Agreement. The escrowed amount

will remain with the escrow agent to cover certain limited indemnification obligations of the Seller pursuant to the Stock Purchase Agreement

until February 2, 2027.

The Seller, together with certain of its subsidiaries,

is a debtor in a voluntary Chapter 11 case before the United States Bankruptcy Court for the Southern District of Texas (the “Bankruptcy

Court”), which commenced on December 15, 2025. Luminar is not a debtor in such Chapter 11 case and is operating in the ordinary

course of business. Upon Bankruptcy Court approval, the Company was designated as the “stalking horse” bidder in connection

with a sale of Luminar under Section 363 of the Bankruptcy Code. The Luminar Acquisition was conducted through a Bankruptcy Court-supervised

process pursuant to Bankruptcy Court-approved bidding procedures and was subject to the receipt of higher or better offers from competing

bidders at an auction, approval of the sale by the Bankruptcy Court, and the satisfaction of certain conditions.

Key Factors Affecting Our Performance

Macroeconomic conditions, including inflation,

interest rates and currency fluctuations, have directly and indirectly impacted, and could in the future materially impact, the Company’s

results of operations and financial condition. Our business may be affected by disruptions or delays to the federal government budget.

We are subject to a lengthy product commercialization timeline and a lengthy sales cycle. Beginning in the second quarter of 2025, new

U.S. tariffs were announced, including additional tariffs on imports from China, India, Japan, South Korea, Taiwan, Vietnam and the EU,

among others. In response, several countries have imposed, or threatened to impose, reciprocal tariffs on imports from the U.S. and other

retaliatory measures. Various modifications to the U.S. tariffs have been announced and further changes could be made in the future, which

may include additional sector-based tariffs or other measures. Tariffs and other measures that are applied to the Company’s products

or their components can have a material adverse impact on the Company’s business, results of operations and financial condition,

including impacting the Company’s supply chain, components, pricing and gross margin. The ultimate impact remains uncertain and

will depend on several factors, including whether additional or incremental U.S. tariffs or other measures are announced or imposed, to

what extent other countries implement tariffs or other retaliatory measures in response, and the overall magnitude and duration of these

measures. Trade and other international disputes can have an adverse impact on the overall macroeconomic environment and result in shifts

and reductions in consumer spending and negative consumer sentiment for the Company’s products and services, all of which can further

adversely affect the Company’s business and results of operations.

Results of Operations

Our results of operations for the years ended

December 31, 2025 and 2024 is as follows (in thousands, except percentages):

Year Ended December 31,

Revenue:

Gross profit margin 10 % 30 %

Operating expenses:

Non-operating income and (expense):

Change in fair value of derivative liability 11,750 (40,532 ) 129 %

Total non-operating income (expense), net 32,403 (42,605 ) (176 )%

Revenues

The Company’s revenues during the years ended December 31, 2025

and 2024 consisted of (in thousands):

Year Ended December 31,

Revenues for the year ended December 31, 2025

were $682 thousand compared to $373 thousand for the year ended December 31, 2024, an increase of $309 thousand, or 83%. Revenue was derived

from sales of hardware products and professional services in 2025 and 2024, in each case provided to multiple commercial and government

customers under multi-month contracts. Product revenue increased substantially compared to 2024 due to successful sales of vibrometer

and quantum networking devices which were delivered during 2025. During 2025 we were able to sell more off the shelf products as opposed

to 2024 where we mostly provided services to create bespoke solutions for our customers. The year-over-year change was driven by changes

in the number of, size of and level of effort performed on active customer proof of concept and research and development services and

customer hardware contracts. In 2025, the Company continued to execute its business strategy to provide quantum-ready solutions for solving

real-world problems. While we have made significant progress toward this overarching objective, the generation of revenue from customers

has been slow to develop, in part due to the fact that quantum computing is a cutting-edge technology for most potential customers, who

are therefore proceeding cautiously with small, exploratory contracts to better understand its applicability to their requirements. Accordingly,

the Company has focused on providing professional services and research and development offerings to introduce customers to quantum-based

solutions to their operating needs as well as on customer education and building customer awareness as a means to generating sales. We

have developed and released multiple products, including commercial and research and development offerings and foundry services for TFLN

Optical Chips manufacturing that we are now in the process of marketing. As a result, we expect product revenues to continue to increase

going forward. The Company also started to recognize revenue for cloud-based access to the Dirac-3 quantum optimization system during

2025.

Cost of Revenues

Cost of revenue,

which consists of direct labor expenses, primarily salary costs for engineering and solutions staff delivering services, and other direct

component costs for custom hardware on research and development contracts, was $615 thousand for the year ended December 31, 2025, compared

to $261 thousand for the prior year, an increase of $354 thousand, or 136%. Cost of revenues for each of the years ended December 31,

2025 and 2024 consists primarily of salary expense. The increase for 2025 was primarily due to the increases in direct labor expenses

on R&D services contracts and custom hardware contracts, an increase in production overhead, and increased other direct costs (primarily

parts and materials) required to perform on the contracts during the 2025 compared to the prior year.

Gross Margin

Gross margin for the year ended December 31, 2025

was $67 thousand compared to $112 thousand for the prior year, a decrease of $45 thousand, or 40%. On a percentage basis, gross margin

was 10%, a decrease of 20% year-over-year. The decrease in gross margin was largely due to higher than anticipated direct labor expenses

required to complete the assembly and test of the first unit of a new hardware product. Cost information from the production of the first

unit will be used in adjusting pricing of subsequent product sales. Our lack of a scaled and distributed base of revenue generation by

product and sales channel can result in significant differences in gross margin between reporting periods. We anticipate product gross

margins will improve as we build additional units of each product.

Operating Expenses

Operating expenses of approximately $51.1 million

during the year ended December 31, 2025 increased as compared to approximately $26.0 million in 2024 primarily as a result of higher research

and development expenses, sales and marketing expenses and general and administrative expenses, as set forth in the below tables (in thousands,

except percentages).

Year Ended December 31, %

Research and development expenses consist primarily

of labor expenses for employees that primarily engage in research and development efforts and non-labor expenses for the development of

hardware products and supporting software. We focus the bulk of our research and development activities on the continued development of

existing products and the development of new offerings for emerging market opportunities.

Research and development expenses during the year ended December 31,

2025 increased $9.2 million or 81% compared with 2024 primarily due to higher headcount and related payroll costs, higher recurring lab

equipment and consumables costs, and higher depreciation for long-lived laboratory equipment, partially offset by lower hosting services

expenses and lower stock based compensation expense. The Company is aggressively pursuing its technology roadmap and has hired additional

scientists, engineers and technicians in order to accelerate the development of key technologies and products.

Year Ended December 31, %

Sales and marketing expenses consist primarily

of employee compensation as well as customer lead generation activities, tradeshow participation, advertising and other marketing and

selling costs.

Sales and marketing expenses during the year ended

December 31, 2025 increased $1.6 million or 89% compared with 2024 primarily due to increases in the sales staff, higher tradeshow and

travel-related costs and increased marketing program costs. During the year ended December 31, 2025 the sales and marketing team participated

in 1or 2 conferences and trade shows per month, compared to 1 or 2 trade shows per quarter during 2024, including greater participation

in international quantum technology events, resulting in higher travel expenses.

Year Ended December 31, %

General and administrative expenses consist primarily

of compensation expenses for employees performing administrative functions, and professional fees incurred for legal, auditing and other

consulting services.

General and administrative expenses during the

year ended December 31, 2025 increased $14.3 million or 111% compared with 2024 primarily due to higher employee and advisor-related expenses

relating to development and implementation of internal financial controls, expansion of accounting staff, increased recruiting fees and

legal expenses related to multiple financings, mergers and acquisition activity, and ongoing litigation.

Non-operating Income (Expense)

The following table summarizes our non-operating

income (expense) for the years ended December 31, 2025 and 2024 (in thousands, except percentages).

Year Ended December 31 %

Change in fair value of derivative and warrant liability 11,750 (40,532 ) 129 %

Interest and other income, net, during the year ended December 31,

2025 increased $20,295 or 4,798% compared with 2024 primarily due to the Company maintaining higher cash balances in mutual funds, deposit

and money market accounts, U.S. Treasuries and corporate bonds during as a result of the substantial amount of new funding the Company

raised in 2025.

Interest expense during the year ended December

31, 2025 decreased $2,431 or 97% compared with 2024 primarily due to a decrease of interest on financial liabilities as the related borrowings

were paid off during 2024. Interest expense during the year ended December 31, 2025 is related to late payroll tax filings.

Change in fair value of derivative and warrant liability during the

year ended December 31, 2025 increased $52,282 or 129% compared with 2024 as a result of the change in the fair value of the QPhoton Warrant

Liability (as defined below). The change in value of the warrant liability is a non-cash charge comprised of mark-to-market adjustments

for the QPhoton Warrants (as defined below). Future mark-to-market adjustments may result in losses if the Company’s stock price

increases above the Company’s closing bid price of $10.26 per share on December 31, 2025; such adjustments may alternatively result

in gains if the closing bid share price of the Company’s common stock decreases. See Note 12, Capital Stock, in the accompanying

notes to our consolidated financial statements appearing elsewhere in this report for additional information on the QPhoton Warrants

The loss on change in value of derivative liability is entirely comprised

of mark-to-market adjustments for the QPhoton Warrants, as defined below in the accompanying notes to our consolidated financial statements

appearing elsewhere in this report, which had no carrying value as of December 31, 2023. Future mark-to-market adjustments may result

in continued losses if the price of the Company’s common stock increases above the closing bid price of $16.55 per share at December

31, 2024; such adjustments may alternatively result in gains if the closing bid share price of the Company’s common stock decreases.

See Note 12, Capital Stock, in the accompanying notes to our consolidated financial statements appearing elsewhere in this report

for additional information on the QPhoton Warrants.

Liquidity and Capital Resources

We have incurred net losses and experienced negative cash flows from

operations since inception. During the year ended December 31, 2025, the Company raised net proceeds of $1,475.1 million through the private

placement of equity. The Company has no lines of credit or short-term debt obligations outstanding. We expect to incur additional losses

and higher operating expenses for the foreseeable future as we continue to invest in research and development and go-to-market programs.

We also expect to incur additional integration and scaling costs associated with the LSI acquisition. As of December 31, 2025, the Company

had cash and cash equivalents of $737.9 million and short-term and long-term investments of $782.5 million.

We believe that our existing cash, cash equivalents

and investments will be sufficient to meet our working capital and capital expenditure needs for at least the next twelve months, although

we may choose to take advantage of opportunistic capital raising or refinancing transactions at any time.

Our primary uses of cash are to fund and invest

in our operations as we continue to grow our business. We will require a significant amount of cash for continued investment in our Foundry

Services offering, including but not limited to future-identified space for expansion of our AZ Chips Facility, as well as the construction

or acquisition of a high-volume chip manufacturing facility, as well as ongoing research and development for our non-linear quantum optical

products and photonics chips. Until such time as we can generate significant revenue from sales or subscriptions of our hardware offerings,

we expect to finance our operating and investing needs through our cash and cash equivalents and, equity and/or debt financings or other

capital sources, including but not limited to U.S. government grant and loan programs. We may, however, be unable to raise sufficient

funds or enter into such other arrangements, when needed, on favorable terms, or at all. In particular, uncertain and unfavorable conditions

in the United States and global macroeconomic environment, including inflationary pressures, interest rates, bank failures, and financial

and credit market fluctuations, could reduce our ability to access capital on favorable terms, or at all. To the extent that we raise

additional capital through the sale of equity or convertible debt securities, the ownership interest of our stockholders will be, or could

be, diluted, and the terms of these securities may include liquidation or other preferences that adversely affect the rights of our common

stockholders. Debt financing and equity financing, if available, may involve agreements that include covenants limiting or restricting

our ability to take specific actions, such as incurring additional debt, making capital expenditures or declaring dividends. If we are

unable to raise additional funds through equity or debt financings when needed, we may be required to delay, limit, or substantially reduce

our product development and go-to-market efforts. There can be no assurances that the Company will be able to secure additional equity

and/or debt investments or achieve an adequate sales level. We believe, however, that the Company’s existing cash and cash equivalents,

together with any cash generated from operations and the proceeds from any additional equity or debt issuances will be sufficient to meet

the Company’s liquidity needs for at least the next 12 months.

The following table summarizes total current assets,

liabilities and working capital at December 31, 2025, compared to December 31, 2024 (in thousands):

At December 31, 2025, we had working capital of

$1,122.7 million as compared to working capital of $74.6 million at December 31, 2024, an increase of $1,048.0 million. The increase in

working capital is primarily attributable to an increase in cash and available-for-sale debt securities from the net proceeds of our sales

of our sales of 86.3 million shares of common stock for an aggregate of $1,475.1 million during 2025.

On a long-term basis, our liquidity is dependent

on continuation and expansion of operations and receipt of revenues. Demand for the Company’s products and services will be dependent

on, among other things, market acceptance of our products and services, the technology market in general, and general economic conditions,

which are cyclical in nature. As revenues will be derived from the sales of our products and services, our business operations may be

adversely affected by the products and services offered by our competitors and any prolonged recession periods.

Cash Flows

The following table summarizes our cash flow for

the years ended December 31, 2025 and 2024 (in thousands):

Year Ended December 31,

Net cash used in operating activities $ (30,294 ) $ (16,213 )

Net cash used in investing activities (788,327 ) (6,036 )

Net increase in cash and cash equivalents $ 658,935 $ 76,886

Cash Flows from Operating Activities

Net cash used in operating activities for the years ended December

31, 2025 and 2024 was $30.3 million and $16.2 million, respectively, in each case primarily as a result of our net loss in each period

offset by noncash adjustments for stock-based compensation, mark-to-market valuation adjustments on derivative liabilities, and depreciation

and amortization.

Cash Flows from Investing Activities

Net cash used in investing activities for the

years ended December 31, 2025 and 2024 was $788.3 million and $6.0 million, respectively, and was attributable to our purchase of computer

hardware, laboratory equipment and TFLN Chips manufacturing equipment, as well as the purchase of $1,197.9 million in available-for-sale-debt

securities offset by $376.3 million in proceeds from sales of available-for-sale-debt securities.

Cash Flows from Financing Activities

Net cash provided by financing activities for

the years ended December 31, 2025 and 2024 was $1,477.6 million and $99.1 million, respectively. Cash flows provided by financing activities

during year ended December 31, 2025 were primarily attributable to net proceeds from our stock issuances.

On a long-term basis, our liquidity is dependent

on continuation and expansion of operations and receipt of revenues. Demand for the Company’s products and services will be dependent

on, among other things, market acceptance of our products and services, the technology market in general, and general economic conditions,

which are cyclical in nature. As revenues will be derived from the sales of our products and services, our business operations may be

adversely affected by the products and services offered by our competitors and any prolonged recession periods.

Critical Accounting Estimates

Certain of our accounting policies require the

application of significant judgment by our management, and such judgments are reflected in the amounts reported in our consolidated financial

statements. In applying these policies, our management uses judgment to determine the appropriate assumptions to be used in the determination

of estimates. Those estimates are based on our historical experience, terms of existing contracts, our observance of market trends, information

provided by our strategic partners and information available from other outside sources, as appropriate. Actual results may differ significantly

from the estimates contained in our consolidated financial statements.

Fair Value of Stock-based Compensation

We recognize stock-based compensation expense

for all share-based payment awards in accordance with ASC 718, Compensation - Stock Compensation. Stock-based compensation expense

for expected-to-vest awards is valued under the single-option approach and amortized on a straight-line basis, accounting for actual forfeitures

as they occur. We utilize the Black-Scholes pricing model in order to determine the fair value of stock-based option awards. The Black-Scholes

pricing model requires various highly subjective assumptions including volatility, expected option life, and risk-free interest rate.

The assumptions used in calculating the fair value of share-based payment awards represent management’s best estimates. These estimates

involve inherent uncertainties and the application of management judgment. If factors change and different assumptions are used, our stock-based

compensation expense could be materially different in the future.

Fair Value of Derivative Liability

Determining the fair market value of the QPhoton

Warrants, which were included in the merger consideration paid to the stockholders of QPhoton (the “QPhoton Merger Consideration”),

is a critical accounting estimate. The QPhoton Warrants are comprised of warrants to purchase up to 7,028,337 shares of the Company’s

common stock at an exercise price of $0.0001 per share (the “QPhoton Warrants”) and are exercisable when and if stock options

and warrants issued by the Company and outstanding as of June 15, 2022 are exercised. The Merger Consideration for shareholders Yuping

Huang and The Trustees of the Stevens Institute of Technology was issued in 2022. A third alleged shareholder, BV Advisory, rejected the

Merger Consideration and commenced litigation in Delaware Chancery Court (see Note 10, Contingencies - Legal Proceedings, in this

Form 10-K for additional information and Item 3, Legal Proceedings, in this Form 10-K for a full discussion). That litigation was

resolved in 2025. Accordingly, as of December 31, 2025 and 2024, we had only issued 6,325,503 of the QPhoton Warrants. In determining

the fair market value of the QPhoton Warrants, the Company determines which underlying options and warrants are in-the-money or out-of-the-money

at period end by comparing to the bid price of the Company’s common stock, then accounts for changes period-over-period by realizing

a mark-to-market gain or loss for the period.

An additional critical accounting estimates involves

determining the fair value of the conversion features inherent in the Streeterville Convertible Note (the “Streeterville Derivative

Liability”), which involves inherent uncertainties and the application of management judgement. The Streeterville Derivative Liability

will be mark-to-market adjusted on a quarterly basis and accreted as interest expense while the Streeterville Convertible Note is outstanding.

The Streeterville Convertible Note was paid off in 2024.

Fair Market Value and Useful Life of Intangible

Assets

Determining the fair market value and useful life

of the intangible assets acquired by the Company through the QPhoton Merger is another critical accounting estimate. In the absence of

market pricing for the intangible assets, the Company relied on independent third-party appraisal experts and comparison with similar

transactions to arrive at estimates of value as well as useful life. The Company will perform periodic assessments of the intangible assets

for impairment, but if any of the initial estimates are incorrect, that could result in a calculation of amortization expense that is

too high or too low.

Valuation Allowances for Deferred Taxes

Our income tax expense, deferred tax assets and

liabilities, and reserves for unrecognized tax benefits reflect management’s assessment of estimated current and future income taxes

to be paid. We are subject to income taxes in the United States. Significant judgments and estimates are required in determining the consolidated

income tax expense, deferred tax assets and liabilities and reserves for unrecognized tax benefits.

Deferred tax assets and liabilities arise from

temporary differences between the tax basis of assets and liabilities and their reported amounts in the consolidated financial statements,

which are expected to result in taxable or deductible amounts in the future. In evaluating our ability to recover our deferred tax assets

within the jurisdiction from which they arise, for all material jurisdictions, we consider all available positive and negative evidence,

including scheduled reversals of deferred tax balances, projected future taxable income, tax-planning strategies and results of recent

operations. In projecting future taxable income, we begin with historical results and incorporate assumptions about the amount of future

state, federal and foreign pretax operating income adjusted for items that do not have tax consequences. The assumptions about future

taxable income require significant judgment and are consistent with the plans and estimates we use to manage the underlying businesses.

In evaluating the objective evidence that historical results provide, we consider three years of cumulative operating results.

As of December 31, 2025,

we had federal and state net operating loss (“NOL”) carryforwards of approximately $158.1 million, or $27.1 million on a tax-effected

basis. We believe that it is more likely than not that the benefit from these NOL carryforwards will not be realized. Accordingly, we

have provided a full valuation allowance on any potential deferred tax assets relating to these NOL carryforwards. If our assumptions

change and we determine we will be able to realize these NOLs, the tax benefits relating to any reversal of the valuation allowance on

deferred tax assets as of December 31, 2025, will be accounted for as a reduction of income tax expense.

The calculation of our

tax liabilities involves evaluating uncertainties in the application of complex tax laws and regulations in a multitude of jurisdictions

across our global operations. ASC 740, Income Taxes, states that a tax benefit from an uncertain tax position may be recognized

when it is more likely than not that the position will be sustained upon examination, including the resolution of any related appeals

or litigation processes, on the basis of the technical merits.

We record unrecognized tax benefits as liabilities

in accordance with ASC 740 and adjust these liabilities when our judgment changes as a result of the evaluation of new information not

previously available. Because of the complexity of some of these uncertainties, the ultimate resolution may result in a tax payment that

is materially different from our current estimate of the unrecognized tax benefit liabilities. These differences will be reflected as

increases or decreases to income tax expense in the period in which new information is made available.

We believe that none of the unrecognized tax benefits may be recognized

by the end of 2026.

Legal and Other Contingencies

The outcomes of legal

proceedings and claims brought against us are subject to significant uncertainty. An estimated loss from a loss contingency such as a

legal proceeding or claim is accrued by a charge to income if it is probable that an asset has been impaired or a liability has been incurred

and the amount of the loss can be reasonably estimated. In determining whether a loss should be accrued we evaluate, among other factors,

the degree of probability of an unfavorable outcome and the ability to make a reasonable estimate of the amount of loss. Changes in these

factors could materially impact our consolidated financial statements.

ITEM 7A. QUANTITATIVE AND QUALITATIVE DISCLOSURES

ABOUT MARKET RISK.

We are exposed to market risks in the ordinary

course of our business. Market risk represents the risk of loss that may impact our financial position due to adverse changes in financial

market prices and rates. Our market risk exposure is primarily the result of fluctuations in foreign currency exchange rates, interest

rates and inflation.

Interest Rate Risk

As of December 31, 2025, we had cash and cash equivalents of $737.9

million and investments in marketable securities of $379.4 million with maturities of less than one year. The goals of our investment

policy are liquidity and capital preservation. We believe that we do not have any material exposure to changes in the fair value of our

cash equivalents or marketable securities as a result of changes in interest rates due to the short-term nature of these assets. A hypothetical

100 basis point increase in interest rates as of December 31, 2025 would not have had a material impact on the fair value of our cash

equivalents or marketable securities due to their short-term maturities. We do not enter into investments for trading or speculative purposes

and have not used any derivative financial instruments to manage our interest rate risk exposure.

Foreign Currency Exchange Risk

All of our operations are based in the

United States and all of our sales transactions are currently denominated in U.S. dollars. However, due to our use of some

international vendors, an immaterial portion of our cost of sales and operating expenses are denominated in currencies other than

the U.S. dollar, principally the British Pound Sterling. Changes in the exchange rate between the U.S. dollar and foreign currencies

in which we incur expenses affect the translated value and relative level of sales and net income that we report from one period to

the next. During the year ended December 31, we incurred a loss on foreign exchange transactions of $9 thousand as compared to $0 in

2024. This amount was not material to our consolidated financial statements.

Impact of Inflation

We do not believe that inflation has had a material

effect on our business, results of operations, or financial condition. Nonetheless, if our costs were to become subject to significant

inflationary pressures it could diminish our margin thereby limiting our profits, especially if we are not able to fully offset such higher

costs. Our inability or failure to do so could harm our business, financial condition, and results of operations.

Other Risks

We do not have material exposure to commodity

price risk, equity price risk, or other significant market risks.

ITEM 8. FINANCIAL STATEMENTS AND SUPPLEMENTARY

DATA.

The financial statements and supplementary data

required by this item, including the report of our independent registered public accounting firm and the notes thereto, are included commencing

at page F-1 of this Annual Report on Form 10-K and incorporated herein by reference.

ITEM 9. CHANGES IN AND DISAGREEMENTS WITH ACCOUNTANTS

ON ACCOUNTING AND FINANCIAL DISCLOSURE.

None.

ITEM 9A. CONTROLS AND PROCEDURES.

Evaluation of Disclosure Controls and Procedures

We maintain “disclosure controls and procedures,” as such

term is defined in Rules 13a-15(e) and 15d-15(e) under the Exchange Act that are designed to ensure that information required to be disclosed

in the reports that we file or submit under the Exchange Act is (1) recorded, processed, summarized and reported within the time periods

specified in the SEC rules and forms and (2) accumulated and communicated to our management, including our principal executive and principal

financial officer, as appropriate to allow timely decisions regarding required disclosure. In designing and evaluating our disclosure

controls and procedures, our management recognized that disclosure controls and procedures, no matter how well designed and operated,

can provide only reasonable, not absolute, assurance that the objectives of disclosure controls and procedures are met. Additionally,

in designing disclosure controls and procedures, our management was necessarily required to apply its judgment in evaluating the cost-benefit

relationship of possible controls and procedures. The design of any disclosure controls and procedures also is based in part upon certain

assumptions about the likelihood of future events, and there can be no assurance that any design will succeed in achieving its stated

goals under all potential future conditions.

As of the end of the period covered by this Annual

Report on Form 10-K, we carried out an evaluation, under the supervision and with the participation of our management, including our principal

executive officer and our principal financial officer, of the effectiveness of our disclosure controls and procedures. Based on such evaluation,

our principal executive officer and principal financial officer concluded that as of December 31, 2025, our disclosure controls and procedures

were not effective due to the material weaknesses in our internal control over financial reporting described below.

Report of Management on Internal Control over

Financial Reporting

Company management is responsible for establishing

and maintaining adequate internal control over financial reporting for the Company (as defined in Rules 13a-15(f) and 15d-15(f) under

the Exchange Act). The Company’s internal control over financial reporting is a process designed by, or under the supervision of,

our principal executive and principal financial officers and effected by the Board, management and other personnel to provide reasonable

assurance regarding the reliability of financial reporting and the preparation of financial statements for external purposes in accordance

with generally accepted accounting principles.

Because of its inherent limitations, internal

control over financial reporting may not prevent or detect misstatements. Projections of any evaluation of effectiveness to future periods

are subject to the risks that controls may become inadequate because of changes in conditions, or that the degree of compliance with the

policies or procedures may deteriorate.

Company management has assessed the effectiveness

of the Company’s internal control over financial reporting as of December 31, 2025. In making this assessment, management used the

criteria set forth by the Committee of Sponsoring Organizations of the Treadway Commission (COSO) in Internal Control-Integrated Framework

(2013).

Based on this assessment, management has determined

that the Company’s internal control over financial reporting was not effective as of December 31, 2025 due to the material weaknesses

noted below.

Material Weakness in Internal Control over

Financial Reporting

A material weakness,

as defined by the Public Company Accounting Oversight Board, is a deficiency, or a combination of deficiencies, in internal control over

financial reporting such that there is a reasonable possibility that a material misstatement of our annual or interim financial statements

will not be prevented or detected on a timely basis.

The ineffectiveness of the Company’s internal control over financial

reporting was due to the following material weaknesses, which are common to many small companies with limited staff:

The

material weakness in the control environment contributed to the following additional material weaknesses:

The material weaknesses

above did not result in a material misstatement to the consolidated financial statements as presented in this Annual Report on Form 10-K.

The effectiveness of the Company’s internal control over financial reporting as of December 31, 2025, has been audited by BPM LLP,

the Company's independent registered public accounting firm, as stated in their report which appears in Part IV, Item 15 of this Annual

Report on Form 10-K.

Management’s Plan to Remediate the

Material Weaknesses

The Company has been implementing and continues to implement measures

designed to ensure that control deficiencies contributing to the material weaknesses are remediated, such that these controls are designed,

implemented, and operating effectively. During 2025, the Company strengthened its accounting function through the hiring of five full-time

accounting professionals, including a Controller and Manager of Technical Accounting, to enhance oversight, technical expertise, and execution

of key financial reporting processes. In addition to identifying and remediating design deficiencies in its processes, the Company has

formally documented its procedures for many of the significant accounting and financial reporting processes, including implementation

of procedures for revenue recognition and segregation of duties. The other remediation actions planned include:

We are committed to maintaining a strong internal

control environment and believe that these remediation efforts will represent significant improvements in our control environment. Our

management will continue to monitor and evaluate the relevance of our risk-based approach and the effectiveness of our internal controls

and procedures over financial reporting on an ongoing basis and is committed to taking further action and implementing additional enhancements

or improvements, as necessary and as funds allow.

Remediation of Previously

Identified Material Weakness

The previously identified

material weaknesses over inadequate controls related to revenue recognition and insufficient written policies and procedures for accounting

and financial reporting with respect to the requirements and application of both accounting principles generally accepted in the United

States of America and SEC Guidelines have been remediated.

Attestation Report

of Independent Registered Public Accounting Firm

The effectiveness of

the Company’s internal control over financial reporting as of December 31, 2025, has been audited by BPM, an independent registered

public accounting firm, as stated in its report included herein.

Changes in Internal

Control over Financial Reporting

As discussed above, we

are implementing certain measures to remediate the remaining material weaknesses identified in the design and operation of our internal

control over financial reporting. Other than those measures, except for the changes discussed above, there have been no changes in our

internal control over financial reporting (as defined in Rule 13a-15(f) and 15d-15(f) under the Exchange Act) during the fiscal quarter

ended December 31, 2024 that have materially affected, or are reasonably likely to materially affect, our internal control over financial

reporting.

ITEM 9B. OTHER INFORMATION.

Rule 10b5-1 Trading

Plans

During the three months

ended December 31, 2025, certain executive officers and directors of the Company (each, a “Plan Participant”) entered

into Rule 10b5-1 trading plan (a “Rule 10b5-1 Trading Plan”) to sell shares of the Company’s common stock, in each

case, subject to any applicable volume limitations. No shares were traded under the Trading Plan during the year ended December 31, 2025.

The table below provides

certain information regarding each Plan Participant’s Rule 10b5-1 Trading Plan.

Rule 10b5-1 Trading Plan is a written document that pre-establishes the amounts, prices and dates (or formulas for determining the amounts,

prices and dates) of future purchases or sales of the Company’s common stock, including, if applicable, shares issued upon exercise

of stock options or vesting of restricted stock units.

Each Plan Participant’s

Rule 10b5-1 Trading Plan was adopted during an authorized trading period and when such Plan Participant was not in possession

of material non-public information and is intended to satisfy the affirmative defense of Rule 10b5-1(c) under the Exchange Act.

The information set

forth below is included for the purpose of providing disclosure under Item 5.02(e) of Form 8-K.

2026 Executive Compensation

Plan

On February 17, 2021,

the Board established an executive compensation framework for fiscal year 2026 (the “2026 Executive Compensation Framework”)

as part of its review of target incentive compensation for our executive officers.

Under the terms of the

2026 Executive Compensation Framework, each of the eligible executive officers are expected to have their salary targeted at the 25th

percentile average of comparable companies, as determined by our compensation consultant, Pearl Meyer & Partners, LLC. Eligible executive

officers may be eligible to receive a cash bonus that will vary in amount depending on our success in achieving certain performance targets

including with respect to achieving $30 million in revenue. In addition, eligible executive officers may also be eligible to receive long

term incentive equity grants comprised of 50% restricted stock units, 30% performance stock units (“PSU’s”) and 20%

stock options. PSU’s are based on three year targets comprised 50% of revenue and backlog and 50% total shareholder return. Individual

bonuses are computed based 50% on the company goal, 50% on individual goals. Our Board and/or our compensation committee retains full

discretion to modify or deviate from the framework described above. The foregoing description is intended to summarize our Board’s

current compensation framework and is not intended to constitute a binding compensatory plan or arrangement.

ITEM 9C. DISCLOSURE REGARDING FOREIGN JURISDICTIONS

THAT PREVENT INSPECTIONS.

Not applicable.

PART III