XTI Aerospace, Inc. 10-Q

Item 2. Management’s Discussion and Analysis of Financial Condition and Results of Operations You should read the following discussion of our financial condition and results of operations in conjunction with the condensed consolidated financial statements and the related notes included elsewhere in this Form 10-Q and with the audited consolidated financial statements included in our Annual Report on Form 10-K for the year ended December 31, 2024, as filed with the SEC. In addition to our historical condensed consolidated financial information, the following discussion contains forward-looking statements that reflect our plans, estimates, and beliefs. Our actual results could differ materially from those discussed in the forward-looking statements. Factors that could cause or contribute to these differences include those discussed below and elsewhere in this Form 10-Q, particularly in Part II, Item 1A, “Risk Factors.” Overview of Our Business We are primarily an aircraft development company focused on the design and commercialization of vertical takeoff and landing (“VTOL”) aircraft. We also provide real-time location systems (“RTLS”) for industrial applications and, through our wholly-owned subsidiary, XTI Drones, LLC, offer drone distribution and technology solutions via our recent acquisitions of Drone Nerds, LLC and Anzu Robotics, LLC (see “ Recent Events ”). Headquartered in Englewood, Colorado, the Company is developing a VTOL airplane that is designed to take off and land like a helicopter and cruise like a fixed-wing business airplane. We believe our initial configuration, the TriFan 600 airplane, will be one of the first civilian fixed-wing VTOL airplanes that offers the speed and comfort of a business airplane and the range and versatility of VTOL for a wide range of customer applications, including private aviation for business and high net worth individuals, emergency medical services and regional charter air travel, defining a new category of VTOL that we term the “xVTOL.” The TriFan 600 is a seven-occupant airplane intended to provide point-to-point air travel over distances of over 1,000 miles, fly at twice the speed and three times the range of competing helicopters and cruise at altitudes of up to 25,000 feet. Since 2013, we have been engaged primarily in developing the aerodynamic performance and top-level engineering design of the TriFan 600, building and testing a two-thirds scale unmanned version of the TriFan 600, generating pre-orders for the TriFan 600, and seeking funds from investors to enable the Company to advance the detailed design and certification of the TriFan 600, and to eventually engage in commercial production and sale of the TriFan 600. We continue to work to optimize our airplane design for both manufacturing and certification. The development of an xVTOL airplane that meets our business requirements demands significant design and development efforts on all facets of the airplane. We believe that by bringing together a mix of talent with VTOL and traditional commercial aerospace backgrounds, we have built a team that enables us to move through the design, development, and certification of our xVTOL airplane with the Federal Aviation Administration (“FAA”) in an efficient manner, thus allowing us to achieve our end goal of bringing to market our airplane as efficiently as possible. To date, we have not generated any revenue from aircraft sales because we are still designing and developing our xVTOL airplane. Additionally, we are seeking the necessary governmental approvals to bring the airplane into service. To continue funding these efforts, we will need to raise capital for the foreseeable future. The amount and timing of our future capital needs will depend on various factors, including the progress and results of our airplane’s design and development, our manufacturing operations, and our success in obtaining the required FAA certifications and other government approvals. For instance, any significant delays in securing FAA certifications or other government approvals may force us to raise more capital and could postpone our ability to generate revenue from aircraft sales. Our RTLS solutions leverage cutting-edge technologies such as IoT, AI, and big data analytics to provide real-time tracking and monitoring of assets, machines, and people within industrial environments. With our RTLS solutions, businesses can achieve improved operational efficiency, enhanced safety and reduced costs. By having real-time visibility into operations, industrial organizations can make informed, data-driven decisions, minimize downtime, and ensure compliance with industry regulations. Drone Nerds, LLC (“Drone Nerds”), a Florida limited liability company founded in 2014 and headquartered in Dania Beach, Florida, is one of the largest drone distributors and solutions providers in the United States. Drone Nerds specializes in the wholesale, retail and e-commerce sale of advanced drone systems and related technologies serving commercial, governmental, and consumer markets, including public safety, construction, energy, and agriculture. The company operates both an online sales platform and a retail location in South Florida and maintains one of the largest drone inventories in the U.S., representing over 30 leading brands. Through its nationwide network of sales, marketing, and service professionals, Drone Nerds delivers comprehensive enterprise drone solutions that improve operational performance and data-driven decision-making for its customers. We currently report financial results for two segments: Commercial Aviation and Industrial IoT. For Industrial IoT, we generate revenue from sales of hardware, software licenses and professional services. During the quarter ended December 31, 2024, we began exploring strategic options to wind down and/or sell the hardware portions of our Industrial IoT business segment in order to shift our focus towards the sales of software products. For Commercial Aviation, the segment is pre-revenue as we are currently developing the TriFan 600 airplane. As of the date of this filing, we have not yet assessed the impact of the recent acquisitions of Drone Nerds and Anzu Robotics to our future segment reporting. 38 Key Factors Affecting Operating Results We believe that the growth of our business and our future success are dependent upon many factors, including our ability to retain and develop engineering internal and third-party resources, secure strategic partnerships with suppliers, expand the number of customer purchase orders, locate a facility for further aircraft development and testing, expand on that facility or locate to a new facility for commercial production, build-out production assembly lines in a timely manner, develop ancillary service offerings related to the TriFan 600 such as flight training and maintenance products, and secure the needed financing to achieve FAA certification. While each of these areas presents significant opportunities for us, they also pose material challenges and risks that we must successfully address to achieve FAA certification of the TriFan 600 and further reach our current aircraft delivery forecasts. Corporate Strategy Update Our primary focus is to power what we term the Vertical Economy™ by delivering high-performance xVTOL solutions that scale from aircraft to innovative technologies and infrastructure. We identify seven areas that comprise the Vertical Economy: manned aircraft, unmanned aircraft, power technology, airspace and infrastructure management, artificial intelligence, aircraft advanced materials and next gen manufacturing. The term “xVTOL” is intended to encompass the broad spectrum of vertical lift technologies within the Vertical Economy, including various aircraft types (e.g., electric VTOL, regional VTOL and drones), operational models (manned and unmanned), supporting technologies (e.g., propulsion systems and aerospace-related artificial intelligence technologies) and customer applications. With the TriFan 600 as our flagship commercial aviation product, we are laying the groundwork for an innovative family of versatile aircraft and solutions addressing passenger travel, logistics, autonomous operations and defense missions that we believe will unlock significant growth and market leadership. Expanding into autonomous, remotely operated drones via the acquisition of Drone Nerds was key to our strategic focus. By combining drone technology with VTOL innovation, we believe we are positioning the Company to accelerate the development of both unmanned aerial vehicles and VTOL solutions, expand its market presence, and create new revenue-generating opportunities across multiple industries. We will also be opportunistic and may consider other strategic transactions, which may include, but not be limited to, other alternative investment opportunities, such as minority investments and joint ventures. If we make any acquisitions in the future, we expect that we may pay for such acquisitions with cash, equity securities and/or debt in combinations appropriate for each acquisition. Recent Events Acquisitions of Drone Nerds and Anzu Robotics On November 10, 2025, XTI Drones Holdings, LLC, a Texas limited liability company (“XTI Drones Holdings”) and a subsidiary of our wholly-owned subsidiary, XTI Drones, LLC, acquired 100% of the issued and outstanding equity interests of two enterprise drone solutions providers, Drone Nerds (as defined above) and Anzu Robotics, LLC, a Delaware limited liability company (“Anzu Robotics”), pursuant to the terms of two separate membership interest purchase agreements (such transactions, respectively, the “Drone Nerds Acquisition” and the “Anzu Robotics Acquisition” and collectively, the “Acquisitions”), in exchange for aggregate consideration consisting of (i) approximately $20.0 million in cash, (ii) approximately $11.9 million in the form of two promissory notes (including approximately $1.6 million in working capital adjustments) and (iii) an aggregate of 6,524,576 Class B Units of XTI Drones Holdings (the “Class B Units”) with a fair market value of approximately $9.7 million. The aggregate purchase price for each Acquisition is subject to customary post-closing adjustments. The Class B Units of XTI Drones Holdings are exchangeable at any time after May 1, 2026 for shares of the Company’s common stock on a one-for-one basis, provided that such exchange ratio is subject to equitable adjustments for stock splits, stock dividends, reclassifications and similar transactions affecting the Company’s common stock. In addition, on the date that is 15 months after November 10, 2025, all outstanding Class B Units will automatically be exchanged for shares of the Company’s common stock on a one-for-one basis, subject to the foregoing adjustments. The Drone Nerds and Anzu Robotics sellers entered into lock-up agreements pursuant to which they agreed not to, without the Company’s prior consent, sell, transfer or dispose of any shares of common stock until November 10, 2026. Following the exchange of all outstanding Class B Units into shares of common stock, XTI Drones, LLC will own 100% of the membership interests of XTI Drones Holdings, and Drone Nerds and Anzu Robotics will be indirect, wholly-owned subsidiaries of the Company. The Company incurred fees of approximately $1.2 million owed to ThinkEquity LLC as compensation for advisory services in connection with the transactions contemplated by the purchase agreements. 39 Private Placement Investment by Unusual Machines On November 10, 2025, the Company entered into a Securities Purchase Agreement (the “PIPE Purchase Agreement”) with Unusual Machines, Inc., a Nevada corporation (“Unusual Machines”), pursuant to which the Company sold Unusual Machines 25,000 shares of the Company’s newly designated Series 10 Convertible Preferred Stock, par value $0.001 per share (the “Series 10 Preferred Stock”), at a subscription amount of $1,000 per share of Series 10 Preferred Stock for an aggregate subscription amount of $25,000,000 (the “Subscription Amount”), pursuant to a private placement that closed on November 12, 2025 (the “PIPE Offering”). The Company received net proceeds from the PIPE Offering of approximately $23.1 million, after deducting the placement agent fees and other expenses payable by the Company of approximately $1.9 million. The Company filed a certificate of designation (the “Certificate of Designation”) on November 10, 2025, with the Secretary of State of the State of Nevada designating the rights, preferences and limitations of the shares of the Series 10 Preferred Stock. The Series 10 Preferred Stock has a stated value of $1,000 per share (the “Stated Value”), and is initially convertible at a conversion price of $1.492 per share, subject to adjustment pursuant to the Certificate of Designation. On November 10, 2025, prior to the closing of the PIPE Offering, Unusual Machines advanced to the Company $10,500,000 (the “Advance”), which was automatically applied to the Subscription Amount at the closing of the PIPE Offering. The Company used the Advance to satisfy certain obligations under Drone Nerds’ and Anzu Robotics’ $25.0 million secured line of credit established pursuant to and evidenced by that certain Loan Agreement, dated July 10, 2025, by and among Drone Nerds Inc, Anzu Robotics, LLC and Banesco USA (the “Banesco Loan Agreement”), and the other Loan Documents (as defined in the Banesco Loan Agreement). The issuance of shares of common stock upon conversion of, or as a dividend on, the Series 10 Preferred Stock is subject to the Company’s receipt of its shareholders’ approval of the removal of the limitations on conversion set forth in the Certificate of Designation of the Series 10 Preferred Stock, in compliance with Nasdaq Listing Rule 5635 (the “Shareholder Approval”, and the date the Shareholder Approval is obtained, the “Shareholder Approval Date”). Pursuant to the PIPE Purchase Agreement, the Company agreed to hold an annual or special meeting of shareholders no later than January 31, 2026 (the “Shareholder Meeting Deadline”), for the purpose of obtaining such Shareholder Approval. If Shareholder Approval is not obtained on or prior to the Shareholder Meeting Deadline, the Company is required to call a special or annual meeting of shareholders 180 days thereafter until such Shareholder Approval is obtained, provided, however, that such obligation will terminate on the two year anniversary of the closing date of the PIPE Offering. On the Shareholder Approval Date, the Series 10 Preferred Stock will automatically convert into shares of common stock. To the extent not converted in connection with a mandatory conversion, the Series 10 Preferred Stock will be convertible into common stock, from and after the Shareholder Approval Date, at the option of the holder. Each outstanding share of Series 10 Preferred Stock is entitled to receive, in preference to shares of Junior Securities (as defined in the Certificate of Designation), cumulative dividends (“Preferential Dividends”), payable quarterly in arrears, at an annual rate of 12.0% of the Stated Value. The Preferential Dividends will be payable, at the option of the Company, either in-kind in shares of common stock, through an accrual on the Stated Value of the Series 10 Preferred Stock or in cash, subject to, with respect to the issuance of shares of common stock, the receipt of Shareholder Approval and the Beneficial Ownership Limitation (as defined in the Certificate of Designation). The rights to Preferential Dividends expire automatically on the two-year anniversary of the original issuance date of the Series 10 Preferred Stock. The Series 10 Preferred Stock has no voting rights, except as required by law and for certain customary protective provisions set forth in the Certificate of Designation. The Certificate of Designation also includes customary liquidation provisions. See Note 19 of the Notes to Condensed Consolidated Financial Statements included in Part I, Item 1 of this report for a summary of the other material terms of the Series 10 Preferred Stock. Pursuant to the PIPE Purchase Agreement, the Company agreed to file a registration statement covering the resale of the shares of common stock underlying the Series 10 Preferred Stock within 90 days of the closing date of the PIPE Offering. The Company agreed to use commercially reasonable efforts to cause such registration to become effective within 60 days (or 90 days if the SEC notifies the Company that it will “review” the registration statement) following the initial filing of such registration statement and to keep such registration statement effective at all times until the earlier of (i) the time that Unusual Machines, Inc. and its successors and assigns do not own any Series 10 Preferred Stock or underlying shares of common stock or (ii) the date on which the shares of common stock underlying the Series 10 Preferred Stock may be sold without restriction, including volume or manner-of-sale restrictions, pursuant to Rule 144. From the date of the PIPE Purchase Agreement until the later of the date that is 5 days from the date (a) Shareholder Approval is obtained and (b) the date that the registration statement covering the resale of all of the shares of common stock underlying the Series 10 Preferred Stock has been declared effective by the SEC, the Company agreed to not enter into any transaction for the sale of any of its equity securities or securities convertible into its equity securities unless the price per share of common stock or per unit price (or conversion price or exercise price, as applicable) is equal to or greater than $2.50, subject to certain customary exempt issuance exceptions. ThinkEquity acted as the Company’s placement agent in connection with the PIPE Offering. As compensation, the Company paid ThinkEquity $1,750,000 of placement agent fees, reimbursed ThinkEquity for $175,000 of actual out-of-pocket offering expenses, and issued ThinkEquity and its designees warrants to purchase an aggregate of 837,801 shares of common stock, which were exercisable commencing November 12, 2025, expire November 12, 2030 and have an exercise price of $1.492 per share. The Company’s obligation to issue shares upon exercise of the warrants is subject to the Company’s receipt of Shareholder Approval. 40 Valkyrie Investment and the Vanguard Platform On October 27, 2025, the Company and Valkyrie Sciences Holdings LLC (“Valkyrie”), a company developing enterprise solutions via the integration of artificial intelligence and advanced materials, announced the Vanguard Platform, an intelligent technology system for the next generation of VTOL aircraft. The Vanguard Platform will apply Valkyrie’s experience with graphene and composite materials, battery technology, and smart systems architecture to the Company’s TriFan 600 program. In connection with this collaboration, on October 21, 2025, the Company made a $2 million strategic investment in Valkyrie through the purchase of a convertible promissory note (the “Valkyrie Note”) with an initial principal amount of $2 million issued by Valkyrie. Valkyrie and its affiliate Valkyrie Andromeda Corporation (together with Valkyrie, the “Borrower”) are jointly and severally liable under the Valkyrie Note. Interest accrues on the outstanding principal amount at the lesser of 10% per annum or the maximum rate permissible by law. The outstanding principal amount, together with any accrued but unpaid interest, is due and payable on December 31, 2026 (the “Maturity Date”). After a Qualified Financing (as defined in the Valkyrie Note) and if the Company does not elect to convert the Valkyrie Note, the Company may, prior to the Maturity Date, elect to require the Borrower to pay the remaining balance of the Valkyrie Note within 60 days after the delivery of the election notice to Valkyrie. September 2025 Offering On September 12, 2025, the Company entered into a placement agency agreement with ThinkEquity LLC (“ThinkEquity”), pursuant to which the Company agreed to issue and sell directly to various investors, in a best efforts public offering (the “September Offering”), 10,575,000 shares of common stock, pre-funded warrants to purchase up to 1,925,000 shares of common stock, and common warrants to purchase up to 12,500,000 shares of common stock. The combined public offering price for each share of common stock, together with one common warrant, was $1.60. The combined public offering price for each pre-funded warrant, together with one common warrant, was $1.599. Each share of common stock, or a pre-funded warrant in lieu thereof, was sold together with one common warrant. The September Offering closed on September 15, 2025, resulting in net proceeds to the Company of approximately $18.5 million, after deducting the placement agent fees and other expenses payable by the Company of approximately $1.5 million. Upon closing of the September Offering, the Company issued ThinkEquity warrants (the “Placement Agent Warrants”) as compensation to purchase up to 625,000 shares of common stock at an exercise price of $2.00 per share. The Placement Agent Warrants were exercisable immediately upon the date of issuance and expire on the five-year anniversary of the commencement of sales of securities in the September Offering. Officer Appointments Effective as of September 1, 2025, Michael A. Tapp was appointed as the Company’s Chief Operating Officer. In connection therewith, the Company entered into an employment agreement and a side letter with Mr. Tapp, the material terms of which are disclosed in the Company’s Current Report on Form 8-K filed with the SEC on September 5, 2025, as amended by Amendment No. 1 on Form 8-K/A filed with the SEC on September 11, 2025. Additionally, on October 2, 2025, we announced the appointment of Steve Zohrabian as Executive Vice President of XTI Aircraft Company, and on October 29, 2025, we announced the appointment of Dr. Alex Williams as XTI Aerospace, Inc.’s Executive Vice President of Technology. Expansion of Corporate Advisory Board During the nine months ended September 30, 2025, the Company expanded its corporate advisory board, which is now comprised of ten advisory board members, who are helping the Company evaluate strategic opportunities to capitalize on the anticipated demand for the TriFan 600. TriFan 600 Engineering Update We remain focused on advancing the TriFan 600 toward certification and commercialization, with Q3 marking notable progress in both engineering development and regulatory engagement activities. During the quarter ended September 30, 2025, we completed initial flight operations for our Sparrow (1:15 scale model) and Kestrel (1:12 scale model) subscale aircraft prototypes, the results of which validated key design elements of the TriFan 600 under flight conditions. We will continue our subscale aircraft program efforts as we progress toward building our full-scale, piloted TriFan 600 demonstrator, which we expect to complete in 2027. We maintain active monthly engagement with the FAA, including ongoing support for Tech Fam sessions with agency subject matter experts. These interactions support continued progress in development and help confirm that our approach remains consistent with applicable regulatory requirements. Critical Accounting Policies and Estimates Our condensed consolidated financial statements are prepared in accordance with U.S. generally accepted accounting principles (“GAAP”). In connection with the preparation of our consolidated financial statements, we are required to make assumptions and estimates about future events, and apply judgments that affect the reported amounts of assets, liabilities, revenue, expenses and the related disclosures. We base our assumptions, estimates and judgments on historical experience, current trends and other factors that management believes to be relevant at the time our consolidated financial statements are prepared. On a regular basis, we review the accounting policies, assumptions, estimates and judgments to ensure that our consolidated financial statements are presented fairly and in accordance with GAAP. However, because future events and their effects cannot be determined with certainty, actual results could differ from our assumptions and estimates, and such differences could be material. The significant accounting policies of the Company are described in Item 7, “Management’s Discussion and Analysis of Financial Condition and Results of Operations,” section of the Company’s annual report on Form 10-K for the year ended December 31, 2024. There have been no significant changes to the Company’s critical accounting policies and estimates. However, the Company did identify an impairment as described below. 41 Valuation of Long-lived and Intangible Assets and Goodwill We periodically review long-lived assets and certain identifiable intangible assets for impairment in accordance with Accounting Standards Codification (“ASC”) 360, “Property, Plant, and Equipment.” Goodwill and intangible assets not subject to amortization are reviewed annually for impairment in accordance with ASC 350, “Intangibles – Goodwill and Other,” or more often if there are indications of possible impairment. The analysis to determine whether or not an asset is impaired requires significant judgments that are dependent on internal forecasts, including estimated future cash flows, estimates of long-term growth rates for our business, the expected life over which cash flows will be realized and assumed royalty and discount rates. Changes in these estimates and assumptions could materially affect the determination of fair value and any impairment charge. While the fair value of these assets are less than their carrying value based on our current estimates and assumptions, materially different estimates and assumptions in the future in response to changing economic conditions, changes in our business or for other reasons could result in the recognition of impairment losses higher than the amount currently recorded. For assets to be held and used, including acquired intangible assets subject to amortization, we initiate our review whenever events or changes in circumstances indicate that the carrying amount of these assets may not be recoverable. Recoverability of an asset is measured by comparison of its carrying amount to the expected future undiscounted cash flows that the asset is expected to generate. Any impairment to be recognized is measured by the amount by which the carrying amount of the asset exceeds its fair value. Significant management judgment is required in this process. For intangible assets not subject to amortization such as goodwill, we test for impairment annually, or whenever events or changes in circumstances indicate that their carrying value may not be recoverable. In testing goodwill for impairment, we compare the fair value with the carrying value. The determination of fair value is based on a discounted cash flow analysis, using inputs and assumptions such as revenue growth rates, other projected expenses, and discount rates. If we were to experience a decrease in forecasted future revenues attributable to the intangible assets, this could indicate a potential impairment. If the carrying value exceeds the estimated fair value, the goodwill is considered impaired, and an impairment loss will be recognized in an amount equal to the excess of the carrying value over the fair value of goodwill. We perform our annual goodwill impairment test required by ASC 350 as of October 1st of each year. In testing goodwill for impairment, we analyze qualitative factors as stated within ASC 350 to determine if the fair value of our reporting unit may be less than the carrying value of the reporting unit. We have one reporting unit that carries goodwill (Industrial IoT). If the fair value of the reporting unit, based on qualitative factors, may be less than the carrying value of the reporting unit, we then perform the goodwill impairment test required under ASC 350 by comparing the fair value of the reporting unit with the carrying value of the reporting unit and, if the fair value is less than the carrying value, the amount that the carrying value exceeds fair value represents the amount of goodwill impairment. Accordingly, we would recognize an impairment loss in the amount of such excess. In connection with the XTI Merger we recorded $12 million in goodwill which was allocated to our Industrial IoT reporting unit. Since the closing date of the XTI Merger on March 12, 2024, the price of our common stock has declined significantly and may continue to fluctuate in future periods. A sustained decrease in the price of our common stock is one of the qualitative factors to be considered as part of an impairment test when evaluating whether events or changes in circumstances may indicate that it is more likely than not that a potential goodwill impairment exists. We will continue monitoring the analysis of the qualitative and quantitative factors used as a basis for the goodwill impairment test during fiscal year 2025 and at the Company’s October 1st annual testing date. As of September 30, 2025, management evaluated potential triggers and determined there was no triggering event during the three months ended September 30, 2025 relating to the Industrial IoT reporting unit. As of June 30, 2025, management evaluated potential triggers and determined there was a triggering event during the three months ended June 30, 2025 relating to the Industrial IoT reporting unit, in the form of a current period operating and cash flow loss, a consistent history of operating losses, and the revenue results for the current period missing forecasted targets due to (i) the sales cycle to close transactions taking longer than anticipated, and (ii) supply chain issues causing delays in our delivery of Nanotron product to customers. As such, the Company completed a qualitative assessment and determined in the aggregate, it is more likely than not, that the fair value of the IoT reporting unit is less than its carrying value. Therefore, a goodwill impairment of $4.05 million was recognized during the second quarter of 2025. One of the key factors in the calculation of the impairment amount is the Company’s forecasted financial performance for the IoT reporting unit. If the projected revenues decreased by 10%, the goodwill impairment amount would have increased by $2.9 million. This estimate is subject to significant uncertainty due to the potential for volatile financial market conditions. 42 Components of Results of Operations Revenue Commercial Aviation We continue to design, develop and certify the TriFan 600 airplane and thus have not generated revenue from this segment. We do not expect to begin generating significant revenues until we complete the design, development, certification, and manufacturing of the airplane. Industrial IoT Our RTLS products are primarily sold on a license and SaaS mode, which we call “location as a service” or “LaaS.” In our licensing model, we also typically charge an annual maintenance fee. The LaaS model is typically for a 3-5 year contract and includes a license to use, maintenance and hardware upgrades. The LaaS model generates a recurring revenue stream. Operating Expenses Research and Development Research and development activities represent a significant part of our business. Our research and development efforts focus on the design and development of (i) our indoor intelligence products, and (ii) our TriFan 600 airplane, including certain of the systems that will be used in it. As part of our aircraft development activities, we continue to work closely with the FAA towards our goal of achieving certification of our TriFan 600 airplane on an efficient timeline. Research and development expenses consist primarily of costs incurred in connection with the research and development of the TriFan 600 airplane. These expenses include: ● employee-related expenses, including salaries and benefits for personnel engaged in research and development functions; ● expenses incurred under agreements with third parties such as consultants and contractors; and ● software and technology-related expenses to support computer-aided design of the aircraft, flight simulations, and other technology needs of our engineers. Research and development costs are expensed as incurred. We expect our research and development expenses to increase significantly for the foreseeable future as we increase staffing to support aircraft engineering and software development, build aircraft prototypes and continue to explore and develop technologies. We cannot determine with certainty the timing, duration or the costs necessary to complete the design, development, certification, and manufacturing of our TriFan 600 airplane due to the inherently unpredictable nature of our research and development activities. Development timelines, the probability of success, and development costs may differ materially from expectations. Sales and Marketing Expenses Sales and marketing costs include activities such as aircraft reservation procurement, brand awareness campaigns, public relations and business opportunity advancement. These functions mainly generate expenses relating to travel, trade show fees and costs, salaries and benefits. Sales and marketing expenses are expensed as incurred. General and Administrative Expenses General and administrative expenses consist primarily of salaries and related costs for personnel in executive, finance, corporate and business development, and administrative functions. General and administrative expenses also include legal fees relating to patent and corporate matters, including non-capitalizable transaction costs; professional fees for accounting, auditing, tax and administrative consulting services; insurance costs, facility related expenses including maintenance and allocated expenses for rent and other operating costs. We anticipate that general and administrative expenses will increase substantially in the future as we increase our headcount to support continued research and development and commercialization of the TriFan 600. 43 Other (Expense) Income Interest expense, net consists primarily of (i) interest relating to convertible and promissory notes payable, (ii) amortization of debt discounts relating to warrants and stock options issued in conjunction with convertible notes, and (iii) interest income on notes receivable. Loss on extinguishment of debt includes (i) prepayment penalties and other expenses incurred during the nine months ended September 30, 2025 as the Company fully repaid the Streeterville promissory notes before the maturity date, and (ii) inducement losses on debt conversions incurred by Legacy XTI when it entered into voluntary note conversion letter agreements with several note holders during the first quarter of 2024. Change in fair value of convertible notes payable represents the remeasurement of certain Legacy XTI convertible notes to fair value. These notes were converted to equity prior to the closing of XTI Merger. Change in fair value of warrant liability represents the remeasurement of certain outstanding warrants to fair value. Other consists of miscellaneous income and expense items. RESULTS OF OPERATIONS Three Months Ended September 30, 2025 compared to the Three Months Ended September 30, 2024 The following table sets forth selected consolidated financial data and as a percentage of period-over-period change: Three Months Ended September 30, 2025 2024 $ % (in thousands, except percentages) Amount Amount Change* Change* Revenues $ 2,484 $ 918 $ 1,566 171 % Cost of revenues $ 1,407 $ 398 $ 1,009 254 % Gross profit $ 1,077 $ 520 $ 557 107 % Operating expenses $ 15,886 $ 4,736 $ 11,150 235 % Loss from operations $ (14,809 ) $ (4,216 ) $ (10,593 ) 251 % Other (expense) income $ 1,364 $ (219 ) $ 1,583 (723 )% Income tax provision $ (1 ) $ — $ (1 ) — Net loss $ (13,446 ) $ (4,435 ) $ (9,011 ) 203 % * Amounts used to calculate dollar and percentage changes are based on numbers in the thousands. Accordingly, calculations in this item, which may be rounded to the nearest hundred thousand, may not produce the same results. Revenues The revenue amount for the periods presented represents the results of the revenue-generating Industrial IoT segment. Revenues for the three months ended September 30, 2025 were $2.5 million, compared to $0.9 million for the three months ended September 30, 2024, representing an increase of approximately $1.6 million. The increase was primarily attributable to a $1.3 million increase in hardware revenue related to the Company’s IoT business, resulting from improved supply chain conditions. These improvements followed the resolution of disruptions caused by regional conflict in the Middle East, which had impacted operations of the Company’s Israeli supplier and resulted in delays in hardware product deliveries during the first half of 2025. In addition, we communicated our plan to explore our strategic options to wind down and/or sell the hardware portions of our Industrial IoT business to our customers which resulted in customers increasing their hardware purchases, and as a result, we do not expect this trend to continue. Cost of Revenues and Gross Profit Cost of revenues for the three months ended September 30, 2025 was $1.4 million compared to $0.4 million for the comparable period in the prior year for an increase of approximately $1.0 million. This increase is consistent with the increase in revenues noted above. Gross profit for the three months ended September 30, 2025 was $1.1 million compared to $0.5 million for the comparable period in the prior year, an increase of approximately $0.6 million, which is consistent with the increase in revenue. The gross margin percentage was 43.4% and 56.6% for the three months ended September 30, 2025 and 2024, respectively. The margin decrease is due primarily to a shift in sales mix to lower margin hardware products during the three months ended September 30, 2025. 44 Operating Expenses Operating expenses for the three months ended September 30, 2025 were $15.9 million and $4.7 million for the comparable period ended September 30, 2024, an increase of $11.2 million. We expect operating expenses to continue to increase as we increase our headcount to accommodate our growth. This increase was primarily attributable to: ● Research and development expenses , which increased by $0.8 million mainly to advance the development of the TriFan 600 airplane. ● Sales and marketing expenses , which increased b y $1.7 million, as the Company invested more in brand development and awareness, trade show participation, and business development initiatives. ● General and administrative expenses , which increased by $8.7 million, due primarily to an increase of approximately $8.2 million in stock-based compensation and an increase in administrative headcount to support operational growth. Other (Expense) Income Other (expense) income for the three months ended September 30, 2025 was income of $1.4 million compared to a loss of $0.2 million for the comparable period in the prior year. The income for the three months ended September 30, 2025 was primarily attributable to the recognition of a $2.2 million gain related to the change in fair value of a warrant liability which was partially offset by $0.8 million of financing costs incurred relating to the issuance of warrants in connection with the September Offering. Income Tax Benefit (Provision) The income tax benefit (provision) for the three months ended September 30, 2025 and 2024 was immaterial. Nine Months Ended September 30, 2025 compared to the Nine Months Ended September 30, 2024 The following table sets forth selected consolidated financial data and as a percentage of period-over-period change: Nine Months Ended September 30, 2025 2024 $ % (in thousands, except percentages) Amount Amount Change* Change* Revenues $ 3,568 $ 2,169 $ 1,399 64 % Cost of revenues $ 1,673 $ 846 $ 827 98 % Gross profit $ 1,895 $ 1,323 $ 572 43 % Operating expenses $ 38,236 $ 28,343 $ 9,893 35 % Loss from operations $ (36,341 ) $ (27,020 ) $ (9,321 ) 34 % Other (expense) income $ (10,840 ) $ 5,289 $ (16,129 ) (305 )% Income tax benefit (provision) $ 5 $ (16 ) $ 21 (131 )% Net loss $ (47,176 ) $ (21,747 ) $ (25,429 ) 117 % * Amounts used to calculate dollar and percentage changes are based on numbers in the thousands. Accordingly, calculations in this item, which may be rounded to the nearest hundred thousand, may not produce the same results. Revenues The revenue amount for the periods presented represents the results of the revenue-generating Industrial IoT segment. Revenues for the nine months ended September 30, 2025 were $3.6 million compared to $2.2 million for the comparable period in the prior year for an increase of approximately $1.4 million. The increase was primarily attributable to a $0.9 million increase in hardware revenue related to the Company’s IoT business, resulting from improved supply chain conditions. These improvements followed the resolution of disruptions caused by regional conflict in the Middle East, which had impacted operations of the Company’s Israeli supplier and resulted in delays in hardware product deliveries during the first half of 2025. In addition, we communicated our plan to explore our strategic options to wind down and/or sell the hardware portions of our Industrial IoT business to our customers which resulted in customers increasing their hardware purchases, and as a result, we do not expect this trend to continue. In addition, recurring software revenue increased by $0.4 million due to existing IoT customers adding new locations to their contracts. 45 Cost of Revenues and Gross Profit Cost of revenues for the nine months ended September 30, 2025 was $1.7 million compared to $0.8 million for the comparable period in the prior year. Gross profit for the nine months ended September 30, 2025 and 2024 was $1.9 million and $1.3 million, respectively. The gross margin percentage was 53% and 61% for the nine months ended September 30, 2025 and 2024, respectively. The margin decrease is due primarily to a shift in sales mix to lower margin hardware products during the first nine months of 2025. Operating Expenses Operating expenses for the nine months ended September 30, 2025 were $38.2 million, compared to $28.3 million for the nine months ended September 30, 2024, an increase of $9.9 million. We expect operating expenses to continue to increase as we increase our headcount to accommodate our growth. The increase was primarily attributable to: ● Research and development expenses , which increased by $2.8 million, primarily related to continued development of the TriFan 600 program. ● Sales and marketing expenses , which increased b y $3.1 million, as the Company expanded investments in brand development and awareness, trade show participation, and business development initiatives. ● Non-cash impairment charges , which increased by $4.7 million, relating to goodwill and intangible assets within the Industrial IoT segment. ● General and administrative expenses , which increased by $6.0 million, primarily due to higher legal and accounting fees associated with capital-raising activities during 2025, increased administrative headcount to support operational growth, and higher public company-related professional fees. The 2024 period reflects the operations of Legacy XTI, a private company, from January 1, 2024 through the March 12, 2024 closing of the XTI Merger. These increases were partially offset by a $6.5 million decrease in acquisition-related costs incurred during the nine months ended September 30, 2024, associated with the closing of the XTI Merger. Other (Expense) Income Other (expense) income for the nine months ended September 30, 2025 was a loss of $10.8 million compared to a gain of $5.3 million for the comparable period ended September 30, 2024. The loss during the nine months ended September 30, 2025 was primarily driven by (i) $6.6 million of financing costs incurred relating to the issuance of warrants in connection with the March Offering, June Offering and September Offering, (ii) the recognition of a $3.3 million loss related to the change in fair value of a warrant liability, and (iii) a loss on extinguishment of debt of $0.4 million. The gain of approximately $5.3 million for the nine months ended September 30, 2024 was primarily driven by the Company recognizing an income gain of approximately $12.9 million relating to the remeasurement of convertible notes at fair value, partially offset by inducement losses on debt conversions of approximately $6.7 million. Income Tax Benefit (Provision) The income tax benefit (provision) for the nine months ended September 30, 2025 and 2024 was immaterial. Liquidity and Capital Resources Our current capital resources and operating results as of and through September 30, 2025, consist of: 1) working capital of approximately $1.1 million, adjusted to approximately $29.3 million when excluding derivative warrant liabilities; 2) cash and cash equivalents of approximately $32.2 million; and 3) net cash used by operating activities for the nine months ended September 30, 2025 of $30.4 million. 46 The breakdown of our working capital as of the periods indicated below is as follows (in thousands): Working Capital September 30, 2025 December 31, 2024 $ Change Current Assets Cash and cash equivalents $ 32,198 $ 4,105 $ 28,093 Accounts receivable, net 2,095 706 1,389 Other receivables 38 538 (500 ) Inventories 1,433 2,214 (781 ) Prepaid expenses and other current assets 918 1,018 (100 ) Total Current Assets 36,682 8,581 28,101 Current Liabilities Accounts payable and related party payables 2,560 5,538 (2,978 ) Accrued expenses and other current liabilities 2,263 6,703 (4,440 ) Accrued interest 342 522 (180 ) Customer deposits 1,350 1,350 — Warrant liability 28,228 — 28,228 Operating lease obligation, current 98 119 (21 ) Deferred revenue 737 532 205 Short-term debt - 2,657 (2,657 ) Total Current Liabilities 35,578 17,421 18,157 Net Working Capital (Deficit) $ 1,104 $ (8,840 ) $ 9,944 Balance Sheet Improvement During the nine months ended September 30, 2025, we raised approximately $62.8 million in net proceeds through our now expired ATM with Maxim, public offerings of our securities placed and underwritten by ThinkEquity and the exercise of warrants issued in connection with certain public offerings. The proceeds from these capital raises and warrant exercises allowed us to significantly reduce debt and other obligations, while progressing the development of the TriFan 600 airplane. The following summarizes the improvements to our balance sheet from December 31, 2024 to September 30, 2025: ● Cash and cash equivalents increased by approximately $28.1 million primarily due to the net proceeds received from the January, March, June and September Offerings. ● Net working capital increased by approximately $9.9 million or increased by approximately $38.2 million when excluding derivative warrant liabilities. ● In March 2025, we repaid in full the outstanding secured promissory notes issued to Streeterville, which resulted in the release of Streeterville’s security interest in the assets of XTI Aircraft Company. In September 2025, we repaid in full Legacy XTI’s secured promissory note with the with the U.S. Small Business Administration. As of September 30, 2025, we had no interest-bearing debt outstanding. ● In March 2025, we redeemed the remaining outstanding shares of Series 9 Preferred Stock, leaving zero shares of Series 9 Preferred Stock issued and outstanding as of September 30, 2025. The Series 9 Preferred Stock had restricted our ability to raise capital, as we were prohibited from taking certain actions without prior written consent from the holders of the Series 9 Preferred Stock. ● In March 2025, we repaid the remaining Strategic Transaction Bonus Plan obligation to prior Legacy Inpixon management, which was the primary driver for the approximate $4.4 million decline in accrued expenses and other current liabilities from December 31, 2024 to September 30, 2025. ● In March 2025, we repaid the accounts payable and most commitments that were inherited from Legacy Inpixon. A remaining deferred consulting fee commitment of $0.5 million is still owed to Nadir Ali, the Company’s former Chief Executive Officer, which is payable on December 31, 2025. We believe the Company’s ability to raise capital has been favorably impacted by the reduction of obligations either assumed from Legacy Inpixon or created by the XTI Merger closing and the elimination of the Streeterville secured debt and equity instruments with fundraising restrictions. 47 Contractual Obligations and Commitments Contractual obligations are cash that we are obligated to pay as part of certain contracts that we have entered during our course of business. Our contractual obligations consist of operating lease liabilities and merger-related transaction liabilities that are included in our condensed consolidated balance sheet and vendor commitments associated with agreements that are legally binding. As of September 30, 2025, the total obligation for capitalized operating leases was approximately $0.3 million, of which approximately $0.1 million is expected to be paid in the next twelve months. Customer Deposits As of September 30, 2025, we received conditional pre-orders under a combination of non-binding aircraft purchase agreements, reservation deposit agreements, options and letters of intent for aircraft, which generated approximately $1.4 million of cash from customer deposits. These funds from customer reservation deposits will not be recorded as revenue until the orders for aircraft are delivered, which may not be for many years or at all if we do not deliver the aircraft. The deposits prioritize orders when the aircraft becomes available for delivery. Customers making deposits are not obligated to purchase aircraft until they execute a definitive purchase agreement. Customers may request a return of their refundable deposit any time up until the execution of a purchase agreement. Customers’ request for a return of their refundable deposits could adversely affect our liquidity resources, and we may be financially unable to return such deposits. Commitment to Nadir Ali As disclosed in Note 16 of the condensed consolidated financial statements, as of September 30, 2025, the Company has a remaining commitment to pay Nadir Ali deferred consulting fees of $500,000 due on December 31, 2025. Risks and Uncertainties; Sources of Liquidity; Long-Term Liquidity Requirements As of September 30, 2025, the Company has working capital of approximately $1.1 million, adjusted to $29.3 million when excluding derivative warrant liabilities, and cash and cash equivalents of approximately $32.2 million. For the nine months ended September 30, 2025, the Company had a net loss of approximately $47.2 million. During the nine months ended September 30, 2025, the Company used approximately $30.4 million of cash for operating activities. On November 10, 2025, the Company acquired 100% of the issued and outstanding equity interests of two enterprise drone solutions providers, Drone Nerds and Anzu Robotics for total purchase consideration of $40.0 million, which was comprised of $20.0 million in cash, $11.9 million in the form of two promissory notes (including approximately $1.6 million in working capital adjustments), and $9.7 million in the form of equity consideration. On November 12, 2025, the Company closed the PIPE Offering pursuant to which the Company issued Unusual Machines 25,000 shares of Series 10 Convertible Preferred Stock for gross proceeds of $25.0 million and net proceeds of $23.1 million after deducting the placement agent fees and other expenses payable by the Company of approximately $1.9 million. There can be no assurances that the Company will ever earn revenues sufficient to support its operations, or that it will ever be profitable. In order to continue its operations, the Company has historically supplemented the revenues it earned with proceeds from the sale of our equity and debt securities and proceeds from loans and bank credit lines. The Company has incurred net losses and negative operating cash flows from operations since the XTI Merger completed on March 12, 2024, and the Company expects to continue to incur losses and negative operating cash flows for the foreseeable future until it commences sustainable commercial operations of the TriFan 600 airplane. Since the XTI Merger, the Company has funded its operations primarily with proceeds from equity financings, including through our now expired ATM with Maxim and four public offerings completed in January 2025, March 2025, June 2025 and September 2025 (collectively, the “Offerings”), and through the issuance of promissory notes. We believe that our current revenue, as supplemented by proceeds from our financings, including the approximately $57.1 million net proceeds we raised in the Offerings, a portion of which was used to fully repay short-term obligations including the outstanding Streeterville promissory note balances, along with our ability to defer or eliminate certain operating expenses that are under our control, will provide us with liquidity to fund our planned operating needs for at least the next twelve months. According to our current development schedule, we do not expect to obtain FAA type certification and other necessary regulatory approvals and commence deliveries of the TriFan 600 until 2030 at the earliest. We expect to fund our operations primarily through equity and/or debt financings at least until we commence sustainable commercial operations of the TriFan 600. We filed a shelf registration statement on Form S-3 on August 1, 2025, which was declared effective by the SEC on August 12, 2025, pursuant to which we may offer and sell, from time to time, in one or more offerings, up to $1 billion in any combination of common stock, preferred stock, depositary shares, debt securities, warrants, units and subscription rights until such shelf registration statement expires in August 2028. 48 Equity financing may result in dilution to the interests of our existing stockholders and could involve issuing securities with rights, preferences, or privileges senior to those of existing common stockholders. Similarly, debt financing could involve instruments with terms that supersede those of preferred or common stockholders and may include operational restrictions. It is important to note that capital markets have experienced volatility in the past and may do so again, which could impact our ability to raise funds on favorable terms or at all. We currently do not have material cash obligations related to existing contracts. As a result, our future cash needs are closely tied to management’s strategic decisions regarding the pace and priorities of short- and long-term initiatives. These requirements are subject to fluctuation based on operational choices, including the timing and scale of infrastructure and development of sub-scale and full-scale test aircraft. Factors influencing our future capital needs include revenue growth, aircraft pre-order deposit timing, expansion of sales and marketing efforts, and the scope of development initiatives. We may also pursue strategic acquisitions or investments in complementary businesses, technologies, or products, which could necessitate additional financing. If we are unable to raise additional capital when needed or on acceptable terms, it could limit our ability to innovate, develop, and compete effectively—ultimately affecting our business performance and financial condition. In such a case, we may be forced to reduce or delay investments in manufacturing, infrastructure, and R&D, or adjust our expansion plans—any of which could have a material adverse impact on our operations and long-term prospects. Cash Flows The Company’s net cash flows used in operating, investing and financing activities for the nine months ended September 30, 2025 and 2024 and certain balances as of the end of those periods are as follows (in thousands): For the Nine Months Ended September 30, 2025 2024 Net cash used in operating activities $ (30,356 ) $ (14,305 ) Net cash (used in) provided by investing activities (126 ) 2,875 Net cash provided by financing activities 58,568 11,928 Effect of foreign exchange rate changes on cash 7 8 Net increase in cash and cash equivalents $ 28,093 $ 506 As of September 30, 2025 As of December 31, 2024 Cash and cash equivalents $ 32,198 $ 4,105 Working capital (deficit) $ 1,104 $ (8,840 ) 49 Operating Activities for the nine months ended September 30, 2025 Net cash used in operating activities during the nine months ended September 30, 2025 was approximately $30.4 million. The cash flows related to the nine months ended September 30, 2025 consisted of the following (in thousands): Net loss $ (47,176 ) Non-cash income and expenses 23,062 Net change in operating assets and liabilities (6,242 ) Net cash used in operating activities $ (30,356 ) The non-cash income and expense of approximately $23.1 million consisted primarily of the following (in thousands): $ 103 Depreciation and amortization 206 Amortization of intangible assets 100 Amortization of right-of-use asset 145 Non-cash interest expense, net of interest income 7,527 Stock-based compensation 4,049 Impairment of goodwill 631 Impairment of intangible assets 421 Loss on extinguishment of debt 6,580 Warrant issuance expense 3,280 Change in fair value of warrant liability 20 Unrealized gain on foreign currency transactions and other income and expense items $ 23,062 Total non-cash expenses The net cash used in the change in operating assets and liabilities aggregated approximately $6.2 million and consisted primarily of the following (in thousands): $ (1,293 ) Increase in accounts receivable and other receivables 1,016 Decrease in inventories 388 Decrease in prepaid expenses and other current assets and other assets (1,991 ) Decrease in accounts payable and related party payables (4,667 ) Decrease in accrued expenses and other current liabilities 67 Increase in accrued interest 336 Increase in deferred revenue (98 ) Decrease in operating lease obligation $ (6,242 ) Net cash used in the changes in operating assets and liabilities The increase in accounts receivable and corresponding decrease in inventories primarily reflect higher Nanotron hardware sales occurring during the latter stages of the quarter ending September 30, 2025. Cash proceeds from the public offerings completed during 2025 allowed the Company to significantly reduce obligations including accounts payable and accrued expenses. The decrease in accrued expenses and other current liabilities of approximately $4.7 million was mainly attributable to (i) cash payments to settle the remaining accrued transaction bonuses and consulting fees owed to prior Legacy Inpixon executives, and (ii) payment of accrued employee bonuses. 50 Operating Activities for the nine months ended September 30, 2024 Net cash used in operating activities during the nine months ended September 30, 2024 was approximately $14.3 million. The cash flows related to the nine months ended September 30, 2024 consisted of the following (in thousands): Net loss $ (21,747 ) Non-cash income and expenses (1,134 ) Net change in operating assets and liabilities 8,576 Net cash used in operating activities $ (14,305 ) The non-cash income and expense of approximately $1.1 million consisted primarily of the following (in thousands): $ 81 Depreciation and amortization expenses 431 Amortization of intangible assets 177 Amortization of right-of-use asset 267 Non-cash interest expense, net of interest income 3,844 Stock-based compensation (12,882 ) Change in fair value of convertible notes payable 6,732 Loss on extinguishment of debt 281 Change in fair value of warrant liability (65 ) Unrealized gain on foreign currency transactions and other income and expense items $ (1,134 ) Total non-cash expenses The net cash provided by the change in operating assets and liabilities aggregated approximately $8.6 million and consisted primarily of the following (in thousands): $ (72 ) Increase in accounts receivable and other receivables 271 Decrease in inventory 279 Decrease in prepaid expenses and other current assets and other assets 2,514 Increase in accounts payable 5,708 Increase in accrued expenses and other liabilities 154 Increase in accrued interest (115 ) Decrease in deferred revenue (163 ) Decrease in operating lease obligation $ 8,576 Net cash provided by the changes in operating assets and liabilities Cash Flows from Investing Activities for the nine months ended September 30, 2025 and 2024 Net cash flows used in investing activities during the nine months ended September 30, 2025 was approximately $0.1 million. Net cash flows provided by investing activities during the nine months ended September 30, 2024 was approximately $2.9 million. Cash flows related to investing activities during the nine months ended September 30, 2024 consist primarily of the cash assumed from Legacy Inpixon in connection with the XTI Merger. 51 Cash Flows from Financing Activities for the nine months ended September 30, 2025 and 2024 Net cash flows provided by financing activities during the nine months ended September 30, 2025 was approximately $58.6 million. During the nine months ended September 30, 2025, the Company received incoming cash flows of $1.7 million from the now expired ATM, $57.1 million from the sale of common stock and warrants via four public offerings, and $4.1 million from the exercise of warrants issued in connection with the public offerings. During the nine months ended September 30, 2025, the Company paid $2.7 million to fully settle the two outstanding promissory note obligations with Streeterville, paid $0.1 million to fully settle the outstanding SBA loan, and paid $1.4 million to redeem the remaining outstanding Series 9 Preferred Stock. Net cash flows provided by financing activities during the nine months ended September 30, 2024 was approximately $11.9 million. During the nine months ended September 30, 2024, the Company received incoming cash flows of $9.6 million from the now expired ATM, $2.0 million from promissory notes issued to Streeterville, and $1.0 million in proceeds from an existing promissory note arrangement with Legacy Inpixon. During the nine months ended September 30, 2024, the Company repaid $0.7 million towards outstanding promissory notes. Off-Balance Sheet Arrangements We do not have any off-balance sheet guarantees, interest rate swap transactions or foreign currency contracts. We do not engage in trading activities involving non-exchange traded contracts. Recently Issued Accounting Standards For a discussion of recently issued accounting pronouncements, please see Note 3 of the Notes to Condensed Consolidated Financial Statements included in Part I, Item 1 of this report. Item 3. Quantitative and Qualitative Disclosures About Market Risk Not applicable.