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Item 1A. Risk Factors

2026-04-15 compared with 2025-04-15 · 1946 added, 1589 removed, 22 unchanged (99% of the section changed)

are subject to various risks and uncertainties that may materially harm our business, prospects, financial condition and results of operations.

An investment in our common stock is speculative and involves a high degree of risk.

In evaluating an investment in shares of our common

stock, you should carefully consider the risks described below, together with the other information included in this report.

any of the events described in the following risk factors actually occurs, or if additional risks and uncertainties later materialize,

that are not presently known to us or that we currently deem immaterial, then our business, prospects, results of operations and financial

condition could be materially adversely affected.

In that event, the trading price of our common stock could decline, and investors in

our common stock may lose all or part of their investment in our shares.

The risks discussed below include forward-looking statements,

and our actual results may differ substantially from those discussed in these forward-looking statements.

following summarizes the risks and uncertainties that could materially adversely affect our business, financial condition, results of

operation and stock price.

We are subject to various

risks and uncertainties that may materially harm our business, prospects, financial condition and results of operations.

An investment

in our common stock and other securities is speculative and involves a high degree of risk.

In evaluating an investment in our securities,

you should carefully consider the risks described below, together with the other information included in this Annual Report.

If any of the events described

in the following risk factors actually occurs, or if additional risks and uncertainties later materialize, that are not presently known

to us or that we currently deem immaterial, then our business, prospects, results of operations and financial condition could be materially

adversely affected.

In that event, the trading price of our common stock could decline, and investors in our securities may lose all

or part of their investment.

The risks discussed below include forward-looking statements, and our actual results may differ substantially

from those discussed in these forward-looking statements.

Moreover, these disclosures reflect the Company’s beliefs and opinions

as to factors that could materially and adversely affect the Company and its securities in the future.

References to past events are

provided by way of example only and are not intended to be a complete listing or a representation as to whether or not such factors have

occurred in the past or their likelihood of occurring in the future.

Summary of Risk Factors

The following summarizes

the risks and uncertainties that could materially adversely affect our business, financial condition, results of operation and stock price.

You should read this summary together with the more detailed description of each risk factor contained below.

Related to Our Business and Industry

have a limited operating history and have not yet manufactured any non-prototype aircraft,

delivered any aircraft to customers or generated any revenues from our aircraft business,

and we may never develop or manufacture any VTOL aircraft according to our current development

schedule, or at all.

will require FAA certification, and a delay in receiving such certification could adversely

affect our prospects, business, financial condition and results of operations.

● The pre-orders we have received for our TriFan 600 airplane are non-binding,

conditional or written expressions of interest and may be terminated at any time prior to execution of a definitive purchase agreement.

If these pre-orders are cancelled, modified, delayed or not placed in accordance with the terms agreed with each party, our business,

results of operations, liquidity and cash flow will be materially adversely affected.

have a history of losses, and in order to successfully execute our business plan, we will

need to raise additional capital through additional debt or equity financing, which may otherwise

not be available on reasonable terms or at all.

● As a result of our failure to timely file a Current Report on Form

8-K, we are currently ineligible to use Form S-3 until August 2025, which may impair our ability to raise capital on terms favorable to

us, in a timely manner or at all.

aircraft carries a degree of inherent risk.

Accidents or incidents involving VTOL aircraft,

us or our competitors could have a material adverse effect on our business, financial condition

Risks Related to Our Business and Industries

Our ability to continue funding our operations and execute our long-term development strategy depends on our ability to maintain sufficient liquidity and obtain additional capital over time;

Our UAS business operates in a rapidly evolving market and is subject to risks related to changes in technology, customer demand, regulatory developments, procurement requirements and competition from companies with substantially greater resources;

Our UAS operations are subject to evolving federal, state, local and international regulatory requirements, and changes in such regulations or our inability to comply with them could adversely affect our business;

Our UAS business depends on relationships with key suppliers and manufacturers, including DJI (as defined below), which represents approximately

49% of our purchases, and adverse regulatory developments, the expiration or non-renewal of dealer agreements, or other disruptions affecting

those suppliers could materially adversely affect our business, financial condition and results of operations;

Our UAS distribution and services business depends on third-party manufacturers, software platforms and OEM policies, and adverse changes in those relationships could materially adversely affect our business, financial condition and results of operations;

Our business may be dependent on a limited number of significant customers, and the loss of one or more such customers, or our inability to attract new customers or fulfill orders, could adversely affect our operating results;

The nature of our UAS business and, to the extent we resume the TriFan 600 program, aircraft development activities involve significant risks and uncertainties, including product liability exposure, that may not be covered by insurance or indemnification;

We have no guarantee of receiving government contracts for our ADS division, and the defense procurement process is lengthy, unpredictable, and resource-intensive.

We may not successfully secure prime contractor agreements, government procurement awards, or commercial partnerships on the timelines we anticipate, or at all;

We may be unable to obtain or maintain the security clearances, certifications, and regulatory authorizations required to pursue and perform classified or sensitive government programs;

We are subject to the risk that changes in U.S.

defense spending, budget sequestration, or shifts in national security priorities will reduce or eliminate the addressable market for our ADS products and services;

The TriFan 600 aircraft program has been paused, and if resumed, may never achieve certification, commercial production or market acceptance.

We have not made a final determination to resume the program, and there can be no assurance that the program will be resumed or successfully commercialized;

Customer orders and service engagements for our UAS products and services and the pre-orders we have received for our aircraft may be non-binding, conditional or written expressions of interest and may be terminated at any time, and cancellations, modifications or delays could materially adversely affect our business, liquidity and cash flows;

We may be adversely affected by interruptions in production or supply chain disruptions that are beyond our control, including disruptions impacting suppliers of UAS products or aircraft components if the TriFan 600 program is resumed;

If we do not adequately protect our intellectual property rights, we may experience a loss of revenue and our operations and growth prospects may be materially harmed;

The ongoing impact of geopolitical conflicts, including the Russia-Ukraine conflict and conflicts in the Middle East, may adversely affect our business, operations and financial condition;

We have a history of losses, and in order to successfully execute our business plan, strategic acquisitions and the development of our advanced systems and domestic manufacturing initiatives, we will need to raise additional capital through debt or equity financing, which may not be available on reasonable terms or at all;

Our asset-based revolving credit facility and the promissory notes issued in connection with the Drone Nerds acquisition contain covenants and payment obligations that, if not satisfied, could materially adversely affect our liquidity and operations;

We may not be able to successfully integrate the business and operations of Drone Nerds or other entities that we have acquired or may acquire in the future, and we may be exposed to unanticipated liabilities or risks arising from the historic operations of acquired businesses;

A significant portion of the purchase price related to our strategic acquisitions was allocated to goodwill and intangible assets that are subject to periodic impairment evaluations, and an impairment loss could have a material adverse impact on our financial condition and results of operations;

Our business depends on experienced and skilled personnel, and if we are unable to attract, retain and integrate such personnel, or if we lose key personnel, our operations and strategic execution may be adversely affected;

We are subject to risks from adverse legal proceedings, cybersecurity threats, IT system failures, privacy and data protection regulations, and numerous other legal and regulatory requirements, violations of which could harm our business;

Changes in U.S.

administrative policy, including tariffs, trade restrictions, geopolitical conflicts, and macroeconomic conditions, could adversely affect our supply chain economics, customer demand, and financial performance;

We may be unable to maintain effective internal control over financial reporting and disclosure controls and procedures, which could adversely affect our ability to accurately report our financial results and maintain investor confidence;

Risks Related to Our Securities

Our failure to maintain compliance with the continued listing requirements of the Nasdaq Capital Market may result in our common stock being delisted from the Nasdaq Capital Market, which could negatively impact the price of our common stock, liquidity, our ability to access the capital markets and our stockholders’ ability to sell their shares;

Our stock price may be volatile, and sales of our common stock, the perception that future sales may occur, or the issuance of additional debt or equity securities may cause the market price of our common stock to decline;

The Class B Units of XTI Drones Holdings, LLC issued in connection with our acquisition of Drone Nerds are exchangeable into shares of our common stock and will be automatically exchanged in February 2027, which will result in dilution to our existing stockholders;

We do not intend to pay cash dividends to our stockholders, so it is unlikely that stockholders will receive any return on their investment in our Company prior to selling our stock;

Some provisions of Nevada law, our articles of incorporation and our bylaws may deter takeover attempts, which may inhibit a takeover that stockholders consider favorable and limit the opportunity of our stockholders to sell their shares at a favorable price.

Risks Related to Our Business and Industries

Our ability to continue funding our operations

and execute our long-term development strategy depends on our ability to maintain sufficient liquidity and obtain additional capital over

Our operations have historically generated net losses and negative

operating cash flows, and we have incurred significant cumulative losses since inception.

Although we believe our current liquidity is

sufficient to fund operations for at least the next twelve months, we will require additional capital over time to support the growth

of our UAS distribution and services businesses via acquisitions and, if we decide to resume the TriFan 600 program, the continued development,

certification and commercialization of the TriFan 600 aircraft.

Because the TriFan 600 program is currently paused, our near-term capital

needs are primarily driven by our UAS growth plan and the development of our unmanned systems and domestic manufacturing initiatives.

Our ability to obtain additional

financing will depend on many factors, including market conditions, investor demand, our operating performance, and broader economic conditions.

If we are unable to obtain additional capital when needed or on acceptable terms, we may be required to delay or scale back certain development

programs, reduce operating expenditures, or modify our business strategy, any of which could materially adversely affect our business,

financial condition and results of operations.

Our UAS business operates in a rapidly evolving

market and is subject to risks related to changes in technology, customer demand, regulatory developments and procurement requirements.

Drone Nerds’ drone,

camera and sensor technologies and related software, training, operational support and repair services are sold in new and rapidly evolving

The commercial unmanned aerial vehicles (“UAV”) industry is in the early stages of customer adoption, and the FAA’s

regulations relating to the integration of commercial drones into the U.S.

National Airspace System continue to evolve.

Accordingly, our

UAS business and future prospects may be difficult to evaluate.

We cannot accurately predict the extent to which demand for drone systems

and solutions will increase, if at all.

The challenges, risks and

uncertainties frequently encountered by companies in rapidly evolving markets could impact our ability to:

sufficient revenue to maintain historical profitability of Drone Nerds;

Acquire and maintain market share;

Achieve or manage growth in our business operations;

Renew customer contracts or maintain customer relationships;

Successfully stock, market and deliver commercial drone products and end-to-end solutions;

Adapt to new or changing policies, regulations and spending priorities of current and prospective clients;

Access to additional financing or capital when required and on reasonable terms.

If we fail to address these

and other challenges, risks and uncertainties successfully, our business, results of operations and financial condition would be materially

Our UAS operations are subject to evolving

federal, state, local and international regulatory requirements, and changes in such regulations or our inability to comply with them

could adversely affect our business.

The distribution, sale, integration

and operation of UAS are subject to extensive and evolving regulation by the FAA, the FCC, the Department of Commerce, the Department

of War and other federal, state, local and foreign authorities.

These regulations govern, among other things, airspace usage, remote identification,

beyond visual line of sight (“BVLOS”) operations, operator certification, product authorizations, communications spectrum,

importation, cybersecurity requirements and procurement eligibility for government customers.

These regulations may require us to obtain,

maintain and periodically renew certifications, waivers or operational authorizations in order to conduct certain types of drone operations,

including operations beyond visual line of sight, nighttime operations, flights over people or operations in controlled or restricted

If we are unable to obtain, maintain or renew required approvals or authorizations on commercially reasonable terms or within

required timeframes, our ability to expand our services, enter new markets or maintain existing operations could be adversely affected.

Regulatory requirements applicable

to UAS technology and operations continue to evolve and may become more restrictive.

For example, new rules or interpretations relating

to airspace access, operational waivers, remote ID compliance, data security, country-of-origin restrictions, or government procurement

eligibility could limit the ability of our customers to deploy certain products or could restrict the products we are permitted to sell.

In addition, certain customers may require additional certifications, security clearances or compliance with emerging federal or state

procurement restrictions before purchasing UAS products or services.

If we or our suppliers are

unable to obtain, maintain or renew required licenses, certifications or authorizations, or if regulatory changes restrict the use, sale

or importation of certain drone platforms, components or related technologies, demand for our products and services could decline.

regulatory scrutiny, enforcement actions, or delays in regulatory approvals could also increase our compliance costs, disrupt our operations

or adversely affect our reputation.

Any material changes in the

regulatory framework governing UAS operations, or our failure to comply with applicable laws and regulations, could have a material adverse

effect on our business, financial condition and results of operations.

Our UAS business depends on relationships

with key suppliers and manufacturers, and adverse regulatory developments or other disruptions affecting those suppliers could materially

adversely affect our business, financial condition and results of operations.

Drone Nerds maintains relationships

with various global suppliers of drones and related electronics.

For the year ended December 31, 2025, purchases from its top three suppliers

represented approximately 49%, 13% and 6% of total purchases, respectively.

If any of these suppliers were to reduce or terminate their

relationship with us, fail to supply products on commercially reasonable terms, or experience operational or regulatory disruptions, our

ability to source products could be materially adversely affected.

Drone Nerds relies on SZ DJI

Technology Co, Ltd.

and affiliates (“DJI”) for a significant portion of its drone sales.

In September 2025, Drone Nerds, LLC

entered into a one-year agreement with DJI to serve as an official non-exclusive dealer of its products in the United States.

been included on certain U.S.

government watchlists relating to national security and data concerns.

In addition, the FCC and other

government agencies have taken actions, including actions relating to the FCC’s Covered List and national security restrictions

affecting certain foreign-manufactured unmanned aircraft systems and related components, that may affect the authorization, procurement,

or use of certain drone platforms in the United States.

These actions may limit manufacturers’ ability to obtain FCC equipment authorization

for new products or product modifications, which could affect the ability to market or sell certain drone platforms or components in the

United States.

Although existing FCC equipment

authorizations for previously approved products generally remain valid, federal agencies may impose procurement restrictions, usage limitations,

or other requirements affecting the deployment of such products.

Regulatory actions, procurement bans, import restrictions, or heightened

export-control or data-security scrutiny could reduce customer demand, limit participation in government-funded projects, or otherwise

adversely affect sales of DJI-based systems.

If regulatory developments restrict

DJI’s ability to sell products in the United States or limit customer use of such products or our agreement with DJI expires and

is not renewed, we may be required to seek alternative suppliers, renegotiate supplier agreements, or incur transition costs.

to diversify our supplier base may be limited, and there can be no assurance that alternative suppliers would be available on comparable

terms, if at all.

Any significant disruption in supply, reduction in product availability, or decline in customer demand could materially

and adversely affect our business, financial condition and results of operations.

Our UAS operations also depend

on the continued availability of critical components such as batteries, sensors, communications equipment, software platforms and replacement

parts supplied by third-party manufacturers and vendors.

Shortages of these components, quality control issues, transportation delays,

trade restrictions, tariffs, geopolitical developments or financial distress affecting key suppliers could delay service delivery, increase

operating costs or reduce operational capacity, which could materially adversely affect our business, financial condition and results

of operations.

Our UAS operations involve assembly, configuration,

integration, repair and service activities that expose us to operational, quality and execution risks that could adversely affect our

Our UAS business includes

activities such as assembling, configuring, integrating, testing, repairing and maintaining drone systems and related components for customers.

These operational activities involve risks that differ from those associated with simple product distribution, including the risk of technician

errors, quality control failures, equipment malfunctions, improper installation, delays in service delivery, and failures to meet customer

specifications or performance expectations.

As our UAS operations grow,

we may face challenges in scaling our service infrastructure, training and retaining qualified personnel, maintaining consistent quality

standards, and managing workflow and inventory across multiple locations.

Any operational or service failures could result in product

returns, warranty claims, customer disputes, contract penalties, reputational harm, increased operating costs or reduced margins.

defects or failures in products that we assemble, configure or service could expose us to liability claims or regulatory scrutiny.

If we are unable to manage

these operational risks effectively, our business, financial condition and results of operations could be materially adversely affected.

We may experience losses or reduced margins

if we are unable to accurately forecast demand for UAS products or manage our inventory effectively.

Our business requires us to

maintain inventory of drone platforms, components and related equipment in advance of customer demand.

Demand for UAS products can be

affected by regulatory changes, technological developments, seasonal purchasing patterns, government procurement cycles and macroeconomic

If we overestimate demand, we may hold excess or obsolete inventory, incur storage and carrying costs, or be required to sell

products at reduced prices.

Conversely, if we underestimate demand, we may be unable to fulfill customer orders in a timely manner, resulting

in lost sales and reduced customer satisfaction.

Any significant mismatch between inventory levels and customer demand could materially

adversely affect our gross margins, operating results and cash flows.

Our UAS distribution and services business

depends on third-party manufacturers, software platforms and OEM policies, and adverse changes in those relationships could materially

adversely affect our business, financial condition and results of operations.

A significant portion of our

UAS business involves the distribution, integration, servicing and support of products manufactured by third-party drone and sensor OEMs.

Our ability to sell, service and support these products depends on maintaining strong commercial relationships with such manufacturers

and complying with their distribution, pricing, branding, warranty and technical requirements.

Many OEMs control critical

elements of the ecosystem in which their products operate, including firmware updates, cloud-based management platforms, software development

kits (SDKs), application programming interfaces (APIs), parts availability, repair authorizations and technical documentation.

to these platforms, pricing structures, reseller programs, minimum purchase requirements, territory allocations, certification requirements

or other OEM policies could:

reduce our margins;

limit our ability to access certain products or components;

restrict our ability to provide repair or support services;

delay product availability;

increase compliance or administrative costs;

result in the termination or non-renewal of distribution or service agreements.

In addition, some OEMs may

choose to sell directly to end customers, expand their own direct sales channels, consolidate distribution networks or favor larger or

strategically aligned distributors.

If any key OEM were to reduce our authorized reseller status, impose less favorable commercial terms,

limit product allocations, or terminate our relationship, we may be unable to replace such products on comparable terms, or at all.

Our dependence on third-party

platforms and OEM-controlled ecosystems reduces our control over product roadmaps, pricing, support policies and long-term availability.

Any material disruption or deterioration in these relationships could have a material adverse effect on our UAS business, financial condition

and results of operations.

market for a civilian long-range fixed-wing VTOL aircraft is new and untested.

If such market

does not respond at the level we expect or if it fails to grow as large as we expect, our

business, financial condition and results of operations could be harmed.

we do not adequately protect our intellectual property rights, we may experience a loss of

revenue and our operations and growth prospects may be materially harmed.

have completed several strategic transactions including acquisitions and dispositions, which

may make it difficult for potential investors to evaluate our future business.

acquisitions or dispositions could disrupt our business and harm our business, financial

condition or operating results.

Furthermore, due to the risks and uncertainties related to

the acquisition of new businesses, any such acquisition does not guarantee that we will be

able to attain profitability.

have been subject to government or regulatory investigations or inquiries under national,

regional and local laws, as amended from time to time, and may be required to comply with

data requests, or requests for information by government authorities and regulators in the

United States or other jurisdictions in which we operate and any resulting enforcement action

could have a materially adverse effect on us.

threats such as cyber-attacks, data protection breaches, computer viruses or malware on our

customers ’ networks, or in cloud-based services provided by or enabled by us, could

result in liability for us, damage our reputation or otherwise harm our business.

failures or interruptions in our services or systems could disrupt our business and impair

our ability to effectively provide our RTLS services and products to our customers, which

could damage our reputation and adversely affect our revenues and profitability.

growth of our RTLS business is dependent on increasing sales to our existing customers and

obtaining new customers, which, if unsuccessful, could limit our financial performance.

Related to Our Securities

failure to maintain compliance with the continued listing requirements of the Nasdaq Capital

Market may result in our common stock being delisted from the Nasdaq Capital Market, which

could negatively impact the price of our common stock, liquidity, our ability to access the

capital markets and our stockholders’ ability to sell their shares.

are subject to certain contractual limitations that could materially adversely affect our

ability to consummate future financings.

stock price may be volatile, and your investment may suffer a decline in value as a result

of the volatility of our stock.

of our common stock or other securities, or the perception that future sales may occur, may

cause the market price of our common stock to decline, even if our business is doing well.

may be future sales or other dilution of our equity, which may adversely affect the market

price of our common stock.

may issue debt and equity securities or securities convertible into equity securities, any

of which may be senior to our common stock as to distributions and in liquidation, which

could negatively affect the value of our common stock.

our common stock becomes subject to the penny stock rules, it would become more difficult

to trade our shares.

do not intend to pay cash dividends to our stockholders, so it is unlikely that stockholders

will receive any return on their investment in our Company prior to selling our stock.

provisions of Nevada law, our articles of incorporation and our bylaws may deter takeover

attempts, which may inhibit a takeover that stockholders consider favorable and limit the

opportunity of our stockholders to sell their shares at a favorable price.

Related to Our Business and Industry

have a limited operating history and have not yet manufactured any non-prototype aircraft, delivered any aircraft to customers or generated

any revenues from our aircraft business, and we may never develop or manufacture any VTOL aircraft according to our current development

schedule, or at all.

We have a limited operating history in the VTOL aircraft industry.

Our primary VTOL aircraft product is the TriFan 600 airplane, which is currently in the developmental stage.

If we are successful in commercially

producing the TriFan 600 according to our current development schedule, we do not expect to be able to obtain approval from the FAA and

regulatory bodies in other countries, and commence deliveries until 2030 at the earliest, if at all.

We have no experience as an organization

in high volume manufacturing of the TriFan 600 or any other type of aircraft.

We cannot assure you that we or our partners will be able

to develop efficient, automated, cost-efficient manufacturing capabilities and processes and reliable sources of component supplies that

will enable us to meet the quality, price, engineering, design and production standards, as well as the production volumes, required to

successfully mass market our aircraft.

You should consider our business and prospects in light of the risks and significant challenges

we face as a new entrant into our industry, including, among other things, with respect to our ability to:

and produce safe, reliable and quality aircraft on an ongoing basis;

the necessary regulatory approvals in a timely manner;

a well-recognized and respected brand;

and expand our customer base;

● successfully

service our aircraft after sales and maintain a good flow of spare parts and customer goodwill;

and maintain our operational efficiency;

our future revenues and appropriately budget for our expenses;

retain and motivate talented employees;

trends that may emerge and affect our business;

and adapt to changing market conditions, including technological developments and changes

in our competitive landscape;

an evolving and complex regulatory environment.

If we fail to adequately address any or all of these risks and challenges,

our business, financial condition and results of operations may be materially and adversely affected.

There is no assurance that we will

ever be profitable or generate sufficient revenue to pay dividends to the holders of our common stock.

We do not believe we will be able

to generate revenues from the sale of aircraft without successfully securing FAA certification of the TriFan 600 airplane, which involves

substantial risk.

As a result, we are dependent upon raising sufficient financing to fund the Company until the TriFan 600’s first

flight, including building the first test airplane.

If planned operating levels are changed, higher operating costs encountered, lower

sales revenue received, more time is needed to implement the plan, or less funding is received from customer deposits or sales, more investor

funds than currently anticipated may be required.

Additional difficulties may be encountered prior to FAA certification, such as unanticipated

problems relating to development, testing, and initial and continuing regulatory compliance, vendor manufacturing costs, production and

assembly, and the competitive and regulatory environments in which we intend to operate.

If additional capital is not available when required,

or is not available on acceptable terms, we may be forced to modify or abandon our business plan.

will require FAA certification, and a delay in receiving such certification could adversely affect our prospects, business, financial

We may be unable to effectively manage the

growth and operational complexity of our expanding UAS distribution and services business.

Our recent growth and the

expansion of our UAS operations have increased the complexity of our business and placed significant demands on our management, personnel,

operational systems and infrastructure.

Continued growth may require us to expand our workforce, warehouse capacity, service capabilities,

information technology systems and internal controls.

If we are unable to successfully manage these operational demands, maintain service

quality, or integrate new personnel and processes effectively, our ability to fulfill customer orders, provide timely support services

and maintain customer satisfaction could be adversely affected.

Any failure to manage our growth effectively could result in operational

inefficiencies, increased costs, service disruptions or reputational harm, which could materially adversely affect our business, financial

condition and results of operations.

TriFan 600 is still in the development stage, and we are still working to obtain FAA type certification of the TriFan 600.

Certification

by the FAA will be required for the sale of the TriFan 600 in the civil or commercial market in the United States.

The process to obtain

such certification is expensive and time consuming and has inherent engineering risks.

These include (but are not limited to) ground

test risks such as structural strength and fatigue resistance, and structural flutter modes.

Flight test risks include (but are not limited

to) stability and handling over the desired center-of-gravity range, performance extremes (stalls, balked-landing climb, single-engine

climb), and flutter control effectiveness (aircraft roll effectiveness, controllability, various control failure safety).

Delays in FAA

certification can be expected to result in us incurring increased costs in attempting to correct any issues causing such delays.

the impact of new or changed laws or regulations on the TriFan 600’s certification or the costs of complying with such laws and

regulations cannot be predicted.

pre-orders we have received for our TriFan 600 airplane are non-binding, conditional or written expressions of interest and may be terminated at

any time prior to execution of a definitive purchase agreement.

If these pre-orders are cancelled, modified, delayed or not placed in

accordance with the terms agreed with each party, our business, results of operations, liquidity and cash flow will be materially adversely

We previously had a pre-sales program that included refundable deposits

for the TriFan 600 airplane that we intend to reopen later in 2025.

Most pre-orders do not include deposits.

Pre-sale agreements generally

provide customers a delivery slot for their airplanes.

The deposits we have received do not create an obligation on the part of the customer

to purchase an airplane, and a customer may request the full return of its refundable deposit.

Most pre-orders are subject to the execution

of a definitive purchase agreement between us and each party that contains the final terms for the purchase of our TriFan 600 airplane,

including, but not limited to, the final number of airplanes to be purchased and the timing for delivery of the airplanes.

customers might not transition to non-refundable purchase contracts until prior to aircraft delivery, if at all.

Aircraft customers might

respond to weak economic conditions or competitive alternatives in the market by canceling orders, resulting in lower demand for our TriFan

600 airplane and other materials, such as parts, services, and training, from which we expect to generate additional revenue.

request for a return of their refundable deposits could have a material adverse effect on our financial results and/or liquidity, including,

but not limited to, the possibility that we may be financially unable to return such deposits.

have a history of losses, and in order to successfully execute our business plan, we will need to raise additional capital through additional

debt or equity financing, which may otherwise not be available on reasonable terms or at all.

We incurred net losses

of approximately $35.6 million and $25.1 million for the fiscal years ended December 31, 2024 and 2023, respectively, and we had an

accumulated deficit of approximately $93.6 million as of December 31, 2024.

These losses and prior-year losses have resulted in

significant negative cash flows.

The continuation of our Company is dependent upon attaining and maintaining profitable operations

in our RTLS business and executing timely on our design, FAA certification and eventual production of the TriFan 600 and raising

additional capital as needed, but there can be no assurance that we will be able to raise any further financing.

management is evaluating options and strategic transactions and continuing to market and promote our new products and technologies, however,

there is no guarantee that these efforts will be successful or that we will be able to achieve or sustain profitability.

Even if we are

able to successfully develop and sell our aircraft, there can be no assurance that the aircraft will be commercially successful and achieve

or sustain profitability.

We expect the rate at which we will incur losses to be significantly higher in future periods as we, among

other things, certify and assemble our aircraft, deploy our facilities, build up inventories of parts and components for our aircraft,

increase our sales and marketing activities, develop our manufacturing infrastructure and increase our general and administrative functions

to support our growing operations.

These efforts may not result in the Company reaching profitability, which would further increase our

We have funded our operations primarily with proceeds from public and private offerings of our common stock and secured and unsecured

debt instruments.

Our history of operating losses and cash uses, our projections of the level of cash that will be required for our operations

to reach profitability, may impair our ability to raise capital on terms that we consider reasonable and at the levels that we will require

over the coming months.

the extent that we raise additional capital by issuing equity securities, such an issuance may cause significant dilution to our stockholders’

ownership and the terms of any new equity securities may have preferences over our common stock.

Any debt financing that we enter into

may involve covenants that restrict our operations.

These restrictive covenants may include limitations on additional borrowing and specific

restrictions on the use of our assets, as well as prohibitions on our ability to create liens, pay dividends, redeem its stock or make

In addition, if we raise additional funds through licensing, partnering or other strategic arrangements, it may be

necessary to relinquish rights to some of our technologies and proprietary rights, or grant licenses on terms that are not favorable

We have issued, and may in the future issue, incentive awards under our equity incentive plans, which may have additional dilutive

We may also be required to recognize non-cash expenses in connection with certain securities we may issue in the future such

as convertible notes and warrants, which would adversely impact our financial condition and results of operations.

ability to obtain needed financing may be impaired by factors, including the condition of the economy and capital markets, both generally

and specifically in our industry, and the fact that we are neither cash flow positive nor profitable, which could affect the availability

or cost of future financing.

We cannot provide any assurances that we will be able to secure additional funding from public or private

offerings or debt financings on terms acceptable to us, if at all.

If the amount of capital we are able to raise from financing activities,

together with our limited revenues from operations, is not sufficient to satisfy our capital needs, we may need to reduce our operations

by, for example, selling certain assets or business segments.

As a result of our failure to timely file

a Current Report on Form 8-K, we are currently ineligible to use Form S-3 until August 2025, which may impair our ability to raise capital

on terms favorable to us, in a timely manner or at all.

S-3 permits eligible issuers to conduct registered offerings using a short form registration statement that allows the issuer to incorporate

by reference its past and future filings and reports made under the Exchange Act.

In addition, Form S-3 enables eligible issuers to conduct

primary offerings “off the shelf” under Rule 415 of the Securities Act.

The shelf registration process, combined with the

ability to forward incorporate information, allows issuers to avoid delays and interruptions in the offering process and to access the

capital markets in a more expeditious and efficient manner than raising capital in a standard registered offering pursuant to a registration

statement on Form S-1.

The ability to register securities for resale may also be limited as a result of the loss of Form S-3 eligibility.

As a result of our failure

to timely file a Current Report on Form 8-K, we are currently ineligible to use Form S-3 until August 2025.

Our inability to use Form

S-3 may significantly impair our ability to raise necessary capital to fund our operations and execute our strategy.

If we seek to access

the capital markets through a registered offering during the period of time that we are unable to use Form S-3, we may be required to

publicly disclose the proposed offering and the material terms thereof before the offering commences, we may experience delays in the

offering process due to SEC review of a Form S-1 registration statement and we may incur increased offering and transaction costs and

other considerations.

Disclosing a public offering prior to the formal commencement of an offering may result in downward pressure on

our stock price.

If we are unable to raise capital through a registered offering, we would be required to conduct our equity financing

transactions on a private placement basis, which may be subject to pricing, size and other limitations imposed under the Nasdaq rules,

or seek other sources of capital.

The foregoing limitations on our financing approaches could prevent us from pursuing transactions or

implementing business strategies that would be beneficial to our business.

aircraft carries a degree of inherent risk.

Accidents or incidents involving VTOL aircraft, us or our competitors could have a material

adverse effect on our business, financial condition and results of operations.

flying a prototype aircraft is inherently risky, and accidents or incidents involving our aircraft are possible.

Any such occurrence

would negatively impact our development, testing and certification efforts, and could result in re-design, certification delay and/or

postponements or delays to the sales of our aircraft.

operation of an aircraft is subject to various risks, and we expect demand for our aircraft to be impacted by accidents or other safety

issues regardless of whether such accidents or issues involve our aircraft.

Such accidents or incidents could also have a material impact

on our ability to obtain certification from the FAA and/or international regulators for our aircraft, or to obtain such certification

in a timely manner.

Such events could impact confidence in a particular aircraft type or the air transportation services industry as

a whole, particularly if such accidents or disasters were due to a safety fault.

We believe that regulators and the general public are

still forming opinions about the safety and utility of various new types of VTOL aircraft, particularly “air taxis”, which

are also known as “eVTOLs.” An accident or incident involving either our VTOL aircraft or an eVTOL aircraft during these

early stages of opinion formation could have a disproportionate impact on the longer-term view of the advanced VTOL aircraft market generally.

may be heightened public skepticism of new types of VTOL aircraft and its adopters.

In particular, there could be negative public perception

surrounding air taxis, including the overall safety and the potential for injuries or death occurring as a result of accidents involving

them, regardless of whether any such safety incidents involve our aircraft.

Any of the foregoing risks and challenges could adversely

affect the combined company’s prospects, business, financial condition and results of operations.

We are at risk of adverse publicity stemming from any public incident

involving our company, our people, our brand or other companies in our industry.

Such an incident could involve the actual or alleged

behavior of any of our employees or third-party contractors.

Further, if our personnel, our TriFan 600 airplane or other types of aircraft

are involved in a public incident, accident, catastrophe or regulatory enforcement action, we could be exposed to significant reputational

harm and potential legal liability.

The insurance we carry may be inapplicable or inadequate to cover any such incident, accident, catastrophe

In the event that our insurance is inapplicable or inadequate, we may be forced to bear substantial losses from an incident

In addition, any such incident, accident, catastrophe or action involving our employees, our TriFan 600 airplane or other

types of aircraft could create an adverse public perception, which could harm our reputation, result in passengers being reluctant to

use our services and adversely impact our business, results of operations and financial condition.

operate in highly competitive markets and we may be required to reduce the prices for some of our products and services to remain competitive,

which could adversely affect our results of operations.

The TriFan 600 potentially competes with a variety of aircraft manufacturers

in the United States and abroad.

Further, we could face competition from competitors of whom we are not aware that have developed or are

developing technologies that will offer alternatives to the TriFan 600.

Competitors could develop an aircraft that renders the TriFan

600 less competitive than we believe it will become.

Many existing potential competitors are well-established, have or may have longer-standing

relationships with customers and potential business partners, have or may have greater name recognition, and have or may have access to

significantly greater financial, technical and marketing resources.

Other manufacturers may be developing a light, fixed-wing, VTOL airplane

with performance similar to that of the TriFan 600.

Additionally,

the RTLS industry is developing rapidly and related technology trends are constantly evolving.

In this environment, we face, among other

things, significant price competition from our competitors.

As a result, we may be forced to reduce the prices of the RTLS products and

services we sell in response to offerings made by our competitors and may not be able to maintain the level of bargaining power that

we have enjoyed in the past when negotiating the prices of our products and services.

If we are not able to maintain favorable pricing

for our RTLS products and services, our results of operations could be adversely affected.

market for a civilian long-range fixed-wing VTOL airplane is new and untested.

If such market does not respond at the level we

expect or if it fails to grow as large as we expect, our business, financial condition and results of operations could be

The market for a civilian long-range fixed-wing VTOL airplane is completely

new and untested.

Our success in this market is dependent upon our ability to effectively market and sell travel and other applications

by the TriFan 600 as a substitute for conventional methods of air transportation (i.e., helicopters and/or light and mid-size business

aircraft) and the effectiveness of our other marketing and growth efforts.

We have projected the market for the TriFan 600 based upon

a variety of internal and external market data.

The estimates involve assumptions, which may not be realized in fact.

There can be no

assurance that our estimates for the number of TriFan 600 airplane that may be sold in the market will be as anticipated.

If the public

does not respond as expected as a result of concerns regarding safety, affordability or for other reasons, then the market for our offerings

may not develop, may develop more slowly than we expect or may not achieve the growth potential we expect, any of which could harm our

business, financial condition and results of operations.

new products and technologies entails significant risks and uncertainties.

or cost overruns in the development or certification of the TriFan 600 and failure of the product to meet its performance estimates is

likely to affect our financial performance.

Delays and increased costs may be caused by unanticipated technological hurdles, changes

to design or failure on the part of our suppliers to deliver components as agreed.

This may further delay the development and/or certification

of the TriFan 600.

Additionally,

the TriFan 600 may not perform at the level we expect or may contain defects in design and manufacture that may cause them not to perform

as expected or that may require repair.

It is not possible to fully replicate every operating condition and validate the long-term durability

of every aspect of our aircraft in testing prior to its use in service.

In some instances, we may need to continue to rely upon projections

and models to validate the projected performance of our aircraft over their lifetime.

Therefore, similar to most aerospace products,

there is a risk that our aircraft may suffer unforeseen faults, defect or other issues in service.

Such faults, defects and other issues

may require significant additional research and development to rectify and could involve suspension of operation of our aircraft until

any such defects can be cured.

There can be no assurance that such research and development efforts would result in viable products or

cure any such defects.

Obtaining the necessary data and results may take longer than planned or may not be obtained at all.

delays or setbacks could have a material adverse effect on our reputation and our ability to achieve our projected timelines and financial

we are unable to obtain and maintain adequate facilities and infrastructure, we may be unable to develop and manufacture the aircraft

as expected, and our aircraft may require maintenance at frequencies or at costs that are greater than expected.

order to develop and manufacture our aircraft, we must be able to obtain and maintain adequate facilities and infrastructure.

be unsuccessful in obtaining, developing and/or maintaining these facilities in a commercially viable manner.

Even if we are able to

begin assembly operations in these facilities, maintenance of these facilities will require considerable capital expenditure as we expand

We cannot provide any assurance that we will be successful in obtaining and maintaining adequate facilities and infrastructure,

and any failure to do so may result in our inability to develop and manufacture our aircraft as expected or on the timelines projected,

which would adversely affect our business, financial condition and results of operations.

Moreover, the TriFan 600, when produced, is anticipated to require

regular maintenance and support.

We are still developing our understanding of the long-term maintenance profile of the airplane, and if

useful lifetimes are shorter than expected, this may lead to greater maintenance costs than previously anticipated.

Our UAS business requires us to maintain

inventory, and we may incur losses due to excess inventory, obsolescence or changes in market demand.

Our UAS distribution and services

business requires us to purchase, hold and manage inventory of drone platforms, components, accessories, replacement parts and related

We must forecast customer demand, regulatory developments and technology trends when making inventory purchasing decisions.

Because the UAS market is characterized by rapid technological change, evolving regulatory requirements and changing customer preferences,

products we hold in inventory may become obsolete, subject to new restrictions, or less desirable before they are sold.

In addition, adverse regulatory

developments, including changes to U.S.

import restrictions, sanctions, FCC authorization requirements, NDAA compliance rules or other

government procurement standards, could limit our ability to sell certain products we have already purchased.

If we are required to discontinue

or restrict sales of certain products, we may be required to write down or dispose of affected inventory at a loss.

We may also experience excess

inventory levels if customer demand declines, orders are cancelled or delayed, suppliers introduce newer models, or macroeconomic conditions

reduce purchasing activity.

Any significant write-downs for excess or obsolete inventory would adversely affect our gross margins, operating

results and financial condition.

Furthermore, if we are unable

to accurately forecast demand or manage inventory effectively, we may experience shortages of high-demand products, which could result

in lost sales and damage to customer relationships.

We may incur significant costs to honor

warranties, provide service, repairs, maintenance and technical support for UAS products we distribute or service, and failures in these

activities could adversely affect our business, financial condition and results of operations.

We may incur costs to support

warranties, provide service, repairs, maintenance and technical support for UAS products we distribute or service, and failures in these

activities could adversely affect our business, financial condition and results of operations.

A portion of our UAS business

involves providing repair, maintenance and technical support services for the drone systems, sensors and related equipment we distribute.

The products we sell are generally covered by manufacturer warranties.

We do not typically provide standalone product warranties;

certain product protection programs may be included with or offered in connection with product sales.

We may also provide support, repair

or other post-sale services to our customers, including facilitating warranty claims with manufacturers.

Although manufacturer warranties

are generally the responsibility of the supplier, we may incur costs associated with providing service support, including labor, logistics

and administrative expenses.

We may also bear costs in situations where warranty coverage is disputed, delayed or otherwise not honored

by the manufacturer.

In addition, we may offer certain extended service or support arrangements in limited circumstances.

If we fail to meet customer

expectations regarding service quality, response time or product performance, or if warranty claims are not resolved in a timely or satisfactory

manner, we could experience customer dissatisfaction, reputational harm, loss of repeat business or increased costs, any of which could

adversely affect our business, financial condition and results of operations.

Licenses and regulatory authorizations required

for certain UAS products may be difficult to obtain in the future, which could adversely affect our ability to sell certain products.

Our drones and other electronic

products require regulatory approvals and certifications, including FCC equipment authorizations, in order to be imported into the United

States and sold to customers.

Such approvals are typically obtained by the manufacturers of the products we distribute.

If our suppliers

are unable to obtain, maintain or renew required regulatory approvals, certifications or authorizations, or if such approvals are delayed,

revoked, restricted or become subject to additional conditions, we may be unable to sell affected products.

In addition, certain UAS operations

may require operational approvals, waivers or authorizations from regulatory authorities, including approvals for operations beyond visual

line of sight, nighttime operations or flights in controlled airspace.

Delays in obtaining or maintaining such approvals could limit our

ability to deploy services, expand into new markets or meet customer requirements.

In addition, changes in regulatory

standards, heightened scrutiny of certain manufacturers, export control regulations, import restrictions or other governmental actions

could limit the availability of certain drone platforms or components.

If key products are restricted, delayed or removed from the market

due to regulatory actions, our revenue, customer relationships and financial results could be materially adversely affected.

The nature of our UAS business and, to the

extent we resume the TriFan 600 program, aircraft development activities involves significant risks and uncertainties, including product

liability exposure, that may not be covered by insurance or indemnification.

Our UAS business and, to the

extent we resume the TriFan 600 program, aircraft development activities involve significant operational and legal risks and uncertainties,

and insurance or indemnification may not be available in all circumstances.

We develop, distribute, service and support drones and other

electronic products.

As a result, claims could be brought against us if the use or misuse of one of the products we sell, service or develop

causes, or merely appears to have caused, personal injury, death or property damage.

In addition, defects, errors or failures in our products

or services could lead to other potential life, health and property risks.

In our UAS operations, product

liability risks may arise from equipment malfunctions, operator error, software failures, battery incidents, collisions or other operational

incidents involving drones deployed by customers or service personnel.

These incidents may result in personal injury, property damage,

regulatory investigations, litigation or reputational harm.

Because drone operations often occur in populated or industrial environments,

even isolated incidents could lead to significant claims, increased insurance costs, operational restrictions or loss of customer confidence.

In addition, Drone Nerds has

historically developed and sold products and services in circumstances where insurance or indemnification may be limited or unavailable,

including in connection with the collection, processing and analysis of various types of information.

Our UAS products and services may

raise legal issues relating to privacy, data security, civil liberties, intellectual property, trespass, conversion and similar concepts,

which may result in claims, regulatory scrutiny, enforcement actions or litigation.

Indemnification to cover potential

claims or liabilities resulting from the failure of technologies we deploy may be available in certain circumstances but not in others.

The uncrewed aerial systems industry continues to evolve, and insurance coverage for certain operational risks may be limited, unavailable,

subject to significant exclusions, or prohibitively expensive.

We may not be able to obtain or maintain product liability insurance or

other insurance coverage in sufficient amounts, on commercially reasonable terms, or at all, and any such insurance may not be adequate

to cover all potential liabilities.

Substantial claims resulting

from an accident, product failure, or personal injury or property liability arising from our products and services in excess of any indemnity

or insurance coverage (or for which indemnity or insurance coverage is not available or is not obtained) could harm our financial condition,

cash flows and operating results.

Any accident, even if fully covered or insured, could negatively affect our reputation among our customers

and the public and make it more difficult for us to compete effectively.

The growth of our

UAS business depends on increasing sales to existing customers and obtaining new customers, which, if unsuccessful, could limit our financial

Our future success depends,

in part, on our ability to increase revenues from existing customers by identifying additional opportunities to sell more of our UAS products

and services, including drone platforms, cameras, sensors, software, training, repair and operational support services, and on our ability

to obtain new customers.

The rate at which customers purchase additional products and services, and our ability to attract new customers,

depends on a number of factors, including customer demand for UAS solutions, our ability to offer high-quality products and services at

competitive prices, meeting customer needs and expectations, the strength of our competitors, the capabilities of our sales and marketing

efforts, the availability of drone products from key suppliers, regulatory developments and general economic conditions.

If we are not able to continue

to increase sales of our UAS products and services to existing customers or to obtain new customers in the future, we may not be able

to increase our revenues and could suffer a decrease in revenues.

In addition, certain customer demand may depend on government budgets,

procurement cycles and contract awards, which are difficult to predict.

Our business may

be dependent on a limited number of significant customers, and the loss of one or more such customers could adversely affect our operating

A portion of our revenues

may be derived from a limited number of significant customers, and the importance of any individual customer may vary from period to period.

The loss of a significant amount of business from one or more major customers, or a reduction in orders, could materially and adversely

affect our results of operations until such time, if ever, as we are able to replace the lost business.

In addition, certain customers,

including public sector and enterprise customers, may delay, reduce or cancel purchases due to budgetary constraints, procurement cycles,

regulatory developments or changing operational priorities.

To the extent that we are dependent on any significant customer, we are subject

to the risks faced by that customer, including financial condition, funding availability and operational performance, which may impact

the customer’s ability to make timely payments to us or continue purchasing our products and services.

If we are unable to collect our receivables

in a timely manner, our liquidity, working capital and results of operations could be adversely affected.

Our UAS business depends on

our ability to successfully obtain payment from customers for products delivered and services performed.

The timely collection of receivables

is critical to generating cash flow, maintaining adequate working capital and supporting inventory purchases, operating expenses and debt

service obligations.

Customers may delay or fail

to pay invoices for a number of reasons, including financial difficulties, macroeconomic conditions, budgetary constraints, administrative

or procurement delays, disputes regarding products or services, or bankruptcy proceedings.

Certain customers, including public sector

customers, may also be subject to extended payment cycles.

An extended delay or default

in payment by significant customers could adversely affect our accounts receivable aging, reduce cash flow and impair our ability to meet

working capital needs.

In addition, because availability under our asset-based lending facility may be tied in part to eligible receivables,

deterioration in receivables quality or collectability could reduce borrowing availability.

If we are unable to timely

collect receivables for any reason, our liquidity, financial condition and results of operations could be materially adversely affected.

Defects, errors or vulnerabilities in the

products we distribute, service or develop, or the failure of such products to perform as expected, could harm our reputation and adversely

affect our results of operations.

The drone systems, sensors,

software and related products we distribute and service are complex and may contain design defects, manufacturing defects, firmware or

software errors, or security vulnerabilities that are not detected until after the products are sold or deployed by customers.

products may fail to perform as expected due to component failures, integration issues, user error, or interoperability issues with third-party

software, communications networks or payloads.

Certain drone platforms and

connected devices may be vulnerable to cybersecurity threats, including unauthorized access, malware, spoofing, jamming or data interception.

Because techniques used by malicious actors evolve rapidly, we may be unable to anticipate these techniques or ensure that products we

sell or support will be able to adequately prevent or mitigate such threats.

Because many drone systems

rely on wireless communications, remote control technologies and network connectivity to operate, cybersecurity incidents affecting these

systems could disrupt flight operations, result in loss of control of aircraft, compromise operational or customer data, or expose us

to liability under aviation safety, data protection or privacy laws and regulations.

In addition, errors in software

updates, firmware updates or configuration changes could result in product malfunction, degraded performance, loss of data, reduced reliability

or safety incidents.

Any defects, errors or vulnerabilities in products we distribute, service or develop could result in:

expenditure of significant financial and operational resources to analyze, correct, replace or work around errors, defects or vulnerabilities;

delayed or lost revenue;

loss of existing or potential customers, suppliers or strategic partners;

increased warranty claims, returns, repair costs or service obligations, which could adversely affect gross margins;

product recalls, regulatory scrutiny, or restrictions on product sales;

litigation, regulatory inquiries or investigations that may be costly and harm our reputation.

If we are unable to prevent,

identify and address such defects, errors or vulnerabilities, our business, financial condition and results of operations could be materially

adversely affected.

If the UAS products and solutions we distribute

and support do not effectively interoperate with our customers’ systems and operational requirements, deployments could be delayed

or cancelled, which would harm our financial condition, operating results and growth prospects.

The UAS products and solutions

we distribute and support must effectively interoperate with our customers’ existing systems, software platforms, communications

networks, payloads, data processing tools and operational workflows.

Customer environments often have different specifications, utilize

multiple protocol standards, deploy products from multiple vendors, and contain multiple generations of equipment that have been added

As a result, when performance issues occur, it may be difficult to identify the source of the problem.

If the products we sell or

support do not integrate effectively with customer systems or operational requirements, customers may experience reduced performance,

delays in deployment, increased support requirements, or the inability to achieve expected mission outcomes.

In such cases, customers

may delay purchases, reduce order volumes or cancel orders, any of which could adversely affect our business, results of operations and

financial condition.

In addition, certain customers,

particularly public sector, defense, and enterprise customers, may require products to comply with specific security, procurement, communications,

data handling or other standards and certifications.

If products we distribute are late in achieving, or fail to achieve, compliance with

applicable certifications and standards, or competitors sooner achieve such compliance, we may be disqualified from selling to such customers

or may otherwise be at a competitive disadvantage, which could harm our business, results of operations and financial condition.

We have no guarantee of receiving government

contracts, and our failure to do so would materially harm our revenues and growth prospects.

ADS intends to pursue contracts

with the Department of War, federal agencies, and allied government customers.

The award of government contracts is subject to competitive

bidding processes, shifting procurement priorities, budget allocations, and administrative determinations that are entirely outside of

There is no assurance that ADS will be awarded any contract for which it competes, that any existing relationships we may

develop with government personnel will translate into contract awards, or that contracts awarded will be renewed or extended upon expiration.

If ADS is unable to secure government contract awards, it may be unable to generate revenues or achieve the growth objectives contemplated

for this division, which would adverse affect our overall business and prospects.

Government customers may also delay procurements, cancel

solicitations, modify technical requirements, or award contracts in smaller quantities than anticipated, which could reduce expected revenues

or delay program execution.

Government contracts are subject to termination

for convenience, funding reductions, and regulatory changes that could eliminate anticipated revenues without recourse.

Even if ADS is successful in securing government contracts, such contracts

may be terminated by the contracting agency at any time for convenience, without cause, and with limited compensation to the Company.

Government appropriations are subject to annual congressional approval, continuing resolutions, sequestration, and other budgetary constraints

that may reduce, delay, or eliminate funding for programs under which ADS operates.

Changes in administration, defense policy priorities,

or national security strategy may result in the cancellation or restructuring of programs in which ADS participates, regardless of performance

or contractual obligations.

In addition, government contracts may be modified, suspended, or terminated for default if we fail to comply

with applicable contractual, regulatory, or performance requirements, which could result in actual or anticipated revenues being reduced

or eliminated, and could subject us to financial penalties, repayment obligations, or reputational harm.

The defense procurement process is lengthy,

unpredictable, and resource-intensive, and we may expend significant capital pursuing contracts that are never awarded.

Defense and government procurement

cycles are complex and can span months or years from initial solicitation to contract award.

ADS may be required to invest substantial

financial, personnel, and technical resources in proposal development, demonstration activities, prototype builds, and compliance preparation

— with no guarantee of award.

Procurement decisions may be protested by competing bidders, resulting in further delays or reversals

The mismatch between our cost of pursuit and the timing of potential contract revenue could strain our liquidity and divert

resources from other strategic priorities.

In addition, procurement terms, evaluation criteria, or customer requirements may change during

the procurement process, requiring us to incur additional costs to remain competitive or compliant, with no assurance of award.

the failure to recover bid and proposal costs for unsuccessful procurements could adversely affect our financial condition, particularly

if multiple large pursuits are unsuccessful or delayed.

We operate in a highly competitive market

for autonomous unmanned systems, and many of our competitors have substantially greater resources, established relationships, and proven

contract histories.

The market for autonomous

unmanned aerial systems serving defense and government customers includes large, established defense primes, well-capitalized venture-backed

startups, and foreign manufacturers with significant price advantages.

Many of our competitors have decades-long relationships with defense

procurement offices, existing IDIQ contract vehicles, cleared facilities and personnel, and proven platform histories that ADS has not

yet established.

Our ability to compete effectively will depend on our capacity to differentiate on technology, cost, compliance, and

speed — none of which is assured in a market where incumbency and past performance carry significant procurement weight.

certain competitors may benefit from government preferences, domestic sourcing requirements, or procurement frameworks that favor incumbent

contractors or suppliers with established past performance records.

Some competitors may also be able to devote substantially greater

resources than we can to proposal development, testing, compliance, manufacturing scale-up, pricing concessions, and lobbying or business

development efforts, which could place us at a competitive disadvantage .

Our autonomous systems may fail to meet

evolving military performance, reliability, and interoperability requirements, which could disqualify us from contract competitions or

result in contract termination.

Defense customers impose rigorous

and evolving technical standards on autonomous platforms, including requirements related to system reliability, cybersecurity, communications

interoperability, electromagnetic compatibility, and resistance to electronic warfare and GPS-denied environments.

ADS’s systems may fail

to meet these requirements during testing, evaluation, or fielded operations.

Military standards and requirements can change between the

time of proposal submission and contract award, and ADS may be required to undertake costly redesigns or modifications to remain competitive

or compliant.

Failure to satisfy technical requirements could disqualify ADS from competition or result in contract termination for default,

with material adverse consequences.

In addition, failures discovered after deployment or acceptance of systems could result in warranty

claims, contractual penalties, or obligations to repair or replace systems at our expense.

Such failures could also delay customer acceptance,

impair our past performance record, give rise to indemnification obligations, or adversely affect our ability to compete for future contracts.

We may be unable to obtain or maintain the

security clearances, certifications, and regulatory authorizations required to pursue and perform classified or sensitive government programs.

Many defense contracts require

company personnel, facilities, and information systems to hold appropriate security clearances issued by the Defense Counterintelligence

and Security Agency or other federal authorities.

ADS may be unable to obtain necessary clearances in a timely manner, or at all, for

key personnel or facilities.

The denial, delay, suspension, or revocation of required clearances — whether due to adjudicative determinations,

foreign ownership or control considerations, or other factors — could prevent ADS from competing for or performing on classified

Additionally, compliance with International Traffic in Arms Regulations (ITAR), Export Administration Regulations (EAR), and

other export control regimes is complex and costly, and violations could result in debarment, fines, and reputational damage.

of export control, sanctions, or national security regulations may also result in suspension or debarment from government contracting,

civil or criminal penalties, or restrictions on our ability to export products or technology.

Compliance with clearance, export control,

and related national security requirements may also require us to implement costly policies, procedures, and system controls, and any

failure to do so adequately could adversely affect our ability to compete for and perform sensitive programs.

We are subject to the risk that changes

defense spending, budget sequestration, or shifts in national security priorities will reduce or eliminate the market for our

products and services.

ADS’s revenue prospects are directly dependent on the level of

government spending on autonomous unmanned systems, which is in turn subject to federal budget negotiations, congressional appropriations,

and executive branch policy determinations.

Reductions in defense spending, shifts in strategic priority toward or away from unmanned

systems, or the consolidation of procurement programs could materially reduce the addressable market for ADS’s products.

has no ability to influence federal budget decisions, and our financial projections may prove incorrect if assumed levels of government

investment in autonomous systems are not sustained.

In addition, delays in appropriations legislation, government shutdowns, or changes

in defense acquisition strategies could disrupt procurement timelines and delay contract awards.

Because our expected ADS revenues may

be concentrated in a limited number of programs or customers, any such delays, reductions, or cancellations could have a disproportionate

adverse effect on this business unit.

We may rely on teaming arrangements and

subcontracts with prime contractors whose decisions and performance are outside of our control and who may become our competitors.

ADS may pursue government contracts

as a subcontractor or teaming partner to larger defense prime contractors.

In these arrangements, the prime contractor retains control

over proposal strategy, pricing, scope allocation, and the customer relationship.

To the extent we secure these types of arrangements,

prime contractors may reduce our workshare, replace us with alternative subcontractors, terminate teaming arrangements without cause,

or develop competing internal capabilities using knowledge gained through our collaboration.

Our revenues from such arrangements would

be contingent on the prime contractor’s continued selection for and performance under the prime contract, over which we have no

direct control.

In addition, disputes with prime contractors regarding performance, pricing, intellectual property rights, or contract

interpretation could result in reduced revenue, litigation, or termination of subcontract relationships.

In certain cases, our rights

against a prime contractor may be limited by the terms of the applicable subcontract or teaming agreement, and we may have little or no

direct recourse against the government customer.

Our ability to scale ADS operations is dependent

on recruiting and retaining personnel with specialized expertise in autonomous systems, defense engineering, and government program management

— talent that is in high demand and limited supply.

The development, integration,

and support of autonomous unmanned systems requires specialized talent in areas including autonomy software, embedded systems engineering,

signals intelligence, RF communications, systems integration, and government program management.

Competition for this talent among defense

primes, technology companies, and government agencies is intense.

ADS may be unable to attract or retain the personnel necessary to execute

its development programs and contract obligations in a timely and cost-effective manner.

The loss of key technical or program management

personnel could delay development programs, impair contract performance, and damage our standing with government customers, with material

adverse effects on our business and prospects.

In addition, certain government programs may require personnel with security clearances

or specialized certifications, which may further limit the available talent pool and increase hiring and retention costs.

Any inability

to recruit, retain, or replace such personnel on acceptable terms could also delay contract execution, increase labor costs, or impair

our ability to satisfy customer requirements.

The TriFan 600 aircraft program has been

paused, and if resumed, may never achieve certification, commercial production or market acceptance.

In 2026, we paused the TriFan

600 aircraft program and redirected the division’s resources toward unmanned systems development.

We are preserving the underlying

intellectual property and engineering work product, but we have not made a final determination to abandon the program.

If the TriFan 600

and related equipment require maintenance more frequently than we plan for or at costs that exceed our estimates, that would have an impact

on the sales of our aircraft and have a material adverse effect on our business, financial condition and results of operations.

may be a shortage of pilots and mechanics who meet the training standards required, which could reduce our ability to sell our aircraft

at scale and on our expected timelines.

is a shortage of pilots that is expected to exacerbate over time as more pilots in the industry approach mandatory retirement age.

trained and qualified aircraft and aviation mechanics are also in short supply.

If these shortages continue, the aviation industry as

a whole and our business may face challenges.

could be adversely affected by interruptions of production that are beyond our control.

intend to produce the TriFan 600 and its derivatives using systems, components and parts developed and manufactured by third-party suppliers.

This supply chain exposes us to multiple potential sources of delivery failure or component shortages for our aircraft, most of which

are out of our control, including shortages of, or disruptions in the supply of, the raw materials used by our partners in the manufacture

of components, disruptions to our partners’ workforce (such as strikes or labor shortfalls) and disruptions to, or capacity constraints

affecting, shipping and logistics.

Such suppliers may be subject to additional risks such as financial problems that limit their ability

to conduct their operations.

If any of these third parties experience difficulties, it may have a direct negative impact on us.

we believe that we may be able to establish alternate supply relationships and can obtain replacement components, we may be unable to

do so in the short term or at all at prices that are acceptable to us or may need to recertify components.

We may experience source disruptions

in our or our partners’ supply chains, which may cause delays in our overall production process for both prototype and commercial

production aircraft.

we needed to find alternative suppliers for any of the key components of our aircraft, then this could increase our costs and adversely

affect our ability to receive such components on a timely basis, or at all, which could cause significant delays in our overall projected

timelines for the delivery of our aircraft and adversely affect our relationships with our customers.

addition, if we experience a significant increase in demand, or need to replace our existing suppliers, there can be no assurance that

additional suppliers of component parts will be available when required on terms that are acceptable to us, or at all, or that any supplier

would allocate sufficient supplies to us in order to meet our requirements or fill our orders in a timely manner.

Further, if we are

unable to manage successfully our relationships with all of our suppliers and partners, the quality and availability of our aircraft

may be harmed.

Our suppliers or partners could, under some circumstances, decline to accept new purchase orders from, or otherwise reduce

their business with, us.

Any disruptions in the supply of components from our suppliers and partners could lead to delays in aircraft

production, which would materially adversely affect our business, financial condition and operating results.

if any conflicts arise between our suppliers or partners and us, the other party may act in a manner adverse to us and could limit our

ability to implement our business strategies, which could impact our projected production timelines and number of aircraft produced.

Our suppliers or partners may also develop, either alone or with others, products in related fields that are competitive with our products

as a result of any conflicts or disagreements.

Any disagreements or conflicts with our suppliers or partners could have an adverse effect

on our reputation, which could also negatively impact our ability to source new suppliers or partners.

changes in business conditions, wars, governmental changes, political intervention and other factors beyond our control or which we do

not presently anticipate, could also affect our partners’ and suppliers’ abilities to deliver components to us on a timely

basis, which could have a material adverse effect on our overall timelines to produce our aircraft.

We do not control our suppliers or

partners or such parties’ labor and other legal compliance practices, including their environmental, health and safety practices.

If our current suppliers or partners, or any other suppliers or partners which we may use in the future, violates any specific laws or

regulations, we may be subjected to extra duties, significant monetary penalties, adverse publicity, the seizure and forfeiture of products

that we are attempting to import or the loss of our import privileges.

The effects of these factors could render the conduct of our business

in a particular country undesirable or impractical and have a negative impact on our business, financial condition and results of operations.

we do not adequately protect our intellectual property rights, we may experience a loss of revenue and our operations and growth prospects

may be materially harmed.

we have received certain patents for the TriFan 600 issued by the US Patent and Trademark Office (USPTO) and various foreign jurisdictions,

there is no guarantee that we will receive one or more additional patents for which we will apply to the USPTO or for which we have applied

or will apply in foreign jurisdictions.

The process of obtaining patent protection is expensive and time-consuming, and we may not be

able to prosecute all necessary or desirable patent applications at a reasonable cost or in a timely manner.

Even if issued, there can

be no assurance that these patents will adequately protect our intellectual property, as the legal standards relating to the validity,

enforceability and scope of protection of patent and other intellectual property rights are complex and often uncertain and are subject

There is no guarantee that any court will rule in our favor in the event of a dispute related to our intellectual property.

In the absence of further patent protection, it may be more difficult for us to achieve commercial production of the TriFan 600.

any patents issued in the future may not provide us with any competitive advantages because our competitors may independently develop

similar or alternative technologies or products that are equal to or superior to our TriFan 600 technology without infringing on any

of our intellectual property rights or design around our proprietary technologies.

our proprietary software is protected by common law copyright laws, as opposed to registration under copyright statutes.

registered copyrights on any of the proprietary software we have developed.

Our performance and ability to compete are dependent to a

significant degree on our proprietary technology.

Common law protection may be narrower than that which we could obtain under registered

As a result, we may experience difficulty in enforcing our copyrights against certain third party infringements.

of our confidentiality-protection procedures, we generally enter into agreements with our employees and consultants and limit access

to, and distribution of, our software, documentation and other proprietary information.

There can be no assurance that the steps we have

taken will prevent misappropriation of our technology or that agreements entered into for that purpose will be enforceable.

the laws of other countries may afford us little or no protection of our intellectual property.

Our inability to protect our intellectual

property rights could adversely affect our financial condition, operating results and growth prospects.

also rely on a variety of technology that we license from third parties.

There can be no assurance that these third party technology

licenses will continue to be available to us on commercially reasonable terms, if at all.

The loss of or inability to maintain or obtain

upgrades to any of these technology licenses could result in delays in completing software enhancements and new development until equivalent

technology could be identified, licensed or developed and integrated.

Any such delays would materially and adversely affect our business.

ability to use net operating loss carryforwards and certain other tax attributes may be limited.

of December 31, 2024, we had federal net operating loss carryforwards (“NOLs”) of approximately $96.9 million, of which approximately

$5.3 million will begin to expire in 2037 and the remainder do not expire.

Under the Tax Cuts and Jobs Act, federal NOLs generated by

us in tax years through December 31, 2017 may be carried forward for 20 years and may fully offset taxable income in the year utilized

and federal NOLs generated by us in tax years beginning after December 31, 2017 may be carried forward indefinitely but may only be used

to offset 80% of our taxable income annually.

Under Sections 382 and 383 of the Code, if a corporation undergoes an “ownership

change,” the corporation’s ability to use its pre-change federal NOLs and other tax attributes (such as research and development

tax credits) to offset its post-change income and taxes may be limited.

In general, an “ownership change” occurs if there

is a greater than 50 percentage point change (by value) in a corporation’s equity ownership by certain stockholders over a rolling

three-year period.

We may have experienced ownership changes in the past and may experience ownership changes in the future as a result

of subsequent shifts in our stock ownership (some of which shifts are outside our control).

As a result, our ability to our pre-change

federal NOLs and other tax attributes to offset future taxable income and taxes could be subject to limitations.

Similar provisions of

state tax law may also apply.

For these reasons, even if we achieve profitability, we may be unable to use a material portion of our

NOLs and other tax attributes which may have an adverse impact on our business, financial condition and results of operations.

may enter into joint venture, teaming and other arrangements, and these activities involve risks and uncertainties.

A failure of any

such relationship could have material adverse results on our business and results of operations.

may enter into joint venture, teaming and other arrangements.

These activities involve risks and uncertainties, including the risk of

the joint venture or applicable entity failing to satisfy its obligations, which may result in certain liabilities to us for guarantees

and other commitments, the challenges in achieving strategic objectives and expected benefits of the business arrangement, the risk of

conflicts arising between us and our partners and the difficulty of managing and resolving such conflicts, and the difficulty of managing

or otherwise monitoring such business arrangements.

In addition, we do not currently have arrangements in place that will allow us to

fully execute our business plan, including, without limitation, final supply and manufacturing agreements.

Moreover, existing or future

arrangements may contain limitations on our ability to enter into arrangements with other partners.

A failure of our business relationships

could have a material adverse effect on our business and results of operations.

are subject to risks associated with climate change, including the potential increased impacts of severe weather events on our operations

program is resumed, the development, certification and commercialization of advanced aircraft is a complex, costly and time-consuming

process, and there can be no assurance that we will successfully complete development, obtain required regulatory approvals or achieve

commercial production.

We will not generate revenues

from the sale of aircraft without successfully resuming active development of the TriFan 600, securing FAA type certification, and completing

production readiness activities, each of which involves substantial risk and uncertainty.

The TriFan 600 program is currently paused,

and any resumption will require significant additional capital.

There can be no assurance that such capital will be available on acceptable

terms, or at all.

The strategic reorientation of our former

XTI Aircraft division toward unmanned systems development introduces significant new execution risks.

In 2026, following the acquisition

of Drone Nerds, the Company paused active development phase of the TriFan 600 manned VTOL aircraft program and redirected the former XTI

Aircraft division, now operating as XTIA Autonomous Defense Systems (the “ADS division”), toward the design and development

of unmanned platforms for defense and commercial applications.

The TriFan 600 program has been paused, and the Company has not made a

final determination to abandon it.

However, there can be no assurance that the program will be resumed, or that, if resumed, it will achieve

FAA certification, reach commercial production, or generate revenues.

The ADS division is in an

early stage of development and has not generated revenues.

Its ability to generate revenues will depend on its success in securing development

contracts, government procurement awards, or commercial partnerships, none of which are assured.

The division faces significant competition

from established defense contractors and unmanned systems developers with substantially greater resources, experience, and existing customer

relationships.

There can be no assurance that the ADS division will successfully develop marketable products, secure contracts, or generate

revenues on the timeline anticipated, or at all.

The reorientation of the former

XTI Aircraft division also introduces execution risks, including the challenge of recruiting and retaining additional personnel with specialized

unmanned systems experience, the difficulty of competing for defense procurement awards as a relatively new entrant, and the risk that

the engineering expertise developed through the TriFan 600 program may not translate directly into commercially viable unmanned systems

These risks, individually or in combination, could materially adversely affect our business, financial condition, and results

of operations.

In addition, we have devoted

significant financial and engineering resources to the TriFan 600 program, and if the program is not resumed, we may not realize a return

on those investments.

While our current operations are primarily

focused on our UAS solutions business, if we resume the TriFan 600 program, the program will be subject to significant development, certification,

and financing risks.

Any resumption of active TriFan 600 development could divert management attention and financial resources from our

UAS operations and adversely affect our business, financial condition and results of operations.

The TriFan 600 aircraft program has been paused.

To the extent we decide

to resume the program, certification by the FAA will be required for the sale of the TriFan 600 in the civil or commercial market in the

United States.

The process to obtain such certification is expensive and time consuming and has inherent engineering risks.

These include

(but are not limited to) ground test risks such as structural strength and fatigue resistance, and structural flutter modes.

risks include (but are not limited to) stability and handling over the desired center-of-gravity range, performance extremes (stalls,

balked-landing climb, single-engine climb), and flutter control effectiveness (aircraft roll effectiveness, controllability, various control

failure safety).

We cannot predict whether or when the TriFan 600 program will be resumed, and until it is, these certification risks

are contingent on a future decision to re-engage the program.

Any decision to resume the TriFan 600 program would require substantial

additional capital and a commitment of engineering and management resources.

Any resumption-related costs, delays or adverse developments

could divert management attention and financial resources from our UAS operations, limit our ability to invest in the growth, staffing

or expansion of our UAS business, or otherwise disrupt the execution of our operating strategy.

These impacts could adversely affect our

ability to meet customer demand, maintain service levels, or pursue new business opportunities in our UAS operations, and could materially

adversely affect our business, financial condition and results of operations.

Customer orders and service

engagements for our UAS products and services and the pre-orders we have received for our aircraft may be non-binding, conditional or

written expressions of interest and may be terminated at any time prior to execution of a definitive agreement, and cancellations, modifications

or delays could materially adversely affect our business, liquidity and cash flows.

Customer orders, project-based engagements and service arrangements

for our UAS products and services may be non-binding, subject to change, or dependent on customer budgets, project timing, regulatory

approvals or operational needs.

Customers may delay, reduce or cancel planned purchases or service engagements with little or no advance

Such changes could result in fluctuations in demand, inventory levels, workforce utilization and revenue, and could adversely

affect our ability to plan operations, manage costs and maintain margins.

Any cancellation, modification or delay in customer orders or

service engagements could materially adversely affect our business, financial condition and results of operations.

We previously operated a pre-sales program for the TriFan 600 aircraft

under which we received refundable deposits equal to approximately $1,350,000.

600 program is currently paused.

Deposits are refundable upon customer request, and customers are not obligated to purchase an aircraft

or to enter into a binding purchase agreement.

We expect to return deposits to customers who request a refund in accordance with the terms

of the applicable customer agreements, and any such returns would reduce our available cash.

Our drone operations may be adversely affected

by weather conditions and other environmental factors beyond our control.

Drone operations are subject

to weather-related and environmental limitations, including high winds, precipitation, temperature extremes, reduced visibility and other

conditions that may prevent or delay safe flight operations.

Adverse weather conditions or environmental disruptions could delay project

completion, increase operating costs, reduce operational efficiency or limit our ability to meet customer expectations.

In addition, severe weather

events, natural disasters or other environmental disruptions could temporarily suspend operations in affected regions or reduce demand

for our services, which could materially adversely affect our business, financial condition and results of operations.

We operate in highly competitive markets

characterized by rapid technological change, and we may be required to reduce prices or modify our offerings to remain competitive, which

could adversely affect our results of operations.

We operate in highly competitive

markets in both the UAS and the aerospace industries, which are characterized by rapid technological innovation, evolving customer requirements,

changing industry standards and frequent introductions of new products, product enhancements, software capabilities and distribution models.

Many of our current and potential competitors are well-established, have or may have longer-standing relationships with customers and

potential business partners, have or may have greater name recognition, and have or may have access to significantly greater financial,

technical and marketing resources.

In our UAS business, we face

significant competition from drone manufacturers that sell directly to customers, other distributors and resellers, systems integrators

and service providers.

In addition, advancements in drone platforms, sensors, batteries, communications systems, autonomy, artificial

intelligence and data processing technologies may quickly render existing products less competitive or obsolete.

Our ability to remain

competitive depends in part on our relationships with key suppliers and our ability to timely introduce new products and services that

reflect current technology trends, customer requirements and regulatory developments.

To the extent we resume our

TriFan 600 aircraft program, such program potentially competes with a variety of aircraft manufacturers in the United States and abroad.

We could face competition from competitors of whom we are not aware that have developed or are developing technologies that will offer

alternatives to the TriFan 600.

Competitors could develop an aircraft that renders the TriFan 600 less competitive than we believe it

would become.

Other manufacturers may be developing a light, fixed-wing VTOL aircraft with performance similar to that of the TriFan 600.

Similarly, if we resume the

program, the development of the TriFan 600 would require the successful integration of advanced propulsion, avionics, software and control

Technological challenges, evolving certification requirements or competitor advancements could require redesign, additional investment

or changes to our development roadmap.

Competitive pressures may

result in pricing pressure, reduced margins, and the need to increase sales and marketing expenditures.

As a result, we may be required

to reduce the prices of certain products and services we sell, offer more favorable terms, or increase promotional activity to remain

If we are not able to maintain favorable pricing, successfully differentiate our offerings, or achieve sufficient gross margins,

our business, financial condition and results of operations could be materially adversely affected.

If we are unable to obtain and maintain adequate

facilities and infrastructure, we may be unable to effectively store, service, repair and distribute UAS products or develop and manufacture

our products as our business grows.

In order to support our UAS operations,

including maintaining adequate warehouse space, service and repair facilities, logistics infrastructure and inventory management systems,

and, if the TriFan 600 program is resumed, to develop and manufacture our aircraft, we must be able to obtain and maintain adequate facilities

and infrastructure.

potential physical effects of climate change, such as increased frequency and severity of high wind conditions, storms, floods, fires,

fog, mist, freezing conditions, sea-level rise and other climate-related events, could affect our operations, infrastructure and financial

Climate change risks could result in but are not limited to operational risk from the physical effect of climate events on our

terminal facilities, production facilities and other assets, as well as transitional risks, including new or more stringent regulatory

requirements, increased monitoring and disclosure requirements, and potential effects on our reputation and/or changes in our business.

We could incur significant costs to improve the climate resiliency of our aircraft or infrastructure and otherwise prepare for, respond

to, and mitigate such physical effects of climate change.

We are not able to accurately predict the materiality of any potential losses

or costs associated with the physical effects of climate change.

and regulatory trends to reduce climate change may not evolve in the direction and within the timing expected, which could have a negative

impact in our business plan.

number of governments globally have introduced or are moving to introduce climate change legislation and treaties at the international,

national, state/provincial and local levels.

Regulation relating to emission levels and energy efficiency is becoming more stringent

and is gaining more widespread market approval, as consumers expect companies to play a role in addressing climate change.

plan is predicated in part on the idea that market and regulatory trends favoring such “clean” energy and addressing climate

change will continue to evolve in our favor.

However, any change or reversal in such market and regulatory trends, such as less focus

on climate-friendly solutions or less stringent legislation with respect to emissions, could result in lower demand for our aircraft

and have an adverse effect on our business.

expectations of our performance relating to environmental, social and governance ( “ ESG ” )

factors may impose additional costs and expose us to new risks.

is an increasing focus from investors, employees, customers and other stakeholders concerning corporate responsibility, specifically

related to ESG matters.

Some investors may use these non-financial performance factors to guide their investment strategies and, in some

cases, may choose not to invest in us if they believe our policies and actions relating to corporate responsibility are inadequate.

growing investor demand for measurement of non-financial performance is addressed by third-party providers of sustainability assessments

and ratings with respect to public companies.

The criteria by which our corporate responsibility practices are assessed may change due

to changes in the sustainability landscape, which could cause us to undertake costly initiatives to satisfy such new criteria.

elect not to or are unable to satisfy such new criteria, investors may conclude that our policies and/or actions with respect to corporate

social responsibility are inadequate.

We may face reputational damage in the event that we do not meet the ESG standards set by various

constituencies.

and contractual protections may not always cover potential claims, lost revenue, increased expenses or liquidated damages payments, which

could adversely affect our financial results.

we maintain insurance and intend to obtain warranties from suppliers, obligate subcontractors to meet certain performance levels and

attempt, where feasible, to pass risks we cannot control to our customers, the proceeds of such insurance or the warranties, performance

guarantees or risk sharing arrangements may not be adequate to cover potential claims, lost revenue, increased expenses or liquidated

damages payments that may be required in the future.

Moreover, there can be no assurance that present levels of coverage will be available

in the future at reasonable cost.

We also expect our insurance needs and costs to increase as we build production facilities, manufacture

aircraft, establish commercial operations and expand into new markets.

have completed several strategic transactions including acquisitions and dispositions, which may make it difficult for potential investors

to evaluate our future business.

Any future acquisitions or dispositions could disrupt our business and harm our business, financial

condition or operating results.

Furthermore, due to the risks and uncertainties related to the acquisition of new businesses, any such

acquisition does not guarantee that we will be able to attain profitability.

We have historically had a

strategic acquisition strategy and since 2014 we completed several strategic transactions and spin-offs.

Our RTLS business has developed

through multiple acquisition transactions.

In August 2018, we completed the spin-off of our VAR business, which included our legacy value

added reseller business, and in 2019 we completed several other acquisition transactions to expand our product portfolio.

acquired the Nanotron business, an exclusive license for the distribution and marketing of statistical analytics and visualization software

solutions for engineering and sciences (SAVES) expanding our operations in the United Kingdom and Germany.

In 2021, we acquired 100% of

the outstanding capital stock of IntraNav GmbH, an industrial IoT (IIoT), real-time location system (RTLS), and sensor data services provider

and 100% of the outstanding capital stock of Design Reactor, Inc which operated an enterprise level employee experience app.

we completed the spin-off of this enterprise apps business.

In December 2023, we transferred the UK division of our SAVES business to

Damon Motors Inc.

(then known as Grafiti Holding Inc.) (“Damon Motors”) in connection with the spin-off and distribution of

all of the shares of Damon to our shareholders upon the effectiveness, in November 2024, of Damon’s registration statement related

to the spin-off distribution.

In February 2024, we divested the remainder of the SAVES and Shoom business in a stock purchase transaction.

Our limited operating history after such acquisitions and divestitures makes it difficult for potential investors to evaluate our business

or prospective operations or the merits of an investment in our securities.

future disposition of assets and business could have material and adverse effect on business, financial conditions, and operations, if

not consummated in a timely manner.

Such transactions may expose us to unknown or unforeseeable challenges resulting in disruption of

business operations, loss of key personnel and ongoing tax benefits treatment, failure to obtain necessary statutory and regulatory approvals,

provide ongoing indemnity, and compliance with post-closing obligations, which may affect or prevent us from consummating the transactions,

and have a material and adverse effect on our business, financial conditions, and operations.

respect to acquisitions, we are subject to the risks inherent in the financing, expenditures, complications and delays characteristic

of a newly combined business, including, but not limited to:

purchase price we pay and/or unanticipated costs could significantly deplete our cash reserves

or result in dilution to our existing stockholders;

may find that the acquired company or technologies do not improve our market position as

may have difficulty integrating the operations and personnel of the acquired company, as

the combined operations will place significant demands on the Company’s management,

technical, financial and other resources;

vendors, suppliers and customers of the acquired company may terminate their relationships

with the acquired company as a result of the acquisition;

may experience additional financial and accounting challenges and complexities in areas such

as tax planning and financial reporting;

may assume or be held liable for risks and liabilities (including environmental-related costs)

as a result of our acquisitions, some of which we may not be able to discover during our

due diligence investigation or adequately adjust for in our acquisition arrangements (for

example, even if we secure indemnification protections in connection with these acquisitions

from undisclosed liabilities, there may not be adequate resources to cover such indemnity);

ongoing business and management’s attention may be disrupted or diverted by transition

or integration issues and the complexity of managing geographically or culturally diverse

may incur one-time write-offs or restructuring charges in connection with the acquisition;

may acquire goodwill and other intangible assets that are subject to amortization or impairment

tests, which could result in future charges to earnings;

may not be able to realize the cost savings or other financial benefits we anticipated.

our business and success faces risks from uncertainties inherent to developing companies in a competitive environment.

There can be no

assurance that our efforts will be successful or that we will ultimately be able to attain profitability.

may not be able to successfully integrate the business and operations of entities that we have acquired, been acquired by or may acquire

in the future into our ongoing business operations, which may result in our inability to fully realize the intended benefits of these

acquisitions, or may disrupt our current operations, which could have a material adverse effect on our business, financial position and/or

While we believe our current facilities are adequate for our present level of operations, as our UAS business grows,

we may be required to expand or upgrade these facilities and systems.

Any inability to secure suitable facilities on commercially reasonable

terms, disruptions at our service or warehouse locations, or failure to effectively manage inventory and repair operations could adversely

affect our ability to fulfill customer orders, provide timely service and support, and maintain customer relationships, which could materially

adversely affect our business, financial condition and results of operations.

Moreover, if the TriFan 600 program is resumed and the aircraft

reaches commercial production, the aircraft would require ongoing maintenance and support, the costs and frequency of which are uncertain.

There can be no assurance that the program will be resumed or that the aircraft will reach commercial production.

Our UAS operations depend on trained drone

operators, technicians and other qualified personnel, and competition for such personnel is significant.

If the TriFan 600 program is

resumed, pilot and mechanic availability could affect the commercialization of the aircraft.

Our UAS operations rely on

trained drone operators, technicians, repair personnel and other skilled employees, including individuals holding FAA Part 107 certifications

and other applicable credentials.

Competition for qualified personnel in the UAS industry is significant and may increase as adoption

of drone technology expands.

If we are unable to attract, train and retain qualified personnel in sufficient numbers, our ability to grow

our UAS business, provide timely service and support, and execute our strategic plans could be adversely affected.

If and when the TriFan 600

program is resumed and the aircraft approaches commercialization, a shortage of pilots and qualified aviation mechanics could adversely

affect demand for the aircraft and the Company’s ability to support customers.

There is an existing shortage of pilots in the broader

aviation industry, and trained aviation mechanics are also in limited supply.

If these conditions persist at the time the TriFan 600 program

is resumed, they may reduce our ability to sell aircraft at scale or operate on the timelines we project at that time.

We may be adversely affected by interruptions

in production or supply chain disruptions that are beyond our control, including disruptions impacting suppliers of UAS products or aircraft

components if the TriFan 600 program is resumed.

UAS Operations

Our UAS operations depend

on the timely availability of drone platforms, payloads, batteries, components and related products from third-party manufacturers.

in global supply chains, shipping delays, manufacturing constraints, tariff or trade restrictions, or other supplier-related issues could

reduce product availability, increase costs, delay customer deliveries, and adversely affect our ability to maintain adequate inventory

Because our current operations are primarily focused on our UAS distribution, service and solutions business, disruptions affecting

our suppliers, logistics providers or product availability could have an immediate impact on our revenue, customer relationships and service

Any such disruptions could materially adversely affect our business, financial condition and results of operations.

In addition, to the extent

we assemble, configure, integrate, test, repair or otherwise prepare UAS products and related components for sale or customer deployment,

we may be exposed to manufacturing and production execution risks.

These risks include quality control issues, defects in assembly or

integration, equipment malfunctions, production inefficiencies, delays in scaling operations, and failures to meet customer specifications

or delivery schedules.

Any such issues could result in product returns, warranty claims, customer disputes, reputational harm, increased

operating costs or reduced margins, any of which could materially adversely affect our business, financial condition and results of operations.

If the TriFan 600 program

is resumed, we would intend to produce the TriFan 600 using systems, components and parts developed and manufactured by third-party suppliers.

supply chain exposes us to multiple potential sources of delivery failure or component shortages for our aircraft, most of which are out

of our control.

Such suppliers may be subject to additional risks such as financial problems that limit their ability to conduct their

If any of these third parties experience difficulties, it could have a direct negative impact on us.

While we believe that we may

be able to establish alternate supply relationships and can obtain replacement components if the program is resumed, we may be unable

to do so in the short term or at all at prices that are acceptable to us or may need to recertify components, which could increase costs

or delay development timelines.

If we needed to find alternative

suppliers for any key components, then this could increase our costs and adversely affect our ability to receive such components on a

timely basis, or at all, which could cause significant delays if we resume the program in the development, certification or commercialization

of our aircraft and adversely affect our relationships with customers.

Our research and development efforts may

not produce successful products or capabilities that result in significant revenue, cost savings or other benefits.

Developing new UAS solutions,

software capabilities, service offerings and related product enhancements, as well as advanced unmanned systems and related technologies,

including in our ADS division, is expensive, time-consuming and subject to significant technical, operational and regulatory uncertainty.

Investments in research and development may not result in successful designs, marketable products, improved performance or other anticipated

benefits, and may take longer than expected to achieve technical milestones.

In addition, development efforts may result in products or

capabilities that are more expensive than anticipated or that do not meet customer requirements or may not be adopted by customers at

the levels we expect.

Our UAS business requires

ongoing investments in evaluating new drone platforms, payload technologies, software tools and service capabilities, as well as developing

customized solutions for customers in specialized industries.

Our ADS division is in an early stage of development and has not generated

revenues, and its ability to generate revenues will depend on its success in developing commercially viable products, securing development

contracts or partnerships, and achieving customer acceptance, none of which are assured.

These efforts may require significant upfront

expenditures for equipment, training, testing, inventory and technical personnel, and may not generate sufficient demand or revenue to

justify those investments.

Our future plans include continued

investments in research and development with respect to our UAS solutions business and the development of capabilities within our ADS

We believe we must continue to dedicate significant resources to these efforts to maintain a competitive position and advance

our UAS offerings.

However, we may not receive significant revenue from these investments in the near future, if at all, and these investments

may not yield the expected benefits.

In addition, to the extent we determine to resume the TriFan 600 program in the future, such efforts

would require substantial additional investment and may not result in commercially viable products or generate revenues.

realize the anticipated returns from our research and development efforts, our business, financial condition and results of operations

could be materially adversely affected.

If we do not adequately protect our intellectual

property rights, we may experience a loss of revenue and our operations and growth prospects may be materially harmed.

Our UAS business relies on

a combination of trademarks, trade secrets, proprietary software, customer relationships, training content, service and repair capabilities,

technical workflows, and other proprietary know-how.

We may not be able to prevent third parties, including competitors, former employees,

contractors, or business partners, from misappropriating or replicating aspects of our business model, training programs, service processes,

software tools or customer solutions.

In addition, competitors or former personnel may attempt to replicate our operational methods, service

offerings or customer relationships without infringing on registered intellectual property rights.

Any failure to protect our intellectual

property and proprietary information could reduce our competitive advantages and adversely affect our business, financial condition and

results of operations.

continue to integrate the technology and operations acquired in connection with our recent acquisitions, including but not limited to

the Legacy XTI technology and operations.

This process involves complex operational, technological and personnel-related challenges,

The Company holds patents

for the TriFan 600 issued by the United States Patent and Trademark Office and in various foreign jurisdictions, and may seek additional

patent protection in connection with the TriFan 600 program or other technologies developed through the ADS division.

The process of obtaining

patent protection is expensive and time-consuming, and we may not be able to prosecute all necessary or desirable patent applications

at a reasonable cost or in a timely manner.

Even if issued, there can be no assurance that these patents will adequately protect our intellectual

property, as the legal standards relating to the validity, enforceability and scope of protection of patent and intellectual property

rights are complex, uncertain and subject to change.

There is no guarantee that any court will rule in our favor in the event of a dispute

related to our intellectual property.

The TriFan 600 program has

been paused, and the primary near-term value of the associated intellectual property lies in its potential applicability to unmanned systems

development within our ADS division.

During the period in which the program is paused, third parties — including potential competitors

— may develop technologies that are equal or superior to our TriFan 600-related intellectual property, design around our existing

patents, or independently develop similar technologies without infringing our rights.

If the TriFan 600 program is ultimately resumed,

the competitive value of our existing patents and other intellectual property may be diminished as a result of developments that occurred

during the pause.

Any failure to adequately protect our intellectual property could adversely affect our ability to commercialize the

TriFan 600 or related technologies, and could materially adversely affect our business, financial condition and results of operations.

Certain proprietary software

and related technology used in our UAS operations and, to the extent applicable, in connection with our ADS division’s development activities,

is protected by common law copyright rather than registered copyright.

We have not registered copyrights on proprietary software we have

Common law protection may be narrower than registered copyright protection.

As a result, we may experience difficulty enforcing

our copyrights against third-party infringement.

As part of our confidentiality procedures, we enter into agreements with employees and

consultants and limit access to and distribution of our software, documentation and other proprietary information.

There can be no assurance

that these measures will prevent misappropriation or that such agreements will be enforceable.

The laws of other countries may afford

us little or no protection of our intellectual property.

Our inability to protect our intellectual property rights could adversely affect

our financial condition, operating results and growth prospects.

We also rely on a variety

of technology that we license from third parties in connection with our UAS operations.

There can be no assurance that these third party

technology licenses will continue to be available to us on commercially reasonable terms, if at all.

The loss of or inability to maintain

or obtain upgrades to any of these technology licenses could result in delays in completing software enhancements and new development

until equivalent technology could be identified, licensed or developed and integrated.

Any such delays would materially and adversely

affect our business.

Our ability to use net operating loss carryforwards

and other tax attributes may be limited.

We have generated net operating

losses (“NOLs”) and other tax attributes that may be available to offset future taxable income.

However, our ability to utilize

these tax attributes may be limited under Sections 382 and 383 of the Internal Revenue Code (the “Code”) if we experience

an “ownership change.”

In general, an ownership change

occurs when there is a greater than 50 percentage point change in the ownership of a corporation’s stock by certain stockholders

over a rolling three-year period.

We may have experienced ownership changes in the past, including in connection with business combinations,

equity financings, preferred stock issuances, conversions, exchanges, or other transactions, and may experience ownership changes in the

future as a result of subsequent shifts in our stock ownership, some of which may be outside our control.

If an ownership change occurs,

our ability to utilize our pre-change NOLs and other tax attributes, including research and development tax credits, to offset future

taxable income and taxes could be subject to significant annual limitations.

Similar provisions of state tax law may also apply.

As a result, even if we achieve

profitability, we may be unable to use a material portion of our NOLs and other tax attributes, which could adversely affect our business,

financial condition and results of operations.

We may enter into joint venture, teaming

and other arrangements, and these activities involve risks and uncertainties, and a failure of any such relationship could have material

adverse results on our business and results of operations.

We may enter into joint venture,

teaming and other arrangements including strategic partnerships, supplier arrangements, dealer relationships, distribution agreements,

and other commercial relationships.

These activities involve risks and uncertainties, including the risk of the joint venture or applicable

entity failing to satisfy its obligations, which may result in certain liabilities to us for guarantees and other commitments, the challenges

in achieving strategic objectives and expected benefits of the business arrangement, the risk of conflicts arising between us and our

partners and the difficulty of managing and resolving such conflicts, and the difficulty of managing or otherwise monitoring such business

arrangements.

In addition, our business

plans, including our UAS operations, depend in part on relationships with third parties, including suppliers, manufacturers, service providers

and other strategic partners.

Moreover, existing or future arrangements may contain limitations on our ability to enter into arrangements

with other partners.

A failure of our business relationships could have a material adverse effect on our business and results of operations.

We are subject to risks associated with

climate change, including the potential increased impacts of severe weather events on our operations and infrastructure, and market and

regulatory trends relating to sustainability and emissions reduction may not evolve as expected.

The potential physical effects

of climate change, such as increased frequency and severity of high wind conditions, storms, floods, fires, fog, mist, freezing conditions,

sea-level rise and other climate-related events, could affect our operations, infrastructure and financial results.

Climate change risks

could result in, but are not limited to, operational risk from the physical effect of climate events on our facilities, distribution and

service infrastructure, and other assets, as well as supply chain disruptions affecting the availability and cost of components and products

that we distribute or use in our development activities.

We could incur significant costs to improve resiliency of our infrastructure

and operations and otherwise prepare for, respond to, and mitigate such physical effects of climate change.

We are not able to accurately

predict the materiality of any potential losses or costs associated with the physical effects of climate change.

In addition to physical risks,

climate change presents transition risks, including evolving regulatory requirements, increased monitoring and disclosure requirements,

and changing market preferences.

A number of governments globally have introduced, or are considering introducing, climate change legislation

and policies at the international, national, state and local levels.

Regulation relating to emission levels, energy efficiency and sustainability

is evolving and may influence purchasing decisions in the aviation and UAS markets.

Certain aspects of our business strategy, including

the positioning of our UAS solutions and the development of the TriFan 600, may benefit from regulatory or market preferences for more

fuel-efficient or lower-emission technologies.

However, market and regulatory trends may not evolve in the direction or within the timing

we anticipate.

Changes in political priorities, economic conditions, energy prices, or public policy could reduce the emphasis on emissions

reduction or sustainability initiatives.

If regulatory incentives are reduced, delayed, or eliminated, or if customers place less importance

on sustainability considerations when making purchasing decisions, demand for our products could be adversely affected, which could have

a material adverse effect on our business, financial condition and results of operations.

Investors’ expectations and regulatory

requirements relating to environmental, social and governance (“ESG”) matters may impose additional costs and expose us to

There is increasing focus

from investors, employees, customers, regulators and other stakeholders concerning corporate responsibility and ESG matters.

Some investors

may use these non-financial performance factors to guide their investment strategies and, in some cases, may choose not to invest in us

if they believe our policies, disclosures or actions relating to ESG matters are inadequate or inconsistent with their expectations.

The growing demand for measurement

and disclosure of non-financial performance has led to evolving reporting standards, regulatory requirements and third-party sustainability

assessments and ratings with respect to public companies.

The criteria by which our ESG practices are assessed may change over time due

to shifts in regulatory frameworks, market expectations or industry standards, which could require us to undertake additional compliance

efforts, incur increased costs, or modify our practices.

In addition, if we elect not

to, or are unable to, satisfy evolving ESG-related expectations or regulatory requirements, or if our ESG-related disclosures are challenged,

we could face reputational harm, reduced investor interest, increased scrutiny or potential litigation.

Conversely, certain stakeholders

may oppose ESG initiatives or disclosures, which could also create reputational or other risks.

Any of these factors could adversely affect

our business, financial condition and results of operations.

Insurance and contractual protections may

not cover product liability, operational claims, lost revenue, increased expenses or liquidated damages, which could adversely affect

our financial results.

Although we maintain insurance

and seek to obtain warranties, indemnities and performance guarantees from suppliers and subcontractors, and where feasible attempt to

allocate risks contractually to customers or other counterparties, the proceeds of such insurance or the protections provided by such

contractual arrangements may not be adequate to cover potential claims, losses, liabilities or damages.

We may be subject to product

liability and other claims arising in the ordinary course of our business, including claims related to the distribution, servicing, repair

or development of drone systems, related components and software, and, in the future, aircraft we may manufacture or sell.

may involve allegations of design defects, manufacturing defects, component failures, software errors, improper installation, inadequate

warnings or instructions, misuse of products, personal injury, death or property damage.

In some jurisdictions, strict liability may be

imposed even in the absence of negligence.

In addition, we may face claims

for breach of contract, warranty obligations, indemnification demands, liquidated damages, operational failures, delays in delivery, or

other performance-related matters.

Our contractual protections may be limited by exclusions, caps, deductibles, insolvency of counterparties

or other limitations, and we may be unable to enforce such protections in certain circumstances.

Insurance coverage for certain

operational, product-related and aviation risks may be limited, unavailable, subject to significant exclusions, or increasingly expensive.

There can be no assurance that our current insurance coverage will be available in the future on commercially reasonable terms or at all,

or that coverage limits will be sufficient to protect us against all potential claims.

Even if we believe a claim is covered, insurers

may dispute coverage.

A successful claim or claims

brought against us in excess of available insurance coverage or contractual protections, or for which such protections are unavailable,

could result in significant liabilities, require us to expend substantial resources, and have a material adverse effect on our business,

financial condition and results of operations.

Any significant incident or claim, even if insured, could also adversely affect our reputation

and customer relationships.

The ongoing impact of geopolitical conflicts,

including the Russia-Ukraine conflict and conflicts in the Middle East, may adversely affect our business, operations and financial condition.

Geopolitical conflicts, including

the ongoing military conflict between Russia and Ukraine and the conflicts in the Middle East, including the Israel-Hamas conflict and

related regional tensions involving Iran and other parties, may increase the likelihood of global supply chain disruptions, inflationary

pressures, higher energy and transportation costs, and volatility in financial markets.

These developments could adversely affect the

availability and cost of drone platforms, components and other products we sell, as well as materials, components and services required

for our aircraft development program.

In addition, the continuation

or escalation of these conflicts could result in additional economic sanctions, export controls, import restrictions, disruptions to global

shipping routes, including in the Red Sea and surrounding regions, and other governmental actions that could disrupt international trade,

limit product availability, increase costs, and adversely affect customer demand.

These events may also contribute to heightened cybersecurity

The overall impact of these developments remains uncertain, and any of the foregoing could materially adversely affect our business,

financial condition and results of operations.

Our business is subject to U.S.

trade compliance, sanctions, import/export and anti-corruption laws, and violations of these laws or changes in their application could

harm our business.

Although we are primarily

a U.S.-based company, our UAS distribution and services business relies on a global supply chain, including suppliers and manufacturers

located in Europe and Asia.

As a result, we are subject to various U.S.

and foreign laws and regulations relating to international trade

and business conduct, including customs and import regulations, export controls, economic sanctions, embargoes, licensing requirements,

and anti-corruption laws such as the U.S.

Foreign Corrupt Practices Act (“FCPA”) and similar laws in other jurisdictions.

These laws and regulations

are complex, frequently changing, and may be subject to inconsistent interpretation and enforcement.

Compliance requires significant management

attention and resources, and any failure to maintain effective compliance programs, controls, training and oversight could expose us to

We may engage third-party

suppliers, distributors, freight forwarders, customs brokers, consultants, resellers, or service providers in connection with sourcing

and distributing UAS products.

We may not be able to fully control the actions of such third parties.

Any violation of applicable anti-corruption,

sanctions, import/export or trade compliance laws by us, our employees or third parties acting on our behalf could result in significant

fines, penalties, reputational harm, loss of import or export privileges, seizure or detention of shipments, restrictions on our ability

to sell certain products, increased compliance costs, and could materially adversely affect our business, financial condition and results

of operation.

In addition, changes in sanctions

programs, export control regimes, import restrictions or licensing requirements could limit the availability of products we distribute,

restrict certain customers or end markets, delay shipments, or otherwise disrupt our operations.

Changes in U.S.

administrative policy, including

tariffs, import restrictions, trade agreements and other trade measures, could adversely affect our supply chain economics and financial

Our UAS distribution and services

business relies on a global supply chain and a significant portion of the products and components we distribute are manufactured outside

the United States, including in China and other parts of Asia and Europe.

As a result, our business is sensitive to changes in U.S.

foreign government administrative policy, including changes to trade agreements, the imposition of new tariffs, increases in existing

tariffs, import restrictions, retaliatory measures by foreign governments, and other actions affecting global trade.

Tariffs and other trade restrictions

may increase the costs of the products we distribute, disrupt product availability, delay shipments, or require us to source products

from alternative suppliers at higher prices or on less favorable terms.

If we are unable to pass such cost increases through to customers,

our margins could be reduced.

Even if we are able to increase pricing, higher costs may reduce customer demand, particularly in price-sensitive

segments of the UAS market.

In addition, uncertainty regarding

the timing, scope and duration of tariffs and related trade measures may make it more difficult for us to forecast costs, manage inventory,

plan purchasing decisions, and maintain consistent pricing.

Any of these factors could materially adversely affect our business, financial

condition and results of operations

Difficult conditions in the global economy

and capital markets may materially adversely affect our business, results of operations and access to capital.

Our business is affected by

conditions in the global economy and financial markets.

Economic uncertainty, slower growth, recessionary conditions, sustained inflation,

higher interest rates, reduced availability of credit, banking instability, geopolitical tensions or other macroeconomic disruptions could

negatively affect customer purchasing behavior, government budgets, and enterprise capital spending.

Demand for our UAS products

and services and, in the future, aircraft we may develop, may be sensitive to general economic conditions.

Customers may delay or reduce

purchases, seek lower-cost alternatives, renegotiate pricing, reduce order quantities, or extend payment terms during periods of economic

Reduced customer spending could adversely affect our revenues and profitability.

Inflationary pressures may

increase our costs of labor, components, logistics, warehousing, insurance and other operating expenses.

Although we may attempt to pass

through increased costs to customers, we may not be able to do so in a timely manner or at all, which could reduce our margins.

higher interest rates may increase our borrowing costs under existing or future credit facilities and may adversely affect our ability

to access capital on favorable terms.

Volatility in equity and credit

markets may also impair our ability to raise additional capital when needed, including to fund strategic acquisitions, development initiatives,

or other capital-intensive programs or aircraft development efforts.

If we are unable to access capital markets or secure financing on

acceptable terms, our liquidity and ability to execute our business strategy could be materially adversely affected.

Any of these factors could

have a material adverse effect on our business, financial condition and results of operations.

We have a history of losses, and in order

to successfully execute our business plan, including strategic acquisitions and the development of our advanced systems and domestic manufacturing

initiatives, we will need to raise additional capital through additional debt or equity financing, which may otherwise not be available

on reasonable terms or at all.

We have incurred net losses

in recent periods and have an accumulated deficit as of December 31, 2025.

These and prior losses have resulted in significant negative

Our ability to execute our business plan depends on attaining and maintaining profitable operations in our UAS business and

other operations and raising additional capital as needed, including for strategic acquisitions and the development of our advanced systems

and domestic manufacturing initiatives.

There can be no assurance that we will be able to raise additional financing.

Our ability to execute our

business plan depends on our ability to generate sufficient cash flow from operations and/or obtain additional debt or equity financing.

There can be no assurance that additional financing will be available on acceptable terms, or at all.

If we are unable to raise sufficient

capital when needed, we may be required to delay, reduce or terminate certain operations or development programs.

We have historically funded

our operations through a combination of equity offerings, preferred equity issuances, convertible instruments, related party financing

arrangements, and secured and unsecured debt.

In November 2025, we issued shares of Series 10 Convertible Preferred Stock in a private

placement transaction, which were subsequently converted in January 2026 into shares of our common stock and a pre-funded warrant.

issuance and conversion of these securities have resulted, and future exercises or exchanges of outstanding securities may result, in

dilution to our existing stockholders.

In connection with our acquisition

of Drone Nerds, we issued equity interests that are exchangeable into shares of our common stock.

The exchange of such equity interests

and the exercise of outstanding warrants could result in additional dilution and increased volatility in the market price of our common

We have also entered into

an asset-based revolving credit facility with JPMorgan Chase Bank, N.A.

to support the working capital needs of our UAS operations.

under this facility are subject to a borrowing base formula and are secured by substantially all of the assets of the applicable borrowers.

The facility contains customary covenants and events of default.

If borrowing availability is reduced or if we fail to comply with the

covenants under this facility, our liquidity could be adversely affected.

Upon an event of default, the lender may accelerate amounts

outstanding and exercise remedies against the collateral securing the facility.

In addition, to the extent

that we are unable to pay our obligations under our credit facilities, related party notes, or other indebtedness, and such obligations

are secured, the applicable lender or noteholder could exercise remedies against the collateral securing such obligations, which could

materially adversely affect our business, financial condition and results of operations.

Our existing and future indebtedness

may limit our ability to obtain additional financing, incur additional debt, or pursue strategic transactions.

The combined effect of

our operating losses, capital requirements, outstanding convertible and exchangeable securities, and secured credit arrangements may adversely

affect our financial flexibility and our ability to execute our long-term strategy.

Our asset-based revolving credit facility

contains borrowing base limitations, financial and operational covenants, and is secured by substantially all of the assets of our UAS

operations, and any default could materially adversely affect our liquidity and operations.

Drone Nerds, LLC and Anzu

Robotics, LLC recently entered into a secured asset-based revolving credit facility (the “ABL Facility”) with JPMorgan Chase

to support the working capital needs of our UAS operations.

The amount available for borrowing under the ABL Facility is subject

to a borrowing base formula, which is based primarily on a percentage of eligible accounts receivable and inventory, subject to applicable

advance rates and reserves.

Because availability under

the ABL Facility depends on the value of eligible collateral, our borrowing capacity may fluctuate from time to time as a result of changes

in our accounts receivable, inventory levels, customer payment patterns, seasonality, credit concentrations, or the imposition of discretionary

reserves by the lender.

If our eligible collateral decreases or if additional reserves are established, the amount available for borrowing

could be reduced, which could adversely affect our liquidity.

The credit agreement governing

the ABL Facility contains affirmative and negative covenants, including covenants limiting the ability of the borrowers to, among other

things, incur additional indebtedness, grant liens, make certain investments, pay dividends, engage in certain mergers or asset sales,

or enter into certain transactions.

The credit agreement also requires the borrowers to maintain a fixed charge coverage ratio as of the

end of any calendar month, that is no less than 1.0 to 1.0, subject to certain cure rights.

The credit agreement also contains customary

events of default that include, among other things, certain payment defaults, cross defaults to other material indebtedness, covenant

defaults, the occurrence of a change in control, unsatisfied judgments over a threshold, and certain bankruptcy events.

The ABL Facility is secured

by substantially all of the assets of the applicable borrowers and guarantors, including accounts receivable, inventory, deposit accounts

and other assets.

Upon the occurrence of an event of default, the lender may, among other remedies, accelerate all outstanding obligations,

terminate lending commitments, increase the interest rate, and exercise remedies against the collateral securing the facility.

of such remedies could materially adversely affect our business, financial condition and results of operations.

Any inability to access funds

under the ABL Facility when needed, any reduction in borrowing availability, or any default under the ABL Facility could materially adversely

affect our ability to fund working capital, inventory purchases, growth initiatives, and ongoing operations .

We may be unable to repay the Notes issued

in connection with the Drone Nerds acquisition.

In connection with the acquisition

of Drone Nerds, XTI Drones Holdings issued a promissory note to the Drone Nerds, LLC seller in the original principal amount of approximately

$11 million and a promissory note to the Anzu Robotics, LLC seller in the original principal amount of approximately $1 million (the “Notes”).

The Company made the initial required principal and interest payments under the Notes in November 2025.

The remaining outstanding principal

and accrued interest under the Notes are payable in scheduled installments through 2026, with all remaining amounts due on or prior to

the applicable maturity date.

Interest accrues on the outstanding

principal balance of each Note at an annual rate of 7.25%.

Our failure to pay principal or interest when due will constitute an event

of default under the applicable Note.

Upon the occurrence of an event of default (other than certain bankruptcy-related events), the holder

may declare the entire unpaid balance of principal and accrued but unpaid interest immediately due and payable and may exercise other

rights and remedies available under the Notes or applicable law.

Upon the occurrence of certain bankruptcy-related events of default,

the outstanding principal and accrued interest will become automatically due and payable.

Following the occurrence of an event of default,

interest will accrue at an increased rate.

In addition, under the terms

of the Notes, if we complete one or more capital raises resulting in aggregate gross proceeds of $40 million or more following issuance

of the Notes, we may be required to repay all outstanding amounts under the Notes, subject to certain limitations.

Any such required repayment

could reduce our available working capital and adversely affect our ability to execute our business plan.

The availability and use of

proceeds from any such financing may also be subject to restrictions under our asset-based revolving credit facility, which could limit

our ability to apply such proceeds toward repayment of the Notes.

We may not have sufficient

cash on hand or be able to obtain additional financing to satisfy amounts due under the Notes when required.

The Notes include provisions

that could result in the acceleration of amounts owed, including upon the occurrence of an event of default or, in certain circumstances,

following specified capital raising activities.

If amounts under the Notes were accelerated or otherwise became due earlier than expected,

we may be required to repay such amounts on an accelerated basis, which could reduce our available liquidity.

If we are unable to meet

our obligations under the Notes, our business, financial condition and results of operations could be materially adversely affected.

We may not be able to successfully integrate

the business and operations of Drone Nerds or other entities that we have acquired or may acquire in the future, and we may not realize

the intended benefits of these acquisitions.

In addition, we may be exposed to unanticipated liabilities or risks arising from the historic

operations of acquired businesses, which could materially and adversely affect our business, financial condition and results of operations.

We are in the process of integrating

the operations of Drone Nerds into our business, and this process involves complex operational, technological and personnel-related challenges,

which are time-consuming and expensive and may disrupt our ongoing business operations.

Furthermore, integration involves a number of

risks, including, but not limited to:

● difficulties

or complications in combining the companies’ operations;

● differences

in controls, procedures and policies, regulatory standards and business cultures among the

combined companies;

diversion of management’s attention from our ongoing core business operations;

exposure to certain governmental regulations and compliance requirements;

potential increase in operating costs;

potential loss of key personnel;

potential loss of key customers or suppliers who choose not to do business with the combined

● difficulties

or delays in consolidating the acquired companies’ technology platforms, including

implementing systems designed to maintain effective disclosure controls and procedures and

internal control over financial reporting for the combined company and enable the Company

to continue to comply with U.S.

Integration involves a number of risks, including,

but not limited to:

the possibility that the purchase price we pay and/or unanticipated costs could significantly deplete our cash reserves or result in dilution to our existing stockholders;

difficulties or complications in combining the companies’ operations, especially if we enter a market with no or limited prior experience;

differences in controls, procedures and policies, regulatory standards and business cultures among the combined companies;

the diversion of management’s attention from our ongoing core business operations;

increased exposure to certain governmental regulations and compliance requirements;

the potential increase in operating costs;

the potential loss of key personnel;

the potential loss of key customers or suppliers who choose not to do business with the combined business and the possibility that we may not be able to expand the reach and customer base for the acquired companies’ current and future products as expected;

the possibility that certain liabilities, including contingent or unanticipated liabilities, related to the acquired companies’ prior operations may not be covered by insurance, indemnification provisions or other contractual protections;

difficulties or delays in consolidating the acquired companies’ technology platforms, including implementing systems designed to maintain effective disclosure controls and procedures and internal control over financial reporting for the combined company and enable the Company to continue to comply with U.S.

GAAP and applicable U.S.

securities laws and regulations;

● unanticipated

costs to successfully integrate operations, technologies, personnel of acquired businesses

and other assumed contingent liabilities;

comparing financial reports due to differing financial and/or internal reporting systems;

any necessary modifications to internal financial control standards to comply with the Sarbanes-Oxley

Act of 2002 and the rules and regulations promulgated thereunder;

tax costs or inefficiencies associated with integrating the operations of the combined company.

factors could cause us to not fully realize the anticipated financial and/or strategic benefits of the acquisitions, which could have

a material adverse effect on our business, financial condition and/or results of operations.

if we are able to successfully operate the acquired businesses, we may not be able to realize the revenue and other synergies and growth

that we anticipated from these acquisitions in the time frame that we currently expect, and the costs of achieving these benefits may

be higher than what we currently expect, because of a number of risks, including, but not limited to:

possibility that the acquisition may not further our business strategy as we expected;

possibility that we may not be able to expand the reach and customer base for the acquired

companies’ current and future products as expected;

possibility that we may have entered a market with no prior experience and may not succeed

in the manner expected;

possibility that the carrying amounts of goodwill and other purchased intangible assets may

not be recoverable.

a result of these risks, the acquisitions and integration may not contribute to our earnings as expected, we may not achieve expected

revenue synergies or our return on invested capital targets when expected, or at all, and we may not achieve the other anticipated strategic

and financial benefits of the acquisitions.

ongoing impact of the military conflict between Russia and Ukraine and the Israel/Hamas conflict may result in an increase in the likelihood

of supply chain constraints, contribute to inflation driving up the cost of material and labor required to make our products, the effects

of which remains uncertain and may have a material adverse impact on our business, operations and financial conditions.

ongoing military conflict between Russia and Ukraine has had an impact on our business and the Israel/Hamas conflict may increase the

likelihood of supply interruptions which may hinder our ability to find the materials we need to make our products.

Supply disruptions

are making it harder for us to find favorable pricing and reliable sources for the materials we need, putting upward pressure on our

costs and increasing the risk that we may be unable to acquire the materials and services we need to continue to make certain products.

The wider implications of the conflict have contributed to inflation driving up the costs of labor and materials required to make our

The fluidity and continuation of the Russian conflict may result in additional economic sanctions and other impacts which could

have a negative impact on the Company’s financial condition, results of operations and cash flows, including decreased sales;

chain and logistics disruptions;

volatility in foreign exchange rates and interest rates;

inflationary pressures on materials and labor;

and heightened cybersecurity threats.

The overall impact on our business of these events continues to remain uncertain and there are

no assurances that we will be able to continue to experience the same growth or not be materially adversely affected.

Changes in U.S.

and foreign government administrative

policy, including the imposition of or increases in tariffs and changes to existing trade agreements, and other changes to macroeconomic

conditions could have a material adverse effect on global economic conditions and our business, results of operations, prospects and financial

As a result of changes to

and foreign government administrative policy, there may be changes to existing trade agreements, greater restrictions on free trade

generally, the imposition of or significant increases in tariffs on goods imported into the U.S., particularly those manufactured in Canada,

Mexico, Europe, and China, and adverse responses by foreign governments to U.S.

trade policies, among other possible changes.

currently a leading global source of hardware products, including the hardware products that we use.

As the implementation of tariffs

is ongoing, more tariffs may be added in the future.

These tariffs could have an adverse impact on our business, results of operations,

prospects and financial condition, and if we are unable to pass such price increases through to our customers, it would likely increase

our cost of sales and, as a result, decrease our gross margins, operating income and net income.

As of the date of this Annual Report

on Form 10-K, discussions remain ongoing in respect of certain trade restrictions and tariffs on imports from Canada, China, Mexico and

Europe, as well as retaliatory tariffs enacted in response to such actions.

In light of these events, there continues to exist significant

uncertainty about the future relationship between the U.S.

and other countries with respect to such trade policies, treaties, and tariffs.

These developments, or the perception that any of them could occur, may have a material adverse effect on global economic conditions and

the stability of global financial markets, and may significantly reduce global trade and, in particular, trade between the impacted nations

and the United States.

Any of these factors could depress economic activity and restrict our access to suppliers or customers and, in

turn, have a material adverse effect on the business and financial condition of such suppliers and customers or other counterparties we

do business with, which in turn would negatively impact us.

Deteriorating macroeconomic

conditions, including slower growth or a recession, inflation, changes in the U.S.

presidential administration, bank failures, supply

chain disruption, increases in interest rates, increases to fuel and other energy costs or vehicle costs, geopolitical events, including

escalating tariff and non-tariff trade measures imposed by the U.S., Mexico, China, Canada and other countries, the potential for new

or unforeseen conflicts such as the impact of the Russia and Ukraine conflict and Hamas and Israel conflict, changes in the labor market,

or decreases in government spending power, could in the future result in a decline in customer spending, which could materially adversely

affect our business, results of operations, prospects and financial condition.

A trade war, other governmental action related to tariffs

or trade agreements, changes in U.S.

social, political, regulatory and economic conditions or in laws and policies governing foreign trade,

manufacturing, development and investment in the territories and countries where we currently do business, and any resulting negative

sentiments towards the U.S.

as a result of such changes, could have a material adverse effect on our business, financial condition, results

of operations and cash flows.

significant portion of the purchase price related to our strategic acquisitions prior to the XTI Merger was allocated to goodwill and

intangible assets that are subject to periodic impairment evaluations.

An impairment loss could have a material adverse impact on our

financial condition and results of operations.

significant portion of the purchase price related to our strategic acquisitions prior to the XTI Merger was allocated to goodwill

and intangible assets that are subject to periodic impairment evaluations.

As of December 31, 2024, our goodwill and the net book

value of our intangible assets was approximately $13.96 million in connection with the various acquisitions that we have

A future impairment loss could have a material adverse impact on our financial condition and results of

required by current accounting standards, we review intangible assets for impairment either annually or whenever changes in circumstances

indicate that the carrying value may not be recoverable.

The risk of impairment to goodwill is higher during the early years following

an acquisition.

This is because the fair values of these assets align very closely with what we paid to acquire the reporting units to

which these assets are assigned.

As a result, the difference between the carrying value of the reporting unit and its fair value (typically

referred to as “headroom”) is smaller at the time of acquisition.

Until this headroom grows over time, due to business growth

or lower carrying value of the reporting unit, a relatively small decrease in reporting unit fair value can trigger impairment charges.

When impairment charges are triggered, they tend to be material due to the size of the assets involved.

unanticipated costs to successfully integrate operations, technologies, personnel of acquired businesses and other assumed contingent liabilities;

difficulty comparing financial reports due to differing financial and/or internal reporting systems;

making any necessary modifications to internal financial control standards to comply with the Sarbanes-Oxley Act of 2002 and the rules and regulations promulgated thereunder;

the possibility that goodwill and other intangible assets we acquire are subject to amortization or impairment tests, which could result in future charges to earnings, or that the carrying amounts of goodwill and other purchased intangible assets may not be recoverable;

possible write-offs, restructuring charges, tax costs or inefficiencies associated with integrating the operations of the combined company.

These risks could prevent

us from successfully integrating Drone Nerds and any other businesses we may acquire and could cause us to not fully realize the anticipated

financial, revenue synergies and/or other strategic benefits of the Drone Nerds acquisition or future acquisitions when expected, or at

all, which could have a material adverse effect on our business, financial condition and results of operations.

We have completed several strategic transactions,

including acquisitions and dispositions, which may make it difficult for investors to evaluate our business and prospects, and future

acquisitions or dispositions could disrupt our business and harm our financial condition or operating results.

We have historically pursued

a strategy involving acquisitions, divestitures and other strategic transactions.

Over time, we have acquired and divested multiple businesses,

including our recent acquisition of Drone Nerds and disposition of our former Inpixon Business operations.

As a result of these transactions,

our business has evolved significantly, and our historical financial results may not be indicative of our future performance.

Frequent changes to our business

portfolio, including acquisitions, divestitures, spin-offs and other strategic transactions, may make it difficult for investors to evaluate

our current business, financial condition and prospects.

In addition, our limited operating history following recent strategic transactions

may limit investors’ ability to assess trends in our business and operating results.

Any future acquisitions or

dispositions of assets or businesses could disrupt our operations, divert management’s attention, result in the loss of key personnel

or customers, create additional regulatory or contractual obligations, or expose us to unforeseen liabilities.

Dispositions may also result

in the loss of revenue streams or tax attributes and may not achieve the anticipated financial or strategic benefits.

There can be no

assurance that any future acquisition or disposition will enhance stockholder value or improve our operating results, and such transactions

may instead materially adversely affect our business, financial condition and results of operations.

A significant portion

of the purchase price related to our strategic acquisitions was allocated to goodwill and intangible assets that are subject to periodic

impairment evaluations, and an impairment loss could have a material adverse impact on our financial condition and results of operations.

As required by current accounting

standards, we review goodwill and indefinite-lived intangible assets for impairment at least annually, and we evaluate long-lived assets,

including definite-lived intangible assets, for impairment whenever events or changes in circumstances indicate that the carrying value

may not be recoverable.

The risk of impairment to goodwill is generally higher during the early years following an acquisition because

the difference between the carrying value of a reporting unit and its fair value may be relatively small.

Until this difference increases

over time due to business growth or reductions in the carrying value of the reporting unit, a relatively small decrease in fair value

could trigger impairment charges.

Our business could be adversely

affected, and impairment of goodwill could be triggered, if any of the following were to occur:

higher attrition rates than planned as

a result of the competitive environment or our inability to provide products and services that are competitive in the marketplace, lower-than-planned

adoption rates by customers, higher-than-expected expense levels to provide services to customers, sustained declines in our stock price

and related market capitalization and changes in our business model that may impact one or more of these variables.

During the years

ended December 31, 2024 and 2023, we recorded an impairment charge to our intangible assets of approximately $2.5 million and zero, respectively.

business depends on experienced and skilled personnel, and if we are unable to attract and integrate skilled personnel, it will be more

difficult for us to manage our business and complete contracts.

success of our business and ability to expand our operations depend on our ability to attract, retain, train, educate, and motivate highly

skilled employees, including employees who may become part of our organization in connection with our acquisitions.

The increase in demand

for engineering, software, sales, consulting, technology integration and managed services has further increased the need for employees

with specialized skills or significant experience in these areas.

Competition for personnel with skill sets specific to our industries

is high, and identifying candidates with the appropriate qualifications can be costly and difficult.

We may not be able to hire the necessary

personnel to implement our business strategy given our anticipated hiring needs, or we may need to provide higher compensation or more

training to our personnel than we currently anticipate.

Furthermore, the industry turnover rates for these types of employees are high

and we may not be successful in retaining, training or motivating our employees.

Any inability to attract, retain, train and motivate

employees could impair our ability to adequately manage and complete existing projects and to accept new customer engagements.

Such inability

may also force us to increase our hiring of independent contractors, which may increase our costs and reduce our profitability on customer

In the event we are unable to attract, hire and retain the requisite personnel and subcontractors, we may experience delays

in completing contracts in accordance with project schedules and budgets, which may have an adverse effect on our business, financial

condition and operating results, harm our reputation and cause us to curtail our pursuit of new contracts.

we were deemed to be an investment company under the Investment Company Act of 1940, as amended (the “1940 Act”), applicable

restrictions could make it impractical for us to continue our business as contemplated and could have a material adverse effect on our

business, financial condition and results of operations.

Sections 3(a)(1)(A) and (C) of the 1940 Act, a company generally will be deemed to be an “investment company” for purposes

of the 1940 Act if (1) it is, or holds itself out as being, engaged primarily, or proposes to engage primarily, in the business of investing,

reinvesting or trading in securities or (2) it engages, or proposes to engage, in the business of investing, reinvesting, owning, holding

or trading in securities and it owns or proposes to acquire investment securities having a value exceeding 40% of the value of its total

assets (exclusive of U.S.

affected, and impairment charges could be triggered, if any of the following were to occur:

higher attrition rates than planned as a result

of the competitive environment or our inability to provide products and services that are competitive in the marketplace, lower-than-planned

customer adoption rates, higher-than-expected expense levels, sustained declines in our stock price and related market capitalization,

adverse changes in macroeconomic conditions, or changes in our business model.

We may record impairment charges

in the future if the carrying value of our remaining goodwill or intangible assets exceeds their estimated fair value or is otherwise

determined to be unrecoverable.

We may make strategic investments in early-stage

companies or technologies that fail to generate returns or result in significant losses or impairment charges.

From time to time, we may

make strategic investments in early-stage companies, emerging technologies, or development-stage ventures that we believe may be complementary

to our business strategy or that may offer potential long-term value to our operations.

These investments are speculative in nature and

involve significant risks.

Early-stage companies typically have limited operating histories, no or minimal revenues, unproven technologies,

and significant dependence on future financing that may not be available on acceptable terms or at all.

The value of these investments

may be difficult to assess at the time of investment, and our due diligence, which is inherently limited by the availability of information

and the early-stage nature of such companies, may not identify all material risks associated with a potential investee.

We may be required to record

credit losses, impairment charges, or write-downs against the carrying value of these investments in accordance with applicable accounting

standards if the financial condition or prospects of an investee deteriorate, if collection of contractual cash flows becomes uncertain,

or if the fair value of an investment declines below its carrying amount.

Such charges could be material and could occur within a short

period following the date of investment.

During the year ended December 31, 2025, we recorded a full credit loss allowance of approximately

$2.0 million against a convertible promissory note investment made in October 2025, reflecting our determination that collection of substantially

all contractual cash flows was not expected at that time based on the investee’s limited operating history and dependence on future financing.

Our ability to recover value

from strategic investments will depend on factors largely outside of our control, including the investee’s ability to execute its business

plan, secure additional financing, develop its technology, and ultimately achieve commercial viability.

There can be no assurance that

any strategic investment we make will generate returns, preserve capital, or provide the strategic benefits we anticipate at the time

of investment.

Losses on strategic investments could adversely affect our financial condition, results of operations, and cash flows,

and could divert management attention and resources that might otherwise be devoted to our core business operations.

Our business depends on experienced and

skilled personnel, and if we are unable to attract, retain and integrate such personnel, or if we lose key personnel, our operations and

strategic execution may be adversely affected.

The success of our business

and our ability to execute our strategic plans depend on our ability to attract, retain, train, integrate and motivate highly skilled

employees, including personnel who have joined or may join us in connection with acquisitions.

Our UAS distribution and services business

requires personnel with specialized skills in engineering, software, sales, training, repair and maintenance services, technology integration

and regulatory compliance.

In addition, our aircraft development program requires highly specialized aerospace engineering and technical

expertise, including experience in certification and regulatory processes.

Competition for qualified

engineering, aviation, regulatory, technology and sales personnel is intense, and identifying and recruiting candidates with the appropriate

qualifications can be costly and time-consuming.

We may not be able to hire the personnel necessary to implement our business strategy

in a timely manner, or we may be required to offer higher compensation or additional incentives than anticipated.

Industry turnover rates

for certain skilled positions are high, and we may not be successful in retaining, training or motivating our employees.

Our success also depends to

a significant extent upon the continued services, experience and performance of our executive officers and other key personnel.

of one or more members of senior management or other key technical, operational or sales personnel could disrupt our operations, delay

aircraft development and certification efforts, impair customer or supplier relationships, or otherwise adversely affect our business.

Given the specialized nature of aerospace engineering, regulatory certification expertise and drone technology distribution and support,

qualified replacements may be difficult to identify and recruit in a timely manner or at all.

While certain key personnel are employed

pursuant to employment agreements, there can be no assurance that we will be able to retain their services.

We do not maintain “key

person” life insurance on the lives of any of our executive officers.

Any inability to attract,

retain, integrate or motivate skilled personnel, or the unexpected loss of key personnel, could impair our ability to manage operations,

fulfill customer orders and service engagements, expand our UAS operations, advance the TriFan 600 program, and execute our strategic

Such challenges could increase our costs, reduce profitability, delay initiatives, harm our reputation and have a material adverse

effect on our business, financial condition and results of operations.

If we were deemed to be an investment company

under the Investment Company Act of 1940, applicable restrictions could make it impractical for us to continue our business as contemplated.

Under Sections 3(a)(1)(A)

and (C) of the 1940 Act, a company generally will be deemed to be an “investment company” for purposes of the 1940 Act if

(1) it is, or holds itself out as being, engaged primarily, or proposes to engage primarily, in the business of investing, reinvesting

or trading in securities or (2) it engages, or proposes to engage, in the business of investing, reinvesting, owning, holding or trading

in securities and it owns or proposes to acquire investment securities having a value exceeding 40% of the value of its total assets (exclusive

government securities and cash items) on an unconsolidated basis.

Although we have made certain strategic investments

in the past, we do not currently believe that we are an “investment company,” as such term is defined in either of those

sections of the 1940 Act.

intend to conduct our operations so that we will not be deemed an investment company.

However, if we were to be deemed an investment

company, restrictions imposed by the 1940 Act, including limitations on our capital structure and our ability to transact with affiliates,

could make it impractical for us to continue our business as contemplated and could have a material adverse effect on our business, financial

condition and results of operations.

may be subject to damages resulting from claims that the Company or our employees have wrongfully used or disclosed alleged trade secrets

of their former employers.

may be subject to claims that the Company or our employees may have inadvertently or otherwise used or disclosed trade secrets or other

proprietary information of former employers or competitors.

Litigation may be necessary to defend against these claims.

We may be subject

to unexpected claims of infringement of third party intellectual property rights, either for intellectual property rights of which we

are not aware, or for which we believe are invalid or narrower in scope than the accusing party.

Even if we are successful in defending

against these claims, litigation could result in substantial costs and be a distraction to management.

If we fail in defending such claims,

in addition to paying money claims, we may lose valuable intellectual property rights or personnel or be enjoined from selling certain

products or providing certain services.

A loss of key research personnel or their work product could hamper or prevent our ability to

commercialize certain products, which could severely harm our business.

have been subject to government or regulatory investigations or inquiries under national, regional and local laws, as amended from time

to time, and may be required to comply with data requests, or requests for information by government authorities and regulators in the

United States or other jurisdictions in which we operate and any resulting enforcement action could have a materially adverse effect

a publicly trading reporting company with operations in the United States and internationally, we interact regularly with regulatory

and self-regulatory agencies in the United States or other jurisdictions in which we operate, including the SEC and the Nasdaq Stock

We have been and may in the future be the subject of SEC and other regulatory investigations and may be required to comply with

informal or formal orders or other requests for information or documentation from such government authorities and regulators regarding

our compliance with national, regional and local laws and regulations, including the rules and regulations under the Securities Act and

the Exchange Act.

Such laws and regulations and their interpretation and applications may also change from time to time.

Responding to

requests for information from regulators in connection with any such investigations or inquiries could have a materially adverse effect

on our business through, among other things, significantly increased legal fees and the time and attention required of the Company’s

management and employees to be diverted from our normal business operations and growth plans.

Moreover, if a regulator were to initiate

an enforcement action against us, any such action could further consume our resources, require us to change our business practices and

have a material adverse effect on our business, financial condition, results of operations and cash flows.

judgments or settlements in legal proceedings could materially harm our business, financial condition, operating results and cash flows.

may be a party to claims that arise from time to time in the ordinary course of our business, which may include those related to, for

example, our securities offerings, contracts, sub-contracts, protection of confidential information or trade secrets, adversary proceedings

arising from customer bankruptcies, employment of our workforce and immigration requirements or compliance with any of a wide array of

state and federal statutes, rules and regulations that pertain to different aspects of our business.

Additionally, we are and we may be made a party to future claims relating

to the XTI Merger.

On December 6, 2023, Xeriant, Inc.

(“Xeriant”) filed a complaint against Legacy XTI, along with two unnamed

companies and five unnamed persons, in the United States District Court for the Southern District of New York.

On January 31, 2024, Xeriant

filed an amended complaint, which added us as a defendant.

On February 2, 2024, the Court ordered Xeriant to show cause as to why the

amended complaint should not be dismissed without prejudice for lack of subject matter jurisdiction.

On February 29, 2024, Xeriant filed

a second amended complaint, which removed us and one of the unnamed companies as defendants.

The second amended complaint alleges that

Legacy XTI, through multiple breaches and fraudulent actions, has caused substantial harm to Xeriant and has prevented it from obtaining

compensation owed to it under various agreements entered into between Xeriant and Legacy XTI, including but not limited to a joint venture

agreement, a cross-patent license agreement, an operating agreement, and a letter dated May 17, 2022 (the “May 17 letter”)

arising from Xeriant’s introducing Legacy XTI to a Nasdaq listed company as a potential acquirer of Legacy XTI.

In particular, Xeriant

contends that Legacy XTI gained substantial advantages from the intellectual property, expertise, and capital deployed by Xeriant in the

design and development of Legacy XTI’s TriFan 600 airplane yet has excluded Xeriant from the transaction involving the TriFan 600

technology in its merger with us, which has resulted in a breach of the May 17 letter, in addition to the other aforementioned agreements.

Xeriant, in the second amended complaint, asserts the following causes of action:

(1) breach of contract;

(2) intentional fraud;

(3) fraudulent

(4) quantum meruit;

(5) unjust enrichment;

(6) unfair competition/deceptive business practices;

and (7) misappropriation

of confidential information, and seeks damages in excess of $500 million, injunctive relief enjoining us from engaging in any further

misconduct, the imposition of a royalty obligation, and such other relief as deemed appropriate by the court.

On March 13, 2024, Legacy

XTI moved for partial dismissal of the second amended complaint.

On January 14, 2025, the Court denied Legacy XTI’s motion to dismiss

the complaint.

On January 28, 2025, Legacy XTI filed an answer to the second amended complaint.

On January 28, 2025, Legacy XTI filed

an amended answer and counterclaims against Xeriant.

The counterclaims assert that Xeriant (1) breached the joint venture agreement by

failing to pay $4,600,000 to fund development of the TriFan 600 technology, and (2) breached its fiduciary duty to XTI by engaging in

bad faith, coercion, and self-dealing, including by appropriating material information for its own use and concealing from Legacy XTI

the identity of a potential strategic partner.

On March 18, 2025, Xeriant moved for dismissal of Legacy XTI’s counterclaims.

case is in its early stages of discovery, and we are unable to estimate the likelihood or magnitude of a potential adverse judgment.

XTI nevertheless denies the allegations of wrongdoing contained in the second amended complaint and is vigorously defending against the

connection with the litigation matter described in the immediately preceding paragraph, on June 12, 2024, we received a letter from counsel

for Auctus Fund, LLC (“Auctus”), dated April 3, 2024, claiming that, pursuant to the above-referenced May 17 letter by and

between Xeriant and Legacy XTI, as a result of the XTI Merger and Legacy XTI’s entry into a promissory note agreement with Legacy

Inpixon in March 2023, XTI Aerospace and Legacy XTI may have assumed Xeriant’s obligations under that certain Senior Secured Promissory

Note in the principal amount of $6,050,000 issued by Xeriant to Auctus, including the obligation to repay Auctus all principal and accrued

and unpaid interest thereunder, which Auctus claims was $8,435,008.81 as of April 3, 2024.

In July 2024, Legacy XTI responded to such

letter and indicated that it believes that the May 17 letter is invalid and unenforceable on several bases.

It further explained that

even if it were valid and enforceable, Legacy XTI does not believe such letter resulted in, or otherwise triggered, the assumption of

obligations of Xeriant under the Senior Secured Promissory Note or any other obligation on the part of Legacy XTI.

There have been no

further developments on this matter.

We are unable to make a reasonable estimate of a potential loss, if any, on this matter.

extent suits or actions are commenced with respect to this matter, we intend to vigorously defend against any and all claims.

or about August 1, 2024, Chardan Capital Markets LLC (“Chardan”) commenced an arbitration (the “Arbitration”)

before the Financial Industry Regulatory Authority (“FINRA”) against XTI Aerospace, Inc.

and Legacy XTI.

Legacy XTI and Chardan

are parties to an engagement letter agreement (the “Agreement”).

In the Arbitration, Chardan alleges that XTI Aerospace,

is bound by the Agreement even though it did not sign the Agreement, which XTI Aerospace, Inc.

Chardan further alleges that

Legacy XTI and XTI Aerospace, Inc.

breached the Agreement by not making certain payments to Chardan.

Chardan also seeks to recover unspecified

amounts relating to an alleged right of first refusal to perform banking services that the Company supposedly did not honor, including

with respect to the Company’s ATM with Maxim Group LLC and other public offerings of securities.

XTI Aerospace, Inc.

XTI deny that Chardan performed its duties under the Agreement and otherwise that Chardan is owed any sums under the Agreement.

XTI Aerospace,

filed a petition in the U.S.

District Court for the Southern District of New York (the “Court”) seeking to stay the

Arbitration to the extent that it has been asserted against XTI Aerospace, Inc.

On or about January 21, 2025, the Court entered a final

judgment that:

(a) enjoins Chardan from prosecuting the Arbitration against XTI Aerospace, Inc.

and (b) declares that XTI Aerospace,

has no contractual or other duty to arbitrate with Chardan.

Legacy XTI remains as a party to the arbitration and intends to defend

against the Arbitration vigorously.

of the merits of any particular claim, responding to such actions could divert time, resources and management’s attention away

from our business operations, and we may incur significant expenses in defending these lawsuits or other similar lawsuits.

of litigation and other legal proceedings are inherently uncertain, and adverse judgments or settlements in some of these legal disputes

may result in adverse monetary damages, penalties or injunctive relief against us, which could have a material adverse effect on our

financial condition, operating results and cash flows.

Any claims or litigation, even if fully indemnified or insured, could damage our

reputation and make it more difficult to compete effectively or to obtain adequate insurance in the future.

while we maintain insurance for certain potential liabilities, such insurance does not cover all types and amounts of potential liabilities

and is subject to various exclusions as well as deductibles and caps on amounts of coverage.

Even if we believe a claim is covered by

insurance, insurers may dispute our entitlement to coverage for a variety of potential reasons, which may affect the timing and, if the

insurers prevail, the amount of our available insurance coverage for a particular claim.

may also be required to initiate expensive litigation or other proceedings to protect our business interests.

There is a risk that we

will not be successful or otherwise be able to satisfactorily resolve such claims or litigation.

Litigation and other legal claims are

subject to inherent uncertainties.

Those uncertainties include, but are not limited to, litigation costs and attorneys’ fees, unpredictable

judicial or jury decisions and the differing laws and judicial proclivities regarding damage awards among the states in which we operate.

Unexpected outcomes in such legal proceedings, or changes in management’s evaluation or predictions of the likely outcomes of such

proceedings, could have a material adverse effect on our business, financial condition, results of operations and cash flows.

financial status may increase our default and litigation risks and may make us more financially vulnerable in the face of threatened

loss of key personnel may adversely affect our operations.

Our success depends to a significant extent upon the operation, experience,

and continued services of our key personnel.

While our key personnel are employed under employment contracts, there is no assurance we

will be able to retain their services.

The loss of several of our key personnel could have an adverse effect on the Company.

we do not maintain “key person” life insurance on the lives of any of our executive officers and their death or incapacity

would have a material adverse effect on us.

The competition for qualified personnel is intense, and the loss of services of certain key

personnel could adversely affect our business.

There can be no assurance that we will be successful in attracting and retaining the personnel

we require to develop and market the proposed TriFan 600 airplane and conduct our proposed operations.

threats such as cyber-attacks, data protection breaches, computer viruses or malware on our customers ’ networks,

or in cloud-based services provided by or enabled by us, could result in liability for us, damage our reputation or otherwise harm our

our implementation of network security measures, the products and services we sell to customers, and our servers, data centers and the

cloud-based solutions on which our data, and data of our customers, suppliers and business partners are stored, are vulnerable to cyber-attacks,

data protection breaches, computer viruses, malicious acts, and similar disruptions from unauthorized tampering or human error.

our products and services in our customers’ environments may have the possibility of being breached as a result of acts other than

our customers exposing confidential and sensitive information.

For example, some parts of our technology, including but not limited to

the technology used in our Indoor Intelligence products, may be based on open-source technology, which is subject to the risk that the

development team or other third parties may intentionally or unintentionally introduce weaknesses or bugs into the core infrastructure

elements of such technology.

Despite our security controls and measures, any such event could compromise our networks or those of our

customers, and the information stored on our networks or those of our customers could be accessed, publicly disclosed, lost or stolen,

which could subject us to liability to our customers, business partners and others, and could have a material adverse effect on our business,

operating results, and financial condition and may cause damage to our reputation.

Efforts to limit the ability of malicious third parties

to disrupt the operations of the Internet or undermine our own security efforts may be costly to implement and meet with resistance,

and may not be successful.

Breaches of network security in our customers’ networks, or in cloud-based services provided by or enabled

by us, regardless of whether the breach is attributable to a vulnerability in our products or services, could result in liability for

us, damage our reputation or otherwise harm our business.

failures or interruptions in our services or systems could disrupt our business and impair our ability to effectively provide our RTLS

services and products to our customers, which could damage our reputation and adversely affect our revenues and profitability.

success depends in part on our ability to provide reliable remote services, technology integration and managed services to our customers.

We are highly dependent on information technology systems, many of which are operated by third parties (e.g., cloud services) and as

a result we may have limited ability to ensure their availability and operation, or, in the event of system failures, to control the

timing and success of system restorations.

We do not have complete redundancy for all of our systems, and we do not maintain real-time

off-site backups of all of our data.

The operations of our Cloud based applications and analytics are susceptible to damage or interruption

from human error, fire, flood, power loss, telecommunications failure, terrorist attacks and similar events.

We could also experience

failures or interruptions of our systems and services, or other problems in connection with our operations, as a result of:

to or failure of our computer software or hardware or our connections;

in the processing of data by our systems;

viruses or software defects;

or electronic break-ins, sabotage, intentional acts of vandalism and similar events;

capacity demands or changes in systems requirements of our customers;

by our employees or third-party service providers.

Any interruptions in our systems

or services could cause us financial or reputational damage, interrupt or suspend our operations, impair our ability to provide our RTLS

products and services to our customers, subject us to legal action and increased regulatory oversight, or otherwise have a material adverse

effect on our business and results of operations, including, among other things, an adverse effect on our ability to bill our customers

for work performed on our contracts, collect the amounts that have been billed and produce accurate financial statements in a timely manner.

While we maintain disaster recovery plans and insurance with coverage we believe to be adequate, claims may exceed insurance coverage

limits, may not be covered by insurance or insurance may not continue to be available on commercially reasonable terms.

growth of our RTLS business is dependent on increasing sales to our existing customers and obtaining new customers, which, if unsuccessful,

could limit our financial performance.

future success depends, in part, on our ability to increase revenues from existing RTLS customers by identifying additional opportunities

to sell more of our RTLS products and services and on our ability to obtain new RTLS customers.

The rate at which our customers purchase

additional products and services, and our ability to attract new customers, depends on a number of factors, including the perceived need

for indoor mapping products and services, our ability to offer high quality products and services at competitive prices, meeting customers’

needs and expectations, the strength of our competitors, the capabilities of our sales and marketing departments and general economic

If we are not able to continue to increase sales of our RTLS products and services to existing customers or to obtain new

customers in the future, we may not be able to increase our revenues and could suffer a decrease in revenues as well.

competitiveness of our RTLS business depends significantly on our ability to keep pace with the rapid changes in the RTLS industry.

by us to anticipate and meet our customers ’ technological needs could adversely affect our competitiveness and growth

RTLS industry in which we operate is characterized by rapid technological innovation, changing customer needs, evolving industry standards

and frequent introductions of new products, product enhancements, services and distribution methods.

Our success depends on our ability

to develop expertise with these new products, product enhancements, services and distribution methods and to implement solutions that

anticipate and respond to rapid changes in technology, the industry, and customer needs.

The introduction of new products, product enhancements

and distribution methods could decrease demand for current products or render them obsolete.

Sales of products and services can be dependent

on demand for specific product categories, and any change in demand for or supply of such products could have a material adverse effect

on our net sales if we fail to adapt to such changes in technology and market demand in a timely manner.

If we do not successfully innovate

and introduce new technology into our anticipated technology solutions or effectively manage the transitions of our technology to new

RTLS product offerings, our business, financial condition and results of operations could be harmed.

can be no assurance that consumer or commercial demand for our future products will meet, or even approach, our expectations.

our pricing and marketing strategies may not be successful.

Lack of customer demand, a change in marketing strategy and changes to our

pricing models could dramatically alter our financial results.

Unless we are able to release location based products that meet a significant

market demand, we will not be able to improve our financial condition or the results of our future operations.

RTLS business currently has a limited number of customers, the importance of which may vary dramatically from year to year, and a loss

of one or more of these key customers may adversely affect our operating results.

RTLS business currently has a limited number of customers.

The loss of a significant amount of business from one of our major RTLS customers

would materially and adversely affect our results of operations until such time, if ever, as we are able to replace the lost business.

Significant customers or projects in any one period may not continue to be significant customers or projects in other periods.

extent that we are dependent on any single customer, we are subject to the risks faced by that customer to the extent that such risks

impede the customer’s ability to stay in business and make timely payments to us.

we cannot collect our receivables or if payment is delayed, our business may be adversely affected by our inability to generate cash

flow, provide working capital or continue our business operations.

RTLS business depends on our ability to successfully obtain payment from our customers of the amounts they owe us for products received

from us and any work performed by us.

The timely collection of our receivables allows us to generate cash flow, provide working capital

and continue our business operations.

Our customers may fail to pay or delay the payment of invoices for a number of reasons, including

financial difficulties resulting from macroeconomic conditions, lack of an approved budget as a result of administrative delays, or participating

in bankruptcy proceedings.

An extended delay or default in payment relating to a significant account will have a material and adverse

effect on the aging schedule and turnover days of our accounts receivable.

If we are unable to timely collect our receivables from our

customers for any reason, our business and financial condition could be adversely affected.

may be subject to product liability due to manufacturing or design defects for which product liability insurance may not be sufficient.

may be a party to product liability claims that arises from time to time in the ordinary course of our business, which may include those

related to, for example, the development or marketing of the products, or adverse events known or reported to be associated with, or

manufacturing defects in, the products sold by us or through third parties.

Product liability claims may be time-consuming, cost-intensive,

and may result in awarding of substantial damages to the plaintiff or demands for a product recall.

Certain of our contract obligations

with vendors, suppliers, or manufacturers require us to provide warranties against such claims.

We cannot assure you that protections

are sufficient against any product liability claim filed by or against us.

In a few countries, strict liability is imposed even if an

injury to the end user of a defective product was not caused by an act of the supplier, manufacturer, or seller.

A successful claim or

claims brought against us in an amount exceeding available insurance coverage or protections under our contractual relationships could

subject us to significant liabilities and could have a material adverse effect on our business, financial condition, results of operations,

and growth prospects.

errors, or vulnerabilities in our products or services or the failure of such products or services to prevent a security breach, could

harm our reputation and adversely affect our results of operations.

our location based security products and services are complex, they have contained and may contain design or manufacturing defects or

errors that are not detected until after their commercial release and deployment by customers.

Defects may cause such products to be

vulnerable to advanced persistent threats (“APTs”) or security attacks, cause them to fail to help secure information or

temporarily interrupt customers’ networking traffic.

Because the techniques used by hackers to access sensitive information change

frequently and generally are not recognized until launched against a target, we may be unable to anticipate these techniques and provide

a solution in time to protect customers’ data.

In addition, defects or errors in our subscription updates or products could result

in a failure to effectively update customers’ hardware products and thereby leave customers vulnerable to APTs or security attacks.

defects, errors or vulnerabilities in our products could result in:

● expenditure

of significant financial and product development resources in efforts to analyze, correct,

eliminate, or work-around errors or defects or to address and eliminate vulnerabilities;

or lost revenue;

of existing or potential customers or partners;

warranty claims compared with historical experience, or increased cost of servicing warranty

claims, either of which would adversely affect gross margins;

● litigation,

regulatory inquiries, or investigations that may be costly and harm our reputation.

current research and development efforts may not produce successful products or features that result in significant revenue, cost savings

or other benefits in the near future.

If we do not realize significant revenue from our research and development efforts, our business

and operating results could be adversely affected.

products and related enhancements in our field is expensive.

Investments in research and development may not result in significant design

improvements, marketable products or features or may result in products that are more expensive than anticipated.

We may not achieve

the cost savings or the anticipated performance improvements expected, and we may take longer to generate revenue from products in development,

or generate less revenue than expected.

future plans include significant investments in research and development and related product opportunities.

Our management believes that

we must continue to dedicate a significant amount of resources to research and development efforts to maintain a competitive position.

However, we may not receive significant revenue from these investments in the near future, or these investments may not yield the expected

benefits, either of which could adversely affect our business and operating results.

the general level of advanced attacks declines, or is perceived by current or potential customers to have declined, this could harm our

location based security and detection operating segment, and our financial condition, operating results and growth prospects.

location based security and detection-operating segment is substantially dependent upon enterprises and governments recognizing that

APTs and other security attacks are pervasive and are not effectively prevented by legacy security solutions.

High visibility attacks

on prominent enterprises and governments have increased market awareness of the problem of APTs and security attacks and help to provide

an impetus for enterprises and governments to devote resources to protecting against attacks, such as testing our platform, purchasing

it, and broadly deploying it within their organizations.

If APTs and other security attacks were to decline, or enterprises or governments

perceived that the general level of attacks has declined, our ability to attract new customers and expand our offerings for existing

customers could be materially and adversely affected, which would, in turn, have a material adverse effect on our financial condition,

results of operations and growth prospects.

our location-based security and detection products do not effectively interoperate with our customers ’ IT infrastructure,

installations could be delayed or cancelled, which would harm our financial condition, operating results and growth prospects.

RTLS products must effectively interoperate with our customers’ existing or future IT infrastructure, which often has different

specifications, utilizes multiple protocol standards, deploys products from multiple vendors, and contains multiple generations of products

that have been added over time.

As a result, when problems occur in a company’s infrastructure, it may be difficult to identify

the sources of these problems.

If we find errors in the existing software or defects in the hardware used in our customers’ infrastructure,

we may have to modify our customers’ software or hardware so that our products will interoperate with their infrastructure.

such cases, our products may be unable to provide significant performance improvements for applications deployed in the infrastructure

of our customers.

These issues could cause longer installation times for our products and could cause order cancellations, either of

which would adversely affect our business, results of operations and financial condition.

In addition, other customers may require products

to comply with certain security or other certifications and standards.

If our products are late in achieving or fail to achieve compliance

with these certifications and standards, or competitors sooner achieve compliance with these certifications and standards, we may be

disqualified from selling our products to such customers, or may otherwise be at a competitive disadvantage, either of which would harm

our business, results of operations, and financial condition.

business and operations expose us to numerous legal and regulatory requirements and any violation of these requirements could harm our

Furthermore, our international business exposes us to geo-political and economic factors, legal and regulatory requirements,

public health and other risks associated with doing business in foreign countries.

are subject to numerous federal, state and foreign legal requirements on matters as diverse as data privacy and protection, employment

and labor relations, immigration, taxation, anti-corruption, import/export controls, trade restrictions, internal control and disclosure

control obligations, securities regulation and anti-competition.

Compliance with diverse and changing legal requirements is costly, time-consuming

and requires significant resources.

Violations of one or more of these diverse legal requirements in the conduct of our business could

result in significant fines and other damages, criminal sanctions against us or our officers, prohibitions on doing business and damage

to our reputation.

Violations of these regulations or contractual obligations related to regulatory compliance in connection with the

performance of customer contracts could also result in liability for significant monetary damages, fines and/or criminal prosecution,

unfavorable publicity and other reputational damage, restrictions on our ability to compete for certain work and allegations by our customers

that we have not performed our contractual obligations.

we provide our RTLS products and services to customers worldwide and our international business exposes us to risks that differ from

and potentially may be greater than those associated with our domestic business.

Our international business is sensitive to changes in

the priorities and budgets of international customers and geo-political uncertainties, which may be driven by changes in threat environments

and potentially volatile worldwide economic conditions, various regional and local economic and political factors, risks and uncertainties,

as well as U.S.

foreign policy.

international operations (or those of our business partners) are also subject to local government laws, regulations and procurement policies

and practices, which may differ from U.S.

government regulations, including regulations relating to import-export control, investments,

foreign exchange controls and repatriation of earnings, as well as to varying currency, geo-political and economic risks.

Our international

contracts may include industrial cooperation agreements requiring specific in-country purchases, manufacturing agreements or financial

support obligations, known as offset obligations, and provide for penalties if we fail to meet such requirements.

Our international contracts

may also be subject to termination at the customer’s convenience or for default based on performance, and may be subject to funding

We also are exposed to risks associated with using foreign representatives and consultants for international sales and operations

and teaming with international subcontractors, partners and suppliers in connection with international programs.

As a result of these

factors, we could experience award and funding delays on international programs and could incur losses on such programs, which could

negatively affect our results of operations and financial condition.

and our business partners are also subject to a number of other risks including:

absence in some jurisdictions of effective laws to protect our intellectual property rights;

and possibly overlapping and conflicting tax laws;

● restrictions

on movement of cash;

burdens of complying with a variety of national and local laws;

fluctuations;

payment cycles;

● restrictions

on the import and export of certain technologies;

controls or restrictions on exchange of foreign currencies;

disasters such as earthquakes, tsunamis, flooding, typhoons and volcanic eruptions that disrupt

manufacturing or other operations;

health issues (for example, an outbreak of a contagious disease such as 2019-Novel Coronavirus

(2019-nCoV), avian influenza, measles or Ebola);

● disruptions

of service from utilities, nuclear power plant accidents;

economic or political factors.

of the above risks, should they occur, could result in an increase in the cost of components, production delays, general business interruptions,

delays from difficulties in obtaining export licenses for certain technology, tariffs and other barriers and restrictions, longer payment

cycles, increased taxes, restrictions on the repatriation of funds and the burdens of complying with a variety of foreign laws, any of

which could ultimately have a material adverse effect on our business.

international operations are subject to special U.S.

government laws and regulations, such as the Foreign Corrupt Practices Act, and

regulations and procurement policies and practices, including import-export control regulations, which may expose us to liability or

impair our ability to compete in international markets.

international operations are subject to the U.S.

Foreign Corrupt Practices Act (“FCPA”), and other laws that prohibit improper

payments or offers of payments to foreign governments and their officials and political parties by U.S.

and other business entities for

the purpose of obtaining or retaining business.

We have operations and deal with governmental customers in countries known to experience

corruption, including certain countries in the Middle East and in the future, the Far East.

Our activities in these countries create

the risk of unauthorized payments or offers of payments by one of our employees, consultants or contractors that could be in violation

of various laws including the FCPA, even though these parties are not always subject to our control.

We are also subject to import-export

control regulations restricting the use and dissemination of information classified for national security purposes and the export of

certain products, services, and technical data, including requirements regarding any applicable licensing of our employees involved in

conditions in the global capital markets and the economy generally may materially adversely affect our business and results of operations,

and we do not expect these conditions to improve in the near future.

results of operations are materially affected by conditions in the global capital markets and the economy generally, both in the U.S.

and elsewhere around the world.

Weak economic conditions generally, sustained uncertainty about global economic conditions, or a prolonged

or further tightening of credit markets could cause our customers and potential customers to postpone or reduce spending on technology

products or services or put downward pressure on prices, which could have an adverse effect on our business, results of operations or

Concerns over inflation, energy costs, geopolitical issues and the availability of credit in the U.S.

have contributed to

increased volatility and diminished expectations for the economy and the markets going forward.

These factors, combined with volatile

oil prices and wavering business and consumer confidence, have precipitated an economic slowdown and uncertain global outlook.

and international equity markets have been experiencing heightened volatility and turmoil.

These events and the continuing market upheavals

may have an adverse effect on our business.

In the event of extreme prolonged market events, such as the global economic recovery, we

could incur significant losses.

The existence of inflation

in certain economies has resulted in, and may continue to result in, rising interest rates and capital costs, supply shortages, increased

costs of labor, components, manufacturing and shipping, as well as weakening exchange rates and other similar effects.

As a result, we

have experienced and may continue to experience cost increases.

Although we take measures to mitigate the effects of inflation and rising

interest rates, if these measures are not effective, our business, financial condition, results of operations and liquidity could be materially

adversely affected.

Even if such measures are effective, there could be a difference between the timing of when those beneficial actions

impact our results or operations and when the cost of inflation is incurred.

and foreign government regulation and enforcement of data practices and data tracking technologies is expansive, broadly defined and

rapidly evolving.

Such regulation could result in additional costs and liabilities to us, directly restrict portions of our business

or indirectly affect our business by constraining our customers’ use of our technology and services or limiting the growth of our

state, municipal and/or foreign governments and agencies have adopted and could in the future adopt, modify, apply or enforce laws, policies,

and regulations covering user privacy, data security, technologies that are used to collect, store and/or process data, and/or the collection,

use, processing, transfer, storage and/or disclosure of data associated with individuals.

The categories of data regulated under these

laws vary widely, are often broadly defined, and subject to new applications or interpretation by regulators.

The uncertainty and inconsistency

among these laws, coupled with a lack of guidance as to how these laws will be applied to current and emerging indoor positioning analytics

technologies, creates a risk that regulators, lawmakers or other third parties, such as potential plaintiffs, may assert claims, pursue

investigations or audits, or engage in civil or criminal enforcement.

These actions could limit the market for our services and technologies

or impose burdensome requirements on our services and/or customers’ use of our services, thereby rendering our business unprofitable.

the U.S., these privacy rules and regulations include those promulgated under the authority of the Federal Trade Commission, the Electronic

Communications Privacy Act, the Computer Fraud and Abuse Act, the California Consumer Privacy Act of 2018 (the “CCPA”) and

other state and federal laws relating to privacy and data security.

By way of example, the CCPA requires covered businesses to provide

new disclosures to California residents, provide them new ways to opt-out of certain disclosures of personal information, and allows

for a cause of action for data breaches.

It includes a framework that includes potential statutory damages and private rights of action.

There is some uncertainty as to how the CCPA, and similar privacy laws emerging in other states, could impact our business as it depends

on how such laws will be interpreted.

As we expand our operations, compliance with privacy laws may increase our operating costs.

features of our services may trigger the data protection requirements of certain foreign jurisdictions, such as the EU General Data Protection

Regulation (the “GDPR”), and the EU ePrivacy Directive.

In addition, our services may be subject to regulation under current

or future laws or regulations.

For instance, as the EU ePrivacy Directive transitions in its entirety to the ePrivacy Regulation, it

will bring an updated set of rules relevant to many aspects of our business.

If our treatment of data, privacy practices or data security

measures fail to comply with these current or future laws and regulations in any of the jurisdictions in which we collect and/or process

information, we may be subject to litigation, regulatory investigations, civil or criminal enforcement, financial penalties, audits or

other liabilities in such jurisdictions, or our customers may terminate their relationships with us.

addition, data protection laws, such as the GDPR, foreign court judgments or regulatory actions could affect our ability to transfer,

process and/or receive transnational data that is critical to our operations, including data relating to users, customers, or partners

outside the United States.

For instance, the GDPR restricts transfers of personal data outside of the European Economic Area, including

to the United States, subject to certain requirements.

Additionally, certain countries have passed or are considering passing laws requiring

local data residency.

The costs of compliance with, and other burdens imposed by, privacy laws, regulations and standards may limit the

use and adoption of our services, reduce overall demand for our services, make it more difficult to meet expectations from or commitments

to customers, lead to significant fines, penalties or liabilities for noncompliance, impact our reputation, or slow the pace at which

we close sales transactions, any of which could harm our business.

the uncertain and shifting regulatory environment and trust climate may cause concerns regarding data privacy and may cause our customers

or our customers’ customers to resist providing the data necessary to allow our customers to use our services effectively.

the perception that the privacy of personal information is not satisfactorily protected or does not meet regulatory requirements could

inhibit sales of our products or services and could limit adoption of our cloud-based solutions.

of our products could harm our reputation and result in litigation or enforcement action or reduced demand for our services.

products, particularly our location-based security and detection products, may be misused by customers or third parties that obtain access

to such products.

For example, location information combined with other information about the same users in the hands of criminals could

result in misuse of the data and privacy law violations and result in negative press coverage and negatively affect our reputation.

our RTLS customers utilize our services and technologies to track connected devices anonymously and we must rely on our customers to

implement and administer notice and choice mechanisms required under applicable laws.

If we or our customers fail to abide by these laws,

it could result in litigation or regulatory or enforcement action against our customers or against us directly.

actual or perceived failure by us to comply with our privacy policy or legal or regulatory requirements in one or multiple jurisdictions

could result in proceedings, actions or penalties against us.

failure or perceived failure by us to comply with federal, state or foreign laws or regulations, industry standards, contractual obligations

or other legal obligations, or any actual or suspected security incident, whether or not resulting in unauthorized access to, or acquisition,

release or transfer of personal data or other data, may result in governmental enforcement actions and prosecutions, private litigation,

fines and penalties or adverse publicity and could cause our customers to lose trust in us, which could have an adverse effect on our

reputation and business.

Any inability to adequately address privacy and security concerns, even if unfounded, or comply with applicable

laws, regulations, policies, industry standards, contractual obligations or other legal obligations could result in additional cost and

liability to us, damage our reputation, inhibit sales and adversely affect our business.

A regional or global health pandemic, such

as the COVID-19 pandemic, could severely affect our business, results of operations and financial condition.

A regional or global health

pandemic, depending upon its duration and severity, could have a material adverse effect on our business.

For example, the COVID-19 pandemic

has had numerous effects on the global economy.

Governmental authorities around the world implemented measures to reduce the spread of

COVID-19 and these measures, including shutdowns and “shelter-in-place” orders suggested or mandated by governmental authorities

or otherwise elected by companies as a preventive measure, adversely affected workforces, customers, consumer sentiment, economies and

financial markets, and, along with decreased consumer spending, led to an economic downturn.

In response to the COVID-19 pandemic, we

modified our business practices (including recommending that all non-essential personnel work remotely).

The extent to which a regional

or global health pandemic, such as the COVID-19 pandemic, would impact our business, operations, financial condition and results of operations

is uncertain and hard to predict and will depend on numerous evolving factors that we may not be able to control or predict including:

the impact on our operations, including our continued ability to execute on business continuity plans for the maintenance of our critical internet infrastructure, if significant portions of our workforce are unable to work effectively, including due to illness, quarantines, social distancing, government actions or other restrictions in connection with a regional or global health pandemic

any disruption of our supply chain and the impact of such disruptions on our suppliers or our ability to deliver products and services to our customers (for example, as a result of the COVID-19 outbreak, our ability to source internal connection cables for certain of our sensors was temporarily delayed, which required us to source these components from other vendors at a higher price that resulted in an increase in our costs to produce our products);

any negative impact on the demand for our services and products resulting from the economic disruption caused by a pandemic and responses thereto such as remote and hybrid work styles that can negatively impact our indoor intelligence solutions.

Related to Our Securities

failure to maintain compliance with the continued listing requirements of the Nasdaq Capital Market may result in our common stock being

delisted from the Nasdaq Capital Market, which could negatively impact the price of our common stock, liquidity, our ability to access

the capital markets and our stockholders’ ability to sell their shares.

common stock is currently listed on the Nasdaq Capital Market (“Nasdaq”) under the symbol “XTIA.” The listing

standards of Nasdaq provide that a company, in order to qualify for continued listing, must maintain a minimum stock price of $1.00 and

satisfy standards relative to minimum stockholders’ equity, minimum market value of publicly held shares and various additional

requirements.

While our common stock is currently listed on Nasdaq, we can give no assurance that we will be able to maintain compliance

with the continued listing requirements for Nasdaq.

If we fail to maintain compliance with any such continued listing requirement, there

can also be no assurance that we will be able to regain compliance with any such continued listing requirement in the future or that

our common stock will not be delisted in the future.

If Nasdaq delists our securities from trading on its exchange for failure to meet

the listing standards, we and our stockholders could face significant negative consequences including:

availability of market quotations for our securities;

determination that the common stock is a “penny stock” which would require brokers

trading in the common stock to adhere to more stringent rules, possibly resulting in a reduced

level of trading activity in the secondary trading market for shares of common stock;

limited amount of analyst coverage, if any;

decreased ability to issue additional securities or obtain additional financing in the future.

from Nasdaq could also result in other negative consequences, including the potential loss of confidence by suppliers, customers and

employees, the loss of institutional investor interest and fewer business development opportunities.

our shares of common stock lose their status on Nasdaq, we believe that they would likely be eligible to be quoted on the inter-dealer

electronic quotation and trading system operated by OTC Markets Group Inc., commonly referred to as the Pink Open Market and we may also

qualify to be traded on their OTCQB market (The Venture Market).

These markets are generally not considered to be as efficient as, and

not as broad as, Nasdaq.

Selling our shares on these markets could be more difficult because smaller quantities of shares would likely

be bought and sold, and transactions could be delayed.

In addition, in the event our shares are delisted, broker-dealers have certain

regulatory burdens imposed upon them, which may discourage broker-dealers from effecting transactions in our common stock or even holding

our common stock, further limiting the liquidity of our common stock.

These factors could result in lower prices and larger spreads in

the bid and ask prices for our common stock.

stock price may be volatile, and your investment may suffer a decline in value as a result of the volatility of our stock.

market price of our common stock is likely to be highly volatile and could fluctuate widely in price in response to various factors,

many of which are beyond our control, including the following:

ability to execute our business plan and complete prospective strategic transactions;

in our industry;

● competitive

pricing pressures;

ability to obtain working capital financing;

or departures of key personnel;

“public float” in the hands of a small number of persons whose sales or lack

of sales could result in positive or negative pricing pressure on the market price for our

common stock;

of our common stock;

Although we have made certain strategic investments in the past

and may from time to time hold significant cash or investment securities, including following strategic transactions, we do not currently

believe that we are an “investment company,” as such term is defined in either of those sections of the 1940 Act.

We intend to conduct our operations

so that we will not be deemed an investment company.

However, if we were to be deemed an investment company, restrictions imposed by the

1940 Act, including limitations on our capital structure and our ability to transact with affiliates, could make it impractical for us

to continue our business as contemplated and could have a material adverse effect on our business, financial condition and results of

We may be subject to claims that we or our

employees have wrongfully used or disclosed alleged trade secrets of their former employers.

We may be subject to claims

that the Company or our employees, including employees who joined us in connection with acquisitions, may have inadvertently or otherwise

used or disclosed trade secrets or other proprietary information of former employers or competitors.

Litigation may be necessary to defend

against these claims.

We may be subject to unexpected claims of infringement of third-party intellectual property rights, either for intellectual

property rights of which we are not aware, or for which we believe are invalid or narrower in scope than the accusing party.

are successful in defending against these claims, litigation could result in substantial costs and be a distraction to management.

we fail in defending such claims, in addition to paying money claims, we may lose valuable intellectual property rights or personnel or

be enjoined from selling certain products or providing certain services.

A loss of key research personnel or their work product could

hamper or prevent our ability to commercialize certain products, which could severely harm our business.

We have been and may in the future be subject

to government or regulatory investigations or inquiries and may be required to comply with requests for information by regulators, and

any resulting enforcement action could have a materially adverse effect on us.

As a publicly trading reporting

company with operations in the United States and internationally, we interact regularly with regulatory and self-regulatory agencies in

the United States or other jurisdictions in which we operate, including the SEC and the Nasdaq Stock Market.

In addition, our operations

may be subject to regulation by other governmental agencies, including agencies involved in aviation, UAS, communications, procurement

and trade compliance.

We have been and may in the

future be the subject of SEC and other regulatory investigations and may be required to comply with informal or formal orders or other

requests for information or documentation from such government authorities and regulators regarding our compliance with national, regional

and local laws and regulations, including the rules and regulations under the Securities Act and the Exchange Act.

Such laws and regulations

and their interpretation and applications may also change from time to time.

Responding to requests for

information from regulators in connection with any such investigations or inquiries could have a materially adverse effect on our business

through, among other things, significantly increased legal fees and the time and attention required of the Company’s management

and employees to be diverted from our normal business operations and growth plans.

Moreover, if a regulator were to initiate an enforcement

action against us, any such action could further consume our resources, require us to change our business practices and have a material

adverse effect on our business, financial condition, results of operations and cash flows.

Adverse judgments or settlements in legal

proceedings could materially harm our business, financial condition, operating results and cash flows.

We may be a party to claims

that arise from time to time in the ordinary course of our business, including claims related to our products, securities offerings, contracts

and subcontracts, protection of confidential information or trade secrets, adversary proceedings arising from customer bankruptcies, employment

matters, immigration requirements, and compliance with various state and federal statutes, rules and regulations applicable to our business.

For example, in February 2026,

the State of Texas filed a petition in the District Court of Collin County, Texas, against Anzu Robotics, LLC (“Anzu”) alleging

that Anzu violated the Texas Deceptive Trade Practices-Consumer Protection Act (the “DTPA”) in connection with the marketing

and sale of its drone products.

The State contends, among other things, that Anzu misrepresented certain characteristics, origins, and

security features of its products and failed to disclose certain alleged material facts relating to the products’ development and

components and Anzu’s alleged business relationship with DJI.

The State seeks temporary and permanent injunctive relief, civil penalties

of up to $10,000 per violation of the DTPA and up to an additional $250,000 if the conduct was calculated to deprive a consumer age 65

or older of money or property, and attorneys’ fees and costs.

The Company is engaged in discussions with the Texas Attorney

General to attempt to resolve the matter cooperatively.

In addition, we are currently

involved in litigation relating to the XTI Merger.

In December 2023, Xeriant, Inc.

filed a lawsuit in the United States District Court

for the Southern District of New York against Legacy XTI and others, asserting claims including breach of contract, fraud, unjust enrichment

and misappropriation of confidential information relating to certain prior agreements and the TriFan 600 program.

The complaint has since

been amended, and the matter is currently proceeding under a Third Amended Complaint filed in December 2025.

Xeriant seeks monetary damages,

injunctive and other equitable relief.

Legacy XTI has asserted counterclaims and continues to vigorously defend against the claims.

litigation is ongoing and in active discovery.

In addition, in May 2025,

Auctus Fund, LLC filed a lawsuit against Legacy XTI in Colorado state court alleging breach of contract relating to an alleged obligation

to repay indebtedness originally issued by Xeriant.

The plaintiff seeks repayment of principal and accrued interest in an amount approaching

Legacy XTI disputes the claims and is defending the action.

The outcome of the foregoing

matters cannot presently be predicted, and an adverse determination in any of these matters could have a material impact on our business,

financial condition and results of operations.

Regardless of the merits of any particular claim, responding to litigation may divert management’s

time and attention, result in significant legal expenses, and expose us to monetary damages, penalties or injunctive relief.

and other legal proceedings are inherently uncertain, and adverse judgments or settlements could materially adversely affect our business,

financial condition, results of operations and cash flows.

Even if a claim is fully indemnified or insured, such litigation could damage

our reputation and make it more difficult to compete effectively or obtain adequate insurance in the future.

Furthermore, while we maintain

insurance for certain potential liabilities, such insurance does not cover all types and amounts of potential liabilities and is subject

to exclusions, deductibles and caps.

Insurers may dispute coverage, which may affect the timing or availability of insurance proceeds.

Unexpected outcomes in legal proceedings, or changes in management’s evaluation of the likely outcomes, could have a material adverse

effect on our business, financial condition, results of operations and cash flows.

We rely on key information technology systems

and third-party cloud service providers, and any disruption, failure, or degradation of these systems could adversely affect our operations

and financial results.

Our business depends on the

reliable operation of our information technology systems and networks, including systems used for financial reporting, inventory management,

procurement, order processing, customer relationship management, communications, and other core business functions.

In addition, portions

of our operations rely on third-party service providers, including cloud-based hosting, data storage, enterprise software platforms, communications

providers, and other outsourced technology services.

Any failure, interruption,

degradation, or other disruption of our internal systems or those of our third-party service providers—whether due to power outages,

telecommunications failures, software bugs, human error, natural disasters, system capacity constraints, acts of terrorism, geopolitical

events, vendor outages, or other events beyond our control—could impair our ability to operate effectively.

Such disruptions could,

among other things, delay order fulfillment, disrupt inventory tracking, impair our ability to provide repair, maintenance or support

services, prevent access to critical business records, delay billing and collections, and adversely affect our ability to produce timely

and accurate financial statements.

We may not be able to promptly

restore our systems or the systems of our third-party service providers in the event of a disruption, and we may not have adequate redundancy,

disaster recovery, or business continuity capabilities for all critical systems.

In addition, third-party providers may experience operational

or financial difficulties, may change their service offerings or pricing, may discontinue services, or may impose contractual limitations

on remedies or liability.

Any of these outcomes could increase our operating costs, harm customer relationships, and adversely affect

our business, financial condition and results of operations.

Digital threats such as cyber-attacks, data

protection breaches, computer viruses or malware affecting our systems, our customers’ systems or cloud-based services could result

in liability for us, damage our reputation or otherwise harm our business.

Despite our implementation

of network security measures, the products and services we sell to customers, and our servers, data centers and cloud-based solutions

on which our data and the data of our customers, suppliers and business partners are stored, are vulnerable to cyber-attacks, data protection

breaches, computer viruses, ransomware, malicious acts and similar disruptions resulting from unauthorized access, human error or other

Our UAS distribution and support

operations involve the sale and servicing of drones, cameras, sensors and related software that may collect, transmit, store or process

sensitive operational, geospatial or customer data.

In addition, our aircraft development activities may involve proprietary engineering

data and regulated technical information.

Any compromise of such data, whether through attacks on our systems, third-party service providers,

suppliers or customers, could result in regulatory scrutiny, contractual liability, litigation, reputational harm and loss of customer

Some components of our technology

and systems, including third-party software and open-source software, may contain vulnerabilities that are difficult to detect and correct.

Although we seek to maintain appropriate security controls, no system is completely secure.

Any breach of our systems, or of cloud-based

services provided by or enabled by us, regardless of whether the breach is attributable to a vulnerability in our products or services,

could subject us to liability to customers or other third parties, result in significant remediation costs, disrupt operations, and have

a material adverse effect on our business, financial condition and results of operations.

Efforts to prevent or mitigate

cyber incidents may be costly and may not be successful.

In addition, evolving data protection and cybersecurity laws and regulatory requirements

may increase compliance costs and potential exposure in the event of a security incident.

We may be unable to maintain effective internal

control over financial reporting and disclosure controls and procedures, which could adversely affect our ability to accurately report

our financial results and maintain investor confidence.

We are required to maintain

effective disclosure controls and procedures and internal control over financial reporting (“ICFR”) to provide reasonable

assurance that information we are required to disclose in reports filed with the SEC is recorded, processed, summarized and reported within

the time periods specified by SEC rules and forms.

Our ability to maintain effective

controls is subject to a number of risks and challenges, including, among other things, the complexity of our corporate structure, the

integration of acquired businesses, the transition of financial reporting systems and processes, changes in accounting standards, the

need to implement and maintain controls over new or evolving business operations, and the continued hiring and retention of personnel

with appropriate accounting, finance and compliance expertise.

In particular, we have completed

significant strategic transactions in recent periods, including the XTI Merger and the Drone Nerds acquisition, and we expect to continue

integrating financial reporting processes, accounting policies, information systems and internal controls across these businesses.

integration activities may increase the risk of control deficiencies, including the risk that we may not be able to timely implement or

maintain consistent accounting policies, procedures and systems, or that we may not be able to effectively remediate any deficiencies

that are identified.

If we identify material weaknesses

or significant deficiencies in our internal controls, we may not be able to accurately report our financial results, prevent fraud, or

timely file our periodic reports with the SEC.

In addition, any failure to maintain effective disclosure controls and procedures or ICFR

could result in errors in our financial statements, restatements of our financial results, delayed SEC filings, or the loss of investor

confidence in our reported financial information.

Any of these outcomes could adversely affect our stock price, our ability to access

the capital markets, our relationships with lenders and business partners, and our business, financial condition and results of operations.

Our business and operations expose us to

numerous legal and regulatory requirements, including privacy, cybersecurity, surveillance, anti-corruption, trade compliance, import/export

and other laws, and violations of these requirements could harm our business.

In addition, our operations and supply chain expose us to

geopolitical, economic and other risks associated with international business.

We are subject to numerous

federal, state and foreign legal and regulatory requirements, including laws relating to aviation and UAS operations, data privacy

and protection, employment and labor relations, immigration, taxation, anti-corruption, import and export controls, trade restrictions,

sanctions, internal control and disclosure obligations, securities regulation and competition laws.

Compliance with diverse and evolving

legal requirements is costly, time-consuming and requires significant management attention and resources.

Violations of these requirements

in the conduct of our business could result in significant fines, penalties, civil damages, criminal sanctions, restrictions on our operations,

loss of licenses or certifications, reputational harm or other adverse consequences.

Violations of regulatory requirements or contractual

compliance obligations in connection with customer contracts, particularly public sector contracts, could also result in monetary damages,

termination rights, suspension or debarment from government programs and other adverse outcomes.

Although our principal operations

are in the United States, our supply chain and certain customer relationships expose us to international risks.

Our business may be affected

by changes in geopolitical conditions, international trade policies, tariffs, sanctions, export controls, foreign exchange controls and

other regulatory developments.

Certain of the products we distribute are sourced from international suppliers and may be subject to evolving

government restrictions or security reviews.

Changes in such laws or policies could disrupt product availability, increase costs

or limit our ability to sell certain products.

We and our business partners

may also be subject to risks including:

restrictions on the import or export of certain technologies or products;

changing or conflicting international trade regulations;

currency fluctuations;

longer payment cycles or restrictions on repatriation of funds;

political instability or regional conflicts;

public health crises;

natural disasters or infrastructure disruptions;

general economic or political volatility.

Any of the foregoing risks

could result in supply chain disruptions, increased costs, production delays, reduced demand, regulatory investigations or other business

interruptions, which could have a material adverse effect on our business, financial condition and results of operations.

Domestic and foreign regulation and enforcement

of data privacy, cybersecurity, surveillance and data tracking technologies is expansive, broadly defined and rapidly evolving, and compliance

with such regulation could result in additional costs and liabilities, restrict portions of our business, constrain our customers’

use of our products and services or limit the growth of our markets.

Any actual or perceived failure by us to comply with data privacy

regulations could result in proceedings, investigations, enforcement actions or penalties against us.

Federal, state, municipal

and foreign governments and agencies have adopted, and may in the future adopt, modify, interpret or enforce laws, regulations and policies

governing privacy, data security, cybersecurity, geolocation data, biometric data, surveillance technologies, and the collection, storage,

use, processing, transfer and disclosure of data associated with individuals.

The scope of data regulated under these laws is often broadly

defined, continues to evolve, and is subject to new applications and interpretations by regulators.

As a result, we may be subject to

investigations, audits, enforcement actions, litigation, fines, penalties or other liabilities if our data practices, cybersecurity measures,

contractual terms, or the products and services we provide are alleged to violate applicable laws or regulatory expectations.

Our UAS business distributes

and supports drones, cameras, sensors and related software, and provides training, operational support and repair services.

These products

and services are frequently used by customers in ways that involve the collection, transmission, storage or analysis of data, including

video, imagery, mapping data, telemetry and other operational information.

Even where we do not control how customers deploy or use these

technologies, we may face reputational, commercial or legal risk based on the end-use of the products we sell or service, including if

our customers’ use of drones or related technologies is alleged to violate privacy laws, surveillance restrictions, data security

requirements, or civil liberties laws.

In addition, certain of our customers, including governmental and public-sector customers, may

impose heightened contractual requirements relating to data security, cybersecurity, compliance certifications, or restrictions on the

use of foreign-manufactured products, and failure to satisfy these requirements could limit our ability to compete for or retain business.

In the United States, privacy

and data security regulation includes laws and regulations enforced by the Federal Trade Commission and state attorneys general, as well

as a growing number of state privacy laws, including the California Consumer Privacy Act, as amended by the California Privacy Rights

Act (“CCPA/CPRA”), and similar laws in other states.

In addition, international laws and regulations, including the European

Union General Data Protection Regulation (“GDPR”), may apply to certain of our activities depending on the nature and location

of our customers, suppliers and business partners.

These laws may impose obligations relating to disclosures, consent, data retention,

data subject rights, cybersecurity safeguards, incident response, and restrictions on cross-border data transfers.

Compliance with these

requirements may require us to implement additional technical, administrative and operational measures, modify our product and service

offerings, or incur increased legal, compliance and cybersecurity costs.

Furthermore, any actual or perceived failure by us to comply

with applicable data privacy laws or regulations could result in governmental investigations, enforcement actions, administrative proceedings,

civil litigation, fines, penalties, consent decrees, or other sanctions.

The regulatory environment

relating to privacy, cybersecurity, surveillance technologies, and unmanned aircraft systems is rapidly evolving and remains uncertain.

If new laws, regulations, or enforcement actions restrict the use of drones or related technologies in certain jurisdictions, or if customers

become more reluctant to deploy such technologies due to privacy or security concerns, demand for our products and services could be reduced.

Any of the foregoing could materially adversely affect our business, reputation, financial condition, results of operations and cash flows.

Misuse of our products could harm our reputation

and result in litigation, regulatory enforcement actions or reduced demand for our products and services.

Our products and services,

including drones, cameras, sensors, related software, training, and operational support services, may be misused by customers or third

For example, drones and related imaging technologies may be used in ways that violate privacy, surveillance, trespass, data protection,

export control, or other laws, or in ways that are perceived as unethical or harmful, even where such use is outside of our control and

not authorized by us.

In addition, the data generated by drones, cameras, sensors, and other connected technologies may be combined with

other information in ways that could increase privacy or security risks.

Misuse of these products or data could result in negative press

coverage, reputational harm, reduced customer demand, increased scrutiny by regulators, and the loss of business relationships.

Certain of our customers may

use our products and services in regulated environments, including public safety, critical infrastructure, and governmental operations,

which may be subject to heightened legal requirements and public scrutiny.

In some cases, we may rely on customers to implement required

policies, permissions, notices, and safeguards, including those related to privacy and data protection.

If we or our customers fail to

comply with applicable laws, contractual requirements, or regulatory standards, we could be subject to litigation, regulatory investigations,

enforcement actions, fines, penalties, or other liabilities, and our business, financial condition and results of operations could be

materially adversely affected.

Risks Related to Our Securities

Our failure to maintain compliance with

the continued listing requirements of the Nasdaq Capital Market may result in our common stock being delisted from the Nasdaq Capital

Market, which could negatively impact the price of our common stock, liquidity, our ability to access the capital markets and our stockholders’

ability to sell their shares.

Our common stock is currently

listed on the Nasdaq Capital Market (“Nasdaq”) under the symbol “XTIA.” The listing standards of Nasdaq provide

that a company, in order to qualify for continued listing, must maintain a minimum stock price of $1.00 and satisfy standards relative

to minimum stockholders’ equity, minimum market value of publicly held shares and various additional requirements.

While our common

stock is currently listed on Nasdaq, we can give no assurance that we will be able to maintain compliance with the continued listing requirements

If we fail to maintain compliance with any such continued listing requirement, there can also be no assurance that we will

be able to regain compliance with any such continued listing requirement in the future or that our common stock will not be delisted in

If Nasdaq delists our securities from trading on its exchange for failure to meet the listing standards, we and our stockholders

could face significant negative consequences including:

limited availability of market quotations for our securities;

a determination that the common stock is a “penny stock” which would require brokers trading in the common stock to adhere to more stringent rules, possibly resulting in a reduced level of trading activity in the secondary trading market for shares of common stock;

a limited amount of analyst coverage, if any;

a decreased ability to issue additional securities or obtain additional financing in the future.

Delisting from Nasdaq could

also result in other negative consequences, including the potential loss of confidence by suppliers, customers and employees, the loss

of institutional investor interest and fewer business development opportunities.

If our shares of common stock

lose their status on Nasdaq, we believe that they would likely be eligible to be quoted on the inter-dealer electronic quotation and trading

system operated by OTC Markets Group Inc., commonly referred to as the Pink Open Market and we may also qualify to be traded on their

OTCQB market (The Venture Market).

These markets are generally not considered to be as efficient as, and not as broad as, Nasdaq.

our shares on these markets could be more difficult because smaller quantities of shares would likely be bought and sold, and transactions

could be delayed.

In addition, in the event our shares are delisted, broker-dealers have certain regulatory burdens imposed upon them,

which may discourage broker-dealers from effecting transactions in our common stock or even holding our common stock, further limiting

the liquidity of our common stock.

These factors could result in lower prices and larger spreads in the bid and ask prices for our common

Our stock price may be volatile, and your

investment may suffer a decline in value as a result of the volatility of our stock.

The market price of our common

stock is likely to be highly volatile and could fluctuate widely in price in response to various factors, many of which are beyond our

control, including the following:

our ability to execute our business plan and complete prospective strategic transactions;

changes in our industry;

competitive pricing pressures;

our ability to obtain working capital financing;

additions or departures of key personnel;

limited “public float” in the hands of a small number of persons whose sales or lack of sales could result in positive or negative pricing pressure on the market price for our common stock;

sales of our common stock;

operating results that fall below expectations;

in our capital structure;

associated with our acquisitions of companies, assets and technologies;

developments;

and other external factors;

● period-to-period

fluctuations in our financial results;

inability to develop or acquire new or needed technologies or news relating to such technologies;

public’s response to press releases or other public announcements by us or third parties, including filings with the SEC;

in financial estimates or ratings by any securities analysts who follow our common stock, our failure to meet these estimates or failure

of those analysts to initiate or maintain coverage of our common stock;

development and sustainability of an active trading market for our common stock;

future sales of our common stock by our officers, directors and significant stockholders.

addition, the stock markets in general, and the markets for technology stocks in particular, have experienced significant volatility

that has often been unrelated to the financial condition or results of operations of particular companies.

These broad market fluctuations

may adversely affect the trading price of our common stock and, consequently, adversely affect the price at which you could sell the

shares that you purchase in this offering.

In the past, following periods of volatility in the market or significant price declines,

securities class-action litigation has often been instituted against companies.

Such litigation, if instituted against us, could result

in substantial costs and diversion of management’s attention and resources, which could materially and adversely affect our business,

financial condition, results of operations and growth prospects.

or availability for sale of a substantial number of shares of our common stock may cause the price of our common stock to decline.

our stockholders sell substantial amounts of our common stock in the public market upon the expiration of any statutory holding period

under Rule 144, or shares issued upon the exercise of outstanding options or warrants, it could create a circumstance commonly referred

to as an “overhang” and, in anticipation of which, the market price of our common stock could fall.

The existence of an overhang,

whether or not sales have occurred or are occurring, also could make more difficult our ability to raise additional financing through

the sale of equity or equity-related securities in the future at a time and price that we deem reasonable or appropriate.

general, a non-affiliated person who has held restricted shares for a period of six months, under Rule 144, may sell into the market

our common stock all of their shares, subject to the Company being current in its periodic reports filed with the SEC.

As of the date

of this filing, a significant portion of our outstanding shares of common stock outstanding are free trading.

of our common stock or other securities, or the perception that future sales may occur, may cause the market price of our common stock

to decline, even if our business is doing well.

of our common stock or other securities, or the perception that future sales may occur, may cause the market price of our common stock

to decline, even if our business is doing well.

Sales of substantial amounts of our common stock in the public market, or the perception

that these sales could occur, could adversely affect the price of our common stock and could impair our ability to raise capital through

the sale of additional shares.

Historically, we have issued our securities to raise additional capital and used our shares of common

stock to satisfy our outstanding debt obligations, and, in the future, we expect to continue to issue our securities to raise additional

capital or satisfy outstanding debt obligations.

The number of new shares of our common stock issued in connection with raising additional

capital or satisfying our outstanding debt obligations could constitute a material portion of the then-outstanding shares of our common

The issuance or sale of such securities could depress the market price of our common stock.

may be future sales or other dilution of our equity, which may adversely affect the market price of our common stock.

articles of incorporation allows us to issue up to 500,000,000 shares of our common stock, par value $0.001 per share, and to issue and

designate the rights of, without stockholder approval, up to 5,000,000 shares of preferred stock, par value $0.001 per share.

additional capital, we may in the future sell additional shares of our common stock or other securities convertible into or exchangeable

for our common stock at prices that are lower than the prices paid by existing stockholders, and investors purchasing shares or other

securities in the future could have rights superior to existing stockholders, which could result in substantial dilution to the interests

of existing stockholders.

The market price of our common stock could decline as a result of sales of common stock or securities that

are convertible into or exchangeable for, or that represent the right to receive common stock or the perception that such sales could

addition, to the extent that outstanding stock options or warrants have been or may be exercised or preferred stock converted or other

shares issued, stockholders may experience further dilution.

may issue debt and equity securities or securities convertible into equity securities, any of which may be senior to our common stock

as to distributions and in liquidation, which could negatively affect the value of our common stock.

the future, we may attempt to increase our capital resources by entering into debt or debt-like financing that is unsecured or secured

by up to all of our assets, or by issuing additional debt or equity securities, which could include issuances of secured or unsecured

commercial paper, medium-term notes, senior notes, subordinated notes, guarantees, preferred stock, hybrid securities, or securities

convertible into or exchangeable for equity securities.

In the event of our liquidation, our lenders and holders of our debt and preferred

securities would receive distributions of our available assets before distributions to the holders of our common stock.

Because our decision

to incur debt and issue securities in future offerings may be influenced by market conditions and other factors beyond our control, we

cannot predict or estimate the amount, timing or nature of our future offerings or debt financings.

Further, market conditions could

require us to accept less favorable terms for the issuance of our securities in the future.

our common stock is delisted, market liquidity for our common stock could be severely affected and our stockholders’ ability to

sell their shares of our common stock could be limited.

A delisting of our common stock from Nasdaq would negatively affect the value

changes in our capital structure;

costs associated with our acquisitions of companies, assets and technologies;

regulatory developments;

economic and other external factors;

period-to-period fluctuations in our financial results;

our inability to develop or acquire new or needed technologies or news relating to such technologies;

the public’s response to press releases or other public announcements by us or third parties, including filings with the SEC;

changes in financial estimates or ratings by any securities analysts who follow our common stock, our failure to meet these estimates or failure of those analysts to initiate or maintain coverage of our common stock;

the development and sustainability of an active trading market for our common stock;

any future sales of our common stock by our officers, directors and significant stockholders.

In addition, the stock markets

in general, and the markets for technology stocks in particular, have experienced significant volatility that has often been unrelated

to the financial condition or results of operations of particular companies.

These broad market fluctuations may adversely affect the

trading price of our common stock and, consequently, adversely affect the price at which you could sell the shares that you purchase in

this offering.

In the past, following periods of volatility in the market or significant price declines, securities class-action litigation

has often been instituted against companies.

Such litigation, if instituted against us, could result in substantial costs and diversion

of management’s attention and resources, which could materially and adversely affect our business, financial condition, results

of operations and growth prospects.

Offers or availability for sale of a substantial

number of shares of our common stock may cause the price of our common stock to decline.

If our stockholders sell substantial

amounts of our common stock in the public market upon the expiration of any statutory holding period under Rule 144, or shares issued

upon the exercise of outstanding options or warrants, it could create a circumstance commonly referred to as an “overhang”

and, in anticipation of which, the market price of our common stock could fall.

The existence of an overhang, whether or not sales have

occurred or are occurring, also could make more difficult our ability to raise additional financing through the sale of equity or equity-related

securities in the future at a time and price that we deem reasonable or appropriate.

In general, a non-affiliated

person who has held restricted shares for a period of six months, under Rule 144, may sell into the market our common stock all of their

shares, subject to the Company being current in its periodic reports filed with the SEC.

As of the date of this filing, a significant

portion of our outstanding shares of common stock outstanding are free trading.

Sales of our common stock or other securities,

or the perception that future sales may occur, may cause the market price of our common stock to decline, even if our business is doing

Sales of our common stock

or other securities, or the perception that future sales may occur, may cause the market price of our common stock to decline, even if

our business is doing well.

Sales of substantial amounts of our common stock in the public market, or the perception that these sales

could occur, could adversely affect the price of our common stock and could impair our ability to raise capital through the sale of additional

Historically, we have issued our securities to raise additional capital and used our shares of common stock to satisfy our outstanding

debt obligations, and, in the future, we expect to continue to issue our securities to raise additional capital or satisfy outstanding

debt obligations.

The number of new shares of our common stock issued in connection with raising additional capital or satisfying our

outstanding debt obligations could constitute a material portion of the then-outstanding shares of our common stock.

The issuance or sale

of such securities could depress the market price of our common stock.

There may be future sales or other dilution

of our equity, which may adversely affect the market price of our common stock.

Our articles of incorporation

allows us to issue up to 500,000,000 shares of our common stock, par value $0.001 per share, and to issue and designate the rights of,

without stockholder approval, up to 5,000,000 shares of preferred stock, par value $0.001 per share.

To raise additional capital, we may

in the future sell additional shares of our common stock or other securities convertible into or exchangeable for our common stock at

prices that are lower than the prices paid by existing stockholders, and investors purchasing shares or other securities in the future

could have rights superior to existing stockholders, which could result in substantial dilution to the interests of existing stockholders.

The market price of our common stock could decline as a result of sales of common stock or securities that are convertible into or exchangeable

for, or that represent the right to receive common stock or the perception that such sales could occur.

In addition, to the extent

that outstanding stock options or warrants have been or may be exercised or preferred stock converted or other shares issued, stockholders

may experience further dilution.

The Class B Units of XTI Drones Holdings,

LLC issued in connection with our acquisition of Drone Nerds are exchangeable into shares of our common stock and will be automatically

exchanged in February 2027, which will result in dilution to our existing stockholders.

In connection with our November

2025 acquisition of Drone Nerds, we issued 6,524,576 Class B Units of XTI Drones Holdings, LLC to the sellers as part of the purchase

consideration.

The Class B Units are exchangeable into shares of our common stock on a one-for-one basis.

Holders may exchange their Class

B Units at any time after May 1, 2026.

All outstanding Class B Units will be automatically exchanged into shares of our common stock on

a one-for-one basis in February 2027, fifteen months after the acquisition closing date, regardless of the then-prevailing market price

of our common stock.

A delisting of our common stock could also adversely affect our ability to obtain financing for our operations and

could result in the loss of confidence in our company.

our common stock becomes subject to the penny stock rules, it would become more difficult to trade our shares.

SEC has adopted rules that regulate broker-dealer practices in connection with transactions in penny stocks.

Penny stocks are generally

equity securities with a price of less than $5.00, other than securities registered on certain national securities exchanges or authorized

for quotation on certain automated quotation systems, provided that current price and volume information with respect to transactions

in such securities is provided by the exchange or system.

If we do not retain a listing on Nasdaq, and if the price of our common stock

is less than $5.00, our common stock will be deemed a penny stock.

The penny stock rules require a broker-dealer, before a transaction

in a penny stock not otherwise exempt from those rules, to deliver a standardized risk disclosure document containing specified information.

In addition, the penny stock rules require that before effecting any transaction in a penny stock not otherwise exempt from those rules,

a broker-dealer must make a special written determination that the penny stock is a suitable investment for the purchaser and receive

(i) the purchaser’s written acknowledgment of the receipt of a risk disclosure statement;

(ii) a written agreement to transactions

involving penny stocks;

No additional consideration is payable upon exchange.

The issuance of approximately 6.5 million shares of common stock upon

exchange of the Class B Units will dilute the ownership interests of our existing stockholders by increasing the number of shares outstanding.

The timing and volume of exchanges prior to the mandatory exchange date, and the mandatory exchange itself, could increase the supply

of shares available for sale in the public market and may adversely affect the market price of our common stock.

We may issue debt and equity securities

or securities convertible into equity securities, any of which may be senior to our common stock as to distributions and in liquidation,

which could negatively affect the value of our common stock.

In the future, we may attempt

to increase our capital resources by entering into debt or debt-like financing that is unsecured or secured by up to all of our assets,

or by issuing additional debt or equity securities, which could include issuances of secured or unsecured commercial paper, medium-term

notes, senior notes, subordinated notes, guarantees, preferred stock, hybrid securities, or securities convertible into or exchangeable

for equity securities.

In the event of our liquidation, our lenders and holders of our debt and preferred securities would receive distributions

of our available assets before distributions to the holders of our common stock.

Because our decision to incur debt and issue securities

in future offerings may be influenced by market conditions and other factors beyond our control, we cannot predict or estimate the amount,

timing or nature of our future offerings or debt financings.

Further, market conditions could require us to accept less favorable terms

for the issuance of our securities in the future.

If our common stock is delisted,

market liquidity for our common stock could be severely affected and our stockholders’ ability to sell their shares of our common

stock could be limited.

A delisting of our common stock from Nasdaq would negatively affect the value of our common stock.

of our common stock could also adversely affect our ability to obtain financing for our operations and could result in the loss of confidence

in our company.

If our common stock becomes subject to the

penny stock rules, it would become more difficult to trade our shares.

The SEC has adopted rules

that regulate broker-dealer practices in connection with transactions in penny stocks.

Penny stocks are generally equity securities with

a price of less than $5.00, other than securities registered on certain national securities exchanges or authorized for quotation on certain

automated quotation systems, provided that current price and volume information with respect to transactions in such securities is provided

by the exchange or system.

If we do not retain a listing on Nasdaq, and if the price of our common stock is less than $5.00, our common

stock will be deemed a penny stock.

The penny stock rules require a broker-dealer, before a transaction in a penny stock not otherwise

exempt from those rules, to deliver a standardized risk disclosure document containing specified information.

In addition, the penny stock

rules require that before effecting any transaction in a penny stock not otherwise exempt from those rules, a broker-dealer must make

a special written determination that the penny stock is a suitable investment for the purchaser and receive (i) the purchaser’s

written acknowledgment of the receipt of a risk disclosure statement;

(ii) a written agreement to transactions involving penny stocks;

and (iii) a signed and dated copy of a written suitability statement.

These disclosure requirements may have

the effect of reducing the trading activity in the secondary market for our common stock, and therefore stockholders may have difficulty

selling their shares.

do not intend to pay cash dividends to our stockholders, so it is unlikely that stockholders will receive any return on their investment

in our Company prior to selling our stock.

have never paid any dividends to our common stockholders as a public company.

We currently intend to retain any future earnings for funding

growth and, therefore, do not expect to pay any cash dividends in the foreseeable future.

If we determine that we will pay cash dividends

to the holders of our common stock, we cannot assure that such cash dividends will be paid on a timely basis.

The success of your investment

in our Company will likely depend entirely upon any future appreciation.

As a result, you will not receive any return on your investment

prior to selling your shares in our Company and, for the other reasons discussed in this “Risk Factors” section, you may

not receive any return on your investment even when you sell your shares in our Company.

provisions of our articles of incorporation and bylaws may deter takeover attempts, which may inhibit a takeover that stockholders consider

favorable and limit the opportunity of our stockholders to sell their shares at a favorable price.

bylaws divide our board of directors into three classes, with members of each class serving staggered three-year terms.

The classified

board provision could increase the likelihood that, in the event an outside party acquired a controlling block of our stock, incumbent

directors nevertheless would retain their positions for a substantial period, which may have the effect of discouraging, delaying, or

preventing a change in control.

In addition, under our articles of incorporation, our Board may issue additional shares of common stock

or preferred stock.

Our Board has the ability to authorize “blank check” preferred stock without future shareholder approval.

This makes it possible for our Board to issue preferred stock with voting or other rights or preferences that could impede the success

of any attempt to acquire us by means of a merger, tender offer, proxy contest or otherwise, including a transaction in which our stockholders

would receive a premium over the market price for their shares and/or any other transaction that might otherwise be deemed to be in their

best interests, and thereby protects the continuity of our management and limits an investor’s opportunity to profit by their investment

in the Company.

Specifically, if in the due exercise of its fiduciary obligations, the Board were to determine that a takeover proposal

was not in our best interest, shares could be issued by our Board without stockholder approval in one or more transactions that might

prevent or render more difficult or costly the completion of the takeover by:

the voting or other rights of the proposed acquirer or insurgent stockholder group,

a substantial voting bloc in institutional or other hands that might undertake to support

the incumbent Board, or

an acquisition that might complicate or preclude the takeover.

provisions of our articles of incorporation and bylaws, alone or together, could delay or prevent hostile takeovers and changes in control

or changes in our management.

Anti-Takeover Law may discourage acquirers and eliminate a potentially beneficial sale for our stockholders.

are subject to the provisions of Sections 78.411 to 78.444, inclusive, of the Nevada Revised Statutes, known as the “business combination”

This statute prevents many Nevada corporations from engaging in a business combination with any interested stockholder, under

specified circumstances.

For these purposes, a business combination includes a merger or sale of more than 5% of our assets, and an interested

stockholder includes a stockholder who owns 10% or more of our outstanding voting stock, as well as affiliates and associates of these

persons that, within two years prior to the combination, beneficially owned such percentage of the voting power.

Under these provisions,

this type of business combination is prohibited for up to four years following the date that the stockholder became an interested stockholder

unless the transaction in which the stockholder became an interested stockholder is approved by the board of directors prior to the date

the interested stockholder attained that status.

Where the person becoming an interested stockholder was not approved in advance by the

board of directors, the Nevada business combination statute imposes a basic moratorium of two years on business combinations unless they

are approved by the board of directors and stockholders owning at least 60% of the outstanding voting power not beneficially owned by

the interested stockholder and its affiliates and associates.

After the two-year period, but before four years, combinations remain prohibited

but may also be permitted if the interested stockholder satisfies certain requirements with respect to the aggregate consideration to

be received by holders of outstanding shares in the combination.

These disclosure requirements may have the effect of reducing the

trading activity in the secondary market for our common stock, and therefore stockholders may have difficulty selling their shares.

We do not intend to pay cash dividends to

our stockholders, so it is unlikely that stockholders will receive any return on their investment in our Company prior to selling our

We have never paid any dividends

to our common stockholders as a public company.

We currently intend to retain any future earnings for funding growth and, therefore, do

not expect to pay any cash dividends in the foreseeable future.

If we determine that we will pay cash dividends to the holders of our

common stock, we cannot assure that such cash dividends will be paid on a timely basis.

The success of your investment in our Company

will likely depend entirely upon any future appreciation.

As a result, you will not receive any return on your investment prior to selling

your shares in our Company and, for the other reasons discussed in this “Risk Factors” section, you may not receive any return

on your investment even when you sell your shares in our Company.

Some provisions of our articles of incorporation

and bylaws may deter takeover attempts, which may inhibit a takeover that stockholders consider favorable and limit the opportunity of

our stockholders to sell their shares at a favorable price.

Our bylaws divide our board

of directors into three classes, with members of each class serving staggered three-year terms.

The classified board provision could increase

the likelihood that, in the event an outside party acquired a controlling block of our stock, incumbent directors nevertheless would retain

their positions for a substantial period, which may have the effect of discouraging, delaying, or preventing a change in control.

under our articles of incorporation, our Board may issue additional shares of common stock or preferred stock.

Our Board has the ability

to authorize “blank check” preferred stock without future shareholder approval.

This makes it possible for our Board to issue

preferred stock with voting or other rights or preferences that could impede the success of any attempt to acquire us by means of a merger,

tender offer, proxy contest or otherwise, including a transaction in which our stockholders would receive a premium over the market price

for their shares and/or any other transaction that might otherwise be deemed to be in their best interests, and thereby protects the continuity

of our management and limits an investor’s opportunity to profit by their investment in the Company.

Specifically, if in the due

exercise of its fiduciary obligations, the Board were to determine that a takeover proposal was not in our best interest, shares could

be issued by our Board without stockholder approval in one or more transactions that might prevent or render more difficult or costly

the completion of the takeover by:

diluting the voting or other rights of the proposed acquirer or insurgent stockholder group,

putting a substantial voting bloc in institutional or other hands that might undertake to support the incumbent Board, or

effecting an acquisition that might complicate or preclude the takeover.

These provisions of our articles

of incorporation and bylaws, alone or together, could delay or prevent hostile takeovers and changes in control or changes in our management.

Nevada Anti-Takeover Law may discourage

acquirers and eliminate a potentially beneficial sale for our stockholders.

We are subject to the provisions

of Sections 78.411 to 78.444, inclusive, of the Nevada Revised Statutes, known as the “business combination” statute.

statute prevents many Nevada corporations from engaging in a business combination with any interested stockholder, under specified circumstances.

For these purposes, a business combination includes a merger or sale of more than 5% of our assets, and an interested stockholder includes

a stockholder who owns 10% or more of our outstanding voting stock, as well as affiliates and associates of these persons that, within

two years prior to the combination, beneficially owned such percentage of the voting power.

Under these provisions, this type of business

combination is prohibited for up to four years following the date that the stockholder became an interested stockholder unless the transaction

in which the stockholder became an interested stockholder is approved by the board of directors prior to the date the interested stockholder

attained that status.

Where the person becoming an interested stockholder was not approved in advance by the board of directors, the Nevada

business combination statute imposes a basic moratorium of two years on business combinations unless they are approved by the board of

directors and stockholders owning at least 60% of the outstanding voting power not beneficially owned by the interested stockholder and

its affiliates and associates.

After the two-year period, but before four years, combinations remain prohibited but may also be permitted

if the interested stockholder satisfies certain requirements with respect to the aggregate consideration to be received by holders of

outstanding shares in the combination.

We are also subject to the

4 unchanged sentences

Under that statute, any person who acquires a controlling

interest in a corporation may not exercise voting rights of any control shares unless such voting rights are conferred by a majority

vote of the disinterested stockholders of the issuing corporation at a special meeting of such stockholders held upon the request and

at the expense of the acquiring person.

interest in a corporation may not exercise voting rights of any control shares unless such voting rights are conferred by a majority vote

of the disinterested stockholders of the issuing corporation at a special meeting of such stockholders held upon the request and at the

expense of the acquiring person.

The statute applies to acquisition of a “controlling interest” in ownership of outstanding

voting shares of an issuing corporation sufficient to enable the acquiring person, individually or in association with others, directly

or indirectly, to exercise (i) one fifth or more but less than one third, (ii) one third or more but less than a majority or (iii) a

majority or more of the voting power of the issuing corporation in the election of directors, and voting rights must be conferred by

a majority of the disinterested stockholders as each threshold is reached and/or exceeded.

In the event that the control shares are accorded

full voting rights and the acquiring person acquires control shares with a majority or more of all the voting power, any stockholder,

other than the acquiring person, who does not vote in favor of authorizing voting rights for the control shares is entitled to demand

payment for the fair value of such person’s shares, and the corporation must comply with the demand.

The Nevada control share statute

does not apply to any acquisition of a controlling interest in an issuing corporation if the articles of incorporation or bylaws of the

corporation in effect on the 10 th day following the acquisition of a controlling interest by the acquiring person provide

that the provisions of those sections do not apply to the corporation or to an acquisition of a controlling interest specifically by

types of existing or future stockholders, whether or not identified.

Therefore, the board of directors of a Nevada corporation usually

may unilaterally avoid the imposition of burdens imposed by the control share statute by amending the bylaws of the corporation in connection

with a transaction.

For example, our bylaws provide that, effective as of March 12, 2024 (the closing date of the XTI Merger) (the “Closing

Date”), the provisions of NRS 78.378 through 78.3793, inclusive, are not applicable to the XTI Merger Agreement and the consummation

of the transactions contemplated thereby, including, without limitation, the acquisition of shares, or of rights to acquire shares, of

the Company by the stockholders, or holders of rights to acquire stock, of Legacy XTI as of the Closing Date.

A Nevada corporation may

impose stricter requirements if it so desires.

statutes could prohibit or delay mergers or other takeover or change in control attempts and, accordingly, may discourage attempts to

limitation of liability, or our indemnification, of our officers and directors may cause us to use corporate resources in a manner that

conflicts with the interests of our stockholders.

law eliminates the personal liability of our directors and officers for damages as a result of an act or failure to act in that capacity

unless a statutory presumption that such person acted in good faith, on an informed basis and with a view to the interests of the corporation

has been rebutted.

In addition, it must be proven both that the act or failure to act constituted a breach of a fiduciary duty as a director

or officer and that such breach involved intentional misconduct, fraud or a knowing violation of law.

This limitation may not affect

the availability of equitable remedies, such as injunctive relief or rescission.

Our Articles of Incorporation require us to indemnify

our directors and officers to the fullest extent permitted by Nevada law, including in circumstances in which indemnification is otherwise

discretionary under Nevada law.

law generally permits indemnification of our directors, officers and others if the person either (i) acted in good faith and in a manner

which he or she reasonably believed to be in or not opposed to the Company’s best interests, and, if the action is not by or in

the right of the corporation and is with respect to any criminal proceeding, the person had no reasonable cause to believe that their

conduct was unlawful, or (ii) is not liable under the Nevada statutory provision eliminating the liability of certain persons as described

in the preceding paragraph.

persons may be indemnified against expenses, including attorneys’ fees, judgments, fines, penalties, including excise taxes, and

amounts paid in settlement and costs, actually and reasonably incurred by the person in connection with the proceeding.

If the person

is adjudged by a court to be liable to the corporation, no indemnification will be made unless that or another court determines that

the person is fairly and reasonably entitled to indemnity for such expenses as the court deems proper.

as indemnification for liabilities under the Securities Act may be permitted to directors, officers or persons controlling us under the

above provisions, we have been informed that, in the opinion of the SEC, such indemnification is against public policy as expressed in

the Securities Act and is, therefore, unenforceable.

obligations associated with being a public company require significant resources and management attention, which may divert from our

business operations.

are subject to the reporting requirements of the Exchange Act and the Sarbanes-Oxley Act of 2002 (the “Sarbanes-Oxley Act”).

The Exchange Act requires that we file annual, quarterly and current reports, proxy statements, and other information.

The Sarbanes-Oxley

Act requires, among other things, that we establish and maintain effective internal controls and procedures for financial reporting.

Our principal executive officer and principal financial officer are required to certify that our disclosure controls and procedures are

effective in ensuring that material information we are required to disclose in reports that we file or submit under the Exchange Act

is recorded, processed, summarized and reported within the time periods specified in the SEC’s rules and forms.

As a result, we

incur significant legal, accounting and other expenses.

Furthermore, the need to establish the corporate infrastructure demanded of a

public company may divert management’s attention from implementing our growth strategy, which could prevent us from improving our

business, results of operations and financial condition.

We have made, and will continue to make, if necessary, changes to our internal

controls and procedures for financial reporting and accounting systems to meet our reporting obligations as a public company.

the measures we take may not be sufficient to satisfy our obligations as a public company.

In addition, we cannot predict or estimate

the amount of additional costs we may incur in order to comply with these requirements.

We anticipate that these costs could materially

increase our selling, general and administrative expenses.

404 of the Sarbanes-Oxley Act requires annual management assessments of the effectiveness of our internal control over financial reporting.

In connection with the implementation of the necessary procedures and practices related to internal control over financial reporting,

we may identify deficiencies.

Additionally, in the event we are no longer a smaller reporting company, as defined under the Exchange

Act, and we are unable to comply with the internal controls requirements of the Sarbanes-Oxley Act of 2002, then we may not be able to

obtain the independent registered public accountants’ certifications required by that act, which may preclude us from keeping our

filings with the SEC current, and interfere with the ability of investors to trade our securities and our shares to continue to be listed

on the Nasdaq Capital Market.

we fail to establish and maintain an effective system of internal controls, we may not be able to report our financial results accurately

or prevent fraud.

Any inability to report and file our financial results accurately and timely could harm our reputation and adversely

affect the trading price of our common stock.

internal controls are necessary for us to provide reliable financial reports and prevent fraud.

If we cannot provide reliable financial

reports or prevent fraud, we may not be able to manage our business as effectively as we would if an effective control environment existed,

and our business and reputation with investors may be harmed.

With each prospective acquisition we may make we will conduct whatever

due diligence is necessary or prudent to assure us that the acquisition target can comply with the internal controls requirements of

the Sarbanes-Oxley Act.

Notwithstanding our diligence, certain internal controls deficiencies may not be detected.

As a result, any internal

control deficiencies may adversely affect our financial condition, results of operations and access to capital.

We have not performed

an in-depth analysis to determine if historical undiscovered failures of internal controls exist, and may in the future discover areas

of our internal controls that need improvement.

we are unable to maintain effective internal controls, we may not have adequate, accurate or timely financial information, and we may

be unable to meet our reporting obligations as a public company, including the requirements of the Sarbanes-Oxley Act, we may be unable

to accurately report our financial results in future periods, or report them within the timeframes required by the requirements of the

SEC, Nasdaq or the Sarbanes-Oxley Act.

Failure to comply with the Sarbanes-Oxley Act, when and as applicable, could also potentially

subject us to sanctions or investigations by the SEC or other regulatory authorities.

Any failure to maintain or implement required new

or improved controls, or any difficulties we encounter in their implementation, could result in identification of additional material

weaknesses or significant deficiencies, cause us to fail to meet our reporting obligations or result in material misstatements in our

financial statements.

Furthermore, if we cannot provide reliable financial reports or prevent fraud, our business and results of operations

could be harmed and investors could lose confidence in our reported financial information.

company compliance may make it more difficult to attract and retain officers and directors.

Sarbanes-Oxley Act and rules implemented by the SEC have required changes in corporate governance practices of public companies.

public company, these rules and regulations increase our compliance costs and may make it more difficult and expensive for us to maintain

our director and officer liability insurance and we may be required to accept reduced policy limits and coverage or incur substantially

higher costs to obtain the same or similar coverage.

As a result, it may be more difficult for us to attract and retain qualified persons

to serve on our Board or as executive officers, and to maintain insurance at reasonable rates, or at all.

securities or industry analysts do not publish research or reports about our business, or if they change their recommendations regarding

our stock adversely, our stock price and trading volume could decline.

trading market for our common stock relies in part on the research and reports that equity research analysts publish about us and our

We do not control these analysts.

The price of our common stock could decline if one or more equity research analysts downgrade

our common stock or if they issue other unfavorable commentary or cease publishing reports about us or our business.

may be or may become the target of securities litigation, which is costly and time-consuming to defend.

periods of market volatility in the price of a company’s securities or the reporting of unfavorable news, security holders may

institute class action litigation.

If the market value of our securities experience adverse fluctuations and we become involved in this

type of litigation, regardless of the outcome, we could incur substantial legal costs and our management’s attention could be diverted

from the operation of our business, causing our business to suffer.

or indirectly, to exercise (i) one fifth or more but less than one third, (ii) one third or more but less than a majority or (iii) a majority

or more of the voting power of the issuing corporation in the election of directors, and voting rights must be conferred by a majority

of the disinterested stockholders as each threshold is reached and/or exceeded.

In the event that the control shares are accorded full

voting rights and the acquiring person acquires control shares with a majority or more of all the voting power, any stockholder, other

than the acquiring person, who does not vote in favor of authorizing voting rights for the control shares is entitled to demand payment

for the fair value of such person’s shares, and the corporation must comply with the demand.

The Nevada control share statute does

not apply to any acquisition of a controlling interest in an issuing corporation if the articles of incorporation or bylaws of the corporation

in effect on the 10 th day following the acquisition of a controlling interest by the acquiring person provide that the provisions

of those sections do not apply to the corporation or to an acquisition of a controlling interest specifically by types of existing or

future stockholders, whether or not identified.

Therefore, the board of directors of a Nevada corporation usually may unilaterally avoid

the imposition of burdens imposed by the control share statute by amending the bylaws of the corporation in connection with a transaction.

A Nevada corporation may impose stricter requirements if it so desires.

These statutes could prohibit

or delay mergers or other takeover or change in control attempts and, accordingly, may discourage attempts to acquire us.

The limitation of liability, or our indemnification,

of our officers and directors may cause us to use corporate resources in a manner that conflicts with the interests of our stockholders.

Nevada law eliminates the

personal liability of our directors and officers for damages as a result of an act or failure to act in that capacity unless a statutory

presumption that such person acted in good faith, on an informed basis and with a view to the interests of the corporation has been rebutted.

In addition, it must be proven both that the act or failure to act constituted a breach of a fiduciary duty as a director or officer and

that such breach involved intentional misconduct, fraud or a knowing violation of law.

This limitation may not affect the availability

of equitable remedies, such as injunctive relief or rescission.

Our Articles of Incorporation require us to indemnify our directors and

officers to the fullest extent permitted by Nevada law, including in circumstances in which indemnification is otherwise discretionary

under Nevada law.

Nevada law generally permits

indemnification of our directors, officers and others if the person either (i) acted in good faith and in a manner which he or she reasonably

believed to be in or not opposed to the Company’s best interests, and, if the action is not by or in the right of the corporation

and is with respect to any criminal proceeding, the person had no reasonable cause to believe that their conduct was unlawful, or (ii)

is not liable under the Nevada statutory provision eliminating the liability of certain persons as described in the preceding paragraph.

These persons may be indemnified

against expenses, including attorneys’ fees, judgments, fines, penalties, including excise taxes, and amounts paid in settlement

and costs, actually and reasonably incurred by the person in connection with the proceeding.

If the person is adjudged by a court to be

liable to the corporation, no indemnification will be made unless that or another court determines that the person is fairly and reasonably

entitled to indemnity for such expenses as the court deems proper.

Insofar as indemnification

for liabilities under the Securities Act may be permitted to directors, officers or persons controlling us under the above provisions,

we have been informed that, in the opinion of the SEC, such indemnification is against public policy as expressed in the Securities Act

and is, therefore, unenforceable.

The obligations associated with being a

public company require significant resources and management attention, which may divert from our business operations.

We are subject to the reporting

requirements of the Exchange Act and the Sarbanes-Oxley Act of 2002 (the “Sarbanes-Oxley Act”).

The Exchange Act requires

that we file annual, quarterly and current reports, proxy statements, and other information.

The Sarbanes-Oxley Act requires, among other

things, that we establish and maintain effective internal controls and procedures for financial reporting.

Our principal executive officer

and principal financial officer are required to certify that our disclosure controls and procedures are effective in ensuring that material

information we are required to disclose in reports that we file or submit under the Exchange Act is recorded, processed, summarized and

reported within the time periods specified in the SEC’s rules and forms.

As a result, we incur significant legal, accounting and

other expenses.

Furthermore, the need to establish the corporate infrastructure demanded of a public company may divert management’s

attention from implementing our growth strategy, which could prevent us from improving our business, results of operations and financial

We have made, and will continue to make, if necessary, changes to our internal controls and procedures for financial reporting

and accounting systems to meet our reporting obligations as a public company.

However, the measures we take may not be sufficient to satisfy

our obligations as a public company.

In addition, we cannot predict or estimate the amount of additional costs we may incur in order to

comply with these requirements.

We anticipate that these costs could materially increase our selling, general and administrative expenses.

Section 404 of the Sarbanes-Oxley

Act requires annual management assessments of the effectiveness of our internal control over financial reporting.

In connection with the

implementation of the necessary procedures and practices related to internal control over financial reporting, we may identify deficiencies.

Additionally, in the event we are no longer a smaller reporting company, as defined under the Exchange Act, and we are unable to comply

with the internal controls requirements of the Sarbanes-Oxley Act of 2002, then we may not be able to obtain the independent registered

public accountants’ certifications required by that act, which may preclude us from keeping our filings with the SEC current, and

interfere with the ability of investors to trade our securities and our shares to continue to be listed on the Nasdaq Capital Market.

If we fail to establish and maintain an

effective system of internal controls, we may not be able to report our financial results accurately or prevent fraud.

Any inability to

report and file our financial results accurately and timely could harm our reputation and adversely affect the trading price of our common

Effective internal controls

are necessary for us to provide reliable financial reports and prevent fraud.

If we cannot provide reliable financial reports or prevent

fraud, we may not be able to manage our business as effectively as we would if an effective control environment existed, and our business

and reputation with investors may be harmed.

With each prospective acquisition we may make we will conduct whatever due diligence is necessary

or prudent to assure us that the acquisition target can comply with the internal controls requirements of the Sarbanes-Oxley Act.

Notwithstanding

our diligence, certain internal controls deficiencies may not be detected.

As a result, any internal control deficiencies may adversely

affect our financial condition, results of operations and access to capital.

We have not performed an in-depth analysis to determine if

historical undiscovered failures of internal controls exist, and may in the future discover areas of our internal controls that need improvement.

If we are unable to maintain

effective internal controls, we may not have adequate, accurate or timely financial information, and we may be unable to meet our reporting

obligations as a public company, including the requirements of the Sarbanes-Oxley Act, we may be unable to accurately report our financial

results in future periods, or report them within the timeframes required by the requirements of the SEC, Nasdaq or the Sarbanes-Oxley

Failure to comply with the Sarbanes-Oxley Act, when and as applicable, could also potentially subject us to sanctions or investigations

by the SEC or other regulatory authorities.

Any failure to maintain or implement required new or improved controls, or any difficulties

we encounter in their implementation, could result in identification of additional material weaknesses or significant deficiencies, cause

us to fail to meet our reporting obligations or result in material misstatements in our financial statements.

Furthermore, if we cannot

provide reliable financial reports or prevent fraud, our business and results of operations could be harmed and investors could lose confidence

in our reported financial information.

Public company compliance may make it more

difficult to attract and retain officers and directors.

The Sarbanes-Oxley Act and

rules implemented by the SEC have required changes in corporate governance practices of public companies.

As a public company, these rules

and regulations increase our compliance costs and may make it more difficult and expensive for us to maintain our director and officer

liability insurance and we may be required to accept reduced policy limits and coverage or incur substantially higher costs to obtain

the same or similar coverage.

As a result, it may be more difficult for us to attract and retain qualified persons to serve on our Board

or as executive officers, and to maintain insurance at reasonable rates, or at all.

If securities or industry analysts do not

publish research or reports about our business, or if they change their recommendations regarding our stock adversely, our stock price

and trading volume could decline.

The trading market for our

common stock relies in part on the research and reports that equity research analysts publish about us and our business.

We do not control

these analysts.

The price of our common stock could decline if one or more equity research analysts downgrade our common stock or if they

issue other unfavorable commentary or cease publishing reports about us or our business.

We may be or may become the target of securities

litigation, which is costly and time-consuming to defend.

Following periods of market

volatility in the price of a company’s securities or the reporting of unfavorable news, security holders may institute class action

If the market value of our securities experience adverse fluctuations and we become involved in this type of litigation, regardless

of the outcome, we could incur substantial legal costs and our management’s attention could be diverted from the operation of our

business, causing our business to suffer.

Compared sentence by sentence after normalising whitespace, quotation marks, case and digits, so re-formatting and restated figures do not read as changed language. Wording changes appear as one removal and one addition. The current filing and the prior one are authoritative.

What changed 10-K

Item 1A. Risk Factors