What changed in this filing

/stocks — the workspaceLOADING

Item 8. Financial Statements and Supplementary Data

2026-04-15 compared with 2025-04-15 · 1930 added, 1979 removed, 289 unchanged (93% of the section changed)

FINANCIAL STATEMENTS AND SUPPLEMENTARY DATA

AEROSPACE, INC.

AND SUBSIDIARIES (FORMERLY KNOW AS INPIXON AND SUBSIDIARIES)

TO FINANCIAL STATEMENTS

XTI AEROSPACE, INC.

AND SUBSIDIARIES (FORMERLY

KNOWN AS INPIXON AND SUBSIDIARIES)

INDEX TO FINANCIAL STATEMENTS

ANNUAL FINANCIAL INFORMATION

Report of Independent Registered Public Accounting Firm (PCAOB NO.

Report of Independent Registered Public Accounting Firm (CBIZ CPAs P.C.)(PCAOB ID.

Report of Independent Registered Public Accounting Firm (Marcum LLP)(PCAOB ID.

Consolidated Balance Sheets as of December 31, 2025 and 2024 F-5

4 unchanged sentences

Notes to Consolidated Financial Statements F-12

OF INDEPENDENT REGISTERED PUBLIC ACCOUNTING FIRM

the Shareholders and Board of Directors of

Aerospace, Inc.

on the Financial Statements

We have audited the accompanying consolidated balance sheets of XTI

Aerospace, Inc.

(the “Company”) as of December 31, 2024 and 2023, the related consolidated statements of operations, stockholders’

equity and cash flows for the years ended December 31, 2024 and 2023, and the related notes (collectively referred to as the “financial

statements”).

In our opinion, based on our audits, the financial statements present fairly, in all material respects, the financial

position of the Company as of December 31, 2024 and 2023, and the results of its operations and its cash flows for each of the years in

the period ended December 31, 2024 and 2023, in conformity with accounting principles generally accepted in the United States of America.

financial statements are the responsibility of the Company’s management.

Our responsibility is to express an opinion on the Company’s

financial statements based on our audits.

We are a public accounting firm registered with the Public Company Accounting Oversight Board

(United States) (“PCAOB”) and are required to be independent with respect to the Company in accordance with the U.S.

securities laws and the applicable rules and regulations of the Securities and Exchange Commission and the PCAOB.

conducted our audits in accordance with the standards of the PCAOB.

Those standards require that we plan and perform the audits

to obtain reasonable assurance about whether the financial statements are free of material misstatement, whether due to error or

The Company is not required to have, nor were we engaged to perform, an audit of its internal control over financial reporting.

As part of our audits we are required to obtain an understanding of internal control over financial reporting but not for the purpose

of expressing an opinion on the effectiveness of the Company’s internal control over financial reporting.

Accordingly, we express

no such opinion.

audits included performing procedures to assess the risks of material misstatement of the financial statements, whether due to error

or fraud, and performing procedures that respond to those risks.

Such procedures included examining, on a test basis, evidence regarding

the amounts and disclosures in the financial statements.

Our audits also included evaluating the accounting principles used and significant

estimates made by management, as well as evaluating the overall presentation of the financial statements.

We believe that our audits

provide a reasonable basis for our opinion.

Audit Matters

REPORT OF INDEPENDENT REGISTERED PUBLIC ACCOUNTING

To the Stockholders and Board of Directors of

XTI Aerospace, Inc.

Opinion on the Financial Statements

We have audited the accompanying consolidated

balance sheet of XTI Aerospace, Inc.

(the “Company”) as of December 31, 2025, the related consolidated statements of operations,

comprehensive loss , stockholders’ equity and cash flows for the year ended December 31, 2025, and the related notes (collectively

referred to as the “financial statements”).

In our opinion, based on our audit, the financial statements present fairly, in

all material respects, the financial position of the Company as of December 31, 2025, and the results of its operations and its cash flows

for the year ended December 31, 2025, in conformity with accounting principles generally accepted in the United States of America.

Basis for Opinion

These financial statements are the responsibility

of the Company’s management.

Our responsibility is to express an opinion on the Company’s financial statements based on our audit.

are a public accounting firm registered with the Public Company Accounting Oversight Board (United States) (“PCAOB”) and are

required to be independent with respect to the Company in accordance with the U.S.

federal securities laws and the applicable rules and

regulations of the Securities and Exchange Commission and the PCAOB.

We conducted our audit in accordance with the

standards of the PCAOB.

Those standards require that we plan and perform the audit to obtain reasonable assurance about whether the financial

statements are free of material misstatement, whether due to error or fraud.

The Company is not required to have, nor were we engaged

to perform, an audit of its internal control over financial reporting.

As part of our audit we are required to obtain an understanding

of internal control over financial reporting but not for the purpose of expressing an opinion on the effectiveness of the Company’s internal

control over financial reporting.

Accordingly, we express no such opinion.

Our audit included performing procedures to assess

the risks of material misstatement of the financial statements, whether due to error or fraud, and performing procedures that respond

to those risks.

Such procedures included examining, on a test basis, evidence regarding the amounts and disclosures in the financial statements.

Our audit also included evaluating the accounting principles used and significant estimates made by management, as well as evaluating

the overall presentation of the financial statements.

We believe that our audit provides a reasonable basis for our opinion.

Critical Audit Matters

The critical audit matters communicated below

6 unchanged sentences

on the critical audit matters or on the accounts or disclosures to which they relate.

Goodwill Impairment

The Company’s evaluation of goodwill for

impairment involves significant judgments and estimates, particularly with respect to the fair value measurement of its reporting units.

The Company performs its annual goodwill impairment test as of December 31, 2024, and more frequently if events or changes in circumstances

indicate that it is more likely than not that the fair value of a reporting unit is less than it carrying amount.

We identified the evaluation

of goodwill impairment as a critical audit matter because it involved complex and subjective judgments by management.

How the Critical Audit Matter Was Addressed

Our audit procedures related to goodwill impairments

include the following, among others:

obtained an understanding of the Company’s process for identifying and evaluating potential goodwill impairment and reviewed the

methodologies used for impairment testing.

● We evaluated the appropriateness of the valuation

models used by the Company, including the discounted cash flow model, and verified its mathematical accuracy.

● We assessed the Company’s valuation model,

including key assumptions, estimates, and sensitivity analysis.

● We assessed the reasonableness of key assumptions

and estimates used by the Company in their valuation models, including growth rates, discount rates, long-term growth rates, and revenue

● We reviewed the sensitivity analyses performed

by the Company to understand how changes in key assumptions could impact the fair value conclusions.

● We reviewed the disclosures in the financial

statements related to goodwill impairment to ensure adequacy and compliance with accounting standards.

Business Combination

10 unchanged sentences

among others:

● We obtained an understanding of the terms and

conditions of the business combination by reviewing the purchase agreement and other related documents.

● We evaluated the appropriateness of the valuation

methodologies used by management to determine the fair value of the identifiable assets acquired and liabilities assumed.

obtained an understanding of the terms and conditions of the business combination by reviewing

the purchase agreement and other related documents.

evaluated the appropriateness of the valuation methodologies used by management to determine

the fair value of the identifiable assets acquired and liabilities assumed.

This included

reviewing the discounted cash flow models, market approach, and cost approach used for the valuation.

● We tested the completeness and accuracy of the

purchase price allocation by verifying the consideration transferred.

● We involved our valuation specialists to assist

in assessing the methodologies and assumptions used by management in the fair value measurements of the acquired intangible assets.

reviewed the disclosures in the financial statements related to the business combination to ensure adequacy and compliance with accounting

We have served

as the Company’s auditor since 2024.

reviewing the discounted cash flow models, market approach, and cost approach used for the

tested the completeness and accuracy of the purchase price allocation by verifying the consideration

involved our valuation specialists to assist in assessing the methodologies and assumptions

used by management in the fair value measurements of the acquired intangible assets

reviewed the disclosures in the financial statements related to the business combination

to ensure adequacy and compliance with accounting standards.

/s/ CBIZ CPAs P.C .

CBIZ CPAs P.C.

We have served as the Company’s auditor

since 2024 (such date takes into account the acquisition of the attest business of Marcum llp

by CBIZ CPAs P.C.

effective November 1, 2024).

April 15, 2026

AEROSPACE, INC.

REPORT OF INDEPENDENT

REGISTERED PUBLIC ACCOUNTING FIRM

To the Stockholders and Board of Directors of

XTI Aerospace, Inc.

Opinion on the Financial Statements

We have audited the accompanying consolidated

balance sheet of XTI Aerospace, Inc.

(the “Company”) as of December 31, 2024, the related consolidated statement of operations,

comprehensive loss, changes in stockholders’ equity and cash flows for the year ended December 31, 2024, and the related notes (collectively

referred to as the “financial statements”).

In our opinion, based on our audit, the financial statements present fairly, in

all material respects, the financial position of the Company as of December 31, 2024, and the results of its operations and its cash flows

for the year ended December 31, 2024, in conformity with accounting principles generally accepted in the United States of America.

Basis for Opinion

These financial statements are the responsibility

of the Company’s management.

Our responsibility is to express an opinion on the Company’s financial statements based on our

We are a public accounting firm registered with the Public Company Accounting Oversight Board (United States) (“PCAOB”)

and are required to be independent with respect to the Company in accordance with the U.S.

federal securities laws and the applicable

rules and regulations of the Securities and Exchange Commission and the PCAOB.

We conducted our audit in accordance with the

standards of the PCAOB.

Those standards require that we plan and perform the audit to obtain reasonable assurance about whether the financial

statements are free of material misstatement, whether due to error or fraud.

The Company is not required to have, nor were we engaged

to perform, an audit of its internal control over financial reporting.

As part of our audit we are required to obtain an understanding

of internal control over financial reporting but not for the purpose of expressing an opinion on the effectiveness of the Company’s

internal control over financial reporting.

Accordingly, we express no such opinion.

Our audit included performing procedures to assess

the risks of material misstatement of the financial statements, whether due to error or fraud, and performing procedures that respond

to those risks.

Such procedures included examining, on a test basis, evidence regarding the amounts and disclosures in the financial statements.

Our audit also included evaluating the accounting principles used and significant estimates made by management, as well as evaluating

the overall presentation of the financial statements.

We believe that our audit provides a reasonable basis for our opinion.

/s/ Marcum LLP

We have served as the Company’s auditor

from 2024 through 2025.

April 15, 2025, except for the effects of the Discontinued Operations

as described in Note 19, which is April 15, 2026.

XTI AEROSPACE, INC.

AND SUBSIDIARIES

BALANCE SHEETS

thousands, except number of shares and par value data)

of December 31,

and cash equivalents

Accounts receivable, net of allowance for credit losses of $ 18 and $ 0 as of December 31, 2024 and December 31, 2023, respectively

expenses and other current assets

CONSOLIDATED BALANCE SHEETS

(In thousands, except number of shares

and par value data)

Current Assets

and equipment, net

lease right-of-use asset, net

AEROSPACE, INC.

Cash and cash equivalents

Accounts receivable, net

Other receivables

Prepaid expenses and other current assets

Current assets of discontinued operations (Note 19)

Total Current Assets

Property and equipment, net

Operating lease right-of-use asset, net

Intangible assets, net

Non-current assets of discontinued operations (Note 19)

XTI AEROSPACE, INC.

AND SUBSIDIARIES

BALANCE SHEETS (CONTINUED)

thousands, except number of shares and par value data)

of December 31,

and Stockholders’ Equity

party payables

expenses and other current liabilities

lease obligation, current

CONSOLIDATED BALANCE SHEETS (CONTINUED)

(In thousands, except number of shares

and par value data)

Current Liabilities

Term Liabilities

lease obligation, noncurrent

liabilities, noncurrent

and Contingencies (Note 19)

Stockholders’

Accounts payable

Related party payables

Accrued expenses and other current liabilities

Accrued interest

Customer deposits

Warrant liability

Operating lease obligation, current

Short-term debt

Current liabilities of discontinued operations (Note 19)

Total Current Liabilities

Long Term Liabilities

Long-term debt

Operating lease obligation, noncurrent

Non-current liabilities of discontinued operations (Note 19)

Total Liabilities

Commitments and Contingencies (Note 15)

Mezzanine Equity

Representative and placement agent warrants, net of issuance costs of $ 191

Stockholders’ Equity

Preferred Stock - $ 0.001 par value;

1 unchanged sentence

Series 4 Convertible Preferred Stock - 10,415 shares authorized;

1 issued, and 1 outstanding as of December 31, 2024 and December 31, 2023, respectively.

1 share issued, and 1 share outstanding as of December 31, 2025 and 2024, respectively.

Series 5 Convertible Preferred Stock - 12,000 shares authorized;

126 issued, and 126 outstanding as of December 31, 2024 and December 31, 2023, respectively.

126 shares issued, and 126 shares outstanding as of December 31, 2025 and 2024, respectively.

Series 9 Preferred Stock - 20,000 shares authorized;

11,302 and 1,331 shares issued and outstanding as of December 31, 2024, and 0 shares issued and outstanding as of December 31, 2023 (Liquidation preference of $ 1,401,589 )

0 shares issued and outstanding as of December 31, 2025, and 1,331 shares issued and 1,331 shares outstanding as of December 31, 2024.

Series 10 Convertible Preferred Stock - 25,000 shares authorized;

25,000 shares issued and outstanding as of December 31, 2025, and 0 shares issued and outstanding as of December 31, 2024 (Liquidation preference of $25,408,333)

Common Stock - $ 0.001 par value;

1 unchanged sentence

32,786,816 and 1,685,021 shares issued and outstanding as of December 31, 2025 and December 31, 2024, respectively.

paid-in capital

other comprehensive loss

Stockholders’ Equity (Deficit)

Liabilities and Stockholders’ Equity

accompanying notes are an integral part of these consolidated financial statements

AEROSPACE, INC.

Additional paid-in capital

Accumulated other comprehensive income

Accumulated deficit

Total Stockholders’ Equity

Noncontrolling interest – Class B Units of XTI Drones Holdings, LLC

Total Liabilities, Mezzanine Equity, and Equity

The accompanying notes are an integral part of

these consolidated financial statements

XTI AEROSPACE, INC.

AND SUBSIDIARIES

STATEMENTS OF OPERATIONS

thousands, except per share data)

the Years Ended

CONSOLIDATED STATEMENTS OF OPERATIONS

(In thousands, except per share data)

For the Years Ended

Cost of Revenues

Operating Expenses

Research and development

1 unchanged sentence

General and administrative

Merger-related transaction

Impairment of intangible

of intangible assets

Operating Expenses

from Operations

Income (Expense)

Interest expense

Interest income

Amortization of deferred

Loss on conversion of

note receivable to equity investment

Loss on extinguishment

of convertible notes payable

Change in fair value

of convertible notes payable

Change in fair value

of Damon investment and related warrants

Change in fair value

of warrant liability

Change in fair value

of JV obligation

income/(expense), net

Other Income (Expense)

Loss, before tax

tax provision

Preferred stock

return and dividend

Deemed dividend

Loss Attributable to Common Stockholders, basic and diluted

Loss Per Share - Basic and Diluted

$ ( 1,576.48 )

Weighted Average Shares

Outstanding, Basic and Diluted

accompanying notes are an integral part of these consolidated financial statements

AEROSPACE, INC.

Merger and acquisition transaction costs

Amortization of intangible assets

Total Operating Expenses

Loss from Operations

Other (Expense) Income

Interest expense, net

Amortization of deferred loan costs

Loss on conversion of note receivable to equity investment

Loss on extinguishment of debt

Provision for expected credit losses on convertible note investment

Change in fair value of convertible notes payable

Change in fair value of equity securities

Change in fair value of warrant liability

Warrant issuance expense

Other income, net

Total Other (Expense) Income

Loss from Continuing Operations Before Income Taxes

Income tax benefit (provision)

Net Loss from Continuing Operations, net of tax

Loss from discontinued operations, net of tax

Net (income) loss attributable to noncontrolling interest

Net Loss Attributable to XTI Aerospace, Inc.

Preferred stock dividends

Deemed dividends

Net Loss Attributable to Common Stockholders

Net Loss Per Share – Basic and Diluted:

Continuing operations

Discontinued operations

Net loss per share

Weighted Average Shares Outstanding, Basic and Diluted

The accompanying notes

are an integral part of these consolidated financial statements

XTI AEROSPACE, INC.

AND SUBSIDIARIES

STATEMENTS OF COMPREHENSIVE LOSS

the Years Ended

foreign exchange loss from cumulative translation adjustments

Comprehensive

accompanying notes are an integral part of these consolidated financial statements

AEROSPACE, INC.

CONSOLIDATED STATEMENTS OF COMPREHENSIVE

(In thousands)

For the Years Ended

Unrealized foreign currency translation adjustments relating to discontinued operations

Comprehensive Loss

Comprehensive Loss Attributable to:

XTI Aerospace, Inc.

Noncontrolling interest

Total Comprehensive Loss

The accompanying notes are an integral part of

these consolidated financial statements

XTI AEROSPACE, INC.

AND SUBSIDIARIES

STATEMENTS OF CHANGES STOCKHOLDERS’ EQUITY (DEFICIT)

THE YEARS ENDED December 31, 2024 and 2023

thousands, except share data)

CONSOLIDATED STATEMENTS OF CHANGES STOCKHOLDERS’

FOR THE YEARS ENDED December

31, 2025 and 2024

(In thousands, except share data)

Comprehensive

Stockholders’

- January 1, 2025

and preferred shares issued via merger

shares issued for net cash proceeds of ATM offering

shares issued as settlement of accrued compensation

Common shares issued

as prepayment of services

shares issued to Xeriant, Inc.

shares issued in exchange of Series 9 preferred stock

interest converted to Series 9 preferred stock

dividend related to Series 9 preferred stock exchange

of Series 9 preferred stock

9 preferred stock dividend accrual

shares issued for net cash proceeds of public offerings

shares issued for exercise of liability classified warrants

shares issued for conversion of debt

loss on debt conversions

shares issued in exchange of warrants

dividend related to December 2023 warrant exchange

Common shares issued

for exercise of warrants

shares issued for cashless exercise of warrants and options

contribution - forgiveness of related party payable

of noncontrolling interest in connection with Drone Nerds acquisition

from issuance of Series 10 Convertible Preferred Stock

costs related to Series 10 Convertible Preferred Stock

10 Convertible Preferred Stock dividend accrual

of Series 9 Preferred Stock

translation adjustment

Balance - December

accompanying notes are an integral part of these consolidated financial statements

AEROSPACE, INC.

Rounding adjustment for fractional shares resulting from 1-for-250 reverse

loss attributable to parent

(income) loss attributable to noncontrolling interest

- December 31, 2025

$ ( 162,323 )

The accompanying notes

are an integral part of these consolidated financial statements

XTI AEROSPACE, INC.

AND SUBSIDIARIES

STATEMENTS OF CHANGES IN STOCKHOLDERS’ EQUITY (DEFICIT)

THE YEARS ENDED December 31, 2024 and 2023

thousands, except share data)

CONSOLIDATED STATEMENTS OF CHANGES IN STOCKHOLDERS’

FOR THE YEARS ENDED December

31, 2025 and 2024

(In thousands, except share data)

Series 9 Preferred

Stock at Redemption

Comprehensive

Stockholders’

- January 1, 2023

from sale of common stock

of warrants with convertible notes

obligation reclassified to equity

- December 31, 2023

AEROSPACE, INC.

Balance - January 1, 2024

Common and preferred shares issued via merger

Common shares issued for net cash proceeds of ATM offering

Common shares issued as settlement of accrued compensation

Common shares issued as prepayment of services

Common shares issued to Xeriant, Inc.

Common shares issued in exchange of Series 9 Preferred Stock

Accrued interest converted to Series 9 Preferred Stock

Deemed dividend related to Series 9 Preferred Stock exchange

Redemption of Series 9 Preferred Stock

Series 9 Preferred Stock dividend accrual

Common shares issued for conversion of debt

Inducement loss on debt conversions

Common shares issued in exchange of warrants

Deemed dividend related to December 2023 warrant exchange

Common shares issued for exercise of warrants

Common shares issued for cashless exercise of warrants and options

Capital contribution – forgiveness of related party payable

Stock-based compensation

Cumulative translation adjustment

Balance – December 31, 2024

The accompanying notes are an integral part of

these consolidated financial statements

XTI AEROSPACE, INC.

AND SUBSIDIARIES

STATEMENTS OF CASH FLOWS

CONSOLIDATED STATEMENTS OF CASH FLOWS

(In thousands)

For the Years Ended

4 unchanged sentences

Amortization of right-of-use asset

Non-cash interest expense, net of interest income

Non-cash interest (income) expense, net

Stock-based compensation

Impairment of goodwill

Impairment of intangible assets

Provision for expected credit losses

Loss on conversion of note receivable to equity investment

Unrealized loss on equity investment

Change in fair value of JV obligation

Change in fair value of convertible notes payable

Loss on extinguishment of convertible notes payable

Loss on extinguishment of debt

Warrant issuance expense

Change in fair value of warrant liability

6 unchanged sentences

Accrued interest

Customer deposits

Deferred revenue

1 unchanged sentence

Net Cash Used in Operating Activities

Cash Flows Provided by (Used in) Investing Activities

Cash Flows (Used in) Provided by Investing Activities

Purchase of property and equipment

Cash received in purchase of Inpixon

Investment in convertible note receivable

Acquisition of Drone Nerds, net of cash acquired of $2.2 million

Purchase of intangible asset

Net Cash Provided by (Used in) Investing Activities

Cash From Financing Activities

Proceeds from sale of common stock and exercise of warrants

Net Cash (Used in) Provided by Investing Activities

Cash Flows Provided by Financing Activities

Net proceeds from sale of common stock and pre-funded warrants via public offerings

Net proceeds from ATM stock offerings

Net proceeds from issuance of Series 10 Convertible Preferred Stock

Net proceeds from the exercise of equity classified warrants

Net proceeds from the exercise of liability classified warrants

Net proceeds from issuance of promissory notes

Net proceeds from loan from Inpixon (prior to merger)

Net proceeds from issuance of convertible notes

Redemptions of Series 9 Preferred Stock

2 unchanged sentences

Effect of Foreign Exchange Rate on Changes on Cash

Net Increase (Decrease) in Cash and Cash Equivalents

Net Increase in Cash and Cash Equivalents

Cash and Cash Equivalents – Beginning of year

3 unchanged sentences

Non-cash investing and financing activities

Common shares issued for conversion of debt and accrued interest

Common shares issued for conversion of debt

Common shares issued in exchange of warrants and cashless exercise of warrants and options

5 unchanged sentences

Capital contribution – forgiveness of related party payable

Common shares issued in exchange of Series 9 preferred stock

Common shares issued in exchange of Series 9 Preferred Stock exchange

Series 9 Preferred Stock dividend accrued

3 unchanged sentences

ATM proceeds withheld as payment towards accounts payable

Warrants issued with convertible notes

Warrants issued with common stock

Reclassification of JV obligation to equity

Conversion of accrued interest to convertible note payable

accompanying notes are an integral part of these consolidated financial statements

AEROSPACE, INC.

Series 10 Convertible Preferred Stock dividend accrued

Placement agent warrants issued in Series 10 financing

Issuance of Class B Units in connection with acquisition

Issuance of promissory notes in connection with acquisition

The following table reconciles cash and cash equivalents

reported in the consolidated balance sheets to the amounts reported in the consolidated statements of cash flows (in thousands):

Year Ended December 31,

Cash and cash equivalents

Cash included in current assets of discontinued operations

Total cash per consolidated statement of cash flows

The accompanying notes are an integral part of

these consolidated financial statements

XTI AEROSPACE, INC.

AND SUBSIDIARIES

1 unchanged sentence

FOR THE YEARS ENDED DECEMBER 31, 2025 AND 2024

- Organization and Nature of Business

March 12, 2024 (the “Closing Date”), XTI Aerospace, Inc., the “Company”, formerly known as Inpixon (“Legacy

Inpixon”), Superfly Merger Sub Inc., a Delaware corporation and a wholly owned subsidiary of Legacy Inpixon (“Merger Sub”),

and XTI Aircraft Company, a Delaware corporation (“Legacy XTI”), completed their previously announced merger transaction

pursuant to that certain Agreement and Plan of Merger, dated as of July 24, 2023 and amended on December 30, 2023 and March 12, 2024

(the “XTI Merger Agreement”), pursuant to which Legacy XTI merged in a reverse triangular merger with Merger Sub with Legacy

XTI surviving the merger as a wholly-owned subsidiary of the Company (the “XTI Merger”).

In connection with the closing of

the XTI Merger, our corporate name changed from Inpixon to “XTI Aerospace, Inc.” and the combined company opened for trading

on the Nasdaq Capital Market on March 13, 2024 under the new ticker symbol “XTIA.”

Company determined the XTI Merger should be accounted for as a reverse acquisition with Legacy XTI being considered the accounting acquirer.

Therefore, the consolidated financial statements included in this report represent a continuation of the financial statements of Legacy

XTI and the results of operations of the accounting acquired entity, Legacy Inpixon, are included in the consolidated financial statements

as of the Closing Date and through the December 31, 2024 reporting date.

The Company is primarily an aircraft development company.

also provides real-time location systems (“RTLS”) for the industrial sector, which was Legacy Inpixon’s focus prior

to the closing of the XTI Merger.

Headquartered in Englewood, Colorado, the Company is developing a vertical takeoff and landing (“VTOL”)

airplane that is designed to take off and land like a helicopter and cruise like a fixed-wing business airplane.

Since 2013, the Company

has been engaged primarily in developing the aerodynamic performance and top-level engineering design of the TriFan 600, building and

testing a two-thirds scale unmanned version of the TriFan 600, generating pre-orders for the TriFan 600, and seeking funds from investors

to enable the Company to advance the detailed design and certification of the TriFan 600, and to eventually engage in commercial production

and sale of TriFan 600.

RTLS solutions leverage cutting-edge technologies such as IoT, AI, and big data analytics to provide real-time tracking and monitoring

of assets, machines, and people within industrial environments.

With our RTLS solutions, businesses can achieve improved operational

efficiency, enhanced safety and reduced costs.

By having real-time visibility into operations, industrial organizations can make informed,

data-driven decisions, minimize downtime, and ensure compliance with industry regulations.

Note 1 - Description of Business and Organization

The following describes the Company’s business and organizational

XTI Aerospace, Inc.

(the “Company”) is a U.S.-based aerospace

company focused on unmanned aircraft systems (“UAS”) and related services.

The Company provides UAS solutions through a combination

of product distribution and service offerings, including the sale and support of UAS platforms, payloads, sensors, batteries, accessories

and related equipment, as well as operator training, program enablement, repair and maintenance, and other fleet lifecycle support services

for enterprise, public safety, government, and defense-related customers.

The Company is also starting in 2026 the design and development

of unmanned platforms for defense and commercial applications.

On March 12, 2024 (the “Closing Date”), the Company, formerly

known as Inpixon (“Legacy Inpixon”), completed a reverse triangular merger with XTI Aircraft Company, a Delaware corporation

(“Legacy XTI”), pursuant to the Agreement and Plan of Merger dated July 24, 2023, as amended (the “XTI Merger”).

In connection with the transaction, Legacy XTI became a wholly owned subsidiary of the Company, and the Company changed its name to “XTI

Aerospace, Inc.” The Company’s common stock began trading on the Nasdaq Capital Market under the ticker symbol “XTIA”

on March 13, 2024.

The XTI Merger was accounted for as a reverse acquisition, with Legacy XTI treated as the accounting acquirer and Legacy

Inpixon treated as the accounting acquiree.

Accordingly, the consolidated financial statements represent a continuation of the financial

statements of Legacy XTI, and include the results of operations of Legacy Inpixon from the Closing Date.

In November 2025, the Company completed the acquisition

of Drone Nerds, LLC and Anzu Robotics, LLC (collectively, “Drone Nerds”) through XTI Drones Holdings, LLC, a Texas limited

liability company (“XTI Drones Holdings”).

The Company holds an 83.403 % controlling equity interest in XTI Drones Holdings

through its ownership of Class A Units, and the remaining 16.597 % equity interest is held by other Class B unitholders.

The results of

Drone Nerds have been included in the Company’s consolidated financial statements from November 10, 2025, the acquisition date,

and the ownership interest not held by the Company is reflected as noncontrolling interest.

Drone Nerds currently represents the Company’s

primary UAS solutions and services operations.

During December 2025, the Company committed to

a plan to dispose of its historical Industrial IoT / real-time location systems (“RTLS”) operations (the “Inpixon Business”)

and classified the business as held for sale.

The disposition of the Inpixon Business was completed on February 3, 2026.

The Inpixon Business

historically comprised the Company’s Industrial IoT operations, which previously represented the Company’s Industrial IoT

reportable segment.

The results of the Inpixon Business have been presented as discontinued operations in the accompanying consolidated

financial statements for all periods presented.

Unless otherwise indicated, the information included in the accompanying notes to the

consolidated financial statements relates to the Company’s continuing operations.

See Note 19 for additional information regarding

discontinued operations.

Reverse Stock Splits

On January 10, 2025, the Company effected a 1-for-250

reverse stock split of its outstanding common stock.

Prior to that, on March 12, 2024, the Company effected a 1-for-100 reverse stock

split of its outstanding common stock.

The par value of the common stock was not changed as a result of either reverse stock split.

All share and per share amounts presented in these

consolidated financial statements have been retroactively adjusted to reflect the reverse stock splits.

Consolidation

consolidated financial statements have been prepared using the accounting records of Legacy XTI and as of March 12, 2024 and forward

(the effective date of the XTI Merger) the accounting records of XTI Aerospace, Inc.

(formerly known as Inpixon), Inpixon GmbH (formerly

known as Nanotron Technologies GmbH), Inpixon Holding UK Limited, and Intranav GmbH.

All material inter-company balances and transactions

have been eliminated.

The consolidated financial statements include the

accounts of the Company and its wholly owned and majority-owned subsidiaries.

The results of Drone Nerds have been included in the consolidated

financial statements from November 10, 2025, the acquisition date.

All intercompany balances and transactions have been eliminated in

consolidation.

AEROSPACE, INC.

2 unchanged sentences

FOR THE YEARS ENDED DECEMBER 31, 2025 AND 2024

3 - Summary of Significant Accounting Policies

of December 31, 2024, the Company has a working capital deficit of approximately $ 8.8 million, and cash of approximately $ 4.1 million.

For the year ended December 31, 2024, the Company had a net loss of approximately $ 35.6 million.

Note 3 - Summary of Significant Accounting

As of December 31, 2025, the Company had cash

and cash equivalents of approximately $ 16.7 million and no outstanding borrowings under its credit facility.

During the year ended December

the Company used approximately $ 22.3 million of cash for operating activities.

31, 2025, the Company incurred a net loss of approximately $ 68.5 million and used approximately $ 36.6 million of cash in operating activities.

Management has evaluated the Company’s liquidity

and capital requirements in accordance with applicable accounting guidance.

The Company’s historical operating losses and negative

cash flows from operations could raise substantial doubt about its ability to continue as a going concern.

The Company’s liquidity position has been

supported by capital raising activities during 2025, including public offerings of equity securities and the issuance of convertible preferred

In addition, the Company has access to financing arrangements, including an asset-based lending facility, which provides borrowing

availability subject to a borrowing base.

Management expects to fund operations through a combination of existing cash balances, borrowing

availability under its credit facility, and its ability to manage discretionary expenditures.

While the Company may pursue additional

capital raising activities, such activities are not considered in management’s assessment of its ability to meet its obligations.

Based on these considerations, management believes

that the Company will have sufficient liquidity to meet its obligations for at least twelve months from the date of issuance of these

consolidated financial statements.

Use of Estimates

The preparation of financial statements in conformity

with accounting principles generally accepted in the United States of America (“GAAP”) requires management to make estimates

and assumptions that affect the reported amounts of assets and liabilities and disclosure of contingent assets and liabilities at the

date of the financial statements and the reported amounts of revenues and expenses during each of the reporting periods.

Actual results

could differ from those estimates.

The Company’s significant estimates consist of:

the valuation of stock-based compensation

the fair value

measurements associated with business combinations, including the valuation of acquired intangible assets and leases, goodwill, and

non-cash consideration;

the valuation and impairment assessment of goodwill and intangible assets;

the allowance for credit losses on accounts receivable;

the valuation of financial instruments measured at fair value;

the valuation allowance for deferred tax assets.

Cash and Cash Equivalents

Cash consists primarily of

demand deposit bank accounts, which, from time to time, may exceed federally insured limits.

The Company considers all highly liquid

investments with an original maturity from date of purchase of three months or less, or that are readily convertible into known amounts

of cash, to be cash equivalents.

As of December 31, 2025 and 2024, the Company did not hold any cash equivalents.

Statement of Cash Flows

The Company presents cash flows from financing

activities on a net basis for transactions in which proceeds are received net of offering costs and other transaction fees.

XTI AEROSPACE, INC.

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS

FOR THE YEARS ENDED DECEMBER 31, 2025 AND 2024

The Company has elected to present cash flows from discontinued operations

on a net basis within each category of the consolidated statements of cash flows.

Accordingly, the consolidated statements of cash flows

do not separately present cash flows from discontinued operations within operating, investing and financing activities.

Additional information

regarding discontinued operations is included in Note 19.

Inventories consist primarily of finished goods

held for resale, including drones and related accessories, and are stated at the lower of cost or net realizable value.

Cost is determined

using the first-in, first-out (“FIFO”) method.

The Company does not manufacture these products and instead purchases inventory

from third-party suppliers, including, in certain cases, products manufactured on its behalf by third-party contract manufacturers, for

distribution to enterprise, public safety, government and commercial customers.

Inventory costs include amounts paid to suppliers

and other costs incurred to bring inventories to their present location and condition, including freight and handling costs.

general and administrative expenses are expensed as incurred and are not included in inventory cost.

Net realizable value is the estimated selling

price in the ordinary course of business, less reasonably predictable costs of completion, disposal and transportation.

The Company evaluates

inventory on a regular basis for excess, slow-moving or obsolete items based on historical sales trends, forecasted demand, product lifecycle

considerations and market conditions.

When required, the Company records a reserve to write down inventory to net realizable value.

Credit Risk and Concentrations

Financial instruments that subject the Company to credit risk consist

principally of trade accounts receivable and cash and cash equivalents.

The Company maintains its cash and cash equivalents primarily

with high-credit-quality financial institutions in the United States and, prior to the Inpixon Business disposition, in Germany.

balances maintained with financial institutions in the United States are generally in excess of federally insured limits.

mitigates its credit risk by limiting its exposure to any single financial institution and by monitoring the credit quality of its counterparties.

The Company places its cash with financial institutions that have long-term credit ratings of at least A- or equivalent, as assigned by

major credit rating agencies.

The Company performs certain credit evaluation procedures and does

not require collateral for financial instruments subject to credit risk.

The Company believes that credit risk is limited because the

Company routinely assesses the financial strength of its customers and, based upon factors surrounding the credit risk of its customers,

establishes an allowance for credit losses.

The following table presents a rollforward of the Company’s allowance

for credit losses (in thousands):

Year Ended December 31, 2025

Beginning balance

Provision for credit losses

Ending balance

Trade accounts receivable acquired in connection with the Drone Nerds acquisition

were recorded at fair value at the acquisition date, which reflects expected credit losses.

No provision for credit losses was recorded

related to these receivables during the post-acquisition period.

Due to the short time between the acquisition date and the year end,

and the existence of credit insurance coverage on these receivables, any incremental anticipated credit losses from Drone Nerds accounts

receivable were not material.

During the year ended December 31, 2025, the Company

sold 998,447 shares of common stock under the Equity Distribution Agreement at per share prices between approximately $ 10.02 and $ 337.36 ,

resulting in net proceeds to the Company of approximately $ 22.2 million.

During May 2024, the Company entered into a note purchase agreement

with Streeterville Capital, LLC, pursuant to which the Company issued two secured promissory notes to Streeterville Capital, LLC in May

2024, resulting in aggregate cash proceeds to the Company of $ 2.0 million.

can be no assurances that the Company will ever earn revenues sufficient to support its operations, or that it will ever be profitable.

In order to continue its operations, the Company has supplemented the revenues it earned with proceeds from the sale of its equity securities

and proceeds from loans.

The Company’s recurring losses and utilization of cash in its

operations are indicators of going concern.

However, the Company’s current liquidity position was favorably impacted by the cash

raised under public offerings aggregating approximately $ 23.3 million subsequent to December 31, 2024, along with repaying and settling

certain debt and other obligations during March 2025 (refer to Note 23).

This, along with the Company’s ability to defer or eliminate

certain operating expenses that are under its control and the revenues expected to be generated by the Industrial IoT segment lead the

Company to believe it has the ability to mitigate such concerns for a period of at least one year from the date these financial statements

preparation of financial statements in conformity with GAAP requires management to make estimates and assumptions that affect the reported

amounts of assets and liabilities and disclosure of contingent assets and liabilities at the date of the financial statements and the

reported amounts of revenues and expenses during each of the reporting periods.

Actual results could differ from those estimates.

Company’s significant estimates consist of:

valuation of stock-based compensation;

valuation of the Company’s common stock issued and assets acquired in transactions, including acquisitions;

valuation of equity securities;

valuation of convertible notes receivable;

valuation of warrant liabilities and assets;

the valuation of convertible notes payable, at fair value;

valuation of loan conversion derivatives;

valuation allowance for deferred tax assets.

AEROSPACE, INC.

AND SUBSIDIARIES

recorded a provision for credit losses of approximately $ 2.0 million related to a convertible promissory note receivable.

As of December

31, 2025, the note receivable was fully reserved (see Note 13).

The provision for credit losses presented in the

consolidated statement of cash flows includes approximately $ 0.1 million related to discontinued operations, which is excluded from the

allowance rollforward above.

XTI AEROSPACE, INC.

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS

FOR THE YEARS ENDED DECEMBER 31, 2025 AND 2024

and Cash Equivalents

consists primarily of demand deposit bank accounts, which, from time to time, may exceed federally insured limits.

The Company considers

all highly liquid investments with an original maturity from date of purchase of three months or less, or that are readily convertible

into known amounts of cash, to be cash equivalents.

Risk and Concentrations

instruments that subject the Company to credit risk consist principally of trade accounts receivable and cash and cash equivalents.

Company performs certain credit evaluation procedures and does not require collateral for financial instruments subject to credit risk.

The Company believes that credit risk is limited because the Company routinely assesses the financial strength of its customers and,

based upon factors surrounding the credit risk of its customers, establishes an allowance for credit losses.

customers who account for 10% or more of the Company’s revenue for the year ended December 31, 2024 or 10% or more of the Company’s

outstanding receivable balance as of December 31, 2024 are presented as follows:

of accounts receivable

Ended December 31, 2024

of December 31, 2024

** Represents less than 10% of the total for the respective period

Company did not have revenue for the year ended December 31, 2023.

The Company did not have outstanding trade receivables as of December

vendors who account for 10% or more of the Company’s purchases or 10% or more of the Company’s outstanding payable balance

are presented as follows for the periods indicated:

of accounts payable

Ended December 31, 2024

of December 31, 2024

of accounts payable

Ended December 31, 2023

of December 31, 2023

** Represents

less than 10% of the total for the respective period

AEROSPACE, INC.

AND SUBSIDIARIES

The customers from continuing

operations who account for 10% or more of the Company’s revenue for the year ended December 31, 2025 or 10% or more of the

Company’s outstanding receivable balance as of December 31, 2025 are presented as follows:

For the year ended December 31, 2024, all revenue was generated by

the Company’s Inpixon Business, which has been classified as discontinued operations as of December 31, 2025.

The vendors from continuing

operations who account for 10% or more of the Company’s purchases for the year ended December 31, 2025 or 10% or more of

the Company’s outstanding accounts payable balance as of December 31, 2025 are presented as follows.

XTI AEROSPACE, INC.

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS

FOR THE YEARS ENDED DECEMBER 31, 2025 AND 2024

Company accounts for business combinations under Financial Accounting Standards Board (“FASB”) Accounting Standards Codification

(“ASC”) 805, “Business Combinations” using the acquisition method of accounting, and accordingly, the assets

and liabilities of the acquired business are recorded at their fair values at the date of acquisition.

The excess of the purchase price

over the estimated fair value is recorded as goodwill.

All acquisition costs are expensed as incurred.

In-Process Research and Development (“IPR&D ” )

accordance with authoritative guidance, the Company recognizes IPR&D at fair value as of the acquisition date and subsequently accounts

for it as an indefinite-lived intangible asset until completion or abandonment of the associated research and development efforts.

an IPR&D project has been completed, the useful life of the IPR&D asset is determined and amortized accordingly.

asset is abandoned, the remaining carrying value is written off.

During fiscal year 2024, the Company acquired IPR&D through the

Assets and Goodwill

intangible assets primarily consist of developed technology, patents, customer relationships, and trade names/trademarks.

They are amortized

ratably over a range of 5 to 15 years, which approximates customer attrition rate and technology obsolescence.

Company tests goodwill for potential impairment at least annually, or more frequently if an event or other circumstance indicates that

the Company may not be able to recover the carrying amount of the net assets of the reporting unit.

In evaluating goodwill for impairment,

the Company may assess qualitative factors to determine whether it is more likely than not (that is, a likelihood of more than 50%) that

the fair value of a reporting unit is less than its carrying amount.

If the Company bypasses the qualitative assessment, or if the Company

concludes that it is more likely than not that the fair value of a reporting unit is less than its carrying value, then the Company performs

a quantitative impairment test by comparing the fair value of a reporting unit with its carrying amount.

Company calculates the estimated fair value of a reporting unit using a weighting of the income and market approaches.

For the income

approach, the Company uses internally developed discounted cash flow models that include the following assumptions, among others:

of revenues, expenses, and related cash flows based on assumed long-term growth rates and demand trends;

expected future investments

to grow new units;

and estimated discount rates.

For the market approach, the Company uses internal analyses based primarily on market

The Company bases these assumptions on its historical data and experience, third party appraisals, industry projections,

micro and macro general economic condition projections, and its expectations.

For the year ended December 31, 2024, the Company estimated

the fair value of a reporting unit with 100 % weighting to the income approach.

Company reviews its long-lived assets, inclusive of its right-of-use assets, for impairment whenever events or changes in circumstances

indicate the carrying amount of an asset may not be recoverable.

Recoverability of assets held and used is measured by comparison of

the carrying amount of an asset to the future undiscounted cash flows expected to be generated from the use of the asset and its eventual

If the carrying amount of an asset group exceeds its estimated future undiscounted cash flows, an impairment charge is recognized

for the amount by which the carrying amount of the asset group exceeds its fair value.

the year ended December 31, 2024, the Company determined that its long-lived assets were impaired by $ 2.5 million.

For the year ended

December 31, 2023, the Company determined none of its long-lived assets were impaired.

AEROSPACE, INC.

AND SUBSIDIARIES

Intangible Assets and Goodwill

Finite-lived intangible assets primarily consist

of developed technology, patents, customer relationships, and trade names and trademarks.

Finite-lived intangible assets are amortized

on a straight-line basis over their estimated useful lives, generally ranging from 5 to 15 years.

The Company reviews the estimated useful

lives of intangible assets periodically and adjusts them if necessary.

Goodwill represents the excess of the purchase

price of an acquired business over the fair value of identifiable net assets acquired.

Goodwill is not amortized but is tested for impairment

at least annually as of October 1, or more frequently if events or changes in circumstances indicate that goodwill may be impaired.

The Company may first perform a qualitative assessment

to determine whether it is more likely than not that the fair value of a reporting unit is less than its carrying amount.

If the Company

bypasses the qualitative assessment, or if the qualitative assessment indicates potential impairment, the Company performs a quantitative

impairment test by comparing the fair value of the reporting unit to its carrying amount.

If the carrying amount exceeds fair value, an

impairment charge is recognized in an amount equal to the excess, limited to the total amount of goodwill allocated to the reporting unit.

The Company estimates the fair value of its reporting

units using the income approach and/or the market approach.

The income approach is based on discounted cash flow models that include assumptions

regarding projected revenues, expenses, cash flows, long-term growth rates, and discount rates.

The market approach is based on comparable

market data and valuation multiples of similar companies.

Long-lived assets, including finite-lived intangible

assets and operating lease right-of-use assets, are reviewed for impairment whenever events or changes in circumstances indicate that

the carrying amount of an asset group may not be recoverable.

Recoverability is assessed by comparing the carrying amount of the asset

group to the undiscounted cash flows expected to result from the use and eventual disposition of the asset group.

If the carrying amount

exceeds the undiscounted cash flows, an impairment charge is recognized for the amount by which the carrying amount exceeds fair value.

Long-lived assets and disposal groups classified

as held for sale are measured at the lower of carrying amount or fair value less costs to sell.

Depreciation and amortization cease upon

classification as held for sale.

See Note 19 – Discontinued Operations for impairment charges recognized in connection with the

classification of the Inpixon Business as held for sale.

XTI AEROSPACE, INC.

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS

FOR THE YEARS ENDED DECEMBER 31, 2025 AND 2024

accordance with ASC Topic 606, Revenue from Contracts with Customers (“ASC 606”), the Company recognizes revenue when the

customer obtains control of promised goods, in an amount that reflects the consideration that it expects to receive in exchange for those

To determine revenue recognition for arrangements that the Company determines are within the scope of ASC 606, the Company performs

the following five steps:

(i) identify the contract with a customer, (ii) identify the performance obligations in the contract, (iii)

determine the transaction price, including variable consideration, if any, (iv) allocate the transaction price to the performance obligations

in the contract, and (v) recognize revenue when (or as) the Company satisfies a performance obligation.

The Company only applies the

five-step model to contracts when it is probable that it will collect the consideration to which it is entitled in exchange for the goods

it transfers to a customer.

and Software Revenue Recognition

sales of hardware and software products, the Company’s performance obligation is satisfied at a point in time when they are shipped

to the customer, at which control is deemed transferred to the customer, and has title of the product and holds the risks and rewards

of ownership.

Company leverages drop-ship arrangements with many of its vendors and suppliers to deliver products to customers without having to physically

hold the inventory at its warehouse.

In such arrangements, the Company negotiates the sale price with the customer, pays the supplier

directly for the product shipped, bears credit risk of collecting payment from its customers and is ultimately responsible for the acceptability

of the product and ensuring that such product meets the standards and requirements of the customer.

Accordingly, the Company concluded

it is the principal in the transaction with the customer and records revenue on a gross basis.

The Company receives fixed consideration

for sales of hardware and software products.

The Company’s customers generally pay within 30 to 60 days from the receipt of a customer

approved invoice.

The Company has elected the practical expedient to expense the costs of obtaining a contract when they are incurred

because the amortization period of the asset that otherwise would have been recognized is less than a year.

As A Service Revenue Recognition

respect to sales of the Company’s maintenance, consulting and other service agreements, customers pay fixed monthly fees in exchange

for the Company’s service.

The Company’s performance obligation is satisfied over time as the digital advertising and electronic

services are provided continuously throughout the service period.

The Company recognizes revenue evenly over the service period using

a time-based measure because the Company is providing continuous access to its service.

Services Revenue Recognition

Company’s professional services include milestone, fixed fee and time and materials contracts.

Professional services under milestone

contracts are accounted for using the percentage of completion method.

As soon as the outcome of a contract can be estimated reliably,

contract revenue is recognized in the consolidated statement of operations in proportion to the stage of completion of the contract.

Contract costs are expensed as incurred.

Contract costs include all amounts that relate directly to the specific contract, are attributable

to contract activity, and are specifically chargeable to the customer under the terms of the contract.

timing of the Company’s revenue recognition may differ from the timing of payment by its customers.

The Company records a receivable

when revenue is recognized prior to payment and the Company has an unconditional right to payment.

Alternatively, when payment precedes

the provision of the related services, the Company records deferred revenue until the performance obligations are satisfied, principally

within one year.

AEROSPACE, INC.

The Company determines whether an arrangement

is or contains a lease at contract inception.

A lease exists when a contract conveys the right to control the use of identified property

or equipment for a period of time in exchange for consideration.

The Company recognizes a right-of-use (“ROU”)

asset and a corresponding lease liability for all leases with a term greater than 12 months at the commencement date.

ROU assets represent

the Company’s right to use an underlying asset over the lease term, and lease liabilities represent the obligation to make lease

payments arising from the lease.

Lease liabilities are measured at the present

value of fixed lease payments over the lease term, including renewal options that are reasonably certain to be exercised.

rate implicit in the lease is generally not readily determinable, the Company uses its incremental borrowing rate at lease commencement

to discount lease payments.

The incremental borrowing rate represents the rate of interest the Company would have to pay to borrow, on

a collateralized basis, an amount equal to the lease payments over a similar term in a similar economic environment.

ROU assets are measured based on the initial lease

liability, adjusted for lease payments made at or before commencement, lease incentives received, and initial direct costs.

Lease expense for operating leases is recognized on a straight-line

basis over the lease term.

Variable lease payments that do not depend on an index or rate are expensed as incurred and are not included

in the measurement of lease liabilities.

These primarily include payments based on usage or other variable factors.

The Company has elected the short-term lease exemption

for leases with a term of 12 months or less.

The Company has elected the practical expedient to combine lease and non-lease components

for all classes of underlying assets and account for them as a single lease component.

The Company reassesses leases

upon the occurrence of certain events, including modifications or changes in circumstances that impact the lease term or expected lease

When a lease liability is remeasured, a corresponding adjustment is made to the related ROU asset .

Revenue Recognition

The Company recognizes revenue in accordance with

ASC Topic 606, Revenue from Contracts with Customers.

Revenue is recognized when control of promised goods transfers to the customer in

an amount that reflects the consideration the Company expects to receive in exchange for those goods.

Revenue from continuing operations is primarily

derived from the sale and distribution of high-end drones, related equipment, accessories, and components to wholesale and retail customers.

XTI AEROSPACE, INC.

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS

FOR THE YEARS ENDED DECEMBER 31, 2025 AND 2024

Product Sales

Revenue is recognized at a point in time when

control transfers to the customer, which generally occurs:

● Upon shipment for wholesale transactions (FOB

shipping point), or

● At the point of sale for retail transactions.

The Company is generally the principal in its sales arrangements as

it controls the goods prior to transfer to the customer, establishes pricing, bears inventory and credit risk, and is responsible for

Accordingly, revenue is recognized on a gross basis.

In limited instances, the Company facilitates the sale of third-party

service offerings (e.g., product protection programs), for which it acts as an agent and recognizes revenue on a net basis;

are not material.

Payment terms vary by customer and channel and

generally range from immediate payment at retail to 30–60 days for wholesale customers.

The transaction price may include variable consideration

in the form of volume discounts, rebates, and estimated product returns.

Revenue is recognized net of estimated returns and allowances.

The Company estimates refund liabilities based on historical return patterns and current trends and records a reserve at each reporting

Freight billed to customers is included in net

Shipping and handling costs are treated as fulfillment costs and included in cost of sales.

Deferred revenue represents customer payments

received in advance of shipment.

Revenue is recognized when the related product is shipped and control transfers to the customer.

Company does not have material contract assets.

The Company may also provide certain service-based

offerings, including product protection programs, that represent stand-ready obligations satisfied over time.

Revenue associated with

these arrangements is recognized over the coverage period.

Such arrangements are not material to the consolidated financial statements.

Vendor Consideration

Consideration received from vendors, including

price protection, rebates, and promotional incentives, is accounted for as a reduction of cost of sales in accordance with ASC 705-20,

Cost of Sales and Services—Accounting for Consideration Received from a Vendor.

Practical Expedients

The Company has elected the practical expedient

related to significant financing components, as the period between transfer of goods and customer payment is generally one year or less.

The Company also expenses incremental costs of obtaining contracts when the amortization period would have been one year or less.

While the Company offers certain services, software,

and training as part of its UAS solutions, these offerings are generally sold on a standalone basis or are not material, and therefore

do not result in material multiple performance obligation arrangements requiring allocation of transaction price.

XTI AEROSPACE, INC.

AND SUBSIDIARIES

1 unchanged sentence

FOR THE YEARS ENDED DECEMBER 31, 2025 AND 2024

The Company periodically enters into aircraft reservation agreements

that include a deposit placed by a potential customer.

The deposits serve to prioritize orders when the TriFan 600 airplane becomes available

for delivery.

Customers making deposits are not obligated to purchase any airplanes until they execute a definitive purchase agreement.

Customers may request return of their deposit any time up until the execution of a purchase agreement.

The Company records such advance

deposits as a liability and defers the related revenue recognition until delivery of an airplane occurs, if any.

Company’s stock-based compensation relates to stock options granted to employees and non-employees.

The Company recognizes the

cost of share-based awards granted to employees and non-employees based on the estimated grant-date fair value of the awards.

are accounted for as they occur, which may result in negative expense when forfeitures exceed the expense recorded within the period.

Company recognizes expense on a straight-line basis over the requisite service period of the award, which is generally equal to the vesting

period of the award.

Company estimates the grant-date fair value of the stock option awards with service only vesting conditions using the Black-Scholes option-pricing

Black-Scholes option-pricing model utilizes inputs and assumptions which involve inherent uncertainties and generally require significant

As a result, if factors or expected outcomes change and significantly different assumptions or estimates are used, the Company’s

stock-based compensation could be materially different.

Significant inputs and assumptions include:

value of Common Stock – As there was no public market for Legacy XTI’s common

stock prior to the XTI Merger, the fair value of the shares of common stock underlying the

stock-based awards on the grant-date has historically been determined by Legacy XTI’s

Board of Directors with assistance of third-party valuation specialists.

Board of Directors exercised reasonable judgment and considered a number of objective and

subjective factors to determine the best estimate of the fair market value, which included

important developments in Legacy XTI’s operations, actual operating results, financial

performance, external market conditions, equity market conditions of comparable public companies,

and the lack of marketability of Legacy XTI’s common stock.

Term – The Company’s expected term represents the period that the Company’s

stock-based awards are expected to be outstanding and is determined using the simplified

method (based on the mid-point between the vesting date and the end of the contractual term).

Volatility – Because Legacy XTI was privately held prior to the XTI Merger and

did not have an active trading market for its common stock, the expected volatility was estimated

based on the average volatility for publicly traded companies that the Company considers

to be comparable, over a period equal to the expected term of the stock option grants.

Interest Rate – The risk-free interest rate is based on the U.S.

Treasury zero

coupon issues in effect at the time of grant for periods corresponding with the expected

term of option.

Dividend – The Company has never paid dividends on its common stock and has no

plans to pay dividends on its common stock.

Therefore, the Company used an expected dividend

yield of zero.

AEROSPACE, INC.

Stock-Based Compensation

The Company accounts for stock-based compensation

in accordance with ASC Topic 718, Compensation—Stock Compensation.

Stock-based compensation expense is measured at the grant date

based on the fair value of the award and is recognized as expense over the requisite service period, which is generally the vesting period.

Stock-based compensation expense is recorded within the accompanying consolidated statements of operations based on the functional classification

of the related employee.

For awards with service-based vesting conditions

only, the Company recognizes compensation expense on a straight-line basis over the requisite service period.

Forfeitures are recognized

as they occur.

Stock Options

The Company estimates the grant-date fair value

of stock option awards using the Black-Scholes option-pricing model.

The Black-Scholes model requires the use of subjective assumptions,

including the expected term of the option, expected volatility, risk-free interest rate, and expected dividend yield.

Changes in these

assumptions could materially affect the fair value of stock option awards and the related stock-based compensation expense.

The assumptions used in the Black-Scholes model

are determined as follows:

● Fair Value of Common Stock — For

awards granted after the Company became publicly traded in connection with the XTI Merger, the fair value of the Company’s common

stock is based on the closing market price of the Company’s common stock on the grant date.

For awards granted prior to the XTI

Merger, the fair value of Legacy XTI’s common stock was determined by Legacy XTI’s board of directors with assistance from

third-party valuation specialists.

Expected Term — The expected term represents the period that stock options are expected to be outstanding.

The Company estimates expected term using the simplified method, which is based on the midpoint between the vesting date and the contractual term, as the Company does not have sufficient historical exercise data to estimate expected term.

● Expected Volatility — The expected

volatility is based on the historical volatility of the Company’s common stock, or, for periods where sufficient historical information

is not available, a peer group of publicly traded companies considered comparable to the Company.

● Risk-Free Interest Rate — The risk-free

interest rate is based on the U.S.

Treasury yield curve in effect at the time of grant for a term consistent with the expected term of

● Expected Dividend Yield — The Company

has never declared or paid cash dividends on its common stock and does not currently expect to pay dividends in the foreseeable future.

Accordingly, an expected dividend yield of zero is used.

Legacy XTI did not grant stock options after 2023.

XTI AEROSPACE, INC.

AND SUBSIDIARIES

1 unchanged sentence

FOR THE YEARS ENDED DECEMBER 31, 2025 AND 2024

Loss Per Share

loss per share attributable to common stockholders is computed using the two-class method required for multiple classes of common stock

and participating securities.

The Company’s participating securities included the Company’s convertible preferred stock and

preferred stock.

Neither the holders of convertible preferred stock, preferred stock nor the holders of the Company’s common stock

warrants have a contractual obligation to share in losses.

net loss per share attributable to common stockholders is calculated by dividing the net loss, as adjusted for any dividends on the preferred

stock for the period, attributable to common stockholders by the weighted-average number of shares of common stock outstanding during

the period, adjusted for outstanding shares that are subject to repurchase or outstanding shares that are contingently returnable by

Contingently issuable shares, including shares that are issuable for little or no cash consideration, are considered outstanding

common shares and included in net loss per share as of the date that all necessary conditions have been satisfied.

Such shares include

outstanding penny warrants and shares issuable to Xeriant Inc.

(“Xeriant”) related to the joint venture arrangement that

expired on May 31, 2023.

net loss per share is computed by giving effect to all potentially dilutive securities outstanding for the period using the treasury

stock method or the if-converted method based on the nature of such securities.

For periods in which the Company reports net losses,

diluted net loss per common share attributable to common stockholders is the same as basic net loss per common share attributable to

common stockholders, because potentially dilutive common shares are not assumed to have been issued if their effect is anti-dilutive.

Company records a provision for income taxes for the anticipated tax consequences of the reported results of operations using the asset

and liability method.

Deferred income taxes are recognized by applying enacted statutory tax rates applicable to future years to differences

between the financial statement carrying amounts of existing assets and liabilities and their respective tax bases as well as net operating

loss and tax credit carryforwards.

The effect on deferred tax assets and liabilities of a change in tax rates is recognized in income

in the period that includes the enactment date.

The measurement of deferred tax assets is reduced, if necessary, by a valuation allowance

for any tax benefits for which future realization is uncertain.

The Company does not recognize certain tax benefits from uncertain tax

positions within the provision for income taxes.

The Company may recognize a tax benefit only if it is more likely than not the tax position

will be sustained on examination by the taxing authorities, based on the technical merits of the position.

The tax benefits recognized

in the financial statements from such positions are then measured based on the largest benefit that has a greater than 50% likelihood

Net Loss Per Share

Basic net loss per share is computed by dividing

net loss attributable to common stockholders by the weighted-average number of shares of common stock outstanding during the period.

Net loss attributable to common stockholders reflects

net loss adjusted for any dividends declared or accumulated on preferred stock and increased or reduced by net income or loss attributable

to noncontrolling interests.

Diluted net loss per share is computed by giving

effect to all potentially dilutive common stock equivalents outstanding during the period, including stock options, warrants (including

pre-funded warrants), convertible preferred stock, and other instruments that may be settled in shares of common stock, using the treasury

stock method or the if-converted method, as applicable.

For periods in which the Company reports a net

loss, diluted net loss per share is the same as basic net loss per share because the inclusion of potentially dilutive securities would

be anti-dilutive.

Potentially dilutive securities excluded from

the computation of diluted net loss per share are disclosed separately in the notes to the consolidated financial statements.

The Company accounts for income taxes under the

asset and liability method in accordance with ASC Topic 740, Income Taxes.

Deferred tax assets and liabilities are recognized for the

future tax consequences attributable to differences between the financial statement carrying amounts of existing assets and liabilities

and their respective tax bases, as well as for net operating loss and tax credit carryforwards.

Deferred tax assets and liabilities are

measured using enacted tax rates expected to apply in the periods in which the temporary differences are expected to reverse.

The Company evaluates deferred tax assets on a

jurisdictional basis and establishes a valuation allowance when it is more likely than not that some or all of the deferred tax assets

will not be realized.

In assessing the need for a valuation allowance, the Company considers all available positive and negative evidence,

including historical operating results, projected future taxable income, reversal of existing temporary differences, and tax planning

Changes in the valuation allowance are recorded in income tax expense in the period of change.

The Company recognizes the effect of income tax

positions only if those positions are more likely than not to be sustained upon examination by taxing authorities based on the technical

merits of the position.

Recognized income tax positions are measured as the largest amount of benefit that is greater than 50% likely

of being realized upon settlement.

The Company recognizes interest and penalties related to uncertain tax positions in income tax expense.

See Note 21 Income Taxes to the consolidated financial statements for further information regarding income taxes.

functional currency for the Company’s subsidiaries is determined based on the primary economic environment in which the subsidiary

The Company translates the assets and liabilities of its non-U.S.

dollar functional currency subsidiaries into U.S.

using exchange rates in effect at the end of each period.

Revenues and expenses for these subsidiaries are translated using rates that

approximate those in effect during the period.

Gains and losses from these translations are recognized in cumulative translation adjustment

included in “Accumulated other comprehensive loss” in Stockholders’ equity on the Consolidated Balance Sheets.

Company remeasures monetary assets and liabilities that are not denominated in the functional currency at exchange rates in effect at

the end of each period.

Gains and losses from these remeasurements are recognized in general and administrative expenses in the consolidated

statements of operations.

Foreign exchange gains (losses) were immaterial for the years ended December 31, 2024 and 2023, respectively.

Company and its Chief Executive Officer (“CEO”), acting as the Chief Operating Decision Maker (“CODM”) determined

its operating segments in accordance with ASC 280, “Segment Reporting” (“ASC 280”).

The Company is organized

and operates as two reporting segments based on similar economic characteristics, the nature of products and production processes, end-use

markets, channels of distribution, and regulatory environments.

Issued and Adopted Accounting Standards

July 2023, the Financial Accounting Standards Board (“FASB”) issued Accounting Standards Update (“ASU”) 2023-03,

Presentation of Financial Statements (Topic 205), Income Statement - Reporting Comprehensive Income (Topic 220), Distinguishing Liabilities

from Equity (Topic 480), Equity (Topic 505), and Compensation - Stock Compensation (Topic 718) , which updates codification on how

an entity would apply the scope guidance in paragraph 718-10-15-3 to determine whether profits interest and similar awards should be

accounted for in accordance with Topic 718, Compensation—Stock Compensation.

The effective date of this update is for fiscal years

beginning after December 15, 2023, including interim periods within those fiscal years.

The Company adopted ASU 2023-03 as of January

The adoption of this guidance did not have a material impact on the condensed consolidated financial statements and disclosures.

November 2023, the FASB issued ASU 2023-07, Segment Reporting (Topic 280) - Improvements to Reportable Segment Disclosures.

The new standard

requires a company to disclose incremental segment information on an annual and interim basis, including significant segment expenses

and measures of profit or loss that are regularly provided to the chief operating decision maker.

The standard is effective for the Company

beginning in fiscal year 2024 and interim periods within fiscal year 2025, with early adoption permitted.

The Company adopted this ASU

for the year ended December 31, 2024 on a retrospective basis.

Refer to Note 15 for further information.

The Company recognizes interest and penalties related to uncertain tax positions as a component of

income tax expense.

The Company’s income tax expense (benefit)

includes federal, state, and foreign income taxes, as applicable.

The Company’s Chief Executive

Officer serves as the Chief Operating Decision Maker (“CODM”) and evaluates financial performance and allocates resources

based on segment operating results.

The Company has two reportable segments:

(i) Unmanned Aircraft Systems (“UAS”) and (ii)

Commercial Aviation.

Segment information is prepared on the same basis as the Company’s consolidated financial statements.

AEROSPACE, INC.

2 unchanged sentences

FOR THE YEARS ENDED DECEMBER 31, 2025 AND 2024

Issued Accounting Standards Not Yet Adopted

November 2024, the FASB issued ASU No.

2024-03, Income Statement-Reporting Comprehensive Income-Expense Disaggregation Disclosures

(Subtopic 220-40):

Disaggregation of Income Statement Expenses.

This update requires entities to disaggregate operating expenses

into specific categories, such as salaries and wages, depreciation, and amortization, to provide enhanced transparency into the nature

and function of expenses.

ASU 2024-03 is effective for fiscal years beginning after December 15, 2026, with early adoption permitted.

ASU 2024-03 may be applied retrospectively or prospectively.

The Company is currently evaluating the impact of ASU 2024-03 on its financial

statement presentation and disclosures.

December 2023, the FASB issued ASU 2023-09, Income Taxes (Topic 740):

Improvements to Income Tax Disclosure s.

The new standard

requires a company to expand its existing income tax disclosures, specifically related to the rate reconciliation and income taxes paid.

The standard is effective for the Company for annual periods beginning after December 15, 2024, with early adoption permitted.

does not expect to early adopt the new standard.

The new standard is expected to be applied prospectively, but retrospective application

is permitted.

The Company is currently evaluating the impact of ASU 2023-09 on its financial statements and related disclosures.

4 - Disaggregation of Revenue and Deferred Revenue

Disaggregation

Company recognizes revenue when control is transferred of the promised products or services to its customers, in an amount that reflects

the consideration the Company expects to be entitled to in exchange for those products or services.

The Company derives revenue from

software as a service, design and implementation services for its Indoor Intelligence systems, and professional services for work performed

in conjunction with its systems recognition policy.

Revenues consisted of the following (in thousands):

the Years Ended

Recurring revenue

recurring revenue

Non-recurring

non-recurring revenue

the Years Ended

Revenue recognized at a point in time

recognized over time

(1) Hardware and Software’s performance obligation is satisfied at a point in time when they are shipped to the customer.

(2) Professional services are also contracted on the fixed fee and time and materials basis.

Fixed fees are paid monthly, in phases, or upon acceptance of deliverables.

The Company has elected the practical expedient to recognize revenue for the right to invoice because the Company’s right to consideration corresponds directly with the value to the customer of the performance completed to date, in which revenue is recognized over time.

(3) Software As A Service Revenue’s performance obligation is satisfied evenly over the service period using a time-based measure because the Company is providing continuous access to its service and revenue is recognized over time.

AEROSPACE, INC.

Recently Issued and Adopted Accounting Standards

In December 2023, the FASB issued ASU 2023-09,

Income Taxes (Topic 740):

Improvements to Income Tax Disclosures , which enhances the transparency and decision usefulness of income

tax disclosures.

The standard requires additional disaggregation of income tax information, including rate reconciliation and income taxes

The guidance is effective for annual periods beginning after December

15, 2024, with early adoption permitted.

The Company adopted this standard prospectively for the year ended December 31, 2025.

did not have a material impact on the Company’s consolidated financial statements;

however, it resulted in expanded income tax disclosures.

Recently Issued Accounting Standards Not

In November 2024, the FASB issued ASU 2024-03,

Income Statement—Reporting Comprehensive Income—Expense Disaggregation Disclosures (Subtopic 220-40):

Disaggregation of Income

Statement Expenses.

This ASU requires public entities to provide enhanced disaggregation of certain expense categories presented on the

income statement, including disclosure of specific types of expenses such as employee compensation, depreciation, and amortization.

standard is effective for fiscal years beginning after December 15, 2026, and interim periods within fiscal years beginning after December

Early adoption is permitted.

The Company is currently evaluating the impact this guidance will have on its consolidated financial

statement disclosures.

Other recently issued accounting standards not

yet effective are not expected to have a material impact on the Company’s consolidated financial statements.

Note 4 - Disaggregation of Revenue

Disaggregation of Revenue

Revenue presented for the year ended December 31, 2025 represents revenue

from continuing operations and excludes revenue from the Inpixon Business, which has been classified as discontinued operations.

presented for the year ended December 31, 2024 relates entirely to the Inpixon Business and has been reclassified to discontinued operations

in the accompanying consolidated financial statements.

Revenues arise substantially from the Company’s UAS offerings

through the following channels (in thousands):

For the Year Ended

Total revenue

Wholesale revenue represents sales through

resellers and channel partners.

Direct sales revenue represents sales to

enterprise, commercial, and governmental end customers, including public safety agencies, that utilize drones as part of their operations.

Retail revenue represents sales to consumers,

including those transacted through the Company’s e-commerce platform.

Enterprise, commercial, and governmental customers

may also purchase through the Company’s e-commerce platform;

such transactions are classified as direct sales based on customer

Revenue is primarily generated in the United States;

however, approximately 25 % of total revenue for the year ended December 31, 2025 was derived from a customer located in Poland.

individual customer accounted for more than 10% of total revenue.

XTI AEROSPACE, INC.

AND SUBSIDIARIES

1 unchanged sentence

FOR THE YEARS ENDED DECEMBER 31, 2025 AND 2024

of December 31, 2023, the Company did not have any deferred revenue.

As part of the XTI Merger, the Company acquired approximately

$ 0.8 million of deferred revenue, all of which relates to RTLS maintenance agreements.

The Company’s

deferred revenue balance of approximately $ 0.5 million as of December 31, 2024 related to cash received in advance for product maintenance

services and professional services provided by the Company’s technical staff.

The fair value of the deferred revenue approximates

the services to be rendered.

The Company expects to satisfy its remaining performance obligations for these maintenance services and

professional services, and recognize the deferred revenue and related contract costs over the next twelve months.

- Merger Transaction

XTI Merger was accounted for as a reverse merger in accordance with GAAP.

Under this method of accounting, Legacy Inpixon was treated

as the “acquired” company for financial reporting purposes.

This determination is primarily based on the fact that subsequent

to the XTI Merger, Legacy XTI maintains control of the Board of Directors and management of the Company, and the preexisting shareholders

of Legacy XTI have majority voting rights of the Company.

For accounting purposes, the acquirer is the entity that has obtained control

of another entity and, thus, consummated a business combination.

Accordingly, Legacy XTI’s assets and liabilities are recorded

at carrying value and the assets and liabilities associated with Legacy Inpixon are recorded at estimated fair value as of the acquisition

The excess of the purchase price over the estimated fair value of the net assets acquired, if applicable, is recognized as goodwill.

below summarizes the total consideration transferred in the business combination (in thousands):

Note 5 – Business Combinations

XTI Merger (March 2024)

The XTI Merger was accounted for as a reverse

merger in accordance with GAAP.

Under this method of accounting, Legacy Inpixon was treated as the “acquired” company for

financial reporting purposes.

This determination is primarily based on the fact that subsequent to the XTI Merger, Legacy XTI maintains

control of the Board of Directors and management of the Company, and the preexisting shareholders of Legacy XTI have majority voting rights

of the Company.

For accounting purposes, the acquirer is the entity that has obtained control of another entity and, thus, consummated

a business combination.

Accordingly, Legacy XTI’s assets and liabilities are recorded at carrying value and the assets and liabilities

associated with Legacy Inpixon are recorded at estimated fair value as of the acquisition date.

The excess of the purchase price over

the estimated fair value of the net assets acquired, if applicable, is recognized as goodwill.

A significant portion of the acquired operations

(the Inpixon Business) was subsequently classified as held for sale and is presented as discontinued operations.

See Note 19 – Discontinued

Operations for additional information.

The below summarizes the total consideration transferred

in the business combination (in thousands):

Fair value of common stock

1 unchanged sentence

Fair value of preferred stock

Fair value of debt

consideration

Company determined the estimated fair value of common stock included in consideration to be calculated based on Legacy Inpixon’s

common stock outstanding of 2,075,743 multiplied by the price of Legacy Inpixon’s common stock on March 12, 2024 of $ 5.27 (which

reflects the 1 to 100 reverse stock split which became effective before the closing of the XTI Merger).

The Company utilized Legacy Inpixon’s

common stock price in determining fair value as it is more reliably measurable than the value of Legacy XTI’s (accounting acquirer)

equity interests given it is not a publicly traded entity.

aggregate fair value of warrants was approximately $ 3.3 million was included in the total equity consideration.

A portion of this total

represents 918,689 warrants outstanding by the Company with a fair value of $ 1.00 per warrant, which is the warrant’s redemption

The warrant fair value was determined to be the redemption value as the warrants include protective covenants for the Company

which prevent the holder from exercising the warrants.

The remainder of this total represents 491,310 warrants with a fair value of $ 4.75

per warrant which was determined by using level 3 inputs and utilizing a Black-Scholes valuation.

Significant inputs related to these

warrants are as follows:

of common stock

Fair value of debt assumed

Total consideration

The Company determined the estimated fair value

of common stock included in consideration to be calculated based on Legacy Inpixon’s common stock outstanding of 2,075,743 multiplied

by the price of Legacy Inpixon’s common stock on March 12, 2024 of $ 5.27 (which reflects the 1-for-100 reverse stock

split of the Company’s outstanding common stock that became effective before the closing of the XTI Merger).

The Company utilized

Legacy Inpixon’s common stock price in determining fair value as it is more reliably measurable than the value of Legacy XTI’s

(accounting acquirer) equity interests given it is not a publicly traded entity.

The aggregate fair value of warrants was approximately

$ 3.3 million was included in the total equity consideration.

A portion of this total represents 918,689 warrants outstanding

by the Company with a fair value of $ 1.00 per warrant, which is the warrant’s redemption value.

The warrant fair value was

determined to be the redemption value as the warrants include protective covenants for the Company that prevent the holder from exercising

the warrants.

The remainder of this total represents 491,310 warrants with a fair value of $ 4.75 per warrant, which was

determined by using level 3 inputs and utilizing a Black-Scholes valuation.

Significant inputs related to these warrants are as follows:

Fair value of common stock

Exercise price

2 unchanged sentences

Dividend yield

AEROSPACE, INC.

AND SUBSIDIARIES

The fair value of preferred stock of approximately

$ 11.3 million included in the total equity consideration represents 11,302 shares of Series 9 Preferred Stock that were

issued and outstanding by the Company upon the consummation of the XTI Merger at a stated value and fair value of $ 1,000 per share.

XTI AEROSPACE, INC.

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS

FOR THE YEARS ENDED DECEMBER 31, 2025 AND 2024

fair value of preferred stock of approximately $ 11.3 million included in the total equity consideration represents 11,302 shares of a

new series of Preferred Stock that was issued and outstanding by the Company upon the consummation of the XTI Merger at a stated value

and fair value of $ 1,000 per share.

following table summarizes the purchase price allocations relating to the XTI Merger (in thousands):

The following table summarizes the purchase price

allocations relating to the XTI Merger (in thousands):

Assets acquired

Cash and cash

Cash and cash equivalents

Accounts receivable

Notes and other receivables

Prepaid assets and other

current assets

Prepaid assets and other current assets

Property and equipment

3 unchanged sentences

Customer relationships

In process research and

In process research and development

Liabilities assumed

4 unchanged sentences

Short-term debt

liabilities assumed

fair value of assets acquired

assets were valued using a combination of a multi-period excess earnings methodologies, a relief from royalty approach, a discounted

cash flow approach and present value of cash flows approach.

Warrant liability

Total liabilities assumed

Fair value of net assets acquired

The assets were valued using a combination of

a multi-period excess earnings methodologies, a relief from royalty approach, a discounted cash flow approach and present value of cash

flows approach.

The goodwill represents the excess fair value after the allocation of intangibles.

As a nontaxable transaction, the historical tax bases of the acquired assets, liabilities and tax attributes have carried over.

no new tax goodwill has been created in the transaction, the Company has approximately $ 5.8 million of tax deductible goodwill that arose

in previous transactions which carries over.

the years ended December 31, 2024 and 2023, the Company incurred merger related transaction costs of approximately $ 6.5 million and $ 1.8

million, respectively.

AEROSPACE, INC.

AND SUBSIDIARIES

As a nontaxable transaction, the historical

tax bases of the acquired assets, liabilities and tax attributes have carried over.

Although no new tax goodwill has been created in the

transaction, the Company has approximately $ 5.8 million of tax deductible goodwill that arose in previous transactions that carries

During 2025, the Company finalized the purchase price allocation related

to the XTI Merger.

No material measurement period adjustments were recorded.

For the year ended December 31, 2024, the Company

incurred merger related transaction costs of approximately $ 6.5 million.

Drone Nerds Acquisition (November 2025)

On November 10, 2025 (the “Closing Date”),

XTI Drones Holdings, LLC (“XTI Drones Holdings”), a subsidiary of the Company’s wholly owned subsidiary, XTI Drones,

LLC, acquired 100 % of the issued and outstanding equity interests of Drone Nerds, LLC, a Florida limited liability company, and Anzu Robotics,

LLC (“Anzu” and, collectively with Drone Nerds, LLC, “Drone Nerds”), a Delaware limited liability company (collectively,

the “Acquisition”).

The Acquisition was accounted for as a business combination in accordance with ASC 805, Business Combinations .

The Company holds an approximately 83.4 % controlling interest in XTI Drones Holdings, with the remaining interest held by noncontrolling

Total purchase consideration for the Acquisition

was approximately $ 40.4 million, consisting of approximately $ 18.8 million in cash, approximately $ 11.9 million in promissory notes, and

approximately $ 9.7 million in equity consideration in the form of an aggregate of 6,524,576 Class B Units of XTI Drones Holdings (the

“Class B Units”).

Drone Nerds, LLC is a drone distributor and enterprise

drone solutions provider in the United States, specializing in the wholesale and retail sale of advanced drone systems and related technologies

serving commercial, governmental, and consumer markets.

Anzu operates in complementary markets and enhances the Company’s drone

platform capabilities.

The Acquisition expands the Company’s footprint in enterprise drone distribution and strengthens its position

in high-growth commercial and public sector markets.

The purpose of the Acquisition was to establish and scale the Company’s enterprise

UAS solutions platform, including hardware distribution, training, compliance support, and lifecycle services, and to accelerate the Company’s

transition toward a revenue-generating UAS business, while strengthening its position in high-growth commercial and public sector markets.

XTI AEROSPACE, INC.

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS

FOR THE YEARS ENDED DECEMBER 31, 2025 AND 2024

6 - Proforma Financial Information

Financial Information

following unaudited proforma financial information presents the consolidated results of operations of the Company and Legacy Inpixon

for the years ended December 31, 2024 and 2023, as if the acquisition had occurred as of the beginning of the first period presented

(January 1, 2023) instead of on March 12, 2024.

The proforma information does not necessarily reflect the results of operations that

would have occurred had the entities been a single company during those periods.

proforma financial information for the Company and Legacy Inpixon is as follows (in thousands):

the Years Ended

Net loss attributable

to common stockholders

loss per basic and diluted share

$ ( 1,016.57 )

Weighted average common shares outstanding:

Basic and Diluted

- Goodwill and Intangible Assets

connection with the XTI and Inpixon Merger, the excess of the purchase price over the estimated fair value of the net assets assumed

of $ 12.4 million was recognized as goodwill.

following table summarizes the changes in the carrying amount of Goodwill for the year ended December 31, 2024 (in thousands):

Estimated purchase price of approximately $ 40.4

million related to the Acquisition is comprised of the following components (in thousands):

Fair Value of Class B Units

Fair value of Promissory Notes

Total consideration

The Class B Units are exchangeable for shares

of the Company’s common stock on a one-for-one basis, subject to customary equitable adjustments.

The fair value of the Class B

Units was determined based on the Company’s five-day volume-weighted average share price of $ 1.492 ending November 7, 2025.

The promissory notes bear interest at 7.25 % per

annum and mature on the one-year anniversary of the Closing Date, subject to scheduled principal repayments and acceleration provisions

upon certain capital raising events.

The Company has performed a preliminary allocation

of the purchase consideration to the tangible and intangible assets acquired and liabilities assumed based on their estimated fair values

as of the Closing Date.

The allocation is preliminary and subject to change as the Company finalizes its valuation analyses, including

assessments of identifiable intangible assets, working capital adjustments, and other contingencies.

The following table summarizes the preliminary

allocation of purchase consideration as of November 10, 2025 (in thousands):

Assets acquired:

Cash and cash equivalents

Accounts receivable

Vendor deposits

Prepaid assets and other current assets

Property and equipment

Right-of-used assets

Tradename & trademarks

Customer relationships

Total assets acquired

Liabilities assumed:

Accounts payable

Accrued liabilities

Customer deposits

Operating lease obligation

Asset-based revolving line of credit

Related-party promissory notes

Total liabilities assumed

Estimated fair value of net assets acquired

The goodwill recognized of approximately $ 11.5

million represents the excess of the purchase price over the estimated fair value of the identifiable net assets acquired.

is primarily attributable to expected synergies from integrating Drone Nerds into the Company’s drone platform, expanded customer

relationships, workforce expertise, and future growth opportunities.

The goodwill is expected to be deductible for tax purposes to the

extent permitted under applicable law.

XTI AEROSPACE, INC.

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS

FOR THE YEARS ENDED DECEMBER 31, 2025 AND 2024

For the year ended December 31, 2025, the Company

incurred acquisition related transaction costs of approximately $ 3.9 million.

Note 6 – Unaudited Pro forma Financial Information

As described in Note 5 – Business Combinations,

on November 10, 2025, the Company acquired a controlling interest in Drone Nerds, LLC and Anzu Robotics, LLC (collectively, the “Acquisition”).

The following unaudited pro forma consolidated

financial information presents the combined results of operations of the Company and the acquired businesses as if the Acquisition had

occurred on January 1, 2024, the beginning of the earliest period presented.

The pro forma financial information has been prepared for

comparative purposes only and does not necessarily reflect the results of operations that would have occurred had the Acquisition been

completed on that date, nor is it indicative of future results of operations.

The unaudited pro forma information reflects adjustments

that are directly attributable to the Acquisitions and are factually supportable, including:

● Incremental amortization expense related to identifiable

intangible assets acquired;

● Interest expense associated with acquisition-related

indebtedness;

● Removal of transaction costs directly attributable to the Acquisition;

● Conforming accounting policy adjustments, where

The pro forma financial information does not include

any anticipated cost savings, operating synergies, or other integration effects of the Acquisition.

The following unaudited pro forma consolidated

financial information presents the combined results of operations of the Company and Drone Nerds as if the Acquisition had occurred on

January 1, 2024 (in thousands, except per share amounts).

Year Ended December 31,

Net loss from continuing operations

Net loss attributable to common stockholders from continuing operations

Net loss per share – basic and diluted

Weighted average common shares outstanding – basic and diluted

XTI AEROSPACE, INC.

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS

FOR THE YEARS ENDED DECEMBER 31, 2025 AND 2024

Note 7 - Goodwill and Intangible Assets

Goodwill represents the excess of the purchase

price over the estimated fair value of identifiable net assets acquired in business combinations.

In connection with the XTI Merger in March 2024,

the Company recognized goodwill of approximately $ 12.4 million related to its Inpixon Business (see Note 19).

The following table summarizes the changes in

the carrying amount of Goodwill for the year ended December 31, 2025 (in thousands):

(Discontinued)

Beginning balance - January 1, 2024

recognized in connection with XTI Merger - Note 5

currency translation adjustment

balance – December 31, 2024

Company tests goodwill for impairment at the reporting unit level annually, on October 1, or more frequently if a change in circumstances

or the occurrence of events indicates that potential impairment exists.

In accordance with ASC 350, the Company performed a qualitative

assessment as of December 31, 2024, to determine if there were any indicators of goodwill impairment that would require a quantitative

analysis to be performed.

Due to the qualitative analysis, the Company determined that there were triggering indicators of goodwill

impairment during the three months ended December 31, 2024 in the form of a sustained decrease of the Company’s stock price and

impairment recognized on long-lived assets under ASC 360.

In accordance with ASC 350, given a triggering event was identified,

the Company performed a quantitative goodwill impairment analysis related to its Industrial IoT reporting unit, and based on such analysis,

the Company concluded that the carrying amount of the reporting unit did not exceed its estimated fair value, indicating that the goodwill

of the reporting unit was not impaired.

The Company utilized an income approach to assess the fair value of the reporting unit as of December

The income approach considered the discounted cash flow model, considering projected future cash flows (including timing and

profitability), a discount rate of 34 % reflecting the risk inherent in future cash flows, perpetual growth rate of 2 %, and projected future

economic and market conditions.

AEROSPACE, INC.

AND SUBSIDIARIES

Goodwill recognized in connection with XTI Merger

Foreign currency translation adjustment

Ending balance – December 31, 2024

Goodwill recognized in connection with Drone Nerds acquisition

Foreign currency translation adjustment

Ending balance – December 31, 2025

Impairment – Inpixon Business (Discontinued

During 2025, the Company recognized goodwill impairment charges related

to the Inpixon Business, which is presented as discontinued operations.

These charges are reflected in the goodwill rollforward above.

See Note 19 – Discontinued Operations for additional information regarding the impairment and classification of the Inpixon Business.

UAS Reporting Unit (Drone Nerds)

Goodwill of approximately $ 11.5 million was recognized

in connection with the Drone Nerds acquisition on November 10, 2025.

The goodwill is attributable to expected synergies, expanded distribution

capabilities, and growth opportunities in the enterprise drone market.

As of December 31, 2025, no impairment indicators

were identified for the UAS reporting unit.

The Company performs its annual goodwill impairment test during the fourth quarter.

XTI AEROSPACE, INC.

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS

FOR THE YEARS ENDED DECEMBER 31, 2025 AND 2024

assets at December 31, 2024 and 2023 consisted of the following (in thousands):

Intangible Assets

Intangible assets consist primarily of patents, and trade names and

trademarks acquired in the Drone Nerds acquisition.

The following table presents intangible assets associated with continuing operations.

December 31, 2025

Gross Amount Accumulated Amortization Impairment Net Carrying Amount Remaining Weighted Average Useful Life

as of December 31,

Amount Accumulated

Amortization Impairment Net

Amount Remaining

Patents $ 468 $ ( 207 ) $ —

Trade Name/Trademarks 897 ( 142 ) ( 451 ) 304 6.1

Proprietary Technology 2,860 ( 326 ) ( 1,583 ) 951 5.6

Trade Names / Trademarks 4,000 ( 43 ) —

Customer Relationships 5,200 ( 80 ) —

In-Process R&D 243 — — 243 3.0

Totals $ 5,152 $ ( 761 ) $ ( 2,507 ) $ 1,884

expense for the year ended December 31, 2024 was approximately $ 0.62 million.

Amortization expense for the year ended December 31, 2023

was approximately $ 0.03 million.

amortization expense on intangibles assets is anticipated to be as follows (in thousands):

the Years Ending December 31,

Total $ 9,668 $ ( 330 ) $ —

December 31, 2024

Amount Accumulated

Amortization Impairment Net

Amount Remaining

Life as of December 31,

Patents $ 468 $ ( 184 ) $ — $ 284 9.8

Total $ 468 $ ( 184 ) $ —

Amortization Expense

Amortization expense for continuing operations

for the years ended December 31, 2025 and 2024 was approximately $0.2 million and $0.03 million, respectively.

Future amortization expense related to intangible

assets associated with continuing operations is estimated as follows (in thousands):

For the Years Ending December 31,

2030 and thereafter

In accordance with ASC 360, the Company performed

a qualitative assessment as of December 31, 2024, to determine if there were any indicators of impairment that would require a quantitative

analysis to be performed.

Based on the qualitative analysis, the Company determined that there were triggering indicators of long-lived

asset impairment during the three months ended December 31, 2024 in the form of a sustained decrease of the Company’s stock price

and the Company beginning planning the process of winding down and/or selling the Nanotron business in the quarter ended December 31,

The Company notes that based on a quantitative assessment, the Company recorded an impairment to its Trade Names & Trademarks,

Proprietary Technology, and Customer Relationships of $ 451,000 , $ 1,583,000 , and $ 473,000 , respectively, for the year ended December 31,

2024, which is included in loss from operations on the statements of operations.

The Company notes that these assets were part of the

Company’s Industrial IoT segment.

Company assessed the fair value of the Customer Relationships by using an income approach in the form of a discounted cash flow model,

which considered projected future cash flows (including timing and profitability), discount rate reflecting the risk inherent in future

cash flows, perpetual growth rate, and projected future economic and market conditions.

The Company assessed the fair value of the Trade

Names & Trademarks and Proprietary Technology by using an income approach in the form of a relief from royalty model, which considered

a specified royalty rate, discount rate reflecting the risk inherent in future cash flows, perpetual growth rate, and projected future

economic and market conditions.

Company notes that for the Trade Names & Trademarks, Proprietary Technology, and Customer Relationships included in the asset groups

that were assessed for fair value, the Company reassessed the useful lives of these long-lived assets.

Management notes that the remaining

useful lives of the Trade Names & Trademarks, Proprietary Technology, and Customer Relationships were 8 years, 5 years, and 0 years,

respectively.

AEROSPACE, INC.

XTI AEROSPACE, INC.

AND SUBSIDIARIES

1 unchanged sentence

FOR THE YEARS ENDED DECEMBER 31, 2025 AND 2024

- Other Balance Sheet Information

expenses and other current assets

expenses and other current assets as of December 31, 2024 and 2023 consisted of the following (in thousands):

of December 31,

- related party

Prepaid insurance

Prepaid software

Note 8 - Other Balance Sheet Information

Prepaid expenses and other current assets

Company did not hold any inventory as of December 31, 2023.

Inventory as of December 31, 2024 consisted of the following

(in thousands):

of December 31, 2024

Raw materials

Work-in-process

are primarily accounted for using the first-in, first-out method, and are valued at the lower of cost and net realizable value.

valuation requires us to make judgments, based on currently available information, about the likely method of disposition, such as through

sales to individual customers, returns to product vendors, or liquidations, and expected recoverable values of each disposition category.

The inventory valuation allowance, representing a write-down of inventory, was approximately $ 0.2 million as of December 31, 2024.

expenses and other current liabilities

Accrued expenses

and other current liabilities as of December 31, 2024 and 2023 consisted of the following (in thousands):

Prepaid expenses and other current assets as of

December 31, 2025 and 2024 consisted of the following (in thousands):

As of December 31,

Accrued transaction bonuses – Strategic Transaction Bonus Plan

Accrued transaction bonuses – related party

Accrued bonuses and commissions

Accrued compensation and benefits

Accrued other

Vendor deposits

Prepaid expenses and other

Total prepaid expenses and other current assets

Inventory as of December 31, 2025 represents inventory

on hand within the Drone Nerds (UAS) segment and consisted of the following (in thousands):

Service parts and components

Total inventories

Inventory acquired in the Drone Nerds acquisition was recorded at its estimated

net realizable value at the acquisition date, and as of December 31, 2025, no material inventory reserves or write-downs have been recorded

subsequent to that date.

Accrued expenses and other current liabilities

Accrued expenses and other current liabilities as of December 31, 2025

and 2024 consisted of the following (in thousands):

As of December 31,

Transaction bonuses – Strategic Transaction Bonus Plan

Transaction bonuses – related party

Bonuses and commissions

Compensation and benefits

Inventory received not invoiced

Total accrued expenses and other current liabilities

AEROSPACE, INC.

AND SUBSIDIARIES

XTI AEROSPACE, INC.

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS

FOR THE YEARS ENDED DECEMBER 31, 2025 AND 2024

The Company’s

outstanding debt consisted of the following at the periods indicated (in thousands):

Note 9 - Debt

Short-Term Debt Maturity 2025 2024

Promissory Note - 2023 $ — $ 3,071

Promissory Note - 2023 - related party — 125

Convertible Note - 2021 - related party 1 — 1,079

Convertible Note - 2021 1 — 2,500

Promissory Note - May 1, 2024 2 5/1/2025 1,442 —

Promissory Note - May 24, 2024 2 5/24/2025 1,426 —

Streeterville Promissory Note - May 1, 2024 5/1/2025 $ —

Streeterville Promissory Note - May 24, 2024 5/24/2025 —

Unamortized Discounts —

Unamortized Loan Costs — ( 35 )

Acquisition-Related Promissory Notes 11/10/26 7,931 —

Asset-Based Revolving Line of Credit (Drone Nerds) Closed —

Total Short-Term Debt $ 7,931 $ 2,657

Long-Term Debt

SBA Loan 6/30/2050 $ 65 $ 65

Convertible notes, at fair value 1 — 16,804

Convertible Note - 2017 1 — 1,987

Convertible Note - 2022 1 — 600

Convertible Note - 2023 1 — 300

Unamortized Discounts — ( 1,210 )

SBA Loan Closed $ —

Promissory Notes Assumed in Connection with the Drone Nerds Acquisition

3/31/2027 450 —

Total Long-Term Debt $ 450 $ 65

balance was either converted to equity immediately prior to the XTI Merger closing time or subsequently repaid

note repaid in full on March 31, 2025

expense on outstanding debt totaled approximately $ 0.3 million and $ 0.6 million for the years ended December 31, 2024 and 2023, respectively.

July 24, 2023, the Company and Legacy XTI entered into a Senior Promissory Note which had an outstanding principal balance of approximately

$ 3.1 million as of December 31, 2023.

During the period from January 1, 2024 to March 12, 2024, Legacy Inpixon provided an additional

$ 1.0 million in funding to Legacy XTI.

As a result of the XTI Merger, Legacy XTI became a wholly-owned subsidiary of the Company

and the outstanding subsidiary debt balance, related parent note receivable balance and accrued interest were eliminated upon the consolidation

of the Company’s December 31, 2024 balance sheet.

Note - 2023 - related party

January 5, 2023, the Company entered into a promissory note agreement with a member of the Company’s board of directors.

had a principal amount of approximately $ 0.1 million and accrued interest at a rate of 5 % per annum.

The note’s outstanding

principal and accrued interest balances were repaid in full during the second quarter of 2024.

AEROSPACE, INC.

AND SUBSIDIARIES

As of December 31, 2025 and 2024, no portion of the Company’s

long-term debt is due within one year.

Interest expense on outstanding debt totaled approximately

$ 0.3 million and $ 0.3 million for the years ended December 31, 2025 and 2024, respectively.

Streeterville Promissory

In May 2024, the Company

issued two secured promissory notes to Streeterville Capital, LLC (“Streeterville”) with aggregate principal of approximately

$ 2.7 million.

The notes bore interest at 10.0 % per annum and were scheduled to mature within 12 months of issuance.

During the first quarter

of 2025, the Company entered into exchange agreements with Streeterville pursuant to which the Company issued an aggregate of 240,229

shares of common stock in exchange for $ 750,000 of principal amount under the notes, in each case at per share prices equal to the Minimum

Price as defined in Nasdaq Listing Rule 5635(d).

On March 31, 2025, the

Company repaid the remaining outstanding balance of the notes in full, including accrued interest, fees and a contractual prepayment premium.

In connection with the repayment, Streeterville released its security interests in the Company’s equity interests in Legacy XTI

and the related assets.

The Company recognized a loss on extinguishment of debt of approximately $ 0.4 million during the year ended December

Acquisition-Related Promissory Notes

In connection with the November 2025 acquisition

of Drone Nerds, XTI Drones Holdings, LLC issued promissory notes to the sellers with an aggregate original principal amount of approximately

$ 11.9 million (the “Notes”).

The Notes bear interest at a rate of 7.25 % per

annum, calculated on a 365 -day year.

Accrued interest is payable in accordance with the terms of the Notes, and unpaid interest is added

to principal if not paid when due.

The Notes require scheduled principal repayments

● $ 4.0 million in the aggregate due no later than

November 30, 2025;

● $ 2.0 million in the aggregate due no later than

March 31, 2026;

● $ 1.5 million in the aggregate due no later than

June 30, 2026;

● $ 1.5 million in the aggregate due no later than

September 30, 2026;

● The remaining outstanding principal and accrued

interest due on or before the one-year anniversary of the Notes.

XTI AEROSPACE, INC.

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS

FOR THE YEARS ENDED DECEMBER 31, 2025 AND 2024

Note - 2021 - related party

On October 1, 2023, an existing convertible note

entered into on December 31, 2021 by and between the Company and a member of the Company’s board of directors was replaced by a

new convertible note with a principal balance of approximately $ 1.1 million and interest rate of 4 %.

On March 12, 2024, approximately

$ 0.9 million of the note’s outstanding balance was converted into shares of the Company’s common stock.

The Company repaid

the remaining balance of the note on April 1, 2024.

See Note 10 for more information.

During 2021, the Company entered into convertible

notes with a syndicate of investors.

The notes had a combined principal amount of $ 2.5 million and accrued interest at a rate of 4.0 %

As discussed in Note 10, pursuant to the terms of voluntary note conversion letter agreements, approximately $ 2.5 million

of the note’s outstanding principal balance and accrued interest were converted into shares of Legacy XTI common stock immediately

prior to the closing of the XTI Merger, which converted into shares of the Company’s common stock at the closing of the XTI Merger

on March 12, 2024.

A repayment obligation remained after the XTI Merger closing with respect to approximately $ 0.05 million in principal,

which was repaid during the second quarter of 2024, and $ 0.25 million in accrued interest which remained outstanding as of December

Note - May 1, 2024

May 1, 2024 (the “Closing Date”), the Company entered into a note purchase agreement (the “Purchase Agreement”)

with Streeterville Capital, LLC (the “Holder”), pursuant to which the Company issued and sold to the Holder a secured promissory

note (the “Note”) in an initial principal amount of approximately $ 1.4 million, which is payable on or before the date

that is 12 months from the issuance date.

The Purchase Agreement provides that, subject to the mutual consent of the Company

and the Holder, the Holder would purchase an additional secured promissory note on the date that is 30 days from the Closing

Date and another secured promissory note on the date that is 60 days from the Closing Date.

The initial principal amount of

the Note includes an original issue discount of approximately $ 0.3 million.

In exchange for the Note, the Holder paid an aggregate

purchase price to the Company of $ 1.0 million.

on the Note accrues at a rate of 10.0 % per annum and is payable on the maturity date or otherwise in accordance with the Note.

effective interest rate is 10.5 %.

If the Note is still outstanding on the date that is six months from the issuance date,

then a one-time monitoring fee equal to 10 % of the then-current outstanding balance will be added to the outstanding balance of

Company’s obligations under the Note, the additional secured promissory note issued by the Company to the Holder on May 24, 2024

(as described below) and the other transaction documents are secured by (i) a pledge of all of the stock the Company owns in Legacy XTI

and (ii) those assets owned by Legacy XTI constituting Collateral (as defined in a security agreement by and between Legacy XTI and the

Additionally, Legacy XTI provided a guarantee of the Company’s obligations to the Holder under the Note, the additional

secured promissory note and the other transaction documents.

Note - May 24, 2024

to the terms of the Purchase Agreement, on May 24, 2024, the Company issued and sold to Streeterville Capital, LLC an additional secured

promissory note in the initial principal amount of $ 1.3 million, which carries an original issue discount of $ 0.3 million.

The terms of this additional note are identical to the terms of the May 1, 2024 note, as described above.

In exchange for the promissory

note, the Holder paid an aggregate purchase price of $ 1.0 million.

On March 31, 2025, the Company repaid the May

1, 2024 and May 24, 2024 promissory notes in full which relieved the Company from all obligations.

As a result of the repayments, Streeterville

released its security interest in the stock the Company owns in Legacy XTI and the assets owned by Legacy XTI.

AEROSPACE, INC.

AND SUBSIDIARIES

On November 30, 2025, the Company made the required

aggregate payment of $ 4.0 million.

On March 31, 2026, the Company made the required aggregate payment of $ 2.0 million.

The Notes may be prepaid at any time without premium

or penalty, provided that accrued and unpaid interest is paid through the prepayment date.

The outstanding principal balance of the Notes

is subject to reduction in connection with indemnification obligations under the applicable purchase agreements.

The Notes contain customary events of default,

including bankruptcy-related events, upon which the outstanding principal and accrued interest may become immediately due and payable.

As of December 31, 2025, the aggregate outstanding

principal balance and accrued interest balance of the Notes was approximately $ 7.9 million and $ 0.049 million, respectively.

Asset-Based Revolving

Line of Credit (Drone Nerds)

At the time of the Company’s

acquisition of Drone Nerds in November 2025, Drone Nerds was party to an asset-based revolving credit facility with a financial institution

with a maximum borrowing capacity of $ 25.0 million (the “Revolving Facility”).

The Revolving Facility bore interest at one-month

Term SOFR plus 2.50 %, subject to a 6.00 % minimum rate, with interest payable monthly, and was scheduled to mature in July 2027 .

Outstanding borrowings

under the Revolving Facility were assumed by the Company as part of the acquisition.

In connection with the transaction, the lender required

that the outstanding balance be repaid in full at closing.

Accordingly, shortly after closing, the Company funded approximately $ 10.5

million to Drone Nerds to fully repay the outstanding borrowings.

No amounts were outstanding under the Revolving Facility as of December

In February 2026, the

Revolving Facility was replaced by a new revolving credit facility with a financial institution.

Note 20 for additional information.

The Company had an outstanding balance of approximately

$ 65,000 under a U.S.

Small Business Administration loan as of December 31, 2024.

The loan bore interest at 3.75 % per annum and was repaid

in full during 2025.

Promissory Notes Assumed in Connection with the Drone Nerds Acquisition

In connection with the acquisition of Drone Nerds, the Company assumed

two unsecured promissory notes payable to parties associated with Drone Nerds with aggregate principal of $ 450,000 .

The notes consist

of a $ 250,000 note and a $ 200,000 note, each bearing interest at 10 % per annum.

On November 9, 2025, each note was amended and

restated in connection with the acquisition transaction.

Beginning January 1, 2026, the notes require monthly interest-only payments,

with the outstanding principal due at maturity on March 31, 2027.

The notes may be prepaid at any time without premium or penalty.

As of December 31, 2025, the aggregate outstanding

principal balance of these notes was $ 450,000 .

Note 10 – Capital Structure

AUTHORIZED CAPITAL

The Company is authorized to

issue 500,000,000 shares of common stock, $ 0.001 par value per share, and 5,000,000 shares of preferred stock, $ 0.001 par value per share.

The Board of Directors is authorized to establish the rights, preferences and privileges of any series of preferred stock.

XTI AEROSPACE, INC.

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS

FOR THE YEARS ENDED DECEMBER 31, 2025 AND 2024

June 3, 2020, Legacy XTI entered into a promissory note with the U.S.

Small Business Administration (SBA).

The note accrues interest

at a rate of 3.75 % per annum and is paid monthly.

The aggregate principal amount is due on the maturity date of June 3, 2050.

- Common Stock

At-the-Market

(ATM) Offering Program

The Company was able, from time to time, to sell

shares of the Company’s common stock under its “at-the-market” offering program (the “ATM”) through Maxim,

as the Company’s exclusive sales agent, up to a maximum offering amount of approximately $ 83.3 million, pursuant to that certain

Equity Distribution Agreement, dated as of July 22, 2022, by and between the Company and Maxim, as amended from time to time (the “Equity

Distribution Agreement”).

The term of the Equity Distribution Agreement expired on December 31, 2024.

Maxim was entitled to compensation

at a fixed commission rate of 3.0 % of the gross sales price per share sold excluding Maxim’s costs and out-of-pocket expenses incurred

in connection with its services, including the fees and out-of-pocket expenses of its legal counsel.

Public Offerings – 2025

During the year ended December 31, 2025, the Company

completed four registered public offerings of its securities (collectively, the “2025 Offerings”).

In the aggregate, the Company issued:

● 19,025,946 shares of common stock

● 7,012,800 pre-funded warrants

● 25,955,200 common warrants

● 1,371,000 additional shares of common stock pursuant

to underwriters’ over-allotment exercises

The 2025 Offerings generated aggregate net proceeds

of approximately $ 57.1 million, after underwriting discounts, placement agent fees and offering expenses of approximately $ 5.3 million.

Based on relative fair value at issuance, approximately:

● $ 20.6 million of net proceeds was allocated to

common stock, and

● $ 36.5 million was allocated to warrants.

The pre-funded warrants were exercisable at $ 0.001

per share and were fully exercised during 2025.

The common warrants are exercisable at prices ranging from $ 1.36 to $ 2.00 per share and

expire five years from issuance.

Warrant Exercises

During the year ended December 31, 2025:

● 7,012,800 pre-funded warrants issued in the 2025 Offerings were exercised, including net exercises, into 7,012,376 shares of the Company’s common stock.

● 2,951,200 common warrants issued in the 2025

Offerings were exercised into 2,951,200 shares of the Company’s common stock.

The Company received aggregate net proceeds of

approximately $ 4.1 million from the exercise of warrants issued in connection with the 2025 Offerings.

At-the-Market (ATM) Offering Program (Expired)

The Company maintained an at-the-market equity

offering program pursuant to an Equity Distribution Agreement with Maxim Group LLC.

The agreement expired on December 31, 2024.

The Company sold 169,299 shares of common

stock under the Equity Distribution Agreement at per share price of $ 10.00 , resulting in net proceeds to the Company of approximately

$ 1.7 million.

This sale originated on December 31, 2024 and closed in early January 2025.

During the year ended December 31, 2024, the Company

sold 998,447 shares of common stock under the Equity Distribution Agreement at per share prices between approximately $ 10.02 and $ 337.36 ,

resulting in net proceeds to the Company of approximately $ 22.2 million.

AEROSPACE, INC.

AND SUBSIDIARIES

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS

FOR THE YEARS ENDED DECEMBER 31, 2024 AND 2023

Immediately prior to the effective time of the

XTI Merger on March 12, 2024, certain convertible notes (collectively classified as “convertible notes, at fair value”) with

an aggregate principal and interest balance of $ 16.8 million were converted into Legacy XTI shares, which converted into an aggregate

of 3,005 shares of the Company’s common stock at the effective time of the XTI Merger.

Immediately prior to the conversion,

the convertible notes, at fair value were marked to market resulting in a gain of $ 12.9 million, which is included in change in

fair value of convertible notes payable in the other income and expense section of the consolidated statements of operations.

of the conversions, the notes were satisfied in full and therefore relieved the Company of all obligations.

induce certain note holders to convert their outstanding note balances into shares of Legacy XTI common stock ahead of the XTI Merger,

Legacy XTI entered into voluntary note conversion letter agreements in February 2024 as detailed in the below table.

Per the letter agreements,

some or all of the outstanding principal and accrued interest under the notes was converted at a reduced conversion price into shares

of Legacy XTI common stock immediately prior to the XTI Merger closing time, which converted into shares of the Company’s common

stock upon the closing of the XTI Merger.

In connection with some of the voluntary note conversions, the Company assumed a repayment

obligation with respect to any outstanding balance under the notes that was not converted into Legacy XTI shares.

The Company accounted

for these conversions as an inducement and recognized a loss of approximately $ 6.7 million related to the fair value of the additional

shares issued compared to the original terms of the convertible note, which is included in inducement loss on debt conversions in the

other income and expense section of the condensed consolidated statements of operations.

The following table details the notes converted

into shares of Legacy XTI common stock (in thousands, except share amounts and conversion price).

Letter Agreement

Principal and Interest Outstanding Immediately Prior to XTI Merger

Principal and Interest Converted to Common Shares

Conversion Price

- Exchange Ratio / Post 1-for-250 Split Common Shares

Payment Obligation Immediately After XTI Merger

Inducement Charge

Convertible Note 2017

Convertible Note 2022

Note Inducement:

Convertible Note 2021 - Related Party

induce David Brody, a board member and founder of Legacy XTI, to convert his outstanding note balances into shares of Legacy XTI common

stock, Legacy XTI entered into a voluntary note conversion letter agreement with the note holder in February 2024.

Per the letter agreement,

$ 0.9 million of the outstanding note balance was converted at a reduced conversion price of $ 865.45 into shares of Legacy XTI

common stock immediately prior to the XTI Merger closing time equal to 1,062 shares of the Company’s common stock, and the

Company assumed the obligation to pay the note holder $ 0.2 million of the note balance that was not converted into Legacy XTI shares.

This repayment obligation was subsequently paid in full on April 1, 2024.

The Company accounted for this conversion as an inducement

and recognized an inducement charge of $ 1.0 million related to the fair value of the additional shares issued compared to the original

terms of the convertible note.

As this note holder is a related party of the Company, the Company accounted for the conversion as a capital

transaction and therefore recorded the inducement charge within additional paid-in capital.

AEROSPACE, INC.

AND SUBSIDIARIES

XTI AEROSPACE, INC.

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS

FOR THE YEARS ENDED DECEMBER 31, 2025 AND 2024

Issuances at or Immediately Prior to XTI Merger Closing

the closing of the XTI Merger, 8,303 shares of the Company’s common stock were issued to Legacy Inpixon’s preexisting

shareholders as consideration for the transaction.

of Legacy XTI common stock were issued to Xeriant immediately prior to the XTI Merger closing time, equal to 1,194 post merger shares

of Company common stock.

This share issuance to Xeriant fully settled the obligation relating to a joint venture arrangement by and between

Legacy XTI and Xeriant which terminated by its terms on May 31, 2023.

The obligation to issue shares to Xeriant was classified in equity

as of December 31, 2023, as the share consideration became fixed once the joint venture terminated.

Issuances to Nadir Ali

June 13, 2024, July 5, 2024, November 19, 2024 and December 2, 2024, the Company entered into a Restricted Stock Award

Agreement with Nadir Ali (the “June 2024 RSA Agreement,” the “July 2024 RSA Agreement”, the “November 2024

RSA Agreement” and the “December 2024 RSA Agreement,” respectively), a consultant to the Company and the Company’s

former Chief Executive Officer and a former director of the Company.

Pursuant to each agreement, the Company issued Mr.

vested shares of common stock under the 2018 Plan, which shares were registered pursuant to a registration statement on Form S-8.

to the June 2024 RSA Agreement, the Company issued 10,722 shares to Mr.

Ali valued at approximately $ 1.2 million in partial

satisfaction of the $1,500,000 Equity Payment owed to Mr.

Ali on June 12, 2024 under the Ali Consulting Agreement (refer to

to the July 2024 RSA Agreement, the Company issued 11,100 shares to Mr.

Ali valued at approximately $ 1.1 million.

Approximately

$ 0.3 million of the shares were issued to Mr.

Ali in satisfaction of the remaining amount of the $ 1,500,000 Equity Payment owed

Ali on June 12, 2024 under the Ali Consulting Agreement.

Approximately $ 0.8 million of the shares were issued to Mr.

in partial satisfaction of amounts owed to Mr.

Ali under the Strategic Transaction Bonus Plan.

to the November 2024 RSA Agreement, the Company issued an aggregate of 86,511 shares to Mr.

Ali valued at approximately $ 1.1

Approximately $ 0.9 million of the shares were issued to Mr.

Ali in partial satisfaction of five monthly payments of $ 375,000

each from July 12, 2024 to November 12, 2024 (in the aggregate amount of $ 1,875,000 ) owed to Mr.

Ali under the Ali Consulting

Approximately $ 0.2 million of the shares were issued to Mr.

Ali in partial satisfaction of amounts owed to Mr.

under the Strategic Transaction Bonus Plan.

to the December 2024 RSA Agreement, the Company issued an aggregate of 85,383 shares to Mr.

Ali valued at approximately $ 1.0

The full $ 1.0 million value of the shares was issued to Mr.

Ali in partial satisfaction of amounts owed to Mr.

the Ali Consulting Agreement.

Stock Issuances

June 6, 2024, the Company entered into a consulting agreement with a third party consultant, which has a term until December 10,

2024, pursuant to which the Company made a cash deposit of $ 0.1 million and issued 1,238 shares of restricted common stock valued

at approximately $ 0.3 million to the consultant as a prepayment for marketing and distribution services agreed to be rendered to

the Company over the six-month contract period.

June 7, 2024, the Company entered into a consulting agreement with a separate third-party consultant, which has a term of six months ,

pursuant to which the Company issued 480 shares of restricted common stock valued at approximately $ 0.1 million to the consultant

as a prepayment for business development consulting services agreed to be rendered to the Company over the six-month contract period.

the year ended December 31, 2023, Legacy XTI issued and sold 64 shares of common stock to a non-executive officer and his family member

valued at approximately $ 0.2 million.

AEROSPACE, INC.

AND SUBSIDIARIES

The following table summarizes the activity of warrants outstanding:

at January 1 2024

Legacy Inpixon warrants from

Outstanding at December

( 9,964,000 )

Outstanding at December

Exercisable at December

Warrant Classification

Liability-Classified Warrants

Certain common warrants issued in the 2025 Offerings

were classified as liabilities under ASC 815 due to adjustment and settlement provisions.

These warrants were recorded at fair value upon

issuance and are remeasured at each reporting date, with changes in fair value recognized in earnings.

Note 13 for additional information regarding the valuation methodology and significant assumptions used

in determining the fair value of the warrant liabilities.

During the year ended December 31, 2025, the Company

● A net loss of approximately $ 0.6

million related to changes in fair value of warrant liabilities;

● Warrant issuance expense of approximately $ 6.6

million related to excess fair value allocations and expense allocation.

Mezzanine Equity Warrants

Placement agent and representative warrants issued

in connection with the 2025 Offerings and the Series 10 Convertible Preferred Stock financing were classified as temporary (mezzanine)

equity because certain fundamental transaction provisions could require settlement in cash or other consideration in a change-in-control

transaction that is not solely within the Company’s control.

In connection with the 2025 Offerings, the Company

issued an aggregate of 1,370,488 placement agent and representative warrants with an exercise price ranging between $ 2.00 and $ 17.1875

per share and a five-year term.

These warrants are presented in mezzanine equity and were recorded at approximately $ 1.0 million, net

of issuance costs of approximately $ 0.1 million.

In connection with the November 2025 Series 10 Convertible Preferred

Stock financing, the Company issued 837,801 placement agent warrants with an exercise price of $ 1.429 per share and a five-year term.

These warrants are presented in mezzanine equity and were recorded at approximately $ 1.7 million, net of issuance costs of approximately

$ 0.1 million.

XTI AEROSPACE, INC.

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS

FOR THE YEARS ENDED DECEMBER 31, 2025 AND 2024

- Preferred Stock

Company is authorized to issue up to 5,000,000 shares of preferred stock with a par value of $ 0.001 per share with rights,

preferences, privileges and restrictions as to be determined by the Company’s Board of Directors.

The placement agent and representative warrants were recorded at fair

value on the issuance date using a Black-Scholes option pricing model.

Significant assumptions used in the valuation included the Company’s

stock price on the grant date, the contractual exercise price, expected volatility, risk-free interest rate, expected term, and dividend

Expected volatility was estimated based on the historical volatility of a peer group of publicly traded companies considered comparable

to the Company and adjusted to reflect the Company’s capital structure, as the Company did not have sufficient trading history for

a term consistent with the warrants.

The significant assumptions used in the valuation included a stock price of $ 1.51 , an exercise price

of $ 1.492 , expected volatility of 130.0 %, a risk-free interest rate of 3.65 %, an expected term of 5.0 years, and a dividend yield of 0.0 %.

The risk-free interest rate was based on U.S.

Treasury yields commensurate with the expected term of the warrants.

The Company assumed

a dividend yield of zero .

These warrants are not subsequently remeasured to fair value and remain recorded within mezzanine equity unless

reclassification is required upon the resolution of the underlying contingency.

PREFERRED STOCK

March 12, 2024, the Company filed the Certificate of Designations of Preferences and Rights of Series 9 Preferred Stock (the “Certificate

of Designation”), with the Secretary of State of Nevada, designating 20,000 shares of preferred stock, par value $ 0.001 of

the Company, as Series 9 Preferred Stock, which was amended by the Certificate of Amendment to Designations of Preferences and Rights

of Series 9 Preferred Stock filed by the Company with the Secretary of State of Nevada on April 30, 2024.

Each share of Series 9 Preferred

Stock has a stated face value of $ 1,050 (“Stated Value”) and do not have any voting rights.

Preferred stock is recorded

on the accompanying consolidated balance sheet at its redemption value which is the carrying value of the redeemable preferred stock.

share of Series 9 Preferred Stock will accrue a rate of return on the Stated Value in the amount of 10 % per year, compounded annually

to the extent not paid, and pro rata for any fractional year periods (the “Preferred Return”).

The Preferred Return will

accrue on each share of Series 9 Preferred Stock from the date of issuance and will be payable on a quarterly basis, either in cash or

through the issuance of an additional number of shares of Series 9 Preferred Stock equal to (i) the Preferred Return then accrued and

unpaid, divided by (ii) the Stated Value, at the Company’s discretion.

The Preferred Stock holders will also receive a quarterly

dividend at 2 % per quarter, beginning on the one -year anniversary of the issuance date and for all periods following the two -year anniversary

of the issuance date of a share of Series 9 Stock, the dividend shall be 3 % per quarter.

Company may elect, in the sole discretion of the Board, to redeem all or any portion of the Series 9 Stock then issued and outstanding

from all of the Series 9 Holders by paying to the applicable Series 9 Holders an amount in cash equal to the liquidation amount as defined

in the preferred stock agreement.

On March 12, 2024, Inpixon and Streeterville Capital, LLC (the “Note

Holder” or “Streeterville”), the holder of an outstanding promissory note issued on December 30, 2022 (as amended, the

“December 2022 Note”), entered into an Exchange Agreement, pursuant to which the Note Holder exchanged the remaining balance

of principal and accrued interest under the December 2022 Note in the aggregate amount of approximately $ 9.8 million for 9,802 shares

of Series 9 Preferred Stock (the “Preferred Stock”), based on an exchange price of $ 1,000 per share of Series 9 Preferred

The Company analyzed the exchange of the principal and interest as an extinguishment and compared the net carrying value of the

debt being extinguished to the reacquisition price (shares of preferred stock being issued).

The Company notes that the net carrying

value of the debt was the fair value of the preferred stock (reacquisition price).

As such, no gain or loss was recognized upon debt

extinguishment.

Following such exchange and the extinguishment of the December 2022 Note, the December 2022 Note is deemed paid in

full, automatically canceled, and will not be reissued.

Purchase Agreement

March 12, 2024, Legacy Inpixon entered into a securities purchase agreement (the “Securities Purchase Agreement”) with 3AM

Investments, LLC (“3AM”), an entity controlled by Legacy Inpixon’s former director and former Chief Executive Officer,

Nadir Ali (such entity, the “Purchaser”).

Pursuant to the Securities Purchase Agreement, the Purchaser purchased 1,500 shares

of Series 9 Preferred Stock for a total purchase price of approximately $ 1.5 million, based on a purchase price of $ 1,000 per

share of Series 9 Preferred Stock.

The Company agreed that the Purchaser will be deemed a “Required Holder” as defined in

the Certificate of Designation as long as the Purchaser holds any shares of Series 9 Preferred Stock.

Securities Purchase Agreement sets forth certain restrictions on the Company’s use of the proceeds from the sale of the Series

9 Preferred Stock pursuant thereto, including that the proceeds must be used in connection with the redemption of the Series 9 Preferred

Stock pursuant to the Certificate of Designation or working capital purposes, and may not, without the consent of the required holders

of Series 9 Preferred Stock, be used for, among other things, (i) the redemption of any XTIA common stock or common stock equivalents,

(ii) the settlement of any outstanding litigation, or (iii) for the repayment of debt for borrowed money to any officer or director,

or Merger-transaction related bonuses to any employee or vendor except for such non-merger transaction related bonuses as may be payable

to participants pursuant to the Company’s existing employee bonus plan.

connection with the issuance of the Preferred Stock, the direct and incremental expenses incurred were immaterial.

Series 10 Convertible Preferred Stock

On November 12, 2025, the Company issued 25,000 shares of Series 10

Convertible Preferred Stock at a stated value of $ 1,000 per share for gross proceeds of $ 25.0 million.

Net proceeds of approximately $ 22.8

million reflect approximately $ 2.2 million of placement agent fees, underwriting expenses, and other offering costs.

Key terms included:

● 12 % cumulative dividend

● Conversion price of $ 1.492 per share

● Beneficial ownership limitation of 4.99 % (or

9.99 % at holder election)

● No redemption rights

The Series 10 Preferred was classified within

stockholders’ equity.

For the year ended December 31, 2025, cumulative

dividends on the Series 10 Convertible Preferred Stock of approximately $ 0.4 million were deducted from net loss in computing net loss

attributable to common stockholders for purposes of basic and diluted net loss per share.

The Series 10 Convertible Preferred Stock was

convertible into shares of common stock;

however, because the Company reported a net loss for the year ended December 31, 2025, the effect

of conversion was antidilutive and therefore excluded from the computation of diluted net loss per share.

Shareholder approval for conversion was obtained in December 2025.

In January 2026, all outstanding shares of Series 10 Preferred automatically converted into common stock and a pre-funded warrant pursuant

to beneficial ownership limitations.

See Note 20 – Subsequent Events.

Series 9 Preferred Stock

In March 2024, the Company issued Series 9 Preferred

Stock in connection with debt exchanges and cash financing.

During 2024 and the first quarter of 2025:

● Substantially all shares were exchanged for common

● A deemed dividend of approximately $ 0.5 million

was recognized during 2024;

● The remaining shares were redeemed for approximately

$ 1.4 million in March 2025.

As of December 31, 2025, no shares of Series 9

Preferred Stock were outstanding.

AEROSPACE, INC.

2 unchanged sentences

FOR THE YEARS ENDED DECEMBER 31, 2025 AND 2024

to Series 9 Preferred Stock

Certificate of Amendment to Designations of Preferences and Rights of Series 9 Preferred Stock (the “Certificate of Amendment”)

allows the Company to pay the holders of Series 9 Preferred Stock, if such holders agree, with securities or other property of the Company

in an amount equal to the Series 9 Preferred Liquidation Amount (as defined in the Series 9 Preferred Stock Certificate of Designation)

in the event the Company elects to redeem all of any portion of the Series 9 Preferred Stock then issued and outstanding (a “Corporation

Optional Redemption”).

Previously, the Company was to pay any such amount in only cash.

The Certificate of Amendment also now provides

that the Company will provide notice of a Corporation Optional Redemption to the holders of Series 9 Preferred Stock within five business

days prior to the consummation of such redemption rather than five business days following the determination of the Company’s

board of directors to consummate such redemption.

In addition, the Certificate of Amendment eliminates the requirement for the Company

to obtain the written consent of the holders of at least a majority of the outstanding Series 9 Preferred Stock before repaying any outstanding

indebtedness owed to any holder of Series 9 Preferred Stock or its affiliates.

The Company evaluated the amendment and accounted for

it as a modification, which requires the Company to recognize any increase in fair value as an expense.

However, the Company concluded

the increase in the fair value of the Series 9 Preferred Stock from immediately before to immediately after the amendment is immaterial.

9 Preferred Stock Exchanges

April through December 31, 2024, the Company entered into exchange agreements with the holder of shares of the Company’s Series

9 Preferred Stock pursuant to which the Company and the holder agreed to exchange 9,790 shares of Series 9 Preferred Stock with an aggregate

stated value of $ 10,279,500 (the “Preferred Shares”) for 441,391 shares of common stock (the “Preferred Exchange Shares”)

at an effective price per share ranging from $ 10.00 to $ 740.00 .

Company issued the Preferred Exchange Shares to the holder, at which time the Preferred Shares were cancelled.

The Preferred Exchange

Shares were issued in reliance on the exemption from registration provided by Section 3(a)(9) of the Securities Act, on the basis that

(a) the Preferred Exchange Shares were issued in exchange for other outstanding securities of the Company, (b) there was no additional

consideration delivered by the holder in connection with the exchange and (c) there were no commissions or other remuneration paid by

the Company in connection with the exchange.

The Company notes that the redemption of the Preferred Shares to Common Stock was accounted

for as an extinguishment.

During the year ended December 31, 2024, the Company recognized a deemed dividend of $ 489,506 .

dividends represented the excess fair value of the common shares issued over the carrying amount of the Preferred Shares and were accounted

for as a reduction to additional paid-in capital.

Return Conversion to Series 9 Preferred Stock

the year ended December 31, 2024, Streeterville and 3AM converted the 10 % rate of return that had accrued through December 2024 into

457.00 and 118.82 shares of Series 9 Preferred Stock, respectively.

9 Preferred Stock Redemptions

November 17, 2024, the Company entered into a Consent, Waiver and Release Agreement (the “Consent Agreement”) with 3AM

and Streeterville, each as a Required Holder, pursuant to which the Series 9 Holders authorized the Company to raise up to an additional

$ 5,000,000 under the ATM (the “ATM Increase”) in consideration for the Company’s agreement to pay 20 % of the proceeds

it receives from sales under the ATM in connection with the ATM Increase (the “Redemption Proceeds”) to the Series 9

Holders to redeem a portion of their Series 9 Preferred Stock, to be distributed as follows:

(i) 75 % of the Redemption Proceeds

to Streeterville ( 15 % of all proceeds received from sales under the ATM), and (ii) 25 % of the Redemption Proceeds to 3AM ( 5 % of

all proceeds received from sales under the ATM).

Distribution payments will be made by wire transfer of immediately available funds weekly

and will be used to partially redeem the Series 9 Preferred Stock.

to the Consent Agreement, the Company delivered an aggregate of $ 492,331 to Streeterville and $ 302,116 to 3AM, which amounts represent

the Redemption Proceeds payable to Streeterville and 3AM, respectively, in connection with amounts raised from sales under the ATM during

the period from November 7, 2024 through December 31, 2024.

Such payments were made for 469.00 shares of the Company’s Series 9

Preferred Stock held by Streeterville and 287.70 shares of the Company’s Series 9 Preferred Stock held by 3AM.

entered into acknowledgment agreements with each of Streeterville and 3AM to record such payments.

of December 31, 2024, Streeterville and 3AM held zero and 1331.12 shares of Series 9 Preferred Stock, respectively.

Pursuant to a Settlement Agreement dated March 27, 2025, the Company redeemed the remaining Series 9 Preferred Stock

held by 3AM as further disclosed in Note 23.

AEROSPACE, INC.

AND SUBSIDIARIES

NONCONTROLLING INTEREST – CLASS B UNITS

OF XTI DRONES HOLDINGS, LLC

In connection with the November 2025 acquisition

of Drone Nerds, the Company issued 6,524,576 Class B Units of XTI Drones Holdings, LLC to the seller as part of the purchase consideration.

The Company holds Class A Units representing an 83.403 % controlling interest in XTI Drones Holdings, LLC.

The Class B Units represent

the remaining 16.597 % ownership interest and are reflected as noncontrolling interest in the consolidated financial statements.

Changes in noncontrolling interest were as follows

(in thousands):

Balance at January 1, 2025

Issuance of Class B Units in connection with Drone Nerds acquisition

Net income attributable to noncontrolling interest

Balance at December 31, 2025

Exchange features of the Class B Units:

● Are exchangeable into shares of the Company’s common stock on

a one-for-one basis at the option of the holder at any time after May 1, 2026;

● All outstanding Class B Units will automatically be exchanged into

shares of the Company’s common stock on a one-for-one basis fifteen months after the acquisition closing date;

● Require no additional consideration upon exchange.

Because the Class B Units are equity interests

in a consolidated subsidiary and are convertible into shares of the Company’s common stock, they are considered potentially dilutive

securities for earnings per share purposes when applicable.

Upon exchange of the Class B Units into shares of the Company’s common

stock, the related noncontrolling interest will be reclassified to stockholders’ equity attributable to the Company with no impact

on the consolidated statements of operations.

For the year ended December 31, 2025, the Company

reported a net loss.

Accordingly, the Class B Units were excluded from the computation of diluted net loss per share because their assumed

conversion would have been antidilutive.

In periods of net income, the Class B Units would be evaluated for dilution under the if-converted

method, which would require the addition of net income attributable to the noncontrolling interest and the inclusion of the underlying

shares of common stock in the diluted weighted-average shares outstanding.

CONVERTIBLE NOTE CONVERSIONS – 2024 (MERGER-RELATED)

Immediately prior to the closing of the XTI Merger

on March 12, 2024, certain outstanding convertible notes with an aggregate principal and accrued interest balance of approximately $ 16.8

million were converted into shares of Legacy XTI common stock, which converted into shares of the Company’s common stock upon consummation

of the merger.

Immediately prior to conversion, the notes were remeasured to fair value, resulting in a gain of approximately $ 12.9 million

recognized during 2024.

In connection with voluntary conversions of certain

outstanding convertible notes with an aggregate principal and accrued interest balance of approximately $ 6.4 million completed prior to

the XTI Merger, the Company recognized inducement charges of approximately $ 6.7 million during 2024.

All such convertible note obligations were satisfied

Note 11 - Stock Award Plans and Stock-Based Compensation

In 2011, the Company adopted the 2011 Employee

Stock Incentive Plan (the “2011 Plan”).

The 2011 Plan terminated by its terms on August 31, 2021 and remains in effect as

to outstanding equity awards granted prior to the date of expiration.

No new awards will be issued under the 2011 Plan.

Legacy XTI adopted the 2017 Employee and Consultant

Stock Ownership Plan, which was assumed by the Company in connection with the XTI Merger.

The plan permits grants of stock options and

other equity awards to employees, directors and consultants.

As of December 31, 2025, no shares remain available for future issuance under

the 2017 Plan.

XTI AEROSPACE, INC.

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS

FOR THE YEARS ENDED DECEMBER 31, 2025 AND 2024

12 - Stock Award Plans and Stock-Based Compensation

Company has three Employee Stock Incentive plans.

The Company assumed Legacy XTI’s 2017 Employee and Consultant Stock Ownership

Plan (the “2017 Plan”) in connection with the XTI Merger.

Legacy Inpixon had put in place a 2011 Employee Stock Incentive

Plan (the “2011 Plan”) and a 2018 Employee Stock Incentive Plan (the “2018 Plan” and together with the 2011 Plan,

the “Legacy Inpixon Option Plans”).

The Company determined that activity within the 2011 Plan is not material.

2017, Legacy XTI adopted the 2017 Plan, which was amended in 2021 to increase the maximum shares eligible to be granted under the 2017

The Company may issue awards in the form of restricted stock units and stock options to employees, directors, and consultants.

Under the 2017 Plan, stock options are generally granted with an exercise price equal to the estimated fair value of the Company’s

common stock, as determined by the Company’s Board of Directors on the date of grant.

Options generally have contractual terms

of ten years .

Incentive stock options (ISO) may only be granted to employees, whereas all other stock awards may be granted to employees,

directors, consultants and other key stakeholders.

As of December 31, 2024, there are no shares available for future grants under the

February 2018, Legacy Inpixon adopted the 2018 Plan which is utilized for employees, corporate officers, directors, consultants and other

key persons employed.

The 2018 Plan provides for the granting of incentive stock options, NQSOs, stock grants and other stock-based awards,

including Restricted Stock and Restricted Stock Units (as defined in the 2018 Plan).

As of December 31, 2024, there are no unvested Restricted

Stock or Restricted Stock Units outstanding under the 2018 Plan.

stock options granted under the Legacy Inpixon Option Plans are granted at exercise prices at a minimum of 100 % of the estimated fair

market value of the underlying common stock at date of grant.

For any individual possessing more than 10% of the total outstanding common

stock of the Company, the exercise price per share for incentive stock options is a minimum 110 % of the estimated fair value of the underlying

common stock on the grant date.

Options granted under these Legacy Inpixon Option Plans vest over periods ranging from immediately to

four years and are exercisable over period sup to ten years from the grant date.

aggregate number of shares that may be awarded under the 2018 Plan as of December 31, 2024 was 280,593 .

As of December 31, 2024, 38,359 shares

of common stock were available for future grant under the 2018 Plan.

below for a summary of the stock options granted under the 2011, 2017, and 2018 plans:

The Company’s 2018 Equity Incentive Plan,

as amended and restated in August 2025, authorizes the grant of incentive stock options, nonqualified stock options, restricted stock,

RSUs and other equity-based awards to employees, officers, directors and consultants.

The 2018 Plan permits the Board to delegate limited

grant authority to designated officers.

Options generally vest over periods ranging from immediate to four years and have contractual

terms of up to ten years .

As of December 31, 2025, there are no unvested

Restricted Stock or Restricted Stock Units outstanding under the 2018 Plan.

The aggregate number of shares that may be awarded

under the 2018 Plan as of December 31, 2025 was 80,105,687 .

As of December 31, 2025, 64,166,804 shares of common stock were available

for future grant under the 2018 Plan, of which 57,209,296 shares are registered.

See below for a summary of the stock options granted

under the 2011, 2017 and 2018 plans:

Weighted Weighted Aggregate

1 unchanged sentence

Number of Exercise Remaining Value

Shares Price Life (Years) (in millions)

Options Price Life (Years) (in millions)

Outstanding at January 1, 2024 4,646 $ 4,481.30 6.7 $ —

Legacy Inpixon stock options from merger 5 $ 16,917.50

Granted 55,434 $ 117.50

3 unchanged sentences

Outstanding at December 31, 2024 51,185 $ 455.00 9.3 $ —

Legacy Inpixon stock options from merger 5 $ 16,917.50

Granted 15,893,584 $ 1.74

Exercised ( 371 ) $ 0.25

Expired ( 3 ) $ 700.00

Forfeitures ( 3,219 ) $ 6,713.33

1 unchanged sentence

Exercisable at December 31, 2025 6,179,722 $ 3.37 9.8 $ —

during the year ended December 31, 2024 were primarily due to the departures of Legacy XTI’s former Chief Executive Officer and

the Company’s former Chief Legal Officer.

The weighted average grant-date fair value of options granted during the years ended

December 31, 2024 and 2023 was approximately $ 0.2 million and $ 0.6 million, respectively.

AEROSPACE, INC.

AND SUBSIDIARIES

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS

FOR THE YEARS ENDED DECEMBER 31, 2024 AND 2023

Board approved awards of options to certain Company executives under the 2018 Plan.

Each option has an exercise price of $ 118.25 per

The options will vest 1/3rd annually over three years starting from the vesting commencement date.

The options expire ten years

from the grant date.

Options were granted as follows:

Grantee Grant Date Vesting Start Date Options Granted

Chief Executive Officer of XTI Aerospace, Inc.

6/12/2024 6/12/2024 11,250

Chief Financial Officer of XTI Aerospace, Inc.

6/12/2024 6/12/2024 6,563

Chief Executive Officer of the XTI Aerospace, Inc.

Real-Time Location System Division 6/12/2024 6/12/2024 3,900

Chief Strategy Officer of XTI Aerospace, Inc.

9/19/2024 8/1/2024 4,688

Chief Legal Officer of XTI Aerospace, Inc.

10/28/2024 10/28/2024 4,688

Total Granted 31,089

following assumptions were used in estimating the fair values of options awarded during the year ended December 31, 2024:

the Year Ended

During the year ended December 31, 2025, the Company

granted 15,893,584 stock options under the 2018 Plan to employees, directors, and other service providers with exercise prices ranging

from $ 1.26 to $ 2.00 per share.

The following assumptions were used in estimating

the fair values of options awarded during the year ended December 31, 2025:

December 31, 2025

8 unchanged sentences

Dividend yield

the year ended December 31, 2023, Legacy XTI granted 1,089 stock options to members of its management team, which vest based on the

achievement of certain performance-based conditions as outlined in the option award agreements.

The exercise price of the stock options

granted to the management team was $ 4,677.36 .

following assumptions were used in estimating the fair values of options awarded during the year ended December 31, 2023:

For the Year Ended

The range in expected term reflects both newly granted awards and modifications

to certain previously granted options, including extensions of contractual terms from 90 days to up to ten years, which resulted in longer

expected terms for those awards.

The following assumptions were used in estimating

the fair values of options awarded during the year ended December 31, 2024:

December 31, 2024

Fair value of common stock

$ 10.75 - $ 118.25

Exercise price

Expected term 5 years

Volatility 74.10 %

$ 10.75 - $ 118.25

Expected term

95.06 % - 103.3 %

Risk-free interest rate

3.51 % - 4.43 %

Dividend yield

Option Exercises

To induce option holders to exercise stock options ahead of the XTI

Merger so to assist the Company in qualifying for a listing on the Nasdaq Capital Market, Legacy XTI entered into exercise letter agreements

with several option holders in February 2024 at reduced exercise prices from the original option agreements.

The net impact of these option

inducements to the condensed consolidated statement of operations was not material.

In total, 1,038,871 stock options granted under

the 2017 Plan were net exercised into pre-exchange common shares of Legacy XTI immediately prior to the XTI Merger closing time, which

resulted in the issuance of 371 post-merger exchange and post 1-for-250 reverse split common shares.

AEROSPACE, INC.

AND SUBSIDIARIES

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS

FOR THE YEARS ENDED DECEMBER 31, 2024 AND 2023

Compensation Expense

Company incurred the following stock-based compensation charges for the periods indicated below (in thousands):

Ended December 31,

and consultant stock options 1

Professional fees 1

of previously unvested warrants 2

Merger-related

professional fees 2

1 amount included in general and administrative expenses on the consolidated statements of operations

2 amount included in merger-related transaction costs on the consolidated statements of operations

of December 31, 2024, the total unrecognized compensation expense related to unvested awards was approximately $ 5.8 million, which

the Company expects to recognize over an estimated weighted average period of 1.78 years.

Compensation Related to Professional Fees

July 31, 2024, the Company entered into an advisory agreement with a third-party advisor, pursuant to which the Company issued 4,000 shares

valued at approximately $ 0.3 million of restricted common stock to the advisor in consideration for financial advisory and business

development services agreed to be rendered to the Company pursuant to the agreement.

Compensation Related to the XTI Merger

of Legacy XTI common stock were issued to Scott Pomeroy, Chief Executive Officer of the Company and former CFO and board member of Legacy

XTI, as transaction compensation immediately prior to the XTI Merger closing time equal to 1,429 post merger shares of Company common

As a result of this share issuance transaction, the Company recorded $ 1.9 million of stock-based compensation expense included

in the consolidated statement of operations during the year ended December 31, 2024.

of Legacy XTI common stock were issued to Maxim as transaction compensation immediately prior to the XTI Merger closing time equal to

1,542 post merger shares of Company common stock.

As a result of this share issuance transaction, the Company recorded approximately

$ 2.0 million of stock-based compensation expense included in the consolidated statement of operations during the year ended December

of Legacy XTI common stock were issued to Chardan Capital Markets LLC as transaction compensation immediately prior to the XTI Merger

closing time equal to 757 post merger shares of Company common stock.

As a result of this share issuance transaction, the Company

recorded $ 1.0 million of stock-based compensation expense included in the consolidated statement of operations during the year ended

December 31, 2024.

of Legacy XTI common stock were issued to a non-executive officer as transaction compensation immediately prior to the XTI Merger closing

time equal to 186 post merger shares of Company common stock.

As a result of this share issuance transaction, the Company recorded

approximately $ 0.2 million of stock-based compensation expense included in the consolidated statement of operations during the year

ended December 31, 2024.

AEROSPACE, INC.

AND SUBSIDIARIES

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS

FOR THE YEARS ENDED DECEMBER 31, 2024 AND 2023

13 - Warrants

The following

table summarizes the activity of warrants outstanding:

Outstanding at January 1, 2023

Outstanding at December

Legacy Inpixon warrants

Outstanding at December

Exercisable at December

On March 11, 2024, Legacy XTI entered into an amendment (the “Warrant

Amendment”) with Mesa Airlines (“Mesa”).

The Warrant Amendment modifies the vesting criteria with respect to the shares

of common stock underlying the warrant issued by the Company to Mesa pursuant to the conditional aircraft purchase contract described

As amended by the Warrant Amendment, (i) one-third or 757 warrant shares vested upon the execution and delivery of the conditional

aircraft purchase contract, dated February 2, 2022, by and between the Company and Mesa, relating to the purchase of 100 TriFan 600 airplane,

(ii) one-sixth or 378 of the warrant shares vested on March 12, 2024 in which the Company recorded $ 0.5 million of stock-based compensation

expense for the year ended December 31, 2024, (iii) one-sixth or 378 unvested warrant shares lapsed on March 12, 2024, and (iv) one-third

or 757 warrant shares will vest upon the acceptance of delivery and final purchase of the first TriFan 600 airplane by Mesa pursuant

to the Aircraft Purchase Agreement.

On March 12, 2024 and per a warrant exercise letter agreement, all vested warrants shares were net

exercised into shares of Legacy XTI common stock immediately prior to the XTI Merger closing time, which resulted in the issuance of 1,135 shares

of the Company’s common stock.

induce warrant holders to exercise warrant shares, Legacy XTI entered into exercise letter agreements with several warrant holders in

February 2024 at reduced exercise prices from the original warrant agreements.

The net impact of these warrant inducements to the condensed

consolidated statement of operations was not material.

In total, 423 warrant shares (adjusted for the merger exchange) were net

exercised into shares of Legacy XTI common stock immediately prior to the XTI Merger closing time, which resulted in the issuance of

423 shares of the Company’s common stock.

the second quarter of 2024, an additional 82 warrant shares originally issued by Legacy XTI were exercised into 82 shares of

the Company’s common stock at an exercise price of $ 30.00 .

April 30, 2024 and May 1, 2024, the Company entered into warrant exchange agreements with the holders of certain of our then outstanding

warrants (the “Existing Warrants”) initially issued on May 17, 2023.

Pursuant to the terms of the agreements, on May 2, 2024,

the Company issued to the warrant holders, who held an aggregate of 3,675 warrant shares, a ratio of 0.70 shares of common stock

for each Existing Warrant, for an aggregate of 2,573 shares of common stock valued at approximately $ 1.6 million, in exchange

for the Existing Warrants.

As the Existing Warrants were liability classified, the exchange resulted in the liability being (i) remeasured

at the warrant redemption value of approximately $ 1.6 million resulting in a fair value loss of approximately $ 0.7 million, which

is reported in other income (expense) within the consolidated statements of operations for the year ended December 31, 2024, and (ii)

reclassified to stockholders’ equity (deficit) within the consolidated balance sheet as of December 31, 2024.

Following the consummation

of the warrant exchange, the Existing Warrants were cancelled and no further shares are issuable pursuant to the Existing Warrants agreement.

AEROSPACE, INC.

AND SUBSIDIARIES

XTI AEROSPACE, INC.

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS

FOR THE YEARS ENDED DECEMBER 31, 2025 AND 2024

May 30, 2024, the Company entered into a warrant exchange agreement with the holder of certain warrants of the Company (the “Assumed

Warrants”) to purchase shares of common stock, which Assumed Warrants were originally issued by Legacy XTI and assumed by the Company

in connection with the XTI Merger.

Pursuant to the terms of the agreement, the Company issued to the warrant holder an aggregate of 462 shares

of common stock valued at approximately $ 0.1 million in exchange for 771 Assumed Warrants, which included 671 warrants

shares granted during the year ended December 31, 2024 as result of price protection clauses per the Assumed Warrant agreements relating

to subsequent equity sales by the Company.

As the Assumed Warrants were liability classified, the exchange resulted in the liability

being (i) remeasured at the warrant redemption value of approximately $ 0.1 million resulting in an immaterial loss, and (ii) reclassified

to stockholders’ equity (deficit) within the consolidated balance sheet as of December 31, 2024.

Following the consummation of

the warrant exchange, the Assumed Warrants were cancelled and no further shares are issuable pursuant to the Assumed Warrants agreement.

June 12, 2024 and June 13, 2024, the Company entered into warrant exchange agreements with the holders (the “Warrant Holders”)

of 1,965 existing warrants of the Company (the “Existing Warrants”) initially issued on December 19, 2023, which were

exercisable for an aggregate of 1,965 shares of our common stock.

Pursuant to the terms of the agreements, on June 13, 2024, the

Company issued to the Warrant Holders 1.50 shares of Common Stock for each Existing Warrant, for an aggregate of 2,935 shares

of common stock, in exchange for the Existing Warrants.

Following the consummation of the Warrant Exchange, the Existing Warrants

were cancelled and no further shares are issuable pursuant to the Existing Warrants agreements.

The incremental increase in fair value

of the Existing Warrants of approximately $ 0.3 million as a result of the exchange was recorded as a return of capital, which reduces

the additional paid-in capital on the consolidated balance sheets as of December 31, 2024, and is shown as a reconciling item on the

consolidated statements of operations from Net Loss to Net Loss Attributable to Common Stockholders.

Warrant Activity

May 9, 2023 and in conjunction with the Convertible Note - 2017 (Note 9), Legacy XTI cancelled 224 warrants previously issued

to the noteholder with an exercise price of $ 4,201.22 and issued 343 new warrants with an exercise price of $ 4,201.22 .

The warrants are

exercisable upon the date of grant through the contractual term of 5 years.

Using the Black-Scholes model, Legacy XTI determined the

grant-date fair value of the warrants was approximately $ 1.1 million, which was recorded as a debt discount and additional paid-in-capital

on the consolidated balance sheet as of December 31, 2023.

- Reverse Stock Splits

Company effected a reverse stock split of its outstanding common stock at a ratio of 1-for-250 effective as of January 10, 2025.

reverse stock split did not alter the par value of the Company’s common stock or modify any voting rights or other terms of the

common stock.

The reverse stock split was primarily intended to bring the Company in compliance with the minimum bid price requirements

for maintaining its listing on the Nasdaq Capital Market.

The Company has reflected the reverse stock split on a retroactive basis herein,

unless otherwise indicated.

addition, the Company effected a reverse stock split of its outstanding common stock at a ratio of 1-for-100 , effective as of March 12,

2024, for the purpose of complying with Nasdaq Listing Rule 5550(a)(2) and satisfying the bid price requirements applicable for initial

listing applications in connection with the closing of the XTI Merger.

The Company has reflected the reverse stock split on a retroactive

basis herein, unless otherwise indicated.

15 - Segments

Company’s Chief Executive Officer (“CEO”), acting as the Chief Operating Decision Maker, or (“CODM”), regularly

reviews and manages certain areas of its businesses, resulting in the Company identifying two reportable segments:

Industrial IoT and

Commercial Aviation.

The Company manages and reports its operating results through these two reportable segments.

This allows the Company

to enhance its customer focus and better align its business models, resources, and cost structure to the specific current and future

growth drivers of each business, while providing increased transparency to the Company’s shareholders.

The commercial aviation segment is currently in the pre-revenue development

stage and its primary activity is the development of the TriFan 600 airplane.

The Industrial IoT segment generates revenue primarily from

the sale of real-time location system solutions for the industrial sector and its customers are primarily located in Germany and the U.S.

As it relates to the Industrial IoT segment, the results disclosed in the table below only reflect activity following the XTI Merger closing

through the December 31, 2024 reporting date.

on each of our reportable segments and reconciliation to consolidated loss from operations is presented in the table below.

We have assigned

certain previously reported expenses to each segment to conform to the way we internally manage and monitor our business.

operating expenses include costs that are not specific to a particular segment but are general to the group;

included expenses incurred

for administrative and accounting staff, general liability and other insurance, accrued consulting fees and transaction bonuses relating

to former Legacy Inpixon executives, professional fees and other similar corporate expenses.

AEROSPACE, INC.

AND SUBSIDIARIES

Stock-based Compensation Expense

Stock-based compensation charges for the periods

indicated below (in thousands) are as follows:

Research and development

Sales and marketing

General and administrative

As of December 31, 2025, the total unrecognized

compensation expense related to unvested awards was approximately $ 16.4 million, which the Company expects to recognize over an estimated

weighted average period of 1.03 years.

In October 2025, the Board approved an extension

of the post-termination exercise period from 90 days to ten years for certain previously granted stock options.

The extension constituted

a modification under ASC 718, Compensation—Stock Compensation.

The Company remeasured the affected awards on the modification date

and recognized incremental compensation cost of approximately $ 0.6 million, representing the excess of the fair value of the modified

awards over the fair value of the original awards immediately prior to modification.

The incremental compensation cost was recognized

immediately for awards that were vested as of the modification date, with the remaining cost related to unvested awards recognized over

the remaining vesting period.

During the year ended December 31, 2025, the Company

issued 125,000 shares of restricted common stock to a third-party advisor in exchange for financial advisory services.

The Company recognized

$ 0.2 million of stock-based compensation expense related to this award during the year ended December 31, 2025.

Note 12 - Segments

The Company’s Chief Executive Officer (“CEO”),

acting as the Chief Operating Decision Maker, or (“CODM”), regularly reviews and manages certain areas of its businesses,

resulting in the Company identifying two reportable segments:

Unmanned Aircraft Systems (“UAS”) and Commercial Aviation.

Company manages and reports its operating results through these two reportable segments.

This allows the Company to enhance its customer

focus and better align its business models, resources, and cost structure to the specific current and future growth drivers of each business,

while providing increased transparency to the Company’s shareholders.

The UAS segment includes operating results of

Drone Nerds, which is owned by the Company’s majority-owned subsidiary, XTI Drones Holdings, which provides an integrated suite

of UAS solutions across hardware distribution, training, compliance management support, repair and maintenance, fleet sustainment, and

related services.

This segment is focused on revenue generation and lifecycle support for enterprise, public safety, government, and defense

The Commercial Aviation segment consists of the development-stage VTOL

aircraft program focused on the TriFan 600, which is designed to combine vertical takeoff and landing capability with the speed and range

of a fixed-wing aircraft.

This segment does not currently generate revenue and consists primarily of research, engineering, certification

planning and program development activities.

As of the beginning of 2026, activity on the development of the TriFan 600 has been paused.

The CODM evaluates segment performance primarily

based on revenues, gross profit, and income (loss) from operations for the UAS segment, and research and development spending and progress

toward program milestones for the Commercial Aviation segment.

Unallocated operating expenses include costs that are not specific to a

particular segment but are general to the group;

included expenses incurred for administrative and accounting staff, public company costs,

general liability and other insurance, accrued consulting fees and transaction bonuses relating to former Legacy Inpixon executives, professional

fees and other similar corporate expenses.

XTI AEROSPACE, INC.

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS

FOR THE YEARS ENDED DECEMBER 31, 2025 AND 2024

following tables reflect the results of operations from our business segments for the periods indicated below (in thousands):

The UAS segment reflects results of Drone Nerds

beginning in November 2025.

There were no UAS segment operations during the year ended December 31, 2024.

Segment operating results are

presented on a consolidated basis prior to the allocation of net income (loss) attributable to noncontrolling interests.

Substantially all revenues and long-lived assets

for continuing operations are located in the United States.

The following tables reflect the results of operations

from our business segments for the periods indicated below (in thousands):

Year Ended December 31, 2025

Cost of revenues

3 unchanged sentences

General and administrative

Impairment of intangible

Other expenses (1)

Total operating expenses

from operations

(1) Other expenses include merger-related transaction costs and amortization of intangibles.

Income (loss) from operations

(1) Other expenses include acquisition-related transaction costs and amortization of intangibles.

Year Ended December 31, 2024

Operating expenses

2 unchanged sentences

General and administrative

operating expenses

from operations

expenses include merger-related transaction costs and amortization of intangibles.

reporting package provided to the Company’s CODM does not include the measure of assets by segment as that information isn’t

reviewed by the CODM when assessing segment performance or allocating resources.

16 - Fair Value Measurements and Fair Value of Financial Instruments

Company measures certain financial assets and liabilities at fair value on a recurring basis.

The Company determines fair value based

upon the exit price that would be received to sell an asset or paid to transfer a liability in an orderly transaction between market

participants, as determined by either the principal market or the most advantageous market.

Inputs used in the valuation techniques to

derive fair values are classified based on a three-level hierarchy.

Other expenses (1)

Total operating expenses

Loss from operations

(1) Other expenses include merger-related transaction costs and amortization of intangibles.

The reporting package provided to the Company’s

CODM does not include the measure of assets by segment as that information isn’t reviewed by the CODM when assessing segment performance

or allocating resources.

XTI AEROSPACE, INC.

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS

FOR THE YEARS ENDED DECEMBER 31, 2025 AND 2024

Note 13 - Fair Value Measurements and Fair

Value of Financial Instruments

The Company measures certain financial assets

and liabilities at fair value on a recurring basis.

The Company determines fair value based upon the exit price that would be received

to sell an asset or paid to transfer a liability in an orderly transaction between market participants, as determined by either the principal

market or the most advantageous market.

Inputs used in the valuation techniques to derive fair values are classified based on a three-level

These levels are:

Quoted prices (unadjusted) in active markets that are accessible at the measurement date for identical assets or liabilities.

Observable prices that are based on inputs not quoted on active markets but corroborated by market data.

Unobservable inputs which are supported by little or no market activity and values determined using pricing models, discounted cash

flow methodologies, or similar techniques, as well as instruments for which the determination of fair value requires significant judgment

or estimation.

instruments consist of cash and cash equivalents, accounts receivable, notes receivable, warrant asset, accounts payable, warrant liability,

convertible notes, and the loan conversion derivative.

Cash and cash equivalents, accounts receivable and accounts payable are stated

at their respective carrying amounts, which approximate fair value due to their short-term nature.

changes in fair value of the warrant liability, convertible notes, and warrant asset are presented within ‘Change in fair value

of warrant liability’, ‘Change in fair value of convertible notes’, and ‘Other expense’, respectively,

in the condensed consolidated statements of operations.

fair value of the Level 3 warrant liability was determined using a pricing model with certain significant unobservable market data inputs.

AEROSPACE, INC.

AND SUBSIDIARIES

Quoted prices (unadjusted) in active markets that are accessible

at the measurement date for identical assets or liabilities.

Observable prices that are based on inputs not quoted on active

markets but corroborated by market data.

Unobservable inputs which are supported by little or no market

activity and values determined using pricing models, discounted cash flow methodologies, or similar techniques, as well as instruments

for which the determination of fair value requires significant judgment or estimation.

Financial instruments consist of cash and cash

equivalents, accounts receivable, notes receivable, warrant asset, accounts payable, warrant liability, convertible notes, and the loan

conversion derivative.

Cash and cash equivalents, accounts receivable and accounts payable are stated at their respective carrying amounts,

which approximate fair value due to their short-term nature.

The changes in fair value of the warrant liability,

convertible notes, and warrant asset are presented within ‘Change in fair value of warrant liability’, ‘Change in fair

value of convertible notes’, and ‘Other expense’, respectively, in the condensed consolidated statements of operations.

The fair value of the Level 3 warrant liability

was determined using a pricing model with certain significant unobservable market data inputs.

Investment in Publicly

Traded Equity Securities

As of December 31, 2025, the Company held a de

minimis investment in publicly traded equity securities with a carrying value of less than $ 0.1 million.

Changes in fair value were immaterial

for the year ended December 31, 2025.

Investment in Convertible Promissory Note

– Valkyrie Sciences Holdings LLC

On October 21, 2025, the Company made a $ 2.0 million

strategic investment in Valkyrie Sciences Holdings LLC (“Valkyrie”) through the purchase of a convertible promissory note

with an initial principal amount of $ 2.0 million (the “Valkyrie Note”).

The Valkyrie Note bears interest at 10.0 % per annum

and matures on December 31, 2026.

The note may be converted, at the Company’s option, into equity securities of Valkyrie upon the

occurrence of certain qualified financing or other defined transactions and contains customary repayment and default provisions.

may provide additional funding of up to $ 8.0 million under the Valkyrie Note;

no additional amounts were funded as of December 31, 2025.

The Company determined that it does not have a

controlling financial interest in Valkyrie and therefore does not consolidate the entity.

The Valkyrie Note is accounted for as an available-for-sale

debt security under ASC 320.

Available-for-sale debt securities are recorded at fair value with unrealized gains and losses recognized

in accumulated other comprehensive income (loss), unless such declines are determined to be credit-related.

During the year ended December 31, 2025, the Company

evaluated the investment for expected credit losses in accordance with ASC 326.

Based on management’s assessment of the issuer’s

financial condition, limited operating revenues, reliance on future financing, and the uncertainty surrounding the issuer’s ability

to repay the contractual obligations, the Company determined that collection of the contractual cash flows associated with the note was

not expected.

Accordingly, the Company recorded a full allowance for expected credit

losses of approximately $ 2.0 million, which reduced the carrying value of the Valkyrie Note to zero as of December 31, 2025.

loss expense was recorded within Other (Expense) Income in the consolidated statements of operations.

Because the investment’s carrying value

was reduced to zero through the recognition of expected credit losses, the asset had no remaining fair value as of December 31, 2025

and therefore is not presented in the fair value hierarchy table.

XTI AEROSPACE, INC.

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS

FOR THE YEARS ENDED DECEMBER 31, 2025 AND 2024

in Equity Securities

October 23, 2023, a Business Combination Agreement (the “Damon Business Combination Agreement”) was entered into by and among

XTI, Grafiti Holding Inc., 1444842 B.C.

LTD (“Amalco Sub”), and Damon Motors Inc.

(“Damon”), pursuant to which

Damon combined and merged with Amalco Sub, a British Columbia corporation and a wholly-owned subsidiary of Grafiti Holding, Inc., with

Damon continuing as the surviving entity and a wholly-owned subsidiary of Grafiti Holding, Inc.

(the “Grafiti Holding Transaction”).

The Damon Business Combination closed in November 2024.

October 26, 2023, Legacy Inpixon purchased a convertible note through a private placement in aggregate principal amount of $ 3.0 million

for a purchase price of $ 3.0 million paid in cash from Damon.

Interest on the convertible note accrues at 12 % per annum.

subsequently amended in November 2024.

As amended, the note was set to mature on November 30, 2024.

The convertible note is subject to

certain conversion features which include qualified financing, and/or qualified transaction, as defined in the securities purchase agreement.

The note was required to convert upon Damon Motors Inc.’s completion of the public company event.

The convertible note receivable

is not traded in active markets and its fair value was determined using a present value technique.

The convertible note receivable is

accounted for as an available-for-sale debt security based on “Level 3” inputs, which consist of unobservable inputs and

reflect management’s estimates of assumptions that market participants would use in pricing the asset, with unrealized holding

gains and losses excluded from earnings and reported in other comprehensive income (loss).

November 18, 2024, Damon completed the Grafiti Holding Transaction which converted the Company’s note receivable into 402,338 shares

of Damon’s common stock.

The carrying value of the note receivable at conversion was approximately $ 3.7 million.

The fair value

of the shares received was approximately $ 1.0 million at the time of conversion and the shares received are accounted for as a marketable

equity security and measured at fair value.

This equity investment is included in Other assets on the consolidated balance sheets.

a result of the automatic conversion, the Company recognized a loss of approximately $ 2.6 million in the consolidated statements of operations,

which includes the $ 59,000 unrealized gain in other comprehensive income reclassified to earnings.

common stock is traded in active markets, as the security is trading under “DMN” on the Nasdaq Exchange.

common stock is accounted for as marketable equity securities based on “Level 1” inputs, which consist of quoted prices

in active markets, with unrealized holding gains and losses included in earnings.

The fair value was determined by the closing

trading price of the security as of December 31, 2024.

The Company recognized an unrealized loss on Damon common stock of approximately

$ 0.6 million which is included in the consolidated statements of operations for the year ended December 31, 2024.

Company’s assets and liabilities measured at fair value consisted of the following at the periods indicated:

Value at December 31, 2024

investment – Damon Motors, Inc.

Value at December 31, 2023

Warrant Liability

Convertible notes, at

conversion derivatives

AEROSPACE, INC.

AND SUBSIDIARIES

Warrant Liability – Fair Value Measurement

The Company’s warrant liability is classified

as a Level 3 liability within the fair value hierarchy as the valuation utilizes significant unobservable inputs.

The fair value of the warrants was estimated using

a Black-Scholes option pricing model.

The model requires the use of significant assumptions, including:

● The Company’s stock price at the valuation

● The contractual exercise price

● Expected volatility

● Risk-free interest rate

● Expected term

● Dividend yield

Expected volatility was based on the historical

volatility of the Company’s common stock.

The risk-free interest rate was based on U.S.

Treasury yields commensurate with the expected

term of the warrants.

The expected term was based on the contractual remaining life of the warrants.

The Company assumed a dividend yield

of zero, as it does not expect to declare dividends in the foreseeable future.

As of December 31, 2025, the significant assumptions

used in the Black-Scholes model were as follows:

● Stock price:

● Exercise prices:

$ 1.36 – $ 2.00

● Expected volatility:

● Risk-free interest rate:

3.63 % – 3.67 %

● Remaining term:

4.25 – 4.71 years

● Dividend yield:

Changes in these assumptions could result in a

material change in the fair value of the warrant liability.

XTI AEROSPACE, INC.

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS

FOR THE YEARS ENDED DECEMBER 31, 2025 AND 2024

below provides a summary of changes in the estimated fair value of the Company’s Level 3 assets and liabilities:

Loan conversion

Fair Value Tables

As of December 31, 2024, the Company did not have

any material assets or liabilities measured at fair value on a recurring basis.

Accordingly, no fair value hierarchy table has been presented

for that date.

As of December 31, 2025, the Company did not have any assets measured

at fair value on a recurring basis.

The Company’s liabilities measured at fair value consisted

of the following at December 31, 2025:

Fair Value at December 31, 2025

Warrant liability

Total liabilities

The table below provides a summary of changes in the estimated fair

value of the Company’s Level 3 assets and liabilities:

Convertible Note Investment –

Sciences Holding

Balance at January 1, 2025

Purchase of convertible note

Interest income accrued on convertible note

Pre-funded and Common Warrants issued in connection with 2025 Public Offerings

Exercise of Warrants

Change in fair value

Exchanged / Conversion

Loss from note conversion

to equity investment

Accrued interest

discount recognition

at December 31, 2024

Foreign Operations

to the XTI Merger, the Company’s operations were located primarily in the United States.

After the XTI Merger, the Company’s

operations are located primarily in the United States, Germany, and the United Kingdom.

Revenues by geographic area are attributed by

country of domicile of our subsidiaries.

The financial data by geographic area are as follows (in thousands):

For the Year Ended

December 31, 2024:

by geographic area

Operating income (loss)

by geographic area

Net income (loss) by

geographic area

the Year Ended December 31, 2023:

Revenues by geographic

Operating income (loss)

by geographic area

Net income (loss) by

geographic area

of December 31, 2024:

Identifiable assets by

geographic area

Long lived assets by

geographic area

Goodwill by geographic

of December 31, 2023:

Identifiable assets by

geographic area

Long lived assets by

geographic area

Goodwill by geographic

- Related Party Transactions

Note 9 for disclosures on related party debt transactions.

Agreement with David Brody

Brody, board member and founder of Legacy XTI, provided legal and strategic consulting services to Legacy XTI under a consulting agreement.

During the years ended December 31, 2024 and 2023, Legacy XTI paid Mr.

Brody consulting compensation of $ 20,000 and $ 60,000 ,

respectively.

Pursuant to an amendment to the consulting agreement, an outstanding payable amount of $ 320,000 was waived by Mr.

and the consulting agreement terminated in connection with the closing of the XTI Merger.

Agreement with Scott Pomeroy

Scott Pomeroy and Legacy XTI entered

into a consulting agreement dated July 1, 2022, as amended effective January 1, 2023, that provided for his engagement as

Legacy XTI’s Chief Financial Officer.

The agreement provided that Mr.

Pomeroy receive a monthly compensation of $ 17,500 .

During the years ended December 31, 2024 and 2023, the Company paid Mr.

Pomeroy consulting compensation of $ 92,750 and

$ 152,250 , respectively.

Pursuant to the consulting agreement and in connection with the closing of the XTI Merger in

March 2024, Mr.

Pomeroy (i) received 4,000,000 shares (pre-merger, pre-reverse stock splits) of Legacy XTI common stock

valued at $ 1.9 million as transaction-related compensation and (ii) was entitled to receive a transaction cash bonus of

The transaction cash bonus obligation remained outstanding as of December 31, 2024 and is included in accrued expenses and

other current liabilities on the accompanying consolidated balance sheets.

This cash bonus obligation was subsequently paid in full

during January 2025.

Effective upon closing time of the XTI Merger, Mr.

Pomeroy was appointed as XTI Aerospace’s Chief

Executive Officer.

AEROSPACE, INC.

AND SUBSIDIARIES

Provision for expected credit losses

Balance at December 31, 2025

XTI AEROSPACE, INC.

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS

FOR THE YEARS ENDED DECEMBER 31, 2025 AND 2024

with AVX Aircraft Company

On March 25, 2024, the Company entered into a letter agreement, as

amended on June 17, 2024, with AVX Aircraft Company (“AVX”) whereas AVX is to provide consulting and advisory services relating

to the development and design of the TriFan 600 airplane.

The Company’s Chairman and CEO, Scott Pomeroy, and board member, David

Brody, also sit on the Board of AVX.

Additionally, as of the date of this report, David Brody owns approximately 26 % of the issued

and outstanding shares of AVX.

During the year ended December 31, 2024, the Company paid AVX $ 0.9 million in consulting fees,

which included advance deposits for future services.

As of December 31, 2024, the deposit balance for future services was approximately

$ 0.5 million, and is included in prepaid expenses and other current assets on the accompanying consolidated balance sheets.

with Nadir Ali

Note 14 - Related Party Transactions

Agreements with Nadir Ali and Affiliated

On March 27, 2025, the Company entered into a

consulting agreement with Mr.

Nadir Ali (the “Ali Consulting Agreement”), the Company’s former Chief Executive Officer.

Ali, through a company of which he is a controlling member, held shares of the Company’s Series 9 Preferred Stock as disclosed

Pursuant to the Ali Consulting Agreement, following the closing of the XTI Merger, Mr.

Ali will provide consulting services

to the Company for 15 months (“Ali Consulting Period”) or until earlier termination in accordance with its terms.

During the Ali Consulting Period, the Company will pay him a monthly fee of $ 20,000 .

addition, the Company shall pay Mr.

Ali (a) the amount of $ 1.5 million due three months following the Closing, and (b) the aggregate

amount of $ 4.5 million, payable in 12 equal monthly installments, starting four months after the closing date

of the XTI Merger (the payments described in (a) and (b), each an “Equity Payment”).

Each Equity Payment may be made, in

Company’s discretion, in (i) cash, (ii) fully vested shares of common stock under the Company’s equity incentive plan, or

a combination of cash and registered shares.

As of the date of this report, the Company repaid the initial $ 1.5 million owed to

Ali under the Ali Consulting Agreement.

During the year ended December 31, 2024, the Company recognized compensation expense of $ 3.6

million, which is included in general and administrative expenses on the consolidated statements of operations, relating to the Ali Consulting

As of December 31, 2024, the Company owed Mr.

Ali accrued consulting fees of approximately $ 0.2 million, which is included

in accounts payable on the accompanying consolidated balance sheets.

On March 27, 2025, the Company entered into a settlement agreement

with 3AM Investments LLC (an entity controlled by Nadir Ali (“Ali”)) (“3AM”), Grafiti Group LLC (“Grafiti

Group”) and Ali (the “Settlement Agreement”).

As a result of the Settlement Agreement, the Company has an outstanding

advisory fee obligation to Ali of $ 1.5 million (the “Deferred Amount”) as of the date of this report, which is due in $ 500,000

installments on June 30, 2025, September 30, 2025, and December 31, 2025.

Upon payment of the Deferred Amount in accordance with the terms

of the Settlement Agreement, the Ali Advisory Fees shall be deemed to be satisfied in full and no further amounts shall be payable by

the Company to Ali or his affiliated parties pursuant to the Ali Consulting Agreement dated March 12, 2024.

Refer to Note 23

for further disclosure of the Settlement Agreement.

July 24, 2023, the compensation committee of the Board (the “Compensation Committee”) adopted a Strategic Transaction Bonus

Plan, which was amended on March 11, 2024, and was intended to provide incentives to certain employees, including Mr.

Ali, and other

service providers to remain with the Company through the consummation of a qualifying transaction.

As of December 31, 2024, the Company

had a transaction bonus obligation of approximately $ 2.1 million payable to Mr.

Ali, which is included in accrued expenses and other

current liabilities on the accompanying consolidated balance sheets.

On March 31, 2025, the Company repaid the remaining transaction

bonus obligation to Mr.

Ali pursuant to the Settlement Agreement.

Group Divestiture

On February 21, 2024, Inpixon completed the disposition

of the remaining portion of the Shoom, SAVES, and GYG business lines and assets (“Grafiti Group Divestiture”) in accordance

with the terms and conditions of an Equity Purchase Agreement, dated February 16, 2024, by and among Inpixon (“Seller”),

Grafiti LLC, and Grafiti Group LLC (an entity controlled by Nadir Ali, the Company’s former CEO) (“Buyer”) (the “Equity

Purchase Agreement”).

Pursuant to the terms of the Equity Purchase Agreement, Buyer acquired from 100 % of the equity interest

in Grafiti LLC, including the assets and liabilities primarily relating to Inpixon’s Saves, Shoom and Game Your Game business,

including 100 % of the equity interests of Inpixon India, Grafiti GmbH (previously Inpixon GmbH) and Game Your Game, Inc.

Company for a minimum purchase price of $ 1.0 million paid in two annual cash installments of $ 0.5 million due within 60 days

after December 31, 2024 and 2025 (the “Grafiti Purchase Amount”).

The purchase price and annual cash installment payments

will be (i) decreased for the amount of transaction expenses assumed;

and (ii) increased or decreased by the amount working capital of

Grafiti LLC on the closing balance sheet is greater or less than $ 1.0 million.

The Company notes that $ 0.5 million of the receivable

is included in current assets as other receivables in the Company’s consolidated balance sheet as of December 31, 2024, and the

remaining $ 0.5 million of the receivable is included in long term assets as other assets in the Company’s consolidated balance

sheet as of December 31, 2024.

Pursuant to the Settlement Agreement, the Company

agreed that, effective as of the Effective Date of the Settlement Agreement, the Grafiti Purchase Amount (i.e., the aggregate amount

of $ 1.0 million) required to be delivered by Grafiti Group pursuant to the Equity Purchase Agreement shall be deemed to be satisfied

in full and no further amounts shall be payable to the Company by Grafiti Group or any of its affiliated parties pursuant to the Equity

Purchase Agreement.

Refer to Note 23 for further disclosure of the Settlement Agreement.

AEROSPACE, INC.

AND SUBSIDIARIES

Settlement Agreement with Nadir Ali, the Company’s former Chief Executive Officer prior to the XTI Merger, and certain of his affiliated

The Settlement Agreement terminated a prior consulting agreement with Mr.

Ali and resolved outstanding obligations relating

to a previously adopted strategic transaction bonus plan that was triggered by the XTI Merger, Series 9 Preferred Stock arrangements,

and a prior equity purchase agreement with an affiliated entity.

During the year ended December 31, 2025, pursuant

to the Settlement Agreement, the Company (i) paid approximately $ 1.1 million of remaining transaction bonus and former management payment

obligations (including approximately $ 0.5 million paid to Mr.

Ali), (ii) paid $ 60,000 and three installments totaling $ 1.5 million in

settlement of amounts due under the terminated consulting agreement, (iii) redeemed the remaining outstanding shares of Series 9 Preferred

Stock held by Mr.

Ali for approximately $ 1.4 million, and (iv) deemed satisfied in full a $ 1.0 million receivable previously recorded

under an equity purchase agreement with an affiliated entity, resulting in the elimination of the related receivable.

During 2025 and prior to the Settlement Agreement,

the Company paid Mr.

Ali approximately $ 1.6 million in transaction bonus payments.

The Company recognized approximately $ 2.3 million

of expense during the year ended December 31, 2025 related to transactions with Mr.

Ali and his affiliated entities, primarily associated

with the settlement of consulting, bonus and related obligations described above.

As of December 31, 2025, no material amounts

were payable to Mr.

Ali or his affiliated entities.

The Settlement Agreement also included mutual releases among the parties with respect

to the matters resolved therein.

Transactions with AVX Aircraft Company

During 2024, the Company paid approximately $ 0.9

million to AVX Aircraft Company (“AVX”) for consulting and advisory services related to aircraft development.

approximately $ 0.5 million outstanding at December 31, 2024 was returned to the Company in April 2025.

During the year ended December 31, 2025, the Company

did not accrue or pay material consulting fees to AVX.

Certain members of the Company’s Board have ownership interests in, or serve

on the board of, AVX.

As of December 31, 2025, neither such individual received compensation from AVX in connection with services provided

by AVX to the Company.

Former Consulting Arrangements

Prior consulting arrangements with David Brody and Scott Pomeroy terminated

in connection with the XTI Merger in March 2024.

During the year ended December 31, 2025, the Company paid Mr.

Pomeroy the remaining $ 400,000

transaction bonus that was earned in connection with the XTI Merger.

No consulting compensation was paid to Mr.

Pomeroy during

the year ended December 31, 2025.

XTI AEROSPACE, INC.

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS

FOR THE YEARS ENDED DECEMBER 31, 2025 AND 2024

- Commitments and Contingencies

time to time, the Company is subject to various claims, charges and litigation matters that arise in the ordinary course of business.

The Company records a provision for a liability when it is both probable that the loss has been incurred and the amount of the loss can

be reasonably estimated.

If the Company determines that a loss is reasonably possible and the loss or range of loss can be reasonably

estimated, it discloses the possible loss or range of loss.

Any potential gains associated with legal matters are not recorded until

the period in which all contingencies are resolved and the gain is realized or realizable.

Depending on the nature and timing of any

such proceedings that may arise, an unfavorable resolution of a matter could materially affect the Company’s future consolidated

results of operations, cash flows or financial position in a particular period.

Except if otherwise indicated, it is not reasonably possible

to determine the probability of loss or estimate damages for any of the matters discussed below, and therefore, the Company has not established

reserves for any of these matters.

On December 6, 2023, 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 (the

“Xeriant Matter”).

On January 31, 2024, Xeriant filed an amended complaint, which added the Company as a defendant to the

Xeriant Matter.

On February 29, 2024, Xeriant filed a second amended complaint.

The Xeriant Matter alleges that Legacy XTI has prevented

Xeriant from obtaining compensation owed 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

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 Legacy Inpixon, which has resulted in a breach of the May 17 letter.

Xeriant 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.

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.

The case is in its early stages of discovery.

XTI denies the allegations of wrongdoing contained in the second amended complaint and is vigorously defending against the lawsuit.

connection with the Xeriant Matter, 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.

are unable to make a reasonable estimate of a potential loss, if any, on this matter.

To the 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 FINRA against the Company and its subsidiary, XTI Aircraft Company (“Aircraft”).

Aircraft and Chardan are parties

to an engagement letter agreement (the “Agreement”).

In the Arbitration, Chardan alleges that the Company is bound by the

Agreement even though it did not sign the Agreement, which the Company denies.

Chardan further alleges that Aircraft and the Company

breached the Agreement by not making separate payments to Chardan of $ 200,000 , $ 94,511 , $ 484,044 and $ 174,000 .

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 an At-The-Market securities offering that was underwritten by Maxim.

The Company and Aircraft deny

that Chardan performed its duties under the Agreement and otherwise that Chardan is owed any sums under the Agreement.

The Company filed

a petition in the U.S.

District Court for the Southern District of New York seeking to stay the Arbitration to the extent that it has

been asserted against the Company.

On or about January 21, 2025, the Court entered a final judgement that:

(a) enjoins Chardan from prosecuting

the arbitration against the Company and (b) declares that the Company has no contractual or other duty to arbitrate with Chardan.

Aircraft subsidiary remains as a party to the arbitration and intends to defend against the arbitration vigorously.

As of December 31,

2024, the Company has accrued $ 200,000 relating to the Agreement, which is included in accounts payable on the consolidated balance sheets.

Advisory Fees

Pursuant to the terms of an amended advisory fees agreement between

the Company and Maxim, the Company is obligated to pay Maxim $ 0.2 million which becomes payable upon the closing of one or more debt or

equity financings for which Maxim serves as placement agent or underwriter and in which the Company raises minimum aggregate gross proceeds

of $ 10 million.

In connection with a capital raise in January 2025, the Company repaid in full its obligation to Maxim (see Note 23).

Agreements with Nadir Ali

As previously disclosed under Note 18, the Company

has an outstanding advisory fee obligation to Nadir Ali of $ 1.5 million, which is payable in $ 500,000 installments on June 30, 2025, September

30, 2025, and December 31, 2025.

AEROSPACE, INC.

AND SUBSIDIARIES

Note 15 - Commitments and Contingencies

Advisory Agreement

On May 13, 2025, the Company entered into an advisory

agreement with a third-party advisor pursuant to which the Company agreed to pay $ 85,000 in cash and issue 125,000 shares of restricted

common stock in exchange for financial advisory services.

The Company paid the cash fee and issued the shares during 2025.

the initial cash fee of $ 42,500 was subsequently waived and returned to the Company in connection with the closing of the June 2025 public

The advisory agreement provided for reimbursement

of certain out-of-pocket expenses (subject to a cap of $ 15,000 ), a customary 12-month fee tail, a 3 % M&A fee with respect to certain

transactions introduced by the advisor, and customary indemnification provisions.

The agreement had a term of 180 days and expired during

From time to time, the Company is involved in legal proceedings arising

in the ordinary course of business.

Except as described below, the Company is not currently a party to any other material legal proceedings.

Xeriant Litigation

In December 2023, Xeriant, Inc.

filed a lawsuit

in the United States District Court for the Southern District of New York against Legacy XTI alleging, among other things, breach of contract,

fraud, unjust enrichment, and misappropriation of confidential information in connection with agreements relating to the TriFan 600 aircraft

and the XTI Merger.

Xeriant previously sought damages in excess of $ 500 million but has since amended its complaint to seek an unspecified

Legacy XTI has asserted counterclaims alleging breach of contract, breach of fiduciary duty, and seeking declaratory relief regarding

ownership of intellectual property and termination of the joint venture agreement.

The litigation is currently in active discovery.

The Company believes the claims against Legacy XTI are without merit and intends to vigorously defend against them.

The outcome of this

matter cannot presently be predicted.

Auctus Litigation

In May 2025, Auctus Fund, LLC filed a lawsuit

in Colorado state court against Legacy XTI alleging breach of contract and asserting that Legacy XTI is obligated to repay approximately

$ 9 million under a promissory note allegedly assumed in connection with a prior letter agreement.

Legacy XTI disputes these claims and

has asserted affirmative defenses.

The case is ongoing.

State of Texas Petition Against Anzu Robotics,

In February 2026, the State of Texas filed a petition in the District

Court of Collin County, Texas, against Anzu Robotics, LLC (“Anzu”), a subsidiary of the Company, alleging violations of the

Texas Deceptive Trade Practices–Consumer Protection Act in connection with the marketing and sale of certain drone products.

petition seeks injunctive relief, civil penalties, and attorneys’ fees and costs.

The Company is engaged in preliminary discussions

with the Texas Attorney General to attempt to resolve the matter cooperatively.

The Company cannot at this time predict the outcome of

this matter or reasonably estimate a range of potential loss, if any.

The Company is unable to predict the ultimate outcome of these matters

or reasonably estimate the amount of any potential loss, if any.

Accordingly, no accrual has been recorded as of December 31, 2025.

adverse outcome in any of these matters could have a material adverse effect on the Company’s financial condition, results of operations,

or cash flows.

XTI AEROSPACE, INC.

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS

FOR THE YEARS ENDED DECEMBER 31, 2025 AND 2024

Strategic Transaction Bonus Plan and Consulting

Arrangement with Prior Legacy Inpixon CFO

On July 24, 2023, the compensation committee

of the Board (the “Compensation Committee”) adopted a Strategic Transaction Bonus Plan, which was amended on March 11, 2024,

and was intended to provide incentives to certain employees and other service providers to remain with the Company through the consummation

of a qualifying transaction.

During the second quarter of 2024, the Company accrued 100 % or $ 6.3 million of the transaction bonuses,

which is included in general and administrative within the accompanying condensed consolidated statements of operations, as the bonuses

became payable upon the earlier of the closing of financing or June 30, 2024.

As of December 31, 2024, the Company had an outstanding

accrued transaction bonus obligation of $ 4.3 million, which is included in accrued expenses and other current liabilities on the accompanying

consolidated balance sheets.

On March 12, 2024, the Company entered into a

Consulting Agreement with Ms.

Wendy Loundermon (the “Loundermon Consulting Agreement”), the Company’s former Chief Financial

Pursuant to the Loundermon Consulting Agreement, following the Closing, Ms.

Loundermon will provide consulting services to the

Company for one year or until earlier termination in accordance with its terms (the “Loundermon Consulting Period”).

As compensation

Loundermon’s consulting services, the Company will pay her (i) $ 83,333 per month for the first six months of the Loundermon

Consulting Period for services she performs on an as-needed basis during the Loundermon Consulting Period regarding the transition of

the management of the Company’s financial reporting function to ensure continuity of business operations, and (ii) $ 300 per hour

for services performed on an as needed basis regarding the preparation and filing of Company’s public company financial reporting

and compliance matters including accounting, payroll, audit and tax compliance functions.

During the year ended December 31, 2024, the

Company recognized compensation expense of $0.5 million, which is included in general and administrative expenses on the consolidated

statements of operations, relating to Ms.

Loundermon’s consulting arrangement.

As of December 31, 2024, the Company owed Ms.

accrued consulting fees of $ 0.5 million, which is included in accounts payable within the accompanying consolidated balance sheets.

Pursuant to the Settlement Agreement, on March

31, 2025, the Company repaid the remaining obligation under the Strategic Transaction Bonus Plan of approximately $ 0.8 million and the

remaining consulting compensation obligation of approximately $ 0.3 million owed to Ms.

Refer to Note 23 for further disclosure

of the Settlement Agreement.

20 - Net Loss Per Share Attributable to Common Stockholders

following table presents the calculation of basic and diluted loss per share attributable to common stockholders (in thousands, except

share and per share data):

the Years Ended

Preferred stock

return and dividend

Deemed dividend

Loss Attributable to Common Stockholders, basic and diluted

Loss Per Share - Basic and Diluted

$ ( 1,576.48 )

Average Shares Outstanding, Basic and Diluted

basic earnings per share calculation for years ended December 31, 2024 and 2023 included 2,435 and 2,435 of penny warrants shares,

respectively, since the exercise price was $ 0.01 per share.

Additionally, the basic earnings per share calculation for the years

ended December 31, 2024 and 2023 included 1,194 shares of common stock that were issuable to Xeriant Inc.

related to the joint venture arrangement that expired by its term on May 31, 2023.

The shares were issued to Xeriant for no additional

consideration immediately prior to the XTI Merger.

following potentially dilutive shares were excluded from the computation of diluted net loss per share attributable to common stockholders

for the periods presented, because including them would have been anti-dilutive (on an as-converted basis):

the Years Ended

Convertible preferred

AEROSPACE, INC.

AND SUBSIDIARIES

Note 16 - Net Loss Per Share Attributable to

Common Stockholders

The following table presents the calculation of

basic and diluted loss per share attributable to common stockholders (in thousands, except share and per share data):

For the Years Ended

Net loss from continuing operations

Net loss from discontinued operations

Net (income) loss attributable to noncontrolling interest

Net loss attributable to XTI Aerospace, Inc.

Preferred stock dividends and deemed dividends

Net Loss Attributable to Common Stockholders

Net loss per share – basic and diluted:

Continuing operations

Discontinued operations

Net loss per share

Weighted Average Shares Outstanding

Net loss per share from continuing and discontinued

operations is calculated based on net loss attributable to common stockholders.

Preferred stock dividends and deemed dividends are allocated

to continuing and discontinued operations on a proportional basis.

Pre-funded warrants outstanding during the period were included in

the calculation of basic earnings per share as their exercise price is nominal.

The following potentially dilutive shares were

excluded from the computation of diluted net loss per share attributable to common stockholders for the periods presented, because including

them would have been anti-dilutive (on an as-converted basis):

For the Years Ended

Convertible Preferred Stock

Noncontrolling Interest – Class B Units

Convertible Notes

Note 17 – Income Taxes

The components of loss

from continuing operations before income taxes for the years ended December 31, 2025 and 2024 are as follows (in thousands):

For the Years Ended

Net loss before income taxes

XTI AEROSPACE, INC.

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS

FOR THE YEARS ENDED DECEMBER 31, 2025 AND 2024

21 – Income Taxes

domestic and foreign components of loss from continuing operations before income taxes for the years ended December 31, 2024 and 2023

are as follows (in thousands):

the Years Ended

Loss, before tax

income tax provision (benefit) for the years ended December 31, 2024 and 2023 consists of the following (in thousands):

the Years Ended

The income tax provision (benefit) for the years

ended December 31, 2025 and 2024 consists of the following (in thousands):

For the Years Ended

State and local

in valuation allowance

Tax Provision (Benefit)

reconciliation between the U.S.

statutory federal income tax rate and the Company’s effective rate for the years ended December

31, 2024 and 2023 is as follows:

the Years Ended

statutory rate

State income taxes, net

of federal benefit

Change in valuation allowance

Income Tax Benefit (Provision)

Amounts for the year ended December 31, 2024 have

been recast to reflect the classification of certain operations as discontinued operations.

The Company adopted ASU 2023-09 prospectively

accordingly, the 2025 rate reconciliation is presented under the new guidance, while the prior year is presented under previous

guidance and is not directly comparable to the current year presentation.

The reconciliation between the U.S.

federal income tax rate and the Company’s effective income tax rate for the year ended December 31, 2025 is as follows:

For the Years Ended December 31, 2025

Pretax Book Income (Loss)

US Federal Statutory Tax Rate

State income taxes, net of federal benefit

State Rate Change

Valuation Allowance

Foreign Tax Effects

Effect of Cross-Border Tax Laws

Effect of Changes in Tax Laws or Rates Enacted in the Current Period

Nontaxable or Nondeductible Items

Acquisition Costs

Cost to Raise Capital

Warrant Expense

Stock Options

Changes in Valuation Allowances

Changes in Unrecognized Tax Benefits

Other Adjustments

Investment in German Subsidiaries

The state income tax impact primarily relates

to operations in Colorado, Florida, and Utah, which individually represent significant components of the Company’s state income

XTI AEROSPACE, INC.

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS

FOR THE YEARS ENDED DECEMBER 31, 2025 AND 2024

The reconciliation between the U.S.

federal income tax rate and the Company’s effective income tax rate for the year ended December 31, 2024 is as follows:

federal statutory rate

State income taxes, net of federal benefit

162(m) Compensation Limit

Transaction Costs

Convertible notes / warrant

Inducement Expense

Convertible notes –

fair value adjustment

Foreign income tax rate

Convertible Notes – FV Adjustment

Other permanent items

Provision to return adjustment

in valuation allowance

AEROSPACE, INC.

AND SUBSIDIARIES

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS

FOR THE YEARS ENDED DECEMBER 31, 2024 AND 2023

of December 31, 2024 and 2023, the Company’s deferred tax assets and liabilities consisted of the effects of temporary differences

attributable to the following (in thousands):

of December 31,

Foreign income tax rate difference

Provision to return adjustments

Change in valuation allowance

Effective Rate

As of December 31, 2025 and 2024, the Company’s

deferred tax assets and liabilities consisted of the effects of temporary differences attributable to the following (in thousands):

As of December 31,

Deferred Tax Asset

1 unchanged sentence

Stock based compensation

Research credits

Accrued expenses

3 unchanged sentences

valuation allowance

Tax Asset, Net of Valuation Allowance

of December 31,

Deferred Tax Asset, Net of Valuation Allowance

XTI AEROSPACE, INC.

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS

FOR THE YEARS ENDED DECEMBER 31, 2025 AND 2024

As of December 31,

Deferred Tax Liabilities

Intangible assets

deferred tax liabilities

Deferred Tax Asset (Liability)

AEROSPACE, INC.

AND SUBSIDIARIES

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS

Total deferred tax liabilities

Net Deferred Tax Asset (Liability)

At December 31, 2025, the Company did not have

any undistributed earnings of its foreign subsidiaries.

As a result, no additional income or withholding taxes have been provided.

Company does not anticipate any impacts of the global intangible low-taxed income (“GILTI”) or base erosion anti-abuse tax

(“BEAT”) and, as such, has not recorded any impact associated with either GILTI or BEAT.

In accordance with Section 382 of the Internal Revenue

Code, the deductibility of the Company’s net operating loss (“NOL”) carryforwards is subject to an annual limitation

in the event of a change in ownership, as defined by the regulations.

The Company performed an analysis of ownership changes occurring

during 2024 and 2025 and determined that certain NOLs are subject to limitation.

As of December 31, 2025, the Company had approximately

$ 133 million of NOL carryforwards available to offset future taxable income, subject to Section 382 limitations.

Of this amount, approximately

$ 5.3 million generated in 2017 will expire on December 31, 2037 if not utilized.

The remaining NOLs generated after 2017 have an indefinite

carryforward period.

As of December 31, 2025 and 2024, the Company had gross state NOLs of $ 268.8 million and $ 163.7 million, respectively.

As of December 31, 2025, the Company’s foreign

subsidiaries, including Nanotron GmbH and Intranav GmbH, had approximately $ 66.1 million of German NOL carryforwards available to offset

future taxable income.

These NOLs do not expire;

however, German minimum taxation rules limit the amount of taxable income that may be

offset in any given year.

The related deferred tax assets and valuation allowances associated with these foreign NOLs are presented within

discontinued operations.

Deferred income taxes reflect the net tax effects

of temporary differences between the carrying amounts of assets and liabilities for financial reporting purposes and the amounts used

for income tax purposes.

In assessing the realizability of deferred tax assets, management considers whether it is more likely than not

that some portion or all of the deferred tax assets will not be realized.

The ultimate realization of deferred tax assets depends on the

generation of future taxable income during the periods in which temporary differences become deductible.

ASC 740 requires that a valuation allowance be

established when it is more likely than not that all, or a portion of, deferred tax assets will not be realized.

After consideration of

all available positive and negative evidence, including cumulative losses and projections of future taxable income, management has concluded

that a full valuation allowance is required against the Company’s deferred tax assets as of December 31, 2025.

The increase in the

valuation allowance for continuing operations was approximately $ 6.7 million for the year ended December 31, 2025.

ASC 740 also clarifies the accounting for uncertainty

in income taxes.

The Company recognizes the financial statement impact of a tax position when it is more likely than not that the position

will be sustained upon examination.

The Company files income tax returns in the United States (federal and state), Germany, and the United

Kingdom, including jurisdictions related to discontinued operations.

The Company has concluded that there are no material uncertain tax

positions requiring recognition in the consolidated financial statements for the years ended December 31, 2025 and 2024.

The Company’s policy is to record interest

and penalties related to unrecognized tax benefits as a component of income tax expense.

No amounts were accrued for interest or penalties

for the years ended December 31, 2025 and 2024.

December 31, 2024, the Company did not have any undistributed earnings of its foreign subsidiaries.

As a result, no additional income

or withholding taxes have been provided for.

The Company does not anticipate any impacts of the global intangible low taxed income (“GILTI”)

and base erosion anti-abuse tax (“BEAT) and as such, the Company has not recorded any impact associated with either GILTI or BEAT.

In accordance with Section 382 of the Internal

Revenue Code, deductibility of the Company’s NOL carryover is subject to an annual limitation in the event of a change of control,

as defined by the regulations.

The Company performed an analysis to determine the annual limitation as a result of the changes in ownership

that occurred during 2023 and 2024.

Ownership changes occurred during the 2023 and 2024 periods and are limited in their use.

available to offset future taxable income is approximately $ 96.9 million, subject to Section 382 limitations.

The NOL generated in 2017

of $ 5.3 million, will expire in December 31, 2037 if not utilized.

The remaining NOLs generated after 2017 have an indefinite life and

do not expire.

of December 31, 2024, Nanotron GmbH, which was acquired through the merger, had approximately $ 45.7 million, respectively, of German

NOL carryovers available to offset future taxable income.

Although these NOLs do not expire, minimum taxation restrictions apply such

that only a percentage of taxable income may be offset by NOL carryovers.

All of these NOLs are available to the Company as a part of

the continuing activity.

of December 31, 2024 Intranav GmbH, which was acquired through the merger, had approximately $ 11.3 million of German NOL carryovers available

to offset future taxable income.

Although these NOLs do not expire, minimum taxation restrictions apply such that only a percentage of

taxable income may be offset by NOL carryovers.

All of these NOLs are available to the Company as a part of the continuing activity.

income taxes reflect the net tax effects of temporary differences between the carrying amounts of assets and liabilities for financial

reporting purposes and the amounts used for income tax purposes.

In assessing the realization of deferred tax assets, management considers,

whether it is “more likely than not”, that some portion or all of the deferred tax assets will not be realized.

realization of deferred tax assets is dependent upon the generation of future taxable income during the periods in which temporary differences

representing net future deductible amounts become deductible.

740, “Income Taxes” requires that a valuation allowance be established when it is “more likely than not” that

all, or a portion of, deferred tax assets will not be realized.

A review of all available positive and negative evidence needs to be

considered, including the scheduled reversal of deferred tax liabilities, projected future taxable income, and tax planning strategies.

After consideration of all the information available, management believes that uncertainty exists with respect to future realization

of its deferred tax assets with respect to XTI Aerospace, Inc, Nanotron, Intranav GmbH, Inpixon Holding (UK) Limited and has, therefore,

established a full valuation allowance as of December 31, 2024.

As of December 31, 2024 and 2023, the change in valuation allowance was

an increase of the valuation allowance of $ 3.9 million, excluding the recording of Inpixon for the merger.

740 also clarifies the accounting for uncertainty in income taxes recognized in an enterprise’s financial statements and prescribes

a recognition threshold and measurement process for financial statement recognition and measurement of a tax position taken or expected

to be taken in a tax return.

For those benefits to be recognized, a tax position must be more likely than not to be sustained upon examination

by taxing authorities.

ASC 740 also provides guidance on de-recognition, classification, interest and penalties, accounting in interim

periods, disclosure and transition.

The Company is required to file income tax returns in the United States (federal), Germany, United

Kingdom, and in various state jurisdictions in the United States.

These filings include discontinued activity periods.

Based on the Company’s

evaluation, it has been concluded that there are no material uncertain tax positions requiring recognition in the Company’s consolidated

financial statements in years ended December 31, 2024 and December 31, 2023.

Company’s policy for recording interest and penalties associated with unrecognized tax benefits is to record such interest and

penalties as interest expense and as a component of income tax expense.

There were no amounts accrued for interest or penalties for the

years ended December 31, 2024 and 2023.

Management does not expect any material changes in its unrecognized tax benefits in the next

Company operates in multiple tax jurisdictions and, in the normal course of business, its tax returns are subject to examination by various

taxing authorities.

Such examinations may result in future assessments by these taxing authorities.

The Company is subject to examination

tax authorities beginning with the year ended December 31, 2021.

AEROSPACE, INC.

Management does not expect any material changes in unrecognized tax benefits in the next

twelve months.

The Company’s tax returns are subject to

examination by various taxing authorities.

The Company is subject to examination by U.S.

federal and state tax authorities beginning with

the year ended December 31, 2022.

Note 18 – Leases

The Company has operating leases for office and

operational facilities in the United States related to its continuing operations.

The Company entered into a lease for its corporate

office in Englewood, Colorado that commenced on February 1, 2024 and expires on January 31, 2028.

The current lease rate is $ 10,630 per

month as of the date of this filing.

XTI AEROSPACE, INC.

AND SUBSIDIARIES

1 unchanged sentence

FOR THE YEARS ENDED DECEMBER 31, 2025 AND 2024

Company has operating leases for administrative offices in the United States (Colorado) and Germany.

As part of the XTI Merger, the Company acquired right-of-use assets

and lease liabilities related to an operating lease for an office space (the IntraNav office) located in Frankfurt, Germany.

term of the lease expired on January 6, 2025, at which time the lease converted to month-to-month at a rate of $ 10,298 (€ 9,890 ) per

The lease will continue indefinitely until either party provides 180-day written notice of termination.

As part of the XTI Merger, the Company acquired right-of-use assets

and lease liabilities related to an operating lease for an office space (the Inpixon GmbH office) located in Berlin, Germany.

expired on March 31, 2025 and had a lease rate of $ 7,810 (€ 7,500 ) per month up to the expiration date.

Subsequent to the March

31, 2025 expiration, the Inpixon GmbH office personnel moved to a new location in Berlin.

The lease rate at the new location is $ 3,897 (€ 3,742 )

The new lease expires on March 31, 2026.

On January 1, 2024, the Company entered into

a lease agreement for its new corporate office location in Englewood, Colorado.

This lease expires on January 31, 2028 and the current

lease rate is $ 10,630 per month as of the date of this filing.

Company has no other operating or financing leases with terms greater than 12 months.

In connection with the Drone Nerds acquisition,

the Company recognized right-of-use assets and lease liabilities for four office leases:

(i) Hollywood Park office, Dania Beach, Florida

(expires April 30, 2029 ;

current monthly base rent of $ 24,587 ), (ii) Aventura Business Park, Suite B09-10, Miami, Florida (expires January

current monthly base rent of $ 4,165 ), (iii) Aventura Business Park, Suite B11, Miami, Florida (expires September 30, 2030 ;

monthly base rent of $ 3,453 ), and (iv) Wynwood office, Miami, Florida (expires April 30, 2032 ;

current monthly base rent of $ 23,435 ).

These leases were recognized at fair value as part of the purchase accounting for the acquisition of Drone Nerds in November 2025.

Right-of-use assets and lease liabilities associated

with the Company’s exited Inpixon Business, including office leases in Frankfurt and Berlin, Germany, are classified as held for

sale and presented within discontinued operations.

Accordingly, the lease disclosures below exclude leases classified within discontinued

Company has no other operating or finance leases with terms greater than 12 months .

Right-of-use assets are summarized below (in thousands):

of December 31, 2024

of December 31, 2023

Berlin, Germany Office

Frankfurt, Germany Office

accumulated amortization

expense for operating leases recorded in the balance sheet is included in operating costs and expenses and is based on the future minimum

lease payments recognized on a straight-line basis over the term of the lease plus any variable lease costs.

Operating lease expenses,

inclusive of short-term and variable lease expenses, recognized in our consolidated statements of operations for the years ended December

31, 2024 and 2023 was $ 0.4 million and $ 0.0 million, respectively.

the years ended December 31, 2024 and 2023, the Company recorded $ 0.3 million and $ 0.0 million, respectively, as rent expense

to the right-of-use assets.

AEROSPACE, INC.

As of December 31,

Englewood, CO Office

Hollywood Park, Dania Beach, FL Office

Aventura Business Park, Suite B09-10, Miami, FL Office

Aventura Business Park, Suite B11, Miami, FL Office

Wynwood, Miami, FL Retail Store

Less accumulated amortization

Right-of-use asset, net

Operating lease cost for the years ended December

31, 2025 and 2024 was approximately $ 0.1 million and $ 0.2 million, respectively, which includes immaterial amounts related to short-term

and variable lease costs.

Lease liabilities are summarized below (in thousands):

As of December 31,

Total lease liability

short term portion

Long term portion

Future minimum lease payments under operating leases are as follows

(in thousands):

Year ending 12/31/2026

Year ending 12/31/2027

Year ending 12/31/2028

Year ending 12/31/2029

Year ending 12/31/2030+

Present value discount

Lease liability

Operating lease liabilities are based on the net

present value of the remaining lease payments over the remaining lease term.

In determining the present value of lease payments, the Company

uses its incremental borrowing rate based on the information available at the lease commencement date or acquisition date, as applicable.

As of December 31, 2025, the weighted average remaining lease term is 4.9 years and the weighted average discount rate used to determine

the operating lease liabilities was 9.1 %.

XTI AEROSPACE, INC.

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS

FOR THE YEARS ENDED DECEMBER 31, 2025 AND 2024

Note 19 – Discontinued Operations

Held-for-Sale Classification

During December 2025, management committed to

a plan to dispose of the Inpixon Business and initiated an active program to identify potential buyers.

The Inpixon Business was available

for immediate sale in its present condition, and the sale was considered probable and expected to be completed within one year.

as of December 31, 2025, the Company classified the assets and liabilities of the Inpixon Business as held for sale in accordance with

Beginning in December 2025, the Company ceased

depreciation and amortization of long-lived assets associated with the Inpixon Business.

The disposition represents a strategic shift that

will have a major effect on the Company’s operations and financial results.

Accordingly, the results of the Inpixon Business are

presented as discontinued operations in the consolidated financial statements for all periods presented in accordance with ASC 205-20.

Disposition of the Inpixon Business

On February 3, 2026 (the “Signing Date”

and “Closing Date”), the Company completed the disposition of its Inpixon Business pursuant to a Share Purchase and Transfer

Agreement (the “SPA”) entered into with EVO 467.

GmbH (the “Purchaser”).

Pursuant to the SPA, the Company sold

all of the shares of Inpixon GmbH for a purchase price of EUR 4,640,000 (approximately $ 5.5 million based on the exchange rate on the

Signing Date), subject to the terms described below.

Inpixon GmbH is the sole shareholder of Aware

and IntraNav GmbH.

The Inpixon Business, which provides indoor positioning, real-time localization and sensor technology solutions,

was conducted through Inpixon GmbH.

Measurement and Impairments

Upon classification as held for sale in December

2025, the disposal group was measured at the lower of its carrying amount or fair value less costs to sell in accordance with ASC 360.

During the year ended December 31, 2025, the Company recognized total

impairment charges of approximately $ 10.5 million related to the Inpixon Business, consisting of:

● Goodwill impairment:

$ 9.9 million

● Intangible asset impairment:

$ 0.6 million

Goodwill Impairment

During 2025, the Company identified triggering

events related to the Inpixon Business, including continued operating losses, negative cash flows, declining revenue trends, and management’s

decision to pursue disposition of the business.

The Company performed a quantitative goodwill impairment test and determined

that the carrying amount of the reporting unit exceeded its estimated fair value.

As a result, the Company recorded a goodwill impairment

charge of approximately $ 4.0 million during 2025.

In December 2025, upon classification of the disposal

group as held for sale, the Company measured the disposal group at fair value less costs to sell in accordance with ASC 360.

this measurement, the Company recorded an additional impairment charge of approximately $ 5.9 million, which was allocated entirely to

The fair value estimate was primarily based on the expected transaction

value from the sale of the Inpixon Business, adjusted for expected recoveries of certain accounts receivable retained by the Company and

liabilities economically retained by the Company.

Intangible Asset Impairment

During 2025, the Company also evaluated long-lived

assets for recoverability in accordance with ASC 360.

As a result, the Company recorded impairment charges totaling approximately $ 0.6

million, consisting of:

● $ 0.1 million related to trade names and trademarks

● $ 0.3 million related to proprietary technology

● $ 0.2 million related to customer relationships

The fair value of the affected asset groups was determined

using an income approach based on estimated future cash flows.

These fair value measurements represent non-recurring Level 3 measurements

within the fair value hierarchy.

All impairment charges related to the Inpixon Business are included

in loss from discontinued operations in the consolidated statements of operations.

XTI AEROSPACE, INC.

AND SUBSIDIARIES

1 unchanged sentence

FOR THE YEARS ENDED DECEMBER 31, 2025 AND 2024

the years ended December 31, 2024 and 2023, the Company recorded short-term lease expenses of $ 0.04 million and $ 0.00 million, respectively.

During the years ended December 31, 2024 and 2023, the Company recorded variable lease expenses of $ 0.02 million and $ 0.00 million, respectively.

liability is summarized below (in thousands):

of December 31, 2024

of December 31, 2023

short term portion

analysis under the lease agreement is as follows (in thousands):

Year ending December 31, 2025

Year ending December 31, 2026

Year ending December 31, 2027

Year ending December

Present value discount

lease liabilities are based on the net present value of the remaining lease payments over the remaining lease term.

In determining the

present value of lease payments, the Company used its incremental borrowing rate based on the information available at the date of adoption

of Topic 842.

As of December 31, 2024, the weighted average remaining lease term is 2.8 years and the weighted average discount rate

used to determine the operating lease liabilities was 8.6 %.

- Subsequent Events

January 2025 Registered Direct Offering

On January 7, 2025, we entered into a placement agency agreement with

ThinkEquity LLC (“ThinkEquity”), as placement agent, pursuant to which we agreed to issue and sell directly to various investors,

in a best efforts public offering (the “January Offering”), an aggregate of 1,454,546 shares of common stock at an offering

price of $ 13.75 per share.

The January Offering closed on January 10, 2025, following the effectiveness of the 1-for-250 reverse stock

split of our outstanding common stock on the same date, which was a condition to the closing of the January Offering.

We received net

proceeds of approximately $ 18.3 million from the January Offering.

As part of its compensation for acting as placement agent for the January

Offering, we issued ThinkEquity and its designees Placement Agent Warrants to purchase 72,727 shares of common stock, which were immediately

exercisable upon issuance, have an exercise price of $ 17.1875 per share and expire on the five-year anniversary of the commencement of

sales of the securities issued in the January Offering.

In connection with the

January Offering, on January 9, 2025, we obtained an amended and restated limited waiver (the “Maxim Waiver”) from Maxim Group

LLC (“Maxim”) of their right of first refusal granted to them by us (the “Maxim ROFR”) pursuant to the terms of

that certain advisory engagement agreement, between us and Maxim, dated May 16, 2023, as amended.

Pursuant to the Maxim Waiver, Maxim

agreed, on a one-time basis, not to exercise the Maxim ROFR in connection with the January Offering and was paid a $ 525,000 cash fee upon

the closing of such offering.

with Nasdaq Continued Listing Requirements

February 11, 2025, the Company received a letter from Nasdaq confirming that the Company has regained compliance with the minimum bid

price requirement set forth under Nasdaq Listing Rule 5550(a)(2), and accordingly, the Nasdaq Hearings Panel has determined to continue

the listing of the Company’s common stock on The Nasdaq Stock Market.

to December 31, 2024 and through the date of this report, the Company issued an aggregate 169,299 shares of common stock in

connection with the ATM Offering at per share prices between approximately $ 4.10 and $ 10.38 , resulting in aggregate net

proceeds to the Company of approximately $ 1.7 million.

AEROSPACE, INC.

Major Classes of Assets and Liabilities

Held for Sale

The carrying amounts of the major classes of assets

and liabilities classified as held for sale as of December 31, 2025 and 2024 were as follows (in thousands):

Assets Held for Sale:

Cash and cash equivalents

Accounts receivable, net and other receivables

Prepaid expenses and other current assets

Current assets held for sale

Property and equipment, net

Operating lease right-of-use asset, net

Intangible assets, net

Non-current assets held for sale

Liabilities Held for Sale:

Accounts payable

Accrued expenses and other current liabilities

Operating lease obligations, current

Deferred revenue

Current liabilities held for sale

Operating lease obligations, noncurrent

Non-current liabilities held for sale

Intercompany balances between the Company and

the Inpixon Business were eliminated in consolidation.

Results of Discontinued Operations

The following table presents the results of discontinued

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

Year Ended December 31,

Cost of revenues

Research and development

Sales and marketing

General and administrative

Impairment of goodwill and intangible assets

Other income (expense), net

Net loss, before tax

Income tax provision

Loss from discontinued operations

Cash Flows from Discontinued Operations

XTI AEROSPACE, INC.

AND SUBSIDIARIES

1 unchanged sentence

FOR THE YEARS ENDED DECEMBER 31, 2025 AND 2024

Share Repurchase Program

On March 18, 2025, the Company issued a press release announcing that the Company’s board of directors authorized a share repurchase

program to acquire up to $ 5 million of the Company’s common stock.

The Company may purchase common stock by way of open market transactions,

through privately negotiated transactions, or by other means including through the use of trading plans intended to qualify under Rule

10b-18 under the Exchange Act, in accordance with applicable securities laws and other restrictions.

The timing, total value of stock

repurchases, and aggregate number of shares repurchased will depend upon business, economic and market conditions, corporate and regulatory

requirements, prevailing stock prices, and other considerations.

The share repurchase program has an initial term of 12 months, which

may be extended to 18 months.

The share repurchase program may be suspended or discontinued at any time and does not obligate the Company

to acquire any amount of common stock.

Streeterville Debt Exchanges and Repayment

Subsequent to December 31, 2024, the Company issued an aggregate of

240,229 shares of common stock (the “Exchange Shares”) to Streeterville Capital, LLC (the “Note Holder”), the

holder of that certain outstanding secured promissory note of the Company issued on May 1, 2024 (the “Original Note”), at

a price between $ 2.48 and $ 4.21 per share, in each case equal to the Minimum Price as defined in Nasdaq Listing Rule 5635(d) in accordance

with the terms and conditions of the Exchange Agreements, pursuant to which the Company and the Note Holder agreed to (i) partition new

secured promissory notes in the form of the Original Note in the aggregate original principal amount of $ 750,000 and then cause the outstanding

balance of the Original Note to be reduced by an aggregate of $ 750,000 ;

and (ii) exchange the partitioned notes for the delivery of the

Exchange Shares.

On March 31, 2025 and using the net proceeds from

the March 2025 Offering (see “ March 2025 Underwritten Offering ” below in this note), the Company repaid

the remaining obligation of approximately $ 2.7 million (which included principal, accrued interest and monitoring fees, and a 15 % prepayment

penalty) in respect of the two secured promissory notes issued by the Company to Streeterville Capital, LLC on May 1, 2024 and May 24,

Settlement Agreement

On March 27, 2025 (the “Effective Date”),

The following table presents the major classes

of cash flows related to discontinued operations (in thousands):

Year Ended December 31,

Net cash used in operating activities

Net cash used in investing activities

Net cash provided by (used in) financing activities

Terms of the Disposition

The Purchase Price of EUR 4,640,000 bears interest

at 5 % per annum from the Signing Date until the fourth anniversary of the Closing Date.

The Company has the right (the “Unwind Option”)

to require the Purchaser to transfer back all shares of Inpixon and its subsidiaries during a specified future period for no consideration

by the Company.

If exercised, all unpaid amounts of the Purchase Price will be forgiven.

If not exercised within the specified period,

the unpaid Purchase Price will also be forgiven.

Immediately prior to closing, the Company eliminated

a shareholder loan with an outstanding principal balance of approximately EUR 13.2 million (approximately $ 15.6 million) through a combination

of capital contribution and waiver.

The Company evaluated the Unwind Option in accordance

with ASC 810-10-40, Consolidation—Deconsolidation , and concluded that control of the Inpixon Business transferred to the

Purchaser upon closing.

Based on management’s evaluation of the facts and circumstances surrounding the transaction, including the

Purchaser’s business plan and other qualitative considerations, the likelihood of exercise of the Unwind Option is considered remote.

Accordingly, the transaction was accounted for as a completed sale and the Inpixon Business was derecognized as of the Closing Date.

The Company has no continuing involvement in the

operations of the Inpixon Business following the Closing Date.

The Purchase Price terms, including the potential forgiveness provisions,

were considered in the Company’s assessment of whether the transaction qualified for sale accounting.

As part of the classification of the Inpixon Business

as held for sale in December 2025, the Company measured the disposal group at the lower of its carrying amount or estimated fair value

less costs to sell.

This resulted in the carrying value of the disposal group being written down to approximate the anticipated economic

proceeds from the transaction, which reflect the negotiated purchase price, expected recoveries of receivables retained by the Company,

and liabilities economically retained by the Company.

Note 20 - Subsequent Events

Automatic Conversion of Series 10 Preferred Stock

On January 5, 2026, all outstanding shares of the Company’s

Series 10 Convertible Preferred Stock automatically converted in accordance with their terms following shareholder approval.

The conversion was based on a stated value of

$ 1,000 per share, plus accrued and unpaid dividends, divided by a conversion price of $ 1.492 per share.

Upon conversion, the Company issued 1,721,980 shares of common stock

and a pre-funded warrant to purchase 15,307,735 shares of common stock.

The pre-funded warrant was issued in lieu of additional shares

of common stock due to beneficial ownership limitations contained in the Series 10 Preferred Stock.

The pre-funded warrant is immediately

exercisable at an exercise price of $ 0.0001 per share.

XTI AEROSPACE, INC.

(the “Company”) entered into a settlement agreement with 3AM Investments LLC (an entity controlled

by Nadir Ali (“Ali”), the Company’s former Chief Executive Officer and a former director of the Company) (“3AM”),

Grafiti Group LLC (“Grafiti Group”) and Ali (the “Settlement Agreement”).

The terms of the Settlement Agreement

Preferred Stock Redemption .

Company and 3AM entered into that certain securities purchase agreement dated as of March 12, 2024 (the “Series 9 Purchase Agreement”),

pursuant to which 3AM acquired 1,500 shares of the Company’s Series 9 Preferred Stock, of which 1,164.12 shares of Series 9 Preferred

Stock were issued and outstanding as of March 27, 2025 (the “Outstanding Preferred Stock”).

Pursuant to the Settlement Agreement,

on the Effective Date, the Company delivered the aggregate amount of $ 1,251,651.26 (the “Series 9 Redemption Amount”)

by wire transfer of immediately available funds to an account designated in writing by Ali, for the redemption of the Outstanding Preferred

Following Ali’s receipt of the Series 9 Redemption Amount, Ali no longer held any shares of Series 9 Preferred Stock.

of the date of this report, there are no shares of Series 9 Preferred Stock issued and outstanding.

Termination of Ali Consulting Agreement .

The Settlement Agreement provides that effective as of the Effective Date, that certain Consulting Agreement, dated March 12, 2024

by and between the Company and Ali (the “Ali Consulting Agreement”) is terminated, and in lieu of the $ 2,775,000

(the “Ali Advisory Fees”) that would be owed to Ali pursuant to the terms of the Ali Consulting Agreement as a result of the

termination of such Ali Consulting Agreement prior to the 15 month anniversary of the effective date thereof, the Company agreed

(i) that the aggregate amount of $ 1,000,000 (the “Grafiti Purchase Amount”) required to be delivered by Grafiti Group pursuant

to that certain Equity Purchase Agreement, dated February 16, 2024, by and among the Company, Grafiti LLC, and Grafiti Group, as amended

(the “Equity Purchase Agreement”), shall be deemed to be satisfied in full and no further amounts shall be payable to the

Company by Grafiti Group or any of its affiliated parties pursuant to the Equity Purchase Agreement;

(ii) to deliver a cash amount of

$ 60,000 (the “Outstanding Amount”) to Ali by wire transfer of immediately available funds;

and (iii) to deliver $ 1,500,000

(the “Deferred Amount”) by wire transfer of immediately available funds in three equal installments of $ 500,000 (“Installment

Amounts”) each on June 30, 2025, September 30, 2025 and December 30, 2025 (the “Deferred Amount Installment Dates”).

Any Installment Amount that is not paid by the applicable due dates will be subject to interest at a rate of 18 % per annum.

of the Outstanding Amount and the Deferred Amount in accordance with the terms of the Settlement Agreement, the Ali Advisory Fees shall

be deemed to be satisfied in full and no further amounts shall be payable by the Company to Ali or his affiliated parties pursuant

to the Ali Consulting Agreement.

On March 31, 2025, the Company paid the Outstanding Amount in full.

As of the date of this report, the

Deferred Amount remains outstanding.

Former Management Payments .

to the Settlement Agreement, the Company agreed to pay the Former Management Payments (as defined below) on the earlier of (a) the closing

date of the Company’s next financing transaction and (b) 30 days following the Effective Date of the Settlement Agreement, subject

to certain penalties for late payment.

The “Former Management Payments” comprise (i) an aggregate amount of $ 803,260.65 (the

“Bonus Plan Payment”) that, as of the Effective Date, remains payable to the recipients of bonuses payable pursuant to that

certain Strategic Transaction Bonus Plan, adopted on July 24, 2023 and as amended (the “Bonus Plan”) together with (ii) an

aggregate amount of $ 303,372.87 (the “Loundermon Advisory Fee”) that, as of the Effective Date, is payable to Wendy Loundermon,

the Company’s former Chief Financial Officer and a former director of the Company (“Loundermon”), pursuant

to that certain Consulting Agreement, dated March 12, 2024, by and between the Company and Loundermon (the “Loundermon Consulting

AEROSPACE, INC.

AND SUBSIDIARIES

1 unchanged sentence

FOR THE YEARS ENDED DECEMBER 31, 2025 AND 2024

On March 31, 2025, the Company paid all amounts

due under the Former Management Payments in full.

Ali Release .

As of the Effective

Date, Ali, on behalf of himself and his former and current affiliated entities, including 3AM, Grafiti LLC and Grafiti Group (collectively,

the “Ali Parties”) agreed to release the Company and each of its former and current subsidiaries, divisions, affiliates, predecessors,

successors, assigns, and its and their respective employees, officers, directors, shareholders, members, partners, trustees, joint venturers,

attorneys, agents, and representatives (collectively, the “XTI Parties”), from and with respect to any and all claims, demands,

causes of action, damages, obligations, liabilities, costs, and expenses of any kind or nature whatsoever (collectively, “Ali Claims”),

arising out of any obligations of the Company with respect to the Ali Consulting Agreement, the Series 9 Purchase Agreement and the portion

of the Bonus Plan relating to Ali, whether known or unknown, foreseen or unforeseen, that the Ali Parties, or any of them, ever had, now

have, or may have against the XTI Parties, or any of them, from the beginning of time through and including the Completion Date (as defined

As used in the Settlement Agreement, the term “Completion Date” means the date on which the Company has delivered

(i) the Series 9 Redemption Amount to Ali by wire transfer of immediately available funds;

(ii) the Deferred Amount to Ali by wire transfer

of immediately available funds;

(iii) the Outstanding Amount to Ali by wire transfer of immediately available funds;

(iv) the Former Management

Payments to Loundermon and the recipients of the Bonus Plan Payments by wire transfer of immediately available funds.

XTI Release .

As of the Effective

Date, the XTI Parties agreed to release the Ali Parties from and with respect to any and all claims, demands, causes of action, damages,

obligations, liabilities, costs, and expenses of any kind or nature whatsoever (collectively, “XTI Claims”), arising out of

any obligations of the Ali Parties with respect to any obligation of the Ali Parties in connection with the payment of the purchase price

as set forth in the Equity Purchase Agreement, the Ali Consulting Agreement, the Series 9 Purchase Agreement and the portion of the Bonus

Plan relating to Ali, whether known or unknown, foreseen or unforeseen, that the XTI Parties, or any of them, ever had, now have, or may

have against the Ali Parties, or any of them, from the beginning of time through and including the Completion Date.

Entire Agreement .

The Settlement

Agreement provides that it supersedes any prior consents or agreements regarding the allocation of financing proceeds for the payment

of any obligations of the Company described in the Settlement Agreement.

March 2025 Underwritten Offering

On March 28, 2025, we entered into an underwriting agreement with ThinkEquity,

as the representative of the underwriters named therein, relating to a firm commitment underwritten public offering (the “March

Offering”) of 765,200 shares of common stock, pre-funded warrants (the “Pre-funded Warrants”) to purchase up to 2,176,000

shares of common stock, and common warrants (the “Common Warrants”) to purchase up to 2,941,200 shares of common stock.

combined public offering price for each share of common stock, together with one Common Warrant, was $ 1.36 .

The combined public offering

price for each Pre-funded Warrant, together with one Common Warrant, was $ 1.359 .

Each share of common stock, or a Pre-funded Warrant in

lieu thereof, was sold together with one Common Warrant.

We received net proceeds of approximately $ 3.3 million from the March Offering

after deducting the underwriting discounts and commissions and other expenses payable by us.

The Pre-funded Warrants were immediately exercisable upon issuance,

have an exercise price of $ 0.001 per share and may be exercised at any time until all of the Pre-funded Warrants are exercised in full.

The Common Warrants were immediately exercisable upon issuance, have an exercise price of $ 1.36 per share, and expire on the fifth anniversary

of the date of issuance.

As a result of our failure to timely file a Current Report on Form 8-K, upon the filing of this Annual Report

on Form 10-K, we became ineligible to file new short form registration statements on Form S-3 or to use the Current Shelf Registration

Therefore, we agreed to file a subsequent registration statement covering the issuance of the shares issuable upon exercise

of the Pre-funded Warrants and the Common Warrants within the timeframes set forth in such warrants.

As of April 11, 2025, 1,126,000 Pre-funded

Warrants remained outstanding and unexercised.

As part of its compensation for serving as representative

in connection with the March Offering, we issued ThinkEquity and its designees Representative Warrants to purchase up to 147,060 shares

of common stock.

The Representative Warrants were immediately exercisable upon issuance, have an exercise price of $ 1.70 per share and

expire on the five-year anniversary of the commencement of sales of the securities issued in the March Offering.

CHANGES IN AND DISAGREEMENTS WITH ACCOUNTANTS ON ACCOUNTING AND FINANCIAL DISCLOSURE

Separation Agreement

On January 29, 2026, in connection with the disposition

of the Inpixon Business, the Company entered into a separation agreement with Soumya Das, pursuant to which Mr.

Das resigned from his

positions with the Company.

Under the agreement, the Company agreed to provide severance and related benefits totaling approximately $ 718,000 ,

plus reimbursement of certain benefits and accelerated vesting of outstanding equity awards.

Consulting Agreement with Director

Subsequent to December 31, 2025, on February 1, 2026, the Company entered

into a consulting agreement with a member of its Board of Directors pursuant to which the consultant will provide advisory services related

to the Company’s VTOL program in exchange for a monthly fee and equity-based compensation.

The agreement has an initial term of

four years and includes customary termination provisions.

Asset-Based Revolving Credit Facility

On February 11, 2026, Drone Nerds, LLC and Anzu

Robotics, LLC (collectively, the “Borrowers”), subsidiaries of the Company, entered into a Credit Agreement with JPMorgan

Chase Bank, N.A., providing for a secured revolving credit facility with aggregate commitments of up to $ 20.0 million, subject to a borrowing

base of eligible accounts receivable and inventory (the “ABL Facility”).

The ABL Facility matures on February 11, 2029 .

Borrowings under the ABL Facility bear interest

at the applicable benchmark rate plus 2 % per annum, subject to adjustment in certain circumstances.

The ABL Facility is secured by substantially

all of the assets of the Borrowers and certain affiliated guarantors.

The Credit Agreement contains customary affirmative

and negative covenants, including limitations on additional indebtedness, liens, asset sales, investments and restricted payments.

Borrowers are required to maintain a minimum Fixed Charge Coverage Ratio as of the end of any calendar month of no less than 1.0 to 1.0 ,

subject to certain cure rights.

Proceeds of the ABL Facility may be used for general corporate purposes, refinancing certain existing

indebtedness and permitted investments.

Warrant Exercises

Subsequent to December 31, 2025 and through the

date of this filing, holders of certain warrants issued in connection with the Company’s 2025 public offerings exercised warrants

to purchase an aggregate of 3,963,408 shares of the Company’s common stock, resulting in gross cash proceeds of approximately $7.9

In connection with the solicitation of such warrant

exercises, the Company engaged ThinkEquity LLC as its exclusive financial advisor and paid cash compensation equal to 3 % of the gross

proceeds, or approximately $ 0.2 million, consistent with the terms of the advisory agreement.

Net proceeds to the Company from these warrant

exercises were approximately $ 7.7 million.

CHANGES IN AND DISAGREEMENTS WITH ACCOUNTANTS

ON ACCOUNTING AND FINANCIAL DISCLOSURE

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 8. Financial Statements and Supplementary Data