XTI Aerospace, Inc. 10-K

ITEM 1A: RISK FACTORS We are subject to various risks and uncertainties that may materially harm our business, prospects, financial condition and results of operations. An investment in our common stock and other securities is speculative and involves a high degree of risk. In evaluating an investment in our securities, you should carefully consider the risks described below, together with the other information included in this Annual Report. If any of the events described in the following risk factors actually occurs, or if additional risks and uncertainties later materialize, that are not presently known to us or that we currently deem immaterial, then our business, prospects, results of operations and financial condition could be materially adversely affected. In that event, the trading price of our common stock could decline, and investors in our securities may lose all or part of their investment. The risks discussed below include forward-looking statements, and our actual results may differ substantially from those discussed in these forward-looking statements. Moreover, these disclosures reflect the Company’s beliefs and opinions as to factors that could materially and adversely affect the Company and its securities in the future. References to past events are provided by way of example only and are not intended to be a complete listing or a representation as to whether or not such factors have occurred in the past or their likelihood of occurring in the future. 10 Summary of Risk Factors The following summarizes the risks and uncertainties that could materially adversely affect our business, financial condition, results of operation and stock price. You should read this summary together with the more detailed description of each risk factor contained below. Risks Related to Our Business and Industries ● Our ability to continue funding our operations and execute our long-term development strategy depends on our ability to maintain sufficient liquidity and obtain additional capital over time; ● Our UAS business operates in a rapidly evolving market and is subject to risks related to changes in technology, customer demand, regulatory developments, procurement requirements and competition from companies with substantially greater resources; ● Our UAS operations are subject to evolving federal, state, local and international regulatory requirements, and changes in such regulations or our inability to comply with them could adversely affect our business; ● Our UAS business depends on relationships with key suppliers and manufacturers, including DJI (as defined below), which represents approximately 49% of our purchases, and adverse regulatory developments, the expiration or non-renewal of dealer agreements, or other disruptions affecting those suppliers could materially adversely affect our business, financial condition and results of operations; ● Our UAS distribution and services business depends on third-party manufacturers, software platforms and OEM policies, and adverse changes in those relationships could materially adversely affect our business, financial condition and results of operations; ● Our business may be dependent on a limited number of significant customers, and the loss of one or more such customers, or our inability to attract new customers or fulfill orders, could adversely affect our operating results; ● The nature of our UAS business and, to the extent we resume the TriFan 600 program, aircraft development activities involve significant risks and uncertainties, including product liability exposure, that may not be covered by insurance or indemnification; ● We have no guarantee of receiving government contracts for our ADS division, and the defense procurement process is lengthy, unpredictable, and resource-intensive. We may not successfully secure prime contractor agreements, government procurement awards, or commercial partnerships on the timelines we anticipate, or at all; ● We may be unable to obtain or maintain the security clearances, certifications, and regulatory authorizations required to pursue and perform classified or sensitive government programs; ● We are subject to the risk that changes in U.S. defense spending, budget sequestration, or shifts in national security priorities will reduce or eliminate the addressable market for our ADS products and services; ● The TriFan 600 aircraft program has been paused, and if resumed, may never achieve certification, commercial production or market acceptance. We have not made a final determination to resume the program, and there can be no assurance that the program will be resumed or successfully commercialized; ● Customer orders and service engagements for our UAS products and services and the pre-orders we have received for our aircraft may be non-binding, conditional or written expressions of interest and may be terminated at any time, and cancellations, modifications or delays could materially adversely affect our business, liquidity and cash flows; ● We may be adversely affected by interruptions in production or supply chain disruptions that are beyond our control, including disruptions impacting suppliers of UAS products or aircraft components if the TriFan 600 program is resumed; ● If we do not adequately protect our intellectual property rights, we may experience a loss of revenue and our operations and growth prospects may be materially harmed; ● The ongoing impact of geopolitical conflicts, including the Russia-Ukraine conflict and conflicts in the Middle East, may adversely affect our business, operations and financial condition; ● We have a history of losses, and in order to successfully execute our business plan, strategic acquisitions and the development of our advanced systems and domestic manufacturing initiatives, we will need to raise additional capital through debt or equity financing, which may not be available on reasonable terms or at all; ● Our asset-based revolving credit facility and the promissory notes issued in connection with the Drone Nerds acquisition contain covenants and payment obligations that, if not satisfied, could materially adversely affect our liquidity and operations; ● We may not be able to successfully integrate the business and operations of Drone Nerds or other entities that we have acquired or may acquire in the future, and we may be exposed to unanticipated liabilities or risks arising from the historic operations of acquired businesses; ● A significant portion of the purchase price related to our strategic acquisitions was allocated to goodwill and intangible assets that are subject to periodic impairment evaluations, and an impairment loss could have a material adverse impact on our financial condition and results of operations; 11 ● Our business depends on experienced and skilled personnel, and if we are unable to attract, retain and integrate such personnel, or if we lose key personnel, our operations and strategic execution may be adversely affected; ● We are subject to risks from adverse legal proceedings, cybersecurity threats, IT system failures, privacy and data protection regulations, and numerous other legal and regulatory requirements, violations of which could harm our business; ● Changes in U.S. administrative policy, including tariffs, trade restrictions, geopolitical conflicts, and macroeconomic conditions, could adversely affect our supply chain economics, customer demand, and financial performance; ● We may be unable to maintain effective internal control over financial reporting and disclosure controls and procedures, which could adversely affect our ability to accurately report our financial results and maintain investor confidence; Risks Related to Our Securities ● Our failure to maintain compliance with the continued listing requirements of the Nasdaq Capital Market may result in our common stock being delisted from the Nasdaq Capital Market, which could negatively impact the price of our common stock, liquidity, our ability to access the capital markets and our stockholders’ ability to sell their shares; ● Our stock price may be volatile, and sales of our common stock, the perception that future sales may occur, or the issuance of additional debt or equity securities may cause the market price of our common stock to decline; ● The Class B Units of XTI Drones Holdings, LLC issued in connection with our acquisition of Drone Nerds are exchangeable into shares of our common stock and will be automatically exchanged in February 2027, which will result in dilution to our existing stockholders; ● We do not intend to pay cash dividends to our stockholders, so it is unlikely that stockholders will receive any return on their investment in our Company prior to selling our stock; and ● Some provisions of Nevada law, our articles of incorporation and our bylaws may deter takeover attempts, which may inhibit a takeover that stockholders consider favorable and limit the opportunity of our stockholders to sell their shares at a favorable price. 12 Risks Related to Our Business and Industries Our ability to continue funding our operations and execute our long-term development strategy depends on our ability to maintain sufficient liquidity and obtain additional capital over time. Our operations have historically generated net losses and negative operating cash flows, and we have incurred significant cumulative losses since inception. Although we believe our current liquidity is sufficient to fund operations for at least the next twelve months, we will require additional capital over time to support the growth of our UAS distribution and services businesses via acquisitions and, if we decide to resume the TriFan 600 program, the continued development, certification and commercialization of the TriFan 600 aircraft. Because the TriFan 600 program is currently paused, our near-term capital needs are primarily driven by our UAS growth plan and the development of our unmanned systems and domestic manufacturing initiatives. Our ability to obtain additional financing will depend on many factors, including market conditions, investor demand, our operating performance, and broader economic conditions. If we are unable to obtain additional capital when needed or on acceptable terms, we may be required to delay or scale back certain development programs, reduce operating expenditures, or modify our business strategy, any of which could materially adversely affect our business, financial condition and results of operations. Our UAS business operates in a rapidly evolving market and is subject to risks related to changes in technology, customer demand, regulatory developments and procurement requirements. Drone Nerds’ drone, camera and sensor technologies and related software, training, operational support and repair services are sold in new and rapidly evolving markets. The commercial unmanned aerial vehicles (“UAV”) industry is in the early stages of customer adoption, and the FAA’s regulations relating to the integration of commercial drones into the U.S. National Airspace System continue to evolve. Accordingly, our UAS business and future prospects may be difficult to evaluate. We cannot accurately predict the extent to which demand for drone systems and solutions will increase, if at all. The challenges, risks and uncertainties frequently encountered by companies in rapidly evolving markets could impact our ability to: ● Generate sufficient revenue to maintain historical profitability of Drone Nerds; ● Acquire and maintain market share; ● Achieve or manage growth in our business operations; ● Renew customer contracts or maintain customer relationships; ● Successfully stock, market and deliver commercial drone products and end-to-end solutions; ● Adapt to new or changing policies, regulations and spending priorities of current and prospective clients; and ● Access to additional financing or capital when required and on reasonable terms. If we fail to address these and other challenges, risks and uncertainties successfully, our business, results of operations and financial condition would be materially harmed. Our UAS operations are subject to evolving federal, state, local and international regulatory requirements, and changes in such regulations or our inability to comply with them could adversely affect our business. The distribution, sale, integration and operation of UAS are subject to extensive and evolving regulation by the FAA, the FCC, the Department of Commerce, the Department of War and other federal, state, local and foreign authorities. These regulations govern, among other things, airspace usage, remote identification, beyond visual line of sight (“BVLOS”) operations, operator certification, product authorizations, communications spectrum, importation, cybersecurity requirements and procurement eligibility for government customers. These regulations may require us to obtain, maintain and periodically renew certifications, waivers or operational authorizations in order to conduct certain types of drone operations, including operations beyond visual line of sight, nighttime operations, flights over people or operations in controlled or restricted airspace. If we are unable to obtain, maintain or renew required approvals or authorizations on commercially reasonable terms or within required timeframes, our ability to expand our services, enter new markets or maintain existing operations could be adversely affected. 13 Regulatory requirements applicable to UAS technology and operations continue to evolve and may become more restrictive. For example, new rules or interpretations relating to airspace access, operational waivers, remote ID compliance, data security, country-of-origin restrictions, or government procurement eligibility could limit the ability of our customers to deploy certain products or could restrict the products we are permitted to sell. In addition, certain customers may require additional certifications, security clearances or compliance with emerging federal or state procurement restrictions before purchasing UAS products or services. If we or our suppliers are unable to obtain, maintain or renew required licenses, certifications or authorizations, or if regulatory changes restrict the use, sale or importation of certain drone platforms, components or related technologies, demand for our products and services could decline. Increased regulatory scrutiny, enforcement actions, or delays in regulatory approvals could also increase our compliance costs, disrupt our operations or adversely affect our reputation. Any material changes in the regulatory framework governing UAS operations, or our failure to comply with applicable laws and regulations, could have a material adverse effect on our business, financial condition and results of operations. Our UAS business depends on relationships with key suppliers and manufacturers, and adverse regulatory developments or other disruptions affecting those suppliers could materially adversely affect our business, financial condition and results of operations. Drone Nerds maintains relationships with various global suppliers of drones and related electronics. For the year ended December 31, 2025, purchases from its top three suppliers represented approximately 49%, 13% and 6% of total purchases, respectively. If any of these suppliers were to reduce or terminate their relationship with us, fail to supply products on commercially reasonable terms, or experience operational or regulatory disruptions, our ability to source products could be materially adversely affected. Drone Nerds relies on SZ DJI Technology Co, Ltd. and affiliates (“DJI”) for a significant portion of its drone sales. In September 2025, Drone Nerds, LLC entered into a one-year agreement with DJI to serve as an official non-exclusive dealer of its products in the United States. DJI has been included on certain U.S. government watchlists relating to national security and data concerns. In addition, the FCC and other U.S. government agencies have taken actions, including actions relating to the FCC’s Covered List and national security restrictions affecting certain foreign-manufactured unmanned aircraft systems and related components, that may affect the authorization, procurement, or use of certain drone platforms in the United States. These actions may limit manufacturers’ ability to obtain FCC equipment authorization for new products or product modifications, which could affect the ability to market or sell certain drone platforms or components in the United States. Although existing FCC equipment authorizations for previously approved products generally remain valid, federal agencies may impose procurement restrictions, usage limitations, or other requirements affecting the deployment of such products. Regulatory actions, procurement bans, import restrictions, or heightened export-control or data-security scrutiny could reduce customer demand, limit participation in government-funded projects, or otherwise adversely affect sales of DJI-based systems. If regulatory developments restrict DJI’s ability to sell products in the United States or limit customer use of such products or our agreement with DJI expires and is not renewed, we may be required to seek alternative suppliers, renegotiate supplier agreements, or incur transition costs. Our ability to diversify our supplier base may be limited, and there can be no assurance that alternative suppliers would be available on comparable terms, if at all. Any significant disruption in supply, reduction in product availability, or decline in customer demand could materially and adversely affect our business, financial condition and results of operations. Our UAS operations also depend on the continued availability of critical components such as batteries, sensors, communications equipment, software platforms and replacement parts supplied by third-party manufacturers and vendors. Shortages of these components, quality control issues, transportation delays, trade restrictions, tariffs, geopolitical developments or financial distress affecting key suppliers could delay service delivery, increase operating costs or reduce operational capacity, which could materially adversely affect our business, financial condition and results of operations. 14 Our UAS operations involve assembly, configuration, integration, repair and service activities that expose us to operational, quality and execution risks that could adversely affect our business. Our UAS business includes activities such as assembling, configuring, integrating, testing, repairing and maintaining drone systems and related components for customers. These operational activities involve risks that differ from those associated with simple product distribution, including the risk of technician errors, quality control failures, equipment malfunctions, improper installation, delays in service delivery, and failures to meet customer specifications or performance expectations. As our UAS operations grow, we may face challenges in scaling our service infrastructure, training and retaining qualified personnel, maintaining consistent quality standards, and managing workflow and inventory across multiple locations. Any operational or service failures could result in product returns, warranty claims, customer disputes, contract penalties, reputational harm, increased operating costs or reduced margins. In addition, defects or failures in products that we assemble, configure or service could expose us to liability claims or regulatory scrutiny. If we are unable to manage these operational risks effectively, our business, financial condition and results of operations could be materially adversely affected. We may experience losses or reduced margins if we are unable to accurately forecast demand for UAS products or manage our inventory effectively. Our business requires us to maintain inventory of drone platforms, components and related equipment in advance of customer demand. Demand for UAS products can be affected by regulatory changes, technological developments, seasonal purchasing patterns, government procurement cycles and macroeconomic conditions. If we overestimate demand, we may hold excess or obsolete inventory, incur storage and carrying costs, or be required to sell products at reduced prices. Conversely, if we underestimate demand, we may be unable to fulfill customer orders in a timely manner, resulting in lost sales and reduced customer satisfaction. Any significant mismatch between inventory levels and customer demand could materially adversely affect our gross margins, operating results and cash flows. Our UAS distribution and services business depends on third-party manufacturers, software platforms and OEM policies, and adverse changes in those relationships could materially adversely affect our business, financial condition and results of operations. A significant portion of our UAS business involves the distribution, integration, servicing and support of products manufactured by third-party drone and sensor OEMs. Our ability to sell, service and support these products depends on maintaining strong commercial relationships with such manufacturers and complying with their distribution, pricing, branding, warranty and technical requirements. Many OEMs control critical elements of the ecosystem in which their products operate, including firmware updates, cloud-based management platforms, software development kits (SDKs), application programming interfaces (APIs), parts availability, repair authorizations and technical documentation. Changes to these platforms, pricing structures, reseller programs, minimum purchase requirements, territory allocations, certification requirements or other OEM policies could: ● reduce our margins; ● limit our ability to access certain products or components; ● restrict our ability to provide repair or support services; ● delay product availability; ● increase compliance or administrative costs; or ● result in the termination or non-renewal of distribution or service agreements. In addition, some OEMs may choose to sell directly to end customers, expand their own direct sales channels, consolidate distribution networks or favor larger or strategically aligned distributors. If any key OEM were to reduce our authorized reseller status, impose less favorable commercial terms, limit product allocations, or terminate our relationship, we may be unable to replace such products on comparable terms, or at all. Our dependence on third-party platforms and OEM-controlled ecosystems reduces our control over product roadmaps, pricing, support policies and long-term availability. Any material disruption or deterioration in these relationships could have a material adverse effect on our UAS business, financial condition and results of operations. 15 We may be unable to effectively manage the growth and operational complexity of our expanding UAS distribution and services business. Our recent growth and the expansion of our UAS operations have increased the complexity of our business and placed significant demands on our management, personnel, operational systems and infrastructure. Continued growth may require us to expand our workforce, warehouse capacity, service capabilities, information technology systems and internal controls. If we are unable to successfully manage these operational demands, maintain service quality, or integrate new personnel and processes effectively, our ability to fulfill customer orders, provide timely support services and maintain customer satisfaction could be adversely affected. Any failure to manage our growth effectively could result in operational inefficiencies, increased costs, service disruptions or reputational harm, which could materially adversely affect our business, financial condition and results of operations. Our UAS business requires us to maintain inventory, and we may incur losses due to excess inventory, obsolescence or changes in market demand. Our UAS distribution and services business requires us to purchase, hold and manage inventory of drone platforms, components, accessories, replacement parts and related products. We must forecast customer demand, regulatory developments and technology trends when making inventory purchasing decisions. Because the UAS market is characterized by rapid technological change, evolving regulatory requirements and changing customer preferences, products we hold in inventory may become obsolete, subject to new restrictions, or less desirable before they are sold. In addition, adverse regulatory developments, including changes to U.S. import restrictions, sanctions, FCC authorization requirements, NDAA compliance rules or other government procurement standards, could limit our ability to sell certain products we have already purchased. If we are required to discontinue or restrict sales of certain products, we may be required to write down or dispose of affected inventory at a loss. We may also experience excess inventory levels if customer demand declines, orders are cancelled or delayed, suppliers introduce newer models, or macroeconomic conditions reduce purchasing activity. Any significant write-downs for excess or obsolete inventory would adversely affect our gross margins, operating results and financial condition. Furthermore, if we are unable to accurately forecast demand or manage inventory effectively, we may experience shortages of high-demand products, which could result in lost sales and damage to customer relationships. We may incur significant costs to honor warranties, provide service, repairs, maintenance and technical support for UAS products we distribute or service, and failures in these activities could adversely affect our business, financial condition and results of operations. We may incur costs to support warranties, provide service, repairs, maintenance and technical support for UAS products we distribute or service, and failures in these activities could adversely affect our business, financial condition and results of operations. A portion of our UAS business involves providing repair, maintenance and technical support services for the drone systems, sensors and related equipment we distribute. The products we sell are generally covered by manufacturer warranties. We do not typically provide standalone product warranties; however, certain product protection programs may be included with or offered in connection with product sales. We may also provide support, repair or other post-sale services to our customers, including facilitating warranty claims with manufacturers. Although manufacturer warranties are generally the responsibility of the supplier, we may incur costs associated with providing service support, including labor, logistics and administrative expenses. We may also bear costs in situations where warranty coverage is disputed, delayed or otherwise not honored by the manufacturer. In addition, we may offer certain extended service or support arrangements in limited circumstances. If we fail to meet customer expectations regarding service quality, response time or product performance, or if warranty claims are not resolved in a timely or satisfactory manner, we could experience customer dissatisfaction, reputational harm, loss of repeat business or increased costs, any of which could adversely affect our business, financial condition and results of operations. Licenses and regulatory authorizations required for certain UAS products may be difficult to obtain in the future, which could adversely affect our ability to sell certain products. 16 Our drones and other electronic products require regulatory approvals and certifications, including FCC equipment authorizations, in order to be imported into the United States and sold to customers. Such approvals are typically obtained by the manufacturers of the products we distribute. If our suppliers are unable to obtain, maintain or renew required regulatory approvals, certifications or authorizations, or if such approvals are delayed, revoked, restricted or become subject to additional conditions, we may be unable to sell affected products. In addition, certain UAS operations may require operational approvals, waivers or authorizations from regulatory authorities, including approvals for operations beyond visual line of sight, nighttime operations or flights in controlled airspace. Delays in obtaining or maintaining such approvals could limit our ability to deploy services, expand into new markets or meet customer requirements. In addition, changes in regulatory standards, heightened scrutiny of certain manufacturers, export control regulations, import restrictions or other governmental actions could limit the availability of certain drone platforms or components. If key products are restricted, delayed or removed from the market due to regulatory actions, our revenue, customer relationships and financial results could be materially adversely affected. The nature of our UAS business and, to the extent we resume the TriFan 600 program, aircraft development activities involves significant risks and uncertainties, including product liability exposure, that may not be covered by insurance or indemnification. Our UAS business and, to the extent we resume the TriFan 600 program, aircraft development activities involve significant operational and legal risks and uncertainties, and insurance or indemnification may not be available in all circumstances. We develop, distribute, service and support drones and other electronic products. As a result, claims could be brought against us if the use or misuse of one of the products we sell, service or develop causes, or merely appears to have caused, personal injury, death or property damage. In addition, defects, errors or failures in our products or services could lead to other potential life, health and property risks. In our UAS operations, product liability risks may arise from equipment malfunctions, operator error, software failures, battery incidents, collisions or other operational incidents involving drones deployed by customers or service personnel. These incidents may result in personal injury, property damage, regulatory investigations, litigation or reputational harm. Because drone operations often occur in populated or industrial environments, even isolated incidents could lead to significant claims, increased insurance costs, operational restrictions or loss of customer confidence. In addition, Drone Nerds has historically developed and sold products and services in circumstances where insurance or indemnification may be limited or unavailable, including in connection with the collection, processing and analysis of various types of information. Our UAS products and services may raise legal issues relating to privacy, data security, civil liberties, intellectual property, trespass, conversion and similar concepts, which may result in claims, regulatory scrutiny, enforcement actions or litigation. Indemnification to cover potential claims or liabilities resulting from the failure of technologies we deploy may be available in certain circumstances but not in others. The uncrewed aerial systems industry continues to evolve, and insurance coverage for certain operational risks may be limited, unavailable, subject to significant exclusions, or prohibitively expensive. We may not be able to obtain or maintain product liability insurance or other insurance coverage in sufficient amounts, on commercially reasonable terms, or at all, and any such insurance may not be adequate to cover all potential liabilities. Substantial claims resulting from an accident, product failure, or personal injury or property liability arising from our products and services in excess of any indemnity or insurance coverage (or for which indemnity or insurance coverage is not available or is not obtained) could harm our financial condition, cash flows and operating results. Any accident, even if fully covered or insured, could negatively affect our reputation among our customers and the public and make it more difficult for us to compete effectively. The growth of our UAS business depends on increasing sales to existing customers and obtaining new customers, which, if unsuccessful, could limit our financial performance. Our future success depends, in part, on our ability to increase revenues from existing customers by identifying additional opportunities to sell more of our UAS products and services, including drone platforms, cameras, sensors, software, training, repair and operational support services, and on our ability to obtain new customers. The rate at which customers purchase additional products and services, and our ability to attract new customers, depends on a number of factors, including customer demand for UAS solutions, our ability to offer high-quality products and services at competitive prices, meeting customer needs and expectations, the strength of our competitors, the capabilities of our sales and marketing efforts, the availability of drone products from key suppliers, regulatory developments and general economic conditions. If we are not able to continue to increase sales of our UAS products and services to existing customers or to obtain new customers in the future, we may not be able to increase our revenues and could suffer a decrease in revenues. In addition, certain customer demand may depend on government budgets, procurement cycles and contract awards, which are difficult to predict. 17 Our business may be dependent on a limited number of significant customers, and the loss of one or more such customers could adversely affect our operating results. A portion of our revenues may be derived from a limited number of significant customers, and the importance of any individual customer may vary from period to period. The loss of a significant amount of business from one or more major customers, or a reduction in orders, could materially and adversely affect our results of operations until such time, if ever, as we are able to replace the lost business. In addition, certain customers, including public sector and enterprise customers, may delay, reduce or cancel purchases due to budgetary constraints, procurement cycles, regulatory developments or changing operational priorities. To the extent that we are dependent on any significant customer, we are subject to the risks faced by that customer, including financial condition, funding availability and operational performance, which may impact the customer’s ability to make timely payments to us or continue purchasing our products and services. If we are unable to collect our receivables in a timely manner, our liquidity, working capital and results of operations could be adversely affected. Our UAS business depends on our ability to successfully obtain payment from customers for products delivered and services performed. The timely collection of receivables is critical to generating cash flow, maintaining adequate working capital and supporting inventory purchases, operating expenses and debt service obligations. Customers may delay or fail to pay invoices for a number of reasons, including financial difficulties, macroeconomic conditions, budgetary constraints, administrative or procurement delays, disputes regarding products or services, or bankruptcy proceedings. Certain customers, including public sector customers, may also be subject to extended payment cycles. An extended delay or default in payment by significant customers could adversely affect our accounts receivable aging, reduce cash flow and impair our ability to meet working capital needs. In addition, because availability under our asset-based lending facility may be tied in part to eligible receivables, deterioration in receivables quality or collectability could reduce borrowing availability. If we are unable to timely collect receivables for any reason, our liquidity, financial condition and results of operations could be materially adversely affected. Defects, errors or vulnerabilities in the products we distribute, service or develop, or the failure of such products to perform as expected, could harm our reputation and adversely affect our results of operations. The drone systems, sensors, software and related products we distribute and service are complex and may contain design defects, manufacturing defects, firmware or software errors, or security vulnerabilities that are not detected until after the products are sold or deployed by customers. In addition, products may fail to perform as expected due to component failures, integration issues, user error, or interoperability issues with third-party software, communications networks or payloads. Certain drone platforms and connected devices may be vulnerable to cybersecurity threats, including unauthorized access, malware, spoofing, jamming or data interception. Because techniques used by malicious actors evolve rapidly, we may be unable to anticipate these techniques or ensure that products we sell or support will be able to adequately prevent or mitigate such threats. Because many drone systems rely on wireless communications, remote control technologies and network connectivity to operate, cybersecurity incidents affecting these systems could disrupt flight operations, result in loss of control of aircraft, compromise operational or customer data, or expose us to liability under aviation safety, data protection or privacy laws and regulations. In addition, errors in software updates, firmware updates or configuration changes could result in product malfunction, degraded performance, loss of data, reduced reliability or safety incidents. Any defects, errors or vulnerabilities in products we distribute, service or develop could result in: ● expenditure of significant financial and operational resources to analyze, correct, replace or work around errors, defects or vulnerabilities; 18 ● delayed or lost revenue; ● loss of existing or potential customers, suppliers or strategic partners; ● increased warranty claims, returns, repair costs or service obligations, which could adversely affect gross margins; ● product recalls, regulatory scrutiny, or restrictions on product sales; and ● litigation, regulatory inquiries or investigations that may be costly and harm our reputation. If we are unable to prevent, identify and address such defects, errors or vulnerabilities, our business, financial condition and results of operations could be materially adversely affected. If the UAS products and solutions we distribute and support do not effectively interoperate with our customers’ systems and operational requirements, deployments could be delayed or cancelled, which would harm our financial condition, operating results and growth prospects. The UAS products and solutions we distribute and support must effectively interoperate with our customers’ existing systems, software platforms, communications networks, payloads, data processing tools and operational workflows. Customer environments often have different specifications, utilize multiple protocol standards, deploy products from multiple vendors, and contain multiple generations of equipment that have been added over time. As a result, when performance issues occur, it may be difficult to identify the source of the problem. If the products we sell or support do not integrate effectively with customer systems or operational requirements, customers may experience reduced performance, delays in deployment, increased support requirements, or the inability to achieve expected mission outcomes. In such cases, customers may delay purchases, reduce order volumes or cancel orders, any of which could adversely affect our business, results of operations and financial condition. In addition, certain customers, particularly public sector, defense, and enterprise customers, may require products to comply with specific security, procurement, communications, data handling or other standards and certifications. If products we distribute are late in achieving, or fail to achieve, compliance with applicable certifications and standards, or competitors sooner achieve such compliance, we may be disqualified from selling to such customers or may otherwise be at a competitive disadvantage, which could harm our business, results of operations and financial condition. We have no guarantee of receiving government contracts, and our failure to do so would materially harm our revenues and growth prospects. ADS intends to pursue contracts with the Department of War, federal agencies, and allied government customers. The award of government contracts is subject to competitive bidding processes, shifting procurement priorities, budget allocations, and administrative determinations that are entirely outside of our control. There is no assurance that ADS will be awarded any contract for which it competes, that any existing relationships we may develop with government personnel will translate into contract awards, or that contracts awarded will be renewed or extended upon expiration. If ADS is unable to secure government contract awards, it may be unable to generate revenues or achieve the growth objectives contemplated for this division, which would adverse affect our overall business and prospects. Government customers may also delay procurements, cancel solicitations, modify technical requirements, or award contracts in smaller quantities than anticipated, which could reduce expected revenues or delay program execution. Government contracts are subject to termination for convenience, funding reductions, and regulatory changes that could eliminate anticipated revenues without recourse. Even if ADS is successful in securing government contracts, such contracts may be terminated by the contracting agency at any time for convenience, without cause, and with limited compensation to the Company. Government appropriations are subject to annual congressional approval, continuing resolutions, sequestration, and other budgetary constraints that may reduce, delay, or eliminate funding for programs under which ADS operates. Changes in administration, defense policy priorities, or national security strategy may result in the cancellation or restructuring of programs in which ADS participates, regardless of performance or contractual obligations. In addition, government contracts may be modified, suspended, or terminated for default if we fail to comply with applicable contractual, regulatory, or performance requirements, which could result in actual or anticipated revenues being reduced or eliminated, and could subject us to financial penalties, repayment obligations, or reputational harm. 19 The defense procurement process is lengthy, unpredictable, and resource-intensive, and we may expend significant capital pursuing contracts that are never awarded. Defense and government procurement cycles are complex and can span months or years from initial solicitation to contract award. ADS may be required to invest substantial financial, personnel, and technical resources in proposal development, demonstration activities, prototype builds, and compliance preparation — with no guarantee of award. Procurement decisions may be protested by competing bidders, resulting in further delays or reversals of awards. The mismatch between our cost of pursuit and the timing of potential contract revenue could strain our liquidity and divert resources from other strategic priorities. In addition, procurement terms, evaluation criteria, or customer requirements may change during the procurement process, requiring us to incur additional costs to remain competitive or compliant, with no assurance of award. Further, the failure to recover bid and proposal costs for unsuccessful procurements could adversely affect our financial condition, particularly if multiple large pursuits are unsuccessful or delayed. We operate in a highly competitive market for autonomous unmanned systems, and many of our competitors have substantially greater resources, established relationships, and proven contract histories. The market for autonomous unmanned aerial systems serving defense and government customers includes large, established defense primes, well-capitalized venture-backed startups, and foreign manufacturers with significant price advantages. Many of our competitors have decades-long relationships with defense procurement offices, existing IDIQ contract vehicles, cleared facilities and personnel, and proven platform histories that ADS has not yet established. Our ability to compete effectively will depend on our capacity to differentiate on technology, cost, compliance, and speed — none of which is assured in a market where incumbency and past performance carry significant procurement weight. In addition, certain competitors may benefit from government preferences, domestic sourcing requirements, or procurement frameworks that favor incumbent contractors or suppliers with established past performance records. Some competitors may also be able to devote substantially greater resources than we can to proposal development, testing, compliance, manufacturing scale-up, pricing concessions, and lobbying or business development efforts, which could place us at a competitive disadvantage . Our autonomous systems may fail to meet evolving military performance, reliability, and interoperability requirements, which could disqualify us from contract competitions or result in contract termination. Defense customers impose rigorous and evolving technical standards on autonomous platforms, including requirements related to system reliability, cybersecurity, communications interoperability, electromagnetic compatibility, and resistance to electronic warfare and GPS-denied environments. ADS’s systems may fail to meet these requirements during testing, evaluation, or fielded operations. Military standards and requirements can change between the time of proposal submission and contract award, and ADS may be required to undertake costly redesigns or modifications to remain competitive or compliant. Failure to satisfy technical requirements could disqualify ADS from competition or result in contract termination for default, with material adverse consequences. In addition, failures discovered after deployment or acceptance of systems could result in warranty claims, contractual penalties, or obligations to repair or replace systems at our expense. Such failures could also delay customer acceptance, impair our past performance record, give rise to indemnification obligations, or adversely affect our ability to compete for future contracts. We may be unable to obtain or maintain the security clearances, certifications, and regulatory authorizations required to pursue and perform classified or sensitive government programs. Many defense contracts require company personnel, facilities, and information systems to hold appropriate security clearances issued by the Defense Counterintelligence and Security Agency or other federal authorities. ADS may be unable to obtain necessary clearances in a timely manner, or at all, for key personnel or facilities. The denial, delay, suspension, or revocation of required clearances — whether due to adjudicative determinations, foreign ownership or control considerations, or other factors — could prevent ADS from competing for or performing on classified programs. Additionally, compliance with International Traffic in Arms Regulations (ITAR), Export Administration Regulations (EAR), and other export control regimes is complex and costly, and violations could result in debarment, fines, and reputational damage. Violations of export control, sanctions, or national security regulations may also result in suspension or debarment from government contracting, civil or criminal penalties, or restrictions on our ability to export products or technology. Compliance with clearance, export control, and related national security requirements may also require us to implement costly policies, procedures, and system controls, and any failure to do so adequately could adversely affect our ability to compete for and perform sensitive programs. 20 We are subject to the risk that changes in U.S. defense spending, budget sequestration, or shifts in national security priorities will reduce or eliminate the market for our products and services. ADS’s revenue prospects are directly dependent on the level of U.S. government spending on autonomous unmanned systems, which is in turn subject to federal budget negotiations, congressional appropriations, and executive branch policy determinations. Reductions in defense spending, shifts in strategic priority toward or away from unmanned systems, or the consolidation of procurement programs could materially reduce the addressable market for ADS’s products. The Company has no ability to influence federal budget decisions, and our financial projections may prove incorrect if assumed levels of government investment in autonomous systems are not sustained. In addition, delays in appropriations legislation, government shutdowns, or changes in defense acquisition strategies could disrupt procurement timelines and delay contract awards. Because our expected ADS revenues may be concentrated in a limited number of programs or customers, any such delays, reductions, or cancellations could have a disproportionate adverse effect on this business unit. We may rely on teaming arrangements and subcontracts with prime contractors whose decisions and performance are outside of our control and who may become our competitors. ADS may pursue government contracts as a subcontractor or teaming partner to larger defense prime contractors. In these arrangements, the prime contractor retains control over proposal strategy, pricing, scope allocation, and the customer relationship. To the extent we secure these types of arrangements, prime contractors may reduce our workshare, replace us with alternative subcontractors, terminate teaming arrangements without cause, or develop competing internal capabilities using knowledge gained through our collaboration. Our revenues from such arrangements would be contingent on the prime contractor’s continued selection for and performance under the prime contract, over which we have no direct control. In addition, disputes with prime contractors regarding performance, pricing, intellectual property rights, or contract interpretation could result in reduced revenue, litigation, or termination of subcontract relationships. In certain cases, our rights against a prime contractor may be limited by the terms of the applicable subcontract or teaming agreement, and we may have little or no direct recourse against the government customer. Our ability to scale ADS operations is dependent on recruiting and retaining personnel with specialized expertise in autonomous systems, defense engineering, and government program management — talent that is in high demand and limited supply. The development, integration, and support of autonomous unmanned systems requires specialized talent in areas including autonomy software, embedded systems engineering, signals intelligence, RF communications, systems integration, and government program management. Competition for this talent among defense primes, technology companies, and government agencies is intense. ADS may be unable to attract or retain the personnel necessary to execute its development programs and contract obligations in a timely and cost-effective manner. The loss of key technical or program management personnel could delay development programs, impair contract performance, and damage our standing with government customers, with material adverse effects on our business and prospects. In addition, certain government programs may require personnel with security clearances or specialized certifications, which may further limit the available talent pool and increase hiring and retention costs. Any inability to recruit, retain, or replace such personnel on acceptable terms could also delay contract execution, increase labor costs, or impair our ability to satisfy customer requirements. The TriFan 600 aircraft program has been paused, and if resumed, may never achieve certification, commercial production or market acceptance. In 2026, we paused the TriFan 600 aircraft program and redirected the division’s resources toward unmanned systems development. We are preserving the underlying intellectual property and engineering work product, but we have not made a final determination to abandon the program. If the TriFan 600 program is resumed, the development, certification and commercialization of advanced aircraft is a complex, costly and time-consuming process, and there can be no assurance that we will successfully complete development, obtain required regulatory approvals or achieve commercial production. We will not generate revenues from the sale of aircraft without successfully resuming active development of the TriFan 600, securing FAA type certification, and completing production readiness activities, each of which involves substantial risk and uncertainty. The TriFan 600 program is currently paused, and any resumption will require significant additional capital. There can be no assurance that such capital will be available on acceptable terms, or at all. 21 The strategic reorientation of our former XTI Aircraft division toward unmanned systems development introduces significant new execution risks. In 2026, following the acquisition of Drone Nerds, the Company paused active development phase of the TriFan 600 manned VTOL aircraft program and redirected the former XTI Aircraft division, now operating as XTIA Autonomous Defense Systems (the “ADS division”), toward the design and development of unmanned platforms for defense and commercial applications. The TriFan 600 program has been paused, and the Company has not made a final determination to abandon it. However, there can be no assurance that the program will be resumed, or that, if resumed, it will achieve FAA certification, reach commercial production, or generate revenues. The ADS division is in an early stage of development and has not generated revenues. Its ability to generate revenues will depend on its success in securing development contracts, government procurement awards, or commercial partnerships, none of which are assured. The division faces significant competition from established defense contractors and unmanned systems developers with substantially greater resources, experience, and existing customer relationships. There can be no assurance that the ADS division will successfully develop marketable products, secure contracts, or generate revenues on the timeline anticipated, or at all. The reorientation of the former XTI Aircraft division also introduces execution risks, including the challenge of recruiting and retaining additional personnel with specialized unmanned systems experience, the difficulty of competing for defense procurement awards as a relatively new entrant, and the risk that the engineering expertise developed through the TriFan 600 program may not translate directly into commercially viable unmanned systems products. These risks, individually or in combination, could materially adversely affect our business, financial condition, and results of operations. In addition, we have devoted significant financial and engineering resources to the TriFan 600 program, and if the program is not resumed, we may not realize a return on those investments. While our current operations are primarily focused on our UAS solutions business, if we resume the TriFan 600 program, the program will be subject to significant development, certification, and financing risks. Any resumption of active TriFan 600 development could divert management attention and financial resources from our UAS operations and adversely affect our business, financial condition and results of operations. The TriFan 600 aircraft program has been paused. To the extent we decide to resume the program, certification by the FAA will be required for the sale of the TriFan 600 in the civil or commercial market in the United States. The process to obtain such certification is expensive and time consuming and has inherent engineering risks. These include (but are not limited to) ground test risks such as structural strength and fatigue resistance, and structural flutter modes. Flight test risks include (but are not limited to) stability and handling over the desired center-of-gravity range, performance extremes (stalls, balked-landing climb, single-engine climb), and flutter control effectiveness (aircraft roll effectiveness, controllability, various control failure safety). We cannot predict whether or when the TriFan 600 program will be resumed, and until it is, these certification risks are contingent on a future decision to re-engage the program. Any decision to resume the TriFan 600 program would require substantial additional capital and a commitment of engineering and management resources. Any resumption-related costs, delays or adverse developments could divert management attention and financial resources from our UAS operations, limit our ability to invest in the growth, staffing or expansion of our UAS business, or otherwise disrupt the execution of our operating strategy. These impacts could adversely affect our ability to meet customer demand, maintain service levels, or pursue new business opportunities in our UAS operations, and could materially adversely affect our business, financial condition and results of operations. 22 Customer orders and service engagements for our UAS products and services and the pre-orders we have received for our aircraft may be non-binding, conditional or written expressions of interest and may be terminated at any time prior to execution of a definitive agreement, and cancellations, modifications or delays could materially adversely affect our business, liquidity and cash flows. Customer orders, project-based engagements and service arrangements for our UAS products and services may be non-binding, subject to change, or dependent on customer budgets, project timing, regulatory approvals or operational needs. Customers may delay, reduce or cancel planned purchases or service engagements with little or no advance notice. Such changes could result in fluctuations in demand, inventory levels, workforce utilization and revenue, and could adversely affect our ability to plan operations, manage costs and maintain margins. Any cancellation, modification or delay in customer orders or service engagements could materially adversely affect our business, financial condition and results of operations. We previously operated a pre-sales program for the TriFan 600 aircraft under which we received refundable deposits equal to approximately $1,350,000. The TriFan 600 program is currently paused. Deposits are refundable upon customer request, and customers are not obligated to purchase an aircraft or to enter into a binding purchase agreement. We expect to return deposits to customers who request a refund in accordance with the terms of the applicable customer agreements, and any such returns would reduce our available cash. Our drone operations may be adversely affected by weather conditions and other environmental factors beyond our control. Drone operations are subject to weather-related and environmental limitations, including high winds, precipitation, temperature extremes, reduced visibility and other conditions that may prevent or delay safe flight operations. Adverse weather conditions or environmental disruptions could delay project completion, increase operating costs, reduce operational efficiency or limit our ability to meet customer expectations. In addition, severe weather events, natural disasters or other environmental disruptions could temporarily suspend operations in affected regions or reduce demand for our services, which could materially adversely affect our business, financial condition and results of operations. 23 We operate in highly competitive markets characterized by rapid technological change, and we may be required to reduce prices or modify our offerings to remain competitive, which could adversely affect our results of operations. We operate in highly competitive markets in both the UAS and the aerospace industries, which are characterized by rapid technological innovation, evolving customer requirements, changing industry standards and frequent introductions of new products, product enhancements, software capabilities and distribution models. Many of our current and potential competitors are well-established, have or may have longer-standing relationships with customers and potential business partners, have or may have greater name recognition, and have or may have access to significantly greater financial, technical and marketing resources. In our UAS business, we face significant competition from drone manufacturers that sell directly to customers, other distributors and resellers, systems integrators and service providers. In addition, advancements in drone platforms, sensors, batteries, communications systems, autonomy, artificial intelligence and data processing technologies may quickly render existing products less competitive or obsolete. Our ability to remain competitive depends in part on our relationships with key suppliers and our ability to timely introduce new products and services that reflect current technology trends, customer requirements and regulatory developments. To the extent we resume our TriFan 600 aircraft program, such program potentially competes with a variety of aircraft manufacturers in the United States and abroad. We could face competition from competitors of whom we are not aware that have developed or are developing technologies that will offer alternatives to the TriFan 600. Competitors could develop an aircraft that renders the TriFan 600 less competitive than we believe it would become. Other manufacturers may be developing a light, fixed-wing VTOL aircraft with performance similar to that of the TriFan 600. Similarly, if we resume the program, the development of the TriFan 600 would require the successful integration of advanced propulsion, avionics, software and control systems. Technological challenges, evolving certification requirements or competitor advancements could require redesign, additional investment or changes to our development roadmap. Competitive pressures may result in pricing pressure, reduced margins, and the need to increase sales and marketing expenditures. As a result, we may be required to reduce the prices of certain products and services we sell, offer more favorable terms, or increase promotional activity to remain competitive. If we are not able to maintain favorable pricing, successfully differentiate our offerings, or achieve sufficient gross margins, our business, financial condition and results of operations could be materially adversely affected. 24 If we are unable to obtain and maintain adequate facilities and infrastructure, we may be unable to effectively store, service, repair and distribute UAS products or develop and manufacture our products as our business grows. In order to support our UAS operations, including maintaining adequate warehouse space, service and repair facilities, logistics infrastructure and inventory management systems, and, if the TriFan 600 program is resumed, to develop and manufacture our aircraft, we must be able to obtain and maintain adequate facilities and infrastructure. While we believe our current facilities are adequate for our present level of operations, as our UAS business grows, we may be required to expand or upgrade these facilities and systems. Any inability to secure suitable facilities on commercially reasonable terms, disruptions at our service or warehouse locations, or failure to effectively manage inventory and repair operations could adversely affect our ability to fulfill customer orders, provide timely service and support, and maintain customer relationships, which could materially adversely affect our business, financial condition and results of operations. Moreover, if the TriFan 600 program is resumed and the aircraft reaches commercial production, the aircraft would require ongoing maintenance and support, the costs and frequency of which are uncertain. There can be no assurance that the program will be resumed or that the aircraft will reach commercial production. Our UAS operations depend on trained drone operators, technicians and other qualified personnel, and competition for such personnel is significant. If the TriFan 600 program is resumed, pilot and mechanic availability could affect the commercialization of the aircraft. Our UAS operations rely on trained drone operators, technicians, repair personnel and other skilled employees, including individuals holding FAA Part 107 certifications and other applicable credentials. Competition for qualified personnel in the UAS industry is significant and may increase as adoption of drone technology expands. If we are unable to attract, train and retain qualified personnel in sufficient numbers, our ability to grow our UAS business, provide timely service and support, and execute our strategic plans could be adversely affected. If and when the TriFan 600 program is resumed and the aircraft approaches commercialization, a shortage of pilots and qualified aviation mechanics could adversely affect demand for the aircraft and the Company’s ability to support customers. There is an existing shortage of pilots in the broader aviation industry, and trained aviation mechanics are also in limited supply. If these conditions persist at the time the TriFan 600 program is resumed, they may reduce our ability to sell aircraft at scale or operate on the timelines we project at that time. We may be adversely affected by interruptions in production or supply chain disruptions that are beyond our control, including disruptions impacting suppliers of UAS products or aircraft components if the TriFan 600 program is resumed. UAS Operations Our UAS operations depend on the timely availability of drone platforms, payloads, batteries, components and related products from third-party manufacturers. Disruptions in global supply chains, shipping delays, manufacturing constraints, tariff or trade restrictions, or other supplier-related issues could reduce product availability, increase costs, delay customer deliveries, and adversely affect our ability to maintain adequate inventory levels. Because our current operations are primarily focused on our UAS distribution, service and solutions business, disruptions affecting our suppliers, logistics providers or product availability could have an immediate impact on our revenue, customer relationships and service operations. Any such disruptions could materially adversely affect our business, financial condition and results of operations. 25 In addition, to the extent we assemble, configure, integrate, test, repair or otherwise prepare UAS products and related components for sale or customer deployment, we may be exposed to manufacturing and production execution risks. These risks include quality control issues, defects in assembly or integration, equipment malfunctions, production inefficiencies, delays in scaling operations, and failures to meet customer specifications or delivery schedules. Any such issues could result in product returns, warranty claims, customer disputes, reputational harm, increased operating costs or reduced margins, any of which could materially adversely affect our business, financial condition and results of operations. TriFan 600 If the TriFan 600 program is resumed, we would intend to produce the TriFan 600 using systems, components and parts developed and manufactured by third-party suppliers. This supply chain exposes us to multiple potential sources of delivery failure or component shortages for our aircraft, most of which are out of our control. Such suppliers may be subject to additional risks such as financial problems that limit their ability to conduct their operations. If any of these third parties experience difficulties, it could have a direct negative impact on us. While we believe that we may be able to establish alternate supply relationships and can obtain replacement components if the program is resumed, we may be unable to do so in the short term or at all at prices that are acceptable to us or may need to recertify components, which could increase costs or delay development timelines. If we needed to find alternative suppliers for any key components, then this could increase our costs and adversely affect our ability to receive such components on a timely basis, or at all, which could cause significant delays if we resume the program in the development, certification or commercialization of our aircraft and adversely affect our relationships with customers. Our research and development efforts may not produce successful products or capabilities that result in significant revenue, cost savings or other benefits. Developing new UAS solutions, software capabilities, service offerings and related product enhancements, as well as advanced unmanned systems and related technologies, including in our ADS division, is expensive, time-consuming and subject to significant technical, operational and regulatory uncertainty. Investments in research and development may not result in successful designs, marketable products, improved performance or other anticipated benefits, and may take longer than expected to achieve technical milestones. In addition, development efforts may result in products or capabilities that are more expensive than anticipated or that do not meet customer requirements or may not be adopted by customers at the levels we expect. Our UAS business requires ongoing investments in evaluating new drone platforms, payload technologies, software tools and service capabilities, as well as developing customized solutions for customers in specialized industries. Our ADS division is in an early stage of development and has not generated revenues, and its ability to generate revenues will depend on its success in developing commercially viable products, securing development contracts or partnerships, and achieving customer acceptance, none of which are assured. These efforts may require significant upfront expenditures for equipment, training, testing, inventory and technical personnel, and may not generate sufficient demand or revenue to justify those investments. Our future plans include continued investments in research and development with respect to our UAS solutions business and the development of capabilities within our ADS division. We believe we must continue to dedicate significant resources to these efforts to maintain a competitive position and advance our UAS offerings. However, we may not receive significant revenue from these investments in the near future, if at all, and these investments may not yield the expected benefits. In addition, to the extent we determine to resume the TriFan 600 program in the future, such efforts would require substantial additional investment and may not result in commercially viable products or generate revenues. If we do not realize the anticipated returns from our research and development efforts, our business, financial condition and results of operations could be materially adversely affected. If we do not adequately protect our intellectual property rights, we may experience a loss of revenue and our operations and growth prospects may be materially harmed. Our UAS business relies on a combination of trademarks, trade secrets, proprietary software, customer relationships, training content, service and repair capabilities, technical workflows, and other proprietary know-how. We may not be able to prevent third parties, including competitors, former employees, contractors, or business partners, from misappropriating or replicating aspects of our business model, training programs, service processes, software tools or customer solutions. In addition, competitors or former personnel may attempt to replicate our operational methods, service offerings or customer relationships without infringing on registered intellectual property rights. Any failure to protect our intellectual property and proprietary information could reduce our competitive advantages and adversely affect our business, financial condition and results of operations. 26 The Company holds patents for the TriFan 600 issued by the United States Patent and Trademark Office and in various foreign jurisdictions, and may seek additional patent protection in connection with the TriFan 600 program or other technologies developed through the ADS division. The process of obtaining patent protection is expensive and time-consuming, and we may not be able to prosecute all necessary or desirable patent applications at a reasonable cost or in a timely manner. Even if issued, there can be no assurance that these patents will adequately protect our intellectual property, as the legal standards relating to the validity, enforceability and scope of protection of patent and intellectual property rights are complex, uncertain and subject to change. There is no guarantee that any court will rule in our favor in the event of a dispute related to our intellectual property. The TriFan 600 program has been paused, and the primary near-term value of the associated intellectual property lies in its potential applicability to unmanned systems development within our ADS division. During the period in which the program is paused, third parties — including potential competitors — may develop technologies that are equal or superior to our TriFan 600-related intellectual property, design around our existing patents, or independently develop similar technologies without infringing our rights. If the TriFan 600 program is ultimately resumed, the competitive value of our existing patents and other intellectual property may be diminished as a result of developments that occurred during the pause. Any failure to adequately protect our intellectual property could adversely affect our ability to commercialize the TriFan 600 or related technologies, and could materially adversely affect our business, financial condition and results of operations. Certain proprietary software and related technology used in our UAS operations and, to the extent applicable, in connection with our ADS division’s development activities, is protected by common law copyright rather than registered copyright. We have not registered copyrights on proprietary software we have developed. Common law protection may be narrower than registered copyright protection. As a result, we may experience difficulty enforcing our copyrights against third-party infringement. As part of our confidentiality procedures, we enter into agreements with employees and consultants and limit access to and distribution of our software, documentation and other proprietary information. There can be no assurance that these measures will prevent misappropriation or that such agreements will be enforceable. The laws of other countries may afford us little or no protection of our intellectual property. Our inability to protect our intellectual property rights could adversely affect our financial condition, operating results and growth prospects. We also rely on a variety of technology that we license from third parties in connection with our UAS operations. There can be no assurance that these third party technology licenses will continue to be available to us on commercially reasonable terms, if at all. The loss of or inability to maintain or obtain upgrades to any of these technology licenses could result in delays in completing software enhancements and new development until equivalent technology could be identified, licensed or developed and integrated. Any such delays would materially and adversely affect our business. Our ability to use net operating loss carryforwards and other tax attributes may be limited. We have generated net operating losses (“NOLs”) and other tax attributes that may be available to offset future taxable income. However, our ability to utilize these tax attributes may be limited under Sections 382 and 383 of the Internal Revenue Code (the “Code”) if we experience an “ownership change.” In general, an ownership change occurs when there is a greater than 50 percentage point change in the ownership of a corporation’s stock by certain stockholders over a rolling three-year period. We may have experienced ownership changes in the past, including in connection with business combinations, equity financings, preferred stock issuances, conversions, exchanges, or other transactions, and may experience ownership changes in the future as a result of subsequent shifts in our stock ownership, some of which may be outside our control. If an ownership change occurs, our ability to utilize our pre-change NOLs and other tax attributes, including research and development tax credits, to offset future taxable income and taxes could be subject to significant annual limitations. Similar provisions of state tax law may also apply. As a result, even if we achieve profitability, we may be unable to use a material portion of our NOLs and other tax attributes, which could adversely affect our business, financial condition and results of operations. 27 We may enter into joint venture, teaming and other arrangements, and these activities involve risks and uncertainties, and a failure of any such relationship could have material adverse results on our business and results of operations. We may enter into joint venture, teaming and other arrangements including strategic partnerships, supplier arrangements, dealer relationships, distribution agreements, and other commercial relationships. These activities involve risks and uncertainties, including the risk of the joint venture or applicable entity failing to satisfy its obligations, which may result in certain liabilities to us for guarantees and other commitments, the challenges in achieving strategic objectives and expected benefits of the business arrangement, the risk of conflicts arising between us and our partners and the difficulty of managing and resolving such conflicts, and the difficulty of managing or otherwise monitoring such business arrangements. In addition, our business plans, including our UAS operations, depend in part on relationships with third parties, including suppliers, manufacturers, service providers and other strategic partners. Moreover, existing or future arrangements may contain limitations on our ability to enter into arrangements with other partners. A failure of our business relationships could have a material adverse effect on our business and results of operations. We are subject to risks associated with climate change, including the potential increased impacts of severe weather events on our operations and infrastructure, and market and regulatory trends relating to sustainability and emissions reduction may not evolve as expected. The potential physical effects of climate change, such as increased frequency and severity of high wind conditions, storms, floods, fires, fog, mist, freezing conditions, sea-level rise and other climate-related events, could affect our operations, infrastructure and financial results. Climate change risks could result in, but are not limited to, operational risk from the physical effect of climate events on our facilities, distribution and service infrastructure, and other assets, as well as supply chain disruptions affecting the availability and cost of components and products that we distribute or use in our development activities. We could incur significant costs to improve resiliency of our infrastructure and operations and otherwise prepare for, respond to, and mitigate such physical effects of climate change. We are not able to accurately predict the materiality of any potential losses or costs associated with the physical effects of climate change. In addition to physical risks, climate change presents transition risks, including evolving regulatory requirements, increased monitoring and disclosure requirements, and changing market preferences. A number of governments globally have introduced, or are considering introducing, climate change legislation and policies at the international, national, state and local levels. Regulation relating to emission levels, energy efficiency and sustainability is evolving and may influence purchasing decisions in the aviation and UAS markets. Certain aspects of our business strategy, including the positioning of our UAS solutions and the development of the TriFan 600, may benefit from regulatory or market preferences for more fuel-efficient or lower-emission technologies. However, market and regulatory trends may not evolve in the direction or within the timing we anticipate. Changes in political priorities, economic conditions, energy prices, or public policy could reduce the emphasis on emissions reduction or sustainability initiatives. If regulatory incentives are reduced, delayed, or eliminated, or if customers place less importance on sustainability considerations when making purchasing decisions, demand for our products could be adversely affected, which could have a material adverse effect on our business, financial condition and results of operations. Investors’ expectations and regulatory requirements relating to environmental, social and governance (“ESG”) matters may impose additional costs and expose us to new risks. There is increasing focus from investors, employees, customers, regulators and other stakeholders concerning corporate responsibility and ESG matters. Some investors may use these non-financial performance factors to guide their investment strategies and, in some cases, may choose not to invest in us if they believe our policies, disclosures or actions relating to ESG matters are inadequate or inconsistent with their expectations. The growing demand for measurement and disclosure of non-financial performance has led to evolving reporting standards, regulatory requirements and third-party sustainability assessments and ratings with respect to public companies. The criteria by which our ESG practices are assessed may change over time due to shifts in regulatory frameworks, market expectations or industry standards, which could require us to undertake additional compliance efforts, incur increased costs, or modify our practices. In addition, if we elect not to, or are unable to, satisfy evolving ESG-related expectations or regulatory requirements, or if our ESG-related disclosures are challenged, we could face reputational harm, reduced investor interest, increased scrutiny or potential litigation. Conversely, certain stakeholders may oppose ESG initiatives or disclosures, which could also create reputational or other risks. Any of these factors could adversely affect our business, financial condition and results of operations. 28 Insurance and contractual protections may not cover product liability, operational claims, lost revenue, increased expenses or liquidated damages, which could adversely affect our financial results. Although we maintain insurance and seek to obtain warranties, indemnities and performance guarantees from suppliers and subcontractors, and where feasible attempt to allocate risks contractually to customers or other counterparties, the proceeds of such insurance or the protections provided by such contractual arrangements may not be adequate to cover potential claims, losses, liabilities or damages. We may be subject to product liability and other claims arising in the ordinary course of our business, including claims related to the distribution, servicing, repair or development of drone systems, related components and software, and, in the future, aircraft we may manufacture or sell. Such claims may involve allegations of design defects, manufacturing defects, component failures, software errors, improper installation, inadequate warnings or instructions, misuse of products, personal injury, death or property damage. In some jurisdictions, strict liability may be imposed even in the absence of negligence. In addition, we may face claims for breach of contract, warranty obligations, indemnification demands, liquidated damages, operational failures, delays in delivery, or other performance-related matters. Our contractual protections may be limited by exclusions, caps, deductibles, insolvency of counterparties or other limitations, and we may be unable to enforce such protections in certain circumstances. Insurance coverage for certain operational, product-related and aviation risks may be limited, unavailable, subject to significant exclusions, or increasingly expensive. There can be no assurance that our current insurance coverage will be available in the future on commercially reasonable terms or at all, or that coverage limits will be sufficient to protect us against all potential claims. Even if we believe a claim is covered, insurers may dispute coverage. A successful claim or claims brought against us in excess of available insurance coverage or contractual protections, or for which such protections are unavailable, could result in significant liabilities, require us to expend substantial resources, and have a material adverse effect on our business, financial condition and results of operations. Any significant incident or claim, even if insured, could also adversely affect our reputation and customer relationships. The ongoing impact of geopolitical conflicts, including the Russia-Ukraine conflict and conflicts in the Middle East, may adversely affect our business, operations and financial condition. Geopolitical conflicts, including the ongoing military conflict between Russia and Ukraine and the conflicts in the Middle East, including the Israel-Hamas conflict and related regional tensions involving Iran and other parties, may increase the likelihood of global supply chain disruptions, inflationary pressures, higher energy and transportation costs, and volatility in financial markets. These developments could adversely affect the availability and cost of drone platforms, components and other products we sell, as well as materials, components and services required for our aircraft development program. In addition, the continuation or escalation of these conflicts could result in additional economic sanctions, export controls, import restrictions, disruptions to global shipping routes, including in the Red Sea and surrounding regions, and other governmental actions that could disrupt international trade, limit product availability, increase costs, and adversely affect customer demand. These events may also contribute to heightened cybersecurity threats. The overall impact of these developments remains uncertain, and any of the foregoing could materially adversely affect our business, financial condition and results of operations. Our business is subject to U.S. and foreign trade compliance, sanctions, import/export and anti-corruption laws, and violations of these laws or changes in their application could harm our business. Although we are primarily a U.S.-based company, our UAS distribution and services business relies on a global supply chain, including suppliers and manufacturers located in Europe and Asia. As a result, we are subject to various U.S. and foreign laws and regulations relating to international trade and business conduct, including customs and import regulations, export controls, economic sanctions, embargoes, licensing requirements, and anti-corruption laws such as the U.S. Foreign Corrupt Practices Act (“FCPA”) and similar laws in other jurisdictions. 29 These laws and regulations are complex, frequently changing, and may be subject to inconsistent interpretation and enforcement. Compliance requires significant management attention and resources, and any failure to maintain effective compliance programs, controls, training and oversight could expose us to liability. We may engage third-party suppliers, distributors, freight forwarders, customs brokers, consultants, resellers, or service providers in connection with sourcing and distributing UAS products. We may not be able to fully control the actions of such third parties. Any violation of applicable anti-corruption, sanctions, import/export or trade compliance laws by us, our employees or third parties acting on our behalf could result in significant fines, penalties, reputational harm, loss of import or export privileges, seizure or detention of shipments, restrictions on our ability to sell certain products, increased compliance costs, and could materially adversely affect our business, financial condition and results of operation. In addition, changes in sanctions programs, export control regimes, import restrictions or licensing requirements could limit the availability of products we distribute, restrict certain customers or end markets, delay shipments, or otherwise disrupt our operations. Changes in U.S. administrative policy, including tariffs, import restrictions, trade agreements and other trade measures, could adversely affect our supply chain economics and financial performance. Our UAS distribution and services business relies on a global supply chain and a significant portion of the products and components we distribute are manufactured outside the United States, including in China and other parts of Asia and Europe. As a result, our business is sensitive to changes in U.S. and foreign government administrative policy, including changes to trade agreements, the imposition of new tariffs, increases in existing tariffs, import restrictions, retaliatory measures by foreign governments, and other actions affecting global trade. Tariffs and other trade restrictions may increase the costs of the products we distribute, disrupt product availability, delay shipments, or require us to source products from alternative suppliers at higher prices or on less favorable terms. If we are unable to pass such cost increases through to customers, our margins could be reduced. Even if we are able to increase pricing, higher costs may reduce customer demand, particularly in price-sensitive segments of the UAS market. In addition, uncertainty regarding the timing, scope and duration of tariffs and related trade measures may make it more difficult for us to forecast costs, manage inventory, plan purchasing decisions, and maintain consistent pricing. Any of these factors could materially adversely affect our business, financial condition and results of operations Difficult conditions in the global economy and capital markets may materially adversely affect our business, results of operations and access to capital. Our business is affected by conditions in the global economy and financial markets. Economic uncertainty, slower growth, recessionary conditions, sustained inflation, higher interest rates, reduced availability of credit, banking instability, geopolitical tensions or other macroeconomic disruptions could negatively affect customer purchasing behavior, government budgets, and enterprise capital spending. Demand for our UAS products and services and, in the future, aircraft we may develop, may be sensitive to general economic conditions. Customers may delay or reduce purchases, seek lower-cost alternatives, renegotiate pricing, reduce order quantities, or extend payment terms during periods of economic uncertainty. Reduced customer spending could adversely affect our revenues and profitability. Inflationary pressures may increase our costs of labor, components, logistics, warehousing, insurance and other operating expenses. Although we may attempt to pass through increased costs to customers, we may not be able to do so in a timely manner or at all, which could reduce our margins. In addition, higher interest rates may increase our borrowing costs under existing or future credit facilities and may adversely affect our ability to access capital on favorable terms. Volatility in equity and credit markets may also impair our ability to raise additional capital when needed, including to fund strategic acquisitions, development initiatives, or other capital-intensive programs or aircraft development efforts. If we are unable to access capital markets or secure financing on acceptable terms, our liquidity and ability to execute our business strategy could be materially adversely affected. Any of these factors could have a material adverse effect on our business, financial condition and results of operations. 30 We have a history of losses, and in order to successfully execute our business plan, including strategic acquisitions and the development of our advanced systems and domestic manufacturing initiatives, we will need to raise additional capital through additional debt or equity financing, which may otherwise not be available on reasonable terms or at all. We have incurred net losses in recent periods and have an accumulated deficit as of December 31, 2025. These and prior losses have resulted in significant negative cash flows. Our ability to execute our business plan depends on attaining and maintaining profitable operations in our UAS business and other operations and raising additional capital as needed, including for strategic acquisitions and the development of our advanced systems and domestic manufacturing initiatives. There can be no assurance that we will be able to raise additional financing. Our ability to execute our business plan depends on our ability to generate sufficient cash flow from operations and/or obtain additional debt or equity financing. There can be no assurance that additional financing will be available on acceptable terms, or at all. If we are unable to raise sufficient capital when needed, we may be required to delay, reduce or terminate certain operations or development programs. We have historically funded our operations through a combination of equity offerings, preferred equity issuances, convertible instruments, related party financing arrangements, and secured and unsecured debt. In November 2025, we issued shares of Series 10 Convertible Preferred Stock in a private placement transaction, which were subsequently converted in January 2026 into shares of our common stock and a pre-funded warrant. The issuance and conversion of these securities have resulted, and future exercises or exchanges of outstanding securities may result, in dilution to our existing stockholders. In connection with our acquisition of Drone Nerds, we issued equity interests that are exchangeable into shares of our common stock. The exchange of such equity interests and the exercise of outstanding warrants could result in additional dilution and increased volatility in the market price of our common stock. We have also entered into an asset-based revolving credit facility with JPMorgan Chase Bank, N.A. to support the working capital needs of our UAS operations. Borrowings under this facility are subject to a borrowing base formula and are secured by substantially all of the assets of the applicable borrowers. The facility contains customary covenants and events of default. If borrowing availability is reduced or if we fail to comply with the covenants under this facility, our liquidity could be adversely affected. Upon an event of default, the lender may accelerate amounts outstanding and exercise remedies against the collateral securing the facility. In addition, to the extent that we are unable to pay our obligations under our credit facilities, related party notes, or other indebtedness, and such obligations are secured, the applicable lender or noteholder could exercise remedies against the collateral securing such obligations, which could materially adversely affect our business, financial condition and results of operations. Our existing and future indebtedness may limit our ability to obtain additional financing, incur additional debt, or pursue strategic transactions. The combined effect of our operating losses, capital requirements, outstanding convertible and exchangeable securities, and secured credit arrangements may adversely affect our financial flexibility and our ability to execute our long-term strategy. Our asset-based revolving credit facility contains borrowing base limitations, financial and operational covenants, and is secured by substantially all of the assets of our UAS operations, and any default could materially adversely affect our liquidity and operations. Drone Nerds, LLC and Anzu Robotics, LLC recently entered into a secured asset-based revolving credit facility (the “ABL Facility”) with JPMorgan Chase Bank, N.A. to support the working capital needs of our UAS operations. The amount available for borrowing under the ABL Facility is subject to a borrowing base formula, which is based primarily on a percentage of eligible accounts receivable and inventory, subject to applicable advance rates and reserves. 31 Because availability under the ABL Facility depends on the value of eligible collateral, our borrowing capacity may fluctuate from time to time as a result of changes in our accounts receivable, inventory levels, customer payment patterns, seasonality, credit concentrations, or the imposition of discretionary reserves by the lender. If our eligible collateral decreases or if additional reserves are established, the amount available for borrowing could be reduced, which could adversely affect our liquidity. The credit agreement governing the ABL Facility contains affirmative and negative covenants, including covenants limiting the ability of the borrowers to, among other things, incur additional indebtedness, grant liens, make certain investments, pay dividends, engage in certain mergers or asset sales, or enter into certain transactions. The credit agreement also requires the borrowers to maintain a fixed charge coverage ratio as of the end of any calendar month, that is no less than 1.0 to 1.0, subject to certain cure rights. The credit agreement also contains customary events of default that include, among other things, certain payment defaults, cross defaults to other material indebtedness, covenant defaults, the occurrence of a change in control, unsatisfied judgments over a threshold, and certain bankruptcy events. The ABL Facility is secured by substantially all of the assets of the applicable borrowers and guarantors, including accounts receivable, inventory, deposit accounts and other assets. Upon the occurrence of an event of default, the lender may, among other remedies, accelerate all outstanding obligations, terminate lending commitments, increase the interest rate, and exercise remedies against the collateral securing the facility. The exercise of such remedies could materially adversely affect our business, financial condition and results of operations. Any inability to access funds under the ABL Facility when needed, any reduction in borrowing availability, or any default under the ABL Facility could materially adversely affect our ability to fund working capital, inventory purchases, growth initiatives, and ongoing operations . We may be unable to repay the Notes issued in connection with the Drone Nerds acquisition. In connection with the acquisition of Drone Nerds, XTI Drones Holdings issued a promissory note to the Drone Nerds, LLC seller in the original principal amount of approximately $11 million and a promissory note to the Anzu Robotics, LLC seller in the original principal amount of approximately $1 million (the “Notes”). The Company made the initial required principal and interest payments under the Notes in November 2025. The remaining outstanding principal and accrued interest under the Notes are payable in scheduled installments through 2026, with all remaining amounts due on or prior to the applicable maturity date. Interest accrues on the outstanding principal balance of each Note at an annual rate of 7.25%. Our failure to pay principal or interest when due will constitute an event of default under the applicable Note. Upon the occurrence of an event of default (other than certain bankruptcy-related events), the holder may declare the entire unpaid balance of principal and accrued but unpaid interest immediately due and payable and may exercise other rights and remedies available under the Notes or applicable law. Upon the occurrence of certain bankruptcy-related events of default, the outstanding principal and accrued interest will become automatically due and payable. Following the occurrence of an event of default, interest will accrue at an increased rate. In addition, under the terms of the Notes, if we complete one or more capital raises resulting in aggregate gross proceeds of $40 million or more following issuance of the Notes, we may be required to repay all outstanding amounts under the Notes, subject to certain limitations. Any such required repayment could reduce our available working capital and adversely affect our ability to execute our business plan. The availability and use of proceeds from any such financing may also be subject to restrictions under our asset-based revolving credit facility, which could limit our ability to apply such proceeds toward repayment of the Notes. We may not have sufficient cash on hand or be able to obtain additional financing to satisfy amounts due under the Notes when required. The Notes include provisions that could result in the acceleration of amounts owed, including upon the occurrence of an event of default or, in certain circumstances, following specified capital raising activities. If amounts under the Notes were accelerated or otherwise became due earlier than expected, we may be required to repay such amounts on an accelerated basis, which could reduce our available liquidity. If we are unable to meet our obligations under the Notes, our business, financial condition and results of operations could be materially adversely affected. 32 We may not be able to successfully integrate the business and operations of Drone Nerds or other entities that we have acquired or may acquire in the future, and we may not realize the intended benefits of these acquisitions. In addition, we may be exposed to unanticipated liabilities or risks arising from the historic operations of acquired businesses, which could materially and adversely affect our business, financial condition and results of operations. We are in the process of integrating the operations of Drone Nerds into our business, and this process involves complex operational, technological and personnel-related challenges, which are time-consuming and expensive and may disrupt our ongoing business operations. Integration involves a number of risks, including, but not limited to: ● the possibility that the purchase price we pay and/or unanticipated costs could significantly deplete our cash reserves or result in dilution to our existing stockholders; ● difficulties or complications in combining the companies’ operations, especially if we enter a market with no or limited prior experience; ● differences in controls, procedures and policies, regulatory standards and business cultures among the combined companies; ● the diversion of management’s attention from our ongoing core business operations; ● increased exposure to certain governmental regulations and compliance requirements; ● the potential increase in operating costs; ● the potential loss of key personnel; ● the potential loss of key customers or suppliers who choose not to do business with the combined business and the possibility that we may not be able to expand the reach and customer base for the acquired companies’ current and future products as expected; ● the possibility that certain liabilities, including contingent or unanticipated liabilities, related to the acquired companies’ prior operations may not be covered by insurance, indemnification provisions or other contractual protections; ● difficulties or delays in consolidating the acquired companies’ technology platforms, including implementing systems designed to maintain effective disclosure controls and procedures and internal control over financial reporting for the combined company and enable the Company to continue to comply with U.S. GAAP and applicable U.S. securities laws and regulations; ● unanticipated costs to successfully integrate operations, technologies, personnel of acquired businesses and other assumed contingent liabilities; ● difficulty comparing financial reports due to differing financial and/or internal reporting systems; ● making any necessary modifications to internal financial control standards to comply with the Sarbanes-Oxley Act of 2002 and the rules and regulations promulgated thereunder; ● the possibility that goodwill and other intangible assets we acquire are subject to amortization or impairment tests, which could result in future charges to earnings, or that the carrying amounts of goodwill and other purchased intangible assets may not be recoverable; and/or ● possible write-offs, restructuring charges, tax costs or inefficiencies associated with integrating the operations of the combined company. These risks could prevent us from successfully integrating Drone Nerds and any other businesses we may acquire and could cause us to not fully realize the anticipated financial, revenue synergies and/or other strategic benefits of the Drone Nerds acquisition or future acquisitions when expected, or at all, which could have a material adverse effect on our business, financial condition and results of operations. 33 We have completed several strategic transactions, including acquisitions and dispositions, which may make it difficult for investors to evaluate our business and prospects, and future acquisitions or dispositions could disrupt our business and harm our financial condition or operating results. We have historically pursued a strategy involving acquisitions, divestitures and other strategic transactions. Over time, we have acquired and divested multiple businesses, including our recent acquisition of Drone Nerds and disposition of our former Inpixon Business operations. As a result of these transactions, our business has evolved significantly, and our historical financial results may not be indicative of our future performance. Frequent changes to our business portfolio, including acquisitions, divestitures, spin-offs and other strategic transactions, may make it difficult for investors to evaluate our current business, financial condition and prospects. In addition, our limited operating history following recent strategic transactions may limit investors’ ability to assess trends in our business and operating results. Any future acquisitions or dispositions of assets or businesses could disrupt our operations, divert management’s attention, result in the loss of key personnel or customers, create additional regulatory or contractual obligations, or expose us to unforeseen liabilities. Dispositions may also result in the loss of revenue streams or tax attributes and may not achieve the anticipated financial or strategic benefits. There can be no assurance that any future acquisition or disposition will enhance stockholder value or improve our operating results, and such transactions may instead materially adversely affect our business, financial condition and results of operations. A significant portion of the purchase price related to our strategic acquisitions was allocated to goodwill and intangible assets that are subject to periodic impairment evaluations, and an impairment loss could have a material adverse impact on our financial condition and results of operations. As required by current accounting standards, we review goodwill and indefinite-lived intangible assets for impairment at least annually, and we evaluate long-lived assets, including definite-lived intangible assets, for impairment whenever events or changes in circumstances indicate that the carrying value may not be recoverable. The risk of impairment to goodwill is generally higher during the early years following an acquisition because the difference between the carrying value of a reporting unit and its fair value may be relatively small. Until this difference increases over time due to business growth or reductions in the carrying value of the reporting unit, a relatively small decrease in fair value could trigger impairment charges. Our business could be adversely affected, and impairment charges could be triggered, if any of the following were to occur: higher attrition rates than planned as a result of the competitive environment or our inability to provide products and services that are competitive in the marketplace, lower-than-planned customer adoption rates, higher-than-expected expense levels, sustained declines in our stock price and related market capitalization, adverse changes in macroeconomic conditions, or changes in our business model. We may record impairment charges in the future if the carrying value of our remaining goodwill or intangible assets exceeds their estimated fair value or is otherwise determined to be unrecoverable. We may make strategic investments in early-stage companies or technologies that fail to generate returns or result in significant losses or impairment charges. From time to time, we may make strategic investments in early-stage companies, emerging technologies, or development-stage ventures that we believe may be complementary to our business strategy or that may offer potential long-term value to our operations. These investments are speculative in nature and involve significant risks. Early-stage companies typically have limited operating histories, no or minimal revenues, unproven technologies, and significant dependence on future financing that may not be available on acceptable terms or at all. The value of these investments may be difficult to assess at the time of investment, and our due diligence, which is inherently limited by the availability of information and the early-stage nature of such companies, may not identify all material risks associated with a potential investee. We may be required to record credit losses, impairment charges, or write-downs against the carrying value of these investments in accordance with applicable accounting standards if the financial condition or prospects of an investee deteriorate, if collection of contractual cash flows becomes uncertain, or if the fair value of an investment declines below its carrying amount. Such charges could be material and could occur within a short period following the date of investment. During the year ended December 31, 2025, we recorded a full credit loss allowance of approximately $2.0 million against a convertible promissory note investment made in October 2025, reflecting our determination that collection of substantially all contractual cash flows was not expected at that time based on the investee’s limited operating history and dependence on future financing. Our ability to recover value from strategic investments will depend on factors largely outside of our control, including the investee’s ability to execute its business plan, secure additional financing, develop its technology, and ultimately achieve commercial viability. There can be no assurance that any strategic investment we make will generate returns, preserve capital, or provide the strategic benefits we anticipate at the time of investment. Losses on strategic investments could adversely affect our financial condition, results of operations, and cash flows, and could divert management attention and resources that might otherwise be devoted to our core business operations. 34 Our business depends on experienced and skilled personnel, and if we are unable to attract, retain and integrate such personnel, or if we lose key personnel, our operations and strategic execution may be adversely affected. The success of our business and our ability to execute our strategic plans depend on our ability to attract, retain, train, integrate and motivate highly skilled employees, including personnel who have joined or may join us in connection with acquisitions. Our UAS distribution and services business requires personnel with specialized skills in engineering, software, sales, training, repair and maintenance services, technology integration and regulatory compliance. In addition, our aircraft development program requires highly specialized aerospace engineering and technical expertise, including experience in certification and regulatory processes. Competition for qualified engineering, aviation, regulatory, technology and sales personnel is intense, and identifying and recruiting candidates with the appropriate qualifications can be costly and time-consuming. We may not be able to hire the personnel necessary to implement our business strategy in a timely manner, or we may be required to offer higher compensation or additional incentives than anticipated. Industry turnover rates for certain skilled positions are high, and we may not be successful in retaining, training or motivating our employees. Our success also depends to a significant extent upon the continued services, experience and performance of our executive officers and other key personnel. The loss of one or more members of senior management or other key technical, operational or sales personnel could disrupt our operations, delay aircraft development and certification efforts, impair customer or supplier relationships, or otherwise adversely affect our business. Given the specialized nature of aerospace engineering, regulatory certification expertise and drone technology distribution and support, qualified replacements may be difficult to identify and recruit in a timely manner or at all. While certain key personnel are employed pursuant to employment agreements, there can be no assurance that we will be able to retain their services. We do not maintain “key person” life insurance on the lives of any of our executive officers. Any inability to attract, retain, integrate or motivate skilled personnel, or the unexpected loss of key personnel, could impair our ability to manage operations, fulfill customer orders and service engagements, expand our UAS operations, advance the TriFan 600 program, and execute our strategic plans. Such challenges could increase our costs, reduce profitability, delay initiatives, harm our reputation and have a material adverse effect on our business, financial condition and results of operations. If we were deemed to be an investment company under the Investment Company Act of 1940, applicable restrictions could make it impractical for us to continue our business as contemplated. Under Sections 3(a)(1)(A) and (C) of the 1940 Act, a company generally will be deemed to be an “investment company” for purposes of the 1940 Act if (1) it is, or holds itself out as being, engaged primarily, or proposes to engage primarily, in the business of investing, reinvesting or trading in securities or (2) it engages, or proposes to engage, in the business of investing, reinvesting, owning, holding or trading in securities and it owns or proposes to acquire investment securities having a value exceeding 40% of the value of its total assets (exclusive of U.S. government securities and cash items) on an unconsolidated basis. Although we have made certain strategic investments in the past and may from time to time hold significant cash or investment securities, including following strategic transactions, we do not currently believe that we are an “investment company,” as such term is defined in either of those sections of the 1940 Act. We intend to conduct our operations so that we will not be deemed an investment company. However, if we were to be deemed an investment company, restrictions imposed by the 1940 Act, including limitations on our capital structure and our ability to transact with affiliates, could make it impractical for us to continue our business as contemplated and could have a material adverse effect on our business, financial condition and results of operations. We may be subject to claims that we or our employees have wrongfully used or disclosed alleged trade secrets of their former employers. We may be subject to claims that the Company or our employees, including employees who joined us in connection with acquisitions, may have inadvertently or otherwise used or disclosed trade secrets or other proprietary information of former employers or competitors. Litigation may be necessary to defend against these claims. We may be subject to unexpected claims of infringement of third-party intellectual property rights, either for intellectual property rights of which we are not aware, or for which we believe are invalid or narrower in scope than the accusing party. Even if we are successful in defending against these claims, litigation could result in substantial costs and be a distraction to management. If we fail in defending such claims, in addition to paying money claims, we may lose valuable intellectual property rights or personnel or be enjoined from selling certain products or providing certain services. A loss of key research personnel or their work product could hamper or prevent our ability to commercialize certain products, which could severely harm our business. 35 We have been and may in the future be subject to government or regulatory investigations or inquiries and may be required to comply with requests for information by regulators, and any resulting enforcement action could have a materially adverse effect on us. As a publicly trading reporting company with operations in the United States and internationally, we interact regularly with regulatory and self-regulatory agencies in the United States or other jurisdictions in which we operate, including the SEC and the Nasdaq Stock Market. In addition, our operations may be subject to regulation by other governmental agencies, including agencies involved in aviation, UAS, communications, procurement and trade compliance. We have been and may in the future be the subject of SEC and other regulatory investigations and may be required to comply with informal or formal orders or other requests for information or documentation from such government authorities and regulators regarding our compliance with national, regional and local laws and regulations, including the rules and regulations under the Securities Act and the Exchange Act. Such laws and regulations and their interpretation and applications may also change from time to time. Responding to requests for information from regulators in connection with any such investigations or inquiries could have a materially adverse effect on our business through, among other things, significantly increased legal fees and the time and attention required of the Company’s management and employees to be diverted from our normal business operations and growth plans. Moreover, if a regulator were to initiate an enforcement action against us, any such action could further consume our resources, require us to change our business practices and have a material adverse effect on our business, financial condition, results of operations and cash flows. Adverse judgments or settlements in legal proceedings could materially harm our business, financial condition, operating results and cash flows. We may be a party to claims that arise from time to time in the ordinary course of our business, including claims related to our products, securities offerings, contracts and subcontracts, protection of confidential information or trade secrets, adversary proceedings arising from customer bankruptcies, employment matters, immigration requirements, and compliance with various state and federal statutes, rules and regulations applicable to our business. For example, in February 2026, the State of Texas filed a petition in the District Court of Collin County, Texas, against Anzu Robotics, LLC (“Anzu”) alleging that Anzu violated the Texas Deceptive Trade Practices-Consumer Protection Act (the “DTPA”) in connection with the marketing and sale of its drone products. The State contends, among other things, that Anzu misrepresented certain characteristics, origins, and security features of its products and failed to disclose certain alleged material facts relating to the products’ development and components and Anzu’s alleged business relationship with DJI. The State seeks temporary and permanent injunctive relief, civil penalties of up to $10,000 per violation of the DTPA and up to an additional $250,000 if the conduct was calculated to deprive a consumer age 65 or older of money or property, and attorneys’ fees and costs. The Company is engaged in discussions with the Texas Attorney General to attempt to resolve the matter cooperatively. In addition, we are currently involved in litigation relating to the XTI Merger. In December 2023, Xeriant, Inc. filed a lawsuit in the United States District Court for the Southern District of New York against Legacy XTI and others, asserting claims including breach of contract, fraud, unjust enrichment and misappropriation of confidential information relating to certain prior agreements and the TriFan 600 program. The complaint has since been amended, and the matter is currently proceeding under a Third Amended Complaint filed in December 2025. Xeriant seeks monetary damages, injunctive and other equitable relief. Legacy XTI has asserted counterclaims and continues to vigorously defend against the claims. The litigation is ongoing and in active discovery. In addition, in May 2025, Auctus Fund, LLC filed a lawsuit against Legacy XTI in Colorado state court alleging breach of contract relating to an alleged obligation to repay indebtedness originally issued by Xeriant. The plaintiff seeks repayment of principal and accrued interest in an amount approaching $9 million. Legacy XTI disputes the claims and is defending the action. The outcome of the foregoing matters cannot presently be predicted, and an adverse determination in any of these matters could have a material impact on our business, financial condition and results of operations. Regardless of the merits of any particular claim, responding to litigation may divert management’s time and attention, result in significant legal expenses, and expose us to monetary damages, penalties or injunctive relief. Litigation and other legal proceedings are inherently uncertain, and adverse judgments or settlements could materially adversely affect our business, financial condition, results of operations and cash flows. Even if a claim is fully indemnified or insured, such litigation could damage our reputation and make it more difficult to compete effectively or obtain adequate insurance in the future. 36 Furthermore, while we maintain insurance for certain potential liabilities, such insurance does not cover all types and amounts of potential liabilities and is subject to exclusions, deductibles and caps. Insurers may dispute coverage, which may affect the timing or availability of insurance proceeds. Unexpected outcomes in legal proceedings, or changes in management’s evaluation of the likely outcomes, could have a material adverse effect on our business, financial condition, results of operations and cash flows. We rely on key information technology systems and third-party cloud service providers, and any disruption, failure, or degradation of these systems could adversely affect our operations and financial results. Our business depends on the reliable operation of our information technology systems and networks, including systems used for financial reporting, inventory management, procurement, order processing, customer relationship management, communications, and other core business functions. In addition, portions of our operations rely on third-party service providers, including cloud-based hosting, data storage, enterprise software platforms, communications providers, and other outsourced technology services. Any failure, interruption, degradation, or other disruption of our internal systems or those of our third-party service providers—whether due to power outages, telecommunications failures, software bugs, human error, natural disasters, system capacity constraints, acts of terrorism, geopolitical events, vendor outages, or other events beyond our control—could impair our ability to operate effectively. Such disruptions could, among other things, delay order fulfillment, disrupt inventory tracking, impair our ability to provide repair, maintenance or support services, prevent access to critical business records, delay billing and collections, and adversely affect our ability to produce timely and accurate financial statements. We may not be able to promptly restore our systems or the systems of our third-party service providers in the event of a disruption, and we may not have adequate redundancy, disaster recovery, or business continuity capabilities for all critical systems. In addition, third-party providers may experience operational or financial difficulties, may change their service offerings or pricing, may discontinue services, or may impose contractual limitations on remedies or liability. Any of these outcomes could increase our operating costs, harm customer relationships, and adversely affect our business, financial condition and results of operations. Digital threats such as cyber-attacks, data protection breaches, computer viruses or malware affecting our systems, our customers’ systems or cloud-based services could result in liability for us, damage our reputation or otherwise harm our business. Despite our implementation of network security measures, the products and services we sell to customers, and our servers, data centers and cloud-based solutions on which our data and the data of our customers, suppliers and business partners are stored, are vulnerable to cyber-attacks, data protection breaches, computer viruses, ransomware, malicious acts and similar disruptions resulting from unauthorized access, human error or other causes. Our UAS distribution and support operations involve the sale and servicing of drones, cameras, sensors and related software that may collect, transmit, store or process sensitive operational, geospatial or customer data. In addition, our aircraft development activities may involve proprietary engineering data and regulated technical information. Any compromise of such data, whether through attacks on our systems, third-party service providers, suppliers or customers, could result in regulatory scrutiny, contractual liability, litigation, reputational harm and loss of customer confidence. Some components of our technology and systems, including third-party software and open-source software, may contain vulnerabilities that are difficult to detect and correct. Although we seek to maintain appropriate security controls, no system is completely secure. Any breach of our systems, or of cloud-based services provided by or enabled by us, regardless of whether the breach is attributable to a vulnerability in our products or services, could subject us to liability to customers or other third parties, result in significant remediation costs, disrupt operations, and have a material adverse effect on our business, financial condition and results of operations. Efforts to prevent or mitigate cyber incidents may be costly and may not be successful. In addition, evolving data protection and cybersecurity laws and regulatory requirements may increase compliance costs and potential exposure in the event of a security incident. 37 We may be unable to maintain effective internal control over financial reporting and disclosure controls and procedures, which could adversely affect our ability to accurately report our financial results and maintain investor confidence. We are required to maintain effective disclosure controls and procedures and internal control over financial reporting (“ICFR”) to provide reasonable assurance that information we are required to disclose in reports filed with the SEC is recorded, processed, summarized and reported within the time periods specified by SEC rules and forms. Our ability to maintain effective controls is subject to a number of risks and challenges, including, among other things, the complexity of our corporate structure, the integration of acquired businesses, the transition of financial reporting systems and processes, changes in accounting standards, the need to implement and maintain controls over new or evolving business operations, and the continued hiring and retention of personnel with appropriate accounting, finance and compliance expertise. In particular, we have completed significant strategic transactions in recent periods, including the XTI Merger and the Drone Nerds acquisition, and we expect to continue integrating financial reporting processes, accounting policies, information systems and internal controls across these businesses. These integration activities may increase the risk of control deficiencies, including the risk that we may not be able to timely implement or maintain consistent accounting policies, procedures and systems, or that we may not be able to effectively remediate any deficiencies that are identified. If we identify material weaknesses or significant deficiencies in our internal controls, we may not be able to accurately report our financial results, prevent fraud, or timely file our periodic reports with the SEC. In addition, any failure to maintain effective disclosure controls and procedures or ICFR could result in errors in our financial statements, restatements of our financial results, delayed SEC filings, or the loss of investor confidence in our reported financial information. Any of these outcomes could adversely affect our stock price, our ability to access the capital markets, our relationships with lenders and business partners, and our business, financial condition and results of operations. Our business and operations expose us to numerous legal and regulatory requirements, including privacy, cybersecurity, surveillance, anti-corruption, trade compliance, import/export and other laws, and violations of these requirements could harm our business. In addition, our operations and supply chain expose us to geopolitical, economic and other risks associated with international business. We are subject to numerous U.S. federal, state and foreign legal and regulatory requirements, including laws relating to aviation and UAS operations, data privacy and protection, employment and labor relations, immigration, taxation, anti-corruption, import and export controls, trade restrictions, sanctions, internal control and disclosure obligations, securities regulation and competition laws. Compliance with diverse and evolving legal requirements is costly, time-consuming and requires significant management attention and resources. Violations of these requirements in the conduct of our business could result in significant fines, penalties, civil damages, criminal sanctions, restrictions on our operations, loss of licenses or certifications, reputational harm or other adverse consequences. Violations of regulatory requirements or contractual compliance obligations in connection with customer contracts, particularly public sector contracts, could also result in monetary damages, termination rights, suspension or debarment from government programs and other adverse outcomes. Although our principal operations are in the United States, our supply chain and certain customer relationships expose us to international risks. Our business may be affected by changes in geopolitical conditions, international trade policies, tariffs, sanctions, export controls, foreign exchange controls and other regulatory developments. Certain of the products we distribute are sourced from international suppliers and may be subject to evolving U.S. government restrictions or security reviews. Changes in such laws or policies could disrupt product availability, increase costs or limit our ability to sell certain products. 38 We and our business partners may also be subject to risks including: ● restrictions on the import or export of certain technologies or products; ● changing or conflicting international trade regulations; ● currency fluctuations; ● longer payment cycles or restrictions on repatriation of funds; ● political instability or regional conflicts; ● public health crises; ● natural disasters or infrastructure disruptions; and ● general economic or political volatility. Any of the foregoing risks could result in supply chain disruptions, increased costs, production delays, reduced demand, regulatory investigations or other business interruptions, which could have a material adverse effect on our business, financial condition and results of operations. Domestic and foreign regulation and enforcement of data privacy, cybersecurity, surveillance and data tracking technologies is expansive, broadly defined and rapidly evolving, and compliance with such regulation could result in additional costs and liabilities, restrict portions of our business, constrain our customers’ use of our products and services or limit the growth of our markets. Any actual or perceived failure by us to comply with data privacy regulations could result in proceedings, investigations, enforcement actions or penalties against us. Federal, state, municipal and foreign governments and agencies have adopted, and may in the future adopt, modify, interpret or enforce laws, regulations and policies governing privacy, data security, cybersecurity, geolocation data, biometric data, surveillance technologies, and the collection, storage, use, processing, transfer and disclosure of data associated with individuals. The scope of data regulated under these laws is often broadly defined, continues to evolve, and is subject to new applications and interpretations by regulators. As a result, we may be subject to investigations, audits, enforcement actions, litigation, fines, penalties or other liabilities if our data practices, cybersecurity measures, contractual terms, or the products and services we provide are alleged to violate applicable laws or regulatory expectations. Our UAS business distributes and supports drones, cameras, sensors and related software, and provides training, operational support and repair services. These products and services are frequently used by customers in ways that involve the collection, transmission, storage or analysis of data, including video, imagery, mapping data, telemetry and other operational information. Even where we do not control how customers deploy or use these technologies, we may face reputational, commercial or legal risk based on the end-use of the products we sell or service, including if our customers’ use of drones or related technologies is alleged to violate privacy laws, surveillance restrictions, data security requirements, or civil liberties laws. In addition, certain of our customers, including governmental and public-sector customers, may impose heightened contractual requirements relating to data security, cybersecurity, compliance certifications, or restrictions on the use of foreign-manufactured products, and failure to satisfy these requirements could limit our ability to compete for or retain business. 39 In the United States, privacy and data security regulation includes laws and regulations enforced by the Federal Trade Commission and state attorneys general, as well as a growing number of state privacy laws, including the California Consumer Privacy Act, as amended by the California Privacy Rights Act (“CCPA/CPRA”), and similar laws in other states. In addition, international laws and regulations, including the European Union General Data Protection Regulation (“GDPR”), may apply to certain of our activities depending on the nature and location of our customers, suppliers and business partners. These laws may impose obligations relating to disclosures, consent, data retention, data subject rights, cybersecurity safeguards, incident response, and restrictions on cross-border data transfers. Compliance with these requirements may require us to implement additional technical, administrative and operational measures, modify our product and service offerings, or incur increased legal, compliance and cybersecurity costs. Furthermore, any actual or perceived failure by us to comply with applicable data privacy laws or regulations could result in governmental investigations, enforcement actions, administrative proceedings, civil litigation, fines, penalties, consent decrees, or other sanctions. The regulatory environment relating to privacy, cybersecurity, surveillance technologies, and unmanned aircraft systems is rapidly evolving and remains uncertain. If new laws, regulations, or enforcement actions restrict the use of drones or related technologies in certain jurisdictions, or if customers become more reluctant to deploy such technologies due to privacy or security concerns, demand for our products and services could be reduced. Any of the foregoing could materially adversely affect our business, reputation, financial condition, results of operations and cash flows. Misuse of our products could harm our reputation and result in litigation, regulatory enforcement actions or reduced demand for our products and services. Our products and services, including drones, cameras, sensors, related software, training, and operational support services, may be misused by customers or third parties. For example, drones and related imaging technologies may be used in ways that violate privacy, surveillance, trespass, data protection, export control, or other laws, or in ways that are perceived as unethical or harmful, even where such use is outside of our control and not authorized by us. In addition, the data generated by drones, cameras, sensors, and other connected technologies may be combined with other information in ways that could increase privacy or security risks. Misuse of these products or data could result in negative press coverage, reputational harm, reduced customer demand, increased scrutiny by regulators, and the loss of business relationships. Certain of our customers may use our products and services in regulated environments, including public safety, critical infrastructure, and governmental operations, which may be subject to heightened legal requirements and public scrutiny. In some cases, we may rely on customers to implement required policies, permissions, notices, and safeguards, including those related to privacy and data protection. If we or our customers fail to comply with applicable laws, contractual requirements, or regulatory standards, we could be subject to litigation, regulatory investigations, enforcement actions, fines, penalties, or other liabilities, and our business, financial condition and results of operations could be materially adversely affected. 40 Risks Related to Our Securities Our failure to maintain compliance with the continued listing requirements of the Nasdaq Capital Market may result in our common stock being delisted from the Nasdaq Capital Market, which could negatively impact the price of our common stock, liquidity, our ability to access the capital markets and our stockholders’ ability to sell their shares. Our common stock is currently listed on the Nasdaq Capital Market (“Nasdaq”) under the symbol “XTIA.” The listing standards of Nasdaq provide that a company, in order to qualify for continued listing, must maintain a minimum stock price of $1.00 and satisfy standards relative to minimum stockholders’ equity, minimum market value of publicly held shares and various additional requirements. While our common stock is currently listed on Nasdaq, we can give no assurance that we will be able to maintain compliance with the continued listing requirements for Nasdaq. If we fail to maintain compliance with any such continued listing requirement, there can also be no assurance that we will be able to regain compliance with any such continued listing requirement in the future or that our common stock will not be delisted in the future. If Nasdaq delists our securities from trading on its exchange for failure to meet the listing standards, we and our stockholders could face significant negative consequences including: ● limited availability of market quotations for our securities; ● a determination that the common stock is a “penny stock” which would require brokers trading in the common stock to adhere to more stringent rules, possibly resulting in a reduced level of trading activity in the secondary trading market for shares of common stock; ● a limited amount of analyst coverage, if any; and ● a decreased ability to issue additional securities or obtain additional financing in the future. Delisting from Nasdaq could also result in other negative consequences, including the potential loss of confidence by suppliers, customers and employees, the loss of institutional investor interest and fewer business development opportunities. If our shares of common stock lose their status on Nasdaq, we believe that they would likely be eligible to be quoted on the inter-dealer electronic quotation and trading system operated by OTC Markets Group Inc., commonly referred to as the Pink Open Market and we may also qualify to be traded on their OTCQB market (The Venture Market). These markets are generally not considered to be as efficient as, and not as broad as, Nasdaq. Selling our shares on these markets could be more difficult because smaller quantities of shares would likely be bought and sold, and transactions could be delayed. In addition, in the event our shares are delisted, broker-dealers have certain regulatory burdens imposed upon them, which may discourage broker-dealers from effecting transactions in our common stock or even holding our common stock, further limiting the liquidity of our common stock. These factors could result in lower prices and larger spreads in the bid and ask prices for our common stock. Our stock price may be volatile, and your investment may suffer a decline in value as a result of the volatility of our stock. The market price of our common stock is likely to be highly volatile and could fluctuate widely in price in response to various factors, many of which are beyond our control, including the following: ● our ability to execute our business plan and complete prospective strategic transactions; ● changes in our industry; ● competitive pricing pressures; ● our ability to obtain working capital financing; ● additions or departures of key personnel; ● limited “public float” in the hands of a small number of persons whose sales or lack of sales could result in positive or negative pricing pressure on the market price for our common stock; ● sales of our common stock; 41 ● operating results that fall below expectations; ● changes in our capital structure; ● costs associated with our acquisitions of companies, assets and technologies; ● regulatory developments; ● economic and other external factors; ● period-to-period fluctuations in our financial results; ● our inability to develop or acquire new or needed technologies or news relating to such technologies; ● the public’s response to press releases or other public announcements by us or third parties, including filings with the SEC; ● changes in financial estimates or ratings by any securities analysts who follow our common stock, our failure to meet these estimates or failure of those analysts to initiate or maintain coverage of our common stock; ● the development and sustainability of an active trading market for our common stock; and ● any future sales of our common stock by our officers, directors and significant stockholders. In addition, the stock markets in general, and the markets for technology stocks in particular, have experienced significant volatility that has often been unrelated to the financial condition or results of operations of particular companies. These broad market fluctuations may adversely affect the trading price of our common stock and, consequently, adversely affect the price at which you could sell the shares that you purchase in this offering. In the past, following periods of volatility in the market or significant price declines, securities class-action litigation has often been instituted against companies. Such litigation, if instituted against us, could result in substantial costs and diversion of management’s attention and resources, which could materially and adversely affect our business, financial condition, results of operations and growth prospects. Offers or availability for sale of a substantial number of shares of our common stock may cause the price of our common stock to decline. If our stockholders sell substantial amounts of our common stock in the public market upon the expiration of any statutory holding period under Rule 144, or shares issued upon the exercise of outstanding options or warrants, it could create a circumstance commonly referred to as an “overhang” and, in anticipation of which, the market price of our common stock could fall. The existence of an overhang, whether or not sales have occurred or are occurring, also could make more difficult our ability to raise additional financing through the sale of equity or equity-related securities in the future at a time and price that we deem reasonable or appropriate. In general, a non-affiliated person who has held restricted shares for a period of six months, under Rule 144, may sell into the market our common stock all of their shares, subject to the Company being current in its periodic reports filed with the SEC. As of the date of this filing, a significant portion of our outstanding shares of common stock outstanding are free trading. Sales of our common stock or other securities, or the perception that future sales may occur, may cause the market price of our common stock to decline, even if our business is doing well. Sales of our common stock or other securities, or the perception that future sales may occur, may cause the market price of our common stock to decline, even if our business is doing well. Sales of substantial amounts of our common stock in the public market, or the perception that these sales could occur, could adversely affect the price of our common stock and could impair our ability to raise capital through the sale of additional shares. Historically, we have issued our securities to raise additional capital and used our shares of common stock to satisfy our outstanding debt obligations, and, in the future, we expect to continue to issue our securities to raise additional capital or satisfy outstanding debt obligations. The number of new shares of our common stock issued in connection with raising additional capital or satisfying our outstanding debt obligations could constitute a material portion of the then-outstanding shares of our common stock. The issuance or sale of such securities could depress the market price of our common stock. 42 There may be future sales or other dilution of our equity, which may adversely affect the market price of our common stock. Our articles of incorporation allows us to issue up to 500,000,000 shares of our common stock, par value $0.001 per share, and to issue and designate the rights of, without stockholder approval, up to 5,000,000 shares of preferred stock, par value $0.001 per share. To raise additional capital, we may in the future sell additional shares of our common stock or other securities convertible into or exchangeable for our common stock at prices that are lower than the prices paid by existing stockholders, and investors purchasing shares or other securities in the future could have rights superior to existing stockholders, which could result in substantial dilution to the interests of existing stockholders. The market price of our common stock could decline as a result of sales of common stock or securities that are convertible into or exchangeable for, or that represent the right to receive common stock or the perception that such sales could occur. In addition, to the extent that outstanding stock options or warrants have been or may be exercised or preferred stock converted or other shares issued, stockholders may experience further dilution. The Class B Units of XTI Drones Holdings, LLC issued in connection with our acquisition of Drone Nerds are exchangeable into shares of our common stock and will be automatically exchanged in February 2027, which will result in dilution to our existing stockholders. In connection with our November 2025 acquisition of Drone Nerds, we issued 6,524,576 Class B Units of XTI Drones Holdings, LLC to the sellers as part of the purchase consideration. The Class B Units are exchangeable into shares of our common stock on a one-for-one basis. Holders may exchange their Class B Units at any time after May 1, 2026. All outstanding Class B Units will be automatically exchanged into shares of our common stock on a one-for-one basis in February 2027, fifteen months after the acquisition closing date, regardless of the then-prevailing market price of our common stock. No additional consideration is payable upon exchange. The issuance of approximately 6.5 million shares of common stock upon exchange of the Class B Units will dilute the ownership interests of our existing stockholders by increasing the number of shares outstanding. The timing and volume of exchanges prior to the mandatory exchange date, and the mandatory exchange itself, could increase the supply of shares available for sale in the public market and may adversely affect the market price of our common stock. We may issue debt and equity securities or securities convertible into equity securities, any of which may be senior to our common stock as to distributions and in liquidation, which could negatively affect the value of our common stock. In the future, we may attempt to increase our capital resources by entering into debt or debt-like financing that is unsecured or secured by up to all of our assets, or by issuing additional debt or equity securities, which could include issuances of secured or unsecured commercial paper, medium-term notes, senior notes, subordinated notes, guarantees, preferred stock, hybrid securities, or securities convertible into or exchangeable for equity securities. In the event of our liquidation, our lenders and holders of our debt and preferred securities would receive distributions of our available assets before distributions to the holders of our common stock. Because our decision to incur debt and issue securities in future offerings may be influenced by market conditions and other factors beyond our control, we cannot predict or estimate the amount, timing or nature of our future offerings or debt financings. Further, market conditions could require us to accept less favorable terms for the issuance of our securities in the future. If our common stock is delisted, market liquidity for our common stock could be severely affected and our stockholders’ ability to sell their shares of our common stock could be limited. A delisting of our common stock from Nasdaq would negatively affect the value of our common stock. A delisting of our common stock could also adversely affect our ability to obtain financing for our operations and could result in the loss of confidence in our company. If our common stock becomes subject to the penny stock rules, it would become more difficult to trade our shares. The SEC has adopted rules that regulate broker-dealer practices in connection with transactions in penny stocks. Penny stocks are generally equity securities with a price of less than $5.00, other than securities registered on certain national securities exchanges or authorized for quotation on certain automated quotation systems, provided that current price and volume information with respect to transactions in such securities is provided by the exchange or system. If we do not retain a listing on Nasdaq, and if the price of our common stock is less than $5.00, our common stock will be deemed a penny stock. The penny stock rules require a broker-dealer, before a transaction in a penny stock not otherwise exempt from those rules, to deliver a standardized risk disclosure document containing specified information. In addition, the penny stock rules require that before effecting any transaction in a penny stock not otherwise exempt from those rules, a broker-dealer must make a special written determination that the penny stock is a suitable investment for the purchaser and receive (i) the purchaser’s written acknowledgment of the receipt of a risk disclosure statement; (ii) a written agreement to transactions involving penny stocks; and (iii) a signed and dated copy of a written suitability statement. These disclosure requirements may have the effect of reducing the trading activity in the secondary market for our common stock, and therefore stockholders may have difficulty selling their shares. 43 We do not intend to pay cash dividends to our stockholders, so it is unlikely that stockholders will receive any return on their investment in our Company prior to selling our stock. We have never paid any dividends to our common stockholders as a public company. We currently intend to retain any future earnings for funding growth and, therefore, do not expect to pay any cash dividends in the foreseeable future. If we determine that we will pay cash dividends to the holders of our common stock, we cannot assure that such cash dividends will be paid on a timely basis. The success of your investment in our Company will likely depend entirely upon any future appreciation. As a result, you will not receive any return on your investment prior to selling your shares in our Company and, for the other reasons discussed in this “Risk Factors” section, you may not receive any return on your investment even when you sell your shares in our Company. Some provisions of our articles of incorporation and bylaws may deter takeover attempts, which may inhibit a takeover that stockholders consider favorable and limit the opportunity of our stockholders to sell their shares at a favorable price. Our bylaws divide our board of directors into three classes, with members of each class serving staggered three-year terms. The classified board provision could increase the likelihood that, in the event an outside party acquired a controlling block of our stock, incumbent directors nevertheless would retain their positions for a substantial period, which may have the effect of discouraging, delaying, or preventing a change in control. In addition, under our articles of incorporation, our Board may issue additional shares of common stock or preferred stock. Our Board has the ability to authorize “blank check” preferred stock without future shareholder approval. This makes it possible for our Board to issue preferred stock with voting or other rights or preferences that could impede the success of any attempt to acquire us by means of a merger, tender offer, proxy contest or otherwise, including a transaction in which our stockholders would receive a premium over the market price for their shares and/or any other transaction that might otherwise be deemed to be in their best interests, and thereby protects the continuity of our management and limits an investor’s opportunity to profit by their investment in the Company. Specifically, if in the due exercise of its fiduciary obligations, the Board were to determine that a takeover proposal was not in our best interest, shares could be issued by our Board without stockholder approval in one or more transactions that might prevent or render more difficult or costly the completion of the takeover by: ● diluting the voting or other rights of the proposed acquirer or insurgent stockholder group, ● putting a substantial voting bloc in institutional or other hands that might undertake to support the incumbent Board, or ● effecting an acquisition that might complicate or preclude the takeover. These provisions of our articles of incorporation and bylaws, alone or together, could delay or prevent hostile takeovers and changes in control or changes in our management. Nevada Anti-Takeover Law may discourage acquirers and eliminate a potentially beneficial sale for our stockholders. We are subject to the provisions of Sections 78.411 to 78.444, inclusive, of the Nevada Revised Statutes, known as the “business combination” statute. This statute prevents many Nevada corporations from engaging in a business combination with any interested stockholder, under specified circumstances. For these purposes, a business combination includes a merger or sale of more than 5% of our assets, and an interested stockholder includes a stockholder who owns 10% or more of our outstanding voting stock, as well as affiliates and associates of these persons that, within two years prior to the combination, beneficially owned such percentage of the voting power. Under these provisions, this type of business combination is prohibited for up to four years following the date that the stockholder became an interested stockholder unless the transaction in which the stockholder became an interested stockholder is approved by the board of directors prior to the date the interested stockholder attained that status. Where the person becoming an interested stockholder was not approved in advance by the board of directors, the Nevada business combination statute imposes a basic moratorium of two years on business combinations unless they are approved by the board of directors and stockholders owning at least 60% of the outstanding voting power not beneficially owned by the interested stockholder and its affiliates and associates. After the two-year period, but before four years, combinations remain prohibited but may also be permitted if the interested stockholder satisfies certain requirements with respect to the aggregate consideration to be received by holders of outstanding shares in the combination. 44 We are also subject to the “acquisition of controlling interest” provisions of Sections 78.378 through 78.3793, inclusive, of the Nevada Revised Statutes, also known as the “control share” statute, which apply to “issuing corporations” that are Nevada corporations doing business, directly or through an affiliate, in Nevada, and having at least 200 stockholders of record, including at least 100 of whom have addresses in Nevada appearing on the stock ledger of the corporation. Under that statute, any person who acquires a controlling interest in a corporation may not exercise voting rights of any control shares unless such voting rights are conferred by a majority vote of the disinterested stockholders of the issuing corporation at a special meeting of such stockholders held upon the request and at the expense of the acquiring person. The statute applies to acquisition of a “controlling interest” in ownership of outstanding voting shares of an issuing corporation sufficient to enable the acquiring person, individually or in association with others, directly or indirectly, to exercise (i) one fifth or more but less than one third, (ii) one third or more but less than a majority or (iii) a majority or more of the voting power of the issuing corporation in the election of directors, and voting rights must be conferred by a majority of the disinterested stockholders as each threshold is reached and/or exceeded. In the event that the control shares are accorded full voting rights and the acquiring person acquires control shares with a majority or more of all the voting power, any stockholder, other than the acquiring person, who does not vote in favor of authorizing voting rights for the control shares is entitled to demand payment for the fair value of such person’s shares, and the corporation must comply with the demand. The Nevada control share statute does not apply to any acquisition of a controlling interest in an issuing corporation if the articles of incorporation or bylaws of the corporation in effect on the 10 th day following the acquisition of a controlling interest by the acquiring person provide that the provisions of those sections do not apply to the corporation or to an acquisition of a controlling interest specifically by types of existing or future stockholders, whether or not identified. Therefore, the board of directors of a Nevada corporation usually may unilaterally avoid the imposition of burdens imposed by the control share statute by amending the bylaws of the corporation in connection with a transaction. A Nevada corporation may impose stricter requirements if it so desires. These statutes could prohibit or delay mergers or other takeover or change in control attempts and, accordingly, may discourage attempts to acquire us. The limitation of liability, or our indemnification, of our officers and directors may cause us to use corporate resources in a manner that conflicts with the interests of our stockholders. Nevada law eliminates the personal liability of our directors and officers for damages as a result of an act or failure to act in that capacity unless a statutory presumption that such person acted in good faith, on an informed basis and with a view to the interests of the corporation has been rebutted. In addition, it must be proven both that the act or failure to act constituted a breach of a fiduciary duty as a director or officer and that such breach involved intentional misconduct, fraud or a knowing violation of law. This limitation may not affect the availability of equitable remedies, such as injunctive relief or rescission. Our Articles of Incorporation require us to indemnify our directors and officers to the fullest extent permitted by Nevada law, including in circumstances in which indemnification is otherwise discretionary under Nevada law. Nevada law generally permits indemnification of our directors, officers and others if the person either (i) acted in good faith and in a manner which he or she reasonably believed to be in or not opposed to the Company’s best interests, and, if the action is not by or in the right of the corporation and is with respect to any criminal proceeding, the person had no reasonable cause to believe that their conduct was unlawful, or (ii) is not liable under the Nevada statutory provision eliminating the liability of certain persons as described in the preceding paragraph. These persons may be indemnified against expenses, including attorneys’ fees, judgments, fines, penalties, including excise taxes, and amounts paid in settlement and costs, actually and reasonably incurred by the person in connection with the proceeding. If the person is adjudged by a court to be liable to the corporation, no indemnification will be made unless that or another court determines that the person is fairly and reasonably entitled to indemnity for such expenses as the court deems proper. Insofar as indemnification for liabilities under the Securities Act may be permitted to directors, officers or persons controlling us under the above provisions, we have been informed that, in the opinion of the SEC, such indemnification is against public policy as expressed in the Securities Act and is, therefore, unenforceable. 45 The obligations associated with being a public company require significant resources and management attention, which may divert from our business operations. We are subject to the reporting requirements of the Exchange Act and the Sarbanes-Oxley Act of 2002 (the “Sarbanes-Oxley Act”). The Exchange Act requires that we file annual, quarterly and current reports, proxy statements, and other information. The Sarbanes-Oxley Act requires, among other things, that we establish and maintain effective internal controls and procedures for financial reporting. Our principal executive officer and principal financial officer are required to certify that our disclosure controls and procedures are effective in ensuring that material information we are required to disclose in reports that we file or submit under the Exchange Act is recorded, processed, summarized and reported within the time periods specified in the SEC’s rules and forms. As a result, we incur significant legal, accounting and other expenses. Furthermore, the need to establish the corporate infrastructure demanded of a public company may divert management’s attention from implementing our growth strategy, which could prevent us from improving our business, results of operations and financial condition. We have made, and will continue to make, if necessary, changes to our internal controls and procedures for financial reporting and accounting systems to meet our reporting obligations as a public company. However, the measures we take may not be sufficient to satisfy our obligations as a public company. In addition, we cannot predict or estimate the amount of additional costs we may incur in order to comply with these requirements. We anticipate that these costs could materially increase our selling, general and administrative expenses. Section 404 of the Sarbanes-Oxley Act requires annual management assessments of the effectiveness of our internal control over financial reporting. In connection with the implementation of the necessary procedures and practices related to internal control over financial reporting, we may identify deficiencies. Additionally, in the event we are no longer a smaller reporting company, as defined under the Exchange Act, and we are unable to comply with the internal controls requirements of the Sarbanes-Oxley Act of 2002, then we may not be able to obtain the independent registered public accountants’ certifications required by that act, which may preclude us from keeping our filings with the SEC current, and interfere with the ability of investors to trade our securities and our shares to continue to be listed on the Nasdaq Capital Market. If we fail to establish and maintain an effective system of internal controls, we may not be able to report our financial results accurately or prevent fraud. Any inability to report and file our financial results accurately and timely could harm our reputation and adversely affect the trading price of our common stock. Effective internal controls are necessary for us to provide reliable financial reports and prevent fraud. If we cannot provide reliable financial reports or prevent fraud, we may not be able to manage our business as effectively as we would if an effective control environment existed, and our business and reputation with investors may be harmed. With each prospective acquisition we may make we will conduct whatever due diligence is necessary or prudent to assure us that the acquisition target can comply with the internal controls requirements of the Sarbanes-Oxley Act. Notwithstanding our diligence, certain internal controls deficiencies may not be detected. As a result, any internal control deficiencies may adversely affect our financial condition, results of operations and access to capital. We have not performed an in-depth analysis to determine if historical undiscovered failures of internal controls exist, and may in the future discover areas of our internal controls that need improvement. If we are unable to maintain effective internal controls, we may not have adequate, accurate or timely financial information, and we may be unable to meet our reporting obligations as a public company, including the requirements of the Sarbanes-Oxley Act, we may be unable to accurately report our financial results in future periods, or report them within the timeframes required by the requirements of the SEC, Nasdaq or the Sarbanes-Oxley Act. Failure to comply with the Sarbanes-Oxley Act, when and as applicable, could also potentially subject us to sanctions or investigations by the SEC or other regulatory authorities. Any failure to maintain or implement required new or improved controls, or any difficulties we encounter in their implementation, could result in identification of additional material weaknesses or significant deficiencies, cause us to fail to meet our reporting obligations or result in material misstatements in our financial statements. Furthermore, if we cannot provide reliable financial reports or prevent fraud, our business and results of operations could be harmed and investors could lose confidence in our reported financial information. Public company compliance may make it more difficult to attract and retain officers and directors. The Sarbanes-Oxley Act and rules implemented by the SEC have required changes in corporate governance practices of public companies. As a public company, these rules and regulations increase our compliance costs and may make it more difficult and expensive for us to maintain our director and officer liability insurance and we may be required to accept reduced policy limits and coverage or incur substantially higher costs to obtain the same or similar coverage. As a result, it may be more difficult for us to attract and retain qualified persons to serve on our Board or as executive officers, and to maintain insurance at reasonable rates, or at all. 46 If securities or industry analysts do not publish research or reports about our business, or if they change their recommendations regarding our stock adversely, our stock price and trading volume could decline. The trading market for our common stock relies in part on the research and reports that equity research analysts publish about us and our business. We do not control these analysts. The price of our common stock could decline if one or more equity research analysts downgrade our common stock or if they issue other unfavorable commentary or cease publishing reports about us or our business. We may be or may become the target of securities litigation, which is costly and time-consuming to defend. Following periods of market volatility in the price of a company’s securities or the reporting of unfavorable news, security holders may institute class action litigation. If the market value of our securities experience adverse fluctuations and we become involved in this type of litigation, regardless of the outcome, we could incur substantial legal costs and our management’s attention could be diverted from the operation of our business, causing our business to suffer.