XTI Aerospace, Inc. 10-K

ITEM 5: MARKET FOR REGISTRANT’S COMMON EQUITY, RELATED STOCKHOLDER MATTERS AND ISSUER PURCHASES OF EQUITY SECURITIES Market Information Our common stock currently trades under the symbol “XTIA” on the Nasdaq Capital Market. Holders of Record According to our transfer agent, as of March 31, 2026, we had approximately 1,600 shareholders of record of our common stock. This number does not include an indeterminate number of shareholders whose shares are held by brokers in street name. Our stock transfer agent is Computershare Trust Company, N.A., 150 Royall Street, Suite 101, Canton, MA 02021. Dividends We have not declared or paid any cash dividends on our common stock, and we currently intend to retain future earnings, if any, to finance the expansion of our business, therefore, we do not expect to pay any cash dividends in the foreseeable future. The decision whether to pay cash dividends on our common stock will be made by our Board, in their discretion, and will depend on our financial condition, results of operations, capital requirements and other factors that our Board considers significant. Holders of Series 4 Convertible Preferred Stock and Series 5 Convertible Preferred Stock will not be entitled to receive any dividends, unless and until specifically declared by our Board. Securities Authorized for Issuance under Equity Compensation Plans For information required by this item with respect to our equity compensation plans, please see Item 11 of this Annual Report. Recent Sales of Unregistered Securities and Use of Proceeds During the period covered by this Annual Report, we have not sold any equity securities that were not registered under the Securities Act that were not previously reported in a quarterly report on Form 10-Q or in a current report on Form 8-K. Purchases of Equity Securities by the Issuer and Affiliated Purchasers We had no share repurchase activity for the three months ended December 31, 2025. ITEM 6: [RESERVED] 51 ITEM 7: MANAGEMENT ’ S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS The following discussion and analysis of our financial condition and results of operations should be read in conjunction with the audited financial statements and related notes included elsewhere in this Annual Report on Form 10-K. In addition to historical information, this discussion and analysis here and throughout this Annual Report on Form 10-K contains forward-looking statements that involve risks, uncertainties and assumptions. Our actual results may differ materially from those anticipated in these forward-looking statements, due to a number of factors, including but not limited to, risks described in the section entitled “Risk Factors. ” OVERVIEW OF OUR BUSINESS XTI Aerospace, Inc. is a U.S.-based aerospace company focused on building and scaling a market-leading UAS solutions platform serving enterprise, public safety, government, and defense customers, while maintaining long-term optionality in advanced vertical lift aircraft development. The Company manages its operations through two reportable segments: Unmanned Aircraft Systems (“UAS”) and Commercial Aviation. These segments reflect the Company’s distinct business models, capital requirements and growth drivers. Our core business currently consists of: ● Unmanned Aircraft Systems - an established UAS solutions and services platform operated through our majority-owned subsidiary, XTI Drones Holdings, LLC, providing enterprise drone distribution, training, compliance management support, repair and maintenance, fleet sustainment and related services, and ● Commercial Aviation - a development-stage VTOL aircraft program focused on the TriFan 600, a fixed-wing aircraft design concept intended to combine the vertical takeoff and landing capability of a helicopter with the speed and range of a conventional business aircraft, operated through our wholly-owned subsidiary, XTI Aircraft Company. During 2024 and 2025, the Company underwent a series of transactions that changed our operating profile, revenue base, and capital allocation priorities. Corporate Transformation On March 12, 2024, we completed a merger (the “XTI Merger”) with XTI Aircraft Company (“Legacy XTI”) that was accounted for as a reverse acquisition, with Legacy XTI treated as the accounting acquirer and the Company (formerly Inpixon) treated as the accounting acquiree. As a result, our consolidated financial statements reflect (i) the historical financial statements of Legacy XTI prior to the closing date and (ii) the consolidated results of the combined company following the closing date. In November 2025, we completed the acquisition of Drone Nerds, LLC and Anzu Robotics, LLC (collectively, “Drone Nerds”) with Anzu Robotics, LLC having been affiliated with Drone Nerds, LLC (then known as Drone Nerds, Inc.) prior to the acquisition. The Company owns an 83.403% controlling interest in the XTI Drones Holdings subsidiary, with the remaining equity reflected as noncontrolling interest. The acquisition of Drone Nerds represents a significant strategic shift. Prior to the acquisition, our operations were primarily focused on our Inpixon Business and the development of the TriFan 600 aircraft and other aerospace technologies. With the acquisition of Drone Nerds, we transitioned our focus towards scaling Drone Nerds’ revenue-generating UAS solutions platform. Because Drone Nerds was acquired in November 2025, our consolidated results for the year ended December 31, 2025 include Drone Nerds’ results only from the acquisition date through year-end. Accordingly, GAAP revenues, cost of revenues, and operating expenses for 2025 do not reflect a full year of UAS operations at scale. In conjunction with the acquisition of Drone Nerds, we also recognized the challenge of the long-term financing requirements of developing a VTOL aircraft and the opportunities in the unmanned systems market in the near term. Late in 2025, we began building a core capability around the design, development, and production of unmanned platforms, with an emphasis on serving defense customers and supporting domestic procurement initiatives aligned with U.S. national security priorities. During December 2025, the Company committed to a plan to dispose of its historical Inpixon Business and classified the business as held for sale. The results of the Inpixon Business are presented as discontinued operations in the consolidated financial statements for all periods presented. As a result of these transactions, our current operating profile differs materially from prior periods, and historical results may not be fully comparable. Accordingly, in addition to reviewing our GAAP results, management evaluates performance and allocates capital with an emphasis on: 52 ● Revenue growth and channel mix within the UAS platform. ● Gross margin expansion through service attachment and lifecycle support. ● Working capital efficiency and liquidity management. ● Disciplined allocation of capital between UAS scaling initiatives and TriFan development. UAS Solutions Platform Through Drone Nerds, we operate an established enterprise-focused UAS solutions platform in the United States. Our operating model is designed to provide end-to-end UAS lifecycle capabilities across hardware distribution, operator training, compliance management support, repair and maintenance, fleet sustainment, and related support services. We operate an OEM-agnostic, multi-vendor ecosystem supporting more than 50 hardware and software manufacturers. This positioning enables us to serve enterprise and public sector customers navigating evolving regulatory requirements, supply chain considerations, and procurement restrictions. Our strategy is aligned with our broader Vertical Economy™ vision, which encompasses vertical lift technologies and supporting infrastructure across unmanned and manned aircraft platforms. While our long-term vision includes broader participation across the vertical lift ecosystem, our near-term operating focus is centered on scaling our UAS platform with disciplined capital allocation and margin optimization. We believe the UAS market is undergoing structural evolution driven by: ● Increasing enterprise adoption of drones for inspection, safety, and operational efficiency ● Regulatory developments affecting fleet eligibility and operational approvals ● Growing emphasis on secure and compliant procurement in government and defense channels ● Customer demand for integrated lifecycle solutions rather than standalone hardware transactions Our integrated model is designed to address these trends by positioning us as a long-term solutions partner rather than a transactional reseller. TriFan 600 VTOL Program As of early 2026, the TriFan 600 program has been paused. Whether and when development may resume will depend on a number of factors, including capital availability, market conditions for advanced air mobility, and the Company’s overall strategic priorities at the relevant time. While the TriFan 600 remains a strategic long-term asset within our broader vertical lift vision, our current revenue base and operating execution are centered on our UAS solutions platform. Capital Allocation and Liquidity Strategy During 2025, we completed multiple public offerings and a Series 10 Convertible Preferred Stock financing, which generated an aggregate of approximately $85.5 million in net proceeds, strengthening our liquidity and supporting our strategic initiatives, including the Drone Nerds acquisition and working capital stabilization. Our operating priorities are focused on: ● Strengthening and scaling our UAS platform. ● Improving margin profile and recurring revenue mix. ● Managing operating expenses and cash burn. ● Preserving long-term vertical lift optionality. Our near-term objective is to move toward improved operating cash flow sustainability within the UAS segment while maintaining disciplined investment in our other programs, which may require additional capital over time. 53 RECENT DEVELOPMENTS Sale of Inpixon Business . In February 2026, we completed the sale of our historical Inpixon Business, which had been classified as discontinued operations during the fourth quarter of 2025. The transaction furthered our strategic repositioning toward a focused aerospace and UAS platform. The final purchase price remains subject to customary post-closing adjustments. Board and Leadership Changes. Clinton Weber was elected to our Board of Directors at our 2025 annual meeting of stockholders held on December 30, 2025. In February 2026, we appointed Jonathan Ornstein to our Board of Directors. In addition, Soumya Das resigned from his position as Chief Executive Officer of the Inpixon Business and from the Company’s Board of Directors in connection with the disposition of that business. Asset-Based Credit Facility. In February 2026, we entered into a new secured asset-based revolving credit facility with JPMorgan Chase Bank, N.A. (the “ABL Facility”). The ABL Facility provides for a revolving line of credit of up to $20.0 million, subject to a borrowing base calculated primarily on eligible accounts receivable and inventory, and includes customary covenants and reporting requirements. Subject to lender approval and the terms of the underlying credit agreement, the facility may be increased by up to an additional $25.0 million. The ABL Facility is intended to enhance our working capital flexibility, support inventory procurement and growth within our UAS platform, and strengthen overall liquidity management. Borrowings under the facility bear interest at variable rates based on applicable benchmark rates plus an agreed margin. Warrant Exercises. Subsequent to December 31, 2025 and through the date of this filing, holders of certain warrants issued in connection with our 2025 public offerings exercised warrants to purchase 3,963,408 shares of the Company’s common stock. These exercises resulted in aggregate cash proceeds to us of approximately $7.9 million. We engaged ThinkEquity LLC as our exclusive advisor in connection with the solicitation of these warrants for which we paid cash compensation of 3% of the gross proceeds, or approximately $0.2 million. After deducting such commissions, the net proceeds we received from these warrant exercises was approximately $7.7 million. CRITICAL ACCOUNTING POLICIES AND ESTIMATES Our consolidated financial statements have been prepared in accordance with U.S. Generally Accepted Accounting Principles (“GAAP”). The preparation of these consolidated financial statements requires management to make estimates, judgments and assumptions that affect the reported amounts of assets, liabilities, revenues, expenses and related disclosures. We base these estimates on historical experience, current trends, and other factors that we believe are reasonable under the circumstances. Actual results may differ from these estimates, and such differences could be material. Our significant accounting policies are described in the notes to our audited consolidated financial statements included elsewhere in this Annual Report. We believe the following accounting estimates are critical to understanding our consolidated financial statements because they involve significant judgment, estimates and assumptions. Revenue Recognition We generate revenue primarily through our UAS solutions and services business, which includes the sale and distribution of UAS platforms, payloads, sensors, batteries, accessories and related equipment, as well as certain support services. Revenue is recognized in accordance with ASC 606, Revenue from Contracts with Customers. Revenue is recognized when control of the promised goods or services is transferred to the customer in an amount that reflects the consideration we expect to receive in exchange for those goods or services. Substantially all revenue is recognized at a point in time when control transfers to the customer, which generally occurs upon shipment for wholesale and direct sales transactions (FOB shipping point) or at the point of sale for retail transactions. Certain service-based offerings, including product protection programs, may be recognized over time; however, such amounts are not material to the consolidated financial statements. We generally act as principal in our sales arrangements and recognize revenue on a gross basis. In limited cases, we facilitate the sale of third-party service offerings (e.g., product protection programs), for which we act as an agent and recognize revenue on a net basis; however, such amounts are not material. The transaction price may include variable consideration, including volume discounts, rebates, and estimated product returns, which are recorded based on historical experience and current trends. Deferred revenue primarily represents amounts received from customers prior to shipment. 54 We record freight billed to customers in revenue, and related shipping and handling costs are included in cost of revenues. We have elected the practical expedient related to significant financing components, as our contracts generally do not include a period greater than one year between transfer of goods or services and payment. We also apply the practical expedient related to costs to obtain a contract and expense such costs as incurred when the amortization period would have been one year or less. The most significant estimates and judgments in our revenue recognition include: ● Estimation of returns and refund liabilities; ● Determination of whether certain arrangements contain variable consideration; ● Evaluation of whether revenue should be recognized at a point in time versus over time (where applicable); and ● Determination of when control transfers under shipping terms. Allowance for Credit Losses We maintain an allowance for credit losses for expected losses resulting from the inability of customers to make required payments. The allowance is based on historical loss experience, aging of receivables, specific customer credit evaluations, current economic conditions, and reasonable and supportable forecasts of future economic conditions. Because the majority of our revenue is generated from the sale and distribution of UAS platforms and related products to enterprise, commercial and governmental customers, changes in customer creditworthiness, economic conditions, or industry dynamics could impact the collectability of receivables. If actual customer payment patterns differ from management’s estimates, additional credit loss expense may be required. We also maintain credit insurance that further reduces our exposure to potential credit losses. Inventory Valuation Inventory represents a significant asset of the Company as of December 31, 2025 and consists primarily of finished goods, including drones and related accessories held for resale in the ordinary course of business. Inventory is stated at the lower of cost or net realizable value, with cost determined using the first-in, first-out method. The determination of net realizable value requires management to make significant estimates and judgments regarding future demand, market conditions, technological developments, and expected selling prices. The enterprise drone industry is characterized by rapid technological innovation, new product introductions, evolving regulatory frameworks, and changes in customer preferences. These factors increase the risk that certain inventory items may become obsolete or experience reduced demand prior to sale. Management evaluates inventory on a regular basis for excess, slow-moving, or obsolete items by analyzing historical sales trends, current backlog, forecasted demand, inventory aging, vendor product roadmaps, and anticipated technological changes. When the estimated net realizable value of inventory is lower than its recorded cost, the Company records a write-down (including a provision for inventory obsolescence) through cost of sales. Such write-downs establish a new cost basis and are not subsequently reversed if market conditions improve. As of December 31, 2025, all inventory relates to the Drone Nerds (UAS) segment and was recorded at its estimated net realizable value in connection with the Drone Nerds acquisition. No material inventory reserves or write-downs were recorded subsequent to the acquisition closing date. While management believes its assumptions and estimates are reasonable, actual results could differ materially due to changes in market conditions, customer demand, competitive pricing pressures, or product life cycles. A sustained decline in demand for key product lines, delays in new product launches, or accelerated technological obsolescence could result in additional inventory write-downs that would adversely affect gross margins and operating results in future periods. Business Combinations and Purchase Accounting We account for business combinations using the acquisition method of accounting. Under this method, the identifiable assets acquired and liabilities assumed are recorded at their estimated fair values as of the acquisition date. The excess of the purchase price over the fair value of identifiable net assets acquired is recorded as goodwill. 55 The determination of fair values requires significant judgment and estimation, including with respect to: ● Identifiable intangible assets and their estimated useful lives; ● Assumed discount rates, royalty rates and forecast assumptions used in valuation models; ● Expected future cash flows and market participant assumptions; and ● The valuation of contingent consideration or other acquisition-related liabilities, if applicable. Changes in assumptions used in purchase accounting could materially affect the amounts assigned to goodwill, intangible assets, depreciation and amortization expense, and future impairment analyses. The valuation of equity and debt instruments issued as consideration requires judgment regarding the fair value of the Company’s common stock, discount rates, and other market-based inputs at the acquisition date. Acquisition-related transaction costs are expensed as incurred. We may refine the purchase price allocation during the measurement period (up to one year from the acquisition date) as additional information becomes available. Valuation of Goodwill and Intangible Assets Goodwill and indefinite-lived intangible assets, if any, are evaluated for impairment at least annually as of October 1, or more frequently if events or changes in circumstances indicate that it is more likely than not that an impairment exists. Long-lived assets and finite-lived intangible assets are reviewed for impairment whenever events or changes in circumstances indicate that their carrying amounts may not be recoverable. For long-lived assets held and used, recoverability is assessed by comparing the carrying amount of the asset group to the expected undiscounted future cash flows expected to be generated by the asset group. If the carrying amount exceeds the undiscounted cash flows, an impairment charge is recorded for the amount by which the carrying value exceeds fair value. For goodwill impairment testing, we compare the estimated fair value of the reporting unit to its carrying value. Fair value is typically estimated using discounted cash flow models and, when appropriate, market-based valuation approaches. These analyses require significant judgment and are sensitive to changes in assumptions, including: ● Forecasted revenue growth rates and margins; ● Expected future cash flows; ● Discount rates; ● Long-term growth rates; and ● Market multiples and comparable company inputs. Impairment of Goodwill and Long-Lived Assets During the year ended December 31, 2025, the Company identified triggering events related to the Inpixon Business, including continued operating losses, negative cash flows, and management’s decision to pursue a disposition of the business. The Company performed a quantitative goodwill impairment test in accordance with ASC 350 and determined that the carrying value of the reporting unit exceeded its estimated fair value. As a result, the Company recorded a goodwill impairment charge of approximately $4.0 million during 2025. In addition, the Company evaluated definite-lived intangible assets and other long-lived assets for recoverability in accordance with ASC 360. Based on this analysis, the Company recorded impairment charges of approximately $0.6 million. These impairments reflect the write-down of asset groups to their estimated fair value. In December 2025, management committed to a plan to dispose of the Inpixon Business and classified the disposal group as held for sale. Upon classification, the disposal group was measured at the lower of carrying value or fair value less costs to sell in accordance with ASC 360, resulting in an additional impairment charge of approximately $5.9 million. The fair value of the affected asset groups and disposal group was determined using an income approach based on estimated future cash flows, which required significant judgment, including assumptions related to revenue growth, margins, and discount rates. 56 All impairment charges recognized during 2025 relate to the Inpixon Business and are presented within loss from discontinued operations in the consolidated statements of operations. Deferred Income Taxes and Valuation Allowances We account for income taxes in accordance with ASC 740, Income Taxes. Deferred tax assets and liabilities are recognized for temporary differences between the financial statement carrying values of assets and liabilities and their respective tax bases. We assess the realizability of deferred tax assets and establish a valuation allowance when it is more likely than not that some portion or all of the deferred tax assets will not be realized. The evaluation of whether a valuation allowance is required is based on all available positive and negative evidence, including: ● Historical taxable income or losses; ● Forecasted future taxable income; ● Reversal patterns of temporary differences; ● Tax planning strategies; and ● The ability to utilize net operating loss carryforwards and tax credit carryforwards. Because our ability to realize deferred tax assets is dependent upon the generation of future taxable income, changes in our forecasts or business performance could materially impact our valuation allowance and income tax expense. We also recognize liabilities for uncertain tax positions when it is more likely than not that the tax position will not be sustained upon examination, and we measure such liabilities based on the largest amount of benefit that is more likely than not to be realized. Fair Value Measurements and Accounting for Financial Instruments We use significant judgment in the accounting for certain financial instruments, including those issued in connection with equity and debt financings. Certain instruments may require classification as liabilities and measurement at fair value, with changes in fair value recognized in earnings. Fair value measurements may require the use of valuation techniques, including option pricing models, which involve significant assumptions such as expected volatility, risk-free interest rates, expected term, and probability of certain events. Because these assumptions can be subjective and sensitive to market conditions, changes in assumptions could materially affect the carrying values of these instruments and the related gains or losses recognized in our consolidated statements of operations. Stock-Based Compensation We account for stock-based compensation in accordance with ASC 718, Compensation—Stock Compensation. Stock-based compensation expense is recognized over the requisite service period and is based on the grant date fair value of the awards. The fair value of stock options is generally estimated using an option pricing model, which requires assumptions such as: ● Expected volatility; ● Expected term; ● Risk-free interest rate; and ● Expected dividends. These assumptions require judgment and could materially impact the amount of stock-based compensation expense recognized. 57 RESULTS OF OPERATIONS Overview and Comparability Considerations Our results of operations for the year ended December 31, 2025 reflect the impact of several transactions, including the acquisition of Drone Nerds in November 2025 and our decision to dispose of the historical Inpixon Business and classification of that business as held for sale, which is presented as discontinued operations. As a result, period-to-period comparisons may not fully reflect the operating scale and revenue profile of the Company following the Drone Nerds acquisition. Corporate and Public Company Costs Following the XTI Merger in March 2024 and our subsequent strategic transactions in 2025, we incurred corporate and public company costs associated with operating as a Nasdaq-listed company, executing capital raises, and completing acquisition-related activity. Corporate costs include executive management, finance, legal, compliance, investor relations, audit, and other public company-related professional fees. Corporate expenses also include stock-based compensation, which is non-cash in nature but can be material in periods involving significant equity-based awards, capital raising activity, or other strategic transactions. During 2025, corporate expenses also included certain non-recurring items, such as transaction costs, integration-related costs, and other costs associated with strategic activities. Discontinued Operations (Inpixon Business) The results of the Inpixon Business are presented as discontinued operations in our consolidated financial statements for all periods presented. Unless otherwise indicated, the discussion below relates to continuing operations. Consolidated GAAP Results of Operations (Continuing Operations) Revenues Revenues for the year ended December 31, 2025 reflect the Company’s UAS solutions and services operations following the Drone Nerds acquisition in November 2025, as well as other continuing operations. Revenues for the comparable period in 2024 primarily reflect the historical results of Legacy XTI, a development-stage aircraft company. Accordingly, year-over-year comparisons are not necessarily indicative of the operating scale of the Company following the acquisition. We expect that revenue growth and mix in future periods will be influenced primarily by the performance of Drone Nerds, including channel mix, enterprise and public sector demand, service attachment rates, and product availability across OEM partners. Cost of Revenues and Gross Profit Cost of revenues consists primarily of product costs associated with UAS hardware and accessories, as well as labor and other direct costs associated with repair, maintenance, training, and other service offerings. Gross margin is influenced by product mix, pricing discipline, inventory and vendor cost dynamics, channel mix (including enterprise versus wholesale and retail), and the relative contribution of higher-margin services. We believe expanding service penetration and lifecycle support offerings may improve gross margin stability over time. Operating Expenses Operating expenses consist primarily of research and development, sales and marketing, and general and administrative expenses. Research and development expenses are primarily attributable to the TriFan 600 VTOL aircraft development program. These costs include personnel-related expenses, engineering and technical consulting fees, prototype and testing costs, software and tooling expenses, and other costs incurred in connection with aircraft development and certification planning. R&D spending may fluctuate based on the timing and scope of development activities and available funding. Sales and marketing expenses consist primarily of personnel costs, advertising and marketing programs, trade shows, and other customer acquisition and relationship management activities. Following the Drone Nerds acquisition, sales and marketing spending is expected to reflect the scale of the UAS business, including enterprise and public sector sales efforts. 58 General and administrative expenses consist primarily of personnel-related costs for executive, finance, legal, and administrative functions, as well as professional fees, insurance, facilities, and public company costs. General and administrative expenses also include stock-based compensation and transaction-related costs, which may be significant in periods involving capital raises, acquisitions, or other strategic transactions. Other Income (Expense) Other income (expense) consists primarily of interest expense, changes in fair value of certain financial instruments, gains or losses related to extinguishment or modification of debt, and other non-operating items. During 2025, our other income (expense) was materially influenced by financing and capital markets activity, including instruments issued in connection with public offerings and the Series 10 Convertible Preferred Stock financing, as well as fair value remeasurement of certain liabilities. These items can create significant period-to-period volatility and may not be indicative of core operating performance. Income Taxes We recorded income tax expense (benefit) primarily related to state minimum taxes and other items. We maintain valuation allowances against substantially all of our deferred tax assets due to historical losses and uncertainty regarding future taxable income. Unaudited Pro Forma Financial Information (Supplemental) Because Drone Nerds was acquired in November 2025, our consolidated results for the year ended December 31, 2025 include only a partial period of Drone Nerds operations. For informational purposes, we have included unaudited pro forma condensed combined financial information in the notes to our consolidated financial statements, which is presented as if the acquisition had occurred on January 1, 2024. Year Ended December 31, 2025 compared to the Year Ended December 31, 2024 Comparability of Financial Information On March 12, 2024, we completed the XTI Merger, which was accounted for as a reverse acquisition with Legacy XTI treated as the accounting acquirer and the Company (formerly Inpixon) treated as the accounting acquiree. As a result, our consolidated financial statements reflect (i) the historical financial statements of Legacy XTI prior to the closing date and (ii) the consolidated results of the combined company from the closing date forward. Accordingly, the year ended December 31, 2024 reflects the historical operations of Legacy XTI, a development-stage aircraft company with no revenue, together with the corporate-level expenses of the public company. The year ended December 31, 2025 reflects the operations of the combined company, including revenue generated from our UAS solutions platform following the acquisition of Drone Nerds in November 2025. In addition, during December 2025, we committed to a plan to dispose of our historical Inpixon Business, which is presented as discontinued operations for all periods presented. As a result of these transactions, period-to-period comparisons may not be fully comparable. The following table presents selected consolidated results of continuing operations: For the Years Ended 2025 2024 (in thousands, except percentages) Amount Amount $ Change % Change Revenues $ 22,490 $ — $ 22,490 ** Cost of revenues 17,569 — 17,569 ** Gross profit 4,921 — 4,921 ** Operating expenses 47,742 29,667 18,075 61 % Loss from continuing operations (42,821 ) (29,667 ) (13,154 ) 44 % Other income (expense) (10,225 ) 1,414 (11,639 ) (823 )% Income tax benefit (provision) 10 (16 ) 26 (163 )% Net loss from continuing operations $ (53,036 ) $ (28,269 ) $ (24,767 ) 88 % ** Comparisons between positive and negative numbers and with a zero are not meaningful. 59 Revenues Revenues for the year ended December 31, 2025 were $22.5 million, reflecting revenue generated by our UAS solutions platform following the acquisition of Drone Nerds in November 2025. Accordingly, revenues for 2025 represent only the period from the acquisition date through December 31, 2025. The Company did not generate revenue during 2024, as Legacy XTI was a development-stage aircraft company focused on the TriFan 600 program. Cost of Revenues and Gross Profit Cost of revenues for the year ended December 31, 2025 was $17.6 million, resulting in gross profit of $4.9 million and a gross margin of approximately 21.9%. The gross margin reflects the product mix and operating model of the UAS distribution and services business, which includes hardware sales, accessories, and related support services. There were no revenues or cost of revenues in 2024. Future gross margin performance will be influenced by product mix, service attachment rates, pricing discipline, vendor cost dynamics, and channel mix. Operating Expenses Operating expenses for the year ended December 31, 2025 were $47.7 million, an increase of $18.1 million, or 61%, compared to $29.7 million in 2024. The increase was primarily attributable to: ● Higher general and administrative expenses associated with operating as a public company for a full year in 2025, including increased legal, accounting, audit, insurance, compliance, and investor relations costs. ● Increased personnel-related expenses, including stock-based compensation. ● Costs associated with capital raising activities and strategic transactions completed during 2025. ● Operating expenses attributable to the acquired Drone Nerds business from the acquisition date through year-end. ● Investment in research and development related to the TriFan 600 program. During 2024, operating expenses included costs associated with the XTI Merger, including $6.5 million of merger and acquisition transaction costs. These costs were lower in 2025; however, this decrease was more than offset by the factors described above. Loss from Continuing Operations Loss from continuing operations increased to $42.8 million in 2025 from $29.7 million in 2024. The increase was driven primarily by the increase in operating expenses discussed above, partially offset by the contribution of gross profit from the UAS business in 2025. Other Income (Expense) Other income (expense) was a net expense of $10.2 million in 2025 compared to net income of $1.4 million in 2024. 60 The 2025 expense was primarily attributable to: ● $6.6 million of warrant issuance expense related to financing transactions completed during the year, ● $2.0 million expense related to a full allowance for expected credit losses on the Company’s convertible promissory note investment in Valkyrie Sciences Holdings LLC. The investment was made in October 2025 as part of the Company’s broader strategic initiative to expand its capabilities in artificial intelligence and advanced technologies and was not primarily intended to generate returns through near-term repayment of contractual cash flows. As of December 31, 2025, based on information available to management, including the issuer’s limited operating history, lack of near-term revenue, and dependence on future financing, the Company determined that collection of substantially all contractual cash flows associated with the note was not expected. Accordingly, a full allowance for expected credit losses was recorded in accordance with ASC 326. The recognition of this allowance reflects the application of the expected credit loss model to the debt instrument and does not represent a reassessment of the Company’s original strategic rationale for the investment or its view of the potential long-term value associated with its relationship with Valkyrie, ● $0.6 million change in fair value of warrant liabilities, ● $0.4 million loss on extinguishment of debt, and ● $0.3 million decrease in the fair value of certain investments and related instruments. These items were partially offset by lower interest expense compared to 2024. In contrast, 2024 included a significant $12.9 million gain related to the change in fair value of convertible notes accounted for under the fair value option, partially offset by inducement losses on debt conversions and other financing-related costs. The absence of a comparable fair value gain in 2025 contributed to the year-over-year decline. Other income (expense) may fluctuate significantly in future periods based on financing activities and fair value remeasurement of certain financial instruments. Income Taxes Income tax benefit (provision) was approximately $0.01 million in 2025 compared to an income tax provision of $0.02 million in 2024. Income taxes for both periods primarily reflect state minimum taxes and other immaterial items. We continue to maintain a valuation allowance against substantially all deferred tax assets. Segment Results of Operations Beginning in November 2025, the Company operates through two reportable segments: UAS and Commercial Aviation. The UAS segment reflects the operations of Drone Nerds beginning on November 10, 2025, while the Commercial Aviation segment includes activities related to the development of the TriFan 600 aircraft program. Beginning in fiscal year 2026, the Company expects that its operating structure and internal management reporting may evolve to reflect the continued development of its UAS solutions, advanced systems and defense, and domestic manufacturing and technology activities. As a result, the Company anticipates that its reportable segments may be modified in future periods to align with how management evaluates performance and allocates resources. Any such changes will be reflected in the Company’s financial reporting beginning in the period in which they occur. UAS Segment For the year ended December 31, 2025, the UAS segment generated revenue of approximately $22.5 million and gross profit of approximately $4.9 million. Operating expenses for the UAS segment consisted primarily of sales and marketing expenses associated with distribution activities and general and administrative expenses required to support the operations of Drone Nerds following the acquisition. Commercial Aviation Segment The Commercial Aviation segment did not generate revenue during the year ended December 31, 2025 as the Company continued to focus on development of the TriFan 600 aircraft. Operating expenses for this segment consisted primarily of research and development costs related to engineering, design and certification activities, as well as general corporate expenses supporting ongoing development efforts. 61 Discontinued Operations During December 2025, the Company committed to a plan to dispose of its Inpixon Business and initiated an active process to identify a buyer. The Company completed the sale of the Inpixon Business on February 3, 2026 for total consideration of approximately $5.5 million. The Inpixon Business is presented as discontinued operations for all periods shown. Loss from discontinued operations was $15.5 million for the year ended December 31, 2025, compared to $7.3 million in 2024. The 2025 loss includes approximately $10.5 million of impairment charges, consisting primarily of goodwill and intangible asset impairments recognized in connection with the Company’s decision to dispose of the business and its classification as held for sale. Excluding impairment charges, the Inpixon Business continued to generate operating losses, reflecting ongoing negative cash flows and the Company’s strategic decision to exit the business. Net cash used in operating activities of discontinued operations was approximately $4.4 million for the year ended December 31, 2025, consistent with the Company’s historical operating losses for this business. The disposition of the Inpixon Business represents a strategic shift that allows the Company to focus its resources on its core UAS and aerospace development operations, following losses of $15.5 million and $7.3 million for the years ended December 31, 2025 and 2024, respectively. Unaudited Pro Forma Financial Information (Supplemental) Because the acquisition of Drone Nerds was completed on November 10, 2025, our consolidated results for the year ended December 31, 2025 include only a partial period of Drone Nerds operations. As a result, our reported GAAP results for 2025 do not reflect a full year of UAS platform operations. To provide additional context regarding the scale of the combined business, we have presented unaudited pro forma consolidated financial information as if the Drone Nerds acquisition had occurred on January 1, 2024. The unaudited pro forma information is presented for comparative purposes only and is not necessarily indicative of: ● The results of operations that would have been achieved had the acquisition been completed on the assumed date; ● The actual results of the combined company for any future period; or ● The Company’s expected future operating performance. The pro forma results reflect adjustments that are directly attributable to the acquisition and factually supportable, including: ● Incremental amortization expense related to acquired intangible assets; ● Interest expense associated with acquisition-related indebtedness; ● Elimination of transaction costs directly attributable to the acquisition; and ● Conforming accounting policy adjustments, where applicable. The pro forma results provide additional information regarding the revenue scale and gross margin profile of the combined business relative to our reported GAAP results for 2025, which include only a partial period of operations following the acquisition. The pro forma information does not reflect potential cost savings, integration benefits, operational synergies, changes in capital structure subsequent to the acquisition, or the impact of future strategic initiatives. 62 For the Years Ended 2025 2024 (in thousands, except percentages) Amount Amount $ Change % Change Revenues $ 121,590 $ 111,201 $ 10,389 9 % Cost of revenues 94,806 93,868 938 1 % Gross profit 26,784 17,333 9,451 55 % Operating expenses 54,291 37,463 16,828 45 % Loss from operations (27,507 ) (20,130 ) (7,377 ) 37 % Other income (expense) (11,545 ) (3,802 ) (7,743 ) 204 % Income tax benefit (provision) 10 (16 ) 26 (163 )% Pro forma net loss from continuing operations (39,0422 ) (23,948 ) (15,094 ) 63 % Non-cash or infrequent items: Warrant issuance expense 6,580 — Change in fair value of warrant liability 596 281 Change in fair value of equity securities 349 1,068 Loss on extinguishment of debt 421 — Provision for credit losses on investments 2,039 — Stock-based compensation 11,507 3,943 Amortization of intangible assets 916 915 Adjusted Pro Forma Net Loss (Non-GAAP) $ (16,634 ) $ (17,741 ) $ 1,107 (6 )% Pro forma Margins: Gross margins 22 % 16 % Adjusted Pro Forma Net Loss Margin (Non-GAAP) (14 )% (16 )% ** Comparisons between positive and negative numbers and with a zero are not meaningful. Interpretation of Pro Forma Results For the year ended December 31, 2025, pro forma revenues were $121.6 million compared to $111.2 million for 2024, representing an increase of approximately 9%. Pro forma gross profit increased to $26.8 million from $17.3 million, and pro forma gross margin improved to 22% from 16%. The improvement in pro forma gross margin was driven primarily by favorable pricing dynamics and a shift in sales mix toward higher-margin enterprise customers, which more than offset increases in input costs, including tariffs, during the period. Operating expenses on a pro forma basis increased to $54.3 million in 2025 from $37.5 million in 2024. The increase reflects continued investment in infrastructure, personnel, public company costs, and development activities, including the TriFan 600 program. Pro forma net loss from continuing operations was $39.0 million for 2025 compared to $23.9 million in 2024. Pro Forma Non-GAAP Measure We also present pro forma non-GAAP net loss, which reflects pro forma results further adjusted to exclude certain non-cash or infrequent items that management believes are not indicative of core operating performance. As a result, Adjusted Pro Forma Net Loss (Non-GAAP) differs from pro forma net loss as it excludes additional non-cash and non-recurring items beyond those reflected in the pro forma adjustments. These items include: ● Warrant issuance expense; ● Changes in fair value of warrant liabilities; ● Changes in fair value of certain investments and related instruments; ● Loss on extinguishment of debt; ● Provision for credit losses on investments; ● Stock-based compensation; and ● Amortization of acquired intangible assets. 63 Adjusted Pro Forma Net Loss (Non-GAAP) was $17.3 million in 2025 compared to $17.7 million in 2024. This non-GAAP measure is intended to supplement, and not be considered as a substitute for, the most directly comparable GAAP measure. Adjusted Pro Forma Net Loss (Non-GAAP) has limitations as an analytical tool and may not be comparable to similarly titled measures used by other companies. LIQUIDITY AND CAPITAL RESOURCES Overview During 2025, the Company completed multiple capital raising transactions that materially strengthened its balance sheet and liquidity profile. These transactions included approximately $62.8 million of aggregate net proceeds from public equity offerings and warrant exercises and approximately $22.8 million of net proceeds from the issuance of Series 10 Convertible Preferred Stock. As a result of these transactions, cash and cash equivalents increased to approximately $16.7 million as of December 31, 2025, and the Company reported working capital of approximately $4.2 million, compared to a working capital deficit of approximately $8.8 million as of December 31, 2024. Working capital at December 31, 2025 includes approximately $22.6 million of derivative warrant liabilities. These instruments are non-cash financial liabilities that are required to be measured at fair value under GAAP and do not represent contractual cash obligations. Excluding these derivative warrant liabilities, working capital would have been approximately $26.8 million. The breakdown of our overall working capital is as follows (in thousands): Working Capital December 31, 2025 December 31, 2024 $ Change Current Assets Cash and cash equivalents $ 16,696 $ 3,972 $ 12,724 Accounts receivable, net 12,093 — 12,093 Other receivables — 513 (513 ) Inventories 15,400 — 15,400 Prepaid expenses and other current assets 3,989 888 3,101 Current assets of discontinued operations 3,645 3,208 437 Total Current Assets 51,823 8,581 43,242 Current Liabilities Accounts payable and related party payables 5,212 5,241 (29 ) Accrued expenses and other current liabilities 6,165 6,071 94 Accrued interest 391 522 (131 ) Customer deposits 3,071 1,350 1,721 Warrant liability 22,561 — 22,561 Operating lease obligation, current 550 88 462 Short-term debt 7,931 2,657 5,274 Current liabilities of discontinued operations 1,722 1,492 230 Total Current Liabilities 47,603 17,421 30,182 Net Working Capital (Deficit) $ 4,220 $ (8,840 ) $ 13,060 Total current assets increased to approximately $51.8 million at December 31, 2025, compared to approximately $8.6 million at December 31, 2024, primarily reflecting the addition of accounts receivable and inventories associated with the November 2025 acquisition of Drone Nerds, as well as higher cash balances resulting from capital raising activities during the year. 64 Total current liabilities increased to approximately $47.6 million at December 31, 2025, compared to approximately $17.4 million at December 31, 2024. The increase was primarily attributable to: ● Recognition of derivative warrant liabilities ● Higher short-term debt associated with the Drone Nerds acquisition ● Increased customer deposits and operating liabilities Credit Facility In February 2026, subsequent to year-end, Drone Nerds, LLC and Anzu Robotics, LLC, each a subsidiary of the Company, entered into a secured asset-based revolving credit facility providing for borrowings of up to $20.0 million, subject to a borrowing base of eligible accounts receivable and inventory. The facility has a maturity date in 2029 and includes an accordion feature that permits the Company, subject to lender approval and customary conditions, to increase total commitments by up to an additional $25.0 million. The facility is intended to support working capital needs of the Company’s UAS operations and general corporate purposes. Liquidity Outlook The Company’s liquidity strategy is focused on maintaining sufficient operating capital to support its enterprise drone distribution business while continuing to develop unmanned platforms for defense and commercial applications Near-term liquidity is expected to be supported by cash on hand, operating cash flows from the Drone Nerds business, and availability under the Company’s asset-based revolving credit facility. The Company does not currently expect to require additional capital to support the ordinary-course operating needs of the Drone Nerds business. However, the Company may seek additional capital in the future to support strategic acquisitions and the development of its advanced systems and domestic manufacturing initiatives. Over the longer term, any future resumption of the TriFan 600 program will require additional capital. Contractual Obligations and Commitments The Company’s contractual obligations consist primarily of operating lease liabilities, short-term debt and acquisition-related promissory notes, and vendor commitments incurred in the ordinary course of business. As of December 31, 2025, total operating lease liabilities were approximately $3.0 million, of which approximately $0.6 million is due within the next twelve months. In addition, the Company had short-term debt and acquisition-related promissory note obligations of approximately $7.9 million, representing scheduled principal payments due within one year. The Company also maintains customary vendor purchase commitments associated with inventory procurement and operating agreements within its Drone Nerds distribution business. These commitments are generally short-term in nature and consistent with normal operating requirements. Customer Deposits As of December 31, 2025, customer deposits totaled approximately $3.1 million. Customer deposits consist of (i) refundable and conditional deposits received in connection with aircraft pre-orders and (ii) advance payments received in the ordinary course of business from customers of the Drone Nerds distribution operations. Aircraft-related deposits are generally refundable until a definitive purchase agreement is executed. If a significant number of customers request refunds, it could adversely impact liquidity. 65 Deposits received in the Drone Nerds business are typically short-term in nature and relate to standard commercial sales arrangements, including advance payments for inventory orders. These deposits are recognized as revenue upon transfer of control of the related goods. Risks and Uncertainties As of December 31, 2025, the Company had working capital of approximately $4.2 million (approximately $26.8 million excluding derivative warrant liabilities) and cash and cash equivalents of approximately $16.7 million. During 2025, the Company incurred a net loss of approximately $68.5 million and used approximately $36.6 million of cash in operating activities. In November 2025, the Company completed the acquisition of Drone Nerds, a historically EBITDA-profitable drone distribution business. Management expects the Drone Nerds operations to contribute positive operating cash flows; however, consolidated operating results remain subject to variability in sales volumes, gross margins, inventory turnover, and broader market conditions affecting enterprise and commercial drone demand, as well as risks associated with the ongoing integration of Drone Nerds into the Company’s operations. The Company has currently paused development activities related to the TriFan 600 aircraft program. Any future resumption of development activities related to the TriFan 600 program would be expected to require additional capital. Management may continue to pursue a range of potential funding alternatives, including equity or debt financing, strategic partnerships, joint ventures, government incentives and other potential sources of capital in connection with any such future resumption. During 2025, the Company strengthened its liquidity through multiple capital raises, including approximately $62.8 million of aggregate net proceeds from public equity offerings and warrant exercises and approximately $22.8 million of net proceeds from the issuance of Series 10 Convertible Preferred Stock. In addition, in February 2026, the Company entered into a secured asset-based revolving credit facility providing for borrowings of up to $20.0 million, subject to a borrowing base. Based on December 31, 2025 balances, the Company estimates borrowing availability under the facility of approximately $14.5 million, subject to customary borrowing base limitations. The Company had no outstanding borrowings under its revolving credit facility as of December 31, 2025. As of December 31, 2025, the Company had approximately 23 million outstanding warrants with an exercise price of $2.00 per share. If fully exercised for cash, these warrants would provide aggregate gross proceeds of approximately $46.0 million; however, exercise is at the discretion of the holders and dependent on market conditions. Subsequent to year-end, certain warrant holders have exercised warrants, resulting in cash proceeds to the Company, net of solicitation commissions paid to ThinkEquity LLC, of approximately $7.7 million. While additional warrant exercises may occur depending on market conditions, the timing and amount of any such future exercises cannot be predicted. Management believes that existing liquidity is sufficient to support current operating requirements for at least the next twelve months. This assessment is based on current operating plans and assumptions, including the Company’s ability to manage expenditures and utilize available sources of liquidity, including cash on hand and borrowing availability under its credit facility. Historical Cash Flows The Company’s net cash flows used in operating, investing and financing activities for the years ended December 31, 2025 and 2024 and certain balances as of the end of those periods are as follows (in thousands): For the Years Ended December 31, 2025 2024 Net cash used in operating activities $ (36,611 ) $ (22,307 ) Net cash (used in) provided by investing activities (18,762 ) 2,853 Net cash provided by financing activities 68,210 23,564 Effect of foreign exchange rate changes on cash (23 ) (10 ) Net increase in cash and cash equivalents $ 12,814 $ 4,100 66 As of December 31, As of December 31, 2025 2024 Cash and cash equivalents $ 16,696 $ 3,972 Working capital (deficit) $ 4,220 $ (8,840 ) Operating Activities for the year ended December 31, 2025 Net cash used in operating activities was approximately $36.6 million for the year ended December 31, 2025, compared to approximately $22.3 million for the year ended December 31, 2024. Included in operating cash flows for the year ended December 31, 2025 is approximately $4.4 million of cash used in operating activities related to discontinued operations (Inpixon Business). Excluding discontinued operations, net cash used in operating activities from continuing operations was approximately $32.2 million. Additional information regarding cash flows from discontinued operations is included in Note 19 – Discontinued Operations. Cash used in operating activities during 2025 was primarily driven by the Company’s consolidated net loss of approximately $68.5 million, partially offset by $33.1 million of non-cash expenses. The most significant non-cash items in 2025 included stock-based compensation expense of approximately $12.0 million, goodwill impairment of approximately $9.9 million, warrant-related expense of approximately $6.6 million, provision for expected credit losses of approximately $2.1 million, and intangible asset impairment charges of approximately $0.6 million. Working capital changes during 2025 resulted in a net use of approximately $1.2 million of cash. These changes primarily reflected reductions in accrued liabilities and accounts payable, partially offset by decreases in inventory and other current assets. The 2025 working capital activity reflects the integration of the Drone Nerds acquisition in the fourth quarter. Management expects that the acquisition of Drone Nerds, a historically EBITDA-profitable business, will contribute positive operating cash flows going forward. However, operating cash flows will continue to be influenced by sales volumes, gross margins, inventory turnover, discretionary operating expenditures, and the pace of investment in the development of unmanned platforms for defense and commercial applications. Operating Activities for the year ended December 31, 2024 Net cash used in operating activities was approximately $22.3 million for the year ended December 31, 2024. Operating cash usage in 2024 was primarily driven by the Company’s net loss of approximately $35.6 million, partially offset by non-cash expenses of approximately $5.8 million. Non-cash adjustments included stock-based compensation, impairment charges, fair value adjustments related to financial instruments, and loss on extinguishment of debt. Working capital changes in 2024 provided approximately $7.5 million of cash, primarily due to increases in accrued liabilities and other operating liabilities, partially offset by modest changes in receivables and deferred revenue. 67 Cash Flows from Investing Activities as of December 31, 2025 and 2024 Net cash used in investing activities was approximately $18.8 million for the year ended December 31, 2025, compared to net cash provided by investing activities of approximately $2.9 million for the year ended December 31, 2024. Investing cash outflows during 2025 were primarily attributable to the acquisition of Drone Nerds, which resulted in a net cash outflow of approximately $16.5 million after considering cash acquired. In addition, the Company funded a $2.0 million investment in a convertible note receivable and incurred approximately $0.2 million of capital expenditures for property and equipment. These outflows were partially offset by minor investing activities. Investing cash inflows during 2024 were primarily attributable to approximately $3.0 million of cash acquired in connection with the XTI Merger, partially offset by modest capital expenditures. Cash Flows from Financing Activities as of December 31, 2025 and 2024 Net cash provided by financing activities was approximately $68.2 million for the year ended December 31, 2025, compared to approximately $23.6 million for the year ended December 31, 2024. Financing cash inflows during 2025 were primarily driven by capital raising activities, including approximately $57.1 million of net proceeds from public offerings of common stock and pre-funded warrants, $22.8 million of net proceeds from the issuance of Series 10 Convertible Preferred Stock, $1.7 million of net proceeds from the Company’s at-the-market (“ATM”) program, which has since expired, and approximately $4.1 million of proceeds from the exercise of liability-classified warrants. These inflows were partially offset by approximately $15.9 million of debt repayments and $1.4 million related to redemptions of Series 9 Preferred Stock and other financing costs. These debt repayments and redemptions, together with the elimination of certain legacy financing obligations associated with the XTI Merger, represented meaningful uses of cash during the period, simplified the Company’s capital structure and removed historical financing restrictions. Financing cash inflows during 2024 were primarily attributable to approximately $22.2 million of net proceeds from ATM stock offerings, $2.0 million of proceeds from the issuance of promissory notes, and approximately $1.0 million received under a loan arrangement with Legacy Inpixon prior to the XTI Merger. These inflows were partially offset by debt repayments and preferred stock redemptions. The significant increase in financing cash flows during 2025 reflects the Company’s efforts to strengthen its liquidity position, fund operating losses, repay outstanding indebtedness, and support strategic initiatives, including the acquisition of Drone Nerds and continued development of the TriFan 600 aircraft program. OFF-BALANCE SHEET ARRANGEMENTS We do not have any off-balance sheet guarantees, interest rate swap transactions or foreign currency contracts. We do not engage in trading activities involving non-exchange traded contracts. RECENTLY ISSUED ACCOUNTING STANDARDS For a discussion of recently issued accounting pronouncements, please see Note 3 to our financial statements, which are included in this Annual Report beginning on page F-1. ITEM 7A: QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISK As a smaller reporting company, we are not required to provide this information. 68