What changed in this filing

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Item 1. Financial Statements

2026-05-14 compared with 2025-11-19 · 725 added, 1445 removed, 258 unchanged (89% of the section changed)

FINANCIAL STATEMENTS

AEROSPACE, INC.

XTI AEROSPACE, INC.

AND SUBSIDIARIES

CONDENSED CONSOLIDATED

BALANCE SHEETS

(In thousands, except

number of shares and par value data)

September 30,

CONDENSED CONSOLIDATED BALANCE SHEETS

(In thousands, except number of shares and

par value data)

Current Assets

Cash and cash equivalents

Accounts receivable, net of allowance for credit losses of $ 37 and $ 18 as of September 30, 2025 and December 31, 2024, respectively

Other receivables

Accounts receivable, net

Prepaid expenses and other current assets

Current assets of discontinued operations (Note 16)

Total Current Assets

2 unchanged sentences

Intangible assets, net

Note receivable

Non-current assets of discontinued operations (Note 16)

The accompanying notes are an integral part of

5 unchanged sentences

par value data)

September 30,

Liabilities, Mezzanine Equity, and Stockholders’ Equity

1 unchanged sentence

Accounts payable

Related party payables

Accrued expenses and other current liabilities

3 unchanged sentences

Operating lease obligation, current

Deferred revenue

Note payable-related party

Short-term debt

Income tax payable

Current liabilities of discontinued operations (Note 16)

Total Current Liabilities

Long Term Liabilities

Long-term debt

Note payable-related party

Operating lease obligation, noncurrent

Non-current liabilities of discontinued operations (Note 16)

Total Liabilities

1 unchanged sentence

Mezzanine Equity

Representative and placement agent warrants, net of issuance costs of $ 96

Representative and placement agent warrants, net of issuance costs

Stockholders’ Equity

Preferred Stock - $ 0.001 par value;

5,000,000 shares authorized, 0 shares issued and outstanding as of September 30, 2025 and December 31, 2024

5,000,000 shares authorized

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

1 share issued and outstanding as of September 30, 2025 and December 31, 2024

1 share issued and outstanding as of March 31, 2026 and December 31, 2025

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

126 shares issued and outstanding as of September 30, 2025 and December 31, 2024

Series 9 Preferred Stock - 20,000 shares authorized;

0 shares issued and outstanding as of September 30, 2025, and 11,302 shares issued and 1,331 shares outstanding as of December 31, 2024

126 shares issued and outstanding as of March 31, 2026 and December 31, 2025

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

0 and 25,000 shares issued and outstanding as of March 31, 2026 and December 31, 2025, respectively

Common Stock - $ 0.001 par value;

500,000,000 shares authorized;

30,861,816 shares issued and outstanding as of September 30, 2025 and 1,685,021 shares issued and outstanding as of December 31, 2024

38,472,204 and 32,786,816 shares issued and outstanding as of March 31, 2026 and December 31, 2025, respectively

Additional paid-in capital

Accumulated other comprehensive income (loss)

Accumulated other comprehensive loss

Accumulated deficit

Total Stockholders’ Equity

Total Liabilities, Mezzanine Equity, and Stockholders’ Equity

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

Total Liabilities, Mezzanine Equity, and Equity

The accompanying notes are an integral part of

1 unchanged sentence

XTI AEROSPACE, INC.

AND SUBSIDIARIES

CONDENSED CONSOLIDATED STATEMENTS OF OPERATIONS

1 unchanged sentence

For the Three Months Ended

September 30,

For the Nine Months Ended

Cost of Revenues

3 unchanged sentences

General and administrative

Merger-related transaction costs

Impairment of goodwill

Impairment of intangible assets

Amortization of intangible assets

3 unchanged sentences

Interest expense, net

Amortization of deferred loan costs

Loss on extinguishment of debt

Warrant issuance expense

Change in fair value of convertible notes

Change in fair value of warrant liability

Total Other (Expense) Income

Net Loss, before tax

Income tax benefit (provision)

Preferred stock return

Deemed dividend

Loss from Continuing Operations Before Income Taxes

Income tax benefit

Net Loss from Continuing Operations, net of tax

Loss from operations of discontinued component, inclusive of tax

Net (income) loss attributable to noncontrolling interest

Net Loss Attributable to XTI Aerospace, Inc.

Preferred stock dividends

Net Loss Attributable to Common Stockholders

Net Loss Per Share – Basic and Diluted:

Weighted Average Shares Outstanding

Basic and Diluted

Continuing operations

Discontinued operations

Net loss per share

Weighted Average Shares Outstanding, Basic and Diluted

The accompanying notes are an integral part of

1 unchanged sentence

XTI AEROSPACE, INC.

AND SUBSIDIARIES

CONDENSED CONSOLIDATED STATEMENTS OF COMPREHENSIVE

1 unchanged sentence

For the Three Months Ended

For the Nine Months Ended

Change in fair value of convertible note receivable

Unrealized foreign exchange gain from cumulative

translation adjustments

Unrealized foreign currency translation adjustments relating to discontinued

Comprehensive loss

Comprehensive income attributable to noncontrolling interest

Total Comprehensive Loss attributable to XTI Aerospace, Inc.

The accompanying notes are an integral part of

1 unchanged sentence

XTI AEROSPACE, INC.

AND SUBSIDIARIES

CONDENSED CONSOLIDATED STATEMENT OF CHANGES

IN STOCKHOLDERS’ EQUITY

For the three and nine months ended September 30,

For the three months ended March 31, 2026

(In thousands, except share data)

Series 9 Preferred

at Redemption Value

Series 10 Convertible

Preferred Stock at

Redemption Value

Comprehensive

Stockholders’

Balance - January 1, 2026

Common shares issued for net cash proceeds of ATM offering

Common shares issued for net cash proceeds of public offerings

Common shares issued for conversion of debt

$ ( 162,323 )

Conversion of Series 10 Preferred Stock to common shares and pre-funded

Stock-based compensation – Options

Common shares issued for exercise of liability classified warrants,

Redemption of Series 9 Preferred Stock

Stock-based compensation

Cumulative translation adjustment

Series 10 Convertible Preferred Stock dividend accrual

Disposition of the Inpixon Business (Note 16)

Net loss attributable to parent

Net income attributable to noncontrolling

Balance – March 31, 2026

Common shares issued for net cash proceeds of public offerings

Common shares issued for exercise of liability classified warrants

Stock-based compensation

Cumulative translation adjustment

Balance - June 30, 2025

Common shares issued for net cash proceeds of public offerings

Common shares issued for exercise of liability classified warrants

Stock-based compensation

Cumulative translation adjustment

Balance - September 30, 2025

$ ( 197,593 )

5 unchanged sentences

IN STOCKHOLDERS’ EQUITY

For the three and nine months ended September 30,

For the three months ended March 31, 2025

(In thousands, except share data)

Series 9 Preferred

at Redemption Value

Preferred Stock at

Redemption Value

Comprehensive

Stockholders’

Equity (Deficit)

Balance - January 1, 2025

Common and preferred shares issued via merger

Common shares issued for net cash proceeds of ATM offering

Common shares issued for net cash proceeds of public offerings

Common shares issued for conversion of debt

Inducement loss on debt conversions

Common shares issued to Xeriant, Inc.

Common shares issued for cashless exercise of warrants and options

Capital contribution - forgiveness of related party payable

Common shares issued for exercise of liability classified warrants

Redemption of Series 9 preferred stock

Stock-based compensation

Cumulative translation adjustment

Series 9 Preferred Stock dividend accrued

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

reverse stock split

Balance – March 31, 2025

Common shares issued in exchange of Series 9 Preferred Stock

Deemed dividend related to Series 9 Preferred Stock exchange

Common shares issued in exchange of warrants

Deemed dividend related to December 2023 warrant exchange

Common shares issued for exercise of equity classified warrants

Common shares issued for net cash proceeds of ATM offering

Common shares issued as settlement of accrued compensation

Common shares issued as prepayment for services

Stock-based compensation

Series 9 Preferred Stock dividend accrued

Change in fair value of convertible note receivable

Cumulative translation adjustment

Balance - June 30, 2024

Common shares issued in exchange of Series 9 Preferred Stock

Deemed dividend related to Series 9 Preferred Stock exchange

Common shares issued for net cash proceeds of ATM offering

Common shares issued as settlement of accrued compensation

Stock-based compensation

Cumulative translation adjustment

Series 9 Preferred Stock dividend accrued

Balance - September 30, 2024

$ ( 106,434 )

The accompanying notes are an integral part of

1 unchanged sentence

XTI AEROSPACE, INC.

AND SUBSIDIARIES

CONDENSED CONSOLIDATED STATEMENTS OF CASH FLOWS

(In thousands)

For the Nine Months Ended

For the Three Months Ended

Cash Flows Used in Operating Activities

3 unchanged sentences

Amortization of right-of-use asset

Non-cash interest expense, net of interest income

Non-cash interest (income) expense, net

Stock-based compensation

Impairment of goodwill

Impairment of intangible assets

Change in fair value of convertible notes payable

Loss on extinguishment of debt

1 unchanged sentence

Change in fair value of warrant liability

Change in value of warrant asset

Unrealized gain on foreign currency transactions

Loss on disposal of the Inpixon Business

Changes in operating assets and liabilities:

8 unchanged sentences

Net Cash Used in Operating Activities

Cash Flows (Used in) Provided by Investing Activities

Cash Flows Used in Investing Activities

Purchase of property and equipment

Cash received in purchase of Inpixon

Purchase of intangible asset

Net Cash (Used in) Provided by Investing Activities

Net cash paid on disposal of the Inpixon Business

Net Cash Used in Investing Activities

Cash Provided by Financing Activities

Net proceeds from the exercise of liability classified warrants

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

Net proceeds from ATM stock offering

Net proceeds from the exercise of equity classified warrants

Net proceeds from the exercise of liability classified warrants

Net proceeds from promissory notes

Net proceeds from loan from Inpixon (prior to merger)

Redemption of Series 9 preferred stock

Net borrowings on line-of-credit

Payment of debt issuance costs

Repayments of promissory notes

1 unchanged sentence

Effect of Foreign Exchange Rate on Changes on Cash

Net Increase in Cash and Cash Equivalents

Net (Decrease) Increase in Cash and Cash Equivalents

Cash and Cash Equivalents - Beginning of period

4 unchanged sentences

Common shares issued for conversion of debt and accrued interest

Common shares issued in exchange of warrants

Deemed dividend related to December 2023 warrant exchange

Common shares issued as settlement of accrued compensation

Common shares issued as prepayment for services

Common shares issued in exchange of series 9 Preferred Stock

Issuance of common shares for merger consideration, net of cash received

Right-of-use asset obtained in exchange for lease liability

Capital contribution - forgiveness of related party payable

Deemed dividend related to series 9 Preferred Stock exchange

ATM proceeds withheld as payment towards accounts payable

Series 9 Preferred Stock dividend accrued

Warrant liabilities exchanged for common stock

Conversion of Series 10 Preferred Stock to pre-funded warrants

The accompanying notes are an integral part of

1 unchanged sentence

XTI AEROSPACE, INC.

AND SUBSIDIARIES

NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS

Note 1 - Nature of Business

On March 12, 2024 (the “Closing Date”), XTI Aerospace,

Inc., the “Company”, formerly known as Inpixon (“Legacy Inpixon”), Superfly Merger Sub Inc., a Delaware corporation

and a wholly owned subsidiary of Legacy Inpixon, and XTI Aircraft Company, a Delaware corporation (“Legacy XTI”), completed

their previously announced merger transaction (the “XTI Merger”).

The Company is primarily an aircraft development

As of November 10, 2025, and through the Company’s wholly-owned subsidiary, XTI Drones, LLC, the Company offers drone distribution

and technology solutions via its recent acquisitions of Drone Nerds, LLC and Anzu Robotics, LLC (see Note 19 “Subsequent Events”).

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

focus prior to the closing of the XTI Merger.

Headquartered in Englewood, Colorado, the Company

is developing a vertical takeoff and landing (“VTOL”) airplane that is designed to take off and land like a helicopter and

cruise like a fixed-wing business airplane.

The Company believes its initial configuration, the TriFan 600 airplane, will be one of the

first civilian fixed-wing VTOL airplanes that offers the speed and comfort of a business airplane and the range and versatility of VTOL

for a wide range of customer applications, including private aviation for business and high net worth individuals, emergency medical services

and regional charter air travel, defining a new category of VTOL that the Company terms the “xVTOL.” The TriFan 600 is a seven-occupant

airplane intended to provide point-to-point air travel over distances of over 1,000 miles, fly at twice the speed and three times the

range of competing helicopters and cruise at altitudes of up to 25,000 feet.

Since 2013, the Company has been engaged primarily in developing

the aerodynamic performance and top-level engineering design of the TriFan 600, building and testing a two-thirds scale unmanned version

of the TriFan 600, generating pre-orders for the TriFan 600, and seeking funds from investors to enable the Company to advance the detailed

design and certification of the TriFan 600, and to eventually engage in commercial production and sale of the TriFan 600 airplane.

The Company’s RTLS solutions leverage cutting-edge technologies

such as Internet of Things (“IoT”), AI, and big data analytics to provide real-time tracking and monitoring of assets, machines,

and people within industrial environments.

With the Company’s RTLS solutions, businesses can achieve improved operational efficiency,

enhanced safety and reduced costs.

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

decisions, minimize downtime, and ensure compliance with industry regulations.

Note 1 - Description of Business and Organization

The following describes the Company’s business and organizational

XTI Aerospace, Inc.

(the “Company”)

is a U.S.-based aerospace company focused on unmanned aircraft systems (“UAS”) and related services.

The Company provides

UAS solutions through a combination of product distribution and service offerings, including the sale and support of UAS platforms, payloads,

sensors, batteries, accessories and related equipment, as well as operator training, program enablement, repair and maintenance, and

other fleet lifecycle support services for enterprise, public safety, government, and defense-related customers.

In 2026, the Company

started the design and development of unmanned platforms for defense and commercial applications.

Effective in fiscal year 2026, as part of the

Company’s strategic shift from the TriFan 600 development program towards the design and development of unmanned platforms, the

Company revised its operating segments to remove the commercial aviation segment and replace it with the advanced defense systems (“ADS”)

The Company currently operates as two reportable segments:

UAS and ADS, refer to Note 11 – Segments.

In November 2025, the Company completed the acquisition

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

liability company (“XTI Drones Holdings”).

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

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

The results of

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

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

Drone Nerds represents the Company’s

primary UAS solutions and services operations.

During December 2025, the Company committed to

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

and retroactively classified the business as held for sale.

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

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

Industrial IoT reportable segment.

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

condensed consolidated financial statements for all periods presented.

Unless otherwise indicated, the information included in the accompanying

notes relates to the Company’s continuing operations.

See Note 16 for additional information regarding discontinued operations.

As of March 31, 2026, the Company had cash and

cash equivalents of approximately $ 15.2 million, $ 4.6 million drawn and $ 8.1 million of remaining availability on the borrowing base

under its credit facility, see Note 8—Debt for further detail on the Company’s credit facility.

During the three months ended

March 31, 2026, the Company incurred a net loss from continuing operations of approximately $ 31.7 million and used approximately $ 10.5

million of cash in operating activities.

During the three months ended March 31, 2026,

the Company received net proceeds of approximately $ 7.4 million from the exercise of warrants, which contributed to its liquidity during

The Company’s liquidity position has been

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

preferred stock, as well as proceeds received from warrant exercises during the three months ended March 31, 2026.

In addition, the Company

has access to financing arrangements, including an asset-based lending facility, which provides borrowing availability subject to a borrowing

Management expects to fund operations through a combination of existing cash balances, proceeds from warrant exercises, borrowing

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

While the Company may pursue additional

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

XTI AEROSPACE, INC.

AND SUBSIDIARIES

NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS

Based on the Company’s current liquidity,

including cash on hand, availability under its credit facility, and expected operating cash flows from its UAS platform, management believes

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

condensed consolidated financial statements.

As of March 31, 2026, the Company’s net working capital was negative $ 40.6 million.

However, after adjusting for the warrant liability, the Company’s net working capital was positive $ 24.3 million.

Note 2 - Basis of Presentation

5 unchanged sentences

have been included.

Interim results for the three and nine months ended September 30, 2025 are not necessarily indicative of the results

for the full year ending December 31, 2025.

These interim unaudited condensed consolidated financial statements should be read in conjunction

with the Company’s audited financial statements and notes for the years ended December 31, 2024 and 2023 included in the annual

Interim results for the three months ended March 31, 2026 are not necessarily indicative of the results for the full

year ending December 31, 2026.

These interim unaudited condensed consolidated financial statements should be read in conjunction with

the Company’s audited financial statements and notes for the years ended December 31, 2025 and 2024 included in the annual

report on Form 10-K for the year ended December 31, 2025, filed with the SEC on April 15, 2026.

XTI AEROSPACE, INC.

AND SUBSIDIARIES

NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS

The condensed consolidated financial statements

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

All intercompany balances and transactions

have been eliminated in consolidation.

Note 3 - Summary of Significant Accounting

The Company’s complete accounting policies

are described in Note 3 to the Company’s audited consolidated financial statements and notes for the year ended December 31,

As of September 30, 2025, the Company had cash

and cash equivalents of approximately $ 32.2 million.

For the nine months ended September 30, 2025, the Company had a net loss of approximately

$ 47.2 million.

During the nine months ended September 30, 2025, the Company used approximately $ 30.4 million of cash for operating activities.

As of September 30, 2025, the Company’s net working capital was approximately $ 1.1 million, representing an increase of approximately

$ 9.9 million from December 31, 2024.

There can be no assurances that the Company will

ever earn revenues sufficient to support its operations, or that it will ever be profitable.

In order to continue its operations, the

Company has supplemented the revenues it earned with proceeds from the sale of its equity securities and proceeds from loans.

The Company’s recurring losses and utilization

of cash in its operations are indicators of going concern issues.

However, the Company’s current liquidity position was favorably

impacted by the cash raised through equity offerings and cash received from warrant exercises aggregating approximately $ 62.8 million

during the nine months ended September 30, 2025, along with repaying and settling certain debt and other obligations during March 2025.

The impact of these financings and warrant exercises to the Company’s cash position and overall net working capital position, along

with the Company’s ability to defer or eliminate certain operating expenses that are under its control and the revenues expected

to be generated by the Industrial IoT segment lead the Company to believe it has the ability to mitigate such concerns for a period of

at least one year from the date these financial statements are issued.

Consolidations

The condensed consolidated financial statements have been prepared

using the accounting records of Legacy XTI and as of March 12, 2024 (the effective date of the XTI Merger) and forward, the accounting

records of XTI Aerospace, Inc.

(formerly known as Inpixon) and its subsidiaries, including Inpixon GmbH (formerly known as Nanotron Technologies

GmbH), Inpixon Holding UK Limited, and Intranav GmbH.

All material inter-company balances and transactions have been eliminated.

Use of Estimates

The preparation of financial statements in conformity

with GAAP requires management to make estimates and assumptions that affect the reported amounts of assets and liabilities and disclosure

of contingent assets and liabilities at the date of the financial statements and the reported amounts of revenues and expenses during

each of the reporting periods.

Actual results could differ from those estimates.

The Company’s significant estimates consist of:

the valuation of stock-based

compensation;

the valuation of the Company’s

common stock issued and assets acquired in transactions, including acquisitions;

the valuation of convertible

notes receivable;

the valuation of convertible

notes payable, at fair value;

the valuation of goodwill

and intangible assets;

the valuation of warrant

the valuation allowance

for deferred tax assets.

XTI AEROSPACE, INC.

AND SUBSIDIARIES

NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS

are described in Note 3 to the Company’s audited consolidated financial statements and notes included in the annual report on Form

10-K for the year ended December 31, 2025.

Credit Risk and Concentrations

1 unchanged sentence

to credit risk consist principally of trade accounts receivable and cash and cash equivalents.

The Company maintains its cash and cash equivalents

primarily with high-credit-quality financial institutions in the United States and Germany.

The Company maintains its cash and cash

equivalents primarily with high-credit-quality financial institutions in the United States.

Cash balances maintained with financial institutions

9 unchanged sentences

risk of its customers, establishes an allowance for credit losses.

The customers who account for 10% or more of

the Company’s revenue or 10% or more of the Company’s outstanding accounts receivable balance are presented as follows for

the periods indicated:

Percentage of revenues

For the three months ended

For the nine months ended

Percentage of accounts

September 30,

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

The vendors who account for 10% or more of the

Company’s purchases or 10% or more of the Company’s outstanding payable balance are presented as follows for the periods

Percentage of purchases

For the three months ended

For the nine months ended

Percentage of accounts

September 30,

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

XTI AEROSPACE, INC.

AND SUBSIDIARIES

NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS

Intangible Assets and Goodwill

Finite-lived intangible assets primarily consist

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

They are amortized ratably over a range of 5 to

15 years, which approximates customer attrition rate and technology obsolescence.

The Company tests goodwill for potential impairment

at least annually, or more frequently if an event or other circumstance indicates that the Company may not be able to recover the carrying

amount of the net assets of the reporting unit.

In evaluating goodwill for impairment, the Company may assess qualitative factors to

determine whether it is more likely than not (that is, a likelihood of more than 50%) that the fair value of a reporting unit is less

than its carrying amount.

If the Company bypasses the qualitative assessment, or if the Company concludes that it is more likely than

not that the fair value of a reporting unit is less than its carrying value, then the Company performs a quantitative impairment test

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

The Company calculates the estimated fair value

of a reporting unit using a weighting of the income and market approaches.

For the income approach, the Company uses internally developed

discounted cash flow models that include the following assumptions, among others:

projections of revenues, expenses, and related cash

flows based on assumed long-term growth rates and demand trends;

expected future investments to grow new units;

and estimated discount

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

The Company bases these assumptions

on its historical data and experience, third party appraisals, industry projections, micro and macro general economic condition projections,

and its expectations.

The Company reviews its long-lived assets, inclusive

of its right-of-use assets, for impairment whenever events or changes in circumstances indicate the carrying amount of an asset may not

be recoverable.

Recoverability of assets held and used is measured by comparison of the carrying amount of an asset to the future undiscounted

cash flows expected to be generated from the use of the asset and its eventual disposition.

If the carrying amount of an asset group

exceeds its estimated future undiscounted cash flows, an impairment charge is recognized for the amount by which the carrying amount

of the asset group exceeds its fair value.

As of March 31, 2026 and December 31, 2025, the Company’s provision

for credit losses related to its accounts receivable is immaterial.

As of March 31, 2026 and December 31, 2025 the provision for credit

losses of $ 2.1 million is related to a convertible promissory note receivable, which is fully reserved.

There was no change in the provision

for credit losses during the three months ended March 31, 2026.

XTI AEROSPACE, INC.

1 unchanged sentence

NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS

For the nine months ended September 30, 2025, the Company determined

that its long-lived assets were impaired by approximately $ 0.6 million.

For the nine months ended September 30, 2025, the Company determined

that its goodwill was impaired by approximately $ 4.05 million.

There was no impairment recorded for the three months ended September 30,

2025 or 2024.

Recently Adopted Accounting Standards

No new accounting standards were adopted in the nine months ended September

The customers from continuing operations who

account for 10% or more of the Company’s revenue for the three months ended March 31, 2026 or 10% or more of the Company’s

outstanding receivable balance as of March 31, 2026 are presented as follows:

Three Months Ended

March 31, 2026

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

For the three months ended March 31, 2025, all

revenue was generated by the Company’s Inpixon Business, which has been classified as discontinued operations.

The vendors from continuing operations who account

for 10% or more of the Company’s purchases for the three months ended March 31, 2026 or 10% or more of the Company’s outstanding

accounts payable balance as of March 31, 2026 are presented as follows.

Three Months Ended

March 31, 2026

** Represents less than 10% of the

total for the respective period.

Recently Issued Accounting Standards Not

In November 2024, the Financial Accounting Standards

Board (“FASB”) issued ASU 2024-03, Income Statement - Reporting Comprehensive Income (Topic 220):

Expense Disaggregation

Disclosures, which includes amendments to require the disclosure of certain specific costs and expenses that are included in a relevant

expense caption on the face of the income statement.

Specific costs and expenses that would be required to be disclosed include:

of inventory, employee compensation, depreciation and intangible asset amortization.

Additionally, a qualitative description of other

items is required, equal to the difference between the relevant expense caption and the separately disclosed specific costs.

The amendments

in ASU 2024-03 are effective for fiscal years beginning after December 15, 2026, and for interim periods beginning after December 15,

2027, and are applied either prospectively or retrospectively at the option of the Company.

The Company is evaluating the impact of the

amendments on our condensed consolidated financial statements and disclosures.

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

Income Taxes (Topic 740) - Improvements to Income Tax Disclosures.

The new standard requires a company to expand its existing income tax

disclosures, specifically related to the rate reconciliation and income taxes paid.

The standard is effective for the Company for annual

periods beginning after December 15, 2024.

The Company is evaluating the impact of ASU 2023-09 on our consolidated financial statements

and disclosures.

XTI AEROSPACE, INC.

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

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

Disaggregation of

Income Statement Expenses .

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

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

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

December 15, 2027.

Early adoption is permitted.

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

consolidated financial statement disclosures.

Other recently issued accounting standards not

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

AEROSPACE, INC.

AND SUBSIDIARIES

NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS

Note 4 - Disaggregation of Revenue and Deferred

Note 4 - Disaggregation of Revenue

Disaggregation of Revenue

The Company recognizes revenue when control is

transferred of the promised products or services to its customers, in an amount that reflects the consideration the Company expects to

be entitled to in exchange for those products or services.

The Company derives revenue from software as a service, design and implementation

services for its Indoor Intelligence systems, and professional services for work performed in conjunction with its systems recognition

Revenues consisted of the following (in thousands):

For the Three Months Ended

For the Nine Months Ended

Recurring revenue

Total recurring revenue

Non-recurring revenue

Professional services

Total non-recurring revenue

Total Revenue

For the Three Months Ended

For the Nine Months Ended

Revenue recognized at a point in time

Industrial IoT (1)

Revenue recognized over time

Industrial IoT (2) (3)

Revenue presented for the three months ended March

31, 2026 represents revenue from continuing operations and excludes revenue from the Inpixon Business, which has been classified as discontinued

Revenue presented for the three months ended March 31, 2025 relates entirely to the Inpixon Business and has been reclassified

to discontinued operations in the accompanying consolidated financial statements.

Revenues arise substantially from the Company’s

UAS offerings through the following channels (in thousands):

Total revenue

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

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

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

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

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

Wholesale revenue represents sales through

resellers and channel partners.

Direct sales revenue represents sales

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

Retail revenue represents sales to consumers,

including those transacted through the Company’s e-commerce platform, and revenues from the Company’s service center.

center revenues are less than 10% of total retail sales.

Enterprise, commercial, and governmental customers

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

such transactions are classified as direct sales based on customer

Revenue is primarily generated in the United

however, approximately 12 % of total revenue for the three months ended March 31, 2026 was derived from a customer located in

No other individual customer accounted for more than 10% of total revenue.

Note 5 – Unaudited Proforma Financial Information

As described in the notes to the financial statements

included in the Company’s annual report on Form 10-K, on November 10, 2025, the Company acquired Drone Nerds, LLC and Anzu Robotics,

LLC (collectively, the “Acquisition”).

The following unaudited pro forma consolidated

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

January 1, 2025.

The pro forma financial information has been prepared for comparative purposes only and does not necessarily reflect

the results of operations that would have occurred had the Acquisition been completed on that date, nor is it indicative of future results

of operations.

The unaudited pro forma information reflects

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

Incremental amortization

expense related to identifiable intangible assets acquired;

XTI AEROSPACE, INC.

1 unchanged sentence

NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS

Deferred revenue

As of September 30, 2025 and December 31,

2024, the Company had approximately $ 0.7 million and $ 0.5 million, respectively, in deferred revenue.

This deferred revenue balance relates

to cash received in advance for product maintenance services and professional services provided by the Company’s technical staff.

The fair value of the deferred revenue approximates the services to be rendered.

The Company expects to satisfy its remaining performance

obligations for these maintenance services and professional services and recognize the deferred revenue and related contract costs over

the next twelve months.

Note 5 - Proforma Financial Information

The XTI Merger was accounted for as a reverse

merger under U.S.

For financial reporting purposes, Legacy Inpixon is treated as the “acquired” company.

the Company’s consolidated financial statements include the operating results of Legacy Inpixon only from March 12, 2024, the merger

closing date.

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

Legacy Inpixon for the three months and nine months ended September 30, 2024, as if the XTI Merger had occurred as of the beginning of

the first period presented (January 1, 2024) instead of on March 12, 2024.

The proforma information does not necessarily reflect the

results of operations that would have occurred had the entities been a single company during those periods.

The proforma financial information for the Company

and Legacy Inpixon is as follows (in thousands):

Three Months Ended

September 30,

Nine Months Ended

September 30,

Net loss attributable to common stockholders

Net loss per basic and diluted common share

Weighted average common shares outstanding:

Basic and Diluted

Interest expense associated

with acquisition-related indebtedness;

Conforming accounting policy

adjustments, where applicable.

The pro forma financial information does not

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

The following unaudited pro forma consolidated

financial information presents the combined results of continuing operations of the Company and Drone Nerds (in thousands, except per

share amounts):

the three months ending March 31, 2025

Net loss from continuing operations

Net loss attributable to common stockholders from continuing operations

Net loss per share – basic and diluted

Weighted average common shares outstanding – basic and diluted

Note 6 - Goodwill and Intangible Assets

In connection with the XTI Merger, the excess

of the purchase price over the estimated fair value of the net assets assumed of $ 12.4 million was recognized as goodwill.

The following table summarizes the changes in

the carrying amount of Goodwill for the nine months ended September 30, 2025 (in thousands):

Beginning balance - January 1, 2025

Foreign currency translation adjustment

Ending balance – September 30, 2025

The Company tests goodwill for impairment at the reporting unit level

annually, on October 1, or more frequently if a change in circumstances or the occurrence of events indicates that potential impairment

In accordance with ASC 350, the Company first assessed whether there were any indicators of goodwill impairment that would require

a quantitative analysis to be performed (i.e., a triggering event).

The Company determined there was no triggering event during the

three months ended September 30, 2025 related to the IoT reporting unit.

However, a triggering event was identified by the Company during

the quarter ended June 30, 2025, in the form of a current period operating and cash flow loss, a consistent history of operating losses,

and the revenue results for the current period missing forecasted targets due to (i) the sales cycle to close transactions taking longer

than anticipated and (ii) supply chain issues causing delays in our delivery of Nanotron product to customers.

XTI AEROSPACE, INC.

AND SUBSIDIARIES

NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS

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

the Company performed a quantitative goodwill impairment analysis related to its Industrial IoT reporting unit, which concluded the carrying

amount of the reporting unit exceeded its estimated fair value, indicating that the goodwill of the reporting unit was impaired.

the Company recorded an impairment loss of $ 4.05 million during the quarter ended June 30, 2025, related to its Industrial IoT reporting

The Company utilized an income approach to assess

the fair value of the reporting unit as of June 30, 2025.

The income approach considered the discounted cash flow model, considering

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

growth rate, and projected future economic and market conditions.

The inputs for the fair value calculations of the reporting unit included

a 3 % terminal growth rate and a discount rate of 29 %.

Management’s estimates of projected cash flows related to the reporting unit

include, but are not limited to, future earnings of the reporting unit using revenue growth rates, gross margins, and other cost assumptions

consistent with the reporting unit’s historical trends, and working capital requirements and future capital expenditures necessary

to fund future operations.

The assumptions in the fair value measurement reflects the current market environment, industry-specific factors

and company-specific factors.

As of March 31, 2026 and December 31, 2025, the

Company had goodwill of approximately $ 11.5 million related to the acquisition of Drone Nerds and included as a part of the UAS segment.

There were no changes in the carrying amount of goodwill during the three months ended March 31, 2026, and no impairment indicators were

Intangible Assets

Intangible assets as of September 30, 2025 and

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

September 30, 2025

Intangible assets consist primarily of patents,

trade names and trademarks, and customer relationships acquired in the Drone Nerds acquisition.

The following table presents intangible

assets associated with continuing operations as of March 31, 2026 and December 31, 2025 (in thousands):

As of March 31, 2026:

Amount Accumulated

Amortization Impairment Net

Amortization Net

Amount Remaining

Patents $ 468 $ ( 215 ) $ 253 8.6

Trade Name/Trademarks 486 ( 191 ) ( 115 ) 180 4.4

Proprietary Technology 1,395 ( 469 ) ( 293 ) 633 5.2

Customer Relationships 137 ( 42 ) —

In-Process R&D 243 ( 20 ) ( 223 ) —

Totals $ 2,729 ( 929 ) $ ( 631 ) $ 1,169 5.8

December 31, 2024

Trade Name/Trademarks

Proprietary Technology

Trade Names / Trademarks 4,000 ( 120 ) 3,880 12.6

Customer Relationships 5,200 ( 225 ) 4,975 8.6

In-Process R&D

Amortization expense for the three and nine months

ended September 30, 2025 was approximately $ 0.1 million and $ 0.2 million, respectively.

Amortization expense for the three and nine months

ended September 30, 2024 was approximately $ 0.2 million and $ 0.4 million, respectively.

Total $ 9,668 $ ( 560 ) $ 9,108

XTI AEROSPACE, INC.

1 unchanged sentence

NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS

Future amortization expense on intangibles assets is anticipated to

be as follows (in thousands):

Year ending December 31,

2025 (for 3 months)

2030 and thereafter

The Company tests for impairment if a change

in circumstances or the occurrence of events indicates that potential impairment exists.

In accordance with ASC 360, the Company first

performed a qualitative assessment to determine if there were any indicators of impairment that would require a quantitative analysis

to be performed.

The results of the qualitative analysis performed by the Company determined there was no triggering event during the

three months ended September 30, 2025.

However, a triggering event was identified by the Company during the first and second quarters

of 2025, in the form of a current period operating and cash flow loss, a consistent history of operating losses, and the revenue results

for the current period missing forecasted targets due to (i) the sales cycle to close transactions taking longer than anticipated and

(ii) supply chain issues causing delays in our delivery of Nanotron product to customers.

Based on a quantitative assessment, the Company

recorded an impairment to its Trade Names & Trademarks, Proprietary Technology, and In-Process Research and Development of $ 0.1 million,

$ 0.3 million, and $ 0.2 million, respectively, during the nine months ended September 30, 2025, which is included in ‘Impairment

of intangible assets’ in the unaudited condensed consolidated statements of operations.

These assets were part of the Company’s

Industrial IoT segment.

The Company assessed the fair value of the Trade

Names & Trademarks, Proprietary Technology, and In-Process Research and Development by using an income approach in the form of a

relief from royalty model, which considered a specified royalty rate, discount rate reflecting the risk inherent in future cash flows,

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

The inputs for the fair value calculations included a 3 %

terminal growth rate, discount rate of 29 %, and a royalty rate of 2 % and 10 % for Tradenames and Trademarks and Proprietary Technology,

respectively.

Management’s estimates of projected cash flows include, but are not limited to, future earnings of the reporting

unit using revenue growth rates, gross margins, and other cost assumptions consistent with the reporting unit’s historical trends,

and working capital requirements and future capital expenditures necessary to fund future operations.

The assumptions in the fair value

measurement reflects the current market environment, industry-specific factors and company-specific factors.

As a result of the impairment,

the Company assessed the remaining useful lives of the Trade Names & Trademarks and Proprietary Technology and concluded that there

were no changes required.

As of December 31, 2025

Amount Accumulated

Amortization Net

Amount Remaining

Patents $ 468 $ ( 207 ) $ 261 8.8

Trade Names / Trademarks 4,000 ( 43 ) 3,957 12.9

Customer Relationships 5,200 ( 80 ) 5,120 8.9

Total $ 9,668 $ ( 330 ) $ 9,338

Amortization expense for the three months ended

March 31, 2026 and 2025 was approximately $ 0.2 million and $ 0.0 million, respectively.

The Company evaluates long-lived assets for impairment

when events or changes in circumstances indicate that the carrying amount may not be recoverable.

No impairment indicators were identified

during the three months ended March 31, 2026.

The UAS segment, which contains materially all goodwill and intangibles, continued to be

profitable for the three months ended March 31, 2026.

Note 7 - Other Balance Sheet Information

1 unchanged sentence

Prepaid expenses and other current assets as

of September 30, 2025 and December 31, 2024 consisted of the following (in thousands):

September 30,

AVX deposit - related party

Prepaid insurance

Prepaid consulting/professional fees

Prepaid software

Total prepaid expenses and other current

of March 31, 2026 and December 31, 2025 consisted of the following (in thousands):

Vendor deposits

Prepaid expenses and other

Total prepaid expenses and other current assets

Inventory as of March 31, 2026 and December 31,

2025 represents inventory on hand within the Drone Nerds (UAS) segment and consisted of the following (in thousands):

Service parts and components

Total inventories

XTI AEROSPACE, INC.

3 unchanged sentences

Accrued expenses and other current liabilities

as of September 30, 2025 and December 31, 2024 consisted of the following (in thousands):

September 30,

Accrued transaction bonuses – Strategic Transaction Bonus Plan

Accrued transaction bonuses – related party

Accrued bonus and commissions

Accrued compensation and benefits

Accrued other

Total accrued expenses and other current

as of March 31, 2026 and December 31, 2025 consisted of the following (in thousands):

Bonuses and commissions

Compensation and benefits

Inventory received not invoiced

Total accrued expenses and other current liabilities

Note 8 - Debt

The Company’s outstanding debt consisted of the following at

the periods indicated (in thousands):

Short-Term Debt Maturity September 30,

Short-Term Debt Maturity March 31,

2026 December 31,

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

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

Unamortized Discounts —

Acquisition-Related Promissory Notes 11/10/2026 $ 5,931 $ 7,931

Asset-Based Revolving Line of Credit (Drone Nerds) 2/11/2029 4,638 —

Total Short-Term Debt $ 10,569 $ 7,931

Long-Term Debt

SBA loan 2 6/3/2050 $ —

Total Long-Term Debt $ —

1 Promissory note paid in full during the first quarter of 2025.

2 SBA loan paid in full during the third quarter of 2025.

Streeterville Debt Exchanges and Repayment

During the first quarter of 2025, the Company

issued an aggregate of 240,229 shares of common stock (the “Exchange Shares”) to Streeterville Capital, LLC (“Streeterville”),

the holder of that certain outstanding secured promissory note of the Company issued on May 1, 2024 (the “Original Note”),

at a price between $ 2.48 and $ 4.21 per share, in each case equal to the Minimum Price as defined in Nasdaq Listing Rule 5635(d) in accordance

with the terms and conditions of certain exchange agreements, pursuant to which the Company and Streeterville agreed to (i) partition

new secured promissory notes in the form of the Original Note in the aggregate original principal amount of $ 750,000 and then cause the

outstanding balance of the Original Note to be reduced by an aggregate of $ 750,000 ;

and (ii) exchange the partitioned notes for the delivery

of the Exchange Shares.

On March 31, 2025, using the net proceeds from

the March Offering (see “ March 2025 Public Offering ” disclosure in Note 9), the Company repaid the remaining obligation

of approximately $ 2.7 million (which included principal, accrued interest and monitoring fees, and a 15 % prepayment penalty) in respect

of the two secured promissory notes issued by the Company to Streeterville on May 1, 2024 and May 24, 2024.

As a result of the repayments,

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

repayment of the promissory notes occurring before the maturity date, the Company incurred a loss on extinguishment of debt of approximately

$ 0.4 million, which is reported within other (expense) income on the condensed consolidated statements of operations.

XTI AEROSPACE, INC.

AND SUBSIDIARIES

NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS

Note 9 - Common Stock

Capital Raises

At-the-Market (ATM) Offering Program

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

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

Group LLC (“Maxim”), as the Company’s exclusive sales agent, up to a maximum offering amount of approximately $ 83.3

million, pursuant to that certain Equity Distribution Agreement, dated as of July 22, 2022, by and between the Company and Maxim, as

amended from time to time (the “Equity Distribution Agreement”).

The term of the Equity Distribution Agreement expired on

December 31, 2024.

Maxim was entitled to compensation at a fixed commission rate of 3.0 % of the gross sales price per share sold, excluding

Maxim’s costs and out-of-pocket expenses incurred in connection with its services, including the fees and out-of-pocket expenses

of its legal counsel.

The Company sold 169,299 shares of common stock

under the Equity Distribution Agreement at per share price of $ 10.00 , resulting in net proceeds to the Company of approximately $ 1.7

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

January 2025 Public Offering

On January 7, 2025, the Company entered into

a placement agency agreement with ThinkEquity LLC (“ThinkEquity”), pursuant to which the Company agreed to issue and sell

directly to various investors, in a best efforts public offering (the “January Offering”), an aggregate of 1,454,546 shares

of common stock at an offering price of $ 13.75 per share.

The January Offering closed on January 10, 2025 resulting in net proceeds to

the Company of approximately $ 18.3 million, after deducting commissions and other expenses of approximately of $ 1.7 million.

March 2025 Public Offering

On March 28, 2025, the Company entered into an

underwriting agreement with ThinkEquity, as the representative of the underwriters named therein, relating to a firm commitment underwritten

public offering (the “March Offering”) of 765,200 shares of common stock (the “Shares”), pre-funded warrants

(the “Pre-funded Warrants”) to purchase up to 2,176,000 shares of common stock, and common warrants (the “Common Warrants”

and together with the Pre-funded Warrants, the “Warrants”) to purchase up to 2,941,200 shares of common stock.

public offering price for each Share, together with one Common Warrant, was $ 1.36 .

The combined public offering price for each Pre-funded

Warrant, together with one Common Warrant, was $ 1.359 .

Each Share, or a Pre-funded Warrant in lieu thereof, was sold together with one

Common Warrant.

The March Offering closed on March 31, 2025.

The net proceeds to the Company from the sale of the Shares and the Warrants were approximately $ 3.4 million, after deducting the underwriting

discounts and commissions and other expenses payable by the Company of approximately $ 0.6 million.

June 2025 Public Offering

On June 24, 2025, the Company entered into an

underwriting agreement with ThinkEquity, as the representative of the underwriters named therein, relating to a firm commitment underwritten

public offering (the “June Offering”) of 6,231,200 shares of common stock (the “Shares”), pre-funded warrants

(the “Pre-funded Warrants”) to purchase up to 2,911,800 shares of common stock, and common warrants (the “Common Warrants”

and together with the Pre-funded Warrants, the “Warrants”) to purchase up to 9,143,000 shares of common stock.

public offering price for each Share, together with one Common Warrant, was $ 1.75 .

The combined public offering price for each Pre-funded

Warrant, together with one Common Warrant, was $ 1.749 .

Each Share, or a Pre-funded Warrant in lieu thereof, was sold together with one

Common Warrant.

The Company also granted ThinkEquity a 45-day option to purchase, at

the public offering price, less the underwriting discounts and commissions, up to 1,371,000 additional shares of common stock (and/or

Pre-funded Warrants in lieu thereof) and/or up to 1,371,000 additional Common Warrants or any combination thereof, to cover any over-allotments

(the “Over-Allotment Option”).

ThinkEquity partially exercised the Over-Allotment Option on June 25, 2025 for 1,371,000 additional

Common Warrants.

Interest expense on outstanding debt totaled

approximately $ 0.2 million and $ 0.2 million for the three months ended March 31, 2026 and 2025, respectively.

Acquisition-Related Promissory Notes

In connection with the November 2025 acquisition

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

$ 11.9 million (the “Notes”).

The Notes bear interest at a rate of 7.25 % per

annum, calculated on a 365 -day year.

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

to principal if not paid when due.

On March 31, 2026, the Company made a required

aggregate principal payment of $ 2.0 million and aggregate accrued interest payment of approximately $ 0.2 million.

The Notes require remaining

scheduled principal repayments as follows:

● $ 1.5 million in the aggregate due no later than June 30, 2026;

● $ 1.5 million in the aggregate due no later than September 30, 2026;

The remaining outstanding

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

XTI AEROSPACE, INC.

1 unchanged sentence

NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS

The June Offering closed on June 26, 2025.

The net proceeds to the

Company from the sale of the Shares and the Warrants, including the Common Warrants sold in connection with the partial exercise of the

Over-Allotment Option on June 25, 2025, were approximately $ 14.7 million, after deducting the underwriting discounts and commissions and

other expenses payable by the Company of approximately $ 1.3 million.

During July 2025, the Company closed multiple partial exercises of

the Over-Allotment Option until the Over-Allotment Option was exercised in full, resulting in the issuance of 1,371,000 shares of common

stock, at the public offering price of $ 1.75 per share, for net proceeds of approximately $ 2.2 million, after deducting the underwriting

discounts and commissions and other expenses payable by the Company of approximately $ 0.2 million.

September 2025 Public Offering

On September 12, 2025, the Company entered into a placement agency

agreement with ThinkEquity, pursuant to which the Company agreed to issue and sell directly to various investors, in a best efforts public

offering (the “September Offering”), 10,575,000 shares of common stock (the “Shares”), pre-funded warrants (the

“Pre-funded Warrants”) to purchase up to 1,925,000 shares of common stock, and common warrants (the “Common Warrants”

and together with the Pre-funded Warrants, the “Warrants”) to purchase up to 12,500,000 shares of common stock.

public offering price for each Share, together with one Common Warrant, was $ 1.60 .

The combined public offering price for each Pre-funded

Warrant, together with one Common Warrant, was $ 1.599 .

Each Share, or a Pre-funded Warrant in lieu thereof, was sold together with one

Common Warrant.

The September Offering closed on September 15, 2025.

The net proceeds

to the Company from the sale of the Shares and the Warrants were approximately $ 18.5 million, after deducting the placement agent fees

and other expenses payable by the Company of approximately $ 1.5 million.

Allocation of Net Proceeds

The aggregate net proceeds from the January Offering, March Offering,

June Offering (including exercises of the Over-Allotment Option during July 2025) and September Offering were approximately $ 57.1 million.

Based on their relative fair value as of the date of issuance, the Company allocated approximately $ 20.6 million of net proceeds to the

sales of common stock and approximately $ 36.5 million of net proceeds to the issuance of warrants.

Other Share Issuances

On May 13, 2025, the Company entered into an

advisory agreement with a third-party advisor, pursuant to which the Company issued 125,000 shares of restricted common stock, subject

to certain registration rights, to the advisor in consideration for financial advisory services agreed to be rendered to the Company

pursuant to the advisory agreement.

As a result of the share issuance, the Company recognized approximately $ 0.2 million in share-based

compensation expense, which is included in general and administrative expenses on the condensed consolidated statements of operations,

for the nine months ended September 30, 2025.

The Notes may be prepaid at any time without

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

The outstanding principal balance

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

The Notes contain customary events of default,

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

As of March 31, 2026 and December 31, 2025, the

aggregate outstanding principal balance of the Notes was approximately $ 5.9 million and $ 7.9 million, respectively.

Asset-Based Revolving

Line of Credit (Drone Nerds)

On February 11, 2026,

Drone Nerds, LLC and Anzu Robotics, LLC (collectively, the “Borrowers”) entered into a Credit Agreement with JPMorgan Chase

(the “Lender”), (the “Credit Agreement”), providing for a secured revolving credit facility with aggregate

commitments of up to $ 20.0 million, subject to certain borrowing base limitations based on a percentage of eligible accounts receivable

and inventory (the “ABL Facility”).

The ABL Facility matures on February 11, 2029.

As of March 31, 2026, the borrowing base was

calculated to be approximately $ 12.7 million, and the Company had $ 4.6 million outstanding, with $ 8.1 million of remaining availability.

Borrowings under the ABL Facility bear interest at Secured Overnight Financing Rate or a base rate, plus a margin of 2.0 %, subject to

adjustment in certain circumstances.

The average unused commitment under the ABL Facility is subject to an unused commitment fee of 0.25 %

Borrowings under the ABL Facility as of March 31, 2026 incurred interest at a weighted average of 5.8 %.

The Credit Agreement is subject to a cash dominion

arrangement, whereby funds deposited into any depository account of the borrower are swept into a blocked account with the Lender and

shall be used to reduce amounts owed under the Credit Facility.

Because of the nature of the cash dominion arrangement, borrowings under

the Credit Agreement are classified as current liabilities despite a maturity date that is more than twelve-months from the balance sheet

The Credit Agreement is secured by substantially all of the assets

of the Borrowers and certain affiliated guarantors.

The Credit Agreement contains customary affirmative

and negative covenants, including limitations on additional indebtedness, liens, asset sales, investments and restricted payments.

Borrowers are required to maintain a minimum Fixed Charge Coverage Ratio as of the end of any calendar month of no less than 1.0 to 1.0,

subject to certain cure rights.

Proceeds of the ABL Facility may be used for general corporate purposes, refinancing certain existing

indebtedness and permitted investments.

Note 9 – Capital Structure

AUTHORIZED CAPITAL

The Company is authorized to issue 500,000,000

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

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

COMMON STOCK AND PREFERRED STOCK

Automatic Conversion of Series 10 Preferred Stock

On January 5, 2026, all outstanding shares of

the Company’s Series 10 Convertible Preferred Stock automatically converted in accordance with their terms following shareholder

The conversion was based on a stated value of

$ 1,000 per share, plus accrued and unpaid dividends, divided by a conversion price of $ 1.492 per share.

XTI AEROSPACE, INC.

1 unchanged sentence

NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS

Note 10 - Preferred Stock

The Company is authorized to issue up to 5,000,000

shares of preferred stock with a par value of $ 0.001 per share with rights, preferences, privileges and restrictions as to be determined

by the Company’s Board of Directors.

Series 9 Preferred Stock Redemptions

On November 17, 2024, the Company entered into

a Consent, Waiver and Release Agreement (the “Consent Agreement”) with Streeterville and 3AM Investments, LLC (“3AM”),

an entity controlled by Nadir Ali, Legacy Inpixon’s former Chief Executive Officer and a former director of Legacy Inpixon, pursuant

to which Streeterville and 3AM authorized the Company to raise up to an additional $ 5,000,000 under the ATM (the “ATM Increase”)

in consideration for the Company’s agreement to pay, on a weekly basis, 20 % of the proceeds it receives from sales under the ATM

in connection with the ATM Increase (the “Redemption Proceeds”) to Streeterville and 3AM to redeem a portion of their Series

9 Preferred Stock, to be distributed as follows:

(i) 75 % of the Redemption Proceeds to Streeterville ( 15 % of all proceeds received from

sales under the ATM), and (ii) 25 % of the Redemption Proceeds to 3AM ( 5 % of all proceeds received from sales under the ATM).

As of December 31, 2024, Streeterville and 3AM

held zero and 1331.12 shares of Series 9 Preferred Stock, respectively.

Pursuant to the Consent Agreement, the Company

delivered an aggregate of approximately $ 0.2 million to 3AM on January 5, 2025, which amount represents the Redemption Proceeds payable

to 3AM in connection with amounts received by the Company on January 2, 2025 from sales under the ATM originating on December 31, 2024.

Such payments were made for 167.00 shares of the Company’s Series 9 Preferred Stock held by 3AM.

The Company entered into an acknowledgment

agreement with 3AM to record such payment.

On March 27, 2025, the Company entered into a

Settlement Agreement with 3AM and other parties as further disclosed in Note 16.

Pursuant to the Settlement Agreement, on the Effective

Date, the Company delivered the aggregate amount of approximately $ 1.3 million (the “Series 9 Redemption Amount”) for the

redemption of the outstanding Series 9 Preferred Stock.

Following 3AM’s receipt of the Series 9 Redemption Amount, 3AM no longer

held any shares of Series 9 Preferred Stock.

As of September 30, 2025, there are no shares

of Series 9 Preferred Stock issued and outstanding.

Upon conversion, the Company issued 1,721,980

shares of common stock and a pre-funded warrant with a $ 0.0001 exercise price to purchase 15,307,735 shares of common stock.

The pre-funded

warrant was issued in lieu of additional shares of common stock due to beneficial ownership limitations contained in the Series 10 Preferred

The pre-funded warrant is immediately exercisable at an exercise price of $ 0.0001 per share.

The pre-funded warrant was determined

to be a liability-classified instrument under ASC 815 due to adjustment and settlement provisions and, as such, upon conversion, the

Company recorded the pre-funded warrant liability at a fair value of $ 24.2 million based on the listed price of the Company’s common

stock along with a reduction of additional paid-in-capital of $ 4.2 million for the difference between the carrying value of the preferred

stock plus accrued and unpaid dividends.

The following table summarizes the activity of warrants outstanding:

Outstanding at January 1, 2026

Conversion of Series 10 Preferred Stock to Pre-funded Warrants

( 3,963,408 )

Outstanding at March 31, 2026

Exercisable at March 31, 2026

Warrant Exercises

During the three months ended March 31, 2026,

holders of certain warrants issued in connection with the Company’s 2025 public offerings exercised warrants to purchase an aggregate

of 3,963,408 shares of the Company’s common stock, resulting in gross cash proceeds of approximately $ 7.9 million.

In connection with the solicitation of such warrant

exercises, the Company paid commissions and other fees to a third party financial advisor of approximately $ 0.5 million.

Net cash proceeds

to the Company from these warrant exercises during the three months ended March 31, 2026 were approximately $ 7.4 million.

NONCONTROLLING INTEREST – CLASS B UNITS

OF XTI DRONES HOLDINGS, LLC

In connection with the November 2025 acquisition

of Drone Nerds, the Company issued 6,524,576 Class B Units of XTI Drones Holdings, LLC to the seller as part of the purchase consideration.

The Company holds Class A Units representing an 83.403 % controlling interest in XTI Drones Holdings, LLC.

The Class B Units represent

the remaining 16.597 % ownership interest and are reflected as noncontrolling interest in the consolidated financial statements.

Exchange features of the Class B Units:

Are exchangeable into shares

of the Company’s common stock on a one-for-one basis at the option of the holder at any time after May 1, 2026;

XTI AEROSPACE, INC.

1 unchanged sentence

NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS

Note 11 - Stock Award Plans and Stock-Based

In 2011, Legacy Inpixon adopted the 2011 Employee

Stock Incentive Plan (the “2011 Plan”).

The 2011 Plan terminated by its terms on August 31, 2021 and remains in effect as

to outstanding equity awards granted prior to the date of expiration.

No new awards will be issued under the 2011 Plan.

During 2017, Legacy XTI adopted the 2017 Employee

and Consultant Stock Ownership Plan (the “2017 Plan”), which was amended in 2021 to increase the maximum shares eligible to

be granted under the 2017 Plan.

The Company assumed the 2017 Plan in connection with the XTI Merger.

The Company may issue awards in the

form of restricted stock units and stock options to employees, directors, and consultants.

Under the 2017 Plan, stock options are generally

granted with an exercise price equal to the estimated fair value of the Company’s common stock, as determined by the Company’s

Board of Directors (the “Board”) on the date of grant.

Options generally have contractual terms of ten years .

Incentive stock

options (ISO) may only be granted to employees, whereas all other stock awards may be granted to employees, directors, consultants and

other key stakeholders.

As of September 30, 2025, there are no shares available for future grants under the 2017 Plan.

In February 2018, Legacy Inpixon adopted the 2018

Plan, which is utilized for employees, corporate officers, directors, consultants and other key persons employed.

The 2018 Plan provides

for the granting of incentive stock options, NQSOs, stock grants and other stock-based awards, including Restricted Stock and Restricted

Stock Units (as defined in the 2018 Plan).

In August 2025, the Board approved the amendment and restatement of the 2018 Plan which, among

other things, provides that the Board may authorize one or more of the Company’s officers to grant awards pursuant to the 2018 Plan,

provided that the Board must specify the total number of shares of common stock that may be subject to the awards granted by such officer.

As of September 30, 2025, there are no unvested

All outstanding Class B

Units will automatically be exchanged into shares of the Company’s common stock on a one-for-one basis fifteen months after

the acquisition closing date;

Require no additional consideration

upon exchange.

Because the Class B Units are equity interests

in a consolidated subsidiary and are convertible into shares of the Company’s common stock, they are considered potentially dilutive

securities for earnings per share purposes when applicable.

Upon exchange of the Class B Units into shares of the Company’s common

stock, the related noncontrolling interest will be reclassified to stockholders’ equity attributable to the Company with no impact

on the consolidated statements of operations.

For the three months ended March 31, 2026, the

Company reported a net loss.

Accordingly, the Class B Units were excluded from the computation of diluted net loss per share because

their assumed conversion would have been antidilutive.

In periods of net income, the Class B Units would be evaluated for dilution under

the if-converted method, which would require the addition of net income attributable to the noncontrolling interest and the inclusion

of the underlying shares of common stock in the diluted weighted-average shares outstanding.

Note 10 - Stock Award Plans and Stock-Based Compensation

Legacy XTI adopted the 2017 Employee and Consultant

Stock Ownership Plan, which was assumed by the Company in connection with the XTI Merger.

The plan permits grants of stock options and

other equity awards to employees, directors and consultants.

As of March 31, 2026, no shares remain available for future issuance under

the 2017 Plan.

The Company’s 2018 Equity Incentive Plan,

as amended and restated in August 2025, authorizes the grant of incentive stock options, nonqualified stock options, restricted stock,

RSUs and other equity-based awards to employees, officers, directors and consultants.

The 2018 Plan permits the Board to delegate limited

grant authority to designated officers.

Options generally vest over periods ranging from immediate to four years and have contractual

terms of up to ten years .

As of March 31, 2026, there are no unvested

Restricted Stock or Restricted Stock Units outstanding under the 2018 Plan.

Incentive stock options granted under the 2018

Plan are granted at exercise prices at a minimum of 100 % of the estimated fair market value of the underlying common stock at date of

For any individual possessing more than 10 % of the total outstanding common stock of the Company, the exercise price per share

for incentive stock options is a minimum 110 % of the estimated fair value of the underlying common stock on the grant date.

Options granted

under the 2018 Plan vest over periods ranging from immediately to four years and are exercisable over periods up to ten years from the

The aggregate number of shares that may be awarded

under the 2018 Plan as of September 30, 2025 was 77,105,687 .

As of September 30, 2025, 10,714,289 stock options were granted to

employees, directors and consultants of the Company and 62,240,174 options were available for future grant under the 2018 Plan.

under the 2018 Plan as of March 31, 2026 was 80,105,687 .

As of March 31, 2026, 61,885,946 shares of common stock were available

for future grant under the 2018 Plan, of which 57,209,296 shares are registered.

See below for a summary of the stock options

granted under the 2011, 2017 and 2018 plans:

Weighted Weighted Aggregate

Average Average Intrinsic

Number of Exercise Remaining Value

Options Price Life (Years) (in millions)

Outstanding at January 1, 2026 15,941,550 $ 2.80 9.8 $ —

Granted 2,709,865 $ 1.66

Forfeitures ( 430,133 ) $ 16.21

Outstanding at March 31, 2026 18,221,282 $ 2.31 9.5 $ 5.7

Exercisable at March 31, 2026 8,930,436 $ 2.62 9.2 $ 2.4

XTI AEROSPACE, INC.

1 unchanged sentence

NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS

See below for a summary of the stock options granted under the 2011,

2017 and 2018 plans:

Shares Weighted

Price Weighted

Life (Years) Aggregate

(In millions)

Beginning balance as of January 1, 2025 51,185 $ 455.00 9.3 $ —

Granted 10,668,256 1.95

Forfeited ( 2,485 ) 2,476.56

Ending balance as of September 30, 2025 10,716,956 $ 3.54 9.9 $ —

Options vested and exercisable as of September 30, 2025 3,654,641 $ 4.63 9.9 $ —

The compensation committee of the Board approved awards of options

to certain Company executives under the 2018 Plan.

Each option has an exercise price of $ 2.00 per share.

The options vested 1/3 rd

on the grant date with the remaining 2/3 rd vesting in equal quarterly installments over two years starting from the grant date.

The options expire ten years from the grant date.

Options were granted as follows:

Grantee Grant Date Vesting

Start Date Options Granted

Chief Executive Officer of XTI Aerospace, Inc.

9/4/2025 9/4/2025 2,621,100

Chief Financial Officer of XTI Aerospace, Inc.

9/4/2025 9/4/2025 1,512,200

Chief Executive Officer of the XTI Aerospace, Inc.

Real-Time Location System Division 9/4/2025 9/4/2025 78,000

Chief Operating Officer of XTI Aerospace, Inc.

9/4/2025 9/4/2025 1,613,000

Chief Strategy Officer of XTI Aerospace, Inc.

9/4/2025 9/4/2025 1,512,200

Total Granted 7,336,500

The measurement of fair value of options is determined

utilizing a Black-Scholes model considering all relevant assumptions current at the date of issuance.

The following assumptions were

used in estimating the fair values of options awarded during the nine months ended September 30, 2025:

value of common stock

During the three months ended March 31, 2026,

the Company granted 2,709,865 stock options under the 2018 Plan to employees, directors, and other service providers with exercise prices

ranging from $ 1.43 to $ 1.92 per share.

The following assumptions were used in estimating

the fair values of options awarded during the three months ended March 31, 2026:

Fair value of common stock

$ 1.43 - $ 1.92

Exercise price

$ 1.43 - $ 1.92

Expected term

5.0 – 5.8 years

134.52 % - 149.33 %

interest rate

Risk-free interest rate

3.51 % - 3.95 %

XTI AEROSPACE, INC.

AND SUBSIDIARIES

NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS

Dividend yield

Stock-based Compensation Expense

The Company accounts

for options granted to employees by measuring the cost of services received in exchange for the award of equity instruments based upon

the fair value of the award on the date of grant.

The fair value of that award is then ratably recognized as an expense over the period

during which the recipient is required to provide services in exchange for that award.

The Company measures

compensation expense for its non-employee stock-based compensation under ASC 718, “Stock-Based Compensation”.

The fair value

of the option issued or committed to be issued is used to measure the transaction, as this is more reliable than the fair value of the

services received.

The fair value is measured at the value of the Company’s common stock or stock award on the date that the commitment

for performance by the counterparty has been reached or the counterparty’s performance is complete.

The fair value of the equity

instrument is charged directly to stock-based compensation expense and credited to additional paid-in capital.

The assumptions used

in calculating the fair value of stock-based awards represent management’s best estimates and involve inherent uncertainties and

the application of management’s judgment.

As a result, if factors change and management uses different assumptions, stock-based

compensation expense could be materially different for future awards.

The Company incurred the following stock-based

compensation charges for the periods indicated below (in thousands):

For the Three Months Ended

For the Nine Months Ended

Employee and consultant

stock options 1

Vesting of previously unvested

Professional fees 2

Merger-related professional fees

1 Amount included in general and administrative expenses on the condensed consolidated statements of operations.

2 Amount included in merger-related transaction costs on the condensed consolidated statements of operations for the three and nine months ended September 30, 2024.

Amount included in general and administrative expenses on the condensed consolidated statements of operations for the three and nine months ended September 30, 2025.

As of September 30, 2025, the total unrecognized

compensation expense related to unvested awards was approximately $ 14.0 million, which the Company expects to recognize over an estimated

weighted average period of 1.71 years.

XTI AEROSPACE, INC.

AND SUBSIDIARIES

NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS

Note 12 - Warrants

The following table summarizes the activity of

warrants outstanding:

Beginning balance as of January 1, 2025

( 8,039,000 )

Ending balance as of September 30, 2025

Exercisable as of September 30, 2025

The weighted average exercise price of warrants

outstanding as of September 30, 2025 was $ 2.77 .

The weighted average exercise price of exercisable warrants outstanding as of September

30, 2025 was $ 2.77 .

Warrants Granted

January 2025 Public

As part of its compensation for acting as placement

agent for the January Offering (refer to Note 9), the Company issued ThinkEquity warrants (the “Placement Agent Warrants”)

to purchase 72,727 shares of common stock.

The Placement Agent Warrants are exercisable commencing January 10, 2025 , expire January 8,

2030 and have an exercise price of approximately $ 17.1875 per share.

The Placement Agent Warrants are classified as a contingently redeemable

warrant in accordance with ASC 718, since these warrants did qualify for equity classification, but could be settled in cash or other

assets in the event that another person or entity becomes the beneficial owner of 50 % of the outstanding shares of the Company’s

common stock.

Because this contingently redeemable feature could result in the warrant holders receiving additional compensation not on

par with the holders of common stock, the Placement Agent Warrants were classified as temporary equity and therefore reported in “Mezzanine

Equity” on the Company’s condensed consolidated balance sheets as of September 30, 2025.

The measurement of fair value of the warrants

was determined utilizing a Black-Scholes model considering all relevant assumptions current at the date of issuance (i.e., share price

of $ 7.31 , exercise price of $ 17.1875 , term of five years, volatility of 98 %, risk-free rate of 4.6 %, and expected dividend rate of 0 %).

The proceeds of the January Offering were allocated to each of the warrants and the common stock based on their relative fair value.

XTI AEROSPACE, INC.

AND SUBSIDIARIES

NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS

The grant date fair value of the warrants and

shares of common stock on January 10, 2025 is summarized below and is reflected as temporary equity for the warrants and within additional

paid-in capital for the common stock as of September 30, 2025.

Placement Agent Warrants

March 2025, June

2025 and September 2025 Public Offerings

As part of the March Offering, June Offering

and September Offering (refer to Note 9), the Company issued pre-funded warrants (the “Pre-funded Warrants”) to purchase

up to an aggregate of 7,012,800 shares of common stock, and common warrants (the “Common Warrants”) to purchase up to an

aggregate of 25,955,200 shares of common stock.

Each Pre-funded Warrant was immediately exercisable

upon issuance, has an exercise price of $ 0.001 per share and may be exercised at any time until all of the Pre-funded Warrants are exercised

Each Common Warrant was immediately exercisable upon issuance and expires on the fifth anniversary of the date of issuance.

The Common Warrants issued in connection with the March Offering have an exercise price of $ 1.36 .

The Common Warrants issued in connection

with the June Offering and the September Offering have an exercise price of $ 2.00 .

Upon closing of the March Offering and June Offering,

the Company issued ThinkEquity, as partial compensation, warrants (the “Representative’s Warrants”) to purchase up to

147,060 and 457,150 shares of common stock, respectively.

The Representative’s Warrants issued in connection with the March Offering

and June Offering have an exercise price of $ 1.70 and $ 2.1875 per share, respectively.

Upon closing of the September Offering, the Company

issued ThinkEquity, as partial compensation, warrants (the “Placement Agent Warrants”) to purchase up to 625,000 shares of

common stock at an exercise price of $ 2.00 per share.

The Representative’s Warrants and the Placement Agent Warrants are exercisable,

in whole or in part, immediately upon issuance until the five-year anniversary of the commencement of sales of securities in the March

Offering, June Offering and September Offering, respectively.

In connection with closing multiple exercises

of the Over-Allotment Option during July 2025 (refer to Note 9), the Company issued ThinkEquity additional Representative’s Warrants

to purchase an aggregate of 68,551 shares of common stock at an exercise price of $ 2.1875 per share with the same terms as the Representative’s

Warrants issued in connection with the initial closing of the June Offering.

The grant date fair value of the additional Representative’s

Warrants was determined to be approximately $ 94,000 .

Similar to the Placement Agent Warrants issued to ThinkEquity in connection

with January Offering, as described above in this note section, the Representative’s Warrants and the Placement Agent Warrants issued

in connection with the March Offering, June Offering and September Offering were determined to be temporary equity under ASC 718 and therefore

reported in “Mezzanine Equity” on the Company’s condensed consolidated balance sheets.

The Common Warrants and Pre-funded

Warrants issued in connection with the March Offering, June Offering and September Offering were determined to be liability classified.

The Common Warrants and Pre-funded Warrants were recognized at fair value at issuance, with a gain in change in fair value of approximately

$ 2.2 million in the three months ended September 30, 2025 and a loss of $ 3.3 million for the nine months ended September 30, 2025 reported

in “change in fair value of warrant liability” on the Company’s condensed consolidated statements of operations.

The measurement of fair value of the Representative’s

Warrants issued in connection with the March Offering was determined utilizing a Black-Scholes model considering all relevant assumptions

current at the date of issuance (i.e., share price of $ 1.09 , exercise price of $ 1.70 , term of five years, volatility of 103 %, risk-free

rate of 4 %, and expected dividend rate of 0 %).

The measurement of fair value of the Common Warrants issued in connection with the March

Offering was determined utilizing a Black-Scholes model considering all relevant assumptions current at the date of issuance (i.e., share

price of $ 1.09 , exercise price of $ 1.36 , term of five years, volatility of 103 %, risk-free rate of 4 %, and expected dividend rate of

XTI AEROSPACE, INC.

AND SUBSIDIARIES

NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS

The measurement of fair value of the Representative’s

Warrants issued in connection with the June Offering was determined utilizing a Black-Scholes model considering all relevant assumptions

current at the date of issuance (i.e., share price of $ 1.66 , exercise price of $ 2.1875 , term of five years, volatility of 106 %, risk-free

rate of 3.8 %, and expected dividend rate of 0 %).

The measurement of fair value of the Common Warrants issued in connection with the June

Offering was determined utilizing a Black-Scholes model considering all relevant assumptions current at the date of issuance (i.e., share

price of $ 1.66 , exercise price of $ 2.00 , term of five years, volatility of 106 %, risk-free rate of 3.8 %, and expected dividend rate of

The measurement of fair value of the Placement

Agent Warrants and Common Warrants issued in connection with the September Offering was determined utilizing a Black-Scholes model considering

all relevant assumptions current at the date of issuance (i.e., share price of $ 1.51 , exercise price of $ 2.00 , term of five years, volatility

of 109 %, risk-free rate of 3.6 %, and expected dividend rate of 0 %).

The March Offering, June Offering and September

Offering proceeds were allocated to each of the warrants and the common stock based on their relative fair value.

The grant date fair

value of the warrants and shares of common stock on March 31, 2025 (March Offering), June 26, 2025 (June Offering) and September 15, 2025

(September Offering) is summarized below in the aggregate and is reflected as temporary equity (“Mezzanine Equity”) for the

Representative’s Warrants and Placement Agent Warrants, a warrant liability for the Common Warrants and Pre-funded Warrants, and

within additional paid-in capital for the common stock as of September 30, 2025.

Pre-funded Warrants

Representative’s Warrants and Placement Agent Warrants

Common Warrants

Total Fair Value of Warrants Issued

Given that the aggregate gross proceeds of approximately

$ 20.0 million from the March Offering (approximately $ 4.0 million) and June Offering (approximately $ 16.0 million) was less than the total

fair value of the warrants issued, the Company recorded a loss on excess fair value at issuance of approximately $ 4.5 million for the

nine months ended September 30, 2025, which is reported in “warrant issuance expense” on the Company’s condensed consolidated

statements of operations.

Given that the gross proceeds of $ 20.0 million from the September Offering exceeded the total fair value of

the warrants issued, the Company did not record a loss during the three months ended September 30, 2025.

In addition, an aggregate of $ 0.8 million and

$ 2.1 million of underwriting discounts and commissions and other expenses relating to the March Offering, June Offering and September

Offering were allocated, based on the fair value at the time of issuance, to the warrant instruments for the three and nine months ended

September 30, 2025, respectively, which is reported in “warrant issuance expense” on the Company’s condensed consolidated

statements of operations.

Stock-based compensation charges for the periods

indicated below (in thousands) are as follows:

Three Months Ended

Research and development

Sales and marketing

General and administrative

As of March 31, 2026, the total unrecognized

compensation expense related to unvested awards was approximately $ 13.9 million, which the Company expects to recognize over an

estimated weighted average period of 1.0 years.

Note 11 - Segments

The Company’s Chief Executive Officer (“CEO”),

acting as the Chief Operating Decision Maker, or (“CODM”), regularly reviews and manages certain areas of its businesses,

resulting in the Company identifying two reportable segments for the three months ended March 31, 2026:

Unmanned Aircraft Systems (“UAS”)

and Advanced Defense Systems (“ADS”).

The Company manages and reports its operating results through these two reportable

This allows the Company to enhance its customer focus and better align its business models, resources, and cost structure to

the specific current and future growth drivers of each business, while providing increased transparency to the Company’s shareholders.

For the three months ended March 31, 2025, the

Company operated as one segment:

Commercial Aviation, which included the TriFan 600 development program.

As of early 2026, the TriFan

600 program has been paused and is no longer identified as an operating segment by management.

Management determined that continued development

of the TriFan 600 program would require substantial additional time and capital that it does not plan to allocate at this time.

XTI AEROSPACE, INC.

1 unchanged sentence

NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS

Warrants Exercised

During the nine months ended September 30, 2025,

2,176,000 Pre-funded Warrants from the March Offering were exercised at an exercise price per share of $ 0.001 , resulting in the issuance

of 2,176,000 shares of common stock and cash proceeds to the Company of $ 2,176 .

During the nine months ended September 30, 2025,

2,884,500 Common Warrants from the March Offering were exercised at an exercise price per share of $ 1.36 , resulting in the issuance of

2,884,500 shares of common stock and cash proceeds to the Company of approximately $ 3.9 million.

As of September 30, 2025, there

were no Pre-funded Warrants and 56,700 Common Warrants outstanding from the March Offering.

During the nine months ended September 30, 2025,

2,911,800 Pre-funded Warrants from the June Offering were exercised at an exercise price per share of $ 0.001 , resulting in the issuance

of 2,911,800 shares of common stock and cash proceeds to the Company of $ 2,912 .

During the nine months ended September 30, 2025,

66,700 Common Warrants from the June Offering were exercised at an exercise price per share of $ 2.00 , resulting in the issuance of 66,700

shares of common stock and cash proceeds to the Company of approximately $ 0.1 million.

As of September 30, 2025, there were no Pre-funded

Warrants and 10,447,330 Common Warrants outstanding from the June Offering.

Note 13 - Segments

The Company’s Chief Executive Officer,

acting as the Chief Operating Decision Maker (“CODM”), regularly reviews and manages certain areas of its businesses , resulting

in the Company identifying two reportable segments:

Industrial IoT and Commercial Aviation.

The Company manages and reports its operating

results through these two reportable segments.

This allows the Company to enhance its customer focus and better align its business models,

resources, and cost structure to the specific current and future growth drivers of each business, while providing increased transparency

to the Company’s shareholders.

The Commercial Aviation segment is currently in

the pre-revenue development stage and its primary activity is the development of the TriFan 600 airplane.

The Industrial IoT segment generates

revenue primarily from the sale of real-time location system solutions for the industrial sector and its customers are primarily located

in Germany and the U.S.

As it relates to the Industrial IoT segment, the results disclosed in the table below only reflect activity following

the XTI Merger closing through the September 30, 2025 reporting date.

Information on each of our reportable segments

and reconciliation to consolidated loss from operations is presented in the table below.

We have assigned certain previously reported

expenses to each segment to conform to the way we internally manage and monitor our business.

Unallocated operating expenses include

costs that are not specific to a particular segment but are general to the group;

included expenses incurred for administrative and accounting

staff, general liability and other insurance, accrued consulting fees and transaction bonuses relating to former Legacy Inpixon executives,

professional fees and other similar corporate expenses.

Given the strategic shift, as well as the addition

of the UAS segment in the fourth quarter of the prior year, the Company did not recast the segment financial information for the three

months ended March 31, 2025.

The UAS segment includes operating results of

Drone Nerds, which is owned by the Company’s majority-owned subsidiary, XTI Drones Holdings, which provides an integrated suite

of UAS solutions across hardware distribution, training, compliance management support, repair and maintenance, fleet sustainment, and

related services.

This segment is focused on revenue generation and lifecycle support for enterprise, public safety, government, and

defense customers.

The ADS segment reflects a strategic shift away

from the TriFan 600 program and toward nearer-term unmanned systems opportunities.

Management determined that continued development of

the TriFan 600 program would require substantial additional time and capital, and the Company therefore appointed new divisional leadership

and redirected existing resources toward unmanned systems opportunities that it believes may offer nearer-term commercial applications.

The ADS segment is focused on the design, development, and production of unmanned platforms for defense and commercial applications,

with an emphasis on serving defense customers and supporting domestic procurement initiatives aligned with U.S.

national security priorities.

The CODM evaluates segment performance primarily

based on revenues, gross profit, and income (loss) from operations for the UAS segment, and research and development spending for the

Unallocated operating expenses include costs that are not specific to a particular segment but are general to the group;

included expenses incurred for administrative and accounting staff, public company costs, general liability and other insurance, accrued

consulting fees and transaction bonuses relating to former Legacy Inpixon executives, professional fees and other similar corporate expenses.

UAS segment reflects results of Drone Nerds beginning in November 2025.

There were no UAS segment operations during the three months

ended March 31, 2025.

Segment operating results are presented on a consolidated basis prior to the allocation of net income (loss) attributable

to noncontrolling interests.

Substantially all revenues and long-lived assets for continuing operations are located in the United

The following tables reflect the results of operations

from our business segments for the periods indicated below (in thousands):

Three Months Ended September 30,

Cost of revenues

Three Months Ended March 31, 2026

Cost of revenue

Operating expenses

1 unchanged sentence

Sales and marketing

General and administrative

Impairment of goodwill

Impairment of intangible assets

and administrative (1)

Total operating expenses

Loss from operations

Income (loss) from operations

(1) Unallocated general and administrative costs primarily consist of stock compensation, personnel expenses, professional fees, and public company costs.

(2) Other expenses include amortization of intangibles.

XTI AEROSPACE, INC.

1 unchanged sentence

NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS

Nine Months Ended September 30,

Cost of revenues

Three Months Ended March 31, 2025

Operating expenses

1 unchanged sentence

Sales and marketing

General and administrative

Impairment of goodwill

Impairment of intangible assets

and administrative (1)

Other expenses (2)

Total operating expenses

Loss from operations

(1) Unallocated general and administrative costs primarily

consist of stock compensation, personnel expenses, professional fees, and public company

(2) Other expenses include amortization of intangibles.

Three Months Ended September 30,

Cost of revenues

Operating expenses

Research and development

Sales and marketing

General and administrative

Total operating expenses

Income (loss) from operations

Nine Months Ended September 30,

Cost of revenues

Operating expenses

Research and development

Sales and marketing

General and administrative

Total operating expenses

Loss from operations

(2) Other expenses include merger-related transaction costs and amortization of intangibles.

The reporting package provided to the Company’s

CODM does not include the measure of assets by segment as that information is not reviewed by the CODM when assessing segment performance

CODM does not include the measure of assets by segment as that information isn’t reviewed by the CODM when assessing segment performance

or allocating resources.

XTI AEROSPACE, INC.

AND SUBSIDIARIES

NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS

Note 14 - Fair Value Measurements and Fair

Value of Financial Instruments

Note 12- Fair Value Measurements and Fair Value of Financial Instruments

The Company measures certain financial assets

5 unchanged sentences

These levels are:

Quoted prices (unadjusted) in active

markets that are accessible at the measurement date for identical assets or liabilities.

Observable prices that are based on

inputs not quoted on active markets but corroborated by market data.

Unobservable inputs which are supported

by little or no market activity and values determined using pricing models, discounted cash flow methodologies, or similar techniques,

as well as instruments for which the determination of fair value requires significant judgment or estimation.

Quoted prices (unadjusted)

in active markets that are accessible at the measurement date for identical assets or liabilities.

Observable prices that

are based on inputs not quoted on active markets but corroborated by market data.

Unobservable inputs which

are supported by little or no market activity and values determined using pricing models, discounted cash flow methodologies, or

similar techniques, as well as instruments for which the determination of fair value requires significant judgment or estimation.

Financial instruments consist of cash and cash

equivalents, accounts receivable, accounts payable, and warrant liability.

Cash and cash equivalents, accounts receivable and accounts

payable are stated at their respective carrying amounts, which approximate fair value due to their short-term nature.

The Company’s assets and liabilities measured

at fair value consisted of the following at the periods indicated:

Fair Value at September 30, 2025

Warrant liability

Total liabilities

The fair value of the Level 3 warrant liability

was determined by using a pricing model with certain significant unobservable market data inputs (refer to Note 12).

The table below provides a summary of changes

in the estimated fair value of the Company’s Level 3 warrant liability:

Balance as of January 1, 2025

Pre-funded and Common Warrants issued in connection with the March Offering (Note 12)

Pre-funded and Common Warrants issued in connection with the June Offering (Note 12)

Pre-funded and Common Warrants issued in connection with the September Offering (Note 12)

Exercise of warrants

Change in fair value

Balance as of September 30, 2025

equivalents, accounts receivable, notes receivable, accounts payable, warrant liability, line of credit, and notes payable.

cash equivalents, accounts receivable and accounts payable are stated at their respective carrying amounts, which approximate fair value

due to their short-term nature.

The change in fair value of the warrant liability

is presented within “Change in fair value of warrant liability” on the condensed consolidated statements of operations.

XTI AEROSPACE, INC.

AND SUBSIDIARIES

NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS

Note 15 - Foreign Operations

Prior to the XTI Merger, the Company’s

operations were located primarily in the United States.

After the XTI Merger, the Company’s operations are located primarily in

the United States, Germany, and the United Kingdom.

Revenues by geographic area are attributed by the country of domicile of our subsidiaries.

The financial data by geographic area are as follows (in thousands):

United States

United Kingdom

For the Three Months Ended September 30, 2025:

Revenues by geographic area

Operating loss by geographic area

Net loss by geographic area

For the Three Months Ended September 30, 2024:

Revenues by geographic area

Operating loss by geographic area

Net loss by geographic area

For the Nine Months Ended September 30, 2025:

Revenues by geographic area

Operating loss by geographic area

Net loss by geographic area

For the Nine Months Ended September 30, 2024:

Revenues by geographic area

Operating loss by geographic area

Net loss by geographic area

As of September 30, 2025:

Identifiable assets by geographic area

Long lived assets by geographic area

Goodwill by geographic area

As of December 31, 2024:

Identifiable assets by geographic area

Long lived assets by geographic area

Goodwill by geographic area

XTI AEROSPACE, INC.

AND SUBSIDIARIES

NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS

Note 16 - Related Party Transactions

Consulting Agreement with David Brody

David Brody, board member and founder of Legacy

XTI, provided legal and strategic consulting services to Legacy XTI under a consulting agreement between Legacy XTI and Mr.

to an amendment to the consulting agreement entered into in January 2024, an outstanding payable amount of $ 320,000 was waived by Mr.

Brody, and the consulting agreement terminated in connection with the closing of the XTI Merger.

This forgiveness of a related party

payable was accounted for as a capital contribution on the condensed consolidated statement of changes in stockholders’ equity.

During the nine months ended September 30, 2024, Legacy XTI paid Mr.

Brody consulting compensation of $ 20,000 .

Consulting Agreement

with Scott Pomeroy

Scott Pomeroy and Legacy XTI entered into a consulting

agreement dated July 1, 2022, as amended effective January 1, 2023, that provided for his engagement as Legacy XTI’s Chief Financial

The agreement provided that Mr.

Pomeroy receive a monthly compensation of $ 17,500 .

Pursuant to the consulting agreement and

in connection with the closing of the XTI Merger in March 2024, Mr.

Pomeroy (i) received 4,000,000 shares (pre-merger, pre-reverse stock

splits) of Legacy XTI common stock valued at $ 1.9 million as transaction-related compensation and (ii) was entitled to receive a transaction

cash bonus of $ 400,000 .

The transaction cash bonus obligation remained outstanding as of December 31, 2024 and was included in accrued

expenses and other current liabilities on the accompanying consolidated balance sheets.

This cash bonus obligation was subsequently paid

in full during January 2025.

Effective upon closing time of the XTI Merger, Mr.

Pomeroy was appointed as XTI Aerospace’s Chief

Executive Officer (“CEO”).

As the consulting agreement was terminated upon Mr.

Pomeroy’s appointment as the Company’s

CEO on March 12, 2024, no consulting compensation was accrued or paid to Mr.

Pomeroy during the three months ended September 30, 2025

During the nine months ended September 30, 2025 and 2024, the Company paid Mr.

Pomeroy consulting compensation of $ 0 and $ 43,750 ,

respectively.

Transactions with AVX Aircraft Company

On August 27, 2024, the Company entered into

an amended and restated letter agreement with AVX Aircraft Company (“AVX”), which amends and restates the original letter

agreement, dated as of March 25, 2024, by and between the Company and AVX, as subsequently amended, pursuant to which AVX provides consulting

and advisory services to the Company relating to the development and design of the TriFan 600 airplane in exchange for the payment of

costs incurred by AVX (with a target cost of approximately $ 960,000 ) plus a fixed fee of 12 % of such costs (approximately $ 115,000 ) for

a total payment of up to approximately $ 1.1 million.

The Company pays AVX for its actual costs plus the 12 % fixed fee on a monthly basis.

The Company’s Chairman and Chief Executive Officer, Scott Pomeroy, and board member, David Brody, also sit on the five-member board

Additionally, as of the date of this report, Mr.

Brody and his spouse together own approximately 26 % of the issued and outstanding

shares of AVX.

As a result of a legal financial separation between Mr.

Brody and his spouse, Mr.

Brody holds approximately 7 % of the

voting power of the outstanding securities of AVX and Mr.

Brody’s spouse holds approximately 19 % of the voting power of the outstanding

securities of AVX.

As of the date of this report, Mr.

Pomeroy owns restricted stock units of AVX which amount to less than 5 % of the

outstanding shares of AVX on a fully diluted basis.

During the nine months ended September 30, 2025, the Company did not accrue or pay

AVX any consulting fees.

During the year ended December 31, 2024, the Company paid AVX approximately $ 0.9 million in consulting fees,

which included advance deposits for future services.

As of December 31, 2024, the deposit balance for future services was approximately

$ 0.5 million and is included in prepaid expenses and other current assets on the accompanying condensed consolidated balance sheets.

In April 2025, the deposit balance of approximately $ 0.5 million was returned to the Company.

As of the date of this report, neither

Brody nor Mr.

Pomeroy has received, and neither is entitled to receive, any compensation or other consideration from AVX, in connection

with services provided by AVX to the Company or otherwise.

On April 18, 2025, XTI Aircraft Company entered

into a novation agreement with AVX and a recruiting firm, pursuant to which AVX assigned to XTI Aircraft Company all of AVX’s rights

and obligations under a talent acquisition engagement agreement with the recruiting firm and, as a result, the recruiting firm assisted

XTI Aircraft Company in hiring an executive for fees of approximately $ 0.1 million, which were incurred subsequent to September 30, 2025.

Agreements with Nadir Ali

On March 12, 2024, the Company entered into a

consulting agreement with Nadir Ali (the “Ali Consulting Agreement”), the Company’s former Chief Executive Officer.

Ali, through 3AM, held shares of the Company’s Series 9 Preferred Stock as disclosed in Note 10.

is presented within ‘Change in fair value of warrant liability’ in the condensed consolidated statements of operations.

The fair value of the Level 3 warrant liability

was determined using a pricing model with certain significant unobservable market data inputs.

XTI AEROSPACE, INC.

1 unchanged sentence

NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS

During the three months ended September 30, 2025

and 2024, the Company recognized compensation expense of $ 0 and approximately $ 1.0 million, respectively, which is included in general

and administrative expenses on the condensed consolidated statements of operations, relating to the Ali Consulting Agreement.

the nine months ended September 30, 2025 and 2024, the Company recognized compensation expense of approximately $ 2.3 million and $ 2.6

million, respectively, which is included in general and administrative expenses on the condensed consolidated statements of operations,

relating to the Ali Consulting Agreement.

As of December 31, 2024, the Company owed Mr.

Ali accrued consulting fees of approximately

$ 0.2 million, which is included in accounts payable on the accompanying consolidated balance sheets.

Pursuant to the Settlement Agreement (see “ Settlement

Agreement ” below in this note), as of September 30, 2025, the Company owed Mr.

Ali accrued consulting fees of $ 0.5 million,

which is included in accounts payable on the accompanying condensed consolidated balance sheets.

On July 24, 2023, the compensation committee of

the Board of Legacy Inpixon adopted a Strategic Transaction Bonus Plan, which was amended on March 11, 2024 (the “Strategic Transaction

Bonus Plan”), and was intended to provide incentives to certain employees, including Mr.

Ali, and other service providers to remain

with the Company through the consummation of a qualifying transaction.

As of December 31, 2024, the Company had a transaction bonus obligation

of approximately $ 2.1 million payable to Mr.

Ali, which is included in accrued expenses and other current liabilities on the accompanying

condensed consolidated balance sheets.

On March 31, 2025, the Company repaid the remaining transaction bonus obligation to Mr.

to the Settlement Agreement (see “ Settlement Agreement ” below in this note).

Settlement Agreement

On March 27, 2025 (the “Effective Date”),

the “Company entered into a settlement agreement (the “Settlement Agreement”) with 3AM, Grafiti Group LLC (“Grafiti

Group”) and Nadir Ali.

The terms of the Settlement Agreement include:

● Termination of Ali Consulting Agreement.

The Settlement Agreement provides that effective as of the Effective Date, the Ali Consulting Agreement was terminated, and in lieu of the $ 2,775,000 (the “Ali Advisory Fees”) that would be owed to Mr.

Ali pursuant to the terms of the Ali Consulting Agreement as a result of the termination of such Ali Consulting Agreement prior to the 15 month anniversary of the effective date thereof, the Company agreed (i) that the aggregate amount of $ 1,000,000 (the “Grafiti Purchase Amount”) required to be delivered by Grafiti Group pursuant to that certain Equity Purchase Agreement, dated February 16, 2024, by and among the Company, Grafiti LLC, and Grafiti Group, as amended (the “Equity Purchase Agreement”), shall be deemed to be satisfied in full and no further amounts shall be payable to the Company by Grafiti Group or any of its affiliated parties pursuant to the Equity Purchase Agreement;

(ii) to deliver a cash amount of $ 60,000 (the “Outstanding Amount”) to Mr.

Ali by wire transfer of immediately available funds;

and (iii) to deliver $ 1,500,000 (the “Deferred Amount”) by wire transfer of immediately available funds in three equal installments of $ 500,000 each on June 30, 2025, September 30, 2025 and December 30, 2025.

Any installment amount that is not paid by the applicable due dates will be subject to interest at a rate of 18 % per annum.

Upon payment of the Outstanding Amount and the Deferred Amount in accordance with the terms of the Settlement Agreement, the Ali Advisory Fees shall be deemed to be satisfied in full and no further amounts shall be payable by the Company to Mr.

Ali or his affiliated parties pursuant to the Ali Consulting Agreement.

On March 31, 2025, the Company paid

the Outstanding Amount of $ 60,000 in full.

On June 30, 2025, the Company paid the first $ 500,000 installment of the Deferred Amount.

On September 30, 2025, the Company paid the second $ 500,000 installment of the Deferred Amount.

As of September 30, 2025, a Deferred

Amount of $ 500,000 remained outstanding.

● Former Management Payments.

Pursuant to the Settlement Agreement, the Company agreed to pay the Former Management Payments (as defined below) on the earlier of (a) the closing date of the Company’s next financing transaction and (b) 30 days following the Effective Date of the Settlement Agreement, subject to certain penalties for late payment.

The “Former Management Payments” comprise (i) an aggregate amount of $ 803,260.65 that, as of the Effective Date, remained payable to the recipients of bonuses payable pursuant to the Strategic Transaction Bonus Plan together with (ii) an aggregate amount of $ 303,372.87 that, as of the Effective Date, was payable to Wendy Loundermon, the Company’s former Chief Financial Officer and a former director of the Company, pursuant to that certain Consulting Agreement, dated March 12, 2024, by and between the Company and Ms.

On March 31, 2025, the Company

paid the Former Management Payments in full.

Warrant Liability – Fair Value Measurement

The Company’s warrant liability is classified

as a Level 3 liability within the fair value hierarchy as the valuation utilizes significant unobservable inputs.

The fair value of the warrants was estimated

using a Black-Scholes option pricing model.

The model requires the use of significant assumptions, including:

The Company’s stock

price at the valuation date

The contractual exercise

Expected volatility

Risk-free interest rate

Expected term

Dividend yield

Expected volatility was based on the historical

volatility of the Company’s common stock.

The risk-free interest rate was based on U.S.

Treasury yields commensurate with the expected

term of the warrants.

The expected term was based on the contractual remaining life of the warrants.

The Company assumed a dividend yield

of zero, as it does not expect to declare dividends in the foreseeable future.

As of March 31, 2026, the significant assumptions

used in the Black-Scholes model were as follows:

● Stock price:

● Exercise prices:

$ 1.36 – $ 2.00

● Expected volatility:

● Risk-free interest rate:

3.80 % – 3.84 %

● Remaining term:

4.00 – 4.46 years

● Dividend yield:

Changes in these assumptions could result in

a material change in the fair value of the warrant liability.

XTI AEROSPACE, INC.

1 unchanged sentence

NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS

● Preferred Stock Redemption.

Pursuant to the Settlement Agreement, on the Effective Date, the Company delivered the aggregate amount of approximately $ 1.3 million (the “Series 9 Redemption Amount”) to Mr.

Ali for the redemption of 1,164.12 shares of Series 9 Preferred Stock outstanding as of such date.

Following Mr.

Ali’s receipt of the Series 9 Redemption Amount, Mr.

Ali no longer held any shares of Series 9 Preferred Stock.

Mutual Release.

As of the Effective Date, Mr.

Ali, on behalf of himself and his former and current affiliated entities, including 3AM, Grafiti LLC and Grafiti Group (collectively, the “Ali Parties”) agreed to release the Company from all claims arising out of any obligations of the Company with respect to the Ali Consulting Agreement, that certain securities purchase agreement, dated as of March 12, 2024 (the “Series 9 Purchase Agreement”), by and between the Company and 3AM, and the portion of the Strategic Transaction Bonus Plan relating to Mr.

Ali, from the beginning of time through and including the date on which the Company has delivered all payments due under the Settlement Agreement (the “Completion Date”).

As of the Effective Date, the Company agreed to release the Ali Parties from all claims arising out of any obligations of the Ali Parties with respect to the payment of the purchase price as set forth in the Equity Purchase Agreement, the Ali Consulting Agreement, the Series 9 Purchase Agreement and the portion of the Strategic Transaction Bonus Plan relating to Mr.

Ali, from the beginning of time through and including the Completion Date.

Entire Agreement .

The Settlement Agreement provides that it supersedes any prior consents or agreements regarding the allocation of financing proceeds

for the payment of any obligations of the Company described in the Settlement Agreement.

Grafiti Group Divestiture

On February 21, 2024, Legacy Inpixon completed

the disposition of the remaining portion of the Shoom, SAVES, and Game Your Game business lines and assets in accordance with the terms

and conditions of the Equity Purchase Agreement.

Pursuant to the terms of the Equity Purchase Agreement, Grafiti Group acquired 100 %

of the equity interest in Grafiti LLC, including the assets and liabilities primarily relating to Legacy Inpixon’s SAVES, Shoom

and Game Your Game business, including 100 % of the equity interests of Inpixon India, Grafiti GmbH (previously Inpixon GmbH) and Game

Your Game, Inc., from the Company for a minimum purchase price of $ 1.0 million to be paid in two annual cash installments of $ 0.5 million

due within 60 days after December 31, 2024 and 2025 (the “Grafiti Purchase Amount”).

The purchase price and annual cash installment

payments were to be (i) decreased for the amount of transaction expenses assumed;

and (ii) increased or decreased by the amount of working

capital of Grafiti LLC on the closing balance sheet is greater or less than $ 1.0 million.

As of December 31, 2024, $ 0.5 million of the

receivable is included in current assets as other receivables on the Company’s condensed consolidated balance sheets, and the remaining

$ 0.5 million of the receivable is included in long term assets as other assets on the Company’s consolidated balance sheets.

Pursuant to the Settlement Agreement dated March

27, 2025 (see “ Settlement Agreement ” above in this note), the Company agreed that, effective as of the Effective Date

of the Settlement Agreement, the Grafiti Purchase Amount shall be deemed to be satisfied in full and no further amounts shall be payable

to the Company by Grafiti Group or any of its affiliated parties pursuant to the Equity Purchase Agreement.

As such, there are no receivables

due from Grafiti Group or any of its affiliates reported in the Company’s condensed consolidated balance sheets as of September

Fair Value Tables

As of March 31, 2026, the Company did not have

any assets measured at fair value on a recurring basis.

The Company’s liabilities measured at fair value consisted of the following

at March 31, 2026:

Fair Value at March 31, 2026

Warrant liability

Total liabilities

The table below provides a summary of changes

in the estimated fair value of the Company’s Level 3 assets and liabilities:

Balance at January 1, 2026

Pre-funded Warrants issued in connection Series 10 Preferred Stock conversion

Exercise of Warrants

Change in fair value

Balance at March 31, 2026

Note 13 - Commitments and Contingencies

Advisory Agreement

On May 13, 2025, the Company entered into an

advisory agreement with a third-party advisor, pursuant to which the Company agreed to pay $ 85,000 in cash and issue 125,000 shares of

restricted common stock, subject to certain registration rights, to the advisor in consideration for financial advisory services agreed

to be rendered to the Company pursuant to the advisory agreement.

During the three months ended June 30, 2025, the Company paid the $ 85,000

cash fee and issued 125,000 shares of common stock to the third-party advisor.

Fifty percent of the initial cash fee payment, or $ 42,500 ,

was subsequently waived and returned to the Company as part of the June Offering closing.

XTI AEROSPACE, INC.

From time to time, the Company is involved in

legal proceedings arising in the ordinary course of business.

Except as described below, the Company is not currently a party to any

other material legal proceedings.

Xeriant Litigation

December 2023, Xeriant, Inc.

filed a lawsuit in the United States District Court for the Southern District of New York against Legacy

XTI alleging, among other things, breach of contract, fraud, unjust enrichment, and misappropriation of confidential information in connection

with agreements relating to the TriFan 600 aircraft and the XTI Merger.

Xeriant previously sought damages in excess of $ 500 million but

has since amended its complaint to seek an unspecified amount.

Legacy XTI has asserted counterc l aims

alleging breach of contract, breach of fiduciary duty, and seeking declaratory relief regarding ownership of intellectual property and

termination of the joint venture agreement.

The litigation is currently in active discovery.

The Company believes the claims against Legacy XTI are without merit and intends to vigorously defend against them.

The outcome of this

matter cannot presently be predicted.

Auctus Litigation

In May 2025, Auctus Fund, LLC filed a lawsuit

in Colorado state court against Legacy XTI alleging breach of contract and asserting that Legacy XTI is obligated to repay approximately

$ 9 million under a promissory note allegedly assumed in connection with a prior letter agreement.

Legacy XTI disputes these claims and

has asserted affirmative defenses.

The case is ongoing.

AEROSPACE, INC.

AND SUBSIDIARIES

NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS

In addition, the Company agreed to reimburse

the advisor for all reasonable travel and other out-of-pocket expenses incurred in connection with the advisory agreement up to a maximum

of $ 15,000 , subject to certain exceptions.

The Company also agreed to:

(1) pay the advisor a customary fee tail during the 12-month period

following the termination or expiration of the advisory agreement, if applicable;

(2) pay an M&A cash fee to the advisor during the

term equal to 3 % of the aggregate consideration to the extent the Company enters into a merger or acquisition with a party initially

introduced by the advisor to the Company;

and (3) indemnify the advisor in in accordance with the terms and conditions of the advisory

The advisory agreement has a term of 180 days,

subject to early termination or further extension, each upon the mutual consent of the parties.

From time to time, the Company is subject to

various claims, charges and litigation matters that arise in the ordinary course of business.

The Company records a provision for a liability

when it is both probable that the loss has been incurred and the amount of the loss can be reasonably estimated.

If the Company determines

that a loss is reasonably possible and the loss or range of loss can be reasonably estimated, it discloses the possible loss or range

Any potential gains associated with legal matters are not recorded until the period in which all contingencies are resolved

and the gain is realized or realizable.

Depending on the nature and timing of any such proceedings that may arise, an unfavorable resolution

of a matter could materially affect the Company’s future consolidated results of operations, cash flows or financial position in

a particular period.

Except if otherwise indicated, it is not reasonably possible to determine the probability of loss or estimate damages

for any of the matters discussed below, and therefore, the Company has not established reserves for any of these matters.

Xeriant Matter

On December 6, 2023, Xeriant, Inc.

filed a complaint in the United States District Court for the Southern District of New York against Legacy XTI, two unnamed entities,

and five unnamed individuals.

On January 31, 2024, Xeriant filed an amended complaint adding the Company as a defendant.

On February 29,

2024, Xeriant filed a second amended complaint, removing the Company and one of the unnamed entities as defendants.

The second amended

complaint alleges that Legacy XTI breached several agreements with Xeriant, including a Joint Venture Agreement dated May 31, 2021, a

cross-patent license agreement, an operating agreement, and a letter dated May 17, 2022, which Xeriant claims arose from its introduction

of Legacy XTI to a Nasdaq-listed company as a potential acquirer.

Xeriant further alleges that it provided intellectual property, expertise,

and capital in connection with Legacy XTI’s TriFan 600 aircraft and was improperly excluded from a subsequent transaction involving

the TriFan 600 technology as part of Legacy XTI’s merger with the Company.

Xeriant asserts causes of action for breach of contract,

fraud, unjust enrichment, and misappropriation of confidential information, and seeks damages in excess of $ 500 million, along with injunctive

and other equitable relief.

On March 13, 2024, Legacy XTI moved to dismiss

portions of the second amended complaint.

The Court denied that motion on January 14, 2025.

Legacy XTI filed its answer on January 28,

2025, and subsequently filed an amended answer and counterclaims on February 18, 2025.

The amended counterclaims, further amended on April

14, 2025, allege that Xeriant breached the Joint Venture Agreement by failing to make required capital contributions of approximately

$ 4.6 million and by failing to deliver promised intellectual property and strategic support.

Legacy XTI further alleges that Xeriant breached

its fiduciary duty by engaging in coercive and self-dealing conduct, including conditioning a strategic introduction on the issuance of

equity and the assumption of debt.

Legacy XTI seeks declaratory relief confirming that the joint venture has been terminated, that all

intellectual property related to the TriFan 600 belongs solely to Legacy XTI, and that Xeriant has no rights in the TriFan 600 technology.

On April 28, 2025, Xeriant moved to dismiss XTI’s

second amended counterclaims.

On September 23, 2025, the Court denied Xeriant’s motion, concluding that XTI plausibly alleged claims

against Xeriant for breach of contract, breach of fiduciary duty, and declaratory judgment.

The Court found that XTI had adequately pleaded

that Xeriant was obligated to contribute $ 10 million in funding to the joint venture and that it acted disloyally by leveraging a potential

merger opportunity for its own benefit.

On July 10, 2025, XTI filed a letter motion requesting

a conference to address:

(i) ongoing deficiencies in Xeriant’s discovery responses;

and (ii) Xeriant’s untimely service of

discovery requests on XTI, which were served more than three months after the applicable deadline.

The Court granted XTI’s letter

motion the same day, and held a conference on July 18, 2025.

During the conference, the Court ordered:

(i) an extension of all discovery

deadlines by three months, through November 24, 2025;

(ii) an extension of expert discovery through February 16, 2026;

and (iii) that

the parties finalize a protective order and Electronically Stored Information (“ESI”) protocol by July 25, 2025.

subsequently submitted a stipulated protective order and ESI protocol, which the Court entered on July 28, 2025.

On September 10, 2025, XTI filed a second letter

motion to compel discovery based on Xeriant’s ongoing failure to comply with its discovery obligations, including its refusal to

engage a qualified e-discovery vendor and produce electronically stored information in accordance with the Court-ordered ESI Protocol.

By order dated October 23, 2025, the Court granted XTI’s motion and compelled Xeriant to conduct ESI discovery in compliance with

the ESI Protocol, warning that continued noncompliance could result in dismissal of Xeriant’s case.

State of Texas Petition Against Anzu Robotics,

In February 2026, the State of Texas filed a petition

in the District Court of Collin County, Texas, against Anzu Robotics, LLC (“Anzu”), a subsidiary of the Company, alleging

violations of the Texas Deceptive Trade Practices–Consumer Protection Act (“DTPA”) in connection with the marketing

and sale of certain drone products.

The petition seeks injunctive relief, civil penalties, and attorneys’ fees and costs.

24, 2026, the State of Texas filed a Motion for No-Answer Default Judgment, with a hearing scheduled for June 24, 2026 in the 429th District

Court of Collin County, Texas.

The Company is evaluating its response to the motion.

In May 2026, the State of Texas also issued a civil

investigative demand to Drone Nerds LLC pursuant to the DTPA.

The Company cannot at this time predict the outcome of this matter or reasonably

estimate a range of potential loss, if any.

State of Florida Subpoena to Anzu Robotics,

In April 2026, the State of Florida issued a

subpoena to Anzu Robotics, LLC (“Anzu”), a subsidiary of the Company, pursuant to the Florida Deceptive and Unfair Trade

Practices Act in connection with the marketing and sale of certain drone products.

The Company is engaged in preliminary discussions

with the Florida Attorney General to attempt to resolve the matter cooperatively.

The Company cannot at this time predict the outcome

of this matter or reasonably estimate a range of potential loss, if any.

The Company is unable to predict the ultimate

outcome of these matters or reasonably estimate the amount of any potential loss, if any.

Accordingly, no accrual has been recorded as

of March 31, 2026.

An adverse outcome in any of these matters could have a material adverse effect on the Company’s financial condition,

results of operations, or cash flows.

Note 14 - Net Loss Per Share Attributable to Common Stockholders

The following table presents the calculation

of basic and diluted loss per share attributable to common stockholders (in thousands, except share and per share data):

Net loss from continuing operations

Net loss from discontinued operations

Net (income) loss attributable to noncontrolling interest

Net loss attributable to XTI Aerospace, Inc.

Preferred stock dividends

Net Loss Attributable to Common Stockholders

Net loss per share – basic and diluted:

Continuing operations

Discontinued operations

Net loss per share

Weighted Average Shares Outstanding Basic and Diluted

XTI AEROSPACE, INC.

1 unchanged sentence

NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS

Auctus Matter

In connection with the “Xeriant Matter”

described above, on June 12, 2024, the Company received correspondence from legal counsel for Auctus Fund, LLC (“Auctus”),

dated April 3, 2024, asserting that the Company and/or Legacy XTI may have assumed Xeriant’s obligations under a Senior Secured

Promissory Note (the “Note”) issued by Xeriant to Auctus in the original principal amount of $ 6,050,000 , pursuant to a letter

agreement dated May 17, 2022, between Xeriant and Legacy XTI (the “May 17 letter”).

Auctus claimed that the outstanding amount

due under the Note, including accrued interest, was $ 8,435,008.81 as of April 3, 2024.

In July 2024, Legacy XTI responded to Auctus’s

claims, asserting that the May 17 letter is invalid and unenforceable on multiple grounds.

Legacy XTI further stated that, even if the

May 17 letter were enforceable, it did not create or trigger any obligation for Legacy XTI to assume Xeriant’s debt under the Note

or otherwise.

On May 13, 2025, Auctus filed a lawsuit against Legacy XTI in the District Court of Arapahoe County, Colorado, asserting

a single claim for breach of contract based on its prior allegations.

Auctus contends that Legacy XTI is contractually obligated to repay

nearly $ 9 million in principal and accrued interest, based on Legacy XTI’s entry into a loan agreement with Legacy Inpixon in March

2023 and its subsequent merger with Legacy Inpixon in March 2024.

On June 25, 2025, Legacy XTI filed a motion to

dismiss or, in the alternative, to stay the proceedings pending resolution of the Xeriant litigation.

Legacy XTI’s motion asserts

that Auctus’ complaint should be dismissed:

(i) for lack of standing, because Auctus is neither a party to, nor a third-party beneficiary

of, the May 17 letter;

(ii) for failure of a condition precedent, because no obligation ever arose in that the alleged triggering condition—a

business combination involving Legacy XTI and Legacy Inpixon did not occur within the required one-year time frame;

(iii) for lack of

valid assignment, because Xeriant’s unilateral assignment of debt to Legacy XTI is void because the underlying Note prohibits assignment

without Auctus’s prior written consent, which is not alleged.

On August 5, 2025, Auctus filed a response arguing that it was an

intended third-party beneficiary of the May 17 letter, that the anti-assignment clause does not bar its claims, and that the request for

a stay is unwarranted because the Xeriant litigation involves different parties and broader claims.

On September 12, 2025, Legacy XTI filed a Reply

Brief reinforcing that Auctus lacks standing, that no obligation ever arose under the May 17 Letter because no qualifying transaction

occurred within its one-year term, and that any purported transfer of debt is void under the Note’s anti-assignment clause.

Reply also emphasized that the enforceability of the May 17 Letter is already before the Southern District of New York and urged dismissal

or a stay to avoid inconsistent rulings.

On October 2, 2025, Legacy XTI filed a Notice

of Supplemental Authority submitting the September 23, 2025 Order of the U.S.

District Court for the Southern District of New York, which

denied Xeriant’s motion to dismiss Legacy XTI’s counterclaims and held that XTI had plausibly alleged that the May 17 Letter

expired by its terms and is unenforceable.

Legacy XTI asserted that the SDNY ruling directly supports dismissal or a stay because it confirms

that the same alleged contract and issues raised by Auctus are already being adjudicated in the federal case.

On November 7, 2025, the court denied Legacy XTI’s

motion to dismiss or, in the alternative, stay the proceedings.

The court held that, when viewing the allegations in the light most favorable

to Auctus, the complaint plausibly stated claims for relief under Colorado’s notice-pleading standard.

The court further denied

XTI’s alternative request for a stay, reasoning that the parties were not identical to those in the federal action and therefore

comity and judicial economy did not warrant a stay.

The court nonetheless directed the parties to update it regarding the outcome of the

federal case to the extent it may be dispositive of overlapping issues.

Legacy XTI’s answer to the complaint is due November 21,

The Company will continue to vigorously defend

against the claims but cannot predict the timing or outcome of the proceedings or estimate any potential exposure.

No accrual has been recorded for the Xeriant and Auctus matters as

at this time, management cannot reasonably estimate the possible loss or range of loss.

Should circumstances change, the Company will

record an accrual in the period such determination is made.

Settlement Agreement with Chardan

On or about August 1, 2024, Chardan Capital Markets

LLC (“Chardan”) commenced an arbitration (the “Arbitration”) before the Financial Industry Regulatory Authority

against the Company and Legacy XTI, related to an engagement letter, dated as of June 7, 2022, by and between Chardan and Legacy XTI,

as amended (the “Engagement Letter”).

On or about June 13, 2025, Legacy XTI filed a counterclaim against Chardan for breach

On July 8, 2025, Chardan, on the one hand, and

the Company and Legacy XTI, on the other hand, entered into a settlement agreement (the “Chardan Settlement Agreement”), pursuant

to which the parties agreed to resolve and settle all claims and matters between them.

Pursuant to the Chardan Settlement Agreement, simultaneous

with the execution thereof, (i) Chardan, the Company and Legacy XTI entered into a mutual release, pursuant to which, Chardan, on the

one hand, and the Company and Legacy XTI, on the other hand, released each other from all claims against each other, including all claims

related to the Arbitration, and (ii) counsel for the parties executed a joint stipulation whereby Chardan and Legacy XTI agreed to dismiss

with prejudice all claims asserted against each other with respect to the Arbitration, which was filed in the Arbitration.

parties made any payments in connection with the Chardan Settlement Agreement and, pursuant to the Chardan Settlement Agreement, the parties

agreed that none of the parties owes each other any amount or debt.

Pursuant to the Chardan Settlement Agreement, the parties also agreed

that the Engagement Letter is terminated and is of no further force or effect.

Net loss per share from continuing and discontinued

operations is calculated based on net loss attributable to common stockholders.

Preferred stock dividends are allocated to continuing

and discontinued operations on a proportional basis.

The following weighted average potentially dilutive

shares were excluded from the computation of diluted net loss per share attributable to common stockholders for the periods presented,

because including them would have been anti-dilutive (on an as-converted basis):

Convertible Preferred Stock

Noncontrolling Interest – Class B Units

Note 15 – Income Taxes

The income tax provision for the three months

ended March 31, 2026 is $ 1.2 million, all included in results from discontinued operations.

The income tax provision for the three months

ended March 31, 2025 was immaterial.

The effective tax rate, inclusive of discrete

items, was 0 % and ( 0.12 )%, respectively, which was driven by a combination of permanent adjustments related to partnership income, 162(m)

compensation limitations, and acquisition costs and a valuation allowance.

The Company evaluated and considered all available evidence, both positive

and negative, to determine whether, based on the weight of that evidence, a valuation allowance for its deferred tax assets was needed.

The deferred tax assets are composed primarily of net operating loss carryforwards.

The Company determine that a full valuation allowance

against all deferred tax assets was appropriate for the three months period ended March 31, 2026 and March 31, 2025.

Note 16 – Discontinued Operations

Disposition of the Inpixon Business

On February 3, 2026 (the “Signing Date”

and “Closing Date”), the Company completed the disposition of its Inpixon Business pursuant to a Share Purchase and Transfer

Agreement (the “SPA”) entered into with EVO 467.

GmbH (the “Purchaser”).

Pursuant to the SPA, the Company sold

all of the shares of Inpixon GmbH for a purchase price of EUR 4,640,000 (approximately $ 5.5 million based on the exchange rate on the

Signing Date).

Inpixon GmbH is the sole shareholder of Aware

and IntraNav GmbH.

The Inpixon Business, which provides indoor positioning, real-time localization and sensor technology solutions,

was conducted through Inpixon GmbH.

The purchase price of EUR 4,640,000 bears interest

of 5 % per annum from the Signing Date until the fourth anniversary of the Closing Date.

The Company has the right (the “Unwind

Option”) to require the Purchaser to transfer back all shares of Inpixon and its subsidiaries at any time during that fifteen (15)

month period beginning on the first day of the thirty-seventh month following the Signing Date and continuing to the end of the fifty-second

month following the Signing Date for no consideration by the Company.

If exercised, all unpaid amounts of the purchase price will be

If not exercised within the specified period, the unpaid purchase price will also be forgiven.

XTI AEROSPACE, INC.

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NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS

Note 18 - Net Loss Per Share Attributable to Common Stockholders

The following table presents the calculation

of basic and diluted loss per share attributable to common stockholders (in thousands, except share and per share data):

For the Three Months Ended

September 30,

For the Nine Months Ended

September 30,

Preferred stock return

Deemed dividend

Net Loss Attributable

to Common Stockholders, Basic and Diluted

Net Loss Per Share, Basic

Weighted Average Shares Outstanding, Basic

The basic earnings per share calculation for

the three months ended September 30, 2025 included 1,925,000 shares of common stock issuable upon exercise of Pre-funded Warrants that

were issued in connection with the September Offering.

The basic earnings per share calculation for the nine months ended September 30,

2025 included 2,176,000 , 2,911,800 , and 1,925,000 shares of common stock, respectively, issuable upon exercise of Pre-funded Warrants

that were issued in connection with the March Offering, June Offering, and September Offering.

These Pre-funded Warrants are considered

penny warrants as the exercise price is $ 0.001 ;

therefore, they are included in the basic earnings per share calculation.

The basic earnings per share calculation for

the three months ended September 30, 2024 included 839 penny warrant shares, since the exercise price was $ 0.01 per share.

The basic earnings per share calculation for the nine months ended September 30, 2024 included 2,434 penny warrants shares.

Additionally, the basic earnings per share calculation for the nine months ended September 30, 2024 included 1,194 shares of

common stock that were issuable to Xeriant related to the joint venture arrangement that expired by its term on May 31, 2023.

were issued to Xeriant for no additional consideration immediately prior to the XTI Merger.

The following potentially dilutive shares were

excluded from the computation of diluted net loss per share attributable to common stockholders for the periods presented, because including

them would have been anti-dilutive (on an as-converted basis):

For the Three Months

Ended September

the Nine Months

Ended September 30,

Convertible preferred stock

Convertible notes

Note 19 - Subsequent Events

Management has evaluated subsequent events through the date of issuance

of this Quarterly Report on Form 10-Q.

Warrant Exercises

Subsequent to September 30, 2025, 1,925,000 Pre-funded Warrants from

the September Offering were exercised at an exercise price per share of $ 0.001 , resulting in the issuance of 1,925,000 shares of common

As of the date of this report, there are no Pre-Funded Warrants from the September Offering remaining.

The Company evaluated the Unwind Option in accordance

with ASC 810-10-40, Consolidation—Deconsolidation, and concluded that control of the Inpixon Business transferred to the

Purchaser upon closing.

Based on management’s evaluation of the facts and circumstances surrounding the transaction, including

the Purchaser’s business plan and other qualitative considerations, the likelihood of exercise of the Unwind Option is considered

Additionally, the purchase price terms, including the potential forgiveness provisions, were also considered in the Company’s

assessment of whether the transaction qualified for sale accounting.

Finally, the Company has no continuing involvement in the operations

of the Inpixon Business following the Closing Date.

Accordingly, the transaction was accounted for as a complete sale and the Inpixon

Business was derecognized as of the Closing Date.

The Company recorded the purchase price as a

note receivable with fair value determined to be $ 4.2 million, as of the Closing Date, in the accompanying unaudited condensed consolidated

balance sheets.

As discussed above, the note receivable accrues interest at 5 % per annum and matures on February 3, 2030.

provisions discussed related to the Unwind Option, the note receivable may be forgiven.

The Company determined the fair value of the

note receivable based on the perceived credit risk of the counterparty and time value of money, going forward the note receivable will

be evaluated for risk of credit loss and will not be remeasured.

Results of Discontinued Operations

The following table presents the results of discontinued

operations for the three months ended March 31, 2026 and 2025 (in thousands):

Cost of revenues

Research and development

Sales and marketing

General and administrative

Impairment of goodwill and intangible assets

Other expense, net

Net loss, before tax

Income tax provision

Loss from discontinued operations, before disposition

Loss on sale of discontinued component

Net loss from discontinued operations

Net Loss Per Share, Basic and Diluted:

Discontinued Operations Before Disposition

Loss on Sale of Discontinued Component

Total Discontinued Operations

Weighted Average Shares Outstanding, Basic and Diluted

XTI AEROSPACE, INC.

1 unchanged sentence

NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS

Valkyrie Investment and the Vanguard Platform

On October 27, 2025, the Company and Valkyrie

Sciences Holdings LLC (“Valkyrie”), a company developing enterprise solutions via the integration of artificial intelligence

and advanced materials, announced the Vanguard Platform, an intelligent technology system for the next generation of VTOL aircraft.

Vanguard Platform will apply Valkyrie’s experience with graphene and composite materials, battery technology, and smart systems

architecture to the Company’s TriFan 600 program.

In connection with this collaboration, on October 21, 2025, the Company made a

$ 2 million strategic investment in Valkyrie through the purchase of a convertible promissory note (the “Valkyrie Note”) with

an initial principal amount of $ 2 million issued by Valkyrie.

Valkyrie and its affiliate Valkyrie Andromeda Corporation (together with

Valkyrie, the “Borrower”) are jointly and severally liable under the Valkyrie Note.

Interest accrues on the outstanding principal

amount at the lesser of 10 % per annum or the maximum rate permissible by law.

The outstanding principal amount, together with any accrued

but unpaid interest, is due and payable on December 31, 2026 (the “Maturity Date”).

After a Qualified Financing (as defined

in the Valkyrie Note) and if the Company does not elect to convert the Valkyrie Note, the Company may, prior to the Maturity Date, elect

to require the Borrower to pay the remaining balance of the Valkyrie Note within 60 days after the delivery of the election notice to

Acquisitions of Drone Nerds and Anzu Robotics

On November 10, 2025, XTI Drones Holdings, LLC

(“XTI Drones Holdings”), a subsidiary of the Company’s wholly-owned subsidiary, XTI Drones, LLC, acquired 100 %

of the issued and outstanding equity interests of two enterprise drone solutions providers, Drone Nerds, LLC (“Drone Nerds”),

a Florida limited liability company, and Anzu Robotics, LLC (“Anzu Robotics”), a Delaware limited liability company (the “Acquisition”)

for total purchase consideration of $ 40.0 million, which was comprised of $ 20.0 million in cash, $ 11.9 million in the form of two promissory

notes (including approximately $ 1.6 million in working capital adjustments), and $ 9.7 million in the form of equity consideration, specifically

an aggregate of 6,524,576 Class B Units of XTI Drones Holdings (the “Class B Units”).

Drone Nerds is one of the largest drone distributors

and solutions providers in the United States.

Drone Nerds specializes in the wholesale, retail and e-commerce sale of advanced drone systems

and related technologies serving commercial, governmental, and consumer markets, including public safety, construction, energy, and agriculture.

The company operates both an online sales platform and a retail location in South Florida and maintains one of the largest drone inventories

in the U.S., representing over 30 leading brands.

Through its nationwide network of sales, marketing, and service professionals, Drone

Nerds delivers comprehensive enterprise drone solutions that improve operational performance and data-driven decision-making for its customers.

The Class B Units of XTI Drones Holdings are exchangeable

at any time after May 1, 2026 for shares of the Company’s common stock on a one-for-one basis, provided that such exchange ratio

is subject to equitable adjustments for stock splits, stock dividends, reclassifications and similar transactions affecting the Company’s

common stock.

In addition, on the date that is 15 months after November 10, 2025, all outstanding Class B Units will automatically be

exchanged for shares of the Company’s common stock on a one-for-one basis, subject to the foregoing adjustments.

The Drone Nerds

and Anzu Robotics sellers entered into lock-up agreements pursuant to which they agreed not to, without the Company’s prior consent,

sell, transfer or dispose of any shares of common stock until November 10, 2026.

Following the exchange of all outstanding Class B Units

into shares of common stock, XTI Drones, LLC will own 100 % of the membership interests of XTI Drones Holdings, and Drone Nerds and Anzu

Robotics will be indirect, wholly-owned subsidiaries of the Company.

The Company incurred fees of approximately $ 1.2

million owed to ThinkEquity LLC as compensation for advisory services in connection with the Acquisition.

Issuance of Series 10 Convertible Preferred Stock

On November 10, 2025, the Company entered into

a Securities Purchase Agreement with Unusual Machines, Inc.

pursuant to which the Company issued Unusual Machines, Inc.

25,000 shares

of Series 10 Convertible Preferred Stock, par value $ 0.001 per share (the “Series 10 Preferred”), at a stated value of $ 1,000

per share, for aggregate gross proceeds of $ 25.0 million in a private placement that closed on November 12, 2025.

The Company received

net proceeds from the Series 10 financing of approximately $ 23.1 million, after deducting the placement agent fees and other expenses

payable by the Company of approximately $ 1.9 million.

The Series 10 Preferred carries a 12 % cumulative

dividend, payable quarterly in cash, common stock, or in kind through accretion to stated value;

provided that the payment of the dividend

in common stock is subject to the receipt of shareholder approval.

The right to such preferential dividend expires on the two-year anniversary

of the original issuance date of the Series 10 Preferred.

Each share will be convertible into common stock at a conversion price of $ 1.492

per share, subject to adjustment as set forth in the Series 10 Preferred certificate of designation (the “Certificate of Designation”),

upon receipt of shareholder approval, at which time all shares will automatically convert.

Conversions are subject to a beneficial ownership

limitation of 4.99 % (or 9.99 % at holder election).

If conversion would exceed such limit, the Company may, at the election of the holder,

issue pre-funded warrants in lieu of conversion shares or such shares will be held by the Company in abeyance for the benefit of such

The Series 10 Preferred includes a Fundamental Transaction clause providing that holders receive equivalent consideration on the

same basis as common shareholders.

The Series 10 Preferred has no redemption rights and may be settled only through equity conversion.

The Series 10 Preferred has no voting rights, except as required by law and for certain customary protective provisions set forth in the

Certificate of Designation.

ThinkEquity acted as the Company’s placement

agent in connection with the Series 10 Preferred financing.

As compensation, the Company paid ThinkEquity $ 1,750,000 of placement agent

fees, reimbursed ThinkEquity for $ 175,000 of actual out-of-pocket offering expenses, and issued ThinkEquity and its designees warrants

to purchase an aggregate of 837,801 shares of common stock at an exercise price of $ 1.492 per share, equal to the Series 10 Preferred

conversion price.

The warrants were immediately exercisable upon closing and expire five years from the date of issuance.

The Company’s

obligation to issue shares upon exercise of the warrants is subject to its receipt of shareholder approval.

If a holder exercises its

warrants prior to the date that shareholder approval is obtained, such holder will receive the right to receive on the shareholder approval

date the number of shares of common stock so issuable upon such exercise and, on the shareholder approval date, the Company will issue

such shares to such holder.

Loss on Disposal

The estimated fair value of the purchase price

to be received from the Purchaser as of the Closing Date was $ 4.2 million resulting in a loss on disposal of approximately $ 0.8 million

during the three months ended March 31, 2026, which is included in discontinued operations.

Additionally, as a result of the sale, the

Company expects to owe income taxes in Germany, the Company recorded a tax provision of $ 1.2 million, including the loss from discontinued

operations, for the three months ended March 31, 2026.

Cash Flows from Discontinued Operations

The following table presents the major classes

of cash flows related to discontinued operations (in thousands):

Net cash used in operating activities

Net cash used in investing activities

Net cash provided by (used in) financing activities

Note 17 - Subsequent Events

The Company has evaluated events through the date of

this Quarterly Report on Form 10-Q, and determined that there have been no events that have occurred that would require adjustments to

or disclosures in the consolidated financial statements.

Compared sentence by sentence after normalising whitespace, quotation marks, case and digits, so re-formatting and restated figures do not read as changed language. Wording changes appear as one removal and one addition. The current filing and the prior one are authoritative.

What changed 10-Q

Item 1. Financial Statements