What changed in this filing

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Item 2. Management’s Discussion and Analysis

2026-05-14 compared with 2025-11-19 · 461 added, 823 removed, 28 unchanged (98% of the section changed)

Discussion and Analysis of Financial Condition and Results of Operations

MANAGEMENT’S DISCUSSION AND

ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS

You should read the following

7 unchanged sentences

to these differences include those discussed below and elsewhere in this Form 10-Q, particularly in Part II, Item 1A, “Risk Factors.”

Overview of Our Business

We are primarily an aircraft

development company focused on the design and commercialization of vertical takeoff and landing (“VTOL”) aircraft.

provide real-time location systems (“RTLS”) for industrial applications and, through our wholly-owned subsidiary, XTI Drones,

LLC, offer drone distribution and technology solutions via our recent acquisitions of Drone Nerds, LLC and Anzu Robotics, LLC (see “ Recent

Headquartered in Englewood,

Colorado, the Company is developing a VTOL airplane that is designed to take off and land like a helicopter and cruise like a fixed-wing

business airplane.

We believe our 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 we term 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, we have 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.

We continue to work to optimize

our airplane design for both manufacturing and certification.

The development of an xVTOL airplane that meets our business requirements

demands significant design and development efforts on all facets of the airplane.

We believe that by bringing together a mix of talent

with VTOL and traditional commercial aerospace backgrounds, we have built a team that enables us to move through the design, development,

and certification of our xVTOL airplane with the Federal Aviation Administration (“FAA”) in an efficient manner, thus allowing

us to achieve our end goal of bringing to market our airplane as efficiently as possible.

To date, we have not generated

any revenue from aircraft sales because we are still designing and developing our xVTOL airplane.

Additionally, we are seeking the necessary

governmental approvals to bring the airplane into service.

To continue funding these efforts, we will need to raise capital for the foreseeable

The amount and timing of our future capital needs will depend on various factors, including the progress and results of our airplane’s

design and development, our manufacturing operations, and our success in obtaining the required FAA certifications and other government

For instance, any significant delays in securing FAA certifications or other government approvals may force us to raise more

capital and could postpone our ability to generate revenue from aircraft sales.

Our RTLS solutions leverage

cutting-edge technologies such as IoT, AI, and big data analytics to provide real-time tracking and monitoring of assets, machines, and

people within industrial environments.

With our RTLS solutions, businesses can achieve improved operational efficiency, enhanced safety

and reduced costs.

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

minimize downtime, and ensure compliance with industry regulations.

Drone Nerds, LLC (“Drone

Nerds”), a Florida limited liability company founded in 2014 and headquartered in Dania Beach, Florida, 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.

We currently report financial

results for two segments:

Commercial Aviation and Industrial IoT.

For Industrial IoT, we generate revenue from sales of hardware, software

licenses and professional services.

During the quarter ended December 31, 2024, we began exploring strategic options to wind down and/or

sell the hardware portions of our Industrial IoT business segment in order to shift our focus towards the sales of software products.

For Commercial Aviation, the segment is pre-revenue as we are currently developing the TriFan 600 airplane.

As of the date of this filing,

we have not yet assessed the impact of the recent acquisitions of Drone Nerds and Anzu Robotics to our future segment reporting.

Key Factors Affecting Operating Results

We believe that the growth

of our business and our future success are dependent upon many factors, including our ability to retain and develop engineering internal

and third-party resources, secure strategic partnerships with suppliers, expand the number of customer purchase orders, locate a facility

for further aircraft development and testing, expand on that facility or locate to a new facility for commercial production, build-out

production assembly lines in a timely manner, develop ancillary service offerings related to the TriFan 600 such as flight training and

maintenance products, and secure the needed financing to achieve FAA certification.

While each of these areas

presents significant opportunities for us, they also pose material challenges and risks that we must successfully address to achieve

FAA certification of the TriFan 600 and further reach our current aircraft delivery forecasts.

Corporate Strategy Update

Our primary focus is to power

what we term the Vertical Economy™ by delivering high-performance xVTOL solutions that scale from aircraft to innovative technologies

and infrastructure.

We identify seven areas that comprise the Vertical Economy:

manned aircraft, unmanned aircraft, power technology,

airspace and infrastructure management, artificial intelligence, aircraft advanced materials and next gen manufacturing.

The term “xVTOL”

is intended to encompass the broad spectrum of vertical lift technologies within the Vertical Economy, including various aircraft types

(e.g., electric VTOL, regional VTOL and drones), operational models (manned and unmanned), supporting technologies (e.g., propulsion systems

and aerospace-related artificial intelligence technologies) and customer applications.

With the TriFan 600 as our flagship commercial

aviation product, we are laying the groundwork for an innovative family of versatile aircraft and solutions addressing passenger travel,

logistics, autonomous operations and defense missions that we believe will unlock significant growth and market leadership.

Expanding into autonomous,

remotely operated drones via the acquisition of Drone Nerds was key to our strategic focus.

By combining drone technology with VTOL innovation,

we believe we are positioning the Company to accelerate the development of both unmanned aerial vehicles and VTOL solutions, expand its

market presence, and create new revenue-generating opportunities across multiple industries.

We will also be opportunistic and may consider

other strategic transactions, which may include, but not be limited to, other alternative investment opportunities, such as minority investments

and joint ventures.

If we make any acquisitions in the future, we expect that we may pay for such acquisitions with cash, equity securities

and/or debt in combinations appropriate for each acquisition.

Recent Events

Acquisitions of Drone Nerds and Anzu Robotics

On November 10, 2025, XTI Drones Holdings, LLC,

a Texas limited liability company (“XTI Drones Holdings”) and a subsidiary of our wholly-owned subsidiary, XTI Drones, LLC,

acquired 100% of the issued and outstanding equity interests of two enterprise drone solutions providers, Drone Nerds (as defined above)

and Anzu Robotics, LLC, a Delaware limited liability company (“Anzu Robotics”), pursuant to the terms of two separate membership

interest purchase agreements (such transactions, respectively, the “Drone Nerds Acquisition” and the “Anzu Robotics

Acquisition” and collectively, the “Acquisitions”), in exchange for aggregate consideration consisting of (i) approximately

$20.0 million in cash, (ii) approximately $11.9 million in the form of two promissory notes (including approximately $1.6 million in working

capital adjustments) and (iii) an aggregate of 6,524,576 Class B Units of XTI Drones Holdings (the “Class B Units”) with a

fair market value of approximately $9.7 million.

The aggregate purchase price for each Acquisition is subject to customary post-closing

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

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 transactions contemplated

by the purchase agreements.

Private Placement Investment by Unusual Machines

On November 10, 2025, the

Company entered into a Securities Purchase Agreement (the “PIPE Purchase Agreement”) with Unusual Machines, Inc., a Nevada

corporation (“Unusual Machines”), pursuant to which the Company sold Unusual Machines 25,000 shares of the Company’s

newly designated Series 10 Convertible Preferred Stock, par value $0.001 per share (the “Series 10 Preferred Stock”), at a

subscription amount of $1,000 per share of Series 10 Preferred Stock for an aggregate subscription amount of $25,000,000 (the “Subscription

Amount”), pursuant to a private placement that closed on November 12, 2025 (the “PIPE Offering”).

The Company received

net proceeds from the PIPE Offering of approximately $23.1 million, after deducting the placement agent fees and other expenses payable

by the Company of approximately $1.9 million.

The Company filed a certificate

of designation (the “Certificate of Designation”) on November 10, 2025, with the Secretary of State of the State of Nevada

designating the rights, preferences and limitations of the shares of the Series 10 Preferred Stock.

The Series 10 Preferred Stock has

a stated value of $1,000 per share (the “Stated Value”), and is initially convertible at a conversion price of $1.492 per

share, subject to adjustment pursuant to the Certificate of Designation.

On November 10, 2025, prior

to the closing of the PIPE Offering, Unusual Machines advanced to the Company $10,500,000 (the “Advance”), which was automatically

applied to the Subscription Amount at the closing of the PIPE Offering.

The Company used the Advance to satisfy certain obligations under

Drone Nerds’ and Anzu Robotics’ $25.0 million secured line of credit established pursuant to and evidenced by that certain

Loan Agreement, dated July 10, 2025, by and among Drone Nerds Inc, Anzu Robotics, LLC and Banesco USA (the “Banesco Loan Agreement”),

and the other Loan Documents (as defined in the Banesco Loan Agreement).

The issuance of shares of

common stock upon conversion of, or as a dividend on, the Series 10 Preferred Stock is subject to the Company’s receipt of its shareholders’

approval of the removal of the limitations on conversion set forth in the Certificate of Designation of the Series 10 Preferred Stock,

in compliance with Nasdaq Listing Rule 5635 (the “Shareholder Approval”, and the date the Shareholder Approval is obtained,

the “Shareholder Approval Date”).

Pursuant to the PIPE Purchase Agreement, the Company agreed to hold an annual or special

meeting of shareholders no later than January 31, 2026 (the “Shareholder Meeting Deadline”), for the purpose of obtaining

such Shareholder Approval.

If Shareholder Approval is not obtained on or prior to the Shareholder Meeting Deadline, the Company is required

to call a special or annual meeting of shareholders 180 days thereafter until such Shareholder Approval is obtained, provided, however,

that such obligation will terminate on the two year anniversary of the closing date of the PIPE Offering.

On the Shareholder Approval

Date, the Series 10 Preferred Stock will automatically convert into shares of common stock.

To the extent not converted in connection

with a mandatory conversion, the Series 10 Preferred Stock will be convertible into common stock, from and after the Shareholder Approval

Date, at the option of the holder.

Each outstanding share of

Series 10 Preferred Stock is entitled to receive, in preference to shares of Junior Securities (as defined in the Certificate of Designation),

cumulative dividends (“Preferential Dividends”), payable quarterly in arrears, at an annual rate of 12.0% of the Stated Value.

The Preferential Dividends will be payable, at the option of the Company, either in-kind in shares of common stock, through an accrual

on the Stated Value of the Series 10 Preferred Stock or in cash, subject to, with respect to the issuance of shares of common stock, the

receipt of Shareholder Approval and the Beneficial Ownership Limitation (as defined in the Certificate of Designation).

The rights to

Preferential Dividends expire automatically on the two-year anniversary of the original issuance date of the Series 10 Preferred Stock.

The Series 10 Preferred Stock

has no voting rights, except as required by law and for certain customary protective provisions set forth in the Certificate of Designation.

The Certificate of Designation also includes customary liquidation provisions.

See Note 19 of the Notes to Condensed Consolidated Financial

Statements included in Part I, Item 1 of this report for a summary of the other material terms of the Series 10 Preferred Stock.

Pursuant to the PIPE Purchase

Agreement, the Company agreed to file a registration statement covering the resale of the shares of common stock underlying the Series

10 Preferred Stock within 90 days of the closing date of the PIPE Offering.

The Company agreed to use commercially reasonable efforts

to cause such registration to become effective within 60 days (or 90 days if the SEC notifies the Company that it will “review”

the registration statement) following the initial filing of such registration statement and to keep such registration statement effective

at all times until the earlier of (i) the time that Unusual Machines, Inc.

and its successors and assigns do not own any Series 10 Preferred

Stock or underlying shares of common stock or (ii) the date on which the shares of common stock underlying the Series 10 Preferred Stock

may be sold without restriction, including volume or manner-of-sale restrictions, pursuant to Rule 144.

From the date of the PIPE

Purchase Agreement until the later of the date that is 5 days from the date (a) Shareholder Approval is obtained and (b) the date that

the registration statement covering the resale of all of the shares of common stock underlying the Series 10 Preferred Stock has been

declared effective by the SEC, the Company agreed to not enter into any transaction for the sale of any of its equity securities or securities

convertible into its equity securities unless the price per share of common stock or per unit price (or conversion price or exercise price,

as applicable) is equal to or greater than $2.50, subject to certain customary exempt issuance exceptions.

ThinkEquity acted as the Company’s

placement agent in connection with the PIPE Offering.

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, which were exercisable commencing November 12, 2025, expire November 12, 2030 and have

an exercise price of $1.492 per share.

The Company’s obligation to issue shares upon exercise of the warrants is subject to the

Company’s receipt of Shareholder Approval.

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

The 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 Valkyrie.

September 2025 Offering

On September 12, 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 “September Offering”), 10,575,000

shares of common stock, pre-funded warrants to purchase up to 1,925,000 shares of common stock, and common warrants to purchase up to

12,500,000 shares of common stock.

The combined public offering price for each share of common stock, together with one common warrant,

The combined public offering price for each pre-funded warrant, together with one common warrant, was $1.599.

Each share of

common stock, or a pre-funded warrant in lieu thereof, was sold together with one common warrant.

The September Offering closed

on September 15, 2025, resulting in net proceeds to the Company of approximately $18.5 million, after deducting the placement agent fees

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

Upon closing of the September Offering, the Company issued ThinkEquity

warrants (the “Placement Agent Warrants”) as compensation to purchase up to 625,000 shares of common stock at an exercise

price of $2.00 per share.

The Placement Agent Warrants were exercisable immediately upon the date of issuance and expire on the five-year

anniversary of the commencement of sales of securities in the September Offering.

Officer Appointments

Effective as of September

1, 2025, Michael A.

Tapp was appointed as the Company’s Chief Operating Officer.

In connection therewith, the Company entered into

an employment agreement and a side letter with Mr.

Tapp, the material terms of which are disclosed in the Company’s Current Report

on Form 8-K filed with the SEC on September 5, 2025, as amended by Amendment No.

1 on Form 8-K/A filed with the SEC on September 11, 2025.

Additionally, on October 2,

2025, we announced the appointment of Steve Zohrabian as Executive Vice President of XTI Aircraft Company, and on October 29, 2025, we

announced the appointment of Dr.

Alex Williams as XTI Aerospace, Inc.’s Executive Vice President of Technology.

Expansion of Corporate Advisory Board

During the nine months ended

September 30, 2025, the Company expanded its corporate advisory board, which is now comprised of ten advisory board members, who are helping

the Company evaluate strategic opportunities to capitalize on the anticipated demand for the TriFan 600.

TriFan 600 Engineering Update

We remain focused on advancing

the TriFan 600 toward certification and commercialization, with Q3 marking notable progress in both engineering development and regulatory

engagement activities.

During the quarter ended September 30, 2025, we completed initial flight operations for our Sparrow (1:15 scale

model) and Kestrel (1:12 scale model) subscale aircraft prototypes, the results of which validated key design elements of the TriFan 600

under flight conditions.

We will continue our subscale aircraft program efforts as we progress toward building our full-scale, piloted

TriFan 600 demonstrator, which we expect to complete in 2027.

We maintain active monthly engagement

with the FAA, including ongoing support for Tech Fam sessions with agency subject matter experts.

These interactions support continued

progress in development and help confirm that our approach remains consistent with applicable regulatory requirements.

Critical Accounting Policies and Estimates

Our condensed consolidated

financial statements are prepared in accordance with U.S.

OVERVIEW OF BUSINESS

XTI Aerospace, Inc.

U.S.-based aerospace company focused on unmanned aircraft systems 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 and related equipment, as

well as operator training, program enablement, repair and maintenance, and other fleet lifecycle support for enterprise, public safety,

government, and defense-related customers.

Recently, the Company also started to design and develop unmanned platforms for defense and

commercial applications.

The Company currently operates

through two reportable segments:

Aircraft Systems (“UAS”) , which consists of its revenue-generating UAS solutions

and services platform operated through XTI Drones Holdings, LLC, and

Defense Systems (“ADS”), which reflects a strategic shift away from commercial

aviation and toward building a core capability around the design, development, and production

of unmanned platforms, with an emphasis on serving defense customers and supporting domestic

procurement initiatives aligned with U.S.

national security priorities

Strategic Transactions and Operating Profile

During the three months ended March 31, 2026,

the Company completed the sale of its Inpixon Business, refer to Note 16—Discontinued Operations to the unaudited condensed consolidated

financial statements in Part I, Item 1 of this Quarterly Report.

As a result, the Company’s financial statements reflect only continuing

operations related to its UAS and ADS segments.

the November 2025 acquisition of Drone Nerds, the Company’s UAS platform represents its primary revenue-generating business.

results of operations for the three months ended March 31, 2026 reflect a full quarter of Drone Nerds activity, whereas the prior-year

period does not, which impacts comparability between periods.

a result of these transactions, our current operating profile differs materially from prior periods, and historical results may not be

fully comparable.

Accordingly, in addition to reviewing our GAAP results, management evaluates performance and allocates capital with

an emphasis on:

growth and channel mix within the UAS platform.

margin expansion through service attachment and lifecycle support.

capital efficiency and liquidity management.

● Disciplined

allocation of capital between UAS scaling initiatives and ADS development programs.

Solutions Platform

Through Drone

Nerds, we operate an established enterprise-focused UAS solutions platform in the United States.

Our operating model is designed to provide

end-to-end UAS lifecycle capabilities across hardware distribution, operator training, compliance management support, repair and maintenance,

fleet sustainment, and related support services.

operate an OEM-agnostic, multi-vendor ecosystem supporting more than 50 hardware and software manufacturers.

This positioning enables

us to serve enterprise and public sector customers navigating evolving regulatory requirements, supply chain considerations, and procurement

restrictions.

strategy is aligned with our broader Vertical Economy™ vision, which encompasses vertical lift technologies and supporting infrastructure

across unmanned and manned aircraft platforms.

While our long-term vision includes broader participation across the vertical lift ecosystem,

our near-term operating focus is centered on scaling our UAS platform with disciplined capital allocation and margin optimization.

the UAS market is undergoing structural evolution driven by:

enterprise adoption of drones for inspection, safety, and operational efficiency

developments affecting fleet eligibility and operational approvals

emphasis on secure and compliant procurement in government and defense channels

demand for integrated lifecycle solutions rather than standalone hardware transactions

Our integrated

model is designed to address these trends by positioning us as a long-term solutions partner rather than a transactional reseller.

Defense Systems (ADS), formerly XTI Aircraft — Strategic Context and Organizational Evolution

ADS division reflects a strategic shift away from the TriFan 600 program and toward nearer-term unmanned systems opportunities.

determined that continued development of the TriFan 600 program would require substantial additional time and capital, and the Company

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

response, management conducted a structured search for new divisional leadership with a mandate to reorient the business around nearer-term,

capital-efficient opportunities.

That search concluded with the appointment of Steve Zohrabian, whose background in advanced manufacturing

and defense product development is relevant to the operational and contractual realities of serving government and defense customers.

acquisition of Drone Nerds in November 2025 served as the second anchor point around which the division’s updated strategy was

Together, Zohrabian’s appointment and the Drone Nerds acquisition defined the strategic perimeter of the division and marked

the beginning of a transformation in staffing, focus, and organizational priorities — a transformation substantially completed

ADS team is now building a core capability around the design, development, and production of unmanned platforms, with an emphasis on

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

national security priorities.

believes the unmanned systems market — particularly in defense and government procurement — presents a more actionable near-term

revenue opportunity than continued TriFan 600 development at this stage of the Company’s evolution.

Advanced Technology

and Manufacturing (ATM)

In addition to its two reportable segments, the

Company is in the early stages of developing a domestic manufacturing and technology division (referred to as the ATM division) focused

on building U.S.-based production capabilities for unmanned systems, components, and related technologies.

The ATM division does not currently

meet the criteria for a reportable segment under ASC 280 as it is in a pre-operational stage and has no discrete financial information

reviewed by the CODM for purposes of resource allocation .

The division’s mandate is to develop a domestically sourced supply

chain designed to support compliance with applicable federal procurement and sourcing requirements, including Section 848 of the NDAA

for unmanned aerial systems, addressing the growing demand from federal agencies, defense contractors, and enterprise customers for platforms

and components that meet applicable government procurement requirements.

The ATM division is expected to pursue growth

through manufacturing partnerships, co-development arrangements, targeted acquisitions of domestic production capacity, and strategic

investments in U.S.-based technology and component suppliers.

The Company believes that demand for compliant, domestically manufactured

unmanned systems has accelerated as regulatory and procurement requirements around foreign-manufactured components have tightened, and

that this environment may create an opportunity to develop manufacturing relationships and capabilities that support government and enterprise

The ATM division has not yet generated any revenues, and its activities

are at an early stage of development.

The division’s ability to generate revenues will depend on its success in establishing manufacturing

partnerships on acceptable terms, securing NDAA-compliant production capacity, and converting that capacity into customer relationships

and contract awards, each of which is subject to significant uncertainty.

There can be no assurance that manufacturing partnerships will

be established on acceptable terms or that the division will generate revenues within the timeframe the Company anticipates, or at all.

600 VTOL Program

of early 2026, the TriFan 600 program has been paused.

Whether and when development may resume will depend on a number of factors, including

capital availability, market conditions for advanced air mobility, and the Company’s overall strategic priorities at the relevant

While the TriFan 600 remains a strategic long-term asset within our broader vertical lift vision, our current revenue base and

operating execution are centered on our UAS solutions platform.

Allocation and Liquidity Strategy

During 2025, we completed multiple public offerings

and a Series 10 Convertible Preferred Stock financing, which generated an aggregate of approximately $85.5 million in net proceeds, strengthening

our liquidity and supporting our strategic initiatives, including the Drone Nerds acquisition and working capital stabilization.

the three months ended March 31, 2026, we received approximately $7.4 million in net proceeds from the exercise of warrants and entered

into a $20.0 million asset-based revolving credit facility, subject to a borrowing base.

The Company ended the most recent quarter with

cash on hand of $15.2 million and $16.7 million as of March 31, 2026 and December 31, 2025.

Our operating priorities are focused on:

● Strengthening

and scaling our UAS platform.

margin profile and recurring revenue mix.

operating expenses and cash burn.

long-term vertical lift optionality.

near-term objective is to move toward improved operating cash flow sustainability within the UAS segment while maintaining disciplined

investment in our other programs, which may require additional capital over time.

Growth Strategy and Potential Acquisitions

As part of our growth strategy, we continue to

evaluate potential acquisitions and strategic transactions that we believe could complement our UAS solutions platform, expand our capabilities

in unmanned systems and domestic manufacturing, or strengthen our position with enterprise, government, and defense customers.

from time to time engage in preliminary discussions or negotiations with potential acquisition targets or their representatives, conduct

due diligence, and explore various transaction structures.

There can be no assurance that any such discussions will result in a definitive

agreement or a completed transaction.

We expect to fund potential acquisitions through

a combination of available cash on hand, debt financing (which may include borrowings under our existing or new credit facilities, term

loans or other debt instruments) and the issuance of our common stock or other equity or equity-linked securities, including equity interests

in our subsidiaries.

The specific terms and financing structure of any potential acquisition would depend on the size, nature, and strategic

fit of the target, as well as prevailing market conditions at the time of any such transaction.

Any acquisition financed in whole or in

part with equity securities could result in dilution to our existing stockholders.

We may incur costs related to potential acquisitions,

including legal, financial advisory, accounting, and due diligence expenses, regardless of whether any such transaction is ultimately

Such costs could be material in the periods in which they are incurred.

ACCOUNTING POLICIES AND ESTIMATES

condensed consolidated financial statements are prepared in accordance with U.S.

generally accepted accounting principles (“GAAP”).

In connection

with the preparation of our consolidated financial statements, we are required to make assumptions and estimates about future events,

and apply judgments that affect the reported amounts of assets, liabilities, revenue, expenses and the related disclosures.

assumptions, estimates and judgments on historical experience, current trends and other factors that management believes to be relevant

at the time our consolidated financial statements are prepared.

On a regular basis, we review the accounting policies, assumptions, estimates

and judgments to ensure that our consolidated financial statements are presented fairly and in accordance with GAAP.

However, because

future events and their effects cannot be determined with certainty, actual results could differ from our assumptions and estimates,

and such differences could be material.

The significant accounting

policies of the Company are described in Item 7, “Management’s Discussion and Analysis of Financial Condition and Results

of Operations,” section of the Company’s annual report on Form 10-K for the year ended December 31, 2024.

have been no significant changes to the Company’s critical accounting policies and estimates.

However, the Company did identify

an impairment as described below.

Valuation of Long-lived and Intangible Assets

We periodically review long-lived

assets and certain identifiable intangible assets for impairment in accordance with Accounting Standards Codification (“ASC”)

360, “Property, Plant, and Equipment.” Goodwill and intangible assets not subject to amortization are reviewed annually for

impairment in accordance with ASC 350, “Intangibles – Goodwill and Other,” or more often if there are indications of

possible impairment.

The analysis to determine

whether or not an asset is impaired requires significant judgments that are dependent on internal forecasts, including estimated future

cash flows, estimates of long-term growth rates for our business, the expected life over which cash flows will be realized and assumed

royalty and discount rates.

Changes in these estimates and assumptions could materially affect the determination of fair value and any

impairment charge.

While the fair value of these assets are less than their carrying value based on our current estimates and assumptions,

materially different estimates and assumptions in the future in response to changing economic conditions, changes in our business or

for other reasons could result in the recognition of impairment losses higher than the amount currently recorded.

For assets to be held and

used, including acquired intangible assets subject to amortization, we initiate our review whenever events or changes in circumstances

indicate that the carrying amount of these assets may not be recoverable.

Recoverability of an asset is measured by comparison of its

carrying amount to the expected future undiscounted cash flows that the asset is expected to generate.

Any impairment to be recognized

is measured by the amount by which the carrying amount of the asset exceeds its fair value.

Significant management judgment is required

in this process.

For intangible assets not

subject to amortization such as goodwill, we test for impairment annually, or whenever events or changes in circumstances indicate that

their carrying value may not be recoverable.

In testing goodwill for impairment, we compare the fair value with the carrying value.

determination of fair value is based on a discounted cash flow analysis, using inputs and assumptions such as revenue growth rates, other

projected expenses, and discount rates.

If we were to experience a decrease in forecasted future revenues attributable to the intangible

assets, this could indicate a potential impairment.

If the carrying value exceeds the estimated fair value, the goodwill is considered

impaired, and an impairment loss will be recognized in an amount equal to the excess of the carrying value over the fair value of goodwill.

We perform our annual goodwill

impairment test required by ASC 350 as of October 1st of each year.

In testing goodwill for impairment, we analyze qualitative factors

as stated within ASC 350 to determine if the fair value of our reporting unit may be less than the carrying value of the reporting unit.

We have one reporting unit that carries goodwill (Industrial IoT).

If the fair value of the reporting unit, based on qualitative factors,

may be less than the carrying value of the reporting unit, we then perform the goodwill impairment test required under ASC 350 by comparing

the fair value of the reporting unit with the carrying value of the reporting unit and, if the fair value is less than the carrying value,

the amount that the carrying value exceeds fair value represents the amount of goodwill impairment.

Accordingly, we would recognize an

impairment loss in the amount of such excess.

In connection with the XTI

Merger we recorded $12 million in goodwill which was allocated to our Industrial IoT reporting unit.

Since the closing date of the XTI

Merger on March 12, 2024, the price of our common stock has declined significantly and may continue to fluctuate in future periods.

sustained decrease in the price of our common stock is one of the qualitative factors to be considered as part of an impairment test

when evaluating whether events or changes in circumstances may indicate that it is more likely than not that a potential goodwill impairment

We will continue monitoring the analysis of the qualitative and quantitative factors used as a basis for the goodwill impairment

test during fiscal year 2025 and at the Company’s October 1st annual testing date.

As of September 30, 2025, management evaluated

potential triggers and determined there was no triggering event during the three months ended September 30, 2025 relating to the Industrial

IoT reporting unit.

As of June 30, 2025, management

evaluated potential triggers and determined there was a triggering event during the three months ended June 30, 2025 relating to the Industrial

IoT reporting unit, 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.

As such, the Company completed a qualitative

assessment and determined in the aggregate, it is more likely than not, that the fair value of the IoT reporting unit is less than its

carrying value.

Therefore, a goodwill impairment of $4.05 million was recognized during the second quarter of 2025.

One of the key factors

in the calculation of the impairment amount is the Company’s forecasted financial performance for the IoT reporting unit.

projected revenues decreased by 10%, the goodwill impairment amount would have increased by $2.9 million.

This estimate is subject to

significant uncertainty due to the potential for volatile financial market conditions.

Components of Results of Operations

Commercial Aviation

We continue to design, develop

and certify the TriFan 600 airplane and thus have not generated revenue from this segment.

We do not expect to begin generating significant

revenues until we complete the design, development, certification, and manufacturing of the airplane.

Industrial IoT

Our RTLS products are primarily

sold on a license and SaaS mode, which we call “location as a service” or “LaaS.” In our licensing model, we

also typically charge an annual maintenance fee.

The LaaS model is typically for a 3-5 year contract and includes a license to use, maintenance

and hardware upgrades.

The LaaS model generates a recurring revenue stream.

Operating Expenses

Research and Development

Research and development

activities represent a significant part of our business.

Our research and development efforts focus on the design and development of

(i) our indoor intelligence products, and (ii) our TriFan 600 airplane, including certain of the systems that will be used in it.

part of our aircraft development activities, we continue to work closely with the FAA towards our goal of achieving certification of

our TriFan 600 airplane on an efficient timeline.

Research and development

expenses consist primarily of costs incurred in connection with the research and development of the TriFan 600 airplane.

These expenses

employee-related expenses,

including salaries and benefits for personnel engaged in research and development functions;

expenses incurred under

agreements with third parties such as consultants and contractors;

software and technology-related

expenses to support computer-aided design of the aircraft, flight simulations, and other technology needs of our engineers.

Research and development

costs are expensed as incurred.

We expect our research and development expenses to increase significantly for the foreseeable future

as we increase staffing to support aircraft engineering and software development, build aircraft prototypes and continue to explore and

develop technologies.

We cannot determine with

certainty the timing, duration or the costs necessary to complete the design, development, certification, and manufacturing of our TriFan

600 airplane due to the inherently unpredictable nature of our research and development activities.

Development timelines, the probability

of success, and development costs may differ materially from expectations.

Sales and Marketing Expenses

Sales and marketing costs

include activities such as aircraft reservation procurement, brand awareness campaigns, public relations and business opportunity advancement.

These functions mainly generate expenses relating to travel, trade show fees and costs, salaries and benefits.

Sales and marketing expenses

are expensed as incurred.

General and Administrative Expenses

General and administrative

expenses consist primarily of salaries and related costs for personnel in executive, finance, corporate and business development, and

administrative functions.

General and administrative expenses also include legal fees relating to patent and corporate matters, including

non-capitalizable transaction costs;

professional fees for accounting, auditing, tax and administrative consulting services;

costs, facility related expenses including maintenance and allocated expenses for rent and other operating costs.

We anticipate that general

and administrative expenses will increase substantially in the future as we increase our headcount to support continued research and

development and commercialization of the TriFan 600.

Other (Expense) Income

Interest expense, net consists

primarily of (i) interest relating to convertible and promissory notes payable, (ii) amortization of debt discounts relating to warrants

and stock options issued in conjunction with convertible notes, and (iii) interest income on notes receivable.

Loss on extinguishment of

debt includes (i) prepayment penalties and other expenses incurred during the nine months ended September 30, 2025 as the Company fully

repaid the Streeterville promissory notes before the maturity date, and (ii) inducement losses on debt conversions incurred by Legacy

XTI when it entered into voluntary note conversion letter agreements with several note holders during the first quarter of 2024.

Change in fair value of convertible

notes payable represents the remeasurement of certain Legacy XTI convertible notes to fair value.

These notes were converted to equity

prior to the closing of XTI Merger.

Change in fair value of warrant

liability represents the remeasurement of certain outstanding warrants to fair value.

Other consists of miscellaneous

income and expense items.

RESULTS OF OPERATIONS

Three Months Ended September 30, 2025 compared

to the Three Months Ended September 30, 2024

The following table sets

forth selected consolidated financial data and as a percentage of period-over-period change:

In connection with the preparation of our consolidated financial statements, we are required to make assumptions and estimates about

future events, and apply judgments that affect the reported amounts of assets, liabilities, revenue, expenses and the related disclosures.

We base our assumptions, estimates and judgments on historical experience, current trends and other factors that management believes

to be relevant at the time our consolidated financial statements are prepared.

On a regular basis, we review the accounting policies,

assumptions, estimates and judgments to ensure that our consolidated financial statements are presented fairly and in accordance with

However, because future events and their effects cannot be determined with certainty, actual results could differ from our assumptions

and estimates, and such differences could be material.

significant accounting policies of the Company are described in Item 7, “Management’s Discussion and Analysis of Financial

Condition and Results of Operations,” section of the Company’s annual report on Form 10-K for the year ended December 31,

There have been no significant changes to the Company’s critical accounting policies and estimates.

OF OPERATIONS

and Comparability Considerations

Company’s results of operations for the three months ended March 31, 2026 reflect a full quarter of operations from its UAS platform

following the acquisition of Drone Nerds in November 2025, as well as the absence of the Inpixon Business following its disposition in

February 2026.

results of the Inpixon Business have been presented as discontinued operations for all periods presented.

As a result, the Company’s

results from continuing operations for the three months ended March 31, 2025 do not reflect the current scale of the Company’s

UAS operations, and period-to-period comparisons may not be indicative of future performance.

Drivers of Operating Results

Company’s operating results are primarily driven by the performance of its UAS platform, including revenue growth, product and

channel mix, service attachment rates, and inventory availability.

margins are influenced by product mix, pricing, vendor costs, and the relative contribution of higher-margin service offerings.

continues to focus on expanding service-based revenue and improving margin consistency.

expenses reflect investments in scaling the UAS platform, as well as ongoing development costs associated with the ADS program.

and administrative expenses also include public company costs and stock-based compensation, which may vary period to period.

income (expense) may be impacted by changes in the fair value of certain financial instruments, interest expense, and other non-operating

items, which can introduce variability that is not directly related to core operating performance.

Months Ended March 31, 2026 compared to the Three Months Ended March 31, 2025

following table sets forth selected consolidated financial data and as a percentage of period-over-period change:

Three Months Ended

3 unchanged sentences

Loss from operations

Other (expense) income

Income tax provision

Amounts used to calculate

dollar and percentage changes are based on numbers in the thousands.

Accordingly, calculations in this item, which may be rounded

to the nearest hundred thousand, may not produce the same results.

The revenue amount for the

periods presented represents the results of the revenue-generating Industrial IoT segment.

Revenues for the three months ended September

30, 2025 were $2.5 million, compared to $0.9 million for the three months ended September 30, 2024, representing an increase of approximately

Other expense, net

Provision for income taxes

Net loss from continuing operations

Comparisons between positive

and negative numbers and with a zero are not meaningful.

for the three months ended March 31, 2026 were $27.7 million, reflecting revenue generated by our UAS solutions platform following the

acquisition of Drone Nerds in November 2025.

were no revenues for the three months ended March 31, 2025.

of Revenues and Gross Profit

of revenues for the three months ended March 31, 2026 were $22.6 million, resulting in gross profit of $5.1 million and a gross margin

of approximately 19%.

The gross margin reflects the product mix and operating model of the UAS distribution and services business, which

includes hardware sales, accessories, and related support services.

were no revenues or cost of revenues for the three months ended March 31, 2025.

gross margin performance will be influenced by product mix, service attachment rates, pricing discipline, vendor cost dynamics, and channel

expenses for the three months ended March 31, 2026 were $15.5 million, an increase of $7.3 million, or 89%, compared to $8.2 million

for the comparable period ended March 31, 2025.

increase was due primarily to increased personnel-related expenses, including stock-based compensation, and operating expenses incurred

at the Drone Nerds business which was acquired in the fourth quarter of 2025 and therefore has no activity reflected in the three months

ended March 31, 2025.

expense, net for the three months ended March 31, 2026 was $21.4 million compared to $2.5 million for the comparable period in the prior

expense of $21.4 million for the three months ended March 31, 2026 was primarily attributable to the change in fair value of the warrant

expense of $2.5 million for the three months ended March 31, 2025 was primarily attributable to (i) $0.4 million loss on extinguishment

of debt due to the full repayment of the Streeterville promissory notes before the maturity date, and (ii) $2.0 million of financing

costs incurred relating to the issuance of warrants in connection with the March Offering.

for Income Taxes

provision for income tax for the three months ended March 31, 2026 and 2025 was immaterial.

As the Company has a history of recognizing

a net taxable loss, the Company records a valuation allowance against substantially all deferred tax assets.

Results of Operations

in early 2026, the Company operates through two reportable segments:

The UAS segment reflects the operations of Drone Nerds

beginning on November 10, 2025, while the ADS segment is now building a core capability around the design, development, and production

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

national security priorities.

the three months ended March 31, 2026, the UAS segment generated revenue of approximately $27.7 million and gross profit of approximately

$5.1 million.

The increase was primarily attributable to a $1.3 million increase in hardware revenue related to the Company’s IoT

business, resulting from improved supply chain conditions.

These improvements followed the resolution of disruptions caused by regional

conflict in the Middle East, which had impacted operations of the Company’s Israeli supplier and resulted in delays in hardware

product deliveries during the first half of 2025.

In addition, we communicated our plan to explore our strategic options to wind down

and/or sell the hardware portions of our Industrial IoT business to our customers which resulted in customers increasing their hardware

purchases, and as a result, we do not expect this trend to continue.

Cost of Revenues and Gross Profit

Cost of revenues for the

three months ended September 30, 2025 was $1.4 million compared to $0.4 million for the comparable period in the prior year for an increase

of approximately $1.0 million.

This increase is consistent with the increase in revenues noted above.

Gross profit for the three

months ended September 30, 2025 was $1.1 million compared to $0.5 million for the comparable period in the prior year, an increase of

approximately $0.6 million, which is consistent with the increase in revenue.

The gross margin percentage was 43.4% and 56.6% for the

three months ended September 30, 2025 and 2024, respectively.

The margin decrease is due primarily to a shift in sales mix to lower margin

hardware products during the three months ended September 30, 2025.

Operating Expenses

Operating expenses for the

three months ended September 30, 2025 were $15.9 million and $4.7 million for the comparable period ended September 30, 2024, an increase

of $11.2 million.

We expect operating expenses to continue to increase as we increase our headcount to accommodate our growth.

This increase

was primarily attributable to:

Research and development expenses , which increased by $0.8 million mainly to advance the development of the TriFan 600 airplane.

Sales and marketing expenses , which increased b y $1.7 million, as the Company invested more in brand development and awareness, trade show participation, and business development initiatives.

General and administrative expenses , which increased by $8.7 million, due primarily to an increase of approximately $8.2 million in stock-based compensation and an increase in administrative headcount to support operational growth.

Other (Expense) Income

Other (expense) income for

the three months ended September 30, 2025 was income of $1.4 million compared to a loss of $0.2 million for the comparable period in

the prior year.

The income for the three months

ended September 30, 2025 was primarily attributable to the recognition of a $2.2 million gain related to the change in fair value of a

warrant liability which was partially offset by $0.8 million of financing costs incurred relating to the issuance of warrants in connection

with the September Offering.

Income Tax Benefit (Provision)

The income tax benefit (provision)

for the three months ended September 30, 2025 and 2024 was immaterial.

Nine Months Ended September 30, 2025 compared

to the Nine Months Ended September 30, 2024

The following table sets

forth selected consolidated financial data and as a percentage of period-over-period change:

Nine Months Ended

September 30,

Operating expenses for the UAS segment consisted primarily of sales and marketing expenses associated with distribution

activities and general and administrative expenses required to support the operations of Drone Nerds following the acquisition.

the three months ended March 31, 2026, the ADS segment did not generate revenue.

Operating expenses for this segment consisted primarily

of research and development costs related to unmanned platforms, with an emphasis on serving defense customers and supporting domestic

procurement initiatives aligned with U.S.

national security priorities, as well as general corporate expenses supporting ongoing efforts.

December 2025, the Company committed to a plan to dispose of its Inpixon Business and initiated an activity process to identify a buyer.

The Company completed the sale of its Inpixon Business on February 3, 2026 for total consideration of approximately $5.5 million.

Inpixon Business is presented as discontinued operations for all periods presented.

from discontinued operations was $3.3 million and $2.2 million for the three months ended March 31, 2026 and 2025, respectively.

from discontinued operations for the three months ended March 31, 2026 includes a loss of $0.8 million recognized upon closing of the

sale, and $1.2 million in income tax expense related to estimated taxes due in foreign jurisdictions as a result of the sale.

disposition of the Inpixon Business represents a strategic shift that allows the Company to focus its resources on its core UAS and aerospace

development operations.

Pro Forma Financial Information (Supplemental)

Company completed its acquisition of a controlling interest in Drone Nerds on November 10, 2025, as such the consolidated results for

the three months ended March 31, 2025 do not include the results of operations.

The following unaudited pro forma combined financials

presents the combined results of operations of the Company and the acquired business as if the acquisition had occurred on January 1,

2025, the beginning of the earliest period presented.

The pro forma financial information has been prepared for comparative purposes

only and does not necessarily reflect the results of operations that would have occurred had the acquisition been completed on that date,

nor is it indicative of future operating results of operations.

pro forma results reflect adjustments that are directly attributable to the acquisition and are factually supportable, including:

● Incremental

amortization expense related to identifiable intangible assets acquired;

expense associated with acquisition-related indebtedness;

accounting policy adjustments, where applicable.

unaudited pro forma financial information does not include any anticipated cost savings, operating synergies, or other integration effects

of the acquisition.

Pro Forma Non-GAAP Measure

We also present Pro Forma EBITDA, Pro Forma Adjusted

EBITDA and Pro Forma Adjusted EBITDA Margin, all non-GAAP measures.

Management defines Pro Forma EBITDA as pro forma net loss before interest,

income taxes, depreciation and amortization.

Pro Forma Adjusted EBITDA is defined as Pro Forma EBITDA further adjusted for certain items

including, (i) non-cash stock based compensation expense;

(ii) severance and restructuring charges;

(iii) changes in fair value of warrant

and (iv) selected charges that are unusual or non-recurring.

Pro Forma Adjusted EBITDA Margin is defined as Pro Form Adjusted

EBITDA as a percentage of pro forma revenue.

The Company believes that EBITDA and Adjusted

EBITDA financial measures assist our board of directors, management, investors, and lenders in comparing our operating performance and

establishing operational goals on a consistent basis across periods by removing the effects of our capital structure and other items that

impact the comparability of financial results from period to period.

We present EBITDA and Adjusted EBITDA because we believe they provide

useful information regarding the factors and trends affecting our business in addition to measures calculated under GAAP.

These non-GAAP financial measures may not be

computed in the same manner as similarly titled measures used by other companies.

The calculation of Pro Forma EBITDA, Pro Forma Adjusted

EBITDA, and Pro Forma Adjusted EBITDA Margin are included in the table below.

The following unaudited pro forma combined financial

information presents the combined results of operations of the Company and Drone Nerds as if the acquisition had occurred on January 1,

Three Months Ended

(in thousands, except percentages)

2 unchanged sentences

Loss from operations

Other (expense) income

Income tax benefit (provision)

Amounts used to calculate

dollar and percentage changes are based on numbers in the thousands.

Accordingly, calculations in this item, which may be rounded

to the nearest hundred thousand, may not produce the same results.

The revenue amount for the

periods presented represents the results of the revenue-generating Industrial IoT segment.

Revenues for the nine months ended September 30,

2025 were $3.6 million compared to $2.2 million for the comparable period in the prior year for an increase of approximately $1.4 million.

The increase was primarily attributable to a $0.9 million increase in hardware revenue related to the Company’s IoT business, resulting

from improved supply chain conditions.

These improvements followed the resolution of disruptions caused by regional conflict in the Middle

East, which had impacted operations of the Company’s Israeli supplier and resulted in delays in hardware product deliveries during

the first half of 2025.

In addition, we communicated our plan to explore our strategic options to wind down and/or sell the hardware

portions of our Industrial IoT business to our customers which resulted in customers increasing their hardware purchases, and as a result,

we do not expect this trend to continue.

In addition, recurring software revenue increased by $0.4 million due to existing IoT customers

adding new locations to their contracts.

Cost of Revenues and Gross Profit

Cost of revenues for the nine

months ended September 30, 2025 was $1.7 million compared to $0.8 million for the comparable period in the prior year.

Gross profit for the nine

months ended September 30, 2025 and 2024 was $1.9 million and $1.3 million, respectively.

The gross margin percentage was 53% and

61% for the nine months ended September 30, 2025 and 2024, respectively.

The margin decrease is due primarily to a shift in sales mix

to lower margin hardware products during the first nine months of 2025.

Other expense, net

Provision for income taxes

Pro forma net loss from continuing operations

Reconciliation of Pro Forma EBITDA and Pro Forma Adjusted EBITDA

Pro form net loss from continuing operations

Interest expense, net

Income tax benefit

Depreciation and amortization

Pro Forma EBITDA

Change in fair value of warrant liability

Severance and restructuring charges

Stock-based compensation expense

Selected charges that are unusual or non-recurring

Pro Forma Adjusted EBITDA

Pro forma Margins:

Pro Forma Adjusted EBITDA Margin

(1) Includes warrant issue expense, change in fair value of investment,

and loss on extinguishment of debt

Interpretation

of Pro Forma Results

For the three months ended March 31, 2026, revenue

was $27.7 million, down 9% from $30.6 million in the same period of 2025.

The decrease was mainly due to timing differences in sales between

the two periods.

In late 2024, supply constraints delayed some product deliveries, causing sales that would normally have occurred in

2024 to shift into the first quarter of 2025, making that period unusually strong.

In contrast, demand increased in late 2025 ahead of

expected FCC regulations on foreign-made drones, which pulled some sales forward from the first quarter of 2026 into 2025, making the

first quarter of 2026 comparatively weaker.

Gross profit for the three months ended March

31, 2026 was $5.1 million, or 19% of revenue, compared to $7.2 million, or 24% of revenue, in the same period of 2025.

The decline was

primarily due to unusually strong margins in the first quarter of 2025, when limited product availability from earlier supply constraints

allowed the Company to sell inventory at higher margins and focus on higher-margin sales as products became available.

expenses for the three months ended March 31, 2026 were $15.5 million, compared to pro forma operating expenses of $11.6 million for

the three months ended March 31, 2025.

The increase reflects continued investment in personnel and public company costs.

Operating expenses

Operating expenses for the

nine months ended September 30, 2025 were $38.2 million, compared to $28.3 million for the nine months ended September 30, 2024, an increase

of $9.9 million.

We expect operating expenses to continue to increase as we increase our headcount to accommodate our growth.

was primarily attributable to:

and development expenses , which increased by $2.8 million, primarily related to continued

development of the TriFan 600 program.

and marketing expenses , which increased b y $3.1 million, as the Company expanded

investments in brand development and awareness, trade show participation, and business development

impairment charges , which increased by $4.7 million, relating to goodwill and intangible

assets within the Industrial IoT segment.

and administrative expenses , which increased by $6.0 million, primarily due to higher

legal and accounting fees associated with capital-raising activities during 2025, increased

administrative headcount to support operational growth, and higher public company-related

professional fees.

The 2024 period reflects the operations of Legacy XTI, a private company,

from January 1, 2024 through the March 12, 2024 closing of the XTI Merger.

These increases were partially

offset by a $6.5 million decrease in acquisition-related costs incurred during the nine months ended September 30, 2024, associated with

the closing of the XTI Merger.

Other (Expense) Income

Other (expense) income for

the nine months ended September 30, 2025 was a loss of $10.8 million compared to a gain of $5.3 million for the comparable period

ended September 30, 2024.

The loss during the nine months ended September 30, 2025 was primarily driven by (i) $6.6 million of financing

costs incurred relating to the issuance of warrants in connection with the March Offering, June Offering and September Offering, (ii)

the recognition of a $3.3 million loss related to the change in fair value of a warrant liability, and (iii) a loss on extinguishment

of debt of $0.4 million.

The gain of approximately

$5.3 million for the nine months ended September 30, 2024 was primarily driven by the Company recognizing an income gain of approximately

$12.9 million relating to the remeasurement of convertible notes at fair value, partially offset by inducement losses on debt

conversions of approximately $6.7 million.

Income Tax Benefit (Provision)

The income tax benefit (provision)

for the nine months ended September 30, 2025 and 2024 was immaterial.

Liquidity and Capital Resources

Our current capital resources

and operating results as of and through September 30, 2025, consist of:

working capital of approximately

$1.1 million, adjusted to approximately $29.3 million when excluding derivative warrant liabilities;

cash and cash equivalents

of approximately $32.2 million;

net cash used by operating

activities for the nine months ended September 30, 2025 of $30.4 million.

The breakdown of our working

capital as of the periods indicated below is as follows (in thousands):

Working Capital

September 30,

Current Assets

Cash and cash equivalents

Accounts receivable, net

Other receivables

Prepaid expenses and other current assets

Total Current Assets

Current Liabilities

Accounts payable and related party payables

Accrued expenses and other current liabilities

Accrued interest

Customer deposits

Warrant liability

Operating lease obligation, current

Deferred revenue

Short-term debt

Total Current Liabilities

Net Working Capital (Deficit)

Balance Sheet Improvement

During the nine months ended

September 30, 2025, we raised approximately $62.8 million in net proceeds through our now expired ATM with Maxim, public offerings of

our securities placed and underwritten by ThinkEquity and the exercise of warrants issued in connection with certain public offerings.

The proceeds from these capital raises and warrant exercises allowed us to significantly reduce debt and other obligations, while progressing

the development of the TriFan 600 airplane.

The following summarizes the improvements to our balance sheet from December 31, 2024 to September

Cash and cash equivalents increased by approximately $28.1 million primarily due to the net proceeds received from the January, March, June and September Offerings.

capital increased by approximately $9.9 million or increased by approximately $38.2 million when excluding derivative warrant liabilities.

In March 2025, we repaid in full the outstanding secured promissory notes issued to Streeterville, which resulted in the release of Streeterville’s security interest in the assets of XTI Aircraft Company.

In September 2025, we repaid in full Legacy XTI’s secured promissory note with the with the U.S.

Small Business Administration.

As of September 30, 2025, we had no interest-bearing debt outstanding.

In March 2025, we redeemed

the remaining outstanding shares of Series 9 Preferred Stock, leaving zero shares of Series 9 Preferred Stock issued and outstanding

as of September 30, 2025.

The Series 9 Preferred Stock had restricted our ability to raise capital, as we were prohibited from taking

certain actions without prior written consent from the holders of the Series 9 Preferred Stock.

In March 2025, we repaid

the remaining Strategic Transaction Bonus Plan obligation to prior Legacy Inpixon management, which was the primary driver for the

approximate $4.4 million decline in accrued expenses and other current liabilities from December 31, 2024 to September 30, 2025.

In March 2025, we repaid

the accounts payable and most commitments that were inherited from Legacy Inpixon.

A remaining deferred consulting fee commitment

of $0.5 million is still owed to Nadir Ali, the Company’s former Chief Executive Officer, which is payable on December 31,

We believe the Company’s

ability to raise capital has been favorably impacted by the reduction of obligations either assumed from Legacy Inpixon or created by

the XTI Merger closing and the elimination of the Streeterville secured debt and equity instruments with fundraising restrictions.

Contractual Obligations and Commitments

Contractual obligations are

cash that we are obligated to pay as part of certain contracts that we have entered during our course of business.

Our contractual obligations

consist of operating lease liabilities and merger-related transaction liabilities that are included in our condensed consolidated balance

sheet and vendor commitments associated with agreements that are legally binding.

As of September 30, 2025, the total obligation for

capitalized operating leases was approximately $0.3 million, of which approximately $0.1 million is expected to be paid in the next twelve

Customer Deposits

As of September 30, 2025,

we received conditional pre-orders under a combination of non-binding aircraft purchase agreements, reservation deposit agreements, options

and letters of intent for aircraft, which generated approximately $1.4 million of cash from customer deposits.

These funds from customer

reservation deposits will not be recorded as revenue until the orders for aircraft are delivered, which may not be for many years or

at all if we do not deliver the aircraft.

The deposits prioritize orders when the aircraft becomes available for delivery.

making deposits are not obligated to purchase aircraft until they execute a definitive purchase agreement.

Customers may request a return

of their refundable deposit any time up until the execution of a purchase agreement.

Customers’ request for a return of their refundable

deposits could adversely affect our liquidity resources, and we may be financially unable to return such deposits.

Commitment to Nadir Ali

As disclosed in Note 16 of

the condensed consolidated financial statements, as of September 30, 2025, the Company has a remaining commitment to pay Nadir Ali deferred

consulting fees of $500,000 due on December 31, 2025.

Risks and Uncertainties;

Sources of Liquidity;

Long-Term Liquidity Requirements

As of September 30, 2025,

the Company has working capital of approximately $1.1 million, adjusted to $29.3 million when excluding derivative warrant liabilities,

and 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.

On November 10, 2025, the

Company acquired 100% of the issued and outstanding equity interests of two enterprise drone solutions providers, Drone Nerds and

Anzu Robotics 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.

On November 12, 2025, the

Company closed the PIPE Offering pursuant to which the Company issued Unusual Machines 25,000 shares of Series 10 Convertible Preferred

Stock for gross proceeds of $25.0 million and net proceeds of $23.1 million after deducting the placement agent fees and other expenses

payable by the Company of approximately $1.9 million.

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 historically supplemented the revenues it earned with proceeds from the sale of our equity and debt securities

and proceeds from loans and bank credit lines.

The Company has incurred net losses and negative operating cash flows from operations since

the XTI Merger completed on March 12, 2024, and the Company expects to continue to incur losses and negative operating cash flows for

the foreseeable future until it commences sustainable commercial operations of the TriFan 600 airplane.

Since the XTI Merger, the Company

has funded its operations primarily with proceeds from equity financings, including through our now expired ATM with Maxim and four public

offerings completed in January 2025, March 2025, June 2025 and September 2025 (collectively, the “Offerings”), and through

the issuance of promissory notes.

We believe that our current revenue, as supplemented by proceeds from our financings, including the

approximately $57.1 million net proceeds we raised in the Offerings, a portion of which was used to fully repay short-term obligations

including the outstanding Streeterville promissory note balances, along with our ability to defer or eliminate certain operating expenses

that are under our control, will provide us with liquidity to fund our planned operating needs for at least the next twelve months.

According to our current development

schedule, we do not expect to obtain FAA type certification and other necessary regulatory approvals and commence deliveries of the TriFan

600 until 2030 at the earliest.

We expect to fund our operations primarily through equity and/or debt financings at least until we commence

sustainable commercial operations of the TriFan 600.

We filed a shelf registration statement on Form S-3 on August 1, 2025, which was

declared effective by the SEC on August 12, 2025, pursuant to which we may offer and sell, from time to time, in one or more offerings,

up to $1 billion in any combination of common stock, preferred stock, depositary shares, debt securities, warrants, units and subscription

rights until such shelf registration statement expires in August 2028.

Equity financing may result

in dilution to the interests of our existing stockholders and could involve issuing securities with rights, preferences, or privileges

senior to those of existing common stockholders.

Similarly, debt financing could involve instruments with terms that supersede those

of preferred or common stockholders and may include operational restrictions.

It is important to note that capital markets have experienced

volatility in the past and may do so again, which could impact our ability to raise funds on favorable terms or at all.

We currently do not have

material cash obligations related to existing contracts.

As a result, our future cash needs are closely tied to management’s strategic

decisions regarding the pace and priorities of short- and long-term initiatives.

These requirements are subject to fluctuation based

on operational choices, including the timing and scale of infrastructure and development of sub-scale and full-scale test aircraft.

influencing our future capital needs include revenue growth, aircraft pre-order deposit timing, expansion of sales and marketing efforts,

and the scope of development initiatives.

We may also pursue strategic

acquisitions or investments in complementary businesses, technologies, or products, which could necessitate additional financing.

we are unable to raise additional capital when needed or on acceptable terms, it could limit our ability to innovate, develop, and compete

effectively—ultimately affecting our business performance and financial condition.

In such a case, we may be forced to reduce or

delay investments in manufacturing, infrastructure, and R&D, or adjust our expansion plans—any of which could have a material

adverse impact on our operations and long-term prospects.

The Company’s net cash

flows used in operating, investing and financing activities for the nine months ended September 30, 2025 and 2024 and certain balances

as of the end of those periods are as follows (in thousands):

For the Nine Months Ended

September 30,

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

Company recognized a loss from continuing operations of $31.7 million for the three months ended March 31, 2026, compared to a pro forma

loss from continuing operations of $7.3 million for the three months ended March 31, 2025.

Loss from continuing operations includes a

$21.4 million loss on the remeasurement of warrant liabilities and stock based compensation expense of $4.8 million for the three months

ended March 31, 2026, compared to a gain on the remeasurement of warrant liabilities of $0.5 million and pro forma stock based compensation

expense of $0.4 million for the three months ended March 31, 2025.

Pro Forma EBITDA was ($31.3 million) and ($6.4 million) for the three

months ended March 31, 2026 and 2025, respectively, and Pro Forma Adjusted EBITDA was ($4.9 million) and ($3.7 million) for the three

months ended March 31, 2026 and 2025, respectively.

Pro Forma Adjusted EBITDA Margin for the same periods was (18%) and (12%), respectively.

The change in these measures is a result of the above-mentioned factors.

AND CAPITAL RESOURCES

of March 31, 2026 and December 31, 2025, the Company had cash and cash equivalents of approximately $15.2 million and $16.7 million,

respectively, and working capital (deficit) of approximately ($40.6 million) and $4.2 million, respectively.

Working capital as of March

31, 2026 and December 31, 2025, includes derivative warrant liabilities of approximately $64.9 million and $22.6 million, respectively.

These instruments are non-cash financial liabilities that are required to be measured at fair value under GAAP and do not represent contractual

cash obligations.

Excluding these derivative warrant liabilities, working capital would have been approximately $24.3 million and $26.8

million as of March 31, 2026 and December 31, 2025, respectively.

Absent changes in warrant liabilities, there were no material changes

to current assets or current liabilities as of March 31, 2026 compared to December 31, 2025.

Company’s liquidity is primarily supported by cash on hand, operating cash flows from its UAS platform, and availability under

its asset-based revolving credit facility.

the three months ended March 31, 2026:

Company received approximately $7.4 million in net proceeds from the exercise of warrants

Company completed the disposition of the Inpixon Business in February 2026

Company entered into a $20.0 million asset-based revolving credit facility, subject to a

borrowing base

February 2026, the Company entered into a secured asset-based revolving credit facility providing for borrowings of up to $20.0 million,

subject to a borrowing base of eligible accounts receivable and inventory.

The facility matures on February 11, 2029 and is intended

to support working capital and general corporate purposes.

of March 31, 2026, the borrowing base was calculated to be $12.7 million, and the Company had $4.6 million outstanding, with approximately

$8.1 million of remaining availability.

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 date.

Company’s liquidity strategy is focused on maintaining sufficient operating capital to support its enterprise drone distribution

business while continuing to develop unmanned platforms for defense and commercial applications.

Near-term liquidity is expected to be

supported by cash on hand, operating cash flows from the Drone Nerds business, and availability under the Company’s asset-based

revolving credit facility.

The Company does not currently expect to require additional capital to support the ordinary-course operating

needs of the Drone Nerds business.

However, the Company may seek additional capital in the future to support strategic acquisitions and

the development of its advanced systems and domestic manufacturing initiatives.

believes that the Company’s existing cash balances, expected operating cash flows, and availability under its credit facility will

be sufficient to meet its obligations for at least the next twelve months from the date of issuance of these financial statements.

Obligations and Commitments

Company’s contractual obligations consist primarily of operating lease liabilities, short-term debt and acquisition-related promissory

notes, and vendor commitments incurred in the ordinary course of business.

of March 31, 2026, total operating lease liabilities were approximately $1.7 million, of which approximately $0.7 million is expected

to be paid in the next twelve months.

As of March 31, 2026, the Company had acquisition-related promissory note obligations of $5.9 million,

representing scheduled principal payments due within one year.

As of March 31, 2026, the Company had $4.6 million drawn on its credit

facility, which matures on February 11, 2029.

Company also maintains customary vendor purchase commitments associated with inventory procurement and operating agreements within its

Drone Nerds distribution business.

These commitments are generally short-term in nature and consistent with normal operating requirements.

of March 31, 2026, customer deposits totaled approximately $2.5 million.

Customer deposits consist of (i) refundable and conditional

deposits received in connection with aircraft pre-orders and (ii) advance payments received in the ordinary course of business from customers

of the Drone Nerds distribution operations.

Aircraft-related deposits are generally refundable until a definitive purchase agreement

If a significant number of customers request refunds, it could adversely impact liquidity.

received in the Drone Nerds business are typically short-term in nature and relate to standard commercial sales arrangements, including

advance payments for inventory orders.

These deposits are recognized as revenue upon transfer of control of the related goods.

and Uncertainties

of March 31, 2026, the Company’s liquidity position reflects cash on hand, operating cash flows from its UAS platform, and availability

under its asset-based revolving credit facility.

While the Company expects the Drone Nerds operations to contribute positive operating

cash flows, its results remain subject to variability in sales volumes, gross margins, inventory turnover, and broader market conditions

affecting demand in the enterprise and commercial drone markets, as well as risks associated with the integration of acquired operations.

of March 31, 2026, the Company had approximately 21 million outstanding warrants with an exercise price ranging from $1.36 to $2.19 per

If fully exercised for cash, these warrants would provide aggregate gross proceeds of approximately $41.9 million;

however, exercise

is at the discretion of the holders and dependent on market conditions.

These amounts exclude prefunded warrants and warrants that management

does not expect to be redeemed due to the exercise price.

During the three months ended March 31, 2026, certain warrant holders exercised

warrants, resulting in net proceeds of approximately $7.4 million.

The timing and extent of any future warrant exercises are not within

the Company’s control.

Company has incurred historical operating losses and negative cash flows from operations and expects to continue to incur losses as it

invests in the growth of its UAS and ADS platform.

The Company has currently paused development activities related to the TriFan 600

aircraft program.

Any future resumption of development activities related to the TriFan 600 program would be expected to require additional

Management may continue to pursue a range of potential funding alternatives, including equity or debt financing, strategic partnerships,

joint ventures, government incentives and other potential sources of capital in connection with any such future resumption.

Company’s net cash flows used in operating, investing and financing activities for the three months ended March 31, 2026 and 2025

and certain balances as of the end of those periods are as follows (in thousands):

For the Three Months

Ended March 31,

Net cash used in operating activities

3 unchanged sentences

Net increase in cash and cash equivalents

September 30,

Cash and cash equivalents

Working capital (deficit)

Operating Activities for the nine months ended

September 30, 2025

Net cash used in operating

activities during the nine months ended September 30, 2025 was approximately $30.4 million.

The cash flows related to the nine months

ended September 30, 2025 consisted of the following (in thousands):

Non-cash income and expenses

Net change in operating assets and liabilities

Net cash used in operating activities

The non-cash income and expense

of approximately $23.1 million consisted primarily of the following (in thousands):

Depreciation and amortization

Amortization of intangible assets

Amortization of right-of-use asset

Non-cash interest expense, net of interest income

Stock-based compensation

Impairment of goodwill

Impairment of intangible assets

Loss on extinguishment of debt

Warrant issuance expense

Change in fair value of warrant liability

Unrealized gain on foreign currency transactions and other income and expense

Total non-cash expenses

The net cash used in the

change in operating assets and liabilities aggregated approximately $6.2 million and consisted primarily of the following (in thousands):

Increase in accounts receivable and other receivables

Decrease in inventories

Decrease in prepaid expenses and other current assets and other assets

Decrease in accounts payable and related party payables

Decrease in accrued expenses and other current liabilities

Increase in accrued interest

Increase in deferred revenue

Decrease in operating lease obligation

Net cash used in the changes in operating assets and liabilities

The increase in accounts receivable

and corresponding decrease in inventories primarily reflect higher Nanotron hardware sales occurring during the latter stages of the quarter

ending September 30, 2025.

Cash proceeds from the public offerings completed during 2025 allowed the Company to significantly reduce obligations

including accounts payable and accrued expenses.

The decrease in accrued expenses and other current liabilities of approximately $4.7

million was mainly attributable to (i) cash payments to settle the remaining accrued transaction bonuses and consulting fees owed to prior

Legacy Inpixon executives, and (ii) payment of accrued employee bonuses.

Operating Activities for the nine months ended

September 30, 2024

Net cash used in operating

activities during the nine months ended September 30, 2024 was approximately $14.3 million.

The cash flows related to the nine months

ended September 30, 2024 consisted of the following (in thousands):

Non-cash income and expenses

Net change in operating assets and liabilities

Net cash used in operating activities

The non-cash income and expense

of approximately $1.1 million consisted primarily of the following (in thousands):

Depreciation and amortization expenses

Amortization of intangible assets

Amortization of right-of-use asset

Non-cash interest expense, net of interest income

Stock-based compensation

Change in fair value of convertible notes payable

Loss on extinguishment of debt

Change in fair value of warrant liability

Unrealized gain on foreign currency transactions and other

income and expense items

Total non-cash expenses

The net cash provided by

the change in operating assets and liabilities aggregated approximately $8.6 million and consisted primarily of the following (in thousands):

Increase in accounts receivable and other receivables

Decrease in inventory

Decrease in prepaid expenses and other current assets and other assets

Increase in accounts payable

Increase in accrued expenses and other liabilities

Increase in accrued interest

Decrease in deferred revenue

Decrease in operating lease obligation

Net cash provided by the changes in operating assets and

Cash Flows from Investing Activities for the

nine months ended September 30, 2025 and 2024

Net cash flows used in investing

activities during the nine months ended September 30, 2025 was approximately $0.1 million.

Net cash flows provided by

investing activities during the nine months ended September 30, 2024 was approximately $2.9 million.

Cash flows related to investing

activities during the nine months ended September 30, 2024 consist primarily of the cash assumed from Legacy Inpixon in connection with

the XTI Merger.

Cash Flows from Financing Activities for the

nine months ended September 30, 2025 and 2024

Net cash flows provided by

financing activities during the nine months ended September 30, 2025 was approximately $58.6 million.

During the nine months ended September

30, 2025, the Company received incoming cash flows of $1.7 million from the now expired ATM, $57.1 million from the sale of common stock

and warrants via four public offerings, and $4.1 million from the exercise of warrants issued in connection with the public offerings.

During the nine months ended September 30, 2025, the Company paid $2.7 million to fully settle the two outstanding promissory note obligations

with Streeterville, paid $0.1 million to fully settle the outstanding SBA loan, and paid $1.4 million to redeem the remaining outstanding

Series 9 Preferred Stock.

Net cash flows provided by

financing activities during the nine months ended September 30, 2024 was approximately $11.9 million.

During the nine months ended September

30, 2024, the Company received incoming cash flows of $9.6 million from the now expired ATM, $2.0 million from promissory notes issued

to Streeterville, and $1.0 million in proceeds from an existing promissory note arrangement with Legacy Inpixon.

During the nine months

ended September 30, 2024, the Company repaid $0.7 million towards outstanding promissory notes.

Off-Balance Sheet Arrangements

We do not have any off-balance

sheet guarantees, interest rate swap transactions or foreign currency contracts.

We do not engage in trading activities involving non-exchange

traded contracts.

Recently Issued Accounting Standards

For a discussion of recently

issued accounting pronouncements, please see Note 3 of the Notes to Condensed Consolidated Financial Statements included in Part I, Item

1 of this report.

Quantitative and Qualitative Disclosures

About Market Risk

Not applicable.

Activities for the three months ended March 31, 2026

cash used in operating activities was approximately $10.5 million for the three months ended March 31, 2026.

in operating cash flows for the three months ended March 31, 2026 is approximately $0.1 million of cash used in operating activities

related to discontinued operations (Inpixon Business).

Excluding discontinued operations, net cash used in operating activities from

continuing operations was approximately $10.3 million.

Additional information regarding cash flows from discontinued operations is included

in Note 16 – Discontinued Operations.

used in operating activities during three months ended March 31, 2026 was primarily driven by the Company’s consolidated net loss

of $35.0 million, adjustments for non-cash items of approximately $27.3 million and changes in working capital resulting in a net use

of cash of approximately $2.8 million.

The largest cash operating expenses include costs of goods sold and personnel related costs.

changes in working capital are primarily driven by increases in inventory and prepaid and other current assets, as well as a reduction

in accounts payable, partially offset by a decrease in accounts receivable and increase in accrued liabilities.

The quarter’s working

capital activity reflects the integration of the Drone Nerds acquisition in the fourth quarter.

expects that the acquisition of Drone Nerds, a historically EBITDA-profitable business, will contribute positive operating cash flows

going forward.

However, operating cash flows will continue to be influenced by sales volumes, gross margins, inventory turnover, discretionary

operating expenditures, and the pace of investment in the development of unmanned platforms for defense and commercial applications.

Activities for the three months ended March 31, 2025

cash used in operating activities for the three months ended March 31, 2025 was approximately $15.2 million, primarily driven by the

Company’s net loss and changes in working capital.

Included in operating cash flows for the three months ended March 31, 2025 is

approximately $1.1 million of cash used in operating activities related to discontinued operations.

Excluding discontinued operations,

net cash used in operating activities from continuing operations was approximately $14.1 million.

used in operating activities during three months ended March 31, 2025 was primarily driven by the Company’s consolidated net loss

of $12.9 million, adjustments for non-cash items, of approximately $3.2 million and changes in working capital resulting in a net use

of cash of approximately $5.6 million.

The largest cash operating expenses for the three months ended March 31, 2025 were professional

services, personnel related costs, and legal fees.

The increase in working capital was primarily driven by a decrease in accrued liabilities,

related to transaction and employee bonuses and consulting fees, and accounts payable, as well as increases in prepaid and other current

from Investing Activities as of March 31, 2026 and 2025

Net cash flows used in investing activities during

the three months ended March 31, 2026 was approximately $825,000, which included $694,000 of cash used in investing activity from discontinued

cash flows used in investing activities during the three months ended March 31, 2025 was approximately $45,000.

from Financing Activities as of March 31, 2026 and 2025

cash flows from financing activities during the three months ended March 31, 2026 was approximately $9.5 million.

During the three months

ended March 31, 2026, the Company received incoming cash flows of $7.4 million from the exercise of warrants, net of commission and advisory

fees, and had net borrowings on its credit facility of $4.6 million, offset by $2.0 million of principal paid on the promissory note

entered into in connection with the Drone Nerds Acquisition and $0.6 million of debt issuance costs associated with the credit facility.

cash flows from financing activities during the three months ended March 31, 2025 was approximately $19.2 million.

During the three months

ended March 31, 2025, the Company received incoming cash flows of $21.7 million from the sale of common stock and warrants via two public

offerings, as well as $1.7 million from the now expired ATM.

During the three months ended March 31, 2025, the Company paid $2.7 million

to fully settle two outstanding promissory note obligations and $1.4 million to redeem the remaining outstanding Series 9 Preferred Stock.

Sheet Arrangements

do not have any off-balance sheet guarantees, interest rate swap transactions or foreign currency contracts.

We do not engage in trading

activities involving non-exchange traded contracts.

Issued Accounting Standards

a discussion of recently issued accounting pronouncements, please see Note 3 to our condensed consolidated financial statements, which

are included in Part I, Item 1 of this report.

Quantitative and Qualitative Disclosures About Market Risk

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 2. Management’s Discussion and Analysis