What changed in this filing

/stocks — the workspaceLOADING

Item 1A. Risk Factors

2026-05-14 compared with 2025-11-19 · 378 added, 473 removed, 2 unchanged (100% of the section changed)

face a number of significant risks and uncertainties in connection with our operations.

Our business, results of operations and financial

condition could be materially adversely affected by these risks.

In addition to the risk factor set forth below and the other information

set forth in this Form 10-Q, you should carefully consider the factors disclosed in Part I, Item 1A, “Risk Factors,” in our

Annual Report on Form 10-K

for the year ended December 31, 2024, filed with the SEC on April 15, 2025, which report is incorporated by reference herein, all

of which could materially affect our business, financial condition and future results.

We are subject to various risks and uncertainties

that may materially harm our business, prospects, financial condition and results of operations.

An investment in our common stock and

other securities is speculative and involves a high degree of risk.

In addition to the risk factors set forth below and the other information

set forth in this Form 10-Q, you should carefully consider the risk factors disclosed in Part I, Item 1A, “Risk Factors,”

in our Annual Report on Form

10-K for the year ended December 31, 2025, filed with the SEC on April 15, 2026, which report is incorporated by

reference herein, all of which could materially affect our business, financial condition and future results.

If any of the events described in the following

risk factors actually occurs, or if additional risks and uncertainties later materialize, that are not presently known to us or that we

currently deem immaterial, then our business, prospects, results of operations and financial condition could be materially adversely affected.

In that event, the trading price of our common stock could decline, and investors in our securities may lose all or part of their investment.

The risks discussed below include forward-looking statements, and our actual results may differ substantially from those discussed in

these forward-looking statements.

Moreover, these disclosures reflect the Company’s beliefs and opinions as to factors that could

materially and adversely affect the Company and its securities in the future.

References to past events are provided by way of example

only and are not intended to be a complete listing or a representation as to whether or not such factors have occurred in the past or

their likelihood of occurring in the future.

Risks Related to Our Financial Condition, Liquidity

and Capital Resources

We intend to pursue additional acquisitions

as part of our growth strategy, which involve significant risks and may not achieve the anticipated benefits.

As part of our growth strategy, we intend to pursue

acquisitions of businesses, technologies, or assets to expand our UAS solutions platform, strengthen our capabilities in unmanned systems

development, and support the buildout of our domestic manufacturing operations.

We may from time to time be engaged in discussions or

negotiations regarding potential acquisition opportunities.

There can be no assurance that we will identify suitable acquisition candidates,

negotiate acceptable terms, obtain financing on favorable terms or at all, receive any required regulatory approvals, or complete any

such transaction.

We may incur material costs related to potential acquisitions, including legal, financial advisory, accounting, and

due diligence expenses, regardless of whether any such transaction is consummated.

We expect to fund potential acquisitions through

a combination of available cash on hand, debt financing, which may include borrowings under our existing asset-based revolving credit

facility or new credit facilities, and the issuance of our common stock or other equity or equity-linked securities, including equity

interests in our subsidiaries.

Any acquisition financed in whole or in part with equity securities could result in dilution to our existing

stockholders.

Acquisition-related indebtedness could reduce our available working capital and financial flexibility.

We may not be able to successfully integrate the business and operations of Drone Nerds or other entities that we have acquired or may

acquire in the future" for additional risks related to the integration of acquired businesses.

In connection with the disposition of our

Inpixon Business, we received consideration in the form of a note receivable that is subject to forgiveness provisions and an Unwind Option,

and we may not collect the full amount of the note receivable.

On February 3, 2026, we completed the disposition

of our former Industrial IoT / Real-Time Location Systems operations (the “Inpixon Business”) for a purchase price of EUR

4,640,000 (approximately $5.5 million), payable over time and bearing interest at 5% per annum.

We recorded the note receivable at an

estimated fair value of approximately $4.2 million as of the closing date.

The note receivable is unsecured and subject to

features that may result in our receiving less than the stated purchase price, including (i) our right (the “Unwind Option”)

to require the purchaser to transfer back the Inpixon Business for no consideration during a specified window beginning thirty-seven months

after closing, in which case any unpaid amounts of the purchase price will be forgiven, (ii) automatic forgiveness of any unpaid portion

of the purchase price if the Unwind Option is not exercised within the specified window, and (iii) the credit risk of the purchaser, a

privately held foreign entity over which we have limited visibility.

If we are unable to collect amounts owed under the note receivable,

are required to record additional credit loss reserves or impairment charges, or exercise the Unwind Option and incur losses or liabilities

upon the return of the Inpixon Business, our financial condition and results of operations could be adversely affected.

Risks Related to Our Commercial Drone Solutions

Division (UAS Business)

The nature of our UAS business involves

significant risks and uncertainties, including product liability exposure, that may not be covered by insurance or indemnification.

Our UAS business involves significant operational

and legal risks and uncertainties, and insurance or indemnification may not be available in all circumstances.

We develop, distribute,

service and support drones and other electronic products.

As a result, claims could be brought against us if the use or misuse of one

of the products we sell, service or develop causes, or merely appears to have caused, personal injury, death or property damage.

defects, errors or failures in our products or services could lead to other potential life, health and property risks.

In our UAS operations, product liability risks

may arise from equipment malfunctions, operator error, software failures, battery incidents, collisions or other operational incidents

involving drones deployed by customers or service personnel.

These incidents may result in personal injury, property damage, regulatory

investigations, litigation or reputational harm.

Because drone operations often occur in populated or industrial environments, even isolated

incidents could lead to significant claims, increased insurance costs, operational restrictions or loss of customer confidence.

In addition, Drone Nerds has historically developed

and sold products and services in circumstances where insurance or indemnification may be limited or unavailable, including in connection

with the collection, processing and analysis of various types of information.

Our UAS products and services may raise legal issues relating

to privacy, data security, civil liberties, intellectual property, trespass, conversion and similar concepts, which may result in claims,

regulatory scrutiny, enforcement actions or litigation.

Indemnification to cover potential claims or liabilities

resulting from the failure of technologies we deploy may be available in certain circumstances but not in others.

The uncrewed aerial

systems industry continues to evolve, and insurance coverage for certain operational risks may be limited, unavailable, subject to significant

exclusions, or prohibitively expensive.

We may not be able to obtain or maintain product liability insurance or other insurance coverage

in sufficient amounts, on commercially reasonable terms, or at all, and any such insurance may not be adequate to cover all potential

Substantial claims resulting from an accident,

product failure, or personal injury or property liability arising from our products and services in excess of any indemnity or insurance

coverage (or for which indemnity or insurance coverage is not available or is not obtained) could harm our financial condition, cash flows

and operating results.

Any accident, even if fully covered or insured, could negatively affect our reputation among our customers and

the public and make it more difficult for us to compete effectively.

Risks Related to Our Autonomous Defense Systems

The strategic reorientation of our former

XTI Aircraft division toward unmanned systems development introduces significant new execution risks.

In 2026, following the acquisition of Drone Nerds,

the Company paused active development phase of the TriFan 600 manned VTOL aircraft program and redirected the former XTI Aircraft division,

now operating as XTIA Autonomous Defense Systems (the “ADS division”), toward the design and development of unmanned platforms

for defense and commercial applications.

The TriFan 600 program has been paused, and the Company has not made a final determination to

However, there can be no assurance that the program will be resumed, or that, if resumed, it will achieve FAA certification,

reach commercial production, or generate revenues.

The ADS division is in an early stage of development

and has not generated revenues.

Its ability to generate revenues will depend on its success in securing development contracts, government

procurement awards, or commercial partnerships, none of which are assured.

The division faces significant competition from established

defense contractors and unmanned systems developers with substantially greater resources, experience, and existing customer relationships.

There can be no assurance that the ADS division will successfully develop marketable products, secure contracts, or generate revenues

on the timeline anticipated, or at all.

The Company’s investment in the ADS division

is subject to ongoing evaluation by management and the Board of Directors based on the division’s ability to achieve key operational

and commercial milestones, including securing development contracts, establishing strategic partnerships, and demonstrating a credible

path to revenue generation.

If the ADS division fails to achieve sufficient progress toward these objectives within the timeframes management

considers reasonable, the Company may determine to significantly reduce investment in the division, restructure its operations, or discontinue

the division entirely.

Any such determination could result in asset impairments, restructuring charges, employee severance costs, and

the loss of the Company's investment in the division to date, including the ADS division’s allocated assets, and could materially

adversely affect our business, financial condition, and results of operations.

There can be no assurance that the Company will continue

to fund the ADS division at current or anticipated levels.

The reorientation of the former XTI Aircraft division

also introduces execution risks, including the challenge of recruiting and retaining additional personnel with specialized unmanned systems

experience, the difficulty of competing for defense procurement awards as a relatively new entrant, and the risk that the engineering

expertise developed through the TriFan 600 program may not translate directly into commercially viable unmanned systems products.

risks, individually or in combination, could materially adversely affect our business, financial condition, and results of operations.

In addition, we have devoted significant financial

and engineering resources to the TriFan 600 program, and if the program is not resumed, we may not realize a return on those investments.

Risks Related to Our Advanced Technology and

Manufacturing Division

Our Advanced Technology and Manufacturing

division is in an early stage of development and has not generated revenues, and we may not successfully develop U.S.-based production

capabilities for NDAA-compliant unmanned systems components and technologies, and we may discontinue such division.

Our Advanced Technology and Manufacturing (“ATM”)

division plans to develop U.S.-based production for NDAA-compliant unmanned systems components and technologies to serve the growing demand

for domestically sourced unmanned systems across defense and enterprise markets.

The ATM division is in an early stage of development

and has not generated revenues.

There can be no assurance that we will successfully develop domestic production capabilities on the timelines

we anticipate, or at all.

Our ability to do so will depend on a number of factors, including site selection, facility build-out, equipment

procurement, supply chain qualification, workforce recruitment, and process validation, each of which is subject to delays, cost overruns,

and execution risk.

If we are unable to develop a viable production platform, we may be unable to generate revenues from the ATM division

or to realize a return on our investment in this initiative.

The Company’s investment in the ATM division

is subject to ongoing evaluation by management and the Board of Directors based on the division’s ability to achieve key operational

and commercial milestones, including establishing manufacturing partnerships on acceptable terms, securing NDAA-compliant production capacity,

and demonstrating a credible path to revenue generation.

If the ATM division fails to achieve sufficient progress toward these objectives

within the timeframes management considers reasonable, the Company may determine to significantly reduce investment in the division, restructure

its operations, or discontinue the division entirely.

Any such determination could result in asset impairments, the write-off of capitalized

development costs, if any, employee severance costs, if any, early termination of manufacturing partnerships or facility commitments,

and the loss of the Company’s investment in the division to date, including the ATM division’s allocated assets, and could

materially adversely affect our business, financial condition, and results of operations.

There can be no assurance that the Company will

continue to fund the ATM division at current or anticipated levels, or that the division will successfully establish manufacturing capabilities

or generate revenues on the timeline anticipated, or at all.

We may be unable to establish manufacturing

partnerships or arrangements necessary to support the ATM division's growth on acceptable terms, or at all.

The development of U.S.-based production capabilities

for NDAA-compliant unmanned systems components may require us to enter into manufacturing partnerships, supply arrangements, joint ventures,

contract manufacturing relationships, or other commercial arrangements with third parties.

We may be unable to identify, negotiate, or

maintain such relationships on commercially reasonable terms, or at all.

If we are unable to establish or maintain manufacturing partnerships

necessary to support the ATM division, we may be required to develop in-house manufacturing capabilities, which would require additional

capital investment and time, or we may be unable to bring ATM division products to market on the timelines we anticipate, or at all.

Our ability to compete in the market for domestically sourced

unmanned systems components depends on our ability to achieve and maintain NDAA compliance and other federal procurement and sourcing

certifications, which is uncertain.

The market opportunity for our ATM division depends

substantially on the ability of our products to qualify as NDAA-compliant or otherwise satisfy federal procurement and sourcing requirements

applicable to defense, government, and enterprise customers.

The standards governing these certifications and eligibility determinations

are complex, evolving, and subject to interpretation by government agencies.

We may be unable to obtain or maintain required certifications

or eligibility determinations on commercially reasonable terms, within anticipated timeframes, or at all.

Any failure or delay in obtaining

or maintaining these qualifications, or any change in the underlying standards, could limit the addressable market for our ATM division's

products and adversely affect our business, financial condition and results of operations.

Demand for our ATM division’s products

will depend on continued U.S.

government policy support for domestic sourcing of unmanned systems components, and changes in such policies

could materially reduce our addressable market.

The market for domestically sourced unmanned systems

components is influenced by U.S.

government policies favoring domestic manufacturing and supply chain security, including procurement

preferences, NDAA compliance mandates, tariffs on foreign-manufactured components, and similar measures.

Any reduction, repeal, or material

change in these policies, or any change in the strategic priorities of the U.S.

government with respect to domestic sourcing of unmanned

systems components, could materially reduce demand for our ATM division's products and adversely affect our business, financial condition

and results of operations.

The development and operation of U.S.-based

manufacturing capabilities will require substantial capital investment, and we may be unable to obtain the financing necessary to fund

our ATM division's growth.

Developing U.S.-based manufacturing capabilities

is capital-intensive and may require substantial investment in facilities, equipment, inventory, qualified personnel, and working capital

before the ATM division generates meaningful revenues.

We may be required to raise additional capital through debt or equity financings,

strategic partnerships, government incentives, or other sources to fund the development and operation of the ATM division.

no assurance that such financing will be available on acceptable terms, or at all.

If we are unable to obtain sufficient financing, we

may be required to delay, reduce or modify our ATM development plans, which could adversely affect our ability to compete in the market

for domestically sourced unmanned systems components.

If and when our ATM division commences manufacturing

operations, it will be subject to operational risks inherent in manufacturing, and any failure to manage these risks effectively could

adversely affect our business.

If and when our ATM division commences manufacturing

operations, it will be subject to a range of operational risks inherent in advanced manufacturing, including equipment failures, quality

control issues, production yield variability, raw material and component shortages, workplace safety incidents, environmental compliance

obligations, and labor disruptions.

The successful operation of a manufacturing facility also requires personnel with specialized expertise

in advanced manufacturing, quality engineering, supply chain management, and regulated production environments, and competition for such

personnel is significant.

Any failure to manage these operational and personnel-related risks effectively could increase our costs, delay

deliveries, expose us to liability, or impair our ability to satisfy customer requirements, any of which could materially adversely affect

our business, financial condition and results of operations.

Our ATM division may face significant competition

from established domestic manufacturers and other entrants, which could limit our ability to win customer commitments or achieve targeted

production volumes.

The market for domestically sourced unmanned systems

components includes established domestic manufacturers, vertically integrated defense primes, and other new entrants, many of which have

substantially greater resources, manufacturing experience, customer relationships, and past performance records than we do.

to compete will depend on our ability to differentiate on product performance, compliance, cost, scalability, and customer service, none

of which is assured.

If we are unable to compete effectively, we may be unable to win customer commitments or achieve targeted production

volumes, which could adversely affect our business, financial condition and results of operations.

Risks Related to Legal, Regulatory and General

Business Operations

Adverse judgments or settlements in legal

proceedings could materially harm our business, financial condition, operating results and cash flows.

We may be a party to claims

that arise from time to time in the ordinary course of our business, which may include those related to, for example, our securities

offerings, contracts, sub-contracts, protection of confidential information or trade secrets, adversary proceedings arising from customer

bankruptcies, employment of our workforce and immigration requirements or compliance with any of a wide array of state and federal statutes,

rules and regulations that pertain to different aspects of our business.

Additionally, we are and we may be made a party to future claims relating to the XTI Merger.

On December 6, 2023,

Xeriant, Inc.

(“Xeriant”) filed a complaint in the United States District Court for the Southern District of New York (the

“S.D.N.Y.”) against Legacy XTI, two unnamed entities, and five unnamed individuals.

On January 31, 2024, Xeriant filed an

amended complaint adding the Company as a defendant.

On February 29, 2024, Xeriant filed a second amended complaint, removing the Company

and one of the unnamed entities as defendants.

The second amended complaint alleges that Legacy XTI breached several agreements with Xeriant,

including a Joint Venture Agreement dated May 31, 2021, a cross-patent license agreement, an operating agreement, and a letter dated May

17, 2022, which Xeriant claims arose from its introduction of Legacy XTI to a Nasdaq-listed company as a potential acquirer.

Xeriant further

alleges that it provided intellectual property, expertise, and capital in connection with Legacy XTI’s TriFan 600 aircraft and was

improperly excluded from a subsequent transaction involving the TriFan 600 technology as part of Legacy XTI’s merger with the Company.

Xeriant asserts causes of action for breach of contract, fraud, unjust enrichment, and misappropriation of confidential information, and

seeks damages in excess of $500 million, along with injunctive and other equitable relief.

On March 13, 2024, Legacy XTI moved to dismiss

portions of the second amended complaint.

proceedings, and regulatory investigations or enforcement actions by state authorities or other governmental agencies, could materially

harm our business, financial condition, operating results, cash flows, and reputation.

We may be a party to claims that arise from time

to time in the ordinary course of our business, including claims related to our products, securities offerings, contracts and subcontracts,

protection of confidential information or trade secrets, adversary proceedings arising from customer bankruptcies, employment matters,

immigration requirements, and compliance with various state and federal statutes, rules and regulations applicable to our business.

For example, we are currently involved in litigation

relating to the XTI Merger.

On December 6, 2023, Xeriant, Inc.

(“Xeriant”) filed a complaint in the United States District

Court for the Southern District of New York (the “S.D.N.Y.”) against Legacy XTI, two unnamed entities, and five unnamed individuals.

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

On February 29, 2024, Xeriant filed a second

amended complaint, removing the Company and one of the unnamed entities as defendants.

The second amended complaint alleges that Legacy

XTI breached several agreements with Xeriant, including a Joint Venture Agreement dated May 31, 2021, a cross-patent license agreement,

an operating agreement, and a letter dated May 17, 2022, which Xeriant claims arose from its introduction of Legacy XTI to a Nasdaq-listed

company as a potential acquirer.

Xeriant further alleges that it provided intellectual property, expertise, and capital in connection

with Legacy XTI’s TriFan 600 aircraft and was improperly excluded from a subsequent transaction involving the TriFan 600 technology

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

Xeriant asserts causes of action for breach of contract, fraud, unjust enrichment,

and misappropriation of confidential information, and seeks damages in excess of $500 million, along with injunctive and other equitable

On March 13, 2024, Legacy XTI moved to dismiss portions of the second amended complaint.

denied that motion on January

Legacy XTI filed an answer on January 28,

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

The amended counterclaims, further amended on April

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

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

Legacy XTI further alleges that Xeriant breached

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

equity and assumption of debt.

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

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

28, 2025, Xeriant moved to dismiss Legacy XTI’s second amended counterclaims.

On September 23, 2025, the S.D.N.Y.

denied Xeriant’s

motion, concluding that Legacy XTI plausibly alleged claims against Xeriant for breach of contract, breach of fiduciary duty, and declaratory

found that Legacy XTI had adequately pleaded that Xeriant was obligated to contribute $10 million in funding to

the joint venture and that it acted disloyally by leveraging a potential merger opportunity for its own benefit.

Following the S.D.N.Y.’s

September 23, 2025 denial of Xeriant’s motion to dismiss Legacy XTI’s counterclaims, the litigation has advanced into full

has since compelled Xeriant to comply with its discovery obligations and warned that continued noncompliance would

result in dismissal of its claims.

While the Company continues to believe the allegations against Legacy XTI are meritless, the case remains

in active discovery and subject to close judicial supervision, which may increase litigation costs and extend the duration of the proceedings.

The outcome of the litigation cannot presently be predicted, and any adverse determination could have a material impact on the Company.

In connection with the litigation

matter described in the immediately preceding paragraph, on June 12, 2024, the Company received correspondence from legal counsel for

Auctus Fund, LLC (“Auctus”), dated April 3, 2024, asserting that the Company and/or Legacy XTI may have assumed Xeriant’s

obligations under a Senior Secured Promissory Note (the “Note”) issued by Xeriant to Auctus in the original principal amount

of $6,050,000, pursuant to a letter agreement dated May 17, 2022, between Xeriant and Legacy XTI (the “May 17 letter”).

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

In July 2024,

Legacy XTI responded to Auctus’s claims, asserting that the May 17 letter is invalid and unenforceable on multiple grounds.

XTI further stated that, even if the May 17 letter were enforceable, it did not create or trigger any obligation for Legacy XTI to assume

Xeriant’s debt under the Note or otherwise.

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

Arapahoe County, Colorado, asserting a single claim for breach of contract based on its prior allegations.

Auctus contends that Legacy

XTI is contractually obligated to repay nearly $9 million in principal and accrued interest, based on Legacy XTI’s entry into a

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

On June 25, 2025, Legacy

XTI filed a motion to dismiss or, in the alternative, to stay the proceedings pending resolution of the Xeriant litigation.

motion asserts that Auctus’ complaint should be dismissed:

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

third-party beneficiary of, the May 17 letter;

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

alleged triggering condition—a business combination involving Legacy XTI and Legacy Inpixon did not occur within the required one-year

(iii) for lack of valid assignment, because Xeriant’s unilateral assignment of debt to Legacy XTI is void because the

underlying Note prohibits assignment without Auctus’s prior written consent, which is not alleged.

On August 5, 2025, Auctus filed

a response arguing that it was an intended third-party beneficiary of the May 17 letter, that the anti-assignment clause does not bar

its claims, and that the request for a stay is unwarranted because the Xeriant litigation involves different parties and broader claims.

On September 12, 2025, Legacy XTI filed a Reply Brief reinforcing that Auctus lacks standing, that no obligation ever arose under the

May 17 Letter because no qualifying transaction occurred within its one-year term, and that any purported transfer of debt is void under

the Note’s anti-assignment clause.

The Reply also emphasized that the enforceability of the May 17 Letter is already before the

and urged dismissal or a stay to avoid inconsistent rulings.

On October 2, 2025, Legacy XTI filed a Notice of Supplemental Authority

submitting the September 23, 2025 Order of the S.D.N.Y., which denied Xeriant’s motion to dismiss Legacy XTI’s counterclaims

and held that Legacy XTI had plausibly alleged that the May 17 Letter expired by its terms and is unenforceable.

Legacy XTI asserted that

ruling directly supports dismissal or a stay because it confirms that the same alleged contract and issues raised by Auctus

are already being adjudicated in the federal case.

On November 7, 2025, the court denied Legacy XTI’s motion to dismiss or, in the

alternative, stay the proceedings.

The court held that, when viewing the allegations in the light most favorable to Auctus, the complaint

plausibly stated claims for relief under Colorado’s notice-pleading standard.

The court further denied XTI’s alternative request

for a stay, reasoning that the parties were not identical to those in the federal action and therefore comity and judicial economy did

not warrant a stay.

The court nonetheless directed the parties to update it regarding the outcome of the federal case to the extent it

may be dispositive of overlapping issues.

Legacy XTI’s answer to the complaint is due November 21, 2025.

The Company will continue

to vigorously defend against the claims but cannot predict the timing or outcome of the proceedings or estimate any potential exposure.

Regardless of the merits

of any particular claim, responding to such actions could divert time, resources and management’s attention away from our business

operations, and we may incur significant expenses in defending these lawsuits or other similar lawsuits.

The results of litigation and

other legal proceedings are inherently uncertain, and adverse judgments or settlements in some of these legal disputes may result in

adverse monetary damages, penalties or injunctive relief against us, which could have a material adverse effect on our financial condition,

operating results and cash flows.

Any claims or litigation, even if fully indemnified or insured, could damage our reputation and make

it more difficult to compete effectively or to obtain adequate insurance in the future.

Furthermore, while we maintain

insurance for certain potential liabilities, such insurance does not cover all types and amounts of potential liabilities and is subject

to various exclusions as well as deductibles and caps on amounts of coverage.

Even if we believe a claim is covered by insurance, insurers

may dispute our entitlement to coverage for a variety of potential reasons, which may affect the timing and, if the insurers prevail,

the amount of our available insurance coverage for a particular claim.

We may also be required to

initiate expensive litigation or other proceedings to protect our business interests.

There is a risk that we will not be successful

or otherwise be able to satisfactorily resolve such claims or litigation.

Litigation and other legal claims are subject to inherent uncertainties.

Those uncertainties include, but are not limited to, litigation costs and attorneys’ fees, unpredictable judicial or jury decisions

and the differing laws and judicial proclivities regarding damage awards among the states in which we operate.

Unexpected outcomes in

such legal proceedings, or changes in management’s evaluation or predictions of the likely outcomes of such proceedings, could

have a material adverse effect on our business, financial condition, results of operations and cash flows.

Our current financial status

may increase our default and litigation risks and may make us more financially vulnerable in the face of threatened litigation.

Drone Nerds operates in evolving markets,

which makes it difficult to evaluate its business and future prospects.

Drone Nerds’ drone,

camera and sensor technologies and software and training, operational support and repair services are and will be sold in new and rapidly

evolving markets.

The commercial unmanned aerial vehicles (“UAV”) industry is in the early stages of customer adoption and

the FAA’s definition of regulations relating to the integration of commercial drones into the U.S.

National Airspace System is rapidly

Accordingly, Drone Nerds’ business and future prospects may be difficult to evaluate.

We cannot accurately predict the

extent to which demand for the drone systems and solutions will increase, if at all.

The challenges, risks and uncertainties frequently

encountered by companies in rapidly evolving markets could impact our ability to do the following in connection with our acquisition of

sufficient revenue to maintain its historical profitability;

and maintain market share;

or manage growth in our business operations;

● Successfully

stock for the commercial market products and end-to-end solutions;

to new or changing polices and spending priorities of current and prospective clients;

to additional financing or capital when required and on reasonable terms.

If we fail to address these

and other challenges, risks and uncertainties successfully, our business, results of operations and financial condition would be materially

The supplier base of Drone Nerds is highly

concentrated.

In addition, Drone Nerds is subject to risks arising from ongoing regulatory discussions and potential legislative actions

targeting its primary supplier from China, SZ DJI Technology Co, Ltd.

and affiliates (“DJI”), who represented a majority of

Drone Nerds’ vendor purchases during the 1H 2025.

Drone Nerds has relationships with various global

suppliers of drones and electronics, however the top 1 2 and 3 suppliers represent 53%, 10% and 7% of purchases, respectively, for the

six months ended June 30, 2025.

If any of those suppliers decided to no longer work with Drone Nerds, this could impact Drone Nerds ability

to source products.

In addition, under the 2025 National Defense Authorization

Act (“NDAA”), a U.S.

national-security agency is required to complete a security review of certain suppliers, including DJI,

by December 23, 2025.

If no agency completes this review by the deadline, the law instructs the Federal Communications Commission (the

“FCC”) to automatically add these suppliers to the FCC “Covered List,” which would effectively block new FCC equipment

authorizations for their technology and drones in the U.S.

(i.e., new models could not be approved).

Drone Nerds relies on DJI for a significant portion

of its drone sales, creating significant regulatory and operational risk.

Also, in September 2025, Drone Nerds signed an additional one-year

contract with DJI to be the official non-exclusive dealer of its products in the U.S.

DJI is already listed on certain U.S.

watchlists for national security and data concerns, which could restrict imports and limit access to government or defense-related contracts.

This dependence exposes Drone Nerds to potential supply disruptions.

In addition, while existing FCC equipment authorizations

for previously approved DJI products would remain valid, federal agencies have indicated that continued use of legacy or in-service DJI

equipment may become restricted or phased out over time.

Such actions could include procurement bans, limits on participation in government-funded

projects, or heightened data-security and export-control scrutiny.

Even absent formal revocation of existing approvals, these measures

could discourage public-sector or enterprise customers from purchasing or deploying DJI-based systems, thereby reducing demand for Drone

Nerds’ products.

Although the NDAA establishes the deadline for

the national-security review, the ongoing federal government shutdown has created uncertainty around whether agencies will complete the

review on time.

Many federal departments responsible for technology and security evaluations are operating with reduced staffing or suspended

programs, which may delay interagency coordination and risk assessments.

If the review is not completed by the statutory deadline, DJI

and other covered suppliers would be automatically added to the FCC Covered List by operation of law.

This outcome—caused indirectly

by administrative delay—could occur even without any final security determination.

If regulatory developments, including delayed

or adverse NDAA determinations, restrict DJI’s market access, Drone Nerds may be forced to renegotiate or terminate this agreement,

seek alternative suppliers, or incur substantial transition costs.

Failure to diversify its supply base or mitigate these risks could

materially and adversely affect Drone Nerds’ business, financial condition, and operating results.

The nature of the Drone Nerds business involves

significant risks and uncertainties that may not be covered by insurance or indemnification.

Drone Nerds has developed and sold products and

services in circumstances where insurance or indemnification may not be available, for example, in connection with the collection and

analysis of various types of information.

In addition, its products and services raise questions with respect to issues of civil liberties,

intellectual property, trespass, conversion, and similar concepts, which may create legal issues.

Indemnification to cover potential claims

or liabilities resulting from the failure of any technologies that we deploy may be available in certain circumstances but not in others.

Currently, the uncrewed aerial systems industry lacks a formative insurance market.

We may not be able to maintain insurance to protect

against all operational risks and uncertainties that our customers confront.

Substantial claims resulting from an accident, product failure,

or personal injury or property liability arising from our products and services in excess of any indemnity or insurance coverage (or for

which indemnity or insurance coverage is not available or is not obtained) could harm our financial condition, cash flows and operating

Any accident, even if fully covered or insured, could negatively affect our reputation among our customers and the public, and

make it more difficult for us to compete effectively.

The Drone Nerds and Anzu Robotics acquisitions

may trigger contractual rights under certain agreements.

Drone Nerds and Anzu Robotics are parties to certain

agreements that may contain termination or other rights following a “change in control” or “sale of all or substantially

all” of such party’s assets.

Any counterparty to such agreements may request modifications of its respective agreements as

a condition to granting a waiver or consent under such agreements, or they may elect not to grant a waiver or consent.

To the extent any

counterparty to such agreements requests modifications of its respective agreements as a condition to granting a waiver or consent under

such agreements, Drone Nerds and Anzu Robotics will use reasonable efforts to accommodate such modification, but such modifications may

not be satisfactory to such counterparty or may not occur.

There is no assurance that such counterparties will not assert otherwise and

seek to exercise any such rights, including termination rights where available, that the exercise of any such rights will not adversely

affect Drone Nerds or Anzu Robotics or that any modifications of such agreements will not materially and adversely affect the Company.

For example, the documentation governing Drone

Nerds’ and Anzu Robotics’ $25.0 million secured revolving credit facility contains customary covenants, including a prohibition

against a change of control without the lender’s prior written approval.

The consummation of the Drone Nerds and Anzu Robotics acquisitions

resulted in a change of control under the revolving credit facility, and the lender’s written approval was not obtained prior to

the acquisitions, which constitutes an event of default under the revolving credit facility.

We are currently in discussions with the

lender to obtain a waiver of such event of default or an amendment to the revolving credit facility.

In the absence of such a waiver or

an amendment, the lender has the right to declare all outstanding obligations under the revolving credit facility immediately due and

payable, cancel the facility, cease making advances under the facility, and proceed against the collateral securing the indebtedness under

the facility.

As of November 11, 2025, Drone Nerds and Anzu Robotics had outstanding borrowings under the revolving credit facility of

approximately $9.2 million.

There can be no assurance that the lender will agree to such a waiver or an amendment or that we will have

sufficient resources available to satisfy all of the obligations under the revolving credit facility if no waiver or amendment is obtained.

We may be unable to repay the Notes issued

in connection with the Acquisitions.

In connection with the Acquisitions,

XTI Drone Holdings issued (i) the Drone Nerds seller a promissory note in the original principal amount of $10,976,284.58 (the “DN

Note”) and (ii) the Anzu Robotics seller a promissory note in the original principal amount of $954,459.53 (the “AR Note”).

The principal of and interest on each Note will be payable as follows:

(i) no later than November 30, 2025 (the “First Required

Payment Date”), the outstanding principal amount of each Note will be repaid in an amount equal to $3,680,000 with respect to the

DN Note and $320,000 with respect to the AR Note, together with all accrued and unpaid interest on each Note as of the First Required

Payment Date, (ii) no later than March 31, 2026 (the “Second Required Payment Date”), the outstanding principal amount of

each Note will be repaid in an amount equal to $1,840,000 with respect to the DN Note and $160,000 with respect to the AR Note, together

with all accrued and unpaid interest on each Note as of the Second Required Payment Date, (iii) no later than June 30, 2026 (the “Third

Required Payment Date”), the outstanding principal amount of each Note will be repaid in an amount equal to $1,380,000 with respect

to the DN Note and $120,000 with respect to the AR Note, together with all accrued and unpaid interest on each Note as of the Third Required

Payment Date, (iv) no later than September 30, 2026 (the “Fourth Required Payment Date”), the outstanding principal amount

of each Note will be repaid in an amount equal to $1,380,000 with respect to the DN Note and $120,000 with respect to the AR Note, together

with all accrued and unpaid interest on each Note as of the Fourth Required Payment Date, (v) the entire outstanding principal amount,

together with all accrued and unpaid interest, of each Note will be repaid on or prior to the one year anniversary of each Note (the “Due

Date”), and (vi) all outstanding accrued interest and the unpaid principal amount of each Note will be due and payable in full on

the earlier of (A) the Due Date, (B) 90 days following a capital raise (or the last capital raise, in connection with a series of transactions,

whether related or unrelated) where the Company or one or more of its affiliates raise, as a result of a single transaction or a series

of transactions occurring pursuant to one or more closings, in any case after the date of the Note, an aggregate amount of $40 million

or more, qualified by the limitation that not more than 20% of net proceeds from any single financing will be applied towards payment

of each Note, or (C) the date on which the Note becomes immediately due and payable as a result of the occurrence of an event of default

Interest will accrue on the

outstanding principal balance of each Note at an annual rate of 7.25%, computed based upon a 365-day year (the “Interest Rate”).

If interest is not paid as it becomes due, it will be added to the principal.

Our failure to pay the principal and interest of each Note

when required will constitute an event of default under the Notes.

Upon the occurrence of an event of default (except a Bankruptcy-Related

Event of Default), the lender may declare the entire unpaid balance of principal and accrued but unpaid interest on the Note, and all

other obligations of XTI Drones Holdings under the applicable Note, to be immediately due and payable and/or exercise any other rights

or remedies under any other instrument or applicable law.

Upon the occurrence of a Bankruptcy-Related Event of Default, the outstanding

principal amount of the Note together with all accrued and unpaid interest and all other obligations of XTI Drones Holdings under the

Note will become due and payable automatically.

Following the occurrence of an event of default, interest will accrue on the outstanding

principal balance of each Note at an annual rate equal to the Interest Rate plus 2.00%.

An event of default under the Notes could also

lead to a default under agreements governing our future indebtedness.

We may not have or be able to secure financing

for sufficient funds to satisfy all amounts under the Notes when due.

If there is an event of default under the Notes, our business, financial

condition and results of operations could be materially and adversely affected.

In addition, to the extent we complete capital raises

in an aggregate amount of $40 million or more, we will be required to repay the outstanding balance of each Note, which may reduce our

working capital and impact our ability to operate as planned.

We may incur substantial product liability

claims relating to our products.

As a distributor of drone and electronic products,

and with aircraft and aviation sector companies under increased scrutiny in recent years, claims could be brought against us if use or

misuse of one of the drones we sell causes, or merely appears to have caused, personal injury or death.

In addition, defects in our products

may lead to other potential life, health and property risks.

Any claims against us, regardless of their merit, could severely harm our

financial condition, strain our management and other resources.

We are unable to predict if we will be able to obtain or maintain product

liability insurance for any of our products.

Changes in U.S.

and foreign government administrative

policy, including the imposition of or increases in tariffs and changes to existing trade agreements, and other changes to macroeconomic

conditions could have a material adverse effect on global economic conditions and our business, results of operations, prospects and financial

As a result of changes to U.S.

and foreign government

administrative policy, there may be changes to existing trade agreements, greater restrictions on free trade generally, the imposition

of or significant increases in tariffs on goods imported into the U.S., particularly those manufactured in Canada, Mexico, Europe, and

China, and adverse responses by foreign governments to U.S.

trade policies, among other possible changes.

China is currently a leading

global source of hardware products, including the hardware products that we use.

As the implementation of tariffs is ongoing, more tariffs

may be added in the future.

These tariffs could have an adverse impact on our business, results of operations, prospects and financial

condition, and if we are unable to pass such price increases through to our customers, it would likely increase our cost of sales and,

as a result, decrease our gross margins, operating income and net income.

As of the date of this report, discussions remain ongoing in

respect of certain trade restrictions and tariffs on imports from Canada, China, Mexico and Europe, as well as retaliatory tariffs enacted

in response to such actions.

In light of these events, there continues to exist significant uncertainty about the future relationship

between the U.S.

and other countries with respect to such trade policies, treaties, and tariffs.

These developments, or the perception

that any of them could occur, may have a material adverse effect on global economic conditions and the stability of global financial markets,

and may significantly reduce global trade and, in particular, trade between the impacted nations and the United States.

Any of these factors

could depress economic activity and restrict our access to suppliers or customers and, in turn, have a material adverse effect on the

business and financial condition of such suppliers and customers or other counterparties we do business with, which in turn would negatively

Deteriorating macroeconomic conditions, including

slower growth or a recession, inflation, changes in the U.S.

presidential administration, bank failures, supply chain disruption, increases

in interest rates, increases to fuel and other energy costs or vehicle costs, geopolitical events, including escalating tariff and non-tariff

trade measures imposed by the U.S., Mexico, China, Canada and other countries, the potential for new or unforeseen conflicts such as the

impact of the Russia and Ukraine conflict and Hamas and Israel conflict, changes in the labor market, or decreases in government spending

power, could in the future result in a decline in customer spending, which could materially adversely affect our business, results of

operations, prospects and financial condition.

A trade war, other governmental action related to tariffs or trade agreements, changes

social, political, regulatory and economic conditions or in laws and policies governing foreign trade, manufacturing, development

and investment in the territories and countries where we currently do business, and any resulting negative sentiments towards the U.S.

as a result of such changes, could have a material adverse effect on our business, financial condition, results of operations and cash

Licenses for new products may be difficult

to obtain in the future

The drones and other electronic products sold

by Drone Nerds and Anzu Robotics require FCC licenses to be imported into the US and sold to customers.

Suppliers may face difficulties

in the future obtaining these licenses.

In such cases, Drone Nerds and Anzu Robotics will not be able to sell products where suppliers

are not able to obtain licenses.

This can be a major impact to Drone Nerds and Anzu Robotics’ business.

Difficult conditions in the global capital

markets and the economy generally may materially adversely affect our business and results of operations, and we do not expect these conditions

to improve in the near future.

Our results of operations are materially affected

by conditions in the global capital markets and the economy generally, both in the U.S.

and elsewhere around the world.

Weak economic

conditions generally, sustained uncertainty about global economic conditions, or a prolonged or further tightening of credit markets could

cause our customers and potential customers to postpone or reduce spending on technology products or services or put downward pressure

on prices, which could have an adverse effect on our business, results of operations or cash flows.

Concerns over inflation, energy costs,

geopolitical issues and the availability of credit in the U.S.

have contributed to increased volatility and diminished expectations for

the economy and the markets going forward.

These factors, combined with volatile oil prices and wavering business and consumer confidence,

have precipitated an economic slowdown and uncertain global outlook.

Domestic and international equity markets have been experiencing

heightened volatility and turmoil.

These events and the continuing market upheavals may have an adverse effect on our business.

event of extreme prolonged market events, such as the global economic recovery, we could incur significant losses.

The existence of inflation in certain economies

has resulted in, and may continue to result in, rising interest rates and capital costs, supply shortages, increased costs of labor, components,

manufacturing and shipping, as well as weakening exchange rates and other similar effects.

As a result, we have experienced and may continue

to experience cost increases.

Although we take measures to mitigate the effects of inflation and rising interest rates, if these measures

are not effective, our business, financial condition, results of operations and liquidity could be materially adversely affected.

if such measures are effective, there could be a difference between the timing of when those beneficial actions impact our results or

operations and when the cost of inflation is incurred.

The Drone Nerds and Anzu Robotics acquisitions,

and any future acquisitions that we may make, could disrupt our business, cause dilution to our stockholders and harm our business, financial

condition or operating results.

The Drone Nerds and Anzu Robotics acquisitions,

and any future acquisitions that we successfully consummate, could subject us to a number of risks, including, but not limited to:

the purchase price we pay and/or unanticipated costs could significantly deplete our cash reserves or result in dilution to our existing stockholders;

we may find that the acquired company or technologies do not improve our market position as planned;

we may have difficulty integrating the operations and personnel of the acquired company, as the combined operations will place significant demands on the Company’s management, technical, financial and other resources;

personnel, vendors, suppliers and customers of the acquired company may terminate their relationships with the acquired company as a result of the acquisition;

we may experience additional financial and accounting challenges and complexities in areas such as tax planning and financial reporting;

we may assume or be held liable for risks and liabilities (including environmental-related costs) as a result of our acquisitions, some of which we may not be able to discover during our due diligence investigation or adequately adjust for in our acquisition arrangements (for example, even if we secure indemnification protections in connection with these acquisitions from undisclosed liabilities, there may not be adequate resources to cover such indemnity);

our ongoing business and management’s attention may be disrupted or diverted by transition or integration issues and the complexity of managing geographically or culturally diverse enterprises;

we may incur one-time write-offs or restructuring charges in connection with the acquisition;

we may acquire goodwill and other intangible assets that are subject to amortization or impairment tests, which could result in future charges to earnings;

we may not be able to realize the cost savings or other financial benefits we anticipated.

We cannot assure you that, following the acquisitions

of Drone Nerds or Anzu Robotics or any future acquisition, our continued business will achieve sales levels, profitability, efficiencies

or synergies that justify the acquisition or that the acquisition will result in increased earnings for us in any future period.

factors could have a material adverse effect on our business, financial condition and operating results.

We may not be able to successfully integrate

the business and operations of Drone Nerds, Anzu Robotics or other entities that we have acquired or may acquire in the future into our

ongoing business operations, which may result in our inability to fully realize the intended benefits of these acquisitions, or may disrupt

our current operations, which could have a material adverse effect on our business, financial position and/or results of operations.

We plan to integrate the operations of Drone Nerds

and Anzu Robotics into our business, and this process involves complex operational, technological and personnel-related challenges, which

are time-consuming and expensive and may disrupt our ongoing business operations.

Furthermore, integration involves a number of risks,

including, but not limited to:

difficulties or complications in combining the companies’ operations;

differences in controls, procedures and policies, regulatory standards and business cultures among the combined companies;

the diversion of management’s attention from our ongoing core business operations;

increased exposure to certain governmental regulations and compliance requirements;

the potential increase in operating costs;

the potential loss of key personnel;

the potential loss of key customers or suppliers who choose not to do business with the combined business;

difficulties or delays in consolidating the acquired companies’ technology platforms, including implementing systems designed to maintain effective disclosure controls and procedures and internal control over financial reporting for the combined company and enable the Company to continue to comply with U.S.

GAAP and applicable U.S.

securities laws and regulations;

unanticipated costs to successfully integrate operations, technologies, personnel of acquired businesses and other assumed contingent liabilities;

difficulty comparing financial reports due to differing financial and/or internal reporting systems;

making any necessary modifications to internal financial control standards to comply with the Sarbanes-Oxley Act of 2002 and the rules and regulations promulgated thereunder;

possible tax costs or inefficiencies associated with integrating the operations of the combined company.

These factors could cause us to not fully realize

the anticipated financial and/or strategic benefits of the acquisitions, which could have a material adverse effect on our business, financial

condition and/or results of operations.

Even if we are able to successfully operate the

acquired businesses, we may not be able to realize the revenue and other synergies and growth that we anticipated from these acquisitions

in the time frame that we currently expect, and the costs of achieving these benefits may be higher than what we currently expect, because

of a number of risks, including, but not limited to:

the possibility that the acquisition may not further our business strategy as we expected;

the possibility that we may not be able to expand the reach and customer base for the acquired companies’ current and future products as expected;

the possibility that we may have entered a market with no prior experience and may not succeed in the manner expected;

the possibility that the carrying amounts of goodwill and other purchased intangible assets may not be recoverable.

In addition, a significant

portion of the aggregate purchase price of Drone Nerds and Anzu Robotics may be allocated to acquired goodwill and other intangible assets,

which must be assessed for impairment at least annually.

For the purposes of the unaudited pro forma condensed combined financial information

included in our Current Report on Form 8-K filed with the SEC on November 12, 2025, the Company has assumed the excess consideration over

the net assets acquired is goodwill.

The Company will perform a more comprehensive assessment of assets acquired that may result in other

intangible assets being identified in that analysis.

If the Acquisitions do not yield expected returns or fair value estimates deteriorate,

we may be required to take charges to our results of operations based on this impairment assessment process, which could adversely affect

our results of operations.

As a result of these risks, the acquisitions of

Drone Nerds and Anzu Robotics and integration may not contribute to our earnings as expected, we may not achieve expected revenue synergies

or our return on invested capital targets when expected, or at all, and we may not achieve the other anticipated strategic and financial

benefits of the acquisitions.

The risks arising with respect to the historic

business and operations of Drone Nerds and Anzu Robotics may be different from what we anticipate, which could significantly increase

the costs and decrease the benefits of the acquisitions and materially and adversely affect our operations going forward.

Although we performed significant financial, legal,

technological and business due diligence with respect to Drone Nerds and Anzu Robotics, we may not have appreciated, understood or fully

anticipated the extent of the risks associated with the acquisitions.

We have secured indemnification for certain matters in connection

with the Drone Nerds and Anzu Robotics acquisitions in order to mitigate the consequences of breaches of representations, warranties and

covenants under the applicable acquisition agreements and the risks associated with historic operations, including those with respect

to compliance with laws, accuracy of financial statements, financial reporting controls and procedures, tax matters and undisclosed liabilities,

and certain matters known to us.

We believe that the indemnification provisions of the acquisition agreements, together with insurance

policies that we have in place will limit the economic consequences of the issues we have identified in our due diligence to acceptable

Notwithstanding our exercise of due diligence and risk mitigation strategies, the Drone Nerds and Anzu Robotics acquisitions may

expose us to unanticipated risks or unknown or contingent liabilities and the costs associated with these risks or liabilities may be

greater than we anticipate.

We may not be able to contain or control the costs associated with unanticipated risks or liabilities, which

could materially and adversely affect our business, liquidity, capital resources or results of operations.

Legacy XTI filed an answer on January 28, 2025, and subsequently filed an amended answer and counterclaims on February 18, 2025.

The amended counterclaims, further amended on April 14, 2025, allege that Xeriant breached the Joint Venture Agreement by failing to make

required capital contributions of approximately $4.6 million and by failing to deliver promised intellectual property and strategic support.

Legacy XTI further alleges that Xeriant breached its fiduciary duty by engaging in coercive and self-dealing conduct, including conditioning

a strategic introduction on the issuance of equity and assumption of debt.

Legacy XTI seeks declaratory relief confirming that the joint

venture has been terminated, that all intellectual property related to the TriFan 600 belongs solely to Legacy XTI, and that Xeriant has

no rights in the TriFan 600 technology.

On April 28, 2025, Xeriant moved to dismiss Legacy XTI’s second amended counterclaims.

September 23, 2025, the S.D.N.Y.

denied Xeriant’s motion, concluding that Legacy XTI plausibly alleged claims against Xeriant for

breach of contract, breach of fiduciary duty, and declaratory judgment.

found that Legacy XTI had adequately pleaded that

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

merger opportunity for its own benefit.

Following the S.D.N.Y.’s September 23, 2025 denial of Xeriant’s motion to dismiss

Legacy XTI’s counterclaims, the litigation has advanced into full discovery.

has since compelled Xeriant to comply

with its discovery obligations and warned that continued noncompliance would result in dismissal of its claims.

While the Company continues

to believe the allegations against Legacy XTI are meritless, the case remains in active discovery and subject to close judicial supervision,

which may increase litigation costs and extend the duration of the proceedings.

On December 9, 2025, Xeriant filed a Third Amended Complaint,

voluntarily non-suiting five counts from the prior complaint and revising its damages demand from $500 million to an unspecified amount.

On December 23, 2025, Legacy XTI filed its Answer, Affirmative Defenses, and Counterclaims in response to the Third Amended Complaint.

Discovery remains ongoing.

The outcome of the litigation cannot presently be predicted, and any adverse determination could have a material

impact on the Company.

In connection with the litigation matter described

in the immediately preceding paragraph, on June 12, 2024, the Company received correspondence from legal counsel for Auctus Fund, LLC

(“Auctus”), dated April 3, 2024, asserting that the Company and/or Legacy XTI may have assumed Xeriant’s obligations

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

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

Auctus claimed that

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

In July 2024, Legacy XTI

responded to Auctus’s claims, asserting that the May 17 letter is invalid and unenforceable on multiple grounds.

Legacy XTI further

stated that, even if the May 17 letter were enforceable, it did not create or trigger any obligation for Legacy XTI to assume Xeriant’s

debt under the Note or otherwise.

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

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

Auctus contends that Legacy XTI is contractually

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

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

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

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

Legacy XTI’s motion asserts that Auctus’

complaint should be dismissed:

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

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

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

(iii) for lack of

valid assignment, because Xeriant’s unilateral assignment of debt to Legacy XTI is void because the underlying Note prohibits assignment

without Auctus’s prior written consent, which is not alleged.

On August 5, 2025, Auctus filed a response arguing that it was an

intended third-party beneficiary of the May 17 letter, that the anti-assignment clause does not bar its claims, and that the request for

a stay is unwarranted because the Xeriant litigation involves different parties and broader claims.

On September 12, 2025, Legacy XTI

filed a Reply Brief reinforcing that Auctus lacks standing, that no obligation ever arose under the May 17 Letter because no qualifying

transaction occurred within its one-year term, and that any purported transfer of debt is void under the Note’s anti-assignment

The Reply also emphasized that the enforceability of the May 17 Letter is already before the S.D.N.Y.

and urged dismissal or a

stay to avoid inconsistent rulings.

On October 2, 2025, Legacy XTI filed a Notice of Supplemental Authority submitting the September 23,

2025 Order of the S.D.N.Y., which denied Xeriant’s motion to dismiss Legacy XTI’s counterclaims and held that Legacy XTI had

plausibly alleged that the May 17 Letter expired by its terms and is unenforceable.

Legacy XTI asserted that the S.D.N.Y.

ruling directly

supports dismissal or a stay because it confirms that the same alleged contract and issues raised by Auctus are already being adjudicated

in the federal case.

On November 7, 2025, the court denied Legacy XTI’s motion to dismiss or, in the alternative, stay the proceedings.

The court held that, when viewing the allegations in the light most favorable to Auctus, the complaint plausibly stated claims for relief

under Colorado’s notice-pleading standard.

The court further denied Legacy XTI’s alternative request for a stay, reasoning

that the parties were not identical to those in the federal action and therefore comity and judicial economy did not warrant a stay.

court nonetheless directed the parties to update it regarding the outcome of the federal case to the extent it may be dispositive of overlapping

On November 21, 2025, Legacy XTI filed its Answer and Affirmative Defenses to the Complaint.

The parties are engaged in discovery.

The Company will continue to vigorously defend against the claims but cannot predict the timing or outcome of the proceedings or estimate

any potential exposure.

In addition, in February 2026, the State of Texas

filed a petition in the District Court of Collin County, Texas, against Anzu Robotics, LLC (“Anzu”) alleging that Anzu violated

the Texas Deceptive Trade Practices-Consumer Protection Act (the “DTPA”) in connection with the marketing and sale of its

drone products.

The State contends, among other things, that Anzu misrepresented certain characteristics, origins, and security features

of its products and failed to disclose certain alleged material facts relating to the products’ development and components and Anzu’s

alleged business relationship with DJI.

The State seeks temporary and permanent injunctive relief, civil penalties of up to $10,000 per

violation of the DTPA and up to an additional $250,000 if the conduct was calculated to deprive a consumer age 65 or older of money or

property, and attorneys’ fees and costs.

On April 24, 2026, the State of Texas filed a Motion for No-Answer Default Judgment, with

a hearing scheduled for June 24, 2026 in the 429th District Court of Collin County, Texas.

The Company is evaluating its response to the

In May 2026, the State of Texas also issued a civil investigative demand to Drone Nerds LLC pursuant to the DTPA The Company

cannot at this time predict the outcome of these matters or reasonably estimate a range of potential loss, if any.

In April 2026, the State of Florida issued a subpoena

to Anzu pursuant to the Florida Deceptive and Unfair Trade Practices Act in connection with the marketing and sale of certain drone products.

The Company is engaged in preliminary discussions with the Florida Attorney General to attempt to resolve the matter cooperatively.

The Company cannot at this time predict the outcome of this matter or reasonably estimate a range of potential loss, if any.

The outcome of the foregoing matters cannot presently

be predicted, and an adverse determination in any of these matters could have a material impact on our business, financial condition and

results of operations.

Regardless of the merits of any particular claim, responding to litigation may divert management’s time and

attention, result in significant legal expenses, and expose us to monetary damages, penalties or injunctive relief.

Litigation and other

legal proceedings are inherently uncertain, and adverse judgments or settlements could materially adversely affect our business, financial

condition, results of operations and cash flows.

Even if a claim is fully indemnified or insured, such litigation could damage our reputation

and make it more difficult to compete effectively or obtain adequate insurance in the future.

Furthermore, while we maintain insurance for certain

potential liabilities, such insurance does not cover all types and amounts of potential liabilities and is subject to exclusions, deductibles

Insurers may dispute coverage, which may affect the timing or availability of insurance proceeds.

Unexpected outcomes in legal

proceedings, or changes in management’s evaluation of the likely outcomes, could have a material adverse effect on our business,

financial condition, results of operations and cash flows.

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 1A. Risk Factors