XTI Aerospace, Inc. 10-Q

ITEM 1: FINANCIAL STATEMENTS XTI AEROSPACE, INC. AND SUBSIDIARIES CONDENSED CONSOLIDATED BALANCE SHEETS (In thousands, except number of shares and par value data) As of March 31, 2026 As of December 31, 2025 (Unaudited) Assets Current Assets Cash and cash equivalents $ 15,185 $ 16,696 Accounts receivable, net 9,051 12,093 Inventories 19,413 15,400 Prepaid expenses and other current assets 6,688 3,989 Current assets of discontinued operations (Note 16) — 3,645 Total Current Assets 50,337 51,823 Property and equipment, net 417 385 Operating lease right-of-use asset, net 1,677 2,965 Intangible assets, net 9,108 9,338 Goodwill 11,544 11,544 Note receivable 4,330 — Other assets 929 403 Non-current assets of discontinued operations (Note 16) — 4,788 Total Assets $ 78,342 $ 81,246 The accompanying notes are an integral part of these Condensed Consolidated Financial Statements 1 XTI AEROSPACE, INC. AND SUBSIDIARIES CONDENSED CONSOLIDATED BALANCE SHEETS (CONTINUED) (In thousands, except number of shares and par value data) As of March 31, 2026 As of December 31, 2025 (Unaudited) Liabilities, Mezzanine Equity, and Stockholders’ Equity Current Liabilities Accounts payable $ 3,413 $ 5,212 Accrued expenses and other current liabilities 6,879 6,165 Accrued interest 342 391 Customer deposits 2,480 3,071 Warrant liability 64,895 22,561 Operating lease obligation, current 682 550 Note payable-related party 450 — Short-term debt 10,569 7,931 Income tax payable 1,241 — Current liabilities of discontinued operations (Note 16) — 1,722 Total Current Liabilities 90,951 47,603 Long Term Liabilities Note payable-related party — 450 Operating lease obligation, noncurrent 1,020 2,427 Non-current liabilities of discontinued operations (Note 16) — 322 Total Liabilities 91,971 50,802 Commitments and Contingencies (Note 13) Mezzanine Equity Representative and placement agent warrants, net of issuance costs 2,701 2,701 Stockholders’ Equity Preferred Stock - $ 0.001 par value; 5,000,000 shares authorized Series 4 Convertible Preferred Stock - 10,415 shares authorized; 1 share issued and outstanding as of March 31, 2026 and December 31, 2025 — — Series 5 Convertible Preferred Stock - 12,000 shares authorized; 126 shares issued and outstanding as of March 31, 2026 and December 31, 2025 — — Series 10 Convertible Preferred Stock - 25,000 shares authorized; 0 and 25,000 shares issued and outstanding as of March 31, 2026 and December 31, 2025, respectively — 21,793 Common Stock - $ 0.001 par value; 500,000,000 shares authorized; 38,472,204 and 32,786,816 shares issued and outstanding as of March 31, 2026 and December 31, 2025, respectively 38 33 Additional paid-in capital 170,948 157,354 Accumulated other comprehensive loss — 881 Accumulated deficit ( 197,593 ) ( 162,323 ) Total Stockholders’ Equity ( 26,607 ) 17,738 Noncontrolling interest – Class B Units of XTI Drones Holdings, LLC 10,277 10,005 Total Equity ( 16,330 ) 27,743 Total Liabilities, Mezzanine Equity, and Equity $ 78,342 $ 81,246 The accompanying notes are an integral part of these Condensed Consolidated Financial Statements 2 XTI AEROSPACE, INC. AND SUBSIDIARIES CONDENSED CONSOLIDATED STATEMENTS OF OPERATIONS (In thousands, except share and per share data) For the Three Months Ended March 31, 2026 2025 (Unaudited) Revenues $ 27,696 $ — Cost of Revenues 22,550 — Gross Profit 5,146 — Operating Expenses Research and development 1,197 1,124 Sales and marketing 2,363 275 General and administrative 11,746 6,796 Amortization of intangible assets 230 8 Total Operating Expenses 15,536 8,203 Loss from Operations ( 10,390 ) ( 8,203 ) Other (Expense) Income Interest expense, net ( 154 ) ( 217 ) Loss on extinguishment of debt — ( 421 ) Warrant issuance expense — ( 2,016 ) Change in fair value of warrant liability ( 21,447 ) 503 Other 245 ( 344 ) Total Other (Expense) Income ( 21,356 ) ( 2,495 ) Loss from Continuing Operations Before Income Taxes ( 31,746 ) ( 10,698 ) Income tax benefit — 15 Net Loss from Continuing Operations, net of tax ( 31,746 ) ( 10,683 ) Loss from operations of discontinued component, inclusive of tax ( 3,252 ) ( 2,189 ) Net loss ( 34,998 ) ( 12,872 ) Net (income) loss attributable to noncontrolling interest ( 272 ) — Net Loss Attributable to XTI Aerospace, Inc. ( 35,270 ) ( 12,872 ) Less: Preferred stock dividends ( 42 ) ( 29 ) Net Loss Attributable to Common Stockholders $ ( 35,312 ) $ ( 12,901 ) Net Loss Per Share – Basic and Diluted: Continuing operations $ ( 0.91 ) $ ( 3.16 ) Discontinued operations $ ( 0.09 ) $ ( 0.64 ) Net loss per share $ ( 1.00 ) $ ( 3.80 ) Weighted Average Shares Outstanding, Basic and Diluted 35,284,100 3,384,736 The accompanying notes are an integral part of these Condensed Consolidated Financial Statements 3 XTI AEROSPACE, INC. AND SUBSIDIARIES CONDENSED CONSOLIDATED STATEMENTS OF COMPREHENSIVE LOSS (In thousands) For the Three Months Ended March 31, 2026 2025 (Unaudited) Net Loss $ ( 34,998 ) $ ( 12,872 ) Unrealized foreign currency translation adjustments relating to discontinued operations — ( 155 ) Comprehensive loss $ ( 34,998 ) $ ( 13,027 ) Comprehensive income attributable to noncontrolling interest 272 — Total Comprehensive Loss attributable to XTI Aerospace, Inc. $ ( 35,270 ) $ ( 13,027 ) The accompanying notes are an integral part of these Condensed Consolidated Financial Statements 4 XTI AEROSPACE, INC. AND SUBSIDIARIES CONDENSED CONSOLIDATED STATEMENT OF CHANGES IN STOCKHOLDERS’ EQUITY For the three months ended March 31, 2026 (Unaudited) (In thousands, except share data) Series 10 Convertible Preferred Stock at Redemption Value Common Stock Additional Paid-In Accumulated Other Comprehensive Accumulated Total Parent Non- Controlling Class B Total Shares Amount Shares Amount Capital Loss Deficit Equity Units Equity Balance - January 1, 2026 25,000 $ 21,793 32,786,816 $ 33 $ 157,354 $ 881 $ ( 162,323 ) $ 17,738 $ 10,005 $ 27,743 Conversion of Series 10 Preferred Stock to common shares and pre-funded warrants ( 25,000 ) ( 21,793 ) 1,721,980 1 ( 1,945 ) — — ( 23,737 ) — ( 23,737 ) Stock-based compensation – Options — — — — 4,847 — — 4,847 — 4,847 Common shares issued for exercise of liability classified warrants, net of costs — — 3,963,408 4 10,734 — — 10,738 — 10,738 Series 10 Convertible Preferred Stock dividend accrual — — — — ( 42 ) — — ( 42 ) — ( 42 ) Disposition of the Inpixon Business (Note 16) — — — — — ( 881 ) — ( 881 ) — ( 881 ) Net loss attributable to parent — — — — — — ( 35,270 ) ( 35,270 ) — ( 35,270 ) Net income attributable to noncontrolling interest — — — — — — — — 272 272 Balance – March 31, 2026 — $ — 38,472,204 $ 38 $ 170,948 $ — $ ( 197,593 ) $ ( 26,607 ) $ 10,277 $ ( 16,330 ) The accompanying notes are an integral part of these Condensed Consolidated Financial Statements 5 XTI AEROSPACE, INC. AND SUBSIDIARIES CONDENSED CONSOLIDATED STATEMENT OF CHANGES IN STOCKHOLDERS’ EQUITY For the three months ended March 31, 2025 (Unaudited) (In thousands, except share data) Series 9 Accumulated Preferred Stock at Redemption Value Common Stock Additional Paid-In Other Comprehensive Accumulated Total Stockholders’ Shares Amount Shares Amount Capital Loss Deficit Equity Balance - January 1, 2025 1,331 $ 1,331 1,685,021 $ 2 $ 99,425 $ ( 622 ) $ ( 93,562 ) $ 6,574 Common shares issued for net cash proceeds of ATM offering — — 169,299 — 1,667 — — 1,667 Common shares issued for net cash proceeds of public offerings — — 2,219,746 2 17,900 — — 17,902 Common shares issued for conversion of debt — — 240,229 — 750 — — 750 Common shares issued for exercise of liability classified warrants — — 300,000 — 408 — — 408 Redemption of Series 9 preferred stock ( 1,331 ) ( 1,331 ) — — ( 96 ) — — ( 1,427 ) Stock-based compensation — — — — 455 — — 455 Cumulative translation adjustment — — — — — 467 — 467 Rounding adjustment for fractional shares resulting from 1-for-250 reverse stock split — — 173,245 1 4 — — 5 Net loss — — — — — — ( 12,872 ) ( 12,872 ) Balance – March 31, 2025 — $ — 4,787,540 $ 5 $ 120,513 $ ( 155 ) $ ( 106,434 ) $ 13,929 The accompanying notes are an integral part of these Condensed Consolidated Financial Statements 6 XTI AEROSPACE, INC. AND SUBSIDIARIES CONDENSED CONSOLIDATED STATEMENTS OF CASH FLOWS (In thousands) For the Three Months Ended March 31, 2026 2025 (Unaudited) Cash Flows Used in Operating Activities Net loss $ ( 34,998 ) $ ( 12,872 ) Adjustment to reconcile net loss to net cash used in operating activities: Depreciation and amortization 56 32 Amortization of intangible assets 230 91 Amortization of right-of-use asset 223 53 Non-cash interest (income) expense, net ( 82 ) 145 Stock-based compensation 4,847 455 Impairment of intangible assets - 531 Loss on extinguishment of debt - 421 Warrant issuance expense - 2,016 Change in fair value of warrant liability 21,447 ( 503 ) Loss on disposal of the Inpixon Business 831 - Other income ( 250 ) - Other ( 2 ) 3 Changes in operating assets and liabilities: Accounts receivable and other receivables 4,335 157 Inventories ( 3,994 ) ( 19 ) Prepaid expenses and other current assets ( 2,729 ) ( 594 ) Other assets 12 348 Accounts payable ( 1,854 ) ( 624 ) Related party payables - ( 51 ) Accrued expenses and other current liabilities 2,136 ( 4,892 ) Accrued interest ( 49 ) 67 Deferred revenue ( 416 ) 46 Operating lease obligation ( 197 ) ( 52 ) Net Cash Used in Operating Activities ( 10,454 ) ( 15,242 ) Cash Flows Used in Investing Activities Purchase of property and equipment ( 131 ) ( 45 ) Net cash paid on disposal of the Inpixon Business ( 694 ) - Net Cash Used in Investing Activities ( 825 ) ( 45 ) Cash Provided by Financing Activities Net proceeds from the exercise of liability classified warrants 7,439 1 Net proceeds from sale of common stock and pre-funded warrants via public offerings - 21,651 Net proceeds from ATM stock offering - 1,667 Redemption of Series 9 preferred stock - ( 1,427 ) Net borrowings on line-of-credit 4,638 - Payment of debt issuance costs ( 565 ) - Repayments of promissory notes ( 2,000 ) ( 2,719 ) Net Cash Provided by Financing Activities 9,512 19,173 Effect of Foreign Exchange Rate on Changes on Cash 33 17 Net (Decrease) Increase in Cash and Cash Equivalents ( 1,734 ) 3,903 Cash and Cash Equivalents - Beginning of period 16,919 4,105 Cash and Cash Equivalents - End of period $ 15,185 $ 8,008 Supplemental Disclosure of cash flow information: Cash paid for: Interest $ 263 $ 281 Income Taxes $ - $ - Non-cash investing and financing activities Common shares issued for conversion of debt and accrued interest $ - $ 750 Warrant liabilities exchanged for common stock $ 3,299 $ - Conversion of Series 10 Preferred Stock to pre-funded warrants $ 24,186 $ - The accompanying notes are an integral part of these Condensed Consolidated Financial Statements 7 XTI AEROSPACE, INC. AND SUBSIDIARIES NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS Note 1 - Description of Business and Organization The following describes the Company’s business and organizational structure: Business XTI Aerospace, Inc. (the “Company”) is a U.S.-based aerospace company focused on unmanned aircraft systems (“UAS”) and related services. The Company provides UAS solutions through a combination of product distribution and service offerings, including the sale and support of UAS platforms, payloads, sensors, batteries, accessories and related equipment, as well as operator training, program enablement, repair and maintenance, and other fleet lifecycle support services for enterprise, public safety, government, and defense-related customers. In 2026, the Company started the design and development of unmanned platforms for defense and commercial applications. Effective in fiscal year 2026, as part of the Company’s strategic shift from the TriFan 600 development program towards the design and development of unmanned platforms, the Company revised its operating segments to remove the commercial aviation segment and replace it with the advanced defense systems (“ADS”) segment. The Company currently operates as two reportable segments: UAS and ADS, refer to Note 11 – Segments. Organization In November 2025, the Company completed the acquisition of Drone Nerds, LLC and Anzu Robotics, LLC (collectively, “Drone Nerds”) through XTI Drones Holdings, LLC, a Texas limited liability company (“XTI Drones Holdings”). The Company holds an 83.403 % controlling equity interest in XTI Drones Holdings through its ownership of Class A Units, and the remaining 16.597 % equity interest is held by other Class B unitholders. The results of Drone Nerds have been included in the Company’s consolidated financial statements from November 10, 2025, the acquisition date, and the ownership interest not held by the Company is reflected as noncontrolling interest. Drone Nerds represents the Company’s primary UAS solutions and services operations. During December 2025, the Company committed to a plan to dispose of its historical Industrial IoT / real-time location systems (“RTLS”) operations (the “Inpixon Business”) and retroactively classified the business as held for sale. The disposition of the Inpixon Business was completed on February 3, 2026. The Inpixon Business historically comprised the Company’s Industrial IoT operations, which previously represented the Company’s Industrial IoT reportable segment. The results of the Inpixon Business have been presented as discontinued operations in the accompanying condensed consolidated financial statements for all periods presented. Unless otherwise indicated, the information included in the accompanying notes relates to the Company’s continuing operations. See Note 16 for additional information regarding discontinued operations. Liquidity As of March 31, 2026, the Company had cash and cash equivalents of approximately $ 15.2 million, $ 4.6 million drawn and $ 8.1 million of remaining availability on the borrowing base under its credit facility, see Note 8—Debt for further detail on the Company’s credit facility. During the three months ended March 31, 2026, the Company incurred a net loss from continuing operations of approximately $ 31.7 million and used approximately $ 10.5 million of cash in operating activities. During the three months ended March 31, 2026, the Company received net proceeds of approximately $ 7.4 million from the exercise of warrants, which contributed to its liquidity during the period. The Company’s liquidity position has been supported by capital raising activities during 2025, including public offerings of equity securities and the issuance of convertible preferred stock, as well as proceeds received from warrant exercises during the three months ended March 31, 2026. In addition, the Company has access to financing arrangements, including an asset-based lending facility, which provides borrowing availability subject to a borrowing base. Management expects to fund operations through a combination of existing cash balances, proceeds from warrant exercises, borrowing availability under its credit facility, and its ability to manage discretionary expenditures. While the Company may pursue additional capital raising activities, such activities are not considered in management’s assessment of its ability to meet its obligations. 8 XTI AEROSPACE, INC. AND SUBSIDIARIES NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS Based on the Company’s current liquidity, including cash on hand, availability under its credit facility, and expected operating cash flows from its UAS platform, management believes that the Company will have sufficient liquidity to meet its obligations for at least twelve months from the date of issuance of these condensed consolidated financial statements. As of March 31, 2026, the Company’s net working capital was negative $ 40.6 million. However, after adjusting for the warrant liability, the Company’s net working capital was positive $ 24.3 million. Note 2 - Basis of Presentation The accompanying unaudited condensed consolidated financial statements of the Company have been prepared in accordance with generally accepted accounting principles in the United States of America (“GAAP”) for interim financial information and the rules and regulations of the Securities and Exchange Commission (“SEC”). Accordingly, they do not include all of the information and footnotes required by GAAP for complete financial statements. In the opinion of management, all adjustments (consisting of normal recurring accruals) considered necessary for a fair presentation have been included. Interim results for the three months ended March 31, 2026 are not necessarily indicative of the results for the full year ending December 31, 2026. These interim unaudited condensed consolidated financial statements should be read in conjunction with the Company’s audited financial statements and notes for the years ended December 31, 2025 and 2024 included in the annual report on Form 10-K for the year ended December 31, 2025, filed with the SEC on April 15, 2026. The condensed consolidated financial statements include the accounts of the Company and its wholly owned and majority-owned subsidiaries. All intercompany balances and transactions have been eliminated in consolidation. Note 3 - Summary of Significant Accounting Policies The Company’s complete accounting policies are described in Note 3 to the Company’s audited consolidated financial statements and notes included in the annual report on Form 10-K for the year ended December 31, 2025. Credit Risk and Concentrations Financial instruments that subject the Company to credit risk consist principally of trade accounts receivable and cash and cash equivalents. The Company maintains its cash and cash equivalents primarily with high-credit-quality financial institutions in the United States. Cash balances maintained with financial institutions in the United States are generally in excess of federally insured limits. The Company mitigates its credit risk by limiting its exposure to any single financial institution and by monitoring the credit quality of its counterparties. The Company places its cash with financial institutions that have long-term credit ratings of at least A- or equivalent, as assigned by major credit rating agencies. The Company performs certain credit evaluation procedures and does not require collateral for financial instruments subject to credit risk. The Company believes that credit risk is limited because the Company routinely assesses the financial strength of its customers and, based upon factors surrounding the credit risk of its customers, establishes an allowance for credit losses. As of March 31, 2026 and December 31, 2025, the Company’s provision for credit losses related to its accounts receivable is immaterial. As of March 31, 2026 and December 31, 2025 the provision for credit losses of $ 2.1 million is related to a convertible promissory note receivable, which is fully reserved. There was no change in the provision for credit losses during the three months ended March 31, 2026. 9 XTI AEROSPACE, INC. AND SUBSIDIARIES NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS The customers from continuing operations who account for 10% or more of the Company’s revenue for the three months ended March 31, 2026 or 10% or more of the Company’s outstanding receivable balance as of March 31, 2026 are presented as follows: Percentage of revenues Percentage of accounts receivable Customer Three Months Ended March 31, 2026 As of March 31, 2026 A ** 34 % B 12 % ** ** Represents less than 10% of the total for the respective period. For the three months ended March 31, 2025, all revenue was generated by the Company’s Inpixon Business, which has been classified as discontinued operations. The vendors from continuing operations who account for 10% or more of the Company’s purchases for the three months ended March 31, 2026 or 10% or more of the Company’s outstanding accounts payable balance as of March 31, 2026 are presented as follows. Percentage of purchases Percentage of accounts payable Vendor Three Months Ended March 31, 2026 As of March 31, 2026 A 49 % 40 % B ** 15 % ** Represents less than 10% of the total for the respective period. Recently Issued Accounting Standards Not Yet Adopted In November 2024, the FASB issued ASU 2024-03, Income Statement—Reporting Comprehensive Income—Expense Disaggregation Disclosures (Subtopic 220-40): Disaggregation of Income Statement Expenses . This ASU requires public entities to provide enhanced disaggregation of certain expense categories presented on the income statement, including disclosure of specific types of expenses such as employee compensation, depreciation, and amortization. The standard is effective for fiscal years beginning after December 15, 2026, and interim periods within fiscal years beginning after December 15, 2027. Early adoption is permitted. The Company is currently evaluating the impact this guidance will have on its condensed consolidated financial statement disclosures. Other recently issued accounting standards not yet effective are not expected to have a material impact on the Company’s condensed consolidated financial statements. 10 XTI AEROSPACE, INC. AND SUBSIDIARIES NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS Note 4 - Disaggregation of Revenue Disaggregation of Revenue Revenue presented for the three months ended March 31, 2026 represents revenue from continuing operations and excludes revenue from the Inpixon Business, which has been classified as discontinued operations. Revenue presented for the three months ended March 31, 2025 relates entirely to the Inpixon Business and has been reclassified to discontinued operations in the accompanying consolidated financial statements. Revenues arise substantially from the Company’s UAS offerings through the following channels (in thousands): For the Three Months Ended March 31, 2026 Wholesale $ 16,471 Direct Sales 7,704 Retail 3,521 Total revenue $ 27,696 Wholesale revenue represents sales through resellers and channel partners. Direct sales revenue represents sales to enterprise, commercial, and governmental end customers, including public safety agencies, that utilize drones as part of their operations. Retail revenue represents sales to consumers, including those transacted through the Company’s e-commerce platform, and revenues from the Company’s service center. Service center revenues are less than 10% of total retail sales. Enterprise, commercial, and governmental customers may also purchase through the Company’s e-commerce platform; such transactions are classified as direct sales based on customer type. Revenue is primarily generated in the United States; however, approximately 12 % of total revenue for the three months ended March 31, 2026 was derived from a customer located in Poland. No other individual customer accounted for more than 10% of total revenue. Note 5 – Unaudited Proforma Financial Information As described in the notes to the financial statements included in the Company’s annual report on Form 10-K, on November 10, 2025, the Company acquired Drone Nerds, LLC and Anzu Robotics, LLC (collectively, the “Acquisition”). The following unaudited pro forma consolidated financial information presents the combined results of operations of the Company and Drone Nerds as if the Acquisition had occurred on January 1, 2025. The pro forma financial information has been prepared for comparative purposes only and does not necessarily reflect the results of operations that would have occurred had the Acquisition been completed on that date, nor is it indicative of future results of operations. The unaudited pro forma information reflects adjustments that are directly attributable to the acquisition and are factually supportable, including: ● Incremental amortization expense related to identifiable intangible assets acquired; 11 XTI AEROSPACE, INC. AND SUBSIDIARIES NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS ● Interest expense associated with acquisition-related indebtedness; ● Conforming accounting policy adjustments, where applicable. The pro forma financial information does not include any anticipated cost savings, operating synergies, or other integration effects of the acquisition. The following unaudited pro forma consolidated financial information presents the combined results of continuing operations of the Company and Drone Nerds (in thousands, except per share amounts): For the three months ending March 31, 2025 Revenues $ 30,587 Net loss from continuing operations $ ( 7,294 ) Net loss attributable to common stockholders from continuing operations $ ( 7,926 ) Net loss per share – basic and diluted $ ( 2.34 ) Weighted average common shares outstanding – basic and diluted 3,384,736 Note 6 - Goodwill and Intangible Assets Goodwill As of March 31, 2026 and December 31, 2025, the Company had goodwill of approximately $ 11.5 million related to the acquisition of Drone Nerds and included as a part of the UAS segment. There were no changes in the carrying amount of goodwill during the three months ended March 31, 2026, and no impairment indicators were identified. Intangible Assets Intangible assets consist primarily of patents, trade names and trademarks, and customer relationships acquired in the Drone Nerds acquisition. The following table presents intangible assets associated with continuing operations as of March 31, 2026 and December 31, 2025 (in thousands): As of March 31, 2026: Gross Amount Accumulated Amortization Net Carrying Amount Remaining Weighted Average Useful Life Patents $ 468 $ ( 215 ) $ 253 8.6 Trade Names / Trademarks 4,000 ( 120 ) 3,880 12.6 Customer Relationships 5,200 ( 225 ) 4,975 8.6 Total $ 9,668 $ ( 560 ) $ 9,108 12 XTI AEROSPACE, INC. AND SUBSIDIARIES NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS As of December 31, 2025 Gross Amount Accumulated Amortization Net Carrying Amount Remaining Weighted Average Useful Life Patents $ 468 $ ( 207 ) $ 261 8.8 Trade Names / Trademarks 4,000 ( 43 ) 3,957 12.9 Customer Relationships 5,200 ( 80 ) 5,120 8.9 Total $ 9,668 $ ( 330 ) $ 9,338 Amortization expense for the three months ended March 31, 2026 and 2025 was approximately $ 0.2 million and $ 0.0 million, respectively. The Company evaluates long-lived assets for impairment when events or changes in circumstances indicate that the carrying amount may not be recoverable. No impairment indicators were identified during the three months ended March 31, 2026. The UAS segment, which contains materially all goodwill and intangibles, continued to be profitable for the three months ended March 31, 2026. Note 7 - Other Balance Sheet Information Prepaid expenses and other current assets Prepaid expenses and other current assets as of March 31, 2026 and December 31, 2025 consisted of the following (in thousands): As of March 31, 2026 As of December 31, 2025 Vendor deposits $ 4,909 $ 2,649 Prepaid expenses and other 1,779 1,340 Total prepaid expenses and other current assets $ 6,688 $ 3,989 Inventories Inventory as of March 31, 2026 and December 31, 2025 represents inventory on hand within the Drone Nerds (UAS) segment and consisted of the following (in thousands): As of March 31, 2026 As of December 31, 2025 Drones $ 8,778 $ 7,725 Accessories 5,657 4,043 Service parts and components 4,978 3,632 Total inventories $ 19,413 $ 15,400 13 XTI AEROSPACE, INC. AND SUBSIDIARIES NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS Accrued expenses and other current liabilities Accrued expenses and other current liabilities as of March 31, 2026 and December 31, 2025 consisted of the following (in thousands): As of March 31, 2026 As of December 31, 2025 Bonuses and commissions $ 1,212 $ 2,839 Compensation and benefits 898 996 Inventory received not invoiced 4,137 1,404 Other 632 926 Total accrued expenses and other current liabilities $ 6,879 $ 6,165 Note 8 - Debt Short-Term Debt Maturity March 31, 2026 December 31, 2025 Acquisition-Related Promissory Notes 11/10/2026 $ 5,931 $ 7,931 Asset-Based Revolving Line of Credit (Drone Nerds) 2/11/2029 4,638 — Total Short-Term Debt $ 10,569 $ 7,931 Interest expense on outstanding debt totaled approximately $ 0.2 million and $ 0.2 million for the three months ended March 31, 2026 and 2025, respectively. Acquisition-Related Promissory Notes In connection with the November 2025 acquisition of Drone Nerds, XTI Drones Holdings, LLC issued promissory notes to the sellers with an aggregate original principal amount of approximately $ 11.9 million (the “Notes”). The Notes bear interest at a rate of 7.25 % per annum, calculated on a 365 -day year. Accrued interest is payable in accordance with the terms of the Notes, and unpaid interest is added to principal if not paid when due. On March 31, 2026, the Company made a required aggregate principal payment of $ 2.0 million and aggregate accrued interest payment of approximately $ 0.2 million. The Notes require remaining scheduled principal repayments as follows: ● $ 1.5 million in the aggregate due no later than June 30, 2026; ● $ 1.5 million in the aggregate due no later than September 30, 2026; and ● The remaining outstanding principal and accrued interest due on or before the one-year anniversary of the Notes. 14 XTI AEROSPACE, INC. AND SUBSIDIARIES NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS The Notes may be prepaid at any time without premium or penalty, provided that accrued and unpaid interest is paid through the prepayment date. The outstanding principal balance of the Notes is subject to reduction in connection with indemnification obligations under the applicable purchase agreements. The Notes contain customary events of default, including bankruptcy-related events, upon which the outstanding principal and accrued interest may become immediately due and payable. As of March 31, 2026 and December 31, 2025, the aggregate outstanding principal balance of the Notes was approximately $ 5.9 million and $ 7.9 million, respectively. Asset-Based Revolving Line of Credit (Drone Nerds) On February 11, 2026, Drone Nerds, LLC and Anzu Robotics, LLC (collectively, the “Borrowers”) entered into a Credit Agreement with JPMorgan Chase Bank, N.A. (the “Lender”), (the “Credit Agreement”), providing for a secured revolving credit facility with aggregate commitments of up to $ 20.0 million, subject to certain borrowing base limitations based on a percentage of eligible accounts receivable and inventory (the “ABL Facility”). The ABL Facility matures on February 11, 2029. As of March 31, 2026, the borrowing base was calculated to be approximately $ 12.7 million, and the Company had $ 4.6 million outstanding, with $ 8.1 million of remaining availability. Borrowings under the ABL Facility bear interest at Secured Overnight Financing Rate or a base rate, plus a margin of 2.0 %, subject to adjustment in certain circumstances. The average unused commitment under the ABL Facility is subject to an unused commitment fee of 0.25 % to 0.375 %. Borrowings under the ABL Facility as of March 31, 2026 incurred interest at a weighted average of 5.8 %. The Credit Agreement is subject to a cash dominion arrangement, whereby funds deposited into any depository account of the borrower are swept into a blocked account with the Lender and shall be used to reduce amounts owed under the Credit Facility. Because of the nature of the cash dominion arrangement, borrowings under the Credit Agreement are classified as current liabilities despite a maturity date that is more than twelve-months from the balance sheet date. The Credit Agreement is secured by substantially all of the assets of the Borrowers and certain affiliated guarantors. The Credit Agreement contains customary affirmative and negative covenants, including limitations on additional indebtedness, liens, asset sales, investments and restricted payments. The Borrowers are required to maintain a minimum Fixed Charge Coverage Ratio as of the end of any calendar month of no less than 1.0 to 1.0, subject to certain cure rights. Proceeds of the ABL Facility may be used for general corporate purposes, refinancing certain existing indebtedness and permitted investments. Note 9 – Capital Structure AUTHORIZED CAPITAL The Company is authorized to issue 500,000,000 shares of common stock, $ 0.001 par value per share, and 5,000,000 shares of preferred stock, $ 0.001 par value per share. The Board of Directors is authorized to establish the rights, preferences and privileges of any series of preferred stock. COMMON STOCK AND PREFERRED STOCK Automatic Conversion of Series 10 Preferred Stock On January 5, 2026, all outstanding shares of the Company’s Series 10 Convertible Preferred Stock automatically converted in accordance with their terms following shareholder approval. The conversion was based on a stated value of $ 1,000 per share, plus accrued and unpaid dividends, divided by a conversion price of $ 1.492 per share. 15 XTI AEROSPACE, INC. AND SUBSIDIARIES NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS Upon conversion, the Company issued 1,721,980 shares of common stock and a pre-funded warrant with a $ 0.0001 exercise price to purchase 15,307,735 shares of common stock. The pre-funded warrant was issued in lieu of additional shares of common stock due to beneficial ownership limitations contained in the Series 10 Preferred Stock. The pre-funded warrant is immediately exercisable at an exercise price of $ 0.0001 per share. The pre-funded warrant was determined to be a liability-classified instrument under ASC 815 due to adjustment and settlement provisions and, as such, upon conversion, the Company recorded the pre-funded warrant liability at a fair value of $ 24.2 million based on the listed price of the Company’s common stock along with a reduction of additional paid-in-capital of $ 4.2 million for the difference between the carrying value of the preferred stock plus accrued and unpaid dividends. WARRANTS The following table summarizes the activity of warrants outstanding: Weighted Number of Average Warrants Exercise Outstanding at January 1, 2026 25,213,417 $ 2.94 Conversion of Series 10 Preferred Stock to Pre-funded Warrants 15,307,735 $ 0.0001 Exercised ( 3,963,408 ) $ 2.00 Outstanding at March 31, 2026 36,557,744 $ 1.81 Exercisable at March 31, 2026 36,556,987 $ 1.81 Warrant Exercises During the three months ended March 31, 2026, holders of certain warrants issued in connection with the Company’s 2025 public offerings exercised warrants to purchase an aggregate of 3,963,408 shares of the Company’s common stock, resulting in gross cash proceeds of approximately $ 7.9 million. In connection with the solicitation of such warrant exercises, the Company paid commissions and other fees to a third party financial advisor of approximately $ 0.5 million. Net cash proceeds to the Company from these warrant exercises during the three months ended March 31, 2026 were approximately $ 7.4 million. NONCONTROLLING INTEREST – CLASS B UNITS OF XTI DRONES HOLDINGS, LLC In connection with the November 2025 acquisition of Drone Nerds, the Company issued 6,524,576 Class B Units of XTI Drones Holdings, LLC to the seller as part of the purchase consideration. The Company holds Class A Units representing an 83.403 % controlling interest in XTI Drones Holdings, LLC. The Class B Units represent the remaining 16.597 % ownership interest and are reflected as noncontrolling interest in the consolidated financial statements. Exchange features of the Class B Units: ● Are exchangeable into shares of the Company’s common stock on a one-for-one basis at the option of the holder at any time after May 1, 2026; 16 XTI AEROSPACE, INC. AND SUBSIDIARIES NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS ● All outstanding Class B Units will automatically be exchanged into shares of the Company’s common stock on a one-for-one basis fifteen months after the acquisition closing date; and ● Require no additional consideration upon exchange. Because the Class B Units are equity interests in a consolidated subsidiary and are convertible into shares of the Company’s common stock, they are considered potentially dilutive securities for earnings per share purposes when applicable. Upon exchange of the Class B Units into shares of the Company’s common stock, the related noncontrolling interest will be reclassified to stockholders’ equity attributable to the Company with no impact on the consolidated statements of operations. For the three months ended March 31, 2026, the Company reported a net loss. Accordingly, the Class B Units were excluded from the computation of diluted net loss per share because their assumed conversion would have been antidilutive. In periods of net income, the Class B Units would be evaluated for dilution under the if-converted method, which would require the addition of net income attributable to the noncontrolling interest and the inclusion of the underlying shares of common stock in the diluted weighted-average shares outstanding. Note 10 - Stock Award Plans and Stock-Based Compensation Legacy XTI adopted the 2017 Employee and Consultant Stock Ownership Plan, which was assumed by the Company in connection with the XTI Merger. The plan permits grants of stock options and other equity awards to employees, directors and consultants. As of March 31, 2026, no shares remain available for future issuance under the 2017 Plan. The Company’s 2018 Equity Incentive Plan, as amended and restated in August 2025, authorizes the grant of incentive stock options, nonqualified stock options, restricted stock, RSUs and other equity-based awards to employees, officers, directors and consultants. The 2018 Plan permits the Board to delegate limited grant authority to designated officers. Options generally vest over periods ranging from immediate to four years and have contractual terms of up to ten years . As of March 31, 2026, there are no unvested Restricted Stock or Restricted Stock Units outstanding under the 2018 Plan. The aggregate number of shares that may be awarded under the 2018 Plan as of March 31, 2026 was 80,105,687 . As of March 31, 2026, 61,885,946 shares of common stock were available for future grant under the 2018 Plan, of which 57,209,296 shares are registered. See below for a summary of the stock options granted under the 2011, 2017 and 2018 plans: Weighted Weighted Aggregate Average Average Intrinsic Number of Exercise Remaining Value Options Price Life (Years) (in millions) Outstanding at January 1, 2026 15,941,550 $ 2.80 9.8 $ — Granted 2,709,865 $ 1.66 Forfeitures ( 430,133 ) $ 16.21 Outstanding at March 31, 2026 18,221,282 $ 2.31 9.5 $ 5.7 Exercisable at March 31, 2026 8,930,436 $ 2.62 9.2 $ 2.4 17 XTI AEROSPACE, INC. AND SUBSIDIARIES NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS During the three months ended March 31, 2026, the Company granted 2,709,865 stock options under the 2018 Plan to employees, directors, and other service providers with exercise prices ranging from $ 1.43 to $ 1.92 per share. The following assumptions were used in estimating the fair values of options awarded during the three months ended March 31, 2026: Three Months Ended March 31, 2026 Fair value of common stock $ 1.43 - $ 1.92 Exercise price $ 1.43 - $ 1.92 Expected term 5.0 – 5.8 years Volatility 134.52 % - 149.33 % Risk-free interest rate 3.51 % - 3.95 % Dividend yield —% Stock-based Compensation Expense Stock-based compensation charges for the periods indicated below (in thousands) are as follows: Three Months Ended March 31, 2026 2025 Research and development $ 205 $ 162 Sales and marketing 382 16 General and administrative 4,260 277 Total $ 4,847 $ 455 As of March 31, 2026, the total unrecognized compensation expense related to unvested awards was approximately $ 13.9 million, which the Company expects to recognize over an estimated weighted average period of 1.0 years. Note 11 - Segments The Company’s Chief Executive Officer (“CEO”), acting as the Chief Operating Decision Maker, or (“CODM”), regularly reviews and manages certain areas of its businesses, resulting in the Company identifying two reportable segments for the three months ended March 31, 2026: Unmanned Aircraft Systems (“UAS”) and Advanced Defense Systems (“ADS”). The Company manages and reports its operating results through these two reportable segments. This allows the Company to enhance its customer focus and better align its business models, resources, and cost structure to the specific current and future growth drivers of each business, while providing increased transparency to the Company’s shareholders. For the three months ended March 31, 2025, the Company operated as one segment: Commercial Aviation, which included the TriFan 600 development program. As of early 2026, the TriFan 600 program has been paused and is no longer identified as an operating segment by management. Management determined that continued development of the TriFan 600 program would require substantial additional time and capital that it does not plan to allocate at this time. 18 XTI AEROSPACE, INC. AND SUBSIDIARIES NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS Given the strategic shift, as well as the addition of the UAS segment in the fourth quarter of the prior year, the Company did not recast the segment financial information for the three months ended March 31, 2025. The UAS segment includes operating results of Drone Nerds, which is owned by the Company’s majority-owned subsidiary, XTI Drones Holdings, which provides an integrated suite of UAS solutions across hardware distribution, training, compliance management support, repair and maintenance, fleet sustainment, and related services. This segment is focused on revenue generation and lifecycle support for enterprise, public safety, government, and defense customers. The ADS segment reflects a strategic shift away from the TriFan 600 program and toward nearer-term unmanned systems opportunities. Management determined that continued development of the TriFan 600 program would require substantial additional time and capital, and the Company therefore appointed new divisional leadership and redirected existing resources toward unmanned systems opportunities that it believes may offer nearer-term commercial applications. The ADS segment is focused on the design, development, and production of unmanned platforms for defense and commercial applications, with an emphasis on serving defense customers and supporting domestic procurement initiatives aligned with U.S. national security priorities. The CODM evaluates segment performance primarily based on revenues, gross profit, and income (loss) from operations for the UAS segment, and research and development spending for the ADS segment. Unallocated operating expenses include costs that are not specific to a particular segment but are general to the group; included expenses incurred for administrative and accounting staff, public company costs, general liability and other insurance, accrued consulting fees and transaction bonuses relating to former Legacy Inpixon executives, professional fees and other similar corporate expenses. The UAS segment reflects results of Drone Nerds beginning in November 2025. There were no UAS segment operations during the three months ended March 31, 2025. Segment operating results are presented on a consolidated basis prior to the allocation of net income (loss) attributable to noncontrolling interests. Substantially all revenues and long-lived assets for continuing operations are located in the United States. The following tables reflect the results of operations from our business segments for the periods indicated below (in thousands): Three Months Ended March 31, 2026 Unallocated UAS ADS Costs Total Revenue $ 27,696 $ — $ — $ 27,696 Cost of revenue 22,550 — — 22,550 Gross Profit 5,146 — — 5,146 Operating expenses Research and development 48 1,149 — 1,197 Sales and marketing 1,426 9 928 2,363 General and administrative (1) 1,892 400 9,454 11,746 Other expenses (2) 222 8 — 230 Total operating expenses 3,588 1,566 10,382 15,536 Income (loss) from operations $ 1,558 $ ( 1,566 ) $ ( 10,382 ) $ ( 10,390 ) (1) Unallocated general and administrative costs primarily consist of stock compensation, personnel expenses, professional fees, and public company costs. (2) Other expenses include amortization of intangibles. 19 XTI AEROSPACE, INC. AND SUBSIDIARIES NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS Three Months Ended March 31, 2025 Commercial Aviation Unallocated Costs Total Operating expenses Research and development $ 1,124 $ — $ 1,124 Sales and marketing 53 222 275 General and administrative (1) 549 6,247 6,796 Other expenses (2) 8 — 8 Total operating expenses 1,734 6,469 8,203 Loss from operations $ ( 1,734 ) $ ( 6,469 ) $ ( 8,203 ) (1) Unallocated general and administrative costs primarily consist of stock compensation, personnel expenses, professional fees, and public company costs. (2) Other expenses include amortization of intangibles. The reporting package provided to the Company’s CODM does not include the measure of assets by segment as that information isn’t reviewed by the CODM when assessing segment performance or allocating resources. Note 12- Fair Value Measurements and Fair Value of Financial Instruments The Company measures certain financial assets and liabilities at fair value on a recurring basis. The Company determines fair value based upon the exit price that would be received to sell an asset or paid to transfer a liability in an orderly transaction between market participants, as determined by either the principal market or the most advantageous market. Inputs used in the valuation techniques to derive fair values are classified based on a three-level hierarchy. These levels are: Level 1: Quoted prices (unadjusted) in active markets that are accessible at the measurement date for identical assets or liabilities. Level 2: Observable prices that are based on inputs not quoted on active markets but corroborated by market data. Level 3: Unobservable inputs which are supported by little or no market activity and values determined using pricing models, discounted cash flow methodologies, or similar techniques, as well as instruments for which the determination of fair value requires significant judgment or estimation. Financial instruments consist of cash and cash equivalents, accounts receivable, notes receivable, accounts payable, warrant liability, line of credit, and notes payable. Cash and cash equivalents, accounts receivable and accounts payable are stated at their respective carrying amounts, which approximate fair value due to their short-term nature. The change in fair value of the warrant liability is presented within ‘Change in fair value of warrant liability’ in the condensed consolidated statements of operations. The fair value of the Level 3 warrant liability was determined using a pricing model with certain significant unobservable market data inputs. 20 XTI AEROSPACE, INC. AND SUBSIDIARIES NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS Warrant Liability – Fair Value Measurement The Company’s warrant liability is classified as a Level 3 liability within the fair value hierarchy as the valuation utilizes significant unobservable inputs. The fair value of the warrants was estimated using a Black-Scholes option pricing model. The model requires the use of significant assumptions, including: ● The Company’s stock price at the valuation date ● The contractual exercise price ● Expected volatility ● Risk-free interest rate ● Expected term ● Dividend yield Expected volatility was based on the historical volatility of the Company’s common stock. The risk-free interest rate was based on U.S. Treasury yields commensurate with the expected term of the warrants. The expected term was based on the contractual remaining life of the warrants. The Company assumed a dividend yield of zero, as it does not expect to declare dividends in the foreseeable future. As of March 31, 2026, the significant assumptions used in the Black-Scholes model were as follows: ● Stock price: $ 2.07 ● Exercise prices: $ 1.36 – $ 2.00 ● Expected volatility: 130 % ● Risk-free interest rate: 3.80 % – 3.84 % ● Remaining term: 4.00 – 4.46 years ● Dividend yield: 0 % Changes in these assumptions could result in a material change in the fair value of the warrant liability. 21 XTI AEROSPACE, INC. AND SUBSIDIARIES NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS Fair Value Tables As of March 31, 2026, the Company did not have any assets measured at fair value on a recurring basis. The Company’s liabilities measured at fair value consisted of the following at March 31, 2026: Fair Value at March 31, 2026 Total Level 1 Level 2 Level 3 Liabilities: Warrant liability $ 64,895 $ — $ — $ 64,895 Total liabilities $ 64,895 $ — $ — $ 64,895 The table below provides a summary of changes in the estimated fair value of the Company’s Level 3 assets and liabilities: Warrant Liability Balance at January 1, 2026 $ 22,561 Pre-funded Warrants issued in connection Series 10 Preferred Stock conversion 24,186 Exercise of Warrants ( 3,299 ) Change in fair value 21,447 Balance at March 31, 2026 $ 64,895 Note 13 - Commitments and Contingencies Litigation From time to time, the Company is involved in legal proceedings arising in the ordinary course of business. Except as described below, the Company is not currently a party to any other material legal proceedings. Xeriant Litigation In December 2023, Xeriant, Inc. filed a lawsuit in the United States District Court for the Southern District of New York against Legacy XTI alleging, among other things, breach of contract, fraud, unjust enrichment, and misappropriation of confidential information in connection with agreements relating to the TriFan 600 aircraft and the XTI Merger. Xeriant previously sought damages in excess of $ 500 million but has since amended its complaint to seek an unspecified amount. Legacy XTI has asserted counterc l aims alleging breach of contract, breach of fiduciary duty, and seeking declaratory relief regarding ownership of intellectual property and termination of the joint venture agreement. The litigation is currently in active discovery. The Company believes the claims against Legacy XTI are without merit and intends to vigorously defend against them. The outcome of this matter cannot presently be predicted. Auctus Litigation In May 2025, Auctus Fund, LLC filed a lawsuit in Colorado state court against Legacy XTI alleging breach of contract and asserting that Legacy XTI is obligated to repay approximately $ 9 million under a promissory note allegedly assumed in connection with a prior letter agreement. Legacy XTI disputes these claims and has asserted affirmative defenses. The case is ongoing. 22 XTI AEROSPACE, INC. AND SUBSIDIARIES NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS State of Texas Petition Against Anzu Robotics, LLC In February 2026, the State of Texas filed a petition in the District Court of Collin County, Texas, against Anzu Robotics, LLC (“Anzu”), a subsidiary of the Company, alleging violations of the Texas Deceptive Trade Practices–Consumer Protection Act (“DTPA”) in connection with the marketing and sale of certain drone products. The petition seeks injunctive relief, civil penalties, and attorneys’ fees and costs. 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 motion. In May 2026, the State of Texas also issued a civil investigative demand to Drone Nerds LLC pursuant to the DTPA. The Company cannot at this time predict the outcome of this matter or reasonably estimate a range of potential loss, if any. State of Florida Subpoena to Anzu Robotics, LLC In April 2026, the State of Florida issued a subpoena to Anzu Robotics, LLC (“Anzu”), a subsidiary of the Company, pursuant to the Florida Deceptive and Unfair Trade Practices Act in connection with the marketing and sale of certain drone products. The Company is engaged in preliminary discussions with the Florida Attorney General to attempt to resolve the matter cooperatively. The Company cannot at this time predict the outcome of this matter or reasonably estimate a range of potential loss, if any. Assessment The Company is unable to predict the ultimate outcome of these matters or reasonably estimate the amount of any potential loss, if any. Accordingly, no accrual has been recorded as of March 31, 2026. An adverse outcome in any of these matters could have a material adverse effect on the Company’s financial condition, results of operations, or cash flows. Note 14 - Net Loss Per Share Attributable to Common Stockholders The following table presents the calculation of basic and diluted loss per share attributable to common stockholders (in thousands, except share and per share data): For the Three Months Ended March 31, 2026 For the Three Months Ended March 31, 2025 Net loss from continuing operations $ ( 31,746 ) $ ( 10,683 ) Net loss from discontinued operations ( 3,252 ) ( 2,189 ) Net loss ( 34,998 ) ( 12,872 ) Less: Net (income) loss attributable to noncontrolling interest ( 272 ) — Net loss attributable to XTI Aerospace, Inc. ( 35,270 ) ( 12,872 ) Less: Preferred stock dividends ( 42 ) ( 29 ) Net Loss Attributable to Common Stockholders $ ( 35,312 ) $ ( 12,901 ) Net loss per share – basic and diluted: Continuing operations $ ( 0.91 ) $ ( 3.16 ) Discontinued operations $ ( 0.09 ) $ ( 0.64 ) Net loss per share $ ( 1.00 ) $ ( 3.80 ) Weighted Average Shares Outstanding Basic and Diluted 35,284,100 3,384,736 23 XTI AEROSPACE, INC. AND SUBSIDIARIES NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS Net loss per share from continuing and discontinued operations is calculated based on net loss attributable to common stockholders. Preferred stock dividends are allocated to continuing and discontinued operations on a proportional basis. The following weighted average potentially dilutive shares were excluded from the computation of diluted net loss per share attributable to common stockholders for the periods presented, because including them would have been anti-dilutive (on an as-converted basis): For the Three Months Ended March 31, 2026 For the Three Months Ended March 31, 2025 Options 17,890,552 51,185 Warrants 38,771,472 65,774 Convertible Preferred Stock 946,097 2 Noncontrolling Interest – Class B Units 6,524,576 — Total 64,132,697 116,961 Note 15 – Income Taxes The income tax provision for the three months ended March 31, 2026 is $ 1.2 million, all included in results from discontinued operations. The income tax provision for the three months ended March 31, 2025 was immaterial. The effective tax rate, inclusive of discrete items, was 0 % and ( 0.12 )%, respectively, which was driven by a combination of permanent adjustments related to partnership income, 162(m) compensation limitations, and acquisition costs and a valuation allowance. The Company evaluated and considered all available evidence, both positive and negative, to determine whether, based on the weight of that evidence, a valuation allowance for its deferred tax assets was needed. The deferred tax assets are composed primarily of net operating loss carryforwards. The Company determine that a full valuation allowance against all deferred tax assets was appropriate for the three months period ended March 31, 2026 and March 31, 2025. Note 16 – Discontinued Operations Disposition of the Inpixon Business On February 3, 2026 (the “Signing Date” and “Closing Date”), the Company completed the disposition of its Inpixon Business pursuant to a Share Purchase and Transfer Agreement (the “SPA”) entered into with EVO 467. GmbH (the “Purchaser”). Pursuant to the SPA, the Company sold all of the shares of Inpixon GmbH for a purchase price of EUR 4,640,000 (approximately $ 5.5 million based on the exchange rate on the Signing Date). Inpixon GmbH is the sole shareholder of Aware RTLS, Inc. and IntraNav GmbH. The Inpixon Business, which provides indoor positioning, real-time localization and sensor technology solutions, was conducted through Inpixon GmbH. The purchase price of EUR 4,640,000 bears interest of 5 % per annum from the Signing Date until the fourth anniversary of the Closing Date. The Company has the right (the “Unwind Option”) to require the Purchaser to transfer back all shares of Inpixon and its subsidiaries at any time during that fifteen (15) month period beginning on the first day of the thirty-seventh month following the Signing Date and continuing to the end of the fifty-second month following the Signing Date for no consideration by the Company. If exercised, all unpaid amounts of the purchase price will be forgiven. If not exercised within the specified period, the unpaid purchase price will also be forgiven. 24 XTI AEROSPACE, INC. AND SUBSIDIARIES NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS The Company evaluated the Unwind Option in accordance with ASC 810-10-40, Consolidation—Deconsolidation, and concluded that control of the Inpixon Business transferred to the Purchaser upon closing. Based on management’s evaluation of the facts and circumstances surrounding the transaction, including the Purchaser’s business plan and other qualitative considerations, the likelihood of exercise of the Unwind Option is considered remote. Additionally, the purchase price terms, including the potential forgiveness provisions, were also considered in the Company’s assessment of whether the transaction qualified for sale accounting. Finally, the Company has no continuing involvement in the operations of the Inpixon Business following the Closing Date. Accordingly, the transaction was accounted for as a complete sale and the Inpixon Business was derecognized as of the Closing Date. The Company recorded the purchase price as a note receivable with fair value determined to be $ 4.2 million, as of the Closing Date, in the accompanying unaudited condensed consolidated balance sheets. As discussed above, the note receivable accrues interest at 5 % per annum and matures on February 3, 2030. Subject to provisions discussed related to the Unwind Option, the note receivable may be forgiven. The Company determined the fair value of the note receivable based on the perceived credit risk of the counterparty and time value of money, going forward the note receivable will be evaluated for risk of credit loss and will not be remeasured. Results of Discontinued Operations The following table presents the results of discontinued operations for the three months ended March 31, 2026 and 2025 (in thousands): Three Months Ending March 31, 2026 Three Months Ending March 31, 2025 Revenues $ 253 $ 484 Cost of revenues 56 149 Research and development 126 590 Sales and marketing 174 746 General and administrative 1,077 585 Impairment of goodwill and intangible assets - 531 Other expense, net - 72 Net loss, before tax ( 1,180 ) ( 2,189 ) Income tax provision ( 1,241 ) - Loss from discontinued operations, before disposition $ ( 2,421 ) $ ( 2,189 ) Loss on sale of discontinued component ( 831 ) - Net loss from discontinued operations $ ( 3,252 ) $ ( 2,189 ) Net Loss Per Share, Basic and Diluted: Discontinued Operations Before Disposition $ ( 0.03 ) $ ( 0.64 ) Loss on Sale of Discontinued Component $ ( 0.06 ) $ - Total Discontinued Operations $ ( 0.09 ) $ ( 0.64 ) Weighted Average Shares Outstanding, Basic and Diluted 35,284,100 3,384,736 25 XTI AEROSPACE, INC. AND SUBSIDIARIES NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS Loss on Disposal The estimated fair value of the purchase price to be received from the Purchaser as of the Closing Date was $ 4.2 million resulting in a loss on disposal of approximately $ 0.8 million during the three months ended March 31, 2026, which is included in discontinued operations. Additionally, as a result of the sale, the Company expects to owe income taxes in Germany, the Company recorded a tax provision of $ 1.2 million, including the loss from discontinued operations, for the three months ended March 31, 2026. Cash Flows from Discontinued Operations The following table presents the major classes of cash flows related to discontinued operations (in thousands): Three Months Ending March 31, 2026 Three Months Ending March 31, 2025 Net cash used in operating activities $ ( 144 ) $ ( 1,149 ) Net cash used in investing activities ( 695 ) - Net cash provided by (used in) financing activities - - Total $ ( 839 ) $ ( 1,149 ) Note 17 - Subsequent Events The Company has evaluated events through the date of this Quarterly Report on Form 10-Q, and determined that there have been no events that have occurred that would require adjustments to or disclosures in the consolidated financial statements. 26