XTI Aerospace, Inc. 10-Q

ITEM 2: MANAGEMENT’S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS You should read the following discussion of our financial condition and results of operations in conjunction with the condensed consolidated financial statements and the related notes included elsewhere in this Form 10-Q and with the audited consolidated financial statements included in our Annual Report on Form 10-K for the year ended December 31, 2025, as filed with the SEC. In addition to our historical condensed consolidated financial information, the following discussion contains forward-looking statements that reflect our plans, estimates, and beliefs. Our actual results could differ materially from those discussed in the forward-looking statements. Factors that could cause or contribute to these differences include those discussed below and elsewhere in this Form 10-Q, particularly in Part II, Item 1A, “Risk Factors.” OVERVIEW OF BUSINESS XTI Aerospace, Inc. is a U.S.-based aerospace company focused on unmanned aircraft systems and related services. The Company provides UAS solutions through a combination of product distribution and service offerings, including the sale and support of UAS platforms and related equipment, as well as operator training, program enablement, repair and maintenance, and other fleet lifecycle support for enterprise, public safety, government, and defense-related customers. Recently, the Company also started to design and develop unmanned platforms for defense and commercial applications. The Company currently operates through two reportable segments: ● Unmanned Aircraft Systems (“UAS”) , which consists of its revenue-generating UAS solutions and services platform operated through XTI Drones Holdings, LLC, and ● Autonomous Defense Systems (“ADS”), which reflects a strategic shift away from commercial aviation and toward building a core capability around the design, development, and production of unmanned platforms, with an emphasis on serving defense customers and supporting domestic procurement initiatives aligned with U.S. national security priorities RECENT DEVELOPMENTS Recent Strategic Transactions and Operating Profile During the three months ended March 31, 2026, the Company completed the sale of its Inpixon Business, refer to Note 16—Discontinued Operations to the unaudited condensed consolidated financial statements in Part I, Item 1 of this Quarterly Report. As a result, the Company’s financial statements reflect only continuing operations related to its UAS and ADS segments. Following the November 2025 acquisition of Drone Nerds, the Company’s UAS platform represents its primary revenue-generating business. The results of operations for the three months ended March 31, 2026 reflect a full quarter of Drone Nerds activity, whereas the prior-year period does not, which impacts comparability between periods. As a result of these transactions, our current operating profile differs materially from prior periods, and historical results may not be fully comparable. Accordingly, in addition to reviewing our GAAP results, management evaluates performance and allocates capital with an emphasis on: ● Revenue growth and channel mix within the UAS platform. ● Gross margin expansion through service attachment and lifecycle support. ● Working capital efficiency and liquidity management. ● Disciplined allocation of capital between UAS scaling initiatives and ADS development programs. 27 UAS Solutions Platform Through Drone Nerds, we operate an established enterprise-focused UAS solutions platform in the United States. Our operating model is designed to provide end-to-end UAS lifecycle capabilities across hardware distribution, operator training, compliance management support, repair and maintenance, fleet sustainment, and related support services. We operate an OEM-agnostic, multi-vendor ecosystem supporting more than 50 hardware and software manufacturers. This positioning enables us to serve enterprise and public sector customers navigating evolving regulatory requirements, supply chain considerations, and procurement restrictions. Our strategy is aligned with our broader Vertical Economy™ vision, which encompasses vertical lift technologies and supporting infrastructure across unmanned and manned aircraft platforms. While our long-term vision includes broader participation across the vertical lift ecosystem, our near-term operating focus is centered on scaling our UAS platform with disciplined capital allocation and margin optimization. We believe the UAS market is undergoing structural evolution driven by: ● Increasing enterprise adoption of drones for inspection, safety, and operational efficiency ● Regulatory developments affecting fleet eligibility and operational approvals ● Growing emphasis on secure and compliant procurement in government and defense channels ● Customer demand for integrated lifecycle solutions rather than standalone hardware transactions Our integrated model is designed to address these trends by positioning us as a long-term solutions partner rather than a transactional reseller. Autonomous Defense Systems (ADS), formerly XTI Aircraft — Strategic Context and Organizational Evolution The ADS division 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 redirected resources toward unmanned systems opportunities that it believes may offer nearer-term commercial applications. In response, management conducted a structured search for new divisional leadership with a mandate to reorient the business around nearer-term, capital-efficient opportunities. That search concluded with the appointment of Steve Zohrabian, whose background in advanced manufacturing and defense product development is relevant to the operational and contractual realities of serving government and defense customers. The acquisition of Drone Nerds in November 2025 served as the second anchor point around which the division’s updated strategy was set. Together, Zohrabian’s appointment and the Drone Nerds acquisition defined the strategic perimeter of the division and marked the beginning of a transformation in staffing, focus, and organizational priorities — a transformation substantially completed in Q1 2026. The ADS team is now building a core capability around the design, development, and production of unmanned platforms, with an emphasis on serving defense customers and supporting domestic procurement initiatives aligned with U.S. national security priorities. The Company believes the unmanned systems market — particularly in defense and government procurement — presents a more actionable near-term revenue opportunity than continued TriFan 600 development at this stage of the Company’s evolution. Advanced Technology and Manufacturing (ATM) In addition to its two reportable segments, the Company is in the early stages of developing a domestic manufacturing and technology division (referred to as the ATM division) focused on building U.S.-based production capabilities for unmanned systems, components, and related technologies. The ATM division does not currently meet the criteria for a reportable segment under ASC 280 as it is in a pre-operational stage and has no discrete financial information reviewed by the CODM for purposes of resource allocation . The division’s mandate is to develop a domestically sourced supply chain designed to support compliance with applicable federal procurement and sourcing requirements, including Section 848 of the NDAA for unmanned aerial systems, addressing the growing demand from federal agencies, defense contractors, and enterprise customers for platforms and components that meet applicable government procurement requirements. 28 The ATM division is expected to pursue growth through manufacturing partnerships, co-development arrangements, targeted acquisitions of domestic production capacity, and strategic investments in U.S.-based technology and component suppliers. The Company believes that demand for compliant, domestically manufactured unmanned systems has accelerated as regulatory and procurement requirements around foreign-manufactured components have tightened, and that this environment may create an opportunity to develop manufacturing relationships and capabilities that support government and enterprise demand. The ATM division has not yet generated any revenues, and its activities are at an early stage of development. The division’s ability to generate revenues will depend on its success in establishing manufacturing partnerships on acceptable terms, securing NDAA-compliant production capacity, and converting that capacity into customer relationships and contract awards, each of which is subject to significant uncertainty. There can be no assurance that manufacturing partnerships will be established on acceptable terms or that the division will generate revenues within the timeframe the Company anticipates, or at all. TriFan 600 VTOL Program As of early 2026, the TriFan 600 program has been paused. Whether and when development may resume will depend on a number of factors, including capital availability, market conditions for advanced air mobility, and the Company’s overall strategic priorities at the relevant time. While the TriFan 600 remains a strategic long-term asset within our broader vertical lift vision, our current revenue base and operating execution are centered on our UAS solutions platform. Capital Allocation and Liquidity Strategy During 2025, we completed multiple public offerings and a Series 10 Convertible Preferred Stock financing, which generated an aggregate of approximately $85.5 million in net proceeds, strengthening our liquidity and supporting our strategic initiatives, including the Drone Nerds acquisition and working capital stabilization. During the three months ended March 31, 2026, we received approximately $7.4 million in net proceeds from the exercise of warrants and entered into a $20.0 million asset-based revolving credit facility, subject to a borrowing base. The Company ended the most recent quarter with cash on hand of $15.2 million and $16.7 million as of March 31, 2026 and December 31, 2025. Our operating priorities are focused on: ● Strengthening and scaling our UAS platform. ● Improving margin profile and recurring revenue mix. ● Managing operating expenses and cash burn. ● Preserving long-term vertical lift optionality. Our near-term objective is to move toward improved operating cash flow sustainability within the UAS segment while maintaining disciplined investment in our other programs, which may require additional capital over time. Growth Strategy and Potential Acquisitions As part of our growth strategy, we continue to evaluate potential acquisitions and strategic transactions that we believe could complement our UAS solutions platform, expand our capabilities in unmanned systems and domestic manufacturing, or strengthen our position with enterprise, government, and defense customers. We may from time to time engage in preliminary discussions or negotiations with potential acquisition targets or their representatives, conduct due diligence, and explore various transaction structures. There can be no assurance that any such discussions will result in a definitive agreement or a completed transaction. We expect to fund potential acquisitions through a combination of available cash on hand, debt financing (which may include borrowings under our existing or new credit facilities, term loans or other debt instruments) and the issuance of our common stock or other equity or equity-linked securities, including equity interests in our subsidiaries. The specific terms and financing structure of any potential acquisition would depend on the size, nature, and strategic fit of the target, as well as prevailing market conditions at the time of any such transaction. Any acquisition financed in whole or in part with equity securities could result in dilution to our existing stockholders. We may incur costs related to potential acquisitions, including legal, financial advisory, accounting, and due diligence expenses, regardless of whether any such transaction is ultimately consummated. Such costs could be material in the periods in which they are incurred. 29 CRITICAL ACCOUNTING POLICIES AND ESTIMATES Our condensed consolidated financial statements are prepared in accordance with U.S. generally accepted accounting principles (“GAAP”). In connection with the preparation of our consolidated financial statements, we are required to make assumptions and estimates about future events, and apply judgments that affect the reported amounts of assets, liabilities, revenue, expenses and the related disclosures. We base our assumptions, estimates and judgments on historical experience, current trends and other factors that management believes to be relevant at the time our consolidated financial statements are prepared. On a regular basis, we review the accounting policies, assumptions, estimates and judgments to ensure that our consolidated financial statements are presented fairly and in accordance with GAAP. However, because future events and their effects cannot be determined with certainty, actual results could differ from our assumptions and estimates, and such differences could be material. The significant accounting policies of the Company are described in Item 7, “Management’s Discussion and Analysis of Financial Condition and Results of Operations,” section of the Company’s annual report on Form 10-K for the year ended December 31, 2025. There have been no significant changes to the Company’s critical accounting policies and estimates. RESULTS OF OPERATIONS Overview and Comparability Considerations The Company’s results of operations for the three months ended March 31, 2026 reflect a full quarter of operations from its UAS platform following the acquisition of Drone Nerds in November 2025, as well as the absence of the Inpixon Business following its disposition in February 2026. The results of the Inpixon Business have been presented as discontinued operations for all periods presented. As a result, the Company’s results from continuing operations for the three months ended March 31, 2025 do not reflect the current scale of the Company’s UAS operations, and period-to-period comparisons may not be indicative of future performance. Key Drivers of Operating Results The Company’s operating results are primarily driven by the performance of its UAS platform, including revenue growth, product and channel mix, service attachment rates, and inventory availability. Gross margins are influenced by product mix, pricing, vendor costs, and the relative contribution of higher-margin service offerings. The Company continues to focus on expanding service-based revenue and improving margin consistency. Operating expenses reflect investments in scaling the UAS platform, as well as ongoing development costs associated with the ADS program. General and administrative expenses also include public company costs and stock-based compensation, which may vary period to period. Other income (expense) may be impacted by changes in the fair value of certain financial instruments, interest expense, and other non-operating items, which can introduce variability that is not directly related to core operating performance. Three Months Ended March 31, 2026 compared to the Three Months Ended March 31, 2025 The following table sets forth selected consolidated financial data and as a percentage of period-over-period change: Three Months Ended March 31, 2026 2025 $ % (in thousands, except percentages) Amount Amount Change Change* Revenues $ 27,696 $ - $ 27,696 ** % Cost of revenues 22,550 - 22,550 ** % Gross profit 5,146 - 5,146 ** % Operating expenses 15,536 8,203 7,333 89 % Loss from operations (10,390 ) (8,203 ) (2,187 ) 27 % Other expense, net (21,356 ) (2,495 ) (18,861 ) 756 % Provision for income taxes - 15 (15 ) -100 % Net loss from continuing operations $ (31,746 ) $ (10,683 ) $ (21,063 ) 197 % ** Comparisons between positive and negative numbers and with a zero are not meaningful. 30 Revenues Revenues for the three months ended March 31, 2026 were $27.7 million, reflecting revenue generated by our UAS solutions platform following the acquisition of Drone Nerds in November 2025. There were no revenues for the three months ended March 31, 2025. Cost of Revenues and Gross Profit Cost of revenues for the three months ended March 31, 2026 were $22.6 million, resulting in gross profit of $5.1 million and a gross margin of approximately 19%. The gross margin reflects the product mix and operating model of the UAS distribution and services business, which includes hardware sales, accessories, and related support services. There were no revenues or cost of revenues for the three months ended March 31, 2025. Future gross margin performance will be influenced by product mix, service attachment rates, pricing discipline, vendor cost dynamics, and channel mix. Operating Expenses Operating expenses for the three months ended March 31, 2026 were $15.5 million, an increase of $7.3 million, or 89%, compared to $8.2 million for the comparable period ended March 31, 2025. This increase was due primarily to increased personnel-related expenses, including stock-based compensation, and operating expenses incurred at the Drone Nerds business which was acquired in the fourth quarter of 2025 and therefore has no activity reflected in the three months ended March 31, 2025. Other Expense, net Other expense, net for the three months ended March 31, 2026 was $21.4 million compared to $2.5 million for the comparable period in the prior year. The expense of $21.4 million for the three months ended March 31, 2026 was primarily attributable to the change in fair value of the warrant liability. The expense of $2.5 million for the three months ended March 31, 2025 was primarily attributable to (i) $0.4 million loss on extinguishment of debt due to the full repayment of the Streeterville promissory notes before the maturity date, and (ii) $2.0 million of financing costs incurred relating to the issuance of warrants in connection with the March Offering. Provision for Income Taxes The provision for income tax for the three months ended March 31, 2026 and 2025 was immaterial. As the Company has a history of recognizing a net taxable loss, the Company records a valuation allowance against substantially all deferred tax assets. Segment Results of Operations Beginning in early 2026, the Company operates through two reportable segments: UAS and ADS. The UAS segment reflects the operations of Drone Nerds beginning on November 10, 2025, while the ADS segment is now building a core capability around the design, development, and production of unmanned platforms, with an emphasis on serving defense customers and supporting domestic procurement initiatives aligned with U.S. national security priorities. 31 UAS Segment For the three months ended March 31, 2026, the UAS segment generated revenue of approximately $27.7 million and gross profit of approximately $5.1 million. Operating expenses for the UAS segment consisted primarily of sales and marketing expenses associated with distribution activities and general and administrative expenses required to support the operations of Drone Nerds following the acquisition. ADS Segment For the three months ended March 31, 2026, the ADS segment did not generate revenue. Operating expenses for this segment consisted primarily of research and development costs related to unmanned platforms, with an emphasis on serving defense customers and supporting domestic procurement initiatives aligned with U.S. national security priorities, as well as general corporate expenses supporting ongoing efforts. Discontinued Operations During December 2025, the Company committed to a plan to dispose of its Inpixon Business and initiated an activity process to identify a buyer. The Company completed the sale of its Inpixon Business on February 3, 2026 for total consideration of approximately $5.5 million. The Inpixon Business is presented as discontinued operations for all periods presented. Loss from discontinued operations was $3.3 million and $2.2 million for the three months ended March 31, 2026 and 2025, respectively. Loss from discontinued operations for the three months ended March 31, 2026 includes a loss of $0.8 million recognized upon closing of the sale, and $1.2 million in income tax expense related to estimated taxes due in foreign jurisdictions as a result of the sale. The disposition of the Inpixon Business represents a strategic shift that allows the Company to focus its resources on its core UAS and aerospace development operations. Unaudited Pro Forma Financial Information (Supplemental) The Company completed its acquisition of a controlling interest in Drone Nerds on November 10, 2025, as such the consolidated results for the three months ended March 31, 2025 do not include the results of operations. The following unaudited pro forma combined financials presents the combined results of operations of the Company and the acquired business as if the acquisition had occurred on January 1, 2025, the beginning of the earliest period presented. The pro forma financial information has been prepared for comparative purposes only and does not necessarily reflect the results of operations that would have occurred had the acquisition been completed on that date, nor is it indicative of future operating results of operations. The pro forma results reflect adjustments that are directly attributable to the acquisition and are factually supportable, including: ● Incremental amortization expense related to identifiable intangible assets acquired; ● Interest expense associated with acquisition-related indebtedness; ● Conforming accounting policy adjustments, where applicable. The unaudited pro forma financial information does not include any anticipated cost savings, operating synergies, or other integration effects of the acquisition. Pro Forma Non-GAAP Measure We also present Pro Forma EBITDA, Pro Forma Adjusted EBITDA and Pro Forma Adjusted EBITDA Margin, all non-GAAP measures. Management defines Pro Forma EBITDA as pro forma net loss before interest, income taxes, depreciation and amortization. Pro Forma Adjusted EBITDA is defined as Pro Forma EBITDA further adjusted for certain items including, (i) non-cash stock based compensation expense; (ii) severance and restructuring charges; (iii) changes in fair value of warrant liabilities; and (iv) selected charges that are unusual or non-recurring. Pro Forma Adjusted EBITDA Margin is defined as Pro Form Adjusted EBITDA as a percentage of pro forma revenue. 32 The Company believes that EBITDA and Adjusted EBITDA financial measures assist our board of directors, management, investors, and lenders in comparing our operating performance and establishing operational goals on a consistent basis across periods by removing the effects of our capital structure and other items that impact the comparability of financial results from period to period. We present EBITDA and Adjusted EBITDA because we believe they provide useful information regarding the factors and trends affecting our business in addition to measures calculated under GAAP. These non-GAAP financial measures may not be computed in the same manner as similarly titled measures used by other companies. The calculation of Pro Forma EBITDA, Pro Forma Adjusted EBITDA, and Pro Forma Adjusted EBITDA Margin are included in the table below. The following unaudited pro forma combined financial information presents the combined results of operations of the Company and Drone Nerds as if the acquisition had occurred on January 1, 2025: Three Months Ended March 31, 2026 2025 $ % (in thousands, except percentages) Amount Amount Change Change* Revenues $ 27,696 $ 30,587 $ (2,891 ) (9 )% Cost of revenues 22,550 23,359 (809 ) (3 )% Gross profit 5,146 7,228 (2,082 ) (29 )% Operating expenses 15,536 11,581 3,955 34 % Loss from operations (10,390 ) (4,353 ) (6,037 ) 139 % Other expense, net (21,356 ) (2,927 ) (18,429 ) 630 % Provision for income taxes - 15 (15 ) (100 )% Pro forma net loss from continuing operations $ (31,746 ) $ (7,265 ) $ (24,481 ) 337 % Reconciliation of Pro Forma EBITDA and Pro Forma Adjusted EBITDA Pro form net loss from continuing operations (31,746 ) (7,265 ) Interest expense, net 154 663 Income tax benefit - (15 ) Depreciation and amortization 279 257 Pro Forma EBITDA $ (31,313 ) $ (6,360 ) (24,953 ) 392 % Change in fair value of warrant liability 21,447 (503 ) Severance and restructuring charges 263 - Stock-based compensation expense 4,675 412 Selected charges that are unusual or non-recurring - 2,781 (1) Pro Forma Adjusted EBITDA $ (4,928 ) $ (3,670 ) $ (1,258 ) 34 % Pro forma Margins: Gross margin 19 % 24 % Pro Forma Adjusted EBITDA Margin (18 )% (12 )% (1) Includes warrant issue expense, change in fair value of investment, and loss on extinguishment of debt Interpretation of Pro Forma Results For the three months ended March 31, 2026, revenue was $27.7 million, down 9% from $30.6 million in the same period of 2025. The decrease was mainly due to timing differences in sales between the two periods. In late 2024, supply constraints delayed some product deliveries, causing sales that would normally have occurred in 2024 to shift into the first quarter of 2025, making that period unusually strong. In contrast, demand increased in late 2025 ahead of expected FCC regulations on foreign-made drones, which pulled some sales forward from the first quarter of 2026 into 2025, making the first quarter of 2026 comparatively weaker. 33 Gross profit for the three months ended March 31, 2026 was $5.1 million, or 19% of revenue, compared to $7.2 million, or 24% of revenue, in the same period of 2025. The decline was primarily due to unusually strong margins in the first quarter of 2025, when limited product availability from earlier supply constraints allowed the Company to sell inventory at higher margins and focus on higher-margin sales as products became available. Operating expenses for the three months ended March 31, 2026 were $15.5 million, compared to pro forma operating expenses of $11.6 million for the three months ended March 31, 2025. The increase reflects continued investment in personnel and public company costs. Operating expenses primarily consist of stock compensation, personnel expenses, professional fees, and public company costs. The Company recognized a loss from continuing operations of $31.7 million for the three months ended March 31, 2026, compared to a pro forma loss from continuing operations of $7.3 million for the three months ended March 31, 2025. Loss from continuing operations includes a $21.4 million loss on the remeasurement of warrant liabilities and stock based compensation expense of $4.8 million for the three months ended March 31, 2026, compared to a gain on the remeasurement of warrant liabilities of $0.5 million and pro forma stock based compensation expense of $0.4 million for the three months ended March 31, 2025. Pro Forma EBITDA was ($31.3 million) and ($6.4 million) for the three months ended March 31, 2026 and 2025, respectively, and Pro Forma Adjusted EBITDA was ($4.9 million) and ($3.7 million) for the three months ended March 31, 2026 and 2025, respectively. Pro Forma Adjusted EBITDA Margin for the same periods was (18%) and (12%), respectively. The change in these measures is a result of the above-mentioned factors. LIQUIDITY AND CAPITAL RESOURCES Overview As of March 31, 2026 and December 31, 2025, the Company had cash and cash equivalents of approximately $15.2 million and $16.7 million, respectively, and working capital (deficit) of approximately ($40.6 million) and $4.2 million, respectively. Working capital as of March 31, 2026 and December 31, 2025, includes derivative warrant liabilities of approximately $64.9 million and $22.6 million, respectively. These instruments are non-cash financial liabilities that are required to be measured at fair value under GAAP and do not represent contractual cash obligations. Excluding these derivative warrant liabilities, working capital would have been approximately $24.3 million and $26.8 million as of March 31, 2026 and December 31, 2025, respectively. Absent changes in warrant liabilities, there were no material changes to current assets or current liabilities as of March 31, 2026 compared to December 31, 2025. The Company’s liquidity is primarily supported by cash on hand, operating cash flows from its UAS platform, and availability under its asset-based revolving credit facility. 34 Recent Developments During the three months ended March 31, 2026: ● The Company received approximately $7.4 million in net proceeds from the exercise of warrants ● The Company completed the disposition of the Inpixon Business in February 2026 ● The Company entered into a $20.0 million asset-based revolving credit facility, subject to a borrowing base Credit Facility In February 2026, the Company entered into a secured asset-based revolving credit facility providing for borrowings of up to $20.0 million, subject to a borrowing base of eligible accounts receivable and inventory. The facility matures on February 11, 2029 and is intended to support working capital and general corporate purposes. As of March 31, 2026, the borrowing base was calculated to be $12.7 million, and the Company had $4.6 million outstanding, with approximately $8.1 million of remaining availability. 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. Liquidity Outlook The Company’s liquidity strategy is focused on maintaining sufficient operating capital to support its enterprise drone distribution business while continuing to develop unmanned platforms for defense and commercial applications. Near-term liquidity is expected to be supported by cash on hand, operating cash flows from the Drone Nerds business, and availability under the Company’s asset-based revolving credit facility. The Company does not currently expect to require additional capital to support the ordinary-course operating needs of the Drone Nerds business. However, the Company may seek additional capital in the future to support strategic acquisitions and the development of its advanced systems and domestic manufacturing initiatives. Management believes that the Company’s existing cash balances, expected operating cash flows, and availability under its credit facility will be sufficient to meet its obligations for at least the next twelve months from the date of issuance of these financial statements. Cash Requirements Contractual Obligations and Commitments The Company’s contractual obligations consist primarily of operating lease liabilities, short-term debt and acquisition-related promissory notes, and vendor commitments incurred in the ordinary course of business. As of March 31, 2026, total operating lease liabilities were approximately $1.7 million, of which approximately $0.7 million is expected to be paid in the next twelve months. As of March 31, 2026, the Company had acquisition-related promissory note obligations of $5.9 million, representing scheduled principal payments due within one year. As of March 31, 2026, the Company had $4.6 million drawn on its credit facility, which matures on February 11, 2029. The Company also maintains customary vendor purchase commitments associated with inventory procurement and operating agreements within its Drone Nerds distribution business. These commitments are generally short-term in nature and consistent with normal operating requirements. 35 Customer Deposits As of March 31, 2026, customer deposits totaled approximately $2.5 million. Customer deposits consist of (i) refundable and conditional deposits received in connection with aircraft pre-orders and (ii) advance payments received in the ordinary course of business from customers of the Drone Nerds distribution operations. Aircraft-related deposits are generally refundable until a definitive purchase agreement is executed. If a significant number of customers request refunds, it could adversely impact liquidity. Deposits received in the Drone Nerds business are typically short-term in nature and relate to standard commercial sales arrangements, including advance payments for inventory orders. These deposits are recognized as revenue upon transfer of control of the related goods. Risks and Uncertainties As of March 31, 2026, the Company’s liquidity position reflects cash on hand, operating cash flows from its UAS platform, and availability under its asset-based revolving credit facility. While the Company expects the Drone Nerds operations to contribute positive operating cash flows, its results remain subject to variability in sales volumes, gross margins, inventory turnover, and broader market conditions affecting demand in the enterprise and commercial drone markets, as well as risks associated with the integration of acquired operations. As of March 31, 2026, the Company had approximately 21 million outstanding warrants with an exercise price ranging from $1.36 to $2.19 per share. If fully exercised for cash, these warrants would provide aggregate gross proceeds of approximately $41.9 million; however, exercise is at the discretion of the holders and dependent on market conditions. These amounts exclude prefunded warrants and warrants that management does not expect to be redeemed due to the exercise price. During the three months ended March 31, 2026, certain warrant holders exercised warrants, resulting in net proceeds of approximately $7.4 million. The timing and extent of any future warrant exercises are not within the Company’s control. The Company has incurred historical operating losses and negative cash flows from operations and expects to continue to incur losses as it invests in the growth of its UAS and ADS platform. The Company has currently paused development activities related to the TriFan 600 aircraft program. Any future resumption of development activities related to the TriFan 600 program would be expected to require additional capital. Management may continue to pursue a range of potential funding alternatives, including equity or debt financing, strategic partnerships, joint ventures, government incentives and other potential sources of capital in connection with any such future resumption. Historical Cash Flows The Company’s net cash flows used in operating, investing and financing activities for the three months ended March 31, 2026 and 2025 and certain balances as of the end of those periods are as follows (in thousands): For the Three Months Ended March 31, 2026 2025 Net cash used in operating activities $ (10,454 ) $ (15,242 ) Net cash (used in) provided by investing activities (825 ) (45 ) Net cash provided by financing activities 9,512 19,173 Effect of foreign exchange rate changes on cash 33 17 Net increase in cash and cash equivalents $ (1,734 ) $ 3,903 As of March 31, 2026 As of December 31, 2025 Cash and cash equivalents $ 15,185 $ 16,696 Working capital (deficit) $ (40,614 ) $ 4,220 36 Operating Activities for the three months ended March 31, 2026 Net cash used in operating activities was approximately $10.5 million for the three months ended March 31, 2026. Included in operating cash flows for the three months ended March 31, 2026 is approximately $0.1 million of cash used in operating activities related to discontinued operations (Inpixon Business). Excluding discontinued operations, net cash used in operating activities from continuing operations was approximately $10.3 million. Additional information regarding cash flows from discontinued operations is included in Note 16 – Discontinued Operations. Cash used in operating activities during three months ended March 31, 2026 was primarily driven by the Company’s consolidated net loss of $35.0 million, adjustments for non-cash items of approximately $27.3 million and changes in working capital resulting in a net use of cash of approximately $2.8 million. The largest cash operating expenses include costs of goods sold and personnel related costs. The changes in working capital are primarily driven by increases in inventory and prepaid and other current assets, as well as a reduction in accounts payable, partially offset by a decrease in accounts receivable and increase in accrued liabilities. The quarter’s working capital activity reflects the integration of the Drone Nerds acquisition in the fourth quarter. Management expects that the acquisition of Drone Nerds, a historically EBITDA-profitable business, will contribute positive operating cash flows going forward. However, operating cash flows will continue to be influenced by sales volumes, gross margins, inventory turnover, discretionary operating expenditures, and the pace of investment in the development of unmanned platforms for defense and commercial applications. Operating Activities for the three months ended March 31, 2025 Net cash used in operating activities for the three months ended March 31, 2025 was approximately $15.2 million, primarily driven by the Company’s net loss and changes in working capital. Included in operating cash flows for the three months ended March 31, 2025 is approximately $1.1 million of cash used in operating activities related to discontinued operations. Excluding discontinued operations, net cash used in operating activities from continuing operations was approximately $14.1 million. Cash used in operating activities during three months ended March 31, 2025 was primarily driven by the Company’s consolidated net loss of $12.9 million, adjustments for non-cash items, of approximately $3.2 million and changes in working capital resulting in a net use of cash of approximately $5.6 million. The largest cash operating expenses for the three months ended March 31, 2025 were professional services, personnel related costs, and legal fees. The increase in working capital was primarily driven by a decrease in accrued liabilities, related to transaction and employee bonuses and consulting fees, and accounts payable, as well as increases in prepaid and other current assets. Cash Flows from Investing Activities as of March 31, 2026 and 2025 Net cash flows used in investing activities during the three months ended March 31, 2026 was approximately $825,000, which included $694,000 of cash used in investing activity from discontinued operations. Net cash flows used in investing activities during the three months ended March 31, 2025 was approximately $45,000. Cash Flows from Financing Activities as of March 31, 2026 and 2025 Net cash flows from financing activities during the three months ended March 31, 2026 was approximately $9.5 million. During the three months ended March 31, 2026, the Company received incoming cash flows of $7.4 million from the exercise of warrants, net of commission and advisory fees, and had net borrowings on its credit facility of $4.6 million, offset by $2.0 million of principal paid on the promissory note entered into in connection with the Drone Nerds Acquisition and $0.6 million of debt issuance costs associated with the credit facility. Net cash flows from financing activities during the three months ended March 31, 2025 was approximately $19.2 million. During the three months ended March 31, 2025, the Company received incoming cash flows of $21.7 million from the sale of common stock and warrants via two public offerings, as well as $1.7 million from the now expired ATM. During the three months ended March 31, 2025, the Company paid $2.7 million to fully settle two outstanding promissory note obligations and $1.4 million to redeem the remaining outstanding Series 9 Preferred Stock. 37 Off-Balance Sheet Arrangements We do not have any off-balance sheet guarantees, interest rate swap transactions or foreign currency contracts. We do not engage in trading activities involving non-exchange traded contracts. Recently Issued Accounting Standards For a discussion of recently issued accounting pronouncements, please see Note 3 to our condensed consolidated financial statements, which are included in Part I, Item 1 of this report. Item 3. Quantitative and Qualitative Disclosures About Market Risk Not applicable.