XTI Aerospace, Inc.: Form 10-Q for the period ended Jun 30, 2026

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, and government-related customers.

RECENT DEVELOPMENTS

Recent Leadership Changes

On August 17, 2026, Scott Pomeroy resigned effective immediately as the Chairman and Chief Executive Officer and director of the Company and his resignation was accepted by the Company’s board of directors. On August 17, 2026, the Company’s board of directors elected current director Jonathan Ornstein as the Interim Chairman of the Board. Additionally, the Company’s board of directors appointed Jeremy Schneiderman as Interim Chief Executive Officer.

Effective October 14, 2026, the Company appointed Dr. Allan Evans as a Class I director, for a term expiring at the Company’s 2027 annual meeting of stockholders, to fill an existing vacancy on the Board. The Board also appointed Dr. Evans to serve as Chairman of the Board. In connection with Dr. Evans’ appointment as Chairman, the Board designated Jonathan G. Ornstein, who previously served as Interim Chairman of the Board, as Vice Chairman of the Board.

In July 2026, a committee of independent directors of our Board of Directors, represented by independent counsel, initiated an internal review of matters relating to our former Chief Executive Officer and related corporate governance matters. The committee completed its review in October 2026, and the review did not identify any misstatement of our financial statements.

Recent Strategic Transactions and Operating Profile

During the six months ended June 30, 2026, the Company continued executing its strategy to build a more focused and financially disciplined business, reducing its cost structure and concentrating resources on its commercial and enterprise drone solutions platform. The Company also ceased investment in its vertical take-off and landing aircraft development activities and took steps to wind down its Advanced Defense Systems (“ADS”) division as it shifts capital and management attention towards its revenue-generating UAS business. The Company launched its UAS platform following the November 2025 acquisition of Drone Nerds, and since then the UAS business has served as the Company’s primary source of revenue.

During the first quarter of 2026, the Company completed the sale of its Inpixon Business, refer to Note 17—Discontinued Operations to the unaudited condensed consolidated financial statements in Part I, Item 1 of this Quarterly Report. During the second quarter of 2026, the Company reduced the headcount of and ceased investment in the ADS business, which included the legacy TriFan 600 and advanced defense systems development programs. Management did not foresee near term revenue-generating opportunities from the ADS business and concluded that a concentration of resources on the UAS platform would create a better foundation for success.

As a result of this evolution, 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.

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.

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.

Advanced Technology and Manufacturing (ATM)

In addition to its UAS business, the Company is in the early stages of developing a domestic manufacturing and technology division (referred to as the ATM division) focused on facilitating partnerships with domestic manufacturers to increase access to NDAA-compliant products. The division’s goal is to develop and expand a domestically sourced supply chain designed to support compliance with applicable federal procurement and sourcing requirements, including Section 848 of the NDAA for unmanned aerial systems, addressing the growing demand from federal agencies, defense contractors, and enterprise customers for platforms and components that meet applicable government procurement requirements. The ATM division 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 ATM division has not yet generated any revenues, and 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.

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 or expand our UAS solutions platform. 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 debt financing (which may include borrowings under our existing or new credit facilities, term loans or other debt instruments), seller financing, 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.

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 condensed 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 condensed consolidated financial statements are prepared. On a regular basis, we review the accounting policies, assumptions, estimates and judgments to ensure that our condensed 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 and six months ended June 30, 2026 reflect the full period of operations from its UAS platform following the acquisition of Drone Nerds in November 2025, the ADS division, as well as the absence of the Inpixon Business following its disposition in February 2026. As a result, the Company’s results from continuing operations for the three and six months ended June 30, 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. The results of the Inpixon Business have been presented as discontinued operations for all periods presented.

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 development costs associated with the now discontinued 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 June 30, 2026 compared to the Three Months Ended June 30, 2025

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

(in thousands, except percentages)

* Comparisons between positive and negative numbers and with a zero are not meaningful.

Revenues

Revenues for the three months ended June 30, 2026 were $32.4 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 June 30, 2025.

Cost of Revenues and Gross Profit

Cost of revenues for the three months ended June 30, 2026 were $26.8 million, resulting in gross profit of $5.6 million and a gross margin of approximately 17%. 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 June 30, 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 June 30, 2026 were $14.7 million, an increase of $8.9 million, or 154%, compared to $5.8 million for the comparable period ended June 30, 2025. Operating expenses for the three months ended June 30, 2026 and 2025 include $3.8 million and $0.7 million of stock-based compensation, respectively.

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 June 30, 2025. Operating expenses for the three months ended June 30, 2026 and 2025 include $1.0 million and $1.8 million, respectively, related to the ADS and Commercial Aviation operating segments which were wound down during the three months ended June 30, 2026. The Company expects future expenses related to ADS to be immaterial.

Other Income (Expense), net

The Company recognized other income, net of $8.2 million for the three months ended June 30, 2026, compared to other expense, net of $9.7 million for the three months ended June 30, 2025. Other income (expense), net is primarily comprised of the change in fair value of the warrant liability, for which the Company recorded a gain of $8.4 million for the three months ended June 30, 2026 compared to a loss of $5.9 million for the three months ended June 30, 2025. Other expense, net for the three months ended June 30, 2025 also included $3.8 million of warrant issue expense, compared to $0 in the current period.

Provision for Income Taxes

The provision for income tax for the three months ended June 30, 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.

Six Months Ended June 30, 2026 compared to the Six Months Ended June 30, 2025

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

(in thousands, except percentages)

* Comparisons between positive and negative numbers and with a zero are not meaningful.

Revenues

Revenues for the six months ended June 30, 2026 were $60.1 million, reflecting revenue generated by our UAS solutions platform following the acquisition of Drone Nerds in November 2025.

There were no revenues for the six months ended June 30, 2025.

Cost of Revenues and Gross Profit

Cost of revenues for the six months ended June 30, 2026 were $49.4 million, resulting in gross profit of $10.8 million and a gross margin of approximately 18%. 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 six months ended June 30, 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 six months ended June 30, 2026 were $30.3 million, an increase of $16.3 million, or 116%, compared to $14.0 million for the comparable period ended June 30, 2025. Operating expenses for the six months ended June 30, 2026 and 2025 include $8.4 million and $1.1 million of stock-based compensation, respectively.

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 June 30, 2025. Operating expenses for the six months ended June 30, 2026 and 2025 include $2.7 million and $3.5 million, respectively, related to the ADS and Commercial Aviation operating segments which were wound down during the three months ended June 30, 2026. The Company expects future expenses related to ADS to be immaterial.

Other Expense, net

The Company recognized other expense, net of $13.1 million for the six months ended June 30, 2026, compared to $12.2 million for the six months ended June 30, 2025. Other expense, net is primarily comprised of the change in fair value of the warrant liability, for which the Company recorded a loss of $13.0 million and $5.4 million for the six months ended June 30, 2026 and 2025, respectively. Other expense, net for the six months ended June 30, 2025 also included $5.8 million of warrant issue expense, compared to $0 in the current period.

Income Tax Benefit

The income tax benefit for the three and six months ended June 30, 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.

Discontinued Operations

During December 2025, the Company committed to a plan to dispose of its Inpixon Business and initiated a 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 $1.6 million and $5.3 million for the three months ended June 30, 2026 and 2025, respectively. Loss from discontinued operations was $4.9 million and $7.5 million for the six months ended June 30, 2026 and 2025, respectively. Loss from discontinued operations for the six months ended June 30, 2026 includes a loss on sale of discontinued component of $2.4 million 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 and six months ended June 30, 2025 do not include the results of operations. The following unaudited pro forma combined financials present 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.

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:

(in thousands, except percentages)

(1) Includes warrant issue expense, change in fair value of investment, loss on extinguishment of debt, and other adjustments that management believes are non-recurring.

Interpretation of Pro Forma Results

For the three months ended June 30, 2026, revenue was $32.4 million, a 29% increase from pro forma revenue of $25.1 million in the same period of 2025. The increase reflects management’s efforts to grow the UAS business. During the three months ended June 30, 2026, the Company saw increased sales to its wholesale customers.

Gross profit for the three months ended June 30, 2026 was $5.6 million, or 17% of revenue, compared to pro forma gross profit of $6.0 million, or 24% of revenue, in the same period of 2025. The decline was primarily due to customer mix; while the Company increased sales to wholesale customers, the gross profit margin on these sales tend to be lower than its direct sales transactions.

Operating expenses for the three months ended June 30, 2026 were $14.7 million, compared to pro forma operating expenses of $9.2 million for the three months ended June 30, 2025. The increase reflects continued investment in personnel and public company costs. Operating expenses primarily consist of stock-based compensation, personnel expenses, professional fees, and public company costs.

The Company recognized a loss from continuing operations of $0.9 million for the three months ended June 30, 2026, compared to a pro forma loss from continuing operations of $13.3 million for the three months ended June 30, 2025. Loss from continuing operations includes stock based compensation expense of $3.8 million and a gain on remeasurement of warrant liabilities of $8.4 million for the three months ended June 30, 2026, compared to stock-based compensation expense of $0.7 million and loss on remeasurement of warrant liabilities of $5.9 million for the three months ended June 30, 2025.

Pro Forma EBITDA was $(0.4) million and $(12.6) million for the three months ended June 30, 2026 and 2025, respectively, and Pro Forma Adjusted EBITDA was $(4.9) million and $(2.2) million for the three months ended June 30, 2026 and 2025. Pro Forma Adjusted EBITDA Margin for the same periods was (15)% and (9)%, respectively. The change in these measures is a result of the above-mentioned factors.

(in thousands, except percentages)

(1) Includes warrant issue expense, change in fair value of investment, loss on extinguishment of debt, and other adjustments that management believes are non-recurring.

Interpretation of Pro Forma Results

For the six months ended June 30, 2026, revenue was $60.1 million, up 8% from pro forma revenue of $55.7 million for the same period of 2025. The increase reflects management’s efforts to grow the UAS business. During the six months ended June 30, 2026 the Company recognized an increase in revenue from its wholesale customers.

Gross profit for the six months ended June 30, 2026 was $10.8 million, or 18% of revenue, compared to pro forma gross profit of $13.3 million, or 24% of revenue, in the same period of 2025. The decline was primarily due to unusually strong margins in the first half 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 six months ended June 30, 2026 were $30.3 million, compared to pro forma operating expenses of $20.8 million for the six months ended June 30, 2025. The increase reflects continued investment in personnel and public company costs. Approximately 75% of the increase was from stock-based compensation expense.

The Company recognized a loss from continuing operations of $32.6 million for the six months ended June 30, 2026, compared to a pro forma loss from continuing operations of $20.5 million for the six months ended June 30, 2025. Loss from continuing operations includes a $13.0 million loss on the remeasurement of warrant liabilities and stock based compensation expense of $8.4 million for the six months ended June 30, 2026, compared to a loss on the remeasurement of warrant liabilities of $5.4 million and pro forma stock based compensation expense of $1.1 million, as well as warrant issue expense of $5.8 million for the six months ended June 30, 2025.

Pro Forma EBITDA was $(31.7) million and $(18.9) million for the six months ended June 30, 2026 and 2025, respectively, and Pro Forma Adjusted EBITDA was $(9.8) million and $(5.9) million for the six months ended June 30, 2026 and 2025, respectively. Pro Forma Adjusted EBITDA Margin for the same periods was (16)% and (11)%, respectively. The change in these measures is a result of the above-mentioned factors.

LIQUIDITY AND CAPITAL RESOURCES

Recent Developments

During the six months ended June 30, 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
• The Company wound down the ADS division in June 2026

Overview

As of June 30, 2026 and December 31, 2025, the Company had cash and cash equivalents of approximately $7.2 million and $16.7 million, respectively, and $8.8 million drawn and $9.1 million of remaining availability on the borrowing base under its credit facility (subject to the cross-defaults described below under “Subsequent Defaults”), see Note 8—Debt for further detail on the Company’s credit facility. Additionally, as of June 30, 2026 and December 31, 2025, the Company had working capital, excluding cash, warrant liabilities, obligations under the acquisition-related promissory note and revolving credit facility, and current assets and liabilities of discontinued operations, of approximately $23.6 million and $16.1 million as of June 30, 2026 and December 31, 2025, respectively. The primary increases in working capital were due to a $3.7 million increase in inventory and a $1.4 million decrease in accounts payable and other current liabilities. Other changes include increases in accounts receivable and prepaid and other current assets, as well as a decrease in customer deposits.

Cash on hand decreased $9.5 million during the six months ended June 30, 2026, as a result of negative cash flows from operations of $21.0 million offset by cash flows from financing of $12.1 million.

The Company has a history of operating losses and negative cash flows from operations. Additionally, as of June 30, 2026, the Company’s obligations include $4.4 million of current debt maturities (See Acquisition-Related Promissory Notes under Note 8 – Debt), operating lease liabilities of approximately $1.5 million, including approximately $0.6 million that is expected to be paid in the next twelve months, and $8.8 million drawn on its credit facility, which matures on February 11, 2029.

The Company continues to focus on improving operating efficiencies in its UAS business, however, 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. The Company also expects to recognize cost savings from the wind down of the TriFan 600 and ADS development programs. Further, 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 potential acquisitions.

The Company is likely to require additional liquidity in order to meet these obligations and support ongoing operations over the next year. As a result, management has concluded that substantial doubt exists about the Company’s ability to continue as a going concern for a period of one year from the issuance date of these unaudited condensed consolidated financial statements.

Management’s plans to address these capital requirements include implementing cost optimization measures, including the wind-down of the ADS division; renegotiating vendor contract terms; restructuring the Seller Notes; seeking a waiver of the cross-defaults and relief from certain borrowing base limitations under the Credit Agreement; and pursuing additional debt or equity financing. There can be no assurance that these plans will be successfully implemented or that they will alleviate the substantial doubt about the Company’s ability to continue as a going concern.

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 June 30, 2026, the borrowing base was calculated to be $18.7 million, and the Company had $8.8 million outstanding and a letter of credit in the amount of $0.8 million, with approximately $9.1 million of remaining availability. As described under “Subsequent Defaults” below, our ability to borrow this remaining availability is subject to the lender’s discretion while the cross-defaults under the Credit Agreement continue.

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.

Subsequent Defaults

On September 30, 2026, XTI Drones Holdings did not make scheduled principal payments under the Seller Notes totaling $1.5 million, together with accrued interest, that were due on September 30, 2026, and events of default occurred under the Seller Notes on October 11, 2026, following the expiration of the ten-day grace period. On October 16, 2026, XTI Drones Holdings entered into Limited Waiver Agreements (the “Waivers”) with The Origin Group DN, Inc. and The Origin Group AZ, Inc., the holders of the Seller Notes, entities in which our Interim Chief Executive Officer has an economic interest. Under the Waivers, the Holders agreed, during a waiver period that began on September 30, 2026, not to accelerate the Seller Notes, charge default interest, charge costs of collection or exercise other remedies as a result of the missed payments, and agreed that nonpayment of the balance due at maturity on November 10, 2026 will not constitute an event of default during the waiver period. The waiver period ends on the earliest of (i) the execution of definitive documents restructuring the Seller Notes, (ii) the tenth day after either party notifies the other in writing that it is ending restructuring negotiations and (iii) December 31, 2026. If the waiver period ends without a restructuring, an event of default will be deemed to exist, and the missed installments and the remaining balance of the Seller Notes (approximately $4.5 million of principal in the aggregate), together with accrued interest, which will have accrued at the default rate of 9.25% per annum from October 10, 2026, will become due on the last day of the waiver period. The Waivers do not address the cross-defaults under the credit facility. JP Morgan has not waived the cross-defaults as of the date of this report. While the cross-defaults continue, JP Morgan may decline to make further advances, which would substantially limit our access to liquidity, and may declare the approximately $8.4 million outstanding as of October 16, 2026 immediately due and payable. We are negotiating a restructuring of the Seller Notes with the holders. In addition, on October 5, 2026, we paid $1.9 million to the former owners of Drone Nerds in respect of customs tariff refunds. As of September 30, 2026, we had cash of approximately $5.1 million, on a preliminary basis subject to completion of our quarter-end closing procedures. See Note 18 – Subsequent Events.

Cash Requirements

Contractual Obligations and Commitments

The Company’s contractual obligations consist primarily of short-term debt, the acquisition-related promissory notes, operating lease liabilities, and vendor commitments incurred in the ordinary course of business.

As of June 30, 2026, the Company had acquisition-related promissory note obligations of $4.4 million, representing scheduled principal payments due within one year, and $8.8 million drawn on its credit facility, which matures on February 11, 2029. Additionally, as of June 30, 2026, total operating lease liabilities were approximately $1.5 million, of which approximately $0.6 million is expected to be paid in the next twelve months.

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.

Customer Deposits

As of June 30, 2026, customer deposits totaled approximately $1.9 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. 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.

Potential Additional Funding Sources

As of June 30, 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 six months ended June 30, 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.

Historical Cash Flows

The Company’s net cash flows used in operating, investing and financing activities for the six months ended June 30, 2026 and 2025 and certain balances as of the end of those periods are as follows (in thousands):

(1) The Company defines Adjusted Working Capital as current assets, excluding cash and current assets of discontinued operations, minus current liabilities, excluding warrant liabilities, acquisition-related promissory note-related party, asset-based revolving line of credit, and current liabilities of discontinued operations.

Operating Activities for the six months ended June 30, 2026

Net cash used in operating activities was approximately $21.0 million for the six months ended June 30, 2026.

Included in operating cash flows for the six months ended June 30, 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 $20.9 million. Additional information regarding cash flows from discontinued operations is included in Note 17 – Discontinued Operations.

Cash used in operating activities during the six months ended June 30, 2026 was primarily driven by the Company’s consolidated net loss of $37.4 million, off-set by adjustments for non-cash items of approximately $23.2 million and changes in working capital resulting in a net use of cash of approximately $6.8 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, and decrease in customer deposits. 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, although there can be no assurance that it will do so. 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 six months ended June 30, 2025

Net cash used in operating activities for the six months ended June 30, 2025 was approximately $22.0 million, primarily driven by the Company’s net loss and changes in working capital. Included in operating cash flows for the six months ended June 30, 2025 is approximately $1.9 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 $20.1 million.

Cash used in operating activities during six months ended June 30, 2025 was primarily driven by the Company’s consolidated net loss of $33.7 million, adjustments for non-cash items of approximately $17.7 million and changes in working capital resulting in a net use of cash of approximately $5.9 million. The largest cash operating expenses for the six months ended June 30, 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.

Cash Flows from Investing Activities for the six months ended June 30, 2026 and 2025

Net cash flows used in investing activities during the six months ended June 30, 2026 was approximately $864,000, which included $694,000 of cash used in investing activity from discontinued operations.

Net cash flows used in investing activities during the six months ended June 30, 2025 was approximately $103,000.

Cash Flows from Financing Activities for the six months ended June 30, 2026 and 2025

Net cash flows from financing activities during the six months ended June 30, 2026 was approximately $12.1 million. During the six months ended June 30, 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 $8.8 million, offset by $3.5 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 six months ended June 30, 2025 was approximately $37.7 million. During the six months ended June 30, 2025, the Company received incoming cash flows of $36.4 million from the sale of common stock and warrants via two public offerings, $3.8 million from the exercise of warrants, and $1.7 million from the now expired ATM. During the six months ended June 30, 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.

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.

Disclosure Controls and Procedures

Disclosure controls are procedures that are designed with the objective of ensuring that information required to be disclosed in our reports filed under the Exchange Act, such as this Form 10-Q, is recorded, processed, summarized and reported within the time periods specified in the SEC’s rules and forms. Disclosure controls are also designed with the objective of ensuring that such information is accumulated and communicated to our management, including the Principal Executive Officer and Principal Financial Officer, as appropriate, to allow timely decisions regarding required disclosure. Internal controls are procedures which are designed with the objective of providing reasonable assurance that (1) our transactions are properly authorized, recorded and reported; and (2) our assets are safeguarded against unauthorized or improper use, to permit the preparation of our condensed consolidated financial statements in conformity with GAAP.

We conducted an evaluation, under the supervision and with the participation of our Chief Executive Officer and Chief Financial Officer, of our disclosure controls and procedures (as defined in Rule 13a-15(e) and Rule 15d-15(e) of the Exchange Act). Based upon this evaluation, our Chief Executive Officer and Chief Financial Officer concluded that our disclosure controls and procedures were effective as of June 30, 2026.

Changes in Internal Controls

There have been no changes in our internal control over financial reporting identified in connection with the evaluation required by paragraph (d) of Rule 13a-15 or 15d-15 under the Exchange Act that occurred during the quarter ended

June 30, 2026 that have materially affected, or are reasonably likely to materially affect, our internal control over financial reporting.

Limitations of the Effectiveness of Control

A control system, no matter how well conceived and operated, can provide only reasonable, not absolute, assurance that the objectives of the control system are met. Because of the inherent limitations of any control system, no evaluation of controls can provide absolute assurance that all control issues, if any, within a company have been detected.

We are subject to various risks and uncertainties that may materially harm our business, prospects, financial condition and results of operations. An investment in our common stock and other securities is speculative and involves a high degree of risk. In addition to the risk factors set forth below and the other information set forth in this Form 10-Q, you should carefully consider the risk factors disclosed in Part I, Item 1A, “Risk Factors,” in our Annual Report on Form 10-K for the year ended December 31, 2025, filed with the SEC on April 15, 2026, which report is incorporated by reference herein, all of which could materially affect our business, financial condition and future results.

If any of the events described in the following risk factors actually occurs, or if additional risks and uncertainties later materialize, that are not presently known to us or that we currently deem immaterial, then our business, prospects, results of operations and financial condition could be materially adversely affected. In that event, the trading price of our common stock could decline, and investors in our securities may lose all or part of their investment. The risks discussed below include forward-looking statements, and our actual results may differ substantially from those discussed in these forward-looking statements. Moreover, these disclosures reflect the Company’s beliefs and opinions as to factors that could materially and adversely affect the Company and its securities in the future. References to past events are provided by way of example only and are not intended to be a complete listing or a representation as to whether or not such factors have occurred in the past or their likelihood of occurring in the future.

Risks Related to Our Financial Condition, Liquidity and Capital Resources

We have a history of operating losses and negative cash flow and failure to improve our financial condition could have a material adverse effect on our business, financial condition, results of operations and liquidity.

We have a history of operating losses and may continue to generate negative cash flows from operations. We incurred net operating losses from continuing operations of $19.5 million and $14.0 million for the six months ended June 30, 2026 and 2025, respectively. As a result, we face uncertainty regarding the adequacy of our long-term liquidity and capital resources. We cannot assure you that available cash on hand and cash generated from operations will be sufficient to continue to fund our operations.

Our liquidity, including our ability to meet our ongoing operational obligations, is dependent upon, among other things, our ability to maintain adequate cash on hand and our ability to generate cash flow from operations (including, but not limited to, our ability to grow our revenues amid challenges stemming from changes in regulatory requirements for and tariffs levied on unmanned systems).

If our financial condition does not improve organically and if we are unable to obtain adequate additional financing to meet our liquidity needs or consummate other appropriate strategic alternatives, we may need to seek relief from covenants and restrictions on distributions of funds under the Credit Agreement. In the event additional financing or covenant relief is required in the future, we may be required to pay additional fees to our creditors and/or agree to additional covenants that limit our ability to engage in specified types of transactions. There can be no assurance that additional financing and/or covenant relief will be available in the future on acceptable terms, or at all. Failure to improve our financial condition and/or failure to obtain covenant relief from our creditors in the future may require us to delay, limit or curtail our operations or otherwise impede our business strategy, which may have a material adverse effect on our business, financial condition, results of operations and liquidity and our ability to continue as a going concern.

We intend to pursue additional acquisitions as part of our growth strategy, which involve significant risks and may not achieve the anticipated benefits.

As part of our growth strategy, we intend to pursue acquisitions of businesses, technologies, or assets to expand our UAS solutions platform, strengthen our capabilities in unmanned systems development, and support the buildout of our domestic manufacturing operations. We may from time to time be engaged in discussions or negotiations regarding potential acquisition opportunities. There can be no assurance that we will identify suitable acquisition candidates, negotiate acceptable terms, obtain financing on favorable terms or at all, receive any required regulatory approvals, or complete any such transaction. We may incur material costs related to potential acquisitions, including legal, financial advisory, accounting, and due diligence expenses, regardless of whether any such transaction is consummated.

We expect to fund potential acquisitions through a combination of debt financing, which may include borrowings under our existing asset-based revolving credit facility or new credit facilities, seller financing, and the issuance of our common stock or other equity or equity-linked securities, including equity interests in our subsidiaries. Any acquisition financed in whole or in part with equity securities could result in dilution to our existing stockholders. Acquisition-related indebtedness could reduce our available working capital and financial flexibility. See risk factor “— We may not be able to successfully integrate the business and operations of Drone Nerds or other entities that we have acquired or may acquire in the future” in the Company’s annual report on Form 10-K as filed with the SEC on April 15, 2026, for additional risks related to the integration of acquired businesses.

In connection with the disposition of our Inpixon Business, we received consideration in the form of a note receivable that is subject to forgiveness provisions and an Unwind Option, and we may not collect the full amount of the note receivable.

On February 3, 2026, we completed the disposition of our former Industrial IoT / Real-Time Location Systems operations (the “Inpixon Business”) for a purchase price of EUR 4,640,000 (approximately $5.5 million), payable over time and bearing interest at 5% per annum. We recorded the note receivable at an estimated fair value of approximately $4.2 million as of the closing date.

The note receivable is unsecured and subject to features that may result in our receiving less than the stated purchase price, including (i) our right (the “Unwind Option”) to require the purchaser to transfer back the Inpixon Business for no consideration during a specified window beginning thirty-seven months after closing, in which case any unpaid amounts of the purchase price will be forgiven, (ii) automatic forgiveness of any unpaid portion of the purchase price if the Unwind Option is not exercised within the specified window, and (iii) the credit risk of the purchaser, a privately held foreign entity over which we have limited visibility. If we are unable to collect amounts owed under the note receivable, are required to record additional credit loss reserves or impairment charges, or exercise the Unwind Option and incur losses or liabilities upon the return of the Inpixon Business, our financial condition and results of operations could be adversely affected.

Risks Related to Our Commercial Drone Solutions Division (UAS Business)

New or increased tariffs or other trade restrictions on imported unmanned aircraft systems and related components could adversely affect our business, financial condition and results of operations.

The United States government has initiated trade measures and national security reviews under Section 232 of the Trade Expansion Act of 1962, as amended, relating to imports of unmanned aircraft systems ("UAS"), commonly referred to as drones, and certain related components. These actions, as well as other existing or potential tariffs, import restrictions and changes in U.S. trade policy, could increase the costs of products and components used in our operations and create additional uncertainty regarding our supply chain.

We may rely on foreign suppliers for certain drones, components, materials and equipment used in our products and operations. The imposition of additional tariffs, expansion of existing tariffs or implementation of other import restrictions on UAS and related components could increase our procurement and manufacturing costs, disrupt established supply arrangements, limit the availability of certain products or components and result in longer lead times. We may be unable to fully mitigate these impacts through alternative sourcing arrangements, operational efficiencies or increases in the prices charged to our customers.

In addition, changes in U.S. trade policy, including the scope, timing or implementation of tariffs and other trade restrictions, could adversely affect demand for our products, our ability to compete with other manufacturers and suppliers, and our relationships with customers and vendors. Efforts to identify alternative suppliers or modify our supply chain could result in additional costs, delays or operational inefficiencies.

The ultimate impact of these measures will depend on future government actions, the products and components subject to tariffs or restrictions, applicable tariff rates, the availability of exemptions or alternative sources of supply, and our ability to respond to changes in the regulatory and trade environment. Any of these developments could materially adversely affect our business, financial condition, cash flows and results of operations.

The nature of our UAS business involves significant risks and uncertainties, including product liability exposure, that may not be covered by insurance or indemnification.

Our UAS business involves significant operational and legal risks and uncertainties, and insurance or indemnification may not be available in all circumstances. We develop, distribute, service and support drones and other electronic products. As a result, claims could be brought against us if the use or misuse of one of the products we sell, service or develop causes, or merely appears to have caused, personal injury, death or property damage. In addition, defects, errors or failures in our products or services could lead to other potential life, health and property risks.

In our UAS operations, product liability risks may arise from equipment malfunctions, operator error, software failures, battery incidents, collisions or other operational incidents involving drones deployed by customers or service personnel. These incidents may result in personal injury, property damage, regulatory investigations, litigation or reputational harm. Because drone operations often occur in populated or industrial environments, even isolated incidents could lead to significant claims, increased insurance costs, operational restrictions or loss of customer confidence.

In addition, Drone Nerds has historically developed and sold products and services in circumstances where insurance or indemnification may be limited or unavailable, including in connection with the collection, processing and analysis of various types of information. Our UAS products and services may raise legal issues relating to privacy, data security, civil liberties, intellectual property, trespass, conversion and similar concepts, which may result in claims, regulatory scrutiny, enforcement actions or litigation.

Indemnification to cover potential claims or liabilities resulting from the failure of technologies we deploy may be available in certain circumstances but not in others. The uncrewed aerial systems industry continues to evolve, and insurance coverage for certain operational risks may be limited, unavailable, subject to significant exclusions, or prohibitively expensive. We may not be able to obtain or maintain product liability insurance or other insurance coverage in sufficient amounts, on commercially reasonable terms, or at all, and any such insurance may not be adequate to cover all potential liabilities.

Substantial claims resulting from an accident, product failure, or personal injury or property liability arising from our products and services in excess of any indemnity or insurance coverage (or for which indemnity or insurance coverage is not available or is not obtained) could harm our financial condition, cash flows and operating results. Any accident, even if fully covered or insured, could negatively affect our reputation among our customers and the public and make it more difficult for us to compete effectively.

Risks Related to Our Advanced Technology and Manufacturing Division

Our Advanced Technology and Manufacturing division is in an early stage of development and has not generated revenues, and we may not successfully develop U.S.-based production capabilities for NDAA-compliant unmanned systems components and technologies, and we may discontinue such division.

Our planned Advanced Technology and Manufacturing (“ATM”) division intends to focus on facilitating partnerships with domestic manufacturers to increase access to NDAA-compliant products. The division’s goal is to develop and expand a domestically sourced supply chain designed to support compliance with applicable federal procurement and sourcing requirements, including Section 848 of the NDAA for unmanned aerial systems, addressing the growing demand from federal agencies, defense contractors, and enterprise customers for platforms and components that meet applicable government procurement requirements. The ATM division is in an early stage of development and has not generated revenues. There can be no assurance that we will successfully develop domestic production partnerships on the timelines we anticipate, or at all. Our ability to do so will depend on a number of factors, including supply chain qualification, workforce recruitment, and process validation, each of which is subject to delays, cost overruns, and execution risk. If we are unable to develop a viable platform, we may be unable to generate revenues from the ATM division or to realize a return on our investment in this initiative.

The Company’s investment in the ATM division is subject to ongoing evaluation by management and the Board of Directors based on the division’s ability to achieve key operational and commercial milestones, including establishing manufacturing partnerships on acceptable terms, securing NDAA-compliant production capacity, and demonstrating a credible path to revenue generation. If the ATM division fails to achieve sufficient progress toward these objectives within the timeframes management considers reasonable, the Company may determine to significantly reduce investment in the division, restructure its operations, or discontinue the division entirely. Any such determination could result in asset impairments, the write-off of capitalized development costs, if any, employee severance costs, if any, early termination of manufacturing partnerships or facility commitments, and the loss of the Company’s investment in the division to date, including the ATM division’s allocated assets, and could materially adversely affect our business, financial condition, and results of operations. There can be no assurance that the Company will continue to fund the ATM division at current or anticipated levels, or that the division will successfully establish manufacturing capabilities or generate revenues on the timeline anticipated, or at all.

We may be unable to establish manufacturing partnerships or arrangements necessary to support the ATM division's growth on acceptable terms, or at all.

The development of U.S.-based production capabilities for NDAA-compliant unmanned systems components may require us to enter into manufacturing partnerships, supply arrangements, joint ventures, contract manufacturing relationships, or other commercial arrangements with third parties. We may be unable to identify, negotiate, or maintain such relationships on commercially reasonable terms, or at all. If we are unable to establish or maintain manufacturing partnerships necessary to support the ATM division, we may be required to develop in-house manufacturing capabilities, which would require additional capital investment and time, or we may be unable to bring ATM division products to market on the timelines we anticipate, or at all.

Our ability to compete in the market for domestically sourced unmanned systems components depends on our ability to achieve and maintain NDAA compliance and other federal procurement and sourcing certifications, which is uncertain.

The market opportunity for our ATM division depends substantially on the ability of our products to qualify as NDAA-compliant or otherwise satisfy federal procurement and sourcing requirements applicable to defense, government, and enterprise customers. The standards governing these certifications and eligibility determinations are complex, evolving, and subject to interpretation by government agencies. We may be unable to obtain or maintain required certifications or eligibility determinations on commercially reasonable terms, within anticipated timeframes, or at all. Any failure or delay in obtaining or maintaining these qualifications, or any change in the underlying standards, could limit the addressable market for our ATM division's products and adversely affect our business, financial condition and results of operations.

Demand for our ATM division’s products will depend on continued U.S. government policy support for domestic sourcing of unmanned systems components, and changes in such policies could materially reduce our addressable market.

The market for domestically sourced unmanned systems components is influenced by U.S. government policies favoring domestic manufacturing and supply chain security, including procurement preferences, NDAA compliance mandates, tariffs on foreign-manufactured components, and similar measures. Any reduction, repeal, or material change in these policies, or any change in the strategic priorities of the U.S. government with respect to domestic sourcing of unmanned systems components, could materially reduce demand for our ATM division's products and adversely affect our business, financial condition and results of operations.

The development and operation of U.S.-based manufacturing capabilities will require substantial capital investment, and we may be unable to obtain the financing necessary to fund our ATM division's growth.

Developing U.S.-based manufacturing capabilities is capital-intensive and may require substantial investment in facilities, equipment, inventory, qualified personnel, and working capital before the ATM division generates meaningful revenues. We may be required to raise additional capital through debt or equity financings, strategic partnerships, government incentives, or other sources to fund the development and operation of the ATM division. There can be no assurance that such financing will be available on acceptable terms, or at all. If we are unable to obtain sufficient financing, we may be required to delay, reduce or modify our ATM development plans, which could adversely affect our ability to compete in the market for domestically sourced unmanned systems components.

If and when our ATM division commences manufacturing operations, it will be subject to operational risks inherent in manufacturing, and any failure to manage these risks effectively could adversely affect our business.

If and when our ATM division commences manufacturing operations, it will be subject to a range of operational risks inherent in advanced manufacturing, including equipment failures, quality control issues, production yield variability, raw material and component shortages, workplace safety incidents, environmental compliance obligations, and labor disruptions. The successful operation of a manufacturing facility also requires personnel with specialized expertise in advanced manufacturing, quality engineering, supply chain management, and regulated production environments, and competition for such personnel is significant. Any failure to manage these operational and personnel-related risks effectively could increase our costs, delay deliveries, expose us to liability, or impair our ability to satisfy customer requirements, any of which could materially adversely affect our business, financial condition and results of operations.

Our ATM division may face significant competition from established domestic manufacturers and other entrants, which could limit our ability to win customer commitments or achieve targeted production volumes.

The market for domestically sourced unmanned systems components includes established domestic manufacturers, vertically integrated defense primes, and other new entrants, many of which have substantially greater resources, manufacturing experience, customer relationships, and past performance records than we do. Our ability to compete will depend on our ability to differentiate on product performance, compliance, cost, scalability, and customer service, none of which is assured. If we are unable to compete effectively, we may be unable to win customer commitments or achieve targeted production volumes, which could adversely affect our business, financial condition and results of operations.

Risks Related to Legal, Regulatory and General Business Operations

Adverse judgments or settlements in legal proceedings, and regulatory investigations or enforcement actions by state authorities or other governmental agencies, could materially harm our business, financial condition, operating results, cash flows, and reputation.

We may be a party to claims that arise from time to time in the ordinary course of our business, including claims related to our products, securities offerings, contracts and subcontracts, protection of confidential information or trade secrets, adversary proceedings arising from customer bankruptcies, employment matters, immigration requirements, and compliance with various state and federal statutes, rules and regulations applicable to our business.

For example, we are currently involved in litigation relating to the XTI Merger. On December 6, 2023, Xeriant, Inc. (“Xeriant”) filed a complaint in the United States District Court for the Southern District of New York (the “S.D.N.Y.”) against Legacy XTI, two unnamed entities, and five unnamed individuals. On January 31, 2024, Xeriant filed an amended complaint adding the Company as a defendant. On February 29, 2024, Xeriant filed a second amended complaint, removing the Company and one of the unnamed entities as defendants. The second amended complaint alleges that Legacy XTI breached several agreements with Xeriant, including a Joint Venture Agreement dated May 31, 2021, a cross-patent license agreement, an operating agreement, and a letter dated May 17, 2022, which Xeriant claims arose from its introduction of Legacy XTI to a Nasdaq-listed company as a potential acquirer. Xeriant further alleges that it provided intellectual property, expertise, and capital in connection with Legacy XTI’s TriFan 600 aircraft and was improperly excluded from a subsequent transaction involving the TriFan 600 technology as part of Legacy XTI’s merger with the Company. Xeriant asserts causes of action for breach of contract, fraud, unjust enrichment, and misappropriation of confidential information, and seeks damages in excess of $500 million, along with injunctive and other equitable relief. On March 13, 2024, Legacy XTI moved to dismiss portions of the second amended complaint. The S.D.N.Y. denied that motion on January 14, 2025. Legacy XTI filed an answer on January 28, 2025, and subsequently filed an amended answer and counterclaims on February 18, 2025. The amended counterclaims, further amended on April 14, 2025, allege that Xeriant breached the Joint Venture Agreement by failing to make required capital contributions of approximately $4.6 million and by failing to deliver promised intellectual property and strategic support. Legacy XTI further alleges that Xeriant breached its fiduciary duty by engaging in coercive and self-dealing conduct, including conditioning a strategic introduction on the issuance of equity and assumption of debt. Legacy XTI seeks declaratory relief confirming that the joint venture has been terminated, that all intellectual property related to the TriFan 600 belongs solely to Legacy XTI, and that Xeriant has no rights in the TriFan 600 technology. On April 28, 2025, Xeriant moved to dismiss Legacy XTI’s second amended counterclaims. On September 23, 2025, the S.D.N.Y. denied Xeriant’s motion, concluding that Legacy XTI plausibly alleged claims against Xeriant for breach of contract, breach of fiduciary duty, and declaratory judgment. The S.D.N.Y. found that Legacy XTI had adequately pleaded that Xeriant was obligated to contribute $10 million in funding to the joint venture and that it acted disloyally by leveraging a potential merger opportunity for its own benefit. Following the S.D.N.Y.’s September 23, 2025 denial of Xeriant’s motion to dismiss Legacy XTI’s counterclaims, the litigation has advanced into full discovery. The S.D.N.Y. has since compelled Xeriant to comply with its discovery obligations and warned that continued noncompliance would result in dismissal of its claims. While the Company continues to believe the allegations against Legacy XTI are meritless, the case remains in active discovery and subject to close judicial supervision, which may increase litigation costs and extend the duration of the proceedings. On December 9, 2025, Xeriant filed a Third Amended Complaint, voluntarily non-suiting five counts from the prior complaint and revising its damages demand from $500 million to an unspecified amount. On December 23, 2025, Legacy XTI filed its Answer, Affirmative Defenses, and Counterclaims in response to the Third Amended Complaint. Discovery has concluded and both sides have filed summary judgment motions, which remain pending. The SDNY has also indicated that it is unlikely to rule before the November 16, 2026 Auctus trial. Xeriant further revised the Third Amended Complaint revising its damages demand to $20 million (among other relief). The outcome of the litigation cannot presently be predicted, and any adverse determination could have a material impact on the Company.

In connection with the litigation matter described in the immediately preceding paragraph, on June 12, 2024, the Company received correspondence from legal counsel for Auctus Fund, LLC (“Auctus”), dated April 3, 2024, asserting that the Company and/or Legacy XTI may have assumed Xeriant’s obligations under a Senior Secured Promissory Note (the “Note”) issued by Xeriant to Auctus in the original principal amount of $6,050,000, pursuant to a letter agreement dated May 17, 2022, between Xeriant and Legacy XTI (the “May 17 letter”). Auctus claimed that the outstanding amount due under the Note, including accrued interest, was $8,435,008.81 as of April 3, 2024. In July 2024, Legacy XTI responded to Auctus’s claims, asserting that the May 17 letter is invalid and unenforceable on multiple grounds. Legacy XTI further stated that, even if the May 17 letter were enforceable, it did not create or trigger any obligation for Legacy XTI to assume Xeriant’s debt under the Note or otherwise. On May 13, 2025, Auctus filed a lawsuit against Legacy XTI in the District Court of Arapahoe County, Colorado, asserting a single claim for breach of contract based on its prior allegations. Auctus contends that Legacy XTI is contractually obligated to repay nearly $9 million in principal and accrued interest, based on Legacy XTI’s entry into a loan agreement with Legacy Inpixon in March 2023 and its subsequent merger with Legacy Inpixon in March 2024. On June 25, 2025, Legacy XTI filed a motion to dismiss or, in the alternative, to stay the proceedings pending resolution of the Xeriant litigation. Legacy XTI’s motion asserts that Auctus’ complaint should be dismissed: (i) for lack of standing, because Auctus is neither a party to, nor a third-party beneficiary of, the May 17 letter; (ii) for failure of a condition precedent, because no obligation ever arose in that the alleged triggering condition—a business combination involving Legacy XTI and Legacy Inpixon did not occur within the required one-year time frame; (iii) for lack of valid assignment, because Xeriant’s unilateral assignment of debt to Legacy XTI is void because the underlying Note prohibits assignment without Auctus’s prior written consent, which is not alleged. On August 5, 2025, Auctus filed a response arguing that it was an intended third-party beneficiary of the May 17 letter, that the anti-assignment clause does not bar its claims, and that the request for a stay is unwarranted because the Xeriant litigation involves different parties and broader claims. On September 12, 2025, Legacy XTI filed a Reply Brief reinforcing that Auctus lacks standing, that no obligation ever arose under the May 17 Letter because no qualifying transaction occurred within its one-year term, and that any purported transfer of debt is void under the Note’s anti-assignment clause. The Reply also emphasized that the enforceability of the May 17 Letter is already before the S.D.N.Y. and urged dismissal or a stay to avoid inconsistent rulings. On October 2, 2025, Legacy XTI filed a Notice of Supplemental Authority submitting the September 23, 2025 Order of the S.D.N.Y., which denied Xeriant’s motion to dismiss Legacy XTI’s counterclaims and held that Legacy XTI had plausibly alleged that the May 17 Letter expired by its terms and is unenforceable. Legacy XTI asserted that the S.D.N.Y. ruling directly supports dismissal or a stay because it confirms that the same alleged contract and issues raised by Auctus are already being adjudicated in the federal case. On November 7, 2025, the court denied Legacy XTI’s motion to dismiss or, in the alternative, stay the proceedings. The court held that, when viewing the allegations in the light most favorable to Auctus, the complaint plausibly stated claims for relief under Colorado’s notice-pleading standard. The court further denied Legacy XTI’s alternative request for a stay, reasoning that the parties were not identical to those in the federal action and therefore comity and judicial economy did not warrant a stay. The court nonetheless directed the parties to update it regarding the outcome of the federal case to the extent it may be dispositive of overlapping issues. On November 21, 2025, Legacy XTI filed its Answer and Affirmative Defenses to the Complaint. The parties have completed discovery and trial is scheduled for November 16, 2026, and the Company has renewed its request to stay the Colorado proceedings pending resolution of the SDNY litigation and confirm the status of that request before filing. The Company will continue to vigorously defend against the claims but cannot predict the timing or outcome of the proceedings or estimate any potential exposure.

In addition, in February 2026, the State of Texas filed a petition in the District Court of Collin County, Texas, against Anzu Robotics, LLC (“Anzu”) alleging that Anzu violated the Texas Deceptive Trade Practices-Consumer Protection Act (the “DTPA”) in connection with the marketing and sale of its drone products. The State contends, among other things, that Anzu misrepresented certain characteristics, origins, and security features of its products and failed to disclose certain alleged material facts relating to the products’ development and components and Anzu’s alleged business relationship with DJI. The State seeks temporary and permanent injunctive relief, civil penalties of up to $10,000 per violation of the DTPA and up to an additional $250,000 if the conduct was calculated to deprive a consumer age 65 or older of money or property, and attorneys’ fees and costs. Trial is set for November 8, 2027.

In May 2026, the State of Texas also issued a civil investigative demand to Drone Nerds LLC pursuant to the DTPA The Company cannot at this time predict the outcome of these matters or reasonably estimate a range of potential loss, if any.

In April 2026, the State of Florida issued a subpoena to Anzu pursuant to the Florida Deceptive and Unfair Trade Practices Act in connection with the marketing and sale of certain drone products. The Company responded to the subpoena. The Company cannot at this time predict the outcome of this matter or reasonably estimate a range of potential loss, if any.

In May 2026, the Federal Communications Commission issued a request for documents to Anzu Robotics LLC under the Communications Act of 1934, inquiring as to the Company directly or indirectly marketed with the United States any radio frequency equipment produced in a manner that may be a violation of the Act. The Company responded to the request. The Company cannot at this time predict the outcome of this matter or reasonably estimate a range of potential loss, if any.

In October 2026, the State of Florida issued a subpoena duces tecum to XTI Aerospace, Inc. pursuant to the Florida Deceptive and Unfair Trade Practices Act, Chapter 501, Part II, Florida Statutes, seeking information concerning XTI’s relationship with Anzu Robotics, LLC, Drone Nerds, and other related information concerning the sale of certain drones and Anzu products in the State of Florida. The Company intends to respond. The Company cannot predict the likelihood or quantity of potential loss (if any) at this time.

In October 2026, the State of Florida issued a subpoena to Drone Nerds LLC pursuant to the Florida Deceptive and Unfair Trade Practices Act in connection with the marketing and sale of certain drone products. The Company has not yet responded to the subpoena. The Company cannot at this time predict the outcome of this matter or reasonably estimate a range of potential loss, if any.

The outcome of the foregoing matters cannot presently be predicted, and an adverse determination in any of these matters could have a material impact on our business, financial condition and results of operations. Regardless of the merits of any particular claim, responding to litigation may divert management’s time and attention, result in significant legal expenses, and expose us to monetary damages, penalties or injunctive relief. Litigation and other legal proceedings are inherently uncertain, and adverse judgments or settlements could materially adversely affect our business, financial condition, results of operations and cash flows. Even if a claim is fully indemnified or insured, such litigation could damage our reputation and make it more difficult to compete effectively or obtain adequate insurance in the future.

Furthermore, while we maintain insurance for certain potential liabilities, such insurance does not cover all types and amounts of potential liabilities and is subject to exclusions, deductibles and caps. Insurers may dispute coverage, which may affect the timing or availability of insurance proceeds. Unexpected outcomes in legal proceedings, or changes in management’s evaluation of the likely outcomes, could have a material adverse effect on our business, financial condition, results of operations and cash flows.

Our failure to timely file this Quarterly Report on Form 10-Q resulted in noncompliance with Nasdaq’s continued listing requirements, and a failure to maintain compliance with Nasdaq’s continued listing requirements could result in the delisting of our common stock.

On August 26, 2026, we received a notice from the Listing Qualifications department of The Nasdaq Stock Market LLC (“Nasdaq”) stating that, because the Company had not yet filed its Quarterly Report on Form 10-Q (“Form 10-Q”) for the quarter ended June 30, 2026, the Company is no longer in compliance with Nasdaq Listing Rule 5250(c)(1). Nasdaq Listing Rule 5250(c)(1) requires listed companies to timely file all required periodic financial reports with the Securities and Exchange Commission (the “SEC”).

We are filing this Quarterly Report on Form 10-Q to address the filing delinquency. However, until Nasdaq confirms that we have regained compliance with Nasdaq Listing Rule 5250(c)(1), we cannot provide assurance that Nasdaq will determine that we have regained compliance. If we fail to maintain compliance with Nasdaq’s continued listing requirements, our common stock could be subject to delisting, which could adversely affect the liquidity and market price of our common stock and our ability to raise capital.

We do not currently satisfy Nasdaq’s stockholders’ equity requirement, which could result in the delisting of our common stock.

Nasdaq Listing Rule 5550(b)(1) requires companies listed on The Nasdaq Capital Market to maintain stockholders’ equity of at least $2.5 million (the “Stockholders’ Equity Requirement”). The alternatives are a market value of listed securities of at least $35 million, or net income from continuing operations of $500,000 in the most recently completed fiscal year or in two of the three most recently completed fiscal years. As of June 30, 2026, we reported a stockholders’ deficit of $(25.6) million, largely as a result of the $56.5 million fair value of our liability-classified warrants. We therefore do not satisfy the Stockholders’ Equity Requirement. Based on the closing price of our common stock on October 16, 2026, the market value of our listed securities was approximately $31 million, and we do not believe we satisfy either alternative standard.

We expect to receive a deficiency notice from Nasdaq following the filing of this Quarterly Report. Nasdaq generally permits a company 45 calendar days to submit a plan to regain compliance and, if it accepts the plan, may grant an extension of up to 180 calendar days from the date of the notice. However, if we also receive a delisting determination for failing the Minimum Bid Price Requirement, as described in the following risk factor, Nasdaq may treat the stockholders’ equity deficiency as an additional basis for delisting in the same proceeding rather than providing a separate compliance period. Regaining compliance may require us to complete one or more equity financings, which could be highly dilutive to our stockholders. Changes in the fair value of our warrant liabilities, which depend in part on our stock price, could also make it more difficult to regain or maintain compliance. There can be no assurance that we will regain compliance with the Stockholders’ Equity Requirement within any period Nasdaq provides, or at all. If we do not, our common stock could be delisted, with the consequences described in the following risk factor.

Our common stock has traded below $1.00 per share since September 23, 2026. Because of our prior reverse stock splits, we will not be eligible for any compliance period if we fail to satisfy Nasdaq’s minimum bid price requirement, and our common stock could be suspended and delisted from Nasdaq.

Our common stock is listed on The Nasdaq Capital Market under the symbol “XTIA.” Nasdaq Listing Rule 5550(a)(2) requires that our common stock maintain a minimum closing bid price of $1.00 per share (the “Minimum Bid Price Requirement”). A company fails this requirement if its closing bid price is below $1.00 for 30 consecutive business days.

The closing bid price of our common stock has been below $1.00 since September 23, 2026, and was $0.80 on October 16, 2026. If the closing bid price remains below $1.00 through November 3, 2026, we will fail the Minimum Bid Price Requirement. Because we effected a 1-for-250 reverse stock split on January 10, 2025, Nasdaq Listing Rule 5810(c)(3)(A)(iv) makes us ineligible for the automatic 180-day compliance period Nasdaq generally provides, and Nasdaq would instead issue a delisting determination. Our only recourse would be to request a hearing before a Nasdaq Hearings Panel, which may grant an exception of up to 180 days but is not required to do so.

If our common stock is suspended or delisted from Nasdaq, it would likely trade, if at all, on an over-the-counter market such as the OTC Markets, which is generally considered a less efficient market. Delisting would likely reduce the liquidity and market price of our common stock, could subject it to the SEC’s “penny stock” rules, and could impair our ability to raise capital on acceptable terms, or at all. Any of these consequences could materially and adversely affect our business, financial condition, results of operations, and the value of your investment.

We are in default under our credit facility, and if our lender accelerates our borrowings or stops making advances, we

may not have sufficient liquidity to continue operations.

On September 30, 2026, our subsidiary XTI Drones Holdings, LLC failed to make scheduled principal payments totaling $1.5 million on the Seller Notes issued in connection with the Drone Nerds acquisition. On October 16, 2026, the holders agreed to temporarily waive the resulting events of default during a waiver period that ends no later than December 31, 2026 and that either party may end on ten days’ notice. If the waiver period ends without a restructuring, the missed installments and the remaining balance of the Seller Notes, together with interest at the default rate from October 10, 2026, will become due. The defaults also caused cross-defaults under our Credit Agreement with JPMorgan Chase Bank, N.A., under which approximately $8.4 million was outstanding as of October 16, 2026. JPMorgan has not waived these defaults. While they continue, JPMorgan may decline to make further advances, charge default interest, accelerate amounts outstanding and enforce its security interest in substantially all of the assets of Drone Nerds and Anzu. Approximately $4.5 million remains outstanding under the Seller Notes, and we are negotiating a restructuring with the holders. We cannot assure you that we will obtain a waiver or a restructuring on acceptable terms, or at all. If our indebtedness is accelerated or we lose access to our credit facility, we may be unable to continue as a going concern.

Our Interim Chief Executive Officer has interests in the holders of our Seller Notes that may conflict with the interests of our stockholders.

Jeremy Schneiderman, our Interim Chief Executive Officer, is the chief executive officer of, and has an economic interest in, the Sellers, which hold the Seller Notes and 6,524,576 Class B Units of XTI Drones Holdings, LLC. The Sellers have agreed to a temporary waiver of the events of default under the Seller Notes that they may end on ten days’ notice, after which the Seller Notes, together with default interest, would become due, and we are negotiating a restructuring of the Seller Notes with them. This gives the Sellers significant leverage in those negotiations. Mr. Schneiderman’s interests in these matters may differ from, or conflict with, the interests of the Company and our other stockholders. There can be no assurance that any conflict will be resolved in a manner favorable to us.