Item 1A. Risk FactorsWe 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 Companys 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 available cash on hand, 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" future in the Companys 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.
39 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.
40 Risks Related to Our Autonomous Defense Systems Division The strategic reorientation of our former XTI Aircraft division toward unmanned systems development introduces significant new execution risks. In 2026, following the acquisition of Drone Nerds, the Company paused active development phase of the TriFan 600 manned VTOL aircraft program and redirected the former XTI Aircraft division, now operating as XTIA Autonomous Defense Systems (the ADS division), toward the design and development of unmanned platforms for defense and commercial applications. The TriFan 600 program has been paused, and the Company has not made a final determination to abandon it. However, there can be no assurance that the program will be resumed, or that, if resumed, it will achieve FAA certification, reach commercial production, or generate revenues. The ADS division is in an early stage of development and has not generated revenues. Its ability to generate revenues will depend on its success in securing development contracts, government procurement awards, or commercial partnerships, none of which are assured. The division faces significant competition from established defense contractors and unmanned systems developers with substantially greater resources, experience, and existing customer relationships. There can be no assurance that the ADS division will successfully develop marketable products, secure contracts, or generate revenues on the timeline anticipated, or at all. The Companys investment in the ADS division is subject to ongoing evaluation by management and the Board of Directors based on the divisions ability to achieve key operational and commercial milestones, including securing development contracts, establishing strategic partnerships, and demonstrating a credible path to revenue generation. If the ADS division fails to achieve sufficient progress toward these objectives within the timeframes management considers reasonable, the Company may determine to significantly reduce investment in the division, restructure its operations, or discontinue the division entirely. Any such determination could result in asset impairments, restructuring charges, employee severance costs, and the loss of the Company's investment in the division to date, including the ADS divisions allocated assets, and could materially adversely affect our business, financial condition, and results of operations. There can be no assurance that the Company will continue to fund the ADS division at current or anticipated levels. The reorientation of the former XTI Aircraft division also introduces execution risks, including the challenge of recruiting and retaining additional personnel with specialized unmanned systems experience, the difficulty of competing for defense procurement awards as a relatively new entrant, and the risk that the engineering expertise developed through the TriFan 600 program may not translate directly into commercially viable unmanned systems products. These risks, individually or in combination, could materially adversely affect our business, financial condition, and results of operations. In addition, we have devoted significant financial and engineering resources to the TriFan 600 program, and if the program is not resumed, we may not realize a return on those investments. Risks Related to Our Advanced Technology and Manufacturing Division
Our Advanced Technology and Manufacturing division is in an early stage of development and has not generated revenues, and we may not successfully develop U.S.-based production capabilities for NDAA-compliant unmanned systems components and technologies, and we may discontinue such division.
Our planned Advanced Technology and Manufacturing (ATM) division plans intends to develop U.S.-based production for focus on facilitating partnerships with domestic manufacturers to increase access to NDAA-compliant unmanned systems components products. The divisions goal is to develop and technologies expand a domestically sourced supply chain designed to serve support compliance with applicable federal procurement and sourcing requirements, including Section 848 of the growing demand NDAA for domestically sourced unmanned systems across aerial systems, addressing the growing demand from federal agencies, defense contractors, and enterprise markets. 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 capabilities partnerships on the timelines we anticipate, or at all. Our ability to do so will depend on a number of factors, including site selection, facility build-out, equipment procurement, supply chain qualification, workforce recruitment, and process validation, each of which is subject to delays, cost overruns, and execution risk. If we are unable to develop a viable production platform, we may be unable to generate revenues from the ATM division or to realize a return on our investment in this initiative.
41 The Companys investment in the ATM division is subject to ongoing evaluation by management and the Board of Directors based on the divisions 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 Companys investment in the division to date, including the ATM divisions 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 divisions 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.
42 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 XTIs TriFan 600 aircraft and was improperly excluded from a subsequent transaction involving the TriFan 600 technology as part of Legacy XTIs 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 XTIs second amended counterclaims. On September 23, 2025, the S.D.N.Y. denied Xeriants 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 Xeriants motion to dismiss Legacy XTIs 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 remains ongoing. 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.
43 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 Xeriants 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 Auctuss 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 Xeriants 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 XTIs 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 XTIs 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 conditiona 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 Xeriants unilateral assignment of debt to Legacy XTI is void because the underlying Note prohibits assignment without Auctuss 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 Notes 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 Xeriants motion to dismiss Legacy XTIs 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 XTIs 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 Colorados notice-pleading standard. The court further denied Legacy XTIs 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 are engaged in discovery. 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 Anzus alleged business relationship with DJI. The State seeks temporary and permanent injunctive relief, civil penalties of up to $10,000 per violation of the DTPA and up to an additional $250,000 if the conduct was calculated to deprive a consumer age 65 or older of money or property, and attorneys fees and costs. On April 24, 2026, the State of Texas filed a Motion for No-Answer Default Judgment, with a hearing scheduled for June 24, 2026 in the 429th District Court of Collin County, Texas. The Company Trial is evaluating its response to the motion. 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 is engaged 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 preliminary discussions 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 XTIs 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 Attorney General issued a subpoena to attempt Drone Nerds LLC pursuant to resolve the matter cooperatively. 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 managements 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 managements evaluation of the likely outcomes, could have a material adverse effect on our business, financial condition, results of operations and cash flows.
44 Our failure to timely file this Quarterly Report on Form 10-Q resulted in noncompliance with Nasdaqs continued listing requirements, and a failure to maintain compliance with Nasdaqs 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 Nasdaqs 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 Nasdaqs 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 Nasdaqs 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 SECs 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. Schneidermans 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.