ITEM 7: MANAGEMENT’S DISCUSSION
AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS
The following discussion
and analysis of our financial condition and results of operations should be read in conjunction with the audited financial statements
and related notes included elsewhere in this Annual Report on Form 10-K. In addition to historical information, this discussion and analysis
here and throughout this Annual Report on Form 10-K contains forward-looking statements that involve risks, uncertainties and assumptions.
Our actual results may differ materially from those anticipated in these forward-looking statements, due to a number of factors, including
but not limited to, risks described in the section entitled “Risk Factors.”
OVERVIEW OF OUR BUSINESS
XTI Aerospace, Inc. is a U.S.-based
aerospace company focused on building and scaling a market-leading UAS solutions platform serving enterprise, public safety, government,
and defense customers, while maintaining long-term optionality in advanced vertical lift aircraft development.
The Company manages its operations
through two reportable segments: Unmanned Aircraft Systems (“UAS”) and Commercial Aviation. These segments reflect the Company’s
distinct business models, capital requirements and growth drivers. Our core business currently consists of:
During 2024 and 2025, the
Company underwent a series of transactions that changed our operating profile, revenue base, and capital allocation priorities.
Corporate Transformation
On March 12, 2024, we completed
a merger (the “XTI Merger”) with XTI Aircraft Company (“Legacy XTI”) that was accounted for as a reverse acquisition,
with Legacy XTI treated as the accounting acquirer and the Company (formerly Inpixon) treated as the accounting acquiree. As a result,
our consolidated financial statements reflect (i) the historical financial statements of Legacy XTI prior to the closing date and (ii)
the consolidated results of the combined company following the closing date.
In November 2025, we completed the acquisition of Drone Nerds, LLC and
Anzu Robotics, LLC (collectively, “Drone Nerds”) with Anzu Robotics, LLC having been affiliated with Drone Nerds, LLC (then
known as Drone Nerds, Inc.) prior to the acquisition. The Company owns an 83.403% controlling interest in the XTI Drones Holdings subsidiary,
with the remaining equity reflected as noncontrolling interest.
The acquisition of Drone Nerds
represents a significant strategic shift. Prior to the acquisition, our operations were primarily focused on our Inpixon Business and
the development of the TriFan 600 aircraft and other aerospace technologies. With the acquisition of Drone Nerds, we transitioned our
focus towards scaling Drone Nerds’ revenue-generating UAS solutions platform. Because Drone Nerds was acquired in November 2025,
our consolidated results for the year ended December 31, 2025 include Drone Nerds’ results only from the acquisition date through
year-end. Accordingly, GAAP revenues, cost of revenues, and operating expenses for 2025 do not reflect a full year of UAS operations at
scale.
In conjunction with the acquisition
of Drone Nerds, we also recognized the challenge of the long-term financing requirements of developing a VTOL aircraft and the opportunities
in the unmanned systems market in the near term. Late in 2025, we began building a core capability around the design, development, and
production of unmanned platforms, with an emphasis on serving defense customers and supporting domestic procurement initiatives aligned
with U.S. national security priorities.
During December 2025, the
Company committed to a plan to dispose of its historical Inpixon Business and classified the business as held for sale. The results of
the Inpixon Business are presented as discontinued operations in the consolidated financial statements for all periods presented.
As a result of these transactions,
our current operating profile differs materially from prior periods, and historical results may not be fully comparable. Accordingly,
in addition to reviewing our GAAP results, management evaluates performance and allocates capital with an emphasis on:
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● 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.
Our strategy is aligned with
our broader Vertical EconomyTM vision, which encompasses vertical lift technologies and supporting infrastructure across unmanned
and manned aircraft platforms. While our long-term vision includes broader participation across the vertical lift ecosystem, our near-term
operating focus is centered on scaling our UAS platform with disciplined capital allocation and margin optimization.
We believe the UAS market
is undergoing structural evolution driven by:
● Regulatory developments affecting fleet eligibility and operational approvals
Our integrated model is designed
to address these trends by positioning us as a long-term solutions partner rather than a transactional reseller.
TriFan 600 VTOL Program
As of early 2026, the TriFan 600 program has been paused. Whether and
when development may resume will depend on a number of factors, including capital availability, market conditions for advanced air mobility,
and the Company’s overall strategic priorities at the relevant time. While the TriFan 600 remains a strategic long-term asset within
our broader vertical lift vision, our current revenue base and operating execution are centered on our UAS solutions platform.
Capital Allocation and Liquidity Strategy
During 2025, we completed
multiple public offerings and a Series 10 Convertible Preferred Stock financing, which generated an aggregate of approximately $85.5 million
in net proceeds, strengthening our liquidity and supporting our strategic initiatives, including the Drone Nerds acquisition and working
capital stabilization. Our operating priorities are focused on:
● Strengthening and scaling our UAS platform.
● Improving margin profile and recurring revenue mix.
● Managing operating expenses and cash burn.
● Preserving long-term vertical lift optionality.
Our near-term objective is
to move toward improved operating cash flow sustainability within the UAS segment while maintaining disciplined investment in our other
programs, which may require additional capital over time.
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RECENT DEVELOPMENTS
Sale of Inpixon Business.
In February 2026, we completed the sale of our historical Inpixon Business, which had been classified as discontinued operations during
the fourth quarter of 2025. The transaction furthered our strategic repositioning toward a focused aerospace and UAS platform. The final
purchase price remains subject to customary post-closing adjustments.
Board and Leadership Changes.
Clinton Weber was elected to our Board of Directors at our 2025 annual meeting of stockholders held on December 30, 2025. In February
2026, we appointed Jonathan Ornstein to our Board of Directors. In addition, Soumya Das resigned from his position as Chief Executive
Officer of the Inpixon Business and from the Company’s Board of Directors in connection with the disposition of that business.
Asset-Based Credit
Facility. In February 2026, we entered into a new secured asset-based revolving credit facility with JPMorgan Chase Bank, N.A.
(the “ABL Facility”). The ABL Facility provides for a revolving line of credit of up to $20.0 million, subject to a
borrowing base calculated primarily on eligible accounts receivable and inventory, and includes customary covenants and reporting
requirements. Subject to lender approval and the terms of the underlying credit agreement, the facility may be increased by up to an
additional $25.0 million.
The ABL Facility is intended
to enhance our working capital flexibility, support inventory procurement and growth within our UAS platform, and strengthen overall liquidity
management. Borrowings under the facility bear interest at variable rates based on applicable benchmark rates plus an agreed margin.
Warrant Exercises.
Subsequent to December 31, 2025 and through the date of this filing, holders of certain warrants issued in connection with our 2025 public
offerings exercised warrants to purchase 3,963,408 shares of the Company’s common stock. These exercises resulted in aggregate cash
proceeds to us of approximately $7.9 million. We engaged ThinkEquity LLC as our exclusive advisor in connection with the solicitation
of these warrants for which we paid cash compensation of 3% of the gross proceeds, or approximately $0.2 million. After deducting such
commissions, the net proceeds we received from these warrant exercises was approximately $7.7 million.
CRITICAL ACCOUNTING POLICIES AND ESTIMATES
Our consolidated financial
statements have been prepared in accordance with U.S. Generally Accepted Accounting Principles (“GAAP”). The preparation of
these consolidated financial statements requires management to make estimates, judgments and assumptions that affect the reported amounts
of assets, liabilities, revenues, expenses and related disclosures. We base these estimates on historical experience, current trends,
and other factors that we believe are reasonable under the circumstances. Actual results may differ from these estimates, and such differences
could be material.
Our significant accounting policies
are described in the notes to our audited consolidated financial statements included elsewhere in this Annual Report. We believe the following
accounting estimates are critical to understanding our consolidated financial statements because they involve significant judgment, estimates
and assumptions.
Revenue Recognition
We generate revenue primarily
through our UAS solutions and services business, which includes the sale and distribution of UAS platforms, payloads, sensors, batteries,
accessories and related equipment, as well as certain support services. Revenue is recognized in accordance with ASC 606, Revenue from
Contracts with Customers.
Revenue is recognized when
control of the promised goods or services is transferred to the customer in an amount that reflects the consideration we expect to receive
in exchange for those goods or services. Substantially all revenue is recognized at a point in time when control transfers to the customer,
which generally occurs upon shipment for wholesale and direct sales transactions (FOB shipping point) or at the point of sale for retail
transactions. Certain service-based offerings, including product protection programs, may be recognized over time; however, such amounts
are not material to the consolidated financial statements.
We generally act as principal in our sales arrangements and recognize
revenue on a gross basis. In limited cases, we facilitate the sale of third-party service offerings (e.g., product protection programs),
for which we act as an agent and recognize revenue on a net basis; however, such amounts are not material.
The transaction price may
include variable consideration, including volume discounts, rebates, and estimated product returns, which are recorded based on historical
experience and current trends. Deferred revenue primarily represents amounts received from customers prior to shipment.
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We record freight billed to
customers in revenue, and related shipping and handling costs are included in cost of revenues. We have elected the practical expedient
related to significant financing components, as our contracts generally do not include a period greater than one year between transfer
of goods or services and payment. We also apply the practical expedient related to costs to obtain a contract and expense such costs as
incurred when the amortization period would have been one year or less.
The most significant estimates
and judgments in our revenue recognition include:
● Estimation of returns and refund liabilities;
● Determination of whether certain arrangements contain variable consideration;
● Determination of when control transfers under shipping terms.
Allowance for Credit Losses
We maintain an allowance for credit losses for
expected losses resulting from the inability of customers to make required payments. The allowance is based on historical loss experience,
aging of receivables, specific customer credit evaluations, current economic conditions, and reasonable and supportable forecasts of future
economic conditions.
Because the majority of our
revenue is generated from the sale and distribution of UAS platforms and related products to enterprise, commercial and governmental customers,
changes in customer creditworthiness, economic conditions, or industry dynamics could impact the collectability of receivables. If actual
customer payment patterns differ from management’s estimates, additional credit loss expense may be required.
We also maintain credit insurance
that further reduces our exposure to potential credit losses.
Inventory Valuation
Inventory represents a significant
asset of the Company as of December 31, 2025 and consists primarily of finished goods, including drones and related accessories held for
resale in the ordinary course of business. Inventory is stated at the lower of cost or net realizable value, with cost determined using
the first-in, first-out method.
The determination of net realizable value requires
management to make significant estimates and judgments regarding future demand, market conditions, technological developments, and expected
selling prices. The enterprise drone industry is characterized by rapid technological innovation, new product introductions, evolving
regulatory frameworks, and changes in customer preferences. These factors increase the risk that certain inventory items may become obsolete
or experience reduced demand prior to sale.
Management evaluates inventory
on a regular basis for excess, slow-moving, or obsolete items by analyzing historical sales trends, current backlog, forecasted demand,
inventory aging, vendor product roadmaps, and anticipated technological changes. When the estimated net realizable value of inventory
is lower than its recorded cost, the Company records a write-down (including a provision for inventory obsolescence) through cost of sales.
Such write-downs establish a new cost basis and are not subsequently reversed if market conditions improve.
As of December 31, 2025, all inventory relates to the Drone Nerds (UAS)
segment and was recorded at its estimated net realizable value in connection with the Drone Nerds acquisition. No material inventory reserves
or write-downs were recorded subsequent to the acquisition closing date. While management believes its assumptions and estimates are reasonable,
actual results could differ materially due to changes in market conditions, customer demand, competitive pricing pressures, or product
life cycles. A sustained decline in demand for key product lines, delays in new product launches, or accelerated technological obsolescence
could result in additional inventory write-downs that would adversely affect gross margins and operating results in future periods.
Business Combinations and Purchase Accounting
We account for business combinations
using the acquisition method of accounting. Under this method, the identifiable assets acquired and liabilities assumed are recorded at
their estimated fair values as of the acquisition date. The excess of the purchase price over the fair value of identifiable net assets
acquired is recorded as goodwill.
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The determination of fair
values requires significant judgment and estimation, including with respect to:
● Identifiable intangible assets and their estimated useful lives;
● Expected future cash flows and market participant assumptions; and
Changes in assumptions used
in purchase accounting could materially affect the amounts assigned to goodwill, intangible assets, depreciation and amortization expense,
and future impairment analyses.
The valuation of equity and
debt instruments issued as consideration requires judgment regarding the fair value of the Company’s common stock, discount rates,
and other market-based inputs at the acquisition date.
Acquisition-related transaction
costs are expensed as incurred. We may refine the purchase price allocation during the measurement period (up to one year from the acquisition
date) as additional information becomes available.
Valuation of Goodwill and Intangible Assets
Goodwill and indefinite-lived
intangible assets, if any, are evaluated for impairment at least annually as of October 1, or more frequently if events or changes in
circumstances indicate that it is more likely than not that an impairment exists. Long-lived assets and finite-lived intangible assets
are reviewed for impairment whenever events or changes in circumstances indicate that their carrying amounts may not be recoverable.
For long-lived assets held
and used, recoverability is assessed by comparing the carrying amount of the asset group to the expected undiscounted future cash flows
expected to be generated by the asset group. If the carrying amount exceeds the undiscounted cash flows, an impairment charge is recorded
for the amount by which the carrying value exceeds fair value.
For goodwill impairment testing,
we compare the estimated fair value of the reporting unit to its carrying value. Fair value is typically estimated using discounted cash
flow models and, when appropriate, market-based valuation approaches. These analyses require significant judgment and are sensitive to
changes in assumptions, including:
● Forecasted revenue growth rates and margins;
● Expected future cash flows;
● Discount rates;
● Long-term growth rates; and
● Market multiples and comparable company inputs.
Impairment of Goodwill and Long-Lived Assets
During the year ended December
31, 2025, the Company identified triggering events related to the Inpixon Business, including continued operating losses, negative cash
flows, and management’s decision to pursue a disposition of the business.
The Company performed a quantitative
goodwill impairment test in accordance with ASC 350 and determined that the carrying value of the reporting unit exceeded its estimated
fair value. As a result, the Company recorded a goodwill impairment charge of approximately $4.0 million during 2025. In addition, the
Company evaluated definite-lived intangible assets and other long-lived assets for recoverability in accordance with ASC 360. Based on
this analysis, the Company recorded impairment charges of approximately $0.6 million. These impairments reflect the write-down of asset
groups to their estimated fair value.
In December 2025, management
committed to a plan to dispose of the Inpixon Business and classified the disposal group as held for sale. Upon classification, the disposal
group was measured at the lower of carrying value or fair value less costs to sell in accordance with ASC 360, resulting in an additional
impairment charge of approximately $5.9 million.
The fair value of the affected
asset groups and disposal group was determined using an income approach based on estimated future cash flows, which required significant
judgment, including assumptions related to revenue growth, margins, and discount rates.
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All impairment charges recognized during 2025 relate to the Inpixon
Business and are presented within loss from discontinued operations in the consolidated statements of operations.
Deferred Income Taxes and Valuation Allowances
We account for income taxes
in accordance with ASC 740, Income Taxes. Deferred tax assets and liabilities are recognized for temporary differences between the financial
statement carrying values of assets and liabilities and their respective tax bases.
We assess the realizability
of deferred tax assets and establish a valuation allowance when it is more likely than not that some portion or all of the deferred tax
assets will not be realized. The evaluation of whether a valuation allowance is required is based on all available positive and negative
evidence, including:
● Historical taxable income or losses;
● Forecasted future taxable income;
● Reversal patterns of temporary differences;
● Tax planning strategies; and
Because our ability to realize
deferred tax assets is dependent upon the generation of future taxable income, changes in our forecasts or business performance could
materially impact our valuation allowance and income tax expense.
We also recognize liabilities
for uncertain tax positions when it is more likely than not that the tax position will not be sustained upon examination, and we measure
such liabilities based on the largest amount of benefit that is more likely than not to be realized.
Fair Value Measurements and Accounting for Financial Instruments
We use significant judgment
in the accounting for certain financial instruments, including those issued in connection with equity and debt financings. Certain instruments
may require classification as liabilities and measurement at fair value, with changes in fair value recognized in earnings. Fair value
measurements may require the use of valuation techniques, including option pricing models, which involve significant assumptions such
as expected volatility, risk-free interest rates, expected term, and probability of certain events.
Because these assumptions
can be subjective and sensitive to market conditions, changes in assumptions could materially affect the carrying values of these instruments
and the related gains or losses recognized in our consolidated statements of operations.
Stock-Based Compensation
We account for stock-based
compensation in accordance with ASC 718, Compensation—Stock Compensation. Stock-based compensation expense is recognized over the
requisite service period and is based on the grant date fair value of the awards.
The fair value of stock options
is generally estimated using an option pricing model, which requires assumptions such as:
● Expected volatility;
● Expected term;
● Risk-free interest rate; and
● Expected dividends.
These assumptions require
judgment and could materially impact the amount of stock-based compensation expense recognized.
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RESULTS OF OPERATIONS
Overview and Comparability Considerations
Our results of operations
for the year ended December 31, 2025 reflect the impact of several transactions, including the acquisition of Drone Nerds in November
2025 and our decision to dispose of the historical Inpixon Business and classification of that business as held for sale, which is presented
as discontinued operations. As a result, period-to-period comparisons may not fully reflect the operating scale and revenue profile of
the Company following the Drone Nerds acquisition.
Corporate and Public Company Costs
Following the XTI Merger in
March 2024 and our subsequent strategic transactions in 2025, we incurred corporate and public company costs associated with operating
as a Nasdaq-listed company, executing capital raises, and completing acquisition-related activity.
Corporate costs include executive
management, finance, legal, compliance, investor relations, audit, and other public company-related professional fees. Corporate expenses
also include stock-based compensation, which is non-cash in nature but can be material in periods involving significant equity-based awards,
capital raising activity, or other strategic transactions.
During 2025, corporate expenses
also included certain non-recurring items, such as transaction costs, integration-related costs, and other costs associated with strategic
activities.
Discontinued Operations (Inpixon Business)
The results of the Inpixon
Business are presented as discontinued operations in our consolidated financial statements for all periods presented. Unless otherwise
indicated, the discussion below relates to continuing operations.
Consolidated GAAP Results of Operations
(Continuing Operations)
Revenues
Revenues for the year ended
December 31, 2025 reflect the Company’s UAS solutions and services operations following the Drone Nerds acquisition in November
2025, as well as other continuing operations. Revenues for the comparable period in 2024 primarily reflect the historical results of Legacy
XTI, a development-stage aircraft company. Accordingly, year-over-year comparisons are not necessarily indicative of the operating scale
of the Company following the acquisition.
We expect that revenue growth
and mix in future periods will be influenced primarily by the performance of Drone Nerds, including channel mix, enterprise and public
sector demand, service attachment rates, and product availability across OEM partners.
Cost of Revenues and Gross Profit
Cost of revenues consists
primarily of product costs associated with UAS hardware and accessories, as well as labor and other direct costs associated with repair,
maintenance, training, and other service offerings.
Gross margin is influenced
by product mix, pricing discipline, inventory and vendor cost dynamics, channel mix (including enterprise versus wholesale and retail),
and the relative contribution of higher-margin services. We believe expanding service penetration and lifecycle support offerings may
improve gross margin stability over time.
Operating Expenses
Operating expenses consist
primarily of research and development, sales and marketing, and general and administrative expenses.
Research and development
expenses are primarily attributable to the TriFan 600 VTOL aircraft development program. These costs include personnel-related expenses,
engineering and technical consulting fees, prototype and testing costs, software and tooling expenses, and other costs incurred in connection
with aircraft development and certification planning. R&D spending may fluctuate based on the timing and scope of development activities
and available funding.
Sales and marketing
expenses consist primarily of personnel costs, advertising and marketing programs, trade shows, and other customer acquisition and relationship
management activities. Following the Drone Nerds acquisition, sales and marketing spending is expected to reflect the scale of the UAS
business, including enterprise and public sector sales efforts.
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General and administrative
expenses consist primarily of personnel-related costs for executive, finance, legal, and administrative functions, as well as professional
fees, insurance, facilities, and public company costs. General and administrative expenses also include stock-based compensation and transaction-related
costs, which may be significant in periods involving capital raises, acquisitions, or other strategic transactions.
Other Income (Expense)
Other income (expense) consists
primarily of interest expense, changes in fair value of certain financial instruments, gains or losses related to extinguishment or modification
of debt, and other non-operating items.
During 2025, our other income
(expense) was materially influenced by financing and capital markets activity, including instruments issued in connection with public
offerings and the Series 10 Convertible Preferred Stock financing, as well as fair value remeasurement of certain liabilities. These
items can create significant period-to-period volatility and may not be indicative of core operating performance.
Income Taxes
We recorded income tax expense
(benefit) primarily related to state minimum taxes and other items. We maintain valuation allowances against substantially all of our
deferred tax assets due to historical losses and uncertainty regarding future taxable income.
Unaudited Pro Forma Financial Information (Supplemental)
Because Drone Nerds was acquired
in November 2025, our consolidated results for the year ended December 31, 2025 include only a partial period of Drone Nerds operations.
For informational purposes, we have included unaudited pro forma condensed combined financial information in the notes to our consolidated
financial statements, which is presented as if the acquisition had occurred on January 1, 2024.
Year Ended December 31, 2025 compared to
the Year Ended December 31, 2024
Comparability of Financial Information
On March 12, 2024, we completed
the XTI Merger, which was accounted for as a reverse acquisition with Legacy XTI treated as the accounting acquirer and the Company (formerly
Inpixon) treated as the accounting acquiree. As a result, our consolidated financial statements reflect (i) the historical financial statements
of Legacy XTI prior to the closing date and (ii) the consolidated results of the combined company from the closing date forward.
Accordingly, the year ended
December 31, 2024 reflects the historical operations of Legacy XTI, a development-stage aircraft company with no revenue, together with
the corporate-level expenses of the public company. The year ended December 31, 2025 reflects the operations of the combined company,
including revenue generated from our UAS solutions platform following the acquisition of Drone Nerds in November 2025. In addition, during
December 2025, we committed to a plan to dispose of our historical Inpixon Business, which is presented as discontinued operations for
all periods presented.
As a result of these transactions,
period-to-period comparisons may not be fully comparable.
The following table presents
selected consolidated results of continuing operations:
For the Years Ended
(in thousands, except percentages) Amount Amount $ Change % Change
Income tax benefit (provision) 10 (16 ) 26 (163 )%
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Revenues
Revenues for the year ended December 31, 2025 were $22.5 million, reflecting
revenue generated by our UAS solutions platform following the acquisition of Drone Nerds in November 2025. Accordingly, revenues for 2025
represent only the period from the acquisition date through December 31, 2025. The Company did not generate revenue during 2024, as Legacy
XTI was a development-stage aircraft company focused on the TriFan 600 program.
Cost of Revenues and Gross Profit
Cost of revenues for the year
ended December 31, 2025 was $17.6 million, resulting in gross profit of $4.9 million and a gross margin of approximately 21.9%. 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 in 2024.
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 year
ended December 31, 2025 were $47.7 million, an increase of $18.1 million, or 61%, compared to $29.7 million in 2024.
The increase was primarily
attributable to:
● Increased personnel-related expenses, including stock-based compensation.
● Investment in research and development related to the TriFan 600 program.
During 2024, operating expenses
included costs associated with the XTI Merger, including $6.5 million of merger and acquisition transaction costs. These costs were lower
in 2025; however, this decrease was more than offset by the factors described above.
Loss from Continuing Operations
Loss from continuing operations
increased to $42.8 million in 2025 from $29.7 million in 2024. The increase was driven primarily by the increase in operating expenses
discussed above, partially offset by the contribution of gross profit from the UAS business in 2025.
Other Income (Expense)
Other income (expense) was a net
expense of $10.2 million in 2025 compared to net income of $1.4 million in 2024.
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The 2025 expense was primarily
attributable to:
● $0.6 million change in fair value of warrant liabilities,
● $0.4 million loss on extinguishment of debt, and
These items were partially
offset by lower interest expense compared to 2024.
In contrast, 2024 included
a significant $12.9 million gain related to the change in fair value of convertible notes accounted for under the fair value option, partially
offset by inducement losses on debt conversions and other financing-related costs. The absence of a comparable fair value gain in 2025
contributed to the year-over-year decline.
Other income (expense) may
fluctuate significantly in future periods based on financing activities and fair value remeasurement of certain financial instruments.
Income Taxes
Income tax benefit (provision)
was approximately $0.01 million in 2025 compared to an income tax provision of $0.02 million in 2024. Income taxes for both periods primarily
reflect state minimum taxes and other immaterial items. We continue to maintain a valuation allowance against substantially all deferred
tax assets.
Segment Results of Operations
Beginning in November 2025,
the Company operates through two reportable segments: UAS and Commercial Aviation. The UAS segment reflects the operations of Drone Nerds
beginning on November 10, 2025, while the Commercial Aviation segment includes activities related to the development of the TriFan 600
aircraft program.
Beginning
in fiscal year 2026, the Company expects that its operating structure and internal management reporting may evolve to reflect the continued
development of its UAS solutions, advanced systems and defense, and domestic manufacturing and technology activities. As a result, the
Company anticipates that its reportable segments may be modified in future periods to align with how management evaluates performance
and allocates resources. Any such changes will be reflected in the Company’s financial reporting beginning in the period in which
they occur.
UAS Segment
For the year ended December
31, 2025, the UAS segment generated revenue of approximately $22.5 million and gross profit of approximately $4.9 million. Operating expenses
for the UAS segment consisted primarily of sales and marketing expenses associated with distribution activities and general and administrative
expenses required to support the operations of Drone Nerds following the acquisition.
Commercial Aviation Segment
The Commercial Aviation segment did not generate revenue during the
year ended December 31, 2025 as the Company continued to focus on development of the TriFan 600 aircraft. Operating expenses for this
segment consisted primarily of research and development costs related to engineering, design and certification activities, as well as
general corporate expenses supporting ongoing development efforts.
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Discontinued Operations
During December 2025, the
Company committed to a plan to dispose of its Inpixon Business and initiated an active process to identify a buyer. The Company completed
the sale of the 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 shown.
Loss from discontinued operations
was $15.5 million for the year ended December 31, 2025, compared to $7.3 million in 2024. The 2025 loss includes approximately $10.5 million
of impairment charges, consisting primarily of goodwill and intangible asset impairments recognized in connection with the Company’s
decision to dispose of the business and its classification as held for sale.
Excluding impairment charges,
the Inpixon Business continued to generate operating losses, reflecting ongoing negative cash flows and the Company’s strategic
decision to exit the business.
Net cash used in operating
activities of discontinued operations was approximately $4.4 million for the year ended December 31, 2025, consistent with the Company’s
historical operating losses for this business.
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, following losses of $15.5 million and
$7.3 million for the years ended December 31, 2025 and 2024, respectively.
Unaudited Pro Forma Financial Information (Supplemental)
Because the acquisition of
Drone Nerds was completed on November 10, 2025, our consolidated results for the year ended December 31, 2025 include only a partial period
of Drone Nerds operations. As a result, our reported GAAP results for 2025 do not reflect a full year of UAS platform operations.
To provide additional context
regarding the scale of the combined business, we have presented unaudited pro forma consolidated financial information as if the Drone
Nerds acquisition had occurred on January 1, 2024.
The unaudited pro forma information is presented
for comparative purposes only and is not necessarily indicative of:
● The actual results of the combined company for any future period; or
● The Company’s expected future operating performance.
The pro forma results reflect
adjustments that are directly attributable to the acquisition and factually supportable, including:
● Incremental amortization expense related to acquired intangible assets;
● Interest expense associated with acquisition-related indebtedness;
● Elimination of transaction costs directly attributable to the acquisition; and
● Conforming accounting policy adjustments, where applicable.
The pro forma results provide
additional information regarding the revenue scale and gross margin profile of the combined business relative to our reported GAAP results
for 2025, which include only a partial period of operations following the acquisition. The pro forma information does not reflect potential
cost savings, integration benefits, operational synergies, changes in capital structure subsequent to the acquisition, or the impact of
future strategic initiatives.
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For the Years Ended
(in thousands, except percentages) Amount Amount $ Change % Change
Income tax benefit (provision) 10 (16 ) 26 (163 )%
Non-cash or infrequent items:
Warrant issuance expense 6,580 —
Change in fair value of warrant liability 596 281
Change in fair value of equity securities 349 1,068
Loss on extinguishment of debt 421 —
Provision for credit losses on investments 2,039 —
Amortization of intangible assets 916 915
Adjusted Pro Forma Net Loss (Non-GAAP) $ (16,634 ) $ (17,741 ) $ 1,107 (6 )%
Pro forma Margins:
Gross margins 22 % 16 %
Adjusted Pro Forma Net Loss Margin (Non-GAAP) (14 )% (16 )%
Interpretation of Pro Forma Results
For the year ended December 31,
2025, pro forma revenues were $121.6 million compared to $111.2 million for 2024, representing an increase of approximately 9%. Pro forma
gross profit increased to $26.8 million from $17.3 million, and pro forma gross margin improved to 22% from 16%.
The improvement in pro forma
gross margin was driven primarily by favorable pricing dynamics and a shift in sales mix toward higher-margin enterprise customers, which
more than offset increases in input costs, including tariffs, during the period.
Operating expenses on a pro forma
basis increased to $54.3 million in 2025 from $37.5 million in 2024. The increase reflects continued investment in infrastructure, personnel,
public company costs, and development activities, including the TriFan 600 program.
Pro forma net loss from continuing
operations was $39.0 million for 2025 compared to $23.9 million in 2024.
Pro Forma Non-GAAP Measure
We also present pro forma
non-GAAP net loss, which reflects pro forma results further adjusted to exclude certain non-cash or infrequent items that management believes
are not indicative of core operating performance. As a result, Adjusted Pro Forma Net Loss (Non-GAAP) differs from pro forma net loss
as it excludes additional non-cash and non-recurring items beyond those reflected in the pro forma adjustments. These items include:
● Warrant issuance expense;
● Changes in fair value of warrant liabilities;
● Changes in fair value of certain investments and related instruments;
● Loss on extinguishment of debt;
● Provision for credit losses on investments;
● Stock-based compensation; and
● Amortization of acquired intangible assets.
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Adjusted Pro Forma Net Loss (Non-GAAP) was $17.3 million in 2025 compared
to $17.7 million in 2024.
This non-GAAP measure is intended
to supplement, and not be considered as a substitute for, the most directly comparable GAAP measure. Adjusted Pro Forma Net Loss (Non-GAAP)
has limitations as an analytical tool and may not be comparable to similarly titled measures used by other companies.
LIQUIDITY AND CAPITAL RESOURCES
Overview
During 2025, the Company completed multiple capital raising transactions
that materially strengthened its balance sheet and liquidity profile. These transactions included approximately $62.8 million of aggregate
net proceeds from public equity offerings and warrant exercises and approximately $22.8 million of net proceeds from the issuance of Series
10 Convertible Preferred Stock.
As a result of these transactions,
cash and cash equivalents increased to approximately $16.7 million as of December 31, 2025, and the Company reported working capital of
approximately $4.2 million, compared to a working capital deficit of approximately $8.8 million as of December 31, 2024.
Working capital at December
31, 2025 includes approximately $22.6 million of derivative warrant liabilities. These instruments are non-cash financial liabilities
that are required to be measured at fair value under GAAP and do not represent contractual cash obligations. Excluding these derivative
warrant liabilities, working capital would have been approximately $26.8 million.
The breakdown of our overall working capital
is as follows (in thousands):
Current Assets
Prepaid expenses and other current assets 3,989 888 3,101
Current assets of discontinued operations 3,645 3,208 437
Current Liabilities
Accounts payable and related party payables 5,212 5,241 (29 )
Accrued expenses and other current liabilities 6,165 6,071 94
Operating lease obligation, current 550 88 462
Current liabilities of discontinued operations 1,722 1,492 230
Total current assets increased
to approximately $51.8 million at December 31, 2025, compared to approximately $8.6 million at December 31, 2024, primarily reflecting
the addition of accounts receivable and inventories associated with the November 2025 acquisition of Drone Nerds, as well as higher cash
balances resulting from capital raising activities during the year.
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Total current liabilities
increased to approximately $47.6 million at December 31, 2025, compared to approximately $17.4 million at December 31, 2024. The increase
was primarily attributable to:
● Recognition of derivative warrant liabilities
● Higher short-term debt associated with the Drone Nerds acquisition
● Increased customer deposits and operating liabilities
Credit Facility
In February 2026, subsequent to year-end, Drone Nerds, LLC and Anzu
Robotics, LLC, each a subsidiary of 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 has a maturity date in
2029 and includes an accordion feature that permits the Company, subject to lender approval and customary conditions, to increase total
commitments by up to an additional $25.0 million. The facility is intended to support working capital needs of the Company’s UAS
operations and general corporate purposes.
Liquidity Outlook
The Company’s liquidity
strategy is focused on maintaining sufficient operating capital to support its enterprise drone distribution business while continuing
to develop unmanned platforms for defense and commercial applications Near-term liquidity is expected to be supported by cash on hand,
operating cash flows from the Drone Nerds business, and availability under the Company’s asset-based revolving credit facility.
The Company does not currently expect to require additional capital to support the ordinary-course operating needs of the Drone Nerds
business. However, the Company may seek additional capital in the future to support strategic acquisitions and the development of its
advanced systems and domestic manufacturing initiatives.
Over the longer term, any future resumption of the TriFan 600 program
will require additional capital.
Contractual Obligations and Commitments
The Company’s contractual
obligations consist primarily of operating lease liabilities, short-term debt and acquisition-related promissory notes, and vendor commitments
incurred in the ordinary course of business.
As of December 31, 2025, total
operating lease liabilities were approximately $3.0 million, of which approximately $0.6 million is due within the next twelve months.
In addition, the Company had short-term debt and acquisition-related promissory note obligations of approximately $7.9 million, representing
scheduled principal payments due within one year.
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 December 31, 2025,
customer deposits totaled approximately $3.1 million. Customer deposits consist of (i) refundable and conditional deposits received
in connection with aircraft pre-orders and (ii) advance payments received in the ordinary course of business from customers of the
Drone Nerds distribution operations. Aircraft-related deposits are generally refundable until a definitive purchase agreement is
executed. If a significant number of customers request refunds, it could adversely impact liquidity.
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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.