{"url_path":"/sec/xtia/10-q/2026/item-1a","section_key":"item-1a","section_title":"Item 1A Risk Factors**","topic":"sec","document":{"doc_type":"10-Q","doc_date":"2026-05-14","source_url":"https://www.sec.gov/Archives/edgar/data/1529113/0001213900-26-056270-index.html","accession_number":"0001213900-26-056270","cik":"0001529113","ticker":"XTIA","issuer_name":"XTI Aerospace, Inc.","edgar_url":"https://www.sec.gov/Archives/edgar/data/1529113/0001213900-26-056270-index.html","primary_entity_key":"0001529113","primary_entity_name":"XTI Aerospace, Inc."},"word_count":4814,"has_tables":true,"body_markdown":"**Item 1A.\nRisk Factors**\n\n** **\n\n*We are subject to various risks and uncertainties\nthat may materially harm our business, prospects, financial condition and results of operations. An investment in our common stock and\nother securities is speculative and involves a high degree of risk. In addition to the risk factors set forth below and the other information\nset forth in this Form 10-Q, you should carefully consider the risk factors disclosed in Part I, Item 1A, “Risk Factors,”\nin our Annual Report on Form\n10-K for the year ended December 31, 2025, filed with the SEC on April 15, 2026, which report is incorporated by\nreference herein, all of which could materially affect our business, financial condition and future results.*\n\n* *\n\n*If any of the events described in the following\nrisk factors actually occurs, or if additional risks and uncertainties later materialize, that are not presently known to us or that we\ncurrently deem immaterial, then our business, prospects, results of operations and financial condition could be materially adversely affected.\nIn that event, the trading price of our common stock could decline, and investors in our securities may lose all or part of their investment.\nThe risks discussed below include forward-looking statements, and our actual results may differ substantially from those discussed in\nthese forward-looking statements. Moreover, these disclosures reflect the Company’s beliefs and opinions as to factors that could\nmaterially and adversely affect the Company and its securities in the future. References to past events are provided by way of example\nonly 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\ntheir likelihood of occurring in the future.*\n\n** **\n\n**Risks Related to Our Financial Condition, Liquidity\nand Capital Resources** \n\n \n\n**We intend to pursue additional acquisitions\nas part of our growth strategy, which involve significant risks and may not achieve the anticipated benefits.**\n\n** **\n\nAs part of our growth strategy, we intend to pursue\nacquisitions of businesses, technologies, or assets to expand our UAS solutions platform, strengthen our capabilities in unmanned systems\ndevelopment, and support the buildout of our domestic manufacturing operations. We may from time to time be engaged in discussions or\nnegotiations regarding potential acquisition opportunities. There can be no assurance that we will identify suitable acquisition candidates,\nnegotiate acceptable terms, obtain financing on favorable terms or at all, receive any required regulatory approvals, or complete any\nsuch transaction. We may incur material costs related to potential acquisitions, including legal, financial advisory, accounting, and\ndue diligence expenses, regardless of whether any such transaction is consummated.\n\n \n\nWe expect to fund potential acquisitions through\na combination of available cash on hand, debt financing, which may include borrowings under our existing asset-based revolving credit\nfacility or new credit facilities, and the issuance of our common stock or other equity or equity-linked securities, including equity\ninterests in our subsidiaries. Any acquisition financed in whole or in part with equity securities could result in dilution to our existing\nstockholders. Acquisition-related indebtedness could reduce our available working capital and financial flexibility. See \"—\nWe may not be able to successfully integrate the business and operations of Drone Nerds or other entities that we have acquired or may\nacquire in the future\" for additional risks related to the integration of acquired businesses.  \n\n \n\n39\n\n \n\n \n\n**In connection with the disposition of our\nInpixon Business, we received consideration in the form of a note receivable that is subject to forgiveness provisions and an Unwind Option,\nand we may not collect the full amount of the note receivable.**\n\n \n\nOn February 3, 2026, we completed the disposition\nof our former Industrial IoT / Real-Time Location Systems operations (the “Inpixon Business”) for a purchase price of EUR\n4,640,000 (approximately $5.5 million), payable over time and bearing interest at 5% per annum. We recorded the note receivable at an\nestimated fair value of approximately $4.2 million as of the closing date.\n\n \n\nThe note receivable is unsecured and subject to\nfeatures that may result in our receiving less than the stated purchase price, including (i) our right (the “Unwind Option”)\nto require the purchaser to transfer back the Inpixon Business for no consideration during a specified window beginning thirty-seven months\nafter closing, in which case any unpaid amounts of the purchase price will be forgiven, (ii) automatic forgiveness of any unpaid portion\nof the purchase price if the Unwind Option is not exercised within the specified window, and (iii) the credit risk of the purchaser, a\nprivately held foreign entity over which we have limited visibility. If we are unable to collect amounts owed under the note receivable,\nare required to record additional credit loss reserves or impairment charges, or exercise the Unwind Option and incur losses or liabilities\nupon the return of the Inpixon Business, our financial condition and results of operations could be adversely affected.\n\n** **\n\n**Risks Related to Our Commercial Drone Solutions\nDivision (UAS Business)**\n\n \n\n**The nature of our UAS business involves\nsignificant risks and uncertainties, including product liability exposure, that may not be covered by insurance or indemnification.**\n\n \n\nOur UAS business involves significant operational\nand legal risks and uncertainties, and insurance or indemnification may not be available in all circumstances. We develop, distribute,\nservice and support drones and other electronic products. As a result, claims could be brought against us if the use or misuse of one\nof the products we sell, service or develop causes, or merely appears to have caused, personal injury, death or property damage. In addition,\ndefects, errors or failures in our products or services could lead to other potential life, health and property risks.\n\n \n\nIn our UAS operations, product liability risks\nmay arise from equipment malfunctions, operator error, software failures, battery incidents, collisions or other operational incidents\ninvolving drones deployed by customers or service personnel. These incidents may result in personal injury, property damage, regulatory\ninvestigations, litigation or reputational harm. Because drone operations often occur in populated or industrial environments, even isolated\nincidents could lead to significant claims, increased insurance costs, operational restrictions or loss of customer confidence.\n\n \n\nIn addition, Drone Nerds has historically developed\nand sold products and services in circumstances where insurance or indemnification may be limited or unavailable, including in connection\nwith the collection, processing and analysis of various types of information. Our UAS products and services may raise legal issues relating\nto privacy, data security, civil liberties, intellectual property, trespass, conversion and similar concepts, which may result in claims,\nregulatory scrutiny, enforcement actions or litigation.\n\n \n\nIndemnification to cover potential claims or liabilities\nresulting from the failure of technologies we deploy may be available in certain circumstances but not in others. The uncrewed aerial\nsystems industry continues to evolve, and insurance coverage for certain operational risks may be limited, unavailable, subject to significant\nexclusions, or prohibitively expensive. We may not be able to obtain or maintain product liability insurance or other insurance coverage\nin sufficient amounts, on commercially reasonable terms, or at all, and any such insurance may not be adequate to cover all potential\nliabilities.\n\n \n\nSubstantial claims resulting from an accident,\nproduct failure, or personal injury or property liability arising from our products and services in excess of any indemnity or insurance\ncoverage (or for which indemnity or insurance coverage is not available or is not obtained) could harm our financial condition, cash flows\nand operating results. Any accident, even if fully covered or insured, could negatively affect our reputation among our customers and\nthe public and make it more difficult for us to compete effectively.\n\n \n\n40\n\n \n\n \n\n**Risks Related to Our Autonomous Defense Systems\nDivision**\n\n** **\n\n**The strategic reorientation of our former\nXTI Aircraft division toward unmanned systems development introduces significant new execution risks.**\n\n \n\nIn 2026, following the acquisition of Drone Nerds,\nthe Company paused active development phase of the TriFan 600 manned VTOL aircraft program and redirected the former XTI Aircraft division,\nnow operating as XTIA Autonomous Defense Systems (the “ADS division”), toward the design and development of unmanned platforms\nfor defense and commercial applications. The TriFan 600 program has been paused, and the Company has not made a final determination to\nabandon it. However, there can be no assurance that the program will be resumed, or that, if resumed, it will achieve FAA certification,\nreach commercial production, or generate revenues.\n\n \n\nThe ADS division is in an early stage of development\nand has not generated revenues. Its ability to generate revenues will depend on its success in securing development contracts, government\nprocurement awards, or commercial partnerships, none of which are assured. The division faces significant competition from established\ndefense contractors and unmanned systems developers with substantially greater resources, experience, and existing customer relationships.\nThere can be no assurance that the ADS division will successfully develop marketable products, secure contracts, or generate revenues\non the timeline anticipated, or at all.\n\n \n\nThe Company’s investment in the ADS division\nis subject to ongoing evaluation by management and the Board of Directors based on the division’s ability to achieve key operational\nand commercial milestones, including securing development contracts, establishing strategic partnerships, and demonstrating a credible\npath to revenue generation. If the ADS division fails to achieve sufficient progress toward these objectives within the timeframes management\nconsiders reasonable, the Company may determine to significantly reduce investment in the division, restructure its operations, or discontinue\nthe division entirely. Any such determination could result in asset impairments, restructuring charges, employee severance costs, and\nthe loss of the Company's investment in the division to date, including the ADS division’s allocated assets, and could materially\nadversely affect our business, financial condition, and results of operations. There can be no assurance that the Company will continue\nto fund the ADS division at current or anticipated levels.  \n\n \n\nThe reorientation of the former XTI Aircraft division\nalso introduces execution risks, including the challenge of recruiting and retaining additional personnel with specialized unmanned systems\nexperience, the difficulty of competing for defense procurement awards as a relatively new entrant, and the risk that the engineering\nexpertise developed through the TriFan 600 program may not translate directly into commercially viable unmanned systems products. These\nrisks, individually or in combination, could materially adversely affect our business, financial condition, and results of operations.\n\n \n\nIn addition, we have devoted significant financial\nand engineering resources to the TriFan 600 program, and if the program is not resumed, we may not realize a return on those investments.\n\n**  **\n\n**Risks Related to Our Advanced Technology and\nManufacturing Division **\n\n** **\n\n**Our Advanced Technology and Manufacturing\ndivision is in an early stage of development and has not generated revenues, and we may not successfully develop U.S.-based production\ncapabilities for NDAA-compliant unmanned systems components and technologies, and we may discontinue such division.**\n\n \n\nOur Advanced Technology and Manufacturing (“ATM”)\ndivision plans to develop U.S.-based production for NDAA-compliant unmanned systems components and technologies to serve the growing demand\nfor domestically sourced unmanned systems across defense and enterprise markets. The ATM division is in an early stage of development\nand has not generated revenues. There can be no assurance that we will successfully develop domestic production capabilities on the timelines\nwe anticipate, or at all. Our ability to do so will depend on a number of factors, including site selection, facility build-out, equipment\nprocurement, supply chain qualification, workforce recruitment, and process validation, each of which is subject to delays, cost overruns,\nand execution risk. If we are unable to develop a viable production platform, we may be unable to generate revenues from the ATM division\nor to realize a return on our investment in this initiative.\n\n \n\n41\n\n \n\n \n\nThe Company’s investment in the ATM division\nis subject to ongoing evaluation by management and the Board of Directors based on the division’s ability to achieve key operational\nand commercial milestones, including establishing manufacturing partnerships on acceptable terms, securing NDAA-compliant production capacity,\nand demonstrating a credible path to revenue generation. If the ATM division fails to achieve sufficient progress toward these objectives\nwithin the timeframes management considers reasonable, the Company may determine to significantly reduce investment in the division, restructure\nits operations, or discontinue the division entirely. Any such determination could result in asset impairments, the write-off of capitalized\ndevelopment costs, if any, employee severance costs, if any, early termination of manufacturing partnerships or facility commitments,\nand the loss of the Company’s investment in the division to date, including the ATM division’s allocated assets, and could\nmaterially adversely affect our business, financial condition, and results of operations. There can be no assurance that the Company will\ncontinue to fund the ATM division at current or anticipated levels, or that the division will successfully establish manufacturing capabilities\nor generate revenues on the timeline anticipated, or at all.\n\n** **\n\n**We may be unable to establish manufacturing\npartnerships or arrangements necessary to support the ATM division's growth on acceptable terms, or at all.**\n\n \n\nThe development of U.S.-based production capabilities\nfor NDAA-compliant unmanned systems components may require us to enter into manufacturing partnerships, supply arrangements, joint ventures,\ncontract manufacturing relationships, or other commercial arrangements with third parties. We may be unable to identify, negotiate, or\nmaintain such relationships on commercially reasonable terms, or at all. If we are unable to establish or maintain manufacturing partnerships\nnecessary to support the ATM division, we may be required to develop in-house manufacturing capabilities, which would require additional\ncapital investment and time, or we may be unable to bring ATM division products to market on the timelines we anticipate, or at all.\n\n** **\n\n**Our ability to compete in the market for domestically sourced\nunmanned systems components depends on our ability to achieve and maintain NDAA compliance and other federal procurement and sourcing\ncertifications, which is uncertain.**\n\n \n\nThe market opportunity for our ATM division depends\nsubstantially on the ability of our products to qualify as NDAA-compliant or otherwise satisfy federal procurement and sourcing requirements\napplicable to defense, government, and enterprise customers. The standards governing these certifications and eligibility determinations\nare complex, evolving, and subject to interpretation by government agencies. We may be unable to obtain or maintain required certifications\nor eligibility determinations on commercially reasonable terms, within anticipated timeframes, or at all. Any failure or delay in obtaining\nor maintaining these qualifications, or any change in the underlying standards, could limit the addressable market for our ATM division's\nproducts and adversely affect our business, financial condition and results of operations.\n\n** **\n\n**Demand for our ATM division’s products\nwill depend on continued U.S. government policy support for domestic sourcing of unmanned systems components, and changes in such policies\ncould materially reduce our addressable market.**\n\n \n\nThe market for domestically sourced unmanned systems\ncomponents is influenced by U.S. government policies favoring domestic manufacturing and supply chain security, including procurement\npreferences, NDAA compliance mandates, tariffs on foreign-manufactured components, and similar measures. Any reduction, repeal, or material\nchange in these policies, or any change in the strategic priorities of the U.S. government with respect to domestic sourcing of unmanned\nsystems components, could materially reduce demand for our ATM division's products and adversely affect our business, financial condition\nand results of operations.\n\n** **\n\n**The development and operation of U.S.-based\nmanufacturing capabilities will require substantial capital investment, and we may be unable to obtain the financing necessary to fund\nour ATM division's growth.**\n\n \n\nDeveloping U.S.-based manufacturing capabilities\nis capital-intensive and may require substantial investment in facilities, equipment, inventory, qualified personnel, and working capital\nbefore the ATM division generates meaningful revenues. We may be required to raise additional capital through debt or equity financings,\nstrategic partnerships, government incentives, or other sources to fund the development and operation of the ATM division. There can be\nno assurance that such financing will be available on acceptable terms, or at all. If we are unable to obtain sufficient financing, we\nmay be required to delay, reduce or modify our ATM development plans, which could adversely affect our ability to compete in the market\nfor domestically sourced unmanned systems components.\n\n** **\n\n42\n\n \n\n** **\n\n**If and when our ATM division commences manufacturing\noperations, it will be subject to operational risks inherent in manufacturing, and any failure to manage these risks effectively could\nadversely affect our business.**\n\n \n\nIf and when our ATM division commences manufacturing\noperations, it will be subject to a range of operational risks inherent in advanced manufacturing, including equipment failures, quality\ncontrol issues, production yield variability, raw material and component shortages, workplace safety incidents, environmental compliance\nobligations, and labor disruptions. The successful operation of a manufacturing facility also requires personnel with specialized expertise\nin advanced manufacturing, quality engineering, supply chain management, and regulated production environments, and competition for such\npersonnel is significant. Any failure to manage these operational and personnel-related risks effectively could increase our costs, delay\ndeliveries, expose us to liability, or impair our ability to satisfy customer requirements, any of which could materially adversely affect\nour business, financial condition and results of operations.\n\n** **\n\n**Our ATM division may face significant competition\nfrom established domestic manufacturers and other entrants, which could limit our ability to win customer commitments or achieve targeted\nproduction volumes.**\n\n \n\nThe market for domestically sourced unmanned systems\ncomponents includes established domestic manufacturers, vertically integrated defense primes, and other new entrants, many of which have\nsubstantially greater resources, manufacturing experience, customer relationships, and past performance records than we do. Our ability\nto compete will depend on our ability to differentiate on product performance, compliance, cost, scalability, and customer service, none\nof which is assured. If we are unable to compete effectively, we may be unable to win customer commitments or achieve targeted production\nvolumes, which could adversely affect our business, financial condition and results of operations.\n\n** **  \n\n**Risks Related to Legal, Regulatory and General\nBusiness Operations**\n\n \n\n**Adverse judgments or settlements in legal\nproceedings, and regulatory investigations or enforcement actions by state authorities or other governmental agencies, could materially\nharm our business, financial condition, operating results, cash flows, and reputation.** \n\n \n\nWe may be a party to claims that arise from time\nto time in the ordinary course of our business, including claims related to our products, securities offerings, contracts and subcontracts,\nprotection of confidential information or trade secrets, adversary proceedings arising from customer bankruptcies, employment matters,\nimmigration requirements, and compliance with various state and federal statutes, rules and regulations applicable to our business.\n\n \n\nFor example, we are currently involved in litigation\nrelating to the XTI Merger. On December 6, 2023, Xeriant, Inc. (“Xeriant”) filed a complaint in the United States District\nCourt for the Southern District of New York (the “S.D.N.Y.”) against Legacy XTI, two unnamed entities, and five unnamed individuals.\nOn January 31, 2024, Xeriant filed an amended complaint adding the Company as a defendant. On February 29, 2024, Xeriant filed a second\namended complaint, removing the Company and one of the unnamed entities as defendants. The second amended complaint alleges that Legacy\nXTI breached several agreements with Xeriant, including a Joint Venture Agreement dated May 31, 2021, a cross-patent license agreement,\nan operating agreement, and a letter dated May 17, 2022, which Xeriant claims arose from its introduction of Legacy XTI to a Nasdaq-listed\ncompany as a potential acquirer. Xeriant further alleges that it provided intellectual property, expertise, and capital in connection\nwith Legacy XTI’s TriFan 600 aircraft and was improperly excluded from a subsequent transaction involving the TriFan 600 technology\nas part of Legacy XTI’s merger with the Company. Xeriant asserts causes of action for breach of contract, fraud, unjust enrichment,\nand misappropriation of confidential information, and seeks damages in excess of $500 million, along with injunctive and other equitable\nrelief. 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\n14, 2025. Legacy XTI filed an answer on January 28, 2025, and subsequently filed an amended answer and counterclaims on February 18, 2025.\nThe amended counterclaims, further amended on April 14, 2025, allege that Xeriant breached the Joint Venture Agreement by failing to make\nrequired capital contributions of approximately $4.6 million and by failing to deliver promised intellectual property and strategic support.\nLegacy XTI further alleges that Xeriant breached its fiduciary duty by engaging in coercive and self-dealing conduct, including conditioning\na strategic introduction on the issuance of equity and assumption of debt. Legacy XTI seeks declaratory relief confirming that the joint\nventure has been terminated, that all intellectual property related to the TriFan 600 belongs solely to Legacy XTI, and that Xeriant has\nno rights in the TriFan 600 technology. On April 28, 2025, Xeriant moved to dismiss Legacy XTI’s second amended counterclaims. On\nSeptember 23, 2025, the S.D.N.Y. denied Xeriant’s motion, concluding that Legacy XTI plausibly alleged claims against Xeriant for\nbreach of contract, breach of fiduciary duty, and declaratory judgment. The S.D.N.Y. found that Legacy XTI had adequately pleaded that\nXeriant was obligated to contribute $10 million in funding to the joint venture and that it acted disloyally by leveraging a potential\nmerger opportunity for its own benefit. Following the S.D.N.Y.’s September 23, 2025 denial of Xeriant’s motion to dismiss\nLegacy XTI’s counterclaims, the litigation has advanced into full discovery. The S.D.N.Y. has since compelled Xeriant to comply\nwith its discovery obligations and warned that continued noncompliance would result in dismissal of its claims. While the Company continues\nto believe the allegations against Legacy XTI are meritless, the case remains in active discovery and subject to close judicial supervision,\nwhich may increase litigation costs and extend the duration of the proceedings. On December 9, 2025, Xeriant filed a Third Amended Complaint,\nvoluntarily non-suiting five counts from the prior complaint and revising its damages demand from $500 million to an unspecified amount.\nOn December 23, 2025, Legacy XTI filed its Answer, Affirmative Defenses, and Counterclaims in response to the Third Amended Complaint.\nDiscovery remains ongoing. The outcome of the litigation cannot presently be predicted, and any adverse determination could have a material\nimpact on the Company.\n\n  \n\n43\n\n \n\n \n\nIn connection with the litigation matter described\nin the immediately preceding paragraph, on June 12, 2024, the Company received correspondence from legal counsel for Auctus Fund, LLC\n(“Auctus”), dated April 3, 2024, asserting that the Company and/or Legacy XTI may have assumed Xeriant’s obligations\nunder a Senior Secured Promissory Note (the “Note”) issued by Xeriant to Auctus in the original principal amount of $6,050,000,\npursuant to a letter agreement dated May 17, 2022, between Xeriant and Legacy XTI (the “May 17 letter”). Auctus claimed that\nthe outstanding amount due under the Note, including accrued interest, was $8,435,008.81 as of April 3, 2024. In July 2024, Legacy XTI\nresponded to Auctus’s claims, asserting that the May 17 letter is invalid and unenforceable on multiple grounds. Legacy XTI further\nstated that, even if the May 17 letter were enforceable, it did not create or trigger any obligation for Legacy XTI to assume Xeriant’s\ndebt under the Note or otherwise. On May 13, 2025, Auctus filed a lawsuit against Legacy XTI in the District Court of Arapahoe County,\nColorado, asserting a single claim for breach of contract based on its prior allegations. Auctus contends that Legacy XTI is contractually\nobligated to repay nearly $9 million in principal and accrued interest, based on Legacy XTI’s entry into a loan agreement with Legacy\nInpixon in March 2023 and its subsequent merger with Legacy Inpixon in March 2024. On June 25, 2025, Legacy XTI filed a motion to dismiss\nor, in the alternative, to stay the proceedings pending resolution of the Xeriant litigation. Legacy XTI’s motion asserts that Auctus’\ncomplaint should be dismissed: (i) for lack of standing, because Auctus is neither a party to, nor a third-party beneficiary of, the May\n17 letter; (ii) for failure of a condition precedent, because no obligation ever arose in that the alleged triggering condition—a\nbusiness combination involving Legacy XTI and Legacy Inpixon did not occur within the required one-year time frame; (iii) for lack of\nvalid assignment, because Xeriant’s unilateral assignment of debt to Legacy XTI is void because the underlying Note prohibits assignment\nwithout Auctus’s prior written consent, which is not alleged. On August 5, 2025, Auctus filed a response arguing that it was an\nintended third-party beneficiary of the May 17 letter, that the anti-assignment clause does not bar its claims, and that the request for\na stay is unwarranted because the Xeriant litigation involves different parties and broader claims. On September 12, 2025, Legacy XTI\nfiled a Reply Brief reinforcing that Auctus lacks standing, that no obligation ever arose under the May 17 Letter because no qualifying\ntransaction occurred within its one-year term, and that any purported transfer of debt is void under the Note’s anti-assignment\nclause. 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\nstay to avoid inconsistent rulings. On October 2, 2025, Legacy XTI filed a Notice of Supplemental Authority submitting the September 23,\n2025 Order of the S.D.N.Y., which denied Xeriant’s motion to dismiss Legacy XTI’s counterclaims and held that Legacy XTI had\nplausibly alleged that the May 17 Letter expired by its terms and is unenforceable. Legacy XTI asserted that the S.D.N.Y. ruling directly\nsupports dismissal or a stay because it confirms that the same alleged contract and issues raised by Auctus are already being adjudicated\nin the federal case. On November 7, 2025, the court denied Legacy XTI’s motion to dismiss or, in the alternative, stay the proceedings.\nThe court held that, when viewing the allegations in the light most favorable to Auctus, the complaint plausibly stated claims for relief\nunder Colorado’s notice-pleading standard. The court further denied Legacy XTI’s alternative request for a stay, reasoning\nthat the parties were not identical to those in the federal action and therefore comity and judicial economy did not warrant a stay. The\ncourt nonetheless directed the parties to update it regarding the outcome of the federal case to the extent it may be dispositive of overlapping\nissues. On November 21, 2025, Legacy XTI filed its Answer and Affirmative Defenses to the Complaint. The parties are engaged in discovery.\nThe Company will continue to vigorously defend against the claims but cannot predict the timing or outcome of the proceedings or estimate\nany potential exposure.\n\n \n\nIn addition, in February 2026, the State of Texas\nfiled a petition in the District Court of Collin County, Texas, against Anzu Robotics, LLC (“Anzu”) alleging that Anzu violated\nthe Texas Deceptive Trade Practices-Consumer Protection Act (the “DTPA”) in connection with the marketing and sale of its\ndrone products. The State contends, among other things, that Anzu misrepresented certain characteristics, origins, and security features\nof its products and failed to disclose certain alleged material facts relating to the products’ development and components and Anzu’s\nalleged business relationship with DJI. The State seeks temporary and permanent injunctive relief, civil penalties of up to $10,000 per\nviolation 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\nproperty, and attorneys’ fees and costs. On April 24, 2026, the State of Texas filed a Motion for No-Answer Default Judgment, with\na hearing scheduled for June 24, 2026 in the 429th District Court of Collin County, Texas. The Company is evaluating its response to the\nmotion. In May 2026, the State of Texas also issued a civil investigative demand to Drone Nerds LLC pursuant to the DTPA  The Company\ncannot at this time predict the outcome of these matters or reasonably estimate a range of potential loss, if any.\n\n \n\nIn April 2026, the State of Florida issued a subpoena\nto Anzu pursuant to the Florida Deceptive and Unfair Trade Practices Act in connection with the marketing and sale of certain drone products.\nThe Company is engaged in preliminary discussions with the Florida Attorney General to attempt to resolve the matter cooperatively.\nThe Company cannot at this time predict the outcome of this matter or reasonably estimate a range of potential loss, if any.\n\n \n\nThe outcome of the foregoing matters cannot presently\nbe predicted, and an adverse determination in any of these matters could have a material impact on our business, financial condition and\nresults of operations. Regardless of the merits of any particular claim, responding to litigation may divert management’s time and\nattention, result in significant legal expenses, and expose us to monetary damages, penalties or injunctive relief. Litigation and other\nlegal proceedings are inherently uncertain, and adverse judgments or settlements could materially adversely affect our business, financial\ncondition, results of operations and cash flows. Even if a claim is fully indemnified or insured, such litigation could damage our reputation\nand make it more difficult to compete effectively or obtain adequate insurance in the future.\n\n \n\nFurthermore, while we maintain insurance for certain\npotential liabilities, such insurance does not cover all types and amounts of potential liabilities and is subject to exclusions, deductibles\nand caps. Insurers may dispute coverage, which may affect the timing or availability of insurance proceeds. Unexpected outcomes in legal\nproceedings, or changes in management’s evaluation of the likely outcomes, could have a material adverse effect on our business,\nfinancial condition, results of operations and cash flows.\n\n \n\n44"}