Note 3 - Summary of Significant Accounting Policies

Liquidity

As of December 31, 2025, the Company had cash and cash equivalents of approximately $16.7 million and no outstanding borrowings under its credit facility. During the year ended December 31, 2025, the Company incurred a net loss of approximately $68.5 million and used approximately $36.6 million of cash in operating activities.

Management has evaluated the Company’s liquidity and capital requirements in accordance with applicable accounting guidance. The Company’s historical operating losses and negative cash flows from operations could raise substantial doubt about its ability to continue as a going concern.

The Company’s liquidity position has been supported by capital raising activities during 2025, including public offerings of equity securities and the issuance of convertible preferred stock. In addition, the Company has access to financing arrangements, including an asset-based lending facility, which provides borrowing availability subject to a borrowing base. Management expects to fund operations through a combination of existing cash balances, borrowing availability under its credit facility, and its ability to manage discretionary expenditures. While the Company may pursue additional capital raising activities, such activities are not considered in management’s assessment of its ability to meet its obligations.

Based on these considerations, management believes that the Company will have sufficient liquidity to meet its obligations for at least twelve months from the date of issuance of these consolidated financial statements.

Use of Estimates

The preparation of financial statements in conformity with accounting principles generally accepted in the United States of America (“GAAP”) requires management to make estimates and assumptions that affect the reported amounts of assets and liabilities and disclosure of contingent assets and liabilities at the date of the financial statements and the reported amounts of revenues and expenses during each of the reporting periods. Actual results could differ from those estimates. The Company’s significant estimates consist of:

Cash and Cash Equivalents

Cash consists primarily of demand deposit bank accounts, which, from time to time, may exceed federally insured limits. The Company considers all highly liquid investments with an original maturity from date of purchase of three months or less, or that are readily convertible into known amounts of cash, to be cash equivalents. As of December 31, 2025 and 2024, the Company did not hold any cash equivalents.

Statement of Cash Flows

The Company presents cash flows from financing activities on a net basis for transactions in which proceeds are received net of offering costs and other transaction fees.

The Company has elected to present cash flows from discontinued operations on a net basis within each category of the consolidated statements of cash flows. Accordingly, the consolidated statements of cash flows do not separately present cash flows from discontinued operations within operating, investing and financing activities. Additional information regarding discontinued operations is included in Note 19.

Inventories

Inventories consist primarily of finished goods held for resale, including drones and related accessories, and are stated at the lower of cost or net realizable value. Cost is determined using the first-in, first-out (“FIFO”) method. The Company does not manufacture these products and instead purchases inventory from third-party suppliers, including, in certain cases, products manufactured on its behalf by third-party contract manufacturers, for distribution to enterprise, public safety, government and commercial customers.

Inventory costs include amounts paid to suppliers and other costs incurred to bring inventories to their present location and condition, including freight and handling costs. Selling, general and administrative expenses are expensed as incurred and are not included in inventory cost.

Net realizable value is the estimated selling price in the ordinary course of business, less reasonably predictable costs of completion, disposal and transportation. The Company evaluates inventory on a regular basis for excess, slow-moving or obsolete items based on historical sales trends, forecasted demand, product lifecycle considerations and market conditions. When required, the Company records a reserve to write down inventory to net realizable value.

Credit Risk and Concentrations

Financial instruments that subject the Company to credit risk consist principally of trade accounts receivable and cash and cash equivalents. The Company maintains its cash and cash equivalents primarily with high-credit-quality financial institutions in the United States and, prior to the Inpixon Business disposition, in Germany. Cash balances maintained with financial institutions in the United States are generally in excess of federally insured limits. The Company mitigates its credit risk by limiting its exposure to any single financial institution and by monitoring the credit quality of its counterparties. The Company places its cash with financial institutions that have long-term credit ratings of at least A- or equivalent, as assigned by major credit rating agencies.

The Company performs certain credit evaluation procedures and does not require collateral for financial instruments subject to credit risk. The Company believes that credit risk is limited because the Company routinely assesses the financial strength of its customers and, based upon factors surrounding the credit risk of its customers, establishes an allowance for credit losses.

The following table presents a rollforward of the Company’s allowance for credit losses (in thousands):

Trade accounts receivable acquired in connection with the Drone Nerds acquisition were recorded at fair value at the acquisition date, which reflects expected credit losses. No provision for credit losses was recorded related to these receivables during the post-acquisition period. Due to the short time between the acquisition date and the year end, and the existence of credit insurance coverage on these receivables, any incremental anticipated credit losses from Drone Nerds accounts receivable were not material.

During the year ended December 31, 2025, the Company recorded a provision for credit losses of approximately $2.0 million related to a convertible promissory note receivable. As of December 31, 2025, the note receivable was fully reserved (see Note 13).

The provision for credit losses presented in the consolidated statement of cash flows includes approximately $0.1 million related to discontinued operations, which is excluded from the allowance rollforward above.

The customers from continuing operations who account for 10% or more of the Company’s revenue for the year ended December 31, 2025 or 10% or more of the Company’s outstanding receivable balance as of December 31, 2025 are presented as follows:

For the year ended December 31, 2024, all revenue was generated by the Company’s Inpixon Business, which has been classified as discontinued operations as of December 31, 2025.

The vendors from continuing operations who account for 10% or more of the Company’s purchases for the year ended December 31, 2025 or 10% or more of the Company’s outstanding accounts payable balance as of December 31, 2025 are presented as follows.

Intangible Assets and Goodwill

Finite-lived intangible assets primarily consist of developed technology, patents, customer relationships, and trade names and trademarks. Finite-lived intangible assets are amortized on a straight-line basis over their estimated useful lives, generally ranging from 5 to 15 years. The Company reviews the estimated useful lives of intangible assets periodically and adjusts them if necessary.

Goodwill represents the excess of the purchase price of an acquired business over the fair value of identifiable net assets acquired. Goodwill is not amortized but is tested for impairment at least annually as of October 1, or more frequently if events or changes in circumstances indicate that goodwill may be impaired.

The Company may first perform a qualitative assessment to determine whether it is more likely than not that the fair value of a reporting unit is less than its carrying amount. If the Company bypasses the qualitative assessment, or if the qualitative assessment indicates potential impairment, the Company performs a quantitative impairment test by comparing the fair value of the reporting unit to its carrying amount. If the carrying amount exceeds fair value, an impairment charge is recognized in an amount equal to the excess, limited to the total amount of goodwill allocated to the reporting unit.

The Company estimates the fair value of its reporting units using the income approach and/or the market approach. The income approach is based on discounted cash flow models that include assumptions regarding projected revenues, expenses, cash flows, long-term growth rates, and discount rates. The market approach is based on comparable market data and valuation multiples of similar companies.

Long-lived assets, including finite-lived intangible assets and operating lease right-of-use assets, are reviewed for impairment whenever events or changes in circumstances indicate that the carrying amount of an asset group may not be recoverable. Recoverability is assessed by comparing the carrying amount of the asset group to the undiscounted cash flows expected to result from the use and eventual disposition of the asset group. If the carrying amount exceeds the undiscounted cash flows, an impairment charge is recognized for the amount by which the carrying amount exceeds fair value.

Long-lived assets and disposal groups classified as held for sale are measured at the lower of carrying amount or fair value less costs to sell. Depreciation and amortization cease upon classification as held for sale. See Note 19 – Discontinued Operations for impairment charges recognized in connection with the classification of the Inpixon Business as held for sale.

Leases

The Company determines whether an arrangement is or contains a lease at contract inception. A lease exists when a contract conveys the right to control the use of identified property or equipment for a period of time in exchange for consideration.

The Company recognizes a right-of-use (“ROU”) asset and a corresponding lease liability for all leases with a term greater than 12 months at the commencement date. ROU assets represent the Company’s right to use an underlying asset over the lease term, and lease liabilities represent the obligation to make lease payments arising from the lease.

Lease liabilities are measured at the present value of fixed lease payments over the lease term, including renewal options that are reasonably certain to be exercised. Because the rate implicit in the lease is generally not readily determinable, the Company uses its incremental borrowing rate at lease commencement to discount lease payments. The incremental borrowing rate represents the rate of interest the Company would have to pay to borrow, on a collateralized basis, an amount equal to the lease payments over a similar term in a similar economic environment.

ROU assets are measured based on the initial lease liability, adjusted for lease payments made at or before commencement, lease incentives received, and initial direct costs.

Lease expense for operating leases is recognized on a straight-line basis over the lease term. Variable lease payments that do not depend on an index or rate are expensed as incurred and are not included in the measurement of lease liabilities. These primarily include payments based on usage or other variable factors.

The Company has elected the short-term lease exemption for leases with a term of 12 months or less. The Company has elected the practical expedient to combine lease and non-lease components for all classes of underlying assets and account for them as a single lease component.

The Company reassesses leases upon the occurrence of certain events, including modifications or changes in circumstances that impact the lease term or expected lease payments. When a lease liability is remeasured, a corresponding adjustment is made to the related ROU asset.

Revenue Recognition

The Company recognizes revenue in accordance with ASC Topic 606, Revenue from Contracts with Customers. Revenue is recognized when control of promised goods transfers to the customer in an amount that reflects the consideration the Company expects to receive in exchange for those goods.

Revenue from continuing operations is primarily derived from the sale and distribution of high-end drones, related equipment, accessories, and components to wholesale and retail customers.

Product Sales

Revenue is recognized at a point in time when control transfers to the customer, which generally occurs:

The Company is generally the principal in its sales arrangements as it controls the goods prior to transfer to the customer, establishes pricing, bears inventory and credit risk, and is responsible for fulfillment. Accordingly, revenue is recognized on a gross basis. In limited instances, the Company facilitates the sale of third-party service offerings (e.g., product protection programs), for which it acts as an agent and recognizes revenue on a net basis; such amounts are not material.

Payment terms vary by customer and channel and generally range from immediate payment at retail to 30–60 days for wholesale customers.

The transaction price may include variable consideration in the form of volume discounts, rebates, and estimated product returns. Revenue is recognized net of estimated returns and allowances. The Company estimates refund liabilities based on historical return patterns and current trends and records a reserve at each reporting date.

Freight billed to customers is included in net sales. Shipping and handling costs are treated as fulfillment costs and included in cost of sales.

Deferred revenue represents customer payments received in advance of shipment. Revenue is recognized when the related product is shipped and control transfers to the customer. The Company does not have material contract assets.

The Company may also provide certain service-based offerings, including product protection programs, that represent stand-ready obligations satisfied over time. Revenue associated with these arrangements is recognized over the coverage period. Such arrangements are not material to the consolidated financial statements.

Vendor Consideration

Consideration received from vendors, including price protection, rebates, and promotional incentives, is accounted for as a reduction of cost of sales in accordance with ASC 705-20, Cost of Sales and Services—Accounting for Consideration Received from a Vendor.

Practical Expedients

The Company has elected the practical expedient related to significant financing components, as the period between transfer of goods and customer payment is generally one year or less. The Company also expenses incremental costs of obtaining contracts when the amortization period would have been one year or less.

While the Company offers certain services, software, and training as part of its UAS solutions, these offerings are generally sold on a standalone basis or are not material, and therefore do not result in material multiple performance obligation arrangements requiring allocation of transaction price.

Stock-Based Compensation

The Company accounts for stock-based compensation in accordance with ASC Topic 718, Compensation—Stock Compensation. Stock-based compensation expense is measured at the grant date based on the fair value of the award and is recognized as expense over the requisite service period, which is generally the vesting period. Stock-based compensation expense is recorded within the accompanying consolidated statements of operations based on the functional classification of the related employee.

For awards with service-based vesting conditions only, the Company recognizes compensation expense on a straight-line basis over the requisite service period. Forfeitures are recognized as they occur.

Stock Options

The Company estimates the grant-date fair value of stock option awards using the Black-Scholes option-pricing model. The Black-Scholes model requires the use of subjective assumptions, including the expected term of the option, expected volatility, risk-free interest rate, and expected dividend yield. Changes in these assumptions could materially affect the fair value of stock option awards and the related stock-based compensation expense.

The assumptions used in the Black-Scholes model are determined as follows:

Legacy XTI did not grant stock options after 2023.

Net Loss Per Share

Basic net loss per share is computed by dividing net loss attributable to common stockholders by the weighted-average number of shares of common stock outstanding during the period.

Net loss attributable to common stockholders reflects net loss adjusted for any dividends declared or accumulated on preferred stock and increased or reduced by net income or loss attributable to noncontrolling interests.

Diluted net loss per share is computed by giving effect to all potentially dilutive common stock equivalents outstanding during the period, including stock options, warrants (including pre-funded warrants), convertible preferred stock, and other instruments that may be settled in shares of common stock, using the treasury stock method or the if-converted method, as applicable.

For periods in which the Company reports a net loss, diluted net loss per share is the same as basic net loss per share because the inclusion of potentially dilutive securities would be anti-dilutive.

Potentially dilutive securities excluded from the computation of diluted net loss per share are disclosed separately in the notes to the consolidated financial statements.

Income Taxes

The Company accounts for income taxes under the asset and liability method in accordance with ASC Topic 740, Income Taxes. Deferred tax assets and liabilities are recognized for the future tax consequences attributable to differences between the financial statement carrying amounts of existing assets and liabilities and their respective tax bases, as well as for net operating loss and tax credit carryforwards. Deferred tax assets and liabilities are measured using enacted tax rates expected to apply in the periods in which the temporary differences are expected to reverse.

The Company evaluates deferred tax assets on a jurisdictional basis and establishes a valuation allowance when it is more likely than not that some or all of the deferred tax assets will not be realized. In assessing the need for a valuation allowance, the Company considers all available positive and negative evidence, including historical operating results, projected future taxable income, reversal of existing temporary differences, and tax planning strategies. Changes in the valuation allowance are recorded in income tax expense in the period of change.

The Company recognizes the effect of income tax positions only if those positions are more likely than not to be sustained upon examination by taxing authorities based on the technical merits of the position. Recognized income tax positions are measured as the largest amount of benefit that is greater than 50% likely of being realized upon settlement. The Company recognizes interest and penalties related to uncertain tax positions as a component of income tax expense.

The Company’s income tax expense (benefit) includes federal, state, and foreign income taxes, as applicable.

Segments

The Company’s Chief Executive Officer serves as the Chief Operating Decision Maker (“CODM”) and evaluates financial performance and allocates resources based on segment operating results. The Company has two reportable segments: (i) Unmanned Aircraft Systems (“UAS”) and (ii) Commercial Aviation. Segment information is prepared on the same basis as the Company’s consolidated financial statements.

Recently Issued and Adopted Accounting Standards

In December 2023, the FASB issued ASU 2023-09, Income Taxes (Topic 740): Improvements to Income Tax Disclosures, which enhances the transparency and decision usefulness of income tax disclosures. The standard requires additional disaggregation of income tax information, including rate reconciliation and income taxes paid.

The guidance is effective for annual periods beginning after December 15, 2024, with early adoption permitted. The Company adopted this standard prospectively for the year ended December 31, 2025. The adoption did not have a material impact on the Company’s consolidated financial statements; however, it resulted in expanded income tax disclosures.

Recently Issued Accounting Standards Not Yet Adopted

In November 2024, the FASB issued ASU 2024-03, Income Statement—Reporting Comprehensive Income—Expense Disaggregation Disclosures (Subtopic 220-40): Disaggregation of Income Statement Expenses. This ASU requires public entities to provide enhanced disaggregation of certain expense categories presented on the income statement, including disclosure of specific types of expenses such as employee compensation, depreciation, and amortization. The standard is effective for fiscal years beginning after December 15, 2026, and interim periods within fiscal years beginning after December 15, 2027. Early adoption is permitted. The Company is currently evaluating the impact this guidance will have on its consolidated financial statement disclosures.

Other recently issued accounting standards not yet effective are not expected to have a material impact on the Company’s consolidated financial statements.