XTI Aerospace, Inc. 10-K

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 54 Table of Content s 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.” In addition, we will file as an amendment to the Current Report on Form 8-K filed with the SEC on March 15, 2024 (i) the audited consolidated financial statements of Legacy XTI as of and for the years ended December 31, 2023 and 2022, (ii) Legacy XTI's Management's Financial Discussion and Analysis of Financial Condition and Results of Operations for the years ended December 31, 2023 and 2022 and (iii) the unaudited pro forma condensed combined financial information of Inpixon and Legacy XTI as of and for the year ended December 31, 2023, in accordance with Item 9.01 of Form 8-K. Overview of Our Business Following the effective time of the XTI Merger (the “Effective Time”) on the Closing Date, we amended our articles of incorporation to change our name from "Inpixon" to "XTI Aerospace, Inc." and the combined company opened for trading on the Nasdaq Capital Market on March 13, 2024 under the new ticker symbol “XTIA”. The financial information included in the Management's Discussion and Analysis of Financial Condition and Results from Operations section below include only the financial results of Inpixon, as the merger occurred after December 31, 2023. Therefore, all references to the "Company" in the Management's Discussion and Analysis of Financial Condition and Results from Operations refer to Inpixon. Following the closing of the XTI Merger, we are primarily an aircraft development and manufacturing company. We also provide real-time location systems (“RTLS”) for the industrial sector, which was our focus prior to the closing of the XTI Merger. Headquartered in Englewood, Colorado, the Company is developing a vertical takeoff and landing aircraft that takes off and lands like a helicopter and cruises like a fixed-wing business aircraft. Our initial model, the TriFan 600, is a six-seat aircraft which is intended to provide point-to-point air travel over distances of up to 700 miles, fly at twice the speed of a helicopter and cruise at altitudes up to 25,000 feet. We believe the TriFan 600 will be one of the first VTOL aircraft that offers the speed and comfort of a business aircraft and the range and versatility of VTOL for a wide range of customer applications, including private aviation for business and high net worth individuals, emergency medical services, and commuter and regional air travel. Since 2012, we have been engaged primarily in developing the design and engineering concepts for the TriFan 600, building and testing a two-thirds scale unmanned version of the TriFan 600, generating pre-orders for the TriFan 600, and seeking funds from investors to enable the Company to build full-scale piloted prototypes of the TriFan 600, and to eventually engage in commercial development of the TriFan 600. Our RTLS solution leverages cutting-edge technologies such as IoT, AI, and big data analytics to provide real-time tracking and monitoring of assets, machines, and people within industrial environments. With our RTLS, businesses can achieve improved operational efficiency, enhanced safety and reduced costs. By having real-time visibility into operations, industrial organizations can make informed, data-driven decisions, minimize downtime, and ensure compliance with industry regulations. With our RTLS, industrial businesses can transform their operations and stay ahead of the curve in the digital age. Our full-stack industrial IoT solution provides end-to-end visibility and control over a wide range of assets and devices. It is designed to help organizations optimize their operations and gain a competitive edge in today's data-driven world. The turn-key platform integrates a range of technologies, including RTLS, sensor networks, edge computing, and big data analytics, to provide a comprehensive view of an organization's operations. We help organizations to track the location and status of assets in real-time, identify inefficiencies, and make decisions that drive business growth. Our IoT stack covers all the technology layers, from the edge devices to the cloud. It includes hardware components such as sensors and gateways, a robust software platforms for data management and analysis, and a user-friendly dashboard for real-time monitoring and control. Our solutions also offer robust security features, to help ensure the protection of sensitive data. Additionally, our RTLS provides scalability and flexibility, allowing organizations to easily integrate it with their existing systems and add new capabilities as their needs evolve. The Company notes that during the fourth quarter and as of December 31, 2023, the Grafiti LLC and Grafiti Holding Inc. divestitures, which represent both the Shoom and SAVES operating segments and a portion of the Indoor Intelligence segment, have been disposed of or met the held for sale criteria and represent a strategic shift in the Company's operations, and therefore are presented as discontinued operations. As such, these disposal groups have been excluded from both continuing operations and segment results for all periods presented. In addition, the Company also notes that as of December 31, 2023, the 55 Table of Content s Enterprise Apps divesiture, which was completed in the first quarter of 2023, is presented as discontinued operations and as such, have been excluded from both continuing operations and segment results for all periods presented. This divestiture represents a portion of the Indoor Intelligence operating segment. Therefore, apart from our aircraft and development and manufacturing business, only the Indoor Intelligence operating segment remains as of December 31, 2023. Revenues decreased in the year ended December 31, 2023 over the same period in 2022 by approximately $1.5 million which is primarily attributable to longer sales cycles and delayed purchasing decisions by customers due to economic certainties for our real time location based technologies. This decrease was also a result of our transition to a location-as-a-service ("LaaS") model which impacts short term non-recurring revenue recognition but will increase our recurring revenue over time. As a result of our shift to recurring revenue with the LaaS business model we are seeing a stronger sales pipeline than the prior year as customers have less upfront expenditure. We expect to grow our Indoor Intelligence product revenues in 2024. The Indoor Intelligence product line does have long sales cycles, which result from customer-related issues such as budget and procurement processes but also because of the early stages of indoor-positioning technology and the learning curve required for customers to implement such solutions. Customers also often engage in a pilot program first which prolongs sales cycles and is typical of most emerging technology adoption curves. We anticipate sales cycles to improve in 2024 as our customer base moves from early adopters to mainstream customers. The sales cycle is also improving with the increased presence and awareness of beacon and Wi-Fi locationing technologies in the market. Indoor Intelligence sales can be licensed-based with government customers but commercial customers typically prefer a SaaS or subscription model. We experienced a net loss from continuing operations of approximately $34.4 million and $19.7 million for the years ended December 31, 2023 and 2022, respectively. This increase in loss of approximately $14.7 million was primarily attributable to the acquisition costs during the year ended December 31, 2023 inclusive of the XTI and Damon transactions of approximately $4.2 million, the transaction costs during the year ended December 31, 2023 inclusive of the CXApp transaction of $3.1 million, the warrant inducement expense of approximately $3.4 million, the higher interest expense and higher tax provision. We cannot assure that we will ever earn revenues sufficient to support our operations, or that we will ever be profitable. In order to continue our operations, we have supplemented the revenues we earned with proceeds from the sale of our equity and debt securities and proceeds from loans and bank credit lines. Recent Events March 2020 Note Exchanges During the year ended December 31, 2023, the Company entered into exchange agreements with Iliad, pursuant to which the Company and Iliad agreed to: (i) partition new promissory notes in the form of the March 2020 Note with Illiad equal to approximately $0.9 million and then cause the outstanding balance of the March 2020 10% Note to be reduced by approximately $0.9 million; and (ii) exchange the partitioned note for the delivery of 6,113 shares of the Company's common stock at effective prices between $109.00 and $168.00 per share. The Company analyzed the exchange of the principal under the March 2020 10% Note as an extinguishment and compared the net carrying value of the debt being extinguished to the reacquisition price (shares of common stock being issued) and there was no loss on the exchange for debt for equity. The March 2020 Note was satisfied in full during the year ended December 31, 2023. July 2022 Note Exchanges and Amendment On May 16, 2023, the Company entered into an amendment (the “July 2022 Note Amendment”) to the July 2022 Note pursuant to which the maturity date was extended from July 22, 2023 to May 17, 2024 (the “July 2022 Note Maturity Date Extension”). In exchange for the July 2022 Note Maturity Date Extension, the Company agreed to pay Streeterville an extension fee in the amount of $0.1 million, which was added to the outstanding balance of the July 2022 Note. During the year ended December 31, 2023, the Company entered into exchange agreements with Streeterville, pursuant to which the Company and Streeterville agreed to: (i) partition new promissory notes in the form of the July 2022 Note equal to approximately $7.6 million and then cause the outstanding balance of the July 2022 Note to be reduced by approximately $7.6 million; and (ii) exchange the partitioned notes for the delivery of 469,046 shares of the Company’s common stock, at effective prices between $5.56 and $91.50 per share. The Company analyzed the exchange of the principal under the July 2022 Note as an extinguishment and compared the net carrying value of the debt being extinguished to the reacquisition price (shares of common stock being issued) and recorded a $0.1 million loss on the exchange for debt for equity which is included in the other income/expense line of the consolidated statement of operations. The July 2022 Note was satisfied in full during the year ended December 31, 2023. 56 Table of Content s December 2022 Note Exchanges and Amendment On May 16, 2023, the Company entered into an amendment (the “December 2022 Note Amendment”) to the December 2022 Note pursuant to which the maturity date of the December 2022 Note was extended from December 30, 2023 to May 17, 2024 (the “December 2022 Note Maturity Date Extension”). In exchange for the December 2022 Note Maturity Date Extension, the Company agreed to pay the Holder an extension fee in the amount of $0.1 million which was added to the outstanding balance of the December 2022 Note. During the year ended December 31, 2023, the Company entered into exchange agreements with Streeterville, pursuant to which the Company and Streeterville agreed to: (i) partition new promissory notes in the form of the Dec 2022 Note equal to approximately $0.7 million and then cause the outstanding balance of the July 2022 Note to be reduced by approximately $0.7 million; and (ii) exchange the partitioned notes for the delivery of 130,000 shares of the Company’s common stock, at effective price of $5.56 per share. The Company analyzed the exchange of the principal under the Dec 2022 Note as an extinguishment and compared the net carrying value of the debt being extinguished to the reacquisition price (shares of common stock being issued) and and there was no loss on the exchange for debt for equity. At-The-Market (ATM) Program On July 22, 2022, the Company entered into an Equity Distribution Agreement (the "Sales Agreement") with Maxim Group LLC (“Maxim”) under which the Company may offer and sell shares of its common stock having an aggregate offering price of up to $25.0 million (the “Shares”) from time to time through Maxim, acting exclusively as the Company’s sales agent (the “ATM Offering”). On June 13, 2023, the Company entered into an amendment to the Sales Agreement with Maxim, pursuant to which the aggregate offering price of the ATM Offering was increased from $25.0 million to approximately $27.4 million. The Company intends to use the net proceeds of the ATM Offering primarily for working capital and general corporate purposes. During the year ended December 31, 2023, the Company sold 703,756 shares of common stock at share prices between $13.96 and $186.00 per share under the Sales Agreement for gross proceeds of approximately $27.4 million or net proceeds of $26.5 million after deducting the placement agency fees and other offering expenses. The Company is not obligated to make any sales of the Shares under the Sales Agreement and no assurance can be given that the Company will sell any additional Shares under the Sales Agreement, or if it does, as to the price or amount of Shares that the Company will sell, or the date on which any such sales will take place. The Company is currently subject to the SEC’s “baby shelf rules,” which prohibit companies with a public float of less than $75 million from issuing securities under a shelf registration statement in excess of one-third of such company’s public float in a 12-month period. These rules may limit future issuances of shares by the Company under the Sales Agreement or other offerings pursuant to the Company’s effective shelf registration statement on Form S-3. On December 29, 2023, the Company entered into Amendment No. 2 to Sales Agreement pursuant to which the parties extended the term of the Sales Agreement until the earliest of (i) December 31, 2024, (ii) the sale of shares of the Company’s common stock having an aggregate offering price equal to the Offering Size (as defined in the Sales Agreement), and (iii) the termination by either Maxim or the Company upon the provision of 15 days written notice or otherwise pursuant to the terms of the Sales Agreement. CVH Class A Unit Transfers On February 27, 2023, the Company entered into Limited Liability Company Unit Transfer and Joinder Agreements with certain of the Company’s employees (the “Transferees”), pursuant to which (i) the Company transferred all of its Class A Units of CVH (the “Class A Units”), an aggregate of 599,999 Class A Units, to the Transferees as bonus consideration in connection with each Transferee’s services performed for and on behalf of the Company as an employee, as applicable, and (ii) each Transferee became a member of CVH and a party to the Amended and Restated Limited Liability Company Agreement of CVH, dated as of September 30, 2020. Warrant Amendments On February 28, 2023, the Company entered into warrant amendments (the “Warrant Amendments”) with certain holders (each, including its successors and assigns, a “Warrant Holder” and collectively, the “Warrant Holders”) of (i) those certain Common Stock Purchase Warrants issued by the Company in April 2018 (the “April 2018 Warrants”) pursuant to the registration statement on Form S-3 (File No. 333-204159), (ii) those certain Common Stock Purchase Warrants issued by the 57 Table of Content s Company in September 2021 (the “September 2021 Warrants”) pursuant to the registration statement on Form S-3 (File No. 333-256827), and (iii) those certain Common Stock Purchase Warrants issued by the Company in March 2022 (the “March 2022 Warrants” and together with the April 2018 Warrants and the September 2021 Warrants, the “Existing Warrants”) pursuant to the registration statement on Form S-3 (File No. 333-256827). Pursuant to the Warrant Amendments, the Company and the Warrant Holders have agreed to amend (i) the September 2021 Warrants and the March 2022 Warrants to provide that all of such outstanding warrants shall be automatically exchanged for shares of common stock of the Company, at a rate of 0.0033 shares of Common Stock (the “Exchange Shares”) for each September 2021 Warrant or March 2022 Warrant, as applicable, and (ii) the April 2018 Warrants to remove the obligation of the Company to hold the portion of a Distribution (as defined in the April 2018 Warrants) in abeyance in connection with the Beneficial Ownership Limitation (as defined in the April 2018 Warrants). In connection with the exchange for all of the then outstanding September 2021 Warrants and March 2022 Warrants as of the effective date of the Warrant Amendments, the Company issued 3,249 Exchange Shares in the aggregate. May 2023 Warrant Purchase Agreement On May 15, 2023, the Company entered into a Warrant Purchase Agreement (the “Agreement”) with multiple purchasers for the purchase and sale of up to an aggregate of 1,500,000 of warrants (the “May 2023 Warrants”). The Agreement and the May 2023 Warrants were subsequently amended on June 20, 2023. The purchase price for one (1) May 2023 Warrant is $0.01 (the “Per Warrant Purchase Price”). The May 2023 Warrants have an initial exercise price $26.00, payable in cash or the cancellation of indebtedness ( the “Initial Exercise Price”). The exercise price will equal the lower of (i) the Initial Exercise Price and (ii) 90% of the lowest VWAP (as defined in the Agreement) of the Common Stock for the five Trading Days (as defined in the Agreement) immediately prior to the date on which a Notice of Exercise is submitted to the Company (the “Adjusted Exercise Price” and together with the Initial Price, as applicable, the “Exercise Price”); provided, however, that the Adjusted Exercise Price shall not be less than $10.00; and provided further that any exercise of the May 2023 Warrants with an Adjusted Exercise Price will be subject to the Company’s consent unless the trading price of the Common Stock as of the time the Notice of Exercise is delivered to the Company is at least 10% or more above the prior Trading Day’s Nasdaq Official Closing Price. No warrant holder may exercise the May 2023 Warrants to the extent such exercise would cause such warrant holder, together with its affiliates and attribution parties, to beneficially own a number of shares of Common Stock which would exceed 9.99% of the Company’s then outstanding Common Stock following such exercise. Each May 2023 Warrant is immediately exercisable for one share of Common Stock and will expire 1 year from the issuance date (the “Termination Date”) unless extended by the Company with the consent of the warrant holder. Pursuant to the terms of the May 2023 Warrants, at any time prior to the Termination Date, the Company may, in its sole discretion, redeem any portion of a May 2023 Warrants that have not been exercised, in cash, at the Per Warrant Purchase Price, plus all liquidated damages and other costs, expenses or amounts due in respect of the Warrants (the “ Redemption Amount ”) upon five Trading Days’ written notice to the warrant holder (the “ Redemption Date ”). On the Termination Date, the Company will be required to redeem any portion of the May 2023 Warrants that have not been exercised or redeemed prior to such date through payment of the Redemption Amount in cash. The Company will be required to pay any Redemption Amount within five Trading Days after the Redemption Date or the Termination Date, as applicable. The 1,500,000 May 2023 Warrants were issued on May 17, 2023 for aggregate gross proceeds of approximately $1.5 million. The aggregate net proceeds from the offerings, after deducting the placement agent fees and other estimated offering expenses, were approximately $1.4 million. The May 2023 Warrants were determined to be within the scope of ASC 480 as they represent obligations to the Company, as the Company is obligated to redeem any May 2023 Warrants that have not been exercised at the Termination Date. As such, the Company recorded the May 2023 Warrants as a liability at fair value on the issuance date. The fair value of the May 2023 Warrants was determined using level 3 inputs utilizing a Monte-Carlo simulation. The May 2023 Warrants are subsequently measured as if the May 2023 Warrants were to be settled on the current redemption value with subsequent changes recognized as interest cost. The fair value of the Warrants was determined to be $1.48 million at the date of issuance, and the redemption value of the Warrants was determined to be approximately $0.9 million as of December 31, 2023. The fair value of the Warrants are reflected within Warrant Liability on the Consolidated Balance Sheet. An immediate loss was recognized on the initial measurement date of $71,250 as a result of the difference between fair value and net proceeds. The change in fair value of Warrants of $71,250 for the year ended December 31, 2023 was reported as other expense on the 58 Table of Content s Consolidated Statement of Operations. The interest cost of $20,000 for the year ended December 31, 2023 was included in interest expense, net on the Consolidated Statement of Operations. During July 2023, the Company issued 90,000 shares of common stock in connection with the exercise of 90,000 warrants with an exercise price of $26.00 per share in connection with the May 2023 offering for which the Company received gross proceeds of approximately $2.3 million. Warrant Inducement On December 15, 2023, the Company entered into an warrant inducement letter agreements (the “Inducement Agreements”) with certain holders (including their respective successors and assigns, the “Holders”) of the Common Stock Purchase Warrants issued by the Company on May 17, 2023 (“May 2023 Warrants”) and reissued on December 15, 2023, as applicable (as amended on June 20, 2023, the “Existing Warrants”) in order to induce the Holders to exercise 491,310 Existing Warrants for cash, pursuant to the terms of and subject to beneficial ownership limitations contained in the Existing Warrants, the Company agreed to issue to the Holders, New Warrants to purchase 1 share of common stock for each share of common stock issued upon such exercise of the remaining Existing Warrants pursuant to the Inducement Agreements for an aggregate of 491,314 New Warrants. Pursuant to the Inducement Agreements the Existing Warrants exercise price was from $10.00 to $5.13 per share, which is equal to a 30% discount to the average closing price of the Common Stock for the five trading days prior to the execution of the Inducement Agreements, such that the Exercised Shares will be exercised at the New Exercise Price. The Inducement Agreements was a limited time offer that had to be accepted by December 18, 2023. The terms of the New Warrants had an initial exercise price of $7.324, which was subsequently reduced by the Company to $5.13, are immediately exercisable, and will expire 5 years from the date of the Exercise Agreement. The Holder paid an aggregate of approximately $2.5 million to the Company for the exercise of the Existing Warrants. The Company recognized approximately $3.4 million of non-cash warrant inducement expense during year ended December 31, 2023, which is displayed in other expense on the accounting statement of operations. The warrant inducement expense represents the fair value of the New Warrants issued to induce the exercise. The fair values were calculated using the Black-Scholes option pricing model. Compliance with Nasdaq Continued Listing Requirements On April 14, 2023, Nasdaq notified us that for the last 30 consecutive business days, the bid price for the Company’s common stock had closed below the minimum $1.00 per share requirement for continued inclusion on the Nasdaq Capital Market pursuant to Nasdaq Listing Rule 5550(a)(2). In accordance with Listing Rule 5810(c)(3)(A), we were provided 180 calendar days, or until October 11, 2023, to regain compliance with the minimum bid price requirement. We were not able to regain compliance within this 180-day period; however, on October 12, 2023, we received notice from Nasdaq that we were granted an additional 180 calendar days, or until April 8, 2024, to regain compliance with the minimum bid price requirement. However, on November 9, 2023, we received notice (the “November 9 Letter”) from Nasdaq that Nasdaq had determined that as of November 8, 2023, our securities had a closing bid price of $0.10 or less for ten consecutive trading days triggering application of Listing Rule 5810(c)(3)(A)(iii) which states in part: if during any compliance period specified in Rule 5810(c)(3)(A), a company’s security has a closing bid price of $0.10 or less for ten consecutive trading days, the Listing Qualifications Department shall issue a Staff Delisting Determination under Rule 5810 with respect to that security (the “Low Priced Stocks Rule”). As a result, the Staff has issued a letter notifying us of its determination to delist our securities from Nasdaq effective as of the opening of business on November 20, 2023, unless we requested an appeal of the Staff’s determination on or prior to November 16, 2023, pursuant to the procedures set forth in the Nasdaq Listing Rule 5800 Series. We requested a hearing before the Nasdaq Hearings Panel (the “Panel”) to appeal the determination described in the November 9 Letter and to address compliance with the Low-Priced Stocks Rule which hearing was held on February 6, 2024. On March 1, 2024, the Panel notified us that it had granted our request for continued listing subject to the company evidencing a closing bid price of $1 or more per share for a minimum of ten consecutive trading days on or before May 7, 2024 which is the full extent of the Panel's discretion. In order to cure the bid price deficiency and satisfy the bid price requirements applicable for initial listing applications in connection with the closing of the XTI Merger, on March 12, 2024, we effected a 1-for-100 reverse stock split of our outstanding shares of common stock shortly prior to the Effective Time of the XTI Merger. On March 26, 2024, we were informed by Nasdaq that we had regained compliance with the minimum bid price requirement and that we were back in compliance with the applicable Nasdaq continued listing criteria. 59 Table of Content s Leonard Oppenheim, a former independent director and the former Chairman of the Audit Committee, resigned from the Board effective as of March 31, 2024. On April 4, 2024, we received a notification letter from the Listing Qualifications Department of Nasdaq that due to Mr. Oppenheim's resignation, we no longer comply with Nasdaq’s independent director and audit committee requirements as set forth in Listing Rule 5605 as the Board is not comprised of a majority of “independent directors” (as that term is defined in Nasdaq Listing Rule 5605(a)(2)) as required by Nasdaq Listing Rule 5605(b)(1) and the Audit Committee is not comprised of at least three independent directors as required by Nasdaq Listing Rule 5605(c)(2)(A). Consistent with Nasdaq Listing Rules 5605(b)(1)(A) and 5605(c)(4), Nasdaq has provided us a cure period in order to regain compliance (i) until the earlier of our next annual shareholders’ meeting or March 31, 2025, or (ii) if the next annual shareholders’ meeting is held before September 27, 2024, then we must evidence compliance no later than September 27, 2024. We intend to appoint an additional independent director to the Board and the Audit Committee prior to the end of the cure period. However, there can be no assurance that we will be able to regain compliance with Nasdaq Listing Rule 5605 or will otherwise be in compliance with other Nasdaq continued listing requirements. Amendments to By-Laws On September 18, 2023, the Company’s Board of Directors(the “Board”) approved two amendments to the Company’s amended and restated by-laws, as amended (the “By-Laws”), effective as of the date of the Board’s approval (“By-Laws Amendment No. 3” and “By-Laws Amendment No. 4,” respectively), pursuant to NRS 78.120(2) of Chapter 78 of the Nevada Revised Statutes (the “NRS”). By-Laws Amendment No. 3 gives the Board the full power and authority to amend the By-Laws as permitted by the NRS. By-Laws Amendment No. 4 (i) revises certain By-Laws relating to the removal of directors and the filling of vacancies on the Board to be consistent with NRS 78.335 and (ii) reduces the quorum requirement for all meetings of stockholders (unless otherwise provided by the NRS, the Company’s articles of incorporation or the By-Laws) from the presence, in person or by proxy, of a majority of the outstanding shares of stock entitled to vote to the presence, in person or by proxy, of one-third of the outstanding shares of stock entitled to vote, as permitted pursuant to NRS 78.320(1) and Nasdaq Listing Rule 5620(c). On March 12, 2024, the Board adopted by resolution an amendment to the By-Laws that classifies the members of the Board into three classes (Class I, Class II and Class III) with staggered terms. Pursuant to the By-Laws amendment, the current term of the Class I directors will expire at the annual meeting of the stockholders of the Company for the year 2024, the current term of the Class II directors will expire at the annual meeting of the stockholders of the Company for the year 2025, and the current term of the Class III directors will expire at the annual meeting of the stockholders of the Company for the year 2026. At each succeeding annual meeting of stockholders of the Company successors of the class of directors whose term expires at that meeting shall be elected to hold office in accordance with the By-Laws. Enterprise Apps Spin-off and Business Combination On March 14, 2023, Inpixon completed (the “Closing”) of the separation (the “Separation”) of its enterprise apps business (including its workplace experience technologies, indoor mapping, events platform, augmented reality and related business solutions) (the “Enterprise Apps Business”) through a spin-off of CXApp Holding Corp., a Delaware corporation ("CXApp"), to certain holders of Inpixon securities as of March 6, 2023 (the “Record Date”) on a pro rata basis (the “Distribution” or “Enterprise Apps Spin-off”) and merger (the “Merger”) of CXApp with a wholly owned subsidiary of KINS Technology Group Inc., a Delaware corporation (“KINS”), in a Reverse Morris Trust transaction (collectively, the “Transactions”) pursuant to (i) an Agreement and Plan of Merger, dated as of September 25, 2022, by and among Inpixon, KINS, CXApp, and KINS Merger Sub Inc. (the "Merger Agreement") and (ii) a Separation and Distribution Agreement, dated as of September 25, 2022, among KINS, Inpixon, CXApp and Design Reactor, Inc. (the "Separation Agreement”, and collectively with the Merger Agreement and the other related transaction documents, the “Transaction Agreements”). In connection with the Closing, KINS was renamed CXApp Inc. (“New CXApp”). Pursuant to the Transaction Agreements, Inpixon contributed cash sufficient to ensure CXApp had $10 million in cash and cash equivalents prior to the deduction of transaction expenses at closing and certain assets and liabilities constituting the Enterprise Apps Business, including certain related subsidiaries of Inpixon, to CXApp (the “Contribution”). In consideration for the Contribution, CXApp issued to Inpixon additional shares of CXApp common stock such that the number of shares of CXApp common stock then outstanding equaled the number of shares of CXApp common stock necessary to effect the Distribution. Pursuant to the Distribution, Inpixon shareholders as of the Record Date received one share of CXApp common stock for each share of Inpixon common stock held as of such date. Pursuant to the Merger Agreement, each share of Legacy CXApp common stock was thereafter exchanged for the right to receive 0.09752221612415190 of a share of New CXApp Class A common stock (with 60 Table of Content s fractional shares rounded down to the nearest whole share) and 0.3457605844401750 of a share of New CXApp Class C common stock (with fractional shares rounded down to the nearest whole share). New CXApp Class A common stock and New CXApp Class C common stock are identical in all respects, except that New CXApp Class C common stock is not listed and will automatically convert into New CXApp Class A common stock on the earlier to occur of (i) the 180th day following the closing of the Merger and (ii) the day that the last reported sale price of New CXApp Class A common stock equals or exceeds $12.00 per share for any 20 trading days within any 30-trading day period following the closing of the Merger. Upon the closing of the Transactions, Inpixon’s existing security holders held approximately 50.0% of the shares of New CXApp common stock outstanding. Employee Matters Agreement On March 14, 2023, in connection with the consummation of the Business Combination and as contemplated by the Separation Agreement, CXApp, Legacy CXApp, Inpixon and Merger Sub entered into the Employee Matters Agreement (the “Employee Matters Agreement”). The Employee Matters Agreement sets forth the terms and conditions of certain employee related matters in connection with the transaction, including, but not limited to the participation in benefits for each of the respective companies as relevant, and the assumption and retention of benefit plan assets and liabilities, worker's compensation, payroll taxes, regulatory filings, and the sharing of employee information. Tax Matters Agreement On March 14, 2023, in connection with the consummation of the Business Combination and as contemplated by the Separation Agreement, CXApp, Legacy CXApp and Inpixon entered into the Tax Matters Agreement (the “Tax Matters Agreement”) which governs each party’s respective rights, responsibilities and obligations with respect to tax liabilities and benefits, tax attributes, the preparation and filing of tax returns, the control of audits and other tax proceedings and certain other matters regarding taxes. Allocation of Taxes In general, KINS and CXApp will be liable for all U.S. federal, state, local and foreign taxes (and any related interest, penalties or audit adjustments) that are (i) imposed with respect to tax returns that include both CXApp and Inpixon, to the extent such taxes are attributable to CXApp or the Enterprise Apps Business, or (ii) imposed with respect to tax returns that include CXApp but not Inpixon, in each case, for tax periods (or portions thereof) beginning after the Distribution. Inpixon will generally be liable for taxes described in clauses (i) and (ii) above for tax periods (or portions thereof) ending on the date of or prior to the Distribution, and any and all Distribution Taxes, as defined in the Tax Matters Agreement (generally, taxes imposed with respect to the Separation, Contribution, and Distribution). However, CXApp and KINS may be liable for certain taxes pursuant to indemnity obligations described below. Indemnification Obligations The Tax Matters Agreement generally provides for indemnification obligations between New CXApp and KINS, on the one hand, and Inpixon, on the other hand. In particular, CXApp and KINS must indemnify Inpixon for taxes allocated to CXApp or KINS, as described above, and Inpixon must indemnify New CXApp and KINS for taxes as allocated to Inpixon as described above, which would generally include Distribution Taxes. The Tax Matters Agreements, however, provides that KINS and CXApp may be liable for certain taxes to the extent such taxes result from a breach of certain representations or restrictive covenants made by KINS and CXApp, as described below. Transition Services Agreement On March 14, 2023, in connection with the consummation of the Business Combination and as contemplated by the Separation Agreement, Legacy CXApp and Inpixon entered into a Transition Services Agreement (the “Transition Services Agreement”) pursuant to which Inpixon and certain employees and representatives and CXApp and certain employees and representatives will provide services to each other primarily related to payroll and benefits administration, IT support, finance and accounting services, contract administration and management services, and other administrative support services that may be required on an as needed basis, which services are of the type that CXApp and Inpixon provided to, and received from, each 61 Table of Content s other prior to the Separation. The fees for each of the transition services are set forth in the Transition Services Agreement. The Transition Services Agreement will terminate on the expiration of the term of the last service provided under it, and if no expiration date is provided for any transition service, then such transition service will terminate twelve months after the date of the Transition Services Agreement, provided that the receiving party shall have the right to an extension of each or any transition service for up to six months by providing written notice to providing party in advance of the original termination date for such transition service if, prior to such request for extension, the receiving party has used commercially reasonable efforts to establish analogous capabilities of its own. On March 15, 2023, New CXApp began regular-way trading on NASDAQ under the ticker symbol “CXAI.” XTI Merger and Leadership Changes On July 24, 2023, we entered into an Agreement and Plan of Merger (amended on December 30, 2023 and March 12, 2024, the “XTI Merger Agreement”) by and among us, Superfly Merger Sub Inc., a Delaware corporation and our then wholly-owned subsidiary (“Merger Sub”), and XTI Aircraft Company, a Delaware corporation (“Legacy XTI”). Pursuant to the XTI Merger Agreement, on March 12, 2024 (the “Closing Date”), Merger Sub merged with and into Legacy XTI (the “XTI Merger”), with Legacy XTI surviving the XTI Merger as our wholly-owned subsidiary. Following the effective time of the XTI Merger (the “Effective Time”) on the Closing Date, we amended our articles of incorporation to change our name from "Inpixon" to "XTI Aerospace, Inc." and the combined company opened for trading on the Nasdaq Capital Market on March 13, 2024 under the new ticker symbol “XTIA”. Shortly prior to the Effective Time, we effected a 1-for-100 reverse split of our outstanding shares of common stock (the "Reverse Stock Split"). At the Effective Time, pursuant to the XTI Merger Agreement, the shares of Legacy XTI common stock outstanding immediately prior to the Effective Time became the right to receive 7,843,668 shares of XTI Aerospace common stock, and the options and warrants to purchase shares of Legacy XTI common stock outstanding immediately prior to the Effective Time were assumed by the Company and became exercisable for approximately 1,068,959 and 382,610 shares of XTI Aerospace common stock, respectively, based on an exchange ratio of 0.0892598 shares of XTI Aerospace common stock for each share of Legacy XTI common stock in accordance with the XTI Merger Agreement. Prior to the Effective Time, Legacy XTI received the consents of certain of its convertible note holders to convert the outstanding balance under their convertible notes, equal to an aggregate outstanding amount of $7,535,701, into shares of Legacy XTI common stock immediately prior to the Effective Time, enabling them to participate in the XTI Merger on the same basis as the other shares of Legacy XTI common stock. Legacy XTI convertible notes in the aggregate remaining principal and interest amount of $51,658, were assumed by the Company at the Effective Time and became convertible into approximately 4,611 shares of XTI Aerospace common stock. Immediately prior to the Effective Time, all but $175,000 of the total principal and accrued interest balance of the convertible note issued by Legacy XTI to Dave Brody on October 1, 2023, as amended on March 12, 2024, was converted into shares of Legacy XTI common stock immediately prior to the Effective Time, enabling him to participate in the XTI Merger on the same basis as the other shares of XTI common stock. The remaining $175,000 became payable in cash by Legacy XTI upon consummation of the XTI Merger. Immediately following the Effective Time, XTI Aerospace had 9,786,801 shares of common stock issued and outstanding, subject to adjustment in connection with rounding associated with the Reverse Stock Split. On March 12, 2024, the Company, Merger Sub and Legacy XTI entered into a Second Amendment to Merger Agreement (the “Merger Agreement Amendment”). The Merger Agreement Amendment amended the original XTI Merger Agreement, as amended by the First Amendment to Merger Agreement dated December 30, 2023, to provide, among other things, (i) adjustments for the issuance of shares of the Company’s newly designated non-convertible Series 9 preferred stock (“Series 9 Preferred Stock”) to Streeterville Capital, LLC in the exchange ratio calculation and (ii) the extension of the deadline to file a resale registration statement covering the shares issued in the XTI Merger that were not registered on the Company’s registration statement on Form S-4 filed in connection with the Merger to ten business days after the filing of this Annual Report on Form 10-K. Following the issuance of shares under the Merger Agreement, Company security holders immediately prior to the Effective Time retained beneficial ownership of approximately 25% of the outstanding common stock of the Company on a fully-diluted basis and Legacy XTI security holders immediately prior to the Effective Time acquired beneficial ownership of 62 Table of Content s shares of common stock amounting to approximately 75% of the outstanding common stock of the Company on a fully-diluted basis. In connection with the consummation of the XTI Merger and as contemplated by the XTI Merger Agreement, as of the Effective Time, Mr. Nadir Ali and Ms. Wendy Loundermon resigned as Chief Executive Officer and Chief Financial Officer of the Company, respectively. Following their resignation, the board of directors of the Company (the “Board”) appointed Mr. Scott Pomeroy as Chief Executive Officer of the Company and Ms. Brooke Turk as Chief Financial Officer of the Company. Also at the Effective Time, Messrs. Nadir Ali and Tanveer Khader and Ms. Wendy Loundermon resigned as directors of the Company. Following the foregoing resignations, the Board appointed Messrs. Scott Pomeroy, Soumya Das and David Brody as directors to the Board. Mr. Leonard Oppenheim resigned from the Board, effective as of March 31, 2024. Mr. Kareem Irfan continues to serve on the Board. As contemplated by the terms of the XTI Merger Agreement, as of the Effective Time, the Company determined that the post-closing Board would consist of a total of five directors, and therefore, two of the directors are required to have been nominated by the Company, at least one of whom is an independent director. Accordingly, the Board is currently comprised of two directors nominated by the Company prior to the Effective Time (Messrs. Kareem Irfan and Soumya Das) and two directors nominated by Legacy XTI prior to the Effective Time (Messrs. Scott Pomeroy and David Brody). Due to Mr. Oppenheim's resignation, the Company received a notification letter from Nasdaq that the Company no longer complies with Nasdaq’s independent director and audit committee requirements as set forth in Listing Rule 5605. The Company has been granted a cure period in order to regain compliance and the Company intends to appoint an additional independent director to the Board and the Audit Committee prior to the end of the cure period. See " - Recent Events - Compliance with Nasdaq Continued Listing Requirements " for more information. Financial Advisory Fees in connection with the XTI Merger Pursuant to the terms of an amended advisory fees agreement among Legacy XTI, the Company and Maxim and in accordance with the XTI Merger Agreement, the Company issued 385,359 registered shares of XTI Aerospace common stock in exchange for shares of Legacy XTI common stock issued to Maxim based on the exchange ratio under the XTI Merger Agreement. Additionally, Maxim will receive $200,000 payable upon the closing of one or more debt or equity financings for which Maxim serves as placement agent or underwriter and in which the Company raises minimum aggregate gross proceeds of $10 million following the Effective Time. Pursuant to its engagement letter with Legacy XTI, dated as of June 7, 2022, as amended (the “Chardan Engagement Letter”) and the XTI Merger Agreement, Chardan Capital Markets (“Chardan”) received a cash payment of $200,000 and 189,037 registered shares of XTI Aerospace common stock (the “Chardan Closing Shares”) in exchange for shares of Legacy XTI common stock issued to Chardan based on the exchange ratio under the XTI Merger Agreement. If within 120 days following the Effective Time, the Company consummates a public offering of securities in which the price per share of XTI Aerospace common stock (“Chardan Qualified Offering price”) is less than the per share price of Inpixon common stock utilized to calculate the number of Chardan Closing Shares, the Company will be required, subject to applicable securities laws, to issue additional shares of XTI Aerospace common stock to Chardan in an amount equal to (i) $1,000,000 minus the product of the number of Chardan Closing Shares and Chardan Qualified Offering Price, divided by (ii) the Chardan Qualified Offeing Price. XTI Promissory Note & Security Agreement Pursuant to the XTI Merger Agreement, on the first calendar day of the month following the date of the XTI Merger Agreement and on the first calendar day of each month thereafter until the earlier of (i) four months following the date of the XTI Merger Agreement and (ii) the Closing Date, Inpixon shall provide loans to XTI on a senior secured basis (each, a “Future Loan”), in such amounts requested by XTI in writing prior to the first calendar day of each such month. Each Future Loan will be in the principal amount of up to $0.5 million, and the aggregate amount of the Future Loans will be up to approximately $1.8 million (or such greater amount as Inpixon shall otherwise agree in its sole and absolute discretion). These Future Loans and security will be evidenced by a Senior Secured Promissory Note (the “XTI Promissory Note”) and a Security and Pledge Agreement (the “Security Agreement”). 63 Table of Content s The XTI Promissory Note provides an aggregate principal amount up to approximately $2.3 million, which amount includes the principal sum of approximately $0.5 million which Inpixon previously advanced to XTI (the “Existing Loans”, collectively with the Future Loans, the “Inpixon Loans to XTI”) plus accrued interest on such amount, and the aggregate principal amount of the Future Loans. The XTI Promissory Note will bear interest at 10% per annum, compounded annually, and for each Future Loan, beginning on the date the Future Loan is advanced to XTI. On November 14, 2023, the principal amount under the XTI Promissory Note was increased to approximately $3.1 million and further increased to approximately $4.0 million effective as of January 30, 2024. The XTI Promissory Note balance and accrued interest as of December 31, 2023 is approximately $3.1 million and $0.04 million, respectively, and is included in the Company's consolidated balance sheet in Notes Receivable. The outstanding principal amount under the XTI Promissory Note, together with all accrued and unpaid interest, shall be due and payable upon the earlier of (a) March 31, 2024, (b) when declared due and payable by Inpixon upon the occurrence of an event of default, or (c) within three business days following termination of the XTI Merger Agreement (i) by XTI because the XTI Board adopts a superior proposal prior to delivering the XTI Stockholder Consent, or (ii) by Inpixon because the XTI Board has made a change in recommendation, or XTI has breached or failed to perform in any material respect any of its covenants and agreements regarding obtaining its required stockholder approval or non-solicitation. The XTI Promissory Note will be forgiven and of no further force if the XTI Merger Agreement is terminated by the Company's Board because it adopts a superior proposal prior to obtaining the required Inpixon stockholder approval, subject to Inpixon’s rights and remedies under the Promissory Note, the Security Agreement, and the Merger Agreement. If the XTI Merger Agreement is terminated by XTI because the Inpixon Board makes a change in recommendation or Inpixon is in material breach of its covenants and agreements regarding obtaining its required stockholder approval or non-solicitation, the maturity date of the XTI Promissory Note will be extended to December 31, 2024. The Security Agreement grants the Company a first priority security interest in and lien upon all of XTI’s property to secure the repayment of the XTI Promissory Note. The Company intends to amend the XTI Promissory Note to extend the term thereof. Amendments to Articles of Incorporation for Reverse Stock Split and Name Change On March 11, 2024, the Company filed a Certificate of Amendment to its articles of incorporation with the Secretary of State of Nevada to effect a 1-for-100 reverse split of our outstanding shares of common stock (the "Reverse Stock Split"), which was approved by the Company’s stockholders at a special meeting in lieu of annual meeting held on December 8, 2023. Any fractional shares resulting from the Reverse Stock Split will be rounded up to the nearest whole share. The Company’s authorized number of shares of common stock was not reduced by the Reverse Stock Split. The Reverse Stock Split became effective shortly before the Effective Time. The exercise price per share and number of shares issuable under all of the Company’s outstanding securities convertible into or exercisable for common stock have been proportionately adjusted to account for the Reverse Stock Split. On March 11, 2024, the Company also filed a Certificate of Amendment to its articles of incorporation with the Secretary of State of Nevada to change the name of the Company from “Inpixon” to “XTI Aerospace, Inc.”, which became effective shortly after the Effective Time. As of March 13, 2024, the trading symbol for the Company’s common stock has changed to “XTIA.” The new CUSIP number for the Company’s common stock following the Reverse Stock Split, the Merger and the name change is 98423K108. Series 9 Preferred Stock On March 12, 2024, the Company filed the Certificate of Designations of Preferences and Rights of Series 9 Preferred Stock (the “Certificate of Designation”), with the Secretary of State of Nevada, designating 20,000 shares of preferred stock, par value $0.001 of the Company, as Series 9 Preferred Stock. Each share of Series 9 Preferred Stock has a stated face value of $1,050.00 (“Stated Value”). The Series 9 Preferred Stock is not convertible into shares of common stock of the Company. Each share of Series 9 Preferred Stock will accrue a rate of return on the Stated Value in the amount of 10% per year, compounded annually to the extent not paid, and pro rata for any fractional year periods (the “Preferred Return”). The Preferred Return will accrue on each share of Series 9 Preferred Stock from the date of issuance and shall be payable on a quarterly basis, 64 Table of Content s either in cash or through the issuance of an additional number of shares of Series 9 Preferred Stock equal to (i) the Preferred Return then accrued and unpaid, divided by (ii) the Stated Value, at the Company’s discretion. Commencing on the one-year anniversary of the respective issuance date of each share of Series 9 Preferred Stock, each such share of Series 9 Preferred Stock shall accrue an automatic quarterly dividend, based on three quarters of 91 days each and the last quarter of 92 days (or 93 days for leap years), which shall be calculated on the Stated Value of such share of Series 9 Preferred Stock, and which shall be payable in additional shares of Series 9 Preferred Stock, based on the Stated Value, or in cash as set forth in the Certificate of Designation (each, as applicable, the “Quarterly Dividend”). For the period beginning on the one-year anniversary of the issuance date of a share of Series 9 Preferred Stock to the two-year anniversary of the issuance date of each share of Series 9 Preferred Stock, the Quarterly Dividend shall be 2% per quarter in respect of such share, and for all periods following the two-year anniversary of the issuance date of each share of Series 9 Preferred Stock, the Quarterly Dividend shall be 3% per quarter in respect of such share. If at any time while any share of Series 9 Preferred Stock is outstanding, the Company undergoes or enters into a Fundamental Transaction (as defined in the Certificate of Designation), the Company shall cause any successor entity in any such Fundamental Transaction in which the Company is not the surviving company, to assume in writing all of the obligations of the Company under the Certificate of Designation. Subject to the terms and conditions in the Certificate of Designation, the Company may, at any time, elect to redeem all, but not less than all, of the shares of Series 9 Preferred Stock issued and outstanding from all of the Series 9 Preferred Stock holders by paying an amount in cash equal to the Series 9 Preferred Liquidation Amount (as defined below) applicable to such shares of Series 9 Preferred Stock being redeemed. The Series 9 Preferred Liquidation Amount per share is determined as the Stated Value per share plus any accrued but unpaid Preferred Return, and any accrued and unpaid Quarterly Dividend at that time. The Series 9 Preferred Stock confers no voting rights on its holders, except with respect to matters that materially and adversely affect the rights or preferences of the Series 9 Preferred Stock or such matters specified in the Certificate of Designation that require the consent of holders of at least a majority of the outstanding shares of Series 9 Preferred Stock. The Certificate of Designation contains certain obligations of the Company, such that until such time as no shares of Series 9 Preferred Stock remain outstanding, the Company and its subsidiaries are required to comply with certain covenants with respect to Fundamental Transactions, the Company’s indebtedness, the Company’s status as a publicly-traded company and an SEC reporting company, and other matters set forth in the Certificate of Designation, unless otherwise consented to by holders of at least a majority of the outstanding Series 9 Preferred Stock. Exchange Agreement On March 12, 2024, the Company and Streeterville Capital, LLC (the “Note Holder”), the holder of an outstanding promissory note issued on December 30, 2023 (as amended, the “December 2023 Note”), entered into an Exchange Agreement, pursuant to which the Note Holder exchanged the remaining balance of principal and accrued interest under the December 2023 Note in the aggregate amount of $9,801,521 for 9,801.521 shares of Series 9 Preferred Stock, based on an exchange price of $1,000 per share of Series 9 Preferred Stock. Following such exchange and the surrender of the December 2023 Note to the Company, the December 2023 Note is deemed paid in full, automatically canceled, and will not be reissued. Securities Purchase Agreement On March 12, 2024, the Company entered into a securities purchase agreement (the “Securities Purchase Agreement”) with an entity controlled by the Company’s director and Chief Executive Officer, Mr. Nadir Ali (the “Purchaser”). Pursuant to the Securities Purchase Agreement, the Purchaser purchased 1,500 shares of Series 9 Preferred Stock for a total purchase price of $1,500,000, based on a purchase price of $1,000 per share of Series 9 Preferred Stock. The Company agreed that the Purchaser will be deemed a “Required Holder” as defined in the Certificate of Designation (as defined under Item 5.03 below) as long as the Purchaser holds any shares of Series 9 Preferred Stock. The Securities Purchase Agreement sets forth certain restrictions on the Company’s use of the proceeds from the sale of the Series 9 Preferred Stock pursuant thereto, including that the proceeds must be used in connection with the redemption of the Series 9 Preferred Stock pursuant to the Certificate of Designation or working capital purposes, and may not, without the consent of the required holders of Series 9 Preferred Stock, be used for, among other things, (i) the redemption of any XTIA 65 Table of Content s common stock or common stock equivalents, (ii) the settlement of any outstanding litigation, or (d) for the repayment of debt for borrowed money to any officer or director, or Merger-transaction related bonuses to any employee or vendor except for such non-merger transaction related bonuses as may be payable to participants pursuant to the Company’s existing employee bonus plan. The foregoing description of the Securities Purchase Agreement does not purport to be complete and is qualified in its entirety by reference to the full text of the Securities Purchase Agreement and the Certificate of Designation, which are filed as Exhibits 10.77 and 3.14, respectively, to this Annual Report on Form 10-K and are incorporated by reference herein. . Transaction Bonus Plan in connection with Completed Transaction On March 14, 2023, Inpixon completed a reorganization involving the transfer of Inpixon’s CXApp and enterprise app business lines to a subsidiary of Inpixon, followed by a distribution of shares of such subsidiary to Inpixon’s equity holders. The reorganization was followed by a subsequent business combination transaction between such former subsidiary and KINS Technology Group Inc., a special purpose acquisition company which was renamed CXApp, Inc. upon the consummation of the business combination (collectively, the “Completed Transaction”). On July 24, 2023, the compensation committee of the Inpixon Board (the “Committee”) adopted a Transaction Bonus Plan (the “Completed Transaction Bonus Plan”), which is intended to compensate certain current and former employees and service providers for the successful consummation of the Completed Transaction. The Completed Transaction Bonus Plan will be administered by the Committee. It will terminate upon the completion of all payments under the terms of the Completed Transaction Bonus Plan, provided, that the Board may terminate the plan as to any participant prior to the completion of all payment to under participant under the plan. Pursuant to the Completed Transaction Bonus Plan, in connection with the Completed Transaction, ● Participants listed on Schedule 1 of the Completed Transaction Bonus Plan will be eligible for a cash bonus equal to 100% of their aggregate annual base salary in effect as of the end of the year ended December 31, 2022, provided that the participants must execute a customary release of claims and confidentiality agreement. ● Participants listed on Schedule 2 of the Completed Transaction Bonus Plan including Inpixon’s named executive officers Nadir Ali and Wendy Loundermon will be eligible for a cash bonus in an aggregate amount of 4% of the $70,350,000 transaction value of the Completed Transaction, with Mr. Ali and Ms. Loundermon being entitled to 3.5% and 0.5% of such transaction value, respectively. The Company paid approximately $3.5 million to the company management and former management under the Transaction Bonus Plan which settled the amount in full and no amounts were owed under the plan as of December 31, 2023. In addition, if a participant becomes entitled to any payments or benefits from the Completed Transaction Bonus Plan or any other amounts (collectively, the “Company Payments Relating to the Completed Transaction Plan”) that are subject to the tax imposed by Section 4999 of the Internal Revenue Code of 1986, as amended (the “Excise Tax”), the company will pay the participant the greater of the following amounts: (i) the Company Payments Relating to the Completed Transaction Plan, or (ii) one dollar less than the amount of the Company Payments Relating to the Completed Transaction Plan that would subject the participant to the Excise Tax, as mutually agreed between the company and the participant. Transaction Bonus Plan in connection with Future Strategic Transactions On July 24, 2023, the Committee adopted a Transaction Bonus Plan, which was amended on March 11, 2024 (the “Plan”), and is intended to provide incentives to certain employees and other service providers to remain with the Company through the consummation of a Contemplated Transaction or Qualifying Transaction (each as defined below) and to maximize the value of the company with respect to such transaction for the benefit of its stockholders. The Plan will be administered by the Committee. It will automatically terminate upon the earlier of (i) the one-year anniversary of the adoption date, (ii) the completion of all payments under the terms of the Plan, or (iii) at any time by the Committee, provided, however, that the Plan 66 Table of Content s may not be amended or terminated following the consummation of a Contemplated Transaction or Qualifying Transaction without the consent of each participant being affected, except as required by any applicable law. The Plan was amended on A “Contemplated Transaction” refers to a strategic alternative transaction including an asset sale, merger, reorganization, spin-off or similar transaction (a “Strategic Transaction”) that results in a change of control as defined in the Plan. A Qualifying Transaction refers to a Strategic Transaction that does not result in a change of control for which bonuses may be paid pursuant to the Plan as approved by the Committee. The XTI Merger qualifies as a Contemplated Transaction. Pursuant to the Plan, in connection with the closing of a Contemplated Transaction or a Qualifying Transaction, the participants will be eligible to receive bonuses as described below. ● Participants listed on Schedule 1 of the Plan, including Nadir Ali, Wendy Loundermon, Soumya Das and certain other employees, are eligible for a cash bonus equal to 100% of their aggregate annual base salary and target bonus amount, provided that the participants must execute a customary release of claims and confidentiality agreement. ● Participants listed on Schedule 2 of the Plan, including Nadir Ali and Wendy Loundermon will be eligible for a cash bonus in an aggregate amount of 4% of the applicable Transaction Value (as defined below). Mr. Ali is eligible for 3.5% of such Transaction Value less $6 million. Ms. Loundermon is eligible for 0.5% of such Transaction Value less $500,000. “Transaction Value” means the sum of any cash and the fair market value of any securities or other assets or property received by Inpixon or available for distribution to the holders of Inpixon’s equity securities in connection with the applicable transaction as provided for in the definitive agreement governing the applicable transaction, or such value as shall be designated by the Committee. The Transaction Value applicable to the XTI Merger was assessed at $225 million which was determined by the Committee in part based on the enterprise value of XTI following a valuation analysis performed by an independent financial advisory firm. ● Schedule 3 of the Plan provides that: (i) Nadir Ali shall receive an award (the “Award”) of fully vested shares of Company common stock (“Shares”) issued under the Inpixon 2018 Employee Stock Incentive Plan or any successor equity incentive plan adopted by the Company (the “Equity Plan”) on the date that is three (3) months following the Closing of the XTI Merger (the “Grant Date”) covering a number of shares having a fair market value (based on the closing price per Share on the Grant Date) equal to $1,023,600. Notwithstanding the foregoing, Nadir Ali shall not be eligible to receive the Award if his Consulting Agreement with the Company dated as of March 12, 2024 (the “Consulting Agreement”), terminates before the Grant Date due to (a) Company Good Reason (as defined in the Consulting Agreement) or (b) termination by Nadir Ali for any reason other than Consultant Good Reason (as defined in the Consulting Agreement). (ii) Any amounts payable to any Participant in cash pursuant to the Plan, may be paid in Shares under the Equity Plan upon written agreement of the Company and such Participant. i ● In the sole discretion of the Committee, receipt or eligibility for receipt by a participant of a transaction bonus in respect of a Contemplated Transaction shall not preclude such participant from receiving or being eligible to receive an additional transaction bonus in respect of a Qualifying Transaction. • Pursuant to the terms of the Plan: (1) The first fifty percent (50%) of any amounts payable in connection with the XTI Merger pursuant to Schedule 1 and Schedule 2 of the Plan for each Participant, as applicable (the “ First Fifty Percent ”), shall become earned upon the earlier of closing of a financing (whether a registered offering or private unregistered offering) in which the Company sells Qualifying Securities (as defined below) and receives an amount of gross proceeds that when added to the proceeds of previous sales of Qualifying Securities following the closing of the XTI Merger equals $5 million (the “ First Financing ”) or June 30, 2024 (the “ Earned Date ”). “Qualifying Securities” means any debt or equity securities other than debt or equity securities having a maturity date or a redemption right at the option of the holder of fewer than six (6) months following the issuance of that security. 67 Table of Content s (2) The remaining fifty percent (50%) of any amounts payable pursuant to Schedule 1 and Schedule 2 of the Plan (the “ Remaining Fifty Percent ”) will be earned upon the earlier of the closing of a subsequent financing in which the Company receives an amount of gross proceeds that when added to the proceeds of previous sales of Qualifying Securities following the First Financing aggregates to at least $5 million (“ Subsequent Financing ”) or the Earned Date. (3) Following the Earned Date, the First Fifty Percent will be paid in three (3) equal monthly installments, beginning on July 1, 2024, and on the first day of each month thereafter until the First Fifty Percent is paid in full. The Remaining Fifty Percent will be paid in three (3) equal monthly installments, beginning October 1, 2024 and on the first day of each month thereafter until the Remaining Fifty Percent is paid in full. (4) A Participant’s right to receive payment of the First Fifty Percent or the Second Fifty Percent is subject to the Participant’s continuing employment or other service with the Company or any of its subsidiaries or affiliates until the date on which the payment is earned (as specified in clause (1) or (2) above); provided , however , that if a Participant’s employment or service with the Company or any of its subsidiaries or affiliates terminates before the applicable payment is earned due to the involuntary termination of the Participant other than for Cause, such Participant will be deemed for this purpose to continue in employment or service with the Company and its subsidiaries and affiliates following the Participant’s termination date until the date the applicable payment is earned. (5) In the event the Company is unable to raise a minimum of $5 million from the sale of Qualifying Securities as of June 30, 2024, the Participants hereby designate and appoint Nadir Ali, as the Participant Representative (defined below) to work with the Company as necessary to amend the payment schedule set forth above to ensure that the Company will have sufficient cash to support its operations. If Nadir Ali cannot or refuses to serve the Participant Representative, then the Participant Representative shall be selected by the Company from among the other Participants entitled to receive any payment pursuant to Schedule 1 or Schedule 2 of the Plan. (6) If the Company or XTI pays cash bonuses related to the closing of the XTI Merger to the Company’s or XTI’s employees or individual service providers who are not Participants (“ Non-Plan Transaction Bonuses ”), any then-unpaid payments to Participants pursuant to the Plan shall be paid on an accelerated basis pursuant to a payment schedule that is substantially similar to the bonus payment schedule for the Non-Plan Transaction Bonuses. Conversely, if the Company agrees to an accelerated payment or more favorable payment terms of amounts payable pursuant to the Plan, all recipients of Non-Plan Transaction Bonuses shall receive similar treatment. During the year ended December 31, 2023, the Company did not pay or accrue any bonuses under the Plan in connection with future strategic transactions. Solutions Divestiture - Grafiti Holding Inc. On October 23, 2023, the Company entered into a Separation and Distribution Agreement (the “Separation Agreement”) with Grafiti Holding Inc. (“Grafiti Holding”). pursuant to which it contributed the assets and liabilities of Inpixon Limited, a then wholly owned subsidiary of the Company, to another then wholly owned subsidiary Grafiti Holding in accordance with the separation and distribution agreement. The Company transferred the Grafiti Holding common shares to a newly-created liquidating trust, titled the Grafiti Holding Inc. Liquidating Trust (the “Trust”), which holds the Grafiti Holding common shares for the benefit of the participating Company security holders of record as of December 27, 2023 (the "Record Date Holders"). Following the effectiveness of a registration statement (the "Spin-off Registration Statement") related to the spin-off distribution, the Grafiti Holding common shares will be delivered to the Record Date Holders, as beneficiaries of the Trust, pro rata in accordance with their ownership of shares or underlying shares of Inpixon common stock as of the record date. Upon distribution of the Grafiti Holding shares, it is expected that Record Date Holders will receive one (1) common share of Grafiti Holding for every fifty (50) shares of common stock of the Company held on the Record Date. Damon Business Combination On October 23, 2023, the Company also entered into a Business Combination Agreement (the “Business Combination Agreement”), with Damon Motors Inc., a British Columbia corporation (“Damon”), Grafiti Holding, and 1444842 B.C. Ltd., a British Columbia corporation and a newly formed wholly-owned subsidiary of Grafiti Holding (“Amalco Sub”), pursuant to which it is proposed that Amalco Sub and Damon amalgamate under the laws of British Columbia, Canada with the amalgamated company (the “Damon Surviving Corporation”) continuing as a wholly-owned subsidiary of Grafiti Holding (the 68 Table of Content s “Damon Business Combination”). The Damon Business Combination is subject to material conditions, including approval of the Damon Business Combination by securities holders of Damon, approval of the issuance of Grafiti Holding Common Shares to Damon securities holders pursuant to the Damon Business Combination Agreement by a British Columbia court after a hearing upon the fairness of the terms and conditions of the Business Combination Agreement as required by the exemption from registration provided by Section 3(a)(10) under the Securities Act, and approval of the listing of the Grafiti Holding Common Shares on the Nasdaq Stock Market (“Nasdaq”) after giving effect to the Damon Business Combination. Upon the consummation of the Damon Business Combination (the “Damon Closing”), both Inpixon UK and the Damon Surviving Corporation will be wholly-owned subsidiaries of Grafiti Holding, which will adopt a new name as determined by Damon. Grafiti Holding, after the Damon Closing, is referred to herein as the “combined company.” Pursuant to the Business Combination Agreement, the parties will take all necessary action so that at the Closing, the board of directors of the combined company will consist of such directors as Damon may determine, subject to the independent requirements under the Nasdaq rules, and provided that at least one director will be nominated by Grafiti Holding. Holders of Grafiti Holding Common Shares, including Participating Security holders and management that hold Grafiti Holding Common Shares immediately prior to the closing of the Damon Business Combination, are anticipated to retain approximately 18.75% of the outstanding capital stock of the combined company determined on a fully diluted basis, which includes up to 5% in equity incentives which may be issued to certain members of the Company's current and former management team. On October 26, 2023, Inpixon purchased a convertible note from Damon in an aggregate principal amount of $3.0 million (the “Bridge Note”) together with the Bridge Note Warrant (as defined below) pursuant to a private placement, for a purchase price of $3.0 million. The Bridge Note has a 12% annual interest rate with a term of 12 months. The full principal balance and interest on the Bridge Note will automatically convert into common shares of Damon upon the public listing of Damon or a successor issuer thereof on a national securities exchange (a “Public Company Event”). The number of shares issued upon conversion due to a Public Company Event will equal the quotient obtained by dividing (x) the outstanding principal and unpaid accrued interest on the date of a Public Company Event (or within ten trading days of a direct listing), if any, by (y) the lesser of the then applicable Conversion Price or Public Company Event Conversion Price, each as defined in the Bridge Note. The Bridge Note will contain customary covenants relating to Damon’s financials and operations. In addition, Damon issued a five-year warrant to purchase 1,096,321 shares of Damon common stock in connection with the note. The exercise price per Common Share is equal to the quotient of the valuation cap and the diluted capitalization, as defined in the agreement.The Bridge Note Warrant contains a cashless exercise option if the warrant shares are not covered by an effective registration statement within 180 days following the consummation of the Public Company Event, and also a full ratchet price protection feature. If the Damon Business Combination is consummated, the Bridge Note will be converted into Grafiti Holding Common Shares and the Bridge Note Warrant will become exercisable for Grafiti Holding Common Shares. Solutions Divestiture - Grafiti LLC On February 21, 2024, the Company completed the disposition of the remaining portion of the Shoom, SAVES, and GYG business lines and assets that were excluded from the Grafiti Holding Transaction in accordance with the terms and conditions of an Equity Purchase Agreement, dated February 16, 2024, by and among Inpixon (“Seller”), Grafiti LLC, and Grafiti Group LLC (a newly formed entity controlled by Nadir Ali, the Company's CEO and a director) (“Buyer”). Pursuant to the terms of the Equity Purchase Agreement, Buyer acquired from 100% of the equity interest in Grafiti LLC, including the assets and liabilities primarily relating to Inpixon’s Saves, Shoom and Game Your Game business, including 100% of the equity interests of Inpixon India, Grafiti GmbH (previously Inpixon Gmbh) and Game Your Game, Inc. from the Company for a minimum purchase price of $1.0 million paid in two annual cash installments of $0.5 million due within 60 days after December 31, 2024 and 2025. The purchase price and annual cash installment payments will be (i) increased for 50% of net income after taxes, if any, from the operations of Grafiti LLC for the years ended December 31, 2024 and 2025; (ii) decreased for the amount of transaction expenses assumed; (iii) increased or decreased by the amount working capital of Grafiti LLC on the closing balance sheet is greater or less than $1.0 million. Critical Accounting Policies and Estimates Our consolidated financial statements are prepared in accordance with U.S. Generally Accepted Accounting Principles (“GAAP”). In connection with the preparation of our consolidated financial statements, we are required to make assumptions 69 Table of Content s and estimates about future events, and apply judgments that affect the reported amounts of assets, liabilities, revenue, expenses and the related disclosures. We base our assumptions, estimates and judgments on historical experience, current trends and other factors that management believes to be relevant at the time our consolidated financial statements are prepared. On a regular basis, we review the accounting policies, assumptions, estimates and judgments to ensure that our consolidated financial statements are presented fairly and in accordance with GAAP. However, because future events and their effects cannot be determined with certainty, actual results could differ from our assumptions and estimates, and such differences could be material. Our significant accounting policies are discussed in Note 2 of the audited consolidated financial statements for the years ended December 31, 2023 and 2022 which are included elsewhere in this Annual Report on Form 10-K. We believe that the following accounting estimates are the most critical to aid in fully understanding and evaluating our reported financial results, and they require our most difficult, subjective or complex judgments, resulting from the need to make estimates about the effect of matters that are inherently uncertain. There have been no changes to estimates during the periods presented in the filing. Historically changes in management estimates have not been material. Revenue Recognition The Company recognizes revenue when control is transferred of the promised products or services to its customers, in an amount that reflects the consideration the Company expects to be entitled to in exchange for those products or services. The Company derives revenue from software as a service, design and implementation services for its Indoor Intelligence systems, and professional services for work performed in conjunction with its systems. Our contracts with customers often include promises to transfer multiple distinct products and services. Our licenses are sold as perpetual or term licenses and the arrangements typically contain various combinations of maintenance and professional services, which are accounted for as separate performance obligations. In determining how revenue should be recognized, a five-step process is used, which requires judgment and estimates within the revenue recognition process. The most critical judgements required in applying ASC 606 Revenue Recognition from Customers , and our revenue recognition policy relate to the determination of distinct performance obligations. • We receive fixed consideration for sales of hardware and software products. Revenue is recognized at point in time when the customer has title to the product and risks and rewards of ownership have transferred. • Revenue related to software as a service contract is recognized over time using the output method (days of software provided) because we are providing continuous access to its service. • Design and implementation revenue is accounted for using the percentage of completion method. As soon as the outcome of a contract can be estimated reliably, contract revenue is recognized in the consolidated statement of operations in proportion to the stage of completion of the contract. Accounting for these contracts involves the use of estimates to determine total contract costs to be incurred. • Professional services revenue under fixed fee contracts is recognized over time using the input method (direct labor hours) to recognize revenue over the term of the contract. We have elected the practical expedient to recognize revenue for the right to invoice because our right to consideration corresponds directly with the value to the customer of the performance completed to date. • We recognize revenue related to Maintenance Services evenly over time using the output method (days of software provided) because we provide continuous service, and the customer simultaneously receives and consumes the benefits provided by our performance as the services are performed. We also consider whether an arrangement has any discounts, material rights, or specified future upgrades that may represent additional performance obligations. We offer discounts in the form of prompt payment discounts and rebates for a decrease in service level percentages. We have determined that the most likely amount method is most useful for contracts that provides 70 Table of Content s these discounts and rebates as the contracts have two potential outcomes and a significant reversal in the amount of cumulative revenue recognized is not expected to occur. Discounts have not historically been significant, but we continue to monitor and evaluate these estimates based on historical experience, anticipated performance, and our best judgment. Renewals or extensions of licenses are evaluated as distinct licenses (i.e., a distinct good or service), and revenue attributed to the distinct good or service cannot be recognized until (1) the entity provides the distinct license (or makes the license available) to the customer and (2) the customer is able to use and benefit from the distinct license. If any of these judgments were to change it could cause a material increase or decrease in the amount of revenue we report in a particular period. Acquired Intangible Assets and Other Long-Lived Assets - Impairment Assessments Long-lived assets are grouped for recognition and measurement of impairment at the lowest level for which identifiable cash flows are largely independent of the cash flows of other assets. The impairment test for long-lived assets requires us to assess the recoverability of our long-lived assets by comparing their net carrying value to the sum of undiscounted estimated future cash flows directly associated with and arising from our use and eventual disposition of the assets. If the net carrying value of a group of long-lived assets exceeds the sum of related undiscounted estimated future cash flows, we would be required to record an impairment charge equal to the excess, if any, of net carrying value over fair value. When assessing the recoverability of our long-lived assets, which include property and equipment and finite-lived intangible assets, we make assumptions regarding estimated future cash flows and other factors. Some of these assumptions involve a high degree of judgment and bear a significant impact on the assessment conclusions. Included among these assumptions are estimating undiscounted future cash flows, including the projection of comparable sales, operating expenses, capital requirements for maintaining property and equipment and residual value of asset groups. We formulate estimates from historical experience and assumptions of future performance, based on business plans and forecasts, recent economic and business trends, and competitive conditions. In the event that our estimates or related assumptions change in the future, we may be required to record an impairment charge. We evaluate the remaining useful lives of long-lived assets and identifiable intangible assets whenever events or circumstances indicate that a revision to the remaining period of amortization is warranted. Such events or circumstances may include (but are not limited to): the effects of obsolescence, demand, competition, and/or other economic factors including the stability of the industry in which we operate, known technological advances, legislative actions, or changes in the regulatory environment. If the estimated remaining useful lives change, the remaining carrying amount of the long-lived assets and identifiable intangible assets would be amortized prospectively over that revised remaining useful life. We have determined that there were no events or circumstances during the years ended December 31, 2023 and 2022, which would indicate a revision to the remaining amortization period related to any of our long-lived assets. Accordingly, we believe that the current estimated useful lives of long-lived assets reflect the period over which they are expected to contribute to future cash flows and are therefore deemed appropriate. The Company recorded an impairment of intangibles of zero and approximately $4.6 million during the years December 31, 2023 and 2022, respectively, all of which pertains to discontinued operations. Deferred Income Taxes In accordance with ASC 740 “Income Taxes” (“ASC 740”), management routinely evaluates the likelihood of the realization of its income tax benefits and the recognition of its deferred tax assets. In evaluating the need for any valuation allowance, management will assess whether it is more likely than not that some portion, or all, of the deferred tax asset may not be realized on a jurisdictional basis. Ultimately, the realization of deferred tax assets is dependent upon the generation of future taxable income during those periods in which temporary differences become deductible and/or tax credits and tax loss carry-forwards can be utilized. In performing its analyses, management considers both positive and negative evidence including historical financial performance, previous earnings patterns, future earnings forecasts, tax planning strategies, economic and business trends and the potential realization of net operating loss carry-forwards within a reasonable timeframe. To this end, management considered (i) that we have had historical losses in the prior years and cannot anticipate generating a sufficient level of future profits in order to realize the benefits of our deferred tax asset; (ii) tax planning strategies; and (iii) the adequacy of future income as of and for the year ended December 31, 2023, based upon certain economic conditions and historical losses through December 31, 2023. After consideration of these factors, management deemed it appropriate to establish a full valuation allowance with respect to the deferred tax assets for Inpixon, Nanotron GmbH, and Intranav GmbH. 71 Table of Content s A liability for “unrecognized tax benefits” is recorded for any tax benefits claimed in the Company’s tax filings that do not meet these recognition and measurement standards. As of December 31, 2023 and 2022, no liability for unrecognized tax benefits was required to be reported. The guidance also discusses the classification of related interest and penalties on income taxes. The Company’s policy is to record interest and penalties on uncertain tax positions as a component of income tax expense. No interest or penalties were recorded during the years ended December 31, 2023 and 2022. Business Combinations We account for business combinations using the acquisition method of accounting, and accordingly, the assets and liabilities of the acquired business are recorded at their fair values at the date of acquisition. The excess of the purchase price over the estimated fair value is recorded as goodwill. Any changes in the estimated fair values of the net assets recorded for acquisitions prior to the finalization of more detailed analysis, but not to exceed one year from the date of acquisition, will change the amount of the purchase price allocable to goodwill. Any subsequent changes to any purchase price allocations that are material to our consolidated financial results will be adjusted. All acquisition costs are expensed as incurred and in-process research and development costs are recorded at fair value as an indefinite-lived intangible asset and assessed for impairment thereafter until completion, at which point the asset is amortized over its expected useful life. Separately recognized transactions associated with business combinations are generally expensed subsequent to the acquisition date. The application of business combination and impairment accounting requires the use of significant estimates and assumptions. Upon acquisition, the accounts and results of operations are consolidated as of and subsequent to the acquisition date and are included in our Consolidated Financial Statements from the acquisition date. R ESULTS OF O PERATIONS During the fourth quarter and as of December 31, 2023, both the Shoom and SAVES operating segments and a portion of the Indoor Intelligence segment, were disposed of or met the held for sale criteria and represented a strategic shift in the Company's operations. As a result, these segments have been presented as discontinued operations and, as such, have been excluded from both continuing operations and segment results for all periods presented. In addition, the Company also notes that as of December 31, 2023, the divesiture of our Enterprise Apps line, which was completed in the first quarter of 2023, is presented as discontinued operations and as such, has been excluded from both continuing operations and segment results for all periods presented. This divestiture represented a portion of the Indoor Intelligence operating segment. Following these divestitures, only the Indoor Intelligence operating segment remained as of December 31, 2023. Year Ended December 31, 2023 compared to the Year Ended December 31, 2022 The following table sets forth selected consolidated financial data as a percentage of our revenue and the percentage of period-over-period change: For the Years Ended 2023 2022 (in thousands, except percentages) Amount % of Revenues Amount % of Revenues $ Change % Change* Revenues $ 4,562 100 % $ 6,109 100 % $ (1,547) (25) % Cost of revenues $ 1,458 32 % $ 2,121 35 % $ (663) (31) % Gross profit $ 3,104 68 % $ 3,988 65 % $ (884) (22) % Operating expenses $ 30,033 658 % $ 23,232 380 % $ 6,801 29 % Loss from operations $ (26,929) (590) % $ (19,244) (315) % $ (7,685) (40) % Other (expense)/income $ (7,397) (162) % $ (619) (10) % $ (6,778) (1,095) % Income tax (provision)/benefit $ (24) (1) % $ 181 3 % $ (205) (113) % Net loss from continuing operations $ (34,350) (753) % $ (19,682) (322) % $ (14,668) (75) % Loss from discontinued operations, net of tax $ (12,750) (279) % $ (46,622) (763) % $ 33,872 73 % Net loss attributable to stockholders of XTI Aerospace, Inc. $ (45,947) (1,007) % $ (63,394) (1,038) % $ 17,447 28 % 72 Table of Content s * Amounts used to calculate dollar and percentage changes are based on numbers in the thousands. Accordingly, calculations in this item, which may be rounded to the nearest hundred thousand, may not produce the same results. Revenues Revenues for the year ended December 31, 2023 were $4.6 million compared to $6.1 million for the comparable period in the prior year for an decrease of approximately $1.5 million, or approximately 25%. This decrease is primarily due to longer sales cycles of the IIOT business and the transition to recurring revenue streams. Gross Margin Cost of revenues for the year ended December 31, 2023 were $1.46 million compared to $2.12 million for the comparable period in the prior year. This decrease in cost of revenues of approximately $0.7 million, or approximately 31%, was primarily attributable to the decreased sales during the year. The gross profit margin for the year ended December 31, 2023 was 68% compared to 65% for the year ended December 31, 2022. This higher margin is primarily due to a large higher than average margin Aware product sale in the year ended December 31, 2023. Operating Expenses Operating expenses for the year ended December 31, 2023 were $30.0 million and $23.2 million for the comparable period ended December 31, 2022. This increase of $6.8 million is primarily attributable to the acquisition costs of the XTI and Damon transactions of approximately $4.2 million and the transaction costs of the CXApp transaction of $3.1 million in the year ended December 31, 2023 offset by the $1.2 million impairment of goodwill in the year ended December 31, 2022. Loss From Operations Loss from operations for the year ended December 31, 2023 was $26.9 million as compared to $19.2 million for the comparable period in the prior year. This increase in loss of $7.7 million is primarily attributable to increased operating expenses of $6.8 million as detailed above and the decreased gross profit of approximately $0.9 million. Other Income/(Expense) Other income/expense for the year ended December 31, 2023 was an expense of $7.4 million compared to expense of $0.6 million for the comparable period in the prior year. This increase in other expense of approximately $6.8 million is primarily attributable to higher interest expense of approximately $4.1 million, a warrant inducement expense of $3.4 million offset by a benefit from the change in fair value of warrants of approximately$0.8 million . Provision for Income Taxes There was an income tax provision of approximately $0.02 million for the year ended December 31, 2023 compared to an income tax benefit of $0.2 million for the comparable period in the prior year. The income tax provision for the year ended December 31, 2023 is attributable to minimum state income taxes. Whereas, the income tax benefit for the year ended December 31, 2022 was attributable to favorable adjustments from the year ended December 31, 2021 when the Company reported taxable income. Loss from Discontinued Operations, Net of Tax Loss from discontinued operations, net of tax for the year ended December 31, 2023 was $12.75 million compared to a loss of $46.62 million for the year ended December 31, 2022. This decrease in loss of $33.9 million was primarily due to the enterprise apps spin off which occured in March 2023, therefore there are only 3 months of discontinued operations in the year ended December 31, 2023 and 12 months of discontinued operations in the year ended December 31, 2022. Additionally, the year ended December 31, 2022 includes $11.0 million of impairment of goodwill and intangibles, a $7.9 million unrealized loss on equity securities and a $1.8 million unrealized loss on equity method investment. 73 Table of Content s Net Loss Attributable To Stockholders of XTI Aerospace, Inc. Net loss attributable to stockholders for the year ended December 31, 2023 was $45.95 million compared to $63.39 million for the comparable period in the prior year. This decrease in loss of approximately $17.4 million was primarily attributable to the lower loss from discontinued operations of $33.9 million, offset by higher operating expenses of $6.8 million , higher other expense of $6.8 million and higher tax provision of $0.2 million. Non-GAAP Financial information EBITDA EBITDA is defined as net income (loss) before interest, provision for (benefit from) income taxes, and depreciation and amortization. Adjusted EBITDA is used by our management as the matrix in which it manages the business. It is defined as EBITDA plus adjustments for other income or expense items, non-recurring items and non-cash stock-based compensation. Adjusted EBITDA for the year ended December 31, 2023 was a loss of $15.9 million compared to a loss of $11.3 million for the prior year period. 74 Table of Content s The following table presents a reconciliation of net income/loss attributable to stockholders of XTI Aerospace, Inc., which is our GAAP operating performance measure, to Adjusted EBITDA for the years ended December 31, 2023 and 2022 (in thousands): For the Years Ended December 31, 2023 2022 Net loss attributable to common stockholders $ (45,947) $ (79,570) Loss from discontinued operations, net of tax 12,750 46,622 Interest expense/(income), net 4,730 600 Income tax provision/(benefit) 24 (181) Depreciation and amortization 1,366 1,296 EBITDA (27,077) (31,233) Adjusted for: Non-recurring one-time charges: Unrealized loss on note — 159 Acquisition transaction/financing costs 4,170 410 Professional service fees — 4 Impairment of goodwill — 1,183 Transaction costs 3,059 — Change in fair value of warrants and derivatives (792) — Warrant inducement expense 3,361 — Accretion of series 7 preferred stock — 4,555 Accretion of series 8 preferred stock — 13,090 Deemed dividend modification Series 8 Preferred Stock — 2,627 Deemed Contribution modification of warrants — (1,469) Amortization premium modification of Series 8 Preferred Stock — (2,627) Distribution of equity method investment shares to employees for compensation 666 — Loss on exchange of debt for equity 124 — Unrealized foreign exchange (gains)/losses (293) 74 Bad debts expense/provision (196) (37) Reserve for inventory obsolescense 85 — Stock-based compensation - compensation and related benefits 805 1,707 Severance costs 226 135 Restructuring costs — 169 Adjusted EBITDA $ (15,862) $ (11,253) We rely on Adjusted EBITDA, which is a non-GAAP financial measure for the following: • To review and assess the operating performance of our Company as permitted by ASC Topic 280, Segment Reporting; • To compare our current operating results with corresponding periods and with the operating results of other companies in our industry; • As a basis for allocating resources to various projects; 75 Table of Content s • As a measure to evaluate potential economic outcomes of acquisitions, operational alternatives and strategic decisions; and • To evaluate internally the performance of our personnel. We have presented Adjusted EBITDA above because we believe it conveys useful information to investors regarding our operating results. We believe it provides an additional way for investors to view our operations, when considered with both our GAAP results and the reconciliation to net income (loss). By including this information, we can provide investors with a more complete understanding of our business. Specifically, we present Adjusted EBITDA as supplemental disclosure because of the following: • We believe Adjusted EBITDA is a useful tool for investors to assess the operating performance of our business without the effect of interest, income taxes, depreciation and amortization and other non-cash items including stock based compensation, amortization of intangibles, change in the fair value of shares to be issued, change in the fair value of derivative liability, impairment of goodwill and one time charges including gain/loss on the settlement of obligations, severance costs, provision for doubtful accounts, acquisition costs and the costs associated with the public offering. • We believe that it is useful to provide to investors with a standard operating metric used by management to evaluate our operating performance; and • We believe that the use of Adjusted EBITDA is helpful to compare our results to other companies. Even though we believe Adjusted EBITDA is useful for investors, it does have limitations as an analytical tool. Thus, we strongly urge investors not to consider this metric in isolation or as a substitute for net income (loss) and the other consolidated statement of operations data prepared in accordance with GAAP. Some of these limitations include the fact that: • Adjusted EBITDA does not reflect our cash expenditures or future requirements for capital expenditures or contractual commitments; • Adjusted EBITDA does not reflect changes in, or cash requirements for, our working capital needs; • Adjusted EBITDA does not reflect the significant interest expense or the cash requirements necessary to service interest or principal payments on our debt; • Although depreciation and amortization are non-cash charges, the assets being depreciated and amortized will often have to be replaced in the future, and Adjusted EBITDA does not reflect any cash requirements for such replacements; • Adjusted EBITDA does not reflect income or other taxes or the cash requirements to make any tax payments; and • Other companies in our industry may calculate Adjusted EBITDA differently than we do, thereby potentially limiting its usefulness as a comparative measure. Because of these limitations, Adjusted EBITDA should not be considered a measure of discretionary cash available to us to invest in the growth of our business or as a measure of performance in compliance with GAAP. We compensate for these limitations by relying primarily on our GAAP results and providing Adjusted EBITDA only as supplemental information. Proforma Non-GAAP Net Loss per Share Basic and diluted net loss per share from continuing operations for the year ended December 31, 2023 was a loss of $55.22 compared to a loss of $1,412.86 for the prior year period. Basic and diluted net loss per share from discontinued operations for the year ended December 31, 2023 was a loss of $21.21 compared to a loss of $1,999.23 for the prior year period. 76 Table of Content s Proforma non-GAAP net income (loss) per share is used by our Company’s management as an evaluation tool as it manages the business and is defined as net income (loss) per basic and diluted share adjusted for non-cash items including loss from discontinued operations, stock based compensation, amortization of intangibles and one time charges including gain on the settlement of obligations, severance costs, provision for doubtful accounts, change in the fair value of shares to be issued, acquisition costs and the costs associated with the public offering. Proforma non-GAAP net loss per basic and diluted common share for the year ended December 31, 2023 was a loss of $35.16 per share compared to a loss of $518.06 per share for the prior year period. The following table presents a reconciliation of net loss per basic and diluted share, which is our GAAP operating performance measure, to proforma non-GAAP net loss per share for the periods reflected (in thousands, except per share data): For the Years Ended December 31, (thousands, except per share data) 2023 2022 Net loss attributable to common stockholders $ (45,947) $ (79,570) Adjustments: Non-recurring one-time charges: Loss from discontinued operations, net of tax 12,750 46,622 Unrealized loss on note — 159 Acquisition transaction/financing costs 4,170 410 Professional service fees — 4 Impairment of goodwill — 1,183 Transaction costs 3,059 — Change in fair value of warrants and derivatives (792) — Warrant inducement expense 3,361 — Accretion of series 7 preferred stock — 4,555 Accretion of series 8 preferred stock — 13,090 Deemed dividend modification Series 8 Preferred Stock — 2,627 Deemed Contribution modification of warrants — (1,469) Amortization premium modification of Series 8 Preferred Stock — (2,627) Distribution of equity method investment shares to employees as compensation 666 — Loss on exchange of debt for equity 124 — Unrealized foreign exchange (gains)/losses (293) 74 Bad debts expense/provision (196) (37) Reserve for inventory obsolescense 85 — Stock-based compensation - compensation and related benefits 805 1,707 Severance costs 226 135 Restructuring costs — 169 Amortization of intangibles 843 887 Proforma non-GAAP net loss $ (21,139) $ (12,081) Proforma non-GAAP net loss per basic and diluted common share $ (35.16) $ (518.06) Weighted average basic and diluted common shares outstanding 601,211 23,320 We rely on proforma non-GAAP net loss per share, which is a non-GAAP financial measure: • To review and assess the operating performance of our Company as permitted by ASC Topic 280, Segment Reporting; 77 Table of Content s • To compare our current operating results with corresponding periods and with the operating results of other companies in our industry; • As a measure to evaluate potential economic outcomes of acquisitions, operational alternatives and strategic decisions; and • To evaluate internally the performance of our personnel. We have presented proforma non-GAAP net loss per share above because we believe it conveys useful information to investors regarding our operating results. We believe it provides an additional way for investors to view our operations, when considered with both our GAAP results and the reconciliation to net income (loss), and that by including this information we can provide investors with a more complete understanding of our business. Specifically, we present proforma non-GAAP net loss per share as supplemental disclosure because: • We believe proforma non-GAAP net loss per share is a useful tool for investors to assess the operating performance of our business without the effect of non-cash items including stock based compensation, amortization of intangibles and one time charges including gain on the settlement of obligations, severance costs, provision for doubtful accounts, change in the fair value of shares to be issued, acquisition costs and the costs associated with the public offering. • We believe that it is useful to provide to investors a standard operating metric used by management to evaluate our operating performance; and • We believe that the use of proforma non-GAAP net loss per share is helpful to compare our results to other companies. Liquidity and Capital Resources as of December 31, 2023 Our current capital resources and operating results as of and through December 31, 2023, consist of: 1) an overall working capital surplus of approximately $3.6 million; 2) cash of approximately $6.3 million; 3) net cash used by operating activities for the year ended December 31, 2023 of $29.2 million. The breakdown of our overall working capital surplus is as follows (in thousands): Working Capital Assets Liabilities Net Cash and cash equivalents $ 6,254 $ — $ 6,254 Accounts receivable, net / accounts payable 568 2,449 (1,881) Inventory 2,415 — 2,415 Accrued liabilities — 2,007 (2,007) Operating lease obligation — 201 (201) Deferred revenue — 625 (625) Notes and other receivables / Short-term debt 6,206 8,738 (2,532) Warrant asset/liability 1,858 919 939 Other 430 — 430 Current assets/liabilities of discontinued operations 2,768 1,960 808 Total $ 20,499 $ 16,899 $ 3,600 Contractual Obligations and Commitments 78 Table of Content s Contractual obligations are cash that we are obligated to pay as part of certain contracts that we have entered during our course of business. Our contractual obligations consists of operating lease liabilities and acquisition liabilities that are included in our consolidated balance sheet and vendor commitments associated with agreements that are legally binding. As of December 31, 2023, the total obligation for operating leases is approximately $0.3 million, of which approximately $0.2 million is expected to be paid in the next twelve months. As of December 31, 2023, we owed approximately $8.7 million in principal under promissory notes with third parties. This balance excludes intercompany amounts that are eliminated in the financial statements. These notes are payable within the next twelve months and the interest rate charged under the notes range from 8% to 10%. See Note 11 of the Notes to Consolidated Financial Statements included elsewhere in this Form 10-K. In addition, as of December 31, 2023, we have accrued a liability for outstanding warrants, of $0.9 million. Each warrant is immediately exercisable for one share of Common Stock and will expire one year from the issuance date in May 2023 unless extended by the Company with the consent of the warrant holder. See Note 17 of the Notes to Consolidated Financial Statements included elsewhere in this Form 10-K. As part of the XTI merger transaction, the Company agreed to provide XTI with $2.3 million in exchange for a senior secured promissory note. On November 14, 2023, the principal amount under this note was increased to approximately $3.1 million. As of December 31, 2023, the Company has provided approximately $3.1 million in principal of that balance. On February 2, 2024, Inpixon and XTI executed a further amendment to the XTI Note, dated effective as of January 30, 2024, to increase the Maximum Principal Amount from approximately $3.1 million to approximately $4.0 million.In addition, the Company agreed to make a best effort to have $10 million cash on hand at closing, inclusive of the $4.0 million convertible note. Additionally, at the signing of the business combination agreement with Damon on October 23, 2023, the Company agreed to and purchased a convertible note from Damon in an aggregate principal amount of $3.0 million. Net cash used in operating activities during the year ended December 31, 2023 of $29.2 million consists of net loss of $47.1 million offset by non-cash adjustments of approximately $14.4 million and net cash changes in operating assets and liabilities of approximately $3.5 million. Although the Company has sustained significant losses during 2023, in addition to the cash we had on hand, we raised gross proceeds of approximately $27.4 million in connection with an ATM Offering and received net proceeds of approximately $5.9 million from warrants issued and warrants exercised in the year ended December 31, 2023. However, general economic conditions may materially impact the liquidity of our common stock or our ability to continue to access capital from the sale of our securities to support our growth plans. Certain global events, such as the recent military conflict between Russia and Ukraine, and other general economic factors that are beyond our control may impact our results of operations. These factors can include interest rates; recession; inflation; the threat or possibility of war, terrorism or other global or national unrest; political or financial instability; and other matters that influence our customers spending. Increasing volatility in financial markets and changes in the economic climate could adversely affect our results of operations. We also expect that supply chain interruptions and constraints, and increased costs on parts, materials and labor may continue to be a challenge for our business. The impact that these global events will have on general economic conditions is continuously evolving and the impact that they will have on our results of operations continues to remain uncertain. There are no assurances that we will not be materially adversely effected. The Company may continue to pursue strategic transactions and may raise such additional capital as needed, using our equity securities and/or cash and debt financings in combinations appropriate for each transaction. The Company's recurring losses and utilization of cash in its operations are indicators of going concern. The Company’s consolidated financial statements as of December 31, 2023 have been prepared under the assumption that the Company will continue as a going concern for the next twelve months from the date the financial statements are issued. Management’s plans and assessment of the probability that such plans will mitigate and alleviate any substantial doubt about the Company’s ability to continue as a going concern is dependent upon the ability to obtain additional equity or debt financing, and attain further operating efficiency, which together represent the principal conditions that raise substantial doubt about our ability to continue as a going concern. The Company’s consolidated financial statements as of December 31, 2023 do not include any adjustments that might result from the outcome of this uncertainty. Liquidity and Capital Resources as of December 31, 2023 Compared With December 31, 2022 The Company’s net cash flows used in operating, investing and financing activities for the years ended December 31, 2023 and 2022 and certain balances as of the end of those periods are as follows (in thousands): 79 Table of Content s For the Years Ended December 31, 2023 2022 Net cash used in operating activities $ (29,213) $ (33,963) Net cash used in investing activities (5,887) 36,387 Net cash provided by financing activities 22,208 (34,586) Effect of foreign exchange rate changes on cash 32 (83) Net decrease in cash and cash equivalents $ (12,860) $ (32,245) As of December 31, 2023 As of December 31, 2022 Cash and cash equivalents $ 6,254 $ 9,284 Working capital surplus $ 3,600 $ 5,152 Operating Activities for the year ended December 31, 2023 Net cash used in operating activities during the year ended December 31, 2023 was approximately $29.2 million. The cash flows related to the year ended December 31, 2023 consisted of the following (in thousands): Net loss $ (47,100) Non-cash income and expenses 14,360 Net change in operating assets and liabilities 3,527 Net cash used in operating activities $ (29,213) The non-cash income and expense of approximately $14.4 million consisted primarily of the following (in thousands): $ 2,697 Depreciation and amortization expenses 254 Amortization of right of use asset 1,003 Stock-based compensation expense attributable to warrants and options issued as part of Company operations 124 Loss on exchange of debt for equity 2,627 Amortization of debt issuance costs 3,361 Warrant inducement expense 2,303 Loss on discontinued operations (1,142) Gain on settlement with FOXO (427) Unrealized gain on foreign currency transactions 666 Distribution of equity method investment shares to employees as compensation 2,593 Deferred income tax (5,609) Unrealized gain on equity securities 6,692 Realized loss on sale of equity securities (782) Other $ 14,360 Total non-cash expenses The net cash used in the change in operating assets and liabilities aggregated approximately $3.5 million and consisted primarily of the following (in thousands): 80 Table of Content s $ (532) Increase in accounts receivable and other receivables 1,109 Decrease in inventory, other current assets and other assets 873 Increase in accounts payable 1,703 Increase in accrued liabilities and other liabilities (257) Decrease in operating lease liabilities 631 Increase in deferred revenue $ 3,527 Net cash used in the changes in operating assets and liabilities Operating Activities for the year ended December 31, 2022 Net cash used in operating activities during the years ended December 31, 2022 was approximately $34.0 million. The cash flows related to the year ended December 31, 2022 consisted of the following (in thousands): Net loss $ (66,304) Non-cash income and expenses 32,345 Net change in operating assets and liabilities (4) Net cash used in operating activities $ (33,963) The non-cash income and expense of approximately $32.3 million consisted primarily of the following (in thousands): $ 7,456 Depreciation and amortization expenses 706 Amortization of right of use asset (278) Accrued interest income, related party 3,656 Stock-based compensation expense attributable to warrants and options issued as part of Company operations 489 Amortization of debt issuance costs (2,827) Earnout payment expense benefit 151 Realized loss on sale of equity securities 1,784 Unrealized loss on equity method investment 1,707 Unrealized gain on foreign currency transactions (1) Deferred income tax 7,904 Unrealized loss on equity securities 12,199 Impairment of goodwill and intangibles (791) Gain on conversion of note receivable 190 Other $ 32,345 Total non-cash expenses The net use of cash in the change in operating assets and liabilities aggregated approximately $0.004 million and consisted primarily of the following (in thousands): $ (115) Increase in accounts receivable and other receivables 843 Decrease in inventory, other current assets and other assets 182 Increase in accounts payable 977 Increase in accrued liabilities and other liabilities (677) Decrease in operating lease liabilities (1,214) Decrease in deferred revenue $ (4) Net use of cash in the changes in operating assets and liabilities 81 Table of Content s Cash Flows from Investing Activities as of December 31, 2023 and 2022 Net cash flows used in investing activities during 2023 was approximately $5.9 million compared to net cash flows provided by investing activities during 2022 of approximately $36.4 million. Cash flows related to investing activities during the year ended December 31, 2023 include $0.2 million for the purchase of property and equipment, $0.2 million for investment in capitalized software, $0.2 million proceeds from repayment of note receivable, $0.3 million sales of equity securities, $3.0 million for issuance of convertible note receivable and $3.0 million for issuance of note receivable. Cash flows related to investing activities during the year ended December 31, 2022 include $0.2 million for the purchase of property and equipment, $0.9 million for investment in capitalized software, $43.0 million for the sales of treasury bills, $0.2 million for sales of equity securities, $5.5 million for the purchase of a convertible note, and $0.2 million for the issuance of a note receivable. Cash Flows from Financing Activities as of December 31, 2023 and 2022 Net cash flows provided by financing activities during the year ended December 31, 2023 was $22.2 million. Net cash flows used in financing activities during the year ended December 31, 2022 was $34.6 million. During the year ended December 31, 2023, the Company received incoming cash flows of $26.5 million from an ATM stock offering, received $1.4 million of net proceeds from the issuance of warrants, received $4.5 million from the exercise of warrants, received $0.4 million of net proceeds from a promissory note, paid a $0.2 million liability related to the CXApp acquisition, distributed $10.0 million to shareholders related to the spin-off of CXApp, and distributed $0.4 million to a trust related to the spin-off of Grafiti Holding. During the year ended December 31, 2022, the Company received incoming cash flows of $46.9 million for the issuance of common stock, preferred stock and warrants, received $12.3 million of net proceeds from a promissory note, received $14.1 million in net proceeds from ATM stock offerings, paid $0.3 million of taxes related to the net share settlement of restricted stock units, paid $5.1 million liability related to the CXApp acquisition, paid $49.3 million for the redemption of preferred stock series 7, and paid $53.2 million for the redemption of preferred stock series 8, Off-Balance Sheet Arrangements We do not have any off-balance sheet guarantees, interest rate swap transactions or foreign currency contracts. We do not engage in trading activities involving non-exchange traded contracts. Recently Issued Accounting Standards For a discussion of recently issued accounting pronouncements, please see Note 2 to our financial statements, which are included in this report beginning on page F-1. ITEM 7A: QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISK As a smaller reporting company, we are not required to provide this information. 82 Table of Content s