XTI Aerospace, Inc. 10-Q

ITEM 1: FINANCIAL STATEMENTS iv Table of Contents XTI AEROSPACE, INC. AND SUBSIDIARIES CONDENSED CONSOLIDATED BALANCE SHEETS (In thousands, except number of shares and par value data) As of March 31, 2024 As of December 31, 2023 (Unaudited) (Unaudited) Assets Current Assets Cash and cash equivalents $ 1,801 $ 5 Accounts receivable, net of allowance for credit losses of $ 27 and $ 0 , respectively 797 — Other receivables 642 101 Inventory 2,875 — Notes receivable 3,264 — Warrant asset 448 — Prepaid expenses and other current assets 1,722 125 Total Current Assets 11,549 231 Property and equipment, net 250 12 Operating lease right-of-use asset, net 653 — Intangible assets, net 5,018 266 Goodwill 12,398 — Other assets 914 — Total Assets $ 30,782 $ 509 The accompanying notes are an integral part of these Condensed Consolidated Financial Statements 1 Table of Contents XTI AEROSPACE, INC. AND SUBSIDIARIES CONDENSED CONSOLIDATED BALANCE SHEETS (CONTINUED) (In thousands, except number of shares and par value data) As of March 31, 2024 As of December 31, 2023 (Unaudited) (Unaudited) Liabilities and Stockholders’ Equity Current Liabilities Accounts payable $ 6,948 $ 2,495 Related party payables 100 540 Accrued expenses and other current liabilities 4,905 1,127 Accrued interest 422 560 Customer deposits 1,350 1,350 Warrant liability 1,019 497 Operating lease obligation, current 259 — Deferred revenue 807 — Short-term debt 838 6,690 Total Current Liabilities 16,648 13,259 Long Term Liabilities Long-term debt 65 18,546 Operating lease obligation, noncurrent 404 — Other liabilities, noncurrent — 333 Total Liabilities 17,117 32,138 Commitments and Contingencies (Note 23) Stockholders’ Equity (Deficit) Preferred Stock -$ 0.001 par value; 5,000,000 shares authorized Series 4 Convertible Preferred Stock - 10,415 shares authorized; 1 issued and outstanding as of March 31, 2024 and December 31, 2023 — — Series 5 Convertible Preferred Stock - 12,000 shares authorized; 126 issued and outstanding as of March 31, 2024 and December 31, 2023 — — Series 9 Preferred Stock - 20,000 shares authorized; 11,302 and 0 shares issued and outstanding as of March 31, 2024 and December 31, 2023, respectively. (Liquidation preference of $ 11,867,100 ) 11,302 — Common Stock - $ 0.001 par value; 500,000,000 shares authorized; 9,919,411 and 3,197,771 shares issued and outstanding as of March 31, 2024 and December 31, 2023, respectively. 10 3 Additional paid-in capital 63,080 26,327 Accumulated other comprehensive loss ( 166 ) — Accumulated deficit ( 60,561 ) ( 57,959 ) Total Stockholders’ Equity (Deficit) 13,665 ( 31,629 ) Total Liabilities and Stockholders’ Equity (Deficit) $ 30,782 $ 509 The accompanying notes are an integral part of these Condensed Consolidated Financial Statements 2 Table of Contents XTI AEROSPACE, INC. AND SUBSIDIARIES CONDENSED CONSOLIDATED STATEMENTS OF OPERATIONS (In thousands, except share and per share data) For the Three Months Ended March 31, 2024 2023 (Unaudited) Revenues $ 220 $ — Cost of Revenues 79 — Gross Profit 141 — Operating Expenses Research and development 464 435 Sales and marketing 304 135 General and administrative 1,717 570 Merger-related transaction costs 6,490 137 Amortization of intangible assets 43 7 Total Operating Expenses 9,018 1,284 Loss from Operations ( 8,877 ) ( 1,284 ) Other Income (Expense) Interest expense, net ( 261 ) ( 233 ) Amortization of deferred loan costs ( 17 ) ( 22 ) Inducement loss on debt conversions ( 6,732 ) — Change in fair value of convertible notes 12,882 — Change in fair value of JV obligation — ( 26 ) Change in fair value of warrant liability 398 — Other income, net 9 — Total Other Income (Expense) 6,279 ( 281 ) Net Loss, before tax ( 2,598 ) ( 1,565 ) Income tax provision ( 4 ) — Net Loss Attributable to Stockholders of XTI Aerospace $ ( 2,602 ) $ ( 1,565 ) Preferred stock return and dividend ( 61 ) $ — Net Loss Attributable to Common Stockholders $ ( 2,663 ) $ ( 1,565 ) Net Loss Per Share - Basic and Diluted $ ( 0.50 ) $ ( 0.41 ) Weighted Average Shares Outstanding Basic and Diluted 5,366,823 3,790,106 The accompanying notes are an integral part of these Condensed Consolidated Financial Statements 3 Table of Contents XTI AEROSPACE, INC. AND SUBSIDIARIES CONDENSED CONSOLIDATED STATEMENTS OF COMPREHENSIVE LOSS (In thousands) For the Three Months Ended March 31, 2024 2023 (Unaudited) Net Loss Attributable to Common Stockholders $ ( 2,663 ) $ ( 1,565 ) Unrealized foreign exchange loss from cumulative translation adjustments ( 166 ) — Comprehensive Loss $ ( 2,829 ) $ ( 1,565 ) The accompanying notes are an integral part of these Condensed Consolidated Financial Statements 4 Table of Contents XTI AEROSPACE, INC. AND SUBSIDIARIES CONDENSED CONSOLIDATED STATEMENT OF CHANGES IN STOCKHOLDERS' EQUITY (DEFICIT) For the three months ended March 31, 2024 (Unaudited) (In thousands, except share and per share data) Series 9 Preferred Stock at Redemption Value Common Stock Additional Paid-In Capital Accumulated Other Comprehensive (Loss) Income Accumulated Deficit Total Stockholders’ (Deficit) Equity Shares Amount Shares Amount Balance - January 1, 2024 — $ — 3,197,771 $ 3 $ 26,327 $ — $ ( 57,959 ) $ ( 31,629 ) Common stock issued for conversion of debt — — 2,621,516 3 8,688 — — 8,691 Common stock issued for conversion of debt - related party — — 266,272 — 923 — — 923 Inducement loss on debt conversions — — — — 6,732 — — 6,732 Common stock issued to Xeriant, Inc. (Note 12) — — 298,395 — — — — — Common stock issued for cashless exercise of warrants — — 389,287 1 ( 1 ) — — — Common stock issued for cashless exercise of options — — 92,728 — — — — — Common and preferred shares issued via merger 11,302 11,302 2,075,743 2 14,301 — — 25,605 Capital contribution - forgiveness of related party payable — — — — 380 — — 380 Stock based compensation — — 977,699 1 5,791 — — 5,792 Cumulative translation adjustment — — — — — ( 166 ) — ( 166 ) Series 9 preferred stock dividend accrued — — — — ( 61 ) — — ( 61 ) Net loss — — — — — — ( 2,602 ) ( 2,602 ) Balance - March 31, 2024 11,302 — $ 11,302 — 9,919,411 — $ 10 — $ 63,080 — $ ( 166 ) — $ ( 60,561 ) — $ 13,665 The accompanying notes are an integral part of these Condensed Consolidated Financial Statements 5 Table of Contents XTI AEROSPACE, INC. AND SUBSIDIARIES CONDENSED CONSOLIDATED STATEMENT OF CHANGES IN STOCKHOLDERS' EQUITY (DEFICIT) For the three months ended March 31, 2023 (Unaudited) (In thousands, except share and per share data) Series 9 Preferred Stock at Redemption Value Common Stock Additional Paid-In Capital Accumulated Other Comprehensive (Loss) Income Accumulated Deficit Total Stockholders’ (Deficit) Equity Shares Amount Shares Amount Balance - January 1, 2023 — $ — 3,181,578 $ 3 $ 17,908 — $ ( 32,893 ) $ ( 14,982 ) Stock based compensation - stock options — — — — 141 — — 141 Issuance of warrants with convertible note — — — — 39 — — 39 Net loss — — — — — — ( 1,565 ) ( 1,565 ) Balance - March 31, 2023 — $ — 3,181,578 $ 3 $ 18,088 $ — $ ( 34,458 ) $ ( 16,367 ) The accompanying notes are an integral part of these Condensed Consolidated Financial Statements 6 Table of Contents XTI AEROSPACE, INC. AND SUBSIDIARIES CONDENSED CONSOLIDATED STATEMENTS OF CASH FLOWS (In thousands) For the Three Months Ended March 31, 2024 2023 Cash Flows Used in Operating Activities (Unaudited) Net loss $ ( 2,602 ) $ ( 1,565 ) Adjustment to reconcile net loss to net cash used in operating activities: Depreciation and amortization 13 3 Amortization of intangible assets 43 7 Amortization of deferred loan costs 17 22 Amortization of right-of-use asset 10 — Stock based compensation 5,792 141 Amortization of debt discount 77 116 Change in fair value of JV obligation — 26 Provision for credit losses 4 — Change in fair value of convertible notes ( 12,882 ) — Inducement loss on debt conversions 6,732 — Change in fair value of warrant liability ( 398 ) — Unrealized loss on foreign currency transactions ( 127 ) — Changes in operating assets and liabilities: Accounts receivable and other receivables ( 143 ) ( 1 ) Inventory 373 — Prepaid expenses and other current assets ( 841 ) 17 Other assets ( 7 ) — Accounts payable 1,722 496 Related party payables ( 60 ) 29 Accrued expenses and other current liabilities ( 496 ) 136 Accrued interest 243 116 Deferred revenue ( 13 ) — Operating lease obligation ( 8 ) — Net Cash Used in Operating Activities ( 2,551 ) ( 457 ) Cash Flows Provided by Investing Activities Purchase of property and equipment ( 7 ) — Cash received in purchase of Inpixon 2,968 — Purchase of intangible asset ( 3 ) — Net Cash Provided by Investing Activities 2,958 — Cash Provided by Financing Activities Net proceeds from promissory notes 378 415 Net proceeds from loan from Inpixon (prior to merger) 1,012 — Net proceeds from convertible notes — 300 Net Cash Provided by Financing Activities 1,390 715 7 Table of Contents XTI AEROSPACE, INC. AND SUBSIDIARIES CONDENSED CONSOLIDATED STATEMENTS OF CASH FLOWS (CONTINUED) (In thousands) Effect of Foreign Exchange Rate on Changes on Cash ( 1 ) — Net Increase in Cash and Cash Equivalents 1,796 258 Cash and Cash Equivalents - Beginning of period 5 115 Cash and Cash Equivalents - End of period $ 1,801 $ 373 Supplemental Disclosure of cash flow information: Cash paid for: Interest $ 2 $ 1 Income Taxes $ 4 $ — Non-cash investing and financing activities Common shares issued for inducement of debt and accrued interest $ 5,637 $ — Issuance of common stock for merger consideration, net of cash received $ 22,637 $ — Right of use asset obtained in exchange for lease liability $ 394 $ — Common shares issued for conversion of debt and accrued interest $ 3,959 $ — Capital contribution - forgiveness of related party payable $ 380 $ — Series 9 preferred stock dividend accrued $ 61 $ — The accompanying notes are an integral part of these Condensed Consolidated Financial Statements 8 Table of Contents XTI AEROSPACE, INC. AND SUBSIDIARIES NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS FOR THE THREE MONTHS ENDED MARCH 31, 2024 AND 2023 Note 1 - Organization and Nature of Business Following the closing of the XTI Merger, we are primarily an aircraft development 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, XTI Aerospace is developing a vertical takeoff and landing ("VTOL") aircraft that is designed to take off and land like a helicopter and cruise like a fixed-wing business aircraft. Since 2013, 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 production and sale of 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. 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 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. On March 12, 2024, Inpixon (“Legacy Inpixon”), Superfly Merger Sub Inc., a Delaware corporation and a wholly owned subsidiary of Legacy Inpixon (“Merger Sub”), and XTI Aircraft Company, a Delaware corporation (“Legacy XTI”), completed their previously announced merger transaction. The merger transaction was completed pursuant to an Agreement and Plan of Merger (the “XTI Merger Agreement”), dated as of July 24, 2023 and amended on December 30, 2023 and March 12, 2024, pursuant to which Legacy XTI merged in a reverse triangular merger with Merger Sub with Legacy XTI surviving the merger as a wholly-owned subsidiary of the Company (the “XTI Merger”). In connection with the closing of the XTI Merger, our corporate name changed 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.” Based on the guidance of ASC Topic 805, "Business Combinations," we determined the XTI Merger transaction should be accounted for as a reverse acquisition with Legacy XTI being considered the accounting acquirer. Therefore, the condensed consolidated financial statements included in this filing represent a continuation of the financial statements of Legacy XTI and the results of operations of the accounting acquired entity, Legacy Inpixon, are included in the condensed consolidated financial statements as of the March 12, 2024 merger closing date and through the March 31, 2024 reporting date. See Note 5 for more details. Note 2 - Basis of Presentation The accompanying unaudited condensed consolidated financial statements of the Company have been prepared in accordance with generally accepted accounting principles in the United States of America (“GAAP”), for interim financial information and the rules and regulations of the Securities and Exchange Commission (“SEC”). Accordingly, they do not include all of the information and footnotes required by GAAP for complete financial statements. In the opinion of management, all adjustments (consisting of normal recurring accruals) considered necessary for a fair presentation have been included. Interim results for the three months ended March 31, 2024 are not necessarily indicative of the results for the full year ending December 31, 2024. These interim unaudited condensed consolidated financial statements should be read in conjunction with Legacy Inpixon's audited consolidated financial statements and notes for the years ended December 31, 2023 and 2022 included in the annual report on Form 10-K for the year ended December 31, 2023, filed with the SEC on April 16, 2024. It should be noted the aforementioned Form 10-K excludes the historical financial position and operating results of Legacy XTI as the merger closed during the first quarter of 2024. 9 Table of Contents XTI AEROSPACE, INC. AND SUBSIDIARIES NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS FOR THE THREE MONTHS ENDED MARCH 31, 2024 AND 2023 Note 3 - Summary of Significant Accounting Policies The Company's complete accounting policies are described in Note 2 to the Legacy Inpixon's audited consolidated financial statements and notes for the year ended December 31, 2023, except for Legacy XTI's accounting policies which have been incorporated into this Note 3. Liquidity and Going Concern As of March 31, 2024, the Company has a working capital deficit of approximately $ 5.1 million, and cash of approximately $ 1.8 million. For the three months ended March 31, 2024, the Company had a net loss of approximately $ 2.7 million. During the three months ended March 31, 2024, the Company used approximately $ 2.6 million of cash for operating activities. The Company cannot assure you 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. The Company's recurring losses and utilization of cash in its operations are indicators of going concern. The Company’s condensed consolidated financial statements as of three months ended March 31, 2024 and 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 condensed consolidated financial statements as of and for the three months ended March 31, 2024 and 2023 do not include any adjustments that might result from the outcome of this uncertainty. Consolidations The consolidated financial statements have been prepared using the accounting records of XTI Aircraft Company and as of March 12, 2024 and forward (the effective date of the XTI Merger - see Note 5) the accounting records of XTI Aerospace, Inc. (formerly known as Inpixon), Inpixon GmbH (formerly known as Nanotron Technologies GmbH), Inpixon Holding UK Limited, and Intranav GmbH. All material inter-company balances and transactions have been eliminated. Use of Estimates The preparation of financial statements in conformity with GAAP requires management to make estimates and assumptions that affect the reported amounts of assets and liabilities and disclosure of contingent assets and liabilities at the date of the financial statements and the reported amounts of revenues and expenses during each of the reporting periods. Actual results could differ from those estimates. The Company’s significant estimates consist of: • the valuation of stock-based compensation; • the valuation of the Company’s common stock issued in transactions, including acquisitions; • the valuation of equity securities; • the valuation of warrant liabilities; • the valuation of convertible notes, at fair value; • the valuation of loan conversion derivatives; and • the valuation allowance for deferred tax assets. Business Combinations The Company accounts for business combinations under Financial Accounting Standards Board (“FASB”) Accounting Standards Codification (“ASC”) 805, “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. All acquisition costs are expensed as incurred. Upon acquisition, the accounts and results of operations are consolidated as of and subsequent to the acquisition date. 10 Table of Contents XTI AEROSPACE, INC. AND SUBSIDIARIES NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS FOR THE THREE MONTHS ENDED MARCH 31, 2024 AND 2023 Note 3 - Summary of Significant Accounting Policies (continued) Intangible Assets Intangible assets primarily consist of developed technology, patents, customer relationships, and trade names/trademarks. They are amortized ratably over a range of 5 to 15 years, which approximates customer attrition rate and technology obsolescence. The Company assesses the carrying value of its intangible assets for impairment each year. Based on its assessments, the Company has recorded no impairment during the three months ended March 31, 2024 and 2023. Acquired In-Process Research and Development (“IPR&D”) In accordance with authoritative guidance, the Company recognizes IPR&D at fair value as of the acquisition date, and subsequently accounts for it as an indefinite-lived intangible asset until completion or abandonment of the associated research and development efforts. Once an IPR&D project has been completed, the useful life of the IPR&D asset is determined and amortized accordingly. If the IPR&D asset is abandoned, the remaining carrying value is written off. During fiscal year 2024, the Company acquired IPR&D through the merger with Inpixon. Carrying Value, Recoverability and Impairment of Long-Lived Assets The Company has adopted Section 360-10-35 of the FASB ASC for its long-lived assets. Pursuant to ASC Paragraph 360-10-35-17, an impairment loss shall be recognized only if the carrying amount of a long-lived asset (asset group) is not recoverable and exceeds its fair value. The carrying amount of a long-lived asset (asset group) is not recoverable if it exceeds the sum of the undiscounted cash flows expected to result from the use and eventual disposition of the asset (asset group). That assessment shall be based on the carrying amount of the asset (asset group) at the date it is tested for recoverability. An impairment loss shall be measured as the amount by which the carrying amount of a long-lived asset (asset group) exceeds its fair value. Pursuant to ASC Paragraph 360-10-35-20 if an impairment loss is recognized, the adjusted carrying amount of a long-lived asset shall be its new cost basis. For a depreciable long-lived asset, the new cost basis shall be depreciated (amortized) over the remaining useful life of that asset. Restoration of a previously recognized impairment loss is prohibited. Pursuant to ASC Paragraph 360-10-35-21, the Company’s long-lived asset (asset group) is tested for recoverability whenever events or changes in circumstances indicate that its carrying amount may not be recoverable. The Company considers the following to be some examples of such events or changes in circumstances that may trigger an impairment review: (a) significant decrease in the market price of a long-lived asset (asset group); (b) a significant adverse change in the extent or manner in which a long-lived asset (asset group) is being used or in its physical condition; (c) a significant adverse change in legal factors or in the business climate that could affect the value of a long-lived asset (asset group), including an adverse action or assessment by a regulator; (d) an accumulation of costs significantly in excess of the amount originally expected for the acquisition or construction of a long-lived asset (asset group); (e) a current-period operating or cash flow loss combined with a history of operating or cash flow losses or a projection or forecast that demonstrates continuing losses associated with the use of a long-lived asset (asset group); and (f) a current expectation that, more likely than not, a long-lived asset (asset group) will be sold or otherwise disposed of significantly before the end of its previously estimated useful life. The Company tests its long-lived assets for potential impairment indicators at least annually and more frequently upon the occurrence of such events. Based on its assessments, the Company has recorded no long-lived assets impairment during the three months ended March 31, 2024 and 2023. Goodwill The Company tests goodwill for potential impairment at least annually, or more frequently if an event or other circumstance indicates that the Company may not be able to recover the carrying amount of the net assets of the reporting unit. In evaluating goodwill for impairment, the Company may assess qualitative factors to determine whether it is more likely than not (that is, a likelihood of more than 50%) that the fair value of a reporting unit is less than its carrying amount. If the Company bypasses the qualitative assessment, or if the Company concludes that it is more likely than not that the fair value of a reporting unit is less than its carrying value, then the Company performs a quantitative impairment test by comparing the fair value of a reporting unit with its carrying amount. The Company calculates the estimated fair value of a reporting unit using a weighting of the income and market approaches. For the income approach, the Company uses internally developed discounted cash flow models that include the following assumptions, among others: projections of revenues, expenses, and related cash flows based on assumed long-term growth rates 11 Table of Contents XTI AEROSPACE, INC. AND SUBSIDIARIES NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS FOR THE THREE MONTHS ENDED MARCH 31, 2024 AND 2023 Note 3 - Summary of Significant Accounting Policies (continued) and demand trends; expected future investments to grow new units; and estimated discount rates. For the market approach, the Company uses internal analyses based primarily on market comparables. The Company bases these assumptions on its historical data and experience, third party appraisals, industry projections, micro and macro general economic condition projections, and its expectations. Based on its assessments, the Company has recorded no goodwill impairment during the three months ended March 31, 2024 and 2023. 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. Hardware and Software Revenue Recognition For sales of hardware and software products, the Company’s performance obligation is satisfied at a point in time when they are shipped to the customer. This is when the customer has title to the product and the risks and rewards of ownership. The delivery of products to Inpixon's customers occurs in a variety of ways, including (i) as a physical product shipped from the Company’s warehouse, (ii) via drop-shipment by a third-party vendor, or (iii) via electronic delivery with respect to software licenses. The Company leverages drop-ship arrangements with many of its vendors and suppliers to deliver products to customers without having to physically hold the inventory at its warehouse. In such arrangements, the Company negotiates the sale price with the customer, pays the supplier directly for the product shipped, bears credit risk of collecting payment from its customers and is ultimately responsible for the acceptability of the product and ensuring that such product meets the standards and requirements of the customer. Accordingly, the Company is the principal in the transaction with the customer and records revenue on a gross basis. The Company receives fixed consideration for sales of hardware and software products. The Company’s customers generally pay within 30 to 60 days from the receipt of a customer approved invoice. The Company has elected the practical expedient to expense the costs of obtaining a contract when they are incurred because the amortization period of the asset that otherwise would have been recognized is less than a year. Software As A Service Revenue Recognition With respect to sales of the Company’s maintenance, consulting and other service agreements, customers pay fixed monthly fees in exchange for the Company’s service. The Company’s performance obligation is satisfied over time as the digital advertising and electronic services are provided continuously throughout the service period. The Company recognizes revenue evenly over the service period using a time-based measure because the Company is providing continuous access to its service. Professional Services Revenue Recognition The Company’s professional services include milestone, fixed fee and time and materials contracts. Professional services under milestone contracts are 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. Contract costs are expensed as incurred. Contract costs include all amounts that relate directly to the specific contract, are attributable to contract activity, and are specifically chargeable to the customer under the terms of the contract. Professional services are also contracted on the fixed fee and time and materials basis. Fixed fees are paid monthly, in phases, or upon acceptance of deliverables. The Company’s time and materials contracts are paid weekly or monthly based on hours worked. Revenue on time and material contracts is recognized based on a fixed hourly rate as direct labor hours are expended. Materials, or other specified direct costs, are reimbursed as actual costs and may include markup. The Company has elected the practical expedient to recognize revenue for the right to invoice because the Company’s right to consideration corresponds directly with the value to the customer of the performance completed to date. For fixed fee contracts including maintenance service provided by in house personnel, the Company recognizes revenue evenly over the service period using a time-based 12 Table of Contents XTI AEROSPACE, INC. AND SUBSIDIARIES NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS FOR THE THREE MONTHS ENDED MARCH 31, 2024 AND 2023 Note 3 - Summary of Significant Accounting Policies (continued) measure because the Company is providing continuous service. Because the Company’s contracts have an expected duration of one year or less, the Company has elected the practical expedient in ASC 606-10-50-14(a) to not disclose information about its remaining performance obligations. Anticipated losses are recognized as soon as they become known. For the three months ended March 31, 2024 and 2023, the Company did not incur any such losses. These amounts are based on known and estimated factors. License Revenue Recognition The Company enters into contracts with its customers whereby it grants a non-exclusive on-premise license for the use of its proprietary software. The contracts provide for a stated term with a one year or multiple year renewal option. The contracts may also provide for yearly on-going maintenance services for a specified price, which includes maintenance services, designated support, and enhancements, upgrades and improvements to the software (the “Maintenance Services”), depending on the contract. Licenses for on-premises software provide the customer with a right to use the software as it exists when made available to the customer. All software provides customers with the same functionality and differ mainly in the duration over which the customer benefits from the software. The timing of the Company's revenue recognition related to the licensing revenue stream is dependent on whether the software licensing agreement entered into represents a good or service. Software that relies on an entity’s IP and is delivered only through a hosting arrangement, where the customer cannot take possession of the software, is a service. A software arrangement that is provided through an access code or key represents the transfer of a good. Licenses for on-premises software represents a good and provide the customer with a right to use the software as it exists when made available to the customer. Customers may purchase perpetual licenses or subscribe to licenses, which provide customers with the same functionality and differ mainly in the duration over which the customer benefits from the software. Revenue from distinct on-premises licenses is recognized upfront at the point in time when the software is made available to the customer. 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. Renewal contracts are not combined with original contracts, and, as a result, the renewal right is evaluated in the same manner as all other additional rights granted after the initial contract. The revenue is not recognized until the customer can begin to use and benefit from the license, which is typically at the beginning of the license renewal period. Therefore, the Company recognizes revenue resulting from renewal of licensed software at a point in time, specifically, at the beginning of the license renewal period. The Company recognizes revenue related to Maintenance Services evenly over the service period using a time-based measure because the Company is providing continuous service and the customer simultaneously receives and consumes the benefits provided by the Company’s performance as the services are performed. Contract Balances The timing of the Company’s revenue recognition may differ from the timing of payment by its customers. The Company records a receivable when revenue is recognized prior to payment and the Company has an unconditional right to payment. Alternatively, when payment precedes the provision of the related services, the Company records deferred revenue until the performance obligations are satisfied. Customer Deposits The Company periodically enters into aircraft reservation agreements that include a deposit placed by a potential customer. The deposits serve to prioritize orders when the aircraft becomes available for delivery. Customers making deposits are not obligated to purchase aircraft until they execute a definitive purchase agreement. Customers may request return of their deposit any time up until the execution of a purchase agreement. The Company records such advance deposits as a liability and defers the related revenue recognition until delivery of an aircraft occurs, if any. 13 Table of Contents XTI AEROSPACE, INC. AND SUBSIDIARIES NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS FOR THE THREE MONTHS ENDED MARCH 31, 2024 AND 2023 Note 3 - Summary of Significant Accounting Policies (continued) Convertible Instruments GAAP requires companies to bifurcate conversion options from their host instruments and account for them as free-standing derivative financial instruments according to certain criteria. The criteria include circumstances in which (a) the economic characteristics and risks of the embedded derivative instrument are not clearly and closely related to the economic characteristics and risks of the host contract, (b) the hybrid instrument that embodies both the embedded derivative instrument and the host contract is not re-measured at fair value under otherwise applicable GAAP changes in fair value reported in earnings as they occur and (c) a separate instrument with the same terms as the embedded derivative instrument would be considered a derivative instrument. An exception to this rule is when the host instrument is deemed to be conventional as that term is described under applicable GAAP. When the Company has determined that the embedded conversion options should not be bifurcated from their host instruments, the Company records, when necessary, discounts to convertible notes for the intrinsic value of conversion options embedded in debt instruments based upon the differences between the fair value of the underlying common stock at the commitment date of the note transaction and the effective conversion price embedded in the note. Debt discounts under these arrangements are amortized over the term of the related debt to their stated date of redemption. When the Company has determined the embedded conversion options should be bifurcated from their host instruments, the Company records a free-standing derivative asset or liability measured at fair value at issuance. Subsequent to initial measurement, the Company will re-measure the derivative asset or liability at fair value at each reporting date with changes in the fair value recognized in earnings. Stock-Based Compensation The Company accounts for options granted to employees by measuring the cost of services received in exchange for the award of equity instruments based upon the fair value of the award on the date of grant. The fair value of that award is then ratably recognized as an expense over the period during which the recipient is required to provide services in exchange for that award. The Company measures compensation expense for its non-employee stock-based compensation under ASC 718, "Stock Based Compensation". The fair value of the option issued or committed to be issued is used to measure the transaction, as this is more reliable than the fair value of the services received. The fair value is measured at the value of the Company’s common stock or stock award on the date that the commitment for performance by the counterparty has been reached or the counterparty’s performance is complete. The fair value of the equity instrument is charged directly to stock-based compensation expense and credited to additional paid-in capital. The assumptions used in calculating the fair value of stock-based awards represent management’s best estimates and involve inherent uncertainties and the application of management’s judgment. As a result, if factors change and management uses different assumptions, stock-based compensation expense could be materially different for future awards. The Company incurred the following stock-based compensation charges for the periods indicated below (in thousands): For the Three Months Ended March 31, 2024 2023 Employee and consultant stock options 1 $ 143 $ 141 Vesting of previously unvested warrants 2 496 — Professional fees 2 5,153 — Total $ 5,792 $ 141 1 amount included in general and administrative expenses on the condensed consolidated statements of operations 2 amount included in merger-related transaction costs on the condensed consolidated statements of operations 14 Table of Contents XTI AEROSPACE, INC. AND SUBSIDIARIES NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS FOR THE THREE MONTHS ENDED MARCH 31, 2024 AND 2023 Note 3 - Summary of Significant Accounting Policies (continued) Net Loss Per Share The Company computes basic and diluted earnings per share by dividing net loss attributable to common shareholders by the weighted average number of common shares outstanding during the period. Basic and diluted net loss per common share were the same since the inclusion of common shares issuable pursuant to the exercise of options and warrants in the calculation of diluted net loss per common shares would have been anti-dilutive. The following table summarizes the number of common shares and common share equivalents excluded from the calculation of diluted net loss per common share for the three months ended March 31, 2024 and 2023 as they are considered to be anti-dilutive: For the Three Months Ended March 31, 2024 2023 Options 1,140,699 929,523 Warrants 443,356 119,532 Convertible preferred stock 2 — Convertible notes 978,975 645,716 Total 2,563,032 1,694,771 Basic earnings per share for the three months ended March 31, 2024 and 2023, included 549,286 and 608,528 of weighted average penny warrants shares, respectively, since the exercise price was $ 0.01 per share. Additional, basic earnings per share for the three months ended March 31, 2024, included 236,093 weighted average number of common shares that were issuable to Xeriant Inc. (Xeriant”) related to the joint venture arrangement that expired by its term on May 31, 2023. The shares were issued to Xeriant for no additional consideration immediately prior to the XTI Merger. Preferred Stock The Company relies on the guidance provided by ASC 480, "Distinguishing Liabilities from Equity" ("ASC 480"), to classify certain redeemable and/or convertible instruments. Preferred shares subject to mandatory redemption are classified as liability instruments and are measured at fair value. Conditionally redeemable preferred shares (including preferred shares that feature redemption rights that are either within the control of the holder or subject to redemption upon the occurrence of uncertain events not solely within the Company’s control) are classified as temporary equity. At all other times, preferred shares are classified as permanent equity. The Company also follows the guidance provided by ASC 815, "Derivatives and Hedging" (“ASC 815”), which states that contracts that are both, (1) indexed to its own stock and (2) classified in stockholders’ equity in its statement of financial position, are not classified as derivative instruments, and to be recorded under stockholder's equity on the balance sheet of the financial statements. Management assessed the preferred stock and determined that it did meet the scope exception under ASC 815, and would be recorded as equity, and not a derivative instrument, on the balance sheet of the Company's financial statements. Fair Value of Financial Instruments and Fair Value Measurements Financial instruments consist of cash and cash equivalents, accounts receivable, notes receivable, accounts payable, and short-term debt. The Company determines the estimated fair value of such financial instruments presented in these financial statements using available market information and appropriate methodology. These financial instruments, except for short-term debt and notes receivable, are stated at their respective historical carrying amounts, which approximate fair value due to their short-term nature. Short-term debt approximates market value based on similar terms available to the Company in the market place. The valuation methodology of notes receivable are described in Note 24 . ASC 820 , " Fair Value Measurements" (“ASC 820” ), provides guidance on the development and disclosure of fair value measurements. The Company follows this authoritative guidance for fair value measurements, which defines fair value, establishes a framework for measuring fair value under generally accepted accounting principles in the United States, and 15 Table of Contents XTI AEROSPACE, INC. AND SUBSIDIARIES NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS FOR THE THREE MONTHS ENDED MARCH 31, 2024 AND 2023 Note 3 - Summary of Significant Accounting Policies (continued) expands disclosures about fair value measurements. The guidance requires fair value measurements be classified and disclosed in one of the following three categories: Level 1: Quoted prices (unadjusted) in active markets that are accessible at the measurement date for identical assets or liabilities. Level 2: Observable prices that are based on inputs not quoted on active markets but corroborated by market data. Level 3: Unobservable inputs which are supported by little or no market activity and values determined using pricing models, discounted cash flow methodologies, or similar techniques, as well as instruments for which the determination of fair value requires significant judgment or estimation. Fair value measurements discussed herein are based upon certain market assumptions and pertinent information available to management as of March 31, 2024 and December 31, 2023 and during the periods ended March 31, 2024 and March 31, 2023. Segments The Company and its Chief Executive Officer ("CEO"), acting as the Chief Operating Decision Maker ("CODM") determined its operating segments in accordance with ASC 280, "Segment Reporting" ("ASC 280"). The Company is organized and operated as two business segments based on similar economic characteristics, the nature of products and production processes, end-use markets, channels of distribution, and regulatory environments. Recently Issued and Adopted Accounting Standards In July 2023, the FASB issued ASU 2023-03, "Presentation of Financial Statements (Topic 205), Income Statement - Reporting Comprehensive Income (Topic 220), Distinguishing Liabilities from Equity (Topic 480), Equity (Topic 505), and Compensation - Stock Compensation (Topic 718)", which updates codification on how an entity would apply the scope guidance in paragraph 718-10-15-3 to determine whether profits interest and similar awards should be accounted for in accordance with Topic 718, Compensation—Stock Compensation. The effective date of this update is for fiscal years beginning after December 15, 2023, including interim periods within those fiscal years. The Company adopted ASU 2023-03 as of January 1, 2024. The adoption of this guidance did not have a material impact on the condensed consolidated financial statements and disclosures. Recently Issued Accounting Standards Not Yet Adopted The Company reviewed recently issued accounting pronouncements and concluded that they were not applicable to the condensed consolidated financial statements, except for the following: In October 2023, the FASB issued ASU 2023-06, "Disclosure Improvements: Codification Amendments in Response to the SEC’s Disclosure Updated and Simplification Initiative", which amends the disclosure or presentation requirements related to various subtopics in the FASB Accounting Standards Codification (the “Codification”). The ASU was issued in response to the SEC’s August 2018 final rule that updated and simplified disclosure requirements. The new guidance is intended to align GAAP requirements with those of the SEC and to facilitate the application of GAAP for all entities. For entities subject to the SEC’s existing disclosure requirements and for entities required to file or furnish financial statements with or to the SEC in preparation for the sale of or for purposes of issuing securities that are not subject to contractual restrictions on transfer, the effective date for each amendment will be the date on which the SEC removes that related disclosure from its rules. For all other entities, the amendments will be effective two years later. However, if by June 30, 2027, the SEC has not removed the related disclosure from its regulations, the amendments will be removed from the Codification and not become effective for any entity. The Company is currently assessing potential impacts of ASU 2023-06 and does not expect the adoption of this guidance will have a material impact on its condensed consolidated financial statements and disclosures. In November 2023, the FASB issued ASU 2023-07, Segment Reporting (Topic 280) - Improvements to Reportable Segment Disclosures. The new standard requires a company to disclose incremental segment information on an annual and interim basis, including significant segment expenses and measures of profit or loss that are regularly provided to the chief operating decision maker. The standard is effective for the Company beginning in fiscal year 2024 and interim periods within fiscal year 2025, 16 Table of Contents XTI AEROSPACE, INC. AND SUBSIDIARIES NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS FOR THE THREE MONTHS ENDED MARCH 31, 2024 AND 2023 Note 3 - Summary of Significant Accounting Policies (continued) with early adoption permitted. The Company does not expect to early adopt the new standard. The Company is currently evaluating the impact of ASU 2023-07 on its financial statements and related disclosures and will adopt the new standard using a retrospective approach. In December 2023, the FASB also issued ASU 2023-09, Income Taxes (Topic 740) - Improvements to Income Tax Disclosures. The new standard requires a company to expand its existing income tax disclosures, specifically related to the rate reconciliation and income taxes paid. The standard is effective for the Company for annual periods beginning after December 15, 2024, with early adoption permitted. The Company does not expect to early adopt the new standard. The new standard is expected to be applied prospectively, but retrospective application is permitted. The Company is currently evaluating the impact of ASU 2023-09 on its financial statements and related disclosures. In March 2024, FASB issued ASU No. 2024-01, “Compensation- Stock Compensation (Topic 718): Scope Application of Profits Interest and Similar Awards.” ASU 2024-01 provides an illustrative example that includes four fact patterns to demonstrate how an entity should apply the scope guidance in paragraph 718-10-15-3 to determine whether a profits interest award should be accounted for in accordance with Topic 718. ASU 2024-01 is effective for fiscal years beginning after December 15, 2024. The Company is currently evaluating the impact of ASU 2024-01 on its financial statements and related disclosures. Note 4 - Disaggregation of Revenue Disaggregation of Revenue 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 recognition policy. Revenues consisted of the following (in thousands): For the Three Months Ended March 31, 2024 2023 Recurring revenue Software $ 53 $ — Total recurring revenue $ 53 $ — Non-recurring revenue Hardware $ 162 $ — Professional services 5 — Total non-recurring revenue $ 167 $ — Total Revenue $ 220 $ — 17 Table of Contents XTI AEROSPACE, INC. AND SUBSIDIARIES NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS FOR THE THREE MONTHS ENDED MARCH 31, 2024 AND 2023 Note 4 - Disaggregation of Revenue (continued) For the Three Months Ended March 31, 2024 2023 Revenue recognized at a point in time Industrial IoT (1) $ 162 $ — Total $ 162 $ — Revenue recognized over time Industrial IoT (2) (3) $ 58 $ — Total $ 58 $ — Total Revenue $ 220 $ — (1) Hardware and Software's performance obligation is satisfied at a point in time when they are shipped to the customer. (2) Professional services are also contracted on the fixed fee and time and materials basis. Fixed fees are paid monthly, in phases, or upon acceptance of deliverables. The Company has elected the practical expedient to recognize revenue for the right to invoice because the Company’s right to consideration corresponds directly with the value to the customer of the performance completed to date, in which revenue is recognized over time. (3) Software As A Service Revenue's performance obligation is satisfied evenly over the service period using a time-based measure because the Company is providing continuous access to its service and revenue is recognized over time. Note 5 – Merger Transaction The XTI Merger was accounted for as a reverse merger in accordance with GAAP. Under this method of accounting, Legacy Inpixon was treated as the "acquired" company for financial reporting purposes. This determination is primarily based on the fact that subsequent to the XTI Merger, Legacy XTI maintains control of the Board of Directors and management of the combined company, and the preexisting shareholders of Legacy XTI will have majority voting rights of the combined company. For accounting purposes, the acquirer is the entity that has obtained control of another entity and, thus, consummated a business combination. Accordingly, Legacy XTI’s assets and liabilities are recorded at carrying value and the assets and liabilities associated with Legacy Inpixon are recorded at estimated fair value as of the acquisition date. The excess of the purchase price over the estimated fair value of the net assets acquired, if applicable, is recognized as goodwill. The below summarizes the total consideration transferred in the business combination (in thousands): Fair value of common stock $ 10,939 Fair value of warrants 3,250 Fair value of preferred stock 11,302 Fair value of debt assumed 114 Total consideration $ 25,605 The Company determined the estimated fair value of common stock included in consideration to be calculated based on Inpixon’s common stock outstanding of 2,075,743 multiplied by the price of Inpixon’s common stock on March 12, 2024 of $ 5.27 (which reflects the 1 to 100 reverse stock split which went effective before the closing of the transaction). The Company determined the stock price of Inpixon was utilized in determining fair value as it is more reliably measurable than the value of the Legacy XTI’s (accounting acquirer) equity interests given it is not a publicly traded entity prior to the Merger. The fair value of warrants of approximately $ 3.3 million was included in the total equity consideration. A portion of this total represents 918,689 warrants outstanding by the Company with a fair value of $ 1.00 per warrant, which is the warrant's redemption value. The warrant fair value was determined to be the redemption value as the warrants include protective 18 Table of Contents XTI AEROSPACE, INC. AND SUBSIDIARIES NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS FOR THE THREE MONTHS ENDED MARCH 31, 2024 AND 2023 Note 5 - Merger Transaction (continued) covenants for the Company which prevent the holder from exercising the warrants. The warrant is redeemable in May 2024, and at that time, the holder will receive the redemption value ($ 1 per share) for each warrant. The remainder of this total represents 491,310 warrants with a fair value of $ 4.75 per warrant which was determined by using level 3 inputs utilizing a Black-Scholes valuation. The Black-Scholes valuation inputs include a dividend rate of — %, risk free rate of 4.2 %, share price of $ 5.27 , exercise price of $ 5.13 per share, an expected term of 4.76 years, and volatility of 146 %. The fair value of preferred stock of approximately $ 11.3 million included in the total equity consideration represents 11,302 shares of a new series of Preferred Stock that was issued and outstanding by the Company upon the consummation of the Merger at a stated value of $ 1,000 and fair value of $ 1,000 per share, which was determined by using level 3 inputs utilizing a scenario-based method under the income approach. Inputs and assumptions under the scenario-based method include preferred return and preferred dividends outlined in Note 13 and an expected holding period of 5 years. The Company has determined preliminary fair values of the assets acquired and liabilities assumed in the merger. These values are subject to change as we perform additional reviews of our assumptions utilized. The Company has made a provisional allocation of the purchase price of the merger to the assets acquired and the liabilities assumed as of the purchase date. The following table summarizes the preliminary purchase price allocations relating to the merger (in thousands): Assets acquired Cash and cash equivalents $ 2,968 Accounts receivable 696 Notes and other receivables 7,929 Inventory 3,283 Prepaid assets and other current assets 756 Property and equipment 246 Other assets 1,202 Warrant assets 448 Tradename & trademarks 913 Proprietary technology 2,934 Customer relationships 702 In process research and development 243 Goodwill 12,398 34,718 Liabilities assumed Accounts payable 2,675 Accrued liabilities 4,282 Operating lease obligation 299 Deferred revenue 824 Short-term debt 114 Warrant liability 919 Total liabilities assumed 9,113 Estimated fair value of assets acquired $ 25,605 The assets were valued using a combination of a multi-period excess earnings methodologies, a relief from royalty approach, a discounted cash flow approach and present value of cash flows approach. The goodwill represents the excess fair value after the allocation of intangibles. As a nontaxable transaction, the historical tax bases of the acquired assets, liabilities and tax attributes have carried over. Although no new tax goodwill has been created in the transaction, the Company has approximately $ 5.8 million of tax deductible goodwill that arose in previous transactions which carries over. 19 Table of Contents XTI AEROSPACE, INC. AND SUBSIDIARIES NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS FOR THE THREE MONTHS ENDED MARCH 31, 2024 AND 2023 Note 5 - Merger Transaction (continued) The Company incurred approximately $ 13.8 million of merger related transaction costs in conjunction with the merger transaction. Refer to XTI Aerospace Inc.'s annual report on Form 10-K for the year ended December 31, 2023, filed with the SEC on April 16, 2024, for more information on the XTI Merger transaction. Note 6 - Proforma Financial Information Inpixon Financial Information The following unaudited proforma financial information presents the consolidated results of operations of the Company and Inpixon for the three months ended March 31, 2024 and 2023, as if the acquisition had occurred as of the beginning of the first period presented (January 1, 2023) instead of on March 12, 2024. The proforma information does not necessarily reflect the results of operations that would have occurred had the entities been a single company during those periods. The proforma financial information for the Company and Inpixon is as follows (in thousands): For the Three Months Ended March 31, 2024 For the Three Months Ended March 31, 2023 Revenues $ 727 $ 1,292 Net loss attributable to common stockholders $ ( 16,530 ) $ ( 9,284 ) Net loss per basic and diluted common share $ ( 1.67 ) $ ( 0.94 ) Weighted average common shares outstanding: Basic and Diluted 9,919,411 9,919,411 20 Table of Contents XTI AEROSPACE, INC. AND SUBSIDIARIES NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS FOR THE THREE MONTHS ENDED MARCH 31, 2024 AND 2023 Note 7- Intangible Assets Intangible assets at March 31, 2024 and December 31, 2023 consisted of the following (in thousands): March 31, 2024 Gross Amount Accumulated Amortization Net Carrying Amount Remaining Weighted Average Useful Life Patents $ 416 $ ( 162 ) $ 254 9.5 Trade Name/Trademarks 921 ( 9 ) 912 5.0 Proprietary Technology 2,934 ( 20 ) 2,914 7.0 Customer Relationships 702 ( 7 ) 695 5.0 In-Process R&D 243 — 243 3.0 Total $ 5,216 $ ( 198 ) $ 5,018 December 31, 2023 Gross Amount Accumulated Amortization Net Carrying Amount Patents $ 413 $ ( 155 ) $ 258 Trade Name/Trademarks 8 — 8 Total $ 421 $ ( 155 ) $ 266 Amortization expense for the three months ended March 31, 2024 and 2023 was approximately $ 0.04 million and $ 0.01 million respectively. Future amortization expense on intangibles assets is anticipated to be as follows (in thousands): Amount December 31, 2024 (for 9 months) $ 577 December 31, 2025 851 December 31, 2026 851 December 31, 2027 851 December 31, 2028 770 December 31, 2029 and thereafter 1,118 Total $ 5,018 21 Table of Contents XTI AEROSPACE, INC. AND SUBSIDIARIES NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS FOR THE THREE MONTHS ENDED MARCH 31, 2024 AND 2023 Note 8 - Inventory The Company did not have any inventory as of December 31, 2023. Inventory as of March 31, 2024 consisted of the following (in thousands): As of March 31, 2024 Raw materials $ 29 Work-in-process 125 Finished goods 2,721 Inventory $ 2,875 Note 9 - Deferred Revenue As of December 31, 2023, the Company did not have any deferred revenue. As part of the merger, the Company acquired approximately $ 0.8 million of deferred revenue, all of which relates to RTLS maintenance agreements. The Company's deferred revenue balance as of March 31, 2024 related to cash received in advance for product maintenance services and professional services provided by the Company’s technical staff. The fair value of the deferred revenue approximates the services to be rendered. The Company expects to satisfy its remaining performance obligations for these maintenance services and professional services, and recognize the deferred revenue and related contract costs over the next twelve months. Note 10 - Accrued Liabilities Accrued liabilities as of March 31, 2024 and December 31, 2023 consisted of the following (in thousands): As of March 31, 2024 As of December 31, 2023 Accrued compensation and benefits $ 3,218 $ 649 Accrued other 613 173 Accrued bonus and commissions 518 305 Consulting agreements expense accrual (See Note 23) 302 — Due to Grafiti Group, LLC 254 — Total $ 4,905 $ 1,127 22 Table of Contents XTI AEROSPACE, INC. AND SUBSIDIARIES NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS FOR THE THREE MONTHS ENDED MARCH 31, 2024 AND 2023 Note 11 - Debt Debt as of March 31, 2024 and December 31, 2023 consisted of the following (in thousands): Short-Term Debt Maturity March 31, 2024 December 31, 2023 Promissory Note - 2023 $ — $ 3,071 Promissory Note - 2023 - related party 5/31/2024 125 125 Convertible Note - 2021 - related party 4/1/2024 175 1,079 Convertible Note - 2021 5/23/2024 47 2,500 Unamortized Discounts — ( 50 ) Unamortized Loan Costs — ( 35 ) Third Party Note Payable - 2023 12/31/2024 114 — Third Party Note Payable - 2024 12/14/2024 377 — Total Short-Term Debt $ 838 $ 6,690 Long-Term Debt SBA loan 6/3/2050 $ 65 $ 65 Convertible notes, at fair value 1 — 16,804 Convertible Note - 2017 1 — 1,987 Convertible Note - 2022 1 — 600 Convertible Note - 2023 1 — 300 Unamortized Discounts — ( 1,210 ) Total Long-Term Debt $ 65 $ 18,546 1 principal balance was converted to equity immediately prior to the XTI Merger closing time - refer to Note 12 Interest expense on the short-term debt totaled approximately $ 0.4 million and $ 0.2 million for the three months ended March 31, 2024 and 2023, respectively. Interest expense includes the interest on the outstanding balance of the notes and the amortization of deferred financing costs and note discounts recorded at issuance for the Short Term Debt. Notes Payable Promissory Note - 2023 On July 24, 2023, the Company and XTI Aircraft Company entered into a Senior Promissory Note which had an outstanding principal balance of approximately $ 3.1 million as of December 31, 2023. During the period from January 1, 2024 to March 12, 2024, legacy Inpixon provided an additional $ 1.0 million in funding to XTI Aircraft Company. On March 12, 2024, the Company and XTI Aircraft Company effected a reverse triangular merger resulting in XTI Aircraft Company becoming a wholly-owned subsidiary of the Company. As a result of the merger, the outstanding subsidiary debt balance, related parent note receivable balance and accrued interest eliminated upon the consolidation of the Company's March 31, 2024 balance sheet. The Company intends to legally terminate this intercompany promissory note during the second quarter of 2024. Promissory Note - 2023 - related party On January 5, 2023, the Company entered into a promissory note agreement with David Brody. The note has a principal amount of approximately $ 0.1 million and accrues interest at a rate of 5 % per annum. The note matures on May 31, 2024 (as amended). On May 2, 2024, the Company paid $ 0.05 million towards the principal balance of the note. 23 Table of Contents XTI AEROSPACE, INC. AND SUBSIDIARIES NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS FOR THE THREE MONTHS ENDED MARCH 31, 2024 AND 2023 Note 11 - Debt (continued) Convertible Note - 2021 - related party On October 1, 2023, an existing convertible note entered into on December 31, 2021 by and between the Company and David Brody was replaced by a new convertible note with a principal balance of approximately $ 1.1 million and interest rate of 4 %. On March 12, 2024, approximately $ 0.9 million of the note's outstanding balance was converted into common shares of the Company, The Company repaid the remaining balance of the note on April 1, 2024. Convertible Note - 2021 During 2021, the Company entered into convertible notes with a syndicate of investors. The notes had a combined principal amount of $ 2.5 million and accrue interest at a rate of 4.0 % per annum. On March 12, 2024, approximately $ 2.45 million of the note's outstanding principal balance was converted into common shares of the Company. As of March 31,2024, approximately $ 0.05 million of the note's principal balance and $ 0.2 million of accrued interest remained outstanding. The note holder has the right to receive repayment of the note at the note’s maturity date in either cash or in shares of common stock of the Company at a value of $ 1.00 per share. The share conversion may occur prior to May 23, 2024 at the option of the note holder. Third Party Note Payable - 2023 - financing agreement As part of the Merger, the Company acquired a financing agreement whereby the lender paid a Company vendor approximately $ 0.1 million for a service contract. The terms of the agreement are for a 12 months period with a 18.6 % interest rate whereby there is no payment due for the first 4 months, and then the Company is to pay approximately $ 0.01 million a month over 8 months until the debt is repaid in full. Third Party Note Payable - 2024 - financing agreement On March 14, 2024, the Company entered into a financing agreement whereby the lender paid a Company vendor approximately $ 0.4 million for an insurance contract. The terms of the agreement are for a 9 month period with a 8.3 % interest rate. The Company is to pay $ 0.04 million per month until the debt is repaid in full. SBA Loan On June 3, 2020, the Company entered into a promissory note with the U.S. Small Business Administration (SBA). The note has a principal amount of $ 0.07 million and accrues interest at a rate of 3.75 % per annum. Monthly interest only payments commenced on June 3, 2021. The note matures on June 3, 2050 and is collateralized by tangible and intangible personal assets of the Company. 24 Table of Contents XTI AEROSPACE, INC. AND SUBSIDIARIES NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS FOR THE THREE MONTHS ENDED MARCH 31, 2024 AND 2023 Note 12 - Common Stock Reverse Stock Split The Company effected a reverse stock split of its outstanding common stock at a ratio of 1-for-100, effective as of March 12, 2024, for the purpose of complying with Nasdaq Listing Rule 5550(a)(2) and satisfying the bid price requirements applicable for initial listing applications in connection with the closing of the XTI Merger. All references in the condensed consolidated financial statements to the number of shares and per share amounts of the Company’s common stock have been retroactively restated to reflect completion of the Merger and the Reverse Stock Split. Note Conversion Immediately prior to the effective time of the XTI Merger on March 12, 2024, the 2017 convertible note, 2018 convertible note and 2019 convertible note (collectively classified as "convertible notes, at fair value" - refer to the debt table in Note 11) were converted into an aggregate 8,416,201 pre-exchange common shares or 751,226 post merger exchange common shares of the company. Immediately prior to the conversion, the convertible notes, at fair value were marked to market resulting in a gain of $ 12.9 million, which is included in change in fair value of convertible notes in the other income and expense section of the condensed consolidated statement of operations. As a result of the conversions, the notes were satisfied in full and therefore relieved the company of all obligations. Note Inducements To induce note holders to convert their outstanding note balances into XTI common shares ahead of the XTI Merger so to assist the Company in qualifying for a Nasdaq Capital Markets listing, Legacy XTI entered into voluntary note conversion letter agreements in February 2024 as detailed below. Per the letter agreements, an aggregate principal and accrued interest balance was converted at a reduced conversion price into common shares of Legacy XTI immediately prior to the XTI Merger closing time. As a result of the voluntary note conversions, for some transactions there was a syndicate note balance remaining post-merger which was assumed by the combined company (XTI Aerospace). The Company accounted for these conversions as an inducement and, as such, recognized a loss related to the fair value of the additional shares issued compared to the original terms of the convertible note, which is included in inducement loss on debt conversions in the other income and expense section of the condensed consolidated statement of operations. Letter Agreement Aggregate Principal and Interest Reduced Conversion Price Pre - Exchange Ratio Common Shares Post - Exchange Ratio Common Shares Post Conversion Note Balance Outstanding - Assumed by XTI Aerospace Net Inducement Charge Convertible Note 2021 $ 2,503,776 $ 0.265 9,450,209 843,523 $ 273,000 $ 3,266,167 Convertible Note 2017 $ 2,147,687 $ 0.265 8,106,195 723,557 $ — $ 2,795,492 Convertible Note 2022 $ 600,000 $ 0.265 2,264,630 202,140 $ 82,000 $ 464,055 Convertible Note 2023 $ 300,000 $ 0.265 1,132,315 101,070 $ 33,000 $ 206,733 Totals 1,870,290 $ 6,732,447 Note Inducement: Convertible Note 2021 - Related Party To induce the note holder to convert his outstanding note balances into XTI common shares ahead of the XTI Merger so to assist the Company in qualifying for a Nasdaq Capital Markets listing, XTI Aircraft Company entered into voluntary note conversion letter agreement with the note holder in February 2024. Per the letter agreement, $ 0.9 million of the outstanding note balance was converted at a reduced conversion price of $ 0.309 into 2,983,115 pre-exchange common shares of XTI immediately prior to the XTI Merger closing time or 266,272 post merger exchange common shares. As a result of the voluntary note conversion, $ 0.2 million of the note balance remained outstanding post-merger and was assumed by the combined company (XTI Aerospace) and was subsequently paid in full on April 1, 2024. The Company accounted for this conversion as an inducement and, as such, recognized an inducement charge of $ 1.0 million related to the fair value of the additional shares issued compared to the original terms of the convertible note. As this note holder is a related party of the 25 Table of Contents XTI AEROSPACE, INC. AND SUBSIDIARIES NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS FOR THE THREE MONTHS ENDED MARCH 31, 2024 AND 2023 Note 12 - Common Stock (continued) Company, the Company accounted for the conversion as a capital transaction and therefore recorded the inducement charge within additional paid in capital. Share Issuances At the closing of the merger transaction, there were 2,075,743 shares of the Company's common stock issued to Inpixon’s preexisting shareholders as consideration for the transaction. 3,342,998 of pre-exchange common shares of XTI Aircraft Company were issued to Xeriant, Inc. immediately prior to the XTI Merger closing time or 298,395 post merger exchange common shares. This share issuance to Xeriant Inc. fully settled the obligation relating to a joint venture arrangement by and between XTI Aircraft Company and Xeriant Inc., which terminated by its terms on May 31, 2023. The obligation to issue shares to Xeriant was classified in equity as of December 31, 2023, as the share consideration became fixed once the joint venture terminated. 4,000,000 of pre-exchange common shares of XTI Aircraft Company were issued to Scott Pomeroy as transaction compensation immediately prior to the XTI Merger closing time or 357,039 post merger exchange common shares. As a result of this share issuance transaction, the Company recorded $ 1.9 million of stock-based compensation expense included in the condensed consolidated statement of operations for the three months ended March 31, 2024. 4,317,279 of pre-exchange common shares of XTI Aircraft Company were issued to Maxim Group as transaction compensation immediately prior to the XTI Merger closing time or 385,359 post merger exchange common of pre-exchange common shares As a result of this share issuance transaction, the Company recorded $ 2.0 million of stock-based compensation expense included in the condensed consolidated statement of operations for the three months ended March 31, 2024. 2,117,817 of pre-exchange common shares of XTI Aircraft Company were issued to Chardan Capital Markets as transaction compensation immediately prior to the XTI Merger closing time or 189,036 post merger exchange common shares. As a result of this share issuance transaction, the Company recorded $ 1.0 million of stock-based compensation expense included in the condensed consolidated statement of operations for the three months ended March 31, 2024. 518,317 of pre-exchange common shares of XTI Aircraft Company were issued to a non-executive officer as transaction compensation immediately prior to the XTI Merger closing time or 46,265 post merger exchange common shares. As a result of this share issuance transaction, the Company recorded $ 0.2 million of stock-based compensation expense included in the condensed consolidated statement of operations for the three months ended March 31, 2024. Note 1 3 - Preferred Stock The Company is authorized to issue up to 5,000,000 shares of preferred stock with a par value of $ 0.001 per share with rights, preferences, privileges and restrictions as to be determined by the Company’s Board of Directors. Series 4 Convertible Preferred Stock On April 20, 2018, the Company filed with the Secretary of State of the State of Nevada the Certificate of Designation that created the Series 4 Convertible Preferred Stock (“Series 4 Preferred”), authorized 10,415 shares of Series 4 Preferred and designated the preferences, rights and limitations of the Series 4 Preferred. The Series 4 Preferred is non-voting (except to the extent required by law) and was convertible into the number of shares of common stock, determined by dividing the aggregate stated value of the Series 4 Preferred of $ 1,000 per share to be converted by $ 1,674,000 . As of March 31, 2024, there was 1 share of Series 4 Preferred outstanding. Series 5 Convertible Preferred Stock On January 14, 2019, the Company filed with the Secretary of State of the State of Nevada the Certificate of Designation that created the Series 5 Convertible Preferred Stock, authorized 12,000 shares of Series 5 Convertible Preferred Stock and designated the preferences, rights and limitations of the Series 5 Convertible Preferred Stock. The Series 5 Convertible Preferred Stock is non-voting (except to the extent required by law). The Series 5 Convertible Preferred Stock is convertible 26 Table of Contents XTI AEROSPACE, INC. AND SUBSIDIARIES NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS FOR THE THREE MONTHS ENDED MARCH 31, 2024 AND 2023 Note 13 - Preferred Stock (continued) into the number of shares of common stock, determined by dividing the aggregate stated value of the Series 5 Convertible Preferred Stock of $ 1,000 per share to be converted by $ 1,123,875 . As of March 31, 2024, there were 126 shares of Series 5 Convertible Preferred Stock outstanding. 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 (“Stated Value”) and do not have any voting rights. Preferred stock is recorded on the accompanying consolidated balance sheet at its redemption value which is the carrying value of the redeemable preferred stock. 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 will be payable on a quarterly basis, 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. The Preferred Stock holders will also receive a quarterly dividend at 2 % per quarter, beginning on the one-year anniversary of the issuance date and for all periods following the two-year anniversary of the issuance date of a share of Series 9 Stock, the dividend shall be 3 % per quarter. The Company may elect, in the sole discretion of the Board, to redeem all or any portion of the Series 9 Stock then issued and outstanding from all of the Series 9 Holders by paying to the applicable Series 9 Holders an amount in cash equal to the liquidation amount as defined in the preferred stock agreement. Exchange Agreement On March 12, 2024, Inpixon and Streeterville Capital, LLC (the “Note Holder”, or “Streeterville”), 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 approximately $ 9.8 million for 9,802 shares of Series 9 Preferred Stock (the “Preferred Stock”), based on an exchange price of $ 1,000 per share of Series 9 Preferred Stock. The Company analyzed the exchange of the principal and interest as an extinguishment and compared the net carrying value of the debt being extinguished to the reacquisition price (shares of preferred stock being issued). The Company notes that the net carrying value of the debt was the fair value of the preferred stock (reacquisition price). As such, no gain or loss was recognized upon debt extinguishment. Following such exchange and the extinguishment of the December 2023 Note, the December 2023 Note is deemed paid in full, automatically canceled, and will not be reissued. Securities Purchase Agreement On March 12, 2024, Legacy Inpixon entered into a securities purchase agreement (the “Securities Purchase Agreement”) with an entity controlled by the Inpixon’s former director and former Chief Executive Officer (the “Purchaser”), and owner of 3AM investments, LLC (“3AM”). Pursuant to the Securities Purchase Agreement, the Purchaser purchased 1,500 shares of Series 9 Preferred Stock for a total purchase price of approximately $ 1.5 million, 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 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 common stock or common stock equivalents, (ii) the settlement of any outstanding litigation, or (iii) 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 27 Table of Contents XTI AEROSPACE, INC. AND SUBSIDIARIES NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS FOR THE THREE MONTHS ENDED MARCH 31, 2024 AND 2023 Note 13 - Preferred Stock (continued) non-merger transaction related bonuses as may be payable to participants pursuant to the Company’s existing employee bonus plan In connection with the issuance of the Preferred Stock, the direct and incremental expenses incurred were immaterial. As of March 31, 2024, there were 11,302 shares of Series 9 Preferred outstanding. Note 14 - Stock Award Plans and Stock-Based Compensation The Company has three Employee Stock Incentive plans. The Company has a 2017 Employee and Consultant Stock Ownership Plan (“2017 Plan”) and legacy Inpixon had put in place a 2011 Employee Stock Incentive Plan (the “2011 Plan”) and a 2018 Employee Stock Incentive Plan (the “2018 Plan”). 2017 Plan During 2017, the Company adopted the 2017 Plan, which was amended in 2021 to increase the maximum shares eligible to be granted under the Plan. The Company may issue awards in the form of restricted stock units and stock options to employees, directors, and consultants. Under the 2017 Plan, stock options are generally granted with an exercise price equal to the estimated fair value of the Company’s common stock, as determined by the Company’s Board of Directors on the date of grant. Options generally have contractual terms of ten years . Incentive stock options (ISO) may only be granted to employees, whereas all other stock awards may be granted to employees, directors, consultants and other key As of March 31, 2024, 1,068,959 of stock options were granted to employees, directors and consultants of the Company. Post merger and as of March 31, 2024, the 2017 Plan has zero unallocated shares available for future grants under the Plan. As of March 31, 2024, the fair value of non-vested stock options of the 2017 Plan totaled approximately $ 5.2 million, which will be amortized to expense over the weighted average remaining term of 0.95 years. 2011 Plan and 2018 Plan In September 2011, legacy Inpixon adopted the 2011 Plan which provides for the granting of incentive and non-statutory common stock options and stock based incentive awards to employees, non-employee directors, consultants and independent contractors. The plan was terminated by its terms on August 31, 2021 and no new awards will be issued under the 2011 Plan. In February 2018, legacy Inpixon adopted the 2018 Plan and together with the 2011 Plan, the “Legacy Inpixon Option Plans”, which is utilized for employees, corporate officers, directors, consultants and other key persons employed. The 2018 Plan provides for the granting of incentive stock options, NQSOs, stock grants and other stock-based awards, including Restricted Stock and Restricted Stock Units (as defined in the 2018 Plan). Incentive stock options granted under the Legacy Inpixon Option Plans are granted at exercise prices not less than 100 % of the estimated fair market value of the underlying common stock at date of grant. The exercise price per share for incentive stock options may not be less than 110 % of the estimated fair value of the underlying common stock on the grant date for any individual possessing more that 10% of the total outstanding common stock of the Company. Options granted under the Option Plans vest over periods ranging from immediately to four years and are exercisable over periods not exceeding ten years . The aggregate number of shares that may be awarded under the 2018 Plan as of March 31, 2024 is 62,164,297 . As of March 31, 2024, 968 of stock options were granted to employees, directors and consultants of the Company, 430 restricted stock awards were granted to employees of the company that were converted to common shares in prior periods and 62,162,899 options were available for future grant under the 2018 Plan. As of March 31, 2024, the fair value of non-vested stock options of the 2018 Plan totaled approximately $ 0.6 million, which will be amortized to expense over the weighted average remaining term of 0.9 years. 28 Table of Contents XTI AEROSPACE, INC. AND SUBSIDIARIES NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS FOR THE THREE MONTHS ENDED MARCH 31, 2024 AND 2023 Note 14 - Stock Award Plans and Stock-Based Compensation (continued) During the three months ended March 31, 2024 and 2023, the Company recorded a charge for the amortization of stock options of approximately $ 0.1 million and $ 0.1 million, respectively, which is included in the operating expense section of the condensed consolidated statement of operations. See below for a summary of the stock options granted under the 2011, 2017, and 2018 plans: 2011 Plan 2017 Plan 2018 Plan Total Beginning balance as of January 1, 2024 — 1,161,687 — 1,161,687 Legacy Inpixon stock options from merger 9 — 1,139 1,148 Granted — — — — Exercised — ( 92,728 ) — ( 92,728 ) Expired ( 9 ) — ( 171 ) ( 180 ) Forfeited — — — — Ending balance as of March 31, 2024 — 1,068,959 968 1,069,927 The fair value of each employee option grant is estimated on the date of the grant using the Black-Scholes option-pricing model, however there were no stock option grants during the three months ended March 31, 2024. The expected stock price volatility for the Company’s stock options was determined by the historical volatilities for industry peers and used an average of those volatilities. The Company attributes the value of stock-based compensation to operations on the straight-line single option method. Risk free interest rates were obtained from U.S. Treasury rates for the applicable periods. The dividends assumptions was $ 0 as the Company historically has not declared any dividends and does not expect to. Stock Option Exercises To induce option holders to exercise option shares ahead of the XTI Merger so to assist the company in qualifying for a Nasdaq Capital Markets listing, XTI Aircraft Company entered into exercise letter agreements with several option holders in February 2024 at reduced exercise prices from the original option agreements. The net impact of these option inducements to the condensed consolidated statement of operations was not material. In total, 1,038,871 option shares under the 2017 Plan were net exercised into 1,036,420 pre-exchange common shares of XTI Aircraft Company immediately prior to the XTI Merger closing time or 92,728 post merger exchange common shares. Note 15 - Warrants The following table summarizes the activity to warrants outstanding: Number of Warrants Beginning balance as of January 1, 2024 771,895 Legacy Inpixon warrants from merger 1,448,481 Granted — Exercised ( 389,287 ) Expired ( 96,504 ) Exchanged — Ending balance as of March 31, 2024 1,734,585 Exercisable as of March 31, 2024 1,545,430 Warrant Exercise Price Reduction On March 21, 2024, the Company’s Board of Directors authorized a reduction in the exercise price of the warrants issued as part of the legacy Inpixon warrant inducement that occurred on December 15, 2023 from $ 7.324 to $ 5.13 per share in 29 Table of Contents XTI AEROSPACE, INC. AND SUBSIDIARIES NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS FOR THE THREE MONTHS ENDED MARCH 31, 2024 AND 2023 Note 15 - Warrants (continued) accordance with the existing terms of such warrants. The Company notes that the reduction in exercise price authorization was perfunctory, as it was known on March 12, 2024 that the reduction was going to occur. Therefore, the Company accounted for the modification of the warrants at the time of the merger and is reflected as part purchase accounting. Warrants Exercises On February 2, 2022, XTI Aircraft Company executed a conditional purchase order (“Aircraft Purchase Agreement”) with a regional airline customer to deliver 100 TriFan aircraft. In conjunction with this purchase order, the Company issued a warrant for the purchase of a total of 6,357,474 shares of common stock at an exercise price of $ 0.01 . Effective as of March 11, 2024, XTI Aircraft Company entered into an amendment (the “Warrant Amendment”) with the same regional airline customer. The Warrant Amendment modifies the vesting criteria with respect to the shares of common stock underlying the warrant. As amended by the Warrant Amendment, (i) one-third of the shares represented by the warrant vested upon the execution and delivery of the conditional aircraft purchase contract, dated February 2, 2022, by and between the Company and regional airline customer, relating to the purchase of 100 TriFan 600 aircraft, (ii) one-sixth of the shares vested on March 12, 2024 in which the Company recorded $ 0.5 million of stock-based compensation expense for the three months ended March 31, 2024, (iii) one-sixth of unvested shares lapsed on March 12, 2024, and (iv) one-third of the shares will vest upon the acceptance of delivery and final purchase of the first TriFan 600 aircraft by the regional airline customer pursuant to the Aircraft Purchase Agreement. The Warrant Amendment requires the parties to agree on an initial strategic public and industry announcement within 90 days of March 11, 2024 or such other time as the parties may mutually agree. On March 12, 2024 and per a warrant exercise letter agreement, all vested warrant shares were net exercised into 3,178,737 pre-exchange common shares of XTI Aircraft Company immediately prior to the XTI Merger closing time or 283,737 post merger exchange common shares. To induce warrant holders to exercise warrant shares ahead of the XTI Merger so to assist the company in qualifying for a Nasdaq Capital Markets listing, XTI Aircraft Company entered into exercise letter agreements with several warrant holders in February 2024 at reduced exercise prices from the original warrant agreements. The net impact of these warrant inducements to the condensed consolidated statement of operations was not material. In total, 1,182,522 warrant shares were net exercised into 1,179,732 pre-exchange common shares of XTI Aircraft Company immediately prior to the XTI Merger closing time or 105,550 post merger exchange common shares . Note 16 - Income Taxes There is an income tax expense of approximately $ 0.004 million and zero for three months ended March 31, 2024 and 2023, respectively. The income tax expense included in the three months ended March 31, 2024 profit and loss statement includes state income tax liabilities for the period. Note 17 - Credit Risk and Concentrations Financial instruments that subject the Company to credit risk consist principally of trade accounts receivable and cash and cash equivalents. The Company performs certain credit evaluation procedures and does not require collateral for financial instruments subject to credit risk. The Company believes that credit risk is limited because the Company routinely assesses the financial strength of its customers and, based upon factors surrounding the credit risk of its customers, establishes an allowance for uncollectible accounts and, consequently, believes that its accounts receivable credit risk exposure beyond such allowances is limited. The Company maintains cash deposits with financial institutions, which, from time to time, may exceed federally insured limits. Cash is also maintained at foreign financial institutions for its UK subsidiary and German subsidiaries. Cash in foreign financial institutions as of March 31, 2024 and December 31, 2023 was immaterial. The Company has not experienced any losses and believes it is not exposed to any significant credit risk from cash. The customers who account for 10% or more of the Company's revenue for the three months ended March 31, 2024 or 10% or more of the Company's outstanding receivable balance as of March 31, 2024 are presented as follows: 30 Table of Contents XTI AEROSPACE, INC. AND SUBSIDIARIES NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS FOR THE THREE MONTHS ENDED MARCH 31, 2024 AND 2023 Note 17 - Credit Risk and Concentrations (continued) Three Months ended March 31, 2024 As of March 31, 2024 Customer Revenues (thousands) Percentage of revenues Accounts Receivable (thousands) Percentage of accounts receivable A $ 162 73 % $ 261 32 % B $ 17 8 % $ 195 24 % C $ 9 4 % $ 198 24 % Total $ 188 85 % $ 654 80 % The Company did not have revenue for the three months ended March 31, 2023. The Company did not have outstanding receivables as of March 31, 2023. The vendors who account for 10% or more of the Company's purchases for three months ended March 31, 2024 or 10% or more of the Company's outstanding payable balance as of March 31, 2024 are presented as follows: Three Months ended March 31, 2024 As of March 31, 2024 Vendor Purchases (thousands) Percentage of purchases Accounts Payable (thousands) Percentage of accounts payable A $ 437 15 % $ 1,785 26 % Total $ 437 15 % $ 1,785 26 % The vendors who account for 10% or more of the Company's purchases for three months ended March 31, 2023 or 10% or more of the Company's outstanding payable balance as of March 31, 2023 are presented as follows: Three Months ended March 31, 2023 As of March 31, 2023 Vendor Purchases (thousands) Percentage of purchases Accounts Payable (thousands) Percentage of accounts payable A $ 101 17 % $ 636 48 % B $ 84 14 % $ 40 3 % C $ 65 11 % $ 2 — % D $ 59 10 % $ — — % E $ — — % $ 525 39 % Total $ 309 52 % $ 1,203 90 % Note 18 - Segments The Company’s Chief Executive Officer (“CEO”), acting as the Chief Operating Decision Maker, or (“CODM”), regularly reviews and manages certain areas of its businesses, resulting in the Company identifying two reportable segments: Industrial IoT and Commercial Aviation. The Company manages and reports its operating results through these two reportable segments. This allows the Company to enhance its customer focus and better align its business models, resources, and cost structure to the specific current and future growth drivers of each business, while providing increased transparency to the Company’s shareholders. The commercial aviation segment is currently in the pre-revenue development stage and its primary activity is the development of the TriFan 600 aircraft. The Industrial IoT segment generates revenue primarily from the sale of real-time location system solutions for the industrial sector and its customers are primarily located in Germany and the U.S. As it relates to the Industrial IoT segment, the results disclosed in the table below only reflect activity following the Merger closing through the March 31, 2024 reporting date: refer to Note 3 - Consolidations . 31 Table of Contents XTI AEROSPACE, INC. AND SUBSIDIARIES NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS FOR THE THREE MONTHS ENDED MARCH 31, 2024 AND 2023 Note 18 - Segments (continued) Gross profit and income (loss) from operations are the primary measures of Industrial IoT segment performance used by the Company’s CODM. The Company notes that Commercial Aviation is in the pre-revenue operating stage, and therefore the CODM primarily focuses on research and development expenses and total loss by operations as the primary measure of Commercial Aviation segment performance used by the Company’s CODM. Unallocated operating expenses include costs that are not specific to a particular segment but are general to the group; included expenses incurred for administrative and accounting staff, general liability and other insurance, professional fees and other similar corporate expenses. The following table reflects results of operations from our business segments for the periods indicated below (in thousands): For the Three Months Ended March 31, 2024 2023 Revenue by Segment Industrial IoT $ 220 $ — Commercial Aviation — — Total segment revenue $ 220 $ — Gross profit by Segment Industrial IoT $ 141 $ — Commercial Aviation — — Gross profit by Segment $ 141 $ — Research and Development Expenses by Segment Industrial IoT $ 127 $ — Commercial Aviation 337 435 Research and Development Expenses by Segment $ 464 $ 435 Income (loss) from operations by Segment Industrial IoT $ ( 164 ) $ — Commercial Aviation ( 7,797 ) ( 1,284 ) Loss from operations by segment $ ( 7,961 ) $ ( 1,284 ) Unallocated costs ( 916 ) $ — Consolidated loss from operations $ ( 8,877 ) $ ( 1,284 ) The reporting package provided to the Company's CODM does not include the measure of assets by segment as that information isn't reviewed by the CODM when assessing segment performance or allocating resources. 32 Table of Contents XTI AEROSPACE, INC. AND SUBSIDIARIES NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS FOR THE THREE MONTHS ENDED MARCH 31, 2024 AND 2023 Note 19 - Fair Value of Financial Instruments The Company's estimates of fair value for financial assets and liabilities are based on the framework established in ASC 820. The framework is based on the inputs used in valuation and gives the highest priority to quoted prices in active markets and requires that observable inputs be used in the valuations when available. The disclosure of fair value estimates in the ASC 820 hierarchy is based on whether the significant inputs into the valuation are observable. In determining the level of the hierarchy in which the estimate is disclosed, the highest priority is given to unadjusted quoted prices in active markets and the lowest priority to unobservable inputs that reflect the Company’s significant market assumptions. We classified our financial instruments measured at fair value on a recurring basis in the following valuation hierarchy. The Company notes that the Company did not hold any financial assets fair valued under ASC 820 as of March 31, 2024 and December 31, 2023, other than the Damon Motors convertible note and warrant outlined in Note 24. The Company's assets and liabilities measured at fair value consisted of the following at March 31, 2024 and December 31, 2023: Fair Value at March 31, 2024 Total Level 1 Level 2 Level 3 Assets: Notes receivable $ 3,264 $ — $ — $ 3,264 Warrant Asset 448 — — 448 Total assets $ 3,712 $ — $ — $ 3,712 Liabilities: Warrant liability $ 1,019 $ — $ — 1,019 Total liabilities $ 1,019 $ — $ — $ 1,019 Fair Value at December 31, 2023 Total Level 1 Level 2 Level 3 Liabilities: Warrant liability $ 497 $ — $ — $ 497 Convertible notes, at fair value 16,804 — — 16,804 Loan conversion derivatives 333 — — 333 Total liabilities $ 17,634 $ — $ — $ 17,634 Refer to Note 24 for discussion of the valuation methodologies used for the Company's Damon Motors convertible note and warrant assets measured at fair value. The fair value of the Level 3 warrant liability was determined using a pricing model with certain significant unobservable market data inputs. The table below includes a reconciliation of the Level 3 assets and liabilities for which significant unobservable inputs were used to determine fair value for the three months ended March 31, 2024: 33 Table of Contents XTI AEROSPACE, INC. AND SUBSIDIARIES NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS FOR THE THREE MONTHS ENDED MARCH 31, 2024 AND 2023 Note 19 - Fair Value of Financial Instruments (continued) Level 3 Level 3 Assets Level 3 Liabilities Level 3 Assets and Liabilities Notes receivable Warrant asset Warrant liability Convertible notes, at fair value Loan conversion derivatives Balance at January 1, 2024 $ — $ — $ 497 $ 16,804 $ 333 Acquired 3,264 448 920 — — Change in fair value — — ( 398 ) ( 12,882 ) — Conversion to Equity — — — ( 3,922 ) ( 333 ) Balance at March 31, 2024 $ 3,264 $ 448 $ 1,019 $ — $ — The changes in fair value of the warrant liability and convertible notes are presented within 'Other income, net' and 'Change in fair value of convertible notes', respectively, in the consolidated statements of operations. 34 Table of Contents XTI AEROSPACE, INC. AND SUBSIDIARIES NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS FOR THE THREE MONTHS ENDED MARCH 31, 2024 AND 2023 Note 20 - Foreign Operations Prior to the Merger, the Company’s operations were located primarily in the United States. After the Merger, the Company's operations are located primarily in the United States, Germany, and the United Kingdom. Revenues by geographic area are attributed by country of domicile of our subsidiaries. The financial data by geographic area are as follows (in thousands): United States Germany United Kingdom Eliminations Total For the Three Months Ended March 31, 2024: Revenues by geographic area $ 27 $ 193 $ — $ — $ 220 Operating (loss) income by geographic area $ ( 8,940 ) $ 63 $ — $ — $ ( 8,877 ) Net (loss) income by geographic area $ ( 2,674 ) $ 72 $ — $ — $ ( 2,602 ) For the Three Months Ended March 31, 2023: Revenues by geographic area $ — $ — $ — $ — $ — Operating (loss) income by geographic area $ ( 1,284 ) $ — $ — $ — $ ( 1,284 ) Net (loss) income by geographic area $ ( 1,565 ) $ — $ — $ — $ ( 1,565 ) As of March 31, 2024: Identifiable assets by geographic area $ 39,147 $ 23,041 $ 10 $ ( 31,416 ) $ 30,782 Long lived assets by geographic area $ 2,186 $ 3,735 $ — $ — $ 5,921 Goodwill by geographic area $ 3,142 $ 9,256 $ — $ — $ 12,398 As of December 31, 2023: Identifiable assets by geographic area $ 509 $ — $ — $ — $ 509 Long lived assets by geographic area $ 278 $ — $ — $ — $ 278 Goodwill by geographic area $ — $ — $ — $ — $ — 35 Table of Contents XTI AEROSPACE, INC. AND SUBSIDIARIES NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS FOR THE THREE MONTHS ENDED MARCH 31, 2024 AND 2023 Note 21 - Related Party Transactions Refer to Note 11 for disclosures on related party debt transactions and Note 23 for disclosures on Nadir Ali's related party consulting agreement. David Brody, board member and founder of XTI Aircraft Company, provided legal and strategic consulting services for the Company. During the three months ended March 31, 2024 and 2023, the Company paid Mr. Brody compensation of $ 20,000 and $ 0 , respectively. As of March 31, 2024 and December 31, 2023, the Company owed Mr. Brody accrued consulting compensation of $ 0 and $ 320,000 , respectively, which is included in Related Party Payables within the accompanying balance sheets. Pursuant to an amendment to the consulting agreement, the outstanding payable amount of $ 320,000 was waived by Mr. Brody and the consulting agreement terminated in connection with the Merger closing. During the three months ended March 31, 2024 and 2023, the Company paid Scott Pomeroy, the Company's CEO and Chairman, who was the CFO and board member of XTI Aircraft Company up until the Merger closing, consulting compensation of $ 43,750 and $ 26,250 , respectively. As of March 31, 2024 and December 31, 2023, the Company owed Mr. Pomeroy accrued consulting compensation of $ 99,750 and $ 99,750 , respectively, which is included in Related Party Payables within the accompanying balance sheets. During the three months ended March 31, 2024 and 2023, the Company paid its former Chief Operating Advisor consultant, Charlie Johnson, who was a board member of XTI Aircraft Company up until the date of the Merger closing, compensation of $ 0 and $ 10,000 , respectively. As of March 31, 2024 and December 31, 2023, the Company owed Mr. Johnson accrued consulting compensation of $ 0 and $ 120,000 , respectively, which is included in Related Party Payables within the accompanying balance sheets. Pursuant to an amendment to the consulting agreement during the first quarter of 2024, the Company paid $ 60,000 to Mr. Johnson and the remaining accrued consulting compensation balance of $ 60,000 was waived. The consulting agreement was terminated in connection with the Merger closing and Mr. Johnson is no longer a board member of the Company's XTI Aircraft Company subsidiary. Grafiti Group Divesiture On February 21, 2024, Inpixon completed the disposition of the remaining portion of the Shoom, SAVES, and GYG business lines and assets ("Grafiti Group Divestiture") 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, 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. The Company notes that $0.5 million of the receivable is included in current assets as other receivables in the Company's condensed consolidated balance sheet as of March 31, 2024, and the remaining $0.5 million of the receivable is included in long term assets as other assets in the Company's condensed consolidated balance sheet as of March 31, 2024. Director Services Agreement The Company and Kareem Irfan, a director of the Company, have amended Mr. Irfan's October 21, 2014 Director Services Agreement on May 16, 2022 (as amended, the "Amended Director Services Agreement") to increase his quarterly compensation by an additional $ 10,000 per month as consideration for the additional time and efforts dedicated to the Company and management in support of the evaluation of strategic relationships and growth initiatives. The Amended Director Services Agreement supersedes and replaces all prior agreements by and between the Company and Mr. Irfan. At its meeting on May 1, 2024, the Board adopted a new Board compensation policy applicable to all Directors - refer to Note 25. 36 Table of Contents XTI AEROSPACE, INC. AND SUBSIDIARIES NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS FOR THE THREE MONTHS ENDED MARCH 31, 2024 AND 2023 Note 22 - Leases The Company has operating leases for administrative offices in the United States (Colorado) and Germany. As part of the Merger, the Company acquired right-of-use assets and lease liabilities related to an operating lease for an office space (the IntraNav office) located in Frankfurt, Germany. This lease expires on January 6, 2025 and the current lease rate is $ 9,295 (€ 8,612 ) per month. As part of the Merger, the Company acquired right-of-use assets and lease liabilities related to an operating lease for an office space (the Inpixon GmbH office) located in Berlin, Germany. This lease expires on May 31, 2026 and the current lease rate is $ 7,987 (€ 7,400 ) per month. On January 1, 2024, the Company entered into a lease agreement for its new corporate office location in Englewood, Colorado. This lease expires on January 31, 2028 and the current lease rate is $ 8,966 per month. The Company has no other operating or financing leases with terms greater than 12 months. Right-of-use assets are summarized below (in thousands): As of March 31, 2024 As of December 31, 2023 Englewood, CO Office $ 394 $ — Berlin, Germany Office 197 — Frankfurt, Germany Office 90 — Less accumulated amortization ( 28 ) — Right-of-use asset, net $ 653 $ — Lease expense for operating leases recorded in the balance sheet is included in operating costs and expenses and is based on the future minimum lease payments recognized on a straight-line basis over the term of the lease plus any variable lease costs. Operating lease expenses, inclusive of short-term and variable lease expenses, recognized in our condensed consolidated statement of income for the three months ended March 31, 2024 and 2023 was approximately $ 43,000 and $ 1,000 , respectively. Lease liability is summarized below (in thousands): As of March 31, 2024 As of December 31, 2023 Total lease liability $ 663 $ — Less: short term portion ( 259 ) — Long term portion $ 404 $ — Maturity analysis under the lease agreement is as follows (in thousands): Nine months ending December 31, 2024 $ 237 Year ending December 31, 2025 220 Year ending December 31, 2026 159 Year ending December 31, 2027 124 Year ending December 31, 2028 10 Year ending December 31, 2029 and thereafter — Total $ 750 Less: Present value discount ( 87 ) Lease liability $ 663 37 Table of Contents XTI AEROSPACE, INC. AND SUBSIDIARIES NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS FOR THE THREE MONTHS ENDED MARCH 31, 2024 AND 2023 Note 22 - Leases (continued) Operating lease liabilities are based on the net present value of the remaining lease payments over the remaining lease term. In determining the present value of lease payments, the Company used its incremental borrowing rate based on the information available at the date of adoption of ASC 842, "Leases" ("ASC 842"). As of March 31, 2024, the weighted average remaining lease term is 2.9 years and the weighted average discount rate used to determine the operating lease liabilities was 6.7 %. Note 23 - Commitments and Contingencies Financial Advisory Fees Pursuant to the terms of an amended advisory fees agreement between the Company and Maxim Group ("Maxim"), the Company is obligated to pay Maxim $ 200,000 which becomes 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. 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 registered shares of XTI Aerospace common stock and will receive a cash payment of $ 200,000 , which is included in Accounts Payable on the condensed consolidated balance sheets as of March 31, 2024. Chardan may be entitled to receive additional common shares of XTI Aerospace depending on the share price of a public offering the Company consummates within 90 days following the XTI Merger closing, as outlined in the amended engagement letter. Consulting Agreements with Prior "Legacy Inpixon" CEO and CFO On March 12, 2024, the Company entered into a Consulting Agreement with Mr. Nadir Ali (the “Ali Consulting Agreement”), the Company's former Chief Executive Officer. Pursuant to the Ali Consulting Agreement, following the Closing of the XTI Merger, Mr. Ali will provide consulting services to the Company for 15 months or until earlier termination in accordance with its terms. During the Ali Consulting Period, the Company will pay him a monthly fee of $ 20,000 . In addition, the Company shall pay Mr. Ali (a) the amount of $ 1,500,000 due three months following the Closing, and (b) the aggregate amount of $ 4,500,000 , payable in 12 equal monthly installments of $ 375,000 each, starting four months after the Effective Date (the payments described in (a) and (b), each an “Equity Payment”). Each Equity Payment may be made, in Company’s discretion, in (i) cash, (ii) fully vested shares of common stock under the Company’s equity incentive plan , or a combination of cash and registered shares. On March 12, 2024, the Company also entered into a Consulting Agreement with Ms. Wendy Loundermon (the “Loundermon Consulting Agreement”), the Company's former Chief Financial Officer. Pursuant to the Loundermon Consulting Agreement, following the Closing, Ms. Loundermon will provide consulting services to the Company for one year or until earlier termination in accordance with its terms (the “Loundermon Consulting Period”). As compensation for Ms. Loundermon’s consulting services, the Company will pay her (i) $ 83,333 per month for the first six months of the Loundermon Consulting Period for services she performs on an as-needed basis during the Loundermon Consulting Period regarding the transition of the management of the Company’s financial reporting function to ensure continuity of business operations , and (ii) $ 300 per hour for services performed on an as needed basis regarding the preparation and filing of Company’s public company financial reporting and compliance matters including accounting, payroll, audit and tax compliance functions. Litigation Certain conditions may exist as of the date the consolidated financial statements are issued which may result in a loss to the Company, but which will only be resolved when one or more future events occur or fail to occur. The Company assesses such contingent liabilities, and such assessment inherently involves an exercise of judgment. In assessing loss contingencies related to legal proceedings that are pending against the Company, or unasserted claims that may result in such proceedings, the Company evaluates the perceived merits of any legal proceedings or unasserted claims, as well as the perceived merits of the amount of relief sought or expected to be sought therein. If the assessment of a contingency indicates that it is probable that a material loss has been incurred and the amount of the liability can be estimated, then the estimated liability would be accrued in the Company’s consolidated financial statements. If the assessment indicates that a potentially material loss contingency is not probable, but is reasonably possible, or is probable 38 Table of Contents XTI AEROSPACE, INC. AND SUBSIDIARIES NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS FOR THE THREE MONTHS ENDED MARCH 31, 2024 AND 2023 Note 23 - Commitments and Contingencies (continued) but cannot be estimated, then the nature of the contingent liability and an estimate of the range of possible losses, if determinable and material, would be disclosed. Loss contingencies considered remote are generally not disclosed, unless they involve guarantees, in which case the guarantees would be disclosed. There can be no assurance that such matters will not materially and adversely affect the Company’s business, financial position, and results of operations or cash flows. On December 6, 2023, Xeriant, Inc. (“Xeriant”) filed a complaint against Legacy XTI, along with two unnamed companies and five unnamed persons, in the United States District Court for the Southern District of New York. On January 31, 2024, Xeriant filed an amended complaint, which added us as a defendant. On February 2, 2024, the Court ordered Xeriant to show cause as to why the amended complaint should not be dismissed without prejudice for lack of subject matter jurisdiction. On February 29, 2024, Xeriant filed a second amended complaint. The second amended complaint alleges that Legacy XTI, through multiple breaches and fraudulent actions, has caused substantial harm to Xeriant and has prevented it from obtaining compensation owed to it under various agreements entered into between Xeriant and Legacy XTI, including but not limited to a joint venture agreement, a cross-patent license agreement, an operating agreement, and a letter agreement. In particular, Xeriant contends that Legacy XTI gained substantial advantages from the intellectual property, expertise, and capital deployed by Xeriant in the design and development of Legacy XTI’s TriFan 600 aircraft yet has excluded Xeriant from the transaction involving the TriFan 600 technology in its merger with Legacy Inpixon, which has resulted in a breach of the Letter Agreement, in addition to the other aforementioned agreements. Xeriant, in the second amended complaint, asserts the following causes of action: (1) breach of contract; (2) intentional fraud; (3) fraudulent concealment; (4) quantum meruit; (5) unjust enrichment; (6) unfair competition/deceptive business practices; and (7) misappropriation of confidential information, and seeks damages in excess of $ 500 million, injunctive relief enjoining us from engaging in any further misconduct, the imposition of a royalty obligation, and such other relief as deemed appropriate by the court. On March 13, 2024, Legacy XTI moved for partial dismissal of the second amended complaint, Counts 2 through 7 in particular. Legacy XTI argued that Counts 2 through 7 are (1) impermissible attempts to repackage claims arising from contractual dispute as quasi-contractual or tort claims; and (2) expressly refuted by the clear and unequivocal terms of the aforementioned agreements. The case is in its early stages, no discovery with respect to the Company has occurred, and we are unable to estimate the likelihood or magnitude of a potential adverse judgment. The Court has neither scheduled Legacy XTI’s motion for hearing nor otherwise ruled upon it. Legacy XTI nevertheless denies the allegations of wrongdoing contained in the second amended complaint and is vigorously defending against the lawsuit. Note 24 - Damon Motors Convertible Note On October 26, 2023, Legacy Inpixon purchased a 12 % convertible note through a private placement in aggregate principal amount of $ 3.0 million for a purchase price of $ 3.0 million from Damon Motors Inc. Interest on the convertible note accrues at 12 % per annum. The term of the convertible note is 12 months from October 26, 2023. The convertible note is subject to certain conversion features which include qualified financing, and/or qualified transaction, as defined in the securities purchase agreement. The note will be required to convert upon Damon Motors Inc. completing a public company event. In addition, Damon Motors Inc. issued a five-year warrant to purchase 1,096,321 shares of Damon Motors Inc. common stock in connection with the note. Management notes the Warrant is freestanding. 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 Warrant provides for cashless exercise after 180 days following the closing of the public company event should there be no effective registration statement. The convertible note receivable is not traded in active markets and its fair value was determined using a present value technique. The convertible note receivable is accounted for as an available-for-sale debt security based on “Level 3” inputs, which consist of unobservable inputs and reflect management’s estimates of assumptions that market participants would use in pricing the asset, with unrealized holding gains and losses excluded from earnings and reported in other comprehensive income (loss). The Warrant is accounted for as an equity security based on “Level 3” inputs, which consist of unobservable inputs and reflect management’s estimates of assumptions that market participants would use in pricing the asset, recorded at fair value with subsequent changes in fair value recorded in earnings. The convertible note's and warrant's values as of March 31, 2024 total $ 3.7 million and are included in Notes Receivable, $ 3.3 million, and Warrant asset, $ 0.4 million, on the condensed consolidated balance sheets. Note 25 - Subsequent Events On April 18, 2024, the Company entered into an exchange agreement with the holder of shares of the Company’s Series 9 Preferred Stock pursuant to which the Company and the holder exchanged 750 shares of Series 9 Preferred Stock with an aggregate stated value of approximately $ 0.8 million for 266,047 shares of common stock at an effective price per share of 39 Table of Contents XTI AEROSPACE, INC. AND SUBSIDIARIES NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS FOR THE THREE MONTHS ENDED MARCH 31, 2024 AND 2023 Note 25 - Subsequent Events (continued) $ 2.96 . The Company issued the shares of common stock to the holder on April 19, 2024, at which time the shares of Series 9 Preferred Stock were cancelled. On April 30, 2024, the Company entered into Exchange Agreements (the “Exchange Agreements”) with the holders (the “Warrant Holders”) of certain existing warrants of the Company (the “Existing Warrants”) initially issued on May 17, 2023, which were exercisable for an aggregate of 918,690 shares of the Company’s common stock. Pursuant to the Exchange Agreements, the Company issued to the Warrant Holders 0.70 shares of common stock for each Existing Warrant, for an aggregate of 643,082 shares of common stock, in exchange for the Existing Warrants. On April 30, 2024, the Company filed a Certificate of Amendment to Designations of Preferences and Rights of Series 9 Preferred Stock with the Secretary of State of the State of Nevada, which now allows the Company to pay the holders of Series 9 Preferred Stock, if such holders agree, with securities or other property of the Company in an amount equal to the Series 9 Preferred Liquidation Amount (as defined in the Series 9 Preferred Stock Certificate of Designation) in the event the Company elects to redeem all of any portion of the Series 9 Preferred Stock then issued and outstanding (a “Corporation Optional Conversion”). Previously, the Company was to pay any such amount in only cash. The amendment also now provides that the Company will provide notice of a Corporation Optional Conversion to the holders of Series 9 Preferred Stock within five business days prior to the consummation of such redemption rather than five business days following the determination of the Company’s board of directors to consummate such redemption. In addition, the amendment eliminates the requirement for the Company to obtain the written consent of the holders of at least a majority of the outstanding Series 9 Preferred Stock before repaying any outstanding indebtedness owed to any holder of Series 9 Preferred Stock or its affiliates. On May 1, 2024, we entered into a note purchase agreement with Streeterville Capital, LLC (the "Holder"), pursuant to which we agreed to issue and sell to the Holder a secured promissory note (the "May 2024 Note") in an aggregate initial principal amount of approximately $ 1.3 million, which is payable on or before the date that is 12 months from the issuance date, and upon the satisfaction of certain conditions set forth in the note purchase agreement, up to two additional secured promissory notes (the “Subsequent Notes”). The initial principal amount of the May 2024 Note includes an original issue discount of approximately $ 0.3 million and approximately $ 0.02 million that we agreed to pay to the Holder to cover the Holder's legal fees, accounting costs, due diligence, monitoring and other transaction costs. In exchange for the May 2024 Note, the Holder paid an aggregate purchase price of $ 1.0 million. The Company intends to use the net proceeds from the sale of the May 2024 Note and any Subsequent Notes for general working capital purposes. The Company disclosed the material terms of the May 2024 Note and related transaction documents in a Current Report on Form 8-K filed with the SEC on May 1, 2024. On May 2, 2024, the Company entered into an exchange agreement with the holder of shares of the Company’s Series 9 Preferred Stock pursuant to which the Company and the holder exchanged 750 shares of Series 9 Preferred Stock with an aggregate stated value of approximately $ 0.8 million for 357,954 shares of common stock at an effective price per share of $ 2.20 . The Company issued the shares of common stock to the holder on May 3, 2024, at which time the shares of Series 9 Preferred Stock were cancelled. On May 1, 2024, the Board approved and adopted a compensation policy for the Company’s non-employee directors (the “Non-Employee Director Compensation Policy”), which was developed in consultation with Zayla Partners, LLC, an independent external compensation consulting firm. Pursuant to the terms of the Non-Employee Director Compensation Policy, non-employee directors are eligible to receive cash retainer fees as well as equity incentive awards pursuant to the Company’s 2018 Employee Stock Incentive Plan for their service, as follows: Each of the Company’s non-employee directors will receive $ 50,000 annually for general availability and participation in meetings and conference calls of the Board. Additionally, the Chair of the Audit Committee will receive $ 20,000 annually and other members of the Audit Committee will receive $ 10,000 annually; the Chair of the Compensation Committee will receive $ 15,000 annually and other members of the Compensation Committee will receive $ 7,500 annually; and the Chair of the Nominating and Corporate Governance Committee will receive $ 10,000 annually and other members of the Nominating and Corporate Governance Committee will receive $ 5,000 annually. All cash compensation will be payable quarterly in arrears. Each of the Company’s non-employee directors will also receive an annual grant of stock options pursuant to the Company’s 2018 Employee Stock Incentive Plan, with a fair market value equal to the aggregate annual cash retainer for the applicable director based upon a Black-Scholes option pricing model. The exercise price of the stock options will be equal to the market price of the Company’s common stock at the time of grant. Effective as of May 13, 2024, the Company's Board of Directors (the “Board”) appointed Tensie Axton to the Board as a Class III director (for a term ending with the 2026 annual meeting of shareholders), to fill the vacancy created by the resignation of Leonard Oppenheim. The Board also appointed Ms. Axton to serve as a member of the Audit Committee, a member of the Compensation Committee and as the Chair of the Nominating and Corporate Governance Committee. In accordance with the 40 Table of Contents XTI AEROSPACE, INC. AND SUBSIDIARIES NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS FOR THE THREE MONTHS ENDED MARCH 31, 2024 AND 2023 Note 25 - Subsequent Events (continued) terms of the Company's Non-Employee Director Compensation Policy, Ms. Axton's compensation comprises (x) the following annual cash fees, each payable quarterly in arrears: (i) $ 50,000 for her services as a director, (ii) $ 10,000 for her services as a member of the Audit Committee, (iii) $ 7,500 for her services as a member of the Compensation Committee, and (iv) $ 10,000 for her services as the Chair of the Nominating and Corporate Governance Committee, and (y) an annual grant of stock options pursuant to the Company’s 2018 Employee Stock Incentive Plan, with a fair market value equal to her aggregate annual cash retainer. The Company entered into an employment agreement with Scott Pomeroy on May 6, 2024 (the “Pomeroy Employment Agreement”), pursuant to which Mr. Pomeroy agreed to continue to serve as the Company’s Chief Executive Officer and as a member and Chairman of the Board. Pursuant to the terms of the Pomeroy Employment Agreement, Mr. Pomeroy is entitled to receive an annual base salary of $ 400,000 , which may be increased by the Board from time to time in its sole discretion. Mr. Pomeroy is also entitled to receive an annual cash bonus of up to a baseline of 100 % of his base salary, with the right and ability to earn up to a cap of 150 % of his base salary, applying a weighted average percentage of the objective and subjective criteria and milestones set forth in the Pomeroy Employment Agreement. The Board will determine and award the annual cash bonus by January 31 following the end of each calendar year during Mr. Pomeroy’s employment period. Mr. Pomeroy’s employment agreement term ends on December 31, 2025, with one automatic one-year extension to December 31, 2026, unless either party provides prior notice of non-renewal on or before March 31, 2025. The Company disclosed the remaining material terms of the Pomeroy Employment Agreement in a Current Report on Form 8-K filed with the SEC on May 10, 2024. The Company entered into an employment agreement with Brooke Turk on May 8, 2024 (the “Turk Employment Agreement”), pursuant to which Ms. Turk agreed to continue to serve as the Company’s Chief Financial Officer. Pursuant to the terms of the Turk Employment Agreement, Ms. Turk is entitled to receive an annual base salary of $ 350,000 , which may be increased by the Board from time to time in its sole discretion. Ms. Turk is also entitled to receive an annual cash bonus of up to a baseline of 75 % of her base salary, with the right and ability to earn up to a cap of 112.5 % of her base salary, applying a weighted average percentage of the objective and subjective criteria and milestones set forth in the Turk Employment Agreement. The Board will determine and award the annual cash bonus within 30 days after the end of each calendar year during Ms. Turk’s employment period. The remaining material terms of the Turk Employment Agreement are substantially similar to the terms of the Pomeroy Employment Agreement. On May 14, 2024, the Company entered into an exchange agreement with the holder of shares of the Company’s Series 9 Preferred Stock pursuant to which the Company and the holder exchanged 500 shares of Series 9 Preferred Stock with an aggregate stated value of approximately $ 0.5 million for 332,278 shares of common stock at an effective price per share of $ 1.58 . The Company issued the shares of common stock to the holder on May 16, 2024, at which time the shares of Series 9 Preferred Stock were cancelled. 41 Table of Contents