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 June 30, 2024 As of December 31, 2023 (Unaudited) Assets Current Assets Cash and cash equivalents $ 5,779 $ 5 Accounts receivable, net of allowance for credit losses of $ 1 and $ 0 as of June 30, 2024 and December 31, 2023, respectively 462 — Other receivables 526 101 Inventory 2,752 — Note receivable available for sale, at fair value 3,462 — Warrant asset 424 — Prepaid expenses and other current assets 1,769 125 Total Current Assets 15,174 231 Property and equipment, net 225 12 Operating lease right-of-use asset, net 583 — Intangible assets, net 4,838 266 Goodwill 12,330 — Other assets 891 — Total Assets $ 34,041 $ 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 June 30, 2024 As of December 31, 2023 (Unaudited) Liabilities and Stockholders’ Equity (Deficit) Current Liabilities Accounts payable $ 7,074 $ 2,495 Related party payables 100 540 Accrued expenses and other current liabilities 10,629 1,127 Accrued interest 686 560 Customer deposits 1,350 1,350 Warrant liability — 497 Operating lease obligation, current 235 — Deferred revenue 464 — Short-term debt 2,504 6,690 Total Current Liabilities 23,042 13,259 Long Term Liabilities Long-term debt 65 18,546 Operating lease obligation, noncurrent 359 — Other liabilities, noncurrent — 333 Total Liabilities 23,466 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 June 30, 2024 and December 31, 2023 — — Series 5 Convertible Preferred Stock - 12,000 shares authorized; 126 issued and outstanding as of June 30, 2024 and December 31, 2023 — — Series 9 Preferred Stock - 20,000 shares authorized; 11,302 and 7,752 shares issued and outstanding as of June 30, 2024, and 0 shares issued and outstanding as of December 31, 2023 (Liquidation preference of $ 8,450,396 ) 7,752 — Common Stock - $ 0.001 par value; 500,000,000 shares authorized; 26,841,686 and 3,197,771 shares issued and outstanding as of June 30, 2024 and December 31, 2023, respectively. 27 3 Additional paid-in capital 78,206 26,327 Accumulated other comprehensive loss ( 139 ) — Accumulated deficit ( 75,271 ) ( 57,959 ) Total Stockholders’ Equity (Deficit) 10,575 ( 31,629 ) Total Liabilities and Stockholders’ Equity (Deficit) $ 34,041 $ 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 June 30, For the Six Months Ended June 30, 2024 2023 2024 2023 (Unaudited) Revenues $ 1,031 $ — $ 1,251 $ — Cost of Revenues 369 — 448 — Gross Profit 662 — 803 — Operating Expenses Research and development 1,148 391 1,612 826 Sales and marketing 837 154 1,141 288 General and administrative 12,412 2,910 14,129 3,481 Merger-related transaction costs — 579 6,490 716 Amortization of intangible assets 192 7 235 13 Total Operating Expenses 14,589 4,041 23,607 5,324 Loss from Operations ( 13,927 ) ( 4,041 ) ( 22,804 ) ( 5,324 ) Other Income (Expense) Interest expense, net ( 70 ) ( 270 ) ( 331 ) ( 503 ) Amortization of deferred loan costs — ( 22 ) ( 17 ) ( 44 ) Inducement loss on debt conversions — — ( 6,732 ) — Change in fair value of convertible notes — — 12,882 — Change in fair value of JV obligation — ( 170 ) — ( 197 ) Change in fair value of warrant liability ( 679 ) ( 126 ) ( 281 ) ( 126 ) Other expense ( 22 ) — ( 13 ) — Total Other Income (Expense) ( 771 ) ( 588 ) 5,508 ( 870 ) Net Loss, before tax ( 14,698 ) ( 4,629 ) ( 17,296 ) ( 6,194 ) Income tax provision ( 12 ) — ( 16 ) — Net Loss ( 14,710 ) ( 4,629 ) ( 17,312 ) ( 6,194 ) Preferred stock return and dividend ( 250 ) — ( 311 ) — Deemed dividend ( 460 ) — ( 460 ) — Net Loss Attributable to Common Stockholders $ ( 15,420 ) $ ( 4,629 ) $ ( 18,083 ) $ ( 6,194 ) Net Loss Per Share - Basic and Diluted $ ( 1.05 ) $ ( 1.19 ) $ ( 1.80 ) $ ( 1.61 ) Weighted Average Shares Outstanding Basic and Diluted 14,714,143 3,899,102 10,068,967 3,844,905 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 June 30, For the Six Months Ended June 30, 2024 2023 2024 2023 (Unaudited) Net Loss $ ( 14,710 ) $ ( 4,629 ) $ ( 17,312 ) $ ( 6,194 ) Change in fair value of convertible note receivable 59 — 59 — Unrealized foreign exchange loss from cumulative translation adjustments ( 32 ) — ( 198 ) — Comprehensive Loss $ ( 14,683 ) $ ( 4,629 ) $ ( 17,451 ) $ ( 6,194 ) 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 and six months ended June 30, 2024 (Unaudited) (In thousands, except 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 shares issued for conversion of debt — — 2,621,516 3 8,688 — — 8,691 Common shares issued for conversion of debt - related party — — 266,272 — 923 — — 923 Inducement loss on debt conversions — — — — 6,732 — — 6,732 Common shares issued to Xeriant, Inc. (Note 12) — — 298,395 — — — — — Common shares issued for cashless exercise of warrants — — 389,287 1 ( 1 ) — — — Common shares 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 Common shares issued in exchange of Series 9 Preferred Stock ( 3,550 ) ( 3,550 ) 2,999,187 3 3,724 — — 177 Deemed dividend related to Series 9 preferred stock exchange — — — — ( 177 ) — — ( 177 ) Common shares issued in exchange of warrants — — 1,492,415 2 1,979 — — 1,981 Deemed dividend related to December 2023 warrant exchange — — — — ( 283 ) — — ( 283 ) Common shares issued for exercise of warrants — — 20,528 — 2 — — 2 Common shares issued for net cash proceeds of ATM offering — — 9,300,203 9 8,666 — — 8,675 Common shares issued as settlement of accrued compensation — — 2,680,459 3 1,189 — — 1,192 Common shares issued as prepayment for services — — 429,483 — 335 — — 335 Stock based compensation — — — — ( 59 ) — — ( 59 ) Series 9 preferred stock dividend accrued — — — — ( 250 ) — — ( 250 ) Change in fair value of convertible note receivable — — — — — 59 — 59 Cumulative translation adjustment — — — — — ( 32 ) — ( 32 ) Net loss — — — — — — ( 14,710 ) ( 14,710 ) Balance - June 30, 2024 7,752 $ 7,752 26,841,686 $ 27 $ 78,206 $ ( 139 ) $ ( 75,271 ) $ 10,575 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 and six months ended June 30, 2023 (Unaudited) (In thousands, except 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 — — — — 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 ) Proceeds from sale of common stock — — 12,853 — 180 — — 180 Stock based compensation — — — — 2,461 — — 2,461 Issuance of warrants with convertible note — — — — 928 — — 928 JV obligation reclassified to equity — — — — 5,583 — — 5,583 Net loss — — — — — — ( 4,629 ) ( 4,629 ) Balance - June 30, 2023 — — 3,194,431 $ 3 $ 27,240 $ — $ ( 39,087 ) $ ( 11,844 ) 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 Six Months Ended June 30, 2024 2023 Cash Flows Used in Operating Activities (Unaudited) Net loss $ ( 17,312 ) $ ( 6,194 ) Adjustment to reconcile net loss to net cash used in operating activities: Depreciation and amortization 47 5 Amortization of intangible assets 235 13 Amortization of deferred loan costs 17 44 Amortization of right-of-use asset 92 — Amortization of debt discount 156 251 Stock based compensation 5,733 2,602 Change in fair value of JV obligation — 197 Provision for credit losses 1 — Change in fair value of convertible notes payable ( 12,882 ) — Inducement loss on debt conversions 6,732 — Change in fair value of warrant liability 281 126 Change in fair value of warrant asset 24 — Unrealized loss on foreign currency transactions ( 131 ) — Other 93 — Changes in operating assets and liabilities: Accounts receivable and other receivables 309 114 Inventory 132 — Prepaid expenses and other current assets 162 29 Other assets 8 — Accounts payable 1,981 727 Related party payables — 59 Accrued expenses and other current liabilities 6,494 206 Accrued interest 86 248 Deferred revenue ( 354 ) — Operating lease obligation ( 94 ) — Net Cash Used in Operating Activities ( 8,190 ) ( 1,573 ) Cash Flows Provided by Investing Activities Purchase of property and equipment ( 18 ) — Cash received in purchase of Inpixon 2,968 — Purchase of intangible asset ( 39 ) — Net Cash Provided by Investing Activities 2,911 — Cash Provided by Financing Activities Proceeds from sale of common stock — 180 Proceeds from warrant exercises 2 — 7 Table of Contents XTI AEROSPACE, INC. AND SUBSIDIARIES CONDENSED CONSOLIDATED STATEMENTS OF CASH FLOWS (CONTINUED) (In thousands) Net proceeds from ATM stock offering 8,547 — Net proceeds from promissory notes 2,000 575 Net proceeds from loan from Inpixon (prior to merger) 1,012 — Net proceeds from convertible notes — 750 Repayments of promissory notes ( 502 ) ( 10 ) Net Cash Provided by Financing Activities 11,059 1,495 Effect of Foreign Exchange Rate on Changes on Cash ( 6 ) — Net Increase (Decrease) in Cash and Cash Equivalents 5,774 ( 78 ) Cash and Cash Equivalents - Beginning of period 5 115 Cash and Cash Equivalents - End of period $ 5,779 $ 37 Supplemental Disclosure of cash flow information: Cash paid for: Interest $ 32 $ 1 Income Taxes $ 4 $ — Non-cash investing and financing activities Common shares issued for conversion of debt and accrued interest $ 9,614 $ — Common shares issued in exchange of warrants $ 1,698 $ — Deemed dividend related to December 2023 warrant exchange $ 283 $ — Common shares issued as settlement of accrued compensation $ 1,192 $ — Common shares issued as prepayment for services $ 335 $ — Issuance of common stock for merger consideration, net of cash received $ 22,637 $ — Right of use asset obtained in exchange for lease liability $ 394 $ — Capital contribution - forgiveness of related party payable $ 380 $ — Common shares issued in exchange of series 9 preferred stock $ 3,550 $ — Series 9 preferred stock dividend accrued $ 311 $ — Deemed dividend related to Series 9 preferred stock exchange $ 177 $ — ATM proceeds withheld as payment towards accounts payable $ 128 $ — Warrants issued with convertible notes $ — $ 967 Warrants issued with common stock $ — $ 98 Reclassification of JV obligation to equity $ — $ 5,583 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 SIX MONTHS ENDED JUNE 30, 2024 AND 2023 Note 1 - Organization and Nature of Business On March 12, 2024, XTI Aerospace, Inc., the "Company", formerly known as 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 pursuant to that certain Agreement and Plan of Merger, dated as of July 24, 2023 and amended on December 30, 2023 and March 12, 2024 (the “XTI Merger Agreement”), 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," the Company determined the XTI Merger 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 report 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 June 30, 2024 reporting date. Following the closing of the XTI Merger, the Company is primarily an aircraft development company. The Company also provides real-time location systems (“RTLS”) for the industrial sector, which was Legacy Inpixon's focus prior to the closing of the XTI Merger. Headquartered in Englewood, Colorado, the Company 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, the Company has 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 platform 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. 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 and six months ended June 30, 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 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. These interim unaudited condensed consolidated financial statements should also be read in conjunction with Legacy XTI's audited financial statements and notes for the years ended December 31, 2023 and 2022 included in the Form 8-K/A filed with the SEC on May 28, 2024. 9 Table of Contents XTI AEROSPACE, INC. AND SUBSIDIARIES NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS FOR THE THREE AND SIX MONTHS ENDED JUNE 30, 2024 AND 2023 Note 3 - Summary of Significant Accounting Policies The Company's complete accounting policies are described in Note 2 to 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 June 30, 2024, the Company has a working capital deficit of approximately $ 7.9 million, and cash of approximately $ 5.8 million. For the six months ended June 30, 2024, the Company had a net loss of approximately $ 17.3 million. During the six months ended June 30, 2024, the Company used approximately $ 8.2 million of cash for operating activities. There can be no assurances that the Company will ever earn revenues sufficient to support its operations, or that it will ever be profitable. In order to continue its operations, the Company has supplemented the revenues it 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 June 30, 2024 and for the three and six months ended June 30, 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 Company's ability to obtain additional equity or debt financing, and attain further operating efficiency, which is uncertain, 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 and six months ended June 30, 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 Legacy XTI and as of March 12, 2024 and forward (the effective date of the XTI Merger) 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 and assets acquired in transactions, including acquisitions; • the valuation of equity securities; • the valuation of notes receivable; • the valuation of warrant liabilities and assets; • 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. 10 Table of Contents XTI AEROSPACE, INC. AND SUBSIDIARIES NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS FOR THE THREE AND SIX MONTHS ENDED JUNE 30, 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. 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 XTI Merger. 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 six months ended June 30, 2024 and 2023. Goodwill The Company tests goodwill for potential impairment at least annually as of October 1, 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 AND SIX MONTHS ENDED JUNE 30, 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 six months ended June 30, 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 the Company'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 12 Table of Contents XTI AEROSPACE, INC. AND SUBSIDIARIES NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS FOR THE THREE AND SIX MONTHS ENDED JUNE 30, 2024 AND 2023 Note 3 - Summary of Significant Accounting Policies (continued) 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 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 six months ended June 30, 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, principally within one year. 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 AND SIX MONTHS ENDED JUNE 30, 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 June 30, For the Six Months Ended June 30, 2024 2023 2024 2023 Employee and consultant stock options 1 $ ( 59 ) $ 2,461 $ 84 $ 2,602 Vesting of previously unvested warrants 2 — — 496 — Professional fees 2 — — 5,153 — Total $ ( 59 ) $ 2,461 $ 5,733 $ 2,602 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 AND SIX MONTHS ENDED JUNE 30, 2024 AND 2023 Note 3 - Summary of Significant Accounting Policies (continued) As the Company accounts for stock option forfeitures in the period in which the forfeiture occurred, the income recognized during the three months ended June 30, 2024 as a result of forfeitures exceeded the expense recognized resulting in a negative or income of approximately $ 59,000 . Net Loss Per Share The Company computes basic and diluted earnings per share by dividing net loss attributable to common stockholders by the weighted average number of shares of common stock outstanding during the period. Basic and diluted net loss per share were the same since the inclusion of shares of common stock issuable pursuant to the exercise of options and warrants in the calculation of diluted net loss per share would have been anti-dilutive. The following table summarizes the weighted average number of shares of common stock and common stock equivalents excluded from the calculation of diluted net loss per share for the three and six months ended June 30, 2024 and 2023 as they are considered to be anti-dilutive: For the Three Months Ended June 30, For the Six Months Ended June 30, 2024 2023 2024 2023 Options 3,292,125 1,161,688 2,222,239 1,054,138 Warrants 802,565 143,924 629,810 131,796 Convertible preferred stock 2 — 2 — Convertible notes 33,285 670,700 502,165 634,942 Total 4,127,977 1,976,312 3,354,216 1,820,876 The basic earnings per share calculation for the three months ended June 30, 2024 and 2023 included 209,688 and 608,528 penny warrant shares, respectively, since the exercise price was $ 0.01 per share. The basic earnings per share calculation for the six months ended June 30, 2024 and 2023 included 608,528 and 608,528 of penny warrants shares, respectively. Additionally, the basic earnings per share calculation for the three months ended June 30, 2023 and for the six months ended June 30, 2024 and 2023 included 298,395 shares of common stock 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 15 Table of Contents XTI AEROSPACE, INC. AND SUBSIDIARIES NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS FOR THE THREE AND SIX MONTHS ENDED JUNE 30, 2024 AND 2023 Note 3 - Summary of Significant Accounting Policies (continued) 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. 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 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 June 30, 2024 and December 31, 2023 and during the periods ended June 30, 2024 and June 30, 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 operates 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 16 Table of Contents XTI AEROSPACE, INC. AND SUBSIDIARIES NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS FOR THE THREE AND SIX MONTHS ENDED JUNE 30, 2024 AND 2023 Note 3 - Summary of Significant Accounting Policies (continued) 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, 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 June 30, For the Six Months Ended June 30, 2024 2023 2024 2023 Recurring revenue Software $ 317 $ — $ 370 $ — Total recurring revenue $ 317 $ — $ 370 $ — Non-recurring revenue Hardware $ 606 $ — $ 768 $ — Software 5 — 5 — Professional services 103 — 108 — Total non-recurring revenue $ 714 $ — $ 881 881 $ — Total Revenue $ 1,031 $ — $ 1,251 $ — 17 Table of Contents XTI AEROSPACE, INC. AND SUBSIDIARIES NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS FOR THE THREE AND SIX MONTHS ENDED JUNE 30, 2024 AND 2023 Note 4 - Disaggregation of Revenue (continued) For the Three Months Ended June 30, For the Six Months Ended June 30, 2024 2023 2024 2023 Revenue recognized at a point in time Industrial IoT (1) $ 611 $ — $ 773 $ — Total $ 611 $ — $ 773 $ — Revenue recognized over time Industrial IoT (2) (3) $ 420 $ — $ 478 $ — Total $ 420 $ — $ 478 $ — Total Revenue $ 1,031 $ — $ 1,251 $ — (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 Company, and the preexisting shareholders of Legacy XTI have majority voting rights of the 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 Legacy Inpixon’s common stock outstanding of 2,075,743 multiplied by the price of Legacy Inpixon’s common stock on March 12, 2024 of $ 5.27 (which reflects the 1 to 100 reverse stock split which became effective before the closing of the XTI Merger). The Company utilized Legacy Inpixon's common stock price in determining fair value as it is more reliably measurable than the value of Legacy XTI’s (accounting acquirer) equity interests given it is not a publicly traded entity. 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 covenants for the Company which prevent the holder from exercising the warrants. The remainder of this total represents 18 Table of Contents XTI AEROSPACE, INC. AND SUBSIDIARIES NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS FOR THE THREE AND SIX MONTHS ENDED JUNE 30, 2024 AND 2023 Note 5 – Merger Transaction (continued) 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 0.0 %, 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 XTI Merger at a stated value of $ 1,000 and fair value of $ 1,000 per share. The issuance of the preferred stock was determined to be an arm's length transaction, therefore fair value is equal to cash proceeds. The Company has determined preliminary fair values of the assets acquired and liabilities assumed in the XTI Merger. These values are subject to change as the Company performs additional reviews of its assumptions utilized. The Company has made a provisional allocation of the purchase price of the XTI 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 XTI 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 AND SIX MONTHS ENDED JUNE 30, 2024 AND 2023 Note 5 – Merger Transaction (continued) For the three months ended June 30, 2024 and 2023, the Company incurred merger related transaction costs of $ 0 and $ 0.6 million, respectively. For the six months ended June 30, 2024 and 2023, the Company incurred merger related transaction costs of $ 6.5 million and $ 0.7 million, respectively. Note 6 - Proforma Financial Information Inpixon Financial Information The following unaudited proforma financial information presents the consolidated results of operations of the Company and Legacy Inpixon for the six months ended June 30, 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 Legacy Inpixon is as follows (in thousands): For the Three Months Ended June 30, 2024 For the Three Months Ended June 30, 2023 Revenues $ 1,031 $ 820 Net loss attributable to common stockholders $ ( 15,420 ) $ ( 9,168 ) Net loss per basic and diluted common share $ ( 1.05 ) $ ( 0.91 ) Weighted average common shares outstanding: Basic and Diluted 14,714,143 10,068,967 The proforma financial information for the Company and Legacy Inpixon is as follows (in thousands): For the Six Months Ended June 30, 2024 For the Six Months Ended June 30, 2023 Revenues $ 1,758 $ 2,727 Net loss attributable to common stockholders $ ( 31,669 ) $ ( 18,453 ) Net loss per basic and diluted common share $ ( 2.15 ) $ ( 1.83 ) Weighted average common shares outstanding: Basic and Diluted 14,714,143 10,068,967 20 Table of Contents XTI AEROSPACE, INC. AND SUBSIDIARIES NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS FOR THE THREE AND SIX MONTHS ENDED JUNE 30, 2024 AND 2023 Note 7 - Intangible Assets Intangible assets at June 30, 2024 and December 31, 2023 consisted of the following (in thousands): June 30, 2024 Gross Amount Accumulated Amortization Net Carrying Amount Remaining Weighted Average Useful Life Patents $ 452 $ ( 169 ) $ 283 9.9 Trade Name/Trademarks 916 ( 54 ) 862 4.7 Proprietary Technology 2,919 ( 125 ) 2,794 6.7 Customer Relationships 698 ( 42 ) 656 4.7 In-Process R&D 243 — 243 3.0 Total $ 5,228 $ ( 390 ) $ 4,838 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 and six months ended June 30, 2024 was approximately $ 0.19 million and $ 0.23 million, respectively. Amortization expense for the three and six months ended June 30, 2023 was approximately $ 0.01 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 6 months) $ 384 December 31, 2025 849 December 31, 2026 849 December 31, 2027 849 December 31, 2028 768 December 31, 2029 and thereafter 1,139 Total $ 4,838 21 Table of Contents XTI AEROSPACE, INC. AND SUBSIDIARIES NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS FOR THE THREE AND SIX MONTHS ENDED JUNE 30, 2024 AND 2023 Note 8 - Inventory The Company did not hold any inventory as of December 31, 2023. Inventory as of June 30, 2024 consisted of the following (in thousands): As of June 30, 2024 Raw materials $ 29 Work-in-process 120 Finished goods 2,603 Inventory $ 2,752 Note 9 - Deferred Revenue As of December 31, 2023, the Company did not have any deferred revenue. As part of the XTI 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 of $ 0.5 million as of June 30, 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 June 30, 2024 and December 31, 2023 consisted of the following (in thousands): As of June 30, 2024 As of December 31, 2023 Accrued transaction bonuses $ 6,731 $ — Accrued compensation and benefits 1,959 649 Accrued bonus and commissions 947 305 Accrued other 648 173 Accrued consulting fees 329 — Accrued sales and other indirect taxes payable 15 — Total $ 10,629 $ 1,127 22 Table of Contents XTI AEROSPACE, INC. AND SUBSIDIARIES NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS FOR THE THREE AND SIX MONTHS ENDED JUNE 30, 2024 AND 2023 Note 11 - Debt Debt as of June 30, 2024 and December 31, 2023 consisted of the following (in thousands): Short-Term Debt Maturity June 30, 2024 December 31, 2023 Promissory Note - 2023 $ — $ 3,071 Promissory Note - 2023 - related party — 125 Convertible Note - 2021 - related party 1 — 1,079 Convertible Note - 2021 1 — 2,500 Promissory Note - May 1, 2024 5/1/2025 1,350 — Promissory Note - May 24, 2024 5/24/2025 1,318 — Unamortized Discounts ( 500 ) ( 50 ) Unamortized Loan Costs — ( 35 ) Third Party Note Payable - 2023 12/31/2024 81 — Third Party Note Payable - 2024 12/14/2024 255 — Total Short-Term Debt $ 2,504 $ 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 either converted to equity immediately prior to the XTI Merger closing time (see Note 12) or subsequently repaid Interest expense on outstanding debt totaled approximately $ 0.2 million and $ 0.3 million for the three months ended June 30, 2024 and 2023, respectively. Interest expense on outstanding debt totaled approximately $ 0.6 million and $ 0.5 million for the six months ended June 30, 2024 and 2023, respectively. Interest expense includes the interest on the outstanding balance of the notes and the amortization of note discounts recorded at issuance for the outstanding debt. Promissory Note - 2023 On July 24, 2023, the Company and Legacy XTI 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 Legacy XTI. On March 12, 2024, the Company and Legacy XTI effected a reverse triangular merger resulting in Legacy XTI becoming a wholly-owned subsidiary of the Company. As a result of the XTI Merger, the outstanding subsidiary debt balance, related parent note receivable balance and accrued interest were eliminated upon the consolidation of the Company's June 30, 2024 balance sheet. The Company intends to legally terminate this intercompany promissory note during the third 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 had a principal amount of approximately $ 0.1 million and accrued interest at a rate of 5 % per annum. The note's outstanding principal and accrued interest balances were repaid in full during the second quarter of 2024. 23 Table of Contents XTI AEROSPACE, INC. AND SUBSIDIARIES NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS FOR THE THREE AND SIX MONTHS ENDED JUNE 30, 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 shares of the Company's common stock. The Company repaid the remaining balance of the note on April 1, 2024. See Note 12 for more information. 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 accrued interest at a rate of 4.0 % per annum. As discussed in Note 12, pursuant to the terms of voluntary note conversion letter agreements, approximately $ 2.45 million of the note's outstanding principal balance and approximately $ 0.05 million in accrued interest were converted into shares of Legacy XTI common stock immediately prior to the closing of the XTI Merger, which converted into shares of the Company's common stock at the closing of the XTI Merger on March 12, 2024. A repayment obligation remained after the XTI Merger closing with respect to an aggregate of approximately $ 0.05 million in principal and approximately $ 0.25 million in accrued interest that were not converted into shares of Legacy XTI common stock. The Company repaid $ 0.05 million of the repayment obligation during the second quarter of 2024. Promissory Note - May 1, 2024 On May 1, 2024, the Company entered into a note purchase agreement (the "Purchase Agreement") with Streeterville Capital, LLC (the "Holder"), pursuant to which the Company agreed to issue and sell to the Holder a secured promissory note (the "Note") in an aggregate initial principal amount of approximately $ 1.4 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 Note includes an original issue discount of approximately $ 0.3 million and approximately $ 0.02 million that the Company 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 Note, the Holder paid an aggregate purchase price of $ 1.0 million. Interest on the Note accrues at a rate of 10.0 % per annum and is payable on the maturity date or otherwise in accordance with the Note. If the Note is still outstanding on the date that is six months from the issuance date, then a one-time monitoring fee equal to 10 % of the then-current outstanding balance will be added to the Note. Beginning on the date that is six months from the issuance date and at the intervals indicated below until the Note is paid in full, the Holder will have the right to require the Company to redeem up to an aggregate of one sixth of the initial principal balance of the Note plus any interest accrued thereunder each month (each monthly exercise, a “Monthly Redemption Amount”) by providing written notice; provided, however, that if the Holder does not exercise any Monthly Redemption Amount in its corresponding month then such Monthly Redemption Amount will be available for the Holder to redeem in any future month in addition to such future month’s Monthly Redemption Amount. Upon receipt of any Monthly Redemption Notice, the Company will be required to pay the applicable Monthly Redemption Amount in cash to the Holder within five business days of the Company’s receipt of such Monthly Redemption Notice. Legacy XTI provided a guarantee, dated as of May 1, 2024, of the Company’s obligations to the Holder under the Note, any Subsequent Notes and the other transaction documents. In addition, the Company’s obligations under the Note, any Subsequent Notes and the other transaction documents are secured by (i) a pledge of all of the stock the Company owns in Legacy XTI pursuant to the terms of the pledge agreement, dated as of May 1, 2024, by and between the Company and the Holder, and (ii) those assets owned by Legacy XTI constituting Collateral, pursuant to (and as defined in) the security agreement, dated as of May 1, 2024, by and between Legacy XTI and the Holder. Promissory Note - May 24, 2024 Pursuant to the terms of the aforementioned Purchase Agreement, on May 24, 2024, the Company issued and sold to Streeterville Capital, LLC an additional secured promissory note in the initial principal amount of $ 1.3 million, which carries an original issue discount of $ 0.3 million. The terms of this additional note are identical to the terms of the May 1, 2024 note, as described above. In exchange for the promissory note, the Holder paid an aggregate purchase price of $ 1.0 million. 24 Table of Contents XTI AEROSPACE, INC. AND SUBSIDIARIES NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS FOR THE THREE AND SIX MONTHS ENDED JUNE 30, 2024 AND 2023 Note 11 - Debt (continued) Third Party Note Payable - 2023 - financing agreement As part of the XTI 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, Legacy XTI 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 Legacy XTI. Note 12 - Common Stock Capital Raises At-the-Market (ATM) Program On June 14, 2024, the Company entered into Amendment No. 6 to the Equity Distribution Agreement (the "Amendment") with Maxim Group LLC ("Maxim") which amends the Equity Distribution Agreement, dated as of July 22, 2022, between the Company and Maxim, as previously amended (as amended, the "Equity Distribution Agreement"), pursuant to which the aggregate gross sales amount under the Equity Distribution Agreement was increased from approximately $ 48.8 million to approximately $ 83.8 million. Accordingly, pursuant to the Equity Distribution Agreement, the Company may, from time to time, sell shares of the Company’s common stock, par value $ 0.001 per share, having an aggregate gross sales amount of up to approximately $ 83.8 million through Maxim, as the Company’s exclusive sales agent (the "ATM Offering"). Maxim is entitled to compensation at a fixed commission rate of 3.0 % of the gross sales price per Share sold excluding Maxim's costs and out-of-pocket expenses incurred in connection with its services, including the fees and out-of-pocket expenses of its legal counsel. During the six months ended June 30, 2024, the Company sold 9,300,203 shares of common stock under the Equity Distribution Agreement at per share prices between approximately $ 0.55 and $ 1.35 , resulting in net proceeds to the Company of approximately $ 8.5 million. Since the date of the Equity Distribution Agreement through the date of this report, the Company sold 11,962,807 shares of common stock at per share prices between $ 0.14 and $ 1.86 under the Equity Distribution Agreement, resulting in net proceeds to the Company of approximately $ 36.1 million. As of June 30, 2024, there was approximately $ 47.4 million in common stock remaining un der the Equity Distribution Agreement, subject to the limitations set forth in the Series 9 ATM Consent (as defined below). In connection with the Amendment and in accordance with the terms of the Certificate of Designation of Preferences and Rights of the Company's Series 9 Preferred Stock, on June 14, 2024, the Company obtained a written consent (the "Series 9 ATM Consent") from at least a majority of the outstanding shares of the Company's Series 9 Preferred Stock (the "Required Holders"). The Series 9 ATM Consent provides that the Company may not register shares under the ATM Offering in excess of $ 47.4 million (the "ATM Maximum Amount") without the Required Holders’ prior written consent, and the Company may not issue or sell more than $ 6 million of additional shares of common stock pursuant to the ATM Offering (the "Initial Tranche") without the Required Holders’ prior written consent, which consent the Company is required to obtain for each additional $ 5 million in sales of common stock under the ATM Offering after the Initial Tranche up to the ATM Maximum Amount. 25 Table of Contents XTI AEROSPACE, INC. AND SUBSIDIARIES NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS FOR THE THREE AND SIX MONTHS ENDED JUNE 30, 2024 AND 2023 Note 12 - Common Stock (continued) Note Conversion Immediately prior to the effective time of the XTI Merger on March 12, 2024, certain convertible notes (collectively classified as "convertible notes, at fair value") with an aggregate principal and interest balance of $ 16.8 million were converted into Legacy XTI shares, which converted into an aggregate of 751,226 shares of the Company's common stock at the effective time of the XTI Merger. 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 certain note holders to convert their outstanding note balances into shares of Legacy XTI common stock ahead of the XTI Merger so to assist the Company in qualifying for a listing on the Nasdaq Capital Market, Legacy XTI entered into voluntary note conversion letter agreements in February 2024 as detailed in the below table. Per the letter agreements, some or all of the outstanding principal and accrued interest under the notes was converted at a reduced conversion price into shares of Legacy XTI common stock immediately prior to the XTI Merger closing time, which converted into shares of the Company's common stock upon the closing of the XTI Merger. In connection with some of the voluntary note conversions, the Company assumed a repayment obligation with respect to any outstanding balance under the notes that was not converted into Legacy XTI shares. 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 Outstanding Immediately Prior to XTI Merger Aggregate Principal and Interest Converted to Common Shares Reduced Conversion Price Post - Exchange Ratio Common Shares Outstanding Payment Obligation Immediately After XTI Merger Net Inducement Charge Convertible Note 2021 $ 2,776,776 $ 2,503,776 $ 0.265 843,523 $ 273,000 $ 3,266,167 Convertible Note 2017 $ 2,147,687 $ 2,147,687 $ 0.265 723,557 $ — $ 2,795,492 Convertible Note 2022 $ 682,000 $ 600,000 $ 0.265 202,140 $ 82,000 $ 464,055 Convertible Note 2023 $ 333,000 $ 300,000 $ 0.265 101,070 $ 33,000 $ 206,733 Totals $ 5,939,463 $ 5,551,463 1,870,290 $ 388,000 $ 6,732,447 Note Inducement: Convertible Note 2021 - Related Party To induce David Brody to convert his outstanding note balances into shares of Legacy XTI common stock ahead of the XTI Merger so to assist the Company in qualifying for listing on the Nasdaq Capital Market, Legacy XTI entered into a 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 shares of Legacy XTI common stock immediately prior to the XTI Merger closing time equal to 266,272 shares of the Company's common stock, and the Company assumed the obligation to pay the note holder $ 0.2 million of the note balance that was not converted into Legacy XTI shares. This repayment obligation 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 Company, the Company accounted for the conversion as a capital transaction and therefore recorded the inducement charge within additional paid in capital. 26 Table of Contents XTI AEROSPACE, INC. AND SUBSIDIARIES NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS FOR THE THREE AND SIX MONTHS ENDED JUNE 30, 2024 AND 2023 Note 12 - Common Stock (continued) Share Issuances At or Immediately Prior to XTI Merger Closing At the closing of the XTI Merger, 2,075,743 shares of the Company's common stock were issued to Legacy Inpixon’s preexisting shareholders as consideration for the transaction. Shares of Legacy XTI common stock were issued to Xeriant, Inc. immediately prior to the XTI Merger closing time, equal to 298,395 post merger shares of Company common stock. This share issuance to Xeriant, Inc. fully settled the obligation relating to a joint venture arrangement by and between Legacy XTI and Xeriant, Inc., which terminated by its terms on May 31, 2023. The obligation to issue shares to Xeriant, Inc. was classified in equity as of December 31, 2023, as the share consideration became fixed once the joint venture terminated. Shares of Legacy XTI common stock were issued to Scott Pomeroy as transaction compensation immediately prior to the XTI Merger closing time equal to 357,039 post merger shares of Company common stock. 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 during the six months ended June 30, 2024. Shares of Legacy XTI common stock were issued to Maxim as transaction compensation immediately prior to the XTI Merger closing time equal to 385,359 post merger shares of Company common stock. 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 during the six months ended June 30, 2024. Shares of Legacy XTI common stock were issued to Chardan Capital Markets LLC as transaction compensation immediately prior to the XTI Merger closing time equal to 189,036 post merger shares of Company common stock. 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 during the six months ended June 30, 2024. Shares of Legacy XTI common stock were issued to a non-executive officer as transaction compensation immediately prior to the XTI Merger closing time equal to 46,265 post merger shares of Company common stock. 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 during the six months ended June 30, 2024. Other Share Issuances On June 6, 2024, the Company entered into a consulting agreement with a third party consultant, which has a term until December 10, 2024, pursuant to which the Company made a cash deposit of $ 0.1 million and issued 309,483 shares of restricted common stock valued at approximately $ 0.3 million to the consultant as a prepayment for marketing and distribution services agreed to be rendered to the Company over the six-month contract period. On June 7, 2024, the Company entered into a consulting agreement with a separate third party consultant, which has a term of six months , pursuant to which the Company issued 120,000 shares of restricted common stock valued at approximately $ 0.1 million to the consultant as a prepayment for business development consulting services agreed to be rendered to the Company over the six-month contract period. On June 13, 2024, the Company issued 2,680,459 shares of fully vested restricted stock valued at approximately $ 1.2 million to Nadir Ali, a consultant, under the Company’s 2018 Employee Stock Incentive Plan, as amended, as payment of accrued consulting fees in accordance with the terms of a consulting agreement, dated March 12, 2024, by and between the Company and Mr. Ali. 27 Table of Contents XTI AEROSPACE, INC. AND SUBSIDIARIES NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS FOR THE THREE AND SIX MONTHS ENDED JUNE 30, 2024 AND 2023 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 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, which was amended by the Certificate of Amendment to Designations of Preferences and Rights of Series 9 Preferred Stock filed by the Company with the Secretary of State of Nevada on April 30, 2024. 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 28 Table of Contents XTI AEROSPACE, INC. AND SUBSIDIARIES NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS FOR THE THREE AND SIX MONTHS ENDED JUNE 30, 2024 AND 2023 Note 1 3 - 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. Amendment to Series 9 Preferred Stock On April 30, 2024, the Company filed a Certificate of Amendment to Designations of Preferences and Rights of Series 9 Preferred Stock (the “Certificate of Amendment”) with the Secretary of State of Nevada, which 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 Redemption”). Previously, the Company was to pay any such amount in only cash. The Certificate of Amendment also now provides that the Company will provide notice of a Corporation Optional Redemption 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 Certificate of 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. The Company evaluated the amendment and accounted for it as a modification, which requires the Company to recognize any increase in fair value as an expense. However, the Company concluded the increase in the fair value of the Series 9 Preferred Stock from immediately before to immediately after the amendment is immaterial. Series 9 Preferred Stock Exchanges From April to June 2024, the Company entered into exchange agreements with the holder of shares of the Company’s Series 9 Preferred Stock pursuant to which the Company and the holder agreed to exchange 3,550 shares of Series 9 Preferred Stock with an aggregate stated value of $ 3,727,500 (the “Preferred Shares”) for 2,999,187 shares of common stock (the “Preferred Exchange Shares”) at an effective price per share ranging from $ 0.52 to $ 2.96 . The Company issued the Preferred Exchange Shares to the holder, at which time the Preferred Shares were cancelled. The Preferred Exchange Shares were issued in reliance on the exemption from registration provided by Section 3(a)(9) of the Securities Act, on the basis that (a) the Preferred Exchange Shares were issued in exchange for other outstanding securities of the Company, (b) there was no additional consideration delivered by the holder in connection with the exchange and (c) there were no commissions or other remuneration paid by the Company in connection with the exchange. The Company notes that the redemption of the Preferred Shares to Common Stock was accounted for as an extinguishment. The Company notes that the $ 176,980 excess fair value of the common shares issued over the carrying amount of the Preferred Shares was accounted for as a deemed dividend with a reduction to additional paid-in capital. The following table summarizes the activity of the Series 9 Preferred Stock outstanding: Shares of Series 9 Preferred Stock Beginning balance as of January 1, 2024 — Streeterville note exchange 9,802 Sold to 3AM 1,500 Exchanges to shares of common stock ( 3,550 ) Ending balance as of June 30, 2024 7,752 Note 14 - Stock Award Plans and Stock-Based Compensation The Company has three Employee Stock Incentive plans. The Company assumed the Legacy XTI's 2017 Employee and Consultant Stock Ownership Plan "2017 Plan") in connection with the XTI Merger. 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" and together with the 2011 Plan, the "Legacy Inpixon Option Plans"). 29 Table of Contents XTI AEROSPACE, INC. AND SUBSIDIARIES NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS FOR THE THREE AND SIX MONTHS ENDED JUNE 30, 2024 AND 2023 Note 14 - Stock Award Plans and Stock-Based Compensation (continued) 2017 Plan During 2017, Legacy XTI adopted the 2017 Plan, which was amended in 2021 to increase the maximum shares eligible to be granted under the 2017 Plan. The Company assumed the 2017 Plan in connection with the XTI Merger. 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 stakeholders. As of June 30, 2024, there were 950,195 outstanding stock options under the 2017 Plan that were granted to employees, directors and consultants of the Company. Post merger and as of June 30, 2024, there are zero unallocated shares available for future grants under the 2017 Plan. As of June 30, 2024, the fair value of non-vested stock options of the 2017 Plan totaled approximately $ 2.4 million, which will be amortized to expense over the weighted average remaining term of 1.25 years. 2011 Plan and 2018 Plan In September 2011, Legacy Inpixon adopted the 2011 Plan which provided 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 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 these Legacy Inpixon 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 June 30, 2024 is 64,148,179 . As of June 30, 2024, 11,374,202 shares of common stock were subject to outstanding stock options granted to employees, directors and consultants of the Company, 962 restricted stock awards were granted to employees of the company that were converted to common shares in prior periods and 52,773,015 shares of common stock were available for future grant under the 2018 Plan. As of June 30, 2024, the fair value of non-vested stock options of the 2018 Plan totaled approximately $ 4.5 million, which will be amortized to expense over the weighted average remaining term of 2.65 years. 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 — — 11,373,730 11,373,730 Exercised — ( 92,728 ) — ( 92,728 ) Expired ( 9 ) ( 55 ) ( 667 ) ( 731 ) Forfeited — ( 118,709 ) — ( 118,709 ) Ending balance as of June 30, 2024 — 950,195 11,374,202 12,324,397 30 Table of Contents XTI AEROSPACE, INC. AND SUBSIDIARIES NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS FOR THE THREE AND SIX MONTHS ENDED JUNE 30, 2024 AND 2023 Note 14 - Stock Award Plans and Stock-Based Compensation (continued) On June 12, 2024, the Board approved the following awards of options to purchase common stock pursuant to the 2018 Plan: 2,812,500 options were awarded to Scott Pomeroy, the Chief Executive Officer of the Company; 1,640,625 options were awarded to Brooke Turk, the Chief Financial Officer of the Company; and 975,000 options were awarded to Soumya Das, the Chief Executive Officer of the Company’s Real-Time Location System (RTLS) Division. Each option has an exercise price of $ 0.473 per share. The options will vest 1/3rd annually over three years starting from the grant date. The options expire on June 12, 2034. The fair value of each employee option grant is estimated on the date of the grant using the Black-Scholes option-pricing model. During the six months ended June 30, 2024, there were 11,373,730 options granted under the 2018 Plan with exercise prices ranging between $ 0.381 and $ 0.473 . The expected stock price volatility for these 2018 option grants ranged between 95.06 % and 95.90 % and 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. The Company notes that the 118,709 forfeited stock options occurred during the six months ended June 30, 2024. These forfeitures were primarily due to the departure of the Chief Executive Officer of the XTI Aircraft Company division. Stock Option Exercises To induce option holders to exercise stock options ahead of the XTI Merger so to assist the Company in qualifying for a listing on the Nasdaq Capital Market, Legacy XTI 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 stock option granted under the 2017 Plan were net exercised into pre-exchange common shares of Legacy XTI immediately prior to the XTI Merger closing time, which resulted in the issuance of 92,728 post merger exchange common shares. Note 15 - Warrants The following table summarizes the activity of warrants outstanding: Number of Warrants Beginning balance as of January 1, 2024 771,895 Legacy Inpixon warrants from merger 1,448,481 Granted 167,664 Exercised ( 409,815 ) Expired ( 96,644 ) Exchanged ( 1,602,630 ) Ending balance as of June 30, 2024 278,951 Exercisable as of June 30, 2024 278,951 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 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 XTI Merger and is reflected as part of purchase accounting. 31 Table of Contents XTI AEROSPACE, INC. AND SUBSIDIARIES NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS FOR THE THREE AND SIX MONTHS ENDED JUNE 30, 2024 AND 2023 Note 15 - Warrants (continued) Warrant Exercises On February 2, 2022, Legacy XTI executed a conditional purchase order (“Aircraft Purchase Agreement”) with Mesa Air Group, Inc. and Mesa Airlines, Inc. ("Mesa") to deliver 100 TriFan aircraft. In conjunction with this purchase order, Legacy XTI issued Mesa a warrant for the purchase of a total of 6,357,474 shares of Legacy XTI common stock at an exercise price of $ 0.01 . Effective as of March 11, 2024, Legacy XTI entered into an amendment (the “Warrant Amendment”) with Mesa. 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 Mesa pursuant to the Aircraft Purchase Agreement. On March 12, 2024 and per a warrant exercise letter agreement, all vested warrant shares were net exercised into shares of Legacy XTI common stock immediately prior to the XTI Merger closing time, which resulted in the issuance of 283,737 shares of the Company's common stock in accordance with the exchange ratio pursuant to the XTI Merger Agreement. To induce warrant holders to exercise warrant shares ahead of the XTI Merger so to assist the company in qualifying for a listing on the Nasdaq Capital Market, Legacy XTI 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 shares of Legacy XTI common stock immediately prior to the XTI Merger closing time, which resulted in the issuance of 105,550 shares of the Company's common stock in accordance with the exchange ratio pursuant to the XTI Merger Agreement. During the three months ended June 30, 2024, an additional 20,528 warrant shares originally issued by Legacy XTI were exercised into 20,528 shares of the Company's common stock at an exercise price of $ 0.12 . Warrant Exchanges On April 30, 2024 and May 1, 2024, the Company entered into warrant exchange agreements with the holders of certain of our then 918,690 outstanding warrants (the “Existing Warrants”) initially issued on May 17, 2023, which were exercisable for an aggregate of 918,690 shares of our common stock. Pursuant to the terms of the agreements, on May 2, 2024, 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 valued at $ 1,590,859 , in exchange for the Existing Warrants. As the Existing Warrants were liability classified, the exchange resulted in the liability being (i) remeasured at the warrant redemption value of $ 1,590,859 resulting in a fair value loss of $ 672,174 which is reported in other income (expense) within the condensed consolidated statements of operations for the three months ended June 30, 2024, and (ii) reclassified to stockholders' equity (deficit) within the condensed consolidated balance sheet as of June 30, 2024. Following the consummation of the warrant exchange, the Existing Warrants were cancelled and no further shares are issuable pursuant to the Existing Warrants agreement. On May 30, 2024, the Company entered into a warrant exchange agreement with the holder of certain warrants of the Company (the “Assumed Warrants”) to purchase shares of common stock, which Assumed Warrants were originally issued by Legacy XTI and assumed by the Company in connection with the XTI Merger. Pursuant to the terms of the agreement, the Company issued to the warrant holder an aggregate of 112,360 shares of common stock valued at $ 106,742 in exchange for 192,626 Assumed Warrants, which included 167,664 warrants shares granted during the three months ended June 30, 2024 as result of price protection clauses per the Assumed Warrant agreements relating to subsequent equity sales by the Company. As the Assumed Warrants were liability classified, the exchange resulted in the liability being (i) remeasured at the warrant redemption value of $ 106,742 resulting in a fair value loss of $ 6,742 which is reported in other income (expense) within the condensed consolidated statements of operations for the three months ended June 30, 2024, and (ii) reclassified to stockholders' equity (deficit) within the condensed consolidated balance sheet as of June 30, 2024. Following the consummation of the warrant exchange, the Assumed Warrants were cancelled and no further shares are issuable pursuant to the Assumed Warrants agreement. On June 12, 2024 and June 13, 2024, the Company entered into warrant exchange agreements with the holders (the “Warrant Holders”) of 491,314 existing warrants of the Company (the “Existing Warrants”) initially issued on December 19, 2023, which were exercisable for an aggregate of 491,314 shares of our common stock. Pursuant to the terms of the agreements, on June 13, 2024, the Company issued to the Warrant Holders 1.50 shares of Common Stock for each Existing Warrant, for an aggregate of 32 Table of Contents XTI AEROSPACE, INC. AND SUBSIDIARIES NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS FOR THE THREE AND SIX MONTHS ENDED JUNE 30, 2024 AND 2023 Note 15 - Warrants (continued) 736,973 shares of common stock, in exchange for the Existing Warrants. Following the consummation of the Warrant Exchange, the Existing Warrants were cancelled and no further shares are issuable pursuant to the Existing Warrants agreements. As it relates to the aforementioned Existing Warrants issued on December 19, 2023, there were 663,581 shares of common stock issued on June 12, 2024 for $ 0.47 per share and 73,392 shares of common stock issued on June 13, 2024 for $ 0.44 per share. The Warrant Holders received a total value of $ 344,176 for the conversion of the Existing Warrants to shares of common stock. The Company determined the fair value of the Existing Warrants as if issued on the exchange date and compared that to the fair value of the common stock issued. The Company calculated the fair value of the Existing Warrants using a Black-Scholes Option pricing model and determined the fair value to be approximately $ 61,000 . The inputs to the Black-Scholes Option pricing model for the June 12, 2024 redemption include a dividend rate of 0 %, a risk free rate of 4.4 %, a stock price of $ 0.47 , strike price of $ 5.13 , term of 4.51 , and a volatility of 90.0 %. The inputs to the Black-Scholes Option pricing model for the June 13, 2024 redemption include a dividend rate of 0 %, a risk free rate of 4.3 %, a stock price of $ 0.44 , a strike price of $ 5.13 , a term of 4.51 , and a volatility of 91.0 %. The fair values of the common stock issued were based on the closing stock price of the date of the exchange. The incremental increase in fair value of $ 283,176 was recorded as a return of capital, which reduces the additional paid-in capital on the condensed consolidated balance sheets as of June 30, 2024, and is shown as a reconciling item on the condensed consolidated statements of operations from Net Loss to Net Loss Attributable to Common Stockholders. Note 16 - Income Taxes There is an income tax expense of approximately $ 0.012 million and zero for the three months ended June 30, 2024 and 2023, respectively, and $ 0.016 million and zero for the six months ended June 30, 2024 and 2023, respectively. The income tax expense included in the three and six months ended June 30, 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 June 30, 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. 33 Table of Contents XTI AEROSPACE, INC. AND SUBSIDIARIES NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS FOR THE THREE AND SIX MONTHS ENDED JUNE 30, 2024 AND 2023 Note 17 - Credit Risk and Concentrations (continued) The customers who account for 10% or more of the Company's revenue for the three and six months ended June 30, 2024 or 10% or more of the Company's outstanding receivable balance as of June 30, 2024 are presented as follows: For the Three Months Ended June 30, 2024 For the Six Months Ended June 30, 2024 As of June 30, 2024 Customer Revenues (thousands) Percentage of revenues Revenues (thousands) Percentage of revenues Accounts Receivable (thousands) Percentage of accounts receivable A $ 367 36 % $ 367 29 % $ — — % B $ 128 12 % $ 137 11 % $ 44 9 % C $ 120 12 % $ 282 23 % $ 120 25 % D $ 104 10 % $ 121 10 % $ — — % E $ 31 3 % $ 32 3 % $ 76 16 % Total $ 750 73 % $ 939 76 % $ 240 50 % The Company did not have revenue for the three and six months ended June 30, 2023. The Company did not have outstanding receivables as of June 30, 2023. The vendors who account for 10% or more of the Company's purchases for the three and six months ended June 30, 2024 or 10% or more of the Company's outstanding payable balance as of June 30, 2024 are presented as follows: For the Three Months Ended June 30, 2024 For the Six Months Ended June 30, 2024 As of June 30, 2024 Vendor Purchases (thousands) Percentage of purchases Purchases (thousands) Percentage of purchases Accounts Payable (thousands) Percentage of accounts payable A $ — — % $ 437 6 % $ 1,685 24 % B $ 422 11 % $ 548 8 % $ 314 4 % C $ 323 8 % $ 470 7 % $ 723 10 % Total $ 745 19 % $ 1,455 21 % $ 2,722 38 % The vendors who account for 10% or more of the Company's purchases for the three and six months ended June 30, 2023 or 10% or more of the Company's outstanding payable balance as of June 30, 2023 are presented as follows: For the Three Months Ended June 30, 2023 For the Six Months Ended June 30, 2023 As of June 30, 2023 Vendor Purchases (thousands) Percentage of purchases Purchases (thousands) Percentage of purchases Accounts Payable (thousands) Percentage of accounts payable A $ 463 54 % $ 564 39 % $ 1,056 57 % B $ 118 14 % $ 202 14 % $ 88 5 % C $ — — % $ — — % $ 525 28 % Total $ 581 68 % $ 766 53 % $ 1,669 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. 34 Table of Contents XTI AEROSPACE, INC. AND SUBSIDIARIES NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS FOR THE THREE AND SIX MONTHS ENDED JUNE 30, 2024 AND 2023 Note 18 - Segments (continued) 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 XTI Merger closing through the June 30, 2024 reporting date. 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, accrued consulting fees and transaction bonuses relating to former Legacy Inpixon executives, 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 June 30, For the Six Months Ended June 30, 2024 2023 2024 2023 Revenue by Segment Industrial IoT $ 1,031 $ — $ 1,251 $ — Commercial Aviation — — — — Total segment revenue $ 1,031 $ — $ 1,251 $ — Gross profit by Segment Industrial IoT $ 662 $ — $ 803 $ — Commercial Aviation — — — — Gross profit by Segment $ 662 $ — $ 803 $ — Research and Development Expenses by Segment Industrial IoT $ 625 $ — 751 — Commercial Aviation 523 391 861 826 Research and Development Expenses by Segment $ 1,148 $ 391 $ 1,612 $ 826 Income (loss) from operations by Segment Industrial IoT $ ( 1,312 ) $ — $ ( 1,476 ) $ — Commercial Aviation ( 1,153 ) ( 4,041 ) ( 8,949 ) ( 5,324 ) Loss from operations by segment $ ( 2,465 ) $ ( 4,041 ) $ ( 10,425 ) $ ( 5,324 ) Unallocated costs ( 11,462 ) — ( 12,379 ) $ — Consolidated loss from operations $ ( 13,927 ) $ ( 4,041 ) $ ( 22,804 ) $ ( 5,324 ) 35 Table of Contents XTI AEROSPACE, INC. AND SUBSIDIARIES NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS FOR THE THREE AND SIX MONTHS ENDED JUNE 30, 2024 AND 2023 Note 18 - Segments (continued) The following table presents total assets by reportable segment (in thousands): June 30, December 31, 2024 2023 Industrial IoT $ 21,268 — Commercial Aviation 866 509 Total assets by segment $ 22,134 $ 509 Corporate 11,907 — Total consolidated assets $ 34,041 $ 509 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. 36 Table of Contents XTI AEROSPACE, INC. AND SUBSIDIARIES NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS FOR THE THREE AND SIX MONTHS ENDED JUNE 30, 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. The Company classified its 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 June 30, 2024 and December 31, 2023, other than the Damon Motors convertible note and warrant. The Company's assets and liabilities measured at fair value consisted of the following at June 30, 2024 and December 31, 2023: Fair Value at June 30, 2024 Total Level 1 Level 2 Level 3 Assets: Notes receivable $ 3,462 $ — $ — $ 3,462 Warrant asset 424 — — 424 Total assets $ 3,886 $ — $ — $ 3,886 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. 37 Table of Contents XTI AEROSPACE, INC. AND SUBSIDIARIES NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS FOR THE THREE AND SIX MONTHS ENDED JUNE 30, 2024 AND 2023 Note 19 - Fair Value of Financial Instruments (continued) 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 six months ended June 30, 2024: 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 ) — Exchanged / Conversion to Equity — — — ( 3,922 ) ( 333 ) Balance at March 31, 2024 $ 3,264 $ 448 $ 1,019 $ — $ — Change in fair value $ 38 $ ( 24 ) $ 679 $ — $ — Accrued interest $ 91 $ — $ — $ — $ — Debt discount recognition $ 49 $ — $ — $ — $ — Exchanged / Conversion to Equity $ — $ — $ ( 1,698 ) $ — $ — Balance at June 30, 2024 $ 3,442 $ 424 $ — $ — $ — The changes in fair value of the warrant liability, convertible notes, and warrant asset are presented within 'Change in fair value of warrant liability', 'Change in fair value of convertible notes', and 'Other expense', respectively, in the condensed consolidated statements of operations. 38 Table of Contents XTI AEROSPACE, INC. AND SUBSIDIARIES NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS FOR THE THREE AND SIX MONTHS ENDED JUNE 30, 2024 AND 2023 Note 20 - Foreign Operations Prior to the XTI Merger, the Company’s operations were located primarily in the United States. After the XTI 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 June 30, 2024: Revenues by geographic area $ 296 $ 874 $ — $ ( 139 ) $ 1,031 Operating (loss) income by geographic area $ ( 13,039 ) $ ( 888 ) $ — $ — $ ( 13,927 ) Net (loss) income by geographic area $ ( 13,823 ) $ ( 887 ) $ — $ — $ ( 14,710 ) For the Three Months Ended June 30, 2023: Revenues by geographic area $ — $ — $ — $ — $ — Operating (loss) income by geographic area $ ( 4,041 ) $ — $ — $ — $ ( 4,041 ) Net (loss) income by geographic area $ ( 4,629 ) $ — $ — $ — $ ( 4,629 ) For the Six Months Ended June 30, 2024: Revenues by geographic area $ 323 $ 1,067 $ — $ ( 139 ) $ 1,251 Operating (loss) income by geographic area $ ( 21,979 ) $ ( 825 ) $ — $ — $ ( 22,804 ) Net (loss) income by geographic area $ ( 16,497 ) $ ( 815 ) $ — $ — $ ( 17,312 ) For the Six Months Ended June 30, 2023: Revenues by geographic area $ — $ — $ — $ — $ — Operating (loss) income by geographic area $ ( 5,324 ) $ — $ — $ — $ ( 5,324 ) Net (loss) income by geographic area $ ( 6,194 ) $ — $ — $ — $ ( 6,194 ) As of June 30, 2024: Identifiable assets by geographic area $ 45,427 $ 22,455 $ 10 $ ( 33,851 ) $ 34,041 Long lived assets by geographic area $ 2,141 $ 3,505 $ — $ — $ 5,646 Goodwill by geographic area $ 3,142 $ 9,188 $ — $ — $ 12,330 As of December 31, 2023: Identifiable assets by geographic area $ 509 $ — $ — $ — $ 509 Long lived assets by geographic area $ 278 $ — $ — $ — $ 278 Goodwill by geographic area $ — $ — $ — $ — $ — 39 Table of Contents XTI AEROSPACE, INC. AND SUBSIDIARIES NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS FOR THE THREE AND SIX MONTHS ENDED JUNE 30, 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 Legacy XTI, provided legal and strategic consulting services for the Company. During the six months ended June 30, 2024 and 2023, the Company paid Mr. Brody compensation of $ 20,000 and $ 0 , respectively. As of June 30, 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 condensed consolidated balance sheets. Pursuant to an amendment to the consulting agreement, the outstanding payable amount of $ 320,000 was waived by Mr. Brody, which was accounted for as a capital contribution, and the consulting agreement terminated in connection with the XTI Merger closing. During the six months ended June 30, 2024 and 2023, the Company paid Scott Pomeroy, the Company's CEO and Chairman, who was the CFO and board member of Legacy XTI up until the XTI Merger closing, consulting compensation of $ 43,750 and $ 36,750 , respectively. As of June 30, 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 condensed consolidated balance sheets. During the six months ended June 30, 2024 and 2023, the Company paid its Chief Operating Advisor consultant, Charlie Johnson, who was a board member of Legacy XTI up until the date of the XTI Merger closing, compensation of $ 0 and $ 15,000 , respectively. As of June 30, 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 condensed consolidated 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, which was accounted for as a capital contribution. The consulting agreement was terminated in connection with the XTI Merger closing and Mr. Johnson is no longer a member of Legacy XTI's board of directors. Effective June 17, 2024, the Company and Mr. Johnson entered into a new consulting arrangement that compensates Mr. Johnson $ 10,000 per month in combination of both cash and equity. The new consulting arrangement initially has a term through December 31, 2024 at which time it becomes month-to-month unless either party terminates the agreement upon 30 days written notice. 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 June 30, 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 June 30, 2024. 40 Table of Contents XTI AEROSPACE, INC. AND SUBSIDIARIES NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS FOR THE THREE AND SIX MONTHS ENDED JUNE 30, 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 XTI 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 $ 9,227 (€ 8,612 ) per month. As part of the XTI 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 $ 7,929 (€ 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 June 30, 2024 As of December 31, 2023 Englewood, CO Office $ 394 $ — Berlin, Germany Office 196 — Frankfurt, Germany Office 89 — Less accumulated amortization ( 96 ) — Right-of-use asset, net $ 583 $ — 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 June 30, 2024 and 2023 was approximately $ 101,000 and $ 1,000 , respectively, and for the six months ended June 30, 2024 and 2023 was approximately $ 144,000 and $ 2,000 , respectively. Lease liability is summarized below (in thousands): As of June 30, 2024 As of December 31, 2023 Total lease liability $ 594 $ — Less: short term portion ( 235 ) — Long term portion $ 359 $ — Maturity analysis under the lease agreement is as follows (in thousands): Six months ending December 31, 2024 $ 157 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 $ 670 Less: Present value discount ( 76 ) Lease liability $ 594 41 Table of Contents XTI AEROSPACE, INC. AND SUBSIDIARIES NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS FOR THE THREE AND SIX MONTHS ENDED JUNE 30, 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 June 30, 2024, the weighted average remaining lease term is 2.8 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 LLC (“Chardan”) received registered shares of XTI Aerospace common stock. During June 2024, the Company received a letter from Chardan’s counsel seeking additional compensation under the Chardan Engagement Letter, including a cash payment of $ 200,000 , and threatening to file an arbitration with the Financial Industry Regulatory Authority. The Company has responded to the letter, disputing that it owes any compensation to Chardan. 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 closing date of the XTI Merger (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. As of the date of this filing, the Company repaid the initial $ 1,500,000 owed to Mr. Ali under the Ali Consulting Agreement. During the three and six months ended June 30, 2024, the Company recognized compensation expense of $ 1,310,000 and $ 1,570,000 , respectively, which is included in general and administrative expenses on the condensed consolidated statements of operations, relating to the Ali Consulting Agreement. As of June 30, 2024, the Company owed Mr. Ali accrued consulting fees of $ 328,804 , which is included in accrued expenses and other current liabilities within the accompanying condensed consolidated balance sheets. 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. During the three and six months ended June 30, 2024, the Company recognized compensation expense of $ 297,700 and $ 366,817 , respectively, which is included in general and administrative expenses on the condensed consolidated statements of operations, relating to Ms. Loundermon's consulting arrangement. As of June 30, 2024, the Company owed Ms. Loundermon accrued consulting fees of $ 310,267 , which is included in accounts payable within the accompanying condensed consolidated balance sheets. 42 Table of Contents XTI AEROSPACE, INC. AND SUBSIDIARIES NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS FOR THE THREE AND SIX MONTHS ENDED JUNE 30, 2024 AND 2023 Note 23 - Commitments and Contingencies (continued) Transaction Bonus Plan in connection with Future Strategic Transactions On July 24, 2023, the compensation committee of the Board (the “Compensation Committee”) adopted a Transaction Bonus Plan, which was amended on March 11, 2024 (as amended, the “Plan,” and such amendment, the “Plan Amendment”), and is intended to provide incentives to certain employees and other service providers to remain with the Company through the consummation of a Contemplated Transaction or Qualifying Transaction (each as defined below) and to maximize the value of the Company with respect to such transaction for the benefit of its stockholders. The Plan is administered by the Compensation Committee. It will automatically terminate upon the earlier of (i) the one-year anniversary of the adoption date, (ii) the completion of all payments under the terms of the Plan, or (iii) at any time by the Compensation Committee, provided, however, that the Plan may not be amended or terminated following the consummation of a Contemplated Transaction or Qualifying Transaction without the consent of each participant being affected, except as required by any applicable law. A “Contemplated Transaction” refers to a strategic alternative transaction including an asset sale, merger, reorganization, spin-off or similar transaction (a “Strategic Transaction”) that results in a change of control as defined in the Plan. A Qualifying Transaction refers to a Strategic Transaction that does not result in a change of control for which bonuses may be paid pursuant to the Plan as approved by the Compensation Committee. The XTI Merger qualifies as a Contemplated Transaction. The Plan Amendment, among other things, changed the timing of and imposed certain additional conditions on the payment of certain bonuses to be paid to the participants thereunder, including Nadir Ali, Wendy Loundermon and Soumya Das. See further disclosures relating to the Transaction Bonus Plan in Management's Discussion and Analysis of Financial Condition and Results of Operations - Contractual Obligations and Commitments included elsewhere in this filing. During the second quarter of 2024, the Company accrued 100 % of the transaction bonuses as the bonuses became payable upon the earlier of the closing of financing or June 30, 2024. As such, the Company recognized approximately $ 6.7 million of transaction bonus expense, which is included in general and administrative within the accompanying condensed consolidated statements of operations, during the three and six months ended June 30, 2024. Approximately $ 6.7 million of accrued transaction bonuses remained outstanding as of June 30, 2024 and is included in Accrued Expenses and Other Current Liabilities on the condensed consolidated balance sheets. 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 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 43 Table of Contents XTI AEROSPACE, INC. AND SUBSIDIARIES NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS FOR THE THREE AND SIX MONTHS ENDED JUNE 30, 2024 AND 2023 Note 23 - Commitments and Contingencies (continued) 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 dated May 17, 2022 (the “May 17 letter”). 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 May 17 letter, 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 the Company is 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. In connection with the litigation matter described in the immediately preceding paragraph, on June 12, 2024, we received a letter from counsel for Auctus Fund, LLC (“Auctus”), dated April 3, 2024, claiming that, pursuant to the above-referenced May 17 letter by and between Xeriant and Legacy XTI, as a result of the XTI Merger and Legacy XTI’s entry into a promissory note agreement with Legacy Inpixon in March 2023, XTI Aerospace and Legacy XTI may have assumed Xeriant’s obligations under that certain Senior Secured Promissory Note in the principal amount of $ 6,050,000 issued by Xeriant to Auctus, including the obligation to repay Auctus all principal and accrued and unpaid interest thereunder, which Auctus claims was $ 8,435,008.81 as of April 3, 2024. In July 2024, Legacy XTI responded to such letter and indicated that it believes that the May 17 letter is invalid and unenforceable on several bases. It further explained that even if it were valid and enforceable, Legacy XTI does not believe such letter resulted in, or otherwise triggered, the assumption of obligations of Xeriant under the Senior Secured Promissory Note or any other obligation on the part of Legacy XTI. There have been no further developments on this matter. We are unable to make a reasonable estimate of a potential loss, if any, on this matter. To the extent suits or actions are commenced with respect to this matter, we intend to vigorously defend against any and all claims. 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 note was subsequently amended. As amended, the note matures on September 30, 2024. 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 $ 2.7364 . 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 June 30, 2024 total $ 3.9 million and are included in Notes Receivable, $ 3.5 million, and Warrant asset, $ 0.4 million, on the condensed consolidated balance sheets. Note 25 - Subsequent Events On July 5, 2024, the Company issued 2,774,883 shares of fully vested restricted stock to Nadir Ali, a consultant, under the Company’s 2018 Employee Stock Incentive Plan, as amended, in accordance with the terms of that certain consulting agreement, dated March 12, 2024, by and between the Company and Mr. Ali. 44 Table of Contents XTI AEROSPACE, INC. AND SUBSIDIARIES NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS FOR THE SIX MONTHS ENDED JUNE 30, 2024 AND 2023 Note 25 - Subsequent Events (continued) Subsequent to June 30, 2024 and through the date of this filing, the Company entered into exchange agreements with the holder of shares of the Company’s Series 9 Preferred Stock pursuant to which the Company and the holder exchanged an aggregate 775 shares of Series 9 Preferred Stock with an aggregate stated value of approximately $ 0.8 million for an aggregate 2,800,537 shares of common stock at an effective price per share ranging between $ 0.21 and $ 0.38 . Subsequent to June 30, 2024 and through the date of this filing, the Company issued an aggregate 1,958,848 shares of common stock in connection with the ATM Offering at per share prices between approximately $ 0.40 and $ 0.43 , resulting in aggregate net proceeds to the Company of approximately $ 0.8 million. On July 9, 2024, XTI Aerospace, Inc. (the “Company”) received a letter from the Listing Qualifications Staff of The Nasdaq Stock Market LLC (“Nasdaq”) indicating that, based upon the closing bid price of the Company’s common stock for the last 30 consecutive business days beginning on May 23, 2024, and ending on July 8, 2024, the Company no longer meets the requirement to maintain a minimum bid price of $1 per share, as set forth in Nasdaq Listing Rule 5550(a)(2). In accordance with Nasdaq Listing Rule 5810(c)(3)(A), the Company has been provided a period of 180 calendar days, or until January 6, 2025, in which to regain compliance. In order to regain compliance with the minimum bid price requirement, the closing bid price of the Company’s common stock must be at least $1 per share for a minimum of ten consecutive business days during this 180-day period. In the event that the Company does not regain compliance within this 180-day period, the Company may be eligible to seek an additional compliance period of 180 calendar days if it meets the continued listing requirement for market value of publicly held shares and all other initial listing standards for the Nasdaq Capital Market, with the exception of the bid price requirement, and provides written notice to Nasdaq of its intent to cure the deficiency during this second compliance period, by effecting a reverse stock split, if necessary. However, if it appears to the Nasdaq staff that the Company will not be able to cure the deficiency, or if the Company is otherwise not eligible, Nasdaq will provide notice to the Company that the common stock will be subject to delisting. The letter does not result in the immediate delisting of the Company’s common stock from the Nasdaq Capital Market. The Company intends to monitor the closing bid price of the common stock and consider its available options in the event that the closing bid price of the common stock remains below $1 per share. On July 31, 2024, the Company entered into an advisory agreement with a third party advisor, pursuant to which the Company issued 1,000,000 shares of restricted common stock to the advisor in consideration for financial advisory and business development services agreed to be rendered to the Company pursuant to the agreement. 45 Table of Contents