XTI Aerospace, Inc. 10-Q

ITEM 1: FINANCIAL STATEMENTS XTI AEROSPACE, INC. AND SUBSIDIARIES CONDENSED CONSOLIDATED BALANCE SHEETS (In thousands, except number of shares and par value data) As of September 30, 2024 As of December 31, 2023 (Unaudited) Assets Current Assets Cash and cash equivalents $ 511 $ 5 Accounts receivable, net of allowance for credit losses of $ 33 and $ 0 as of September 30, 2024 and December 31, 2023, respectively 610 — Other receivables 552 101 Inventory 2,730 — Note receivable available for sale, at fair value 3,601 — Warrant asset 424 — Prepaid expenses and other current assets 1,704 125 Total Current Assets 10,132 231 Property and equipment, net 235 12 Operating lease right-of-use asset, net 522 — Intangible assets, net 4,778 266 Goodwill 12,738 — Other assets 878 — Total Assets $ 29,283 $ 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 September 30, 2024 As of December 31, 2023 (Unaudited) Liabilities and Stockholders’ Equity (Deficit) Current Liabilities Accounts payable $ 7,625 $ 2,495 Related party payables 100 540 Accrued expenses and other current liabilities 8,659 1,127 Accrued interest 940 560 Customer deposits 1,350 1,350 Warrant liability — 497 Operating lease obligation, current 217 — Deferred revenue 526 — Short-term debt 2,620 6,690 Total Current Liabilities 22,037 13,259 Long Term Liabilities Long-term debt 65 18,546 Operating lease obligation, noncurrent 316 — Other liabilities, noncurrent — 333 Total Liabilities 22,418 32,138 Commitments and Contingencies (Note 18) 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 September 30, 2024 and December 31, 2023 — — Series 5 Convertible Preferred Stock - 12,000 shares authorized; 126 issued and outstanding as of September 30, 2024 and December 31, 2023 — — Series 9 Preferred Stock - 20,000 shares authorized; 11,302 and 6,677 shares issued and outstanding as of September 30, 2024, and 0 shares issued and outstanding as of December 31, 2023 (Liquidation preference of $ 7,506,833 ) 6,677 — Common Stock - $ 0.001 par value; 500,000,000 shares authorized; 38,008,995 and 3,197,771 shares issued and outstanding as of September 30, 2024 and December 31, 2023, respectively. 38 3 Additional paid-in capital 79,332 26,327 Accumulated other comprehensive loss 524 — Accumulated deficit ( 79,706 ) ( 57,959 ) Total Stockholders’ Equity (Deficit) 6,865 ( 31,629 ) Total Liabilities and Stockholders’ Equity (Deficit) $ 29,283 $ 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 September 30, For the Nine Months Ended September 30, 2024 2023 2024 2023 (Unaudited) Revenues $ 918 $ — $ 2,169 $ — Cost of Revenues 398 — 846 — Gross Profit 520 — 1,323 — Operating Expenses Research and development 1,228 472 2,840 1,299 Sales and marketing 1,019 198 2,160 486 General and administrative 2,293 988 16,422 4,469 Merger-related transaction costs — 713 6,490 1,428 Amortization of intangible assets 196 7 431 20 Total Operating Expenses 4,736 2,378 28,343 7,702 Loss from Operations ( 4,216 ) ( 2,378 ) ( 27,020 ) ( 7,702 ) Other Income (Expense) Interest expense, net ( 222 ) ( 303 ) ( 553 ) ( 806 ) Amortization of deferred loan costs — ( 22 ) ( 17 ) ( 66 ) Inducement loss on debt conversions — — ( 6,732 ) — Change in fair value of convertible notes — — 12,882 — Change in fair value of JV obligation — — — ( 197 ) Change in fair value of warrant liability — — ( 281 ) ( 126 ) Other income/(expense), net 3 — ( 10 ) — Total Other Income (Expense) ( 219 ) ( 325 ) 5,289 ( 1,195 ) Net Loss, before tax ( 4,435 ) ( 2,703 ) ( 21,731 ) ( 8,897 ) Income tax provision — — ( 16 ) — Net Loss ( 4,435 ) ( 2,703 ) ( 21,747 ) ( 8,897 ) Less: Preferred stock return and dividend ( 185 ) — ( 496 ) — Less: Deemed dividend ( 54 ) — ( 514 ) — Net Loss Attributable to Common Stockholders, basic and diluted $ ( 4,674 ) $ ( 2,703 ) $ ( 22,757 ) $ ( 8,897 ) Net Loss Per Share - Basic and Diluted $ ( 0.13 ) $ ( 0.66 ) $ ( 1.23 ) $ ( 2.26 ) Weighted Average Shares Outstanding, Basic and Diluted 34,986,105 4,116,700 18,439,744 3,931,075 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 September 30, For the Nine Months Ended September 30, 2024 2023 2024 2023 (Unaudited) Net Loss $ ( 4,435 ) $ ( 2,703 ) $ ( 21,747 ) $ ( 8,897 ) Change in fair value of convertible note receivable — — 59 — Unrealized foreign exchange loss from cumulative translation adjustments 663 — 465 — Comprehensive Loss $ ( 3,772 ) $ ( 2,703 ) $ ( 21,223 ) $ ( 8,897 ) 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 nine months ended September 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 — — 2,887,788 3 9,611 — — 9,614 Inducement loss on debt conversions — — — — 6,732 — — 6,732 Common shares issued to Xeriant, Inc. — — 298,395 — — — — — Common shares issued for cashless exercise of warrants and options — — 482,015 1 ( 1 ) — — — 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 Common shares issued in exchange of Series 9 preferred stock ( 1,075 ) ( 1,075 ) 4,196,813 4 1,125 — — 54 Deemed dividend related to Series 9 preferred stock exchange — — — — ( 54 ) — — ( 54 ) Common shares issued for net cash proceeds of ATM offering — — 3,190,727 3 1,032 — — 1,035 Common shares issued as settlement of accrued compensation — — 2,774,883 3 1,098 — — 1,101 Stock-based compensation — — 1,004,886 1 ( 1,890 ) — — ( 1,889 ) Series 9 preferred stock dividend accrued — — — — ( 185 ) — — ( 185 ) Cumulative translation adjustment — — — — — 663 — 663 Net loss — — — — — — ( 4,435 ) ( 4,435 ) Balance - September 30, 2024 6,677 $ 6,677 38,008,995 $ 38 $ 79,332 $ 524 $ ( 79,706 ) $ 6,865 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 nine months ended September 30, 2023 (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, 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 ) Proceeds from sale of common stock — — 3,142 — 44 — — 44 Stock-based compensation — — — — 164 — — 164 Net loss — — — — — — ( 2,703 ) ( 2,703 ) Balance - September 30, 2023 — $ — 3,197,573 $ 3 $ 27,448 $ — $ ( 41,790 ) $ ( 14,339 ) 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 Nine Months Ended September 30, 2024 2023 Cash Flows Used in Operating Activities (Unaudited) Net loss $ ( 21,747 ) $ ( 8,897 ) Adjustment to reconcile net loss to net cash used in operating activities: Depreciation and amortization 81 8 Amortization of intangible assets 431 20 Amortization of right-of-use asset 177 — Non-cash interest expense, net 267 456 Stock-based compensation 3,844 2,766 Change in fair value of JV obligation — 197 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 gain on foreign currency transactions ( 123 ) — Other 34 — Changes in operating assets and liabilities: Accounts receivable and other receivables ( 72 ) 127 Inventory 271 — Prepaid expenses and other current assets 247 28 Other assets 32 — Accounts payable 2,514 1,160 Related party payables — 64 Accrued expenses and other current liabilities 5,708 561 Accrued interest 154 398 Deferred revenue ( 115 ) — Operating lease obligation ( 163 ) — Net Cash Used in Operating Activities ( 14,305 ) ( 2,986 ) Cash Flows Provided by Investing Activities Purchase of property and equipment ( 54 ) ( 3 ) Cash received in purchase of Inpixon 2,968 — Purchase of intangible asset ( 39 ) — Net Cash Provided by Investing Activities 2,875 ( 3 ) Cash Provided by Financing Activities Proceeds from sale of common stock and exercise of warrants 2 224 Net proceeds from ATM stock offering 9,582 — Net proceeds from promissory notes 2,000 2,150 Net proceeds from loan from Inpixon (prior to merger) 1,012 — 7 Table of Contents XTI AEROSPACE, INC. AND SUBSIDIARIES CONDENSED CONSOLIDATED STATEMENTS OF CASH FLOWS (CONTINUED) (In thousands) Net proceeds from convertible notes — 750 Repayments of promissory notes ( 668 ) ( 14 ) Net Cash Provided by Financing Activities 11,928 3,110 Effect of Foreign Exchange Rate on Changes on Cash 8 — Net Increase (Decrease) in Cash and Cash Equivalents 506 121 Cash and Cash Equivalents - Beginning of period 5 115 Cash and Cash Equivalents - End of period $ 511 $ 236 Supplemental Disclosure of cash flow information: Cash paid for: Interest $ 54 $ 1 Income Taxes $ 16 $ — 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 $ 2,293 $ — 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 $ 4,625 $ — Series 9 preferred stock dividend accrued $ 496 $ — Deemed dividend related to Series 9 preferred stock exchange $ 231 $ — ATM proceeds withheld as payment towards accounts payable $ 128 $ — Warrants issued with convertible notes $ — $ 967 Warrants issued with common stock $ — $ 121 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 NINE MONTHS ENDED SEPTEMBER 30, 2024 AND 2023 Note 1 - Organization and Nature of Business On March 12, 2024 (the "Closing Date"), 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.” 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 Closing Date and through the September 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. 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 nine months ended September 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 NINE MONTHS ENDED SEPTEMBER 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 September 30, 2024, the Company has a working capital deficit of approximately $ 11.9 million, and cash of approximately $ 0.5 million. For the nine months ended September 30, 2024, the Company had a net loss of approximately $ 21.7 million. During the nine months ended September 30, 2024, the Company used approximately $ 14.3 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 its 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 September 30, 2024 and for the three and nine months ended September 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 nine months ended September 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. 10 Table of Contents XTI AEROSPACE, INC. AND SUBSIDIARIES NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS FOR THE THREE AND NINE MONTHS ENDED SEPTEMBER 30, 2024 AND 2023 Cash and Cash Equivalents Cash consists primarily of demand deposit bank accounts, which, from time to time, may exceed federally insured limits. The Company considers all highly liquid investments with an original maturity from date of purchase of three months or less, or that are readily convertible into known amounts of cash, to be cash equivalents. 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 credit losses. The customers who account for 10% or more of the Company's revenue for the three and nine months ended September 30, 2024 or 10% or more of the Company's outstanding receivable balance as of September 30, 2024 are presented as follows: Percentage of revenues Percentage of accounts receivable Customer For the Three Months Ended September 30, 2024 For the Nine Months Ended September 30, 2024 As of September 30, 2024 A 25 % 23 % ** B ** 17 % ** C 25 % 16 % 29 % D 13 % 12 % 10 % E ** ** 10 % F ** ** 24 % **Represents less than 10% of the total for the respective period The Company did not have revenue for the three and nine months ended September 30, 2023. The Company did not have outstanding trade receivables as of September 30, 2023. The vendors who account for 10% or more of the Company's purchases or 10% or more of the Company's outstanding payable balance are presented as follows for the periods indicated: Percentage of purchases Percentage of accounts payable Three Months Ended September 30, Nine Months Ended September 30, As of September 30, Vendor 2024 2023 2024 2023 2024 2023 A ** 45 % ** 42 % 21 % 61 % B ** ** ** 11 % ** ** C ** ** ** ** ** 23 % **Represents less than 10% of the total for the respective period 11 Table of Contents XTI AEROSPACE, INC. AND SUBSIDIARIES NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS FOR THE THREE AND NINE MONTHS ENDED SEPTEMBER 30, 2024 AND 2023 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. 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. Intangible Assets and Goodwill Intangible assets primarily consist of developed technology, patents, customer relationships, and trade names/trademarks. They are amortized ratably over a range of 5 to 15 years, which approximates customer attrition rate and technology obsolescence. The Company tests goodwill for potential impairment at least annually as of October 1, or more frequently if events or changes in circumstances indicate that the asset may be impaired . Goodwill is tested for impairment by comparing the fair value of the reporting unit with its carrying amount and the Company recognizes an impairment charge, if any, for the amount by which the carrying amount exceeds the reporting unit’s fair value. Based on its assessments, the Company does not believe it has a goodwill impairment during the nine months ended September 30, 2024 and 2023. Impairment of Long-Lived Assets The Company reviews its long-lived assets, inclusive of its right-of-use assets, for impairment whenever events or changes in circumstances indicate the carrying amount of an asset may not be recoverable. Recoverability of assets held and used is measured by comparison of the carrying amount of an asset to the future undiscounted cash flows expected to be generated from the use of the asset and its eventual disposition. If the carrying amount of an asset group exceeds its estimated future undiscounted cash flows, an impairment charge is recognized for the amount by which the carrying amount of the asset group exceeds its fair value. For the nine months ended September 30, 2024 and 2023, the Company determined none of its long-lived assets were impaired. Revenue Recognition In accordance with ASC Topic 606, Revenue from Contracts with Customers (“ASC 606”), the Company recognizes revenue when the customer obtains control of promised goods, in an amount that reflects the consideration that it expects to receive in exchange for those goods. To determine revenue recognition for arrangements that the Company determines are within the scope of ASC 606, the Company performs the following five steps: (i) identify the contract with a customer, (ii) identify the performance obligations in the contract, (iii) determine the transaction price, including variable consideration, if any, (iv) allocate the transaction price to the performance obligations in the contract, and (v) recognize revenue when (or as) the Company satisfies a performance obligation. The Company only applies the five-step model to contracts when it is probable that it will collect the consideration to which it is entitled in exchange for the goods it transfers to a customer. 12 Table of Contents XTI AEROSPACE, INC. AND SUBSIDIARIES NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS FOR THE THREE AND NINE MONTHS ENDED SEPTEMBER 30, 2024 AND 2023 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, at which control is deemed transferred to the customer, and has title of the product and holds the risks and rewards of ownership. 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 concluded it is the principal in the transaction with the customer and records revenue on a gross basis. The Company receives fixed consideration for sales of hardware and software products. The Company’s customers generally pay within 30 to 60 days from the receipt of a customer approved invoice. The Company has elected the practical expedient to expense the costs of obtaining a contract when they are incurred because the amortization period of the asset that otherwise would have been recognized is less than a year. Software As A Service Revenue Recognition With respect to sales of the Company’s maintenance, consulting and other service agreements, customers pay fixed monthly fees in exchange for the Company’s service. The Company’s performance obligation is satisfied over time as the digital advertising and electronic services are provided continuously throughout the service period. The Company recognizes revenue evenly over the service period using a time-based measure because the Company is providing continuous access to its service. Professional Services Revenue Recognition The Company’s professional services include milestone, fixed fee and time and materials contracts. Professional services under milestone contracts are accounted for using the percentage of completion method. As soon as the outcome of a contract can be estimated reliably, contract revenue is recognized in the consolidated statement of operations in proportion to the stage of completion of the contract. Contract costs are expensed as incurred. Contract costs include all amounts that relate directly to the specific contract, are attributable to contract activity, and are specifically chargeable to the customer under the terms of the contract. Professional services are also contracted on the fixed fee and time and materials basis. Fixed fees are paid monthly, in phases, or upon acceptance of deliverables. The Company’s time and materials contracts are paid weekly or monthly based on hours worked. Revenue on time and material contracts is recognized based on a fixed hourly rate as direct labor hours are expended. Materials, or other specified direct costs, are reimbursed as actual costs and may include markup. The Company has elected the practical expedient to recognize revenue for the right to invoice because the Company’s right to consideration corresponds directly with the value to the customer of the performance completed to date. For fixed fee contracts including maintenance service provided by in house personnel, the Company recognizes revenue evenly over the service period using a time-based 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 nine months ended September 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. 13 Table of Contents XTI AEROSPACE, INC. AND SUBSIDIARIES NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS FOR THE THREE AND NINE MONTHS ENDED SEPTEMBER 30, 2024 AND 2023 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. Stock-Based Compensation The Company’s stock-based compensation relates to stock options granted to employees and non-employees. The Company recognizes the cost of share-based awards granted to employees and non-employees based on the estimated grant-date fair value of the awards. Forfeitures are accounted for as they occur, which may result in negative expense when forfeitures exceed the expense recorded within the period. The Company recognizes expense on a straight-line basis over the requisite service period of the award, which is generally equal to the vesting period of the award. The Company estimates the grant-date fair value of the stock option awards with service only vesting conditions using the Black-Scholes option-pricing model. The Black-Scholes option-pricing model utilizes inputs and assumptions which involve inherent uncertainties and generally require significant judgment. As a result, if factors or expected outcomes change and significantly different assumptions or estimates are used, the Company’s stock-based compensation could be materially different. Significant inputs and assumptions include: Fair value of Common Stock – As there was no public market for Legacy XTI’s common stock prior to the XTI Merger, the fair value of the shares of common stock underlying the stock-based awards on the grant-date has historically been 14 Table of Contents XTI AEROSPACE, INC. AND SUBSIDIARIES NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS FOR THE THREE AND NINE MONTHS ENDED SEPTEMBER 30, 2024 AND 2023 determined by Legacy XTI’s Board of Directors with assistance of third-party valuation specialists. Legacy XTI's Board of Directors exercised reasonable judgment and considered a number of objective and subjective factors to determine the best estimate of the fair market value, which included important developments in Legacy XTI’s operations, actual operating results, financial performance, external market conditions, equity market conditions of comparable public companies, and the lack of marketability of Legacy XTI’s common stock. Expected Term – The Company’s expected term represents the period that the Company’s stock-based awards are expected to be outstanding and is determined using the simplified method (based on the mid-point between the vesting date and the end of the contractual term). Expected Volatility – Because Legacy XTI was privately held prior to the XTI Merger and did not have an active trading market for its common stock, the expected volatility was estimated based on the average volatility for publicly traded companies that the Company considers to be comparable, over a period equal to the expected term of the stock option grants. Risk-Free Interest Rate – The risk-free interest rate is based on the U.S. Treasury zero coupon issues in effect at the time of grant for periods corresponding with the expected term of option. Expected Dividend – The Company has never paid dividends on its common stock and has no plans to pay dividends on its common stock. Therefore, the Company used an expected dividend yield of zero. Net Loss Per Share Net loss per share attributable to common stockholders is computed using the two-class method required for multiple classes of common stock and participating securities. The Company’s participating securities included the Company’s convertible preferred stock and preferred stock. Neither the holders of convertible preferred stock, preferred stock nor the holders of the Company’s common stock warrants have a contractual obligation to share in losses. Basic net loss per share attributable to common stockholders is calculated by dividing the net loss, as adjusted for any dividends on the preferred stock for the period, attributable to common stockholders by the weighted-average number of shares of common stock outstanding during the period, adjusted for outstanding shares that are subject to repurchase or outstanding shares that are contingently returnable by the holder. Contingently issuable shares, including shares that are issuable for little or no cash consideration, are considered outstanding common shares and included in net loss per share as of the date that all necessary conditions have been satisfied. Such shares include outstanding penny warrants and shares issuable to Xeriant Inc. ("Xeriant") related to the the joint venture arrangement that expired on May 31, 2023. Diluted net loss per share is computed by giving effect to all potentially dilutive securities outstanding for the period using the treasury stock method or the if-converted method based on the nature of such securities. For periods in which the Company reports net losses, diluted net loss per common share attributable to common stockholders is the same as basic net loss per common share attributable to common stockholders, because potentially dilutive common shares are not assumed to have been issued if their effect is anti-dilutive. 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 15 Table of Contents XTI AEROSPACE, INC. AND SUBSIDIARIES NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS FOR THE THREE AND NINE MONTHS ENDED SEPTEMBER 30, 2024 AND 2023 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. 16 Table of Contents XTI AEROSPACE, INC. AND SUBSIDIARIES NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS FOR THE THREE AND NINE MONTHS ENDED SEPTEMBER 30, 2024 AND 2023 Recently Issued Accounting Standards Not Yet Adopted 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. 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. 17 Table of Contents XTI AEROSPACE, INC. AND SUBSIDIARIES NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS FOR THE NINE MONTHS ENDED SEPTEMBER 30, 2024 AND 2023 Note 4 - Disaggregation of Revenue and Deferred 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 September 30, For the Nine Months Ended September 30, 2024 2023 2024 2023 Recurring revenue Software $ 327 $ — $ 697 $ — Total recurring revenue $ 327 $ — $ 697 $ — Non-recurring revenue Hardware $ 422 $ — $ 1,190 $ — Software 77 — 82 — Professional services 92 — 200 — Total non-recurring revenue $ 591 $ — $ 1,472 $ — Total Revenue $ 918 $ — $ 2,169 $ — For the Three Months Ended September 30, For the Nine Months Ended September 30, 2024 2023 2024 2023 Revenue recognized at a point in time Industrial IoT (1) $ 499 $ — $ 1,272 $ — Total $ 499 $ — $ 1,272 $ — Revenue recognized over time Industrial IoT (2) (3) $ 419 $ — $ 897 $ — Total $ 419 $ — $ 897 $ — Total Revenue $ 918 $ — $ 2,169 $ — (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. 18 Table of Contents XTI AEROSPACE, INC. AND SUBSIDIARIES NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS FOR THE THREE AND NINE MONTHS ENDED SEPTEMBER 30, 2024 AND 2023 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 September 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 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 aggregate fair value of warrants was 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 491,310 warrants with a fair value of $ 4.75 per warrant which was determined by using level 3 inputs and utilizing a Black-Scholes valuation. Significant inputs related to these warrants are as follows: Fair value of common stock $ 5.27 Exercise price $ 5.13 Expected term 4.76 years Volatility 146 % Risk-free interest rate 4.2 % Dividend yield — % 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 and fair value of $ 1,000 per share. 19 Table of Contents XTI AEROSPACE, INC. AND SUBSIDIARIES NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS FOR THE THREE AND NINE MONTHS ENDED SEPTEMBER 30, 2024 AND 2023 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. For the nine months ended September 30, 2024 and 2023, the Company incurred merger related transaction costs of approximately $ 6.5 million and $ 1.4 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 nine months ended September 30, 2024 and 2023, as if the acquisition had occurred as of the beginning 20 Table of Contents XTI AEROSPACE, INC. AND SUBSIDIARIES NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS FOR THE NINE MONTHS ENDED SEPTEMBER 30, 2024 AND 2023 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 September 30, 2024 For the Three Months Ended September 30, 2023 Revenues $ 918 $ 759 Net loss attributable to common stockholders $ ( 4,674 ) $ ( 9,944 ) Net loss per basic and diluted share $ ( 0.13 ) $ ( 1.17 ) Weighted average common shares outstanding: Basic and Diluted 34,986,105 8,476,635 The proforma financial information for the Company and Legacy Inpixon is as follows (in thousands): For the Nine Months Ended September 30, 2024 For the Nine Months Ended September 30, 2023 Revenues $ 2,676 $ 3,486 Net loss attributable to common stockholders $ ( 36,571 ) $ ( 28,397 ) Net loss per basic and diluted share $ ( 1.83 ) $ ( 3.35 ) Weighted average common shares outstanding: Basic and Diluted 20,006,531 8,475,135 Note 7 - Goodwill and Intangible Assets Goodwill In connection with the XTI and Inpixon Merger, the excess of the purchase price over the estimated fair value of the net assets assumed of $ 12.4 million was recognized as goodwill. The Company tests goodwill for impairment at the reporting unit level annually or more frequently if a change in circumstances or the occurrence of events indicates that potential impairment exists. In accordance with ASC 350, the Company elected to perform a qualitative assessment as of September 30, 2024, to determine if there were any indicators of goodwill impairment that would require a quantitative analysis to be performed. Due to the qualitative analysis, the Company determined that there were no triggering indicators of goodwill impairment during the three months ended September 30, 2024. The following table summarizes the changes in the carrying amount of Goodwill for the nine months ended September 30, 2024 (in thousands): Amount Beginning balance - January 1, 2024 $ — Goodwill recognized in connection with XTI Merger - Note 5 12,398 Foreign currency translation adjustment 340 Ending balance - September 30, 2024 $ 12,738 21 Table of Contents XTI AEROSPACE, INC. AND SUBSIDIARIES NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS FOR THE NINE MONTHS ENDED SEPTEMBER 30, 2024 AND 2023 Intangible Assets Intangible assets at September 30, 2024 and December 31, 2023 consisted of the following (in thousands): September 30, 2024 Gross Amount Accumulated Amortization Net Carrying Amount Remaining Weighted Average Useful Life Patents $ 452 $ ( 176 ) $ 276 9.7 Trade Name/Trademarks 945 ( 103 ) 842 4.5 Proprietary Technology 3,012 ( 237 ) 2,775 6.5 Customer Relationships 721 ( 79 ) 642 4.5 In-Process R&D 243 — 243 3.0 Total $ 5,373 $ ( 595 ) $ 4,778 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 nine months ended September 30, 2024 was approximately $ 0.20 million and $ 0.43 million, respectively. Amortization expense for the three and nine months ended September 30, 2023 was approximately $ 0.01 million and $ 0.02 million, respectively. Future amortization expense on intangibles assets is anticipated to be as follows (in thousands): Amount December 31, 2024 (for 3 months) $ 198 December 31, 2025 873 December 31, 2026 873 December 31, 2027 873 December 31, 2028 792 December 31, 2029 and thereafter 1,169 Total $ 4,778 22 Table of Contents XTI AEROSPACE, INC. AND SUBSIDIARIES NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS FOR THE THREE AND NINE MONTHS ENDED SEPTEMBER 30, 2024 AND 2023 Note 8 - Other Balance Sheet Information Prepaid expenses and other current assets Prepaid expenses and other current assets as of September 30, 2024 and December 31, 2023 consisted of the following (in thousands): As of September 30, 2024 As of December 31, 2023 AVX deposit - related party $ 523 $ — Prepaid insurance 460 13 Other 340 — Fulfillment costs 286 — Prepaid software 95 90 Deposits — 22 Total prepaid expenses and other current assets $ 1,704 $ 125 Inventory The Company did not hold any inventory as of December 31, 2023. Inventory as of September 30, 2024 consisted of the following (in thousands): As of September 30, 2024 Raw materials $ 33 Work-in-process 125 Finished goods 2,572 Total inventory $ 2,730 Accrued expenses and other current liabilities Accrued expenses and other current liabilities liabilities as of September 30, 2024 and December 31, 2023 consisted of the following (in thousands): As of September 30, 2024 As of December 31, 2023 Accrued transaction bonuses $ 5,782 $ — Accrued compensation and benefits 1,120 649 Accrued bonus and commissions 1,196 305 Accrued other 561 173 Total accrued expenses and other current liabilities $ 8,659 $ 1,127 23 Table of Contents XTI AEROSPACE, INC. AND SUBSIDIARIES NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS FOR THE THREE AND NINE MONTHS ENDED SEPTEMBER 30, 2024 AND 2023 Note 9 - Debt The Company's outstanding debt consisted of the following at the periods indicated (in thousands): Short-Term Debt Maturity September 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 1,419 — Promissory Note - May 24, 2024 5/24/2025 1,386 — Third Party Note Payable - 2023 12/31/2024 42 — Third Party Note Payable - 2024 12/14/2024 129 — Unamortized Discounts ( 356 ) ( 50 ) Unamortized Loan Costs — ( 35 ) Total Short-Term Debt $ 2,620 $ 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 or subsequently repaid Interest expense on outstanding debt totaled approximately $ 0.4 million and $ 0.3 million for the three months ended September 30, 2024 and 2023, respectively. Interest expense on outstanding debt totaled approximately $ 0.9 million and $ 0.8 million for the nine months ended September 30, 2024 and 2023, respectively. 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. As a result of the XTI Merger, Legacy XTI became a wholly-owned subsidiary of the Company and the outstanding subsidiary debt balance, related parent note receivable balance and accrued interest were eliminated upon the consolidation of the Company's September 30, 2024 balance sheet. Promissory Note - 2023 - related party On January 5, 2023, the Company entered into a promissory note agreement with a member of the Company's board of directors. 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. 24 Table of Contents XTI AEROSPACE, INC. AND SUBSIDIARIES NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS FOR THE THREE AND NINE MONTHS ENDED SEPTEMBER 30, 2024 AND 2023 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 a member of the Company's board of directors 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 10 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 10, pursuant to the terms of voluntary note conversion letter agreements, approximately $ 2.5 million of the note's outstanding principal balance and 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 approximately $ 0.05 million in principal, which was repaid during the second quarter of 2024, and $ 0.25 million in accrued interest which remained outstanding as of September 30, 2024. Promissory Note - May 1, 2024 On May 1, 2024 (the "Closing Date"), the Company entered into a note purchase agreement (the "Purchase Agreement") with Streeterville Capital, LLC (the "Holder"), pursuant to which the Company issued and sold to the Holder a secured promissory note (the "Note") in an initial principal amount of approximately $ 1.4 million, which is payable on or before the date that is 12 months from the issuance date. The Purchase Agreement provides that, subject to the mutual consent of the Company and the Holder, the Holder would purchase an additional secured promissory note on the date that is 30 days from the Closing Date and another secured promissory note on the date that is 60 days from the Closing Date. The initial principal amount of the Note includes an original issue discount of approximately $ 0.3 million. In exchange for the Note, the Holder paid an aggregate purchase price to the Company 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. The effective interest rate is 10.5 %. 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 outstanding balance of the Note. Beginning on the date that is six months from the issuance date and at monthly intervals 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. The Company’s obligations under the Note, the additional secured promissory note issued by the Company to the Holder on May 24, 2024 (as described below) and the other transaction documents are secured by (i) a pledge of all of the stock the Company owns in Legacy XTI and (ii) those assets owned by Legacy XTI constituting Collateral (as defined in a security agreement by and between Legacy XTI and the Holder). Additionally, Legacy XTI provided a guarantee of the Company's obligations to the Holder under the Note, the additional secured promissory note and the other transaction documents. Promissory Note - May 24, 2024 Pursuant to the terms of the 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. 25 Table of Contents XTI AEROSPACE, INC. AND SUBSIDIARIES NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS FOR THE THREE AND NINE MONTHS ENDED SEPTEMBER 30, 2024 AND 2023 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. After this period, the Company is required to make equal monthly payments 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 required to pay equal amounts 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 accrues interest at a rate of 3.75 % per annum and is paid monthly. The aggregate principal amount is due on the maturity date of June 3, 2050. Note 10 - 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 three months ended September 30, 2024, the Company sold 3,190,727 shares of common stock under the Equity Distribution Agreement at per share prices between approximately $ 0.19 and $ 0.43 , resulting in net proceeds to the Company of approximately $ 1.0 million. During the nine months ended September 30, 2024, the Company sold 12,490,930 shares of common stock under the Equity Distribution Agreement at per share prices between approximately $ 0.19 and $ 1.35 , resulting in net proceeds to the Company of approximately $ 9.6 million. Since the date of the Equity Distribution Agreement through the date of this report, the Company sold 101,704,300 shares of common stock at per share prices between approximately $ 0.06 and $ 1.86 under the Equity Distribution Agreement, resulting in gross proceeds of approximately $ 45.2 million. As of the date of this report, there was approximately $ 38.6 million in common stock gross sales remaining under 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 (the "Certificate of Designation"), on June 14, 2024, the Company obtained a written consent (the "Series 9 ATM Consent") from the Required Holders (as defined below). 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. "Required Holders" is defined in the Certificate of Designation as the holders of at least a majority of the outstanding Series 9 Preferred Stock; provided that, pursuant to that certain securities purchase agreement dated as of March 12, 2024, between the Company and 3AM Investments LLC (an entity controlled by the Company's former director and former Chief Executive Officer, Nadir Ali) (the "Purchaser"), the Purchaser 26 Table of Contents XTI AEROSPACE, INC. AND SUBSIDIARIES NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS FOR THE THREE AND NINE MONTHS ENDED SEPTEMBER 30, 2024 AND 2023 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. 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, 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 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. The following table details the notes converted into shares of Legacy XTI common stock (in thousands, except conversion price). 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 $ 2,777 $ 2,504 $ 0.265 844 $ 273 $ 3,266 Convertible Note 2017 $ 2,148 $ 2,148 $ 0.265 724 $ — $ 2,795 Convertible Note 2022 $ 682 $ 600 $ 0.265 202 $ 82 $ 464 Convertible Note 2023 $ 333 $ 300 $ 0.265 101 $ 33 $ 207 Totals $ 5,940 $ 5,552 1,871 $ 388 $ 6,732 Note Inducement: Convertible Note 2021 - Related Party To induce David Brody, a board member and founder of Legacy XTI, to convert his outstanding note balances into shares of Legacy XTI common stock, 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 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. Share Issuances At or Immediately Prior to XTI Merger Closing 27 Table of Contents XTI AEROSPACE, INC. AND SUBSIDIARIES NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS FOR THE THREE AND NINE MONTHS ENDED SEPTEMBER 30, 2024 AND 2023 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 immediately prior to the XTI Merger closing time, equal to 298,395 post merger shares of Company common stock. This share issuance to Xeriant fully settled the obligation relating to a joint venture arrangement by and between Legacy XTI and Xeriant which terminated by its terms on May 31, 2023. The obligation to issue shares to Xeriant was classified in equity as of December 31, 2023, as the share consideration became fixed once the joint venture terminated. 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 and July 5, 2024, the Company issued 2,680,459 shares valued at $ 1.2 million and 2,774,883 shares valued at $ 1.1 million, respectively, of fully vested restricted stock 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. 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 valued at $ 0.3 million 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. Note 1 1 - 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. 28 Table of Contents XTI AEROSPACE, INC. AND SUBSIDIARIES NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS FOR THE THREE AND NINE MONTHS ENDED SEPTEMBER 30, 2024 AND 2023 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 3AM Investments, LLC ("3AM"), an entity controlled by Legacy Inpixon’s former director and former Chief Executive Officer, Nadir Ali (such entity, the "Purchaser"). Pursuant to the Securities Purchase Agreement, the Purchaser purchased 1,500 shares of Series 9 Preferred Stock for a total purchase price of 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 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 The Certificate of Amendment to Designations of Preferences and Rights of Series 9 Preferred Stock (the “Certificate of Amendment”) 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 through September 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 4,625 shares of Series 9 Preferred Stock with an aggregate stated value of $ 4,856,250 (the “Preferred Shares”) for 7,196,000 shares of common stock (the “Preferred Exchange Shares”) at an effective price per share ranging from $ 0.2085 to $ 2.96 . The Company issued the 29 Table of Contents XTI AEROSPACE, INC. AND SUBSIDIARIES NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS FOR THE THREE AND NINE MONTHS ENDED SEPTEMBER 30, 2024 AND 2023 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. During the three and nine months ending September 30, 2024, the Company recognized a deemed dividend of $ 53,750 and $ 230,730 , respectively. The deemed dividends represented the excess fair value of the common shares issued over the carrying amount of the Preferred Shares and were accounted for as a reduction to additional paid-in capital. Note 12 - Stock Award Plans and Stock-Based Compensation The Company has three Employee Stock Incentive plans. The Company assumed Legacy XTI's 2017 Employee and Consultant Stock Ownership Plan (the "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"). The Company determined that activity within the 2011 Plan is not material. 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 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 September 30, 2024, there are no unallocated shares available for future grants under the 2017 Plan. 2018 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). As of September 30, 2024, there are no unvested Restricted Stock or Restricted Stock Units outstanding under 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 September 30, 2024 was 67,148,179 . As of September 30, 2024, 52,370,064 shares of common stock were available for future grant under the 2018 Plan. See below for a summary of the stock options granted under the 2011, 2017, and 2018 plans: 30 Table of Contents XTI AEROSPACE, INC. AND SUBSIDIARIES NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS FOR THE THREE AND NINE MONTHS ENDED SEPTEMBER 30, 2024 AND 2023 Number of Shares Weighted Average Exercise Price Weighted Average Remaining Contractual Life (Years) Aggregate Intrinsic Value (In millions) Beginning balance as of January 1, 2024 1,161,687 $ 17.95 6.7 $ — Legacy Inpixon stock options from merger 1,148 61.67 Granted 12,565,606 0.47 Exercised ( 92,718 ) 0.00 Expired ( 242 ) 19,043.35 Forfeited ( 853,299 ) 8.83 Ending balance as of September 30, 2024 12,782,182 $ 1.87 9.6 $ — Options vested and exercisable as of September 30, 2024 852,174 15.13 7.6 — Forfeitures during the nine months ended September 30, 2024 were primarily due to the departure of Legacy XTI's former Chief Executive Officer. The Board approved awards of options to certain Company executives under the 2018 Plan. Each option has an exercise price of $ 0.473 per share. The options will vest 1/3rd annually over three years starting from the vesting commencement date. The options expire ten years from the grant date. Options were granted as follows: Grantee Grant Date Vesting Start Date Options Granted Chief Executive Officer of XTI Aerospace, Inc. 6/12/2024 6/12/2024 2,812,500 Chief Financial Officer of XTI Aerospace, Inc. 6/12/2024 6/12/2024 1,640,625 Chief Executive Officer of the XTI Aerospace, Inc. Real-Time Location System Division 6/12/2024 6/12/2024 975,000 Chief Strategy Officer of XTI Aerospace, Inc. 9/19/2024 8/1/2024 1,171,875 Total Granted 6,600,000 The following assumptions were used in estimating the fair values of options awarded during the nine months ended September 30, 2024: Fair value of common stock $ 0.191 - $ 0.473 Exercise price $ 0.191 - $ 0.473 Expected term 10.0 years Volatility 95.06 % - 96.17 % Risk-free interest rate 3.58 % - 4.32 % Dividend yield — % 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 31 Table of Contents XTI AEROSPACE, INC. AND SUBSIDIARIES NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS FOR THE THREE AND NINE MONTHS ENDED SEPTEMBER 30, 2024 AND 2023 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. Stock-based Compensation Expense The Company incurred the following stock-based compensation charges for the periods indicated below (in thousands): For the Three Months Ended September 30, For the Nine Months Ended September 30, 2024 2023 2024 2023 Employee and consultant stock options 1 $ ( 2,159 ) $ 164 $ ( 2,075 ) $ 2,766 Professional fees 1 270 — 270 — Vesting of previously unvested warrants 2 — — 496 — Merger-related professional fees 2 — — 5,153 — Total $ ( 1,889 ) $ 164 $ 3,844 $ 2,766 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 As of September 30, 2024, the total unrecognized compensation expense related to unvested awards was $ 6.4 million, which the Company expects to recognize over an estimated weighted average period of 1.94 years. Stock-based Compensation Related to the XTI Merger Shares of Legacy XTI common stock were issued to Scott Pomeroy, Chief Executive Officer of the Company and former CFO and board member of Legacy XTI, 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 nine months ended September 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 $ 2.03 million of stock-based compensation expense included in the condensed consolidated statement of operations during the nine months ended September 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 nine months ended September 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 $ 0.24 million of stock-based compensation expense included in the condensed consolidated statement of operations during the nine months ended September 30, 2024. Note 13 - Warrants The following table summarizes the activity of warrants outstanding: 32 Table of Contents XTI AEROSPACE, INC. AND SUBSIDIARIES NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS FOR THE THREE AND NINE MONTHS ENDED SEPTEMBER 30, 2024 AND 2023 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 ( 96,659 ) Exchanged ( 1,602,630 ) Ending balance as of September 30, 2024 278,936 Exercisable as of September 30, 2024 89,780 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. As the reduction in exercise price was part of the consideration for the XTI Merger, the Company accounted for the modification as part of its purchase accounting. Warrant Exercises On March 11, 2024, Legacy XTI entered into an amendment (the “Warrant Amendment”) with Mesa Airlines ("Mesa"). The Warrant Amendment modifies the vesting criteria with respect to the shares of common stock underlying the warrant issued by the Company to Mesa pursuant to the conditional aircraft purchase contract described below. 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 Mesa, 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 nine months ended September 30, 2024, (iii) one-sixth of unvested shares lapsed on March 12, 2024, and (iv) one-third or 189,156 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, 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 second quarter of 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 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 nine months ended September 30, 2024, and (ii) reclassified to stockholders' equity (deficit) within the condensed consolidated balance sheet as of September 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. 33 Table of Contents XTI AEROSPACE, INC. AND SUBSIDIARIES NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS FOR THE THREE AND NINE MONTHS ENDED SEPTEMBER 30, 2024 AND 2023 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 nine months ended September 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 nine months ended September 30, 2024, and (ii) reclassified to stockholders' equity (deficit) within the condensed consolidated balance sheet as of September 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 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 September 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 14 - Segments The Company’s Chief Executive Officer (“CEO”), acting as the Chief Operating Decision Maker, or (“CODM”), regularly reviews and manages certain areas of its businesses, resulting in the Company identifying two reportable segments: Industrial IoT and Commercial Aviation. The Company manages and reports its operating results through these two reportable segments. This allows the Company to enhance its customer focus and better align its business models, resources, and cost structure to the specific current and future growth drivers of each business, while providing increased transparency to the Company’s shareholders. The commercial aviation segment is currently in the pre-revenue development stage and its primary activity is the development of the TriFan 600 aircraft. The Industrial IoT segment generates revenue primarily from the sale of real-time location system solutions for the industrial sector and its customers are primarily located in Germany and the U.S. As it relates to the Industrial IoT segment, the results disclosed in the table below only reflect activity following the XTI Merger closing through the September 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. 34 Table of Contents XTI AEROSPACE, INC. AND SUBSIDIARIES NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS FOR THE THREE AND NINE MONTHS ENDED SEPTEMBER 30, 2024 AND 2023 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 September 30, For the Nine Months Ended September 30, 2024 2023 2024 2023 Revenue by Segment Industrial IoT $ 918 $ — $ 2,169 $ — Commercial Aviation — — — — Total segment revenue $ 918 $ — $ 2,169 $ — Gross profit by Segment Industrial IoT $ 520 $ — $ 1,323 $ — Commercial Aviation — — — — Gross profit by Segment $ 520 $ — $ 1,323 $ — Research and Development Expenses by Segment Industrial IoT $ 609 $ — 1,361 — Commercial Aviation 619 472 1,479 1,299 Research and Development Expenses by Segment $ 1,228 $ 472 $ 2,840 $ 1,299 Income (loss) from operations by Segment Industrial IoT $ ( 1,312 ) $ — $ ( 2,788 ) $ — Commercial Aviation 1,788 ( 2,378 ) ( 7,161 ) ( 7,702 ) Loss from operations by segment $ 476 $ ( 2,378 ) $ ( 9,949 ) $ ( 7,702 ) Unallocated costs ( 4,692 ) — ( 17,071 ) — Consolidated loss from operations $ ( 4,216 ) $ ( 2,378 ) $ ( 27,020 ) $ ( 7,702 ) The following table presents total assets by reportable segment (in thousands): September 30, December 31, 2024 2023 Industrial IoT $ 21,583 $ — Commercial Aviation 1,231 509 Total assets by segment $ 22,814 $ 509 Corporate 6,469 — Total consolidated assets $ 29,283 $ 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. 35 Table of Contents XTI AEROSPACE, INC. AND SUBSIDIARIES NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS FOR THE THREE AND NINE MONTHS ENDED SEPTEMBER 30, 2024 AND 2023 Note 15 - Fair Value Measurements and Fair Value of Financial Instruments The Company measures certain financial assets and liabilities at fair value on a recurring basis. The Company determines fair value based upon the exit price that would be received to sell an asset or paid to transfer a liability in an orderly transaction between market participants, as determined by either the principal market or the most advantageous market. Inputs used in the valuation techniques to derive fair values are classified based on a three-level hierarchy. These levels are: 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. Financial instruments consist of cash and cash equivalents, accounts receivable, notes receivable, warrant asset, accounts payable, warrant liability, convertible notes, and the loan conversion derivative. Cash and cash equivalents, accounts receivable and accounts payable are stated at their respective carrying amounts, which approximate fair value due to their short-term nature. 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. The fair value of the Level 3 warrant liability was determined using a pricing model with certain significant unobservable market data inputs. Damon Motors Convertible Note On October 26, 2023, Legacy Inpixon purchased a 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 November 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 September 30, 2024 total $ 4.0 million and are included in Notes Receivable, $ 3.6 million, and Warrant asset, $ 0.4 million, on the condensed consolidated balance sheets. 36 Table of Contents XTI AEROSPACE, INC. AND SUBSIDIARIES NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS FOR THE THREE AND NINE MONTHS ENDED SEPTEMBER 30, 2024 AND 2023 The Company's assets and liabilities measured at fair value consisted of the following at the periods indicated: Fair value at September 30, 2024 Total Level 1 Level 2 Level 3 Assets: Notes receivable $ 3,601 $ — $ — $ 3,601 Warrant asset 424 — — 424 Total assets 4,025 — — 4,025 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 The table below provides a summary of changes in the estimated fair value of the Company's 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 $ — $ — $ — Change in fair value 20 — — — — Accrued interest 90 — — — — Debt discount recognition 49 — — — — Balance at September 30, 2024 $ 3,601 $ 424 $ — $ — $ — 37 Table of Contents XTI AEROSPACE, INC. AND SUBSIDIARIES NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS FOR THE THREE AND NINE MONTHS ENDED SEPTEMBER 30, 2024 AND 2023 Note 16 - 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 September 30, 2024: Revenues by geographic area $ 435 $ 622 $ — $ ( 139 ) $ 918 Operating (loss) income by geographic area $ ( 3,167 ) $ ( 1,049 ) $ — $ — $ ( 4,216 ) Net (loss) income by geographic area $ ( 3,389 ) $ ( 1,046 ) $ — $ — $ ( 4,435 ) For the Three Months Ended September 30, 2023: Revenues by geographic area $ — $ — $ — $ — $ — Operating (loss) income by geographic area $ ( 2,378 ) $ — $ — $ — $ ( 2,378 ) Net (loss) income by geographic area $ ( 2,703 ) $ — $ — $ — $ ( 2,703 ) For the Nine Months Ended September 30, 2024: Revenues by geographic area $ 758 $ 1,689 $ — $ ( 278 ) $ 2,169 Operating (loss) income by geographic area $ ( 25,146 ) $ ( 1,874 ) $ — $ — $ ( 27,020 ) Net (loss) income by geographic area $ ( 19,886 ) $ ( 1,861 ) $ — $ — $ ( 21,747 ) For the Nine Months Ended September 30, 2023: Revenues by geographic area $ — $ — $ — $ — $ — Operating (loss) income by geographic area $ ( 7,702 ) $ — $ — $ — $ ( 7,702 ) Net (loss) income by geographic area $ ( 8,897 ) $ — $ — $ — $ ( 8,897 ) As of September 30, 2024: Identifiable assets by geographic area $ 43,253 $ 23,322 $ 10 $ ( 37,302 ) $ 29,283 Long lived assets by geographic area $ 2,086 $ 3,449 $ — $ — $ 5,535 Goodwill by geographic area $ 3,142 $ 9,596 $ — $ — $ 12,738 As of December 31, 2023: Identifiable assets by geographic area $ 509 $ — $ — $ — $ 509 Long lived assets by geographic area $ 278 $ — $ — $ — $ 278 Goodwill by geographic area $ — $ — $ — $ — $ — 38 Table of Contents XTI AEROSPACE, INC. AND SUBSIDIARIES NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS FOR THE THREE AND NINE MONTHS ENDED SEPTEMBER 30, 2024 AND 2023 Note 17 - Related Party Transactions Refer to Note 9 for disclosures on related party debt transactions. David Brody, board member and founder of Legacy XTI, provided legal and strategic consulting services for the Company. During the nine months ended September 30, 2024 and 2023, amounts paid by the Company to Mr. Brody were not significant. The Company had no payables to Mr. Brody at September 30, 2024 and had accrued $ 0.3 million of fees as of December 31, 2023 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 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. Scott Pomeroy, the Company's CEO and Chairman, who was the CFO and board member of Legacy XTI up until the XTI Merger closing, provided consulting services to the Company during the nine months ended September 30, 2024 and 2023. Amounts paid to Mr. Pomeroy were not significant. As of September 30, 2024 and December 31, 2023, the Company owed Mr. Pomeroy accrued consulting compensation of $ 0.1 million, which is included in Related Party Payables within the accompanying condensed consolidated balance sheets. In addition and as disclosed in Note 12, Mr. Pomeroy was issued shares of Legacy XTI as transaction compensation immediately prior to the XTI Merger. Transactions with AVX Aircraft Company On March 25, 2024, the Company entered into a letter agreement, as amended on June 17, 2024, with AVX Aircraft Company ("AVX") whereas AVX is to provide consulting and advisory services relating to the development and design of the TriFan 600 aircraft. The Company's Chairman and CEO, Scott Pomeroy, and board member, David Brody, also sit on the Board of AVX. Additionally, as of the date of this report, David Brody owns approximately 26 % of the issued and outstanding shares of AVX. During the three and nine months ended September 30, 2024, the Company paid AVX $ 0.8 million and $ 0.9 million in consulting fees, respectively, which included advance deposits for future services. As of September 30, 2024, the deposit balance for future services was approximately $ 0.5 million, and is included in prepaid expenses and other current assets on the accompanying condensed consolidated balance sheets. Agreements with Prior "Legacy Inpixon" CEO 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. Mr. Ali, through a company of which he is a controlling member, currently holds shares of the Company's Series 9 Preferred Stock as disclosed in Note 11. 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 ("Ali Consulting Period") or until earlier termination in accordance with its terms. During the Ali Consulting Period, the Company will pay him an aggregate of $ 0.3 million. In addition, the Company shall pay Mr. Ali (a) the amount of $ 1.5 million due three months following the Closing, and (b) the aggregate amount of $ 4.5 million, payable in 12 equal monthly installments, 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 report, the Company repaid the initial $ 1.5 million owed to Mr. Ali under the Ali Consulting Agreement. During the three and nine months ended September 30, 2024, the Company recognized compensation expense of $ 1.0 million and $ 2.6 million, respectively, which is included in general and administrative expenses on the condensed consolidated statements of operations, relating to the Ali Consulting Agreement. As of September 30, 2024, the Company owed Mr. Ali accrued consulting fees of approximately $ 1.0 million, which is included in accounts payable on the accompanying condensed consolidated balance sheets. 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, and was intended to provide incentives to certain employees, including Mr. Ali, and other service providers to remain with the Company through the consummation of a qualifying transaction. As of September 30, 2024, the Company had an transaction bonus obligation of approximately $ 2.7 million payable to Mr. Ali, which is included in accrued expenses and other current liabilities on the accompanying condensed consolidated balance sheets. 39 Table of Contents XTI AEROSPACE, INC. AND SUBSIDIARIES NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS FOR THE THREE AND NINE MONTHS ENDED SEPTEMBER 30, 2024 AND 2023 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 (an entity controlled by Nadir Ali, the Company's former CEO) (“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 September 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 September 30, 2024. Note 18 - Commitments and Contingencies Litigation From time to time, the Company is subject to various claims, charges and litigation matters that arise in the ordinary course of business. The Company records a provision for a liability when it is both probable that the loss has been incurred and the amount of the loss can be reasonably estimated. If the Company determines that a loss is reasonably possible and the loss or range of loss can be reasonably estimated, it discloses the possible loss or range of loss. Any potential gains associated with legal matters are not recorded until the period in which all contingencies are resolved and the gain is realized or realizable. Depending on the nature and timing of any such proceedings that may arise, an unfavorable resolution of a matter could materially affect the Company’s future consolidated results of operations, cash flows or financial position in a particular period. Except if otherwise indicated, it is not reasonably possible to determine the probability of loss or estimate damages for any of the matters discussed below, and therefore, the Company has not established reserves for any of these matters. On December 6, 2023, 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 (the "Xeriant Matter"). On January 31, 2024, Xeriant filed an amended complaint, which added the Company as a defendant to the Xeriant Matter. On February 29, 2024, Xeriant filed a second amended complaint. The Xeriant Matter alleges that Legacy XTI has prevented Xeriant from obtaining compensation owed 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. Xeriant 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 Xeriant Matter. The case is in its early stages, no discovery with respect to the Company has occurred. The Court has not scheduled hearings for Legacy XTI’s motion 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 Xeriant Matter, 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 40 Table of Contents XTI AEROSPACE, INC. AND SUBSIDIARIES NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS FOR THE THREE AND NINE MONTHS ENDED SEPTEMBER 30, 2024 AND 2023 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. On or about August 1, 2024, Chardan Capital Markets LLC (”Chardan”) commenced an arbitration (the “Arbitration”) before FINRA against the Company and its subsidiary, XTI Aircraft Company (“Aircraft”). Aircraft and Chardan are parties to an engagement letter agreement (the “Agreement”). In the Arbitration, Chardan alleges that the Company is bound by the Agreement even though it did not sign the Agreement, which the Company denies. Chardan further alleges that Aircraft and the Company breached the Agreement by not making separate payments to Chardan of $ 200,000 , $ 94,511 , $ 484,044 and $ 174,000 . Chardan also seeks to recover unspecified amounts relating to an alleged right of first refusal to perform banking services that the Company supposedly did not honor, including with respect to an At-The-Market securities offering that was underwritten by The Maxim Group LLC. The Company and Aircraft deny that Chardan performed its duties under the Agreement and otherwise that Chardan is owed any sums under the Agreement. The Company has filed a petition in the U.S. District Court for the Southern District of New York seeking to stay the Arbitration to the extent that it has been asserted against the Company. The Company has indicated that it plans to prosecute the foregoing Petition and, if the Arbitration is not stayed, defend against the Arbitration vigorously. As of September 30, 2024, the Company has accrued $ 200,000 relating to the Agreement, which is included in accounts payable on the condensed consolidated balance sheets. 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 $ 0.2 million 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. Legacy XTI Deferred Compensation and Retention Bonus Plan In an effort to conserve cash, Legacy XTI implemented a cost savings plan, effective on July 1, 2022. As part of the cost savings plan, Legacy XTI installed a compensation reduction directive and retention bonus program impacting all employees and several current consultants. Accrued deferred compensation amounts under the cost savings plan will be repaid to participating individuals when executive management, at its sole discretion, determines that sufficient funding has been received by the Company, provided, in the case of employees, that such employees remain employed with the Company on such date. As part of the plan, Legacy XTI granted participants a retention bonus, of either cash or equity, at the participant’s discretion, equal in value to three months of their monthly deferred compensation amount, if cash, or six months of their monthly deferred compensation amount, if equity, if the employee remains with the Company at the “earn date,” which is defined as six months after the date on which the deferred compensation described above is repaid. Upon receiving additional financing during the first quarter of 2023, Legacy XTI restored the salaries of all employees to the original salary amount, effective with the semi-monthly payroll ended March 31, 2023. As of September 30, 2024, liability amounts of approximatel y $ 0.4 million and $ 0.1 million are included in accrued expenses and other current liabilities and related party payables, respectively, on the accompanying condensed consolidated balance sheets relating to deferred compensation and retention bonuses under this plan. Consulting Arrangement with Prior "Legacy Inpixon" CFO 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 41 Table of Contents XTI AEROSPACE, INC. AND SUBSIDIARIES NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS FOR THE THREE AND NINE MONTHS ENDED SEPTEMBER 30, 2024 AND 2023 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 nine months ended September 30, 2024, the Company recognized compensation expense of $ 211,063 and $ 577,880 , 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 September 30, 2024, the Company owed Ms. Loundermon accrued consulting fees of $ 522,619 , which is included in accounts payable and accrued expenses within the accompanying condensed consolidated balance sheets. Transaction Bonus Plan 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, and was intended to provide incentives to certain employees and other service providers to remain with the Company through the consummation of a qualifying transaction. During the second quarter of 2024, the Company accrued 100 % or $ 6.7 million of the transaction bonuses, which is included in general and administrative within the accompanying condensed consolidated statements of operations, as the bonuses became payable upon the earlier of the closing of financing or June 30, 2024. As of September 30, 2024, the Company had an aggregate accrued transaction bonus obligation of 5.5 million, which is included in accrued expenses and other current liabilities on the accompanying condensed consolidated balance sheets. Note 19 - Net Loss Per Share Attributable to Common Stockholders The following table presents the calculation of basic and diluted loss per share attributable to common stockholders (in thousands, except share and per share data): For the Three Months Ended September 30, For the Nine Months Ended September 30, 2024 2023 2024 2023 Net Loss $ ( 4,435 ) $ ( 2,703 ) $ ( 21,747 ) $ ( 8,897 ) Less: Preferred stock return and dividend ( 185 ) — ( 496 ) — Less: Deemed dividend ( 54 ) — ( 514 ) — Net Loss Attributable to Common Stockholders, basic and diluted $ ( 4,674 ) $ ( 2,703 ) $ ( 22,757 ) $ ( 8,897 ) Net Loss Per Share - Basic and Diluted $ ( 0.13 ) $ ( 0.66 ) $ ( 1.23 ) $ ( 2.26 ) Weighted Average Shares Outstanding, Basic and Diluted 34,986,105 4,116,700 18,439,744 3,931,075 The basic earnings per share calculation for the three months ended September 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 nine months ended September 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 September 30, 2023 and for the nine months ended September 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. 42 Table of Contents XTI AEROSPACE, INC. AND SUBSIDIARIES NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS FOR THE THREE AND NINE MONTHS ENDED SEPTEMBER 30, 2024 AND 2023 The following potentially dilutive shares were excluded from the computation of diluted net loss per share attributable to common stockholders for the periods presented, because including them would have been anti-dilutive (on an as-converted basis): For the Three Months Ended September 30, For the Nine Months Ended September 30, 2024 2023 2024 2023 Options 12,818,530 1,161,688 5,791,342 1,095,195 Warrants 278,963 163,603 457,094 142,276 Convertible preferred stock 2 — 2 — Convertible notes — 679,828 345,695 650,027 Total 13,097,495 2,005,119 6,594,133 1,887,498 Note 20 - Subsequent Events Subsequent to September 30, 2024 and through the date of this report, 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 1,725 shares of Series 9 Preferred Stock with an aggregate stated value of approximately $ 1.8 million for an aggregate 25,071,318 shares of common stock at an effective price per share ranging between $ 0.05 and $ 0.19 . Subsequent to September 30, 2024 and through the date of this report, the Company issued an aggregate 88,509,614 shares of common stock in connection with the ATM Offering at per share prices between approximately $ 0.06 and $ 0.19 , resulting in aggregate net proceeds to the Company of approximately $ 6.5 million. On July 9, 2024, 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 was provided a period of 180 calendar days, or until January 6, 2025, in which to regain compliance with the minimum bid price requirement. On November 7, 2024, the Company received another letter (the "Low Price Deficiency Letter") from Nasdaq notifying the Company that, as of November 6, 2024, the Company’s common stock had a closing bid price of $0.10 or less for ten consecutive trading days. Accordingly, the Company is subject to the provisions contemplated under Listing Rule 5810(c)(3)(A)(iii) (the "Low Priced Stocks Rule"). As a result, Nasdaq has determined to delist the Company’s securities from The Nasdaq Capital Market (the "Determination"), unless the Company requests an appeal of the Determination on or prior to November 14, 2024, pursuant to the procedures set forth in the Nasdaq Listing Rule 5800 Series. The Company requested a hearing before the Nasdaq Hearings Panel (the "Panel") to appeal the Determination and to address compliance with the Low Priced Stocks Rule. The Low Price Deficiency Letter states that hearings are typically scheduled to occur approximately 30-45 days after the date of the hearing request. The Company will be asked to provide the Panel with a plan to regain compliance, which plan the Company is in the process of preparing. The Low Price Deficiency Letter has no immediate effect on the listing of the Company’s common stock on Nasdaq and its common stock will continue to be listed on the Nasdaq Capital Market under the symbol "XTIA." While the appeal process is pending, the suspension of trading of the Company’s common stock would be stayed and the Company’s common stock would continue to trade on The Nasdaq Capital Market until the hearing process concludes and the Panel issues a written decision. There can be no assurance, however, that the Company will be successful in its appeal to the Panel or be able to regain or maintain compliance with the Nasdaq listing rules. 43 Table of Contents