PART II

UNITED STATES 
SECURITIES AND EXCHANGE COMMISSION 
Washington, D.C. 20549

FORM 1-K

ANNUAL REPORT 
PURSUANT TO REGULATION A OF THE SECURITIES ACT OF 1933

For the fiscal year ended December 31, 2018

XTI Aircraft Company 
(Exact name of registrant as specified in its charter)

Commission File Number: 24R-00007

Delaware	37-1589087
(State or other jurisdiction of incorporation or	(I.R.S. Employer Identification No.)
organization)

Centennial Airport
c/o XTI Aircraft Company 2209 Green Oaks Lane
Greenwood Village, CO 80121	80112
(Address of principal executive offices)	(Zip Code)

(303) 503-5660 
Registrant’s telephone number, including area code

Common Stock, par value $0.001 per share 
(Title of each class of securities issued pursuant to Regulation A)

TABLE OF CONTENTS

DESCRIPTION OF BUSINESS	- 1 -
MANAGEMENT’S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS	- 9 -
DIRECTORS, EXECUTIVE OFFICERS, AND SIGNIFICANT EMPLOYEES	-13 -
SECURITY OWNERSHIP OF MANAGEMENT AND CERTAIN SECURITYHOLDERS	- 16 -
INTEREST OF MANAGEMENT AND OTHERS IN CERTAIN TRANSACTIONS	- 17 -
FINANCIAL STATEMENTS FOR THE FISCAL YEARS ENDED DECEMBER 31, 2018 AND DECEMBER 31, 2017	- 20 -

In this Annual Report, references to “XTI,” “we,” “us,” “our,” or the “company” mean XTI Aircraft Company.

THIS ANNUAL REPORT MAY CONTAIN FORWARD-LOOKING STATEMENTS AND INFORMATION RELATING TO, AMONG OTHER THINGS, THE COMPANY, ITS BUSINESS PLAN AND STRATEGY, AND ITS INDUSTRY. THESE FORWARD-LOOKING STATEMENTS ARE BASED ON THE BELIEFS OF, ASSUMPTIONS MADE BY, AND INFORMATION CURRENTLY AVAILABLE TO THE COMPANY’S MANAGEMENT. WHEN USED IN THE OFFERING MATERIALS, THE WORDS “ESTIMATE,” “PROJECT,” “BELIEVE,” “ANTICIPATE,” “INTEND,” “EXPECT” AND SIMILAR EXPRESSIONS ARE INTENDED TO IDENTIFY FORWARD-LOOKING STATEMENTS. THESE STATEMENTS REFLECT MANAGEMENT’S CURRENT VIEWS WITH RESPECT TO FUTURE EVENTS AND ARE SUBJECT TO RISKS AND UNCERTAINTIES THAT COULD CAUSE THE COMPANY’S ACTUAL RESULTS TO DIFFER MATERIALLY FROM THOSE CONTAINED IN THE FORWARD-LOOKING STATEMENTS. INVESTORS ARE CAUTIONED NOT TO PLACE UNDUE RELIANCE ON THESE FORWARD-LOOKING STATEMENTS, WHICH SPEAK ONLY AS OF THE DATE ON WHICH THEY ARE MADE.

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DESCRIPTION OF BUSINESS

Background

XTI is an early-stage aircraft manufacturer that is creating a revolutionary solution for the business aviation industry. Based in Denver, Colorado, the company’s mission is to develop innovative solutions to universal business aviation problems by enabling true point-to-point air travel over long distances.

Almost 84% of organizations that use business aircraft identify reducing total trip times or reaching remote locations not served by scheduled airlines as primary reasons for using business aircraft – both dominant features of the TriFan 600.

Our vertical takeoff airplane has unique advantages over existing private airplanes which still require time-consuming trips to and from a limited number of airports, and over helicopters which fly at much slower speeds, significantly shorter distances, and in less comfort than typical business jets. We are rethinking how people travel by developing an aircraft that combines a helicopter’s ability to take off and land from almost anywhere, with the speed and range of a private jet. The TriFan 600 will offer true point-to-point travel over longer distances – greatly reducing total travel time by departing from or arriving into locations that are much closer to the customer’s point of departure and/or destination, including remote locations – almost eliminating time spent driving to and from an airport, with the potential of adding back hours to those whose time is valued by the number of meetings or destinations they can reach in a single day.

TriFan 600

The latest aircraft technology and materials have become available commercially and have advanced tremendously over the past 55 years, including advances in turboshaft engines, which make them lighter, more powerful, more reliable, and more fuel efficient, as well as advanced composite structures making aircraft lighter, and digital computer technology which greatly improves controllability. These advances, combined with the TriFan’s unique hybrid-electric propulsion system, which takes full advantage of advances in battery and electric motor technologies, and the 21st century innovation of XTI, have resulted in a fixed- wing ducted fan VTOL aircraft that the Company believes will be fully functional and practical, with competitive speed, range, and comfort for a pilot plus five passengers, and a substantial payload capability.

In designing the TriFan 600, we identified certain goals and guidelines for the performance and capabilities for the airplane, including:

• Begin with a proven fixed-wing airplane configuration (not a rotorcraft platform), and develop ducted fan technology for vertical take-off and landing, because: (a) ducted fans are safer and more compact than helicopter rotors, (b) the aircraft will be able to achieve the speed, range, comfort, and the other advantages of a fixed-wing aircraft; and (c) fixed-wing aircraft are safer and easier to operate than conventional rotorcraft.

• Use currently available components to create a hybrid-electric drive system that will result in business aircraft performance, low procurement cost, low operating cost.

• Create a sleek luxury aircraft which will seat six people, cruise at 350 miles per hour, and will have a range competitive with light turboprop fixed -wing business aircraft on one tank of fuel, and will out-perform any helicopter over distance.

• Minimize downwash from the fans so the aircraft can land and take off from existing helipads and driveways, and other paved surfaces.

• Design the aircraft with sufficient redundancy in the critical components to maximize safety and increase the likelihood of securing FAA certification.

• Incorporate the most advanced technology and materials available, including fly-by-wire, all-composite carbon-fiber airframe, computer-assisted take-off and landing, and the most advanced state- of-the-art pilot- friendly safety technologies available to maximize safety and to provide the ultimate flying experience for the pilot and passengers.

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• Design the aircraft to achieve maximum balance, control, and safety during vertical takeoff and landing and during transition to and from VTOL, through the basic location and configuration of the lifting fans and by advanced computer- assisted avionics.

• Design the aircraft’s exterior and interior to be physically/aesthetically attractive and to provide maximum comfort, luxury and convenience to the passengers.

As a result of the advances in materials, computers, engines, batteries and other technologies over the past few decades, combined with our innovative team, we accomplished all of the above objectives in the conceptual design of the TriFan 600 and are now advancing these objectives in preliminary design engineering.

Engineering and Development to Date

XTI expects that the TriFan 600 will be a fully certified, high performance, civilian fixed-wing vertical takeoff airplane. We completed initial configuration and engineering analysis for the TriFan 600 in April 2014, and are currently engaged in ground testing of our 65% scale flying prototype. Progress here has been affected by constraints on our resources. In the first quarter of 2017, we revised the propulsion system to become a hybrid-electric aircraft, with one smaller turbine engine combined with three generators, two electric motors in each of the three fans and battery power packs which will be charged by the turbine engine. We began construction of a flying, 65% scale proof of concept aircraft in 2018 which we expect to fly in the second quarter of 2019. We intend to fly a full scale proof of concept aircraft within two years of raising the first $25 million from the sale of securities. Following the full scale proof of concept, XTI will seek certification with the Federal Aviation Administration (“FAA”), which we expect will take an additional 4-5 years to complete. If the company is able to secure FAA certification of the TriFan 600 and completion of all phases up to and including commercial production, we believe that this aircraft will be the first civil, FAA-certified vertical takeoff airplane in aviation history.

Management

XTI is guided by a leadership team with decades of experience, a deep well of expertise in fixed wing and vertical takeoff and landing aircraft, and a successful track record of bringing new aircraft to market. XTI has assembled a management team that includes aviation industry executives and professionals with decades of experience from the largest fixed wing and rotary wing aircraft companies in the world. Charlie Johnson, former president and COO of Cessna Aircraft Company, is an active outside director of the company. David Brody, former CEO and Chairman of AVX Aircraft Company, is Chairman of the board, president and secretary, and the founder of XTI. Robert LaBelle, former CEO of AgustaWestland North America, is CEO and a director of the company

The company believes that this management team knows what is required to finance, design, certify and launch a program of this magnitude. This management team brings to XTI decades of sound management experience developing and executing strategic business and aircraft development plans, and technical and financial expertise, in enterprises of various scales in both helicopter and airplane markets. In their roles at Cessna, AVX, AgustaWestland, and other companies over the past 30 years, they have each designed, led and championed several new aircraft concepts and programs. Mr. LaBelle and Mr. Johnson have managed and overseen over 25 FAA certifications during their careers at AgustaWestland and Cessna.

Technology

XTI is not developing new technology; rather, the TriFan 600 is an evolution in the application of existing technology. Our proprietary patented design and configuration primarily utilizes advanced technologies, components and systems which are widely in use throughout the civil aviation industry today. As a result, most of the underlying technology is well established and understood, which we expect will reduce the risk associated with manufacturing and certifying the TriFan 600.

Over 50 years ago, the US military funded the development of vertical takeoff and landing airplanes using rotating, ducted fans, much like the TriFan 600. These included the Bell X-22 and the Doak VZ-4, which had fixed wings. Both of these planes were capable of taking off vertically, transitioning to forward flight, and then transitioning to a hover before landing vertically. However, neither of these aircraft went into commercial production because the technology available at the time limited the performance capabilities of the aircraft, making them economically unviable and difficult to operate.

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Over the past 50 years, aircraft technologies and materials have advanced significantly. Current engines are dramatically lighter, more fuel-efficient, and provide greater power performance than prior versions. Composite materials are available that allow aircraft structures to be much lighter and stronger than previously. And finally, advances in software technology allow airplanes to be controlled largely by computers, increasing controllability, reliability, and safety. All of these advanced technologies are widely used in today’s civil aviation market. By combining these technologies with our patented proprietary design in a unique and revolutionary configuration, we believe the TriFan 600 will be a commercially successful product for the business aviation market. In other words, the technology of today has caught up with the long-held idea or concept of a vertical takeoff airplane.

The Market

The business aviation market is a global market that focuses on high net worth individuals and companies as its primary customer base. These users place a significant premium on the value of their time and have demonstrated a willingness to pay for the time-saving features that private aviation can deliver. By avoiding long security lines at commercial airports and eliminating the need to arrive at least one hour prior to departure, often combined with the ability to utilize airports or landing strips that are closer to their ultimate destination, private aircraft users are able to dramatically reduce the total time of a trip. Business aircraft also offer individuals the flexibility to determine their own schedule and travel itinerary.

As a result of these time saving and convenience factors, high net worth individuals and businesses purchased an estimated 6,125 aircraft between 2004 and 2013, valued at over $161 billion according to JetNet iQ. This represents an average annual aircraft volume for light, medium and large private aircraft of approximately 612 aircraft deliveries and an annual market value of over $16 billion. JetNet iQ forecasted that this market will grow by roughly 3%-4% per year over the next twenty years.

XTI attended the National Business Aviation Association (“NBAA”) trade show in October 2017, and the Ft. Lauderdale International Boat Show in November 2017. As a result of those and other efforts, XTI has executed aircraft order agreements and taken deposits for the delivery of 76 aircraft. These existing aircraft orders represent roughly $494 million of future revenue potential and validate the demand for this revolutionary aircraft.

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. While these deposits represent the potential for roughly $494 million of future revenue, that revenue may not be earned for many years, or at all.

Total addressable market

We expect that existing owners of business aircraft will be the primary customer for the TriFan 600. While some individuals and businesses that do not currently own an aircraft will be interested in a TriFan 600, we have excluded these new owners from our analysis of the addressable market for conservatism. Among existing owners, a significant number own both airplanes and helicopters. We will focus our initial efforts on these dual owners because they have demonstrated a demand for both vertical lift capabilities and for the speed, range and comfort of a business jet. Because of the way aircraft are generally owned or titled, the number of aircraft owned by dual owners is not readily available at this time.

As reflected in the table below, there are currently over 61,000 business airplanes and helicopters in operation worldwide. North America accounts for more than half of the total existing market and annual aircraft deliveries in the world.

Region	All Jets & Turboprops		Helicopters		Total Aircraft
North America		20,955		12,224		33,179
Rest of World		11,179		16,785		27,964
Total		32,134		29,009		61,143

Source: AvData, Inc. by ARGUS International, 2014

TriFan 600 addresses primary market driver of reducing total trip time

The industry’s leading trade organization, NBAA, often reports that decisions to utilize business aviation depend on a variety of factors, including the unavailability of commercial airline service, both at the site of origin and travel destinations; the number of sites to be visited in a single day; the requirement to move vital assets rapidly; and a host of other considerations focused on traveler time savings.(1) As illustrated in the table below, reducing total transportation time amounts to 84% of reasons for why business aircraft are used. Surveys conducted by other industry sources, such as Business Jet Traveler magazine, have similarly reported that the two most important reasons readers cite for why they choose to fly privately are to save time, and for service to destinations not served by airlines.

¹ Source: 2014 NBAA Business Aviation Fact Book.

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	Related to
Primary Reason for Use of Business Aircraft	Saving Time?			Other			% of Total
Support schedules not met with scheduled airlines		X						64	%
Reach locations scheduled airlines do not serve		X						19	%
Make connections with scheduled airline flights		X						1	%
Industrial or personal security reasons					X			6	%
Other					X			10	%
Total		84	%		16	%		100	%

Source: 2014 NBAA Business Aviation Fact Book.

No traditional airplane or helicopter can fully serve the needs of executive travelers, because neither of them alone or in combination can fly its passengers directly from point A to point B with the same speed, range or operational flexibility as the TriFan 600. With TriFan 600, executive travelers will have the ability to bypass highways and runways, lifting up from any helipad or helipad-sized paved surface, and proceeding directly to their destination, they could potentially save hundreds of hours a year, achieve more, and avoid missing what’s important.

The TriFan 600 will help individuals and business executives reduce total travel time dramatically. The figure below shows how the TriFan 600 can save an executive nearly half his or her total trip time for a 500 nautical mile trip, even compared to a business jet, because of the TriFan 600’s ability to reduce or eliminate time wasted traveling to and from airports. We chose a 500 nautical mile trip as the comparison point because the average trip length for most flights in private aircraft is less than this distance, even if the aircraft is capable of going further without the need to stop to refuel.

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Sample flight illustrating how TriFan 600 enables shorter trip times

Based on the company’s estimates, TriFan 600 will be able to deliver these impressive time savings while still being able to accomplish the vast majority of flight plans flown with private aviation. The table below shows the average flight length flown in private aircraft by class of aircraft. This data was provided by ARGUS International. This clearly illustrates that the TriFan 600 can provide the range capability that most users of private aviation require. While the TriFan 600 won’t be able to accomplish all missions conducted with private aviation, we believe that our ability to cover most requirements while also improving the convenience and time savings of customers will allow us to capture a meaningful share of the existing market of over 60,000 business aircraft.

Aircraft Type	Average Trip Length (Nautical Miles)
Mid-Sized Jet	538
Light Jet	401
Turboprop	259
Turbine Helicopter	72
Piston Helicopter	52
XTI TriFan 600 Range	825

Tri-Fan is priced competitively with what business aircraft owners are paying

Currently, the only way for individuals using business aircraft to get from one place to another in a shorter period of time is by flying in a faster aircraft. Generally, the larger the size of the aircraft, the faster it can travel, and the more expensive the aircraft. Business jet owners consistently pay millions of dollars more for increased speed (among other features). However, as shown in the figure above, more speed does not always equal more time. True time savings can only be achieved by taking off vertically like a helicopter, cruising at altitudes and speeds of airplanes, and landing vertically near a final destination.

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The TriFan 600 design combines the best aspects of each platform (airplane and helicopter), enabling what the company believes will be a dramatic reduction in total trip time, at a price point that is competitive to market prices. Purchase prices for aircraft in this market can range up to $18 million, with a high correlation between speed and cost. There is a clear connection between the ability to save time through faster transportation and a willingness to pay more for this capability.

	Purchase Price Range ($MM)
Aircraft Type	Low		High
Mid-Sized Jet	$	12	$	18
Light Jet	$	4	$	11
Turboprop	$	2	$	8
Turbine Helicopter	$	4	$	10
Piston Helicopter	$	1	$	4
TriFan 600	$	6	$	8

Achievable market share

It is difficult to compare the TriFan 600 directly to existing aircraft and historical sales levels of similar aircraft because there is no aircraft with the same performance capabilities as the TriFan 600. In order to estimate the number of aircraft we believe we can sell each year, we conducted a market analysis based on the TriFan 600’s performance characteristics relative to existing alternatives.

To conduct the analysis, we identified the likely objections that buyers of a particular type of aircraft would have when considering the purchase of a TriFan 600. We then estimated what percentage of those buyer segments would object to the TriFan 600 because of each of the considerations (i.e., those that would object because it could not seat enough passengers or because it could not fly a long enough distance, etc.). This resulted in a percentage of each buyer segment that would not object to the TriFan 600 relative to aircraft in that class, leaving the expected portion of each market that we could capture.

With the potential share for each market estimated, we then analyzed market forecast data from Teal Group, an industry leading market forecasting company. This data identified the number of units, by type of aircraft, which are expected to be sold over the next several years. Applying the market share of each aircraft type we expect to capture to the number of aircraft expected to be delivered in each category per year, we estimated that we can expect to sell between 85 – 95 aircraft each year. This analysis only considered sales to civilian users, and does not include military or commercial use forecasts.

After completing our internal analysis, our management team, board of directors, aviation marketing companies and other industry participants all reviewed those findings and provided input as to the reasonableness of the company’s conclusion or expectation of selling 85-95 TriFan 600 aircraft each year. Based on the totality of the data and those conversations, we feel that this estimate is achievable. However, for the purpose of creating our business plan, we have assumed a lower more conservative number of annual aircraft deliveries.

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Production Plan and Suppliers

XTI intends to use a horizontally integrated manufacturing strategy whereby the company maintains control of all planning, design and final assembly aspects of the process, but outsources the manufacture of the vast majority of components (i.e., fuselage, engines, transmission, avionics, landing gear, etc.). XTI would only seek to design and manufacture a limited number of certain critical components, if any.

We intend to utilize the professional networks of our executive team, gained from decades of experience in the industry, to secure favorable supply agreements with leading manufactures. These suppliers will design and fabricate components to XTI’s design specifications for incorporation into a final product. The majority of these components will be largely off-the-shelf systems used in other aircraft, with only limited customization or design features that are specifically required for the TriFan 600.

Under this plan, the company intends to focus its efforts on the most critical components for our success, while enjoying cost savings from using specialists in areas that are not as critical or customized. This will also allow the company to choose between multiple suppliers, reducing any potential dependence on a small set of suppliers.

Research and Development

The company’s primary activity to date has been to conduct research and development associated with our core vertical takeoff and landing configuration for the TriFan 600. This includes the completion of our preliminary design, computational fluid dynamics, executing our patent and IP strategy, developing additional technical capabilities and analysis, and other R&D activities to determine the feasibility of our financial and technical aspects of our aircraft and program. In addition, in 2018 we began construction of our 65% scale proof of concept aircraft to test the hover and transition to forward flight capabilities of our design. We expect this aircraft to complete initial test flights in 2019. To date, the company has expended over $3.0 million on engineering, marketing, legal, and a variety of other general and administrative costs.

Employees and Consultants

The company has used and continues to use a number of consultants during our history to limit our operating expenses and allow us to scale as necessary. Currently, the company has four full-time consultants and between 10-20 part-time consultants at any given time. It does not have any full time employees. The company intends to hire a number of employees after the Regulation A offering it is currently conducting (the “Offering”) primarily to support our engineering and development efforts.

Aviation Regulations

In the U.S., civil aviation is regulated by the Federal Aviation Administration (the “FAA”), which controls virtually every aspect of flight from pilot licensing to aircraft design and construction. The FAA requires that every civilian aircraft that flies in the U.S. must carry a valid type certificate and airworthiness certificate issued by the FAA or a foreign civil aviation authority.

The company will seek to obtain approval for the design of the TriFan 600 by obtaining a standard Type Certificate under the Federal Aviation Regulations. The FAA will conduct extensive testing and analysis of the company’s TriFan 600 to determine the safety, stability, reliability and performance of the aircraft and that the aircraft complies with the applicable airworthiness standards for the TriFan 600’s category of airplane. If the TriFan 600 is approved by the FAA, XTI will be issued a type certificate for it.

The FAA also issues standard airworthiness certificates to each aircraft that is manufactured in accordance with an approved design or type certificate. Rather than test each aircraft that is built, the FAA allows manufacturers to prove that their manufacturing process and quality control system produces conforming aircraft each time. Only a company that owns a type certificate is entitled to this authorization, called a production certificate. If the FAA approves of XTI’s manufacturing process, the company will be issued a production certificate and each aircraft manufactured by XTI in accordance with the type certificate will receive an airworthiness certificate.

The process of obtaining a valid type certificate, production certificate and airworthiness certificate for the TriFan 600 will take several years. XTI is not permitted to deliver commercially produced aircraft to civilian customers until obtaining FAA certification, which effectively means that no significant revenue will be generated from civilian aircraft sales to fund operations until that time. Any delay in the certification process will negatively impact the company by requiring additional funds to be spent on the certification process and by delaying the company’s ability to sell aircraft.

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In addition to the FAA, operation of the TriFan 600 will be regulated by various state, county and municipal agencies. Specifically, flight of the TriFan 600 will be regulated by the FAA, while the ability to take off and land will be governed by the FAA and various zoning restrictions imposed by non-federal agencies in each location where an owner of the TriFan 600 intends to operate. These restrictions will vary by location and may limit the TriFan 600 to landing in already zoned areas. However, there are currently over 5,000 helipads in the U.S. where helicopters are already allowed to land. So the company expects that the TriFan 600 will also be able to land legally and safely in these locations and at thousands of other paved areas or grassy areas, as long as it’s safe and legal, as well as smaller general aviation airports unavailable to jets. Unlike jet aircraft, the TriFan 600 is not limited by runway length, clear landing approaches, and the sophistication of the electronic landing aids that serve larger general aviation airports. The TriFan 600 is both VTOL (vertical takeoff and landing) capable and STOL (short takeoff and landing capable). It will be able to take off and land from thousands of locations, thereby making the TriFan 600 much more versatile and able to use thousands of privately-owned locations in the U.S. and the world (driveways, lots, job sites, and other paved surfaces) that will not all be limited by local regulations. As a result, the company expects there will be sufficient locations for the TriFan 600 to take off and land.

Intellectual Property

We have sought to protect the intellectual property of the company through the use of patents, copyrights, trademarks, and trade secrets. Protection is supported by patent and copyright laws. Employee and third-party consultants have signed non-disclosure agreements with the company to further protect its proprietary rights. The company is continuing to develop intellectual property, and it intends to aggressively protect its position in key technologies. The company owns several trademarks protecting the company’s name and logo, as well as extensive data, engineering analyses, and other intellectual property.

The company’s patent and patent applications cover various embodiments of a vertical take-off and landing aircraft. In general terms, a “utility patent” protects the way an article is used and works, while a “design patent” protects the way an article looks. The company is seeking broad patent protection in both respects. We have been granted a design patent titled “VTOL aircraft”, also identifiable as publication number D741247. Also, US Patent 9,676,479 was issued on June 13, 2017. This utility patent covers the engineering and mechanical operation of the aircraft.

Furthermore, the company has filed several foreign patent applications where the aircraft will be sold and widely used. Legal counsel also filed a Patent Cooperation Treaty (“PCT”) application that claims priority back to the filing date for the provisional patent application. The PCT currently covers 141 countries that can be designated for protection, including a European and African patent. XTI patents have been issued in Japan and Europe. Patents are pending in Brazil, Canada and China.

David Brody, founder and Chairman of XTI, developed the TriFan 600 configuration and basic performance objectives, filed for the patents. Dr. Dennis Olcott, XTI’s former Senior Vice President for Engineering and Chief Engineer, is co-inventor on certain patent applications. Mr. Brody and Dr. Olcott have assigned all patents, patent applications and other intellectual property to XTI.

Litigation

The company settled a previous law suit, in which Answer Engineering LLC (“Answer”, partly owned by Dr. Olcott) filed a claim against the company in December 2017 alleging breach of contract for XTI’s failure to pay certain invoices, and in which XTI filed a counter claim against Answer for Answer’s breach of contract for its failure to perform various engineering services. The settlement resolved these matters and only requires XTI to pay amounts already accrued in the company’s financials.

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MANAGEMENT’S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS

The following discussion of our financial condition and results of operations should be read in conjunction with our financial statements and the related notes included in this annual report. The following discussion contains forward-looking statements that reflect our plans, estimates, and beliefs. Our actual results could differ materially from those discussed in the forward-looking statements.

General Information

The company was incorporated in October 2009. No operations occurred until the fourth quarter of 2012. Since then we have been engaged primarily in developing the design and engineering concepts for the TriFan 600 and seeking funds from investors to fund that development.

Operating Results

We have not yet generated any revenues and do not expect to do so until after receiving FAA certification for the TriFan 600. Such certification may not come until 2022 or later.

In 2017 and 2018, we received $1,420,000for a combination of deposits and convertible notes that represent orders for 76 aircraft under our Aircraft Reservation Deposit Agreement. These funds will not be recorded as revenue until the orders are delivered, which may not be for many years or at all if we do not deliver aircraft to those customers. 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.

Year Ended December 31, 2018 Compared to Year Ended December 31, 2017. Operating expenses for the year ended December 31, 2018 was approximately 20% lower than operating expenses for the year ended December 31, 2017. The principal drivers of the decrease in spending came from a decreased spending on sales and marketing and stock compensation expense included within general and administrative expenses, offset by an increase in spending on conceptual design. For instance, conceptual design costs to advance development of the TriFan 600 were increased from $635,692 to $764,944 (an increase of approximately 20%). Sales and marketing expense decreased from $327,546 to $42,334 (a decrease of approximately 87%). General and administrative costs were decreased from $2,197,250 to $1,713,100 (a decrease of approximately 22%). This decrease was the result of issuing fewer options to members of the executive management team as compensation for services in 2018 as compared to 2017. We continue to prioritize our conceptual design costs to reach the next phase of development of the TriFan 600.

Interest expense for this time period increased from $58,247 to $1,237,028 as we continued to rely on loan financing from related parties (discussed below). Included in this amount is a non-cash interest expense of $1,080,631 associated with a beneficial conversion feature attached to a convertible note.

As a result, our net loss for the year ended December 31, 2018 was $3,798,753 as compared to a net loss of $3,192,836 for the period ended December 31, 2017, an increase of approximately 19%. Our accumulated deficit at December 31, 2018 was $9,100,649.

Liquidity and Capital Resources

December 31, 2018. As of December 31, 2018, we had cash of $556,847 and a working capital deficit of $1,794,032 as compared to cash of $436,973 and a working capital deficit of $1,930,694 at December 31, 2017. Additional current assets include $86,885 held in escrow from the sale of securities under the Regulation A Offering.

For the year ended December 31, 2018, we funded our operations primarily through the sale of Common Stock to investors under Regulation A. These sales accounted for net proceeds of $327,739. We also issued $715,000 in new convertible notes and sold $331,900 of common stock securities outside of the Regulation A offering. We also repaid $36,888 in net borrowings under a revolving line of credit of up to $250,000 entered into between the company and our founder, Mr. Brody as of January 1, 2016. Borrowings under the credit revolver accrue interest at a rate of 3.0% per annum.

Included in the current liabilities are convertible notes issued to related parties. Of the $1,806,929 related party note liability, $763,176 is owed to David Brody. The convertible note has a principal amount of $763,176 and accrued interest at a rate of 3.0% per annum. The convertible note has different maturity dates contingent upon the company securing different levels of investment from third parties. Mr. Brody has the right to receive repayment of the note upon maturity in either cash or in shares of common stock of the company. The loan with Mr. Brody is included as Exhibit 6.9 to this annual report. The company also received loans from Jeffrey Pino, who has since passed away. The notes have a principal amount of $97,268 and bear interest at a rate of 3.0% per annum. The loans with Mr. Pino are included in Exhibits 6.10 and 6.11 to this annual report. The company also received a loan from Robert Denehy in exchange for a convertible promissory note. The convertible note has a principal amount of $500,000 and bears interest at a rate of 10.0% per annum. In October 2018, the principal and accrued interest on this note (totaling $550,000) plus an additional $165,000 of new cash were combined into a new convertible note with a principal balance of $715,000. The original convertible note with Mr. Denehy was cancelled as part of this new note. The remaining note bears interest at a rate of 10.0% per annum. The convertible note with Mr. Denehy is included in Exhibit 6.14 to this annual report and is more fully described below in “Interest of Management and Others in Certain Transactions.” The company also received a loan from Saleem Zaheer, a consultant and shareholder of the company, in exchange for a convertible note. The note has a principal amount of $30,000 and bears interest at a rate of 10.0% per annum. The loan with Mr. Zaheer is included in Exhibit 6.15 to this annual report.

Currently, the company requires additional capital to continue operations. If we do not receive funding from private investors or our Regulation A Offering, we anticipate that the company will run out of funding in the third quarter of 2019 based on our current cash balance and burn rate.

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Plan of Operations

The company has developed a detailed plan to complete its preliminary design phase, hire key members of its management team, expand sales and marketing efforts and complete detailed design and development work to support the completion of a 65% scale and production of a full scale flying proof of concept aircraft. The 65% scale prototype is currently in production and is expected to complete its first flight in 2019. The full scale aircraft is expected to take approximately 2.0 years to produce and the company will require $25 million in total funding during this period. Once the full scale proof of concept has been completed and demonstrated, the company will seek FAA certification for the TriFan 600 and begin preparations for production and manufacturing of the aircraft. The exact time and cost to secure FAA certification and commence production is not known, but we estimate that it will take 4 to 5 years and require at least $175 million in additional funding after completion of the proof of concept.

Investors will note that the above plan is a significant change from our original plan. Our original plan called for a 6 to 8 year timeline and a total cost of more than $400 million. The new plan requires half of the total funding and can be accomplished in a shorter timeframe. The switch to a hybrid-electric propulsion system has yielded significant savings in the engineering and development that will be required to build and certify the aircraft. This change has also reduced the expected sale price of the aircraft from approximately $12 million to only $6.5 million. The company will still be able to achieve the same profit margins at this lower price. We believe this change in expected sale price will expand the potential market for our aircraft. We believe the combination of the lower total cost of development and the expanded market potential increases the probability of successfully developing, funding and flying the TriFan 600.

With the receipt of sufficient financing, we will continue to focus our resources on four key areas: (i) hiring key members of the management team; (ii) pursuing additional funding; (iii) continuing development of the aircraft; and (iv) expanding sales and marketing to enable the company to take refundable customer deposits. With the $1,438,590 received during 2018 from the sale of Common Stock under Regulation A, common stock directly to investors and the issuance of convertible notes combined with the issuance of options to management and key vendors, we moved forward in each effort in 2018.

We will continue our design and development efforts by engaging key supply partners to assist in the creation of both the 65% scale and full scale proof of concept aircraft. These aircraft will help to identify and solve potential challenges in certain critical path systems of the aircraft including the engines, batteries, transmission and fly-by- wire system. Key milestones for this process will include:

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	Complete and fly the 65% scale proof of concept aircraft
•	Initiate dialogue with vendors of key components of the full scale proof of concept aircraft

• Commission and complete trade studies

• Complete preliminary design of critical path systems

• Complete and fly the aircraft

We will continue to develop an internal and external sales and marketing capability to increase awareness of the aircraft and position the company to continue taking refundable customer deposits and pre-sales orders. This will be accomplished with the following milestones:

• Continue existing sales and marketing efforts

• Build and fly a subscale airplane

• Attend and exhibit at major international trade shows

• Receive additional refundable, escrowed deposit orders for the TriFan 600

We believe that increasing awareness of the aircraft and demonstrating customer demand through orders will enable the company to raise additional capital in the future more easily. To date, the company has received orders and deposits for 76 aircraft representing almost $494 million of future revenue. However, this revenue may not be earned for many years, or at all if customers cancel their deposits or we do not deliver aircraft to those customers.

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The milestones identified above assume that we are able to raise the full amount we are seeking to raise in our Regulation A offering of $22.5 million. In that event, the company would expect to accomplish all of the above milestones within the first 24 months. However, we have developed our spending plans in each of these areas to be scalable to the amount of money that we raise from investors. We will need additional capital to complete our development of the proof of concept and beyond as discussed above and are pursuing multiple options for such funding, rather than relying on one source. We believe funding will come from a combination of short-term and long-term sources, including potential industry partners and suppliers.

Despite funding levels below our target, the company was able to accomplish several significant milestones in 2018, including:

· Initiated production of our 65% scale proof of concept aircraft and progressed that process to be ready to conduct test flights in the second quarter of 2019

· Attended multiple tradeshows both domestically and internationally to secure additional orders for the aircraft

· Secured additional orders for 18 aircraft representing an additional ~$114 million in future revenue above and beyond the 58 aircraft reservations representing $380 million in future revenue secured in 2017.

· Continued dialogue with multiple industry participants and potential vendors for key components

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DIRECTORS, EXECUTIVE OFFICERS, AND SIGNIFICANT EMPLOYEES

XTI has assembled an experienced management team including aviation industry executives and professionals with decades of experience from the largest fixed wing and rotary wing aircraft companies in the world. Charlie Johnson, former president and COO of Cessna Aircraft Company (from 1997-2003), is an outside director of the company. David Brody, founder and former CEO and Chairman of AVX Aircraft Company (from 2005-2013), is Chairman of the Board, president, secretary, and the founder of XTI. Robert LaBelle, former CEO of AgustaWestland North America (from 2013-2017), is CEO and director.

The table below lists our directors and executive officers, their ages as of February 28, 2019 and the date of their first appointment to such positions. Each position is currently held with an indefinite term of office.

Name	Position	Age	Date of First Appointment
Executive Officers
David Brody	Founder, Chairman, President and Secretary	70	October, 2009
Robert J. LaBelle	Chief Executive Officer	63	February, 2017
Andrew Woglom	Chief Financial Officer and Chief Accounting Officer	41	December, 2014
Directors
David Brody	Director	70	October, 2009
Charles Johnson	Director	76	December, 2014
Robert J. LaBelle	Director	63	February, 2017
Paul Willard	Director	49	June, 2017
Robert Denehy	Director	62	October 2017

Executive Officers

David Brody, founder and Chairman of XTI. Mr. Brody has had a life-long passion for aircraft, science and technology. Beginning in 2012, he developed the Tri-Fan configuration and basic performance objectives, organized XTI as a Delaware corporation, and filed for patents. After developing the company’s basic strategic plan, he recruited XTI’s Board members and executive and engineering team. Mr. Brody was also the founder of an advanced technology helicopter company in 2005 (AVX Aircraft Company), and served as Chairman and CEO of AVX, and remains on the AVX board. He has practiced law in Denver with Hogan Lovells US LLP from January 2013 to the present. Prior to that time he was a partner in Patton Boggs, LLP, another international law firm, for 14 years. He has several patents issued in his name for inventions in aircraft technology and other fields, and has written three books, including a national Book-of-the-Month Club best seller on science and technology, “The Science Class You Wish You Had, The Seven Greatest Scientific Discoveries in History and the People Who Made Them” (Putnam Berkeley, New York 1997, 2nd edition, 2013). The company has not yet determined whether, after the company receives financing under this Offering, Mr. Brody will become a full-time or part-time consultant or employee of the company.

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Robert J. LaBelle, Chief Executive Officer. Mr. LaBelle joined XTI as its Chief Executive Officer in February 2017 after spending the prior three years as CEO of AgustaWestland North America. Prior to that, Mr. LaBelle served as President of AgustaWestland Tiltrotor Company, the company supporting development of the AW 609 Tiltrotor. He joined AgustaWestland in 2004 after a career in the U.S. Navy where he was program manager for several aircraft, including the E-2 Hawkeye, C-2 Greyhound, F/A-18 Foreign Military Sales, and S-3B Viking.

Andrew Woglom, Chief Financial Officer and Chief Accounting Officer of XTI. Mr. Woglom has diverse experience in investment banking, private equity and operations. From 2009 to 2013, he was Chief Financial Officer for the NEK group of companies (NEK), an international portfolio of businesses spanning aviation, defense contracting, construction, software development start-ups and real estate holdings. He led NEK’s stockholders through a successful exit in 2012. From 2013 to present, Mr. Woglom has worked as a consultant, assisting clients with strategic planning, operational improvements, M&A transactions and capital raising. Prior to NEK, he was a Vice President at Gallagher Industries from 2004 to 2009, a Denver based private equity firm. Before that, from 2000 to 2004, he spent several years in New York in investment banking at both Tri Artisan Partners and at Lehman Brothers. In addition to his role at XTI, he is currently (and has been for the past six years) the principal of Acuity Advisors, LLC, a CFO and advisory services company offering strategic guidance in accounting and finance to clients. After the company receives financing, it is not yet known whether Mr. Woglom will become a full-time or part-time consultant or employee of the company.

Directors

Charles B. Johnson, Director. Mr. Johnson is an aviation executive and pilot with over 40 years of experience. He served as President and COO of Cessna Aircraft Company from 1997 to 2003. He joined Cessna in 1979 as Manager of Production Flight Test and subsequently held positions as the Senior Vice President of Aircraft Completion and Product Support and Executive Vice President of Operations. Prior to joining Cessna, Mr. Johnson served as Chief of Production Flight Test for Gates Learjet. He began his aviation career after completing U.S. Air Force pilot training in 1968 as an F-105 pilot, and accumulated over 1,000 hours of military flight time in the F-105, serving in combat in Southeast Asia. Previously he was chief pilot for Arnold Palmer. In addition to being a board member of XTI since 2014, for the past three years up to the present he has been the President and COO of Aero Electric Aircraft Corporation. He holds Airline Transport and Instructor Pilot Certificates with type ratings in all Cessna Citation models.

Mr. Paul Willard, Director. Paul Willard is a Silicon Valley Engineer and Tech Investor. Paul has served as a Partner at two venture capital funds, Subtraction Capital and Storm Ventures. He helped start Subtraction Capital, where he focused on being very involved with the startups that the fund invested in, mentoring across product, engineering and marketing efforts.  For 14 years prior to being an investor, Paul was a product and marketing executive at 4 tech startups. He was Chief Marketing Officer at Atlassian and Practice Fusion, head of product and marketing at Coupons.com, and Director of Product Management at NextCard.  Through these efforts, he gained extensive experience building and marketing hyper-growth web and mobile applications for large-scale markets. He began his career as an Aerodynamics Engineer for more than six years at The Boeing Company, acquiring critical skills in aircraft design, data analysis, and testing.  His work included commercial and military aircraft as well as VTOL and autonomous aircraft.  He has more than 25 years of technology experience in product design, analysis and distribution. Mr. Willard holds a Bachelor of Science in Aerospace Engineering from Iowa State University, a Masters of Science in Manufacturing Systems Engineering from Stanford University, and an E.M.B.A. from Singularity University.

Robert Denehy, Director. Mr Denehy is the General Manager of Aerogulf Services, a commercial helicopter operator and maintenance facility located in Dubai. Mr. Denehy has been with Aerogulf Services since July 1995. At Aerogulf, Mr. Denehy oversees all engineering and operations for a company that provides support to offshore oil and gas operations in the United Arab Emirates and throughout North Africa. Prior to Aerogulf, Mr. Denehy served as a US Air Force Intelligence Officer.

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Significant Employees

The company has four full-time consultants and many part-time consultants. It does not presently have any full time employees. To conduct its operations to date, XTI has engaged several teams of experienced engineering consulting companies and various other contractors with extensive knowledge and experience in the aerospace industry to assist with development and marketing of the TriFan 600 and to assist with FAA certification issues, as well as financing and strategic planning. The company anticipates that it will hire a number of full-time personnel as employees after completion of the Offering.

Compensation of Directors and Executive Officers

The following table sets forth information about the annual compensation of each of our three highest-paid persons who were directors or executive officers during our last completed fiscal year.

Name	Capacities in which compensation was received	Cash compensation ($)		Other compensation ($)		Total compensation ($)
David Brody	Chairman		-0-		-0-		-0-
Charlie Johnson	Director		-0-		-0-		-0-
Robert LaBelle	Director and CEO		225,000		-0-		225,000

Compensation of Directors

For the fiscal year ended December 31, 2018, we did not provide any cash compensation to any of our directors. We do not compensate our directors for attendance at meetings. We reimburse our officers and directors for reasonable expenses incurred during the course of their performance. We have no long-term incentive plans. However, such directors have received equity in lieu of compensation for their board service.

Compensation of Mr. LaBelle

Under its consulting agreement with Robert J. LaBelle, the company provided Mr. LaBelle cash compensation of $25,000 per month through December 31, 2018. Mr. LaBelle, has also been granted stock options equal to 3% of the outstanding shares of the company, on a fully-diluted basis. The consulting agreement also includes certain cash and equity bonus provisions tied to the performance of the company and its fundraising activities.

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SECURITY OWNERSHIP OF MANAGEMENT AND CERTAIN SECURITYHOLDERS

Set forth below is information regarding the beneficial ownership of our common stock, our only outstanding class of capital stock, as of December 31, 2018 by (i) each person whom we know owned, beneficially, more than 10% of the outstanding shares of our common stock, and (ii) all of the current officers and directors as a group. We believe that, except as noted below, each named beneficial owner has sole voting and investment power with respect to the shares listed. Unless otherwise indicated herein, beneficial ownership is determined in accordance with the rules of the Securities and Exchange Commission, and includes voting or investment power with respect to shares beneficially owned.

Name and address of beneficial owner (1)	Amount and nature of beneficial ownership (2)		Amount and nature of beneficial ownership acquirable		Percent of class (3)
David Brody		25,000,000		-0-		65.0	%
Estate of Jeffrey Pino		4,347,826		-0-		11.3	%
All directors and officers as a group (6 persons)		27,355,072		-0-		71.1	%

(1) The address of those listed is c/o XTI Aircraft Company, 2209 Green Oaks Lane, Greenwood Village, CO 80121.

(2) Unless otherwise indicated, all shares are owned directly by the beneficial owner.

(3) Based on 38,476,770 shares outstanding as of December 31, 2018.

It should be noted that Mr. Brody, along with two other current shareholders who have each held shares in the company for over three years, are exploring the possibility of undertaking resales of a small portion of their shares in one or more private secondary market sales. If any such sale occurs, the number of shares to be sold by Mr. Brody or the two other shareholders, would not exceed 12 percent of their current ownership. For example, if Mr. Brody sold 12 percent of his shares, he would continue to hold 22,000,000 shares of the company’s common stock.

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INTEREST OF MANAGEMENT AND OTHERS IN CERTAIN TRANSACTIONS

David Brody’s Consulting Agreement and Convertible Note

Mr. Brody’s consulting agreement with the company provides that if and when the company receives $20 million or more in investments from third parties (excluding further investment from Mr. Brody), he will receive compensation totaling $240,000 in recognition of his services as Chairman, President and Secretary performed between January 1, 2014 and December 31, 2015.

In addition, Mr. Brody is the holder of a convertible promissory note from the company (the “Brody Note”) in the principal amount of $763,176. Under the Brody Note, the note will partially or fully mature and shall be due and payable ten days after the company receives investment from investors (excluding investments from Mr. Brody) in this Offering or other offerings as follows:

• $250,000 matures once the company receives at least $5.0 million from investors;

• $250,000 matures once the company receives at least $10.0 million in total from investors; and

• $263,176 matures once the company receives at least $15.0 million in total from investors.

Mr. Brody has the option to receive repayment under the note in cash or in common stock of the company. If the note is repaid in stock, the stock will be issued using a pre-money valuation of $35.0 million.

We have assumed that Mr. Brody will receive cash payments totaling $1,003,176 if the maximum offering is achieved, representing repayment of the convertible note and payment of the consulting agreement. Mr. Brody will not receive any cash payments for the above agreements unless we raise at least $5 million.

Robert LaBelle’s Consulting Agreement

Mr. LaBelle’s consulting agreement with the company, effective February 1, 2017, provided for certain bonus payments upon the event of the company raising specific amounts of equity and debt financing, along with regular cash compensation. The compensation terms provide for payments of $25,000 per month through December 31, 2018. None of the bonus amounts were earned under this prior agreement. Effective January 1, 2019, the company entered into a new consulting agreement with Mr. LaBelle that includes payments of $25,000 per month through December 31, 2019, unless extended by mutual agreement of the parties. The agreement is to be supplemented by bonus payments in the following amounts:

• $150,000 and additional stock options equal to 1% of the then outstanding shares of the company upon raising $3,000,000 by December 31, 2019;

• $150,000 and additional stock options equal to 1% of the then outstanding shares of the company upon raising $3,000,000 above the previously-raised $3,000,000 by March 31, 2020;

• $250,000 and additional stock options equal to 1% of the then outstanding shares of the company upon raising $9,000,000 above the previously-raised $6,000,000 by December 31, 2020

• $500,000 and additional stock options equal to 2% of the then outstanding shares of the company upon raising $25,000,000 above the previously-raised $15,000,000 by December 31, 2021;

• Additional stock options equal to 2% of the then outstanding shares of the company upon the company raising a total of $75,000,000

David Brody’s Revolving Credit Promissory Note

As of January 1, 2016, the company entered into a revolving line of credit with Mr. Brody. The line of credit provides that the company may draw up to $250,000 from Mr. Brody with monthly interest charged on any unpaid outstanding balance in the amount of 3.0% per annum. As of December 31, 2018, the balance on the revolving line of credit was $143,175.

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Jeff Pino’s Convertible Notes

Mr. Pino’s estate is the holder of two convertible demand promissory notes from the company (the “Pino Notes”) in the principal amount of $47,268 and $50,000, respectively. The Pino Notes do not carry a maturity date, but Mr. Pino’s estate can request repayment of the notes at any time. In addition, Mr. Pino’s estate can elect to have all or any portion of the notes repaid in common stock of the company using the good faith estimated value of the company (as agreed between the company and Mr. Pino’s estate) to determine the number of shares to be issued as repayment. In February 2019, the company reached an agreement with Mr. Pino’s estate to retire the outstanding Pino Notes in exchange for cash and the return of 2,347,826 shares of Common Stock held by the estate.

Consulting Agreement with Acuity Advisors

Mr. Woglom is currently the principal for Acuity Advisors, LLC, a strategy and finance consulting company. The company has engaged Acuity Advisors to provide certain CFO and financial consulting services in support of the company. For the year ended December 31, 2018 and 2017, the Company paid this vendor $37,482 and $29,370, respectively. The Company owed this vendor $34,500 and $46,000 as of December 31, 2018 and December 31, 2017, respectively.  

Robert Denehy’s Consulting Agreement and Convertible Note

Mr. Denehy’s consulting agreement with the company, effective October 25, 2017, provides for certain payments upon the event of the company raising equity and debt financing from investors introduced to the company solely by Mr. Denehy. Mr Denehy will receive compensation based upon the amount of financing actually received from investors introduced by him alone of: 

· Cash compensation equal to 2.0% of the cash received by the company

· Options or shares equal to 2.0% of the cash received by the company. The number of shares will be calculated using the same price per share actually paid by the investor.

In addition, Mr. Denehy is the holder of a convertible promissory note from the company (the “Denehy Note”) in an original principal amount of $500,000 and that bears an interest rate of 10.0% per annum. In October 2018, the principal and accrued interest on this note (totaling $550,000) plus an additional $165,000 of new cash were combined into a new convertible note with a principal balance of $715,000. The original convertible note with Mr. Denehy and the warrants issued under such note were cancelled as part of this new note. The remaining note bears interest at a rate of 10.0% per annum. Under the Denehy Note, the note will mature and shall be due and payable on November 1, 2023. Mr Denehy may elect to convert all or a portion of the principal amount of the note into shares of the company at a conversion price of $1.00 per share. The Denehy Note also included warrants for 214,500 shares of common stock with an exercise price of $1.50 per share.

Future Transactions

All future affiliated transactions will be made or entered into on terms that are no less favorable to us than those that can be obtained from an unaffiliated third party. A majority of the independent, disinterested members of our board of directors will approve future affiliated transactions, and we will maintain at least two independent directors on our board of directors to review all material transactions with affiliates.

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OTHER INFORMATION

Changed in Issuer’s Certifying Accountant

In March 2019, the company engaged Artesian CPA to serve as the principal accountant to audit the company’s financial statements. The engagement with Artesian CPA was approved by the company’s CEO and directors in an informal action. Prior to the engagement, the company did not consult with Artesian CPA about the application of accounting principles or express any disagreements in regard to the previous work performed by EKS&H LLLP.

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FINANCIAL STATEMENTS FOR THE FISCAL YEARS ENDED DECEMBER 31, 2018 AND DECEMBER 31, 2017 

The balance sheet of XTI Aircraft Company as of December 31, 2018 and the statements of operations, changes in stockholders' deficit, and cash flows for the year then ended of XTI Aircraft Company have been included in this Annual Report with the Independent Auditor's Report of Artesian CPA, LLC, independent certified public accountants, and upon the authority of said firm as experts in accounting and auditing.

In addition, the balance sheet of XTI Aircraft Company as of December 31, 2017 and the statements of operations, changes in stockholders' deficit, and cash flows of XTI Aircraft Company for that fiscal year, have been included in this Annual Report as they were when previously filed with the Independent Auditor's Report of EKS&H LLLP dated April 27, 2018.

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XTI Aircraft Company

Financial Statements

and

Independent Auditor’s Report

December 31, 2018 and 2017

- 21 -

xti aircraft company

Table of Contents

	Page
Independent Auditor’s Report	23
Financial Statements:
Balance Sheets	25
Statements of Operations	26
Statements of Changes in Stockholders’ Deficit	27
Statements of Cash Flows	28
Notes to Financial Statements	29

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To the Board of Directors of

XTI Aircraft Company

Englewood, Colorado

INDEPENDENT AUDITOR’S REPORT

Report on the Financial Statements

We have audited the accompanying financial statements of XTI Aircraft Company (the “Company”) (a Delaware corporation), which comprise the balance sheet as of December 31, 2018, and the related statements of operations, changes in stockholders’ deficit, and cash flows for the year then ended, and the related notes to the financial statements.

Management’s Responsibility for the Financial Statements

Management is responsible for the preparation and fair presentation of these financial statements in accordance with accounting principles generally accepted in the United States of America; this includes the design, implementation, and maintenance of internal control relevant to the preparation and fair presentation of financial statements that are free from material misstatement, whether due to fraud or error.

Auditor’s Responsibility

Our responsibility is to express an opinion on these financial statements based on our audit. We conducted our audit in accordance with auditing standards generally accepted in the United States of America. Those standards require that we plan and perform the audit to obtain reasonable assurance about whether the financial statements are free from material misstatements.

An audit involves performing procedures to obtain audit evidence about the amounts and disclosures in the financial statements. The procedures selected depend on the auditor’s judgment, including the assessment of the risks of material misstatement of the financial statements, whether due to fraud or error. In making those risk assessments, the auditor considers internal control relevant to the entity’s preparation and fair presentation of the financial statements in order to design audit procedures that are appropriate in the circumstances, but not for the purpose of expressing an opinion on the effectiveness of the entity’s internal control. Accordingly, we express no such opinion. An audit also includes evaluating the appropriateness of accounting policies used and the reasonableness of significant accounting estimates made by management, as well as evaluating the overall presentation of the financial statements. We believe that the audit evidence we have obtained is sufficient and appropriate to provide a basis for our audit opinion.

Artesian CPA, LLC

1624 Market Street, Suite 202 | Denver, CO 80202

p: 877.968.3330 f: 720.634.0905

info@ArtesianCPA.com | www.ArtesianCPA.com

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Opinion

In our opinion, the financial statements referred to above present fairly, in all material respects, the financial position of XTI Aircraft Company as of December 31, 2018, and the results of its operations and its cash flows for the year then ended, in accordance with accounting principles generally accepted in the United States of America.

Emphasis of a Matter

The accompanying financial statements have been prepared assuming that the Company will continue as a going concern. As described in Note 1 to the financial statements, the Company has not generated revenues or profits since inception, has negative cash flows from operations, has sustained a net loss of $3,798,753 for the year ended December 31, 2018, has an accumulated deficit of $9,100,649 as of December 31, 2018, and has limited liquid assets with $556,847 of cash while having $2,437,764 of current assets as of December 31, 2018. These factors, among others, raise substantial doubt about the Company’s ability to continue as a going concern. Management’s plans in regard to these matters are also described in Note 1. The financial statements do not include any adjustments that might result from the outcome of this uncertainty. Our opinion is not modified with respect to this matter.

Other Matter

The accompanying financial statements of XTI Aircraft Company as of December 31, 2017 and for the year then ended were audited by a predecessor auditor. The predecessor auditor issued an unqualified opinion dated April 27, 2018 on the financial statements as of December 31, 2017 and for the year then ended. The predecessor auditor included an emphasis of a matter paragraph in its opinion related to the existence of substantial doubt as to the Company’s ability to continue as a going concern.

/s/ Artesian CPA, LLC

Denver, Colorado

May 6, 2019

Artesian CPA, LLC

1624 Market Street, Suite 202 | Denver, CO 80202

p: 877.968.3330 f: 720.634.0905

info@ArtesianCPA.com | www.ArtesianCPA.com

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xti aircraft company

Balance Sheets

	December 31,
	2018			2017
Assets
Current assets:
Cash	$	556,847		$	436,973
Escrow receivable		86,885			65,503
Total current assets		643,732			502,476
Non-current assets:
Patent, net		197,720			91,940
Trademarks		7,518			7,518
Total non-current assets		205,238			99,458
Total assets	$	848,970		$	601,934
Liabilities and Stockholders’ Deficit
Current liabilities:
Accounts payable	$	432,262		$	139,684
Accounts payable - related party		448,909			527,809
Accrued interest		120,502			77,944
Customer deposits		175,000			75,000
Convertible notes - related party, current portion		890,444			1,281,866
Revolving line-of-credit - related party		143,175			180,063
Warrant liability		227,472			150,804
Total current liabilities		2,437,764			2,433,170
Long-term liabilities:
Convertible notes - related party, net of current portion, net of unamortized discount of $348,515 and $0 as of December 31, 2018 and 2017, respectively		916,485			-
Total liabilities		3,354,249			2,433,170
Commitments and contingencies
Stockholders’ deficit:
Common stock, $0.001 par value, 100,000,000 shares authorized at December 31, 2018 and 2017, 38,476,770 and 37,455,017 shares issued and outstanding, respectively		38,477			37,445
Additional paid-in capital		6,556,893			3,433,215
Accumulated deficit		(9,100,649	)		(5,301,896	)
Total stockholders’ deficit		(2,505,279	)		(1,831,236	)
Total liabilities and stockholders’ deficit	$	848,970		$	601,934

See Independent Auditor’s Report and notes to financial statements.

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xti aircraft company

Statements of Operations

	For the Years Ended
	December 31,
	2018			2017
Operating expenses:
Conceptual design	$	764,944		$	635,692
Sales and marketing		42,334			327,546
General and administrative		1,713,100			2,197,250
Total operating expenses		2,520,378			3,160,488
Operating loss		(2,520,378	)		(3,160,488	)
Other expense:
Change in value of warrant		(41,347	)		25,899
Interest Expense		(93,801	)		(40,102	)
Interest Expense – beneficial conversion feature		(1,080,631	)		-
Interest expense – discount accretion		(62,596	)		(18,145	)
Total other expense		(1,278,375	)		(32,348	)
Net loss	$	(3,798,753	)	$	(3,192,836	)
Weighted average common shares outstanding during the year		38,092,290			37,445,017
Net loss per common share – basic and diluted	$	(0.10	)	$	(0.09	)

See Independent Auditor’s Report and notes to financial statements.

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xti aircraft company

Statements of Changes in Stockholders’ Deficit

For the Years Ended December 31, 2018 and 2017

	Common Stock				Additional			Accumulated			Total Stockholders'
	Shares		Amount		Paid-In Capital			Deficit			Deficit
Balance at December 31, 2016		36,428,839	$	36,429	$	678,270		$	(2,109,060	)	$	(1,394,361	)
Issuance of shares through Reg A offering		378,178		378		377,800			-			378,178
Issuance of shares for compensation		513,000		513		512,487			-			513,000
Issuance of common stock		125,000		125		124,875			-			125,000
Stock-based compensation - options		-		-		1,678,301			-			1,678,301
Warrants issued with convertible debt		-		-		126,723			-			126,723
Offering costs		-		-		(65,241	)		-			(65,241	)
Net loss		-		-		-			(3,192,836	)		(3,192,836	)
Balance at December 31, 2017		37,445,017	$	37,445	$	3,433,215		$	(5,301,896	)	$	(1,831,236	)
Issuance of shares through Reg A offering ($1.00)		319,863		320		319,543			-			319,863
Issuance of shares through Reg A offering ($1.50)		66,655		67		99,916			-			99,983
Issuance of shares for compensation		313,335		313		359,690			-			360,003
Issuance of common stock		331,900		332		320,342			-			320,674
Stock-based compensation - options		-		-		558,505			-			558,505
Stock-based compensation - warrants		-		-		198,720			-			198,720
Warrants issued with share issuance		-		-		11,226			-			11,226
Warrants issued with convertible debt		-		-		302,533			-			302,533
Beneficial conversion feature on convertible debt		-		-		1,080,631			-			1,080,631
Offering costs		-		-		(127,428	)		-			(127,428	)
Net loss		-		-		-			(3,798,753	)		(3,798,753	)
Balance at December 31, 2018		38,476,770	$	38,477	$	6,556,893		$	(9,100,649	)	$	(2,505,279	)

See Independent Auditor’s Report and notes to financial statements.

- 27 -

XTI AIRCRAFT COMPANY 

Statements of Cash Flows

	For the Years Ended
	December 31,
	2018			2017
Cash flows from operating activities
Net loss	$	(3,798,753	)	$	(3,192,836	)
Adjustments to reconcile net loss to net cash used in operating activities:
Amortization of intangible assets		14,635			4,805
Accretion of debt discount to interest expense		62,596			18,145
Change in fair value of warrant liability		41,347			(25,899	)
Stock issuance for compensation		360,003			513,000
Stock compensation expense		558,505			1,678,301
Warrant compensation expense		198,720			-
Amortization of convertible note beneficial conversion feature		1,080,631			-
Changes in operating assets and liabilities:
Deposits		-			67,560
Prepaids		-			18,293
Accounts payable		292,579			68,472
Accounts payable - related party		(78,900	)		47,028
Customer deposits		100,000			75,000
Accrued interest		92,558			40,101
Net cash used in operating activities		(1,076,079	)		(688,030	)
Cash flows from investing activities
Patent issuance costs		(120,416	)		(20,000	)
Net cash provided by investing activities		(120,416	)		(20,000	)
Cash flows from financing activities
Proceeds from convertible notes		715,000			530,000
Proceeds from Reg A offering, net		327,739			353,196
Proceeds held in escrow		(21,382	)		(6,229	)
Borrowings on revolving line-of-credit		-			101,533
Payments on revolving line-of-credit		(36,888	)		(25,823	)
Proceeds from issuance of common stock		331,900			125,000
Net cash provided by financing activities		1,316,369			1,077,677
Net increase in cash		119,874			369,647
Cash - beginning of period		436,973			67,326
Cash - end of period	$	556,847		$	436,973
Supplemental Disclosure of Non-Cash Financing Activities:
Warrants issued as broker compensation	$	35,322		$	176,703
Conversion of accrued interest to convertible note payable	$	50,000		$	-
Warrants issued with common stock	$	11,226		$	-
Warrants issued with convertible notes	$	302,533		$	126,723

No cash for interest or income taxes was paid during the years ended December 31, 2018 and 2017.

See Independent Auditor’s Report and notes to financial statements.

- 28 -

xti aircraft company

Notes to Financial Statements

As of December 31, 2018 and 2017 and for the years then ended

Note 1 - Description of Business and Significant Accounting Policies

XTI Aircraft Company (the “Company,” “XTI,” or “we”) is a privately owned aviation business incorporated in Delaware in 2009 to develop vertical takeoff airplanes. XTI is an early-stage aircraft manufacturer that is creating a revolutionary solution for the business aviation industry. Once developed, this vertical takeoff airplane, the TriFan, will offer point-to-point travel to reduce total travel time by decreasing time spent driving to and from an airport before enjoying the benefits of a private jet.

Since inception, the Company has been engaged primarily in developing the design and engineering concepts for the TriFan and seeking funds from investors to fund that development.

Going Concern and Management’s Plans

The accompanying financial statements have been prepared on a going-concern basis, which contemplates the realization of assets and liquidation of liabilities in the ordinary course of business. As of December 31, 2018, the Company has cash totaling $556,847, current liabilities totaling $2,437,764, and inception-to-date losses totaling $9,100,649, raising substantial doubt about the Company’s ability to continue as a going concern.

In order for the Company to continue as a going concern, management’s plan is to expand its financing plans to include potential additional closings under Regulations A offerings. Nonetheless, to date the Company has not accomplished a financing of the size needed to put the Company on a stable operating basis. There can be no assurance that the Company will be able to secure additional debt or equity financing, will be able to obtain positive cash flow operations, or that, if the Company is successful in any of those actions, those actions will produce adequate cash flow to enable the Company to meet future obligations. If the Company is unable to obtain additional debt or equity financing, operations may need to be reduced or ceased. The inability or failure to secure adequate debt or equity financing could adversely affect the Company’s business, financial condition, and results of operations.

Cash

The Company holds cash in checking accounts. The Company continually monitors its positions with, and the credit quality of, the financial institutions with which it holds cash. The Company had $300,703 and $0 of cash in excess of FDIC insured balances as of December 31, 2018 and 2017, respectively.

Intangible Assets

Intangible assets are recorded at historical cost. These assets are related to legal costs incurred in pursuing patents and trademarks to protect the Company’s intellectual property. If the Company determines it will abandon these efforts, or if the United States Patent and Trademark Office indicates the patents or trademarks will not be accepted, all capitalized cost would be expensed immediately. The Company amortizes patents over a 15-year life once awarded. As of December 31, 2018 and 2017, costs totaling $227,046 and $106,630 associated with patents and trademarks had been recorded, respectively. Amortization expense of $14,635 and $4,805 has been recorded for the years ended December 31, 2018 and 2017, respectively.

- 29 -

xti aircraft company

Notes to Financial Statements

As of December 31, 2018 and 2017 and for the years then ended

Conceptual Design Costs

Conceptual design costs, also referred to as research and development costs, of the Company are expensed as incurred. These costs relate to the design and creation of the TriFan. For the years ended December 31, 2018 and 2017, the Company incurred conceptual design cost expenses of $764,944 and $635,692, respectively.

Advertising and Promotion

The cost of advertising and promotion is expensed as incurred. For the years ended December 31, 2018 and 2017, the Company incurred advertising and promotion expenses of $42,334 and $327,546, respectively. As of December 31, 2018 and 2017, the Company had no accrued advertising expense recorded as liabilities in the accompanying balance sheets.

Income Taxes

The Company converted from an S corporation for tax purposes to a C corporation effective September 26, 2016. The Company follows guidance for income taxes and uncertain tax positions. Deferred income taxes are provided for the differences between the bases of assets and liabilities for financial reporting and income tax purposes. Tax positions meeting the more-likely-than-not recognition threshold are measured in accordance with accounting guidance. A valuation allowance is established when necessary to reduce deferred tax assets to the amount expected to be realized.

Interest and penalties associated with tax positions are recorded in the period assessed as general and administrative expenses. However, no interest or penalties have been assessed as of December 31, 2018.

Use of Estimates

The preparation of financial statements in accordance with accounting principles generally accepted in the United States of America requires management to make estimates and assumptions that affect the reported amounts of assets and liabilities and disclosures of contingent assets and liabilities at the date of the financial statements and the reported amounts of revenues and expenses during the reporting periods. Actual results could differ from those estimates.

Long-Lived Assets

Long-lived assets principally include intangible assets. The Company evaluates long-lived assets for impairment whenever events or changes in circumstances indicate that the carrying value of the asset may not be recoverable.

An impairment is measured by comparing expected future cash flows (undiscounted and before interest) to the carrying value of the assets. If impairment exists, the amount of impairment is measured as the difference between the net book value of the assets and their estimated fair value. The Company believes that no impairment of any long-lived assets existed at December 31, 2018 and 2017.

- 30 -

xti aircraft company

Notes to Financial Statements

As of December 31, 2018 and 2017 and for the years then ended

Convertible Instruments

U.S. GAAP requires companies to bifurcate conversion options from their host instruments and account for them as free standing derivative financial instruments according to certain criteria. The criteria include circumstances in which (a) the economic characteristics and risks of the embedded derivative instrument are not clearly and closely related to the economic characteristics and risks of the host contract, (b) the hybrid instrument that embodies both the embedded derivative instrument and the host contract is not re-measured at fair value under otherwise applicable generally accepted accounting principles with changes in fair value reported in earnings as they occur and (c) a separate instrument with the same terms as the embedded derivative instrument would be considered a derivative instrument. An exception to this rule is when the host instrument is deemed to be conventional as that term is described under applicable U.S. GAAP.

When the Company has determined that the embedded conversion options should not be bifurcated from their host instruments, the Company records, when necessary, discounts to convertible notes for the intrinsic value of conversion options embedded in debt instruments based upon the differences between the fair value of the underlying common stock at the commitment date of the note transaction and the effective conversion price embedded in the note.  Debt discounts under these arrangements are amortized over the term of the related debt to their stated date of redemption.

Convertible Warrant Liabilities and Common Stock Warrants

Freestanding warrants to purchase shares of the Company’s common stock are classified as liabilities on the balance sheets at their estimated fair value when the warrant holder has the option to elect to receive cash value for the warrants and, therefore, may obligate the Company to transfer assets at some point in the future. Such common stock warrants are recorded at fair value upon issuance and are subject to remeasurement to their respective estimated fair values. At the end of each reporting period, changes in the estimated fair value of such common stock warrants are recorded in the statements of operations. The Company will continue to adjust the liability associated with the liability classified common stock warrants for changes in the estimated fair value until the earlier of the exercise or expiration of the common stock warrants.

The Company issued common stock warrants in connection with the execution of certain debt financings during the years ended December 31, 2018 and 2017 and in exchange for professional services rendered to the Company. Common stock warrants that are not considered derivative liabilities are accounted for at fair value at the date of issuance in additional paid-in capital. The fair value of these common stock warrants is determined using the Black-Scholes option-pricing model.

Stock-Based Compensation

The Company accounts for stock-based compensation in accordance with ASC 718, Compensation - Stock Compensation.  Under the fair value recognition provisions of ASC 718, stock-based compensation cost is measured at the grant date based on the fair value of the award and is recognized as expense ratably over the requisite service period, which is generally the option vesting period.  The Company uses the Black-Scholes option pricing model to determine the fair value of stock options.  

- 31 -

xti aircraft company

Notes to Financial Statements

As of December 31, 2018 and 2017 and for the years then ended 

The Company measures compensation expense for its non-employee stock-based compensation under ASC 505, Equity. The fair value of the option issued or committed to be issued is used to measure the transaction, as this is more reliable than the fair value of the services received. The fair value is measured at the value of the Company’s common stock or stock award on the date that the commitment for performance by the counterparty has been reached or the counterparty’s performance is complete. The fair value of the equity instrument is charged directly to stock-based compensation expense and credited to additional paid-in capital.

The assumptions used in calculating the fair value of stock-based awards represent management’s best estimates and involve inherent uncertainties and the application of management’s judgment. As a result, if factors change and management uses different assumptions, stock-based compensation expense could be materially different for future awards.

The expected life of stock options was estimated using the “simplified method,” as the Company has limited historical information to develop reasonable expectations about future exercise patterns and employment duration for its stock options grants. The simplified method is based on the average of the vesting tranches and the contractual life of each grant. For stock price volatility, the Company uses comparable public companies as a basis for its expected volatility to calculate the fair value of options grants. The risk-free interest rate is based on U.S. Treasury notes with a term approximating the expected life of the option. The estimation of the number of stock awards that will ultimately vest requires judgment, and to the extent actual results or updated estimates differ from the Company’s current estimates, such amounts are recognized as an adjustment in the period in which estimates are revised.

Beneficial Conversion Feature

From time to time, the Company may issue convertible notes that may have conversion prices that create an embedded beneficial conversion feature pursuant to FASB ASC Subtopic 470-20, Debt with Conversion and Other Options. A beneficial conversion feature (“BCF”) exists on the date a convertible note is issued when the fair value of the underlying common stock to which the note is convertible is in excess of the conversion price. In accordance with this guidance, the intrinsic value of the BCF is recorded as a debt discount with a corresponding amount to additional paid-in capital. The debt discount is amortized to interest expense over the life of the note using the effective interest method.

Net Loss per Share

Net earnings or loss per share is computed by dividing net income or loss by the weighted-average number of common shares outstanding during the period, excluding shares subject to redemption or forfeiture. The Company presents basic and diluted net earnings or loss per share.  Diluted net earnings or loss per share reflect the actual weighted average of common shares issued and outstanding during the period, adjusted for potentially dilutive securities outstanding. Potentially dilutive securities are excluded from the computation of the diluted net loss per share if their inclusion would be anti-dilutive. As the Company is in a net loss position as of December 31, 2018 and 2017, all dilutive items are anti-dilutive and therefore basic net loss per share equals diluted net loss per share. Potentially dilutive items outstanding as of December 31, 2018 and 2017 include stock options (Note 4), warrants (Note 5), and convertible notes (Note 3).

- 32 -

xti aircraft company

Notes to Financial Statements

As of December 31, 2018 and 2017 and for the years then ended

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.

Reclassifications of Prior Year Balances

Certain balances were reclassified from prior year presentation to conform to current year presentation. These changes did not have a material impact to these financial statements.

Note 2 – Revolving Line-of-Credit – Related Party

On January 1, 2016, the Company entered into a revolving line-of-credit with a stockholder of the Company, which allowed the Company to borrow up to $250,000. Under terms of the agreement, balances drawn on the revolving line-of-credit bear interest of 3% annually. The revolving line-of-credit has a maturity date of January 1, 2020 and through the date the financials were available to be issued has not been repaid by the Company. As of December 31, 2018 and 2017, the balance on the revolving line-of-credit was $143,175 and $180,063, respectively. Interest expense on this line of credit for the years ended December 31, 2018 and 2017 was $4,029 and $3,450, respectively. As of December 31, 2018 and 2017, accrued interest payable on the line of credit was $11,167 and $7,138, respectively.

Note 3 – Convertible Notes – Related Party

In August 2015, the Company entered into a convertible note agreement with a stockholder. The convertible note has a principal amount of $763,176 and accrues interest at a rate of 3% per annum, provided that on and after the maturity dates (noted below) interest shall accrue from and after such date on the unpaid principal and all accrued but unpaid interest of the note at a rate of 10% per annum. The convertible note matures upon the Company securing different levels of investment from third parties as follows:

· $250,000 matures once the Company receives at least $5.0 million in total from investors;

· $250,000 matures once the Company receives at least $10.0 million in total from investors; and

· $263,176 matures once the Company receives at least $15.0 million in total from investors.

- 33 -

xti aircraft company

Notes to Financial Statements

As of December 31, 2018 and 2017 and for the years then ended

The stockholder has the right to receive repayment of the note upon maturity in either cash or in shares of common stock of the Company. The terms of the conversion state that the shares to be issued to the stockholder upon a conversion shall be equal to the value of shares based on a $35 million pre-money valuation of the Company. The conversion may occur at any time on or before the third maturity date noted above. The stockholder, at his option, may cause all or any portion of the unpaid principal and any accrued but unpaid interest to be converted into common stock of the Company. As of December 31, 2018 and 2017, the outstanding balance was $763,176. Interest expense on this obligation for the years ended December 31, 2018 and 2017 was $22,895 and $22,895, respectively. As of December 31, 2018 and 2017, accrued interest payable on this obligation was $77,644 and $55,330, respectively.

During 2015, the Company entered into a convertible note with a consultant and Board member of the Company. The note has a principal amount of $97,268 and bears interest at a rate of 3.0% per annum. The holder of this note may demand repayment of the note at any time and has the option to receive repayment of the note in either cash or in shares of common stock of the Company based on the fair market value of the Company’s common stock on the date of the conversion. As of December 31, 2018 and 2017, the outstanding balance was $97,268. Interest expense on this obligation for the years ended December 31, 2018 and 2017 was $2,918 and $2,918, respectively. As of December 31, 2018 and 2017, accrued interest payable on this obligation was $8,754 and $5,836, respectively.

During 2017, the Company entered into a convertible note with a consultant and Board member of the Company. The note has a principal amount of $500,000 and accrues interest at a rate of 10.0% per annum, provided that on and after the maturity date of November 2023 interest shall accrue from and after such date on the unpaid principal and all accrued but unpaid interest of the note at a rate of 12.0% per annum. In October 2018, the principal and accrued interest on this note (totaling $550,000) plus an additional $165,000 of new cash were combined into a new convertible note with a principal balance of $715,000. The original convertible note was cancelled as part of this new note. The remaining note bears interest at a rate of 10.0% per annum. Interest expense on this obligation for the years ended December 31, 2018 and 2017 was $51,792 and $8,470, respectively. As of December 31, 2018 and 2017, accrued interest payable on this obligation was $10,262 and $8,470, respectively. This convertible note is presented on the balance sheet net of unamortized discounts of $139,522 related to warrants issued in conjunction with this convertible note (see Note 5), for a net carrying balance of $575,478 as of December 31, 2018.

The holder of this note has the right to receive repayment of the note upon maturity in either cash or in shares of common stock of the Company at a value of $1.00 per share. The conversion may occur at any time on or before November 1, 2023. On the date of issuance, the Company was actively selling shares of its common stock at $1.50 per share. Thus, the Company determined there was a beneficial conversion feature on the date of the issuance. The Company recorded a discount of $579,851 related to the beneficial conversion feature. This amount was fully amortized to interest expense during 2018 because the note is immediately convertible into common stock.

During 2017, the Company entered into a convertible note with a consultant and stockholder of the Company. The note has a principal amount of $30,000 and accrues interest at a rate of 10.0% per annum, provided that on and after the maturity dates (noted below) interest shall accrue from and after such date on the unpaid principal and all accrued but unpaid interest of the note at a rate of 12.0% per annum. The principal balance outstanding on this obligation was $30,000 as of both December 31, 2018 and 2017. Interest expense on this obligation for the years ended December 31, 2018 and 2017 was $3,000 and $508, respectively. As of December 31, 2018 and 2017, accrued interest payable on this obligation was $3,508 and $508, respectively.

- 34 -

xti aircraft company

Notes to Financial Statements

As of December 31, 2018 and 2017 and for the years then ended

The holder of this note has the right to receive repayment of the note upon maturity in either cash or in shares of common stock of the Company at a value of $1.00 per share. The conversion may occur at any time on or before the maturity date noted below.

The convertible note matures upon the earlier of:

· 60 days after the Company flies its first prototype of the TriFan 600; or

· December 31, 2018

During 2018, the Company entered into a convertible note with a consultant of the Company. The note has a principal amount of $550,000 and accrues interest at a rate of 10.0% per annum, provided that on and after the maturity date (noted below) interest shall accrue from and after such date on the unpaid principal and all accrued but unpaid interest of the note at a rate of 12.0% per annum. The principal balance outstanding as of December 31, 2018 was $550,000. Interest expense on this obligation for the year ended December 31, 2018 was $9,167. As of December 31, 2018, accrued interest payable on this obligation was $9,167. This convertible note is presented on the balance sheet net of unamortized discounts of $208,993 related to warrants issued in conjunction with this convertible note (see Note 5), for a net carrying balance of $341,007 as of December 31, 2018.

The holder of this note has the right to receive repayment of the note upon maturity in either cash or in shares of common stock of the Company at a value of $1.00 per share. The conversion may occur at any time on or before November 1, 2023. On the date of issuance, the Company was actively selling shares of its common stock at $1.50 per share. Thus, the Company determined there was a beneficial conversion feature on the date of the issuance. The Company recorded a discount of $500,780 related to the beneficial conversion feature. This amount was fully amortized to interest expense during 2018 because the note is immediately convertible into common stock.

· 60 days after the Company flies its first prototype of the TriFan 600; or

· November 1, 2023

Note 4 – Stockholders’ Deficit

The Company has authorized 100,000,000 shares of $0.001 par value common stock.

In 2017, in conjunction with the initial close under its Reg A filing the Company issued 138,667 warrants to a service provider to purchase common stock with an exercise price of $1.00 per warrant. The warrants are exercisable for a period of 10 years. The Company considered accounting guidance and determined that the warrants are liability classified. The fair value of the warrants was determined to be $136,444, with the remaining $328,482 net proceeds from the Reg A filing allocated to equity. The warrant liability will be re-measured at fair value each reporting period. The settlement of the warrant liability will occur once all the warrants have either been exercised or expire and will not require the Company to pay cash. See Note 7 for discussion of fair value.

- 35 -

xti aircraft company

Notes to Financial Statements

As of December 31, 2018 and 2017 and for the years then ended

During 2017, the Company completed closings under its Reg A Filing and sold 378,178 shares of common stock at a value of $1.00 per share for gross proceeds of $378,178 to 452 different individual investors. As of December 31, 2017, proceeds of $65,503 were held in escrow and recorded as an asset on the balance sheet. Offering costs totaling $25,482 have been netted against the gross proceeds received during 2017.

The Company issued 50,500 additional warrants to the same service provider during 2017. The Company considered accounting guidance and determined that the warrants are liability classified. The fair value of the warrants was determined to be $40,259, with the remaining $312,937 net proceeds from the Reg A filing allocated to equity. The warrant liability will be re-measured at fair value each reporting period. The settlement of the warrant liability will occur once all the warrants have either been exercised or expire and will not require the Company to pay cash. See Note 7 for discussion of fair value.

During 2018, the Company completed additional closings under its Reg A Filing and sold 319,863 shares of common stock at a value of $1.00 per share for gross proceeds of $319,863 to 180 different individual investors. As of December 31, 2018, proceeds of $7,650 were held in escrow and recorded as an asset on the balance sheet. This offering was closed in July 2018.

The Company issued 27,500 additional warrants to the same service provider during 2018 with an exercise price of $1.00 per share. The warrants are exercisable upon the date of grant through the contractual term of 10 years. The Company considered accounting guidance and determined that the warrants are liability classified. The fair value of the warrants was determined to be $30,960, with the remaining net proceeds from the Reg A filing allocated to equity. The warrant liability will be re-measured at fair value each reporting period. The settlement of the warrant liability will occur once all the warrants have either been exercised or expire and will not require the Company to pay cash. See Note 7 for discussion of fair value.

On September 19, 2018, the Company initiated a new Reg A filing that offered shares for sale at a value of $1.50 per share. During 2018, the Company completed closings under this Reg A filing and sold 66,655 shares of common stock at a value of $1.50 per share for gross proceeds of $99,983 to 38 individual investors. As of December 31, 2018, proceeds of $79,235 were held in escrow and recorded as an asset on the balance sheet.

The Company issued 4,222 additional warrants to the same service provider during 2018 with an exercise price of $1.50 per share. The warrants are exercisable upon the date of grant through the contractual term of 5 years. The Company considered accounting guidance and determined that the warrants are liability classified. The fair value of the warrants was determined to be $4,362 with the remaining net proceeds from the Reg A filing allocated to equity. The warrant liability will be re-measured at fair value each reporting period. The settlement of the warrant liability will occur once all the warrants have either been exercised or expire and will not require the Company to pay cash. See Note 7 for discussion of fair value.

Offering costs totaling $92,107 from both offerings have been netted against the gross proceeds received during 2018.

- 36 -

xti aircraft company

Notes to Financial Statements

As of December 31, 2018 and 2017 and for the years then ended

During 2018, the Company issued 313,335 shares of common stock to various service providers in exchange for services performed for the Company. These shares were valued by the Company at the common stock offering price in its Regulation A offerings live at the time of each issuance, ranging from $1.00 to $1.50 per share. Total compensation expense recorded for the year ended December 31, 2018 under these arrangements was $360,003.

During 2018, the Company issued 331,900 shares of common stock at $1.00 per share for gross proceeds of $331,900. Two of these issuances included warrants to purchase a total of 105,000 shares of common stock at an exercise price of $1.00 per share. The warrants are exercisable upon the date of grant through the contractual term of 1 year. The Company considered accounting guidance and determined that the warrants are equity classified. The fair value of the warrants was determined to be $11,226, which was netted from the gross proceeds in recording these stock issuances to additional paid-in capital.

Stock Option Plan

During 2017 the Company adopted the 2017 Employee and Consultant Stock Ownership Plan (“2017 Plan”). The Company may issue awards up to a maximum of 6,000,000 common shares in the form of restricted stock units and stock options to employees, directors, and consultants.

On October 21, 2017 the Company issued 2,230,954 stock options to consultants. Each option was fully vested on the date of grant with an exercise price of $1.00 and expire 10 years from the date of grant. The Company valued the stock options using the Black-Scholes model with the following assumptions: stock price - $1.00; exercise price - $1.00; expected term - 5 years; volatility - 100.6%; risk free yield - 2.03%; dividend rate - 0%. The grant date fair value for the options was $1,678,301 which was recorded as stock-based compensation for the year ended December 31, 2017.

During 2018, the Company issued 762,346 stock options to consultants. Each option was fully vested on the date of grant with exercise prices ranging between $1.00 to $1.50. Each option grant expires 10 years from the date of grant. The Company valued the stock options using the Black-Scholes model with the following assumptions: expected term - 5 years; volatility – 86.5%; risk free yield between 2.69% and 3.14% (depending on the date of grant); dividend rate - 0%; stock price of $1.00 or $1.50 (based on the price per share available to the public through the applicable Reg A offering); exercise price of either $1.00 or $1.50. The grant date fair value for the options was $558,508 which was recorded as stock-based compensation for the year ended December 31, 2018. The weighted average Black-Scholes fair value and exercise price of stock options issued in 2018 was $0.73 and $1.10 per share, respectively.

As of December 31, 2018, there were 2,993,300 stock options outstanding and exercisable with a weighted average exercise price of $1.02 per share. The weighted average duration to expiration of outstanding options as of December 31, 2018 was 8.9 years. There is no unrecognized compensation expense as of December 31, 2018 as all outstanding options are fully vested.

- 37 -

xti aircraft company

Notes to Financial Statements

As of December 31, 2018 and 2017 and for the years then ended 

Note 5 – Warrants

The following table summarizes the status of the Company’s common stock warrants at December 31, 2018 and 2017 and changes during the years then ended:

Common stock Warrants	Number of Underlying Shares			Weighted Average Exercise Price per Share
Outstanding – December 31, 2016		141,167		$	1.00
Granted		209,500		$	1.00
Outstanding – December 31, 2017		350,667		$	1.00
Cancelled		(150,000	)	$	1.00
Granted		711,222		$	1.00
Outstanding – December 31, 2018		911,889		$	1.00

In conjunction with the 2017 convertible notes – related party (Note 3) the Company issued warrants for the purchase of a total of 159,000 shares of common stock at an exercise price of $1.00. The warrants are exercisable upon the date of grant through the contractual term of 10 years. The Company evaluated the warrants determining the warrants are equity classified. Using the Black-Scholes model, the Company determined the grant-date fair value of the warrants was $126,723 which has been recorded as a debt discount and additional paid-in-capital. The debt discount was being accreted to interest expense through the maturity date of December 31, 2018 or 60 days after the Company flies its first prototype of the TriFan 600. In conjunction with the 2018 convertible notes – related party (Note 3) the Company cancelled 150,000 warrants previously issued with an exercise price of $1.00 and issued new 214,500 new warrants with an exercise price of $1.50. The warrants are exercisable upon the date of grant through the contractual term of 5 years. The Company evaluated the warrants determining the warrants are equity classified. Using the Black-Scholes model, the Company determined the net grant-date fair value of the warrants was $86,333, which has been recorded as a debt discount and additional paid-in-capital. The debt discounts are being accreted to interest expense through the maturity date of November 1, 2023. For the years ended December 31, 2018 and 2017 the Company accreted $55,389 and $18,145, respectively, of these debt discounts to interest expense.

In conjunction with the 2018 convertible notes – related party (Note 3) from a new investor, the Company issued warrants for the purchase of a total of 100,000 shares of common stock at an exercise price of $1.00 and 100,000 shares of common stock at an exercise price of $1.50. The warrants are exercisable upon the date of grant through the contractual term of 10 years. The Company evaluated the warrants determining the warrants are equity classified. Using the Black-Scholes model, the Company determined the grant-date fair value of the warrants was $216,200, which has been recorded as a debt discount and additional paid-in-capital. The debt discount is being accreted to interest expense through the maturity date of November 1, 2023 or 60 days after the Company flies its first prototype of the TriFan 600. For the year ended December 31, 2018 the Company accreted $7,207 of the debt discount to interest expense.

During 2018, the Company issued a service provider warrants for 160,000 shares of common stock at an exercise price of $0.01 per share. The warrants are exercisable upon the date of grant through the contractual term of 10 years. The Company evaluated the warrants determining the warrants are equity classified. Using the Black-Scholes model, the Company determined the grant-date fair value of the warrants was $198,720, which has been recorded to operating expenses and additional paid-in capital.

See discussions of additional warrant issuances in conjunction with stock issuances during 2018 discussed in Note 4.

- 38 -

xti aircraft company

Notes to Financial Statements

As of December 31, 2018 and 2017 and for the years then ended

Warrants granted during 2018 were valued using the following Black-Scholes pricing model inputs:

	2018
Risk Free Interest Rate		2.47% - 2.96%
Expected Dividend Yield		0.00%
Expected Volatility		86.50%
Expected Life (years)		0.50 - 5.0
Fair Value per Warrant		$0.70 - $1.49

Note 6 - Related Party Transactions

See Notes 2 and 3 for disclosure of related party revolving line-of-credit and convertible notes.

The Company conducts business with a vendor that is owned by one of the Company’s officers and stockholders and currently provides the Company with consulting CFO work. For the years ended December 31, 2018 and 2017, the Company paid this vendor $37,482 and $29,370, respectively. The Company owed this vendor $34,500 and $46,000 as of December 31, 2018 and 2017, respectively.

The Company conducts business with a consultant that is one of the Company’s officers and currently provides the Company with CEO services. For the years ended December 31, 2018 and 2017, the Company paid this vendor $288,131 and $227,442, respectively. The Company owed this vendor $100,974 and $75,447 as of December 31, 2018 and 2017, respectively.

The Company conducts business with a number of vendors and consultants that hold common stock, options and / or warrants in the Company that provide various services in the normal course of operations. The Company owed these vendors $313,435 and $248,184 as of December 31, 2018 and 2017, respectively.

Note 7 – Fair Value Measurements

Financial assets and liabilities and nonfinancial assets and liabilities are measured at fair value on a recurring (annual) basis under a framework of a fair value hierarchy which prioritizes the inputs into valuation techniques used to measure fair value into three broad levels.  This hierarchy gives the highest priority to quoted prices (unadjusted) in active markets and the lowest priority to unobservable inputs.  Further, financial assets and liabilities should be classified by level in their entirety based upon the lowest level of input that was significant to the fair value measurement.  The three levels of the fair value hierarchy are as follows:

Level 1:  Unadjusted quoted market prices in active markets for identical assets or liabilities that are accessible at the measurement date.

Level 2:  Quoted prices in inactive markets for identical assets or liabilities, quoted prices for similar assets or liabilities in active markets, or other observable inputs either directly related to the asset or liability or derived principally from corroborated observable market data.

- 39 -

xti aircraft company

Notes to Financial Statements

As of December 31, 2018 and 2017 and for the years then ended

Level 3:  Unobservable inputs due to the fact that there is little or no market activity. This entails using assumptions in models which estimate what market participants would use in pricing the asset or liability.

Recurring Fair Value Measurements

The following table summarizes the Company’s financial assets and liabilities measured on a recurring basis at fair value at December 31, 2018 by respective level of the fair value hierarchy:

	Level 1		Level 2		Level 3		Total
At December 31, 2018:
Liabilities:
Warrant liability	$	-	$	227,472	$	-	$	227,472
	$	-	$	227,472	$	-	$	227,472
At December 31, 2017:
Liabilities:
Warrant liability	$	-	$	150,804	$	-	$	150,804
	$	-	$	150,804	$	-	$	150,804

There were no financial assets and liabilities measured on a non-recurring basis as of December 31, 2018 or December 31, 2017.

The warrants were valued at the time of grant using the Black-Scholes model. Key assumptions include a 10-year term, volatility of 86.5%, and no expected dividends.

Note 8 - Commitments and Contingencies

Consulting Agreements

On July 8, 2015, the Company entered into an agreement with a third-party consultant for services relating to operating a web-based platform for prospective investors. The compensation is an administrative fee equal to $50 per investor. The agreement had an original effective date until July 8, 2016 and was subsequently extended to August 31, 2017 and later extended again to December 31, 2018. For the years ended December 31, 2018 and 2017, the Company paid this consultant $9,400 and $11,450, respectively. No amounts were owed as of December 31, 2018 and 2017 to this consultant.

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xti aircraft company

Notes to Financial Statements

As of December 31, 2018 and 2017 and for the years then ended

During 2018, the Company entered into an agreement with this same vendor for its new Reg A filing. The fees charged under this new agreement included $25,000 for the build and creation of the Company’s campaign page, an administrative fee equal to $50 per investor and warrants based on the number of investors that ultimately invest. The Company paid this consultant $5,800 during 2018. The Company owed this vendor $25,605 as of December 31, 2018.

During 2015, the Company engaged a broker-dealer consultant to perform administrative functions in connection with the 1-A Offering in addition to acting as the escrow agent. Compensation for this consultant is $2 per domestic investor for the anti-money-laundering check and a fee equal to 1.0% of the gross proceeds from the sale of the shares offered. If the Company elects to terminate the 1-A Offering prior to its completion, the Company has agreed to reimburse the consultant for its out-of-pocket expenses incurred in connection with the services provided under the agreement. Additionally, the Company will pay $225 for account set-up and $25 per month for so long as the 1-A Offering is being conducted, but in no event longer than two years ($600 in total fees), and up to $15 per investor for processing incoming funds. The Company will pay an affiliated company of the consultant, a technology service provider, $4 for each subscription agreement executed via electronic signature. The agreement originally terminated on January 21, 2017 but was amended to include a new termination date of December 31, 2018.

During 2018, the Company entered into an agreement with this same vendor for its new Reg A filing. The fees charged under this new agreement included $5 per domestic investor for the anti-money-laundering check and a fee equal to 0.5% of the gross proceeds from the sale of the shares offered. If the Company elects to terminate the offering prior to its completion, the Company has agreed to reimburse the consultant for its out-of-pocket expenses incurred in connection with the services provided under the agreement. Additionally, the Company will pay $500 for account set-up and $35 per month for so long as the offering is being conducted, but in no event longer than one year ($420 in total fees), and up to $15 per investor for processing incoming funds. The Company will pay an affiliated company of the consultant, a technology service provider, $3 for each subscription agreement executed via electronic signature. The agreement remains effective for as long as the offering remains open and active.

Litigation

On January 11, 2018, a lawsuit was filed against the Company seeking to recover more than $222,000 in fees for alleged breach of contract related to engineering work performed by the plaintiff, a related party. On March 6, 2018, the Company filed counterclaims seeking more than $100,000 for breach of contract and breach of fiduciary duty for failure to perform engineering work the plaintiff agreed to perform and refusal to return intellectual property and work product to the Company. The Company has included in accounts payable – related party $141,000 in engineering services related to this case. The Company reached a settlement agreement in April 2019 that resolved these claims. The Company agreed to pay $210,000 in exchange for full settlement of the claims and the relinquishment of certain common stock owned by a principal of the plaintiff.

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xti aircraft company

Notes to Financial Statements

As of December 31, 2018 and 2017 and for the years then ended

Note 9 – Income Taxes

The Company uses the liability method of accounting for income taxes as set forth in ASC 740, Income Taxes.  Under the liability method, deferred taxes are determined based on the temporary differences between the financial statement and tax basis of assets and liabilities using tax rates expected to be in effect during the years in which the basis differences reverse.  A valuation allowance is recorded when it is unlikely that the deferred tax assets will be realized.

The income tax provision from operations consists of the following:

		December 31,
		2018			2017
Current
Federal	$	-		$	-
State		-			-
	$	-		$	-
Deferred
Federal	$	(532,283	)	$	(550,157	)
State		(92,711	)		(121,668	)
Valuation allowance		624,994			671,825
	$	-		$	-

A reconciliation between the expected federal income tax rate and the actual tax rate is as follows:

	December 31,
	2018			2017
Computed income taxes at 21% and 21%	$	(797,738	)	$	(1,117,493	)
Increase in income taxes resulting from:
State and local income taxes, net of federal impact		(138,947	)		(97,701	)
Change in valuation allowance		624,994			671,825
Change in tax rate		-			540,467
Non-deductibles and other		311,691			2,902
Provision for income taxes		-			-

A summary of deferred tax assets and liabilities are as follows:

	December 31,
	2018			2017
Deferred tax assets
Accrued expenses	$	246,990		$	220,819
Stock compensation		702,976			427,493
Loss carryforwards		673,496			346,308
Total deferred tax assets		1,623,462			994,620
Valuation allowance		(1,623,462	)		(994,620	)
Net deferred tax assets		-			-

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xti aircraft company

Notes to Financial Statements

As of December 31, 2018 and 2017 and for the years then ended

At December 31, 2018 and 2017, the Company has federal net operating loss carryforwards of approximately $2,731,382 and $1,404,000, respectively, for income tax purposes that begin to expire starting in 2037. Due to uncertainty as to the Company’s ability to generate sufficient taxable income in the future to utilize the net operating loss carryforwards before they begin to expire in 2037, the Company has recorded a full valuation allowance to reduce the net deferred tax asset to zero.

There are no significant matters determined to be unrecognized tax benefits taken or expected to be taken in a tax return, in accordance with ASC 740 “Income Taxes”, which clarifies the accounting for uncertainty in income taxes recognized in the financial statements and have been recorded on the Company’s financial statements for the years ended December 31, 2018 and 2017. The Company does not anticipate a material change to unrecognized tax benefits in the next twelve months.

In December 2017, the Tax Cuts and Jobs Act (the “Tax Act”) was enacted into law and the new legislation contains several key tax provisions that affected the Company, including a reduction of the corporate income tax rate to 21% effective January 1, 2018, among others. The Company is required to recognize the effect of the tax law changes in the period of enactment, such as determining the transition tax, remeasuring deferred tax assets and liabilities, as well as reassessing the net realizability of our deferred tax assets and liabilities. The Company used the new tax rates in calculating its 2018 and 2017 deferred tax assets, resulting in a decrease of its December 31, 2017 and prior generated net deferred tax assets of $540,467.

The Company files U.S. federal and state income tax returns. All previous tax returns have been filed. All tax periods since inception remain open to examination by the taxing jurisdictions to which the Company is subject.   

Note 10 - Subsequent Events

The Company has evaluated all subsequent events through the auditors’ report date, which is the date the financial statements were available for issuance. There were no subsequent events that required recognition or disclosure in the financial statements.

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INDEX TO EXHIBITS

Exhibit 2.1	Certificate of Incorporation (AVX Aircraft Technologies, Inc.) — September 29, 2009 (1)
Exhibit 2.2	Certificate of Amendment to the Certificate of Incorporation (AVX Aircraft Technologies, Inc.) (2)
Exhibit 2.3	Bylaws of AVX Aircraft Technologies, Inc. — September 30, 2009 (3)
Exhibit 2.4	Certificate of Validation and Certificate of Amendment — November 10, 2015 (4)
Exhibit 4	Form of Subscription Agreement (5)
Exhibit 6.1	Consulting Agreement with David E. Brody — October 1, 2015 (6)
Exhibit 6.2	Consulting Agreement with Answer Engineering, LLP — May 1, 2014 (7)
Exhibit 6.3	Director Services Agreement with Jeff Pino — January 1, 2015 (8)
Exhibit 6.4	Consulting Agreement with Dennis Olcott — January 1, 2015 (9)
Exhibit 6.5	Consulting Agreement with Charles Johnson — January 1, 2015 (10)
Exhibit 6.6	Consulting Agreement with David A. Bovino — August 1, 2015 (11)
Exhibit 6.7	Agreement with Acuity Advisors (12)
Exhibit 6.9	Unsecured Convertible Promissory Note with David Brody — August 31, 2015 (13)
Exhibit 6.10	Promissory Note with Jeffrey Pino — September 30, 2015 (14)
Exhibit 6.11	Promissory Note with Jeffrey Pino — December 11, 2015 (15)
Exhibit 6.12	Consulting Agreement with Robert LaBelle – February 1, 2017 (16)
Exhibit 6.13	Revolving Credit Promissory Note with David E. Brody – January 1, 2016 (17)
Exhibit 6.14	Convertible Promissory Note with Robert Denehy – October 25, 2017 (18)
Exhibit 6.15	Convertible Promissory Note with Saleem Zaheer – October 30, 2017 (19)
Exhibit 6.17	Amended Convertible Promissory Note with Robert Denehy – November 1, 2018 (20)
Exhibit 6.18	Consulting Agreement with Robert LaBelle – January 1, 2019 (21)
Exhibit 7	Assignment and Assumption Agreement — July 30, 2013 (22)

(1) Filed as an exhibit to the company’s Form 1-A available here,

https://www.sec.gov/Archives/edgar/data/1638850/000164460015000027/exhibit2-1.htm.

(2) Filed as an exhibit to the company’s Form 1-A available here,

https://www.sec.gov/Archives/edgar/data/1638850/000164460015000027/exhibit2-2.htm.

(3) Filed as an exhibit to the company’s Form 1-A available here,

https://www.sec.gov/Archives/edgar/data/1638850/000164460015000027/exhibit2-4.htm.

(4) Filed as an exhibit to the company’s Form 1-A available here,

https://www.sec.gov/Archives/edgar/data/1638850/000164460015000027/exhibit2-3.htm.

(5) Filed as an exhibit to the company’s Form 1-A available here,

https://www.sec.gov/Archives/edgar/data/1638850/000164460015000027/exhibit4.htm.

- 44 -

(6) Filed as an exhibit to the company’s Form 1-A available here,

https://www.sec.gov/Archives/edgar/data/1638850/000164460015000027/exhibit6-1.htm

(7) Filed as an exhibit to the company’s Form 1-A available here,

https://www.sec.gov/Archives/edgar/data/1638850/000164460015000027/exhibit6-2.htm.

(8) Filed as an exhibit to the company’s Form 1-A available here,

https://www.sec.gov/Archives/edgar/data/1638850/000164460015000027/exhibit6-3.htm.

(9) Filed as an exhibit to the company’s Form 1-A available here,

https://www.sec.gov/Archives/edgar/data/1638850/000164460015000027/exhibit6-4.htm.

(10) Filed as an exhibit to the company’s Form 1-A available here,

https://www.sec.gov/Archives/edgar/data/1638850/000164460015000027/exhibit6-5.htm.

(11) Filed as an exhibit to the company’s Form 1-A available here,

https://www.sec.gov/Archives/edgar/data/1638850/000164460015000027/exhibit6-6.htm.

(12) Filed as an exhibit to the company’s Form 1-A available here,

https://www.sec.gov/Archives/edgar/data/1638850/000164460015000027/exhibit6-7.htm.

(13) Filed as an exhibit to the company’s Form 1-A available here,

https://www.sec.gov/Archives/edgar/data/1638850/000164460015000027/exhibit6-9.htm.

(14) Filed as an exhibit to the company’s Form 1-A available here,

https://www.sec.gov/Archives/edgar/data/1638850/000164460015000027/exhibit6-10.htm.

(15) Filed as an exhibit to the company’s Form 1-A available here,

https://www.sec.gov/Archives/edgar/data/1638850/000164460016000066/exhibit611.htm.

(16) Filed as an exhibit to the company’s Form 1-K available here,

https://www.sec.gov/Archives/edgar/data/1638850/000164460017000075/exhibit6-12.htm.

(17) Filed as an exhibit to the company’s Form 1-K available here,

https://www.sec.gov/Archives/edgar/data/1638850/000164460017000075/exhibit6-13.htm.

(18) Filed as an exhibit to the company’s Form 1-K available here,

https://www.sec.gov/Archives/edgar/data/1638850/000114420418024044/tv492480_ex6-14.htm.

(19) Filed as an exhibit to the company’s Form 1-K available here,

https://www.sec.gov/Archives/edgar/data/1638850/000114420418024044/tv492480_ex6-15.htm.

(20) Included as an exhibit with this Form 1-K.

(21) Included as an exhibit with this Form 1-K.

(22) Filed as an exhibit to the company’s Form 1-A available here,

https://www.sec.gov/Archives/edgar/data/1638850/000164460015000027/exhibit7.htm.

- 45 -

SIGNATURES

Pursuant to the requirements of Regulation A, the issuer has duly caused this Annual Report to be signed on its behalf by the undersigned, thereunto duly authorized.

XTI Aircraft Company
By David E. Brody,
Signature:	/s/ David E. Brody
	Chairman of the Board
Date: May 6, 2019

This Annual Report has been signed by the following persons in the capacities and on the dates indicated.

/s/ David E. Brody

David E. Brody, President and Chairman  

Date: May 6, 2019

/s/ Robert J. LaBelle

Robert J. LaBelle, CEO and Director 

Date: May 6, 2019

/s/ Andrew Woglom

Andrew Woglom, Chief Financial Officer and Chief Accounting Officer

Date: May 6, 2019

/s/ Charles Johnson

Charles Johnson, Director

Date: May 6, 2019

/s/ Paul Willard

Paul Willard, Director

Date: May 6, 2019

/s/ Robert Denehy

Robert Denehy, Director

Date: May 6, 2019

- 46 -

EX1K-6 MAT CTRCT

Exhibit 6.17

THE SECURITIES REPRESENTED HEREBY HAVE NOT BEEN REGISTERED UNDER THE SECURITIES ACT OF 1933, AND HAVE BEEN ACQUIRED FOR INVESTMENT AND NOT WITH A VIEW TO, OR IN CONNECTION WITH, THE SALE OR DISTRIBUTION THEREOF. NO SUCH SALE OR DISTRIBUTION MAY BE EFFECTED WITHOUT AN EFFECTIVE REGISTRATION STATEMENT RELATED THERETO OR AN OPINION OF COUNSEL IN A FORM SATISFACTORY TO THE COMPANY THAT SUCH REGISTRATION IS NOT REQUIRED UNDER THE SECURITIES ACT OF 1933.

UNSECURED CONVERTIBLE PROMISSORY NOTE

$715,000	November 1, 2018
	Denver, Colorado

For value received, XTI Aircraft Company, a Delaware corporation (the “Company”), promises to pay to Robert Denehy (the “Holder”), the principal sum of Seven Hundred Fifteen Thousand and 00/xx US Dollars ($715,000). Interest shall accrue from the date of this Note on the unpaid principal amount at a rate equal to 10.00% per annum, compounded annually; provided that on and after the Maturity Date (as defined below) or an Event of Default (as defined below), interest shall accrue from and after such date on the unpaid principal and all accrued but unpaid interest of this Note at a rate equal to 12.00% per annum. This Unsecured Convertible Promissory Note (the “Note”) is one of a number of promissory notes (collectively, the “Notes”) related to the offering described in that certain Subscription Agreement between the Company and Holder, dated November 1, 2018 (the “Subscription Agreement”). This Note is convertible into the Company’s Common Stock (“Shares”) at a price of $1.00 per Share (the “Conversion Price”). This Note is subject to the following terms and conditions:

1.          Maturity. Unless converted as provided herein, all principal and any accrued but unpaid interest under this Note shall be due and payable on November 1, 2021 (the “First Maturity Date”) or on November 1, 2023 (the “Second Maturity Date”, as defined and determined under Section 2, below). Any time between the closing date under the Subscription Agreement and the First Maturity Date or Second Maturity Date, whichever is applicable, the Holder may elect to convert all or any portion of the principal amount of this Note into Shares, as set forth in Section 2, below. Subject to Section 2, below, interest shall accrue on this Note annually and shall be due and payable in full on the applicable Maturity Date. Notwithstanding the foregoing, the entire unpaid principal sum of this Note, together with accrued and unpaid interest thereon, shall become immediately due and payable upon the occurrence of any of the following (each, an “Event of Default”): (a) any act of bankruptcy by the Company, (b) the execution by the Company of a general assignment for the benefit of creditors, (c) the filing by or against the Company of a petition in bankruptcy or any petition for relief under the federal bankruptcy act or the continuation of such petition without dismissal for a period of 60 days or more, (d) a material breach of this Note, or (e) a material breach of the Subscription Agreement, which is not cured within thirty (30) days of such breach.

2.          Conversion. At any time after the date of this Note and prior to the First Maturity Date, the Holder may, at its sole discretion, provide written notice to the Company (the “Conversion Notice”) stating that the Holder desires to convert all or a portion of the Note into Shares, and specifying the dollar amount of the Note to be so converted. Such conversion shall be deemed to have been made on the date of the Company’s receipt of the Conversion Notice. Provided, however, in the event the Company has not received the Conversion Notice by October 1, 2021, then the First Maturity Date shall be deemed to be extended automatically (without further action by either the Company or the Holder) to November 1, 2023 (the “Second Maturity Date”). The number of Shares to be issued upon conversion shall be equivalent to US$1.00 per Share (adjusted for stock splits, stock dividends, reclassifications and the like). At any time on or following the applicable Maturity Date, if (i) this Note has not previously converted into Shares, (ii) this Note has not been repaid in full, and (iii) the Holder has not provided the Company with written notice prior to the Maturity Date of its desire for this Note to convert into Shares, the amount of the Note that has not been converted into Shares (the “Conversion Amount”) shall automatically, and without any further action required by the Holder, convert into Shares, effective on the applicable Maturity Date. The number of Shares that the Conversion Amount shall convert into shall be the outstanding dollar amount remaining after prior conversions and repayments, if any, under this Note divided by the Conversion Price (as adjusted for stock splits, stock dividends, reclassifications and the like).

3.          Warrants. Within sixty (60) days after the date of this Note, the Company shall issue Warrants to the Holder, in the form attached hereto, to purchase 30% of the number of shares of Common Stock that could be purchased upon conversion of the face amount of the Note at an exercise price of $1.50. The Warrants shall have a term of five (5) years from the date of this Note and shall be exercisable on a cash basis.

4.          Liquidation Event. In the event of a Liquidation Event (as defined below) prior to repayment in full or conversion of this Note, immediately prior to such Liquidation Event, at the option of the Holder, the Conversion Amount of this Note will either be repaid in full or shall convert into the number of Shares determined in the same manner as set forth in Section 2, above. The effective date of any such conversion shall be the date of the Liquidation Event. The term “Liquidation Event” means any of the following actions by the Company: (a) applying for or consent to the appointment of a receiver, trustee, liquidator or custodian of itself or of all or a substantial part of its property; (b) making a general assignment for the benefit of its creditors; (c) dissolution or liquidation; (d) commencing a voluntary case or other proceeding seeking liquidation, reorganization or other relief with respect to itself or its debts under any bankruptcy, insolvency or other similar law now or hereafter in effect or consent to any such relief or the appointment of or taking possession of its property by any official in an involuntary case or other proceeding commenced against it; (e) taking any material action to effect any of the foregoing; (f) any Involuntary Bankruptcy or Insolvency Proceedings, which is defined as proceedings for the appointment of a receiver, trustee, liquidator or custodian of the Company or of all or a substantial part of the property thereof, or an involuntary case or other proceedings seeking liquidation, reorganization or other relief with respect to the Company or the debts thereof under any bankruptcy, insolvency, or other similar law now or hereafter in effect, and an order for relief entered or such proceeding has not be dismissed or discharged within sixty (60) days of commencement.

5.          Conversion Procedure.

(a)          Automatic Conversion. If all or a portion of this Note is converted pursuant to Section 2 or 3, the Company shall give written notice to the Holder, notifying the Holder of the conversion to be effected and specifying the amount of the Note (including outstanding principal and accrued but unpaid interest) to be converted, the applicable conversion price, the number of Shares to be issued and the date on which such conversion is expected to occur and calling upon such Holder to surrender the Note to the Company. Upon receipt of such notice, the Holder shall surrender this Note at the Company’s principal executive office, or, if this Note has been lost, stolen, destroyed or mutilated, then, in the case of loss, theft or destruction, the Holder shall deliver an indemnity agreement reasonably satisfactory in form and substance to the Company or, in the case of mutilation, the Holder shall surrender and cancel this Note. As soon as practicable after receipt of this Note for cancellation (or receipt of an indemnity agreement), the Company shall issue and deliver to such Holder, at the address requested by such Holder, a certificate or certificates for the number of Shares to which the Holder shall be entitled upon such conversion (bearing such legends as reasonably required by the Company and applicable state and federal securities laws in the opinion of counsel to the Company). Effective on and after the effective date of conversion under Sections 2 and 3, whichever is applicable, the person entitled to receive the Shares issuable upon such conversion shall be treated for all purposes as the record holder of such Shares.

2

(b)          No Fractional Shares. No fractional shares will be issued upon conversion of this Note. In lieu of any fractional share to which the Holder would otherwise be entitled, the Company will pay to the Holder in cash the amount of the unconverted principal and interest balance of this Note that would otherwise be converted into such fractional share. Upon conversion of the principal amount of this Note into Shares, any interest accrued on this Note that is not by reason of Section 2 or 3 simultaneously converted into Shares shall be immediately paid to the Holder.

6.          Payment; Prepayment. All payments shall be made in lawful money of the United States of America at such place as the Holder hereof may from time to time designate in writing to the Company. Payment shall be credited first to expenses owed to the Holder, then to the accrued interest then due and payable and the remainder shall be applied to principal. The Company may prepay this Note at any time without penalty by providing the Holder thirty (30) days written notice of the Company’s request to prepay the Notes. The Holder may elect to convert the Note into Common Stock during such 30-day period by providing a Conversion Notice to the Company pursuant to Section 2, above.

7.          Taxes on Conversion. The Company shall pay any and all transfer, stamp and similar taxes that may be payable with respect to the issuance and delivery of the Shares; provided, however, that the Company shall not be required to pay any tax that may be payable in respect of the issuance and delivery of such Shares to any person other than the Holder.

8.          Invalidity. If any provision of this Note is invalid, illegal or unenforceable, the balance of this Note shall remain in effect, and if any provision is inapplicable to any person or circumstance, it shall nevertheless remain applicable to all other persons and circumstances. In such an event, the parties will in good faith attempt to effect the business agreement represented by such invalidated term to the fullest extent permitted by law. In the event that the parties cannot reach a mutually agreeable and enforceable replacement for such provisions(s), then (i) such provisions(s) shall be excluded from this Note, (ii) the balance of the Note shall be interpreted as if such provision(s) were so excluded, and (iii) the balance of the Note shall be enforceable in accordance with its terms.

9.          Transfer; Successors and Assigns. The terms and conditions of this Note shall inure to the benefit of and be binding upon the respective successors and assigns of the Company and the Holder. Notwithstanding the foregoing, the Holder may not assign, pledge, or otherwise transfer this Note without the prior written consent of the Company; provided that the Holder may transfer this Note to any of its affiliates. Subject to the preceding sentence, this Note may be transferred only upon surrender of the original Note (or a reasonable indemnity agreement if the Note is lost, stolen or destroyed) for registration of transfer, duly endorsed, or accompanied by a duly executed written instrument of transfer in form satisfactory to the Company. Thereupon, a new note for the same principal amount and interest will be issued to, and registered in the name of, the transferee. Interest and principal are payable only to the registered holder of this Note. The Company cannot assign this Note or its obligations or rights hereunder without the approval of the Holder.

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10.         Governing Law. This Note and all acts and transactions pursuant hereto and the rights and obligations of the Company and the Holder shall be governed, construed and interpreted in accordance with the laws of the state of Delaware, without giving effect to principles of conflicts of law.

11.         Notices. All notices and other communications given or made pursuant to this Note shall be in writing and shall be deemed effectively given upon: (a) personal delivery to the party to be notified, (b) when sent, if received by electronic mail or facsimile during normal business hours of the recipient, and if not received during normal business hours, then on the recipient’s next business day, (c) five (5) business days after having been sent by registered or certified mail, return receipt requested, postage prepaid, or (d) one (1) business day after deposit with a nationally recognized overnight courier, freight prepaid, specifying next business day delivery, with written verification of receipt. All communications shall be sent to the respective parties at their address as set forth on the signature pages hereto, or as subsequently modified by written notice.

12.         Amendments and Waivers. Any term of this Note may be amended only with the written consent of the Company and the holders of a majority of the outstanding amounts owed under all of the Notes; provided, that the following terms cannot be amended without the consent of the Holder: a reduction in the interest rate, accrued interest or principal amount owed on this Note or the convertibility price of this Note.

13.         Entire Agreement. This Note, together with the Subscription Agreement and the documents referred to therein, constitute the entire agreement between the Company and the Holder pertaining to the subject matter hereof, and any and all other written or oral agreements existing between the Company and the Holder are expressly canceled, including that certain Unsecured Convertible Promissory Note between the Company and Holder, dated October 31, 2017 and the Warrants (for 150,000 shares) issued under said 2017 Note, dated October 31, 2017. The Subscription Agreement between the Company and the Holder, dated October 25, 2017 (for 500,000 shares of the Company) shall remain in full force and effect.

14.         Counterparts. This Note may be executed in any number of counterparts, each of which will be deemed to be an original and all of which together will constitute a single agreement.

15.         Interest Rate Limitation. Notwithstanding anything to the contrary contained in this Note or the Subscription Agreement (the “Loan Documents”), the interest paid or agreed to be paid under the Loan Documents shall not exceed the maximum rate of non-usurious interest permitted by applicable law (the “Maximum Rate”). If the Holder receives interest in an amount that exceeds the Maximum Rate, the excess interest shall be applied to the principal remaining owed under this Note or, if it exceeds such unpaid principal, refunded to the Company. In determining whether the interest contracted for, charged, or received by the Holder exceeds the Maximum Rate, the Holder may, to the extent permitted by applicable law, (a) characterize any payment that is not principal as an expense, fee, or premium rather than interest, (b) exclude voluntary prepayments and the effects thereof, and (c) amortize, prorate, allocate, and spread in equal or unequal parts the total amount of interest throughout the contemplated term of this Note.

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16.         Action to Collect on Note. If (i) (A) the Company breaches this Note or the Subscription Agreement or an Event of Default occurs and (B) this Note is placed in the hands of an attorney for collection or enforcement or is collected or enforced through any legal proceeding or the Holder otherwise takes action to collect amounts due under this Note (including settlement) or to enforce the provisions of this Note or (ii) there occurs any bankruptcy, reorganization, receivership of the Company or other similar proceedings affecting rights of the Company creditors and involving a claim under this Note, then the Company shall pay the reasonable costs incurred by the Holder for such collection, enforcement or action or in connection with such bankruptcy, reorganization, receivership or other proceeding, including, but not limited to, reasonable attorneys’ fees and disbursements.

17.         Loss of Note. Upon receipt by the Company of evidence reasonably satisfactory to it of the loss, theft, destruction or mutilation of this Note and, in the case of loss, theft or destruction, delivery of an indemnity agreement reasonably satisfactory in form and substance to the Company or, in the case of mutilation, on surrender and cancellation of this Note, the Company shall execute and deliver, in lieu of this Note, a new Note executed in the same manner as this Note, in the same principal amount as the unpaid principal amount of this Note and dated the date to which interest shall have been paid on this Note or, if no interest shall have yet been so paid, dated the date of this Note.

IN WITNESS WHEREOF, the Company has executed this Convertible Promissory Note as of the date first set forth above.

THE COMPANY:
XTI AIRCRAFT COMPANY
By:	/s/ Robert LaBelle
Name: Robert LaBelle
Title: Chief Executive Officer
Address: Englewood, Colorado 80112 Email: rlabelle@xtiaircraft.com

ACCEPTED AND AGREED TO
THIS 30 DAY OF NOVEMBER      , 2018:
HOLDER:
/s/ Robert F Denehy
Signature
Name (typed):	Robert F Denehy
Address:	41 Cottage Place Hillsdale, NJ 07642 USA

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EX1K-6 MAT CTRCT

Exhibit 6.18

CONSULTING SERVICES AGREEMENT

Between

XTI Aircraft Company

and

Robert J. LaBelle

Effective January 1, 2019

TABLE OF CONTENTS

1.	SERVICES		1
	(a)	General Services	1
	(b)	Independent Contractor	1
	(c)	No Benefits or Worker's Comp	1
	(d)	Appointment as a Director	1
2.	COMPENSATION		1
	(a)	Compensation	1
	(b)	Cash Bonus and Options	1
	(c)	Expenses	3
	(d)	Stock Options	3
3.	TERM AND TERMINATION		3
	(a)	Term	3
	(b)	Termination by the Company for Cause	3
4.	CONFIDENTIAL INFORMATION AND ASSIGNMENT OF INVENTIONS		3
	(a)	Confidential Information	3
	(b)	Definition	3
	(c)	Exclusions	4
	(d)	Non-Disclosure	4
	(e)	Work Product	4
	(f)	Assignment of Inventions	4
	(g)	Non-Compete	4
5.	INDEMNIFICATION		5
	(a)	Indemnification by the Consultant	5
	(b)	Indemnification by the Company	5
6.	GENERAL PROVISIONS		5
	(a)	Covenants	5
	(b)	Binding Effect; Delegation of Duties Prohibited	5
	(c)	Entire Agreement; Amendments	5
	(d)	Governing Law; Forum and Venue	6
	(e)	Severability	6
	(f)	Counterparts and Facsimile	6

CONSULTING SERVICES AGREEMENT 

THIS CONSULTING SERVICES AGREEMENT (this “Agreement”) is made effective as of January 1, 2019 (the “Effective Date”), by and between XTI Aircraft Company (“XTI” or the “Company”) and Robert J. LaBelle (“Consultant”). XTI and Consultant may sometimes be referred to herein as the “Parties” and individually as a “Party”. The Parties agree as follows:

1.             SERVICES:

(a)          General Services. Consultant shall provide services to XTI, as follows: (i) Consultant shall serve in the capacity of Chief Executive Officer of the Company; and (ii) Consultant shall perform any other senior executive function, as reasonably requested by XTI from time-to-time during the term of this Agreement that Consultant agrees to perform. The services described in (i) and (ii) of this Section 1(a) shall be collectively referred to herein as the “Services”.

(b)          Independent Contractor. Consultant shall at all times during the term hereof be an independent contractor, and as such be solely responsible for determining the exact means, method and manner in which the Services are to be performed. Consultant shall not in any way be considered an agent, employee or representative, joint venturer or partner of the Company, nor shall Consultant represent, act for, undertake any liabilities or commit to any contract on behalf of the Company as an agent or otherwise, except in his capacity as the Chief Executive Officer of the Company. Nothing in this Agreement is intended to create a relationship, express or implied, of employer-employee or principal-agent between the Company and Consultant.

(c)          No Benefits or Worker’s Comp. Consultant shall not be eligible for any of the Company’s employment rights or benefits, including but not limited to health insurance benefits, retirement plan benefits, vacation pay or sick pay. No workers’ compensation or unemployment compensation insurance has been or will be obtained by the Company for Consultant. However, Consultant is covered by all provisions of the Company’s Directors and Officers Liability Insurance policy obtained from Airsure (the “Policy”), and will continue to be covered by any amendments or extensions of the Policy or any new or similar policy obtained by the Company.

(d)          Appointment as a Director. Commencing on the Effective Date of this Agreement, and continuing during the term of this Agreement, Consultant shall serve as a member of the Board of Directors of the Company, which shall be evidenced or confirmed by a vote of the current shareholders of the Company, but subject however to the right of a majority of the shareholders of the Company any time after the date of this Agreement to elect all directors pursuant to the Company’s Bylaws.

2.             COMPENSATION:

(a)          Compensation. For all Services rendered from the Effective Date through December 31, 2019 XTI shall pay the Consultant $25,000 a month (payable on the last day of each month). The Company shall not withhold or pay any payroll or employment taxes of any kind with respect to payments to Consultant. Consultant is solely responsible for paying all payroll and employment taxes including, but not limited to, FICA, FUTA, federal personal income tax, state personal income tax, state disability insurance tax, state unemployment insurance tax, and state worker’s compensation insurance tax.

(b)          Cash Bonus and Options. In addition to the above-described $25,000/month salary for each month of this Agreement (the “Initial Term”), the Company shall issue to Consultant stock options (the “Options”) equal to 3% of the shares of the Company simultaneously with the Consultant signing this Agreement, which are authorized and issued as of the Effective Date, on a fully-diluted basis. In addition, the Company shall pay the following cash bonuses and issue the following additional Options upon reaching the “Financing” amounts indicated:

(i)          Cash bonus of $150,000 and additional Options equal to 1% of the then outstanding shares of the Company, paid and issued upon XTI raising $3,000,000.

(ii)         If the Company raises an additional $3,000,000 (above the previously-raised $3,000,000) before the end of the Initial Term, or if the Agreement is extended beyond the Initial Term by the Parties mutual agreement, a cash bonus of $150,000 and additional options equal to 1 % of the then outstanding shares of the Company, paid and issued upon XTI raising an additional $3,000,000 (above the previously-raised $3,000,000) within fifteen months from the Effective Date.

(iii)        If the Company raises an additional $9,000,000 (above the previously-raised $6,000,000) before the end of the Initial Term, or if the Agreement is extended beyond the Initial Term by the Parties mutual agreement, a cash bonus of $250,000 and additional options equal to 1% of the then outstanding shares of the Company, paid and issued upon XTI raising an additional $9,000,000 (above the previously-raised $6,000,000) within twenty-four months from the Effective Date.

(iv)        If the Company raises an additional $25,000,000 (above the previously-raised $15,000,000) before the end of the Initial Term, or if the Agreement is extended beyond the Initial Term by the Parties mutual agreement, a cash bonus of $500,000 and additional options equal to 2% of the then outstanding shares of the Company, paid and issued upon XTI raising an additional $25,000,000 (above the previously-raised $15,000,000) within thirty-six months from the Effective Date.

(v)         For all amounts above $40,000,000 raised by the company during this term or if the agreement is extended beyond the initial term by the Parties’ mutual agreement, a cash bonus of 3% of the amount raised above $40,000,000.

(vi)        When the Company raises a total of $75,000,000, the Company shall issue additional options of 2% of the then outstanding shares of the Company issued upon XTI raising a total of $75,000,000.

If the Company raises a minimum of $5,000,000 by the end of the Initial Term, both Parties shall be obligated to extend the terms of this Agreement for an additional 12-month period or any other mutually agreed-upon period (the “Extended Term”). There shall not be any correlation between the timing of Consultant's annual salary and the timing of the cash bonuses and options. For example, if the Company raises $15 million in year one of Consultant's employment, Consultant would receive the cumulative bonus amounts of $550,000, plus options equal to 3% of the Company in that first year, in addition to Consultant’s $25,000/month salary, any additional compensation agreed to after the Initial Term, and the initial 3% of the Company in Options.

Options: The Options shall have an exercise price equal to the market value of the shares being purchased and sold at the time of the issuance of the Options. For example, at the time of closing the equity crowdfunding or closing an investment under the Company’s Series B financing, the Options shall have an exercise price in an amount which is the same as the actual purchase price paid by such investors. The term of the Options shall be ten years (exercisable by the holder of the Option at the original exercise price any time within that ten-year period).

For purposes of this Agreement, “Financing” means securing one or more debt or equity investments from third parties (excluding David E. Brody) in the amounts described in Sections 2(b)(i) through (iv), above, during the period after the Effective Date.

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(c)          Expenses During the Term, XTI shall pay directly or reimburse the Consultant for his out-of-pocket expenses related to performing the Services, including but not limited to out of town travel expenses so long as such expenses constitute business deductions from taxable income for the Company and are excludable from taxable income to the Consultant under the governing laws and regulations of the Internal Revenue Code. The reimbursement of Consultant’s business expenses shall be payable monthly upon presentation to and approval by the Company of valid receipts and other appropriate documentation for such expenses. The reimbursement of expenses to Consultant under this Agreement shall be made in a manner consistent with the Company’s then applicable accounts payable policies and procedures.

(d)          Stock Options The Company plans to create a stock option plan at some time in the future, within its sole discretion. After the stock option plan is effective, the Company and Consultant shall use commercially reasonable efforts to negotiate the number and type of stock options that Company will grant to Consultant in addition to the Options to be issued pursuant to Section 2(b), above.

3.             TERM AND TERMINATION:

(a)          Term This Agreement is effective between the Parties as of the Effective Date, and shall continue for a period of one year, with either Party having the right and ability to terminate this Agreement upon sixty days prior written notice. Termination of this agreement will not divest either Party of their rights to any fee or commission that was earned for an Investment to the Company prior to notice of termination. A commission is earned for this purpose when an Investor has been Introduced and registered with the Company prior to Notice of Termination. In connection with such earned commission, Consultant shall be paid all sums due only after receipt or relevant payments by the Company, in accord with the compensation provisions of this Agreement.

(b)          Termination by the Company for Cause This Agreement may be terminated by Company at any time during the Initial Term only for Cause by giving Consultant written notice. For purposes of this Agreement, “Cause” shall be deemed to mean, in the reasonable judgment of the Company's board of directors, (i) the Consultant commits fraud, misappropriation, theft or embezzlement against the Company, or (ii) the Consultant compromises trade secrets or other proprietary information of the Company in contravention of Section 4 of this Agreement that could reasonably be expected to result in material harm to the Company or its business, (iii) the Consultant's conviction of a felony involving moral turpitude, (iv) the Consultant breaches any of the material terms of this Agreement (other than those referenced in clause (ii) of this Section 3(b) and fails to cure such breach within 30 days after the receipt of written notice from the Company, (v) intentional and willful misconduct that may subject the Company to criminal or civil liability, or (vi) in so far as Consultant, himself, serves as a member of the board of directors, breach of the Consultant’s fiduciary duty of loyalty, including but not limited to the diversion or usurpation of corporate opportunities belonging to the Company.

4.             CONFIDENTIAL INFORMATION AND ASSIGNMENT OF INVENTIONS:

(a)          Confidential Information. Consultant shall maintain the Confidential Information of the Company in strict confidence during the Term of this Agreement and after its termination, and shall exercise no less than reasonable care with respect to the handling and protection of such Confidential Information. Consultant shall use the Confidential Information of the Company only during the Term of this Agreement and as expressly permitted herein, and shall disclose such Confidential Information only to employees and representatives of Consultant as is reasonably required in connection with the exercise of the rights and obligations under this Agreement (and only subject to binding use and disclosure restrictions at least as protective as those set forth herein executed in writing by such employees and representatives).

(b)          Definition. “Confidential Information” means all oral or written communication or data information disclosed by the Company, including, but not limited to any information relating to the Company’s business affairs, including trade secrets, inventions, samples, formulae, source and object code, concepts, ideas, know-how, processes, techniques, other works of authorship, technology, features, improvements, drawings, specifications, data, databases, discoveries, developments, designs, and enhancements, business information, business plans, marketing materials and plans, technical or financial information, research and development plans, budgets, financial information, proposals, sketches, models, samples, computer programs and documentation, price lists, costs, supplier information, employee lists, employment and consulting agreements, personnel policies, the substance of agreements with customers, suppliers, vendors and others, marketing arrangements, customer lists, commercial arrangements, and any similar information, whether or not marked “Confidential,” “Proprietary” or “Trade Secret,” including all Third Party Information. “Third Party Information” means confidential or proprietary information received from a third party and that is subject to a duty on the Company’s part to maintain the confidentiality of such information and to use it only for certain limited purposes.

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(c)          Exclusions. Confidential Information excludes information that: (i) is in or enters the public domain, through no fault of Consultant; or (ii) has been disclosed by the Company to a third party without restriction; or (iii) is known to the general public through publication or otherwise; or (iv) is already known to the Consultant at the time of its disclosure; or (v) is independently developed by Consultant without use of or reference to the Company’s Confidential Information.

Notwithstanding the foregoing exclusions, all information that relates to Work Product or Inventions (each as defined below) or that is developed in connection with Work Product or Inventions under this Agreement, regardless of whether such is identified as being confidential or proprietary or falls under one or more of the exceptions set forth above, shall be deemed to be the Confidential Information of the Company and shall be subject to the restrictions set forth in this Section 4.

(d)          Non-Disclosure. Consultant acknowledges the confidential and proprietary nature of the Company’s Confidential Information and agrees, except as expressly authorized or permitted under this Agreement, (i) to hold the Company’s Confidential Information in confidence and to take all reasonable precautions to protect such Confidential Information (including, without limitation, all precautions the Consultant employs with respect to its own confidential materials), (ii) not to divulge any such Confidential Information to any third person, and (iii) not to make any use whatsoever of such Confidential Information, except as required in order to perform the Services.

(e)          Work Product. The product of all work performed on behalf of the Company by Consultant pursuant to this Agreement in connection with the Services, whether or not pursuant to a written agreement (the “Work Product”) shall be owned by the Company. Consultant acknowledges that the copyright to all original works of authorship which are or have been made by it (solely or jointly with others) within the scope of Consultant’s Services, and which are classifiable as “works made for hire,” as defined by the United States Copyright Act (17 U.S.C., Section 101), shall be owned by the Company. At termination of this Agreement, Consultant shall deliver to the Company both the completed and any uncompleted portions of the Work Product, without exception. The Company, as owner of all Work Product, may change, alter, and revise the Work Product as necessary.

(f)          Assignment of Inventions. Consultant agrees to assign to the Company all of Consultant's right, title and interest in and to any and all Inventions trade secrets, Work Product, Confidential Information, whether or not eligible for or covered by patent, copyright or trade secret protection (all collectively hereinafter referred to as “Inventions”) that are made, conceived, reduced to practice or learned by Consultant during the Term. Inventions assigned to the Company are hereinafter referred to as “Company Inventions.”

(g)          Non-Compete. During the Term, Consultant: (i) will have access to and knowledge of Confidential Information; and (ii) the Services rendered by Consultant to the Company are key services. To protect the Company’s Confidential Information and business, and because of the key technical work performed by Consultant for the Company, Consultant agrees that during the Term, and for a period of five years after the Term (regardless of whether or not the Consultant is working for the Company), the Consultant will not, anywhere in the world, directly or indirectly engage in, or have any ownership interest in, or participate in the financing, operation, management or control of, a “Restricted Business” (as defined below), as an employee, equity owner, consultant, proprietor, partner, or director. Ownership of less than one percent (1%) of the outstanding voting stock of a publicly traded corporation will not be a violation of this Section 4(g).

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Consultant agrees and acknowledges that (i) the time and geographic limitations on the restrictions in this Section 4(g) are reasonable, (ii) this Section 4(g) is reasonably necessary for the protection of Company's Confidential Information, (iii) through the performance of Services the Consultant shall receive adequate consideration for any loss of opportunity associated with the provisions herein, and that these provisions provide a reasonable way of protecting Company’s business value. If any restriction set forth in this Section 4(g) is found by any court of competent jurisdiction to be unenforceable because it extends for too long a period of time, over too great a range of activities, or too great of a geographic area, it shall be interpreted to extend only over the maximum period of time, range of activities, and geographic area as to which it may be enforceable, and any such decision of invalidity or unenforceability in any jurisdiction shall not invalidate or render such provision unenforceable in any other jurisdiction.

As used in this Section 4(g), “Restricted Business” shall mean the development, design, manufacturing, marketing or sales of manned or unmanned fixed-wing vertical take-off and landing aircraft of any weight or size, using one or more ducted fans for vertical take-off and landing, anywhere in the world.

Consultant acknowledges that its experience and capabilities are such that Consultant's breach of the obligations under this Agreement, including but not limited to this Section 4 cannot be reasonably or adequately compensated in damages in an action at law. If Consultant breaches or threatens to breach any provisions of this Agreement, the Consultant agrees that the Company shall be entitled to an injunction, without bond or other security, enjoining and restraining Consultant, or its affiliates, associates, partners or agents, either directly or indirectly, from committing such breach. The Company’s right to an injunction shall be cumulative and not limit its right to any other remedies, including damages.

5.             INDEMNIFICATION:

(a)          Indemnification by the Consultant. Consultant hereby indemnifies and agrees to hold the Company and its affiliates (including any and all officers, directors, employees and agents) harmless from and against any loss, claim, liability, cost, expense or other damages (including reasonable legal fees and expenses)(collectively “Losses”) which are caused by or arise out of Consultant's fraud, gross negligence or willful misconduct.

(b)          Indemnification by the Company. The Company hereby agrees to indemnify Consultant from any and against any Losses which are caused by or arise out of Consultant’s performance of the Services to the Company pursuant to this Agreement; provided, however, Consultant shall not be entitled to indemnification for any Losses that are the result of (i) any breach by Consultant of this Agreement, or (ii) acts or omissions of Consultant that would constitute fraud, gross negligence or willful misconduct.

6.             GENERAL PROVISIONS:

(a)          Covenants. If the Consultant's engagement hereunder expires or is terminated, this Agreement will continue in full force and effect as is necessary or appropriate to enforce the covenants and agreements of both Parties. The Parties have participated jointly in the negotiation and drafting of this Agreement. In the event an ambiguity or question or intent or interpretation arises, this Agreement shall be construed as if drafted jointly by the parties and no presumption or burden of proof shall arise favoring or disfavoring any Party by virtue of authorship of any of the provisions of this Agreement.

(b)          Binding Effect; Delegation of Duties Prohibited. The duties and covenants of the Consultant under this Agreement, being personal, may not be delegated.

(c)          Entire Agreement; Amendments. This Agreement contains the entire agreement between the Parties with respect to the subject matter hereof and supersedes all prior consulting agreements and understandings, oral or written, between the Parties hereto with respect to the subject matter hereof, except for any Non-Disclosure Agreement, executed between the Parties, which shall remain in effect in accordance with its terms. This Agreement may not be amended orally, but only by an agreement in writing signed by both Parties.

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(d)          Governing Law: Forum and Venue. This Agreement shall be construed according to the law of the State of Colorado and any actions to enforce the terms of this Agreement shall be exclusively brought in either state or federal court in Denver, Colorado, and each of the Parties consents to the jurisdiction of such courts (and of the appropriate appellate courts) in any such action or proceeding and waives any objection to venue laid therein. The prevailing Party in any such action shall be entitled to recover its attorney’s fees and all costs of any such action.

(e)          Severability. If any provision of this Agreement is held invalid or unenforceable by any court of competent jurisdiction, the other provisions of this Agreement will remain in full force and effect. Any provision of this Agreement held invalid or unenforceable only in part or degree will remain in full force and effect to the extent not held invalid or unenforceable.

(f)          Counterparts and Facsimile. This Agreement may be executed in one or more counterparts, each of which will be deemed to be an original copy of this Agreement and all of which, when taken together, will be deemed to constitute one and the same agreement. Electronic signatures shall be considered an original signature.

IN WITNESS WHEREOF, the Parties have executed and delivered this Agreement as of the Effective Date.

XTI Aircraft Company
By:	/s/ David E. Brody	/s/ Robert J. LaBelle
	David E. Brody, Chairman	Robert J. LaBelle, an individual

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