I removed the #EXTM3U and it was recognized already but it only plays the first file.

I've update my X1's firmware into 1.5. I exported a playlist from iTunes (Mac) into an M3U8 file then edited it based on the tips posted here and retained just 5 songs in the list for easy editing as seen below. It is saved on the root. I keep on getting a "File Not Found" message.  ...

I think the remaining option for now is check if the car stereo has an option for another aux connection that can accommodate a 3.5mm jack which would most likely require a proprietary aux connection cable.

The thing when you use the X1 via the USB AUX of your car head unit it that it just becomes a USB memory device, reading the contents only of your microSD. Thus, you are not able to use the processing power of the X1. Its really equivalent to attaching a microSD card reader to your head unit's...