Unfortunately, Capcom® did not put much thought into the control options in Mortal Kombat™ games for PC. Mainly that they make it nearly impossible to use keyboard-based controllers/encoders for controls in the games, even though keyboard-based controllers have been around since forever. Put simply, they don't make it possible to play with 2 players on one keyboard or a keyboard encoder like have been used in many brands of game controllers for many years.
To work around these limitations you can simply make the X-Arcade work as a gamepad instead.