Yoyos are often given as prizes to players who win or place high in the contest. Most people who get yoyos at contests either buy them from retailers or manufacturers who sponsor the contest and set up tables there, or they buy/trade for them secondhand from other players.
Contests are a good place to meet other players, exchange tricks, try out new yoyos, etc., as well as see some of the most skilled players in the area perform. They are a social event for a lot of the players who attend.
X division is 2A-5A. Many smaller contests do not have enough non-1A competitors to have five separate divisions, so they have a 1A division and an X division. For example, if you compete in offstring, you may be competing directly against freehand players, 2A players, and/or 3A players.
What sponsored players use is generally between the player and the company. Most players do use their sponsor’s yoyos unless they are competing in a division their sponsor does not make yoyos for (such as 2A or offstring for some companies). I don’t think all sponsors require it, but it is generally good form for the sponsor and the player to support each other.
Most people who attend contests are just there as spectators. The social aspects and getting to watch the performances make it worthwhile to go whether or not you want to compete.