XTI Aerospace, Inc. 10-Q

Item 1A. Risk Factors We face a number of significant risks and uncertainties in connection with our operations. Our business, results of operations and financial condition could be materially adversely affected by these risks. In addition to the risk factors set forth below and the other information set forth in this Form 10-Q, you should carefully consider the factors disclosed in Part I, Item 1A, “Risk Factors,” in our Annual Report on Form 10-K for the year ended December 31, 2020, filed with the SEC on March 31, 2021, which report is incorporated by reference herein, all of which could materially affect our business, financial condition and future results. For example, these risks now include risks related to recent transactions, the COVID-19 pandemic and related economic developments. Changes in the value of the Sysorex common stock we own may result in material fluctuations (increases or decreases) in our total asset value and net income on a quarterly basis. On April 14, 2021, the Company entered into a Securities Settlement Agreement (the “SSA”) and a Rights Letter Agreement (the “RLA”), each with Sysorex, Inc. (“Sysorex”), whereby Sysorex agreed to satisfy in full its outstanding debt, in the aggregate amount of $9,088,176 as of March 31, 2021, owed to the Company, including but, not limited to, amounts outstanding under that certain secured promissory note (the “Sysorex Note”), originally dated December 31, 2018, as amended from time to time (the “Debt Settlement”). To effect the Debt Settlement, Sysorex agreed to issue to the Company (i) pursuant to the terms of the SSA, 12,972,189 shares of its common stock and (ii) rights to acquire 3,000,000 additional shares of its common stock pursuant to the terms of the RLA. The Debt Settlement was entered into in connection with Sysorex’s closing of a reverse triangular merger with TTM Digital Assets & Technologies, Inc. The Company recorded $7.5 million for the release of the previously recorded valuation allowance related to the Sysorex Note, $1.6 million of interest income, and a gain on settlement of $49.8 million equal to the difference in the carry value of the Sysorex Note, including interest, and the value of the common stock and rights to acquire additional shares received in the settlement. As of September 30, 2021, the value of these securities decreased to $7.7 million from the prior quarter as a result of the corresponding decrease in Sysorex's common stock price. Accordingly, the unrealized loss on the Sysorex note increased to $51.3 million for the nine months ended September 30, 2021 as compared to $29.0 million for the six months ended June 30, 2021. Consequently, approximately 4% our assets represent the shares of common stock of Sysorex we own, which are inherently volatile. Accordingly, the value of our total assets and as a consequence, the price of our common stock may decline or increase regardless of our operating performance, which may result in losses for investors purchasing shares of our common stock. Further, to the extent that we experience unrealized losses in connection with such securities from declines in securities values that management determines to be other than temporary, the book value of those securities will be adjusted to their estimated recovery value and we will recognize a charge to earnings in the quarter during which we make that determination. Additionally, the Company has no control over the price the Company will eventually receive as a result of the disposition of such assets and may be unable to sell the aforementioned securities at favorable prices quickly or when desired. We previously received a notice of failure to satisfy a continued listing rule from the Nasdaq which may ultimately result in delisting of our common stock. In several instances in the past, including as recently as on October 25, 2021, we received written notification from Nasdaq informing us that because the closing bid price of our common stock was below $1.00 for 30 consecutive trading days, our shares no longer complied with the minimum closing bid price requirement for continued listing on Nasdaq under the Nasdaq Listing Rules. Each time, we were given a period of 180 days from the date of the notification to regain compliance with Nasdaq’s listing requirements by having the closing bid price of our common stock listed on Nasdaq be at least $1.00 for at least 10 consecutive trading days. 68 Table of Contents While we have regained compliance within the applicable time periods in the past but not in connection with the October 25, 2021 notice. In accordance with Nasdaq Listing Rule 5810(c)(3)(A), we have been provided a period of 180 calendar days, or until April 25, 2022, in which to regain compliance. In order to regain compliance with the minimum bid price requirement, the closing bid price of our common stock must be at least $1.00 per share for a minimum of ten consecutive business days during this 180-day period. In the event that we do not regain compliance within this 180-day period, we may be eligible to seek an additional compliance period of 180 calendar days if we meet the continued listing requirement for market value of publicly held shares and all other initial listing standards for the Nasdaq Capital Market, with the exception of the bid price requirement, and provide written notice to Nasdaq of our intent to cure the deficiency during this second compliance period, by effecting a reverse stock split, if necessary. However, if it appears to the Nasdaq staff that we will not be able to cure the deficiency, or if we are otherwise not eligible, Nasdaq will provide notice to us that our common stock will be subject to delisting. Delisting could adversely affect our ability to raise additional capital through the public or private sale of equity securities, would significantly affect the ability of investors to trade our securities and would negatively affect the value and liquidity of our common stock. Delisting could also have other negative results, including the potential loss of confidence by employees, the loss of institutional investor interest and fewer business development opportunities. The shares of our Series 7 Convertible Preferred Stock are subject to a holder’s redemption right and requires us to maintain a minimum cash balance. At any time beginning on the 6-month anniversary of the original issue date of the Series 7 Convertible Preferred Stock and ending ninety (90) days thereafter, each holder of such shares may require us to redeem all or part of the Series 7 Convertible Preferred Stock then held by such holder in cash for a redemption price per share equal to the stated value plus all accrued but unpaid dividends thereon and all liquidated damages and other costs, expenses, or amounts due in respect of such shares (the “Redemption Amount”), provided that in certain instances of our default more particularly described in the Certificate of Designation for the Series 7 Convertible Preferred Stock, the Redemption Amount is increased to 110% of the stated value plus all accrued but unpaid dividends thereon and all liquidated damages and other costs, expenses, or amounts due in respect of such shares. If we fail to pay the full Redemption Amount timely, we will be obligated to pay interest thereon at a rate equal to the lesser of 18% per annum or the maximum rate permitted by applicable law, accruing daily from the due date until the Redemption Amount and all interest thereon are paid in full. Until the earlier of the conversion or redemption of all shares of Series 7 Convertible Preferred Stock and June 14, 2022, we will maintain a cash balance (in the form of cash and cash equivalents equal to the sum of (i) the stated value of all of the shares of Series 7 Convertible Preferred Stock then outstanding, (ii) the aggregate amount of any debt (including trade payables) and other securities that are issued that are senior to, or pari passu with, the Series 7 Convertible Preferred Stock, and (iii) the aggregate amount of monetary judgments with respect to us and our subsidiaries or any of their respective property or assets. As a result, we will be limited in the amount of cash that we utilize until such requirement lapses. Any limitation in our ability to deploy capital as needed could have a material adverse effect on our business and operating results. We may never have sufficient number of authorized shares of common stock to honor exercise of the warrants issued in September 2021. On September 15, 2021, in connection with our sale of Series 7 Convertible Preferred Stock, we issued warrants to purchase up to an aggregate of 47,000,000 shares of common stock pursuant to a securities purchase agreement with certain institutional investors. We currently have insufficient number of authorized shares of common stock to issue upon the exercise of such warrants and will need to seek stockholder approval to authorize additional shares of common stock or to effect an alternative corporate action in connection with the potential exercise of the warrants or any future equity financing transaction we may seek to undertake. Accordingly, we are seeking approval of an increase in the number of our authorized shares of common stock at our 2021 annual meeting of stockholders. However, we cannot assure you that our stockholders would authorize an increase in the number of shares of our common stock. Our failure to have a sufficient number of authorized shares of common stock for issuance upon future exercise of the warrants could result in an inability of the warrant holders to exercise their warrants and in our obligation to incur additional continuous expenses to call stockholders’ meeting every four months to seek the stockholders’ approval, which could adversely affect our business, financial condition, results of operations and prospects. The effects of the COVID-19 pandemic could adversely affect our business, operations, financial condition and results of operations, and the extent to which the effects of the pandemic will impact our business, operations, financial condition and results of operations remains uncertain. The United States and the global community we serve are facing unprecedented challenges posed by the COVID-19 pandemic. The pandemic, and the preventative measures taken in response (including “shelter-in-place” or “stay-at-home” and 69 Table of Contents similar orders issued by international, federal, state or local authorities), have resulted in, and are expected to continue to result in, significant volatility and business and economic disruptions and uncertainty. We have taken steps to protect our employees and we continue to operate all of our services, but the extent to which the effects of the pandemic will impact our business, operations, financial condition and results of operations is uncertain, rapidly changing and hard to predict and will depend on numerous evolving factors that we may not be able to control or predict, including: ● the duration and scope of the pandemic; ● the extent and effectiveness of responsive actions by authorities and the impact of these and other factors on our employees, customers and vendors; ● the impact of the pandemic on our employees, including key personnel; ● the extent to which we are able to maintain and replace critical internet infrastructure components, when necessary; ● any disruption of our supply chain and the impact of such disruptions on our suppliers or our ability to deliver products and services to our customers; ● our continued ability to execute on business continuity plans for the maintenance of our critical internet infrastructure, while most of our employees continue to work remotely; and ● any negative impact on the demand for our services and products resulting from the economic disruption caused by the pandemic and responses thereto. If we are unable to successfully respond to and manage the impact of the pandemic, and the resulting responses to it, our business, operations, financial condition and results of operations could be adversely impacted.