Q2 2023 Inpixon Earnings Call and Presentation by XTI Aircraft Management

Participants

Nadir Ali; CEO & Director; Inpixon

Alexandra Schilt

Michael Hinderberger

Scott Pomeroy

Presentation

Operator

Good afternoon, and welcome to Inpixon's Business Update presentation. Participants are being advised that this presentation is being broadcast live over the Internet and is also being recorded for playback purposes. A webcast will be available on the company's Investor Relations page of its website within approximately 24 hours after the end of the call.
I would now like to turn the call over to Alexandra Schilt, Vice President of Crescendo Communications, LLC, Inpixon's Investor Relations firm. Please go ahead.

Alexandra Schilt

Good afternoon, everyone. Thank you for joining Inpixon's second quarter business update presentation, where management intends to discuss business developments during the quarter as well as provide an update on the recent definitive merger agreement with XTI Aircraft. With us today are Nadir Ali, Inpixon's Chief Executive Officer; Scott Pomeroy, XTIs Chief Financial Officer; and Mike Hinderberger, Chief Executive Officer of XTI Aircraft. Today, Inpixon released financial results for its 2023 second quarter ended June 30, 2023. If you have not received Inpixon's earnings release, please visit Inpixon's Investor Relations page at ir.inpixon.com.
During the course of this conference call, the company will be making forward-looking statements regarding expectations for future performance and business prospects. Forward-looking information involves risks and uncertainties, and the stated expectations could differ materially from actual results or performance. The company advises you to read and contemplate the information and disclaimer comments within our news release and presented on the slides, which include details about forward-looking statements, risk factors and where to find more information about the proposed transaction.
I will now turn the call over to Nadir Ali, Inpixon's CEO. Nadir, please go ahead.

Nadir Ali

Thank you, Alexandra. Good afternoon, everyone, and thank you for joining our business update presentation. This is a very exciting time for Inpixon and we'll be spending most of our time today on our recent merger announcement with XTI. But before that, I'd like to start by doing a quick recap on our industrial RTLS business.
Our award-winning full-stack industrial RTLS or real-time location system leverages a network of connected hardware and software components that track the location and objects within a defined area to provide actionable intelligence that helps customers make data-driven decisions, resulting in smarter, more efficient operations, enabling the precise positioning of people, assets and objects RTLS utilizes RF technologies such as ultra-wideband, bluetooth, Wi-Fi and our proprietary chirp technology to wirelessly communicate and determine the location of the targeted object.
Utilization of RTLS within a business allows customers to locate, learn and leverage. With our complete lineup of location technologies, we can meet the needs of nearly any facility type and use case. Given that our platform is technology agnostic, it can integrate seamlessly with third-party systems like SAP and others, which enhances a customer's ability to learn from the information we delivered. Then by leveraging this valuable data, customers can enable automation and data-driven decision-making to drive reduced costs, increase productivity and streamline their operations.
RTLS is increasingly being utilized by Industry 4.0 smart factories, warehouses, mining operations and digital supply chains to enhance their operations. Our customers include leading manufacturers in the automotive, aerospace, mining, energy and industrial segments, including companies like Siemens Energy, BMW, Festo and PERI.
Our financial results for the quarter ending June 30, 2023, were released today. These results no longer include the CXApp business, which was separated with the KINS transaction in March of this year. Revenues were flat for the 6-month period. However, gross margins have expanded as we increased our recurring revenues, primarily based on the Internet product line.
We expect the industrial RTLS business to continue to expand its opportunities for increasing reoccurring revenue by providing our customers with a location as a service business model instead of the onetime nonrecurring revenue from hardware and software product sales. We also reduced our operating expenses as reflected in our Q2 results, and our cash on hand at June 30 was approximately $15.7 million.
As we've discussed before, we believe that Inpixon isn't being adequately valued in the market. As a result, the Board and I have been taking steps to explore and execute strategic alternatives that we believe will unlock value for our shareholders. This is why we did the CXApp transaction and why we continue to explore additional strategic transactions.
Towards this end, we recently entered into a merger agreement with XTI Aircraft. You're going to hear from the XTI management team shortly. About the competitive advantage the XTI TriFan design as compared to others in the business aircraft market. You'll hear how XTI's aircraft is unique, how it can potentially grow market share and revenue and scale faster because it can leverage existing infrastructure has longer range than other vertical takeoff and landing or VTOL aircraft and can meet existing regulatory requirements and so on. These are just some of the reasons that we felt XTI was the right opportunity for Inpixon and our shareholders. Not to mention that they are building a very cool looking aircraft.
In addition, of course, we think it's fantastic that XTI already has tremendous interest and validation with more than 700 conditional free orders, which we expect could yield over $7 billion in gross revenue based on their current list price of $10 million per aircraft, assuming, of course, the company is able to execute on the development program for the TriFan, secure FAA certification and deliver these aircraft. We believe they should be able to continue to drive value for the combined company and for our shareholders as they deliver those aircraft. We're very excited to get into the details and show the potential of the combined companies which will result in a NASDAQ-listed company with the name changing to XTI Aerospace, the new senior management team and a new Board of Directors.
We will be holding a shareholder meeting and vote on this transaction and any related proposals to ensure a successful closing. Shareholders of a soon-to-be-scheduled record date will have the opportunity to participate in that shareholder meeting and vote. And we expect to close the merger during the fourth quarter of 2023. As I mentioned, there will be a new leadership team. It is expected that Wendy Loundermon, our current CFO, and I will be leaving the company after the transaction closes. The new CEO and Chairman of the Board is expected to be Scott Pomeroy, XTI's current CFO and the CEO of the XTI Aircraft subsidiary will be Michael Hinderberger.
Our current COO, Inpixon's COO, Soumya Das, will become the CEO of the subsidiary operating Inpixon's RTLS business. We wanted to use today's call to help you understand more about the XTI business and meet some of the senior leadership team. We do plan to hold another call about this transaction. So stay tuned for that date and time for that event.
All right. And with that, I'm pleased to introduce Scott Pomeroy, who is the current CFO of XTI, and expected CEO of the new combined company, XTI Aerospace. Scott?

Scott Pomeroy

Thanks, Nadir, and good afternoon. It's a pleasure to be joining you as part of Inpixon's earnings call for the second quarter. My name is Scott Pomeroy. And it's not a noted, I've been serving as XTI's Chief Financial Officer since 2022. But we'll be assuming the role of Chairman and CEO of XTI Aerospace, the expected new name of the company following the closing of the transaction.
By way of just a brief introduction, I have a long-standing career with and for substantial private equity owners serving portfolio companies as their CFO or CEO, I have served in that capacity for these companies across several sectors in the private and public markets. And I was fortunate enough to have taken one of the organizations public through a jumbo IPO a number of years ago and I'm excited to be assuming this new role for XTI.
I'm joined today by Mike Hinderberger, the current CEO of XTI Aircraft. Mike will continue serving in his capacity as CEO of the XTI Aircraft subsidiary post-merger. Mike brings a strong history of aircraft development and certification to his leadership role with us here at XTI. We are fortunate to have Mike leading the design, development and production of the TriFan 600 aircraft.
At XTI, we have an established vision statement to transform business aviation from a more efficient and sustainable future. As with all vision statements, it's lofty and purpose driven. Oxford languages defined transformer transformation is making a thorough or dramatic change in form appearance or character. What we are developing and ultimately selling at XTI is an aircraft that is unlike anything in the market today. But yet is comprised of parts, subassemblies and systems that are all very familiar to the FAA.
Another word that stands out in this statement is efficiency. And it's fundamental to transformation. To deliver on our objective, we must build an aircraft that is more productive with minimal wasted effort, all that at a lower cost. And finally, this transformative aircraft must be sustainable in all the various meetings of that word, longevity, meaning we'd expect it to have a lengthy and useful shelf life as well as environmental sustainability and safety. As we take full advantage of various tech ready capabilities, both now and in the future.
Before we provide more specifics on XTI and the TriFan 600, I wanted to take a minute or 2 and provide a bit more context around the sector. Dozens of vertical takeoff and landing aircraft concepts for passengers have been tested in flight throughout the last century. Many, if not most, of these concepts are actually rooted in military designs and applications. For instance, the Marine Corps V-22 Osprey Tilt-rotor is an aircraft many of you may have heard of. Jet engine thrust aircrafts such as the British Harrier or the U.S. F-35 fighter jets have been around for a number of years.
And the AgustaWestland 609 Tilt-rotor a very expensive VTOL aircraft is reporting that after years of design and testing its certification and entry into service will occur sometime over the next year. Each of these aircraft solves different flight issues and serve diverse mission objectives. However, we believe they all have limitations and inefficiencies with a common theme of being very expensive designs, which in turn require costly manufacturing processes and certifications.
None of these historical solutions or configurations have met the challenge of developing a commercial VTOL aircraft that has high forward speed, relatively easy to fly, very safe, cost effective and with an empty weight low enough at a maximum growth rate high enough to allow for an optimized range to payload profile.
While the concept of VTOL has been around for decades. Today, much of the conversation around this sector is largely dominated by companies in the E or what we call electric VTOL sector. As evidence of the significant growth of the sector, the vertical flight society, the world's leading nonprofit organization working to advance vertical flight maintains a directory of eVTOL designs, which now number in the hundreds.
Some of the larger eVTOL companies in this e-aviation sector took full advantage of the robust SPAC market in 2021. To advance the development of their aircraft by entering the public markets, allowing them to raise capital from a new source. 5 prominent eVTOL companies completed SPAC merger transactions during that year, with a combined valuation at the time of the merger in excess of $10 billion according to articles published on nasdaq.com. The companies in the eVTOL sector are currently at various stages of completing the full FAA review process, involving certifications for design, production, airworthiness and operation. None of the eVTOL companies have achieved the required certifications to date. Although as I noted earlier, some are indicating that they expect some of those certifications over the next couple of years.
While we believe these eVTOL aircraft will eventually have significant utility, there are noteworthy differences between them and us as well as challenges they still need to overcome. The most significant differentiators range in speed. The eVTOL market is essentially comprised of air taxis that fly a short distance, generally under 100 miles compared to our 700-mile range. Their challenges include an undefined regulatory environment, the nascent infrastructure such as charging stations, vertiports and landing sites and final certifications involving new battery under hydrogen technologies. These limitations are largely imposed by the current technical readiness of battery or hydrogen power sources, limiting range, air speed, altitude and payload. Taking off and landing vertically consumes a lot of energy, and today's current technology simply limits a number of key aircraft performance capabilities.
And while the TriFan 600 could certainly compete with any of these leading eVTOL aircraft, it has been designed for a much broader use case. So much so that we have begun to refer to the aircraft in a more hybrid sense, a vertical lift crossover airplane or VLCA as we like to call it. The TriFan is much more of a business aircraft versus the air taxis that dominate the eVTOL space. The TriFan is targeted for regional intercity capability such as Manhattan heliports to Washington, D.C. versus the more local short-range utility of the eVTOLs.
The TriFan makes point-to-point regional air travel possible over distances of 700 miles at airspeeds of nearly 350 miles per hour, accommodating up to 6 people and most importantly, using existing infrastructure with no additional flight regulations required. The aircraft is ushering in a new utility for VTOL, true regional air travel for medevac missions. Taking off and landing like a helicopter while maintaining the comfort and speed of a business airplane. For those of you that have not had a chance yet to take a look, the following video is a computer simulation of the TriFan 600.
(presentation)

Scott Pomeroy

As reflected in the video, the crossover TriFan elegantly blends the best-of-business aircraft with the convenience and efficiency of helicopters. Over 700 miles of range at speeds of 350 miles per hour reduced time because of the point-to-point capability, no new infrastructure or regulation required and given the inherent limitations of clean energy power, the TriFan has been intentionally designed to incorporate proven aircraft systems and assemblies, like the 2 turbo shaft engines, ducted fans for hovering crews and fly by wire or computer regulated flight controls. No new manufacturing systems are required. The TriFan is essentially proven parts, systems and subassemblies and a newly conceived configuration and design.
The TriFan's versatility, one airplane able to perform the role of two of fixed-wing aircraft and a helicopter truly expands and enhances our addressable market. The existing business aircraft sector, such as the King Air turboprop airplane from Beechcraft or airplanes from Cessna or Pilatus, and even some light jets are clear areas of the market in which we will compete. The emerging regional air mobility market, such as the Leonardo AW609 Tilt-rotor that I referred to earlier.
By the way, Leonardo is just the new name for AgustaWestland, is another prime target for us as we seek to compete on both price and performance basis. The existing helicopter market is also a logical market for us in situations where existing solutions are pushing the envelope of the range and comfort of a helicopters utility.
And as I noted earlier, the eVTOL urban air mobility sector is one in which we can also clearly compete. Although we are certainly subject to the same issues, of immature infrastructure and regulatory environment that will play the pure-play eVTOL competitors. The strategy is to bring our solution to the market to provide a better alternative for existing regional carriers, corporations private owners, medical transport, et cetera. We also expect to introduce our aircraft into situations and circumstances that have never before envisioned air travel as an option. In total, the existing and emerging addressable markets are currently estimated to be in excess of $1 trillion.
As I previously mentioned, one of the fundamental benefits of the TriFan is that it will require no new infrastructure for placement into service. The aircraft will be able to operate from existing helipads and airports as well as firm ground such as parking lots, open fields or roads, wherever it's safe and legal. In addition to the speed and range we've already touched on, the aircraft has altitude capabilities of up to 25,000 feet above most weather in a pressurized cabin and will be certified IFR, Instrument Flight Rules for flight and inclement weather as well as being safe under known icing conditions.
The map reflected here has a couple of examples of TriFan's range capability, centered in Los Angeles and New York. And as you can see, the 700-mile radius provides for very practical and efficient regional travel. When we dial in our map to the Greater New York area and contemplate the metrics and what will be the mission objectives of the intra-city eVTOL competitors, you can see here the clear performance benefits of the TriFan 600. To highlight just one, all eVTOLs will require the development of an entirely new and widespread battery charging network to allow them to have useful route structure. However, a TriFan can deploy rapidly worldwide using existing infrastructure.
Because of TriFan designed primarily for speed and range, we will compete initially in the existing and emerging business aircraft in medevac markets and look to adopt full electric capability as the battery and/or hydrogen technologies mature and evolve. As we take -- we had a different vantage point and zoom out a bit to a broader aircraft competitive set that includes helicopters and business airplanes and look at some of the same characteristics and attributes, the TriFan continues to showcase very well. From its range, speed and payload to proven propulsion and other mechanical systems to the ability to place the aircraft into service without having to build new technologies or infrastructure. We believe that TriFan will offer the best of a helicopter combined with the best of a fixed-wing business airplane when it enters service.
With that, let me turn it over to Mike.

Michael Hinderberger

Thanks, Scott. What makes the TriFan 600 possible today this technology that it didn't exist or wasn't mature previously. Today, we use advanced computational fluid dynamics for the aerodynamic design to optimize the vehicle for hover, transition and crews. With the aid of a rear fan, we have vertical lift capability. The rear fan doors will open during vertical flight operations and close for the cruise portion, providing for a very efficient flying. We plan to initially certify with 2 proven turboshaft engines capable of running on 100% sustainable aviation fuel, the use of which will result in a life cycle CO2 emissions reduction of about 80%.
The aircraft will incorporate fly-by-wire controls to aid the pilot during takeoff, landing and transition to conventional flight. While the pilot will initiate a maneuver through control stick, the fly-by-wire system will ensure continued safe and stable operation for the passengers. TriFan 600 is designed to fly above the weather with a comfortable pressurized cabin, similar to most business aircraft today. For takeoff and landing, we will have excellent pilot visibility through the use of optimized windows, camera systems and lighting.
At XTI, we are fully committed to sustainability. Unlike short-range eVTOL aircraft for our regional mission requirements of 700 miles range and 350 miles per hour speed, battery and hybrid technology just doesn't yet exist. Therefore, we're taking a phased approach, a practical approach, first certifying with turboshaft engines and later introducing a hybrid configuration as the technology, regulatory guidance and infrastructure mature. This considerably derisks the program.
The TriFan 600 VLCA is a beautiful airplane. Its length and wing span are both less than 50 feet to ensure access to standard helipads, and it has a takeoff weight of about 10,500 pounds with 6 acumens. It's designed to take off vertically, but it has the added flexibility to rotate the front fans to intermediate positions or facing forward to use any available runway to increase the payload and the range. We have 3 main interior configurations, the standard business interior with club seating for 4 plus an additional passenger upfront, we have an air taxi variant that will accommodate up to 6 passengers with bags and also an air medical configuration.
Between 2017 and 2020, we developed a small version of the airplane and 65% to be exact, that we use to validate hover capability of the vehicle. This battery-powered demonstrator validated the power required, the weight and balance of the aircraft. And as you can see in the lower right-hand picture, we did execute a series of successful hovers. Initial hover flights are tethered at this stage of the program, which is why you see the aircraft only a few inches off the ground in this photograph. Unfortunately, further testing of this aircraft was significantly hampered due to the COVID pandemic, we have since been focusing on development of the full-scale piloted version.
The TriFan is a versatile aircraft that we project will reduce time, cost and emissions compared to today's choices. For example, compared to a helicopter on a 200-mile trip, say Wall Street heliport to Boston flying at twice the speed, we can arrive at half the time, hence, about half the cost and half the emissions. This then allows the TriFan to be available to conduct twice as many flights hence twice the revenue potential.
TriFan also saves the aircraft's owner money over the long period. The 5-year cost of ownership is in line with today's business aircraft, but of course, they need a runway. So the TriFan's vertical takeoff ability affords time savings. Compared to helicopters, our cost of ownership, as you can see, is quite a bit less. So what does all of this mean to XTI's value proposition? We estimate the total addressable market to be over $1 trillion. Today, we have over 700 conditional preorders, which will yield over $7 billion in gross revenue based on our current list price of $10 million per aircraft, assuming the company is able to execute on the development program with the TriFan, secure FAA certification and deliver these aircraft.
As detailed in this presentation, we believe our projected superior range and speed and our attractive cost of ownership, coupled with a measure reduced risk approach aligned with the current infrastructure and regulatory environment provide strong competitive advantages. An independent financial advisory firm ascertained the enterprise value of XTI to be within the range of $252 million and $343 million.
And with that, I'll turn it back to Nadir. Thank you.

Nadir Ali

All right. Thanks, Michael. So you'll all note on the left of this slide, we've set up a merger information where you can keep up to date on the latest merger-related news. So I encourage you to look at that bookmark and bookmark that site for future access.
All right. Alexandra, would you please lead us through the Q&A discussion.

Question and Answer Session

Alexandra Schilt

Thanks, Nadir. Like last quarter in our conference call announcement press release, we suggested interested parties submit their questions in advance. We'd like to address those questions for you now. Some questions were duplicative, so we did our best to reconcile those where possible. If you have any further questions after the call, please feel free to follow up with Investor Relations and we'll be sure to respond as quickly as possible.
Let's start with the transaction-related questions for Nadir. Nadir our first question. Why is Inpixon pursuing this merger?

Nadir Ali

All right. Well, so as I discussed earlier in the presentation, we believe that the value of Inpixon is not properly reflected in our current share price or market cap. And so as a result, we explored and evaluated strategic alternatives with the goal of really unlocking value for shareholders. This strategy has resulted in our CXApp transaction, which we completed in March. And now we've got this definitive merger agreement with XTI.
So we believe we found the right opportunity with XTI for a variety of reasons, starting with the competitive advantage of their unique aircraft, their go-to-market strategy the market size and the industry that they're in, we believe, is the future of aviation. We believe there are existing preorders that validate the potential they have for continuing to grow shareholder value in the future. So because of all these factors, we see the potential opportunity for significant upside with this transaction and for our shareholders.

Alexandra Schilt

Thank you, Nadir. Our next question what will be the ratio of stock ownership following the merger?

Nadir Ali

Yes. So we covered this in our recent press release and disclosed that we anticipate that the XTI shareholders will own about 60% of the outstanding shares of common stock of the post-combination company and Inpixon shareholders will retain approximately 40%. However, this ratio is subject to adjustment and determination of the final exchange ratio will be in accordance with the terms of the merger agreement. So we'll provide further details as we move forward towards the closing, but that's where we are today.

Alexandra Schilt

Thank you. Next question. Will my Inpixon shares be automatically converted into shares of the new company?

Nadir Ali

Actually, so for Inpixon shareholders, nothing will change if you hold on to your current share position. Inpixon shares will stay the same. However, our name and our ticker symbol will be changing. But there will be no conversion or exchange of your shares.

Alexandra Schilt

Thank you. And why was the shareholder meeting moved?

Nadir Ali

Good question. So the meeting -- shareholder meeting that was recently adjourned is really to allow shareholders more time to respond and vote as we do have important proposals within our proxy materials that will help us execute on our strategy. So now we plan to host the shareholder meeting on Friday, September 8, at 1 p.m. Eastern, and we encourage all our investors to take this opportunity to vote.

Alexandra Schilt

Great. Thank you, Nadir. Now let's shift to some XTI-related questions. Scott, our first question is, why is XTI doing this deal?

Scott Pomeroy

Thanks, and great question. Simply and fundamentally, we believe the transaction enhances our ability to execute on our business plan. It allows us to maintain our production road map, formalized partnerships with suppliers and really accelerate the aircraft development, further allows us to expand on our world-class team and really enhance our profile as a NASDAQ-listed company.

Alexandra Schilt

Thank you, Scott. Our next question, the preorder pipeline of more than 700 aircraft is substantial. How would you characterize these customers and their use cases.

Scott Pomeroy

While customers are spread across the world and our mix of business aircraft and helicopter fleet operators, individuals, businesses and regional airlines. Because of the specific attribute of one TriFan, being able to perform the role of both business aircraft and the helicopter at a competitive price, we believe our customers actually see the unique value this offers to transport customers point to point. Now forget that you can buy just 1 TriFan rather than both an airplane and a helicopter with all the attendant savings that delivers.
Our contacts have told us they anticipate being able to use the TriFan for business travel, air taxi shut and shuttle air medical connecting communities with geographic challenges were lacking effective transport infrastructure and even for military applications. At times when we pointed out the TriFan's unique abilities to potential customers, their eyes kind of light up when they start to see the opportunities that were previously unimaginable for various use cases.

Alexandra Schilt

Thank you. Next question, could you please explain your sustainability path and why you're not using electric propulsion like all the eVTOLs aircraft being developed?

Scott Pomeroy

Yes, really good question. Simply put, our mission is just very different from theirs. We're targeting a longer-range regional market. The TriFan is able to fly, as we've said, up to 700 miles helipad to helipad at speeds of up to 350 miles. The missions, these missions are just not possible with the battery technology that exists today. But we are committed to sustainability. As a matter of fact, we spent about 5 years working on hybrid electric propulsion. Both with batteries and with hydrogen.
Last year, we concluded that there are too many variables outside our control, such as tech maturity of these novel propulsion systems, evolving regulatory guidance lack of charging infrastructure to name a few. And we really felt that, that would lead to delays in cost escalation of the project. So we're therefore starting with a reliable certified turboshaft engine capable of operating on 100% staff, as Mike pointed out, which significantly reduces the CO2 emissions while greatly derisking the program in terms of cost and time line. We'll transition to hybrid electric and finally to all electric propulsion once these technologies mature and the other factors are evolved sufficiently.

Alexandra Schilt

Thank you, Scott. And who are your main competitors?

Scott Pomeroy

In terms of commercial or civilian VTOL aircraft that have almost similar performance to the TriFan, I'd have to say it's the Leonardo AW609 Tilt-rotor which is projecting certification sometime next year, as we mentioned earlier. Though given publicly available information, we believe we have significant advantages in terms of both acquisition and operating costs. We also sporadically hear of a few others, but they appear to be lagging in development compared to the TriFan. And of course, the all-electric short-range, low-speed eVTOL manufacturers we've mentioned quite extensively here. On the other hand, number in the hundreds.

Alexandra Schilt

All right. Thank you, gentlemen. That does conclude the Q&A session. As I mentioned in the opening of this call, you are advised to read and contemplate the information regarding forward-looking statements, risk factors and where to find more information about the proposed transaction. This information has been published on the SEC website and our definitive merger announcement press release in this conference call date announcement press release and in this presentation.
Now I'll turn it back over to Nadir for the close.

Nadir Ali

All right. Thanks, Alexandra. And thank you all for joining us today. As always, we appreciate the support of all of our shareholders and look forward to providing you with more updates as developments unfold on this exciting news. And as I mentioned earlier, we do plan to have another call in the near future. So keep an eye out for that. And you can also bookmark our merger information portal at xti-inpx-merger.com. Okay. Thank you, everyone, and take care.