XTI Aerospace, Inc. (XTIA) Q2 2018 Earnings Report, Transcript and Summary

Good afternoon and welcome to the Inpixon's Earnings Conference Call for the Second Quarter Ended June 30, 2018. All participants will be in listen-only mode. [Operator Instructions] After today’s presentation there’ll be an opportunity to ask questions. [Operator Instructions] Participants on this call are advised that the audio of this conference call is being broadcast live over the Internet and is also being recorded for playback purposes. A replay of the call will be available approximately one-hour after the end of today’s call September 9, 2018. I would now like to turn the conference over to Scott Arnold, Managing Director of CORE IR the Company's Investor Relations firm. Please go ahead, sir.

Thank you, Steve. And please turn to Slide 2 for the Safe Harbor statement. Thank you for joining today's conference call to discuss Inpixon's corporate development and financial results for the second quarter ended June 30, 2018. With us today are Nadir Ali, the Company's CEO; and Wendy Loundermon, VP of Finance. At 4:05 p.m. Eastern Time today, Inpixon released financial results for the second quarter ended June 30, 2018. If you have not received Inpixon's earnings release, please visit the Investors page at www.inpixon.com. During the course of this conference call, the Company will be making forward-looking statements. The Company cautions you that any statement that is not a statement of historical fact is a forward-looking statement. This includes any projections of earnings, revenues, cash or other statements relating to the Company's future financial results; any statements about plans, strategies or objectives of management for future operations; any statements about our ability to complete the spinoff in a timely manner or at all or those that satisfy the various closing conditions through the spinoff, impact of the spinoff on our business and that of Sysorex and inflictions in Sysorex’s ability to execute the respective business strategies prior spinoff; any statements concerning proposed new products; any statements regarding anticipated new relationships or agreements; any statements regarding expectations for the success of the Company's products in the U.S. and international markets; any statements regarding future economic conditions or performance; statements of belief; and any statements of assumptions underlying any of the foregoing. These statements are based on expectations and assumptions as of the date of this conference call and are subject to numerous risks and uncertainties that could cause actual results to differ materially from those described in the forward-looking statements. Some of these risks are described in the section of today's press release titled Cautionary Note on Forward-Looking Statements, and in the public periodic reports the Company files with the Securities and Exchange Commission. Investors or potential investors should read these risks. Inpixon assumes no obligation to update these forward-looking statements to reflect future events or actual outcomes and does not intend to do so. In addition, to supplement the GAAP numbers, the Company has provided non-GAAP adjusted net loss and net loss per share information in addition to non-GAAP adjusted EBITDA information. The Company believes these non-GAAP numbers provide meaningful supplemental information and are helpful in assessing our historical and future performance. A table reconciling the GAAP information to the non-GAAP information is included in the Company's financial release. I will now turn the call over to Nadir Ali, Inpixon’s CEO.

Thanks, Scott, and good afternoon everyone. Welcome to our second quarter 2018 earnings call and corporate update. I wish to express my sincere thanks for your continued support in Inpixon. We do have some slides that we’re sharing as we talk through the call today, so feel free to log in. I am currently on Slide 3 and follow along on those if you wish. We’re pleased to have announced on August 7, 2018, that Inpixon’s Board of Directors formally approved the separation of our infrastructure segment or value-added reseller business from our indoor positioning analytics business through a pro rata distribution of all of our shares of common stock of Sysorex Inc. to holders of our outstanding common stock preferred stock and certain warrants pursuing to a separation and distribution agreement by and between Inpixon Sysorex. Before we discuss the details of the forthcoming spinoff, more specifically including the reasons for the spinoff and it anticipated implications, I would like to take some time to review our accomplishments during the second quarter, which in many ways support our upcoming transition and position each of Inpixon and Sysorex to capitalize on what we believe is their best potential. While we recognize lower revenues from the bar business this quarter as a result of some the credit issues experienced during 2017 and early 2018, which we are continuing to repair and rebuild we have been able to continue to strengthen our balance sheet, significantly reducing our liabilities and increasing stockholders equity allowing us to be able to regain compliance with NASDAQ stockholders equity requirement. We anticipate that the VAR business will have improved results during the third and fourth quarters of 2018, as a result of the efforts we have made to rebuild our vendor and supplier relationships as well as following the federal government’s busy season in September and October. During the second quarter of 2018, our Indoor Positioning Analytics business has continued to improve in terms of revenue and gross margins. In addition, we have continued to progress in the development of certain technology enhancements and new product offerings putting the launch of our IPA Pod. We have also increased the number of channel partners and customers. For those of you joining us today they are may be new to Inpixon, let me spend a few minutes to describe who we are and what we are offering. If you move to Slide 4, you will see that Inpixon Indoor Positioning Analytics or IPA, the IPA platform is redefining the indoors by locating all accessible cellular, Wi-Fi and Bluetooth signals using a rapid data mining engine to provide invaluable data delivering greater visibility and intelligence and allowing organizations to improve their decision-making processes and increase productivity. Inpixon IPA offers government agencies and commercial entities, the ability to see all mobile devices that correlate to a single identity on a single interface along with in-depth intelligent analytics. We offer SaaS or subscription and license based pricing options providing flexibility to our customers. Let's turn to next slide and talk about our growth strategy. We continue to drive our sales growth strategy by recruiting new resellers, a strategy which we are confident will continue to grow our pipeline ever more rapidly. As a result of these efforts we are on boarding high-technology, global defense, federal government and telecommunications customers, both within the U.S. and abroad. The number of increased POCs and projects in North America and in EMEA is growing. Moreover, as a result of existing relationships between our channel partners and their customers, we are experiencing shorten sales cycles and mission-critical use cases. This quarter, we announced a new channel partner relationship with Canadian-based wireless integration expert Genwave Technologies. Together, we intend to provide commercial, industrial and federal government customers with bigger, richer data stores while fusing indoor spaces with location-based detection and radiofrequency engineering tools. Known for its mastery of in-building radiofrequency engineering and design build to generate Inpixon partnership will nurture the indoor technology industry’s profits growth, intertwined with the Internet of Things or IoT, RF system and Wi-Fi. As a strategic partner in the location driven and physical arenas, Inpixon's IPA reinforces the shared spectrum bridging the IoT to RF engineering Business Insider predicts business spending on IoT Solutions will hit 6 trillion by 2021. IPA’s precise detection of universal IoT devices found through cellular Bluetooth and Wi-Fi signals depicts a complete bird’s eye view of indoor zones. Inpixon also expanded its international presence with new channel and reseller partnerships in Africa, Central America, North America, United Kingdom and Portugal. With our growing global channel partner network, our sales pipeline is also seeing a steady growth and interest across several industries, including high-technology, retail banking, entertainment, healthcare and various federal government agencies. Some of these prospects in our current pipeline have already become new customers and have received shipments as we continue to expand our reach in the U.S. and abroad. As we previously reported, initial evaluation systems have been deployed at one of the world's largest technology firms in Silicon Valley to secure its worldwide facilities against rogue device attacks. A global defense and space system contractor has ordered an Inpixon PSK unit as a test for securing sensitive areas within its facilities around the world. The U.S. government is powering the PSKs for detecting the presence of contraband mobile phones and other radiofrequency based communication devices in federal prisons. A Middle Eastern telecom provider is piloting Inpixon IPA intelligence in store in order to enhance customer experiences. Leveraging advanced analytics, the provider will be able to understand customer journey and areas that may cause congestion or high wait times. And in Kuwait, Inpixon IPA sensors have been deployed for visitor management in a multistory building. Inpixon has continued to develop and progress on certain key technology initiatives including AI, blockchain, VUI and AWS that are continuing to drive our competitive edge. We’ve enhanced our IPA engine with artificial intelligence to strengthen device identity in the evolving digitized doors of security and marketing. More specifically, combing analytics with AI technology and machine learning to identify device possession patterns and signal variance elimination. We are also leveraging AI to increase IPA’s positional accuracy several fold and build visitor profiles. Inpixon has also completed a test scenario of blockchain technology relating to identity verification and device profile management, and is evaluating the technology for incorporation into different use cases with the ultimate plan to utilize technology for wireless device management. Earlier this year, we demonstrated IPA integration with and enterprise VUI, visual user interface, digital assistant technology at the 30th Annual ROTH Conference. Inpixon continued to develop the technology, handing off analytics too and interfacing with a major VUI platform with natural language processing for queries and text-to-speech for feedback. The Company plans to deploy VUI in the near future. In February of this year, we announced that we have selected AWS cloud infrastructure for our IPA delivery. With the adoption of AWS, Inpixon’s IPA platform is able to deliver a great range -- a greater range of high ability software-as-a-Service offerings, providing both on premises security monitoring and cloud-hosted intelligence analytics. In addition, with AWS, the IPA platform can offer solution that is highly resilient, highly available and infinitely scalable. As a result, Inpixon expects that it will help its IPA engine leverage a centralized development and operations team to be able to provide an unprecedented level of service to its customers while simultaneously lowering operational costs. The migration process has already begun and the Company anticipates that most cloud customers will be on the AWS platform by the end of third quarter. To now move to the next slide, Slide number 6. You will see some information about one of our most recent exciting developments, the introduction of Inpixon's IPA Pod. I’d like to spend a few moments talking about the IPA Pod as it is integral to our growth strategy. The IPA Pod will expand Inpixon's IPA product line with an entry level product and price point to attract a wider customer base and to assist in rapidly increasing product adoption. The new IPA Pod is a miniaturized Wi-Fi version and Inpixon IPA sensor that can plug in to any electrical outlet or USB connection. The air freshener size sensor will be able to communicate with any existing Wi-Fi network and position any Wi-Fi enabled device on that network. In test environment, the IPA Pod delivers accuracy at less than 1 meter, typical Wi-Fi access point providers delivering positioning as a byproduct -- are delivering positioning as a byproduct, but are unable to do so effectively. They’re promising utility of indoor positioning using WiFi has been limited to wide-ranging proximity solutions from access point providers like Cisco and Aruba and others leveraging access points. These access points don't deliver on the required positional accuracy, making it difficult to extract meaningful intelligence and data. Inpixon's IPA Pod we will be able to fulfill this previously unkept promise of Wi-Fi positioning by enabling retail, marketing and security customers to realize the full potential of Wi-Fi indoor positioning analytics. Inpixon IPA Pod will fill an immediate need in the market. The use cases are staggering. Hotel environments, banks, hospitals, pharmacies, retail stores and any secured multifactor authentication requirements. We look forward to rolling out IPA Pod to our beta customers in Q3 2018. So on Slide 7, we will talk a little bit about our strategy for market leadership. In addition to these strategies we have implemented and discussed today in order to grow the Inpixon IPA business organically, we continue to pursue and evaluate opportunities for the growth of our business through potential mergers and acquisitions. We are interest in pursuing strategic transactions with companies that have complementary capabilities and/or innovative and commercially proven technologies in indoor positioning and big data analytics in an effort to obtain and establish customer base and more rapidly expand within the indoor location market. On Slide 7, we identified some of the types of acquisitions that we are interested in pursuing. Now moving onto Slide 8 to cover the purpose of the spinoff, the forthcoming separation of IPA business and our infrastructure VAR segment business and used the slide to explain why we anticipate that this transaction will increase long-term shareholder value. We believe this transaction will provide each of Inpixon and Sysorex with greater flexibility to focus on and pursue the respective growth strategies with Inpixon solely focused on the IPA business and Sysorex focus on leveraging their strength, the strength of its brand and reputation in order to rebuild and grow its value added reseller and integration business with federal government and commercial customers. The separation will not only provide our stockholders with an equity ownership in two separate public companies, but we believe that it will also create two sharper, stronger, more focused companies by enabling the management of each company to concentrate efforts on the unique needs of each business and the pursuit of distinct opportunities for long-term growth and profitability. Also allow each business to move to more effectively pursue its own distinct capital structures and capital allocation strategies and design more effective equity compensation programs, and enable our investors to better evaluate the financial performance strategies, and other characteristics of each business and company separately, which will permit investors to make investment decisions based on each company's individual performance and potential enhancing the likelihood that the market will value each company appropriately. For all of these reasons, we believe that following the separation each of Inpixon and Sysorex will be better positioned to achieve profitability and long-term shareholder value. We’ve talked a lot about the Inpixon products and company overview, let's take a moment and talk about Sysorex. On Slide 9 for your reference, you'll see that as a record all of our shareholders will also be shareholders in Sysorex. Sysorex is headquartered just outside of Washington DC and has an established reputation and proven track record as a value-added reseller or systems integrator with commercial and federal government customers with top security clearance, providing it with a competitive advantage. Sysorex will be led by CEO, Zaman Khan, who was originally hired by the Company in 2017 to lead our federal division. Zaman has a proven track record as a former Executive Vice President at Intelligent Decisions where he was responsible for leading its business development strategic programs, professional services, contract management and new business capture. During a period in which Intelligent Decisions experienced a growth in revenue from 20 million in 1997 to 548 million in 2014. I am confident in Zaman’s ability to rebuild and lead Sysorex to growth and profitability. He also has experienced finance business development and technology leaders on his management team to execute on their business plan. Slide 10 with Sysorex’s government contracts; in the federal government market Sysorex has three key government wide acquisition or GWAC contracts, which means that any agency can purchase offer them, these three GWAC and multi work contracts are the NASA SEWP, NIH CIO-CS and the GSA schedule contract. These task order based contracts are valid for several years and have substantial ceiling amounts remaining. They will provide Sysorex an opportunity to significantly grow its business and are key during the upcoming government busy season. Sysorex has several other contracts that are shown here with a variety of agencies for a variety of hardware and software products and services. On Slide 11, you’ll see Sysorex has an impressive historical customer base in both the federal and commercial markets which it intends to leverage as it rebuilds this business. Sysorex is also rebuilding vendor and supplier relationships to assist in support of its growth. Now let’s turn to the anticipated timeline and conditions of the spinoff with Slide 12. The transaction will result in the distribution of all of the outstanding common stock of Sysorex owned by Inpixon to be distributed pro rata to participating holders of Inpixon outstanding common stock, preferred stock and certain warrants that are entitled to participate in the distribution as determined on a fully diluted basis. Participating holders will be entitled to receive one share of Sysorex common stock for every three shares of Inpixon common stock held, or issuable upon completion -- on complete conversion of the preferred stock, or exercising of certain warrants outstanding as of the record date in connection with the distribution which is expected to be completed following the close of business on or about August 31, 2018. After the spinoff is completed, Inpixon will not own any shares of Sysorex’s common stock and Sysorex will be an independent public reporting company that is anticipated to trade on the OTC QB platform of the OTC markets following the completion of the distribution. The applicable record date of those entitled to participate in the distribution is August 21st and the anticipated distribution and completion date for the transaction is August 31st. Slide 13, identifies the conditions to the separation. The completion of the distribution of the size back shares by infection is subject to satisfaction or waiver of a number of conditions, including the effectiveness of the registration statement on form 10 as amended for Sysorex common's stock, which will occur automatically on August 14, 2018. And information statement describing the spinoff and information concerning Sysorex including the risks of owning Sysorex common stock and other details regarding the distribution will be mailed to participating holder prior to the distribution. In addition in order to initiate trading, the Form 211 filed with FINRA must be approved. There are certain conditions described in the information statement included as an exhibit to form 10 and in the separation of distribution agreement which will be filed as an exhibit to the front 10. With that, I'll now turn the call over to Wendy to discuss our financial results for the quarter ended June 30, 2018, and I will then wrap up with the few closing comments. Wendy.

Thank you, Nadir. Net revenues for the three months ended June 30, 2018, were $1.8 million compared to $15.1 million for the comparable period in the prior year. This $13.3 million decrease or approximately 88% is primarily associated with the decline in revenues earned by the infrastructure segment as a result of the supplier credit issues and a $1.6 million decrease in revenue resulting from the adoption of the new ASC 606 revenue recognition policy beginning in January 2018. For the three-months ended June 30, 2018, Indoor Positioning Analytics revenue was $1.3 million compared to $1.2 million for the prior-year period. Infrastructure revenue was $564,000 million for the three months ended June 30, 2018, and $13.9 million for the prior year period. We anticipate the infrastructure segment revenue which will be part of the Sysorex going forward will start to recover in the third and fourth quarters of 2018, as we rebuild our supplier relationship and head into the federal government busy season. Gross profit for the three months ending June 30, 2018, was $1 million compared to $3.4 million for the prior year period. The gross profit margin for the three months ended June 30, 2018, was 55% compared to 22% during the three months ended June 30, 2017. This decrease in gross margin is primarily due to the decrease in lower margin storage and maintenance sales. Indoor Positioning Analytics gross margin for the three months ended June 30, 2018 and 2017 were 72% and 67% respectively. Gross margins for the infrastructure segment for the three months ended June 30, 2018 and 2017 were 19%. GAAP net loss attributable to common stockholders for the three months ended June 30, 2018 was $5.9 million compared to $6.4 million for the prior-year period. This decrease in loss of $500,000 was attributable to the changes described for the various reporting captions discussed previously. GAAP net loss per share for the quarter ended June 30, 2018, was $1.08 per share compared to a net loss of $81.26 per share for the comparable period in 2017. Pro forma non-GAAP net loss for basic and diluted common share for the three months ended June 30, 2018 was $0.34 per share compared $56.70 per share for the prior year period. These decreases are attributable to the changes discussed in our results of operations. Adjusted EBITDA for the three months ended June 30 2018 was a loss of 4.1 million compared to a loss of 2.7 million for a prior year period. Adjusted EBITDA for the six months ending June 30, 2018 was a loss of 7.5 million compared to a loss of 6 million in the prior year period. Non-GAAP adjusted EBITDA defined as net income or loss before interest, provision for income taxes and depreciation, and amortization plus adjustments for other income and expense items, non-recurring items, and non-cash stock-based compensation. On the balance sheet, we ended the second quarter with cash and cash equivalents of $8.3 million and total current assets of $11.8 million. The Company continues to identify areas where it can create operating efficiencies realized operating cost savings in 2018. This concludes my comments, and I now would like to turn the call back over to Nadir.

Thanks Wendy. We are on the forefront of the landscape that will forever change the way technology, data and human experience intersect with the immediate solutions to tomorrows needs and location based analytics that are predicted to demonstrate during this growth and demand. We are leading the innovation rates and have revised our strategic growth approach to a land grab that we are confident will increase returns upon execution. This has not been an easy path nor one that has rewarded our investors and stakeholders just yet. We understand and acknowledge the difficulties for those of your continued support the Company during recent times. We believe we have faced our challenges head-on and are strategically pivoting to position our company to move past the challenges and get back on the track to grow. It is now yet reflecting in our fundamentals, but we believe that we have corrected course and that the results will follow. With that, Keith, we are ready to open up the call for any questions.

[Operator Instructions] And the first question comes from Ross Silver with Sylva International.

Just two questions for you. The first one is as it relates to the indoor positioning analytics, could you tell us a little bit about client base or the customers you are targeting on that side, just to get an idea of size and scope of these types of customers?

Sure. So, certainly on the security side use cases or applications with our technology, we are targeting, not only government agencies which we have talked about quite a bit in the past and continue to grow our customer base with government agencies, but we are also looking at enterprise customers. We have engaged with several large enterprise customers in the Fortune1000 in pilots and deployments. And I expect as IoT security issues become more pervasive just like other cyber security breaches, one big one figures a lot of attention and focus from others. We expect that will happen and I am sure there is probably some IoT security breaches already have occurred and we just haven’t heard about them yet. But we think that's another huge opportunity I mentioned earlier on the call today that a high-tech company here in Silicon Valley, that’s a very large Fortune 500 type company. We have others that are now starting to see the need for protecting the airwaves that are better in their facilities right, so that's where our security don't term comes in, and we’re ready to protect those airways. So I think corporate boards are definitely going to be start thinking more and more about this, and we will have to address the security risks associated with all of these connected devices in their facility, especially with -- in this day and age of rapid corporate espionage and hacking.

And then just one other question is it relates to the spinoff, congratulations on getting that done here fairly soon, it sounds like it’ll be done before the end of the month. Could you just talk a little bit about the benefit associated with the spinoff and kind of thinking behind it?

Sure, yes, I mean I covered some of that on the call, but let me add to what I said earlier. Certainly, there is -- the aspect of both companies being able to focus their energies and resources on their own business plan and growth strategies. For Inpixon in particular it allows us to dedicate our resources and energies on this multibillion-dollar location and analytics opportunity and really spend all of our efforts along that side. I think it also will help our shareholders because the messaging to the street will be much clearer. We’ve had two companies under one banner all this time. So, I think separating these two with the Board's decision to do so some time ago and it’s just -- and in the time process you get it done, makes a lot of sense and certainly feedback that I received from analysts and shareholders is that they also feel that the message will be much clear, and I think Inpixon will finally be seen truly as the technology company after the separation. And Sysorex likewise, can then flourish on its own as the systems integration bar business and really become a leader in that space because that’s historically where that business has done well and has a brand reputation. But for Inpixon I think because it was incubated inside of this part of this all the time. This will be the first time that it's a standalone technology company and I think the market will react well to that. I think it will also attract investors and partners, employees, etc. who have always wanted to be part of the IPA story but were reluctant to get involved and so this separation happened so we’re looking forward to that as well.

Thank you, and this concludes our question-and-answer session, and I would like to turn the conference back over to Nadir Ali for any closing remarks.

Alright, thanks Keith. Thank you again for your support and interest in Inpixon. We look forward to updating you on our continued progress. Thank you for joining us today.

Thank you. This conference is now concluded. Thank you for attending to today’s presentation. You may now disconnect your lines.