XTI Aerospace, Inc. Common Stock

Good afternoon and welcome to the XTI Aerospace Full Year 2025 Earnings Call. Joining us today from XTI Aerospace are Scott Pomeroy, Chief Executive Officer, and Brooke Turk, Chief Financial Officer. Before we begin, please note that certain statements made during today's call may be considered forward-looking statements within the meaning of the federal securities laws. These statements are subject to risks and uncertainties that could cause actual results to differ materially from those described in the forward-looking statements. Additional information regarding these risks and uncertainties can be found in the company's filing for the Securities and Exchange Commission. The forward-looking statements made today speak only as of today, and the company undertakes no obligation to update them except as required by law. This morning, the company posted its earnings news release, slide presentation, and prepared remarks to the investor relations section of its website. Today's session will be conducted as a live video earnings call. Scott Pomeroy and Brooke Turk will be responding to questions from participants. The discussion today will focus on full year 2025 results, and the company will not be providing or discussing fourth quarter results separately. Additional information may be referenced from the materials available on the company's investor relations website. I would now like to turn the call over to Scott Pomeroy, Chief Executive Officer and Chairman of the Board. Mr. Pomeroy, you may begin.

Great. Well, thank you. And on behalf of the Board of Directors and the management team, I want to extend my thanks My appreciation for your joining the call here today with us at XDI. As the moderator noted earlier today, we filed the 10K. We issued an earnings release. We filed our script as an 8K. And we also posted the investor deck on the website. By the way, all those materials can be found on the website. That's a lot of information. And obviously, this is a different approach. For us, we intend to maximize information that's both compliant and clear for you as investors. Our objective here is not to waste your time simply reading to you something that you are perfectly capable of reading through yourself. Thus, we file the script in advance. And we really want to ensure that our time is spent talking with you, not at you. And so the objective here is to maximize the time that we have to entertain your questions, what's on your mind, and try to maximize the amount of information that we convey during the short period of time we have together. Obviously, we've been very busy, as the information would suggest, that's out there over the past five months since the closing of Your Own Nerds. We have fully integrated the company. We've established new objectives, targets, strategies to drive growth into a business that's got an eight-plus year history of growth and profitability. We exited one of our divisions, and we established a clear and bold new vision for the overall company as we seek to take full advantage of one of the most significant market opportunities in modern aerospace. We look forward to entertaining your questions and hearing what's on your mind. With that, I'll turn it back over to the moderator. We'll have a few instructions to provide, and then we'll open it up for you to extend to us your questions.

At this time, we will open the floor for questions. To ask a question, please click on the raise hand button, which can be found on the black bar at the bottom of your screen. When it is your turn, you will receive a message on your screen from the host allowing you to talk. and then you will hear your name called. Please accept, unmute your audio, and ask your question. We will wait one moment to allow the queue to form. Our first question will come from Matthew Galenko with Maxim Group. Please unmute your audio and ask your question.

Hey, good afternoon. Thanks for taking my question. Just to confirm, you can hear me? We can, yes. Thanks, Matt. Perfect. Thanks for taking my question. Maybe could you walk us through how you're navigating the DJI FCC potential disruption? Are your customers prepared, and how is your engagement with them on preparing for that?

Yeah, thanks, Matt. Good question. Obviously, as you know, we're under a ban from the administration under a prospective. In other words, the ban that's currently in place is for future SKUs, future models of foreign drones, in particular DJI and Autel that are on the list. So, that's intended to provide for a ramp of compliance on the part of the customers, those like us that are in the distribution. We find a mixed bag of adoption. Frankly, we're seeing that some of the governmental agencies are taking more of an aggressive stance and beginning to make the migration and move sooner. And then we have many, many who are looking at this as a slower adoption, that it will take a few years to take effect, as some of the new models that come out are are no longer SEC certified. So from a customer standpoint, you see a different kind of reaction depending on who they are and what sector they're in. And certainly one of the things that you're seeing from our strategic statements that we've made about what we're looking at in getting more into manufacturing, one of the objectives there is to mitigate this potential risk. We don't see it as a flash cut. We don't see it as something that's going to take place overnight, that we're going to have time to address that sunsetting. But we also don't want to rely on that because we don't have control over those regulatory pronouncements. So we're preparing to fill that gap. I'd also point out that, you know, as a the largest distributor in the U.S., we've got a multitude of brands that we represent. So, to the extent that our customers begin to sunset their dependence on or their willingness to use DJI, we are replacing that with other models that are manufactured and produced in other places, including the U.S., but there's still a lot of foreign manufacturing that we're having to rely on and make sure that they're blue list compliant, NDAA compliant. So, we're also seeing our customers rely on us more heavily to discern that regulatory labyrinth that we find ourselves in to ensure that what they're doing is going to be NDAA compliant both now and in the future. So, that enhances our relationship with our customers on the necessity of our involvement with them as well. In total, while we see it as disruptive, we don't see it as traumatic. It's something that we have to address. We think we've got time to address it, but we're looking at this under a multitude of facets that we're addressing.

Our next question comes from Michael Molnar with MITE Advisors. Please unmute your line and ask your question.

Hi, Brooke and Scott. Hi, Michael. Michael. Good afternoon. Thanks for doing this, and thanks for putting out your voluminous filing this morning that had to be claimed. Whoever pulled that off, I have to say, was heroic and did it in a timely fashion, so that's impressive. Scott, is there any remnant of the engineering and development and R&D capabilities that came with the vertical takeoff and landing efforts, the internal combustion efforts, that is relevant for you going forward? So I think the way I see the business is it's disproportionately drone nerds. which is a nice business, and you got it at a nice price at a good time, and you got UMAC on board, which is great. Alan's terrific. I'm just curious, sort of, are there other components here? Maybe some of the legacy R&D and engineering abilities are relevant in future product development efforts. So how might the revenue composition look sort of by year end? Is it just disproportionately grown nerds or? Are there other sources that might evolve?

Yeah, good question, Michael. So first and foremost, the simple answer is yes, right? And we looked at that as we made the determination to pause the VTOL business. And as we pointed out in our findings, it's really a capital allocation or prioritization issue. For us, when you look at the development of the VTOL, which is a long-dated asset, juxtaposed against the market that really is more short-term in nature in terms of capital raising, we were able to take some of the capabilities. Frankly, when you're any kind of an aircraft, vertical takeoff and landing kind of an aircraft, and I do include drones among that mix, you're really looking for three things. You need engineering. You need what the industry calls touch labor, which is really the ability to take your engineering and turn it into a product that you can test fly, and then flight control system capabilities. So when we looked at the potential repurposing and then filling in some of the needs that we had, we looked at those three areas, engineering, touch labor, and flight control systems. You see in our filings, as we've talked about what is, you know, we refer to as our ADS, or Autonomous and Defense Systems Division, you know, formerly the XDI aircraft. We've retained those skills, and we are currently bidding and proposing on numerous different government programs that are dealing with autonomous flight, And historically, the tri-fan was a vertical takeoff and landing. It was just a manned aircraft. You probably could not have picked a more difficult, you know, aircraft to go build initially, a manned version of a drone in essence. So what we've really in essence done is rolled that back and said the current future is in autonomous flight. We need to ensure we have that capability. to ever make the VTOL truly viable in the ecosystem out there. And so our focus is on drone, drone technology, drone capability, drone manufacturing. And obviously the business, the core business we have is a distribution business that is, you know, is beginning to move into governmental or military focus as well. But it's historically... planted its flag very squarely in the commercial and enterprise market. So, yes, we have retained that capability. We've already put that to good use as we're bidding and proposing. You know, that bid and proposal has us, you know, looking at somewhere in the neighborhood of up to $150 million roughly of contract value with over $1.5 billion of production value should all those be won. Now, we don't We don't anticipate winning all those by any stretch, but we are relevant in those contracts. So, as you think about future revenues, I would think about both the distribution revenue, contract revenue, manufacturing revenue in the future, in the not-too-distant future for us.

Okay. So, Scott, just repeat, so that it's command and control, or how would you describe those capabilities? That you just referenced.

Like, we're... Navigation... With regard to the team, yeah. Well, it's basically the ability to design, produce, and manufacture at scale. Productize your manufacturing, if you will. And so, the skill set that our leadership has, I think we've highlighted Steve Zerabian, in particular, who's leading, leads that group, comes out of of Boeing Phantom Works. He's had a long stint at Paiseki doing just exactly what he's doing for us now, which is government-related work around aircraft. And we're focused on the autonomous drone flight and and programs that the government's currently looking at. And by the way, we're much more facile and flexible. So what you're starting to see, even in the drone market, whether it's Anduril, Shield AI, they're starting to become the industrial military complex in their own right. And so having somebody who's more, you know, more conversant in, more flexible with, more capable, in the area of your group three, four, and five drones is something that the military relishes.

Okay. And does counter drones fall broadly into that realm?

Absolutely. Yeah. Yeah, certainly an area of focus for the military. As does your group one and group two, right? We're seeing different, you know, different – agencies, departments within DOW and otherwise, starting to look at Group 1 and Group 2. Because we're still in the group 3 through 5, you know, it would be a fair accusation to say we're still killing gnats with bazookas. And while we're being taught in theater like Ukraine and Iran and other, you know, Israel, that, you know, you could do some serious damage with a $30,000 drone. And so we're trying to, you know, the military is trying to figure some of that out.

And is the $160 million guide for calendar 25, if I have that right, how does that break down drone nerves versus other?

So we haven't specifically broken it down. It does incorporate, you know, all of our revenue. that we anticipate for this year. But, you know, you probably could do as good a job just on the back of the napkin with, you know, given our current base of, you know, 120, 121 million that we reported for last year, 41 million for the quarter, roughly. So, you know, we're, it's a formidable business going towards this.

Yeah. Okay. Yeah, for sure. Okay. That's great. Well, I'm, Nice to see you both, Brooke. Thanks for all your help in keeping us up to speed, and thank you for your time, and congratulations on your progress, and happy to be a shareholder. Great. Thanks, Mike. Thank you.

Our next question comes from Matthew Gallenko with Maxim Group. Once again, please unmute your line and ask your question.

Hello again. A couple of follow-ups. First being maybe how your capital allocation philosophy has evolved with kind of the new operating structure and objectives for the business. You do touch on a little bit of potential for M&A in the press release, so I'm curious where things kind of shake out and whether you expect to be acquisitive under any of the segments in the next year or two.

Yeah, thanks, Matt. So, again, simple answer would be yes, we do expect to be acquisitive. Obviously, we've got – there are constraints on that. We've got – our market cap is what it is. You know, we don't have some of the cash arsenals that some of our peer groups have that have taken advantage of some of the market conditions out there. But we do and we have signaled that capital needs for potential acquisitions is something that we will be considering. So we have to be smart about it. And we'll be looking for opportunities. We think we did a very, very good job of buying drone nerds right. And, you know, we think that's one of our areas from the senior leadership team, of the company that's, it doesn't take you much digging to figure out that this is a team that's, you know, comes from a legacy and heritage of M&A. It means we understand how to buy right, we understand how to integrate, we understand how to derive value out of an M&A strategy. And so, you know, we will absolutely be looking at that. The industry is consolidating. And so, you know, to the extent you're not a consolidator, you're a consolidatee in this market and environment likely. So, we believe we've got the makings of being a successful consolidator as we take the advantages that we have. You know, we occupy a space that very few others really can boast, which is a clear understanding of the market. I mean, we have You know, we know what the demand signals are out there, and we understand who's buying, what they're buying, why they're buying what they're buying, and it makes us, you know, an ideal candidate for, you know, really moving laterally both into manufacturing and government applications. So we're, you know, we're confident that we'll be – We'll be active in that area, but you can expect us to be, you know, as disciplined and as smart as we were on the drone nerds acquisition.

Thanks. And then on the revenue mix, can we kind of expect a similar shift in 26 as we had in the prior year? In other words, enterprise and government grow faster, distribution shrinks. or do you think it'll be a relatively steady mix compared to the prior year?

I think we'll start to see growth in government. I think you're also going to see continued growth in enterprise. If you take a look at the chart that we provided in the deck where we showed some of the mix shifting, what really is happening there is we're moving more and more to direct interface with customers The objective of Drone Nerds itself is to become a highly valued value add reseller as we look to consume more share of wallet and we look to have a stickier relationship directly with our customers that are more enterprise and commercial related and government related. Historically, the company was built on a high volume of retail. They have systematically, you know, moved themselves out of that for margin considerations. And so, you know, as we moderate the mix, as we diminish our reliance on some of the Chinese products, as we expand share of wallet, my expectation is that you'll see some margin expansion.

Great. Thank you.

We received a written question that asks, what is the core driver of XTI's business today? And as a reminder, if you'd like to ask a question, please click on the raise hand button, which can be found at the black bar at the bottom of your screen.

Yeah. I mean, you know, I'd probably amplify a few of the points in answering that question with some of the points I've already made. You know, really our XTI drones, which is represented by drone nerds today, is really the engine. of the company. As we've noted, we generated over $121 million in 2025 pro forma revenue and positive cash flow. It's a scaled commercial platform serving enterprise and increasingly defense customers. And that profitability allows us to fund some of our operations. It allows us to move with some investment into some of the other areas of our business. as I've highlighted. We view this as a flywheel with our anchor in the core driver of the business, which is, in fact, our distribution. It informs us. Data is incredibly important. As I mentioned earlier, we understand the demand signals, and that's a consequence of the of the data that we derive by serving over 14,000 customers and tens of thousands of units that we sell each year. And so we derive a tremendous amount of information about what's driving demand out there. That data feeds the other elements of our strategy around demand. government development around our manufacturing aspirations, and we think we're well positioned because of our knowledge and understanding of the industry to be one of the more efficient operators as we seek to be a gap filler and assist in gap filling what's clearly a shortcoming in the United States today, which is drone manufacturing capability.

Our last question is also a written question. How is XDI positioned in the defense and autonomous systems market?

So, as I mentioned earlier, you know, our AVS or autonomous defense systems was born out of our legacy roots of XDI aircraft. We brought over the capability and, you know, and intentionally so. in the area of engineering and touch labor and in flight control systems, which are all necessary to be able to, you know, design, develop, produce aircraft in the group three, group two, group five space in government drone production. As a consequence of that capability, We find ourselves now with the opportunity to be bidding and proposing on nearly $150 million of contract value that has $1.5 billion in production value. I'll reiterate again that we don't expect to win all those, but we think we're a relevant and, you know, positive, you know, entrant into that process. We think that we are going to have success in that area. We aren't necessarily forecasting or projecting exactly what that will be, but we do anticipate some success. In addition to some of the work that we're bidding directly with some of the government agencies, such as the Navy, the Marines, the Air Force, SOCOM, to name a few, we're also looking to bid with primes who are further bidding into some of the government contracts. So, we've got an, you know, an abundance of opportunity. We're evaluating that. We think it gives us, you know, line of sight to be able to bring forward ultimately NDA compliant domestic production. And we'll, you know, we'll continue pursuing that. And you'll hear from us as we progress our successes in that area. And You know, that's certainly where we fall short in what our learnings are as we go through that process. But we think we're well positioned.

There are no more questions at this time. I will now turn the call back over to Mr. Pomeroy for any closing remarks.

Excellent. Well, thank you very much. And, again, appreciate the participation and the questions. You know, at the risk of being repetitive, I suppose. I would leave you with a handful of thoughts, the thing that we would want you to remember. Obviously, we have a strong foundation. We secured an asset with DroneNerds that constitutes the baseline for us and the foundation upon which we're building the rest of our strategy. It's a scaled commercial platform. It's our engine. We're performing. We're delivering over $120 million in revenue at over 20% gross margins, strong EBITDA out of that. We are looking to expand share of wallet, expanding customers, moving closer to the customer as we increase our value. We've got an opportunity to expand, you know, both geographically and vertically as we go deeper with that in the area of M&A. And it really provides the basis of everything else which is embodied in the data. We've launched our advanced technology in manufacturing that's powered, you know, literally by our understanding of the demand signals from our distribution platform. We won't be product biased as we build out capability. We will be relying on those demand signals to determine, you know, what we produce and for whom. We're targeting NDAA compliant domestically manufactured hardware that's purpose built for enterprise and defense procurement. And ultimately, you know, it's led by an individual, Dr. Williams, who we highlight in all of our materials. You can see his credentials there. but this is an individual that has studied, understands, and is capable in the area of manufacturing. We had a long ways to go in this country to make up the ground against some of our foreign competitors. In the area of autonomous defense systems, you know, we determined that we had a need to pause the tri-fan. We made that decision, you know, to reiterate we are not We're currently not spending money against that program that has been reappropriated, and we put ourselves in a position by keeping engineering, touch labor, and flight control capabilities that we now have a foundational bid, propose, and ultimately produce opportunities with the military. I listed before some of the departments that we're bidding with, that we expect some success with and the magnitude of the contract and production value that that represents. Bottom line is what we've established strategically as our flywheel is working. Ultimately, distribution drives customer adoption and data at scale. That data gives us an understanding of those demand signals that enhances our manufacturing effectiveness and efficiency. Those capabilities in manufacturing enhance our credibility and the success that we expect to see in the productization from the military. And ultimately, all of that feeds, you know, success in the military feeds civilian and commercial product placement and adoption. When taken together, it all will drive growth at the top line, margin expansion, and strategic value creation over time. So we are encouraged by where we are. It's only been five months since we closed, as I opened some of my comments with. We've been extremely busy putting all of these pieces in place and together. We're moving at a rapid pace, and we're thankful for the support and the interest in the company, and we look forward to further conversation and and bringing you further information in the not-too-distant future.

This concludes today's call. Thank you for joining us. You may now disconnect.