Draganfly - Q1 2024

Transcript

Rolly Bustos (Internal Investor Relations Representative)

All right, I think to respect everybody's time, I think we will get started today. So as usual, greetings and welcome to all shareholders and stakeholders to today's Draganfly 2024 Q1 Earnings Call. My name is Rolly Bustos, and I am the Internal Investor Relations Representative here at Draganfly. We appreciate you joining us. We'll start with our CEO and President Cameron Chell recapping the first quarter earnings headlines.

All right. Is this just me with the echo?

Cameron Chell (President and CEO)

Hi, good afternoon.

Rolly Bustos (Internal Investor Relations Representative)

Sorry.

Cameron Chell (President and CEO)

Oh.

Rolly Bustos (Internal Investor Relations Representative)

We will then quickly move right into a more detailed financial review for CFO. We'll then jump back in and discuss some operational highlights and subsequent events. We will conclude with our Lead Director, Scott Larson, moderating the pre-submitted questions we've received. As always, you're welcome to reach out to me at [email protected]. Once again, I remind everyone that this presentation may include forward-looking information and statements. These statements are not guarantees of future performance or financial results, and undue reliance should not be placed on them. Any future events or financial results may differ from what might be discussed here. The full forward-looking disclaimer can be found on Page 2 of this presentation. So Cam, if you're ready, please go ahead.

Cameron Chell (President and CEO)

Hi, sorry, everyone. I just had a computer glitch there. Let me just give me one second here to pull the document back up. I apologize. Sorry about that. Of course, this always happens, right, at the worst moment. Yeah, I've got it here now. Sorry. Great. Thanks, everybody, for your patience. I appreciate that. Okay, so Q1. So our Q1 revenues were $1.3 million, somewhat by design. That included $1.2 million in product sales and just under $100,000 of services. Now, it's important to note that this is a 45% increase Q over Q from our Q4 of last year. Now, as most of you probably realize, we had gone through a major upgrade of two plants last year and were able to bring on our main plant in the end of Q3, beginning of Q4, of last year.

We've been preparing or throttling, if you will, basically for expected incoming orders that we've been working on now for about a year and a half, in particular from our military customers. A number of announcements leading up to this, you will have noticed, our sales into military customers, which are all kind of the precursor in order for us to be able to meet the demand signals that were given to us by the military. I'll talk a little bit more about this after Paul runs through the numbers, exactly where we're at in this cycle and the steps that we've taken in order to prepare for it. We had a gross profit of $280,000, which is about a 21% margin. Our cash balance, as of the end of Q1 was $4 million.

We had a subsequent event, just right after the Q here of another $3.5 million. So we're in a strong cash position. As Paul will run through, you'll see that our burn rate is declining significantly. So, without further ado, before I get into some of the operational highlights, I'll turn it over to Paul Sun, our CFO, to run through the financial results. Paul?

Paul Sun (CFO)

Yeah, thanks, Cam. Thanks, everyone, for joining. So Cam just kind of went through the revenue numbers. I'll, I'll just go through this table, real quick. So he talked about quarter-over-quarter. In this table, we're doing a year-over-year comparison. So for our Q1 of this year, we did $1.3 million. That's about 16% down from $1.6 million in the first quarter of 2023. Again, part of the reason is what Cam had talked about in terms of the, the, the transition we had. Again, revenue comprised $1.2 million of product sales, with the balance coming from drone services. He did talk about the gross profit being $280,000, compared to $443,000 in Q1 of last year. I will note there was a one-time non-cash write-down of inventory of about $148,000. So gross profit would have been $429,000.

So, gross profit for Q1 2023, if you kind of X'd out their non-cash, would have been $520,000. If you take away the one-time inventory write-down that we just talked about, it's, it's basically a flat year-over-year gross profit of about 32%. Total comprehensive loss for the quarter was $1.89 million compared to a loss of $7.1 million. That is, again, partially talking about the, the burn that, that Cam just mentioned. Again, there's some non-cash changes, in that number. There's a fair value of derivative liability of about $1.8 million, the inventory write-down of $148,000, and we had a small gain on an impairment of a note receivable of $6,700. So the loss would have been $3.5 million versus an adjusted loss of $7.1 million a year ago.

So again, a pretty big decrease in the year-over-year loss, primarily due to lower office and miscellaneous costs, professional fees, and wages. So Cam, if you now go on to the next table, the quarterly table. Yeah, so we just went through the year-over-year changes. So now we'll do kind of the quarter-over-quarter changes between this quarter and Q4 of last year. So, revenue for Q1 increased $413,000 to $1.3 million, up from $916,000 in Q4 of last year. Again, an increase of 45% due to higher product sales. Gross margin percentage for Q1 was 21%, again, comparing to 28.3% versus Q4. Again, if we back out those numbers, the true comp is 32% for this quarter compared to 41% of last quarter, with the difference being really product mix between the quarters, as some products have higher margins, some services have higher margins.

So it really kind of depends on where they fall in the quarter. In terms of comprehensive loss for Q1, again, $1.89 million compared to $4.2 million for Q4 of last year. Again, we had that gain in fair value of derivative liability of $1.8 million, the write-down in inventory, and the gain on the note receivable. So if you back that out, comprehensive loss again, $3.5 million. If we do the same analysis with Q4 of last year, their loss pretty much stays the same at $4.2 million. So again, our loss is, is getting better. It's, it's lower, due to professional fees and wage costs. So on the final table here on the next page, you can just scroll forward, Cam. Yeah, it just kind of looks high-level at our balance sheet.

You can see our total assets increased slightly from $8.3 million to $9 million from the end of 2023 to the end of March, largely due to an increase in cash. Working capital, as at the end of this quarter, was $534,000 compared to what is shown here as a deficit of $717,000. However, if we X out that non-cash fair value of derivative liability again, of $4 million in that particular case, working capital would be a surplus of $4.6 million this quarter and $3.5 million at the end of December of last year. Doing the same analysis for the shareholders' equity at this quarter end would be $5.7 million versus the $1.7 million shown here and $4.6 million at the end of December versus the $408,000 shown here. So you can really see the derivative does swing the number. And again, it is a non-cash, number.

Again, we continue to have minimal debt. And as Cam mentioned at the outset, at the outset, company's cash balance is $4.3 million compared to $3.1 million at the end of December of last year. And with that, I'll pass it back to you, Cam.

Cameron Chell (President and CEO)

That cash balance is, not inclusive of the subsequent event of the $3.5 million.

Paul Sun (CFO)

Correct.

Cameron Chell (President and CEO)

That's just coming from an operational standpoint. It was an important quarter for us. Again, our big focus through the end of last year and the beginning of this year was really tooling for and securing what we believe are the, by all indications, larger, in particular, military contracts that we've been working on for the last year and a half, plus. That said, a couple of things of note in preparation for this is we did announce an additional partnership with ParaZero, the drone safety systems, which are standardizing on our Commander 3XL system. And we actually are using this on a project that we announced with Mass General Brigham Hospital, where we were selected by them to perform their medical deliveries.

So they're moving forward in Massachusetts with a significant pilot, which will enable them to be delivering things like test kits, samples, pharmaceuticals, etc., which normally take hours and hours to get through the city that they are now looking to do by drone. So this, this was a very, very prestigious win for us. And kudos to the team for putting this together with this excellent crew. Mass General worked closely with the Department of Transportation, and they've actually been working on this project for a number of years in contact with the FAA, as well. We also announced Doodle Labs, a number of projects with them. Doodle, in addition to this, also just got approved over in the Ukraine theater on testing, where we've been for a couple of years.

So that was a significant announcement for us, as well as UXV Technologies. So UXV has a very particular and specified controller that's ruggedized and very important, in particular, in military applications. And so we've been working with both these companies for the last year and a half, and we were able to formalize our relationship with them and actually announce it, based in anticipation of a number of the other projects that we've got coming up. We were also at the AUVSI Conference, which was an extremely interesting conference for us recently, probably the greatest level of activity that we've ever had as an organization, with multiple specific customers coming to the conference just to not just speak with us, but do a number of strategic planning sessions as we roll out with them.

Also on that front, we are enrolled in what's called the Green Program with AUVSI. And the Green Program, or what they call the Green List, is a list that supersedes the Blue List. So, originally, when the Blue List first came out, I was very dismissive of it. And this was a mistake on my part, because we have been selling into and continue to sell into government agencies in North America, you know, for the last 20+ years. I really looked at the Blue List as, as a marketing thing, and, and we weren't, you know, candidly over-impressed with what they were what they were certifying. Little did we know that it would become a very important list to be on.

Now, there is provisions that if you sell into government agencies or into the military in particular, they can make a request to Blue List to include you on the Blue List. And we've had those requests made on our behalf by the military, but Blue is out of budget. So they're not including more people on that list. So AUVSI came out with what's called the Green List, which actually supersedes the Blue List. So if you're on the Green List, then you supersede Blue. So we're going through green certification right now. But other than you know delaying some of the sales cycle by a few weeks, the Blue List has not prevented us from selling or being eligible to sell into the government requirements that we have because we already were selling. We are already NDAA compliant, and we already sell into the military.

Further to this, we did enter our drones into a contest. And we were awarded the best enterprise drone, the best delivery drone, and actually, I can't, I forget what the other award was. But we're pretty pleased with it, and we're really kudos to our engineering team for the work that they put together and the valuations that they went through in order to do this. The First Nations is becoming a really important player in drones across North America, simply because of the mapping and the survey work, and in particular because of the mining and the fire prevention or wildfire work. So we were selected by a number of organizations throughout the quarter, but in particular, the Ulkatcho First Nation, which, of note, has a very, very strong program that they're moving forward with federal firefighting authorities.

Along with this, similar, the Squamish Search and Rescue has entered into a partnership with us whereby they have selected the Draganfly, not only just our drones, but actually the entire Draganfly as the exclusive drone provider and solution provider for all of their search and rescue. And they are one of the busiest search and rescue organizations in North America, well over 100 calls per year, fast water rescues, mountain rescues, search and searches, lost hiker, you know, just the list goes on. There probably isn't much of anything that they haven't had to do. And the use cases that they're presenting for why they selected in particular the 3XL and the Heavy Lift actually are pretty unique and well positioned for us.

So that this is strategic for us because it's also an organization that's looked at by many search and rescue organizations as the leading indicator of what they're doing with their drone programs and how they're looking to move forward. We also announced a partnership with MMS. So MMS is an organization or, excuse me, a company that does provide many tactical options for the military, and has sold into many military organizations. MMS has selected Draganfly as a drone of choice to deliver many of their tactical payloads. And we've been on multiple demonstrations with them over the last year and a bit, and we're able to finally announce that partnership.

I think it's important to note also that in terms of some of the demonstrations and such that we've been doing, I want to draw attention in particular to the demo training and evaluation that we went through at Fort Liberty. We had the great pleasure of training over 200 special and conventional forces on our 3XL and on our new FlexForce Modular FPV UAV. So the FlexForce FPV is the first NDAA-compliant FPV to be utilized within the forces. It's gone through full evaluation. I can't give more detail than that at this time. But know that we came out with this product for the express purpose, based on demand that was coming for this particular product as an NDAA-compliant device. So it has some incredibly unique features.

We are not overly compelled to talk a lot about some of the features of this particular product. It is very strategically differentiated, not just because it's an FPV, but because of the features of this particular FPV that were designed in part by the very specific requirements that were asked for for this particular product. So we're really excited about where this is going to go, who's buying it. We have stood up a production line for this now, as part of the evaluation process that we had to go through for this to be a product that could be purchased by the DoD and several different defense forces. We had a very successful SOF Week.

SOF Week is the Special Operations Forces week, where we did hold live demos with just about well 19 specifically different agencies in partnership with MMS. That was a full day at a live site just outside of out of Tampa. Again, this was in support of the orders that we're ramping up for right now. I'm not going to spend a lot of time on our product review, other than what I did mention here, that we did introduce the FlexForce Modular FPV UAV. You'll notice that the center sections blurred out. That's for many different reasons, but know that basically it's modular. And what I can tell you is that this particular FPV can change sizes, dimensions, and flight characteristics within minutes in the field and without the use of any tools.

And this is really important because it increases the range, the payload capacity, the actual tactics that can be used with this particular FPV that can be used in full acrobatic mode. So it can, you know, very skilled pilots can use this without any stabilization. So you can flip this thing around and it flies at, you know, in the 100 mph range, sustainable at 93 mph. And you know, you can imagine at the 4-in size or the 9-in size, this thing at 93 mph is just completely unstoppable. Now it does have uniquely some electronic, I'll call it, warfare capabilities and GPS-denied environment capabilities, which again at this time is a unique feature for an FPV.

One thing that you can look for in this FPV actually is that this FPV or multiples of these FPVs actually can be launched from a 3XL or from the Heavy Lift. Again, some very unique features that are part of the requirements that we built for going forward here. So on that note, I am going to open it up to Scott Larson, our Lead Director, for some questions. Scott.

Scott Larson (Lead Director)

Yeah, thanks, Cam. We have had a number of questions who have come in prior to this, of course. Always encourage people to email the questions in. We try to get through as many of them as we can. I have a number here, and I think still ours still one or two might be coming in. So let's kind of get to them.

Cam, maybe talk a little bit about some of the stuff we're doing internationally. We've talked about that in the past. Wasn't a whole lot of stuff there, and, you know, obviously not trying to get ahead of ourselves, but, what are some of the international markets that we're looking at? How are they developing? What kind of effort, time, resources, and things like that? And what do we hope to see out of some of them?

Cameron Chell (President and CEO)

Yeah, I think there's probably two, excuse me, three specific areas that we'd like to address, in that regard or that we probably should address in that regard. So, the first is India. So India is a very, very big potential market for us.

We have some very strong partnerships there and have done a considerable amount of work to be ready to execute in that particular region. Now, as you all well know or you may know that, Draganfly is located in Canada and the United States. And, as it relates to India, Canada and India have had some tough relations in the past six to eight months, which seem to be working through. Those relations have slowed down our progress in that particular market. We don't think it's going to impede it long term. And we continue to work in the manner that we can. But in terms of being able to push that forward as quickly as we would like, that has run into a bit of international geopolitical scenarios whereby we've just had to slow that down a little bit.

We do not see it as a long-term impediment. However, it is something that is just a little bit in a holding pattern at the moment. The other area that's been really interesting for us, we did announce some work in the MENA region. And we are working there on a delivery project with the government, whereby that we will be providing deliveries in the area. And that's, again, about as much as I can say about it. And that in turn has led us to do an awful lot of work also in Africa. So we've been very active in that region. I don't really or can't really say much more about that. But it is a surprisingly busy area for drones, and drones of our particular use case, as well.

So I think we can look to see a lot more activity from the entire drone industry out of Africa. And we're active there in many regards. And then the final one to touch base on is just our NATO partners. And so, because of the DoD evaluations that we've gone through with our drone systems and the ability for them to be used by the DoD and special forces, we've got considerable inquiry that comes in from the NATO partners. And so, we have been a bit surprised about the robust nature of it.

We've been very, very selective about where and who we've pursued those with, just for the simple fact that we, you know, based on the demand signal and, you know, what we're planning for, we will likely be at capacity here by the end of the year. And so we're being very cautious about what we're taking on, when we're taking on, how we're taking things on, because those order sizes with NATO partners are also very, very significant. But our primary partner has been the DoD, and then secondary, you know, looking to work in conjunction with the DND.

Scott Larson (Lead Director)

Okay. What is the approximate capacity utilization of the company's expanded manufacturing facilities? So how much of, you know, we talked about expansion. We announced it, of course. We've talked about it in the last a call or two. How much of the capacity we have left are we using? How much is left? What does that look like?

Cameron Chell (President and CEO)

Yeah. So organic capacity on the production side, not including services would be about $100 million. Now, that would be across what was two and is now three production lines. It's more than three lines, but it's three production products, being the Heavy Lift, being the 3XL, and now being the FlexForce FPV. So, yeah, so we've got about $100 million worth of organic capacity. Now, those three lines, as they move, we can now move those to outsource manufacturing as well within the United States, when the demand signals.

But we need at least that much internally in order to meet the DoD type requirements and sizes that we believe that we have coming, is probably the best way for me to say it. And of course, that's all within secure environment, and it's been audited and clearances and cybersecurity and all the rest of it. So that's basically where we're targeting. Did you ask what we're at in terms of current capacity, Scott? I'm sorry.

Scott Larson (Lead Director)

Just, you know, what's the capacity utilization? Yeah, I think you answered it. Yeah. So it's, you know, it's 15% or 20%-ish, I suppose, is probably the if we do the opposite math there.

Cameron Chell (President and CEO)

Yeah. And it all depends on a lot of different variables and mixes. And sometimes the timeframes get compressed where you got to jam stuff into a quarter more quickly. And other times you can, you know, spread it out. So it's, you know, whether it's 15% or 20% right now, it's, you know, circumstantial.

Scott Larson (Lead Director)

There's a question or two here on the Blue UAS. I think you answered that, of course, earlier in the presentation. Talk a little bit about what you see in the industry as a whole. Any kind of broader trends? You mentioned a couple of conferences that you've been at. Any kind of trends throughout the industry that you or other partners of Draganfly are kind of seeing and what do you think that looks like?

Cameron Chell (President and CEO)

I would say, I don't know if it's an industry trend, but the thing that to me that's been most notable at the last couple of shows, well, the shows in the last eight or six or eight months, has been basically the emergence of three or maybe two or three, maybe three or four, drone manufacturers that are beyond having great product. So I think there's probably 12, you know, North American-based drone manufacturers that have great product. The real crux of where the industry's at right now is you have to have great product, and you have to have capacity. So it's taken a number of years for the industry to get to a point between regulation and demand signal, which is now unfortunately being driven by geopolitics more than commercial requirements.

The commercial requirements are growing like this. But the demand signal on the geopolitical side, I'll call it the military side, is just so significant. Because those are, I'll call it mission critical, the bigger issue there isn't just great product. It's capacity, right? And capability in terms of being able to meet orders. And that goes everything from clearances to quality to cybersecurity to, obviously, capacity and all the rest of it. And I would say that there's a number of great drone companies out there with great product, but there's probably three, maybe, that can now meet the capacity of the orders that are going to be required.

So the industry has become, in this last, I'll call it six months, nine months, maybe, but really become evident that you have to be nimble and quick to be able to adapt your drone capabilities quickly. But none of that matters if you can't meet the capacity requirements and demands that are coming down the line. And so that would be, to me, in terms of, like, the very, very tactical look at the industry right now, probably for the first time ever in the North American drone industry, there's three-ish companies that could meet the capacity demand. And that's really where our governments have been trying to get the industry to. And so I think we're on the precipice of that happening. And it's probably somewhat obvious what those three-ish companies are.

And not that there won't be other players, but there's really an opportunity now in this Category 1 and Category 2 drones, where I would suggest that we're probably the position to be the dominant play in Category 2 drones. That's drones that are greater than 55 lbs, but have a kinetic energy of you know that won't hurt people if the drone fell on them. And would even suggest that we're the only company that have drones approved in that area with particular customers. So that I see things forming up, if that makes sense, Scott.

Scott Larson (Lead Director)

Yeah, it is. Any, we've talked in the past about some supply chain issues. Are those just across the industry, and are those fully solved? What does that look like? Any other macro issues that are affecting supply chain, particularly for some of these larger contracts that might be coming down?

Cameron Chell (President and CEO)

I think for the most part, they're worked through. Maybe not exactly on the payload side. I think on the drone side, not just for us, but for the other manufacturers out there, I think that they've worked hard to get that sorted, because they've had to in order to represent that they can meet the demand. However, there is still some challenge on the payload side, with maybe some of the different sensors out there that require some particular chips or some particular types of cameras.

Scott Larson (Lead Director)

Two more questions here. You know, one, you know, again, question on, is it going to be another financing? I know we can't disclose this, but any thoughts or comments there on the last financing? You know, we talked about us kind of trimming some costs and perhaps being prudent, moving a little more prudent moving forward. Any thoughts or comments on that?

Cameron Chell (President and CEO)

Yeah, I think a couple of things. We've worked really hard, and we've been fortunate, very fortunate, to be in a spot where we've seen costs come down significantly. You know, we definitely did some belt tightening and looking at where we could do that. Those are always painful decisions that you go through when you do those types of things. But you've seen pretty much every major company in the world go through that type of stuff recently.

But moreover, we were fortunate because we got to a spot where the maturity of the products that we had brought out and the heavy lifting work that we had to put in place in order to be able to meet this demand signal and the capacity were basically done. So we're at a spot now where on plan, those costs started coming down, significantly. And now as we start to see sales, us being able to put an emphasis on sales, not that that wasn't before, we just couldn't turn it on, because we were at capacity by the end of Q2 last year, which you've basically seen us flat since then or just kind of managing or meeting the most important customer demands that we had to.

So we've been fortunate in the spot where we've seen that come down. That's a bit more circumstantial than it is us gone through cost cutting. So I'm not sure if I answered the whole question for you, Scott.

Scott Larson (Lead Director)

Yeah, I think you did. I think that's totally fine. I think last question here, unless there's one or two that come in over the next minute or so. We've talked a lot about contracts and you've even talked about it now. Any thoughts on timing, these obviously long lead type things? What are your thoughts on kind of some of those coming to fruition, of course, without you know, without trying to get too far ahead of ourselves here?

Cameron Chell (President and CEO)

They're coming. They're coming. And they keep getting bigger. Requirements keep slightly changing. It's, you know, whether it's Congress approving budgets, whether it's changing situations in the field, whether it's whatever the case is, whether it's, you know, getting through the last steps of evaluations, whether it's the all of a sudden immediate requirements and needs for FPV drones as well as our other drones or swarming technologies that it's all of these things are things that then have to go through extensive testing and extensive evaluation and certifications and such. And we're not the only ones that are going through this. I think an informed, a sophisticated, informed investor in this space knows who the, you know, the two to four companies are that are positioned for this.

And this, if one of them was, you know, had the $30 million and $50 million orders and they were all happening and nobody else did or two of the four did, and you know, you could maybe make some calls on whether that company's going to get them. But I think you're going to see the industry, not just Draganfly, dropping these, you know, in short order. It's yeah, but I don't know what to say. The orders, they'll happen when they'll happen. And there's nobody else to fill them. That's the bottom line. So you know, we're not taking that for granted. We're working very hard every day to make sure that we're going to be able to do our duty.

Scott Larson (Lead Director)

Just maybe the last question that's come in, actually just right now. And, we've talked about this in the past, of course. Any more consolidation? It's, you know, some things have been announced. Some companies have closed the doors. There's been a sale or two or some kind. Are you expecting that to continue?

Cameron Chell (President and CEO)

There will be consolidation. There is consolidation happening. I don't think there's going to be a lot of M&A activity because I think the those two to four companies out there don't have time to do an M&A. Like, we've looked at it lots, and not that we're not going to continue to look at it. But we don't have time.

Like, our organic growth is so imminent and so big and so taxing to meet, you know, the requirements and demands, that integrating another company at this time is just it. It's, I think, that would be a heavy lift for the folks that are in the trenches doing the real business right now. That's just my own opinion. But that would be my expectation. I do think we have seen yet another cycle of North American drone companies that didn't last. And we're kind of seeing another bunch of new drone startups that are kind of coming into it. A lot of people think this is an easy industry.

You know, you put four blades on a battery and you can fly the thing without realizing that it's the regulatory environment, the testing, the demands, this is an aircraft in the air. It is a highly technical, highly regulated business, which really lends credence and valuation to the companies that are positioned well, now. So we'll see consolidation, but I don't really think because of M&A.

Until these, you know, kind of two to four companies that I keep referring to, you know, reach a critical mass, then I think there's a level of M&A from either the primes or some of the, the tier one subprimes that'll be looking to play in the Category 1, Category 2 space as it starts becoming a more and more important part of, of the military complex, as well as the commercial complex, out there. And that critical mass is happening. So, you know, you may see consolidation of these two to four companies, not maybe not necessarily together, but by bigger companies, you know, in a year-ish, you know, from now. But between now and then, I don't think you're going to see these two to four buy companies. I think you're going to see companies go into business and these two to four rise even further.

Scott Larson (Lead Director)

Okay. Well, that is the end of the questions. Thanks for sending them in, everybody. We appreciate those. And again, as always, if there's other ones that you guys think of afterwards, send them through. We'll try to get to them, of course, as best we can. But yeah, Cam, back to you to close and wind this out.

Cameron Chell (President and CEO)

Just, you know, first and foremost, thank you to our customers and to the people that have continued to work with us and develop these products out. It's an honor to be of service to both our government and our commercial customers. We can't say enough about our sales, our engineering, our customer service, and the people that really are building something here that's incredibly special and really, really important. And of course, to our shareholders. It's been a very long haul, and I know a lot of you have been very, very patient with us. And we appreciate your trust and we'll continue hard to do the best we can to hold that trust.