Draganfly - Q3 2021

Transcript

Cameron Chell (CEO)

Hi, everyone, how you doing? It's Cameron Chell here, CEO and Chairman of Draganfly. I'd like you to welcome you to our Q3 earnings call. Joining me today, we have Scott Larson, our President, we have Paul Sun, our CFO, and also, we've got a couple facilitators and people that are helping us manage the questions and such, including Roly Buster, who handles our internal IR. So the format for today's call, if it's okay with everybody, is that basically we'll run through a short corporate presentation, and during that time, I'll give some overview of how our earnings outlaid or unfolded for the Q. I'll have Paul Sun run through some of the details of that.

And during that time, we really encourage you to participate in the Q&A session, and we'll do our best at the end, facilitated by Scott Larson, our President, in order to answer all the questions that we possibly can. So on that note, I wanted to say thank you first and foremost to all of our staff and our team, for the incredible commitment and work in this last quarter and all the quarters before. We continue to hit tremendous growth. We did see some delays in a number of shipments due to some supply chain stuff. Nonetheless, we still had a record quarter and have an incredible backlog here going forward.

I'm really, really proud of the team and our customers and partners as it relates to the initiatives that we have, currently, unfolding, and the size of the business that we continue to scale on. So, on that note, I'll just, you know, mention quick that we're up over 30% year-over-year. So again, another record quarter at $1.896 million, notwithstanding a bunch of supply chain issues and delivery challenges as it relates to some global events. And our gross profit was increased at 212%, so up almost 40% for the Q3.

I'm gonna let Paul get into a bunch of the details, but what I'll do is I'll just give a quick company overview and highlight a bunch of the customer initiatives that we are, in the midst of, have completed or are in the midst of, and should give some pretty good insights as to how the business is tracking right now. So I'll just do a quick share screen, and, great. So just a very quick review, Draganfly is the oldest, or certainly recognized within the industry in many other areas as the oldest, commercial drone manufacturer and, solution provider in the industry. We are rapidly growing, as evidenced, by our numbers. Our specialty really is in artificial intelligence, data acquisition and data analytics.

So while we have full manufacturing capabilities, we really look at these capabilities in our unique ability to deliver on customer requirements and/or collect very specific pieces of customer data. Our overall thesis is that nothing can deliver probably as efficiently as a drone, and nothing can collect data as efficiently as a drone. There really is no device that can collect more or better data and unique data as a drone. And in so doing, that's really where we focus our efforts. And though Draganfly will always be known as a drone company, and hopefully the number one or number two player in the North American market over the coming years, it wouldn't be surprising to us to have be one of the largest repositories of battery mining data or one of the largest repositories of forestry data.

So it's our, it's our intense focus on collecting strategic information and helping analyze that data for our customers that helps differentiate us as a customer. Of course, we have very strong IP. We have over 30 patents and hundreds of pieces of IP that we do not publish. And we're constantly developing new products. Every quarter, there's new products coming out that are really driven by our customer requests. Now, Draganfly's been a very technology, engineering-focused company for the last 20+ years. But a couple of years ago, when the FAA came out with very clear guidance about beyond visual line of sight and how that will start to integrate into the infrastructure and into the economy and into the airspace, it became very clear to us that that was the time that this industry was going to scale.

This is when we went from an organization that spent most of our time, you know, selling and educating with our customers, to actually taking orders and designing product and just struggling to keep up. And so it's at that point that we really took a concerted effort to go and move from a contract manufacturing and engineering shop to our own specializing brand and solution provider. The other big thing that happened in the last couple of years is a realization by both corporations and by government that drones collect data better than anything else, and the security around that type of data is paramount.

So as a 20+-year-old company, with people that have all the appropriate security clearances, with a track record of working with military contractors and public safety and U.S. and Canadian agencies, that we have a trusted name and track record in order to deliver on that security. And it's that type of business, it's that type of customer relationships that we've had for the last 20 years that's really driving business and gives us another strategic advantage. While we're an organization that's been building hardware and software in the 1990s and the 2000s, and even in through the early and the mid-2000s, we're focusing on autonomous and AI, as we go forward, these are the two key components that will differentiate the business.

So while we do see competitors coming out with some pretty cool hardware innovations and new software features, at the end of the day, all of that stuff can be engineered, and it's a race to the bottom. Where the future of the drone industry is, is who can best deliver autonomous operations and AI insights? We have four general components to the business. We have contract engineering, which is the stalwart of our business. This is where we really have honed our skills and our energy and developed incredibly strong engineering bench, both in software, excuse me, in software, in AI, and in our device, and our hardware manufacturing. We also have now developed a full line of product sales and development. We do full product development of full sales, full warranty, and it's a mature line that's fully commercialized.

We've demonstrated that we have the ability to go from idea to commercialization in less than nine months, with some of the most complex engineering and AI-driven solutions in the market today. We also do full flight services. Now, a bit of the difference for us here is that our flight services are focused on particular verticals. So we don't generally go and do any flight service work unless we have a strategic differentiator in that particular area, whether it's in forestry or mining or energy, whether that's software or AI driven. Again, it's all about what differentiation do we have that we can bring to our customers to make them more competitive. And then, of course, there's data services.

While this remains a small component of the overall business, we see this as likely the most important part of the business going forward over the next five years. As mentioned, we have a full product lineup, whether it's multi-rotor drones, whether it's ground robots, whether it's fixed-wing aircraft, whether it's vertical takeoff and horizontal flight. We, of course, have our flight services in these four key areas that I mentioned, and we have an AI bench that's developed solutions that no other drone company has in the world. One of these solutions would include Vital Intelligence. Vital Intelligence is a product that we developed that simply from a camera, can read your heart rate, your respiratory rate, it can read your blood pressure, it can read your blood oxygen level.

This was developed for a specific customer that needed drones to be able to take Vital Intelligence situations in multiple different scenarios. We've now ported this technology over to kiosks, security cameras, smartphones, and telemedicine systems. This piece of business alone will probably garner us $5 million to maybe up to $20 million in business in the coming year. And again, it's this type of innovation that we see differentiates us. Our airframes are great airframes, but it's what we do with our airframes. It's the data that we capture, it's the packages and how we deliver those packages in a certain way with these airframes that really make us special. In terms of our Q3 2021 customer highlights, I wanted to start off talking quickly about Digital Dream Labs. So Digital Dream Labs has awarded us a contract.

It's $9 million per year, and that's a three-year contract. Now, to put that in context, though, it's, you know, obvious, is that our entire revenues this year are coming in around that $7 million-$8 million range, which is up 100% over last year and 100% the year before. This one contract represents an entire year's revenue with just one customer. Now we're dealing with dozens, maybe not dozens, excuse me, we're dealing with a dozen scenarios like this right now of these customer sizes and larger. And this speaks not just to the growth of Draganfly, but the growth of the entire industry. We're certainly thrilled and honored to be working with Digital Dream Labs on this project with them for this particular drone.

Also this quarter, we announced an innovation lab with the Drone Racing League, which has already garnered some incredible business development opportunities for us. We're using this lab to highlight the technologies, the very specific technologies that Draganfly can bring to the market that others can't or don't currently have the capability to do. These innovations will be demonstrated on the racetrack and across NBC and across the sponsors, and partners that Drone Racing League has, will be able to clearly demonstrate how we can then port that into the commercial industry after it's been in one of the toughest environments in the world. We also signed a contract with Valqari. Valqari is a well-known drone delivery box.

This is a box that receives drone delivery packages in different scenarios, whether it's suburbs or whether it's industrial facilities or whether it's medical facilities. We have a minimum order contract of $400,000 from them, but Valqari has hundreds of POs, and this is something that we look forward to being a very large piece of our business going forward over the coming years. Coldchain Delivery Systems is the work that we're doing in Texas with the emergency medical services, and this last six weeks alone, we did over 300 delivery test flights with Texas EMS. We've also now initiated nighttime test flying, and we look forward next quarter to moving into beyond visual line of sight flying and actually flying live missions.

This piece of business for us is incredibly important because it demonstrates not just our capabilities, but it has us working with the right levels of government to understand the budgeting and the approval process for this really, really important component of drones in the emergency medical service space. This is being looked at by multiple states. Very important project for us. Of course, at Alabama State University, we implemented a drone training program at a university level to graduate pilots from Alabama State University. This is a fully paid curriculum, and in the coming quarters, we expect to roll it out to multiple universities. In this last quarter, from a product standpoint, we did release the Commander2, which we launched, which has additional and expanded capabilities. This is our signature small, light drone.

Now, we manufacture dozens of types of drones for different scenarios across multiple customers. But this is one of the base platforms that's very popular with public safety. With the Vital Intelligence, we integrated into the Fobi Venue Management System. So, Fobi is deploying their venue management system into multiple venues across the United States, where the requirement for vaccination cards and health screening are required. And they now have integrated the Vital Intelligence technology to actually take the vital signs of people as they're coming into facilities. And we have also now deployed the new Vital Intelligence Kiosk, entire new product design, and it's being deployed into multiple customers as we speak. This has really given us scalability in this particular area, which we're excited about because we've got increased and incredible demand.

So on that note, what I'd like to do at this point is I'd like to turn it over to Paul Sun, our CFO, and have him run through our key financial and operational highlights for Q3, 2021. Paul?

Paul Sun (CFO)

Thanks very much, Cam. I appreciate it, and thanks again for everybody joining our call today. So just to take you through some of the highlights here, revenue for the Q3 was up 30.5% to $1.9 million, up from $1.45 million in the Q3 of 2020. Q3 revenue comprised of $1.35 million for product sales, with $412,000 of that from drone services, with the balance coming from engineering services. Gross profit increased by $213,000, or 38% this quarter, over the same period last year. Gross margin as a percentage of revenues was 40.8% this quarter versus 38.5% in Q3 of last year.

This was a result of more sales coming from engineering services this quarter versus Q3 last year, as these services tend to have higher gross margins than the other categories. Total comprehensive income for the quarter was $24 million, compared to a loss of $2.5 million in the same quarter last year. The large increase is from the accounting treatment of a $30.6 million non-cash liability from USD warrants that were issued during the company's Regulation A offering earlier this year. So the year-over-year comprehensive income increased, as Q3 last year did not have the treatment of that USD warrant from the company's Reg A offering. The year-over-year increase was somewhat offset by increase in office and miscellaneous expenses and professional expenses. Our company's cash balance at the end of 30 September 2021 was $28 million, compared to $2 million on 31 December 2020.

On this slide, looking at the table on the left, we somewhat just talked about this. Q3 revenues increased $443,000 from the same period last year, and was driven predominantly by product sales coming from our Candrone division. Of the $1.9 million in sales, just over 70% was from products, while just over 20% from drone services, and again, the balance from engineering services. The gross profit from the quarter was $773,000, an increase of $212,000 over the same period last year. And again, as a percentage of revenue, was 40.8% this quarter versus 38.5% last year. As touched on earlier, product mix changes every quarter, but in this case, was actually pretty consistent year-over-year.

The net income and comprehensive income for the three months ended 30 September 2021, includes a non-cash gain in fair value derivatives, which we just talked about, of $30.6 million. So if you back that out, the loss would have been $6.7 million and $6.6 million, respectively, meaning a net loss and a comprehensive loss, which again, I think is quite reasonable, given, you know, we've recently uplisted to the Nasdaq. Following that, loss per share would be approximately $0.20 versus the reported income per share of $0.75, again, due to that USD derivative liability. If we look at the table in the middle, the balance sheet, you can see our total assets increased substantially from the end of this quarter to that of the end of last year, fiscal year 2020.

We had $60 million versus $7.1 million, which is largely due to the closing of the Reg A financing and the Nasdaq financing that we just did earlier this year. Plus, we had a booking of the Vital Intelligence acquisition, which we spoke on our Q1 call. Working capital as at 30 September 2021, would have been a surplus of $37.4 million, and shareholders' equity would be $58 million if we ex out that non-cash fair value of derivative liability from the USD warrants from the Reg A offering. And you can see we have minimal debt. And finally, on the right-hand table, since we already spoke about the year-over-year changes for the quarter, I'll focus on the quarter-over-quarter changes between Q3, 2021, and Q2, 2021.

So again, revenue for Q3 2021 decreased by 4% to $1.9 million, compared to the $1.98 million we reported for Q2. Again, that's just due to slightly lower product sales. Gross margin percentage for Q3 2021 improved to 40.8%, up from 36.8% in Q2 2021. Increases due to the sales mix of the products sold, and operating expenses for Q3 2021 increased 139.6% from Q2 of this year, in part due to higher insurance, marketing, investor relations costs, professional fees, and share-based payments. And total comprehensive income for Q3 2021 was $24 million, compared to a loss of $8 million in Q2 of this year.

As mentioned, Q3 includes a non-cash gain and fair value of derivative liability of $30.6 million, while Q2 includes a non-cash loss and fair value of derivative liability of $4.8 million. So if you X those out, Q3 would have had a comprehensive loss of $6.6 million, compared to a loss of $3.3 million in Q2. And with that, I'll pass it back to you, Cam. Thanks.

Cameron Chell (CEO)

It's amazing. Thanks, Paul. So just quickly before I turn it over to Scott for Q&A, you know, we really feel that the team has executed this last quarter as it relates to product expectations. We've certainly executed in terms of contracts getting signed for this last quarter. And we're really excited about the upcoming opportunities that are in front of us. Overall, you know, I think we've got we're in a market where we've got rapid financial growth. We've got a really good market as it relates to the regulators.

We've got customer demand that's pent up, and we've got a seasoned executive team that's built these types of companies before, and is demonstrating their ability to get commercial products to market and to close on customers. So with that, we really want to take the time to thank you for this opportunity to work with us and to be shareholders, and we look forward to continuing to meeting and hopefully exceeding expectations. And with that, I'm gonna turn it over to Scott to help facilitate some Q&A. Scott?

Scott Larson (President)

Yeah, thanks, Cam, and thanks, everybody who has logged in here. Just as a bit of a recap and just to kind of remind people how we've done this in the past, we've asked for questions. A bunch of questions have already come in, and so I'll just try to go through those. More questions have come in, actually, during just the last 15 minutes, 20 minutes here. And so what I'm gonna try to do here is work our way through as many of the questions as we can. Some of these, of course, we probably can't answer. They're looking for guidance and a few things like that, which we don't give.

So, don't want to be too awkward here, but we'll try to pick as many of these questions that we can answer, and just give a little more color perhaps on some of these other ones. So I'm gonna take a few of them. A few of the other ones, I'll refer back to either Cam or Paul, and we'll try to work our way through. If there are more questions, of course, keep throwing them in there. We'll do our best to kind of get our way through. So with that being said, first question here is to better understand the deal with DDL and the timeline. According to DDL, Draganfly is gonna provide a couple of prototypes.

The market launch is gonna be Christmas 2022. So, Cam, maybe I'll give this to you. Can you give a little more color on DDL, what it looks like, and when this is gonna be wrapping up?

Cameron Chell (CEO)

Sure. Sounds great. So DDL has graciously asked us to produce a new companion drone to an existing STEM-based science, technology, education, and math education toy. So this toy has an install base of about five million users. Currently, they're looking and growing, and they're looking for a companion drone to be a part of the product lineup that they have already and fill about 20%-25% of the existing market for their Cozmo robot. They are launching some very assertive marketing. I'm not sure, I gotta be careful. I'm not sure what they've disclosed.

So, they have some fantastic media properties that are being launched this year, and in doing so, we're currently in the process of tooling up and being in a spot to be able to meet their product demand. Now, their big push really won't be happening until Christmas of next year, but of course, it takes us a little bit of time to get all the testing done and production going and meet all the demand. But we're looking at a minimum $9 million a year of product based on the numbers that they've given us. So, they have demonstrated capability to sell much more than this, and so we're really excited about this product.

This particular product, while it, in some respects, feels a bit like a consumer drone, and it's priced under $1,000, it really is, it's not a consumer, it's not consumer technology that's in this drone. It's highly interactive with the existing product line that they have. It has significant AI built into it, and it has a lot of programming options that had to be worked around because it is a programmable device. So with that being said, it's highly complex, and we're doing it in a manner where certainly the brains of the operation, which is the AI in it, is really why we were brought in to do the expertise. Certainly, you know, the super cool drone design and, you know, the aeronautics and all of that kind of stuff is a bit table stakes, and so, we're bringing that to the table as well.

But we look forward to this partnership with them and actually growing on it in many, many ways. We think it's perfectly designed for Draganfly, even though it's, you know, it speaks a lot to the fact that these drones, you know, you can build a $15 drone, you know, over in Asia or a $50 drone over in Asia and you know, make it as a giveaway or grab or whatever it is, but when you want to get into stuff that's actually got some durability, it's gonna have some communication, is programmable, is going to work with things in the future, interact with things like Siri, all the rest of it, that, all that type of stuff really takes some foresight and some deep engineering work, and we're thrilled to be able to be a part of that.

Scott Larson (President)

Another question here. Thanks, Cam. Another question here, since the raise back in July, how has the cash on hand been deployed? Yeah, I'll take a stab at this. We talked about this in our filings that we put out today, of course. A couple of the big things that came out of that would be just D&O insurance. The insurance market these days is incredibly difficult. We're starting to ramp up as a company, bring in other layers of management and as we're chasing some of these other things that we're going after. So there has been an increase in employees, kind of headcount generally.

You know, we're starting to invest in what we think the next iteration of the drone industry is gonna be with regards to drone deliveries. Of course, Cam talked about that as well. And then just basically making us more, you know, just increasing our governance, our systems, our structures, building in different levels of redundancy, more or less across the company, to you know, to reduce overall risk, to make sure that we have the foundation for growth. Cam talked about a few of the initiatives that we're chasing, even this DDL, of course, and it's just making sure that we have the systems in place to really deliver on that.

So, some of the cash that's being spent is kind of one-off stuff, insurance being put down and so forth, and others of this is just gonna be as the company scales up and looks to take advantage of some of the opportunities that are coming to us. We'll go through here a couple more questions. Yeah, Cam, I'll put this back to you again. Can we talk a little more about Woz ED? What's the, what kind of timeline? What's the update there? You know, the deal has been talked about for a while. What are we looking at in terms of deal finalization?

Cameron Chell (CEO)

Yeah. I'm hopeful for Q4 in terms of the finalization. The scope and nature of it has changed dramatically as the whole industry is expanding and capabilities are expanding and other partners are coming to the table for the initiatives around education and STEM. And surprisingly to me, if you would've asked me a few years ago, "Was education gonna be a big a big push for Draganfly?" I would have said no. But you know, you look at it today, and we've got incredible things happening with DRL on the education front. We've got incredible things happening with DDL on the education front.

Of course, we've just announced a whole program with Alabama State University, which we plan to expand through all the historically black colleges. And we have a university-level course now, which includes Part 107 licensing. And the whole education side of this is really, really expanding. So I know it's been a while since we've talked about the Woz ED. We've you know had to be quiet about it, but it's for all the right reasons, and hopefully we'll have something an update to provide here in Q4. Well, but if not Q4, Q1, but I expect in Q4 we'll be able to make some announcements around that. And I think that'll paint a pretty good picture around the whole education initiative as a strategic vertical that Draganfly is surrounding.

Scott Larson (President)

Yeah. Okay. Thank you. Another question has come in with regards to supply chain constraints and other impacts to revenue that, or, top line. Yeah, I think supply chain is an issue across the, you know, globally, of course, and it certainly has. It's something that we think about, given, our focus more on, our solutions moving forward, more on things like, drone deliveries, working with some of the things that Cam just talked about. I think, and we, you know, we put this, of course, into our, into our risk, assessment that we also just released, today as well.

I think from a supply chain issue, it is an issue, it is a constraint, it does impact, given the nature of what we're doing and the customer focus, and a little bit less on actually building and selling drones and more on integration with other systems and data collection and the services side of it. The supply chain is mitigated in terms of the impact that it's had on us. And of course, you know, there's been supply chain issues for the last 12 months or more, and it hasn't had a negative impact really on our top line. Revenue has continued to increase, and of course, this is another record quarter.

I think it is something that we look at, it is something that we talk about, it is something that we watch, and we try to get ahead of in terms of lead orders and just be smarter with purchasing. It's not trivial, but we've done a pretty good job of managing it so far, and to be frank, we expect that to continue to move forward.

Cameron Chell (CEO)

Scott, we [crosstalk]

Scott Larson (President)

Yeah.

Cameron Chell (CEO)

Maybe a slight characterization there. I mean, I think it's certainly had impact on our current Q. It's certainly not had impact on sales. And we've been very fortunate through some great management on your part and Paul's part to not have previous past impacts on with this, and I think you've got a great plan going forward to help ensure that it doesn't materially affect us. But it's, you know, to speak to that point, it, you know, I do think it's, as you said, it's something that's real every day, and has had some effect for sure. But I think you've got a great plan in place.

Scott Larson (President)

Yeah. Another question here. Paul, maybe I'll Paul Sun, I'll send this to you. Can we give any quick comments without kind of digging in too deep with regards to what the OpEx is gonna look like moving forward? Is there a baseline in terms of quarterly OpEx on a go-forward basis that we're getting close to? Is this, is there a bunch of one-off stuff right now? Is it? What does it look like moving forward?

Paul Sun (CFO)

Yeah, thanks, Scott. Yeah, I mean, obviously, you know, people can go back and look at each quarter in terms of our operating expenses. They definitely have fluctuated. Certainly since coming onto the NASDAQ, you know, they have maybe trended a little bit higher, but you would expect that because we, you know, as you just went through, we raised capital, and as a result, we are trying to scale the business in terms of looking at a number of initiatives, including, you know, hires and whatnot. So, I would say it's a bit too early to say that we've hit kind of a steady state, you know, quarterly operating expense threshold or number.

I think, you know, certainly we don't give guidance, but I think it would be fair to say that, you know, for the next few quarters, it will fluctuate up and down. But, you know, kind of using the last few quarters as a proxy, I think would be fair.

Scott Larson (President)

Okay. Cam, I'll put this one back to you. Any challenges or pushbacks with any of the current programs with regards to FAA regulatory? You know, how do we see the regulatory environment within the drone industry looking moving forward?

Cameron Chell (CEO)

Yeah, I think, so overall, the tailwinds are at the industry's back. And we have a very friendly regulator, who, in my opinion, has very strong favor to established companies, who are working with real use cases, real customers, solving real problems, and such. That said, certainly within individual programs, there are, you know, a number of delays and challenges and questions and research and stuff. So while, on somewhat of a surface level, there are a couple of programs that are somewhat frustrating because they're just taking time, type certifications taking longer, that's a bit due to manpower, some to backlog of the organization, some to, you know, regulatory clarity, some to politics, you know, all the kind of stuff you would typically expect.

But overall, you know, the FAA, I think, has done a fantastic job. They're really working hard with the industry. There's a strong mandate, because, you know, the environmental impact, positive impact of drones, you know, the congestion issues, the economic industry opportunities, the advanced security, like, just everything that the drone industry brings, you know, the regulators are behind. So, it's a bit of a surface answer without being able to go into, you know, a specific mentioned program or something, but overall, very, very positive. But there's always challenges, and it always takes a little bit longer. But I kind of view the whole regulatory environment as being, you know, the whole industry, you know, quite frankly, is taking longer to mature, but it's gonna be 10x the size of what anybody expected.

Scott Larson (President)

Yeah, I think, just a little color on that from my standpoint. I've been to a few conferences over the last quarter, and obviously, the regulatory environment is a key topic of conversation at any one of these conferences. I think across the board, everybody's thankful that the changes are coming, that at least now there's a framework that companies like us can operate under. There's some, you know, a bit of a framework that we can target. Getting approvals, getting certification, working our way through that is still takes a lot of time, but we're thankful now that at least there's a process. So we're, you know, companies like us and others, of course, can start to take the first steps.

You know, we talked a little bit about it already with what we've done with ColdChain in Texas and drone deliveries and so forth. So all that has been enabled because the regulations and the regulatory environment has been loosened over the last nine months. So I think we look forward to that continue to happen. There's, you know, there's other companies that like large, large retailers that are starting to put their pilot projects in place. So I think over the next six to 12 months, nothing moves particularly fast, but over the next six to 12 months, we can expect to see the same type of forward momentum, slowly loosening, better definition with regards to what the regulations actually are within the industry.

Couple other ones here that we'll, you know, certainly cognizant of time here. But yeah, quick question here that's come in regarding our new, our, the new board members, particularly a new member that's came on within the last quarter. And the question is, are the government contracts in the making? What is, you know, what do, what do new board members mean? And yeah, it's a fair question. Cam said this before, we all consider this to say that we, that we think we, you know, Draganfly is blessed with the type of board we have, particularly some of the folks out of the U.S., Andy Card, John, and then, of course, Julie just came on recently.

From a board standpoint, we are thankful for the board we have. I don't think we want to get specifically into government contracts and just, you know, get too pointed to that. But certainly, the board has been helpful, and the board has been able to introduce us to groups that we probably wouldn't have had access to elsewhere. So, yeah, I hope that answers the question. Cam, I don't know if you want to give any more color to that without-[crosstalk]

Cameron Chell (CEO)

Yeah, no, I think you answered it as best you can without us saying anything we can't. But, you know, we have the board. We're very blessed to have the board that we have, and the board that we have is very strategic. We certainly didn't, you know. Yeah, it's very strategic in terms of who's on that board, why they're on that board, what industry and what government background they have. Then, you know, regulatory compliance and being a regulatory compliant and friendly, well-positioned company in this industry will be key. And having access or credibility within those circles will be key. And so, we're super grateful for a company like us to have the board that we do, and they've been very impactful already. And in quarters to come, it'll be very apparent, in my opinion.

Scott Larson (President)

Maybe talk a little, Cam, about Vital Intelligence, the telehealth, COVID, of course, you know, all over the map here. It's you know, we're generally kind of getting our heads wrapped around what it means. What do you see happening with Vital Intelligence, specifically with regards to COVID perhaps being under control? I don't wanna, you know, overstate things here, but what do you see that looking like moving forward?

Cameron Chell (CEO)

Yeah. Well, I think there's a couple of things. So, you know, even, I mean, boy, where do I even start? The whole health security industry, which is this brand new industry, it has sprung up. And one of the, the, the, in my opinion, preeminent technologies in that industry is simply being able to use a camera to measure vital signs. So whether you've got, agencies that before delivering Ebola vaccines into villages, are using cameras on drones to look at the population health, make sure that the contacts that are coming out to receive the vaccines are healthy, don't have infectious conditions, and/or then can even deliver the vaccines in and/or provide population health over the course of the vaccine distribution.

I mean, that's one use case that's got, you know, massive potential across the world. Whether it's first responder drones that as they're either, you know, coming into accident scenes or whether they're doing disaster relief, are being able to triage survivors on the ground and provide vital information back to the trucks that are rolling in because they're, you know, providing that vital intelligence that vital signs. You know, for us, this is the type of sensors and AI that we put on our drones that make us strategically different. This is the type of data that's critical in terms of, like, how quick responders are getting to scenes, and how much quicker are they able to respond to emergency situations, and how better is their triage process?

And those are the things that really make a difference with drones and with the technology that we provide. We focus on the solutions. We don't focus necessarily on the drone. And so that, you know, just that alone differentiates Draganfly and is earning us kudos in business in emergency response sectors that we never would have had, and nobody else is even having the opportunity to look at. But if we look in particular at health services, you know, in correctional facilities, where you've got National Guard units that are going in and taking vital signs of inmate populations, and now you can put kiosks in there, and they're doing it, whether it's, you know, kiosks or smartphones or whatever the case is.

This, the fact that COVID is at least in some level of predictability right now, doesn't take away from the fact that it's very prevalent. And now this is a core piece of health and safety that needs to be implemented into manufacturing and schools and federal buildings and in all kinds of different ways. So I'm really excited about this business. Even in, and I, you know, I think it's gonna be, it'll be a meaningful number for us going forward, over the course of the next year, you know, $5 million-$20-ish million in business over the next year to 18 months, and potentially growing much larger from there.

Even, even in terms of our Drone Racing League partnership, I mean, you're gonna see the drone racers, you know, racing the courses, and you'll see their vital signs right on the side of the screen now. You'll see how they react to crashes, how are they dealing with stress, how do they deal with victory, how do they deal with defeat? You know, I, I would even predict, this is bold, that you're gonna see the betting lines that the DraftKings makes on Drone Racing League. People are starting to paying attention to that data that's there. I mean, you could just go on and on with the implications. And again, this is but one piece of AI that we put into our drones.

Scott Larson (President)

Yeah. Thank you. So, we've worked our way through most of these here. A couple of them, you know, with regards to guidance and so forth, I don't think we can answer, given where we are right now. Maybe we'll just take one more. And, Paul Sun, I'll put this to you. Please discuss how we need to scale operations, manufacturing, and overall costs in order to service some of these contracts that are coming through. What do we, what do you think that's gonna look like? How does that affect gross margin? Any thoughts on what scale increase might look like?

Paul Sun (CFO)

Sure. Yeah, you know, right now, just to remind everybody, you know, we have manufacturing at two of our facilities in Canada. We are building something out in the U.S. as well. So really, depending on the contract and the skill set of the engineers at that facility, we might find ourselves needing to, you know, scale up or expand the capacity of that facility. Or in some cases, we might look to, you know, to outsource the non kind of IP-centric stuff to, you know, to get a contract done sooner or later. So it really is on a case-by-case basis.

Certainly, we are, kind of at this balancing point between trying to put revenue on the board as well as, you know, trying to get to profitability. You know, as Cam spoke about through his presentation, I think, there is this opportunity now where the drone space is opening up. So I think, you know, from my personal opinion, it feels like we're kind of going more for, for a land grab situation, to really try to maximize, you know, the projects that we can, that we can get our hands on. So I would, I would say we were probably more revenue focused, right now versus, total profitability focused. But obviously, we do wanna make, you know, certainly gross margin on, you know, on all our projects.

So, you know, we're not gonna necessarily do something at a loss. But, depending on the situation, there are gonna be swings in gross margin, and you already see that in our business. You know, straight through product sales, you know, are lower gross margin. When we do engineering services, that's very high margin. When we do software type integrations, you know, that has the highest margin. So it really does depend. So I think, you know, we're gonna be thoughtful on as we roll things out. You know, we're not gonna, you know, build a huge facility and, you know, hope they come, but I think we're kind of, you know, bootstrap and, you know, make sure we can keep up with the initiatives that come our way.

Scott Larson (President)

Yeah, I think it's, it just. I'll just add to that. One of the things that Draganfly has always done is, you know, focus on doing as much as we can with, you know, with the resources that we have. And in the past, those resources have been limited, and we've been able to execute, well, in my opinion. And so I think we're gonna keep that mentality moving forward, which is, we work with a bunch of outside partners. We keep our costs certainly as low as we can. We scale up, fix up OpEx and, you know, kind of baked in OpEx very, very slowly. And we've done that in the past, and we'll continue to do it.

Where there is one-off charges and costs and things like that, as Paul mentioned, of course, those come through when they come through. But we have been diligent in the past about just really, really making as smart decisions as we can with regards to increasing our baseline OpEx and making sure that it flows in with real opportunities, real revenues, real customers, things that are really gonna provide shareholder value over the longer term. And we're certainly gonna keep that mentality moving forward. So, it's been 45 minutes, and we're cognizant of time here, of course. We're a couple of minutes longer than we might have thought.

I think, from a questions and a question standpoint, feel free to email those in to our investor relations ones, if you think they haven't been answered. We worked our way through most of them. There was some, obviously, some duplication and overlap that I'm looking at here, but got through as most of them. If there's ones that you think we missed, feel free to email them in. We'll do our best to get back to you and follow up offline with those. So with that said, Cam, I'll, I'm gonna throw it back to you just for a final farewell, and then we can look to adjourn this call.

Cameron Chell (CEO)

Scott and Paul, thank you very much for your partnership and the management that we get to do together. It's an honor to get to lead with you. To our shareholders, you know, we really thank you for the trust and the opportunity. We're always looking for your input. We're a very shareholder-focused organization, both communication and shareholder value-wise. We do have a longer-term view. We definitely are focused on sustainability, and so keep that in mind as we continue to move forward. There's a reason a lot of drone companies haven't made it over the years, and we're still here after 20-some years, and we're gonna be here for another 20-some years.

We aim to be that number one or maybe number two player in the market in the coming timeframe. To our partners and customers, really, thank you so much. You're what make this fun. You know, getting to create incredible things, working with you is really what gets us up in the morning. Of course, to our employees and everybody that we get to work with, you know, this is the only reason that we do this. So thanks for your ongoing support, and we look forward to growing our business together.