Draganfly Q1 2023 Earnings Call Transcript

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Provided by Quartr
May 9, 2023

There are 4 speakers on the call.

Operator

All right. So just to be respectful of everybody's time and to start on time, we will get started. So hello and welcome again to the Dragonfly 2023 Q1 Earnings call. As usual, my name is Willie Bustos, Internal Investor Relations here at Dragonfly. I welcome each and every one of you today, shareholders, stakeholders and analysts.

Operator

Format will be the same as previous and then I'll begin with our CEO and President, Kevin Schell, discussing the Q1 operational highlights. From there, our CFO, Paul Sun will jump in and discuss the financials as reported earlier. And as always, we'll conclude with our Lead Director, Scott Larson, facilitating the Q and A portion. You're always welcome to reach out to me at investor. Relationdragonfly.com after the call if your questions did not get answered.

Operator

Lastly, I want to remind everyone that this presentation may include forward looking information and statements. These statements are not guarantees of future performance and undue reliance may place upon them. Any future events or financial results may differ from what might be discussed here. A forward looking disclaimer can be found on Page 2 of this presentation, and I'd be happy to send that to anybody upon request. So, Cam, please go ahead.

Speaker 1

Great. Thank you, William. Thanks everybody for taking the time to be here today. It's an honor and a pleasure. Just pull up the screen share.

Speaker 1

And so welcome to our Q1 2023 shareholder earnings call. Thanks, Rolly, for reviewing the disclaimer with us. To immediately and right to the point, review our financial results for Q1, which given all of the circumstance around we're very happy with and we think it's set a great platform for the for the coming quarters going forward. So we had revenue of $1,600,000 or just over that. Of that, dollars 1,380,000 of that was product sales with basically the remainder of that in service provision.

Speaker 1

Our 2023 Q1 gross profit was $443,000 which represents 27.7 percent gross margin. But I think it's very important to note that that gross margin would have been $500,000 or comfortably over 30%, have we not included a one time inventory charge of $77,000 Again, taking conservative action at the advice of our finance team and auditors. Our March 31, 2023 cash balance is $13,000,000 So we're in a strong financial position still. We can continue to be on budget. This is a bit of a review for some, but a level set for a number of new shareholders that we'd like to welcome to the company and thank you for your trust and the opportunity to serve.

Speaker 1

Dragonfly is recognized as a global commercial leader in the multirotor space. And we are a rapidly growing drone manufacturer and solution provider. We do have a strong emphasis on artificial intelligence and data analysis capabilities. We've been saying for quite some time now that 5 years Dragonfly will be known as a drone company, but really we're a data company. And at the end of the day, data is the only thing that will probably differentiate artificial intelligence.

Speaker 1

And so we'll continue to place focus on data, data collection, data analysis and really being able to do things with that data or provide or unique ways to collect that data because nothing collects data better than a drone for our customers to give them a strategic advantage. We have a very strong IP portfolio. We have a culture of developing IP. We definitely have a tech focus and engineering focus culture as well. And I'd like to suggest that that will continue to the largest degree.

Speaker 1

And we have always new product development, but it's always driven customers. So we're not R and D ing things that aren't brought forward by a customer. And so what that provides us with an advantage in today's market is that we have a product that has matured that previously has matured and as we've cut over to our new product line has matured quickly. And I'll give some analysis and some observations from the UBSI show that I'm currently attending in terms of where we see the rest of the industry and where some of our specific advantages are. So, the other kind of global things that are happening right now is that the market is significantly expanded in the government, civil and commercial sectors.

Speaker 1

And that's primarily because of security concerns, offshore concerns, data concerns. And we see that there's a domestication of product manufacturing in North America. There's a handful of manufacturers in North America and even a smaller handful that can do the type of work that we're doing, which also speaks to the amount of time it takes to get products to market. I mean, these are aircraft. And if we think about how long it takes an aircraft to get to market, That's how these things are being treated by the FAA and by our commercial and by our military partners.

Speaker 1

And so I'm really pleased to see where we're at with that and how we're drifting through it and the advantage that gives us. And we're also now moving and have moved into a favorable regulatory environment where things like BV loss beyond visual line of sight, as an example or pre flight inspections done by video as opposed to humans. Those are the types of things that are now unfolding and opening up the entire commercial market. So in terms of industry outlook, 2022 is about $30,000,000,000 industry, but it's really important to note that the vast majority, 97% plus of this was in the military space and very large drone systems, not necessarily small UAS space. And then a couple of percent of this was in the consumer space.

Speaker 1

But it's really only a percent or 2 of this is in the commercial space, but the vast majority of that growth through 2020 through 2,030 is going to be in the commercial space. Now, the other outlier out there is Ukraine. Now, the Ukraine has completely expanded the military space into small UAS or for small UAS. So previously, 10,000 feet down well, previously air dominance was all very large air systems. And now 10,000 feet down, air dominance is all about small UAS.

Speaker 1

So we've seen entirely new budgets either shifting or being created for small UAS. And it's taken this last year of unfortunate conflict in Ukraine for those budgets to start to move through. We now start to see requests tasking orders and procurement orders and things like that flowing through to budget. And as we go into early next year, we'll see large military budgets starting to come into effect. And I think our product is lined up quite nicely before done.

Speaker 1

In terms of our history, the bottom left here is toy drones In the top right would be the most sophisticated AI based, predators or reapers or multi tens and tens of 1,000,000, if not $100,000,000 systems. And the black dots represent the products that we have out in market. The blue dots represent systems that We've done contract engineering for with U. S. Military contractors and the yellow would represent the types of systems that our personnel have worked on.

Speaker 1

So you can see we skew heavily to a much more sophisticated drone system. And what's interesting about the military market is that's obviously where that needs to be. When you think about the commercial market, now that it's maturing, they're looking at who has hardened systems, who has the most amount of flight times, who has systems that can operate in weather. And it's one thing to produce a drone and this is a big thing that we're seeing at AUVSI, lots of new whiz bangs out there, Not as much vaporware, still a lot of vaporware, but not as much, but lots of new whizbang features, great things like that, but not a lot of product that's ready to be sold into the market, because it hasn't gone through extensive testing. And the product that is ready to go to market hasn't gone through the production cycle for the most part, 90% of it out there where it can be done at scale.

Speaker 1

So what we're seeing in the marketplace going forward here is winning companies are the ones that can actually produce product and get it out into the market. And with bang features are going to become a little bit less and less over the next 18 months to 24 months. And so again, I think in this last quarter, we got a new production facility coming online actually at the end of this month. And we've tried to time that as best as possible when we see our sales ramping, which they're now doing and we've got a backlog. And so that production capacity is really, really important to us.

Speaker 1

And I really want to throw it out to our team for the work that they've done in timing that, not overspending, building our infrastructure, not pre scaling, but at the same time having a product that's ready to be sold into the market. So just in terms of some operational highlights, Dragonfly heavy lift drones, our Commander 3XL and our Dragonfly lighter system. So the 3 XL is now we are now starting to carry inventory of it. It's all sold out. And and we're building up that inventory absolutely as fast as we can.

Speaker 1

The heavy lift drone, we've got multiple customers either putting deposits or wanting to put deposits on it, it will be available Q4 really for full delivery into Q1. And our LiDAR system, we have systems sold and again is probably about a Q3 before the production comes off there. So a combination of getting the products ready, a combination and again, this is a new product cutover. So we've had several successful product lines in the past And basically doing a cutover from last generation into this new generation, also taking into account the new rules and regulations that are available to us and taking into account the new customer requirements. So what you don't see here at this point are small UASs.

Speaker 1

Like that middle drone there, that Commander 3 XL, that's about the size of a coffee table. And so just give you a sense of the scale of it, that particular drone will lift £23, it's only about a £24,000,000 drone. So it's under the £55,000,000 regulatory limits that kind of changes the scope of what the drone can do and is allowed to do is probably the most efficient drone and Certainly in terms of demand, we're going to have a tough time keeping up on this thing for quite some time. So as mentioned, we now have product wait list. So again, the sales teams, which have matured, our new ERP systems got put into place last year, our sales processes are hardened And we've got experienced sales staff on now.

Speaker 1

That's and we've also had brought on new business development So we didn't want to overscale or pre scale on the biz dev side, and so we knew we could meet demand on the sales side. And so now not only do we have a waitlist that's growing for both these product lines, but we now have business development that's adding into, okay, how are we actually going to be utilizing these with partners. And so as evidence of that in this last quarter, actually I'll come back to the slide in one second. In this last quarter, we announced 4 key partnerships. So we are direct sales model.

Speaker 1

We do not sell through a reseller type of program. And as such, and we're doing that for a number of reasons. One, it really helps ensure that the that we're getting to the market, we have direct contact with the customer. So our customer is that end user. Our customer is somebody who we want to create advantage for their business.

Speaker 1

That's always been our ethos. So, as we go to market, how do we amplify our particular sales capabilities? Well, we do it through partnerships. Now the DragonFly 3XL drone is really designed to be a utility drone, kind of like the Jeep or the Humvee of the military in their day, where you can bolt on all types of systems to it. So what that means is that as we go into market, whether it's software or different payloads, Actually one of the biggest sales challenge that these partners have is that as they go to market, they may have a particular customer that wants to use their particular software or their particular payload.

Speaker 1

But it's hard to match it with a drone that actually is integrated or can be used for that particular mission, because it's too small, it doesn't fly long enough, the battery life that any number of reasons. And so what we've done in building the 3 XL in particular is a drone that already has dozens of payloads that fit onto it. It's integrated into several systems. And DGI had a very popular drone called the M600 that they took off life and that this is now replaced into the market. So the 1000 and thousands of payloads that were designed for that actually clip right into this particular drone.

Speaker 1

Now, These partners here that we're listing are all strategically chosen and we're completely honored to be working with them. Agile Mess basically builds will add its technology to our UAV platform for wireless surveillance products. So these folks really are really strong in the public service and the public safety market. And so we're referring business back and forth with each other. Have a very specific market that they go after and our drone fits that very specific market within their vertical that they're doing.

Speaker 1

So we're honored to be working with them. Sky Browse integrates world class reality capture platform with Dragonfly Software. Now, In theory, you can kind of integrate this with any drone system. But as you optimize it with ours, there are a whole bunch of advantages, everything from speed and accuracy and such in terms of how it works with the DragonFly drone. And we have got a similar customer set that we can go and talk to.

Speaker 1

Vemir, this is primarily military, but it's got lots of commercial application as well. They provide virtualization environments in GPS denied areas. So if you're flying in feeder and you don't have GPS, but you need to fly either on screen or first person, they can actually provide an environment even if you don't have GPS in there. So this is an organization as all these organizations are, Vermeer and Codan in particular that are at SOFIC, this which is the special operations conference down in Miami. And we certainly have representatives down there, but these organizations are carrying our product and our drones in their booth because we are co selling into that market.

Speaker 1

And these are very established companies in that market. Really, really excited about our relationship with Codan Communications. They provide a Koffdiem radio. We do work with other radio systems as well that are requested by our customers. There's incredible great competitors In this market, the Syllabus radio was one of them.

Speaker 1

In particular, we have built a really strong relationship with Codan as they look at those markets and we were co developing products together. We're working in those particular markets. They've been very gracious in representing us at their shows. We have customer engagement that are happening with them multiple places around the world as we do with our other partners. And this is the type of work that will actually propel Dragonfly forward.

Speaker 1

And these are the types of customers that help us do that. What I'd like to do now at this point is turn it over to Paul Sun to talk about our financial results for Q1. Paul?

Speaker 2

Thanks, Ken, and thanks everybody for joining. So looking at this table here, we'll go over the year over year comparisons for Q1 of this year versus Q1 of last year. So, revenue for the Q1 was down 1% to $1,600,000 from $2,000,000 in the Q1 of 2022. As Ken mentioned at the outset, revenue comprised mainly of product sales, dollars 1,380,000 with balance coming from drone services. And as mentioned earlier, some of the reduction in revenue is due to new products cut over and production capacity build out.

Speaker 2

Gross profit was $443,000 due to a one time write down of inventory and otherwise would have been $520,000 for the quarter and as a percentage of revenues would have been 32.5% this quarter, which is down 7.4% from the same quarter of last year. Again, this is a result of more sales coming from lower margin products versus those sold in Q1 of last year as the product mix just changes from quarter to quarter. Total comprehensive loss for the quarter was $7,000,000 compared to a loss of $6,300,000 in the same quarter of last year. This quarter, as mentioned, includes a non cash change comprised of derivative liability of $57,000 and a write down of $77,000 of inventory and would otherwise be a comprehensive loss of $7,000,000 So no real big change there versus an adjusted loss of $5,000,000 a year ago. So the increase is due to higher office and miscellaneous advertising, marketing, IR, wages partially offset by lower insurance costs.

Speaker 2

So, Continuing to focus on the quarter, if we now look at the table on the right, since I just went over year over year changes, we'll look at quarter over quarter changes comparing this quarter to Q4 of last year. So in this case, revenue actually increased 22 percent to $1,600,000 compared to $1,300,000 in Q4 of last year due to higher product sales. Gross margin, as I just mentioned, would have been 32.5%. The actual posted value was 28% and that compares to a negative gross margin in Q4 due to an inventory write down, etcetera, the gross margin actually would have been 24%. So we're still seeing an increase in gross margin of 8.5% quarter over quarter, again, due to the sales mix of the products sold.

Speaker 2

Total comprehensive loss, we talked about this $7,000,000 compared to a comprehensive loss of $16,700,000 in Q4 of last year. And for those that were with us on the call then, we had a number of non cash items last quarter. So if we excluded those, the those, the comprehensive loss would have been $7,400,000 in Q4. So our loss this quarter was a bit better, primarily due to higher revenues. If we go to the next page, Kim, just looking at a kind of a high level balance sheet, you can see that our total assets increased from $14,600,000 to $19,600,000 from the year end, which is largely due to the recent financing the company did.

Speaker 2

We have a strong working capital surplus at the end of the quarter. We're at $14,700,000 versus $10,200,000 and you can see that the company continues to have minimal debt. As mentioned, company cash balance is $13,300,000 compared to $7,800,000 at the end of fiscal Q2. And with that, Jim, I'll pass it back to you.

Speaker 1

Thank you very much, Paul. That concludes the formal presentation. I think we're lucky enough to have some Q and A at this point. So I think I'll be turning it over to Scott.

Speaker 3

Thanks, Cam. We have a number of questions that came in before the call. And of course, feel free to send the questions through during the call as well. Of course, there's some coming in right now. Linda is going to go through some of these questions and I'll be screening them and sending them back and forth to either Paul or Cam as they come in.

Speaker 3

So first question here, Cam, Talk a little more about Ukraine. Is this an area that we still want to be putting time and effort into it? What does it look like over the next 6, 12 months? We haven't talked too much about customers, but what do you think the Ukrainian efforts that we're going to do is will impact Dragonfly in the future?

Speaker 1

Great. I'm really glad somebody asked this question, because I didn't focus on it purposely during this particular call, because we wanted to get through and really talk more about where we're at on the product side, which has been a big focus of ours this last couple of quarters. Obviously, Ukraine remains strategically imperative to us. It's very, very important. It will in the future, if you were a player in Ukraine, you will be a credible player going forward in the UAS market.

Speaker 1

Obviously, not just in the commercial market, but on the defense side. The numbers that we talked about at the beginning, those industry numbers really don't account for what has happened in Ukraine and what this means in terms of what I refer to as air dominance and how budgets are now shifting toward that. I would say that the primary reason that we have so much activity in our military business right now is quite frankly because of the credibility that we've built up in theater in the Ukraine. So we're there with pilots, We're there with people on the ground. We're doing de mining.

Speaker 1

We understand the search and rescue. We understand reconnaissance and basically the skill of what it takes for pilots to work. We have product that is hardened in those areas. And so that's a whole bunch of credibility as we are moving forward with our military prospects here. So just from that pure prospect, it's really important for us to be there.

Speaker 1

In terms of revenue generation out of Ukraine, we have been very focused on the demining market, because it also has a much it has a very large global footprint. It's not something that's been comprehensively tackled by somebody in the past because it's one, it's tough work, but 2, there's not really ever been this active of a theater in order to be able to do it. So we do have expectation of some significant announcements that will be coming from that particular business. But in terms of other drone sales and training, we are active in the region and We have to be a little bit careful with announcements and such, but we expect Ukraine in particular to be a large revenue source for us And really kind of a stepping stone for defense budgets over the next 7 to 10 years, which will be at absolute record levels, in particular for drones and things like AI.

Speaker 3

Thanks, Cam. Can you talk a little more about the production capacity? Does that look like? How is that scaling up? We've talked about it at the last call.

Speaker 3

Maybe give a little more color there, if you can.

Speaker 1

Yes. So without saying things that probably It might be a little close to the edge. We were on the new product lines, we were at a spot where we could produce 10s at a time. And now keep in mind that that was also because we're making product adjustments on customer feedback and tests and all the rest of it. Now that the product of 3x in particular is hardened, we've moved to be able to be producing 100 in a short timeframe.

Speaker 1

And then by 2 of next year, we'll be in the spot where those kind of scales are in 1,000 of a short timeframe. So that's a combination of the new plant opening up. It's a combination of new plant new processes being implemented. It's a combination Some continual redesign of those products so that our production capacity is optimized and we have less supply chain risk. These are all the things that like when you're in manufacturing, especially in an industry that's so new, it doesn't have set requirements coming out or even government regulations in some cases that would provide oversight on how certain things have to be done.

Speaker 1

You're in this kind of continual flux of like, okay, what does the customer need? What can the actual customer do? What did it and such. So it's a very, very tough business and very tough time to build scale unless you're in like kind of like a consumer space where those things don't come into effect. So anyway, I think we're there now and we look forward to filling the backlog and Having some financial results to demonstrate that.

Speaker 2

Okay, good.

Speaker 3

Any progress here with Windfall Geotech In regards to landmine detection or some of the downstream stuff that we talked about with them before?

Speaker 1

Yes. So they're active with us in our work that we're doing in the Ukraine. And certainly the AI system that continues to develop out as we gain data, we think will be game changing in the space. So we're thrilled to be working with them. We have the strategic imperative to develop this out with them.

Speaker 1

And this is now moving over actually into our mining business as well more and more. So I'm pretty excited about what's going on in the mining industry In terms of the size and type of drone that they are moving to, which fits very, very well with our 3XL. And then obviously a number of the other players in the industry other than a couple of monsters that we're dealing with moving to this AI software for prospecting. So I think our mining offering will be second to well, probably already second to none, but we'll start some scale around it in the next Q, maybe 2 Qs.

Speaker 3

Paul, so maybe I'll throw this back to you. Can you talk a little more about the cash position, Current cash burn, maybe a little more color just from the financial statements that we just released talked about. We did a financing, of course. We don't give guidance. We never have.

Speaker 3

But what kind of runway does this look at, how we in terms of expenses, things like that without giving too much detail, but maybe a little color and commentary on that if you can.

Speaker 2

Yes. So we announced an $8,000,000 financing right at the end of Q1. We also announced an at the market transaction, which gives us, I think, flexibility to pull that leap on if we need it. As we've always said, we do balance cost versus scaling. Cam just spoke a lot about how we're building capacity expansion, positioning ourselves.

Speaker 2

We have a lot of great initiatives. I think it's really on us to kind of decide how we deploy. If you look historically at our cash burn, it's anywhere, I guess, between $1,000,000 and 1,500,000 Another thing a month. So, that's not necessarily to say that that's going to be as Scott said, we don't give guidance, but to give you a sense of the range. If you look back at our quarters, we are cash flow negative right now.

Speaker 2

Our losses do fluctuate though, this loss this time was better than last quarter and sometimes it flips back and forth. So, we are cognizant. We have a healthy cash balance right now. So, I think that gives us a lot of flexibility and that can give us quite a bit of runway to do the things that we have in our business plan. So hopefully, that's again, I'll be careful to not give too much detail, but hopefully that helps a little bit on the context.

Speaker 3

Yes, good. Thanks. With regards to the questions that came in advance, I think that's all of them actually. There's been a couple that have come through during A few that have come through during the call right now and those are in the process of being answered. Maybe just a real quick one here, a technical one.

Speaker 3

How many shares we have on standing pole?

Speaker 2

Yes. We are at $43,000,000 ish. Okay.

Speaker 3

So that is That's all the questions. That's all the questions that have come in and all the questions that were emailed in before. And There are still 1 or 2 that are still being answered right now, just ones that are answered in the chat for those of you who have sent those in. So we'll continue to do that. So I think With that said and done, Cam, unless there's anything else, I think we can probably sign off.

Speaker 3

I'll let you go ahead.

Speaker 1

Probably everybody was relieved at that. So I was just trying to get to a couple of questions in the chat before we signed off. Yes, I know. So thanks everybody for your time and consideration. I have an opportunity to talk with a lot of shareholders and really appreciate the faith and trust and we'll continue to work to be of service.

Speaker 1

The AUV SI Show right now and the SOPHIC Show are really indicative of what's going on in the industry. And to say the interest is overwhelming is probably accurate. And it's really because we have products that's ready for the market now and the majority of the rest of the market doesn't. They have product that's either going through testing or it looks good or and not that there isn't other product out there that's available, but there's a real surge and a real opportunity. So it's been a long haul.

Speaker 1

It's been a struggle. We'll continue to work this through. And but as difficult as it is for us, it is for everybody out there. And but I think we're there and it's fun to be on the road selling. Not that I love product building and as does our team, but it's fine to be on the road selling though that we can start to deliver.

Speaker 1

So thanks everybody for your time and consideration. And please follow-up with any questions that we didn't get to with Roli and he and I will do our best to get back to you as soon as we can.

Speaker 3

The recording has stopped.

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