Epsilon Energy Q4 2023 Earnings Call Transcript

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Provided by Quartr
July 27, 2023

There are 7 speakers on the call.

Operator

by. Good afternoon, and welcome to the Redcat Holdings Fiscal 2023 Year End Financial Results and Corporate Update Conference Call. At this time, all participants are in a listen only mode. After today's presentation, there will be an opportunity to ask questions. Participants of this call

Speaker 1

are advised that the audio

Operator

of this conference call is being broadcast live over the Internet and is also being recorded for playback purposes. A webcast replay of the call will be available approximately 1 hour after the call on time of the call through October 27, 2023. And now I'd like to turn the conference over to Joe Dela Jose, Vice President of Core IR, the company's Investor Relations firm. Please go ahead, sir.

Speaker 2

Thank you, Keith. Good afternoon, everyone, and thank you for joining us for the Redcat Holdings fiscal 2023 year end financial results and business update conference call. Joining us today from Redcat Holdings are Jeff Thompson, Chief Executive Officer and Joseph Hernan, Chief Financial Officer. During this call, management will be making forward looking statements, including statements that address Redcat's expectations for future performance or operational results. Forward looking statements involve risks and other factors that may cause actual results to differ materially from those statements.

Speaker 2

For more information about these risks, please refer to the risk factors described in Redcat's most recently filed periodic reports on Form 10 ks and Form 10 Q and in Redcat's press release that accompanies this call, particularly the cautionary statements entered. The content of this call contains time sensitive information that is accurate only as of today, July 27, 2023. Except as required by law, Redcat disclaims any obligation to publicly update or revise any information to reflect events or circumstances that occur after this call. Is now my pleasure to turn the call over to Jeff Thompson, Chief Executive Officer. Jeff?

Speaker 3

Thank you, Joey. Good afternoon and thank you all for joining our fiscal 2023 year end call and webcast. Also joining me today is Joseph Hernan, our Chief Financial Officer. First, some housekeeping. I'm sorry to report that Mary Beth Long has resigned as a Board member.

Speaker 3

She will be available to the company in an advisory capacity, but she is working on foreign affairs that are very important to the country. We wish her well. It's been an honor to have her on our Board even for this short period of time. I would like to highlight the transformation our company started in the last year that will set us up for success in 2024. First, I would like to remind everyone that this is the 1st year that we separated our enterprise and our consumer segments.

Speaker 3

We did this as part of a strategic shift to focus on building out our capabilities at Teal Drones. The results are a brand new Teal-two drone and a larger engineering team that is no longer building drones and creating the new prototype for the SRR, short range for Constance, program of record. I'm paraphrasing from a YouTube video called The Future of War. If you're not winning these multibillion dollar programs of record, you're just another company building a cog in the machine and winning scraps and small buys, a prototype shop. The key is to get a program of record.

Speaker 3

So let's talk about the SRR program of record. We still do not know the size of the award for the now combined tranche 23.

Operator

Here is

Speaker 3

the information we do have. Tranche 1 production award was for $100,000,000 for approximately 1,000 drones. Tranche 23 is for approximately 12,000 drones and has been extended to almost 10 years. There is usually a 3 year replacement cycle in programs of this size. The Ukraine has demonstrated this importance of Group 1 drones like the SRR program and we will believe this will be a significant program of record.

Speaker 3

We are well positioned as one of the 3 competitors in the Army's short range reconnaissance program, SRR. There has been a delay in the award cycle as the program has been made larger through the combination of tranche 2 and tranche 3, which I just discussed. We recently announced a new SRR contract of $1,200,000 as the additional award for the extra work. We are confident that our offering will be put us in a favorable position for this program of record. We also believe that the market is much larger than just SRR, which is for the Army.

Speaker 3

We are being told that the Air Force, Navy and Marines are likely to want to have the similar capabilities. Back to the TL2, the drone that we will be selling for the next 2 years. Timing on our approval by the GSA and the blue UAS, I'm sorry to stop for one second here, but someone needs to mute. There's a lot of background noise. Thank you.

Speaker 3

Timing on our approval by the GSA and the Blue UAS could not have been better. When you consider government sales, it is important to remember that the government fiscal year ends on September 30th and many budgets are use it or lose it. They hate giving the money back. For that reason, we expect seasonality in our sales cycle with our biggest wins coming in August September. For instance, the Border Patrol order for over 1,000,000 we shipped in January for the bake off was finalized on September 29, 2022.

Speaker 3

We believe we are well positioned to compete for a large portion of the business available between now and the end of September, what we call sweeps. We anticipate this will create backlog that will stabilize our revenue for a large portion of fiscal year 2024. But orders are only as good as the capacity to fulfill them. Our 10 ks shows our sizable investment in both production capacity and inventory. And now this machine is building drones and revenue.

Speaker 3

We have seen drone competitors in the U. S. That have not been able to ship orders they received. Because of this, one of the first questions we get when we are dealing with the Ukraine is how many can you make and when can you ship them. On that note, we recently completed our shipment of 200 FPV drones to the Ukraine.

Speaker 3

And I'm happy to say we no longer have 3,700 chipsets and that our production line is constantly producing TL2s when we are shipping them out the door. As part of the strategic focus on programs of record, we decided to sell our consumer segment. We approved this initial agreement with Unusual Machines last November and we continue to work toward closing the sale. In the short term, this will raise Red Cat $3,000,000 to $5,000,000 of non dilutive capital. We believe our shareholders should continue to indirectly benefit from the sale of the consumer business.

Speaker 3

It's healthy, it's growing and the team is great. And we believe it will be a successful IPO onto New York Stock Exchange in early September. Fiscal year 2023 was a year of change in investment. 2024 will be a year of TL2 production, sales and revenue and possibly the 1st and largest program of record in the Group 1 drone category. And with that, I will hand it off to Joseph Hernan.

Speaker 4

Thanks, Jeff, and to everyone for joining the call today. I'm going to echo many of the statements that Jeff just made with some added financial perspective. As Jeff just noted, fiscal 2023 was a year in which the company reported strong revenue growth, while making substantial investments designed to position the company for continued revenue growth in fiscal 2024 and beyond. Revenues totaled almost $10,000,000 in fiscal 2023, representing an increase of 54% compared to fiscal 2022. This growth was led by Teal, whose revenues almost tripled in fiscal 2023.

Speaker 4

With the launch of the Teal 2 in April 2023, the pending sale of our consumer segment and the consolidation of Skypersonic's technology into teal, we have clearly positioned teal as our platform for success going forward. Negative gross margins reported for fiscal 2023 primarily relate to the accelerated expensing of inventory related to Teal's legacy drone, the Golden Eagle. This action was largely driven by customer demand for the improved functionality and features of the Teal 2. Operating expenses in fiscal 2023 almost doubled compared to fiscal 2023, increasing from approximately $14,000,000 in fiscal 2022 to almost $27,000,000 in fiscal 2023. Substantially all of this increase was related to our increased focus on an expansion of the operations of Teal.

Speaker 4

Operations expense increased from $1,400,000 in fiscal 2022 to $4,400,000 in fiscal 2023. Since acquiring Teal in August 2021, we have increased its headcount from 15 to 59. Almost all of these employees are focused on operations or research and development. Operations personnel are focused on building, refining and expanding our production capacity, which is presently at 100 systems per month, but which we believe can more than triple over the next few years. The year over year increase in operations expense more than doubled.

Speaker 4

However, during fiscal 2023, we also doubled the size of Teal's facilities and built our initial production line. These are very expensive objectives, both of which were accomplished. Many of these costs are non recurring. Research and development expenses doubled from $2,600,000 in fiscal 2022 to $5,200,000 in fiscal 2023. This investment culminated in the launch of the Teal 2 at the end of fiscal 2023.

Speaker 4

It is very expensive to complete the final stages of the development and commercial launch of the new products. But we are very excited to have the TiAL 2 on the market at the beginning of fiscal 2024. TILs and marketing expense more than tripled to approximately $4,000,000 in fiscal 2023. Building relationships with government related entities, including the military is an expensive and long process. However, once established, these relationships often result in long term recurring revenues and contracts.

Speaker 4

During fiscal 2023, we recognized revenues through the Army's tranche 2 SSR program and shipped drones to the U. S. Border control as well as the NATO country, which plans to deploy the drones in the Ukraine. Looking forward, we expect to realize additional revenues from these customers in fiscal 2024. We also expect additional government agencies including other U.

Speaker 4

S. Military branches to place orders in fiscal 2024. Our investment in building an experienced talented team of sales and business development professionals is yielding results. Jeff founded Red Hat with a vision that drones were one of the few technologies which were going to change the world in the next decade. Beginning in early 2020, Red Hat acquired 4 separate drone companies, each focused on a different segment of the drone industry.

Speaker 4

Since then, we have integrated these companies and established separate consumer and enterprise segments. In the middle of fiscal 2023, we entered into an agreement to sell the consumer segment at an attractive valuation. More recently, we have decided to integrate Skypersonic's technology into Teal and shift its business strategy to military and commercial applications more aligned with Teal's business strategy. This change in strategy required us to record a non cash impairment charge of $2,800,000 to write off the goodwill, which we recorded when we acquired Skypersonic. However, this accounting charge does not change our perspective regarding the utility and potential of Skypersonic's technology.

Speaker 4

Imagine the Skycopter exploring a bombed out building instead of a soldier. That truly is life saving technology. In summary, we spent a lot of money in 2023, fiscal 2023. Building a world class manufacturing facility, hiring a team of talented engineers and professionals who designed and launched the field 2 and establishing business relationships with U. S.

Speaker 4

Government agencies who are traditionally difficult to establish, but long term customers once secured is an expensive endeavor. The entire Red Hat team is proud to have accomplished all of these objectives. Looking forward, we reported more than $16,000,000 in cash at the end of fiscal 2023. This balance is net of more than $14,000,000 in inventory that we held at the end of fiscal 2023. We are very excited to convert this inventory into revenues in fiscal 2024.

Speaker 4

I will now turn the call over to the operator for questions. Yes. Thank

Operator

And the first question does come from Ashok Kumar with ThinkEquity.

Speaker 5

Great. First question is on the sales side. Can you please elaborate on the new SRR contract you indicated for $1,200,000 And any and also on the autos that we can expect from the military in August September? And then outside of the military, could you I think you indicated on the Border Patrol, I think you shipped 54 systems in mid January, right? So in terms of what we can expect in terms of additional orders for this calendar year and then also on the drone infrastructure inspection grant, right?

Speaker 5

So that's $100,000,000 bipartisan grant. And given that you're well positioned, what is the opportunity for this calendar year?

Speaker 6

Hello? Jeff, are you there?

Speaker 3

Sorry, I was on mute. Anyway, that's a lot of questions there Ashut, but I will try to go through them 1 by 1. So first with, I think it was the SRR contract, we recently received a contract. The actual contract, if you read it, was for over $5,000,000 but the Army actually reviews our press releases and the appropriations is only through November. So that's $1,200,000 that we'll get for the prototyping through November of this year of calendar 2023.

Speaker 3

And the rest of the contract that we have signed goes through the end of March when they're supposed to do the final selection. There's also supposed to be one more down selection in the fall. So, two things could happen with that SRR contract. I think people will be pretty excited if we get down selected in October, November timeframe, if they do it on time. And then once the rest of the money that we have a signed contract for is appropriated, it would be a total contract between now and March for $5,300,000 I think the total was.

Speaker 3

The second question, Ashif, what was that? I'm sorry. I was trying to write that down.

Speaker 5

The orders we can expect in August September, right? You've mentioned on the military side.

Speaker 3

Yes. So it's this is again, I mentioned it in my comments, this week's time. So we've been all over the place trying to demo our drones at all sorts of different military facilities throughout the U. S. We also just got back from the Ukraine at a testing facility to get tested against GPS jamming, which went very well.

Speaker 3

We're heading back there the week after next. So, there's a lot of activity in the Ukraine. But, we think there's going to be some pretty significant orders coming in this August, September timeframe that we are working on for over a year. We have nothing concrete purchase orders that I can announce, but we think it will be substantial from last year.

Speaker 5

Great. And any additional color on the Border Patrol? And any additional orders you can expect for this year? And then on the inspection grant act, any upside there, please?

Speaker 3

Yes. So on the Border Patrol, they did there was a bake off. It's interesting, it's between all the people that are in the SRR program. We all got an order for drones that we had to deliver in January Skydio and Vantage. And we're hoping we get more orders.

Speaker 3

And we haven't received anything yet, but we would expect to like hopefully if we win sometime before the end of September like we did last year. And then the last question was on the $100,000,000 buy part?

Speaker 5

Yes.

Speaker 3

Yes. If you read that bill, it has to be a U. S. Made drone. And we have one of the only U.

Speaker 3

S. Companies and now it's integrating into the Teal facility. The largest competitor for infrastructure for that type of drone is actually a non U. S. Company.

Speaker 3

So now that it's a bipartisan bill, we expect that to hopefully put us in a good spot for that capability. And we haven't heard anything yet from it, but we stayed all over it. And we're also hoping we saw some activity in the Senate recently for the American Securities Drone Act. So if that goes through, that actually puts even more barriers for Chinese drones across the U. S, not just for the Department of Defense.

Speaker 3

So there's a lot

Speaker 5

of activity that would lead to U. S.

Operator

Drone manufacturers

Speaker 3

getting quite a bit of getting quite a bit of business.

Speaker 5

Great. Any quick responses on the operating expenses? I guess given you'd indicated some of these are non recurring costs, some of it headcount related and so on, do you expect it to stabilize in fiscal 2024? And then the gross margins that assume that should improve with product shipment increase and efficiency on the manufacturing and assembly process side?

Speaker 3

Yes. So we expect once we start producing, we don't have to invest anymore. The factory is working or producing drones every single day and shipping. And the margins once we are building 100 drones plus a month are typically get us around 40%. And then if we are selling product, which we mostly sell with our partners like Athena AI, artificial intelligence and targeting, Tomahawk Robotics, which make the capabilities for the ForeShip product, Reveal technology that can bring up our margins dramatically when we add these software sales in a partnered capability.

Speaker 3

So, we expect the margins to go up throughout the rest of the year. We also won't have any of these write offs that we had for this year end. So you're going to see dramatic margin improvement throughout the year.

Speaker 5

Got it. One last question on the chipset, right? I think you had 3,700, which can support 3,200 to 3,500 drones. Is there any risk of inventory obsolescence? Are there any spec changes to your drones or do you feel?

Speaker 3

No. That 3,700 was a lot of it was it's all going into the TL2. So we're not going to have that 3,700 is well protected. The stuff we were talking about earlier in the Golden Eagle is completely different tech.

Speaker 5

Great. Thank you. And the

Operator

next question comes from Carlo Corzine with Dawson James Securities.

Speaker 1

Hi, Jeff. How are you doing? Great certifications and making great progress. On the 200 drones that were delivered, they were to be delivered in June, were they in fact in June or some in July? And when you do the partnerships, how do we break down what the sale price is, how much goes to Redcat, how much goes to the other people?

Speaker 1

And I don't have any idea right now as far as how much the sell price is for the border control versus the TL?

Speaker 3

Yes. So, the typical TL2 is similar in price as you see on the GSA to the old Golden Eagle about $15,000 for the airframe and for the controller. And it's a little difficult to pigeonhole partnership percentages because it depends on which country we're selling to, who had the partnership, who brought the partnership in, whether it's Athena that's bringing us along because they have the sale or if it's us bringing Athena along, whether we brought the sale, same with Tomahawk. We're most of the time when we're doing demonstrations like we've done all the last few weeks, we're either doing a demonstration with Tomahawk using their grip and controller with the Athena AI on top of their KXM. So it could be even a three way partnership where in some instances it's Redcat bringing the main customer to the table.

Speaker 3

We're going to get a percentage of all of their revenue or if they're bringing it in, they're going to get a percentage of our revenue. So kind of a difficult question to ask with exact numbers. But it's these partnerships are always come with a license capability and they're pretty good for Red Cat.

Speaker 1

So how should we figure that if you sell 50 drones and we got a 15,000 obviously maybe is 50% of that yours, 60% of that yours? How can we

Speaker 3

work with that? For the 15,000 that's 100% on us. That's just for the

Speaker 1

Oh, that is. Okay. Okay.

Speaker 3

Yes. And the typical there will be added features if they require it and there will be additional revenue on top of that.

Speaker 1

Okay. Got it. And who is as far as research, who's covering you right now?

Speaker 3

So far, ThinkEquity?

Speaker 1

Stock wise. Yes, Stock wise.

Speaker 3

Well, not the person.

Speaker 1

Is ThinkEquity the only one or is anybody else covering you research wise?

Speaker 3

This is the only research. There's a few newsletter guys that follow us pretty closely, but no, that's pretty much it. Thank you, Carl.

Operator

Thank you. And the next question comes from Scott Michael, an investor.

Speaker 1

Hi, Jeff. Thanks for taking my call. To clarify, a question was asked earlier about the 200 drones. Was that were they delivered in June or June July?

Speaker 3

I'm pretty sure most of them were shipped into June.

Speaker 1

Excellent. Thank you. Also the question on the chips, you'd referenced earlier that the you have 3,700, but where you're producing now, I'm assuming that number is lowered. Do we have any supply line issues on the chips at this point or is that pretty much addressed?

Speaker 3

No, it's pretty much everyone. We're always cautious about supply chain because you've got to make such large decisions so far ahead of time. But like everyone else is seeing, supply chains are getting better. But we have a lot of chips in a lot of different parts. And so if not every single part of that every chip is doing well with supply chain.

Speaker 3

You can't breathe a sigh yet. But we're in really good shape. And because of the amount of buying we've been doing over the last year, we're usually getting some good preferences. And the TLT is doing so well that everyone's excited about it in our supply chain.

Speaker 1

Excellent. Thank you. And it looks like just that you left Skypersonic, does that affect the NASA contract at all?

Speaker 3

No. So the goal for the Skycopter was, one is to we already started working on the remote piloting over a year ago. We had separate offices. We wanted to integrate as much as possible. And now someone already mentioned the $100,000,000 bill for U.

Speaker 3

S. Made inspection drones, which we want to migrate to made in USA for CytoSonic. So we're doing a lot of work to integrate, but it does not affect the massive deal.

Speaker 1

Excellent. Thank you. Can you clarify what our investment into Firestorm was? And do we have any reciprocal arrangement with them for production or anything like that?

Speaker 3

Not yet on the production levels, but it's in the 10 ks that we invested $250,000 into their 1st round. Well, there's 2 things, right? We do hope to help them with production. We do have a factory. It's very difficult to build a factory.

Speaker 3

We have electronics that have been flying for years now and that are have all the bugs out. The electronics that fly the drone are very important. So you don't have to start from scratch there. We hope we can help there. Our production facility, we hope we can help there.

Speaker 3

But they've got a great team and they're moving along quickly and we hope to be able to accelerate their time to market because of our head start in electronics and manufacturing.

Speaker 1

Excellent. Thank you. You said production is 100 per month. I think in the past you'd referenced maybe 1,000 per month. Is the 100 per month going to increase?

Speaker 1

Or is that pretty much where we're at for the rest of the year?

Speaker 3

No. I mean, we first you just got to get the factory up and running and make sure that you have all the issues out of the production line. Is it reliably do 100 a month? Some of our team says is we do 100 a month, no problem at EASE right now. And that number is already growing slightly.

Speaker 3

But what you can't you don't go off and build 1,000 drones because there's different frequencies. So for instance, some of the organizations that we've been working with for demonstrations to hopefully get in sheets relatively soon, want 1.8 gigahertz, some of them want 2.4 gigahertz, some of them want other frequencies that we're not really talking about for other countries. And so you can't just make huge batches and hope for the best of 1,000 and then ship them out. But we've been at a good clip and we can expand that capability. If we had to, if we got an order for 1,000, we would ramp that up dramatically in a few months.

Speaker 1

Excellent. Now you referenced in the report that the cash in hand is $16,000,000 $14,000,000 in product. Is that correct? Did I understand that correctly?

Speaker 3

Yes. Yes. A little over yes, go ahead, Joseph.

Speaker 1

I'm sorry, that was a yes on that?

Speaker 4

Yes. We ended fiscal 2023 with $16,000,000 in the bank and slightly more than $14,000,000 in inventory. That's not all finished goods, but that's a substantial amount of inventory, much of which is largely completed and ready to convert into sales.

Speaker 1

So whereas cash in hand has significantly dropped from what it previously was, Is an offering something that we need to be concerned of as investors?

Speaker 4

Well, I think

Speaker 3

Hold on, Joe. Let me start and then you can finish up for one second. Sure. So for us to the $14,000,000 that Joseph is talking about can be as we get sales that's immediately converted into cash. We have the UMass offering is another way that we raise non diluted cash.

Speaker 3

So that's those are the ways we like to raise cash. So, and Joseph, do you want to add to that because we don't have the huge investments going anymore?

Speaker 4

Yes. One of the things that I wanted that I tried to emphasize in my statements was that there were a lot of unusual expenses in fiscal 2023 that resulted in our spending a lot of money. I think we've been very candid about that. We built a brand new world class facility that's a big investment. It's scaling.

Speaker 4

It's done. It's completed. You built a great team out in Salt Lake. It's hard to attract talented engineers and technical professionals and we have them. And we don't see that kind of capital investment going forward.

Speaker 4

The $14,000,000 is ready to convert into revenue. So there's a lot of positives why we feel we're pretty well positioned. We're an emerging technology company. We're not yet profitable. But we feel we're in a pretty good position because the manufacturing facility is completed.

Speaker 4

It's done. It's ready to produce drones. It's doing it every month. I don't personally recall us ever saying we could produce 1,000 a month. 1,000 a month at 15,000 per drones.

Speaker 4

I don't have the calculator in front of me, but that's an incredible amount of revenue. So we feel in a good financial position, especially after investing so much money in our facilities and our people and our product development in fiscal 2023.

Speaker 1

Okay. Thank you so much. Appreciate your time.

Operator

Thank you. And the next question comes from Vince Maluca who's retired.

Speaker 6

Yes, sir. Hello. Thank you, Jeff. Say, I have been reading and seeing a lot about Kiyo's big goal to dominate the night. And I think that's a pretty amazing goal to have.

Speaker 6

But what makes Tio the leaders in this field? And how do you guys see that impacting your sales down

Speaker 5

the road?

Speaker 3

Yes. It's a great question. And we spent a lot of time and effort with our customers and to figure out when do they use our drone or when do they use any drone. So when you talk to the military, when we're dealing with special operations teams, the question is, when do you use the drones? And it's like over 90% at nighttime.

Speaker 3

They always use their advantage typically is at nighttime. They want to use the drones at nighttime. Even the border patrol says they do 70% of their missions at nighttime. A lot of the some of the first responders, a lot of their stuff is done at nighttime. And some of our competitors' drones are almost impossible to fly at nighttime because their sensors don't work.

Speaker 3

And not only did we design it, we got a camera that's much better than all of our peers and our competitors at nighttime because the thermal imaging is so good. But we optimize the camera and the entire drone first, not that our drones don't fly well at daytime. If you can fly really well at nighttime, which is how we optimize the drone, we can really solve a lot of our customers' problems. And we've gotten great response from our customers because they needed nighttime capabilities. I mean, the nighttime capabilities that were previous out there for a Group 1 drone were horrible.

Speaker 3

So we've gotten a lot of traction and we think we're going to have a great summer.

Speaker 6

Excellent. How do you guys think your sales are going to be increasing with the government agencies that you're doing right now?

Speaker 3

Well, I'm sorry, I didn't understand the question.

Speaker 6

How do you think your sales are going to be increasing on these government buys and the different militaries?

Speaker 3

Well, you got Army Air Force, Navy and Marines and Yes. So we don't give guidance for sales that we don't have purchase orders for. But we do August September, the next 2 months are typically the biggest 2 months, not just for us, but for anyone that's selling to the military and government budgets. So we call it suites. And I would say stay close to the company.

Speaker 3

I'll be speaking at the Canaccord Genuity Conference up in Boston on August 9th, Wednesday, August 9th, to be giving more company updates. So I think if you stay close to the company and look for any announcements over the next couple of months, hopefully you'll be satisfied.

Speaker 6

Excellent. Thank you, guys.

Speaker 4

Thank you.

Operator

Thank you. And this concludes the question and answer session from call participants. I'll now turn the call over to Joseph De La Houssik of CORE IR to read pre submitted questions for management. Joey?

Speaker 2

Thanks, Jeff. I'm sorry, thanks, Keith. Jeff, we have a few pre submitted questions from some investors. And I thought this would be a good forum for you to address them. So if it's okay, I'll just read a few of them off here.

Speaker 2

One of the first one, I think you may have alluded to it in part of a response to Ashok, but it had to do essentially with the Ukraine opportunity. Do you expect any additional orders from that conflict as well as perhaps any other NATO countries that might be interested in the TL2?

Speaker 3

Yes. So we've actually our teams in Europe right now, I think they're I don't want to say where they are. We try not to project that anymore. But we spend a lot of time in and out of the Ukraine, in and out of the country. There's a lot of work to get when you're selling a system that we can operate at nighttime, the training, the capability is very crucial and you show them the reliability before using the frontline.

Speaker 3

So we are going to continue to do some work with Ukraine. We've been selling some drones to Ukraine, but we haven't got the orders that we want to get from them yet. And we're going to continue to work with them to show them how great our drones. One of the biggest complaints that they have is actually in a Wall Street Journal article recently is that they need nighttime drones because that's when the Russians advance every single night. So, we're hoping to answer that big gap in their technology.

Speaker 3

There's tons of articles constantly about how Group 1 drones are so important for the Ukraine. So we expect to play big there, but we have nothing yet to report. We have also been working with a lot of other countries that are frankly, they're buying drones to also ship to the Ukraine. So again, we hope to have the factories up and running. We're starting to get orders.

Speaker 3

We're shipping drones almost every day. And like I said, I think it's going to be a great summer.

Speaker 2

Okay. Thank you. And then can you perhaps describe the transaction that you guys are working towards with Universal Machines and how that could benefit Redcat shareholders?

Speaker 3

Yes. So I think I touched upon it in my comments, but it's unusual machines. It looks like they're going to be IPO in early September on the New York Stock Exchange. That will generate about $3,000,000 once we close and there's some additional capital adjustments that will put it between $3,000,000 and $5,000,000 we think. And then, we'll have about a 30% ownership in the Company going forward.

Speaker 3

So, it seems like they've got a lot of interest in their IPO already. And we expect it to be a good IPO, which will actually help could drive Redcat stock because their IPO goes up. And then, we also own stock. So, we don't know what we do with that ownership, whether we'll sell stock down the road. We would never hurt their company and sell shares and crush their stock, but we do have the option to sell share to raise non dilutive money or to do a dividend.

Speaker 3

We don't know what we're going to do with that percentage ownership yet, but you can see there'll be a pretty large benefit to the Red Cat shareholders from this IPO.

Speaker 2

I see. Okay. And the final question is, could you maybe elaborate on the importance of getting cleared and being a part of the blue UAS list finally as well as through the federal government's GSA schedule and that how that may help with the procurement cycle?

Speaker 3

Yes. Actually, we're so glad we got so two things. I think with the 1st company with 2 different birds certified on the VLEOIS, not sure about that. But yes, we got the new TL2 certified, which you need to get certified by DIU before you can go on the GSA. So those are 2 lengthy processes you got to put together.

Speaker 3

And we got this done just in time for suites. We've had people already asking if they could start buying off the GSA. So we're glad that's there. So we're locked and loaded for what we think could be a great summer. And but yes, it's a lengthy process to get to the Blue UAS.

Speaker 3

They ask a lot of questions, you get audited. And we're just very excited that the TL2 has got that distinction. And what's exciting though is other NATO countries accept the Blue UAS group. So that's good for not just for the U. S.

Speaker 5

Great. Well, that was

Speaker 2

the last of the previously submitted questions and thanks for your answers on those. Hopefully, they gave investors some additional insight. I'd like to now, I guess, turn the call back over to you for any closing remarks, Joe.

Speaker 4

Yes, great. Well, thanks.

Speaker 3

This has been a good call. We have a large group on the call, which is good to see at this time of year. But stay close to the company. If you want to listen to my webcast at the Canaccord Genuity Conference on August 9th, I'll be meeting with investors for 2 days there and we had another conference in September. So it's going to be hearing a lot from us over the next couple of months and thanks for joining the call today.

Operator

Thank you. This concludes today's teleconference. Thank you for attending today's presentation. You may now disconnect your lines.

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Earnings Conference Call
Epsilon Energy Q4 2023
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