Draganfly Q4 2023 Earnings Call Transcript

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March 27, 2024

There are 3 speakers on the call.

Operator

All right. I think just to be considerate of everybody's time here today, I think we'll get started. So greetings and welcome again to all shareholders and stakeholders to today's Dragonfly 2023 Q4 and full year earnings call. My name is Rolly Bustos, and I remind all joining us today that I am the internal Investor Relations representative here at DragonFly. We appreciate you joining us for this review and update.

Operator

We will start with our CEO and President, Cameron Schell, discussing the 4th quarter and full year operational highlights. From there, our CFO, Paul Sun, will review the financials, and we will conclude as usual by going through the presubmitted questions that we've received. As always, you're welcome to reach out to me individually at investor. Relations at dragonfly.com. Again, I remind everyone that this presentation may include forward looking information and statements.

Operator

These statements are not guarantees of future performance or financial results, and undue reliance should not be placed on them. Any future events or results may differ from what might be discussed here. The full forward looking disclaimer can be found on Page 2 and in your screen right now. So, Cam, please go ahead.

Speaker 1

Thanks, Rolleif. I appreciate everybody's taking the time today to on the earnings call. We really appreciate your trust and consideration. So, 2023 was a pivotal year for Dragonfly, highlighted in particular by the fact that we had now shipped our production to organic capability to produce well over $100,000,000 internally of product with 2 production lines on our 2 main products, which we'll talk about here shortly. We still maintain our full custom and contract engineering capabilities as well as our workbenches, which enable us to produce smaller batches as well.

Speaker 1

So in 2023, we had a little bit by design, especially in the last two quarters or 3 quarters, but 2 in particular with building out our new plants, understanding that we weren't going to grow the revenues because in fact we couldn't grow the revenue because of capacity issues. So our revenue for the year was $6,500,000 with product sales being $5,200,000 and provision of services being $1,260,000 We did have a gross profit margin of $2,000,000 on that, so fairly healthy and which is about 31.5%. And as of the end of December, we had a cash balance of just over $3,000,000 So some operational highlights from Q4, in particular was us receiving special flight operations certificates for Transport from Transport Canada. We have received other certificates as well from other jurisdictions. And these ones in particular were for the wildfire services that we were providing up to the Canadian government.

Speaker 1

This is an area that's going to grow significantly for us this coming year and was highlighted by the capabilities of the particular drones that we have manufactured. We've also been working very, very closely with the United Nations on several initiatives that do relate to wildfires and in particular climate change and have had spoken a number of times and consulted several times as well with the World Meteorological Association in conjunction with the International Centre of Digital Innovation, all part of the United Nations Convention to Compact Desertification. Further to that and by far the enormously fast growing area of the entire drone market is the defense space. And a couple of the highlights from Q4 in particular were our not just our display, but our demonstrations at Modern Warfare Week, not just of the Commander 3XL, but also of several payload partners that participated in Modern Warfare Week with us. Leading up to that and out of that, we have done through Q4 and into this year, we have done multiple live test scenarios and exclusive demonstrations with multiple branches of the DoD.

Speaker 1

And those continue to push forward in support of the orders that we have coming forward in that regard. So a couple of other things again to highlight was our new plant is now fully operational. It went it opened in Q3. In Q4, it went operational. We have received several best practices certificates and participated in a number of audits from different defenses or militaries in order to certify the plant ready for production, of which we're just now completing all of those certifications.

Speaker 1

So pretty exciting time for the entire team and the organization. I think also of note in Q4, we did unveil the Commander 3XL Hybrid. Now this is a hybrid that's really in demand in particular, but not just from our commercial customers, but from military customers. So this takes all of the capabilities of the Commander 3 XL, which is really the Swiss army knife of drones and puts a hybrid engine on it whereby we can run it by gas or electric. It takes the operational timeframe from about 50 minutes up to about 2.5 hours.

Speaker 1

So you can imagine the increased flight time, the increased range and the entire engine on that only weighs about £9. So we're still have capability of well over £10 between £10.15 commercially and even greater than that for military operations or defense operations to be carrying payloads, whatever those payloads may be. Interestingly enough, a lot of those payloads as we're now looking at are actually other drones that drop in particular FPV drones and with swarming capabilities. Again, this is when we designed that Commander 3XL, we designed it with the ultimate and flexibility. Now we didn't anticipate being able to or we didn't anticipate necessarily putting on a hybrid engine or being able to drop systems or create swarming with it.

Speaker 1

But that's just an indication of the versatility of this drone. We also hosted our 1st Dragonflyer experience, which was a first responder user conference at our joint air flight facility in Texas. We had at least a dozen different services there in attendance, training, testing, flying machines, trying payloads, working through use case scenarios, working through con ops and a number of different things. And so that whole facility for us has just turned out to be an incredible opportunity for us to demonstrate not just our capabilities, but actually provide flight training and testing for con ops or potential use cases that maybe aren't necessarily available for some of our customers to do at their own facilities or if they have facilities at all. And so this facility itself has everything from sensor calibration to demining to tactical grounds to all sorts of different training scenarios as well as conference centers and such.

Speaker 1

And so we look forward to hosting more of our user The thing that's kind of interesting, especially in this Q and coming out of Q4 is that we've got a record pipeline and a number of customer demonstrations that are happening. And in fact, we've really had to temper that simply because of the amount of orders that we're now preparing to fulfill and the resources that we have at hand in order to do both that work and the work that we've got terms of all the training and testing that's happening. So, interesting and positive challenge to have. But nonetheless, we can't for technical reasons call it backlog as of the moment, but we can call it qualified pipeline and customer demonstrations. So we're at record numbers there.

Speaker 1

As everyone knows, I think the drone industry is growing, but the military impact has really been absolutely incredible since the I think really all nations or all defense departments, but in particular, NATO departments are really focusing on the small UAV market. The Ukraine theater has demonstrated that small UAV is the tactical advantage now from anything from 5,000 feet down. So if you want air dominance, you really need to deploy these types of drones. So whether that's a heavy lift drone, whether it's reconnaissance drones, whether it's FPV being first person flyer drones, whether it be logistics drones, whether it be munitions, whatever the case is, it is now all about drones. And we think we're really well positioned with the product lineup that we have designed to be incredibly versatile.

Speaker 1

Going into this last couple of years, I think it's worth noting again that our experience and background while we were the oldest commercial manufacturer in the world, one of the reasons that we're the oldest commercial manufacturers in the world is that we've done contract engineering for the military primes for basically about the last 18 or 19 years. And that's in fact what has been able to sustain the company while all the other North American companies didn't survive the last 20 years. So this slide here just shows an example of the types of products that we have out there, the type of products we've worked on, the types of products that we have worked on for other organizations. And that top right corner represents basically military and artificial intelligence, where the bottom left corner would be a very consumer type of toy. So we'll continue to focus in this area.

Speaker 1

And as fortune would have it, it's unfortunately geopolitically, but as fortune would have it, it is the fastest growing area and I think we're well positioned to become a major player in that. Just a quick product review and update, we've got our heavy lift drones. As mentioned, we've launched the Commander 3XL. We have precision delivery systems. We have quick release delivery boxes.

Speaker 1

We do have many payloads are integrated with dozens of different sensors from other manufacturers, whether those are cameras, whether they're ordinance, whether they're surveillance, whatever the case may be. We've really again designed this system so that all of those payloads can fit on this and then we are approaching the market as partners. The majority of our pipeline work now really is coming in from payload partners. So these payload partners work with a customer, whether it's commercial or primary military right now, where they've got a specific capability on their sensor. And then that sensor is in demand.

Speaker 1

And then what we've done is integrated with that sensor to be the best of breed for that sensor to be able to work. And a big part of that is the amount of battery life that we can deliver and the amount of range that we can deliver with our particular platforms. It should be noted that we will unexpectedly, we will be having a number of products come out through the rest of the year. These are purpose driven products. These are products that have been specifically requested for us to build by customers at scale.

Speaker 1

And so this has been the real kind of eye opening and pleasurable surprise that we've had this year where we've standardized on our Commander 3XL and our heavy lift drone as a platform, we will be having some new products come out this year that we will put into production lines by Q1 of next year, which is a lot quicker than we thought, but it's just based on the specifications and the types of customers that are ordering and giving us demand signals at size. So on this note, I am going to turn it over to Paul to run through our financials and then I'll come back and go through some Q and A. Paul?

Speaker 2

Yes. Thanks, Cam, and thanks everybody for joining as usual. At the beginning of the presentation, Ken went through the revenue for the year. Just to reiterate, dollars 6,600,000 versus $7,600,000 year over year, so down about 13%. And I think Cam explained the reason why that happened.

Speaker 2

Again, the split on revenue $5,300,000 from product sales, $1,300,000 coming from drone services. On the gross profit side, dollars 2,100,000 for the year compared to $791,000 from last year. This year's gross profit included a one time non cash write down of inventory of about $331,000 while last year's included a non cash adjustment of $1,900,000 So to do an apples to apples, if we ex out these adjustments, gross profit decreased by about $370,000 year over year. And as a percentage of sales, adjusted margin increased from 36.4% last year to 36.5%. So pretty much the same year over year on a gross margin perspective.

Speaker 2

Total comprehensive loss for the year including all non cash items was $23,700,000 compared to a loss of $27,300,000 last year. Again, there was the non cash changes comprised of a gain in fair value of derivative liability of $211,000 dollars an expense impairment on some notes receivable of $101,000 a write down of inventory of $331,000 an expense of goodwill and intangible impairment of about $87,000 So otherwise comprehensive loss netting call that out actually wouldn't have changed too much, dollars 23,400,000 versus last year's $24,000,000 again on an apples to apples adjusted basis. So slightly better year over year. And then following that, the adjusted loss per share this year would still pretty much be the same at $0.56 compared to the adjusted loss from last year of about $0.71 versus the $0.81 shown here. On the next slide, please.

Speaker 2

Just kind of look at the quarters now. So we just went year over year. So we'll now look at Q4 doing a year over year comparison. Revenue for the Q4 was down about 30% to $916,000 from $1,300,000 in the Q4 of 2022. 4th quarter revenue comprised of about $671,000 from product sales with the balance of $244,000 coming from drone services.

Speaker 2

The gross profit was $258,000 compared to negative $1,600,000 in Q4 of last year due to one time non cash write down of inventory and otherwise would have been $310,000 for the same quarter last year. So gross profit for Q4 of this year would have been $382,000,000 if we took away the one time inventory write down of $123,000 while Q4 last year would have been 310 dollars due to the one time write down that I mentioned earlier. Hence gross profit for the quarter was up 23.1% year over year, while an adjusted margin as a percentage of revenue was 41.7% versus last year's 23.6%. So big jump on the quarters on a gross margin basis and that's as a result of kind of more sales coming from higher margin products in this quarter versus same quarter last year. On the comprehensive loss for the quarter, dollars 4,200,000 compared to a loss of $16,700,000 in the same quarter last year.

Speaker 2

As mentioned, the quarter included non change and comprised of a fair value of derivative liability of $154,000 $123,000 inventory write down and would otherwise be a comprehensive loss of $4,200,000 comparing that to an adjusted loss of $7,500,000 exiting out that quarter's one time items. So again, loss quarter for the year for Q4, quite a bit better, decreases primarily due to lower professional fees, wage costs and share based compensation. We just went through the year over year outlook for the quarter. I'll now look at the quarter over quarter changes, meaning Q4 to Q3. So basically, sorry, Kev, just the previous, still the same slide.

Speaker 2

Yes. Yes, that's right. Yes. So basically, revenue for Q4 was down 57% compared to Q3, just mainly due to some lower product sales. Gross margin as a percentage for Q4 was 28.3% compared to 41% in the previous quarter.

Speaker 2

However, if we back up the one time inventory write down, gross margin for Q4, as mentioned, was effectively 41.7%, so pretty much in line with the previous quarter. Total comprehensive loss for Q4, dollars 4,200,000 again. This time we compare it to a loss of $5,500,000 in the previous quarter. Again, we ex out the one time gain and fair value of derivative liability and the write down of the inventory. So that loss would have been $4,200,000 and we compare that to $5,400,000 for the previous quarter.

Speaker 2

So again, quarter over quarter, the loss is better and again the decrease is primarily due to professional fees and wage costs. Now on the final slide, if you just move it forward a bit, can't be up, and it's great. You can see total assets decreased from $14,600,000 to $8,300,000 year over year, which is largely due to the deployment of cash and reduction of receivables and prepaids. The working capital deficit at the end of the year of 7.17 actually would have been a surplus of 3,500,000 and shareholders' equity would have been $4,600,000 versus the $408,000 shown here if we exit out the non cash fair value of derivative liability of $4,200,000 So just to remind everyone, the derivative liability comes from the fact that our functional currency is in Canadian and we have some U. S.

Speaker 2

Dollar denominated warrants, which the treatment is that it's a liability and which is why we're exiting it out just to kind of help you see the actual results. And you can see we continue to have minimal debt. And as Cam stated at the outset, cash balance at the end of the year was $3,100,000 compared to $7,900,000 a year ago. And with that, I'll pass it back to you, Ken.

Speaker 1

Thanks, Paul. Appreciate it. What I'll do now is I'm going to just go to the questions that came in and were forwarded to me. And but as of note, if there is any questions, don't feel be afraid at all to reach out to me or to Rollie. I do my best to get back to everybody.

Speaker 1

It's overwhelming at times, so sometimes it's tough. And if I missed you, I apologize. But between Rolly and I, I think we come close to hitting about 100% of anybody that writes in or we certainly try to anyway. So first question is, what percent of the company's revenue is commercial versus defense? I'll give an approximation right now, it would probably be based on the numbers that we just went through here, it would probably be about 85% commercial and 15% defense as it's kind of like a very, very broad rule.

Speaker 1

However, you can expect, and I have to qualify this by saying, in my opinion, that in the coming this year, you'll basically you'll end up seeing this being 99 percent defense and maybe that's a bit of an overstatement, but let's call it 90% defense and the rest commercial. And by way of example, one order that comes out of the customer base that we're working with right now in the defense market, it would be multiple times the size of our revenue for the past number of years. So it would just absolutely dwarf the commercial numbers. And that's where we've been putting our focus because that's where the big win is, for the shareholders. That's where the big scale is.

Speaker 1

So it's been a bit of a bold decision to do that because we've not been scaling the commercial business even though there's really good demand there and we've been focusing on getting the certifications and meeting the demand requirements on the military side. So while it seems skewed right now in the commercial side, the reality is it's incredibly skewed on the military side. So hopefully that provides some clarity to that question. The second question that I've got here is that you mentioned that you have all this demand and an increased capacity, yet we haven't seen the new contracts and why. And so we've got the new plant built.

Speaker 1

We're going through the, I'll call it the program of record certifications, all the rest of the clearances, everything that has to happen in order for the orders to start flowing. And there's very big moats around these orders, there's an incredible amount of testing. There's it's been a year and a half, almost 2 years of really intense work with multiple areas of DoD in order to put these products through. And that's why it's just taken that much time. We're not seeing anybody else scale at this point either.

Speaker 1

But I think it's pretty well known that there are a few of other players out there who have well known names, a couple of which, one in particular are public. They're on the verge of scaling as well. And we're just starting to see the beginnings of that. So I think we're on track with just the fact where the purchasing cycle is for this right now. So what and again, we couldn't be I mean, I still kind of scratch my head every day, not just the size, but at the capability and the requirements and the trust and the amount of exposure, the depth at which we're able to, we're being trusted.

Speaker 1

And I don't know, every morning, I wake up incredibly proud of the team and the work that you do and the demonstrations and the tests that I'm not at, the feedback that I get. And it's a great story today. I can't be too specific, but I had a payload partner call up and mentioned a new opportunity with a new branch for their particular payload. And then they said that what was interesting is the first time this happened is that they wanted that payload, but they wanted to make sure that it was integrated with the commander because they want to make sure it's the commander that it's flying on. And that to me was just there was an incredible moment And I think it's indicative of what's going to continue to unfold.

Speaker 1

So there's a third question here is, once again, we did a lowball equity raise. Is this finally the last time? Gosh, I hope so. I hope so. There are we have multiple financing opportunities or options, excuse me, in front of us.

Speaker 1

I wish the markets weren't the way they were. I wish that we were getting the valuations that we were getting when we were half the company we were a number of years ago compared to our capabilities and demand signals right now and having a $300,000,000 valuation as opposed to a $15,000,000 or $20,000,000 or less valuation right now. So, it's been really painful for all of us. And I feel for the shareholders. I feel for our management.

Speaker 1

I feel for our Board. I'm feeling that pain and going through it as much as anybody else. And the financing opportunities that we do have in front of us, of course, include equity, but they also include more traditional financing as these Tier 1 customers come on board. So we elected to do a small raise. Any future raises, we'll continue to do small raises as well until the valuation or if needed.

Speaker 1

At that point, the valuation is such that we would do a large raise. But right now, we're really focused on trying to keep the dilution minimal, trying to run things as close to reasonably to the edge as possible so that we are trying to keep all our costs in line relative to the size of the market that we're trying to address and not trying to take in too much money. So by some small business standards, you may look at some of the numbers and go, wow, you're burning a lot of cash. But if you look at our competitors out there, in particular, the private competitors who have multi $1,000,000,000 valuations aren't doing more revenue. In fact, they don't disclose your revenue, but I'm confident they're not doing more revenue than we are or much more revenue than we are.

Speaker 1

And they've raised 100 and 100 and 100 of 1,000,000 of dollars and lose multiple times per month. But they've got that big opportunity in front of them. And I do believe that they will be very successful. So I think when you compare it on that basis of the size of the opportunity, we're totally within a reasonable range at this moment. So, there's been nothing mentioned, 4th question, there's been nothing mentioned about Ukraine lately.

Speaker 1

Is that not the focus anymore? No, the Ukraine has been for many important reasons. And, but it's a focus and we're big supporters of it. And it's been an incredibly poignant time for us to be able to look at our experience in Ukraine and relate it back to the experience that we're bringing to our products and to the con ops of the domestic militaries that we're working with right now. So Ukraine will continue to be a focus for us and at the appropriate time, you'll hear a lot more about the work that we're doing there.

Speaker 1

It's just not appropriate at this time for us to talk. You'll notice overall that our PR has dropped off quite a bit and that's just a requirement of where we're at right now with a number of things and the customers that we're working with. So the 5th question is, are stocks at an all time low? What's the plan to turn that around? Sales.

Speaker 1

Sales Tier 1 customers. And at the time that we can be a bit more vocal, we will be very vocal. And just because we're really proud of the work that our people are doing and the trust that the shareholders have given us. And I think I've been fortunate enough to be in the game long enough to know when that swing is going to happen. And this feels like it's going to be a really, really significant swing when it happens.

Speaker 1

We'll be appropriately loud when we can be at that point, and it will be very meaningful and we'll have some great numbers to back it up Just leave it there. Yes. And that tends to be happening more and more. There's very interesting inquiries coming in now. And yes, but listen, we want to build a fantastic company.

Speaker 1

We think we've got multibillion dollar potential here. There's certainly the market in front of us for us. We've got a product that's proving out to be worthy of that. We've got a team that's able to integrate with the types of customers that we want to have. And we have facilities and capabilities to scale to that now.

Speaker 1

So those all become interesting things for people that are potentially looking to acquire us. But at this point, we're looking to drive shareholder value through the market. And then the final question that I've got is what is the greatest near term threat to the company? I think it's balancing where we're at this time in the market with having made the strategic decision to focus on a very few customers and get them over the line with our particular products and the categories that they're in and balancing that with managing the cash flows and managing the financings and such between those 2. So it's for us, it becomes a bit of a timing issue where within a quarter or 2 of that all happening and coming together, we feel confident with where we're at with the plan.

Speaker 1

It's been painful for everybody, in particular our shareholders. But that would be the greatest threat to us. We think we've got it in hand. We've been here before in other projects and but nothing with the upside of what's happening here. So I would have said previously, our biggest threat would have been finding the specific focus that has the scale that we would really want to drive down and we've found that now and now we just kind of got to thread that needle a little bit over this next couple of quarters.

Speaker 1

So that's the questions that we've had that have come in. There might have been some others that I'm not entirely aware of, but don't again be afraid to reach out to myself or to Rollie and we'll certainly do our best to get back to you as soon as possible. Again, we deeply appreciate your trust and consideration. The management team is incredibly committed and dedicated. In fact, not just the management team, the executive, the management team, all the people here, we really believe in our mission.

Speaker 1

We think we've got now incredibly strong indication that we've got the right product lineup, the right service lineup. And it's just a matter of time hopefully before you're able to share the enthusiasm that we have internally here. So on that note, thank you from all of us and we look forward to speaking with you shortly.

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