Draganfly Q1 2024 Earnings Call Transcript

Quartr
Provided by Quartr
May 14, 2024

There are 4 speakers on the call.

Operator

All right. I think to respect everybody's time, I think we will get started today. So as usual, greetings and welcome to all shareholders and stakeholders for today's DragonFly 2024 Q1 earnings call. My name is Rolly Bustos, and I am the internal Investor Relations representative here at Dragonfly. We appreciate you joining us.

Operator

We appreciate our CEO and President, Cameron Schell recapping the Q1 earnings headlines. I just muted the echo.

Speaker 1

Hi, good afternoon.

Operator

It's just mute the echo. Sorry. We will then quickly run through a more detailed financial review. We'll then jump back in and discuss the operations, highway and subsequent events. We will conclude with our Chief Director, Scott Larson, moderating the pre submitted questions we have received.

Operator

As always, you are welcome to reach out to me at investor. Relationsdragonfly.com. Once again, I remind everyone that this presentation may include forward looking information and statements. These statements are not guarantees of future performance or financial results, and undue reliance should not be placed on them. Any future events or financial results may differ from what might be discussed here.

Operator

A forward looking disclaimer can be found on Page 2 of this presentation. So Cam, if you're ready, please go ahead.

Speaker 1

Hi, sorry, everyone. I just had a computer glitch there. Let me just just give me one second here to pull the document back up. I apologize. Sorry about that.

Speaker 1

Of course, this always happens, right, the worst moment. Great. Thanks everybody for your patience. I appreciate that. Okay.

Speaker 1

So Q1. So our Q1 revenues were $1,300,000 somewhat by design. That included $1,200,000 in product sales and just under $100,000 of services. Now it's important to note that this is a 45% increase q overq from our Q4 of last year. Now as most of you probably realize, we've gone through a major upgrade of 2 plants last year and we're able to bring on our main plant in the end of Q3 beginning of Q4 of last year.

Speaker 1

And we've been preparing or throttling if you will basically for expected incoming orders that we've been working on now for about a year and a half in particularly from our military customers. A number of announcements leading up to this you will have noticed our sales into military customers which are all kind of the precursor in order for us to be able to meet the demand signals that were given to us by the military. And I'll talk a little bit more about this after Paul runs through the numbers exactly where we're at in this cycle and the steps that we've taken in order to prepare for it. So we had a gross profit $280,000 which is about a 21% margin. Our cash balance as of the end of Q1 was $4,000,000 and we had a subsequent event just right after the Q here of another $3,500,000 So we're in a strong cash position.

Speaker 1

And as Paul will run through, you'll see that our burn rate is declining significantly. So without further ado, before I get into some of the operational highlights, I'll turn it over to Paul Sun, our CFO to run through the financial results. Paul?

Speaker 2

Yes. Thanks, Cam. Thanks everyone for joining. So Cam just kind of went through the revenue numbers. I'll just go through this table real quick.

Speaker 2

He talked about quarter over quarter. In this table, we're doing a year over year comparison. So for our Q1 of this year, we did $1,300,000 That's about 16% down from $1,600,000 in the Q1 of 2023. Again, part of the reason is what Cam had talked about in terms of the transition we had. Again, revenue comprised $1,200,000 of product sales with the balance coming from drone services.

Speaker 2

He did talk about the gross profit being $280,000 compared to $443 in Q1 of last year. I will note there was a one time non cash write down of inventory of about $148,000 So gross profit would have been $429,000 So gross profit for Q1 2023, you kind of xed out their non cash would have been $520,000,000 If you take away the one time inventory write down that we just talked about, it's basically a flat year over year gross profit of about 32%. Total comprehensive loss for the quarter was $1,800,000 compared to a loss of $7,100,000 That is again partially talking about the burn that Cam just mentioned. Again, there is some non cash changes in that number. There's a fair value of derivative liability of about $1,800,000 the inventory write down of $148,000 and we had a small gain on an impairment of a note receivable of $6,700,000 So the loss would have been $3,500,000 versus an adjusted loss of $7,100,000 a year ago.

Speaker 2

So again, a pretty big decrease in the year over year loss, primarily due to lower office and miscellaneous costs, professional fees and wages. Stan, if you now go on to the next table, the quarterly table. Yes, so we just went through the year over year changes. So now we'll do kind of the quarter over quarter changes between this quarter and Q4 of last year. So, revenue for Q1 increased $413,000 to $1,300,000 up from $916,000 in Q4 of last year, again an increase of 45% due to higher product sales.

Speaker 2

Gross margin percentage for Q1 was 21% again comparing to 28.3% versus Q4. Again, if we back out those numbers, the true comp is 32% for this quarter compared to 41% of last quarter with the difference being really product mix between the quarters. Some products have higher margin, some services have higher margin. So it really kind of depends on where they fall in the quarter. In terms of comprehensive loss for Q1 again, dollars 1,89,000 compared to $4,200,000 for Q4 of last year.

Speaker 2

Again, we had that gain in fair value of derivative liability of $1,800,000 the write down in inventory and the gain on the note receivable. So if you back that out, comprehensive loss again $3,500,000 If we do the same analysis with Q4 of last year, their loss pretty much stays the same at 4.2%. So again, our loss is getting better. It's lower due to professional fees and wage costs. So, on the final table here on the next page, you can just scroll forward, Kim.

Speaker 2

Yes, just kind of looks high level on our balance sheet. You can see our total assets increased slightly from $8,300,000 to $9,000,000 from the end of 2023 to the end of March largely due to an increase in cash. Working capital as at the end of this quarter was $534,000 compared to what is shown here as a deficit of 717,000. However, if we ex out that non cash fair value of derivative liability again of $4,000,000 in that particular case, working capital would be a surplus of $4,600,000 this quarter and $3,500,000 at the end of December of last year. Doing the same analysis for the shareholders' equity at this quarter end would be $5,700,000 versus the $1,700,000 shown here and $4,600,000 at the end of December versus $408,000 shown here.

Speaker 2

So you can really see the derivative does swing the number and again it is a non cash number. Again, we continue to have minimal debt. And as Ken mentioned at the outset, company's cash balance is $4,300,000 compared to $3,100,000 at the end of December of last year. And with that, I'll pass back to you Ken.

Speaker 1

And that cash balance is not inclusive of the subsequent event of the $3,500,000,000 From an operational standpoint, it was an important quarter for us. Again, our big focus through the end of last year and the beginning of this year was really tooling for and securing what we believe are the by all indications the larger in particular military contracts that we've been working on for the last year and a half plus. That said, a couple of things of note in preparation for this is we did announce an additional partnership with ParaZero, the drone safety systems, which are standardizing on our Commander 3 XL system. And we actually are using this on a project that we announced with Mass General or Boston Mass General Brigham Hospital where we were selected by them to perform their medical deliveries. So they're moving forward in Massachusetts with a significant pilot, which will enable them to be delivering things like test kits, samples, pharmaceuticals, etcetera, which normally take hours and hours to get through the city that they are now looking to do by drone.

Speaker 1

So this was a very, very prestigious win for us and kudos to the team for putting this together with this excellent crew. Mass General worked closely with the Department of Transportation and they've actually been working on this project for a number of years in contact with the FAA as well. We also announced Doodle Labs, a number of projects with them. Doodle, in addition to this, also just got approved over in the Ukraine theater on testing, where we've been for a couple of years. So that was a significant announcement for us as well as UXV Technology.

Speaker 1

So UXV has a very particular and specified controller that's ruggedized and very important in particular in military applications. And so we've been working with both these companies for the last year and a half and we're able to formalize our relationship with them and actually announce it based in anticipation of a number of the other projects that we've got coming up. We were also at the AUVSI conference which was an extremely interesting conference for us recently, probably the greatest level of activity that we've ever had as an organization with multiple specific customers coming to the conference just as to not to speak with us, but do a number of strategic planning sessions as we roll out with them. Also on that front, we are enrolled in what's called the green program with AUVDSI. And the green program or what they call the green list is a list that supersedes the blue list.

Speaker 1

So originally when the blue list first came out, I was very dismissive of it. And this was a mistake on my part because we have been selling into and continue to sell into government agencies in North America for the last 20 plus years, I really looked at the Blue List as a marketing thing and we weren't candidly over impressed with what they were certifying. Little did we know that it would become a very important list to be on. Now there is provisions that if you sell it to government agencies or into the military in particular, they can make a request to Blue List to include you on the Blue List. And we've had those requests made on our behalf by the military, but blue is on a budget.

Speaker 1

So they're not including more people on that list. So AUVSI came out with what's called the green list, which actually supersedes the blue list. So if you're on the green list, then you supersede blue. So we're going through green certification right now. But other than delaying some of the sales cycle by a few weeks, the Blue list has not prevented us from selling or being eligible to sell into the government requirements that we have because we already were selling,

Speaker 3

we are already NDAA compliant and we

Speaker 1

already sell into the military. Drones into a contest and we were awarded the best enterprise drone, the best delivery drone. And actually, I forget what the other award was. But we're pretty pleased with and we're really kudos off to our engineering team for the work that they put together and the valuations that they went through in order to do this. The First Nations is becoming a really important player in drones across North America simply because of the mapping and the survey work and in particular because of the mining and the fire prevention or wildfire work.

Speaker 1

So we were selected by a number of organizations throughout the quarter, but in particular, the El Cacho Nation, which has a very, very strong program that they're moving forward with federal firefighting authorities. Along with this similar, the Squamish Search and Rescue has entered into a partnership with us whereby they are they have selected the DragonFly, not only just our drones, but actually the entire DragonFly as the exclusive drone provider and solution provider for all of their search and rescue. And they are one of the busiest search and rescue organizations in North America, well over 100 calls per year, fast water rescues, mountain rescues, search and searches, loss hiker, just the list goes on. There probably isn't much of anything that they haven't had to do. And the use cases that they're presenting for, why they selected in particular the 3XL and the heavy lift actually are pretty unique and well positioned for us.

Speaker 1

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

Speaker 1

I think it's important to note also that in terms of some of the demonstrations and such that we've been doing, I want to draw attention in particular to the demo training and evaluation that we went through at Fort Liberty. We had the great pleasure of training over 200 special and conventional forces on our 3XL and on our new Flex Force modular FPV UAV. So the Flex Force FPV is the 1st NDAA compliant FPV to be utilized within the forces. It's gone through full evaluation. I can't give more detail than that at this time.

Speaker 1

But know that we came out with this product for the express purpose based on demand that was coming for this particular product as an NDA compliant device. So it has some incredibly unique features. We are not overly compelled to talk a lot about some of the features of this particular product. They are it is very strategically differentiated, not just because it's an FPV, but because of the features of this particular FPV that were helped that were designed in part by the very specific requirements that were asked for this particular product. We're really excited about where this is going to go, who's buying it.

Speaker 1

We are standing up we have stood up a production line for this now as part of the evaluation process that we had to go through for this to be a product that could be purchased by the DoD and several different defense forces. We had a very successful SOF week. SOF week is the Special Operations Forces week, where we were where we did hold live demos with just about, well, 19 specifically different agencies in partnership with MMS. And that was a full day at a live site just outside of out of Tampa. Again, this was in support of the orders that we're ramping up for right now.

Speaker 1

I'm not going to spend a lot of time on our product review other than what I did mention here that we did introduce the Flex Force modular FPV UAV. You'll notice that center sections blurred out. That's for many different reasons. But know that basically it's modular. And what I can tell you is that this particular, FPV can change sizes, dimensions and flight characteristics within minutes in the field and without the use of any tools.

Speaker 1

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

Speaker 1

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

Speaker 3

Yes. Thanks, Ken. We have had a number of questions who have come in prior to this, of course, always encourage people to email the questions in. We try to get through as many of them as we can. I have a number here and I think still are so one of you might be coming in.

Speaker 3

So let's kind of get to them. Cam, maybe talk a little bit about some of the stuff we're doing internationally. We've talked about that in the past. Wasn't a whole lot of stuff there and obviously not trying to get ahead of ourselves, but what are some of the international markets that we're looking at? How are they developing?

Speaker 3

What kind of effort, time, resources and things like that? And what do we hope to see out of some of them?

Speaker 1

Yes, I think there's probably 2 excuse me, 3 specific areas that we'd like to address in that regard or that we would probably should address in that regard. So the first is India. So, India is a very, very big potential market for us and we have some very strong partnerships there and have done a considerable amount of work to be ready to execute in that particular region. Now, as you all well know or you may know that DragonFly dislocated in Canada and the United States. And as it relates to India, Canada and India have had some tough relations in the past 6 to 8 months, which seem to be working through.

Speaker 1

Those relations have slowed down our progress in that particular market. We don't think it's going to repeat it long term and we continue to work in the manner that we can. But in terms of being able to push that forward as quickly as we would like, that has run into a bit of international geopolitical scenarios whereby we've just had to slow that down a little bit. We do not see it as a long term impediment. However, it is something that is just a little bit in a holding pattern at the moment.

Speaker 1

The other area that's been really interesting for us, we did announce some work in the MENA region and we are working there on a delivery project with the government whereby that we will be providing deliveries in the area. And that's again about as much as I can say about it. And that in turn has led us to do an awful lot of work also in Africa. So we've been very active in that region. They don't really or can't really say much more about that.

Speaker 1

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

Speaker 1

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

Speaker 3

Okay. What is the approximate capacity utilization of the company's expanded manufacturing facility? So how much of we talked about expansion, we announced of course, we've talked about it in the last call or 2. How much of the capacity we have left are we using? How much is left?

Speaker 3

What does that look like?

Speaker 1

Yes. So organic capacity on the production side, not including services would be about $100,000,000 Now that would be across what was 2 and is now 3 production lines. It's more than 3 lines, but it's 3 production products being the heavy lift, being the 3XL and now being the Flex Force FPV. So, yes, so we've got about $100,000,000 worth of organic capacity. Now, those three lines as they move we can now move those to outsource manufacturing as well within the United States when the demand signals.

Speaker 1

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

Speaker 3

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

Speaker 1

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

Speaker 3

There's a question or 2 here on the blue view AS. I think you answered that, of course, earlier in the presentation. Talk a little bit about what you see in the industry as a whole. Any kind of any broader trends? You mentioned a couple of conferences that you've been at.

Speaker 3

Any kind of trends throughout the industry that you or other partners of Dragonfly are kind of seeing? And what do you think that looks like?

Speaker 1

I would I would say the I don't know if it's an industry trend, but the thing that to me that's been most notable at the last couple of shows the shows the last 6 or 8 months has been basically the emergence of 3 or maybe 2 or 3, maybe 3 or 4 drone manufacturers that are beyond having great product. So I think there is probably a dozen North American based drill manufacturers that have great product. The real crux where the industry is at right now is you have to have great product and you have to have capacity. So it's taken a number of years for the industry to get to a point between regulation and demand signal, which is now unfortunately being driven by geopolitics more than commercial the commercial requirements are growing like this. But the demand signal on the geopolitical side, I'll call it the military side is just so significant.

Speaker 1

And because those are, I'll call it, mission critical, the bigger issue there isn't just great product, it's capacity, right, and capability in terms of being able to meet orders. And that goes everything from clearances to quality to cybersecurity to obviously capacity and all the rest of it. And I would say that there's a number of great drone companies out there with great product, but there's probably 3 maybe that can now meet the capacity of the orders that are going to be required. So the industry has become in this last, I'll call it 6 months, 9 months maybe, but really become evident that you have to be nimble and quick to be able to adapt your drone capabilities quickly. But none of that matters if you can't meet the capacity requirements and demands that are coming down the line.

Speaker 1

And so that would be to me in terms of like the very, very tactical look at the industry right now, probably for the first time ever in the North American drone industry, there's 3 ish companies that could meet the capacity demand. And that's really where our governments have been trying to get the industry to. And so, I think we're on the precipice of that happening. And it's probably somewhat obvious what those 3 ish companies are. And not that there won't be other players, but there's really an opportunity now in this category 1 and category 2 drones where and I would suggest that we're probably the position to be the dominant play in category 2 drones.

Speaker 1

That's drones that are greater than £55 but have a kinetic energy of that won't hurt people if the drone fell on them. And would even suggest that we're the only company that have drones approved in that area with particular customers. So I see things forming up if that makes sense Scott.

Speaker 3

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

Speaker 1

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

Speaker 3

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

Speaker 1

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

Speaker 1

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

Speaker 1

So I'm not sure if I answered the whole question for you, Scott.

Speaker 3

Yes, I think you did. I think that's totally fine. I think last question here unless there's 1 or 2 that come in over the next minute or so. Any we've talked a lot about contracts and you've talked about it now. Any thoughts on timing?

Speaker 3

These obviously long lead type things. What are your thoughts on kind of some of those coming to fruition, of course, without trying to get

Operator

too far ahead of us and all of you?

Speaker 1

They're coming. They're coming. And they keep getting bigger. Requirements keep slightly changing. It's whether it's Congress approving budgets, whether it's changing situations in the field, whether it's whatever the case is whether it's getting through the last steps of evaluations, whether it's the all of a sudden immediate requirements and needs for FPV drones as well as our other drones or swarming technologies that it's all of these things are things that then have to go through extensive testing and extensive evaluation and certifications and such.

Speaker 1

And we're not the only ones that are going through this. I think an informed, a sophisticated and informed investor in this space knows who the 2 to 4 companies are that are positioned for this. And if one of them was at the $30,000,000 $50,000,000 orders they were all happening and nobody else did or 2 of the 4 did and you could maybe make some calls on whether that company is going to get them. But I think you're going to see the industry, not just Dragonfly dropping these in short order. It's yes, I don't know what to say.

Speaker 1

The orders are they'll happen when they'll happen. And there's nobody else to fill them. That's the bottom line. So we're not taking that for granted. We're working very hard every day to make sure that we're going to be able to do our duty.

Speaker 3

Just maybe the last question that's coming actually just by now. Any we've talked about this in the past, of course. Any more consolidation? It's some things have been announced. Some companies have closed the doors.

Speaker 3

There's been a sale or 2 or something. Are you expecting that to continue?

Speaker 1

There will be consolidation. There is consolidation happening. I don't think there's going to be a lot of M and A activity because I think the those 2 to 4 companies out there don't have time to do an M and A. We've looked at it lots and not that we're not going to continue to look at it, but we don't have time Like our organic growth is so imminent and so big and so taxing to meet the requirements and demands that integrating another company at this time is just I think that would be a heavy lift for the folks that are in the trenches doing the real business right now. That's just my own opinion.

Speaker 1

And but that would be my expectation. I do think we have seen another yet another cycle of North America drone companies that didn't last. And we're kind of seeing another bunch of new drone startups that are kind of coming into it. A lot of people think this is an easy industry. You put 4 blades on a battery and you can fly the thing without realizing that it's the regulatory environment, the testing, the demands, this is an aircraft in the air.

Speaker 1

It is highly technical, highly regulated business, which really lends credence and valuation to the companies that are positioned well now. So we'll see consolidation, but I don't really think because of M and A. Until these kind of 2 to 4 companies that I keep referring to reach a critical mass, then I think there's a level of M and A from either the primes or some of the Tier 1 subprimes that will be looking to play in the category 1, category 2 space as it starts becoming a more and more important part of the military complex as well as the commercial complex out there. And that critical mass is happening. So you may see consolidation of these 2 to 4 companies, not maybe not necessarily together, but by bigger companies in a year ish from now.

Speaker 1

But between now and then, I don't think you're going to see these 2 to 4 buy companies. I think you're going to see companies go into business and these 2 to 4 rise even further.

Speaker 3

Okay. Well, that is the end of the questions. Thanks for sending them in everybody. Appreciate those. And again, as always, if there's other ones that you guys think of afterwards, send them through.

Speaker 3

We'll try to get to them, of course, as best we can. But yes, Cam, back to you to close and wind this out.

Speaker 1

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

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