Red Cat Q4 2024 Earnings Call Transcript

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Provided by Quartr
August 8, 2024

There are 6 speakers on the call.

Operator

Ladies and gentlemen, thank you for standing by. Good afternoon and welcome to the Redcat Holdings Fiscal 2024 Annual 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 are advised that the audio of this conference call is being broadcast live over the Internet and is also being recorded for playback purposes.

Operator

Joining us today from Red Cat Holdings are Jeff Thompson, Chief Executive Officer and Leah Langer, Chief Financial Officer. During this call, management will be making forward looking statements, including statements that address Red Cat'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. For more information about these risks, please refer to the risk factors described in Red Cat's most recently filed periodic reports on Form 10 ks and in Redcat's press release that accompanies this call, particularly the cautionary statements in it. The content of this call contains time sensitive information that is accurate only as of today, August 8, 2024.

Operator

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. It is now my pleasure to turn the call over to Jeff Thompson, Chief Executive Officer. Jeff, please go ahead.

Speaker 1

Thank you. Welcome everyone to our Q4 and full fiscal year 2024 earnings conference call. I will start by summarizing our performance and recent achievements. Leah will then take you through our financial results in greater detail, and then Leah and I will take your questions. I am pleased to report record results for the quarter and a record breaking fiscal year for Red Cat.

Speaker 1

1st, for the full fiscal year, revenue increased 286 percent to a record $17,800,000 compared to $4,600,000 last fiscal year. 4th quarter revenue rose to $6,400,000 over 100% increase from the same period last year and now a new top line quarter record. This is our 4th consecutive quarter of top line sequential growth averaging above 10%. The last 4 quarters were driven by feet on the street organic sales revenue. None of this revenue was from a program of record production contract or the replicator initiative.

Speaker 1

These record breaking achievements were completed with a single product, the TiO2. During this past fiscal year, global demand continued to surge for small portable autonomous systems and Redcat responded accordingly. We invested across the organization to strengthen our product portfolio and expand our manufacturing capacity to meet the evolving needs of our customers. Our product portfolio has expanded from 1 drone to 3 drones, completing our recently announced family of systems. Let's discuss the Redcat family of systems.

Speaker 1

Our family of systems strategy is a result of listening to our urgent user needs regarding the deployment of low cost, portable, field repairable and recoverable ISR and precision strike systems. This is a paradigm shift in the drone industry where more expensive nonrecoverable systems have dominated the market for the last decade. The family of systems addresses a variety of mission sets from medium range ISR, short range reconnaissance and first person view FPV precision strike capabilities commanded and controlled from a singular tactical ground control system and optimized for GPS denied and other contested environments. I will now discuss our recent acquisitions and partnerships. I will start with FlytWave.

Speaker 1

Our proposed acquisition of FlytWave Aerospace brings medium to long range ISR and high resolution mapping capabilities to the RedCap portfolio through their flagship product, the Edge 130 Blue. With a range of 20 kilometers and extended flight endurance, the Edge 130 outperforms other drones in its class while maintaining a small portable form factor, which is critical to frontline war fighters. In the near future, the Edge 130 will be will complement the solutions of Redcat's other subsidiary, KIL Drones, by performing joint meshed networked autonomous ISR missions in multiple domains such as land, sea and air. We also have an exclusive partnership with Sensient Robotics. The partnership between Red Cat and Sensient Robotics will enable Red Cat to provide war fighters with the ability for continuous uninterrupted reconnaissance on enemy targets with drone swarms.

Speaker 1

Teal Drones battlefield tested drones coupled with Sentient's fleet handling capabilities give Warfighter tools and technology they have never had access to. New technology is dramatically changing the nature of warfare we believe those who can integrate defensive and offensive assets across multiple domains and rapidly deploy those capabilities against adversarial targets will gain tactical superiority. This agreement with Sentient is a major step toward the autonomous deployment and control of drone swarms and the capability to launch from small boats or ships. This brings us to the Replicator initiative, which seems to be focused on the Indo Pacific region. For investors new to the Red Cat story, the Replicator initiative is a program launched by the U.

Speaker 1

S. Department of Defense aimed at rapidly delivering advanced autonomous systems to the military. Announced in August 2023, The initiative focuses on creating and deploying thousands of all domain Attritable Autonomous Systems or otherwise known as ADA2 within 18 to 24 months. The Senate Appropriations Committee recently approved a defense spending bill for fiscal 2025 that would provide full funding for the Pentagon's high profile autonomous systems initiatives known as Replicator. And lawmakers raised the possibility that even more money could be allotted for the effort.

Speaker 1

This DoD funding for drones is going to be the primary vehicle the U. S. Government uses to kick start domestic production. This budget plus the continuing resolution last year and other allocations will result in about $1,500,000,000 in funds for theta alone going to drone manufacturers from now until September of 2025. That will be approximately $100,000,000 per month.

Speaker 1

We believe we are well positioned for future replicator tranches with our family of systems combined with our swarming capabilities. Last but not least, let's discuss programs of record. Again, for the people new to the story, a program of record in the Department of Defense refers to an acquisition program that has been officially recognized and funded with the Future Year's Defense Program. This means the program has successfully passed through the necessary approval processes and is included in the DoD's budget planning. SRR, the Short Range Reconnaissance Program is a U.

Speaker 1

S. Army initiative designed to equip soldiers with small, rapidly deployable unmanned aircraft systems for reconnaissance and surveillance activities. The primary goal is to enhance situational awareness and provide a tactical advantage at the platoon level. This program of record selection process has gone on for over 5 years. It started with 37 companies and is now down to Red Cat and one other company.

Speaker 1

The final test for the Army was in May. We had to deliver approximately 50 final prototype systems. The final down collection is scheduled for the end of next month, September 2024. We believe this production contract will be in the 100 of 1,000,000. Usually, when we talk about programs of record, they are U.

Speaker 1

S.-based contracts. REDCap is also in late stages for NATO programs of record. We believe that they are also significantly larger than the U. S. SRR program of running.

Speaker 1

These programs are expected in the next 2 months to have their down selection. In summary, 2024 was a great year for the TL2 with record revenues. We are steadily reducing cash burn while gaining market share. We expect 2025 revenue to be another record year in top line growth and scale. We expect the Flightwave deal to close soon, adding significant revenue to the 2025 calendar year.

Speaker 1

We believe we are well positioned for a short range reconnaissance program of record win worth 100 of 1,000,000 of dollars and we hope to finalize NATO based programs of record before the end of calendar 2024. And with that, I will hand the call to Leah.

Speaker 2

Thank you, Jeff, and everyone for joining the call this evening. As Jeff highlighted, fiscal 2024 was an exceptional year marked by record revenues of $17,800,000 compared to $4,600,000 in fiscal 2023. This represents growth of 286 percent. All 4 quarters of fiscal 2024 brought record revenues sequentially. Quarter 4 revenues totaled $6,300,000 compared to $1,100,000 in the same quarter of the prior year, representing a 4 85% increase.

Speaker 2

Gross profit for fiscal 2024 totaled $3,700,000 or approximately 21% of total revenues, compared to negative 18% in fiscal 2023. We continue to expect steady improvements in gross margin over time as we focus efforts on manufacturing efficiencies and reductions in cost of goods sold. We now have dedicated teams for manufacturing, engineering and warranty and returns to accomplish these goals effectively. Our focus on controlling costs, while scaling revenues, led to a decrease in operating expenses for fiscal 2024. Adjusted operating expenses, which exclude non cash items of impairment loss and stock based compensation expense, totaled $17,500,000 in fiscal 2024 compared to $18,100,000 in fiscal 2023.

Speaker 2

This represents a decrease of approximately $600,000 or 3%. As a percentage of revenue, adjusted operating expenses decreased from 3 91 percent of revenue in fiscal 2023 to 98% of revenue in fiscal 2024, which demonstrates our success in controlling costs, while nearly quadrupling revenues. Our combined cash and accounts receivable balances as of April 30, 2024 totaled over $10,000,000 Additionally, in July, we secured $4,400,000 of non dilutive financing through the divestiture of our investment in Unusual Machines. Closing this transaction eliminated our Equity at Method investment, while providing additional funding for accomplishing our strategic objectives. We are pleased to report that our cash used in operations has decreased significantly on both a quarterly and annual basis.

Speaker 2

Cash used in operations for quarter 4 of fiscal 2024 was $2,300,000 This represents a decrease of $1,800,000 or 43 percent sequentially and a decrease of $5,200,000 or 69 percent compared to the same quarter in the prior fiscal year. On an annual basis, cash used in operations decreased by 6,600,000 27% compared to fiscal 2023. Overall, fiscal 2024 has been a year of growth and accomplishment. We have successfully scaled revenues both domestically and internationally, while controlling costs, and we look forward to continued revenue growth and improved profit margins in the upcoming year. Shortly after year end, we completed our engineering efforts for the Army, having delivered final prototypes in April May of 2024.

Speaker 2

We remain one of only 2 finalists in the SRR Tranche 2 program, and we believe we are well positioned to receive an award next month. During the call today, I referenced adjusted operating expenses, which is a non GAAP financial measure. Adjusted operating expenses exclude non cash items of impairment loss and stock based compensation expense. The most directly comparable GAAP financial measure is operating expenses. Listeners can find operating expenses as well as a quantitative reconciliation of differences between adjusted operating expenses and operating expenses on Redcat's website, which is at redcat.

Speaker 2

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

Operator

We will now begin the question and answer

Speaker 1

Before we start with the questions, I just want to do a little bit of housekeeping. I know we got a I'm seeing a very large list of questions already. So people don't waste the same question on this. So for guidance, we will resume guidance next quarter. We are in the middle of sweeps for the next 6 weeks.

Speaker 1

We expect to hear on SOR down selection in the next few weeks. We hope to close Flightwave in the next week or 2 and believe they could add $10,000,000 to $20,000,000 in revenue in calendar 2025. So we will be able to give and resume with guidance once these data sets are resolved. So I want to get that out there before we take questions. Thank you.

Operator

The first question today comes from Ashok Kumar with Bank Equities. Please go ahead.

Speaker 3

Thank you. A 3 part question. The first question is that you had mentioned you had $10,000,000 in cash and receivables. Does that include the $4,400,000 you just closed with Humac. The second question, as you had mentioned, that some of the NATO programs of record, the POR are larger than the U.

Speaker 3

S. Army POR. Can you give us the magnitude? And the last one is, have you received any demand for the Flight Wave Edge 130 system? Thank you.

Speaker 1

Great. Thanks, Ashok. Actually, Bia, why don't you grab the first one and I'll grab the second and third?

Speaker 2

Yes, I'd be happy to answer that. So the $10,400,000 in cash and accounts receivables was our balance as of April 30 and we closed the sale of our investment in Unusual Machines last month. So the $4,400,000 mentioned is in addition to cash and AR as of year end.

Operator

Go ahead, Jeff.

Speaker 1

Great. Thanks. Yes, so the programs of record in NATO are significant and you can understand why with them being so close to the Ukraine war. So I'll just give an example of one of them and compared to SRR. SRR is about a little under 6,000 systems.

Speaker 1

It's still a very significant contract, but the at least one of the programs of record in NATO is for 25,000 systems, it's 4x. So they are pretty massive compared to the SLR program of record. And then I think you mentioned demand for the flight Edge 130. We've got a great response since we announced the LOI. A lot of our customers are willing to cuss knowing that we can actually build and meet the demand.

Speaker 1

It's a great system. Mike have done a great job designing that system and the employees there have made a very unique platform that can fly longer than any other vehicle in its size and range. We think it's a great replacement for the now discontinued aero environment Ravens. So that's we have seen great demand signals for the Edge 130. Thanks.

Speaker 3

Thank you and all the best.

Operator

The next question comes from Glenn Mattson with Ladenburg Thalmann. Please go ahead.

Speaker 4

Yes. Thanks for taking the question and congrats on the quarter. On the there was a period of time where you lowered production in Q4 to get the CL3 out. So just generally asking about the production capacity and capabilities. So is that back up and running, things going out the door again?

Speaker 4

And then when it comes to Flightwave and the acquisition, would you move that manufacturing into your existing facility? And just give us an update on how that all will play out if you could? Thanks.

Speaker 1

Yes. Thanks, Glenn. So the we are back in production. We're also we are in a pretty large hiring spree right now to scale production of the future teal drone that we it's the drone that we actually submitted for the Army prototype. We are preparing for large scale production and moving into the Teal, we're calling it currently the Teal 3.

Speaker 1

So we're back in production. We did almost take 6 weeks. It was a pretty easy decision. Did we want to try to make guidance or did we want to spend the right amount of time building those prototypes to get to the Army to win a contract that's worth 100 of 1,000,000. So obviously, we chose to make sure the prototypes were perfect and built a great bird and the team did an exceptional job that the new drone has been flying flawlessly.

Speaker 1

And then on the Flightwave, once we close, we will probably we'll be doing simultaneous tasks. They've actually have a huge amount of demand right now and we hope to be able to meet that demand for them, 1 by continuing to do the production they have in California and simultaneously in parallel building a production line in Salt Lake City. So we're as you can see, we've been hiring quite a bit. We're gearing up to do both those things I just talked about.

Speaker 4

Great. On the you just mentioned a number of $25,000,000,000 potentially for Flightwave in 2025. Is that based on some awards you expect to win? You mentioned a lot about the family of systems and the replicator program and how maybe you're more applicable to be able to get awards against that revenue source potential revenue source. So maybe just a little background on that color that you since you gave that number.

Speaker 4

Thanks.

Speaker 1

Yes. So the Flight Rate system, it we go from having a one product company now into 3 drones, a family of systems that are all going to be working together through a single controller. So the Flightwave capability puts us into a completely kind of different class of drone, even though it's still a Class 1 drone, it can do it can compete against class 2 drones with class 1 pricing. And that's been resonating very well. And its unique capability in flight time that's more than its predecessors, but this one is rucksack portable.

Speaker 1

You don't need 2 people to launch it. It's not 7 feet. You don't have to stand up and throw it in an open field and get shot at. So we think there's huge amount of demand for this unique product. And I think that the Flight Wave is going to fill a huge void.

Speaker 1

The capability and the timeframe and the distances and the speed, it's one of the I think it's the fastest growing in the Blueyeo S group. So we can get places very quick, it can go very high and it has very long flight time. So we believe 10 to 20 is a very safe projection for next calendar year 2025 for that product.

Speaker 4

Great, thanks. And last one for me, you mentioned the NATO stuff and I couldn't quite get quite hear what you said. I think you said down selected in the next 2 months and then I thought you heard you say awarded by the end of the year. Is that did I get both those right? And if not, maybe you can correct me.

Speaker 1

Yeah. Once you get down selected, then you work on production contracts. So yes, you got those timeframes correct.

Speaker 4

Great. Okay. Thanks. Congrats and good luck.

Speaker 1

Thank you.

Operator

The next question comes from Carlo Corzine with Dawson James Securities. Please go ahead.

Speaker 5

Thank you. Great quarter, Jeff. I wanted to kind of go back to the manufacturing capacity. I think the full capacity in Salt Lake was 300 at one time and now we've got I'd like to know how much the Flightwave, what their capacity is and where we're at in the capacity there. One thing we had always talked about because of so many contracts you can't announce was the backlog, hopefully in a monthly basis and we haven't seen that lot.

Speaker 5

I'd love to see that as you get contracts you can't speak about. And last was which one gives you the lethal payloads? Is that the new thing? I thought it would took like 2 years to get that kind of accreditation or did you buy that through one of the acquisitions? That's it.

Speaker 3

Great. Thanks, Carlo.

Speaker 1

So I'll try to go in reverse here. So we don't actually make munitions that work on FANG, which is our FPD drone. And we're also working on kinetic capability for the TL3. So both of those birds will have strike capability. And long term, we actually expect to look at in long term, I mean, like next year, we're looking at having the Edge 130 be able to handle a kinetic payload also, which could be very compelling considering it would be a much longer lasting loitering munition than even the Switchblade 300, which I think only has 12 minutes.

Speaker 1

So there is but when we partner, we're able to basically drop almost anything from these drop mechanisms. They can be kinetic or they don't have to be kinetic. They could be supplies. They could be ammunition. So we don't have to get those approvals.

Speaker 1

The companies that are making the actual kinetic would have to get those approvals, which can take like 2 years.

Speaker 5

Okay. And on the capacity at Salt Lake? Yes.

Speaker 1

I mean, the Salt Lake facility can easily do thousands of drones, not easily, it's hard to do thousands of drones a month. But we can get to thousands of drones a month for the TL2 TL3 based on getting the demand that we want from that. So we're preparing as you can see that we are preparing and getting ready for that type of scale immediately. And the Flightwave capacity, we don't know yet. We're hopefully closing in the next week or 2.

Speaker 1

We're going to ramp up their capacity dramatically. We're getting great demand signals on the Edge 130. It's a great bird. It's a great team. But I don't have the answers on Flight Rate yet.

Operator

This concludes our question and answer session. I would like to turn the call back over to Jeff Thompson for any closing remarks.

Speaker 1

Great. Well, thanks for joining us tonight. I want to thank our investors and our employees. I want to thank the finance team for getting 2 years of audits done in 3 months. That was a heavy lift.

Speaker 1

The entire Tiel team for delivering an incredible prototype for the U. S. Army. And I saw a very interesting quote from the CEO of Ryan Mattal today. It doesn't convert so well from German, but he said the super cycle, a long term surge in defense spending is in full swing.

Speaker 1

I'll leave you with that. Thanks and good night.

Operator

The conference has now concluded. Thank you for attending today's presentation. You may now disconnect.

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Earnings Conference Call
Red Cat Q4 2024
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