Draganfly Inc. (NASDAQ:DPRO) Q1 2024 Earnings Call Transcript

Draganfly Inc. (NASDAQ:DPRO) Q1 2024 Earnings Call Transcript May 17, 2024

Rolly Bustos: All right. To respect everybody’s time, I think we will get started today. So as usual, greetings, and welcome to all shareholders and stakeholders in today’s Draganfly 2024 Q1 Earnings Call. My name is Rolly Bustos, and I am the internal Investor Relations representative here at Draganfly. We appreciate you joining us. We will start with our CEO and President, Cameron Chell, recapping the first quarter earnings headline.

Cameron Chell: Good afternoon.

Rolly Bustos: Then quickly, we will have a more detailed financial review from our CFO, Paul Sun, then Cam will discuss some operational highlights and subsequent events. As usual, we will conclude with our Lead Director, Scott Larson, moderating the pre-submitted questions we have received. As always, you are welcome to reach out to me at investor.relations@draganfly.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. The forward-looking disclaimer can be found on Page 2 of this presentation. So Cam, if you’re ready, please go ahead.

Cameron Chell: Great. Thanks, everybody, for your patience. I appreciate that. Okay. So our Q1 revenues were $1.3 million, somewhat by design, that included $1.2 million in product sales and just under $100,000 of services. Now it’s important to note that this is a 45% increase Q-over-Q from our Q4 of last year. Now as most of you probably realize, we’ve gone through a major upgrade of two plants last year, and we’re able to bring on our main plant in the end of Q3, beginning of Q4 of last year. And we’ve been preparing, or throttling, if you will, basically for expected incoming orders that we’ve been working on now for about 1.5 years and particularly from our military customers. A number of announcements leading up to this, you will have noticed, are 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 of $280,000, which is about a 21% margin. Our cash balance as of the end of Q1 was $4 million, and we had a subsequent event just right after the Q here of another $3.5 million. So we’re in a strong cash position. And as Paul will run through, you’ll see that our burn rate is declining significantly. So without further ado, and 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?

Q&A Session

Paul Sun: 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. So he talked about quarter-over-quarter. In this table, we’re doing a year-over-year comparison. So for Q1 of this year, we did $1.3 million. That’s about 16% down from $1.6 million in the first quarter of 2023. Again, part of the reason is what Cam had talked about in terms of the transition we had. Again, revenue comprised $1.2 million of product sales with the balance coming from drone services. He did talk about the gross profit being $280,000 compared to $443,000 in Q1 of last year. I will note there was a onetime noncash write-down of inventory of about $148,000. So gross profit would have been $429,000.

So gross profit for Q1 2023, if you kind of x out the noncash, would have been $520,000. If you take away the onetime 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 $1.89 million compared to a loss of $7.1 million. That is, again, partially talking about the burn that Cam just mentioned. Again, there’s some noncash changes in that number. There’s a fair value of derivative liability of about $1.8 million, the inventory write-down of $148,000, and we had a small gain on an impairment of a note receivable of $6,700. So the loss would have been $3.5 million versus an adjusted loss of $7.1 million a year ago. So again, a pretty big decrease in the year-over-year loss primarily due to lower office and miscellaneous costs, professional fees and wages.

If we 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 $1.3 million, up from $916,000 in Q4 of last year, again, an increase of 45% due to higher product sales. 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 margins. Some services have higher margins. So it really kind of depends on where they fall in the quarter. In terms of comprehensive loss for Q1, again, $1.89 million compared to $4.2 million for Q4 of last year.

Again, we had that gain in fair value of derivative liability of $1.8 million, the write-down in inventory and the gain on the note receivable. So if you back that out, comprehensive loss, again, $3.5 million. If we do the same analysis with Q4 of last year, there, loss pretty much stays the same at $4.2 million. 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 just kind of looks at a high level on our balance sheet. You can see our total assets increased slightly from $8.3 million to $9 million 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 x out that noncash fair value of derivative liability again of $4 million, in that particular case, working capital would be a surplus of $4.6 million this quarter and $3.5 million at the end of December of last year. Doing the same analysis for the shareholders’ equity at this quarter end, it would be $5.7 million versus the $1.7 million shown here and $4.6 million at the end of December versus the $408,000 shown here. So you can really see the derivative does swing the number. And again, it is a noncash number. Again, we continue to have minimal debt. And as Cam mentioned at the outset, the Company’s cash balance is $4.3 million compared to $3.1 million at the end of December of last year. And with that, I’ll pass it back to you, Cam.

Cameron Chell: And that cash balance is not inclusive of the subsequent event of the $3.5 million. 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, by all indications, the larger, in particular, military contracts that we’ve been working on for the last 1.5 years 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 Boston Mass General Brigham Hospital where we were selected by them to perform their medical delivery.

So they’re moving forward in Massachusetts with a significant pilot, which will enable them to be delivering things like test kits, samples, pharmaceuticals, et cetera, which normally take hours and hours to get through the city that they are now looking to do by drone. 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 Technologies. 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 1.5 years, and we’re able to formalize our relationship with them and actually announce it in anticipation of a number of the other projects that we’ve got coming up. We were also at the AUVSI conference, which is 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 to not just 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 AUVSI. And the Green program, or what they call the Green List, is a list that supersedes the Blue List. So originally, when the Blue list first came out, I was very dismissive of it. And this was a mistake on my report. 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 overimpressed with what they were certified. Little did we know that it would become a very important list to be on. Now there is provisions that if you sell into government agencies or into the military in particular, they can make a request to the Blue List to include you on the Blue List.

And we’ve had those requests made on our behalf by the military. But Blue’s out of budget. 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, we are already NDAA compliant and we already sell into the military. Further to this, we did enter our 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 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. So we were selected by a number of organizations throughout the quarter but, in particular, the Ulkatcho Nation, which has a very, very strong program that they’re moving forward with federal firefighting authorities. Along with this, similar, the Squamish Search & Rescue has entered into a partnership with us, whereby they have selected Draganfly, not only just our drones but actually the entire Draganfly, 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, 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. 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 a company that does provide many tactical options for the military and has sold into many military organizations.

MMS has selected Draganfly 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. I think it’s important to note also that in terms of some of the administrations 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 3 XL and on our new FlexForce Modular FPV UAV. So the FlexForce FPV is the first 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 but know that we came out with this product for the expressed purpose based on demand that was coming for this particular product as an NDAA-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. It is very strategically differentiated not just because it’s an FPV but because of the features of this particular FPV that were designed in part by the very specific requirements that we’re asked for, for this particular product. We’re really excited about where this is going to go, who’s buying it. 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. The SOF Week is the Special Operation Forces Week where we did hold live demos with just about 19 specifically different agencies in partnership with MMS.

And that was a full day and a live site just out of Tampa. Again, this was in support of the orders that we’re ramping up for right now. 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 FlexForce Modular FPV UAV. You’ll notice that, that center section’s blurred out. That’s for many different reasons. But know that it basically is 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. And this is really important because it increases the range, the payload capacity, the actual tactics that can be used with this particular FPV. It can be used in full acrobatic mode.

Very skilled clients can use this without any stabilization. So you can flip this thing around and it flies in the 100-mile-an-hour range, sustainable at 93 miles per hour. And you can imagine that the 4-inch size or the 9-inch 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. One thing that you could look for in this FPV actually is this FPV or multiples of these FPVs actually can be launched from a 3 XL 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 up to Scott Larson, our Lead Director, for some questions.

Scott?

A – Scott Larson: Yes. Thanks, Cam. We have had a number of questions who have come in prior to this. Of course, we always encourage people to e-mail the questions in. We try to get through as many of them as we can. I have a number here, and I think still one or two are maybe coming in. 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. It wasn’t a whole lot of stuff there, and obviously, we’re not trying to get ahead of ourselves, but what are some of the international markets that we’re looking at, how are they developing, what kind of effort, time, resources and things like that and what are we hoping to see out of some of them.

Cameron Chell: Yes. I think there’s probably three specific areas that we’d like to address in that regard, that we 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 well already may know that Draganfly is located in Canada and the United States. And as it relates to India, Canada and India have had some tough relations in the past six to eight months, which seemed to be working through. Those relations have slowed down our progress in that particular market. We don’t think it’s going to impede it long term and we continue to work in a 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 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 holding pattern at the moment. 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 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. I can’t really say much more about that, but it is a 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 in special forces, we’ve got considerable inquiry that comes in from the NATO partners. And so we have been a bit surprised about the robust nature of it. We’ve been very, very selective about where and who we’ve pursued those with just for the simple fact that, 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 DoD.

Scott Larson: Okay. What is the approximate capacity utilization of the Company’s expanded manufacturing facilities? We talked about expansion. Of course, we’ve talked about it on the last call or two how much of the capacity that we have left are we using, how much is left, what does that look like.

Cameron Chell: Yes. So organic capacity on the production side, not including services, would be about $100 million. Now that would be across what was two and is now three production lines. It’s more than three lines, but it’s three production products, being the Heavy Lift, being the 3 XL and now being the FlexForce FPV. Yes, so we’ve got about $100 million worth of organic capacity. Now those three lines, we can now move those to outsourced manufacturing as well within the United States when the demand signals. But we need at least that much internally in order to meet the DoD type requirements and sizes that we believe we have coming. That’s probably the best way for me to say it. And of course, that’s all within a 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 where we’re at in terms of current capacity, Scott? I’m sorry.

Scott Larson: Just what’s the capacity utilization, yes, I think you answered it. So it’s 15- or 20-ish, I suppose, is probably the idea, if we do the opposite math there.

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

Scott Larson: There’s a question or two here on the Blue List. I think you answered that, of course, earlier in the presentation. Talk a little about what you see in the industry as a whole, any broader trends? You mentioned a couple of conferences that you’ve been at, any kind of trends throughout the industry that you or other partners of Draganfly have kind of seen? And what do you think that looks like?

Cameron Chell: I don’t know if it’s an industry trend, but the thing to me that’s been most notable at the shows the last six or eight months has been basically the emergence of maybe two or three, maybe three or four drone manufacturers that are beyond having a great product. So I think there’s probably a dozen North American-based drone manufacturers that have great product. The real crux of 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. The commercial requirements are growing, but the demand signal on the geopolitical side, I’ll call it the military side, is just so significant.

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 three maybe that can now meet the capacity of the orders that are going to be required. So the industry, in this last, I’ll call it, six months, nine months maybe, it’d 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 or demands that are coming down the line.

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 three-ish companies that could meet the capacity demand. And that’s really where our governments have been trying to get the industry, too. And so I think we’re on the precipice of that happening. And it’s probably somewhat obvious what those three-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. And I would suggest that we’re probably in the position to be the dominant player in Category 2 drones, that’s drones that are greater than 55 pounds but have a kinetic energy that will hurt people if the drones 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.

Scott Larson: Yes. 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 of the macro issues that are affecting supply chain, particularly for some of these larger contracts that may be coming down?

Cameron Chell: I think for the most part, they worked 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.

Scott Larson: Two more questions here. One, is there 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 a little more prudent moving forward. Any thoughts or comments on that?

Cameron Chell: 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’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. But moreover, we were fortunate because we got to a spot where the majority 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 were 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 being 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 us flat since then or just kind of managing or meeting the most important customer demand that we had to. And so we’ve been fortunate in this spot where we’ve seen that come down. That’s a bit more circumstantial than it is us going through cost-cutting. So I’m not sure if I answered the whole question for you, Scott.

Scott Larson: Yes, I think you did. I think that’s fine. I think the last question here, unless there’s one or two that come in over the next minute or so, we’ve talked a lot about contracts and you talked about it now. Any thoughts on timing? These are obviously long lead time things. What are your thoughts on kind of some of those coming to fruition, of course, without trying to get too far ahead of ourselves here?

Cameron Chell: They’re coming, and they keep getting bigger. Requirements keep slightly changing. Whether it’s Congress approving budgets, whether it’s changing situations in the field, whether it’s getting through the last steps of evaluations, whether it’s, all of a sudden, immediate requirements and needs for FPV drones as well as our other drones, or swarming technologies, all of these things are things that then you have to go through extensive testing and extensive evaluation and certifications and such, and we’re not the only ones that are going through this. I think a sophisticated informed investor in this space knows who the two to four companies are that are positioned for this. And if one of them had the $30 million and $50 million orders, and they were all happening and nobody else did, or two of the four did, 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 Draganfly, dropping these in short order. Yes, I don’t know what to say. The orders, 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, and we’re working very hard every day to make sure that that we’re going to be able to do our duty.

Scott Larson: Just maybe last question that’s come in actually just right now, we’ve talked about this in the past, of course. Any more consolidation? Some things have been announced. Some companies have closed the doors. There’s been a sale of two or something. Are you expecting that to continue?

Cameron Chell: There will be consolidation. There is consolidation happening. I don’t think there’s going to be a lot of M&A activity because I think those two to four companies out there don’t have time to do an M&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. Our organic growth is so imminent and so big and so taxing to meet the requirements in demands. Integrating another company at this time, 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, but that would be my expectation. I do think we have seen yet another cycle of North American drone companies that didn’t last, and we’re kind of seeing another bunch of new drone start-ups that are kind of coming into it.

A lot of people think this is an easy industry. You put four 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. It is a 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&A. Until these kind of two to four companies that I keep referring to reach a critical mass, then I think there’s a level of M&A from either the primes or some of the Tier 1 sub-primes 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 two to four companies, maybe not necessarily together, but by bigger companies in a year-ish from now. But between now and then, I don’t think you’re going to see these two to four buy companies. I think you’re going to see companies go into business and these two to four rising even further.

Scott Larson: Okay. Well, that is the end of the questions. Thanks for sending them in, everybody. We appreciate those. And again, as always, if there’s other ones that you guys think of afterwards, send them, too. We’ll try to get to them, of course, as best we can. But Cam, back to you to close and wind this up.

Cameron Chell: Just first and foremost, thank you to our customers and the people that have continued to work with us and develop these products out. It’s an honor to be at service to both our government and our commercial customers. I can’t say enough about our sales, our engineering, our customer service and the people that really are building something here that’s incredibly special and really, really important and, of course, to our shareholders. It’s been a very long call, and I know a lot of you have been very, very patient with us. And we appreciate your trust, and we’ll continue hard to do the best we can to hold that trust.