Draganfly Inc. (NASDAQ:DPRO) Q3 2024 Earnings Call Transcript

Draganfly Inc. (NASDAQ:DPRO) Q3 2024 Earnings Call Transcript November 14, 2024

Rolly Bustos: Hello and welcome to the Q3 2024 Draganfly Call. We just opened up the call and the attendees are just filing in. So we’ll just give it a minute but then we’ll get started. Okay. To be respectful of everybody’s time, I think we will get started today. So as always, greetings and welcome to all the shareholders and stakeholders on today’s Draganfly 2024 Q3 Earnings Call. My name is Rolly Bustos and I’m the internal Investor Relations representative here at Draganfly. We appreciate you all joining us. As usual, we’ll start with our CEO and President, Cameron Chell, recapping the third quarter earnings headlines, we’ll move right into a more detailed financial review with CFO, Paul Sun. And then as always, we’ll conclude with our Chairman, Scott Larson facilitating the pre-submitted questions that we have received.

You are always welcome to reach out to me at investor.relations@draganfly.com if we did not get to your question today. 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 full forward-looking disclaimer can be found on Page 2 of this presentation. So Cam, I think we’re ready. Please go ahead.

Cameron Chell: Great. Thanks very much, Rolly. And thanks everybody for joining us today. It’s a great pleasure to be here. So the market continues to be relatively robust with an incredible amount of business development that’s unfolding, in particular around – well, all of our products, but in particular, around the APEX Drone which we launched last quarter. So the financial highlights for the quarter is that we had revenue of $1.885 million, which is seasonally our best Q3 ever. We had product sales of $1.3 million and services of $0.5 million. So we had gross profit of $440,000 with a margin of 23%. And Paul will explain a number of things as he goes through his presentation, talking through actually how that margin calculates out to be a bit larger than that.

And of course, we’ve got cash on hand right now of a little over $3.9 million, close to $4 million. So we’re in a really stable position. We’ve got really good biz dev on the go. We’ve got a lot of our systems dialed in and really looking forward to what this means for Q4 and going forward. In terms of the operational highlights for Q3, we had Honorable Mr. Andy Card, the former White House Chief of Staff, who previously was a board member of ours, has joined our advisory board. Of course, he stepped off the board earlier this year just for some other commitments that he had been making. He’s such a key contributor and of course, a mentor on many levels. And so he’s still working with us closely, advising the board and helping us provide access into many accounts and relationships that are incredibly important to us as we build out Draganfly, this amazing industry that’s just on the verge of completely booming.

Another highlight for us as an organization was launching the APEX Drone. We’ll talk a little bit more about the products back around the APEX Drone, but this is a drone that we think is that we’ve pretty much nailed into the smaller Category 1 drones. And we have got significant demand on it, which we’ll talk a little bit as well. Also, we wanted to talk about a couple of our military orders. So VRR, which is an organization that’s got in the tens of millions of dollars of business that and grants for its particular technology, which is the swarming technology, whereby what’s happening is you’ve got a Commander 3 XL and you’ve got what’s called the HellHive, which the Commander 3 XL carries and is integrated with, and then it launches our FPV drones.

Q&A Session

So VRR developed this technology, separately they’ve come to us to do the contract engineering for the actual HellHive. And their primary integration for this use case of which we’ve now been selling to the military is the 3 XL, the Commander 3 XL, and the Flex FPV drones. We also had a military order through TB2. TB2 has an incredibly innovative box that’s basically a drone comes in, lands on the box, it’s got a magnetic attachment to it. It picks up into the hundreds of pounds, depending on the drone profile that you’re using. The box actually charges the drone while it flies. And then they’ve got multiple integrations of different types of payloads. So it might be a logistics payload carrying medical supplies, it might be a munitions payload, it might be a robotic dog, it might be whatever the case is.

But as the drones come in and pick up these payloads, they’re actually getting charged. So the drones are running continuous missions. So an incredibly exciting project that the military is working to adopt and now we’ve made some sales in that area as well. And I think what’s really important to note here is that in this is that the drones that we have are being utilized in so many use cases, in fact, I don’t think it’s inaccurate to suggest that every single week there’s a new use case coming from some government agency, through that agency, some branch of the military, to be able to utilize the drone platforms that we have. And keep in mind that the drone platforms that we built are all universal in the fact that they use the same controllers, they use the same batteries, they use the same flight systems.

So there’s a lot less training whether you’re flying an FPV or whether you’re flying a heavy drone or a super heavy drone. Further to that, it’s really important to know that all the mounts and all the payloads are universal. So you can run as long as it can have the weight bearing. You can run a payload on an APEX or on a 3 XL and they’re interchangeable. And this is something that’s really come across strongly as a value proposition for us. We also announced a Fortune 50 oil and gas company having adopted the drone-in-a-box solution utilizing the APEX Drone and Nightingale Security. This is a massive, massive customer. And this drone-in-a-box installation that we’ve done primarily for security, but also for field inspection purposes represents an opportunity of literally tens of thousands of sites for us.

It was a year-long cycle to the sales cycle to get through and the testing cycle, it was very competitive and we’re really pleased on how that’s worked out for us. Let’s talk a little bit about the APEX Drone. So this is a drone that we launched that is a Category 1 drone. This particular drone fits in between our Flex FPV drone and our Commander 3 XL. So the Commander 3 XL drone is really a medium lift drone that enables much longer ranges and a very, very broad capability across all kinds of types of payloads. Now the – this particular drone now, but the common comment that we get back about the 3 XL, regardless of its utility, is the fact that it is quite large. It’s about the size of a coffee table. And so while you can run dual payloads and such with it and carry heavy loads, it’s not really all that convenient to be packing around.

So this particular drone fits inside of a backpack. It has a capacity of 5 pounds of payload capacity. You can run dual payloads on it and you can get optional NVIDIA chips with it. So the reason that it’s got the NVIDIA chips that go with it, quite frankly, is because of the edge computing and the AI capabilities that are now being required for drones to run. So this is going to allow for things like real-time processing onboard, which affects not just the drone performance and your ability to do real-time navigation in contested areas where GPS might not be available, but it also enables for real-time processing of payloads. Now, a really key strategy of ours is to work with payload partners. So as mentioned earlier, we’ve got great partners like VRR or TB2 that are selling their, that have incredible payload use cases into, in their cases, military applications.

But it’s not just a matter of having a drone that can carry that or integrate that with the software, but those payloads, they can’t – well, not in TB2’s case because it’s actually a battery, but in most of the – well, in fact, in every other case, unless it’s a battery as a payload, those payloads suck a lot of battery life. So being able to have a drone of this size, which is really again a flying battery, and be able to do real time processing on board is an incredible advantage for our payload partners, which then increases the amount of use cases that this particular drone is capable of. So, military is obvious market for this, but where we’re actually getting the greatest demand right now is in law enforcement. And again, because it has all the capabilities of a Commander 3XL except for the amount of weight it can carry, but it can fit inside of a backpack.

So we’re really excited about how this is unfolding for us and we think we’ve nailed it right into that sweet spot. Now what we have decided not to do is to focus our product line into the small surveillance drone. There’s – we can see that that’s a very crowded market. It is dominated by the Chinese manufacturers though they’re going to – they have and are going to continue to have a tough time to be selling that product into North American accounts and certainly not into military or law enforcement accounts. However, it is still a very, very competitive market. It generally is also a lower margin business. And we think that market is still a bit of a race to the bottom. So we’re going to continue to stay away from that really small drone footprint unless it’s an FPV drone specifically for military purposes.

And the FPV drone that we’ve designed and is now in use is a very unique drone in the fact that it has one power system, but three different sizes of arms and blades that it can be used with. So if you need to fly it through a window, you can use that FPV. If you need to fly it 12 miles out for military mission one way, then you’ve got that capability with it as well. So speaking just to that a little bit, this is the primary drone lineup. Again, not that we don’t have custom builds or other drones available for select clients, but it goes all the way from on the far right there, the heavy lift drone with a capacity of 30 kg, all the way down to our Flex FPV drone. And in between there on the Commander 3XL, we also have a full electric variant or we’ve got a variant that’s a hybrid with gas, which gives it up to two and a half hours of flight capability.

We continue to see incredible demand from the industry. We have been seeing incredible demand for two years, but by the time, it was really about two years ago that we see the NATO militaries, post the Ukraine – beginning of the Ukraine conflict, really getting serious about adopting Category 1 and Category 2 drones. And it’s frankly taken that long for them to develop their use cases, their mission profiles basically go through selection processes, determine who they’re going to work with, testing criteria, et cetera, et cetera. And we’re now seeing, and you’ll see it not just with us as a drone company, but you’re starting to see it now with some other publicly traded drone companies. You’re starting to see those order sizes come in.

And it’s a fairly small group. And so we all kind of are now able to see who’s landing where, unintended, and exactly what the capabilities are and what either military or law enforcement, public safety or even industrial customers are choosing and who they’re choosing them from and where those strengths lie. So I think that there’s three or four players out there that you’re really going to start to see emerge based on the history, based on their capabilities with the drones that they’ve got, based on the testing criteria that they’ve gone through, and that they’ve kind of got through these final selection parts or passes. Now the other piece of that is can you scale your business? So it’s great to have a drone that does all kinds of cool things.

Does it have the air time on it? Does it have the testing requirements and certifications on it? And then ultimately, can you produce enough for these particular customers because the orders come in massive amounts all at once. So I’ll leave the rest for Q&A as it relates to the operational highlights and production and sales. And at this point I’ll turn it over to Paul Sun to run through our financial results. Paul?

Paul Sun: Yes. Thanks, Cam. And thanks everybody for joining our call. Just go through the year-over-year numbers here for third quarter. So starting with revenue, we came in at, call it, $1.9 million down 11.8% from $2.1 million in the third quarter of last year. Third quarter revenue comprised of $1.3 million from product sales with the balance coming from drone services. Gross profit $441,000 compared to $895,000 in Q3 of last year due to one-time non-cash write downs of inventory of $176,000. Otherwise would have been $617,000. Gross profit for the same period last year would have been $903,000, if we took away the same one-time inventory write downs associated with that period. So taking these non-cash items into account, gross margin would have been 32.7% versus 42.2% year-over-year.

On the loss side, total comprehensive loss for the quarter was $365,000 compared to a loss of $5.5 million in the same quarter of last year. However, this quarter does include non-cash changes comprised of a fair value of derivative liability gain of $3.6 million. The inventory write down that I spoke about $176,000 again on an impairment of notes receivable of $7,000. So if we ex those things out, the loss would have been around $3.8 million versus an adjusted loss of $5.6 million a year ago. So the decrease in loss year-over-year is primarily due to lower office and miscellaneous expenses, professional fees, and wage costs. So Cam, if you can move to the next slide so we can go through the quarterly table there? That’s great. Thank you.

So yes, we just went through the year-over-year changes. So now we’ll just do a quarter-over-quarter analysis looking at Q3 versus Q2 all in 2024. So revenue was up $152,000 to the $1.9 million up from $1.7 million in Q2 of this year, which is an increase of about 8.8%, primarily due to higher service sales. Gross margin percentage for Q3 was 23.4% compared to 26.6% for Q2. If we back out that one-time inventory write down that we talked about in both quarters, gross margin would have been 32.7% versus 34.4% in Q2, so that slight difference just really being the product mix quarter-over-quarter. Total comprehensive loss for Q3, we talked about the $365,000, now we’re comparing it to $7.1 million for Q2. Of course, we had that gain in fair value of derivative liability of $3.6 million, the write down of inventory, the gain on impairment of notes.

So if we ex those things out as a reminder, comprehensive loss for Q3 would have been $3.8 million. If we do the same for Q2, that loss would have been $4.4 million. So similarly to the year-over-year decrease in loss, again, primarily due to lower SG&A expenses such as wages, also professional fees partially offset by slightly higher R&D and share based payments for this quarter. So on the next page, Cam, we’ll just have a quick snapshot of the kind of the balance sheet here. Yes, so yes you can see that total assets increased from $8.3 million to $8.5 million from the end of 2023, which is largely due to the increase in cash. Working capital, as at the end of this quarter was $3.5 million versus the deficit shown at the end of December of 2017.

However, if we ex out the fair value of derivative liability of $1.3 million working capital would have been $4.8 million this quarter and $3.5 million last year. Doing the same for shareholders equity. This quarter would have been $5.6 million versus the $4.3 million shown here and $4.6 million at the end of December versus the $408,000 shown here. We do continue to have minimal debt and as Cam alluded to at the front, the presentation and cash balance is, call it, $4 million compared to $3.1 million at the end of December. And with that I’ll pass it back to you Cam. Thanks.

Cameron Chell: Great. Thanks, Paul. Why don’t we go right into Q&A because I think that’s highly productive and allows us to answer a lot of the curiosities that our shareholders, investors have and gives a good overview of what’s going on in the market and with the company right now. Scott?

Scott Larson: Yes. Thanks, Cam. I just want to reiterate and welcome from the board standpoint everyone on the call. So as we’ve done with previous calls, there’s been a bunch of questions that have come in. I’m looking at them on my screen here. A few that have come in real time during the chat that we’ve tried to answer and so forth. And so we have a list of six or seven questions, maybe seven or eight. There’s some crossover here. I’ll go ahead and ask them to either Cam or Paul, direct them as needed. There’s a couple things we always can’t answer just because we don’t get guidance and so there’s a little bit of nuance here, but we’ll try to kind of piece together, parse together as well, some of the questions here.

So, Cam, will the Trump election help win or delay any new military contacts? Any thoughts there on what happens to south of the border in the U.S.? How that impacts Canada? What that looks like? How that impacts us? We’ve got operations down there, of course, but just maybe a little color or context regarding what the new administration, how that might impact some of the things that we’re seeing, if at all?

Cameron Chell: Yes. So in terms of our overall numbers, it won’t have any impact because the percentage of penetration that not just us, but some other public drone companies out there have into the markets that would be affected by, say the Trump administration is still so small that even if they made a sweeping change on something, the NATO militaries in particular, and specifically here, the U.S. Military, they’re just starting their adoption cycle. And so, there’s hundreds of millions of dollars of purchases that need to be happened just because drones are the new reality within the military. But from a policy standpoint, we do expect to see significant increase in the Pac Rim, the Pacific Rim area, which by size dwarfs the budget sizes required or looked at in the Eastern European Theater.

So if there is offset, it’s actually a much bigger offset. But the expectation is no. I mean, there may be policy changes and some shifts, but overall the penetration so small that drones are being adopted and there’s a very few select players now that are left in the ring to be able to provide the products and requirements necessary.

Scott Larson: Any new sales – yes, so since we announced the distributor partnership in Australia, what does that look like traction? What’s the sales cycle? How does that – these all mostly the long lead items, of course. But what does that look like? Any color context there?

Cameron Chell: Yes. Yes. So the sales cycle that we started in Australia this year would be similar to the sales cycle that we started in earnest with a couple of our different and now meaningful military clients about a year and a half ago. So it’s going to take a solid year to get through that sales cycle. We are in testing, we are in pilot projects, we are in use case and mission profiling. The budget season there is kind of opposite to the budget season here. They’re down in their summer, so about early Q2, that’s when we start to see some budgets opening up and such. But yes, the response has been fantastic. This speaks largely to the Pac Rim opportunities within the military that are likely to be unfolding at large scale in the next couple of years, which is why we thought it was really important to be entering into that market down there.

Australia will be a very big launching pad. Australia is also really forward thinking in its public safety work and its search and rescue work, first responder work, which is a key market for us as well. So yes, really confident about what will be unfolding there. But you do need time on the ground and to make that happen. But I think we’ve got the right representation and we’re in the right offices.

Scott Larson: Any updates on [indiscernible] we’ve talked about it before. It’s come up on previous shareholder calls. There’s been lots of reports in the industry about companies that are going through some difficulties. And I think we’ve even disclosed in the past that that we take a look at all of them, but any more thoughts there?

Cameron Chell: It’s still really active and we’ve still elected not to participate up until this point. And I know on our desks that there are a couple things that look pretty interesting. But again, it’s an opportunity cost and the focus on our organic growth meeting the demand that continues to build and is kind of committed and getting through budget cycles and getting through final sign offs and that type of stuff you just can’t compare right now us taking on too many other things. That said, there are some pretty interesting things going on. We’ll continue to see consolidation in the space, building drones for these types of use cases is a lot trickier than people think when it comes out of the game. There are so many variables. So we’ll remain active, we’ll continue to see lots of activity, but we’re in a spot where we just have to be incredibly discerning.

Scott Larson: Yes, I would just – from my own personal thoughts on that, some of the stuff ends up on my plate as well, of course. We don’t – it would be an exaggeration to say every week, but certainly fairly regularly they just keep coming in either from bankers or someone in the mix, advisors who have clients that are struggling, going into some level of receivership, protection, whatever that is. And they’re looking for either consolidation, asset sale, shareholder sale. And so a lot does come through our desk kind of trickles in. We look at all of it, we scratch a bunch of it. We decline it, as Cam mentioned, but it’s certainly been part of what we’ve talked about before. And I don’t think any of that’s an exaggeration and it’s probably not going to change. But to Cam’s point, these are opportunity costs. And so we have to be measured and make the right decisions, which I think we’ve done a pretty good job so far when it comes to that.

Cameron Chell: Yes. I mean, this is about the seventh cycle that having – the company having been around for 25 years, this is about the seventh cycle of this, that we’ve seen. And of course, all indications are that this is the cycle that actually it will pop and we’ll see that beyond explosive growth of drones. And so, the few companies that out there that are, it’s still a game about, of survival and if you’re going to – it’s going to be last man standing. With great product and great customers and there’s lots of reasons you are last man or last person standing, but that’s still a game. And this time, instead of there only being one company in North America that’s left standing, there will be three or four, which still isn’t enough, frankly.

So it’s been interesting this time and probably a bit more catastrophic in terms of the amount of companies that really got excited and jumped in hard this time, and with lots of funding and they just didn’t make it.

Scott Larson: That kind of leads pretty well into the next question, which is regarding supply chain. I think a couple, three years ago that was a concern we’ve talked about in the last couple of shareholder calls, that that’s less of an issue. But frankly, there’s been new reports that have come out even over the last few months that other companies probably with regards to or as an effect of some of the large military contracts that have been discussed, where companies have come out and said that the supply chain is an issue again, particularly because it impacts some of the China issues and so forth. So any thoughts there? What does it look like for Draganfly? How much of an issue is this? How are we mitigating around it? How much can we expect to mitigate around it?

Cameron Chell: Yes. Yes, no, it’s an issue, again, it doesn’t have any direct effect on us at the moment, but it is an issue, again, or becoming an issue again, but for different reasons. So the last time supply chain was a real matter was kind of COVID related and just not being able to get supply. Today the supply chain issue is, is kind of twofold. One, people who are in the industry and in the know see the demand curve and where the buying cycle is about to hit. And so it’s like a basketball going through a garden hose. So that will work itself out in some time. However, the variable is part one of this, which is now the security concerns. So if a bunch of that supply chain is not coming from specifically domestic sources, it might not be Chinese, but it’s still coming from overseas or very close to China, in those packed rim areas.

It’s very easy for that supply chain to be disrupted. So the concern is around the dependence of the geographical location and supply from that area into where it needs to be manufactured for all other kinds of security reasons. So we will see ancillary market growing in North America. It will take a few years for it to happen where more and more of these parts and certainly the critical parts will be manufactured here. There’s a number. So the build of materials being all North American or all NATO based or all protected supply chain based is going to become a reality in the drone space. But there’s a lot of really smart people thinking about it. And the top three or four companies again, at least, I know we are – I think we’re – well, nobody’s ahead of the curve, but I think, we’re on the curve in terms of being able to address those concerns from our customers going forward.

But in the short-term as it relates specifically to our financials and I know we don’t give guidance, I wish we could but – or I wish we did, but it shouldn’t have an effect here certainly in the next three to four quarters.

Scott Larson: What do you – yes, again with the other saying that we don’t get guidance, what do we think the next three to nine, 12 months is going to look like with regards to, these are long lead items. So any context around there, is the funnel getting bigger? Is it pushing out, just maybe a little bit color there and again without overstepping any of the lines?

Paul Sun: Yes, so the funnel, which I’ll call confirmed, has definitely pushed to the right for all kinds of administrative reasons and such. The funnel does continue to grow, but it’s almost pointless. I would say the funnel, it continues to get refined. So we’re swapping in items that are either higher margin or more use case critical for us and our focus in for and we’re taking other orders and pushing them further out. And that’s kind of what we see. There’s no point in the funnel getting bigger. It’s already just enormous. But I do see – and we haven’t given guidance in the past, but I do see us in a spot finally. And I know I certainly alluded to this before, but I can say with a very high degree of confidence we’re more than on track for our best Q4 ever by far.

And the size of opportunities that we’ll be able to talk about in Q4 are, orders of magnitude bigger than what we do on a yearly basis. So if that gives some indication. And they’re really fun projects, they’re really interesting work.

Scott Larson: Which of the drones is getting the most attention? So which of the drones within our suite of products right now is getting the most attention?

Paul Sun: That is a great question. And as soon as I think of the one, I’m going to say, but the other one is getting the – so right now, FPVs are incredibly hot and those sales cycles are shortening and in the first quarter we didn’t anticipate that they were going to be requiring this much demand. So FPVs are very, very hot. But we also launched the APEX this last quarter and it fits into a spot where we were being asked to produce this thing by so many people. So, we’ll be delivering those in Q4 at some significant scale. So that’s also very hot for us. The Commander 3 XL, it’s got the longest amount of time with pilots on the stick out there, having tested it, having put it through its paces, and we’ve got the most amount of payload partners that have integrated with the 3 XL.

And quite frankly, they’re generating demand for us. So those are the three platforms that are shortest to having to create this sales bubble that finally, hopefully will get spit out at the end of the garden hose. We see significant interest on our heavy lift because a lot of people are just seeing the utility of drones and we’ll have some additional product announcements in a couple of quarters around even heavier drones there. So definitively, I couldn’t tell you like, we built our products based on customer demand and we built them to be interoperable. So we’re seeing demand across our categories. But right now I would have to say that the majority of inbound and immediate pressures is probably around FPV. But to us, FPV is a bit of a loss leader because they’re a low cost, often one way product.

Now there are some very interesting developments happening with those one way products where they’re getting the requirements, are being asked to be more sophisticated, being able to operate in GPS denied environments, et cetera. Because everybody hears about the effectiveness of FPVs but you also don’t hear about the fact that their success rate, their effectiveness is based on numbers, but their percentage of success rate is much, much lower than anybody would like to talk about. So there is a level of sophistication that’s going up there, but they’re also a means to an end for us. So FPVs are going to allow us to sell a lot of HellHives and a lot of 3 XLs because people want to get these FPVs deeper into particular geographic regions and, and they want to be able to swarm with them.

And so again, the level of sophistication in the FPV and using things like the 3 XL as a mothership or a carrying case for them is it drives significant sales with good margin for us.

Scott Larson: Perfect, thank you for that. That is actually all the questions we have. There’s been a couple that have come in that have been answered online in kind of real time. But in terms of questions, that is all the ones that came in. I think we’d like to just to reiterate what Rolly said at the onset, which is if there’s – feel free to email in, we do do our best to get back to you right away. Thoughts, comments, things like that incorporate into some of our disclosures if need to be. But certainly feel free to email through to the Investor Relations questions, comments on what’s happening here and we do our best to answer them without crossing any of the disclosure issues. So with that, Cam, we’ll send it back to you to end this out and look to close it off.

Cameron Chell: Well, first of all, I really want to thank our shareholders and investors for the extreme patience and that they’ve displayed. It has been a real grind for you, we understand, but I think we’re in the right place at the right time. We’ll be one of the last ones standing. We have an incredible product lineup. We have an incredible service ethic. The ethos of the company is all about making our customer uncompetable, being able to provide them strategic differentiation whether they’re military or police or industrial or whatever the case is. And I think we’re meeting that order. And I think we continue to build a reputation as a really, really strong player in the market that can do things that a lot of other companies can’t do.

I also really want to thank our partner and employee base like people are working, like ridiculous hours. They’re doing crazy amounts of travel. They’re like bending over backwards for the customer. I mean, it’s really, at the end of the day, it is about the people that are attached to the mission and the passion that we have around that mission. So I just really, deeply want to thank our board, the executive, and most importantly, our frontline people who are just crushing it. I mean, the stories we hear back all the time about what we were able to do and what it’s going to mean for our customers future is really incredible. So thank you for that. Thanks everybody for your time and patience. And we look forward to a fantastic Q4.

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