Draganfly Inc. Q2 FY2024 Earnings Call

Okay, thank you. Respectful of everyone's time, even though I see people still coming in, I think we'll get started today. Greetings, and welcome to all shareholders and stakeholders to today's Draganfly 2024 Q2 Earnings Call. My name is Rolly Bustos, and I am the internal Investor Relations representative here at Draganfly. I've talked to many of you in the past. We appreciate you joining us. We will start with our CEO and President, Cameron Chell, recapping the second quarter earnings headline. We will then move right into a more detailed financial review with our CFO, Paul Sun. Cam will then jump back in and discuss some operational highlights and subsequent events, as well as go through the pre-submitted questions we have received. Like always, you are welcome to reach out to me at [email protected] at any time. 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 will be found on page two of the presentation. So, Cam, please go ahead.

Thanks, Rolly. Thanks everybody for taking the time to join us today. We really appreciate it, to the Q2 2024 earnings call for Draganfly. As mentioned, the disclaimer, this presentation will be posted on the website under the Investor Relations tab immediately following the call. And the disclaimer could be found on slide two. So, just to hit the financial highlights, basically, in Q2 2024, we had organic revenue of $1.732 million, which consisted of $1.3 million, close to $1.4 million in product sales, and then provision of services of $345,000. This is a 30% increase quarter-over-quarter from our last quarter, which I'll speak to why that's the case, and why we now see sales starting to move forward again shortly. Also in Q2 2024, our gross profit was $461,000, with a gross margin of 26.6%. Paul Sun, our CFO, will speak to some detail around that of why the actual operating gross margin was a bit higher and healthy. And then, we have a cash balance of $5.2 million. So, let me jump in a little bit into the operational highlights, which I'll actually speak back to some of these financials, and then we'll have Paul run through the details of the financials. But I think most notably, some of the work that we did in Q2 was a bit of a Board shuffle. And so, we want to really thank our former chairman, John Mitnick, for the services he provided to the company and his career moves now, and where he's moved on to. We're really, really pleased to invite three new Board members to the Board of Draganfly. Very notably, Secretary Thomas Modly, who was the former Under Secretary and Acting Secretary of the United States Navy, the most senior civilian personnel that runs the Navy. Thomas also has a very illustrious career, West Point grad, ran the entire defense division for PricewaterhouseCoopers for years, and we are thrilled with what he is already contributing and bringing to the table. Kim Moody also joined us. Kim is a long-time tax accountant and audit specialist, ran his own firm for a couple of decades, now consults to it because he sold out. He's sitting in our Public Board. He's now actually heading up our Audit Committee. Kim is also very well-placed politically in the Canadian environment. And so, we look to him as well in terms of our government relations and business development work within the Canadian government and the DND up in Canada. Tim Dunnigan Sr. is a very experienced entrepreneur, particularly in the military space. He's a three-tour combat veteran, has launched several companies that have had programs of record with different departments within the DoD, and brings to us a wealth of operational knowledge both from an entrepreneurial perspective and also from a military perspective, actually understanding how we're moving through a bunch of our products and services through several military organizations throughout the world, but in particular the DoD. Also of note, Tim was actually a co-founder and the CEO of the largest drone services company, which he is no longer with, but he brings incredible experience. He's a PhD candidate specializing in AI ethics with the use of drones. So, incredible depth has come to our Board, and we're really excited about what they're already contributing. On the operational side, a couple of highlights to talk about, Mass General Brigham selected Draganfly to be their provider of both equipment and services of choice to set up their drone delivery programs, particularly as it relates to their home-hospital delivery. Phase 1 of those are actually commencing next month. There's been extensive planning that has gone into the launch of these initial services, which includes work with Mass DoD and the FAA to make it happen. It's an incredibly prestigious opportunity for us, and essentially, every drone provider out there that has a delivery-type service was in the mix to win this opportunity, and we won it in Q2. So, we're really excited about what's unfolding there. Also, just wanted to highlight a little bit on the Green UAS and Blue UAS front, these are certifications that a number of select drone companies have. We do not have Blue UAS, and candidly, this is something that, way back a couple of years ago, I didn't think was that important because we were already selling into the organizations as an NDAA compliant drone manufacturer. However, it's become a bit of a marketing thing and is an important thing to have. But it hasn't prevented us from getting any sales because of the history we've got as a company. We enrolled in a Green UAS program, which is an equivalent, and arguably, a higher type of certification. We are also deeply involved in many military certifications that are certainly harder to attain but we've been working with and complying with for years. So, we are going down these paths, and again, they haven't prevented us from any sales. I think we're unique in that regard because of our 25-year history. But we are endeavoring and pushing down them quite quickly. On the services side, I did want to touch base. First Atlantic Nickel; we signed a significant contract with them to provide services for properties they've got in Atlanta, Canada. But this is important beyond just the type of contract it is. It's because of the strategic mineral they're going after. It is a massive potential deposit, and this is really an ideal scenario that is setting up our data division, enabling us for the AI work that we're doing with the data we're collecting around mining. So, on the services side, we've consolidated a number of our services into areas that we believe can really scale. So, things like forestry are very important to us because we can collect incredible data there that we can feed back to our client. So, it's a service on top of the actual flight services and equipment that we provide. And this would include mining as a strategic initiative for us as well. So, we're going to continue to push down that path. The other one that's of note is the wildfire services that we provide. I can't name the actual governments here that we work for, but we have government contracts, multi-year contracts to provide wildfire services. And what these services typically involve is us flying night missions with our equipment to look for hot spots, and teams having been into a particular area and then looking for root fires. Interestingly enough, over the course of this last quarter, we have also been doing frontline work, flying while crews are active during the day, providing everything from fire direction to weather reports and a number of different environmental sensors. We've increased this contract from kind of an on-call contract two years ago to a couple of full-time crews last year to up to five full-time crews now this year, and we expect that will continue to grow next year. We believe that by next year we'll actually be doing equipment delivery. We've done some testing with this. Actually delivering items like chainsaws, hoses, shovels, and fuel live during active action. We are getting incredible hands-on experience with this, and now have a number of other government wildfire services throughout North America studying our work. We will continue to expand this service. Just recently we announced that we have signed a distributor in Australia. This came out of direct feedback that we were getting from the Australian and New Zealand military that were looking for the particular products we sell, which are non-Chinese; the heavy lift, the 3XL, and our FPV drones. We're pleased to announce that we've signed a deal with the Drone Technology Institute out of Australia, who is the primary seller of drones into the U.S. military. We will be at the Land Forces Conference in September, which is the main military annual conference down there, launching our products with them. We have a week-long set of demonstrations throughout many parts of the country with our products. We expect that it's a Five Eyes country, very closely aligned with the United States, Canada, Great Britain, etc. We're really excited about getting pulled into that market. We have done some private label products with Knightscope and are excited about the pipeline they are building. I think that's notable because they're super active in the space. This is somewhat for manned drones, but more about drone-in-a-box type solutions to work with their automated security systems as well. Squamish Search and Rescue is an important contract to us because Squamish is one of the busiest search and rescue units in all of North America. They respond to hundreds of calls per year. They've now gone exclusive with Dragonfly products particularly because of the capabilities and modularity of the 3XL we bring to the table. We're providing everything from swift current rescue to alpine observation and logistics, dropping emergency supplies. The wealth of knowledge we're gaining from them and the spin-offs to other search and rescue units looking to Squamish and our services have been extensive. So, we're pretty excited about the ongoing work with public safety. Ulkatcho First Nation signed an alliance with us, exclusively using our drones for various applications like mining surveys, search and rescue, wildfire work, etc. We have a full training program with them, now a model for other First Nations looking to build out their drone services. They provide everything from wildfire services to security and survey, and mining and forestry. ParaZero is a strategic partner of ours. We collaborate closely with them on initiatives related to parachutes, medical delivery, military applications, and commercial enterprise applications. Recently, the FAA announced that for drones under 3.5 pounds that feature a parachute, they have a much-reduced or streamlined waiver process for flights over people. This is exciting news along with some additional product announcements we have coming shortly. We also established a strategic alliance with Doodle Labs to continue our excellent work. We've been able to provide both in the Ukraine theater and locally in a GPS-denied environment, leading to some exciting developments. I want to highlight the global military impact: approximately $20 billion in growth for small Category 1 and Category 2 drones between now and 2030, with a large portion for NDAA compliant non-Chinese drones. There are really three or four companies positioned to provide on scale and meet this market opportunity. I think it's crucial to understand that four years ago, any military drone operation had to be signed off at the most senior level. This illustrates the impact of that $20 billion market for small UAVs in the military, meaning the demand is there, but we must work through the process for that demand to become scalable. The military has come to companies like us and weeded out lesser competitors based on product quality, personnel, and ability to scale. It takes time to navigate these opportunities. Our work is not based on low-cost or inferior products but on delivering high quality and the capabilities necessary to meet the demands of sophisticated environments. Here, we have our heavy-lift drone, commissioned now in small quantities but we're growing as we generate more airtime. The heavy-lift drone carries 67 kilograms, with larger units also in the pipeline. The Commander 3XL Hybrid continues being our flagship product, recognized as versatile and effective across countless applications and payloads fitted onto it. The Flex FPV is a first-person viewer drone. This unique drone is NDAA-compliant and available to allied countries. This drone is versatile, with capabilities to conduct small missions through windows or operate across several kilometers, carrying payloads of up to six kilograms; its range and adaptability are remarkable. We have now trained over 200 special ops forces in the U.S. with this drone, including it in the Ranger School curriculum. We expect substantial scaling of this product over the next year. These product lines are integrated, allowing capabilities for swarming maneuvers where drones can function cooperatively across missions. This provides flexibility for tactical operations and enhances effectiveness across diverse missions.

Yes, absolutely. Thanks, Cam. And thanks everybody for joining our call. Appreciate it. So yes, looking here, we're going to do a year-over-year comparison. So revenue for the second quarter was $1.7 million, down 8% from $1.8 million in the same quarter last year. Second quarter revenue comprised of $1.4 million of product sales with the balance being from drone services. Gross profit was $462,000 compared to $467,000 in Q2 last year, but there was a one-time non-cash write-down of inventory of $134,000, so otherwise would have been $596,000. Gross profit for the same period last year would have been $589,000. If we consider the one-time inventory write-down from that period, that's the direct comparison. Our gross margin would have been 34.4% versus the 26.6% for Q2, and direct comparison would be 31.1% for the same period last year, so a few points higher year-over-year on the gross margin side. Total comprehensive loss for the quarter was $7.1 million compared to a loss of $9 million in the same quarter last year. As usual, this quarter includes a non-cash change within the fair value derivative loss of $2.6 million. That inventory write-down and a small gain on an impairment of a notes receivable of $4,000. Otherwise, that $7.1 million loss would have been a $4.4 million loss versus an adjusted loss of $6.8 million a year ago, so year-over-year, quite a bit better on the loss side. This is due to lower operational costs, including office and miscellaneous expenses, professional fees, wage costs, etc. So, can we flip to the next quarterly table? We just went through the year-over-year, so now we'll do a quarter-over-quarter change between this quarter and Q1 this year. So again, revenue $1.7 million, that increased by $403,000 from $1.3 million in Q1, a 30% increase due to higher product sales. Gross margin, as mentioned, 26.6% compared to 21.1% from Q1. If we back out those one-time write-downs, would’ve been 34.4% versus 32.2% for Q1, showing some improvements quarter-over-quarter on the gross margin side. Total comprehensive loss remains at $7.1 million, compared to $1.9 million for the first quarter. Please recall the non-cash fair value of derivative liability of $2.6 million, the inventory write-down and the gain on the notes receivable. The comprehensive loss would thus be $4.4 million if we adjust the same non-cash items for Q1, where that loss would have been $3.6 million. Q2 faced a higher loss than Q1 due to elevated professional fees during Q2. On the final page, Cam, you can see here our total assets increased to $9.9 million from $8.3 million at the end of the year, due largely to increased cash. Working capital at the end of June shows a deficit of $3.7 million versus a deficit of $717,000. However, we did have a significant fair value of derivative liability of $9.4 million on our balance sheet. This relates to us meeting company reporting in Canadian currency versus U.S. currency, among other factors, leading to a non-cash item. Backing that out, working capital would show a surplus of $5.7 million, as compared to $3.5 million at the end of the year. Similar adjustments lead to shareholder equity of $6.8 million compared to $2.6 million here, versus the $4.6 million at year-end. Our minimal debt remains at the forefront, and as Cam mentioned, our cash balance stands at $5.3 million compared to $3.1 million at the end of the year. With that, I'll pass it back to you, Cam.

Great. Thanks, Paul. So I'm just going to jump into the questions that came in and were submitted to me, if that's okay with everybody. So the first question I've got here is that the market is telling us there's something of concern going on. Are we at risk of bankruptcy? Okay. Well, this is an opinion, and as CEO, you can imagine it's a biased opinion. I do not believe we are at risk of bankruptcy. I think probably if you're a pure black-and-white numbers auditor person, you could argue the risk involved here or not. This is a venture company, and it is risky. I do not believe we are at risk of bankruptcy. We have an incredibly experienced board and management team. We've been in this position before, with a clear understanding of a good strategy and what it takes to drive this company through $100 million-plus of sales in the near future. We've scaled the company to do that based on the demand indicators we have on hand, evaluated pipeline. You cannot attract the people on the board we have without a real company, real products, and real demand. We continue to be financeable and are making the right moves for long-term sustainability. We have generally raised much less money than our competitors in the same position. While not dismissing the challenges we've faced or inherent industry intricacies, we position ourselves strategically to experience the expected growth in this industry. Our competitors seem to win in revenue and stock price. What are they doing right that we don't seem to be? Well, I think not all competitors are doing well. There are a couple that are doing quite well in terms of valuation and stock price. I believe one in particular they have pretty much a single product that they've done a very good job on, particularly positioning in military markets. I do believe that company may win a significant portion of the program of record they compete with. They have focused their product strategy on a single product, which allows for scaling without significant infrastructure complexity as we have with our variety of offerings. We avoided that strategy as it's been the most competitive space, with many North American companies failing in that market over the past 25 years. However, I don't see that the mentioned competitor will fail but market conditions differ today due to factors like military demands and regulations. We plan to differentiate from that space considering competition from low-cost foreign providers. We will enter that space with integrated solutions that address varied logistics and operational needs for clients. Their market success also helps the entire industry, and I wish them well. When do we see ourselves gaining meaningful contracts? I see it happening this year. We are working on advanced contracts, following thorough testing, and understand who remains in the process, confirming we're on track for meaningful contract wins this year. Have we considered strategic alternatives like mergers? The drone space is seeing movements, and we've explored various companies. While not actively pursuing it, we are open to looking at our options, remaining focused on organic growth, large contract announcements, and different valuation principles supported by historical experience. Will we reach full production capacity by the end of 2024? Yes, as we anticipate scaling capacity with contract awards or other developments. Are we involved in the Replicator program? Many drone companies are involved in one form or another with the program, including us. Supply chain issues—are we worried? Yes, it’s dynamic; we see supply chain shifts from China to Malaysia and Southeast Asia, enabling NDA compliance while permitting North American market scaling, putting some price pressure down the line. But we’re not concerned about managing it. How do we perceive the potential in Australia? Massive potential, as it’s a significant market and a strategic partner country, addressing critical concerns observed with Taiwan and China. We were brought into this situation via initial work within Ukraine and consistent partnerships with U.S. and Canadian military. Thus, we feel uniquely positioned as early movers for unique product offerings. How are we sending drones to Ukraine? The conflict continues, meaning demand for drones for various functionalities remains strong, and we are facilitating this demand effectively.

That's the end of the questions that I've got. But please feel free to email Rolly or myself with any further questions. I'll do my best to get back to you. It's challenging to meet the demand for inquiries, but Rolly and I will ensure to communicate transparently about everything moving forward. I want to acknowledge the challenging market conditions and the continuous cash burn we are addressing. Last year, during the first six months, our operational cash burn totalled $11.6 million, while this past period saw it drop to about $6.4 million of operational expenditure. It's crucial to note that last year's operational burn focused heavily on building capacity; while this year, our emphasis has shifted onto product management and sales integration. We believe we’re on track. Our board remains comfortable despite recent shareholder discomfort with market fluctuations, often driven by a few large shareholders holding significant positions that can impact market activities substantially. As we mature, I believe we will surpass these challenges witnessing exponential growth reflected in our stock. We appreciate your patience and empathize with shareholder challenges. We’ll continue to prioritize exceptional products and solid customer partnerships. So, thank you for your time today. Appreciate it.

Goodbye.