Draganfly Inc. Q2 FY2025 Earnings Call

Hello, everybody. Sorry for that little bit of a late start, a little bit of a tech issue on our end, but it looks like it's all clear now. So we're just going to get started immediately here. So right now, you're joining us today for Draganfly's 2025 Q2 Earnings Call. My name is Rolly Bustos, and I am the Internal Investor Relations Representative here at Draganfly. We appreciate you all joining us. As always, we'll start with our CEO and President, Cameron Chell, recapping the second quarter earnings headlines. Next will be a more detailed financial review with our CFO, Paul Sun. We will then conclude by addressing the pre-submitted questions that we received. As always, we are welcome to reach out to me directly at [email protected]. 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 company's results and statements are accurate as of today, August 11, 2025. We're under no obligation to update or renew these statements outside of material press release disclosure going forward. The full forward-looking disclaimer can be found on Page 2 of this presentation. So Cam, if you're ready, please go ahead.

Great, thank you, Rolly. I appreciate everyone’s patience regarding the delay. We are happy to be presenting our Q2 earnings call for 2025. To begin, I would like to highlight a few key points. Our revenue for Q2 was approximately $2.155 million, which marks a 37% increase quarter-over-quarter and a 22% increase year-over-year. Last quarter, our product sales totaled $1.9 million, while our service provision generated $213,000. We achieved a gross profit of $504,000, reflecting a 9.3% year-over-year increase and a gross margin of around 24%. As of the end of Q2, we had a cash balance just over $22 million. However, following a recent financing, our current cash balance is about $68 million. This quarter has been quite active for us, especially in the drone industry, as shown by our level of engagement and activity. Some highlights include our Commander 3XL plus DROPS, which had a 100% success rate at the U.S. Army SMEX25 event, demonstrating both our partnership with DROPS and the robustness of our Commander 3XL. Additionally, Draganfly completed a $13.75 million public offering, strengthening our balance sheet, and the market has responded positively. There has been notable budget increases from Canada and Europe for defense modernization and NATO spending. This is particularly significant for Draganfly, as we are the only domestic drone manufacturer in Canada with a strong presence in law enforcement and defense, positioning us well for the anticipated increase in spending. Furthermore, Draganfly was selected for a drone pilot program with the Cochise County Sheriff's Department at the U.S. southern border. This department is highly regarded in border management and is known for its innovative approach. A key challenge they face is integrating drones with their existing camera systems and AI due to the limited battery life of current U.S. drone models. In response, we have developed a drone that can fly for up to 7 hours, offering capabilities such as heavy payload transport and advanced surveillance, which will enhance their operations significantly. Our collaboration with Cochise County focuses on custom solutions tailored to their operational needs. Draganfly’s extensive experience equips us to adapt our diverse range of drones to various customer requirements, whether for law enforcement, military, or commercial use. Additionally, we exhibited our tactical drone at the innovation and global defense summit in Latvia, where we were the only company showcasing a comprehensive range of drones. Our FPV drone drew considerable attention, and we have announced its delivery to a major U.S. defense contractor. This drone was designed based on experiences from Ukraine, enhancing our product relevance for various defense departments globally. We are also making strides in the demining sector, having signed a partnership with Autonome Labs to deploy UAV-based solutions for landmine detection using our drones, and recently performing demining missions in Ukraine, which will inform our AI databases. We are proud to announce the establishment of our Public Safety Advisory Board, led by Paul Goldenberg, who brings a wealth of experience in law enforcement. This initiative has increased our visibility in the public safety sector, showcasing our versatile drone lineup. We raised an additional $3.6 million in capital this quarter, with $8 million worth of warrants exercised, contributing to our strong balance sheet. Finally, Draganfly has received a strategic military order for the Commander 3XL UAV systems, which are expected to lead to further orders as we establish our reputation for meeting military operational needs. Our extensive line of drones positions us uniquely in the market, as we continue to develop innovative solutions for various uses and uphold our manufacturing presence in both Canada and the United States. Now, I will turn it over to Paul Sun to elaborate on our financial details. I believe Rolly has some questions that have been submitted.

Yes. Thanks, Cam. Thanks, everyone, for joining. So as Cam mentioned at the outset, revenue for the second quarter was $2.1 million, up 22% from $1.7 million in the second quarter of 2024. Second quarter revenue comprised of $1.9 million in product sales with the balance coming from drone services. Gross profit, $505,000 this quarter compared to $462,000 in Q2 of last year. This quarter had a one-time noncash write-down of inventory of $10,000 and otherwise would have been a gross profit of $515,000. Gross profit for Q2 of last year same period would have been $596,000 if we took away the one-time inventory write-down that that period had of $134,000. And taking these noncash items into account, gross margin would have been 24.4% for this quarter compared to 34.4% year-over-year. Total comprehensive loss for the quarter of $4.7 million compared to a loss of $7.1 million in the same quarter last year. This quarter included that noncash write-down of inventory of $10,000. It also included a derivative liability loss of $180,000 and a gain on the notes receivable of $8,000 and otherwise would have been a comprehensive loss of $4.6 million. The same period last year had a one-time change in noncash derivative liability of $2.6 million, a $134,000 inventory write-down and a gain on impairment of notes receivable of $4 million and otherwise would have been a comprehensive loss of $4.4 million. So the slight increase in loss is due to higher office and miscellaneous costs, wage costs and share-based payments offset by professional fees. Cam, if you can just go to the next slide there on the quarterly side. We just went through the year-over-year changes. So here, we'll just go through the quarter-over-quarter changes between Q2 and Q1 of 2025. Again, Q2 '25 increased by $567,000 to $2.1 million, up from the $1.5 million in revenue we saw in Q1 of this year, an increase of 37% due to higher product sales. Gross margin percentage for Q2, again, was 24% compared to 20% for Q1 of this year. Again, if we back out that one-time inventory write-down that we mentioned before for Q2 and $39,000 that we had to back out for Q1, gross margin for Q2 would have been the 24% versus 17.5% in Q1 of this year, with the difference being products mix during the various quarters. Comprehensive loss for Q2, as mentioned, $4.7 million compared to $3.4 million for Q1. Again, remember, we had a loss in fair value of derivative liability, a write-down of inventory and a gain on notes receivable. So that adjustment would have got us to $4.6 million. If we did the same for Q1, we would have got to a loss of $3.6 million, and again, the increase in loss quarter-over-quarter primarily due to higher office and admin and some wage costs. Moving on, I think, to the last slide here, Cam, on the balance sheet. You can see our total assets increased from $10.2 million at the end of 2024 to $28.4 million, which is largely due to the increase in cash that Cam talked about earlier. Working capital at the end of June 30 was $22.4 million versus $3.8 million at the end of December. However, if we ex out that fair value of derivative liability of $2.2 million that we have on our balance sheet, working capital would have had been a surplus of $24.6 million this quarter and $6 million at the end of December of last year. Doing the same exercise for the shareholders' equity, at the end of this quarter would have been $25 million versus the $22.9 million shown here and the $6.8 million at the end of December versus the $4.6 million shown here. And as always, we continue to show here that we have minimal debt. And I think Cam also mentioned cash at the end of the quarter was $22.6 million, but subsequent due to the warrant exercises and the July financing, we're approximately at $68 million in cash. And with that, I'll pass it back to you, Cam.

Thank you, Paul. If we look at the overall comprehensive loss, including derivative liabilities, we can see that our revenues are steadily increasing while we manage costs effectively. In fact, we're reducing our overall operating expenses as a percentage. It's important to note that these sales do not include the significant outlier sales that we have been developing for years and have increased our capacity to support. This represents the growth that both shareholders and management are aiming for. I also want to emphasize that we are well-positioned to be part of the future of drones. Now, I will turn it back to you, Rolly. I know you had several questions, some of which you sent to me this morning. I apologize for not having reviewed them yet, but I look forward to addressing them now.

Okay. Thanks, Cam. Yes, honestly, you've actually answered a lot of them in the presentation, so I'm going to kind of bounce around a little bit so we don't repeat ourselves. Can we just start with the first one here a shareholder sent me in? He said he noticed that Draganfly has been on the AUVSI Green List pending for a long time now. Can you comment on this? And what, if anything, does the new drone memo by Secretary Hegseth mean for these classifications, for example, the Green and Blue Lists?

I've mentioned this before, and I'll reiterate it. Initially, I disagreed with our management team regarding the importance of the Blue List when it was first introduced. I thought it was merely a marketing initiative, believing we were already well-established with police and military sales. We've been involved in military contracting for many years, so I didn't understand why being on the Blue List was necessary. I acknowledge now that we were compliant with NDAA regulations before they even existed and have always been careful about our supply chain. Consequently, we didn't pursue the Blue List at that time, which I now see as a mistake. Currently, we have various units undergoing Blue List testing and have also submitted for the Green List. There was some confusion about whether Green equated to Blue and vice versa, but we now have clarity on that. Additionally, the Defense Innovation Unit has announced new adjudicators who will provide the clearances or testing for the Blue List. We are progressing in this process without any unusual delays, aside from the effort to clarify regulations. This hasn’t hindered our sales to defense or law enforcement; the main decision-making factors in large defense contracts remain capabilities, performance, capacity, and personnel. We have demonstrated compliance with all four factors that meet the requisite criteria through audits and other assessments. When large orders are placed, various waivers are available to different departments and commanders within the Department of Defense, allowing us to bypass the Blue List status. While being on the Blue List is important and we intend to continue pursuing it, it has not significantly impacted our ability to secure orders. The recent memo from Secretary Hegseth and the positioning of the defense department align with this view. It's clear that there are processes at the command level necessary to accept something not on the Blue List, and the landscape may be challenging for newcomers who wish to enter the drone market. The demand for specific needs at the command level creates opportunities for a company like Draganfly.

Great. Thanks, Cam. I'm going to jump to the next one here. It seems that you now have a very healthy cash balance. What plans do you have for these funds?

We're still very focused on organic growth. Capacity building is in place, fortunately, and thanks to our shareholders. And so we're going to be very pragmatic with our cash. We are scaling in particular our ability to iterate even quicker. So this is a key function within, in fact, not just military but within police and commercial. Drones are a competitive advantage, but everybody is going to have them, which is great for Draganfly and the drone industry, but a differentiator will be how quickly can you iterate. So a lot of our focus is on that. That does bring up us taking a look at some M&A activity. And we do have some of that going on. However, it's not our focus. So there are some pretty cool and exciting things that could unfold in that direction. But again, we've managed to stay in business for 27 years because we don't make a lot of knee-jerk moves. And so it's also why we don't provide guidance. Other comparable companies out there have provided some really robust guidance. And from an order standpoint, I 100% believe their guidance. From an execution standpoint, it's very, very tough to scale in the way that they want with the types of products that the industry is demanding. So basically, what it means is that we're going to be able to do what we say and that our customers, which are very large customers, have a lot of confidence now in our balance sheet. So if ever before, that was a question, them saying, 'Hey, you're a small company. You're only like 60, 70 people. Can you execute? You've only got a few million dollars on your balance sheet. Do we really want to make a bet on you?', right now, this is a big insurance policy for them. And that's the biggest impact. Not that we won't use it wisely, not that we won't use it to drive growth, but right now, proving that product up and ensuring that our customers have confidence in this, which is inclusive of a strong balance sheet, is really the most important thing.

Great. Thanks. That's very helpful. The next one is kind of just an extension to the capacity issue you've been talking about. With hopeful meaningful contracts coming, can you comment on how you're positioned in terms of production capacity to fill them? Are we able to scale quickly if need be?

We have several factors to consider in this situation. Firstly, we've increased our production capacity over the past few years, which was essential to accept the incoming orders we have now. We're confident in our ability to quickly scale and adapt our operations to meet specific high-demand requirements. Additionally, we are actively exploring further contract manufacturing options to enhance our scalability. However, this process is more involved than simply announcing a contract. For instance, we spent 18 months assessing potential contract manufacturers, developing compatible tools, and ensuring that both their and our personnel are trained effectively. It's crucial that they can match our speed and that we understand their supply chain management, alongside collaborating with our customers on their supply chain needs. I feel some announcements regarding scalability and contract manufacturing might not reflect the depth of consideration required for such decisions. While I won't comment on others' choices, I am confident in the thoroughness of our approach. We're excited about our progress and capabilities. Ultimately, when clients pose detailed inquiries, they want concrete answers regarding specifications and inventories, leaving no room for hesitation. I believe we are well-positioned, though not without the potential for mistakes, but I think we are on the right track.

Great. Thank you. Just a couple more here. Given the recent surge in police departments adopting drones as first responders, can you comment on whether Draganfly has seen inbound interest or engagement from agencies considering this model?

Yes, everybody is interested in it. And what's interesting about that public safety market is that the very large departments have spent the last maybe 18 or 24 months, other than a few innovators who have even been at it longer than that, with DFR drone as a first responder, which is going to be an absolute game-changer for public safety. But most of the inquiries we see coming in today are still like about regulation, about how do you train pilots, like I mean they're still trying to figure out budgets. There's still a lot of question, believe it or not, about whether it's going to be Chinese-allowed or not, which is not, in my opinion. And whether that's right, wrong or different doesn't matter. The point is, I believe it's not. And so the inquiry levels are still really there. Now again, some of the larger departments have adopted or in the process of adopting, and some really innovative departments, maybe a dozen of them in the States, are real leaders in this regard. So in terms of having multiple drones that can fit into a DFR response, not just with just an ISR drone or just a VTOL or whatever the case may be, but drones that are actually multi-mission is weighing heavily into the decisions and the positioning that we've got. So in terms of the boxes, the response, the automation, that type of stuff, it's all stuff that's well within our capabilities, and we're very active in that space. Candidly, we're not focused on the really, really big departments. There's other competitors there that are in there with their small ISR drones. They make a great product. They are willing to spend heavily to earn that business. We think long term that we'll be there. But if we look at all the rest of the market out there, which is the majority of the market being small, rural, campus, tribal, private security, that's where we're just getting tremendous traction right now. And of course, they're dealing with much less different type of budget constraints. Sometimes the budgets are smaller, but they're quicker to move. Sometimes in the private security space, they're much larger and they're quicker to move. So we like where we're at in that space, and we're going to continue to focus down that. Again, we have such a strategic advantage with our Board of Advisers. And the other aspect of police enforcement that seems to be working really well for us is international being up in Canada, over in Europe and the U.K., parts of Eastern Europe and some parts of Asia as well because of our NDAA compliance and our multi-mission drone platforms.

Great. Okay. I'm just going to give you one more question here, but I'll just remind everyone on the call that if your question did not get answered or if you have another one, please reach out to me, [email protected]. And as always, I'll try my very best to answer it for you. So Cam, it seems possible that an end to the Ukraine conflict might be coming. Does this negatively impact Draganfly or the drone industry as a whole?

No. I think the situation is clear, and the unfortunate conflict in Ukraine has highlighted the critical importance of drones. We are currently seeing the rest of the world recognizing the need to utilize drones. Even if the conflict were to end tomorrow, I believe that drone usage will continue to grow. Currently, the primary application of drones there is FPV. If the conflict were to cease, we would likely see a shift towards ISR, logistics, demining, and reconstruction, among other things. The types of drones we offer will see increased usage. While there aren't many North American drones being sold in Ukraine, the Ukrainian people are remarkable innovators and engineers. They are custom-building their products and are very dedicated. The local industry will undergo significant changes, but the external industry's approach will remain largely the same, aside from the valuable learnings and training opportunities that arise from the situation.

Okay. Great. I think that will be it for the questions, Cam, to respect everyone's time. I know we started a little bit late. If you can just give some final thoughts to everyone on the call.

Well, first and foremost, I really want to thank our shareholders for their consideration. I know it's been a long haul for many of you, many of us as well. So whether you're new or old, we appreciate the trust, and we take that very, very seriously. Our customers, thank you for your consideration and trust, and we're going to continue to work hard to make you uncompetitive, meaning that nobody can compete with you. So our internal goal is to give you a strategic advantage. And then certainly, to the team members at Draganfly, I know how hard you're working. Your commitment is inspiring to absolutely everybody, including our customers in terms of what you show to them. So we're just sitting here in a lot of gratitude right now. We know how much work we have to do, and we know we're going to just grind it out, and we'll be here for the long term and appreciate everybody's support.