Ladies and gentlemen, thank you for standing by. Good afternoon and welcome to the Red Cat Holdings Fiscal Second Quarter 2022 Financial Results and Corporate Update Conference Call. At this time, all participants are in a listen-only mode. After today's presentation, there will be an opportunity to ask questions. Participants of this call are advised that the audio of this conference call is being broadcast live over the Internet and is also being recorded for playback purposes. A webcast replay of the call will be available approximately one hour after the end of the call through March 20, 2022. I would now like to turn the call over to Scott Gordon, President of Core IR, the company's Investor Relations firm. Please go ahead.

Thank you, Ellie. Good afternoon, everyone and thank you for joining us for the Red Cat Holdings fiscal second quarter 2022 financial results and corporate update conference call. Joining us today from Red Cat Holdings are Jeff Thompson, Chief Executive Officer of Red Cat Holdings; and Joseph Hernon, Chief Financial Officer. During this call, management will be making forward-looking statements including statements that address Red Cat's expectations for future performance for operational results. Forward-looking statements involve risks and other factors that may cause actual results to differ materially from those statements. For more information about these risks, please refer to the risk factors described in Red Cat's most recently filed periodic reports on Form 10-K, Form 10-Q and Red Cat's press release that accompanies this call, particularly the cautionary statements in it. The context of this call contains time-sensitive information that is accurate only as of today, December 20, 2021. Except as required by law, Red Cat disclaims any obligation to publicly update or revise any information to reflect events or circumstances that occur after this call. It is now my pleasure to turn the call over to Jeff Thompson, Chief Executive Officer. Jeff, please go ahead.

Great, thank you, Scott. Good afternoon, and thank you all for joining our fiscal second quarter 2022 call and webcast. Also joining me today is Joseph Hernon, our Chief Financial Officer. We've completed many milestones in Q2. We were awarded a NASA contract. We closed the Teal Drones acquisition. We have brought on key hires for our business development and sales and opened a U.S. manufacturing facility in Salt Lake City. I will start and review our consumer companies Rotor Riot and Fat Shark. Fat Shark is continuing to develop its digital system called Shark Byte. Shark Byte is a high-quality, low latency, high-definition FPV, which means First Person View system. We are now seeing approximately 50% conversions from analog to digital. We expect that to add momentum to the 2022 calendar year revenue. We are also seeing crossover up to and using commercial and military use cases. I'll now turn to Rotor Riot. Rotor Riot produces weekly drone media and has an online store where you can buy products seen on the weekly YouTube shows. Rotor Riot continues to grow and has over 235,000 subscribers. We are happy to report that we've been able to get most of our Rotor Riot supply chain issues fixed that were causing us to be out of stock on popular items. We expect the store to gain new users as Rotor Riot becomes a one-stop store for Ready to Fly FPV drones and has reliable inventory. Next, I'll talk about Skypersonic. Skypersonic has a drone platform that combines artificial intelligence software with the camera and sensors of the Skycopter inspection UAV. They also have remote piloting capabilities which break the one drone, one pilot rule. This capability was crucial in obtaining the five-year NASA contract we announced in September. NASA's crew will conduct simulated spacewalks and operations by remote piloting Skypersonic drones and rovers in a simulated Martian environment. Skypersonic's real-time transoceanic remote piloting platform will drive the piloting on both the drones and the rover. We believe Skypersonic's software and platform will also benefit from the recent infrastructure bill that was passed. There are millions of miles of sewer that will need inspections and hundreds of thousands of bridges that will need inspection. We expect Skypersonic to have an exciting 2022. Let's dive into our newest acquisition, Teal Drones. Teal Drones has built a complete drone platform. We believe it is one of the most capable drones in its category. I recently toured the new facility and was able to see the Golden Eagle fly simulated missions. Its performance was incredible. It is quiet, stable, and reliable. We recently announced the opening of the manufacturing facility of approximately 13,000 square feet. We have since decided to double the size of the manufacturing to 26,000 square feet. These new production lines will be able to produce thousands of drones a month. We have invested in machinery, robots, and inventory to meet existing and expected contract awards. Before we talk about contracts, I would like to discuss the recent events in the U.S. DJI was put on the Department of Commerce and State list last December. The U.S. Government will place eight Chinese companies, including drone manufacturer DJI, on the investment block list. The House has a bipartisan bill banning existing government fleets of Chinese drones. The Senate has a similar bipartisan bill, and we expect both to pass. This gives Teal a great opportunity to fill the gap with made in USA drones. By banning all federal dollars from Chinese drones, this opens up public safety and first responders as a new category for the Golden Eagle. These new bills also ground thousands of Chinese drones that will require immediate replacement with made in USA drones. So now let's talk about SRR. Most of the questions I get from investors are mainly about the Short-Range Reconnaissance tranche 2. The SRR contract is to put a drone in every rucksack. Teal Drones is almost two years into this process. We have nothing new to report and will update our investors as soon as we hear back from the Army. I will now hand the call over to Joseph Hernon, our CFO.

Thanks, Jeff and to everyone for joining the call today. I will now provide a review of our financial results for our second fiscal quarter which ended on October 31, 2021. Revenues during the quarter totaled almost $1.9 million, representing a new quarterly record for the company. This represented an increase of more than 300% compared to the second quarter of last year and an increase of 33% compared to our first quarter of this fiscal year. We expect to report continued sequential revenue growth going forward. Gross margin as a percent of revenues was 8% during the second fiscal quarter compared to 7% in the first fiscal quarter and 19% during the second quarter of last year. The lower gross margins that we have been experiencing in the first half of fiscal '22 reflect higher product and shipping costs as we have been impacted like many businesses by COVID-19. We expect gross margins to improve going forward, especially as we begin to scale up manufacturing at our newly opened and expanded facility for Teal Drones in Salt Lake City. Operating expenses totaled $2.9 million in the second fiscal quarter compared to $1.8 million in the first fiscal quarter and $500,000 in the second quarter of last fiscal year. This increase compared to the second quarter last year reflects the acquisitions of Fat Shark, Skypersonic, and Teal, all of which were acquired subsequent to our reporting results for the second fiscal quarter of last year. The sequential increase compared to our first fiscal quarter related to the acquisition of Teal Drones which closed early in the second quarter and represents our largest acquisition to date. Net loss for the second quarter totaled approximately $2.7 million compared to $1.6 million in the first fiscal quarter and $700,000 in the second fiscal quarter. We ended the second fiscal quarter with almost $60 million in cash and investments. For the first six months of our current fiscal year ending on October 31, our year-to-date net loss adjusted for non-cash expenses, such as stock-based compensation, was $3 million, meaning that our current cash balance provided approximately 20 times coverage of that net loss for the first six months of this fiscal year. I think that really demonstrates that we are in a really good financial position to execute on our growth initiatives over the balance of the fiscal year. I will now turn the call over to the operator for questions.

And our first question today comes from Kevin Dede with HCW.

Hi Jeff, Joe. Thanks for taking my call. Congrats on the numbers. I'm thinking most of the 19 was generated by Teal, is that the right way to think about it?

Yes, go ahead Joseph.

Yes, I would just that, call that short statement Jeff made. I think at this point Kevin and looking back on the second fiscal quarter, certainly Teal made an immediate impact on our revenues, but it was not even a full quarter yet for the company and I'll let Jeff comment maybe on the outlook going forward. Jeff?

Yes Kevin, it was, they did contribute, but I think they are going to significantly start to contribute as we head into the next calendar year. As we mentioned in our press release, we expect them to start generating about $1 million a month starting around January. We expect that to actually move up as we get further down the year and we're getting lots of traction and we're continuing to work with the large contracts on the government, hoping to land some of those soon, but we're also actually already out there. Our biz dev team has been flying around the globe going to other NATO countries and pitching the Golden Eagle and doing demonstrations to other military countries, and we're getting some good traction there. So we're going to have starting early next year we're going to have some pretty aggressive revenue growth coming from the Teal acquisition.

Can we look at it from another perspective Jeff? What would you estimate that DJI's revenue run rate was in their sales to U.S. customers, where they've now been excluded?

Yes, I haven't found any recent figures because they have effectively been removed from any government and enterprise opportunities. Therefore, I don't have those numbers, and nobody is willing to share them with us. However, we believe there are hundreds of millions of dollars in potential revenue lost due to DJI's exclusion from government funding. Some public safety fleets currently operate over a thousand DJI drones. If certain bills are passed, existing fleets of Chinese-made drones will be grounded, and no renewals or new purchases will be allowed. This could mean thousands of drones being affected per department. The military is not using Chinese drones, but there are still significant contracts involved. We believe that the bans on DJI and other Chinese drones will create a void that will significantly benefit the Golden Eagle more than any competitor.

Who would you size up as able and ready to manufacture competitors?

Yes, that's a great question. I know that on the consumer side of the five that are allowed, that are in the SRR program, Skydio is probably the biggest threat, but I think that with our more military style bird, the Golden Eagle, the new manufacturing facility that we just set up is really going to give us the capabilities to meet those large contracts. But I would say there's only Skydio that we would have to worry about.

So granted Salt Lake City, but my understanding was you were trying to build out facilities in Puerto Rico. Am I thinking about that incorrectly? And then why Salt Lake City?

Yes, so the Teal team is all there. The manufacturing is going to be in Salt Lake City. We have just moved into a new facility that I was at two weeks ago. They are moving from basically preproduction to actually a real assembly platform where they can actually achieve better yields and better reliability. And again, from the activity that we have on the sales side now, we've actually opted to double the size of that factory just two weeks ago.

And when do you suspect you'll be at full factory utilization?

The factory has the capacity to produce thousands of drones each month. While reaching that level will take some time, we aim to achieve an output of 200 to 300 drones monthly over the next year. However, this is just the beginning. The SRR contracts are expected to be awarded late next year, and we are exploring additional opportunities. We are committed to building the facility as swiftly as possible and have been actively acquiring significant inventory. This will enable us to ramp up production to thousands of drones per month, which are priced around $14,400 according to the GSA website. We anticipate considerable growth in both our capabilities and revenue.

Well, congratulations Jeff, Joe. Thanks for taking my questions.

Thanks, Kevin.

Our next question comes from Scott Michael, a private investor.

Thank you. I don’t know if I can be heard. Can you hear me okay?

I can hear you.

Okay, thank you. Congratulations on the building by the way. What is your timeframe for the completion of the upgrade in the Teal production building?

Well we just started building it in September and it's already producing drones. We closed in September and right away we got into the new facility and started building the production and manufacturing capabilities. The new site is going to be right next to the existing site we just signed, so that's going to take a while. But we can get up to thousands of drones in the existing location, but we are already planning to really bring capacity way up.

Okay, thank you. Secondly, the timeframe for the Fat Shark development on the digital system is there a timeframe for that and as well as the Skypersonic infrastructure attempts?

I'll start with the last question first. As you're aware, the infrastructure bill just passed this fall, and no one is expecting significant awards until at least mid-next year. For actual infrastructure contracts for Skypersonic, we believe we won't see anything until then. In the meantime, we are doing extensive work not only with Teal drones but also with Aramco. We recently completed a large 10-day training program for the drone purchases made by Aramco. We're continuing to collaborate with GM on inspecting their sites and assisting with inventory in parking lots using our artificial intelligence. We are seeing more successes, and it’s becoming clear that many large companies prefer not to award inspection contracts to Chinese-made drones, which gives our made-in-the-USA Skycopter excellent opportunities for immediate inspection revenue. We hope to maintain this momentum and achieve more wins similar to our collaboration with NASA. Our remote piloting capability also gives us a significant advantage as a USA-made company. I believe you will see steady growth from Skypersonic, and it will be interesting to see what happens once infrastructure funds start coming in.

Okay, thank you, and the Fat Shark development of the digital system, is there a time frame for that?

Yes, they have versions available now, which are continuously improving with better features and updates. The system is impressive; it has very low latency, significantly lower than the Chinese competitor's FPV goggles. We are at an early stage and starting to see, as I mentioned, a shift from analog to digital platforms. This is a promising development for the market since analog systems are effective. The Fat Shark goggles are well-constructed and have a long lifespan, so users don’t need to replace them frequently. Now that about 50% of new users are transitioning to digital, we hope to see this conversion rate increase, and the HD system will continue to gain popularity throughout the year.

Yes, two other questions if you don't mind. Has the chip issue been resolved for Teal? And then secondly, or lastly, I know you cannot comment on the tranche 2 status, but can you at least reference if the government has not eliminated Teal from consideration at this point?

Oh absolutely not, Teal is still in the process. We continue to work with them, which we are pretty excited about, but again we don't have anything to report there. And I'm sorry, what was the other question? I didn’t get that.

The chip, for production for Teal, last conference I believe there was an issue securing chips; I think you only had 600, has that chip issue been resolved for manufacturing purposes?

Not completely, but we are starting to see relief in some chips coming in quicker than we had planned for. One of the bigger issues we were having last call was the batteries, which, when I got my tour, I don't mean to go on a tangent here, but people don't realize how many features the battery that we've redesigned, that Teal has designed, and it has like 100 features in that smart battery; it is an amazing piece of technology. But we have that resolved and we are starting to see some relief going into all of the supply chain constraints, but not every single chipset is perfectly available. So our team was actually very forward, mostly Allan Evans, our COO, really pushed us to ensure we ordered early to get in the front of the line, and that's worked out really well. So we don't think that we will be constrained as we're building up our monthly build capability. We believe we will be fine and will get through this chip shortage.

Okay, thank you very much.

Thank you. Thanks for the questions.

Our next question comes from Dan Fan, a private investor.

Hello, this is Dan, if you can hear me okay, congratulations on the growth in revenue and productivity from Teal Drones. Most of my questions have been answered, but I have one left. So given the supply chains have been relieved and there were a lot of proactive activities I heard there regarding getting us ready to produce more Teal Drones, which is the main revenue stream right now. My only question left is, what are we doing with the $60 million plus, or the significant amount of cash equivalent to continue with the growth in terms of the investment for the short term or long term into next year?

That's a great question. To provide some context, if we secure one of the large government contracts, it could be valued at tens of millions of dollars, potentially reaching up to $50 million or $100 million over five years for drone orders. This would necessitate a significant investment of capital. The funds we raised in July were intended to enable us to set up a factory capable of handling the requirements of such a large contract and to acquire the necessary parts to fulfill those orders. Additionally, we are in the early stages of building our enterprise sales team and have not yet recruited all the employees we need. We are looking to hire about 10 individuals specifically for Teal, and our sales team will likely expand by five or six high-quality business development and sales professionals over the next year. Thus, we will be investing in sales, marketing, manufacturing, customer service, and other areas essential for delivering these large government contracts effectively, as well as for future acquisitions.

Then that was my next question, if there was any acquisition in the plans that would make us more competitive in this field.

Yes, most of what we're currently considering, as I mentioned in the last call, is primarily software-driven to enhance the Teal platform. Great, thanks for your questions.

This concludes our question-and-answer session. I'd like to turn the call back over to Jeffrey Thompson for any closing remarks.

Great, thanks. I just want to thank all the employees at Red Cat. We have an incredible team. I was able to go and see the folks at Teal. My next quest is to get up and see the folks at Skypersonic; they are doing a great job, and not, we're right all the time. So we're pretty excited about this next calendar year. We have a weird year-end for our fiscal year, but we're very excited. I want to thank all the employees. I want to thank our customers and wish them a great Christmas. Merry Christmas.

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