Leah, do you have a copy of the disclosure?

Yeah, I was just going to say, why don't I get our opening remarks going firsthand here? So welcome everyone to the Red Cat Holdings Fiscal 2025 Second Quarter Financial Results and Corporate Update Conference Call. After today's presentation, there will be an opportunity to ask questions. To ask a question, you just can submit it through the Zoom Q&A function. Participants of this call are advised that this conference call is being recorded for playback purposes. So joining us today from Red Cat Holdings are Jeff Thompson, Chief Executive Officer, myself, Leah Lunger, Chief Financial Officer, and Geoffrey Hitchcock, Chief Revenue Officer. During this call, management will be making forward-looking statements, including statements that address Red Cat's expectations for future performance or operational results. Forward-looking statements involve risks and other factors that may cause actual results to differ materially from these 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 and in Red Cat's press release that accompanies this call, particularly the cautionary statements in it. The content of this call contains time-sensitive information that is accurate only as of today, December 16, 2024. 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, go ahead.

Thanks, Leah. Just a little bit of housekeeping again, as we usually start off. Like I said, we have a lot of fun stuff to talk about, today's news and a few other great things that are happening and Geoff's updates and a little bit more color on guidance. But not all of it is going to be super fun. We do have a little bit of sad news and I'm going to hand this over to Leah for a second here.

Thanks, Jeff. So I'm just going to take this opportunity to inform everyone that I have resigned as CFO of Red Cat, due to family reasons. Just to share a little, one of my children has a disability and his needs have increased such that I can no longer devote the time required to do my job well. This has been an extremely difficult decision to say the least. I'm very sad to be leaving, especially at such an exciting time for the company. But I've chosen to prioritize the needs of my family and truly the needs of the company. On a more positive note, I'm also actually five months pregnant. So we've been planning for some kind of interim support after I have the baby. So now with this change, we're just kind of accelerating that timeline. Jeff, I'll let you add anything that you want to that.

Thanks, yeah. We're sad to see you go, Leah. The only good news out of this is that we have a bunch of candidates that we've been talking to to help when Leah has the baby. There are some great CFOs with some industry expertise in the drone space that have been doing it for quite some time. So I think we're going to be okay. We're going to miss Leah, but we have been kind of planning for this. We're just going to have to accelerate everything. So with that, I'm going to kind of move on into some of the stuff that's happened. Mostly today I've been on the phone all day. Everybody wants to know about what's going on with this new partnership that we did with Palantir, and it is really amazing. We've been working with these folks since AUSA in DC. What we are doing now is we're taking the Black Widow, which is the winner of the SRR Soul Source, which is going to be 12,000 drones out there. We're partnering with Palantir's visual navigation and their artificial intelligence. This Black Widow is going to be one of the most capable birds ever fielded by the DoD, and it fits in your rucksack. This drone has a capability to identify objects. The two biggest problems that you're going to face when you're at a battlefield right now are Electronic Warfare, which we actually have some great testing that we've done and completed, and GPS, GPS doesn't work in any battlefield. They're basically useless. Our goal is to not even ship a GPS on the Black Widow in the future and just continue to utilize visual navigation. The visual navigation that Palantir has is unlike anything else. There are 40 companies out there trying to do this right now, but they have access to real-time capabilities in satellite images. If you're in a battlefield and three of the buildings disappear and the road disappears, most visual navigation will not work anymore. We can get real-time updates to that mapping that you're comparing between what the camera sees and what the map you have on board, the Black Widow. This is going to be very difficult to defeat in a battlefield. And when you add our strike capabilities, you're really giving a warfighter something that's going to make them safer and more lethal. So that's a really great thing that's just happened, and we finally announced it today, but we've been working on this for quite some time. They're already working on the drones and integrating this. The other question we get with this deal is how does this work financially? This is just going to add additional revenue to each drone that we sell. We haven't put the pricing out yet or the revenue share that we're working with Palantir, but this is going to be very high-margin software that's going to go on every bird that people want. Visual navigation, specifically visual navigation, that we believe is going to be the best in the drone space. This is going to be an add-on that will bring our margins up even once we get to the 50% gross margins with just the hardware side. This software will add to our margins and hopefully accelerate our path to profitability. I just want to touch on guidance a little bit because we'll be coming back to it. We upped our guidance from a $50 million to a $55 million goalpost and we put some kind of wide goalposts out there, $80 million to $120 million. That's basically adding what we think SRR-related revenue is going to be to the total. The wide goalposts are, you know, we're not completely into all the contracting that we need, which will be happening in the next few weeks. We will probably have an Analyst Day in New York in early January, hoping to pin it down before tonight. We'll be actually giving an update just in a few weeks after the holidays and we will be able to give you more detail on all the contracts that we've been signing and maybe firm up those goalposts a little bit for everyone.

Thank you, Jeff. Thanks, everybody, for joining. I'm looking at the numbers. It's astounding that we have like 1100 people watching this right now. And it wasn't too long ago that it was 10 or 12. So thank you all for joining. I do want to take a minute and thank Leah for everything she's done for the company up to this point. I wish her the best. I understand her reasoning for it, but it does make me sad. She was a joy to work with. Hopping into a little bit of what we've got going on. Since the SRR announcement about three weeks ago, we have been inundated by customers requesting quotes and pricing and responses to RFPs, both through DoD, USG, and internationally. As of Friday, the quotes that have gone out were right around $14.7 million. This is not SRR customers; this is all Black Widow customers. Proponents of those are going to be U.S. DoD, who are doing budgeting now. So when the CR ends, they can pull the trigger on that. We're super excited about that. We're getting great demand signals globally on the new platform. When the CR ends and the budgets are allocated out to the individual entities, we expect the triggers to start getting pulled on those. We have been in discussions with the Army since the award. Right now we've responded to their request for a six-month R&D contract. We're expecting to kick that off. That's to finish up some of the harder things, visual navigation being one of them. We're expecting that in the January timeframe for award. We have the short range reconnaissance contract kick-off briefing scheduled for some time in January. That's when we're going to get a lot more understanding of what initial LRIP and full rate production contracts are going to look like. So over the next couple of months, we'll have some answers for you right now. We're still not sure until we have the sit down, but that's supposed to be scheduled in January sometime. I'm excited about the Palantir announcement that went out today. We've been looking at a lot of companies and this is one of the hardest remaining problems to solve that the Army had requested, which is both day and night visual navigation. Palantir has been a market leader in this space for a while, and the fact that they're bringing it down to a platform our size solves the GPS problem. I do truly believe that a day will come when we won't need GPS at all, and we're just flying visual-based navigation. That will make us all-domain and all-weather, day and night, with the ability to navigate safely and accurately, making us more lethal on the battlefield. Additionally, our partnership with Doodle Labs is very strong. They offer something in our space with their frequency hopping sense software where it's not actually hopping within a band; it's hopping within six radio bands. So it makes it very hard to jam. I think it's going to take us about six months before we're showing the Army that software. They're very excited, and we're very excited. It's going to be a good year. Lots of work still to do, but we will have the most dominant platform in this market space globally when we get this integration done. So rather than that, I'll wait for your questions later.

Before we hand it off to Leah, I just want to translate some of the Army speak from Mr. Hitchcock. The CR he's talking about is the continuing resolution on budgets. That money is going to be loosened up pretty soon. It just needs to be signed. On some of the contracts that he was mentioning, we are getting additional newfound money. It's going to be approximately $3 million, Geoff, I think you said, that we're going to get in January for these new features. LRIP starts again, continues to still start in the first half of 2025. Full-rate production starts in the second half of 2025. Since I'm the guy that's been dealing mostly with Palantir, we're going to have the software on that drone a lot quicker than that. We're hoping to demo it in just two months to the public. That software will be ready for LRIP. Another exciting point is once we have it integrated fully onto the Black Widow, we're going to move quickly right onto the Flight Edge 130, probably into the Triton version when we put visual navigation on there, because we'll be putting Doodle's technology on the Edge 130. So it will also be able to do Electronic Warfare and navigate through GPS denied locations. Those are the two hardest things to do on a battlefield with small drones, and we have that cured. Not only that, but we have artificial intelligence from the best artificial intelligence in the world on our drone. It's really great. So with that, I'm going to hand it off to Leah. Take it away.

Thank you, Jeff. Before I dive into the financial highlights of our second fiscal quarter, I just want to remind everyone that we're changing our fiscal year-end from April 30th to December 31st, beginning December 31st, 2024. So today we're reporting quarter two results for the six months ended October 31st, 2024, in accordance with our previous fiscal year. Our next report will be a transition report 10-K for the eight months ended December 31st, 2024. After that, all future filings will be based on the calendar year. We ended up with year-to-date revenues totaling $4.3 million compared to $5.7 million for the same period last year. So that's a 24% year-over-year decrease, which is due to the company's strategic decision to focus on Black Widow. While we're still selling the TL2, we've dramatically shifted manufacturing and sales efforts to prepare for mass production of Black Widow in calendar 2025, prioritizing long-term growth over short-term revenue. Similarly, the gross margin year-to-date was negative 12% of revenue compared to positive 25% in the same period last year. This was primarily due to the final delivery of the prototypes for the SRR Tranche 2 program at the start of the fiscal year. Our focus on Black Widow also led to lower than planned production quantities of TL2, which resulted in lower than targeted gross margins. In spite of this, our efforts have been successful, and we're thrilled to have been selected as the winner of the U.S. Army's Short Range Reconnaissance Program of Record. We plan to produce a Black Widow for several years, steadily increasing margins over time. Additionally, during quarter two, we closed the acquisition of FlightWave, adding the Edge 130 to our product mix. So now, with our family of systems, we expect to reach up to 50% gross margins in the future under mass production. Cash used in operations totaled $12.5 million, representing an 11% increase compared to the same period last year. In the second fiscal quarter, we began to increase staffing and other resources to ensure our ability to fulfill the demands of not only the Army contract but also other sales of Black Widow, Webb, and the Edge 130 that we anticipate in the future. We ended the quarter with $5.7 million in cash and accounts receivable and have since closed an additional $6 million financing. We're still evaluating our long-term cash needs as we prepare for future growth. And with that, I'll hand it back over to Jeff.

Thank you. Yeah, great. So we're kind of moderating ourselves here. The practice round was much easier when Stan was guiding us around here.

You know, I can take questions, Jeff, if you want. I've got that pulled up so I can do that.

Right, yeah. He just emailed me a bunch of the ones from some of the analysts on there. But let me also just kind of round up because a lot of the questions that I bet you all the questions are going to come in about fundraising. So as Leah just said, we've got cash in the bank well into the quarter. We just closed on $6 million worth of financing. We have some more cash coming, about possibly $3 million coming in January from the new features on the army. We believe that the debt holders have warrants that are not cashless, that are weighing the money. We expect them now that their shares are registered to probably exercise those. That's another $5 million. So we are very healthy to wait until we need to make a decision to hopefully raise as little money as possible. We've also been notified that we should be applying for the Office of Strategic Capital, which provides loans between $10 million and $150 million. They just appropriated $998 million for that program, which is available now. We're applying for it in early January. We're supposed to know by the end of February or early March if we can receive that $10 million to $150 million. They only want to give it to 10 or 15 companies and we fit into several categories. I think we check off six or eight of them. We're a perfect candidate. We have a program of record. So we hope that we can get that Strategic Capital, which is very low interest. And you can read it; it's all publicly available. You can also waive repaying the loan for years, so it's very grant-like funding. We have plenty of ways to access capital without dilution. The first questions are from Glenn Mattson of Ladenburg. I'll read the questions. It's going to sound goofy when I read the questions, but I'll read them and then respond to them. I want to touch more on the relationship with Palantir. Can you talk further about how that came along, how much collaboration was done before, how much integration still has to get done, and was the relationship driven by customers asking for you guys to work together? That's a great question. We're actually going to be working with a joint customer that requested this technology on one of our drones. We've been working with them since AUSA in early September, and we hope to have this complete in the next couple of months for at least initial testing. Also, is there upside from Palantir built into the guidance? If not, can you frame how much upside it could provide? That's another good question. We did give guidance of $80 million to $120 million. That does not include any additional revenue on each Black Widow drone that will probably come in. I don't think anyone's going to want to miss out on taking this software. So there will be additional revenue on every drone that you get with this Palantir visual navigation and artificial intelligence on every single drone. So that will add to our guidance, but this is a relatively new situation and we haven't given pricing or any details yet. So once we have those pricing details, that will add to the guidance. In terms of funding, can you just remind me of your latest assumptions or needs for investment, either OpEx or CapEx, as well as the level of commitment from DoD? I think we covered that a little, but again, we are trying to wait and find out what type of upfront payments we'll get for LRIP and full-rate production. As I just mentioned, we have the capital to get through that part.

Would you expand on the previous question of what revenue per drone we can expect with AI software from Palantir?

Oh gosh, I knew everyone was going to want to know that. We don't have the per-drone revenue number yet. We hope to get there as quickly as possible. We'll let the Street know. And obviously, software has very high margins compared to hardware. We're hoping to reach 50% gross margins as we continue to stamp out the Black Widow. Soon as we know, we'll let you know.

When do you think the FlightWave factory will be up and running?

That's a good question. So we are just starting to move in now. We just signed the lease. We hope to have more of a startup style factory in about three or four weeks, where basically they're sitting on top of each other in their office right now. They'll be able to spread out, put a bunch of tables out there and just get a mapped-out production line that looks like a real factory like the Teal Factory, hopefully in about two months. We are trying to meet some goals that they have with the orders they have. They've got orders for almost 250 drones already. So we need to build and ship them. We hope to ship them in Q1, so it'll be up relatively quickly.

Will we be adding the Palantir software to the Edge 130?

Yep, I did mention that earlier, yes. Once we're done with the Black Widow, we're going to move right to integration on the Edge 130.

You said Black Widow was basically built to specifications for the Army SRR program. How do you expect to adapt it for winning non-Army business in the United States, i.e., Law Enforcement and First Responders, etc.?

This is a really good question because there are actually some other things that we were going to bring up later. The ban of DJI and Autel is passed in the House. I’m not sure if the Senate has voted on it yet, but when this new NDAA bill goes through, it usually goes through on December 20 something for the last two years, DJI and Autel will be banned within a year. You will not be able to get Chinese drones anymore. Now what that does, you know, Brendan, who does our government work, has derived numbers from customs holding DJI equipment in customs. We believe that there will be a total addressable market of about $975 million once this DJI ban is put in place. As Kevin's question was, we built the Black Widow specifically for the warfighter, specifically for the requirements that the Army gave us. We've done similar things in the past, and we have first responders, border patrol, and almost every agency either has a TL2 or is asking for a Black Widow right now. These do work for First Responders and could work for Law Enforcement. So with that TAM of $975 million, I'm going to be very generous to one of our competitors in that if Skydio gets 2 and we get 1 of that TAM, that could be a big market that we weren't looking at. Frankly, we were ignoring it while we focused on the army.

Is RCAT going to be presenting at any investment conferences in January and February?

Yeah, we've been invited to quite a few. We've been invited to so many things the last few days. We will get our conference schedule out right after the holidays, but there are going to be quite a few of them, and they're going to involve some bigger banks than last year.

Well, that's interesting. If they're looking at our financials right now, we haven't shipped a single SRR drone. So look at our financials in two quarters, and I think you'll realize when you have a product like this, it'll have 50% margins. With software on it, it’s better than almost anything in the industry.

I will also remind that company that Geoff might have something to say about this, but they did participate in Tranche 1.

They weren't down selected.

There you go. They lost, we won. Okay. So that's all the ones that Stan keeps feeding me. I will have to go to the live ones as I don't have a feed anymore from Stan. Leah, if you have a few.

I've got this, Jeff, yeah, I can read these. Okay, so from Hassan Kakhli, what is the competitive landscape for drones being able to land in the water, recharge, and send data, etc? Does anyone else have a partnership with a company like OPTT?

I can address this. The competitive landscape, there’s not much competition really for drones that can land in the water because that has to be a purpose-built drone. The only reliable one I know of is AeroVironment Puma because it was purpose-built. That being said, it doesn't necessarily have to land in the water, but if it lands on something in the water, that's the approach we're taking with some hive solutions and unmanned surface vehicle approaches that we're discussing with regard to Red Cat Future initiatives. So there are lots of ways to skin a cat, and we've just selected to use unmanned surface vehicles with hives that will keep the drones charged while they're in the box. Not many people are doing that. I don’t know anyone actually that's doing that cradle to grave. That's what makes the Red Cat Future Initiative so compelling.

Thank you. We'll take another one here. I apologize if I'm messing up these names, but Sambodhi Sarkar says, can you please describe how the Palantir contract will help increase gross margins?

It's pretty simple. Looking at what we’ve been saying for quite some time in the modeling that myself, Geoff, and Leah have done while we were in the factory in Salt Lake City recently. We do get to about 50% gross margins just stamping out the same aircraft quarter after quarter. We're excited that we don't have to switch aircraft for the first time ever and just build this airframe that will be so important to the industry so people can actually put their software on top of our drone now, knowing it's going to be there for years, not only to the Army but also to all the other branches and all the other parts of the DoD and MoDs across the globe that want this product. We expect 50% gross margins with just hardware, but you can't get much more than that. You could squeeze out a little extra with scale and better prices, as we're ordering more now because we're a program of record. We move up the list because of our criticality, so we get prioritized for chips and all that stuff, which helps with margins a little bit, but you're not going to get to 70% gross margins with just the hardware side. Now, add Palantir software that can do visual navigation, which is very difficult to do with real-time updates combined with artificial intelligence from someone that's been collecting objects and data from machine learning for 20 years in wars. That's very high-margin revenue. So if you think about that software, you can do it at $10,000, $20,000 per drone; their margins are up near 80% or 90%. You put that software's margins onto our 50% gross margins, and you can dramatically increase the margins going forward, which hopefully gets us to cash flow profitability quicker.

Thanks, Jeff. Okay, the next question here is from Akshay Rao. Have we seen any movement on NATO and other EU contracts that were awaiting clarity on the SRR award? Any timeline expectations here?

Yes, there were several NATO countries awaiting the SRR announcement. We are actively engaged with them. Timing, we're not going to release at this point until it continues to work through that. But part of that $14.7 million over the last couple of weeks is for FMS cases, some of it's for direct commercial sales. We've got several opportunities for working in NATO.

Actually, let me add to this. Our guidance, the new guidance, is with SRR-related revenue. I was going through the weekly forecast with Jeff and his team the other day, and one of the things they mentioned that scared Hitchcock is that we have no idea how to predict foreign military sales. They come in out of nowhere and hot. We had a very large request the other day, but it wasn’t for a class one drone. It was for a class three drone, and they thought we had one, but the number was huge. They just come out of anywhere. So none of that foreign military sales are predicted in there, but I’m sure that we’ll get some.

It's important to keep in mind that right now we're in the process of doing the first engineering build, which is going to net some marketing assets. We haven't even taken Black Widow out to show anybody yet. After the first of the year, when we have those assets, we're basically going to revisit everybody we've ever met with, and start that process all over again. Most people want to see it and touch it before they buy it. We'll be doing demonstration after demonstration after demonstration, so I think the numbers are only going to improve. The fact that we've got $14.7 million in quotes out there for somebody that's never even seen it fly? I've never seen that in my 20 years in this space. I think it's pretty incredible.

Thank you guys. Another question comes from Christopher Johnson. How does Red Cat Holdings plan to differentiate itself in the drone market, particularly in the defense and commercial sectors, and what steps are being taken to secure long-term contracts in both spaces?

Right now, our focus is getting ready for the SRR program, finishing up the system for both U.S. and international government work. The next big thing we have to do after that is get our remote ID incorporated into the drone. The board design already has the hooks for that done, but the first thing we're going to do is get it right for the Army. Then we will start looking mid-year to get our ID integrated into that. We're looking at some other things that would be very disruptive to the community that first responders are going to love. I'm not going to talk much about it right now because I don't want other people to start working on it, but we have an approach that will be very unique. And 90% of DFR and USG are asking for the same thing the military is asking for. If you've got GPS jamming, the Palantir software is going to work both ways. The Doodle radios will also work both ways. Flying in urban environments is always contested. There's nothing but RF interference. So we're looking at new and creative ways to make sure we're addressing that market as well.

I'll just add a little to that before we go to the next question. We've basically been laser-focused on building a drone that's for the warfighter. But having a drone with swarm capability, or a smaller hive that can fit in the back of a truck, is great for border patrol and things like that. This new total addressable market that’s become available—almost a billion dollars is being taken away from the Chinese drone manufacturers—is a chunk of revenue that's likely to be significant, but we've focused on SRR for quite some time. All those locations could use a small swarm; they could surround the building and do all the things that they want to do for safety. There’s a lot of great potential, or we could chase down a bunch of drones in New Jersey.

This next question just came in for Hitchcock. Does a contract with the U.S. DoD limit you from selling drones to foreign countries?

Not at all. There's going to be a slice that go to our partners and foreign countries, as long as you’re not on the bad boy list, we'll be able to sell to anybody. It'll still be EAR 99, totally exportable. The Palantir software add will have to be worked through, and that may require an export license, but it's not something we're unfamiliar with. It’s a matter of getting that approved through state. What we're developing for SRR will have a slice that we’ll be able to sell internationally.

Can you address sentiments of the future administration and how it might affect the size of contracts or volume of contracts available?

I can start with that. Mr. Hitchcock has more he wants to add to that. So there's been a lot of talk from this administration about how they don't like huge, exquisite machines that cost tens of millions of dollars when you can buy drones like ours that are probably more capable than any drone ever fielded, and now it fits in your rucksack and costs a lot less. We fit perfectly into the efficiency models to make soldiers better, safer, and more lethal. This administration has said many times, specifically in the last couple of days, that they want to build the largest drone and robot army in the world. That's one great thing that we think bodes well for us moving forward. We do have a good relationship. My other company that I'm on the board of, UMAC, actually has Donald Trump Jr. on our board as an advisor. They are really excited to bring U.S. manufacturing back into the United States in the drone space.

I just want to say, if we missed your question, I do apologize since we're trying to sift through everything here. We will continue to improve in this new format that we're digging into here. I think that will end our question-and-answer session. And Jeff, if you just want to have any final closing remarks, that would be great.

Yes. Let’s do a little recap here. We're pretty excited; we don’t have to talk about possibly winning an SRR anymore. It’s so nice not having to say that. We won a sole-source contract. We're getting some extra cash from that contract to do a few more features that we'll get in January. We'll start LRIP. We have the kick-off meeting for LRIP in January at Salt Lake City, which is great. I love seeing all these guys and just Hitchcock will be there taking care of that. We go from LRIP to full-rate production with the Black Widow, and now the Black Widow has a lot more capability. We just announced today artificial intelligence for the battlefield, visual navigation, no GPS required. Those same types of things will be going on the FlightWave. We have not spent nearly enough time on the FlightWave Edge 130. It’s a very unique and capable bird that has the best flight time out of anyone on the Blue UAS list. We’ll have a lot more updates, right after the New Year. So stay tuned for our Analyst Day and any news. I want to wish everybody a Merry Christmas and thanks for being on the call. I think we broke a record with almost 1,200 people on here at one point. So thanks everybody.

Thank you.

Thank you.