Earnings Call Transcript - RCAT Q1 2022

Operator, Operator

Ladies and gentlemen, thank you for standing by. Good afternoon and welcome to the Red Cat Holdings Fiscal First 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 1 hour after the end of the call through December 20, 2021. 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, sir.

Scott Gordon, President of Core IR

Thank you, Ellie. Good afternoon, everyone and thank you for joining us for the Red Cat Holdings fiscal first 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 Jeff 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 or 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 and Form 10-Q and the Form 8-K filed with the SEC today 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, September 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, Red Cat’s CEO. Jeff, please go ahead.

Jeffrey Thompson, CEO

Thank you, Scott. Good afternoon, and thank you all for joining our fiscal first quarter 2022 call and webcast. Also joining me today is Joseph Hernon, our CFO. The series of recent acquisitions we have completed, both in fiscal 2021 and 2022 thus far, are pivotal to the direction and outlook for Red Cat. The acquisitions of Teal Drones at the beginning of September 2021 and Skypersonic in early May 2021 position the company to compete effectively in the military and infrastructure inspection marketplaces, respectively. And both will add considerable contribution to our Enterprise segment. With the Teal Drones acquisition, we gained immediate access to the military reconnaissance and public safety applications markets for small UAVs. Teal’s Golden Eagle drone is one of just five drones approved by the Department of Defense. We are both invigorated and optimistic about the military contracts that we can now bid on. Additionally, the Golden Eagle is currently the only drone approved to fly on United States Air Force property. This is an important exclusivity and we intend to continue to leverage this competitive advantage moving forward. Teal drones are made in the USA and with the ban on drones and even drone components made in China coming into effect, this is another competitive advantage for Red Cat. Additionally, we continue to move forward with the DoD in the Short-Range Reconnaissance (SRR) program. And we are participating in the second tranche of that program. In fact, Dr. Allan Evans, our COO; and George Matus, CEO and Founder of Teal Drones are attending the program for advanced autonomous short-range VTOL CSO as we speak. After attending product one, we received notice approximately five weeks later. This could be a $2 million win for Teal and Red Cat. While we are working on securing government contracts, we're also aggressively scaling Golden Eagle production to meet the current levels of government agency demands. We are fortunate to be fully funded, and we plan on using some of our cash reserves as an internal investment to grow production capabilities. Turning to Skypersonic, we have an incredible opportunity to use drones to evaluate the structural integrity of enterprise and/or government structures or other assets, particularly in locations where there's high risk for human operators involved. Skypersonic allows for the execution of remote drone flights with operators anywhere in the world using patented technology that allows for tight space inspections, even in areas where GPS is not allowed or available. We've already received small purchase orders for pilot programs for our artificial intelligence platform that Skypersonic is building as part of Dronebox. We anticipate success in these programs as well as more substantial revenues for these services in the next 12 months. Also, we currently have outstanding bids on jobs in Europe with General Motors and other domestic government agencies. We're currently co-bidding on a project with partners in Italy that is approximately $8 million. And if we are selected, we would get the material portion of the award. Let's move on to the Consumer segment. I'm pleased with the performance especially given the adversity seen in the quarter. The global supply chain crisis resulted in being out of stock of our most popular items at Fat Shark and Rotor Riot divisions for over a month. Luckily, we anticipated the issue and minimized the impact. We are very excited for the fiscal second quarter because we have gotten ahead on inventory and expect a robust Christmas for Rotor Riot along with growing digital goggle sales from Fat Shark. Rotor Riot had a backlog of almost 100 ready-to-fly drones. We have quickly started building and are expected to be caught up now that we have the supply chain issues resolved. Fat Shark is also poised in Q2 to rebound with new products and proper inventory. We continue to perform strongly in the market, carving out our leadership position in the industry through acquisitions and performance. As we continue to execute on the expansion of the company, with it comes an expansion of our revenue and overall market performance. As Joseph, our CFO will talk about a little later, we recognized a 155% year-over-year increase in our revenues in our fiscal first quarter ending July 31. And we are extremely confident in our strong position to build large contracts, and execute on our roadmap, thanks to the $66 million in cash and equivalents on our balance sheet as of July 31, 2021. And with that, I'm going to hand the call over to Joseph.

Joseph Hernon, CFO

Thank you, Jeff, and to everyone for joining today. Our first quarter of fiscal 2022 was exciting and eventful in a number of respects. Our strategy to acquire synergistic drone technologies and platforms continued to move forward, as we completed our first full quarter of operations for Fat Shark, closed on the acquisition of Skypersonic in May, signed a Letter of Intent to acquire Teal in July and then closed on that acquisition at the end of August. Revenues, despite the challenges that Jeff described, still grew strongly in Q1 '22 compared to Q1 '21, primarily driven by Fat Shark. Like many companies, our gross margin and our availability of inventory to meet demand during the quarter was adversely impacted by higher shipping and fulfillment costs, in part related to the COVID-19 pandemic. All of our functional expense categories were higher in fiscal '22 compared to the same quarter in fiscal '21, reflecting the growth of the company as we integrated the Fat Shark and Skypersonic acquisitions. The largest increase in expenses was incurred in the category of general and administrative which were heavily impacted by our uplifting to the NASDAQ market, including the associated NASDAQ listing fees, securing D&O coverage to attract qualified additional Board members, as well as formally engaging a PR IR firm. While our net loss was higher in Q1 '22 compared to Q1 '21, we continue to efficiently grow the enterprise while controlling cash burn. Our adjusted net loss in the first quarter of 2022, which excludes non-cash expenses related to derivative liabilities and stock-based compensation, both to employees and service providers, totaled only $1.1 million in Q1 '22. We think this is an impressive accomplishment, considering that we were busy integrating Fat Shark and Skypersonic during the quarter. As most of us know, integrating acquisitions is often expensive. In summary, we were pleased with our operating performance during the quarter. We were equally pleased with our ability to strengthen our financial position during the quarter. In May, we closed an offering of 4 million shares of common stock, which generated gross proceeds of $16 million. In July, we closed the second offering of slightly more than 13 million shares of common stock, which generated gross proceeds of $60 million. It is important to note that we completed these offerings without having to include warrants, which is very typical for a company of our size. This enables us to avoid an overhang of future dilution. We ended the quarter with approximately $66 million in cash and equivalents. If you compare that amount to our adjusted net loss of $1.1 million for the first quarter of fiscal 2022, you can quickly understand why we feel so strongly and confident about our financial position at this time. With that, I would like to turn the call over for questions.

Operator, Operator

Our first question today comes from Ashok Kumar with ThinkEquity.

Ashok Kumar, Analyst

Good afternoon, Jeff. And Jeff, could you please review the short-term and long-run revenue opportunities? Thank you very much.

Jeffrey Thompson, CEO

Thanks for joining the call, Ashok. There's a lot to discuss, as I mentioned earlier. What's exciting right now is that we've ordered approximately 630 drone chipsets, enabling us to build over 600 drones that could be delivered in the next six months. If we engage distributors, this could generate around $6.5 million in revenue, and if we sell directly, it could bring in about $8.4 million from these drones currently under construction. Additionally, if we secure the second tranche, which our team is pursuing this week, it could add another $2 million to that figure. Therefore, in the short term, the next six to eight months could see revenue from Teal ranging from $6.5 million to $10.5 million based on what I've shared. We believe Teal is on the verge of significant growth, and our aim is to reach a specific monthly drone output that achieves breakeven. We're quite optimistic. Furthermore, Skypersonic is making great progress with its artificial intelligence platform. Initially, we reached out to a few customers to ensure it met our standards, and now we believe the product is ready to scale. We've received some smaller purchase orders for Skypersonic, and we are sending units out to companies. We expect that if they are satisfied with what they receive, they'll move on to larger contracts. Overall, we are in a strong position to ramp up revenue over the next six months.

Operator, Operator

Our next question comes from Kevin Dede with H.C. Wainwright.

Spencer Kirschman, Analyst

This is Spencer Kirschman in for Kevin. Congrats on a great quarter. I was just curious how you guys are thinking about branding and potential brand consolidation given the various subsidiaries?

Jeffrey Thompson, CEO

Yes, it gets quite interesting as some brands have a larger appeal than others. The Rotor Riot brand is very well-known, so we’ll maintain it as a standalone brand, and the same goes for Fat Shark, which has been a leader in the goggle space for eight years. These are brands we prefer not to alter. In the military sector, we are fortunate with Teal and its government contracting capabilities, as it has a strong brand presence. If a brand is well-known and gaining traction, we’ll likely leave it unchanged. People in the military may not recognize Red Cat, but they do know Teal Drones, just like Rotor Riot and Fat Shark. Therefore, we will be cautious in how we brand or rebrand companies we acquire.

Spencer Kirschman, Analyst

And I believe you're going to continue with that M&A strategy of just trying to acquire other drone manufacturers or software, whatever it may be. Can you provide any more color on that in terms of what you see in the space, in terms of that potential consolidation?

Jeffrey Thompson, CEO

Yes. As we focus on the DoD contracts we are targeting, initially five companies were eligible to participate in these programs; that number has now decreased to four, since Altavian has stopped pursuing after its acquisition by Teledyne. Therefore, we are one of four, which positions us well. We aim to ensure that we possess the best features to enhance our chances of securing these large contracts in tranche three. If there are any elements we believe we are missing, we will likely seek to acquire them, primarily in the software sector. However, our acquisition strategy may not be as aggressive as it has been over the past six months. We intend to concentrate on the LuGus deal now that we have finalized Teal, which provides us with an excellent simulation platform necessary for all our divisions. So, while we will still pursue acquisitions, the pace may not match the activity we experienced in the previous six months.

Spencer Kirschman, Analyst

And last question, are you able to provide any additional color on different DoD activities, like different kinds of projects that you may be looking at?

Jeffrey Thompson, CEO

Yes, some of the things that we're hearing right now specifically for this DoD, the pitch that we're going to this week, we’ve actually found out that it used to be just specifically for the Army. Recently, I've heard that they're adding the Marines and the Navy to this program, which could enlarge the contract awards next year. So we are basically already in almost every government entity and have Teal Drones there.

Operator, Operator

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

Jeffrey Thompson, CEO

Yes. Thanks, everybody. Hopefully, you survived this crazy day. But we're pretty excited and I just want to wish the team well, and I want to thank all the Red Cat employees from all the different divisions. It's going to be an exciting quarter. Thank you.

Operator, Operator

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