Draganfly Inc.

Okay, we have still some folks starting, but to respect everybody's time, I think we will get started. So greetings and welcome to the Dragonfly Q1 2022 earnings call. Though our last call seemed to be so recent, much has happened within our company and around the world, even in the past few months. My name is Rolly Bustos. As most of you know, I'm the head of internal investor relations here at Dragonfly. I personally welcome each and every one of you and thank you for joining us today. Today's call will follow the same format as previous ones, which means it will start with our CEO and now our president, Cameron Chell, discussing first quarter operational highlights. From there, CFO Paul Sun will jump in and discuss the financials as were reported earlier today. We will then end with our lead director, Scott Larson, facilitating the Q&A portion. While we'll try to address them all, I apologize in advance if time doesn't allow us to do so. I've already talked to so many of you, but remember, you're always welcome to reach out to me anytime, investor.relations at dragonfly.com. So without any further hesitation, Cam, please go ahead.

Hi, everyone, and thanks very much for taking the time to be with us today. We appreciate your consideration and your graciousness in terms of looking at Dragonfly as an investment, and hopefully, as we expect, it will work toward being the number one or number two player in the North American drone space in the coming years. I'm just going to do a share screen here and take us through the presentation. So this will be review for some of you and certainly for some of our new shareholders. Hopefully give you an orientation point of who Dragonfly is and what we are endeavoring to do. So Dragonfly is a leading and rapidly growing drone manufacturer. In fact, certainly within the industry, we're known as the oldest commercial drone manufacturer in the world. We've been manufacturing drones since 1998. We got a start in the drone industry really focusing on the public safety and services business by attaching thermal cameras to drones and providing them to search and rescue teams in order to look for heat signatures. And in fact, a Dragonfire drone was the first drone that was ever credited with saving a human life. And today, that drone sits on permanent display in the Smithsonian. And in fact, even recently this week, I got a some pictures in the text from a shareholder who was in North Carolina at a police museum, and they actually had old Dragonfire drone controllers in the police museum as the first drones that were used in public safety and public service. So we have a rich history and an incredible bench. And I think what's really important to note there is that in our 24-year history, we've only had two employees that have left. and one of them retired. One of them was stolen by Google a number of years ago. And so that the culmination of the expertise that we are able to bring to the table, not just from an engineering perspective, but from an industry and a relationship perspective, is something that's really propelling us forward in the market today as it opens up. We also have a very strong artificial intelligence bench and software bench. Many companies today are producing some great hardware, but we were producing hardware in the 90s and 2000s and really producing software in the 2000s and really focusing on AI and autonomy. in this last decade. And those are the spaces that you have to be in if you're going to win in the drone industry today. So we have a strong IP asset base as well. We have 24 patents. Basically, we have 24 patents because we're 24 years old. And each year we bring out one more patent. We have hundreds of pieces of IP, but it's a bit more of a cultural thing for us when we put our engineers' names on the patents that they so deliberately should be there. and, you know, we bring out something that, you know, is used within the industry. But, you know, basically when you bring out those patents, everybody else is kind of copying them. We're doing iterations of them right away. So we really rely on that as a credibility piece with our customers and demonstration piece for our culture. But it's really all the other hundreds of pieces of IP that we keep as trade secrets that really help us have a competitive advantage with our customers. We are really strong in new product development. And we'll talk a bit about that on today's call. But our new product development is driven by customer demand. So we're not a shop that's building things necessarily on spec. We have a very good idea of what's going to be happening in the next few years in the industry. So we know what we need to be prepping for. But if we don't see customer demand really pushing in that direction, if we don't see our relationships on a regulatory basis pushing in that direction, we won't invest in technology just because we think it's cool. We're data-driven, and we're really focused on what our customers want. The underlying premise of the drone industry today, as opposed to the last 20 years that we've been in it, is that it is finally scaling. One of the reasons that we have been a small company up until this point is that the industry just wasn't scaling. And so when we think about all the fantastic companies that were in this industry, the 3DRs and the Air Lilies and the Airwares and the list goes on, all of which those companies at one point had tried to buy us. But the reality is none of them are in the drone business or even in business today because Greenberg, and Paul Mullen. that then is now opening up budgets for companies to look toward how they're going to use commercial drones. Literally within weeks of that announcement coming out from the FAA a couple of years ago, you know, I went from spending my days, you know, diving for dollars quite basically, you know, grinding it out for customers to really being overwhelmed with inbound orders. Now, one of the reasons that we were overwhelmed with those orders is simply because we had so many years of customers that have been looking toward these rulings of this guidance coming out. And as soon as it came out, the phones were ringing because they wanted to get going on their projects. It's taken us about a year and maybe a year and a half to tool up, to build our capacity, to meet that customer demand, which is why we did the public offering that we did. And we're finally at that point now where we're starting to see that scale come to fruition. The other thing that happened, both from a sentiment and a policy basis, is really the advent of the recognition that nothing collects data better than a drone. And because of that, security is paramount. So there's great concern over the foreign manufacturers and the possibility of their data collection or the use of the data that they do collect. And so North American manufacturing, security protocols, clearances are all incredibly important. And with our rich history and 24 years of service to the public safety and to our military contracting community, you know, we have those credentials. And that's another reason that we're starting to see scale. And it's a strategic differentiator for us. A lot of the new drone startups or even if they're not Starbucks, but, you know, companies have been around for four or five, six years. They just, you know, they're still building hardware and all credit to them. And they're still figuring out how to get those clearances and build those relationships. And they're doing a fine job of it. We just have the advantage of having 20 years of having done that. So our business model and growth strategy is pretty simple. We like to keep it basic. At a base level, we do contract engineering for military contractors. And it's great business. It's high margin. It's low volume. But what's really important about that is that it helps us really build our engineering bench. It helps us attract the best talent in the industry. One of the reasons that we've been able to keep our talent for so long, we get to work on really incredible projects, blood delivery on the battlefield or counter drone technology, autonomous and AI type of technologies that have we been now working with for, in some cases, a decade, which are now only starting to become prevalent in the commercial market. We have a full product development and sales arm. We have a full contingent of products, multi-rotor, fixed wing, heavy lift, lidar, controllers, ground robotics, sensors, software, AI. We can provide an end-to-end solution for those all-important Fortune 5000 customers and government agencies that are really important to us and where the business is scaling. We have full flight services. We have some of the most experienced pilots in the world. We recruit heavily out of the military for our pilots as well. We do mapping. We do survey. We do data collection. We do delivery. We have experience in all of these areas. And all of these are incredibly important from a service perspective and from an infrastructure build and from a utilization of the products that we provide. But long term and probably most important is our data solutions. So when we go to work for companies, you know, most companies today are already not caring about if your drone flies 10 minutes longer or a thousand feet higher. What they really care about is, is the job getting done? Is the data being collected? And when we deliver terabytes of data, whether it's LiDAR data, mapping data, environmental data, whatever the case is, to customers more and more, they're asking us to house that data. They're asking us to analyze that data. They're asking us to manage the security permissions around that data. So we have an AWS type of infrastructure that is growing for that data acquisition. And I would suggest that in coming years in some industries will be one of the largest data repositories for those particular industries in the world. And that is the power of where Dragonfly is going. In terms of our products and services, as I mentioned before, we've got fixed wing, we've got medical response drones, our whole DFR drone as a first responder aspect of our business is growing immensely right now. We do view ourselves as world leaders in that space and we'll touch a little bit on that in terms of what we're doing in Ukraine in particular and other parts of the world. We have full fixed wings and we have vertical takeoff and horizontal flight drones as well. In terms of flight services, we're very specialized in mining, agriculture, forestry, and power lines, or long-form infrastructure, which would be power lines or pipelines, for example. In each of these areas, we do have a strategic differentiator, usually based on our software or our AI or in our analysis, so we can provide information back to these companies that other flight service organizations can't. and those are the types of things that we will continue to do in order to build modes or strategic differentiators around our particular flight services. We have a full AI solutions bench and software. And so we're able to build and do things with drones that simply a lot of other companies just can't. Most notably, our drones can read things like heart rate, respiratory rate, All critical components when you think about drones that are working in humanitarian aspect or search and rescue. At this point, what I'd like to do before we get on and talk about some of our customer highlights from this last quarter is I'd like to turn it over to our CFO, Paul Sun, to talk about our financial results.

Thanks very much, Ken. So looking at this slide here, if you look at the left table, that's basically a An income statement. So for a quick snapshot of Q1 2022, you'll see that revenue for the first quarter was up 32.8% to just over $2 million, up from $1.53 million in the first quarter of 2021. First quarter revenue comprised of $1.64 million from product sales with $406,000 coming from drone services with the balance coming from engineering services. You'll see that gross profit increased by 301,000, or 58.5% this quarter over the same period last year. And gross margin as a percentage of revenue was 39.93% this quarter versus 33.4% in Q1 of last year. And this was just primarily a result of more sales coming from higher margin products versus those sold in Q1 of last year. Total comprehensive loss for the quarter was $6.29 million compared to a loss of $44.91 million in the same quarter last year. But for some of our investors that have been with us for a while, they'll recall that there's an accounting treatment where a non-cash change in fair value from derivatives are included in these numbers. So in this quarter, there's a non-cash expense of $1.2 million from the derivative liability along with a non-cash recovery of $771,000 from a receivable. So the comprehensive loss would have been $5.83 million. And if you X out the non-cash change in fair value of derivative liability of $41 million from Q1 of last year, the comprehensive loss would have been $3.9. So the year-over-year increase in loss was mainly attributed to an increase in office and miscellaneous expenses and professional expenses. following that loss per share would have been 18 cents versus the reported 19 cents. Now looking at the middle table, our balance sheet, you'll see that total assets decreased by from 42 million to 37.59 million from the year end, which is largely due to the deployment of cash and it's offset by the recovery of a receivable. The working capital surplus as at March 31 of this year was $21.4 million and would have been a surplus of $28.2 million with shareholders equity would have been $36.2 million versus the $29 million shown here if we X out that non-cash care value of derivative liability of $6.8 million. And you can see that we continue to have minimal debt. Our cash balance as at the end of March was $19.6 million compared to $23 million as at the end of December. and now focusing on the right table, we just spoke about the year over year changes. So here we'll talk about the quarter over changes between Q1 of this year and Q4 of last year. So Q1 again, we did 2.04 million increased by 25% compared to 1.64 million for Q4 of last year. And that's just basically due to stronger product sales for this period. You'll see the gross profit Gross margin percentage was increased slightly to 39.9 compared to 38.8. Again, that's due to sales mix, but pretty much steady. Operating expenses for Q1 increased 7.7% from Q4 of last year, in part due to higher marketing and investor relations costs. and total comprehensive loss for Q1 of 2022 was 6.29 million compared to a comprehensive income of 12.64 million in Q4 of last year. And again, you'll know that that includes a non-cash change in fair value of derivative liability of 1.23 million and that recovery of a note receivable of 771,000 versus What we saw in Q4 of $23.4 million. So again, if we X those out, Q1 would have had a comprehensive loss of $5.83 million compared to a loss of $10.8 million in Q4 of last year.