Draganfly Inc.

All right. To respect everybody's time and to get started on time, I think we'll begin. Greetings and welcome to the Dragonfly Q3 2022 earnings call. As most of you know, my name is Roley Bustos and I am internal investor relations here at Dragonfly. I personally welcome each and every shareholder, stakeholder, and analyst on our call today. Today's call will begin with our CEO and president, Cameron Chell, discussing the third quarter operational highlights. from there our CFO, Paul Sun, will discuss the financials as were reported earlier this afternoon. We will then conclude as usual with our lead director, Scott Larson, facilitating the Q&A portion. Remember, you're always welcome to reach out to me directly, investor.relations at dragonfly.com if you do not get to your question. Lastly, I want to remind everyone that this presentation may include forward-looking information and statements. These statements are not guaranteed that future performance and undue reliance should not be placed upon them. Any future events or financial results may differ from what might be discussed here. The full forward looking disclaimer can be found on page two of the presentation, and I'd be happy to send that to anybody upon request. So Cam, please go ahead.

That's great. Thank you, Roli. Welcome, everyone. We appreciate your time and consideration being with us here today. and others. Jumping right to the heart of the matter, we are pleased to announce that our 2022 Q3 revenue was $1.876 million, so just underneath $1.9 million, with product sales being $1.359 million and service sales being $516,000. We had a gross profit in Q3 of $626,908, which demonstrates a margin of 33.4%. At the end of September, our cash balance was $11.7 million. We are on budget as per plan and expect to continue with these results as per budget. around the expectations of our Q4 results and our year-end filings. Just as a quick overview, Dragonfly is the oldest, recognized often or usually as the oldest commercial drone manufacturer in the world. We've been in business since 1998. We've commercialized our first drone in 1998. And we are a total solution provider. So we are an organization that does not provide just an airframe or just a component of something that somebody in the drone industry, a customer needs. would purchase, but rather we provide full turnkey solutions. And we are able to do this, frankly, because of the amount of time that we've been in the industry, the bed strength and the experience that we bring to the table. As noted before, we're excited about this industry for a lot of reasons other than just being passionate about drones and what the impact will have on society, but also because today it's a $20 billion industry, which is primarily a military-focused industry in terms of those revenues, but it's growing to a $40-plus billion industry over the next number of years, and most of that growth will be in the commercial space, where Dragonfly is uniquely positioned We think to own significant market share of that growth. Operational highlights from the last quarter for us were in large part focused on the release and now the initial sales of our latest product lineup. We unveiled three particular new products, one being the Dragonfly Heavy Lift Drone, the Dragonfly Commander 3XL Drone, and the Dragonfly LiDAR system. These were actually announced at the end of Q2 and the beginning of Q3 and actually went on sale at the end of Q3. What's really important to note and probably the statistic that I'm most pleased about in Q3 is to look at our pipeline growth. And not just from, you know, from a very, very tactical and a very, very quantitative perspective, we can see where our order sizes are now going from, you know, ones and twos and threes in terms of airframes to tens and twenties and thirties in terms of order sizes. And I think this is for a number of reasons. One, the maturing of the industry, the ongoing clarity around regulation, and for us in particular, the actual now availability of these particular products. When we initially went public on July 31 of 2021, our use of proceeds was focused on building out our capacity to be able to meet the demand. which is still the overall constraint around our numbers growing. And we feel that by the end of Q2, we'll be at a spot where we can meet demand. And we'll continue to see growth obviously between now and then. And the other was the new product lineup. So the products that you see before you really are more sophisticated products than what I would suggest a number of our competitors are coming to market with. And I don't mean that in a poor way or a poor reflection on them. A lot of their markets that we're seeing is tends to be towards, you know, the small blue UAV or the smaller type drone offerings. And what we're finding is that what our customers and the customers we're dealing with, whether it's commercial, industrial or like military, are really, really focused on sophisticated central deployment. or payload deployment that tends to be a bit heavier. And so that's what really determines and dictates to us the airframes that we are building. And so you'll see that middle drone there. That's the 3XL, which we've now had at a number of trade shows. And we see our pipelines incredibly strong looking for this particular product. This 3XL is likely, in my opinion anyway, the most efficient drone in the market today. It is actually quite large. It's a few feet or two and a half feet square. Now, it's a 26-pound drone. and it can carry 24 pounds of payload. So it stays underneath the 55 pound threshold that still allows you to run under a part 107 license without having to get additional permits or waivers from the FAA. That's very important. The other really key component of this particular product is that it is a direct replacement for the DGI M600, which is their heavy lift drone, which has now been discontinued. We're seeing huge demand for this as a direct replacement for that. All the rails on this thing fit all the payloads that fit on the DGI. It's got a familiar type of feel to it other than it can carry a lot more than what it's replacing, and it still fits under that 55-pound threshold. So this application is everything from, again, light commercial, industrial, and right through to light military use. On the far left, you'll see the heavy lift drone. That's a drone that's about nine feet across. And that does require special waivers to be flown by pilots from the FAA. It has full autonomous capabilities beyond visual line of sight capabilities. as does the 3XL as well. And this particular drone right now is a little bit longer lead time, but we've got really solid demand in this and we're working on a number of BB loss certificates with a number of government agencies now in order to utilize this drone. This drone carries an extremely efficient and heavy payload and can be used for anything from additional medical delivery, cargo delivery, logistics for military and et cetera. And on the far right, you'll see our LiDAR system there. So this is a LiDAR with such accuracy that typically before it would have to be flown on an aircraft. And so we're now seeing a generation of LiDAR that's able to fly on a drone. And again, because so many of our customers are coming to us, not necessarily looking for a particular airframe, they're looking for a solution. What the demand demonstrated to us is that we actually needed to provide a turnkey solution around a LIDAR and a drone system, and that's what you see on the far right-hand side. And so while this last quarter was really focused on product, it also really focused on our internal sales process, the integration of our ERP systems that we had installed this year, the integrations of our CRM systems. and ultimately what it means is that we now have greater inbound traffic driven by our PR, our IR and our customers to our website than we've ever seen. So we're collecting incredible data about what we should be building, how we should be building it, when it needs to be deployed. So the whole maturing of the business right now is probably the thing that's most excited to me. The demand in the market has always been there. or has been there for a number of years, constrained either by capacity or moreover by regulation, both of which are opening up at a really nice pace right now. I've already spoken to this a bit, but what's really cool to see is that we now have a significant wait list that's growing, in particular for the 3XL drone. And we think this is going to be a particular runaway product for us over the course of the next year because it's replacing a large install base of products that's out there with a higher degree of efficiency and a greater degree of sophistication and a wider range of payloads that can be used on this particular drone. Again, whether it's light military or drone as a first responder for public safety, or whether it's carrying chainsaws up mountains for firefighters, this thing has got all kinds of applicability and people on the waiting list now, which Paul Mullen has things in full production. I think a couple of other things on the product side which are noteworthy is that we did unveil our product, our Vital Intelligence product, which was born out of the pandemic to the California Probation Parole and Correctional Association at their training conference, and we see Greenberg, Paul Sun. and others to be able to do touchless vital signs. This isn't a simple thermometer temperature reading. This provides heart rate, respiratory rate, blood pressure, blood oxygen levels and those types of things. And the ROI on this is that it speeds up the intake process. It also requires a different type of less expensive personnel in order to run it. So this is something that is really starting to take off for us in directions that we didn't necessarily expect, but is doing quite well. That same technology is being integrated and has been tested obviously on drones as well. So if we think about the applicability of this for search and rescue or for military operations, or reconnaissance operations to understand troop conditions and things like that. The opportunity around this particular technology will continue to grow. We're really excited about what's been unveiled here in the last quarter on it. I think it's worthy to note that, you know, understanding our product positioning to our shareholders and stakeholders, we think is an important thing. So down in that bottom left corner, you know, that's where you would see maybe a greater amount of consumer drones or even prosumer drones or a number of the DGI type or parrot type of products. and those would even be the small kind of like the blue UAS type drones that are going into some of the military units and such. But as you move further up into that top right-hand corner from the bottom left-hand corner, you start moving more to autonomy, artificial intelligence, sensor awareness, are really important in the commercial and military space. These are all systems here that we have built or worked on or that our personnel have worked on. And so you see the vast majority and continue to skew in the technical sophistication area. And that's where we're going to continue to push We've seen this three or four times now over the last at least my 15 years and probably for some of the other employees who've been around even longer than that. I've seen at least three cycles of this where we've seen new entrants come into the market and they all tend to go down to that smaller airframe. They all tend to push into what I would almost consider a prosumer space. We're seeing right now where that is getting very crowded very quickly. Once again, we're not going to go into that space. We're going to stay up in this upper quadrant. Now, this upper quadrant is a bit more regulatory dependent, but the whole industry is regulatory dependent now. We feel it's an opportune time to continue to push and move in this direction. Also, we wanted to just provide an update on some of the work that we've done in the Ukraine. Strategically, we believe, or at least our realization around work in Ukraine, is that in the coming years in particular, in the light military and in the commercial and industrial space, If you weren't present in Ukraine, if you did not have operations in Ukraine, if you were not in there learning, developing, improving your products, your services, your techniques, your training, all of that type of stuff with the various players and stakeholders in that environment, you're going to be asked why in a couple of years from now, why you weren't there. From a perspective of like... Excuse me. That's where all the best pilots are coming out of. It's where all the new techniques are being learned. It's where the new technology is getting battle tested literally very quickly. And so as we are what we're now already seeing in our international business, you know, whether it be India or the Middle East, one of the first questions they ask is, are you in the Ukraine? What are you learning from Ukraine? What is your equipment doing there? And because we have demonstrated the ability to be in there, in that theater, and we've put people on the ground over there and we're working hand in hand with customers, we are able to speak very, very credibly with not just those international partners, but the customers that we're talking with back in North America as well. So Ukraine to us is much more important than just the immediate revenue sales over the next number of years. which appear to be trending towards being very, very significant. We'll talk about a couple of things in that regard. But more importantly, as a company that is a focused and dedicated drone organization, what is it that you've learned? How have you been there? What credibility do you bring to the table from having been there and what have you learned? I certainly know from our organization, we've accelerated in terms of our insights, our abilities, our capabilities because of the work that we've done there. So specifically, we've done medical response drones, which are really in many respects becoming a logistics drone that can also deliver many other types of packages in theater. We have done reconnaissance drones in the area and we'll continue to do more and more of that. The other area that was not planned but has really come across and is a massive market is landmine detection. It's going to take 20 years to demine Ukraine, just Ukraine alone. For every day of war, there's 30 days of demining that has to happen. And there's hundreds of millions of dollars of budget per year that's required to do that demining. And this isn't demining in remote regions that people are not living. I mean, this is city urban centers. It's areas around cities. It's areas lining cities. The Rivers. It's agricultural land. It's the industrial land. It's just unbelievable the amount of mining. And in fact, the entire offensive right now where we see Russia pulling out of Kherson, actually the only thing that's delaying that from even happening faster, we see it happening now but from a couple weeks ago, is all the mines that were laid. So there's a big, big push in this area, and we've got some very exciting news coming up in that regard. with the amount of work that we've done, the sensors that we have, the flight and testing facilities that we've built, et cetera. So along that area, too, I think it's also important to note that we are in country there. We have working relationships with industry, with ministry, with civil departments on all and many, many different levels. And if you're not willing to be there doing the work, you're not going to get the work. And so the fact that we have been there and made that commitment and the relationships that we built there, we think is going to garner us years and years of work, not just during this very unfortunate time, but during the rebuilding process for not just Ukraine, but all of Eastern Europe and the inroads that that's now actually giving us into the European market, the credibility in the MENA region and in India as well has been really significant. So this is an unfortunate conflict, but for a company like Dragonfly, it will turn out to be an incredible opportunity for us to further develop our At this point, I'd like to turn it over to Paul Sun, our CFO, to run through our specific results for P3, and then we'll go to some Q&A from everybody led by Scott Larson. Thank you.

Thanks very much, Cam. Appreciate it. Yeah, so just looking at this slide here on the left, you basically see a caption of the income statement. It's a snapshot of Q3 revenue for the third quarter, as Cam mentioned, was, you know, $1.36 million of products and $516,000 coming from drone services. So basically it was a flat quarter, just down 1.1% year over year from the same period. Greenberg, and Paul Sun. as you know, the sales mix varies from quarter to quarter. And then the total comprehensive loss for the quarter was 4.99 million compared to income of 23.9 million in the same quarter of last year. And for those that follow us know that there's an accounting treatment where there's a non-cash change and fair value derivative that's included in these numbers. So in this quarter, the non-cash gain is 305,000 from that derivative liability. So the comprehensive loss would have been $5.3 million. And if you X up the non-cash change and fair value of derivative liability from the same period last year of $30.6 million, the loss would have been $6.6 million. So the year-over-year improvement in the loss was mainly attributed to a decrease in insurance, professional fees, slightly offset by an increase in wages as the company scales. The loss per share would be approximately $0.16, including these variations, so it is as reported. Switching to the middle table, which is the balance sheet, you can see our total assets are at $29.4 million for the quarter. The deployment of cash and reduction of prepaids is probably the main contributor for the assets there. Working capital surplus as at September 30th, 2022 was $18.5 million, would have been a surplus of $18.9 million. And shareholder's equity would have been $27.7 million versus the $26.8 million shown here. Again, if we X out that non-cash fair value of derivative liability of $391,000. and we continue to have minimal debt on the balance sheet. As Cam mentioned at the outset, our cash balance at the end of the quarter was 11.7 million. Now looking at the last table on the right, we just spoke about year over year changes. So now we'll talk about quarter over quarter changes, looking at Q3 this quarter compared to Q2 of last quarter. So revenue for Q3, again, was 1.8 million compared to 2.37 million for Q2 of 2022. Mainly reason here was there were some lower product sales due to expected timing. So, you know, again, things just where the dates land, sometimes it'll, you know, it'll get pushed into the fall quarter. So we think that's, you know, what happened here. On the gross margin percentage, Q3 decreased to 33.4% compared to 42.8% in the second quarter of this year. Again, the decrease is due to the sales mix of the products sold. Operating expenses for the quarter decreased 2.4% from Q2 of 2022, in part due to lower professional fees and insurance costs. and finally on the total comprehensive loss for Q3 2022, we mentioned 4.99 million was the loss compared to a comprehensive income of $640,000 in Q2 of this year. And again, you'll recall a non-cash change in fair value derivative of 305,000. So if we X that out, Q3 would have had a comprehensive loss of 5.29 million compared to a loss of 5.45 million. Millian, and Q2 of this year. So making this quarter's loss slightly better than that of last quarter. And with that, I'll pass it back to you, Ken.