Draganfly Inc.

All right. To be respectful of everybody's time, I think we will get started. So, greetings and welcome to the Dragonfly 2023 Q2 earnings call. My name is Roley Bustos, and I'm internal investor relations here at Dragonfly. We appreciate you all for joining us today. We will start as usual with our CEO and president, Cameron Chell, discussing the second quarter operational highlights. From there, our CFO, Paul Sun, will discuss the financials, and we will conclude the lead director, Scott Larsen, facilitating the Q&A portion. As always, you're welcome to reach out to me at any time at investor.relations at dragonfly.com. 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 on 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 this presentation and I'd be pleased to send that along to anybody upon request. So Cam, please go ahead.

Great. Thanks, everybody. Appreciate everybody being here today and taking the time. First and foremost, I'd like to thank our employees and team members who have done an amazing job this last quarter on taking Dragonfly to the next level with all of our customers. Second of all, I'd really like to thank our customers and clients who have taken the time to believe in Dragonfly and allow us to help them in their endeavors. And foremost, I'd like to thank our shareholders for your trust in what we're building here. I'm just going to do a screen share here to run through our highlights for the last quarter. A couple of things noteworthy of mention is that our revenue for the quarter was $1.899 million, so just shy of $1.9 million. That's $1.5 million in product revenue. and $317,000 in services revenue for the quarter. Slightly down on the quarter on the services side, primarily due to resourcing as it relates to some additional build-outs that we were doing with our facilities and certainly looking forward to our Q3 and Q4 results as our second plant comes on stream or our new plant in Saskatoon comes on stream Here at the end of August. So thanks to all of our shareholders for your trust and belief and patience in allowing us to grow to this point where we're able to ramp up production to meet demand. We had a gross profit of $467,000. So that's down slightly. As a percentage, again, because we did a little bit less services and solutions revenue this quarter, which we expect to see quite significantly different in the coming quarters. And then we have a cash balance at the end of the quarter of $6.7 million. So we're on budget and feeling quite confident about our performance in terms of what we've done. This is where we projected to be. and fortunately we're seeing the market react in a manner in terms of demand and us meeting that demand in a responsible manner as we had expected. Just a quick overview in terms of the drone industry and some of the changes and evolutions that we are seeing in the market today. Let me just hide that. Okay. And so, first of all, you know, what a big, big driver in this industry is the regulatory shift or evolution, if you will. And so, again, we're seeing a stronger and stronger move towards North American manufacturing. North American Security and North American Solutions for a number of reasons, not just security, but also quality, quality control, supply chain, et cetera, et cetera. And so where we're now at with Dragonfly is that we have a manufacturer with two very well strategically positioned plants in North America. A brand new plant coming online at the end of August to join our new facility that became available at June. And so what we did in the last quarter is basically we brought on our June, our facility in Burnaby. and then we're able to take down the Saskatoon facility, moving into our brand new building, our brand new facility, expand capabilities while our Burnaby facility was able to maintain where things are at and as Saskatoon comes up on stream, basically significantly increasing, well more than doubling or well beyond that our capacity and capabilities as well as our additional features that we can now build into our products. We should see some great scaling happening going forward. But really important that these are North American managed, controlled, all the way from cyber right through to the actual manufacturing capabilities and processes that we've got. Really, really important to the customer base that we have. We've also seen as a key industry driver in this last quarter, Accelerate, the FAA and Transport Canada streamlining regulatory environments for drone operations. It was about three years ago that the FAA in particular came out with new regulations around BB loss. And listen, there's a lot of regulations within the drone industry, but BB loss or SFOC in Canada, which is Certificate of Advanced Operations, are really the key, key regulations that everything else kind of builds around. And we saw significant streamlining both from the FAA and Transport Canada in this regard. And I think these are probably more significant than even the initial BD loss type regulation that was introduced about three years ago, which really started, and the industry rolling on total merit. And so in that timeframe alone, we've already been authorized or we've already been granted to SFOC for beyond visual line of sight and advanced air operations, which we'll talk a little bit more later on. But really great to be able to see these things be able to be granted inside of a quarter as opposed to at times where they can take six or nine months in the past. Advanced technologies are creating incredibly efficient business models, and we're starting to see more and more of this. And so the artificial intelligence and data analytics capabilities that we have, as well as our data solutions and storage facilities, are really, really starting to pay off in terms of inbound and our ability to differentiate between what we do in terms of just producing airframes but actually providing total solutions. and our Vital Intelligence product line has really been an example of this, in particular in terms of artificial intelligence and machine vision. So the adaptation of new markets by verticals, utilizing different drone types. I think it's worthy to note that our medical supply delivery drones, our first responder drones, and a great partnership that we had that came to fruition over this last quarter after a year of hard work with ChromoDrone in terms of outdoor advertising with drones, which has really been effective, but also a dual use for public safety and emergency management. Dronap adoption in the defense industries. It's just staggering that basically now everything from 5,000 feet down in terms of air dominance is all drone. It's all small drone. It's not even large predator or reaper-type drone. It's all small UAS. And so we're very well positioned there in terms of our product service lines and our experience. We've got active operations in Ukraine. We're doing demining work, surveillance work. and training as well, which is really putting us at the forefront on many, many areas in terms of, oh, if you guys know how to train and fly in these areas and these environments, you know, the experience that we get that then translates back into our product engineering and design and production, again, is really starting to bear fruit for us in our pipeline. So I want to talk a little bit about our product and capabilities because I do think this is a differentiator for us in the market. in a very meaningful way. On the bottom left, you'll basically see toy drones, right, bottom left corner. And those are consumer, manually operated, fly-by-stick type drones. And, you know, up at the far type right, those would be, you know, fully automated military artificial intelligence-based type drones. But you can see that all of the work that we do tends to skew up into that area. and the drone industry in many respects is either about saving time, money or lives. One of those three things. And in order to do that, you need industrial quality, automated artificial intelligence capabilities. And with the 25 years of experience and bench strength that we have, were very well positioned to be able to evolve with this market. And this is the market that will really see the inflection point happening over the course of the next year to make this industry truly the multi-billion dollar industry that it has promised to be. What you'll see there is in yellow, those are the systems that Dragonfly employees have worked on. The actual blue dots are systems that we've done contract engineering for with the primes, the defense contractors. And then the black dots, those are actual drones and systems that we manufacture. And you'll see more and more of those black dots showing up. over in that top right corner. We have the distinct opportunity and advantage to be able to be building our product lines, which I'm really excited about what's coming out next quarter, around customer demand. And that's a big difference for us. We're not building things on spec. And so we've been able to scale our operations significantly. Greenberg, Paul Sun Every other North American drone company has gone out of business. We've never tried to scale in the past. And this is the first time that we're actually scaling up because we've seen the demand, we've got the capabilities, and there's actually a real market that's developing here. So it's just an incredibly fruitful time to be in this space and positioned where we're at. So we're very grateful for that. I'm talking specifically about the highlights of some of the products right now. On the far left side, you've heard us talk probably quite a bit about the heavy lift drone, which is a multi-rotor VTOL capable of carrying 30 kilograms or over 70 pounds. And this has got unbelievable traction in the market right now. We have tooled up to be able to start to put this into production. We have been taking pre-orders on it. and then in the bottom left corner there, the Commander 3XL. This has really become our signature drone. It's the Swiss Army knife of drones. It's got dozens and dozens and dozens of payloads that fit on it from different manufacturers that we've already integrated with it. and I'll talk a little bit more about some of the applications on it in just a second here. I did want to highlight our LiDAR system as well. And again, this is something that, you know, we don't just make airframes, we make total solutions. And this is a LiDAR system that previously given its weight and power, needed to fly on a helicopter. And so this is now a system that can fly actually all the way down to our 3XL drone. So the cost savings in using this LiDAR system is incredible. The advantages it gives us over other organizations that are trying to fly LiDAR in terms of our services is really distinct and important to us because it enables us to capture data and provide data analytics and storage back for our customers in a meaningful way. So while we sell this particular product out into the market, the real differentiator for us here is this is a service differentiator where we can do certain missions that other organizations just simply can't do. And we're going to continue to work on those types of solutions. We're very focused on what are the strategic differentiators for Dragonfly. And being able to do what we do end to end gives us that capability. At the end of the day, you know, the majority of the drone industry is about data, even though obviously things like delivery are incredibly important and a significant piece of it. But the data in this industry really, you know, will probably account for about 80% of the value that's created. So we're going to continue to skew towards data. But on the delivery side, I think it's important to note that we just introduced two new payloads that we have engineered for the Commander 3 XL. Actually, these will work on the heavy lift as well. But one is the drop-down winch system. So the drop-down winch system has some incredible engineering capabilities Greenberg, Paul Sun. and then right below that you'll see our quick release box. Now the boxes that we have tended to focus on in the past and we're seeing great demand for have been in the medical delivery side of it. So our differentiator there is that they're thermal managed. And so we can deliver things like pharmaceuticals and vaccines and organs and blood and such. and many more. or into tight spots where you can't get landed or emergency situations or just typical delivery, you've got multiple options with precision surveillance and aiming camera on the base of this actual unit. and then coming right down to the middle there, the Starling X.2 drone. This is a collaboration between Promo Drone and Jamar, the CEO and his team over there have just done an incredible job with this product. The 3XL was made to be able to carry this payload with the incredible battery capabilities and lift capabilities. So, you know, originally this was designed as an advertising platform, but there's been, you know, tremendous demand in emergency management services, and I think that'll probably be their biggest market. So it fits in really well with what we've done. It's been a great collaboration, and Promo Drone's been a fantastic customer for us. I know they're taking pre-orders on it already. They've got very strong demand, and, of course, that translates very well to us selling more and more of this equipment, not just the 3XL. So we're very grateful to Promo Drone and the work that they've allowed us to do with them. Some operational highlights, DEFC, who is a very strong partner of ours over in the Ukraine. We've expanded our joint UAV operations with them, and they are deeply involved in both the civil and the defense sectors. We now have capabilities for increased inventory and repair. and logistics within the country, which is incredibly important. So it's one thing to be able to deliver drones and some sort of drone capability into the country. But when you look at when larger orders are being adhered to or asked for, the logistics now are really important. And not just the logistics, but the training. So, you know, the amount of drone activity that's happened over in Canada, Feeder there has now started to lead to a maturing of standard operating procedures. So that in the command and control structure, you actually know what drones you have, what capabilities they have. And up until this point, it's been a hodgepodge of just whatever anybody can get into Feeder, which makes it very difficult to do plan strategy and a number of tactics. But what we see now is a maturing of this. And that maturing really is skewing the purchasing decisions and the tactical decisions to organizations that can provide a consistent, not just supply, but a consistent product that fits within a standard operating procedure that we now had the great fortune of being a part of helping design, which we'll talk a little bit about. More about here shortly. At the World Police and Fire Games, we were able to unveil our precision delivery system, the winching system and the box. We're a proud sponsor of the World Games, and we're able to carry the closing ceremony flag and turn that over to Birmingham, Alabama, which the next World Police and Fire Games will be at. We did receive a special flight operation for advanced operations and delivery over people in order to do that particular mission. It was a big success and really helped demonstrate to a number of our customers some of the additional capabilities that our winching system has. and Delivery Systems do have. So Transport Canada did also grant us another SFOC for Beyond Visual Line of Sight operations above 400 feet for wildfire suppression operations. And we'll talk more about that in the coming quarter. But that has been a big area of growth for the drone industry in particular. And we're very proud to be a part of that. And that's all we'll say about that at this point. The other thing I did want to mention that isn't in the operational highlight but is in our press releases is the deal that we have done with Heel Corp and the Ukrainian National Academy of Internal Affairs. So the MOI is the organization that is much larger than the MOD, as a matter of fact, in the Ukraine. and the MOI oversees everything from the National Guard, certain aspects of Presidential Guard, Special Forces, Emergency Services, Police, Border Patrol, et cetera, et cetera. So we're training up to 1,000 new pilots per year with them on Dragonfly equipment and Dragonfly payloads. So obviously great exposure for Dragonfly and the whole procurement process. Really, what's important there is, listen, the best drone pilots in the world right now are in the Ukraine. We're not going to be teaching anybody how to fly Better Stick or operations over there. But what is important about this is it's a formalized system to develop curriculum around standard operating procedures, which gives us incredible insight into how to design our product for that particular theater and or other theaters that are similar to it. We've already seen this type of experience. both very well for us in our pipeline as it relates to incoming sales. Nobody, again, wants to be putting equipment on scale into any type of theater unless they know the capabilities and there's a standard operating procedure for all of the assets they've got in that particular environment and they know how they can deploy them, repair them, and what operational capabilities they have. These are a lot of the things that, you know, when you think about the drone industry, you think, oh, who can lift more or who can have longer battery life or those types of things. But it's really more about how do you integrate operationally so that you can have successful data collection or delivery. So, again, super, super proud of our teams, in particular in Ukraine, who have been going above and beyond in order to serve their cause. I touched on this slightly already, but obviously our production capacity, which has been next to sales, well, in fact, in front of sales, this has been our focus. So, as mentioned before, we brought Burnaby on in June. We slowed down Saskatoon. We have a brand-new facility that's very close to being operational, and as that becomes operational, We're going to be able to meet demand, and I think we're looking for some pretty nice results in the coming quarters due to that. Like I say, we do have very good revenue visibility at this point, and so, you know, tough strategic decision not to push numbers harder sooner, but very, very pleased what that means in terms of how we'll be able to scale. What I'd like to do now is turn it over to Paul Sun, our CFO, to review the financial results.

Paul? Thanks, Ken. Thanks, everyone, for joining. So we'll look at Q2 here as a year-over-year comparison on slide nine here. Revenue for the second quarter was down 19.8% to $1.9 million from the $2.37 million in the second quarter of last year. Second quarter revenue, as Ken mentioned at the outset, and Paul Mullen. Gross margin as a percentage of revenue would have been 31.1%, down 11.7% from Q2 of last year. Again, this was a result of more sales coming from products that generally tend to have a lower margin than that of services. Total comprehensive loss for the quarter, $6.9 million compared to a comprehensive income of $640,000 in the same quarter of last year. This quarter includes, as mentioned, a non-cash charge of a write-down of inventory of about $122,000 and otherwise would be a comprehensive loss of $6.76 million. However, in the same quarter of last year, the income had a gain in fair value of derivative liability of $6.1 million, so it would otherwise have been a comprehensive loss of $5.45 million. So the year-over-year increase in loss is primarily due to the decreased gross profit that we talked about and slightly higher SG&A. Now on slide 10, we look at the quarter again, but since we just went through the year-over-year changes for the quarter, here we'll focus on the quarter-over-quarter changes between this quarter, meaning Q2, and that of Q1 of 2023. So revenue for Q2 increased by 19% to $1.9 million. compared to the $1.6 million that was done in Q1 of this year due to both higher product and sales and services. Gross margin percentage for Q2, again, was 24.6 due to that inventory write-down that we talked about and otherwise would have been 31.1% compared to 27.7% in Q1 of this year. So, hence, on an adjusted basis, gross margin would have been up and Paul Mullen. So excluding that, Q1's 2023 loss would have been pretty much unchanged at $7.1 million. So our loss this quarter was actually a bit better primarily due to higher revenues quarter over quarter. On the next slide, slide 11, you can see our total assets decreased from 14.6 million at the end of last year to 12.7 million, which is just largely due to the use of cash. Working capital surplus at the end of this quarter was 7.5 million versus 10.1 million at the end of 2022, again, primarily for the same reason. We do continue to have minimal debt. and our balance sheet shows cash at the end of June at $6.7 million and we compare that to $7.8 million at the end of last year, December 31, 2022. And with that, I'll pass it back to you, Ken.