Draganfly Inc.

Hello and welcome everyone who are joining us today for the call. Let's just give it one more minute as people start to file in and then we'll get started. All right. I think to respect everybody's time, I think we will get started today. So as usual, greetings and welcome to all shareholders and stakeholders to today's Dragonfly 2024 Q1 earnings call. My name is Roli Bustos and I am the internal investor relations representative here at Dragonfly. We appreciate you joining us. We appreciate our CEO and President Cameron Schell recapping the first quarter earnings headline. President Cameron Schell recapping the first quarter earnings headline. Let's just mute the echo.

Good afternoon.

Let's just mute the echo. Sorry. We will then quickly move right into a more detailed financial review. We'll then jump back in and discuss some operational highlights and substantive events. As usual, we will conclude with our new director, Scott Larson, moderating the pre-submitted questions we've received. As always, you're welcome to reach out to me at investor.relations at dragonfly.com. Once again, I remind everyone that this presentation may include forward-looking information and statements. These statements are not guaranteed that future performance or financial results 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. So Cam, if you're ready, please go ahead.

Hi, sorry, everyone. I just had a computer glitch there. Let me just, just give me one second here to hold the document back up. I apologize. Sorry about that. Of course, this always happens right at the worst moment.

Great.

Thanks, everybody, for your patience. I appreciate that. Okay, so... So our Q1 revenues were $1.3 million, somewhat by design. That included $1.2 million in product sales and just under $100,000 of services. Now, it's important to note that this is a 45% increase Q over Q from our Q4 of last year. Now, as most of you probably realize, we've gone through a major upgrade of two plants last year and we're able to bring on our main plant in the end of Q3, beginning of Q4 of last year. And we've been preparing or throttling, if you will, basically for expected incoming orders that we've been working on now for about a year and a half, in particular from our military customers. A number of announcements leading up to this, you will have noticed our sales into military customers, which are all kind of the precursor in order for us to be able to meet the demand requirements. signals that were given to us by the military. And I'll talk a little bit more about this after Paul runs through the numbers, exactly where we're at in this cycle and the steps that we've taken in order to prepare for it. So we had a gross profit of $280,000, which is about a 21% margin. Our cash balance as of the end of Q1 was $4 million. And we had a subsequent event just right after the Q here of another $3.5 million. So we're in a strong cash position. And as Paul will run through, you'll see that our burn rate is declining significantly. So without further ado, before I get into some of the operational highlights, I'll turn it over to Paul's son, our CFO, to run through the financial results. Paul?

Yeah, thanks Cam. Thanks everyone for joining. So Cam just kind of went through the revenue numbers. I'll just go through this table real quick. So he talked about quarter over quarter. In this table, we're doing a year over year comparison. So for our Q1 of this year, we did 1.3 million. That's about 16% down from 1.6 million in the first quarter of 2023. Again, part of the reason is what Cam had talked about in terms of the transition we had. Again, revenue comprised 1.2 million of product sales with the balance coming from drone services. He did talk about the gross profit being 280 grand compared to 443 in Q1 of last year. I will note there was a one-time non-cash write-down of inventory of about $148,000. So gross profit would have been $429,000. So gross profit for Q1 2023, you kind of X'd out their non-cash, would have been 520. If you take away the one-time inventory write-down that we just talked about, it's basically a flat year-over-year gross profit of about 32%. Total comprehensive loss for the quarter was $1.89 million compared to a loss of $7.1 million. That is, again, partially talking about the burn that Cam just mentioned. Again, there's some non-cash changes in that number. There's a fair value of derivative liability of about $1.8 million. the inventory write-down of 148,000, and we had a small gain on an impairment of a note receivable of 6.7 thousand. So the loss would have been 3.5 million versus an adjusted loss of 7.1 million a year ago. So again, a pretty big decrease in the year-over-year loss, primarily due to lower office and miscellaneous costs, professional fees, and wages. So if you now go on to the next table, the quarterly table, Yeah, so we just went through the year over year changes. So now we'll do kind of the quarter over quarter changes between this quarter and Q4 of last year. So revenue for Q1 increased $413,000 to $1.3 million up from $916,000 in Q4 of last year. Again, an increase of 45% due to higher product sales. Gross margin percentage for Q1 was 21%, again, comparing to 28.3% versus Q4. Again, if we back out those numbers, the true comp is 32% for this quarter compared to 41% of last quarter, with the difference being really product mix between the quarters. Some products have higher margins, some services have higher margins, so it really kind of depends on where they fall in the quarter. In terms of comprehensive loss for Q1, again, 1.89 million compared to 4.2 million for Q4 of last year. Again, we had that gain in fair value of derivative liability of 1.8 million, the write down in inventory and the gain on the note receivable. So if you back that out, comprehensive loss again, 3.5 million. If we do the same analysis with Q4 of last year, their loss pretty much stays the same at 4.2. So again, our loss is getting better. It's lower due to professional fees and wage costs. So on the final table here on the next page, you just scroll forward, Kim. Yeah, just kind of looks high level on our balance sheet. You can see our total assets increased slightly from $8.3 million to $9 million from the end of 2023 to the end of March, largely due to an increase in cash. Working capital as at the end of this quarter was $534,000. compared to what is shown here as a deficit of 717,000. However, if we X out that non-cash fair value of derivative liability, again, of $4 million in that particular case, working capital would be a surplus of 4.6 million this quarter and 3.5 million at the end of December of last year. Doing the same analysis for the shareholders' equity, At this quarter end would be 5.7 million versus the 1.7 million shown here and 4.6 million at the end of December versus the 408,000 shown here. So you can really see the derivative does swing the number. And again, it is a non-cash number. Again, we continue to have minimal debt. And as Ken mentioned, at the outset, company's cash balance is $4.3 million compared to $3.1 million at the end of December of last year. And with that, I'll pass it back to you, Ken.

And that cash balance is not inclusive of the subsequent event of the $3.5 million. Correct. From an operational standpoint, it was an important quarter for us. Again, our big focus through the end of last year and the beginning of this year was really tooling for and securing what we believe are the, by all indications, the larger, in particular, military contracts that we've been working on for the last year and a half plus. That said, a couple of things of note in preparation for this is we did announce an additional partnership with ParaZero, the drone safety systems, which are standardizing on our Commander 3 XL system. And we actually are using this on a drone. project that we announced with Mass General or Boston Mass General Brigham Hospital, where we were selected by them to perform their medical delivery. So they're moving forward in Massachusetts with a significant pilot. which will enable them to be delivering things like test kits, samples, pharmaceuticals, etc., which normally take hours and hours to get through the city that they are now looking to do by drone. So this was a very, very prestigious win for us. and kudos to the team for putting this together with this excellent crew. Mass General worked closely with the Department of Transportation, and they've actually been working on this project for a number of years in contact with the FAA as well. We also announced Doodle Labs, a number of projects with them, Doodle, in addition to this, also just got approved over in the Ukraine theater on testing where we've been for a couple of years. So that was a significant announcement for us, as well as UXV Technologies. So UXV has a very particular and specified controller that's ruggedized and very important in particular in military applications. And so we've been working with both these companies for the last year and a half, and we were able to formalize our relationship with them and actually announce it based in anticipation of a number of the other projects that we've got coming up. We were also at the AUVSI conference, which was an extremely interesting conference for us. Recently, probably the greatest level of activity that we've ever had as an organization with multiple specific customers coming to the conference just to not just speak with us, but do a number of strategic planning sessions as we roll out with them. Also on that front, we are enrolled in what's called the green program with AUVSI. And the green program or what they call the green list is a list that supersedes the blue list. So originally when the blue list first came out, I was very dismissive of it. And this was a mistake on my part. Because we have been selling into and continue to sell into government agencies in North America for the last 20 plus years, I really looked at the blue list as a marketing thing and marketing. we weren't candidly over impressed with what they were certifying. Little did we know that it would become a very important list to be on. Now there is provisions that if you sell into government agencies or into the military in particular, they can make a request to Blue List to include you on the Blue List. And we've had those requests made on our behalf by the military, but Blue's out of budget. So they're not including more people on that list. So AUVSI came up with what's called the Green List, which actually supersedes the Blue List. So if you're on the Green List, then you supersede Blue. So we're going through green certification right now. But other than, you know, delaying some of the sales cycle by a few weeks, the blue list has not prevented us from selling or being eligible to sell into the government requirements that we have because we already were selling. We are already NDAA compliant and we already sell into the military. Third of this, we did enter our drones into a contest and we were awarded the best enterprise drone, the best delivery drone. And actually, I forget what the other award was, but we're pretty pleased with and really kudos off to our engineering team. for the work that they put together and the valuations that they went through in order to do this. The First Nations is becoming a really important player in drones across North America, simply because of the mapping and the survey work, and in particular because of the mining and the fire prevention or wildfire work. So we were selected by a number of organizations throughout the quarter, but in particular, the El Cacho Nation, which has a very, very strong program that they're moving forward with federal firefighting. authorities. Along with this, similar, the Squamish Search and Rescue has entered into a partnership with us whereby they have selected the dragonfly, not only just our drones, but actually the entire dragonfly as the exclusive drone provider and solution provider for all of their search and rescue. And they are one of the busiest search and rescue organizations in North America and Well over 100 calls per year, fast water rescues, mountain rescues, searches, lost hiker, you know, just the list goes on. There probably isn't much of anything that they haven't had to do. and the use cases that they're presenting for, why they selected in particular the 3XL and the heavy lift actually are pretty unique and well positioned for us. So this is strategic for us because it's also an organization that's looked at by many search and rescue organizations as the leading indicator of what they're doing with their drone programs and how they're looking to move forward. We also announced a partnership with MMS and So MMS is an organization or excuse me, a company that does provide many tactical options for the military and has sold into many military organizations. MMS has selected Dragonfly as a drone of choice. to deliver many of their tactical payloads. And we've been on multiple demonstrations with them over the last year and a bit, and we're able to finally announce that partnership. I think it's important to note also that in terms of some of the demonstrations and such that we've been doing, I want to draw attention in particular to the demo training and evaluation that we went through at Fort Liberty. We had the great pleasure of training over 200 special and conventional forces on our 3XL and on our new FlexForce modular FPV UAV. So the FlexForce FPV is the first NDAA-compliant FPV to be utilized within the forces. It's gone through full evaluation. I can't give more detail than that at this time. But... know that we came out with this product for the express purpose based on demand that was coming for this particular product as an NDA compliant device. So it has some incredibly unique features. We are not overly compelled to talk a lot about some of the features of this particular product. It is very strategically differentiated, not just because it's an FPV, but because of the features of this particular FPV that were designed in part to by the very specific requirements that were asked for for this particular product. We're really excited about where this is going to go, who's buying it. We are standing up, we have stood up a production line for this now. as part of the evaluation process that we had to go through for this to be a product that could be purchased by the DoD and several different defense forces. We had a very successful SOF week. SOF week is the special operation forces week where we did hold live demos with just about 19 specifically different agencies in partnership with MMS. And that was a full day at a live site just outside of out of Tampa. Again, this was in support of the orders that we're ramping up for right now. I'm not going to spend a lot of time on our product review, other than what I did mention here, that we did introduce the FlexForce modular FPV UAV. You'll notice that center section's blurred out. That's for many different reasons. But know that basically it's modular. And what I can tell you is that this particular FPV can change sizes, dimensions, and flight characteristics within minutes in the field and without the use of any tools. And this is really important because it increases the range, the payload capacity, The actual tactics that can be used with this particular FPV that can be used in full acrobatic mode. So it can, you know, very skilled pilots can use this without any stabilization. So you can flip this thing around and it flies it, you know, in the 100 mile an hour range. uh, sustainable at 93 miles, uh, per hour. And, uh, you know, you can imagine that the four inch size of the 90th size, uh, this thing at 93 miles an hour is just completely unstoppable. Now it does have, uh, uniquely some, uh, electronic, uh, uh, I'll call it warfare capabilities and GPS denied environment, uh, capabilities, which again, at this time is a unique feature for, uh, an FPV. Um, uh, One thing that you can look for in this FPV actually is that this FPV or multiples of these FPVs actually can be launched from a 3XL or from the heavy lift. Again, some very unique features that are part of the requirements that we built for going forward here. So on that note, I am going to open it up to Scott Larson, our lead director, for some questions. Scott. Yeah, thanks, Cam.

We have had a number of questions who have come in prior to this, of course. Always encourage people to email the questions in. We try to get through as many of them as we can. I have a number here, and I think still one or two might be coming in. So let's kind of get to them. Yeah, maybe talk a little bit about some of the stuff we're doing internationally. We've talked about that in the past. Wasn't a whole lot of stuff there and obviously not trying to get at ourselves. But what are some of the international markets that we're looking at? How are they developing? What kind of effort, time, resources and things like that? And what do we hope to see out of some of them?

Yeah, I think there's probably two, excuse me, three specific areas that we'd like to address in that regard or that we probably should address in that regard. So the first is India. So India is a very, very big potential market for us. We have some very strong partnerships there and have done a considerable amount of work to be ready to execute in that particular region. Now, as you all well know or you may know that Dragonfly, This is located in Canada and the United States. And as it relates to India, Canada and India have had some tough relations in the past six to eight months, which seem to be working through. Those relations have slowed down our progress in that particular market. We don't think it's going to repeat it long term. And we continue to work in the manner that we can. But in terms of being able to push that forward as quickly as we would like, that has run into a bit of international geopolitical scenarios whereby we've just had to slow that down a little bit. We do not see it as a long-term impediment. However, it is something that is just a little bit in a holding pattern at the moment. The other area that's been really interesting for us, we did announce some work in the MENA region, and we are working there on a delivery project with the government, whereby that we will be providing deliveries in the area. And that's again, about as much as I can say about it. And that in turn has led us to do an awful lot of work also in Africa. So we've been very active in that region. don't really or can't really say much more about that. But it is a surprisingly busy area for drones and drones of our particular use case as well. So I think we can look to see a lot more of activity from the entire drone industry out of Africa and we're active there in many regards. And then the final one to touch base on is just our NATO partners. And so because of the DOD evaluations that we've gone through with our drone systems and the ability for them to be used by the DOD and special forces, we've got considerable inquiry that comes in from the NATO partners. And so we have been a bit surprised about the robust nature of it. We've been very, very selective about where and who we've pursued those with. Just for the simple fact that we, you know, based on the demand signal and, you know, what we're planning for, we will likely be at capacity here by the end of the year. And so we're being very cautious about what we're taking on, when we're taking on, how we're taking things on. Because those order sizes with NATO partners are also very, very significant. But our primary partner has been the DOD and then secondary, you know, looking to work in conjunction with the DND.

Okay. What is the approximate capacity utilization of the company's expanded manufacturing facility? So how much of, you know, we talked about expansion. We announced, of course, we've talked about in the last call or two, how much of the capacity we have left are we using? How much is left? What does that look like?

Yeah, so organic capacity on the production side, not including services, would be about $100 million. Now, that would be across what was two and is now three production lines. It's more than three lines, but it's three production products being the heavy lift. Being the 3XL and now being the FlexForce FPV. So, yeah, so we've got about 100 million bucks worth of organic capacity. Now, those three lines, as they move, we can now move those to outsource manufacturing as well within the United States. When the demand signals, but we need at least that much internally in order to meet the DOD type requirements and sizes that we believe that we have coming is probably the best way for me to say it. And and of course, that's all within secure environment and it's been audited and clearances and cybersecurity and all the rest of it. So that's that's basically where we're we're targeting. And did you ask what we're out in terms of current capacity, Scott? I'm sorry.

Just what's the capacity utilization? Yeah, I think you answered it. Yeah. So it's, you know, what's it's 15 or 20, I suppose, is probably that if we do the opposite math there.

Yeah. And it all depends on a lot of different variables and mixes. And sometimes the time frames get compressed where you got to jam stuff into a quarter more quickly. And other times you can spread it out. So it's, you know, whether it's 15 or 20 percent right now, it's, you know, circumstantial.

There's a question or two here on the blue UAS. I think you answered that, of course, earlier in the presentation. Talk a little bit about what you see in the industry as a whole, any broader trends. You mentioned a couple of conferences that you've been at. Any kind of trends throughout the industry that you or other partners at Dragonfly are kind of seeing, and what do you think that looks like?

I would say the... I would say, I don't know if it's an industry trend, but the thing that, to me, that's been most notable at the last couple of shows, well, the shows the last six or eight months, has been basically the emergence of three or maybe two or three, maybe three or four drone manufacturers that are beyond having great product. So I think there's probably a dozen manufacturers you know, North American based drone manufacturers that have great product. The real crux of where the industry's at right now is you have to have great product and you have to have capacity. So it's taken a number of years for the industry to get to a point between regulation and demand signal, which is now unfortunately being driven by geopolitics more than commercial requirements. The commercial requirements are growing like this, but the demand signal on the geopolitical side, I'll call it the military side, is just so significant. And because those are, I'll call it mission critical, the bigger issue there isn't just great product, it's capacity, right? And capability in terms of being able to meet And that goes everything from clearances to quality to cybersecurity to obviously capacity and all the rest of it. And I would say that there's a number of great drone companies out there with great product, but there's probably three companies. maybe, that can now meet the capacity of the orders that are going to be required. So the industry has become, in this last, I'll call it six months, nine months, maybe, but really become evident that you have to be nimble and quick to be able to adapt your drone capabilities quickly. But none of that matters if you can't meet the capacity requirements and demands that are coming down the line. And so that would be to me in terms of like the very, very tactical look at the industry right now, probably for the first time ever, In the North American drone industry, there's three-ish companies that could meet the capacity demand. And that's really where our governments have been trying to get the industry to. And so I think we're on the precipice of that happening. And it's probably somewhat obvious what those three-ish companies are. And not that there won't be other players. But there's really an opportunity now in this category one and category two drones where and I would suggest that we're probably the the the position to be the dominant play in category two drones. That's drones that are greater than 55 pounds, but have a kinetic energy of, you know, that that won't hurt people if if the drone fell on them. Right. and would even suggest that we're the only company that have drones approved in that area with particular customers. So I see things forming up, if that makes sense, Scott.

Yeah, it does. We've talked in the past about some supply chain issues. Are those just across the industry and are those fully solved? What does that look like? Any other macro issues that are affecting supply chain, particularly for some of these larger contracts that might be coming down?

I think for the most part, they're worked through. Maybe not exactly on the payload side. I think on the drone side, not just for us, but for the other manufacturers out there, I think that they've worked hard to get that sorted because they've had to in order to represent that they can meet the demand. However, there is still some challenge on the payload side with maybe some of the different sensors out there that require some particular chips or some particular types of cameras.

Two more questions here. One, again, question on Is it going to be another financing? I know we can't disclose this, but any thoughts or comments there on the last financing? And, you know, we talked about us kind of trimming some costs and perhaps being prudent, moving a little more prudent moving forward. Any thoughts or comments on that?

Yeah, I think a couple of things. We've worked really hard and we've been fortunate, very fortunate to be in a spot where we've seen significant, we've seen costs come down significantly. We definitely did some belt tightening and looking at where we could do that. And those are always painful decisions that you go through when you do those types of things. But you've seen pretty much every major company in the world go through that type of stuff recently. But moreover, we were fortunate because we got to a spot where the maturity of the products that we had brought out and the heavy lifting work that we had to put in place in order to be able to meet this demand signal and the capacity were basically done. So we're at a spot now where on plan, those costs started coming down significantly. And now as we start to see sales, us be able to put an emphasis on sales, not that it wasn't before, we just couldn't turn it on because we were at capacity by the end of Q2 last year, which is you've basically seen us flat since then or just kind of managing or meeting the most important customer demands. that we had to. And so we've been fortunate in this spot where we've seen that come down. That's a bit more circumstantial than it is us gone through cost cutting. So I'm not sure if I answered the whole question for you, Scott.

Yeah, I think you did. I think that's probably fine. I think last question here, unless there's one or two that come in over the next minute or so. We've talked a lot about contracts and you've talked about it now. Any thoughts on timing? These obviously long lead type things. What are your thoughts on kind of some of those coming to fruition, of course, without trying to get too far ahead of ourselves here?

They're coming. They're coming. And they keep getting bigger. Requirements keep slightly changing. It's, you know, whether it's Congress approving budgets, whether it's... changing situations in the field, whether it's whatever the case is, whether it's, you know, getting through the last steps of evaluations, whether it's the all of a sudden immediate requirements and needs for FPV drones as well as our other drones or swarming technologies. All of these things are things that then have to go through extensive testing and extensive evaluation and certifications and such. And we're not the only ones that are going through this. I think an informed, a sophisticated, informed investor in this space knows everything. who the two to four companies are that are positioned for this. And if one of them had the $30 and $50 million orders and they were all happening and nobody else did, or two of the four did, you could maybe make some calls on whether that company is going to get them. But I think you're going to see the industry not just drag and fly dropping these in short order. I don't know what to say. The orders, they'll happen when they'll happen. There's nobody else to fill them. That's the bottom line. We're not taking that for granted. We're working very hard every day to make sure that we're going to be able to do our duty.

Just maybe the last question that's coming in actually just right now. We've talked about this in the past, of course. Any more consolidation? Some things have been announced. Some companies have closed the doors. There's been a sale or two or something. Are you expecting that to continue?

There will be consolidation. There is consolidation happening. I don't think there's going to be a lot of M&A activity. because I think those two to four companies out there don't have time to do an M&A. We've looked at it lots and not that we're not gonna continue to look at it, but we don't have time. Like our organic growth, is so eminent and so big and so taxing to meet the requirements and demands, then integrating another company at this time is just, I think that would be a heavy lift for the folks that are in the trenches doing the real business right now. That's just my own opinion. um uh and and but that would that would be my expectation um i do think we have seen uh another yet another cycle of north america drone companies uh that that that didn't last and um uh and and and we're kind of seeing another bunch of new drone startups that are kind of coming into it a lot of people think this is an easy industry you know you put four blades on a battery and you can fly the thing without realizing that it's the regulatory environment, the testing, the demands. This is an aircraft in the air. It is highly technical, highly regulated business, which which really lends credence and valuation to the companies that are positioned well now. So we'll we'll see consolidation. But I don't really think because of M&A until these, you know, kind of two to four companies that I keep referring to. reach a critical mass, then I think there's a level of M&A from either the primes or some of the tier one subprimes that'll be looking to play in the category one, category two space as it starts becoming a more and more important part of the military complex, as well as the commercial complex out there. And that critical mass is happening. So you may see consolidation of these two to four companies, maybe not necessarily together, but by bigger companies in a year-ish, you know, from now. But between now and then, I don't think you're going to see these two to four buy companies. I think you're going to see companies go out of business and these two to four rise even further.

Okay. Well, that is the end of the questions. Thanks for sending them in, everybody. We appreciate those. And again, as always, if there's other ones that you guys think of afterwards, send them through. We'll try to get to them, of course, as best we can. But yeah, Cam, back to you to close and wind this up.

First and foremost, thank you to our customers and to the people that have continued to work with us and develop these products out. It's an honor to be of service to both our government and our commercial customers. We can't say enough about our sales, our engineering, our customer service, and the people that really are building something here that's incredibly special and really, really important. And of course, to our shareholders. It's been a very long haul. And I know a lot of you have been very, very patient with us. And we appreciate your trust and will continue hard to do the best we can to hold that trust.