Draganfly Inc.

Greetings and welcome to all shareholders and stakeholders to today's Dragonfly 2024 Q2 earnings call. My name is Roley Bustos, and I'm the Internal Investor Relations Representative here at Dragonfly. I've talked to many of you in the past. We appreciate you joining us. We will start with our CEO and President Cameron Schell recapping the second quarter earnings headlines. We will then move right into a more detailed financial review with our CFO, Paul Sunn. Tam will then jump back in and discuss some operational highlights and subsequent events, as well as go through the pre-semitic questions we've received. Like always, you are welcome to reach out to me at investor.relations at dragonfly.com at any time. I remind everyone that this presentation may include forward-looking information and statements. These statements are not guaranteed for 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 will be found on page two of the presentation. So Cam, please go ahead.

Thanks, Roli. Thanks, everybody, for taking the time to hook up with us today. We really appreciate it. To the Q2 2024 earnings call for Dragonfly. As mentioned, the disclaimer, this presentation will be posted on the website under the investor relations tab immediately following the call. The disclaimer can be found on slide two. So just to hit the financial highlights, basically in Q2 2024, we had organic revenue of $1.732 million. That consisted of 1.3, close to $1.4 million in product sales, and then provision of services of $345,000. This is a 30% increase quarter over quarter from our last quarter, which I'll speak to why that's the case and why we now see sales starting to move forward again here shortly. Also in Q2 2024, our gross profit was $461,000 with a gross margin of 26.6%. Paul Sun, our CFO, will speak to some of the detail around that of why the actual operating gross margin was a bit higher and healthy. And then we have a cash balance of $5.2 million. So let me jump in a little bit into the operational highlights, which will actually speak back to some of these financials. And then we'll have Paul run through the details of the financials. But I think most notably, some of the work that we did in through Q2 was a bit of a board shuffle. And so we want to really thank our former chairman, John Mitnick for the service that he provided to the company and to his career moves now where he's moved on to. We're really, really pleased to invite three new board members to the board of Dragonfly. Very notably, Secretary Thomas Mowdley, who was the former undersecretary and acting secretary of the United States Navy, the most senior civilian personnel that, well, the person that runs the Navy. And Thomas also has a very illustrious career. West Point grad ran the entire Defense Division for Prey Waterhouse Coopers for years. And we're thrilled with what he is already contributing and bringing to the table. Tim Moody also joined us. Tim is a longtime tax accountant and audit specialist, ran his own firm for a couple of decades, now consults to it because he sold out. He's sitting on our public board. He's now actually heading up our audit committee. And Kim is also very well placed politically in the Canadian environment. And so we look to him as well in terms of our government relations and business development work within the Canadian government and the DND environment. up in Canada. Tim Dunning Sr. is a very experienced entrepreneur, particularly in the military space. He's a three-tour combat veteran, has launched several companies that have had programs of record with different departments within the DOD, and brings to us a wealth of operational knowledge, both from an entrepreneurial perspective but also from a military perspective and actually understanding how we're moving through a bunch of our products and services through several military organizations throughout the world, but in particular, the DoD. Also of note, Tim was actually a co-founder and the CEO of the largest drone services company, which still is, in the United States. He's not with them anymore. He's moved on to several other ventures since then, but he brings incredible, incredible experience. He's also a PhD candidate, which is specializing in AI ethics with the use of drones. So incredible, incredible depth that has come to our board, and we're really excited about what they're already contributing. On the operational side, a couple of highlights to talk about. Mass General Brigham selected Dragonfly to be their provider, both equipment and services of choice, to be setting up their drone delivery programs, in particular as it relates to their home hospital delivery. Phase one of those are actually commencing next month. There's been extensive planning that's gone into the launch of these initial services, which includes work with Mass DOD and the FAA to make it happen. This was, it's an incredibly prestigious opportunity for us and, you know, was, you know, basically fantastic. for all intents and purposes, every drone provider out there that has a delivery type service was in the mix to win this opportunity and we won it in Q2. So we're really excited about what's unfolding there. Also just wanted to highlight a little bit on the green UAS and blue UAS front. These are certifications out there that a number of select drone companies have. We do not have blue UAS. And candidly, this is something that way back a couple of years ago, I didn't think was that important because we were already selling into the organizations as an NDA compliant certification. drone manufacturer. However, it's become a bit of a marketing thing and is an important thing to have. It hasn't prevented us from getting any sales because of the history we've got as a company. We are enrolled in the green UAS program, which is an equivalent and arguably, you know, kind of higher type of certification. We also are involved deeply in many military certifications that trump these, might be the wrong way to put it, but certainly are harder certifications to attain that we've been working with and complying with for years. So we are going down these paths, though. Again, they haven't prevented us from any sales. And I think we're unique in that regard because of our 24, 25 year history, excuse me. But we are endeavoring and pushing down them quite quickly. On the services side, I did want to touch base. First Atlantic Nickel, we signed a significant contract with them to provide services for properties they've got in Atlantic Canada. But this is important beyond just the type of contract it is. It's because of the type of mineral that they're going after. It is a strategic mineral and it's a massive potential deposit that they've got on hand. And this is really an ideal scenario that's setting up our data division that's enabling us for the AI work that we're doing with the data we're collecting around mining. So on the services side, we've consolidated a number of our services into particular areas that we believe that can really scale. So things like forestry are very important to us because we can collect incredible data there that we can feed back to our clients. So it's a service on top of the actual just flight services and equipment that we provide. And this would include mining as a strategic initiative for us as well. So we're going to continue to push down that path. The other one that's of note is the wildfire services that we provide. I can't name the actual governments here that we work for, but we have government contracts, multi-year contracts to provide wildfire services. And what these services typically are involved with is us flying night missions with our equipment to look for hotspots. Mark Benthien, ECA- host teams having been into a particular area and then looking for route fires interestingly enough over the course of this last quarter, we have also been doing frontline work. Mark Benthien, ECA- Flying while crews are active during the day, providing everything from. fire direction, weather reports, a number of different environmental sensors. And we've increased this contract in particular from kind of like an on-call contract two years ago to a couple of full-time crews last year to up to five full-time crews now this year. And we expect that that will continue to grow next year. We believe that by next year, we'll actually be doing equipment, and we've done some testing with this, actually equipment delivery, dropping things like or bringing in things like chainsaws and hoses and shovels and uh, fuel and, uh, a number of different things like that live during active action. So we're, we're really getting incredible experience, uh, hands on with this. And we now have a number of other, uh, government, um, wildfire services throughout North America that are actually studying and looking at the work that we're doing here. And so we'll continue to expand, um, this service. Um, just recently we announced, uh, that, uh, we have signed after a long process, of making a selection, we have signed a distributor in Australia. This came out of direct feedback that we were getting from the Australian and New Zealand military that were looking for the particular products that we sell that are, of course, non-Chinese. The heavy lift, the 3XL, and our FPV drones And so we're very pleased to announce that we've signed a deal with the Drone Institute, the Drone Technology Institute out of Australia, who is the primary seller of drones into the US military and such. So we'll be down at the Land Forces Conference in September, which is the main military conference, annual conference down there, launching our products with them. We've got a week long ahead of time demonstrations and stuff throughout many parts of the country with our particular products as well. So we expect that, you know, it's a five eyes country and very closely aligned with the United States and Canada and Great Britain, et cetera. So we're really excited about the opportunity and getting pulled into that market. We have done some private label product with Nightscope and so pretty excited about the pipeline that they're building in that regard. And I think that's notable because they're super active in the space. And this is somewhat for manned drones, but more it's about drone in a box type solutions to work with their automated security systems as well. Squamish Search and Rescue, an important contract to us because Squamish is one of the busiest search and rescue units in all of North America. It's an outdoor area. Everything from ocean to swift current to alpine recreation. They respond to hundreds of calls per year. They've now gone exclusive with Dragonfly product in particular because of the capabilities and modularity of 3XL that we bring to the table. We're providing everything from swift current rescue to alpine observation, alpine rescue, location finding, logistics, dropping of emergency supplies, the wealth of knowledge that we're gaining in terms of working with them and the spinoffs of the other search and rescue units that look to Squamish and are looking to the services that we're now providing there have been pretty extensive. So we're pretty excited about the ongoing work that we do with public safety. El Cacho First Nation, they have signed an alliance with us. They're an exclusive product supplier for drones. They're using drones from everything from mining surveys, search and rescue, wildfire work, etc. We have a full training program with them. And it's actually a model now for other First Nations that are looking to build outdoor drone services. Again, to provide everything from wildfire services right through to security, to survey and mining and forestry. ParaZero is a strategic partner of ours. We work closely with them on a number of initiatives as it relates to parachutes, medical delivery, military applications, and of course, commercial enterprise applications. Recently, the FAA has announced that for drones that are under three and a half that they've got a parachute on them. They've got a much reduced or streamlined waiver process to do flights over people. So that's pretty exciting with some additional product announcements that we've got coming up shortly. And then we've also got a strategic alliance or deal that we put together with Doodle Labs to continue to work and grow the excellent work that they've done and that we've been able to provide both in the Ukraine theater and locally in a GPS denied environment. So some pretty exciting things that are unfolding on all fronts. I just want to highlight again, the military impact. So the military impact globally is approximately $20 billion in growth for small, what we'll call category one and category two drones between now and 2030. And a very large portion of that is going to be, you know, NDAA compliant, non uh uh chinese drones and so there's really three or four people right now that are positioned to be able to provide on scale uh and meet this type of market so it's probably about a 20 billion dollar opportunity you know spread across three or four uh um at least North American companies and probably three or four other companies in a couple of the other parts of the world. But I think it's really important to understand, and this really, I was on a board call this morning and the impact really hit me. One of our board members explained that less than four years ago, Any drone operation that was done by at least the Navy had to be signed off at an incredible senior level, actually at the most senior level. And that was only four years ago. And so when we talk about the impact of a $20 billion market for small UAVs just in the military, the issue isn't the demand. The issue is working through the process for that demand to become scalable. And so while the military has come to companies like us and really we did the rest of the industry out based on, first of all, the product, second of all, the people which is reflected in the product, and then third of all, your ability to scale. And that really came down to that last aspect for the three or four companies that are left to serve this market is they're the ones that are able to scale. But it takes an incredibly long time to work through that opportunity to scale. Much different than, say, some of the activity and much of the activity that happens in the Ukraine theater where they're able to just, you know, put together $800 drones as FPVs. Chinese parts, whatever, it doesn't matter. I mean, there's certainly implications for quality control and reliability around those. But, you know, we hear about these really big volumes of numbers that are happening in the drone industry, but we fail to recognize that those volumes are actually very low-priced drones that are not working at a level that would be satisfactory to many of the NATO or the 5i type of countries out there. That said, the Ukraine is a very important market for us, which I'll touch base on. I have gone through this slide before, but it's slightly adjusted because we have added some new product lines into this. In particular, this black dot up here should have FPV in front of it. I apologize. But that's the new FPV product that we've introduced in the last quarter and a bit, which is very unique, and I'll talk about it. But it does, again, emphasize the fact that, you know, the work that we're doing is not down in these lower price drones. And so the ability and capabilities to work these through these very sophisticated channels, both on the military, the public safety, the government aspects, other than the military and the, you know, I'll call it the enterprise, which is different than the commercial enterprises and They have many of the same security concerns, many of the same safety concerns, many of the same requirements that the government agencies have. And so working through that product and we've chosen to go down these product lines because we don't want to be in a situation where we're constantly in a race to the bottom in terms of providing a low cost or inferior type of product. So I'm not going to spend much time on this. We've got our heavy lift drone. We actually have commissions around a heavy, heavy lift drone, which is larger than this drone here. This drone here carries 67 kilograms, which we are shipping now. It's small quantities, but growing as we get more airtime on it. And as mentioned, there's even a bigger unit than this coming out that's under commission. We've got our Commander 3XL hybrid, our precision delivery systems. We've got our quick delivery release delivery boxes. These can also be winched down. But basically the Commander 3 XL remains at this point to be the stalwart of our sales and efforts, which is really known as the Swiss army knife of drones, which has dozens and dozens of different, not just applications, but payloads that now fit onto this. And so getting all that integration work, whether it's precision or targeting cameras or logistic systems or whatever the case is, is really kind of winning the day for us and we're starting to see scale on. As mentioned, and I want to go into just a little bit of detail here, the Flex FPV. So this is a first person viewer drone. This is a very unique drone. It is an FPV drone. It is a full NDAA compliant FPV drone. So it is available to be purchased by Five Eyes, NATO and many of the other allied drones. countries out there. It has some incredibly unique features, not a lot of which that I will go into details, but in terms of range, transmission capability, and adaptability to be able to fly missions as small as through windows or missions as large as several kilometers away that could carry six kilogram payloads. all on one airframe is incredibly unique. And we've now trained over 200 special ops forces in the United States on this drone. It is being included into Ranger School on the training side. And so over the course of next year, again, we do expect to see significant improvements scaling of this particular product. I think it's important to note that this particular product, all these product lines are all integrated with each other as well. So what you may have heard about there is the ability for these FPV drones to actually start swarming. But the capability of this drone combined, say, with the 3XL or the heavy lift, if you will, is actually this drone, which can fly into a GPS-denied environment, and actually have laser targeting on it to then drop swarms of these drones here, which have much shorter ranges and don't have the cost on it to be able to put GPS denied counter measures type of electronic countermeasures on it. So this can get deep into a territory and then these things here can be dropped and used for whatever mission profile they have. That's the type of capability that we've been working in and going through several tests with many different militaries out there. So again, we're really excited about where the entire product line is going and where our customers are taking us. So on that note, I know that there's lots of questions. I'll come to them at the end. But on that note, I'm going to turn it over to Paul here. And what I did want to just quickly highlight is that this quarter we saw a 30% increase in our revenue. We have seen a flat year overall. That's primarily been due to the fact that we've had a requirement to build out the capacity to scale all of these product lines for the large to be able to qualify for the military type contracts. And so that has taken a lot of focus for us to do that and to be able to get through all of the certifications and audits that were required in order to be able to continue to meet the requirements of the military products and testing that we've gone through. We were able to complete that right around the first quarter of even toward the end of the fourth quarter of last year. And so we had some hangover in order to kind of clean up and take not a breather, but really just kind of get caught up in Q1. And then Q2, we've started to see this scale, both in terms of our military contracts and but also being able to pay attention to our traditional market, our commercial market, and our public safety folks. So pretty excited about us starting to see that scale start to happen again. And I'll address some of those questions in the Q&A section here as well. So maybe, Paul, if it's okay with you, I'll throw it over to you.

Yeah, absolutely. Thanks, Tim. And thanks, everybody, for joining our call. Appreciate it. So yeah, just looking here, we're going to do a year-over-year comparison. So revenue for the second quarter was $1.7 million. As Ken mentioned, just down 8% from $1.8 million in the same quarter last year. Second quarter revenue comprised of $1.4 million of product sales, with the balance being from drone services. Gross profit was $462,000 compared to $467,000 in Q2 of last year. But there was a one-time non-cash write-down of inventory of $134,000. So otherwise would have been $596,000. Gross profit for the same period last year would have been $589,000. So if we took away the one-time inventory write-down from that period, that's the direct comp. And as Cam mentioned at the outset, our gross margin would have been 34.4%. versus the 26.6. And the direct comparison would be 31.1 for the same period last year. So up a few points year over year on the gross margin side. Total comprehensive loss for the quarter was 7.1 million compared to a loss of 9 million in the same quarter last year. Like usual, this quarter does include a non-cash change and comprised fair value derivative loss of $2.6 million, that inventory write-down that I mentioned, and a small gain on an impairment of a notes receivable of $4,000. So otherwise, that $7.1 million loss would have actually been a $4.4 million loss versus an adjusted loss of $6.8 million a year ago. So year over year, quite a bit better on the loss, and that's due to lower office and miscellaneous costs, professional fees, wage costs, et cetera. So, Ken, if you can just flip to the next quarterly table there, We just went through the year-over-year, so now we'll just do a quarter-over-quarter change between this quarter and Q1 of this year. So again, revenue, $1.7 million. That increased by $403,000 from $1.3 million in Q1, an increase of 30% due to higher product sales. Gross margin, as mentioned, 26.6% compared to 21.1% from Q1. Again, if we back out, those one-time write-downs would have been 34.4 versus 32.2 for Q1, so a few points higher quarter over quarter on the gross margin as well. Total comprehensive loss, we mentioned 7.1 million, this time compared to 1.9 million for the first quarter. Please recall that non-cash fair value of derivative liability of 2.6, the inventory write-down and the gain on the notes receivable. So the comprehensive loss, again, would have been 4.4 million. If we adjust the same non-cash items for Q1, that loss would have been 3.6. So Q2 had a bit higher loss than Q1. That's because of some higher professional fees done in Q2 versus in Q1. And then on the final page, Kim, you can see here our total assets did increase to 8.3 million, sorry, from 8.3 million to 9.9 million from the end of the year, which is largely due to an increase in cash. The working capital, as at the end of June, was a deficit of 3.7 million versus a deficit of 717,000. We did have a big fair value of derivative liability of $9.4 million on our balance sheet. And again, that's due to us meeting the company reporting in Canadian currency versus US and some other things. So that's why it's treated as a liability. Again, it's a non-cash item. So if you back that out, working capital would have been a surplus of $5.7 million and $3.5 million at the end of the year. Doing the same thing with shareholders' equity. At the end of this quarter, that would have been a shareholders' equity of $6.8 million versus the $2.6 million that you see here, and $4.6 million at the end of December versus the $4.08 shown here. You can see we continue to have minimal debt. And as Cam mentioned at the outset, our cash balance is at $5.3 million compared to $3.1 at the end of the year. And with that, I'll pass it back to you, Cam.