Draganfly Inc.

Hello, and welcome to the Q3 2024 Dragonfly call. We just opened up the call, and the attendees are just filing in. So we'll just give it a minute, but then we'll get started right away. Okay. To be respectful of everybody's time, I think we will get started today. So as always, greetings and welcome to all the shareholders and stakeholders on today's Dragonfly 2024 Q3 earnings call. My name is Roley Bustos and I am the internal investor relations representative here at Dragonfly. We appreciate you all joining us. As usual, we'll start with our CEO and president Cameron Schell, recapping the third quarter earnings headlines. We'll move right into a more detailed financial review with CFO Paul Sun. And then, as always, we'll conclude with our chairman, Scott Larson, facilitating the pre-submitted questions that we have received. You're always welcome to reach out to me at investor.relations at dragonfly.com if we did not get to your question today. I remind everyone that this presentation may include forward-looking information and statements. These statements are not guaranteed their future performance or financial results. An 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, I think we're ready. Please go ahead.

Great. Thanks very much, Roli. And thanks, everybody, for joining us today. It's a great pleasure to be here. So the market continues to be relatively robust with an incredible amount of business development that's unfolding in particular around, well, all of our products, but in particular around the Apex drone, which we launched last quarter. So the financial highlights for the quarter is that we had revenue of $1.885 million, which is seasonally our best Q3 ever. We have product sales of $1.3 million and services of half a million dollars. So we had gross profit of $440,000 with a margin of 23%. And Paul will explain a number of things as he goes through his presentation, talking through actually how that margin calculates out to be a bit larger than that. And of course, we've got cash on hand right now of a little over 3.9, close to $4 million. So we're in a really stable position. We've got really good biz dev on the go. We've got a lot of our systems dialed in and really looking forward to what this means for Q4 and going forward. In terms of the operational highlights for Q3, we had Honorable Mr. Andy Card, the former White House Chief of Staff, who previously was a board member of ours, has joined our advisory board. Of course, he stepped off the board. Earlier this year, just for some other commitments that he had been making. He's such a key contributor and, of course, a mentor on many levels. And so he's still working with us closely, advising the board and helping us provide access into many accounts and relationships that are incredibly important to us as we build out Dragonfly in this amazing environment. industry that's just on the verge of completely booming. Another highlight for us as an organization was launching the Apex drone. We'll talk a little bit more about the products back around the Apex drone, but this is a drone that we think is that we've pretty much nailed into the smaller category one drones. And we have got significant demand on it, which we'll talk a little bit as well. Also, we wanted to talk about a couple of our military orders. So VRR, which is an organization that's got in the tens of millions of dollars of business and grants for its particular organization. uh technology uh which is the swarming technology whereby what's happening is you've got a commander 3xl and you've got what's called the hellhive which uh the commander 3xl carries and is integrated with and then it launches our uh fpv drones so uh vrr uh developed this technology Separately, they've come to us to do the contract engineering for the actual Hellhive. And their primary integration for this use case, of which we've now been selling to the military, is the 3XL, the Commando 3XL, and the Flex FPV drones. We also had a military order through TB2. TB2 has an incredibly innovative box that's basically a drone comes in, lands on the box. It's got a magnetic attachment to it. It picks up into the hundreds of pounds, depending on the drone profile that you're using. The box actually charges the drone while it flies. And then they've got multiple integrations of different types of payloads. So it might be a logistics payload carrying medical supplies. It might be a munitions payload. It might be a robotic dog. It might be whatever the case is. But as the drones come in and pick up these payloads, they're actually getting charged. So the drones are running continuous missions. So an incredibly exciting project that the military is working to adopt. And now we've made some sales in that area as well. And I think, you know, what's really important to note here is that in this is that The drones that we have are being utilized in so many use cases. In fact, I don't think it's inaccurate to suggest that every single week there's a new use case coming from some government agency, three-letter agency, some branch of the military to be able to utilize the drone platforms that we have. And keep in mind that the drone platforms that we built are all universal in the fact that they use the same controllers, they use the same batteries, they use the same flight systems. So there's a lot less training, whether you're flying an FPV or whether you're flying a heavy drone or a super heavy drone. Further to that, it's really important to note that all the mounts and all the payloads are universal. So you can run, as long as it can have the weight bearing, you can run a payload on an Apex or on a 3XL and they're interchangeable. And this is something that's really come across strongly as a value proposition for us. We also announced a Fortune 50 oil and gas company having adopted the drone in a box solution, utilizing the Apex drone and Nightingale security. This is a massive, massive customer. And this drone in a box installation that we've done previously. primarily for security, but also for field inspection purposes, represents an opportunity of literally tens of thousands of sites for us. It was a year-long cycle, the sales cycle to get through and the testing cycle. It was very competitive, and we're really pleased on how that's worked out for us. It's dope. Excuse me. Let's talk a little bit about the Apex drone. So this is a drone that we launched that is a category one drone. This particular drone fits in between our Flex FPV drone and our Commander 3XL. So the Commander 3XL drone is really a medium lift drone that enables much longer ranges and a very, very broad capability across all kinds of types of payloads. Now, the common comment that we get back about the 3XL, regardless of its utility, is the fact that it is quite large. It's about the size of a coffee table. And so while you can run dual payloads and such with it and carry heavy loads, it's not really all that convenient to be packing around. So this particular drone fits inside of a backpack. It has a capacity of five pounds of payload capacity. You can run dual payloads on it and you can get optional NVIDIA chips with it. So the reason... that it's got the NVIDIA chips that go with it, quite frankly, is because of the edge computing and the AI capabilities that are now being required for drones to run. So this is going to allow for things like real-time processing onboard, which affects not just the drone performance, and your ability to do real-time navigation in contested areas where GPS might not be available, but it also enables for real-time processing of payloads. Now, a really key strategy of ours is to work with payload partners. So as mentioned earlier, you know, we've got great partners like VRR or TB2 that are selling, that have incredible payload use cases into, in their cases, military applications. But it's not just a matter of having a drone that can carry that or integrate that with the software, but those payloads, they can't, well, not in TB2's case, because it's actually a battery, but in most of the, well, in fact, in every other case, unless it's a battery as a payload, those payloads suck a lot of battery life. So being able to have a drone of this size, which is really, again, a flying battery, and be able to do real-time processing on board is an incredible advantage for our payload partners, which then increases the amount of use cases that this particular drone is capable of. So, you know, military is obvious market for this, but where we're actually getting the greatest demand right now is in law enforcement. And so, and again, because it has all the capabilities of a Commander 3 XL, except for the amount of weight it can carry, but it can fit inside of a backpack. So we're really excited about how this is unfolding for us. And we think we've nailed it right into that sweet spot. Now, what we have decided not to do is to focus our product line into the small surveillance drone. We can see that that's a very crowded market. It is dominated by the Chinese manufacturers, though they have and are going to continue to have a tough time to be selling that product into North American accounts and certainly not into military or law enforcement accounts. However, it is still a very, very competitive market. It generally is also a lower margin business. And we think that market's still a bit of a race to the bottom. So we're going to continue to stay away from that really small drone footprint, unless it's an FPV drone specifically for military purposes. And the FPV drone that we've designed and is now in use is a very unique drone in the fact that it has one power system, but three different sizes of arms and blades that it can be used with. So if you need to fly it through a window, you can use that FPV. If you need to fly it 12 miles out for a military mission one way, then you've got that capability with it as well. So speaking just to that a little bit, this is the primary drone lineup. Again, not that we don't have custom builds or other drones available for select clients, but it goes all the way from on the far right there, the heavy lift drone with a capacity of 30 kilograms all the way down to our Flex FPV drone. And in between there on the Commander 3XL, we also have a full electric variant Or we've got a variant that's a hybrid with gas, which gives it up to two and a half hours of flight capability. We continue to see incredible demand from the industry. We have been seeing incredible demand for two years. But by the time, it was really about two years ago that we see the NATO militaries post the Ukraine, beginning of the Ukraine conflict, really getting serious about adopting category one and category two drones. And it's frankly taken that long for them to develop their use cases, their mission profiles, basically go through selection processes, determine who they're going to work with, testing criteria, et cetera, et cetera. And we're now seeing, and you'll see it not just with us as a drone company, but you're starting to see it now with some other publicly traded drone companies. You're starting to see those order sizes come in and you know we're it's a it's a fairly small group and so we all kind of are now able to see who's landing where uh pun intended and exactly what the capabilities are and what either military or law enforcement public safety or even industrial customers are choosing and who they're choosing them from and where those strengths lie so i think I think that there's three or four players out there that you're really going to start to see emerge based on the history, based on their capabilities with the drones that they've got, based on the testing criteria that they've gone through, and that they've kind of got through these final selection stages. Now, the other piece of that is, can you scale your business? So it's great to have a drone that does all kinds of cool things. Does it have the airtime on it? Does it have the testing requirements and certifications on it? And then ultimately, can you produce enough for these particular customers? Because their orders come in massive amounts all at once. So I'll leave the rest for Q&A as it relates to the operational highlights of product and sales. And at this point, I'll turn it over to Paul Sun to run through our financial results. Paul?

Thanks, Kim. And thanks, everybody, for joining our call. We'll just go through the year over year numbers here for third quarter. So starting with revenue, we came in at call it 1.9 million, down 11.8% from 2.1 million in the third quarter of last year. Third quarter revenue comprised of 1.3 million from product sales with the balance coming from drone services. Gross profit $441,000 compared to $895,000 in Q3 of last year due to one-time non-cash write-downs of inventory of $176,000. Otherwise, it would have been $617,000. Gross profit for the same period last year would have been $903,000 if we took away the same one-time inventory write-downs associated with that period. So taking these non-cash items into account, gross margin would have been 32.7%. versus 42.2% year-over-year. On the loss side, total comprehensive loss for the quarter was $365,000 compared to a loss of $5.5 million in the same quarter of last year. However, this quarter does include non-cash changes comprised of a fair value of derivative liability gain of $3.6 million. The inventory write-down that I spoke about, $176,000. a gain on an impairment of notes receivable of 7,000. So if we X those things out, the loss would have been around 3.8 million versus an adjusted loss of 5.6 million a year ago. So that decrease in loss year over year is primarily due to lower office and miscellaneous expenses, professional fees, and wage costs. So Cam, if you can move to the next slide so we can go through the quarterly table there. That's great. Thank you. So yeah, we just went through the year over year changes. So now we'll just do a quarter over quarter analysis looking at Q3 versus Q2, all in 2024. So revenue was up 152,000 to the 1.9 million. up from $1.7 million in Q2 of this year, which is an increase of about 8.8%, primarily due to higher service sales. Gross margin percentage for Q3 was 23.4% compared to 26.6% for Q2. If we back out that one-time inventory write-down that we talked about in both quarters, gross margin would have been 32.7% versus 34.4% in Q2. So that slight difference just really being a product mix quarter over quarter. Total comprehensive loss for Q3, we talked about the 365. Now we're comparing it to $7.1 million. For Q2, of course, we had that gain in fair value of derivative liability of $3.6 million, the write down of inventory, the gain on impairment of notes. So if we X those things out as a reminder, comprehensive loss for Q3 would have been $3.8. If we do the same for Q2, that loss would have been $4.4 million. So similarly to the year-over-year decrease in loss, again, primarily due to lower SG&A expenses such as wages, also professional fees partially offset by slightly higher R&D and share-based payments for this quarter. So on the next page, Kim, we'll just have a quick snapshot of the results. of the balance sheet here yeah so yeah you can see that total assets increased um from 8.3 million to 8.5 million from the end of 2023 which is largely due to the increase in cash Working capital as at the end of this quarter was $3.5 million versus the deficit shown at the end of December of 2017. However, if we X out the fair value of derivative liability of $1.3 million, working capital would have been $4.8 million this quarter instead. and $3.5 million last year. Doing the same for shareholders' equity, this quarter would have been $5.6 million versus the $4.3 million shown here, and $4.6 million at the end of December versus the $4.08 shown here. We do continue to have minimal debt. And as Cam alluded to at the front of the presentation, cash balance is call it $4 million compared to $3.1 at the end of December. And with that, I'll pass it back to you, Cam. Thanks.