Red Cat Holdings, Inc.

Ladies and gentlemen, thank you for standing by. Good afternoon and welcome to the Red Cat Holdings Fiscal First Quarter 2022 Financial Results and Corporate Update Conference Call. At this time, all participants are in a listen-only mode. Should you need assistance, please signal a conference specialist by pressing the star key followed by zero. After today's presentation, there will be an opportunity to ask questions. To ask a question, you may press star then one on your telephone keypad. To withdraw your question, please press star, then two. Participants of this call are advised that the audio of this conference call is being broadcast live over the Internet and is also being recorded for playback purposes. A webcast replay of the call will be available approximately one hour after the end of the call through December 20, 2021. I would now like to turn the call over to Scott Gordon, President of CoreIR, the company's investor relations firm. Please go ahead, sir.

Thank you, Eileen. Good afternoon, everyone, and thank you for joining us for the REDCAT Holdings Fiscal First Quarter 2022 Financial Results and Corporate Update Conference Call. Joining us today from REDCAT Holdings are Jeff Thompson, Chief Executive Officer of REDCAT Holdings, and Jeff Hernan, Chief Financial Officer. During this call, management will be making forward-looking statements, including statements that address REDCAT's expectations for future performance or operational results Forward-looking statements involve risks and other factors that may cause actual results to differ materially from those statements. For more information about these risks, please refer to the risk factors described in REDCAT's most recently filed periodic reports on Form 10-K and Form 10-Q, the Form 8-K filed with the SEC today, and REDCAT's press release that accompanies this call, particularly the cautionary statement in it. The content of this call contains time-sensitive information that is accurate only as of today, September 20th, 2021. Except as required by law, REDCAT disclaims any obligation to publicly update or revise any information to reflect events or circumstances that occur after this call. It is now my pleasure to turn the call over to Jeff Thompson, REDCAT CEO. Jeff, please go ahead. Thank you, Scott.

Good afternoon, and thank you all for joining our fiscal first quarter 2022 call and webcast. Also joining me today is Joseph Kernan, our CFO. The series of recent acquisitions we have completed, both in fiscal 2021 and 2022 thus far, are pivotal to the direction and outlook for REDCap. The acquisitions of Keel Drones at the beginning of September 2021 and Skypersonic in early May 2021 positioned the company to compete effectively in the military, and infrastructure inspection marketplaces, respectively. And both will add considerable contribution to our enterprise segment. With the Teal drones acquisition, we gain immediate access to the military reconnaissance and public safety applications markets for small UAVs. Teal's Golden Eagle drone is one of just five drones approved by the Department of Defense, We are both invigorated and optimistic about the military contracts that we can now bid on. Additionally, the Golden Eagle is currently the only drone approved to fly on United States Air Force property. This is an important exclusivity, and we intend to continue to leverage this competitive advantage moving forward. Teal drones are made in the USA, and the ban on drones and even drone components made in China coming into effect. This is another competitive advantage for REDCAT. Additionally, we continue to move forward with the DoD and the short-range reconnaissance, SRR, program, and we are participating in the second tranche of that program. In fact, Dr. Alan Evans, our COO, and George Matus, CEO and founder of Teal Drones, are attending the program for Advanced Autonomous Short-Range VTOL CSO as we speak. After attending crunch one, we received notice approximately five weeks later. This could be a $2 million win for Teal and Red Cat. While we are working on securing government contracts, we are also aggressively scaling Golden Eagle production to meet the current levels of government agency demands. We are fortunate to be fully funded, and we plan on using some of our cash reserve as an internal investment to grow production Turning to Scepersonic, we have an incredible opportunity to use drones to evaluate the structural integrity of enterprise and or government structures or other assets, particularly in locations where there's high risk for human operators involved. Scepersonic allows for the execution of remote drone flights with operators anywhere in the world using patented technology that allows for tight space inspections even in areas where GPS is not allowed or available. We've already received small purchase orders for pilot programs for our artificial intelligence platform that Skypersonic is building as part of DroneBox. We anticipate success in these programs as well as more substantial revenues for these services in the next 12 months. Also, we currently have outstanding bids on jobs in Europe and with General Motors and other domestic government agencies. We're currently co-bidding on a project with partners in Italy that is approximately $8 million, and if we were selected, we would get a material portion of the award. Let's move on to the consumer segment. I am pleased with its performance, especially given the adversity seen in the quarter. The global supply chain crisis resulted in being out of stock of our most popular items at Fatshark and Rotoride divisions for over a month. Luckily, we anticipated the issue and minimized the impact. We are very excited for the fiscal second quarter because we have gotten ahead on inventory and expect robust Christmas for Rotor Riot along with growing digital goggle sales from Fatshark. Rotor Riot had a backlog of almost 100 ready-to-fly drones. We have quickly started building and are expected to be caught up now that we have the supply chain issues resolved. Batshark is also poised in Q2 to rebound with new products and proper inventory. We continue to perform strongly in the market, carving out a leadership position in the industry through acquisitions and performance. As we continue to execute on the expansion of the company, with it comes an expansion of our revenue and overall market performance. As Joseph, our CFO, will talk a little later, we recognize a 155% year-over-year increase in our revenues overall. in our fiscal first quarter ending in July 31. And we are extremely in a strong position to fill large contracts and execute on our roadmap, thanks to the $66 million in cash and equivalents on our balance sheet as of July 31, 2021. And with that, I'm going to hand the call over to Joseph.

Thank you, Jeff, and to everyone for joining today. Our first quarter of fiscal 22 was exciting and eventful in a number of respects. Our strategy to acquire synergistic, grown technologies and platforms continued to move forward as we completed our first full quarter of operations for Fat Shark, closed on the acquisition of Skypersonic in May, signed a letter of intent to acquire Teal in July, and then closed on that acquisition at the end of August. Revenues, despite the challenges that Jeff described, still grew strongly in Q1 2022 compared to Q1 2021, primarily driven by Fatshark. Like many companies, our gross margin and our availability of inventory to meet demand during the quarter was adversely impacted by higher shipping and fulfillment costs, in part related to the COVID-19 pandemic. All of our functional expense categories were higher in fiscal 22 compared to the same quarter in fiscal 21, reflecting the growth of the company as we integrated the Fat Shark and Skypersonic acquisitions. the largest increase in expenses incurred in the category of general and administrative, which were heavily impacted by our uplifting to the NASDAQ market, including the associated NASDAQ listing fees, securing D&O coverage to attract qualified additional board members, as well as formally engaging a PR IR firm. While our net loss was higher in Q1-22 compared to Q1-21, we continue to efficiently grow the enterprise while controlling cash burn. Our adjusted net loss in the first quarter of 2022, which excludes non-cash expenses related to derivative liabilities and stock-based comp, both to employees and service providers, totaled only $1.1 million in Q1 2022. We think this is an impressive accomplishment considering that we were busy integrating FatShark and Skypersonic during the quarter. As most of us know, integrating acquisitions is often expensive. In summary, we were pleased with our operating performance during the quarter. we were equally pleased with our ability to strengthen our financial position during the quarter. In May, we closed an offering of 4 million shares of common stock, which generated gross proceeds of 16 million. In July, we closed a second offering of slightly more than 13 million shares of common stock, which generated gross proceeds of 60 million. It is important to note that we completed these offerings without having to include warrants, which are very typical for a company of our size. This enables us to avoid an overhang of future dilution. We ended the quarter with approximately 66 million in cash and equivalents. If you compare that amount to our adjusted net loss of 1.1 million, for the first quarter of fiscal 2022, you can quickly understand why we feel so strongly and confident about our financial position at this time. With that, I would like to turn the call over for questions. Operator?

Ladies and gentlemen, if you wish to ask a question on today's call, please press star, then the number one on your telephone. If your question has been answered and you wish to withdraw your request, you may do so by pressing star then two. If you are using a speaker phone, please pick up your handset before entering your request and speaking on the call. One moment please for the first question. Our first question today comes from Ashok Kumar with Think Equity.

Good afternoon. Jeff and Jeff, could you please review the short-term and the long-run revenue opportunities? Thank you very much.

Yeah, thanks for jumping on the call, Ashok. Yeah, there's a lot about that, as I kind of mentioned in my prepared remarks. But what's pretty exciting right now is Teal Drones. We have already ordered about 630 drones. drone chipsets to be able to construct over 600 drones that we could actually have delivered in the next six months. Depending on if we use distributors, that would generate about $6.5 million in revenue. And if we sell direct, it would generate about $8.4 million in revenue from those drones that we have being constructed right now. And then if we add in the possibility of winning the second tranche, which our team is attending right now this week, if they get that award in the next five or six weeks, that would be an additional $2 million. So the short term, I would say the next six to eight months just from Teal could be anywhere from $6.5 million with all the things I just discussed up to $10.5 million. So we think that Teal is going to start to uh, you know, hit its stride. And the goal is to get to a certain amount of drones per month that gets us to break even. So we're, we're pretty excited with Teal. And then now Scrapasonic is, is also starting to, uh, get its artificial intelligence platform in, in, in great order. We were really just going out to a few customers to make sure that it was working the way we wanted it to. We now think that the product is ready to start scaling. And as we mentioned in the remarks, we have received some smaller purchase orders on the Skypersonic world for basically getting units out to companies. And then we expect, if they like what they see, that they'll grow into very large contracts. So I think we're in a really good spot over the next six months to ramp revenue pretty quickly.

Great.

Thank you, and all the very best.

Our next question comes from Kevin DD with HC, HC Wainwright.

Hi, Jeff and Joe. This is Spencer Kirschman in for Kevin. Uh, congrats on a great quarter. I was just curious how you guys are thinking about branding and potential brand consolidation given the various subsidiaries.

Um, yeah, that's actually, it gets pretty interesting where, you know, the, uh, Some of the brands have bigger appeal than others. You know, Rotor Riot's brand is so well known that we'll keep that as a standalone brand. Same with Fat Shark. Fat Shark has been one of the leaders in the goggle space for eight years. So those are brands we would not want to touch. In the military portion with Teal and the government contracting capabilities, They also have a relatively great brand. So if, if the brand is well known and is starting to get traction, we'll probably leave it as is. And, you know, the people in the military barely know who Redcat is, but they know they knew who the heck Teal Drones is. And the same thing with Rotoride. So we'll be selective on how we brand or rebrand companies as we acquire them.

Okay. That's great color. Thank you. And, I believe you're going to continue with that M&A strategy of just, you know, trying to acquire other drone manufacturers or, you know, software, whatever it may be. Can you provide any more color on that in terms of what you see in the space in terms of, you know, that potential consolidation?

Yeah. So we, you know, as we're looking at, you know, like specifically for the DOD contract that we're looking at, there's five companies that are able to participate in these programs. It has since gone down to four, which Altevion is no longer pursuing after they got bought by Taradine. So we're one of four, which really puts us in a good spot. We want to make sure that we have the best features to hopefully win these large contracts in tranche three. Uh, so if there's any pieces of the puzzle that we don't think that we have, we would probably go after those. And they're mostly in the software world. Um, we will probably not go as such a vicious rate with our acquisitions, uh, as we have in the last, uh, six months. Um, you know, we'd like to continue to work on the Lucas deal now that we've got teal squared away. Um, which gives a great simulation platform that is needed in all of our divisions, basically, that are actually already working with Lugas. So we will still be doing acquisitions. It just probably won't be at the same pace that we've done in the last six months.

Okay, thank you. And last question, are you able to provide any additional color on different DOD activities, like different kinds of projects that you may be looking at?

Yeah. Some of the things that we're hearing right now specifically for this DOD pitch that we're going to this week, we've actually found out that it used to be just specifically for the Army, and recently we've heard that they're adding the Marines and the Navy to this program, which could enlarge the contract awards next year. So But we are basically already in almost every government entity and have teal drones there.

All right. Thank you. That's great, Collin. Really appreciate it.

This concludes our question and answer session. I'd like to turn the call back over to Jeff Thompson for any closing remarks.

Yeah, thanks, everybody. Hopefully you survived this crazy day. but we're pretty excited, and I just want to wish the team luck down in Fort Benning, and I want to thank all the REDCAT employees from all the different divisions, and it's going to be an exciting quarter. Thank you.

The conference has now concluded. Thank you for attending today's presentation. You may now disconnect.