Red Cat Holdings, Inc.

Ladies and gentlemen, thank you for standing by. Good afternoon and welcome to the Red Cat Holdings fiscal 2024 annual 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 November 8th, 2024. Joining us today from Red Cat Holdings are Jeff Thompson, Chief Executive Officer, and Leah Lunger, Chief Financial Officer. During this call, management will be making forward-looking statements, including statements that address Red Cat'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 in REDCAT's press release that accompanies this call, particularly the cautionary statements in it. The content of this call contains time-sensitive information that is accurate only as of today, August 8, 2024. 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, Chief Executive Officer. Jeff, please go ahead.

Thank you. Welcome everyone to our fourth quarter and full fiscal year 2024 earnings conference call. I will start by summarizing our performance and recent achievements. Leah will then take you through our financial results in greater detail, and then Leah and I will take your questions. I am pleased to report record results for the quarter and a record-breaking fiscal year for REDCap. First, for the full fiscal year, revenue increased 286 percent to a record $17.8 million, compared to 4.6 million last fiscal year. Fourth quarter revenue rose to 6.4 million, over 100% increase from the same period last year, and now a new top-line quarter record. This is our fourth consecutive quarter of top-line sequential growth, averaging above 10%. The last four quarters were driven by feet on the street organic sales revenue. None of this revenue was from a program of record production contract or the replicator initiative. These record-breaking achievements were completed with a single product, the TL2. During this past fiscal year, global demand continued to surge for small, portable, autonomous systems, and REDCAT responded accordingly. We invested across the organization to strengthen our product portfolio and expand our manufacturing capacity to meet the evolving needs of our customers. Our product portfolio has expanded from one drone to three drones, completing our recently announced family of systems. Let's discuss the REDCap family of systems. Our family of systems strategy is a result of listening to our urgent user needs regarding the deployment of low-cost, portable, field repairable, and recoverable ISR and precision strike systems. This is a paradigm shift in the drone industry where more expensive, non-recoverable systems have dominated the market for the last decade. The family of systems addresses a variety of mission sets from medium range ISR, short range reconnaissance, and first person view FPV precision strike capabilities commanded and controlled from a singular tactical ground control system and optimized for GPS denied and other contested environments. I will now discuss our recent acquisitions and partnerships. I will start with FlightWave. Our proposed acquisition of FlightWave Aerospace brings medium to long-range ISR and high-resolution mapping capabilities to the REDCap portfolio through their flagship product, the Edge 130 Blue. With a range of 20 kilometers and extended flight endurance, the Edge-130 outperforms other drones in its class while maintaining a small, portable form factor, which is critical to frontline warfighters. In the near future, the Edge-130 will complement the solutions of REDCAT's other subsidiary, Teal Drones, by performing joint-meshed network autonomous ISR missions in multiple domains, such as land, sea, and air. We also have an exclusive partnership with Sentient Robotics. The partnership between REDCAT and Sentient Robotics will enable REDCAT to provide warfighters with the ability for continuous, uninterrupted reconnaissance on enemy targets with drone swarms. Teal Drone's battlefield-tested drones, coupled with Sentient's fleet handling capabilities, give warfighter tools and technology they have never had access to. New technology is dramatically changing the nature of warfare, and we believe those who can integrate defensive and offensive assets across multiple domains and rapidly deploy those capabilities against adversarial targets will gain tactical superiority. Disagreeing with sentient is a major step toward the autonomous deployment and control of drone swarms. and the capability to launch from small boats or ships. This brings us to the Replicator Initiative, which seems to be focused on the Indo-Pacific region. For investors new to the REDCAT story, the Replicator Initiative is a program launched by the U.S. Department of Defense aimed at rapidly delivering advanced autonomous systems to the military. Announced in August 2023, The initiative focuses on creating and deploying thousands of all-domain attributable autonomous systems, or otherwise known as ADA2, within 18 to 24 months. The Senate Appropriations Committee recently approved a defense spending bill for fiscal 2025 that would provide full funding for the Pentagon's high-profile autonomous systems initiatives, known as Replicator. and lawmakers raised the possibility that even more money could be allotted for the effort. This DOD funding for drones is going to be the primary vehicle the U.S. government uses to kickstart domestic production. This budget plus the continuing resolution last year and other allocations will result in about $1.5 billion in funds for Replicator alone going to drone manufacturers from now until September of 2025. That would be approximately $100 million per month. We believe we are well positioned for future replicator tranches with our family of systems combined with our swarming capabilities. Last but not least, let's discuss programs of record. Again, for the people new to the story, a program of record in the Department of Defense refers to an acquisition program that has been officially recognized and funded with the Future Years Defense Program. This means the program has successfully passed through the necessary approval processes and is included in the DOD's budget planning. SRR, the Short-Range Reconnaissance Program, is a U.S. Army initiative designed to equip soldiers with small, rapidly deployable unmanned aircraft systems for reconnaissance and surveillance activities. The primary goal is to enhance situational awareness and provide a tactical advantage at the platoon level. This program of record selection process has gone on for over five years. It started with 37 companies and is now down to REDCAT and one other company. The final test for the Army was in May. We had to deliver approximately 50 final prototype systems. The final down collection is scheduled for the end of next month, September 2024. We believe this production contract will be in the hundreds of millions. Usually, when we talk about programs of record, they are U.S.-based contracts. REDCAT is also in late stages for NATO programs of record. We believe that they are also significantly larger than the U.S. SRR program of record. These programs are expected in the next two months to have their balance selection. In summary, 2024 was a great year for the TL2 with record revenues. We are steadily reducing cash burn while gaining market share. We expect 2025 revenue to be another record year in top-line growth and scale. We expect the FlightWave deal to close soon adding significant revenue to the 2025 calendar year. We believe we are well positioned for a short-range reconnaissance program of record win worth hundreds of millions of dollars, and we hope to finalize NATO-based programs of record before the end of calendar 2024. And with that, I will hand the call to Leah.

Thank you, Jeff, and everyone for joining the call this evening. As Jeff highlighted, fiscal 24 was an exceptional year, marked by record revenues of $17.8 million compared to $4.6 million in fiscal 23. This represents growth of 286%. All four quarters of fiscal 24 brought record revenues sequentially. Quarter 4 revenues totaled $6.3 million compared to $1.1 million in the same quarter of the prior year, representing a 485% increase. Gross profit for fiscal 24 totaled $3.7 million, or approximately 21% of total revenues, compared to negative 18% in fiscal 23. We continue to expect steady improvements in gross margin over time as we focus efforts on manufacturing efficiencies and reductions in cost of goods sold. We now have dedicated teams for manufacturing engineering and warranty and returns to accomplish these goals effectively. Our focus on controlling costs while scaling revenues led to a decrease in operating expenses for fiscal 24. Adjusted operating expenses, which exclude non-cash items of impairment loss and stock-based compensation expense, totaled $17.5 million in fiscal 24 compared to $18.1 million in fiscal 23. This represents a decrease of approximately $600,000, or 3%. As a percentage of revenue, Adjusted operating expenses decreased from 391% of revenue in fiscal 23 to 98% of revenue in fiscal 24, which demonstrates our success in controlling costs while nearly quadrupling revenues. Our combined cash and accounts receivable balances as of April 30, 2024, totaled over $10 million. Additionally, in July, we secured $4.4 million of non-dilutive financing through the divestiture of our investment in unusual machines. Closing this transaction eliminated our equity method investment while providing additional funding for accomplishing our strategic objectives. We are pleased to report that our cash used in operations has decreased significantly on both a quarterly and annual basis. Cash used in operations for quarter four of fiscal 24 was $2.3 million. This represents a decrease of $1.8 million or 43% sequentially and a decrease of $5.2 million or 69% compared to the same quarter in the prior fiscal year. On an annual basis, cash used in operations decreased by $6.6 million or 27% compared to fiscal 23. Overall, fiscal 24 has been a year of growth and accomplishment. We have successfully scaled revenues both domestically and internationally while controlling costs, and we look forward to continued revenue growth and improved profit margins in the upcoming year. Shortly after year end, we completed our engineering efforts for the Army, having delivered final prototypes in April and May of 2024. We remain one of only two finalists in the SRR Tranche 2 program, and we believe we are well positioned to receive an award next month. During the call today, I referenced adjusted operating expenses, which is a non-GAAP financial measure. Adjusted operating expenses exclude non-cash items of impairment loss and stock-based compensation expense. The most directly comparable GAAP financial measure is operating expenses. Listeners can find operating expenses as well as a quantitative reconciliation of the differences between adjusted operating expenses and operating expenses on REDCAT's website, which is at REDCAT.RED. I will now turn the call over to the operator for questions.

We will now begin the question and answer session. If you wish to ask a question on today's call, you will need to 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.

Before we start with the questions, I just want to do a little bit of housekeeping. I know I'm seeing a very large list of questions already, so people don't waste the same question on this. For guidance, we will resume guidance next quarter. We are in the middle of sweeps for the next six weeks. We expect to hear on SRR down selection in the next few weeks. We hope to close FlightWave in the next week or two and believe they could add 10 to 20 million in revenue in calendar 2025. So we will be able to give and resume with guidance once these data sets are resolved. So I wanted to get that out there before we took questions. Thank you.

The first question today comes from Ashok Kumar with Bank Equities. Please go ahead.

Thank you. A three-part question. The first question is you had mentioned you had $10 million in cash and receivables. Does that include the $4.4 million you just closed with UMAC? The second question, as you mentioned, that some of the NATO programs of record, the POR, are larger than the U.S. Army POR. Can you give us the magnitude? And the last one is, have you received any demand for the FlightWave Edge 130 system? Thank you.

Great. Thanks, Ashok. Actually, why don't you grab the first one, and I'll grab the second and third.

Yeah, I'd be happy to answer that. So the $10.4 million in cash and accounts receivables was our balance as of April 30th, and we closed to the sale of our investment in unusual machines last month. So the $4.4 million mentioned is in addition to cash and AR as of year end. Go ahead, Jeff.

Great. Thanks. Yeah, so the programs of record in NATO are are significant and you can understand why with them being so close to the Ukraine war. So I'll just give an example of one of them and compare it to SRR. SRR is about a little under 6,000 systems. It's still a very significant contract, but at least one of the programs of record in NATO is for 25,000 systems, it's 4X. So they are pretty massive compared to uh the uh slr program of record uh and then i think you mentioned uh demand for the flight uh edge 130. uh we've got a great response uh since we announced the loi um a lot of our customers that were on the cuffs knowing that we can actually build and meet the demand it's a great system uh you know trent and mike have done a great job designing that system and the employees there have made a very unique platform that can fly longer than any other vehicle in its size and range. We think it's a great replacement for the now discontinued, you know, aero environment Ravens. So that's, we have seen great demand signals for the Edge 130. Thanks.

Thank you, Anil Dibas.

The next question comes from Glenn Mattson with Ladinburg Salmon. Please go ahead.

Yeah, thanks for taking the question, and congrats on the quarter. On the, you know, there was a period of time where you lowered production in Q4 to get the CO3 out. So, you know, just generally asking about the production capacity and capabilities. So is that back up and running? Things going out the door again? And then when it comes to FlightWave and the acquisitions, would you move that manufacturing into your existing facility? And just give us an update on how that all will play out, if you could. Thanks.

Yes. Thanks, Glenn. So we are back in production. We're also, you know, we are in a pretty large hiring spree right now to scale production of the future teal-grown products. that we actually submitted for the Army prototype. We are preparing for large-scale production and moving into the TEAL. We're calling it currently the TEAL-3. So we're back in production. We did almost take six weeks. It was a pretty easy decision. Did we want to try to make guidance or did we want to spend the right amount of time building those prototypes to get to the Army to win, you know, a contract that's worth hundreds of millions. So, obviously, we chose to make sure the prototypes were perfect and built a great bird, and the team did an exceptional job. The new drone has been flying flawlessly. And then on the flight wave, once we close, we will probably be doing simultaneous paths They actually have a huge amount of demand right now, and we hope to be able to meet that demand for them, one, by continuing to do the production they have in California and simultaneously and parallel building a production line in Salt Lake City. So as you can see, we've been hiring quite a bit. We're gearing up to do both those things I just talked about.

Great. You just mentioned a number of $25 billion potentially for FlightWave in 2025. Is that, you know, based on some awards you expect to win? You mentioned a lot about the family of systems and the replicator program and how maybe you're more applicable to be able to get awards against that revenue source, potential revenue source. So maybe just a little background on that color that you said you gave that number. Thanks.

Yeah, so the FlightWave system, we go from having a one-product company now to three drones, family of systems that are all going to be working together through a single controller. So the FlightWave capability puts us into a completely kind of different class of drone. Even though it's still a class one drone, it can compete against class two drones with class one pricing. And that's been resonating very well. And it's unique capability in flight time that's more than its predecessors. But this one is rucksack portable. You don't need two people to launch it. It's not seven feet. You don't have to stand up and throw it in an open field and get shot at. So we think there's a huge amount of demands for this unique product. And I think that the flight wave is going to fill a huge void. the capability and the timeframe and the distances and the speed. It's one of the, I think it's the fastest drone in the Blue EOS group. So it can get places very quick. It can go very high. And it has very long flight time. So we believe 10 to 20 is a very safe projection for next calendar year 2025 for that product.

Great. Thanks. And last one for me, you mentioned the NATO. and I couldn't quite hear what you said. I thought you said down selected in the next two months, and then I thought you heard you say awarded by the end of the year. Did I get both those right? And if not, maybe you could correct me.

Yeah, once you get down selected, then you work on production contracts. So, yes, you got those timeframes correct.

Great. Okay, thanks. Congrats, and good luck. Thank you.

The next question comes from Carlo Corzine with Dawson James Securities. Please go ahead.

Thank you. Great quarter, Jeff. I want to kind of go back to the manufacturing capacity. I think the full capacity in Salt Lake was 300 at one time, and now we've got, I'd like to know how much the FlightWave, what their capacity is and where we're at in the capacity there. One thing we had always talked about because of so many contracts you can't announce was the backlog, hopefully a monthly basis, and we haven't seen that a lot. I'd love to see that as you get contracts you can't speak about. And last was which one gives you the lethal payloads? Is that the new thing? I thought it took like two years to get that kind of accreditation, or did you buy that through one of the acquisitions? That's it.

Great, thanks, Carlo. So I'll try to go in reverse here. So we don't actually make munitions that work on FANG, which is our FPV drone. And we're also working on kinetic capability for the TL3. So both of those birds will have strike capability. And long term, we actually expect to look at In long term, I mean like next year, we're looking at having the Edge 130 be able to handle a kinetic payload also, which could be very compelling considering it would be a much longer lasting loitering remission than even the Switchblade 300, which I think only has 12 minutes. But when we partner, we're able to basically drop almost anything from these you know, these drop mechanisms. They can be kinetic or they don't have to be kinetic. They could be supplies. They could be ammunition. So we don't have to get those approvals. The companies that are making the actual kinetic would have to get those approvals, which can take, like, two years.

Okay. And the capacity at Salt Lake?

Yes. yeah i mean the salt lake facilities can easily do thousands of drones not easily it's hard to do thousands of drones a month but we can get to thousands of drones a month for the the you know tl2 tl3 um you know based on getting the demand that we want from that so we're we're preparing as you can see that we are preparing and getting ready for that type of scale immediately um and the flight wave capacity we don't know yet uh we're hopefully closing in the next week or two You know, we're going to ramp up their capacity dramatically. We're getting great demand signals on the Edge 130. It's a great bird. It's a great team. But I don't have the answers on FlightWave yet.

Okay, thank you.

As a reminder, if you would like to ask a question, please press star then one. This concludes our question and answer session. I would like to turn the call back over to Jeff Thompson for any closing remarks.

Great. Well, thanks for joining us tonight. I want to thank our investors and our employees. I want to thank the finance team for getting two years of audits done in three months. That was a heavy lift. The entire TEAL team for delivering an incredible prototype to the U.S. Army. And I saw a very interesting quote from the CEO of Rheinmetall today. It doesn't convert so well from German, but he said, the super cycle, a long-term surge in defense spending is in full swing. And I'll leave you with that. Thanks and good night.

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