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.