Red Cat Holdings, Inc.

Ladies and gentlemen, thank you for standing by. Good afternoon, and welcome to the REDCAT Holdings Fiscal 2025 First Quarter 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 and then one on your telephone keypad. To withdraw your question, please press star then 2. 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 22, 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 make 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 results on Form 10-K and in REDCAT's press release that accompanies this call. particularly the cautionary statements in it. The contents of this call contain time-sensitive information that is accurate only as of today, September 23rd, 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, and welcome, everyone. to our first quarter fiscal year 2025 earnings conference call. We'll begin with some housekeeping items, followed by the exciting launch of our new product line, the Family of Systems. Leah will then provide a detailed review of our financial results. Afterward, I'll share our expectations and goals for the calendar year 2025. Finally, Leah and I will be available to answer any questions you may have. So let's start with housekeeping. I am pleased to announce that following requests from our lawyers, auditors, analysts, board members, and many shareholders, we will be switching to a calendar year starting January 2025. Our guidance will also align with calendar year for 2025. Leah will provide more details on the mechanics of this transition. I'm pleased to report another record quarter for Q1 with approximately $2.8 million in revenue, a 59% year-over-year increase. However, the real highlight of Q1 is that we delivered the final prototypes to the Army for IoT and E. IoT and E stands for initial operational tests and evaluation. This process is used primarily in the military and defense sectors to assess whether a system or product is operationally effective and suitable for its intended use before it goes into full-rate production. We successfully delivered approximately 40 systems to the Army and built TEAL-3 units for demos and partner integrations. Within weeks, the TL3 proved to be an immediate success. Our management, engineering, and manufacturing teams quickly developed a plan to scale production for 2025. Over the past four months, our engineering and manufacturing teams have been retooling and preparing for high volume production. We are also implementing quality management systems to meet scaling requirements and achieve AS9100 certification in 2025. A common question from investors is whether we can meet the demand of an SRR contract or other large-scale contracts. The answer now is a resounding yes. The pause in manufacturing in Teal 2 and building our Army prototypes impacted TL2 sales in two ways. First, we couldn't produce and sell TL2 units while we're tooling our factory. And second, once customers learned about the TL3, some chose to wait for its release. This is similar to how no one buys a new Apple iPhone in August. We believe these strategies have been successful as evidenced by our record backlog of 13 million. More details on backlog during our guidance update. In Q1, we launched the REDCAT family of systems, expanding from one product to three. This diversification enhances our product range and revenue streams, which we believe reduces investment risk. The past five months have been incredibly busy as we scaled engineering, scaled manufacturing, expanded our product offerings. We are no longer a one-product company. Let's move on to products in REDCAT's family of systems. REDCAT's family of ISR and precision strike drones will provide the industry with an alternative to conventional ISR strike systems on the market that are high-cost and non-retrievable. REDCAT's sensor-to-shooter S2S system for identifying targets with optional precision strike capabilities is differentiated from other systems with its low-cost portable drones. The objective of this new family of systems is to meet the increasingly urgent need of the Pentagon's initiatives for swarms of low-cost, attributable ISR and surgical strike drones deployable in air, land, and sea environments. REDCAT's new family of low-cost and portable unmanned ISR and precision lethal strike systems include three aircraft with complementary capabilities in a common ground control system, such as the Android Tactical Assault Kit, otherwise known as ATAC, for multi-vehicle command and control. These three systems are the Edge 130 Blue, currently the Teal 2, and last but not least, Fang, our new FPV drone. The Edge 130 Blue, a hybrid VTOL system, can be assembled and then hand-launched or ground-launched in just one minute by a single user to capture high-accuracy aerial imagery with long-range autonomy. Weighing only 1,200 grams, The Edge 130 has flown two hours in forward flight mode, which is the longest flight time of approved Blue UAS drones. Teal 2, everybody already knows about this drone. We've been selling it for over 18 months. And then finally, Fang, an FPV drone that will add surgical strike capabilities. Warfighters can combine and deploy these FPV drones with lethal payloads and ISR drones based on the mission profile for seek and destroy capabilities. Since we just closed on FlightWave, I want to spend some time on the Edge 130 Blue. The Edge 130 Blue is a unique product in the drone space. It is a VTOL, vertical takeoff and landing, fixed wing airplane that is portable and fits in a warfighter's rucksack. It has the longest flight time on the Blue UAS cleared list, Demand for the Edge 130 has been much better than expected since we announced the LOI. I will talk about the significant contract wins when I discuss our guidance after Leah's comments. I want to congratulate the FlightWave team on this engineering model. Now for the elephant in the room, short-range reconnaissance, SRR. The last few years, we have received our down selection for SLR prototype contracts in September. The final production contract award has been scheduled for down selection in September 2024 for almost two years. In late August, at the Pathfinder Conference in Huntsville, Alabama, the Army mentioned during a speech that SLR had a clear winner. We are hoping to have an update from the Army for this call but that is not the case. This is why we do not include SOR in our full-year guidance for 2025 or any guidance. We worked very hard to give the Army a product that meets and exceeds their requirements. We hope to hear back in the next few weeks. I will now hand the call to Leah, after which we will talk about our guidance.

Thank you, Jeff. Hello everyone and thank you for joining the call this afternoon. Today I will be reviewing the highlights of our first quarter of fiscal 2025. Revenue for the first quarter of fiscal 2025 totaled $2.8 million compared to $1.7 million for the first quarter of the prior year. This represents year-over-year growth of 59%. Growth margin for the quarter was negative 17% of revenue. This was entirely due to the final delivery of prototypes for the SRR Trunch 2 program and was not related to product sales. We do not expect to have negative margins again in the future. In spite of this, we are thrilled to have completed this engineering effort and excitedly await an announcement on whether we will be down-selected for a production contract under the short-range reconnaissance program. Cash used in operations for the first quarter of fiscal 25 was $2.3 million. This represents a decrease of $4.6 million, or 66%, compared to the same quarter in the prior fiscal year, and remained flat sequentially. We continue to prioritize efforts to control costs without limiting growth. We ended the quarter with $7.7 million in cash and just closed a debt deal securing an additional $8 million in financing. Looking to the future, we have been preparing manufacturing of our latest product, which we're calling the TL3 for right now. We expect to produce this drone for several years, which will allow us to steadily increase margins over time. As we have said in the past, we anticipate product margins to reach up to 50% under mass production. Overall, we remain optimistic about the future of Redcat and our ability to provide products that meet the needs of the warfighter. This is especially true with our new family of systems, which includes the FlightWave Edge 130 Blue, the TL2, eventually TL3, and Fang. Additionally, we believe this multi-system strategy will lower investment risk through product diversification. As Jeff mentioned, we're also going to be changing our fiscal year end from April 30th to December 31st, beginning December 31st, 2024. What this means from a reporting standpoint is that we will report quarter two results for the three months ended October 31st, 2024 in accordance with the current fiscal year. Then we will file a transition report 10-K for the eight months ended December 31st, 2024. After that, all future filings will be based on a calendar year. I'm now going to turn it back over to Jeff to provide guidance for the upcoming calendar year 2025 before we take questions.

Thanks, Leah. REDCAT expected to have news about SRR for this conference call. And as you know, we are still waiting like everyone else on this call. As I said earlier, we usually get down selection news in September. But preparing for this call without SRR was very eye-opening. Without SRR or any other NATO programs of record, we are still growing revenue 200% a year and are a very healthy growing company. If we get news in the next couple of weeks, we will update our guidance for calendar 2025. As stated in the press release, we expect revenue for 2025 of 50 to 55 million, again, without SRR or any other programs of record from NATO. We currently have a backlog of approximately 13 million, a company record. This could change day to day as we finish sweeps this week. We can now open it up 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 and then two. If you are using a speakerphone, please pick up your handset before entering your request and speaking on the call. One moment, please, for the first question. And our first question today comes from Ashok Kumar with Think Equity. Please go ahead.

Thank you, Jeff, and congratulations. Two quick questions. You have a backlog of 13 million. Can you give us any color on the product mix? And the second part is, will this backlog ship this calendar year? Thank you.

Great. Thanks, Ashok. Yeah, this is a very exciting question. We've never had a product mix question because we only had one product. But about half of the backlog is FlightWave Edge 130 Blues, which, as you know, we just closed about 16 days ago. We had a lot of interest. Since we signed the LOI, because we're a great combination, an incredible engineering team over there, and we have great manufacturing capability and access to capital, we're hoping to ship a significant portion of that backlog by the end of calendar year. We're kind of in this really weird spot now where we're transitioning from our old fiscal year into a calendar year, but we're just basically running so hard to build drones, ship drones, get rid of some of this backlog, and prepare for 2025, which, as you know, with the new guidance, is pretty compelling, even without SOR. Male Speaker 1 Great.

Thank you very much, and all the best.

Male Speaker 2 Our next question comes from Glenn Mattson with Leidenberg Thalmann. Please go ahead.

Glenn Mattson Hi. Thanks for taking the questions, and congrats on the progress. So when you speak to the guidance, the $55 million for calendar 2025, can you talk about the mix involved with that? I know FlightWave, you know, Jeff, I know you're pretty excited about some of the activity you're seeing around that. You know, can you just give us a balance of kind of where you expect that to shake out between the two main products lines and if there's FPV involved in that as well?

Yeah, I think – I'll start with the FPV portion. FPV, you know, it's a must have product for the warfighter on the battlefield. So that's why we've included it in our, you know, family of systems. It really gives you a complete solution and strike capabilities. We don't think that the FPV is going to be a large portion of our revenue for next year, maybe five to eight million, you know, because they're very low cost. I think the remaining revenue for 2025 from the forecasting that we've been working at will be pretty close to 50-50, the TL3 and the Edge 130 Blue. And, you know, we've been pretty conservative with our previous guidance and done pretty well before. So I think that's kind of a thumbnail of the mix of the $55 million.

Great, helpful. Leah talked about, I think it was she said 50% gross margins, correct me if I'm wrong, but can you talk about if you're at that $55 million as you kind of in the back half of that run rate, in the back half of next year, can you talk about what the margin profile would look like at that point or if there'd be a greater scale needed to get to those target margins?

Yeah, great question. I'll just give some color before I hand it to Leah. For the last, you know, year and four or five months, we've been building the Teal 2. It came out of the box very hot and was selling very well, still selling very well. But we always knew that once we had the, you know, what we were delivering for the SRL prototypes is going to be the next Rev Bird. So we're, you know, switching airframes every couple of years. You never get to that mass production where you're making a drone for, you know, three, four years straight, will happen with the TL3. So, and Leah's done some great modeling on how we get to, you know, 50%. But Leah, if you want to add to that.

Yeah, I'd be happy to. I would love the example Jeff gave about the iPhone because I think we can all relate to holding out for the next one, and that's exactly what we've seen here. But thankfully, we don't anticipate that same situation anytime soon with the TL3 because we plan to produce it all of next year and for a longer time period after that. We expect to just steadily increase margins as we go and not having to, you know, change over the production lines. And with the ability for our teal engineering and manufacturing teams to really focus consistently on the teal three, we believe we can rapidly get to 50% margins.

That's helpful. You did mention, Jeff, that you raised a little bit of debt, I believe it was post the quarter. Can you talk about that? amount of capital you might need to get to profitability, or is there any color you can give there?

Yeah. We didn't even make it into the press release because we closed about two hours ago, but we raised approximately $8 million. Leah really worked really hard to get that done. We do expect this could get us to January, February timeframe, which for us is very important because any large contract wins, that's approximately when we would receive our first set of funds to build out any large production contract. So our goal is just to get to those prepayments without any more dilution. So that's why we did this small piece of debt. But Leah, if you want to give some of the parameters on the debt.

Yeah, definitely. There are a few main points I can go over. As Jeff mentioned, it will be proceeds of $8 million. There are no repayments for six months, which we're very excited about, as Jeff said, just kind of getting through to that January-February timeframe. There are some warrants with it, but warrant coverage is approximately 30% and they are cash only. The exercise price on those warrants is $6.50. So, you know, if and when they're exercised, those would generate approximately an additional $4.9 million in proceeds. So, yeah, as you said, we've worked really hard on this and we believe it will do a lot of good for the company and help us get through the next, you know, into next year.

Great. Thanks for the call there. And let's just last discuss a couple quick ones on SRR. Jeff, do you have any sense – I know it could be any day now. Is there any type of, like, you know, specific times that you're looking for for when an announcement could be made, number one? And then can you just remind us one more time of the scope? And I believe I have a number in my head of, like, $79 million in the first fiscal, you know, government fiscal year potentially as the kind of the TAM or SAM, I guess – You know, maybe just a little more color on that would be great. Thanks.

Yeah, thanks. Yeah, we're, like I said, you know, it's been said publicly that there's a clear winner in it, and it's done. You know, so, but when you When you submit your final prototypes, you don't really get to communicate. So you don't have any information until they call you and give you the news of down selection, usually three or four days before the rest of the world finds out. We think it could happen anywhere from early October or maybe they wait to the big army show they have every year at AUSA. We're very confident, but until we get official notice, we have no idea. And, yeah, some of the things that you can find online for the first year of deliveries between May and September of 2025 is approximately 79. That's the same number we found out there.

Great. Okay, thanks. I'll pass it on. Thanks very much.

And our next question comes from Carlo Corzine with Dawson James Securities. Please go ahead. Hi, guys. Just a couple things.

The SRR, how is that tied? Actually, I think the last conversation you thought you'd see some NATO orders. I know you've been working with five or six different countries, thought you'd see NATO orders possibly before SRR. And are they tied together? I mean, if you don't get the SRR, will you get NATO, and vice versa? And my second question is in the financials that just came out. Are those combined? If not, when will they be combined flightways?

Yeah, okay, great. Yeah, so SOR and any NATO contracts are not, they don't rely on each other whatsoever. We've been doing tests with certain ministries of defense for some almost 16 months now. We are, we have a couple that are getting real close. We think we're pretty darn close to getting what we call the initial order. It's typically one or 200 systems to get the training started before they do a very significant buy. You're always waiting for that first order, kind of like what happened with us in Border Patrol. They gave us an order for 50 before they gave us a large order and we became the drone for the Border Patrol. We are getting close with a couple in NATO right now. We were hoping it would come in quicker. We were originally told one of them was supposed to happen in June. You know, we just have no control over these large bureaucratic systems. But if you look at some of the country's announcements in Europe, you know, there's a lot of growth in what everyone's expecting to build their drone arsenal. So we're feeling pretty good about that, and we're feeling pretty good about SRR. Oh, financials are not combined yet.

When do you expect those to be combined, and why didn't you go with a government year, October 1st, instead of calendar year?

So for FlightWave, we closed the APA at the beginning of this month, and the financials reported today are through July 31st. And so FlightWave will be included in what we report as of October 31st. That will be reported in mid-December. And in that filing, it will include the September and October activities. So it will be two of the three months. And then, you know, Jeff can speak more to this, but for the fiscal year, what we see a lot with the government contracts, you know, the government fiscal year is through September, as you've stated. But what we find is that their budget isn't always finalized, and then there are sometimes amendments, and our contracts tend to be finalized around that December, January timeframe. And so building in a little bit of that delay with a calendar year, just will give us better visibility and better consistency for our company.

Yeah, Carla, just to give you a little bit more color on that, like I mentioned in my prepared notes, is every single year for four years we've been getting our down selection in September. They then give you a prototype contract for – for the next year of building the prototypes to hopefully win a production contract. I don't know if you're aware, but they announced the MRR winner, which is the company level, which was almost two weeks ago now, which was Anduril, Ghost, and PDW. They're two years behind in that program from where we are now. We're going for a production contract. But so you get a production contract or prototype contract right around now, once you get down selected, you typically negotiate for two to three months. We've signed probably the last three years in December. By the time we have a closed deal, we're heading and we start getting our first checks in January. And if you look at all the continuing resolutions, they always get in the way. So we're using their methodology to capture as much of it in something that's going to be more reliable for us, knowing that it's usually delayed, but we'll typically get the full year and get to ship these items.

Great.

Great. Thanks.

That concludes our question and answer session. I would like to turn the conference back over to Jeff Thompson for any closing remarks.

Well, thanks, everybody, for jumping on. We obviously have an exciting year coming in 2025. Maybe it could be even more exciting in a few weeks. We will keep Everybody informed as soon as we know. But regardless, we are in great shape. We're excited. We're building great stuff. People love it. Our new product from FlightWave is fantastic. Our new FANG product is fantastic. The TL3 has got an incredible response. So we look forward to talking to you in the future. Thanks, everybody.

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