Draganfly Inc

CNSX:DPRO

Earnings Call Transcript 2023-Q1

[Rolly Bustos, Internal Investor Relations]

All right. So just to be respectful of everybody's time and to start on time, we will get started. So hello, and welcome again to the Draganfly 2023 Q1 earnings call. As usual, my name is Rolly Bustos, Internal Investor Relations here at Draganfly.

I welcome each and every one of you today, shareholders, stakeholders and analysts. The format will be the same as previous and then I'll begin with our CEO and President, Cameron Chell, discussing the first quarter operational highlights. From there, our CFO, Paul Sun, will jump in and discuss the financials as reported earlier. And as always, we'll conclude with our Lead Director, Scott Larson, facilitating the Q&A portion. You're always welcome to reach out to me at [e-mail] after the call if your questions did not get answered.

Lastly, I want to remind everyone that this presentation may include forward-looking information and statements. These statements are not guarantees of future performance and undue reliance should not be placed upon 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 2 of this presentation, and I'd be happy to send that to anybody upon request. So Cam, please go ahead.

[Cameron Chell, President and CEO]

Great. Thank you, Rolly. Thanks, everybody, for taking the time to be here today. It's an honor and a pleasure. Just pull up the screen share.

And -- so welcome to our Q1 2023 shareholder earnings call. Thanks, Rolly, for reviewing the disclaimer with us.

To immediately and right to the point, review our financial results for Q1, which given all of the circumstance around we're very happy within we think it's set a great platform for the coming quarters going forward. So we had revenue of $1.6 million or just over that. Of that $1.38 million of that was product sales with basically the remainder of that in service provision. Our 2023 Q1 gross profit was $443,000, which represents a 27.7% gross margin, but I think it's very important to note that, that gross margin would have been $500,000 or comfortably over 30% have we not included a onetime inventory charge of $77,000, again, taking conservative action at the advice of our finance team and auditors.

Our March 31, 2023, cash balance is $13 million. So we're in a strong financial position still and continue to be on budget. This is a bit of a review for some, but a level set for a number of new shareholders that we'd like to welcome to the company, and thank you for your trust and the opportunity to serve. Draganfly is recognized as a global commercial leader in the multi-rotor space. And we are a rapidly growing drone manufacturer and solution provider.

We do have a strong emphasis on artificial intelligence and data analysis capabilities. We've been saying for quite some time now that five years from now, Draganfly will be known as a drone company. But really we're a data company. And at the end of the day, data is the only thing that will probably differentiate artificial intelligence. And so we'll continue to place focus on data, data collection, data analysis and really being able to do things with that data or provide or unique ways to collect that data because nothing collects data better than a drone for our customers to give them a strategic advantage.

We have a very strong IP portfolio. We have a culture of developing IP. We definitely have a tech-focus and engineering-focus culture as well, and I'd like to suggest that, that will continue to the largest degree. And we have always new product development, but it's always driven by customers. So we're R&D and things that aren't brought forward by a customer.

And so what that provides us with an advantage in today's market is that we have a product line that has matured -- that previously has matured and as we've cut over to a new product line has matured quickly. And I'll give some analysis and some observations from the AUVSI show that I'm currently attending in terms of where we see the rest of the industry and where some of our specific advantages are.

So the other kind of global things that are happening right now is that the market has significantly expanded in the government, civil and commercial sectors. And that's primarily because of security concerns, offshore concerns, data concerns, and we see that there's a domestication of product manufacturing in North America. There's a handful of manufacturers in North America and even a smaller handful that can do the type of work that we're doing, which also speaks to the amount of time it takes to get products to market, I mean, these are aircraft. And if we think about how long it takes an aircraft to get to market, that's how these things are being treated by the FAA and by our commercial and by our military partners. And so I'm really pleased to see where we're at with that and how we're progressing through it and the advantage that gives us.

And we're also now moving and have moved into a favorable regulatory environment, where things like BV lost beyond visual line of sight as an example, or preflight inspections done by video as opposed to humans. Those are the types of things that are now unfolding and opening up the entire commercial work.

So in terms of industry outlook, 2022 is about a $30 billion industry, but it's really important to note that the vast majority, 97% plus of this was in the military space and very large drone systems, not necessarily small UAS space. And then a couple of percent of this was in the consumer space that is really only 1% or 2% of this is in the commercial space. But the vast majority of that growth through 2020 -- through 2030 is going to be in the commercial space.

Now the other outlet out there is Ukraine. Now the Ukraine has completely expanded the military space into small UAS or four small UAS. So previously, 10,000 feet down -- well, previously air dominance was all very large air systems. And now 10,000 feet down, air dominance is all about small UAS. So we've seen entirely new budgets, either shifting or being created or small UAS.

And it's taken this last year of unfortunate conflict in Ukraine for those budgets to start to move through. We now start to see requests and tasking orders and procurement orders and things like that flowing through to budget. And as we go into early next year, we'll see large military budgets starting to come into effect. And I think our product line is lined up quite nicely for that.

In terms of our history, the bottom left here is Toy drones. And the top right would be the most sophisticated AI-based predators or reapers or multi -- tens and tens of millions, if not hundred million dollar systems. And the black dots represent the products that we have out in market. The blue dots represent systems that we've done contract engineering for with U.S. military contractors.

And the yellow would represent the type of systems that our personnel have worked on. So you can see we skew heavily to a much more sophisticated drone system. And what's interesting about the military market is that's obviously where that needs to be. But when you think about the commercial market, now that it's maturing, they're looking at who has hardened systems, who has the most amount of flight times, who have systems that can operate in weather.

And it's one thing to produce a drone, and this is a big thing that we're seeing at AUVSI, lots of new whizbang out there, not as much vapor, where still a lot of vaporware, but not as much, but lots of new whizbang features, great things like that, but not a lot of product that's ready to be sold into the market because it hasn't gone through extensive testing. And the product that is ready to go to market hasn't gone through the production cycle for the most part, 90% of it out there where it can be done at scale. So what we're seeing in the marketplace going forward here is the winning companies are the ones that can actually produce product and get it out into the market. And whizbang features are going to become a little bit less and less over the next 18 to 24 months.

And so again, I think in this last quarter, we've got a new production facility coming online actually at the end of this month. And we've tried to time that as best as possible when we see our sales ramping, which they're now doing and we've got a backlog, and so that production capacity is really, really important to us. And I really want to throw it out to our team for the work that they've done in timing that, not overspending, building our infrastructure, not pre-scaling but at the same time having a product that's ready to be sold into the market.

So just in terms of some operational highlights, Draganfly heavy lift drones, our Commander 3XL and our Draganfly lighter system. So the 3XL is now -- we are now starting to carry inventory of it. It's all sold out. And we're building up that inventory absolutely as fast as we can. The heavy lift drone.

We've got multiple customers either putting deposits or wanting to put deposits on it. It will be available Q4 really for full delivery into Q1.

And at our LiDAR system. We have systems sold and again, it's probably about Q3 before the production comes off there. So a combination of getting the products ready, a combination -- and again, this is a new product cutover. So -- we've had several successful product lines in the past and basically doing a cutover from last generation into this new generation also taking into account the new rules and regulations that are available to us and taking into account the new customer requirements. So what you don't see here at this point are small UAS, like that middle drone there Commander 3XL. That's about the size of a coffee table.

So to just give you a sense of the scale of it. That particular drone will list -- lift 23 pounds. It's only about a 24-pound drone. So it's under the 55-pound regulatory limits that kind of changes the scope of what the drone can do and is allowed to do is probably the most efficient drone and certainly in terms of demand. We're going to have a tough time keeping up on this thing for quite some time.

So as mentioned, we now have product wait list. So again, the sales teams, which have matured, our new ERP systems have got put into place last year, our sales processes are hardened and we've got experienced sales staff on now. That's -- and we've also have brought on new business development staff. So we didn't want to overscale or pre-scale on the biz dev side until we knew we could meet demand on the sales side. And so now not only do we have a wait list that has -- that's growing for both these product lines, but we now have business development that's adding into, okay, how are we actually going to be utilizing these with partners.

And so as evidence of that in this last quarter -- actually, I'll come back to this slide in one second. In this last quarter, we announced four key partnerships. So we are a direct sales model. We do not sell through a reseller type of program. And as such -- and we're doing that for a number of reasons. One, it really helps ensure that the product that we're getting to the market, we have direct contact with the customers.

So our customer is that end user. Our customer is somebody who we want to create advantage for their business. That's always been our ethos.

So as we go to market, how do we amplify our particular sales capabilities? Well, we do it through partnerships. Now the Draganfly 3XL drone is really designed to be a utility drone, kind of like the jeep or the hum vehicle of the military in their date where you could bolt on all types of systems to it. So what that means is that as we go to market, whether it's software or different payloads, the -- actually one of the biggest sales challenge that these partners have is that as they go out to market, they may have a particular customer that wants to use their particular software or their particular payload, but it's hard to match it with the drone that actually is integrated or can be used for that particular mission. Because it's too small, it doesn't fly long enough, the battery life, any number of reasons.

And so what we've done in building the 3XL in particular is a drone that already has dozens of payloads that fit on to it. It's integrated into several systems. And DGI had a very popular drone called the M600. They took off life and that this is now replaced into the market. So the thousands and thousands of payloads that were designed for that actually clip right into this particular drone.

And now these partners here that we're listing are all strategically chosen and we're completely honored to be working with them. Agile mess basically builds -- will add its technology to our UAV platform for wireless surveillance products. So these folks really are really strong in the public service and the public safety market. And so we're referring business back and forth with each other. They have a very specific market that they go after and our drone fits that very specific market within their vertical that they're doing.

So we're honored to be working with them. SkyeBrowse integrates world-class reality capture platform with Draganfly software. Now in theory, you can kind of integrate this with any drone system. But as you optimize it with ours, there are a whole bunch of advantages, everything from speed and accuracy and such in terms of how it works with the Draganfly drone. And we have got a similar customer set that we can go and talk to.

The mirror, this is primarily military, but it's got lots of commercial application as well. They provide virtualization environment in GPS-denied areas. So if you're flying in theater and you don't have GPS, but you need to fly either on screen or first person, they can actually provide an environment even if you don't have GPS in there. So this is an organization as all of these organizations are Vermeer and CODAN in particular, that are at Soffe, which is the special operations conference down in Miami. And we certainly have representatives down there, but both these organizations are carrying our product and our drones in their booth because we are co-selling into that market.

And these are very established companies in that market. Really, really excited about our relationship with CODAN Communications. They provide a [coffee radio]. We do work with other radio systems as well that are requested by our customers. There's incredible great competitors in this market. The [selvis Radio] was one of them.

In particular, we have built a really strong relationship with CODAN as they look at those particular markets, and we are codeveloping products together. We're working in those particular markets. They've been very gracious in representing us at their shows. We have customer -- customer engagements that are happening with them, multiple places around the world as we do with our other partners, and this is the type of work that will actually propel Draganfly forward. And these are the types of customers that help us do that.

What I'd like to do now at this point is turn it over to Paul Sun to talk about our financial results for Q1. Paul?

[Paul Sun, Chief Financial Officer]

Thanks, Cam, and thanks, everybody, for joining. So looking at this table here, we'll go over the year-over-year comparisons for Q1 of this year versus Q1 of last year.

So revenue for the first quarter was down [1%] to $1.6 million from $2 million in the first quarter of 2022. As Cam mentioned at the outset, revenue comprised mainly of product sales, $1.38 million with the balance coming from drone services. And as mentioned earlier, some of the reduction in revenue is due to new products cutover and production capacity build-out.

Gross profit was $443,000 due to a onetime write-down of inventory and otherwise would have been $520,000 for the quarter and as a percentage of revenues would have been 32.5% this quarter, which is down 7.4% from the same quarter of last year. Again, this is a result of more sales coming from lower-margin products versus those sold in Q1 of last year, as the product mix just changes from quarter-to-quarter.

Total comprehensive loss for the quarter was $7 million compared to a loss of $6.3 million in the same quarter of last year. This quarter, as mentioned, includes a noncash change comprised of derivative liability of $57,000 and a write-down of $77,000 of inventory and would otherwise be a comprehensive loss of $7 million. So no real big change there versus an adjusted loss of $5 million a year ago. So the increase is due to higher office and miscellaneous advertising, marketing, IR wages, partially offset by lower insurance costs.

So continuing to focus on the quarter. If we now look at the table on the right, since they just went over year-over-year changes, we'll look at quarter-over-quarter changes comparing this quarter to Q4 of last year. So in this case, revenue actually increased 22% to $1.6 million compared to $1.3 million in Q4 of last year due to higher product sales. Gross margin, as I just mentioned, would have been 32.5%. The actual posted value was 28%, and that compares to a negative gross margin in Q4 due to an inventory write-down, et cetera.

The gross margin actually would have been 24%. So we're still seeing an increase in gross margin of 8.5% quarter-over-quarter and again, due to the sales mix of the products sold.

Total comprehensive loss, we talked about this $7 million compared to a comprehensive loss of $16.7 million in Q4 of last year. And for those that were with us on the call then, we had a number of noncash items last quarter. So if we excluded those, the comprehensive loss would have been $7.4 million in Q4. So our loss this quarter was a bit better primarily due to higher revenues.

If you go to the next page, Cam, just looking at a kind of a high-level balance sheet, you can see that our total assets increased from $14.6 million to $19.6 million from the year-end, which is largely due to the recent financing the company did. We have a strong working capital surplus at the end of the quarter, we're up $14.7 million versus $10.2 million. And you can see that the company continues to have minimal debt. As mentioned, company's cash balance is $13.3 million compared to $7.8 million at the end of fiscal '22.

And with that, Cam, I'll pass it back to you.

[Cameron Chell, President and CEO]

Thank you very much, Paul. That concludes the formal presentation. I think we're lucky enough to have some Q&A at this point. So I think I'll be turning it over to Scott.

[Scott Larson, Lead Director]

Yes. Thanks, Cam. We have a number of questions that came in before the call. And of course, feel free to send the questions to doing the call as well, of course, as some come in right now. I'm just going to go through some of these questions and I'd be screening them and send them back and forth to either Paul or Cam as they come in.

So first question here, Cam, talk a little bit about Ukraine. Is this an area that we still want to be putting time and effort into it, what does it look like over the next six, 12 months? We haven't talked too much about customers, but what do you think the Ukrainian efforts that we're going to do is -- will impact Draganfly in the future?

[Cameron Chell, President and CEO]

Yes, great. I'm really glad somebody asked this question because I didn't focus on it purposely during this particular call because we wanted to get through and really talk more about where we're at on the product side, which has been a big focus of ours this last couple of quarters. Obviously, Ukraine remains strategically imperative to us. It's a very, very important. It will -- in the future, if you are a player in Ukraine, you will be a credible player going forward in the UAS market.

Obviously, not just in the commercial market, but on the defense side. The numbers that we talked about at the beginning, those industry numbers really don't account for what has happened in Ukraine and in terms of what I refer to as air dominance, and how budgets are now shifting towards that. I would say that the primary reason that we have so much activity in our military business right now is quite frankly, because of the credibility that we've built up in theater in the Ukraine. So we're there with pilots. We're there with people on the ground. We're doing de mining.

We understand the search and rescue, we understand reconnaissance and basically the skill of what it takes for pilots to work. We have a product that is hardened in those areas, and so that's a whole bunch of credibility as we are moving forward our military prospects here. So just from that pure prospect, it's really important for us to be there.

Now in terms of revenue generation out of Ukraine, we have been very focused on the mining market because it also has a much -- it has a very large global footprint. And it's not something that's been comprehensively tackled by somebody in the past because it's one, it's tough work. But two, there's not really ever been this active of a theater in order to be able to do it.

So we do have expectation of some significant announcements that will be coming from that particular business. But in terms of other drone sales and training, we are active in the region and we have to be a little bit careful with announcements and such, but we expect Ukraine in particular, to be a large revenue source for us and really kind of a stepping stone for defense budgets over the next seven to 10 years, which will be at absolute record doubles in particular for drones and things like AI.

[Scott Larson, Lead Director]

Can you talk a little more about the production capacity? What does that look like? How is that scaling up? We've talked about it at the last call. Maybe give a little more color there, if you can.

[Cameron Chell, President and CEO]

Yes. So without saying things that probably might be a little close to the edge. We -- on the new product lines, we are at a spot where we could produce tens at a time. And now keep in mind that, that was also because we're making product adjustments based on customer feedback and tests and all the rest of it. And now that the product at 3x in particular is hardened, we've moved to be able to be producing hundreds in a short time frame.

And then by two of next year, we'll be in the spot where those kind of scales are in thousands of a short time frame. So that's a combination of the new plant opening up. It's a combination of new processes being implemented. It's a combination of some continual redesign on those products so that our production capacity is optimized and we have less supply chain risk.

These are all the things that like when you're in manufacturing, especially in an industry that's so new, it doesn't have set requirements coming out or even government regulations in some cases that would over -- provide oversight on how certain things have to be done. You're in this kind of continual flux of like, okay, what does the customer need, what can the actual customer do and such. So it's a very, very tough business and very tough time to build scale, unless you're in like kind of like a consumer space where those things don't come into effect. So anyway, I think we're there now, and we look forward to filling the backlog and having some financial results to demonstrate that.

[Scott Larson, Lead Director]

Yes. Okay. Good. Any progress here with Windfall Geotech in regards to land mine detection or some of the downstream stuff that we talked about with them before?

[Cameron Chell, President and CEO]

Yes. So they're active with us in our work that we're doing in the Ukraine. And certainly, the AI system that continues to value as we gain data, we think will be game changing in the space. So we're thrilled to be working with them. We have a strategic imperative to develop this out with them.

And this is now moving over actually into our mining business as well more and more. So I'm pretty excited about what's going on in the mining industry in terms of the size and type of drone that they are moving to, which fits very, very well with our 3XL. And then, obviously, a number of the other players in the industry other than a couple of monitors that we're dealing with moving to this AI software for prospecting. So I think our mining offering will be second -- well, probably already is second to none, but we'll start to see some scale around in the next Q, maybe 2Q.

[Scott Larson, Lead Director]

Paul, so maybe I'll throw this back to you. Can you talk a little bit more about the cash position, current cash burn. Maybe a little more color just on the financial statements that we just released talked about. We did a financing, of course. We don't give guidance, we never have.

But what kind of runway does this look at how we -- in terms of expenses, things like that, without getting too much detail, but maybe a little color and commentary on that, if you can.

[Paul Sun, Chief Financial Officer]

Sure. Yes. So we announced an $8 million financing right at the end of Q1. We also announced an at-the-market transaction, which gives us, I think, flexibility to pull that we need it. As we've always said, we do balance cost versus scaling.

Cam just spoke a lot about how we're building capacity expansion, positioning ourselves. We have a lot of great initiatives. So I think it's really on us to kind of decide how we deploy. If you look historically at our cash burn, it's anywhere, I guess, between $1 million and $1.5 million kind of thing a month. So that's not necessarily to say that that's going to be -- as Scott said, we don't give guidance, but kind of give you a sense of the range.

If you look back at our quarters, we are cash flow negative right now. Our losses do fluctuate, though. This loss this time was better than last quarter and sometimes it flips back and forth. So we are cognizant. We have a healthy cash balance right now.

So I think that gives us a lot of flexibility, and that can give us quite a bit of runway to do the things that we have in our business plan. So hopefully, that's again, got to be careful to not give too much detail, but hopefully, that helps a little bit on the context.

[Scott Larson, Lead Director]

Yes, good. With regards to the questions that came in advance, I think that's all of them actually. There's been a couple that have come through during -- a few that have come through during the call right now, and those are in the process of being answered maybe just a real quick one here, a technical one.-- how many shares do we have on outstanding, Paul?

[Paul Sun, Chief Financial Officer]

Yes, we are at 43 million-ish.

[Scott Larson, Lead Director]

So that is -- that's all the questions. That's all the questions that have come in. And all the questions that we've answered that were e-mailed in before. And there are still one or two that are still being answered right now, just ones that are answered in the chat for those of you who have sent those in. So we'll continue to do that.

So I think with that said and done, Cam, unless there's anything else, I think we can probably sign off. I'll let you go ahead.

[Cameron Chell, President and CEO]

Probably everybody was relieved at that. So I was just trying to get through a couple of questions in the chat before we signed off. Yes, so thanks, everybody, for your time and consideration. I have an opportunity to talk with a lot of shareholders and really appreciate the faith and trust, and we'll continue to work to be of service. The AUVSI show right now in the SOFIC show are really indicative of what's going on in the industry.

And to say the interest is overwhelming is probably accurate. And it's really because we have a product that's ready for the market now. And the majority of the rest of the market doesn't. They have product that's either going through testing or it looks good or -- and not that there isn't other product out there that's available, but there's a real source and a real opportunity. So it's been a long haul. It's been a struggle.

We'll continue to work this through -- and -- but it's difficult as it is for us, it is for everybody out there. And -- but I think we're there, and it's fun to be on the road selling. Not that -- I love product building as does our team, but it's fine to be on the road selling now that we can start to deliver. So thanks, everybody, for your time and consideration. And please follow up with any questions that we didn't get to with Rolly, and he and I will do our best to get back to you as soon as we can.