Draganfly Inc. (NASDAQ:DPRO) Q1 2023 Earnings Call Transcript May 13, 2023
Rolly Bustos: 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 investor.relations@draganfly.com 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: 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: 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: 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.
A – Scott Larson: 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?
