Rhythm Pharmaceuticals, Inc. (NASDAQ:RYTM) Q3 2023 Earnings Call Transcript

Rhythm Pharmaceuticals, Inc. (NASDAQ:RYTM) Q3 2023 Earnings Call Transcript March 7, 2023

Operator: Ladies and gentlemen, thank you for standing by. Good morning, and welcome to the Red Cat Holdings Fiscal 2023 Third Quarter Financial Results and Corporate Update Conference Call. At this time, all participants are in a listen-only mode. After today’s presentation, there will be an opportunity to ask questions. 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 June 7, 2023. I would now like to turn the call over to Scott Gordon, President of CoreIR, the company’s Investor Relations firm. Please go ahead.

Scott Gordon: Thank you, Kate. Good morning, everyone. Thank you for joining us on the Red Cat Holdings fiscal 2023 third quarter financial results and corporate update conference call. Joining us today from Red Cat Holdings are Jeff Thompson, Chief Executive Officer; and Joseph Hernon, 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 Red Cat’s most recently filed periodic reports on Form 10-K, Form 10-Q and in Red Cat’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, March 7, 2023. Except as required by law, Red Cat 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.

Jeff Thompson: Great. Thank you. Welcome to our fiscal year 2023 third quarter earnings conference call. I’m going to keep my prepared remarks brief as I was just told, we have quite a few email questions. So let’s get some housekeeping out of the way, and I’ll start with the status of the sale of the consumer division. Unusual Machines is expected to have its IPO later this month or early April. And that would cause the closing of this deal. And the proxy now has — the voting proxy now has a quorum and we shed those results on the vote very soon. As a reminder, the sale of the consumer division will be non-dilutive event and will raise cash for Red Cat. It allow us to focus on our core customers: the military and first responders.

The Salt Lake City factory is complete and ready to go. We now have a state-of-the art grown factory. We have chips to make thousands of drones, and we’re only producing the new Teal 2 drone with the new camera payload. The Teal team has done an incredible job completing this in just 12 months. We now have the capacity to produce thousands of drones per month. Let’s switch gears and talk about Tranche 2 or Short Range Reconnaissance, SRR, program of record. As I previously mentioned, Tranche 3 has been pushed into Tranche 2. And we will receive more funds from the Army to include these new features into Tranche 2. We do not know the size of the awards yet, but should happen in the next couple of months. Next up is Border Patrol. We made our first shipment to the Border Patrol for 54 systems in mid-January.

This was only a few weeks after production started on the new Teal 2. We believe there’s a significant opportunity for additional orders this calendar year and are very encouraged by the feedback from the Border Patrol. On to Skypersonic, where I am now. Skypersonic, our indoor drone division has two significant opportunities coming out. One is a Navy SBIR, we call it, or Small Business Innovation Research project for compact aerial inspection systems and for elevated and small spaces. This is a Navy SBIR, as I just mentioned. The program matches the Skycopter perfectly, and this is being actually submitted tomorrow, March 8. And we’re hoping to get into another program through Skypersonic. The second is the Drone Infrastructure Inspection Grant Act.

This is a bipartisan grant for $100 million that is expected to pass the Senate soon and has already passed the House. We also believe we are well positioned to be part of this grant. So I am doing this call from Torino, Italy. This is where Skypersonic office is, and we are co-located in the Leonardo campus. Leonardo is a large Italian defense contractor. In Torino, last week, we were invited to the Diana NATO (ph) meeting. And one of the goals of this organization is to introduce small companies to governments that need defense products. We had great introductions and we were only one of two presenters. The previous two weeks myself and the business development team have been to at least five different countries. We believe it’s been a very successful trip and the Teal 2 drone is getting a great response from operators and more fighters.

We also received initial orders and we believe we are well positioned to be awarded a sole source contract for hundreds of drones. Red Cat also became certified in the European country to be included in their defense catalog, breaking the log jam to be able to sell to these European countries. And finally, we have identified opportunities to get the new Teal 2 to the Ukrainian warfighters and I will address that in a little bit more detail in the Q&A. In summary, before I hand the call over to Joseph, we have completed a new state of the art factory in Salt Lake City, with chip supplies to build thousands of drones. We have the best in class drone in great response from the market, mostly military, and recently, as in yesterday, first responders.

We’ll have more to come on this new development in the next couple of weeks. We have our outdoor drones and our indoor drones for our military customers. And we expect the next six months to be the most exciting six months in company history with material sales, partnerships and new products. So with that, I’m going to hand the call over to Joseph. Look forward to your questions.

Joseph Hernon: Thank you, Jeff, and to everyone for joining the call today. I will now provide a review of our financial results through our fiscal quarter which ended on January 31, 2023. Revenues exceeded $3 million for the second of three quarters in fiscal 2023, and have increased more than 50% on a year to date basis compared to the first three quarters of fiscal 2022. Gross margin remained challenged as we continue to refine and scale manufacturing at our expanded facility in Salt Lake City. We expect gross margins to improve going forward as product shipments increase and we improve the efficiency of our manufacturing and assembly processes. Operating expenses decreased almost 20% in the third quarter compared to the second quarter, the prior quarter, as the level of nonrecurring costs associated with the expansion of the Teal manufacturing facility and its headcount have subsided.

We expect operating cost to stabilize for the balance of the fiscal year and through the end of 2023. Net loss for the fiscal third quarter totaled $5.7 million or $0.10 per share, representing a 9% decrease from the prior quarter and more than a doubling compared to the third fiscal quarter of the prior year. That significant increase is directly related to the doubling in size and the build out of the manufacturing facility at Teal, as well as a more than tripling of its headcount. We ended the third fiscal quarter with approximately $25 million in cash and investments. In addition, we have invested $7 million in raw materials, including chips, drones in production and finished product for Teal. We expect this investment in inventory to yield and support strong sales over the balance of the year.

At this point, the Teal manufacturing facility expansion has been completed, a sales force has been built and trained, our sales pipeline is building and expanding and we are looking forward to new and repeat orders over the balance of calendar 2023. I will now turn the call over to the operator for questions.

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Q&A Session

Operator: First question is from Scott Michael, a Private Investor. Please go ahead.

Unidentified Participant: Hi. Thank you for taking my call. Can you clarify the number of chips that we have in reserve?

Jeff Thompson: Yeah. Well, the number hasn’t changed since we put in the initial order of approximately 3,700 chip sets over almost two years ago now. Which with — we’re not going to give you a 100% yield. You’re going to have some — don’t make it, we end up scrap. But we think that those could produce between 3,200 and 3,500 drones.

Unidentified Participant: Okay. Thank you. Do we have a source for chips? Should we get any large orders that exceeds this production capability?

Jeff Thompson: Yes. Well, I mean, everyone watching the news understands, the supply chain is better. It’s not perfect yet by any way, shape or form. But people that put in large orders know that they’re going to get certain shipments at certain times. You give us an order for 5,000 drones, you’ll get X — you’ll get 1,000 drones on day X, a thousand more drones then. But the key item for us, we’re not as concerned about getting supply in right now, it’s more about having the factory to be able to, A, get it fully running at high capacities for the first shift, the second shift, if we get big orders and then we continue — we add another line next door. We have the room to do so. So that’s all there now. We’ve invested all of that and now the engineers are sitting on top of the factory work, people and the inventory.

They’re actually in their own offices, we have a flying area now. So, all the stuff that was kind of difficult to do because we’re in middle of construction, basically, like, living in a house while you’re doing reconstruction is now over. And so, we will have the capability to meet any large orders that we receive.

Unidentified Participant: Okay. Thank you. Two more questions. You referenced that Tranche 2 and 3 are being combined and in your state and you said that we should have news in the next couple of months. Was that pertaining to the size or is that regarding the tranche to award, because there was an article that was posted the other day suggesting that army or that there will not be soldier testing until the fall of this year. If I read it correctly, I may have read it incorrectly. To me that would suggest Tranche 2 award would be into the beginning of next year or the end of this year. Is that accurate?

Jeff Thompson: Yes. So I actually saw that same article. We get the heads up on that. And basically what they talked about was that, they started — they did the first initial alpha test, which was, I think, January 9, where each company flew for the day. What I can report is that, our drones flew as close to flawlessly as you could get in a alpha product. Very proud of the Teal team, the engineering team, the team that flew that day, but we had a great demo day. And anyone in the drone industry knows that’s not usually the case. But what I was referring to is, there was originally three tranches and every tranche has a prototype contract, which we won a prototype contract in Tranche 1 and typically a production contract. We did not win the production contract for Tranche 1 almost three years ago.

And so Tranche 2 had a prototype contract and there’s three of us that won that. And then Tranche 3, which they — which was going to start after they awarded Tranche 2, was pushed into there. So the money that you typically receive for Tranche 3, which would have been in about six to nine months to a year, everyone’s going to get for — Tranche 2. So that award will probably happen in the next couple of months.