Red Cat Holdings, Inc. (RCAT) Earnings Call Transcript & Summary

Good day, and welcome to the Second Annual Winter Wonderland Best Ideas Conference. The next presenting company is Red Cat. [Operator Instructions] I'd now like to turn the floor over to today's host, Jeff Thompson, Founder and CEO of Red Cat. Sir, the floor is yours.

Great. Thanks for having me at this conference. I'm excited. And I just want to apologize to everybody that we couldn't get our technology to work that our Internet service provider would not work with this webcasting address, so we had to reschedule and hopefully, we think we got it fixed so that we can jump right in. I'm going to be really brief on the slides because I've done about 18 meetings in the last week and no one wanted to review the slides to kind of want to just ask questions and dig right in. There's a lot going on in the industry. So we're going to just dive right in, get the presentation done and I look forward to hopefully a bunch of questions. So next, I'm going to make sure that we put up disclosures. And I know you're all fast readers, and we'll quickly move on to Slide 3, which is the management team. So I myself, and this is my third company I founded that ended up being public and I've being in the public markets for quite some time. My last company was a telecommunications company did, I think, 5 or 6 acquisitions there. It was a NASDAQ-based company. I ran that company for almost 10 years before I decided to get to the drone industry. And we've done 4 acquisitions so far at Red Cat. We -- I also was able to get Joseph Hernon, our Chief Financial Officer. This is his fourth public company that he's been the CFO. He has incredible capital markets experience, incredible CFO capabilities. He's building a great team. He's also fantastic at working on acquisitions, and we've been fortunate to get him off the bench and get him back on the team. So we're really appreciate having Joe's expertise. And Joe and I worked for 8 years at that company now and we're at right about 3 years here. So pretty excited to kind of get the band back together. And then Dr. Evans, the newest addition to the C level was the CEO of Fat Shark. I could go on for 20 minutes about his expertise in this industry. About virtual reality goggles, he knows everything about manufacturing, scaling manufacturing. He's been our COO now for closing on a year and has been doing a fantastic job. He's actually out at TEAL's manufacturing facility for the last week or so and has been giving me some really great updates on all the progress that we're making on building out manufacturing location. So Slide 4. Pushing out here now. It's not saying anything. Here we go, pushing Slide 4. I'm new to the system, so you're going to have to be a little patient with me. So investment tailwinds, yes, and the pun is intentional. We've got incredible things going on in the industry right now that is -- basically, it's a once-in-a-lifetime opportunity. And the way we think about it, before I go into these points that are here on the investment tailwinds slide, is if you look at what happened in China, when they threw out Amazon and then they started Alibaba, that's happening in the United States right now in the drone industry. The leader, the people that invented basically the entire market is DJI, a Chinese company that has ownership by the government, but they've built the market. They actually build great drones. But all the federal dollars and now state dollars are all saying, listen, we do not want Chinese drones in this market where they could be scanning, 3D mapping, taking pictures constantly of every part of the United States. So we're seeing a lot of the same push that we saw what happened to Amazon in the Chinese market. So this huge vacuum needs to be filled with U.S. manufactured drones. So we're in a really great place with having the manufacturing being built out in Salt Lake City at the Teal factory, which will also probably end up making the Skycopter from Skypersonic. But just to hit on these investment tailwinds, we had about $60 million in cash in our last report. We're continuing to invest that cash to build out inventory and our chipsets to build the factory, to scale the factory. We've already doubled the size of what the factory is going to end up being probably early next year after we get the first production lines fully ramped to where we want them. But we also now have -- we have all the bran, not just for DGI now. We also have every Chinese drone manufacturers brand from federal dollars, including anything to do with the infrastructure build. So again, giving us a great opportunity to fill that void in the market with the U.S. made drone. We also recently saw the $1 trillion infrastructure bill go through. We think this is going to really help Skypersonic, -- about $280 billion is earmarked to civil projects. Skypersonic is one of the leaders in the space. We think they're one of the 2 leaders in the space in the inspection drone industry, the other drone company has a Chinese-based drone. So those will be able to accept infrastructure dollars. So we think we're very well poised. But we don't see the infrastructure money hitting for about 9 to 12 months. But we are gearing up and getting ready with the Skypersonic team and starting to get some small wins and getting ready for once that does hit. And again, some of the other things -- we were 1 of the 5 original drone companies that were awarded the Blue sUAS stature DoD. And there's been a little bit of activity that people with Skydio, yesterday, which I'll talk a little bit more when we get to some further slides. Slide 5, I'm going to push out here now. Here we go. It takes a little time here from Puerto Rico. So we look at a lot of the stuff that's going on. We just -- we're concentrated in commercial applications and more particularly in the inspection space. The inspection space is great because of a couple of things. One is we are buying in doors, most of the time we're in tunnels and the FAA doesn't control that. So we're not always waiting for the FAA rules to catch up with the drone technology, we can be generating revenue here and now, not down the road with a lot of the commercial and civil applications that are out there. And as you can see in this slide, it's a huge market, construction, oil and gas, now we're seeing first responders, also having Chinese [ban]. So again, we keep seeing great tailwinds for Red Cat, and we're just -- we're very fortunate to have the capital to be ready for. As we go to the next Slide, Slide 6, some pretty exciting things that our team -- our biz dev team, headed by Jeff Hitchcock been flying around the globe, meeting with not only some of the military applications here in the U.S.. But also in a lot of other NATO countries, that's their background. They're building a great biz dev team, but there's a lot of exciting things that we can do for military applications. And as you can see, these seem to be pretty self-explanatory from mission, mapping, battle damage assessment. All of these things are very important to the military applications is being requested by the Teal team. Slide 7, as I wait for it to come up on my side. These are the business lines that we've had. We've got 5 business lines. We've done 4 acquisitions, and this is probably the last presentation we'll talk about Drone Box as a standalone product because Drone Box has been migrated into the Teal's infrastructure and platform. And the same for was Skypersonic. So these are going to be part of our goals to have a hardware platform that gets out there. We want to be the platform for all federal dollars in the U.S. And once everyone has our hardware platform. Then we're going to be selling services on top of that. And that's where we see these features from Drone Box being brought into the Teal platform and the Skypersonic platform. But I'm not going to spend much time on each one of these right here because I've got a full slide for each one of them. So we're going to go next to Slide 8. And I don't know if a few people have been watching TV a lot but the Drone Racing League, which is -- that's the picture on the right-hand side of this slide was televised live on national television on Christmas Day. And a rotor pilot Vanover -- Congratulations, Vanover, won it, which is pretty exciting. But you'll notice that every single racer is using Fat Shark's goggles. And we're pretty excited about where Fat Shark is going right this moment. They've been working really hard. And one of the reasons that they actually became part of the Red Cat team was to have the capital to get the technology to do the things that we need to compete in goggle space. Mostly, what I'm talking about is high def, getting high-def goggles with low latency. And we're pretty excited. I don't want to get ahead of ourselves with any announcements on the Fat Shark side. But I think Fat Shark's going to have a tremendous second half of the year, and they've built insanely cool goggles, reliable goggles. I still have my HDO2s. And we're pretty excited to see the next version. I'll just leave you with that. So Skypersonic, this is when we bought the company, an incredible software stack the team is mostly based in Italy. We have Giuseppe, the founder, he's a professor. He has built a great platform to do a lot of interesting things. Most of the Skypersonic platform, believe it or not it's software, it's cloud-based artificial intelligence software that can do anything from counting cars for GM to checking bolts and inspecting seams and welds, but all of those services and the different things that the Skypersonic inspection copter can do is all in the cloud. So once we get the Skypersonic Skycopter in the hands of our customers, we're pretty excited that we have a great follow-up there for them to do more and more with our cloud-based services. And as I mentioned, some of these services are part of where Drone Box is being injected into these platforms. So this is probably the last time you'll see a single slide on all of these features that you see here in Drone Box are capabilities that you're going to be able to have and get when you have the -- use the Teal Drone, Golden Eagle platform for the Skypersonic Skycopter platform, we want you to be able to evaluate and analyze all of the things that your droned in on, every single flight. And we're pretty excited about the way that this is going to feed into these other 2 platforms and give us that opportunity to be a hardware-based software platform. As we go to the next slide we here to talk -- as you can see, Rotor Riot's subscriber numbers keep going up. Those views are actually dated -- those were actually up. We've got an incredible team of pilots, an incredible team that's building out the Rotor Riot platform for race in freestyle FPV pilots. They are very steady group for us. But more importantly, what they're doing is really making an impact and very kind of quietly. They've built -- they're kind of helping build up the entire like what we call the Cinewhoop, which is the cinematography, there was a great article in CNN about I have to use racing drones to do all these high-speed sports now. You need to use drones to be able to keep up with these things. And there's been a lot of famous drone videos recently that were done with FPV racing drones and mostly would be the Rotor Riot Cinewhoop. There was the original bowling alley video, which got over 10 million views and went super viral. There was also a PGA -- in a tournament, one that went crazy because the last part as the guy hold a shot from the sand traps. But the footage that you can get using a cinematography race drone that Rotor Riot actually kind of the leader in the space, the footage is just incredible. We recently just did the [pro ball], Dallas Cowboys whole entire facility. You can go Google all of these, and you'll see some really great and basically viral capabilities. And that's just to tell you that what's exciting about that for us at Red Cat that what are we doing with racing and freestyle drones. If you want to launch a product, you go to Rotor Riot, one of our largest competitor is DJI, sponsored a ton of episodes with their products. So we haven't even tapped that avenue yet. And as some of our newer products come out here, we will take advantage of this great platform of knowledgeable pilots that continue to want to be see Rotor Riot content. Next, we're going to talk about the Teal acquisition, which is our latest acquisition. Everyone always ends up here, everyone is so excited because of all the large contract capabilities that the Teal platform can bring to Red Cat. So let me just -- I've gotten a lot of questions on the last day, so I'm going to talk -- first I'm going to talk about some of the contracts that we've already won and some of the things that we're looking to do in the future. So what's great about the Teal platform is that we are producing in the U.S., made in U.S.A. Everything that we have is made out in Salt Lake City. We've won -- we are awarded some contracts already. We were awarded the tranche 1 contract, which I'll talk a little bit more in the questions, but that was almost 2 years ago now. And now we're right in the middle of tranche 2 for the SRR contracts, which we think is going to be a pretty massive contract considering what we saw in the last few days on tranche 1. And to go into next slide here -- hold on 1 second. Sorry about that. I'm sure most of you have seen this, but -- there's a lot of work when we -- the Teal team has gone through a large process to get certified by Blue sUAS, we were like one of the first 5 approved. And what we're seeing now is this list is being used by states. We -- I saw an announcement recently where Florida is banning Chinese drones also at the state level, and they actually use the Blue sUAS contract winners for the DoD as the drones that you're allowed to buy in Florida. And we've actually had a great response by a lot of the counties in Florida already from that announcement. So there's -- this slide -- this is a new slide investor deck. This is going to be on our website, if it isn't already right now. So you can go through these and you Google the thing, there's some pretty incredible things that it takes to get some of this certification. And to talk about some of the recent contracts. So we announced a $90 million over a 5-year contract with Border Protection and Homeland Security. It's called an IDIQ, which a lot of people -- the naysayers will say, well, it means they might not buy anything. But we think there's some important things that have happened recently that have pushed the speed of which this is happening. The House has recently passed a couple of bills and so has the senate and you kind of keep criss crossing back and forth. But the House actually is past to build that not only says you can't buy -- renew contracts with Chinese companies, buy any new drones, but they're also saying you now have to stop using the fleet that you have right now. So for someone like Border Protection and Homeland Security, that's thousands of Chinese drones that we think are going to be grounded very quickly and they need to act. We had only started talking to Homeland Security and the Border Patrol in September of last year, and weren't expecting anything for at least a year to evolve. And we're pretty excited that we have been part of this process and continue to be part of the process -- actually part of -- two weeks ago, we had to go to West Virginia to actually demonstrate the Golden Eagle to Border Patrol. So we are pretty excited that we're continuing and hopefully, even though it's an IDIQ contract, we think is a little bit of a sense of urgency for them to replace their existing Chinese fleet, which are probably mostly Mavics. So that's a pretty exciting thing for us, and we're continuing to push forward on that. And we also have received a contract with NASA with Skypersonic. We are about to start working on that. It's actually going to be the Mars simulation. It's actually going to be based in Italy. We've found out. And we're pretty excited that we got validated for this remote software platform to do this program. It's not a huge revenue generator, it's under $0.5 million currently. But it is over a 5-year period. So we expect as they grow that program, we hope to grow with them. Slide 15 is just a traditional peers comps. As you can see, we're trading at a much lesser multiple than most folks out there, and we think we're a great value here, and we hope that our stock climbs back to where it should be, and we're starting to see a little bit of that now. Slide 16 -- kind of like the bookends here, we're -- what's exciting right now is Red Cat's fully funded. This market has been horrible for small-cap companies right now. We're very fortunate that we raised money in July at $4.50. And now we don't have to go back to the markets where they're very rocky right now. The amount of transactions is very sparse. Some of the markets that just completely shut down. Valuations are going down. So we're very fortunate to be fully funded as we actually go after all these great opportunities again. So again, it's a once-in-a-lifetime opportunity to be able to have this large market developed by this large corporation and then have the U.S. government ban them and only have made in the U.S.A. And we're very excited to hopefully see U.S. manufacturing jump back up to where it should be so that all of these drones can be made in the U.S.A. I did that as fast as I could. I know most of you have seen most of these presentations, but I'm going to go right to Q&A and hopefully answer some of your questions as there's been a lot of stuff going on in this industry.

We already got a bunch of questions in here. Okay. I'm going to go from the top here. What's next for Skypersonic? Next model? Next industry? What I'd say is what's next for Skypersonic is we've been making the drone as easy to fly as possible, and that's kind of our next -- the question says next model, but our next iteration of the Skycopter is to just make it so simple, it's so easy to use. Because the drone is so capable and it can do so much with its AI back end and the cloud-based artificial intelligence. So we think we're just at the beginning. And we expect Skypersonic, even though everyone talks about the Teal team, the Skypersonic is in the middle of a bunch of large contracts. I know that they just get back, I think, from 10-day training in Aramco. So they're clicking along, but I think they're really going to see them hit their stride as the infrastructure dollars come in. The next question is, is Teal still in the running for an SRR contract for the [indiscernible] (00:24:38). Skydio was awarded a $100 million contract yesterday. What does that mean for us? Is there more money in contracts still on the way? Yes. So there's a lot of confusion about that contract that came out yesterday. So that was actually awarded 2 years ago to Skydio. There was -- each tranche of the SRR program has a prototyping award and a production contract. The one that we got for from Skydio got delayed because of COVID, and that just came out, and that was actually from tranche 2. What's exciting about that is we didn't think tranche 1 production contract was going to be that large. So we're like -- we look at this as a huge positive because now we're seeing the opportunity for tranche 2 and actually tranche 3 be even larger and that it's real dollars for this program. So we are in the middle of tranche 2. We went down September 14, I think it was to demonstrate the capabilities of the Golden Eagle to. And what's really exciting is each tranche has production and prototyping awards when Teal was -- 2 years ago competing on those prototyping and production contracts, they did not have a major facility in Salt Lake City being built. We can now compete with them head-to-head on features and on manufacturing. So we're pretty excited where we are with tranche 2. We don't expect it to take how long this took to get awarded. But we think we're in a good spot for tranche 2 and tranche 3. So there is -- nothing has changed for tranche 2 because of the Skydio award yesterday from 2 years ago. I hope that answered the question. Next question is, have we a full complement of chips in order for Teal to meet 25 -- 35 to 200 units per month reference the most recent video Teal production. We have a good solid source for chips. I think I read it correctly. But yes, we do. I know that we have -- because of some of the moves we made earlier before we even closed on the Teal acquisition, thanks George Matus, thanks, Dr. Evans for pushing. We are -- we're good through November of this year on chipsets and to hit those numbers and hopefully much higher per month. And the production line that we're building, by the way, can do up to 2,000 drones a month. We're not there yet. I don't want to able to get ahead of ourselves, but that production line will be able to do 2,000 a month. And we -- like I said, we've doubled the size of the production facility so that once we get to the max that we can on this existing production line, we're actually going to build another one in the same facility. So we'll be able to double that production. So we are in a really good spot with chips. We're really good spot with production. And Dr. Evans has been out to like the last couple of weeks with George Motus and things are coming well -- very nicely at the facility. Next question I see here is the LuGus deal still in play? We are -- we don't want to see a lot of cash going out the door. We love the LuGus team. They're a great company. They're still growing. We hope they start to grow even faster. But right now, we're going to focus on some of our own software that we have and continue to get our platforms scalable, reliable and then start pushing our software platform on top of that. Let me hit refresh because I think there's more questions coming. They just deleted one as it came in. I think we've had all the questions. I hope I answered everyone's questions. And I know I've got a couple of full days with folks for the one-on-one conferences tomorrow and Friday. I want to thank everyone who joined the call today. And I want to thank the folks for having me at this conference again. Actually, this is my first time at the Winter Wonderland. But I hope to be here next year, and it's been a great conference so far for us. We have a great schedule. And I guess I want to let everyone know, very excited where Red Cat is right now. I think the company in the next quarter or 2 is going to be running on all cylinders. And hopefully, the stock price will reflect that. So thanks, everybody, for supporting the company. Bye now.

Thank you. Ladies and gentlemen, this does conclude the Red Cat presentation. This concludes today's event. Remember, one-on-one meeting requests are still open. So be sure to log into the conference platform and request more meetings. You may now disconnect.