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

Ladies and gentlemen, thank you for standing by. Good afternoon, and welcome to the Red Cat Holdings Fiscal 2020 Year-End Financial Results and Corporate Update Conference Call. [Operator Instructions]. 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 1 hour after the end of the call through October 27, 2022. I would now like to turn the call over to Scott Gordon, President of CORE IR, the company's Investor Relations firm. Sir, please go ahead.

Thank you, Jamie. Good afternoon, everyone, and thank you for joining us for the Red Cat Holdings Fiscal 2022 year-end Financial Results and Corporate Update Conference Call. Joining us today from Red Cat Holdings are Jeff Thompson, Chief Executive Officer of Red Cat Holdings; and Joseph Hernon, Chief Financial Officer. During this call, management will be making forward-looking statements, including statements that address Redcats expectations for future performance or operational results, particularly. 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 and Form 10-Q and 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, July 27, 2022. 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.

Great. Thanks. And thanks, everyone, for joining the 2022 year-end results for Red cat. It's been an incredible year, and we have spent a lot of time and energy putting the company in the right spot at the right time in the drone industry. The press release has some great highlights of each subsidiary, but I want to add a few brief comments for each team. Rotor Riot, which was our first acquisition and over the last year under Drew Camden has started to grow organically and it's having its best quarter in the history of Rotor Riot. I want to say thanks, Drew, and thanks, Stacy. Fat Shark, the new product refresh of the Fat Shark dominator launched in Q1 2023 and is getting great reviews and is also off to a great start. Thank you, Mr. French, who was a huge undertaking. Skypersonic. The team at Skypersonic has been very busy in Europe. They have been perfecting the remote piloting from thousands of miles away and the NASA contract has also been going very well with drones and actual Rovers. We expect Skypersonic to improve each quarter and be very important as infrastructure dollars start to come to the market. Teal Drones, lots of progress with Teak Drones over the last 12 months. They were 12 people with no factory, now 50 employees with a full working production line. Supply chain is still tricky, but we made some decisions a year ago, basically this month that are now bearing fruit. Thanks Dr. Evans. This has enabled Teal Drones to have a predictable delivery system for the DoD in equivalent organizations in NATO countries. The Teal Drone production line is in full swing and producing high-quality drones. We expect to go into mass production in the fall. And when mass production starts, it will also have a new camera payload that customers have been begging for. This, again, will allow predictable drone delivery with large numbers of drones each month. This has been Red Cat's goal for the last 12 months to get to mass production. Our sales team at Teal has been all over the U.S. and Europe, demoing the Golden Eagle 4 shift almost every week. Most recently, as in last week, was at Leonardo, the defense contractor in Italy. So let me talk about the 4-Ship product in case you were not familiar with it. The 4-Ship is a software platform that controls 4, Teal, Golden Eagle drones that can be formed by one pilot. This enables full 360 degrees of situational awareness. We can also stay in the air theoretically forever by having drones replace themselves in the formation when the batteries get low. The 4-Ship solves many drone issues, but let me just focus on two big issues. Number one, battery life. It's the biggest issue for drones, Almost everybody knows this. Being able to keep our drones in the air and definitely until the mission is complete, is an industry first. DJI, the banned Chinese role manufacturer that has been around for 15-plus years does not have the solution. 1:1 pilot ratio is #2. 4 drones can do the work faster and better than a single drone and being able to control them with one pilot instead of 4 is also a game changer. The biggest cost center for any aviation program is always the pilots. I've gone for another hour talking about things we have done with Teal Drones, but I promise to be brief and get to questions. Some housekeeping before we move on to Joseph's comments. We'll be reporting Q1 in early September. I'm sure many of today's questions will be about Q1. The quarter is not done, and we will talk about the first quarter, the very first full quarter with Teal Golden Eagles and shipments of the Dominator goggle in September. And I also want to thank the finance team for getting our year-end, which is the toughest finance that we have to file done a couple of days early. Thank you, Lea and Steve. And with that, I'm going to hand it over to Joseph Hernon.

Mr. Hernon, this is the conference operator. Is it possible that your phone is on mute?

Yes. Thank you. And thank you, Jeff, and to everyone for joining the call. I will now provide a review of our financial results for the fiscal year, which ended on April 30, 2022. Revenues totaled $6.4 million in fiscal 2022, representing 29% growth compared to fiscal 2021. Q4 revenues were impacted by the global supply chain issues that have affected many companies. In our case, some initial shipments of the Dominator, Fat Shark's new digital goggle were pushed into Q1 of fiscal 2023. Looking forward, we are confident that we will again deliver strong revenue growth in fiscal 2023. Our operating loss for fiscal 2022 increased to $13 million compared to almost $5 million for fiscal '21. This increase was expected and primarily related to the two acquisitions that we completed in fiscal '22, namely Skypersonic and Teal Drones. As Jeff noted, since acquiring Teal last August, we have invested significantly in building out the Teal organization in preparing it for the multitude of revenue opportunities that are emerging. We doubled the size of its facilities, both to increase its manufacturing output and to house its rapidly expanding workforce. While this strategy impacted our fiscal '22 operating results, we strongly believe that it better positions us to take advantage of much larger and more durable long-term sales opportunities in fiscal '23 and beyond. Other income in fiscal '22 was income of $1.3 million compared to other expense of $8.4 million in fiscal '21. For both years, the majority of the net amount related to derivative features that were embedded in convertible notes and warrants that we issued in fiscal '21. These derivative expenses and income are both noncash charges for revenue that are highly correlated to changes in our stock price. On a positive note, all of the notes have been converted into common stock and approximately 25% of the warrants have been exercised. As a result, future amounts related to these derivative features are expected to be moderate. In total, our net loss for fiscal '22 totaled approximately $11.7 million compared to $13.2 million for fiscal '21, representing a decrease of 11%. Cash used in operations totaled $8.9 million in fiscal '22 compared to $1.6 million in fiscal '21. As previously noted, we have completed two acquisitions in fiscal '22, and we have been making significant capital commitments in Teal, both in its facilities and its people to take advantage of significant commercial opportunities. Finally, in response to the supply chain issues, including the availability of the chips we need, we increased our inventory balances, including deposits on inventory from approximately $840,000 at the beginning of the year to $5.6 million at the end of fiscal '22. So this was an important use of our cash burn during fiscal '20. Despite these important uses of cash, we ended the year in a very strong financial position. We have reported almost $49 million in cash and marketable securities and less than $2 million in debt. That leaves us in a strong financial position to execute on our growth initiatives in fiscal '23. I will now turn the call over to the operator.

[Operator Instructions] We will pause for just a moment for the first question. Our first question today comes from Ashok Kumar from ThinkEquity.

A three part question. First, is Teal Drones shipping in your first fiscal quarter? The second part is the new Fat Shark goggle also shipping with expected revenue in fiscal Q1? And the last part is, have you had any follow-up orders in Ukraine?

Yes, those are great questions. So it's always difficult when you're doing your year-end. I hate year-end because it's kind of already old news. March and April were so long ago for us as we're preparing to build our production line. But yes, starting -- in April, we started some small amounts of production but have ramped up significantly for Q1, May, June and July. I know we have a weird year, so I'll make sure that I clarify our Q. But the Golden Eagle was shipping in all 3 months of the first quarter, which ends in a few days. The Dominator, as Joseph mentioned, was supposed to be out a little bit earlier than it was, but we did run into a few glitches in supply chain. It did eventually ship and the Dominator has been shipping also in Q1 and has got a really great response and is also selling really well. And then the question, I think, was Ukraine, yes, we did have the initial order from one of the NATO countries. And yes, we have had additional drones being shipped to the Ukraine.

And just the Fat Shark goggle please update in terms of expected revenue?

Well, you never know with a brand-new product refresh, it all depends on -- first, you have to worry about what the reviews are like. And the reviews for the first week were confusing. But in the second week, the -- I mean as people got the goggles in their hands, their reviews have been really good. And Fat Shark usually does before we bought them and they were basically -- when we bought them, the whole idea was to switch to a digital platform over a year ago. That was the entire idea is to invest and get a digital goggle out. And we finally got this goggle out in pretty -- basically record time going against DJI. And the new goggle is getting great reviews. It's done very well sales-wise, but they usually do $7 million to $10 million before we bought them, per year.

Our next question comes from Scott Michael , who is a private investor.

How do we look on chip supplies? And do we have a resource or a source for those in the future?

Yes. As I mentioned in my comments, it was a year ago in July, where we put our first large order in to be able to make sure that once we completed the acquisition of Teal Drones, that we would have enough chipsets to build every Golden Eagle that we would want to. So as I've mentioned previously, we had already committed in delivery already as 3,730 chipsets, that will yield about 3,500 drones. So we have that already, and we've also started putting orders in for next year. For the next rev of the Golden Eagle with the better payload and then as we go into calendar 2023. So we're looking good right now in chipsets. I don't want to jinx us. As I mentioned before, the supply chain is still a little tricky, but it is getting better.

Any chance that you can tell us is the order in jeopardy? Or are we looking at a solid commitment?

No. We're set. We -- those are committed and we're finding those chipsets are -- they're here.

Okay. And can you tell us the amounts?

3,730 which will -- yes, we're not going to get a full yield. It's not going to be 100% yield. It will be about 3,500 drones that those chipsets can deliver.

And our next question comes from Greg Bruce from Laura Capital.

Do you have any guidance that you're providing for fiscal year?

No. We are -- there's a couple of things. One is our factory gift was basically put into production in April. We're kind of in what we call preproduction into September. And then when we break and go to mass production, we'll have some improvements in a new camera that's going into the Golden Eagle. So there's going to be kind of a switch over and some improvements in the production line that we've been seeing with preproduction. So we'll have a small short break in the early fall to switch from preproduction to mass production. Once we start mass production, and we have the large quantities that we're going to be able to build every month, and we get a couple of quarters under our belt and supply chain starts to ease. It will be much easier for us to give forward guidance. We've never given forward guidance yet as a company. And once you start, you can't stop. So until supply chain is eased, we will not be giving our forward guidance.

Okay. Fair enough. So when do you -- what month or quarter, fiscal quarter do you think you'll be at mass production? Is that October time frame?

Yes. It's -- we expect to get it done in late -- actually late September into October to go into mass production. Correct.

Okay. All right. And then you have $1 in cash per share. I know you're acquisitive. And just what's the mindset in terms of cash and stock on M&A going forward with such a large cash component?

Yes. So we've built out kind of what we look at as our hardware platform and now that we're starting to scale the production, we've now looked to add software to our platform to increase the margins. So when we announced the 4-Ship, that is a software platform that we partnered with a company called Autonodyne. So that's going to increase our margins as we bring software partners into the mix to develop on top of the Golden Eagle platform. And so we are going to -- now that we have a platform and it's an open platform compared to our peers, which is a closed platform in the U.S. manufacturing. We expect to have a lot of developers starting to develop on top of our platform, but we are looking to acquire high-quality software companies that make our Golden Eagle and Skypersonic grow better.

And just what's the target in terms of use of cash and mix on any acquisitions and...

If you look at it, we've looked at -- everyone is like, well, you got a lot of cash. Why don't you do a buyback and buybacks are scary when you don't know if there's ever capital available if we get a huge order from the government or if we win tranche 2, which is for tens of thousands of drones and hundreds of millions of dollars worth of revenue, we want to have the capital in the bank instead of doing things like buybacks. But...

You can finance for that, right? You got finance from the government...

Where I'm going is there's -- everyone knows that most of the start-ups in the drone industry right now are VC-backed and are going to be starving for cash. We've already seen a lot of inward -- inbound people wanting to get bought by Red Cat. Our deal flow is pretty high right now.

Yes, that's my next question, whether you're seeing the stress in that market.

Yes. Well. We need the partners but no one's getting around, but we have to look at -- our stock has got cut when we -- since we did our financing at $4.50. So we have to make sure that our relative market cap to their acquisition price reflects the downturn in private companies. Private companies were still holding on to about 3 months ago, and now private companies are now their private valuations are coming way down dramatically. And as their start for cash, I think you'll -- I don't want to say we'll be opportunistic, but there's going to be plenty of opportunities for us to grab some drone companies. We want to be careful using stock because where we are right now. We prefer to get a couple of quarters under our belt where people will see the results from the production that we've been doing over the last quarter and people will see the growth and hopefully bring the stock price back up to use stock and/or it's -- if we use some cash for an acquisition, it's almost like we're doing a buyback. If a company's worth it and they could drive value for the -- on top of the Golden Eagle platform.

Right. No, I'm happy to hear that. And what -- are you looking at or have you considered any -- adding any autonomous drones. Is that an area that you're interested in or...

Well, yes, the -- with Autonodyne has autonomous capabilities.

It does?

Yes.

What is that? What is the description of it?

Yes. The product is called the 4-Ship, which is I talked about in our comments. It's on our website.

It's autonomous. I don't really...

It's autonomous. Well, it does a lot. It can be basically to give you -- it's -- the technology is pretty incredible. So if you're -- we've done a lot of demos for a lot of the military and other assets, but like if there's a target they want us to show -- we use intent and we tell the drones where to go. They go surround that target. If it's a target, they will look inward, if they have to go protect somebody, here's a target -- go well, here's an asset go protect it. The drones will circle that asset and they'll be looking outward. If you need to do a wall, we have a wall formation, all of that is autonomous.

Okay. Terrific. And you don't currently have an ATM out do you?

No, we don't. The only thing we have out there is we have $40 million left on our $100 million shelf. But as we said in the comments before, we are -- we have plenty of cash. We do not need to do an offering.

Right. Right. And then last question, and I'll pass it on is do you have -- do you provide any CapEx budget for the fiscal year?

We have not -- again, it's with the supply chain and the opportunities are continuing to increase in the space because of Ukraine and because of just almost every budget has increased in everyone's military across Europe and the U.S. We don't know what the market is going to be like over the next 6 to 12 months because it's growing pretty rapidly. So we have not put out any CapEx projections yet.

And our next question comes from Dr. Mark Hoelscher from Miller Street Trading.

Hello. I'm glad to be on the call with you. I have three or four little tidbits. Number one, on the NASDAQ listing issue was the only issue the annual meeting that you are now going to have in September? Was there any other issues that they had lined out?

No, that was the only issue. And the only reason we ran into that issue was we literally went public on the last day of fiscal 2021. And so under the NASDAQ rule, we were supposed to have our Annual Meeting within 12 months after that. And what was strange about that is it would have positioned us to have the Annual Meeting before we had completed our fiscal year. So we just elected to be proactive and schedule the meeting in September NASDAQ was signed with our plan, and that was the only issue.

Okay. Great. And then on the notes, I have here, when you mentioned on 517, the GM business that you had done for them inspecting, I think it was structure -- or facilities for GM. And then you listed on news on 628, the overseas inspection that had been done virtually, of course, with the assistance of on-site members of your team, I'm sure as well. I never saw any revenue numbers or contracts mentioned. Were those paid? Or were those prototype experiences for you and the other companies? Or do you have any contracts going forward with those companies that you did that work for?

So we -- if there were material contracts, we would release the information, obviously, but they were contracted work, but we did not release those numbers.

Okay. And on the GL side, I just had one question on the orders that you are getting are most -- where are your buyers coming from? Are they retail? Are they commercial? Are they agricultural? Where are you getting most of your interest from?

None of those, they are almost 100% defense related.

Open. Okay. That was -- that's really the end of my question. I appreciate you giving me the floor.

Our next question comes from John Resins, who is a private investor.

When you talk about the Autonodyne development product for the 4-Ship is, that's something that we -- that Teal or Red Cat owns outright? Or is that something that has been licensed from them?

Yes, it's a great question. Yes, we have a license partnership with Autonodyne that's worked out very well for us to not only use it for the 4-Ship, but to also use it for our single, dual and tri-based capabilities. But yes, it's a partnership with Autonodyne.

And is it exclusive that no other company will be able to use that? Or does that like have a 90-day or a short term on that?

I'm not going to go into contract negotiations on a public conference call, but it's a great contract for Red Cat and for Autonodyne.

[Operator Instructions] Our next question comes from Curtis Sange from ATB Financial. Mr. Sange, is it possible your phone is on mute? [Operator Instructions] We do have Mr. Sange back in the question queue.

I don't think his phone's working.

Gentlemen, with that, I will turn the floor back over to you for any closing comments.

Great. Thank you, folks, and thanks again for being on the call. We are excited for 2023, and we'll be updating investors on Q1 at the H.C. Wainwright Conference in the first half of September. I also want to thank the biz dev team, Mr. Hitchcock, Lance, Brian, Mike, Miguel, Deb and demoing the Golden Eagle 4-Ship all over the globe. And I look forward to seeing you guys next week in Fort Bragg. Thanks again, everyone. Thanks for joining. Good night.

Ladies and gentlemen, with that, we'll conclude today's conference call. We do thank you for joining. You may now disconnect your lines.