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

Welcome to the Red Cat Holdings shareholder update. [Operator Instructions]. Please note, this event is being recorded. I would now like to turn the conference over to Scott Gordon, President of CORE IR, the company's Investor Relations firm. Please go ahead, sir.

Thank you, Sarah. Good afternoon, everyone, and thank you for joining us for the Red Cat Holdings corporate update conference call. Joining us today from Red Cat Holdings are Jeff Thompson, Chief Executive Officer of Red Cat Holdings; Joseph Hernon, Chief Financial Officer; and Allan Evans, Chief Operating 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, 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, 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, November 29, 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.

Thanks, folks. And sorry, we're reporting here live from the Teal factory. So it might be a little noisy. There's construction that way. That's the entire other side of the factory that's close to completion. But we are here right in front of 6 production lines right behind me. And we're here to mostly answer investor questions, but -- and to basically announce us selling our consumer division, which consists of Fat Shark and Rotor Riot so that we can focus on defense between the Teal Golden Eagle Tranche 2 and also Skypersonic's new drone. So that's -- the high level is basically that the 8-K is all filed. It's approximately an $18 million deal between $8 million and $10 million in cash in the short term. And once the IPO is done, we will have a significant share of shares in the new IPO company called Unusual Machines. So with that, if unless, Allan, do you have any comments, I want to start getting it right to questions. Because I'm sure a lot of people have questions about Teal. We're at the factory for once. People always want to hear about the factory, see the factory. So that's why we're doing this call here. So with that...

I have nothing else. I think questions are great. Let's go right into some questions.

[Operator Instructions] Our first question comes from [ Scott Michael ], private investor.

I'm on the phone, so I can't see the status of the production plant. But where are we with regards to the anticipated completion? And how much -- what is our production capacity going to be?

Great. Well, yes, thanks. Sorry that you can't see it, but I got in here last night, and I was very excited to see the progress we made since a few months ago when I was here. Right behind us, we have a -- which, again, sorry, you can't see it, but the production line is up and moving. We are about to start being able to ship over the next 4 to 6 weeks, the brand new bird that we've been working on with an incredible new payload with incredible night capabilities. So the factory is going to be basically in full swing. It's starting now, and we'll be able to produce thousands of drones per month if we have the orders for them. We have the inventory. We have the parts, we have the capital, and our supply chain is looking pretty good right now. So the factory is doing awesome. You want to add anything to that because you built it, you and George?

Everybody here built it. But -- we're really -- we're in the start of a new ramp, as Jeff had said. So we're at low rate production right now, and we'll carry that forward for a few months just to be sure that all our fixtures and everything mature and our product quality is high, and then we'll be able to turn it on. So I'm really looking forward to delivering to the Border Patrol and then moving forward from there to deliver to the rest of our customers.

[Operator Instructions] This concludes our question-and-answer session by voice. I would like to turn the conference back over to your host, who will address some of your questions that you texted.

Thank you, Sarah. Folks, we have a number of questions that have come through. The first one is, any new NATO order for Teal?

Yes. So we've -- as we've mentioned before, we're working with many NATO countries, and they're basically RFP processes like we have here in the U.S. We have some pretty significant large RFPs we're participating in, and we're just getting through certain phases. We've been downselected by one of the NATO countries for a pretty large program. So we're excited about that. So we're waiting for the next section now that we've been downselected. So we expect to have a pretty strong sales year in 2023, specifically with the new Golden Eagle bird that has this incredible new payload and camera. So we're pretty excited that we'll be able to meet the needs of almost everybody that's brought their budgets up since the Ukraine war started. We're going to just try to get this behind the filled up with drones to be able to meet the needs that we're expecting in the first couple of quarters of next year.

Excellent. Next question, could you tell us anything about [ Autonodyne ]?

See, it's a very hard to produce name. It's called a Autonodyne. Yes, I know it's...

Autonodyne.

Yes. Autonodyne, yes. So we've moved on from Autonodyne. It's public information that we sued them for breach of contract. We're pretty much just going to leave it there. But what I will say is that it's been a process that actually brought us into a new partnership with Tomahawk Robotics, which builds an incredibly robust, hardened Warfighter-capable platform that can replace everything that Autonodyne does and -- for us and is already in a form factor that our customers want. So this actually turned out to be a blessing for us. We also are doing a lot more with them because it's so integrated. They're already integrated with another one of our partners called Reveal Technology and also who else -- who is here with us Athena AI, which does targeting. So all of this can now happen that were integrated now to the Tomahawk platform. It's almost like an app store. It rides on top of the Golden Eagle, and all of Tomahawk's partners can participate and make the Warfighters so efficient.

Our next question, what is the plan on distributing equity to Red Cat's shareholders after the other company completes their IPO?

Yes. So it's -- if you looked at the 3 different parts of the transaction, you had a payment right after the IPO of $5 million, some convertible debt and then 11.5 million -- $10.5 million shares -- of preferred shares. So we'll have a significant ownership of the new company. So if -- and we will be registered those shares. So if we want to, we could sell them. I don't think we would need to do that right away. We'll be generating -- we'll be -- one of the good things is that we'll be getting close to $10 million in cash pretty rapidly, which is nondilutive for our shareholders. So that's pretty exciting for us. And then having a significant portion in the new company, which -- I think the new company, Unusual Machines, is going to do very well because we've been so focused, laser-focused on Teal, defense -- military and defense that Fat Shark and Rotor Riot will get the needed attention. And I was just at Rotor Riot last week, and they're doing great. So I think with them having a new ownership, they'll be able to ramp pretty rapidly. So I think our shareholders are going to do really well by having ownership in this new IPO.

Great. What is the status of the border protection contract opportunity?

Yes. So we're delivering the drones -- well, it's not December yet. So next January.

January. We're in training.

Yes. We deliver those drones with training. It's the -- it's the newer Teal bird that has the new payload. So we're pretty excited about that because nighttime operations are very important on the border. And we think that we're going to have the best nighttime camera on the new Golden Eagle. So we feel pretty good about, hopefully, getting some more business after we get this initial tranche to them.

What happened to the canceled FAA swarm demo?

That's pretty specific, but it's -- when you do a temporary event like that, or one-day event, you have to list out everything, including the software and not to beat to death, but that was listed originally with Autonodyne software. And we were going to try to do the demo with Tomahawk, which I think people would have been very impressed by. I was when I saw it. But we could -- it would have taken 6 weeks to switch Tomahawk into the platform demonstration. So we didn't get a chance to do that. We either hope to do another one in this -- in the winter months in Florida and/or do it in the spring up in New York.

Any news from NASA regarding the simulated Mars mission with Skypersonic?

A lot of progress there. I would just say stay tuned this week on that.

Will you be diversifying into other areas of the defense industry now that you are divesting from your non-defense businesses? What new areas could be a potential target for growth?

Well, at first, we're going to stay laser-focused on Tranche 2 and the new bird, which we'll be selling over all of 2023. But the focus isn't just on Tranche 2. There's other very large opportunities that we are already participating, other countries that have come here to this factory that are actually larger than Tranche 2. So we're pretty excited about some of the RFPs we're working on. So we hope to get Tranche 2, but we also have other large projects with other countries that we think would be much larger than Tranche 2. So we got a lot of things in the fire, but the focus is the Golden Eagle platform, getting all of those features that we have to the Warfighter.

Jeff, sorry to cut in here.

Please do.

But I think part of the question is also corporately, are we looking at other partners or other elements in the more DoD, Public Safety segment more than just where we're focused with Teal? I think this sounds a little bit like it might be an M&A question.

Well, we're -- as we've done in the past, we've done 4 acquisitions. We're -- we typically are very acquisitive, but our acquisitions will be very focused on things that align well with defense, military and first responders. So it's -- there are some great companies that we're working with now. There are some other companies we're just learning about. But we will continue to look for opportunities, specifically in this environment where mostly VC-backed companies are not able to get a dime right now. So we're a great alternative for people well-funded, plenty of cash, do not need to do any financing, it's going to generate more cash from this deal that we just announced yesterday. So we'll be -- we have nothing to report right now, but we're always looking.

How do we keep up with the other Tranche 2 competitor?

I'm sorry, can you repeat that question again?

How do we keep up with the other Tranche 2 competitor?

Well, I'd like to look at it a different way. We're -- what we have here at this factory is what other people are going to have -- our competitors have to catch up to. We think what we're building here and what we're doing here and the way the Tranche 2 is going so far for us, we're more concerned about making sure that we deliver a great drone that they will want to award us this large contract. So we're going to stay laser-focused on that and not care what some other competitor might be doing.

Are supply chain issues subsided?

I wouldn't say it's completely subsided, and I'm not going to let him go on a 10-minute spiel here, but slightly improving. But we -- a lot of decisions that Mr. Evans -- Dr. Evans here forced us into over a year ago is enabling this line behind us to be up and running today.

Okay. That concludes the set of questions that we have received. I will pass the call back to you, Jeff, for some closing remarks.

Great. Well, thanks, everybody, for joining the call. This is a big moment for the company. It allows us to focus where we think it's the right place to focus. It also generates cash for the company, non-dilutive cash, gives us ownership, and I think it's going to be a good company going forward. which will enhance all shareholders. So again, thanks, everybody. Happy Thanksgiving, and we'll let you know as things go. All stay tuned this week. Lots of stuff happening.

The conference has now concluded. Thank you for attending today's presentation. You may now disconnect.