Red Cat Holdings Inc (RCAT) 2022 Q4 法說會逐字稿

Ladies and gentlemen, thank you for standing by, and good afternoon and welcome to the Red Cat Holdings Fiscal 2022 yearend financial results and corporate update conference call. At this time, all participants are in a listen only mode. Should you need assistance, please signal a conference specialist by pressing the star key followed by zero. After today's presentation, there will be an opportunity to ask questions to ask a question, you may press star and then one on your telephone keypad. To withdraw your questions, you may press star and two, 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 October 27, 2022.

I would now like to turn the call over to Scott Gordon, President of CORE IR and 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 for 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 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 and Form 10-Q and Red Cat's press release that accompanies this call, particularly cautionary statements in it. The content of this call contains time-sensitive information is accurate only as of today, July 27, 2022. Except as required by law, Redcats 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. We've spent a lot of time and energy putting the Company in the right spot at the right time in the drone industry, press release has some great highlights of each subsidiary, but I want to add a few brief comments from each team Rotor Riot, which was our first acquisition and over the last year under Drew Camdem has started to grow organically as having its best quarter in the history of Rotor Riot.

I would like to say thanks, Drew, and thanks, Stacy. Fat Shark, the new product refresh of the Fat Shark dominator launched in Q1 2023 is getting great reviews is also off to a great start.

Thank you, Mr. French. It was a huge undertaking. Skypersonic, the team at the Skypersonic has been very busy in Europe. They have been protecting 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 is very important as infrastructure dollars start to come to the market kill drones lots of progress with Children's. Over the last 12 months, there were 12 people with no factory now 50 employees with a full working production mine supply chain is still tricky, but we made some decisions a year ago, basically this month that are now bearing fruit.

Thanks, Dr. Adams. This has enabled Teal drones to have a predictable delivery system for the DoD and 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 Cap's goal for the last 12 months to get to mass production. Our sales team at Teal and I have been all over the US and Europe demoing the Golden Eagle 4-ship almost every week. Most recently as of last week was at Leonardo, the defense contractor in Italy.

So let me talk about the 4-ship clause. In case you are not familiar with it. 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 scan the year theoretically forever by having drones replace themselves and the formation when the batteries get low, 4-ship solves many drone issues.

But let me just focus on two big issues. Number one, battery life, the biggest issue for drones, almost everybody knows us being able to keep our drones in the year-- And definitely until the mission is complete is an industry first DJI, the band Chinese drone manufacturer that has been around for 15 plus years does not have the solution. One to one pilot ratio is number two for drones can do work faster and better than a single drone and be able to control them with one pilot instead of four is also a game changer. The biggest cost center for any any aviation program is always the pilots. I go on 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 Joshep's comments, we'll be reporting Q1 in early September. I am sure many of today's questions will be about Q1, the quarter's not done and we will talk about the first quarter, the very first full quarter with Teal Golden Eagles and shipments of the dominator goggles 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, Leah and Steve. And with that, I'm going to hand it over Joseph Hernon.

Mr. Hernan, 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 fetch as new digital cargo 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 drone. As Jeff noted, since acquiring last August, we have invested significantly in building out the Teal organization in preparing it for the multitude of revenue opportunities that are emerging with double the size of its facilities, both to increase its manufacturing output and to house it's a 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.

Yes, 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 non-cash 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 and deal both in its facilities and it's people we 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. This was an important use of our cash burn during fiscal '22. 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.

And ladies and gentlemen, if you wish to ask a question on today's call, you'll need to press star and then the number one on your telephones. If your question has been addressed and you wish to withdraw your request, you may do so by pressing star and two, if you are using a speakerphone, we do ask that you please pick up your handset prior to entering the numbers to ensure the best sound quality. Once again, that is star and then one to join the question queue. We will pause for just a moment for the first question. Our first question today comes from Ashok Kumar from Think Equity. Please go ahead with your question.

Thank you. Three-part question. First Teal drones, the shipping in your first fiscal quarter. And 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 [on] Ukraine? Thank you very much.

Thanks, Ashok. Thanks for being on the call today. And yes, those are great questions. So, it's always difficult when you're doing your year-end, and I hate year-end end because it's kind of already old news in March and April were so long ago for us as we're preparing to build up 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 three months of the first quarter, which again 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 it's got a really great response and this 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, an update on in terms of expected revenues?

Well, you never know within brand new product refresh it all depends on 1st year to worry about what the reviews are like. And the reviews for the first week were confusing. But in the second week, I mean, as people got the goggles in their hands, the reviews have been really good, and Fat Shark usually does before we bought them, and there 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 DGI, and the new goggle is getting great reviews. It's done very well sales-wise, but they usually do seven to $10 million before we bought them per year.

Great. Thank you and all the best.

Great. Thanks, Ashok.

Our next question comes from Scott Michael from who is a private investor Please go with your question.

Thank you for taking my call on how do we look on chip supplies and do we have a a resource or a source for those in the future?

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 it already committed in delivery already as 3,730 shipsets, that'll 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 are we're looking good right now in chipsets. I don't want and I don't want to jinx us. As I've mentioned before, the supply chain is still a little tricky, but it is getting better.

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

Not a massive we're set. We those are committed and we're finding those chipsets are here.

Okay, thank you. And can you tell us the amount?

3730, we're not going to get a full yield. It's not 100% yield. It will be about 3500 drones that those chipsets can deliver.

Okay. Thank you very much. Appreciate it.

And our next question comes from Greg M Bruce from Roar capital. Please go with your question.

Yes, good afternoon and thanks for taking my call. Do you have any guidance that you're providing our first fiscal year?

No, we our heels is a couple of things. One is our factory just was basically put into production in April were kind of in what we call preproduction into September. And then when we break and go to mass production, we'll have some improvements and a new camera that's going into the Golden Eagle. So there's going to be kind of a switchover 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 important forward guidance yet as a company. And once you start, you can't stop So until in our supply chain. So supply chain is eased. We will not be human upward in your forward guidance.

Okay, fair enough. So what month or quarter fiscal quarter do you think you'll be at a mass production that October timeframe?

Yes, we expect to get it done in late and actually late September into October to go into mass production.

Okay, great. 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 on M&A going forward with such a large cash component?

Yes. So we've we 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 automatized.

So that's going to increase our margins as we bring our software partners into the mix to develop on top of the Golden Eagle platform. And so we are going to now do we have a platform and it's an open platform compared to our peers, which is a close tap platform in the US 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 drone better.

Just what's the target in terms of use of cash and mix on any (inaudible)?

Yes. If you look at it, we've looked at us everyone's like what you got a lot of cash when you do a buyback,buybacks are scary. When you don't know if there's ever capital available, if we get a huge order from the government, when 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 where I'm going is there's everyone knows that most of the startups in the drone industry right now are VC-backed and are going to be really starving for cash. We've already seen a lot of inbound people wanting to get bought by Red Cap, our deal flow is pretty high right now.

Here's my last question, whether you're seeing distress in the market?

Everyone needs 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 our market cap to their equity, their acquisition price reflects the downturn in private companies, private companies we're still holding onto about three months ago and now private companies and now they're there, they're private valuations are coming way down dramatically.

And as they 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 where 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 your stock and or it's if we use some cash for an acquisition, it's almost like we're doing a buyback. It's companies, worked it in there and they could drive value on top of the Golden Eagle platform right now.

I'm happy to hear that and what are you looking at or have you considered adding any autonomous drones? Is that an area that you're interested in?

We have the 4-ship [with a ton of Dine] has autonomous capabilities.

It does. Okay. What is the description it?

The product is called the 4-ship which is I talked about in our comments, it's on our website located. It's autonomous, it can be basically to give you is because the technology is pretty incredible. So, if you're in, we've done a lot of demos for a lot of military and other assets. But like if there's a target. They want us to show.

We use intent and we tell them we tell the drones where to go, they go surround that target. It's target. They're looking inward. If they have to go protect somebody that has a target go at what here's an asset called protected. The drones will circle that asset and we'll be looking outward if you need to do a wall. We have a wall formation. All of that as autonomous.

And you don't currently have an ATM out too now?

We don't the only thing we have put 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 growth.

Right. And then last question and I'll pass it on is, do you have you provide any CapEx budget for fiscal year. We have not again, it's with the supply chain and the opportunities are continuing to increase in this space because of Ukraine and because of just almost every budget has increased in the third in everyone's military across Europe and the US. We don't know what the market's going to be like over the next six to 12 months because it's growing pretty rapidly. So we have not put out the CapEx projections yet.

And our next question comes from [Dr. Mark Hocker] from Miller Street Trading. Please go ahead with your question.

]

Hello. I'm glad to be on the call with you. I have three or four little titbits. 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, 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, you know, scheduled the meeting and said NASDAQ was fine with our plan and that was the only issue.

]

Okay, great. And then on the notes, I have here when you mention 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 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. You mentioned the were those paid or were those a prototype experiences for you and 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 deal side. I just have one question on the orders that you are getting are most where are your buyers going from, are they retail, are they commercial or are they agricultural, where are you getting most of your interest from on none of those?

They're almost 100% defense related defense.

]

Okay. That is that's really the end of my questions. I appreciate you giving in floor space. Thank you.

Okay. Our next question comes from [John Ridge], who is a private investor. Please go ahead with your question.

]

When you talk about the autonodyne development product for the 4-ship, is that something that Teal or Red Cat owns outright? Or is that something that has been licensed from them?

That's a great question. Yes, we have a license partnership with Autonodyne, that what's worked out very well for us to not only use it for the 4-ship, but 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 is that we like have 90 days, short term on that.

I'm not going to go into contract negotiations on a public conference call, but I think it's a great contract for Redcats and for accommodation.

]

That's right. That's fair. Thank you.

And once again, if you would like to ask a question, please press star and one. Our next question comes from Curtis Tsang from ATB Financial. Please go ahead with your question. Mr. Tsang is it possible your phone is on mute.

I don't think he's phones working.

and gentlemen, with that, we'll I will turn the floor back over to you for any closing comments. Thanks.

Great. Thank you, both, and thanks again for being on the call. We are excited for 2023, and we'll be up to 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, they have been demoing the Golden Eagle for ship all over the globe. And I am 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, and thank you for joining. You may now disconnect your lines.