Q1 2025 Red Cat Holdings Inc Earnings Call
Hello, I'm Jeffrey Thompson, Unknown Executive, and I'm John B.
Speaker Change: Hello, I'm Jeffrey Thompson, Unknown Executive, Unknown Executive,
Speaker Change: i
Speaker Change: Ladies and gentlemen, thank you for standing by. Good afternoon. And welcome to the Red Cat Holdings, fiscal 2025, first quarter financial results and corporate update conference call.
Speaker Change: 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.
Speaker Change: 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 question, please press star and then two.
Speaker Change: 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.
Speaker Change: A webcast replay of the call will be available approximately one hour after the end of the call through December 22, 2024.
Speaker Change: Joining us today from Red Cat Holdings, our Jeff Thompson, Chief Executive Officer and Leah Lunger, Chief Financial Officer.
Speaker Change: During this call, management will make forward-looking statements, including statements that address RedCats expectations for future performance or operational results.
Speaker Change: Forward-looking statements involve risks and other factors that may cause actual results to differ materialy from those statements.
Speaker Change: For more information about these risks, please refer to the risk factors described in red cats most recently filed, periodic results on Form 10K, and in red cats press release that accompanies this call. Particularly the cautionary statements in it.
Speaker Change: The contents of this call contain time-sensitive information that is accurate only as of today, September 23, 2024.
Speaker Change: Accept as required by law, red cat describes any obligation to publicly update or revise any information to reflect events or circumstances that occur after this call.
Speaker Change: It is now my pleasure to turn the call over to Jeff Thompson, Chief Executive Officer. Jeff, please go ahead. Thank you. And welcome everyone to our first quarter fiscal year, 2025 earnings conference call.
Jeff Thompson: We'll begin with some housekeeping items followed by the exciting launch of our new product line, the family of systems.
Speaker Change: will then provide a detailed review of our financial results.
Speaker Change: Afterward, I'll share our expectations and goals for the calendar year 2025.
Speaker Change: Finally, Leah and I would be available to answer any questions you may have.
Speaker Change: So let's start with housekeeping.
Speaker Change: I'm pleased to announce that following week press from our lawyers, auditors, analysts, board members and many shareholders.
Speaker Change: We will be switching to a calendar year starting January 2025.
Speaker Change: Our guidance will also align with calendar year for 2025.
Speaker Change: will provide more details on the mechanics of this transition.
Speaker Change: I'm pleased to report another record quarter for Q1 with approximately 2.8 million in revenue.
Speaker Change: A 59% year-over-year increase.
Speaker Change: However, the real highlight of Q1 is that we delivered the final prototypes to the Army for IOT and E.
Speaker Change: IOT&E stands for Initial Operational Test and Evaluation.
Speaker Change: This process is used primarily in the military and defense sectors to assess whether a system or product is operationally affected and suitable for its intended use.
Speaker Change: Before it goes into full rate production
Speaker Change: We successfully delivered approximately 40 systems to the Army and built kill 3 units for demos and partner integrations.
Speaker Change: Within weeks, the tail tree proved to be a media success.
Speaker Change: Our management, engineering and manufacturing teams quickly develops a plan to scale production for 2025.
Speaker Change: Over the past four months, our engineering and manufacturing teams have been retooling and preparing for high volume production.
Speaker Change: We are also implementing quality management systems to meet scaling requirements in achieve AS-9100 certification in 2025.
Speaker Change: A common question from investors is whether we can meet the demand of an SRR contract or other large-scale contracts.
Speaker Change: The answer now is a resounding yes.
Speaker Change: The Pause and Manufacturing until 2, and building our army prototypes impacted for two sales in two ways. First,
Speaker Change: who couldn't produce themselves killed two units while we're killing our factory.
Speaker Change: In 2nd, once customers learned about the T.O.3.
Speaker Change: Tom shows to wait for it to release.
Speaker Change: This is similar to how no one buys a new Apple iPhone in August.
Speaker Change: We believe the strategies have been successful, a evidence by our record backlog of 13 million.
Speaker Change: More details on Backwall during a guidance update.
Speaker Change: Thank you one, we launched the Red Cat Family Assistance, expanding from one product to three.
Speaker Change: This diversification enhances our product range and revenue streams, which we believe reduces investment risk.
Speaker Change: The past five months have been incredibly busy as we sailed engineering.
Speaker Change: Guild Manufacturing.
Speaker Change: Extended our product offerings.
Speaker Change: We are no longer a one-product company.
Speaker Change: Let's move on to products and redcaps family systems.
Speaker Change: White House family of ISR and Precision Strike Drones will provide the industry.
Speaker Change: With an alternative to conventional ISR-spray systems on the market that are high cost.
Speaker Change: and non-retrievable.
Speaker Change: Redcats, Center of Shooter, S2S, System for identifying targets with optional precision-strike capabilities.
Speaker Change: is differentiated from other systems with its low-cost portable drones.
Speaker Change: The objective of this new family of systems is to meet the increasingly urgent need of the Pentagon's initiatives for swarms of low-cost, equitable ISR and surgical strike drones, deployable and air-landency environments.
Speaker Change: Redcasts new family of low-cost and portable unmanned ISR and precision, lethal strike systems include three aircraft.
Speaker Change: with complimentary capabilities in a common ground control system, such as the Android Tactical Assault Kit, otherwise known as ATAC.
Speaker Change: for multi-vehable command and control.
Speaker Change: These three systems are the Edge 130 Glow.
Speaker Change: Currently the TL2, and last but not least, fans are new FTV drone.
Speaker Change: The Edge 130 Blue, a hybrid V-TOL system, can be assembled and then hand launched or ground launch, in just one minute by a single user to capture high accuracy aerial imagery with long range pototable.
Speaker Change: Wayne only 1,200 grams.
Speaker Change: The Edge 130 has flown two hours in forward flight mode, which is longest flight time of approved blue UAS drones.
Speaker Change: TL2, everybody already knows about this drone, we've been selling it for over 18 months. And then finally, bang, an FPD drone that will add surgical strike capabilities.
Speaker Change: Warfighters can combine and deploy these FPV drones with lethal payloads, and ISR drones based on the mission profile for seeking destroy cake buildings.
Speaker Change: Since we just closed on quite late, I want to spend some time on the Edge 130 Blue.
Speaker Change: The Edge 130 Blue is a unique product in the drone space.
Speaker Change: is a veto.
Speaker Change: Vertical take off in landing, fixed wing airplane that is portable.
Speaker Change: and Fistening Warfighters Rocks Act.
Speaker Change: It has a long flight time on the Blue UAS cleared this.
Speaker Change: The man for the age 130 has been much better than expected than to announce the ROI. I will talk about the significant contract wins when I discuss our guidance after Leah's comments.
Speaker Change: I want to congratulate the flight we have team on this engineering model.
Speaker Change: Now for the elephant in the room.
Speaker Change: Drought ladies and gentlemen, S.R.R.
Speaker Change: Last few years, we have received our down selection for SOR prototype contracts in September.
Speaker Change: The final production contract award has been scheduled for down selection in September 2024 for almost two years.
Speaker Change: In late August, at the Pathfinder Conference in Huntsville, Alabama, Naomi mentioned during a speech that S.R.R. had a clear winner.
Speaker Change: We're hoping to have an update from the Army for this call, but that is not the case.
Speaker Change: This is why we do not include SOR in our full-year guidance for 2025 or any guidance.
Speaker Change: We work very hard to give the Army a product that meets and exceeds their requirements.
Speaker Change: We hope to hear back in the next few weeks.
Speaker Change: I will now send you call to Leah after which we will talk about our guidance.
Speaker Change: Thank you, Jeff.
Speaker Change: Hello everyone, and thank you for joining the call this afternoon. Today, I will be reviewing the highlights of our first quarter of fiscal 2025.
Speaker Change: Revenue for the 1st quarter of fiscal 25, total 2.8 million, compared to 1.7 million for the 1st quarter of the prior year.
Speaker Change: This represents your over-year growth of 59%.
Speaker Change: Growth margin for the quarter was negative 17% of revenue. This was entirely due to the final delivery of prototypes for the Athera R. Trunch 2 program and was not related to product sales.
Speaker Change: We do not expect to have negative margins again in the future. In spite of this, we are thrilled to have completed this engineering effort and excitedly await an announcement on whether we will be down-selected for a production contract under the short-range reconnaissance program.
Speaker Change: to ask you as to an operation for the first quarter of fiscal 25 was 2.3 million.
Speaker Change: This represents a decrease of 4.6 million or 66% compared to the same quarter in the prior fiscal year and remained flat sequentially.
Speaker Change: We continue to prioritize efforts to control costs without limiting growth.
Speaker Change: We ended the quarter with $7.7 million in cash and just closed it at deal securing an additional $8 million in financing.
Speaker Change: Looking to the future, we have been preparing manufacturing of our latest product, which we're calling the TL3 for right now. We expect to produce this drone for several years, which will allow us to steadily increase margins over time.
Speaker Change: As we have said in the past, we anticipate product margins to reach up to 50% under mass production.
Speaker Change: Overall, we remain optimistic about the future of Red Cat and our ability to provide products that meet the needs of the warfighter.
Speaker Change: This is especially true with our new family assistance, which includes the Flight Wave Edge 130 Blue, the TL2, eventually TL3, and Fang.
Speaker Change: Additionally, we believe this multi-system strategy will lower investment risk through product diversification.
Speaker Change: As Jeff mentioned, we're also going to be changing our fiscal year end from April 30th to December 31st, beginning December 31st, 2024.
Speaker Change: What this means from a reporting standpoint is that we will report quarter-two results for the three months and deduct sober 31st, 2020-4 in accordance with the current fiscal year.
Speaker Change: Then, we will file a transition report 10K for the eight months and did December 31, 2024.
Speaker Change: After that, all future filings will be based on a calendar year.
Speaker Change: I'm now going to turn it back over to Jeff to provide guidance for the upcoming calendar year 2025 before we take questions.
Jeff Thompson: Thanks Leah.
Speaker Change: Rencat expected to have news about SLR for this conference call, and as you know, we are still waiting for everyone else on this call.
Speaker Change: As I said earlier, we usually get down selection, down selection news in September.
Speaker Change: But preparing for this call without SRR.
Speaker Change: was very eye-opening.
Speaker Change: Without SRR or any other NATO programs of record, we are still growing revenue, 200% a year. There are very healthy growing company.
Speaker Change: If we get news in the next couple of weeks.
Speaker Change: We'll update our guidance for calendar 2025.
Speaker Change: As stage in the press release, we expect revenue for 2025 of 50 to 55 million, again, without SR or any other programs of record from NATO.
Speaker Change: We currently have a backlog of approximately 13 million.
Speaker Change: A company record.
Speaker Change: This could change day to day as we finish sweep this week.
Speaker Change: We can now open it up for questions.
Speaker Change: We will now begin the question and answer session. If you wish to ask a question on today's call, you will need to press star then the number one on your telephone.
Speaker Change: If your question has been answered and you wish to withdraw your request, you may do so by pressing star and then too.
Speaker Change: If you are using a speaker phone, please pick up your handset before entering your request and speaking on the call. One moment please for the first question.
Speaker Change: Hello, I'm Jeffrey Thompson, Unknown Executive, Unknown Executive, Unknown Executive,
Speaker Change: i
Speaker Change: And our first question today comes from Ashok Kumar with Think Equity. Please go ahead.
Speaker Change: Thank you, just congratulations. But two quick questions, you have a backlog of 13 million. Can you give us any color on the product mix?
Speaker Change: and the second part is with this backlog ship of this calendar, you're thank you.
Speaker Change: Great, thanks a shock. This is a very exciting question that we've never had a product mix question that we only had one product.
Speaker Change: But about half of the backlog is a flightway of edge 130 blues, which as you know, we just closed about 16 days ago, we had a lot of interest.
Speaker Change: Since we signed the L.I. because we're a great combination of incredible engineering team over there and we have great manufacturing capability and access to capital.
Speaker Change: We will, we are hoping to ship a significant portion of that backlog by the end of calendar year. We're kind of in this really weird spot now where we're transitioning from our.
Speaker Change: Old fiscal year into a calendar year, but we're just basically running so hard to build build drones, ship drones, get rid of some of the backlog and prepare for 2025, which, as you know, with the, with the.
Speaker Change: New guidance is pretty compelling even without that sort of art.
Speaker Change: Okay, thank you very much and all the best.
Speaker Change: Our next question comes from Glenn Matson with Layton Berg-Thelman. Please go ahead.
Speaker Change: Hi, yeah, thanks for taking the questions and congrats on the progress.
Speaker Change: So, when you speak to the guidance of the 55th...
Speaker Change: Million for Counter-2025.
Speaker Change: Can you talk about the mix involved with that? I know Flywave, you know Jeff, I know you're pretty excited about some of the activities you're seeing around that. You know, can you just give us a balance of kind of what we're going to expect that to shake out between the two main products lines, and if there's a PV involved in that as well.
Speaker Change: Yeah, I think I'll start with the FPV portion, FPV.
Speaker Change: It's a must-have product for the warfighter on the battlefield. So that's why we've included it in our...
Speaker Change: Family of Systems, it really gives you a complete solution and try to take abilities. We don't think that the FTV is going to be a large portion of our revenue for next year. Maybe five to eight million because they're very low cost.
Speaker Change: I think the remaining revenue for 2025 from the forecasting that we've been working at will be pretty close to 50-50, the TL3 and the Edge 130 blue and you know we've.
Speaker Change: We've been pretty conservative without previous guidance and done pretty well before, so I think that's kind of a thumbnail of the mix of the 55 million.
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Speaker Change: On the back half of next year, can you talk about what the margin profile would look like at that point, or if there'd be greater scale needed to get to those target margins.
Speaker Change: Yeah, a great question, you know, just I'll just use some color required hand to to Leah, um, for the last, you know.
Speaker Change: The year and four or five months we've been building the TL2, it came out of the box very hot and was selling very well, still selling very well.
Speaker Change: But we always knew that once we had the, you know, what we were delivering for the SRA prototypes is going to be the next rev bird. So we're switching air frames every couple of years. You never get to that.
Speaker Change: Mass production, where you're making a drone for, you know, three, four years straight, which would, will happen with the TL3. So, and Leah's done some great modeling on how we get to, you know, 50% but Leah, if you want to add to that.
Speaker Change: Yeah, I'd be happy to you.
Speaker Change: I just I always love an example Jeff Gaye about the iPhone because I think we can all relate to holding out for the next one and that's exactly what we've seen here but thankfully, you know we don't anticipate that same situation anytime soon with the two or three.
Speaker Change: Um, you know, because we plan to produce it all of next year and for a longer time period after that after that.
Speaker Change: We expect to just steadily increase margins as we go and not having to change over the production lines and with the ability for our teal engineering and manufacturing teams to really focus consistently on the teal 3. We believe we can rapidly get to 50% margins.
Speaker Change: It's helpful. When you do mention Jeff and you raised a little bit of debt, I believe it's post-the-quarter. Can you talk about the amount of capital you might need to get to profitability or is there any color you'd give there?
Speaker Change: Yeah, it's something we didn't even make it into the press release because we closed about two hours ago, but we raised approximately eight, eight million. Leah really worked really hard to get that done. You know, we do expect this could get us.
Speaker Change: of January February timeframe, which for us.
Speaker Change: is very important because any large contract wins, we, that's approximately when.
Speaker Change: We would receive our first set of funds to build out.
Speaker Change: and E-Loges production contracts. So our goal is just to get to those pre-payments.
Speaker Change: Without any more delusions, so that's why we did this small piece of debt, but Leah, if you want to give some of the parameters on the debt.
Leah Lunger: Yeah, definitely, there are, you know, a few main points I can go over as Jeff mentioned, it will be proceeds of $8 million.
Leah Lunger: There are no repayments for six months, which were very excited about Jeff said, you know, just kind of getting through to that junior February timeframe.
Speaker Change: There are some warrants with it, but warrant coverage is approximately 30% and they are cash only. The exercise price on those warrants is $6.50.
Speaker Change: So, you know, if and when they're exercise, those are generally approximately an additional 4.9 million in proceeds. So yeah, as you said, we've worked really hard on this and we believe it will do a lot of good for the company and help us get through the next, you know, into next year.
Speaker Change: Great thanks for the call there and no, it's just last the discussed couple quick ones on SRR.
Speaker Change: Jeff, do you have it? It's sense. I know you could be any day now, is there any type of like, you know, specific times that you're looking for for when and when and how it's actually made number one and then can you just remind us one more time of the scope and
Speaker Change: I believe I have a number ahead of like 79 million in the first fiscal, you know, a government fiscal year, potentially, as the kind of the, the, the, the, the, the, the Tam or Sam, I guess, you know, maybe just a little more color and that'd be great thanks.
Speaker Change: Yeah, thanks. Yeah, we're like I said, you know, it's been said publicly that there's a clear winner in it's done, you know, so, but when you...
Speaker Change: When you submit your final prototype, you don't really get to communicate, so we don't have any information until they call you and give you the news of down-so-action, usually create a 4 days before the rest of the world finds out.
Speaker Change: We think it could happen anywhere from early October or maybe they wait to the big army show they have every year at AUSA.
Speaker Change: We're very confident, but you know when we...
Speaker Change: Until we get official notice, we have no idea, and yeah, that's some of the things that you can find online for the first year of deliveries between May and September of 2025 is approximately 79, that's the same number we found out there.
Speaker Change: Great, okay, thanks for all past a lot, thanks very much.
Speaker Change: And our next question comes from Carlo Corsion with Dawson James Securities. Please go ahead.
Speaker Change: Hey guys, just couple things.
Speaker Change: The SRR, how's that tied? Actually, I think the last conversation you thought you'd see some NATO orders.
Speaker Change: and now you've been working with five or six different countries thought you'd see native wars possibly before SRR.
Speaker Change: and are they tied together? I mean, if you don't get the SRR, we get NATO, we vice versa. And my second question was, is in the financials that just came out, are those combined if not, when will they become buying flightways?
Speaker Change: O'Kourra.
Speaker Change: Yeah, okay great. Yeah, so SLR and any NATO contracts are not, or they don't rely on each other whatsoever. We've been test doing tests.
Speaker Change: with certain ministries of defense for, you know, some almost 16 months now. We are, we have a couple of the getting what I'll close.
Speaker Change: We think we're pretty darn closely getting what we call the initial order. This typically one or two hundred systems to get the training started before they do a very significant buy.
Speaker Change: and that's you know you're always waiting for that first order to kind of like what happened with us in a board patrol to give us an order for 50 before they
Speaker Change: Give us a large order, and we came the drone for the border patrol. So we are getting close with a couple of NATO right now. We were hoping they would come in quicker. We were originally told one of them was supposed to happen in June. We just have no control over these large bureaucratic systems. But if you look at them,
Speaker Change: Some of the countries announcements in Europe, you know, there's a lot of growth in what everyone's expecting to build their their drone arsenal. So we're feeling pretty good about that and we're feeling pretty good about that. That's all.
Speaker Change: I'm not combined yet, Leah, you want to run the, when do you expect those to be combined and why didn't you go with a government year October 1st instead of calendar year.
Speaker Change: So, for Flight Wave, we closed the APA at the beginning of this month.
Speaker Change: and the financials reported today are through July 31st and so Flight Wave will be included in what we report as of October 31st. That'll be reported in mid-December and at that endot filing it will include the September and October activity, so it'll be two of the three months.
Speaker Change: and then, you know, Jeff can speak more to this, but for the, um,
Speaker Change: Fiscal Year, what we see a lot with the government contracts, you know, the government fiscal year is through September as you stated.
Speaker Change: But what we find is that their budget isn't always finalized, and then there are sometimes amendments, and our contracts tend to be finalized around that December, January timeframe. And so building in a little bit of that delay with a calendar year.
Speaker Change: Just will give us better visibility and better consistency for our company.
Speaker Change: and follow the, uh, just to give you a little bit more color on that.
Speaker Change: Like I mentioned in my prepared notes is every single year for four years we've been getting our down selection in September. They then give you a prototype contract.
Speaker Change: For...
Speaker Change: for the next year building the prototypes to hopefully win a production contract.
Speaker Change: I don't know if you were, but they announced the MRR winner, which is the company level, which was almost two weeks ago now, which was in the role Ghost and PDW.
Speaker Change #100: There are two years behind the map program from where we are now. We're going for production contracts. But so you get production contract for prototype contract right around now once you get down selected. You typically negotiate for two to three months.
Speaker Change #101: We've signed, probably, last three years in December, by the time we have a close deal, we're heading and we've got to start getting our first checks in January.
Speaker Change #101: So, and if you look at all the continuing resolution, they always get in the way, so we're using there.
Speaker Change #101: Their methodology to capture as much of it in something that's going to be more reliable for us, knowing that it's usually delayed, but we'll typically get the full year and get to shift these items.
Speaker Change #102: As concludes our question and answer session, I would like to turn the conference back over to Jeff Thompson for any closing remarks.
Speaker Change #103: Well, thanks everybody for jumping on. We obviously have an exciting year coming in 2025.
Speaker Change #104: Maybe it could be even more exciting in a few weeks. We will keep.
Speaker Change #105: Everybody informed as soon as we know, but regardless, we are, we're in great shape, we're excited, we're building great stuff, people love it, our new product, the flight rate is fantastic, our new fan product is fantastic, the TL3's got an incredible response. So we look forward to talking to you in the future. Thanks, everybody.
Speaker Change #106: The conference is now concluded. Thank you for attending today's presentation. You may now disconnect.