Ladies and gentlemen, thank you for standing by. Good afternoon and welcome to the Red Cat Holdings Fiscal Second Quarter 2022 Financial Results and Corporate Update Conference Call. At this time, all participants are in a listen-only mode. [Operator Instructions] After today's presentation, there will be an opportunity to ask questions. [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 one hour after the end of the call through March 20, 2022. I would now like to turn the call over to Scott Gordon, President of Core IR, the company's Investor Relations firm. Please go ahead.

Thank you, Ellie. Good afternoon, everyone and thank you for joining us for the Red Cat Holdings fiscal second quarter 2022 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 Red Cat's expectations for future performance for operational results. 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 context of this call contains time-sensitive information that is accurate only as of today, December 20, 2021. 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, thank you, Scott. Good afternoon, and thank you all for joining our fiscal second quarter 2022 call and webcast. Also joining me today is Joseph Hernon, our Chief Financial Officer. We've completed many milestones in Q2. We are awarded a NASA contract. We close the Teal Drones acquisition. We have brought on key hires for our business development and sales and opened a U.S. manufacturing facility in Salt Lake City. I will start and review our consumer companies Rotor Riot and Fat Shark. Fat Shark is continuing to develop its digital system called Shark Byte. Shark Byte is a high-quality, low latency, high def FPV, which means First Person View system. We are now seeing approximately 50% conversions from analog to digital. We expect that to add momentum to the 2022 calendar year revenue. We are also seeing crossover up to and using commercial and military use cases. I'll now turn to Rotor Riot. Rotor Riot produces weekly drone media and has an online store where we can buy products seen on the weekly YouTube shows. Rotor Riot continues to grow and has over 235,000 subscribers. We are happy to report that we've been able to get most of our Rotor Riot supply chain issues fixed that were causing us to be out of stock on popular items. We expect the store to gain new users as Rotor Riot becomes a one-stop store for Ready to Fly FPV drones and has reliable inventory. Next I'll talk about Skypersonic. Skypersonic has a drone platform that combines artificial intelligence software with the camera and sensors of the Skycopter inspection UAV. They also have a remote piloting capabilities which breaks the one drone, one pilot drone problem. This capability was crucial in getting the five-year NASA contract we announced in September. NASA's…

Thanks Jeff and to everyone for joining the call today. I will now provide a review of our financial results for our second fiscal quarter which ended on October 31, 2021. Revenues during the quarter totaled almost $1.9 million, representing a new quarterly record for the company. This represented an increase of more than 300% compared to the second quarter of last year and an increase of 33% compared to our first quarter of this fiscal year. We expect to report continued sequential revenue growth going forward. Gross margin as a percent of revenues was 8% during the second fiscal quarter compared to 7% in the first fiscal quarter and 19% during the same -- the second quarter of last year. The lower gross margins that we have been experiencing in the first half of fiscal '22 reflect higher product and shipping costs as we have been impacted like many businesses by COVID-19. We expect gross margins to improve going forward, especially as we begin to scale up manufacturing at our newly opened and expanded facility for Teal Drones in Salt Lake City. Operating expenses totaled $2.9 million in the second fiscal quarter compared to $1.8 million in the first fiscal quarter and $500,000 in the second quarter of last fiscal year. This increase compared to the second quarter last year reflects the acquisitions of the Fat Shark, Skypersonic, and Teal, all of which were acquired subsequent to our reporting results for the second fiscal quarter of last year. The sequential decrease, increase excuse me, compared to our first fiscal quarter related to the acquisition of Teal Drones which closed early in the second quarter and represents our largest acquisition to date. Net loss for the second quarter totaled approximately $2.7 million compared to $1.6 million in the first fiscal quarter and $700,000 in the second fiscal quarter. We ended the second fiscal quarter with almost $60 million in cash and investments. For the first six months of our current fiscal year ending on October 31, our year-to-date net loss adjusted for non-cash expenses, such as stock-based compensation was $3 million, meaning that our current cash balance provided approximately 20 times coverage of that net loss for the first six months of this fiscal year. I think that really demonstrates that we are in a really good financial position to execute on our growth initiatives over the balance of the fiscal year. I will now turn the call over to the operator for questions.

[Operator Instructions] And our first question today comes from Kevin Dede with HCW.

Hi Jeff, Joe. Thanks for taking my call. Congrats on the numbers. I'm thinking most of the 19 was generated by Teal, is that the right way to think about it?

Yes, go ahead Joseph.

Yes, I would just that, call that short statement Jeff made. I think at this point Kevin and looking back on the second fiscal quarter, certainly Teal made an immediate impact on our revenues, but it was not even a full quarter yet for the company and I'll let Jeff comment maybe on the outlook going forward. Jeff?

Yes Kevin, it was, they did contribute, but I think they are going to significantly start to contribute as we head into the next calendar year. As we mentioned in our press release we expect them to start generating about $1 million a month starting around January. We expect that to actually to move up as we get into further down the year and we're getting lots of traction and we're continuing to work with the large contracts on the government hoping to land some of those soon, but we're also actually already out there. Our biz dev team has been flying around the globe going to other NATO countries and pitching the Golden Eagle and doing demonstrations to other military countries and we're getting some good traction there. So we're going to have starting early next year we're going to have some pretty aggressive revenue growth coming from the Teal acquisition.

Can we look at it from another perspective Jeff? What would you estimate that DJI's revenue run rate was in their sales to U.S. customers, where they've now been excluded?

Yes, so they have -- I haven’t been able to find any recent numbers because they've basically been thrown out of any government and enterprise capability right now. So they are -- I wouldn't have those numbers and no one would share them with us. But we believe there is hundreds of millions of dollars of potential revenue from DJI not being allowed to be part of government funding anymore, whether it's -- some fleets that are in public safety that are over thousand drones that are actually DJI drones currently which we know if some of these bills get passed where you can no longer fly your existing fleet that are Chinese made. You can't renew anything and you can't buy anything new. But to ground the existing fleet could be thousands of drones per department obviously, but the military isn’t doing anything with Chinese drones, but those contracts are also very large. So we think that there is this is vacuum from the DJI ban and now all the Chinese drone bans are really going to drive things hopefully close to the Golden Eagle than anyone else.

Who would you size up as able and ready to manufacture competitors?

Yes, that's a great question. I know that on the consumer side of the five that are allowed, that are in the SRR program, Skydio is probably the biggest threat, but I think that with our more military style bird, the Golden Eagle, the new manufacturing facility that we just set up is really going to give us the capabilities to meet those large contracts. But I would -- for competitors I would say there's only Skydio that we would have to worry about.

So granted Salt Lake City, but my understanding was you were trying to build out facilities in PR, am I thinking about that incorrectly? And then why Salt Lake City?

Yes, so the Teal team is all there. The manufacturing is to going to be in Salt Lake City. We have just moved into a new facility that I was at two weeks ago. They are moving from basically preproduction to actually a real assembly platform where they can actually get better yields and better reliability. And again from the activity that we have on the sales side now we've actually opted to double the size of that factory just two weeks ago.

And when do you suspect you'll be at full factory utilization?

Well I mean the factory can put out thousands of drones a month, so for us to get there that's going to take a while, but we're excited to get to 200 to 300 drones a month over the next 12 months, but that's -- we're not going to be stopping there. We will be -- the SRR contracts are getting awarded late next year and we have other opportunities. So we're going to be building this facility as quickly as we can. We've been buying up a ton of inventory. We're getting everything you need to get up thousands of drones per month which and they cost about $14,400 if you look at the GSA website. So there's going to be some pretty significant ramp in capability and in revenue.

Well, congratulations Jeff, Joe. Thanks for taking my questions.

Thanks Kevin.

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

Thank you. I don’t know if I can be heard. Can you hear me okay?

I can hear you.

Okay, thank you. Do you have -- congratulations on the building by the way, is your timeframe for the completion of the upgrade in the Teal production building?

Well we just started building it in September and it's already producing drones. We closed in September and right away we got into the new facility and started building the production and manufacturing capabilities. The new site is going to be right next to the existing site is we just signed, so that's going to take some while. But we can get up to thousands of drones in existing location, but we are already planning to really bring capacity way up.

Okay, thank you. Secondly, the timeframe for the Fat Shark development on the digital system is there a timeframe for that and as well as the Skypersonic infrastructure attempts?

Yes, so I'll start with the last question first, there will be, as you all know, the infrastructure built just the past this fall. No one is expecting significant awards to happen until at least mid next year. So on the -- for actual infrastructure, official infrastructure contracts for Skypersonic, we don't think we'd see anything until mid next year. They are also doing a ton of work also around the globe not just Teal drones, but we've been working with Aramco. I know we just finished a large training, a 10-day training period for the Aramco drone purchases that they've made. We are continuing to work with GM on inspecting their sites and helping them with inventory in parking lots using our artificial intelligence. And we continue to get other wins and we're starting to see not just the Teal drones made in USA is important, but a lot of large companies do not want to award inspection contracts to Chinese made inspection drones, so our made in USA Skycopter also gives us some great opportunities for here and now inspection revenue which you'll continue to see hopefully we continue to see more wins like we did with NASA and the remote piloting capability gives us a huge advantage and we're also made in USA. So there -- I think you'll see some steady growth out of Skypersonic and then we don't know what's going to happen once we start seeing infrastructure dollars there.

Okay, thank you and the Fat Shark development of the digital system is there a time frame for that?

Yes, well they have versions of it now. It's continuing to be improved and continue to get better features and continue to get updates. The system is amazing, is very low latency, much lower latency than the Chinese competitor as goggles set for FPV. So we're at this early now and we're starting to finally see, as I mentioned in my remarks, we're starting to see people switch from the analog platforms to the digital platforms. So that's a great stage for the -- that analog systems work. The Fat Shark goggles are very well made, so they last long time, so people don't really have to replace them all the time. But now that we're seeing about 50% of the people coming on board are using, are switching to digital and hopefully we can see that conversion rate go up, then the HD system will continue to get traction throughout the year.

Yes, two other questions if you don't mind. Has the chip issue been resolved for Teal? and then secondly or lastly, I know you cannot comment on the tranche 2 status, but can you at least reference if the government has not eliminated Teal from consideration at this point?

Oh absolutely not, Teal is eliminated from the process. We continue to work with them which is we're pretty excited about, but again we don't have anything to report there. And I'm sorry, what was the other question? I didn’t get that.

The chip, for production for Teal last conference I believe there was an issue securing chips, I think you only had 600, has that chip issue been resolved for manufacturing purposes?

Not completely, but we are starting to see relief in some chips coming in quicker than we had planned for. One of the bigger issues we were having last call was the batteries which, when I got my tour I don't mean to go a tangent here, but people don't realize how many features the battery that we've redesigned, that Teal has designed, and it is like 100 features in that smart battery, it is an amazing piece of technology. But we have that resolved and we are starting to see some relief going into the, all of the supply chain constraints, but not every single chip set is perfectly available. So we -- our team was actually very forward in mostly Allan Evans, our COO really pushed us to make sure we ordered early to get in the front of the line and that's worked out really well. So we don't think that we will be constrained as we're building up our monthly build capability. We think that we will be fine and we'll get through this chip shortage.

Okay thank you very much.

Thank you. Thanks for the questions.

Our next question comes from Dan Fan, a private investor.

Hello, this is Dan, if you can hear me okay, congratulations on the growth in revenue and productivity from Teal Drones. Most of my questions have been answered, but I have one left. So given the supply chains have been relieved and there were a lot of proactive activities I heard there as far as getting us ready to produce more Teal Drones that's the main revenue stream right now. My only question left is, so what are we doing with the $60 million plus or the significant amount of cash equivalent to continue with the growth in terms of the investment for the short term or long term into next year?

Yes, that's a great question. Yes, so first of all let me back up a little bit, so if we get one of the large government contracts, it could be for tens of millions of dollars if not $50 million or $100 million dollars over five years of drones orders, which means we would need to put a good chunk of capital to work, that's the reason that we raised the money in July is to have the capital to be able to, A, rollout a factory that can handle the actual requests for a large contract we could actually build what we are quoting and then to be able to have the actual capital to buy all the parts to fulfill such a large order. We're also just at the beginning building our enterprise sales team and we're not fully, we don’t have all the employees that we're looking to get. We are hiring -- we get about 10 hires that we're looking just for Teal and then the sales team probably has five or six people over the next year that will be filling in with high quality biz dev and sales folks. So we will be investing in our sales and marketing and manufacturing, customer service, all the things that we're going to need to be able to supply these large government contracts with good service, and further acquisitions.

Then that was my next question, if there was any acquisition in the plans it would make us more competitive like in this field.

Yes most of the -- anything that we're looking at right now I mentioned on the last call is mostly software driven that would help the Teal platform.

Got it, thank you very much.

Great, thanks for your questions.

This concludes our question-and-answer session. I'd like to turn the call back over to Jeffrey Thompson for any closing remarks.

Great, thanks. I just want to thank all the employees at Red Cat. We've got an incredible team. I was able to go and see the folks at Teal. My next quest is to get up and see the folks at Skypersonic, they are doing a great job, and not, we're right all the time. So we're pretty darned excited about this next calendar year. We have a weird year-end for our fiscal year, but we're very excited. I want to thank all the employees. I want to thank our customers and want them really have a great Christmas, Merry Christmas.

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