Pink Cat Holdings, Inc. (NASDAQ:RCAT) Q1 2024 Earnings Convention Name September 19, 2023 4:30 PM ET
Firm Individuals
Joseph Delahoussaye – Vice President of Investor Relations, CoreIR
Jeffrey Thompson – President and Chief Govt Officer
Joseph Hernon – Chief Monetary Officer
Convention Name Individuals
Ashok Kumar – ThinkEquity
James McIlree – Dawson James
Operator
Women and gents, thanks for standing by. Good afternoon and welcome to the Pink Cat Holdings Fiscal First Quarter 2024 Monetary Outcomes and Company Replace Convention Name. At the moment, all members are in listen-only mode. [Operator Instructions] After as we speak’s presentation, there shall be a chance to ask questions. [Operator Instructions] Individuals of this name are suggested that the audio of this convention is being broadcast dwell over the Web and can also be being recorded for playback functions. A webcast replay of the decision shall be out there roughly one hour after the tip of the decision via December 18, 2023.
I might now like to show the decision over to Joey Delahoussaye, Vice President of CoreIR, the corporate’s Investor Relations agency. Please go forward, sir.
Joseph Delahoussaye
Thanks, Sarah. Good afternoon, everybody, and thanks for becoming a member of us for the Pink Cat Holdings Fiscal First Quarter 2024 Monetary Outcomes and Enterprise Replace Convention Name. Becoming a member of us as we speak from Pink Cat Holdings are Jeff Thompson, Chief Govt Officer; and Joseph Hernon, Chief Monetary Officer.
Throughout this name, administration shall be making forward-looking statements, together with statements that tackle Pink Cat’s expectations for future efficiency or operational outcomes. Ahead-looking statements contain dangers and different elements that will trigger precise outcomes to vary materially from these statements.
For extra details about these dangers, please consult with the danger elements described in Pink Cat’s most just lately filed periodic stories on Kind 10-Ok and Kind 10-Q and in Pink Cat’s press launch that accompanies this name, notably the cautionary statements in it.
The content material of this name comprises time-sensitive data that’s correct solely as of as we speak, September 19, 2023. Besides as required by regulation, Pink Cat disclaims any obligation to publicly replace or revise any data to replicate occasions or circumstances that happen after this name.
It’s now my pleasure to show the decision over to Jeff Thompson, Chief Govt Officer. Jeff?
Jeffrey Thompson
Thanks, Joey. Thanks. Welcome, everybody to our fiscal 12 months 2024 first quarter earnings convention name. I am going to begin by summarizing our latest efficiency and achievements, after which I’ll present data associated to our outlook for fiscal 12 months 2024. After which, Joseph will overview our monetary outcomes, after which we’ll take your questions.
I’m happy to report that the Teal 2 drone is getting a heat welcome as essentially the most distinctive and succesful nighttime drone within the Group 1 class. We introduced the Teal 2 on the Military Aviation Affiliation of America Convention on April 26, a number of days earlier than our fiscal year-end. The Teal Drones income for fiscal Q1 was $1.75 million.
We can not make a year-over-year comparability as a result of the Teal 2 didn’t exist. However when you had been a start-up and launched a brand-new product and did nearly $2 million in income in your first quarter, it will be thought-about a house run, particularly, if there was follow-through, however extra on that in our steerage replace.
And Joey and Joseph, are you able to ensure that your traces are muted. We’re listening to some background noise.
So we have met with lots of traders just lately and lots of them are new to the story. So I will form of again up and focus on a few of the regulatory tailwinds that helped create the USA rising markets present standing.
So December 2020, DJI, the most important drone producer on the planet, was placed on the US authorities’s entity listing. In December 2021, DJI was additionally placed on the financial blacklist. Quick ahead to July 2023, the American Securities Drone ACT, ASDA, handed the Senate unanimously and we anticipate it to be regulation within the subsequent few months.
August 2023, Pink Cat’s Teal 2 receives Distant ID certification from the FAA. This was an enormous achievement, the paperwork over 300 pages, very troublesome to get the certification from the FAA. Only some of us have achieved it thus far. It is so troublesome that the majority firms couldn’t pull it off, and so they really delayed the standing and the requirement for six months.
So what are all these items — what are all these regulatory tailwinds imply? Effectively, it implies that the most important drone producer on the earth, whose primary market was the USA, can not by regulation be purchased by anybody that obtain Federal {dollars}.
It isn’t simply the Division of Protection, it is native teams, it is fireplace departments, it is anybody that receives Federal {dollars}. This has created a really massive market and a really massive vacuum for less than us and one different producer within the US that may construct a scale to fill. So it is a very distinctive alternative that does not at all times occur.
Now I am going to transfer on into our income and funding tailwinds. I will focus on the present natural income development or fast income. I will then focus on the DoD newly introduced and funded replicator initiative. We have a look at that as midterm income within the subsequent three to 6 months. After which the quick vary reconnaissance SRR program of document, which is a 10-year program of document and most of the people on this name are ready for this to occur, however it’s a very important program.
So let’s begin with our natural income in our backlog. As we speak, we reported for Q1 $1.75 million in income. Our steerage for Q2 is $3 million, 71% sequential natural development. Our steerage for Q3 is $5 million, 67% sequential development on high of 71% sequential development
This steerage relies on signed buy orders and we anticipate extra within the subsequent 11 days. Q3 income of $5 million places us at a $20 million run charge after promoting the Teal 2 for slightly below 5 months. That is a tremendous development story and want to thank the whole Teal group for making it occur.
So now let’s transfer on to midterm income alternatives, which we consider are within the subsequent three to 6 months. The replicator initiative. The Pentagon has unveiled a radical new technique targeted on fielding 1000’s of low-cost, sensible and autonomous battle drones throughout a number of domains inside 18 to 24 months to counter China’s army.
In response to the Wall Road Journal, Deputy Secretary of Protection, Kathleen Hicks, stated the Division of Protection plans to develop AI techniques supposed to be small, sensible and low-cost to counter threats from China and different international locations.
Total, we will be delivering within the 1000’s, Hicks stated throughout Tuesday’s interview. Final week, we introduced our replicator initiative, the newest effort to beat the manufacturing valley of demise starting with the accelerating the scaling of all area attributable autonomous techniques.
So what does this imply? Tens of 1000’s of disposable drones must be delivered to the battle fighter in 18 months, which suggests orders most definitely must be delivered to those distributors within the subsequent three to 6 months. We consider we’re very nicely positioned or already in touch with this program.
Now let’s transfer on to long-term income alternatives. SRR or quick vary reconnaissance program of document. Simply to overview or for brand new traders which are on the decision, SRR program of document began over three years in the past and was initially set to have three tranches. Tranche 1, 2 and three.
Tranche 1 would have a prototype contract and a manufacturing contract. The identical was alleged to occur to Tranche 2 after which Tranche 3. We had been awarded Tranche 1 prototype contract and we’re not awarded the manufacturing contract. That manufacturing contract a few years in the past was for $100 million for 1,083 drones.
Tranche 2 was alleged to be awarded months in the past, however the US Military notified us final December and stated they’re placing Tranche 3 into Tranche 2 to speed up, to get the ultimate product into the battle fighter’s palms. This was due principally due to the Ukraine battle and everybody’s understanding how necessary small drones are. And truly, that is what additionally began the replicator initiatives.
So Tranche 2 and three, which is now mixed which the subsequent down choice, I consider, is at finish of December or early January, in the event that they announce the subsequent down choice on time. We do not know what the precise contract quantity is, however the $100 million was for 1,083 drones, the remaining quantity on this contract is for 12,000 drones.
I am not doing linear math. I am not saying that that is going to be a $1.2 billion award, however I’m saying, it will be important. And now with the fixed want for 1000’s of drones, we do not know if this shall be sized up due to the necessity for small drones.
I’ll now hand the decision over to Joseph. I sit up for your questions.
Joseph Hernon
Thanks, Jeff, and to everybody for becoming a member of the decision as we speak. I’ll now present a overview of our working outcomes for the fiscal first quarter, which ended on July thirty first, 2023. My feedback are going to deal with a variety of financial-based milestones and occasions, which depart us strongly positioned for the steadiness of fiscal ’24 and past.
As lots of you already know, now we have a pending settlement to promote our shopper phase to uncommon machines, which I may also consult with as UM. The gross sales worth contains a right away money cost of $3 million plus $17 million in shares of UM. We additionally anticipate to obtain a good working capital adjustment of roughly $4 million, which shall be payable in further inventory.
The sale of the patron phase is contingent upon common machines finishing an preliminary public providing on a serious inventory alternate. UM has just lately suggested us that they’ve considerably accomplished the registration course of with the SEC and that they anticipate to finish an IPO throughout our fiscal second quarter.
Subsequently, underneath the accounting guidelines for the reason that transaction is prone to shut throughout the subsequent 12 months, the accounting guidelines require us to report the patron phase as discontinued operations. The monetary accounting and reporting for continued operations is way completely different than what now we have traditionally reported. Principally, the working outcomes of our shopper phase, which consists of Fats Shark and Rotor Riot have been condensed into one separate line in every of our monetary statements.
There’s actually no combining of quantities associated to our persevering with operations, which is our Enterprise phase consisting of Teal and Skypersonic with our discontinued operations, which is our shopper phase consisting of Rotor Riot and Fats Shark.
Since we anticipate to obtain roughly $21 million in shares of UM, which can make us a big shareholder, I’ll present a short overview of the Q1 working outcomes for the Shopper phase. Pushed by robust development at Rotor Riot, Q1 revenues had been nearly at a document degree. The working loss for shopper was very modest at lower than $300,000.
UM believes that there are a number of alternatives to proceed rising the patron phase underneath its stewardship. We consider that our shares in UM could have important long-term worth and admittedly signify a hidden worth relative to Pink Cat’s present market capitalization.
Turning now to the enterprise phase. As Jeff famous, simply earlier than the beginning of fiscal 2024, we launched the Teal 2 in late April. The market response has been fast and significant. We reported document gross sales for the Enterprise phase within the first quarter of fiscal 2024 and consider that greater gross sales shall be reported every quarter all through fiscal 2024.
We’re already starting to obtain repeat orders and presently have an order backlog of roughly 6 million. As now we have famous in prior calls, we initially established comparatively excessive stock ranges in response to provide chain challenges that emerged throughout COVID-19. These actions led by our COO, Allan Evans, enabled us to safe chips and different digital parts at a time once they had been very exhausting to acquire and at cheap costs. That savvy transfer leaves us very nicely positioned as we speak. Thanks, Dr. Evans.
With escalating demand for the Teal 2, we estimate that it’ll value roughly $3 million to transform our present $11 million of stock into roughly 1,200 drones, which represents revenues of 18 million primarily based on our base gross sales worth of fifty,000 per drone. This stock conversion will generate web money proceeds of roughly 15 million and represents one in every of a variety of money sources that we anticipate to appreciate in fiscal 2024.
Our anticipated money proceeds of three million from the sale of shopper is one other supply of capital. Whereas we won’t instantly promote our 21 million shares of UM, the 180-day lockup interval is comparatively quick and will start to generate money proceeds late in fiscal 2024. We anticipate that orders from authorities companies will proceed to be the supply of most of our enterprise revenues. As a result of excessive certainty of the funding sources for government-based orders, there are better than regular alternatives for us to safe financing secured by these orders.
Lastly, one in every of our biggest property is our manufacturing facility in Salt Lake Metropolis. Since buying Teal in 2021, constructing this facility has been an enormous focus of administration, our devoted workers and our valuable capital. The power is now absolutely operational and continues to scale manufacturing output.
At the moment, we’re not in a position to absolutely leverage its manufacturing capabilities, which is leading to decrease than focused gross margins. Nevertheless, as Jeff simply famous, we anticipate orders for the Teal 2 to proceed to develop all through fiscal 2024, and we’ll manufacture these further drones at a decrease unit value, which can enhance gross margins and working money flows.
Our drones are made within the USA which continues to turn into extra critically necessary to authorities companies together with the army branches. We consider that this supplies us with an enormous aggressive benefit in an business that’s positioned for important long-term development.
I’ll now flip the decision over to the operator for questions.
Query-and-Reply Session
Operator
[Operator Instructions] Our first query comes from Ashok Kumar with ThinkEquity. Please go forward.
Ashok Kumar
Thanks. Two questions. The primary query, two elements. By way of your Q3 fiscal steerage of 5 million and your present value construction and bettering margins, will that get you near money stream optimistic. And the second a part of that query is, given your present money place and the near-term burn, is there a necessity to lift capital. The second query is on the aggressive entrance on the SRR program. You are competing with Skydio and Vantage and then you definitely’re in a bake-off for the Border Patrol Program with the identical rivals. So might you please give us an replace on the chance and the Border Patrol Program. Thanks.
Jeffrey Thompson
Certain. So let me begin along with your final query and go backwards right here. So, sure, we — all of us obtained orders earlier this 12 months. We obtained an order for about one million drones from the Border Patrol. Skydio did additionally and Vantage Robotics additionally obtained a a lot smaller order. So, sure, we’re in a bake-off to achieve their enterprise. Now we have nothing new to report, however it’s attention-grabbing, and that is precisely who we’re going up towards for the massive SRR quick vary reconnaissance program of document. In order quickly as we hear, that is the time of the 12 months may very well be any day if we hopefully, we do hear one thing, you may be the primary to know. Secondly, I am going to go into your query about do we have to increase capital. And we have gotten that query so much whereas we had been in any respect these conferences we had been eventually week. And it is a reputable query. However let me simply begin with the C-level and the executives and the staff, we’re not employed weapons. The corporate, the staff, we personal nearly 40% of the shares excellent. So we have written checks, we’re not employed weapons. We do not personal 0.0% and simply wish to do a bunch of raises and dilute everyone. As a result of if we dilute the shareholders, we’re half the shareholders nearly. So we don’t wish to do this. So let me undergo a few of the particulars on this. As Joseph simply talked about, we’ll be turning thousands and thousands of {dollars} of stock into gross sales over the subsequent couple of quarters. In our first three quarters, we have got about $10 million in shipped income we’ll be posting, which is greater than all of final 12 months, and we’re not even achieved with gross sales but. So these numbers might really be greater. As additionally as Joseph seen, we anticipate to shut UMAC within the subsequent few weeks, which can generate roughly 3 million in non-dilutive capital. And he additionally talked about the 1 million to 2 million in stock or extra. We even be getting roughly 2.4 million from our SRR prototype contracts beginning in November and that goes via March. And now we have additionally just lately acquired analysis venture that might generate roughly $1 million to $2 million. On high of that, final week and as latest as as we speak, we have gotten time period sheets, the small debt choices, not convertible debt, and we said, as Joseph talked about, exploring credit score traces primarily based on our authorities contracts, that are a lot cheaper debt. So to summarize this non-dilutive strategy to increase capital over the subsequent few months is roughly 7.4 million to 9.4 million within the subsequent six months of non-diluted capital. And when you add a small debt providing, it goes from providing of three million to five million, which we might simply service in our fashions. That is a complete of 10.4 million to 14.4 million of non-dilutive capital, which is greater than sufficient to get us to money stream optimistic. And I feel your query for Q3 will 5 million of income get us to money stream optimistic. We’re not going to make that projection but, however I can let you know that is — it is fairly darn shut at that time. So I feel I answered all three of your questions.
Ashok Kumar
Nice. Thanks very a lot and all one of the best.
Jeffrey Thompson
Nice. Thanks.
Operator
[Operator Instructions] Our subsequent query comes from Jim McIlree with Dawson James. Please go forward.
James McIlree
Yeah, thanks, and good night. So in your commentary about — within the commentary concerning the stock ranges, it means that gross margin on this 15 million of income of about 22%. I am assuming that, that is since you’ve obtained a excessive burden of the manufacturing facility. Whenever you get to both an affordable capability utilization or absolutely utilized? What sort of gross margins wouldn’t it be cheap to anticipate?
Jeffrey Thompson
Sure. I am going to contact on the excessive degree and Joseph would possibly wish to tackle. That is one thing I overview with. And the fitting particular person for that is Dr. Evans as a result of he is been constructing factories for the final 10 years. So I will begin from the absolutely utilized manufacturing facility. If we had been pumping out 1000’s of drones, we actually can stand up into the 70% gross margins. In the beginning, you are completely right. Having the complete burden of a manufacturing facility, you open it Day 1, which now we have just lately, and when you’re producing 25 or 50 or 120 drones, your margins look horrible since you obtained to place this full burden of the manufacturing facility on high of that. However with our materials margins, we’re usually proper now already within the 40% to 50% vary, however we’re right here doing GAAP. So these — your numbers are 22% to we might stand up to 70% as soon as absolutely utilized saying to get massive contracts with the replicator initiative or SRR can produce these sort of margins.
Joseph Hernon
Sure. I haven’t got so much so as to add on high of that. I feel that one of many factors that I used to be making an attempt to make is that we’re in a novel place from a money stream perspective in fiscal ’24 as a result of we have already purchased and we have already paid for a lot of the fabric value to supply these 1,200 drones. That will not be a typical state of affairs. However due to COVID and the shortage of digital parts and there was lots of worth gouging occurring. Allan had the foresight to exit and admittedly spend fairly a little bit of the cash we raised in 2021 to place us able the place we would not be unable to fill orders as a result of we could not get the parts we would have liked. So we’re in a novel place proper now. And as a part of your preliminary query, sure, we’re simply coping with a capability utilization problem, which is quite common for rising firms that constructed the kind of facility that we constructed, which is one other — that is constructed, that is behind us. That is firing on all cylinders, and that is an enormous step for an rising development firm like us to have behind us. It is form of one of many the explanation why we really feel so good about our outlook for the remainder of fiscal ’24 and past.
James McIlree
That is nice. If I can simply ask one other one right here. So on the SRR and the replicator applications or contracts, are these fastened priced contracts. So you should have the flexibility to enhance margins as you enhance your manufacturing or is it extra of a time and supplies contract.
Jeffrey Thompson
No, no. Sure, I am certain you are bringing that up as a result of the time and value are over plus is a horrible enterprise. Now these are fastened. They’re going to be fastened to our GSA pricing. We’re not even allowed to regulate that usually except there’s a big quantity. However, sure, our margins will enhance dramatically. The entire orders that we have introduced earlier than have been GSA pricing. So this may the SRR program shall be primarily based on fastened pricing, the replicator program, which is one thing that additionally we did not actually go into, however once they had been saying the — ensuring that these small firms which are constructing these small drones do not go into the worth of demise, which is the funding worth of debt once you’re coping with massive authorities this replicated program, we anticipate to receives a commission up entrance, which alleviates additionally dilution for us like once more as being a considerable amount of shareholders. So we — the pricing shall be fastened pricing.
James McIlree
That is nice. And my final one is the 5 million in OpEx this quarter, is {that a} good quantity going ahead?
Jeffrey Thompson
Sure, I might say so.
Joseph Hernon
Sure, I might say in order nicely. Sadly, I do not see lots of value financial savings related to one of the best in shopper. Clearly, there is a actually substantial fastened prices and being a public firm. I do assume the excellent news is that greater revenues shouldn’t end in dramatic will increase in these bills. You may see operations expense really decreased within the fiscal first quarter. So I feel we’re going to have the ability to leverage each gross margin and our OpEx which means that as revenues enhance, I do not see dramatic step in step will increase in OpEx.
James McIlree
Nice. Thanks very a lot. That is it for me.
Operator
[Operator Instructions] Displaying no additional questions, this concludes our question-and-answer session of the decision. I’ll now return the decision to Jeff Thompson for closing remarks.
Jeffrey Thompson
Sorry, of us, I used to be on mute. Effectively, thanks, everyone, for becoming a member of us. I wish to thank the group at Teal. I wish to thank our BizDev group. You guys are superior. And we’ll be seeing lots of you out. We’re in lots of conferences and I am going to even plug James’ and his firm, however we’ll be on the Dawson James convention on the 12th and we’ll be on the LD Micro in early October. So please come see us.
Operator
The convention has now concluded. Thanks for attending as we speak’s presentation. You might now disconnect.
