Welcome to the Volatus Aerospace Q1 2025 earnings call. I am Danielle Gagne, Head of Marketing and Communications for Volatus Aerospace, and the moderator for this call. Before we get started, just a reminder that we welcome your questions, and we'll be having a Q&A session at the end of the presentation. You're welcome to submit your questions at any time during the webinar by clicking on the Q&A box at the bottom of the webinar screen and typing in your questions. If we're unable to answer your question today, we'll be happy to connect with you after the program. This presentation will be recorded and made available on our Investor website within 24 hours. I would also like to take a moment to point out that certain information set forth in this presentation contains forward-looking information, including future-oriented financial information and financial outlook, and actual results may differ materially.
The risks, uncertainties, and other factors that could influence actual results are described in the presentation, in the press release, and in our MD&A filed with Canadian regulators. This presentation also contains non-IFRS measures, which are also outlined in the presentation. There is a full disclosure on page two of this presentation, which we encourage you to read, and can be found on Volatus's Investor website at investor.volatusaerospace.com. The company considers the earnings call part of its routine disclosure to educate investors on information contained in the quarterly results and related MD&A. If you have any questions, please feel free to contact the Volatus Aerospace IR team at investorrelations@volatusaerospace.com. Now that that is done, it's my pleasure to introduce Glen Lynch, CEO, and Abhinav Singhvi, CFO of Volatus Aerospace.
Thanks very much, Danielle. And thank you, everybody, for joining us here this morning. My name's Glen Lynch. I'm the Chief Executive Officer for Volatus, and I'm joined by Abhinav, or Avi Singhvi, who's our Chief Financial Officer. Because we're only one month since our last investor briefing for our 2024 year-end, this will be a relatively short presentation. Expect the presentation will last about 15- 20 minutes, with a Q&A session of 10 to 15 minutes thereafter. We should be done in about 30 minutes. We'll start out with a review of our Q1 numbers, followed by a business update, and then into the question period. So with that, I'll pass the microphone over to Avi so that he can start with our financial review. Avi?
Thanks, Glen. So this screen provides an overview of our financial performance for the quarter. In Q1 2025, we generated CAD 5.7 million in revenue, compared to CAD 6.6 million in Q1 2024. While this represents a year-over-year decline, it's important to understand the key drivers behind it. The primary factor was seasonal weather-related impacts. As is typical during winter conditions, inspection activity slowed significantly due to cold temperatures, snow-covered grounds, and challenging wind conditions. In addition, geopolitical uncertainties, particularly tariff headwinds, also affected our operations. These factors contributed to delays in certain sales, shifting revenue recognition into later periods. Looking ahead, we are encouraged by current revenue opportunities, particularly through our merger with Volatus. We are seeing strong sales pipeline within DDC.
For context, DDC generated CAD 103,000 in revenue in Q1 2024, and we are actively working to expand this segment to drive both top-line growth, not just in Canada, but U.S. and Africa, and drive improved margin across group by enabling BVLOS through our OCC Operations Control Center. We remain optimistic and expect much smoother and stronger performance in Q2. The impact on sales also directly affected our gross profit. Despite the revenue decline, we continued to prioritize high-margin, long-term contracts and approach that aligns with our strategic goals. As a result, we achieved a 5% year-over-year improvement in our gross margin, equipment gross margin, compared to Q1. Our services gross margin remained strong and stable at 42%. Overall, our blended gross margin for the quarter was 32%, in line with our expectation for a seasonally slow quarter.
While the loss from operations appeared to have increased, I would like to draw your attention to the pro forma loss, which has actually improved, a decline from CAD 4.4 million in Q1 2024 to CAD 3.36 million in Q1 2025. A key driver of this improvement is in the reduction of post-merger costs, which were down by CAD 1.78 million in Q1 alone. On an annualized basis, we expect this number to increase further as we continue to realize operational efficiencies and synergies. Looking at our operating expense, you'll notice meaningful improvement in our G&A.
Marketing expense reduced by 54%. IT and tech costs declined by 5%, driven by our active vendor management. Office costs were down 25%. Further synergies expected as we go forward. Personnel costs increased by 11% as we continue to invest in key talent and capacity to support future growth. R&D spending remained focused on commercialization efforts going forward.
Sales and travel increased by 12%, aligned with our push to expand pipeline and customer engagement, and external partner costs remained consistent. Turning to our normalized EBITDA, while comparing Q1 2025 to 2024, we achieved a 30% improvement, reflecting strong operational discipline and margin focus. On a pro forma basis, the improvement is even more significant, 70% year-on-year, demonstrating our impact of our efficiency initiatives and post-merger integration efforts. In addition, we generated CAD 1.45 million in cash from operating activities during the quarter, a strong signal of our financial health and operational execution. Moving on to the next slide, our highlight is on product mix and gross profit trend. Starting with the product mix on the left, Q1 2025, our mix was 44% equipment and 56% services. This is a meaningful shift compared to our previous quarter, especially Q3 and Q4, where equipment contributions were lower.
The rebound in equipment is largely as a result of improved financial flexibility. In Q1 last year, you'll see a consistent trend, which is 42% in equipment and 58% in services. We expect a similar trend on a go-forward basis as well as we ramp up our equipment segment of the business. On the right side, we see our gross profit trend. Our gross profit for Q1 was CAD 1.83 million, with a 32% gross margin, compared to CAD 2.23 million and 34% gross margin in Q1 2024. The modest dip is in line with the forecast for a slower seasonal quarter, but what's encouraging is the underlying margin performance, especially given the product mix shift and improved gross margin execution. In summary, the diversification and normalization of the revenue mix, supported by strong financial footing, is positioning us for a higher margin expansion in the coming quarters.
With this, I will hand it back to Glen.
Thanks, Avi. So I'm going to focus specifically on some of our recent announcements. I'm pleased to share that Volatus has achieved a significant milestone with the expansion of our beyond visual line of sight, or what we call BVLOS operations, right across Canada. We now hold general BVLOS approvals nationwide for daytime operations and uncontrolled airspace based on internationally recognized methodology. These approvals apply to multiple aircraft types and a variety of mission scenarios, giving us significant flexibility. In addition to our previously announced authorization for nighttime beyond visual line of sight operations, this allows us to fly at altitudes up to 400 feet in uncontrolled airspace and outside of aerodrome environments. Of particular importance is our approval to operate in what's typically considered or known as atypical airspace.
This is described as within 100 feet vertically or above and 200 feet horizontally beside vertical structures like towers, buildings, and power line, power line corridors. We also have approvals to fly in restricted airspace, which actually dovetails into wildfire and in Northern Domestic Airspace, basically in the Arctic region, basically some of Canada's most remote and underserved areas. These new BVLOS authorities are a game changer for our Operations Control Center. With nationwide approvals for day and night beyond visual line of sight operations, including in complex and atypical airspace, we can now scale remote drone operations from a single centralized hub. This means fewer boots on the ground and faster deployment, lower operating costs for our customers, and it unlocks commercial applications like infrastructure inspections, border surveillance, cargo delivery, and environmental monitoring, all of them at scale.
In short, the approvals allow us to commercialize our operations control center as a service, offering fully remote compliant drone operations anywhere in Canada with the safety and efficiency and regulatory backing required by our clients. One of the most exciting opportunities unlocked by our regulatory approvals is the deployment of Nesting Drone-in-a-Box solution. These are fully automated systems that can launch, land, recharge, and transmit data from a remote location with no human intervention on site. When combined with our operations control center, these systems become a powerful force multiplier. We're now able to deploy and manage entire fleets of drones across the country remotely from our single hub, with full compliance for beyond visual line of sight operations, both day and night, in challenging airspace near vertical structures and corridors and in Canada's far north.
This makes a Drone-in-a-Box ideal for applications like infrastructure inspections, industrial site monitoring, emergency response support, and things like persistent surveillance for utilities, border zones, and more. The list of applications, even in oil and gas, goes on. Our focus moving forward is to scale these deployments commercially, offering our customers turnkey services for remote operations that's safe, efficient, and backed by our national authority and control infrastructure. This is where automation meets scale and where the OCC and Drone-in-a-Box converge to drive real-world revenues. Our commercialization strategy is tightly aligned with both current government priorities and the evolving geopolitical landscape. Today, we're focused on serving sectors where security, resilience, and autonomy are top of mind. Some of the areas, for example, are critical infrastructure, where we're supporting utilities, energy, and transportation with remote monitoring and inspections at scale.
Mining is another one where we're enhancing safety, operational efficiency, or environmental compliance. These are especially important in remote and hard-to-access locations. Public safety and emergency response, where we enable faster situational awareness through drone as a first responder and overwatch capabilities. Remote cargo delivery, where we improve healthcare and remote supply logistics in rural and indigenous communities. And of course, border and environmental surveillance, where we're addressing national security and sovereignty concerns along our borders. As our government looks to strengthen domestic capabilities, our Canadian-owned services, technology, and regulatory leadership uniquely position us as a trusted partner. We're not just building solutions. We're building infrastructure that supports our national interest. With that, I'm happy to open it up and take some questions, Danielle.
We have a number of questions already in our inbox, but if anyone wants to continue to ask those questions, just a reminder, the Q&A box is at the bottom of the screen. So we have a lot of questions, and I'm going to kind of ask you the same thing. Can you discuss your progress towards positive EBITDA, and what is it required to take the company towards a profitable position?
Avi, you want to take that one?
Yes, and I can take that one. So as we committed that, in the last call as well, we made a commitment that when we did the merger, that Q4 will be the period where we'll be close to break-even. We did a -CAD 200,000 in EBITDA gain. Q1 has always been a seasonal quarter, and the seasonality, the impact of seasonality always differs in Q1, so the EBITDA dips. But Q2 and moving forward, the focus is to break-even as early as Q2 itself and moving forward to be positive. We have line of sight on our revenue opportunities, not just pipeline, but the contracts that we are confident that by mid this year itself will be EBITDA positive.
All right. Good. So Scott here says, "Congratulations on your accomplishments. What is not clear to me is how typical seasonal slowdowns could explain a difference in sales between Q1 2025 and 2024." Can you speak a little bit more to that?
Sure, yeah. Good, yeah.
So what I'd say, Scott, is a couple of things there. It was obviously a very interesting Q1. The entire world was upside down. We found, for example, during Q1 and early Q2 is typically our RFQ or RFP season where a lot of the power utilities energy companies are putting out their request for quotes for the current season. And a lot of that has been delayed this year just because people were busy figuring out how the current tariffs and geopolitical situation was going to affect us. The other thing that happens is it's based on numbers of days that are flyable. So when we get extreme cold, I'll use the example of extreme cold days where operating temperatures in areas like Western Canada, for example, go below the operating temperatures of a helicopter.
Those helicopter missions for pipeline surveillance, they don't go away, but they do get slid to the right until the weather and temperatures become more favorable. The other thing that happens is it's just a little bit the business mix. If we're doing specific types of inspections where ground contour is necessary, the challenge is when everything's snow-covered, it's harder to deal with a lot of the various sensor data that's accumulated, everything from thermal inspections and whatnot. Thermal inspections for buildings can be very good during this period. A lot of other applications are more challenging just because they're snow-covered, so as the snow starts to clear, as the temperatures warm up, all of those things start to accelerate. Plus, again, there's been delays where we would have expected to have awards of some of our seasonal business, and when I say awards, oftentimes that's the work scopes.
People have simply been busy figuring out how current geopolitical changes are actually affecting their own business. Everybody's workloads got up. So it's just moved things a little bit to the right. That being said, we're still quite excited about the pipeline. I think it's been more sliding to the right than it has been anything else.
Can you update us on how you are progressing with your new partnerships that you've updated us on in the previous webinars?
So those are progressing quite well. I mean, the reality is, I mean, we just attended the CANSEC event in Ottawa, one of the larger security defense and security shows with our partners at Kongsberg. So we're starting to do an awful lot of work now where we're collaborating on opportunities and marketing events and so on. To be frank, some of the real commercialization benefits, bless you, some of the real commercialization benefits actually come with the regulatory approvals, which have just recently been announced. So I think seeing the revenue-generating opportunities from those, we'll see those in subsequent quarters looking forward.
We have an attendee asking, "What is the range that each nesting station could potentially cover?
So that's a very good question. It's one of the reasons that we have multiple products. One of our nesting stations is our own design. It has a specific capability. It's been designed to operate off-grid in a specific area. But we also are technology agnostic, so we have a number of other solutions. For example, we have a large nesting station with our partners at Ondas. And that nesting station is capable of operating almost continuously around the clock. It does robotic battery changes. It does robotic payload changes. It can have as many as 11 batteries and nine payloads in its library that can be swapped out from a distance. Now, it's all based on cost and specific mission requirements.
But they would range anywhere from, I would say, 20 kilometers across, so 10 kilometers either side of the nesting station out to we have one system that's capable of flying closer to 30 kilometers on either side of the nesting station. So it really depends on what the requirements are for that specific opportunity and which system we're deploying.
Can you discuss the near-term headwinds around Chinese drones in the U.S., and where and under what conditions does this become a tailwind?
Actually, it's very interesting. The entire geopolitical situation creates a bit of both. So in the United States, it's obviously had a very severe impact on the Chinese drone technologies. They've effectively been banned from the United States or most parts of U.S. contracting, and the tariffs have made it almost impossible now to look at those technologies in the U.S. That's created a short-term problem because the supply chain is underdeveloped in the United States. That being said, American ingenuity, I suspect that'll be resolved very quickly. So in the U.S., we're very much focused in the use of U.S. technologies flown by our U.S. workers in support of U.S.-based contracts. In places like Canada and other parts of the world, it's less of a concern. I think that Chinese technologies start to be a concern when we're aligning with U.S. interests.
But basically, if you look at most of our partnerships, they're non-Chinese partnerships. So the Chinese technologies are still being deployed. They're very effective. They're super cost-effective in the fields where they are being deployed in other parts of the world, and we continue to do that. Now, the geopolitical situation is actually creating some tailwinds now. Canada, I guess I probably should have added this to my comments on Q1. Canada was also somewhat impaired by our focus on border surveillance and a lot of the things that were affected by government being paralyzed. Now that our government is in place and functional after the 27th of last month, we expect that we'll start seeing an acceleration in spending and in the programs such as border surveillance, the development of mining and critical minerals, and energy or trade corridors and energy infrastructure.
All of those create significant tailwinds or the potential for significant tailwinds, as does the drive towards more domestic capacity and capability.
How is the active fire season in Western Canada impacting the business? Have you seen any impact there yet?
In the immediate past, we have not. I would expect that would happen going forward. Of course, right now, they're dealing with a severe fire situation. A lot of what Volatus does is part of that cleanup effort after the fact. So our services are targeted to hotspot detection, where basically we go out after an area is somewhat extinguished or extinguished, looking for areas or hotspots that may need a cleanup action after the fact. So we would expect to see some activity from that going forward.
So we talked a lot about our Operations Control Center. Can you talk a little bit about that model and how is it scalable and how it can support international expansion?
For sure. So if you think about the challenge when you deploy a drone today, so we have people, for example, in the field that started our contract in Connecticut doing inspections of power lines. They started, I think, at the end of February or early March. And basically, for those applications, we actually deploy a truck with a couple of people and a drone on board or a couple of drones on board to go out and fly these aircraft on a local basis. So that means that for every drone that's flying, we end up needing one or two people in the field and the support infrastructure. The advantage to having a remote operations center and the approval to use it in areas like power lines, remember the power structures create that atypical airspace that allows us to fly.
And so from a practical standpoint, we're now able to change our methodology and operate numerous drones with a single operator in the field and our operators out of the remote operations control center. So it allows us to fly longer range, more drones with less people out in the field that significantly improves our margins and our scalability.
How differentiated are your drone and Drone-in-a-Box Solutions versus others in the market that you're seeing?
That's a great question. What really differentiates us, remember, we're a drone-agnostic or technology-agnostic company. So truthfully, there are other people that can sell the same technologies that we can. What makes us a little bit unique is that we can deploy these technologies and operate them very, very quickly, in some cases, right out of the box. If we're talking in areas that are remote and outside of controlled airspace and away from airports like mines, for example, we can drop a nesting station in position and be operational the same day. So that's where our real competitive advantage comes from. And again, back to the remote operations center, for the operators that are in that station, we can operate many drones with a single operator that are already in existence in that station. So it becomes very, very scalable.
We don't need to set up infrastructure at each location.
That's because of the operations control center. Is that correct?
Correct.
Okay. Can you explain how Volatus supports fully autonomous beyond visual line of sight without visual observers?
So in some areas, they're not required. And in other areas, we use ground-based detect and avoid. And in some cases, in-flight detect and avoid, which we actually have some active testing going on in our test site north of Toronto right now. But for example, if I just use one example of the beyond visual line of sight operation we have over the Milton Oakville area, we use a ground-based radar to detect uncooperative or unknown aircraft that may be flying through that area.
And what's your monetization model for OCC and Drone-in-a-Box? What's the CapEx, subscription or managed service? Avi, I think this one's for you.
It's a good question. What we have done is pre-merger, DDC's entire business model was company-owned, company-operated. What it meant was the drones would be operated by the organization. And basically, it was just a service contract. It was CapEx-heavy. It was working capital-heavy. What we did is we had diversified the model, and the focus now is on customer-owned, company-operated. Basically, we get a sale on day one where we actually sell the hard asset to the customer. And then we start driving revenue by recurring contracts, which is our ARR or MRR, and then additional revenue that comes in with maintenance and operations. So it is not CapEx-heavy because we pass on the CapEx on the customer. And then we start driving the margins by managing the contracts and operating for the customer.
To follow up on that, how capital-intensive is scaling the drone and the box OCC model?
It is not because the CapEx now is with the customer and not with the company.
I would add something to that, Danielle. Basically, my background for the last 40 years has been managing aircraft for corporations and high-net-worth individuals. It's very much the same opportunity. In some cases, we may deploy assets that are owned by us on a subscription model basis. In other cases, especially larger scale deployments, we would sell the equipment to the third party and then ultimately manage it and provide the managed services on their behalf.
I have an attendee asking specifically about the DroneUp partnership and how it may unlock potential urban deliveries. Can you speak to that?
Yeah, definitely. So DroneUp, there's two parts to the DroneUp relationship. First of all, their technologies. They've got some extraordinary technologies that have been tried and true and really are in that somewhat B2C, also B2B environment. And again, we think there'll be some opportunities that come from that given our current beyond visual line of sight authority. The other thing that it does is it allows us to leverage the relationship with their regulatory approvals. When you start operating large-scale commercial deliveries in a different country, you need domestic partners to meet the commercial requirements in Canada to meet the requirements of the Canadian Transportation Agency. In the U.S., it's the Department of Transportation, which is part of the DOT requirements for having domestic-controlled services. So that's where those services will benefit.
Obviously, that announcement with DroneUp was extremely important to us, but it also got set back a little bit in timing just because of the geopolitical changes that have happened and everybody figuring out where the dust was going to settle.
So are there any key regulatory milestones or hurdles ahead for border deployment?
It's too early to tell. Obviously, there's a real challenge on the border surveillance side. One of the concerns, obviously, with U.S. deportations is that we now have illegal immigration, or I'll call it irregular immigration. It's not to us to determine whether it's illegal or not, but with people crossing the border northbound, and of course, that makes border security, or at least the intelligence along those borders, to be particularly important. We've got key ministers in place, and we're very, very well connected, particularly through our lobbyist in Ottawa right now, but it's too early to say how quickly this could move because the government literally is kind of a week in its chair, and obviously, a lot of things while they're getting organized.
This is our last question because we're at the top of the hour. Are there any near-term catalysts, contracts, certifications, partnerships that could materially shift the outlook that you've given for 2025?
So that'd be that trick question, like a bear trap to step into. The truth of the matter is we obviously can't comment too much on that other than to say that we've disclosed a very, very substantial pipeline, and we are working our tails off to secure as much of that as possible. So we're excited about the year ahead is about all I can say on that note.
Excellent. I want to thank everyone for joining us today. As we are at the end of our session, I just want to remind everyone that the presentation recording will be available on our investor site within 24 hours at investor.volatusaerospace.com, and if you have any additional questions, please reach out to us at investorrelations@volatusaerospace.com. Thank you again, and have a great day.