Contributor Mark Bunting of Capital Ideas Research interviews the CEO of Drone Delivery Canada (CNSX:FLT)
Mark Bunting/ March 31, 2017/ SmallCapPower: Drones are the new marijuana. At least, that’s according to Tony Di Benedetto, the CEO of Drone Delivery Canada (CSE: FLT). Mr. Di Benedetto says his company’s current race to get a government license and to commercialize deliveries by drone, is similar to where many marijuana companies were a few years ago.
“It’s a brand new industry. It’s a very disruptive space,” he says. “Some people compare this industry as no different from the marijuana space where you had a lot of these upcoming producers starting to mobilize their businesses getting ready for a change (in regulations). Without licenses you can’t generate revenues. It sounds like a parallel industry, and we see what’s going on with the marijuana stocks.”
Tracking the path of marijuana companies
Yes, we do see. Marijuana stocks in Canada have generally soared in the last year as licensed producers ramp up production of medical marijuana, and as anticipation increases ahead of the expected legalization in Canada of recreational marijuana.
There’s no guarantee, of course, that Drone Delivery can generate the same kinds of returns as the likes of Canopy Growth and PharmaCan Capital, but Mr. Di Benedetto is hopeful, as are many investors, that the company is in the early stages of what may be a strong growth story.
Drone Delivery’s back story
In 2010, the Canadian federal government started a drone unmanned aerial vehicle (UAV) program, prompting engineers from the University of Waterloo and University of Toronto to get involved. In 2013, Asher Resources, essentially a shell company looking for a business, decided to target the sector, and changed its name to Drone Delivery Canada.
The Company started tapping a lot of that academic brainpower for its research and engineering needs. Mr. Di Benedetto says these alliances have been very helpful in giving the Company what he believes is “first mover advantage” in the sector.
Drone Delivery’s management team hit on its business model after having frequent discussions with the federal government, which Mr. Di Benedetto describes as “pro-technology and pro-innovation.”
The Company realized the area that had the most potential, and would serve as the best and fastest way to approach commercialization, was the country’s “backyard” — rural and remote communities where transportation of goods can be a lengthy and costly process.
Drones as a cheaper alternative
Mr. Di Benedetto gave us scenarios that can occur in rural and remote regions if certain goods need to be delivered in a short period of time.
“A case of water, from what we’re told, costs $25,” he says. “A jug of orange juice costs $35, and medical supplies can quickly ramp up to the thousands if you need it just in time. So we saw there’s an immediate application there.”
Drone Delivery thinks it can deliver those kinds of products to far flung outposts in a “faster, easier and cheaper” way than current delivery systems. To that end, the Company’s plan, from a geographic standpoint, is to develop its business from the outside in.
“We want to start here and then commence testing, commercialization and operations in this geography, and then slowly, over time, we start bringing it closer to more suburban areas, and then, potentially later on, to more of an urban area.”
Customer list growing
Drone Delivery has been lining up customers that it hopes to serve, and to derive revenue from when it becomes a commercial business. Some of these companies include Staples, the office supply retailer, and NAPA Canada, the auto parts company.
Part of Drone Delivery’s initial plan is to facilitate business-to-business deliveries more so than business-to-consumer. So don’t expect that drone-delivered pizza at your door anytime soon.
“We have about 40 clients that we’re engaged with in some shape or form,” Mr. Di Benedetto says. “Everything from medical to food to logistics, like traditional courier companies. There’s been expressions of interest from general commodities companies. First responders is another one. So there’s a tremendous amount of applications for this technology.”
Halfway to certification
Drone Delivery is about 50% off the way toward getting its operator status certificate, according to Mr. Di Benedetto. The Company has been testing its drones in the Waterloo area within visual line of sight (VLOS) restrictions meaning, as the name suggests, the drones had to remain within sight.
Drone Delivery announced recently it had been granted an additional Special Flight Operations Certificate (SFOC) from Transport Canada, which will allow it to expand its current drone delivery testing program within Southern Ontario, and accelerate its commercial testing in the Canadian skies.
In the spring, Drone Delivery will be the first company to begin commercial testing at the Transport Canada-approved beyond visual line of sight (BVLOS) range in Foremost, Alberta. It offers operators 700 square nautical miles of restricted airspace up to 18,000 feet above sea level. Mr. Di Benedetto calls it a “significant milestone” for Drone Delivery.
Drone Delivery also plans to conduct testing at a range in Alma, Quebec, where, in 2012, Canada’s CAE and Israeli defense company, Aeronautics Ltd, demonstrated potential civilian use for military drones, such as inspection of pipelines and surveillance of forest fires.
Amazon, Google and DHL are among some of the other companies testing deliveries by drone in other parts of the world.
Cashing up
Drone Delivery recently raised nearly $11 million by issuing warrants, which will give the holders the right to convert them into shares in the company. Mr. Di Benedetto says the money is needed because Drone Delivery is growing faster than expected.
“Acceleration of projects is really what it boils down to,” he says. “Our demand from a variety of different customers is really ramping up very quickly, and things are just happening a lot faster than we had anticipated. This is a race to the starting line. It’s not a finish line. We want to run as fast as possible to get to where we really need to be to really capture the market.”
Not another Blackberry
Another key decision made by Drone Delivery was to focus on the software within its drones and not the drones themselves.
“We see our business as being extremely scaleable,” Mr. Di Benedetto says. “It’s not really dependent on an air frame, the drone. We didn’t want to be a Blackberry, if that makes sense, we didn’t want to focus on the handheld. So we said ‘let’s build a hardware agnostic platform’ that as better air frames come to market, we take our logic and put them into the drones. No different than a SIM card into a cellphone. It gives us the ability to really leverage the development that’s happening around the world, and with that we’re able to achieve different capacities and distances and speeds.”
Investment case
Drone Delivery Canada is a speculative, lightly-traded stock. The Company is pre-revenue, has a market cap of about $53 million, and no analysts cover it. But, Drone Delivery expects to be profitable in 2018, if it gets its operating license this year, and executes on its business plan. If that happens, the Company’s stock could follow the path of so many marijuana companies, which were in a similar position a few years ago.
“It’s pretty scaleable, and we see the opportunities as really being endless,” Mr. Di Benedetto says. “It’s a very efficient and high-margin model with a lot of recurring revenue, and I think the sky’s the limit.”
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Mark Bunting is a host at Bloomberg TV Canada, and the publisher of Capital Ideas Digest, a weekly compilation of actionable investment ideas drawn from a wide variety of research reports, data and newsletters. Try it now to get your first month for free. capitalideasresearch.com
Disclosure: Neither Mark Bunting nor the principals at Capital Ideas Research, or their family members, own shares in Drone Delivery Canada.
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