10-Q: Quarterly report pursuant to Section 13 or 15(d)
Published on September 23, 2024
UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
WASHINGTON, D.C. 20549
FORM
(Mark One)
QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934
For
the
or
For the transition period from ________ to _________
Commission
File Number:
(Exact name of registrant as specified in its charter)
| (State or other jurisdiction of incorporation or organization) | (I.R.S. Employer Identification No.) |
|
|
|
|
| (Address of principal executive offices) | (Zip Code) |
(Registrant’s telephone number, including area code)
(Former name, former address and former fiscal year, if changed since last report)
Securities registered pursuant to Section 12(b) of the Act:
| Title of each class | Trading Symbol(s) | Name of each exchange on which registered | ||
| The
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Indicate
by check mark whether the registrant (1) has filed all reports required to be filed by Section 13 or 15(d) of the Securities Exchange
Act of 1934 during the preceding 12 months (or for such shorter period that the registrant was required to file such reports), and (2)
has been subject to such filing requirements for the past 90 days.
Indicate
by check mark whether the registrant has submitted electronically every Interactive Data File required to be submitted pursuant to Rule
405 of Regulation S-T (§ 232.405 of this chapter) during the preceding 12 months (or for such shorter period that the registrant
was required to submit such files).
Indicate by check mark whether the registrant is a large accelerated filer, an accelerated filer, a non-accelerated filer, a smaller reporting company, or an emerging growth company. See the definitions of “large accelerated filer,” “accelerated filer,” “smaller reporting company,” and “emerging growth company” in Rule 12b-2 of the Exchange Act.
| Large accelerated filer | ☐ | Accelerated filer | ☐ |
| ☑ | Smaller reporting company | ||
| Emerging growth company |
If an emerging growth company, indicate by check mark if the registrant has elected not to use the extended transition period for complying with any new or revised financial accounting standards provided pursuant to Section 13(a) of the Exchange Act. ☐
Indicate
by check mark whether the registrant is a shell company (as defined in Rule 12b-2 of the Exchange Act). Yes ☐
As of September 19, 2024 , there were shares of the registrant’s common stock outstanding.
TABLE OF CONTENTS
| PART I - FINANCIAL INFORMATION | Page | |
| ITEM 1. | Financial Statements | 3 |
| Condensed Consolidated Balance Sheets as of July 31, 2024 (Unaudited) and April 30, 2024 | 3 | |
| Condensed Consolidated Statements of Operations and Comprehensive Income for the Three Months Ended July 31, 2024 and 2023 (Unaudited) | 4 | |
| Condensed Consolidated Statements Stockholders' Equity for the Three Months Ended July 31, 2024 and 2023 (Unaudited) | 5 | |
| Condensed Consolidated Statements of Cash Flows for the Three Months Ended July 31, 2024 and 2023 (Unaudited) | 6 | |
| Notes to Unaudited Condensed Consolidated Financial Statements | 7 | |
| ITEM 2. | Management’s Discussion and Analysis of Financial Condition and Results of Operations | 20 |
| ITEM 3. | Quantitative and Qualitative Disclosures About Market Risk | 25 |
| ITEM 4. | Controls and Procedures | 25 |
| PART II - OTHER INFORMATION | ||
| ITEM 1. | Legal Proceedings | 26 |
| ITEM 1A. | Risk Factors | 26 |
| ITEM 2. | Unregistered Sales of Equity Securities and Use of Proceeds | 26 |
| ITEM 3. | Defaults Upon Senior Securities | 26 |
| ITEM 4. | Mine Safety Disclosures | 27 |
| ITEM 5. | Other Information | 27 |
| ITEM 6. | Exhibits | 27 |
| SIGNATURES | 28 | |
CAUTIONARY NOTE REGARDING FORWARD-LOOKING STATEMENTS AND INDUSTRY DATA
This Quarterly Report on Form 10-Q contains certain forward-looking statements which are made pursuant to the safe harbor provisions of Section 27A of the Securities Act of 1933, as amended (the “Securities Act”), and Section 21E of the Securities Exchange Act of 1934, as amended (the “Exchange Act”). Any statements in this Quarterly Report on Form 10-Q about our expectations, beliefs, plans, objectives, assumptions or future events or performance are not historical facts and are forward-looking statements. These statements are often, but not always, made through the use of words or phrases such as “may,” “should,” “believes,” “will,” “expects,” “anticipates,” “estimates,” “predicts,” “potential,” “continues,” “intends,” “plans” and “would” or the negative of these terms or other comparable terminology. For example, statements concerning financial condition, possible or assumed future results of operations, growth opportunities, and plans are all forward-looking statements. Our forward-looking statements are based on a series of expectations, assumptions, estimates and projections about our company, are not guarantees of future results or performance and involve substantial risks and uncertainty. They involve known and unknown risks, uncertainties and assumptions that may cause actual results, levels of activity, performance or achievements to differ materially from any results, levels of activity, performance or achievements expressed or implied by any forward-looking statement. We may not actually achieve the plans, intentions or expectations disclosed in these forward-looking statements. Our business and our forward-looking statements involve substantial known and unknown risks and uncertainties, including the risks and uncertainties inherent in our statements regarding:
| | the market and sales success of our existing and any new products; |
| | our ability to raise capital when needed and on acceptable terms; |
| | our ability to make acquisitions and integrate acquired businesses into our company; |
| | our ability to attract and retain management; |
| | the intensity of competition; |
| | changes in the political and regulatory environment and in business and economic conditions in the United States and globally; and |
| | geopolitical conflicts throughout the world, including those in Ukraine and Israel. |
All of our forward-looking statements are as of the date of this Quarterly Report on Form 10-Q only. In each case, actual results may differ materially from such forward-looking information. We can give no assurance that such expectations or forward-looking statements will prove to be correct. An occurrence of, or any material adverse change in, one or more of the risk factors or risks and uncertainties referred to in this Quarterly Report on Form 10-Q or included in our other public disclosures or our other periodic reports or other documents or filings filed with or furnished to the U.S. Securities and Exchange Commission (the “SEC”) could materially and adversely affect our business, prospects, financial condition and results of operations. Except as required by law, we do not undertake or plan to update or revise any such forward-looking statements to reflect actual results, changes in plans, assumptions, estimates or projections or other circumstances affecting such forward-looking statements occurring after the date of this Quarterly Report on Form 10-Q, even if such results, changes or circumstances make it clear that any forward-looking information will not be realized. Any public statements or disclosures by us following this Quarterly Report on Form 10-Q that modify or impact any of the forward-looking statements contained in this Quarterly Report on Form 10-Q will be deemed to modify or supersede such statements in this Quarterly Report on Form 10-Q.
This Quarterly Report on Form 10-Q may include market data and certain industry data and forecasts, which we may obtain from internal company surveys, market research, consultant surveys, publicly available information, reports of governmental agencies and industry publications, articles and surveys. Industry surveys, publications, consultant surveys and forecasts generally state that the information contained therein has been obtained from sources believed to be reliable, but the accuracy and completeness of such information is not guaranteed. While we believe that such studies and publications are reliable, we have not independently verified market and industry data from third-party sources. Given these uncertainties, readers of this Quarterly Report on Form 10-Q are cautioned not to place undue reliance on such forward-looking statements. We disclaim any obligation to update any such factors or to publicly announce the result of any revisions to any of the forward-looking statements contained herein to reflect future events or developments.
All
references in this Quarterly Report on Form 10-Q to the “Company”, “we”, “us”, or “our”,
are to Red Cat Holdings, Inc., a Nevada corporation, including its wholly owned consolidated subsidiaries Skypersonic, Inc. (“Skypersonic”),
Teal Drones, Inc. (“Teal”), and Red Cat Propware, Inc. (“Propware”), as well as Rotor Riot LLC (“Rotor
Riot”), Fat Shark Holdings, Ltd. (“Fat Shark”), which were wholly owned subsidiaries until February 16, 2024.
PART I - FINANCIAL INFORMATION
ITEM 1. FINANCIAL STATEMENTS
RED CAT HOLDINGS, INC.
Condensed Consolidated Balance Sheets
(Unaudited)
| July 31, | April 30, | |||||||
| 2024 | 2024 | |||||||
| ASSETS | ||||||||
| Current assets | ||||||||
| Cash | $ | $ | ||||||
| Accounts receivable, net | ||||||||
| Inventory | ||||||||
| Other | ||||||||
| Total current assets | ||||||||
| Goodwill | ||||||||
| Intangible assets, net | ||||||||
| Equity method investee | ||||||||
| Note receivable | ||||||||
| Property and equipment, net | ||||||||
| Other | ||||||||
| Operating lease right-of-use assets | ||||||||
| Total long-term assets | ||||||||
| TOTAL ASSETS | $ | $ | ||||||
| LIABILITIES AND STOCKHOLDERS' EQUITY | ||||||||
| Current liabilities | ||||||||
| Accounts payable | $ | $ | ||||||
| Accrued expenses | ||||||||
| Debt obligations - short term | ||||||||
| Customer deposits | ||||||||
| Operating lease liabilities | ||||||||
| Total current liabilities | ||||||||
| Operating lease liabilities | ||||||||
| Total long-term liabilities | ||||||||
| Commitments and contingencies (Note 17) | ||||||||
| Stockholders' equity | ||||||||
| Series B preferred stock - shares authorized ; issued and outstanding and | ||||||||
| Common stock - shares authorized ; issued and outstanding and | ||||||||
| Additional paid-in capital | ||||||||
| Accumulated deficit | ( |
) | ( |
) | ||||
| Accumulated other comprehensive income (loss) | ||||||||
| Total stockholders' equity | ||||||||
| TOTAL LIABILITIES AND STOCKHOLDERS' EQUITY | $ | $ | ||||||
The accompanying notes are an integral part of these unaudited condensed consolidated financial statements.
| 3 |
RED CAT HOLDINGS, INC.
Condensed Consolidated Statements of Operations and Comprehensive Income
(Unaudited)
|
Three months ended July 31, |
||||||||
| 2024 | 2023 | |||||||
| Revenues | $ | $ | ||||||
| Cost of goods sold | ||||||||
| Gross (loss) profit | ( |
) | ||||||
| Operating Expenses | ||||||||
| Research and development | ||||||||
| Sales and marketing | ||||||||
| General and administrative | ||||||||
| Impairment loss | ||||||||
| Total operating expenses | ||||||||
| Operating loss | ( |
) | ( |
) | ||||
| Other (income) expense | ||||||||
| Loss on sale of equity method investment | ||||||||
| Equity method loss | ||||||||
| Investment loss, net | ||||||||
| Interest (income) expense, net | ( |
) | ||||||
| Other, net | ( |
) | ||||||
| Other expense | ||||||||
| Net loss from continuing operations | ( |
) | ( |
) | ||||
| Loss from discontinued operations | ( |
) | ||||||
| Net loss | $ | ( |
) | $ | ( |
) | ||
| Other comprehensive income (loss) | ||||||||
| Change in foreign currency translation adjustments | ( |
) | ||||||
| Unrealized gain on marketable securities | ||||||||
| Other comprehensive loss | $ | ( |
) | $ | ( |
) | ||
| Loss per share - basic and diluted | ||||||||
| Continuing operations | $ | ( |
) | $ | ( |
) | ||
| Discontinued operations | ||||||||
| Loss per share - basic and diluted | $ | (0.17 | ) | $ | (0.11 | ) | ||
| Weighted average shares outstanding - basic and diluted | ||||||||
The accompanying notes are an integral part of these unaudited condensed consolidated financial statements.
| 4 |
RED CAT HOLDINGS, INC.
Condensed Consolidated Statements of Shareholders’ Equity
(Unaudited)
| Series B | Additional | Accumulated Other | ||||||||||||||||||||||||||||||
| Preferred Stock | Common Stock | Paid-in | Accumulated | Comprehensive | Total | |||||||||||||||||||||||||||
| Shares | Amount | Shares | Amount | Capital | Deficit | Income (Loss) | Equity | |||||||||||||||||||||||||
| Balances, April 30, 2023, as restated | $ | $ | $ | ( |
) | $ | ( |
) | $ | |||||||||||||||||||||||
| Stock based compensation | — | — | ||||||||||||||||||||||||||||||
| Vesting of restricted stock units | — | ( |
) | ( |
) | |||||||||||||||||||||||||||
| Conversion of preferred stock | ( |
) | ( |
) | ||||||||||||||||||||||||||||
| Unrealized gain on marketable securities | — | — | ||||||||||||||||||||||||||||||
| Currency translation adjustments | — | — | ||||||||||||||||||||||||||||||
| Net loss | — | — | ( |
) | ( |
) | ||||||||||||||||||||||||||
| Balances, July 31, 2023 | $ | $ | $ | ( |
) | $ | ( |
) | $ | |||||||||||||||||||||||
| Balances, April 30, 2024 | $ | $ | $ | ( |
) | $ | $ | |||||||||||||||||||||||||
| Stock based compensation | — | — | ||||||||||||||||||||||||||||||
| Vesting of restricted stock units | — | ( |
) | ( |
) | |||||||||||||||||||||||||||
| Exercise of warrants | — | ( |
) | |||||||||||||||||||||||||||||
| Currency translation adjustments | — | — | ( |
) | ( |
) | ||||||||||||||||||||||||||
| Net loss | — | — | ( |
) | ( |
) | ||||||||||||||||||||||||||
| Balances, July 31, 2024 | $ | $ | $ | ( |
) | $ | $ | |||||||||||||||||||||||||
The accompanying notes are an integral part of these unaudited condensed consolidated financial statements.
| 5 |
RED CAT HOLDINGS, INC.
Condensed Consolidated Statements of Cash Flows
(Unaudited)
| Three months ended July 31, | ||||||||
| 2024 | 2023 | |||||||
| Cash Flows from Operating Activities | ||||||||
| Net loss | $ | ( |
) | $ | ( |
) | ||
| Net loss from discontinued operations | ( |
) | ||||||
| Net loss from continuing operations | ( |
) | ( |
) | ||||
| Adjustments to reconcile net loss to net cash from operations: | ||||||||
| Stock based compensation - options | ||||||||
| Stock based compensation - restricted units | ||||||||
| Amortization of intangible assets | ||||||||
| Realized loss from sale of marketable securities | ||||||||
| Depreciation | ||||||||
| Loss on sale of equity method investment and note receivable | ||||||||
| Equity method loss | ||||||||
| Impairment on goodwill and intangible assets | ||||||||
| Changes in operating assets and liabilities | ||||||||
| Accounts receivable | ( |
) | ||||||
| Inventory | ( |
) | ( |
) | ||||
| Other | ( |
) | ||||||
| Operating lease right-of-use assets and liabilities | ( |
) | ( |
) | ||||
| Customer deposits | ( |
) | ( |
) | ||||
| Accounts payable | ( |
) | ||||||
| Accrued expenses | ||||||||
| Net cash used in operating activities of continuing operations | ( |
) | ( |
) | ||||
| Cash Flows from Investing Activities | ||||||||
| Purchases of property and equipment | ( |
) | ( |
) | ||||
| Proceeds from sale of marketable securities | ||||||||
| Proceeds from sale of equity method investment and note receivable | ||||||||
| Net cash provided by investing activities of continuing operations | ||||||||
| Cash Flows from Financing Activities | ||||||||
| Payments under debt obligations | ( |
) | ( |
) | ||||
| Payments of taxes related to equity transactions | ( |
) | ( |
) | ||||
| Net cash used in financing activities of continuing operations | ( |
) | ( |
) | ||||
| Discontinued operations | ||||||||
| Operating activities | ( |
) | ||||||
| Investing activities | ||||||||
| Financing activities | ||||||||
| Net cash used in discontinued operations | ( |
) | ||||||
| Net increase (decrease) in Cash | ( |
) | ||||||
| Cash, beginning of period | ||||||||
| Cash, end of period | ||||||||
| Less: Cash of discontinued operations | ( |
) | ||||||
| Cash of continuing operations, end of period | $ | $ | ||||||
| Cash paid for interest | $ | $ | ||||||
| Cash paid for income taxes | $ | $ | ||||||
| Non-cash transactions | ||||||||
| Unrealized gain on marketable securities | $ | $ | ||||||
| Conversion of preferred stock into common stock | $ | $ | ||||||
The accompanying notes are an integral part of these unaudited condensed consolidated financial statements.
| 6 |
RED CAT HOLDINGS, INC.
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
(Unaudited)
Note 1 – The Business
The Company was originally incorporated in February 1984. Since April 2016, the Company’s primary business has been to provide products, services, and solutions to the drone industry which it presently does through its wholly owned operating subsidiaries. Beginning in January 2020, the Company expanded the scope of its drone products and services through four acquisitions, including:
| A. | In January 2020, the Company
acquired Rotor Riot, a provider of First Person View (“FPV”) drones and equipment, primarily to consumers. The purchase
price was $ |
| B. | In November 2020, the Company
acquired Fat Shark Holdings, Ltd. (“Fat Shark”), a provider of FPV video goggles to the drone industry. The purchase
price was $ |
| C. | In May 2021, the Company
acquired Skypersonic which provided hardware and software solutions that enable drones to complete inspection services in locations
where GPS is either denied or not available, yet still record and transmit data even while being operated from thousands of miles
away. The purchase price was $ |
| D. | In August 2021, the Company
acquired Teal Drones, Inc. (“Teal”), a leader in commercial and government Unmanned Aerial Vehicles (“UAV”)
technology. The purchase price was $ |
Following the Teal acquisition in August 2021, we concentrated on integrating and organizing these businesses. Effective May 1, 2022, we established the Enterprise segment (“Enterprise”) and the Consumer segment (“Consumer”) to focus on the unique opportunities in each sector. Enterprise's initial strategy was to provide UAVs to commercial enterprises, and the military, to navigate dangerous military environments and confined industrial and commercial interior spaces. Subsequently, Enterprise narrowed its near-term attention on the military and other government agencies. Skypersonic's technology has been redirected to military applications and its operations consolidated into Teal.
On February 16, 2024, we closed the sale of our Consumer segment, consisting of Rotor Riot and Fat Shark, to Unusual Machines. The sale reflects the Company's decision to focus its efforts and capital on defense where it believes that there are more opportunities to create long term shareholder value. See Note 3 and Note 7.
On December 11, 2023,
the Company completed a firm commitment underwritten public offering with ThinkEquity of shares of common stock which generated
gross proceeds of $
Note 2 – Summary of Significant Accounting Policies
Basis of Presentation – The accompanying unaudited condensed consolidated financial statements have been prepared in accordance with accounting principles generally accepted in the United States (“GAAP”) for interim financial information and with the instructions of Form 10-Q and Article 10 of Regulation S-X. Accordingly, they do not include all of the information and footnotes required by GAAP for complete financial statements. In the opinion of management, all adjustments, consisting only of normal recurring adjustments necessary for a fair presentation with respect to the interim financial statements have been included. The results of operations for the three months ended July 31, 2024 are not necessarily indicative of the results for the full year ending April 30, 2025. For further information, refer to the consolidated financial statements and footnotes thereto for the year ended April 30, 2024, included in the Company’s Annual Report on Form 10-K.
Restatement of Previously Issued Consolidated Financial Statements – The Company’s Condensed Consolidated Statement of Operations and Stockholders’ Equity for the three months ended July 31, 2023, which were originally filed with the U.S. Securities and Exchange Commission (the “SEC”) on September 19, 2023, have been restated. The Company revised its financial statements to remove derivative liabilities due to erroneously reporting warrants from our convertible note financings, as described in Note 14, as having a derivative component.
| 7 |
The impacts of these restatements are detailed in the tables below:
|
Condensed Consolidated Statement of Operations For the three months ended July 31, 2023 |
||||||||||||
|
Originally Reported |
As Restated |
Change | ||||||||||
| Change in fair value of derivative liability | $ | ( |
) | $ | $ | ( |
) | |||||
| Net loss | $ | ( |
) | $ | ( |
) | $ | ( |
) | |||
|
Condensed Consolidated Statement of Shareholders’ Equity For the three months ended July 31, 2023 |
||||||||||||
|
Originally Reported |
As Restated |
Change | ||||||||||
| Additional paid-in capital | $ | $ | $ | |||||||||
| Accumulated deficit | $ | ( |
) | $ | ( |
) | $ | ( |
) | |||
| Total equity | $ | $ | $ | |||||||||
Principles of Consolidation – Our condensed consolidated financial statements include the accounts of our wholly owned subsidiaries which include Teal and Skypersonic as well as Rotor Riot and Fat Shark through the sale date of February 16, 2024. Non-majority owned investments, including the formerly wholly owned subsidiaries Rotor Riot and Fat Shark, are accounted for using the equity method when the Company is able to significantly influence the operating policies of the investee. Intercompany transactions and balances have been eliminated.
The Consumer segment businesses are characterized as discontinued operations in these financial statements. The operating results and cash flows of discontinued operations are separately stated in those respective financial statements. See Note 3.
Use of Estimates – The preparation of financial statements in accordance with GAAP requires management to make estimates and assumptions that affect the reported amounts of assets and liabilities, the disclosure of contingent assets and liabilities at the date of the financial statements, and the reported amounts of revenue and expenses during the reporting period. Actual results could differ from those estimates. Significant estimates reflected in these financial statements include those used to (i) complete purchase price accounting for acquisitions, (ii) the evaluation of long-term assets, including goodwill, for impairment, and (iii) the evaluation of other-than-temporary-impairment of equity method investments.
Concentration of Credit Risk – Financial instruments, which potentially subject the Company to concentrations of credit risk, include trade receivables. In the normal course of business, the Company provides credit terms to its customers. Accordingly, the Company performs ongoing credit evaluations of its customers, generally does not require collateral and considers the credit risk profile of the customer from which the receivable is due in further evaluating collection risk. Customers that accounted for 10% or greater of accounts receivable, net as of July 31, 2024 and April 30, 2024 were as follows:
| July 31, 2024 | April 30, 2024 | |||||||
| Customer A | % | % | ||||||
| Customer B | % | % | ||||||
As of July 31, 2024, three customers accounted for equal to or greater than 10% of total revenue, totaling 32%, 20% and 12%, respectively. As of July 31, 2023, three customers accounted for equal to or greater than 10% of total revenue, totaling 13%, 12% and 10%, respectively.
| 8 |
Equity
Method Investment – The equity method of accounting is applied to investments in which
the Company has an ownership interest of between 20% and 50%. The Company evaluates its equity method investments each reporting period
for evidence of a loss in value that is other than a temporary decline. Evidence of a loss in value might include, but would not necessarily
be limited to, absence of an ability to recover the carrying amount of the investment or the inability of the investee to sustain an
earnings capacity that would justify the carrying amount of the investment. The Company performed this analysis and concluded that its
investment in UMAC was other-than-temporarily impaired and recognized an impairment charge of $
Fair Values, Inputs and Valuation Techniques for Financial Assets and Liabilities, and Related Disclosures – The fair value measurements and disclosure guidance defines fair value and establishes a framework for measuring fair value. Fair value is defined as the price that would be received to sell an asset or paid to transfer a liability (an exit price) in an orderly transaction between market participants at the measurement date. In accordance with this guidance, the Company has categorized its recurring basis financial assets and liabilities into a three-level fair value hierarchy based on the priority of the inputs to the valuation technique.
The fair value hierarchy gives the highest priority to quoted prices in active markets for identical assets or liabilities (Level 1) and the lowest priority to unobservable inputs (Level 3). The inputs used to measure fair value may fall into different levels of the fair value hierarchy. In such cases, the level in the fair value hierarchy within which the fair value measurement in its entirety falls has been determined based on the lowest level input that is significant to the fair value measurement in its entirety. The Company's assessment of the significance of a particular input to the fair value measurement in its entirety requires judgment and considers factors specific to the asset or liability.
The guidance establishes three levels of the fair value hierarchy as follows:
Level 1: Inputs are unadjusted, quoted prices in active markets for identical assets or liabilities at the measurement date;
Level 2: Inputs are observable, unadjusted quoted prices in active markets for similar assets or liabilities, unadjusted quoted prices for identical or similar assets or liabilities in markets that are not active, or other inputs that are observable or can be corroborated by observable market data for substantially the full term of the related assets or liabilities; and
Level 3: Unobservable inputs that are significant to the measurement of the fair value of the assets or liabilities that are supported by little or no market data.
The Company's financial instruments mainly consist of cash, receivables, current assets, accounts payable, accrued expenses and debt. The carrying amounts of these instruments approximates fair value due to their short-term nature.
Revenue Recognition –
The Company recognizes revenue in accordance with ASC Topic 606 - Revenue from Contracts with Customers, issued by the Financial Accounting
Standards Board (“FASB”). This standard includes a comprehensive evaluation of factors to be considered regarding revenue
recognition including (i) identifying the promised goods, (ii) evaluating performance obligations, (iii) measuring the transaction price,
(iv) allocating the transaction price to the performance obligations if there are multiple components, and (v) recognizing revenue as
each obligation is satisfied. The Company’s revenue transactions include the shipment of goods to customers as orders are
fulfilled, completion of non-recurring engineering, completion of training, and customer support services. The Company recognizes revenue
upon shipment of product or prototypes unless otherwise specified in the purchase order or contract. Customer deposits totaled $
The following table presents the Company’s revenue disaggregated by revenue type:
| Three Months Ended July 31, | ||||||||
| 2024 | 2023 | |||||||
| Contract related | $ | $ | ||||||
| Product related | ||||||||
| Total | $ | $ | ||||||
| 9 |
Product
Warranty - The Company accrues an estimate of its exposure to warranty claims based upon both current and historical product sales
data and warranty costs incurred. Product warranty reserves are recorded in current liabilities under accrued expenses. Warranty
liability was approximately $
Recent Accounting Pronouncements – Management does not believe that recently issued, but not yet effective accounting pronouncements, if adopted, would have a material effect on the accompanying consolidated financial statements.
Comprehensive
Loss – Comprehensive loss consists of net loss and other comprehensive loss. Other comprehensive loss refers to gains and losses
that are recorded as an element of stockholders' equity but are excluded from net loss. Our other comprehensive loss is comprised of
foreign currency translation adjustments and unrealized gains or losses on available-for-sale securities. During the three months ended
July 31, 2024 and July 31, 2023, comprehensive loss was $
| July 31, 2024 | July 31, 2023 | |||||||
| Series B Preferred Stock, as converted | ||||||||
| Stock options | ||||||||
| Warrants | ||||||||
| Restricted stock | ||||||||
| Total | ||||||||
Related Parties – Parties are considered to be related to us if they have control or significant influence, directly or indirectly, over us, including key management personnel and members of the Board of Directors or are direct relatives of key management personnel of members of the Board of Directors. Related Party transactions are disclosed in Note 16.
Liquidity
and Going Concern – The Company has never been profitable and has incurred net losses related to acquisitions, as
well as costs incurred to pursue its long-term growth strategy. During the three months ended July 31, 2024, the Company incurred a
net loss of approximately $ and
used cash in operating activities of approximately $.
As of July 31, 2024, working capital totaled approximately $
Note 3 – Divestiture of Consumer Segment
On February 16, 2024, the Company closed the sale of Rotor Riot and Fat Shark to Unusual Machines. The sale was conducted pursuant to a Share Purchase Agreement dated November 21, 2022, as amended on April 13, 2023, July 10, 2023, and December 11, 2023 (the “SPA”). The transaction closed concurrently with UMAC’s initial public offering and listing on the NYSE American exchange (“IPO”) under the symbol “UMAC.”
The
total consideration received by the Company was valued at $
| 10 |
Secured Promissory Note
The Promissory Note from Unusual Machines bears interest at a rate of 8% per year, is due 18 months from the date of issue, and requires monthly payments of interest due in arrears on the 15th day of each month. In the event of a Qualified Financing (defined as one or more related debt or equity financings by UMAC resulting in net proceeds of at least $5 million, other than UMAC’s completed IPO), the Company may require payment of this Promissory Note in whole or in part upon written notice given within 10 days of the Qualified Financing. During the occurrence and continuance of any event of default under the Note, the Company may, at its option, convert the amounts due under the Note to common stock of UMAC in whole or in part from time to time. The conversion price will be a 10% discount to the average daily volume weighted average price for UMAC’s common stock over the 10 days preceding the conversion price. Conversions under the Note will be limited such that no conversion may be made to the extent that, after giving effect to the conversion, the Company, together with its affiliates, would beneficially own in excess of 4.99% of UMAC’s common stock. This limit may be increased by the Company upon 61 days written notice.
Unusual Machines Securities
The $
Working Capital
The
purchase price was adjusted for working capital as of the closing date. Actual
working capital excess amounts increased the principal amount of the Promissory Note dollar for dollar. Working
capital as of closing was finalized at $
The Consumer segment has been classified as Discontinued Operations and reported in accordance with the applicable accounting standards. Set forth below are the results of operations for the Consumer segment for:
|
Three months ended July 31 |
||||||||
| 2024 | 2023 | |||||||
| Revenues | $ | $ | ||||||
| Cost of goods sold | ||||||||
| Gross Profit | ||||||||
| Operating Expenses | ||||||||
| Research and development | ||||||||
| Sales and marketing | ||||||||
| General and administrative | ||||||||
| Total operating expenses | ||||||||
| Operating loss | ( |
) | ||||||
| Other expense (income) | ||||||||
| Interest expense | ||||||||
| Other, net | ( |
) | ||||||
| Other expense | ||||||||
| Net loss from discontinued operations | $ | $ | ( |
) | ||||
| 11 |
Note 4 – Inventories
Inventories consisted of the following:
| July 31, 2024 | April 30, 2024 | |||||||
| Raw materials | $ | $ | ||||||
| Work-in-process | ||||||||
| Finished goods | ||||||||
| Total | $ | $ | ||||||
Note 5 – Other Current Assets
Other current assets included:
| July 31, 2024 | April 30, 2024 | |||||||
| Prepaid expenses | $ | $ | ||||||
| Prepaid inventory | ||||||||
| Contract asset | ||||||||
| Grant receivable | ||||||||
| Total | $ | $ | ||||||
Note 6 – Intangible Assets
Intangible assets relate to acquisitions completed by the Company, including those described in Note 1, and were as follows:
| July 31, 2024 | April 30, 2024 | |||||||||||||||||||||||
| Gross Value | Accumulated Amortization | Net Value |
Gross Value |
Accumulated Amortization | Net Value | |||||||||||||||||||
| Proprietary technology | $ | $ | ( |
) | $ | $ | $ | ( |
) | $ | ||||||||||||||
| Non-compete agreements | ( |
) | ( |
) | ||||||||||||||||||||
| Total finite-lived assets | ( |
) | ( |
) | ||||||||||||||||||||
| Brand name | ||||||||||||||||||||||||
| Total indefinite-lived assets | ||||||||||||||||||||||||
| Total intangible assets, net | $ | $ | ( |
) | $ | $ | $ | ( |
) | $ | ||||||||||||||
Proprietary technology and non-compete agreements are being amortized over six years and three years, respectively. Goodwill and Brand name are not amortized but evaluated for impairment on a quarterly basis.
Note 7 – Equity Method Investment
On
July 22, 2024, the Company sold all of its securities in UMAC to two unaffiliated third-party purchasers (the “Purchasers”).
As part of the transaction, on July 22, 2024, the Company entered into an Exchange Agreement with UMAC pursuant to which the Company exchanged
shares of UMAC’s common stock, par value $ per share, for shares of UMAC’s newly designated Series A
Convertible Preferred Stock (the “Series A”). The Company sold the Series A ownership interest ($ at time of sale)
and the Note Receivable of $
As
of April 30, 2024, the Company had owned approximately a
| 12 |
Financial information for UMAC prior to the sale of the Company’s equity interest was derived from UMAC’s Form 10-Q for the six months ended June 30, 2024 and was as follows:
| Current assets | $ | |||
| Long-term assets | ||||
| Current liabilities | ||||
| Long-term liabilities | ||||
| Revenues | ||||
| Gross profit | ||||
| Net loss | $ | ( |
) | |
The Company’s investments in UMAC have been impacted by the following:
| Initial investment, February 16, 2024 | $ | 17,000,000 | ||
| Equity method loss | ( |
) | ||
| Impairment | ( |
) | ||
| Investment balance, April 30, 2024 | $ | |||
| Equity method loss | ( |
) | ||
| Sale of ownership interest | ( |
) | ||
| Investment balance, July 31, 2024 | $ |
The computation of both the initial investment as of February 16, 2024 and investment balance as of April 30, 2024, was based on the fair market value of UMAC’s common stock.
Note 8 – Property and Equipment
Property and equipment consist of assets with an estimated useful life greater than one year and are reported net of accumulated depreciation. The reported values are periodically assessed for impairment, and were as follows:
| July 31, 2024 | April 30, 2024 | |||||||
| Equipment and related | $ | $ | ||||||
| Leasehold improvements | ||||||||
| Furniture and fixtures | ||||||||
| Accumulated depreciation | ( |
) | ( |
) | ||||
| Net carrying value | $ | $ | ||||||
Depreciation
expense totaled $
Note 9 – Other Long-Term Assets
Other long-term assets included:
| July 31, 2024 | April 30, 2024 | |||||||
| SAFE agreement | $ | $ | ||||||
| Security deposits | ||||||||
| Total | $ | $ | ||||||
| 13 |
In
November 2022, the Company entered into a SAFE (Simple Agreement for Future Equity) agreement with Firestorm Labs, Inc. (“Firestorm”)
under which it made a payment of $
Note 10 – Right of Use Assets and Liabilities
As
of July 31, 2024, the Company had operating type leases for real estate and no finance type leases. The Company’s leases have remaining
lease terms of up to 6.42 years, including options to extend certain leases for up to six years. Operating lease expense totaled $
Leases on which the Company made rent payments during the reporting period included:
| Location | Monthly Rent | Expiration | ||||||
| South Salt Lake, Utah | $ | December 2030 | ||||||
| San Juan, Puerto Rico | $ | June 2027 | ||||||
| Grantsville, Utah | $ | December 2026 | ||||||
Supplemental information related to operating leases for the three months ended July 31, 2024 was:
| Operating cash paid to settle lease liabilities | $ |
|||
| Weighted average remaining lease term (in years) | ||||
| Weighted average discount rate | ||||
Note 11 – Debt Obligations
| A. | Decathlon Capital |
On
August 31, 2021, Teal entered into an Amended and Restated Loan and Security Agreement with Decathlon Alpha IV, L.P. (“DA4”)
in the amount of $
| B. | Pelion Note |
In
May 2021, Teal entered into a note agreement totaling $
| C. | Corporate Equity |
Beginning
in October 2021, and amended in January 2022, Teal financed a total of $
| D. | Ascentium Capital |
In
September 2021, Teal entered into a financing agreement with Ascentium Capital to fund the purchase of a fixed asset totaling $
| 14 |
| E. | Summary |
Future annual principal payments at July 31, 2024 were as follows:
| Fiscal Year Ended: | ||||||
| 2025 | ||||||
| Thereafter | ||||||
| Total | $ | |||||
Note 12 – Common Stock
Our common stock has a par value of $ per share. We are authorized to issue shares of common stock. Each share of common stock is entitled to one vote. A summary of shares of common stock issued by the Company since April 30, 2023 is as follows:
| Description of Shares | Shares Issued | |||
| Shares outstanding as of April 30, 2023 | ||||
| Vesting of restricted stock to employees, net of shares withheld of 27,189 to pay taxes | ||||
| Vesting of restricted stock to Board of Directors | ||||
| Vesting of restricted stock to consultants | ||||
| Conversion of preferred stock | ||||
| Issuance of common stock through ATM facilities | ||||
| Issuance of common stock through public offering | ||||
| Exercise of stock options | ||||
| Shares outstanding as of April 30, 2024 | ||||
| Vesting of restricted stock to employees, net of shares withheld of 126,828 to pay taxes | ||||
| Vesting of restricted stock to Board of Directors | ||||
| Exercise of warrants | ||||
| Shares outstanding as of July 31, 2024 | ||||
ATM Facility
In
August 2023, we entered into a sales agreement (“the 2023 ATM Facility”) with ThinkEquity LLC (“ThinkEquity”),
which provides for the sale, in our sole discretion, of shares of our common stock through ThinkEquity, as our sales agent. In
accordance with the terms of the ATM Sales Agreement, the Company may offer and sell shares of our common stock, par value $0.001 per
share, having an aggregate offering price of up to $
Due to the expiration of the registration statement that was used for the 2023 ATM Facility, and due to the disqualification of our prior auditors from appearing or practicing before the SEC, no additional securities may be sold under 2023 ATM Facility.
Public Offering
In
December 2023, the Company entered into an underwriting agreement with ThinkEquity LLC, as representative of the underwriters, pursuant
to which the Company agreed to sell to the underwriters in a firm commitment underwritten public offering (the “Offering”)
an aggregate of
The
Offering closed on December 11, 2023, resulting in the issuance of shares of Common Stock which
generated gross proceeds of $
| 15 |
Note 13 – Preferred Stock
Our
preferred stock has a par value of $ per share. Series B Preferred Stock (“Series B Stock”) is convertible into common
stock at a ratio of 0.8334 shares of common stock for each share of Series B Stock held and votes together with the common stock on an
as-if-converted basis.
Note 14 – Warrants
The
Company issued 5 year warrants to investors in connection with two convertible note financings. The warrants have an exercise price of
$
A summary of the warrants issued were:
| Upon Issuance | ||||||||||
| Date of Transaction | Number of Warrants | Initial Fair Value | ||||||||
| October 2020 | $ | |||||||||
| January 2021 | $ | |||||||||
To date, we have received $301,248 related to the exercise of warrants.
In
May 2021, the Company issued warrants to purchase
shares of common
stock to the placement agent of its common stock offering. The warrants have a five-year term and an exercise price of $
In
July 2021, the Company issued warrants to purchase shares of
common stock to the placement agent of its common stock offering. The warrants have a five-year term and an exercise price of $
In
December 2023, the Company issued warrants to purchase shares
of common stock to the placement agent of its common stock offering. The warrants have a five-year term and an exercise price of $
The following table summarizes the changes in warrants outstanding since April 30, 2023.
|
Number of Shares |
Weighted-average Exercise Price per Share |
Weighted-average Remaining Contractual Term (in years) |
Aggregate Intrinsic Value |
||||||||||||||
| Balance as of April 30, 2023 | $ | ||||||||||||||||
| Granted | $ | ||||||||||||||||
| Exercised | |||||||||||||||||
| Outstanding as of April 30, 2024 | $ | ||||||||||||||||
| Granted | |||||||||||||||||
| Exercised | ) | ||||||||||||||||
| Outstanding at July 31, 2024 | $ | $ | |||||||||||||||
| 16 |
The 2019 Equity Incentive Plan (the "Plan") allows us to incentivize key employees, consultants, and directors with long term compensation awards such as stock options, restricted stock, and restricted stock units (collectively, the "Awards"). The number of shares issuable in connection with Awards under the Plan may not exceed .
| A. | Options |
The range of assumptions used to calculate the fair value of options granted during the three months ended July 31 was:
| 2024 | 2025 | |||||||
| Exercise Price | $ | – | $ | – | ||||
| Stock price on date of grant | – | – | ||||||
| Risk-free interest rate | – % | – % | ||||||
| Dividend yield | ||||||||
| Expected term (years) | – | – | ||||||
| Volatility | – % | – % |
A summary of options activity under the Plan since April 30, 2023 was:
| Shares | Weighted-Average Exercise Price | Weighted-Average Remaining Contractual Term | Aggregate Intrinsic Value | |||||||||||||
| Outstanding as of April 30, 2023 | $ | |||||||||||||||
| Granted | ||||||||||||||||
| Exercised | ( |
) | ||||||||||||||
| Forfeited or expired | ( |
) | ||||||||||||||
| Outstanding as of April 30, 2024 | ||||||||||||||||
| Granted | ||||||||||||||||
| Exercised | ( |
) | ||||||||||||||
| Forfeited or expired | ( |
) | ||||||||||||||
| Outstanding as of July 31, 2024 | ||||||||||||||||
| Exercisable as of July 31, 2024 | $ | $ | ||||||||||||||
The
aggregate intrinsic value of outstanding options represents the excess of the stock price at the indicated date over the exercise price
of each option. As of July 31, 2024, there was $
| B. | Restricted Stock |
A summary of restricted stock activity under the Plan since April 30, 2023 was:
| Shares | Weighted Average Grant-Date Fair Value Per Share | |||||||
| Unvested and outstanding as of April 30, 2023 | $ | |||||||
| Granted | ||||||||
| Vested | ( |
) | ||||||
| Forfeited | ( |
) | ||||||
| Unvested and outstanding as of April 30, 2024 | ||||||||
| Granted | ||||||||
| Vested | ( |
) | ||||||
| Forfeited | ||||||||
| Unvested and outstanding as of July 31, 2024 | $ | |||||||
| 17 |
| C. | Stock Compensation |
Stock compensation expense for the three months ended July 31 by functional operating expense was:
| 2024 | 2023 | |||||||
| Research and development | $ | $ | ||||||
| Sales and marketing | ||||||||
| General and administrative | ||||||||
| Total | $ | $ | ||||||
Stock
compensation expense pertaining to options totaled $
Note 16 - Related-Party Transactions
In February 2024, the Company sold Rotor Riot and Fat Shark to Unusual Machines, as further described in Note 3 and Note 7. UMAC’s Chief Executive Officer is a direct relative of a member of the Company’s management.
Note 17 – Commitments and Contingencies
Legal Proceedings
In the ordinary course of business, we may be involved, at times, in various legal proceedings involving a variety of matters. We do not believe there are any pending legal proceedings that will have a material adverse effect on our business, consolidated financial position, results of operations, or cash flows. However, the outcome of such legal matters is inherently unpredictable and subject to significant uncertainties. We have not recorded any litigation reserves as of July 31, 2024.
One pending legal matter is an action filed against Teal in a U.S. District Court in Delaware. The complaint asserts claims for breach of contract which management denies. We are asserting vigorous defenses to the complaint. Additionally, the Company has filed a lawsuit against the complainant for Tortious Interference with Contractual Relations and Prospective Contractual Relations. No discovery or other significant developments in the Lawsuit have occurred.
Note 18 – Subsequent Events
Subsequent events have been evaluated through the date of this filing and there are no subsequent events which require disclosure, except as follows:
FlightWave Acquisition
On September 4, 2024, the Company, Teal, FW Acquisition, Inc. (“Buyer”), and FlightWave Aerospace Systems Corporation (“Seller”) entered into and closed on the transactions set forth in an Asset Purchase Agreement (the “APA” and the transactions set forth therein, the “Transactions”), pursuant to which Buyer purchased and Seller sold certain assets used in designing, developing, manufacturing, and selling long range, AI-powered UAVs for commercial use.
As a condition to the closing of the Transactions, each of the shareholders of the Seller entered into a Joinder Agreement with the Company, Teal and Buyer pursuant to which such shareholder agreed to the terms of the APA and agreed to be bound by the provisions thereof applicable to the Seller’s shareholders, including without limit, the indemnification provisions in the APA.
| 18 |
The purchase price under the APA is equal to $14 million worth of shares of the Company’s common stock which are payable as follows:
| | $7 million worth of the Company’s common stock to be issued on September 30, 2024, at a price per share equal to the VWAP on such date, which shall be payable to the preferred shareholders of the Seller as set forth in the APA. |
| | $7 million worth of the Company’s common stock to be issued on December 31, 2024, at a price per share equal to the VWAP on such date, of which (i) $2 million will be payable to preferred shareholders of the Seller, and (ii) $5 million will be payable to common shareholders and option-holders of the Seller as set forth the APA. |
Promissory Note
On September 23, 2024, we entered into a Securities Purchase Agreement (the “SPA”) with Lind Global Asset Management X LLC (“Lind”). Under the SPA, within days of closing, we will receive $8 million in funding from Lind in exchange for our issuance to Lind of a Senior Secured Convertible Promissory Note in the amount of $9,600,000 (the “Note”) and a Common Stock Purchase Warrant for the purchase of 750,000 shares of our common stock at a price of $6.50 per share, exercisable for 5 years (the “Warrant”). As addition consideration to Lind, we have agreed to pay a commitment fee in the amount of $280,000, which may be paid by deduction from the funding to be received.
The Note, which does not accrue interest, shall be repaid in eighteen (18) consecutive monthly installments in the amount of $533,334 beginning six months from the issuance date. At our option, monthly payments can be increased up to $1,000,000 so long as our market capitalization is at least $50 million. In addition, if the Repayment Share Price (as defined below) is equal to or greater than $2.00, Lind can, at its option, increase the monthly payment amount up to $1,300,000 for up to two months. The monthly payments due under the Note may be made by the issuance of common stock valued at the Repayment Share Price, cash in an amount equal to 1.025 times the required payment amount, or a combination thereof. The Repayment Share Price is defined in the Note as ninety percent (90%) of the average of the five (5) consecutive lowest daily VWAPs for our common stock during the twenty (20) trading days prior to the payment date, subject to a floor price of $0.75 per share.
The Note may be converted by Lind from time to time at a price of $6.50 per share (the “Conversion Price”). The dollar amount of any conversions by Lind will be applied to toward upcoming Note payments in chronological order. The Note may be prepaid in whole upon 5 days’ notice, but in the event of a prepayment notice, Lind may convert up to 25% of principal amount due at the lesser of the Repayment Share Price (but only if the Repayment Share Price is equal to or greater than $2.00) or the Conversion Price.
| 19 |
ITEM 2. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS
You should read the following discussion and analysis of our financial condition and results of operations together with our financial statements and the related notes appearing elsewhere in this Quarterly Report on Form 10-Q. In addition to historical information, this discussion and analysis contains forward-looking statements that involve risks, uncertainties and assumptions. Our actual results may differ materially from those discussed below. Factors that could cause or contribute to such differences include, but are not limited to, those identified below, and those discussed in the section titled “Risk Factors” included in our Annual Report on Form 10-K for the fiscal year ended April 30, 2024 as may be amended, supplemented or superseded from time to time by other reports we file with the SEC. All amounts in this report are in U.S. dollars, unless otherwise noted.
Overview
We are a technology company focused on developing products, services, and solutions to the drone industry. We were originally incorporated under the laws of the State of Colorado in 1984 under the name “Oravest International, Inc.” In November 2016, we changed our name to “TimefireVR, Inc.” and re-incorporated in Nevada. In May 2019, we completed a share exchange agreement with Propware which resulted in the Propware shareholders acquiring an 83% ownership interest, and management control, of the Company. In connection with the share exchange agreement, we changed our name to “Red Cat Holdings, Inc.”, and our operating focus to the drone industry.
Prior to the share exchange agreement, Propware was focused on the research and development of software solutions that could provide secure cloud-based analytics, storage and services for the drone industry. Following the share exchange agreement and name change, we have completed a series of acquisitions and financings which have broadened the scope of our activities in the drone industry.
Recent Developments
On September 4, 2024, the Company, Teal, FW Acquisition, Inc. (“Buyer”), and FlightWave Aerospace Systems Corporation (“Seller”) entered into and closed on the transactions set forth in an Asset Purchase Agreement (the “APA” and the transactions set forth therein, the “Transactions”), pursuant to which Buyer purchased and Seller sold certain assets used in designing, developing, manufacturing, and selling long range, AI-powered UAVs for commercial use.
As a condition to the closing of the Transactions, each of the shareholders of the Seller entered into a Joinder Agreement with the Company, Teal and Buyer pursuant to which such shareholder agreed to the terms of the APA and agreed to be bound by the provisions thereof applicable to the Seller’s shareholders, including without limit, the indemnification provisions in the APA.
The purchase price under the APA is equal to $14 million worth of shares of the Company’s common stock which are payable as follows:
| | $7 million worth of the Company’s common stock to be issued on September 30, 2024, at a price per share equal to the VWAP on such date, which shall be payable to the preferred shareholders of the Seller as set forth in the APA. |
| | $7 million worth of the Company’s common stock to be issued on December 31, 2024, at a price per share equal to the VWAP on such date, of which (i) $2 million will be payable to preferred shareholders of the Seller, and (ii) $5 million will be payable to common shareholders and option-holders of the Seller as set forth the APA. |
On September 23, 2024, we entered into a Securities Purchase Agreement (the “SPA”) with Lind Global Asset Management X LLC (“Lind”). Under the SPA, within days of closing, we will receive $8 million in funding from Lind in exchange for our issuance to Lind of a Senior Secured Convertible Promissory Note in the amount of $9,600,000 (the “Note”) and a Common Stock Purchase Warrant for the purchase of 750,000 shares of our common stock at a price of $6.50 per share, exercisable for 5 years (the “Warrant”). As addition consideration to Lind, we have agreed to pay a commitment fee in the amount of $280,000, which may be paid by deduction from the funding to be received. The Note, which does not accrue interest, shall be repaid in eighteen (18) consecutive monthly installments in the amount of $533,334 beginning six months from the issuance date.
| 20 |
Plan of Operations
Since April 2016, our primary business has been to provide products, services, and solutions to the drone industry which we presently do through our three wholly owned subsidiaries Skypersonic, Teal, and Propware. Beginning in January 2020, we expanded the scope of our drone products and services through four acquisitions, including:
| A. | In January 2020, we acquired Rotor Riot, a provider of First Person View (FPV) drones and equipment, primarily to the consumer marketplace. The purchase price was $1,995,114. |
| B. | In November 2020, we acquired Fat Shark Holdings, a provider of FPV video goggles to the drone industry. The purchase price was $8,354,076. |
| C. | In May 2021, we acquired Skypersonic which provides hardware and software solutions that enable drones to complete inspection services in locations where GPS is not available, yet still record and transmit data even while being operated from thousands of miles away. The purchase price was $2,791,012. |
| D. | In August 2021, we acquired Teal, a leader in commercial and government UAV technology, primarily drones, to government and commercial enterprises, most notably, the military. Teal manufactures drones approved by the U.S. Department of Defense for reconnaissance, public safety, and inspection applications. The purchase price was $10,011,279. |
Following the Teal acquisition in August 2021, we concentrated on integrating and organizing these businesses. Effective May 1, 2022, we established the Enterprise segment (“Enterprise”) and the Consumer segment (“Consumer”) to focus on the unique opportunities in each sector. Enterprise's initial strategy was to provide UAVs to commercial enterprises, and the military, to navigate dangerous military environments and confined industrial and commercial interior spaces. Subsequently, Enterprise narrowed its near-term attention on the military and other government agencies. Skypersonic's technology has been redirected to military applications and its operations consolidated into Teal.
The Enterprise segment’s current business strategy is focused on providing integrated robotic hardware and software for use across a variety of applications. Its solutions provide critical situational awareness and actionable intelligence to on-the-ground warfighters and battlefield commanders as well as firefighters and public safety officials. Our Enterprise segment’s efforts are centered on developing and scaling an American made family of systems. We have since completed construction of a manufacturing facility in Salt Lake City, Utah and believe that an increased focus by the United States government and American businesses on purchasing products that are “Made in America” provide our Enterprise segment with a competitive advantage.
On February 16, 2024, we closed the sale of our Consumer segment, consisting of Rotor Riot and Fat Shark, to Unusual Machines. The sale reflects our decision to focus our efforts and capital on defense where we believe there are more opportunities to create long term shareholder value.
On September 4, 2024, we entered into and closed on the transactions set forth in an Asset Purchase Agreement with FlightWave pursuant to which we purchased certain assets for designing, developing, manufacturing, and selling long range, AI-powered UAVs for commercial use. Please refer to the Recent Developments section above for further information regarding the APA and related transactions.
Results of Operations
The analysis of our results of operations for the three months ended July 31, 2024 compared to the three months ended July 31, 2023 includes only our Enterprise segment as our Consumer segment was divested in February 2024.
Discussion and Analysis of Three Months Ended July 31, 2024 compared to Three Months Ended July 31, 2023
Revenues
Consolidated revenues totaled $2,776,535 during the three months ended July 31, 2024 (or the “2024 period”) compared to $1,748,129 during the three months ended July 31, 2023 (or the “2023 period”) representing an increase of $1,028,406, or 59%. The increase related to higher product revenue and higher contract revenue. Product revenue totaled $1,890,095 during the quarter ended July 31, 2024 compared to $1,437,248 during the quarter ended July 31, 2023 representing an increase of $452,847, or 32%. Contract revenues totaled $886,440 during the 2024 period compared to $310,881 during the 2023 period, representing an increase of $575,559, or 185%. Contract revenues are primarily sourced through government agencies and can fluctuate from period to period based on the timing of award deliverables and amendments.
| 21 |
Gross Profit
Consolidated gross loss totaled $483,391 during the 2024 period compared to a gross profit of $174,665 during the 2023 period representing a decrease of $658,056, or 377%. On a percentage basis, gross loss was 17% during the 2024 period compared to a gross profit of 10% during the 2023 period. The gross loss in the 2024 period was due to the delivery of final prototypes under the Short Range Reconnaissance Tranche 2 contract with the U.S. Army and did not pertain to product sales.
Operating Expenses
Research and development expenses totaled $1,626,440 during the 2024 period compared to $1,353,551 during the 2023 period, representing an increase of $272,889, or 20%. Professional fees totaled $483,129 in the 2024 period compared to $211,883 in the 2023 period. This increase of $271,246, or 128%, primarily related to outsourced software development expenses and represented substantially all of the total increase in research and development costs.
Sales and marketing costs totaled $2,041,511 during the 2024 period compared to $1,288,760 during the 2023 period, representing an increase of $752,751 or 58%. The increase was driven by higher payroll expenses and an increase in tradeshow attendance to support increased sales efforts of our Teal 2 drone.
General and administrative expenses totaled $3,483,095 during the 2024 period compared to $2,863,758 during the 2023 period, representing an increase of $619,337 or 22%. The increase primarily related to higher stock compensation expense.
During the 2024 period, we incurred stock-based compensation costs of $1,446,038 compared to $911,606 in the 2023 period, resulting in an increase of $534,432 or 59%.
Other Income
Other expense totaled $4,688,889 during the 2024 period compared to $262,891 during the 2023 period, representing an increase of $4,425,998 or more than 16 times. During the 2024 period, we incurred a loss on the sale of our equity method investment of $4,008,357.
Net Loss from Continuing Operations
Net loss from continuing operations totaled $12,416,376 for the 2024 period compared to $5,594,295 for the 2023 period, resulting in an increase of $6,822,081 or 122%. Total operating expenses totaled $6,407,513 for the 2024 period compared to $5,187,700 for the 2023 period. This increase of $1,219,813 or 24%, primarily to the increase in sales and marketing expenses.
Cash Flows
Operating Activities
Net cash used in operating activities was $2,348,412 during the 2024 period compared to net cash used in operating activities of $6,926,069 during the 2023 period, representing a decrease of $4,577,657 or 66%. The decreased use of cash primarily related to timing of accounts receivable receipts for government customers. Net cash used in operations, net of non-cash expenses, totaled $6,755,639 during the 2024 period, compared to $1,522,611 during the 2023 period, resulting in an increase of $5,233,028, or 344%. Net cash used related to changes in operating assets and liabilities totaled $3,312,325 during the 2024 period, compared to negative $2,854,385 during the 2023 period, representing an increase of $6,166,710 or 216%. Changes in operating assets and liabilities can fluctuate significantly from period to period depending upon the timing and level of multiple factors, including inventory purchases, vendor payments, and customer collections.
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Investing Activities
Net cash provided by investing activities was $4,300,043 during the 2024 period compared to net cash provided by investing activities of $4,883,345 during the 2023 period, resulting in a decrease of $583,302 or 12%. Proceeds of $4,400,000 from the sale of equity method investment were used to fund operations during the 2024 period.
Financing Activities
Net cash used in financing activities totaled $286,037 during the 2024 period compared to net cash used in financing activities of $146,509 during the 2023 period. Financing activities can vary from period to period depending upon market conditions, both at a macro-level and specific to the Company.
Liquidity and Capital Resources
At July 31, 2024, we reported current assets totaling $21,470,151, current liabilities totaling $4,230,512 and net working capital of $17,239,639. Cash totaled $7,732,763 at July 31, 2024. Inventory related balances, including pre-paid inventory, totaled $10,667,676.
Going Concern
We have never been profitable and have incurred net losses related to acquisitions, as well as costs incurred to pursue our long-term growth strategy. During the three months ended July 31, 2024, we incurred a net loss of approximately $12,000,000 and used cash in operating activities of approximately $2,300,000. As of July 31, 2024, working capital totaled approximately $17,200,000. These financial results and our financial position at July 31, 2024 raise substantial doubt about our ability to continue as a going concern. However, we have recently taken actions to strengthen our liquidity.
On December 11, 2023, we completed a public offering of 18,400,000 shares of common stock which generated net proceeds of approximately $8,400,000 as further described in Note 1 and Note 12. In addition, our operating plan for the next twelve months has been updated to reflect recent operating improvements. Revenues have accelerated and are expected to continue growing. Our manufacturing facility is scaling production and gross profits are projected to increase. If necessary, we will seek to obtain additional debt financing for which there can be no guarantee. As described in Note 7, we sold our equity method investment for $4,400,000 in July 2024. As described in Note 18, the Company closed a financing with proceeds of $8 million to be received in late September 2024. Management has concluded that these recent positive developments alleviate any substantial doubt about our ability to continue our operations, and meet our financial obligations, for twelve months from the date these consolidated financial statements are issued.
Critical Accounting Policies and Estimates
Our financial statements and accompanying notes have been prepared in accordance with GAAP applied on a consistent basis. The preparation of financial statements in conformity with GAAP requires management to make estimates and assumptions that affect the reported amounts of assets and liabilities, the disclosure of contingent assets and liabilities at the date of the financial statements and the reported amounts of revenues and expenses during the reporting periods.
We regularly evaluate the accounting policies and estimates that we use to prepare our financial statements. A complete summary of these policies is included in the notes to our financial statements. In general, management's estimates are based on historical experience, information from third party professionals, and on various other assumptions that are believed to be reasonable under the facts and circumstances. Actual results could differ from those estimates made by management.
Significant estimates reflected in these financial statements include those used to (i) complete purchase price accounting for acquisitions, (ii) the evaluation of long-term assets, including goodwill, for impairment, and (iii) the evaluation of other-than-temporary-impairment of equity method investments.
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Goodwill and Long-lived Assets – Goodwill represents the future economic benefit arising from other assets acquired in an acquisition that are not individually identified and separately recognized. We test goodwill for impairment in accordance with the provisions of ASC 350, Intangibles – Goodwill and Other, (“ASC 350”). Goodwill is tested for impairment at least annually at the reporting unit level or whenever events or changes in circumstances indicate that goodwill might be impaired. ASC 350 provides that an entity has the option to first assess qualitative factors to determine whether the existence of events or circumstances leads to a determination that it is more likely than not that the fair value of a reporting unit is less than its carrying amount. If, after assessing the totality of events or circumstances, an entity determines it is not more likely than not that the fair value of a reporting unit is less than its carrying amount, then additional impairment testing is not required. However, if an entity concludes otherwise, then it is required to perform an impairment test. The impairment test involves comparing the estimated fair value of a reporting unit with its book value, including goodwill. If the estimated fair value exceeds book value, goodwill is considered not to be impaired. If, however, the fair value of the reporting unit is less than book value, then an impairment loss is recognized in an amount equal to the amount that the book value of the reporting unit exceeds its fair value, not to exceed the total amount of goodwill allocated to the reporting unit.
The estimate of fair value of a reporting unit is computed using either an income approach, a market approach, or a combination of both. Under the income approach, we utilize the discounted cash flow method to estimate the fair value of a reporting unit. Significant assumptions inherent in estimating the fair values include the estimated future cash flows, growth assumptions for future revenues (including gross profit, operating expenses, and capital expenditures), and a rate used to discount estimated future cash flow projections to their present value based on estimated weighted average cost of capital (i.e., the selected discount rate). Our assumptions are based on historical data, supplemented by current and anticipated market conditions, estimated growth rates, and management’s plans. Under the market approach, fair value is derived from metrics of publicly traded companies or historically completed transactions of comparable businesses. The selection of comparable businesses is based on the markets in which the reporting units operate and consider risk profiles, size, geography, and diversity of products and services.
Fair Values, Inputs and Valuation Techniques for Financial Assets and Liabilities and Related Disclosures – The fair value measurements and disclosure guidance defines fair value and establishes a framework for measuring fair value. Fair value is defined as the price that would be received to sell an asset or paid to transfer a liability (an exit price) in an orderly transaction between market participants at the measurement date. In accordance with this guidance, we have categorized our recurring basis financial assets and liabilities into a three-level fair value hierarchy based on the priority of the inputs to the valuation technique.
The fair value hierarchy gives the highest priority to quoted prices in active markets for identical assets or liabilities (Level 1) and the lowest priority to unobservable inputs (Level 3). The inputs used to measure fair value may fall into different levels of the fair value hierarchy. In such cases, the level in the fair value hierarchy within which the fair value measurement in its entirety falls has been determined based on the lowest level input that is significant to the fair value measurement in its entirety. Our assessment of the significance of a particular input to the fair value measurement in its entirety requires judgment and considers factors specific to the asset or liability.
The guidance establishes three levels of the fair value hierarchy as follows:
Level 1: Inputs are unadjusted, quoted prices in active markets for identical assets or liabilities at the measurement date;
Level 2: Inputs are observable, unadjusted quoted prices in active markets for similar assets or liabilities, unadjusted quoted prices for identical or similar assets or liabilities in markets that are not active, or other inputs that are observable or can be corroborated by observable market data for substantially the full term of the related assets or liabilities; and
Level 3: Unobservable inputs that are significant to the measurement of the fair value of the assets or liabilities that are supported by little or no market data.
Financial Instruments
Our financial instruments mainly consist of cash, receivables, current assets, accounts payable, accrued expenses and debt. The carrying amounts of cash, receivables, current assets, accounts payable, accrued expenses and current debt approximates fair value due to the short-term nature of these instruments.
Recently Issued Accounting Pronouncements
We have implemented all new accounting pronouncements that are in effect. These pronouncements did not have any material impact on the financial statements unless otherwise disclosed, and we do not believe that there are any other new accounting pronouncements that have been issued that might have a material impact on our financial position or results of operations.
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ITEM 3. QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISK
We are not required to provide the information required by this Item as we are a “smaller reporting company,” as defined in Rule 12b-2 of the Exchange Act.
ITEM 4. CONTROLS AND PROCEDURES
Evaluation of Disclosure Controls and Procedures
Our principal executive officer and principal financial officer evaluated the effectiveness of our “disclosure controls and procedures” as of July 31, 2024, the end of the period covered by this Quarterly Report on Form 10-Q. The term “disclosure controls and procedures,” as defined in Rules 13a-15(e) and 15d-15(e) under the Exchange Act, means controls and other procedures of a company that are designed to ensure that information required to be disclosed by a company in the reports that it files under the Exchange Act is recorded, processed, summarized and reported, within the time periods specified in the SEC’s rules and forms. Disclosure controls and procedures include, without limitation, controls and procedures designed to ensure that information required to be disclosed by a company in the reports that it files under the Exchange Act is accumulated and communicated to a company’s management, including its principal executive officer and principal financial officer, as appropriate to allow timely decisions regarding required disclosure. Based on the evaluation of our disclosure controls and procedures as of July 31, 2024, our Chief Executive Officer and our Chief Financial Officer concluded that, as of such date, our disclosure controls and procedures were not effective, specifically pertaining to the quarter ended July 31, 2023 for which we restated items related to the removal of the derivative liabilities.
Management's quarterly report on internal control over financial reporting.
Our management is responsible for establishing and maintaining adequate internal control over financial reporting. Our internal control over financial reporting is designed to provide reasonable assurances regarding the reliability of financial reporting and the preparation of our consolidated financial statements in accordance with GAAP. Our accounting policies and internal controls over financial reporting, established and maintained by management, are under the general oversight of the Board’s audit committee.
Our internal control over financial reporting includes those policies and procedures that:
| • | pertain to the maintenance of records that, in reasonable detail, accurately and fairly reflect the transactions and dispositions of our assets; | |
| • | provide reasonable assurance that transactions are recorded as necessary to permit preparation of financial statements in accordance with GAAP, and that receipts and expenditures are being made only in accordance with authorizations of our management and directors; and | |
| • | provide reasonable assurance regarding prevention or timely detection of unauthorized acquisition, use or disposition of assets that could have a material effect on the financial statements. |
Because of its inherent limitations, internal control over financial reporting may not prevent or detect misstatements. Also, projections of any evaluation of effectiveness to future periods are subject to the risk that controls may become inadequate because of changes in conditions, or that the degree or compliance with the policies or procedures may deteriorate.
Management assessed our internal control over financial reporting as of July 31, 2024. The standard measures adopted by management in making its evaluation are the measures in the Internal-Control Integrated Framework published by the Committee of Sponsoring Organizations (“COSO”) of the Treadway Commission.
Based on management’s assessment using the COSO criteria, our CEO and CFO concluded that our internal control over financial reporting was not effective, specifically pertaining to the quarter ended July 31, 2023 for which we restated items related to the removal of the derivative liabilities. The Company is currently in the process of formalizing narratives and processes which are expected to mitigate these weaknesses, and has hired additional personnel to strengthen the internal control environment.
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Changes In Controls Over Financial Reporting
There were no changes in our internal control over financial reporting (as defined in Rule 13a-15(f) of the Exchange Act) that occurred during the three months ended July 31, 2024, that have materially affected, or are reasonably likely to materially affect, our internal controls over financial reporting.
Limitations on Effectiveness of Controls and Procedures
In designing and evaluating the disclosure controls and procedures, management recognizes that any controls and procedures, no matter how well designed and operated, cannot provide absolute assurance that the objectives of the controls system are met, and no evaluation of controls can provide absolute assurance that all control issues and instances of fraud, if any, within a company have been detected. In addition, the design of disclosure controls and procedures must reflect the fact that there are resource constraints and that management is required to apply judgment in evaluating the benefits of possible controls and procedures relative to their costs.
PART II - OTHER INFORMATION
ITEM 1. LEGAL PROCEEDINGS
From time to time, we are involved in various legal proceedings, lawsuits and claims incidental to the conduct of our business, some of which may be material. Our businesses are also subject to extensive regulation, which may result in regulatory proceedings against us. Other than as described below, we do not believe that the outcome of any of our current legal proceedings will have a material adverse impact on our business, financial condition and results of operations.
On May 9, 2024, Autonodyne LLC filed a complaint against wholly-owned Red Cat subsidiary Teal Drones, Inc. in the Superior Court of the State of Delaware. The Complaint alleges a single cause of action, asserting that Teal breached a Software Licensing Agreement between it and Autonodyne (the “SLA”) by disclosing confidential information contained in the SLA. Autonodyne alleges that it rightfully terminated the SLA, and at that point it became entitled to $8.25 million of accelerated payments, pursuant to section 14.4(e) of the SLA. Teal Drones has answered the Complaint, but no discovery has been served yet. As any litigation is subject to many uncertainties, it is not possible to predict the ultimate outcome of this claim or to estimate the loss, if any, which may result. Accordingly, the outcome of the claim is not yet determinable, and the extent to which an outflow of funds may be required to settle this possible obligation cannot be reliably determined. The Company plans to vigorously assert defenses to the complaint.
ITEM 1A. RISK FACTORS
Risk factors that affect our business and financial results are discussed in Part I, Item 1A “Risk Factors,” in our Annual Report on Form 10-K for the year ended April 30, 2024, as filed with the SEC on August 8, 2024 (“Annual Report”). There have been no material changes in our risk factors from those previously disclosed in our Annual Report. You should carefully consider the risks described in our Annual Report which could materially affect our business, financial condition or future results. The risks described in our Annual Report are not the only risks we face. Additional risks and uncertainties not currently known to us or that we currently deem to be immaterial also may materially adversely affect our business, financial condition, and/or operating results. If any of the risks actually occur, our business, financial condition, and/or results of operations could be negatively affected.
ITEM 2. UNREGISTERED SALES OF EQUITY SECURITIES AND USE OF PROCEEDS
None.
ITEM 3. DEFAULTS UPON SENIOR SECURITIES
None.
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ITEM 4. MINE SAFETY DISCLOSURES
Not applicable
ITEM 5. OTHER INFORMATION
Rule 10b5-1 Trading Plans
During the three months ended July 31, 2024, none of our directors or officers adopted or terminated any contract, instruction or written plan for the purchase or sale of Company securities that was intended to satisfy the affirmative defense conditions of Rule 10b5-1(c) or any “non-Rule 10b5-1 trading arrangement.”
ITEM 6. EXHIBITS
* Filed herewith.
** Furnished herewith.
+ Certain schedules, appendices and exhibits to this agreement have been omitted in accordance with Item 601(b)(2) of Regulation S-K. A copy of any omitted schedule and/or exhibit will be furnished supplementally to the SEC staff upon request.
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SIGNATURES
Pursuant to the requirements of the Securities Exchange Act of 1934, the registrant has duly caused this report to be signed on its behalf by the undersigned thereunto duly authorized.
| RED CAT HOLDINGS, INC. | |||
| Date: September 23, 2024 |
By: /s/ Jeffrey Thompson |
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Jeffrey Thompson Chief Executive Officer (Principal Executive Officer) |
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| Date: September 23, 2024 | By: /s/ Leah Lunger | ||
|
Leah Lunger Chief Financial Officer (Principal Financial and Accounting Officer) |
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