Red Cat Holdings, Inc. — FY2020 Form 10-K
Reporting period: Fiscal year ended April 30, 2020; filed August 13, 2020. This is an annual report, not a report for calendar 2019 Q4. The company shifted from bitcoin-related activities to drones and acquired Rotor Riot on January 23, 2020. FY2020 results include Rotor Riot sales only from January 24 through April 30.
Financial results and liquidity
| Metric | FY2020 | FY2019 |
|---|---|---|
| Revenue | $403,940 | $0 |
| Cost of goods sold | $325,379 | $0 |
| Gross profit / margin | $78,561 / 19.4% | $0 |
| Research and development | $488,990 | $366,590 |
| General and administrative | $1,248,717 | $384,742 |
| Operating loss | $(1,659,146) | $(751,332) |
| Net loss | $(1,601,931) | $(751,332) |
| Net cash used in operations | $(811,584) | $(753,388) |
- Net loss increased $850,599, or 113%, year over year. The company attributed much of the increase to public-company and merger-related costs, including professional services expense that rose $504,673.
- Cash was $236,668 at year-end, down from $503,438. Current assets were $318,338 versus current liabilities of $829,266, leaving negative working capital of $510,928.
- Current liabilities included $249,050 of accounts payable, $89,342 of accrued expenses, $118,771 of notes payable, and $333,684 due to related parties. The balance sheet also reported $450,000 of convertible debentures.
- Cash provided by financing was $498,487; investing activities provided $46,327, principally cash acquired in acquisitions. The company reported a $2.6 million accumulated deficit and less than $500,000 of revenue since inception.
- FY2020 other income of $57,215 was a Small Business Administration Paycheck Protection Program loan amount that management believed would be forgiven after eligible spending; the filing does not establish that forgiveness had been formally approved.
Business, changes, and outlook
- Rotor Riot designs, builds, and resells FPV drones and components through its e-commerce site. Red Cat is also developing Dronebox, a cloud-based flight-data recording and analytics service using blockchain technology.
- The Rotor Riot acquisition was valued at $1,995,114 for accounting purposes, including a $175,000 promissory note; the company recorded goodwill of approximately $2.37 million in the acquisition allocation. The acquired business contributed the reported FY2020 sales for only part of the year.
- Dronebox entered limited beta testing in May 2020. The company targeted commercial release in the second half of 2020, with another section specifying Q4; timing and commercial success were not assured. No numerical revenue or earnings guidance was provided.
- Management planned to grow Rotor Riot sales, launch Dronebox, raise capital, and consider acquisitions of complementary revenue-generating businesses. It cautioned that these plans might not succeed.
Risks, contingencies, and unusual items
- The auditor highlighted substantial doubt about the company’s ability to continue as a going concern, citing recurring losses and negative operating cash flows. Management said additional working capital was needed for the next 12 months and that financing might not be available on acceptable terms.
- COVID-19 had disrupted supply and delivery, increased some input costs, and could affect demand, operations, and access to capital. The company also relied on a limited number of suppliers, with much inventory sourced from China.
- Convertible notes totaling $450,000 bear 12% interest, mature after two years, and have holder conversion rights. Their conversion terms can result in significant dilution, particularly following a qualifying equity offering; the notes include ownership limits and default provisions.
- Management reported that internal controls over financial reporting were not effective, citing inadequate segregation of duties and lack of independent review. The auditor did not attest to internal-control effectiveness.
- Other risks include competition from larger, better-capitalized firms; FAA and other regulatory changes; Dronebox development and adoption risk; and reliance on key personnel. The company reported no pending material legal proceedings and no off-balance-sheet arrangements.
Important facts for investors to verify
- Cash runway, financing plans, and whether the going-concern uncertainty has been alleviated.
- Dronebox release timing, regulatory readiness, customer adoption, and recurring subscription economics.
- Terms, accrued interest, potential conversion dilution, and repayment status of the convertible and related-party obligations.
- Rotor Riot’s post-acquisition sales, gross margins, supplier concentration, and the assumptions supporting recorded goodwill.
- Whether internal-control deficiencies have been remediated and whether the PPP loan was ultimately forgiven.