Red Cat Holdings, Inc. — Form 10-Q Summary
Reporting period: Three months ended July 31, 2022, the company’s fiscal first quarter of fiscal 2023. Comparative period: three months ended July 31, 2021. The filing is unaudited.
Business context
Red Cat provides products and services for the drone industry through Teal Drones and Skypersonic (Enterprise) and Fat Shark and Rotor Riot (Consumer). Results for the quarter include Teal, acquired in August 2021; Teal was not included in the comparable 2021 reported results. Management said Teal was the largest operating subsidiary in the current quarter.
Financial performance and liquidity
| Metric | Three months ended July 31, 2022 | Prior comparable period |
|---|---|---|
| Revenue | $3.07 million | $1.40 million |
| Gross profit / margin | $358,000 / 11.7% | $102,000 / 7.3% |
| Operating loss | $3.70 million | $1.68 million |
| Net loss | $3.81 million | $1.56 million |
| Loss per share, basic and diluted | $0.07 | $0.05 |
| Net cash used in operating activities | $4.81 million | $4.07 million |
- Revenue rose 120%. Consumer revenue increased 43% to $1.94 million, with much of the increase attributed to Fat Shark’s Dominator product launch. Enterprise revenue was $1.13 million; Teal represented 98% of Enterprise revenue.
- Gross margin improved, principally because Fat Shark’s newer product mix generated higher margins. Operating expenses increased to $4.06 million from $1.78 million, reflecting Teal’s inclusion and higher operating, R&D, sales and marketing, and stock-based compensation costs.
- Cash and marketable securities totaled $42.95 million at July 31, 2022, including $6.25 million of cash and $36.71 million of marketable securities. Current assets were $51.18 million, current liabilities $4.55 million, and working capital $46.62 million.
- Investing activities provided $7.66 million, mainly from maturities of marketable securities, partly offset by $545,000 in property and equipment purchases. Financing activities used $685,000; there were no common-stock offering proceeds in this quarter.
- Debt obligations totaled $1.72 million ($882,000 current and $836,000 long term). The filing also reports operating lease liabilities of approximately $962,000 combined current and long term.
- Marketable securities had $1.34 million of unrealized losses at quarter-end, recorded in other comprehensive income. Net investment income was $130,000.
Changes, outlook and risks
- The year-over-year increase in revenue and costs is not directly comparable because Teal was acquired after the 2021 comparison period. Teal reported an operating loss of approximately $1.31 million in the current quarter.
- Management expects net losses for at least the next 12 months, but states cash and investment resources should fund operations for at least that period. It cautions that funding may be needed if the company does not become profitable and that future financing may not be available on acceptable terms or at all. No revenue or earnings guidance is provided.
- Management cites significant global supply-chain disruptions and delays. Inventory, including prepaid inventory, totaled $6.39 million; outstanding inventory purchase orders were approximately $31.9 million. Subsequent orders placed in August and September totaled $3.1 million, and the company says it may cancel or modify orders before shipment.
- A lawsuit against Teal and its CEO alleges breach of contract, conversion and breach of fiduciary duty, and seeks damages in excess of $1 million. The litigation is ongoing; the filing does not quantify a probable loss.
- Teal’s acquisition consideration may increase by $4 million to $16 million if specified sales thresholds are met during the 24 months after closing. Teal’s purchase-price allocation remained subject to final valuation work.
- The company reported no off-balance-sheet arrangements and stated that disclosure controls were effective as of July 31, 2022.
Important facts for investors to verify
- Whether revenue growth and margin improvement can continue as Teal’s contribution, product launches and acquisition-related costs evolve.
- Cash burn relative to the stated 12-month liquidity outlook, including the timing of inventory commitments and any need for new financing.
- Supply-chain exposure, inventory recoverability and the company’s ability to meet or adjust its substantial purchase orders.
- Developments in the Teal litigation and any financial exposure, as well as any contingent acquisition consideration or purchase-accounting adjustments.
- Potential dilution: weighted-average shares rose to 53.78 million from 34.07 million, and the filing lists 6.97 million potentially dilutive securities excluded from diluted loss per share as anti-dilutive.