Red Cat Holdings, Inc. — Form 10-Q Summary
Reporting period: Three and six months ended October 31, 2020 (fiscal second quarter and first half); filed December 21, 2020. The company sells drones and related components through Rotor Riot and is developing Dronebox, a cloud-based drone data platform. Fat Shark was acquired after quarter-end.
Key financial results
| Metric | Three months ended Oct. 31, 2020 | Six months ended Oct. 31, 2020 | Prior-year comparable period |
|---|---|---|---|
| Revenue | $427,807 | $976,089 | $0 |
| Gross profit / margin | $99,051 / 23.2% | $201,201 / 20.6% | $0 |
| Operating expenses | $588,942 | $1,074,336 | $216,121 / $537,623 |
| Operating loss | $(489,891) | $(873,135) | $(216,121) / $(537,623) |
| Net loss | $(722,281) | $(1,105,525) | $(216,121) / $(537,623) |
| Operating cash flow | Not separately presented | $(568,452) | $(415,848) |
Prior-year revenue was zero because Red Cat had not yet acquired Rotor Riot, which closed in January 2020; the current-period revenue is not a like-for-like growth comparison. The filing reports basic and diluted loss per share of $0.04 for the quarter and $0.05 for the six months, versus $0.01 and $0.06, respectively, in the prior-year periods.
At October 31, cash was $480,065, inventory $170,486, current assets $650,551 and current liabilities $1,989,456. The balance-sheet figures imply negative working capital of $1,338,905; the MD&A also states negative $1,388,905, an apparent inconsistency. Total assets were $3.14 million and stockholders’ equity was $1.13 million. Current notes payable were $354,527, amounts due to related parties $329,777, and the balance sheet reported a $812,390 derivative liability. Six-month financing cash inflows were $811,849.
Changes, transactions and outlook
- Revenue and operating costs reflect Rotor Riot’s inclusion following its January 2020 acquisition. Six-month R&D expense declined 26% to $193,814 as the company shifted resources from development toward commercial operations; G&A rose 125% to $619,977, including higher stock compensation and professional services.
- In October, the company raised $600,000 through two-year convertible notes bearing 12% interest and issued warrants for approximately 400,000 shares. Derivative-related expenses were $232,390 for the six-month period, comprising $148,587 of derivative expense and an $83,803 fair-value loss.
- On November 6, 2020, after quarter-end, Red Cat completed its $7 million Fat Shark acquisition, paying with 5,227,223 common shares valued at $5.75 million, a $1 million senior secured note, and $250,000 cash. Fat Shark is a supplier of FPV headsets and goggles; management said it expected Fat Shark to generate a majority of revenue over the following 12 months. The MD&A also describes a separate $1.5 million Fat Shark note issued to the seller in connection with an estimated working-capital adjustment and cancellation of approximately $950,000 of debt; the filing’s transaction details merit review.
- The company provided no quantified revenue, earnings or cash-flow guidance. Management said it would seek public-market capital, release commercial products, and pursue complementary acquisitions. It stated that additional capital was needed to execute its business plan.
Risks, contingencies and controls
- Management and the notes state that negative working capital, accumulated losses of approximately $3.7 million, operating cash outflows and dependence on additional financing raise substantial doubt about the company’s ability to continue as a going concern. Management gave no assurance its financing and operating plans would succeed.
- The convertible notes and warrants have variable-price, dilution-protection and default provisions. The notes contain ownership limits on conversions; the terms described in different parts of the filing are not fully consistent.
- Disclosure controls and procedures were reported ineffective as of October 31, 2020, citing inadequate segregation of duties and lack of independent review of the CFO’s non-routine financial work. The company said it hired a controller in November to support improvements.
- The filing reported no pending material legal proceedings and no off-balance-sheet arrangements. It reported no income-tax provision, with a full valuation allowance against deferred tax assets.
Important facts for investors to verify
- Reconcile the working-capital amounts: the balance-sheet arithmetic gives a $1,338,905 deficit, while MD&A states $1,388,905.
- Confirm the final Fat Shark acquisition accounting, including the additional seller note and working-capital adjustment, and assess the combined debt and cash requirements.
- Review the exact conversion-price and anti-dilution terms of the October 2020 notes and warrants, the derivative-liability valuation, and potential dilution.
- Assess available financing, cash burn and liquidity against the company’s going-concern warning and its stated need for capital.
- Monitor whether the controller appointment results in effective segregation of duties and stronger financial-reporting controls.