Red Cat Holdings, Inc. — Form 10-Q Summary
Reporting period: Fiscal quarter and nine months ended January 31, 2021; filed March 22, 2021. The filing’s “2020 Q3” metadata does not match the reported quarter-end date. All figures are unaudited.
Business context
Red Cat sells drones and related components through Rotor Riot, develops drone data software including Dronebox, and acquired Fat Shark on November 2, 2020. Fat Shark supplies FPV headsets and goggles. The company said Fat Shark was expected to generate most revenue over the following 12 months.
Financial results and liquidity
| Metric | Three months ended Jan. 31, 2021 | Nine months ended Jan. 31, 2021 |
|---|---|---|
| Revenue | $2.146 million | $3.122 million |
| Gross profit | $570,000; 26.5% margin | $771,000; 24.7% margin |
| Operating expenses | $1.717 million | $2.791 million |
| Operating loss | $1.147 million | $2.020 million |
| Other expense | $7.837 million | $8.070 million |
| Net loss | $8.984 million | $10.090 million |
| Basic and diluted loss per share | $0.34 | $0.46 |
- Comparable-period revenue was $34,538 and net loss was $438,619 for the quarter, and $34,538 and $976,242, respectively, for the nine months. Comparisons are substantially affected by the Rotor Riot and Fat Shark acquisitions.
- Nine-month operating cash use was $917,016, versus $704,651 in the prior-year period. Investing cash use was $48,368; financing provided $1.200 million. Cash at period-end was $471,652.
- At January 31, current assets were $1.998 million and current liabilities were $10.897 million, producing negative working capital of $8.899 million. Stockholders’ equity was negative $646,369.
- Current liabilities included a $9.144 million derivative liability. The company also reported $177,279 of current notes payable, $395,544 due to related parties, and $1.753 million of long-term related-party debt, primarily the secured Fat Shark seller note due November 2023. Convertible debentures were reported net at $79,187.
Material changes and unusual items
- Fat Shark was acquired for stated consideration of $8.354 million: $6.351 million in stock, a $1.753 million secured note, and $250,000 cash. The initial purchase allocation included $7.600 million of goodwill; intangible asset valuations were not yet complete.
- For the quarter, Rotor Riot generated approximately 28% of revenue and Fat Shark 72%; for the nine months, their reported shares were approximately 51% and 49%, respectively.
- Other expense principally reflected derivative accounting on convertible notes and warrants. Nine-month derivative expense was $4.630 million and fair-value change expense was $3.434 million; management linked the charges to the rise in the company’s stock price. These charges drove most of the increase in net loss and are not equivalent to operating cash outflows.
- Stock-based compensation was $854,195 for the quarter and $1.068 million for the nine months, up from $149,462 and $161,529, respectively. Shares outstanding increased to 27,160,926 at period-end from 20,011,091 at April 30, 2020, in part reflecting acquisitions and equity awards.
- In March 2021, all holders of the $1.1 million October 2020 and January 2021 convertible notes gave notice of intent to convert principal and accrued interest into shares; the filing said conversion had not yet been processed as of its filing date.
Outlook, risks, and contingencies
- Management expected gross margins of 25%–30% and anticipated Fat Shark would account for most revenue over the next 12 months. No specific revenue or earnings guidance was provided.
- The company reported substantial doubt about its ability to continue as a going concern, citing negative working capital, accumulated losses of approximately $12.7 million, and insufficient cash for the next 12 months. It plans to seek public-market capital, release commercial products, and pursue complementary acquisitions, with no assurance these efforts will succeed.
- After quarter-end, the company agreed to acquire 97.46% of Skypersonic for $3 million in Red Cat shares, subject to closing conditions and expected by May 14, 2021. It also agreed to provide Skypersonic a secured $75,000 bridge loan. These are subsequent events, not period-end results.
- Management concluded disclosure controls and procedures were not effective at January 31, 2021, citing inadequate segregation of duties and no independent review of the CFO’s financial duties. A corporate controller had been hired to support control improvements.
- The filing reported no pending material legal proceedings and no off-balance-sheet arrangements.
Important facts for investors to verify
- Current liquidity, cash runway, and the company’s ability to raise financing or otherwise address the going-concern uncertainty.
- The final Fat Shark purchase-price allocation, including customer relationship and brand valuations, and whether goodwill or other assets require impairment.
- The terms, share count, and dilution effects of the subsequent $1.1 million note conversions, as well as outstanding warrants and any applicable conversion-price adjustments.
- Whether reported acquisition-driven revenue and management’s 25%–30% gross-margin expectation are sustained, particularly given the acquisitions’ effect on comparability.
- Progress on remediation of the disclosed control weaknesses and the closing, consideration, and working-capital adjustments for the proposed Skypersonic acquisition.