Red Cat Holdings, Inc. — Form 10-Q Summary
Reporting period: Three months ended July 31, 2021 (the company’s fiscal first quarter), compared with the three months ended July 31, 2020. Red Cat develops and sells drone products and related services through Fat Shark, Rotor Riot, Skypersonic and Red Cat Propware. Teal Drones was acquired after quarter-end.
Key financial results
| Metric | Three months ended July 31, 2021 | Prior-year period |
|---|---|---|
| Revenue | $1.397 million | $548,282 |
| Gross profit / margin | $102,404 / 7% | $102,150 / 19% |
| Operating expenses | $1.782 million | $485,394 |
| Operating loss | $1.680 million | $383,244 |
| Net loss | $1.558 million | $383,244 |
| Basic and diluted loss per share | $0.05 | $0.02 |
| Cash used in operating activities | $4.074 million | $232,822 |
- At July 31, 2021, cash was $66.119 million, current assets were $69.728 million and current liabilities were $4.557 million. Reported working capital was $65.171 million.
- Total liabilities were approximately $6.178 million, including a $2.495 million warrant derivative liability. Debt-related balances included $154,872 of current notes payable, $239,954 due to related parties and a $1.621 million long-term related-party note.
- Financing activities provided $69.901 million, principally from two public stock offerings. The company reported 48.489 million common shares outstanding at quarter-end; 53.680 million were outstanding as of September 16, 2021.
Material changes and notable items
- Revenue rose 155% year over year, largely reflecting acquisitions completed after the prior-year quarter. Fat Shark contributed $948,417, or 68% of current-quarter revenue.
- Gross profit was nearly unchanged despite higher sales, and gross margin declined from 19% to 7%. Management attributed the reduction to higher product and shipping costs associated with COVID-19 impacts.
- Operating expenses increased by about $1.297 million, driven by the larger acquired business, higher general and administrative costs, and stock-based compensation. Net loss increased by about $1.175 million.
- Operating cash use increased substantially. Management said about $2 million of the period’s higher working-capital cash use related to inventory and prepaid purchases not yet delivered.
- May and July 2021 offerings generated approximately $14.6 million and $55.5 million of net proceeds, respectively. The July offering price was $4.50 per share.
- Skypersonic closed on May 7, 2021. The company’s preliminary working-capital deficit calculation implied a $689,848 purchase-price reduction; finalization with the sellers was expected by the end of September 2021.
- Teal Drones acquisition closed August 31, 2021, after quarter-end. Red Cat issued 3,738,911 shares for net closing consideration of $10.873 million after debt and working-capital adjustments. Additional shares worth up to $16 million may be payable if specified sales milestones are met. Red Cat also guaranteed Teal’s secured loan of approximately $1.67 million, bearing 10% interest and payable monthly.
Outlook, risks and contingencies
The filing provides no formal revenue or earnings guidance. Management expected net losses for at least the next twelve months and said operations would continue to require equity or debt financing until product and service sales can sustain the business. The company disclosed substantial doubt about its ability to continue as a going concern, citing recurring losses, negative operating cash flows and the need for working capital. Management said the May and July offerings were intended to support sales, marketing, acquisitions and working capital, but gave no assurance that financing and other efforts would resolve the going-concern uncertainty for more than twelve months.
Other items to monitor include acquisition accounting estimates and purchase-price adjustments; dilution from stock offerings, equity awards and potential earn-outs; and the valuation volatility of warrant derivative liabilities. The filing reported no pending material legal proceedings and no off-balance-sheet arrangements. Management concluded disclosure controls were effective as of July 31, 2021.
Important facts for investors to verify
- Whether acquired businesses can grow revenue while improving gross margin and reducing operating cash burn.
- Cash use, working-capital requirements and the sufficiency of available capital in light of the going-concern disclosure.
- Final Skypersonic purchase-price and working-capital adjustments, and the final accounting for its acquired assets.
- Teal’s operating performance against earn-out thresholds, as well as the costs and risks of its secured loan and Red Cat’s guarantee.
- Actual dilution from shares issued, outstanding warrants and options, and any future acquisition consideration.