Red Cat Holdings, Inc. — Form 10-Q Summary
Reporting period: Three and six months ended October 31, 2019; balance sheet compared with April 30, 2019. The filing describes this as the quarter ended October 31, 2019. Amounts are in U.S. dollars.
Business context
Red Cat is developing blockchain-enabled data storage, analytics, and related services for the drone industry, planned as a software-as-a-service platform. Potential users include regulators, insurers, and drone pilots. The company targeted the first-half of 2020 to release “Black Box by Red Cat,” while cautioning that timing was not assured. It reported no revenue since inception.
In May 2019, the company completed a share exchange with TimeFireVR, changed its name from TimeFire VR to Red Cat Holdings in July, and changed its fiscal year-end to April 30 in August. The transaction was accounted for as a reverse merger, with Red Cat Propware as the accounting acquirer. The company also effected a 1-for-1,200 reverse stock split.
Financial performance and position
| Metric | Three months ended Oct. 31 | Six months ended Oct. 31 |
|---|---|---|
| Revenue | $0 in 2019 and 2018 | $0 in 2019 and 2018 |
| Research and development | $76,724; prior year $112,096 | $262,419; prior-year statement $219,264 |
| General and administrative | $139,397; prior year $45,785 | $275,204; prior year $84,567 |
| Net loss | $216,121; prior year $157,881 | $537,623; prior year $303,831 |
| Loss per share, basic and diluted | $0.01; prior year $0.88 | $0.06; prior year $1.70 |
The company had no revenue, so operating margins are not meaningful. No income tax provision was recorded. Six-month operating cash use was $415,848, investing cash provided was $24,704, and financing cash provided was $152,239; net cash decreased by $238,905. Cash at October 31 was $264,533, down from $503,438 at April 30.
At October 31, current assets were $289,533 and current liabilities were $222,957, yielding reported working capital of $66,576. Liabilities included $60,895 of accounts payable, $9,823 of accrued expenses, and $152,239 of common stock to be issued. Total assets were $382,583; stockholders’ equity was $159,626. The company reported no debt on the October 31 balance sheet, but subsequently issued convertible notes described below.
Material changes, outlook, and risks
- Quarterly net loss rose from $157,881 to $216,121. R&D expense fell 32%, while G&A increased 204%; management attributed higher G&A primarily to professional services associated with operating as a public company.
- For the six-month period, net loss increased from $303,831 to $537,623. Management cited higher payroll costs in R&D and increased professional services related to the reverse merger and public-company transition. It expected costs and losses to rise as it prepared to launch its first product.
- Management stated that available cash was insufficient for the next 12 months and that additional capital would be required. The filing identifies substantial doubt about the company’s ability to continue as a going concern, citing recurring losses, operating cash outflows, no revenue, and dependence on financing or future sales. Management’s proposed responses included raising capital, launching the product, and pursuing complementary revenue-generating acquisitions; success was not assured.
- After quarter-end, the company issued notes totaling $450,000: $300,000 in November and $150,000 in December 2019, including $150,000 from a director and the CEO. The notes mature in two years, bear 12% interest, and are convertible at the holder’s option. Before a qualifying equity offering of at least $3 million, conversion is based on the 30-day volume-weighted average price; after such an offering, conversion is at 40% of the offering price. Early prepayment within one year carries a 112% principal repayment amount. These are subsequent events, not October 31 balance-sheet debt.
- In September 2019, the company received $152,239 from warrant exercises; required paperwork was not completed until November, and shares were expected to be issued in December. The amount was therefore shown as common stock to be issued at October 31.
- Disclosure controls and procedures were deemed ineffective as of October 31. Management cited inadequate segregation of duties and lack of independent review of non-routine transactions and financial statements; it engaged a financial consultant in November to assist with review.
- The filing reported no pending material legal proceedings and no off-balance-sheet arrangements. It also disclosed $93,050 of acquisition goodwill, subject to impairment testing.
Key facts for investors to verify
- Whether the product launched on the targeted schedule and whether it generated meaningful revenue after the reporting period.
- Cash runway, subsequent financing needs, and the terms and potential dilution from the $450,000 of convertible notes and outstanding convertible preferred shares and warrants.
- Whether the disclosed ineffective controls were remediated and whether subsequent financial reporting received independent review.
- The six-month 2018 R&D comparison is inconsistent: the financial statements report $219,264, while MD&A reports $219,764. Confirm the correct comparative amount.
- Whether goodwill remains recoverable and whether the company’s financing, product-launch, and going-concern plans were successful.