Red Cat (RCAT) - 2026 Q1 - Quarterly Report

PART I - FINANCIAL INFORMATION Financial Statements The company's financial statements show a significant increase in total assets driven by financing activities, a sharp decline in revenue, and a widening net loss Condensed Consolidated Balance Sheets Condensed Consolidated Balance Sheet Highlights (Unaudited) | Account | June 30, 2025 | December 31, 2024 | Change | | :--- | :--- | :--- | :--- | | Assets | | | | | Cash | $65,930,475 | $9,154,297 | +$56,776,178 | | Total current assets | $91,573,633 | $25,798,257 | +$65,775,376 | | Total Assets | $121,367,851 | $55,604,267 | +$65,763,584 | | Liabilities & Equity | | | | | Convertible notes payable | $19,434,004 | $0 | +$19,434,004 | | Total current liabilities | $24,129,516 | $4,178,650 | +$19,950,866 | | Total liabilities | $25,802,729 | $5,484,714 | +$20,318,015 | | Total stockholders' equity | $95,565,122 | $50,119,553 | +$45,445,569 | - The company's cash position increased dramatically from $9.2 million to $65.9 million, primarily due to financing activities[16] - Total assets more than doubled, while total liabilities increased nearly fivefold, mainly from the issuance of convertible notes[16] Condensed Consolidated Statements of Operations Condensed Consolidated Statements of Operations (Unaudited) | Metric | Three Months Ended June 30, 2025 | Three Months Ended June 30, 2024 | Six Months Ended June 30, 2025 | Six Months Ended June 30, 2024 | | :--- | :--- | :--- | :--- | :--- | | Revenues | $3,218,577 | $6,419,669 | $4,848,239 | $13,033,698 | | Gross Profit (Loss) | $375,054 | $267,804 | $(475,356) | $1,389,008 | | Operating Loss | $(12,646,547) | $(5,376,018) | $(25,124,746) | $(11,419,317) | | Net Loss from Continuing Operations | $(13,278,960) | $(8,160,019) | $(36,402,311) | $(13,567,642) | | Loss Per Share (Basic & Diluted) | $(0.15) | $(0.11) | $(0.41) | $(0.18) | - Revenues for the three and six months ended June 30, 2025, decreased by 50% and 63% respectively compared to the same periods in 2024[18] - Operating expenses more than doubled in both periods, driven by significant increases in R&D, sales & marketing, and general & administrative costs, leading to substantially higher operating and net losses[18] Condensed Consolidated Statements of Stockholders' Equity - Total stockholders' equity increased from $50.1 million at the end of 2024 to $95.6 million by June 30, 2025[21][22] - This increase was primarily driven by $71.8 million raised from public offerings and $4.8 million from the conversion of notes, which offset the $13.3 million net loss for the quarter[21][22] Condensed Consolidated Statements of Cash Flows Cash Flow Summary for the Six Months Ended June 30 (Unaudited) | Cash Flow Activity | 2025 | 2024 | | :--- | :--- | :--- | | Net cash used in operating activities | $(28,804,656) | $(6,569,510) | | Net cash (used in) provided by investing activities | $(579,626) | $912,937 | | Net cash provided by (used in) financing activities | $86,160,460 | $(297,819) | | Net increase (decrease) in Cash | $56,776,178 | $(6,149,361) | - The company's cash balance increased by $56.8 million in the first six months of 2025, driven by $86.2 million in cash from financing activities[24] - This influx from public offerings and convertible notes more than compensated for the $28.8 million cash used in operations[24] Notes to Unaudited Condensed Consolidated Financial Statements The notes detail key corporate events including acquisitions and divestitures, significant financing activities, and an updated going concern assessment - The company acquired substantially all assets of FlightWave Aerospace Systems Corporation for an aggregate purchase price of $14 million in company stock, treated as a business combination[50] - On February 16, 2024, the company sold its consumer segment (Rotor Riot and Fat Shark) to Unusual Machines, Inc (UMAC) for a total consideration valued at $20 million[55] - The company raised approximately $15 million in February 2025 through a Senior Convertible Promissory Note, followed by two direct offerings in April and June 2025 raising gross proceeds of approximately $30 million and $46.75 million, respectively[78][86][87] - Management has concluded that there is no longer substantial doubt about the company's ability to continue as a going concern due to recent capital raises and a major U.S. Army contract[49] - Subsequent to the quarter's end, the company obtained a contract with the U.S. Army to deliver up to 690 SRR Black Widow systems in July 2025[104] Management's Discussion and Analysis of Financial Condition and Results of Operations Management attributes the revenue decline and gross loss to a strategic manufacturing shift, while rising operating expenses were driven by acquisitions and investments Results of Operations Comparison of Six Months Ended June 30, 2025 and 2024 | Metric | Six Months 2025 | Six Months 2024 | Change (%) | | :--- | :--- | :--- | :--- | | Revenues | $4,848,239 | $13,033,698 | -63% | | Gross Profit (Loss) | $(475,356) | $1,389,008 | -134% | | R&D Expenses | $7,030,860 | $2,958,518 | +138% | | Sales & Marketing | $6,502,333 | $3,614,028 | +80% | | General & Admin | $11,116,197 | $5,822,780 | +91% | | Net Loss from Continuing Ops | $(36,402,311) | $(13,567,642) | +168% | - The decrease in revenue and gross profit is attributed to the company shifting its manufacturing focus from the Teal 2 to the Black Widow drone, which also resulted in inventory write-offs[117][118] - The surge in operating expenses was primarily due to increased headcount from the FlightWave acquisition and strategic investments in personnel to support the anticipated U.S. Army SRR contract[119][121] Liquidity and Capital Resources Liquidity Position as of June 30, 2025 | Metric | Amount | | :--- | :--- | | Cash | $65,930,475 | | Current Assets | $91,573,633 | | Current Liabilities | $24,129,516 | | Net Working Capital | $67,444,117 | - Cash provided by financing activities was $86.2 million for the six months ended June 30, 2025, a stark contrast to the $0.3 million used in the same period of 2024, reflecting proceeds from stock offerings and convertible notes[127] Critical Accounting Policies and Estimates - Management identifies several significant estimates critical to its financial statements, including purchase price accounting, impairment evaluation, inventory valuation, and fair value of convertible notes[131] Quantitative and Qualitative Disclosures About Market Risk As a "smaller reporting company," the company is not required to provide this information - As a "smaller reporting company," Red Cat Holdings, Inc. is exempt from the requirement to provide quantitative and qualitative disclosures about market risk[144] Controls and Procedures Management concluded that disclosure controls were ineffective as of June 30, 2025, due to a persistent material weakness in internal financial reporting controls - The CEO and CFO concluded that as of June 30, 2025, the company's disclosure controls and procedures were not effective[145] - A material weakness in internal control over financial reporting was identified, stemming from insufficient resources for adequate supervision and segregation of duties, and the lack of a formalized accounting policies manual[149] - Management is actively working to implement enhanced procedures and controls to address the identified material weakness[149][150] PART II - OTHER INFORMATION Legal Proceedings The company is involved in routine legal proceedings not expected to materially impact its financial condition - The company does not expect any pending legal proceedings to have a material adverse effect on its business, financial position, or cash flows[100][154] Risk Factors Key risks include potential asset foreclosure from secured debt, uncertainty in winning government contracts, and the identified material weakness in internal controls - A default on obligations to Lind, which are secured by company assets, could lead to foreclosure and liquidation of those assets, potentially requiring the company to cease operations[156] - The company's success is highly dependent on winning government contracts, which involves a lengthy, uncertain, and competitive process with substantial upfront costs[161] - The company has identified a material weakness in its internal control over financial reporting, which could result in an inability to accurately and timely report financial results and may erode investor confidence[165][167] - A significant portion of potential revenue is derived from U.S. Government contracts, which are subject to risks such as termination for convenience, funding cuts, and congressional appropriation delays[172][173][174] Unregistered Sales of Equity Securities and Use of Proceeds There were no unregistered sales of equity securities during the period - None[175] Defaults Upon Senior Securities There were no defaults upon senior securities during the period - None[177] Mine Safety Disclosures This item is not applicable to the company - Not applicable[178] Other Information No directors or officers adopted or terminated Rule 10b5-1 trading plans during the quarter - No directors or officers adopted or terminated Rule 10b5-1 trading plans during the quarter[178] Exhibits This section lists the exhibits filed with the Form 10-Q, including financing agreements and officer certifications - The report includes various exhibits, such as amendments to notes and warrants, securities purchase agreements, and certifications required by the Sarbanes-Oxley Act[178]