Red Cat (RCAT) - 2021 Q4 - Annual Report

Part I Business The company provides drone products and solutions, focusing on FPV systems, expanding via acquisitions and a SaaS platform - The company's business is centered on providing products, services, and solutions to the drone industry, with a particular emphasis on drones piloted with wearable display devices (FPV)[26] - Red Cat has expanded its operations through several key acquisitions: Rotor Riot (January 2020), Fat Shark (November 2020), Skypersonic (May 2021), and has a pending merger agreement with Teal Drones (July 2021)[18][19][21][23] - The company sells FPV flight systems, cameras, transmitters, and goggles through its subsidiaries Rotor Riot and Fat Shark. Prior to the Fat Shark acquisition, approximately 50% of revenue was from reselling and 50% from its own branded products[28] - A key part of the business strategy is the development of "Dronebox," a blockchain-based SaaS platform for secure drone data storage, analytics, and reporting, targeting fleet operators, insurance companies, and government entities[32][33] - The company faces significant competition from market leader DJI, which holds over 70% of the global civilian drone market share. Red Cat competes by leveraging its strong brand presence on social media, including a Rotor Riot YouTube channel with over 192,000 subscribers[36] - The company is heavily reliant on Chinese suppliers, with 68% of Rotor Riot's inventory purchased directly from China. These imports are subject to U.S. tariffs ranging from 2% to 25%, which increases costs and reduces profit margins[38] Research and Development Expenses | Fiscal Year Ended April 30 | R&D Costs (excluding stock-based compensation) ($) | | :--- | :--- | | 2021 | $516,084 | | 2020 | $488,990 | Risk Factors The company faces multiple risks including capital needs, competition, supply chain issues, and regulatory compliance - The company has a history of net losses, accumulating approximately $15.8 million in losses as of April 30, 2021, and will require additional capital to fund its expanding operations[47][50] - The drone industry is highly competitive, with major players like DJI, and the company faces competition from larger entities with greater financial, marketing, and R&D resources[58][59] - Significant reliance on Chinese suppliers for components exposes the company to supply chain disruptions, long lead times, and the financial impact of U.S. tariffs on Chinese imports[67][108][109] - The business is subject to extensive and evolving government regulations from bodies like the FAA and FCC, which could increase compliance costs or force product changes[52][53][54] - Management holds significant voting control, with the CEO owning approximately 26% and all officers and directors collectively owning about 32% of the outstanding common stock, which could influence corporate actions[134] - The COVID-19 pandemic has adversely impacted operations, sales, and supply chains, causing disruptions, delays, and increased prices for supplies[147] Unresolved Staff Comments The company reports that it has no unresolved staff comments - There are no unresolved staff comments as of the report date[150] Properties The company leases its office and warehouse facilities in Puerto Rico, Florida, and Grand Cayman, which are deemed adequate - The company leases its corporate headquarters in Puerto Rico for $2,000/month, office/warehouse space in Orlando, FL for $4,268/month, and office space in Grand Cayman for $3,450/month[151] Legal Proceedings The company reports that it is not a party to any pending legal proceedings - There are no pending legal proceedings to which the company is a party[152] Mine Safety Disclosures The company reports that there are no mine safety disclosures - Not applicable[153] Part II Market for Registrant's Common Equity, Related Stockholder Matters and Issuer Purchases of Equity Securities The company's common stock trades on Nasdaq, has 587 stockholders, has never paid dividends, and details its equity plan - Common stock began trading on the Nasdaq Capital Market under the symbol "RCAT" on April 30, 2021[156] - As of August 9, 2021, there were 587 stockholders of record[157] - The company has never paid dividends and does not plan to in the foreseeable future[158] Equity Compensation Plan Information as of April 30, 2021 | Plan category | Number of securities to be issued upon exercise (shares) | Weighted-average exercise price ($) | Number of securities remaining available for future issuance (shares) | | :--- | :--- | :--- | :--- | | Equity compensation plans approved by security holders | 3,197,475 | $1.79 | 5,552,525 | Selected Financial Data As a smaller reporting company, Red Cat Holdings, Inc. is not required to provide this information - The company is not required to provide selected financial data as it qualifies as a smaller reporting company[164] Management's Discussion and Analysis of Financial Condition and Results of Operations Acquisitions significantly shaped the company's FY2021 financials, boosting revenue but widening net loss, with subsequent capital raises addressing liquidity and going concern Results of Operations FY2021 revenues surged due to acquisitions, but net loss significantly expanded from operating costs and non-cash derivative expenses Comparison of Operations for Fiscal Years Ended April 30 | Metric | 2021 ($) | 2020 ($) | Change (%) | | :--- | :--- | :--- | :--- | | Revenues | $4,999,517 | $403,940 | +1137.7% | | Cost of Goods Sold | $3,929,832 | $325,379 | +1107.8% | | Gross Margin | $1,069,685 | $78,561 | +1261.6% | | Operating Expenses | $5,946,295 | $1,708,521 | +248.0% | | Operating Loss | ($4,876,610) | ($1,629,960) | +199.2% | | Other Expense (Income) | $8,359,565 | ($28,029) | N/A | | Net Loss | ($13,236,175) | ($1,601,931) | +726.2% | - The significant increase in revenue for FY 2021 is attributed to the acquisitions of Rotor Riot (January 2020) and Fat Shark (November 2020). Rotor Riot and Fat Shark contributed approximately 44% and 56% of revenues, respectively[173] - Other Expense for FY 2021 was $8.36 million, a stark contrast to Other Income of $28,029 in FY 2020. This expense was primarily driven by derivative liability charges related to convertible debentures and warrants issued in October 2020 and January 2021[180] Liquidity and Capital Resources The company had a working capital deficit, but significantly improved liquidity post-year-end through public offerings Working Capital as of April 30, 2021 | Component | Amount ($) | | :--- | :--- | | Current Assets | $1,640,010 | | Current Liabilities | $4,674,070 | | Working Capital | ($3,034,060) | - The company has a history of net losses and has funded operations through private offerings. It has raised significant capital post-fiscal year end[186] - In May 2021, a common stock offering raised gross proceeds of $16 million[186][198] - In July 2021, a common stock offering raised gross proceeds of $60 million[186][200] Going Concern Auditors expressed substantial doubt about the company's going concern due to recurring losses, which management plans to address with capital raises - The independent auditor's report for the fiscal year ended April 30, 2021, includes an explanatory paragraph raising substantial doubt about the company's ability to continue as a going concern[202][224] - Key factors contributing to the going concern doubt are recurring net losses, negative operating cash flows, and an accumulated deficit of approximately $15.8 million as of April 30, 2021[202][203] - Management is addressing these concerns through capital raised in public offerings in May 2021 ($16M gross) and July 2021 ($60M gross), which are intended to fund operations and growth initiatives[204][257] Financial Statements and Supplementary Data FY2021 consolidated financial statements reflect significant changes from acquisitions, resulting in increased assets, liabilities, a substantial net loss, and a going concern qualification Consolidated Balance Sheet Highlights (as of April 30) | Account | 2021 ($) | 2020 ($) | | :--- | :--- | :--- | | Cash | $277,347 | $236,668 | | Total Current Assets | $1,640,010 | $318,338 | | Goodwill | $8,017,333 | $2,466,073 | | Total Assets | $11,693,365 | $2,808,264 | | Total Current Liabilities | $4,674,070 | $829,266 | | Warrant derivative liability | $2,812,767 | $0 | | Total Liabilities | $6,427,070 | $1,279,266 | | Total Stockholders' Equity | $5,266,295 | $1,528,998 | Consolidated Statement of Operations Highlights (for the year ended April 30) | Account | 2021 ($) | 2020 ($) | | :--- | :--- | :--- | | Revenues | $4,999,517 | $403,940 | | Gross Margin | $1,069,685 | $78,561 | | Operating Loss | ($4,876,610) | ($1,629,960) | | Derivative expense | $4,630,288 | $0 | | Net Loss | ($13,236,175) | ($1,601,931) | | Loss per share | ($0.56) | ($0.12) | Consolidated Cash Flow Highlights (for the year ended April 30) | Account | 2021 ($) | 2020 ($) | | :--- | :--- | | Net cash used in operating activities | ($1,399,001) | ($811,584) | | Net cash (used in) provided by investing activities | ($48,368) | $46,327 | | Net cash provided by financing activities | $1,488,048 | $498,487 | - The auditor's report contains a paragraph expressing substantial doubt about the company's ability to continue as a going concern due to recurring losses and negative cash flows from operations[224] Changes in and Disagreements with Accountants on Accounting and Financial Disclosure The company reports that there were no changes in or disagreements with its accountants on any matter of accounting principles or practices, financial statement disclosure, or auditing scope or procedure - There were no disagreements with accountants on accounting and financial disclosure[325] Controls and Procedures This section addresses the company's disclosure controls and procedures Other Information This section provides additional information not covered elsewhere in the report Part III Directors, Executive Officers, and Corporate Governance The company's leadership includes key executives and a five-member Board with independent members and established committees - The executive team includes Jeffrey M. Thompson (CEO), Allan Evans (COO), and Joseph Hernon (CFO)[326] - The Board of Directors has five members: Jeffrey M. Thompson, Nicolas Liuzza, Jr., Patrick T. Mitchell, Jonathan Read, and Joseph Freedman[326] - The Board has determined that all directors are independent except for CEO Jeffrey M. Thompson[338] - The Board has three standing committees: Audit (Nicholas Liuzza, Jonathan Read), Compensation (Joseph Freedman, Nicholas Liuzza), and Governance and Nominating (Joseph Freedman, Nicholas Liuzza)[340][344][348] - Several late Section 16(a) filings were reported for the fiscal year, involving multiple directors and officers including Allan Evans, Jeffrey Thompson, and Joseph Freedman[361] Executive Compensation FY2021 executive compensation included significant stock option awards and employment agreements for key executives Summary Compensation Table (Fiscal Year 2021) | Name and Principal Position | Salary ($) | Option Awards ($) | Total ($) | | :--- | :--- | :--- | :--- | | Jeffrey Thompson, CEO | $167,334 | $2,038,368 | $2,205,702 | | Joseph Hernon, CFO | $125,500 | $0 | $125,500 | - CEO Jeffrey Thompson's employment agreement provides for a base salary of $248,000, an annual bonus up to 200% of base salary, and includes clawback provisions[377][378][379] - CFO Joseph Hernon's employment agreement provides for a base salary equal to 75% of the CEO's salary and an annual bonus up to 150% of his base salary[369] - Fat Shark CEO Allan Evans' employment agreement includes a base salary equal to 70% of the Red Cat CEO's salary and a grant of 1,000,000 shares of common stock with performance and time-based vesting conditions[383][384] Security Ownership of Certain Beneficial Owners and Management and Related Stockholder Matters Executive officers and directors collectively owned 32.3% of common stock, with the CEO holding 26.0% Security Ownership of Beneficial Owners (as of August 9, 2021) | Name of Beneficial Owner | Percentage of Beneficial Ownership (%) | | :--- | :--- | | Officers & Directors | | | Jeffrey Thompson (CEO) | 26.0% | | All executive officers and directors as a group (7 persons) | 32.3% | | Other 5% Holders | | | Gregory French | 10.0% | | Empery Asset Management, LP | 6.2% | | CVI Investments, Inc. | 5.2% | | Sabby Volatility Warrant Master Fund, Ltd | 5.3% | Certain Relationships and Related Transactions, and Director Independence The company engaged in related-party transactions, primarily convertible note financings with directors and the CEO - Director Nicholas Liuzza, Jr. participated in convertible note financings in December 2019 ($125,000), October 2020 ($300,000), and January 2021 ($100,000). All notes were subsequently converted to common stock[409][411][415][416] - CEO Jeffrey Thompson participated in a convertible note financing in December 2019 for $25,000, which was later converted to common stock[409][410] - Director Joseph Freedman participated in a convertible note financing in January 2021 for $50,000, which was converted to common stock in March 2021[417][418] - Upon his appointment as a director on January 11, 2021, Joseph Freedman was granted a ten-year option to purchase 100,000 shares of common stock[413] Principal Accounting Fees and Services For FY2021, the company incurred $116,500 in total fees from its principal accountant, including $86,400 for audit services, all pre-approved Accountant Fees Billed | Fee Type | April 30, 2021 ($) | April 30, 2020 ($) | | :--- | :--- | :--- | | Audit Fees | $86,400 | $94,800 | | Audit-Related Fees | — | — | | Tax Fees | — | — | | All Other Fees | $30,100 | — | - The Audit Committee pre-approves all services provided by the principal accountant, BF Borgers, CPA P.C.[425] Part IV Exhibits, Financial Statement Schedules This section lists all exhibits filed with the Form 10-K, including underwriting, merger, acquisition, and employment agreements, along with corporate governance documents - Key exhibits filed include underwriting agreements from the April and July 2021 offerings[428] - Acquisition and merger agreements for Rotor Riot, Skypersonic, and Teal Drones are included as exhibits[428] - Employment agreements for CEO Jeffrey Thompson, CFO Joseph Hernon, and a consulting agreement for Director Joseph Freedman are filed as exhibits[429] Form 10-K Summary This section is not applicable - Not applicable[430]