Red Cat (RCAT) - 2023 Q2 - Quarterly Report

PART I. FINANCIAL INFORMATION This section presents the company's unaudited consolidated financial statements, management's analysis of financial condition, and disclosures on market risk and internal controls Item 1. Financial Statements The unaudited consolidated financial statements for the period ended October 31, 2022, show a significant increase in net loss and operating expenses, primarily driven by the full consolidation of the Teal Drones acquisition Consolidated Balance Sheets As of October 31, 2022, total assets decreased to $75.0 million from $85.1 million, primarily due to reduced cash and marketable securities, while stockholders' equity also declined Consolidated Balance Sheet Highlights (Unaudited) | Balance Sheet Item | Oct 31, 2022 | Apr 30, 2022 | | :--- | :--- | :--- | | Cash | $1,582,751 | $4,084,815 | | Marketable securities | $31,302,888 | $44,790,369 | | Total current assets | $44,816,972 | $55,653,297 | | Goodwill | $19,839,750 | $25,138,750 | | TOTAL ASSETS | $75,044,382 | $85,078,625 | | Total current liabilities | $4,521,287 | $5,439,421 | | Total long term liabilities | $1,295,824 | $1,723,532 | | Total stockholders' equity | $69,227,271 | $77,915,672 | | TOTAL LIABILITIES AND STOCKHOLDERS' EQUITY | $75,044,382 | $85,078,625 | Consolidated Statements Of Operations For the three and six months ended October 31, 2022, revenues were $1.5 million and $4.6 million, respectively, with net losses significantly increasing to $6.2 million and $10.1 million due to higher operating expenses from recent acquisitions Consolidated Statements of Operations Summary (Unaudited) | Metric | Three Months Ended Oct 31, 2022 | Three Months Ended Oct 31, 2021 | Six Months Ended Oct 31, 2022 | Six Months Ended Oct 31, 2021 | | :--- | :--- | :--- | :--- | :--- | | Revenues | $1,530,462 | $1,863,239 | $4,599,733 | $3,259,990 | | Gross Margin | $233,655 | $152,582 | $591,282 | $254,986 | | Total operating expenses | $7,005,989 | $2,912,720 | $11,062,112 | $4,694,736 | | Operating loss | $(6,772,334) | $(2,760,138) | $(10,470,830) | $(4,439,750) | | Net loss | $(6,244,477) | $(2,740,601) | $(10,056,076) | $(4,298,373) | | Loss per share | $(0.12) | $(0.05) | $(0.19) | $(0.10) | Consolidated Statements of Stockholders' Equity Stockholders' equity decreased from $77.9 million at April 30, 2022, to $69.2 million at October 31, 2022, primarily due to the $10.1 million net loss for the six-month period - The accumulated deficit increased from $(27,499,056) at April 30, 2022, to $(37,555,132) at October 31, 2022, reflecting the net losses incurred during the period[13] Consolidated Statements of Cash Flows For the six months ended October 31, 2022, net cash used in operating activities significantly increased to $13.5 million, leading to a decrease in the company's cash balance from $4.1 million to $1.6 million Cash Flow Summary (Unaudited) | Cash Flow Activity | Six Months Ended Oct 31, 2022 | Six Months Ended Oct 31, 2021 | | :--- | :--- | :--- | | Net cash used in operating activities | $(13,534,139) | $(8,567,507) | | Net cash provided by (used in) investing activities | $11,960,901 | $(48,127,938) | | Net cash (used in) provided by financing activities | $(928,826) | $67,977,856 | | Net (decrease) increase in Cash | $(2,502,064) | $11,282,411 | | Cash, beginning of period | $4,084,815 | $277,347 | | Cash, end of period | $1,582,751 | $11,559,758 | Notes to Consolidated Financial Statements The notes detail the company's business structure, recent acquisitions, accounting policies, and segment-level financial performance, including the subsequent sale of the Consumer segment - The company operates through four wholly-owned subsidiaries: Teal Drones, Fat Shark, Rotor Riot, and Skypersonic, providing products and services to the drone industry[20] - Effective May 1, 2022, the company organized its business into two segments: Enterprise (Teal Drones, Skypersonic) and Consumer (Rotor Riot, Fat Shark)[61] Segment Performance (Six Months Ended Oct 31, 2022) | Segment | Revenues | Gross Margin | Operating Loss | | :--- | :--- | :--- | :--- | | Enterprise | $1,874,163 | $205,971 | $(5,071,006) | | Consumer | $2,725,570 | $385,311 | $(641,066) | - Subsequent to the quarter end, on November 21, 2022, the company entered into an agreement to sell its Consumer segment (Rotor Riot and Fat Shark) to Unusual Machines, Inc. for $18 million in cash and securities[122] Item 2. Management's Discussion and Analysis of Financial Condition and Results of Operations Management attributes the significant increase in operating expenses and net loss to the Teal Drones acquisition, with plans to divest the Consumer segment and focus on military and defense, believing current cash resources are sufficient for the next twelve months - The analysis of results is significantly impacted by the acquisition of Teal Drones on August 31, 2021, which is the company's largest operating subsidiary, leading to a more than tripled headcount and expanded facilities since the acquisition[136] - The company plans to sell its Consumer segment to Unusual Machines for $18 million to focus its efforts and capital on the military and defense sectors, where it sees greater long-term value creation opportunities[135] Year-over-Year Comparison (Six Months Ended Oct 31) | Metric | 2022 | 2021 | Change (%) | | :--- | :--- | :--- | :--- | | Revenues | $4,599,733 | $3,259,990 | +41% | | Gross Margin | $591,282 | $254,986 | +132% | | Operating Expenses | $11,062,112 | $4,694,736 | +136% | | Net Loss | $(10,056,076) | $(4,298,373) | +134% | - As of October 31, 2022, the company had cash and marketable securities totaling $32.9 million and believes these resources are sufficient to fund operations for at least the next twelve months[162][165] Item 3. Quantitative and Qualitative Disclosures about Market Risk As a smaller reporting company, the company is not required to provide quantitative and qualitative disclosures about market risk in this report - As a smaller reporting company, Red Cat Holdings, Inc. is not required to provide quantitative and qualitative disclosures about market risk[171] Item 4. Controls and Procedures Management concluded that the company's disclosure controls and procedures were effective as of October 31, 2022, with no material changes to internal control over financial reporting during the quarter - Based on an evaluation, the Principal Executive Officer and Principal Financial Officer concluded that the company's disclosure controls and procedures were effective as of October 31, 2022[172] - There were no changes in internal controls over financial reporting during the period that have materially affected, or are reasonably likely to materially affect, internal control over financial reporting[173] PART II. OTHER INFORMATION This section covers legal proceedings, risk factors, unregistered equity sales, defaults, mine safety disclosures, other information, and exhibits Item 1. Legal Proceedings The company is involved in two legal proceedings: a lawsuit against its subsidiary Teal Drones for breach of contract and stock conversion, and a lawsuit filed by the company against Autonodyne LLC for alleged breach of an exclusive license agreement - A lawsuit was filed against Teal Drones, Inc. by Robert Stang alleging breach of contract and unlawful conversion of shares, seeking damages in excess of $1 million, with the company intending to pursue indemnification under the Teal acquisition agreement[175] - The company and Teal Drones filed a complaint against Autonodyne LLC and its founder, alleging breach of an exclusive license agreement[176] Item 1A. Risk Factors As a smaller reporting company, Red Cat is not required to provide risk factor information in its Form 10-Q, with detailed disclosures available in its Annual Report on Form 10-K - The company is a smaller reporting company and is not required to provide risk factor information in this report, with disclosures available in the Annual Report on Form 10-K filed on July 27, 2022[177] Item 2. Unregistered Sales of Equity Securities and Use of Proceeds There were no unregistered sales of equity securities during the reporting period that were not previously reported on a Form 8-K - No unregistered sales of equity securities occurred during the quarter that were not previously disclosed[178] Item 3. Defaults Upon Senior Securities The company reported no defaults upon senior securities - None[179] Item 4. Mine Safety Disclosures This item is not applicable to the company - Not applicable[180] Item 5. Other Information The company reported no other information for this item - None[180] Item 6. Exhibits The report lists several exhibits filed with the Form 10-Q, including certifications from the CEO and CFO as required by the Sarbanes-Oxley Act of 2002, and XBRL data files - Exhibits filed include CEO and CFO certifications (31.1, 31.2, 32.1, 32.2) and XBRL Instance Documents[182]