Red Cat (RCAT) - 2024 Q2 - Quarterly Report

PART I. FINANCIAL INFORMATION Financial Statements (unaudited) Unaudited Q2 FY2024 financial statements reveal increased revenue from continuing operations, driven by the Enterprise segment, alongside significant net losses, cash outflow, and a decrease in total assets, with the Consumer segment now classified as discontinued operations Consolidated Balance Sheets As of October 31, 2023, total assets decreased to $50.6 million from $60.2 million, primarily due to reduced cash and marketable securities, resulting in a decline in total stockholders' equity to $45.9 million Consolidated Balance Sheet Highlights (Unaudited) | Account | October 31, 2023 | April 30, 2023 | | :--- | :--- | :--- | | Assets | | | | Cash | $1,408,977 | $3,173,649 | | Marketable securities | $2,615,289 | $12,814,038 | | Total current assets | $23,262,672 | $32,175,012 | | Goodwill | $17,012,832 | $17,012,832 | | Total Assets | $50,606,644 | $60,193,090 | | Liabilities & Equity | | | | Total current liabilities | $4,405,265 | $4,760,616 | | Total liabilities | $4,731,769 | $5,583,465 | | Total stockholders' equity | $45,874,875 | $54,609,625 | Consolidated Statements of Operations Revenues from continuing operations significantly increased for the three and six months ended October 31, 2023, driven by the Enterprise segment, despite the company continuing to report substantial operating and net losses Three Months Ended October 31, 2023 vs 2022 (Continuing Operations) | Metric | Q2 FY2024 (ended Oct 31, 2023) | Q2 FY2023 (ended Oct 31, 2022) | Change | | :--- | :--- | :--- | :--- | | Revenues | $3,930,868 | $747,612 | +425.8% | | Gross Margin | $1,200,582 | $123,851 | +869.4% | | Operating Loss | ($4,559,641) | ($6,350,789) | -28.2% | | Net Loss from Continuing Operations | ($5,081,817) | ($5,830,982) | -12.8% | | Loss per Share (Continuing) | ($0.09) | ($0.11) | N/A | Six Months Ended October 31, 2023 vs 2022 (Continuing Operations) | Metric | H1 FY2024 (ended Oct 31, 2023) | H1 FY2023 (ended Oct 31, 2022) | Change | | :--- | :--- | :--- | :--- | | Revenues | $5,678,997 | $1,874,163 | +203.0% | | Gross Margin | $1,375,247 | $205,971 | +567.7% | | Operating Loss | ($9,572,676) | ($9,829,764) | -2.6% | | Net Loss from Continuing Operations | ($10,649,592) | ($9,423,184) | +13.0% | Consolidated Statements of Cash Flows Net cash used in continuing operations increased to $11.2 million for the six months ended October 31, 2023, partially offset by $10.1 million from investing activities, leading to an overall $1.8 million decrease in cash Cash Flow Summary (Six Months Ended October 31) | Cash Flow Activity | 2023 | 2022 | | :--- | :--- | :--- | | Net cash used in operating activities (continuing) | ($11,240,359) | ($9,527,472) | | Net cash provided by investing activities (continuing) | $10,065,641 | $11,960,901 | | Net cash used in financing activities (continuing) | ($286,206) | ($928,826) | | Net cash used in discontinued operations | ($384,094) | ($4,006,667) | | Net decrease in Cash | ($1,845,018) | ($2,502,064) | Notes to Consolidated Financial Statements Notes detail the company's business structure, the Consumer segment's classification as discontinued operations, capital raises, and a goodwill impairment, with management concluding recent financing alleviates going concern doubts - The company is organized into Enterprise and Consumer segments, with the Enterprise segment focused on military and government agencies, and the Consumer segment, which is being sold, catering to hobbyists[18][53] - In November 2022, the company agreed to sell its Consumer segment (Rotor Riot and Fat Shark) to Unusual Machines, Inc. for $20 million, consisting of cash and securities, with the transaction pending the buyer's successful IPO[20][106][107] - The company recognized a goodwill impairment charge of $2,826,918 in April 2023 related to the Skypersonic acquisition, as its technology was refocused for military applications and consolidated into Teal Drones[63] - Subsequent to the quarter end, on December 11, 2023, the company closed a common stock offering, generating net proceeds of approximately $8.4 million[111] - Management concluded that recent positive developments, including accelerated revenues and the December 2023 equity offering, alleviate substantial doubt about the company's ability to continue as a going concern for the next twelve months[54] Management's Discussion and Analysis of Financial Condition and Results of Operations Management attributes revenue growth to the Teal 2 drone launch and improved gross margins, while increased R&D expenses persist; recent capital raises, including an $8.4 million stock offering, are crucial for liquidity and addressing prior going concern doubts - The company's strategic plan involves focusing efforts and capital on the military and defense sector through its Enterprise segment, leading to the decision to sell the Consumer segment[120] - The company has identified substantial doubt about its ability to continue as a going concern due to historical unprofitability and increasing net losses[156] - A stock offering on December 11, 2023, generated net proceeds of approximately $8.4 million, which is a key factor in addressing liquidity concerns[118] Results of Operations - Continuing Operations Continuing operations saw over four-fold revenue growth to $3.9 million for the quarter, driven by Teal 2 drone sales, with improved gross margins and reduced operating loss, though the six-month net loss increased due to higher R&D and sales expenses Continuing Operations Performance (Three Months Ended Oct 31) | Metric | 2023 | 2022 | Change | | :--- | :--- | :--- | :--- | | Revenues | $3,930,868 | $747,612 | +425.8% | | Gross Margin % | 30.5% | 16.6% | +13.9 pts | | Operating Loss | ($4,559,641) | ($6,350,789) | -28.2% | - The increase in revenue is primarily related to higher product sales following the launch of the Teal 2 drone in April 2023[123][137] - Research and development expenses increased by 57% for the quarter and 82% for the six-month period, reflecting increased efforts in developing new products[126][140] Results of Discontinued Operations The discontinued Consumer segment reported increased revenues but negative gross margins for the quarter due to a significant inventory write-off, leading to a wider net loss for both the three and six-month periods - Fat Shark's gross margin was severely impacted by a $317,155 charge to write-off excess inventory of its Dominator product due to declining sales volumes[134][148] Discontinued Operations Performance (Three Months Ended Oct 31) | Metric | 2023 | 2022 | Change | | :--- | :--- | :--- | :--- | | Revenues | $1,056,932 | $782,850 | +35.0% | | Gross Margin | ($97,268) | $109,804 | -188.6% | | Net Loss | ($599,511) | ($413,495) | +45.0% | Liquidity and Capital Resources As of October 31, 2023, the company held $4.0 million in cash and marketable securities, but recurring losses led to substantial doubt about going concern, which management believes is mitigated by an $8.4 million equity offering in December 2023 - The company held $4,024,266 in cash and marketable securities as of October 31, 2023[154] - Management has concluded there is substantial doubt about the Company's ability to continue as a going concern due to its history of unprofitability and increasing net losses[156] - The company will require additional liquidity to continue its operations and meet its financial obligations for the next twelve months[156] Quantitative and Qualitative Disclosures about Market Risk As a smaller reporting company, Red Cat Holdings, Inc. is not required to provide this information - The company is a smaller reporting company and is not required to provide information for this item[173] Controls and Procedures Management, including the CEO and CFO, evaluated the company's disclosure controls and procedures as of October 31, 2023, and concluded that these controls and procedures were effective, with no material changes in internal control over financial reporting during the quarter - The CEO and CFO concluded that the company's disclosure controls and procedures were effective as of October 31, 2023[176] - No material changes to the internal control over financial reporting occurred during the six months ended October 31, 2023[177] PART II. OTHER INFORMATION Legal Proceedings The company reports no material adverse legal proceedings, though a pending action against Teal Drones seeks over $1 million for alleged breach of contract, which the company is vigorously defending - A pending legal action has been filed against Teal Drones and the Company, with the plaintiff seeking over $1 million in damages for claims including breach of contract and unlawful conversion of shares[110] - The company does not believe there are any pending legal proceedings that will have a material adverse effect on its business[108] Risk Factors As a smaller reporting company, Red Cat Holdings, Inc. is not required to provide the information for this item, and refers to its Annual Report on Form 10-K for the year ended April 30, 2023, for its most recent risk factor disclosures - The company is a smaller reporting company and is not required to provide information for this item[181] Unregistered Sales of Equity Securities, Use of Proceeds, and Issuer Purchases of Equity Securities The company reported no unregistered sales of equity securities, use of proceeds, or issuer purchases of equity securities for the period - None reported for the period[182] Other Information During the six months ended October 31, 2023, none of the company's directors or executive officers adopted or terminated any Rule 10b5-1 trading plans or any non-Rule 10b5-1 trading arrangements - No directors or executive officers adopted or terminated any Rule 10b5-1 trading plans during the period[184] Exhibits This section lists the exhibits filed with the Form 10-Q, including the ATM Sales Agreement, amendments to agreements, and officer certifications as required by the Sarbanes-Oxley Act