UNITED STATES

SECURITIES AND EXCHANGE COMMISSION

Washington, D.C. 20549

 

FORM 10-Q

 

 

	☑	QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934
		For the quarterly period ended January 31, 2024

 

or

 

	☐	TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934
		For the transition period from ___________ to ___________

 

Commission File Number: 000-31587

 

Red Cat Holdings, Inc.

(Exact name of registrant as specified in its charter)

 

Nevada		88-0490034
(State or other jurisdiction of incorporation or organization)		(I.R.S. Employer Identification No.)

 

 

15 Ave. Munoz Rivera, Ste 2200 San Juan, Puerto Rico		00901
(Address of principal executive offices)		(Zip Code)

 

(833) 373-3228

(Registrant's telephone number, including area code)

__________________________________

(Former name, former address and former fiscal year, if changed since last report)

 

Securities registered pursuant to Section 12(b) of the Act:

 

Title of each class		Trading Symbol(s)		Name of each exchange on which registered
Common Stock		RCAT		Nasdaq Capital Market

 

Indicate by check mark whether the registrant (1) has filed all reports required to be filed by Section 13 or 15(d) of the Securities Exchange Act of 1934 during the preceding 12 months (or for such shorter period that the registrant was required to file such reports), and (2) has been subject to such filing requirements for the past 90 days. Yes ☑  No ☐

 

Indicate by check mark whether the registrant has submitted electronically every Interactive Data File required to be submitted pursuant to Rule 405 of Regulation S-T (§232.405 of this chapter) during the preceding 12 months (or for such shorter period that the registrant was required to submit such files). Yes ☑  No ☐ 

 

Indicate by check mark whether the registrant is a large accelerated filer, an accelerated filer, a non-accelerated filer, a smaller reporting company, or an emerging growth company. See the definitions of "large accelerated filer," "accelerated filer," "smaller reporting company," and "emerging growth company" in Rule 12b-2 of the Exchange Act.

 

Large accelerated filer ☐	Accelerated filer ☐
Non-accelerated filer ☑	Smaller reporting company ☑
	Emerging growth company ☐

 

If an emerging growth company, indicate by check mark if the registrant has elected not to use the extended transition period for complying with any new or revised financial accounting standards provided pursuant to Section 13(a) of the Exchange Act. ☐

 

Indicate by check mark whether the registrant is a shell company (as defined in Rule 12b-2 of the Exchange Act). Yes ☐  No ☑ 

 

As of March 15, 2024, there were 74,281,520  shares of the registrant's common stock outstanding.

 

Red Cat Holdings, Inc. 

 

Form 10-Q

For the Quarterly Period Ended January 31, 2024

 

TABLE OF CONTENTS 

 

PART I.	FINANCIAL INFORMATION	Page
Item 1.	Financial Statements (unaudited)	3
	Consolidated Balance Sheets as of January 31, 2024 and April 30, 2023	3
	Consolidated Statements of Operations for the Three and Nine Months Ended January 31, 2024 and 2023	4
	Consolidated Statements Stockholders' Equity for the Three and Nine Months Ended January 31, 2024 and 2023	5
	Consolidated Statements of Cash Flows for the Nine Months Ended January 31, 2024 and 2023	6
	Notes to Consolidated Financial Statements	7
Item 2.	Management's Discussion and Analysis of Financial Condition and Results of Operations	24
Item 3.	Quantitative and Qualitative Disclosures about Market Risk	31
Item 4.	Controls and Procedures	31

 

PART II.	OTHER INFORMATION
Item 1.	Legal Proceedings	31
Item 1A.	Risk Factors	31
Item 2.	Unregistered Sales of Equity Securities, Use of Proceeds, and Issuer Purchases of Equity Securities	31
Item 3.	Defaults Upon Senior Securities	32
Item 4.	Mine Safety Disclosures	32
Item 5.	Other Information	32
Item 6.	Exhibits	32
SIGNATURES		33

 

 RED CAT HOLDINGS

Consolidated Balance Sheets

(Unaudited) 

		January 31,				April 30,
		2024				2023
ASSETS
Current assets
Cash		$	7,697,335			$	3,173,649
Marketable securities			—				12,814,038
Accounts receivable, net			5,091,724				719,862
Inventory			9,093,270				8,920,573
Other			2,798,293				1,263,735
Current assets of discontinued operations			3,261,136				5,283,155
Total current assets			27,941,758				32,175,012
Goodwill			17,012,832				17,012,832
Intangible assets, net			6,672,235				7,323,004
Property and equipment, net			2,477,601				2,650,358
Other			303,180				303,180
Operating lease right-of-use assets			453,416				620,307
Long-term assets of discontinued operations			456,177				108,397
Total long-term assets			27,375,441				28,018,078
TOTAL ASSETS		$	55,317,199			$	60,193,090
LIABILITIES AND STOCKHOLDERS' EQUITY
Current liabilities
Accounts payable		$	2,281,874			$	1,392,550
Accrued expenses			936,625				409,439
Debt obligations - short term			899,935				922,138
Customer deposits			52,296				155,986
Operating lease liabilities			297,435				281,797
Warrant derivative liability			285,384				588,205
Current liabilities of discontinued operations			474,439				1,010,501
Total current liabilities			5,227,988				4,760,616
Operating lease liabilities			194,727				379,466
Debt obligations - long term			—				401,569
Long-term liabilities of discontinued operations			321,771				41,814
Total long-term liabilities			516,498				822,849
Commitments and contingencies
Stockholders' equity
Series B preferred stock - shares authorized 4,300,000; outstanding 4,676 and 986,676			47				9,867
Common stock - shares authorized 500,000,000; outstanding 74,171,106 and 54,568,065			74,171				54,568
Additional paid-in capital			121,060,881				109,993,100
Accumulated deficit			(71,567,007	)			(54,586,793	)
Accumulated other comprehensive loss			4,621				(861,117	)
Total stockholders' equity			49,572,713				54,609,625
TOTAL LIABILITIES AND STOCKHOLDERS' EQUITY		$	55,317,199			$	60,193,090

 

 

See accompanying notes.  

  

RED CAT HOLDINGS

Consolidated Statements Of Operations

(Unaudited)

		Three months ended January 31,								Nine months ended January 31,
		2024				2023				2024				2023
Revenues		$	5,847,933			$	1,667,683			$	11,526,930			$	3,541,846
Cost of goods sold			4,746,282				1,764,612				9,050,032				3,432,804
Gross Margin			1,101,651				(96,929	)			2,476,898				109,042
Operating Expenses
Operations			527,447				663,668				1,675,795				3,131,789
Research and development			2,125,268				1,221,738				5,251,285				2,938,658
Sales and marketing			883,982				1,015,412				2,546,380				1,986,121
General and administrative			1,426,531				1,397,667				4,329,760				4,275,385
Stock based compensation			585,771				788,691				2,693,702				2,790,958
Total operating expenses			5,548,999				5,087,176				16,496,922				15,122,911
Operating loss			(4,447,348	)			(5,184,105	)			(14,020,024	)			(15,013,869	)
Other (income) expense
Change in fair value of derivative liability			(113,819	)			(157,575	)			(302,821	)			(751,397	)
Investment loss (income), net			160,340				(65,110	)			733,697				(257,244	)
Interest expense			15,507				28,667				57,060				96,839
Other, net			(320,043	)			345,836				330,965				657,040
Other (income) expense			(258,015	)			151,818				818,901				(254,762	)
Net loss from continuing operations			(4,189,333	)			(5,335,923	)			(14,838,925	)			(14,759,107	)
Loss from discontinued operations			(1,299,205	)			(330,079	)			(2,141,289	)			(962,971	)
Net loss		$	(5,488,538	)		$	(5,666,002	)		$	(16,980,214	)		$	(15,722,078	)
Loss per share - basic and diluted
Continuing operations		$	(0.08	)		$	(0.09	)		$	(0.27	)		$	(0.27	)
Discontinued operations			(0.02	)			(0.01	)			(0.04	)			(0.02	)
Loss per share - basic and diluted		$	(0.10	)		$	(0.10	)		$	(0.31	)		$	(0.29	)
Weighted average shares outstanding - basic and diluted			55,688,114				54,294,116				55,409,930				54,050,127

 

 

See accompanying notes.

 

 

RED CAT HOLDINGS

Consolidated Statements of Stockholders’ Equity

For the three and nine months ended January 31, 2024 and January 31, 2023

(Unaudited)

		Series B																Additional								Accumulated Other
		Preferred Stock								Common Stock								Paid-in				Accumulated				Comprehensive				Total
		Shares				Amount				Shares				Amount				Capital				Deficit				Income (Loss)				Equity
Balances, April 30, 2022			986,676			$	9,867				53,748,735			$	53,749			$	106,821,384				(27,499,056	)			(1,470,272	)		$	77,915,672
Stock based compensation			—				—				—				—				755,471				—				—				755,471
Vesting of restricted stock units			—				—				69,707				69				(84,145	)			—				—				(84,076	)
Unrealized gain on marketable securities			—				—				—				—				—				—				133,582				133,582
Currency translation adjustments			—				—				—				—				—				—				352				352
Net loss			—				—				—				—				—				(3,811,599	)			—				(3,811,599	)
Balances, July 31, 2022			986,676			$	9,867				53,818,442			$	53,818			$	107,492,710				(31,310,655	)			(1,336,338	)		$	74,909,402
Stock based compensation			—				—				—				—				1,246,796				—				—				1,246,796
Vesting of restricted stock units			—				—				411,097				411				(332,794	)			—				—				(332,383	)
Unrealized loss on marketable securities			—				—				—				—				—				—				(350,811	)			(350,811	)
Currency translation adjustments			—				—				—				—				—				—				(1,256	)			(1,256	)
Net loss			—				—				—				—				—				(6,244,477	)			—				(6,244,477	)
Balances, October 31, 2022			986,676			$	9,867				54,229,539			$	54,229			$	108,406,712				(37,555,132	)			(1,688,405	)		$	69,227,271
Stock based compensation			—				—				—				—				788,691				—				—				788,691
Vesting of restricted stock units			—				—				155,922				156				(3,508	)			—				—				(3,352	)
Unrealized gain on marketable securities			—				—				—				—				—				—				545,235				545,235
Currency translation adjustments			—				—				—				—				—				—				1,124				1,124
Net loss			—				—				—				—				—				(5,666,002	)			—				(5,666,002	)
Balances, January 31, 2023			986,676			$	9,867				54,385,461			$	54,385			$	109,191,895				(43,221,134	)			(1,142,046	)		$	64,892,967
Balances, April 30, 2023			986,676			$	9,867				54,568,065			$	54,568			$	109,993,100				(54,586,793	)			(861,117	)		$	54,609,625
Stock based compensation			—				—				—				—				911,606				—				—				911,606
Vesting of restricted stock units			—				—				155,476				155				(8,675	)			—				—				(8,520	)
Conversion of preferred stock			(982,000	)			(9,820	)			818,334				818				9,002				—				—				—
Unrealized gain on marketable securities			—				—				—				—				—				—				289,389				289,389
Currency translation adjustments			—				—				—				—				—				—				1,646				1,646
Net loss			—				—				—				—				—				(5,810,348	)			—				(5,810,348	)
Balances, July 31, 2023			4,676			$	47				55,541,875			$	55,541			$	110,905,033				(60,397,141	)			(570,082	)		$	49,993,398
Stock based compensation			—				—				—				—				1,196,325				—				—				1,196,325
Vesting of restricted stock units			—				—				54,786				55				(7,826	)			—				—				(7,771	)
Issuance of common stock through ATM facility, net			—				—				53,235				53				9,159				—				—				9,212
Unrealized gain on marketable securities			—				—				—				—				—				—				363,663				363,663
Currency translation adjustments			—				—				—				—				—				—				1,376				1,376
Net loss			—				—				—				—				—				(5,681,328	)			—				(5,681,328	)
Balances, October 31, 2023			4,676			$	47				55,649,896			$	55,649			$	112,102,691				(66,078,469	)			(205,043	)		$	45,874,875
Stock based compensation			—				—				—				—				585,771				—				—				585,771
Vesting of restricted stock units			—				—				118,210				119				(7,433	)			—				—				(7,314	)
Exercise of stock options			—				—				3,000				3				2,652				—				—				2,655
Public offering, net of $804,400 of issuance costs			—				—				18,400,000				18,400				8,377,200				—				—				8,395,600
Unrealized gain on marketable securities			—				—				—				—				—				—				211,113				211,113
Currency translation adjustments			—				—				—				—				—				—				(1,449	)			(1,449	)
Net loss			—				—				—				—				—				(5,488,538	)			—				(5,488,538	)
Balances, January 31, 2024			4,676			$	47				74,171,106			$	74,171			$	121,060,881				(71,567,007	)		$	4,621			$	49,572,713

 

 

See accompanying notes.

 

RED CAT HOLDINGS

Consolidated Statements of Cash Flows

(Unaudited)

		Nine months ended January 31,
		2024				2023
Cash Flows from Operating Activities
Net loss		$	(16,980,214	)		$	(15,722,078	)
Net loss from discontinued operations			(2,141,289	)			(962,971	)
Net loss from continuing operations			(14,838,925	)			(14,759,107	)
Adjustments to reconcile net loss to net cash from operations:
Stock based compensation - options			1,955,547				1,308,768
Stock based compensation - restricted units			738,155				1,482,190
Amortization of intangible assets			650,769				437,157
Realized loss from sale of marketable securities			851,986				106,225
Depreciation			357,289				169,748
Change in fair value of derivative			(302,821	)			(751,397	)
Changes in operating assets and liabilities
Accounts receivable			(4,371,862	)			(1,623,146	)
Inventory			(172,697	)			(3,243,110	)
Other			(1,534,558	)			(126,947	)
Operating lease right-of-use assets and liabilities			(2,210	)			25,786
Customer deposits			(103,690	)			(225,741	)
Accounts payable			889,324				1,008,430
Accrued expenses			528,759				(615,006	)
Net cash used in operating activities of continuing operations			(15,354,934	)			(16,806,150	)
Cash Flows from Investing Activities
Purchases of property and equipment			(184,532	)			(1,735,882	)
Proceeds from sale of marketable securities			12,826,217				24,282,117
Investment in SAFE agreement			—				(250,000	)
Net cash provided by investing activities of continuing operations			12,641,685				22,296,235
Cash Flows from Financing Activities
Proceeds from issuance of common stock:
Public offering, net			8,395,600				—
ATM facility, net			9,212				—
Payments under debt obligations			(423,772	)			(471,923	)
Payments of taxes related to equity transactions			(23,604	)			(594,454	)
Exercise of stock options			2,655				—
Proceeds from related party obligations			—				13,404
Payments under related party obligations			—				(40,057	)
Net cash provided by (used in) financing activities of continuing operations			7,960,091				(1,093,030	)
Discontinued operations
Operating activities			(781,482	)			(4,588,708	)
Investing activities			—				—
Financing activities			98,441				—
Net cash used in discontinued operations			(683,041	)			(4,588,708	)
Net increase (decrease) in Cash			4,563,801				(191,653	)
Cash, beginning of period			3,260,305				4,084,815
Cash, end of period			7,824,106				3,893,162
Less: Cash of discontinued operations			(126,771	)			(84,058	)
Cash of continuing operations, end of period			7,697,335				3,809,104
Cash paid for interest			57,963				97,005
Cash paid for income taxes			—				—
Non-cash transactions
Unrealized gain on marketable securities		$	864,165			$	328,006
Conversion of preferred stock into common stock		$	9,820			$	—
Shares withheld as payment of note receivable		$	—			$	18,449
Taxes related to net share settlement of equity awards		$	—			$	11,682

 

See accompanying notes. 

   

 

RED CAT HOLDINGS, INC.

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS

(Unaudited)

 

Our unaudited interim consolidated financial statements and accompanying notes are prepared in accordance with accounting principles generally accepted in the United States of America ("GAAP"). In the opinion of management, the unaudited interim consolidated financial statements reflect all adjustments of a normal recurring nature that are necessary for a fair presentation of the results for the interim periods presented. Interim results are not necessarily indicative of results for a full year. The information included in this Form 10-Q should be read in conjunction with the financial information included in the Annual Report on Form 10-K for the fiscal year ended April 30, 2023 of Red Cat Holdings, Inc. (the "Company" or “Red Cat”), filed with the Securities and Exchange Commission ("SEC") on July 27, 2023.

 

 

Note 1 – The Business

 

The Company was originally incorporated in February 1984. Since April 2016, the Company’s primary business has been to provide products, services, and solutions to the drone industry which it presently does through its four wholly owned operating subsidiaries. Beginning in January 2020, the Company expanded the scope of its drone products and services through four acquisitions, including: 

 

A.

In January 2020, the Company acquired Rotor Riot, a provider of First Person View (“FPV”) drones and equipment, primarily to consumers. The purchase price was $1,995,114.

 

B.

In November 2020, the Company acquired Fat Shark Holdings (“Fat Shark”), a provider of FPV video goggles to the drone industry. The purchase price was $8,354,076.

   

C.

In May 2021, the Company acquired Skypersonic which provides hardware and software solutions that enable drones to complete inspection services in locations where GPS is either denied or not available, yet still record and transmit data even while being operated from thousands of miles away. The purchase price was $2,791,012.

 

D.

In August 2021, the Company acquired Teal Drones (“Teal”), a leader in commercial and government Unmanned Aerial Vehicles (“UAV”) technology. The purchase price was $10,011,279.

 

Following the Teal acquisition in August 2021, we concentrated on integrating and organizing these businesses. Effective May 1, 2022, we established the Enterprise segment (“Enterprise”) and the Consumer segment (“Consumer”) to focus on the unique opportunities in each sector. Enterprise's initial strategy was to provide UAV's to commercial enterprises, and the military, to navigate dangerous military environments and confined industrial and commercial interior spaces. Subsequently, Enterprise narrowed its near-term attention on the military and other government agencies. Skypersonic's technology has been redirected to military applications and its operations consolidated into Teal. The Consumer segment, which includes Fat Shark and Rotor Riot, caters to hobbyists, drone racers, and enthusiasts. The reportable segments were established based on how our chief operating decision maker (“CODM”), which is a committee comprised of our Chief Executive Officer (“CEO”), Chief Technology Officer (“CTO”) and our Chief Financial Officer (“CFO”), manages our business, makes resource allocation and operating decisions, and evaluates operating performance. See “Note 21 - Segment Reporting”.

 

On December 11, 2023, the Company completed a firm commitment underwritten public offering with ThinkEquity of 18,400,000 shares of common stock which generated gross proceeds of $9,200,000 and net proceeds of approximately $8,400,000. 

 

On February 16, 2024 , we closed the sale of our Consumer segment to Unusual Machines, Inc. (or “Unusual Machines” or “UM”). The sale reflects the Company's decision to focus its efforts and capital on defense where it believes that there are more opportunities to create long term shareholder value. See Note 3 and Note 23.

  

 

Note 2 – Summary of Significant Accounting Policies

 

Basis of Accounting – The financial statements and accompanying notes are prepared in accordance with generally accepted accounting principles in the United States (“GAAP”). Certain prior period amounts have been restated to conform to the current year presentation.

 

Principles of Consolidation – Our consolidated financial statements include the accounts of our wholly owned subsidiaries which include Teal, Skypersonic, Rotor Riot, and Fat Shark.  Intercompany transactions and balances have been eliminated.

 

The Consumer segment businesses are characterized as discontinued operations in these financial statements.  The assets and liabilities of these entities have been presented separately in the Consolidated Balance Sheet as discontinued operations.  Similarly, the operating results and cash flows of discontinued operations are separately stated in those respective financial statements.

 

Use of Estimates – The preparation of financial statements in accordance with GAAP requires management to make estimates and assumptions that affect the reported amounts of assets and liabilities, the disclosure of contingent assets and liabilities at the date of the financial statements, and the reported amounts of revenue and expenses during the reporting period. Actual results could differ from those estimates. Significant estimates reflected in these financial statements include those used to (i) determine stock-based compensation, (ii) complete purchase price accounting for acquisitions, (iii) accounting for derivatives, (iv) reserves and allowances related to accounts receivable and inventory, and (v) the evaluation of long-term assets, including goodwill, for impairment.

  

Cash and Cash Equivalents – At January 31, 2024, we had cash of $7,697,335 in multiple commercial banks and financial services companies. We have not experienced any loss on these cash balances and believe they are not exposed to any significant credit risk.

 

Marketable Securities – Our marketable securities have been classified and accounted for as available-for-sale securities. These securities are primarily invested in corporate bonds and are readily saleable, and therefore, we have classified them as short term. Our available-for-sale securities are carried at fair value with any unrealized gains and losses reported as a component of comprehensive income (loss). Once realized, any gains or losses are recognized in the statement of operations.

 

We have elected to present accrued interest income separately from marketable securities on our consolidated balance sheets. Accrued interest income was $0 and $151,671 as of January 31, 2024 and April 30, 2023, respectively, and was included in other current assets. We did not write off any accrued interest income during the nine months ended January 31, 2024 and 2023.

 

Accounts Receivable, net – Accounts receivable are recorded at the invoiced amount less allowances for doubtful accounts. The Company's estimate of the allowance for doubtful accounts is based on a multitude of factors, including historical bad debt levels for its customer base, experience with a specific customer, the economic environment, and other factors. Accounts receivable balances are written off against the allowance when it is probable that the receivable will not be collected.

 

Inventories – Inventories, which consist of raw materials, work-in-process, and finished goods, are stated at the lower of cost or net realizable value, and are measured using the first-in, first-out method. Cost components include direct materials, direct labor, indirect  overhead, as well as in-bound freight. At each balance sheet date, the Company evaluates the net realizable value of its inventory using various reference measures including current product selling prices and recent customer demand, as well as evaluating for excess quantities and obsolescence.

 

Goodwill and Long-lived Assets – Goodwill represents the future economic benefit arising from other assets acquired in an acquisition that are not individually identified and separately recognized. We test goodwill for impairment in accordance with the provisions of ASC 350, Intangibles – Goodwill and Other, (“ASC 350”). Goodwill is tested for impairment at least annually at the reporting unit level or whenever events or changes in circumstances indicate that goodwill might be impaired. ASC 350 provides that an entity has the option to first assess qualitative factors to determine whether the existence of events or circumstances leads to a determination that it is more likely than not that the fair value of a reporting unit is less than its carrying amount. If, after assessing the totality of events or circumstances, an entity determines it is not more likely than not that the fair value of a reporting unit is less than its carrying amount, then additional impairment testing is not required. However, if an entity concludes otherwise, then it is required to perform an impairment test. The impairment test involves comparing the estimated fair value of a reporting unit with its book value, including goodwill. If the estimated fair value exceeds book value, goodwill is considered not to be impaired. If, however, the fair value of the reporting unit is less than book value, then an impairment loss is recognized in an amount equal to the amount that the book value of the reporting unit exceeds its fair value, not to exceed the total amount of goodwill allocated to the reporting unit.

 

The estimate of fair value of a reporting unit is computed using either an income approach, a market approach, or a combination of both. Under the income approach, we utilize the discounted cash flow method to estimate the fair value of a reporting unit. Significant assumptions inherent in estimating the fair values include the estimated future cash flows, growth assumptions for future revenues (including gross margin, operating expenses, and capital expenditures), and a rate used to discount estimated future cash flow projections to their present value based on estimated weighted average cost of capital (i.e., the selected discount rate). Our assumptions are based on historical data, supplemented by current and anticipated market conditions, estimated growth rates, and management’s plans. Under the market approach, fair value is derived from metrics of publicly traded companies or historically completed transactions of comparable businesses. The selection of comparable businesses is based on the markets in which the reporting units operate and consider risk profiles, size, geography, and diversity of products and services. 

 

Goodwill for Rotor Riot relates to its strong social media presence including more than 200,000 YouTube subscribers. Goodwill for Fat Shark is attributable to its relationship with manufacturing sources in China and the potential to integrate its goggle technologies with the Teal drone. Goodwill for Teal is ascribed to its existing relationship with several U.S. government agencies including its classification as an approved vendor. The Company expects that the Goodwill recognized in each transaction will be deductible for tax purposes.  The Company has reported net losses since its inception and is presently unable to determine when and if the tax benefit of this deduction will be realized.

 

Property and equipment – Property and equipment is stated at cost less accumulated depreciation which is calculated using the straight-line method over the estimated useful life of the asset. The estimated useful lives of our property and equipment are generally: (i) furniture and fixtures - seven years, (ii) equipment and related - two to five years, and (iii) leasehold improvements - 15 years.

 

Leases – Accounting Standards Codification (ASC) 842 requires the recognition of assets and liabilities associated with lease agreements. The Company determines if a contract is a lease or contains a lease at inception. Operating lease liabilities are measured, on each reporting date, based on the present value of the future minimum lease payments over the remaining lease term. The Company's leases do not provide an implicit rate. Therefore, the Company uses an effective discount rate of 12% based on its last debt financing. Operating lease assets are measured by adjusting the lease liability for lease incentives, initial direct costs incurred and asset impairments. Lease expense for minimum lease payments is recognized on a straight-line basis over the lease term with the operating lease asset reduced by the amount of the expense. Lease terms may include options to extend or terminate a lease when they are reasonably certain to occur.

 

Fair Values, Inputs and Valuation Techniques for Financial Assets and Liabilities, and Related Disclosures – The fair value measurements and disclosure guidance defines fair value and establishes a framework for measuring fair value. Fair value is defined as the price that would be received to sell an asset or paid to transfer a liability (an exit price) in an orderly transaction between market participants at the measurement date. In accordance with this guidance, the Company has categorized its recurring basis financial assets and liabilities into a three-level fair value hierarchy based on the priority of the inputs to the valuation technique.

 

The fair value hierarchy gives the highest priority to quoted prices in active markets for identical assets or liabilities (Level 1) and the lowest priority to unobservable inputs (Level 3). The inputs used to measure fair value may fall into different levels of the fair value hierarchy. In such cases, the level in the fair value hierarchy within which the fair value measurement in its entirety falls has been determined based on the lowest level input that is significant to the fair value measurement in its entirety. The Company's assessment of the significance of a particular input to the fair value measurement in its entirety requires judgment and considers factors specific to the asset or liability.

 

The guidance establishes three levels of the fair value hierarchy as follows:

 

Level 1: Inputs are unadjusted, quoted prices in active markets for identical assets or liabilities at the measurement date;

Level 2: Inputs are observable, unadjusted quoted prices in active markets for similar assets or liabilities, unadjusted quoted prices for identical or similar assets or liabilities in markets that are not active, or other inputs that are observable or can be corroborated by observable market data for substantially the full term of the related assets or liabilities; and

Level 3: Unobservable inputs that are significant to the measurement of the fair value of the assets or liabilities that are supported by little or no market data. 

   

Disclosures for Non-Financial Assets Measured at Fair Value on a Non-Recurring Basis

 

The Company's financial instruments mainly consist of cash, receivables, current assets, accounts payable, accrued expenses and debt. The carrying amounts of these instruments approximates fair value due to their short-term nature.

 

Convertible Securities and Derivatives

 

When the Company issues convertible debt or equity instruments that contain embedded derivative instruments that are to be bifurcated and accounted for as liabilities, the total proceeds from the convertible host instruments are first allocated to the bifurcated derivative instruments.  The remaining proceeds, if any, are then allocated to the convertible instruments themselves, resulting in those instruments being recorded at a discount from their face value but no lower than zero. Any excess amount is recognized as a derivative expense.

 

Derivative Liabilities

 

The Company has issued financial instruments which include embedded features subject to derivative accounting.  Specifically, there are warrants outstanding, issued in connection with a convertible debt financing, which include provisions under which the exercise price is equal to the lesser of (i) $1.50 or (ii) the exercise or conversion price of securities issued in a future, qualified offering.  Embedded derivatives are valued separately from the host instrument and are recognized as liabilities on the Company's balance sheet.  The warrants are valued using a multinomial lattice method that values the derivative liability based on a probability weighted discounted cash flow model. The liability is valued at each reporting date and the change in liability is reflected as a change in derivative liability in the statement of operations.

 

Revenue Recognition – The Company recognizes revenue in accordance with ASC 606, “Revenue from Contracts with Customers”, issued by the Financial Accounting Standards Board (“FASB”). This standard includes a comprehensive evaluation of factors to be considered regarding revenue recognition including (i) identifying the promised goods, (ii) evaluating performance obligations, (iii) measuring the transaction price, (iv) allocating the transaction price to the performance obligations if there are multiple components, and (v) recognizing revenue as each obligation is satisfied.  The Company’s revenue transactions include a single component , specifically, the shipment of goods to customers as orders are fulfilled. The Company recognizes revenue upon shipment unless otherwise specified in the purchase order. The timing of the shipment of orders can vary considerably depending upon whether an order is for an item normally maintained in inventory or an order that requires assembly or unique parts. Customer deposits totaled $52,296 and $155,986 at January 31, 2024 and April 30, 2023, respectively.

 

Research and Development – Research and development expenses include payroll, employee benefits, and other headcount-related expenses associated with product development. Research and development expenses also include third-party development and programming costs, materials, and a proportionate share of overhead costs such as rent.

 

Income Taxes – Deferred taxes are provided on the liability method whereby deferred tax assets are recognized for deductible temporary differences and deferred tax liabilities are recognized for taxable temporary differences. Temporary differences are the differences between the reported amounts of assets and liabilities and their tax bases. Deferred tax assets and liabilities are adjusted for the effects of changes in tax laws and rates on the date of enactment. 

 

Recent Accounting Pronouncements – Management does not believe that recently issued, but not yet effective accounting pronouncements, if adopted, would have a material effect on the accompanying consolidated financial statements.

 

Foreign Currency – The functional currency of our international subsidiary, Skyset, is the local Italian currency. For that subsidiary, we translate assets and liabilities to U.S. dollars using period-end exchange rates, and average monthly exchange rates for revenues, costs, and expenses. We record translation gains and losses in accumulated other comprehensive income.

   

Comprehensive Loss – Comprehensive loss consists of net loss and other comprehensive loss. Other comprehensive loss refers to gains and losses that are recorded as an element of stockholders' equity but are excluded from net loss. Our other comprehensive loss is comprised of foreign currency translation adjustments and unrealized gains or losses on available-for-sale securities. During the nine months ended January 31, 2024, comprehensive loss was $865,738 lower than net loss, related to unrealized gains on available-for-sale securities totaling $864,165, and foreign currency translation adjustments of $1,573. During the nine months ended January 31, 2023, comprehensive loss was $328,226 lower than net loss, related to unrealized gains on available-for-sale securities totaling $328,006, and foreign currency translation adjustments of $220.

 

Stock-Based Compensation – Stock options are valued using the estimated grant-date fair value method of accounting in accordance with ASC Topic 718, Compensation – Stock Compensation. Fair value is determined based on the Black-Scholes Model using inputs reflecting our estimates of expected volatility, term and future dividends. We recognize forfeitures as they occur. The fair value of restricted stock is based on our stock price on the date of grant. Compensation cost is recognized on a straight-line basis over the service period which is the vesting term.

  

Basic and Diluted Net Loss per Share – Basic and diluted net loss per share has been calculated by dividing net loss by the weighted average number of shares of common stock outstanding during the period. Common stock equivalents were excluded from the computation of diluted net loss per share of common stock because they were anti-dilutive. The conversion or exercise of these common stock equivalents would dilute earnings per share if we become profitable in the future. Outstanding securities not included in the computation of diluted net loss per share because their effect would have been anti-dilutive include:

 

		January 31, 2024				April 30, 2023
Series B Preferred Stock, as converted			3,896				822,230
Stock options			6,679,100				4,784,809
Warrants			1,539,999				1,539,999
Restricted stock			653,386				781,060
Total			8,876,381				7,928,098

 

 

 

Related Parties – Parties are considered to be related to us if they have control or significant influence, directly or indirectly, over us, including key management personnel and members of the Board of Directors. Related Party transactions are disclosed in Note 20.

 

Segment Reporting

 

Since January 2020, we have acquired four separate businesses operating in various aspects of the drone industry. Following the Teal acquisition in August 2021, we focused on integrating and organizing these businesses. Effective May 1, 2022, we established the Enterprise and Consumer segments to focus on the unique opportunities in each sector. Enterprise's initial strategy was to provide UAV's to commercial enterprises, and the military, to navigate dangerous military environments and confined industrial and commercial interior spaces. Subsequently, Enterprise narrowed its near-term attention on the military and other government agencies. Skypersonic's technology has been redirected to military applications and its operations consolidated into Teal. The Consumer segment, which includes Fat Shark and Rotor Riot, caters to hobbyists, drone racers, and enthusiasts.  The reportable segments were established based on how our CODM manages our business, makes resource allocation and operating decisions, and evaluates operating performance. See “Note 21 - Segment Reporting”.

 

Liquidity and Going Concern – The Company has never been profitable and has incurred net losses related to acquisitions, as well as costs incurred to pursue its long-term growth strategy. During the nine months ended January 31, 2024, the Company incurred a net loss from continuing operations of $14,838,925 and used cash in operating activities of continuing operations of $15,354,934. As of January 31, 2024, working capital for continuing operations totaled $19,927,073. These financial results and our financial position at January 31, 2024 raise substantial doubt about our ability to continue as a going concern. However, the Company has recently taken actions to strengthen its liquidity. On December 11, 2023, we completed a public offering of 18,400,000 shares of common stock which generated net proceeds of approximately $8,400,000 as further described in Note 1 and Note 15. In addition, the Company’s operating plan for the next twelve months has been updated to reflect recent operating improvements.  Revenues have accelerated and are expected to continue growing. The Company’s new manufacturing facility is scaling production and gross margins are projected to increase. Management has concluded that these recent positive developments alleviate any substantial doubt about the Company’s ability to continue its operations, and meet its financial obligations, for twelve months from the date these consolidated financial statements are issued.

 

 

Note 3 – Discontinued Operations – Sale of Consumer Segment

 

On February 16, 2024  , the Company closed the sale of its Consumer segment consisting of Rotor Riot and Fat Shark. Accordingly, the Consumer segment has been classified as Discontinued Operations and reported in accordance with the applicable accounting standards. See Note 23 for additional information regarding the transaction. Set forth below are the results of operations for the Consumer segment for:

		Three months ended January 31,								Nine months ended January 31,
		2024				2023				2024				2023
Revenues		$	1,100,943			$	1,438,961			$	4,027,094			$	4,164,531
Cost of goods sold			1,745,771				1,239,420				4,285,087				3,579,679
Gross Margin			(644,828	)			199,541				(257,993	)			584,852
Operating Expenses
Operations			288,059				151,502				671,864				484,340
Research and development			36,379				80,270				113,682				251,034
Sales and marketing			286,918				192,625				978,435				555,916
General and administrative			43,024				116,837				96,612				276,321
Total operating expenses			654,380				541,234				1,860,593				1,567,611
Operating loss			(1,299,208	)			(341,693	)			(2,118,586	)			(982,759	)
Other (income) expense
Interest expense			—				—				22,856				—
Other, net			(3	)			(11,614	)			(153	)			(19,788	)
Other (income) expense			(3	)			(11,614	)			22,703				(19,788	)
Net loss from discontinued operations		$	(1,299,205	)		$	(330,079	)		$	(2,141,289	)		$	(962,971	)

   

Assets and liabilities for the Consumer segment included:

 

		January 31, 2024				April 30, 2023
Current assets
Cash		$	126,771			$	86,656
Accounts receivable, net			1,760				61,107
Inventory			1,545,667				3,065,954
Other			1,586,938				2,069,438
Total current assets			3,261,136				5,283,155
Intangible assets, net			20,000				20,000
Other			59,426				3,853
Operating lease right-of-use assets			376,751				84,544
Total long term assets			456,177				108,397
Current liabilities
Accounts payable		$	156,421			$	606,872
Accrued expenses			116,812				109,480
Debt obligations - short term			98,441				—
Customer deposits			45,791				244,688
Operating lease liabilities			56,974				49,461
Total current liabilities			474,439				1,010,501
Long term liabilities - Operating lease liabilities			321,771				41,814
Working capital		$	2,786,697			$	4,272,654

 

 

Note 4 – Marketable Securities

 

There were no marketable securities at January 31, 2024.

 

At April 30, 2023, marketable securities consisted solely of corporate bonds and were classified at Level 2 in the Fair Value Hierarchy. Fair value, cost basis, and unrealized losses totaled $12,814,038, $13,678,203, and $864,165 at April 30, 2023, respectively.

 

 

Note 5 – Inventories

 

Inventories consisted of the following:

 

		January 31, 2024				April 30, 2023
Raw materials		$	7,235,844			$	8,132,196
Work-in-process			1,666,976				509,381
Finished goods			190,450				278,996
Total		$	9,093,270			$	8,920,573

  

  

Note 6 – Other Current Assets

 

Other current assets included:

 

		January 31, 2024				April 30, 2023
Prepaid expenses		$	1,152,751			$	752,564
Prepaid inventory			970,542				359,500
Grant receivable			675,000				—
Accrued interest income			—				151,671
Total		$	2,798,293			$	1,263,735

 

   

Note 7 – Due From Related Party

 

In January 2022, the Company determined that a senior executive had relocated in 2021 but their compensation had not been subject to the income tax withholding required by the new jurisdiction. The amount subject to taxation included $155,624 of cash compensation and $1,413,332 of income associated with the vesting of restricted stock ("Stock Compensation"). In March 2022, the Company entered into a note agreement (the "Note") with the employee in the amount of $510,323, representing the estimated taxes owed by the employee related to the Stock Compensation. Under the terms of the Note, 104,166 shares of common stock with a fair value of $280,832, which had vested during calendar 2021, were withheld by the Company and applied against the Note. The employee agreed not to sell or transfer 110,983 shares of common stock held at the Company's transfer agent until the Note was repaid. In addition, the employee has 20,833 shares of restricted stock vesting monthly in calendar 2022, of which 3,000 shares were withheld with the fair value of those shares applied against the Note. Shares issued to the employee in 2022 were held at the transfer agent until the Note was repaid. The Note matured on December 31, 2022. The Company filed amended payroll tax returns on March 16, 2022. In March and April 2022, the Company made payments to the relevant tax authorities totaling $712,646 representing $510,323 owed by the employee, $31,604 owed by the Company, and $170,719 of penalties and interest. The Note was repaid in full in August 2022.

 

 

Note 8 – Intangible Assets

 

Intangible assets relate to acquisitions completed by the Company, including those described in Note 1, and were as follows:

		January 31, 2024												April 30, 2023
		Gross Value				Accumulated Amortization				Net Value				Gross Value				Accumulated Amortization				Net Value
Proprietary technology		$	4,967,000			$	(1,468,897	)		$	3,498,103			$	4,967,000			$	(841,223	)		$	4,125,777
Non-compete agreements			81,000				(75,584	)			5,416				81,000				(56,667	)			24,333
Customer relationships			39,000				(22,284	)			16,716				39,000				(18,106	)			20,894
Total finite-lived assets			5,087,000				(1,566,765	)			3,520,235				5,087,000				(915,996	)			4,171,004
Brand name			3,152,000				—				3,152,000				3,152,000				—				3,152,000
Total indefinite-lived assets			3,152,000				—				3,152,000				3,152,000				—				3,152,000
Total intangible assets, net		$	8,239,000			$	(1,566,765	)		$	6,672,235			$	8,239,000			$	(915,996	)		$	7,323,004

 

Proprietary technology and non-compete agreements are being amortized over five to six years and three years, respectively. Customer relationships are being amortized over seven years. Goodwill and Brand name are not amortized but evaluated for impairment on a quarterly basis.

  

As of January 31, 2024, expected amortization expense for finite-lived intangible assets for the next five years is as follows:

 

Fiscal Year Ended:
	2024			$	216,036
	2025				842,471
	2026				815,271
	2027				786,679
	2028				644,833
	Thereafter				214,945
	Total			$	3,520,235

       

Goodwill represents the future economic benefit arising from other assets acquired in an acquisition that are not individually identified and separately recognized. The composition of, and changes in goodwill, consist of:

 

	Date			Acquisition		Goodwill
	January 2020			Rotor Riot		$	1,849,073
	November 2020			Fat Shark			6,168,260
	May 2021			Skypersonic			2,826,918
	August 2021			Teal Drones			8,995,499
	April 2023 - Impairment loss			Skypersonic			(2,826,918	)
	Balance at April 30, 2023 and January 31, 2024					$	17,012,832

   

Following the establishment of the Enterprise and Consumer segments, management evaluated the long-term business strategy of each segment. This resulted in the Enterprise segment narrowing its focus on the military and other government agencies. It was determined that Skypersonic's technology would be re-focused for the near term on military applications and consolidated into the operations of Teal. The Company completes a formal evaluation of the carrying value of its intangible assets, including goodwill, at the end of each fiscal year. Based on (i) the operating results for Skypersonic since its acquisition in May 2021, (ii) its consolidation into Teal, (iii) our current expectations of its future business conditions and trends, including its projected revenues, expenses, and cash flows, the Company recognized an impairment charge of $2,826,918 in April 2023.

 

 

Note 9 – Property and Equipment

 

Property and equipment consist of assets with an estimated useful life greater than one year and are reported net of accumulated depreciation. The reported values are periodically assessed for impairment, and were as follows:

 

		January 31, 2024				April 30, 2023
Equipment and related		$	1,471,096			$	1,386,373
Leasehold improvements			1,548,609				1,473,890
Furniture and fixtures			157,842				132,752
Accumulated depreciation			(699,946	)			(342,657	)
Net carrying value		$	2,477,601			$	2,650,358

 

Depreciation expense totaled $357,289 and $169,748 for the nine months ended January 31, 2024 and 2023, respectively.

 

 

Note 10 – Other Long-Term Assets

 

Other long-term assets included:

 

		January 31, 2024				April 30, 2023
SAFE agreement		$	250,000			$	250,000
Security deposits			53,180				53,180
Total		$	303,180			$	303,180

  

In November 2022, the Company entered into a SAFE (Simple Agreement for Future Equity) agreement with Firestorm Labs, Inc. (“Firestorm”) under which it made a payment of $250,000 to Firestorm in exchange for the right to certain shares of Firestorm stock. The SAFE permits the Company to participate in a future equity financing of Firestorm by converting the $250,000 into shares of Preferred Stock of Firestorm. If there is a change in control of Firestorm or a public offering of shares of its stock, then the Company shall have the right to receive cash payments, or shares of stock, whichever has greater value. The Company’s investment in the SAFE agreement has been recorded on the cost method of accounting. The Company plans to evaluate the investment for any indications of impairment in value on a quarterly basis. No factors indicative of impairment were identified during the nine months ended January 31, 2024.

 

 

Note 11 – Operating Leases

 

As of January 31, 2024, the Company had operating type leases for real estate and no finance type leases. The Company’s leases have remaining lease terms of up to 3.33 years, some of which may include options to extend for up to 5 years. Operating lease expense totaled $260,300 for the nine months ended January 31, 2024, including period cost for short-term, cancellable, and variable leases, not included in lease liabilities, of $3,300 for the nine months ended January 31, 2024.

 

Leases on which the Company made rent payments during the reporting period included:

 

Location		Monthly Rent				Expiration
South Salt Lake, Utah		$	22,667				December 2024
San Juan, Puerto Rico		$	5,647				June 2027
Grantsville, Utah		$	1,000				December 2026
Troy, Michigan		$	550				May 2022

      

Supplemental information related to operating leases for the nine months ended January 31, 2024 was:

Operating cash paid to settle lease liabilities			$259,211
Weighted average remaining lease term (in years)			2.06
Weighted average discount rate			12%

 

Future lease payments at January 31, 2024 were as follows:

 

Fiscal Year Ended:
	2024				90,951
	2025				273,743
	2026				92,619
	2027				91,300
	2028				6,627
	Total			$	555,240

   

  

Note 12 – Debt Obligations

 

A.

Decathlon Capital

On August 31, 2021, Teal entered into an Amended and Restated Loan and Security Agreement with Decathlon Alpha IV, L.P. (“DA4”) in the amount of $1,670,294 (the “Loan”), representing the outstanding principal amount previously due and owing by Teal to DA4. Interest on the Loan accrues at a rate of ten (10%) percent per annum. Principal and interest is payable in monthly installments of $49,275 until maturity on December 31, 2024. The balance outstanding at January 31, 2024 and April 30, 2023 totaled $506,852 and $895,709, respectively.

  

B.

Pelion Note

In May 2021, Teal entered into a note agreement totaling $350,000 which is payable upon demand. The Note bears interest at the applicable Federal Rate as of the date of the Note which was 0.13% on the date of issuance. Accrued interest totaled $1,222 at January 31, 2024.

 

C.

Vendor Agreement

In connection with the acquisition of Teal on August 31, 2021, the Company assumed an obligation with a contract manufacturing firm. The assumed balance of $387,500 was repaid in monthly installments of $37,500 and paid in full in July 2022. 

 

D.

SBA Loan

In February 2021, Teal received a Small Business Administration Paycheck Protection Program (“SBA PPP”) loan in the amount of $300,910. The loan was unsecured, non-recourse, and accrued interest at one percent annually. The loan was used to fund qualifying payroll, rent and utilities. In February 2022, the principal balance of $300,910 and accrued interest of $3,001 were forgiven.

 

E.

Corporate Equity

Beginning in October 2021, and amended in January 2022, Teal financed a total of $120,000 of leasehold improvements with Corporate Equity, LLC. The loan bears interest at 8.25% annually and requires monthly payments of $3,595 through December 2024. The balance outstanding at January 31, 2024 and April 30, 2023 totaled $37,576 and $66,586 respectively.

  

F.

Revenue Financing Arrangement

In April 2021, Teal entered into an agreement under which it sold future customer payments, at a discount, to Forward Financing. At August 31, 2021, the Company assumed the outstanding balance of $38,758. Repayment of the remaining balance was completed in January 2022.

 

G.

Ascentium Capital

In September 2021, Teal entered into a financing agreement with Ascentium Capital to fund the purchase of a fixed asset totaling $24,383. Monthly payments of $656 are payable through October 2024. The balance outstanding at January 31, 2024 and April 30, 2023 totaled $5,507 and $11,412 respectively.

 

H.

Summary

Outstanding principal payments on debt obligations are due as follows:

 

Fiscal 2024			498,366
Fiscal 2025			401,569
Total		$	899,935
Short term – through January 31, 2025		$	899,935
Long term – thereafter		$	—

    

  

Note 13 – Due to Related Party

 

BRIT, LLC

 

In January 2020, in connection with the acquisition of Rotor Riot, the Company assumed a line of credit obligation of the seller, BRIT, LLC, totaling $47,853 which bore interest at 6.67% annually. The remaining balance of $37,196 plus accrued interest totaling $292 was paid in October 2022.

 

 

Note 14 – Income Taxes

 

Our operating subsidiary, Red Cat Propware, Inc., is incorporated and based in Puerto Rico which is a commonwealth of the United States. We are not subject to taxation by the United States as Puerto Rico has its own taxing authority. Since inception, we have incurred net losses in each year of operations. Our current provision for the reporting periods presented in these financial statements consisted of a tax benefit against which we applied a full valuation allowance, resulting in no current provision for income taxes. In addition, there was no deferred provision for any of these reporting periods.

 

At January 31, 2024 and April 30, 2023, we had accumulated deficits of approximately $71,600,000 and $54,600,000, respectively. Deferred tax assets related to the future benefit of these net operating losses for tax purposes totaled approximately $13,246,000 and $10,101,000, respectively, calculated using the base Puerto Rico corporate tax rate of 18.5%. Currently, we focus on projected future taxable income in evaluating whether it is more likely than not that these deferred assets will be realized. Based on the fact that we have not generated an operating profit since inception, we have applied a full valuation allowance against our deferred tax assets at January 31, 2024 and April 30, 2023.

 

 

Note 15 – Common Stock

 

Our common stock has a par value of $0.001 per share. We are authorized to issue 500,000,000 shares of common stock. Each share of common stock is entitled to one vote. A summary of shares of common stock issued by the Company since April 30, 2022 is as follows:

 

Description of Shares		Shares Issued
Shares outstanding as of April 30, 2022			53,748,735
Vesting of restricted stock to employees, net of shares withheld of 273,874 to pay taxes and 9,000 to repay a Note			653,308
Vesting of restricted stock to Board of Directors			116,507
Vesting of restricted stock to consultants			9,683
Shares issued for services			39,832
Shares outstanding as of April 30, 2023			54,568,065
Vesting of restricted stock to employees, net of shares withheld of 27,189 to pay taxes			145,623
Vesting of restricted stock to Board of Directors			181,088
Vesting of restricted stock to consultants			1,761
Conversion of preferred stock			818,334
Issuance of common stock through ATM facilities			53,235
Issuance of common stock through public offering			18,400,000
Exercise of stock options			3,000
Shares outstanding as of January 31, 2024			74,171,106

 

ATM Facility

 

In August 2023, we entered into a sales agreement (“the 2023 ATM Facility”) with ThinkEquity LLC (“ThinkEquity”), which provides for the sale, in our sole discretion, of shares of our common stock through ThinkEquity, as our sales agent. In accordance with the terms of the ATM Sales Agreement, the Company may offer and sell shares of our common stock, par value $0.001 per share, having an aggregate offering price of up to $4,375,000. The issuance and sale of these shares by us pursuant to the 2023 ATM Facility are deemed “at the market” offerings as defined in Rule 415 under the Securities Act of 1933, as amended (the “Securities Act”), and are registered under the Securities Act. We pay a commission of up to 2.5% of gross sales proceeds of any common stock sold under the 2023 ATM Facility.

 

During the nine months ended January 31, 2024, we sold an aggregate of 53,235 shares of common stock under the 2023 ATM Facility, at an average price of $1.07 per share, for gross proceeds of approximately $57,000 and net proceeds of approximately $55,700, after deducting commissions and other offering expenses payable by us. Additionally, the Company incurred legal fees of approximately $46,000 establishing the 2023 ATM Facility. In December 2023, the Prospectus Supplement dated August 8, 2023 was amended to change the aggregate offering price under the ATM facility to up to $4,375,000.

 

As of January 31, 2024, approximately $4,318,000 of common stock remained available to be sold under the 2023 ATM Facility, subject to certain conditions as specified in the sales agreement.

 

Public Offering

 

In December 2023, the Company entered into an underwriting agreement with ThinkEquity LLC, as representative of the underwriters, pursuant to which the Company agreed to sell to the underwriters in a firm commitment underwritten public offering (the “Offering”) an aggregate of 16,000,000 shares of the Company’s common stock, par value $0.001 per share (the “Common Stock”), at a public offering price of $0.50 per share. The Company also granted the underwriters a 45-day option to purchase up to an additional 2,400,000 shares of Common Stock to cover over-allotments. 

 

The Offering closed on December 11, 2023, resulting in the issuance of 18,400,000 shares of Common Stock which generated gross proceeds of $9,200,000. Net proceeds to the Company from the Offering, after deducting the underwriting discount, the underwriters’ fees and expenses and the Company’s estimated Offering expenses, were approximately $8,400,000. 

 

 

Note 16 – Preferred Stock

 

Series B Preferred Stock (“Series B Stock”) is convertible into common stock at a ratio of 0.8334 shares of common stock for each share of Series B Stock held and votes together with the common stock on an as-if-converted basis. 982,000 shares of Series B Stock were converted into 818,334 shares of common stock in June 2023. Shares outstanding at January 31, 2024 totaled 4,676 which are convertible into 3,896 shares of common stock.

 

 

Note 17 – Warrants

 

The Company issued 5 year warrants to investors in connection with two convertible note financings. The warrants have an initial exercise price of $1.50 which may be reduced to a 25% discount of the price per share of Common Stock offered in a future qualified offering. The warrants were valued using the multinominal lattice model and are considered derivative liabilities under ASC 815-40. The value of the warrants was included in the determination of the initial accounting for each financing including the calculation of the derivative liability and related expense.

 

A summary of the warrants issued and their fair values were:

 

				Upon Issuance								Outstanding at January 31, 2024
Date of Transaction				Number of Warrants				Initial Fair Value				Number of Warrants				Fair Value
	October 2020				399,998			$	267,999				266,666			$	87,196
	January 2021				675,000			$	2,870,666				540,000			$	198,189

  

To date, we have received $301,248 related to the exercise of 268,332 warrants.  These exercises eliminated the derivative liability in these warrants, resulting in a decrease of $857,446 in the derivative liability with a corresponding increase in additional paid in capital.

 

In May 2021, the Company issued warrants to purchase 200,000 shares of common stock to the placement agent of its common stock offering. The warrants have a five-year term and an exercise price of $5.00.

   

In July 2021, the Company issued warrants to purchase 533,333 shares of common stock to the placement agent of its common stock offering. The warrants have a five-year term and an exercise price of $5.625.

 

There have been no issuances or exercises of warrants since April 30, 2022. The key attributes of the 1,539,999 warrants outstanding, which have a weighted average exercise price of $3.38, are as follows:

 

				Weighted-average Remaining Contractual Term (in years)				Aggregate Intrinsic Value
	April 30, 2022				3.89			$	427,533
	April 30, 2023				2.89			$	—
	January 31, 2024				2.13			$	—

  

 

Note 18 – Share Based Awards

 

The 2019 Equity Incentive Plan (the "Plan") allows us to incentivize key employees, consultants, and directors with long term compensation awards such as stock options, restricted stock, and restricted stock units (collectively, the "Awards"). The number of shares issuable in connection with Awards under the Plan may not exceed 11,750,000.

 

A.

Options

 

The range of assumptions used to calculate the fair value of options granted during the nine months ended January 31 was:

 

			2024				2023
Exercise Price		$	0.95 – 1.12			$	1.06 – 2.38
Stock price on date of grant			0.95 – 1.12				1.06 – 2.38
Risk-free interest rate			3.47 – 4.34%				3.34 – 7.52%
Dividend yield			—				—
Expected term (years)			6.00 – 8.25				8.25
Volatility			242.38 – 260.22%				253.52 – 513.58%%

     

A summary of options activity under the Plan since April 30, 2022 was:

 

		Shares				Weighted-Average Exercise Price				Weighted-Average Remaining Contractual Term				Aggregate Intrinsic Value
Outstanding as of April 30, 2022			3,694,142			$	2.17				8.56				1,407,545
Granted			1,503,500				1.40
Exercised			—				—
Forfeited or expired			(412,833	)			2.67
Outstanding as of April 30, 2023			4,784,809				1.88				8.72				74,586
Granted			2,541,042				1.06
Exercised			(3,000	)			0.89
Forfeited or expired			(643,751	)			2.43
Outstanding as of January 31, 2024			6,679,100				1.53				7.86				—
Exercisable as of January 31, 2024			3,575,496			$	1.86				6.31			$	—

       

The aggregate intrinsic value of outstanding options represents the excess of the stock price at the indicated date over the exercise price of each option. As of January 31, 2024 and January 31, 2023, there was $1,767,088 and $3,052,603 of unrecognized stock-based compensation expense related to unvested stock options which is expected to be recognized over the weighted average periods of 1.99 and 2.22 years, respectively. 

 

B.

Restricted Stock

 

A summary of restricted stock activity under the Plan since April 30, 2022 was:

 

		Shares				Weighted Average Grant-Date Fair Value Per Share
Unvested and outstanding as of April 30, 2022			1,083,675			$	2.59
Granted			780,884				2.14
Vested			(1,062,372	)			2.42
Forfeited			(21,127	)			2.13
Unvested and outstanding as of April 30, 2023			781,060				2.44
Granted			298,643				1.06
Vested			(355,661	)			1.94
Forfeited			(70,656	)			1.25
Unvested and outstanding as of January 31, 2024			653,386			$	2.14

        

C.

Stock Compensation

 

Stock compensation expense by functional operating expense was:

		Three months ended January 31,								Nine months ended January 31,
		2024				2023				2024				2023
Operations		$	114,425			$	181,908			$	544,046			$	566,218
Research and development			(106,314	)			170,579				168,732				524,874
Sales and marketing			120,180				120,733				494,392				390,076
General and administrative			457,480				315,471				1,486,532				1,309,790
Total		$	585,771			$	788,691			$	2,693,702			$	2,790,958

 

Stock compensation expense pertaining to options totaled $1,955,547 and $1,308,768 for the nine months ended January 31, 2024 and 2023, respectively. Stock compensation expense pertaining to restricted stock units totaled $738,155 and $1,482,190 for the nine months ended January 31, 2024 and 2023, respectively.

 

 

Note 19 – Derivatives

 

The Company has completed financings which included notes and warrants containing embedded features subject to derivative accounting. Both the notes and the warrants included provisions which provided for a reduction in the conversion and exercise prices, respectively, if the Company completed a future qualified offering at a lower price. These provisions represent embedded derivatives which are valued separately from the host instrument (meaning the notes and warrants) and recognized as derivative liabilities on the Company's balance sheet. The Company initially measures these financial instruments at their estimated fair value and recognizes changes in their estimated fair value in results of operations during the period of change. The Company also measures these financial instruments on the date of settlement (meaning when the note is converted, or the warrant is exercised) at their estimated fair value and recognizes changes in their estimated fair value in results of operations. Any discount in the carrying value of the note is fully amortized on the date of settlement and recognized as interest expense. The Company estimated the fair value of these embedded derivatives using a multinomial lattice model. The range of underlying assumptions used in the binomial model to determine the fair value of the derivative warrant liability upon settlement of the derivative liability and as of January 31, 2024 and April 30, 2023 are set forth below. In addition, the Company's stock price on each measurement date was used in the model.

 

			January 31, 2024				April 30, 2023
Risk-free interest rate			4.73 – 5.54%				2.83 – 4.51%
Expected dividend yield			—				—
Expected term (in years)			1.67 – 2.50				2.42 – 3.50
Expected volatility			74.41 – 107.90%				138.49 – 235.23%

     

As of January 31, 2024, all of the notes had been converted into common stock and 806,666 of the warrants were outstanding. Changes in the derivative liability during the nine months ended January 31, 2024 and the year ended April 30, 2023 were as follows:

 

		January 31, 2024				April 30, 2023
Balance, beginning of period		$	588,205			$	1,607,497
Additions			—				—
Eliminated upon conversion of notes/exercise of warrants			—				—
Changes in fair value			(302,821	)			(1,019,292	)
Balance, end of period		$	285,384			$	588,205

    

Changes in fair value primarily relate to changes in the Company’s stock price during the period, with increases in the stock price increasing the liability and decreases in the stock price reducing the liability.

 

 

Note 20 - Related-Party Transactions

 

In January 2022, the Company entered into a note agreement with an employee in the principal amount of $510,323, as further described in Note 7.

 

In February 2024, the Company sold Rotor Riot and Fat Shark to Unusual Machines, as further described in Note 23.

 

Additional related party transactions are disclosed in Note 13.

 

 

Note 21 - Segment Reporting

 

The following table sets forth key operating data and asset categories which are reviewed by our CODM in evaluating the operating performance of each segment:

 

		For the nine months ended January 31, 2024
		Enterprise				Consumer				Corporate				Total
Revenues		$	11,526,930			$	4,027,094			$	—			$	15,554,024
Cost of goods sold			9,050,032				4,285,087				—				13,335,119
Gross margin			2,476,898				(257,993	)			—				2,218,905
Operating expenses			10,304,246				1,860,593				6,192,676				18,357,515
Operating loss			(7,827,348	)			(2,118,586	)			(6,192,676	)			(16,138,610	)
Other expenses, net			(277,333	)			22,703				1,096,234				841,604
Net loss		$	(7,550,015	)		$	(2,141,289	)			(7,288,910	)		$	(16,980,214	)

 

		For the nine months ended January 31, 2023
		Enterprise				Consumer				Corporate				Total
Revenues		$	3,541,846			$	4,164,531			$	—			$	7,706,377
Cost of goods sold			3,432,804				3,579,679				—				7,012,483
Gross margin			109,042				584,852				—				693,894
Operating expenses			8,041,686				1,567,611				7,081,225				16,690,522
Operating loss			(7,932,644	)			(982,759	)			(7,081,225	)			(15,996,628	)
Other expenses, net			265,855				(19,788	)			(520,617	)			(274,550	)
Net loss		$	(8,198,499	)		$	(962,971	)		$	(6,560,608	)		$	(15,722,078	)

  

		As of January 31, 2024
		Enterprise				Consumer				Corporate				Total
Accounts receivable, net		$	5,091,724			$	1,760			$	—			$	5,093,484
Inventory, net			9,093,270				1,545,667				—				10,638,937
Inventory deposits		$	970,542			$	1,586,938			$	—			$	2,557,480

 

		As of April 30, 2023
		Enterprise				Consumer				Corporate				Total
Accounts receivable, net		$	719,862			$	61,107			$	—			$	780,969
Inventory, net			8,920,573				3,065,954				—				11,986,527
Inventory deposits		$	359,500			$	2,062,038			$	—			$	2,421,538

 

 

Note 22 – Commitments and Contingencies  

 

Legal Proceedings

 

In the ordinary course of business, we may be involved, at times, in various legal proceedings involving a variety of matters. We do not believe there are any pending legal proceedings that will have a material adverse effect on our business, consolidated financial position, results of operations, or cash flows. However, the outcome of such legal matters is inherently unpredictable and subject to significant uncertainties. We have not recorded any litigation reserves as of January 31, 2024.

  

One pending legal matter is an action filed against Teal and the Company in a U.S. District Court in California. The complaint asserts claims for breach of contract, and the unlawful conversion and sale of shares of common stock that plaintiff alleges to have purchased in Teal prior to its acquisition by the Company. The complaint also alleges breach of fiduciary duty and seeks in excess of $1 million in damages. The Company is asserting vigorous defenses to the complaint.

 

 

Note 23 – Subsequent Events

 

Sale of Consumer Segment 

 

On February 16, 2024 the Company closed the sale of Rotor Riot and Fat Shark to Unusual Machines. The sale was conducted pursuant to a Share Purchase Agreement dated November 21, 2022, as amended on April 13, 2023, July 10, 2023, and December 11, 2023 (the “SPA”). The transaction closed concurrently with UMAC’s initial public offering and listing on the NYSE American exchange (“IPO”) under the symbol “UMAC.”

 

The total consideration received by the Company was valued at $20 million and consisted of i) $1 million in cash, ii) $2 million in a secured promissory note (“Promissory Note”), iii) $17 million in securities of Unusual Machines, and iv) a post-closing adjustment for excess working capital.

 

Secured Promissory Note

 

The Promissory Note from Unusual Machines bears interest at a rate of 8% per year, is due 18 months from the date of issue, and requires monthly payments of interest due in arrears on the 15th day of each month. In the event of a Qualified Financing (defined as one or more related debt or equity financings by UMAC resulting in net proceeds of at least $5 million, other than UMAC’s completed IPO), the Company may require payment of this Promissory Note in whole or in part upon written notice given within 10 days of the Qualified Financing.

 

Unusual Machines Securities

The $17 million worth of UMAC common stock was valued at the IPO price for UMAC’s common stock of $4.00 per share, resulting in 4,250,000 shares of UMAC common stock being issued to the Company (representing approximately 48.66% of UMAC’s issued and outstanding common stock after giving effect to the IPO and to the issuance of common stock to the Company upon closing of the IPO).

 

Working Capital

 

The purchase price will be adjusted for working capital as of the closing date. Any actual working capital excess amount will, at Red Cat’s option, be payable in cash or will increase the principal amount of the Promissory Note and any actual working capital deficiency amount will, at Red Cat’s option, be payable in cash or will reduce the principal amount of the Promissory Note dollar for dollar. The Company estimates that working capital as of closing will be approximately $3.0 million.

 

  

ITEM 2.  MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS

 

The following discussion should be read in conjunction with our unaudited condensed consolidated financial statements and related notes and other financial data included elsewhere in this Quarterly Report on Form 10-Q.

 

Management's Discussion and Analysis contains forward-looking statements that involve risks and uncertainties, such as statements relating to our liquidity, and our plans for our business focusing on providing products, services and solutions to the drone industry. Any statements that are not historical fact are forward-looking statements. When used, the words "believe," "plan," "intend," "anticipate," "target," "estimate," "expect," and the like, and/or future-tense or conditional constructions ("will," "may," "could," "should," etc.), or similar expressions, identify certain of these forward-looking statements. These forward-looking statements are subject to risks and uncertainties that could cause actual results or events to differ materially from those expressed or implied by the forward-looking statements in this Quarterly Report on Form 10-Q. The Company's actual results and the timing of events could differ materially from those anticipated in these forward-looking statements as a result of many factors. Investors should also review the risk factors in the Company's Annual Report on Form 10-K filed with the SEC on July 27, 2023, and subsequent filings made with the SEC.

 

All forward-looking statements speak only as of the date on which they are made. The Company does not undertake any obligation to update such forward-looking statements to reflect events that occur or circumstances that exist after the date of this Quarterly Report on Form 10-Q except as required by federal securities law.

 

Recent Developments

 

Corporate developments during the two years ended January 31, 2024 include:

 

Capital Transactions

 

During the first quarter of fiscal 2022, the Company completed two firm commitment underwritten public offerings with ThinkEquity, a division of Fordham Financial Management. The first offering, in May 2021, generated gross and net proceeds of $16 and $14.6 million, respectively. The second offering, in July 2021, generated gross and net proceeds of $60 and $55.5 million, respectively.

 

On December 11, 2023, the Company completed a firm commitment underwritten public offering with ThinkEquity of 18,400,000 shares of common stock which generated gross proceeds of $9,200,000 and net proceeds of approximately $8,400,000.

 

Plan of Operations

 

Since April 2016, the Company's primary business has been to provide products, services, and solutions to the drone industry which it presently does through its four wholly owned subsidiaries. Beginning in January 2020, the Company expanded the scope of its drone products and services through four acquisitions, including: 

 

A.

In January 2020, the Company acquired Rotor Riot, a provider of First Person View (FPV) drones and equipment, primarily to the consumer marketplace. The purchase price was $1,995,114.

 

B.

In November 2020, the Company acquired Fat Shark, a provider of FPV video goggles to the drone industry. The purchase price was $8,354,076.

   

C.

In May 2021, the Company acquired Skypersonic which provides hardware and software solutions that enable drones to complete inspection services in locations where GPS is not available, yet still record and transmit data even while being operated from thousands of miles away. The purchase price was $2,791,012.

 

D.

In August 2021, the Company acquired Teal, a leader in commercial and government UAV (Unmanned Aerial Vehicles) technology. The purchase price was $10,011,279.

 

Following the Teal acquisition, we focused on integrating and organizing these businesses. Effective May 1, 2022, we established the Enterprise and Consumer segments in order to sharpen our focus on the unique opportunities in each sector. Enterprise's initial strategy was to provide UAV's, primarily drones, to commercial enterprises, and government agencies including the military, to navigate dangerous military environments and confined industrial and commercial interior spaces. Subsequently, Enterprise narrowed its near-term focus on the military and other government agencies. Skypersonic's technology has been re-focused on military applications and its operations consolidated into Teal. The Consumer segment, which includes Fat Shark and Rotor Riot, is focused on hobbyists and enthusiasts which are expected to increase as drones become more visible and useful in our daily lives. 

 

On February 16, 2024, we closed the sale of our Consumer segment to Unusual Machines, Inc. (or “Unusual Machines” or “UM”). The total consideration received by the Company was valued at $20 million, including $1 million in cash, $2 million in a secured promissory note, and $17 million in securities of Unusual Machines plus a post-closing adjustment for excess working capital. The sale reflects the Company's decision to focus its efforts and capital and defense where it believes that there are more opportunities to create long term shareholder value.

 

Results of Operations - Continuing Operations

 

The analysis of the Company's results of continuing operations for the three and nine months ended January 31, 2024 compared to the three and nine months ended January 31, 2023 includes only the Company's Enterprise Segment which includes Teal and Skypersonic.  During Fiscal 2023, the operations of Skypersonic were consolidated into Teal.  The following discussion and analysis describes the operating results of Teal and Skypersonic on a consolidated basis with Teal representing more than 90% of the operating activities of the Enterprise Segment.

  

Discussion and Analysis of the Three Months Ended January 31, 2024 compared to the Three Months Ended January 31, 2023

 

Revenues

 

Revenues totaled $5,847,933 during the three months ended January 31, 2024 (or the "2024 period") compared to $1,667,683 during the three months ended January 31, 2023 (or the "2023 period") representing an increase of $4,180,250, or 251%. The increase primarily related to higher product revenue related to the launch of the Teal 2 in April 2023. Product revenue totaled $4,764,253 during the three months ended January 31, 2024 compared to $1,176,602 during the three months ended January 31, 2023 representing an increase of $3,587,651, or 305%. The increase in revenue also partially related to increased contract revenues during the 2024 period. Contract revenues totaled $1,008,328 during the 2024 period compared to $486,432 during the 2023 period, representing an increase of $521,896, or 107%. Contract revenues are primarily sourced through government agencies and can fluctuate from period to period based on the timing of award deliverables and amendments.

 

Gross Margin

 

Gross margin totaled $1,101,651 during the 2024 period compared to negative $96,929 during the 2023 period representing an increase of $1,198,580, or more than 12 times. On a percentage basis, gross margin was 19% during the 2024 period compared to negative 6% during the 2023 period. The percentage basis increase in gross margin in the 2024 period primarily related to obsolete inventory write-offs that occurred during the 2023 period. Additionally, lower manufacturing levels in the 2023 period resulted in higher relative overhead costs compared to the 2024 period. Our manufacturing facility is presently producing drones at a lower level than it is designed for, and these lower production levels, combined with higher overhead costs, continue to result in lower than targeted gross margins. As production levels increase, our fixed overhead costs, including labor, are expected to be allocated to a greater number of drones which is expected to drive our per-drone production costs lower and increase gross margins.

 

Operating Expenses

 

Operations expenses totaled $527,447 during the 2024 period compared to $663,668 during the 2023 period, resulting in a decrease of $136,221, or 21%. This decrease is primarily due to lower professional fees due to the Teal facility expansion having been completed since the 2023 period.

 

Research and development expenses totaled $2,125,268 during the three months ended January 31, 2024, compared to $1,221,738 during the three months ended January 31, 2023, representing an increase of $903,530, or 74%. Supplies and materials expense totaled $1,339,607 in the 2024 period compared to $395,431 in the 2023 period. This increase of $944,176, or 239%, primarily related to increased efforts in developing new products and represented substantially all of the total increase in research and development costs.

 

Sales and marketing costs totaled $883,982 during the 2024 period compared to $1,015,412 during the 2023 period, representing a decrease of $131,430 or 13%. The decrease was driven by lower advertising expenses and lower professional fees.

 

General and administrative expenses totaled $1,426,531 during the three months ended January 31, 2024, compared to $1,397,667 during the three months ended January 31, 2023, representing an increase of $28,864 or 2%. The increase primarily related to payroll, professional fees and information technology expenses.

 

During the three months ended January 31, 2024, we incurred stock-based compensation costs of $585,771 compared to $788,691 in the 2023 period, resulting in a decrease of $202,920 or 26%. Since the 2023 period, the Company issued 3,442,542 additional options and 298,643 additional RSUs which resulted in incremental stock-based compensation costs of $406,935 and $59,791, respectively. This increase was offset by an RSU award that fully vested since the 2023 period, as well as the forfeiture 643,751 stock options and 70,656 RSU awards resulting in decremental stock-based compensation expense of $570,041.

 

Other (Income) Expense 

 

Other income totaled $258,015 during the 2024 period compared to other expense of $151,818 during the 2023 period, representing an increase of $409,833 or 270%. During the 2024 period, the Company was awarded a manufacturing modernization grant from the State of Utah for $750,000 of which $675,000 is attributable to the 2024 period.

 

Net Loss from Continuing Operations

 

Net loss from continuing operations totaled $4,189,333 for the three months ended January 31, 2024, compared to $5,335,923 for the three months ended January 31, 2023, resulting in a decrease of $1,146.590 or 21%. Total operating expenses totaled $5,548,999 for the three months ended January 31, 2024 compared to $5,087,176 for the three months ended January 31, 2023. The increase in operating expenses was offset by the increase in other income. Higher gross margin is attributable to the decrease in net loss from continuing operations.

 

Results of Discontinued Operations

 

Net loss from discontinued operations totaled $1,299,205 for the three months ended January 31, 2024, compared to $330,079 for the three months ended January 31, 2023, representing an increase of $969,126, or 294%. Net loss for Fat Shark totaled $968,680 for the three months ended January 31, 2024, compared to $42,136 for the three months ended January 31, 2023, representing an increase of $926,544 or nearly 22 times, and represents 96% of the total increase in net loss from discontinued operations. Fat Shark’s results were adversely impacted by a charge of $927,765 during the three months ended January 31, 2024 related to the write-off of excess quantities of Dominator inventory based on sales volumes. Net loss for Rotor Riot totaled $330,525 for the three months ended January 31, 2024, compared to $287,943 for the three months ended January 31, 2023, representing an increase of $42,582 or 15%.

 

Discussion and Analysis of the Nine Months Ended January 31, 2024 compared to the Nine Months Ended January 31, 2023

 

Revenues

 

Revenues totaled $11,526,930 during the nine months ended January 31, 2024 (or the "fiscal 2024 period") compared to $3,541,846 during the nine months ended January 31, 2023 (or the "fiscal 2023 period") representing an increase of $7,985,084, or 225%. The increase primarily related to higher product revenue related to the launch of the Teal 2 in April 2023. Product revenue totaled $9,569,215 during the nine months ended January 31, 2024 compared to $2,229,516 during the nine months ended January 31, 2023 representing an increase of $7,339,699, or 329%. The increase in revenue also partially related to higher contract revenues during the fiscal 2024 period.  Contract revenues totaled $1,848,646 during the fiscal 2024 period compared to $1,128,237 during the fiscal 2023 period, representing an increase of $720,409, or 64%. Contract revenues are primarily sourced through government agencies and can fluctuate from period to period based on the timing of award deliverables and amendments.

 

Gross Margin

 

Gross margin totaled $2,476,898 during the fiscal 2024 period compared to $109,042 during the fiscal 2023 period representing an increase of $2,367,856, or nearly 22 times. On a percentage basis, gross margin was 21% during the fiscal 2024 period compared to 3% during the fiscal 2023 period. The percentage basis increase in gross margin in the fiscal 2024 period was primarily related to obsolete inventory write-offs that occurred during the fiscal 2023 period. Additionally, lower manufacturing levels in the fiscal 2023 period resulted in higher relative overhead costs compared to the fiscal 2024 period. Our manufacturing facility is presently producing drones at a lower level than it is designed for, and these lower production levels, combined with higher overhead costs, continue to result in lower than targeted gross margins. As production levels increase, our fixed overhead costs, including labor, will be allocated to a greater number of drones which will drive our per-drone production costs lower and increase gross margins.

 

Operating Expenses

 

Operations expenses totaled $1,675,795 during the fiscal 2024 period compared to $3,131,789 during the fiscal 2023 period, resulting in a decrease of $1,455,994, or 46%. This decrease is primarily due to lower payroll costs, controlled spending on manufacturing supplies, and lower office expenses related to fewer new hires in the fiscal 2024 period.

 

Research and development expenses totaled $5,251,285 during the nine months ended January 31, 2024, compared to $2,938,658 during the nine months ended January 31, 2023, representing an increase of $2,312,627, or 79%. Supplies and materials expense totaled $2,358,971 in the fiscal 2024 period compared to $789,938 in the fiscal 2023 period. This increase of $1,569,033, or 199%, primarily related to increased efforts in developing new products and represented 68% of the total increase in research and development costs. Additionally, higher payroll expenses represented 22% of the increase.

 

Sales and marketing costs totaled $2,546,380 during the fiscal 2024 period compared to $1,986,121 during the fiscal 2023 period, representing an increase of $560,259 or 28%. This increase in sales and marketing expense represents 7% of the total increase in revenue during the fiscal 2024 period compared to the fiscal 2023 period. Headcount for sales, customer service, and marketing totaled 12 at the end of the fiscal 2024 period compared to 8 at the end of the fiscal 2023 period, resulting in total payroll expense of $1,341,913 in the fiscal 2024 period compared to $903,898 in the fiscal 2023 period. This increase of $438,015, or 48% represented 78% of the total increase in sales and marketing costs. Higher travel-related and office expenses represented 33% and 24% of the increase, respectively. This was partially offset by a reduction in advertising expenses and professional fees.

 

General and administrative expenses totaled $4,329,760 during the nine months ended January 31, 2024, compared to $4,275,385 during the nine months ended January 31, 2023, representing an increase of $54,375 or 1%.

 

During the nine months ended January 31, 2024, we incurred stock-based compensation costs of $2,693,702 compared to $2,790,958 in the fiscal 2023 period, resulting in a decrease of $97,256 or 3%. Since the fiscal 2023 period, the Company issued 3,442,542 additional options and 298,643 additional RSUs which resulted in incremental stock-based compensation costs of $1,517,516 and $196,247, respectively. This increase was offset by an RSU award that fully vested since the fiscal 2023 period, as well as the forfeiture 643,751 stock options and 70,656 RSU awards resulting in decremental stock-based compensation expense of $2,060,980.

 

Other (Income) Expense 

 

Other expense totaled $818,901 during the fiscal 2024 period compared to other income of $254,762 during the fiscal 2023 period, representing a decrease of $1,073,663 or 421%. Investment loss totaled $733,697 during the nine months ended January 31, 2024, compared to an investment gain of $257,244 during the nine months ended January 31, 2023. During the fiscal 2024 period, the Company sold certain investment grade securities to fund operations. The fair value of these securities had been adversely impacted by the sharp increase in interest rates since the securities were acquired. Changes in the fair value of the derivative liability resulted in income of $302,821 during the fiscal 2024 period compared to income of $751,397 during the fiscal 2023 period, representing a net detrimental difference of $448,576.

 

Net Loss from Continuing Operations

 

Net loss from continuing operations totaled $14,838,925 for the nine months ended January 31, 2024, compared to $14,759,107 for the nine months ended January 31, 2023, resulting in an increase of $79,818 or 1%. The increase in net loss was primarily driven by the decrease in investment income as the Company sold certain investment-grade securities at a loss which were adversely impacted by a sharp increase in interest rates.

 

Results of Discontinued Operations

 

Net loss from discontinued operations totaled $2,141,289 for the nine months ended January 31, 2024, compared to $962,971 for the nine months ended January 31, 2023, representing an increase of $1,178,318, or 122%. Net loss for Rotor Riot totaled $784,967 for the nine months ended January 31, 2024, compared to $726,255 for the nine months ended January 31, 2023, representing an increase of $58,712 or 8%. Net loss for Fat Shark totaled $1,356,322 for the nine months ended January 31, 2024, compared to $236,716 for the nine months ended January 31, 2023, representing an increase of $1,119,606 or 473%. Fat Shark’s results were adversely impacted by a charge of $1,244,920 during the nine months ended January 31, 2024, related to the write-off of excess quantities of Dominator inventory based on sales volumes.

 

Cash Flows

 

Operating Activities

 

Net cash used in operating activities was $15,354,934 during the nine months ended January 31, 2024, compared to net cash used in operating activities of $16,806,150 during the nine months ended January 31, 2023, representing a decrease of $1,451,216 or 9%. The decreased use of cash primarily related to timing of accounts receivable receipts for government customers. Net cash used in operations, net of non-cash expenses, totaled $10,588,000 during the nine months ended January 31, 2024, compared to $12,006,416 during the nine months January 31, 2023, resulting in a decrease of $1,418,416, or 12%. Net cash used related to changes in operating assets and liabilities totaled $4,766,934 during the nine months ended January 31, 2024, compared to $4,799,734 during the nine months ended January 31, 2023, representing a decrease of $32,800 or 1%. Changes in operating assets and liabilities can fluctuate significantly from period to period depending upon the timing and level of multiple factors, including inventory purchases, vendor payments, and customer collections.

 

Investing Activities

 

Net cash provided by investing activities was $12,641,685 during the nine months ended January 31, 2024, compared to net cash provided by investing activities of $22,296,235 during the nine months ended January 31, 2023, resulting in a decrease of $9,654,550 or 43%. During the fiscal 2024 period, proceeds of $12,826,217 from the sale of marketable securities were used to fund operations. During the fiscal 2023 period, proceeds of $24,282,117 from the sale of marketable securities were used to fund operations.

 

Financing Activities

 

Net cash provided by financing activities totaled $7,960,091 during the nine months ended January 31, 2024, compared to net cash used in financing activities of $1,093,030 during the nine months ended January 31, 2023. Financing activities can vary from period to period depending upon market conditions, both at a macro-level and specific to the Company. During the fiscal 2024 period, the company received net proceeds from issuance of common stock of $8,395,600.

 

Liquidity and Capital Resources

 

At January 31, 2024, the Company reported current assets totaling $27,941,758, current liabilities totaling $5,227,988 and net working capital of $22,713,770. Cash and marketable securities totaled $7,697,335 at January 31, 2024. Inventory related balances, including pre-paid inventory, totaled $10,063,812. We continue to maintain high inventory balances related to the global supply chain issues which continue to impact the timing of our purchase decisions.

 

Going Concern

 

The Company has never been profitable and has incurred net losses related to acquisitions, as well as costs incurred to pursue its long-term growth strategy. During the nine months ended January 31, 2024, the Company incurred a net loss from continuing operations of $14,838,925 and used cash in operating activities of continuing operations of $15,354,934. As of January 31, 2024, working capital for continuing operations totaled $19,927,073. These financial results and our financial position at January 31, 2024 raise substantial doubt about our ability to continue as a going concern. However, the Company has recently taken actions to strengthen its liquidity. On December 11, 2023, we completed a public offering of 18,400,000 shares of common stock which generated net proceeds of approximately $8,400,000. In addition, the Company’s operating plan for the next twelve months has been updated to reflect recent operating improvements.  Revenues have accelerated and are expected to continue growing. The Company’s new manufacturing facility is scaling production and gross margins are projected to increase. Management has concluded that these recent positive developments alleviate any substantial doubt about the Company’s ability to continue its operations, and meet its financial obligations, for twelve months from the date these consolidated financial statements are issued.

 

Critical Accounting Policies and Estimates

 

Our financial statements and accompanying notes have been prepared in accordance with GAAP applied on a consistent basis. The preparation of financial statements in conformity with GAAP requires management to make estimates and assumptions that affect the reported amounts of assets and liabilities, the disclosure of contingent assets and liabilities at the date of the financial statements and the reported amounts of revenues and expenses during the reporting periods.

 

We regularly evaluate the accounting policies and estimates that we use to prepare our financial statements. A complete summary of these policies is included in the notes to our financial statements. In general, management's estimates are based on historical experience, information from third party professionals, and on various other assumptions that are believed to be reasonable under the facts and circumstances. Actual results could differ from those estimates made by management. 

 

Significant estimates reflected in these financial statements include those used to (i) determine stock-based compensation, (ii) complete purchase price accounting for acquisitions, (iii) accounting for derivatives, and (iv) reserves and allowances related to accounts receivable and inventory.

 

Goodwill and Long-lived Assets – Goodwill represents the future economic benefit arising from other assets acquired in an acquisition that are not individually identified and separately recognized. We test goodwill for impairment in accordance with the provisions of ASC 350, Intangibles – Goodwill and Other, (“ASC 350”). Goodwill is tested for impairment at least annually at the reporting unit level or whenever events or changes in circumstances indicate that goodwill might be impaired. ASC 350 provides that an entity has the option to first assess qualitative factors to determine whether the existence of events or circumstances leads to a determination that it is more likely than not that the fair value of a reporting unit is less than its carrying amount. If, after assessing the totality of events or circumstances, an entity determines it is not more likely than not that the fair value of a reporting unit is less than its carrying amount, then additional impairment testing is not required. However, if an entity concludes otherwise, then it is required to perform an impairment test. The impairment test involves comparing the estimated fair value of a reporting unit with its book value, including goodwill. If the estimated fair value exceeds book value, goodwill is considered not to be impaired. If, however, the fair value of the reporting unit is less than book value, then an impairment loss is recognized in an amount equal to the amount that the book value of the reporting unit exceeds its fair value, not to exceed the total amount of goodwill allocated to the reporting unit.

 

The estimate of fair value of a reporting unit is computed using either an income approach, a market approach, or a combination of both. Under the income approach, we utilize the discounted cash flow method to estimate the fair value of a reporting unit. Significant assumptions inherent in estimating the fair values include the estimated future cash flows, growth assumptions for future revenues (including gross margin, operating expenses, and capital expenditures), and a rate used to discount estimated future cash flow projections to their present value based on estimated weighted average cost of capital (i.e., the selected discount rate). Our assumptions our based on historical data, supplemented by current and anticipated market conditions, estimated growth rates, and management’s plans. Under the market approach, fair value is derived from metrics of publicly traded companies or historically completed transactions of comparable businesses. The selection of comparable businesses is based on the markets in which the reporting units operate and consider risk profiles, size, geography, and diversity of products and services.  

 

Fair Values, Inputs and Valuation Techniques for Financial Assets and Liabilities and Related Disclosures – The fair value measurements and disclosure guidance defines fair value and establishes a framework for measuring fair value. Fair value is defined as the price that would be received to sell an asset or paid to transfer a liability (an exit price) in an orderly transaction between market participants at the measurement date. In accordance with this guidance, the Company has categorized its recurring basis financial assets and liabilities into a three-level fair value hierarchy based on the priority of the inputs to the valuation technique.

  

The fair value hierarchy gives the highest priority to quoted prices in active markets for identical assets or liabilities (Level 1) and the lowest priority to unobservable inputs (Level 3). The inputs used to measure fair value may fall into different levels of the fair value hierarchy. In such cases, the level in the fair value hierarchy within which the fair value measurement in its entirety falls has been determined based on the lowest level input that is significant to the fair value measurement in its entirety. The Company's assessment of the significance of a particular input to the fair value measurement in its entirety requires judgment and considers factors specific to the asset or liability.

 

The guidance establishes three levels of the fair value hierarchy as follows:

 

Level 1: Inputs are unadjusted, quoted prices in active markets for identical assets or liabilities at the measurement date;

Level 2: Inputs are observable, unadjusted quoted prices in active markets for similar assets or liabilities, unadjusted quoted prices for identical or similar assets or liabilities in markets that are not active, or other inputs that are observable or can be corroborated by observable market data for substantially the full term of the related assets or liabilities; and

Level 3: Unobservable inputs that are significant to the measurement of the fair value of the assets or liabilities that are supported by little or no market data.

 

Financial Instruments

 

The Company's financial instruments mainly consist of cash, receivables, current assets, accounts payable, accrued expenses and debt. The carrying amounts of cash, receivables, current assets, accounts payable, accrued expenses and current debt approximates fair value due to the short-term nature of these instruments.

  

Derivative Liabilities

 

The Company has financial instruments that are considered derivatives or contain embedded features subject to derivative accounting. Embedded derivatives are valued separately from the host instrument and are recognized as liabilities on the Company's balance sheet. The Company measures these instruments at their estimated fair value and recognizes changes in their estimated fair value in results of operations during the period of change. 

  

In October 2020 and January 2021, the Company entered into convertible note agreements which included provisions under which the conversion price was equal to the lesser of an initial stated amount or the conversion price of a future offering. This variable conversion feature was recognized as a derivative. Both financings included the issuance of warrants which contained similar variable conversion features. The Company values these convertible notes and warrants using the multinomial lattice method. The valuation is updated each reporting date with the change in the liability reflected as a change in derivative liability in the statement of operations.

 

Recently Issued Accounting Pronouncements

 

The Company has implemented all new accounting pronouncements that are in effect. These pronouncements did not have any material impact on the financial statements unless otherwise disclosed, and the Company does not believe that there are any other new accounting pronouncements that have been issued that might have a material impact on its financial position or results of operations. 

 

 

ITEM 3. QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISK

 

We are a smaller reporting company and are not required to provide this information.

 

 

ITEM 4. CONTROLS AND PROCEDURES

 

Disclosure Controls and Procedures.

 

Our management, with the participation of our CEO and Interim CFO, has evaluated the effectiveness of the Company’s disclosure controls and procedures, as defined in Rule 13a-15(e) and 15d-15(e) of the Exchange Act, as of January 31, 2024.

 

The term “disclosure controls and procedures” as defined in Rules 13a-15(e) and 15d-15(e) means controls and other procedures of the Company that are designed to ensure that information required to be disclosed by a company in reports, such as this report, that it files or submits under the Exchange Act is recorded, processed, summarized and reported within the time periods specified in the SEC rules and forms. Disclosure controls and procedures include, without limitation, controls and procedures designed to ensure that information required to be disclosed by a company in the reports that it files or submits under the Exchange Act is accumulated and communicated to the company’s management, including its principal executive and principal financial officers, as appropriate to allow timely decisions regarding required disclosure. Management recognizes that any controls and procedures, no matter how well designed and operated, can provide only reasonable assurance of achieving their objectives, and management necessarily applies its judgment in evaluating the cost-benefit relationship of possible controls and procedures.

 

Based on that evaluation, our CEO and Interim CFO concluded that our disclosure controls and procedures were effective as of January 31, 2024.  

  

Changes In Internal Control Over Financial Reporting.

 

There were no changes in our internal control over financial reporting (as defined in Rule 13a-15(f) of the Exchange Act) that occurred during the three months ended January 31, 2024 that have materially affected, or are reasonably likely to materially affect, our internal control over financial reporting. 

  

 

PART II - OTHER INFORMATION

 

ITEM 1. LEGAL PROCEEDINGS 

 

From time to time, we are involved in various legal proceedings, lawsuits and claims incidental to the conduct of our business, some of which may be material. Our businesses are also subject to extensive regulation, which may result in regulatory proceedings against us. We do not believe that the outcome of any of our current legal proceedings will have a material adverse impact on our business, financial condition and results of operations.

 

 

ITEM 1A. RISK FACTORS

 

As a smaller reporting company, we are not required to provide the information required by this Item. Our most recent risk factor disclosures may be reviewed in our Annual Report on Form 10-K for the year ended April 30, 2023, as filed with the SEC on July 27, 2023.

 

 

ITEM 2. UNREGISTERED SALES OF EQUITY SECURITIES AND USE OF PROCEEDS

 

None.

 

 

ITEM 3. DEFAULTS UPON SENIOR SECURITIES

 

None.

 

 

ITEM 4. MINE SAFETY DISCLOSURES

 

Not applicable

 

 

ITEM 5. OTHER INFORMATION

 

Rule 10b5-1 Trading Plans

 

During the three months ended January 31, 2024, none of the Company’s directors or executive officers adopted or terminated any contract, instruction or written plan for the purchase or sale of Company securities that was intended to satisfy the affirmative defense conditions of Rule 10b5-1(c) or any “non-Rule 10b5-1 trading arrangement.” 

 

  

ITEM 6. EXHIBITS

 

Exhibit		Description
10.1*		Addendum to Executive Employment Agreement with Joseph Hernon
10.2		Amendment No. 4 to Share Purchase Agreement with Unusual Machines, Inc. (incorporated by reference to Exhibit 10.1 to the Company’s Current Report on Form 8-K filed with the Securities and Exchange Commission on December 15, 2023)
10.3		Form of 8% Promissory Note from Unusual Machines, Inc. (incorporated by reference to Exhibit 10.2 to the Company’s Current Report on Form 8-K filed with the Securities and Exchange Commission on December 15, 2023)
10.4		Form of Registration Rights Agreement with Unusual Machines, Inc. (incorporated by reference to Exhibit 10.3 to the Company’s Current Report on Form 8-K filed with the Securities and Exchange Commission on December 15, 2023)
23.1		Consent of The Crone Law Group, P.C. (incorporated by reference to Exhibit 23.1 to the Company’s Current Report on Form 8-K filed with the Securities and Exchange Commission on August 8, 2023)
31.1*		Certification of Principal Executive Officer pursuant to Exchange Act Rules 13a-14(a) and 15d-14(a), as adopted pursuant to Section 302 of the Sarbanes-Oxley Act of 2002
31.2*		Certification of Principal Financial and accounting Officer pursuant to Exchange Act Rules 13a-14(a) and 15d-14(a), as adopted pursuant to Section 302 of the Sarbanes-Oxley Act of 2002
32.1#		Certification of Chief Executive Officer pursuant to 18 U.S.C. Section 1350, as adopted pursuant to Section 906 of the Sarbanes-Oxley Act of 2002
32.2 #		Certification of Chief Financial Officer pursuant to 18 U.S.C. Section 1350, as adopted pursuant to Section 906 of the Sarbanes-Oxley Act of 2002
101.INS*		Inline XBRL Instance Document
101.SCH*		Inline XBRL Taxonomy Extension Schema Document
101.CAL*		Inline XBRL Taxonomy Extension Calculation Linkbase Document
101.DEF*		Inline XBRL Taxonomy Extension Definition Linkbase Document
101.LAB*		Inline XBRL Taxonomy Extension Labels Linkbase Document
101.PRE*		Inline XBRL Taxonomy Extension Presentation Linkbase Document
104*		Cover Page Interactive Data File (formatted as inline XBRL and contained in Exhibit 101)

 

 

*

Filed herewith.

 

#

This certification is deemed not filed for purposes of Section 18 of the Exchange Act, or otherwise subject to the liability of that section, nor shall it be deemed incorporated by reference into any filing under the Securities Act.

 

 

 

SIGNATURES

 

Pursuant to the requirements of the Securities Exchange Act of 1934, the registrant has duly caused this report to be signed on its behalf by the undersigned thereunto duly authorized.

 

Date: March 18, 2024		Red Cat Holdings, Inc.     By: /s/ Jeffrey Thompson Jeffrey Thompson Chief Executive Officer (Principal Executive Officer)
Date: March 18, 2024		By: /s/ Leah Lunger
		Leah Lunger Interim Chief Financial Officer (Principal Financial and Accounting Officer)

 

 

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