Red Cat Holdings Inc

Previous wording

On September 23, 2024, we entered into a Securities Purchase Agreement (the “SPA”) with Lind Global Asset Management X LLC (“Lind”). Under the SPA, within days of closing, we will receive $8 million in funding from Lind in exchange for our issuance to Lind of a Senior Secured Convertible Promissory Note in the amount of $9,600,000 (the “Note”) and a Common Stock Purchase Warrant for the purchase of 750,000 shares of our common stock at a price of $6.50 per share, exercisable for 5 years (the “Warrant”). As addition consideration to Lind, we have agreed to pay a commitment fee in the amount of $280,000, which may be paid by deduction from the funding to be received. The Note, which does not accrue interest, shall be repaid in eighteen (18) consecutive monthly installments in the amount of $533,334 beginning six months from the issuance date.

Current wording

On September 23, 2024, we entered into a Securities Purchase Agreement (the “SPA”) with Lind Global Asset Management X LLC (“Lind”). Under the SPA, we received $8 million in funding from Lind in exchange for our issuance to Lind of a Senior Secured Convertible Promissory Note in the amount of $9,600,000 (the “Note”) and a Common Stock Purchase Warrant for the purchase of 750,000 shares of our common stock at a price of $6.50 per share, exercisable for 5 years (the “Warrant”). As additional consideration to Lind, we paid a commitment fee in the amount of $280,000, which was paid by deduction from the funding to be received. The Note, which does not accrue interest, shall be repaid in eighteen (18) consecutive monthly installments in the amount of $533,334 beginning March 23, 2024. See Note 13 for further information.

Previous wording

Since April 2016, our primary business has been to provide products, services, and solutions to the drone industry which we presently do through our three wholly owned subsidiaries Skypersonic, Teal, and Propware. Beginning in January 2020, we expanded the scope of our drone products and services through four acquisitions, including:

Current wording

Since April 2016, our primary business has been to provide products, services, and solutions to the drone industry which we presently do through our three wholly owned subsidiaries Skypersonic, Teal, and Propware. Beginning in January 2020, we expanded the scope of our drone products and services through five acquisitions, including:

Previous wording

The analysis of our results of operations for the three months ended July 31, 2024 compared to the three months ended July 31, 2023 includes only our Enterprise segment as our Consumer segment was divested in February 2024.

Current wording

The analysis of our results of operations for the three and six months ended October 31, 2024 compared to the three and six months ended October 31, 2023 includes only our Enterprise segment as our Consumer segment was divested in February 2024.

Previous wording

Consolidated revenues totaled $2,776,535 during the three months ended July 31, 2024 (or the “2024 period”) compared to $1,748,129 during the three months ended July 31, 2023 (or the “2023 period”) representing an increase of $1,028,406, or 59%. The increase related to higher product revenue and higher contract revenue. Product revenue totaled $1,890,095 during the quarter ended July 31, 2024 compared to $1,437,248 during the quarter ended July 31, 2023 representing an increase of $452,847, or 32%. Contract revenues totaled $886,440 during the 2024 period compared to $310,881 during the 2023 period, representing an increase of $575,559, or 185%. Contract revenues are primarily sourced through government agencies and can fluctuate from period to period based on the timing of award deliverables and amendments.

Current wording

Consolidated revenues totaled $1,534,727 during the three months ended October 31, 2024 (or the “2024 period”) compared to $3,930,868 during the three months ended October 31, 2023 (or the “2023 period”) representing a decrease of $2,396,141, or 61%. The decrease related to lower product revenue and lower contract revenue as the Company has begun shifting manufacturing focus from the Teal 2 to the Black Widow. Product revenue totaled $1,524,791 during the quarter ended October 31, 2024 compared to $3,383,238 during the quarter ended October 31, 2023 representing a decrease of $1,858,447, or 55%. There were no contract revenues during the 2024 period compared to $529,438 during the 2023 period, representing a decrease of $529,438, or 100%. Contract revenues are primarily sourced through government agencies and can fluctuate from period to period based on the timing of award deliverables and amendments.

Previous wording

Sales and marketing costs totaled $2,041,511 during the 2024 period compared to $1,288,760 during the 2023 period, representing an increase of $752,751 or 58%. The increase was driven by higher payroll expenses and an increase in tradeshow attendance to support increased sales efforts of our Teal 2 drone.

Current wording

Sales and marketing costs totaled $2,343,779 during the 2024 period compared to $1,032,645 during the 2023 period, representing an increase of $1,311,134 or 127%. The increase was driven by higher payroll expenses due to an increased headcount and an increase in tradeshow attendance in efforts to spread awareness of new products and the Red Cat Futures Initiative.

Previous wording

During the 2024 period, we incurred stock-based compensation costs of $1,446,038 compared to $911,606 in the 2023 period, resulting in an increase of $534,432 or 59%.

Current wording

During the 2024 period, we incurred stock-based compensation costs of $1,304,037 compared to $1,196,325 in the 2023 period, resulting in an increase of $107,712 or 9%.

Previous wording

Net loss from continuing operations totaled $12,416,376 for the 2024 period compared to $5,594,295 for the 2023 period, resulting in an increase of $6,822,081 or 122%. Total operating expenses totaled $6,407,513 for the 2024 period compared to $5,187,700 for the 2023 period. This increase of $1,219,813 or 24%, primarily to the increase in sales and marketing expenses.

Current wording

Net loss from continuing operations totaled $13,334,618 for the 2024 period compared to $5,244,299 for the 2023 period, resulting in an increase of $8,090,319 or 154%. Total operating expenses totaled $9,092,944 for the 2024 period compared to $6,092,862 for the 2023 period. This increase of $3,000,082 or 49%, related to the increase in sales and marketing expenses and general and administrative expenses.

Previous wording

Consolidated gross loss totaled $483,391 during the 2024 period compared to a gross profit of $174,665 during the 2023 period representing a decrease of $658,056, or 377%. On a percentage basis, gross loss was 17% during the 2024 period compared to a gross profit of 10% during the 2023 period. The gross loss in the 2024 period was due to the delivery of final prototypes under the Short Range Reconnaissance Tranche 2 contract with the U.S. Army and did not pertain to product sales.

Current wording

Consolidated gross loss totaled $506,866 during the 2024 period compared to a gross profit of $1,375,247 during the 2023 period representing a decrease of $1,882,113, or 137%. On a percentage basis, gross loss was 12% during the 2024 period compared to a gross profit of 24% during the 2023 period. The gross loss in the 2024 period was due primarily to the delivery of final prototypes under the Short Range Reconnaissance Tranche 2 contract with the U.S. Army which occurred in the first quarter. This is also due to lower-than-planned manufacturing levels in the transition to the Black Widow which resulted in higher relative overhead costs compared to the 2023 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.

Previous wording

Other expense totaled $4,688,889 during the 2024 period compared to $262,891 during the 2023 period, representing an increase of $4,425,998 or more than 16 times. During the 2024 period, we incurred a loss on the sale of our equity method investment of $4,008,357.

Current wording

Other expense totaled $8,907,088 during the 2024 period compared to $614,910 during the 2023 period, representing an increase of $8,292,178 or more than 13 times. This increase is primarily related to a loss incurred on the sale of our equity method investment of $4,008,357 as well as a loss of $4,230,307 recognized on the issuance of the Note to Lind, based on its fair value.

Previous wording

Net cash used in operating activities was $2,348,412 during the 2024 period compared to net cash used in operating activities of $6,926,069 during the 2023 period, representing a decrease of $4,577,657 or 66%. 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 $6,755,639 during the 2024 period, compared to $1,522,611 during the 2023 period, resulting in an increase of $5,233,028, or 344%. Net cash used related to changes in operating assets and liabilities totaled $3,312,325 during the 2024 period, compared to negative $2,854,385 during the 2023 period, representing an increase of $6,166,710 or 216%. 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.

Current wording

Net cash used in operating activities was $12,487,713 during the 2024 period compared to net cash used in operating activities of $11,240,359 during the 2023 period, representing an increase of $1,247,354 or 11%. The increased 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 $13,088,786 during the 2024 period, compared to $7,427,197 during the 2023 period, resulting in an increase of $5,661,589, or 76%. Net cash used related to changes in operating assets and liabilities totaled $601,073 during the 2024 period, compared to negative $3,813,162 during the 2023 period, representing an increase of $4,414,235 or 116%. 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.

Previous wording

Net cash provided by investing activities was $4,300,043 during the 2024 period compared to net cash provided by investing activities of $4,883,345 during the 2023 period, resulting in a decrease of $583,302 or 12%. Proceeds of $4,400,000 from the sale of equity method investment were used to fund operations during the 2024 period.

Current wording

Net cash provided by investing activities was $4,276,207 during the 2024 period compared to net cash provided by investing activities of $10,065,641 during the 2023 period, resulting in a decrease of $5,789,434 or 58%. During the 2023 period, proceeds of marketable securities were approximately $10,200,000 compared to $0 during the 2024 period. During the 2024 period, we received proceeds of $4,400,000 from the sale of equity method investment.

Previous wording

At July 31, 2024, we reported current assets totaling $21,470,151, current liabilities totaling $4,230,512 and net working capital of $17,239,639. Cash totaled $7,732,763 at July 31, 2024. Inventory related balances, including pre-paid inventory, totaled $10,667,676.

Current wording

At October 31, 2024, we reported current assets totaling $20,913,163, current liabilities totaling $14,672,706 and net working capital of $6,240,457. Cash totaled $4,611,092 at October 31, 2024. Inventory related balances, including pre-paid inventory, totaled $12,554,330.

Previous wording

We have never been profitable and have incurred net losses related to acquisitions, as well as costs incurred to pursue our long-term growth strategy. During the three months ended July 31, 2024, we incurred a net lossof approximately $12,000,000 and used cash in operating activities of approximately $2,300,000. As of July 31, 2024, working capital totaled approximately $17,200,000. These financial results and our financial positionat July 31, 2024 raise substantial doubt about our ability to continue as a going concern. However, we have recently taken actions to strengthen our liquidity.

Current wording

We have never been profitable and have incurred net losses related to acquisitions, as well as costs incurred to pursue its long-term growth strategy. During the six months ended October 31, 2024, we incurred a net lossof approximately $25,750,000 and used cash in operating activities of approximately $12,500,000. As of October 31, 2024, working capital totaled approximately $6,240,000. These financial results and our financial positionat October 31, 2024 raise substantial doubt about our ability to continue as a going concern. However, we have recently taken actions to strengthen our liquidity. In November 2024, the Company was selected as the winner of the U.S. Army’s Short Range Reconnaissance (SRR) Program of Record. The Company’s manufacturing facility is scaling production of its most recent products and gross profits are projected to increase. As described in Note 13 and Note 20, the Company closed financings with proceeds of approximately $8,000,000 and $6,000,000 in September 2024 and November 2024, respectively. Additionally, the Company’s Form S-3 became effective on December 11, 2024. If necessary, the Company will seek additional equity financing for which there can be no guarantee. 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.

Previous wording

Significant estimates reflected in these financial statements include those used to (i) complete purchase price accounting for acquisitions, (ii) the evaluation of long-term assets, including goodwill, for impairment, and (iii) the evaluation of other-than-temporary-impairment of equity method investments.

Current wording

Significant estimates reflected in these financial statements include those used to (i) complete purchase price accounting for acquisitions, (ii) the evaluation of long-term assets, including goodwill, for impairment, (iii) the evaluation of other-than-temporary-impairment of equity method investments, and (iv) valuations of convertible notes payable.

Previous wording

Our 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.

Current wording

Our financial instruments mainly consist of cash, accounts receivable, current assets, accounts payable, accrued expenses, notes payable, and convertible notes payable. The recorded carrying amounts of cash, accounts receivable, current assets, accounts payable, accrued expenses, and notes payable are considered to approximate their estimated fair values due to their short-term nature. Liabilities recognized at fair value on a recurring basis in the consolidated balance sheets consist of convertible notes payable. These items are categorized based upon the level of judgment associated with the inputs used to measure their fair values. Fair value is defined as the price that would be paid to transfer a liability in an orderly transaction between market participants at the measurement date.