Red Cat Holdings, Inc.: Form 10-Q for the period ended Mar 31, 2026

You should read the following discussion and analysis of our financial condition and results of operations together with our financial statements and the related notes appearing elsewhere in this Quarterly Report on Form 10-Q. In addition to historical information, this discussion and analysis contains forward-looking statements that involve risks, uncertainties and assumptions. Our actual results may differ materially from those discussed below. Factors that could cause or contribute to such differences include, but are not limited to, those identified below, and those discussed in the section titled “Risk Factors” included in our Annual Report on Form 10-K for the year ended December 31, 2025 as may be amended, supplemented or superseded from time to time by other reports we file with the SEC. All amounts in this report are in U.S. dollars, unless otherwise noted.

Overview

We are a drone technology company integrating robotic hardware and software for military, government and commercial operations. We were originally incorporated under the laws of the State of Colorado in 1984 under the name “Oravest International, Inc.” In November 2016, we changed our name to “TimefireVR, Inc.” and re-incorporated in Nevada. In May 2019, we completed a share exchange agreement with Propware which resulted in the Propware shareholders acquiring an 83% ownership interest, and management control, of the Company. In connection with the share exchange agreement, we changed our name to “Red Cat Holdings, Inc.”, and our operating focus to the drone industry.

Prior to the share exchange agreement, Propware was focused on the research and development of software solutions that could provide secure cloud-based analytics, storage and services for the drone industry. Following the share exchange agreement and name change, we have completed a series of acquisitions and financings which have broadened the scope of our activities in the drone industry.

Discussion and Analysis of the Three Months Ended March 31, 2026 Compared to the Three Months Ended March 31, 2025

Revenues

(in thousands)

Consolidated revenues totaled $15.5 million during the three months ended March 31, 2026, or the “2026 period” compared to $1.6 million during the three months ended March 31, 2025, or the “2025 period” representing an increase of $13.9 million, or 849%. The increase is attributable primarily to increased revenue associated with the scaling of drone deliveries to the U.S. Army under the SRR program.

Gross Profit

(in thousands)

Consolidated gross profit totaled $2.0 million during the 2026 period compared to a gross loss of $0.8 million during the 2025 period representing an increase of $2.8 million. On a percentage basis, gross profit was 13% during the 2026 period compared to a gross loss of 52% during the 2025 period. The gross profit increase was primarily due to higher revenue and lower inventory write-offs in the 2026 period compared to the 2025 period.

Operating Expenses

(in thousands)

Research and development expenses totaled $8.0 million during the 2026 period compared to $3.4 million during the 2025 period, representing an increase of $4.5 million or 132%. The increase was attributable primarily to increased investment in engineering personnel costs, prototype development, testing, and other expenses associated with the development of new and enhanced drone platforms and related technologies.

Sales and marketing costs totaled $4.6 million during the 2026 period compared to $3.3 million during the 2025 period, representing an increase of $1.3 million or 38%. The increase was attributable primarily to higher payroll and related personnel costs associated with expanding our sales and marketing team to support increased business development and customer engagement activities.

General and administrative expenses totaled $16.7 million during the 2026 period compared to $4.9 million during the 2025 period, representing an increase of $11.8 million or 243%. The increase was attributable primarily to higher payroll and related personnel costs resulting from increased headcount, as well as higher stock-based compensation expense. These increases reflect the expansion of our corporate, administrative, and compliance functions to support growth during the 2026 period.

Stock-Based Compensation

(in thousands)

During the 2026 period, we incurred stock-based compensation costs of $4.8 million compared to $1.6 million in the 2025 period, resulting in an increase of $3.2 million or 201%. This increase was driven by expense from new grants awarded since March 31, 2025, primarily due to increased headcount.

Other (Income) Expense

(in thousands)

Other income totaled $0.8 million during the 2026 period compared to other expense of $10.6 million during the 2025 period, representing an increase of $11.4 million or 107%. This increase was attributable primarily to the change in fair value of convertible notes payable, which resulted in a loss of $10.7 million during the 2025 period compared to a loss of $0.9 million during the 2026 period. Interest income also increased from $0.1 million during the 2025 period to $1.3 million during the 2026 period.

Cash Flows

The following table summarizes our cash flows for the periods indicated (in thousands):

Operating Activities

Net cash used in operating activities was $31.9 million during the three months ended March 31, 2026 (or the “2026 period”) compared to net cash used in operating activities of $15.9 million during the three months ended March 31, 2025 (or the “2025 period”), representing an increase of $16.0 million or 101%. The increase was attributable primarily to inventory purchases made during the 2026 period, partially offset by accounts receivable collections. Net cash used in operations, net of non-cash expenses, totaled $6.2 million during the 2026 period, compared to $12.9 million during the 2025 period, resulting in a decrease of $6.7 million, or 52%. Net cash used related to changes in operating assets and liabilities totaled $11.6 million during the 2026 period, compared to net cash used of $5.7 million during the 2025 period, representing an increase of $5.9 million. 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 used in investing activities was $6.8 million during the 2026 period compared to net cash used in investing activities of $0.3 million during the 2025 period, resulting in an increase of $6.5 million. This increase was due to increased purchases of property and equipment.

Financing Activities

Net cash provided by financing activities totaled $2.8 million during the 2026 period compared to net cash provided by financing activities of $14.7 million during the 2025 period. This decrease is attributable primarily to proceeds from issuance of convertible notes payable of $15.0 million received during the 2025 period which were not present in the 2026 period. This decrease was partially offset by proceeds from warrant exercises of $2.8 million during the 2026 period which were not present in the 2025 period.

Liquidity and Capital Resources

At March 31, 2026, we reported current assets totaling $209.7 million, current liabilities totaling $19.1 million and net working capital of $190.6 million. Cash totaled $131.9 million at March 31, 2026. Inventory related balances, including prepaid inventory, totaled $62.7 million.

Critical Accounting Policies and Estimates

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 addition to our critical accounting estimates and polices below, refer to “Note 2 – Summary of Significant Accounting Policies” for further information.

Revenue Recognition

We recognize revenue in accordance with ASC Topic 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. We determined there to be judgment in the determination of performance obligations identified in certain contracts. Our revenue transactions include the shipment of goods to customers as orders are fulfilled, completion of non-recurring engineering, completion of training, and customer support services. We recognize revenue upon shipment of product or prototypes unless otherwise specified in the purchase order or contract.

Purchase Price Accounting

We record our acquisitions under the acquisition method of accounting, under which the identifiable assets acquired and liabilities assumed are initially recorded at their respective fair values and any excess purchase price is reflected as goodwill. We utilize management estimates and, in some instances, independent third-party valuation firms to assist in determining the fair values of assets acquired, liabilities assumed, and contingent consideration, if any. Such estimates and valuations require us to make significant assumptions, including projections of future events and operating performance.

The fair value of brand names, backlog, customer relationships, non-compete agreements, and proprietary technology acquired in our acquisitions are determined using various valuation methods based on significant assumptions specific to each acquisition. We evaluate each acquired intangible asset individually to determine whether its useful life is finite or indefinite. Brand names are assigned an indefinite useful life when no factors are identified that would limit the period over which the brand name is expected to contribute to the Company's cash flows; otherwise, brand names are amortized over their estimated useful lives.

Finite-lived intangible assets are amortized on a straight-line basis over their estimated useful lives. Proprietary technology is being amortized over six to seven years. Backlog is being amortized over two years. Customer relationships is being amortized over seven years. Non-compete agreements are being amortized over three years. Finite-lived intangible assets are reviewed for impairment whenever events or changes in circumstances indicate that the carrying amount may not be recoverable.

The estimated fair values are subject to change during the measurement period, which is limited to one year subsequent to the acquisition date.

Recent Accounting Pronouncements

For information on recently issued accounting pronouncements, if any, refer to Note 2 - Summary of Significant Accounting Policies in our condensed consolidated financial statements included elsewhere in this Quarterly Report on Form 10-Q.

We are not required to provide the information required by this Item as we are a “smaller reporting company,” as defined in Rule 12b-2 of the Exchange Act.

Evaluation of Disclosure Controls and Procedures

The Company’s management, with the participation of the Company’s Chief Executive Officer and Chief Financial Officer, have evaluated the effectiveness of the design and operation of the Company’s disclosure controls and procedures (as defined in Rules 13a-15(e) and 15d-15(e) under the Securities Exchange Act of 1934, as amended (the “Exchange Act”)) as of March 31, 2026. Based on that evaluation, the Company’s Chief Executive Officer and the Company’s Chief Financial Officer have concluded that, as a result of the material weakness discussed below, the Company’s disclosure controls and procedures were not effective.

In light of the material weaknesses described below, management performed additional analysis and other procedures to ensure that our consolidated financial statements were prepared in accordance with U.S. generally accepted accounting principles (GAAP). Accordingly, management believes that the consolidated financial statements included in this Quarterly Report on Form 10-Q fairly present, in all material respects, our financial position, results of operations, and cash flows as of and for the periods presented, in accordance with U.S. GAAP.

Management’s Report on Internal Control over Financial Reporting

Management is responsible for establishing and maintaining adequate internal control over financial reporting (as defined in Rules 13a-15(f) and 15d-15(f) of the Exchange Act). The Company’s management, with participation of the Chief Executive Officer and Chief Financial Officer, and under the oversight of our Board of Directors, conducted an evaluation of the effectiveness of our internal control over financial reporting based on the framework in “Internal Control — Integrated Framework (2013)” issued by the Committee of Sponsoring Organizations of the Treadway Commission. Based on that evaluation, management concluded that the Company’s internal control over financial reporting was not effective as of March 31, 2026 due to the material weaknesses in internal control over financial reporting described below.

Because of its inherent limitations, internal control over financial reporting may not prevent or detect misstatements. Also, projections of any evaluation of effectiveness to future periods are subject to the risk that controls may become inadequate because of changes in conditions, or that the degree of compliance with the policies or procedures may deteriorate. We continue to review our internal control over financial reporting and may from time to time make changes aimed at enhancing their effectiveness and to ensure that our systems evolve with our business.

A material weakness is a deficiency, or a combination of deficiencies, in internal control over financial reporting such that there is a reasonable possibility that a material misstatement of our financial statements will not be prevented or detected on a timely basis.

Management identified material weaknesses due to an insufficient number of resources that resulted in inadequate levels of supervision and review and segregation of duties.

The control deficiencies did not result in any material misstatements. However, the control deficiencies described above created a reasonable possibility that a material misstatement to the consolidated financial statements would not be prevented or detected on a timely basis. The material weaknesses in the Company's internal control over financial reporting previously disclosed in the Company's Annual Report on Form 10-K for the fiscal year ended December 31, 2025 continued to exist as of March 31, 2026. The Company continues to implement its remediation plan as described below.

Management’s Remediation Plans

The above material weaknesses existed in prior year, and management has made progress towards their remediation as follows:

We have hired additional qualified personnel to establish more robust processes, perform effective risk assessment, and design and implement process-level controls to mitigate identified risks. We have enhanced the level of supervision and review and segregation of duties, formalized accounting and financial reporting policies and procedures manuals, and designed and implemented additional process-level controls, including those over complex transactions.

We believe the above actions will be effective in remediating the material weaknesses described above. However, the material weaknesses cannot be considered remediated until remediated controls operate for a sufficient period of time and management has concluded, through testing, that these controls are operating effectively.

Changes In Controls Over Financial Reporting

There was no change in our internal controls over financial reporting, as defined under Rule 13a-15(f) under the Exchange Act, that has materially affected, or is reasonably likely to materially affect, our internal controls over financial reporting.

Risk factors that affect our business and financial results are discussed in Part I, Item 1A “Risk Factors,” in our Annual Report on Form 10-K for the year ended December 31, 2025, as filed with the SEC on March 19, 2026 (“Annual Report”), as supplemented by our Quarterly Reports on Form 10-Q. Except for the risk factors described below, there have been no material changes in our risk factors from those previously disclosed in our Annual Report. You should carefully consider the risks described in such reports which could materially affect our business, financial condition or future results. The risks described in such reports are not the only risks we face. Additional risks and uncertainties not currently known to us or that we currently deem to be immaterial also may materially adversely affect our business, financial condition, and/or operating results. If any of the risks actually occur, our business, financial condition, and/or results of operations could be negatively affected.

We may be subject to litigation, legal proceedings, and class action claims that could adversely affect our business and financial condition.

From time to time, we are subject to claims, legal proceedings, and class action lawsuits arising in the ordinary course of our business or otherwise. For example, we and certain of our current and former executive officers and directors are defendants in a federal class action securities lawsuit filed in May 2025 and two related federal shareholder derivative lawsuits filed in August 2025 and January 2026. Each lawsuit alleges that, among other items, the defendants made false and/or misleading statements related to the production capacity of the Company’s manufacturing facility in Salt Lake City and the potential value of the Company’s contract for the U.S. Army’s SRR Program of Record. Although we do not currently believe that any pending or threatened legal proceedings or claims will have a material adverse effect on our business, financial condition, or results of operations, we cannot provide assurance that pending legal matters, including the class action and derivative lawsuits, will not result in significant liabilities. The defense of litigation, regardless of its merit, can be costly and time-consuming, may divert management's attention and resources, and could result in settlements, judgments, or other outcomes that adversely affect our business, financial condition, and results of operations. Any adverse resolution of such matters could also harm our reputation and negatively impact our relationships with customers, partners, and government agencies.

Our pending acquisition of Quaze Technologies, Inc. (“Quaze”) is subject to customary closing conditions, including regulatory approval under the Investment Canada Act, which may delay, prevent, or impose burdensome conditions on the consummation of the transaction, potentially materially adversely affecting our business, financial condition, and stock price.

The completion of our proposed acquisition of Quaze (the "Acquisition") is subject to customary closing conditions, including the receipt of required regulatory approvals. Specifically, the Acquisition is subject to review and clearance under the Investment Canada Act (the "ICA"). There can be no assurance that the necessary clearances under the ICA will be obtained in a timely manner, or at all. The Canadian governmental authorities possess significant discretion in their review process.

If we fail to satisfy any of the closing conditions, including failing to obtain the required ICA clearance, or if the governmental authorities seek to impose conditions that are unacceptable to us or that permit either party to terminate the definitive transaction agreement, the Acquisition may not close. If the Acquisition is delayed or not consummated:

• the market price of our common stock may decline to the extent that the current market price reflects a market assumption that the transaction will be completed;
• we will have incurred significant transaction costs, including legal, accounting, and advisory fees, and committed substantial management time and resources, which must be absorbed regardless of whether the Acquisition is completed; and
• we will not realize the anticipated strategic and financial benefits of the Acquisition, which could adversely affect our future business plans and growth strategy.

Any of these outcomes could have a material adverse effect on our business, financial condition, and results of operations.