Item 1. Business
ITEM 1. BUSINESS
Overview
The Company was 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, the Company 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. (“Red Cat” or the “Company” or “we”) 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 its name change, Red Cat has completed a series of acquisitions and financings
which have broadened the scope of its activities in the drone industry. These acquisitions included:
In January 2020, we acquired Rotor Riot, a reseller of drones and related parts, primarily to the consumer marketplace through its digital storefront located at www.rotorriot.com. The total purchase price was $2.0 million.
In November 2020, the Company acquired Fat Shark which sells consumer electronics products to the first-person view (“FPV”) sector of the drone industry. Fat Shark’s flagship products are headsets with a built-in display (or “goggles”) that allow a pilot to see a real-time video feed from a camera typically mounted on an aerial platform or drone. The total purchase price was $8.4 million.
In May 2021, we acquired Skypersonic, a provider of drone products and software solutions that enable drone inspection flights that can be executed by pilots anywhere in the world. Skypersonic powers drones to “Fly Anywhere” and “Inspect the Impossible”. Its patented software and hardware solutions allow for inspection services in restricted spaces where GPS is denied or unavailable. The total purchase price was $2.8 million.
In August 2021, the Company acquired Teal, a leader in providing sophisticated and complex unmanned aerial vehicle ("UAV") technology, primarily drones, to government and commercial enterprises, most notably, the military. Teal manufactures drones approved by the U.S. Department of Defense for reconnaissance, public safety, and inspection applications. The total purchase price was $10.0 million.
Following the Teal acquisition in August 2021, we
concentrated on integrating and organizing these businesses. Effective May 1, 2022, we established the Enterprise segment and the Consumer
segment to focus on the unique opportunities in each sector. The Enterprise segment’s initial strategy was to provide UAVs to commercial
enterprises, and the military, to navigate dangerous military environments and confined industrial and commercial interior spaces. Subsequently,
the segment 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 Enterprise segment’s
current business strategy is focused on providing integrated robotic hardware and software for use across a variety of applications.
Its solutions provide critical situational awareness and actionable intelligence to on-the-ground warfighters and battlefield commanders
as well as firefighters and public safety officials. Our Enterprise segment’s efforts are centered on developing and scaling an
American made family of systems. We have since completed construction of a manufacturing facility in Salt Lake City and believe that
an increased focus by the United States government and American businesses on purchasing products that are “Made in America”
provide our Enterprise segment with a competitive advantage.
On February 16, 2024,
we closed the sale of our Consumer segment, consisting of Rotor Riot and Fat Shark, to Unusual Machines, Inc. (or “Unusual Machines”
or “UMAC”). The sale reflects our decision to focus our efforts and capital on defense where we believe there are more opportunities
to create long term shareholder value.
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Key Business
Accomplishments during Fiscal 2024 and to date include:
Scaling
Teal 2, a military-grade sUAS Designed to “Dominate the Night™”
Following its acquisition
by Red Cat in August 2021, Teal accelerated efforts on the development of its next generation drone for our Enterprise segment. These
efforts culminated in the launch of the Teal 2 in April 2023. The Teal 2 is the first small, unmanned aircraft system (“sUAS”)
designed to “Dominate the Night”, when most combat operations take place, through its enhanced capabilities. The Teal 2 offers
the latest intelligence, surveillance, and reconnaissance (“ISR”) technology and delivers time-critical information that enables
the warfighter to make faster and smarter decisions.
The Teal 2 is manufactured
exclusively at Teal’s purpose-built factory in Salt Lake City, Utah. Teal originally moved into the facility in October 2021. In
January 2022, Teal doubled the size of the facility, which now totals approximately 22,000 square feet, to fully scale production capacity
to meet the forecast growth in demand and to house its expanding team of software and technology engineers. We believe that maximum production
capacity for this facility can reach 5,000 or more drones per month over the next few years, provided that additional capital investments
are made and manufacturing efficiencies realized. Manufacturing in the United States, “Made in the USA,” is a critical consideration
of the U.S. government and other state and local government agencies.
During
Fiscal 2024, Teal continued to scale the manufacturing facility, including dedicated teams for production and assembly, manufacturing
engineering, supply chain and logistics, warranty and returns, as well as a flight operations team that is focused on manufacturing and
quality assurance and quality control.
Designation of Teal
2 as Blue UAS received from U.S. Department of Defense
In June 2023, the Teal 2 received clearance from
the U.S. Department of Defense ("DoD") to be designated as a Blue UAS. The DoD defines these drones as NDAA (National Defense
Authorization Act) compliant, validated as cyber secure, and safe to fly. This designation enables Teal to fill orders from federal, state,
and local government agencies subject to oversight by the DoD, including those orders that were contingent upon receiving certification.
In addition, many governments of allied nations are more likely to purchase Blue UAS approved drones. Teal's legacy drone, the Golden
Eagle, is also on the cleared list.
After the U.S. Army banned its forces from using
Chinese-made quadcopters due to security risks (the radio controls of the drone are unencrypted and the devices could potentially capture,
store and upload sensitive information to the Chinese government), the DoD began developing its own alternatives under a defense program
known as Blue sUAS. Blue sUAS is an initiative of the Defense Innovation Unit (“DIU”), the only DoD organization focused on accelerating
the adoption of commercial and dual use technology to solve operational challenges at a speed and scale that is faster and higher than
normal for government agencies.
Red Cat Futures Initiative
In May 2024, we announced the formation of the
Red Cat Futures Initiative (RFI). RFI is an independent, industry-wide consortium of robotics and autonomous systems (RAS) partners dedicated
to putting the most advanced and interoperable uncrewed aircraft systems into the hands of warfighters. Anchored by Red Cat’s Teal
Drones, the RFI unites the world’s most innovative UAS hardware and software companies focused on AI/ML, swarming, FPV, command
and control, and payloads.
Founding members include Ocean Power Technologies
(NYSE: OPTT), Sentien Robotics, Primordial Labs, Athena AI, Unusual Machines, Reach Power, Doodle Labs, and MMS Products. The shared goal
is advocacy, integrations and co-marketing that bridges considerable technology gaps through modular open architecture.
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Government Contracts and Orders
The Enterprise segment is focused on U.S. federal
government agencies, particularly the DoD, as its initial target market. Its longer term target customer base includes U.S. state
and local government agencies, as well as governments of foreign allies. An overview of existing government contracts and recent
developments include:
Finalist for Short Range Reconnaissance Program
of Record
In March 2022, Teal was selected by the DoD’s
DIU and the U.S. Army to compete in the Short Range Reconnaissance Tranche 2 (SRR T2) Program of Record. The rigorous technical requirements
and program objectives of SRR T2 dramatically narrowed the field from 37 drone manufacturers down to two vendors. The Army has
indicated that Tranche 2 and 3 have been combined and will represent the final tranche of the SRR program.
Teal was selected to develop a next-generation
sUAS designed for intelligence, surveillance and reconnaissance (ISR) duties, with a focus on autonomous capability, for the U.S. Army.
The ultimate goal of the SRR T2 program is to provide a small, rucksack portable, fully encrypted sUAS that provides all Army infantry
platoons (consisting of 20-50 soldiers) with situational awareness beyond the next terrain.
As of May 2024, Teal has completed all milestones
in its SRR T2 contract, whose value totaled $5.7 million. Teal expects the Army to announce vendor selection of a production award by
the fourth quarter of calendar 2024.
U.S. Border Patrol
$1.8 Million Purchase Order from U.S. Border
Patrol
In September 2023, Teal was awarded a $1.8 million
contract from U.S. Customs and Border Protection to provide Teal 2 systems to U.S. Border Patrol. The U.S. Border Patrol is using the
Teal 2 to provide supplemental airborne reconnaissance, surveillance and tracking capability, enhancing situational awareness for U.S.
field commanders and agents.
Customs and Border Protection Contract Worth
up to $90 Million over Five Years
In December 2021, Teal was one of only five contractors
designated to participate in a firm, fixed price, multiple award blanket purchase agreement (BPA) by the United States Customs and Border
Protection. The BPA has an estimated value of $90 million in total over a 5-year period.
The Department of Homeland Security agencies
can place orders through the BPA for unmanned aircraft systems (UAS). The drones will provide supplemental airborne reconnaissance, surveillance,
and tracking capability to enhance situational awareness for field commanders and agents in areas that lack nearby traditional surveillance
systems or available manned air support.
U.S. Defense Logistics Agency
In August 2023, Teal received two purchase orders
totaling $5.2 million from the U.S. Defense Logistics Agency (DLA). Both orders were requested by U.S. Air Force Security Forces, whose
role is to defend Air Force bases and installations.
The procurements were sourced by global
operations support company Noble Supply & Logistics, LLC (NOBLE) as part of the DLA’s Special Operational
Equipment Tailored Logistics Support (“SOE TLS Program”). NOBLE is a DLA-designated provider for the SOE TLS Program. This 10-year
program, capped at $33 billion, covers the delivery of logistics support to federal agencies, military bases and
other DLA customers worldwide, helping them meet their special operational equipment requirements.
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NATO Allied Countries
In March 2024, Teal received $2.5 million in
new contract awards with two NATO allied countries. As part of our expanded global sales strategy, the contract delivery featured Teal
2 drone systems, training, and accessories.
Product
Development
Product
development efforts in fiscal 2024 were focused on the scaling of the Teal 2 which was officially launched in April 2023 at the Army
Aviation Mission Solutions Summit. Significant resources were also expended developing the next generation system under the Army's SRR
Tranche 2 program.
Sales
and Marketing
Since
acquiring Teal in August 2021, we have built a sales and marketing team which presently consists of 16 direct and support professionals.
Most of their efforts in fiscal 2024 were focused on developing relationships with the military agencies of the U.S. Federal Government.
While the sales cycle for government agencies can be extensive and take considerable time and effort to establish, they can often become
a long-term buyer once initial sales are closed.
During fiscal 2024,
we continued global expansion efforts among U.S. allies. In December 2023, the team showcased the Teal 2 drone at Expodefensa 2023 in
Latin America. Expodefensa 2023 is a main hub for security and defense in Latin America, allowing international exhibitors to present
their systems and products in response to a growing regional demand. The aim of the event was to help governments and armed forces face
their operational and capability challenges while playing a role in building a safer Latin America.
In February 2024, the
team showcased the Teal 2 drone at the World Defense Show in Saudi Arabia. The World Defense Show provided a unique platform for the
world’s defense industry to network, partner, share knowledge, and discover new innovations and capabilities across all defense
domains. The World Defense Show attracted key defense figures, government officials, decision-makers, and thought leaders across all
levels of the supply chain.
Other Teal Information
Suppliers
Teal purchases inventory
from over 35 suppliers. Approximately 80% of this inventory is purchased from four vendors. The most critical components are electronics
and cameras. Teal's supply chain is NDAA and Blue UAS compliant. All suppliers are approved based on Teal's strict vendor qualification
process.
Competition
Teal's primary competitor is Shenzhen Da-Jiang Innovations
Sciences and Technologies Company Limited (“DJI”), headquartered in Shenzhen, China. Though regulation is trending toward
further restrictions against Chinese made drones, DJI remains a global industry leader and continues to serve markets on which Teal is
focused. Teal’s primary domestic competitor is Skydio Inc. This company was selected alongside Teal out of 37 companies to compete
in the Short Range Reconnaissance Tranche 2 program. Future competitors may include established defense contractors that are better capitalized
and resourced to compete in Teal's markets. Teal competes with a combination of its unique product value propositions (i.e., nighttime
capability, modular platform), and scalable, low-cost, domestic manufacturing.
The Drone Industry
The drone industry
continues to expand to become a powerful business tool and recreational activity, with growth occurring broadly and across our targeted
industries. According to Drone Industry Insights, the global drone market is expected to grow to $54.6 billion by 2030, with the commercial
market growing at a 7.7% compound annual growth rate (“CAGR”). According to Vantage Market Research, the global military
drone market is projected to reach a value of $34.9 billion by 2030 at a CAGR of 11.6%.
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Government Regulation
and Federal Policy
The Federal Aviation
Administration
The Federal Aviation Administration (the “FAA”)
of the United States Department of Transportation is responsible for the regulation and oversight of civil aviation within the U.S. Its
primary mission is to ensure the safety of civil aviation. The FAA has adopted the name “unmanned aircraft systems” (“UAS”)
to describe aircraft systems without a flight crew on board. More common names include drone, UAV and remotely operated aircraft.
The FAA began issuing conditional approvals allowing
the operation of drones as early 2005 with their scope and frequency expanding in recent years with the significant increase in the number
of drones sold. In December 2015, the FAA announced that all drones weighing more than 250 grams, or 0.55 pounds, must be registered with
the FAA. In June 2016, the FAA released a new section under title 14 of the Code of Federal Regulations (Part 107) defining a regulatory
framework for the commercial, industrial and public safety use of drones, establishing a licensing program for drone pilots, and issuing
Remote Pilot certificates to qualified pilots. As of July 2023, the FAA reported the registration of almost 870,000 drones, of which approximately
350,000 were commercial and approximately 520,000 were recreational. In addition, more than 330,000 remote pilots were certified. This
data strongly suggests drones represent the largest share of commercial aviation in the United States by number of pilots, aircraft, and
flights.
In January 2021, the
FAA finalized rules requiring that drones be identifiable remotely. These rules became effective for drone manufacturers in September
2022 and for drone pilots in September 2023. The FAA believes that remote ID technologies enhance safety and security by allowing the
FAA, law enforcement, and federal security agencies to identify drones flying in their jurisdiction. These efforts lay the foundation
for more complex operations, such as those beyond visual line of sight at low altitudes, as the FAA and the drone industry move toward
a unified air traffic management ecosystem as drone operations become a routine fixture in the National Airspace System (the “NAS”).
In May of 2023, the
FAA began soliciting recommendations from the industry regarding rule making supporting the implementation of Beyond Visual Line of Sight
(BVLOS) operations. This rulemaking would support standard implementation of routine flights over the horizon, and potentially multiple
miles from a drone’s control station and pilot. This rulemaking would free drone pilots and operators from restrictive and labor-intensive conditional approval petitions, and would improve the economies of scale for drones to tackle larger mission sets, such as
surveying miles of power lines or railroad tracks, or securing miles of rural border.
In July 2023, the FAA
released a notice of proposed rulemaking for another regulation that would ease the integration of UAS into the NAS. This rule, known
as Modernization of Special Purpose Airworthiness Certificates, seeks to modernize the manner in which the FAA performs safety assessment
of the design of certain aircraft, including UAS. As a result, the testing and evaluation burden on manufacturers is greatly decreased,
and the cost of development of UAS may be dramatically reduced.
American Security
Drone Act
In February 2023, two
Congressman introduced the American Security Drone Act (ASDA) which would prohibit the purchase and operation of drones from countries
identified as national security threats such as China. The basis for the legislation is that purchases from these countries (i) pose
a significant threat to national security, (ii) represent efforts to infiltrate and influence American society, and (iii) risk the theft
of personal and business data. Specifically, the American Security Drone Act:
Prohibits federal departments and agencies from procuring
certain foreign commercial off-the-shelf drone or covered unmanned aircraft system manufactured or assembled in countries identified
as national security threats and provides a timeline to end current use of these drones.
Prohibits the use of federal funds awarded through certain
contracts, grants, or cooperative agreements to state or local governments from being used to purchase foreign commercial off-the-shelf
drones or covered unmanned aircraft systems manufactured or assembled in a country identified as a national security threat.
Requires the Comptroller General of the United States to
submit a report to Congress detailing the amount of foreign commercial off-the-shelf drones and covered unmanned aircraft systems
procured by federal departments and agencies from countries identified as national security threats.
In
December 2023, the ASDA was officially passed into law as part of the National Defense Authorization Act.
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Other Corporate
Information
Environmental
Considerations
While the
operations of many businesses have some form of negative impact on the environment, drones have a unique ability to provide a positive
contribution. Many of these relate to a drone’s ability to reach places in a more efficient manner, and include such activities
as:
Aerial mapping
and nature monitoring
Maintenance
of renewable energy sources and infrastructure
Disaster relief
monitoring
Agriculture
sustainability
Wildlife conservation
Intellectual
Property
The
Company has consolidated its intellectual property (“IP”) into a subsidiary, UAVPatent Corp. The subsidiary holds 22 issued
patents and registered designs and 8 pending patents and registered designs. The IP portfolio includes design and utility patents ranging
from modular architectures to autonomous capabilities. None of the patents are currently licensed and IP is generated in the general
course of engineering design.
UAVPatent
Corp also has the trademarks on the Teal, Skypersonic, and Red Cat brands and logos.
Employees
As of June 30, 2024,
the Company had 89 full-time employees.
Research and
Development
During the years ended
April 30, 2024 and 2023, we incurred research and development costs of $5,500,932 and $4,902,334, respectively, excluding $395,105 and
$692,947 of stock-based compensation, respectively.
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