Quick Take
Red Cat Holdings (NASDAQ:RCAT) has filed to raise $20 million in an IPO uplisting to Nasdaq of its common stock, according to an S-1 registration statement.
The firm designs and sells first-person-view products for drone operations and other drone products.
RCAT has recently acquired Fat Shark to expand its offerings and grow its revenue and customer base.
I'll provide a final opinion when we learn more about the IPO from management.
Company & Technology
Humacao, Puerto Rico-based Red Cat was founded to provide high performance viewing and related products for drone racing and other drone use cases.
Management is headed by president, Chairman and CEO Jeffrey Thompson, who has been with the firm since May 2019 and was previously founder and CEO of Towerstream (OTC:TWER), a fixed wireless internet service provider.
Below is a brief overview video of the company's recent acquisition of Fat Shark:
Source: RedChip Companies
The company's primary offerings include:
Race and freestyle products
SMB / Drone service providers
Platform / enterprise
Red Cat has received at least $4.8 million from investors.
Customer/User Acquisition
The company sells products to different sectors of the drone market, including first person view products sold to racers and freestyle drone enthusiasts as well as other drone products to industry and government.
Red Cat also offers a data acquisition and storage platform for compliant operations for business and related drone operators.
The firm seeks other acquisition opportunities to expand its offerings to various industry targets.
Sales and Marketing expenses as a percentage of total revenue have been 5.0% for the six months ended Oct. 31, 2020.
The company's Sales and Marketing efficiency rate, defined as how many dollars of additional new revenue are generated by each dollar of Sales and Marketing spend, was a very high 20.0x in the most recent reporting period.
Market & Competition
According to a 2020 market research report by MarketsAndMarkets, the global market for drone services of all types is projected to exceed $63 billion by 2025, up from $4.4 billion in 2019.
This represents an extremely strong forecast CAGR of 55.4% from 2019 to 2025.
The main drivers for this expected growth are a growing use of drone services for industry-specific applications, increased need for data about and from operations and an improved regulatory framework.
Also, the North America region will likely account for the greatest demand through 20205, followed by Europe and the Asia Pacific region, as the chart shows below:
Major competitive or other industry participants, whether via products or service offerings, include:
DJI (DJII)
Parrot SA (OTC:PAOTF)
Yuneec
Lumenier
DroneDeploy
Identified Technologies
Measure
Phoenix Drone Services
Prioria Robotics
Sharper Shape
Unmanned Experts
Financial Performance
Red Cat's recent financial results can be summarized as follows:
Increasing topline revenue from a small base
Growing gross profit and gross margin
Increased operating losses
Growing cash used in operations
Below are relevant financial results derived from the firm's registration statement:
Total Revenue | ||
Period | Total Revenue | |
Six Mos. Ended Oct. 31, 2020 | $ 976,089 | |
FYE April 30, 2020 | $ 403,940 | |
Gross Profit (Loss) | ||
Period | Gross Profit (Loss) | |
Six Mos. Ended Oct. 31, 2020 | $ 201,201 | |
FYE April 30, 2020 | $ 78,561 | |
Gross Margin | ||
Period | Gross Margin | |
Six Mos. Ended Oct. 31, 2020 | 20.61% | |
FYE April 30, 2020 | 19.45% | |
Operating Profit (Loss) | ||
Period | Operating Profit (Loss) | Operating Margin |
Six Mos. Ended Oct. 31, 2020 | $ (873,135) | -89.5% |
FYE April 30, 2020 | $ (1,659,146) | -410.7% |
FYE April 30, 2019 | $ (751,332) | --% |
Net Income (Loss) | ||
Period | Net Income (Loss) | |
Six Mos. Ended Oct. 31, 2020 | $ (1,105,525) | |
FYE April 30, 2020 | $ (1,601,931) | |
FYE April 30, 2019 | $ (751,332) | |
Cash Flow From Operations | ||
Period | Cash Flow From Operations | |
Six Mos. Ended Oct. 31, 2020 | $ (568,452) | |
FYE April 30, 2020 | $ (811,584) | |
FYE April 30, 2019 | $ (753,388) | |
Source: Company registration statement
As of September 30, 2020, Red Cat had $480,065 in cash and $2 million in total liabilities.
Free cash flow during the twelve months ended September 30, 2020, was negative ($964,188).
Below are the pro forma financials, which include the acquisition of Fat Shark, for the nine months ended September 30, 2020:
Source: Company registration statement
IPO Details
Red Cat intends to raise $20 million in gross proceeds from an IPO of its common stock, although the final figure may vary.
No existing shareholders have indicated an interest to purchase shares at the IPO price.
The firm's stock is currently quoted on the OTCQB and on February 23, 2021, the average of the high and low prices for the stock was $4.5550 per share.
Management says it will use the net proceeds from the IPO as follows:
Management's presentation of the company roadshow is not available.
The sole listed bookrunner of the IPO is ThinkEquity.
Commentary
Red Cat is seeking to uplist its stock to Nasdaq likely for greater visibility and to take advantage of its recent acquisition of Fat Shark, which promises to sharply increase the firm's revenue base with its around $7 million in annual revenue.
The company's financials could use the help as the firm has little in the way of historical operating results and a tiny revenue base outside of the Fat Shark acquisition
The market opportunity for providing first-person-view products and drone software is significant, although management admits the drone racer/enthusiast market is small, however influential.
Management appears to be pursuing an acquisition approach to entering new markets, although the firm faces competition from a growing array of product and service providers.
The industrial/commercial drone space is characterized by specialized providers of equipment to each industry vertical, so is likely not a horizontal play.
ThinkEquity is the only listed underwriter and IPOs led by the firm over the last 12-month period have generated an average return of 18.1% since their IPO. This is a middle tier performance for all major underwriters during the period.
With the financials for the Fat Shark on a pro forma basis, the firm is still generating operating losses, at least for the most recent reporting period of the nine months ended September 30, 2020.
Valuation at IPO will be critical, so when we learn that information, I'll provide a final opinion.
Expected IPO Pricing Date: To be announced.
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