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What changed in Red Cat Holdings, Inc.'s 10-K — 2022 vs 2023

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Paragraph-level year-over-year comparison of Red Cat Holdings, Inc.'s 2022 and 2023 10-K annual filings, covering the Business, Risk Factors, Legal Proceedings, Cybersecurity, MD&A and Market Risk sections. Every new, removed and edited paragraph is highlighted side-by-side so you can see exactly what management changed in the 2023 report.

+401 added−340 removedSource: 10-K (2023-07-27) vs 10-K (2022-07-27)

Top changes in Red Cat Holdings, Inc.'s 2023 10-K

401 paragraphs added · 340 removed · 207 edited across 5 sections

Item 1. Business

Business — how the company describes what it does

172 edited+129 added−77 removed148 unchanged
Biggest changeThere are a number of competing providers of micro-display-based personal display technology, including HMDs, and we may fail to capture a substantial portion of the FPV personal wearable display market. In addition to competing with other HMD manufacturers and distributors for FPV displays, we also compete with micro-display-based personal display technologies that have been developed by other companies.
Biggest changeIn addition to competing with other HMD manufacturers and distributors for FPV displays, we also compete with micro-display-based personal display technologies that have been developed by other companies. Numerous start-up companies plan to offer HMD products and developer kits in the future. Further, industry blogs have speculated that companies such as Apple may also offer HMDs in the future.
Specifically, the bill states: "United States taxpayer dollars invested in public infrastructure should not be used to reward companies that have moved their operations, investment dollars, and jobs to foreign countries or foreign factories, particularly those that do not share the commitment of the United States to environmental, worker, and workplace safety protections." 10 Red Cat Holdings was founded as an American company and each of its acquisitions has been completed within the U.S. borders to help strengthen the U.S. economy and provide U.S.-based jobs.
Specifically, the bill states: "United States taxpayer dollars invested in public infrastructure should not be used to reward companies that have moved their operations, investment dollars, and jobs to foreign countries or foreign factories, particularly those that do not share the commitment of the United States to environmental, worker, and workplace safety protections." Red Cat Holdings was founded as an American company and each of its acquisitions has been completed within the U.S. borders to help strengthen the U.S. economy and provide U.S.-based jobs.
This effect requires sophisticated electronics that transmit visual information with sufficient speed and reliability to allow pilot control over the drone in real-time. Pilots routinely achieve speeds of over 90 mph in racing and other mission critical applications. An FPV pilot must experience a near complete transfer of their visual consciousness into the body of their piloted device.
This requires sophisticated electronics that transmit visual information with sufficient speed and reliability to allow pilot control over the drone in real-time. Pilots routinely achieve speeds of over 90 mph in racing and other mission critical applications. An FPV pilot must experience a near complete transfer of their visual consciousness into the body of their piloted device.
If we are unable to continually add software and hardware, effectively upgrade our systems and network infrastructure and take other steps to improve the efficiency of our systems, then system interruptions or delays could occur that would adversely affect our operating results. We utilize third-party vendors for our customer-facing ecommerce technology, portions of our order management system and fulfillment internationally.
If we are unable to continually add software and hardware, effectively upgrade our systems and network infrastructure and take other steps to improve the efficiency of our systems, then system interruptions or delays could occur that would adversely affect our operating results. We utilize third-party vendors for our customer-facing ecommerce technology, portions of our order management system and fulfillment.
B. Risks Related to Our Enterprise Segment U.S. government contracts are generally not fully funded at inception and may include provisions that are not favorable to us which could adversely impact our cash flows and results of operations US government contracts often have long lead times for design and development, and can be subject to significant changes in delivery timelines.
Risks Related to Our Enterprise Segment U.S. government contracts are generally not fully funded at inception and may include provisions that are not favorable to us which could adversely impact our cash flows and results of operations. US government contracts often have long lead times for design and development, and can be subject to significant changes in delivery timelines.
We primarily sell products either from in-house sales teams directly to retail outlets such as hobby shops or through websites and value-added resellers (“VARS”). Distributors, third-party online resellers and VARs generally offer products from several different manufacturers. Accordingly, these distributors, resellers and VARs may give higher priority to selling other companies’ products.
We primarily sell products either from in-house sales teams directly to retail outlets such as hobby shops or through websites and value-added resellers. Distributors, third-party online resellers, and VARs generally offer products from several different manufacturers. Accordingly, these distributors, resellers and VARs may give higher priority to selling other companies’ products.
We operate in areas of the world that experience corruption by government officials to some degree and, in certain circumstances, compliance with anti-bribery and anticorruption laws may conflict with local customs and practices. Our global operations require us to import and export to and from several countries, which geographically expands our compliance obligations.
We operate in areas of the world that experience corruption by government officials to some degree and, in certain circumstances, compliance with anti-bribery and anticorruption laws may conflict with local customs and practices. Our global operations require us to import from several countries which geographically expands our compliance obligations.
Any of these events could adversely affect our brand, harm our reputation, reduce demand for our products and harm our ability to meet demand if we need to identify alternative manufacturers or suppliers. Our principal manufacturer of HMDs is located in China and is owned by a related party which could create conflicts of interest.
Any of these events could adversely affect our brand, harm our reputation, reduce demand for our products and harm our ability to meet demand if we need to identify alternative manufacturers or suppliers. 37 Our principal manufacturer of HMDs is located in China and is owned by a related party which could create conflicts of interest.
This concentration of ownership may have the effect of delaying or preventing a change in control and may adversely affect the market price of our common stock. 28 Our failure to maintain effective internal controls over financial reporting could have an adverse impact on the Company . We are required to establish and maintain appropriate internal controls over financial reporting.
This concentration of ownership may have the effect of delaying or preventing a change in control and may adversely affect the market price of our common stock. Our failure to maintain effective internal controls over financial reporting could have an adverse impact on the Company . We are required to establish and maintain appropriate internal controls over financial reporting.
The Company believes that the oversight of the FAA is beneficial to the drone industry generally, and the Company specifically. Approximately 10 % of the drones sold by Rotor Riot are below the weight threshold required to register. The remaining 90% have more functionality, are more likely to be used for commercial purposes, and therefore, should be registered.
The Company believes that the oversight of the FAA is beneficial to the drone industry generally, and the Company specifically. Approximately 10 % of the drones sold by Rotor Riot are below the weight threshold required to register. The remaining 90% have more functionality, are more likely to be used for commercial purposes, and therefore, should be registered. 2.
Foreign Corrupt Practices Act (FCPA) and similar anti-bribery and anticorruption laws in other jurisdictions generally prohibit U.S.-based companies and their intermediaries from making improper payments to non-U.S. officials for the purpose of obtaining or retaining business, directing business to another, or securing an advantage.
Foreign Corrupt Practices Act (FCPA) and similar anti-bribery and anticorruption laws in other jurisdictions prohibit U.S.-based companies and their intermediaries from making improper payments to non-U.S. officials for the purpose of obtaining or retaining business, directing business to another, or securing an advantage.
We develop and sell products where insurance or indemnification may not be available, including (i) those using advanced and unproven technologies and drones, and (ii) those that collect, distribute and analyze various types of information. Failure of certain of our products could result in loss of life or property damage.
We develop and sell products where insurance or indemnification may not be available, including (i) those using advanced and unproven technologies and drones, and (ii) those that collect, distribute and analyze various types of information. 24 Failure of certain of our products could result in loss of life or property damage.
The U.S. government has indicated its intent to alter its approach to international trade policy through the renegotiation, and potential termination, of certain trade agreements and treaties with China, countries in EMEA and other countries. These changes could include the imposition of tariffs on a wide range of products.
The U.S. government has indicated its intent to alter its approach to international trade policy through the renegotiation, and potential termination, of certain trade agreements and treaties with China, countries in EMEA and other countries. These changes could include the imposition of additional tariffs on a wide range of products.
These laws often develop in ways we cannot predict and may materially increase our cost of doing business, particularly as we expand the nature and types of products we offer. Data protection legislation is becoming increasingly common in the United States at both the federal and state level.
These laws often develop in ways we cannot predict and may materially increase our cost of doing business, particularly as we expand the nature and types of products we offer. 45 Data protection legislation is becoming increasingly common in the United States at both the federal and state level.
As a result, capital appreciation, if any, of our common stock, will be the sole source of gain for investors for the foreseeable future. The listing of our securities on Nasdaq subject us to additional regulations and compliance requirements. We are required to maintain compliance with the continued listing standards of Nasdaq.
As a result, capital appreciation, if any, of our common stock, will be the sole source of gain for investors for the foreseeable future. 39 The listing of our securities on Nasdaq subject us to additional regulations and compliance requirements. We are required to maintain compliance with the continued listing standards of Nasdaq.
Our dependence on sales to VARs, resellers, and distributors increases the risks of managing our supply chain and may result in excess inventory or inventory shortages. The majority of our various reseller relationships for our HMD products and their accessories could involve them taking inventory positions and reselling to multiple customers.
Our dependence on sales to VARs, resellers, and distributors increases the risks of managing our supply chain and may result in excess inventory or inventory shortages. The majority of the reseller relationships for our HMD products and their accessories could involve them taking inventory positions and reselling to multiple customers.
Any actual or perceived weaknesses and conditions that need to be addressed in our internal control over financial reporting, disclosure of management’s assessment of our internal controls, or disclosure of our public accounting firm’s attestation to our internal controls over financial reporting may have an adverse impact on the price of our Common Stock.
Any actual or perceived weaknesses and conditions that need to be addressed in our internal controls over financial reporting, disclosure of management’s assessment of our internal controls, or disclosure of our public accounting firm’s attestation to our internal controls over financial reporting may have an adverse impact on the price of our Common Stock.
As a result of lack of long-term purchase orders and purchase commitments, we may experience a rapid decline in sales. 14 Our products require a continuing investment in research and development, and may experience technical problems or delays, which could lead the business to fail.
As a result of lack of long-term purchase orders and purchase commitments, we may experience a rapid decline in sales. Our products require a continuing investment in research and development, and may experience technical problems or delays, which could lead the business to fail.
The market for drones and head-worn display devices, including FPV HMDs, is highly competitive. Further, we expect competition to intensify in the future as existing competitors introduce new and more competitive offerings alongside their existing products, and as new market entrants introduce new products into our markets.
The market for drones and head-worn display devices, including FPV HMDs, is highly competitive. We expect competition to intensify in the future as existing competitors introduce new and more competitive offerings alongside their existing products, and as new market entrants introduce new products into our markets.
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.
ITEM 1. BUSINESS I. 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.
Since 2019, tariffs ranging from 2% to 25% have been imposed on 88% of Rotor Riot’s inventory. 68% of Rotor Riot's inventory is purchased directly from Chinese based vendors, all of these items are subject to tariffs.
Since 2019, tariffs ranging from 2% to 25% have been imposed on 88% of Rotor Riot’s inventory. 68% of Rotor Riot's inventory is purchased directly from Chinese based vendors, and all these items are subject to tariffs.
Following the share exchange agreement and its name change, Red Cat Holdings has completed a series of acquisitions and financings which have broadened the scope of its activities in 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.
Our failure to comply with past, present and future similar laws could result in reduced sales of our products, reputational damage, penalties and other sanctions, which could harm our business and financial condition. 15 Our products will likely experience declining unit prices and we may not be able to offset that decline with production cost decreases or higher unit sales.
Our failure to comply with past, present and future similar laws could result in reduced sales of our products, reputational damage, penalties and other sanctions, which could harm our business and financial condition. 25 Our products will likely experience declining unit prices and we may not be able to offset that decline with production cost decreases or higher unit sales.
Failure to comply could result in monetary liabilities and other sanctions which could increase our costs or decrease our revenue resulting in a negative impact on our business, financial condition and results of operations. 12 Our business and products are subject to government regulation and we may incur additional compliance costs or be forced to suspend or cease operations if we fail to comply.
Failure to comply could result in monetary liabilities and other sanctions which could increase our costs or decrease our revenue resulting in a negative impact on our business, financial condition and results of operations. 41 Our business and products are subject to government regulation, and we may incur additional compliance costs or be forced to suspend or cease operations if we fail to comply.
In recent years, we have completed four acquisitions which have resulted in a significant expansion in the number of key management personnel and our reliance on them. Allan Evans, the former President of Fat Shark is now Chief Operating Officer of Red Cat Holdings. George Matus has remained as President of Teal Drones.
In recent years, we have completed four acquisitions which have resulted in a significant expansion in the number of key management personnel and our reliance on them. Dr. Allan Evans, the former CEO of Fat Shark is now Chief Operating Officer of Red Cat Holdings. George Matus has remained as President of Teal Drones.
We rely on third-party suppliers, some of which are sole-source suppliers, to provide components for our products which may lead to supply shortages, long lead times for components, and supply changes, any of which could disrupt our supply chain, increase our costs, and adversely impact our operating results Our ability to meet customer demand depends, in part, on our ability to obtain timely and adequate delivery of components for our products.
We rely on third-party suppliers, some of which are sole-source suppliers, to provide components for our products which may lead to supply shortages, long lead times for components, and supply changes, any of which could disrupt our supply chain, increase our costs, and adversely impact our operating results Our ability to meet customer demand depends on our ability to obtain timely and adequate delivery of components for our products.
As such, if we or our intermediaries fail to comply with the requirements of the FCPA or similar legislation, governmental authorities in the United States and elsewhere could seek to impose substantial civil and/or criminal fines and penalties which could have a material adverse effect on our business, reputation, operating results and financial condition.
As a result, if we or our intermediaries fail to comply with the requirements of the FCPA or similar legislation, governmental authorities in the United States and elsewhere could seek to impose substantial civil and/or criminal fines and penalties which could have a material adverse effect on our business, reputation, operating results and financial condition.
The ultimate goal of the SRR T2 program is to provide a small, rucksack portable sUAS that provides all Army infantry platoons (consisting of 20-50 soldiers) with situational awareness beyond the next terrain. Following a successful demonstration in September 2021, Teal was notified by the U.S.
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. Following a successful demonstration in September 2021, Teal was notified by the U.S.
This experience is accomplished by live streaming footage from a camera mounted on the nose of the drone directly into specially designed goggles worn by the pilot. The image is transmitted via radio (traditionally analog but increasingly digital) to the pilot. The drone remote control unit, the drone device, and the FPV goggles are all interconnected via radio.
This experience is accomplished by live streaming footage from a camera mounted on the nose of the drone directly into specially designed goggles worn by the pilot. The image is transmitted via radio (traditionally analog but increasingly digital) to the pilot. The drone remote control unit, the drone device, and the FPV goggles are all connected via radio.
To succeed in the consumer marketplace, we seek to enhance existing products and develop and market new products that keep pace with continuing changes in industry standards, requirements, and customer preferences. 26 Our success depends on our ability to develop new products and to identify trends as well as to anticipate and react to changing customer demands in a timely manner.
To succeed in the consumer marketplace, we seek to enhance existing products and develop and market new products that keep pace with continuing changes in industry standards, requirements, and customer preferences. 35 Our success depends on our ability to develop new products and to identify trends as well as to anticipate and react to changing customer demands in a timely manner.
An additional 20% is purchased from vendors that are affected by the tariffs resulting in increase in costs to Rotor Riot. 28% of Rotor Riot’s inventory consists of DJI products which are subject to the highest 25% tariff rate. These tariffs increase the cost of goods which reduces the company’s profit margins.
An additional 20% is purchased from vendors that are affected by the tariffs resulting in higher costs for Rotor Riot. 28% of Rotor Riot’s inventory consists of DJI products which are subject to the highest 25% tariff rate. These tariffs increase the cost of goods which reduces the company’s profit margins.
Any cybersecurity breaches or our actual or perceived failure to comply with such legal obligations by us, or by our third-party service providers or partners, could harm our business. We may collect, store, process and use the personally identifiable information of our customers and other data in our transactions with them.
Any cybersecurity breaches or our failure to comply with such legal obligations by us, or by our third-party service providers or partners, could harm our business. We may collect, store, process and use the personally identifiable information of our customers and other data in our transactions with them.
If the existing tariffs are expanded or interpreted by a court or governmental agency to apply to any of our other products, we may be required to raise our prices on those products, which may further result in a loss of customers and harm our operating performance.
If the existing tariffs are expanded or interpreted by a court or governmental agency to apply to any of our other products, we may be required to raise the selling prices on those Consumer products, which may further result in a loss of customers and harm our operating performance.
Our new products might not receive customer acceptance if customer preferences shift to other products, and our future success depends on our ability to anticipate and respond to these changes. Failure to anticipate and respond in a timely manner to changing customer preferences could lead to, among other things, lost business, lower revenue and excess inventory levels.
Our new products might not receive customer acceptance if customer preferences shift to other products, and our future success depends on our ability to anticipate and respond to these changes. Failure to anticipate and respond in a timely manner to changing customer preferences could lead to lost business, lower revenue and excess inventory levels.
The additional two drones also allow pilots to bring in units with fresh batteries, while units with drained batteries drop off to be charged – all without breaking up the four-drone flight pattern. This allows for continuous 360-degree surveillance of any target and overcomes the biggest weakness of any drone which is limited battery life.
The additional two drones also allow pilots to bring in units with fresh batteries while units with drained batteries drop off to be charged – all without breaking up the four-drone flight pattern. This allows for continuous 360-degree surveillance of any target and overcomes the biggest weakness of any currently fielded drone which is limited battery life. D.
The total purchase price was $2.0 million. • In November 2020, the Company acquired Fat Shark Holdings, which sells consumer electronics products to the first-person view (“FPV”) sector of the drone industry.
The total purchase price was $2.0 million. • In November 2020, the Company acquired Fat Shark Holdings (“Fat Shark”) which sells consumer electronics products to the first-person view (“FPV”) sector of the drone industry.
Our business depends in part on technology rights and software licensed from third parties. We could lose our exclusivity or other rights to use the technology if we fail to comply with the terms and performance requirements of the licenses. In addition, certain licensors may terminate a license upon our breach and have the right to consent to sublicense arrangements.
Our business relies on technology rights and software licensed from third parties. We could lose our exclusivity or other rights to use the technology if we fail to comply with the terms and performance requirements of the licenses. In addition, certain licensors may terminate a license upon our breach and have the right to consent to sublicense arrangements.
Rotor Riot has been unable to find comparable non-Chinese products and vendors. The Drone Industry The Drone industry continues to expand beyond its military origin to become a powerful business tool and recreational activity.
To date, Rotor Riot has been unable to find comparable non-Chinese products and vendors. V. The Drone Industry The Drone industry continues to expand beyond its military origin to become a powerful business tool and recreational activity.
SZ DJI Technology Company, Ltd., commonly known as DJI, is the dominant market leader in the Customer Segment with a global market share estimated at more than 70%, according to many industry research firms. Other competitors include Parrot and Lumenier. Race Day Quads is a larger, direct competitor in the FPV sector.
SZ DJI Technology Company, Ltd., commonly known as DJI, is the dominant market leader in the Consumer Segment with a global market share estimated at more than 70%, according to industry research firms. Other competitors include Parrot and Lumenier. Race Day Quads is a larger, direct competitor in the FPV sector.
Many countries and military units are recognizing the strategic benefit of having an adequate baseline inventory of drone units that can be invaluable in reconnaissance and surveillance on the front lines.
Many countries and military units are recognizing the strategic benefit of having an adequate inventory of drone units that can be invaluable in reconnaissance and surveillance on the front lines. C.
With Teal’s new drone manufacturing facility up and running in Utah, the Company is well positioned to provide drones and services to support the needs of these infrastructure programs.
With Teal’s new drone manufacturing facility up and running in Utah, the Company is well positioned to provide drones and services to support the needs of these infrastructure programs. 18 3.
In any liquidation, all of our debts and liabilities must be paid before any payment is made to our shareholders. 29 The market price of our shares of common stock is subject to fluctuation.
In any liquidation, all of our debts and liabilities must be paid before any payment is made to our shareholders. 40 The market price of our shares of common stock is subject to fluctuation.
If we were to lose the services of a distributor, online reseller, or VAR, we might need to find a replacement, and there can be no assurance of our ability to do so in a timely manner or on favorable terms.
If we were to lose the services of a distributor, online reseller, or VAR, we might need to find a replacement, and there can be no assurance of our ability to do so in a timely manner or on reasonable terms and conditions.
The Skycopter provided an inspection and data collection service that is faster than traditional methods while also providing a much safer work environment for employees. The full inspection program took over two years to complete, including the initial planning and pilot training phases, while the inspection process across all 19 facilities required 14 months.
The Skycopter provided an inspection and data collection service that is faster than traditional methods while also providing a much safer work environment for employees. The full inspection program took over two years to complete, including the initial planning and pilot training phases, while the inspection process required 14 months.
Under some typical distributor relationships, we would not recognize revenue until the distributors sell the product to their end user customers and receive payment thereon; however, at this time we do not currently enter into these types of arrangements. Our distributor and VAR relationships may reduce our ability to forecast sales and increase risks to our business.
Under some typical distributor relationships, we would not recognize revenue until the distributors sell the product to their end user customers and receive payment. However, we do not currently enter into these types of arrangements. Our distributor and VAR relationships may reduce our ability to forecast sales and increase risks to our business.
The drone industry is subject to various laws and government regulations which could complicate and delay our ability to introduce products, maintain compliance, and avoid violations which could negatively impact our financial condition and results of operations. We operate in the drone industry which is a highly regulated environment in the US and international markets.
Risks Related to Regulatory Matters The drone industry is subject to various laws and government regulations which could complicate and delay our ability to introduce products, maintain compliance, and avoid violations which could negatively impact our financial condition and results of operations. We operate in the drone industry which is a highly regulated environment in the US and international markets.
If we are unable to scale and improve our product launch coordination, we could frustrate our customers and lose possible retail shelf space and product sales; • Existing Products Impacted by New Introductions : The introduction of new products or product enhancements may shorten the life cycle of our existing products, or replace sales of some of our current products, thereby offsetting the benefit of a successful product introduction and may cause customers to defer purchasing our existing products in anticipation of the new products and potentially lead to challenges in managing inventory of existing products.
If we are unable to scale and improve our product launch coordination, we could frustrate our customers and lose possible retail shelf space and product sales; • Existing Products Impacted by New Introductions : The introduction of new products or product enhancements may shorten the life cycle of our existing products, or replace sales of some of our current products, thereby offsetting the benefit of a successful product introduction and may cause customers to defer purchasing our existing products in anticipation of the new products.
Drew Camden has remained as President of Rotor Riot, LLC. Giuseppe Santangelo has remained as President of Skypersonic. Each of these individuals were critical to the founding and growth of their companies prior to their being acquired by Red Cat Holdings.
Drew Camden has remained as President of Rotor Riot, LLC. Each of these individuals were critical to the founding and growth of their companies prior to their being acquired by Red Cat Holdings.
Government Regulation and Federal Policy of Drones The Federal Aviation Administration (“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.
A. Government Regulation and Federal Policy 1. The Federal Aviation Administration The Federal Aviation Administration (“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.
As of the date of this filing, we own 29 granted United States and foreign patents and 13 pending United States and foreign patent applications. The U.S. patents and patent applications include claims to, among other things, a drone, a printed circuit board, and HMD technology.
As of the date of this filing, we own 36 granted United States and foreign patents and 16 pending United States and foreign patent applications. The U.S. patents and patent applications include claims to, among other things, a drone, a printed circuit board, and HMD technology.
Risks associated with our doing business outside of the United States include: • compliance burdens and costs with a wide variety of foreign laws and regulations, particularly labor, environmental and other laws and regulations that govern our operations in those countries; • legal uncertainties regarding foreign taxes, tariffs, border taxes, quotas, and export controls, • export licenses, import controls and other trade barriers; • economic instability and high levels of inflation in the countries where our suppliers are located and • customers, particularly in the Asia-Pacific region, causing delays or reductions in orders for their products and therefore our sales; • political or public health instability, including global pandemics, in the countries in which our suppliers operate; • changes or volatility in currency exchange rates; • difficulties in collecting accounts receivable and longer accounts receivable payment cycles; and • Any of these factors could harm our own, our suppliers’ and our customers’ international operations and businesses and impair our and/or their ability to continue expanding into international markets. 19 We could be adversely affected by violations of the U.S.
Risks associated with conducting business outside of the United States include: • compliance burdens and costs associated with a wide variety of foreign laws and regulations, particularly labor and environmental, that govern our operations in those countries; • legal uncertainties regarding foreign taxes, tariffs, border taxes, quotas, and export controls, • export licenses, import controls and other trade barriers; • economic instability and high levels of inflation in certain countries where our suppliers are located and • customers, particularly in the Asia-Pacific region, causing delays or reductions in orders for their products and therefore our sales; 43 • political or public health instability, including global pandemics, in the countries in which our suppliers operate; • changes or volatility in currency exchange rates; • difficulties in collecting accounts receivable and longer accounts receivable payment cycles; and • Any of these factors could harm our own, our suppliers’ and our customers’ international operations and businesses and impair our and/or their ability to continue expanding into international markets.
We spent $2.6 million, or 41% of our revenue, in our fiscal year ended April 30, 2022, on internal research and development activities. We believe that there are significant investment opportunities in a number of business areas. Because we account for internal research and development as an operating expense, these expenditures will adversely affect our earnings in the future.
We spent $5.2 million, or 53% of our revenue, in our fiscal year ended April 30, 2023, on internal research and development activities. We believe that there are significant investment opportunities in a number of business areas. Because we account for internal research and development as an operating expense, these expenditures will adversely affect our earnings in the future.
Customers Revenues for the Consumer segment are principally generated through distributors (for Fat Shark) and online (for Rotor Riot through its e-commerce site, www.rotorriot.com ). We currently market our products and services to recreational and professional drone pilots and hobbyists. Competition Rotor Riot competes with a number of significantly larger, better capitalized companies.
Customers Revenues for the Consumer segment are principally generated through distributors (for Fat Shark) and online (for Rotor Riot through its e-commerce site, www.rotorriot.com ). Consumer markets its products and services to recreational and professional drone pilots and hobbyists. C. Competition Rotor Riot competes with a number of significantly larger, better capitalized companies.
These are head mounted displays (“HMDs”) for drone pilots. HMDs give pilots “first person view” (“FPV”) perspective to control their drone in flight. This is a unique experience where the pilot is interacting with an aircraft through visual immersion. In this augmented virtual reality, the pilot sees only what the drone sees, as if sitting in the pilot seat.
These are head mounted displays (“HMDs”), similar to goggles, for drone pilots. HMDs give pilots a “first person view” (“FPV”) to control their drone in flight. This is a unique experience where the pilot is interacting with an aircraft through visual immersion. The pilot sees only what the drone sees, as if sitting in the pilot seat.
If adequate financing is not available or unavailable on acceptable terms, we may find we are unable to fund expansion, continue offering products and services, take advantage of acquisition opportunities, develop or enhance services or products, or to respond to competitive pressures in the industry which may jeopardize our ability to continue operations. We have incurred net losses since inception.
If adequate financing is not available or unavailable on acceptable terms, we may find we are unable to fund expansion, continue offering products and services, take advantage of acquisition opportunities, develop or enhance services or products, or to respond to competitive pressures in the industry which may jeopardize our ability to continue operations.
Any such inability by us to comply with regulations may also result in our not being permitted, or limit our ability, to ship our products which would adversely affect our revenue and ability to achieve or maintain profitability.
Any such failure to comply with regulations may also result in our not being permitted, or limit our ability, to ship our products which would adversely affect our revenue and ability to achieve or maintain profitability.
Jeffrey Thompson, our Chairman and Chief Executive Officer, owns approximately 23% of our common stock and our current officers and directors currently own approximately 31% of our common stock. In addition, the founder of Fat Shark owns approximately 7% of our issued and outstanding common stock.
Jeffrey Thompson, our Chairman and Chief Executive Officer, owns approximately 23% of our common stock and our current officers and directors currently own approximately 31% of our common stock. In addition, Greg French, the founder of Fat Shark owns approximately 9% of our issued and outstanding common stock.
If we were to lose our rights under any of these licenses, or if we were unable to obtain required consents to future sublicenses, we could lose a competitive advantage in the market, and may even lose the ability to commercialize certain products or technologies. Either of these results could substantially decrease our revenues.
If we were to lose our rights under any of these licenses, or if we were unable to obtain required consents to future sublicenses, we could lose a competitive advantage in the market, and may even lose the ability to commercialize certain products or technologies.
If significant tariffs or other restrictions are placed and maintained on Chinese imports or any related counter-measures are taken by China, our revenue and results of operations may be adversely impacted. If significant tariffs or other restrictions are placed on Chinese imports or any related counter-measures are taken by China, our revenue and results of operations may be adversely impacted.
If significant tariffs or other restrictions are placed and maintained on Chinese imports or any related countermeasures are taken by China, our revenue and results of our Consumer operations may be adversely impacted.
If our customers do not continue to purchase our products, then our sales volume could decline rapidly with little or no warning. We cannot rely on long-term purchase orders or commitments to protect us from the negative financial effects of a decline in demand for products.
In addition, current customers may decide not to purchase products for any reason. If our customers do not continue to purchase our products, then our sales volume could decline rapidly with little or no warning. We cannot rely on long-term purchase orders or commitments to protect us from the negative financial effects of a decline in demand for our products.
Trans-Atlantic Inspection of Italian Utility Plant Completed by Pilot Controlling Drone from the United States In June 2022, Skypersonic completed an inspection of a utility plant in Turin, Italy using a drone controlled by a pilot physically located in Orlando, Florida. The drone was controlled relying solely on an internet connection from a normal cellphone.
Inspected Italian Utility Plant with drone piloted from the United States In June 2022, Skypersonic completed an inspection of a utility plant in Turin, Italy using a drone controlled by a pilot physically located in Orlando, Florida. The drone was controlled relying solely on an internet connection from a normal cellphone.
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.
VI. Other Corporate Information A. 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.
We are also subject to the risks of distributors, resellers and VARs encountering financial difficulties which could impede their effectiveness and also expose us to financial risk. For example, if they are unable to pay for the products they purchase or ongoing disruptions in business, for example from natural disasters or the effects of COVID-19.
We are also subject to the risks of distributors, resellers and VARs encountering financial difficulties which could impede their effectiveness and also expose us to financial risk. For example, if they are unable to pay for the products they purchase or are subject to ongoing disruptions in their business from unexpected events such as COVID-19.
(“Red Cat” or the “Company” or “we”) and changed our operating business from the bitcoin industry to the drone industry. Recent Developments 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.
(“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.
These developments include: • In January 2020, we acquired Rotor Riot, LLC, a reseller of drones and related parts, primarily to the consumer marketplace through its digital storefront located at www.rotorriot.com .
These acquisitions included: • In January 2020, we acquired Rotor Riot, LLC (“Rotor Riot”), a reseller of drones and related parts, primarily to the consumer marketplace through its digital storefront located at www.rotorriot.com .
These tariffs currently affect some of our products and we may be required to raise our prices on those products due to the tariffs, which may result in a loss of customers and harm our operating performance.
These tariffs are still in effect in 2023. These tariffs currently affect some of the products of our Consumer segment, and we may be required to raise our prices on those products due to the tariffs which may result in a loss of customers and harm our operating performance.
(China), Shenzhen FatShark Co., Ltd (China) and Zeng Linghao (China). As a result, these business activities have and may, in the future, be subject to influences and may provide such parties with conflicts of interest and business opportunities that may not be subject to reasonable assessment and may not be available to Fat Shark or to the Company.
As a result, these business activities have and may, in the future, be subject to influences and may provide such parties with conflicts of interest and business opportunities that may not be subject to reasonable assessment and may not be available to Fat Shark or to the Company.
Fat Shark also competes with other FPV headset companies that include Skyzone, Orca, and HD Zero. The Fat Shark brand has been synonymous with FPV headsets since the emergence of the market in 2008. Fat Shark continues to compete through partnerships with other FPV companies and a focus on manufacturing and product quality.
Fat Shark also competes with DJI as well as other FPV headset companies including Skyzone, Orca, and HD Zero. The Fat Shark brand has been synonymous with FPV headsets since the emergence of the market in 2008. Fat Shark continues to compete through partnerships with other FPV companies and a focus on manufacturing and product quality. 16 D.
We compete against these financially stronger companies by leveraging our visibility on the internet through our Facebook page which has more than 33,000 members and our Rotor Riot channel which has more than 192,000 subscribers. The Rotor Riot brand has been at the center of the racing and freestyle culture of drones since registering its domain name in 2015.
Consumer competes against these financially stronger companies by leveraging its visibility on the internet through its Facebook page which has more than 37,000 members and its Rotor Riot channel which has more than 267,000 subscribers. The Rotor Riot brand has been at the center of the racing and freestyle culture of drones since registering its domain name in 2015.
Foreign Corrupt Practices Act or similar anti-bribery laws in other jurisdictions in which we operate. The global nature of our business creates various domestic and local regulatory challenges and subject us to risks associated with our international operations.
We could be adversely affected by violations of the U.S. Foreign Corrupt Practices Act or similar anti-bribery laws in other jurisdictions in which we operate. The global nature of our business creates various domestic and local regulatory challenges and subject us to risks associated with our international operations.
Moreover, our competitors may succeed in developing new micro-display-based personal display technologies and products that are more affordable or have more desirable features than our technology. If our products are unable to capture a reasonable portion of the HMD market, our business strategy may fail.
Most of our competitors have greater financial, marketing, distribution, and technical resources than we do. Moreover, our competitors may succeed in developing new micro-display-based personal display technologies and products that are more affordable or have more desirable features than our technology. If our products are unable to capture a reasonable portion of the HMD market, our business strategy may fail.
The program consisted of the video recording of 50,000 cumulative feet of crane rails captured from more than 200 flight hours by the Skycopter across all 19 facilities for subsequent analysis by structural engineers. The Skycopter was piloted by General Motors personnel at all times following their completion of an initial pilot training program with Skypersonic.
The program consisted of the video recording of 50,000 cumulative feet of crane rails captured from more than 200 flight hours. The Skycopter was piloted by General Motors personnel at all times following completion of an initial pilot training program with Skypersonic.
Any inability by us to comply with regulations in the future could result in the imposition of fines or in the suspension or cessation of our operations or sales in the applicable jurisdictions.
Failure to comply with regulations in the future could result in the imposition of fines or in the suspension or cessation of our operations or sales in the applicable jurisdictions.
Companies in the consumer electronics, wireless communications, semiconductor, IT, and display industries steadfastly pursue and protect intellectual property rights, often times resulting in considerable and costly litigation to determine the validity of patents and claims by third parties of infringement of patents or other intellectual property rights.
Companies in the consumer electronics, wireless communications, semiconductor, IT, and display industries steadfastly pursue and protect intellectual property rights, often resulting in considerable and costly litigation to determine the validity of patents and claims by third parties of infringement of patents or other intellectual property rights. Our products could be found to infringe on the intellectual property rights of others.
The market prices of our shares may fluctuate significantly in response to a wide range of factors, many of which are beyond our control, including: • The announcement of new products by our competitors • The release of new products by our competitors • Developments in our industry or target markets • General market conditions including factors unrelated to our operating performance Recently, the stock market, in general, has experienced extreme price and volume fluctuations.
The market prices of our shares may fluctuate significantly in response to a wide range of factors, many of which are beyond our control, including: • The announcement and release of new products by our competitors • Developments in our industry or target markets • General market conditions including factors unrelated to our operating performance • National or international economic or political events which result in a material effect on the stock market The stock market has, from time to time, experienced extreme price and volume fluctuations.
These persons may also face a conflict in selecting between Fat Shark and their other business interests. We have not formulated a policy for the resolution of such conflicts. These entities are not subject to restrictions on competition with Fat Shark or the Company. D. Risks Related to Our Common Stock Our management has voting control of the Company .
These persons may also face a conflict in selecting between Fat Shark and their other business interests. We have not formulated a policy for the resolution of such conflicts. These entities are not subject to restrictions on competition with Fat Shark or the Company.
Our products could be found to infringe on the intellectual property rights of others. Other companies may hold or obtain patents or inventions or other proprietary rights in technology necessary for our business. Periodically, other companies inquire about our products and technology in their attempts to assess whether we violate their intellectual property rights.
Other companies may hold or obtain patents or inventions or other proprietary rights in technology necessary for our business. Periodically, other companies inquire about our products and technology in their attempts to assess whether we violate their intellectual property rights.
Risks Related to Our Business We may need additional capital to fund our expanding operations until we reach profitability, and if we are not able to obtain sufficient capital, we may be forced to limit or curtail our operations. During the fiscal year ended April 30, 2022, we acquired Skypersonic and Teal Drones.
We may need additional capital to fund our expanding operations until we reach profitability, and if we are not able to obtain sufficient capital, we may be forced to limit or curtail our operations. During the fiscal year ended April 30, 2022, we acquired Skypersonic and Teal Drones. Our other businesses include Rotor Riot and Fat Shark.
Information was captured in two to three hours versus what would normally take eight to twelve hours and require shutting the facility down completely, erecting scaffolds, and hoisting personnel in the air and onto the rails for manual inspection.
Information was captured in two to three hours versus what would normally take eight to twelve hours and require shutting the facility down completely, erecting scaffolds, and hoisting personnel in the air and onto the rails for manual inspection, saving not only significant time but also substantial costs.
Moreover, we cannot be certain whether: • we were the first to conceive, reduce to practice, invent, or file the inventions covered by each of our issued patents and pending patent applications; • others will independently develop similar or alternative products, technologies, services or designs or duplicate any of our products, technologies, services or designs; • any patents issued to us will provide us with any competitive advantages, or will be challenged by third parties; • we will develop additional proprietary products, services, technologies or designs that are patentable; or • the patents of others will have an adverse effect on our business. 16 The patents we own or license and those that may be issued to us in the future may be challenged, invalidated, rendered unenforceable or circumvented, and the rights granted under any issued patents may not provide us with proprietary protection or competitive advantages.
Moreover, we cannot be certain whether: 46 • we were the first to conceive, reduce to practice, invent, or file the inventions covered by each of our issued patents and pending patent applications; • others will independently develop similar or alternative products, technologies, services or designs or duplicate any of our products, technologies, services or designs; • any patents issued to us will provide us with any competitive advantages, or will be challenged by third parties; • we will develop additional proprietary products, services, technologies or designs that are patentable; or • the patents of others will have an adverse effect on our business.

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Item 2. Properties

Properties — owned and leased real estate

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Biggest changeFuture lease payment obligations at April 30, 2022 were as follows: Fiscal Year Ended: 2023 $ 400,092 2024 403,878 2025 304,676 2026 76,619 2027 79,300 Thereafter 6,627 Total $ 1,271,192
Biggest changeThe weighted average remaining lease term as of April 30, 2023 was 2.40 years. The Company used a discount rate of 12% to calculate its lease liability at April 30, 2023. Future lease payment obligations at April 30, 2023 were as follows: Fiscal Year Ended: 2024 403,878 2025 304,676 2026 76,619 2027 79,300 2028 6,627 Total $ 871,100 47
PROPERTIES The Company has the following operating leases for real estate locations where it operates: Location Monthly Rent Expiration South Salt Lake, Utah $ 22,000 December 2024 Orlando, Florida $ 4,692 May 2024 San Juan, Puerto Rico $ 2,226 June 2027 Troy, Michigan $ 2,667 May 2022 Orlando, Florida $ 1,690 September 2022 These lease agreements have remaining terms up to 5.08 years, excluding options to extend certain leases for up to 5 years.
PROPERTIES The Company has the following operating leases for real estate locations where it operates: Location Monthly Rent Expiration South Salt Lake, Utah $ 22,667 December 2024 Orlando, Florida $ 4,520 January 2025 San Juan, Puerto Rico $ 5,647 June 2027 Troy, Michigan $ 550 May 2022 These lease agreements have remaining terms up to 4.08 years, excluding options to extend certain leases for up to 5 years.
Removed
The weighted average remaining lease term as of April 30, 2022 was 3.28 years. The Company used a discount rate of 12% to calculate its lease liability at April 30, 2022.

Item 3. Legal Proceedings

Legal Proceedings — active lawsuits and investigations

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Biggest changeThe complaint asserts claims for breach of contract and unlawful conversion and sale of shares of common stock that plaintiff alleges to have purchased from Teal Drones, Inc. prior to the acquisition by the Company. The Complaint also alleges breach of fiduciary duty against Mr. Matus and seeks in excess of $1 million in damages.
Biggest changeTeal Drones, Inc. and George Matus (No. 22-cv-01586-JSC) and on September 15, 2022 filed a First Amended Complaint naming Teal’s former director Benjamin Lambert and the Company as additional defendants. The complaint asserts claims for breach of contract and unlawful conversion and sale of shares of common stock that plaintiff alleges to have purchased.
ITEM 3. LEGAL PROCEEDINGS On March 15, 2022, Robert Stang filed an action against Teal Drones, Inc. and George Matus in the United States District Court for the Northern District of California, Robert Stang v. Teal Drones, Inc. and George Matus (No. 22-cv-01586-JSC).
ITEM 3. LEGAL PROCEEDINGS On March 15, 2022, Robert Stang filed an action against Teal Drones, Inc. and George Matus in the United States District Court for the Northern District of California, Robert Stang v.
Removed
The Company has not been formally served and expects to seek dismissal of such action.
Added
The Complaint also alleges breach of fiduciary duty and seeks in excess of $1 million in damages.
Added
The Company believes it has a right to indemnification under the Teal acquisition agreements and has notified the sellers of its intention to pursue indemnification claims under the Teal acquisition agreement and set off claims against escrowed shares of the Company for such purpose.
Added
On September 29, 2022, we, and our wholly-owned subsidiary Teal Drones, Inc., initiated a legal proceeding (the “Lawsuit”) against Autonodyne LLC (“Autonodyne”) and its principal equity owner Daniel Schwinn (“Schwinn”), in Delaware Chancery Court. The case is captioned as Red Cat Holdings, Inc., et al. v. Autonodyne LLC, et al., C.A. No. 2022-0878.
Added
The case arises from Autonodyne’s unilateral purported termination of a software licensing agreement entered between Teal Drones and Autonodyne in May 2022.
Added
The Lawsuit alleges causes of action for Breach of Contract, Breach of the Implied Covenant of Good Faith and Fair Dealing, Tortious Interference with Contractual Relations and Prospective Contractual Relations, Declaratory Judgment, and Injunctive Relief, and seeks both actual damages and injunctive relief.
Added
Before the defendants answered, we filed a First Amended Complaint on December 5, 2022, which the defendants have moved to dismiss. The hearing on the motion to dismiss is presently scheduled for October 23, 2023. No discovery or other significant developments in the Lawsuit have occurred.

Item 5. Market for Registrant's Common Equity

Market for Common Equity — stock, dividends, buybacks

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Biggest changeRecent Sales of Unregistered Securities Except as set forth below, there were no sales of equity securities during the period covered by this Annual Report that were not registered under the Securities Act and were not previously reported in a Quarterly Report on Form 10-Q or a Current Report on Form 8-K filed by the Company.
Biggest changeRecent Sales of Unregistered Securities There were no sales of equity securities during the period covered by this Annual Report that were not registered under the Securities Act and were not previously reported in a Quarterly Report on Form 10-Q or a Current Report on Form 8-K filed by the Company. 49
Holders As of July 26, 2022, there were 649 stockholders of record of our common stock. Dividends The Company has never paid dividends on its common stock and does not anticipate that it will pay dividends in the foreseeable future. It intends to use any future earnings for the expansion of its business.
Holders As of July 26, 2023, there were 598 stockholders of record of our common stock Dividends The Company has never paid dividends on its common stock and does not anticipate that it will pay dividends in the foreseeable future. It intends to use any future earnings for the expansion of its business.
ITEM 5. MARKET FOR REGISTRANT’S COMMON EQUITY, RELATED STOCKHOLDER MATTERS AND ISSUER PURCHASES OF EQUITY SECURITIES Market Information Our common stock is trading on the Nasdaq Capital Market (“Nasdaq”) since April 30, 2021 under the symbol “RCAT The last reported sales price of our common stock on July 26, 2022 was $2.28.
ITEM 5. MARKET FOR REGISTRANT’S COMMON EQUITY, RELATED STOCKHOLDER MATTERS AND ISSUER PURCHASES OF EQUITY SECURITIES Market Information Our common stock is trading on the Nasdaq Capital Market (“Nasdaq”) since April 30, 2021 under the symbol “RCAT”. The last reported sales price of our common stock on July 24, 2023 was $1.12.
Securities Authorized for Issuance Under Equity Compensation Plan The following table provides information regarding our equity compensation plans as of April 30, 2022: Equity Compensation Plan Information Plan category Number of securities to be issued upon exercise of outstanding options, warrants, and vesting of restricted stock Weighted-average exercise price of outstanding options and warrants Number of securities remaining available for future issuance under equity compensation plans Equity compensation plans approved by security holders 4,777,817 (1) $ 2.17 2,910,199 Equity compensation plans not approved by security holders — $ — — ______________ (1) Represents stock options issued and restricted stock units awarded under the Company’s 2019 Equity Incentive Plan.
Securities Authorized for Issuance Under Equity Compensation Plan The following table provides information regarding our equity compensation plans as of April 30, 2023: Equity Compensation Plan Information Plan category Number of securities to be issued upon exercise of outstanding options, warrants, and vesting of restricted stock Weighted-average exercise price of outstanding options and warrants Number of securities remaining available for future issuance under equity compensation plans Equity compensation plans approved by security holders 7,307,341 $ 1.88 1,442,659 Equity compensation plans not approved by security holders — $ — — ______________ (1) Represents stock options issued and restricted stock units awarded under the Company’s 2019 Equity Incentive Plan.
Removed
The above issuances did not involve any underwriters, underwriting discounts or commissions, or any public offering and we believe are exempt from the registration requirements of the Securities Act of 1933 by virtue of Section 4(2) thereof.

Item 7. Management's Discussion & Analysis

Management's Discussion & Analysis (MD&A) — revenue / margin commentary

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Biggest changeDuring the year ended April 30, 2022, we incurred general and administrative expenses totaling $5,548,589 compared to $1,279,471 for the year ended April 30, 2021, resulting in an increase of $4,269,118, or greater than 100%. Payroll costs totaled $1,536,126 in Fiscal 2022 compared to $297,909 in Fiscal 2021, representing an increase of $1,238,217, or more than 100%.
Biggest changeIn addition, higher advertising and show production costs represented 27% of the increase while professional fees accounted for 15% of the increase. 53 General and administrative expenses totaled $6,618,596 during the year ended April 30, 2023 compared to $5,548,589 during the year ended April 30, 2022, representing an increase of $1,070,007 or 19%.
In general, management’s estimates are based on historical experience, on 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.
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.
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.
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. 58
These shares of common stock were offered and sold by the Company pursuant to a registration statement on Form S-3, as amended (File No. 333-256216), filed with the SEC, which was declared effective by the SEC on June 14, 2021 and a Supplement to the Prospectus contained in this registration statement filed with the SEC on July 19, 2021.
The shares were sold pursuant to a registration statement on Form S-3, as amended (File No. 333-256216), filed with the SEC, which was declared effective by the SEC on June 14, 2021 and a Supplement to the Prospectus contained in a registration statement filed with the SEC on July 19, 2021.
These shares of common stock were offered to and sold by the Company pursuant to a registration statement on Form S-1, as amended (File No. 333-253491), filed with the SEC, which was declared effective by the Commission on April 29, 2021 (the "S-1 Registration Statement").
The shares were sold pursuant to a registration statement on Form S-1, as amended (File No. 333-253491), filed with the SEC, which was declared effective by the Commission on April 29, 2021 (the "S-1 Registration Statement").
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.
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. 57 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 cash, receivables, current assets, accounts payable, accrued expenses and current debt approximates fair value due to the short-term nature of these instruments.
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.
ITEM 7. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS Management's Discussion and Analysis contains forward-looking statements that involve risks and uncertainties, such as statements relating to our business plan to provide products, services and solutions to the drone industry. Any statements that are not statements of historical fact are forward-looking statements.
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.
Underwritten Public Offerings S-1 Offering On May 4, 2021, the Company closed a firm commitment underwritten public offering (the "S-1 Offering") in which it sold 4,000,000 shares of common stock, at a public offering price of $4.00 per share, to ThinkEquity, a division of Fordham Financial Management, Inc., as representative of the underwriters ("ThinkEquity"), pursuant an underwriting agreement dated April 29, 2021.
Recent Developments Corporate developments during the two years ended April 31, 2023 include: Capital Transactions S-1 Offering On May 4, 2021, the Company closed a firm commitment underwritten public offering (the "S-1 Offering") for the sale of 4,000,000 shares of common stock, at a public offering price of $4.00 per share, to ThinkEquity, a division of Fordham Financial Management, Inc., as representative of the underwriters ("ThinkEquity"), pursuant to an underwriting agreement with Think Equity.
Changes in operating assets and liabilities can fluctuate significantly from year to year depending upon the timing and level of multiple factors, including inventory purchases and vendor payments.
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 and vendor payments. Net inventory purchases, including deposits, totaled $8,805,110 and $3,457,633 in fiscal 2023 and fiscal 2022, respectively.
Embedded derivatives are valued separately from the host instrument and are recognized as derivative liabilities on the Company's balance sheet.
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. 38 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.
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.
Net cash used related to changes in operating assets and liabilities totaled $7,094,901 during the year ended April 30, 2022 compared to net cash provided by changes in operating assets and liabilities of $188,945 during the year ended April 30, 2021, representing a net increase in cash used of $7,283,846, or greater than 100%.
Net cash used related to changes in operating assets and liabilities totaled $8,876,755 during the year ended April 30, 2023, compared to $7,094,901 during the year ended April 30, 2022, representing an increase of $1,781,854 or 25%.
Investing Activities Net cash used in investing activities was $46,603,486 during the year ended April 30, 2022 compared to net cash provided by investing activities of $48,368 during the year ended April 30, 2021.
Investing Activities Net cash provided by investing activities was $29,590,235 during the year ended April 30, 2023, compared to net cash used in investing activities of $46,603,486 during the year ended April 30, 2022 resulting in a decrease of $76,193,721 or greater than 100%.
Adjustments in a purchase price allocation may require a change in the amounts allocated to goodwill during the periods in which the adjustments are determined. 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 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.
S-3 Offering On July 21, 2021, the Company closed on a firm commitment underwritten public offering (the "S-3 Offering") in which it sold an aggregate of 13,333,334 shares of Common Stock at a purchase price of $4.50 per share to ThinkEquity, pursuant to an underwriting agreement dated July 18, 2021.
The S-1 offering generated gross proceeds of $16 million and net proceeds of approximately $14.6 million. 50 S-3 Offering On July 21, 2021 the Company closed a firm commitment underwritten public offering (the "S-3 Offering") for the sale of 13,333,334 shares of common stock at a purchase price of $4.50 per share to ThinkEquity.
Net cash used in operations, net of non-cash expenses, totaled $8,924,419 in the year ended April 30, 2022 compared to $1,587,946 in the year ended April 30, 2021, resulting an increase of $7,336,473, or greater than 100%. The increase primarily related to higher operating costs associated with the acquisitions of Teal Drones and Skypersonic.
Net cash used in operations, net of non-cash expenses, totaled $20,322,665 during the year ended April 30, 2023, compared to 8,924,419 during the year ended April 30, 2022, resulting in an increase of $11,398,246, or greater than 100%.
Significant estimates reflected in these financial statements include those used to (i) determine stock based compensation, (ii) complete purchase price accounting for acquisitions, and (iii) accounting for derivatives 37 Goodwill – Goodwill represents the excess of the purchase price of an acquisition over the estimated fair value of identifiable net assets acquired.
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. 56 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.
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.
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.
Financing Activities Net cash provided by financing activities totaled $66,430,274 during the year ended April 30, 2022 compared to $1,488,048 during the year ended April 30, 2021, representing an increase of $64,942,226, or greater than 100%. Financing activities can vary, in nature and amount, from period to period.
Financing Activities Net cash used in financing activities totaled $1,215,325 during the year ended April 30, 2023, compared to net cash provided by financing activities of $66,430,274 during the year ended April 30, 2022. Financing activities can vary from period to period depending upon market conditions, both at a macro-level and specific to the Company.
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 that values the derivative liability based on a probability weighted discounted cash flow model.
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. Off-Balance Sheet Arrangements We have no off-balance sheet arrangements.
During the year ended April 30, 2022, we incurred research and development expenses totaling $2,606,141 compared to $516,084 for the year ended April 30, 2021 resulting in an increase of $2,090,057, or greater than 100%. Payroll costs totaled $2,211,909 in Fiscal 2022 compared to $510,084 in Fiscal 2021, representing an increase of $1,701,825, or more than 100%.
Research and development expenses totaled $5,248,336 during the year ended April 30, 2023 compared to $2,606,141 during the year ended April 30, 2022, representing an increase of $2,642,195, or approximately 100%.
Enterprise is building the infrastructure to manage drone fleets, fly and provide services remotely, and navigate confined interior spaces and dangerous military environments. The Consumer segment is focused on enthusiasts and hobbyists which are expected to increase as drones become more visible in our daily lives.
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 in our daily lives. In November 2022, we entered into an agreement to sell our Consumer segment to Unusual Machines.
The resulting liability is valued at each reporting date and the change in the liability is reflected as change in derivative liability in the statement of operations. Off-Balance Sheet Arrangements We have no off-balance sheet arrangements. Recently Issued Accounting Pronouncements The Company has implemented all new accounting pronouncements that are in effect.
Recently Issued Accounting Pronouncements The Company has implemented all new accounting pronouncements that are in effect.
This increase was partially offset by a change in the impact of derivative accounting which resulted in a net benefit of $1,042,129 in Fiscal 2022 compared to a net expense of $7,123,182 in Fiscal 2021 resulting in a net difference of $8,165,401. 35 Cash Flows Operating Activities Net cash used in operating activities was $16,019,320 during the year ended April 30, 2022 compared to net cash used in operating activities of $1,399,001 during the year ended April 30, 2021 representing an increase of $14,620,319, or greater than 100%.
The increase represented 31% of the increase in the consolidated loss. 54 Cash Flows Operating Activities Net cash used in operating activities was $29,199,420 during the year ended April 30, 2023, compared to net cash used in operating activities of $16,019,320 during the year ended April 30, 2022, representing an increase of $13,180,100 or 82%.
During the year ended April 30, 2022, sales and marketing expenses totaled $1,127,532 compared to $172,182 during the year ended April 30, 2021, resulting in an increase of $955,350 or greater than 100%. Payroll costs totaled $764,404 in Fiscal 2022 compared to $90,363 in Fiscal 2021, representing an increase of $674,041, or more than 100%.
The entire increase can be attributed to Teal, with approximately 43% of its expenses related to payroll, 33% related to office, 21% related to professional fees, and 3% related to information technology. Sales and marketing costs totaled $4,028,007 during the 2023 period compared to $1,127,532 during the 2022 period, resulting in an increase of $2,900,475 or more than 100%.
Other Expense Other income totaled $1,313,158 during the year ended April 30, 2022, compared to other expense of $8,359,565 during the year ended April 30, 2021, resulting in a change that is not comparable.
Other Income Other income totaled $39,324 during the 2023 period compared to $1,313,158 during the 2022 period, representing a decrease of $1,273,834.
Removed
Recent Developments Red Cat Holdings has recently completed a series of acquisitions and financings which have broadened the scope of its activities in the drone industry. These developments include: • In November 2020, the Company acquired Fat Shark Holdings, which sells consumer electronics products to the first-person view (“FPV”) sector of the drone industry.
Added
ITEM 7. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS The following discussion should be read in conjunction with our audited consolidated financial statements and related notes and other financial data included elsewhere in this Annual Report on Form 10-K.
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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 mounted on an aerial platform.
Added
The S-3 offering generated gross proceeds of $60 million and net proceeds of approximately $55.5 million. 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.
Removed
The total purchase price was $8.4 million. • In May 2021, the Company closed a firm commitment underwritten public offering (the “Underwritten Offering”) resulting in the sale of 4,000,000 shares of common stock at a public offering price of $4.00 per share to underwriters, ThinkEquity, a division of Fordham Financial Management, Inc.
Added
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.
Removed
(“ThinkEquity”), pursuant to a registration statement on Form S-1, as amended (File No. 333-253491), filed with the Securities and Exchange Commission (the “Commission”), which was declared effective on April 29, 2021.
Added
In November 2020, the Company acquired Fat Shark Holdings, a provider of FPV video goggles to the drone industry. The purchase price was $8,354,076. C.
Removed
The financing generated gross proceeds of $16.0 million and net proceeds of $14.6 million. • In May 2021, we acquired Skypersonic, Inc., 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”.
Added
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.
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Its patented software and hardware solutions allow for inspection services in restricted spaces where GPS is not allowed or available. The total purchase price was $2.8 million. • In July 2021, the Company closed an Underwritten Offering resulting in the sale of 13,333,334 shares of common stock at a public offering price of $4.50 per share to ThinkEquity.
Added
In August 2021, the Company acquired Teal Drones, 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.
Removed
The shares of Common Stock were offered by the Company pursuant to a registration statement on Form S-3, as amended (File No. 333-256216), filed with the Commission which was declared effective on June 14, 2021 (the “Registration Statement”).
Added
Enterprise's initial strategy was to provide UAV's, primarily drones, to commercial enterprises, 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.
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The financing generated gross proceeds of $60.0 million and net proceeds of approximately $55.5 million. • In August 2021, we closed the acquisition of Teal Drones ("Teal"), a leader in commercial and government unmanned aerial vehicle ("UAV") technology. Teal manufactures the Golden Eagle, one of only five drones approved by the U.S.
Added
The adjusted sale price is $20 million, including $3 million in cash, at closing, and $17 million in securities of Unusual Machines. The agreement reflects the Company's decision to focus its efforts and capital on military and defense where it believes that there are more opportunities to create long term shareholder value.
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Department of Defense for reconnaissance, public safety, and inspection applications. The total purchase price was $14 million. Business Strategy Red Cat remains focused on building a portfolio of complementary products and services to support the continued growth and maturation of the drone industry in both the enterprise and consumer market segments.
Added
The closing of the transaction is contingent upon Unusual Machines completing (i) an initial public offering that raises sufficient capital to close the transaction, and (ii) a listing on a public stock exchange such as the NYSE or Nasdaq. 51 Results of Operations The analysis of the Company's results of operations for the year ended April 30, 2023 ("Fiscal 2023") compared to the year ended April 30, 2022 ("Fiscal 2022") includes its wholly owned subsidiaries including Teal Drones, Rotor Riot, Fat Shark, and Skypersonic.
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Our disciplined acquisition strategy targets companies with advanced product offerings and unique drone platforms and intellectual property.
Added
The results for both periods is significantly impacted by the acquisition of Teal Drones on August 31, 2021. Teal is the Company’s largest operating subsidiary, and its operating results include 8 months for Fiscal 2022 and 12 months for Fiscal 2023. Since acquiring Teal, the Company has more than tripled the number of Teal employees and significantly expanded its facilities.
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After the integration of Teal Drones, we would expect government customers including defense, public safety, and infrastructure to be our most significant revenue drivers in the fiscal year ending April 30, 2023. 33 During the second half of the fiscal year ending on April 30, 2022, the Company focused on integrating and organizing its acquired businesses.
Added
As a result, the comparison of the year ended April 30, 2023 to the year ended April 30, 2022 yields more significant changes than might normally occur. At the end of Fiscal 2023, the Company recognized an impairment loss of $2,826,918 related to Skypersonic goodwill which was written down to zero. In addition, its operations were consolidated into Teal.
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These efforts including refining the establishment of Enterprise and Consumer segments in order to sharpen the Company's focus on the unique opportunities in each sector of the drone industry. The Enterprise segment is focused on opportunities in the commercial sector, including the military.
Added
Skypersonic's operating results represented 2% and 4% of consolidated revenues and operating loss for Fiscal 2023. Based on its immateriality, Skypersonic is not included in the operating analysis set forth below.
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Consumer provides a growing revenue base, strong brand visibility for the Company, and is an excellent source of professional pilots. Results of Operations When evaluating its operating results, the Company categorizes its functional expenses into sub-categories that capture the essence of the hundreds of general ledger accounts that it maintains.
Added
A summary comparison of Fiscal 2023 operating results compared to Fiscal 2022 is as follows: Fiscal 2023 Fiscal 2022 Dollar Change Percentage Change Revenues $ 9,911,780 $ 6,428,963 $ 3,482,817 54 % Cost of Goods $ 10,248,575 $ 5,503,448 $ 4,745,127 86 % Gross Margin $ (336,795 ) $ 925,515 $ (1,262,310 ) (136 ) % Operating Expenses $ 26,790,266 $ 13,927,801 $ 12,862,465 92 % Operating Loss $ (27,127,061 ) $ (13,002,286 ) $ (14,124,775 ) (109 ) % Discussion and Analysis of Fiscal 2023 compared to Fiscal 2022 Revenues Consolidated revenues totaled $9,911,780 during the year ended April 30, 2023 ("Fiscal 2023") compared to $6,428,963 during the year ended April 30, 2022 ("Fiscal 2022") representing an increase of $3,482,817, or 54%.
Removed
The Company believes this process enables a more insightful understanding of changes in its operating expenses. Cost of Goods is categorized into (i) materials, (ii) labor, (iii) overhead, and (iv) freight. Operations includes (i) payroll and (ii) overhead. Research and development is categorized into (i) payroll, (ii) materials, and (iii) overhead.
Added
Revenue growth for Teal and Rotor Riot represented $2,854,413 and $1,345,972 of the dollar increase, or 82% and 39%, of the percentage increase, respectively, which was partially offset by Fat Shark’s decrease of $606,006 or 17%. Revenue growth for Teal benefitted from a full year of operations in Fiscal 2023 compared to only eight months in Fiscal 2023.
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Sales and marketing includes (i) payroll, (ii) advertising programs, and (iii) third party services. General and administrative is categorized into (i) payroll, (ii) facilities, (iii) professional services, (iv) public company, (v) office, and (vi) insurance and related.
Added
Higher revenues for Rotor Riot were generated by a significant increase in digital marketing spending. Lower revenues for Fat Shark related to its newest product, the Dominator, which was launched at the beginning of Fiscal 2023, and while it generated strong initial sales in the first quarter, sales declined significantly over the remaining quarters in Fiscal 2023.
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During the fiscal year ended April 30, 2022 (“Fiscal 2022”), the Company completed the acquisitions of Teal Drones and Skypersonic which effectively doubled the number of operating subsidiaries.
Added
Revenues for the Enterprise Segment totaled $4,620,834 in Fiscal 2023 compared to $1,877,983 for Fiscal 2022, representing an increase of $2,742,851, or greater than 100%. This revenue growth was entirely attributable to Teal which recognized product sales of $3,051,348 in Fiscal 2023 and $904,600 of revenue under the SRR Tranche II program.
Removed
These transactions were the primary reason that the Company’s operating expenses increased to $13,927,801 in Fiscal 2022 compared to $5,946,295 in Fiscal 2021 (the fiscal year ending April 30, 2021) representing an increase of $7,981,506, or 134%. During Fiscal 2022, employee headcount increased from 16 at the beginning of the year to 62 on April 30, 2022.
Added
Revenues for the Consumer Segment totaled $5,290,946 in Fiscal 2023 compared to $4,550,980 for Fiscal 2022, representing an increase of $739,966, or 16%.
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This increase includes the addition of 15 and 10 employees from Teal and Skypersonic, respectively, that now work for the Company. Since acquiring Teal, its headcount has doubled from 15 to 30 in connection with its expanded operations. In addition, we have hired 6 employees to form an internal sales team primarily focused on our Enterprise segment.
Added
This revenue growth was entirely attributable to Rotor Riot whose revenues increased by $1,345,972, more than offsetting a $606,006 decrease for Fat Shark. 52 Gross Margin Consolidated gross margin totaled negative $336,795 during Fiscal 2023 compared to $925,515 during Fiscal 2022 representing a decrease of $1,262,310, or 136%.
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Year Ended April 30, 2022 and April 30, 2021 Revenue During the year ended April 30, 2022 (or the “2022 period”), we generated revenues totaling $6,428,963 compared to revenues totaling $4,999,517 during the year ended April 30, 2021 (or the “2021 period”) representing an increase of $1,429,446 or 29%.
Added
Gross margin dollar contribution for Teal, Rotor Riot, and Fat Shark totaled negative $857,721, positive $431,751, and positive $158,285, respectively. The reported gross margin of negative 19% for Teal was adversely impacted by a charge of $1,405,807 related to the write off of obsolete inventory related to its legacy drone, the Golden Eagle.
Removed
Rotor Riot and Fat Shark revenues comprise the entire amount for the 2021 period. During fiscal year 2022, we acquired two additional drone technology companies: Skypersonic and Teal. The increase in revenue during the 2022 period is directly related to the acquisitions.
Added
Excluding this charge, core gross margin for Teal was 12% in Fiscal 2023 compared to 19% in Fiscal 2022. The lower core gross margin in Fiscal 2023 reflects a significant investment by the Company to build and scale a new manufacturing facility in Salt Lake City, Utah.
Removed
The increase is partially offset by a decrease in both Rotor Riot and Fat Shark revenues of 8% and 9%, respectively. The decreased sales for Fat Shark primarily related to its primary product being at the end of its sales cycle. Fat Shark released its next generation product in June 2022.
Added
Our manufacturing facility is presently producing drones at a lower level than it is designed for, and these lower production levels, combined with higher labor and overhead costs, are adversely impacting core gross margins at Teal.
Removed
Cost of Goods Sold During the year ended April 30, 2022, we incurred cost of goods sold of $5,503,448 compared to $3,929,832 during the year ended April 30, 2021 resulting in an increase of $1,573,616 or 40%. The higher dollar amount relates to the increase in revenues, primarily related to the acquisitions of Skypersonic and Teal .
Added
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. The core operating margin for Fat Shark was 15% in Fiscal 2023 compared to 2% in Fiscal 2022.
Removed
Gross Margin During the year ended April 30, 2022, gross margin was $925,515 compared to $1,069,685 during the year ended April 30, 2021, resulting in a decrease of $144,170 or 13%. Gross margin, as a percentage of sales, totaled 14% in Fiscal 2022 compared to 21% in Fiscal 2021.
Added
The lower gross margin in Fiscal 2022 related to price reductions of the prior digital goggle as the Company prepared for the launch of the Dominator in early Fiscal 2023. Separately, Fat Shark recorded a charge of $182,845 related to the write-off of excess quantities of Dominator inventory based on sales volumes during the second half of Fiscal 2023.
Removed
The lower level of gross margin was primarily related to Teal whose gross margin of 19% was lower than the consolidated gross margin.
Added
This charge reduced gross margin from 15% to 7%. The core operating margin for Rotor Riot was 13% in Fiscal 2023 compared to 21% in Fiscal 2022. The decrease related to higher product and shipping costs.
Removed
In addition, the gross margin of Fat Shark decreased from 18% to 2% due to pricing discounts associated with the sales of products at the end of their life cycles. 34 Operating Expenses Operations expenses totaled $1,353,904 during Fiscal 2022 compared to $590,342 during Fiscal 2021, representing an increase of $763,562, or 129%.
Added
Operating Expenses Operations expenses totaled $4,411,685 during the 2023 period compared to $1,353,904 during the 2022 period, resulting in an increase of $3,057,781, or greater than 100%. Higher costs for Teal represented $2,934,250 or 96% of the percentage increase. Since its acquisition, we have more than tripled Teal's headcount and doubled the size of its facilities.
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Payroll costs increased to $911,358 in Fiscal 2022 compared to $219,396 in Fiscal 2021, representing an increase of $691,962, or more than 100%. Higher payroll costs represented 91% of the total increase in Operations expense.
Added
Approximately 49% of Teal's costs related to payroll, 21% to employee-related office expenses, and 9% to overhead expenses with the balance spread ratably across numerous categories including information technology, facilities, professional fees, and travel.
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Higher payroll costs represented 81% of the total increase in Research and Development expense. In addition, materials costs totaled $350,372 in Fiscal 2022 compared to $1,449 in Fiscal Year 2021 representing an increase of $348,923. Higher material costs represented 17% of the year-over-year increase.

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