Red Cat Holdings, Inc. (RCAT)

Overview

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

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

Discussion and Analysis of the Three Months Ended June 30, 2026 Compared to the Three Months Ended June 30, 2025

Revenues

Consolidated revenues totaled $20.2 million during the three months ended June 30, 2026, or the “2026 period” compared to $3.2 million during the three months ended June 30, 2025, or the “2025 period,” representing an increase of $17.0 million, or 527%. The increase is attributable primarily to increased revenue associated with the scaling of drone deliveries to the U.S. Army and the commencement of drone deliveries to the Japan Ground Self-Defense Force.

Gross Profit

Consolidated gross profit totaled $3.3 million during the 2026 period compared to gross profit of $0.4 million during the 2025 period, representing an increase of $2.9 million. On a percentage basis, gross profit was 16.1% during the 2026 period compared to gross profit of 11.6% during the 2025 period. The gross profit increase was primarily due to higher revenue and increased manufacturing efficiencies in the 2026 period compared to the 2025 period.

24

Table of contents

Operating Expenses

Research and development expenses totaled $14.2 million during the 2026 period compared to $3.6 million during the 2025 period, representing an increase of $10.6 million or 295%. The increase was attributable primarily to increased investment in engineering personnel costs, prototype development, testing, and other expenses associated with the development of new and enhanced drone platforms and related technologies.

Sales and marketing costs totaled $6.4 million during the 2026 period compared to $3.2 million during the 2025 period, representing an increase of $3.3 million or 102%. The increase was attributable primarily to higher payroll and related personnel costs associated with expanding our sales and marketing team to support increased business development and customer engagement activities.

General and administrative expenses totaled $21.2 million during the 2026 period compared to $6.2 million during the 2025 period, representing an increase of $15.0 million or 241%. The increase was attributable primarily to higher payroll and related personnel costs resulting from increased headcount, higher stock-based compensation expense, and increased software and technology costs associated with corporate IT infrastructure and the Company's pursuit of Cybersecurity Maturity Model Certification compliance.

Stock-Based Compensation

During the 2026 period, we incurred stock-based compensation costs of $5.0 million compared to $2.0 million in the 2025 period, resulting in an increase of $3.0 million or 148%. This increase was driven by equity awards granted to new employees, as well as annual equity grants made to eligible employees as part of the Company's employee compensation program.

Other (Income) Expense

Other income totaled $3.4 million during the 2026 period compared to other expense of $0.6 million during the 2025 period, representing an increase of $4.0 million or 639%. This increase was attributable to the change in fair value and extinguishment of convertible notes payable, which resulted in a loss of $0.8 million during the 2025 period, which was not present during the 2026 period. Interest income also increased from $0.2 million during the 2025 period to $1.9 million

25

Table of contents

during the 2026 period. Additionally, the Company recognized an unrealized gain on equity securities of $1.5 million in the 2026 period, which was not present during the 2025 period.

Discussion and Analysis of the Six Months Ended June 30, 2026 Compared to the Six Months Ended June 30, 2025

Revenues

Consolidated revenues totaled $35.7 million during the six months ended June 30, 2026, or the “2026 period” compared to $4.8 million during the six months ended June 30, 2025, or the “2025 period,” representing an increase of $30.8 million, or 636%. The increase is attributable primarily to increased revenue associated with the scaling of drone deliveries to the U.S. Army and the commencement of drone deliveries to the Japan Ground Self-Defense Force.

Gross Profit

Consolidated gross profit totaled $5.2 million during the 2026 period compared to a gross loss of $0.5 million during the 2025 period, representing an increase of $5.7 million. On a percentage basis, gross profit was 14.7% during the 2026 period compared to a gross loss of 9.8% during the 2025 period. The gross profit increase was primarily due to higher revenue and increased manufacturing efficiencies in the 2026 period compared to the 2025 period.

Operating Expenses

Research and development expenses totaled $22.2 million during the 2026 period compared to $7.0 million during the 2025 period, representing an increase of $15.2 million or 216%. The increase was attributable primarily to increased investment in engineering personnel costs, prototype development, testing, and other expenses associated with the development of new and enhanced drone platforms and related technologies.

Sales and marketing costs totaled $11.0 million during the 2026 period compared to $6.5 million during the 2025 period, representing an increase of $4.5 million or 69%. The increase was attributable primarily to higher payroll and related personnel costs associated with expanding our sales and marketing team to support increased business development and customer engagement activities.

General and administrative expenses totaled $38.0 million during the 2026 period compared to $11.1 million during the 2025 period, representing an increase of $26.8 million or 242%. The increase was attributable primarily to higher payroll and related personnel costs resulting from increased headcount, as well as higher stock-based compensation expense. These increases reflect the expansion of our corporate, administrative, and compliance functions to support growth during the 2026 period.

26

Table of contents

Stock-Based Compensation

During the 2026 period, we incurred stock-based compensation costs of $9.9 million compared to $3.6 million in the 2025 period, resulting in an increase of $6.2 million or 171%. This increase was driven by equity awards granted to new employees, as well as annual equity grants made to eligible employees as part of the Company's employee compensation program.

Other (Income) Expense

Other income totaled $4.2 million during the 2026 period compared to other expense of $11.3 million during the 2025 period, representing an increase of $15.4 million or 137%. This increase was primarily attributable to the change in fair value and extinguishment of convertible notes payable, which resulted in a loss of $11.5 million during the 2025 period compared to a loss of $0.5 million during the 2026 period. Interest income also increased from $0.2 million during the 2025 period to $3.2 million during the 2026 period. Additionally, the Company recognized an unrealized gain on equity securities of $1.5 million in the 2026 period, which was not present during the 2025 period.

Cash Flows

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

[Excerpt truncated for page length; source filing is linked above.]

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. In addition to our historical consolidated financial information, the following discussion contains forward-looking statements that reflect our plans, estimates, and beliefs. Our actual results could differ materially from those discussed in the forward-looking statements. For more information regarding forward-looking statements, please refer to the discussion above under the heading “Forward-Looking Statements.”

Recent Developments

Change in Fiscal Year

In September 2024, our Board of Directors approved a change in fiscal year end from April 30 to December 31, effective as of December 31, 2024. In accordance with SEC regulations, our Consolidated Financial Statements are comprised of our Consolidated Balance Sheets as of December 31, 2025 and 2024 and our Consolidated Statements of Operations, Consolidated Statements of Stockholders' Equity, Consolidated Statements of Cash Flows for the year ended December 31, 2025, eight months ended December 31, 2024, and year ended April 30, 2024. As a result, this Management’s Discussion and Analysis of Financial Condition and Results of Operations is comparing our results of operations for the year ended December 31, 2025 with our results of operations for the eight month period ended December 31, 2024 and the year ended April 30, 2024.

Capital Transactions

In April 2025, we entered into a securities purchase agreement with certain institutional investors pursuant to which we issued and sold, in a registered direct offering, an aggregate of 4,724,412 shares of our common stock, par value $0.001 per share, at a price of $6.35 per share. The gross proceeds were approximately $30 million, before deducting the placement agents’ fees and other offering expenses.

In June 2025, we entered into a securities purchase agreement with certain institutional investors pursuant to which we issued and sold, in a registered direct offering, an aggregate of 6,448,276 shares of our common stock, par value $0.001 per share, at a price of $7.25 per share. The gross proceeds were approximately $46.8 million, before deducting the placement agents’ fees and other offering expenses.

In September 2025, we entered into an underwriting agreement with a certain institutional investor pursuant to which we issued and sold, in a registered direct offering, an aggregate of 15,625,000 shares of our common stock, par value $0.001 per share, at a price of $9.60 per share. We also granted the underwriters a thirty day option to purchase up to an additional 2,343,750 shares of common stock at the public offering price, which the underwriters exercised in full at closing. The gross proceeds were approximately $172.5 million, before deducting the underwriters’ fees and other offering expenses.

Discussion and Analysis of Year Ended December 31, 2025 compared to Eight Month Transition Period Ended December 31, 2024 and Year Ended April 30, 2024

Revenues

Consolidated revenues totaled $40.7 million during the year ended December 31, 2025 (or the “2025 Period”) compared to $4.9 million during the eight months ended December 31, 2024 (or the "Transition Period") and compared to $17.8 million during the year ended April 30, 2024 (or the "2024 Period"). This represents an increase of $35.8 million, or 739% compared to the Transition Period and an increase of $22.9 million, or 128% compared to the 2024 Period. The increase compared to both periods is attributable primarily to increased revenue associated with the commencement and scaling of drone deliveries to the U.S. Army under the SRR program.

Gross Profit

Consolidated gross profit totaled $1.3 million during the 2025 Period compared to gross loss of $1.4 million during the Transition Period and gross profit of $3.7 million during the 2024 Period. This represents an increase of $2.7 million, or 195% compared to the Transition Period and a decrease of $2.4 million, or 65% compared to the 2024 Period. On a

35

Table of Contents

percentage basis, gross profit was 3% during the 2025 Period compared to gross loss of 28% during the Transition Period and gross profit of 21% during the 2024 Period. Our manufacturing facility is currently operating below its designed production capacity. These lower production levels, combined with higher fixed overhead costs, have resulted in lower gross margins during the 2025 Period. As production volumes increase, we expect fixed overhead costs, including labor, to be allocated across a greater number of units, which is expected to reduce per-unit production costs and improve gross margins.

Operating Expenses

Research and development expenses totaled $17.9 million during the 2025 Period compared to $6.6 million during the Transition Period and $6.3 million during the 2024 period. This represents an increase of $11.3 million, or 171% compared to the Transition Period and an increase of $11.6 million, or 186% compared to the 2024 Period. The increase compared to both periods was attributable primarily to increased investment in research and development activities, including engineering personnel costs, prototype development, testing, and other expenses associated with the development of new and enhanced drone platforms and related technologies.

Sales and marketing costs totaled $13.1 million during the 2025 Period compared to $6.3 million during the Transition Period and $5.1 million during the 2024 Period. This represents an increase of $6.8 million, or 107% compared to the Transition Period and an increase of $8.0 million, or 158% compared to the 2024 Period. The increase compared to both periods was attributable primarily to higher payroll and related personnel costs associated with expanding our sales and marketing team to support increased business development and customer engagement activities.

General and administrative expenses totaled $36.9 million during the 2025 Period compared to $11.5 million during the Transition Period and $11.2 million during the 2024 Period. This represents an increase of $25.4 million, or 222% compared to the Transition Period and $25.7 million, or 229% compared to the 2024 Period. The increase compared to both periods was attributable primarily to higher payroll and related personnel costs resulting from increased headcount, as well as higher stock-based compensation expense. These increases reflect the expansion of our corporate, administrative, and compliance functions to support growth during the 2025 Period.

Other Expense

Other expense totaled $5.0 million during the 2025 Period compared to $17.8 million during the Transition Period and $2.2 million during the 2024 Period. This represents a decrease of $12.8 million or 72% compared to the Transition Period and an increase of $2.8 million, or 126% compared to the 2024 Period. During the 2025 Period, other expense consisted primarily of a fair value adjustment on convertible notes payable of $11.4 million, partially offset by a gain on extinguishment of convertible notes payable of $3.2 million and net interest income of $2.7 million. During the Transition Period, other expense consisted primarily of a fair value adjustment on convertible note payable of $13.1 million and a loss on sale of equity method investment of $4.0 million. During the 2024 Period, other expense consisted primarily of impairment on equity method investment of $11.4 million, partially offset by a gain of $9.6 million related to the divestiture of the Consumer segment.

Net Loss

Net loss from continuing operations totaled $72.1 million during the 2025 Period compared to $43.6 million during the Transition Period and $21.5 million during the 2024 period. This represents a decrease of $28.5 million, or 65% compared to the Transition Period and a decrease of $50.6 million, or 235% compared to the 2024 Period.

Cash Flows

Operating Activities

Net cash used in operating activities was $89.1 million during the 2025 Period compared to $20.5 million during the Transition Period and $17.7 million during the 2024 Period. This represents an increase of $68.6 million compared to the Transition Period and an increase of $71.4 million compared to the 2024 Period. The increase compared to both periods was attributable primarily to the increase in net loss during the 2025 period. Non-cash expenses totaled $20.5 million during the 2025 period, compared to $22.6 million during Transition Period and $8.5 million during the 2024 Period. Net cash used related to changes in operating assets and liabilities totaled $37.6 million during the 2025 Period. Net cash provided by related to changes in operating assets and liabilities totaled $0.4 million during the Transition Period. Net cash

36

Table of Contents

used related to changes in operating assets and liabilities totaled $4.7 million during the 2024 Period. Changes in operating assets and liabilities can fluctuate significantly from period to period depending upon the timing and level of multiple factors, including inventory purchases, vendor payments, and customer collections.

Investing Activities

Net cash used in investing activities was $6.6 million during the 2025 Period compared to net cash provided by investing activities of $4.2 million during the Transition Period and $13.6 million during the 2024 Period. During the 2025 Period, net cash used in investing activities consisted entirely of purchases of property and equipment totaling $6.6 million, compared to purchases of property and equipment of $0.2 million during the Transition Period and $0.3 million during the 2024 Period. During the Transition Period, net cash provided by investing activities was primarily attributable to proceeds of $4.4 million from the sale of equity method investment and note receivable. During the 2024 Period, net cash provided by investing activities was primarily attributable to proceeds of $12.8 million from the sale of marketable securities and $1.0 million from the divestiture of the consumer segment.

Financing Activities

Net cash provided by investing activities was $254.5 million during the 2025 Period compared to $19.4 million during the Transition Period, and $7.8 million during the 2024 Period. This represents an increase of $235.1 million compared to the Transition Period and an increase of $246.7 million compared to the 2024 Period. The increase compared to both periods relates to the proceeds from issuance of common stock during the 2025 Period.

Liquidity and Capital Resources

At December 31, 2025, the Company reported current assets totaling $226.9 million, current liabilities totaling $14.8 million and net working capital of $212.1 million. Cash totaled $167.9 million at December 31, 2025. Inventory related balances, including pre-paid inventory, totaled $30.4 million.

Critical Accounting Policies and Estimates

We regularly evaluate the accounting policies and estimates that we use to prepare our financial statements. A complete summary of these policies is included in the notes to our financial statements.

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

Revenue Recognition

We recognize revenue in accordance with ASC Topic 606 - Revenue from Contracts with Customers, issued by the Financial Accounting Standards Board (“FASB”). This standard includes a comprehensive evaluation of factors to be considered regarding revenue recognition including (i) identifying the promised goods, (ii) evaluating performance obligations, (iii) measuring the transaction price, (iv) allocating the transaction price to the performance obligations if there are multiple components, and (v) recognizing

[Excerpt truncated for page length; the complete text is on the linked full-MD&A page.]