10-Q: Quarterly report pursuant to Section 13 or 15(d)
Published on March 7, 2023
UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549
FORM
| QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934 | ||
|
For the |
or
| TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934 | ||
|
For the transition period from ___________ to ___________ |
Commission File Number:
(Exact name of Registrant as specified in its charter)
| (State or other jurisdiction of incorporation or organization) | (I.R.S. Employer Identification No.) |
|
|
|
|
| (Address of principal executive offices) | (Zip Code) |
(
(Registrant's telephone number, including area code)
__________________________________
(Former Name, Former Address and Former Fiscal Year, if Changed Since Last Report)
Securities registered pursuant to Section 12(b) of the Act:
|
Title of Each Class |
Trading Symbol(s) |
Name of each exchange on which registered |
||
Indicate
by check mark whether the registrant (1) has filed all reports required to be filed by Section 13 or 15(d) of the Securities Exchange
Act of 1934 during the preceding 12 months (or for such shorter period that the registrant was required to file such reports), and (2)
has been subject to such filing requirements for the past 90 days.
Indicate
by check mark whether the registrant has submitted electronically every Interactive Data File required to be submitted pursuant to Rule
405 of Regulation S-T (§232.405 of this chapter) during the preceding 12 months (or for such shorter period that the registrant
was required to submit such files).
Indicate by check mark whether the registrant is a large accelerated filer, an accelerated filer, a non-accelerated filer, smaller reporting company, or an emerging growth company. See definition of "large accelerated filer", "accelerated filer" and "smaller reporting company" and "emerging growth company" in Rule 12b-2 of the Exchange Act.
| Large accelerated filer ☐ | Accelerated filer ☐ |
| Smaller reporting company | |
| Emerging
growth company |
If an emerging growth company, indicate by check mark if the registrant has elected not to use the extended transition period for complying with any new or revised financial accounting standards provided pursuant to Section 13(a) of the Exchange Act. ☐
Indicate
by check mark whether the registrant is a shell company (as defined in Rule 12b-2 of the Exchange Act). Yes ☐
As of March 6, 2023, there were shares of the registrant's common stock outstanding.
INDEX TO FORM 10-Q
| PART I. | FINANCIAL INFORMATION | Page |
| Item 1. | Financial Statements: | 3 |
| Unaudited Balance Sheets as of January 31, 2023 and April 30, 2022 | 3 | |
| Unaudited Statements of Operations for the Three and Nine Months Ended January 31, 2023 and 2022 | 4 | |
| Unaudited Statements of Changes in Shareholders' Equity for the Three and Nine Months Ended January 31, 2023 and 2022 | 5 | |
| Unaudited Statements of Cash Flows for the Nine Months Ended January 31, 2023 and 2022 | 7 | |
| Notes to Financial Statements | 8 | |
| Item 2. | Management's Discussion and Analysis of Financial Condition and Results of Operations | 28 |
| Item 3. | Quantitative and Qualitative Disclosures about Market Risk | 34 |
| Item 4. | Controls and Procedures | 34 |
| PART II. | OTHER INFORMATION | |
| Item 1. | Legal Proceedings | 35 |
| Item 1A. | Risk Factors | 35 |
| Item 2. | Unregistered Sales of Equity Securities and Use of Proceeds | 35 |
| Item 3. | Defaults Upon Senior Securities | 35 |
| Item 4. | Mine Safety Disclosures | 35 |
| Item 5. | Other Information | 35 |
| Item 6. | Exhibits | 36 |
| SIGNATURES | 36 | |
RED CAT HOLDINGS
Consolidated Balance Sheets
(Unaudited)
| January 31, | April 30, | |||||||
| 2023 | 2022 | |||||||
| ASSETS | ||||||||
| Current assets | ||||||||
| Cash | $ | $ | ||||||
| Marketable securities | ||||||||
| Accounts receivable, net | ||||||||
| Inventory | ||||||||
| Other | ||||||||
| Due from related party | ||||||||
| Total current assets | ||||||||
| Goodwill | ||||||||
| Intangible assets, net | ||||||||
| Property and equipment, net | ||||||||
| Other | ||||||||
| Operating lease right-of-use assets | ||||||||
| Total long term assets | ||||||||
| TOTAL ASSETS | $ | $ | ||||||
| LIABILITIES AND STOCKHOLDERS' EQUITY | ||||||||
| Current liabilities | ||||||||
| Accounts payable | $ | $ | ||||||
| Accrued expenses | ||||||||
| Debt obligations - short term | ||||||||
| Due to related party | ||||||||
| Customer deposits | ||||||||
| Operating lease liabilities | ||||||||
| Warrant derivative liability | ||||||||
| Total current liabilities | ||||||||
| Operating lease liabilities | ||||||||
| Debt obligations - long term | ||||||||
| Total long term liabilities | ||||||||
| Commitments and contingencies | ||||||||
| Stockholders' equity | ||||||||
| Series B preferred stock - shares authorized ; outstanding and | ||||||||
| Common stock - shares authorized ; outstanding and | ||||||||
| Additional paid-in capital | ||||||||
| Accumulated deficit | ( |
) | ( |
) | ||||
| Accumulated other comprehensive income | ( |
) | ( |
) | ||||
| Total stockholders' equity | ||||||||
| TOTAL LIABILITIES AND STOCKHOLDERS' EQUITY | $ | $ | ||||||
See accompanying notes.
| 3 |
RED CAT HOLDINGS
Consolidated Statements Of Operations
(Unaudited)
| Three months ended January 31, | Nine months ended January 31, | |||||||||||||||
| 2023 | 2022 | 2023 | 2022 | |||||||||||||
| Revenues | $ | $ | $ | $ | ||||||||||||
| Cost of goods sold | ||||||||||||||||
| Gross Margin | ||||||||||||||||
| Operating Expenses | ||||||||||||||||
| Operations | ||||||||||||||||
| Research and development | ||||||||||||||||
| Sales and marketing | ||||||||||||||||
| General and administrative | ||||||||||||||||
| Stock based compensation | ||||||||||||||||
| Total operating expenses | ||||||||||||||||
| Operating loss | ( |
) | ( |
) | ( |
) | ( |
) | ||||||||
| Other Expense (Income) | ||||||||||||||||
| Change in fair value of derivative liability | ( |
) | ( |
) | ( |
) | ( |
) | ||||||||
| Investment income, net | ( |
) | ( |
) | ( |
) | ( |
) | ||||||||
| Interest expense | ||||||||||||||||
| Other, net | ||||||||||||||||
| Other Expense (Income) | $ | $ | ( |
) | $ | ( |
) | $ | ( |
) | ||||||
| Net loss | $ | ( |
) | $ | ( |
) | $ | ( |
) | $ | ( |
) | ||||
| Loss per share - basic and diluted | $ | ( |
) | $ | ( |
) | $ | ( |
) | $ | ( |
) | ||||
| Weighted average shares outstanding - basic and diluted | ||||||||||||||||
See accompanying notes.
| 4 |
RED CAT HOLDINGS
Consolidated Statements of Stockholders’ Equity
For the three months ended January 31, 2023 and January 31, 2022
(Unaudited)
| Series A | Series B | Additional | Accumulated Other | |||||||||||||||||||||||||||||||||||||
| Preferred Stock | Preferred Stock | Common Stock | Paid-in | Accumulated | Comprehensive | Total | ||||||||||||||||||||||||||||||||||
| Shares | Amount | Shares | Amount | Shares | Amount | Capital | Deficit | Income (Loss) | Equity | |||||||||||||||||||||||||||||||
| Balances, October 31, 2021 | — | $ | $ | $ | $ | $ | ( |
) | $ | $ | ||||||||||||||||||||||||||||||
| Stock based compensation | — | — | ( |
) | ( |
) | ||||||||||||||||||||||||||||||||||
| Currency translation adjustments | — | — | — | |||||||||||||||||||||||||||||||||||||
| Net loss | — | — | — | ( |
) | ( |
) | |||||||||||||||||||||||||||||||||
| Balances, January 31, 2022 | — | $ | $ | $ | $ | $ | ( |
) | $ | $ | ||||||||||||||||||||||||||||||
| Balances, October 31, 2022 | — | $ | $ | $ | $ | $ | ( |
) | $ | ( |
) | $ | ||||||||||||||||||||||||||||
| Stock based compensation | — | — | — | |||||||||||||||||||||||||||||||||||||
| Vesting of restricted stock units | — | — | ( |
) | ( |
) | ||||||||||||||||||||||||||||||||||
| Unrealized gain on marketable securities | — | — | — | |||||||||||||||||||||||||||||||||||||
| Currency translation adjustments | — | — | — | |||||||||||||||||||||||||||||||||||||
| Net loss | — | — | — | ( |
) | ( |
) | |||||||||||||||||||||||||||||||||
| Balances, January 31, 2023 | — | $ | $ | $ | $ | $ | ( |
) | $ | ( |
) | $ | ||||||||||||||||||||||||||||
| 5 |
RED CAT HOLDINGS
Consolidated Statements of Stockholders’ Equity
For the nine months ended January 31, 2023 and January 31, 2022
(Unaudited)
| Series A | Series B | Additional | Accumulated Other | |||||||||||||||||||||||||||||||||||||
| Preferred Stock | Preferred Stock | Common Stock | Paid-in | Accumulated | Comprehensive | Total | ||||||||||||||||||||||||||||||||||
| Shares | Amount | Shares | Amount | Shares | Amount | Capital | Deficit | Income (Loss) | Equity | |||||||||||||||||||||||||||||||
| Balances, April 30, 2021 | $ | $ | $ | $ | $ | ( |
) | $ | $ | |||||||||||||||||||||||||||||||
| Acquisition of Skypersonic | — | — | ||||||||||||||||||||||||||||||||||||||
| Acquisition of Teal Drones | — | — | ||||||||||||||||||||||||||||||||||||||
| Public offerings, net of $ |
— | — | ||||||||||||||||||||||||||||||||||||||
| Exercise of warrants | — | — | ||||||||||||||||||||||||||||||||||||||
| Conversion of preferred stock | ( |
) | ( |
) | ( |
) | ( |
) | ||||||||||||||||||||||||||||||||
| Stock based compensation | — | — | ||||||||||||||||||||||||||||||||||||||
| Vesting of restricted stock units | — | — | — | |||||||||||||||||||||||||||||||||||||
| Shares issued for services | — | — | ||||||||||||||||||||||||||||||||||||||
| Currency translation adjustments | — | — | — | |||||||||||||||||||||||||||||||||||||
| Net loss | — | — | — | ( |
) | ( |
) | |||||||||||||||||||||||||||||||||
| Balances, January 31, 2022 | — | $ | $ | $ | $ | $ | ( |
) | $ | $ | ||||||||||||||||||||||||||||||
| Balances, April 30, 2022 | — | $ | $ | $ | $ | $ | ( |
) | $ | ( |
) | $ | ||||||||||||||||||||||||||||
| Stock based compensation | — | — | — | |||||||||||||||||||||||||||||||||||||
| Vesting of restricted stock units | — | — | ( |
) | ( |
) | ||||||||||||||||||||||||||||||||||
| Unrealized gain on marketable securities | — | — | — | |||||||||||||||||||||||||||||||||||||
| Currency translation adjustments | — | — | — | |||||||||||||||||||||||||||||||||||||
| Net loss | — | — | — | ( |
) | ( |
) | |||||||||||||||||||||||||||||||||
| Balances, January 31, 2023 | — | $ | $ | $ | $ | $ | ( |
) | $ | ( |
) | $ | ||||||||||||||||||||||||||||
See accompanying notes.
| 6 |
RED CAT HOLDINGS
Consolidated Statements of Cash Flows
(Unaudited)
| Nine months ended January 31, | ||||||||
| 2023 | 2022 | |||||||
| Cash Flows from Operating Activities | ||||||||
| Net loss | $ | ( |
) | $ | ( |
) | ||
| Stock based compensation - options | ||||||||
| Stock based compensation - restricted units | ||||||||
| Common stock issued for services | ||||||||
| Amortization of intangible assets | ||||||||
| Realized loss from sale of marketable securities | ||||||||
| Depreciation | ||||||||
| Change in fair value of derivative | ( |
) | ( |
) | ||||
| Changes in operating assets and liabilities, net of acquisitions | ||||||||
| Accounts receivable | ( |
) | ( |
) | ||||
| Inventory | ( |
) | ( |
) | ||||
| Other | ( |
) | ( |
) | ||||
| Operating lease right-of-use assets and liabilities | ||||||||
| Customer deposits | ( |
) | ||||||
| Accounts payable | ( |
) | ||||||
| Accrued expenses | ( |
) | ( |
) | ||||
| Net cash used in operating activities | ( |
) | ( |
) | ||||
| Cash Flows from Investing Activities | ||||||||
| Cash acquired through acquisitions | ||||||||
| Purchases of property and equipment | ( |
) | ( |
) | ||||
| Proceeds from maturities of marketable securities | ||||||||
| Purchases of marketable securities | ( |
) | ||||||
| Investment in SAFE agreement | ( |
) | ||||||
| Net cash provided by (used in) investing activities | ( |
) | ||||||
| Cash Flows from Financing Activities | ||||||||
| Proceeds from exercise of warrants | ||||||||
| Proceeds from related party obligations | ||||||||
| Payments under related party obligations | ( |
) | ( |
) | ||||
| Payments under debt obligations | ( |
) | ( |
) | ||||
| Payments of taxes related to equity transactions | ( |
) | ( |
) | ||||
| Proceeds from issuance of common stock, net | ||||||||
| Net cash (used in) provided by financing activities | ( |
) | ||||||
| Net (decrease) increase in Cash | ( |
) | ||||||
| Cash, beginning of period | ||||||||
| Cash, end of period | ||||||||
| Cash paid for interest | ||||||||
| Cash paid for income taxes | ||||||||
| Non-cash transactions | ||||||||
| Fair value of shares issued in acquisitions | $ | $ | ||||||
| Taxes related to net share settlement of equity awards | $ | $ | ||||||
| Unrealized gain on marketable securities | $ | $ | ||||||
| Elimination of derivative liability | $ | $ | ||||||
| Financed purchases of property and equipment | $ | $ | ||||||
| Indirect payment to related party | $ | $ | ||||||
| Shares withheld as payment of note receivable | $ | $ | ||||||
| Conversion of preferred stock into common stock | $ | $ | ||||||
See accompanying notes.
| 7 |
RED CAT HOLDINGS, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
January 31, 2023 and 2022
(unaudited)
Our unaudited interim consolidated financial statements and accompanying notes are prepared in accordance with accounting principles generally accepted in the United States of America ("GAAP"). In the opinion of management, the unaudited interim consolidated financial statements reflect all adjustments of a normal recurring nature that are necessary for a fair presentation of the results for the interim periods presented. Interim results are not necessarily indicative of results for a full year. The information included in this Form 10-Q should be read in conjunction with the financial information included in the Annual Report on Form 10-K for the fiscal year ended April 30, 2022 of Red Cat Holdings, Inc. (the "Company"), filed with the Securities and Exchange Commission ("SEC") on July 27, 2022.
Note 1 – The Business
Red Cat Holdings (“Red Cat” or the “Company”) was originally incorporated in February 1984. 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. Teal Drones is a leader in commercial and government Unmanned Aerial Vehicles (UAV) technology. Fat Shark is a provider of First Person View (FPV) video goggles to the drone industry. Rotor Riot sells FPV drones and equipment to the consumer marketplace through its digital storefront located at www.rotorriot.com. Skypersonic provides software and hardware solutions that enable drones to complete inspection services in locations where GPS (global positioning systems) is not available, yet still record and transmit data even while being operated from thousands of miles away.
Corporate developments since May 1, 2021 include:
| A. | Fat Shark Acquisition |
On September 30, 2020, the
Company entered into a share purchase agreement (“Share Purchase Agreement”) with Greg French (“French”), the
founder and sole shareholder of Fat Shark Holdings (“Fat Shark”), to acquire all of the issued and outstanding shares of Fat
Shark and its subsidiaries. The transaction closed on November 2, 2020 and was valued at $
A summary of the purchase price and its related allocation was as follows:
| Shares issued | $ | 6,351,076 | ||
| Promissory note issued | ||||
| Cash | ||||
| Total Purchase Price | $ |
| Assets acquired | ||||
| Cash | ||||
| Accounts receivable | ||||
| Other assets | ||||
| Inventory | ||||
| Brand name | ||||
| Proprietary technology | ||||
| Non-compete agreement | ||||
| Total assets acquired | ||||
| Liabilities assumed | ||||
| Accounts payable and accrued expenses | ||||
| Customer deposits | ||||
| Total liabilities assumed | ||||
| Total fair value of net assets acquired | ||||
| Goodwill | $ | |||
| 8 |
Intangible assets included proprietary technology and a non-compete agreement which are being amortized over 5 and 3 years, respectively. The carrying value of brand name is not being amortized but is reviewed quarterly and formally evaluated at year end. The excess of the purchase price above the net assets acquired was recorded as goodwill which is reviewed quarterly and formally evaluated at year end.
| B. | Skypersonic Acquisition |
In May 2021, the Company acquired all of the outstanding
stock of Skypersonic, Inc. (“Skypersonic”) in exchange for $3,000,000 of our common stock. The number of shares issuable was
based on the volume weighted average price ("VWAP") of our common stock for the 20 trading days ending May 7, 2021. Based on
a VWAP of $4.0154, the Company issued
shares. In addition, the Company also agreed to issue
shares of common stock to
a shareholder. For accounting purposes, the shares were valued at $
The final summary of the purchase price and its related allocation is as follows:
| Shares issued | $ | 2,716,012 | ||
| Cash | ||||
| Total Purchase Price | $ |
| Assets acquired | ||||
| Cash | ||||
| Accounts receivable | ||||
| Other assets | ||||
| Inventory | ||||
| Proprietary technology | ||||
| Non-compete agreement | ||||
| Total assets acquired | ||||
| Liabilities assumed | ||||
| Accounts payable and accrued expenses | ||||
| Total liabilities assumed | ||||
| Total fair value of net assets acquired | ( |
) | ||
| Goodwill | $ | |||
Intangible assets included proprietary technology and a non-compete agreement which are being amortized over 5 and 3 years, respectively. The excess of the purchase price above the net assets acquired was recorded as goodwill which is reviewed quarterly and formally evaluated at year end.
| C. | Teal Drones Acquisition |
On August 31, 2021, the Company closed the acquisition
of Teal Drones Inc., (“Teal”). Under the terms of the agreement, the base purchase price of $
| 9 |
The final summary of the purchase price and its related allocation is as follows:
| Total Purchase Price – shares issued | $ | 10,011,279 |
| Assets acquired | ||||
| Cash | ||||
| Accounts receivable | ||||
| Other current assets | ||||
| Other assets | ||||
| Inventory | ||||
| Brand name | ||||
| Proprietary technology | ||||
| Total assets acquired | ||||
| Liabilities assumed | ||||
| Accounts payable and accrued expenses | ||||
| Customer deposits | ||||
| Notes payable | ||||
| Total liabilities assumed | ||||
| Total fair value of net assets acquired | ||||
| Goodwill | $ | |||
Intangible assets included proprietary technology which is being amortized over 6 years. The carrying value of brand name is not being amortized but is reviewed quarterly and formally evaluated at year end. The excess of the purchase price above the net assets acquired was recorded as goodwill which is reviewed quarterly and formally evaluated at year end.
Supplemental Unaudited Pro Forma Financial and Other Information
There is no pro forma financial information for the nine months ended January 31, 2023 because all acquisitions had closed prior to the beginning of the reporting period. The following table presents pro forma results as if our acquisition of Teal had occurred on May 1, 2021:
| Nine months ended January 31, 2022 | ||||||||||||
| Red Cat | Teal | Consolidated | ||||||||||
| Revenues | $ | $ | $ | |||||||||
| Net Loss | ( |
) | ( |
) | ( |
) | ||||||
The acquisition of Skypersonic was completed on May 7, 2021 and its activities during the period from May 1, 2021 to May 7, 2021 were immaterial to the consolidated pro forma results.
The unaudited pro forma financial information has been compiled in a manner consistent with the Company's accounting policies, and includes transaction costs, amortization of the acquired intangible assets, and other expenses directly related to each respective acquisition. The unaudited pro forma financial information is based on estimates and assumptions which the Company believes are reasonable and are not necessarily indicative of the results that would have been realized had the acquisitions closed on the dates indicated in the tables, nor are they indicative of results of operations that may occur in the future.
Other information related to the Company’s acquisitions include:
| | The purchase price allocation has been finalized for each acquisition based on the report from the valuation services firm engaged to assist in the identification and valuation of intangible assets acquired. |
| | The fair value of shares issued by the Company as part of the consideration paid is normally based on the volume weighted average price of the Company’s common stock for the twenty days prior to the closing of the transaction. For accounting purposes, the shares issued are valued based on the closing stock price on the date that the transaction closes. |
| 10 |
| | Goodwill for Rotor Riot relates to its strong social media presence including more than 200,000 YouTube subscribers. Goodwill for Fat Shark is attributable to its relationship with manufacturing sources in China and the potential to integrate its goggle technologies with the Teal drone. Goodwill for Skypersonic relates to the future customers expected to leverage its “Fly Anywhere” technologies in a wide range of commercial environments. Goodwill for Teal is ascribed to its existing relationship with several U.S. government agencies including its classification as an approved vendor. |
| | The Company expects that the Goodwill recognized in each transaction will be deductible for tax purposes. The Company has reported net losses since its inception and is presently unable to determine when and if the tax benefit of this deduction will be realized. |
Note 2 – Summary of Significant Accounting Policies
Basis of Accounting – The financial statements and accompanying notes are prepared in accordance with generally accepted accounting principles in the United States (“GAAP”). Certain prior period amounts have been restated to conform to the current year presentation.
Principles of Consolidation – Our consolidated financial statements include the accounts of our wholly owned operating subsidiaries, which consist of Teal Drones, Fat Shark, Rotor Riot, and Skypersonic. Intercompany transactions and balances have been eliminated.
Use of Estimates – The preparation of financial statements in accordance with GAAP requires management to make estimates and assumptions that affect the reported amounts of assets and liabilities, the disclosure of contingent assets and liabilities at the date of the financial statements, and the reported amounts of revenue and expenses during the reporting period. Actual results could differ from those estimates. 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, and (iv) reserves and allowances related to accounts receivable and inventory.
Cash and Cash Equivalents – At January 31, 2023, we had cash of $3,893,162 in multiple commercial banks and financial services companies. We have not experienced any loss on these cash balances and believe they are not exposed to any significant credit risk.
Marketable Securities – Our marketable securities have been classified and accounted for as available-for-sale securities. These securities are primarily invested in corporate bonds and are readily saleable, and therefore, we have classified them as short term. Our available-for-sale securities are carried at fair value with any unrealized gains and losses reported as a component of comprehensive income (loss). Once realized, any gains or losses are recognized in the statement of operations.
We have elected to present accrued interest income separately from marketable securities on our consolidated balance sheets. Accrued interest income was $233,471 and $385,730 as of January 31, 2023 and April 30, 2022, respectively, and was included in other current assets. We did not write off any accrued interest income during the nine months ended January 31, 2023 and 2022.
Accounts Receivable, net – Accounts receivable are recorded at the invoiced amount less allowances for doubtful accounts. The Company's estimate of the allowance for doubtful accounts is based on a multitude of factors, including historical bad debt levels for its customer base, past experience with a specific customer, the economic environment, and other factors. Accounts receivable balances are written off against the allowance when it is probable that the receivable will not be collected.
Inventories – Inventories, which consist of raw materials, work-in-process, and finished goods, are stated at the lower of cost or net realizable value, and are measured using the first-in, first-out method. Cost components include direct materials and direct labor, as well as in-bound freight. At each balance sheet date, the Company evaluates ending inventories for excess quantities and obsolescence.
| 11 |
Goodwill – Goodwill represents the excess of the purchase price of an acquisition over the estimated fair value of identifiable net assets acquired. The measurement period for the valuation of assets acquired and liabilities assumed ends as soon as information on the facts and circumstances that existed as of the acquisition date becomes known, not to exceed 12 months. Adjustments in a purchase price allocation may require a change in the amounts allocated to goodwill during the periods in which an adjustment is determined.
We perform an impairment test at the end of each fiscal year, or more frequently if indications of impairment arise. We have two business segments and evaluate goodwill for impairment based on an evaluation of the fair value of each business segment individually.
Property and equipment – Property and equipment is stated at cost less accumulated depreciation and depreciated using the straight-line method over the estimated useful life of the asset. The estimated useful lives of our property and equipment are generally: (i) furniture and fixtures - seven years, (ii) equipment and related - two to five years, and (iii) leasehold improvements - 15 years.
Leases – Effective August 1, 2021, the Company adopted Accounting Standards Codification (ASC) 842 titled “Leases” which requires the recognition of assets and liabilities associated with lease agreements. The Company adopted ASC 842 on a modified retrospective transition basis which means that it did not restate financial information for any periods prior to August 1, 2021. Upon adoption, the Company recognized a lease liability obligation of $796,976 and a right-of-use asset for the same amount.
The Company determines if a contract is a lease or contains a lease at inception. Operating lease liabilities are measured, on each reporting date, based on the present value of the future minimum lease payments over the remaining lease term. The Company's leases do not provide an implicit rate. Therefore, the Company uses an effective discount rate of 12% based on its last debt financing. Operating lease assets are measured by adjusting the lease liability for lease incentives, initial direct costs incurred and asset impairments. Lease expense for minimum lease payments is recognized on a straight-line basis over the lease term with the operating lease asset reduced by the amount of the expense. Lease terms may include options to extend or terminate a lease when they are reasonably certain to occur.
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 value is defined as the price that would be received to sell an asset or paid to transfer a liability (an exit price) in an orderly transaction between market participants at the measurement date. In accordance with this guidance, the Company has categorized its recurring basis financial assets and liabilities into a three-level fair value hierarchy based on the priority of the inputs to the valuation technique.
The fair value hierarchy gives the highest priority to quoted prices in active markets for identical assets or liabilities (Level 1) and the lowest priority to unobservable inputs (Level 3). The inputs used to measure fair value may fall into different levels of the fair value hierarchy. In such cases, the level in the fair value hierarchy within which the fair value measurement in its entirety falls has been determined based on the lowest level input that is significant to the fair value measurement in its entirety. 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.
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.
| 12 |
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.
Convertible Securities and Derivatives
When the Company issues convertible debt or equity instruments that contain embedded derivative instruments that are to be bifurcated and accounted for as liabilities, the total proceeds from the convertible host instruments are first allocated to the bifurcated derivative instruments. The remaining proceeds, if any, are then allocated to the convertible instruments themselves, resulting in those instruments being recorded at a discount from their face value but no lower than zero. Any excess amount is recognized as a derivative expense.
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.
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. 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. 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.
Revenue Recognition – The Company recognizes revenue in accordance with ASC 606, “Revenue from Contracts with Customers”, issued by the Financial Accounting Standards Board (“FASB”). This standard includes a comprehensive evaluation of factors to be considered regarding revenue recognition including (i) identifying the promised goods, (ii) evaluating performance obligations, (iii) measuring the transaction price, (iv) allocating the transaction price to the performance obligations if there are multiple components, and (v) recognizing revenue as each obligation is satisfied. The Company’s revenue transactions include a single component, specifically, the shipment of goods to customers as orders are fulfilled. The Company recognizes revenue upon shipment. The timing of the shipment of orders can vary considerably depending upon whether an order is for an item normally maintained in inventory or an order that requires assembly or unique parts. Customer deposits totaled $219,148 and $437,930 at January 31, 2023 and April 30, 2022, respectively.
Research and Development – Research and development expenses include payroll, employee benefits, and other headcount-related expenses associated with product development. Research and development expenses also include third-party development and programming costs, as well as a proportionate share of overhead costs such as rent. Costs related to software development are included in research and development expense until technological feasibility is reached, which for our software products, is generally shortly before the products are released to production. Once technological feasibility is reached, such costs are capitalized and amortized as a cost of revenue over the estimated lives of the products.
Income Taxes – Deferred taxes are provided on the liability method whereby deferred tax assets are recognized for deductible temporary differences and deferred tax liabilities are recognized for taxable temporary differences. Temporary differences are the differences between the reported amounts of assets and liabilities and their tax bases. Deferred tax assets and liabilities are adjusted for the effects of changes in tax laws and rates on the date of enactment.
Recent Accounting Pronouncements – Management does not believe that recently issued, but not yet effective accounting pronouncements, if adopted, would have a material effect on the accompanying consolidated financial statements.
Foreign Currency – The functional currency of our international subsidiary is the local currency. For that subsidiary, we translate assets and liabilities to U.S. dollars using period-end exchange rates, and average monthly exchange rates for revenues, costs, and expenses. We record translation gains and losses in accumulated other comprehensive income.
| 13 |
Comprehensive Loss – Comprehensive loss consists of net loss and other comprehensive loss. Other comprehensive loss refers to gains and losses that are recorded as an element of stockholders' equity and are excluded from net loss. Our other comprehensive loss is comprised of foreign currency translation adjustments and unrealized gains or losses on available-for-sale securities. During the nine months ended January 31, 2023 and January 31, 2022, comprehensive loss was $328,226 lower and $2,158 lower than net loss, respectively, related to unrealized gains on available-for-sale securities totaling $328,006 and $0, respectively, as well as by foreign currency translation adjustments of $220 and $2,158.
Stock-Based Compensation – For stock options, we use the estimated grant-date fair value method of accounting in accordance with ASC Topic 718, Compensation – Stock Compensation. Fair value is determined based on the Black-Scholes Model using inputs reflecting our estimates of expected volatility, term and future dividends. We recognize forfeitures as they occur. For restricted stock, we determine the fair value based on our stock price on the date of grant. For both stock options and restricted stock, we recognize compensation costs on a straight-line basis over the service period which is the vesting term.
Outstanding securities not included in the computation of diluted net loss per share because their effect would have been anti-dilutive included the following:
| January 31, 2023 | April 30, 2022 | |||||||
| Series B Preferred Stock, as converted | ||||||||
| Stock options | ||||||||
| Warrants | ||||||||
| Restricted stock | ||||||||
| Total | ||||||||
Related Parties – Parties are considered to be related to us if they have control or significant influence, directly or indirectly, over us, including key management personnel and members of the Board of Directors. Related Party transactions are disclosed in Note 20.
Segment Reporting
Since January 2020, we have acquired four separate businesses operating in various aspects of the drone industry. Following the most recent acquisition, the Company focused on integrating and organizing its acquired businesses. These efforts included refining the establishment of Enterprise and Consumer segments to sharpen the Company’s focus on the unique opportunities in each sector of the drone industry. The Enterprise segment, which includes Teal Drones and Skypersonic, is focused on opportunities in the commercial sector, including military. Enterprise is building the infrastructure to manage drone fleets, fly and provide services remotely, and navigate confined industrial interior spaces and dangerous military environments. The Consumer segment, which includes Rotor Riot and Fat Shark, is focused on enthusiasts and hobbyists which are expected to increase as drones become more visible in our daily lives. Effective May 1, 2022, we began to manage our business operations through these business segments. The reportable segments were identified based on how our chief operating decision maker (“CODM”), which is a committee comprised of our Chief Executive Officer (“CEO”), Chief Operating Officer (“COO”) and our Chief Financial Officer (“CFO”), manages our business, makes resource allocation and operating decisions, and evaluates operating performance. See “Note 21 - Segment Reporting”.
| 14 |
Note 3 – Marketable Securities
The following tables set forth information related to our marketable securities as of January 31, 2023:
| I. | Cost, unrealized gains or losses, and fair values |
| Cost | Unrealized Gains (Losses) | Fair Value | ||||||||||
| Asset-backed securities | $ | $ | (14,218 | ) | $ | |||||||
| Corporate bonds | (1,132,070 | ) | ||||||||||
| Total | $ | $ | (1,146,288 | ) | $ | |||||||
| II. | Contractual Maturities |
| One Year or Less | One to Three Years | Three to Five Years | Total | |||||||||||||
| Asset-backed securities | $ | $ | $ | $ | ||||||||||||
| Corporate bonds | ||||||||||||||||
| Total | $ | $ | $ | $ | ||||||||||||
| III. | Fair Value Hierarchy |
| Level 1 | Level 2 | Level 3 | Total | |||||||||||||
| Asset-backed securities | $ | $ | $ | $ | ||||||||||||
| Corporate bonds | ||||||||||||||||
| Total | $ | $ | $ | $ | ||||||||||||
Note 4 – Inventories
Inventories consisted of the following:
| January 31, 2023 | April 30, 2022 | |||||||
| Raw materials | $ | $ | ||||||
| Work-in-process | ||||||||
| Finished goods | ||||||||
| Total | $ | $ | ||||||
Inventory purchase orders outstanding totaled approximately $26 million. The global supply chain for materials required to produce our drones continues to experience significant disruptions and delays. While we have increased our order lead times and quantities, we retain the right to cancel or modify these orders prior to their shipment.
Note 5 – Other Current Assets
Other current assets included:
| January 31, 2023 | April 30, 2022 | |||||||
| Prepaid inventory | $ | $ | ||||||
| Accrued interest income | ||||||||
| Prepaid expenses | ||||||||
| Total | $ | $ | ||||||
| 15 |
Note 6 – Due From Related Party
In January 2022, the Company determined that an employee
had relocated in 2021 but their compensation had not been subject to the income tax withholding required by the new jurisdiction. The
amount subject to taxation included $
Note 7 – Intangible Assets
Intangible assets relate to acquisitions completed by the Company, including those described in Note 1. Intangible assets were as follows:
| January 31, 2023 | April 30, 2022 | |||||||||||||||||||||||
| Gross Value | Accumulated Amortization | Net Value |
Gross Value |
Accumulated Amortization | Net Value | |||||||||||||||||||
| Proprietary technology | $ | $ | ( |
) | $ | $ | $ | ( |
) | $ | ||||||||||||||
| Non-compete agreements | ( |
) | ( |
) | ||||||||||||||||||||
| Customer relationships | ( |
) | ( |
) | ||||||||||||||||||||
| Total finite-lived assets | ( |
) | ( |
) | ||||||||||||||||||||
| Brand name | ||||||||||||||||||||||||
| Trademark | ||||||||||||||||||||||||
| Total indefinite-lived assets | ||||||||||||||||||||||||
| Total intangible assets, net | $ | $ | ( |
) | $ | $ | $ | ( |
) | $ | ||||||||||||||
Proprietary technology and non-compete agreements are being amortized over five to six years and three years, respectively. Customer relationships is being amortized over seven years. Goodwill and Brand name are not amortized but evaluated for impairment on a quarterly basis.
As of January 31, 2023, expected amortization expense for finite-lived intangible assets for the next five years is as follows:
| Fiscal Year Ended: | ||||||
| 2023 | $ | |||||
| 2024 | ||||||
| 2025 | ||||||
| 2026 | ||||||
| 2027 | ||||||
| Thereafter | ||||||
| Total | $ | |||||
| 16 |
Goodwill is a separately stated intangible asset and represents the excess of the purchase price of acquisitions above the net assets acquired. The composition of, and changes in goodwill, consist of:
| Date | Acquisition | Goodwill | ||||||
| January 2020 | Rotor Riot | $ | ||||||
| November 2020 | Fat Shark | |||||||
| Balance at April 30, 2021 | ||||||||
| May 2021 | Skypersonic | |||||||
| August 2021 | Teal Drones | |||||||
| Balance at April 30, 2022 and January 31, 2023 | $ | |||||||
Note 8 – Property and Equipment
Property and equipment consist of assets with an estimated useful life greater than one year and are reported net of accumulated depreciation. The reported values are periodically assessed for impairment, and were as follows:
| January 31, 2023 | April 30, 2022 | |||||||
| Equipment and related | $ | $ | ||||||
| Leasehold improvements | ||||||||
| Furniture and fixtures | ||||||||
| Accumulated depreciation | ( |
) | ( |
) | ||||
| Net carrying value | $ | $ | ||||||
Depreciation expense totaled $
Note 9 – Other Long Term Assets
Other long term assets included:
| January 31, 2023 | April 30, 2022 | |||||||
| SAFE agreement | $ | $ | ||||||
| Security deposits | ||||||||
| Total | $ | $ | ||||||
In November 2022, the Company entered into a
SAFE (Simple Agreement for Future Equity) agreement with Firestorm Labs, Inc. (“Firestorm”) under which it made a
payment of $
| 17 |
Note 10 – Operating Leases
As of January 31, 2023, the Company had operating
type leases for real estate and no finance type leases. The Company’s leases have remaining lease terms of up to 4.33 years, some
of which may include options to extend for up to 5 years. Operating lease expense totaled $
Leases on which the Company made rent payments during the reporting period included:
| Location | Monthly Rent | Expiration | ||||||
| South Salt Lake, Utah | $ | December 2024 | ||||||
| Orlando, Florida | $ | January 2025 | ||||||
| San Juan, Puerto Rico | $ | June 2027 | ||||||
| Troy, Michigan | $ | May 2022 | ||||||
| Orlando, Florida | $ | September 2022 | ||||||
Supplemental information related to operating leases for the nine months ended January 31, 2023 was:
| Operating cash paid to settle lease liabilities | $ |
|||
| Weighted average remaining lease term (in years) | ||||
| Weighted average discount rate | ||||
Future lease payments at January 31, 2023 were as follows:
| Fiscal Year Ended: | ||||||
| 2023 | $ | |||||
| 2024 | ||||||
| 2025 | ||||||
| 2026 | ||||||
| 2027 | ||||||
| Thereafter | ||||||
| Total | $ | |||||
Note 11 – Debt Obligations
| A. | Decathlon Capital |
On August 31, 2021, Teal entered into an Amended and
Restated Loan and Security Agreement with Decathlon Alpha IV, L.P. (“DA4”) (the “Loan Agreement”) in the amount
of $
| B. | Pelion Note |
In May 2021, Teal
entered into a note agreement totaling $
| C. | Vendor Agreement |
In connection with the
acquisition of Teal on August 31, 2021, the Company assumed an obligation with a contract manufacturing firm. The assumed balance of
$
| 18 |
| D. | SBA Loan |
In February 2021, Teal received a Small Business Administration
Paycheck Protection Program (“SBA PPP”) loan in the amount of $
| E. | Shopify Capital |
Shopify Capital is an affiliate of Shopify, Inc. which provides sales software and services to the Company. The Company processes customer transactions ordered on the e-commerce site for Rotor Riot through Shopify. Shopify Capital has entered into multiple agreements with the Company in which it has "purchased receivables" at a discount. Shopify retains a portion of the Company's daily receipts until the purchased receivables have been paid. The Company recognizes the discount as a transaction fee, in full, in the month in which the agreement is executed. Agreements with activity during the two years ended January 31, 2023 included:
| Date of Transaction | Purchased Receivables | Payment to Company | Transaction Fees | Withholding Rate | Fully Repaid In | |||||
| September 2020 | $ |
$ |
$ |
|
May 2021 | |||||
| April 2021 | $ |
$ |
$ |
|
January 2022 |
| F. | Corporate Equity |
Beginning in October 2021, and amended in January
2022, Teal financed a total of $
| G. | Revenue Financing Arrangement |
In April 2021, Teal entered
into an agreement under which it sold future customer payments, at a discount, to Forward Financing. At August 31, 2021, the Company assumed
the outstanding balance of $
| H. | Ascentium Capital |
In September 2021, Teal entered into a financing agreement
with Ascentium Capital to fund the purchase of a fixed asset totaling $
| I. | PayPal |
PayPal is an electronic commerce company that facilitates
payments between parties through online funds transfers. The Company processes certain customer payments ordered on its e-commerce site
through PayPal. The Company has entered into multiple agreements under which PayPal provides an advance on customer payments, and then
retains a portion of customer payments until the advance is repaid. PayPal charges a fee which the Company recognizes in full upon
entering an agreement. A November 2019 agreement under which PayPal advanced $
| J. | Summary |
Outstanding principal payments on debt obligations are due as follows:
| Fiscal 2023 | $ | 484,974 | ||
| Fiscal 2024 | ||||
| Fiscal 2025 | ||||
| Total | $ | |||
| Short term – through January 31, 2024 | $ | |||
| Long term – thereafter | $ |
| 19 |
Note 12 – Due to Related Party
| A. | Founder of Fat Shark |
In connection with the acquisition of Fat Shark in
November 2020, the Company issued a secured promissory note for $
| B. | BRIT, LLC |
In January 2020, in connection with the acquisition
of Rotor Riot, the Company issued a promissory note for $
The Company also assumed a line of credit obligation
totaling $
| C. | Aerocarve |
In 2020, the Company received advances totaling $
Note 13 – Convertible Notes
October 2020 Financing
In October 2020, the Company closed a private offering
of convertible promissory notes (the "2020 Notes") in the aggregate principal amount of $
The Company determined that the provision associated
with a potential reduction in the conversion price of the notes and the exercise price of the warrant represented an embedded derivative
financial liability. The derivative liability was initially valued at $
As of January 31, 2023, (a) the 2020 Notes were fully
converted into common stock and the related derivative liability eliminated, and (b)
January 2021 Financing
In January 2021, the Company closed a private offering
of convertible promissory notes (the "2021 Notes") in the aggregate principal amount of $
| 20 |
The Company determined that the provision associated
with a potential reduction in the conversion price of the notes and the exercise price of the warrant represented an embedded derivative
financial liability. The derivative liability was initially valued at $
As of January 31, 2023, (a) the 2021 Notes were fully
converted into common stock and the related derivative liability eliminated, and (b)
Note 14 – Income Taxes
Our operating subsidiary, Red Cat Propware, Inc., is incorporated and based in Puerto Rico which is a commonwealth of the United States. We are not subject to taxation by the United States as Puerto Rico has its own taxing authority. Since inception, we have incurred net losses in each year of operations. Our current provision for the reporting periods presented in these financial statements consisted of a tax benefit against which we applied a full valuation allowance, resulting in no current provision for income taxes. In addition, there was no deferred provision for any of these reporting periods.
At January 31, 2023 and April 30, 2022, we
had accumulated deficits of approximately $
and $,
respectively. Deferred tax assets related to the future benefit of these net operating losses for tax purposes totaled approximately
$
Note 15 – Common Stock
Our common stock has a par value of $ per share. We are authorized to issue shares of common stock. Each share of common stock is entitled to one vote. A summary of shares of common stock issued by the Company since April 30, 2021 is as follows:
| Description of Shares | Shares Issued | |||
| Shares outstanding as of April 30, 2021 | ||||
| Conversion of Series A preferred stock | ||||
| Conversion of Series B preferred stock | ||||
| Exercise of warrants | ||||
| Acquisition of Skypersonic on May 7, 2021, see Note 1 | ||||
| Acquisition of Teal Drones on August 31, 2021, see Note 1 | ||||
| Public offerings which generated gross proceeds of $76 million and net proceeds of approximately $70.1 million | ||||
| Exercise of stock options | ||||
| Vesting of restricted stock units to employees, net of shares withheld of 225,869 to pay taxes and 92,812 to repay a Note | ||||
| Vesting of restricted stock units to Board of Directors | ||||
| Vesting of restricted stock units to consultants | ||||
| Shares issued for services | ||||
| Shares outstanding as of April 30, 2022 | ||||
| Vesting of restricted stock units to employees, net of shares withheld of 542,151 to pay taxes and 9,000 to repay a Note | ||||
| Vesting of restricted stock units to Board of Directors | ||||
| Vesting of restricted stock units to consultants | ||||
| Shares outstanding as of January 31, 2023 | ||||
| 21 |
Note 16 – Preferred Stock
Series A Preferred Stock outstanding totaled at April 30, 2021, and were converted into shares of common stock on August 10, 2021.
Series B Preferred Stock (“Series B Stock”) is convertible into common stock at a ratio of 0.8334 shares of common stock for each share of Series B Stock held and votes together with the common stock on an as-if-converted basis. Shares outstanding at January 31, 2023 totaled which are convertible into shares of common stock.
Note 17 – Warrants
The company issued five-year warrants in connection
with two convertible note financings. The warrants have an initial exercise price of $
A summary of the warrants issued and their fair values were:
| Upon Issuance | Outstanding at January 31, 2022 | |||||||||||||||||
| Date of Transaction | Number of Warrants | Initial Fair Value | Number of Warrants | Fair Value | ||||||||||||||
| October 2020 | $ | $ | ||||||||||||||||
| January 2021 | $ | $ | ||||||||||||||||
In March and April 2021, we received $
In May 2021, the Company issued warrants to purchase
shares of common stock to the placement agent of its common stock offering. The warrants have a five-year term and an exercise
price of $
In July 2021, the Company issued warrants to purchase shares of common stock to the placement agent of its common stock offering. The warrants have a five-year term and an exercise
price of $
The following table presents the range of assumptions used to estimate the fair values of warrants granted during the nine months ended January 31:
| 2023 | 2022 | |||||||
| Risk-free interest rate | – % | |||||||
| Expected dividend yield | ||||||||
| Expected term (in years) | — | |||||||
| Expected volatility | – % |
| 22 |
The following table summarizes the changes in warrants outstanding since April 30, 2021.
|
Number of Shares |
Weighted-average Exercise Price per Share |
Weighted-average Remaining Contractual Term (in years) |
Aggregate Intrinsic Value |
||||||||||||||
| Balance as of April 30, 2021 | $ | ||||||||||||||||
| Granted | $ | ||||||||||||||||
| Exercised | ) | ||||||||||||||||
| Outstanding as of April 30, 2022 | $ | ||||||||||||||||
| Granted | |||||||||||||||||
| Exercised | |||||||||||||||||
| Outstanding at January 31, 2022 | $ | $ | |||||||||||||||
The 2019 Equity Incentive Plan (the "Plan") allows us to incentivize key employees, consultants, and directors with long term compensation awards such as stock options, restricted stock, and restricted stock units (collectively, the "Awards"). The number of shares issuable in connection with Awards under the Plan may not exceed .
| A. | Options |
The range of assumptions used to calculate the fair value of options granted during the nine months ended January 31 was:
| 2023 | 2022 | |||||||
| Exercise Price | $ | – | $ | – | ||||
| Stock price on date of grant | – | – | ||||||
| Risk-free interest rate | – % | – % | ||||||
| Dividend yield | ||||||||
| Expected term (years) | – | |||||||
| Volatility | – % | – % |
A summary of options activity under the Plan since April 30, 2021 was:
| Shares | Weighted-Average Exercise Price | Weighted-Average Remaining Contractual Term | Aggregate Intrinsic Value | |||||||||||||
| Outstanding as of April 30, 2021 | $ | |||||||||||||||
| Granted | ||||||||||||||||
| Exercised | ( |
) | ||||||||||||||
| Forfeited or expired | ( |
) | ||||||||||||||
| Outstanding as of April 30, 2022 | ||||||||||||||||
| Granted | ||||||||||||||||
| Exercised | ||||||||||||||||
| Forfeited or expired | ( |
) | ||||||||||||||
| Outstanding as of January 31, 2023 | ||||||||||||||||
| Exercisable as of January 31, 2023 | $ | $ | ||||||||||||||
| 23 |
The aggregate intrinsic value of outstanding options
represents the excess of the stock price at the indicated date over the exercise price of each option. As of January 31, 2023 and January
31, 2022, there was $
| B. | Restricted Stock |
A summary of restricted stock activity under the Plan since April 30, 2021 was:
| Shares | Weighted Average Grant-Date Fair Value Per Share | |||||||
| Unvested and outstanding as of April 30, 2021 | $ | |||||||
| Granted | ||||||||
| Vested | ( |
) | ||||||
| Forfeited | ||||||||
| Unvested and outstanding as of April 30, 2022 | ||||||||
| Granted | ||||||||
| Vested | ( |
) | ||||||
| Forfeited | ( |
) | ||||||
| Unvested and outstanding as of January 31, 2023 | $ | |||||||
| C. | Stock Compensation |
Stock compensation expense by functional category was:
|
Three months ended January 31, |
Nine months ended January 31, |
|||||||||||||||
| 2023 | 2022 | 2023 | 2022 | |||||||||||||
| Operations | $ | $ | $ | $ | ||||||||||||
| Research and development | ||||||||||||||||
| Sales and marketing | ||||||||||||||||
| General and administrative | ||||||||||||||||
| Total | $ | $ | $ | $ | ||||||||||||
Stock compensation expense pertaining to options
totaled $
Note 19 – Derivatives
The Company completed financings in October 2020 and January 2021 which included notes and warrants containing embedded features subject to derivative accounting. See Note 13 for a full description of these financings. Both the notes and the warrants included provisions which provided for a reduction in the conversion and exercise prices, respectively, if the Company completed a future qualified offering at a lower price. These provisions represent embedded derivatives which are valued separately from the host instrument (meaning the notes and warrants) and recognized as derivative liabilities on the Company's balance sheet. The Company initially measures these financial instruments at their estimated fair value and recognizes changes in their estimated fair value in results of operations during the period of change. The Company also measures these financial instruments on the date of settlement (meaning when the note is converted, or the warrant is exercised) at their estimated fair value and recognizes changes in their estimated fair value in results of operations. Any discount in the carrying value of the note is fully amortized on the date of settlement and recognized as interest expense. The Company estimated the fair value of these embedded derivatives using a multinomial lattice model. The range of underlying assumptions used in the binomial model to determine the fair value of the derivative warrant liability upon settlement of the derivative liability and as of January 31, 2023 and April 30, 2022 are set forth below. In addition, the Company's stock price on each measurement date was used in the model.
| 24 |
| January 31, 2023 | April 30, 2022 | |||||||
| Risk-free interest rate | % | – % | ||||||
| Expected dividend yield | ||||||||
| Expected term (in years) | – | – | ||||||
| Expected volatility | – % | – % |
As of January 31, 2023 all of the notes had been converted into common stock and 806,666 of the warrants were outstanding. Changes in the derivative liability during the nine months ended January 31, 2023 and the year ended April 30, 2022 were as follows:
| January 31, 2023 | April 30, 2022 | |||||||
| Balance, beginning of period | $ | $ | ||||||
| Additions | ||||||||
| Eliminated upon conversion of notes/exercise of warrants | ( |
) | ||||||
| Changes in fair value | ( |
) | ( |
) | ||||
| Balance, end of period | $ | $ | ||||||
Changes in fair value primarily relate to changes in the Company’s stock price during the period, with increases in the stock price increasing the liability and decreases in the stock price reducing the liability.
Note 20 - Related-Party Transactions
In July 2021, the Company entered into a consulting
agreement with a director resulting in monthly payments of $
In January 2022, the Company entered into a note agreement with an employee in the principal amount of $510,323, as further described in Note 6.
Additional related party transactions are disclosed in Note 12.
Note 21 - Segment Reporting
We define our segments as those operations whose results are regularly reviewed by our CODM to analyze performance and allocate resources. Therefore, segment information is prepared on the same basis that management reviews financial information for operational decision-making purposes. Our CODM is a committee comprised of our CEO, COO, and CFO.
The Enterprise segment is focused on opportunities in the commercial sector, including military. Enterprise is building the infrastructure to manage drone fleets, fly and provide services remotely, and navigate confined industrial 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.
| 25 |
Our CODM allocates resources to and assesses the performance of our two operating segments based on the operating segments’ net sales and gross profit. The following table sets forth information by reportable segment for the three and nine months ended January 31, 2023, respectively.
| For the three months ended January 31, 2023 | ||||||||||||||||
| Enterprise | Consumer | Corporate | Total | |||||||||||||
| Revenues | $ | $ | $ | $ | ||||||||||||
| Cost of goods sold | ||||||||||||||||
| Gross margin | ( |
) | ||||||||||||||
| Operating expenses | ||||||||||||||||
| Operating loss | ( |
) | ( |
) | ( |
) | ( |
) | ||||||||
| Other expenses, net | ( |
) | ||||||||||||||
| Net loss | $ | ( |
) | $ | ( |
) | $ | ( |
) | $ | ( |
) | ||||
| For the nine months ended January 31, 2023 | ||||||||||||||||
| Enterprise | Consumer | Corporate | Total | |||||||||||||
| Revenues | $ | $ | $ | $ | ||||||||||||
| Cost of goods sold | ||||||||||||||||
| Gross margin | ||||||||||||||||
| Operating expenses | ||||||||||||||||
| Operating loss | ( |
) | ( |
) | ( |
) | ( |
) | ||||||||
| Other expenses, net | ( |
) | ( |
) | ( |
) | ||||||||||
| Net loss | $ | ( |
) | $ | ( |
) | $ | ( |
) | $ | ( |
) | ||||
The following table sets forth specific asset categories which are reviewed by our CODM in the evaluation of operating segments:
| As of January 31, 2023 | ||||||||||||||||
| Enterprise | Consumer | Corporate | Total | |||||||||||||
| Accounts receivable, net | $ | $ | $ | $ | ||||||||||||
| Inventory, net | ||||||||||||||||
| Inventory deposits | $ | $ | $ | $ | ||||||||||||
Note 22 – Subsequent Events
Subsequent events have been evaluated through the date of this filing and there are no subsequent events which require disclosure except as set forth below:
Sale of Consumer Segment
On November 21, 2022, the Company entered into a Stock Purchase Agreement (the "SPA") with Unusual Machines, Inc. (“UM”) and Jeffrey Thompson, the founder and Chief Executive Officer of the Company (the “Principal Stockholder”), related to the sale of the Company’s consumer business consisting of Rotor Riot, (“RR”), and Fat Shark Holdings (“FS”), for $18 million in cash and securities of UM.
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The purchase price consists of (i) $5 million in cash (as increased for positive working capital and decreased for negative working capital at closing) plus (ii) $2.5 million in a convertible senior note of UM (the “Senior Note”) plus (iii) $10.5 million in Series A convertible preferred stock of UM (the “Series A Stock”). The Senior Note and Series A Stock will be convertible into Common Stock at the lesser of $4.00 per share or the IPO price of UM. The Senior Note and Series A Stock shall contain beneficial ownership blockers under which conversion shall be limited to 4.99% and/or 9.99% of the total voting power of UM, and may be further subject to limitations on voting and conversion required in order to conform with requirements of NASDAQ related to the issuance of more than 19.99% of the outstanding Common Stock in accordance with NASDAQ Rule 5635(d). The Senior Note and Series A Stock will include anti-dilution protection in the case of issuances by UM at a price lower than the then applicable conversion price for so long as the Senior Note or Series A Stock remains outstanding under which the conversion price will be reduced to such lower price.
Under the terms of the SPA the Principal Stockholder and UM have agreed to indemnification obligations which shall survive for a period of 9 months, subject to certain limitations, which includes a basket of $250,000 before any claim can be asserted and a cap equal to the value of the escrow shares, other than in cases involving fraud. The Principal Stockholder agreed to deposit 450,000 shares of UM common stock owned to secure any indemnification obligations.
The closing of the SPA, is subject to customary conditions including shareholder approval by a majority of the disinterested shareholders of the Company. The Principal Stockholder, who holds approximately 24% of the voting power of the Company, shall abstain from the vote on approval of the SPA. On November 21, 2022, the Board of Directors of the Company approved the SPA and its submission to shareholders for approval. In addition, closing of the SPA is subject to successful completion of an initial public offering (the “IPO”) by UM in the minimum amount of $15 million, and the listing of UM’s common stock on NASDAQ. The SPA requires the Company to cooperate with UM in connection with the IPO and to deliver audited financial statements of RR and FS. UM has agreed to register all of the common stock for which the Senior Note is convertible in the IPO for resale by the Company, or to pay the note in full with proceeds of the offering at closing, at UM’s election. In addition, UM has agreed to enter into a registration rights agreement for 100% of the common stock for which the Series A Stock may be converted and to use its best efforts to file and have declared effective such registration statement, on demand and on a piggy-back basis in connection with any other registration statements filed by UM.
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ITEM 2. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS
The following discussion should be read in conjunction with our unaudited condensed consolidated financial statements and related notes and other financial data included elsewhere in this Quarterly Report on Form 10-Q.
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. 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. These forward-looking statements are subject to risks and uncertainties that could cause actual results or events to differ materially from those expressed or implied by the forward-looking statements in this Quarterly Report on Form 10-Q. The Company's actual results and the timing of events could differ materially from those anticipated in these forward-looking statements as a result of many factors. Investors should also review the risk factors in the Company's Annual Report on Form 10-K filed with the SEC on July 27, 2022.
All forward-looking statements speak only as of the date on which they are made. The Company does not undertake any obligation to update such forward-looking statements to reflect events that occur or circumstances that exist after the date of this Quarterly Report on Form 10-Q except as required by federal securities law.
Recent Developments
Corporate developments during the two years ended January 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. 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 S-1 offering generated gross proceeds of $16 million and net proceeds of approximately $14.6 million.
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. 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. 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. 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. | 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. |
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| C. | 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. | 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. The Enterprise segment, which includes Teal Drones and Skypersonic, is focused on opportunities in the commercial sector, including military. Enterprise is building the infrastructure to manage drone fleets, fly and provide services remotely, and navigate confined industrial interior spaces and dangerous military environments. 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 2021, we entered into an agreement to sell our Consumer segment to Unusual Machines for total consideration of $18 million, including $5 million in cash, at closing, and $13 million in securities of Unusual Machines. The Company has determined to focus its efforts and capital on military and defense where it believes that there are more opportunities to create long term shareholder value. The transaction is expected to close in the first half of calendar 2023 but is contingent upon Unusual Machines completing (i) an initial public offering that raises sufficient capital to close the transaction, and (ii) a listing of its common stock on Nasdaq. There can be no assurances that the transaction will successfully close.
Results of Operations
The analysis of the Company's results of operations for the three and nine months ended January 31, 2023 compared to the three and nine months ended January 31, 2022 is significantly impacted by the acquisition of Teal Drones on August 31, 2021. Teal is the Company’s largest operating subsidiary. Since acquiring Teal, the Company has more than tripled the number of employees and significantly expanded its facilities. As a result, the comparison of the three and nine months ended January 31, 2023 compared to the three and nine months ended January 31, 2022 yields more significant changes than might normally occur.
Three Months Ended January 31, 2023 and January 31, 2022
Revenues
Revenues totaled $3,106,644 during the three months ended January 31, 2023 (or the "2023 period") compared to $1,856,751 for the three months ended January 31, 2022 (or the "2022 period"), representing an increase of $1,249,893, or 67%. Consumer revenues totaled $1,438,961 during the 2023 period compared to $1,026,978 during the 2022 period, resulting in an increase of $411,983, or 40%. Fat Shark launched its newest product, the Dominator, in the first fiscal quarter during which the Consumer segment generated record quarterly revenues. Fat Shark revenues totaled $529,394 during the 2023 period compared to $432,529 during the 2022 period, resulting in an increase of $96,865, or 22%. Enterprise revenues totaled $1,667,683 during the 2023 period compared to $829,773 during the 2022 period, resulting in an increase of $837,910, or 101%. This increase primarily related to Teal, which launched the Teal 2 during the 2023 period. Teal accounted for nearly 100% of Enterprise revenues during the 2023 period.
Cost of Goods Sold
Cost of Goods totaled $3,004,032 in the 2023 period compared to $1,516,970 in the 2022 period, representing an increase of $1,487,062, or 98%. The increase directly related to higher revenues which increased by 67% in the 2023 period compared to the 2022 period.
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Gross Margin
Gross margin totaled $102,612 during the three months ended January 31, 2023 compared to $339,781 during the three months ended January 31, 2022, representing a decrease of $237,169, or approximately 70%. On a percentage basis, gross margin was 3% during the 2023 period compared to 18% during the 2022 period. The percentage basis decrease primarily related to Teal which realized lower margins in the 2023 period related to the launch of the Teal 2 and corresponding disposal of obsolete inventory used exclusively for the Golden Eagle.
Operating Expenses
Operations expense totaled $815,170 during the 2023 period compared to $334,278 during the 2022 period, resulting in an increase of $480,892, or greater than 100%. Approximately 98% of the increase, or $469,212, related to Teal which was acquired on August 31, 2021. Since acquiring Teal, we have more than tripled its headcount and expanded its facilities. Approximately 45% of Teal's costs related to payroll, 16% to employee-related office expenses, 21% to professional fees with the balance spread ratably across numerous categories including travel, meals, overhead, and information technology.
Research and development expenses totaled $1,302,008 during the three months ended January 31, 2023 compared to $811,288 during the three months ended January 31, 2022, representing an increase of 490,720, or 60%. Substantially all of the increase related to Teal which was acquired on August 31, 2021. Since acquiring Teal, we have more than tripled its headcount and expanded its facilities. Approximately 24% of Teal's expenses related to payroll with 36% related to office, and 32% related to professional fees.
Sales and marketing costs totaled $1,208,037 during the 2023 period compared to $238,624 during the 2022 period, resulting in an increase of $969,413, or greater than 100%. Payroll costs totaled $417,810 in the 2023 period compared to $164,326 resulting in an increase of $253,484 which represented 26% of the total increase in sales and marketing costs. Advertising and Show Production totaled $348,508 in the 2023 period compared to $61,978 resulting in an increase of $286,530 which represented 30% of the total increase. Professional Fees totaled $280,061 in the 2023 period compared to $6,642 resulting in an increase of $273,419 which represented 28% of the total increase.
General and administrative expenses totaled $1,514,504 during the three months ended January 31, 2023 compared to $1,337,183 during the three months ended January 31, 2022, representing an increase of $177,321, or 13%. Payroll costs totaled $515,883 in the 2023 period compared to $410,640 in the 2022 period resulting in an increase of $105,243 or 59% of the total increase in general and administrative expenses. Legal and lobbying services costs increased by $121,381 representing 68% of the total increase.
During the three months ended January 31, 2023, we incurred stock-based compensation costs of $788,691 compared to $782,123 in the 2022 period, resulting in an increase of 6,568 or 1%. Since the 2022 period, the Company has issued 623,000 additional options which resulted in incremental stock based compensation costs of $99,706 in the 2023 period. In addition, costs related to restricted stock awards totaled $370,634 during the 2023 period compared to $313,925 during the 2022 period, representing an increase of $56,709, or 18%.
Other Income
Other expense totaled $140,204 during the 2023 period compared to other income of $598,898 during the 2022 period, representing an increase of $739,102, which primarily related to the change in fair value of derivative liability. Changes in the fair value of the derivative liability are most significantly impacted by changes in the Company's stock price. A decrease in the stock price during both the 2023 and 2022 periods resulted in a decrease in the carrying value of the liability, and therefore, the recognition of income. Income of $157,575 was recognized during the 2023 period compared to income of $1,026,466 during the 2022 period, representing a decrease of $868,891.
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Net Loss
Net Loss totaled $5,666,002 during the three months ended January 31, 2023 compared to $2,564,817 during the three months ended January 31, 2022, representing an increase of $3,101,185, or greater than 100%. The acquisition of Teal Drones on August 31, 2021 accounted for the majority of the increase. Since acquiring Teal, we have more than tripled its headcount and significantly expanded its facilities. Net loss for Teal during the 2023 period totaled $2,901,938 compared to $781,233 for the 2022 period, representing an increase of $2,120,705, or greater than 100%. The higher net loss for Teal represented 68% of the increase in the consolidated net loss.
Nine Months Ended January 31, 2023 and January 31, 2022
Revenues
Revenues during the nine months ended January 31, 2023 (or the "2023 period") totaled $7,706,377 compared to $5,116,741 for the nine months ended January 31, 2022 (or the "2022 period"), representing an increase of $2,589,636, or 51%. Consumer revenues totaled $4,164,531 during the 2023 period compared to $3,737,460 during the 2022 period, resulting in an increase of $427,071, or 11%. Fat Shark revenues totaled $1,703,045 during the 2023 period compared to $2,228,552 during the 2022 period, resulting in a decrease of $525,507, or 24%. Enterprise revenues totaled $3,541,846 during the 2023 period compared to $1,379,281 during the 2022 period, resulting in an increase of $2,162,565, or greater than 100%. This increase primarily related to Teal, which launched its latest product, the Teal 2, during the 2023 period. Teal accounted for 95% of Enterprise revenues during the 2023 period.
Cost of Goods Sold
Cost of Goods totaled $7,012,483 in the 2023 period compared to $4,521,974 in the 2022 period, representing an increase of $2,490,509, or 55%. The increase directly related to higher revenues which increased by 51% in the 2023 period compared to the 2022 period.
Gross Margin
Gross margin totaled $693,894 during the nine months ended January 31, 2023 compared to $594,767 during the nine months ended January 31, 2022, representing an increase of $99,127, or 17%. On a percentage basis, gross margin was 9% during the 2023 period compared to 12% during the 2022 period. The percentage basis decrease primarily related to Teal which realized lower margins in the 2023 period related to the launch of the Teal 2 and corresponding disposal of obsolete inventory used exclusively for the Golden Eagle. This obsolete inventory decreased gross margin for Teal from 8% in the 2022 period to 2% in the 2023 period. The percentage basis decrease was partially offset by Fat Shark which realized higher margins in the 2023 period related to the launch of its Dominator goggles compared to the 2022 period when it lowered prices to expedite the sale of products near the end of their life cycle. These changes in product offerings increased gross margin for Fat Shark from 2% in the 2022 period to 15% in the 2023 period.
Operating Expenses
Operations expense totaled $3,616,129 during the 2023 period compared to $794,390 during the 2022 period, resulting in an increase of $2,821,739, or greater than 100%. Approximately 94% of the increase, or $2,645,431, related to Teal which was acquired on August 31, 2021. Since its acquisition, we have more than tripled Teal's headcount and doubled the size of its facilities. Approximately 48% of Teal's costs related to payroll, 22% to employee-related office expenses, and 11% to overhead expenses with the balance spread ratably across numerous categories including information technology, facilities, professional fees, and travel.
Research and development expenses totaled $3,189,692 during the nine months ended January 31, 2023 compared to $1,548,983 during the nine months ended January 31, 2022, representing an increase of $1,640,709, or greater than 100%. The entire increase can be attributed to Teal, with approximately 41% its expenses related to payroll, 30% related to office, and 23% related to professional fees.
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Sales and marketing costs totaled $2,542,037 during the 2023 period compared to $524,642 during the 2022 period, resulting in an increase of $2,017,395 or almost four times. Payroll costs, related to hiring at Teal, totaled $553,972 in the 2023 period compared to $19,993 during the 2022 period, resulting in an increase of $533,979 which represented 26% of the total increase in sales and marketing costs. Travel and related costs totaled $369,901 in the 2023 period compared to $2,356 resulting in an increase of $367,545 which represented 18% of the total increase. In addition, higher advertising and show production costs represented 22% of the increase while professional fees accounted for 19%.
General and administrative expenses totaled $4,551,706 during the nine months ended January 31, 2023 compared to $3,264,071 during the nine months ended January 31, 2022, representing an increase of $1,287,635, or 39%. Payroll costs totaled $1,638,765 in the 2023 period compared to $820,027 in the 2022 period resulting in an increase of $818,738 or 64% of the total increase in general and administrative expenses. Legal and lobbying services costs increased by $388,204 representing 30% of the total increase.
During the nine months ended January 31, 2023, we incurred stock-based compensation costs of $2,790,958 compared to $2,066,146 in the 2022 period, resulting in an increase of $724,812 or 35%. Since the 2022 period, the Company has issued 623,000 additional options which resulted in incremental stock-based compensation costs of $192,128 in the 2023 period. In addition, costs related to restricted stock awards totaled $1,482,190 during the 2023 period compared to $1,092,127 during the 2022 period, resulting in an increase of $390,063 or 54% of the total increase in stock-based compensation costs.
Other Income
Other income totaled $274,550 during the 2023 period compared to $740,275 during the 2022 period, representing a decrease of $465,725, which primarily related to the change in fair value of derivative liability. Changes in the fair value of the derivative liability are most significantly impacted by changes in the Company's stock price. A decrease in the stock price during both the 2023 and 2022 periods resulted in a decrease in the carrying value of the liability, and therefore, the recognition of income. Income of $751,397 was recognized during the 2023 period compared to income of $1,299,527 during the 2022 period, representing a decrease of $548,130.
Net Loss
Net Loss totaled $15,722,078 during the nine months ended January 31, 2023 compared to $6,863,190 during the nine months ended January 31, 2022, representing an increase of $8,858,888, or greater than 100%. The acquisition of Teal Drones in August 2021 accounted for the majority of the increase. Since acquiring Teal, we have more than tripled its headcount and significantly expanded its facilities. Net loss for Teal during the 2023 period totaled $7,497,605 compared to $1,222,351 for the 2022 period, representing an increase of $6,275,254, or almost five times. The higher net loss for Teal represented 71% of the increase in the consolidated net loss.
Cash Flows
Operating Activities
Net cash used in operating activities was $21,394,858 during the nine months ended January 31, 2023, compared to net cash used in operating activities of $12,039,115 during the nine months ended January 31, 2022, representing an increase of $9,355,743, or 78%. Net cash used in operations, net of non-cash expenses totaling $2,752,691, equaled $12,969,387 in the 2023 period compared to $5,779,305, net of non-cash expenses totaling $1,083,885 in the 2022 period, resulting in an increase of $7,190,082, or greater than 100%. The higher use of cash primarily related to the acquisition of Teal Drones in August 2021 which resulted in a full nine months of operations in the 2023 period compared to five months of operations in the 2022 period. Net cash used related to changes in operating assets and liabilities totaled $8,425,471 during the nine months ended January 31, 2023, compared to $6,259,810 during the nine months ended January 31, 2022, representing an increase of $2,165,661 or 35%. 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.
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Investing Activities
Net cash provided by investing activities was $22,296,235 during the nine months ended January 31, 2023, compared to net cash used in investing activities of $48,514,017 during the nine months ended January 31, 2022 resulting in an increase of $70,810,252 or greater than 100%. During the 2023 period, net proceeds of $24,282,117 from the maturities of marketable securities were used to fund operations, and $1,735,882 was used to purchase property and equipment, primarily related to the expansion of the manufacturing facilities for Teal. During the 2022 period, $54,696,624 of proceeds from stock offerings were invested in marketable securities.
Financing Activities
Net cash used in financing activities totaled $1,093,030 during the nine months ended January 31, 2023, compared to net cash provided by financing activities of $67,387,312 during the nine months ended January 31, 2022. Financing activities can vary from period to period depending upon market conditions, both at a macro-level and specific to the Company. During the 2022 period, the Company received net proceeds of approximately $70 million in connection with two offerings of common stock.
Liquidity and Capital Resources
At January 31, 2023, the Company reported current assets totaling $40,527,873 current liabilities totaling $5,140,218 and net working capital of $35,387,655. Cash and marketable securities totaled $24,623,195 at January 31, 2023. Inventory related balances, including pre-paid inventory, totaled $12,602,568. We continue to maintain higher-than-normal inventory balances related to the global supply chain issues, including chip shortages, which have been ongoing for more than a year. At January 31, 2023, the Company was in a strong liquidity and capital position relative to its operating results for the quarter ended January 31, 2023 and its expected cash requirements for the next twelve months.
Going Concern
We only began generating revenues in January 2020 and have reported net losses since inception. We expect to report net losses for at least the next twelve months. To date, we have funded our operations through debt and equity transactions. In May and July 2021, we completed common stock offerings which generated gross proceeds of approximately $70 million. At January 31, 2023, we reported cash and investment balances of approximately $24.6 million. We expect these financial resources to be sufficient to fund our operations for at least the next twelve months. However, we can provide no assurance that these financial resources will be sufficient to fund our operations until we reach profitability. If we are unable to become profitable before expending our current financial resources, we will need to raise additional capital through equity or debt transactions. We can provide no assurance that such additional financing, if required, will be available to us on acceptable terms, or at all. If we are unable to become profitable or obtain sufficient funding, our business, prospects, financial condition and results of operations will be materially and adversely affected, and we may be unable to continue as a going concern.
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Critical Accounting Policies and Estimates
Our financial statements and accompanying notes have been prepared in accordance with GAAP applied on a consistent basis. The preparation of financial statements in conformity with GAAP requires management to make estimates and assumptions that affect the reported amounts of assets and liabilities, the disclosure of contingent assets and liabilities at the date of the financial statements and the reported amounts of revenues and expenses during the reporting periods.
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 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.
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, and (iv) reserves and allowances related to accounts receivable and inventory.
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. 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.
ITEM 3. QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISK
We are a smaller reporting company and are not required to provide this information.
ITEM 4. CONTROLS AND PROCEDURES
Evaluation of Disclosure Controls and Procedures
Disclosure controls and procedures are controls and procedures that are designed to ensure that information required to be disclosed in our reports filed under the Exchange Act is recorded, processed, summarized and reported, within the time periods specified in the SEC's rules. Disclosure controls and procedures include, without limitation, controls and procedures designed to ensure that information required to be disclosed by our company in the reports that it files or submits under the Exchange Act is accumulated and communicated to our management, including its principal executive and principal financial officers, or persons performing similar functions, as appropriate to allow timely decisions regarding required disclosure. Our management carried out an evaluation under the supervision and with the participation of our Principal Executive Officer and Principal Financial Officer, of the effectiveness of the design and operation of our disclosure controls and procedures pursuant to Rules 13a-15(e) and 15d-15(e) under the Exchange Act. Based upon that evaluation, our Principal Executive Officer and Principal Financial Officer have concluded that our disclosure controls and procedures were effective as of January 31, 2023.
Changes in Internal Control over Financial Reporting
During the period covered by this report, there were no changes in our internal controls over financial reporting that have materially affected, or are reasonably likely to materially affect, our internal control over financial reporting.
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PART II - OTHER INFORMATION
ITEM 1. 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) and on September 15, 2022 filed a First Amended Complaint naming our subsidiary’s former director Benjamin Lambert as an additional defendant. The complaint asserts claims for breach of contract and unlawful conversion and sale of shares of common stock that plaintiff alleges to have purchased. The Complaint also alleges breach of fiduciary duty and seeks in excess of $1 million in damages. In connection with the action the Company believes it has a right to indemnification and has notified the sellers of Teal of its intention to pursue indemnification claims under the Teal acquisition agreement and escrow.
On December 5, 2022 the Company and Teal filed a First Amended Complaint in an action brought against Autonodyne LLC and its founder Daniel Schwinn in the Court of Chancery of the State of Delaware alleging, among other things, breach of an exclusive license agreement by Autonodyne, LLC dated May 23, 2022 and tortious interference by Mr. Schwinn. Red Cat Holdings, Inc. and Teal Drones, Inc. v. Autonodyne LLC and Daniel Schwinn (No. 2022-0878-NAC). Defendants filed a motion to dismiss which is pending.
ITEM 1A. RISK FACTORS
We are a smaller reporting company as defined by Rule 12b-2 of the Securities Exchange Act of 1934 (the "Exchange Act") and are not required to provide the information. Our most recent risk factor disclosures may be review in our Annual Report on Form 10-K for the year ended April 30, 2022, as filed with the SEC on July 27, 2022.
ITEM 2. RECENT UNREGISTERED SALES OF EQUITY SECURITIES AND USE OF PROCEEDS
There were no sales of equity securities sold during the period covered by this Report that were not registered under the Securities Act and were not previously reported in a Current Report on Form 8-K filed by the Company.
ITEM 3. DEFAULTS UPON SENIOR SECURITIES
None.
ITEM 4. MINE SAFETY DISCLOSURES
Not applicable
ITEM 5. OTHER INFORMATION
None.
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ITEM 6. EXHIBITS
| 101.INS | XBRL Instance Document | |
| 101.SCH | XBRL Taxonomy Extension Schema Document | |
| 101.CAL | XBRL Taxonomy Extension Calculation Linkbase Document | |
| 101.DEF | XBRL Taxonomy Extension Definition Linkbase Document | |
| 101.LAB | XBRL Taxonomy Extension Label Linkbase Document | |
| 101.PRE | XBRL Taxonomy Extension Presentation Linkbase Document |
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SIGNATURES
Pursuant to the requirements of the Securities Exchange Act of 1934, the registrant has duly caused this report to be signed on its behalf by the undersigned thereunto duly authorized.
| Date: March 7, 2023 |
Red Cat Holdings, Inc.
By: /s/ Jeffrey Thompson Jeffrey Thompson Chief Executive Officer (Principal Executive Officer) |
|
| Date: March 7, 2023 | By: /s/ Joseph P. Hernon | |
|
Joseph Hernon Chief Financial Officer (Principal Financial and Accounting Officer) |
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