Exhibit 99.2

 

Teal Drones, Inc.
CONDENSED BALANCE SHEET
(Unaudited)
    
    As of 
    August 31, 2021 
Assets     
Current Assets     
Cash  $11,364 
Accounts receivable   76,742 
Prepaid expenses   15,085 
Inventory   1,272,018 
Total Current Assets   1,375,209 
      
Property and equipment, net   64,683 
Other assets   3,759 
Total Assets  $1,443,651 
      
Liabilities     
Current Liabilities     
Accounts payable  $523,598 
Accrued expenses   237,006 
Unearned revenue   1,768,282 
Current portion of long term debt   4,495,754 
Other liabilities   3,859 
Total Current Liabilities   7,028,499 
      
Long term debt   253,337 
Total Liabilities   7,281,836 
      
Stockholders' Equity     
Preferred stock, $0.00001 par value, 81,520,284 shares authorized:     
Series Seed, 7,600,000 shares authorized, 6,350,000 outstanding   64 
Series Seed Prime, 5,454,545 shares authorized, 5,000,000 outstanding   50 
Series A, 17,745,697 shares authorized, 16,782,000 outstanding   168 
Series A-1, 5,050,990 shares authorized, 5,040,990 outstanding   50 
Series A-2, 5,337,344 shares authorized,  5,337,344 outstanding   53 
Common stock, $0.001 par value, 79,000,000 shares authorized, 12,380,203 issued and outstanding   124 
Additional paid-in capital   23,254,220 
Accumulated deficit   (29,092,914)
Total Stockholders' Deficit   (5,838,185)
Total Liabilities and Stockholders' Deficit  $1,443,651 
      
See accompanying notes to financial statements

   

 

 

Teal Drones, Inc.
CONDENSED STATEMENT OF OPERATIONS
(Unaudited)
    
   For the Eight Months Ended
   August 31, 2021
Revenues  $832,125 
Cost of goods sold   626,171 
Gross Profit   205,954 
      
Operating Expenses     
General and administrative   2,153,052 
Research and development   356,113 
Sales and marketing   85,589 
Total Operating Expenses   2,594,754 
Loss from operations   (2,388,800)
      
Other Income (Expense)     
Other income, net   253,098 
Interest expense   (1,739,004)
Total Other Income (Expense)   (1,485,906)
Loss before Income Taxes   (3,874,706)
Provision for income taxes   —   
Net Loss  $(3,874,706)
      
See accompanying notes to financial statements

 

   

 

 

Teal Drones, Inc.
CONDENSED STATEMENTS OF STOCKHOLDERS' DEFICIT
FOR THE EIGHT MONTHS ENDED August 31, 2021
(Unaudited)
                                              
                                              
   Series Seed Preferred Stock  Series Seed Prime Preferred Stock 

Series A

Preferred Stock

  Series A-1 Preferred Stock  Series A-2 Preferred Stock  Common Stock  Additional Paid-In  Accumulated  Stockholders'
   Shares  Amount  Shares  Amount  Shares  Amount  Shares  Amount  Shares  Amount  Shares  Amount  Capital  Deficit  Deficit
Balance at December 31, 2020   6,350,000   $64    5,000,000   $50    16,782,000   $168    5,040,990   $50    5,337,344   $53    12,380,203   $124   $23,243,969   $(25,218,208)  $(2,009,876)
Series A-2 Receivable   —      —      —      —      —      —      —      —      —      —      —      —      —      —      36,146 
Stock-based compensation expense   —      —      —      —      —      —      —      —      —      —      —      —      10,251    —      10,251 
Net loss   —      —      —      —      —      —      —      —      —      —      —      —      —      (3,874,706)   (3,874,706)
Balance at August 31, 2021   6,350,000   $64    5,000,000   $50    16,782,000   $168    5,040,990   $50    5,337,344   $53    12,380,203   $124   $23,254,220   $(29,092,914)  $(5,838,185)
                                                                            
See accompanying notes to financial statements

   

 

 

Teal Drones, Inc.
CONDENSED STATEMENT OF CASH FLOWS
(UNAUDITED)
    
   For the Eight Months Ended
   August 31, 2021
Cash Flows from Operating Activities     
Net Loss  $(3,874,706)
Adjustment to reconcile net loss from operations:     
Depreciation   33,949 
Stock-based compensation   10,251 
Forgiveness of PPP Loan   (222,020)
Changes in Operating Assets and Liabilities     
Accounts receivable   (76,742)
Prepaid expenses   (5,855)
Inventory   (1,201,645)
Accounts payable   281,916 
Accrued expenses   1,704,374
Unearned revenue   1,754,182 
Net Cash Used in Operating Activities   (1,596,296)
      
Cash Flows from Investing Activities     
Purchases of property and equipment   (5,134)
Net Cash Used in Investing  Activities   (5,134)
      
Cash Flows from  Financing Activities     
Issuance of Series A-2 preferred stock   36,146 
Proceeds from issuance of long term debt   710,910 
Payments under long term debt   (174,441)
Net Cash Provided by Financing Activities   572,615 
      
Net (Decrease) in Cash   (1,028,815)
Cash at Beginning of Period   1,040,179 
Cash at End of Period  $11,364 
      
Cash paid for interest and taxes  $20,402 
      
See accompanying notes to financial statements

   

 

 

Teal Drones, Inc.

NOTES TO CONDENSED INTERIM FINANCIAL STATEMENTS

FOR THE EIGHT MONTHS ENDED AUGUST 31, 2021

 

Note 1 – The Business

 

Teal Drones, Inc. (“Teal,” the ‘Company”, “us,” “we,” “our”) was founded in November 2015 under the name iDrone, Inc. In July 2016, iDrone, Inc. changed its name to Teal Drones, Inc. The Company develops, produces and sells advanced drone systems in the unmanned aerial vehicle (UAV) industry. The Company’s current product, the “Golden Eagle”, includes advanced imaging technologies and is targeted at government and business entities.

 

 

Note 2 – Going Concern

 

The financial statements have been prepared on a going concern basis which contemplates the realization of assets and the settlement of liabilities in the normal course of business. As reflected in our accompanying financial statements, we had negative working capital of more than $5.6 million at August 31, 2021 and have accumulated losses totaling more than $29 million since inception. Management recognizes that the Company will likely continue to incur losses and that its financial position raises substantial doubt about the Company’s ability to continue as a going concern. The financial statements do not include any adjustments related to the recoverability and classification of recorded asset amounts and the classification of liabilities that might be necessary should the Company be unable to continue as a going concern.

 

On August 31, 2021, the Company was acquired by Red Cat Holdings, a publicly traded company with more than $60 million in cash balances on the date of acquisition.

 

 

Note 3 - Summary of Significant Account Policies

 

Basis of Accounting - The financial statements and accompanying notes are prepared in accordance with generally accepted accounting principles (“GAAP”).

 

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) evaluate inventory for excess and obsolescence, and (iii) calculate fair values for warrants issued with debt.

 

Cash – Cash balances at August 31, 2021 totaled $11,364. The Company maintains cash balances at financial institutions that are insured by the Federal Deposit Insurance Corporation (“FDIC”) up to $250,000. The Company’s bank balances at times may exceed the FDIC limit. To date, the Company has not experienced any losses on its invested cash.

 

Inventories – Inventories, which consist of raw materials, work-in-process, and finished goods, are stated at the lower of cost or net realizable value, with cost being determined by the average-cost method, which approximates 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.

 

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 based upon orders. Most customers pay at the time the order is ready to be shipped and the Company recognizes revenue upon shipment. The timing of the shipment of orders can vary considerably depending upon the availability of goods ready for shipment. Customer deposits for future shipments of good totaled $1,768,282 at August 31, 2021.

 

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.

 

Stock-Based Compensation - We use the estimated grant-date fair value method of accounting in accordance with ASC Topic 718, Compensation - Stock Compensation. Fair value is determined using the Black-Scholes Model using inputs reflecting our estimates of expected volatility, term and future dividends. We recognize forfeitures as they occur. We recognize compensation costs on a straight-line basis over the service period which is generally the vesting term.

 

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 condensed financial statements.

 

Related Parties – Parties are considered to be related if they have control or significant influence, directly or indirectly, over Teal, including key management personnel and members of the Board of Directors.

 

Comprehensive Loss – During the eight months ended August 31, 2021, there were no differences between net loss and comprehensive loss.

 

 

Note 4 – Inventories

 

Inventories totaled $1,272,018 at August 31, 2021, and consisted of raw materials and finished goods totaling $1,253,755 and $18,263, respectively.

 

 

Note 5 – Property and Equipment

 

Property and equipment consist of assets with an estimated useful life greater than one year. Property and equipment are reported net of accumulated depreciation and the reported values are periodically assessed for impairment. Property and equipment as of August 31,2021 was as follows:

 

Original cost  $234,968 
Accumulated depreciation  $170,285 
Net carrying value  $64,683 

  

 

Note 6 – Income Taxes

 

Since inception, we have incurred net losses in each year of operations. Our current provision for the eight months ended August 31, 2021 consisted of a tax benefit against which we applied a full valuation allowance, resulting in no current provision for income taxes.

 

As of August 31, 2021, we had an accumulated deficit of approximately $29 million. Deferred tax assets related to the future benefit of these net operating losses for tax purposes totaled approximately $7,250,000 based on a blended effective tax rate of 25%. Currently, we focus on projected future taxable income in evaluating whether it is more likely than not that these deferred assets will be realized. Based on the fact that we have not generated an operating profit since inception, we have applied a full valuation allowance against the deferred tax asset at August 31, 2021.

 

 

Note 7 – Long Term Debt

 

SBA Loan

 

On April 17, 2020, the Company received a loan of $219,460 from the Small Business Administration (SBA) as part of its Paycheck Protection Plan (PPP) program. The loan is unsecured, nonrecourse, accrues interest at one percent annually, and has a two-year term. All or a portion of the loan is forgivable if the proceeds are used to fund qualifying payroll, rent and utilities during a designated twenty-four-week period following the disbursement of loan proceeds. In June 2021, the entire principal and accrued interest of $2,560 was forgiven.

 

On February 2, 2021, the Company received a second SBA PPP loan in the amount of $300,910. The loan is unsecured, non-recourse, and accrues interest at one percent annually. All or a portion of the loan is forgivable if the funds are used for the same qualified expenses as the first PPP loan. If not forgiven, the loan is payable over five years beginning in August 2021. Management intends to use the proceeds for the purposes required to secure forgiveness.

 

Vendor Settlement

 

On May 28, 2020, the Company entered into a settlement agreement with a vendor that had been providing contract manufacturing services. Under the terms of the agreement, the Company conveyed title to inventory valued at $500,000 and agreed to make cash payments totaling $600,000. As of August 31, 2021, the inventory had been conveyed and $387,500 of payments remained, which are payable in monthly installments of $37,500 with a final installment of $12,500 due in July 2022.

 

Decathlon Capital

 

On December 2020, the Company entered into a loan agreement with Decathlon Capital for $2,000,000. Repayments commenced in January 2021 and the loan matured in May 2025. The amount of each monthly payment is based on a percentage, ranging from 4.25% to 4.75%, of revenues generated in the prior month. Based on an expected repayment schedule, the effective annual interest rate was approximately 27%.

 

In addition, the Company issued warrants to Decathlon Capital to purchase 195,211 shares of the Company’s common stock at an exercise price of $0.01 per share. In accordance with ASC 470 and ASC 815, the note and warrants were separately valued at $3,169,474 and $9,761, respectively. The net proceeds were then allocated pro rata to the notes and warrants at $1,993,860 and $6,140, respectively. The note was classified as debt and the warrant was booked as a reduction in the carrying value of the note. The discounted value of the note will be accreted over the remaining term of the note. As of August 31, 2021, the net carrying amount of the note, including accrued interest, of $1,660,019, was $3,670,294.

 

Revenue Financing Arrangement

 

On April 22, 2021, the Company entered into an agreement under which it sold future customer payments to Forward Financing at a discount. A total of $91,200 of future customer payments were sold for an advance payment of $60,000 from Forward Financing. Beginning in April 2021, weekly payments of $2,280 will be remitted to Forward Financing until $91,200 of payments have been made.

 

Convertible Note

 

On May 26, 2021, the Company entered into a convertible note agreement totaling $350,000 with one of its equity investors. The note bears interest at the applicable Federal Rate which was approximately 0.13% on the date of issuance. The note is repayable upon demand at any time after December 31, 2021.

 

 

Note 8 – Stockholders’ Equity

 

Preferred Stock

 

The Company has issued several series of preferred stock, all with a $0.00001 par value. The number of shares authorized and outstanding for each series of preferred stock as of August 31, 2021 was as follows:

 

Series Authorized Outstanding
Seed 7,600,000 6,350,000
Seed Prime 5,454,545 5,000,000
Series A 17,745,697 16,782,000
Series A-1 5,050,990 5,040,990
Series A-2 5,337,344 5,337,344

 

Each share of preferred stock is entitled to one vote and is convertible to common stock on a one-to-one basis based on its stated conversion price. Each series has a liquidation preference before common stock with Series A-2 being the most senior preferred security, and all other series of preferred stock participating together.

 

Common Stock

 

There are 79,000,000 shares of common stock authorized for issuance, of which 12,380,203 are outstanding. The Company has reserved 41,188,576 shares of common stock for the potential conversion of preferred stock.

 

Share Based Awards

 

The 2015 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").

 

Options exercisable as of August 31, 2021 totaled 3,242,441. The remaining weighted average contractual term of the options outstanding at August 31, 2021 was 6.46 years. As of August 31, 2021, there was $7,990 of unrecognized stock-based compensation expense related to unvested stock options, net of estimated forfeitures, which is expected to be recognized over a weighted average period of 1.67 years. 

 

A summary of activity under the Plan during the eight months ended August 31, 2021 is as follows:

 

  Options  Weighted-Average Exercise Price  Weighted-Average Remaining Contractual Term  Aggregate Intrinsic Value
Outstanding as of December 31, 2020   3,546,151   $0.06           
Granted   —      —             
Exercised   —      —             
Forfeited or expired   —      —             
Outstanding as of August 31, 2021   3,546,151    0.06    6.46    —   
Exercisable as of August 31, 2021   3,242,441   $0.06    8.36   $—   

 

Stock compensation expense for the eight months ended August 31, 2021 was $10,251.

   

Warrants

 

In December 2020, the Company issued a warrant to purchase 195,211 shares of common stock to Decathlon Capital as described in Note 7. The warrants are exercisable at $0.01 and have a 10-year term.

 

During the year ended December 2020, the Company issued warrants to purchase 5,337,344 shares of common stock to the investors in the Series A-2 financing. The warrants are exercisable at $0.23 per share and have a 10 year term.

 

As of August 31, 2021, there are outstanding warrants to purchase 17,815,662 shares of the Company’s common stock with strike prices ranging from $0.01 to $0.23 per share.

 

 

Note 9 – Subsequent Events

 

Subsequent events have been evaluated through the date of this filing.

 

On August 31, 2021, Red Cat Holdings, Inc. (“Red Cat”) acquired all of the issued and outstanding share capital of the Company for $14,000,000, reduced by debt assumed consisting of approximately $1.67 million payable to Decathlon Capital, and approximately $1,457,000 in working capital deficit, resulting in a net purchase price of $10,872,753. Based on a volume weighted average share price of $2.908 per share, Red Cat issued 3,738,911 shares of its common stock.

 

The purchase price may be increased if the Company reaches certain revenue targets during the 24 month period following the closing. The maximum increase in the purchase price would be $16 million if sales of the Golden Eagle, the Company’s newly launched product, total $36 million. The minimum threshold provides that the purchase price will increase by $4 million if sales total $18 million. Any increase in the purchase price will be payable in shares of Red Cat common stock.