10-Q: Quarterly report pursuant to Section 13 or 15(d)
Published on December 20, 2021
UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549
FORM
(Mark One)
| QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934 | ||
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For
the quarterly ended , |
or
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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 | (I.R.S. Employer Identification Number) |
| incorporation or organization) | |
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| (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:
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Title of Each Class |
Trading Symbol(s) |
Name of each exchange on which registered |
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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 ☐ |
| Non-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 December 15, 2021, 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 Sheet as of October 31, 2021 and Balance Sheet as of April 30, 2021 | 3 | |
| Unaudited Statements of Operations for the Three and Six Months Ended October 31, 2021 and 2020 | 4 | |
| Unaudited Statements of Cash Flows for the Six Months Ended October 31, 2021 and 2020 | 5 | |
| Unaudited Statement of Changes in Shareholders' Equity for the Three and Six Months Ended October 31, 2021 and 2020 | 6 | |
| Notes to Financial Statements | 7 | |
| Item 2. | Management's Discussion and Analysis of Financial Condition and Results of Operations | 24 |
| Item 3. | Quantitative and Qualitative Disclosures about Market Risk | 30 |
| Item 4. | Controls and Procedures | 30 |
| PART II. | OTHER INFORMATION | |
| Item 1. | Legal Proceedings | 31 |
| Item 1A. | Risk Factors | 31 |
| Item 2. | Unregistered Sales of Equity Securities and Use of Proceeds | 31 |
| Item 3. | Defaults Upon Senior Securities | 31 |
| Item 4. | Mine Safety Disclosures | 31 |
| Item 5. | Other Information | 31 |
| Item 6. | Exhibits | 31 |
| SIGNATURES | 32 | |
| RED CAT HOLDINGS | ||||||||
| Consolidated Balance Sheets | ||||||||
| (Unaudited) | ||||||||
| October 31 | April 30, | |||||||
| 2021 | 2021 | |||||||
| ASSETS | ||||||||
| Current Assets | ||||||||
| Cash | $ | $ | ||||||
| Investments | ||||||||
| Accounts receivable, net | ||||||||
| Inventory | ||||||||
| Other | ||||||||
| Total Current Assets | ||||||||
| Goodwill | ||||||||
| Intangible assets, net | ||||||||
| Property and equipment, net | ||||||||
| Operating lease right-of-use assets | ||||||||
| Other | ||||||||
| 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 | ||||||||
| Warrant derivative liability | ||||||||
| Total Current Liabilities | ||||||||
| Operating lease liabilities | ||||||||
| Debt obligations - long term | ||||||||
| Note payable to related party | ||||||||
| Total Long Term Liabilities | ||||||||
| Commitments and contingencies | ||||||||
| Stockholders' Equity | ||||||||
| Series A Preferred Stock - shares authorized ; outstanding and | ||||||||
| 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 October 31, | Six months ended October 31, | |||||||||||||||
| 2021 | 2020 | 2021 | 2020 | |||||||||||||
| 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) | ||||||||||||||||
| Derivative expense | ||||||||||||||||
| 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 | ||||||||||||||||
| 4 |
| RED CAT HOLDINGS | ||||||||
| Condensed Consolidated Cash Flows Statements | ||||||||
| (Unaudited) | ||||||||
| Six months ended October 31, | ||||||||
| 2021 | 2020 | |||||||
| Cash Flows from Operating Activities | ||||||||
| Net loss | $ | ( |
) | $ | ( |
) | ||
| Stock based compensation | ||||||||
| Common stock issued for services | ||||||||
| Amortization of intangible assets | ||||||||
| Depreciation | ||||||||
| Change in fair value of derivative liability | ( |
) | ||||||
| Amortization of debt discount | ||||||||
| Derivative expense | ||||||||
| Adjustments to reconcile net loss to net cash from operations: | ||||||||
| Changes in operating assets and liabilities | ||||||||
| 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 | ||||||||
| Net cash provided by investing activities | ||||||||
| Cash Flows from Financing Activities | ||||||||
| Proceeds from sale of investments | ||||||||
| Purchases of investments | ( |
) | ||||||
| Purchases of property and equipment | ( |
) | ||||||
| Proceeds from exercise of warrants | ||||||||
| Payments under related party obligations | ( |
) | ( |
) | ||||
| Proceeds from debt obligations | ||||||||
| Payments under debt obligations | ( |
) | ( |
) | ||||
| Proceeds from convertible debentures | ||||||||
| Proceeds from issuance of common stock, net | ||||||||
| Net cash provided by financing activities | ||||||||
| Effect of foreign exchange rate changes on cash | ||||||||
| Net increase in Cash | ||||||||
| Cash, beginning of period | ||||||||
| Cash, end of period | ||||||||
| Cash paid for interest | ||||||||
| Cash paid for taxes | ||||||||
| Non-cash transactions | ||||||||
| Common stock issued for services | $ | $ | ||||||
| Fair value of shares issued in acquisitions | $ | $ | ||||||
| Indirect payment to related party | $ | $ | ||||||
| Conversion of derivative liability | $ | $ | ||||||
| Conversion of preferred stock into common stock | $ | $ | ||||||
| Conversion of Notes into common stock | $ | $ | ||||||
| Conversion of accrued interest into common stock | $ | $ | ||||||
| See accompanying notes. | ||||||||
| 5 |
| RED CAT HOLDINGS | ||||||||||||||||||||||||||||||||||||||||
| Consolidated Stockholders' Equity Statements | ||||||||||||||||||||||||||||||||||||||||
| (Unaudited) | ||||||||||||||||||||||||||||||||||||||||
| Series A | Series B | Common Stock | Additional | Accumulated Other | ||||||||||||||||||||||||||||||||||||
| Preferred Stock | Preferred Stock | Paid-in | Accumulated | Comprehensive | Total | |||||||||||||||||||||||||||||||||||
| Shares | Amount | Shares | Amount | Shares | Amount | Capital | Deficit | Income (Loss) | Equity | |||||||||||||||||||||||||||||||
| Balances, April 30, 2020 | $ | $ | $ | $ | $ | ( |
) | $ | $ | |||||||||||||||||||||||||||||||
| Stock based compensation | ||||||||||||||||||||||||||||||||||||||||
| Net Loss | — | — | — | ( |
) | ( |
) | |||||||||||||||||||||||||||||||||
| Balances, July 31, 2020 | $ | $ | $ | $ | $ | ( |
) | $ | $ | |||||||||||||||||||||||||||||||
| Conversion of Debt | ||||||||||||||||||||||||||||||||||||||||
| Stock based compensation | ||||||||||||||||||||||||||||||||||||||||
| Net Loss | — | — | — | ( |
) | ( |
) | |||||||||||||||||||||||||||||||||
| Balances, October 31, 2020 | $ | $ | $ | $ | $ | ( |
) | $ | $ | |||||||||||||||||||||||||||||||
| Balances, April 30, 2021 | $ | $ | $ | $ | $ | ( |
) | $ | $ | |||||||||||||||||||||||||||||||
| Acquisition of Skypersonic | ||||||||||||||||||||||||||||||||||||||||
| Public offerings,
net of $ |
||||||||||||||||||||||||||||||||||||||||
| Exercise of warrants | ||||||||||||||||||||||||||||||||||||||||
| Conversion of preferred stock | ( |
) | ( |
) | ||||||||||||||||||||||||||||||||||||
| Stock based compensation | ||||||||||||||||||||||||||||||||||||||||
| Shares issued for services | ||||||||||||||||||||||||||||||||||||||||
| Currency translation adjustments | ||||||||||||||||||||||||||||||||||||||||
| Net Loss | — | — | — | ( |
) | ( |
) | |||||||||||||||||||||||||||||||||
| Balances, July 31, 2021 | $ | $ | $ | $ | $ | ( |
) | $ | $ | |||||||||||||||||||||||||||||||
| Acquisition of Skypersonic | ||||||||||||||||||||||||||||||||||||||||
| Acquisition of Teal | ||||||||||||||||||||||||||||||||||||||||
| Conversion of preferred stock | ( |
) | ( |
) | ||||||||||||||||||||||||||||||||||||
| Stock based compensation | ||||||||||||||||||||||||||||||||||||||||
| Shares issued for services | ||||||||||||||||||||||||||||||||||||||||
| Currency translation adjustments | ||||||||||||||||||||||||||||||||||||||||
| Net Loss | — | — | — | ( |
) | ( |
) | |||||||||||||||||||||||||||||||||
| Balances, October 31, 2021 | $ | $ | $ | $ | $ | ( |
) | $ | $ | |||||||||||||||||||||||||||||||
| 6 |
RED CAT HOLDINGS, INC.
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
October 31, 2021 and 2020
(unaudited)
Our unaudited interim condensed 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 condensed 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, 2021 of Red Cat Holdings, Inc. (the "Company"), filed with the Securities and Exchange Commission ("SEC") on August 12, 2021.
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 five wholly owned subsidiaries. Teal Drones is a leader in commercial and government UAV technology. Fat Shark Holdings is a provider of First Person View (FPV) video goggles. Rotor Riot sells FPV drones and equipment, primarily to the consumer marketplace. Skypersonic provides software and hardware solutions that enable drones to complete inspection services in locations where GPS (global positioning systems) are not available, yet still record and transmit data even while being operated from thousands of miles away. Red Cat Propware is developing drone flight data analytics and storage solutions, as well as diagnostic products and services.
Corporate developments since January 1, 2020 include:
| A. | Rotor Riot Acquisition |
In
January 2020, the Company consummated a Merger Agreement under which Rotor Riot Acquisition Corp, a wholly owned subsidiary of the Company,
merged with and into Rotor Riot, with Rotor Riot continuing as the surviving entity and a wholly owned subsidiary of the Company. Under
the Merger Agreement, each member of Rotor Riot received its pro rata portion of the total number of shares of the Company's common stock
issued based on (A)(i) $3,700,000 minus (ii) $915,563 (which included certain debt and other obligations of Rotor Riot and its Chief
Executive Officer that the Company agreed to assume (the "Assumed Obligations") divided by (B) the volume weighted average price
("VWAP") of the Company's common stock for the twenty trading days prior to the closing of the Merger. Based on a share issuance
value of $and a VWAP of $
Following
the closing, the Company's management controlled the operating decisions of the combined company. Accordingly, we accounted for the transaction
as an acquisition of Rotor Riot by the Company. Based on purchase price accounting, we recognized the assets and liabilities of Rotor
Riot at fair value with the excess of the purchase price over the net assets acquired recognized as goodwill. The table below reflects
the acquisition date values of the purchase consideration, assets acquired, and liabilities assumed. The shares issued were valued at
$(shares issued times $
| 7 |
| Shares issued | $ | 1,820,114 | ||
| Promissory note issued | ||||
| Total Purchase Price | $ |
| Assets acquired | ||||
| Cash | ||||
| Accounts receivable | ||||
| Other assets | ||||
| Inventory | ||||
| Trademark | ||||
| Brand name | ||||
| Customer relationships | ||||
| Total assets acquired | ||||
| Liabilities assumed | ||||
| Accounts payable and accrued expenses | ||||
| Notes payable | ||||
| Due to related party | ||||
| Total liabilities assumed | ||||
| Total fair value of net assets acquired | ||||
| Goodwill | $ |
The
final purchase price allocation was determined by an independent valuation services firm. Customer Relationships with a value of $
| B. | Fat Shark Acquisition |
In November 2020, the Company closed a share purchase agreement ("Share Purchase Agreement") with the 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 was valued at $
| 8 |
| 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 | $ |
The final purchase price allocation was determined by an independent valuation services firm. Intangible assets included proprietary technology and non-compete agreement which are being amortized over 5 and 3 years, respectively. The carrying value of Brand Name is not being amortized but will be reviewed quarterly and formally evaluated at the end of each fiscal year.
| C. | Skypersonic Acquisition |
In
February 2021, the Company entered into Share Purchase and Liquidity Event Agreements (the "Skypersonic Agreements") with
the founder and majority shareholder of Skypersonic, Inc., ("Skypersonic") and the holders of common stock and equity based
agreements representing 97.46% of Skypersonic (the "Sellers"), pursuant to which, subject to the satisfaction of certain
closing conditions, the Company would acquire all of the issued and outstanding share capital of Skypersonic for an aggregate of
$in
shares (the "Share Consideration") of the Company's common stock, based upon the VWAP of the Company's common stock at
closing of the transaction (the "Skypersonic Transaction"). Prior to the closing, the Company provided $
| 9 |
| Shares issued | $ | 2,716,013 | ||
| Cash | ||||
| Total Purchase Price | $ |
| Assets acquired | ||||
| Cash | ||||
| Accounts receivable | ||||
| Other assets | ||||
| Inventory | ||||
| Total assets acquired | ||||
| Liabilities assumed | ||||
| Accounts payable and accrued expenses | ||||
| Total liabilities assumed | ||||
| Total fair value of net assets acquired | ( |
) | ||
| Goodwill | $ |
The foregoing amounts reflect our current estimates of fair value as of the May 7, 2021 acquisition date. The Company expects to recognize fair values associated with the customer relationships acquired, as well as the Skypersonic brand name, but has not yet accumulated sufficient information to assign such values. As additional information becomes known regarding the acquired assets and assumed liabilities, management may make adjustments to the opening balance sheet of the acquired company up to the end of the measurement period, which is a one-year period following the acquisition date. The determination of the fair values of the acquired assets and liabilities assumed (and the related determination of estimated lives of depreciable tangible and intangible assets) requires significant judgment.
| D. | Teal Drones Acquisition |
On August 31, 2021, the Company closed the acquisition of Teal Drones Inc., (“Teal”). The acquisition of Teal was made pursuant to an Agreement and Plan of Merger by and among Red Cat Holdings, Inc., a Nevada corporation (the “Company”), Teal Acquisition I Corp., a Delaware corporation (“Acquisition”) and wholly-owned subsidiary of the Company, and Teal, as amended and restated August 31, 2021 (the “Merger Agreement” or “Merger”).
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 $1,670,294 (the “Loan”), representing the outstanding principal amount previously due and owing by Teal to DA4. Interest on the Loan accrues at a rate of ten (10%) percent per annum. Principal and interest under the term Loan is payable monthly in an amount equal to $49,275 until maturity on December 31, 2024.
Pursuant to the Merger Agreement, we acquired all of the issued and outstanding share capital of Teal in exchange for $14,000,000 of our common stock, par value $0.001 per share (“Common Stock”) at the Volume Weighted Average Price (VWAP) of our Common Stock for the 20 trading days ended August 31, 2021 of $2.908 per share, reduced by the amount of Teal debt assumed consisting of approximately $1.67 million payable to DA4, and approximately $1,457,000 in working capital deficit, for a net closing date payment of $10,872,753. At closing, we issued 3,738,911 shares of our Common Stock (the “Stock Consideration”) which had a fair market value of $10,431,562. Fifteen (15%) of the Share Consideration (the “Escrow Shares”) was deposited in an escrow account for a period of eighteen (18) months as security for indemnification obligations, any purchase price adjustments due to working capital deficiencies and any other claims or expenses. In December 2021, the Company and Teal agreed to a reduction in the purchase price of $438,058 which resulted in the cancellation of 150,639 shares held in escrow. The fair market value of the cancelled shares was $420,283. A revised summary of the purchase price and its related allocation is set forth below.
The Stock Consideration payable under the Merger Agreement may be increased upon the achievement of certain milestones set forth in the Merger Agreement (the “Earn-Out Consideration”). Additional shares of Common Stock may become issuable by the Company in the event that within twenty-four (24) months following closing of the Merger, Teal realizes certain revenue targets. A total of Sixteen Million Dollars ($16,000,000) in additional shares of Common Stock will be issued if sales and services of Teal's Golden Eagle drones equal at least Thirty-six Million Dollars ($36,000,000). A total of Ten Million Dollars ($10,000,000) in additional shares of Common Stock will be issued if sales and services of Teal's Golden Eagle drones equal at least $24 million ($24,000,000) but less than $36 million ($36,000,000). A total of Four Million Dollars ($4,000,000) in additional shares of Common Stock will be issued if sales and services of Teal's Golden Eagle drones equal at least Eighteen Million Dollars ($18,000,000) but less than Twenty-Four Million Dollars ($24,000,000). Additional Share Consideration, if earned, is issuable at the VWAP of the Company within thirty (30) days of the determination that Earn-Out Consideration is payable.
| 10 |
| Shares issued | $ | 10,011,279 | ||
| Total Purchase Price | $ |
| Assets acquired | ||||
| Cash | ||||
| Accounts receivable | ||||
| Other current assets | ||||
| Other assets | ||||
| Inventory | ||||
| 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 | $ |
The foregoing amounts reflect our current estimates of fair value as of the August 31, 2021 acquisition date. The Company expects to recognize fair values associated with the customer relationships acquired, as well as the Teal brand name, but has not yet accumulated sufficient information to assign such values. As additional information becomes known regarding the acquired assets and assumed liabilities, management may make adjustments to the opening balance sheet of the acquired company up to the end of the measurement period, which is a one-year period following the acquisition date. The determination of the fair values of the acquired assets and liabilities assumed (and the related determination of estimated lives of depreciable tangible and intangible assets) requires significant judgment.
Note 2 - Summary of Significant Accounting Policies
Basis of Accounting - The financial statements and accompanying notes are prepared in accordance with accounting principles generally accepted in the United States ("GAAP").
Principles of Consolidation - Our condensed consolidated financial statements include the accounts of our operating subsidiaries, Red Cat Propware, Inc., Rotor Riot, Fat Sharking Holdings, Skypersonic, and Teal Drones. 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, and (iii) the accounting for derivatives.
Cash
and Cash Equivalents - At October 31, 2021, we had cash of $
Investments – Our investments have been classified and accounted for as available-for-sale securities. Our investment manager can sell any of our investment holdings at any time, and therefore, we have classified our investments as short term. Our available-for-sale securities are carried at fair value, with unrealized gains and losses reported within investment income in our consolidated statements of operations.
We
have elected to present accrued interest receivable separately from investments on our consolidated balance sheets. Accrued interest
receivable was $
| 11 |
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, 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.
Goodwill - Goodwill represents the excess of the purchase price of an acquisition over the estimated fair value of identifiable net assets acquired. The measurement periods 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 the adjustments are determined.
We perform an impairment test at the end of each fiscal year, or more frequently if indications of impairment arise. We have a single reporting unit, and consequently, evaluate goodwill for impairment based on an evaluation of the fair value of the Company as a whole.
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 will 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 recent debt financings. 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 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.
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The levels of the fair value hierarchy are described below:
| | Level 1 inputs utilize quoted prices (unadjusted) in active markets for identical assets or liabilities that the Company has the ability to access. |
| | Level 2 inputs utilize other than quoted prices included in Level 1 that are observable for the asset, either directly or indirectly, for substantially the full term of the asset. Level 2 inputs include quoted prices for similar assets in active markets, quoted prices for identical or similar assets in markets that are not active and inputs other than quoted prices that are observable in the marketplace for the asset. The observable inputs are used in valuation models to calculate the fair value for the asset. |
| | Level 3 inputs are unobservable but are significant to the fair value measurement for the asset, and include situations where there is little, if any, market activity for the asset. These inputs reflect management's own assumptions about the assumptions a market participant would use in pricing the asset. |
A review of fair value hierarchy classifications is conducted on a quarterly basis. Changes in the observability of valuation inputs may result in a reclassification of levels for certain securities within the fair value hierarchy.
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 and accrued expenses and debt. The carrying amounts of its 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 derivative liabilities in 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 within the notes 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. Customers pay at the time they order and 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 $117,842 and $46,096 at October 31, 2021 and April 30, 2021, 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.
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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 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 as a component of stockholders' equity. Net foreign exchange transaction gains and losses resulting from the conversion of the transaction currency to functional currency are recorded in other income, net in the consolidated statements of operations.
Comprehensive
Loss - During the three and six months ended October 31, 2021, differences between net loss and comprehensive loss totaled $
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.
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 17.
Note 3 – Fair Value Measurements
We disclose and recognize the fair value of our assets and liabilities using a hierarchy that prioritizes the inputs to valuation techniques used to measure 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. 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.
Our financial instruments consist of cash and cash equivalents, short-term and long-term investments, accounts payable, and accrued liabilities. At October 31, 2021, and April 30, 2021, the carrying values of cash and cash equivalents, accounts payable, and accrued liabilities approximated fair value due to their short-term maturities.
The following tables set forth information related to our available-for-sales investment securities as of October 31, 2021:
| I. | Amortized cost, net unrealized gains or losses, and fair values |
| Amortized Cost | Net Unrealized Gains (Losses) | Fair Value | ||||||||||
| Money market funds | $ | $ | $ | |||||||||
| Asset-backed securities | ( |
) | ||||||||||
| Corporate bonds | ( |
) | ||||||||||
| Total | $ | $ | ( |
) | $ | |||||||
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| II. | Contractual Maturities |
| One Year or Less | Over One Year | Over Five Years | Total | |||||||||||||
| Money market funds | $ | $ | $ | $ | ||||||||||||
| Asset-backed securities | ||||||||||||||||
| Corporate bonds | ||||||||||||||||
| Total | $ | $ | $ | $ | ||||||||||||
| III. | Fair Value Hierarchy |
| Level 1 | Level 2 | Level 3 | Total | |||||||||||||
| Money market funds | $ | $ | $ | $ | ||||||||||||
| Asset-backed securities | ||||||||||||||||
| Corporate bonds | ||||||||||||||||
| Total | $ | $ | $ | $ | ||||||||||||
Note 4 – Inventories
Inventories consisted of the following:
|
October 2021 |
April 2021 |
|||||||
| Raw materials | $ | $ | ||||||
| Work-in-process | ||||||||
| Finished goods | ||||||||
| Total | $ | $ | ||||||
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Note 5 - Other Current Assets
Other current assets included:
|
October 2021 |
April 2021 |
|||||||
| Prepaid inventory | $ | $ | ||||||
| Accrued interest held in investments | ||||||||
| Prepaid insurance | ||||||||
| Prepaid expenses | ||||||||
| Security deposits | ||||||||
| Due from related party | ||||||||
| Total | $ | $ | ||||||
Note 6 – 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 October 31, 2021 was as follows:
| Original cost | $ | 289,369 | ||
| Accumulated depreciation | ||||
| Net carrying value | $ |
Note 7 – Lease Agreements
The Company has the following operating leases for real estate locations where it operates:
| Location | Monthly Rent | Expiration | |||||
| South Salt Lake, Utah | $ | August 2024 | |||||
| Orlando, Florida | $ | May 2024 | |||||
| Cayman Islands | $ | Month to Month | |||||
| Troy, Michigan | $ | May 2022 | |||||
| Orlando, Florida | $ | September 2022 | |||||
| Torino, Italy | $ | January 2024 | |||||
These lease agreements have remaining terms up to 2.84 years, excluding options to extend certain leases for up to 5 years. The weighted average remaining lease term as of October 31, 2021 was 2.52 years. The Company used a discount rate of 12% to calculate its lease liability at October 31, 2021. Future lease payment obligations at October 31, 2021 were as follows:
| Fiscal Year Ended: | |||||
| 2022 | $ | ||||
| 2023 | |||||
| 2024 | |||||
| 2025 | |||||
| Total | $ | ||||
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Note 8 – Debt Obligations
| A. | Decathlon Capital |
In
connection with the acquisition of Teal by the Company, Decathlon Capital agreed to restructure the terms of an existing loan agreement
with Teal. Effective August 31, 2021, the principal amount outstanding of $
| B. | Convertible Note |
In
May 2021, Teal entered into a convertible note agreement totaling $
| C. | Vendor Settlement |
In
May 2020, Teal entered into a settlement agreement with a vendor that had been providing contract manufacturing services. At August 31,
2021, the Company assumed the outstanding balance of $
| D. | SBA Loan |
On
February 2, 2021, Teal received a second 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. The Company assumed an existing agreement when it acquired Rotor Riot in January 2020. This agreement was repaid in May 2020. Since then, the Company has entered into the following agreements with Shopify:
| Date of Transaction | Purchased Receivables | Payment to Company | Transaction Fees | Withholding Rate | Balance at October 31, 2021 | |||||
| May 2020 | $ |
$ |
$ |
|||||||
| September 2020 | $ |
$ |
$ |
|||||||
| April 2021 | $ |
$ |
$ |
$ |
| F. | Corporate Equity |
In
October 2021, Teal entered into an agreement with Corporate Equity to fund $
| 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 $
Short and long term debt obligations totaled $1,338,030 and $1,431,739 at October 31, 2021, respectively. Outstanding principal payments are due as follows:
| Balance of calendar 2021 | $ | 608,894 | |||
| 2022 | |||||
| 2023 | |||||
| 2024 | |||||
| 2025 | |||||
| 2026 | |||||
| Total | $ |
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Note 9 - 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 in the amount of $
| B. | BRIT, LLC |
In January 2020, in connection with the acquisition
of Rotor Riot, the Company issued a promissory note in the amount of $
BRIT incurred certain financial obligations in support
of the operations of Rotor Riot which the Company assumed responsibility to pay at the effective time of the Merger. These obligations
bear interest at annual rates ranging from
| C. | Aerocarve |
In
2020, the Company received advances totaling $
Note 10 - Convertible Notes
In
November 2019, the Company issued a convertible note in the principal amount of $
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 October 31, 2021, (a) the entire $
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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 $
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 October 31, 2021, (a) the entire $
Note 11 - 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 which passed the Export Services Act, also known as Act 20, in 2012. Under Act 20, eligible businesses are subject to a special corporate tax rate of 4%. 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
October 31, 2021 and April 30, 2021, 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 $
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Note 12 - 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.
On May 4, 2021, the Company closed an offering of of common stock which generated gross proceeds of $ and net proceeds of approximately $.
On May 4, 2021, the Company issued shares of common stock for investor relations services rendered.
On May 7, 2021, the Company issued shares of common stock in connection with the acquisition of Skypersonic, as further described in Note 1.
On July 21, 2021, the Company closed an offering of shares of common stock which generated gross proceeds of $ and net proceeds of approximately $ million.
During the three months ended July 31, 2021, shares of common stock were issued under the terms of a restricted stock agreement with an officer.
On August 10, 2021, the Company issued shares of common stock in connection with the conversion of shares of Series A Preferred Stock.
On August 15, 2021, the Company issued shares of common stock for investor relations services rendered.
On August 31, 2021, the Company issued shares of common stock in connection with the acquisition of Teal Drones, as further described in Note 1.
During the three months ended October 31, 2021, the Company issued shares of common stock in connection with working capital adjustments related to the acquisition of Skypersonic, as further described in Note 1.