10-Q: Quarterly report pursuant to Section 13 or 15(d)
Published on September 12, 2022
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 | ||
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For the
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or
| TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934 | ||
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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.) |
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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 ☐ |
| 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 September 9, 2022, 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 July 31, 2022 and April 30, 2022 | 3 | |
| Unaudited Statements of Operations for the Three Months Ended July 31, 2022 and 2021 | 4 | |
| Unaudited Statement of Changes in Shareholders' Equity for the Three Months Ended July 31, 2022 and 2021 | 5 | |
| Unaudited Statements of Cash Flows for the Three Months Ended July 31, 2022 and 2021 | 6 | |
| Notes to Financial Statements | 7 | |
| Item 2. | Management's Discussion and Analysis of Financial Condition and Results of Operations | 26 |
| Item 3. | Quantitative and Qualitative Disclosures about Market Risk | 30 |
| Item 4. | Controls and Procedures | 31 |
| 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 | 32 |
| SIGNATURES | 32 | |
| RED CAT HOLDINGS | ||||||||
| Consolidated Balance Sheets | ||||||||
| (Unaudited) | ||||||||
| July 31, | April 30, | |||||||
| 2022 | 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 July 31, | ||||||||
| 2022 | 2021 | |||||||
| 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 | ||||||||||||||||||||||||||||||||||||||||
| (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, 2021 | $ | $ | $ | $ | $ | ( |
) | $ | $ | |||||||||||||||||||||||||||||||
| Acquisition of Skypersonic | — | — | ||||||||||||||||||||||||||||||||||||||
| Public offerings, net of $ |
— | — | ||||||||||||||||||||||||||||||||||||||
| Exercise of warrants | — | — | ||||||||||||||||||||||||||||||||||||||
| Conversion of preferred stock | — | ( |
) | ( |
) | |||||||||||||||||||||||||||||||||||
| Stock based compensation | — | — | — | |||||||||||||||||||||||||||||||||||||
| Vesting of restricted stock | — | — | ||||||||||||||||||||||||||||||||||||||
| Shares issued for services | — | — | ||||||||||||||||||||||||||||||||||||||
| Currency translation adjustments | — | — | — | |||||||||||||||||||||||||||||||||||||
| Net Loss | — | — | — | ( |
) | ( |
) | |||||||||||||||||||||||||||||||||
| Balances, July 31, 2021 | $ | $ | $ | $ | $ | ( |
) | $ | $ | |||||||||||||||||||||||||||||||
| Balances, April 30, 2022 | $ | $ | $ | $ | $ | ( |
) | $ | ( |
) | $ | |||||||||||||||||||||||||||||
| Stock based compensation | — | — | — | |||||||||||||||||||||||||||||||||||||
| Vesting of restricted stock units | — | — | ( |
) | ( |
) | ||||||||||||||||||||||||||||||||||
| Unrealized gain on marketable securities | — | — | — | |||||||||||||||||||||||||||||||||||||
| Currency translation adjustments | — | — | — | |||||||||||||||||||||||||||||||||||||
| Net Loss | — | — | — | ( |
) | ( |
) | |||||||||||||||||||||||||||||||||
| Balances, July 31, 2022 | $ | $ | $ | $ | $ | ( |
) | $ | ( |
) | $ | |||||||||||||||||||||||||||||
| See accompanying notes. | ||||||||||||||||||||||||||||||||||||||||
| 5 |
| RED CAT HOLDINGS | ||||||||
|
Consolidated Statements of Cash Flows (Unaudited) |
||||||||
| Three months ended July 31, | ||||||||
| 2022 | 2021 | |||||||
| 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 | ( |
) | ||||||
| Net cash provided by investing activities | ||||||||
| Cash Flows from Financing Activities | ||||||||
| Proceeds from exercise of warrants | ||||||||
| 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 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 | $ | $ | ||||||
| Common stock issued for services | $ | $ | ||||||
| Conversion of derivative liability | $ | $ | ||||||
| Unrealized gain on marketable securities | $ | |||||||
| Indirect payment to related party | $ | $ | ||||||
| Shares withheld as payment of note receivable | $ | $ | ||||||
| Taxes related to net share settlement of equity awards | $ | $ | ||||||
| Conversion of preferred stock into common stock | $ | $ | ||||||
| See accompanying notes. | ||||||||
| 6 |
RED CAT HOLDINGS, INC.
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
July 31, 2022 and 2021
(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, 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 during the two years ended July 31, 2022 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 | $ | |||
| 7 |
The Company engaged a valuation services firm to value the intangible assets acquired and the purchase price allocation is now complete. 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 |
On May 7, 2021, the Company closed the
acquisition of Skypersonic, Inc. ("Skypersonic"). Under the terms of the agreement, we acquired all of the outstanding stock
of Skypersonic in exchange for $
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 | $ | |||
The Company engaged a valuation services firm to value the intangible assets acquired and the purchase price allocation is now complete. 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 $
| 8 |
A revised summary of the purchase price and its related allocation is set forth below.
| Total Purchase Price – shares issued | $ | 10,011,279 |
| 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 has engaged an independent valuation services firm to complete a formal evaluation of the acquisition. 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. When the valuation project is completed, the Company may make adjustments to the opening balance. 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.
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 $
Supplemental Unaudited Pro Forma Financial Information and Other Information
There is no pro forma financial information for the three months ended July 31, 2022 because all acquisitions had closed prior to
the beginning of the reporting period.
The following table presents pro forma results for the three months ended July 31, 2021 as if our acquisition of Teal had occurred on
May 1, 2021:
| July 31, 2021 | ||||||||||||
| 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.
| 9 |
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 except Teal for which the Company is waiting for the final 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. |
| | Goodwill for Rotor Riot relates to its strong social media presence including its 253,000 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 of 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, and (iii) accounting for derivatives.
Cash and Cash Equivalents – At July 31,
2022, we had cash of $
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 receivable
separately from marketable securities on our consolidated balance sheets. Accrued interest receivable was $
| 10 |
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.
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 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 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 $
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 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 (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.
| 11 |
The guidance establishes three levels of the fair value hierarchy as follows:
Level 1: Inputs are unadjusted, quoted prices in active markets for identical assets or liabilities at the measurement date;
Level 2: Inputs are observable, unadjusted quoted prices in active markets for similar assets or liabilities, unadjusted quoted prices for identical or similar assets or liabilities in markets that are not active, or other inputs that are observable or can be corroborated by observable market data for substantially the full term of the related assets or liabilities; and
Level 3: Unobservable inputs that are significant to the measurement of the fair value of the assets or liabilities that are supported by little or no market data.
Disclosures for Non-Financial Assets Measured at Fair Value on a Non-Recurring Basis
The Company's financial instruments mainly consist of cash, receivables, current assets, accounts payable, accrued expenses and debt. The carrying amounts of cash, receivables, current assets, accounts payable, accrued expenses and current debt approximates fair value due to the short-term nature of these instruments.
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 $
| 12 |
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.
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 three months ended July 31, 2022 and July 31, 2021,
comprehensive loss was $
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:
| July 31, 2022 | 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 19.
| 13 |
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 in order 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 20 - Segment Reporting”.
Note 3 – Marketable Securities
The following tables set forth information related to our marketable securities as of July 31, 2022:
| I. | Cost, unrealized gains or losses, and fair values |
| Cost | Unrealized Gains (Losses) | Fair Value | ||||||||||
| Asset-backed securities | $ | $ | ( |
) | $ | |||||||
| Corporate bonds | ( |
) | ||||||||||
| Total | $ | $ | ( |
) | $ | |||||||
| II. | Contractual Maturities |
| One Year or Less | One to Five Years |
Over 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:
| July 31, 2022 | April 30, 2022 | |||||||
| Raw materials | $ | $ | ||||||
| Work-in-process | ||||||||
| Finished goods | ||||||||
| Total | $ | $ | ||||||
Inventory purchase orders outstanding totaled approximately
$
| 14 |
Note 5 – Other Current Assets
Other current assets included:
| July 31, 2022 | April 30, 2022 | |||||||
| Prepaid inventory | $ | $ | ||||||
| Accrued interest income | ||||||||
| Prepaid expenses | ||||||||
| Total | $ | $ | ||||||
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 required tax withholding 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:
| July 31, 2022 | April 30, 2022 | |||||||||||||||||||
| Gross Value | Accumulated Amortization | Net 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 5 and 3 years, respectively. Customer relationships is being amortized over 7 years. Goodwill and Brand name are not amortized but evaluated for impairment on a quarterly basis.
| 15 |
As of July 31, 2022, expected amortization expense for finite-lived intangible assets for the next five years is as follows:
| Fiscal Year Ended: | ||||||
| 2023 | $ | |||||
| 2024 | ||||||
| 2025 | ||||||
| 2026 | ||||||
| 2027 | ||||||
| Total | $ | |||||
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 July 31, 2022 | $ | |||||||
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:
| July 31, 2022 | April 30, 2022 | |||||||
| Equipment and related | $ | $ | ||||||
| Leasehold improvements | ||||||||
| Furniture and fixtures | ||||||||
| Accumulated depreciation | ( |
) | ( |
) | ||||
| Net carrying value | $ | $ | ||||||
Depreciation expense totaled $
Note 9 – Operating Leases
As of July 31, 2022, 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 4.83 years, some of
which may include options to extend for up to 5 years. Operating lease expense totaled $
| Location | Monthly Rent | Expiration | ||||||
| South Salt Lake, Utah | $ | December 2024 | ||||||
| Orlando, Florida | $ | May 2024 | ||||||
| San Juan, Puerto Rico | $ | June 2027 | ||||||
| Troy, Michigan | $ | May 2022 | ||||||
| Orlando, Florida | $ | September 2022 | ||||||
| 16 |
Supplemental information related to operating leases for the three months ended July 31, 2022 was:
| Operating cash paid to settle lease liabilities | $ |
|||
| Weighted average remaining lease term (in years) | ||||
| Weighted average discount rate | ||||
Future lease payments at July 31, 2022 were as follows:
| Fiscal Year Ended: | ||||||
| 2023 | $ | |||||
| 2024 | ||||||
| 2025 | ||||||
| 2026 | ||||||
| 2027 | ||||||
| Thereafter | ||||||
| Total | $ | |||||
Note 10 – Debt Obligations
| A. | Decathlon Capital |
In August 2021, Teal restructured
its loan agreement with Decathlon Capital. The principal amount of $
| B. | Pelion Note |
In May 2021, Teal entered
into a 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 11, 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 July 31, 2022 included:
| 17 |
| Date of Transaction | Purchased Receivables | Payment to Company | Transaction Fees | Withholding Rate | Fully Repaid In | |||||
| May 2020 | $ |
$ |
$ |
|
October 2020 | |||||
| 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 | $ | 744,108 | ||
| Fiscal 2024 | ||||
| Fiscal 2025 | ||||
| Total | $ | |||
| Short term – through July 31, 2023 | $ | |||
| Long term – thereafter | $ |
Note 11 – 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 $
| 18 |
| 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 12 – Convertible Notes
November 2019 Financing
In November 2019 Financing, 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 July 31, 2022, (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 $
| 19 |
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 July 31, 2022, (a) the 2021 Notes were fully
converted into common stock and the related derivative liability eliminated, and (b)
Note 13 – 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 July 31, 2022 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 14 – 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 33,267 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 | ||||
| Share outstanding as of July 31, 2022 | ||||
| 20 |
Note 15 – 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 July 31, 2022 totaled which are convertible into shares of common stock.
Note 16 – 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 | July 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 three months ended July 31:
| 2022 | 2021 | |||||||
| Risk-free interest rate | – % | |||||||
| Expected dividend yield | ||||||||
| Expected term (in years) | — | – | ||||||
| Expected volatility | – % |
| 21 |
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 July 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 .
Options
The table below sets forth the range of assumptions used to calculate the fair value of options granted during the three months ended July 31:
| 2022 | 2021 | |||||||
| 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 is as follows:
| Options | 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 July 31, 2022 | ||||||||||||||||
| Exercisable as of July 31, 2022 | $ | $ | ||||||||||||||
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 July 31, 2022 and July 31,
2021, there was $
| 22 |
Restricted Stock
A summary of restricted stock activity under the plan since April 30, 2021 is as follows:
| Restricted Stock | 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 July 31, 2022 | $ | |||||||
Stock Compensation
Stock compensation expense for the three months ended July 31 was as follows:
| 2022 | 2021 | |||||||
| General and administrative | $ | $ | ||||||
| Research and development | ||||||||
| Operations | ||||||||
| Sales and marketing | ||||||||
| Total | $ | $ | ||||||
Stock compensation expense pertaining to options
totaled $
Note 18 – 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 12 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 July 31, 2022 and April 30, 2022 are set forth below. In addition, the Company's stock price on each measurement date was used in the model.
| July 31, 2022 | April 30, 2022 | |||||||
| Risk-free interest rate | % | – % | ||||||
| Expected dividend yield | ||||||||
| Expected term (in years) | – | – | ||||||
| Expected volatility | – % | – % |
| 23 |
As of July 31, 2022 all of the notes had been
converted into common stock and
| July 31, 2022 | 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 19 - 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 $
Additional related party transactions are disclosed in Note 11.
Note 20 - 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.
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 months ended July 31, 2022 and 2021, respectively.
| For the three months ended July 31, 2022 | ||||||||||||||||
| Enterprise | Consumer | Corporate | Total | |||||||||||||
| Revenues | $ | $ | $ | $ | ||||||||||||
| Cost of goods sold | ||||||||||||||||
| Gross margin | ||||||||||||||||
| Operating expenses | ||||||||||||||||
| Operating loss | ( |
) | ( |
) | ( |
) | ( |
) | ||||||||
| Other expenses, net | ( |
) | ||||||||||||||
| Net loss | $ | ( |
) | $ | ( |
) | $ | ( |
) | $ | ( |
) | ||||
| 24 |
The following table sets forth specific asset categories which are reviewed by our CODM in the evaluation of operating segments:
| For the three months ended July 31, 2022 | ||||||||||||||||
| Enterprise | Consumer | Corporate | Total | |||||||||||||
| Accounts receivable, net | $ | $ | $ | $ | ||||||||||||
| Inventory, net | ||||||||||||||||
| Inventory deposits | $ | $ | $ | $ | ||||||||||||
Note 21 – 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:
In August and September 2022, the Company entered
into inventory purchase orders totaling $
| 25 |
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 since May 1, 2021 include:
Capital Transactions
S-1 Offering
On May 4, 2021, the Company closed a firm commitment underwritten public offering (the "S-1 Offering") in which it sold 4,000,000 shares of its 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. These shares of common stock were sold by the Company pursuant to a registration statement on Form S-1, as amended (File No. 333-253491), filed with the SEC, which was declared effective by the Commission on April 29, 2021 (the "S-1 Registration Statement").
S-3 Offering
On July 21, 2021 the Company closed a firm commitment underwritten public offering (the "S-3 Offering") in which it sold an aggregate of 13,333,334 shares of its Common Stock at a purchase price of $4.50 per share to ThinkEquity. These shares of common stock were sold by the Company pursuant to a registration statement on Form S-3, as amended (File No. 333-256216), filed with the SEC, which was declared effective by the SEC on June 14, 2021 and a Supplement to the Prospectus contained in this registration statement filed with the SEC on July 19, 2021.
Acquisitions
The Company has completed a number of acquisitions since May 2020. A full description of these acquisitions is set forth in Note 1 of the financial statements. A brief summary of these acquisitions is as follows:
In September 2020, the Company acquired Fat Shark Holdings, a provider of First Person View (FPV) video goggles to the drone industry. The purchase price was $8,354,076.
| 26 |
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.
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.
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 has expanded the scope of its drone products and services through a number of acquisitions. Fat Shark Holdings is a provider of First Person View (FPV) video goggles to the drone industry. Rotor Riot sells FPV drones and equipment, primarily 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) are not available, yet still record and transmit data even while being operated from thousands of miles away. Teal Drones is a leader in commercial and government UAV technology.
Results of Operations
The analysis of the Company's results of operations for the three months ended July 31, 2022 compared to the three months ended July 31, 2021 is significantly impacted by the acquisition of Teal Drones in August 31, 2021. The timing of the acquisition resulted in there being no financial information related to Teal included in the Company's financial statements for the three months ended July 31, 2021. Conversely, Teal was the largest operating subsidiary during the three months ended July 31, 2022. Since acquiring Teal, the Company has tripled the number of employees and significantly expanded its facilities. As a result, the comparison of the three months ended July 31, 2022 to the three months ended July 31, 2021 yields more significant changes than might normally occur.
Three Months Ended July 31, 2022 and July 31, 2021
Revenue
During the three months ended July 31, 2022 (or the "2022 period"), we generated revenues of $3,069,271 compared to $1,396,751 for the three months ended July 31, 2021 (or the "2021 period"), representing an increase of $1,672,520, or 120%. Consumer revenues totaled $1,942,720 during the 2022 period compared to $1,355,675 during the 2021 period, resulting in an increase of $587,045, or 43%. Approximately $371,000, or 63%, of the increase is attributed to higher revenues for Fat Shark which launched its newest product release, the Dominator, in the first quarter. Enterprise revenues totaled $1,126,551 during the 2022 period compared to $41,076 during the 2021 period, resulting in an increase of $1,085,475, or greater than 100%. This increase is due to the acquisition of Teal that occurred after the 2021 period which accounted for 98% of Enterprise revenues during the 2022 period.
Cost of Goods Sold
Cost of Goods totaled $2,711,644 in the 2022 period compared to $1,294,347 in the 2021 period, representing an increase of $1,417,297, or 109%. The increase directly related to higher revenues which increased by 120% in the 2022 period compared to the 2021 period.
Gross Margin
Gross margin totaled $357,627 during the three months ended July 31, 2022 compared to $102,404 during the three months ended July 31, 2021, representing an increase of $255,223, or approximately 250%. On a percentage basis, gross margin was 11.7% during the 2022 period compared to 7.3% during the 2021 period. The percentage basis increase primarily related to Fat Shark which realized higher margins in the 2022 period related to the launch of its Dominator goggles compared to the 2021 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 12% in the 2021 period to 16% in the 2022 period.
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Operating Expenses
Operations expense totaled $1,048,086 during the 2022 period compared to $176,863 during the 2021 period, resulting in an increase of $871,223, or almost five times. Approximately 89% of the increase, or $777,550, related to Teal which was not acquired until August 2021, and therefore, had no expenses during the 2021 period. Approximately 62% of Teal's costs related to payroll with the balance spread ratably across numerous categories including office, overhead, and information technology.
Research and development expenses totaled $532,770 during the three months ended July 31, 2022 compared to $244,254 during the three months ended July 31, 2021, representing an increase of $288,516, or 118%. The entire increase related to expenses incurred at Teal which was acquired on August 31, 2021, and therefore had no expenses in the 2021 period. Approximately 69% of Teal's expenses related to payroll with 25% related to office.
Sales and marketing costs totaled $602,231 during the 2022 period compared to $100,633 during the 2021 period, resulting in an increase of $501,598, or almost five times. Payroll costs totaled $217,520 in the 2022 period compared to $50,080 resulting in an increase of $167,440 which represented 33% of the total increase in sales and marketing costs. Professional services costs totaled $150,259 in the 2022 period compared to $5,071 resulting in an increase of $145,188 which represented 29% of the total increase. In addition, higher travel and related costs represented 18% of the increase while advertising costs accounted for 17%.
General and administrative expenses totaled $1,117,565 during the three months ended July 31, 2022 compared to $876,180 during the three months ended July 31, 2021, representing an increase of $241,385, or 28%. Payroll costs totaled $360,133 in the 2022 period compared to $197,435 in the 2021 period resulting in an increase of $162,698, or 67% of the total increase in general and administrative expenses. Information technology services costs increased by $72,988 representing 30% of the total increase.
During the three months ended July 31, 2022, we incurred stock-based compensation costs of $755,471 compared to $384,086 in the 2021 period, resulting in an increase of $371,385 or 97%. Since the 2021 period, the Company has issued 1,232,000 additional options which resulted in incremental stock based compensation costs of $270,529 in the 2022 period. In addition, costs related to restricted stock awards totaled $297,448 during the 2022 period compared to $196,592 during the 2021 period.
Other Income
Other Income (Expense) totaled other expense of $113,103 during the 2022 period compared to other income of $121,840 during the 2021 period, representing a change of $234,943. The largest component change was the recognition of an expense of $92,922 during the 2022 period related to the change in the fair value of derivative liability compared to income of $154,248 during the 2021 period, representing a change of $247,170. Changes in the fair value of the derivative liability are most significantly impacted by changes in the Company's stock price. An increase in the stock price during the 2022 period resulted in expense whereas a decrease in the stock price during the 2021 period resulted in income. In addition, the Company recognized net investment income of $130,296 in the 2022 period compared to zero during the 2021 period. Early in fiscal 2022, the Company completed two offerings of common stock which generated net proceeds of approximately $70 million. These funds were primarily invested in high quality, corporate debt which generated investment income during the 2022 period. Depreciation and amortization expense, included in other, totaled $84,432 in the 2022 period compared to $16,326 in the 2021 period, resulting in an increase of $68,106, or more than 100%.
Net Loss
Net Loss totaled $3,811,599 during the three months ended July 31, 2022 compared to $1,557,772 during the three months ended July 31, 2021, representing an increase of $2,253,827, or approximately 145%. The acquisition of Teal Drones in August 2021 accounted for the majority of the increase as it was fully operational in the 2022 period but was acquired after the end of the 2021 period. Teal's operating loss for the three months ended July 31, 2022 was approximately $1,309,000 which equals approximately 36% of the consolidated net loss for the 2022 period. Since acquiring Teal, we have tripled its headcount and significantly expanded its facilities.
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Cash Flows
Operating Activities
Net cash used in operating activities was $4,813,815 during the three months ended July 31, 2022, compared to net cash used in operating activities of $4,073,042 during the three months ended July 31, 2021 representing an increase of $740,773, or 18%. Net cash used in operations, net of non-cash expenses totaling $943,500, equaled $2,868,099 in the 2022 period compared to $1,119,608 in the 2021 period, resulting in an increase of $1,748,491, 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 quarter of operations in the 2022 period but no activity in the 2021 period. Teal incurred an operating loss of $1,309,219 in the 2022 period which approximates the net cash used. Net cash used related to changes in operating assets and liabilities totaled $1,945,716 during the three months ended July 31, 2022, compared to $2,953,434 during the three months ended July 31, 2021, representing a decrease of $1,007,718, or 34%. 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. During the 2021 period, the Company made deposits to purchase inventory totaling $1,519,598 in response to worldwide supply chain issues.
Investing Activities
Net cash provided by investing activities was $7,659,707 during the three months ended July 31, 2022 compared to $13,502 during the three months ended July 31, 2021 resulting in an increase of $7,646,205. The increase is primarily due to net proceeds of $8,204,649 from maturities of marketable securities which were used to fund operations, partially offset by purchases of property and equipment of $544,942 primarily related to the expansion of the manufacturing facilities for Teal.
Financing Activities
Net cash used in financing activities totaled $685,281 during the three months ended July 31, 2022 compared to net cash provided by financing activities of $69,900,774 during the three months ended July 31, 2021. 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 $70.1 million in connection with two offerings of common stock.
Liquidity and Capital Resources
At July 31, 2022, the Company reported current assets totaling $51,176,438, current liabilities totaling $4,554,396 and net working capital of $46,622,042. Cash and marketable securities totaled $42,954,053 at July 31, 2022. Inventory related balances, including pre-paid inventory, totaled $6,389,375. 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 July 31, 2022, the Company was in a strong liquidity and capital position relative to its operating results for the quarter ended July 31, 2022 and its expected cash requirements for the next twelve months.
Capital Transactions
S-1 Offering
On May 4, 2021, the Company closed a firm commitment underwritten public offering (the “S-1 Offering”) in which it sold 4,000,000 shares of its 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. These shares of common stock were sold by the Company pursuant to a registration statement on Form S-1, as amended (File No. 333-253491), filed with the SEC, which was declared effective by the Commission on April 29, 2021 (the “S-1 Registration Statement”). The net proceeds to the Company from the Offering, after deducting the underwriting discount, the underwriters' fees and expenses and the Company's estimated Offering expenses, were approximately $14.6 million.
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S-3 Offering
On July 21, 2021 the Company closed a firm commitment
underwritten public offering (the "S-3 Offering") in which it sold an aggregate of 13,333,334 shares of its Common Stock at
a purchase price of $4.50 per share to ThinkEquity. These shares of common stock were sold by the Company pursuant to a registration statement
on Form S-3, as amended (File No. 333-256216), filed with the SEC, which was declared effective by the SEC on June 14, 2021
and a Supplement to the Prospectus contained in this registration statement filed with the SEC on July 19, 2021. The net proceeds to the
Company from the S-3 Offering, after deducting the underwriting discount, the underwriters' fees and expenses and the Company's estimated
expenses related to this S-3 Offering, were approximately $55.5 million.
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 July 31, 2022, we reported cash and investment balances of approximately $43 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.
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, on information from third party professionals, and on various other assumptions that are believed to be reasonable under the facts and circumstances. Actual results could differ from those estimates made by management.
Significant estimates reflected in these financial statements include those used to (i) determine stock-based compensation, (ii) complete purchase price accounting for acquisitions, and (iii) accounting for derivatives.
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.
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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 July 31, 2022.
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.
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). The complaint asserts claims for breach of contract and unlawful conversion and sale of shares of common stock that plaintiff alleges to have purchased from Teal Drones, Inc. prior to the acquisition by the Company. The Complaint also alleges breach of fiduciary duty against Mr. Matus and seeks in excess of $1 million in damages. The Company has filed an Answer to the Complaint and the litigation is ongoing.
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: September 12, 2022 |
Red Cat Holdings, Inc.
By: /s/ Jeffrey Thompson Jeffrey Thompson Chief Executive Officer (Principal Executive Officer) |
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Date: September 12, 2022 |
By: /s/ Joseph P. Hernon |
|
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Joseph Hernon Chief Financial Officer (Principal Financial and Accounting Officer) |
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