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UNITED STATES

SECURITIES AND EXCHANGE COMMISSION

Washington, D.C. 20549

 

FORM 10-Q

 

 

  QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934
   

 

For the quarterly period ended October 31, 2022

or

  TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934
   

 

For the transition period from ___________ to ___________

 

Commission File Number: 000-31587

 

Red Cat Holdings, Inc.

(Exact name of Registrant as specified in its charter)

 

Nevada   86-0490034
(State or other jurisdiction of incorporation or organization)   (I.R.S. Employer Identification No.)

 

 

 

 

15 Ave. Munoz Rivera, Ste 2200

San Juan, Puerto Rico

 

 

 

 

00901

(Address of principal executive offices)   (Zip Code)

 

(833) 373-3228

(Registrant's telephone number, including area code)

__________________________________

(Former Name, Former Address and Former Fiscal Year, if Changed Since Last Report)

 

Securities registered pursuant to Section 12(b) of the Act:

 

 

Title of Each Class

 

Trading

Symbol(s)

 

 

Name of each exchange on which registered

Common Stock   RCAT   Nasdaq Capital Market

 

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. Yes  No 

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). Yes  No  

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  No 

 

As of December 15, 2022, there were 54,317,718 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, 2022 and April 30, 2022 3
     
  Unaudited Statements of Operations for the Three and Six Months Ended October 31, 2022 and 2021 4
     
  Unaudited Statement of Changes in Shareholders' Equity for the Three and Six Months Ended October 31, 2022 and 2021 5
     
  Unaudited Statements of Cash Flows for the Six Months Ended October 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 32
     
Item 4. Controls and Procedures 32

 

PART II. OTHER INFORMATION  
     
Item 1. Legal Proceedings 33
     
Item 1A. Risk Factors 33
     
Item 2. Unregistered Sales of Equity Securities and Use of Proceeds 33
     
Item 3.   Defaults Upon Senior Securities 33
     
Item 4. Mine Safety Disclosures 33
     
Item 5. Other Information 33
     
Item 6. Exhibits 34
     
SIGNATURES 34

 

 

RED CAT HOLDINGS

Consolidated Balance Sheets

(Unaudited)

 

           
    October 31,    April 30, 
    2022    2022 
ASSETS          
Current assets          
Cash  $1,582,751   $4,084,815 
Marketable securities   31,302,888    44,790,369 
Accounts receivable, net   917,802    495,506 
Inventory   6,560,092    3,895,870 
Other   4,453,439    2,354,884 
Due from related party         31,853 
Total current assets   44,816,972    55,653,297 
           
Goodwill   19,839,750    25,138,750 
Intangible assets, net   7,777,741    2,698,531 
Property and equipment, net   1,700,821    511,690 
Other   57,033    57,033 
Operating lease right-of-use assets   852,065    1,019,324 
Total long term assets   30,227,410    29,425,328 
           
TOTAL ASSETS  $75,044,382   $85,078,625 
           
LIABILITIES AND STOCKHOLDERS' EQUITY          
Current liabilities          
Accounts payable  $1,649,341   $1,018,747 
Accrued expenses   541,097    1,084,494 
Debt obligations - short term   895,257    956,897 
Due to related party         40,057 
Customer deposits   123,308    437,930 
Operating lease liabilities   298,609    293,799 
Warrant derivative liability   1,013,675    1,607,497 
Total current liabilities   4,521,287    5,439,421 
           
Operating lease liabilities   601,243    749,825 
Debt obligations - long term   694,581    973,707 
Total long term liabilities   1,295,824    1,723,532 
Commitments and contingencies          
           
Stockholders' equity          
Series B preferred stock - shares authorized 4,300,000; outstanding 986,676 and 986,676   9,867    9,867 
Common stock - shares authorized 500,000,000; outstanding 54,229,539 and 53,748,735   54,229    53,749 
Additional paid-in capital   108,406,712    106,821,384 
Accumulated deficit   (37,555,132)   (27,499,056)
Accumulated other comprehensive income   (1,688,405)   (1,470,272)
Total stockholders' equity   69,227,271    77,915,672 
TOTAL LIABILITIES AND STOCKHOLDERS' EQUITY  $75,044,382   $85,078,625 

 

 

See accompanying notes. 

 

 

 3 

 

RED CAT HOLDINGS

Consolidated Statements Of Operations

(Unaudited) 

 

                     
   Three months ended October 31,  Six months ended October 31,
   2022  2021  2022  2021
Revenues  $1,530,462   $1,863,239   $4,599,733   $3,259,990 
                     
Cost of goods sold   1,296,807    1,710,657    4,008,451    3,005,004 
                     
Gross Margin   233,655    152,582    591,282    254,986 
                     
Operating Expenses                    
Operations   1,752,873    283,249    2,800,959    460,112 
Research and development   1,354,914    493,441    1,887,684    737,695 
Sales and marketing   731,769    185,385    1,334,000    286,018 
General and administrative   1,919,637    1,050,708    3,037,202    1,926,888 
Stock based compensation   1,246,796    899,937    2,002,267    1,284,023 
Total operating expenses   7,005,989    2,912,720    11,062,112    4,694,736 
Operating loss   (6,772,334)   (2,760,138)   (10,470,830)   (4,439,750)
                     
Other Expense (Income)                    
Change in fair value of derivative liability   (686,744)   (118,813)   (593,822)   (273,061)
Investment income, net   (103,817)   38,447    (234,113)   38,447 
Interest expense   32,485    46,017    68,172    63,116 
Other, net   230,219    14,812    345,009    30,121 
Other Expense (Income)  $(527,857)  $(19,537)  $(414,754)  $(141,377)
                     
Net loss  $(6,244,477)  $(2,740,601)  $(10,056,076)  $(4,298,373)
                     
Loss per share - basic and diluted  $(0.12)  $(0.05)  $(0.19)  $(0.10)
                     
Weighted average shares outstanding - basic and diluted   54,078,111    52,147,541    53,928,133    43,110,884 

 

 

See accompanying notes.

 

 

 4 

 

RED CAT HOLDINGS

Consolidated Statements of Stockholders’ Equity

(Unaudited)

 

                               
   Series A  Series B     Additional     Accumulated Other   
   Preferred Stock  Preferred Stock  Common Stock  Paid-in  Accumulated  Comprehensive  Total
   Shares  Amount  Shares  Amount  Shares  Amount  Capital  Deficit  Income (Loss)  Equity
Balances, April 30, 2021   158,704   $1,587    1,968,676   $19,687    29,431,264   $29,431   $21,025,518   $(15,809,928)  $     $5,266,295 
                                                   
Acquisition of Skypersonic   —            —            685,321    685    2,630,955                2,631,640 
                                                   
Public offerings, net of $5,959,800 of issuance costs   —            —            17,333,334    17,333    70,022,871                70,040,204 
                                                   
Exercise of warrants   —            —            66,666    67    263,073                263,140 
                                                   
Conversion of preferred stock   —            (982,000)   (9,820)   818,333    818    9,002                   
                                                   
Stock based compensation   —            —            —            384,023                384,023 
                                                   
Vesting of restricted stock   —            —            62,500    63                      63 
                                                   
Shares issued for services   —            —            91,667    92    191,908                192,000 
                                                   
Currency translation adjustments   —            —            —                        922    922 
                                                   
Net loss   —            —            —                  (1,557,772)         (1,557,772)
                                                   
Balances, July 31, 2021   158,704   $1,587    986,676   $9,867    48,489,085   $48,489   $94,527,350   $(17,367,700)  $922   $77,220,515 
                                                   
Acquisition of Skypersonic   —            —            21,972    22    84,350                84,372 
                                                   
Acquisition of Teal Drones   —            —            3,588,272    3,588    10,007,691                10,011,279 
                                                   
Conversion of preferred stock   (158,704)    (1,587)    —          1,321,996    1,322    265                   
                                                   
Stock based compensation   —            —            243,585    244    899,693                899,937 
                                                   
Shares issued for services   —            —            20,000    20    59,380                58,400 
                                                   
Currency translation adjustments   —            —            —                        669    669 
                                                   
Net loss   —            —            —                  (2,740,601)         (2,740,601)
                                                   
Balances, October 31, 2021   —     $      986,676   $9,867    53,684,910   $53,685   $105,577,729   $(20,108,301)  $1,591   $85,534,571 
                                                   
Balances, April 30, 2022        $      986,676   $9,867    53,748,735   $53,749   $106,821,384   $(27,499,056)  $(1,470,272)  $77,915,672 
                                                   
Stock based compensation   —            —            —            755,471                755,471 
                                                   
Vesting of restricted stock units   —            —            69,707    69    (84,145)               (84,076)
                                                   
Unrealized gain on marketable securities   —            —            —                        133,582    133,582 
                                                   
Currency translation adjustments   —            —            —                        352    352 
                                                   
Net loss   —            —            —                  (3,811,599)         (3,811,599)
                                                   
Balances, July 31, 2022        $      986,676   $9,867    53,818,442   $53,818   $107,492,710   $(31,310,655)  $(1,336,338)  $74,909,402 
                                                   
Stock based compensation   —            —            —            1,246,796                1,246,796 
                                                   
Vesting of restricted stock units   —            —            411,097    411    (332,794)               (332,383)
                                                   
Unrealized loss on marketable securities   —            —            —                        (350,811)   (350,811)
                                                   
Currency translation adjustments   —            —            —                        (1,256)   (1,256)
                                                   
Net loss   —            —            —                  (6,244,477)         (6,244,477)
                                                   
Balances, October 31, 2022        $      986,676   $9,867    54,229,539   $54,229   $108,406,712   $(37,555,132)  $(1,688,405)  $69,227,271 

 

 

See accompanying notes.

 

 

 5 

 

RED CAT HOLDINGS

Consolidated Statements of Cash Flows

(Unaudited)

 

           
   Six months ended  October 31,
   2022  2021
Cash Flows from Operating Activities          
Net loss  $(10,056,076)  $(4,298,373)
Stock based compensation - options   890,711    505,821 
Stock based compensation - restricted units   1,111,556    778,202 
Common stock issued for services         250,400 
Amortization of intangible assets   219,790    32,651 
Realized loss from sale of marketable securities   28,416       
Depreciation   91,804    5,455 
Change in fair value of derivative   (593,822)   (273,061)
Changes in operating assets and liabilities, net of acquisitions          
Accounts receivable   (422,296)   27,002 
Inventory   (2,664,222)   (319,124)
Other   (2,098,555)   (3,814,101)
Operating lease right-of-use assets and liabilities   23,487    10,887 
Customer deposits   (314,622)   8,753 
Accounts payable   630,594    (976,679)
Accrued expenses   (380,904)   (505,340)
Net cash used in operating activities   (13,534,139)   (8,567,507)
           
Cash Flows from Investing Activities          
Cash acquired through acquisitions         24,866 
Purchases of property and equipment   (1,280,935)   (30,147)
Proceeds from maturities of marketable securities   13,241,836    1,855,788 
Purchases of marketable securities         (49,978,445)
Net cash provided by (used in) investing activities   11,960,901    (48,127,938)
           
Cash Flows from Financing Activities          
Proceeds from exercise of warrants         99,999 
Proceeds from related party obligations   13,404    —   
Payments under related party obligations   (40,057)   (1,866,381)
Payments under debt obligations   (340,766)   (320,965)
Payments of taxes related to equity transactions   (561,407)      
Proceeds from issuance of common stock, net         70,065,203 
Net cash (used in) provided by financing activities   (928,826)   67,977,856 
           
Net (decrease) increase in Cash   (2,502,064)   11,282,411 
Cash, beginning of period   4,084,815    277,347 
Cash, end of period   1,582,751    11,559,758 
           
Cash paid for interest   62,862    26,175 
Cash paid for income taxes            
           
Non-cash transactions          
Fair value of shares issued in acquisitions  $     $12,727,292 
Unrealized loss on marketable securities  $217,229   $   
Elimination of derivative liability  $     $163,141 
Indirect payment to related party  $     $132,200 
Shares withheld as payment of note receivable  $18,449   $   
Conversion of preferred stock into common stock  $     $11,407 
Taxes related to net share settlement of equity awards  $9,448   $   

 

See accompanying notes.

 

 

 6 

 

 RED CAT HOLDINGS, INC.

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS

October 31, 2022 and 2021

(unaudited)

 

Our unaudited interim consolidated financial statements and accompanying notes are prepared in accordance with accounting principles generally accepted in the United States of America ("GAAP"). In the opinion of management, the unaudited interim consolidated financial statements reflect all adjustments of a normal recurring nature that are necessary for a fair presentation of the results for the interim periods presented. Interim results are not necessarily indicative of results for a full year. The information included in this Form 10-Q should be read in conjunction with the financial information included in the Annual Report on Form 10-K for the fiscal year ended April 30, 2022 of Red Cat Holdings, Inc. (the "Company"), filed with the Securities and Exchange Commission ("SEC") on July 27, 2022.


 

Note 1 – The Business

 

Red Cat Holdings (“Red Cat” or the “Company”) was originally incorporated in February 1984. Since April 2016, the Company’s primary business has been to provide products, services and solutions to the drone industry which it presently does through its four wholly owned subsidiaries. Teal Drones is a leader in commercial and government Unmanned Aerial Vehicles (UAV) technology. Fat Shark is a provider of First Person View (FPV) video goggles to the drone industry. Rotor Riot sells FPV drones and equipment to the consumer marketplace through its digital storefront located at www.rotorriot.com. Skypersonic provides software and hardware solutions that enable drones to complete inspection services in locations where GPS (global positioning systems) is not available, yet still record and transmit data even while being operated from thousands of miles away.

 

Corporate developments during the two years ended October 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 $8,354,076 based on (i) the issuance of 5,227,273 shares of common stock with a value of $6,351,076 on the date of closing (ii) a senior secured promissory note in the original principal amount of $1,753,000, and (iii) a cash payment of $250,000. The Share Purchase Agreement included indemnification provisions, a two year non-compete agreement, and registration rights for the shares issued in the transaction.

 

A summary of the purchase price and its related allocation was as follows:

 

Shares issued  $6,351,076 
Promissory note issued   1,753,000 
Cash   250,000 
Total Purchase Price  $8,354,076 

 

Assets acquired   
Cash   201,632 
Accounts receivable   249,159 
Other assets   384,232 
Inventory   223,380 
Brand name   1,144,000 
Proprietary technology   272,000 
Non-compete agreement   16,000 
Total assets acquired   2,490,403 
Liabilities assumed     
Accounts payable and accrued expenses   279,393 
Customer deposits   25,194 
Total liabilities assumed   304,587 
Total fair value of net assets acquired   2,185,816 
Goodwill  $6,168,260 

   

 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

 

In May 2021, the Company acquired all of the outstanding stock of Skypersonic, Inc. (“Skypersonic”) in exchange for $3,000,000 of our common stock. The number of shares issuable was based on the volume weighted average price ("VWAP") of our common stock for the 20 trading days ending May 7, 2021. Based on a VWAP of $4.0154, the Company issued 747,124 shares. In addition, the Company also agreed to issue 110,000 shares of common stock to a shareholder. For accounting purposes, the 857,124 shares were valued at $3,291,356 based on the closing price of our common stock of $3.84 on May 7, 2021. Prior to the closing, the Company provided $75,000 to Skypersonic to fund its operating costs. This amount was capitalized as part of the purchase price. In October 2021, the Company and Skypersonic agreed to a reduction in the purchase price of $601,622 which resulted in the cancellation of 149,829 shares held in escrow.

 

The final summary of the purchase price and its related allocation is as follows:

 

Shares issued  $2,716,012 
Cash   75,000 
Total Purchase Price  $2,791,012 

 

Assets acquired   
Cash   13,502 
Accounts receivable   51,083 
Other assets   12,950 
Inventory   50,556 
Proprietary technology   826,000 
Non-compete agreement   65,000 
Total assets acquired   1,019,091 
Liabilities assumed     
Accounts payable and accrued expenses   1,054,997 
Total liabilities assumed   1,054,997 
Total fair value of net assets acquired   (35,906)
Goodwill  $2,826,918 

 

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 $14,000,000 was reduced by $1,670,294 of debt assumed by the Company, as well as a working capital deficit adjustment of $1,456,953. Based on the net amount payable of $10,872,753, and a VWAP of $2.908 for the twenty trading days ending August 31, 2022, the Company issued 3,738,911 of common stock. For accounting purposes, the shares were valued at $10,431,562 based on the closing price of our common stock of $2.79 on August 31, 2021. 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 Stock Consideration may be increased if Teal attains certain revenue levels in the 24-month period following the closing.  The additional consideration begins at $4 million if sales total at least $18 million and ends at $16 million if sales total $36 million.

 

 8 

 

The final summary of the purchase price and its related allocation is as follows:

 

Total Purchase Price – shares issued  $10,011,279 

 

Assets acquired   
Cash   11,364 
Accounts receivable   47,964 
Other current assets   15,085 
Other assets   48,595 
Inventory   1,253,755 
Brand name   1,430,000 
Proprietary technology   3,869,000 
Total assets acquired   6,675,763 
Liabilities assumed     
Accounts payable and accrued expenses   1,143,899 
Customer deposits   1,766,993 
Notes payable   2,749,091 
Total liabilities assumed   5,659,983 
Total fair value of net assets acquired   1,015,780
Goodwill  $8,995,499 

  

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 which is being amortized over 6 years. The carrying value of brand name is not being amortized but is reviewed quarterly and formally evaluated at year end. The excess of the purchase price above the net assets acquired was recorded as goodwill which is reviewed quarterly and formally evaluated at year end.

 

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 is payable in monthly installments to $49,275 until maturity on December 31, 2024. The Company assumed the Loan Agreement in connection with the acquisition.

 

Supplemental Unaudited Pro Forma Financial and Other Information

 

There is no pro forma financial information for the six months ended October 31, 2022 because all acquisitions had closed prior to the beginning of the reporting period. The following table presents pro forma results as if our acquisition of Teal had occurred on May 1, 2021:

                               
 

Three months ended October 31, 2021

 

Six months ended October 31, 2021

   Red Cat  Teal  Consolidated  Red Cat  Teal  Consolidated
Revenues  $1,863,239   $104,016   $1,967,255   $3,259,990   $416,063   $3,676,053 
                               
Net Loss  $(2,740,601)  $(301,783)  $(3,042,384)  $(4,298,373)  $(1,467,770)  $(5,766,143)



The acquisition of Skypersonic was completed on May 7, 2021 and its activities during the period from May 1, 2021 to May 7, 2021 were immaterial to the consolidated pro forma results.

 

The unaudited pro forma financial information has been compiled in a manner consistent with the Company's accounting policies, and includes transaction costs, amortization of the acquired intangible assets, and other expenses directly related to each respective acquisition.  The unaudited pro forma financial information is based on estimates and assumptions which the Company believes are reasonable and are not necessarily indicative of the results that would have been realized had the acquisitions closed on the dates indicated in the tables, nor are they indicative of results of operations that may occur in the future.

 

 9 

 

Other information related to the Company’s acquisitions include:

 

  The purchase price allocation has been finalized for each acquisition based on the report from the valuation services firm engaged to assist in the identification and valuation of intangible assets acquired.

 

  The fair value of shares issued by the Company as part of the consideration paid is normally based on the volume weighted average price of the Company’s common stock for the twenty days prior to the closing of the transaction.  For accounting purposes, the shares issued are valued based on the closing stock price on the date that the transaction closes.

 

  Goodwill for Rotor Riot relates to its strong social media presence including more than 200,000 YouTube subscribers. Goodwill for Fat Shark is attributable to its relationship with manufacturing sources in China and the potential to integrate its goggle technologies with the Teal drone.  Goodwill for Skypersonic relates to the future customers expected to leverage its “Fly Anywhere” technologies in a wide range of commercial environments.  Goodwill for Teal is ascribed to its existing relationship with several U.S. government agencies including its classification as an approved vendor.

 

  The Company expects that the Goodwill recognized in each transaction will be deductible for tax purposes.  The Company has reported net losses since its inception and is presently unable to determine when and if the tax benefit of this deduction will be realized.

 

 

Note 2 – Summary of Significant Accounting Policies

 

Basis of Accounting – The financial statements and accompanying notes are prepared in accordance with generally accepted accounting principles in the United States (“GAAP”). Certain prior period amounts have been restated to conform to the current year presentation.

 

Principles of Consolidation – Our consolidated financial statements include the accounts of our wholly owned operating subsidiaries, which consist of Teal Drones, Fat Shark, Rotor Riot, and Skypersonic. Intercompany transactions and balances have been eliminated.

 

Use of Estimates – The preparation of financial statements in accordance with GAAP requires management to make estimates and assumptions that affect the reported amounts of assets and liabilities, the disclosure of contingent assets and liabilities at the date of the financial statements, and the reported amounts of revenue and expenses during the reporting period. Actual results could differ from those estimates. Significant estimates reflected in these financial statements include those used to (i) determine stock-based compensation, (ii) complete purchase price accounting for acquisitions, and (iii) accounting for derivatives.

  

Cash and Cash Equivalents – At October 31, 2022, we had cash of $1,582,751 in multiple commercial banks and financial services companies. We have not experienced any loss on these cash balances and believe they are not exposed to any significant credit risk.

 

Marketable Securities – Our marketable securities have been classified and accounted for as available-for-sale securities. These securities are primarily invested in corporate bonds and are readily saleable, and therefore, we have classified them as short term. Our available-for-sale securities are carried at fair value with any unrealized gains and losses reported as a component of comprehensive income (loss). Once realized, any gains or losses are recognized in the statement of operations.

 

We have elected to present interest income receivable separately from marketable securities on our consolidated balance sheets. Accrued interest receivable was $312,931 and $385,730 as of October 31, 2022 and April 30, 2022, respectively, and was included in other current assets. We did not write off any accrued interest receivable during the six months ended October 31, 2022 and 2021.

 

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.

  

 10 

 

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 an adjustment is determined.

 

We perform an impairment test at the end of each fiscal year, or more frequently if indications of impairment arise. We have two business segments and evaluate goodwill for impairment based on an evaluation of the fair value of each business segment individually.

 

Property and equipmentProperty 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.

 

LeasesEffective August 1, 2021, the Company adopted Accounting Standards Codification (ASC) 842 titled “Leases” which requires the recognition of assets and liabilities associated with lease agreements. The Company adopted ASC 842 on a modified retrospective transition basis which means that it did not restate financial information for any periods prior to August 1, 2021. Upon adoption, the Company recognized a lease liability obligation of $796,976 and a right-of-use asset for the same amount.

  

The Company determines if a contract is a lease or contains a lease at inception.  Operating lease liabilities are measured, on each reporting date, based on the present value of the future minimum lease payments over the remaining lease term.  The Company's leases do not provide an implicit rate. Therefore, the Company uses an effective discount rate of 12% based on its last debt financing. Operating lease assets are measured by adjusting the lease liability for lease incentives, initial direct costs incurred and asset impairments.  Lease expense for minimum lease payments is recognized on a straight-line basis over the lease term with the operating lease asset reduced by the amount of the expense. Lease terms may include options to extend or terminate a lease when they are reasonably certain to occur.

 

Fair Values, Inputs and Valuation Techniques for Financial Assets and Liabilities, and Related Disclosures – The fair value measurements and disclosure guidance defines fair value and establishes a framework for measuring fair value. Fair value is defined as the price that would be received to sell an asset or paid to transfer a liability (an exit price) in an orderly transaction between market participants at the measurement date. In accordance with this guidance, the Company has categorized its recurring basis financial assets and liabilities into a three-level fair value hierarchy based on the priority of the inputs to the valuation technique.

  

The fair value hierarchy gives the highest priority to quoted prices in active markets for identical assets or liabilities (Level 1) and the lowest priority to unobservable inputs (Level 3). The inputs used to measure fair value may fall into different levels of the fair value hierarchy. In such cases, the level in the fair value hierarchy within which the fair value measurement in its entirety falls has been determined based on the lowest level input that is significant to the fair value measurement in its entirety. The Company's assessment of the significance of a particular input to the fair value measurement in its entirety requires judgment and considers factors specific to the asset or liability.

 

The guidance establishes three levels of the fair value hierarchy as follows:

 

Level 1: Inputs are unadjusted, quoted prices in active markets for identical assets or liabilities at the measurement date;

Level 2: Inputs are observable, unadjusted quoted prices in active markets for similar assets or liabilities, unadjusted quoted prices for identical or similar assets or liabilities in markets that are not active, or other inputs that are observable or can be corroborated by observable market data for substantially the full term of the related assets or liabilities; and

Level 3: Unobservable inputs that are significant to the measurement of the fair value of the assets or liabilities that are supported by little or no market data.

 11 

 

  

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 $123,308 and $437,930 at October 31, 2022 and April 30, 2022, respectively.

 

Research and Development – Research and development expenses include payroll, employee benefits, and other headcount-related expenses associated with product development. Research and development expenses also include third-party development and programming costs, as well as a proportionate share of overhead costs such as rent. Costs related to software development are included in research and development expense until technological feasibility is reached, which for our software products, is generally shortly before the products are released to production. Once technological feasibility is reached, such costs are capitalized and amortized as a cost of revenue over the estimated lives of the products.

 

Income Taxes – Deferred taxes are provided on the liability method; whereby deferred tax assets are recognized for deductible temporary differences and deferred tax liabilities are recognized for taxable temporary differences. Temporary differences are the differences between the reported amounts of assets and liabilities and their tax bases. Deferred tax assets and liabilities are adjusted for the effects of changes in tax laws and rates on the date of enactment. 

 

Recent Accounting Pronouncements – Management does not believe that recently issued, but not yet effective accounting pronouncements, if adopted, would have a material effect on the accompanying consolidated financial statements.

 

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Foreign CurrencyThe 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 six months ended October 31, 2022 and October 31, 2021, comprehensive loss was $218,133 higher and $1,591 lower than net loss, respectively, related to unrealized losses on available-for-sale securities totaling $217,229 and $0, respectively, as well as by foreign currency translation adjustments of negative $904 and positive $1,591.

 

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.

  

Basic and Diluted Net Loss per Share – Basic and diluted net loss per share has been calculated by dividing net loss by the weighted average number of shares of common stock outstanding during the period. Common stock equivalents were excluded from the computation of diluted net loss per share of common stock because they were anti-dilutive. The conversion or exercise of these common stock equivalents would dilute earnings per share if we become profitable in the future.

 

Outstanding securities not included in the computation of diluted net loss per share because their effect would have been anti-dilutive included the following:

 

   October 31, 2022  April 30, 2022
Series B Preferred Stock, as converted   822,230    822,230 
Stock options   3,994,558    3,694,142 
Warrants   1,539,999    1,539,999 
Restricted stock   1,106,514    1,083,675 
Total   7,463,301    7,140,046 

 

 

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.

 

Segment Reporting

 

Since January 2020, we have acquired four separate businesses operating in various aspects of the drone industry. Following the most recent acquisition, the Company focused on integrating and organizing its acquired businesses. These efforts included refining the establishment of Enterprise and Consumer segments to sharpen the Company’s focus on the unique opportunities in each sector of the drone industry. The Enterprise segment, which includes Teal Drones and Skypersonic, is focused on opportunities in the commercial sector, including military. Enterprise is building the infrastructure to manage drone fleets, fly and provide services remotely, and navigate confined industrial interior spaces and dangerous military environments. The Consumer segment, which includes Rotor Riot and Fat Shark, is focused on enthusiasts and hobbyists which are expected to increase as drones become more visible in our daily lives. Effective May 1, 2022, we began to manage our business operations through these business segments. The reportable segments were identified based on how our chief operating decision maker (“CODM”), which is a committee comprised of our Chief Executive Officer (“CEO”), Chief Operating Officer (“COO”) and our Chief Financial Officer (“CFO”), manages our business, makes resource allocation and operating decisions, and evaluates operating performance. See “Note 20 - Segment Reporting”.

 

 

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Note 3 – Marketable Securities

 

The following tables set forth information related to our marketable securities as of October 31, 2022: 

 

I. Cost, unrealized gains or losses, and fair values  

 

   Cost  Unrealized Gains (Losses)  Fair Value
Asset-backed securities  $1,663,414   $(27,702)  $1,635,712 
Corporate bonds   31,330,997    (1,663,821)   29,667,176 
Total  $32,994,411   $(1,691,523)  $31,302,888 

 

II. Contractual Maturities

 

   One Year or Less  One to
Five Years
  Over Five Years  Total
Asset-backed securities  $     $1,635,712   $     $1,635,712 
Corporate bonds   14,785,077    14,577,260    304,839    29,667,176 
Total  $14,785,077   $16,212,972   $304,839   $31,302,888 

  

III. Fair Value Hierarchy

 

   Level 1  Level 2  Level 3  Total
Asset-backed securities  $     $1,635,712   $     $1,635,712 
Corporate bonds         29,667,176          29,667,176 
Total  $     $31,302,888   $     $31,302,888 

 

 

Note 4 – Inventories

 

Inventories consisted of the following:

 

   October 31, 2022  April 30, 2022
Raw materials  $3,221,442   $2,831,713 
Work-in-process   291,870    173,112 
Finished goods   3,046,780    891,045 
Total  $6,560,092   $3,895,870 

  

Inventory purchase orders outstanding totaled approximately $29.3 million. The global supply chain for materials required to produce our drones continues to experience significant disruptions and delays. While we have increased our order lead times and quantities, we retain the right to cancel or modify these orders prior to their shipment.

 

 

Note 5 – Other Current Assets

 

Other current assets included:

 

   October 31, 2022  April 30, 2022
Prepaid inventory  $3,705,853   $1,707,085 
Accrued interest income   312,931    385,730 
Prepaid expenses   434,655    262,069 
Total  $4,453,439   $2,354,884 

 

 

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Note 6 – Due From Related Party

 

In January 2022, the Company determined that an employee had relocated in 2021 but their compensation had not been subject to the income tax withholding required by the new jurisdiction. The amount subject to taxation included $155,624 of cash compensation and $1,413,332 of income associated with the vesting of restricted stock ("Stock Compensation"). In March 2022, the Company entered into a note agreement (the "Note") with the employee in the amount of $510,323, representing the estimated taxes owed by the employee related to the Stock Compensation. Under the terms of the Note, 104,166 shares of common stock with a fair value of $280,832, which had vested during calendar 2021, were withheld by the Company and applied against the Note. The employee agreed not to sell or transfer 110,983 shares of common stock held at the Company's transfer agent until the Note was repaid. In addition, the employee has 20,833 shares of restricted stock vesting monthly in calendar 2022, of which 3,000 shares will be withheld with the fair value of those shares applied against the Note. Any shares issued to the employee in 2022 will be held at the transfer agent until the Note is repaid in full. The Note matures on December 31, 2022. The Company filed amended payroll tax returns on March 16, 2022. In March and April 2022, the Company made payments to the relevant tax authorities totaling $712,646 representing $510,323 owed by the employee, $31,604 owed by the Company, and $170,719 of penalties and interest. The Note was repaid in full in August 2022.

 

 

Note 7 – Intangible Assets

 

Intangible assets relate to acquisitions completed by the Company, including those described in Note 1. Intangible assets were as follows:

 

                      
   October 31, 2022  April 30, 2022
   Gross Value  Accumulated Amortization  Net Value 

Gross

Value

  Accumulated Amortization  Net Value
Proprietary technology  $4,967,000    (422,773)  $4,544,227   $1,098,000   $(219,267)  $878,733 
Non-compete agreements   81,000    (43,166)   37,834    81,000    (29,667)   51,333 
Customer relationships   39,000    (15,320)   23,680    39,000    (12,535)   26,465 
Total finite-lived assets   5,087,000    (481,259)   4,605,741    1,218,000    (261,469)   956,531 
Brand name   3,152,000          3,152,000    1,722,000          1,722,000 
Trademark   20,000          20,000    20,000          20,000 
Total indefinite-lived assets   3,172,000          3,172,000    1,742,000          1,742,000 
Total intangible assets, net  $8,259,000   $(481,259)  $7,777,741   $2,960,000   $(261,469)  $2,698,531 

 

Proprietary technology and non-compete agreements are being amortized over five to six years and three years, respectively. Customer relationships is being amortized over seven years. Goodwill and Brand name are not amortized but evaluated for impairment on a quarterly basis.

 

As of October 31, 2022, expected amortization expense for finite-lived intangible assets for the next five years is as follows:

 

Fiscal Year Ended:   
 2023   $434,738 
 2024    866,805 
 2025    842,471 
 2026    815,271 
 2027    786,679 
 Thereafter    859,777 
 Total   $4,605,741 

  

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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  $1,849,073 
 November 2020   Fat Shark   6,168,260 
 Balance at April 30, 2021       8,017,333 
 May 2021   Skypersonic   2,826,918 
 August 2021   Teal Drones   8,995,499 
 Balance at April 30, 2022 and October 31, 2022      $19,839,750 

  

 

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:

 

   October 31, 2022  April 30, 2022
Equipment and related  $1,003,488   $509,376 
Leasehold improvements   930,986    149,330 
Furniture and fixtures   54,254    42,746 
Accumulated depreciation   (287,907)   (189,762)
Net carrying value  $1,700,821   $511,690 

  

Depreciation expense totaled $91,804 and $5,455 for the six months ended October 31, 2022 and 2021, respectively.

 

 

Note 9 – Operating Leases

 

As of October 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 4.58 years, some of which may include options to extend for up to 5 years. Operating lease expense totaled $201,004 for the six months ended October 31, 2022, including period cost for short-term, cancellable, and variable leases, not included in lease liabilities, of $19,725 for the six months ended October 31, 2022.

 

Leases on which the Company made rent payments during the reporting period included:

 

Location  Monthly Rent  Expiration
South Salt Lake, Utah  $22,000    December 2024 
Orlando, Florida  $4,692    January 2025 
San Juan, Puerto Rico  $2,226    June 2027 
Troy, Michigan  $2,667    May 2022 
Orlando, Florida  $1,690    September 2022 

  

Supplemental information related to operating leases for the six months ended October 31, 2022 was:

 

    
Operating cash paid to settle lease liabilities  $176,887 
Weighted average remaining lease term (in years)   2.83 
Weighted average discount rate   12%

 

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Future lease payments at October 31, 2022 were as follows:

 

Fiscal Year Ended:   
 2023   $197,723 
 2024    403,878 
 2025    304,676 
 2026    76,619 
 2027    79,300 
 Thereafter    6,627 
 Total   $1,068,823 

  

 

Note 10 – Debt Obligations

 

  A. Decathlon Capital

In August 2021, Teal restructured its loan agreement with Decathlon Capital. The principal amount of $1,670,294 bears interest at 10% and is payable in monthly installments of $49,275 through its December 31, 2024 maturity date. The balance outstanding at October 31, 2022 totaled $1,139,516.

  

  B. Pelion Note

In May 2021, Teal entered into a note agreement totaling $350,000 which is payable upon demand. The Note bears interest at the applicable Federal Rate as of the date of the Note which was 0.13% on the date of issuance. Accrued interest totaled $652 at October 31, 2022.

 

  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 $387,500 which was payable in monthly installments of $37,500 with a final payment of $12,500 that was made in July 2022.

 

  D. SBA Loan

In February 2021, Teal received a Small Business Administration Paycheck Protection Program (“SBA PPP”) loan in the amount of $300,910. The loan was unsecured, non-recourse, and accrued interest at one percent annually. The loan was used to fund qualifying payroll, rent and utilities. In February 2022, the principal balance of $300,910 and accrued interest of $3,001 were forgiven.

 

  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 October 31, 2022 included:

 

 Date of Transaction    Purchased Receivables   Payment to Company   Transaction Fees    Withholding Rate    Fully Repaid In
September 2020   $209,050   $185,000   $24,050   17%   May 2021
April 2021   $236,500   $215,000   $21,500   17%   January 2022

    

  F. Corporate Equity

Beginning in October 2021, and amended in January 2022, Teal financed a total of $120,000 of leasehold improvements with Corporate Equity. The loan bears interest at 8.25% annually and requires monthly payments of $3,595 through December 2024. The balance outstanding at October 31, 2022 and April 30, 2022 totaled $84,971 and $102,599 respectively.

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