10-Q: Quarterly report pursuant to Section 13 or 15(d)
Published on December 15, 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 | ||
|
For
the |
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.) |
|
|
|
|
| (Address of principal executive offices) | (Zip Code) |
(
(Registrant's telephone number, including area code)
__________________________________
(Former Name, Former Address and Former Fiscal Year, if Changed Since Last Report)
Securities registered pursuant to Section 12(b) of the Act:
|
Title of Each Class |
Trading Symbol(s) |
Name of each exchange on which registered |
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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 December 15, 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 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 | $ | $ | ||||||
| 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 October 31, | Six months ended October 31, | |||||||||||||||
| 2022 | 2021 | 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) | $ | (527,857 | ) | $ | (19,537 | ) | $ | (414,754 | ) | $ | (141,377 | ) | ||||
| 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 | Additional | Accumulated Other | |||||||||||||||||||||||||||||||||||||
| Preferred Stock | Preferred Stock | Common Stock | Paid-in | Accumulated | Comprehensive | Total | ||||||||||||||||||||||||||||||||||
| Shares | Amount | Shares | Amount | Shares | Amount | Capital | Deficit | Income (Loss) | Equity | |||||||||||||||||||||||||||||||
| Balances, April 30, 2021 | $ | $ | $ | $ | $ | ( |
) | $ | $ | |||||||||||||||||||||||||||||||
| Acquisition of Skypersonic | — | — | ||||||||||||||||||||||||||||||||||||||
| 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 | $ | $ | $ | $ | $ | ( |
) | $ | $ | |||||||||||||||||||||||||||||||
| Acquisition of Skypersonic | — | — | ||||||||||||||||||||||||||||||||||||||
| Acquisition of Teal Drones | — | — | ||||||||||||||||||||||||||||||||||||||
| Conversion of preferred stock | ( |
) | ( |
) | — | |||||||||||||||||||||||||||||||||||
| Stock based compensation | — | — | ||||||||||||||||||||||||||||||||||||||
| Shares issued for services | — | — | ||||||||||||||||||||||||||||||||||||||
| Currency translation adjustments | — | — | — | |||||||||||||||||||||||||||||||||||||
| Net loss | — | — | — | ( |
) | ( |
) | |||||||||||||||||||||||||||||||||
| Balances, October 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 | $ | $ | $ | $ | $ | ( |
) | $ | ( |
) | $ | |||||||||||||||||||||||||||||
| Stock based compensation | — | — | — | |||||||||||||||||||||||||||||||||||||
| Vesting of restricted stock units | — | — | ( |
) | ( |
) | ||||||||||||||||||||||||||||||||||
| Unrealized loss on marketable securities | — | — | — | ( |
) | ( |
) | |||||||||||||||||||||||||||||||||
| Currency translation adjustments | — | — | — | ( |
) | ( |
) | |||||||||||||||||||||||||||||||||
| Net loss | — | — | — | ( |
) | ( |
) | |||||||||||||||||||||||||||||||||
| Balances, October 31, 2022 | $ | $ | $ | $ | $ | ( |
) | $ | ( |
) | $ | |||||||||||||||||||||||||||||
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 | $ | ( |
) | $ | ( |
) | ||
| 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 (used in) investing activities | ( |
) | ||||||
| Cash Flows from Financing Activities | ||||||||
| Proceeds from exercise of warrants | ||||||||
| Proceeds from related party obligations | 13,404 | — | ||||||
| Payments under related party obligations | ( |
) | ( |
) | ||||
| Payments under debt obligations | ( |
) | ( |
) | ||||
| Payments of taxes related to equity transactions | ( |
) | ||||||
| Proceeds from issuance of common stock, net | ||||||||
| Net cash (used in) provided by financing activities | ( |
) | ||||||
| Net (decrease) increase in Cash | ( |
) | ||||||
| Cash, beginning of period | ||||||||
| Cash, end of period | ||||||||
| Cash paid for interest | ||||||||
| Cash paid for income taxes | ||||||||
| Non-cash transactions | ||||||||
| Fair value of shares issued in acquisitions | $ | $ | ||||||
| Unrealized loss on marketable securities | $ | $ | ||||||
| Elimination of derivative liability | $ | $ | ||||||
| Indirect payment to related party | $ | $ | ||||||
| Shares withheld as payment of note receivable | $ | $ | ||||||
| Conversion of preferred stock into common stock | $ | $ | ||||||
| Taxes related to net share settlement of equity awards | $ | $ | ||||||
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 $
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 |
In
May 2021, the Company acquired all of the outstanding stock of Skypersonic, Inc. (“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 |
The final summary of the purchase price and its related allocation is as follows:
| Total Purchase Price – shares issued | $ | 10,011,279 |
| Assets acquired | ||||
| Cash | ||||
| Accounts receivable | ||||
| Other current assets | ||||
| Other assets | ||||
| Inventory | ||||
| Brand name | ||||
| Proprietary technology | ||||
| Total assets acquired | ||||
| Liabilities assumed | ||||
| Accounts payable and accrued expenses | ||||
| Customer deposits | ||||
| Notes payable | ||||
| Total liabilities assumed | ||||
| Total fair value of net assets acquired | ||||
| Goodwill | $ | |||
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 $
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 | $ | $ | $ | $ | $ | $ | ||||||||||||||||||
| Net Loss | $ | ( |
) | $ | ( |
) | $ | ( |
) | $ | ( |
) | $ | ( |
) | $ | ( |
) | ||||||
The acquisition of Skypersonic was completed on May 7, 2021 and its activities during the period from May 1, 2021 to May 7, 2021 were immaterial to the consolidated pro forma results.
The unaudited pro forma financial information has been compiled in a manner consistent with the Company's accounting policies, and includes transaction costs, amortization of the acquired intangible assets, and other expenses directly related to each respective acquisition. The unaudited pro forma financial information is based on estimates and assumptions which the Company believes are reasonable and are not necessarily indicative of the results that would have been realized had the acquisitions closed on the dates indicated in the tables, nor are they indicative of results of operations that may occur in the future.
| 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 equipment – Property and equipment is stated at cost less accumulated depreciation and depreciated using the straight-line method over the estimated useful life of the asset. The estimated useful lives of our property and equipment are generally: (i) furniture and fixtures - seven years, (ii) equipment and related - two to five years, and (iii) leasehold improvements - 15 years.
Leases – Effective August 1, 2021, the Company adopted Accounting Standards Codification (ASC) 842 titled “Leases” which requires the recognition of assets and liabilities associated with lease agreements. The Company adopted ASC 842 on a modified retrospective transition basis which means that it did not restate financial information for any periods prior to August 1, 2021. Upon adoption, the Company recognized a lease liability obligation of $796,976 and a right-of-use asset for the same amount.
The Company determines if a contract is a lease or contains a lease at inception. Operating lease liabilities are measured, on each reporting date, based on the present value of the future minimum lease payments over the remaining lease term. The Company's leases do not provide an implicit rate. Therefore, the Company uses an effective discount rate of 12% based on its last debt financing. Operating lease assets are measured by adjusting the lease liability for lease incentives, initial direct costs incurred and asset impairments. Lease expense for minimum lease payments is recognized on a straight-line basis over the lease term with the operating lease asset reduced by the amount of the expense. Lease terms may include options to extend or terminate a lease when they are reasonably certain to occur.
Fair Values, Inputs and Valuation Techniques for Financial Assets and Liabilities, and Related Disclosures – The fair value measurements and disclosure guidance defines fair value and establishes a framework for measuring fair value. Fair value is defined as the price that would be received to sell an asset or paid to transfer a liability (an exit price) in an orderly transaction between market participants at the measurement date. In accordance with this guidance, the Company has categorized its recurring basis financial assets and liabilities into a three-level fair value hierarchy based on the priority of the inputs to the valuation technique.
The fair value hierarchy gives the highest priority to quoted prices in active markets for identical assets or liabilities (Level 1) and the lowest priority to unobservable inputs (Level 3). The inputs used to measure fair value may fall into different levels of the fair value hierarchy. In such cases, the level in the fair value hierarchy within which the fair value measurement in its entirety falls has been determined based on the lowest level input that is significant to the fair value measurement in its entirety. The Company's assessment of the significance of a particular input to the fair value measurement in its entirety requires judgment and considers factors specific to the asset or liability.
The guidance establishes three levels of the fair value hierarchy as follows:
Level 1: Inputs are unadjusted, quoted prices in active markets for identical assets or liabilities at the measurement date;
Level 2: Inputs are observable, unadjusted quoted prices in active markets for similar assets or liabilities, unadjusted quoted prices for identical or similar assets or liabilities in markets that are not active, or other inputs that are observable or can be corroborated by observable market data for substantially the full term of the related assets or liabilities; and
Level 3: Unobservable inputs that are significant to the measurement of the fair value of the assets or liabilities that are supported by little or no market data.
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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 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 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.
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 | ||||||||
| 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.
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 | $ | $ | ( |
) | $ | |||||||
| 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:
| October 31, 2022 | April 30, 2022 | |||||||
| Raw materials | $ | $ | ||||||
| Work-in-process | ||||||||
| Finished goods | ||||||||
| Total | $ | $ | ||||||
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 | $ | $ | ||||||
| Accrued interest income | ||||||||
| Prepaid expenses | ||||||||
| Total | $ | $ | ||||||
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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 $
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 | $ | ( |
) | $ | $ | $ | ( |
) | $ | |||||||||||||||
| Non-compete agreements | ( |
) | ( |
) | ||||||||||||||||||||
| Customer relationships | ( |
) | ( |
) | ||||||||||||||||||||
| Total finite-lived assets | ( |
) | ( |
) | ||||||||||||||||||||
| Brand name | ||||||||||||||||||||||||
| Trademark | ||||||||||||||||||||||||
| Total indefinite-lived assets | ||||||||||||||||||||||||
| Total intangible assets, net | $ | $ | ( |
) | $ | $ | $ | ( |
) | $ | ||||||||||||||
Proprietary technology and non-compete agreements are being amortized over five to six years and three years, respectively. Customer relationships is being amortized over seven years. Goodwill and Brand name are not amortized but evaluated for impairment on a quarterly basis.
As of October 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 | ||||||
| Thereafter | ||||||
| Total | $ | |||||
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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 | $ | ||||||
| November 2020 | Fat Shark | |||||||
| Balance at April 30, 2021 | ||||||||
| May 2021 | Skypersonic | |||||||
| August 2021 | Teal Drones | |||||||
| Balance at April 30, 2022 and October 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:
| October 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 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
$
Leases on which the Company made rent payments during the reporting period included:
| Location | Monthly Rent | Expiration | ||||||
| South Salt Lake, Utah | $ | December 2024 | ||||||
| Orlando, Florida | $ | January 2025 | ||||||
| San Juan, Puerto Rico | $ | June 2027 | ||||||
| Troy, Michigan | $ | May 2022 | ||||||
| Orlando, Florida | $ | September 2022 | ||||||
Supplemental information related to operating leases for the six months ended October 31, 2022 was:
| Operating cash paid to settle lease liabilities | $ |
|||
| Weighted average remaining lease term (in years) | ||||
| Weighted average discount rate | ||||
| 16 |
Future lease payments at October 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 |
In
February 2021, Teal received a Small Business Administration Paycheck Protection Program (“SBA PPP”) loan in the amount of $
| E. | Shopify Capital |
Shopify Capital is an affiliate of Shopify, Inc. which provides sales software and services to the Company. The Company processes customer transactions ordered on the e-commerce site for Rotor Riot through Shopify. Shopify Capital has entered into multiple agreements with the Company in which it has "purchased receivables" at a discount. Shopify retains a portion of the Company's daily receipts until the purchased receivables have been paid. The Company recognizes the discount as a transaction fee, in full, in the month in which the agreement is executed. Agreements with activity during the two years ended October 31, 2022 included:
| Date of Transaction | Purchased Receivables | Payment to Company | Transaction Fees | Withholding Rate | Fully Repaid In | |||||
| September 2020 | $ |
$ |
$ |
|
May 2021 | |||||
| April 2021 | $ |
$ |
$ |
|
January 2022 |
| F. | Corporate Equity |
Beginning
in October 2021, and amended in January 2022, Teal financed a total of $
| 17 |
| 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 $