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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 January 31, 2023

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 March 6, 2023, there were 54,453,397 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 Sheets as of January 31, 2023 and April 30, 2022 3
     
  Unaudited Statements of Operations for the Three and Nine Months Ended January 31, 2023 and 2022 4
     
  Unaudited Statements of Changes in Shareholders' Equity for the Three and Nine Months Ended January 31, 2023 and 2022 5
     
  Unaudited Statements of Cash Flows for the Nine Months Ended January 31, 2023 and 2022 7
   
  Notes to Financial Statements 8
     
Item 2. Management's Discussion and Analysis of Financial Condition and Results of Operations 28
     
Item 3. Quantitative and Qualitative Disclosures about Market Risk 34
     
Item 4. Controls and Procedures 34

 

PART II. OTHER INFORMATION  
     
Item 1. Legal Proceedings 35
     
Item 1A. Risk Factors 35
     
Item 2. Unregistered Sales of Equity Securities and Use of Proceeds 35
     
Item 3.   Defaults Upon Senior Securities 35
     
Item 4. Mine Safety Disclosures 35
     
Item 5. Other Information 35
     
Item 6. Exhibits 36
     
SIGNATURES 36

 

 
 

 

RED CAT HOLDINGS

Consolidated Balance Sheets

(Unaudited)

 

   January 31,  April 30,
   2023  2022
ASSETS          
Current assets          
Cash  $3,893,162   $4,084,815 
Marketable securities   20,730,033    44,790,369 
Accounts receivable, net   2,063,872    495,506 
Inventory   9,294,253    3,895,870 
Other   4,546,553    2,354,884 
Due from related party          31,853 
Total current assets   40,527,873    55,653,297 
           
Goodwill   19,839,750    25,138,750 
Intangible assets, net   7,560,374    2,698,531 
Property and equipment, net   2,077,824    511,690 
Other   307,033    57,033 
Operating lease right-of-use assets   779,734    1,019,324 
Total long term assets   30,564,715    29,425,328 
           
TOTAL ASSETS  $71,092,588   $85,078,625 
           
LIABILITIES AND STOCKHOLDERS' EQUITY          
Current liabilities          
Accounts payable  $2,444,962   $1,018,747 
Accrued expenses   392,457    1,084,494 
Debt obligations - short term   908,746    956,897 
Due to related party          40,057 
Customer deposits   219,148    437,930 
Operating lease liabilities   318,805    293,799 
Warrant derivative liability   856,100    1,607,497 
Total current liabilities   5,140,218    5,439,421 
           
Operating lease liabilities   509,468    749,825 
Debt obligations - long term   549,935    973,707 
Total long term liabilities   1,059,403    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 54,385,461 and 53,748,735   54,385    53,749 
Additional paid-in capital   109,191,895    106,821,384 
Accumulated deficit   (43,221,134)   (27,499,056)
Accumulated other comprehensive income   (1,142,046)   (1,470,272)
Total stockholders' equity   64,892,967    77,915,672 
TOTAL LIABILITIES AND STOCKHOLDERS' EQUITY  $71,092,588   $85,078,625 

 

 

See accompanying notes. 

 

 3 

 

RED CAT HOLDINGS

Consolidated Statements Of Operations

(Unaudited)

             
   Three months ended January 31,  Nine months ended January 31,
   2023  2022  2023  2022
             
Revenues  $3,106,644   $1,856,751   $7,706,377   $5,116,741 
                     
Cost of goods sold   3,004,032    1,516,970    7,012,483    4,521,974 
                     
Gross Margin   102,612    339,781    693,894    594,767 
                     
Operating Expenses                    
Operations   815,170    334,278    3,616,129    794,390 
Research and development   1,302,008    811,288    3,189,692    1,548,983 
Sales and marketing   1,208,037    238,624    2,542,037    524,642 
General and administrative   1,514,504    1,337,183    4,551,706    3,264,071 
Stock based compensation   788,691    782,123    2,790,958    2,066,146 
Total operating expenses   5,628,410    3,503,496    16,690,522    8,198,232 
Operating loss   (5,525,798)   (3,163,715)   (15,996,628)   (7,603,465)
                     
Other Expense (Income)                    
Change in fair value of derivative liability   (157,575)   (1,026,466)   (751,397)   (1,299,527)
Investment income, net   (23,131)   (151,165   (257,244)   (251,708
Interest expense   28,667    46,596    96,839    109,712 
Other, net   292,243    532,137    637,252    701,248 
Other Expense (Income)  $140,204   $(598,898)  $(274,550)  $(740,275)
                     
Net loss  $(5,666,002)  $(2,564,817)  $(15,722,078)  $(6,863,190)
                     
Loss per share - basic and diluted  $(0.10)  $(0.05)  $(0.29)  $(0.15)
                     
Weighted average shares outstanding - basic and diluted   54,294,116    53,592,927    54,050,127    46,604,898 

 

 

See accompanying notes.

 

 4 

 

RED CAT HOLDINGS

Consolidated Statements of Stockholders’ Equity

For the three months ended January 31, 2023 and January 31, 2022

(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, October 31, 2021    —     $       986,676   $9,867    53,684,910   $53,685   $105,577,729   $(20,108,301)  $1,591   $85,534,571 
                                                   
Stock based compensation    —              —             (46,939)   (47)   369,974                  369,927 
                                                   
Currency translation adjustments    —              —              —                           567    567 
                                                   
Net loss    —              —              —                    (2,564,817)          (2,564,817)
                                                   
Balances, January 31, 2022    —     $       986,676   $9,867    53,637,971   $53,638   $105,947,703   $(22,673,118)  $2,158   $83,340,248 
                                                   
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 
                                                   
Stock based compensation    —              —              —             788,691                  788,691 
                                                   
Vesting of restricted stock units    —              —             155,922    156    (3,508)                 (3,352)
                                                   
Unrealized gain on marketable securities    —              —              —                           545,235    545,235 
                                                   
Currency translation adjustments    —              —              —                           1,124    1,124 
                                                   
Net loss    —              —              —                    (5,666,002)          (5,666,002)
                                                   
Balances, January 31, 2023    —     $       986,676   $9,867    54,385,461   $54,385   $109,191,895   $(43,221,134)  $(1,142,046)  $64,892,967 

 

 5 

 

RED CAT HOLDINGS

Consolidated Statements of Stockholders’ Equity

For the nine months ended January 31, 2023 and January 31, 2022

(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    —              —             707,293    707    2,715,305                  2,716,012 
                                                   
Acquisition of Teal Drones    —              —             3,588,272    3,588    10,007,691                  10,011,279 
                                                   
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   (158,704)   (1,587)   (982,000)   (9,820)   2,140,299    2,140    9,267                      
                                                   
Stock based compensation    —              —             259,176    260    1,269,667                  1,269,927 
                                                   
Vesting of restricted stock units    —              —              —             384,023                  384,023 
                                                   
Shares issued for services    —              —             111,667    112    250,288                  250,400 
                                                   
Currency translation adjustments    —              —              —                           2,158    2,158 
                                                   
Net loss    —              —              —                    (6,863,190)          (6,863,190)
                                                   
Balances, January 31, 2022    —     $       986,676   $9,867    53,637,971   $53,638   $105,947,703   $(22,673,118)  $2,158   $83,340,248 
                                                   
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    —              —              —             2,790,958                  2,790,958 
                                                   
Vesting of restricted stock units    —              —             636,726    636    (420,447)                 (419,811)
                                                   
Unrealized gain on marketable securities    —              —              —                           328,006    328,006 
                                                   
Currency translation adjustments    —              —              —                           220    220 
                                                   
Net loss    —              —              —                    (15,722,078)          (15,722,078)
                                                   
Balances, January 31, 2023    —     $       986,676   $9,867    54,385,461   $54,385   $109,191,895   $(43,221,134)  $(1,142,046)  $64,892,967 

 

 

See accompanying notes.

 

 6 

 

RED CAT HOLDINGS

Consolidated Statements of Cash Flows

(Unaudited)

       
   Nine months ended January 31,
   2023  2022
Cash Flows from Operating Activities          
Net loss  $(15,722,078)  $(6,863,190)
Stock based compensation - options   1,308,768    974,019 
Stock based compensation - restricted units   1,482,190    1,092,127 
Common stock issued for services          250,400 
Amortization of intangible assets   437,157    48,978 
Realized loss from sale of marketable securities   106,225        
Depreciation   169,748    17,888 
Change in fair value of derivative   (751,397)   (1,299,527)
Changes in operating assets and liabilities, net of acquisitions          
Accounts receivable   (1,568,366)   (470,765)
Inventory   (5,398,383)   (673,297)
Other   (2,191,669)   (3,492,145)
Operating lease right-of-use assets and liabilities   24,239    10,696 
Customer deposits   (218,782)   227,532 
Accounts payable   1,426,215    (1,673,545)
Accrued expenses   (498,725)   (188,286)
Net cash used in operating activities   (21,394,858)   (12,039,115)
           
Cash Flows from Investing Activities          
Cash acquired through acquisitions          24,866 
Purchases of property and equipment   (1,735,882)   (92,581)
Proceeds from maturities of marketable securities   24,282,117    6,250,322 
Purchases of marketable securities          (54,696,624)
Investment in SAFE agreement   (250,000)       
Net cash provided by (used in) investing activities   22,296,235    (48,514,017)
           
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)   (1,969,193)
Payments under debt obligations   (471,923)   (694,738)
Payments of taxes related to equity transactions   (594,454)   (113,959)
Proceeds from issuance of common stock, net          70,065,203 
Net cash (used in) provided by financing activities   (1,093,030)   67,387,312 
           
Net (decrease) increase in Cash   (191,653)   6,834,180 
Cash, beginning of period   4,084,815    277,347 
Cash, end of period   3,893,162    7,111,527 
           
Cash paid for interest   97,005    27,563 
Cash paid for income taxes              
           
Non-cash transactions          
Fair value of shares issued in acquisitions  $      $12,727,292 
Taxes related to net share settlement of equity awards  $11,682   $522,628 
Unrealized gain on marketable securities  $328,006   $    
Elimination of derivative liability  $      $163,141 
Financed purchases of property and equipment  $      $144,383 
Indirect payment to related party  $      $132,200 
Shares withheld as payment of note receivable  $18,449   $5,100 
Conversion of preferred stock into common stock  $      $11,407 

 

See accompanying notes. 

 

 7 

 

RED CAT HOLDINGS, INC.

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS

January 31, 2023 and 2022

(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 since May 1, 2021 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 

 

 8 

 

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 

 

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.

 

 9 

 

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 

  

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.

 

Supplemental Unaudited Pro Forma Financial and Other Information

 

There is no pro forma financial information for the nine months ended January 31, 2023 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:

          
   Nine months ended January 31, 2022
   Red Cat  Teal  Consolidated
Revenues  $5,116,741   $416,063   $5,532,804 
                
Net Loss   (6,863,190)   (1,467,770)   (8,330,960)

 

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.

 

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.

 

 10 

 

  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, (iii) accounting for derivatives, and (iv) reserves and allowances related to accounts receivable and inventory.

  

Cash and Cash Equivalents – At January 31, 2023, we had cash of $3,893,162 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 accrued interest income separately from marketable securities on our consolidated balance sheets. Accrued interest income was $233,471 and $385,730 as of January 31, 2023 and April 30, 2022, respectively, and was included in other current assets. We did not write off any accrued interest income during the nine months ended January 31, 2023 and 2022.

 

Accounts Receivable, net – Accounts receivable are recorded at the invoiced amount less allowances for doubtful accounts. The Company's estimate of the allowance for doubtful accounts is based on a multitude of factors, including historical bad debt levels for its customer base, past experience with a specific customer, the economic environment, and other factors. Accounts receivable balances are written off against the allowance when it is probable that the receivable will not be collected.

 

Inventories – Inventories, which consist of raw materials, work-in-process, and finished goods, are stated at the lower of cost or net realizable value, and are measured using the first-in, first-out method. Cost components include direct materials and direct labor, as well as in-bound freight. At each balance sheet date, the Company evaluates ending inventories for excess quantities and obsolescence.

 

 11 

 

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. 

  

 12 

 

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 $219,148 and $437,930 at January 31, 2023 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.

 

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.

  

 13 

 

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 nine months ended January 31, 2023 and January 31, 2022, comprehensive loss was $328,226 lower and $2,158 lower than net loss, respectively, related to unrealized gains on available-for-sale securities totaling $328,006 and $0, respectively, as well as by foreign currency translation adjustments of $220 and $2,158.

 

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:

 

   January 31, 2023  April 30, 2022
Series B Preferred Stock, as converted   822,230    822,230 
Stock options   4,165,142    3,694,142 
Warrants   1,539,999    1,539,999 
Restricted stock   984,841    1,083,675 
Total   7,512,212    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 20.

 

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 21 - Segment Reporting”.

 

 

 14 

 

Note 3 – Marketable Securities

 

The following tables set forth information related to our marketable securities as of January 31, 2023: 

 

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

 

   Cost  Unrealized Gains (Losses)  Fair Value
Asset-backed securities  $924,509   $(14,218)  $910,291 
Corporate bonds   20,951,812    (1,132,070)   19,819,742 
Total  $21,876,321   $(1,146,288)  $20,730,033 

 

II. Contractual Maturities

 

   One Year or Less  One to Three Years  Three to Five Years  Total
Asset-backed securities  $      $910,291   $      $910,291 
Corporate bonds   6,494,035    12,744,060    581,647    19,819,742 
Total  $6,494,035   $13,654,351   $581,647   $20,730,033 

  

III. Fair Value Hierarchy

 

   Level 1  Level 2  Level 3  Total
Asset-backed securities  $      $910,291   $      $910,291 
Corporate bonds          19,819,742           19,819,742 
Total  $      $20,730,033   $      $20,730,033 

 

 

Note 4 – Inventories

 

Inventories consisted of the following:

 

   January 31, 2023  April 30, 2022
Raw materials  $5,608,584   $2,831,713 
Work-in-process   192,166    173,112 
Finished goods   3,493,503    891,045 
Total  $9,294,253   $3,895,870 

  

Inventory purchase orders outstanding totaled approximately $26 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:

 

   January 31, 2023  April 30, 2022
Prepaid inventory  $3,308,315   $1,707,085 
Accrued interest income   233,471    385,730 
Prepaid expenses   1,004,767    262,069 
Total  $4,546,553   $2,354,884 

 

  

 15 

 

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:

 

                      
   January 31, 2023  April 30, 2022
   Gross Value  Accumulated Amortization  Net Value 

Gross

Value

  Accumulated Amortization  Net Value
Proprietary technology  $4,967,000   $(631,997)  $4,335,003   $1,098,000   $(219,267)  $878,733 
Non-compete agreements   81,000    (49,916)   31,084    81,000    (29,667)   51,333 
Customer relationships   39,000    (16,713)   22,287    39,000    (12,535)   26,465 
Total finite-lived assets   5,087,000    (698,626)   4,388,374    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   $(698,626)  $7,560,374   $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 January 31, 2023, expected amortization expense for finite-lived intangible assets for the next five years is as follows:

 

Fiscal Year Ended:   
 2023   $217,371 
 2024    866,805 
 2025    842,471 
 2026    815,271 
 2027    786,679 
 Thereafter    859,777 
 Total   $4,388,374 

   

 16 

 

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 January 31, 2023      $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:

 

   January 31, 2023  April 30, 2022
Equipment and related  $1,195,675   $509,376 
Leasehold improvements   1,207,357    149,330 
Furniture and fixtures   54,254    42,746 
Accumulated depreciation   (379,462)   (189,762)
Net carrying value  $2,077,824   $511,690 

 

Depreciation expense totaled $169,748 and $17,888 for the nine months ended January 31, 2023 and 2022, respectively.

 

 

Note 9 – Other Long Term Assets

 

Other long term assets included:

 

   January 31, 2023  April 30, 2022
SAFE agreement  $250,000   $    
Security deposits   57,033    57,033 
Total  $307,033   $57,033 

 

In November 2022, the Company entered into a SAFE (Simple Agreement for Future Equity) agreement with Firestorm Labs, Inc. (“Firestorm”) under which it made a payment of $250,000 to Firestorm in exchange for the right to certain shares of Firestorm stock. The SAFE permits the Company to participate in a future equity financing of Firestorm by converting the $250,000 into shares of Preferred Stock of Firestorm. If there is a change in control of Firestorm or a public offering of shares of its stock, then the Company shall have the right to receive cash payments, or shares of stock, whichever has greater value. The Company’s investment in the SAFE agreement has been recorded on the cost method of accounting. The Company plans to evaluate the investment for any indications of impairment in value on a quarterly basis. No factors indicative of impairment were identified during the three months ended January 31, 2023.

 

 

 17 

 

Note 10 – Operating Leases

 

As of January 31, 2023, 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 4.33 years, some of which may include options to extend for up to 5 years. Operating lease expense totaled $296,436 for the nine months ended January 31, 2023, including period cost for short-term, cancellable, and variable leases, not included in lease liabilities, of $21,375 for the nine months ended January 31, 2023.

 

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  $5,775    June 2027 
Troy, Michigan  $2,667    May 2022 
Orlando, Florida  $1,690    September 2022 

   

Supplemental information related to operating leases for the nine months ended January 31, 2023 was:

 

    
Operating cash paid to settle lease liabilities  $271,568 
Weighted average remaining lease term (in years)   2.62 
Weighted average discount rate   12%

 

  

Future lease payments at January 31, 2023 were as follows:

 

Fiscal Year Ended:   
 2023   $99,662 
 2024    403,878 
 2025    304,676 
 2026    76,619 
 2027    79,300 
 Thereafter    6,627 
 Total   $970,762 

   

 

Note 11 – Debt Obligations

 

  A.  Decathlon Capital

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 of $49,275 until maturity on December 31, 2024. The balance outstanding at January 31, 2023 totaled $1,019,409.

  

  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 $767 at January 31, 2023.

 

  C.  Vendor Agreement

In connection with the acquisition of Teal on August 31, 2021, the Company assumed an obligation with a contract manufacturing firm. The assumed balance of $387,500 was repaid in monthly installments of $37,500 and paid in full in July 2022. 

 

 18 

 

  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 January 31, 2023 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 January 31, 2023 and April 30, 2022 totaled $75,890 and $102,599 respectively.

  

  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 $38,758. Repayment of the remaining balance was completed in January 2022.

 

  H.  Ascentium Capital

In September 2021, Teal entered into a financing agreement with Ascentium Capital to fund the purchase of a fixed asset totaling $24,383. Monthly payments of $656 are payable through October 2024. The balance outstanding at January 31, 2023 totaled $13,382.

 

  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 $100,000 and charged a transaction fee of $6,900 was completed in January 2021. A January 2021 agreement under which PayPal advanced $75,444 and charged a transaction fee of $2,444 was completed in August 2021. 

 

  J.  Summary

Outstanding principal payments on debt obligations are due as follows:

 

Fiscal 2023  $484,974 
Fiscal 2024   572,139 
Fiscal 2025   401,568 
Total  $1,458,681 
Short term – through January 31, 2024  $908,746 
Long term – thereafter  $549,935 

  

 

 19 

 

Note 12 – Due to Related Party

 

  A. Founder of Fat Shark

 

In connection with the acquisition of Fat Shark in November 2020, the Company issued a secured promissory note for $1,753,000 to the seller. The note accrued interest at 3% annually and matured in full in November 2023. In May 2021, the Company made an initial payment of $132,200 by directing a refund from a vendor based in China to the noteholder who is also based in China. The remaining balance of $1,620,800 plus accrued interest totaling $45,129 was paid in September 2021.

 

  B. BRIT, LLC

 

In January 2020, in connection with the acquisition of Rotor Riot, the Company issued a promissory note for $175,000 to the seller, BRIT, LLC. The note accrued interest at 4.75% annually. In October 2021, the outstanding balance of $85,172 plus accrued interest totaling $12,942 was paid.

 

The Company also assumed a line of credit obligation totaling $47,853 which bears interest at 6.67% annually. The remaining balance of $37,196 plus accrued interest totaling $292 was paid in October 2022.

 

  C. Aerocarve

 

In 2020, the Company received advances totaling $79,000 from Aerocarve which is controlled by the Company's Chief Executive Officer. The parties agreed that the funds would bear interest at 5% annually until repaid. The balance was repaid in full in May 2021.

 

 

Note 13 – Convertible Notes

  

October 2020 Financing

 

In October 2020, the Company closed a private offering of convertible promissory notes (the "2020 Notes") in the aggregate principal amount of $600,000. The 2020 Notes accrued interest at 12% annually, had a two-year term, and were convertible into common stock at the lower of $1.00 or a 25% discount of the price per share of Common Stock offered in a future, qualified offering. The financing also included the issuance of warrants to purchase 399,998 shares of common stock. The Warrants are exercisable for a period of five years at a price equal to the lower of (1) $1.50 per share, or (2) at a price equal to 75% of the price per share of the common stock offered in a future, qualified offering.

  

The Company determined that the provision associated with a potential reduction in the conversion price of the notes and the exercise price of the warrant represented an embedded derivative financial liability. The derivative liability was initially valued at $728,587 using a multinomial lattice model with $460,588 and $267,999 related to the derivative features of the notes and warrants, respectively. In addition, $580,000 of the proceeds were applied as a debt discount to reduce the initial carrying value of the 2020 Notes to zero with the remaining $20,000 applied against transaction fees. The excess of the liability over the net proceeds totaled $148,587 which was recognized as a derivative expense in the fiscal year ended April 30, 2021.

 

As of January 31, 2023, (a) the 2020 Notes were fully converted into common stock and the related derivative liability eliminated, and (b) 266,666 of the warrants were outstanding with a derivative liability of $273,196.

 

January 2021 Financing

 

In January 2021, the Company closed a private offering of convertible promissory notes (the "2021 Notes") in the aggregate principal amount of $500,000. The 2021 Notes accrued interest at 12% annually, had a two-year term, and were convertible into shares of the Company's common stock at the lower of $1.00 or a 25% discount of the price per share of Common Stock offered in a future, qualified offering. The financing also included the issuance of warrants to purchase 675,000 shares of common stock. The Warrants are exercisable for a period of five years at a price equal to the lower of (i) $1.50 per share, or (ii) a 25% discount to the price per share of common stock offered in a future qualified offering.

 

 20 

 

The Company determined that the provision associated with a potential reduction in the conversion price of the notes and the exercise price of the warrant represented an embedded derivative financial liability. The derivative liability was initially valued at $4,981,701 using a multinomial lattice model with $2,111,035 and $2,870,666 related to the derivative features of the notes and warrants, respectively. In addition, $500,000 was applied as a debt discount to reduce the initial carrying value of the 2021 notes to zero. The excess of the liability over the net proceeds totaled $4,481,701 which was recognized as a derivative expense in the fiscal year ended April 30, 2021.

 

As of January 31, 2023, (a) the 2021 Notes were fully converted into common stock and the related derivative liability eliminated, and (b) 540,000 of the warrants were outstanding with a derivative liability of $582,904.

 

 

Note 14 – Income Taxes

 

Our operating subsidiary, Red Cat Propware, Inc., is incorporated and based in Puerto Rico which is a commonwealth of the United States. We are not subject to taxation by the United States as Puerto Rico has its own taxing authority. Since inception, we have incurred net losses in each year of operations. Our current provision for the reporting periods presented in these financial statements consisted of a tax benefit against which we applied a full valuation allowance, resulting in no current provision for income taxes. In addition, there was no deferred provision for any of these reporting periods.

 

At January 31, 2023 and April 30, 2022, we had accumulated deficits of approximately $43,000,000 and $27,500,000, respectively. Deferred tax assets related to the future benefit of these net operating losses for tax purposes totaled approximately $7,955,000 and $5,087,500, respectively, calculated using the base Puerto Rico corporate tax rate of 18.5%. Currently, we focus on projected future taxable income in evaluating whether it is more likely than not that these deferred assets will be realized. Based on the fact that we have not generated an operating profit since inception, we have applied a full valuation allowance against our deferred tax assets at January 31, 2023 and April 30, 2022.

 

 

Note 15 – Common Stock

 

Our common stock has a par value of $0.001 per share. We are authorized to issue 500,000,000 shares of common stock. Each share of common stock is entitled to one vote. A summary of shares of common stock issued by the Company since April 30, 2021 is as follows:

 

Description of Shares  Shares Issued
Shares outstanding as of April 30, 2021   29,431,264 
Conversion of Series A preferred stock   1,321,996 
Conversion of Series B preferred stock   818,333 
Exercise of warrants   66,666 
Acquisition of Skypersonic on May 7, 2021, see Note 1   707,293 
Acquisition of Teal Drones on August 31, 2021, see Note 1   3,588,272 
Public offerings which generated gross proceeds of $76 million and net proceeds of approximately $70.1 million   17,333,334 
Exercise of stock options   89,107 
Vesting of restricted stock units to employees, net of shares withheld of 225,869 to pay taxes and 92,812 to repay a Note   225,637 
Vesting of restricted stock units to Board of Directors   48,124 
Vesting of restricted stock units to consultants   7,042 
Shares issued for services   111,667 
Shares outstanding as of April 30, 2022   53,748,735 
Vesting of restricted stock units to employees, net of shares withheld of 542,151 to pay taxes and 9,000 to repay a Note   534,318 
Vesting of restricted stock units to Board of Directors   95,366 
Vesting of restricted stock units to consultants   7,042 
Shares outstanding as of January 31, 2023   54,385,461 

 

 

 21 

 

Note 16 – Preferred Stock

 

Series A Preferred Stock outstanding totaled 158,704 at April 30, 2021, and were converted into 1,321,996 shares of common stock on August 10, 2021.

 

Series B Preferred Stock (“Series B Stock”) is convertible into common stock at a ratio of 0.8334 shares of common stock for each share of Series B Stock held and votes together with the common stock on an as-if-converted basis. Shares outstanding at January 31, 2023 totaled 986,676 which are convertible into 822,230 shares of common stock.

 

 

Note 17 – Warrants

 

The company issued five-year warrants in connection with two convertible note financings. The warrants have an initial exercise price of $1.50 which may be reduced to a 25% discount of the price per share of Common Stock offered in a future qualified offering. The warrants were valued using the multinominal lattice model and are considered derivative liabilities under ASC 815-40. The value of the warrants was included in the determination of the initial accounting for each financing including the calculation of the derivative liability and related expense.

 

A summary of the warrants issued and their fair values were:

 

   Upon Issuance  Outstanding at January 31, 2022
Date of Transaction  Number of Warrants  Initial Fair Value  Number of Warrants  Fair Value
 October 2020     399,998   $267,999    266,666   $273,196 
 January 2021    675,000   $2,870,666    540,000   $582,904 

  

In March and April 2021, we received $201,249 related to the exercise of 201,666 of the warrants. Since these exercises resulted in the elimination of the derivative liability in the warrants, the derivative liability was reduced by $694,305 with a corresponding increase in additional paid in capital. In June 2021, we received $99,999 in connection with the exercise of 66,666 warrants which resulted in the elimination of $163,141 of the derivative liability in the warrants.

 

In May 2021, the Company issued warrants to purchase 200,000 shares of common stock to the placement agent of its common stock offering. The warrants have a five-year term and an exercise price of $5.00.

   

In July 2021, the Company issued warrants to purchase 533,333 shares of common stock to the placement agent of its common stock offering. The warrants have a five-year term and an exercise price of $5.625.

 

The following table presents the range of assumptions used to estimate the fair values of warrants granted during the nine months ended January 31:

 

    2023    2022 
Risk-free interest rate          0.790.85% 
Expected dividend yield            
Expected term (in years)    —      5.00 
Expected volatility         222.45223.17% 

   

 22 

 

The following table summarizes the changes in warrants outstanding since April 30, 2021.

 

   

 

Number of Shares 

 

 

Weighted-average Exercise Price per Share

 

 Weighted-average Remaining Contractual Term

(in years) 

 

 

Aggregate Intrinsic Value 

  Balance as of April 30, 2021 873,332     1.50        4.62     $ 2,218,263  
  Granted     733,333      $ 5.45                  
  Exercised     (66,666 )     1.50                  
  Outstanding as of April 30, 2022 1,539,999     3.38