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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, 2024

 

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   88-0490034
(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, a smaller reporting company, or an emerging growth company. See the definitions of "large accelerated filer," "accelerated filer," "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 15, 2024, there were 74,281,520  shares of the registrant's common stock outstanding.

 

Red Cat Holdings, Inc. 

 

Form 10-Q

For the Quarterly Period Ended January 31, 2024

 

TABLE OF CONTENTS 

 

PART I. FINANCIAL INFORMATION Page
     
Item 1. Financial Statements (unaudited) 3
     
  Consolidated Balance Sheets as of January 31, 2024 and April 30, 2023 3
     
  Consolidated Statements of Operations for the Three and Nine Months Ended January 31, 2024 and 2023 4
     
  Consolidated Statements Stockholders' Equity for the Three and Nine Months Ended January 31, 2024 and 2023 5
     
  Consolidated Statements of Cash Flows for the Nine Months Ended January 31, 2024 and 2023 6
     
  Notes to Consolidated Financial Statements 7
     
Item 2. Management's Discussion and Analysis of Financial Condition and Results of Operations 24
     
Item 3. Quantitative and Qualitative Disclosures about Market Risk 31
     
Item 4. Controls and Procedures 31

 

PART II. OTHER INFORMATION  
     
Item 1. Legal Proceedings 31
     
Item 1A. Risk Factors 31
     
Item 2. Unregistered Sales of Equity Securities, Use of Proceeds, and Issuer Purchases of Equity Securities 31
     
Item 3.   Defaults Upon Senior Securities 32
     
Item 4. Mine Safety Disclosures 32
     
Item 5. Other Information 32
     
Item 6. Exhibits 32
     
SIGNATURES 33

 

 RED CAT HOLDINGS

Consolidated Balance Sheets

(Unaudited) 

       
   January 31,  April 30,
   2024  2023
ASSETS          
Current assets          
Cash  $7,697,335   $3,173,649 
Marketable securities         12,814,038 
Accounts receivable, net   5,091,724    719,862 
Inventory   9,093,270    8,920,573 
Other   2,798,293    1,263,735 
Current assets of discontinued operations   3,261,136    5,283,155 
Total current assets   27,941,758    32,175,012 
           
Goodwill   17,012,832    17,012,832 
Intangible assets, net   6,672,235    7,323,004 
Property and equipment, net   2,477,601    2,650,358 
Other   303,180    303,180 
Operating lease right-of-use assets   453,416    620,307 
Long-term assets of discontinued operations   456,177    108,397 
Total long-term assets   27,375,441    28,018,078 
           
TOTAL ASSETS  $55,317,199   $60,193,090 
           
LIABILITIES AND STOCKHOLDERS' EQUITY          
Current liabilities          
Accounts payable  $2,281,874   $1,392,550 
Accrued expenses   936,625    409,439 
Debt obligations - short term   899,935    922,138 
Customer deposits   52,296    155,986 
Operating lease liabilities   297,435    281,797 
Warrant derivative liability   285,384    588,205 
Current liabilities of discontinued operations   474,439    1,010,501 
Total current liabilities   5,227,988    4,760,616 
           
Operating lease liabilities   194,727    379,466 
Debt obligations - long term         401,569 
Long-term liabilities of discontinued operations   321,771    41,814 
Total long-term liabilities   516,498    822,849 
Commitments and contingencies          
           
Stockholders' equity          
Series B preferred stock - shares authorized 4,300,000; outstanding 4,676 and 986,676   47    9,867 
Common stock - shares authorized 500,000,000; outstanding 74,171,106 and 54,568,065   74,171    54,568 
Additional paid-in capital   121,060,881    109,993,100 
Accumulated deficit   (71,567,007)   (54,586,793)
Accumulated other comprehensive loss   4,621    (861,117)
Total stockholders' equity   49,572,713    54,609,625 
TOTAL LIABILITIES AND STOCKHOLDERS' EQUITY  $55,317,199   $60,193,090 

 

 

See accompanying notes.  

  

 3 

 

RED CAT HOLDINGS

Consolidated Statements Of Operations

(Unaudited)

                     
  

Three months ended

January 31,

 

Nine months ended

January 31,

   2024  2023  2024  2023
Revenues  $5,847,933   $1,667,683   $11,526,930   $3,541,846 
                     
Cost of goods sold   4,746,282    1,764,612    9,050,032    3,432,804 
                     
Gross Margin   1,101,651    (96,929)   2,476,898    109,042 
                     
Operating Expenses                    
Operations   527,447    663,668    1,675,795    3,131,789 
Research and development   2,125,268    1,221,738    5,251,285    2,938,658 
Sales and marketing   883,982    1,015,412    2,546,380    1,986,121 
General and administrative   1,426,531    1,397,667    4,329,760    4,275,385 
Stock based compensation   585,771    788,691    2,693,702    2,790,958 
Total operating expenses   5,548,999    5,087,176    16,496,922    15,122,911 
Operating loss   (4,447,348)   (5,184,105)   (14,020,024)   (15,013,869)
                     
Other (income) expense                    
Change in fair value of derivative liability   (113,819)   (157,575)   (302,821)   (751,397)
Investment loss (income), net   160,340    (65,110)   733,697    (257,244)
Interest expense   15,507    28,667    57,060    96,839 
Other, net   (320,043)   345,836    330,965    657,040 
Other (income) expense   (258,015)   151,818    818,901    (254,762)
                     
Net loss from continuing operations   (4,189,333)   (5,335,923)   (14,838,925)   (14,759,107)
                     
Loss from discontinued operations   (1,299,205)   (330,079)   (2,141,289)   (962,971)
Net loss  $(5,488,538)  $(5,666,002)  $(16,980,214)  $(15,722,078)
                     
Loss per share - basic and diluted                    
Continuing operations  $(0.08)  $(0.09)  $(0.27)  $(0.27)
Discontinued operations   (0.02)   (0.01)   (0.04)   (0.02)
Loss per share - basic and diluted  $(0.10)  $(0.10)  $(0.31)  $(0.29)
                     
Weighted average shares outstanding - basic and diluted   55,688,114    54,294,116    55,409,930    54,050,127 

 

 

See accompanying notes.

 

 4 

 

 

RED CAT HOLDINGS

Consolidated Statements of Stockholders’ Equity

For the three and nine months ended January 31, 2024 and January 31, 2023

(Unaudited)

                                          
   Series B      Additional     Accumulated Other   
   Preferred Stock  Common Stock  Paid-in  Accumulated  Comprehensive  Total
   Shares  Amount  Shares  Amount  Capital  Deficit  Income (Loss)  Equity
Balances, April 30, 2022   986,676   $9,867    53,748,735   $53,749   $106,821,384    (27,499,056)   (1,470,272)  $77,915,672 
                                         
Stock based compensation   —            —            755,471                755,471 
                                         
Vesting of restricted stock units   —            69,707    69    (84,145)               (84,076)
                                         
Unrealized gain on marketable securities   —            —                        133,582    133,582 
                                         
Currency translation adjustments   —            —                        352    352 
                                         
Net loss   —            —                  (3,811,599)         (3,811,599)
                                         
Balances, July 31, 2022   986,676   $9,867    53,818,442   $53,818   $107,492,710    (31,310,655)   (1,336,338)  $74,909,402 
                                         
Stock based compensation   —            —            1,246,796                1,246,796 
                                         
Vesting of restricted stock units   —            411,097    411    (332,794)               (332,383)
                                         
Unrealized loss on marketable securities   —            —                        (350,811)   (350,811)
                                         
Currency translation adjustments   —            —                        (1,256)   (1,256)
                                         
Net loss   —            —                  (6,244,477)         (6,244,477)
                                         
Balances, October 31, 2022   986,676   $9,867    54,229,539   $54,229   $108,406,712    (37,555,132)   (1,688,405)  $69,227,271 
                                         
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 
                                         
Balances, April 30, 2023   986,676   $9,867    54,568,065   $54,568   $109,993,100    (54,586,793)   (861,117)  $54,609,625 
                                         
Stock based compensation   —            —            911,606                911,606 
                                         
Vesting of restricted stock units   —            155,476    155    (8,675)               (8,520)
                                         
Conversion of preferred stock   (982,000)   (9,820)   818,334    818    9,002                   
                                         
Unrealized gain on marketable securities   —            —                        289,389    289,389 
                                         
Currency translation adjustments   —            —                        1,646    1,646 
                                         
Net loss   —            —                  (5,810,348)         (5,810,348)
                                         
Balances, July 31, 2023   4,676   $47    55,541,875   $55,541   $110,905,033    (60,397,141)   (570,082)  $49,993,398 
                                         
Stock based compensation   —            —            1,196,325                1,196,325 
                                         
Vesting of restricted stock units   —            54,786    55    (7,826)               (7,771)
                                         
Issuance of common stock through ATM facility, net   —            53,235    53    9,159                9,212 
                                         
Unrealized gain on marketable securities   —            —                        363,663    363,663 
                                         
Currency translation adjustments   —            —                        1,376    1,376 
                                         
Net loss   —            —                  (5,681,328)         (5,681,328)
                                         
Balances, October 31, 2023   4,676   $47    55,649,896   $55,649   $112,102,691    (66,078,469)   (205,043)  $45,874,875 
                                         
Stock based compensation   —            —            585,771                585,771 
                                         
Vesting of restricted stock units   —            118,210    119    (7,433)               (7,314)
                                         
Exercise of stock options   —            3,000    3    2,652                2,655 
                                         
Public offering, net of $804,400 of issuance costs   —            18,400,000    18,400    8,377,200                8,395,600 
                                         
Unrealized gain on marketable securities   —            —                        211,113    211,113 
                                         
Currency translation adjustments   —            —                        (1,449)   (1,449)
                                         
Net loss   —            —                  (5,488,538)         (5,488,538)
                                         
Balances, January 31, 2024   4,676   $47    74,171,106   $74,171   $121,060,881    (71,567,007)  $4,621   $49,572,713 
                                         

 

 

See accompanying notes.

 

 5 

 

RED CAT HOLDINGS

Consolidated Statements of Cash Flows

(Unaudited)

       
   Nine months ended January 31,
   2024  2023
Cash Flows from Operating Activities          
Net loss  $(16,980,214)  $(15,722,078)
Net loss from discontinued operations   (2,141,289)   (962,971)
Net loss from continuing operations   (14,838,925)   (14,759,107)
Adjustments to reconcile net loss to net cash from operations:          
Stock based compensation - options   1,955,547    1,308,768 
Stock based compensation - restricted units   738,155    1,482,190 
Amortization of intangible assets   650,769    437,157 
Realized loss from sale of marketable securities   851,986    106,225 
Depreciation   357,289    169,748 
Change in fair value of derivative   (302,821)   (751,397)
Changes in operating assets and liabilities          
Accounts receivable   (4,371,862)   (1,623,146)
Inventory   (172,697)   (3,243,110)
Other   (1,534,558)   (126,947)
Operating lease right-of-use assets and liabilities   (2,210)   25,786 
Customer deposits   (103,690)   (225,741)
Accounts payable   889,324    1,008,430 
Accrued expenses   528,759    (615,006)
Net cash used in operating activities of continuing operations   (15,354,934)   (16,806,150)
           
Cash Flows from Investing Activities          
Purchases of property and equipment   (184,532)   (1,735,882)
Proceeds from sale of marketable securities   12,826,217    24,282,117 
Investment in SAFE agreement         (250,000)
Net cash provided by investing activities of continuing operations   12,641,685    22,296,235 
           
Cash Flows from Financing Activities          
Proceeds from issuance of common stock:          
Public offering, net   8,395,600       
ATM facility, net   9,212       
Payments under debt obligations   (423,772)   (471,923)
Payments of taxes related to equity transactions   (23,604)   (594,454)
Exercise of stock options   2,655       
Proceeds from related party obligations         13,404 
Payments under related party obligations         (40,057)
Net cash provided by (used in) financing activities of continuing operations   7,960,091    (1,093,030)
           
Discontinued operations          
Operating activities   (781,482)   (4,588,708)
Investing activities            
Financing activities   98,441       
Net cash used in discontinued operations   (683,041)   (4,588,708)
           
Net increase (decrease) in Cash   4,563,801    (191,653)
Cash, beginning of period   3,260,305    4,084,815 
Cash, end of period   7,824,106    3,893,162 
Less: Cash of discontinued operations   (126,771)   (84,058)
Cash of continuing operations, end of period   7,697,335    3,809,104 
           
Cash paid for interest   57,963    97,005 
Cash paid for income taxes            
           
Non-cash transactions          
Unrealized gain on marketable securities  $864,165   $328,006 
Conversion of preferred stock into common stock  $9,820   $   
Shares withheld as payment of note receivable  $     $18,449 
Taxes related to net share settlement of equity awards  $     $11,682 

 

See accompanying notes. 

   

 6 

 

 

RED CAT HOLDINGS, INC.

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS

(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, 2023 of Red Cat Holdings, Inc. (the "Company" or “Red Cat”), filed with the Securities and Exchange Commission ("SEC") on July 27, 2023.


 

 

Note 1 – The Business

 

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 operating subsidiaries. Beginning in January 2020, the Company expanded the scope of its drone products and services through four acquisitions, including: 

 

  A. In January 2020, the Company acquired Rotor Riot, a provider of First Person View (“FPV”) drones and equipment, primarily to consumers. The purchase price was $1,995,114.

 

  B. In November 2020, the Company acquired Fat Shark Holdings (“Fat Shark”), a provider of FPV video goggles to the drone industry. The purchase price was $8,354,076.

   

  C. In May 2021, the Company acquired Skypersonic which provides hardware and software solutions that enable drones to complete inspection services in locations where GPS is either denied or not available, yet still record and transmit data even while being operated from thousands of miles away. The purchase price was $2,791,012.

 

  D. In August 2021, the Company acquired Teal Drones (“Teal”), a leader in commercial and government Unmanned Aerial Vehicles (“UAV”) technology. The purchase price was $10,011,279.

 

Following the Teal acquisition in August 2021, we concentrated on integrating and organizing these businesses. Effective May 1, 2022, we established the Enterprise segment (“Enterprise”) and the Consumer segment (“Consumer”) to focus on the unique opportunities in each sector. Enterprise's initial strategy was to provide UAV's to commercial enterprises, and the military, to navigate dangerous military environments and confined industrial and commercial interior spaces. Subsequently, Enterprise narrowed its near-term attention on the military and other government agencies. Skypersonic's technology has been redirected to military applications and its operations consolidated into Teal. The Consumer segment, which includes Fat Shark and Rotor Riot, caters to hobbyists, drone racers, and enthusiasts. The reportable segments were established based on how our chief operating decision maker (“CODM”), which is a committee comprised of our Chief Executive Officer (“CEO”), Chief Technology Officer (“CTO”) and our Chief Financial Officer (“CFO”), manages our business, makes resource allocation and operating decisions, and evaluates operating performance. See “Note 21 - Segment Reporting”.

 

On December 11, 2023, the Company completed a firm commitment underwritten public offering with ThinkEquity of 18,400,000 shares of common stock which generated gross proceeds of $9,200,000 and net proceeds of approximately $8,400,000. 

 

On February 16, 2024 , we closed the sale of our Consumer segment to Unusual Machines, Inc. (or “Unusual Machines” or “UM”). The sale reflects the Company's decision to focus its efforts and capital on defense where it believes that there are more opportunities to create long term shareholder value. See Note 3 and Note 23.

  

 

 7 

 

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 ConsolidationOur consolidated financial statements include the accounts of our wholly owned subsidiaries which include Teal, Skypersonic, Rotor Riot, and Fat Shark.  Intercompany transactions and balances have been eliminated.

 

The Consumer segment businesses are characterized as discontinued operations in these financial statements.  The assets and liabilities of these entities have been presented separately in the Consolidated Balance Sheet as discontinued operations.  Similarly, the operating results and cash flows of discontinued operations are separately stated in those respective financial statements.

 

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, (iv) reserves and allowances related to accounts receivable and inventory, and (v) the evaluation of long-term assets, including goodwill, for impairment.

  

Cash and Cash Equivalents – At January 31, 2024, we had cash of $7,697,335 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 $0 and $151,671 as of January 31, 2024 and April 30, 2023, respectively, and was included in other current assets. We did not write off any accrued interest income during the nine months ended January 31, 2024 and 2023.

 

Accounts Receivable, netAccounts 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, 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, direct labor, indirect  overhead, as well as in-bound freight. At each balance sheet date, the Company evaluates the net realizable value of its inventory using various reference measures including current product selling prices and recent customer demand, as well as evaluating for excess quantities and obsolescence.

 

Goodwill and Long-lived Assets – Goodwill represents the future economic benefit arising from other assets acquired in an acquisition that are not individually identified and separately recognized. We test goodwill for impairment in accordance with the provisions of ASC 350, Intangibles – Goodwill and Other, (“ASC 350”). Goodwill is tested for impairment at least annually at the reporting unit level or whenever events or changes in circumstances indicate that goodwill might be impaired. ASC 350 provides that an entity has the option to first assess qualitative factors to determine whether the existence of events or circumstances leads to a determination that it is more likely than not that the fair value of a reporting unit is less than its carrying amount. If, after assessing the totality of events or circumstances, an entity determines it is not more likely than not that the fair value of a reporting unit is less than its carrying amount, then additional impairment testing is not required. However, if an entity concludes otherwise, then it is required to perform an impairment test. The impairment test involves comparing the estimated fair value of a reporting unit with its book value, including goodwill. If the estimated fair value exceeds book value, goodwill is considered not to be impaired. If, however, the fair value of the reporting unit is less than book value, then an impairment loss is recognized in an amount equal to the amount that the book value of the reporting unit exceeds its fair value, not to exceed the total amount of goodwill allocated to the reporting unit.

 

 8 

 

The estimate of fair value of a reporting unit is computed using either an income approach, a market approach, or a combination of both. Under the income approach, we utilize the discounted cash flow method to estimate the fair value of a reporting unit. Significant assumptions inherent in estimating the fair values include the estimated future cash flows, growth assumptions for future revenues (including gross margin, operating expenses, and capital expenditures), and a rate used to discount estimated future cash flow projections to their present value based on estimated weighted average cost of capital (i.e., the selected discount rate). Our assumptions are based on historical data, supplemented by current and anticipated market conditions, estimated growth rates, and management’s plans. Under the market approach, fair value is derived from metrics of publicly traded companies or historically completed transactions of comparable businesses. The selection of comparable businesses is based on the markets in which the reporting units operate and consider risk profiles, size, geography, and diversity of products and services. 

 

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 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.

 

Property and equipmentProperty and equipment is stated at cost less accumulated depreciation which is calculated 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.

 

LeasesAccounting Standards Codification (ASC) 842 requires the recognition of assets and liabilities associated with lease agreements. 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. 

   

 9 

 

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 these instruments approximates fair value due to their short-term nature.

 

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 issued financial instruments which include embedded features subject to derivative accounting.  Specifically, there are warrants outstanding, issued in connection with a convertible debt financing, which include provisions under which the exercise price is equal to the lesser of (i) $1.50 or (ii) the exercise or conversion price of securities issued in a future, qualified offering.  Embedded derivatives are valued separately from the host instrument and are recognized as liabilities on the Company's balance sheet.  The warrants are valued using a multinomial lattice method that values the derivative liability based on a probability weighted discounted cash flow model. The liability is valued at each reporting date and the change in liability is reflected as a 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 unless otherwise specified in the purchase order. 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 $52,296 and $155,986 at January 31, 2024 and April 30, 2023, 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, materials, and a proportionate share of overhead costs such as rent.

 

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, Skyset, is the local Italian 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 but 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, 2024, comprehensive loss was $865,738 lower than net loss, related to unrealized gains on available-for-sale securities totaling $864,165, and foreign currency translation adjustments of $1,573. During the nine months ended January 31, 2023, comprehensive loss was $328,226 lower than net loss, related to unrealized gains on available-for-sale securities totaling $328,006, and foreign currency translation adjustments of $220.

 10 

 

 

Stock-Based Compensation – Stock options are valued using 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. The fair value of restricted stock is based on our stock price on the date of grant. Compensation cost is recognized 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 include:

 

   January 31, 2024  April 30, 2023
Series B Preferred Stock, as converted   3,896    822,230 
Stock options   6,679,100    4,784,809 
Warrants   1,539,999    1,539,999 
Restricted stock   653,386    781,060 
Total   8,876,381    7,928,098 

 

 

 

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 Teal acquisition in August 2021, we focused on integrating and organizing these businesses. Effective May 1, 2022, we established the Enterprise and Consumer segments to focus on the unique opportunities in each sector. Enterprise's initial strategy was to provide UAV's to commercial enterprises, and the military, to navigate dangerous military environments and confined industrial and commercial interior spaces. Subsequently, Enterprise narrowed its near-term attention on the military and other government agencies. Skypersonic's technology has been redirected to military applications and its operations consolidated into Teal. The Consumer segment, which includes Fat Shark and Rotor Riot, caters to hobbyists, drone racers, and enthusiasts.  The reportable segments were established based on how our CODM manages our business, makes resource allocation and operating decisions, and evaluates operating performance. See “Note 21 - Segment Reporting”.

 

Liquidity and Going Concern – The Company has never been profitable and has incurred net losses related to acquisitions, as well as costs incurred to pursue its long-term growth strategy. During the nine months ended January 31, 2024, the Company incurred a net loss from continuing operations of $14,838,925 and used cash in operating activities of continuing operations of $15,354,934. As of January 31, 2024, working capital for continuing operations totaled $19,927,073. These financial results and our financial position at January 31, 2024 raise substantial doubt about our ability to continue as a going concern. However, the Company has recently taken actions to strengthen its liquidity. On December 11, 2023, we completed a public offering of 18,400,000 shares of common stock which generated net proceeds of approximately $8,400,000 as further described in Note 1 and Note 15. In addition, the Company’s operating plan for the next twelve months has been updated to reflect recent operating improvements.  Revenues have accelerated and are expected to continue growing. The Company’s new manufacturing facility is scaling production and gross margins are projected to increase. Management has concluded that these recent positive developments alleviate any substantial doubt about the Company’s ability to continue its operations, and meet its financial obligations, for twelve months from the date these consolidated financial statements are issued.

 

 

 11 

 

Note 3 – Discontinued Operations – Sale of Consumer Segment

 

On February 16, 2024  , the Company closed the sale of its Consumer segment consisting of Rotor Riot and Fat Shark. Accordingly, the Consumer segment has been classified as Discontinued Operations and reported in accordance with the applicable accounting standards. See Note 23 for additional information regarding the transaction. Set forth below are the results of operations for the Consumer segment for:

                     
  

Three months ended

January 31,

 

Nine months ended

January 31,

   2024  2023  2024  2023
Revenues  $1,100,943   $1,438,961   $4,027,094   $4,164,531 
                     
Cost of goods sold   1,745,771    1,239,420    4,285,087    3,579,679 
                     
Gross Margin   (644,828)   199,541    (257,993)   584,852 
                     
Operating Expenses                    
Operations   288,059    151,502    671,864    484,340 
Research and development   36,379    80,270    113,682    251,034 
Sales and marketing   286,918    192,625    978,435    555,916 
General and administrative   43,024    116,837    96,612    276,321 
Total operating expenses   654,380    541,234    1,860,593    1,567,611 
Operating loss   (1,299,208)   (341,693)   (2,118,586)   (982,759)
                     
Other (income) expense                    
Interest expense               22,856       
Other, net   (3)   (11,614)   (153)   (19,788)
Other (income) expense   (3)   (11,614)   22,703    (19,788)
                     
Net loss from discontinued operations  $(1,299,205)  $(330,079)  $(2,141,289)  $(962,971)

   

 12 

 

Assets and liabilities for the Consumer segment included:

 

   January 31, 2024  April 30, 2023
Current assets          
Cash  $126,771   $86,656 
Accounts receivable, net   1,760    61,107 
Inventory   1,545,667    3,065,954 
Other   1,586,938    2,069,438 
Total current assets   3,261,136    5,283,155 
           
Intangible assets, net   20,000    20,000 
Other   59,426    3,853 
Operating lease right-of-use assets   376,751    84,544 
Total long term assets   456,177    108,397 
           
Current liabilities          
Accounts payable  $156,421   $606,872 
Accrued expenses   116,812    109,480 
Debt obligations - short term   98,441       
Customer deposits   45,791    244,688 
Operating lease liabilities   56,974    49,461 
Total current liabilities   474,439    1,010,501 
           
Long term liabilities - Operating lease liabilities   321,771    41,814 
           
Working capital  $2,786,697   $4,272,654 

 

 

Note 4 – Marketable Securities

 

There were no marketable securities at January 31, 2024.

 

At April 30, 2023, marketable securities consisted solely of corporate bonds and were classified at Level 2 in the Fair Value Hierarchy. Fair value, cost basis, and unrealized losses totaled $12,814,038, $13,678,203, and $864,165 at April 30, 2023, respectively.

 

 

Note 5 – Inventories

 

Inventories consisted of the following:

 

   January 31, 2024  April 30, 2023
Raw materials  $7,235,844   $8,132,196 
Work-in-process   1,666,976    509,381 
Finished goods   190,450    278,996 
Total  $9,093,270   $8,920,573 

  

  

 13 

 

Note 6 – Other Current Assets

 

Other current assets included:

 

   January 31, 2024  April 30, 2023
Prepaid expenses  $1,152,751   $752,564 
Prepaid inventory   970,542    359,500 
Grant receivable   675,000       
Accrued interest income         151,671 
Total  $2,798,293   $1,263,735 

 

   

Note 7 – Due From Related Party

 

In January 2022, the Company determined that a senior executive 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 were withheld with the fair value of those shares applied against the Note. Shares issued to the employee in 2022 were held at the transfer agent until the Note was repaid. The Note matured 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 8 – Intangible Assets

 

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

                      
   January 31, 2024  April 30, 2023
   Gross Value  Accumulated Amortization  Net Value 

Gross

Value

  Accumulated Amortization  Net Value
Proprietary technology  $4,967,000   $(1,468,897)  $3,498,103   $4,967,000   $(841,223)  $4,125,777 
Non-compete agreements   81,000    (75,584)   5,416    81,000    (56,667)   24,333 
Customer relationships   39,000    (22,284)   16,716    39,000    (18,106)   20,894 
Total finite-lived assets   5,087,000    (1,566,765)   3,520,235    5,087,000    (915,996)   4,171,004 
Brand name   3,152,000          3,152,000    3,152,000          3,152,000 
Total indefinite-lived assets   3,152,000          3,152,000    3,152,000          3,152,000 
Total intangible assets, net  $8,239,000   $(1,566,765)  $6,672,235   $8,239,000   $(915,996)  $7,323,004 

 

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

  

 14 

 

As of January 31, 2024, expected amortization expense for finite-lived intangible assets for the next five years is as follows:

 

Fiscal Year Ended:   
 2024   $216,036 
 2025    842,471 
 2026    815,271 
 2027    786,679 
 2028    644,833 
 Thereafter    214,945 
 Total   $3,520,235 

       

Goodwill represents the future economic benefit arising from other assets acquired in an acquisition that are not individually identified and separately recognized. 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 
 May 2021   Skypersonic   2,826,918 
 August 2021   Teal Drones   8,995,499 
 April 2023 - Impairment loss   Skypersonic   (2,826,918)
 Balance at April 30, 2023 and January 31, 2024      $17,012,832 

   

Following the establishment of the Enterprise and Consumer segments, management evaluated the long-term business strategy of each segment. This resulted in the Enterprise segment narrowing its focus on the military and other government agencies. It was determined that Skypersonic's technology would be re-focused for the near term on military applications and consolidated into the operations of Teal. The Company completes a formal evaluation of the carrying value of its intangible assets, including goodwill, at the end of each fiscal year. Based on (i) the operating results for Skypersonic since its acquisition in May 2021, (ii) its consolidation into Teal, (iii) our current expectations of its future business conditions and trends, including its projected revenues, expenses, and cash flows, the Company recognized an impairment charge of $2,826,918 in April 2023.

 

 

Note 9 – 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, 2024  April 30, 2023
Equipment and related  $1,471,096   $1,386,373 
Leasehold improvements   1,548,609    1,473,890 
Furniture and fixtures   157,842    132,752 
Accumulated depreciation   (699,946)   (342,657)
Net carrying value  $2,477,601   $2,650,358 

 

Depreciation expense totaled $357,289 and $169,748 for the nine months ended January 31, 2024 and 2023, respectively.

 

 

Note 10 – Other Long-Term Assets

 

Other long-term assets included:

 

   January 31, 2024  April 30, 2023
SAFE agreement  $250,000   $250,000 
Security deposits   53,180    53,180 
Total  $303,180   $303,180 

  

 15 

 

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 nine months ended January 31, 2024.

 

 

Note 11 – Operating Leases

 

As of January 31, 2024, 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 3.33 years, some of which may include options to extend for up to 5 years. Operating lease expense totaled $260,300 for the nine months ended January 31, 2024, including period cost for short-term, cancellable, and variable leases, not included in lease liabilities, of $3,300 for the nine months ended January 31, 2024.

 

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

 

Location  Monthly Rent  Expiration
South Salt Lake, Utah  $22,667    December 2024 
San Juan, Puerto Rico  $5,647    June 2027 
Grantsville, Utah  $1,000    December 2026 
Troy, Michigan  $550    May 2022 

      

Supplemental information related to operating leases for the nine months ended January 31, 2024 was:

    
Operating cash paid to settle lease liabilities  $259,211 
Weighted average remaining lease term (in years)   2.06 
Weighted average discount rate   12%

 

Future lease payments at January 31, 2024 were as follows:

 

Fiscal Year Ended:   
 2024    90,951 
 2025    273,743 
 2026    92,619 
 2027    91,300 
 2028    6,627 
 Total   $555,240 

   

  

Note 12 – 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”) 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, 2024 and April 30, 2023 totaled $506,852 and $895,709, respectively.

  

  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 $1,222 at January 31, 2024.

 

 16 

 

  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. 

 

  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.  Corporate Equity

Beginning in October 2021, and amended in January 2022, Teal financed a total of $120,000 of leasehold improvements with Corporate Equity, LLC. The loan bears interest at 8.25% annually and requires monthly payments of $3,595 through December 2024. The balance outstanding at January 31, 2024 and April 30, 2023 totaled $37,576 and $66,586 respectively.

  

  F.  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.

 

  G.  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, 2024 and April 30, 2023 totaled $5,507 and $11,412 respectively.

 

  H.  Summary

Outstanding principal payments on debt obligations are due as follows:

 

Fiscal 2024   498,366 
Fiscal 2025   401,569 
Total  $899,935 
Short term – through January 31, 2025  $899,935 
Long term – thereafter  $   

    

  

Note 13 – Due to Related Party

 

BRIT, LLC

 

In January 2020, in connection with the acquisition of Rotor Riot, the Company assumed a line of credit obligation of the seller, BRIT, LLC, totaling $47,853 which bore interest at 6.67% annually. The remaining balance of $37,196 plus accrued interest totaling $292 was paid in October 2022.

 

 

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.

 

 17 

 

At January 31, 2024 and April 30, 2023, we had accumulated deficits of approximately $71,600,000 and $54,600,000, respectively. Deferred tax assets related to the future benefit of these net operating losses for tax purposes totaled approximately $13,246,000 and $10,101,000, 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, 2024 and April 30, 2023.

 

 

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, 2022 is as follows:

 

Description of Shares  Shares Issued
Shares outstanding as of April 30, 2022   53,748,735 
Vesting of restricted stock to employees, net of shares withheld of 273,874 to pay taxes and 9,000 to repay a Note   653,308 
Vesting of restricted stock to Board of Directors   116,507 
Vesting of restricted stock to consultants   9,683 
Shares issued for services   39,832 
Shares outstanding as of April 30, 2023   54,568,065 
Vesting of restricted stock to employees, net of shares withheld of 27,189 to pay taxes   145,623 
Vesting of restricted stock to Board of Directors   181,088 
Vesting of restricted stock to consultants   1,761 
Conversion of preferred stock   818,334 
Issuance of common stock through ATM facilities   53,235 
Issuance of common stock through public offering   18,400,000 
Exercise of stock options   3,000 
Shares outstanding as of January 31, 2024   74,171,106 

 

ATM Facility

 

In August 2023, we entered into a sales agreement (“the 2023 ATM Facility”) with ThinkEquity LLC (“ThinkEquity”), which provides for the sale, in our sole discretion, of shares of our common stock through ThinkEquity, as our sales agent. In accordance with the terms of the ATM Sales Agreement, the Company may offer and sell shares of our common stock, par value $0.001 per share, having an aggregate offering price of up to $4,375,000. The issuance and sale of these shares by us pursuant to the 2023 ATM Facility are deemed “at the market” offerings as defined in Rule 415 under the Securities Act of 1933, as amended (the “Securities Act”), and are registered under the Securities Act. We pay a commission of up to 2.5% of gross sales proceeds of any common stock sold under the 2023 ATM Facility.

 

During the nine months ended January 31, 2024, we sold an aggregate of 53,235 shares of common stock under the 2023 ATM Facility, at an average price of $1.07 per share, for gross proceeds of approximately $57,000 and net proceeds of approximately $55,700, after deducting commissions and other offering expenses payable by us. Additionally, the Company incurred legal fees of approximately $46,000 establishing the 2023 ATM Facility. In December 2023, the Prospectus Supplement dated August 8, 2023 was amended to change the aggregate offering price under the ATM facility to up to $4,375,000.

 

As of January 31, 2024, approximately $4,318,000 of common stock remained available to be sold under the 2023 ATM Facility, subject to certain conditions as specified in the sales agreement.

 

Public Offering

 

In December 2023, the Company entered into an underwriting agreement with ThinkEquity LLC, as representative of the underwriters, pursuant to which the Company agreed to sell to the underwriters in a firm commitment underwritten public offering (the “Offering”) an aggregate of 16,000,000 shares of the Company’s common stock, par value $0.001 per share (the “Common Stock”), at a public offering price of $0.50 per share. The Company also granted the underwriters a 45-day option to purchase up to an additional 2,400,000 shares of Common Stock to cover over-allotments. 

 

 18 

 

The Offering closed on December 11, 2023, resulting in the issuance of 18,400,000 shares of Common Stock which generated gross proceeds of $9,200,000. Net proceeds to the Company from the Offering, after deducting the underwriting discount, the underwriters’ fees and expenses and the Company’s estimated Offering expenses, were approximately $8,400,000. 

 

 

Note 16 – Preferred Stock

 

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. 982,000 shares of Series B Stock were converted into 818,334 shares of common stock in June 2023. Shares outstanding at January 31, 2024 totaled 4,676 which are convertible into 3,896 shares of common stock.

 

 

Note 17 – Warrants

 

The Company issued 5 year warrants to investors 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, 2024
Date of Transaction  Number of Warrants  Initial Fair Value  Number of Warrants  Fair Value
 October 2020     399,998   $267,999    266,666   $87,196 
 January 2021    675,000   $2,870,666    540,000   $198,189 

  

To date, we have received $301,248 related to the exercise of 268,332 warrants.  These exercises eliminated the derivative liability in these warrants, resulting in a decrease of $857,446 in the derivative liability with a corresponding increase in additional paid in capital.

 

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.

 

There have been no issuances or exercises of warrants since April 30, 2022. The key attributes of the 1,539,999 warrants outstanding, which have a weighted average exercise price of $3.38, are as follows:

 

   Weighted-average Remaining Contractual Term (in years) 

 

Aggregate Intrinsic Value 

 April 30, 2022    3.89   $427,533 
 April 30, 2023    2.89   $   
 January 31, 2024    2.13   $   

  

 

Note 18 – Share Based Awards

 

The 2019 Equity Incentive Plan (the "Plan") allows us to incentivize key employees, consultants, and directors with long term compensation awards such as stock options, restricted stock, and restricted stock units (collectively, the "Awards"). The number of shares issuable in connection with Awards under the Plan may not exceed 11,750,000.

 

 19 

 

  A. Options 

 

The range of assumptions used to calculate the fair value of options granted during the nine months ended January 31 was:

 

      2024       2023  
Exercise Price   $ 0.95 1.12     $ 1.06 2.38  
Stock price on date of grant     0.95 1.12       1.06 2.38  
Risk-free interest rate     3.47 4.34%       3.347.52%  
Dividend yield                  
Expected term (years)     6.00 8.25       8.25  
Volatility     242.38 260.22%       253.52513.58%%  

     

A summary of options activity under the Plan since April 30, 2022 was:

 

  Shares   Weighted-Average Exercise Price   Weighted-Average Remaining Contractual Term   Aggregate Intrinsic Value
Outstanding as of April 30, 2022     3,694,142     $ 2.17       8.56        1,407,545   
Granted     1,503,500       1.40                  
Exercised                                  
Forfeited or expired     (412,833     2.67                  
Outstanding as of April 30, 2023     4,784,809     1.88       8.72        74,586   
Granted     2,541,042       1.06                  
Exercised     (3,000     0.89                  
Forfeited or expired     (643,751     2.43                  
Outstanding as of January 31, 2024     6,679,100     1.53       7.86         
Exercisable as of January 31, 2024     3,575,496     $ 1.86       6.31     $     

       

The aggregate intrinsic value of outstanding options represents the excess of the stock price at the indicated date over the exercise price of each option. As of January 31, 2024 and January 31, 2023, there was $1,767,088 and $3,052,603 of unrecognized stock-based compensation expense related to unvested stock options which is expected to be recognized over the weighted average periods of 1.99 and 2.22 years, respectively. 

 

  B. Restricted Stock

 

A summary of restricted stock activity under the Plan since April 30, 2022 was:

 

  Shares  Weighted Average Grant-Date Fair Value Per Share
Unvested and outstanding as of April 30, 2022   1,083,675   $2.59 
Granted   780,884    2.14 
Vested   (1,062,372)   2.42 
Forfeited   (21,127)   2.13 
Unvested and outstanding as of April 30, 2023   781,060    2.44 
Granted   298,643    1.06 
Vested   (355,661)   1.94 
Forfeited   (70,656)   1.25 
Unvested and outstanding as of January 31, 2024   653,386   $2.14 

        

 20 

 

  C. Stock Compensation

 

Stock compensation expense by functional operating expense was:

             
  

Three months ended

January 31,

 

Nine months ended

January 31,

   2024  2023  2024  2023
Operations  $114,425   $181,908   $544,046   $566,218 
Research and development   (106,314)   170,579    168,732    524,874 
Sales and marketing   120,180    120,733    494,392    390,076 
General and administrative   457,480    315,471    1,486,532    1,309,790 
Total  $585,771   $788,691   $2,693,702   $2,790,958 

 

Stock compensation expense pertaining to options totaled $1,955,547 and $1,308,768 for the nine months ended January 31, 2024 and 2023, respectively. Stock compensation expense pertaining to restricted stock units totaled $738,155 and $1,482,190 for the nine months ended January 31, 2024 and 2023, respectively.

 

 

Note 19 – Derivatives

 

The Company has completed financings which included notes and warrants containing embedded features subject to derivative accounting. Both the notes and the warrants included provisions which provided for a reduction in the conversion and exercise prices, respectively, if the Company completed a future qualified offering at a lower price. These provisions represent embedded derivatives which are valued separately from the host instrument (meaning the notes and warrants) and recognized as derivative liabilities on the Company's balance sheet. The Company initially measures these financial instruments at their estimated fair value and recognizes changes in their estimated fair value in results of operations during the period of change. The Company also measures these financial instruments on the date of settlement (meaning when the note is converted, or the warrant is exercised) at their estimated fair value and recognizes changes in their estimated fair value in results of operations. Any discount in the carrying value of the note is fully amortized on the date of settlement and recognized as interest expense. The Company estimated the fair value of these embedded derivatives using a multinomial lattice model. The range of underlying assumptions used in the binomial model to determine the fair value of the derivative warrant liability upon settlement of the derivative liability and as of January 31, 2024 and April 30, 2023 are set forth below. In addition, the Company's stock price on each measurement date was used in the model.

 

    January 31, 2024    April 30, 2023 
Risk-free interest rate    4.735.54%    2.834.51% 
Expected dividend yield            
Expected term (in years)    1.67 2.50    2.42 3.50 
Expected volatility    74.41107.90%    138.49235.23% 

     

As of January 31, 2024, all of the notes had been converted into common stock and 806,666 of the warrants were outstanding. Changes in the derivative liability during the nine months ended January 31, 2024 and the year ended April 30, 2023 were as follows:

 

   January 31, 2024  April 30, 2023
Balance, beginning of period  $588,205   $1,607,497 
Additions            
Eliminated upon conversion of notes/exercise of warrants            
Changes in fair value   (302,821)   (1,019,292)
Balance, end of period  $285,384   $588,205 

    

Changes in fair value primarily relate to changes in the Company’s stock price during the period, with increases in the stock price increasing the liability and decreases in the stock price reducing the liability.

 

 

 21 

 

Note 20 - Related-Party Transactions

 

In January 2022, the Company entered into a note agreement with an employee in the principal amount of $510,323, as further described in Note 7.

 

In February 2024, the Company sold Rotor Riot and Fat Shark to Unusual Machines, as further described in Note 23.

 

Additional related party transactions are disclosed in Note 13.

 

 

Note 21 - Segment Reporting

 

The following table sets forth key operating data and asset categories which are reviewed by our CODM in evaluating the operating performance of each segment:

 

             
   For the nine months ended January 31, 2024
   Enterprise  Consumer  Corporate  Total
Revenues  $11,526,930   $4,027,094   $     $15,554,024 
Cost of goods sold   9,050,032    4,285,087          13,335,119 
Gross margin   2,476,898    (257,993)         2,218,905 
                     
Operating expenses   10,304,246    1,860,593    6,192,676    18,357,515 
Operating loss   (7,827,348)   (2,118,586)   (6,192,676)   (16,138,610)
                     
Other expenses, net   (277,333)   22,703    1,096,234    841,604 
Net loss  $(7,550,015)  $(2,141,289)   (7,288,910)  $(16,980,214