10-Q: Quarterly report pursuant to Section 13 or 15(d)
Published on December 16, 2024
UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
WASHINGTON, D.C. 20549
FORM
(Mark One)
QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934
For the
or
For the transition period from ________ to _________
Commission File Number:
(Exact name of registrant as specified in its charter)
| (State or other jurisdiction of incorporation or organization) | (I.R.S. Employer Identification No.) |
|
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|
|
| (Address of principal executive offices) | (Zip Code) |
(Registrant’s telephone number, including area code)
Not applicable
(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 | ||
| The |
Indicate by check mark whether the registrant (1)
has filed all reports required to be filed by Section 13 or 15(d) of the Securities Exchange Act of 1934 during the preceding 12 months
(or for such shorter period that the registrant was required to file such reports), and (2) has been subject to such filing requirements
for the past 90 days.
Indicate by check mark whether the registrant has
submitted electronically every Interactive Data File required to be submitted pursuant to Rule 405 of Regulation S-T (§ 232.405
of this chapter) during the preceding 12 months (or for such shorter period that the registrant was required to submit such files).
Indicate by check mark whether the registrant is a large accelerated filer, an accelerated filer, a non-accelerated filer, 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 | ☐ |
| ☑ | Smaller reporting company | ||
| Emerging growth company |
If an emerging growth company, indicate by check mark if the registrant has elected not to use the extended transition period for complying with any new or revised financial accounting standards provided pursuant to Section 13(a) of the Exchange Act. ☐
Indicate by check mark whether the registrant is a
shell company (as defined in Rule 12b-2 of the Exchange Act). Yes ☐
As of December 13, 2024 , there were shares of the registrant’s common stock outstanding.
TABLE OF CONTENTS
CAUTIONARY NOTE REGARDING FORWARD-LOOKING STATEMENTS AND INDUSTRY DATA
This Quarterly Report on Form 10-Q contains certain forward-looking statements which are made pursuant to the safe harbor provisions of Section 27A of the Securities Act of 1933, as amended (the “Securities Act”), and Section 21E of the Securities Exchange Act of 1934, as amended (the “Exchange Act”). Any statements in this Quarterly Report on Form 10-Q about our expectations, beliefs, plans, objectives, assumptions or future events or performance are not historical facts and are forward-looking statements. These statements are often, but not always, made through the use of words or phrases such as “may,” “should,” “believes,” “will,” “expects,” “anticipates,” “estimates,” “predicts,” “potential,” “continues,” “intends,” “plans” and “would” or the negative of these terms or other comparable terminology. For example, statements concerning financial condition, possible or assumed future results of operations, growth opportunities, and plans are all forward-looking statements. Our forward-looking statements are based on a series of expectations, assumptions, estimates and projections about our company, are not guarantees of future results or performance and involve substantial risks and uncertainty. They involve known and unknown risks, uncertainties and assumptions that may cause actual results, levels of activity, performance or achievements to differ materially from any results, levels of activity, performance or achievements expressed or implied by any forward-looking statement. We may not actually achieve the plans, intentions or expectations disclosed in these forward-looking statements. Our business and our forward-looking statements involve substantial known and unknown risks and uncertainties, including the risks and uncertainties inherent in our statements regarding:
| • | the market and sales success of our existing and any new products; |
| • | our ability to raise capital when needed and on acceptable terms; |
| • | our ability to make acquisitions and integrate acquired businesses into our company; |
| • | our ability to attract and retain management; |
| • | the intensity of competition; |
| 1 |
| • | changes in the political and regulatory environment and in business and economic conditions in the United States and globally; and |
| • | geopolitical conflicts throughout the world, including those in Ukraine and Israel. |
All of our forward-looking statements are as of the date of this Quarterly Report on Form 10-Q only. In each case, actual results may differ materially from such forward-looking information. We can give no assurance that such expectations or forward-looking statements will prove to be correct. An occurrence of, or any material adverse change in, one or more of the risk factors or risks and uncertainties referred to in this Quarterly Report on Form 10-Q or included in our other public disclosures or our other periodic reports or other documents or filings filed with or furnished to the U.S. Securities and Exchange Commission (the “SEC”) could materially and adversely affect our business, prospects, financial condition and results of operations. Except as required by law, we do not undertake or plan to update or revise any such forward-looking statements to reflect actual results, changes in plans, assumptions, estimates or projections or other circumstances affecting such forward-looking statements occurring after the date of this Quarterly Report on Form 10-Q, even if such results, changes or circumstances make it clear that any forward-looking information will not be realized. Any public statements or disclosures by us following this Quarterly Report on Form 10-Q that modify or impact any of the forward-looking statements contained in this Quarterly Report on Form 10-Q will be deemed to modify or supersede such statements in this Quarterly Report on Form 10-Q.
This Quarterly Report on Form 10-Q may include market data and certain industry data and forecasts, which we may obtain from internal company surveys, market research, consultant surveys, publicly available information, reports of governmental agencies and industry publications, articles and surveys. Industry surveys, publications, consultant surveys and forecasts generally state that the information contained therein has been obtained from sources believed to be reliable, but the accuracy and completeness of such information is not guaranteed. While we believe that such studies and publications are reliable, we have not independently verified market and industry data from third-party sources. Given these uncertainties, readers of this Quarterly Report on Form 10-Q are cautioned not to place undue reliance on such forward-looking statements. We disclaim any obligation to update any such factors or to publicly announce the result of any revisions to any of the forward-looking statements contained herein to reflect future events or developments.
All references in this Quarterly Report on Form 10-Q to the “Company”, “we”, “us”, or “our”, are to Red Cat Holdings, Inc., a Nevada corporation, including its wholly owned consolidated subsidiaries, Teal Drones, Inc. (“Teal”), Red Cat Propware, Inc. (“Propware”), Skypersonic, Inc. (“Skypersonic”), and FW Acquisition, Inc. (“FlightWave”), as well as Rotor Riot LLC (“Rotor Riot”), Fat Shark Holdings, Ltd. (“Fat Shark”), which were wholly owned subsidiaries until February 16, 2024.
| 2 |
PART I - FINANCIAL INFORMATION
ITEM 1. FINANCIAL STATEMENTS
RED CAT HOLDINGS, INC.
Condensed Consolidated Balance Sheets
(Unaudited)
| October 31, | April 30, | |||||||
| 2024 | 2024 | |||||||
| ASSETS | ||||||||
| Current assets | ||||||||
| Cash | $ | $ | ||||||
| Accounts receivable, net | ||||||||
| Inventory | ||||||||
| Other | ||||||||
| Total current assets | ||||||||
| Goodwill (Note 3) | ||||||||
| Intangible assets, net (Note 3) | ||||||||
| Equity method investee | ||||||||
| Note receivable | ||||||||
| Property and equipment, net | ||||||||
| Other | ||||||||
| Operating lease right-of-use assets | ||||||||
| Total long-term assets | ||||||||
| TOTAL ASSETS | $ | $ | ||||||
| LIABILITIES AND STOCKHOLDERS' EQUITY | ||||||||
| Current liabilities | ||||||||
| Accounts payable | $ | $ | ||||||
| Accrued expenses | ||||||||
| Debt obligations - short term | ||||||||
| Customer deposits | ||||||||
| Operating lease liabilities | ||||||||
| Convertible notes payable - short term | ||||||||
| Acquisition consideration payable | ||||||||
| Total current liabilities | ||||||||
| Operating lease liabilities | ||||||||
| Convertible notes payable - long term | ||||||||
| Total long-term liabilities | ||||||||
| Total liabilities | ||||||||
| Commitments and contingencies (Note 19) | ||||||||
| Stockholders' equity | ||||||||
| Series B preferred stock - shares authorized 4,300,000; issued and outstanding 4,676 and 4,676 | ||||||||
| Common stock - shares authorized 500,000,000; issued and outstanding 78,025,403 and 74,289,351 | ||||||||
| Additional paid-in capital | ||||||||
| Accumulated deficit | ( |
) | ( |
) | ||||
| Accumulated other comprehensive income | — | 4,621 | ||||||
| Total stockholders' equity | ||||||||
| TOTAL LIABILITIES AND STOCKHOLDERS' EQUITY | $ | $ | ||||||
The accompanying notes are an integral part of these unaudited condensed consolidated financial statements.
| 3 |
RED CAT HOLDINGS, INC.
Condensed Consolidated Statements of Operations and Comprehensive Income
(Unaudited)
| Three months ended October 31, | Six months ended October 31, | |||||||||||||||
| 2024 | 2023 | 2024 | 2023 | |||||||||||||
| (As Restated) | (As Restated) | |||||||||||||||
| Revenues | $ | $ | $ | $ | ||||||||||||
| Cost of goods sold | ||||||||||||||||
| Gross (loss) profit | ( |
) | ( |
) | ||||||||||||
| Operating Expenses | ||||||||||||||||
| Research and development | ||||||||||||||||
| Sales and marketing | ||||||||||||||||
| General and administrative | ||||||||||||||||
| Impairment loss | ||||||||||||||||
| Total operating expenses | ||||||||||||||||
| Operating loss | ( |
) | ( |
) | ( |
) | ( |
) | ||||||||
| Other (income) expense | ||||||||||||||||
| Convertible notes payable fair value adjustment | ||||||||||||||||
| Loss on sale of equity method investment | ||||||||||||||||
| Equity method loss | ||||||||||||||||
| Investment loss, net | ||||||||||||||||
| Interest (income) expense, net | ( |
) | ( |
) | ||||||||||||
| Other, net | ( |
) | ( |
) | ||||||||||||
| Other expense | ||||||||||||||||
| Net loss from continuing operations | ( |
) | ( |
) | ( |
) | ( |
) | ||||||||
| Loss from discontinued operations | ( |
) | ( |
) | ||||||||||||
| Net loss | $ | ( |
) | ( |
) | $ | ( |
) | $ | ( |
) | |||||
| Other comprehensive income (loss) | ||||||||||||||||
| Change in foreign currency translation adjustments | ( |
) | ||||||||||||||
| Unrealized gain on marketable securities | ||||||||||||||||
| Other comprehensive loss | $ | ( |
) | ( |
) | $ | ( |
) | $ | ( |
) | |||||
| Loss per share - basic and diluted | ||||||||||||||||
| Continuing operations | $ | ( |
) | ( |
) | $ | ( |
) | $ | ( |
) | |||||
| Discontinued operations | ( |
) | ( |
) | ||||||||||||
| Loss per share - basic and diluted | $ | (0.18 | ) | (0.11 | ) | $ | (0.34 | ) | $ | (0.21 | ) | |||||
| Weighted average shares outstanding - basic and diluted | ||||||||||||||||
The accompanying notes are an integral part of these unaudited condensed consolidated financial statements.
| 4 |
RED CAT HOLDINGS, INC.
Condensed Consolidated Statements of Stockholders’ Equity
(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, 2023, as restated | $ | $ | $ | $ | ( |
) | $ | ( |
) | $ | ||||||||||||||||||||||
| Stock based compensation | — | — | ||||||||||||||||||||||||||||||
| Vesting of restricted stock units | — | ( |
) | ( |
) | |||||||||||||||||||||||||||
| Conversion of preferred stock | ( |
) | ( |
) | ||||||||||||||||||||||||||||
| Unrealized gain on marketable securities | — | — | ||||||||||||||||||||||||||||||
| Currency translation adjustments | — | — | ||||||||||||||||||||||||||||||
| Net loss | — | — | ( |
) | ( |
) | ||||||||||||||||||||||||||
| Balances, July 31, 2023 | $ | $ | $ | $ | ( |
) | $ | ( |
) | $ | ||||||||||||||||||||||
| Stock based compensation | — | — | ||||||||||||||||||||||||||||||
| Vesting of restricted stock units | — | ( |
) | ( |
) | |||||||||||||||||||||||||||
| Issuance of common stock through ATM facility, net | — | |||||||||||||||||||||||||||||||
| Unrealized gain on marketable securities | — | — | ||||||||||||||||||||||||||||||
| Currency translation adjustments | — | — | ||||||||||||||||||||||||||||||
| Net loss | — | — | ( |
) | ( |
) | ||||||||||||||||||||||||||
| Balances, October 31, 2023 | $ | $ | $ | $ | ( |
) | $ | ( |
) | $ | ||||||||||||||||||||||
| Balances, April 30, 2024 | $ | $ | $ | $ | ( |
) | $ | $ | ||||||||||||||||||||||||
| Stock based compensation | — | — | ||||||||||||||||||||||||||||||
| Vesting of restricted stock units | — | ( |
) | ( |
) | |||||||||||||||||||||||||||
| Exercise of warrants | — | ( |
) | |||||||||||||||||||||||||||||
| Currency translation adjustments | — | — | ( |
) | ( |
) | ||||||||||||||||||||||||||
| Net loss | — | — | ( |
) | ( |
) | ||||||||||||||||||||||||||
| Balances, July 31, 2024 | $ | $ | $ | $ | ( |
) | $ | $ | ||||||||||||||||||||||||
| Stock based compensation | — | — | ||||||||||||||||||||||||||||||
| Vesting of restricted stock units | — | ( |
) | ( |
) | |||||||||||||||||||||||||||
| Exercise of warrants | — | ( |
) | |||||||||||||||||||||||||||||
| Exercise of options | — | |||||||||||||||||||||||||||||||
| Acquisition of FlightWave | — | |||||||||||||||||||||||||||||||
| Net loss | — | — | ( |
) | ( |
) | ||||||||||||||||||||||||||
| Balances, October 31, 2024 | $ | $ | $ | $ | ( |
) | $ | $ | ||||||||||||||||||||||||
The accompanying notes are an integral part of these unaudited condensed consolidated financial statements.
| 5 |
RED CAT HOLDINGS, INC.
Condensed Consolidated Statements of Cash Flows
(Unaudited)
| Six months ended October 31, | ||||||||
| 2024 | 2023 | |||||||
| (As Restated) | ||||||||
| Cash Flows from Operating Activities | ||||||||
| Net loss | $ | ( |
) | $ | ( |
) | ||
| Net loss from discontinued operations | ( |
) | ||||||
| Net loss from continuing operations | ( |
) | ( |
) | ||||
| Adjustments to reconcile net loss to net cash used in operations: | ||||||||
| Stock based compensation - options | ||||||||
| Stock based compensation - restricted units | ||||||||
| Amortization of intangible assets | ||||||||
| Realized loss from sale of marketable securities | ||||||||
| Depreciation | ||||||||
| Loss on sale of equity method investment and note receivable | ||||||||
| Equity method loss | ||||||||
| Impairment on goodwill and intangible assets | ||||||||
| Convertible note payable fair value adjustment | ||||||||
| Changes in operating assets and liabilities | ||||||||
| Accounts receivable | ( |
) | ||||||
| Inventory | ( |
) | ( |
) | ||||
| Other | ( |
) | ||||||
| Operating lease right-of-use assets and liabilities | ( |
) | ( |
) | ||||
| Customer deposits | ( |
) | ( |
) | ||||
| Accounts payable | ||||||||
| Accrued expenses | ||||||||
| Net cash used in operating activities of continuing operations | ( |
) | ( |
) | ||||
| Cash Flows from Investing Activities | ||||||||
| Purchases of property and equipment | ( |
) | ( |
) | ||||
| Proceeds from sale of marketable securities | ||||||||
| Proceeds from sale of equity method investment and note receivable | ||||||||
| Net cash provided by investing activities of continuing operations | ||||||||
| Cash Flows from Financing Activities | ||||||||
| Proceeds from issuance of convertible notes payable, net of issuance costs | ||||||||
| Payments under debt obligations | ( |
) | ( |
) | ||||
| Payments of taxes related to equity transactions | ( |
) | ( |
) | ||||
| Proceeds from issuance of common stock through ATM facility, net | ||||||||
| Net cash provided by (used in) financing activities of continuing operations | ( |
) | ||||||
| Discontinued operations | ||||||||
| Operating activities | ( |
) | ||||||
| Investing activities | ||||||||
| Financing activities | ||||||||
| Net cash used in discontinued operations | ( |
) | ||||||
| Net decrease in Cash | ( |
) | ( |
) | ||||
| Cash, beginning of period | ||||||||
| Cash, end of period | ||||||||
| Less: Cash of discontinued operations | ( |
) | ||||||
| Cash of continuing operations, end of period | $ | $ | ||||||
| Cash paid for interest | $ | $ | ||||||
| Cash paid for income taxes | $ | $ | ||||||
| Non-cash transactions | ||||||||
| Fair value of shares issued in acquisition | $ | $ | ||||||
| Acquisition consideration payable | $ | $ | ||||||
| Net assets assumed in acquisition | $ | $ | ||||||
| Unrealized gain on marketable securities | $ | $ | ||||||
| Conversion of preferred stock into common stock | $ | $ | ||||||
The accompanying notes are an integral part of these unaudited condensed consolidated financial statements.
| 6 |
RED CAT HOLDINGS, INC.
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
(Unaudited)
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 wholly owned operating subsidiaries. Beginning in January 2020, the Company expanded the scope of its drone products and services through five 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 $ |
| B. | In November 2020, the Company acquired Fat Shark Holdings, Ltd. (“Fat Shark”), a provider of FPV video goggles to the drone industry. The purchase price was $ |
| C. | In May 2021, the Company acquired Skypersonic which provided 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, Inc. (“Teal”), a leader in commercial and government Unmanned Aerial Vehicles (“UAV”) technology. The purchase price was $ |
|
| E. | In September 2024, the Company acquired FlightWave Aerospace Systems Corporation,
an industry-leading provider of VTOL drone, sensor and software solutions, under an Asset Purchase Agreement (the “APA”). As
part of the acquisition, the Company created a new subsidiary, FW Acquisition Inc. (“FlightWave”) for ongoing operations.
The purchase price was $ |
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 UAVs 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.
On February 16, 2024, we closed the sale of our Consumer segment, consisting of Rotor Riot and Fat Shark, to Unusual Machines. 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 4 and Note 8.
Note 2 – Summary of Significant Accounting Policies
Basis of Presentation – The accompanying unaudited condensed consolidated financial statements have been prepared in accordance with accounting principles generally accepted in the United States (“GAAP”) for interim financial information and with the instructions of Form 10-Q and Article 10 of Regulation S-X. Accordingly, they do not include all of the information and footnotes required by GAAP for complete financial statements. In the opinion of management, all adjustments, consisting only of normal recurring adjustments necessary for a fair presentation with respect to the interim financial statements have been included. The results of operations for the six months ended October 31, 2024 are not necessarily indicative of the results for the full year. For further information, refer to the consolidated financial statements and footnotes thereto for the year ended April 30, 2024, included in the Company’s Annual Report on Form 10-K. In September 2024, the Company’s Board of Directors approved a change in fiscal year end from April 30 to December 31.
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Restatement of Previously Issued Consolidated Financial Statements – The Company’s Condensed Consolidated Statement of Operations and Stockholders’ Equity for the six months ended October 31, 2023, which were originally filed with the U.S. Securities and Exchange Commission (the “SEC”) on December 15, 2023, have been restated. The Company revised its financial statements to remove derivative liabilities due to erroneously reporting warrants from our convertible note financings, as described in Note 16, as having a derivative component.
The impacts of these restatements are detailed in the tables below:
|
Condensed Consolidated Statement of Operations For the three months ended October 31, 2023 |
||||||||||||
|
Originally Reported |
As Restated |
Change | ||||||||||
| Change in fair value of derivative liability | $ | ( |
) | $ | $ | ( |
) | |||||
| Net loss | $ | ( |
) | $ | ( |
) | $ | ( |
) | |||
|
Condensed Consolidated Statement of Operations For the six months ended October 31, 2023 |
||||||||||||
|
Originally Reported |
As Restated |
Change | ||||||||||
| Change in fair value of derivative liability | $ | ( |
) | $ | $ | ( |
) | |||||
| Net loss | $ | ( |
) | $ | ( |
) | $ | ( |
) | |||
|
Condensed Consolidated Statement of Stockholders’ Equity For the six months ended October 31, 2023 |
||||||||||||
|
Originally Reported |
As Restated |
Change | ||||||||||
| Additional paid-in capital | $ | $ | $ | |||||||||
| Accumulated deficit | $ | ( |
) | $ | ( |
) | $ | ( |
) | |||
| Total equity | $ | $ | $ | ( |
) | |||||||
Principles of Consolidation – Our condensed consolidated financial statements include the accounts of our wholly owned subsidiaries which include Teal, FlightWave (beginning on September 5, 2024), Skypersonic, as well as Rotor Riot and Fat Shark through the sale date of February 16, 2024. Non-majority owned investments, including the formerly wholly owned subsidiaries Rotor Riot and Fat Shark, are accounted for using the equity method when the Company is able to significantly influence the operating policies of the investee. Intercompany transactions and balances have been eliminated.
The Consumer segment businesses are characterized as discontinued operations in these financial statements. The operating results and cash flows of discontinued operations are separately stated in those respective financial statements. See Note 4.
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) complete purchase price accounting for acquisitions, (ii) the evaluation of long-term assets, including goodwill, for impairment, (iii) the evaluation of other-than-temporary-impairment of equity method investments, and (iv) valuations of convertible notes payable.
Concentration of Credit Risk – Financial instruments, which potentially subject the Company to concentrations of credit risk, include trade receivables. In the normal course of business, the Company provides credit terms to its customers. Accordingly, the Company performs ongoing credit evaluations of its customers, generally does not require collateral and considers the credit risk profile of the customer from which the receivable is due in further evaluating collection risk. Customers that accounted for 10% or greater of accounts receivable, net as of October 31, 2024 and April 30, 2024 were as follows:
| 8 |
| October 31, 2024 | April 30, 2024 | |||||||
| Customer A | % | * | ||||||
| Customer B | % | * | ||||||
| Customer C | * | % | ||||||
| Customer D | * | % | ||||||
* Accounts Receivable was less than 10%
During the six months ended October 31, 2024, two customers accounted for equal to or greater than 10% of total revenue, totaling 21% and 19%, respectively. During the six months ended October 31, 2023, three customers accounted for equal to or greater than 10% of total revenue, totaling 13%, 12% and 10%, respectively. The Company does not believe the loss of one or more of these customers would be significant to operations.
Equity Method Investment – The
equity method of accounting is applied to investments in which the Company has an ownership interest of between 20% and 50%. The Company
evaluates its equity method investments each reporting period for evidence of a loss in value that is other than a temporary decline.
Evidence of a loss in value might include, but would not necessarily be limited to, absence of an ability to recover the carrying amount
of the investment or the inability of the investee to sustain an earnings capacity that would justify the carrying amount of the investment.
The Company performed this analysis and concluded that its investment in UMAC was other-than-temporarily impaired and recognized an impairment
charge of $
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.
The Company’s financial instruments mainly consist of cash, accounts receivable, current assets, accounts payable, accrued expenses, notes payable, and convertible notes payable. The recorded carrying amounts of cash, accounts receivable, current assets, accounts payable, accrued expenses, and notes payable are considered to approximate their estimated fair values due to their short-term nature. Liabilities recognized at fair value on a recurring basis in the consolidated balance sheets consist of convertible notes payable. These items are categorized based upon the level of judgment associated with the inputs used to measure their fair values. Fair value is defined as the price that would be paid to transfer a liability in an orderly transaction between market participants at the measurement date.
The following table summarizes the Company’s financial instruments at fair value based on the fair value hierarchy for each class of instrument:
| 9 |
| Level 1 | Level 2 | Level 3 | Total | |||||||||||||
| Convertible notes payable | $ | $ | $ | $ | ||||||||||||
Convertible Notes Payable
The Company measures its convertible notes payable at fair value based on significant inputs not observable in the market, which caused them to be classified as Level 3 measurements within the fair value hierarchy. Changes in the fair value of the convertible notes payable related to updated assumptions and estimates were recognized as a convertible notes payable fair value adjustment within the consolidated statements of operations and comprehensive loss.
In determining the fair value of the convertible notes payable as of October 31, 2024, the Company used a market-based approach. The valuation method utilized a negotiated discount rate and a market yield rate which are unobservable inputs.
An increase or decrease in any of the unobservable inputs in isolation could result in a material increase or decrease in the estimated fair value. In the future, depending on the weight of evidence and valuation approaches used, these or other inputs may have a more significant impact on the estimated fair value.
The Company calculated the estimated fair value of the convertible notes payable as of October 31, 2024 using the following assumptions:
| October 31, 2024 | ||||
| Issuance date | ||||
| Maturity date | ||||
| Stock price | ||||
| Expected volatility factor | % | |||
| Risk-free interest rate | % | |||
The following table presents changes in the Level 3 convertible notes payable measured at fair value for the six months ended October 31, 2024:
| Balance, May 1, 2024 | $ | |||
| Additions | ||||
| Fair value measurement adjustments | ||||
| Balance, October 31, 2024 | $ | |||
Warrants
The fair value of the warrants as of October 31, 2024 was estimated using a Monte Carlo simulation model. The significant unobservable inputs for the Monte Carlo model include the stock price, exercise price, risk-free rate of return, time to expiration, and the volatility. An increase or decrease in the unobservable inputs in isolation could result in a material increase or decrease in the estimated fair value. In the future, depending on the weight of evidence and valuation approaches used, these or other inputs may have a more significant impact on the estimated fair value. Additionally, if certain provisions are triggered, reset adjustments may be required in the future. For the quarter ended October 31, 2024, no value was assigned to the warrants due to the fair market value of the convertible note payable being in excess of the proceeds received.
Revenue Recognition – The Company recognizes
revenue in accordance with ASC Topic 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 the shipment of goods to customers as orders are fulfilled, completion
of non-recurring engineering, completion of training, and customer support services. The Company recognizes revenue upon shipment of
product or prototypes unless otherwise specified in the purchase order or contract. Customer deposits totaled $
| 10 |
The following table presents the Company’s revenue disaggregated by revenue type:
|
Three months ended October 31, |
Six months ended October 31, |
|||||||||||||||
| 2024 | 2023 | 2024 | 2023 | |||||||||||||
| Contract related | $ | $ | $ | $ | ||||||||||||
| Product related | ||||||||||||||||
| Total | $ | $ | $ | $ | ||||||||||||
Product Warranty - The Company accrues an estimate
of its exposure to warranty claims based upon both current and historical product sales data and warranty costs incurred. Product warranty
reserves are recorded in current liabilities under accrued expenses. Warranty liability was approximately $
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.
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 six months ended October 31, 2024 and October 31, 2023, comprehensive loss was $
| October 31, 2024 | October 31, 2023 | |||||||
| Series B Preferred Stock, as converted | ||||||||
| Stock options | ||||||||
| Warrants | ||||||||
| Restricted stock | ||||||||
| Total | ||||||||
Related Parties – Parties are considered to be related to us if they have control or significant influence, directly or indirectly, over us, including key management personnel and members of the Board of Directors or are direct relatives of key management personnel of members of the Board of Directors. Related Party transactions are disclosed in Note 18.
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 six
months ended October 31, 2024, the Company incurred a net loss of approximately $ and used cash in operating activities
of approximately $. As of October 31, 2024, working capital totaled approximately $
| 11 |
Note 3 – Business Combination
On September 4, 2024,
the Company entered into an Asset Purchase Agreement (the “APA”) with FlightWave Aerospace
Systems Corporation (the “Seller”) to broaden the Company’s range of drone products.
The seller sold certain assets used in designing, developing, manufacturing, and selling long range, AI-powered UAVs for commercial use.
Pursuant to the APA, the Company has acquired substantially all of the assets owned, controlled or used by the Seller for an aggregate
purchase price of $
| • | $ |
|
| • | $ |
The Company expects that the Goodwill recognized 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.
The preliminary summary of the purchase price and its related allocation is as follows:
| Shares issued | $ | |||
| Acquisition consideration payable | ||||
| Total Purchase Price | $ | |||
| Assets acquired | ||||
| Accounts receivable | $ | |||
| Inventory | ||||
| Operating lease right-of-use assets | ||||
| Other assets | ||||
| Goodwill | ||||
| Total assets acquired | ||||
| Liabilities assumed | ||||
| Accounts payable and accrued expenses | ||||
| Customer deposits | ||||
| Operating lease liabilities | ||||
| Total liabilities assumed | ||||
| Total fair value of net assets acquired | $ | |||
The foregoing amounts reflect our current estimates of fair value as of the September 4, 2024 acquisition date. The Company expects to recognize fair values associated with the customer relationships acquired, as well as the FlightWave proprietary technology and brand name, but has not yet accumulated sufficient information to assign such values. As additional information becomes known regarding the acquired assets and assumed liabilities, management may make adjustments to the opening balance sheet of the acquired company up to the end of the measurement period, which is a one-year period following the acquisition date. The determination of the fair values of the acquired assets and liabilities assumed (and the related determination of estimated lives of depreciable tangible and intangible assets) requires significant judgment.
Supplemental Unaudited Pro Forma Financial Information
The following unaudited pro forma financial information summarizes the results of operations for the Company as though the Business Combination had occurred on May 1, 2023. The unaudited pro forma financial information has been presented for illustrative purposes only and is not necessarily indicative of results of operations that would have been achieved had the acquisition taken place on the date indicated, or the future consolidated results of operations of the Company. The information below does not include the effects of finite-lived intangible assets to be evaluated.
| 12 |
|
Six months ended October 31, 2024 |
||||
| Consolidated | ||||
| Revenues | $ | |||
| Net Loss | ( |
) | ||
| Loss per share – basic and diluted | ( |
) | ||
|
Six months ended October 31, 2023 |
||||
| Consolidated | ||||
| Revenues | $ | |||
| Net Loss | ( |
) | ||
| Loss per share – basic and diluted | ( |
) | ||
Note 4 – Divestiture of Consumer Segment
On February 16, 2024, the Company closed the sale of Rotor Riot and Fat Shark to Unusual Machines. The sale was conducted pursuant to a Share Purchase Agreement dated November 21, 2022, as amended on April 13, 2023, July 10, 2023, and December 11, 2023 (the “SPA”). The transaction closed concurrently with UMAC’s initial public offering and listing on the NYSE American exchange (“IPO”) under the symbol “UMAC.”
The total consideration
received by the Company was valued at $
Secured Promissory Note
The Promissory Note from Unusual Machines bore interest at a rate of 8% per year, was due 18 months from the date of issue, and required monthly payments of interest due in arrears on the 15th day of each month.
Unusual Machines Securities
The $
Working Capital
The purchase
price was adjusted for working capital as of the closing date. Actual working capital excess amounts increased the principal amount
of the Promissory Note dollar for dollar. Working capital as of closing was finalized at $
| 13 |
The Consumer segment has been classified as Discontinued Operations and reported in accordance with the applicable accounting standards. Set forth below are the results of operations for the Consumer segment for:
|
Three months ended October 31, |
Six months ended October 31, |
|||||||||||||||
| 2024 | 2023 | 2024 | 2023 | |||||||||||||
| Revenues | $ | $ | $ | $ | ||||||||||||
| Cost of goods sold | ||||||||||||||||
| Gross Margin | ( |
) | ||||||||||||||
| Operating Expenses | ||||||||||||||||
| Research and development | ||||||||||||||||
| Sales and marketing | ||||||||||||||||
| General and administrative | ||||||||||||||||
| Total operating expenses | ||||||||||||||||
| Operating loss | ( |
) | ( |
) | ||||||||||||
| Other (income) expense | ||||||||||||||||
| Interest expense | ||||||||||||||||
| Other, net | ( |
) | ( |
) | ||||||||||||
| Other (income) expense | ( |
) | ||||||||||||||
| Net loss from discontinued operations | $ | $ | ( |
) | $ | $ | ( |
) | ||||||||
Note 5 – Inventories
Inventories consisted of the following:
| October 31, 2024 | April 30, 2024 | |||||||
| Raw materials | $ | $ | ||||||
| Work-in-process | ||||||||
| Finished goods | ||||||||
| Total | $ | $ | ||||||
Note 6 – Other Current Assets
Other current assets included:
| October 31, 2024 | April 30, 2024 | |||||||
| Prepaid expenses | $ | $ | ||||||
| Prepaid inventory | ||||||||
| Contract asset |
|
|||||||
| Grant receivable | ||||||||
| Total | $ | $ | ||||||
| 14 |
Note 7 – Intangible Assets
Intangible assets relate to acquisitions completed by the Company, including those described in Note 1, and were as follows:
| October 31, 2024 | April 30, 2024 | |||||||||||||||||||||||
| Gross Value | Accumulated Amortization | Net Value |
Gross Value |
Accumulated Amortization | Net Value | |||||||||||||||||||
| Proprietary technology | $ | $ | ( |
) | $ | $ | $ | ( |
) | $ | ||||||||||||||
| Non-compete agreements | ( |
) | ( |
) | ||||||||||||||||||||
| Total finite-lived assets | ( |
) | ( |
) | ||||||||||||||||||||
| Brand name | ||||||||||||||||||||||||
| Total indefinite-lived assets | ||||||||||||||||||||||||
| Total intangible assets, net | $ | $ | ( |
) | $ | $ | $ | ( |
) | $ | ||||||||||||||
Proprietary technology and non-compete agreements are being amortized over six years and three years, respectively. Goodwill and Brand name are not amortized but evaluated for impairment on a quarterly basis.
Note 8 – Equity Method Investment
On
July 22, 2024, the Company sold all of its securities in UMAC to two unaffiliated third-party purchasers (the “Purchasers”).
As part of the transaction, on July 22, 2024, the Company entered into an Exchange Agreement with UMAC pursuant to which the Company exchanged
shares of UMAC’s common stock, par value $ per share, for shares of UMAC’s newly designated Series A
Convertible Preferred Stock (the “Series A”). The Company sold the Series A ownership interest ($ at time of sale)
and the Note Receivable of $
As
of April 30, 2024, the Company had owned approximately a
Financial information for UMAC prior to the sale of the Company’s equity interest was derived from UMAC’s Form 10-Q for the six months ended June 30, 2024 and was as follows:
| Current assets | $ | |||
| Long-term assets | ||||
| Current liabilities | ||||
| Long-term liabilities | ||||
| Revenues | ||||
| Gross profit | ||||
| Net loss | $ | ( |
) | |
The Company’s investments in UMAC have been impacted by the following:
| Initial investment, February 16, 2024 | $ | 17,000,000 | ||
| Equity method loss | ( |
) | ||
| Impairment | ( |
) | ||
| Investment balance, April 30, 2024 | $ | |||
| Equity method loss | ( |
) | ||
| Sale of ownership interest | ( |
) | ||
| Investment balance, October 31, 2024 | $ |
The computation of both the initial investment as of February 16, 2024 and investment balance as of April 30, 2024, was based on the fair market value of UMAC’s common stock.
| 15 |
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:
| October 31, 2024 | April 30, 2024 | |||||||
| Equipment and related | $ | $ | ||||||
| Leasehold improvements | ||||||||
| Furniture and fixtures | ||||||||
| Accumulated depreciation | ( |
) | ( |
) | ||||
| Net carrying value | $ | $ | ||||||
Depreciation
expense totaled $
Note 10 – Other Long-Term Assets
Other long-term assets included:
| October 31, 2024 | April 30, 2024 | |||||||
| SAFE agreement | $ | $ | ||||||
| Security deposits | ||||||||
| Total | $ | $ | ||||||
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 $
Note 11 – Right of Use Assets and Liabilities
As
of October 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 6.17 years, including options to extend certain leases for up to six years. Operating lease expense totaled
$
Leases on which the Company made rent payments during the reporting period included:
| Location | Monthly Rent | Expiration | ||||||
| South Salt Lake, Utah | $ | December 2030 | ||||||
| Santa Monica, California | $ | June 2025 | ||||||
| San Juan, Puerto Rico | $ | June 2027 | ||||||
| Grantsville, Utah | $ | December 2026 | ||||||
Supplemental information related to operating leases for the six months ended October 31, 2024 was:
| Operating cash paid to settle lease liabilities | $ |
|||
| Weighted average remaining lease term (in years) | ||||
| Weighted average discount rate | ||||
| 16 |
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 $
| B. | Pelion Note |
In
May 2021, Teal entered into a note agreement totaling $
| C. | Corporate Equity |
Beginning
in October 2021, and amended in January 2022, Teal financed a total of $
| D. | Ascentium Capital |
In
September 2021, Teal entered into a financing agreement with Ascentium Capital to fund the purchase of a fixed asset totaling $
| E. | Summary |
Future annual principal payments at October 31, 2024 were as follows:
| Fiscal Year Ended: | ||||||
| 2025 | ||||||
| Thereafter | ||||||
| Total | $ | |||||
Note 13 – Convertible Notes Payable
In
September 2024, the Company entered into a Securities Purchase Agreement (the “SPA”) with Lind Global Asset Management X LLC
(“Lind”). Under the SPA, the Company received approximately $
The Note, which does not accrue interest, will be
repaid in eighteen consecutive monthly installments in the amount of $
| 17 |
The Note may be converted by Lind upon issuance
a price of $
The fair value of the convertible note and related
warrants were estimated using a Monte Carlo simulation model. No value was assigned to the warrant liability due to the fair market value
of the convertible note payable being in excess of the proceeds received. The Company’s convertible
notes payable balance at October 31, 2024 was $
Subsequent to quarter end, on November 26, 2024,
we entered into a First Amendment to our SPA with Lind. Additionally, on December 13, 2024, Lind
provided notice to the Company to convert $
Note 14 – Common Stock
Our common stock has a par value of $0.001 per share. We are authorized to issue shares of common stock. Each share of common stock is entitled to one vote. A summary of shares of common stock issued by the Company since April 30, 2023 is as follows:
| Description of Shares | Shares Issued | |||
| Shares outstanding as of April 30, 2023 | ||||
| Vesting of restricted stock to employees, net of shares withheld of 27,189 to pay taxes | ||||
| Vesting of restricted stock to Board of Directors | ||||
| Vesting of restricted stock to consultants | ||||
| Conversion of preferred stock | ||||
| Issuance of common stock through ATM facilities | ||||
| Issuance of common stock through public offering | ||||
| Exercise of stock options | ||||
| Shares outstanding as of April 30, 2024 | ||||
| Vesting of restricted stock to employees, net of shares withheld of 138,744 to pay taxes | ||||
| Vesting of restricted stock to Board of Directors | ||||
| Exercise of stock options | ||||
| Exercise of warrants | ||||
| FlightWave acquisition | ||||
| Shares outstanding as of October 31, 2024 | ||||
See note 20 for subsequent events.
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
The
Offering closed on December 11, 2023, resulting in the issuance of shares of Common Stock which generated gross proceeds
of $
Note 15 – Preferred Stock
Our
preferred stock has a par value of $per share. 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.
| 18 |
Note 16 – Warrants
The
Company issued 5 year warrants to investors in connection with two convertible note financings. The warrants have an exercise price of
$
A summary of the warrants issued were:
| Upon Issuance | ||||||||||
| Date of Transaction | Number of Warrants | Initial Fair Value | ||||||||
| October 2020 | $ | |||||||||
| January 2021 | $ | |||||||||
As of October 31, 2024, we have received $301,248 related to the exercise of warrants.
In
May 2021, the Company issued warrants to purchase
shares of common stock to the placement agent of its common stock offering.
The warrants have a five-year term and an exercise price of $
In
July 2021, the Company issued warrants to purchase shares of common stock to the placement agent of its common stock offering.
The warrants have a five-year term and an exercise price of $
In
December 2023, the Company issued warrants to purchase shares of common stock to the placement agent of its common stock
offering. The warrants have a five-year term and an exercise price of $
In
September 2024, the Company issued warrants to purchase shares of common stock to Lind, as further described in Note 13.
The warrants have a five-year term and an exercise price of $
The following table summarizes the changes in warrants outstanding since April 30, 2023.
|
Number of Shares |
Weighted-average Exercise Price per Share |
Weighted-average Remaining Contractual Term (in years) |
Aggregate Intrinsic Value |
||||||||||||||
| Balance as of April 30, 2023 | $ | ||||||||||||||||
| Granted | $ | ||||||||||||||||
| Exercised | |||||||||||||||||
| Outstanding as of April 30, 2024 | $ | ||||||||||||||||
| Granted | |||||||||||||||||
| Exercised | ) | ||||||||||||||||
| Outstanding at October 31, 2024 | $ | $ | |||||||||||||||
The 2019 Equity Incentive Plan (the “2019 Plan”) and the 2024 Omnibus Equity Incentive Plan (the “2024 Plan”) (collectively, the “Plans”) allow 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 2019 Plan were not to exceed . However, no shares are issuable under the 2019 Plan after the 2024 Plan became effective on October 15, 2024. The number of shares issuable in connection with Awards under the 2024 Plan may not exceed plus any underlying forfeited 2019 Plan awards.
| 19 |
| A. | Options |
The range of assumptions used to calculate the fair value of options granted during the six months ended October 31 was:
| 2024 | 2023 | |||||||
| Exercise Price | $ | – | $ | – | ||||
| Stock price on date of grant | – | – | ||||||
| Risk-free interest rate | – % | – % | ||||||
| Dividend yield | ||||||||
| Expected term (years) | – | – | ||||||
| Volatility | – % | – % |
A summary of options activity under the Plans since April 30, 2023 was:
| Shares | Weighted-Average Exercise Price | Weighted-Average Remaining Contractual Term | Aggregate Intrinsic Value | |||||||||||||
| Outstanding as of April 30, 2023 | $ | |||||||||||||||
| Granted | ||||||||||||||||
| Exercised | ( |
) | ||||||||||||||
| Forfeited or expired | ( |
) | ||||||||||||||
| Outstanding as of April 30, 2024 | ||||||||||||||||
| Granted | ||||||||||||||||
| Exercised | ( |
) | ||||||||||||||
| Forfeited or expired | ( |
) | ||||||||||||||
| Outstanding as of October 31, 2024 | ||||||||||||||||
| Exercisable as of October 31, 2024 | ||||||||||||||||