Quarterly report pursuant to Section 13 or 15(d)

Note 1 - The Business

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Note 1 - The Business
3 Months Ended
Jul. 31, 2021
Accounting Policies [Abstract]  
Note 1 - The Business

Note 1 - The Business

 

Red Cat Holdings ("Red Cat" or the "Company") was originally incorporated in February 1984. Since April 2016, the Company's primary business has been to provide products, services and solutions to the drone industry which it presently does through its four wholly owned subsidiaries. Fat Shark Holdings is a provider of First Person View (FPV) video goggles to the drone industry. Rotor Riot sells FPV drones and equipment, primarily to the consumer marketplace through its digital storefront located at www.rotorriot.com. Skypersonic provides software and hardware solutions that enable drones to complete inspection services in locations where GPS (global positioning systems) are not available, yet still record and transmit data even while being operated from thousands of miles away. Red Cat Propware is developing drone flight data analytics and storage solutions, as well as diagnostic products and services.

 

Corporate developments during the two years ended July 31, 2021 include:

  

  A. Organizational

 

In August 2019, we effected a reverse stock split (the "Reverse Stock Split") of our outstanding shares of common stock at a ratio of one-for-twelve hundred (1 for 1,200). All references in this report to shares of the Company's common stock, including prices per share of its common stock, reflect the Reverse Stock Split.  

 

  B. Merger Agreement with Rotor Riot, LLC

 

In January 2020, the Company consummated a Merger Agreement under which Rotor Riot Acquisition Corp, a wholly owned subsidiary of the Company, merged with and into Rotor Riot, with Rotor Riot continuing as the surviving entity and a wholly owned subsidiary of the Company. Under the Merger Agreement, each member of Rotor Riot received its pro rata portion of the total number of shares of the Company's common stock issued based on (A)(i) $3,700,000 minus (ii) $915,563 (which included certain debt and other obligations of Rotor Riot and its Chief Executive Officer that the Company agreed to assume (the "Assumed Obligations") divided by (B) the volume weighted average price ("VWAP") of the Company's common stock for the twenty trading days prior to the closing of the Merger. Based on a share issuance value of $2,784,437 and a VWAP of $1.25445, the Company issued an aggregate of 2,219,650 shares of common stock to the members of Rotor Riot.

 

Following the closing, the Company's management controlled the operating decisions of the combined company. Accordingly, we accounted for the transaction as an acquisition of Rotor Riot by the Company. Based on purchase price accounting, we recognized the assets and liabilities of Rotor Riot at fair value with the excess of the purchase price over the net assets acquired recognized as goodwill. The table below reflects the acquisition date values of the purchase consideration, assets acquired, and liabilities assumed. The shares issued were valued at $1,820,114 (2,219,650 shares issued times $0.82 per share which equaled the closing price of the Company's common stock on the date that the merger agreement was consummated). A summary of the purchase price and its related allocation is as follows:

 

  I. Purchase Price

 

Shares issued   $ 1,820,114  
Promissory note issued   175,000  
Total Purchase Price   $ 1,995,114  

 

  II. Purchase Price Allocation

 

Assets Acquired    
Cash   $ 21,623  
Accounts receivable     28,500  
Other assets     3,853  
Inventory     127,411  
Trademark     20,000  
Brand name     578,000  
Customer relationships     39,000  
Goodwill     1,756,023  
Total assets acquired   $ 2,574,410  
         
Liabilities Assumed        
Accounts payable and accrued expenses   $ 171,651  
Notes payable     209,799  
Due to related party     197,846  
Total liabilities assumed     579,296  
Net assets acquired   $ 1,995,114  

 

The final purchase price allocation was determined by an independent valuation services firm. Customer Relationships with a value of $39,000 are being amortized over 7 years. The carrying value of Brand Name is not being amortized but will be reviewed quarterly and formally evaluated at the end of each fiscal year.

 

  C. Fat Shark Acquisition

 

In November 2020, the Company closed a share purchase agreement ("Share Purchase Agreement") with the sole shareholder of Fat Shark Holdings ("Fat Shark"), to acquire all of the issued and outstanding shares of Fat Shark and its subsidiaries. The transaction was valued at $8,354,076 based on (i) the issuance of 5,227,273 shares of common stock with a value of $6,351,076 on the date of closing (ii) a senior secured promissory note in the original principal amount of $1,753,000 which matures on November 1, 2023, and (iii) a cash payment of $250,000. The Share Purchase Agreement includes indemnification provisions, a two year non-compete agreement, and registration rights for the shares issued in the transaction. A summary of the purchase price and its related allocation is as follows:

 

  I. Purchase Price

 

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

 

  II. Purchase Price Allocation

 

Assets Acquired    
Cash   $ 201,632  
Accounts receivable     249,159  
Other assets     384,232  
Inventory     223,380  
Brand name     1,144,000  
Proprietary technology     272,000  
Non-compete agreement     16,000  
Goodwill     6,168,260  
Total assets acquired   $ 8,658,663  
         
Liabilities Assumed        
Accounts payable and accrued expenses   $ 279,393  
Customer deposits     25,194  
Total liabilities assumed     304,587  
Net assets acquired   $ 8,354,076  

 

The final purchase price allocation was determined by an independent valuation services firm. Intangible assets included proprietary technology and non-compete agreement which are being amortized over 5 and 3 years, respectively. The carrying value of Brand Name is not being amortized but will be reviewed quarterly and formally evaluated at the end of each fiscal year.

 

  D. Skypersonic Acquisition

 

In February 2021, the Company entered into Share Purchase and Liquidity Event Agreements (the "Skypersonic Agreements") with the founder and majority shareholder of Skypersonic, Inc., ("Skypersonic") and the holders of common stock and equity based agreements representing 97.46% of Skypersonic (the "Sellers"), pursuant to which, subject to the satisfaction of certain closing conditions, the Company would acquire all of the issued and outstanding share capital of Skypersonic for an aggregate of $3,000,000 in shares (the "Share Consideration") of the Company's common stock, based upon the VWAP of the Company's common stock at closing of the transaction (the "Skypersonic Transaction"). Prior to the closing, the Company provided $75,000 to fund operating costs of Skypersonic. This amount was capitalized as part of the purchase price. The transaction closed on May 7, 2021 and was paid through the issuance of 857,124 shares of common stock which had a fair market value of $3,291,356. Fifty (50%) percent of the Share Consideration (the "Escrow Shares") was deposited in an escrow account for a period of twelve (12) months as security for indemnification obligations and any purchase price adjustments due to working capital deficiencies and any other claims or expenses arising under the Skypersonic Agreements. Under the Skypersonic Agreements, closing date working capital deficits in excess of $300,000 shall result in a reduction of the Share Consideration on a dollar of dollar basis. As of July 31, 2021, the Company has completed a preliminary determination of the working capital deficit to be $989,848 which would result in a reduction in the purchase price of $689,848. The Company has reflected the required adjustments in the financial statements as of July 31, 2021 and for the three months then ended, including a 171,801 reduction in the number of shares to be issued. The Company and the Sellers have agreed to finalize the calculation by the end of September 2021. A preliminary summary of the purchase price and its related allocation is as follows:

 

  I. Purchase Price

 

Shares issued   $ 2,631,640  
Cash     75,000  
Total Purchase Price   $ 2,706,640  

 

  II. Purchase Price Allocation

 

Assets Acquired    
Cash   $ 13,502  
Accounts receivable     51,083  
Other assets     12,950  
Inventory     50,556  
Goodwill     3,633,546  
Total assets acquired   $ 3,761,637  
         
Liabilities Assumed        
Accounts payable and accrued expenses   $ 1,054,997  
Total liabilities assumed     1,054,997  
Net assets acquired   $ 2,706,640  

  

The foregoing amounts reflect our current estimates of fair value as of the May 7, 2021 acquisition date. The Company expects to recognize fair values associated with the customer relationships acquired, as well as the Skypersonic 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 judgement.

 

  E. Signing of Teal Drones Acquisition

 

 On July 13, 2021, the Company and Teal Acquisition I Corp., ("Acquisition"), a wholly-owned subsidiary, entered into an Agreement and Plan of Merger (the "Agreement") with Teal Drones, Inc. ("Teal"). Under the terms of the Agreement, subject to the satisfaction of certain closing conditions, Acquisition will acquire Teal by merger of Acquisition with and into Teal, with Teal as the surviving corporation (the "Merger"). At the Effective Time of the Merger. all of the issued and outstanding share capital of Teal will be exchanged for an aggregate of Fourteen Million Dollars ($14,000,000) of Company common stock, (the "Common Stock") and Series C Convertible Preferred Stock, (the "Series C Preferred", and together with the Common Stock, the "Share Consideration"). The Company will at closing issue such number of shares equal to the Share Consideration divided by the VWAP of the Company (the "Closing Date VWAP") which shall be equal to the average of the Daily VWAP for the twenty (20) trading days ending on and including the Closing Date. "Daily VWAP" means, for any trading day, the per share volume-weighted average price of the Company's Common Stock as reported by Nasdaq. Fifteen (15%) percent of the Share Consideration (the "Escrow Shares") shall be held in an escrow account for a period of eighteen (18) months as security for indemnification obligations and any purchase price adjustments due to working capital deficiencies and any other claims or expenses arising under the Agreement.

 

In addition, the Share Consideration may be increased upon the achievement of certain milestones (the "Earn-Out Consideration"). A total of $16 million in Earn Out Consideration will be issued if sales and services of Teal's Golden Eagle drones ("Teal Sales") total $36 million during the 24 month period following the Closing (the "Earn-Out Period"). A total of $10 million in Earn Out Consideration will be issued if Teal Sales total at least $24 million but less than $36 million during the Earn-Out Period. A total of $4 million in Earn Out Consideration will be issued if Teal Sales total at least $18 million but less than $24 million. Additional Share Consideration, if earned, is issuable at the VWAP of the Company within thirty (30) days of the determination that Earn-Out Consideration is payable.

Under the Agreement, the Share Consideration to be paid on the Closing Date shall be reduced by any indebtedness of Teal, including up to $2 million of senior secured debt to be assumed by the Company (the "Assumed Debt") and any working capital deficit, on a dollar of dollar basis. In addition, it is anticipated that $1 million of the Share Consideration payable to the shareholders of Teal in connection with the Merger, has been agreed to be paid to the Assumed Debt holder to secure consent to the Merger and the transactions contemplated thereby.