Red Cat Holdings, Inc. Quarterly report pursuant to Section 13 or 15(d)

Quarterly report pursuant to Section 13 or 15(d)

Fair Value Measurements

Fair Value Measurements

9 Months Ended

Sep. 30, 2018

10. Fair Value Measurements

Our financial instruments consist of cash, accounts payable, accrued liabilities, and warrant liability. We do not believe that we are exposed to significant interest, currency, or credit risks arising from these financial instruments. The fair values of the warrants approximates their carrying values using Level 3 inputs. Gains and losses recognized on changes in fair value of the warrants are reported in other income (expense). Our warrant valuation was measured at fair value by applying the Black-Scholes option valuation model, which utilizes Level 3 inputs.

The assumptions used in the Black-Scholes option re-valuation for the September 2016 warrants at September 30, 2018 are as follows:

Dividend yield – 0%	Expected life – 3.0 years
Risk-free interest rate - 2.88%	Volatility – 226.491%.

The assumptions used for the March 2017 warrants at September 30, 2018 are as follows:

Dividend yield – 0%	Expected life – 4.0 years
Risk-free interest rate - 2.94%	Volatility – 225.847%.

The assumptions used for the March 6, 2018 warrants at September 30, 2018 are as follows:

Dividend yield – 0%	Expected life – 5.0 years
Risk-free interest rate – 2.94%	Volatility – 214.712%.

The assumptions used for the March 16, 2018 warrants at September 30, 2018 are as follows:

Dividend yield – 0%	Expected life – 2.5 years
Risk-free interest rate - 2.88%	Volatility – 256.626%.

The assumptions used for the August 21, 2018 warrants at September 30, 2018 are as follows:

Dividend yield – 0%	Expected life – 5.5 years
Risk-free interest rate - 2.94%	Volatility – 211.215%.

The following summarizes the Company's financial liabilities that are measured at fair value on a recurring basis at September 30, 2018.

	Level 1		Level 2		Level 3		Total
Liabilities
Derivative liabilities	$	—	$	—	$	222,316	$	222,316

- Definition

The entire disclosure for the fair value of financial instruments (as defined), including financial assets and financial liabilities (collectively, as defined), and the measurements of those instruments as well as disclosures related to the fair value of non-financial assets and liabilities. Such disclosures about the financial instruments, assets, and liabilities would include: (1) the fair value of the required items together with their carrying amounts (as appropriate); (2) for items for which it is not practicable to estimate fair value, disclosure would include: (a) information pertinent to estimating fair value (including, carrying amount, effective interest rate, and maturity, and (b) the reasons why it is not practicable to estimate fair value; (3) significant concentrations of credit risk including: (a) information about the activity, region, or economic characteristics identifying a concentration, (b) the maximum amount of loss the entity is exposed to based on the gross fair value of the related item, (c) policy for requiring collateral or other security and information as to accessing such collateral or security, and (d) the nature and brief description of such collateral or security; (4) quantitative information about market risks and how such risks are managed; (5) for items measured on both a recurring and nonrecurring basis information regarding the inputs used to develop the fair value measurement; and (6) for items presented in the financial statement for which fair value measurement is elected: (a) information necessary to understand the reasons for the election, (b) discussion of the effect of fair value changes on earnings, (c) a description of [similar groups] items for which the election is made and the relation thereof to the balance sheet, the aggregate carrying value of items included in the balance sheet that are not eligible for the election; (7) all other required (as defined) and desired information.

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