Red Cat Holdings, Inc 10-Q for FY2021 Q3
Red Cat Holdings, Inc. (RCAT)
About this 10-Q
Red Cat Holdings, Inc filed this 10-Q on December 20, 2021, covering the quarter ended October 31, 2021 (FY2021 Q3).
Headline figures
Quarter ended October 31, 2021, as reported in this filing, compared with the same period a year earlier where the filing states it.
- Revenue
- $1.86M
- up 335.5% from $427.81K a year earlier
- Net loss
- $2.74M
- compared with a net loss of $722.28K a year earlier
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 quarterly ended , |
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:
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| incorporation or organization) | |
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| (Address of principal executive offices) | (Zip Code) |
(
(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 | ||
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, smaller reporting company, or an emerging growth company. See definition of "large accelerated filer", "accelerated filer" and "smaller reporting company" and "emerging growth company" in Rule 12b-2 of the Exchange Act.
| Large accelerated filer ☐ | Accelerated filer ☐ |
| Non-accelerated filer | Smaller reporting company |
| Emerging
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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 15, 2021, there were shares of the registrant's common stock outstanding.
INDEX TO FORM 10-Q
| PART I. | FINANCIAL INFORMATION | Page |
| Item 1. | Financial Statements: | 3 |
| Unaudited Balance Sheet as of October 31, 2021 and Balance Sheet as of April 30, 2021 | 3 | |
| Unaudited Statements of Operations for the Three and Six Months Ended October 31, 2021 and 2020 | 4 | |
| Unaudited Statements of Cash Flows for the Six Months Ended October 31, 2021 and 2020 | 5 | |
| Unaudited Statement of Changes in Shareholders' Equity for the Three and Six Months Ended October 31, 2021 and 2020 | 6 | |
| Notes to 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 | 30 |
| Item 4. | Controls and Procedures | 30 |
| PART II. | OTHER INFORMATION | |
| Item 1. | Legal Proceedings | 31 |
| Item 1A. | Risk Factors | 31 |
| Item 2. | Unregistered Sales of Equity Securities and Use of Proceeds | 31 |
| Item 3. | Defaults Upon Senior Securities | 31 |
| Item 4. | Mine Safety Disclosures | 31 |
| Item 5. | Other Information | 31 |
| Item 6. | Exhibits | 31 |
| SIGNATURES | 32 | |
| RED CAT HOLDINGS | ||||||||
| Consolidated Balance Sheets | ||||||||
| (Unaudited) | ||||||||
| October 31 | April 30, | |||||||
| 2021 | 2021 | |||||||
| ASSETS | ||||||||
| Current Assets | ||||||||
| Cash | $ | $ | ||||||
| Investments | ||||||||
| Accounts receivable, net | ||||||||
| Inventory | ||||||||
| Other | ||||||||
| Total Current Assets | ||||||||
| Goodwill | ||||||||
| Intangible assets, net | ||||||||
| Property and equipment, net | ||||||||
| Operating lease right-of-use assets | ||||||||
| Other | ||||||||
| Total Long Term Assets | ||||||||
| TOTAL ASSETS | $ | $ | ||||||
| LIABILITIES AND STOCKHOLDERS' EQUITY | ||||||||
| Current Liabilities | ||||||||
| Accounts payable | $ | $ | ||||||
| Accrued expenses | ||||||||
| Debt obligations - short term | ||||||||
| Due to related party | ||||||||
| Customer deposits | ||||||||
| Warrant derivative liability | ||||||||
| Total Current Liabilities | ||||||||
| Operating lease liabilities | ||||||||
| Debt obligations - long term | ||||||||
| Note payable to related party | ||||||||
| Total Long Term Liabilities | ||||||||
| Commitments and contingencies | ||||||||
| Stockholders' Equity | ||||||||
| Series A Preferred Stock - shares authorized ; outstanding and | ||||||||
| Series B Preferred Stock - shares authorized ; outstanding and | ||||||||
| Common stock - shares authorized ; outstanding and | ||||||||
| Additional paid-in capital | ||||||||
| Accumulated deficit | ( | ) | ( | ) | ||||
| Accumulated other comprehensive income | ||||||||
| Total Stockholders' Equity | ||||||||
| TOTAL LIABILITIES AND STOCKHOLDERS' EQUITY | $ | $ | ||||||
| See accompanying notes. | ||||||||
| 3 |
| RED CAT HOLDINGS | ||||||||||||||||
| Consolidated Statements Of Operations | ||||||||||||||||
| (Unaudited) | ||||||||||||||||
| Three months ended October 31, | Six months ended October 31, | |||||||||||||||
| 2021 | 2020 | 2021 | 2020 | |||||||||||||
| Revenues | $ | $ | $ | $ | ||||||||||||
| Cost of goods sold | ||||||||||||||||
| Gross Margin | ||||||||||||||||
| Operating Expenses | ||||||||||||||||
| Operations | ||||||||||||||||
| Research and development | ||||||||||||||||
| Sales and marketing | ||||||||||||||||
| General and administrative | ||||||||||||||||
| Stock based compensation | ||||||||||||||||
| Total operating expenses | ||||||||||||||||
| Operating loss | ( | ) | ( | ) | ( | ) | ( | ) | ||||||||
| Other Expense (Income) | ||||||||||||||||
| Derivative expense | ||||||||||||||||
| Change in fair value of derivative liability | ( | ) | ( | ) | ||||||||||||
| Investment income, net | ||||||||||||||||
| Interest expense | ||||||||||||||||
| Other, net | ||||||||||||||||
| Other Expense (Income) | $ | ( | ) | $ | $ | ( | ) | $ | ||||||||
| Net loss | $ | ( | ) | $ | ( | ) | $ | ( | ) | $ | ( | ) | ||||
| Loss per share - basic and diluted | $ | ( | ) | $ | ( | ) | $ | ( | ) | $ | ( | ) | ||||
| Weighted average shares outstanding - basic and diluted | ||||||||||||||||
| 4 |
| RED CAT HOLDINGS | ||||||||
| Condensed Consolidated Cash Flows Statements | ||||||||
| (Unaudited) | ||||||||
| Six months ended October 31, | ||||||||
| 2021 | 2020 | |||||||
| Cash Flows from Operating Activities | ||||||||
| Net loss | $ | ( | ) | $ | ( | ) | ||
| Stock based compensation | ||||||||
| Common stock issued for services | ||||||||
| Amortization of intangible assets | ||||||||
| Depreciation | ||||||||
| Change in fair value of derivative liability | ( | ) | ||||||
| Amortization of debt discount | ||||||||
| Derivative expense | ||||||||
| Adjustments to reconcile net loss to net cash from operations: | ||||||||
| 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 | ( | ) | ( | ) | ||||
| Cash Flows from Investing Activities | ||||||||
| Cash acquired through acquisitions | ||||||||
| Net cash provided by investing activities | ||||||||
| Cash Flows from Financing Activities | ||||||||
| Proceeds from sale of investments | ||||||||
| Purchases of investments | ( | ) | ||||||
| Purchases of property and equipment | ( | ) | ||||||
| Proceeds from exercise of warrants | ||||||||
| Payments under related party obligations | ( | ) | ( | ) | ||||
| Proceeds from debt obligations | ||||||||
| Payments under debt obligations | ( | ) | ( | ) | ||||
| Proceeds from convertible debentures | ||||||||
| Proceeds from issuance of common stock, net | ||||||||
| Net cash provided by financing activities | ||||||||
| Effect of foreign exchange rate changes on cash | ||||||||
| Net increase in Cash | ||||||||
| Cash, beginning of period | ||||||||
| Cash, end of period | ||||||||
| Cash paid for interest | ||||||||
| Cash paid for taxes | ||||||||
| Non-cash transactions | ||||||||
| Common stock issued for services | $ | $ | ||||||
| Fair value of shares issued in acquisitions | $ | $ | ||||||
| Indirect payment to related party | $ | $ | ||||||
| Conversion of derivative liability | $ | $ | ||||||
| Conversion of preferred stock into common stock | $ | $ | ||||||
| Conversion of Notes into common stock | $ | $ | ||||||
| Conversion of accrued interest into common stock | $ | $ | ||||||
| See accompanying notes. | ||||||||
| 5 |
| RED CAT HOLDINGS | ||||||||||||||||||||||||||||||||||||||||
| Consolidated Stockholders' Equity Statements | ||||||||||||||||||||||||||||||||||||||||
| (Unaudited) | ||||||||||||||||||||||||||||||||||||||||
| Series A | Series B | Common Stock | Additional | Accumulated Other | ||||||||||||||||||||||||||||||||||||
| Preferred Stock | Preferred Stock | Paid-in | Accumulated | Comprehensive | Total | |||||||||||||||||||||||||||||||||||
| Shares | Amount | Shares | Amount | Shares | Amount | Capital | Deficit | Income (Loss) | Equity | |||||||||||||||||||||||||||||||
| Balances, April 30, 2020 | $ | $ | $ | $ | $ | ( | ) | $ | $ | |||||||||||||||||||||||||||||||
| Stock based compensation | ||||||||||||||||||||||||||||||||||||||||
| Net Loss | — | — | — | ( | ) | ( | ) | |||||||||||||||||||||||||||||||||
| Balances, July 31, 2020 | $ | $ | $ | $ | $ | ( | ) | $ | $ | |||||||||||||||||||||||||||||||
| Conversion of Debt | ||||||||||||||||||||||||||||||||||||||||
| Stock based compensation | ||||||||||||||||||||||||||||||||||||||||
| Net Loss | — | — | — | ( | ) | ( | ) | |||||||||||||||||||||||||||||||||
| Balances, October 31, 2020 | $ | $ | $ | $ | $ | ( | ) | $ | $ | |||||||||||||||||||||||||||||||
| Balances, April 30, 2021 | $ | $ | $ | $ | $ | ( | ) | $ | $ | |||||||||||||||||||||||||||||||
| Acquisition of Skypersonic | ||||||||||||||||||||||||||||||||||||||||
| Public offerings,
net of $ | ||||||||||||||||||||||||||||||||||||||||
| Exercise of warrants | ||||||||||||||||||||||||||||||||||||||||
| Conversion of preferred stock | ( | ) | ( | ) | ||||||||||||||||||||||||||||||||||||
| Stock based compensation | ||||||||||||||||||||||||||||||||||||||||
| Shares issued for services | ||||||||||||||||||||||||||||||||||||||||
| Currency translation adjustments | ||||||||||||||||||||||||||||||||||||||||
| Net Loss | — | — | — | ( | ) | ( | ) | |||||||||||||||||||||||||||||||||
| Balances, July 31, 2021 | $ | $ | $ | $ | $ | ( | ) | $ | $ | |||||||||||||||||||||||||||||||
| Acquisition of Skypersonic | ||||||||||||||||||||||||||||||||||||||||
| Acquisition of Teal | ||||||||||||||||||||||||||||||||||||||||
| Conversion of preferred stock | ( | ) | ( | ) | ||||||||||||||||||||||||||||||||||||
| Stock based compensation | ||||||||||||||||||||||||||||||||||||||||
| Shares issued for services | ||||||||||||||||||||||||||||||||||||||||
| Currency translation adjustments | ||||||||||||||||||||||||||||||||||||||||
| Net Loss | — | — | — | ( | ) | ( | ) | |||||||||||||||||||||||||||||||||
| Balances, October 31, 2021 | $ | $ | $ | $ | $ | ( | ) | $ | $ | |||||||||||||||||||||||||||||||
| 6 |
RED CAT HOLDINGS, INC.
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
October 31, 2021 and 2020
(unaudited)
Our unaudited interim condensed 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 condensed 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, 2021 of Red Cat Holdings, Inc. (the "Company"), filed with the Securities and Exchange Commission ("SEC") on August 12, 2021.
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 five wholly owned subsidiaries. Teal Drones is a leader in commercial and government UAV technology. Fat Shark Holdings is a provider of First Person View (FPV) video goggles. Rotor Riot sells FPV drones and equipment, primarily to the consumer marketplace. 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 since January 1, 2020 include:
| A. | Rotor Riot Acquisition |
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 $and a VWAP of $
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
$(shares issued times $
| 7 |
| Shares issued | $ | 1,820,114 | ||
| Promissory note issued | ||||
| Total Purchase Price | $ |
| Assets acquired | ||||
| Cash | ||||
| Accounts receivable | ||||
| Other assets | ||||
| Inventory | ||||
| Trademark | ||||
| Brand name | ||||
| Customer relationships | ||||
| Total assets acquired | ||||
| Liabilities assumed | ||||
| Accounts payable and accrued expenses | ||||
| Notes payable | ||||
| Due to related party | ||||
| Total liabilities assumed | ||||
| Total fair value of net assets acquired | ||||
| Goodwill | $ |
The
final purchase price allocation was determined by an independent valuation services firm. Customer Relationships with a value of $
| B. | 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 |
| Shares issued | $ | 6,351,076 | ||
| Promissory note issued | ||||
| Cash | ||||
| Total Purchase Price | $ |
| Assets acquired | ||||
| Cash | ||||
| Accounts receivable | ||||
| Other assets | ||||
| Inventory | ||||
| Brand name | ||||
| Proprietary technology | ||||
| Non-compete agreement | ||||
| Total assets acquired | ||||
| Liabilities assumed | ||||
| Accounts payable and accrued expenses | ||||
| Customer deposits | ||||
| Total liabilities assumed | ||||
| Total fair value of net assets acquired | ||||
| Goodwill | $ |
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.
| C. | 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
$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 $
| 9 |
| Shares issued | $ | 2,716,013 | ||
| Cash | ||||
| Total Purchase Price | $ |
| Assets acquired | ||||
| Cash | ||||
| Accounts receivable | ||||
| Other assets | ||||
| Inventory | ||||
| Total assets acquired | ||||
| Liabilities assumed | ||||
| Accounts payable and accrued expenses | ||||
| Total liabilities assumed | ||||
| Total fair value of net assets acquired | ( | ) | ||
| Goodwill | $ |
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 judgment.
| D. | Teal Drones Acquisition |
On August 31, 2021, the Company closed the acquisition of Teal Drones Inc., (“Teal”). The acquisition of Teal was made pursuant to an Agreement and Plan of Merger by and among Red Cat Holdings, Inc., a Nevada corporation (the “Company”), Teal Acquisition I Corp., a Delaware corporation (“Acquisition”) and wholly-owned subsidiary of the Company, and Teal, as amended and restated August 31, 2021 (the “Merger Agreement” or “Merger”).
On August 31, 2021, Teal entered into an Amended and Restated Loan and Security Agreement with Decathlon Alpha IV, L.P. (“DA4”) (the “Loan Agreement”) in the amount of $1,670,294 (the “Loan”), representing the outstanding principal amount previously due and owing by Teal to DA4. Interest on the Loan accrues at a rate of ten (10%) percent per annum. Principal and interest under the term Loan is payable monthly in an amount equal to $49,275 until maturity on December 31, 2024.
Pursuant to the Merger Agreement, we acquired all of the issued and outstanding share capital of Teal in exchange for $14,000,000 of our common stock, par value $0.001 per share (“Common Stock”) at the Volume Weighted Average Price (VWAP) of our Common Stock for the 20 trading days ended August 31, 2021 of $2.908 per share, reduced by the amount of Teal debt assumed consisting of approximately $1.67 million payable to DA4, and approximately $1,457,000 in working capital deficit, for a net closing date payment of $10,872,753. At closing, we issued 3,738,911 shares of our Common Stock (the “Stock Consideration”) which had a fair market value of $10,431,562. Fifteen (15%) of the Share Consideration (the “Escrow Shares”) was deposited in an escrow account for a period of eighteen (18) months as security for indemnification obligations, any purchase price adjustments due to working capital deficiencies and any other claims or expenses. In December 2021, the Company and Teal agreed to a reduction in the purchase price of $438,058 which resulted in the cancellation of 150,639 shares held in escrow. The fair market value of the cancelled shares was $420,283. A revised summary of the purchase price and its related allocation is set forth below.
The Stock Consideration payable under the Merger Agreement may be increased upon the achievement of certain milestones set forth in the Merger Agreement (the “Earn-Out Consideration”). Additional shares of Common Stock may become issuable by the Company in the event that within twenty-four (24) months following closing of the Merger, Teal realizes certain revenue targets. A total of Sixteen Million Dollars ($16,000,000) in additional shares of Common Stock will be issued if sales and services of Teal's Golden Eagle drones equal at least Thirty-six Million Dollars ($36,000,000). A total of Ten Million Dollars ($10,000,000) in additional shares of Common Stock will be issued if sales and services of Teal's Golden Eagle drones equal at least $24 million ($24,000,000) but less than $36 million ($36,000,000). A total of Four Million Dollars ($4,000,000) in additional shares of Common Stock will be issued if sales and services of Teal's Golden Eagle drones equal at least Eighteen Million Dollars ($18,000,000) but less than Twenty-Four Million Dollars ($24,000,000). 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.
| 10 |
| Shares issued | $ | 10,011,279 | ||
| Total Purchase Price | $ |
| Assets acquired | ||||
| Cash | ||||
| Accounts receivable | ||||
| Other current assets | ||||
| Other assets | ||||
| Inventory | ||||
| Total assets acquired | ||||
| Liabilities assumed | ||||
| Accounts payable and accrued expenses | ||||
| Customer deposits | ||||
| Notes payable | ||||
| Total liabilities assumed | ||||
| Total fair value of net assets acquired | ( | ) | ||
| Goodwill | $ |
The foregoing amounts reflect our current estimates of fair value as of the August 31, 2021 acquisition date. The Company expects to recognize fair values associated with the customer relationships acquired, as well as the Teal 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.
Note 2 - Summary of Significant Accounting Policies
Basis of Accounting - The financial statements and accompanying notes are prepared in accordance with accounting principles generally accepted in the United States ("GAAP").
Principles of Consolidation - Our condensed consolidated financial statements include the accounts of our operating subsidiaries, Red Cat Propware, Inc., Rotor Riot, Fat Sharking Holdings, Skypersonic, and Teal Drones. Intercompany transactions and balances have been eliminated.
Use of Estimates - The preparation of financial statements in accordance with GAAP requires management to make estimates and assumptions that affect the reported amounts of assets and liabilities, the disclosure of contingent assets and liabilities at the date of the financial statements, and the reported amounts of revenue and expenses during the reporting period. Actual results could differ from those estimates. Significant estimates reflected in these financial statements include those used to (i) determine stock based compensation, (ii) complete purchase price accounting for acquisitions, and (iii) the accounting for derivatives.
Cash
and Cash Equivalents - At October 31, 2021, we had cash of $
Investments – Our investments have been classified and accounted for as available-for-sale securities. Our investment manager can sell any of our investment holdings at any time, and therefore, we have classified our investments as short term. Our available-for-sale securities are carried at fair value, with unrealized gains and losses reported within investment income in our consolidated statements of operations.
We
have elected to present accrued interest receivable separately from investments on our consolidated balance sheets. Accrued interest
receivable was $
| 11 |
Accounts Receivable, net - Accounts receivable are recorded at the invoiced amount less allowances for doubtful accounts. The Company's estimate of the allowance for doubtful accounts is based on a multitude of factors, including historical bad debt levels for its customer base, past experience with a specific customer, the economic environment, and other factors. Accounts receivable balances are written off against the allowance when it is probable that the receivable will not be collected.
Inventories – Inventories, which consist of raw materials, work-in-process, and finished goods, are stated at the lower of cost or net realizable value, with cost being determined by the average-cost method, which approximates the first-in, first-out method. Cost components include direct materials and direct labor, as well as in-bound freight. At each balance sheet date, the Company evaluates ending inventories for excess quantities and obsolescence.
Goodwill - Goodwill represents the excess of the purchase price of an acquisition over the estimated fair value of identifiable net assets acquired. The measurement periods for the valuation of assets acquired and liabilities assumed ends as soon as information on the facts and circumstances that existed as of the acquisition date becomes known, not to exceed 12 months. Adjustments in a purchase price allocation may require a change in the amounts allocated to goodwill during the periods in which the adjustments are determined.
We perform an impairment test at the end of each fiscal year, or more frequently if indications of impairment arise. We have a single reporting unit, and consequently, evaluate goodwill for impairment based on an evaluation of the fair value of the Company as a whole.
Leases - Effective August 1, 2021, the Company adopted Accounting Standards Codification (ASC) 842 titled “Leases” which requires the recognition of assets and liabilities associated with lease agreements. The Company adopted ASC 842 on a modified retrospective transition basis which means that it will not restate financial information for any periods prior to August 1, 2021. Upon adoption, the Company recognized a lease liability obligation of $796,976 and a right-of-use asset for the same amount.
The Company determines if a contract is a lease or contains a lease at inception. Operating lease liabilities are measured, on each reporting date, based on the present value of the future minimum lease payments over the remaining lease term. The Company's leases do not provide an implicit rate. Therefore, the Company uses an effective discount rate of 12% based on its recent debt financings. 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 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.
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The levels of the fair value hierarchy are described below:
| • | Level 1 inputs utilize quoted prices (unadjusted) in active markets for identical assets or liabilities that the Company has the ability to access. |
| • | Level 2 inputs utilize other than quoted prices included in Level 1 that are observable for the asset, either directly or indirectly, for substantially the full term of the asset. Level 2 inputs include quoted prices for similar assets in active markets, quoted prices for identical or similar assets in markets that are not active and inputs other than quoted prices that are observable in the marketplace for the asset. The observable inputs are used in valuation models to calculate the fair value for the asset. |
| • | Level 3 inputs are unobservable but are significant to the fair value measurement for the asset, and include situations where there is little, if any, market activity for the asset. These inputs reflect management's own assumptions about the assumptions a market participant would use in pricing the asset. |
A review of fair value hierarchy classifications is conducted on a quarterly basis. Changes in the observability of valuation inputs may result in a reclassification of levels for certain securities within the fair value hierarchy.
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 and accrued expenses and debt. The carrying amounts of its cash, receivables, current assets, accounts payable, accrued expenses and current debt approximates fair value due to the short-term nature of these instruments.
Convertible Securities and Derivatives
When the Company issues convertible debt or equity instruments that contain embedded derivative instruments that are to be bifurcated and accounted for as liabilities, the total proceeds from the convertible host instruments are first allocated to the bifurcated derivative instruments. The remaining proceeds, if any, are then allocated to the convertible instruments themselves, resulting in those instruments being recorded at a discount from their face value but no lower than zero. Any excess amount is recognized as a derivative expense.
Derivative Liabilities
The Company has financial instruments that are considered derivatives or contain embedded features subject to derivative accounting. Embedded derivatives are valued separately from the host instrument and are recognized as derivative liabilities in the Company's balance sheet. The Company measures these instruments at their estimated fair value and recognizes changes in their estimated fair value in results of operations during the period of change.
In October 2020 and January 2021, the Company entered into convertible note agreements which included provisions under which the conversion price was equal to the lesser of an initial stated amount or the conversion price of a future offering. This variable conversion feature was recognized as a derivative. Both financings included the issuance of warrants which contained similar variable conversion features. The Company values these convertible notes and warrants using the multinomial lattice method that values the derivative liability within the notes based on a probability weighted discounted cash flow model. The resulting liability is valued at each reporting date and the change in the liability is reflected as change in derivative liability in the statement of operations.
Revenue Recognition - The Company recognizes revenue in accordance with ASC 606, "Revenue from Contracts with Customers", issued by the Financial Accounting Standards Board ("FASB"). This standard includes a comprehensive evaluation of factors to be considered regarding revenue recognition including (i) identifying the promised goods, (ii) evaluating performance obligations, (iii) measuring the transaction price, (iv) allocating the transaction price to the performance obligations if there are multiple components, and (v) recognizing revenue as each obligation is satisfied. The Company's revenue transactions include a single component, specifically, the shipment of goods to customers as orders are fulfilled. Customers pay at the time they order and the Company recognizes revenue upon shipment. The timing of the shipment of orders can vary considerably depending upon whether an order is for an item normally maintained in inventory or an order that requires assembly or unique parts. Customer deposits totaled $117,842 and $46,096 at October 31, 2021 and April 30, 2021, respectively.
Research and Development - Research and development expenses include payroll, employee benefits, and other headcount-related expenses associated with product development. Research and development expenses also include third-party development and programming costs, as well as a proportionate share of overhead costs such as rent. Costs related to software development are included in research and development expense until technological feasibility is reached, which for our software products, is generally shortly before the products are released to production. Once technological feasibility is reached, such costs are capitalized and amortized as a cost of revenue over the estimated lives of the products.
Income Taxes - Deferred taxes are provided on the liability method, whereby deferred tax assets are recognized for deductible temporary differences and deferred tax liabilities are recognized for taxable temporary differences. Temporary differences are the differences between the reported amounts of assets and liabilities and their tax bases. Deferred tax assets and liabilities are adjusted for the effects of changes in tax laws and rates on the date of enactment.
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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 condensed consolidated financial statements.
Foreign Currency - The functional currency of our international subsidiary is the local currency. For that subsidiary, we translate assets and liabilities to U.S. dollars using period-end exchange rates, and average monthly exchange rates for revenues, costs, and expenses. We record translation gains and losses in accumulated other comprehensive income as a component of stockholders' equity. Net foreign exchange transaction gains and losses resulting from the conversion of the transaction currency to functional currency are recorded in other income, net in the consolidated statements of operations.
Comprehensive
Loss - During the three and six months ended October 31, 2021, differences between net loss and comprehensive loss totaled $
Stock-Based Compensation - We use the estimated grant-date fair value method of accounting in accordance with ASC Topic 718, Compensation - Stock Compensation. Fair value is determined using the Black-Scholes Model using inputs reflecting our estimates of expected volatility, term and future dividends. We recognize forfeitures as they occur. We recognize compensation costs on a straight line basis over the service period which is generally the vesting term.
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 17.
Note 3 – Fair Value Measurements
We disclose and recognize the fair value of our assets and liabilities using a hierarchy that prioritizes the inputs to valuation techniques used to measure 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. 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.
Our financial instruments consist of cash and cash equivalents, short-term and long-term investments, accounts payable, and accrued liabilities. At October 31, 2021, and April 30, 2021, the carrying values of cash and cash equivalents, accounts payable, and accrued liabilities approximated fair value due to their short-term maturities.
The following tables set forth information related to our available-for-sales investment securities as of October 31, 2021:
| I. | Amortized cost, net unrealized gains or losses, and fair values |
| Amortized Cost | Net Unrealized Gains (Losses) | Fair Value | ||||||||||
| Money market funds | $ | $ | $ | |||||||||
| Asset-backed securities | ( | ) | ||||||||||
| Corporate bonds | ( | ) | ||||||||||
| Total | $ | $ | ( | ) | $ | |||||||
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| II. | Contractual Maturities |
| One Year or Less | Over One Year | Over Five Years | Total | |||||||||||||
| Money market funds | $ | $ | $ | $ | ||||||||||||
| Asset-backed securities | ||||||||||||||||
| Corporate bonds | ||||||||||||||||
| Total | $ | $ | $ | $ | ||||||||||||
| III. | Fair Value Hierarchy |
| Level 1 | Level 2 | Level 3 | Total | |||||||||||||
| Money market funds | $ | $ | $ | $ | ||||||||||||
| Asset-backed securities | ||||||||||||||||
| Corporate bonds | ||||||||||||||||
| Total | $ | $ | $ | $ | ||||||||||||
Note 4 – Inventories
Inventories consisted of the following:
October 2021 | April 2021 | |||||||
| Raw materials | $ | $ | ||||||
| Work-in-process | ||||||||
| Finished goods | ||||||||
| Total | $ | $ | ||||||
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Note 5 - Other Current Assets
Other current assets included:
October 2021 | April 2021 | |||||||
| Prepaid inventory | $ | $ | ||||||
| Accrued interest held in investments | ||||||||
| Prepaid insurance | ||||||||
| Prepaid expenses | ||||||||
| Security deposits | ||||||||
| Due from related party | ||||||||
| Total | $ | $ | ||||||
Note 6 – Property and Equipment
Property and equipment consist of assets with an estimated useful life greater than one year. Property and equipment are reported net of accumulated depreciation and the reported values are periodically assessed for impairment. Property and equipment as of October 31, 2021 was as follows:
| Original cost | $ | 289,369 | ||
| Accumulated depreciation | ||||
| Net carrying value | $ |
Note 7 – Lease Agreements
The Company has the following operating leases for real estate locations where it operates:
| Location | Monthly Rent | Expiration | |||||
| South Salt Lake, Utah | $ | August 2024 | |||||
| Orlando, Florida | $ | May 2024 | |||||
| Cayman Islands | $ | Month to Month | |||||
| Troy, Michigan | $ | May 2022 | |||||
| Orlando, Florida | $ | September 2022 | |||||
| Torino, Italy | $ | January 2024 | |||||
These lease agreements have remaining terms up to 2.84 years, excluding options to extend certain leases for up to 5 years. The weighted average remaining lease term as of October 31, 2021 was 2.52 years. The Company used a discount rate of 12% to calculate its lease liability at October 31, 2021. Future lease payment obligations at October 31, 2021 were as follows:
| Fiscal Year Ended: | |||||
| 2022 | $ | ||||
| 2023 | |||||
| 2024 | |||||
| 2025 | |||||
| Total | $ | ||||
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Note 8 – Debt Obligations
| A. | Decathlon Capital |
In
connection with the acquisition of Teal by the Company, Decathlon Capital agreed to restructure the terms of an existing loan agreement
with Teal. Effective August 31, 2021, the principal amount outstanding of $
| B. | Convertible Note |
In
May 2021, Teal entered into a convertible note agreement totaling $
| C. | Vendor Settlement |
In
May 2020, Teal entered into a settlement agreement with a vendor that had been providing contract manufacturing services. At August 31,
2021, the Company assumed the outstanding balance of $
| D. | SBA Loan |
On
February 2, 2021, Teal received a second Small Business Administration Paycheck Protection Program (“SBA PPP”) loan in
the amount of $
| E. | Shopify Capital |
Shopify Capital is an affiliate of Shopify, Inc. which provides sales software and services to the Company. The Company processes customer transactions ordered on the e-commerce site for Rotor Riot through Shopify. Shopify Capital has entered into multiple agreements with the Company in which it has "purchased receivables" at a discount. Shopify retains a portion of the Company's daily receipts until the purchased receivables have been paid. The Company recognizes the discount as a transaction fee, in full, in the month in which the agreement is executed. The Company assumed an existing agreement when it acquired Rotor Riot in January 2020. This agreement was repaid in May 2020. Since then, the Company has entered into the following agreements with Shopify:
| Date of Transaction | Purchased Receivables | Payment to Company | Transaction Fees | Withholding Rate | Balance at October 31, 2021 | |||||
| May 2020 | $ |
$ |
$ |
|||||||
| September 2020 | $ |
$ |
$ |
|||||||
| April 2021 | $ |
$ |
$ |
$ |
| F. | Corporate Equity |
In
October 2021, Teal entered into an agreement with Corporate Equity to fund $
| G. | Revenue Financing Arrangement |
In
April 2021, Teal entered into an agreement under which it sold future customer payments, at a discount to Forward Financing. At August
31, 2021, the Company assumed the outstanding balance of $
| H. | Ascentium Capital |
In
September 2021, Teal entered into a financing agreement with Ascentium Capital to fund the purchase of a fixed asset totaling $
| I. | PayPal |
PayPal
is an electronic commerce company that facilitates payments between parties through online funds transfers. The Company processes certain
customer payments ordered on its e-commerce site through PayPal. The Company has entered into multiple agreements under which PayPal
provides an advance on customer payments, and then retains a portion of customer payments until the advance is repaid. PayPal charges
a fee which the Company recognizes in full upon entering an agreement. A November 2019 agreement under which PayPal advanced $
Short and long term debt obligations totaled $1,338,030 and $1,431,739 at October 31, 2021, respectively. Outstanding principal payments are due as follows:
| Balance of calendar 2021 | $ | 608,894 | |||
| 2022 | |||||
| 2023 | |||||
| 2024 | |||||
| 2025 | |||||
| 2026 | |||||
| Total | $ |
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Note 9 - Due to Related Party
| A. | Founder of Fat Shark |
In
connection with the acquisition of Fat Shark in November 2020, the Company issued a secured promissory note in the amount of $
| B. | BRIT, LLC |
In January 2020, in connection with the acquisition
of Rotor Riot, the Company issued a promissory note in the amount of $
BRIT incurred certain financial obligations in support
of the operations of Rotor Riot which the Company assumed responsibility to pay at the effective time of the Merger. These obligations
bear interest at annual rates ranging from
| C. | Aerocarve |
In
2020, the Company received advances totaling $
Note 10 - Convertible Notes
In
November 2019, the Company issued a convertible note in the principal amount of $
October 2020 Financing
In
October 2020, the Company closed a private offering of convertible promissory notes (the "2020 Notes") in the aggregate principal
amount of $
The Company determined that the provision associated
with a potential reduction in the conversion price of the notes and the exercise price of the warrant represented an embedded derivative
financial liability. The derivative liability was initially valued at $
As of October 31, 2021, (a) the entire $
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January 2021 Financing
In
January 2021, the Company closed a private offering of convertible promissory notes (the "2021 Notes") in the aggregate principal
amount of $
The Company determined that the provision associated
with a potential reduction in the conversion price of the notes and the exercise price of the warrant represented an embedded derivative
financial liability. The derivative liability was initially valued at $
As of October 31, 2021, (a) the entire $
Note 11 - 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 which passed the Export Services Act, also known as Act 20, in 2012. Under Act 20, eligible businesses are subject to a special corporate tax rate of 4%. Since inception, we have incurred net losses in each year of operations. Our current provision for the reporting periods presented in these financial statements consisted of a tax benefit against which we applied a full valuation allowance, resulting in no current provision for income taxes. In addition, there was no deferred provision for any of these reporting periods.
At
October 31, 2021 and April 30, 2021, we had accumulated deficits of approximately $ and $, respectively. Deferred
tax assets related to the future benefit of these net operating losses for tax purposes totaled approximately $
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Note 12 - Common Stock
Our common stock has a par value of $per share. We are authorized to issue shares of common stock. Each share of common stock is entitled to one vote.
On May 4, 2021, the Company closed an offering of of common stock which generated gross proceeds of $ and net proceeds of approximately $.
On May 4, 2021, the Company issued shares of common stock for investor relations services rendered.
On May 7, 2021, the Company issued shares of common stock in connection with the acquisition of Skypersonic, as further described in Note 1.
On July 21, 2021, the Company closed an offering of shares of common stock which generated gross proceeds of $ and net proceeds of approximately $ million.
During the three months ended July 31, 2021, shares of common stock were issued under the terms of a restricted stock agreement with an officer.
On August 10, 2021, the Company issued shares of common stock in connection with the conversion of shares of Series A Preferred Stock.
On August 15, 2021, the Company issued shares of common stock for investor relations services rendered.
On August 31, 2021, the Company issued shares of common stock in connection with the acquisition of Teal Drones, as further described in Note 1.
During the three months ended October 31, 2021, the Company issued shares of common stock in connection with working capital adjustments related to the acquisition of Skypersonic, as further described in Note 1.
During the three months ended October 31, 2021, shares of common stock were issued as stock based compensation.
Note 13 - Preferred Stock
Series A Preferred Stock ("Series A Stock") is convertible to common stock at a ratio of 8.33 shares of common stock for each share of Series A Stock, and votes together with the common stock on an as-if-converted basis. The Series A Stock was automatically converted into shares of common stock upon the effectiveness of our reverse stock split in August 2019, except for shares which were subject to a limitation on the number of shares of common stock that can be held by the holder of those shares of Series A Stock. Shares outstanding totaled at July 31, 2021, and were converted into shares of common stock on August 10, 2021.
Series B Preferred Stock ("Series B Stock") is convertible into common stock at a ratio of 0.8334 shares of common stock for each share of Series B Stock held and votes together with the common stock on an as-if-converted basis. Shares outstanding at October 31, 2021 totaled 986,676 which are convertible into shares of common stock.
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Note 14 - Warrants
In
October 2020, the Company issued five-year warrants to purchase a total of shares
in connection with the issuance of $
In
January 2021, the Company issued five-year warrants to purchase a total of shares
in connection with the issuance of $
In
March and April 2021, we received $
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
June 2021, we received $
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 $
The following table summarizes the changes in warrants outstanding since April 30, 2020.
Number of Shares |
Weighted-average Exercise Price per Share |
Weighted-average Remaining Contractual Term (in years) |
Aggregate Intrinsic Value | |||||||||||||
| Balance as of April 30, 2020 | — | |||||||||||||||
| Granted | $ | |||||||||||||||
| Exercised | ) | |||||||||||||||
| Outstanding as of April 30, 2021 | $ | |||||||||||||||
| Granted | ||||||||||||||||
| Exercised | ) | |||||||||||||||
| Outstanding at October 31, 2021 | $ | $ | ||||||||||||||
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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 .
The
aggregate intrinsic value of outstanding options represents the excess of the stock price at October 31, 2021 of $2.96 over the
exercise price of each option. As of October 31, 2021 and April 30, 2021, there was $
The table below sets forth the assumptions used to calculate the fair value of options granted during the three months ended October 31, 2021:
| Exercise price | - | |||
| Stock price on date of grant | - | |||
| Volatility | % - % | |||
| Risk-free interest rate | % - % | |||
| Expected term (years) | 6.56 – 8.25 | |||
| Dividend yield |
A summary of activity under the Plan since April 30, 2020 is as follows:
| Options | Shares | Weighted-Average Exercise Price | Weighted-Average Remaining Contractual Term | Aggregate Intrinsic Value | ||||||||||||
| Outstanding as of April 30, 2020 | $ | |||||||||||||||
| Granted | ||||||||||||||||
| Exercised | ||||||||||||||||
| Forfeited or expired | ||||||||||||||||
| Outstanding as of April 30, 2021 | ||||||||||||||||
| Granted | ||||||||||||||||
| Exercised | ( |
) | ||||||||||||||
| Forfeited or expired | ||||||||||||||||
| Outstanding as of October 31, 2021 | 8.70 | $ | ||||||||||||||
| Exercisable as of October 31, 2021 | $ | 8.35 | $ | |||||||||||||
Stock compensation expense was as follows:
Three months ended October 31, | Six months ended October 31, | |||||||||||||||
| 2021 | 2020 | 2021 | 2020 | |||||||||||||
| General and administrative | $ | $ | 94,629 | $ | $ | 189,258 | ||||||||||
| Research and development | 9,945 | 19,890 | ||||||||||||||
| Operations | 2,487 | 4,974 | ||||||||||||||
| Sales and marketing | — | — | ||||||||||||||
| Total | $ | $ | 107,061 | $ | $ | 214,122 | ||||||||||
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Note 16 - Derivatives
The Company completed financings in October 2020 and January 2021 which included notes and warrants containing embedded features subject to derivative accounting. See Note 10 for a full description of these financings. 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 mode1. 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 October 31, 2021 are set forth below. In addition, the Company's stock price on each measurement date was used in the model.
| Risk-free interest rate | - % | |||
| Expected dividend yield | ||||
| Expected term (in years) | 3.92 - 4.24 | |||
| Expected volatility | – % |
As of October 31, 2021, 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 three and six months ended October 31, 2021 were as follows:
| Derivative liability at April 30, 2021 | $ | |||
| Eliminated upon exercise of warrants | ( | ) | ||
| Changes in fair value, primarily related to decrease in Company's stock price | ( | ) | ||
| Derivative liability at July 31, 2021 | $ | |||
| Eliminated upon exercise of warrants | ||||
| Changes in fair value, primarily related to decrease in Company's stock price | ( | ) | ||
| Derivative liability at October 31, 2021 | $ |
Note 17 - Related-Party Transactions
In
November 2019, the Company issued a convertible note in the principal amount of $
In
July 2021, the Company entered into a consulting agreement with a director resulting in monthly payments of $
Additional related party transactions are disclosed in Note 9.
Note 18 - Subsequent Events
Subsequent events have been evaluated through the date of this filing and there are no subsequent events which require disclosure.
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ITEM 2. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS
The following discussion should be read in conjunction with our unaudited condensed consolidated financial statements and related notes and other financial data included elsewhere in this Quarterly Report on Form 10-Q.
The Management's Discussion and Analysis contains forward-looking statements that involve risks and uncertainties, such as statements relating to our liquidity, and our plans for our business focusing on (i) selling drones and related components, and (ii) cloud-based analytics, storage, and services for drones. Any statements that are not historical fact are forward-looking statements. When used, the words "believe," "plan," "intend," "anticipate," "target," "estimate," "expect," and the like, and/or future-tense or conditional constructions ("will," "may," "could," "should," etc.), or similar expressions, identify certain of these forward-looking statements. These forward-looking statements are subject to risks and uncertainties that could cause actual results or events to differ materially from those expressed or implied by the forward-looking statements in this Quarterly Report on Form 10-Q. The Company's actual results and the timing of events could differ materially from those anticipated in these forward-looking statements as a result of many factors. Investors should also review the risk factors in the Company's Annual Report on Form 10-K filed with the SEC on August 12, 2021.
All forward-looking statements speak only as of the date on which they are made. The Company does not undertake any obligation to update such forward-looking statements to reflect events that occur or circumstances that exist after the date of this Quarterly Report on Form 10-Q except as required by federal securities law.
Recent Developments
Underwritten Firm Commitment Underwritten Public Offering.
S-1 Offering
On May 4, 2021, the Company closed a firm commitment underwritten public offering (the "S-1 Offering") in which it sold 4,000,000 shares of common stock, at a public offering price of $4.00 per share, to ThinkEquity, a division of Fordham Financial Management, Inc., as representative of the underwriters ("ThinkEquity"), pursuant an underwriting agreement dated April 29, 2021. These shares of common stock in the S-1 Offering were offered and sold by the Company pursuant to a registration statement on Form S-1, as amended (File No. 333-253491), filed with the SEC, which was declared effective by the Commission on April 29, 2021 (the "S-1 Registration Statement"). The 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 $14.6 million.
S-3 Offering
On July 21, 2021 the Company closed on a firm commitment underwritten public offering (the "S-3 Offering") in which it sold an aggregate of 13,333,334 shares of Common Stock at a purchase price of $4.50 per share to ThinkEquity, pursuant to an underwriting agreement dated July 18, 2021. These shares of common stock in the S-3 Offering were offered and sold by the Company pursuant to a registration statement on Form S-3, as amended (File No. 333-256216), filed with the SEC, which was declared effective by the SEC on June 14, 2021 and a Supplement to the Prospectus contained in this registration statement filed with the SEC on July 19, 2021. The net proceeds to the Company from the S-3 Offering, after deducting the underwriting discount, the underwriters’ fees and expenses, and the Company’s estimated expenses related to the S-3 Offering, were approximately $55.5 million.
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Acquisition of Teal Drones
On August 31, 2021, we closed the acquisition of Teal Drones Inc., ("Teal"). Teal is a leader in commercial and government unmanned aerial vehicle ("UAV") technology and manufactures the Golden Eagle drone, approved by the US Department of Defense for reconnaissance, public safety, and inspection applications.
Pursuant to the Merger Agreement, we acquired all of the issued and outstanding share capital of Teal in exchange for $14,000,000 of our common stock, par value $0.001 per share ("Common Stock") at the Volume Weighted Average Price (VWAP) of our Common Stock on August 31, 2021 of $2.908 per share, reduced by the amount of Teal debt assumed consisting of approximately $1.67 million payable to Decathlon Alpha IV, L.P., ("DA4"), approximately $771,000 payable to other creditors and approximately $686,000 in working capital deficit, for a net closing date payment of $10,872,753. At closing, we issued 3,738,911 shares of our Common Stock (the "Merger Consideration"). On August 31, 2021, the Company, Acquisition, Teal and George Matus, as Shareholder Representative, entered into an Escrow Agreement with Equity Stock Transfer, LLC. Fifteen (15%) percent of the Merger Consideration (the "Escrow Shares") was deposited in an escrow account as security for working capital adjustments and indemnification obligations for a period of eighteen (18) months under the Merger Agreement. The indemnification obligations feature a basket amount of fifty-thousand dollars ($50,000) before any claim can be asserted and is subject to a cap equal to the value of the Escrow Shares. George Matus, founder of Teal, will continue in the role of Chief Executive Officer of Teal pursuant to an employment agreement entered August 31, 2021.
The consideration payable under the Merger Agreement may be increased upon the achievement of certain milestones set forth in the Merger Agreement (the "Earn-Out Consideration"). Additional shares of Common Stock may become issuable by the Company in the event that within twenty-four (24) months following closing of the Merger, Teal realizes certain revenue targets. A total of Sixteen Million Dollars ($16,000,000) in additional shares of Common Stock may become issuable in the event that sales and services of Teal's Golden Eagle drones shall have equaled at least Thirty-six Million Dollars ($36,000,000). A total of Ten Million Dollars ($10,000,000) in additional shares of Common Stock may become issuable in the event that sales and services of Teal's Golden Eagle drones shall have equaled at least $24 million ($24,000,000) but less than $36 million ($36,000,000). A total of Four Million Dollars ($4,000,000) in additional shares of Common Stock may become issuable in the event that sales and services of Teal's Golden Eagle drones shall have equaled at least Eighteen Million Dollars ($18,000,000) but less than Twenty-Four Million Dollars ($24,000,000). 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.
On August 31, 2021, Teal entered into an Amended and Restated Loan and Security Agreement with DA4 (the "Loan Agreement") in the amount of $1,670,294 (the "Loan"), representing the outstanding principal amount previously due and owing by Teal to DA4. Interest on the Loan accrues at a rate of ten (10%) percent per annum. Principal and interest under the term Loan is payable monthly in an amount equal to $49,275 until maturity on December 31, 2024. Teal may prepay the loan at any time, subject to a prepayment premium of $300,705, less the amount of any prior payments of interest. Under the Loan Agreement, Teal granted DA4 a continuing security interest in substantially all of the assets of Teal. In the event of a default under the loan DA4 may declare the full amount of the Loan immediately due and payable as a secured lender and take additional actions as a secured lender including seeking to foreclose on collateral pledged under the Loan Agreement. The Company agreed to guaranty the obligations of Teal under the Loan pursuant to a Joinder Agreement dated August 31, 2021.
Plan of Operations
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 five wholly owned subsidiaries. Beginning in January 2020, the Company has expanded the scope of its drone products and services through a number of acquisitions. Fat Shark Holdings is a provider of First Person View (FPV) video goggles. Rotor Riot sells FPV drones and equipment, primarily to the consumer marketplace. 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. On August 31, 2021, the Company acquired Teal Drones, a leader in commercial and government UAV technology.
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Results of Operations
Three Months Ended October 31, 2021 and October 31, 2020
Revenue
During the three months ended October 31, 2021 (or the "2021 period"), we generated revenues totaling $1,863,239 compared to $427,807 during the three months ended October 31, 2020 (or the "2020 period"), representing an increase of $1,435,432, or greater than 100%. The increase in revenues related to acquisitions completed after the end of the 2020 period. In November 2020, we acquired Fat Shark which contributed $898,929, or 48%, of our revenues in the 2021 period. In August 2021, we acquired Teal which contributed $402,227, or 22%, of our revenues in the 2021 period.
Cost of Goods Sold
During the three months ended October 31, 2021, we incurred cost of goods sold of $1,710,657 compared to $328,756 during the three months ended October 31, 2020, representing an increase of $1,381,901 or greater than 100%. The increase related to higher revenues associated with the acquisitions of Fat Shark, Skypersonic, and Teal which were completed after the end of the 2020 period.
Gross Margin
During the three months ended October 31, 2021, gross margin was $152,582 compared to $99,051 during the three months ended October 31, 2020, representing an increase of $53,531 or 54%. Gross margin, as a percentage of revenue, decreased from 23% during the 2020 period to 8% during the 2021 period. The lower gross margin during the 2021 period reflects higher product and shipping costs resulting from the impact of COVID-19 on business operations.
Operating Expenses
During the three months ended October 31, 2021, we incurred operations expense of $283,249 compared to $120,210 during the 2020 period, resulting in an increase of $163,039 or 136%. This increase is directly related to our expanded operations following the acquisitions of Fat Shark in November 2020, Skypersonic in May 2021, and Teal in August 2021. Operations expense for Fat Shark, Skypersonic, and Teal in the 2021 period collectively represented 86% of the increase.
During the three months ended October 31, 2021, we incurred research and development expenses totaling $493,441 compared to $86,614 for the three months ended October 31, 2020 resulting in an increase of $406,827, or greater than 100%. This increase is directly related to our expanded operations following the acquisitions of Fat Shark and Teal. Research and development expense for Fat Shark and Teal collectively represented 90% of the increase.
During the three months ended October 31, 2021, we incurred sales and marketing expenses of $185,385 compared to $24,679 during the three months ended October 31, 2020, resulting in an increase of $160,706 or greater than 100%. This increase is primarily related to higher payroll and branding costs of $63,455 and $36,000, respectively, in the 2021 period. In addition, we incurred $14,649 and $24,255 of separate expenses related to Fat Shark and Teal, respectively, which were not included in the 2020 period.
During the three months ended October 31, 2021, we reported general and administrative expenses of $1,050,708 compared to $250,378 for the three months ended October 31, 2020, representing an increase of $800,330, or more than 100%. Much of the increase related to "public company" expenses associated with the Company's listing on the Nasdaq Capital Market in April 2021. This resulted in increased costs associated with Directors' and Officers' insurance, investor relations and other public company expenses which collectively increased by $229,495 in the 2021 period compared to the 2020 period. In addition, auditing fees increased by $67,200 and payroll costs increased by $75,245. In addition, we incurred general and administrative expenses for Fat Shark, Skypersonic, and Teal of $49,296, $111,380, and $133,076, respectively, which were not included in the 2020 period.
During the three months ended October 31, 2021, we incurred stock based compensation costs of $899,937 compared to $107,061 in the 2020 period, resulting in an increase of $792,876 or greater than 100%. This increase related to expense associated with the issuance of 400,000 restricted stock units and 470,000 options in the 2021 period which were not applicable to the 2020 period.
Other Expense (Income)
Other income, net totaled $19,537 during the three months ended October 31, 2021 compared to Other Expense of $232,390 during the three months ended October 31, 2020 representing a change of $251,927. Changes in the values of the Company's derivative liabilities accounted for most of the change between periods. During the 2020 period, the Company recorded derivative related expenses totaling $232,390 whereas the Company recorded a net benefit related to its derivatives of $118,813 during the 2021 period. The net benefit in the 2021 period was partially offset by interest expense of $46,017. The derivative liability is valued using a multinomial lattice model which utilizes the Company's stock price in its calculation. A decrease in the stock price during the 2021 period resulted in the net benefit.
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Net Loss
Net Loss during the three months ended October 31, 2021 totaled $2,740,601 compared to a net loss of $722,281 during the three months ended October 31, 2020, representing an increase of $2,018,320, or greater than 100%. This increase is primarily related to higher operating expenses which increased to $2,912,720 in the 2021 period as compared to $588,942 in the 2020 period, representing an increase of $2,323,778. Approximately $902,412 of the increase, or 39%, related to Fat Shark, Skypersonic, and Teal whose acquisitions were completed after the 2020 period. Higher general and administrative and stock based compensation expense of $1,050,708 and $899,937, respectively, primarily accounted for the balance of the increase.
Results of Operations
Six Months Ended October 31, 2021 and October 31, 2020
Revenue
During the six months ended October 31, 2021 (or the "2021 period"), we generated revenues totaling $3,259,990 compared to $976,089 during the six months ended October 31, 2020 (or the "2020 period"), representing an increase of $2,283,901, or greater than 100%. The increase in revenues related to acquisitions completed after the end of the 2020 period. In November 2020, we acquired Fat Shark which contributed $1,894,496, or 58%, of our revenues in the 2021 period, and represented 83% of the increase.
Costs of Goods Sold
During the six months ended October 31, 2021, we incurred cost of goods sold of $3,005,004 compared to $774,888 during the six months ended October 31, 2020, representing an increase of $2,230,116 or greater than 100%. The increase related to higher revenues associated with the acquisitions of Fat Shark, Skypersonic, and Teal which were completed after the end of the 2020 period.
Gross Margin
During the six months ended October 31, 2021, gross margin was $254,986 compared to $201,201 during the six months ended October 31, 2020, representing an increase of $53,785 or 27%. Gross margin, as a percentage of revenue, decreased from 21% during the 2020 period to 8% during the 2021 period. The lower gross margin during the 2021 period reflects higher product and shipping costs resulting from the impact of COVID-19 on business operations.
Operating Expenses
During the six months ended October 31, 2021, we incurred operations expense of $460,112 compared to $206,756 during the 2020 period, resulting in an increase of $253,356 or greater than 100%. This increase is directly related to our expanded operations following the acquisitions of Fat Shark in November 2020, Skypersonic in May 2021, and Teal in August 2021. Operations expense for Fat Shark, Skypersonic, and Teal collectively represented 94% of the increase.
During the six months ended October 31, 2021, we incurred research and development expenses totaling $737,695 compared to $173,924 for the six months ended October 31, 2020 resulting in an increase of $563,771 or greater than 100%. This increase is directly related to our expanded operations following the acquisitions of Fat Shark, Skypersonic, and Teal. Research and development expense for Fat Shark, Skypersonic, and Teal collectively represented 100% of the increase.
During the six months ended October 31, 2021, we incurred sales and marketing expenses of $286,018 compared to $48,815 during the six months ended October 31, 2020, resulting in an increase of $237,203 or greater than 100%. This increase is primarily related to higher payroll and marketing event costs of $85,818 and $30,799, respectively, in the 2021 period. In addition, we incurred $62,893 of expenses collectively related to Fat Shark, Skypersonic, and Teal which was included in the 2021 period.
During the six months ended October 31, 2021, we reported general and administrative expenses of $1,926,888 compared to $430,719 for the six months ended October 31, 2020, representing an increase of $1,496,169, or more than 100%. Much of the increase related to "public company" expenses associated with the Company's listing on the Nasdaq Capital Market in April 2021. This resulted in increased costs associated with Directors' and Officers' insurance, investor relations and other public company expenses which collectively increased by $643,324 in the 2021 period compared to the 2020 period. In addition, auditing fees increased by $87,200 and payroll costs increased by $130,545. In addition, we incurred general and administrative expenses for Fat Shark, Skypersonic, and Teal of $100,149, $239,595, and $133,076, respectively, which was included in the 2021 period.
During the six months ended October 31, 2021, we incurred stock based compensation costs of $1,284,023 compared to $214,122 in the 2020 period, resulting in an increase of $1,069,901 or greater than 100%. This increase related to expense associated with the issuance of 775,000 restricted stock units and 919,000 options in the 2021 period which were not applicable to the 2020 period.
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Other Expense (Income)
Other income, net totaled $141,377 during the six months ended October 31, 2021, compared to other expense of $232,390 during the six months ended October 31, 2020 representing a change of $373,767. Changes in the values of the Company's derivative liabilities accounted for most of the change between periods. During the 2020 period, the Company recorded derivative related expenses totaling $232,390 whereas the Company recorded a net benefit related to its derivatives of $273,061 during the 2021 period. The net benefit in the 2021 period was partially offset by interest expense of $63,116. The derivative liability is valued using a multinomial lattice model which utilizes the Company's stock price in its calculation. A decrease in the stock price during the 2021 period resulted in the net benefit.
Net Loss
Net Loss during the six months ended October 31, 2021 totaled $4,298,373 compared to a Net Loss of $1,105,525 during the six months ended October 31, 2020, representing an increase of $3,192,848, or greater than 100%. This increase is primarily related to higher operating expenses which increased to $4,694,736 in the 2021 period as compared to $1,074,336 in the 2020 period, representing an increase of $3,620,400. Approximately $1,338,413 of the increase, or 37%, related to Fat Shark, Skypersonic, and Teal whose acquisitions were completed after the 2020 period. Higher general and administrative and stock based compensation expense totaling $1,926,888 and $1,284,023, respectively, primarily accounted for the balance of the increase.
Cash Flows
Operating Activities
Net cash used in operating activities was $8,569,098 during the six months ended October 31, 2021 compared to net cash used in operating activities of $568,452 during the six months ended October 31, 2020 representing an increase of $8,000,646, or greater than 100%. Net cash used in operations, net of non-cash expenses totaling $1,299,468, equaled $2,998,905 in the 2021 period compared to $640,612 in the 2020 period, resulting in an increase of $2,358,293, or greater than 100%. The higher operating use of cash in the 2021 period reflected the acquisitions of Fat Shark, Skypersonic, and Teal. Net cash used related to changes in operating assets and liabilities totaled $5,570,193 during the six months ended October 31, 2021 compared to net cash provided through changes in operating assets and liabilities of $72,160 during the six months ended October 31, 2020, representing an increase of $5,642,353, or greater than 100%. Approximately $3,017,267, or 53%, of the increase related to inventory, both higher balances on hand as well as prepaid purchases not yet delivered. Changes in operating assets and liabilities can fluctuate significantly from period to period depending upon the timing and level of multiple factors, including inventory purchases and vendor payments.
Investing Activities
Net cash provided by investing activities was $24,866 during the six months ended October 31, 2021 compared to zero during the six months ended October 31, 2020. The Company acquired $24,866 of cash in connection with acquisitions completed in the 2021 period.
Financing Activities
Net cash used provided by financing activities totaled $19,825,052 during the six months ended October 31, 2021 compared to $811,849 during the six months ended October 31, 2020. Financing activities can vary from period to period depending upon market conditions, both at a macro-level and specific to the Company. During the 2021 period, the Company received net proceeds of approximately $70 million in connection with two offerings of common stock, approximately $50 million of which was used to purchase investments.
Liquidity and Capital Resources
As of October 31, 2021, we had current assets totaling $64,629,199, including cash of $11,559,758, investments of $48,122,657, and inventory of $1,985,507. Current liabilities as of October 31, 2021 totaled $5,848,303, including accounts payable of $1,218,005, accrued expenses of $653,233, short term debt obligations of $1,338,030, and derivative liability of $2,376,565. Our net working capital as of October 31, 2021 was $58,780,896.
We have reported net losses since inception and only began generating revenues in January 2020. To date, we have primarily funded our operations through offerings of common stock. In May 2021, we completed an offering of common stock which raised gross proceeds of $16 million. In July 2021, we completed an offering of common stock which raised gross proceeds of $60 million.
2021 Underwritten Public Offerings
S-1 Offering
On May 4, 2021, the Company closed a firm commitment underwritten public offering (the "S-1 Offering") in which it sold 4,000,000 shares of common stock, at a public offering price of $4.00 per share, to ThinkEquity, a division of Fordham Financial Management, Inc., as representative of the underwriters ("ThinkEquity"), pursuant to an underwriting agreement dated April 29, 2021. These shares of common stock in the S-1 Offering were offered and sold by the Company pursuant to a registration statement on Form S-1, as amended (File No. 333-253491), filed with the SEC, which was declared effective by the Commission on April 29, 2021 (the "S-1 Registration Statement"). The 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 $14.6 million.
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S-3 Offering
On July 21, 2021 the Company closed on a firm commitment underwritten public offering (the "S-3 Offering") in which it sold an aggregate of 13,333,334 shares of Common Stock at a purchase price of $4.50 per share to ThinkEquity, pursuant to an underwriting agreement dated July 18, 2021. These shares of common stock in the S-3 Offering were offered and sold by the Company pursuant to a registration statement on Form S-3, as amended (File No. 333-256216), filed with the SEC, which was declared effective by the SEC on June 14, 2021 and a Supplement to the Prospectus contained in this registration statement filed with the SEC on July 19, 2021. The net proceeds to the Company from the S-3 Offering, after deducting the underwriting discount, the underwriters' fees and expenses and the Company's estimated expenses related to this S-3 Offering, were approximately $55.5 million.
Until we are able to sustain operations through the sale of products and services, we will continue to fund operations through equity and/or debt transactions. We can provide no assurance that the financing described above will be sufficient to fund our operations until we are able to sustain operations through the sale of products and services. In addition, there can be no assurance that such additional financing, if required, will be available to us on acceptable terms, or at all.
Critical Accounting Policies and Estimates
Our financial statements and accompanying notes have been prepared in accordance with GAAP applied on a consistent basis. The preparation of financial statements in conformity 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 revenues and expenses during the reporting periods.
We regularly evaluate the accounting policies and estimates that we use to prepare our financial statements. A complete summary of these policies is included in the notes to our financial statements. In general, management's estimates are based on historical experience, on information from third party professionals, and on various other assumptions that are believed to be reasonable under the facts and circumstances. Actual results could differ from those estimates made by management.
Off-Balance Sheet Arrangements
We have no off-balance sheet arrangements.
Recently Issued Accounting Pronouncements
The Company has implemented all new accounting pronouncements that are in effect. These pronouncements did not have any material impact on the financial statements unless otherwise disclosed, and the Company does not believe that there are any other new accounting pronouncements that have been issued that might have a material impact on its financial position or results of operations.
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ITEM 3. QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISK
We are a smaller reporting company and are not required to provide this information.
ITEM 4. CONTROLS AND PROCEDURES
Evaluation of Disclosure Controls and Procedures
Disclosure controls and procedures are designed to ensure that information required to be disclosed in our reports filed under the Exchange Act is recorded, processed, summarized and reported, within the time periods specified in the SEC's rules. Disclosure controls and procedures include, without limitation, controls and procedures designed to ensure that information required to be disclosed by our company in the reports that it files or submits under the Exchange Act is accumulated and communicated to our management, including its principal executive and principal financial officers, or persons performing similar functions, as appropriate to allow timely decisions regarding required disclosure. Our management carried out an evaluation under the supervision and with the participation of our Principal Executive Officer and Principal Financial Officer, of the effectiveness of the design and operation of our disclosure controls and procedures pursuant to Rules 13a-15(e) and 15d-15(e) under the Exchange Act. Based upon that evaluation, our Principal Executive Officer and Principal Financial Officer have concluded that our disclosure controls and procedures were effective as of October 31, 2021, except that our disclosure controls and procedures are not effective for the following reasons:
| ● | We did not maintain effective controls regarding the timely financial reporting of accounting transactions. Specifically, certain individuals did not provide reporting on a timely basis regarding certain corporate banking accounts which they managed. The failure to comply with the Company's internal reporting deadlines increases the risk that (i) transactions are not properly accounted for, and (ii) adequate documentation is not obtained. Both risks can adversely impact the accuracy of our financial reporting. The Company is presently evaluating how to remedy this internal control weakness. |
Changes in Internal Control over Financial Reporting
During the period covered by this report, there were no changes in our internal controls over financial reporting that have materially affected, or are reasonably likely to materially affect, our internal control over financial reporting.
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PART II - OTHER INFORMATION
ITEM 1. LEGAL PROCEEDINGS
There are no pending legal proceedings to which the Company is a party or in which any director, officer or affiliate of the Company, any owner of record or beneficially of more than 5% of any class of voting securities of the Company, or security holder is a party adverse to the Company or has a material interest adverse to the Company. The Company's property is not the subject of any pending legal proceedings.
ITEM 1A. RISK FACTORS
We are a smaller reporting company as defined by Rule 12b-2 of the Securities Exchange Act of 1934 (the "Exchange Act") and are not required to provide the information.
ITEM 2. RECENT UNREGISTERED SALES OF EQUITY SECURITIES AND USE OF PROCEEDS
There were no sales of equity securities sold during the period covered by this Report that were not registered under the Securities Act and were not previously reported in a Current Report on Form 8-K filed by the Company.
ITEM 3. DEFAULTS UPON SENIOR SECURITIES
None.
ITEM 4. MINE SAFETY DISCLOSURES
Not applicable
ITEM 5. OTHER INFORMATION
None.
ITEM 6. EXHIBITS
| Exhibit | Description | |
| 31.1 | Certification of Principal Executive Officer pursuant to Exchange Act Rules 13a-14(a) and 15d-14(a), as adopted pursuant to Section 302 of the Sarbanes-Oxley Act of 2002 | |
| 31.2 | Certification of Principal Financial and accounting Officer pursuant to Exchange Act Rules 13a-14(a) and 15d-14(a), as adopted pursuant to Section 302 of the Sarbanes-Oxley Act of 2002 | |
| 32.1 | Certification of Chief Executive Officer pursuant to 18 U.S.C. Section 1350, as adopted pursuant to Section 906 of the Sarbanes-Oxley Act of 2002 | |
| 32.2 | Certification of Chief Financial Officer pursuant to 18 U.S.C. Section 1350, as adopted pursuant to Section 906 of the Sarbanes-Oxley Act of 2002 |
| 101.INS | XBRL Instance Document | |
| 101.SCH | XBRL Taxonomy Extension Schema Document | |
| 101.CAL | XBRL Taxonomy Extension Calculation Linkbase Document | |
| 101.DEF | XBRL Taxonomy Extension Definition Linkbase Document | |
| 101.LAB | XBRL Taxonomy Extension Label Linkbase Document | |
| 101.PRE | XBRL Taxonomy Extension Presentation Linkbase Document |
-------
| 31 |
SIGNATURES
Pursuant to the requirements of the Securities Exchange Act of 1934, the registrant has duly caused this report to be signed on its behalf by the undersigned thereunto duly authorized.
| Date: December 20, 2021 | Red Cat Holdings, Inc.
By: /s/ Jeffrey Thompson Jeffrey Thompson Chief Executive Officer (Principal Executive Officer) | |
| Date: December 20, 2021 |
By: /s/ Joseph P. Hernon | |
Joseph Hernon Chief Financial Officer (Principal Financial and Accounting Officer) |
32
EXHIBIT 31.1
CERTIFICATION OF CHIEF EXECUTIVE OFFICER
PURSUANT TO SECTION 302 OF THE SARBANES-OXLEY ACT AND RULE 13A-14(A)
OR 15D-14(A) UNDER THE SECURITIES EXCHANGE ACT OF 1934
I, Jeffrey Thompson, certify that:
| 1. | I have reviewed this Quarterly Report on Form 10-Q of Red Cat Holdings, Inc. |
| 2. | Based on my knowledge, this report does not contain any untrue statement of a material fact or omit to state a material fact necessary to make the statements made, in light of the circumstances under which such statements were made, not misleading with respect to the period covered by this report; |
| 3. | Based on my knowledge, the financial statements, and other financial information included in this report, fairly present in all material respects the financial condition, results of operations and cash flows of the registrant as of, and for, the periods presented in this report; |
| 4. | I am responsible for establishing and maintaining disclosure controls and procedures (as defined in Exchange Act Rules 13a-15(e) and 15d-15(e)) and internal control over financial reporting (as defined in Exchange Act Rules 13a-15(f) and 15d-15(f)) for the registrant and have: |
| (a) | Designed such disclosure controls and procedures, or caused such disclosure controls and procedures to be designed under my supervision, to ensure that material information relating to the registrant, including its consolidated subsidiaries, is made known to me by others within those entities, particularly during the period in which this report is being prepared; | |
| (b) | Designed such internal control over financial reporting, or caused such internal control over financial reporting to be designed under my supervision, to provide reasonable assurance regarding the reliability of financial reporting and the preparation of financial statements for external purposes in accordance with generally accepted accounting principles; | |
| (c) | Evaluated the effectiveness of the registrant’s disclosure controls and procedures and presented in this report my conclusions about the effectiveness of the disclosure controls and procedures, as of the end of the period covered by this report based on such evaluation; and | |
| (d) | Disclosed in this report any change in the registrant’s internal control over financial reporting that occurred during the registrant’s most recent fiscal quarter that has materially affected, or is reasonably likely to materially affect, the registrant’s internal control over financial reporting; and |
| 5. | I have disclosed, based on my most recent evaluation of internal control over financial reporting, to the registrant’s auditors and the audit committee of registrant’s board of directors (or persons performing the equivalent functions): |
| (a) | All significant deficiencies and material weaknesses in the design or operation of internal control over financial reporting which are reasonably likely to adversely affect the registrant’s ability to record, process, summarize and report financial information; and | |
| (b) | Any fraud, whether or not material, that involves management or other employees who have a significant role in the registrant’s internal control over financial reporting. |
| Date: December 20, 2021 | /s/ Jeffrey Thompson |
|
Chief Executive Officer (Principal Executive Officer) |
EXHIBIT 31.2
CERTIFICATION OF CHIEF FINANCIAL OFFICER
PURSUANT TO SECTION 302 OF THE SARBANES-OXLEY ACT AND RULE 13A-14(A)
OR 15D-14(A) UNDER THE SECURITIES EXCHANGE ACT OF 1934
I, Joseph Hernon, certify that:
| 1. | I have reviewed this Quarterly Report on Form 10-Q of Red Cat Holdings, Inc. |
| 2. | Based on my knowledge, this report does not contain any untrue statement of a material fact or omit to state a material fact necessary to make the statements made, in light of the circumstances under which such statements were made, not misleading with respect to the period covered by this report; |
| 3. | Based on my knowledge, the financial statements, and other financial information included in this report, fairly present in all material respects the financial condition, results of operations and cash flows of the registrant as of, and for, the periods presented in this report; |
| 4. | I am responsible for establishing and maintaining disclosure controls and procedures (as defined in Exchange Act Rules 13a-15(e) and 15d-15(e)) and internal control over financial reporting (as defined in Exchange Act Rules 13a-15(f) and 15d-15(f)) for the registrant and have: |
| (a) | Designed such disclosure controls and procedures, or caused such disclosure controls and procedures to be designed under my supervision, to ensure that material information relating to the registrant, including its consolidated subsidiaries, is made known to me by others within those entities, particularly during the period in which this report is being prepared; | |
| (b) | Designed such internal control over financial reporting, or caused such internal control over financial reporting to be designed under my supervision, to provide reasonable assurance regarding the reliability of financial reporting and the preparation of financial statements for external purposes in accordance with generally accepted accounting principles; | |
| (c) | Evaluated the effectiveness of the registrant’s disclosure controls and procedures and presented in this report my conclusions about the effectiveness of the disclosure controls and procedures, as of the end of the period covered by this report based on such evaluation; and | |
| (d) | Disclosed in this report any change in the registrant’s internal control over financial reporting that occurred during the registrant’s most recent fiscal quarter that has materially affected, or is reasonably likely to materially affect, the registrant’s internal control over financial reporting; and |
| 5. | I have disclosed, based on my most recent evaluation of internal control over financial reporting, to the registrant’s auditors and the audit committee of registrant’s board of directors (or persons performing the equivalent functions): |
| (a) | All significant deficiencies and material weaknesses in the design or operation of internal control over financial reporting which are reasonably likely to adversely affect the registrant’s ability to record, process, summarize and report financial information; and | |
| (b) | Any fraud, whether or not material, that involves management or other employees who have a significant role in the registrant’s internal control over financial reporting. |
| Date: December 20, 2021 | /s/ Joseph Hernon |
|
Chief Financial Officer (Principal Financial and Accounting Officer) |
EXHIBIT 32.1
CERTIFICATION PURSUANT TO
18 U.S.C. SECTION 1350,
AS ADOPTED PURSUANT TO
SECTION 906 OF THE SARBANES-OXLEY ACT OF 2002
In connection with the Quarterly Report on Form 10-Q of Red Cat Holdings, Inc. (the “Company”), for the quarter ended October 31, 2021, as filed with the Securities and Exchange Commission on the date hereof (the “Report”), I, Jeffrey Thompson, Chief Executive Officer of the Company, certify, pursuant to 18 U.S.C. Section 1350, as adopted pursuant to Section 906 of the Sarbanes-Oxley Act of 2002, that:
| (1) | The Report fully complies with the requirements of Section 13(a) or 15(d) of the Securities Exchange Act of 1934; and |
| (2) | The information contained in the Report fairly presents, in all material respects, the financial condition and results of operations of the Company. |
| Date: December 20, 2021 | By: | /s/ Jeffrey Thompson |
| Name: | Jeffrey Thompson | |
| Title: | Chief Executive Officer | |
| (Principal Executive Officer) |
EXHIBIT 32.2
CERTIFICATION PURSUANT TO
18 U.S.C. SECTION 1350,
AS ADOPTED PURSUANT TO
SECTION 906 OF THE SARBANES-OXLEY ACT OF 2002
In connection with the Quarterly Report on Form 10-Q of Red Cat Holdings, Inc. (the “Company”), for the quarter ended October 31, 2021, as filed with the Securities and Exchange Commission on the date hereof (the “Report”), I, Joseph Hernon, Chief Financial Officer of the Company, certify, pursuant to 18 U.S.C. Section 1350, as adopted pursuant to Section 906 of the Sarbanes-Oxley Act of 2002, that:
| (1) | The Report fully complies with the requirements of Section 13(a) or 15(d) of the Securities Exchange Act of 1934; and |
| (2) | The information contained in the Report fairly presents, in all material respects, the financial condition and results of operations of the Company. |
| Date: December 20, 2021 | By: | /s/ Joseph Hernon |
| Name: | Joseph Hernon | |
| Title: | Chief Financial Officer | |
| (Principal Financial and Accounting Officer) |