UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549
FORM 10-Q
(Mark One)
| ☑ | QUARTERLY REPORT PURSUANT TO SECTION 13 OR | |
| 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934 | ||
For the quarterlyperiodendedJuly 31, 2023 |
For the quarterly period ended September 30, 2017
ORor
| ☐ | TRANSITION REPORT PURSUANT TO SECTION 13 OR | |
| 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934 | ||
For the transition period from ___________ to ___________ |
For the transition period from _______ to _______
Commission File Number 814-00175Number: 000-31587
TimefireVRRed Cat Holdings, Inc.
(Exact name of Registrant as specified in its charter)
| Nevada | 88-0490034 | |
| (State or other jurisdiction of | ||
| incorporation or organization) | (I.R.S. Employer Identification |
15 Ave. Munoz Rivera, Ste 2200 San Juan, Puerto Rico | 00901 | |
| (Address of principal executive offices) | (Zip Code) |
(888) 875-9928(833) 373-3228
(Registrant's telephone number, including area code)
__________________________________
(Former Name, Former Address and Former Fiscal Year, if Changed Since Last Report)
Securities registered pursuant to Section 12(b) of the Act:
Title of Each Class | Trading Symbol(s) | Name of each exchange on which registered | ||
| Common Stock | RCAT | Nasdaq Capital Market |
Indicate by check mark whether the registrant (1) has filed all reports required to be filed by Section 13 or 15(d) of the Securities Exchange Act of 1934 during the preceding 12 months (or for such shorter period that the registrant was required to file such reports), and (2) has been subject to such filing requirements for the past 90 days.Yes☑ No ☐
Indicate by check mark whether the registrant has submitted electronically and posted on its corporate Web site, if any, every Interactive Data File required to be submitted and posted 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 and post such files). Yes☑ No ☐
Indicate by check mark whether the registrant is a large accelerated filer, an accelerated filer, a non-accelerated filer, or a smaller reporting company, or an emerging growth company. See definitionthe definitions of "large accelerated filer," "accelerated filer"filer," "smaller reporting company," and "smaller reporting"emerging growth company" in Rule 12b-2 of the Exchange Act.
| Large accelerated filer ☐ | Accelerated filer ☐ | |
| Non-accelerated filer | Smaller reporting company ☑ | |
| Emerging |
If an emerging growth company, indicate by check mark if the registrant has elected not to use the extended transition period for complying with any new or revised financial accounting standards provided pursuant to Section 13(a) of the Exchange Act.☐
|
|
|
Indicate by check mark whether the registrant is a shell company (as defined in Rule 12b-2 of the Exchange Act). Yes ☐ No☑
As of September 18, 2023, there were shares of the registrant's common stock outstanding.
Red Cat Holdings, Inc.
Form 10-Q
For the Quarterly Period Ended July 31, 2023
TABLE OF CONTENTS
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As of November 14, 2017, there were 47,269,804 shares of the registrant’s $.001 par value common stock issued and outstanding.
INDEX TO FORM 10-Q
PART I - FINANCIAL INFORMATIONRED CAT HOLDINGS
Consolidated Balance Sheets
ITEM 1. FINANCIAL STATEMENTS(Unaudited)
| July 31, | April 30, | |||||||
| 2023 | 2023 | |||||||
| ASSETS | ||||||||
| Current assets | ||||||||
| Cash | $ | 937,756 | $ | 3,173,649 | ||||
| Marketable securities | 7,922,392 | 12,814,038 | ||||||
| Accounts receivable, net | 720,642 | 719,862 | ||||||
| Inventory | 9,376,444 | 8,920,573 | ||||||
| Other | 3,020,708 | 1,263,735 | ||||||
| Current assets of discontinued operations | 4,545,370 | 5,283,155 | ||||||
| Total current assets | 26,523,312 | 32,175,012 | ||||||
| Goodwill | 17,012,832 | 17,012,832 | ||||||
| Intangible assets, net | 7,105,636 | 7,323,004 | ||||||
| Property and equipment, net | 2,554,411 | 2,650,358 | ||||||
| Other | 303,180 | 303,180 | ||||||
| Operating lease right-of-use assets | 554,064 | 620,307 | ||||||
| Long-term assets of discontinued operations | 97,443 | 108,397 | ||||||
| Total long-term assets | 27,627,566 | 28,018,078 | ||||||
| TOTAL ASSETS | $ | 54,150,878 | $ | 60,193,090 | ||||
| LIABILITIES AND STOCKHOLDERS' EQUITY | ||||||||
| Current liabilities | ||||||||
| Accounts payable | $ | 822,674 | $ | 1,392,550 | ||||
| Accrued expenses | 448,229 | 409,439 | ||||||
| Debt obligations - short term | 936,150 | 922,138 | ||||||
| Customer deposits | 45,123 | 155,986 | ||||||
| Operating lease liabilities | 292,852 | 281,797 | ||||||
| Warrant derivative liability | 561,685 | 588,205 | ||||||
| Current liabilities of discontinued operations | 471,199 | 1,010,501 | ||||||
| Total current liabilities | 3,577,912 | 4,760,616 | ||||||
| Operating lease liabilities | 301,710 | 379,466 | ||||||
| Debt obligations - long term | 249,568 | 401,569 | ||||||
| Long-term liabilities of discontinued operations | 28,290 | 41,814 | ||||||
| Total long-term liabilities | 579,568 | 822,849 | ||||||
| Commitments and contingencies | ||||||||
| Stockholders' equity | ||||||||
| Series B preferred stock - shares authorized ; outstanding and | 47 | 9,867 | ||||||
| Common stock - shares authorized ; outstanding and | 55,541 | 54,568 | ||||||
| Additional paid-in capital | 110,905,033 | 109,993,100 | ||||||
| Accumulated deficit | (60,397,141 | ) | (54,586,793 | ) | ||||
| Accumulated other comprehensive loss | (570,082 | ) | (861,117 | ) | ||||
| Total stockholders' equity | 49,993,398 | 54,609,625 | ||||||
| TOTAL LIABILITIES AND STOCKHOLDERS' EQUITY | $ | 54,150,878 | $ | 60,193,090 | ||||
| TIMEFIREVR INC. | ||||||||
| (FORMERLY ENERGYTEK CORP.) | ||||||||
| CONDENSED CONSOLIDATED BALANCE SHEETS | ||||||||
| September 30, | December 31, | |||||||
| 2017 | 2016 | |||||||
| (Unaudited) | ||||||||
| ASSETS | ||||||||
| Current Assets: | ||||||||
| Cash | $ | 2,021 | $ | 225,379 | ||||
| Escrow fund | — | 79,855 | ||||||
| Accounts receivable | 86 | — | ||||||
| Deposit on contract | — | 75,000 | ||||||
| Prepaid expenses and other current assets | 157,500 | 119,545 | ||||||
| Total current assets | 159,607 | 499,779 | ||||||
| Other Assets: | ||||||||
| Property and equipment, net | 29,279 | 38,735 | ||||||
| Deposit | 41,876 | 44,876 | ||||||
| Total Assets | $ | 230,762 | $ | 583,390 | ||||
| LIABILITIES AND SHAREHOLDERS' EQUITY/(DEFICIT) | ||||||||
| Current Liabilities: | ||||||||
| Accounts payable and accrued expenses | $ | 296,931 | $ | 34,450 | ||||
| Demand obligation payable - related party | 90,000 | — | ||||||
| Convertible notes payable | 713,158 | — | ||||||
| Convertible note payable - related party | 100,000 | — | ||||||
| Accrued interest | 211,965 | — | ||||||
| Short-term advance - related party | 57,400 | — | ||||||
| Total current liabilities | 1,469,454 | 34,450 | ||||||
| Long Term Liabilities: | ||||||||
| Derivative liabilities | 262,823 | 4,392,075 | ||||||
| Total long term liabilities | 262,823 | 4,392,075 | ||||||
| Total liabilities | 1,732,277 | 4,426,525 | ||||||
| Commitments and Contingencies | — | — | ||||||
| Mezzanine Equity | ||||||||
| Preferred Series A stock, par value $.01 per share, 134,000 shares authorized; 133,334 shares issued and outstanding at September 30, 2017 and December 31, 2016. Stated at redemption value. | 1,500,004 | 1,500,004 | ||||||
| Shareholders' Equity/(Deficit): | ||||||||
| Preferred Stock, par value $.01, 10,000,000 shares authorized all series: | ||||||||
| Preferred Series A-1 stock, par value $.01 per share, 21,000 shares authorized; 14,923 and 20,371 shares issued and outstanding at September 30, 2017 and December 31, 2016, respectively | 149 | 204 | ||||||
| Preferred Series B stock, par value $.01 per share, 300,000 shares authorized; no shares issued and outstanding at September 30, 2017 and December 31, 2016, respectively | — | — | ||||||
| Preferred Series C stock, par value $.01 per share, 502 and 615 shares issued and outstanding at September 30, 2017 and December 31, 2016, respectively | 5 | 6 | ||||||
| Common stock, par value $.001 per share, 500,000,000 shares authorized; 47,269,804 and 44,520,065 shares issued and outstanding at September 30, 2017 and December 31, 2016, respectively | 47,270 | 44,520 | ||||||
| Additional paid-in capital | (738,877 | ) | (1,518,484 | ) | ||||
| Accumulated deficit | (2,310,066 | ) | (3,869,385 | ) | ||||
| Total shareholders' equity/(deficit) | (3,001,519 | ) | (5,343,139 | ) | ||||
| Total Liabilities and Shareholders' Equity/(Deficit) | $ | 230,762 | $ | 583,390 | ||||
| The accompanying notes are an integral part of these unaudited condensed consolidated financial statements. | ||||||||
See accompanying notes.
| 3 |
| TIMEFIREVR INC. | ||||||||||||||||
| (FORMERLY ENERGYTEK CORP.) | ||||||||||||||||
| CONDENSED CONSOLIDATED STATEMENTS OF OPERATIONS | ||||||||||||||||
| (Unaudited) | ||||||||||||||||
| Three Months Ended | Nine Months Ended | |||||||||||||||
| September 30, | September 30, | September 30, | September 30, | |||||||||||||
| 2017 | 2016 | 2017 | 2016 | |||||||||||||
| Revenues | $ | 340 | $ | — | $ | 828 | $ | 203,640 | ||||||||
| Cost of sales | 102 | — | 248 | — | ||||||||||||
| Gross profit | 238 | — | 580 | 203,640 | ||||||||||||
| Operating expenses: | ||||||||||||||||
| Research and development | 110,125 | 205,503 | 903,017 | 544,235 | ||||||||||||
| Occupancy | 20,507 | 10,114 | 63,849 | 27,595 | ||||||||||||
| Depreciation and amortization | 3,152 | 3,152 | 9,455 | 9,147 | ||||||||||||
| Officer compensation | 108,864 | 105,875 | 571,779 | 105,875 | ||||||||||||
| Professional fees | 89,457 | 259,381 | 733,823 | 264,209 | ||||||||||||
| Other operating expenses | 1,783 | 8,513 | 35,624 | 15,281 | ||||||||||||
| Total operating expenses | 333,888 | 592,538 | 2,317,547 | 966,342 | ||||||||||||
| Loss from operations | (333,650 | ) | (592,538 | ) | (2,316,967 | ) | (762,702 | ) | ||||||||
| Other income (expense): | ||||||||||||||||
| Change in fair value of derivative | 114,191 | — | 4,129,252 | — | ||||||||||||
| Interest income | — | — | 2 | — | ||||||||||||
| Interest expense | (108,774 | ) | (4,286 | ) | (252,968 | ) | (10,399 | ) | ||||||||
| Total other income (expense) | 5,417 | (4,286 | ) | 3,876,286 | (10,399 | ) | ||||||||||
| Income/(loss) before income taxes | (328,233 | ) | (596,824 | ) | 1,559,319 | (773,101 | ) | |||||||||
| Income tax expense | — | — | — | — | ||||||||||||
| Net income/(loss) | (328,233 | ) | (596,824 | ) | 1,559,319 | (773,101 | ) | |||||||||
| Accretion on Series A preferred stock | — | (397,591 | ) | — | (397,591 | ) | ||||||||||
| Net loss attributed to common shareholders | $ | (328,233 | ) | $ | (994,415 | ) | $ | 1,559,319 | $ | (1,170,692 | ) | |||||
| Basic net income/(loss) per common share | $ | (0.01 | ) | $ | (0.02 | ) | $ | 0.03 | $ | (0.03 | ) | |||||
| Diluted net income/(loss) per common share | $ | (0.01 | ) | $ | (0.02 | ) | $ | 0.02 | $ | (0.03 | ) | |||||
| Basic weighted average common shares outstanding | 47,269,804 | 41,569,112 | 46,135,441 | 41,456,782 | ||||||||||||
| Diluted weighted average common shares outstanding | 47,269,804 | 41,569,112 | 69,561,595 | 41,456,782 | ||||||||||||
| The accompanying notes are an integral part of these unaudited condensed consolidated financial statements. | ||||||||||||||||
RED CAT HOLDINGS
Consolidated Statements Of Operations
(Unaudited)
| Three months ended July 31, | ||||||||
2023 | 2022 | |||||||
| Revenues | $ | 1,748,129 | $ | 1,126,551 | ||||
| Cost of goods sold | 1,573,464 | 1,044,431 | ||||||
| Gross margin | 174,665 | 82,120 | ||||||
| Operating expenses | ||||||||
| Operations | 707,903 | 886,303 | ||||||
| Research and development | 1,138,127 | 449,964 | ||||||
| Sales and marketing | 986,908 | 406,953 | ||||||
| General and administrative | 1,443,156 | 1,062,404 | ||||||
| Stock based compensation | 911,606 | 755,471 | ||||||
| Total operating expenses | 5,187,700 | 3,561,095 | ||||||
| Operating loss | (5,013,035 | ) | (3,478,975 | ) | ||||
| Other (income) expense | ||||||||
| Change in fair value of derivative liability | (26,520 | ) | 92,922 | |||||
| Investment loss (income), net | 239,490 | (130,296 | ) | |||||
| Interest expense | 21,857 | 35,687 | ||||||
| Other, net | 319,913 | 114,914 | ||||||
| Other (income) expense | 554,740 | 113,227 | ||||||
| Net loss from continuing operations | $ | (5,567,775 | ) | $ | (3,592,202 | ) | ||
| Loss from discontinued operations | (242,573 | ) | (219,397 | ) | ||||
| Net loss | $ | (5,810,348 | ) | $ | (3,811,599 | ) | ||
| Loss per share - basic and diluted | ||||||||
| Continuing operations | $ | (0.11 | ) | $ | (0.07 | ) | ||
| Discontinued operations | — | — | ||||||
| Loss per share - basic and diluted | $ | (0.11 | ) | $ | (0.07 | ) | ||
| Weighted average shares outstanding - basic and diluted | 54,935,339 | 53,778,154 | ||||||
See accompanying notes.
| 4 |
| TIMEFIREVR INC. | ||||||||
| (FORMERLY ENERGYTEK CORP.) | ||||||||
| CONDENSED CONSOLIDATED STATEMENTS OF CASH FLOWS | ||||||||
| (Unaudited) | ||||||||
| Nine Months Ended | ||||||||
| September 30, | September 30, | |||||||
| 2017 | 2016 | |||||||
| Operating Activities: | ||||||||
| Net income/(loss) | $ | 1,559,319 | $ | (773,101 | ) | |||
| Adjustments to reconcile net loss to net cash used in operating activities: | ||||||||
| Depreciation and amortization | 9,455 | 9,147 | ||||||
| Common stock issued for services | 242,500 | — | ||||||
| Options issued for services | 411,109 | — | ||||||
| Change in derivative liability | (4,129,252 | ) | — | |||||
| Restricted stock units issued for services | 128,693 | 78,472 | ||||||
| Interest expense from amortization of debt discount | 40,658 | — | ||||||
| Deferred rent | 3,553 | — | ||||||
| Changes in operating assets and liabilities: | ||||||||
| Accounts receivable | (86 | ) | — | |||||
| Prepaid expenses and other current assets | (37,955 | ) | (7,971 | ) | ||||
| Deferred contracted software development costs - related party | — | 55,938 | ||||||
| Escrow fund | 79,855 | (214,750 | ) | |||||
| Deposits | 78,000 | (44,876 | ) | |||||
| Accrued interest | 211,965 | 8,040 | ||||||
| Accounts payable and accrued expenses | 258,928 | 2,112 | ||||||
| Unearned revenue - related party | — | (156,000 | ) | |||||
| Net Cash Used in Operating Activities | (995,858 | ) | (1,042,989 | ) | ||||
| Investing Activities: | ||||||||
| Purchases of property and equipment | — | (8,737 | ) | |||||
| Cash acquired in merger | — | 420 | ||||||
| Net Cash Used in Investing Activities | — | (8,317 | ) | |||||
| Financing Activities: | ||||||||
| Capital contributions | — | 325,000 | ||||||
| Proceeds from sale of Series A Preferred stock | — | 1,500,004 | ||||||
| Proceeds from notes payable | — | 25,000 | ||||||
| Payments on notes payable | — | (27,500 | ) | |||||
| Demand obligation payable - related party | 90,000 | — | ||||||
| Short-term advance - related party | 57,400 | — | ||||||
| Net proceeds from convertible notes payable | 677,500 | — | ||||||
| Net proceeds from convertible notes payable - related party | 95,000 | — | ||||||
| Net Cash Provided by Financing Activities | 772,500 | 1,822,504 | ||||||
| Net Increase in Cash | (223,358 | ) | 771,198 | |||||
| Cash - Beginning of Period | 225,379 | 3,165 | ||||||
| Cash - End of Period | $ | 2,021 | $ | 774,363 | ||||
| Supplemental disclosure of non-cash investing and financing activities: | ||||||||
| Conversion of Series C Preferred stock to common stock | $ | 1,130 | $ | 1,000 | ||||
| Conversion of Series A-1 Preferred stock to common stock | $ | 545 | $ | — | ||||
| Supplemental disclosure of cash flow information: | ||||||||
| Interest paid in cash | $ | 346 | $ | 1,268 | ||||
| Income taxes paid in cash | $ | — | $ | — | ||||
| The accompanying notes are an integral part of these unaudited condensed consolidated financial statements. | ||||||||
RED CAT HOLDINGS
Consolidated Statements of Stockholders’ Equity
For the three months ended July 31, 2023 and July 31, 2022
(Unaudited)
| Series A Preferred | Series B Preferred | Additional | Accumulated Other | |||||||||||||||||||||||||||||||||||||
| Stock | Stock | Common Stock | Paid-in | Accumulated | Comprehensive | Total | ||||||||||||||||||||||||||||||||||
| Shares | Amount | Shares | Amount | Shares | Amount | Capital | Deficit | Income (Loss) | Equity | |||||||||||||||||||||||||||||||
| Balances, April 30, 2022 | — | $ | — | 986,676 | $ | 9,867 | 53,748,735 | $ | 53,749 | $ | 106,821,384 | $ | (27,499,056 | ) | $ | (1,470,272 | ) | $ | 77,915,672 | |||||||||||||||||||||
| Stock based compensation | — | — | — | — | — | — | 755,471 | — | — | 755,471 | ||||||||||||||||||||||||||||||
| Vesting of restricted stock units | — | — | — | — | 69,707 | 69 | (84,145 | ) | — | — | (84,076 | ) | ||||||||||||||||||||||||||||
| Unrealized gain on marketable securities | — | — | — | — | — | — | — | — | 133,582 | 133,582 | ||||||||||||||||||||||||||||||
| Currency translation adjustments | — | — | — | — | — | — | — | — | 352 | 352 | ||||||||||||||||||||||||||||||
| Net Loss | — | — | — | — | — | — | — | (3,811,599 | ) | — | (3,811,599 | ) | ||||||||||||||||||||||||||||
| Balances, July 31, 2022 | — | $ | — | 986,676 | $ | 9,867 | 53,818,442 | $ | 53,818 | $ | 107,492,710 | $ | (31,310,655 | ) | $ | (1,336,338 | ) | $ | 74,909,402 | |||||||||||||||||||||
| Balances, April 30, 2023 | — | $ | — | 986,676 | $ | 9,867 | 54,568,065 | $ | 54,568 | $ | 109,993,100 | $ | (54,586,793 | ) | $ | (861,117 | ) | $ | 54,609,625 | |||||||||||||||||||||
| Stock based compensation | — | — | — | — | — | — | 911,606 | — | — | 911,606 | ||||||||||||||||||||||||||||||
| Vesting of restricted stock units | — | — | — | — | 155,476 | 155 | (8,675 | ) | — | — | (8,520 | ) | ||||||||||||||||||||||||||||
| Conversion of preferred stock | — | — | (982,000 | ) | (9,820 | ) | 818,334 | 818 | 9,002 | — | — | — | ||||||||||||||||||||||||||||
| Unrealized gain on marketable securities | — | — | — | — | — | — | — | — | 289,389 | 289,389 | ||||||||||||||||||||||||||||||
| Currency translation adjustments | — | — | — | — | — | — | — | — | 1,646 | 1,646 | ||||||||||||||||||||||||||||||
| Net loss | — | — | — | — | — | — | — | (5,810,348 | ) | — | (5,810,348 | ) | ||||||||||||||||||||||||||||
| Balances, July 31, 2023 | — | $ | — | 4,676 | $ | 47 | 55,541,875 | $ | 55,541 | $ | 110,905,033 | $ | (60,397,141 | ) | $ | (570,082 | ) | $ | 49,993,398 | |||||||||||||||||||||
See accompanying notes.
| 5 |
RED CAT HOLDINGS
Consolidated Statements of Cash Flows
(Unaudited)
| Three months ended July 31, | ||||||||
| 2023 | 2022 | |||||||
| Cash Flows from Operating Activities | ||||||||
| Net loss | $ | (5,810,348 | ) | $ | (3,811,599 | ) | ||
| Net loss from discontinued operations | (242,573 | ) | (219,397 | ) | ||||
| Net loss from continuing operations | (5,567,775 | ) | (3,592,202 | ) | ||||
| Adjustments to reconcile net loss to net cash from operations: | ||||||||
| Stock based compensation - options | 629,426 | 458,023 | ||||||
| Stock based compensation - restricted units | 282,180 | 297,448 | ||||||
| Amortization of intangible assets | 217,368 | 56,160 | ||||||
| Realized loss from sale of marketable securities | 292,636 | 10,675 | ||||||
| Depreciation | 101,001 | 28,272 | ||||||
| Change in fair value of derivative | (26,520 | ) | 92,922 | |||||
| Changes in operating assets and liabilities | ||||||||
| Accounts receivable | (780 | ) | (257,301 | ) | ||||
| Inventory | (455,871 | ) | (273,439 | ) | ||||
| Other, principally inventory deposits | (1,756,973 | ) | (214,316 | ) | ||||
| Operating lease right-of-use assets and liabilities | (458 | ) | 11,139 | |||||
| Customer deposits | (110,863 | ) | (116,237 | ) | ||||
| Accounts payable | (569,876 | ) | (154,139 | ) | ||||
| Accrued expenses | 40,436 | (161,767 | ) | |||||
| Net cash used in operating activities | (6,926,069 | ) | (3,814,762 | ) | ||||
| Cash Flows from Investing Activities | ||||||||
| Purchases of property and equipment | (5,054 | ) | (544,942 | ) | ||||
| Proceeds from sale of marketable securities | 4,888,399 | 9,094,592 | ||||||
| Purchases of marketable securities | — | (889,943 | ) | |||||
| Net cash provided by investing activities of continuing operations | 4,883,345 | 7,659,707 | ||||||
| Cash Flows from Financing Activities | ||||||||
| Payments under related party obligations | — | (2,861 | ) | |||||
| Payments under debt obligations | (137,989 | ) | (212,789 | ) | ||||
| Payments of taxes related to equity awards | (8,520 | ) | (469,631 | ) | ||||
| Net cash used in financing activities of continuing operations | (146,509 | ) | (685,281 | ) | ||||
| Discontinued operations | ||||||||
| Operating activities | (356,109 | ) | (999,053 | ) | ||||
| Investing activities | — | — | ||||||
| Financing activities | 237,814 | — | ||||||
| Net cash used in discontinued operations | (118,295 | ) | (999,053 | ) | ||||
| Net (decrease) increase in Cash | (2,307,528 | ) | 2,160,611 | |||||
| Cash, beginning of period | 3,260,305 | 4,084,815 | ||||||
| Cash, end of period | 952,777 | 6,245,426 | ||||||
| Cash paid for interest | 22,590 | 36,082 | ||||||
| Cash paid for income taxes | — | — | ||||||
| Non-cash transactions | ||||||||
| Unrealized gain on marketable securities | $ | 289,389 | $ | 133,582 | ||||
| Conversion of preferred stock into common stock | $ | 9,820 | $ | — | ||||
| Shares withheld as payment of note receivable | $ | — | $ | 18,449 | ||||
| Taxes related to net share settlement of equity awards | $ | — | $ | 15,982 | ||||
See accompanying notes.
| 6 |
TIMEFIREVR
RED CAT HOLDINGS, INC.
(FORMERLY ENERGYTEK CORP.)
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
Basis of Presentation and Organization and Reorganization(Unaudited)
TimefireVR Inc. (“Timefire” or the “Company”), formerly EnergyTek Corp., is a Nevada corporation. Effective September 13, 2016, TimefireVR Inc. entered into an Agreement and Plan of Merger ("Merger Agreement") through which it acquired Timefire, LLC, a Phoenix-based virtual reality content developer that is an Arizona Limited Liability Company. As consideration for the merger, the Company issued the equity holders of Timefire, LLC a total of 41,400,000 shares of its common stock, and 2,800,000 five year warrants exercisable at $0.58 per share for 100% of the membership interests of Timefire, LLC. As a result, the former members of Timefire, LLC owned approximately 99% of the then outstanding shares of common stock.
For accounting purposes, the transaction has been recorded as a reverse recapitalization, with Timefire, LLC as the accounting acquirer. Consequently, the historical pre-merger financial statements of Timefire, LLC are now those of the Company. The 41,400,000 shares of common stock issued in the transaction are shown as outstanding for all periods presented in the same manner as a stock split. The accompanyingOur unaudited interim consolidated financial statements reflect the consolidated operations of the Company from September 13, 2016.
On November 14, 2016, the Company filed a Certificate of Amendment to its Articles of Incorporation with the Secretary of State of Nevada to change the Company's name to TimefireVR Inc. and implement a reverse stock split of its common stock at a ratio of one-for-10. The resulting par value difference was charged to additional paid in capital. The name change and reverse stock split each became effective November 21, 2016.
Unaudited Interim Financial Statements
The interim condensed consolidated financial statements of the Company as of September 30, 2017 and 2016, and for the periods then ended,accompanying notes are prepared in accordance with the instructions to Form 10-Q. Accordingly, the accompanying condensed consolidated financial statements and notes thereto do not reflect all disclosures required under accounting principles generally accepted in the United States of America. However, in the opinion of management, the interim financial statements include all adjustments, consisting of only normal recurring adjustments, necessary to present fairly the Company’s financial position as of September 30, 2017 and the results of its operations and its cash flows for the periods ended September 30, 2017 and 2016. These results are not necessarily indicative of the results expected for the year ended December 31, 2017. The financial statements should be read in conjunction with the latest annual financial statements filed with the Securities and Exchange Commission on Form 10-K. The balance sheet as of December 31, 2016 has been derived from the audited financial statements included in that filing.
Principles of Consolidation
The consolidated financial statements include the accounts of the Company and its wholly-owned subsidiary. All significant intercompany transactions and balances have been eliminated. Equity investments through which we exercise significant influence over but do not control the investee and are not the primary beneficiary of the investee's activities are accounted for using the equity method where applicable.
Accounting Estimates
The preparation of financial statements in conformity with accounting principles generally accepted in the United States of America ("GAAP"). In the opinion of management, the unaudited interim consolidated financial statements reflect all adjustments of a normal recurring nature that are necessary for a fair presentation of the results for the interim periods presented. Interim results are not necessarily indicative of results for a full year. The information included in this Form 10-Q should be read in conjunction with the financial information included in the Annual Report on Form 10-K for the fiscal year ended April 30, 2023 of Red Cat Holdings, Inc. (the "Company"), filed with the Securities and Exchange Commission ("SEC") on July 27, 2023.
Note 1 – The Business
Red Cat Holdings (“U.S. Red Cat” or the “Company”) was originally incorporated in February 1984. Since April 2016, the Company’s primary business has been to provide products, services and solutions to the drone industry which it presently does through its four wholly owned subsidiaries. Beginning in January 2020, the Company expanded the scope of its drone products and services through four acquisitions, including:
| A. | In January 2020, the Company acquired Rotor Riot, a provider of First Person View (FPV) drones and equipment, primarily to the consumer marketplace. The purchase price was $1,995,114. |
| B. | In November 2020, the Company acquired Fat Shark Holdings, a provider of FPV video goggles to the drone industry. The purchase price was $8,354,076. |
| C. | In May 2021, the Company acquired Skypersonic which provides hardware and software solutions that enable drones to complete inspection services in locations where GPS is not available, yet still record and transmit data even while being operated from thousands of miles away. The purchase price was $2,791,012. |
| D. | In August 2021, the Company acquired Teal Drones, a leader in commercial and government UAV (Unmanned Aerial Vehicles) technology. The purchase price was $10,011,279. |
Following the Teal acquisition in August 2021, we focused on integrating and organizing these businesses. Effective May 1, 2022, we established the Enterprise and Consumer segments in order to sharpen our focus on the unique opportunities in each sector. Enterprise's initial strategy was to provide UAV's, primarily drones, to commercial enterprises, including the military, to navigate dangerous military environments and confined industrial and commercial interior spaces. Subsequently, Enterprise narrowed its near-term focus on the military and other government agencies. Skypersonic's technology has been re-focused on military applications and its operations consolidated into Teal. The Consumer segment, which includes Fat Shark and Rotor Riot, is focused on hobbyists and enthusiasts which are expected to increase as drones become more visible in our daily lives. The reportable segments were established based on how our chief operating decision maker (“CODM”), which is a committee comprised of our Chief Executive Officer (“CEO”), Chief Operating Officer (“COO”) and our Chief Financial Officer (“CFO”), manages our business, makes resource allocation and operating decisions, and evaluates operating performance. See “Note 21 - Segment Reporting”.
In November 2022, we entered into an agreement to sell our Consumer segment to Unusual Machines, Inc. (or “Unusual Machines” or “UM”). The adjusted sale price is $20 million, including $3 million in cash, at closing, and $17 million in securities of Unusual Machines. The agreement reflects the Company's decision to focus its efforts and capital on military and defense where it believes that there are more opportunities to create long term shareholder value. The closing of the transaction is contingent upon Unusual Machines completing (i) an initial public offering that raises sufficient capital to close the transaction, and (ii) a listing on a public stock exchange such as the NYSE or Nasdaq.
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Note 2 – Summary of Significant Accounting Policies
Basis of Accounting– The financial statements and accompanying notes are prepared in accordance with generally accepted accounting principles in the United States (“GAAP”). Certain prior period amounts have been restated to conform to the current year presentation.
Principles of Consolidation – Our consolidated financial statements include the accounts of our wholly owned operating subsidiaries which include Teal Drones, Skypersonic, Rotor Riot, and Fat Shark. Intercompany transactions and balances have been eliminated.
As further described in Note 3, we presently expect to sell our Consumer segment, which includes Rotor Riot and Fat Shark, within the next twelve months. Accordingly, the Consumer segment businesses are characterized as Discontinued Operations in these financial statements. The assets and liabilities of these entities have been presented separately in the Consolidated Balance Sheet as discontinued operations. Similarly, the operating results and cash flows of discontinued operations are separately stated in those respective financial statements.
Use of Estimates – The preparation of financial statements in accordance with GAAP requires management to make estimates and assumptions that affect the reported amounts of assets and liabilities, andthe 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 materially differ from those estimates. Significant estimates reflected in these financial statements include those used to (i) determine stock-based compensation, (ii) complete purchase price accounting for acquisitions, (iii) accounting for derivatives, (iv) reserves and allowances related to accounts receivable and inventory, and (v) the evaluation of long-term assets, including goodwill, for impairment.
Cash and Cash Equivalents– At July 31, 2023, we had cash of $937,756 in multiple commercial banks and financial services companies. We have not experienced any loss on these cash balances and believe they are not exposed to any significant credit risk.
Marketable Securities– Our marketable securities have been classified and accounted for as available-for-sale securities. These securities are primarily invested in corporate bonds and are readily saleable, and therefore, we have classified them as short term. Our available-for-sale securities are carried at fair value with any unrealized gains and losses reported as a component of comprehensive income (loss). Once realized, any gains or losses are recognized in the statement of operations.
We have elected to present accrued interest income separately from marketable securities on our consolidated balance sheets. Accrued interest income was $82,318 and $151,671 as of July 31, 2023 and April 30, 2023, respectively, and was included in other current assets. We did not write off any accrued interest income during the three months ended July 31, 2023 and 2022.
Accounts Receivable, net – Accounts receivable are recorded at the invoiced amount less allowances for doubtful accounts. The Company's estimate of the Company include accountingallowance for depreciationdoubtful 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 amortization, derivative liability, accruals and contingencies,other factors. Accounts receivable balances are written off against the fair value of Company common stock and the estimated fair value of warrants.
Revenue Recognition
The Company uses Financial Accounting Standards Board (“FASB”) Accounting Standards Codification (“ASC”) No. 605 for revenue recognition. The Company recognizes revenueallowance when it is realized or realizable and earned. The Company considers revenue realized or realizable and earned when all of the following criteria are met: (i) persuasive evidence of an arrangement exists, (ii) the sales price is fixed or determinable, and (iii) collectability is reasonably assured.
Cash and Cash Equivalents
The Company considers all highly liquid instruments, with original maturity of three months or less when purchased, to be cash equivalents.
Escrow Fund
Pursuant to the Series A Preferred Stock Securities Purchase Agreement ("SPA") (see Note 7), the Company was required to hold an initial amount of $215,000 in cash in escrow. The cash is restricted to be used for certain expenses as defined in the SPA. On March 3, 2017, the Company received financing via notes payable (see Note 4). Per the terms of those notes, the Company was required to put $100,000 of the proceeds into the escrow account. As of September 30, 2017, $315,000 has been disbursed from the escrow account, leaving a remaining balance of $0.
Property and Equipment
Property and equipment are recorded at cost. Depreciation is provided for on the straight-line method, over the estimated useful lives of the assets. Maintenance and repairs that neither materially add to the value of the property nor appreciably prolong its life are charged to expense as incurred. Betterments or renewals are capitalized when incurred. Gains and losses on the disposition of property and equipment are recorded in the period incurred.
The estimated useful lives of property and equipment are:
Impairment of Long-Lived Assets and Amortizable Intangible Assets
The Company follows ASC 360-10,"Property, Plant, and Equipment," which established a"primary asset" approach to determine the cash flow estimation period for a group of assets and liabilities that represents the unit of accounting for a long-lived asset to be held and used. Long-lived assets to be held and used are reviewed for impairment whenever events or changes in circumstances indicateprobable that the carrying amount of an asset mayreceivable will not be recoverable. The carrying amountcollected.
Inventories – Inventories, which consist of a long-lived asset is not recoverable if it exceeds the sum of the undiscounted cash flows expected to result from the useraw materials, work-in-process, and eventual disposition of the asset. Long-lived assets to be disposed offinished goods, are reportedstated at the lower of carrying amountcost or fairnet realizable value, less cost to sell.
Business Segments
ASC 280,"Segment Reporting" requires use of the"management approach" model for segment reporting. The management approach model is based on the way a company's management organizes segments within the company for making operating decisions and assessing performance. The Company determined it has one operating segment as of September 30, 2017.
Income Taxes
The Company accounts for income taxes under FASB ASC 740, Income Taxes. Deferred income tax assets and liabilities are determined based upon differences between financial reporting and tax bases of assets and liabilities and are measured using the enacted tax ratesfirst-in, first-out method. Cost components include direct materials and laws that will be in effect when the differences are expected to reverse.
Stock-Based Compensation
In accordance with ASC No. 718, Compensation – Stock Compensation (“ASC 718”),direct labor, as well as in-bound freight. At each balance sheet date, the Company measuresevaluates the compensation costs of stock-based compensation arrangements based on the grant date fairnet realizable value of granted instrumentsits inventory using various reference measures including current product selling prices, as well as evaluating for excess quantities and recognizes the costs in the financial statements over the period during which such awards vest. Stock-based compensation arrangements include stock options and restricted stock awards.obsolescence.
Equity instruments (“instruments”) issued to non-employees are recorded on the basis of the fair value of the instruments, as required by ASC 718. ASC No. 505, Equity Based Payments to Non-Employees (“ASC 505”), defines the measurement date and recognition period for such instruments. In general, the measurement date is (a) when a performance commitment, as defined, is reached or (b) when the earlier of (i) the non-employee performance is complete and (ii) the instruments are vested. The measured fair value related to the instruments is recognized over a period based on the facts and circumstances of each particular grant as defined in ASC 505.
Net Income/(Loss) Per Share
Basic earnings per share does not include dilution and is computed by dividing loss available to common stockholders by the weighted average number of common shares outstanding for the period. Diluted earnings per share reflects the potential dilution of securities that could share in the earnings of an entity. Dilutive securities are not included in the weighted average number of shares when inclusion would be anti-dilutive. As of September 30, 2017 and 2016, there were total shares of 23,426,154 and 22,119,943, respectively, issuable upon conversion of preferred stock, exercise of warrants and options.
Fair Value Measurements
ASC 820 Fair Value Measurements defines fair value, establishes a framework for measuring fair value in generally accepted accounting principles, and expands disclosure about fair value measurements.
The following provides an analysis of financial instruments that are measured subsequent to initial recognition at fair value, grouped into Levels 1 to 3 based on the degree to which fair value is observable:
Level 1- fair value measurements are those derived from quoted prices (unadjusted in active markets for identical assets or liabilities);
Level 2- fair value measurements are those derived from inputs other than quoted prices included within Level 1 that are observable for the asset or liability, either directly (i.e. as prices) or indirectly (i.e. derived from prices); and
Level 3- fair value measurements are those derived from valuation techniques that include inputs for the asset or liability that are not based on observable market data (unobservable inputs).
Financial instruments classified as Level 1 - quoted prices in active markets include cash.
These financial instruments are measured using management’s best estimate of fair value, where the inputs into the determination of fair value require significant management judgment to estimation. Valuations based on unobservable inputs are highly subjective and require significant judgments. Changes in such judgments could have a material impact on fair value estimates. In addition, since estimates are as of a specific point in time, they are susceptible to material near-term changes. Changes in economic conditions may also dramatically affect the estimated fair values.
Fair value estimates discussed herein are based upon certain market assumptions and pertinent information available to management as of September 30, 2017. The respective carrying value of certain financial instruments approximated their fair values due to the short-term nature of these instruments. These financial instruments include cash, accounts payable and accrued expenses.
Derivative Liability
The Company issued common stock warrants in September 2016 in conjunction with the Merger Agreement and the Securities Purchase Agreement. Additional warrants were issued in March and August 2017 as part of private placement offerings (see Note 4). In accordance with Accounting Standards Codification (“ASC”) 480, Distinguishing Liabilities from Equity (“ASC 480”), the fair value of these warrants is classified as a liability on the Company’s Condensed Consolidated Balance Sheets because, according to the warrants' terms, a fundamental transaction could give rise to an obligation of the Company to pay cash to certain warrant holders and the Company has concluded that the remaining warrants are not indexed to the Company’s common stock. Corresponding changes in the fair value of the warrants are recognized in earnings on the Company’s Consolidated Statements of Operations in each subsequent period.
The fair value of the warrants at September 30, 2017 and December 31, 2016 was $262,823 and $4,392,075, respectively. The difference has been recorded as a change in change in fair value of derivative.
The Company has incurred losses since inception and requires additional funds for future operating activities. The Company’s selling activity has not reached a level of revenue sufficient to fund its operating activities. These factors create an uncertainty as to how the Company will fund its operations and maintain sufficient cash flow to operate as a going concern. The combination of these factors, among others, raise substantial doubt about the Company’s ability to continue as a going concern. Management’s plans in response to these factors include the issuances of debt in exchange for cash such as that which is described in Note 9, Subsequent Events.
The Company’s ability to meet its cash requirements in the next year is dependent upon obtaining additional financing. If this is not achieved, the Company will be unable to obtain sufficient cash flow to fund its operations and obligations, and as a result there is substantial doubt the Company will be able to continue as a going concern. The accompanying condensed consolidated financial statements have been prepared on a going concern basis, and accordingly, do not include any adjustments relating to the recoverability and classification of recorded asset amounts; nor do they include adjustments to the amounts and classification of liabilities that might be necessary should the Company be unable to continue operations or be required to sell its assets.
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The Company accountedGoodwill and Long-lived Assets – Goodwill represents the future economic benefit arising from other assets acquired in an acquisition that are not individually identified and separately recognized. We test goodwill for impairment in accordance with the Merger Agreement with Timefire asprovisions of ASC 350, Intangibles – Goodwill and Other, (“ASC 350”). Goodwill is tested for impairment at least annually at the reporting unit level or whenever events or changes in circumstances indicate that goodwill might be impaired. ASC 350 provides that an entity has the option to first assess qualitative factors to determine whether the existence of events or circumstances leads to a reverse recapitalization, with Timefire being the accounting acquirer. In its determination that Timefire wasit is more likely than not that the accounting acquirer,fair value of a reporting unit is less than its carrying amount. If, after assessing the Companytotality of events or circumstances, an entity determines it is not more likely than not that the fair value of a reporting unit is less than its carrying amount, then additional impairment testing is not required. However, if an entity concludes otherwise, then it is required to perform an impairment test. The impairment test involves comparing the estimated fair value of a reporting unit with its book value, including goodwill. If the estimated fair value exceeds book value, goodwill is considered pertinent facts and circumstances, includingnot to be impaired. If, however, the following: (i) the Timefire owners received the largest portionfair value of the voting rights of the combined entity; (ii) the management team of the combined entityreporting unit is primarily comprised of owners or management of Timefire; (iii) the Board of Directors of the combined entityless than book value, then an impairment loss is primarily comprised of owners, management or affiliates of Timefire; (iv) the continuing business of the combined entity will be the business of Timefire.
On March 6, 2017, the Company closed on a private placement offering with institutional investors and one director (the "Investors") pursuant to which the Company issued and sold the Investors Senior Convertible Notes (the “Notes”)recognized in the aggregate principal amount of $750,000, with an original issue discount of 5%, for gross proceeds to the Company of $712,500 prior to payment of $20,000 in reimbursement of legal fees of the lead Investor. The Notes matured on September 3, 2017 (the “Maturity Date”) and bear interest at 8% per annum, with a default interest rate of 18% from the default date. On the Maturity Date, the Company was obligated to repay an amount equal to 120%the amount that the book value of outstanding principalthe reporting unit exceeds its fair value, not to exceed the total amount of goodwill allocated to the reporting unit.
The estimate of fair value of a reporting unit is computed using either an income approach, a market approach, or a combination of both. Under the income approach, we utilize the discounted cash flow method to estimate the fair value of a reporting unit. Significant assumptions inherent in estimating the fair values include the estimated future cash flows, growth assumptions for future revenues (including gross margin, operating expenses, and accrued interest. This additional 20% amountedcapital expenditures), and a rate used to $171,000 asdiscount estimated future cash flow projections to their present value based on estimated weighted average cost of September 30, 2017,capital (i.e., the selected discount rate). Our assumptions are based on historical data, supplemented by current and itanticipated market conditions, estimated growth rates, and management’s plans. Under the market approach, fair value is included in accrued interestderived from metrics of publicly traded companies or historically completed transactions of comparable businesses. The selection of comparable businesses is based on the balance sheet. Onmarkets in which the Maturity Date (and subsequently,reporting units operate and consider risk profiles, size, geography, and diversity of products and services.
Goodwill for Rotor Riot relates to its strong social media presence including more than 200,000 YouTube subscribers. Goodwill for Fat Shark is attributable to its relationship with manufacturing sources in China and the potential to integrate its goggle technologies with the Teal drone. Goodwill for Teal is ascribed to its existing relationship with several U.S. government agencies including its classification as an approved vendor. The Company expects that the Goodwill recognized in each transaction will be deductible for tax purposes. The Company has reported net losses since its inception and is presently unable to determine when and if the Holders elect to extendtax benefit of this deduction will be realized.
Property and equipment – Property and equipment is stated at cost less accumulated depreciation which is calculated using the Maturity Date),straight-line method over the Investors may elect to convert the Notes into the common stock of the Company at $0.30 per share, subject to adjustment (the “Conversion Price”). As additional consideration, the Company issued the Investors a total of 2,500,000 five-year warrants to purchase the Company’s common stock, which are exercisable on or after the Maturity Date at $0.35 per share. The Company failed to pay the Notes on the Maturity Date, which date the investors did not elect to extend.
On August 18, 2017, the Company closed on an offering of convertible notes and warrants on terms substantially identical to the March 6, 2017 financing. The purchasers are the same investors as in the March financing except for one person who is a former director that did not participate in this financing. The Company received $60,000 in net proceeds from the issuance of $63,158 of convertible notes. Additionally, the Company issued the investors a total of 210,526 five-year warrants at $.35 per share. The Company failed to pay these convertible notes when due on September 3, 2017.
The original issue discount interest expense of $40,658 was amortized over theestimated useful life of the Notes,asset. The estimated useful lives of our property and was fully amortized asequipment are generally: (i) furniture and fixtures - seven years, (ii) equipment and related - two to five years, and (iii) leasehold improvements - 15 years.
Leases – Effective August 1, 2021, the Company adopted Accounting Standards Codification (ASC) 842 titled “Leases” which requires the recognition of September 30, 2017.
assets and liabilities associated with lease agreements. The Company was unableadopted ASC 842 on a modified retrospective transition basis which means that it did not restate financial information for any periods prior to pay approximately $1,012,000 to retire its convertible notes due September 3, 2017. 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 has no finite plans concerningdetermines 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 financing, although it has had preliminary discussions with investors about a restructuring which wouldminimum lease payments over the remaining lease term. The Company's leases do not provide some working capital. No specific terms have been discussed and any financing will be very dilutive to existing shareholders.
As discussed in Note 4, on March 6, 2017,an implicit rate. Therefore, the Company closeduses an effective discount rate of 12% based on its last debt financing. Operating lease assets are measured by adjusting the lease liability for lease incentives, initial direct costs incurred and asset impairments. Lease expense for minimum lease payments is recognized on a private placement offering that included as an investor a Company director (who subsequently resigned). This investor’s note is for $100,000.
On June 2, 2017,straight-line basis over the Company entered into an agreementlease term with an entity managedthe operating lease asset reduced by a former directorthe amount of the Companyexpense. Lease terms may include options to provide servicesextend 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 entity. A retainer deposit of $57,400 wasprice that would be received and services were to be initiated within sixty days. As of September 30, 2017,sell an asset or paid to transfer a liability (an exit price) in an orderly transaction between market participants at the measurement date. In accordance with this guidance, the Company has not yet performed the services outlined in this agreement,categorized its recurring basis financial assets and per its terms, will need to return the deposit. This amount is included in short term advance–related partyliabilities into a three-level fair value hierarchy based on the balance sheet.
Duringpriority of the quarter ended September 30, 2017, the Company received advances totaling $90,000 from a related party, an original Timefire, LLC investor. These are not evidenced by a promissory note at this time. Until otherwise determined, this is considered a short-term demand obligation. The Company has no finite plans concerning the repayment of this obligation, however, it has had preliminary discussions with investors about a restructuring that would address the satisfaction of this obligation.
Employment Agreements
Effective September 13, 2016, the Company entered into an employment agreement with its then Chief Executive Officer ("CEO"). The agreement was for a two year period at the rate of $150,000 per annum. The agreement could automatically be extended for additional terms of one year each unless terminated by either party. In addition to other customary benefits, the CEO was granted 500,000 restricted stock units ("RSUs") which were scheduled to vest over a two year period. Effective January 31, 2017, the Company entered into an agreement with its former Chief Executive Officer following his resignation, which terminated the employment agreement and pursuant to which he also agreed to provide certain consulting servicesinputs to the Company for a period of six months, for a monthly fee of $12,500. In addition, under the agreement, 333,333 unvested restricted stock units previously granted were immediately vested.valuation technique.
Effective September 13, 2016, the Company entered into an employment agreement with its new President. The agreement is for a two year period at the rate of $150,000 per annum. The agreement will be automatically extended for additional terms of one year each unless terminated by either party. The Company is currently in default on this agreement, and the payroll for this officer has been accruing since July 8, 2017.
Effective September 13, 2016, the Company entered into an employment agreement with its new Chief Strategy Officer, who has since been named our Chief Executive Officer. The agreement is for a two year period at the rate of $150,000 per annum. The agreement will be automatically extended for additional terms of one year each unless terminated by either party. The Company is currently in default on this agreement, and the payroll for this officer has been accruing since May 16, 2017.
For more information on these employment agreements, see Subsequent Events Note 9.
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Lease AgreementsThe 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.
On September 23, 2016,
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.
Disclosures for Non-Financial Assets Measured at Fair Value on a Non-Recurring Basis
The Company's financial instruments mainly consist of cash, receivables, current assets, accounts payable, accrued expenses and debt. The carrying amounts of 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 liabilities on 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 office lease agreement commencing October 1, 2016.initial stated amount or the conversion price of a future offering. This lease expires December 31, 2018. A concessionvariable conversion feature was recognized as a derivative. Both financings included the issuance of the first five months’ rent was provided. After that time, the monthly rent will be $8,121 for months 6 through 17, and $8,375 for months 18 through 27. Total rent to be paid over the course of the lease is being expensed ratably over the period of the entire lease, creating a deferred rent liability of $23,687 as of September 30, 2017.warrants which contained similar variable conversion features. The Company has paidvalues these convertible notes and warrants using the multinomial lattice method that values the derivative liability based on a security depositprobability 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 $41,876.operations.
Other Agreements
On November 11, 2016, theRevenue Recognition– The Company entered into a six-month agreementrecognizes revenue in accordance with a firm to act as its corporate communications counsel. The monthly fee for these services was $6,500. Additionally, the Company issued 125,000 shares of common stock per this agreement for a total expense of $162,500.
On January 20, 2017, the Company entered into an agreementASC 606, “Revenue from Contracts with a firm to provide their artificial intelligence conversational voice platform for integration into the Company’s product. Per the agreement, the Company issued 50,000 shares of common stock and will make scheduled monthly payments towards a $127,500 integration fee. Additionally, the Company will pay a royalty of 25% of all revenues attributable to their enhancements of the platform.
On March 13, 2017, the Company entered into an agreement with a firm to provide corporate development and strategic advisory services. Per the terms of the agreement, the Company paid $15,000 upon execution of the contract with an additional fee of $5,000 due thirty days from execution. Additionally, upon a financing of the Company through a party introduced by the firm, the Company will pay a cash fee of 7% of proceeds and will also issue a warrant to purchase the Company’s common shares equal to 7% of the number of sharesCustomers”, issued by the Company inFinancial Accounting Standards Board (“FASB”). This standard includes a financing.
On November 7, 2016,comprehensive evaluation of factors to be considered regarding revenue recognition including (i) identifying the Company entered into an agreement withpromised 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 firmsingle component, specifically, the shipment of goods to provide general advisory and business development advisory services for a fee of $75,000.customers as orders are fulfilled. The Company remitted $75,000, but the contract was ultimately cancelled and the services were postponed.recognizes revenue upon shipment. The amount was recorded as a deposit on contract. Later, on March 27, 2017, the Company entered into an agreement with the same firm to provide these services on an expanded scale for a fee of $150,000. Per the agreement, the firm applied our previously remitted funds and we paid the remaining $75,000 balance. In addition to the cash compensation, the firm was also compensated via a one-time equity retainer of 25,000 shares of common stock.
On April 4, 2017, the Company entered into an agreement with a firm to provide management and general business consulting services. The termtiming of the agreementshipment of orders can vary considerably depending upon whether an order is 24 months,for an item normally maintained in inventory or an order that requires assembly or unique parts. Customer deposits totaled $45,123 and the firm will be compensated via the issuance of 1,000,000 shares of common stock. The shares will be expensed ratably over the term of the agreement.$155,986 at July 31, 2023 and April 30, 2023, respectively.
Common Stock
There is currently only one class of common stock. Each share common stock is entitled to one vote. The authorized number of shares of common stock of the Company at September 30, 2017 and December 31, 2016 was 500,000,000 shares with a par value per share of $0.001. Authorized shares that have been issued and fully paid amounted to 47,269,804 as of September 30, 2017.
On September 13, 2016, the Company entered into a Merger Agreement through which the Company acquired Timefire (See Note 1). As consideration for the merger, the Company issued the equity holders of Timefire a total of 41,400,000 shares of the Company’s common stock, and 2,800,000 five year warrants exercisable at $0.58 per share for 100% of the membership interests of Timefire. The members of Timefire may also be entitled to additional warrants contingent on certain future financings, as defined in the Merger Agreement.
Preferred Stock
The Company is authorized to issue 10,000,000 shares of Preferred stock with a par value of $0.01 per share, with rights, preferences and limitations as may be decided from time-to-time by the Board of Directors.
Series C
In 2014, the Board of Directors approved the issuance of Series C Preferred Stock ("Series C"). 900 Shares of Series C Preferred Stock were issued in exchange for 900 Shares of previously issued Series A Preferred Stock ("Prior Series A"). Each share of Series C shall be convertible at the option of the holder at any time, into 10,000 shares of common stock. Each holder of Series C shall be entitled to one vote for each share of Series C held. Holders cannot convert their Series C to the extent that after such conversion, they and their affiliates would beneficially own in excess of 9.99% of the Company’s common stock, which limitation is waivable upon 61 days’ notice to the Company. In addition, certain holders subsequently agreed to reduce their beneficial ownership limitation to 2.49%. In 2015, 10 Series C shares were converted into 100,000 shares of our common stock. In 2016, holders of 275.46 shares of Series C converted them into 2,754,600 shares of our common stock. During the nine months ended September 30, 2017, holders of 113 shares of Series C converted them into 1,130,000 shares of our common stock. At September 30, 2017, there are 501.54 shares of Series C outstanding.
| 10 |
Series A-1
Effective August 24, 2016, the Board of Directors approved the issuance of Series A-1 Preferred Stock ("Series A-1"). The Company entered into agreementsResearch and Development– Research and development expenses include payroll, employee benefits, and other headcount-related expenses associated with certain note holders under which the note holders agreed to convert an aggregate of $229,170 in principalproduct development. Research and accrued interest intodevelopment expenses also include third-party development and programming costs, as well as a total of 20,371 shares of Series A-1 Preferred Stock. Eachproportionate share of Series A-1 shall be convertible atoverhead 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 optionproducts 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 holder at any time, into 100 sharesproducts.
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 common stock. The Series A-1 ranks senior to the common stockassets and junior to the Series C. Holders of Series A-1 are entitled to receive dividends and vote together with holders of the common stock on an as-converted basis. Holders cannot convert their Series A-1 to the extent that after such conversion, theyliabilities and their affiliatestax bases. Deferred tax assets and liabilities are adjusted for the effects of changes in tax laws and rates on the date of enactment.
Recent Accounting Pronouncements– Management does not believe that recently issued, but not yet effective accounting pronouncements, if adopted, would beneficially ownhave a material effect on the accompanying consolidated financial statements.
Foreign Currency – The functional currency of our international subsidiary, Skyset, is the local Italian currency. For that subsidiary, we translate assets and liabilities to U.S. dollars using period-end exchange rates, and average monthly exchange rates for revenues, costs, and expenses. We record translation gains and losses in excessaccumulated other comprehensive income.
Comprehensive Loss– Comprehensive loss consists of 2.49%net loss and other comprehensive loss. Other comprehensive loss refers to gains and losses that are recorded as an element of the Company’s common stock, which limitationstockholders' equity and are excluded from net loss. Our other comprehensive loss is waivable upon 61 days’ notice to the Company.comprised of foreign currency translation adjustments and unrealized gains or losses on available-for-sale securities. During the ninethree months ended September 30, 2017, holdersJuly 31, 2023 and July 31, 2022, comprehensive loss was $291,035 and $133,934 lower than net loss, respectively, related to unrealized gains on available-for-sale securities totaling $289,389 and $133,582, respectively, and foreign currency translation adjustments of 5447.39 shares$1,646 and $352.
Stock-Based Compensation– Stock options are valued using the estimated grant-date fair value method of Series A-1 converted them into 544,739 sharesaccounting in accordance with ASC Topic 718, Compensation – Stock Compensation. Fair value is determined based on the Black-Scholes Model using inputs reflecting our estimates of common stock. At September 30, 2017, there are 14,923 sharesexpected volatility, term and future dividends. We recognize forfeitures as they occur. The fair value of Series A-1 outstanding.
Series A
Effective September 13, 2016,restricted stock is based on our stock price on the Company closeddate of grant. Compensation costs is recognized on a Securities Purchase Agreementstraight-line basis over the service period which is the vesting term.
Each sharehas been calculated by dividing net loss by the weighted average number of New Series A shall be convertible, at the option of the holder, into 50 shares of common stock subject to certain adjustments. The New Series A ranks senior to all other classes and seriesoutstanding during the period. Common stock equivalents were excluded from the computation of the Company's capital stock. Holdersdiluted net loss per share of New Series A are entitled to receive dividends and vote together with holders of the common stock on an as-converted basis. At September 30, 2017, therebecause they were anti-dilutive. The conversion or exercise of these common stock equivalents would dilute earnings per share if we become profitable in the future. Outstanding securities not included in the computation of diluted net loss per share because their effect would have been anti-dilutive included:
| July 31, 2023 | April 30, 2023 | |||||||
| Series B Preferred Stock, as converted | 3,896 | 822,230 | ||||||
| Stock options | 6,884,017 | 4,784,809 | ||||||
| Warrants | 1,539,999 | 1,539,999 | ||||||
| Restricted stock | 842,701 | 781,060 | ||||||
| Total | 9,270,613 | 7,928,098 | ||||||
Related Parties – Parties are 133,334 shares of New Series A outstanding.
New Series A contains certain provisions that are outside the Company's control and which the Company believes cause the New Series Aconsidered to be classified as mezzanine equity.
Warrants
The balance of warrants outstanding for purchase of the Company’s common stock as of September 30, 2017 is as follows:
| Common Shares Issuable Upon Exercise of Warrants | Exercise Price of Warrants |
Date Issued |
Expiration Date | |||||||||||
| Balance of warrants at December 31, 2016 | 5,386,207 | |||||||||||||
| Issued per offering (1) | 2,500,003 | $.35 | 3/3/2017 | 9/3/2022 | ||||||||||
| Issued per offering (2) | 210,526 | $.35 | 8/21/17 | 2/21/2023 | ||||||||||
| Balance of warrants at September 30, 2017 | 8,096,736 | |||||||||||||
(1) On March 3, 2017, per the terms of an offering (see Note 4), the Company issued warrants at $.35related to purchase 2,500,003 shares of common stock. The warrants may not be exercised for six months after their effective date of March 3, 2017. The warrantsus if they have an expiration date of five years after the initial six months have passed. As of September 30, 2017, the Company has recorded $89,250 as a derivative liability for these warrants.
(2) On August 21, 2017, per the terms of an offering (see Note 4), the Company issued warrants at $.35 to purchase 210,526 shares of common stock. The warrants may not be exercised for six months after their effective date of August 21, 2017. The warrants have an expiration date of five years after the initial six months have passed. As of September 30, 2017, the Company has recorded $7,516 as a derivative liability for these warrants.
2016 Equity Incentive Plan
Effective September 13, 2016, the Company adopted the 2016 Equity Incentive Plan (the "2016 Plan") to provide an incentive to our employees, consultants, officerscontrol or significant influence, directly or indirectly, over us, including key management personnel and directors who are responsible for or contribute to our long range success. A total of 3,300,000 shares of our common stock have been reserved for the implementation of the 2016 Plan, either through the issuance of incentive stock options, non-qualified stock options, stock appreciation rights ("SARs"), restricted awards, or restricted stock units ("RSUs"). Whenever practical, the 2016 Plan is to be administered by a committee of not less than two members of the Board of Directors appointed by the full Board, and the 2016 Plan has a term of ten years, unless sooner terminated by the Board. As of September 30, 2017, 1,145,000 shares of common stockDirectors. Related Party transactions are available for issuance under the 2016 Plan.disclosed in Note 20.
Effective September 13, 2016, pursuant to his employment agreement, the Company entered into a Restricted Stock Unit Agreement with its CEO which granted the CEO 500,000 RSUs pursuant to the 2016 Plan. The RSUs were to vest in three approximately equal increments with the first tranche being fully vested on the grant date and the remaining tranches vesting on the first-year and second-year anniversaries of the grant date. The fair value of the award was calculated based on the price of the common stock on the grant date and is being charged to operations over the vesting period. Effective January 31, 2017, this employment agreement was terminated and the RSUs became fully vested. The Company recorded $128,693 in expense in connection with the acceleration of the vesting of the remaining amount of this grant during the nine months ended September 30, 2017.
On January 20, 2017, the Company granted options to purchase 1,655,000 shares of its common stock at $.50 to employees including a total of 800,000 options to its Chief Executive Officer and Chief Financial Officer per the 2016 Equity Incentive Plan. The shares will vest based on months of service as of the grant date. Employees that had worked for twelve months or more as of the grant date had one-third of their options vested as of grant date. All other employees received pro-rata vesting for the portion of a year that they had worked. The remaining options will equally vest on the 1st and 2nd anniversary of the grant date. The Company recorded $411,109 in expense related to this grant in the nine months ended September 30, 2017.
| 11 |
Segment Reporting
Our financial instruments consist of cash, accounts payable, accrued liabilities, and warrant liability. We do not believe thatSince January 2020, we are exposed to significant interest, currency, or credit risks arising from these financial instruments. The fair valueshave acquired four separate businesses operating in various aspects of the warrants approximates their carrying values using Level 3 inputs. Gainsdrone industry. Following the Teal acquisition in August 2021, we focused on integrating and losses recognizedorganizing these businesses. Effective May 1, 2022, we established the Enterprise and Consumer segments in order to sharpen our focus on changesthe unique opportunities in fair valueeach sector. Enterprise's initial strategy was to provide UAV's, primarily drones, to commercial enterprises, including the military, to navigate dangerous military environments and confined industrial and commercial interior spaces. Subsequently, Enterprise narrowed its near-term focus on the military and other government agencies. Skypersonic's technology has been re-focused on military applications and its operations consolidated into Teal. The Consumer segment, which includes Fat Shark and Rotor Riot, is focused on hobbyists and enthusiasts which are expected to increase as drones become more visible in our daily lives. The reportable segments were established based on how our chief operating decision maker (“CODM”), which is a committee comprised of the warrants are reported in other income (expense). Our warrant valuation was measured at fair value by applying the Black-Scholes option valuation model, which utilizes Level 3 inputs. The assumptions used in the Black-Scholes option re-valuation for the September 2016 warrants at September 30, 2017 are as follows: dividend yield – 0%; risk-free interest rate - 1.92%; expected life – 4.0 years; volatility 178.656%. The assumptions used for the March and August 2017 warrants at September 30, 2017 are as follows: dividend yield – 0%; risk-free interest rate - 1.92%; expected life – 5.0 years; volatility 183.555%.
The following summarizes the Company's financial liabilities that are measured at fair value on a recurring basis at September 30, 2017.
| Level 1 | Level 2 | Level 3 | Total | |||||||||||||
| Liabilities | ||||||||||||||||
| Derivative liabilities | $ | — | $ | — | $ | 262,823 | $ | 262,823 | ||||||||
In October 2017, the Company received an advance in the amount of $10,000 from a related party. This amount is not evidenced by a promissory note at this time. See Note 5.
On October 27, 2017, the Company entered into senior secured convertible notes with institutional investors in the aggregate principal amount of $70,000. The Notes mature on November 27, 2017 (the “Maturity Date”) and bear interest at 8% per annum. On the Maturity Date, the Company must repay an amount equal to 120% of outstanding principal and accrued interest.
In October 2017, the Company’sour Chief Executive Officer (“CEO”), Chief Operating Officer (“COO”) and President each resignedour Chief Financial Officer (“CFO”), manages our business, makes resource allocation and operating decisions, and evaluates operating performance. See “Note 21 - Segment Reporting”.
Liquidity and Going Concern – The Company has never been profitable and its net losses have been increasing related to acquisitions, as officerswell as costs incurred to pursue its long-term growth strategy. During the three months ended July 31, 2023, the Company incurred a net loss of $5,810,348 and directors. The resignations terminatedused cash in operating activities of $6,926,069. As of July 31, 2023, the Company has working capital of $22,945,400. While the Company has historically been successful in raising capital to meet its working capital requirements, the ability to continue raising such capital to enable the Company to continue its growth is not guaranteed. Therefore, there is substantial doubt about the Company’s ability to continue as a going concern as the Company will require additional liquidity to continue its operations and meet its financial obligations underfor twelve months from the executives’ employment agreements, except for past due compensation.date these consolidated financial statements are issued.
On October 20, 2017, Mr. Jonathan Read, who had served as Chief Executive Officer until January 2017, was appointed Chief Executive Officer.
Note 3 – Discontinued Operations – Sale of Consumer Segment
In November 2022, the Company agreed to the sale of its consumer segment consisting of Rotor Riot, (“RR”), and Fat Shark Holdings (“FS”). The closing of the transaction is subject to the successful initial public offering by the buyer, Unusual Machines, Inc. The Company has concluded that the transaction is presently likely to close within the next twelve months. Accordingly, the Consumer segment has been classified as Discontinued Operations and reported in accordance with the applicable accounting standards. See Note 22 for additional information regarding the transaction. Set forth below are the results of operations for:
| Three months ended July 31, | ||||||||
2023 | 2022 | |||||||
| Revenues | $ | 1,869,219 | $ | 1,942,720 | ||||
| Cost of goods sold | 1,385,116 | 1,667,213 | ||||||
| Gross margin | 484,103 | 275,507 | ||||||
| Operating expenses | ||||||||
| Operations | 209,980 | 161,783 | ||||||
| Research and development | 46,249 | 82,806 | ||||||
| Sales and marketing | 404,104 | 195,278 | ||||||
| General and administrative | 43,606 | 55,161 | ||||||
| Total operating expenses | 703,939 | 495,028 | ||||||
| Operating loss | (219,836 | ) | (219,521 | ) | ||||
| Other (income) expense | ||||||||
| Interest expense | 22,856 | — | ||||||
| Other, net | (119 | ) | (124 | ) | ||||
| Other (income) expense | 22,737 | (124 | ) | |||||
| Net loss from discontinued operations | $ | (242,573 | ) | $ | (219,397 | ) | ||
| 12 |
Assets and liabilities for the Consumer Segment included:
| July 31, 2023 | April 30, 2023 | |||||||
| Current assets | ||||||||
| Cash | $ | 15,021 | $ | 86,656 | ||||
| Accounts receivable, net | 106,649 | 61,107 | ||||||
| Inventory | 2,921,262 | 3,065,954 | ||||||
| Other | 1,502,438 | 2,069,438 | ||||||
| Total current assets | 4,545,370 | 5,283,155 | ||||||
| Intangible assets, net | 20,000 | 20,000 | ||||||
| Other | 3,853 | 3,853 | ||||||
| Operating lease right-of-use assets | 73,590 | 84,544 | ||||||
| Total long term assets | 97,443 | 108,397 | ||||||
| Current liabilities | ||||||||
| Accounts payable | $ | 65,058 | $ | 606,872 | ||||
| Accrued expenses | 89,014 | 109,480 | ||||||
| Debt obligations - short term | 237,814 | — | ||||||
| Customer deposits | 28,079 | 244,688 | ||||||
| Operating lease liabilities | 51,234 | 49,461 | ||||||
| Total current liabilities | 471,199 | 1,010,501 | ||||||
| Long term liabilities - Operating lease liabilities | 28,290 | 41,814 | ||||||
| Working capital | $ | 4,074,171 | $ | 4,272,654 | ||||
Note 4 – Marketable Securities
Marketable securities consisted solely of corporate bonds at July 31, 2023 and were classified at Level 2 in the Fair Value Hierarchy. Fair value, cost basis, and unrealized losses totaled $7,922,392, $8,497,168, and $574,776 at July 31, 2023, respectively. Contractual maturities of one to three years totaled $7,922,392.
Note 5 – Inventories
Inventories consisted of the following:
| July 31, 2023 | April 30, 2023 | |||||||
| Raw materials | $ | 7,721,211 | $ | 8,132,196 | ||||
| Work-in-process | 1,611,283 | 509,381 | ||||||
| Finished goods | 43,950 | 278,996 | ||||||
| Total | $ | 9,376,444 | $ | 8,920,573 | ||||
| 13 |
Note 6 – Other Current Assets
Other current assets included:
| July 31, 2023 | April 30, 2023 | |||||||
| Prepaid inventory | $ | 1,708,515 | $ | 359,500 | ||||
| Prepaid expenses | 1,229,875 | 752,564 | ||||||
| Accrued interest income | 82,318 | 151,671 | ||||||
| Total | $ | 3,020,708 | $ | 1,263,735 | ||||
Note 7 – Due From Related Party
In January 2022, the Company determined that a senior executive had relocated in 2021 but their compensation had not been subject to the income tax withholding required by the new jurisdiction. The amount subject to taxation included $155,624 of cash compensation and $1,413,332 of income associated with the vesting of restricted stock ("Stock Compensation"). In March 2022, the Company entered into a note agreement (the "Note") with the employee in the amount of $510,323, representing the estimated taxes owed by the employee related to the Stock Compensation. Under the terms of the Note, shares of common stock with a fair value of $280,832, which had vested during calendar 2021, were withheld by the Company and applied against the Note. The employee agreed not to sell or transfer shares of common stock held at the Company's transfer agent until the Note was repaid. In addition, the employee has shares of restricted stock vesting monthly in calendar 2022, of which shares were withheld with the fair value of those shares applied against the Note. Shares issued to the employee in 2022 were held at the transfer agent until the Note was repaid. The Note matured on December 31, 2022. The Company filed amended payroll tax returns on March 16, 2022. In March and April 2022, the Company made payments to the relevant tax authorities totaling $712,646 representing $510,323 owed by the employee, $31,604 owed by the Company, and $170,719 of penalties and interest. The Note was repaid in full in August 2022.
Note 8 – Intangible Assets
Intangible assets relate to acquisitions completed by the Company, including those described in Note 1. Intangible assets were as follows:
| July 31, 2023 | April 30, 2023 | |||||||||||||||||||||||
| Gross Value | Accumulated Amortization | Net Value | Gross Value | Accumulated Amortization | Net Value | |||||||||||||||||||
| Proprietary technology | $ | 4,967,000 | $ | (1,050,448 | ) | $ | 3,916,552 | $ | 4,967,000 | $ | (841,223 | ) | $ | 4,125,777 | ||||||||||
| Non-compete agreements | 81,000 | (63,417 | ) | 17,583 | 81,000 | (56,667 | ) | 24,333 | ||||||||||||||||
| Customer relationships | 39,000 | (19,499 | ) | 19,501 | 39,000 | (18,106 | ) | 20,894 | ||||||||||||||||
| Total finite-lived assets | 5,087,000 | (1,133,364 | ) | 3,953,636 | 5,087,000 | (915,996 | ) | 4,171,004 | ||||||||||||||||
| Brand name | 3,152,000 | — | 3,152,000 | 3,152,000 | — | 3,152,000 | ||||||||||||||||||
| Total indefinite-lived assets | 3,152,000 | — | 3,152,000 | 3,152,000 | — | 3,152,000 | ||||||||||||||||||
| Total intangible assets, net | $ | 8,239,000 | $ | (1,133,364 | ) | $ | 7,105,636 | $ | 8,239,000 | $ | (915,996 | ) | $ | 7,323,004 | ||||||||||
Proprietary technology and non-compete agreements are being amortized over five to six years and three years, respectively. Customer relationships are being amortized over seven years. Goodwill and Brand name are not amortized but evaluated for impairment on a quarterly basis.
| 14 |
As of July 31, 2023, expected amortization expense for finite-lived intangible assets for the next five years is as follows:
| Fiscal Year Ended: | ||||||
| 2024 | $ | 649,437 | ||||
| 2025 | 842,471 | |||||
| 2026 | 815,271 | |||||
| 2027 | 786,679 | |||||
| 2028 | 644,833 | |||||
| Thereafter | 214,945 | |||||
| Total | $ | 3,953,636 | ||||
Goodwill represents the future economic benefit arising from other assets acquired in an acquisition that are not individually identified and separately recognized. The composition of, and changes in goodwill, consist of:
| Date | Acquisition | Goodwill | ||||||
| January 2020 | Rotor Riot | $ | 1,849,073 | |||||
| November 2020 | Fat Shark | 6,168,260 | ||||||
| May 2021 | Skypersonic | 2,826,918 | ||||||
| August 2021 | Teal Drones | 8,995,499 | ||||||
| April 2023 - Impairment loss | Skypersonic | (2,826,918 | ) | |||||
| Balance at April 30, 2023 and July 31, 2023 | $ | 17,012,832 | ||||||
Following the establishment of the Enterprise and Consumer segments, management evaluated the long-term business strategy of each segment. This resulted in the Enterprise segment narrowing its focus on the military and other government agencies. It was determined that Skypersonic's technology would be re-focused for the near term on military applications and consolidated into the operations of Teal Drones. The Company completes a formal evaluation of the carrying value of its intangible assets, including goodwill, at the end of each fiscal year. Based on (i) the operating results for Skypersonic since its acquisition in May 2021, (ii) its consolidation into Teal, (iii) our current expectations of its future business conditions and trends, including its projected revenues, expenses, and cash flows, the Company recognized an impairment charge of $2,826,918 in April 2023.
Note 9 – Property and Equipment
Property and equipment consist of assets with an estimated useful life greater than one year and are reported net of accumulated depreciation. The reported values are periodically assessed for impairment, and were as follows:
| July 31, 2023 | April 30, 2023 | |||||||
| Equipment and related | $ | 1,340,237 | $ | 1,386,373 | ||||
| Leasehold improvements | 1,517,199 | 1,473,890 | ||||||
| Furniture and fixtures | 132,752 | 132,752 | ||||||
| Accumulated depreciation | (435,777 | ) | (342,657 | ) | ||||
| Net carrying value | $ | 2,554,411 | $ | 2,650,358 | ||||
Depreciation expense totaled $101,001 and $28,272 for the three months ended July 31, 2023 and 2022, respectively.
Note 10 – Other Long-Term Assets
Other long-term assets included:
| July 31, 2023 | April 30, 2023 | |||||||
| SAFE agreement | $ | 250,000 | $ | 250,000 | ||||
| Security deposits | 53,180 | 53,180 | ||||||
| Total | $ | 303,180 | $ | 303,180 | ||||
| 15 |
In November 2022, the Company entered into a SAFE (Simple Agreement for Future Equity) agreement with Firestorm Labs, Inc. (“Firestorm”) under which it made a payment of $250,000 to Firestorm in exchange for the right to certain shares of Firestorm stock. The SAFE permits the Company to participate in a future equity financing of Firestorm by converting the $250,000 into shares of Preferred Stock of Firestorm. If there is a change in control of Firestorm or a public offering of shares of its stock, then the Company shall have the right to receive cash payments, or shares of stock, whichever has greater value. The Company’s investment in the SAFE agreement has been recorded on the cost method of accounting. The Company plans to evaluate the investment for any indications of impairment in value on a quarterly basis. No factors indicative of impairment were identified during the three months ended July 31, 2023.
Note 11 – Operating Leases
As of July 31, 2023, the Company had operating type leases for real estate and no finance type leases. The Company’s leases have remaining lease terms of up to 3.83 years, some of which may include options to extend for up to 5 years. Operating lease expense totaled $85,252 for the three months ended July 31, 2023, including period cost for short-term, cancellable, and variable leases, not included in lease liabilities, of $1,650 for the three months ended July 31, 2023.
Leases on which the Company made rent payments during the reporting period included:
| Location | Monthly Rent | Expiration | ||||||
| South Salt Lake, Utah | $ | 22,667 | December 2024 | |||||
| San Juan, Puerto Rico | $ | 5,647 | June 2027 | |||||
| Troy, Michigan | $ | 550 | May 2022 | |||||
Supplemental information related to operating leases for the three months ended July 31, 2023 was:
| Operating cash paid to settle lease liabilities | $85,709 | |||
| Weighted average remaining lease term (in years) | 2.30 | |||
| Weighted average discount rate | 12% | |||
Future lease payments at July 31, 2023 were as follows:
| Fiscal Year Ended: | ||||||
| 2024 | 260,453 | |||||
| 2025 | 260,743 | |||||
| 2026 | 76,619 | |||||
| 2027 | 79,300 | |||||
| 2028 | 6,627 | |||||
| Total | $ | 683,742 | ||||
Note 12 – Debt Obligations
| A. | Decathlon Capital |
On August 31, 2021, Teal entered into an Amended and Restated Loan and Security Agreement with Decathlon Alpha IV, L.P. (“DA4”) in the amount of $1,670,294 (the “Loan”), representing the outstanding principal amount previously due and owing by Teal to DA4. Interest on the Loan accrues at a rate of ten (10%) percent per annum. Principal and interest is payable in monthly installments of $49,275 until maturity on December 31, 2024. The balance outstanding at July 31, 2023 totaled $769,170.
| B. | Pelion Note |
In May 2021, Teal entered into a note agreement totaling $350,000 which is payable upon demand. The Note bears interest at the applicable Federal Rate as of the date of the Note which was 0.13% on the date of issuance. Accrued interest totaled $992 at July 31, 2023.
| 16 |
| C. | Vendor Agreement |
In connection with the acquisition of Teal on August 31, 2021, the Company assumed an obligation with a contract manufacturing firm. The assumed balance of $387,500 was repaid in monthly installments of $37,500 and paid in full in July 2022.
| D. | SBA Loan |
In February 2021, Teal received a Small Business Administration Paycheck Protection Program (“SBA PPP”) loan in the amount of $300,910. The loan was unsecured, non-recourse, and accrued interest at one percent annually. The loan was used to fund qualifying payroll, rent and utilities. In February 2022, the principal balance of $300,910 and accrued interest of $3,001 were forgiven.
| E. | Corporate Equity |
Beginning in October 2021, and amended in January 2022, Teal financed a total of $120,000 of leasehold improvements with Corporate Equity. The loan bears interest at 8.25% annually and requires monthly payments of $3,595 through December 2024. The balance outstanding at July 31, 2023 and April 30, 2023 totaled $57,106 and $66,586 respectively.
| F. | Revenue Financing Arrangement |
In April 2021, Teal entered into an agreement under which it sold future customer payments, at a discount, to Forward Financing. At August 31, 2021, the Company assumed the outstanding balance of $38,758. Repayment of the remaining balance was completed in January 2022.
| G. | Ascentium Capital |
In September 2021, Teal entered into a financing agreement with Ascentium Capital to fund the purchase of a fixed asset totaling $24,383. Monthly payments of $656 are payable through October 2024. The balance outstanding at July 31, 2023 and April 30, 2023 totaled $9,442 and $11,412 respectively.
| H. | Summary |
Outstanding principal payments on debt obligations are due as follows:
| Fiscal 2024 | 784,149 | |||
| Fiscal 2025 | 401,569 | |||
| Total | $ | 1,185,718 | ||
| Short term – through July 31, 2024 | $ | 936,150 | ||
| Long term – thereafter | $ | 249,568 |
Note 13 – 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 for $1,753,000 to the seller. The note accrued interest at 3% annually and matured in full in November 2023. In May 2021, the Company made an initial payment of $132,200 by directing a refund from a vendor based in China to the noteholder who is also based in China. The remaining balance of $1,620,800 plus accrued interest totaling $45,129 was paid in September 2021.
| B. | BRIT, LLC |
In January 2020, in connection with the acquisition of Rotor Riot, the Company issued a promissory note for $175,000 to the seller, BRIT, LLC. The note accrued interest at 4.75% annually. In October 2021, the outstanding balance of $85,172 plus accrued interest totaling $12,942 was paid.
The Company also assumed a line of credit obligation totaling $47,853 which bears interest at 6.67% annually. The remaining balance of $37,196 plus accrued interest totaling $292 was paid in October 2022.
| 17 |
Note 14 – Income Taxes
Our operating subsidiary, Red Cat Propware, Inc., is incorporated and based in Puerto Rico which is a commonwealth of the United States. We are not subject to taxation by the United States as Puerto Rico has its own taxing authority. Since inception, we have incurred net losses in each year of operations. Our current provision for the reporting periods presented in these financial statements consisted of a tax benefit against which we applied a full valuation allowance, resulting in no current provision for income taxes. In addition, there was no deferred provision for any of these reporting periods.
At July 31, 2023 and April 30, 2023, we had accumulated deficits of approximately $60,397,000 and $54,600,000, respectively. Deferred tax assets related to the future benefit of these net operating losses for tax purposes totaled approximately $11,173,000 and $10,101,000, respectively, calculated using the base Puerto Rico corporate tax rate of 18.5%. Currently, we focus on projected future taxable income in evaluating whether it is more likely than not that these deferred assets will be realized. Based on the fact that we have not generated an operating profit since inception, we have applied a full valuation allowance against our deferred tax assets at July 31, 2023 and April 30, 2023.
Note 15 – Common Stock
Our common stock has a par value of $0.001 per share. We are authorized to issue 500,000,000 shares of common stock. Each share of common stock is entitled to one vote. A summary of shares of common stock issued by the Company since April 30, 2022 is as follows:
| Description of Shares | Shares Issued | |||
| Shares outstanding as of April 30, 2022 | 53,748,735 | |||
| Vesting of restricted stock to employees, net of shares withheld of 273,874 to pay taxes and 9,000 to repay a Note | 653,308 | |||
| Vesting of restricted stock to Board of Directors | 116,507 | |||
| Vesting of restricted stock to consultants | 9,683 | |||
| Shares issued for services | 39,832 | |||
| Shares outstanding as of April 30, 2023 | 54,568,065 | |||
| Vesting of restricted stock to employees, net of shares withheld of 10,870 to pay taxes | 44,130 | |||
| Vesting of restricted stock to Board of Directors | 109,585 | |||
| Vesting of restricted stock to consultants | 1,761 | |||
| Conversion of preferred stock | 818,334 | |||
| Shares outstanding as of July 31, 2023 | 55,541,875 | |||
Note 16 – Preferred Stock
Series A Preferred Stock outstanding totaled at April 30, 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. 982,000 shares of Series B Stock were converted into 818,334 shares of common stock in June 2023. Shares outstanding at July 31, 2023 totaled which are convertible into shares of common stock.
Note 17 – Warrants
The Company issued five-year warrants in connection with two convertible note financings. The warrants have an initial exercise price of $1.50 which may be reduced to a 25% discount of the price per share of Common Stock offered in a future qualified offering. The warrants were valued using the multinominal lattice model and are considered derivative liabilities under ASC 815-40. The value of the warrants was included in the determination of the initial accounting for each financing including the calculation of the derivative liability and related expense.
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A summary of the warrants issued and their fair values were:
| Upon Issuance | Outstanding at July 31, 2023 | |||||||||||||||||
| Date of Transaction | Number of Warrants | Initial Fair Value | Number of Warrants | Fair Value | ||||||||||||||
| October 2020 | 399,998 | $ | 267,999 | 266,666 | $ | 179,982 | ||||||||||||
| January 2021 | 675,000 | $ | 2,870,666 | 540,000 | $ | 381,703 | ||||||||||||
In March and April 2021, we received $201,249 related to the exercise of of the warrants. Since these exercises resulted in the elimination of the derivative liability in the warrants, the derivative liability was reduced by $694,305 with a corresponding increase in additional paid in capital. In June 2021, we received $99,999 in connection with the exercise of warrants which resulted in the elimination of $163,141 of the derivative liability in the warrants.
In May 2021, the Company issued warrants to purchase shares of common stock to the placement agent of its common stock offering. The warrants have a five-year term and an exercise price of $5.00.
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 $5.625.
The following table summarizes the changes in warrants outstanding since April 30, 2022.
Number of Shares |
Weighted-average Exercise Price per Share | Weighted-average Remaining Contractual Term (in years) |
Aggregate Intrinsic Value | ||||||||||||||
| Balance as of April 30, 2022 | $ | ||||||||||||||||
| Granted | |||||||||||||||||
| Exercised | |||||||||||||||||
| Outstanding as of April 30, 2023 | $ | ||||||||||||||||
| Granted | |||||||||||||||||
| Exercised | |||||||||||||||||
| Outstanding at July 31, 2023 | $ | ||||||||||||||||
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 .
| A. | Options |
The range of assumptions used to calculate the fair value of options granted during the three months ended July 31 was:
| 2023 | 2022 | |||||||
| Exercise Price | $ | – | $ | — | ||||
| Stock price on date of grant | – | — | ||||||
| Risk-free interest rate | – % | — | ||||||
| Dividend yield | — | |||||||
| Expected term (years) | – | — | ||||||
| Volatility | – % | — |
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A summary of options activity under the Plan since April 30, 2022 was:
| Shares | Weighted-Average Exercise Price | Weighted-Average Remaining Contractual Term | Aggregate Intrinsic Value | |||||||||||||
| Outstanding as of April 30, 2022 | 3,694,142 | $ | 2.17 | 1,407,545 | ||||||||||||
| Granted | 1,503,500 | 1.40 | ||||||||||||||
| Exercised | — | — | ||||||||||||||
| Forfeited or expired | (412,833 | ) | 2.67 | |||||||||||||
| Outstanding as of April 30, 2023 | 4,784,809 | 1.88 | 74,586 | |||||||||||||
| Granted | 2,401,042 | 1.07 | ||||||||||||||
| Exercised | — | — | ||||||||||||||
| Forfeited or expired | (301,834 | ) | 2.55 | |||||||||||||
| Outstanding as of July 31, 2023 | 6,884,017 | 1.57 | 298,615 | |||||||||||||
| Exercisable as of July 31, 2023 | 3,157,975 | $ | 2.00 | $ | 241,274 | |||||||||||
The aggregate intrinsic value of outstanding options represents the excess of the stock price at the indicated date over the exercise price of each option. As of July 31, 2023 and July 31, 2022, there was $5,918,668 and $2,760,989 of unrecognized stock-based compensation expense related to unvested stock options which is expected to be recognized over the weighted average periods of 2.24 and 2.1 years, respectively.
| B. | Restricted Stock |
A summary of restricted stock activity under the Plan since April 30, 2022 was:
| Shares | Weighted Average Grant-Date Fair Value Per Share | |||||||
| Unvested and outstanding as of April 30, 2022 | 1,083,675 | $ | 2.59 | |||||
| Granted | 780,884 | 2.14 | ||||||
| Vested | (1,062,372 | ) | 2.42 | |||||
| Forfeited | (21,127 | ) | 2.13 | |||||
| Unvested and outstanding as of April 30, 2023 | 781,060 | 2.44 | ||||||
| Granted | 298,643 | 1.06 | ||||||
| Vested | (166,346 | ) | 1.70 | |||||
| Forfeited | (70,656 | ) | 1.25 | |||||
| Unvested and outstanding as of July 31, 2023 | 842,701 | $ | 2.14 | |||||
| C. | Stock Compensation |
Stock compensation expense for the three months ended July 31 was as follows:
| 2023 | 2022 | |||||||
| General and administrative | $ | 427,781 | $ | 345,168 | ||||
| Research and development | 127,417 | 144,798 | ||||||
| Operations | 191,099 | 158,431 | ||||||
| Sales and marketing | 165,309 | 107,074 | ||||||
| Total | $ | 911,606 | $ | 755,471 | ||||
Stock compensation expense pertaining to options totaled $629,426 and $458,023 for the three months ended July 31, 2023 and 2022, respectively. Stock compensation expense pertaining to restricted stock units totaled $282,180 and $297,448 for the three months ended July 31, 2023 and 2022, respectively.
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Note 19 – Derivatives
The Company completed financings in October 2020 and January 2021 which included notes and warrants containing embedded features subject to derivative accounting. Both the notes and the warrants included provisions which provided for a reduction in the conversion and exercise prices, respectively, if the Company completed a future qualified offering at a lower price. These provisions represent embedded derivatives which are valued separately from the host instrument (meaning the notes and warrants) and recognized as derivative liabilities on the Company's balance sheet. The Company initially measures these financial instruments at their estimated fair value and recognizes changes in their estimated fair value in results of operations during the period of change. The Company also measures these financial instruments on the date of settlement (meaning when the note is converted, or the warrant is exercised) at their estimated fair value and recognizes changes in their estimated fair value in results of operations. Any discount in the carrying value of the note is fully amortized on the date of settlement and recognized as interest expense. The Company estimated the fair value of these embedded derivatives using a multinomial lattice model. The range of underlying assumptions used in the binomial model to determine the fair value of the derivative warrant liability upon settlement of the derivative liability and as of July 31, 2023 and April 30, 2023 are set forth below. In addition, the Company's stock price on each measurement date was used in the model.
| July 31, 2023 | April 30, 2023 | |||||||
| Risk-free interest rate | % | – % | ||||||
| Expected dividend yield | ||||||||
| Expected term (in years) | – | – | ||||||
| Expected volatility | – % | – % |
As of July 31, 2023, 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 months ended July 31, 2023 and the year ended April 30, 2023 were as follows:
| July 31, 2023 | April 30, 2023 | |||||||
| Balance, beginning of period | $ | 588,205 | $ | 1,607,497 | ||||
| Additions | — | — | ||||||
| Eliminated upon conversion of notes/exercise of warrants | — | — | ||||||
| Changes in fair value | (26,520 | ) | (1,019,292 | ) | ||||
| Balance, end of period | $ | 561,685 | $ | 588,205 | ||||
Changes in fair value primarily relate to changes in the Company’s stock price during the period, with increases in the stock price increasing the liability and decreases in the stock price reducing the liability.
Note 20 - Related-Party Transactions
In July 2021, the Company entered into a consulting agreement with a director resulting in monthly payments of $6,000. In addition, the Company issued 150,000 options to purchase common stock at $2.51 which vested quarterly over the one-year term of the agreement. In January 2022, the agreement was amended to increase the monthly payments to $10,000. The agreement expired in June 2022.
In January 2022, the Company entered into a note agreement with an employee in the principal amount of $510,323, as further described in Note 7.
Additional related party transactions are disclosed in Note 13.
Note 21 - Segment Reporting
The following table sets forth key operating data and asset categories which are reviewed by our CODM in evaluating the operating performance of each segment:
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| For the three months ended July 31, 2023 | ||||||||||||||||
| Enterprise | Consumer | Corporate | Total | |||||||||||||
| Revenues | $ | 1,748,129 | $ | 1,869,219 | $ | — | $ | 3,617,348 | ||||||||
| Cost of goods sold | 1,573,464 | 1,385,116 | — | 2,958,580 | ||||||||||||
| Gross margin | 174,665 | 484,103 | — | 658,768 | ||||||||||||
| Operating expenses | 3,153,405 | 703,939 | 2,034,295 | 5,891,639 | ||||||||||||
| Operating loss | (2,978,740 | ) | (219,836 | ) | (2,034,295 | ) | (5,232,871 | ) | ||||||||
| Other expenses, net | 122,858 | 22,737 | 431,882 | 577,477 | ||||||||||||
| Net loss | $ | (3,101,598 | ) | $ | (242,573 | ) | $ | (2,466,177 | ) | $ | (5,810,348 | ) | ||||
| For the three months ended July 31, 2022 | ||||||||||||||||
| Enterprise | Consumer | Corporate | Total | |||||||||||||
| Revenues | $ | 1,126,551 | $ | 1,942,720 | $ | — | $ | 3,069,271 | ||||||||
| Cost of goods sold | 1,044,431 | 1,667,213 | — | 2,711,644 | ||||||||||||
| Gross margin | 82,120 | 275,507 | — | 357,627 | ||||||||||||
| Operating expenses | 1,661,363 | 495,028 | 1,899,732 | 4,056,123 | ||||||||||||
| Operating loss | (1,579,243 | ) | (219,521 | ) | (1,899,732 | ) | (3,698,496 | ) | ||||||||
| Other expenses, net | 63,229 | (124 | ) | 49,998 | 113,103 | |||||||||||
| Net loss | $ | (1,642,472 | ) | $ | (219,397 | ) | $ | (1,949,730 | ) | $ | (3,811,599 | ) | ||||
| As of July 31, 2023 | ||||||||||||||||
| Enterprise | Consumer | Corporate | Total | |||||||||||||
| Accounts receivable, net | $ | 720,642 | $ | 106,649 | $ | — | $ | 827,291 | ||||||||
| Inventory, net | 9,376,444 | 2,921,262 | — | 12,297,706 | ||||||||||||
| Inventory deposits | $ | 1,708,515 | $ | 1,502,438 | $ | — | $ | 3,210,953 | ||||||||
| As of April 30, 2023 | ||||||||||||||||
| Enterprise | Consumer | Corporate | Total | |||||||||||||
| Accounts receivable, net | $ | 719,862 | $ | 61,107 | $ | — | $ | 780,969 | ||||||||
| Inventory, net | 8,920,573 | 3,065,954 | — | 11,986,527 | ||||||||||||
| Inventory deposits | $ | 359,500 | $ | 2,062,038 | $ | — | $ | 2,421,538 | ||||||||
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Note 22 - Sale of Consumer Segment
In November 2022, the Board of Directors approved a Stock Purchase Agreement (the "SPA") between the Company, Unusual Machines and Jeffrey Thompson, the founder and Chief Executive Officer of the Company (the “Principal Stockholder”), related to the sale of the Company’s consumer segment consisting of Rotor Riot, (“RR”), and Fat Shark Holdings (“FS”), to UM. In March 2023, shareholders approved the sale.
The final, amended purchase price of $20 million includes $3 million in cash, payable at closing, with the remaining $17 million consisting of shares of common stock of Unusual Machines. The purchase price will be adjusted for working capital on the closing date (increased for positive working capital and decreased for negative working capital). The Company estimates that working capital at closing will range between $3.0 to $4.5 million. The number of shares of UM’s common stock (the “Unusual Common Stock”) to be issued will be based on the initial public offering price for the Unusual Common Stock. All of the Unusual Common Stock will be subject to a lock-up of 180 days and be eligible for registration. The closing of the SPA is subject to the successful completion of an initial public offering (the “IPO”) by UM in the minimum amount of $5 million, and the listing of UM’s common stock on a public stock exchange such as the NYSE or Nasdaq. UM filed a registration statement on Form S-1 for an initial public offering of its Common Stock with the SEC. UM is required to deposit $1.0 million cash with the Company upon effectiveness of the registration statement with the SEC.
Note 23 – Commitments and Contingencies
Legal Proceedings
In the ordinary course of business, we may be involved, at times, in various legal proceedings involving a variety of matters. We do not believe there are any pending legal proceedings that will have a material adverse effect on our business, consolidated financial position, results of operations, or cash flows. However, the outcome of such legal matters is inherently unpredictable and subject to significant uncertainties. We have not recorded any litigation reserves as of April 30, 2023.
One pending legal matter is an action filed against Teal Drones and the Company in a U.S. District Court in California. The complaint asserts claims for breach of contract, and the unlawful conversion and sale of shares of common stock that plaintiff alleges to have purchased in Teal prior to its acquisition by the Company. The complaint also alleges breach of fiduciary duty and seeks in excess of $1 million in damages. The Company is asserting vigorous defenses to the complaint.
Note 24 – 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 Management's Discussion and Analysisdiscussion should be read in conjunction with TimefireVR Inc.our unaudited condensed consolidated financial statements and the related notes thereto. The and other financial data included elsewhere in this Quarterly Report on Form 10-Q.
Management's Discussion and Analysis contains forward-looking statements that involve risks and uncertainties, such as statements ofrelating to our liquidity, and our plans objectives, expectationsfor our business focusing on providing products, services and intentions.solutions to the drone industry. Any statements that are not statements of historical fact are forward-looking statements. When used, the words “believe,” “plan,” “intend,” “anticipate,” “target,” “estimate,” “expect,”"believe," "plan," "intend," "anticipate," "target," "estimate," "expect," and the like, and/or future-tense or conditional constructions (“("will,” “may,” “could,” “should,”" "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’sCompany's actual results and the timing of events could differ materially from those anticipated in these forward-looking statements as a result of severalmany factors. ExceptInvestors should also review the risk factors in the Company's Annual Report on Form 10-K filed with the SEC on July 27, 2023.
All forward-looking statements speak only as required by U.S. securities laws,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 occurringthat exist after the date of this Quarterly Report on Form 10-Q.10-Q except as required by federal securities law.
Recent Developments
Corporate developments during the two years ended July 31, 2023 include:
Capital Transactions
During the first quarter of fiscal 2022, the Company completed two firm commitment underwritten public offerings with ThinkEquity, a division of Fordham Financial Management. The following discussion should be readfirst offering, in conjunction withMay 2021, generated gross and net proceeds of $16 and $14.6 million, respectively. The second offering, in July 2021, generated gross and net proceeds of $60 and $55.5 million, respectively.
Plan of Operations
Since April 2016, the Company's primary business has been to provide products, services, and solutions to the drone industry which it presently does through its four wholly owned subsidiaries. Beginning in January 2020, the Company expanded the scope of its drone products and services through four acquisitions, including:
| A. | In January 2020, the Company acquired Rotor Riot, a provider of First Person View (FPV) drones and equipment, primarily to the consumer marketplace. The purchase price was $1,995,114. |
| B. | In November 2020, the Company acquired Fat Shark Holdings, a provider of FPV video goggles to the drone industry. The purchase price was $8,354,076. |
| C. | In May 2021, the Company acquired Skypersonic which provides hardware and software solutions that enable drones to complete inspection services in locations where GPS is not available, yet still record and transmit data even while being operated from thousands of miles away. The purchase price was $2,791,012. |
| D. | In August 2021, the Company acquired Teal Drones, a leader in commercial and government UAV (Unmanned Aerial Vehicles) technology. The purchase price was $10,011,279. |
Following the Teal acquisition, we focused on integrating and organizing these businesses. Effective May 1, 2022, we established the Enterprise and Consumer segments in order to sharpen our unaudited consolidated financial statementsfocus on the unique opportunities in each sector. Enterprise's initial strategy was to provide UAV's, primarily drones, to commercial enterprises, and related notesgovernment agencies including the military, to navigate dangerous military environments and confined industrial and commercial interior spaces. Subsequently, Enterprise narrowed its near-term focus on the military and other financial data included elsewheregovernment agencies. Skypersonic's technology has been re-focused on military applications and its operations consolidated into Teal. The Consumer segment, which includes Fat Shark and Rotor Riot, is focused on hobbyists and enthusiasts which are expected to increase as drones become more visible and useful in this report. See alsoour daily lives.
| 24 |
In November 2022, we entered into an agreement to sell our Consumer segment to Unusual Machines. The adjusted sale price is $20 million, including $3 million in cash, at closing, and $17 million in securities of Unusual Machines. The agreement reflects the notesCompany's decision to our consolidated financial statementsfocus its efforts and Management’s Discussioncapital on military and Analysisdefense where it believes that there are more opportunities to create long term shareholder value. The closing of Financial Conditionthe transaction is contingent upon Unusual Machines completing (i) an initial public offering that raises sufficient capital to close the transaction, and (ii) a listing on a public stock exchange such as the NYSE or Nasdaq.
Results of Operations contained in our Annual Report on Form 10-K for the year ended December 31, 2016.- Continuing Operations
OVERVIEW
The Company is a Nevada corporation. Effective September 13, 2016, the Company entered into an Agreement and Plan of Merger (“Merger Agreement”) through which the Company acquired Timefire, LLC (the “LLC”), a Phoenix-based virtual reality content developer that is an Arizona Limited Liability Company. The LLC has not generated material revenue to date and has incurred material losses. Asanalysis of the dateCompany's results of this Report, the Company is exploring engaging in the virtual currency business. Its Chief Executive Officer is currently an independent director of a virtual currency company that was an early pioneer of Bitcoin.
The Company has no operating capital and we cannot pay our liabilities. Our former Chief Executive Officer and President both resigned after September 30, 2017 and we believe they want to continue the virtual reality business. We very recently received a non-binding term sheet from a group that includes these former executive officers to buy the assets of the LLC that will pay us limited cash and a twelve month note as well as assume $100,000 of past due convertible notes and $100,000 in short-term demand obligations and approximately $255,000 of other obligations, including approximately $82,000 which the Company owes the landlord in past due and future rent obligations. We are negotiating this term sheet with the intent of securing more operating capital. We cannot be certain we can consummate an oral understanding or sell these assets. At the same time, we owe $713,158 plus interest on other past due convertible notes as of the date of this Report (and an additional $70,000 plus interest will be due on November 27, 2017) and are uncertain whether we can reach an accommodation with these secured creditors and obtain future operating capital. Further, our ability to enter the highly competitive virtual currency business is uncertain as well.
Results of Operations
Total revenuecontinuing operations for the three months ended September 30, 2017July 31, 2023 compared to the three months ended July 31, 2022 includes only the Company's Enterprise Segment which includes Teal Drones and 2016 was $340Skypersonic. During Fiscal 2023, the operations of Skypersonic were consolidated into Teal. The following discussion and $0, respectively.analysis describes the operating results of Teal and Skypersonic on a consolidated basis with Teal representing more than 90% of the operating activities of the Enterprise Segment.
Discussion and Analysis of the Three Months Ended July 31, 2023 compared to the Three Months Ended July 31, 2022
Revenues
Revenues totaled $1,748,129 during the three months ended July 31, 2023 (or the "2023 period") compared to $1,126,551 during the three months ended July 31, 2022 (or the "2022 period") representing an increase of $621,578, or 55%. The revenue in 2017 wasincrease related exclusively to higher product sales related to our limited software release effective June 15, 2017. Revenue for the ninelaunch of the Teal 2 in April 2023. Product sales totaled $1,413,127 during the three months ended September 30, 2017July 31, 2023 compared to $700,214 during the three months ended July 31, 2022 representing an increase of $712,913, or more than 100%. The increase in product sales was partially offset by lower contract revenues during the 2023 period. Contract revenues totaled $310,881 during the 2023 period compared to $398,499 during the 2022 period, representing a decrease of $87,618, or 22%. Contract revenues are primarily sourced through government agencies and 2016can fluctuate from period to period based on the timing of awards and amendments.
Gross Margin
Gross margin totaled $174,665 during the 2023 period compared to $82,120 during the 2022 period representing an increase of $92,545, or more than 100%. On a percentage basis, gross margin was $828 and $203,640, respectively.10.0% during the 2023 period compared to 7.3% during the 2022 period. The 2016 revenuepercentage basis increase in gross margin in the 2023 period was primarily duerelated to lower relative labor costs as recently hired manufacturing operators replaced higher compensated engineers in performing many production activities. Our manufacturing facility is presently producing drones at a lower level than it is designed for, and these lower production levels, combined with higher overhead costs, continue to result in lower than targeted gross margins. As production levels increase, our fixed overhead costs, including labor, will be allocated to a one-time development project for a related party.greater number of drones which will drive our per-drone production costs lower and increase gross margins.
Operating Expenses
Operations expenses intotaled $707,903 during the quarter ended September 30, 2017 amounted to $333,888 as2023 period compared to $592,538 for$886,303 during the quarter ended September 30, 2016. The2022 period, resulting in a decrease in operating expenses is due to a significant reduction in labor costs after the Company laid off most personnel. Operating expenses for the nine months ended September 30, 2017 and 2016 were $2,317,547 and $966,342, respectively. The increaseof $178,400, or 20%. This decrease is primarily due to lower payroll costs, controlled spending on manufacturing supplies, and lower office expenses related to fewer new hires in the ramping up of operations after the September 2016 merger.2023 period.
The net loss forResearch and development expenses totaled $1,138,127 during the three months ended September 30, 2017 was $328,233 asJuly 31, 2023 compared to $449,964 during the three months ended July 31, 2022, representing an increase of $688,163, or more than 100% Payroll expense totaled $699,385 in the 2023 period compared to $316,223 in the 2022 period. This increase of $383,162, or more than 100%, primarily related to increased efforts in developing new products and represented 58% of the total increase in research and development costs. Higher professional services fees and increased office costs represented 22% and 16% of the increase, respectively.
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Sales and marketing costs totaled $986,908 during the 2023 period compared to $406,953 during the 2022 period, representing an increase of $579,955 or more than 100%. Headcount for sales, customer service, and marketing totaled 11 at the end of the 2023 period compared to 5 at the end of the 2022 period, resulting in total payroll expense of $428,464 in the 2023 period compared to $187,732 in the 2022 period. This increase of $240,732, or more than 100%, represented 42% of the total increase in sales and marketing costs. Higher office and travel-related expenses represented 32% and 19% of the increase, respectively.
General and administrative expenses totaled $1,443,156 during the three months ended July 31, 2023 compared to $1,062,404 during the three months ended July 31, 2022, representing an increase of $380,752 or 36%. Higher costs at the corporate level represented 57% of the increase. Corporate includes executive compensation and other administrative costs associated with operating a netpublicly traded company including departments such as finance, human resources, and administration. Other significant costs include professional services fees (legal, audit, and board compensation), Nasdaq listing fees and filing costs, and corporate insurance. Specific increases in costs included payroll which totaled $534,764 in the 2023 period compared to $353,135 in the 2022 period resulting in an increase of $181,629 or 48% of the total increase in general and administrative expenses. Legal and lobbying services costs totaled $281,587 in the 2023 period compared to $89,739, representing an increase of $191,848, or 50% of the total increase.
During the three months ended July 31, 2023, we incurred stock-based compensation costs of $911,606 compared to $755,471 in the 2022 period, resulting in an increase of $156,135 or 21%. Since the 2022 period, the Company issued 3,900,542 additional options and 298,643 additional RSUs which resulted in incremental stock-based compensation costs of $442,639 and $93,749, respectively. This increase was partially offset by an RSU award that fully vested since the 2022 period, resulting in decremental stock-based compensation expense of $336,252.
Other (Income) Expense
Other expense totaled $554,740 during the 2023 period compared to $113,227 during the 2022 period, representing an increase of $441,513 or greater than 100%. This increase in other expense was primarily related to higher depreciation and amortization expense which totaled $101,001 and $217,368, respectively, during the 2023 period compared to $28,272 and $56,160, respectively during the 2022 period resulting in an increase of $72,729 and $161,208, respectively, collectively representing 53% of the total increase in other expense. Higher depreciation expense related to approximately $2 million in capital expenditures since the 2022 period, primarily related to the construction of the new manufacturing facility in Salt Lake City, Utah. Higher amortization expense related to amortization of intangible assets acquired through acquisitions, especially Teal.
Investment income totaled $130,296 during the three months ended July 31, 2022 compared to an investment loss of $994,415 for$239,490 during the quarter ended September 30, 2016. This difference is primarily due to the recent personnel layoff. The net income for the ninethree months ended September 30, 2017 was $1,559,319 as comparedJuly 31, 2023. During the 2023 period, the Company sold certain investment grade securities in order to a lossfund operations. The fair value of $1,170,692 forthese securities had been adversely impacted by the nine months ended September 30, 2016. This difference is primarily due tosharp increase in interest rates since the post-merger operational scale-up which was offset by a $4,129,252 changesecurities were acquired. Changes in the fair value of the warrants issuedderivative liability resulted in an expense of $92,922 during the 2022 period compared to investors. Investors should understand that these warrants either createincome of $26,520 during the 2023 period, representing a non-cash gainnet beneficial difference of $119,442.
Net Loss from Continuing Operations
Net loss from continuing operations totaled $5,567,775 for the three months ended July 31, 2023, compared to $3,592,202 for the three months ended July 31, 2022, resulting in an increase of $1,975,573 or 55%. Total operating expenses totaled $5,187,700, or 93% of net loss from continuing operations. Higher operating expenses represented 82% of the total increase in the net loss and were driven by an increase in headcount from 63 at the end of the 2022 period to 74 at the end of the 2023 period which was an increase of 17%. Other expenses totaled $554,740 during the three months ended July 31, 2023, compared to $113,227 for the three months ended July 31, 2022, representing an increase of $441,513, or more than 100%. The increase in other expenses represented 22% of the total increase in the net loss and were driven by a $369,786 decrease in investment income as the Company was forced to sell certain investment grade securities at a loss which is inversewere adversely impacted by a sharp increase in interest rates.
Results of Discontinued Operations
Revenue from discontinued operations totaled $1,869,219 for the three months ended July 31, 2023, compared to $1,942,720 for the pricethree months ended July 31, 2022, representing a decrease of $73,501 or 4%. During the Company’s common stock. Because2023 period, Rotor Riot generated revenues totaling $1,243,907 compared to $888,419 during the price2022 period, representing an increase of $355,488 or 40%. During the 2023 period, Rotor Riot’s higher revenues were generated by a significant increase in digital marketing spending. During the 2023 period, Fat Shark generated revenues totaling $625,312 compared to $1,054,301 during the 2022 period, representing a decrease of $428,989 or 41%. Lower revenues for the 2023 period related to its newest product, the Dominator, which was lower on September 30, 2017 than on December 31, 2016,launched at the resulting difference is non-cash income.
beginning of Fiscal 2023, and while it generated strong initial sales in the first quarter, sales declined significantly since the 2022 period.
Gross margin from discontinued operations totaled $484,103 during the 2023 period compared to $275,507 during the 2022 period representing an increase of $208,596, or 76%. On a percentage basis, gross margin from discontinued operations was 26% during the 2023 period compared to 14% during the 2022 period. The percentage basis increase in gross margin in the 2023 period primarily related to successful efforts to reduce tariff expenses for Rotor Riot’s inventory purchases.
Operating expenses totaled $703.939 during the 2023 period compared to $495.028 during the 2022 period, resulting in an increase of $208,911, or 42%. This increase is primarily due to increased advertising expenses in the 2023 period.
Net loss from discontinued operations totaled $242,573 for the three months ended July 31, 2023, compared to $219,397 for the three months ended July 31, 2022, representing an increase of $23,176, or 11%.
Cash Flows
Operating Activities
Net cash used in operating activities was $6,926,069 during the three months ended July 31, 2023, compared to net cash used in operating activities of $3,814,762 during the three months ended July 31, 2022, representing an increase of $3,111,307 or 82%. Net cash used in operations, net of non-cash expenses, totaled $4,071,684 during the three months ended July 31, 2023, compared to $2,648,702 during the three months ended July 31, 2022, resulting in an increase of $1,422,982, or 54%. The higher use of cash primarily related to the expansion of the Teal Drones operations since its acquisition in August 2021. Headcount at Teal increased from 47 at the end of the 2022 period to 60 at the end of the 2023 period which was an increase of 28%. Net cash used related to changes in operating assets and liabilities totaled $2,854,385 during the three months ended July 31, 2023, compared to $1,166,060 during the three months ended July 31, 2022, representing an increase of $1,688,325 or more than 100%. 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. Net payments related to inventory, including deposits, totaled $1,804,886 in the 2023 period compared to $227,516 in the 2022 period, representing an increase of $1,577,370, or more than 100%. This increase represented 93% of the total increase in operating assets and liabilities.
Investing Activities
Net cash provided by investing activities was $4,883,345 during the three months ended July 31, 2023, compared to net cash provided by investing activities of $7,659,707 during the three months ended July 31, 2022 resulting in a decrease of $2,776,362 or 36%. During the 2023 period, proceeds of $4,888,399 from the sale of marketable securities were used to fund operations. During the 2022 period, proceeds from the sale of marketable securities, net of purchases of marketable securities, totaled $8,204,649. During the 2023 period, the Company was spending the proceeds from the 2022 period stock offerings to support operations for the full year, whereas in the 2022 period the proceeds from the stock offerings were invested in marketable securities and also used to support operations for the second half of the 2022 period.
Financing Activities
Net cash used in financing activities totaled $146,509 during the three months ended July 31, 2023, compared to net cash used in financing activities of $685,281 during the three months ended July 31, 2022. Financing activities can vary from period to period depending upon market conditions, both at a macro-level and specific to the Company. During the 2023 period, the Company made payments of $8,520 related to payroll taxes on equity awards compared to payments of $469,631 during the 2022 period, resulting in a decrease of $461,111. This decrease represented 86% of the total decrease. The lower payments related to lower equity award vesting in the 2023 period compared to the 2022 period.
Liquidity and Capital Resources
On
At July 5, 2017,31, 2023, the Company laid off all non-officer personnel duereported current assets totaling $26,523,312, current liabilities totaling $3,577,912 and net working capital of $22,945,400. Cash and marketable securities totaled $8,875,169 at July 31, 2023. Inventory related balances, including pre-paid inventory, totaled $15,508,659. We continue to lack of available funds. Within a week, the Company was able to bring back four full-time staff members as well as two part-time workers as contractors. Duemaintain higher-than-normal inventory balances related to the significant reduction in personnel, our abilityglobal supply chain issues, including chip shortages, which continue to continue with product development has been slowed.
Duringimpact the period of July through October 2017, the Company received advances totaling $100,000 from a related party who submitted the non-binding term sheet to purchase the LLC’s assets. The advances are not evidenced by a promissory note. Until otherwise determined, this is considered a short-term demand obligation.
Our balance sheet as of September 30, 2017 reflects $2,021 in cash. As of November 9, 2017, the company had $16,835 in cash.
The Company was unable to pay approximately $1,012,000 to retire its convertible notes due September 3, 2017. The Company has no finite plans concerning future financing, although it has had preliminary discussions with investors about a restructuring which would provide some working capital. No specific terms have been discussed and any financing will be very dilutive to existing shareholders.
On October 27, 2017, the Company entered into senior secured convertible notes with two institutional investors in the aggregate principal amount of $70,000. The Notes mature on November 27, 2017 (the “Maturity Date”) and bear interest at 8% per annum. On the Maturity Date, the Company must repay an amount equal to 120% of outstanding principal and accrued interest.
Management is continuing to pursue financing from various sources, including private placements from investors and institutions. We do not have capital to satisfy our estimated needs for the next 12 months. Because of the uncertainty regarding the sale of the LLC assets and the virtual currency business costs as well as the sums we owe our principal lenders, we cannot predict, with certainty, the outcometiming of our actions to generate liquidity, including the availability of additional debt financing, or whether such actions would generate enough liquidity. At this time, our Company does not have a commitment from any party to provide additional financing. There is no assurance that any additional financing will be available or if available, on terms that will be acceptable. Any financing will be extremely dilutive to our common shareholders. If we cannot obtain financing, we will cease operations.purchase decisions.
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Going Concern
The Company has never been profitable, and its net losses have been increasing related to acquisitions, as well as costs incurred losses since inception and requires additional funds for future operating activities. The Company’s selling activity has not reached a level of revenue sufficient to fundpursue its operating activities. These factors create an uncertainty as to howlong-term growth strategy. During the three months ended July 31, 2023, the Company will fund itsincurred net losses of $5,567,775 from continuing operations and maintain sufficient$242,573 from discontinued operations and used cash flowin operating activities of $6,926,069 from continuing operations and $356,109 from discontinued operations. As of July 31, 2023, the Company has working capital of $22,945,400. While the Company has historically been successful in raising capital to operate as a going concern. The combination of these factors, among others, raisemeet its working capital requirements, the ability to continue raising such capital to enable the Company to continue its growth is not guaranteed. Therefore, there is substantial doubt about the Company’s ability to continue as a going concern.concern as the Company will require additional liquidity to continue its operations and meet its financial obligations for twelve months from the date these consolidated financial statements are issued.
If the Company is unable to raise additional capital, there is a risk that the Company could default on its financial obligations and could be required to discontinue or significantly reduce the scope of its operations. The consolidated financial statements do not include any adjustments relating to the recoverability and classification of recorded asset amounts, or the amount and classification of liabilities or any other adjustment that might be necessary should the Company be unable to continue as a going concern.
Critical Accounting Policies and Estimates
Our financial statements and accompanying notes have been prepared in accordance with United States generally accepted accounting principlesGAAP applied on a consistent basis. The preparation of financial statements in conformity with U.S. generally accepted accounting principlesGAAP 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’smanagement'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.
Significant estimates reflected in these financial statements include those used to (i) determine stock-based compensation, (ii) complete purchase price accounting for acquisitions, (iii) accounting for derivatives, and (iv) reserves and allowances related to accounts receivable and inventory.
Goodwill and Long-lived Assets – Goodwill represents the future economic benefit arising from other assets acquired in an acquisition that are not individually identified and separately recognized. We test goodwill for impairment in accordance with the provisions of ASC 350, Intangibles – Goodwill and Other, (“ASC 350”). Goodwill is tested for impairment at least annually at the reporting unit level or whenever events or changes in circumstances indicate that goodwill might be impaired. ASC 350 provides that an entity has the option to first assess qualitative factors to determine whether the existence of events or circumstances leads to a determination that it is more likely than not that the fair value of a reporting unit is less than its carrying amount. If, after assessing the totality of events or circumstances, an entity determines it is not more likely than not that the fair value of a reporting unit is less than its carrying amount, then additional impairment testing is not required. However, if an entity concludes otherwise, then it is required to perform an impairment test. The impairment test involves comparing the estimated fair value of a reporting unit with its book value, including goodwill. If the estimated fair value exceeds book value, goodwill is considered not to be impaired. If, however, the fair value of the reporting unit is less than book value, then an impairment loss is recognized in an amount equal to the amount that the book value of the reporting unit exceeds its fair value, not to exceed the total amount of goodwill allocated to the reporting unit.
The estimate of fair value of a reporting unit is computed using either an income approach, a market approach, or a combination of both. Under the income approach, we utilize the discounted cash flow method to estimate the fair value of a reporting unit. Significant assumptions inherent in estimating the fair values include the estimated future cash flows, growth assumptions for future revenues (including gross margin, operating expenses, and capital expenditures), and a rate used to discount estimated future cash flow projections to their present value based on estimated weighted average cost of capital (i.e., the selected discount rate). Our assumptions our based on historical data, supplemented by current and anticipated market conditions, estimated growth rates, and management’s plans. Under the market approach, fair value is derived from metrics of publicly traded companies or historically completed transactions of comparable businesses. The selection of comparable businesses is based on the markets in which the reporting units operate and consider risk profiles, size, geography, and diversity of products and services.
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Fair Values, Inputs and Valuation Techniques for Financial Assets and Liabilities and Related Disclosures – The fair value measurements and disclosure guidance defines fair value and establishes a framework for measuring fair value. Fair value is defined as the price that would be received to sell an asset or paid to transfer a liability (an exit price) in an orderly transaction between market participants at the measurement date. In accordance with this guidance, the Company has categorized its recurring basis financial assets and liabilities into a three-level fair value hierarchy based on the priority of the inputs to the valuation technique.
The fair value hierarchy gives the highest priority to quoted prices in active markets for identical assets or liabilities (Level 1) and the lowest priority to unobservable inputs (Level 3). The inputs used to measure fair value may fall into different levels of the fair value hierarchy. In such cases, the level in the fair value hierarchy within which the fair value measurement in its entirety falls has been determined based on the lowest level input that is significant to the fair value measurement in its entirety. The Company's assessment of the significance of a particular input to the fair value measurement in its entirety requires judgment and considers factors specific to the asset or liability.
The guidance establishes three levels of the fair value hierarchy as follows:
Level 1: Inputs are unadjusted, quoted prices in active markets for identical assets or liabilities at the measurement date;
Level 2: Inputs are observable, unadjusted quoted prices in active markets for similar assets or liabilities, unadjusted quoted prices for identical or similar assets or liabilities in markets that are not active, or other inputs that are observable or can be corroborated by observable market data for substantially the full term of the related assets or liabilities; and
Level 3: Unobservable inputs that are significant to the measurement of the fair value of the assets or liabilities that are supported by little or no market data.
Financial Instruments
The Company's financial instruments mainly consist of cash, receivables, current assets, accounts payable, accrued expenses and debt. The carrying amounts of cash, receivables, current assets, accounts payable, accrued expenses and current debt approximates fair value due to the short-term nature of these instruments.
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 liabilities on 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. The valuation is updated each reporting date with the change in the liability reflected as a change in derivative liability in the statement of operations.
Off-Balance Sheet Arrangements
We have no significant off-balance sheet arrangements that have or are reasonably likely to have a current or future effect on our financial condition, changes in financial condition, revenues or expenses, results of operations, liquidity, capital expenditures or capital resources that are material to stockholders.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.
ITEM 3. QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISK
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 under this item.information.
ITEM 4. CONTROLS AND PROCEDURES
Evaluation of Disclosure Controls and ProceduresProcedures.
DisclosureOur management, with the participation of our CEO and CFO, has evaluated the effectiveness of the Company’s disclosure controls and procedures, areas defined in Rule 13a-15(e) and 15d-15(e) of the Exchange Act, as of July 31, 2023.
The term “disclosure controls and procedures” as defined in Rules 13a-15(e) and 15d-15(e) means controls and other procedures of the Company that are designed to ensure that information required to be disclosed by a company in our reports, filedsuch as this report, that it files or submits under the Exchange Act is recorded, processed, summarized and reported within the time periods specified in the SEC'sSEC rules and forms. Disclosure controls and procedures include, without limitation, controls and procedures designed to ensure that information required to be disclosed by oura company in the reports that it files or submits under the Exchange Act is accumulated and communicated to ourthe company’s 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 disclosureManagement recognizes that any controls and procedures, pursuant to Rules 13a-15(e)no matter how well designed and 15d-15(e) underoperated, can provide only reasonable assurance of achieving their objectives, and management necessarily applies its judgment in evaluating the Exchange Act. cost-benefit relationship of possible controls and procedures.
Based uponon that evaluation, our Principal Executive OfficerCEO and Principal Financial Officer haveCFO concluded that our disclosure controls and procedures were not effective as of September 30, 2017.July 31, 2023.
Because of our working capital limitations, management is presently unable to spend any efforts in remediating these control deficiencies.
Changes inIn Internal Control overOver Financial ReportingReporting.
Our management has also evaluatedThere were no changes in our internal control over financial reporting and there(as defined in Rule 13a-15(f) of the Exchange Act) that occurred during the three months ended July 31, 2023 that have been no significant changes inmaterially affected, or are reasonably likely to materially affect, our internal controls or in other factors that could significantly affect those controls subsequent to the date of our last evaluation.
The Company is not required by current SEC rules to include, and does not include, an auditor's attestation report. The Company's registered public accounting firm has not attested to Management's reports on the Company's internal control over financial reporting.
PART II - OTHER INFORMATION
ITEM 1. LEGAL PROCEEDINGS
From time to time, the Company may become subject to various legal proceedings that are incidental to the ordinary conduct of its business. Although the Company cannot accurately predict the amount of any liability that may ultimately arise with respect to any of these matters, it makes provision for potential liabilities when it deems them probable and reasonably estimable. These provisions are based on current information and legal advice and may be adjusted from time to time according to developments.None.
ITEM 1A. RISK FACTORS
We are a smaller reporting company as defined by Rule 12b-2 of the Securities Exchange Act of 1934 and are not required to provide the information underrequired by this item.Item. Our most recent risk factor disclosures may be reviewed in our Annual Report on Form 10-K for the year ended April 30, 2023, as filed with the SEC on July 27, 2023.
ITEM 2. RECENTUNREGISTERED SALES OF EQUITY SECURITIES, AND USE OF PROCEEDS, AND ISSUER PURCHASES OF EQUITY SECURITIES
We have previously disclosed all sales of securities without registration under the Securities Act of 1933 (the “Act”).None.
ITEM 3. DEFAULTS UPON SENIOR SECURITIES
None.
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On March 6, 2017, the Company sold 5% OID Senior Convertible Notes (the “Notes”) in the principal amount of $750,000 to investors. The Notes matured on September 3, 2017 (the “Maturity Date”).
On the Maturity Date, the Company was required to repay an amount equal to 120% of outstanding principal and accrued interest. The Company was unable to repay the Notes and accrued interest on the Maturity Date resulting in a default of approximately $1,012,000 on the Notes.
As of November 14, 2017, the total amount due under the Notes was approximately $1,047,000 including accrued interest.
ITEM 4. MINE SAFETY DISCLOSURES
N/A.Not applicable
ITEM 5. OTHER INFORMATION
Rule 10b5-1 Trading Plans
None.During the fiscal quarter ended July 31, 2023, none of the Company’s directors or executive officers adopted or terminated any contract, instruction or written plan for the purchase or sale of Company securities that was intended to satisfy the affirmative defense conditions of Rule 10b5-1(c) or any “non-Rule 10b5-1 trading arrangement.”
ITEM 6. EXHIBITS
| Incorporated by Reference | Filed or Furnished | |||||||||||||
| Exhibit # | Exhibit Description | Form | Date | Number | Herewith | |||||||||
| 2.1 | Agreement and Plan of Merger *** | 8-K | 9/13/16 | 2.1 | ||||||||||
| 2.2 | Articles of Merger - Nevada | 8-K | 9/13/16 | 2.2 | ||||||||||
| 2.3 | Statement of Merger - Arizona | 8-K | 9/13/16 | 2.3 | ||||||||||
| 3.1 | Articles of Incorporation, as amended | S-1 | 2/8/17 | 3.1 | ||||||||||
| 3.2 | Bylaws, as amended | S-1 | 2/8/17 | 3.2 | ||||||||||
| 4.1 | Certificate of Designation for Series A-1 Convertible Preferred Stock | 8-K | 8/30/16 | 4.1 | ||||||||||
| 4.2 | Amended and Restated Certificate of Designation for Series A Convertible Preferred Stock *** | 8-K | 9/13/16 | 4.1 | ||||||||||
| 4.3 | Form of Merger Warrant dated September 7, 2016 | 8-K | 9/13/16 | 4.2 | ||||||||||
| 4.4 | Form of Investor Warrant dated September 7, 2016 | 8-K | 9/13/16 | 4.3 | ||||||||||
| 4.5 | Certificate of Correction to Certificate of Designation of the Series C Convertible Preferred Stock filed with the Nevada Secretary of State on May 22, 2014 | 10-K | 3/31/15 | 4.5 | ||||||||||
| 4.6 | Certificate of Amendment to Certificate of Designation of the Series C Convertible Preferred Stock filed with the Nevada Secretary of State on September 19, 2014 | 10-K | 3/31/15 | 4.6 | ||||||||||
| 4.7 | Certificate of Designation of Series C Convertible Preferred Stock filed with the Nevada Secretary of State on May 20, 2014 | 8-K | 5/28/14 | 4.1 | ||||||||||
| 10.1 | Non-Qualified Stock Option under the 2016 Equity Incentive Plan | Filed | ||||||||||||
| 10.2 | Jonathan Read Severance Agreement dated January 31, 2017 | 10-K | 4/7/17 | 10.14 | ||||||||||
| 10.3 | Form of Securities Purchase Agreement dated March 3, 2017 *** | 8-K | 3/7/17 | 10.1 | ||||||||||
| 10.4 | Form of Senior Convertible Note dated March 3, 2017 *** | 8-K | 3/7/17 | 10.2 | ||||||||||
| 10.5 | Form of Warrant dated March 3, 2017 *** | 8-K | 3/7/17 | 10.3 | ||||||||||
| 10.6 | Form of Convertible Promissory note dated July 15, 2016 | 8-K | 7/27/16 | 10.1 | ||||||||||
| 10.7 | Form of Exchange Agreement dated August 24, 2016 *** | 8-K | 8/30/16 | 10.1 | ||||||||||
| 10.8 | Form of Convertible Promissory Note dated August 30, 2016 | 8-K | 9/6/16 | 10.1 | ||||||||||
| 10.9 | 2016 Equity Incentive Plan | 8-K | 9/13/16 | 10.1 | ||||||||||
| 10.10 | Employment Agreement – John Wise | 8-K | 9/13/16 | 10.2 | ||||||||||
| 10.11 | Employment Agreement – Jeffrey Rassas | 8-K | 9/13/16 | 10.3 | ||||||||||
| 10.12 | Employment Agreement – Jonathan Read | 8-K | 9/13/16 | 10.4 | ||||||||||
| 10.13 | Restricted Stock Unit Agreement – Jonathan Read | 8-K | 9/13/16 | 10.5 | ||||||||||
| 10.14 | Jonathan Read Severance Agreement dated January 31, 2017 | 10-K | 4/7/17 | 10.14 | ||||||||||
| 10.15 | Securities Purchase Agreement dated September 7, 2016 *** | 8-K | 9/13/16 | 10.6 | ||||||||||
| 10.16 | Registration Rights Agreement dated September 7, 2016 *** | 8-K | 9/13/16 | 10.7 | ||||||||||
| 10.17 | Form of Agreement and Mutual Release dated as of July 21, 2016 *** | 10-Q | 11/8/16 | 10.11 | ||||||||||
| 10.18 | Form of Note dated October 30, 2017 *** | Filed | ||||||||||||
| 10.19 | Form of Security Agreement dated October 30, 2017 *** | Filed | ||||||||||||
| 10.20 | Form of Guaranty Agreement dated October 30, 2017 *** | Filed | ||||||||||||
| 31.1 | Certification of Principal Executive Officer (302) | Filed | ||||||||||||
| 31.2 | Certification of Principal Financial Officer (302) | Filed | ||||||||||||
| 32.1 | Certification of Principal Executive and Principal Financial Officer (906) | Furnished** | ||||||||||||
| 101.INS | XBRL Instance Document | Filed | ||||||||||||
| 101.SCH | XBRL Taxonomy Extension Schema Document | Filed | ||||||||||||
| 101.CAL | XBRL Taxonomy Extension Calculation Linkbase Document | Filed | ||||||||||||
| 101.DEF | XBRL Taxonomy Extension Definition Linkbase Document | Filed | ||||||||||||
| 101.LAB | XBRL Taxonomy Extension Label Linkbase Document | Filed | ||||||||||||
| 101.PRE | XBRL Taxonomy Extension Presentation Linkbase Document | Filed | ||||||||||||
| 101.INS* | Inline XBRL Instance Document (the instance document does not appear in the Interactive Data File because its XBRL tags are embedded within the Inline XBRL document) | ||
| 101.SCH* | Inline XBRL Taxonomy Extension Schema Document | ||
| 101.CAL* | Inline XBRL Taxonomy Extension Calculation Linkbase Document | ||
| 101.DEF* | Inline XBRL Taxonomy Extension Definition Linkbase Document | ||
| 101.LAB* | Inline XBRL Taxonomy Extension Labels Linkbase Document | ||
| 101.PRE* | Inline XBRL Taxonomy Extension Presentation Linkbase Document | ||
| 104* | Cover Page Interactive Data File (formatted as inline XBRL and contained in Exhibit 101) | ||
| * | Filed herewith. |
| # | This | |
|
Copies of this report (including the financial statements) and any of the exhibits referred to above will be furnished at no cost to our shareholders who make a written request to TimefireVR Inc., at the address on the cover page of this report, Attention: Corporate Secretary.
SIGNATURES
SIGNATURES
In accordance withPursuant 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 hereuntothereunto duly authorized, this 14th day of November, 2017.authorized.
Red Cat Holdings, Inc. | ||||
By: /s/ | Jeffrey Thompson Jeffrey Thompson Chief Executive Officer (Principal Executive Officer) | |||
| Date: September 19, 2023 | By: /s/ Joseph P. Hernon | |||
Joseph Hernon Chief | ||||
(Principal Financial and Accounting Officer) |
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