UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549
FORM 10-Q
☑ | QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934 | |
For the quarterly period ended October 31, |
or
☐ | TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934 | |
For the transition period from ___________ to ___________ |
Commission File Number: 000-31587
Red Cat Holdings, Inc.
(Exact name of Registrant as specified in its charter)
Nevada | ||
(State or other jurisdiction of incorporation or organization) | (I.R.S. Employer Identification No.) |
15 Ave. Munoz Rivera, Ste 2200 San Juan, Puerto Rico | 00901 | |
(Address of principal executive offices) | (Zip Code) |
(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 every Interactive Data File required to be submitted pursuant to Rule 405 of Regulation S-T (§232.405 of this chapter) during the preceding 12 months (or for such shorter period that the registrant was required to submit such files). Yes ☑ No ☐
Indicate by check mark whether the registrant is a large accelerated filer, an accelerated filer, a non-accelerated filer, a smaller reporting company, or an emerging growth company. See definitionthe definitions of "large accelerated filer",filer," "accelerated filer" andfiler," "smaller reporting company"company," and "emerging growth company" in Rule 12b-2 of the Exchange Act.
Large accelerated filer ☐ | Accelerated filer ☐ | |
Non-accelerated filer | Smaller reporting company ☑ | |
Emerging growth company ☐ |
If an emerging growth company, indicate by check mark if the registrant has elected not to use the extended transition period for complying with any new or revised financial accounting standards provided pursuant to Section 13(a) of the Exchange Act. ☐
Indicate by check mark whether the registrant is a shell company (as defined in Rule 12b-2 of the Exchange Act). Yes ☐ No ☑
As of December 15, 2022,12, 2023, there were shares of the registrant's common stock outstanding.
INDEX TO FORM 10-QRed Cat Holdings, Inc.
Form 10-Q
For the Quarterly Period Ended October 31, 2023
TABLE OF CONTENTS
RED CAT HOLDINGS
Consolidated Balance Sheets
(Unaudited)
October 31, | April 30, | |||||||
2023 | 2023 | |||||||
ASSETS | ||||||||
Current assets | ||||||||
Cash | $ | 1,408,977 | $ | 3,173,649 | ||||
Marketable securities | 2,615,289 | 12,814,038 | ||||||
Accounts receivable, net | 2,989,054 | 719,862 | ||||||
Inventory | 9,255,698 | 8,920,573 | ||||||
Other | 2,839,892 | 1,263,735 | ||||||
Current assets of discontinued operations | 4,153,762 | 5,283,155 | ||||||
Total current assets | 23,262,672 | 32,175,012 | ||||||
Goodwill | 17,012,832 | 17,012,832 | ||||||
Intangible assets, net | 6,888,269 | 7,323,004 | ||||||
Property and equipment, net | 2,567,787 | 2,650,358 | ||||||
Other | 303,180 | 303,180 | ||||||
Operating lease right-of-use assets | 485,771 | 620,307 | ||||||
Long-term assets of discontinued operations | 86,133 | 108,397 | ||||||
Total long-term assets | 27,343,972 | 28,018,078 | ||||||
TOTAL ASSETS | $ | 50,606,644 | $ | 60,193,090 | ||||
LIABILITIES AND STOCKHOLDERS' EQUITY | ||||||||
Current liabilities | ||||||||
Accounts payable | $ | 1,618,351 | $ | 1,392,550 | ||||
Accrued expenses | 643,224 | 409,439 | ||||||
Debt obligations - short term | 953,819 | 922,138 | ||||||
Customer deposits | 61,805 | 155,986 | ||||||
Operating lease liabilities | 304,226 | 281,797 | ||||||
Warrant derivative liability | 399,203 | 588,205 | ||||||
Current liabilities of discontinued operations | 424,637 | 1,010,501 | ||||||
Total current liabilities | 4,405,265 | 4,760,616 | ||||||
Operating lease liabilities | 221,386 | 379,466 | ||||||
Debt obligations - long term | 90,762 | 401,569 | ||||||
Long-term liabilities of discontinued operations | 14,356 | 41,814 | ||||||
Total long-term liabilities | 326,504 | 822,849 | ||||||
Commitments and contingencies | ||||||||
Stockholders' equity | ||||||||
Series B preferred stock - shares authorized ; outstanding and | 47 | 9,867 | ||||||
Common stock - shares authorized ; outstanding and | 55,649 | 54,568 | ||||||
Additional paid-in capital | 112,102,691 | 109,993,100 | ||||||
Accumulated deficit | (66,078,469 | ) | (54,586,793 | ) | ||||
Accumulated other comprehensive loss | (205,043 | ) | (861,117 | ) | ||||
Total stockholders' equity | 45,874,875 | 54,609,625 | ||||||
TOTAL LIABILITIES AND STOCKHOLDERS' EQUITY | $ | 50,606,644 | $ | 60,193,090 |
October 31, | April 30, | |||||||
2022 | 2022 | |||||||
ASSETS | ||||||||
Current assets | ||||||||
Cash | $ | 1,582,751 | $ | 4,084,815 | ||||
Marketable securities | 31,302,888 | 44,790,369 | ||||||
Accounts receivable, net | 917,802 | 495,506 | ||||||
Inventory | 6,560,092 | 3,895,870 | ||||||
Other | 4,453,439 | 2,354,884 | ||||||
Due from related party | — | 31,853 | ||||||
Total current assets | 44,816,972 | 55,653,297 | ||||||
Goodwill | 19,839,750 | 25,138,750 | ||||||
Intangible assets, net | 7,777,741 | 2,698,531 | ||||||
Property and equipment, net | 1,700,821 | 511,690 | ||||||
Other | 57,033 | 57,033 | ||||||
Operating lease right-of-use assets | 852,065 | 1,019,324 | ||||||
Total long term assets | 30,227,410 | 29,425,328 | ||||||
TOTAL ASSETS | $ | 75,044,382 | $ | 85,078,625 | ||||
LIABILITIES AND STOCKHOLDERS' EQUITY | ||||||||
Current liabilities | ||||||||
Accounts payable | $ | 1,649,341 | $ | 1,018,747 | ||||
Accrued expenses | 541,097 | 1,084,494 | ||||||
Debt obligations - short term | 895,257 | 956,897 | ||||||
Due to related party | — | 40,057 | ||||||
Customer deposits | 123,308 | 437,930 | ||||||
Operating lease liabilities | 298,609 | 293,799 | ||||||
Warrant derivative liability | 1,013,675 | 1,607,497 | ||||||
Total current liabilities | 4,521,287 | 5,439,421 | ||||||
Operating lease liabilities | 601,243 | 749,825 | ||||||
Debt obligations - long term | 694,581 | 973,707 | ||||||
Total long term liabilities | 1,295,824 | 1,723,532 | ||||||
Commitments and contingencies | ||||||||
Stockholders' equity | ||||||||
Series B preferred stock - shares authorized ; outstanding and | 9,867 | 9,867 | ||||||
Common stock - shares authorized ; outstanding and | 54,229 | 53,749 | ||||||
Additional paid-in capital | 108,406,712 | 106,821,384 | ||||||
Accumulated deficit | (37,555,132 | ) | (27,499,056 | ) | ||||
Accumulated other comprehensive income | (1,688,405 | ) | (1,470,272 | ) | ||||
Total stockholders' equity | 69,227,271 | 77,915,672 | ||||||
TOTAL LIABILITIES AND STOCKHOLDERS' EQUITY | $ | 75,044,382 | $ | 85,078,625 |
See accompanying notes.
3 |
RED CAT HOLDINGS
Consolidated Statements Of Operations
(Unaudited)
Three months ended October 31, | Six months ended October 31, | |||||||||||||||
2023 | 2022 | 2023 | 2022 | |||||||||||||
Revenues | $ | 3,930,868 | $ | 747,612 | $ | 5,678,997 | $ | 1,874,163 | ||||||||
Cost of goods sold | 2,730,286 | 623,761 | 4,303,750 | 1,668,192 | ||||||||||||
Gross Margin | 1,200,582 | 123,851 | 1,375,247 | 205,971 | ||||||||||||
Operating Expenses | ||||||||||||||||
Operations | 440,445 | 1,581,818 | 1,148,348 | 2,468,121 | ||||||||||||
Research and development | 1,987,890 | 1,266,956 | 3,126,017 | 1,716,920 | ||||||||||||
Sales and marketing | 675,490 | 563,756 | 1,662,398 | 970,709 | ||||||||||||
General and administrative | 1,460,073 | 1,815,314 | 2,903,229 | 2,877,718 | ||||||||||||
Stock based compensation | 1,196,325 | 1,246,796 | 2,107,931 | 2,002,267 | ||||||||||||
Total operating expenses | 5,760,223 | 6,474,640 | 10,947,923 | 10,035,735 | ||||||||||||
Operating loss | (4,559,641 | ) | (6,350,789 | ) | (9,572,676 | ) | (9,829,764 | ) | ||||||||
Other (income) expense | ||||||||||||||||
Change in fair value of derivative liability | (162,482 | ) | (686,744 | ) | (189,002 | ) | (593,822 | ) | ||||||||
Investment loss (income), net | 333,867 | (92,711 | ) | 573,357 | (192,134 | ) | ||||||||||
Interest expense | 19,696 | 32,485 | 41,553 | 68,172 | ||||||||||||
Other, net | 331,095 | 227,163 | 651,008 | 311,204 | ||||||||||||
Other (income) expense | 522,176 | (519,807 | ) | 1,076,916 | (406,580 | ) | ||||||||||
Net loss from continuing operations | (5,081,817 | ) | (5,830,982 | ) | (10,649,592 | ) | (9,423,184 | ) | ||||||||
Loss from discontinued operations | (599,511 | ) | (413,495 | ) | (842,084 | ) | (632,892 | ) | ||||||||
Net loss | $ | (5,681,328 | ) | $ | (6,244,477 | ) | $ | (11,491,676 | ) | $ | (10,056,076 | ) | ||||
Loss per share - basic and diluted | ||||||||||||||||
Continuing operations | $ | (0.09 | ) | $ | (0.11 | ) | $ | (0.19 | ) | $ | (0.18 | ) | ||||
Discontinued operations | (0.01 | ) | (0.01 | ) | (0.02 | ) | (0.01 | ) | ||||||||
Loss per share - basic and diluted | $ | (0.10 | ) | $ | (0.12 | ) | $ | (0.21 | ) | $ | (0.19 | ) | ||||
Weighted average shares outstanding - basic and diluted | 55,606,336 | 54,078,111 | 55,270,838 | 53,928,133 |
Three months ended October 31, | Six months ended October 31, | |||||||||||||||
2022 | 2021 | 2022 | 2021 | |||||||||||||
Revenues | $ | 1,530,462 | $ | 1,863,239 | $ | 4,599,733 | $ | 3,259,990 | ||||||||
Cost of goods sold | 1,296,807 | 1,710,657 | 4,008,451 | 3,005,004 | ||||||||||||
Gross Margin | 233,655 | 152,582 | 591,282 | 254,986 | ||||||||||||
Operating Expenses | ||||||||||||||||
Operations | 1,752,873 | 283,249 | 2,800,959 | 460,112 | ||||||||||||
Research and development | 1,354,914 | 493,441 | 1,887,684 | 737,695 | ||||||||||||
Sales and marketing | 731,769 | 185,385 | 1,334,000 | 286,018 | ||||||||||||
General and administrative | 1,919,637 | 1,050,708 | 3,037,202 | 1,926,888 | ||||||||||||
Stock based compensation | 1,246,796 | 899,937 | 2,002,267 | 1,284,023 | ||||||||||||
Total operating expenses | 7,005,989 | 2,912,720 | 11,062,112 | 4,694,736 | ||||||||||||
Operating loss | (6,772,334 | ) | (2,760,138 | ) | (10,470,830 | ) | (4,439,750 | ) | ||||||||
Other Expense (Income) | ||||||||||||||||
Change in fair value of derivative liability | (686,744 | ) | (118,813 | ) | (593,822 | ) | (273,061 | ) | ||||||||
Investment income, net | (103,817 | ) | 38,447 | (234,113 | ) | 38,447 | ||||||||||
Interest expense | 32,485 | 46,017 | �� | 68,172 | 63,116 | |||||||||||
Other, net | 230,219 | 14,812 | 345,009 | 30,121 | ||||||||||||
Other Expense (Income) | $ | (527,857 | ) | $ | (19,537 | ) | $ | (414,754 | ) | $ | (141,377 | ) | ||||
Net loss | $ | (6,244,477 | ) | $ | (2,740,601 | ) | $ | (10,056,076 | ) | $ | (4,298,373 | ) | ||||
Loss per share - basic and diluted | $ | (0.12 | ) | $ | (0.05 | ) | $ | (0.19 | ) | $ | (0.10 | ) | ||||
Weighted average shares outstanding - basic and diluted | 54,078,111 | 52,147,541 | 53,928,133 | 43,110,884 |
See accompanying notes.
4 |
RED CAT HOLDINGS
Consolidated Statements of Stockholders’ Equity
(Unaudited)For the three and six months ended October 31, 2023 and October 31, 2022
(Unaudited)
Series A | Series B | Additional | Accumulated Other | Series B | Additional | Accumulated Other | ||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||
Preferred Stock | Preferred Stock | Common Stock | Paid-in | Accumulated | Comprehensive | Total | Preferred Stock | Common Stock | Paid-in | Accumulated | Comprehensive | Total | ||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||
Shares | Amount | Shares | Amount | Shares | Amount | Capital | Deficit | Income (Loss) | Equity | |||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||
Balances, April 30, 2021 | 158,704 | $ | 1,587 | 1,968,676 | $ | 19,687 | 29,431,264 | $ | 29,431 | $ | 21,025,518 | $ | (15,809,928 | ) | $ | — | $ | 5,266,295 | ||||||||||||||||||||||||||||||||||||||||||||||||||||||
Acquisition of Skypersonic | — | — | — | — | 685,321 | 685 | 2,630,955 | — | — | 2,631,640 | ||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||
Public offerings, net of $5,959,800 of issuance costs | — | — | — | — | 17,333,334 | 17,333 | 70,022,871 | — | — | 70,040,204 | ||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||
Exercise of warrants | — | — | — | — | 66,666 | 67 | 263,073 | — | — | 263,140 | ||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||
Conversion of preferred stock | — | — | (982,000 | ) | (9,820 | ) | 818,333 | 818 | 9,002 | — | — | — | ||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||
Stock based compensation | — | — | — | — | — | — | 384,023 | — | — | 384,023 | ||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||
Vesting of restricted stock | — | — | — | — | 62,500 | 63 | — | — | — | 63 | ||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||
Shares issued for services | — | — | — | — | 91,667 | 92 | 191,908 | — | — | 192,000 | ||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||
Currency translation adjustments | — | — | — | — | — | — | — | — | 922 | 922 | ||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||
Net loss | — | — | — | — | — | — | — | (1,557,772 | ) | — | (1,557,772 | ) | ||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||
Balances, July 31, 2021 | 158,704 | $ | 1,587 | 986,676 | $ | 9,867 | 48,489,085 | $ | 48,489 | $ | 94,527,350 | $ | (17,367,700 | ) | $ | 922 | $ | 77,220,515 | ||||||||||||||||||||||||||||||||||||||||||||||||||||||
Acquisition of Skypersonic | — | — | — | — | 21,972 | 22 | 84,350 | — | — | 84,372 | ||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||
Acquisition of Teal Drones | — | — | — | — | 3,588,272 | 3,588 | 10,007,691 | — | — | 10,011,279 | ||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||
Conversion of preferred stock | (158,704 | ) | (1,587 | ) | — | — | 1,321,996 | 1,322 | 265 | — | — | — | ||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||
Stock based compensation | — | — | — | — | 243,585 | 244 | 899,693 | — | — | 899,937 | ||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||
Shares issued for services | — | — | — | — | 20,000 | 20 | 59,380 | — | — | 58,400 | ||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||
Currency translation adjustments | — | — | — | — | — | — | — | — | 669 | 669 | ||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||
Net loss | — | — | — | — | — | — | — | (2,740,601 | ) | — | (2,740,601 | ) | ||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||
Balances, October 31, 2021 | — | $ | — | 986,676 | $ | 9,867 | 53,684,910 | $ | 53,685 | $ | 105,577,729 | $ | (20,108,301 | ) | $ | 1,591 | $ | 85,534,571 | ||||||||||||||||||||||||||||||||||||||||||||||||||||||
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 | 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 | — | — | — | — | 755,471 | — | — | 755,471 | ||||||||||||||||||||||||||||||||||||||||||||||||||||||
Vesting of restricted stock units | — | — | — | — | 69,707 | 69 | (84,145 | ) | — | — | (84,076 | ) | — | — | 69,707 | 69 | (84,145 | ) | — | — | (84,076 | ) | ||||||||||||||||||||||||||||||||||||||||||||||||||
Unrealized gain on marketable securities | — | — | — | — | — | — | — | — | 133,582 | 133,582 | — | — | — | — | — | — | 133,582 | 133,582 | ||||||||||||||||||||||||||||||||||||||||||||||||||||||
Currency translation adjustments | — | — | — | — | — | — | — | — | 352 | 352 | — | — | — | — | — | — | 352 | 352 | ||||||||||||||||||||||||||||||||||||||||||||||||||||||
Net loss | — | — | — | — | — | — | — | (3,811,599 | ) | — | (3,811,599 | ) | — | — | — | — | — | (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 | 986,676 | $ | 9,867 | 53,818,442 | $ | 53,818 | $ | 107,492,710 | $ | (31,310,655 | ) | $ | (1,336,338 | ) | $ | 74,909,402 | |||||||||||||||||||||||||||||||||||||
Stock based compensation | — | — | — | — | — | — | 1,246,796 | — | — | 1,246,796 | — | — | — | — | 1,246,796 | — | — | 1,246,796 | ||||||||||||||||||||||||||||||||||||||||||||||||||||||
Vesting of restricted stock units | — | — | — | — | 411,097 | 411 | (332,794 | ) | — | — | (332,383 | ) | — | — | 411,097 | 411 | (332,794 | ) | — | — | (332,383 | ) | ||||||||||||||||||||||||||||||||||||||||||||||||||
Unrealized loss on marketable securities | — | — | — | — | — | — | — | — | (350,811 | ) | (350,811 | ) | — | — | — | — | — | — | (350,811 | ) | (350,811 | ) | ||||||||||||||||||||||||||||||||||||||||||||||||||
Currency translation adjustments | — | — | — | — | — | — | — | — | (1,256 | ) | (1,256 | ) | — | — | — | — | — | — | (1,256 | ) | (1,256 | ) | ||||||||||||||||||||||||||||||||||||||||||||||||||
Net loss | — | — | — | — | — | — | — | (6,244,477 | ) | — | (6,244,477 | ) | — | — | — | — | — | (6,244,477 | ) | — | (6,244,477 | ) | ||||||||||||||||||||||||||||||||||||||||||||||||||
Balances, October 31, 2022 | — | $ | — | 986,676 | $ | 9,867 | 54,229,539 | $ | 54,229 | $ | 108,406,712 | $ | (37,555,132 | ) | $ | (1,688,405 | ) | $ | 69,227,271 | 986,676 | $ | 9,867 | 54,229,539 | $ | 54,229 | $ | 108,406,712 | $ | (37,555,132 | ) | $ | (1,688,405 | ) | $ | 69,227,271 | |||||||||||||||||||||||||||||||||||||
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 | ||||||||||||||||||||||||||||||||||||||||||||||||||||||||
Stock based compensation | — | — | — | — | 1,196,325 | — | — | 1,196,325 | ||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||
Vesting of restricted stock units | — | — | 54,786 | 55 | (7,826 | ) | — | — | (7,771 | ) | ||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||
Issuance of common stock through ATM facility, net | — | — | 53,235 | 53 | 9,159 | — | — | 9,212 | ||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||
Unrealized gain on marketable securities | — | — | — | — | — | — | 363,663 | 363,663 | ||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||
Currency translation adjustments | — | — | — | — | — | — | 1,376 | 1,376 | ||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||
Net loss | — | — | — | — | — | (5,681,328 | ) | — | (5,681,328 | ) | ||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||
Balances, October 31, 2023 | 4,676 | $ | 47 | 55,649,896 | $ | 55,649 | $ | 112,102,691 | $ | (66,078,469 | ) | $ | (205,043 | ) | $ | 45,874,875 |
See accompanying notes.
5 |
RED CAT HOLDINGS
Consolidated Statements of Cash Flows
(Unaudited)
Six months ended October 31, | ||||||||
2023 | 2022 | |||||||
Cash Flows from Operating Activities | ||||||||
Net loss | $ | (11,491,676 | ) | $ | (10,056,076 | ) | ||
Net loss from discontinued operations | (842,084 | ) | (632,892 | ) | ||||
Net loss from continuing operations | (10,649,592 | ) | (9,423,184 | ) | ||||
Adjustments to reconcile net loss to net cash from operations: | ||||||||
Stock based compensation - options | 1,606,305 | 890,711 | ||||||
Stock awards - restricted units | 501,626 | 1,111,556 | ||||||
Amortization of intangible assets | 434,735 | 219,790 | ||||||
Realized loss from sale of marketable securities | 646,300 | 28,416 | ||||||
Depreciation | 222,431 | 91,804 | ||||||
Change in fair value of derivative | (189,002 | ) | (593,822 | ) | ||||
Changes in operating assets and liabilities | ||||||||
Accounts receivable | (2,269,192 | ) | (443,563 | ) | ||||
Inventory | (335,125 | ) | (1,119,484 | ) | ||||
Other | (1,576,157 | ) | (87,846 | ) | ||||
Operating lease right-of-use assets and liabilities | (1,115 | ) | 24,519 | |||||
Customer deposits | (94,181 | ) | (248,016 | ) | ||||
Accounts payable | 225,801 | 355,651 | ||||||
Accrued expenses | 236,807 | (334,004 | ) | |||||
Net cash used in operating activities of continuing operations | (11,240,359 | ) | (9,527,472 | ) | ||||
Cash Flows from Investing Activities | ||||||||
Purchases of property and equipment | (139,860 | ) | (1,280,935 | ) | ||||
Proceeds from sale of marketable securities | 10,205,501 | 13,241,836 | ||||||
Net cash provided by investing activities of continuing operations | 10,065,641 | 11,960,901 | ||||||
Cash Flows from Financing Activities | ||||||||
Proceeds from related party obligations | — | 13,404 | ||||||
Payments under related party obligations | — | (40,057 | ) | |||||
Payments under debt obligations | (279,126 | ) | (340,766 | ) | ||||
Payments of taxes related to equity transactions | (16,292 | ) | (561,407 | ) | ||||
Proceeds from issuance of common stock through ATM facility, net | 9,212 | — | ||||||
Net cash used in financing activities of continuing operations | (286,206 | ) | (928,826 | ) | ||||
Discontinued operations | ||||||||
Operating activities | (550,120 | ) | (4,006,667 | ) | ||||
Investing activities | — | — | ||||||
Financing activities | 166,026 | — | ||||||
Net cash used in discontinued operations | (384,094 | ) | (4,006,667 | ) | ||||
Net decrease in Cash | (1,845,018 | ) | (2,502,064 | ) | ||||
Cash, beginning of period | 3,260,305 | 4,084,815 | ||||||
Cash, end of period | 1,415,287 | 1,582,751 | ||||||
Less: Cash of discontinued operations | (6,310 | ) | (90,810 | ) | ||||
Cash of continuing operations, end of period | 1,408,977 | 1,491,941 | ||||||
Cash paid for interest | 42,031 | 62,862 | ||||||
Cash paid for income taxes | — | — | ||||||
Non-cash transactions | ||||||||
Unrealized gain (loss) on marketable securities | $ | 653,052 | $ | (217,229 | ) | |||
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 | $ | — | $ | 9,448 |
Six months ended October 31, | ||||||||
2022 | 2021 | |||||||
Cash Flows from Operating Activities | ||||||||
Net loss | $ | (10,056,076 | ) | $ | (4,298,373 | ) | ||
Stock based compensation - options | 890,711 | 505,821 | ||||||
Stock based compensation - restricted units | 1,111,556 | 778,202 | ||||||
Common stock issued for services | — | 250,400 | ||||||
Amortization of intangible assets | 219,790 | 32,651 | ||||||
Realized loss from sale of marketable securities | 28,416 | — | ||||||
Depreciation | 91,804 | 5,455 | ||||||
Change in fair value of derivative | (593,822 | ) | (273,061 | ) | ||||
Changes in operating assets and liabilities, net of acquisitions | ||||||||
Accounts receivable | (422,296 | ) | 27,002 | |||||
Inventory | (2,664,222 | ) | (319,124 | ) | ||||
Other | (2,098,555 | ) | (3,814,101 | ) | ||||
Operating lease right-of-use assets and liabilities | 23,487 | 10,887 | ||||||
Customer deposits | (314,622 | ) | 8,753 | |||||
Accounts payable | 630,594 | (976,679 | ) | |||||
Accrued expenses | (380,904 | ) | (505,340 | ) | ||||
Net cash used in operating activities | (13,534,139 | ) | (8,567,507 | ) | ||||
Cash Flows from Investing Activities | ||||||||
Cash acquired through acquisitions | — | 24,866 | ||||||
Purchases of property and equipment | (1,280,935 | ) | (30,147 | ) | ||||
Proceeds from maturities of marketable securities | 13,241,836 | 1,855,788 | ||||||
Purchases of marketable securities | — | (49,978,445 | ) | |||||
Net cash provided by (used in) investing activities | 11,960,901 | (48,127,938 | ) | |||||
Cash Flows from Financing Activities | ||||||||
Proceeds from exercise of warrants | — | 99,999 | ||||||
Proceeds from related party obligations | 13,404 | — | ||||||
Payments under related party obligations | (40,057 | ) | (1,866,381 | ) | ||||
Payments under debt obligations | (340,766 | ) | (320,965 | ) | ||||
Payments of taxes related to equity transactions | (561,407 | ) | — | |||||
Proceeds from issuance of common stock, net | — | 70,065,203 | ||||||
Net cash (used in) provided by financing activities | (928,826 | ) | 67,977,856 | |||||
Net (decrease) increase in Cash | (2,502,064 | ) | 11,282,411 | |||||
Cash, beginning of period | 4,084,815 | 277,347 | ||||||
Cash, end of period | 1,582,751 | 11,559,758 | ||||||
Cash paid for interest | 62,862 | 26,175 | ||||||
Cash paid for income taxes | — | — | ||||||
Non-cash transactions | ||||||||
Fair value of shares issued in acquisitions | $ | — | $ | 12,727,292 | ||||
Unrealized loss on marketable securities | $ | 217,229 | $ | — | ||||
Elimination of derivative liability | $ | — | $ | 163,141 | ||||
Indirect payment to related party | $ | — | $ | 132,200 | ||||
Shares withheld as payment of note receivable | $ | 18,449 | $ | — | ||||
Conversion of preferred stock into common stock | $ | — | $ | 11,407 | ||||
Taxes related to net share settlement of equity awards | $ | 9,448 | $ | — |
See accompanying notes.
6 |
RED CAT HOLDINGS, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
October 31, 2022 and 2021(Unaudited)
(unaudited)
Our unaudited interim consolidated financial statements and accompanying notes are prepared in accordance with accounting principles generally accepted in the United States of America ("GAAP"). In the opinion of management, the unaudited interim 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, 20222023 of Red Cat Holdings, Inc. (the "Company"), filed with the Securities and Exchange Commission ("SEC") on July 27, 2022.2023.
Note 1 – The Business
Red Cat Holdings (“Red Cat” or the “Company”) was originally incorporated in February 1984. Since April 2016, the Company’s primary business has been to provide products, services, and solutions to the drone industry which it presently does through its four wholly owned subsidiaries. Teal Drones is a leaderBeginning in commercialJanuary 2020, the Company expanded the scope of its drone products and government Unmanned Aerial Vehicles (UAV) technology. Fat Shark is a provider of First Person View (FPV) video goggles to the drone industry. Rotor Riot sells FPV drones and equipment to the consumer marketplaceservices through its digital storefront located at www.rotorriot.com. Skypersonic provides software and hardware solutions that enable drones to complete inspection services in locations where GPS (global positioning systems) is not available, yet still record and transmit data even while being operated from thousands of miles away.four acquisitions, including:
A. | In January 2020, the Company acquired Rotor Riot, a provider of First Person View (FPV) drones and equipment, primarily to consumers. The purchase price was $1,995,114. |
Corporate developments during the two years ended October 31, 2022 include:
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. |
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. |
On September 30, 2020,Following the Company enteredTeal acquisition in August 2021, we concentrate on integrating and organizing these businesses. Effective May 1, 2022, we established the Enterprise and Consumer segments to focus on the unique opportunities in each sector. Enterprise's initial strategy was to provide UAV's to commercial enterprises, and the military, to navigate dangerous military environments and confined industrial and commercial interior spaces. Subsequently, Enterprise narrowed its near-term attention on the military and other government agencies. Skypersonic's technology has been redirected to military applications and its operations consolidated into a share purchase agreement (“Share Purchase Agreement”) with Greg French (“French”), the founder and sole shareholder of Fat Shark Holdings (“Fat Shark”), to acquire all of the issued and outstanding shares ofTeal. The Consumer segment, which includes Fat Shark and its subsidiaries.Rotor Riot, caters to hobbyists, drone racers, and enthusiasts. The transaction closed on November 2, 2020 and was valued at $8,354,076reportable segments were established based on (i) the issuancehow our chief operating decision maker (“CODM”), which is a committee comprised of shares of common stock with a value of $6,351,076 on the date of closing (ii) a senior secured promissory note in the original principal amount of $1,753,000our Chief Executive Officer (“CEO”), Chief Operating Officer (“COO”) and (iii) a cash payment of $250,000. The Share Purchase Agreement included indemnification provisions, a two year non-compete agreement,our Chief Financial Officer (“CFO”), manages our business, makes resource allocation and registration rights for the shares issued in the transaction.operating decisions, and evaluates operating performance. See “Note 21 - Segment Reporting”.
A summary of the purchase price and its related allocation was as follows:
Shares issued | $ | 6,351,076 | ||
Promissory note issued | 1,753,000 | |||
Cash | 250,000 | |||
Total Purchase Price | $ | 8,354,076 |
Assets acquired | ||||
Cash | 201,632 | |||
Accounts receivable | 249,159 | |||
Other assets | 384,232 | |||
Inventory | 223,380 | |||
Brand name | 1,144,000 | |||
Proprietary technology | 272,000 | |||
Non-compete agreement | 16,000 | |||
Total assets acquired | 2,490,403 | |||
Liabilities assumed | ||||
Accounts payable and accrued expenses | 279,393 | |||
Customer deposits | 25,194 | |||
Total liabilities assumed | 304,587 | |||
Total fair value of net assets acquired | 2,185,816 | |||
Goodwill | $ | 6,168,260 |
7 |
The Company engaged a valuation services firm to value the intangible assets acquired and the purchase price allocation is now complete. Intangible assets included proprietary technology and a non-compete agreement which are being amortized over 5 and 3 years, respectively. The carrying value of brand name is not being amortized but is reviewed quarterly and formally evaluated at year end. The excess of the purchase price above the net assets acquired was recorded as goodwill which is reviewed quarterly and formally evaluated at year end.
In May 2021, the Company acquired all of the outstanding stock of Skypersonic, Inc. (“Skypersonic”) in exchange for $ of our common stock. The number of shares issuable was based on the volume weighted average price ("VWAP") of our common stock for the 20 trading days ending May 7, 2021. Based on a VWAP of $4.0154, the Company issued shares. In addition, the Company also agreed to issue shares of common stock to a shareholder. For accounting purposes, the shares were valued at $3,291,356 based on the closing price of our common stock of $3.84 on May 7, 2021. Prior to the closing, the Company provided $75,000 to Skypersonic to fund its operating costs. This amount was capitalized as part of the purchase price. In October 2021, the Company and Skypersonic agreed to a reduction in the purchase price of $601,622 which resulted in the cancellation of shares held in escrow.
The final summary of the purchase price and its related allocation is as follows:
Shares issued | $ | 2,716,012 | ||
Cash | 75,000 | |||
Total Purchase Price | $ | 2,791,012 |
Assets acquired | ||||
Cash | 13,502 | |||
Accounts receivable | 51,083 | |||
Other assets | 12,950 | |||
Inventory | 50,556 | |||
Proprietary technology | 826,000 | |||
Non-compete agreement | 65,000 | |||
Total assets acquired | 1,019,091 | |||
Liabilities assumed | ||||
Accounts payable and accrued expenses | 1,054,997 | |||
Total liabilities assumed | 1,054,997 | |||
Total fair value of net assets acquired | (35,906 | ) | ||
Goodwill | $ | 2,826,918 |
The Company engaged a valuation services firm to value the intangible assets acquired and the purchase price allocation is now complete. Intangible assets included proprietary technology and a non-compete agreement which are being amortized over 5 and 3 years, respectively. The excess of the purchase price above the net assets acquired was recorded as goodwill which is reviewed quarterly and formally evaluated at year end.
On August 31, 2021, the Company closed the acquisition of Teal Drones Inc., (“Teal”). Under the terms of the agreement, the base purchase price of $14,000,000 was reduced by $1,670,294 of debt assumed by the Company, as well as a working capital deficit adjustment of $1,456,953. Based on the net amount payable of $, and a VWAP of $2.908 for the twenty trading days ending August 31,November 2022, the Company issued of common stock. For accounting purposes, the shares were valued at $10,431,562 based on the closing price of our common stock of $2.79 on August 31, 2021. In December 2021, the Company and Teal agreed to a reduction in the purchase price of $438,058 which resulted in the cancellation of shares held in escrow. The Stock Consideration may be increased if Teal attains certain revenue levels in the 24-month period following the closing. The additional consideration begins at $4 million if sales total at least $18 million and ends at $16 million if sales total $36 million.
The final summary of the purchase price and its related allocation is as follows:
Assets acquired | ||||
Cash | 11,364 | |||
Accounts receivable | 47,964 | |||
Other current assets | 15,085 | |||
Other assets | 48,595 | |||
Inventory | 1,253,755 | |||
Brand name | 1,430,000 | |||
Proprietary technology | 3,869,000 | |||
Total assets acquired | 6,675,763 | |||
Liabilities assumed | ||||
Accounts payable and accrued expenses | 1,143,899 | |||
Customer deposits | 1,766,993 | |||
Notes payable | 2,749,091 | |||
Total liabilities assumed | 5,659,983 | |||
Total fair value of net assets acquired | 1,015,780 | |||
Goodwill | $ | 8,995,499 |
The Company engaged a valuation services firm to value the intangible assets acquired and the purchase price allocation is now complete. Intangible assets included proprietary technology which is being amortized over 6 years. The carrying value of brand name is not being amortized but is reviewed quarterly and formally evaluated at year end. The excess of the purchase price above the net assets acquired was recorded as goodwill which is reviewed quarterly and formally evaluated at year end.
On August 31, 2021, Tealwe entered into an Amendedagreement to sell our Consumer segment to Unusual Machines, Inc. (or “Unusual Machines” or “UM”). The unadjusted sale price is $20 million, including $3 million in cash, at closing, and Restated Loan$17 million in securities of Unusual Machines plus a post-closing adjustment for excess working capital. The agreement reflects the Company's decision to focus its efforts and Security Agreement with Decathlon Alpha IV, L.P. (“DA4”) (the “Loan Agreement”) in the amount of $1,670,294 (the “Loan”), representing the outstanding principal amount previously duecapital and owing by Tealdefense where it believes that there are more opportunities to DA4. Interest on the Loan accrues at a rate of ten (10%) percent per annum. Principal and interest is payable in monthly installments to $49,275 until maturity on December 31, 2024.create long term shareholder value. The Company assumed the Loan Agreement in connection with the acquisition.
Supplemental Unaudited Pro Forma Financial and Other Information
There is no pro forma financial information for the six months ended October 31, 2022 because all acquisitions had closed prior to the beginningclosing of the reporting period. The following table presents pro forma resultstransaction 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 if our acquisition of Teal had occurred on May 1, 2021:
Three months ended October 31, 2021 | Six months ended October 31, 2021 | |||||||||||||||||||||||
Red Cat | Teal | Consolidated | Red Cat | Teal | Consolidated | |||||||||||||||||||
Revenues | $ | 1,863,239 | $ | 104,016 | $ | 1,967,255 | $ | 3,259,990 | $ | 416,063 | $ | 3,676,053 | ||||||||||||
Net Loss | $ | (2,740,601 | ) | $ | (301,783 | ) | $ | (3,042,384 | ) | $ | (4,298,373 | ) | $ | (1,467,770 | ) | $ | (5,766,143 | ) |
The acquisition of Skypersonic was completed on May 7, 2021 and its activities during the period from May 1, 2021 to May 7, 2021 were immaterial to the consolidated pro forma results.NYSE or Nasdaq.
The unaudited pro forma financial information has been compiled in a manner consistent with the Company's accounting policies, and includes transaction costs, amortization of the acquired intangible assets, and other expenses directly related to each respective acquisition. The unaudited pro forma financial information is based on estimates and assumptions which the Company believes are reasonable and are not necessarily indicative of the results that would have been realized had the acquisitions closed on the dates indicated in the tables, nor are they indicative of results of operations that may occur in the future.
Other information related to the Company’s acquisitions include:
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 consist ofinclude Teal Drones, Fat Shark,Skypersonic, Rotor Riot, and Skypersonic.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, the disclosure of contingent assets and liabilities at the date of the financial statements, and the reported amounts of revenue and expenses during the reporting period. Actual results could differ from those estimates. Significant estimates reflected in these financial statements include those used to (i) determine stock-based compensation, (ii) complete purchase price accounting for acquisitions, and (iii) accounting for derivatives.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 October 31, 2022,2023, we had cash of $1,582,751$1,408,977 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 receivable separately from marketable securities on our consolidated balance sheets. Accrued interest receivableincome was $312,931$20,572 and $385,730$151,671 as of October 31, 20222023 and April 30, 2022,2023, respectively, and was included in other current assets. We did not write off any accrued interest receivableincome during the six months ended October 31, 20222023 and 2021.2022.
8 |
Accounts Receivable, net – Accounts receivable are recorded at the invoiced amount less allowances for doubtful accounts. The Company's estimate of the allowance for doubtful accounts is based on a multitude of factors, including historical bad debt levels for its customer base, past experience with a specific customer, the economic environment, and other factors. Accounts receivable balances are written off against the allowance when it is probable that the receivable will not be collected.
Inventories – Inventories, which consist of raw materials, work-in-process, and finished goods, are stated at the lower of cost or net realizable value, and are measured using the first-in, first-out method. Cost components include direct materials and direct labor, as well as in-bound freight. At each balance sheet date, the Company evaluates ending inventoriesthe net realizable value of its inventory using various reference measures including current product selling prices and recent customer demand, as well as evaluating for excess quantities and obsolescence.
Goodwill and Long-lived Assets– Goodwill represents the excess of the purchase price offuture economic benefit arising from other assets acquired in an acquisition overthat 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 identifiable net assets acquired. The measurement period fora reporting unit with its book value, including goodwill. If the valuation of assets acquired and liabilities assumed ends as soon as information on the facts and circumstances that existed as of the acquisition date becomes known,estimated fair value exceeds book value, goodwill is considered not to exceed 12 months. Adjustments in a purchase price allocation may require a change in the amounts allocated to goodwill during the periods in which an adjustment is determined.
We perform an impairment test at the end of each fiscal year, or more frequently if indications of impairment arise. We have two business segments and evaluate goodwill for impairment based on an evaluation ofbe 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 are 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.
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 business segment individually.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 tax benefit of this deduction will be realized.
Property and equipment – Property and equipment is stated at cost less accumulated depreciation and depreciatedwhich is calculated using the straight-line method over the estimated useful life of the asset. The estimated useful lives of our property and equipment are generally: (i) furniture and fixtures - seven years, (ii) equipment and related - two to five years, and (iii) leasehold improvements - 15 years.
9 |
Leases– Effective August 1, 2021, the Company adopted Accounting Standards Codification (ASC) 842 titled “Leases” which requires the recognition of assets and liabilities associated with lease agreements. The Company adopted ASC 842 on a modified retrospective transition basis which means that it did not restate financial information for any periods prior to August 1, 2021. Upon adoption, the Company recognized a lease liability obligation of $796,976 and a right-of-use asset for the same amount.
The Company determines if a contract is a lease or contains a lease at inception. Operating lease liabilities are measured, on each reporting date, based on the present value of the future minimum lease payments over the remaining lease term. The Company's leases do not provide an implicit rate. Therefore, the Company uses an effective discount rate of 12% based on its 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 straight-line basis over the lease term with the operating lease asset reduced by the amount of the expense. Lease terms may include options to extend or terminate a lease when they are reasonably certain to occur.
Fair Values, Inputs and Valuation Techniques for Financial Assets and Liabilities, and Related Disclosures – The fair value measurements and disclosure guidance defines fair value and establishes a framework for measuring fair value. Fair value is defined as the price that would be received to sell an asset or paid to transfer a liability (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.
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 debtthese instruments approximates fair value due to thetheir short-term nature of these instruments.nature.
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.
10 |
Derivative Liabilities
The Company has issued financial instruments that are considered derivatives or containwhich include embedded features subject to derivative accounting. Specifically, there are warrants outstanding, issued in connection with a convertible debt financing, which include provisions under which the exercise price is equal to the lesser of (i) $1.50 or (ii) the exercise or conversion price of securities issued in a future, qualified offering. 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 ofwarrants are valued using a future offering. This variable conversion feature was recognized as a derivative. Both financings included the issuance of warrants which contained similar variable conversion features. The Company values these convertible notes and warrants using the multinomial lattice method that values the derivative liability based on a probability weighted discounted cash flow model. The resulting liability is valued at each reporting date and the change in the liability is reflected as a change in derivative liability in the statement of operations.
Revenue Recognition– The Company recognizes revenue in accordance with ASC 606, “Revenue from Contracts with Customers”, issued by the Financial Accounting Standards Board (“FASB”). This standard includes a comprehensive evaluation of factors to be considered regarding revenue recognition including (i) identifying the promised goods, (ii) evaluating performance obligations, (iii) measuring the transaction price, (iv) allocating the transaction price to the performance obligations if there are multiple components, and (v) recognizing revenue as each obligation is satisfied. The Company’s revenue transactions include a single component, specifically, the shipment of goods to customers as orders are fulfilled. The Company recognizes revenue upon shipment. The timing of the shipment of orders can vary considerably depending upon whether an order is for an item normally maintained in inventory or an order that requires assembly or unique parts. Customer deposits totaled $123,308$61,805 and $437,930$155,986 at October 31, 20222023 and April 30, 2022,2023, respectively.
Research and Development– Research and development expenses include payroll, employee benefits, and other headcount-related expenses associated with product development. Research and development expenses also include third-party development and programming costs, as well as a proportionate share of overhead costs such as rent. Costs related to software development are included in research and development expense until technological feasibility is reached, which for our software products, is generally shortly before the products are released to production. Once technological feasibility is reached, such costs are capitalized and amortized as a cost of revenue over the estimated lives of the products.
Income Taxes – Deferred taxes are provided on the liability method;method whereby deferred tax assets are recognized for deductible temporary differences and deferred tax liabilities are recognized for taxable temporary differences. Temporary differences are the differences between the reported amounts of assets and liabilities and their tax bases. Deferred tax assets and liabilities are adjusted for the effects of changes in tax laws and rates on the date of enactment.
Recent Accounting Pronouncements– Management does not believe that recently issued, but not yet effective accounting pronouncements, if adopted, would have a material effect on the accompanying consolidated financial statements.
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 accumulated other comprehensive income.
Comprehensive Loss– Comprehensive loss consists of net loss and other comprehensive loss. Other comprehensive loss refers to gains and losses that are recorded as an element of stockholders' equity andbut are excluded from net loss. Our other comprehensive loss is comprised of foreign currency translation adjustments and unrealized gains or losses on available-for-sale securities. During the six months ended October 31, 20222023, comprehensive loss was $656,074 lower than net loss, primarily related to unrealized gains on available-for-sale securities totaling $653,052, and foreign currency translation adjustments of $3,022. During the six months ended October 31, 2021,2022, comprehensive loss was $218,133 higher and $1,591 lower than net loss, respectively,primarily related to unrealized losses on available-for-sale securities totaling $217,229, and $0, respectively, as well as by foreign currency translation adjustments of negative $904 and positive $1,591.$904.
11 |
Stock-Based Compensation– For stockStock options we useare valued using the estimated grant-date fair value method of accounting 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 expected volatility, term and future dividends. We recognize forfeitures as they occur. ForThe fair value of restricted stock we determine the fair valueis based on our stock price on the date of grant. For both stock options and restricted stock, we recognize compensation costsCompensation cost is recognized on a straight-line basis over the service period which is the vesting term.
Outstanding securities not included in the computation of diluted net loss per share because their effect would have been anti-dilutive included the following:include:
October 31, 2023 | April 30, 2023 | |||||||
Series B Preferred Stock, as converted | 3,896 | 822,230 | ||||||
Stock options | 6,861,517 | 4,784,809 | ||||||
Warrants | 1,539,999 | 1,539,999 | ||||||
Restricted stock | 779,850 | 781,060 | ||||||
Total | 9,185,262 | 7,928,098 |
October 31, 2022 | April 30, 2022 | |||||||
Series B Preferred Stock, as converted | 822,230 | 822,230 | ||||||
Stock options | 3,994,558 | 3,694,142 | ||||||
Warrants | 1,539,999 | 1,539,999 | ||||||
Restricted stock | 1,106,514 | 1,083,675 | ||||||
Total | 7,463,301 | 7,140,046 |
Related Parties – Parties are considered to be related to us if they have control or significant influence, directly or indirectly, over us, including key management personnel and members of the Board of Directors. Related Party transactions are disclosed in Note 19.20.
Segment Reporting
Since January 2020, we have acquired four separate businesses operating in various aspects of the drone industry. Following the most recentTeal acquisition the Companyin August 2021, we focused on integrating and organizing its acquiredthese businesses. These efforts included refiningEffective May 1, 2022, we established the establishment of Enterprise and Consumer segments to sharpen the Company’s focus on the unique opportunities in each sector ofsector. Enterprise's initial strategy was to provide UAV's to commercial enterprises, and the drone industry. The Enterprise segment, which includes Teal Dronesmilitary, to navigate dangerous military environments and Skypersonic, is focused on opportunities in the commercial sector, including military. Enterprise is building the infrastructure to manage drone fleets, fly and provide services remotely, and navigate confined industrial and commercial interior spacesspaces. Subsequently, Enterprise narrowed its near-term attention on the military and dangerousother government agencies. Skypersonic's technology has been redirected to military environments.applications and its operations consolidated into Teal. The Consumer segment, which includes Fat Shark and Rotor Riot, caters to hobbyists, drone racers, and Fat Shark, is focused on enthusiasts and hobbyists which are expected to increase as drones become more visible in our daily lives. Effective May 1, 2022, we began to manage our business operations through these business segments.enthusiasts. The reportable segments were identifiedestablished 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”),CODM manages our business, makes resource allocation and operating decisions, and evaluates operating performance. See “Note 2021 - Segment Reporting”.
Liquidity and Going Concern – The Company has never been profitable and its net losses have been increasing related to acquisitions, as well as costs incurred to pursue its long-term growth strategy. During the six months ended October 31, 2023, the Company incurred a net loss from continuing operations of $10,649,592 and used cash in operating activities of continuing operations of $11,240,359. As of October 31, 2023, working capital for continuing operations totaled $15,128,282. These financial results and our financial position at October 31, 2023 raise substantial doubt about our ability to continue as a going concern. However, the Company has recently taken actions to strengthen its liquidity. On December 11, 2023, we closed an offering of 18,400,000 shares of common stock which generated net proceeds of approximately $8,400,000 as further described in Note 24. In addition, the Company’s operating plan for the next twelve months has been updated to reflect recent operating improvements. Revenues have accelerated and are expected to continue growing. The Company’s new manufacturing facility is scaling production and gross margins are projected to increase. Management has concluded that these recent positive developments alleviate any substantial doubt about the Company’s ability to continue its operations, and meet its financial obligations, for twelve months from the date these consolidated financial statements are issued. See “Note 24 – Subsequent Events”.
12 |
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 the Consumer segment for:
Three months ended October 31, | Six months ended October 31, | |||||||||||||||
2023 | 2022 | 2023 | 2022 | |||||||||||||
Revenues | $ | 1,056,932 | $ | 782,850 | $ | 2,926,151 | $ | 2,725,570 | ||||||||
Cost of goods sold | 1,154,200 | 673,046 | 2,539,316 | 2,340,259 | ||||||||||||
Gross Margin | (97,268 | ) | 109,804 | 386,835 | 385,311 | |||||||||||
Operating Expenses | ||||||||||||||||
Operations | 173,825 | 171,055 | 383,805 | 332,838 | ||||||||||||
Research and development | 31,054 | 87,958 | 77,303 | 170,764 | ||||||||||||
Sales and marketing | 287,413 | 168,013 | 691,517 | 363,291 | ||||||||||||
General and administrative | 9,982 | 104,323 | 53,588 | 159,484 | ||||||||||||
Total operating expenses | 502,274 | 531,349 | 1,206,213 | 1,026,377 | ||||||||||||
Operating loss | (599,542 | ) | (421,545 | ) | (819,378 | ) | (641,066 | ) | ||||||||
Other (income) expense | ||||||||||||||||
Interest expense | — | — | 22,856 | — | ||||||||||||
Other, net | (31 | ) | (8,050 | ) | (150 | ) | (8,174 | ) | ||||||||
Other (income) expense | (31 | ) | (8,050 | ) | 22,706 | (8,174 | ) | |||||||||
Net loss from discontinued operations | $ | (599,511 | ) | $ | (413,495 | ) | $ | (842,084 | ) | $ | (632,892 | ) |
13 |
Assets and liabilities for the Consumer segment included:
October 31, 2023 | April 30, 2023 | |||||||
Current assets | ||||||||
Cash | $ | 6,310 | $ | 86,656 | ||||
Accounts receivable, net | 44,431 | 61,107 | ||||||
Inventory | 2,599,022 | 3,065,954 | ||||||
Other | 1,503,999 | 2,069,438 | ||||||
Total current assets | 4,153,762 | 5,283,155 | ||||||
Intangible assets, net | 20,000 | 20,000 | ||||||
Other | 3,853 | 3,853 | ||||||
Operating lease right-of-use assets | 62,280 | 84,544 | ||||||
Total long term assets | 86,133 | 108,397 | ||||||
Current liabilities | ||||||||
Accounts payable | $ | 64,777 | $ | 606,872 | ||||
Accrued expenses | 96,838 | 109,480 | ||||||
Debt obligations - short term | 166,026 | — | ||||||
Customer deposits | 43,936 | 244,688 | ||||||
Operating lease liabilities | 53,060 | 49,461 | ||||||
Total current liabilities | 424,637 | 1,010,501 | ||||||
Long term liabilities - Operating lease liabilities | 14,356 | 41,814 | ||||||
Working capital | $ | 3,729,125 | $ | 4,272,654 |
Note 34 – Marketable Securities
The following tables set forth information related to our marketableMarketable securities asconsisted solely of corporate bonds at October 31, 2022: 2023 and were classified at Level 2 in the Fair Value Hierarchy. Fair value, cost basis, and unrealized losses totaled $2,615,289, $2,826,402, and $211,113 at October 31, 2023, respectively. Contractual maturities of one to three years totaled $2,615,289.
Cost | Unrealized Gains (Losses) | Fair Value | ||||||||||
Asset-backed securities | $ | 1,663,414 | $ | (27,702 | ) | $ | 1,635,712 | |||||
Corporate bonds | 31,330,997 | (1,663,821 | ) | 29,667,176 | ||||||||
Total | $ | 32,994,411 | $ | (1,691,523 | ) | $ | 31,302,888 |
One Year or Less | One to Five Years | Over Five Years | Total | |||||||||||||
Asset-backed securities | $ | — | $ | 1,635,712 | $ | — | $ | 1,635,712 | ||||||||
Corporate bonds | 14,785,077 | 14,577,260 | 304,839 | 29,667,176 | ||||||||||||
Total | $ | 14,785,077 | $ | 16,212,972 | $ | 304,839 | $ | 31,302,888 |
Level 1 | Level 2 | Level 3 | Total | |||||||||||||
Asset-backed securities | $ | — | $ | 1,635,712 | $ | — | $ | 1,635,712 | ||||||||
Corporate bonds | — | 29,667,176 | — | 29,667,176 | ||||||||||||
Total | $ | — | $ | 31,302,888 | $ | — | $ | 31,302,888 |
Note 45 – Inventories
Inventories consisted of the following:
October 31, 2023 | April 30, 2023 | |||||||
Raw materials | $ | 7,804,167 | $ | 8,132,196 | ||||
Work-in-process | 1,327,888 | 509,381 | ||||||
Finished goods | 123,643 | 278,996 | ||||||
Total | $ | 9,255,698 | $ | 8,920,573 |
October 31, 2022 | April 30, 2022 | |||||||
Raw materials | $ | 3,221,442 | $ | 2,831,713 | ||||
Work-in-process | 291,870 | 173,112 | ||||||
Finished goods | 3,046,780 | 891,045 | ||||||
Total | $ | 6,560,092 | $ | 3,895,870 |
14 |
Inventory purchase orders outstanding totaled approximately $29.3 million. The global supply chain for materials required to produce our drones continues to experience significant disruptions and delays. While we have increased our order lead times and quantities, we retain the right to cancel or modify these orders prior to their shipment.
Note 56 – Other Current Assets
Other current assets included:
October 31, 2022 | April 30, 2022 | |||||||
Prepaid inventory | $ | 3,705,853 | $ | 1,707,085 | ||||
Accrued interest income | 312,931 | 385,730 | ||||||
Prepaid expenses | 434,655 | 262,069 | ||||||
Total | $ | 4,453,439 | $ | 2,354,884 |
October 31, 2023 | April 30, 2023 | |||||||
Prepaid inventory | $ | 1,616,111 | $ | 359,500 | ||||
Prepaid expenses | 1,203,209 | 752,564 | ||||||
Accrued interest income | 20,572 | 151,671 | ||||||
Total | $ | 2,839,892 | $ | 1,263,735 |
Note 67 – Due From Related Party
In January 2022, the Company determined that an employeea 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 will bewere withheld with the fair value of those shares applied against the Note. Any sharesShares issued to the employee in 2022 will bewere held at the transfer agent until the Note is repaid in full.was repaid. The Note maturesmatured 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 78 – Intangible Assets
Intangible assets relate to acquisitions completed by the Company, including those described in Note 1. Intangible assets1, and were as follows:
October 31, 2023 | April 30, 2023 | |||||||||||||||||||||||
Gross Value | Accumulated Amortization | Net Value | Gross Value | Accumulated Amortization | Net Value | |||||||||||||||||||
Proprietary technology | $ | 4,967,000 | $ | (1,259,673 | ) | $ | 3,707,327 | $ | 4,967,000 | $ | (841,223 | ) | $ | 4,125,777 | ||||||||||
Non-compete agreements | 81,000 | (70,167 | ) | 10,833 | 81,000 | (56,667 | ) | 24,333 | ||||||||||||||||
Customer relationships | 39,000 | (20,891 | ) | 18,109 | 39,000 | (18,106 | ) | 20,894 | ||||||||||||||||
Total finite-lived assets | 5,087,000 | (1,350,731 | ) | 3,736,269 | 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 | $ | (1,350,731 | ) | $ | 6,888,269 | $ | 8,239,000 | $ | (915,996 | ) | $ | 7,323,004 |
October 31, 2022 | April 30, 2022 | |||||||||||||||||||||||
Gross Value | Accumulated Amortization | Net Value | Gross Value | Accumulated Amortization | Net Value | |||||||||||||||||||
Proprietary technology | $ | 4,967,000 | (422,773 | ) | $ | 4,544,227 | $ | 1,098,000 | $ | (219,267 | ) | $ | 878,733 | |||||||||||
Non-compete agreements | 81,000 | (43,166 | ) | 37,834 | 81,000 | (29,667 | ) | 51,333 | ||||||||||||||||
Customer relationships | 39,000 | (15,320 | ) | 23,680 | 39,000 | (12,535 | ) | 26,465 | ||||||||||||||||
Total finite-lived assets | 5,087,000 | (481,259 | ) | 4,605,741 | 1,218,000 | (261,469 | ) | 956,531 | ||||||||||||||||
Brand name | 3,152,000 | — | 3,152,000 | 1,722,000 | — | 1,722,000 | ||||||||||||||||||
Trademark | 20,000 | — | 20,000 | 20,000 | — | 20,000 | ||||||||||||||||||
Total indefinite-lived assets | 3,172,000 | — | 3,172,000 | 1,742,000 | — | 1,742,000 | ||||||||||||||||||
Total intangible assets, net | $ | 8,259,000 | $ | (481,259 | ) | $ | 7,777,741 | $ | 2,960,000 | $ | (261,469 | ) | $ | 2,698,531 |
Proprietary technology and non-compete agreements are being amortized over five to six years and three years, respectively. Customer relationships isare being amortized over seven years. Goodwill and Brand name are not amortized but evaluated for impairment on a quarterly basis.
15 |
As of October 31, 2022, 2023, expected amortization expense for finite-lived intangible assets for the next five years is as follows:
Fiscal Year Ended: | ||||||
2023 | $ | 434,738 | ||||
2024 | 866,805 | |||||
2025 | 842,471 | |||||
2026 | 815,271 | |||||
2027 | 786,679 | |||||
Thereafter | 859,777 | |||||
Total | $ | 4,605,741 |
Fiscal Year Ended: | ||||||
2024 | $ | 432,070 | ||||
2025 | 842,471 | |||||
2026 | 815,271 | |||||
2027 | 786,679 | |||||
2028 | 644,833 | |||||
Thereafter | 214,945 | |||||
Total | $ | 3,736,269 |
Goodwill is a separately stated intangible asset and represents the excess of the purchase price of acquisitions above the netfuture economic benefit arising from other assets acquired.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 October 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.
Date | Acquisition | Goodwill | ||||||
January 2020 | Rotor Riot | $ | 1,849,073 | |||||
November 2020 | Fat Shark | 6,168,260 | ||||||
Balance at April 30, 2021 | 8,017,333 | |||||||
May 2021 | Skypersonic | 2,826,918 | ||||||
August 2021 | Teal Drones | 8,995,499 | ||||||
Balance at April 30, 2022 and October 31, 2022 | $ | 19,839,750 |
Note 89 – Property and Equipment
Property and equipment consist of assets with an estimated useful life greater than one year and are reported net of accumulated depreciation. The reported values are periodically assessed for impairment, and were as follows:
October 31, 2023 | April 30, 2023 | |||||||
Equipment and related | $ | 1,426,424 | $ | 1,386,373 | ||||
Leasehold improvements | 1,548,609 | 1,473,890 | ||||||
Furniture and fixtures | 157,842 | 132,752 | ||||||
Accumulated depreciation | (565,088 | ) | (342,657 | ) | ||||
Net carrying value | $ | 2,567,787 | $ | 2,650,358 |
October 31, 2022 | April 30, 2022 | |||||||
Equipment and related | $ | 1,003,488 | $ | 509,376 | ||||
Leasehold improvements | 930,986 | 149,330 | ||||||
Furniture and fixtures | 54,254 | 42,746 | ||||||
Accumulated depreciation | (287,907 | ) | (189,762 | ) | ||||
Net carrying value | $ | 1,700,821 | $ | 511,690 |
Depreciation expense totaled $91,804222,431 and $5,45591,804 for the six months ended October 31, 2023 and 2022, and 2021, respectively.
16 |
Note 10 – Other Long-Term Assets
Other long-term assets included:
October 31, 2023 | April 30, 2023 | |||||||
SAFE agreement | $ | 250,000 | $ | 250,000 | ||||
Security deposits | 53,180 | 53,180 | ||||||
Total | $ | 303,180 | $ | 303,180 |
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 six months ended October 31, 2023.
Note 911 – Operating Leases
As of October 31, 2022,2023, 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 4.583.58 years, some of which may include options to extend for up to 5 years. Operating lease expense totaled $201,004170,505 for the six months ended October 31, 2022,2023, including period cost for short-term, cancellable, and variable leases, not included in lease liabilities, of $19,7253,300 for the six months ended October 31, 2022.2023.
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 |
Location | Monthly Rent | Expiration | ||||||
South Salt Lake, Utah | $ | 22,000 | December 2024 | |||||
Orlando, Florida | $ | 4,692 | January 2025 | |||||
San Juan, Puerto Rico | $ | 2,226 | June 2027 | |||||
Troy, Michigan | $ | 2,667 | May 2022 | |||||
Orlando, Florida | $ | 1,690 | September 2022 |
Supplemental information related to operating leases for the six months ended October 31, 20222023 was:
Operating cash paid to settle lease liabilities | $ | |||
Weighted average remaining lease term (in years) | ||||
Weighted average discount rate | 12% |
Future lease payments at October 31, 2023 were as follows:
Fiscal Year Ended: | ||||||
2024 | 174,542 | |||||
2025 | 260,743 | |||||
2026 | 76,619 | |||||
2027 | 79,300 | |||||
2028 | 6,627 | |||||
Total | $ | 597,831 |
Future lease payments at October 31, 2022 were as follows:
Fiscal Year Ended: | ||||||
2023 | $ | 197,723 | ||||
2024 | 403,878 | |||||
2025 | 304,676 | |||||
2026 | 76,619 | |||||
2027 | 79,300 | |||||
Thereafter | 6,627 | |||||
Total | $ | 1,068,823 |
Note 1012 – Debt Obligations
A. | Decathlon Capital |
InOn August 31, 2021, Teal restructured its loan agreemententered into an Amended and Restated Loan and Security Agreement with Decathlon Capital. The principalAlpha IV, L.P. (“DA4”) in the amount of $1,670,294 bears interest(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 through itsuntil maturity on December 31, 2024 maturity date.2024. The balance outstanding at October 31, 20222023 totaled $1,139,516639,663.
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 $6521,107 at October 31, 2022.2023.
C. | Vendor |
In May 2020,connection with the acquisition of Teal entered into a settlement agreement with a vendor that had been providing contract manufacturing services. Aton August 31, 2021, the Company assumed the outstandingan obligation with a contract manufacturing firm. The assumed balance of $387,500 which was payablerepaid in monthly installments of $37,500 with a final payment of $12,500 that was madeand 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. |
Shopify Capital is an affiliate of Shopify, Inc. which provides sales software and services to the Company. The Company processes customer transactions ordered on the e-commerce site for Rotor Riot through Shopify. Shopify Capital has entered into multiple agreements with the Company in which it has "purchased receivables" at a discount. Shopify retains a portion of the Company's daily receipts until the purchased receivables have been paid. The Company recognizes the discount as a transaction fee, in full, in the month in which the agreement is executed. Agreements with activity during the two years ended October 31, 2022 included:
Date of Transaction | Purchased Receivables | Payment to Company | Transaction Fees | Withholding Rate | Fully Repaid In | |||||
September 2020 | $209,050 | $185,000 | $24,050 | 17% | May 2021 | |||||
April 2021 | $236,500 | $215,000 | $21,500 | 17% | January 2022 |
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 October 31, 20222023 and April 30, 20222023 totaled $84,97147,442 and $102,59966,586 respectively.
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.
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 October 31, 20222023 and April 30, 2023 totaled $15,3517,476. and $11,412 respectively.
18 |
PayPal is an electronic commerce company that facilitates payments between parties through online funds transfers. The Company processes certain customer payments ordered on its e-commerce site through PayPal. The Company has entered into multiple agreements under which PayPal provides an advance on customer payments, and then retains a portion of customer payments until the advance is repaid. PayPal charges a fee which the Company recognizes in full upon entering an agreement. A November 2019 agreement under which PayPal advanced $100,000 and charged a transaction fee of $6,900 was completed in January 2021. A January 2021 agreement under which PayPal advanced $75,444 and charged a transaction fee of $2,444 was completed in August 2021.
Summary |
Outstanding principal payments on debt obligations are due as follows:
Fiscal 2023 | $ | 616,131 | ||||||
Fiscal 2024 | 572,139 | 643,012 | ||||||
Fiscal 2025 | 401,568 | 401,569 | ||||||
Total | $ | 1,589,838 | $ | 1,044,581 | ||||
Short term – through October 31, 2023 | $ | 895,257 | ||||||
Short term – through October 31, 2024 | $ | 953,819 | ||||||
Long term – thereafter | $ | 694,581 | $ | 90,762 |
Note 1113 – Due to Related Party
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.
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 of the seller, BRIT, LLC, totaling $47,853which bearsbore interest at 6.67% annually. The remaining balance of $37,196plus accrued interest totaling $292was paid in October 2022.
In 2020, the Company received advances totaling $79,000 from Aerocarve, which is controlled by the Company's Chief Executive Officer. The parties agreed that the funds would bear interest at 5% annually until repaid. The balance was repaid in full in May 2021.
Note 12 – Convertible Notes
October 2020 Financing
In October 2020, the Company closed a private offering of convertible promissory notes (the "2020 Notes") in the aggregate principal amount of $600,000. The 2020 Notes accrued interest at 12% annually, had a two-year term, and were convertible into common stock at the lower of $1.00 or a 25% discount of the price per share of Common Stock offered in a future, qualified offering. The financing also included the issuance of warrants to purchase 399,998 shares of common stock. The Warrants are exercisable for a period of five years at a price equal to the lower of (1) $1.50 per share, or (2) at a price equal to 75% of the price per share of the common stock offered in a future, qualified offering.
The Company determined that the provision associated with a potential reduction in the conversion price of the notes and the exercise price of the warrant represented an embedded derivative financial liability. The derivative liability was initially valued at $728,587 using a multinomial lattice model with $460,588 and $267,999 related to the derivative features of the notes and warrants, respectively. In addition, $580,000 of the proceeds were applied as a debt discount to reduce the initial carrying value of the 2020 Notes to zero with the remaining $20,000 applied against transaction fees. The excess of the liability over the net proceeds totaled $148,587 which was recognized as a derivative expense in the fiscal year ended April 30, 2021.
As of October 31, 2022, (a) the 2020 Notes were fully converted into common stock and the related derivative liability eliminated, and (b) 266,666 of the warrants were outstanding with a derivative liability of $330,493.
January 2021 Financing
In January 2021, the Company closed a private offering of convertible promissory notes (the "2021 Notes") in the aggregate principal amount of $500,000. The 2021 Notes accrued interest at 12% annually, had a two-year term, and were convertible into shares of the Company's common stock at the lower of $1.00 or a 25% discount of the price per share of Common Stock offered in a future, qualified offering. The financing also included the issuance of warrants to purchase 675,000 shares of common stock. The Warrants are exercisable for a period of five years at a price equal to the lower of (i) $1.50 per share, or (ii) a 25% discount to the price per share of common stock offered in a future qualified offering.
The Company determined that the provision associated with a potential reduction in the conversion price of the notes and the exercise price of the warrant represented an embedded derivative financial liability. The derivative liability was initially valued at $4,981,701 using a multinomial lattice model with $2,111,035 and $2,870,666 related to the derivative features of the notes and warrants, respectively. In addition, $500,000 was applied as a debt discount to reduce the initial carrying value of the 2021 notes to zero. The excess of the liability over the net proceeds totaled $4,481,701 which was recognized as a derivative expense in the fiscal year ended April 30, 2021.
As of October 31, 2022, (a) the 2021 Notes were fully converted into common stock and the related derivative liability eliminated, and (b) 540,000 of the warrants were outstanding with a derivative liability of $683,182.
Note 1314 – 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 October 31, 20222023 and April 30, 2022,2023, we had accumulated deficits of approximately $37,500,00066,100,000 and $27,500,00054,600,000, respectively. Deferred tax assets related to the future benefit of these net operating losses for tax purposes totaled approximately $6,937,50012,229,000 and $5,087,50010,101,000, 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 October 31, 20222023 and April 30, 2022.2023.
19 |
Note 1415 – Common Stock
Our common stock has a par value of $ $0.001 per share. We are authorized to issue shares of common stock. Each share of common stock is entitled to one vote. A summary of shares of common stock issued by the Company since April 30, 20212022 is as follows:
Description of Shares | Shares Issued | |||
Shares outstanding as of April 30, | ||||
Vesting of restricted stock | ||||
Vesting of restricted stock | ||||
Vesting of restricted stock | ||||
39,832 | ||||
Shares outstanding as of April 30, 2023 | 54,568,065 | |||
Vesting of restricted stock to employees, net of shares withheld of 18,935 to pay taxes | 94,971 | |||
Vesting of restricted stock to Board of Directors | 113,530 | |||
Vesting of restricted stock to consultants | 1,761 | |||
Conversion of preferred stock | 818,334 | |||
Issuance of common stock through ATM facilities | 53,235 | |||
Shares outstanding as of October 31, |
Note 15 – Preferred StockATM Facility
Series A Preferred Stock outstanding totaled at April 30, 2021,In August 2023, we entered into a sales agreement (“the 2023 ATM Facility”) with ThinkEquity LLC (“ThinkEquity”), which provides for the sale, in our sole discretion, of shares of our common stock having an aggregate offering price of up to $17 million through ThinkEquity, as our sales agent. The issuance and were converted intosale of these shares by us pursuant to the 2023 ATM Facility are deemed “at the market” offerings as defined in Rule 415 under the Securities Act of 1933, as amended (the Securities Act), and are registered under the Securities Act. We pay a commission of up to 2.5% of gross sales proceeds of any common stock sold under the 2023 ATM Facility.
During the six months ended October 31, 2023, we sold an aggregate of on August 10, 2021.under the 2023 ATM Facility, at an average price of $1.07 per share, for gross proceeds of approximately $57,000 and net proceeds of approximately $55,700, after deducting commissions and other offering expenses payable by us. Additionally, the Company incurred legal fees of approximately $46,000 establishing the 2023 ATM Facility. As of October 31, 2023, approximately $16,943,000 of common stock remained available to be sold under the 2023 ATM Facility, subject to certain conditions as specified in the sales agreement.
Subsequent to the quarter ended October 31, 2023, in December 2023, the terms of the 2023 ATM Facility were amended to change the aggregate offering price to up to $4,375,000.
Note 16 – Preferred Stock
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 October 31, 20222023 totaled which are convertible into shares of common stock.
20 |
Note 1617 – Warrants
The companyCompany issued five-year5 year warrants to investors 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.
A summary of the warrants issued and their fair values were:
Upon Issuance | Outstanding at October 31, 2023 | |||||||||||||||||
Date of Transaction | Number of Warrants | Initial Fair Value | Number of Warrants | Fair Value | ||||||||||||||
October 2020 | 399,998 | $ | 267,999 | 266,666 | $ | 125,613 | ||||||||||||
January 2021 | 675,000 | $ | 2,870,666 | 540,000 | $ | 273,590 |
Upon Issuance | Outstanding at October 31, 2022 | |||||||||||||||||
Date of Transaction | Number of Warrants | Initial Fair Value | Number of Warrants | Fair Value | ||||||||||||||
October 2020 | 399,998 | $ | 267,999 | 266,666 | $ | 330,493 | ||||||||||||
January 2021 | 675,000 | $ | 2,870,666 | 540,000 | $ | 683,182 |
In March and April 2021,To date, we have received $201,249 $301,248 related to the exercise of of the268,332 warrants. Since theseThese exercises resulted in the elimination ofeliminated the derivative liability in thethese warrants, resulting in a decrease of $857,446 in 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 $5.00.5.00.
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 presents the range of assumptions used to estimate the fair valuesThere have been no issuances or exercises of warrants granted during the six months ended October 31:
2022 | 2021 | |||||||
Risk-free interest rate | – % | |||||||
Expected dividend yield | ||||||||
Expected term (in years) | — | |||||||
Expected volatility | – % |
The following table summarizes the changes in warrants outstanding since April 30, 2021.2022. The key attributes of the 1,539,999 warrants outstanding, which have a weighted average exercise price of $3.38, are as follows:
Number of Shares |
Weighted-average Exercise Price per Share | Weighted-average Remaining Contractual Term (in years) |
Aggregate Intrinsic Value | ||||||||||||||
Balance as of April 30, 2021 | |||||||||||||||||
Granted | $ | ||||||||||||||||
Exercised | ) | ||||||||||||||||
Outstanding as of April 30, 2022 | $ | ||||||||||||||||
Granted | |||||||||||||||||
Exercised | |||||||||||||||||
Outstanding at October 31, 2022 | $ | $ |
Weighted-average Remaining Contractual Term (in years) |
Aggregate Intrinsic Value | ||||||
April 30, 2022 | 3.89 | $427,533 | |||||
April 30, 2023 | 2.89 | $— | |||||
October 31, 2023 | 2.38 | $— |
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 six months ended October 31 was:
2022 | 2021 | |||||||
Exercise Price | $ | $ | – | |||||
Stock price on date of grant | – | |||||||
Risk-free interest rate | % | – % | ||||||
Dividend yield | ||||||||
Expected term (years) | 8.25 | – | ||||||
Volatility | % | – % |
21 |
2023 | 2022 | |||||||
Exercise Price | $ | – | $ | |||||
Stock price on date of grant | – | |||||||
Risk-free interest rate | – % | % | ||||||
Dividend yield | — | |||||||
Expected term (years) | – | |||||||
Volatility | – % | % |
A summary of options activity under the Plan since April 30, 20212022 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 | 2,541,042 | 1.01 | ||||||||||||||
Exercised | — | — | ||||||||||||||
Forfeited or expired | (464,334 | ) | 2.43 | |||||||||||||
Outstanding as of October 31, 2023 | 6,861,517 | 1.52 | 57,374 | |||||||||||||
Exercisable as of October 31, 2023 | 3,261,527 | $ | 1.91 | $ | 57,374 |
Options | Shares | Weighted-Average Exercise Price | Weighted-Average Remaining Contractual Term | Aggregate Intrinsic Value | ||||||||||||
Outstanding as of April 30, 2021 | 2,197,475 | $ | 1.79 | 4,943,870 | ||||||||||||
Granted | 1,681,000 | 2.58 | ||||||||||||||
Exercised | (150,000 | ) | 2.49 | |||||||||||||
Forfeited or expired | (34,333 | ) | 2.11 | |||||||||||||
Outstanding as of April 30, 2022 | 3,694,142 | 2.17 | 1,407,545 | |||||||||||||
Granted | 397,000 | 2.38 | ||||||||||||||
Exercised | — | |||||||||||||||
Forfeited or expired | (96,584 | ) | 2.48 | |||||||||||||
Outstanding as of October 31, 2022 | 3,994,558 | 2.18 | 608,162 | |||||||||||||
Exercisable as of October 31, 2022 | 2,569,306 | $ | 2.06 | $ | 559,578 |
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 October 31, 20222023 and October 31, 2021,2022, there was $3,277,0732,712,605 and $4,429,6263,277,073 of unrecognized stock-based compensation expense related to unvested stock options which is expected to be recognized over the weighted average periods of 1.242.12 and 1.311.24 years, respectively.
B. | Restricted Stock |
A summary of restricted stock activity under the Plan since April 30, 20212022 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 | (229,197 | ) | 1.92 | |||||
Forfeited | (70,656 | ) | 1.25 | |||||
Unvested and outstanding as of October 31, 2023 | 779,850 | $ | 2.11 |
Restricted Stock | Shares | Weighted Average Grant-Date Fair Value Per Share | ||||||
Unvested and outstanding as of April 30, 2021 | 687,500 | $ | 2.69 | |||||
Granted | 995,659 | 2.55 | ||||||
Vested | (599,484 | ) | 2.64 | |||||
Forfeited | — | — | ||||||
Unvested and outstanding as of April 30, 2022 | 1,083,675 | 2.59 | ||||||
Granted | 696,000 | 2.27 | ||||||
Vested | (673,161 | ) | 2.45 | |||||
Forfeited | — | — | ||||||
Unvested and outstanding as of October 31, 2022 | 1,106,514 | $ | 2.48 |
Stock Compensation
Stock compensation expense by functional operating expense was:
Three months ended October 31, | Six months ended October 31, | |||||||||||||||
2022 | 2021 | 2022 | 2021 | |||||||||||||
Operations | $ | 225,879 | $ | 311,346 | $ | 384,310 | $ | 374,607 | ||||||||
Research and development | 209,497 | 84,751 | 354,295 | 141,231 | ||||||||||||
Sales and marketing | 162,269 | 114,088 | 269,343 | 158,832 | ||||||||||||
General and administrative | 649,151 | 389,752 | 994,319 | 609,353 | ||||||||||||
Total | $ | 1,246,796 | $ | 899,937 | $ | 2,002,267 | $ | 1,284,023 |
22 |
C. | Stock Compensation |
Stock compensation expense by functional operating expense was:
Three months ended October 31, | Six months ended October 31, | |||||||||||||||
2023 | 2022 | 2023 | 2022 | |||||||||||||
Operations | $ | 238,522 | $ | 225,879 | $ | 429,621 | $ | 384,310 | ||||||||
Research and development | 147,629 | 209,497 | 275,046 | 354,295 | ||||||||||||
Sales and marketing | 208,903 | 162,269 | 374,212 | 269,343 | ||||||||||||
General and administrative | 601,271 | 649,151 | 1,029,052 | 994,319 | ||||||||||||
Total | $ | 1,196,325 | $ | 1,246,796 | $ | 2,107,931 | $ | 2,002,267 |
Stock compensation expense pertaining to options totaled $890,7111,606,305 and $505,821890,711 for the six months ended October 31, 20222023 and 2021,2022, respectively. Stock compensation expense pertaining to restricted stock units totaled $1,111,556501,626 and $778,2021,111,556 for the six months ended October 31, 2023 and 2022, and 2021, respectively.
Note 1819 – Derivatives
The Company has completed financings in October 2020 and January 2021 which included notes and warrants containing embedded features subject to derivative accounting. See Note 12 for a full description of these financings. Both the notes and the warrants included provisions which provided for a reduction in the conversion and exercise prices, respectively, if the Company completed a future qualified offering at a lower price. These provisions represent embedded derivatives which are valued separately from the host instrument (meaning the notes and warrants) and recognized as derivative liabilities on the Company's balance sheet. The Company initially measures these financial instruments at their estimated fair value and recognizes changes in their estimated fair value in results of operations during the period of change. The Company also measures these financial instruments on the date of settlement (meaning when the note is converted, or the warrant is exercised) at their estimated fair value and recognizes changes in their estimated fair value in results of operations. Any discount in the carrying value of the note is fully amortized on the date of settlement and recognized as interest expense. The Company estimated the fair value of these embedded derivatives using a multinomial lattice 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 October 31, 20222023 and April 30, 20222023 are set forth below. In addition, the Company's stock price on each measurement date was used in the model.
October 31, | April 30, | |||||||
Risk-free interest rate | % – 5.54 | – % | ||||||
Expected dividend yield | ||||||||
Expected term (in years) | – | – | ||||||
Expected volatility | – % | – % |
As of October 31, 20222023, 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 six months ended October 31, 20222023 and the year ended April 30, 20222023 were as follows:
October 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 | (189,002 | ) | (1,019,292 | ) | ||||
Balance, end of period | $ | 399,203 | $ | 588,205 |
October 31, 2022 | April 30, 2022 | |||||||
Balance, beginning of period | $ | 1,607,497 | $ | 2,812,767 | ||||
Additions | — | — | ||||||
Eliminated upon conversion of notes/exercise of warrants | — | (163,141 | ) | |||||
Changes in fair value | (593,822 | ) | (1,042,129 | ) | ||||
Balance, end of period | $ | 1,013,675 | $ | 1,607,497 |
23 |
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 1920 - 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,$510,323, as further described in Note 6.7.
Additional related party transactions are disclosed in Note 11.13 and Note 22.
Note 2021 - Segment Reporting
We define our segments as those operations whose results are regularly reviewed by our CODM to analyze performance and allocate resources. Therefore, segment information is prepared on the same basis that management reviews financial information for operational decision-making purposes. Our CODM is a committee comprised of our CEO, COO, and CFO.
The Enterprise segment is focused on opportunities in the commercial sector, including military. Enterprise is building the infrastructure to manage drone fleets, fly and provide services remotely, and navigate confined industrial interior spaces and dangerous military environments.
The Consumer segment is focused on enthusiasts and hobbyists which are expected to increase as drones become more visible in our daily lives.
Our CODM allocates resources to and assesses the performance of our two operating segments based on the operating segments’ net sales and gross profit. The following table sets forth information by reportable segment for the threekey operating data and six months ended October 31, 2022, respectively.
For the three months ended October 31, 2022 | ||||||||||||||||
Enterprise | Consumer | Corporate | Total | |||||||||||||
Revenues | $ | 747,612 | $ | 782,850 | $ | — | $ | 1,530,462 | ||||||||
Cost of goods sold | 623,761 | 673,046 | — | 1,296,807 | ||||||||||||
Gross margin | 123,851 | 109,804 | — | 233,655 | ||||||||||||
Operating expenses | 3,615,614 | 531,349 | 2,859,026 | 7,005,989 | ||||||||||||
Operating loss | (3,491,763 | ) | (421,545 | ) | (2,859,026 | ) | (6,772,334 | ) | ||||||||
Other expenses, net | 96,015 | (8,050 | ) | (615,822 | ) | (527,857 | ) | |||||||||
Net loss | $ | (3,587,778 | ) | $ | (413,495 | ) | $ | (2,243,204 | ) | $ | (6,244,477 | ) |
For the six months ended October 31, 2022 | ||||||||||||||||
Enterprise | Consumer | Corporate | Total | |||||||||||||
Revenues | $ | 1,874,163 | $ | 2,725,570 | $ | — | $ | 4,599,733 | ||||||||
Cost of goods sold | 1,668,192 | 2,340,259 | — | 4,008,451 | ||||||||||||
Gross margin | 205,971 | 385,311 | — | 591,282 | ||||||||||||
Operating expenses | 5,276,977 | 1,026,377 | 4,758,758 | 11,062,112 | ||||||||||||
Operating loss | (5,071,006 | ) | (641,066 | ) | (4,758,758 | ) | (10,470,830 | ) | ||||||||
Other expenses, net | 159,244 | (8,174 | ) | (565,824 | ) | (414,754 | ) | |||||||||
Net loss | $ | (5,230,250 | ) | $ | (632,892 | ) | $ | (4,192,934 | ) | $ | (10,056,076 | ) |
The following table sets forth specific asset categories which are reviewed by our CODM in evaluating the evaluationoperating performance of operating each segment:
For the six months ended October 31, 2023 | ||||||||||||||||
Enterprise | Consumer | Corporate | Total | |||||||||||||
Revenues | $ | 5,678,997 | $ | 2,926,151 | $ | — | $ | 8,605,148 | ||||||||
Cost of goods sold | 4,303,750 | 2,539,316 | — | 6,843,066 | ||||||||||||
Gross margin | 1,375,247 | 386,835 | — | 1,762,082 | ||||||||||||
Operating expenses | 6,494,296 | 1,206,213 | 4,453,627 | 12,154,136 | ||||||||||||
Operating loss | (5,119,049 | ) | (819,378 | ) | (4,453,627 | ) | (10,392,054 | ) | ||||||||
Other expenses, net | 257,824 | 22,706 | 819,092 | 1,099,622 | ||||||||||||
Net loss | $ | (5,376,873 | ) | $ | (842,084 | ) | (5,272,719 | ) | $ | (11,491,676 | ) |
For the six months ended October 31, 2022 | ||||||||||||||||
Enterprise | Consumer | Corporate | Total | |||||||||||||
Revenues | $ | 1,874,163 | $ | 2,725,570 | $ | — | $ | 4,599,733 | ||||||||
Cost of goods sold | 1,668,192 | 2,340,259 | — | 4,008,451 | ||||||||||||
Gross margin | 205,971 | 385,311 | — | 591,282 | ||||||||||||
Operating expenses | 5,276,977 | 1,026,377 | 4,758,758 | 11,062,112 | ||||||||||||
Operating loss | (5,071,006 | ) | (641,066 | ) | (4,758,758 | ) | (10,470,830 | ) | ||||||||
Other expenses, net | 159,244 | (8,174 | ) | (565,824 | ) | (414,754 | ) | |||||||||
Net loss | $ | (5,230,250 | ) | $ | (632,892 | ) | $ | (4,192,934 | ) | $ | (10,056,076 | ) |
24 |
As of October 31, 2023 | ||||||||||||||||
Enterprise | Consumer | Corporate | Total | |||||||||||||
Accounts receivable, net | $ | 2,989,054 | $ | 44,431 | $ | — | $ | 3,033,485 | ||||||||
Inventory, net | 9,255,698 | 2,599,022 | — | 11,854,720 | ||||||||||||
Inventory deposits | $ | 1,616,111 | $ | 1,503,999 | $ | — | $ | 3,120,110 |
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 |
segments: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, 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. Mr. Thompson is a significant shareholder in Unusual Machines.
The final, amended purchase price of $20 million includes $1 million in cash, payable at closing, a $2 million secured promissory note, 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.
Note 23 – Commitments and Contingencies
As of October 31, 2022 | ||||||||||||||||
Enterprise | Consumer | Corporate | Total | |||||||||||||
Accounts receivable, net | $ | 874,439 | $ | 43,363 | $ | — | $ | 917,802 | ||||||||
Inventory, net | 4,332,532 | 2,227,560 | — | 6,560,092 | ||||||||||||
Inventory deposits | $ | 1,164,884 | $ | 2,540,969 | $ | — | $ | 3,705,853 |
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 October 31, 2023.
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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 2124 – Subsequent Events
Subsequent events have been evaluated through the date of this filing and there are no subsequent events which require disclosure except as set forth below:
On December 11, 2023, the Company closed an offering of 18,400,000 shares of common stock which generated gross proceeds of $9,200,000 and net proceeds of approximately $8,400,000 million. In connection with the offering, the amount of shares issuable under the ATM Facility was reduced to $4,375,000.
Sale of Consumer Segment
On November 21, 2022, the Company entered into a Stock Purchase Agreement (the "SPA") with Unusual Machines, Inc. (“UM”) and Jeffrey Thompson, the founder and Chief Executive Officer of the Company (the “Principal Stockholder”), related to the sale of the Company’s consumer business consisting of Rotor Riot, (“RR”), and Fat Shark Holdings (“FS”), for $18 million in cash and securities of UM.
The purchase price consists of (i) $5 million in cash (as increased for positive working capital and decreased for negative working capital at closing) plus (ii) $2.5 million in a convertible senior note of UM (the “Senior Note”) plus (iii) $10.5 million in Series A convertible preferred stock of UM (the “Series A Stock”). The Senior Note and Series A Stock will be convertible into Common Stock at the lesser of $4.00 per share or the IPO price of UM. The Senior Note and Series A Stock shall contain beneficial ownership blockers under which conversion shall be limited to 4.99% and/or 9.99% of the total voting power of UM, and may be further subject to limitations on voting and conversion required in order to conform with requirements of NASDAQ related to the issuance of more than 19.99% of the outstanding Common Stock in accordance with NASDAQ Rule 5635(d). The Senior Note and Series A Stock will include anti-dilution protection in the case of issuances by UM at a price lower than the then applicable conversion price for so long as the Senior Note or Series A Stock remains outstanding under which the conversion price will be reduced to such lower price as UM shall issue or agree to issue any of its securities.
Under the terms of the SPA the Principal Stockholder and UM have agreed to indemnification obligations, which shall survive for a period of 9 months, subject to certain limitations, which includes a basket of $250,000 before any claim can be asserted and a cap equal to the value of the escrow shares, other than in cases involving fraud. The Principal Stockholder agreed to deposit 450,000 shares of UM common stock owned to secure any indemnification obligations.
As a condition to closing, UM shall enter into an employment agreement with its Chief Executive Officer including non-compete provisions, which cannot be amended or waived without the prior written consent of the Company. UM, RR and FS will also be subject to non-competition agreements restricting activities involving Class I ISR drones, and for military, government, and enterprise customers.
The closing of the SPA is subject to customary closing conditions which include shareholder approval by the Company’s shareholders following filing with the SEC and mailing of the Company’s Proxy Statement on Schedule 14A and the approval of the transactions by a majority of the disinterested shareholders of the Company. The Principal Stockholder, who holds approximately 24% of the voting power of the Company, shall abstain from the vote on approval of the SPA. On November 21, 2022, the Board of Directors of the Company approved the SPA and its submission to shareholders for approval. In addition, closing of the SPA is subject to successful completion of an initial public offering (the “IPO”) by UM in the minimum amount of $15 million, and the listing of UM’s common stock on NASDAQ. The SPA requires the Company to cooperate with UM in connection with the IPO and to deliver audited financial statements of RR and FS. UM has agreed to register all of the common stock for which the Senior Note is convertible in the IPO for resale by the Company, or to pay the note in full with proceeds of the offering at closing, at UM’s election. In addition, UM has agreed to enter into a registration rights agreement for 100% of the common stock for which the Series A Stock may be converted and to use its best efforts to file and have declared effective such registration statement, on demand and on a piggy-back basis in connection with any other registration statements filed by UM.
ITEM 2. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS
The following discussion should be read in conjunction with our unaudited condensed consolidated financial statements and related notes and other financial data included elsewhere in this Quarterly Report on Form 10-Q.
Management's Discussion and Analysis contains forward-looking statements that involve risks and uncertainties such as statements relating to our liquidity, and our plans for our business focusing on providing products, services and solutions to the drone industry. Any statements that are not historical fact are forward-looking statements. When used, the words "believe," "plan," "intend," "anticipate," "target," "estimate," "expect," and the like, and/or future-tense or conditional constructions ("will," "may," "could," "should," etc.), or similar expressions, identify certain of these forward-looking statements. These forward-looking statements are subject to risks and uncertainties that could cause actual results or events to differ materially from those expressed or implied by the forward-looking statements in this Quarterly Report on Form 10-Q. The Company's actual results and the timing of events could differ materially from those anticipated in these forward-looking statements as a result of many factors. Investors should also review the risk factors in the Company's Annual Report on Form 10-K filed with the SEC on July 27, 2022.2023.
All forward-looking statements speak only as of the date on which they are made. The Company does not undertake any obligation to update such forward-looking statements to reflect events that occur or circumstances that exist after the date of this Quarterly Report on Form 10-Q except as required by federal securities law.
Recent Developments
Corporate developments during the two years ended October 31, 20222023 include:
Capital Transactions
S-1 Offering
On May 4, 2021,During the first quarter of fiscal 2022, the Company closed acompleted two firm commitment underwritten public offering (the "S-1 Offering") for the sale of 4,000,000 shares of common stock, at a public offering price of $4.00 per share, toofferings with ThinkEquity, a division of Fordham Financial Management, Inc., as representativeManagement. The first offering, in May 2021, generated gross and net proceeds of the underwriters ("ThinkEquity"), pursuant to an underwriting agreement with Think Equity.$16 and $14.6 million, respectively. The shares were sold pursuant to a registration statement on Form S-1, as amended (File No. 333-253491), filed with the SEC, which was declared effective by the Commission on April 29,second offering, in July 2021, (the "S-1 Registration Statement").
S-3 Offeringgenerated gross and net proceeds of $60 and $55.5 million, respectively.
On July 21, 2021 In August 2023, we entered into a sales agreement (“the Company closed a firm commitment underwritten public offering (the "S-3 Offering"2023 ATM Facility”) with ThinkEquity LLC (“ThinkEquity”), which provides for the sale, in our sole discretion, of 13,333,334shares of our common stock having an aggregate offering price of up to $17 million through ThinkEquity, as our sales agent. The issuance and sale of these shares by us pursuant to the 2023 ATM Facility are deemed “at the market” offerings as defined in Rule 415 under the Securities Act of 1933, as amended (the Securities Act), and are registered under the Securities Act. We pay a commission of up to 2.5% of gross sales proceeds of any common stock sold under the 2023 ATM Facility.
During the six months ended October 31, 2023, we sold an aggregate of 53,235 shares of common stock under the 2023 ATM Facility, at a purchasean average price of $4.50$1.07 per share, to ThinkEquity. Thefor gross proceeds of approximately $57,000 and net proceeds of approximately $55,700, after deducting commissions and other offering expenses payable by us.
On December 11, 2023, the Company closed an offering of 18,400,000 shares were sold pursuant to a registration statement on Form S-3, as amended (File No. 333-256216), filedof common stock which generated gross proceeds of $9,200,000 and net proceeds of approximately $8,400,000 million. In connection with the SEC, whichoffering, the amount of shares issuable under the ATM Facility was declared effective by the SEC on June 14, 2021 and a Supplementreduced to the Prospectus contained in a registration statement filed with the SEC on July 19, 2021.
$4,375,000
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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 focus on the unique opportunities in each sector. The Enterprise segment, which includes Teal DronesEnterprise's initial strategy was to provide UAV's, primarily drones, to commercial enterprises and Skypersonic, is focused on opportunities ingovernment agencies, including the commercial sector, including military. Enterprise is building the infrastructuremilitary, to manage drone fleets, flynavigate dangerous military environments and provide services remotely, and navigate confined industrial and commercial interior spacesspaces. Subsequently, Enterprise narrowed its near-term focus on the military and dangerousother government agencies. Skypersonic's technology has been re-focused on military environments.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 our daily lives.
In November 2021,2022, we entered into an agreement to sell our Consumer segment to Unusual Machines for total consideration of $18Machines. The adjusted sale price is $20 million, including $ 5$3 million in cash, at closing, and $13$17 million in securities of Unusual Machines. The Company has determinedagreement 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.create long term shareholder value. The transaction is expected to close inclosing of the first half of calendar 2023 buttransaction is contingent upon Unusual Machines completing (i) an initial public offering that raises sufficient capital to close the transaction, and (ii) a listing of its commonon a public stock onexchange such as the NYSE or Nasdaq. There can be no assurances that the transaction will successfully close.
Results of Operations - Continuing Operations
The analysis of the Company's results of continuing operations for the three and six months ended October 31, 20222023 compared to the three and six months ended October 31, 2021 is significantly impacted by2022 includes only the acquisitionCompany's Enterprise segment which includes Teal Drones and Skypersonic. During Fiscal 2023, the operations of Skypersonic were consolidated into Teal. The following discussion and analysis describes the operating results of Teal Dronesand Skypersonic on August 31, 2021.a consolidated basis with Teal is the Company’s largest operating subsidiary. Since acquiring Teal, the Company hasrepresenting more than tripled the number of employees and significantly expanded its facilities. As a result, the comparison90% of the threeoperating activities of the Enterprise segment.
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Discussion and six months endedAnalysis of the Three Months Ended October 31, 20222023 compared to the three and six months ended October 31, 2021 yields more significant changes than might normally occur.
Three Months Ended October 31, 2022 and October 31, 2021
Revenues
Revenues totaled $1,530,462$3,930,868 during the three months ended October 31, 2023 (or the "2023 period") compared to $747,612 during the three months ended October 31, 2022 (or the "2022 period") comparedrepresenting an increase of $3,183,256, or more than four times. The increase primarily related to $1,863,239 forhigher product sales related to the launch of the Teal 2 in April 2023. Product sales totaled $3,383,238 during the three months ended October 31, 2021 (or the "2021 period"), representing a decrease of $332,777, or 18%. Consumer revenues totaled $782,850 during the 2022 period2023 compared to $1,354,807 during the 2021 period, resulting in a decrease of $571,957, or 42%. Fat Shark launched its newest product, the Dominator, in the prior fiscal quarter during which the Consumer segment generated record quarterly revenues. During the three months ended October 31, 2022, sales decreased sharply for Fat Shark which often happens in the quarter after the launch of new consumer products. Fat Shark revenues totaled $46,322 during the 2022 period compared to $847,606 during the 2021 period, resulting in a decrease of $801,284, or 95%. Enterprise revenues totaled $747,612 during the 2022 period compared to $508,432 during the 2021 period, resulting in an increase of $239,180, or 47%. This increase primarily related to Teal, which contributed a full three months of revenue in the 2022 period compared to only two months during the 2021 period. Teal accounted for 81% of Enterprise revenues during the 2022 period.
Cost of Goods Sold
Cost of Goods totaled $1,296,807 in the 2022 period compared to $1,710,657 in the 2021 period, representing a decrease of $413,850, or 24%. The decrease directly related to lower revenues which decreased by 18% in the 2022 period compared to the 2021 period.
Gross Margin
Gross margin totaled $233,655$330,061 during the three months ended October 31, 2022 representing an increase of $3,053,177, or more than 9 times. The increase in product sales also partially related to increased contract revenues during the 2023 period. Contract revenues totaled $529,438 during the 2023 period compared to $152,582$243,306 during the 2022 period, representing an increase of $286,132, or more than 100%. Contract revenues are primarily sourced through government agencies and can fluctuate from period to period based on the timing of award deliverables and amendments.
Gross Margin
Gross margin totaled $1,200,582 during the 2023 period compared to $123,851 during the 2022 period representing an increase of $1,076,731, or more than eight times. On a percentage basis, gross margin was 30.5% during the 2023 period compared to 16.6% during the 2022 period. The percentage basis increase in gross margin in the 2023 period was primarily related to contract revenue whose margins fluctuate from period to period as the labor required to meet the deliverables varies greatly. During the 2023 period, Teal’s gross margin % on product revenue was 24% compared to negative 22% during the 2022 period. The percentage basis increase in gross margin on product revenue in the 2023 period primarily related to lower relative labor costs as recently hired manufacturing operators replaced higher compensated engineers in performing many production activities. Additionally, lower manufacturing levels in the 2022 period resulted in higher relative overhead costs compared to the 2023 period. 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 greater number of drones which will drive our per-drone production costs lower and increase gross margins of product revenue.
Operating Expenses
Operations expenses totaled $440,445 during the 2023 period compared to $1,581,818 during the 2022 period, resulting in a decrease of $1,141,373, or 72%. 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 2023 period.
Research and development expenses totaled $1,987,890 during the three months ended October 31, 2021, representing an increase of $81,073, or approximately 53%. On a percentage basis, gross margin was 15% during the 2022 period2023 compared to 8% during the 2021 period. The percentage basis increase primarily related to Fat Shark which realized higher margins in the 2022 period related to the launch of its Dominator goggles compared to the 2021 period when it lowered prices to expedite the sale of products near the end of their life cycle. These changes in product offerings increased gross margin for Fat Shark from negative 13% in the 2021 period to positive 6% in the 2022 period.
Operating Expenses
Operations expense totaled $1,752,873 during the 2022 period compared to $283,249 during the 2021 period, resulting in an increase of $1,469,624, or almost 5 times. Approximately 95% of the increase, or $1,398,669, related to Teal which was acquired on August 31, 2021. Since acquiring Teal, we have more than tripled its headcount and expanded its facilities. Approximately 38% of Teal's costs related to payroll, 31% to employee-related office expenses, 16% to overhead with the balance spread ratably across numerous categories including facilities, travel, and information technology.
Research and development expenses totaled $1,354,914$1,266,956 during the three months ended October 31, 2022, compared to $493,441 during the three months ended October 31, 2021, representing an increase of $861,473,$720,934, or greater57%. Supplies and materials expense totaled $857,067 in the 2023 period compared to $310,394 in the 2022 period. This increase of $546,673, or more than 100%. Substantially all, primarily related to increased efforts in developing new products and represented 76% of the total increase related to Teal which was acquired on August 31, 2021. Since acquiring Teal, we have more than tripled its headcountin research and expanded its facilities. Approximately 51%development costs. Additionally, higher payroll expenses represented 22% of Teal's expenses related to payroll with 27% related to office, and 21% related to professional fees.the increase.
Sales and marketing costs totaled $731,769$675,490 during the 2023 period compared to $563,756 during the 2022 period, representing an increase of $111,734 or 20%. Headcount for sales, customer service, and marketing totaled 11 at the end of the 2023 period compared to $185,385 during9 at the 2021end of the 2022 period, resulting in an increasetotal payroll expense of $546,384, or almost three times. Payroll costs totaled $385,938$381,268 in the 2023 period compared to $310,014 in the 2022 period compared to $108,297 resulting in anperiod. This increase of $277,641 which$71,254, or 23%, represented 51%64% of the total increase in sales and marketing costs. Meals, travel, and training costs totaled $139,746 in the 2022 period compared to $2,356 resulting in an increase of $137,390 whichHigher advertising expenses represented 25% of the total increase. In addition, higher advertising costs represented 12%34% of the increase.
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General and administrative expenses totaled $1,919,637$1,460,073 during the three months ended October 31, 2023 compared to $1,815,314 during the three months ended October 31, 2022, representing a decrease of $355,241 or 20%. Lower costs at the corporate level represented 78% of the decrease. Corporate level costs includes executive compensation and other administrative costs associated with operating a publicly 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. Lobbying costs totaled $21,734 in the 2023 period compared to $1,050,708 during the three months ended October 31, 2021, representing an increase of $868,929, or 83%. Payroll costs totaled $712,338$139,553 in the 2022 period compared to $211,954 in the 2021 period resulting in an increasea decrease of $500,384,$117,819 or 58%33% of the total increasedecrease in general and administrative expenses. Legal and lobbying services costs increased by $241,294 representing 28% of the total increase.
During the three months ended October 31, 2022,2023, we incurred stock-based compensation costs of $1,246,796$1,196,325 compared to $899,937$1,246,796 in the 20212022 period, resulting in an increasea decrease of $346,859$50,471 or 39%4%. Since the 20212022 period, the Company has issued 1,159,0003,643,542 additional options and 348,643 additional RSUs which resulted in incremental stock basedstock-based compensation costs of $213,351 in$775,520 and $42,708, respectively. This increase was partially offset by an RSU award that fully vested since the 2022 period. In addition, costs relatedperiod, resulting in decremental stock-based compensation expense of $168,125.
Other (Income) Expense
Other expense totaled $522,176 during the 2023 period compared to restricted stock awards totaled $814,108other income of $519,807 during the 2022 period, representing a decrease of $1,041,983 or greater than 100%. Investment loss totaled $333,867 during the three months ended October 31, 2023 compared to $581,610an investment loss of $92,711 during the 2021 period, representing an increase of $232,498, or 67% ofthree months ended October 31, 2022. During both the total increase.
Other Income
Other Income totaled $527,857 during2023 and the 2022 period comparedperiods, the Company sold certain investment grade securities in order to $19,537 during the 2021 period, representing an increase of $508,320.fund operations. The largest component change was the recognition of income of $686,744 during the 2022 period related to the change in the fair value of derivative liability compared to income of $118,813 duringthese securities had been adversely impacted by the 2021 period, representing ansharp increase of $567,931.in interest rates since the securities were acquired. Changes in the fair value of the derivative liability are most significantly impacted by changesresulted in income of $162,482 during the Company's stock price. A decrease in the stock price2023 period compared to income of $686,744 during the 2022 period, resultedrepresenting a net decremental difference of $524,262.
Net Loss from Continuing Operations
Net loss from continuing operations totaled $5,081,817 for the three months ended October 31, 2023, compared to $5,830,982 for the three months ended October 31, 2022, resulting in a decrease of $749,165 or 13%. Total operating expenses totaled $5,760,223 for the three months ended October 31, 2023 compared to $6,474,640 for the three months ended October 31, 2022. Lower operating expenses represented 95% of the total decrease in the carrying valuenet loss and were driven by operating efficiencies as Teal Drones scales production.
Results of Discontinued Operations
Revenues from discontinued operations totaled $1,056,932 for the liability, and therefore,three months ended October 31, 2023, compared to $782,850 for the recognitionthree months ended October 31, 2022, representing an increase of income. In addition,$274,082 or 35%. During the Company recognized net investment income of $103,817 in2023 period, Rotor Riot generated revenues totaling $936,450 compared to $736,528 during the 2022 period, representing an increase of $199,922 or 27%. 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 $120,482 compared to net expense of 38,447$46,322 during the 2021 period. Early2022 period, representing an increase of $74,160 or more than 100%. Higher revenues in fiscalthe 2023 period reflected re-orders from resellers which can occur infrequently and impact quarter to quarter comparisons.
Gross margin from discontinued operations totaled negative $97,268 during the 2023 period compared to positive $109,804 during the 2022 period representing a decrease of $207,072, or more than 100%. On a percentage basis, gross margin from discontinued operations was negative 9% during the Company completed two offerings of common stock which generated net proceeds of approximately $70 million. These funds were primarily invested in high quality, corporate debt which generated investment income2023 period compared to 14% during the 2022 period. Depreciation and amortization expense, included in other, totaled $227,162 inGross margin for Rotor Riot was 24% for the 20222023 period compared to $21,780 in the 2021 period, resulting in an increase of $205,382, or more than 100%. Since the end of the 2021 period, we have incurred capital expenditures totaling $735,993 through the end of11% for the 2022 period. Gross margin for Fat Shark was negative 154% for the 2023 period which has resulted in higher depreciation expense. compared to 6% for the 2022 period. A charge of $317,155 to write-off excess quantities of Dominator inventory based on sales volumes. This charge reduced gross margin from negative 7% to negative 154%. Fat Shark’s gross margin, exclusive of inventory write-offs, was negative during the 2023 period due to sales discounts for the Dominator whose sales volumes have steadily declined since its launch.
Net LossOperating expenses totaled $502,274 during the 2023 period compared to $531,349 during the 2022 period, resulting in a decrease of $29,075, or 5%. This decrease is primarily due to efforts to control spending.
Net Lossloss from discontinued operations totaled $6,244,477 during$599,511 for the three months ended October 31, 2023, compared to $413,495 for the three months ended October 31, 2022, representing a decrease of $186,016, or 45%.
Discussion and Analysis of the Six Months Ended October 31, 2023 compared to $2,740,601 during the three months ended October 31, 2021, representing an increase of $3,503,876, or greater than 100%. The acquisition of Teal Drones on August 31, 2021 accounted for the majority of the increase. Since acquiring Teal, we have more than tripled its headcount and significantly expanded its facilities. Net loss for Teal during the 2022 period totaled $3,098,709 compared to $441,118 for the 2021 period, representing an increase of $2,657,597, or more than 6 times. The higher net loss for Teal represented 76% of the increase in the consolidated net loss.
Six Months Ended October 31, 2022 and October 31, 2021
Revenues
Revenues totaled $5,678,997 during the six months ended October 31, 2023 (or the "2023 period") compared to $1,874,163 during the six months ended October 31, 2022 (or the "2022 period") representing an increase of $3,804,834, or more than 100%. The increase related primarily to higher product sales related to the launch of the Teal 2 in April 2023. Product sales totaled $4,599,733 compared to $3,259,990 for$4,796,365 during the six months ended October 31, 2021 (or2023 compared to $1,030,275 during the "2021 period"),six months ended October 31, 2022 representing an increase of $1,339,743,$3,766,090, or 41%. Consumermore than 3 times. The increase in product sales also partially related to higher contract revenues during the 2023 period. Contract revenues totaled $2,725,570$840,318 during the 20222023 period compared to $2,710,482$641,805 during the 2021 period, resulting in an increase of $15,088, or 1%. Enterprise revenues totaled $1,874,163 during the 2022 period compared to $549,508 during the 2021 period, resulting in an increase of $1,324,655, or greater than 100%. The increase related to Teal, which we acquired on August 31, 2021, and which accounted for 91% of Enterprise revenues during the 2022 period.
Cost of Goods Sold
Cost of Goods totaled $4,008,451 in the 2022 period compared to $3,005,004 in the 2021 period, representing an increase of $1,003,447,$198,514, or 33%31%. The increase directly relatedContract revenues are primarily sourced through government agencies and can fluctuate from period to higher revenues which increased by 41% inperiod based on the 2022 period compared to the 2021 period.timing of award deliverables and amendments.
Gross Margin
Gross margin totaled $591,282$1,375,247 during the 2023 period compared to $205,971 during the 2022 period representing an increase of $1,169,276, or more than five times. On a percentage basis, gross margin was 24.2% during the 2023 period compared to 10.9% during the 2022 period. The percentage basis increase in gross margin in the 2023 period was primarily related to contract revenue whose margins fluctuate from period to period as the labor required to meet the deliverables varies greatly. During the 2023 period, Teal’s gross margin percentage on product revenue was 19% compared to negative 9% during the 2022 period. The percentage basis increase in gross margin on product revenue in the 2023 period primarily related to lower relative labor costs as recently hired manufacturing operators replaced higher compensated engineers in performing many production activities. Additionally, lower manufacturing levels in the 2022 period resulted in higher relative overhead costs compared to the 2023 period. 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 greater number of drones which will drive our per-drone production costs lower and increase gross margins.
Operating Expenses
Operations expenses totaled $1,148,348 during the 2023 period compared to $2,468,121 during the 2022 period, resulting in a decrease of $1,319,773, or 53%. 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 2023 period.
Research and development expenses totaled $3,126,017 during the six months ended October 31, 2023 compared to $1,716,920 during the six months ended October 31, 2022, compared to $254,986 during the six months ended October 31, 2021, representing an increase of $336,296,$1,409,097, or greater than 100%82%. On a percentage basis, gross margin was 13% duringSupplies and materials expense totaled $1,019,364 in the 20222023 period compared to 8% during the 2021 period. The percentage basis increase primarily related to Fat Shark which realized higher margins in the 2022 period related to the launch of its Dominator goggles compared to the 2021 period when it lowered prices to expedite the sale of products near the end of their life cycle. These changes in product offerings increased gross margin for Fat Shark from 0% in the 2021 period to 13%$394,507 in the 2022 period.
Operating Expenses
Operations expense totaled $2,800,959 during the 2022 period compared to $460,112 during the 2021 period, resulting in anThis increase of $2,340,847,$624,857, or more than four times. Approximately 93%100%, primarily related to increased efforts in developing new products and represented 44% of the total increase or $2,176,219, related to Teal which was acquired on August 31, 2021,in research and therefore, only operated for 2 months indevelopment costs. Additionally, higher payroll expenses represented 38% of the 2021 period compared to a full six months in the 2022 period. In addition, we have more than tripled Teal's headcount and doubled the size of its facilities. Approximately 48% of Teal's costs related to payroll, 24% to employee-related office expenses, and 12% to overhead expenses with the balance spread ratably across numerous categories including information technology, facilities, and travel.increase.
Research and development expenses totaled $1,887,684 during the six months ended October 31, 2022 compared to $737,695 during the six months ended October 31, 2021, representing an increase of $1,149,989, or greater than 100%. The entire increase can be attributed to Teal, with approximately 54% its expenses related to payroll, 26% related to office, and 17% related to professional fees.
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Sales and marketing costs totaled $1,334,000$1,662,398 during the 2023 period compared to $970,709 during the 2022 period, representing an increase of $691,689 or 71%. Headcount for sales, customer service, and marketing totaled 11 at the end of the 2023 period compared to $286,018 during9 at the 2021end of the 2022 period, resulting in an increasetotal payroll expense of $1,047,982, or almost four times. Payroll costs, related$809,732 in the 2023 period compared to hiring at Teal, totaled $676,641$524,467 in the 2022 period compared to $158,376 resulting in anperiod. This increase of $518,265 which$285,265, or more than 100%, represented 49%41% of the total increase in sales and marketing costs. TravelHigher travel-related and related costs totaled $232,239 in the 2022 period compared to $2,356 resulting in an increase of $229,883 whichoffice expenses represented 22% of the total increase. In addition, higher advertising25% and show production costs represented 15%16% of the increase, while professional fees accounted for 10%.respectively.
General and administrative expenses totaled $3,037,202$2,903,229 during the six months ended October 31, 2023 compared to $2,877,718 during the six months ended October 31, 2022, compared to $1,926,888 during the six months ended October 31, 2021, representing an increase of $1,110,314,$25,511 or 58%1%. Payroll costs totaled $1,122,882 in the 2022 period compared to $409,387 in the 2021 period resulting in an increase of $713,495, or 64% of the total increase in general and administrative expenses. Legal and lobbying services costs increased by $269,938 representing 24% of the total increase.
During the six months ended October 31, 2022,2023, we incurred stock-based compensation costs of $2,002,267$2,107,931 compared to $1,284,023$2,002,267 in the 20212022 period, resulting in an increasea decrease of $718,244$105,664 or 56%5%. Since the 20212022 period, the Company has issued 1,159,0003,643,542 additional options and 348,643 additional RSUs which resulted in incremental stock basedstock-based compensation costs of $354,343 in$1,551,039 and $144,398, respectively. This increase was partially offset by an RSU award that fully vested since the 2022 period. In addition, costs relatedperiod, resulting in decremental stock-based compensation expense of $351,535.
Other (Income) Expense
Other expense totaled $1,076,916 during the 2023 period compared to restricted stock awards totaled $1,111,556other income of $406,580 during the 2022 period, representing a decrease of $1,483,496 or greater than 100%. Investment loss totaled $573,357 during the six months ended October 31, 2023 compared to $778,202an investment loss of $234,113 during the 2021 period.
Other Income
Other income totaled $414,754 duringsix months ended October 31, 2022. During both periods, the 2022 period comparedCompany sold certain investment grade securities in order to $141,377 during the 2021 period, representing an increase of $273,377.fund operations. The largest component change was the recognition of income of $593,822 during the 2022 period related to the change in the fair value of derivative liability compared to income of $273,061 duringthese securities had been adversely impacted by the 2021 period, representing ansharp increase of $320,761.in interest rates since the securities were acquired. Changes in the fair value of the derivative liability are most significantly impacted by changesresulted in income of $189,002 during the Company's stock price. A decrease in the stock price2023 period compared to income of $593,822 during the 2022 period, resulted inrepresenting a decrease in the carrying valuenet decremental difference of the liability, and therefore, the recognition of income. In addition, the Company recognized net investment income of $234,113 in the 2022 period compared to expense of 38,447 during the 2021 period. Early in fiscal 2022, the Company completed two offerings of common stock which generated net proceeds of approximately $70 million. These funds were primarily invested in high quality, corporate debt which generated investment income during the 2022 period. Depreciation and amortization expense, included in other, totaled $311,594 in the 2022 period compared to $38,106 in the 2021 period, resulting in an increase of $273,488, or more than 100%. Since the end of the 2021 period, we have incurred capital expenditures totaling $1,280,935 through the end of the 2022 period which has resulted in higher depreciation expense.
Net Loss$404,820.
Net Loss from Continuing Operations
Net loss from continuing operations totaled $10,056,076 during$10,649,592 for the six months ended October 31, 2023, compared to $9,423,184 for the six months ended October 31, 2022, compared to $4,298,373 duringresulting in an increase of $1,226,408 or 13%. Total operating expenses totaled $10,947,923 for the six months ended October 31, 2021,2023 compared to $10,035,735 for the six months ended October 31, 2022. Lower operating expenses represented 74% of the total decrease in the net loss and were driven by operating efficiencies as Teal Drones scales production.
Results of Discontinued Operations
Revenues from discontinued operations totaled $2,926,151 for the six months ended October 31, 2023, compared to $2,725,570 for the six months ended October 31, 2022, representing an increase of $5,757,703,$200,581 or greater than 100%7%. The acquisition of Teal Drones in August 2021 accounted forDuring the majority of the increase. Since acquiring Teal, we have more than tripled its headcount and significantly expanded its facilities. Net loss for Teal2023 period, Rotor Riot generated revenues totaling $2,180,357 compared to $1,624,947 during the 2022 period totaled $4,805,548 compared to $441,118 for the 2021 period, representing an increase of $4,364,430,$555,410 or almost ten times. The34%. During the 2023 period, Rotor Riot’s higher net lossrevenues were generated by a significant increase in digital marketing spending. During the 2023 period, Fat Shark generated revenues totaling $745,794 compared to $1,100,623 during the 2022 period, representing a decrease of $354,829 or 32%. Lower revenues for Teal represented 76%the 2023 period related to its newest product, the Dominator, which was launched at the beginning of the increase2022 period, and while it generated strong initial sales in the consolidated net loss.first quarter of its launch, sales have declined significantly since then.
Gross margin from discontinued operations totaled $386,835 during the 2023 period compared to $385,311 during the 2022 period representing an increase of $1,524, or 0.4%. On a percentage basis, gross margin from discontinued operations was 13% during the 2023 period compared to 14% during the 2022 period. Gross margin for Rotor Riot was 30% for the 2023 period compared to 14% for the 2022 period. Gross margin for Fat Shark was negative 24% for the 2023 period compared to positive 13% for the 2022 period. The reported gross margin of negative 24% for Fat Shark was adversely impacted by a charge of $317,155 related to the write-off of excess quantities of Dominator inventory based on sales volumes. This charge reduced gross margin from 7% to negative 24%.
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Operating expenses totaled $1,206,213 during the 2023 period compared to $1,026,377 during the 2022 period, resulting in an increase of $179,836, or 18%. This increase is primarily due to increased advertising expenses in the 2023 period.
Net loss from discontinued operations totaled $842,084 for the six months ended October 31, 2023, compared to $632,892 for the six months ended October 31, 2022, representing an increase of $209,192, or 33%.
Cash Flows
Operating Activities – Continuing Operations
Net cash used in operating activities was $13,534,139$11,240,359 during the six months ended October 31, 2022,2023, compared to net cash used in operating activities of $8,567,507$9,527,472 during the six months ended October 31, 2021,2022, representing an increase of $4,966,632,$1,712,887 or 58%18%. The higher use of cash primarily related to timing of accounts receivable receipts for government customers. Net cash used in operations, net of non-cash expenses, totaling $1,748,455, equaled $8,307,621 intotaled $7,427,197 during the 2022 periodsix months ended October 31, 2023, compared to $2,998,905, net of non-cash expenses totaling $1,299,468 in$7,674,729 during the 2021 period,six months ended October 31, 2022, resulting in an increasea decrease of $5,308,716,$247,532, or greater than 100%3%. The higher use of cash primarily related to the acquisition of Teal Drones in August 2021 which resulted in a full six months of operations in the 2022 period compared to two months of operations in the 2021 period. Net cash used related to changes in operating assets and liabilities totaled $5,226,518$3,813,162 during the six months ended October 31, 2023, compared to $1,852,743 during the six months ended October 31, 2022, compared to $5,568,602 during the six months ended October 31, 2021, representing a decreasean increase of $342,084,$1,960,419 or 6%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, vendor payments, and vendor payments. customer collections.
Investing Activities
Net cash provided by investing activities was $10,065,641 during the six months ended October 31, 2023, compared to net cash provided by investing activities of $11,960,901 during the six months ended October 31, 2022 compared to net cash used in investing activities of $48,127,938 during the six months ended October 31, 2021 resulting in an increasea decrease of $60,088,839,$1,895,260 or greater than 100%16%. During the 20222023 period, net proceeds of $13,241,836$10,205,501 from the maturitiessale of marketable securities were used to fund operations, and $1,280,935 wasoperations. During the 2022 period, proceeds of $13,241,836 from the sale of marketable securities were used to purchase property and equipment, primarily related to the expansion of the manufacturing facilities for Teal. During the 2021 period, almost $50 million of proceeds from stock offerings were invested in marketable securities.fund operations.
Financing Activities
Net cash used in financing activities totaled $286,206 during the six months ended October 31, 2023, compared to net cash used in financing activities of $928,826 during the six months ended October 31, 2022, compared to net cash provided by financing activities of $67,977,856 during the six months ended October 31, 2021.2022. Financing activities can vary from period to period depending upon market conditions, both at a macro-level and specific to the Company. During the 20212023 period, the Company received net proceedsmade payments of approximately $70 million$16,292 related to payroll taxes on equity awards compared to payments of $561,407 during the 2022 period, resulting in connection with two offeringsa decrease of common stock.$545,115. This decrease represented 97% 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
At October 31, 2022,2023, the Company reported current assets totaling $44,816,972,$23,262,672, current liabilities totaling $4,521,287$4,405,265 and net working capital of $40,295,685.$18,857,407. Cash and marketable securities totaled $32,885,639$4,024,266 at October 31, 2022.2023. Inventory related balances, including pre-paid inventory, totaled $10,265,945.$10,871,809. We continue to maintain higher-than-normalhigh inventory balances related to the global supply chain issues, including chip shortages, which have been ongoing for more than a year. At October 31, 2022,continue to impact the Company was in a strong liquidity and capital position relative to its operating results for the quarter ended October 31, 2022 and its expected cash requirements for the next twelve months.timing of our purchase decisions.
Capital Transactions
S-1 Offering
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On May 4, 2021, the Company closed a firm commitment underwritten public offering (the "S-1 Offering") for the sale of 4,000,000 shares of common stock, at a public offering price of $4.00 per share, to ThinkEquity, a division of Fordham Financial Management, Inc., as representative of the underwriters ("ThinkEquity"), pursuant to an underwriting agreement with Think Equity. The shares were sold pursuant to a registration statement on Form S-1, as amended (File No. 333-253491), filed with the SEC, which was declared effective by the Commission on April 29, 2021 (the "S-1 Registration Statement").
S-3 Offering
On July 21, 2021 the Company closed a firm commitment underwritten public offering (the "S-3 Offering") for the sale of 13,333,334 shares of common stock at a purchase price of $4.50 per share to ThinkEquity. The shares were sold pursuant to a registration statement on Form S-3, as amended (File No. 333-256216), filed with the SEC, which was declared effective by the SEC on June 14, 2021 and a Supplement to the Prospectus contained in a registration statement filed with the SEC on July 19, 2021.
Going Concern
We only began generating revenues in January 2020The Company has never been profitable, and have reportedits net losses since inception. We expecthave been increasing related to reportacquisitions, as well as costs incurred to pursue its long-term growth strategy. During the six months ended October 31, 2023, the Company incurred net losses for at least the next twelve months. To date, we have funded ourof $10,649,592 from continuing operations through debt and equity transactions. In May$842,084 from discontinued operations and July 2021, we completed common stock offerings which generated gross proceedsused cash in operating activities of approximately $70 million. At$11,240,359 from continuing operations and $550,120 from discontinued operations. As of October 31, 2022, we reported cash2023, the Company has working capital of $18,857,407. 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 investment balances of approximately $33 million. We expectmeet its financial obligations for twelve months from the date these consolidated financial resources to be sufficient to fund our operations for at leaststatements are issued.
If the next twelve months. However, we can provide no assurance that these financial resources will be sufficient to fund our operations until we reach profitability. If we areCompany is unable to become profitable before expending our current financial resources, we will need to raise additional capital, through equitythere is a risk that the Company could default on its financial obligations and could be required to discontinue or debt transactions. We can provide no assurancesignificantly 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 such additional financing, if required, willmight be available to us on acceptable terms, or at all. If we are unable to become profitable or obtain sufficient funding, our business, prospects, financial condition and results of operations will be materially and adversely affected, and we maynecessary 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 GAAP applied on a consistent basis. The preparation of financial statements in conformity with GAAP requires management to make estimates and assumptions that affect the reported amounts of assets and liabilities, the disclosure of contingent assets and liabilities at the date of the financial statements and the reported amounts of revenues and expenses during the reporting periods.
We regularly evaluate the accounting policies and estimates that we use to prepare our financial statements. A complete summary of these policies is included in the notes to our financial statements. In general, management's estimates are based on historical experience, 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, and (iii) accounting for derivatives.derivatives, (iv) reserves and allowances related to accounts receivable and inventory, and (v) the evaluation of long-term assets, including goodwill, for impairment.
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.
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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.
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.
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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 off-balance sheet arrangements.
Recently Issued Accounting Pronouncements
The Company has implemented all new accounting pronouncements that are in effect. These pronouncements did not have any material impact on the financial statements unless otherwise disclosed, and the Company does not believe that there are any other new accounting pronouncements that have been issued that might have a material impact on its financial position or results of operations.
ITEM 3. QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISK
We are a smaller reporting company and are not required to provide this information.
ITEM 4. CONTROLS AND PROCEDURES
Evaluation of Disclosure Controls and 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 October 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's rules.SEC 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 effective as of October 31, 2022.2023.
Changes inIn Internal Control overOver Financial ReportingReporting.
During the period covered by this report, thereThere were no changes in our internal controlscontrol over financial reporting (as defined in Rule 13a-15(f) of the Exchange Act) that occurred during the six months ended October 31, 2023 that have materially affected, or are reasonably likely to materially affect, our internal control over financial reporting.
PART II - OTHER INFORMATION
ITEM 1. LEGAL PROCEEDINGS
On March 15, 2022, Robert Stang filed an action against Teal Drones, Inc. and George Matus in the United States District Court for the Northern District of California, Robert Stang v. Teal Drones, Inc. and George Matus (No. 22-cv-01586-JSC) and on September 15, 2022 filed a First Amended Complaint naming our former director Benjamin Lambert as an additional defendant. The complaint asserts claims for breach of contract and unlawful conversion and sale of shares of common stock that plaintiff alleges to have purchased. The Complaint also alleges breach of fiduciary duty and seeks in excess of $1 million in damages. The Company has filed an Answer and on November 4, 2022 a Motion to Dismiss on behalf of Mr. Lambert. In connection with the action the Company has notified the sellers of Teal of its intention to pursue indemnification claims under the Teal acquisition agreement and escrow.
On December 5, 2022 the Company and Teal filed a First Amended Complaint in an action brought against Autonodyne LLC and its founder Daniel Schwinn in the Court of Chancery of the State of Delaware alleging, among other things, breach of an exclusive license agreement by Autonodyne, LLC dated May 23, 2022 and tortious interference by Mr. Schwinn, Red Cat Holdings, Inc. and Teal Drones, Inc. v. Autonodyne LLC and Daniel Schwinn (No. 2022-0878-NAC). On October 21, 2022, Autonodyne and Schwinn filed a Motion to Dismiss the Complaint and Motion for Confidential Treatment. None.
ITEM 1A. RISK FACTORS
We are a smaller reporting company as defined by Rule 12b-2 of the Securities Exchange Act of 1934 (the "Exchange Act") and are not required to provide the information.information required by this Item. Our most recent risk factor disclosures may be reviewreviewed in our Annual Report on Form 10-K for the year ended April 30, 2022,2023, as filed with the SEC on July 27, 2022.2023.
ITEM 2. RECENT UNREGISTERED SALES OF EQUITY SECURITIES, AND USE OF PROCEEDS, AND ISSUER PURCHASES OF EQUITY SECURITIES
There were no sales of equity securities sold during the period covered by this Report that were not registered under the Securities Act and were not previously reported in a Current Report on Form 8-K filed by the Company.None.
ITEM 3. DEFAULTS UPON SENIOR SECURITIES
None.
ITEM 4. MINE SAFETY DISCLOSURES
Not applicable
ITEM 5. OTHER INFORMATION
None. Rule 10b5-1 Trading Plans
During the six months ended ended October 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
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) | |||
Inline XBRL Taxonomy Extension Schema Document | |||
Inline XBRL Taxonomy Extension Calculation Linkbase Document | |||
Inline XBRL Taxonomy Extension Definition Linkbase Document | |||
Inline XBRL Taxonomy Extension | |||
Inline XBRL Taxonomy Extension Presentation Linkbase Document | |||
104* | Cover Page Interactive Data File (formatted as inline XBRL and contained in Exhibit 101) | ||
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* | Filed herewith. |
# | This certification is deemed not filed for purposes of Section 18 of the Exchange Act, or otherwise subject to the liability of that section, nor shall it be deemed incorporated by reference into any filing under the Securities Act. |
SIGNATURES
Pursuant to the requirements of the Securities Exchange Act of 1934, the registrant has duly caused this report to be signed on its behalf by the undersigned thereunto duly authorized.
Date: December 15, | Red Cat Holdings, Inc. By: /s/ Jeffrey Thompson Jeffrey Thompson Chief Executive Officer (Principal Executive Officer) | |
Date: December 15, | By: /s/ Joseph P. Hernon | |
Joseph Hernon Chief Financial Officer (Principal Financial and Accounting Officer) |
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