| Note 1 - The Business | Note
1 - The Business Red
Cat Holdings ("Red Cat" or the "Company") was originally incorporated in February 1984. Since April 2016, the
Company's primary business has been to provide products, services and solutions to the drone industry which it presently does
through its five wholly owned subsidiaries. Teal Drones is a leader in commercial and government UAV technology. Fat Shark Holdings
is a provider of First Person View (FPV) video goggles. Rotor Riot sells FPV drones and equipment, primarily
to the consumer marketplace. Skypersonic provides software and hardware
solutions that enable drones to complete inspection services in locations where GPS (global positioning systems) are not available,
yet still record and transmit data even while being operated from thousands of miles away. Red Cat Propware is developing drone
flight data analytics and storage solutions, as well as diagnostic products and services. Corporate
developments since January 1, 2020 include:
A. Rotor Riot Acquisition In
January 2020, the Company consummated a Merger Agreement under which Rotor Riot Acquisition Corp, a wholly owned subsidiary of the Company,
merged with and into Rotor Riot, with Rotor Riot continuing as the surviving entity and a wholly owned subsidiary of the Company. Under
the Merger Agreement, each member of Rotor Riot received its pro rata portion of the total number of shares of the Company's common stock
issued based on (A)(i) $3,700,000 minus (ii) $915,563 (which included certain debt and other obligations of Rotor Riot and its Chief
Executive Officer that the Company agreed to assume (the "Assumed Obligations") divided by (B) the volume weighted average price
("VWAP") of the Company's common stock for the twenty trading days prior to the closing of the Merger. Based on a share issuance
value of $ 2,784,437
and a VWAP of $ 1.25445 ,
the Company issued an aggregate of 2,219,650
shares of common stock to the members
of Rotor Riot. Following
the closing, the Company's management controlled the operating decisions of the combined company. Accordingly, we accounted for the transaction
as an acquisition of Rotor Riot by the Company. Based on purchase price accounting, we recognized the assets and liabilities of Rotor
Riot at fair value with the excess of the purchase price over the net assets acquired recognized as goodwill. The table below reflects
the acquisition date values of the purchase consideration, assets acquired, and liabilities assumed. The shares issued were valued at
$ 1,820,114
( 2,219,650
shares issued times $ 0.82
per share which equaled the closing price of the Company's common
stock on the date that the merger agreement was consummated). summary of the purchase price and its related allocation
Shares
issued $ 1,820,114
Promissory
note issued 175,000
Total
Purchase Price $ 1,995,114
Assets acquired
Cash 21,623
Accounts
receivable 28,500
Other
assets 3,853
Inventory 127,411
Trademark 20,000
Brand
name 578,000
Customer
relationships 39,000
Total
assets acquired 818,387
Liabilities
assumed
Accounts
payable and accrued expenses 171,651
Notes
payable 209,799
Due
to related party 197,846
Total
liabilities assumed 579,296
Total
fair value of net assets acquired 239,091
Goodwill $ 1,756,023 The
final purchase price allocation was determined by an independent valuation services firm. Customer Relationships with a value of $ 39,000
are being amortized over 7 years. The carrying value of Brand
Name is not being amortized but will be reviewed quarterly and formally evaluated at the end of each fiscal year.
B. Fat Shark Acquisition In November 2020, the Company closed a share purchase agreement ("Share Purchase Agreement") with the sole shareholder of Fat Shark Holdings ("Fat Shark"),
to acquire all of the issued and outstanding shares of Fat Shark and its subsidiaries. The transaction was valued at $ 8,354,076 5,227,273 6,351,076 1,753,000 250,000 summary of the purchase price and its related allocation
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 The
final purchase price allocation was determined by an independent valuation services firm. Intangible assets included proprietary technology
and non-compete agreement which are being amortized over 5 and 3 years, respectively. The carrying value of Brand Name is not being amortized
but will be reviewed quarterly and formally evaluated at the end of each fiscal year.
C. Skypersonic Acquisition In
February 2021, the Company entered into Share Purchase and Liquidity Event Agreements (the "Skypersonic Agreements") with
the founder and majority shareholder of Skypersonic, Inc., ("Skypersonic") and the holders of common stock and equity based
agreements representing 97.46% of Skypersonic (the "Sellers"), pursuant to which, subject to the satisfaction of certain
closing conditions, the Company would acquire all of the issued and outstanding share capital of Skypersonic for an aggregate of
$ 3,000,000 75,000 857,124 3,291,356 300,000 601,622 revised summary of the purchase price and its related allocation
Shares
issued $ 2,716,013
Cash 75,000
Total
Purchase Price $ 2,791,013
Assets acquired
Cash 13,502
Accounts
receivable 51,083
Other
assets 12,950
Inventory 50,556
Total
assets acquired 128,091
Liabilities
assumed
Accounts
payable and accrued expenses 1,054,997
Total
liabilities assumed 1,054,997
Total
fair value of net assets acquired (926,906 )
Goodwill $ 3,717,919 The
foregoing amounts reflect our current estimates of fair value as of the May 7, 2021 acquisition date. The Company expects to recognize
fair values associated with the customer relationships acquired, as well as the Skypersonic brand name, but has not yet accumulated sufficient
information to assign such values. As additional information becomes known regarding the acquired assets and assumed liabilities, management
may make adjustments to the opening balance sheet of the acquired company up to the end of the measurement period, which is a one-year
period following the acquisition date. The determination of the fair values of the acquired assets and liabilities assumed (and the related
determination of estimated lives of depreciable tangible and intangible assets) requires significant judgment.
D. Teal Drones Acquisition On August 31, 2021, the Company closed the acquisition
of Teal Drones Inc., (“Teal”). The acquisition of Teal was made pursuant to an Agreement and Plan of Merger by and among Red
Cat Holdings, Inc., a Nevada corporation (the “Company”), Teal Acquisition I Corp., a Delaware corporation (“Acquisition”)
and wholly-owned subsidiary of the Company, and Teal, as amended and restated August 31, 2021 (the “Merger Agreement” or “Merger”). On August 31, 2021, Teal entered into an Amended and
Restated Loan and Security Agreement with Decathlon Alpha IV, L.P. (“DA4”) (the “Loan Agreement”) in the amount
of $1,670,294 (the “Loan”), representing the outstanding principal amount previously due and owing by Teal to DA4. Interest
on the Loan accrues at a rate of ten (10%) percent per annum. Principal and interest under the term Loan is payable monthly in an amount
equal to $49,275 until maturity on December 31, 2024. Pursuant
to the Merger Agreement, we acquired all of the issued and outstanding share capital of Teal in exchange for $14,000,000 of our
common stock, par value $0.001 per share (“Common Stock”) at the Volume Weighted Average Price (VWAP) of our Common
Stock for the 20 trading days ended August 31, 2021 of $2.908 per share, reduced by the amount of Teal debt assumed consisting of
approximately $1.67 million payable to DA4, and approximately $1,457,000 in working capital deficit, for a net closing date payment
of $10,872,753. At closing, we issued 3,738,911 shares of our Common Stock (the “Stock Consideration”) which had a fair
market value of $10,431,562. Fifteen (15%) of the Share Consideration (the “Escrow Shares”) was deposited in an escrow
account for a period of eighteen (18) months as security for indemnification obligations, any purchase price adjustments due to
working capital deficiencies and any other claims or expenses. In December 2021, the Company and
Teal agreed to a reduction in the purchase price of $438,058 which resulted in the cancellation of 150,639 shares held in escrow.
The fair market value of the cancelled shares was $420,283. A revised summary of the purchase price
and its related allocation The Stock Consideration payable under the Merger
Agreement may be increased upon the achievement of certain milestones set forth in the Merger Agreement (the “Earn-Out Consideration”).
Additional shares of Common Stock may become issuable by the Company in the event that within twenty-four (24) months following closing
of the Merger, Teal realizes certain revenue targets. A total of Sixteen Million Dollars ($16,000,000) in additional shares of Common
Stock will be issued if sales and services of Teal's Golden Eagle drones equal at least Thirty-six Million Dollars ($36,000,000).
A total of Ten Million Dollars ($10,000,000) in additional shares of Common Stock will be issued if sales and services of Teal's
Golden Eagle drones equal at least $24 million ($24,000,000) but less than $36 million ($36,000,000). A total of Four Million Dollars
($4,000,000) in additional shares of Common Stock will be issued if sales and services of Teal's Golden Eagle drones equal at least
Eighteen Million Dollars ($18,000,000) but less than Twenty-Four Million Dollars ($24,000,000). Additional Share Consideration, if earned,
is issuable at the VWAP of the Company within thirty (30) days of the determination that Earn-Out Consideration is payable.
Shares
issued $ 10,011,279
Total Purchase
Price $ 10,011,279
Assets acquired
Cash 11,364
Accounts
receivable 47,964
Other current assets 15,085
Other
assets 48,595
Inventory 1,253,755
Total
assets acquired 1,376,763
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 (4,283,220 )
Goodwill $ 14,294,499 The foregoing amounts reflect our current estimates
of fair value as of the August 31, 2021 acquisition date. The Company expects to recognize fair values associated with the customer relationships
acquired, as well as the Teal brand name, but has not yet accumulated sufficient information to assign such values. As additional information
becomes known regarding the acquired assets and assumed liabilities, management may make adjustments to the opening balance sheet of
the acquired company up to the end of the measurement period, which is a one-year period following the acquisition date. The determination
of the fair values of the acquired assets and liabilities assumed (and the related determination of estimated lives of depreciable tangible
and intangible assets) requires significant judgment. |
