| 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 four wholly owned subsidiaries. Teal Drones is a leader in commercial 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 marketplace 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. Corporate
developments during the two years ended October 31, 2022 include:
A. Fat
Shark Acquisition On
September 30, 2020, the Company entered 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
of Fat Shark and its subsidiaries. The transaction closed on November 2, 2020 and was valued at $ 8,354,076 5,227,273 6,351,076 1,753,000 250,000 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 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.
B. Skypersonic
Acquisition In
May 2021, the Company acquired all of the outstanding stock of Skypersonic, Inc. (“Skypersonic”) in exchange for $ 3,000,000 747,124 110,000 857,124 3,291,356 3.84 75,000 601,622 149,829 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.
C. Teal
Drones Acquisition 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 1,670,294 1,456,953 10,872,753 3,738,911 10,431,562 2.79 438,058 150,639 The
final summary of the purchase price and its related allocation is as follows:
Total Purchase Price – shares
issued $ 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
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, 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 10 49,275 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 beginning
of the reporting period. The following table presents pro forma results 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. Other
information related to the Company’s acquisitions include:
The
purchase price allocation has been finalized for each acquisition based on the report from the valuation services firm engaged to
assist in the identification and valuation of intangible assets acquired.
The
fair value of shares issued by the Company as part of the consideration paid is normally based on the volume weighted average price
of the Company’s common stock for the twenty days prior to the closing of the transaction. For accounting purposes, the
shares issued are valued based on the closing stock price on the date that the transaction closes.
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 Skypersonic relates to the future customers expected to leverage its “Fly Anywhere”
technologies in a wide range of commercial environments. Goodwill for Teal is ascribed to its existing relationship with several
U.S. government agencies including its classification as an approved vendor.
The
Company expects that the Goodwill recognized in each transaction will be deductible for tax purposes. The Company has reported
net losses since its inception and is presently unable to determine when and if the tax benefit of this deduction will be realized. |
