NOTES TO CONSOLIDATED FINANCIAL
STATEMENTS
October 31, 2020 and 2019
(unaudited)
Our
unaudited interim condensed consolidated financial statements and accompanying notes are prepared in accordance with accounting
principles generally accepted in the United States of America (“GAAP”). In the opinion of management, the unaudited
interim condensed consolidated financial statements reflect all adjustments of a normal recurring nature that are necessary for
a fair presentation of the results for the interim periods presented. Interim results are not necessarily indicative of results
for a full year. The information included in this Form 10-Q should be read in conjunction with the financial information included
in the Annual Report on Form 10-K for the fiscal year ended April 30, 2020 of Red Cat Holdings, Inc. (the “Company”),
filed with the Securities and Exchange Commission (“SEC”) on August 13, 2020.
Note
1 - The Business
The
Company was originally incorporated in February 1984. The Company’s primary business is to provide products, services and
solutions to the drone industry. It operates in two sectors of the drone industry. Rotor Riot, LLC, an Ohio limited liability
company and a wholly owned subsidiary (“Rotor Riot”), designs and sells drones and related components. Rotor Riot
is focused on the consumer market and sells its products through its e-commerce platform operated at www.rotorriot.com. The Company
is also developing software solutions to provide secure cloud-based analytics, storage and services for the drone industry. Its
initial product candidate is Dronebox, a blockchain technology that records, stores and analyzes flight data and information from
a drone, much like the “black box” utilized by the airline industry. The Company plans to offer Dronebox as a Software-as-a-Service
platform.
The
Company closed the acquisition of Fat Shark Holdings (“Fat Shark”) on November 6, 2020. Fat Shark is a leading
provider of headsets and goggles for professional FPV (First Person View) racers and drone pilots and has an estimated 85%
share of its market. The Company expects that Fat Shark will generate a majority of its revenue over the next 12 months. This
acquisition continues the Company’s efforts to become a fully-integrated drone business with a strong supply chain, as
well as a provider of software solutions for the drone industry.
Recent
corporate developments include:
|
A.
|
The Share
Exchange Agreement
|
Effective
May 15, 2019, we closed a Share Exchange Agreement (the “SEA”) with TimeFireVR, Inc., (“TimeFire”), a
Nevada corporation. Under the SEA, we acquired approximately 83.33% of TimeFire’s outstanding share capital on a fully-diluted
basis. We issued: (i) 196,667 shares of our common stock, (ii) 2,169,068 shares of our newly-designated Series A Preferred Stock,
and (iii) 4,212,645 shares of our newly-designated Series B Preferred Stock. In total, the common stock, Series A Preferred Stock,
and Series B Preferred Stock issued under the SEA were valued at $117,754.
The
transaction was accounted for as a “reverse acquisition” as the stockholders of Red Cat possessed majority voting
control of the company immediately following the acquisition. In this reverse merger, the financial results of Red Cat Propware,
Inc., (the accounting acquirer), have been presented as the continuing operations of the Company since inception. The transaction
was accounted for as follows:
|
Cash
|
|
|
$
|
24,704
|
|
|
Goodwill
|
|
|
|
93,050
|
|
|
Total
|
|
|
$
|
117,754
|
|
The
goodwill recognized in connection with the acquisition is primarily attributable to anticipated synergies and benefits from the
combination of the two companies, including access to the public markets to raise capital, and is expected to be deductible for
tax purposes.
Series
A Preferred Stock is convertible to common stock at a ratio of 8.33 shares of common stock for each share of preferred stock held
and votes together with the common stock on an as-converted basis. The new Series A Preferred Stock converted automatically to
common stock upon the effectiveness of the reverse split of our common stock in August 2019. This common stock and Series A Preferred
Stock issued under the SEA constituted approximately 83.33% of our issued and outstanding share capital on a fully-diluted basis
on the date of issuance.
Series
B Preferred Stock is convertible to common stock at a ratio of 0.83 shares of common stock for each share of preferred stock held
and votes together with the common stock on an as-converted basis. The Series B Preferred Stock issued under the SEA constituted
approximately 15.64% of our issued and outstanding share capital on a fully-diluted basis on the date of issuance.
In
July 2019, we changed our name from TimeFire VR Inc. to Red Cat Holdings, Inc.
In
August 2019, we changed our fiscal year to April 30 which was the historical fiscal year of Red Cat Propware, Inc.
In
August 2019, we effected a reverse stock split (the “Reverse Stock Split”) of our outstanding shares of common stock
at a ratio of one-for-twelve hundred (1 for 1,200). All references in this report to shares of the Company’s common stock,
including prices per share of its common stock, reflect the Reverse Stock Split.
|
C.
|
Merger
Agreement with Rotor Riot, LLC
|
On
December 31, 2019, the Company entered into an Agreement of Merger (the “Merger Agreement”) with Rotor Riot and the
three members of Rotor Riot. On January 23, 2020, the Merger was consummated under which Rotor Riot Acquisition Corp, a wholly
owned Delaware 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 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 of the Merger Agreement, the former members of Rotor Riot owned approximately 10.4% of the Company. In addition, the
Company’s management controls the operating decisions of the combined company. Accordingly, we have accounted for the transaction
as an acquisition of Rotor Riot by the Company. Based on purchase price accounting, we have 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 Company’s estimates of the acquisition date values of the purchase consideration, assets acquired, and
liabilities assumed. The shares issued were valued at $1,820,113 (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).
Shares issued
|
|
$
|
1,820,114
|
|
Promissory note issued
|
|
$
|
175,000
|
|
Total Purchase Price
|
|
$
|
1,995,114
|
|
|
II.
|
Purchase
Price Allocation
|
Assets Acquired
|
|
|
Cash
|
|
$
|
21,623
|
|
Accounts receivable
|
|
|
28,500
|
|
Other assets
|
|
|
3,853
|
|
Inventory
|
|
|
127,411
|
|
Trademark
|
|
|
20,000
|
|
Goodwill
|
|
|
2,373,023
|
|
Total assets acquired
|
|
|
2,574,410
|
|
|
|
|
|
|
Liabilities Assumed
|
|
|
|
|
Accounts Payable and accrued expenses
|
|
$
|
171,651
|
|
Notes payable
|
|
$
|
209,799
|
|
Due to Related Party
|
|
$
|
197,846
|
|
Total liabilities assumed
|
|
$
|
579,296
|
|
Net assets acquired
|
|
$
|
1,995,114
|
|
The
foregoing amounts reflect our current estimates of fair value as of the January 23, 2020 acquisition date. The Company expects
to recognize fair values associated with the customer relationships acquired, as well as the Rotor Riot 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 judgement.
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 for a purchase price of $7,000,000. The transaction closed on
November 6, 2020 and was paid through (i) the issuance of 5,227,223 shares of common stock with an agreed value of $5,750,000
(ii) a senior secured promissory note in the original principal amount of $1,000,000 which matures on November 1, 2023, and (iii)
a cash payment of $250,000 in cash. The Share Purchase Agreement includes indemnification provisions, a two year non-compete agreement,
and registration rights for the shares issued in the transaction.
Convertible
Note Offering
On
October 5, 2020, the Company closed a private offering of convertible promissory notes (the “2020 Notes”) in the aggregate
principal amount of $600,000 which included the issuance of five-year warrants to purchase an aggregate of 399,996 shares of common
stock. The 2020 Notes accrue interest at the rate of 12% per annum and are payable two years from the date of issuance. The 2020
Notes are convertible into common stock at a conversion price equal to the lower of (i) $1.00 per share or, (ii) at a price equal
to 75% of the price of an offering of common stock that results in the listing for trading on certain stock exchanges (a “Qualified
Offering”). The 2020 Notes also contain protection from dilution which would lower the conversion price in the event of
a lower priced issuance. An event of default could also result in a reduction of the conversion price.
The
Company may prepay any portion of the 2020 Notes, without penalty or premium, upon ten business days’ notice. No conversion
will be completed if it would result in the noteholder, including its affiliates, owning more than 9.99% of the Company’s
outstanding common stock immediately after completing such conversion.
The
Warrants are exercisable at $1.50 per share. The exercise price will be reduced to a price equal to 75% of the price per share
of the common stock offered in a Qualified Offering.
Note
2 - Going Concern
The
financial statements have been prepared on a going concern basis which contemplates the realization of assets and the settlement
of liabilities and commitments in the normal course of business. As reflected in our accompanying financial statements, we have
negative working capital of $1,338,905 at October 31, 2020 and have accumulated losses totaling approximately $3.7 million through
October 31, 2020. Management recognizes that these operating results and our financial position raise substantial doubt about
our ability to continue as a going concern. The financial statements do not include any adjustments related to the recoverability
and classification of recorded asset amounts and the classification of liabilities that might be necessary should we be unable
to continue as a going concern.
We
are presently seeking to address these going concern doubts through a number of actions including efforts to (a) raise capital
through the public markets, (b) release additional commercial products and (c) pursue acquisitions of complementary, revenue generating
companies which are accretive to our operating results. We can provide no assurance that any of these efforts will be successful
or, that even if successful, that they will alleviate doubts about our ability to continue as a going concern.
Note
3 - Summary of Significant Accounting Policies
Basis
of Accounting - The financial statements and accompanying notes are prepared in accordance with GAAP.
Principles
of Consolidation – Our condensed consolidated financial statements include the accounts of our subsidiaries, Red Cat
Propware, Inc. and Rotor Riot, LLC. Intercompany transactions and balances have been eliminated.
Use
of Estimates – The preparation of financial statements in accordance with GAAP requires management to make estimates
and assumptions that affect the reported amounts of assets and liabilities, the disclosure of contingent assets and liabilities
at the date of the financial statements, and the reported amounts of revenue and expenses during the reporting period. Actual
results could differ from those estimates. Significant estimates reflected in these financial statements include those used to
(i) determine stock based compensation and (ii) complete purchase price accounting for acquisitions.
Cash
– At October 31, 2020, we had cash of $480,065 in multiple commercial banks and financial services companies. We have
not experienced any loss on these accounts and believe they are not exposed to any significant credit risk.
Leases
– Leases at October 31, 2020 are short term in nature and do not require accounting
under the lease accounting standards.
Goodwill
– Goodwill represents the excess of the purchase price of an acquisition over the estimated fair value of identifiable
net assets acquired. The measurement periods for the valuation of assets acquired and liabilities assumed ends as soon as information
on the facts and circumstances that existed as of the acquisition date becomes known, not to exceed 12 months. Adjustments in
a purchase price allocation may require a change in the amounts allocated to goodwill during the periods in which the adjustments
are determined.
We
perform an impairment test at the end of each fiscal year, or more frequently if indications of impairment arise. We have a single
reporting unit, and consequently, evaluate goodwill for impairment based on an evaluation of the fair value of the Company as
a whole.
Fair Value of Financial instruments
– FASB ASC 820, “Fair Value Measurements and Disclosures” (“ASC 820”), provides rules for assets
and liabilities measured at fair value on a recurring basis. ASC 820 establishes a common definition for fair value to be applied
to existing generally accepted accounting principles that require the use of fair value measurements, and establishes a framework
for measuring fair value and expands disclosure about such fair value measurements.
ASC 820 defines fair value as the price
that would be received to sell an asset or paid to transfer a liability in an orderly transaction between market participants at
the measurement date. Additionally, ASC 820 requires the use of valuation techniques that maximize the use of observable inputs
and minimize the use of unobservable inputs. These inputs are prioritized below:
Level 1:
|
Observable inputs such as quoted market prices in active markets for identical assets or liabilities
|
Level 2:
|
Observable market-based inputs or unobservable inputs that are corroborated by market data
|
Level 3:
|
Unobservable inputs for which there is little or no market data, which require the use of the reporting entity’s own assumptions.
|
The Company accounts for its derivative liabilities,
at fair value, on a recurring basis under level 2.
Convertible Securities and Derivatives – The
Company estimates the fair values of the debt and warrants, and allocates the proceeds pro rata based on these values. The
allocation of proceeds to the warrants results in the debt instrument being recorded at a discount from the face amount of the
debt and the value allocated to the warrant is recorded to additional paid-in capital.
When the convertible debt or equity instruments
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.
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 received. Customers pay at the time
they order and the Company recognizes revenue upon shipment. The timing of the shipment of orders can vary considerably depending
upon whether an order is for an item normally maintained in inventory or an order that requires assembly or unique parts. Customer
deposits totaled $66,205 and $38,419 at October 31, 2020 and April 30, 2020, respectively.
Research
and Development - Research and development expenses include payroll, employee benefits, and other headcount-related expenses
associated with product development. Research and development expenses also include third-party development and programming costs,
as well as a proportionate share of overhead costs such as rent. Costs related to software development are included in research
and development expense until technological feasibility is reached, which for our software products, is generally shortly before
the products are released to production. Once technological feasibility is reached, such costs are capitalized and amortized as
a cost of revenue over the estimated lives of the products.
Income
Taxes - Deferred taxes are provided on the liability method, whereby deferred tax assets are recognized for deductible temporary
differences and deferred tax liabilities are recognized for taxable temporary differences. Temporary differences are the
differences between the reported amounts of assets and liabilities and their tax bases. Deferred tax assets and liabilities are
adjusted for the effects of changes in tax laws and rates on the date of enactment.
Recent
Accounting Pronouncements - Management does not believe that recently issued, but not yet effective accounting pronouncements,
if adopted, would have a material effect on the accompanying condensed consolidated financial statements.
Comprehensive
Loss –During the three and six months ended October 31, 2020 and 2019, there were no differences between net loss and
comprehensive loss. Therefore, the consolidated statements of comprehensive loss have been omitted.
Stock-Based
Compensation – We use the estimated grant-date fair value method of accounting in accordance with ASC Topic 718, Compensation
– Stock Compensation. Fair value is determined using the Black-Scholes Model using inputs reflecting our estimates of expected
volatility, term and future dividends. We plan to estimate the forfeiture rate based on our historical experience but have made
no such allowance to date as our first issuances of stock based awards occurred in October 2019 and we have not experienced any
forfeitures to date. We recognize compensation costs on a straight line basis over the service period which is generally the vesting
term.
Basic
and Diluted Net Loss per Share – Basic and diluted net loss per share has been calculated by dividing net loss by the
weighted average number of shares of common stock outstanding during the period. Common stock equivalents were excluded from the
computation of diluted net loss per share of common stock because they were anti-dilutive. The exercise of these common stock
equivalents would dilute earnings per share if we become profitable in the future.
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 13.
Note 4 - Notes Payable
In
connection with the merger agreement with Rotor Riot, the Company agreed to assume certain financial obligations of Rotor Riot
totaling $216,099 in the aggregate. A summary of these obligations is as follows:
|
A.
|
Note
Payable to PayPal
|
In
November 2019, Rotor Riot entered into an agreement with PayPal under which it borrowed $100,000. 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 note is being repaid through 52 weekly payments of $2,056. The balance outstanding
at October 31, 2020 was $26,254.
|
B.
|
Note
Payable to Shopify Capital
|
In
August 2019, Rotor Riot entered into an agreement with Shopify Capital under which it sold $176,000 of “Purchased Receivables”
for total consideration of $160,000. Shopify Capital is an affiliate of Shopify, Inc. which provides sales software and services
to the Company. The Company processes customer transactions ordered on its e-commerce site through Shopify which retained 14%
of daily receipts until a total of $176,000 was retained. This note was repaid in May 2020. In May 2020, Rotor Riot entered into
a new agreement with Shopify Capital under which it sold $158,200 of Purchased Receivables for total consideration of $140,000.
Shopify retained 17% of daily receipts until a total of $158,200 was retained. This note was repaid in October 2020. In September
2020, Rotor Riot entered into a new agreement with Shopify Capital under which it sold $209,050 of Purchased Receivables for total
consideration of $185,000. Shopify will retain 17% of daily receipts until a total of $209,050 is retained. Shopify did not begin
withholding amounts under this Note until November 2020 as the prior Note was not repaid until the end of October 2020. The balance
outstanding at October 31, 2020 was $209,050.
|
C.
|
Note
Payable to Race Day Quads
|
During
2019, Rotor Riot purchased inventory from Race Day Quads (“RDQ”), an online retailer of drone racing parts. The
owner of Race Day Quads acquired a Membership Interest in Rotor Riot in March 2019.The balance owed at October 31, 2020 totaled
$49,223.
During the three months ended October 31, 2020, the Company received
advances totaling $70,000 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.
Note
5 - Due to Related Party
BRIT,
LLC, formally known as Brains Riding in Tanks, LLC, was the largest shareholder of Rotor Riot. Following the Merger, BRIT is a
significant shareholder in the Company. The controlling shareholder of BRIT is now employed in a management role with the Company.
|
A.
|
Note
Payable to BRIT, LLC
|
Under
the terms of the Merger Agreement, the Company issued a promissory note to BRIT, LLC in the principal amount of $175,000. The
promissory note bears interest at 4.75% annually and provides for monthly principal payments of $3,500. The outstanding principal
amount and all accrued interest is due on the earlier of (a) January 23, 2021 or (b) the closing of an equity offering by the
Company of at least $3,500,000. The balance outstanding at October 31, 2020 totaled $161,547. In addition, accrued interest on
the note totaled $6,422 at October 31, 2020.
|
B.
|
Obligations
of BRIT, LLC
|
BRIT
incurred certain financial obligations in support of the operations of Rotor Riot which the Company assumed responsibility to
pay. These obligations bear interest at annual rates ranging from 7.5% to 21.74%. The outstanding balance totaled $168,229 at
October, 2020.
Note
6 - Convertible Debentures
In
November 2019 we issued a convertible note in the principal amount of $300,000 to one accredited investor and in December 2019
we issued a convertible note in the principal amount of $125,000 to a director and a convertible note in the principal amount
of $25,000 to our chief executive officer (collectively, the “2019 Notes”). In September and October 2020, the entire
$450,000 of 2019 Notes, plus accrued interest totaling $45,204, was converted into 710,445 shares of common stock. The Notes had
a term of 2 years and accrued interest at an annual rate of 12% through the date of conversion.
In
October 2020, we closed a Convertible Note financing which generated gross proceeds of $600,000. The Notes have a term of 2 years
and bear interest at a rate of 12% which accrues and is payable in full when the Notes mature. Interest on the Notes may be paid
in cash or in shares of common stock of the Company at the Conversion Price (as defined below).The Notes are convertible into
shares of common stock at the holder’s sole discretion as follows: (A) prior to consummating an equity financing which generates
gross proceeds of not less than $3,000,000 (a “Qualified Offering”), then at the 30 day VWAP of a share of our common
stock as listed or quoted on the market in which the shares are then traded or listed, or (B) after we have consummated a Qualified
Offering, at 40% of the price per share of common stock sold in the Qualified Offering (the “Conversion Price”). We
may, upon 10 business days advance notice, elect to pre-pay the Note, including all accrued interest, in whole or in part, provided
that any such prepayment prior to the one-year anniversary of the Note issuance shall be at a price equal to 112% of the then
outstanding original principal amount. Upon an event of default, as described in the Notes, the outstanding principal and interest
shall become immediately due and payable. Additionally, under the Note, unless waived by the holder, the holder shall not be entitled
to convert the Note if such conversion would result in beneficial ownership by the holder and its affiliates of more than 9.99%
of the outstanding shares of common stock of the Company on such date. Based on the Company’s results since inception, both
on an operating and capital raising basis, we believe that it is more likely than not that the Company will not be able to complete
an equity financing of at least $3,000,000 during the term of the Notes. In addition, we do not believe that the Company will
be able to pre-pay the Notes prior to the one-year anniversary of their issuance. Based on these conclusions, the Company has
not recognized a beneficial conversion feature or a derivative liability in connection with the convertible debentures.
Note
7 - Income Taxes
Our
operating subsidiary is incorporated and based in Puerto Rico which is a commonwealth of the United States. We are not subject
to taxation by the United States as Puerto Rico has its own taxing authority which passed the Export Services Act, also known
as Act 20, in 2012. Under Act 20, eligible businesses are subject to a special corporate tax rate of 4%. Since inception, we have
incurred net losses in each year of operations. Our current provision for the reporting periods presented in these financial statements
consisted of a tax benefit against which we applied a full valuation allowance, resulting in no current provision for income taxes.
In addition, there was no deferred provision for any of these reporting periods.
At
October 31, 2020 and April 30, 2020, we had accumulated deficits of approximately $3,500,000 and $2,600,000, respectively.
Deferred tax assets related to the future benefit of these net operating losses for tax purposes totaled approximately
$140,000 and $104,000, respectively, based on the Act 20 rate of 4%. 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, 2020 and April 30, 2020.
Note 8 - Common Stock
Our
common stock has a par value of $0.001 per share. We are authorized to issue 500,000,000 shares of common stock. Each share of
common stock is entitled to one vote.
Note
9 - Preferred Stock
Our
Series A Preferred Stock (“Series A Stock”) is convertible to common stock at a ratio of 8.33 shares of common stock
for each share of Series A Stock, and votes together with the common stock on an as-converted basis. The Series A Preferred Stock
was originally issued under the Securities Exchange Agreement, as further described in Note 1. The Series A Stock was automatically
converted into shares of common stock upon the effectiveness of our reverse stock split in August 2019, except for 208,704 shares
which were subject to a limitation on the number of shares of common stock that can be held by the holder of those shares of Series
A Stock.
Our
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-converted basis. The Series B Preferred
Stock was originally issued under the Exchange Agreement, as further described in Note 1. Conversions of Series B Stock into Common
Stock are as follows:
Date
|
|
Series
B
|
|
Common
Stock
|
July 2019
|
|
240,000
|
|
200,000
|
November 2019
|
|
60,000
|
|
50,000
|
December 2019
|
|
231,022
|
|
192,519
|
Note
10 - Warrants
In
September 2019, we received $152,239 in connection with the exercise of 469,874 warrants which had been issued in May 2019 as
part of the Share Exchange Agreement. We also assumed a fully vested, restricted stock unit agreement requiring the issuance of
41,667 shares of common stock in May 2021, as well as a warrant to purchase 5,556 shares of common stock at an exercise price
of $60.00 per share. This warrant expires in March 2021.
In October 2020, the Company issued five-year
warrants to purchase a total of 399,998 shares in connection with the issuance
of $600,000 of convertible notes. The warrants have an initial exercise price of $1.50 which may be reduced to (i) a 25% discount
of the price per share of Common Stock offered in a future qualified offering and also include a ratchet provision.
The warrants were valued at $267,999 using the multinomial lattice model and are considered derivative liabilities under ASC 815-40.
The following table presents the assumptions
used to estimate the fair values of the warrants:
|
|
October 31, 2020
|
Expected volatility
|
|
|
89-95
|
%
|
Expected dividends
|
|
|
0
|
%
|
Expected term
|
|
|
4.92-5 Years
|
|
Risk-free interest rate
|
|
|
0.27-0.29
|
%
|
The following table summarizes the changes
in warrants outstanding issued to non-employees of the Company during the six months ended October 31, 2020.
|
|
Number of Warrants
|
|
Weighted Average Exercise Price
|
|
Weighted Average Grant Date Fair Value
|
|
Expiration Date (yrs)
|
|
Value if Exercised
|
Balance as of April 30, 2020
|
|
|
|
—
|
|
|
|
—
|
|
|
|
—
|
|
|
|
—
|
|
|
$
|
—
|
|
Granted
|
|
|
|
399,998
|
|
|
|
1.50
|
|
|
|
0.67
|
|
|
|
5.00
|
|
|
|
599,997
|
|
Exercised
|
|
|
|
—
|
|
|
|
—
|
|
|
|
—
|
|
|
|
—
|
|
|
|
—
|
|
Cancelled/Expired
|
|
|
|
—
|
|
|
|
—
|
|
|
|
—
|
|
|
|
—
|
|
|
|
—
|
|
Outstanding as of October 31, 2020
|
|
|
|
399,998
|
|
|
$
|
1.50
|
|
|
$
|
0.67
|
|
|
|
4.92
|
|
|
$
|
599,997
|
|
Note
11 - Share Based Awards
Effective
August 2019, shareholders approved the 2019 Equity Incentive Plan (the “Plan”) which 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 8,750,000.
|
A.
|
October
2019 Issuances
|
In
October 2019, we issued options to purchase 350,000 shares of common stock valued at $477,500. Options to purchase 200,000 shares
vest ratably over a two-year period and expire in October 2029. Options to purchase 150,000 shares vest ratably over a three-year
period and expire in October 2024. All of the options were issued at an exercise price of $2.10 which equaled the stock price
on the date of issuance. We used the Black-Scholes Model to estimate the fair value of the stock options issued using the following
assumptions: (i) expected volatility – 75%, (ii) risk free interest rate – 1.59% or 1.74%, (iii) expected life –
5 or 10 years, and (iv) expected dividend yield of 0%.
|
B.
|
January
2020 Issuances
|
In
January 2020, we issued options to purchase 1,100,000 shares of common stock exercisable at $0.82 vesting quarterly over a three-year
period. These options were valued at $707,300. We also issued options to purchase 147,475 shares of common stock exercisable at
$0.82. These options were valued at $94,826 and were vested in full upon issuance. All of these options were issued at an exercise
price which equaled the stock price on the date of issuance. We used the Black-Scholes Model to estimate the fair value of the
stock options issued using the following assumptions: (i) expected volatility – 75%, (ii) risk free interest rate –
1.74%, (iii) expected life – 10 years, and (iv) expected dividend yield of zero.
Stock
compensation expense for the three and six months ended October 31, 2020 was as follows:
|
|
3
months
|
|
6 months
|
|
|
|
|
|
General and administrative
|
|
$
|
94,629
|
|
|
$
|
189,258
|
|
Research and development
|
|
|
9,945
|
|
|
|
19,890
|
|
Operations
|
|
|
2,487
|
|
|
|
4,974
|
|
|
|
$
|
107,061
|
|
|
$
|
214,122
|
|
There
was no compensation expense recognized in the three months ended October 31, 2019.
Options
exercisable as of October 31, 2020 totaled 572,476. The remaining weighted average contractual term of the options outstanding
at October 31, 2020 was 8.73 years. The aggregate intrinsic value of outstanding options, representing the excess of the stock
price at October 31, 2020 of $1.21 over the exercise price of each option, was $492,753.
Note 12 - Financial Instruments
The Company has financial instruments that
are considered derivatives or contain embedded features subject to derivative accounting related to 4 convertible notes issued
totaling $600,000 which included a ratchet provision in the conversion price of the lower of 1.00 or 25% discount of the price
per share of Common Stock offered in the Qualified offering and also include a ratchet provision. Attached to these notes as additional
consideration was 399,998 5-year warrants with a conversion price of the lower of 1.50 or 25% discount of the price per share of
Common Stock offered in the Qualified offering and also include a ratchet provision. Embedded derivatives are valued separately
from the host instrument and are recognized as derivative liabilities in the Company’s balance sheet. The Company measures
these instruments at their estimated fair value and recognizes changes in their estimated fair value in results of operations during
the period of change. The Company has estimated the fair value of these embedded derivatives for convertible debentures and associated
warrants using a multinomial lattice model as of October 31, 2020. The fair values of the derivative instruments are measured each
quarter, which resulted in a loss of $83,803 and derivative expense of $148,587 during the six and months ended October 31, 2020.
As of October 31, 2020, the fair market value of the derivatives aggregated $812,390, using the following assumptions: estimated
2.00-5.00-year term, estimated volatility of 88.80-95.11%, and a discount rate of 0.13-0.33%.
Financial instruments measured at fair value on a recurring basis
at October 31, 2020, are summarized as follows:
|
|
Level 1
|
|
Level 2
|
|
Level 3
|
|
Total
|
|
Fair value of derivatives
|
|
|
$
|
—
|
|
|
$
|
812,390
|
|
|
$
|
—
|
|
|
$
|
812,390
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Note
13 - Related-Party Transactions
Shares
Issued for Services – In May 2019, we issued 1,570 shares of common stock valued at $70,000 to a shareholder for legal services
provided to us. In April 2020, we issued 150,000 shares of common stock with a fair market value of $204,000 to a different law
firm for services provided to us.
Convertible
Note Financing – In December 2019, we completed a convertible note financing with a member of the Board of Directors for
$125,000 and with our Chief Executive Officer for $25,000. The same Board member invested $300,000 in the convertible note financing
completed in October 2020. See Note 6 for details on the terms of the transaction.
Payable to Aerocarve – During the three
months ended October 31, 2020, the Company received advances totaling $70,000 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.
Note
14 - 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
November 6, 2020, the Company completed the acquisition of Fat Shark Holdings which was paid through (i) the issuance of 5,227,223
shares of common stock with an agreed value of $5,750,000 (ii) a senior secured promissory note in the original principal amount
of $1,000,000 which matures on November 1, 2023, and (iii) a cash payment of $250,000 in cash. The Share Purchase Agreement includes
indemnification provisions, a two year non-compete agreement, and registration rights for the shares issued in the transaction.