NOTES
TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
October
31, 2019 and 2018
(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 Form 8-K/A filed with the Securities and Exchange Commission (“SEC”) on July 31, 2019.
Note
1 - The Business
The Company was originally incorporated in
February 1984. Beginning in May 2019, we have elected to focus on the business operations of Red Cat Holdings (or “Red Cat”)
which is developing products to provide distributed data storage, analytics and related services to the drone industry. We plan
to utilize blockchain based technologies and offer our solutions as a Software-as-a-Service platform. Potential customers include
regulators to track and review flight data, insurance companies for coverage and claims administration, and pilots to maintain
compliance with regulations. We are targeting the first half of 2020 for the release of our first product, “Black Box by
Red Cat” although no assurances can be provided regarding the actual release date.
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.
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 Quarterly Report to shares of the Company’s common stock, including prices per share
of its common stock, reflect the Reverse Stock Split.
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.
Our new 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 will convert automatically to common stock upon the effectiveness
of any future reverse split of our common stock. This common stock and Series A Preferred Stock issued under the SEA will constitute
approximately 83.33% of our issued and outstanding share capital on a fully-diluted basis.
Our new 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. This Series B Preferred Stock issued under the SEA will constitute approximately 15.64% of our
issued and outstanding share capital on a fully-diluted basis.
In total, the common stock, Series A Preferred
Stock, and Series B Preferred Stock issued under the SEA are valued at $117,754.
Red
Cat Propware, Inc.
On May 15, 2019, we acquired TimeFireVR, Inc.,
in a $117,754 stock transaction classified as a reverse-merger transaction. The acquisition will provide access to the public markets
and support the development of our product platform. 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.
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.
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
never generated revenues since our inception and have accumulated losses totaling approximately $1.5 million through October 31,
2019. 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 our first commercial product 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 subsidiary, Red Cat Propware,
Inc. 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
determine stock based compensation.
Cash
– At October 31, 2019, we held cash of $264,533 with two commercial banks. We have not experienced any loss on these
accounts and believe they are not exposed to any significant credit risk.
Prepaid
Expenses – Prepaid expenses relate to a consulting contract for market research and analysis which ends in January 2020.
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
plan to 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.
Common
Stock – Our common stock has a par value of $0.001 per share.
Warrants
– In connection with our Series B Preferred Stock Issuance, we issued warrants to purchase shares of our common stock.
Outstanding warrants are standalone instruments that are not puttable or mandatorily redeemable by the holder and are classified
as equity. We measured the fair value of the warrants using the Black-Scholes option pricing model.
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 nine months ended October 30, 2019 and 2018, 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 during the three months ended October 31, 2019.
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 9.
Note
4 - 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
not generated any revenues and incurred net losses in each of the three and nine month periods ended October 31, 2019 and 2018.
Our current provision for each of these periods 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, 2019 and April 30,
2019, we had accumulated deficits of approximately $1.5 million and $972,000, respectively. Deferred tax assets related to
the future benefit of these net operating losses for tax purposes totaled approximately $60,000 and $40,000, 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 any revenues since inception, we have applied a full valuation
allowance against our deferred tax assets at October 31, 2019 and April 30, 2018.
Note
5 – Common Stock
We
are authorized to issue 500,000,000 shares of common stock. Each share of common stock is entitled to one vote.
Note
6 – 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. In August 2019, a total of 240,000 shares
of Series B Stock were converted into 200,000 shares of common stock.
Note
7 - Warrants
In May 2019, as part of the Share Exchange
Agreement, we issued warrants to purchase 469,874 shares of common stock at an exercise price of $0.324 per share of common stock.
The value of these warrants was considered to be a nominal amount at the time of issuance. In September 2019, we received $152,239
in connection with the exercise of these warrants. The holder did not provide the required paperwork to complete the exercise until
November 2019 and the shares are not expected to be issued until December 2019. As a result, the amount received has been reported
as Common Stock to be Issued in the liabilities section of the Balance Sheet at October 31, 2019. 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.
Note
8 – 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.
In
October 2019, we issued options to purchase 350,000 shares of common stock valued at $477,500. 200,000 of the options vest ratably
over a 2 year period and expire in October 2029. 150,000 of the options vest ratably over a 3 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. None
of the options were exercisable as of October 31, 2019. The remaining weighted average contractual term of the options outstanding
at October 31, 2019 was 7.80 years. The aggregate intrinsic value of the options, representing the excess of the stock price over
the exercise price, was zero at October 31, 2019.
We
recognized stock compensation expense of $12,067 during the three months ended October 31, 2019, of which $8,815 was included
in general and administrative expenses and $3,252 was included in research and development expenses. 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%.
Note
9 - 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.
Office
Lease – We rented space from our Chief Executive Officer during parts of the fiscal years ended April 30, 2019 and 2018,
and made payments totaling $8,100 and $7,200, respectively.
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. See Note 11 for details on the terms of the transaction.
Note
10 - Commitments and Contingencies
Office
Lease – In December 2018, we entered into a one year lease arrangement for office space in San Juan, Puerto Rico, for
$26,638 annually. There are no renewal terms.
Note
11 - Subsequent Events
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 “Notes”). 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 volume weighted average of the closing price 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.