ITEM 1. FINANCIAL STATEMENTS
RED CAT HOLDINGS, INC
|
Balance Sheets
|
(unaudited)
|
|
|
|
|
|
|
|
|
|
June 30
|
|
|
|
December
31
|
|
|
|
|
2019
|
|
|
|
2018
|
|
ASSETS
|
|
|
|
|
|
|
|
|
Current Assets
|
|
|
|
|
|
|
|
|
Cash
|
|
$
|
389,664
|
|
|
$
|
211,053
|
|
Cryptocurrencies
|
|
|
8,162
|
|
|
|
0
|
|
Miscellaneous receivable
|
|
|
22,500
|
|
|
|
0
|
|
Prepaid
expenses
|
|
|
89,470
|
|
|
|
0
|
|
Total Current Assets
|
|
|
509,796
|
|
|
|
211,053
|
|
|
|
|
|
|
|
|
|
|
Property and Equipment
|
|
|
75,650
|
|
|
|
0
|
|
Goodwill
|
|
|
12,862
|
|
|
|
0
|
|
TOTAL ASSETS
|
|
$
|
598,308
|
|
|
$
|
211,053
|
|
|
|
|
|
|
|
|
|
|
LIABILITIES AND STOCKHOLDERS' EQUITY
|
|
|
|
|
|
|
|
|
Current Liabilities
|
|
|
|
|
|
|
|
|
Accounts
payable
|
|
$
|
60,926
|
|
|
$
|
0
|
|
Payroll
liabilities
|
|
|
6,943
|
|
|
|
0
|
|
Accrued
Expense
|
|
|
34,837
|
|
|
|
68,628
|
|
Capital
to be returned
|
|
|
2,270
|
|
|
|
0
|
|
Total
Current Liabilities
|
|
|
104,976
|
|
|
|
68,628
|
|
Total Liabilities
|
|
|
104,976
|
|
|
|
68,628
|
|
|
|
|
|
|
|
|
|
|
Commitments and contingencies
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Stockholders' Equity
|
|
|
|
|
|
|
|
|
Series A Preferred Stock -
shares authorized 10,000,000; outstanding 2,169,068 and 0
|
|
|
21,691
|
|
|
|
0
|
|
Series B Preferred Stock -
shares authorized 10,000,000; outstanding 4,212,645 and 0
|
|
|
42,126
|
|
|
|
0
|
|
Common stock - shares authorized
500,000,000; outstanding 471,460,470 and 215,150,947
|
|
|
471,460
|
|
|
|
215,151
|
|
Additional paid-in capital
|
|
|
1,121,727
|
|
|
|
569,399
|
|
Accumulated
deficit
|
|
|
(1,163,672
|
)
|
|
|
(642,125
|
)
|
Total Stockholders' Equity
|
|
|
493,332
|
|
|
|
142,425
|
|
TOTAL LIABILITIES AND STOCKHOLDERS' EQUITY
|
|
$
|
598,308
|
|
|
$
|
211,053
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
See accompanying notes.
|
RED CAT PROPWARE, INC
|
Operations Statements
|
(unaudited)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Three months ended
June 30
|
|
Six months ended
June 30
|
|
|
2019
|
|
2018
|
|
2019
|
|
2018
|
REVENUES
|
|
|
|
|
|
|
|
|
Revenue
|
|
$
|
0
|
|
|
$
|
0
|
|
|
$
|
0
|
|
|
$
|
0
|
|
Total Revenue
|
|
|
0
|
|
|
|
0
|
|
|
|
0
|
|
|
|
0
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
EXPENSES
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Research and development
|
|
|
145,942
|
|
|
|
100,157
|
|
|
|
295,649
|
|
|
|
113,387
|
|
Payroll expense
|
|
|
3,576
|
|
|
|
30,555
|
|
|
|
9,815
|
|
|
|
36,159
|
|
Professional fees
|
|
|
95,570
|
|
|
|
5,585
|
|
|
|
168,465
|
|
|
|
7,994
|
|
General and administrative expenses
|
|
|
29,950
|
|
|
|
1,169
|
|
|
|
47,618
|
|
|
|
1,230
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Loss before income taxes
|
|
|
275,038
|
|
|
|
137,466
|
|
|
|
521,547
|
|
|
|
158,770
|
|
Provision for income taxes
|
|
|
0
|
|
|
|
0
|
|
|
|
0
|
|
|
|
0
|
|
NET LOSS
|
|
$
|
275,038
|
|
|
$
|
137,466
|
|
|
$
|
521,547
|
|
|
$
|
158,770
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
LOSS PER SHARE - basic and diluted
|
|
$
|
0.00
|
|
|
$
|
0.00
|
|
|
$
|
0.00
|
|
|
$
|
0.00
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Weighted average shares outstanding -
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
basic and diluted
|
|
|
281,197,042
|
|
|
|
195,284,615
|
|
|
|
281,197,042
|
|
|
|
195,284,615
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
See accompanying notes.
|
RED CAT PROPWARE, INC
|
Stockholders' Equity Statements
|
(unaudited)
|
|
|
|
|
|
|
|
|
|
Series
A
|
|
Series
B
|
|
Common
Stock
|
|
Additional
|
|
|
|
|
|
|
Preferred
Stock
|
|
Preferred
Stock
|
|
|
|
|
|
Paid-in
|
|
Accumulated
|
|
Total
|
|
|
Shares
|
|
Amount
|
|
Shares
|
|
Amount
|
|
Shares
|
|
Amount
|
|
Capital
|
|
Deficit
|
|
Equity
|
Balances, January 1, 2018
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
187,702,046
|
|
|
$
|
187,702
|
|
|
($
|
83,152
|
)
|
|
($
|
108,975
|
)
|
|
($
|
4,425
|
)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Issuance of common stock
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
27,448,901
|
|
|
|
27,449
|
|
|
|
578,151
|
|
|
|
|
|
|
|
605,600
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Issuance of warrants
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
74,400
|
|
|
|
|
|
|
|
74,400
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Net Deficit
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
(158,770
|
)
|
|
|
(158,770
|
)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Balances, June 30, 2018
|
|
|
—
|
|
|
|
—
|
|
|
|
—
|
|
|
|
—
|
|
|
|
215,150,947
|
|
|
$
|
215,151
|
|
|
$
|
569,399
|
|
|
($
|
267,745
|
)
|
|
$
|
516,805
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Balances, January 1, 2019
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
215,150,947
|
|
|
$
|
215,151
|
|
|
$
|
569,399
|
|
|
($
|
642,125
|
)
|
|
$
|
142,425
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Issuance of Common Stock
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
18,425,761
|
|
|
|
18,426
|
|
|
|
666,274
|
|
|
|
|
|
|
|
684,700
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Shares Issued for Services
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
1,883,762
|
|
|
|
1,884
|
|
|
|
68,116
|
|
|
|
|
|
|
|
70,000
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Share Exchange with Red Cat Propware
|
|
|
2,169,068
|
|
|
|
21,691
|
|
|
|
4,212,645
|
|
|
|
42,126
|
|
|
|
236,000,000
|
|
|
|
236,000
|
|
|
|
(182,063
|
)
|
|
|
|
|
|
|
117,754
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Net Deficit
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
(521,547
|
)
|
|
|
(521,547
|
)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Balances, June 30, 2019
|
|
|
2,169,068
|
|
|
$
|
21,691
|
|
|
|
4,212,645
|
|
|
$
|
42,126
|
|
|
|
471,460,470
|
|
|
$
|
471,460
|
|
|
$
|
1,121,727
|
|
|
($
|
1,163,672
|
)
|
|
$
|
493,332
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
See accompanying notes.
|
RED CAT PROPWARE, INC
|
Cash Flows Statements
|
(unaudited)
|
|
|
|
|
|
|
|
|
Six months ended
June 30,
|
|
|
2019
|
|
2018
|
OPERATIONS
|
|
|
|
|
Net loss
|
|
$
|
(
521,547
|
)
|
|
$
|
(
158,770
|
)
|
Adjustments to reconcile net loss to net cash
from operations:
|
|
|
|
|
|
|
|
|
Common stock issued for services
|
|
|
70,000
|
|
|
|
0
|
|
Prepaid expenses
|
|
|
(89,470
|
)
|
|
|
0
|
|
Accounts payable
|
|
|
(8,652
|
)
|
|
|
0
|
|
Accrued expense
|
|
|
34,837
|
|
|
|
0
|
|
Payroll
liabilities
|
|
|
6,943
|
|
|
|
880
|
|
Net cash from operations
|
|
|
(507,889
|
)
|
|
|
(157,890
|
)
|
|
|
|
|
|
|
|
|
|
FINANCING
|
|
|
|
|
|
|
|
|
Common stock issued
|
|
|
684,700
|
|
|
|
605,600
|
|
Warrants issued
|
|
|
0
|
|
|
|
74,400
|
|
Capital to be returned
|
|
|
1,800
|
|
|
|
0
|
|
Net cash from financing
|
|
|
686,500
|
|
|
|
680,000
|
|
|
|
|
|
|
|
|
|
|
Net increase (use) of cash
|
|
|
178,611
|
|
|
|
522,110
|
|
Cash, beginning of period
|
|
|
211,053
|
|
|
|
(11
|
)
|
Cash, end of period
|
|
$
|
389,664
|
|
|
$
|
522,099
|
|
|
|
|
|
|
|
|
|
|
Cash paid for interest and taxes
|
|
$
|
0
|
|
|
$
|
0
|
|
|
|
|
|
|
|
|
|
|
NONCASH
|
|
|
|
|
|
|
|
|
Common stock issued for services
|
|
$
|
70,000
|
|
|
$
|
0
|
|
Shares exchanged in acquisition
|
|
$
|
117,754
|
|
|
$
|
0
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
See accompanying notes.
|
RED CAT HOLDINGS, INC
NOTES TO FINANCIAL STATEMENTS
June 30, 2019 and 2018
(unaudited)
Note 1 - The Business
Our Operations
Red Cat Propware, Inc., (“Red Cat”), offers
secure, cloud-based analytics, storage, and services for drones. Red Cat was incorporated in April 2016 in the State of Nevada.
Our primary products are Black Box by Red Cat. Black Box by Red Cat analysis drone flight data and performs detailed flight reply
and analytics. This data is also encrypted using our proprietary systems utilizing blockchain architecture.
We are based in Puerto
Rico, a location which offers important tax incentives, certain cost advantages, and access to the top blockchain companies in
the world.
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) 236,000,000 shares of our common
stock, (ii) 2,169,068.0554 shares of our newly-designated Series A Preferred Stock, and (iii) 4,212,645.28 shares of our newly-designated
Series B Preferred Stock.
Our new Series A Preferred Stock is convertible to common
stock at a ratio of 10,000 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 an outstanding share capital on a fully-diluted basis.
Our new Series B Preferred Stock is convertible to common
stock at a ratio of 1,000 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
an 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.
Note 2 - Going Concern
These 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, for the six months ended
June 30, 2019, Red Cat had a net loss of $521,547 and used cash in operating activities of $507,889. Additionally, Red Cat had
an accumulated deficit of $1,163,672 and does not yet generate revenues. Management believes that these matters raise substantial
doubt about Red
Note 2 - Going Concern (continued)
Cat’s ability to continue as a going concern for
twelve months from the issuance date of this report. These financial statements do not include any adjustments related to the recoverability
and classification of recorded asset amounts and classification of liabilities that might be necessary should the Company be unable
to continue as a going concern.
Management believes Red Cat is well positioned after
two-and-a-half years of drone research and software development. Our expertise in encryption, drone flights logs, and producing
easy to use analytics will differentiate our soon to be released storage and analytics product. The Company was founded in April
2016 and has operated by using funds raised from accredited investors to build our software platform. Now a public entity with
the reverse merger completed in May 2019, investors have gained public market liquidity which should allow us to raise additional
funds. We believe that the going concern previously mentioned will be alleviated with the following steps listed:
|
·
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We are currently working with investment banks to
raise our first institutional financing.
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|
·
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We are working on acquisitions that will expedite
our software platform revenue
|
|
·
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We believe the acquisitions we are pursuing will
be accretive once closed
|
|
·
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We believe we will complete 2 or 3 acquisitions by
our year end
|
|
·
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Our commercial software product is launching in fourth
quarter of calendar 2019
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Note 3 - Summary of Significant Accounting Policies
Basis of Accounting
- The financial statements
and accompanying notes are prepared in accordance with accounting principles generally accepted in the United States of America
(“GAAP”).
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 and 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 for
the six months ended June 30, 2019 and 2018, include estimates of current and deferred income taxes and deferred tax valuation
allowances.
Cash
– At June 30, 2019 and December 31,
2018, cash is $389,664 and $216,807 deposited in one commercial bank account. Red Cat has not experienced any loss on such account
and believes it is not exposed to any significant credit risk regarding its cash balance.
Note 3 - Summary of Significant Accounting Policies
(continued)
Prepaid Expenses
– At June 30, 2019, prepaid
expenses comprised principally of one consulting contract for market research and analysis services. This contract will end at
January 6, 2020, unless terminated by the parties.
Capital to be Returned
– At June 30, 2019,
$1,800 represents an amount received in excess of shares issued to one investor.
Common Stock
– Red Cat’s common stock
has a par value of $0.001 per share.
Warrants
- In connection with a certain stock
issuance, Red Cat 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. Such costs related to software development
are included in research and development expense until the point that 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 to 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.
Related Parties
-
Parties
are considered to be related to Red Cat if the party, directly or indirectly, through one or more intermediaries, control, are
controlled by, or are under common control with Red Cat. Related parties also include principal owners of the Company, its management,
members of the immediate families of principal owners of Red Cat and its management and other parties with which Red Cat may deal
with if one party controls or can significantly influence the management or operating policies of the other to an extent that one
of the transacting parties might be prevented from fully pursuing its own separate interests.
Note 4 - Stockholders’ Equity
Issuance of Warrants
– On April 4, 2018,
Red Cat issued 6,054,905 five-year warrants valued at $74,400 to purchase 6,054,095 shares of common stock at $0.003 per share.
The following assumptions were used as inputs in the Black-Scholes option-pricing model: term - 5 years, risk-free interest rate
- 5%, expected dividend rate – 0%, and expected volatility - 50%.
Note 5 - Income Taxes
At June 30, 2019 and 2018, income
tax benefits consisted of the following:
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|
2019
|
|
2018
|
Current Provision:
|
|
|
|
|
|
|
|
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Federal
|
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$
|
(109,525
|
)
|
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$
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(33,342
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)
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State
|
|
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(104,309
|
)
|
|
|
(31,754
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)
|
|
|
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(213,834
|
)
|
|
|
(65,096
|
)
|
Valuation Allowance
|
|
|
213,834
|
|
|
|
65,096
|
|
|
|
|
—
|
|
|
|
—
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
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2019
|
|
|
|
2018
|
|
Deferred Provision:
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|
|
|
|
|
|
|
|
Federal
|
|
|
—
|
|
|
|
—
|
|
State
|
|
|
—
|
|
|
|
—
|
|
|
|
$
|
—
|
|
|
$
|
—
|
|
The deferred tax asset comprises
of the recognition of net operating losses for tax purposes.
|
|
2019
|
|
2018
|
Deferred Tax Asset
|
|
$
|
477,106
|
|
|
$
|
263,271
|
|
Valuation Allowance
|
|
|
(477,106
|
)
|
|
|
(263,271
|
)
|
|
|
$
|
—
|
|
|
$
|
—
|
|
The valuation allowance at June 30, 2019, is $447,106.
In assessing the realizability of deferred tax assets, management considers whether it is more likely than not that some portion
or all of the deferred income tax assets will not be realized. The ultimate realization of deferred income tax assets is dependent
upon the generation of future taxable income during the periods in which those temporary differences become deductible. Management
considers the scheduled reversal of deferred income tax liabilities, projected future taxable income, and tax planning strategies
in making this assessment. Based on consideration of these items, management has determined that enough uncertainty exists relative
to the realization of the deferred income tax asset balances to assess the application of a valuation allowance as of June 30,
2019, and December 31, 2018.
Note 5 - Income Taxes (continued)
Red Cat, Inc., has not filed corporate income tax returns
for Federal or state purposes.
Note 6 - Related-Party Transactions
Founders’ Shares
- On January
23, 2017, Red Cat issued 183,665,443 shares of its common stock as Founders’ Shares for $4,550. 156,418,372 were issued to
Red Cat’s founder and CEO and 27,247,071 to an outside consultant who assisted with the Red Cat’s formation and early
organization.
Initial Investment
- On January
26, 2017, the same outside consultant purchased 4,036,603 shares of common stock for $100,000.
Shares Issued for Services
- On
May 7, 2019, the same outside consultant was issued 1,883,792 shares valued at $70,000 for legal services provided.
Office Space Rental
– Red Cat rented office
space from Red Cat’s CEO for the 2019 and 2018 years for $8,100 and $7,200. This office space arrangement ended March 31,
2019. Rent expense is classified within general and administrative expenses.
Note 7 - Commitments and Contingencies
Office Lease
– In December 2018, Red Cat
entered into a lease arrangement for its office space located in San Juan, Puerto Rico, for $26,638 per anum. Red Cat pays $2,220
per month for this space. There are no renewal terms. Rent expense is classified within general and administrative expenses.
Note 8 - Subsequent Events
Letter of Intent
- On June 4, 2019, we executed
a Letter of Intent with Rotor Riot, LLC. The LOI, which is non-binding, sets forth the terms for our contemplated acquisition of
Rotor Riot, a drone technology and media company. Any acquisition of Rotor Riot will be subject to the completion of due diligence,
the negotiation of a definitive agreement, and other conditions.
End of Financial Statements
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 consolidated financial statements and related notes and other financial data included elsewhere
in this 10-Q. See also: (i) the notes to our consolidated financial statements and Management’s Discussion and Analysis of
Financial Condition and Results of Operations contained in our Annual Report on Form 10-K for the year ended December 31, 2018;
and (ii) the audited financial statements and notes thereto for our recently-acquired operating subsidiary, Red Cat Propware, Inc.,
filed July 31, 2018 on Form 8-K/A. The Management's Discussion and Analysis contains forward-looking statements that involve risks
and uncertainties, such as statements relating to our liquidity, and our plans in for our business focusing on cloud-based analytics,
storage, and services for drones. Any statements that are not statements of 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 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 several factors. Investors should review the Risk Factors in the Company’s Current Report on Form 8-K filed May
16, 2019. Except as required by U.S. securities laws, the Company does not undertake any obligation to update forward-looking statements
to reflect events or circumstances occurring after the date of this Report on Form 10-Q.
OVERVIEW
We are a Nevada corporation incorporated on
April 10, 2002. Effective August 1, 2019, we changed our name to Red Cat Holdings, Inc. Until recently, our operations have focused
on the bitcoin mining business. On May 15, 2019, however, we acquired Red Cat Propware, Inc. (“Red Cat”), a company
offering secure, cloud-based analytics, storage, and services for drones. We are focusing primarily on the business of Red Cat
going forward.
Acquisition of Red Cat Propware, Inc.
We acquired Red Cat under a Share Exchange
Agreement (the “SEA”) with Red Cat and each of the shareholders of Red Cat. Under the SEA, we acquired all of the issued
and outstanding capital stock of Red Cat, in exchange for our issuance to the Red Cat shareholders of: (i) 236,000,000 shares of
our common stock, and (ii) 2,169,068.0554 shares of our newly-designated Series A Preferred Stock. In total, the common stock and
Series A Preferred Stock issued Red Cat Propware’s shareholders under the SEA constituted approximately 83.33% of our issued
an outstanding share capital on a fully-diluted basis.
With the exception of shares held by the President
of Red Cat and our current CEO, Jeffrey Thompson, the convertibility of shares of Series A Preferred Stock is limited such that
a holder of Series A Preferred Stock may not convert Series A Preferred Stock to our common stock to the extent that the number
of shares of common stock to be issued pursuant to such conversion, when aggregated with all other shares of common stock owned
by the holder at such time, would result in the holder beneficially owning (as determined in accordance with Section 13(d) of the
Securities Exchange Act of 1934) more than 4.99% of all of our common stock outstanding. Effective August 1, 2019, we conducted
a 1 for 1,200 reverse split of our common stock. The effectiveness of the reverse split resulted in the automatic conversion of
all Series A Preferred Stock to common stock, with exception of certain Series A Preferred shares affected by the 4.99% conversion
blocker. Following the reverse split, our remaining shares of Series A Preferred Stock are convertible to common stock at a ratio
of approximately 8.33 shares of common stock for each share of Series A Preferred Stock.
Exchange Agreements with Holders of Series
E Convertible Preferred Stock, Promissory Notes, Options, and Warrants
Immediately prior to the closing of the SEA,
we entered into Securities Exchange Agreements (the “Exchange Agreements”) with each of the holders of our outstanding
Series E Convertible Preferred Stock, Promissory Notes, Options, and Warrants (collectively, the “Exchange Securities”).
The holders of the Exchange Securities were issued, in exchange for their Exchange Securities, a total of 4,212,645.28 shares of
our newly-designated Series B Preferred Stock. In total, the Series B Preferred Stock issued under the Exchange Agreements constituted
approximately 15.64% of our issued an outstanding share capital on a fully-diluted basis. Following the reverse split, our new
Series B Preferred Stock is convertible to common stock at a ratio of approximately 0.833 shares of common stock for each share
of Series B Preferred Stock. The convertibility of shares of Series B Preferred Stock is also limited such that a holder of Series
B Preferred Stock may not convert Series B Preferred Stock to our common stock to the extent that the number of shares of common
stock to be issued pursuant to such conversion, when aggregated with all other shares of common stock owned by the holder at such
time, would result in the holder beneficially owning (as determined in accordance with Section 13(d) of the Securities Exchange
Act of 1934) more than 4.99% of all of our common stock outstanding. Series B Preferred Stock does not have an automatic conversion
feature.
Business of Red Cat Propware, Inc.
Through our recently-acquired operating subsidiary,
Red Cat Propware, Inc., we are in the business of providing secure, cloud-based analytics, storage, and services for drones. Our
primary product is Black Box by Red Cat. Black Box by Red Cat is a blockchain technology that records all information from a drone
much like a traditional airliner black box. Red Cat sends the information directly to the cloud and clones the drone in real
time. This information can then be viewed using Red Cat’s analytics platform with a secure login.
Effective August 6, 2019, our Board of Directors
approved a change in our fiscal year end to April 30, which is the accounting year-end for our operating subsidiary Red Cat Propware,
Inc. Following this Quarterly Report, an additional report on Form 10-Q will be filed covering the transition period.
Results of Operations
The following discussion
analyzes our results of operations for the three and six months ended June 30, 2019. The following information should be considered
together with our financial statements for such periods and the accompanying notes thereto.
We generated
no revenues during the three and six months ended June 30, 2019, and have not generated revenue to date from our current operations.
During the three months ended June 30, 2019, we incurred $275,038 in total expenses from continuing operations, consisting of
$145,942 in research and development, $95,570 in professional fees, $29,950 in general and administrative expenses, and $3,576
in payroll expenses. By comparison, during the three months ended June 30, 2018, we incurred $137,466 in expenses from continuing
operations, consisting of $100,157 in research and development, $5,585 in professional fees, $1,168 in general and administrative
expenses, and $30,555 in payroll expenses. During the six months ended June 30, 2019, we incurred $521,547 in total expenses from
continuing operations, consisting of $295,649 in research and development, $168,465 in professional fees, $47,618 in general and
administrative expenses, and $9,815 in payroll expenses. By comparison, during the six months ended June 30, 2018, we incurred
$158,770 in expenses from continuing operations, consisting of $113,387 in research and development, $7,994 in professional fees,
$1,230 in general and administrative expenses, and $36,159 in payroll expenses.
Our expenses and our net loss for the three
and six months ended June 30, 2019 are greater than those experienced during the same periods last year due to costs associated
with Red Cat Propware becoming a public company through the SEA, and increased costs associated with the expansion of the company.
As we continue to develop our business, we expect that costs and net losses will continue to increase until such time as we begin
generating material revenue from sales of our is Black Box by Red Cat product.
Liquidity and Capital Resources
As of June 30, 2019, we had current assets
in the amount of $509,796, consisting of cash in the amount of $389,664, prepaid expenses of $89,470, a miscellaneous receivable
in the amount of $22,500, and cryptocurrencies valued at $8,162. Our current liabilities as of June 30, 2019 totaled $104,976,
and consisted of accounts payable of $60,926, accrued expenses of $34,837, payroll liabilities of $6,943, and capital to be returned
in the amount of $2,270. Our net working capital as of June 30, 2019 was $404,820. During the six months ended June 30, 2019,
our operations used $507,889 in cash and financing activities provided $686,500 in cash, resulting in a net increase of $178,611
over the period.
We do
not have any long term liabilities and, to date, the business of Red Cat has been funded through private offerings of common stock
sourced primarily from individual private investors. We will require additional capital in order to execute on our business plan
and begin generating net revenue from the Red Cat business. Until we are able to sustain our ongoing operations through sales revenue,
we intend to fund operations through equity and/or debt financing arrangements, which may be insufficient to fund our capital expenditures,
working capital, or other cash requirements. We do not have any formal commitments or arrangements for the sales of stock or the
advancement or loan of funds at this time. There can be no assurance that such additional financing will be available to us on
acceptable terms, or at all.
Going Concern
We have experienced losses from operations
since inception. To date, the Red Cat business not been able to produce sales or to become cash flow positive and profitable. The
success of our business plan during the next 12 months and beyond will be contingent upon generating sufficient revenue to cover
our costs of operations and/or upon obtaining additional financing. For these reasons, our auditor has raised substantial doubt
about our ability 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, on 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.
Off-Balance Sheet Arrangements
We have no significant off-balance sheet arrangements
that have or are reasonably likely to have a current or future effect on our financial condition, changes in financial condition,
revenues or expenses, results of operations, liquidity, capital expenditures or capital resources that are material to stockholders.
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.