NOTES TO CONDENSED CONSOLIDATED
FINANCIAL STATEMENTS
July 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
information included in the Red Cat Holdings, Inc. (the “Company”), Form 8-K/A filed with the U.S. Securities and Exchange Commission
(“SEC”) on July 31, 2019.
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) 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 an 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 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.
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 is expected to provide
access to the public markets to assist our rapid growth through acquisitions and continued development of our Saas 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.
The purchase price allocation
as of the date of the acquisition was based on a preliminary valuation and is subject to revision as more detailed analyses are
completed and additional information about the fair value of assets acquired and liabilities assumed becomes available. The major
classes of assets and liabilities to which we have preliminarily allocated the purchase price were as follows:
Cash
|
|
$
|
24,704
|
|
Prepaid expenses
|
|
|
14,470
|
|
Equipment
|
|
|
3,000
|
|
Goodwill
|
|
|
132,636
|
|
Accounts payable
|
|
|
(57,056
|
)
|
|
|
|
|
|
Total
|
|
|
117,754
|
|
The goodwill recognized in connection
with the acquisition is primarily attributable to anticipated synergies from future growth and is expected to be deductible for
tax purposes.
Reverse Stock Split
On August 1, 2019, the Company effected
a reverse stock split of its 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.
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 three months
ended July 31, 2019, Red Cat had a net loss of $321,502 and used cash in operating activities of $155,329. Additionally, Red
Cat had an accumulated deficit of $1,293,324 and does not yet generate revenues. Management believes that these matters raise
substantial doubt about Red 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:
|
·
|
We are currently working
with investment banks to raise our first institutional financing.
|
|
·
|
We are working on acquisitions
that will expedite our software platform revenue
|
|
·
|
We believe the acquisitions
we are pursuing will be accretive once closed
|
|
·
|
We believe we will complete
2 or 3 acquisitions by our year end
|
|
·
|
Our commercial software
product is launching in fourth quarter of calendar 2019
|
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”).
Principles of Consolidation - The
condensed consolidated financial statements include the accounts of Red Cat Holdings, Inc., and its 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 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 three months ended July 31, 2019 and 2018, include estimates of current and deferred income
taxes and deferred tax valuation allowances.
Cash – At July 31,
2019 and April 30, 2019, cash is $330,227 and $503,438 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.
Prepaid Expenses –
At July 31, 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.
Goodwill – The measurement
periods for the valuation of assets acquired and liabilities assumed end as soon as information on the facts and circumstances
that existed as of the acquisition dates becomes available, but do not exceed 12 months. Adjustments in purchase price allocations
may require a change in the amounts allocated to goodwill during the periods in which the adjustments are determined.
Capital to be Returned –
At July 31, 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 our Series B Preferred 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.
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.
Note 4 - Warrants
On May 15, 2019, as part of the
Share Exchange Agreement, Red Cat issued 469,874 five-year warrants to purchase 469,874 shares of common stock at $0.324 per share.
The value of these warrants were considered to be a nominal amount at the time of issuance.
Note 5 - Income Taxes
At July 31, 2019 and 2018, income
tax benefits consisted of the following:
|
|
2019
|
|
2018
|
Current Provision:
|
|
|
|
|
|
|
|
|
Federal
|
|
$
|
(67,515
|
)
|
|
$
|
(30,755
|
)
|
State
|
|
|
(64,300
|
)
|
|
|
(29,290
|
)
|
|
|
|
(131,816
|
)
|
|
|
(60,045
|
)
|
Valuation Allowance
|
|
|
131,816
|
|
|
|
60,045
|
|
|
|
|
—
|
|
|
|
—
|
|
|
|
|
|
|
|
|
|
|
|
|
|
2019
|
|
|
|
2018
|
|
Deferred Provision:
|
|
|
|
|
|
|
|
|
Federal
|
|
|
—
|
|
|
|
—
|
|
State
|
|
|
—
|
|
|
|
—
|
|
|
|
$
|
—
|
|
|
$
|
—
|
|
The deferred tax asset comprises
of the recognition of net operating losses for tax purposes.
|
|
July 31, 2019
|
|
April 30, 2019
|
Deferred Tax Asset
|
|
$
|
530,263
|
|
|
$
|
398,447
|
|
Valuation Allowance
|
|
|
(530,263
|
)
|
|
|
(398,447
|
)
|
|
|
$
|
—
|
|
|
$
|
—
|
|
Note 5 - Income Taxes (continued)
The valuation allowance at July 31,
2019, is $530,263. 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 July 31, 2019, and December 31, 2018.
Red Cat, Inc., has not filed corporate
income tax returns for Federal or state purposes.
Note 6 - Related-Party Transactions
Shares
Issued for Services - On May 7, 2019, the Company issued 1,570 shares of common stock valued at $70,000 to a consultant
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 Condensed Consolidated Financial
Statements