RISK
FACTORS
Any
investment in our securities involves a high degree of risk. Investors should carefully consider the risks described below and
all of the information contained in this prospectus before deciding whether to purchase our securities. Our business, financial
condition and results of operations could be materially adversely affected by these risks if any of them actually occur. This
prospectus also contains forward-looking statements that involve risks and uncertainties. Our actual results could differ materially
from those anticipated in these forward-looking statements as a result of certain factors, including the risks we face as described
below and elsewhere in this prospectus.
Risks
Related To Our Common Stock
Our
management has voting control of the Company.
Our
current officers and directors currently own approximately 65% of the total issued and outstanding capital stock of the Company.
If they act together, they will be able to influence the outcome of all corporate actions requiring approval of our shareholders,
including the election of directors and approval of significant corporate transactions, which may result in corporate action with
which other stockholders do not agree. This concentration of ownership may have the effect of delaying or preventing a change
in control and may adversely affect the market price of our common stock.
Our
failure to maintain effective internal controls over financial reporting could have an adverse impact on us.
We
are required to establish and maintain appropriate internal controls over financial reporting. Failure to establish those controls,
or any failure of those controls once established, could adversely impact our public disclosures regarding our business, financial
condition or results of operations. In addition, management’s assessment of internal controls over financial reporting may
identify weaknesses and conditions that need to be addressed in our internal controls over financial reporting or other matters
that may raise concerns for investors. Any actual or perceived weaknesses and conditions that need to be addressed in our internal
control over financial reporting, disclosure of management’s assessment of our internal controls over financial reporting
or disclosure of our public accounting firm’s attestation to or report on management’s assessment of our internal
controls over financial reporting may have an adverse impact on the price of our Common Stock.
We
have never paid dividends and we do not expect to pay dividends for the foreseeable future
We
intend to retain earnings, if any, to finance the growth and development of our business and do not intend to pay cash dividends
on shares of our common stock in the foreseeable future. The payment of future cash dividends, if any, depend upon, among other
things, conditions then existing including earnings, financial condition and capital requirements, restrictions in financing agreements,
business opportunities and other factors. As a result, capital appreciation, if any, of our common stock, will be your sole source
of gain for the foreseeable future.
We
are traded on the Pink Open Market. An active, liquid trading market for our common stock may not develop or be sustained. If
and when an active market develops the price of our common stock may be volatile.
Presently,
our common stock is traded on the Pink Open Market, the lowest and most speculative tier of the three marketplaces for the trading
of over the counter stocks established by OTC Markets which does not establish financial standards or disclosure requirements
for trading. As a result, Pink Open Markets trading is often avoided by investors or disallowed for traders and fund managers.
Although we presently are fully-reporting and current in our SEC filings and reports, prior to 2012 our predecessor failed to
maintain current reporting with the SEC. We are in our early stages, an investment in our company will require a long-term commitment,
with no certainty of return. Presently there is limited trading in our stock and in the absence of an active trading market investors
may have difficulty buying and selling or obtaining market quotations, market visibility for shares of our common stock may be
limited, and a lack of visibility for shares of our common stock may have a depressive effect on the market price for shares of
our common stock.
The
lack of an active market impairs your ability to sell your shares at the time you wish to sell them or at a price that you consider
reasonable. The lack of an active market may also reduce the fair market value of your shares. An inactive market may also impair
our ability to raise capital to continue to fund operations by selling shares.
Trading
in stocks quoted on the Pink Open Market is often thin and characterized by wide fluctuations in trading prices, due to many factors
that may have little to do with our operations or business prospects. The securities market has from time to time experienced
significant price and volume fluctuations that are not related to the operating performance of particular companies. These market
fluctuations may also materially and adversely affect the market price of shares of our common stock. Moreover, the Pink
Open Market is not a stock exchange, and trading of securities is often more sporadic than the trading of securities listed on
a quotation system like NASDAQ or a national stock exchange like the NYSE. Accordingly, stockholders may have difficulty reselling
any shares of common stock.
Our
Board of Directors may authorize and issue shares of new classes of stock that could be superior to or adversely affect current
holders of our common stock.
Our
board of directors has the power to authorize and issue shares of classes of stock, including preferred stock that have voting
powers, designations, preferences, limitations and special rights, including preferred distribution rights, conversion rights,
redemption rights and liquidation rights without further shareholder approval which could adversely affect the rights of the holders
of our common stock. In addition, our board could authorize the issuance of a series of preferred stock that has greater voting
power than our common stock or that is convertible into our common stock, which could decrease the relative voting power of our
common stock or result in dilution to our existing common stockholders.
Any
of these actions could significantly adversely affect the investment made by holders of our common stock. Holders of common stock
could potentially not receive dividends that they might otherwise have received. In addition, holders of our common stock could
receive less proceeds in connection with any future sale of the Company, whether in liquidation or on any other basis.
Our
shares will be subordinate to all of our debts and liabilities, which increases the risk that you could lose your entire investment.
Our
shares are equity interests that will be subordinate to all of our current and future indebtedness with respect to claims on our
assets. In any liquidation, all of our debts and liabilities must be paid before any payment is made to our shareholders.
The
market price of our shares of common stock is subject to fluctuation.
The
market prices of our shares may fluctuate significantly in response to factors, some of which are beyond our control, including:
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The announcement of new products
by our competitors
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The release of new products by
our competitors
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Developments in our industry or
target markets
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General market conditions including
factors unrelated to our operating performance
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Recently,
the stock market, in general, has experienced extreme price and volume fluctuations. Continued market fluctuations could result
in extreme market volatility in the price of our shares of common stock which could cause a decline in the value of our shares.
Our
common stock may be deemed a “penny stock” which may reduce the value of an investment in the stock.
Rule
15g-9 under the Exchange Act establishes the definition of a “penny stock,” for the purposes relevant to us, as any
equity security that has a market price of less than $5.00 per share or with an exercise price of less than $5.00 per share, subject
to certain exceptions. For any transaction involving a penny stock, unless exempt, the rules require: (a) that a broker or dealer
approve a person’s account for transactions in penny stocks; and (b) the broker or dealer receive from the investor a written
agreement to the transaction, setting forth the identity and quantity of the penny stock to be purchased.
In
order to approve a person’s account for transactions in penny stocks, the broker or dealer must: (a) obtain financial information
and investment experience objectives of the person and (b) make a reasonable determination that the transactions in penny stocks
are suitable for that person and the person has sufficient knowledge and experience in financial matters to be capable of evaluating
the risks of transactions in penny stocks.
The
broker or dealer must also deliver, prior to any transaction in a penny stock, a disclosure schedule prescribed by the SEC relating
to the penny stock market, which, in highlight form: (a) sets forth the basis on which the broker or dealer made the suitability
determination; and (b) confirms that the broker or dealer received a signed, written agreement from the investor prior to the
transaction. Generally, brokers may be less willing to execute transactions in securities subject to the “penny stock”
rules. If our Common Stock is or becomes subject to the “penny stock” rules, it may be more difficult for investors
to dispose of our common stock and cause a decline in the market value of our common stock.
Disclosure
also has to be made about the risks of investing in penny stocks in both public offerings and in secondary trading and about commissions
payable to both the broker or dealer and the registered representative, current quotations for the securities and the rights and
remedies available to an investor in cases of fraud in penny stock transactions. Finally, monthly statements have to be sent disclosing
recent price information for the penny stock held in the account and information on the limited market in penny stocks.
Future
capital raises may dilute our existing stockholders’ ownership and/or have other adverse effects on our operations.
If
we raise additional capital by issuing equity securities, our existing stockholders’ percentage ownership may decrease,
and these stockholders may experience substantial dilution. If we raise additional funds by issuing debt instruments, these debt
instruments could impose significant restrictions on our operations, including liens on our assets. If we raise additional funds
through collaborations and licensing arrangements, we may be required to relinquish some rights to our technologies or products,
or to grant licenses on terms that are not favorable to us or could diminish the rights of our stockholders.
Risks
Related to our Business
The
COVID-19 pandemic has adversely impacted, and poses risks to, our business, results of operations and financial condition, the
nature and extent of which are highly uncertain and unpredictable.
The
global spread of COVID-19 is having, and will continue to have, an adverse impact on our operations, sales and delivery and supply
chains. Many countries including the United States have implemented measures such as quarantine, shelter-in-place, curfew,
travel restrictions and similar isolation measures, including government orders and other restrictions on the conduct of business
operations. It remains uncertain what impact the pandemic will have on our ability to generate sales and customer interest
even once conditions begin to improve. The COVID-19 pandemic has also impacted our supply chain as we have experienced disruptions
or delays in shipments of certain materials or components of our products. Prices of our supplies have also increased as
a result of the pandemic. Accordingly, COVID-19 has negatively affected our business. Given the rapid and evolving nature of the
virus, it is uncertain how materially COVID-19 will affect our operations generally if these impacts persist, worsen or re-emerge
over an extended period of time.
Additionally,
the COVID-19 pandemic caused significant volatility and uncertainty in U.S. and international markets, which may result
in a prolonged economic downturn. A disruption of financial markets may reduce our ability to access capital and increase the
cost of doing so. There are no assurances that the credit markets or the capital markets will be available to us in the
future or that financing will be available.
We
cannot reasonably estimate the length or severity of the COVID-19 pandemic or the related response, or the extent to
which the disruption may continue to impact our business, financial position, results of operations and cash flows. Ultimately,
the COVID-19 pandemic could have a material adverse impact on our business, financial position, results of operations
and cash flows.
We
may not be able to continue operating as a going concern.
We
have experienced losses from operations since inception and have never generated positive cash flow. The success of our business
plan during the next 12 months and beyond will be contingent upon generating sufficient revenue to cover our operating costs and
obtaining additional financing. The report from our independent registered public accounting firm for the fiscal year ended April
30, 2020 includes an explanatory paragraph stating the Company has recurring net losses from operations, negative operating cash
flows, does not yet generate revenue from operations and will need additional working capital for ongoing operations These factors,
among others, raise substantial doubt about the Company's ability to continue as a going concern. If we are unable to obtain sufficient
funding, our business, prospects, financial condition and results of operations will be materially and adversely affected and
we may be unable to continue as a going concern.
We
have incurred net losses since inception.
We
have accumulated net losses of approximately $3.0 million as of July 31, 2020. These losses have had an adverse effect on our
financial condition, stockholders’ equity, net current assets, and working capital. We will need to generate higher revenues
and control operating costs in order to attain profitability. There can be no assurances that we will be able to do so or to reach
profitability.
We
will need additional capital to fund our expanding operations, and if we are not able to obtain sufficient capital, we may be
forced to limit the scope of our operations.
We
expect that our planned expansion of business activities will require additional working capital. Rotor Riot’s e-commerce
platform business operating at www.rotorriot.com has not attained profitability. The planned release of our first software product,
DroneBox, will require working capital to finish product development, support its market release, and provide technical customer
support upon its commercial release. We plan to offer DroneBox under a software-as-a-service (“SAAS”) platform which
may require a higher number of customers in order to reach profitability. There can be no assurance that either or both of our
operating businesses will reach profitability.
If
adequate additional debt and/or equity financing is not available on reasonable terms or at all, then we may not be able to continue
to develop our business activities, and we will have to modify our business plan. These factors could have a material adverse
effect on our future operating results and our financial condition.
If
we are unable to raise needed additional funds to continue as a going concern, we could be forced to cease our business activities
and dissolve. In such an event, we may incur additional financial obligations, including the accelerated maturity of debt obligations,
lease termination fees, employee severance payments, and other creditor and dissolution-related obligations.
Our
ability to raise financing through sales of equity securities depends on general market conditions and the demand for our common
stock. We may be unable to raise adequate capital through sales of equity securities, and if our stock has a low market price
at the time of such sales, our existing stockholders could experience substantial dilution. If adequate financing is not available
or unavailable on acceptable terms, we may find we are unable to fund expansion, continue offering products and services, take
advantage of acquisition opportunities, develop or enhance services or products, or to respond to competitive pressures in the
industry which may jeopardize our ability to continue operations.
We
operate in an emerging and rapidly growing industry which makes it difficult to evaluate our business and future prospects.
The
drone industry is relatively new and is growing rapidly. As a result, it is difficult to evaluate our business and future prospects.
We cannot accurately predict whether, and even when, demand for our products will increase, if at all. The risks, uncertainties
and challenges encountered by companies operating in emerging and rapidly growing industries include:
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Generating sufficient revenue to cover operating costs and sustain operations;
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Acquiring and maintaining market share;
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Attracting and retaining qualified personnel, especially engineers with the requisite technical skills;
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Successfully developing and commercially marketing new products:
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Accessing the capital markets to raise additional capital, on reasonable terms, if and when required to sustain operations or
to grow the business.
The
drone industry is subject to various laws and government regulations which could complicate and delay our ability to introduce
products, maintain compliance, and avoid violations, which could lead to increased costs or the interruption of normal business
operations that could negatively impact our financial condition and results of operations.
The
drone industry is subject to various laws and government regulations which could complicate and delay our ability to introduce
products, maintain compliance, and avoid violations, which could lead to increased costs or the interruption of normal business
operations that could negatively impact our financial condition and results of operations.
We
operate in the drone industry which is a highly regulated environment in the US and international markets. Federal, state and
local governmental entities and foreign governments may regulate aspects of the industry, including the production or distribution
of our products, software or services. These regulations may include accounting standards, taxation requirements (including changes
in applicable income tax rates, new tax laws and revised tax law interpretations), product safety and other safety standards,
trade restrictions, regulations regarding financial matters, environmental regulations, products directed toward children or hobbyists,
and other administrative and regulatory restrictions. While we endeavor to take all the steps necessary to comply with these laws
and regulations, there can be no assurance that we can maintain compliance on a continuing basis. Failure to comply could result
in monetary liabilities and other sanctions which could increase our costs or decrease our revenue resulting in a negative impact
on our business, financial condition and results of operations.
We
face competition from larger companies that have substantially greater resources which challenges our ability to establish market
share, grow the business, and reach profitability.
The
drone industry is attracting a wide range of significantly larger companies which have substantially greater financial, management,
research and marketing resources than we have. These competitors include transportation companies like United Parcel Service,
Federal Express and Amazon, as well as defense companies such as Lockheed Martin Corporation and Northrop Grumman Corporation.
Our competitors may be able to provide customers with different or greater capabilities than we can provide, including technical
qualifications, pricing, and key technical support. Many of our competitors may utilize their greater resources to develop competing
products and technologies, leverage their financial strength to utilize economies of scale and offer lower pricing, and hire more
qualified personnel by offering more generous compensation packages. In order to secure contracts, we may have to offer comparable
products and services at lower pricing which could adversely affect our operating margins. Our inability to compete effectively
against these larger companies could have a material adverse effect on our business, financial condition and operating results.
We
may not be able to keep pace with technological advances.
The
drone industry in general, and the software and hardware industries in particular, continue to undergo significant changes, primarily
due to technological developments. Because of the rapid growth of technology, shifting consumer tastes and the popularity and
availability of other forms of activities, it is impossible to predict the overall effect these factors could have on potential
revenue from, and profitability of, software and hardware or training directed to the drone industry. It is impossible to predict
the overall effect these factors could have on our ability to compete effectively in a changing market, and if we are not able
to keep pace with these technological advances, then our revenues, profitability and results from operations may be materially
adversely affected.
We
may not be able to successfully release and sell our software solutions.
Our
first software product, DroneBox, is presently in beta testing in order to identify any operating issues and to secure user feedback
on its features, including both those presently part of the software and those that might be added to enhance the product. While
we expect to commercially release DroneBox by the end of 2020, there are numerous risks that could prevent us from attaining this
timeline. To date, the FAA has not issued any formal rules and regulations regarding software applications used by drones. However,
it could decide to issue formal rules and regulations which could delay the release of DroneBox or cause us to withdraw it from
the market. It is possible that we may not be able to comply with any rules and regulations issued by the FAA.
DroneBox
will compete against software solutions which are already available in the marketplace. These include competing products offered
by Airdata, a small company, and Skyward which is owned by Verizon. We plan to include features in DroneBox that we believe will
provide a competitive advantage. These include (i) flight analyzation and replay, (ii) an embedded, encrypted ticket system, and
(iii) live support assistance. However, users may not perceive our enhancements as providing added value and may determine not
to migrate to DroneBox. In addition, Verizon could provide sales and marketing support to Skyward that could distract users and
cause them not to focus on the enhanced features provided by DroneBox. These risks could adversely impact the number of users
that subscribe to DroneBox and have a material adverse impact on our operating results.
If
critical components used to assemble our products become scarce or unavailable, then we may incur delays in fulfilling sales orders
which could adversely impact our business.
We
obtain components for our drones from a limited number of suppliers. Most of these components are sourced from China which has
been engaged in a trade war with the United States over the past few years. We do not have a long term agreement with these suppliers
that obligates them to sell components to us. Our reliance on these suppliers entails significant risks and uncertainties, including
whether these suppliers will provide an adequate quantity of components, at a reasonable price, and on a timely basis. While there
are options to purchase certain components from suppliers based in the United States, we would be forced to pay higher prices
which would adversely impact our gross margin and operating results. Our operating results could be materially, adversely impacted
if our suppliers do not provide the critical components used to assemble our products on a timely basis, at a reasonable price,
and in sufficient quantities.
Our
results of operations may fluctuate from period to period which could cause volatility in our stock price.
Results
of operations for any company developing untested technology can be expected to fluctuate until the products are in the market
and could fluctuate thereafter even when products are in the marketplace. There is significant lead time in developing software
and manufacturing hardware. Unanticipated delays can adversely impact the release of software products and drone-related equipment
into the marketplace. Revenues generated through our e-commerce site have been growing but could be adversely impacted if a lack
of working capital limits our ability to purchase new items for sale. We cannot predict with certainty when our first software
analytics product will be released commercially and what level of sales will be generated.
Our
results of operations depend significantly upon the appeal of our content to our customers, the timing of releases of our products
and the commercial success of our products, none of which can be predicted with certainty. Accordingly, our revenues and results
of operations may fluctuate from period to period. The results of one period may not be indicative of the results of any
future period. Any quarterly fluctuations that we report in the future may not match the expectations of market analysts and investors. This
could cause the price of our common stock to fluctuate significantly.
The
loss of key personnel may adversely affect our business.
Our
success greatly depends on the performance of our executive management team, including Jeffrey Thompson, our Chief Executive Officer,
who has significant experience raising capital for emerging technology companies. In addition, Chad Kapper, our Chief Marketing
Officer and Drew Camden, President of Rotor Riot, have significant experience in the drone industry and are recognized as experts
in the FPV sector of the drone industry which is a core focus of our e*commerce store. None of our executives have employment
agreements or provisions that would restrict or prohibit them from competing with us. As a result, any of these individuals could
terminate their employment and immediately compete against us. The loss of the services of any member of our executive management
team or other key persons could have a material adverse effect on our business, results of operations and financial condition.
Litigation
could harm our business or otherwise distract management.
Substantial,
complex or extended litigation could cause us to incur large expenditures and could distract management. For example, lawsuits
by licensors, consumers, employees or stockholders or litigation with federal, state or local governments or regulatory bodies
could be very costly and disrupt business. While disputes from time to time are not uncommon, we may not be able to resolve such
disputes on terms favorable to us which could have a material, adverse impact on our results of operations and financial condition.
If
we fail to protect our intellectual property rights, we could lose our ability to compete in the marketplace.
Our
intellectual property and proprietary rights are important to our ability to remain competitive and for the success of our products
and our business. Patent protection can be limited and not all intellectual property is or can be patented. We may rely on a combination
of patent, trademark, copyright, and trade secret laws as well as confidentiality agreements and procedures and other contractual
provisions to protect our intellectual property, other proprietary rights and our brand. We have little protection when we must
rely on trade secrets and confidentiality/nondisclosure agreements. Our intellectual property rights may be challenged, invalidated
or circumvented by third parties. We may not be able to prevent the unauthorized disclosure or use of our technical knowledge
or other trade secrets by employees or competitors. Furthermore, our competitors may independently develop technologies and products
that are substantially equivalent or superior to our technologies and/or products, which could result in decreased revenues for
us. Moreover, the laws of foreign countries may not protect our intellectual property rights to the same extent as the laws of
the U.S. Litigation may be necessary to enforce our intellectual property rights, which could result in substantial costs to us
and substantial diversion of management attention. If we do not adequately protect our intellectual property, our competitors
could use it to enhance their products. Our inability to adequately protect our intellectual property rights could adversely affect
our business and financial condition and the value of our brand and other intangible assets.
If
we fail to protect our intellectual property rights, our ability to pursue the development of our technologies and products would
be negatively affected.
Our
success will depend in part on our ability to obtain patents and maintain adequate protection of our intellectual property and
technologies. Some foreign countries lack rules and methods for defending intellectual property rights and do not protect proprietary
rights to the same extent as the United States. We have not filed for any patent protection rights outside the United States,
and many companies have had difficulty protecting their proprietary rights in foreign countries. We may not be able to prevent
misappropriation of our proprietary rights.
The
patent process is subject to numerous risks and uncertainties and there can be no assurance that we will be successful in protecting
our technologies by obtaining and enforcing patents. These risks and uncertainties include the following: patents that may be
issued or licensed may be challenged, invalidated, or circumvented, or otherwise may not provide any competitive advantage; our
competitors, many of which have substantially greater resources than us and many of which have made significant investments in
competing technologies, may seek, or may already have obtained, patents that will limit, interfere with, or eliminate our ability
to make, use, and license our technologies either in the United States or in international markets; there may be significant pressure
on the United States government and other international governmental bodies to limit the scope of patent protection both inside
and outside the United States for technologies that prove successful as a matter of public policy regarding security concerns;
countries other than the United States may have less restrictive patent laws than those upheld by United States courts, allowing
foreign competitors the ability to exploit these laws to create, develop, and market competing products.
Moreover,
any patents issued to us may not provide us with meaningful protection, or others may challenge, circumvent or narrow our patents.
Third parties may also independently develop technologies similar to ours or design around any patents on our technologies.
In
addition, the USPTO and patent offices in other jurisdictions have often required that patent applications concerning software
inventions be limited or narrowed substantially to cover only the specific innovations exemplified in the patent application,
thereby limiting the scope of protection against competitive challenges. Thus, even if we or our licensors are able to obtain
patents, the patents may be substantially narrower than anticipated.
Our
success depends on our patents, patent applications that may be licensed exclusively to us, and other patents to which we may
obtain assignment or licenses. We may not be aware, however, of all patents, published applications, or published literature that
may affect our business by blocking our ability to commercialize our products, by preventing the patentability of future products
or services to us or our licensors, or by covering the same or similar technologies that may invalidate our patents, limit the
scope of our future patent claims or adversely affect our ability to market our products and services.
In
addition to patents, we rely on a combination of trade secrets, confidentiality, nondisclosure and other contractual provisions,
and security measures to protect our confidential and proprietary information. These measures may not adequately protect our trade
secrets or other proprietary information. If they do not adequately protect our rights, third parties could use our technology,
and we could lose any competitive advantage we may have. In addition, others may independently develop similar proprietary information
or techniques or otherwise gain access to our trade secrets, which could impair any competitive advantage we may have.
Patent
protection and other intellectual property protection are crucial to the success of our business and prospects, and there is a
substantial risk that such protections will prove inadequate.
Other
companies may claim that we infringe their intellectual property, which could materially increase our costs and harm our ability
to generate future revenue and profit.
While
we are not aware that our technologies infringe the proprietary rights of any third party, we do not regularly conduct freedom
to operate searches. Claims of infringement are becoming increasingly common and third parties may assert infringement claims
against us. A number of companies, including competing companies, are actively developing extensive patent portfolios on aerial
drones. These companies include big players like Amazon, Google, IBM, Qualcomm, Verizon, Walmart, Boeing, Lockheed Martin, SZ
DJI, as well as a variety of smaller companies, universities and startups. It may be difficult or impossible to identify, prior
to receipt of notice from a third party, the trade secrets, patent position or other intellectual property rights of a third party,
either in the United States or in foreign jurisdictions. Any such assertion may result in litigation or may require us to obtain
a license for or otherwise restrict our use of the intellectual property rights of third parties. If we are required to obtain
licenses to use any third-party technology, we would have to pay royalties, which may significantly reduce any profit on our products.
In addition, any such litigation could be expensive and disruptive to our ability to generate revenue or enter into new market
opportunities. If any of our products are found to infringe other parties’ proprietary rights and we are unable to
come to terms regarding a license with such parties, we may be forced to modify our products to make them non-infringing or to
cease production of such products altogether.
The
nature of our business involves significant risks and uncertainties that may not be covered by insurance or indemnity.
We
develop and sell products where insurance or indemnification may not be available, including:
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Designing
and developing products using advanced and unproven technologies and drones; and
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Designing
and developing products to collect, distribute and analyze various types of information.
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Failure
of certain of our products could result in loss of life or property damage. Certain products may raise questions with respect
to issues of civil liberties, intellectual property, trespass, conversion and similar concepts, which may raise new legal issues.
Indemnification to cover potential claims or liabilities resulting from a failure of technologies developed or deployed may be available
in certain circumstances, but not in others. We do not and are not able to maintain insurance to protect against our risks and
uncertainties. Substantial claims resulting from an accident, failure of our product, or liability arising from our products in
excess of any indemnity or insurance coverage (or for which indemnity or insurance is not available or was not obtained) could
harm our financial condition, cash flows, and operating results. Any accident, even if fully covered or insured, could negatively
affect our reputation among our customers and the public, and make it more difficult for us to compete effectively.
Risks
Related to Our Planned Fat Shark Acquisition
Fat
Shark operates in a highly competitive market and the size, resources and brand name of some of its competitors may allow
them to compete more effectively than Fat Shark can, which could result in a loss of market share and a decrease in
revenue and profitability.
The
market for head-worn display devices, including FPV HMDs, is highly competitive. Further, we expect competition to intensify in
the future as existing competitors introduce new and more competitive offerings alongside their existing products, and as new
market entrants introduce new products into our markets. We compete against established, well-known diversified consumer electronics
manufacturers such as Samsung Electronics Co., Sony Corporation, LG Electronics (LGE), HTC, Lenovo, and large software and other
products companies such as Alphabet Inc. (Google), Microsoft Corporation, Facebook and Snap. In the FPV drone market we compete
with additional established, well-known manufacturers such as Epson, Yuneec, Boscam, Eachine, Walkera, SkyZone, MicroLED and DJI.
Many of our current competitors have substantial market share, diversified product lines, well-established supply and distribution
systems, strong worldwide brand recognition and greater financial, marketing, research and development and other resources than
we do. In addition, many of our existing and potential competitors enjoy substantial competitive advantages, such as:
• longer
operating histories;
• the
capacity to leverage their sales efforts and marketing expenditures across a broader portfolio of products;
• broader
distribution and established relationships with channel partners;
• access
to larger established customer bases and known branding;
• greater
resources to fund research and development and to make acquisitions;
• larger
intellectual property portfolios; and
• the
ability to bundle competitive offerings with other products and services.
Moreover,
smartphones, tablets, and new wearable devices with ever growing larger video display screens and computing power have significantly
improved the mobile personal computing experience. In the future, the manufacturers of these devices, such as Apple Inc., Samsung,
LGE, Lenovo, Google/Fitbit, Snap, Garmin, Facebook, Microsoft and others may design or develop products similar to ours. In addition
to competition or potential competition from large, established companies, new companies may emerge and offer competitive products.
Increased competition may result in pricing pressures and reduced profit margins and may impede our ability to increase the sales
of our products, any of which could substantially harm our business and results of operations.
Fat
Shark’s lack of long-term purchase orders and commitments from customers may lead to a rapid decline in
sales.
All
customers issue purchase orders solely at their own discretion, often shortly before the requested date of shipment. Customers are generally able to cancel orders (without penalty) or delay the delivery of products on relatively short notice.
In addition, current customers may decide not to purchase products for any reason. If those customers do not continue
to purchase products, sales volume could decline rapidly with little or no warning.
Fat
Shark cannot rely on long-term purchase orders or commitments to protect from the negative financial effects of a decline in
demand for products and typically plans production and inventory levels based on internal forecasts of customer demand, which
are highly unpredictable and can fluctuate substantially. Customers give rolling forecasts and issue purchase orders but they
have options to reschedule or pay cancellation fees. The uncertainty of product orders makes it difficult to forecast sales
and allocate resources in a manner consistent with actual sales. Moreover, expense levels and the amounts invested in capital
equipment and new product development costs are based in part on expectations of future sales and, if expectations regarding
future sales are inaccurate, Fat Shark may be unable to reduce costs in a timely manner to adjust for sales shortfalls. As a
result of lack of long-term purchase orders and purchase commitments, Fat Shark may experience a rapid decline in
sales.
As
a result of these and other factors, investors should not rely on Fat Shark revenues and operating results for any one
quarter or year as an indication of future revenues or operating results. If quarterly revenues or results of
operations fall below expectations of investors or public market analysts, the price of the common stock could fall
substantially.
If
Fat Shark does not effectively maintain and further develop sales channels for products, including developing and
supporting retail sales channel, value added resellers (VARs) and distributors, its business could be
harmed.
Fat
Shark depends upon effective sales channels in reaching the customers who are the ultimate purchasers of HMD products and
primarily sell products either from in-house sales teams directly to retail outlets such as hobby shops or through
websites and VARs.
Distributors,
third-party online resellers and VARs generally offer products from several different manufacturers. Accordingly, Fat Shark
is at risk that these distributors, resellers and VARs may give higher priority to selling other companies’ products.
If Fat Shark were to lose the services of a distributor, online reseller, or VAR, they might need to find another in that
area, and there can be no assurance of the ability to do so in a timely manner or on favorable terms. Further, resellers and
distributors can at times build inventories in anticipation of future sales, and if such sales do not occur as rapidly as
they anticipate, resellers and distributors will decrease the size of their future product orders. Fat Shark is also subject
to the risks of distributors, resellers and VARs encountering financial difficulties, which could impede their effectiveness
and also expose Fat Shark to financial risk, for example if they are unable to pay for the products they purchase or ongoing disruptions in business, for example from natural disasters or the effects of COVID-19. Any reduction in sales by
current distributors or VARs, loss of key distributors and VARs or decrease in revenue from distributors and VARs
could adversely affect Fat Shark’s revenue, operating results, and financial condition.
Future growth and profitability may be adversely affected if marketing initiatives are not effective in generating sufficient
levels of brand awareness.
Our
future growth and profitability will depend in large part upon the effectiveness and efficiency of our marketing efforts, including
our ability to:
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create
awareness of brands and products;
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convert
consumer awareness into actual product purchases;
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effectively manage marketing costs (including creative and media)
in order to maintain acceptable operating margins and return on marketing investment; and
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successfully
offer to sell products or license technology to third-party companies for sale.
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Planned
marketing expenditures are unknown and may not result in increased total sales or generate sufficient levels of product and
brand name awareness. Fat Shark may not be able to manage marketing expenditures on a cost-effective basis.
Fat
Shark products require ongoing research and development and may experience technical problems or delays, which could lead
the business to fail.
Fat
Shark’s research and development efforts remain subject to all of the risks associated with the development of new
products based on emerging and innovative technologies, including, for example, unexpected technical problems or the possible
insufficiency of funds for completing development of these products. If technical problems or delays arise, further
improvements in products and the introduction of future products could be adversely impacted, and Fat Shark could incur
significant additional expenses and the business may fail.
Fat
Shark depends on advances in technology by other companies and if those advances do not materialize, some anticipated
new products could be delayed or cancelled.
We
rely on and will continue to rely on components of our products (including micro-display panels organic light-emitting diode
(“OLED”) and liquid crystal (“LC”) displays) for our goggle displays, transmitters and cameras) that
are developed and produced by other companies. The commercial success of certain of our planned future products will depend
in part on advances in these and other technologies by other companies. We may, from time to time, contract with and support
companies developing key technologies in order to accelerate the development of such products for our specific uses. Such
activities might not result in useful technologies or components for us.
If
Fat Shark fails to keep pace with changing technologies or is unable to anticipate customer preferences, business and
results of operations may be materially adversely affected.
Rapidly
changing customer requirements, evolving technologies and industry standards characterize the consumer electronics,
wearables, and display industries. To achieve these goals, Fat Shark needs to enhance existing products and develop and
market new products that keep pace with continuing changes in industry standards, requirements, and customer
preferences.
Fat
Shark’s success depends on our ability to originate new products and to identify product trends as well as to
anticipate and react to changing customer demands in a timely manner. If are unable to introduce new products or novel
technologies in a timely manner or new products or technologies are not accepted by customers, Fat Shark’s competitors
may introduce more attractive products, which could hurt Fat Shark’s competitive position. New products might not
receive customer acceptance if customer preferences shift to other products, and future success depends in part on the
ability to anticipate and respond to these changes. Failure to anticipate and respond in a timely manner to changing customer
preferences could lead to, among other things, lower revenue and excess inventory levels.
If
HMD’s and pilot gear do not gain greater acceptance in the marketplace, the business strategy may fail.
The
planned acquisition of Fat Shark is based upon the acceptance of HMD wearables for FPV control of drones and the continuation
of the attractiveness of that method for piloting drones. Fat Shark has experienced declining revenues over the past several
years and such trend may continue or accelerate. Advances in other technologies may overcome their current market limitations
and permit them to remain or become more attractive technologies for FPV applications, which could limit the potential market
for our products and cause our business strategy to fail. If end-users fail to accept HMDs in the numbers we anticipate or as
soon as we anticipate, the sales of our FPV products and our results of operations would be adversely affected and our
business strategy may fail.
There
are a number of competing providers of micro-display-based personal display technology, including HMDs, and we may fail to capture
a substantial portion of the FPV personal wearable display market.
In
addition to competing with other HMD manufacturers and distributors for FPV displays, we also compete with micro-display-based
personal display technologies that have been developed by other companies. Numerous start-up companies have announced their intentions
to offer HMD products and developer kits in the near future. Further, industry blogs have speculated that companies such as Apple
may offer HMDs in the near future.
Most
of our competitors have greater financial, marketing, distribution, and technical resources than we do. Moreover, our competitors
may succeed in developing new micro-display-based personal display technologies and products that are more affordable or have
more desirable features than our technology. If our products are unable to capture a reasonable portion of the HMD market, our
business strategy may fail.
Fat
Shark’s and our business and products are subject to government regulation and may incur additional compliance costs
or, if we fail to comply with applicable regulations, may incur fines or be forced to suspend or cease
operations.
In
our current business and as we expand into new markets and product categories, we must comply with a wide variety of laws, regulations,
standards and other requirements governing, among other things, electrical safety, wireless emissions, health and safety, e-commerce,
consumer protection, export and import requirements, hazardous materials usage, product-related energy consumption, packaging,
recycling and environmental matters. Compliance with these laws, regulations, standards, and other requirements may be onerous
and expensive, and they may be inconsistent from jurisdiction to jurisdiction (including from country to country), further increasing
the cost of compliance and doing business. Our products may require regulatory approvals or satisfaction of other regulatory concerns
in the various jurisdictions in which they are manufactured, sold or both. These requirements create procurement and design challenges
that require us to incur additional costs identifying suppliers and manufacturers who can obtain and produce compliant materials,
parts and products. Failure to comply with such requirements can subject us to liability, additional costs, and reputational harm
and, in extreme cases, force us to recall products or prevent us from selling our products in certain jurisdictions. If there
is a new regulation, or change to an existing regulation, that significantly increases our costs of manufacturing or causes us
to significantly alter the way that we manufacture our products, this would have a material adverse effect on our business, financial
condition and results of operations. Additionally, while we have implemented policies and procedures designed to ensure compliance
with applicable laws and regulations, there can be no assurance that our employees, contractors, and agents will not violate such
laws and regulations or our policies and procedures.
Our
products must comply with certain requirements of the U.S. Federal Communications Commission (“FCC”) regulating electromagnetic
radiation in order to be sold in the United States and with comparable requirements of the regulatory authorities of the
European Union (“EU”), Japan, China and other jurisdictions in order to be sold in those jurisdictions. Our FPV products include
wireless radios and receivers which require additional emission testing. We are also subject to various environmental laws
and governmental regulations related to toxic, volatile, and other hazardous chemicals used in the third-party components
incorporated into our products, including the Restriction of Certain Hazardous Substances Directive, or RoHS and the EU Waste
Electrical and Electronic Equipment Directive, or the WEEE Directive, as well as the implementing legislation of the EU
member states. This directive restricts the distribution of products within the EU that exceed very low maximum concentration
amounts of certain substances, including lead. Similar laws and regulations have been passed or are pending in China, Japan,
and numerous countries around the world and may be enacted in other regions, including in the United States, and we are, or
may in the future be, subject to these laws and regulations.
From
time to time, our products are subject to new domestic and international requirements. Compliance with regulations enacted in
the future could substantially increase our cost of doing business or otherwise have a material adverse effect on our results
of operations and our business. Any inability by us to comply with regulations in the future could result in the imposition of
fines or in the suspension or cessation of our operations or sales in the applicable jurisdictions. Any such inability by us to
comply with regulations may also result in our not being permitted, or limit our ability, to ship our products which would adversely
affect our revenue and ability to achieve or maintain profitability.
Although
we have encourage our contract manufacturers and major component suppliers to comply with the supply chain transparency requirements,
such as the RoHS Directive, we cannot provide assurance that our manufacturers and suppliers consistently comply with these requirements.
In addition, if there are changes to these or other laws (or their interpretation) or if new related laws are passed in other
jurisdictions, we may be required to re-engineer our products to use components compatible with these regulations. This re-engineering
and component substitution could result in additional costs to us or disrupt our operations or logistics.
The
WEEE Directive requires electronic goods producers to be responsible for the collection, recycling and treatment of such products.
Changes in interpretation of the directive may cause us to incur costs or have additional regulatory requirements to meet in the
future in order to comply with this directive, or with any similar laws adopted in other jurisdictions. Our failure to comply
with past, present, and future similar laws could result in reduced sales of our products, substantial product inventory write-offs,
reputational damage, penalties and other sanctions, which could harm our business and financial condition. We also expect that
our products will be affected by new environmental laws and regulations on an ongoing basis. To date, our expenditures for environmental
compliance have not had a material impact on our results of operations or cash flows and, although we cannot predict the future
impact of such laws or regulations, they will likely result in additional costs and may increase penalties associated with violations
or require us to change the content of our products or how they are manufactured, which could have a material adverse effect on
our business and financial condition.
Product
quality issues and a higher-than-expected number of warranty claims or returns could harm our business and operating results.
The
products that we sell could contain defects in design or manufacture. Defects could also occur in the products or components that
are supplied to us. There can be no assurance we will be able to detect and remedy all defects in the hardware and software we
sell, which could result in product recalls, product redesign efforts, loss of revenue, reputational damage and significant warranty
and other remediation expenses. Similar to other mobile and consumer electronics, our products have a risk of overheating in the
course of usage or upon malfunction. Any such defect could result in harm to property or in personal injury. If we determine that
a product does not meet product quality standards or may contain a defect, the launch of such product could be delayed until we
remedy the quality issue or defect. The costs associated with any protracted delay necessary to remedy a quality issue or defect
in a new product could be substantial.
We
generally provide a one-year warranty on all of our products, except in certain European countries where it can be two years for
some consumer-focused products. The occurrence of any material defects in our products could expose us to liability for damages
and warranty claims in excess of our current reserves, and we could incur significant costs to correct any defects, warranty claims
or other problems. In addition, if any of our product designs are defective or are alleged to be defective, we may be required
to participate in a recall campaign. In part due to the terms of our warranty policy, any failure rate of our products that exceeds
our expectations may result in unanticipated losses. Any negative publicity related to the perceived quality of our products could
affect our brand image and decrease retailer, distributor and consumer confidence and demand, which could adversely affect our
operating results and financial condition. Further, accidental damage coverage and extended warranties are regulated in the United
States at the state level and are treated differently within each state. Additionally, outside of the United States, regulations
for extended warranties and accidental damage vary from country to country. Changes in interpretation of the regulations concerning
extended warranties and accidental damage coverage on a federal, state, local or international level may cause us to incur costs
or have additional regulatory requirements to meet in the future in order to continue to offer our support services. Our failure
to comply with past, present and future similar laws could result in reduced sales of our products, reputational damage, penalties
and other sanctions, which could harm our business and financial condition.
Regulations
related to conflict minerals may cause Fat Shark to incur additional expenses and could limit the supply and increase the
costs of certain materials used in the manufacturing of products.
As
a public company, we are subject to requirements under the Dodd-Frank Wall Street Reform and Consumer Protection Act of 2010,
or the Dodd-Frank Act, that require us to determine, disclose and report whether or not our products contain conflict minerals.
These requirements could adversely affect the sourcing, availability and pricing of the materials used in the manufacture of components
used in our products. We also may face reputational harm if we determine that certain of our products
contain minerals not determined to be conflict free or if we are unable to alter our products, processes, or sources of supply
to avoid such materials.
Our
products will likely experience declining unit prices and we may not be able to offset that decline with production cost decreases
or higher unit sales.
In
the markets in which we compete, prices of established consumer electronics, displays, personal computers, and mobile products
tend to decline significantly over time or as new enhanced versions are introduced, frequently every 12 to 24 months. In order
to maintain adequate product profit margins over the long term, we believe that we will need to continuously develop product enhancements
and new technologies that will either slow price declines of our products or reduce the cost of producing and delivering our products.
While we anticipate many opportunities to reduce production costs over time, we may not be able to reduce our component costs.
We expect to attempt to offset the anticipated decrease in our average selling price by introducing new products, increasing our
sales volumes or adjusting our product mix. If we fail to do so, our results of operations will be materially and adversely affected.
Fat
Shark’s products could infringe on the intellectual property rights of others.
Companies
in the consumer electronics, wireless communications, semiconductor, IT, and display industries steadfastly pursue and protect
intellectual property rights, often times resulting in considerable and costly litigation to determine the validity of patents
and claims by third parties of infringement of patents or other intellectual property rights. Our products could be found to infringe
on the intellectual property rights of others. Other companies may hold or obtain patents or inventions or other proprietary rights
in technology necessary for our business. Periodically, other companies inquire about our products and technology in their attempts
to assess whether we violate their intellectual property rights. If we are forced to defend against infringement claims, we may
face costly litigation, diversion of technical and management personnel, and product shipment delays, even if the allegations
of infringement are unwarranted. If there is a successful claim of infringement against us and we are unable to develop non-infringing
technology or license the infringed or similar technology on a timely basis, or if we are required to cease using one or more
of our business or product names due to a successful trademark infringement claim against us, it could adversely affect our business.
Fat
Shark’s intellectual property rights and proprietary rights may not adequately protect our products.
Fat
Shark’s commercial success will depend substantially on the ability to obtain patents and other intellectual property
rights and maintain adequate legal protection for products in the United States and other countries. We will be able to
protect our intellectual property from unauthorized use by third parties only to the extent that these assets are covered by
valid and enforceable patents, trademarks, copyrights or other intellectual property rights, or are effectively maintained as
trade secrets. As of the date of this filing, we have 10 issued and 6 pending U.S. and foreign patent applications. We apply
for patents covering our products, services, technologies, and designs, as we deem appropriate. We may fail to apply for
patents on important products, services, technologies or designs in a timely fashion, or at all. We do not know whether any
of our patent applications will result in the issuance of any patents. Even if patents are issued, they may not be sufficient
to protect our products, services, technologies, or designs. Our existing and future patents may not be sufficiently broad to
prevent others from developing competing products, services technologies, or designs. Intellectual property protection and
patent rights outside of the United States are even less predictable. As a result, the validity and enforceability of patents
cannot be predicted with certainty. Moreover, we cannot be certain whether:
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we
were the first to conceive, reduce to practice, invent, or file the inventions covered
by each of our issued patents and pending patent applications;
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others
will independently develop similar or alternative products, technologies, services or
designs or duplicate any of our products, technologies, services or designs;
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any
patents issued to us will provide us with any competitive advantages, or will be challenged
by third parties;
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we
will develop additional proprietary products, services, technologies or designs that
are patentable; or
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the
patents of others will have an adverse effect on our business.
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The
patents we own or license and those that may be issued to us in the future may be challenged, invalidated, rendered unenforceable
or circumvented, and the rights granted under any issued patents may not provide us with proprietary protection or competitive
advantages. Moreover, third parties could practice our inventions in territories where we do not have patent protection or in
territories where they could obtain a compulsory license to our technology where patented. Such third parties may then try to
import products made using our inventions into the United States or other territories. We cannot ensure that any of our pending
patent applications will result in issued patents, or even if issued, predict the breadth, validity and enforceability of the
claims upheld in our and other companies’ patents.
Unauthorized
parties may attempt to copy or otherwise use aspects of our processes and products that we regard as proprietary. Policing unauthorized
use of our proprietary information and technology is difficult and can be costly, and our efforts to do so may not prevent misappropriation
of our technologies. We may become engaged in litigation to protect or enforce our patent and other intellectual property rights
or in International Trade Commission proceedings to abate the importation of goods that would compete unfairly with our products
and, if unsuccessful, these actions could result in the loss of patent or other intellectual property rights protection for the
key technologies on which our business strategy depends.
We
rely in part on unpatented proprietary technology, and others may independently develop the same or similar technology or otherwise
obtain access to our unpatented technology. We require employees, contractors, consultants, financial advisors, suppliers, and
strategic partners to enter into confidentiality and intellectual property assignment agreements (as appropriate), but these agreements
may not provide sufficient protection for our trade secrets, know-how or other proprietary information.
The
laws of certain countries do not protect intellectual property and proprietary rights to the same extent as the laws of the United
States and, therefore, in certain jurisdictions, we may be unable to protect our products, services, technologies and designs
adequately against unauthorized third-party copying, infringement or use, which could adversely affect our competitive position.
To protect or enforce our intellectual property rights, we may initiate proceedings or litigation against third parties. Such
proceedings or litigation may be necessary to protect our trade secrets or know-how, products, technologies, designs, brands,
reputation, likeness, authorship works or other intellectual property rights. Such proceedings or litigation also may be necessary
to determine the enforceability, scope and validity of the proprietary rights of others. Any proceedings or lawsuits that we initiate
could be expensive, take significant time and divert management’s attention from other business concerns. Additionally,
we may provoke third parties to assert claims against us, which could invalidate or narrow the scope of our own intellectual property
rights. We may not prevail in any proceedings or lawsuits that we initiate and the damages or other remedies awarded, if any,
may be commercially valuable. The occurrence of any of these events may adversely affect our business, financial condition and
operating results.
We
have registered and applied to register certain of our trademarks in several jurisdictions worldwide. In some jurisdictions where
we have applied to register our trademarks, other applications or registrations exist for the same, similar, or otherwise related
products or services. If we are not successful in arguing that there is no likelihood of confusion between our marks and the marks
that are the subject of the other applications or registrations owned by third parties, our applications may be denied, preventing
us from obtaining trademark registrations and adequate protection for our marks in the relevant jurisdictions, which could impact
our ability to build our brand identity and market our products and services in those jurisdictions. Whether or not our application
is denied, third parties may claim that our trademarks infringe their rights. As a result, we could be forced to pay significant
settlement costs or cease the use of these trademarks and associated elements of our brand in the United States or other jurisdictions.
Even
in those jurisdictions where we are able to register our trademarks, competitors may adopt or apply to register similar trademarks
to ours, may register domain names that mimic ours or incorporate our trademarks, or may purchase keywords that are identical
or confusingly similar to our brand names as terms in Internet search engine advertising programs, which could impede our ability
to build our brand identity and lead to confusion among potential customers of our products and services. If we are not successful
in proving that we have prior rights in our marks and arguing that there is a likelihood of confusion between our marks and the
marks of these third parties, our inability to prevent these third parties from using may negatively impact the strength, value
and effectiveness of our brand names and our ability to market our products and prevent consumer confusion.
If
we lose our rights under our third-party technology licenses, our operations could be adversely affected.
Our
business depends in part on technology rights and software licensed from third parties. We could lose our exclusivity or other
rights to use the technology under our licenses if we fail to comply with the terms and performance requirements of the licenses.
In addition, certain licensors may terminate a license upon our breach and have the right to consent to sublicense arrangements.
If we were to lose our rights under any of these licenses, or if we were unable to obtain required consents to future sublicenses,
we could lose a competitive advantage in the market, and may even lose the ability to commercialize certain products or technologies
completely. Either of these results could substantially decrease our revenues.
Fat
Shark’s business depends in part on access to third-party platforms or technologies, and if the access is withdrawn,
denied, or is not available on terms acceptable, or if the platforms or technologies change without notice, business and operating results could be adversely affected.
With
the growth of mobile devices and personal voice assistants, cloud services and artificial intelligence (“AI”), the number of
supporting platforms has grown, and with it the complexity and increased need for us to have business and contractual
relationships with the platform owners in order to produce products compatible with these platforms and enable access to and
use of these platforms with our products. Our product strategy includes current and future products designed for use with
third-party platforms or software, such as iPhone, Android phones, Google Assistant and Amazon Alexa, as well as gaming
platforms. Our business in these categories relies on our access to the platforms of third parties, some of whom are our
competitors. Platform owners that are competitors may limit or decline access to their platforms, and in any case have a
competitive advantage in designing products for their own platforms and may produce products that work better, or are
perceived to work better, than our products in connection with those platforms. As we expand the number of platforms and
software applications with which our products are compatible, we may not be successful in launching products for those
platforms or software applications and/or we may not be successful in establishing strong relationships with the new platform
or software owners, which could negatively impact our ability to develop and produce high-quality products on a timely basis
for those platforms and software applications. We may otherwise fail to navigate various new relationships, which could
adversely affect our relationships with existing platform or software owners.
Our
access to third-party platforms may also require paying a royalty or licensing fee, which lowers our product margins or may otherwise
be on terms that are not acceptable to us. In addition, the third-party platforms or technologies used to interact with our product
portfolio can be delayed in production or can change without prior notice to us, which can result in our having excess inventory,
lower margins, or customer support issues.
If
we are unable to access third-party platforms or technologies, or if our access is withdrawn, denied, or is not available on terms
acceptable to us, or if the platforms or technologies are delayed or change without notice to us, our business and operating results
could be adversely affected.
If
Fat Shark’s customers are not satisfied with our technical support, firmware or software updates on some products, they
may choose not to purchase Fat Shark’s products, which would adversely impact business and operating
results.
Our
business relies, in part, on our customers’ satisfaction with the technical support, firmware, software and security updates
we provide to support our products. If we fail to provide technical support services and necessary updates that are responsive,
satisfy our customers’ expectations and resolve issues that they encounter with our products, customers may choose not to
purchase additional products and we may face brand and reputational harm, which could adversely affect our operating results.
Our
use of open source software could negatively affect our ability to sell our products and could subject us to possible litigation.
We
incorporate open source software into our products. Open source software is generally licensed by its authors or other third parties
under open source licenses. Some of these licenses contain requirements that we make available source code for modifications or
derivative works we create based upon the open source software, and that we license such modifications or derivative works under
the terms of a particular open source license or other license granting third parties certain rights of further use. Additionally,
if a third-party software provider has incorporated open source software into software that we license from such provider, we
could be required to disclose any of our source code that incorporates or is a modification of our licensed software. If an author
or other third-party that distributes open source software that we use or license were to allege that we had not complied with
the conditions of the applicable license, we could be required to incur significant legal expenses defending against those allegations
and could be subject to significant damages, enjoined from offering or selling our products that contained the open source software
and be required to comply with the foregoing conditions. Any of the foregoing could disrupt and harm our business and financial
condition.
Our
dependence on sales to VARs, resellers, and distributors increases the risks of managing our supply chain and may result in excess
inventory or inventory shortages.
The
majority of our various reseller relationships for our HMD products and their accessories could involve them taking inventory
positions and reselling to multiple customers. Under some typical distributor relationships, we would not recognize revenue until
the distributors sell the product to their end user customers and receive payment thereon; however, at this time we do not currently
enter into these types of arrangements. Our distributor and VAR relationships may reduce our ability to forecast sales and increase
risks to our business. Since our distributors and VARs would act as intermediaries between us and the end user customers or resellers,
we would be required to rely on our distributors to accurately report inventory levels and production forecasts. This may require
us to manage a more complex supply chain and monitor the financial condition and credit worthiness of our distributors and VARs
and their major end user customers. Our failure to manage one or more of these risks could result in excess inventory or shortages
that could adversely impact our operating results and financial condition.
Our
operating results may be adversely impacted by worldwide political, economic and public health uncertainties and specific conditions
in the markets we address.
Any
worsening of global economic, financial, or public health conditions, including global pandemics, could materially adversely affect
(i) our ability to raise, or the terms of needed capital; (ii) demand for our current and future products; and (iii) the supply
of components for our products. We cannot predict the timing, strength, or duration of any economic slowdown or subsequent economic
recovery, worldwide, or in the display industry.
Our
results of operations may suffer if we are not able to successfully manage our increasing exposure to foreign exchange rate risks.
A
substantial majority of our sales and cost of components are denominated in U.S. dollars. As our business grows, both our sales
and production costs may increasingly be denominated in other currencies. Where such sales or production costs are denominated
in other currencies, they are converted to U.S. dollars for the purpose of calculating any sales or costs to us. Our sales may
decrease as a result of any appreciation of the U.S. dollar against these other currencies.
The
majority of our current expenditures are incurred in U.S. dollars and many of our components come from countries that currently
peg their currency against the U.S. dollar. If the pegged exchange rates change adversely or are allowed to float up, additional
U.S. dollars will be required to fund our purchases of these components.
Although
we do not currently enter into currency option contracts or engage in other hedging activities, we may do so in the future. There
is no assurance that we will undertake any such hedging activities or that, if we do so, they will be successful in reducing the
risks to us of our exposure to foreign currency fluctuations.
Due
to our significant level of international operations, including the use of foreign contract manufactures, we are subject to international
operational, financial, legal, political and public health risks which could harm our operating results.
A
substantial part of our operations, including manufacturing of certain components used in our products, are outside of the United
States and many of our customers and suppliers have some or all of their operations in countries other than the United States.
Risks associated with our doing business outside of the United States include:
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compliance
burdens and costs with a wide variety of foreign laws and regulations, particularly labor,
environmental and other laws and regulations that govern our operations in those countries;
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legal
uncertainties regarding foreign taxes, tariffs, border taxes, quotas, export controls,
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export
licenses, import controls and other trade barriers;
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economic
instability and high levels of inflation in the countries of our suppliers and
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customers,
particularly in the Asia-Pacific region, causing delays or reductions in orders for their
products and therefore our sales;
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political
or public health instability, including global pandemics, in the countries in which
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changes
or volatility in currency exchange rates;
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difficulties
in collecting accounts receivable and longer accounts receivable payment cycles; and
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Any
of these factors could harm our own, our suppliers’ and our customers’ international
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operations
and businesses and impair our and/or their ability to continue expanding into international
markets.
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We
could be adversely affected by violations of the U.S. Foreign Corrupt Practices Act, the U.K. Bribery Act or similar anti-bribery
laws in other jurisdictions in which we operate.
The
global nature of our business and the significance of our international revenue create various domestic and local regulatory challenges
and subject us to risks associated with our international operations. We operate in areas of the world that experience corruption
by government officials to some degree and, in certain circumstances, compliance with anti-bribery and anticorruption laws may
conflict with local customs and practices. Our global operations require us to import and export to and from several countries,
which geographically expands our compliance obligations. In addition, changes in such laws could result in increased regulatory
requirements and compliance costs which could adversely affect our business, financial condition, and results of operations.
The
U.S. Foreign Corrupt Practices Act (FCPA), the U.K. Bribery Act 2010 (U.K. Bribery Act), and similar anti-bribery and anticorruption
laws in other jurisdictions generally prohibit U.S.-based companies and their intermediaries from making improper payments to
non-U.S. officials for the purpose of obtaining or retaining business, directing business to another, or securing an advantage.
In addition, U.S. public companies are required to maintain records that accurately and fairly represent their transactions and
have an adequate system of internal accounting controls. Under the FCPA, U.S. companies may be held liable for the corrupt actions
taken by directors, officers, employees, agents, or other strategic or local partners or representatives. As such, if we or our
intermediaries fail to comply with the requirements of the FCPA or similar legislation, governmental authorities in the United
States and elsewhere could seek to impose substantial civil and/or criminal fines and penalties which could have a material adverse
effect on our business, reputation, operating results and financial condition.
We
are subject to governmental export and import controls and economic sanctions laws that could subject us to liability and impair
our ability to compete in international markets.
The
U.S. and various foreign governments have imposed controls, export license requirements and restrictions on the import or export
of some technologies. Our products are subject to U.S. export controls, including the Commerce Department’s Export Administration
Regulations and various economic and trade sanctions regulations established by the Treasury Department’s Office of Foreign
Assets Controls, and exports of our products must be made in compliance with these laws. Furthermore, U.S. export control laws
and economic sanctions prohibit the provision of products and services to countries, governments, and persons targeted by U.S.
sanctions. Even though we take precautions to prevent our products from being provided to targets of U.S. sanctions, our products,
including our firmware updates, could be provided to those targets or provided by our customers despite such precautions. Any
such provision could have negative consequences, including government investigations, penalties, and reputational harm. Our failure
to obtain required import or export approval for our products could harm our international and domestic sales and adversely affect
our revenue.
If
significant tariffs or other restrictions are placed and maintained on Chinese imports or any related counter-measures are taken
by China, our revenue and results of operations may be materially harmed.
If
significant tariffs or other restrictions are placed on Chinese imports or any related counter-measures are taken by China, our
revenue and results of operations may be materially harmed. In July 2018, the Trump Administration introduced a list of thousands
of categories of goods that begun facing tariffs of 10%, which may be increased to 25% in 2019 if a new trade deal with China
is not concluded. These tariffs currently affect some of our products and we may be required to raise our prices on those products
due to the tariffs, which may result in a loss of customers and harm our operating performance. If the existing tariffs are expanded
or interpreted by a court or governmental agency to apply to any of our other products, we may be required to raise our prices
on those products, which may further result in a loss of customers and harm our operating performance. It is possible further
tariffs will be imposed on imports of our products, or that our business will be impacted by retaliatory trade measures taken
by China or other countries in response to existing or future tariffs, causing us to raise prices or make changes to our operations,
any of which could materially harm our revenue or operating results.
Changes
in trade policy in the United States and other countries, including changes in trade agreements and the imposition of tariffs
and the resulting consequences, may have adverse impacts on our business, results of operations and financial condition.
The
U.S. government has indicated and demonstrated its intent to alter its approach to international trade policy through the renegotiation,
and potential termination, of certain existing bilateral or multilateral trade agreements and treaties with, and the imposition
of tariffs on a wide range of products and other goods from, China, countries in EMEA and other countries. Given our manufacturing
in those countries, and our lack of manufacturing elsewhere, policy changes in the United States or other countries, such as the
tariffs already proposed, implemented, and threatened, present particular risks for us. Tariffs already announced and implemented
are having an adverse effect on certain of our products, tariffs announced but not yet implemented may have an adverse effect
on many of our products, and threatened tariffs could adversely affect more or all of our products. There are also risks associated
with retaliatory tariffs and resulting trade wars. We cannot predict future trade policy, the terms of any renegotiated trade
agreements or treaties, or tariffs and their impact on our business. A trade war could have a significant adverse effect on world
trade and the world economy. To the extent that trade tariffs and other restrictions imposed by the United States or other countries
increase the price of, or limit the amount of, our products or components or materials used in our products imported into the
United States or other countries, or create adverse tax consequences, the sales, cost or gross margin of our products may be adversely
affected and the demand from our customers for products and services may be diminished. Uncertainty surrounding international
trade policy and disputes and protectionist measures could also have an adverse effect on consumer confidence and spending. If
we deem it necessary to alter all or a portion of our activities or operations in response to such policies, agreements or tariffs,
our capital and operating costs may increase. Our ongoing efforts to address these risks may not be effective and may have long-term
adverse effects on our operations and operating results that we may not be able to reverse. Such efforts may also take time to
implement or to have an effect, and may result in adverse quarterly financial results or fluctuations in our quarterly financial
results. As a result, changes in international trade policy, changes in trade agreements and tariffs could adversely affect our
business, results of operations and financial condition.
Any
significant disruption to ecommerce business could result in lost sales.
Our
sales through ecommerce channels have been growing. Sales through rotorriot.com, and in the future, fatshark.com and our
related web stores generally have higher profit margins than sales through resellers, and distributors. Online sales are
subject to a number of risks. System interruptions or delays could cause potential customers to fail to purchase our products
and could harm our brand. The operation of our direct to consumer ecommerce business depends on our ability to maintain the
efficient and uninterrupted operation of online order-taking and fulfillment operations. Our ecommerce operations subject us
to certain risks that could have an adverse effect on our operating results, including risks related to the computer systems
that operate our website and related support systems, such as system failures, viruses, denial of services attacks, computer
hackers and similar disruptions. If we are unable to continually add software and hardware, effectively upgrade our systems
and network infrastructure and take other steps to improve the efficiency of our systems, system interruptions or delays
could occur that would adversely affect our operating results.
We
utilize third-party vendors for our customer-facing ecommerce technology, portions of our order management system and fulfillment
internationally. We depend on our technology vendors to manage “up-time” of the front-end ecommerce store, manage
the intake of our orders, and export orders for fulfillment. Any failure on the part of our third-party ecommerce vendors or in
our ability to transition third-party services effectively could result in lost sales and harm our business.
We
may collect, store, process and use our customers’ personally identifiable information and other data, which subjects us
to governmental regulation and other legal obligations related to privacy, information security and data protection. Any cybersecurity
breaches or our actual or perceived failure to comply with such legal obligations by us, or by our third-party service providers
or partners, could harm our business.
We
may collect, store, process and use our customers’ personally identifiable information and other data in our transactions
with them, and we rely on third parties that are not directly under our control to do so as well. While we take reasonable measures
intended to protect the security, integrity and confidentiality of the personal information and other sensitive information we
collect, store or transmit, we cannot guarantee that inadvertent or unauthorized use or disclosure will not occur, or that third
parties will not gain unauthorized access to this information. While our privacy policies currently prohibit such activities,
our third-party service providers or partners may engage in such activity without our knowledge or consent. If we or our third-
party service providers were to experience a breach, disruption or failure of systems compromising our customers’ data,
or if one of our third-party service providers or partners were to access our customers’ personal data without our authorization,
our brand and reputation could be adversely affected, use of our products could decrease and we could be exposed to a risk of
loss, litigation and regulatory proceedings.
Regulatory
scrutiny of privacy, data collection, use of data and data protection is intensifying globally, and the personal information and
other data we collect, store, process and use is increasingly subject to legislation and regulations in numerous jurisdictions
around the world, especially in Europe. These laws often develop in ways we cannot predict and may materially increase our cost
of doing business, particularly as we expand the nature and types of products we offer. For example, the General Data Protection
Regulation (the "GDPR"), which came into effect in the EU in May 2018 and superseded prior EU data protection legislation,
imposes more stringent data protection requirements and provides for greater penalties for noncompliance.
Further,
data protection legislation is also becoming increasingly common in the United States at both the federal and state level. For
example, in June 2018, the State of California enacted the California Consumer Privacy Act of 2018 (the "CCPA"), which
went into effect on January 1, 2020. The CCPA requires companies that process information on California residents to make new
disclosures to consumers about their data collection, use and sharing practices, allows consumers to opt out of certain data sharing
with third parties and provides a new cause of action for data breaches. Additionally, the Federal Trade Commission and many state
attorneys general are interpreting federal and state consumer protection laws to impose standards for the online collection, use,
dissemination and security of data. The burdens imposed by the CCPA and other similar laws that may be enacted at the federal
and state level may require us to modify our data processing practices and policies and/or to incur substantial expenditures in
order to comply.
Cybersecurity
risks could adversely affect our business and disrupt our operations.
The
threats to network and data security are increasingly diverse and sophisticated. Despite our efforts and processes to prevent
breaches, our devices, as well as our servers, computer systems, and those of third parties that we use in our operations are
vulnerable to cybersecurity risks, including cyber-attacks such as viruses and worms, phishing attacks, denial-of-service attacks,
physical or electronic break-ins, employee theft or misuse, and similar disruptions from unauthorized tampering with our servers
and computer systems or those of third parties that we use in our operations, which could lead to interruptions, delays, loss
of critical data, unauthorized access to user data, and loss of consumer confidence. In addition, we may be the target of email
scams that attempt to acquire personal information or company assets. Despite our efforts to create security barriers to such
threats, we may not be able to entirely mitigate these risks. Any cyber-attack that attempts to obtain our or our users’
data and assets, disrupt our service, or otherwise access our systems, or those of third parties we use, if successful, could
adversely affect our business, operating results, and financial condition, be expensive to remedy, and damage our reputation.
In addition, any such breaches may result in negative publicity, adversely affect our brand, decrease demand for our products
and services, and adversely affect our operating results and financial condition.
We
may lose the services of key management personnel and may not be able to attract and retain other necessary personnel.
Changes
in our management could have an adverse effect on our business, and in particular while our staff is relatively small with under
25 employees, we are dependent upon the active participation of several key management personnel, including Jeffrey Thompson,
our founder, President and Chief Executive Officer, Chad Kapper, Rotor Riot’s founder and Chief Executive Officer, Greg
French, Fat Shark’s founder and Chief Technology Officer, and Allan Evans, Fat Shark’s Chief Executive Officer. Each
of these executives are critical to the strategic direction and overall management of our company as well as our manufacturing,
and research and development process. The loss of any of them could adversely affect our business, financial condition, and operating
results. We do not carry key person life insurance on any of our senior management or other key personnel. Greg French, the founder
of Fat Shark on whom we expect to continue to rely, is a Canadian citizen, and has his principal residence in China and is tied
by family relationship to Fat Shark’s principal manufacturing supplier and Allan Evans is a citizen of and resides in the
Cayman Islands where Fat Shark and its subsidiaries are domiciled. If either becomes unable to legally or efficiently travel to
or from work in the United States, China or elsewhere where there is dependence on the manufacturing supply chain, their ability
to perform some of their duties could be materially adversely affected.
We
will need to hire and retain highly skilled technical personnel as employees and as independent contractors in order to develop
our products and grow our business. The competition for highly skilled technical, managerial, and other personnel is at times
intense. Our recruiting and retention success is substantially dependent upon our ability to offer competitive salaries and benefits
to our employees. We must compete with companies that possess greater financial and other resources than we do and that may be
more attractive to potential employees and contractors. To be competitive, we may have to increase the compensation, bonuses,
stock options and other fringe benefits we offer to employees in order to attract and retain such personnel. The costs of retaining
or attracting new personnel may have a material adverse effect on our business and operating results. If we fail to attract and
retain the technical and managerial personnel required to be successful, our business, operating results and financial condition
could be materially adversely affected.
We
may acquire other businesses or receive offers to be acquired, which could require significant management attention, disrupt our
business, dilute stockholder value and adversely affect our operating results.
As
part of our business strategy, we may make investments in complementary businesses, products, services, or technologies. We have
not made any material acquisitions to date other than Rotor Riot and the acquisition of Fat Shark and, as a result, our ability
as an organization to successfully acquire and integrate other companies, products, services or technologies is unproven. We may
not be able to find suitable acquisition candidates and we may not be able to complete acquisitions on favorable terms, if at
all. If we do complete acquisitions, we may not ultimately strengthen our competitive position or achieve our goals, and any acquisitions
we complete could be viewed negatively by customers or investors. In addition, if we fail to successfully integrate such acquisitions,
or the technologies associated with such acquisitions, into our company, the revenue and operating results of the combined company
could be adversely affected. Any integration process will require significant time and resources, and we may not be able to manage
the process successfully. We may not successfully evaluate or utilize the acquired technology and accurately forecast the financial
impact of an acquisition transaction, including accounting charges. We may have to pay cash, incur debt or issue equity securities
to pay for any such acquisition, each of which could affect our financial condition or the value of our capital stock. The sale
of equity or issuance of debt to finance any such acquisitions could result in dilution to our stockholders. The incurrence of
indebtedness would result in increased fixed obligations and could also include covenants or other restrictions that would impede
our ability to manage our operations. Additionally, we may receive indications of interest from other parties interested in acquiring
some or all of our business. The time required to evaluate such indications of interest could require significant attention from
management, disrupt the ordinary functioning of our business and adversely affect our operating results.
Our
failure to effectively manage growth could harm our business.
We
intend to expand the number and types of products we sell. We will need to replace and regularly introduce on a timely basis new
products and technologies, enhance existing products, and effectively stimulate customer demand for new products and upgraded
or enhanced versions of our existing products.
The
replacement and expansion of our products places a significant strain on our management, operations and engineering resources.
Specifically, the areas that are strained most by these activities include the following:
|
•
|
New
Product Launches: With the changes in and growth of our product portfolio, we
will experience increased complexity in coordinating product development, manufacturing,
and shipping. As this complexity increases, it places a strain on our ability to accurately
coordinate the commercial launch of our products with adequate supply to meet anticipated
customer demand and effectively market to stimulate demand and market acceptance. We
have experienced delays in the past. If we are unable to scale and improve our product
launch coordination, we could frustrate our customers and lose possible retail shelf
space and product sales;
|
|
•
|
Existing
Products Impacted by New Introductions: The introduction of new products or product
enhancements may shorten the life cycle of our existing products, or replace sales of
some of our current products, thereby offsetting the benefit of even a successful product
introduction and may cause customers to defer purchasing our existing products in anticipation
of the new products and potentially lead to challenges in managing inventory of existing
products. We may also provide price protection to some of our retailers as a result of
our new product introductions and reduce the prices of existing products. If we fail
to effectively manage new product introductions, our revenue and profitability may be
harmed; and
|
|
•
|
Forecasting,
Planning and Supply Chain Logistics: With the changes in and growth of our product
portfolio, we will experience increased complexity in forecasting customer demand, in
planning for production, and in transportation and logistics management. If we are unable
to scale and improve our forecasting, planning, production, and logistics management,
we could frustrate our customers, lose product sales or accumulate excess inventory.
|
Our
facilities and information systems and those of our key suppliers could be damaged as a result of disasters or unpredictable events,
which could have an adverse effect on our business operations.
Fat
Shark operates the majority of its business from one location in George Town, Grand Cayman, Cayman Islands and Rotor Riot operates
the majority of its business from one location in Orlando, Florida. The corporate headquarters of the Company is located in San
Juan, Puerto Rico. We also rely on third-party manufacturing plants in the US and Asia and third-party logistics, sales and marketing
facilities elsewhere in other parts of the world to provide key components for our products and services. If major disasters such
as earthquakes, hurricanes, tropical storms pandemics, fires, floods, wars, terrorist attacks, computer viruses, transportation
disasters or other events occur in any of these locations, or the effect of climate change on any of these factors or our locations,
or our information systems or communications network or those of any of our key component suppliers breaks down or operates improperly
as a result of such events, our facilities or those of our key suppliers may be seriously damaged, and we may have to stop or
delay production and shipment of our products. We may also incur expenses relating to such damages. If production or shipment
of our products or components is stopped or delayed or if we incur any increased expenses as a result of damage to our facilities,
our business, operating results and financial condition could be materially adversely affected.
Risks
Related to HMD Manufacturing
We
do not control our contract manufacturers or suppliers or require them to comply with a formal code of conduct, and actions that
they might take could harm our reputation and sales.
We
do not control our contract manufacturers or suppliers, including their labor, environmental or other practices, or require them
to comply with a formal code of conduct. Though we may seek to conduct periodic visits to some of our contract manufacturers and
suppliers, these visits are not frequent or thorough enough to detect non-compliance with applicable laws and good industry practices.
A violation of labor, environmental or other laws by our contract manufacturers or suppliers, or a failure of these parties to
follow ethical business practices, could lead to negative publicity and harm our reputation. In addition, we may choose to seek
alternative manufacturers or suppliers if these violations or failures were to occur. Identifying and qualifying new manufacturers
or suppliers can be time consuming and we might not be able to substitute suitable alternatives in a timely manner or at an acceptable
cost. Other consumer products companies have faced significant criticism for the actions of their manufacturers and suppliers,
and we could face such criticism ourselves. Any of these events could adversely affect our brand, harm our reputation, reduce
demand for our products and harm our ability to meet demand if we need to identify alternative manufacturers or suppliers.
Our
principal manufacturer of HMDs is located in China and is owned by the wife of Fat Shark’s founder Greg French which could
create conflicts of interest.
Fat
Shark has historically made purchases and sales of products and supplies for FPV and HMD products from and sold through three
companies owned by the spouse of Greg French, Direct FPV Ltd. (China), Shenzhen FatShark Co., Ltd (China) and Zeng Linghao (China).
In light of these relationships these business activities have and may, in the future, be subject to influences and may provide
such parties with conflicts of interest and business opportunities that may not be subject to reasonable assessment and may not
be available to Fat Shark or to the Company. These persons may also face a conflict in selecting between the Fat Shark and their
other business interests. We have not formulated a policy for the resolution of such conflicts. These entities are not subject
to restrictions on competition with Fat Shark or the Company.
We
rely on third-party suppliers, some of which are sole-source suppliers, to provide components for our products which may lead
to supply shortages, long lead times for components, and supply changes, any of which could disrupt our supply chain and may increase
our costs.
Our
ability to meet customer demand depends, in part, on our ability to obtain timely and adequate delivery of components for our
products. All of the components that go into the manufacturing are sourced from third-party suppliers.
Some
of the key components used to manufacture our products come from a limited or single source of supply, or by a supplier that could
potentially become a competitor. Our contract manufacturers generally purchase these components on our behalf from approved suppliers.
We are subject to the risk of shortages and long lead times in the supply of these components and the risk that our suppliers
discontinue or modify components used in our products. In addition, the lead times associated with certain components are lengthy
and preclude rapid changes in quantities and delivery schedules. We have in the past experienced and may in the future experience
component shortages, and the availability of these components may be unpredictable.
If
we lose access to components from a particular supplier or experience a significant disruption in the supply of products and components
from a current supplier, we may be unable to locate alternative suppliers of comparable quality at an acceptable price, or at
all, and our business could be materially and adversely affected. In addition, if we experience a significant increase in demand
for our products, our suppliers might not have the capacity or elect not to meet our needs as they allocate components to other
customers. Developing suitable alternate sources of supply for these components may be time-consuming, difficult and costly, and
we may not be able to source these components on terms that are acceptable to us, or at all, which may adversely affect our ability
to meet our development requirements or to fill our orders in a timely or cost-effective manner. Identifying a suitable supplier
is an involved process that requires us to become satisfied with the supplier’s quality control, responsiveness and service,
financial stability, labor and other ethical practices, and if we seek to source materials from new suppliers, there can be no
assurance that we could do so in a manner that does not disrupt the manufacture and sale of our products.
Our
reliance on single source, or a small number of suppliers involves a number of additional risks, including risks related to supplier
capacity constraints, price increases, timely delivery, component quality, failure of a key supplier to remain in business and
adjust to market conditions, delays in, or the inability to execute on, a supplier roadmap for components and technologies; and
natural disasters, fire, acts of terrorism or other catastrophic events, including global pandemics.
We
do not currently own or operate any manufacturing facilities. Certain components and services necessary for the manufacture of
our products are available from only a limited number of sources, and other components and services are only available from a
single source. We currently purchase almost all of components for HMDs from manufacturers related by marriage to Greg French,
the Fat Shark founder. Our relationship generally is on a purchase order basis and these firms do not have a contractual obligation
to provide adequate supply or acceptable pricing to us on a long-term basis. These firms could discontinue sourcing merchandise
for us at any time. If any of these firms were to discontinue its relationship with us, or discontinue providing specific products
to us, and we are unable to contract with a new supplier that can meet our requirements, or if they or such other supplier were
to suffer a disruption in their production, we could experience disruption of our inventory flow, a decrease in sales and the
possible need to re-design our products. Any such event could disrupt our operations and have an adverse effect on our business,
financial condition and results of operations. Several new and alternative suppliers have begun offering components suitable for
use in our products. With new tooling and electronics, any one of these alternative displays could be incorporated into our products
but our costs of production could be higher, they may offer less performance, and, as a result, make our products too costly and
less desirable.
The
manufacture of HMDs encompasses several complex processes and several steps of our production processes are dependent upon certain
critical machines and tools which could result in delivery interruptions, which could adversely affect our operating results.
Our
product technology and manufacturing processes are evolving which can result in production challenges and difficulties. We may
be unable to produce our products in sufficient quantity and quality to maintain existing customers and attract new customers.
In addition, we may experience manufacturing problems which could result in delays in delivery of orders or product introductions.
Several
steps of our production processes are dependent upon certain critical machines and tools which could result in delivery interruptions
and foregone revenues.
We
currently have little equipment redundancy in manufacturing locales. If we experience any significant disruption in manufacturing
or a serious failure of a critical piece of equipment, we may be unable to supply products to our customers in a timely manner.
Interruptions in our manufacturing could be caused by equipment problems, the introduction of new equipment into the manufacturing
process or delays in the delivery of new manufacturing equipment. Lead-time for delivery, installation, testing, repair and maintenance
of manufacturing equipment can be extensive. We have experienced production interruptions in the past and no assurance can be
given that we will not lose potential sales or be able to meet production orders due to future production interruptions in our
manufacturing lines.
Our
products are subject to lengthy development cycles.
Some
HMDs are subject to lengthy product development phases. The time elapsed between initial sampling of our products, the custom
design of our products to meet specific product requirements, and the ultimate incorporation of our products into salable products
is significant, often with a duration of between one to two years. If our products fail to meet our customers’ cost, performance,
or technical requirements or if unexpected technical challenges arise in the integration of our products into consumer products,
our operating results could be significantly and adversely affected. Long delays in achieving customer qualification and incorporation
of our products also could adversely affect our business. Many HMD companies including Fat Shark are introducing digital HMDs
which could create shortages of components and provides an opportunity for companies with significantly greater resources than
us to accelerate migration to digital products in a manner or timeline which we cannot meet, which could cause us to lose market
share and harm our business and prospects.
We
depend on third parties to provide integrated circuit chip sets and other critical components for use in our products.
We
do not manufacture the integrated circuit chip sets, optics, micro-displays, backlights, projection engines, printed circuit boards
or other electronic components which are used in our products. Instead, we purchase them from third-party suppliers or rely on
third-party independent contractors for these integrated circuit chip sets and other critical components, some of which are customized
or custom made for us. We also may use third parties to assemble all or portions of our products. Some of these third-party contractors
and suppliers are small companies with limited financial resources. If any of these third-party contractors or suppliers were
unable or unwilling to supply these HMDs may decrease. As the availability of components decreases, the cost of acquiring those
components ordinarily increases. High growth product categories such as the consumer electronics and mobile phone markets have
experienced chronic shortages of components during periods of exceptionally high demand. If we do not properly anticipate the
need for or procure critical components, we may pay higher prices for those components, our gross margins may decrease and we
may be unable to meet the demands of our customers and end-users, which could reduce our competitiveness, cause a decline in our
market share and have a material adverse effect on our results of operations.
INDEX TO FINANCIAL STATEMENTS
|
Page
|
|
|
Condensed Consolidated Balance Sheets as of
July 31, 2020 and April 30, 2020
|
F-1
|
|
|
Condensed Consolidated Statements of Operations
for the three months ended July 31, 2020 and 2019
|
F-2
|
|
|
Condensed Consolidated Stockholders’ Equity
Statement for the three months ended July 31, 2020 and 2019
|
F-3
|
|
|
Condensed Consolidated Statements of Cash Flows
for the three months ended July 31, 2020 and 2019
|
F-4
|
|
|
Notes to Unaudited Condensed Consolidated Financial
Statements
|
F-5
|
|
|
Report of Independent Registered
Accounting Firm
|
F-12
|
|
|
Balance Sheets as of April 30,
2020 and 2019
|
F-13
|
|
|
Statements of Operations for the
years ended April 30, 2020 and 2019
|
F-14
|
|
|
Statements of Changes in Shareholders’
Equity for the years ended April 30, 2020 and 2019
|
F-15
|
|
|
Statements of Cash Flows for the
years ended April 30, 2020 and 2019
|
F-16
|
|
|
Notes to the Financial Statements
|
F-17
|
RED CAT HOLDINGS, INC.
|
Condensed Consolidated Balance Sheets
|
|
|
|
|
July 31,
|
|
|
|
April 30,
|
|
|
|
|
2020
|
|
|
|
2020
|
|
ASSETS
|
|
|
|
|
|
|
|
|
Current Assets
|
|
|
|
|
|
|
|
|
Cash
|
|
$
|
55,870
|
|
|
$
|
236,668
|
|
Inventory
|
|
$
|
133,634
|
|
|
$
|
78,650
|
|
Other
|
|
|
—
|
|
|
|
3,020
|
|
Total Current Assets
|
|
|
189,504
|
|
|
|
318,338
|
|
|
|
|
|
|
|
|
|
|
Goodwill
|
|
|
2,466,073
|
|
|
|
2,466,073
|
|
Trademark
|
|
|
20,000
|
|
|
|
20,000
|
|
Other
|
|
|
3,853
|
|
|
|
3,853
|
|
|
|
|
|
|
|
|
|
|
TOTAL ASSETS
|
|
$
|
2,679,430
|
|
|
$
|
2,808,264
|
|
|
|
|
|
|
|
|
|
|
LIABILITIES AND STOCKHOLDERS' EQUITY
|
|
|
|
|
|
|
|
|
Current Liabilities
|
|
|
|
|
|
|
|
|
Accounts payable
|
|
$
|
295,300
|
|
|
$
|
249,050
|
|
Accrued Expenses
|
|
|
99,783
|
|
|
|
89,342
|
|
Notes Payable
|
|
|
171,275
|
|
|
|
118,771
|
|
Due to Related Party
|
|
|
333,204
|
|
|
|
333,684
|
|
Customer deposits
|
|
|
77,053
|
|
|
|
38,419
|
|
Total Current Liabilities
|
|
|
976,615
|
|
|
|
829,266
|
|
|
|
|
|
|
|
|
|
|
Convertible debentures
|
|
|
450,000
|
|
|
|
450,000
|
|
Commitments and contingencies
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Stockholders' Equity
|
|
|
|
|
|
|
|
|
Series A Preferred Stock - shares authorized 2,200,000; outstanding 208,704
|
|
|
2,087
|
|
|
|
2,087
|
|
Series B Preferred Stock - shares authorized 4,300,000; outstanding 3,681,623
|
|
|
36,816
|
|
|
|
36,816
|
|
Common stock - shares authorized 500,000,000; outstanding 20,011,091
|
|
|
20,011
|
|
|
|
20,011
|
|
Additional paid-in capital
|
|
|
4,150,898
|
|
|
|
4,043,837
|
|
Accumulated deficit
|
|
|
(2,956,997
|
)
|
|
|
(2,573,753
|
)
|
Total Stockholders' Equity
|
|
|
1,252,815
|
|
|
|
1,528,998
|
|
TOTAL LIABILITIES AND STOCKHOLDERS' EQUITY
|
|
$
|
2,679,430
|
|
|
$
|
2,808,264
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
See accompanying notes.
|
RED CAT HOLDINGS, INC.
|
Condensed Consolidated Statements Of Operations
|
|
|
|
|
|
|
|
Three months ended July 31,
|
|
|
2020
|
|
2019
|
Revenues
|
|
$
|
548,282
|
|
|
$
|
—
|
|
|
|
|
|
|
|
|
|
|
Cost of goods sold
|
|
|
446,132
|
|
|
$
|
—
|
|
|
|
|
|
|
|
|
|
|
Gross Margin
|
|
|
102,150
|
|
|
$
|
—
|
|
|
|
|
|
|
|
|
|
|
Operating Expenses
|
|
|
|
|
|
|
|
|
Operations
|
|
|
89,033
|
|
|
|
—
|
|
Research and development
|
|
|
97,255
|
|
|
|
185,695
|
|
Sales and marketing
|
|
|
24,136
|
|
|
|
—
|
|
General and administrative
|
|
|
274,970
|
|
|
|
135,807
|
|
Total operating expenses
|
|
|
485,394
|
|
|
|
321,502
|
|
Operating loss
|
|
|
(383,244
|
)
|
|
|
(321,502
|
)
|
|
|
|
|
|
|
|
|
|
Provision for income taxes
|
|
$
|
—
|
|
|
$
|
—
|
|
|
|
|
|
|
|
|
|
|
Net loss
|
|
$
|
(383,244
|
)
|
|
$
|
(321,502
|
)
|
|
|
|
|
|
|
|
|
|
Loss per share - basic and diluted
|
|
$
|
0.02
|
|
|
$
|
0.89
|
|
|
|
|
|
|
|
|
|
|
Weighted average shares outstanding - basic and
diluted
|
|
|
20,011,091
|
|
|
|
359,715
|
|
RED CAT HOLDINGS, INC.
|
Condensed Consolidated Stockholders' Equity Statements
|
|
|
|
|
|
|
|
|
|
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, April 30, 2019
|
|
|
—
|
|
|
|
—
|
|
|
|
—
|
|
|
|
—
|
|
|
|
179,292
|
|
|
$
|
179
|
|
|
$
|
784,371
|
|
|
$
|
(971,822
|
)
|
|
$
|
(187,272
|
)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Issuance of common stock
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
15,355
|
|
|
|
15
|
|
|
|
684,685
|
|
|
|
|
|
|
|
684,699
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Share Exchange Agreement
|
|
|
2,169,068
|
|
|
|
21,691
|
|
|
|
4,212,645
|
|
|
|
42,126
|
|
|
|
196,667
|
|
|
|
197
|
|
|
|
53,740
|
|
|
|
|
|
|
|
117,754
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Conversion of Preferred Stock
|
|
|
(1,960,364
|
)
|
|
|
(19,604
|
)
|
|
|
(240,000
|
)
|
|
|
(2,400
|
)
|
|
|
16,536,164
|
|
|
|
16,536
|
|
|
|
5,467
|
|
|
|
|
|
|
|
—
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Shares Issued for Services
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
1,570
|
|
|
|
2
|
|
|
|
69,998
|
|
|
|
|
|
|
|
70,000
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Net Loss
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
(321,502
|
)
|
|
|
(321,502
|
)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Balances, July 31, 2019
|
|
|
208,704
|
|
|
|
2,087
|
|
|
|
3,972,645
|
|
|
|
39,726
|
|
|
|
16,929,048
|
|
|
|
16,929
|
|
|
|
1,598,261
|
|
|
|
(1,293,324
|
)
|
|
|
363,679
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Balances, April 30, 2020
|
|
|
208,704
|
|
|
|
2,087
|
|
|
|
3,681,623
|
|
|
|
36,816
|
|
|
|
20,011,091
|
|
|
|
20,011
|
|
|
|
4,043,837
|
|
|
|
(2,573,753
|
)
|
|
|
1,528,998
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Stock based compensation
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
107,061
|
|
|
|
|
|
|
|
107,061
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Net Loss
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
(383,244
|
)
|
|
|
(383,244
|
)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Balances, April 30, 2020
|
|
|
208,704
|
|
|
|
2,087
|
|
|
|
3,681,623
|
|
|
|
36,816
|
|
|
|
20,011,091
|
|
|
|
20,011
|
|
|
|
4,150,898
|
|
|
|
(2,956,997
|
)
|
|
|
1,252,815
|
|
RED CAT HOLDINGS, INC.
|
Condensed Consolidated Cash Flows Statements
|
|
|
|
Three months ended July 31,
|
|
|
2020
|
|
2019
|
Cash Flows from Operating Activities
|
|
|
|
|
|
|
|
|
Net loss
|
|
$
|
(383,244
|
)
|
|
$
|
(321,502
|
)
|
Stock based compensation
|
|
|
107,061
|
|
|
|
—
|
|
Adjustments to reconcile net loss to net cash from operations:
|
|
|
|
|
|
|
|
|
Changes in operating assets and liabilities
|
|
|
|
|
|
|
|
|
Inventory
|
|
|
(54,984
|
)
|
|
|
—
|
|
Other current assets
|
|
|
3,020
|
|
|
$
|
43,931
|
|
Customer deposits
|
|
|
38,634
|
|
|
|
—
|
|
Accounts payable
|
|
|
46,250
|
|
|
|
(17,024
|
)
|
Accrued expenses
|
|
|
10,441
|
|
|
$
|
96,680
|
|
Net cash used in operating activities
|
|
|
(232,822
|
)
|
|
|
(197,915
|
)
|
|
|
|
|
|
|
|
|
|
Cash Flows from Investing Activities
|
|
|
|
|
|
|
|
|
Acquired through acquisitions
|
|
|
—
|
|
|
$
|
24,704
|
|
Net cash provided by investing activities
|
|
|
—
|
|
|
$
|
24,704
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Cash Flows from Financing Activities
|
|
|
|
|
|
|
|
|
Payments under related party obligations
|
|
|
(480
|
)
|
|
|
—
|
|
Proceeds from notes payable
|
|
|
140,000
|
|
|
|
—
|
|
Payments under notes payable
|
|
|
(87,496
|
)
|
|
|
—
|
|
Net cash provided by financing activities
|
|
|
52,024
|
|
|
|
—
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Net use of Cash
|
|
|
(180,798
|
)
|
|
|
(173,211
|
)
|
Cash, beginning of period
|
|
|
236,668
|
|
|
|
503,438
|
|
Cash, end of period
|
|
$
|
55,870
|
|
|
$
|
330,227
|
|
|
|
|
|
|
|
|
|
|
Cash paid for interest and taxes
|
|
|
—
|
|
|
|
—
|
|
|
|
|
|
|
|
|
|
|
Noncash transactions
|
|
|
|
|
|
|
|
|
Common stock issued for services
|
|
|
—
|
|
|
$
|
70,000
|
|
Fair value of shares exchanged in acquisitions
|
|
|
—
|
|
|
$
|
117,754
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
See accompanying notes.
|
RED CAT HOLDINGS, INC.
NOTES TO CONDENSED CONSOLIDATED FINANCIAL
STATEMENTS
July 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.
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 volume weighted average price (“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.
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 approximately
$800,000 at July 31, 2020 and have accumulated losses totaling approximately $3 million through July 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 July 31, 2020,
we held cash of $55,870 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 July 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.
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.
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 $77,053 and $38,419 at July 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 months ended July 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 12.
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 ending in November 2020, resulting in an effective interest
rate of 16%. The balance outstanding at July 31, 2020 was $55,945.
|
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 will retain 17% of daily receipts until a total of $158,200 is retained. The balance outstanding at July 31, 2020 was
$66,107.
|
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 July 31, 2020 totaled $49,223.
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 July 31, 2020 totaled $164,260. In addition, accrued interest totaled $5,010 at July 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. The total amount assumed
was $167,939. These obligations bear interest at annual rates ranging
from 7.5% to 21.74%. The outstanding balance totaled $168,944 at July 31, 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 “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. 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 July 31, 2020 and April 30, 2020, we
had accumulated deficits of approximately $3,000,000 and $2,600,000, respectively. Deferred tax assets related to the future benefit
of these net operating losses for tax purposes totaled approximately $120,000 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 July 31, 2020 and April 30, 2020.
Note 8 – 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 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 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. 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 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 2 year period and expire
in October 2029. Options to purchase 150,000 shares 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. 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 3 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.
|
C.
|
Summary for three months ended July 31, 2020
|
Share based compensation expense
recognized in the three months ended July 31, 2020 was $107,061, of which $94,629 was included in general and administrative
expenses, $9,945 was included in research and development expenses, and $2,487 was included in operations expenses. There was no
compensation expense recognized in the three months ended July 31, 2019.
Options exercisable as of January 31, 2020 totaled 330,809. The remaining
weighted average contractual term of the options outstanding at October 31, 2019 was 8.98 years. The aggregate intrinsic value
of outstanding options, representing the excess of the stock price at July 31, 2020 of $0.99 over the exercise price of each option,
was $212,071 at July 31, 2020.
Note 12 - 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. See Note 6 for details on the terms of the transaction.
Note 13 - Subsequent Events
Subsequent events have been evaluated
through the date of this filing and there are no subsequent events which require disclosure.
Report of Independent Registered
Public Accounting Firm
To the shareholders and the board
of directors of Red Cat Holdings, Inc.
Opinion on the Financial Statements
We have audited the accompanying
consolidated balance sheets of Red Cat Holdings, Inc. as of April 30, 2020 and 2019, the related statements of operations, stockholders'
equity (deficit), and cash flows for the years then ended, and the related notes (collectively referred to as the "financial
statements"). In our opinion, the financial statements present fairly, in all material respects, the financial position of
the Company as of April 30, 2020 and 2019, and the results of its operations and its cash flows for the years then ended, in conformity
with accounting principles generally accepted in the United States.
Basis for Opinion
These financial statements are the
responsibility of the Company's management. Our responsibility is to express an opinion on the Company's financial statements based
on our audit. We are a public accounting firm registered with the Public Company Accounting Oversight Board (United States) ("PCAOB")
and are required to be independent with respect to the Company in accordance with the U.S. federal securities laws and the applicable
rules and regulations of the Securities and Exchange Commission and the PCAOB.
We conducted our audit in accordance
with the standards of the PCAOB. Those standards require that we plan and perform the audit to obtain reasonable assurance about
whether the financial statements are free of material misstatement, whether due to error or fraud. The Company is not required
to have, nor were we engaged to perform, an audit of its internal control over financial reporting. As part of our audits we are
required to obtain an understanding of internal control over financial reporting but not for the purpose of expressing an opinion
on the effectiveness of the Company’s internal control over financial reporting. Accordingly, we express no such opinion.
Our audit included performing procedures
to assess the risks of material misstatement of the financial statements, whether due to error or fraud, and performing procedures
that respond to those risks. Such procedures included examining, on a test basis, evidence regarding the amounts and disclosures
in the financial statements. Our audit also included evaluating the accounting principles used and significant estimates made by
management, as well as evaluating the overall presentation of the financial statements. We believe that our audit provides a reasonable
basis for our opinion.
Substantial Doubt about the Company’s
Ability to Continue as a Going Concern
The accompanying financial statements
have been prepared assuming that the Company will continue as a going concern. As discussed in Note 2 to the financial statements,
the Company has suffered recurring losses from operations and has a significant accumulated deficit. In addition, the Company continues
to experience negative cash flows from operations. These factors raise substantial doubt about the Company's ability to continue
as a going concern. Management's plans in regard to these matters are also described in Note 2. The financial statements do not
include any adjustments that might result from the outcome of this uncertainty.
/S/ BF Borgers CPA PC
BF Borgers CPA PC
We have served as the Company's auditor since
2020
Lakewood, CO
August 13, 2020
RED CAT HOLDINGS
|
Consolidated Balance Sheets
|
|
|
|
|
|
April
30,
|
|
|
|
April
30,
|
|
|
|
|
2020
|
|
|
|
2019
|
|
ASSETS
|
|
|
|
|
|
|
|
|
Current Assets
|
|
|
|
|
|
|
|
|
Cash
|
|
$
|
236,668
|
|
|
$
|
503,438
|
|
Inventory
|
|
$
|
78,650
|
|
|
$
|
0
|
|
Other
|
|
|
3,020
|
|
|
|
100,000
|
|
Total Current Assets
|
|
|
318,338
|
|
|
|
603,438
|
|
|
|
|
|
|
|
|
|
|
Goodwill
|
|
|
2,466,073
|
|
|
|
—
|
|
Trademark
|
|
|
20,000
|
|
|
|
—
|
|
Other
|
|
|
3,853
|
|
|
|
—
|
|
|
|
|
|
|
|
|
|
|
TOTAL ASSETS
|
|
$
|
2,808,264
|
|
|
$
|
603,438
|
|
|
|
|
|
|
|
|
|
|
LIABILITIES AND STOCKHOLDERS' EQUITY
|
|
|
|
|
|
|
|
|
Current Liabilities
|
|
|
|
|
|
|
|
|
Accounts
payable
|
|
$
|
249,050
|
|
|
$
|
20,894
|
|
Accrued
Expenses
|
|
|
89,342
|
|
|
|
15,116
|
|
Notes
Payable
|
|
|
118,771
|
|
|
|
—
|
|
Due
to Related Party
|
|
|
333,684
|
|
|
|
—
|
|
Customer
deposits
|
|
|
38,419
|
|
|
|
—
|
|
Common
shares to be issued
|
|
|
—
|
|
|
|
754,700
|
|
Total Current Liabilities
|
|
|
829,266
|
|
|
|
790,710
|
|
|
|
|
|
|
|
|
|
|
Convertible debentures
|
|
|
450,000
|
|
|
|
—
|
|
Commitments and contingencies
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Stockholders' Equity
|
|
|
|
|
|
|
|
|
Series A Preferred Stock - shares
authorized 2,200,000; outstanding 208,704 and 0
|
|
|
2,087
|
|
|
|
—
|
|
Series B Preferred Stock - shares authorized
4,300,000; outstanding 3,681,623 and 0
|
|
|
36,816
|
|
|
|
—
|
|
Common stock - shares authorized 500,000,000; outstanding 20,011,091 and 179,292
|
|
|
20,011
|
|
|
|
179
|
|
Additional paid-in capital
|
|
|
4,043,837
|
|
|
|
784,371
|
|
Accumulated
deficit
|
|
|
(2,573,753
|
)
|
|
|
(971,822
|
)
|
Total Stockholders' Equity
|
|
|
1,528,998
|
|
|
|
(187,272
|
)
|
TOTAL LIABILITIES AND STOCKHOLDERS' EQUITY
|
|
$
|
2,808,264
|
|
|
$
|
603,438
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
See accompanying notes.
|
RED CAT HOLDINGS
|
Consolidated Statements Of Operations
|
|
|
|
|
|
|
|
|
|
|
|
|
Year ended April
30,
|
|
|
2020
|
|
2019
|
Revenues
|
|
$
|
403,940
|
|
|
$
|
—
|
|
|
|
|
|
|
|
|
|
|
Cost of goods sold
|
|
|
325,379
|
|
|
$
|
—
|
|
|
|
|
|
|
|
|
|
|
Gross Margin
|
|
|
78,561
|
|
|
$
|
—
|
|
|
|
|
|
|
|
|
|
|
Operating Expenses
|
|
|
|
|
|
|
|
|
Research and development
|
|
|
488,990
|
|
|
|
366,590
|
|
General and administrative
|
|
|
1,248,717
|
|
|
|
384,742
|
|
Total operating expenses
|
|
|
1,737,707
|
|
|
|
751,332
|
|
Operating loss
|
|
|
(1,659,146
|
)
|
|
|
(751,332
|
)
|
|
|
|
|
|
|
|
|
|
Provision for income taxes
|
|
$
|
—
|
|
|
$
|
—
|
|
|
|
|
|
|
|
|
|
|
Net operating income
|
|
|
(1,659,146
|
)
|
|
|
(751,332
|
)
|
|
|
|
|
|
|
|
|
|
Other income
|
|
|
57,215
|
|
|
$
|
—
|
|
|
|
|
|
|
|
|
|
|
Net loss
|
|
$
|
(1,601,931
|
)
|
|
$
|
(751,332
|
)
|
|
|
|
|
|
|
|
|
|
Loss per share - basic and diluted
|
|
$
|
0.12
|
|
|
$
|
0.14
|
|
|
|
|
|
|
|
|
|
|
Weighted
average shares outstanding - basic and diluted
|
|
|
13,732,205
|
|
|
|
5,328,630
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
See accompanying notes.
|
RED
CAT HOLDINGS
|
Consolidated Stockholders' Equity Statements
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
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,
April 30, 2018
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
177,611
|
|
|
$
|
178
|
|
|
$
|
734,372
|
|
|
$
|
(220,490
|
)
|
|
$
|
514,060
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Issuance of common stock
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
1,681
|
|
|
|
2
|
|
|
|
49,999
|
|
|
|
|
|
|
|
50,000
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Net Loss
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
(751,332
|
)
|
|
|
(751,332
|
)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Balances, April 30,
2019
|
|
|
—
|
|
|
|
—
|
|
|
|
—
|
|
|
|
—
|
|
|
|
179,292
|
|
|
$
|
179
|
|
|
$
|
784,371
|
|
|
$
|
(971,822
|
)
|
|
$
|
(187,272
|
)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Issuance of common stock
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
15,355
|
|
|
|
15
|
|
|
|
684,186
|
|
|
|
|
|
|
|
684,200
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Share Exchange Agreement
|
|
|
2,169,068
|
|
|
|
21,691
|
|
|
|
4,212,645
|
|
|
|
42,126
|
|
|
|
196,667
|
|
|
|
197
|
|
|
|
53,740
|
|
|
|
|
|
|
|
117,754
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Conversion of Preferred
Stock
|
|
|
(1,960,364
|
)
|
|
|
(19,604
|
)
|
|
|
(531,022
|
)
|
|
|
(5,310
|
)
|
|
|
16,778,683
|
|
|
|
16,779
|
|
|
|
8,135
|
|
|
|
|
|
|
|
—
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Exercise of warrants
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
469,874
|
|
|
|
470
|
|
|
|
151,769
|
|
|
|
|
|
|
|
152,239
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Merger with Rotor Riot
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
2,219,650
|
|
|
|
2,220
|
|
|
|
1,817,893
|
|
|
|
|
|
|
|
1,820,113
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Stock based compensation
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
269,895
|
|
|
|
|
|
|
|
269,895
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Shares Issued for Services
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
151,570
|
|
|
|
152
|
|
|
|
273,848
|
|
|
|
|
|
|
|
274,000
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Net Loss
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
(1,601,931
|
)
|
|
|
(1,601,931
|
)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Balances,
April 30, 2020
|
|
|
208,704
|
|
|
$
|
2,087
|
|
|
|
3,681,623
|
|
|
$
|
36,816
|
|
|
|
20,011,091
|
|
|
|
$20,011
|
|
|
|
$4,043,837
|
|
|
$
|
(2,573,753
|
)
|
|
$
|
1,528,998
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
See accompanying
notes.
|
RED CAT HOLDINGS
|
Consolidated Cash Flows
Statements
|
|
|
|
|
Year ended April
30,
|
|
|
2020
|
|
2019
|
Cash Flows from Operating Activities
|
|
|
|
|
|
|
|
|
Net loss
|
|
$
|
(1,601,931
|
)
|
|
$
|
(751,332
|
)
|
Stock based compensation
|
|
|
269,895
|
|
|
|
0
|
|
Common stock issued for services
|
|
|
204,000
|
|
|
|
70,000
|
|
Adjustments to reconcile net loss to net cash from operations:
|
|
|
|
|
|
|
|
|
Changes in operating assets and liabilities
|
|
|
|
|
|
|
|
|
Inventory
|
|
|
48,761
|
|
|
|
—
|
|
Other current assets
|
|
|
124,979
|
|
|
|
(100,000
|
)
|
Customer deposits
|
|
|
38,419
|
|
|
|
|
|
Accounts payable
|
|
|
68,068
|
|
|
|
20,894
|
|
Accrued expense
|
|
|
36,225
|
|
|
|
7,050
|
|
Net cash used in operating activities
|
|
|
(811,584
|
)
|
|
|
(753,388
|
)
|
|
|
|
|
|
|
|
|
|
Cash Flows from Investing Activities
|
|
|
|
|
|
|
|
|
Acquired through acquisitions
|
|
|
46,327
|
|
|
|
—
|
|
Net cash provided by investing activities
|
|
|
46,327
|
|
|
|
—
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Cash Flows from Financing Activities
|
|
|
|
|
|
|
|
|
Proceeds from issuance of common stock
|
|
|
—
|
|
|
|
684,700
|
|
Capital to be returned
|
|
|
|
|
|
|
1,800
|
|
Proceeds from exercise of warrants
|
|
|
152,239
|
|
|
|
—
|
|
Proceeds from issuance of convertible debentures
|
|
|
450,000
|
|
|
|
—
|
|
Payments under related party obligations
|
|
|
(12,725
|
)
|
|
|
|
|
Payments under notes payable
|
|
|
(91,027
|
)
|
|
|
—
|
|
Net cash provided by financing activities
|
|
|
498,487
|
|
|
|
686,500
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Net use of Cash
|
|
|
(266,770
|
)
|
|
|
(66,888
|
)
|
Cash, beginning of period
|
|
|
503,438
|
|
|
|
570,326
|
|
Cash, end of period
|
|
$
|
236,668
|
|
|
$
|
503,438
|
|
|
|
|
|
|
|
|
|
|
Cash paid for interest and taxes
|
|
|
—
|
|
|
|
—
|
|
|
|
|
|
|
|
|
|
|
Noncash transactions
|
|
|
|
|
|
|
|
|
Common stock issued for services
|
|
|
204,000
|
|
|
|
70,000
|
|
Fair value of shares exchanged in acquisitions
|
|
$
|
1,937,867
|
|
|
$
|
—
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
See accompanying notes.
|
RED CAT HOLDINGS, INC.
NOTES TO CONDENSED CONSOLIDATED FINANCIAL
STATEMENTS
April 30, 2020 and 2019
Note 1 - The Business
Red
Cat Holdings, Inc. (“Red Cat” or 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, a wholly owned subsidiary, 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.
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.
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 Red Cat Holdings.
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 volume weighted average price (“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, management of Red Cat Holdings controls
the operating decisions of the combined company. Accordingly, we have accounted for the transaction as an acquisition of Rotor
Riot by Red Cat. 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.
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 (i) negative working capital of approximately
$500,000 at April 30, 2020, (ii) have generated less than $500,000 in revenues since our inception, and (iii) have accumulated
losses totaling approximately $2.6 million through April 30, 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 generally accepted accounting principles (“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 April 30, 2020,
our cash balances totaled $236,668 and was held across 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 April 30, 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 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.
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 $38,419
and $ 0 at April 30, 2020 and 2019, respectively.
Other Income – In April 2020,
the Company received $57,215 in connection with a Payment Protection Program loan issued by the Small Business Administration.
Under the terms of the loan, the full amount is eligible to be forgiven if the Company spends the funds for certain operating expenses,
including payroll costs, over a certain period of time after the issuance of the loan. The Company believes that it has complied
with the terms of the loan and that the entire amount will be forgiven. Therefore, the full amount has been recognized as Other
Income in the Statement of Operations for the fiscal year ended April 30, 2020.
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 years ended April 30, 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. 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 12.
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 ending in November 2020, resulting in an effective interest
rate of 16%. The balance outstanding at April 30, 2020 was $61,673.
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B.
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Note Payable to Shopify Capital
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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 will retain 14% of daily receipts until a total of $176,000
is retained. The balance outstanding at April 30, 2020 was $7,875.
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C.
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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. In October 2019, RDQ agreed to allow Rotor Riot to pay for $82,141 of inventory
purchases on an installment basis through June 2020. The balance outstanding at January 31, 2020 was $49,223. The Company has been
in discussions with RDQ regarding the payment of the remaining balance.
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.
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A.
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Note Payable to BRIT, LLC
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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 requires $3,500 of the principal amount to be paid monthly. 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 April 30, 2020 totaled $164,234. In addition, accrued interest totaled $2,232 at April 30, 2020.
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B.
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Obligations of BRIT, LLC
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BRIT incurred certain financial obligations
in support of the operations of Rotor Riot which the Company has agreed to assume responsibility to pay. The total amount assumed
was $167,939 which equals the balance outstanding at January 31, 2020. These obligations bear interest at annual rates ranging
from 7.5% to 21.74%. The outstanding balance of these assumed obligations totaled $72,299 at April 30, 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 “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. 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 April 30, 2020 and 2019, we had accumulated
deficits of approximately $2,600,000 and $972,000, respectively. Deferred tax assets related to the future benefit of these net
operating losses for tax purposes totaled approximately $104,000 and $39,000, 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 January 31, 2020 and April 30, 2019.
Note 8 – 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 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
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|
Series B
|
|
Common Stock
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July 2019
|
|
240,000
|
|
200,000
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November 2019
|
|
60,000
|
|
50,000
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December 2019
|
|
231,022
|
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192,519
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Note 10 - 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. 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 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.
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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 2 year period and expire
in October 2029. Options to purchase 150,000 shares 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. 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%.
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B.
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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 3 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.
Compensation expense recognized during the
year ended April 30, 2020 was 269,895, of which $213,959 was included in general and administrative expenses and $55,936 was included
in research and development expenses. There was no compensation expense recognized during the year ended April 30, 2019.
Options exercisable as of January 31, 2020
totaled 339,142. The remaining weighted average contractual term of the options outstanding at October 31, 2019 was 9.22 years.
The aggregate intrinsic value of outstanding options, representing the excess of the stock price at April 30, 2020 of $1.50 over
the exercise price of each option, was $848,283 at April 30, 2020.
Note 12 - 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.
Office Lease – We rented
space from our Chief Executive Officer during the fiscal year ended April 30, 2019 and made payments totaling $8,100.
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 6 for details on the terms of the transaction.
Note 13 - Subsequent Events
Subsequent events have been evaluated
through the date of this filing and there are no subsequent events which require disclosure.
________________
Shares of Common Stock
PROSPECTUS
,
2020