Red Cat (RCAT) - 2025 Q1 - Quarterly Report

PART I ITEM 1. Financial Statements This section presents the unaudited condensed consolidated financial statements for Red Cat Holdings, Inc., including the balance sheets, statements of operations and comprehensive income, statements of stockholders' equity, and statements of cash flows, along with detailed notes explaining significant accounting policies, business operations, divestitures, and other financial details for the period ended July 31, 2024 Condensed Consolidated Balance Sheets Presents the company's financial position, detailing assets, liabilities, and equity as of July 31, 2024, and April 30, 2024 | ASSETS/LIABILITIES | July 31, 2024 | April 30, 2024 | | :----------------- | :------------ | :------------- | | ASSETS | | | | Total current assets | $21,470,151 | $22,397,549 | | Total long-term assets | $16,485,080 | $26,140,063 | | TOTAL ASSETS | $37,955,231 | $48,537,612| | LIABILITIES & EQUITY | | | | Total current liabilities | $4,230,512 | $3,651,130 | | Total long-term liabilities | $1,269,185 | $1,321,952 | | Total stockholders' equity | $32,455,534 | $43,564,530 | | TOTAL LIABILITIES AND STOCKHOLDERS' EQUITY | $37,955,231 | $48,537,612| - Total assets decreased by approximately $10.58 million from April 30, 2024, to July 31, 2024, primarily due to a significant reduction in long-term assets[8] - Total stockholders' equity decreased by approximately $11.11 million, reflecting the net loss incurred during the period[8] Condensed Consolidated Statements of Operations and Comprehensive Income Details the company's revenues, expenses, and net loss for the three months ended July 31, 2024, and 2023 | Metric | Three Months Ended July 31, 2024 | Three Months Ended July 31, 2023 | | :---------------------------------- | :------------------------------- | :------------------------------- | | Revenues | $2,776,535 | $1,748,129 | | Cost of goods sold | $3,259,926 | $1,573,464 | | Gross (loss) profit | $(483,391) | $174,665 | | Total operating expenses | $7,244,096 | $5,506,069 | | Operating loss | $(7,727,487) | $(5,331,404) | | Other expense | $4,688,889 | $262,891 | | Net loss from continuing operations | $(12,416,376) | $(5,594,295) | | Net loss | $(12,416,376) | $(5,836,868) | | Loss per share - basic and diluted | $(0.17) | $(0.11) | - Revenues increased by 59% year-over-year, from $1,748,129 in Q1 2023 to $2,776,535 in Q1 2024[9] - The company reported a gross loss of $(483,391) in Q1 2024, a significant decrease from a gross profit of $174,665 in Q1 2023, primarily due to the delivery of final prototypes under a U.S. Army contract[9][90] - Net loss from continuing operations increased by 122% to $(12,416,376) in Q1 2024, largely driven by a $4,008,357 loss on the sale of an equity method investment and increased operating expenses[9][92] Condensed Consolidated Statements of Stockholders' Equity Outlines changes in stockholders' equity, including common stock, additional paid-in capital, and accumulated deficit | Equity Component | April 30, 2024 | July 31, 2024 | | :--------------------------------- | :------------- | :------------ | | Series B Preferred Stock Amount | $47 | $47 | | Common Stock Amount | $74,289 | $74,890 | | Additional Paid-in Capital | $124,616,305 | $125,927,705 | | Accumulated Deficit | $(81,130,732) | $(93,547,108) | | Accumulated Other Comprehensive Income (Loss) | $4,621 | $0 | | Total Equity | $43,564,530 | $32,455,534| - Total stockholders' equity decreased from $43,564,530 at April 30, 2024, to $32,455,534 at July 31, 2024, primarily due to the net loss of $12,416,376[10] - Additional paid-in capital increased by $1,311,400, mainly from stock-based compensation and vesting of restricted stock units[10] Condensed Consolidated Statements of Cash Flows Summarizes cash flows from operating, investing, and financing activities for the three months ended July 31, 2024, and 2023 | Cash Flow Activity | Three Months Ended July 31, 2024 | Three Months Ended July 31, 2023 | | :--------------------------------- | :------------------------------- | :------------------------------- | | Net cash used in operating activities of continuing operations | $(2,348,412) | $(6,926,069) | | Net cash provided by investing activities of continuing operations | $4,300,043 | $4,883,345 | | Net cash used in financing activities of continuing operations | $(286,037) | $(146,509) | | Net increase (decrease) in Cash | $1,665,594 | $(2,307,528) | | Cash, end of period | $7,732,763 | $952,777 | - Net cash used in operating activities significantly decreased by 66% to $(2,348,412) in Q1 2024, primarily due to improved timing of accounts receivable receipts for government customers[13][93] - Net cash provided by investing activities decreased by 12% to $4,300,043, with proceeds from the sale of an equity method investment ($4.4 million) being a key contributor in Q1 2024[13][95] - Cash at the end of the period increased to $7,732,763 in Q1 2024 from $952,777 in Q1 2023, reflecting a net increase of $1,665,594 during the quarter[13] Notes to Unaudited Condensed Consolidated Financial Statements Provides detailed explanations of significant accounting policies, business operations, divestitures, and other financial details Note 1 – The Business Describes Red Cat Holdings, Inc.'s focus on the drone industry, its subsidiaries, and strategic acquisitions and divestitures - Red Cat Holdings, Inc. (the 'Company') focuses on providing products, services, and solutions to the drone industry through its wholly-owned operating subsidiaries: Skypersonic, Teal Drones, and Red Cat Propware[14][7] - The Company expanded its drone business through four acquisitions since January 2020: Rotor Riot (FPV drones, Jan 2020), Fat Shark (FPV video goggles, Nov 2020), Skypersonic (GPS-denied inspection solutions, May 2021), and Teal Drones (commercial and government UAV technology, Aug 2021)[14][15] - On February 16, 2024, the Company sold its Consumer segment (Rotor Riot and Fat Shark) to Unusual Machines to focus efforts and capital on the defense sector, where it sees greater long-term shareholder value[16] - On December 11, 2023, the Company completed a public offering of 18,400,000 common stock shares, generating net proceeds of approximately $8.4 million[17] Note 2 – Summary of Significant Accounting Policies Outlines the accounting principles, restatement details, revenue recognition, and going concern assessment for interim financial reporting - The unaudited condensed consolidated financial statements are prepared in accordance with GAAP for interim financial information and Form 10-Q instructions, not including all footnotes required for complete financial statements[18] - The Company restated its Condensed Consolidated Statement of Operations and Stockholders' Equity for the three months ended July 31, 2023, to remove derivative liabilities erroneously reported from convertible note financings[19] Impact of Restatement on July 31, 2023 Financials | Metric | Originally Reported | As Restated | Change | | :------------------------------- | :------------------ | :---------- | :------- | | Change in fair value of derivative liability | $(26,520) | $0 | $(26,520) | | Net loss | $(5,810,348) | $(5,836,868) | $(26,520) | | Additional paid-in capital | $110,905,033 | $113,554,659 | $2,649,626 | | Accumulated deficit | $(60,397,141) | $(62,914,971) | $(2,517,830) | | Total equity | $49,993,398 | $50,125,194 | $131,796 | - The Consumer segment businesses (Rotor Riot and Fat Shark) are classified as discontinued operations following their sale on February 16, 2024[21][22] Revenue Disaggregation by Type | Revenue Type | Three Months Ended July 31, 2024 | Three Months Ended July 31, 2023 | | :------------- | :------------------------------- | :------------------------------- | | Contract related | $886,440 | $310,881 | | Product related | $1,890,095 | $1,437,248 | | Total | $2,776,535 | $1,748,129 | - Contract related revenue increased by 185% YoY, and product related revenue increased by 32% YoY[29] - The Company's financial results and position as of July 31, 2024, raised substantial doubt about its ability to continue as a going concern, but management concluded that recent actions (public offering, equity method investment sale, new financing) alleviate this doubt for the next twelve months[32] Note 3 – Divestiture of Consumer Segment Details the sale of the Consumer segment (Rotor Riot and Fat Shark) to Unusual Machines and the consideration received - On February 16, 2024, the Company sold its Consumer segment (Rotor Riot and Fat Shark) to Unusual Machines (UMAC) for a total consideration valued at $20 million[33] - The consideration included $1 million in cash, a $2 million secured promissory note (later adjusted to $4 million), and $17 million in UMAC securities (4,250,000 shares at $4.00/share, representing ~49% of UMAC's common stock)[33][34][35] Consumer Segment Results (Discontinued Operations) | Metric | Three Months Ended July 31, 2024 | Three Months Ended July 31, 2023 | | :-------------------------------- | :------------------------------- | :------------------------------- | | Revenues | $0 | $1,869,219 | | Cost of goods sold | $0 | $1,385,116 | | Gross Profit | $0 | $484,103 | | Total operating expenses | $0 | $703,939 | | Net loss from discontinued operations | $0 | $(242,573) | Note 4 – Inventories Provides a breakdown of inventory components, including raw materials, work-in-process, and finished goods Inventories Breakdown | Inventory Type | July 31, 2024 | April 30, 2024 | | :--------------- | :------------ | :------------- | | Raw materials | $6,863,187 | $5,750,324 | | Work-in-process | $1,622,121 | $1,289,997 | | Finished goods | $1,977,626 | $966,916 | | Total | $10,462,934 | $8,007,237 | - Total inventories increased by $2,455,697 (30.7%) from April 30, 2024, to July 31, 2024, driven by increases across all categories, particularly raw materials and finished goods[36] Note 5 – Other Current Assets Details other current assets such as prepaid expenses, prepaid inventory, contract assets, and grant receivables Other Current Assets Breakdown | Asset Type | July 31, 2024 | April 30, 2024 | | :---------------- | :------------ | :------------- | | Prepaid expenses | $2,387,937 | $1,206,306 | | Prepaid inventory | $204,742 | $602,888 | | Contract asset | $0 | $1,477,859 | | Grant receivable | $0 | $675,000 | | Total | $2,592,679 | $3,962,053 | - Other current assets decreased by $1,369,374 (34.6%) from April 30, 2024, to July 31, 2024, primarily due to the reduction of contract assets and grant receivables to zero[37] Note 6 – Intangible Assets Presents the net value of intangible assets, including proprietary technology, non-compete agreements, and brand name Intangible Assets, Net | Asset Type | Gross Value (July 31, 2024) | Accumulated Amortization (July 31, 2024) | Net Value (July 31, 2024) | Net Value (April 30, 2024) | | :------------------------ | :-------------------------- | :--------------------------------------- | :------------------------ | :------------------------- | | Proprietary technology | $4,282,001 | $(2,094,941) | $2,187,060 | $2,364,389 | | Non-compete agreements | $65,000 | $(65,000) | $0 | $0 | | Brand name | $1,430,000 | $0 | $1,430,000 | $1,430,000 | | Total intangible assets, net | $5,777,001 | $(2,159,941) | $3,617,060 | $3,794,389 | - Total intangible assets, net, decreased by $177,329 from April 30, 2024, to July 31, 2024, primarily due to amortization of proprietary technology[38] - Proprietary technology is amortized over six years, while brand name and goodwill are not amortized but evaluated for impairment quarterly[38] Note 7 – Equity Method Investment Describes the sale of the company's investment in Unusual Machines and the resulting loss recognized - On July 22, 2024, the Company sold all its securities in UMAC (Unusual Machines), including 4,250,000 shares of common stock exchanged for Series A Convertible Preferred Stock, and a $4,000,000 Note Receivable, to unaffiliated third-party purchasers for $4.4 million in cash[39] UMAC Investment Balance Changes | Event | Amount | | :------------------------------------ | :------------- | | Initial investment, February 16, 2024 | $17,000,000 | | Equity method loss | $(503,625) | | Impairment | $(11,353,875) | | Investment balance, April 30, 2024 | $5,142,500 | | Equity method loss | $(734,143) | | Sale of ownership interest | $(4,408,357) | | Investment balance, July 31, 2024 | $0 | - The Company recognized a loss on the sale of its equity method investment of $4,008,357 during the three months ended July 31, 2024[92] Note 8 – Property and Equipment Details the net carrying value of property and equipment, including equipment, leasehold improvements, and furniture Property and Equipment, Net | Asset Type | July 31, 2024 | April 30, 2024 | | :----------------------- | :------------ | :------------- | | Equipment and related | $1,609,269 | $1,540,888 | | Leasehold improvements | $1,556,139 | $1,547,976 | | Furniture and fixtures | $186,703 | $163,290 | | Accumulated depreciation | $(1,208,192) | $(911,470) | | Net carrying value | $2,143,919 | $2,340,684 | - Net carrying value of property and equipment decreased by $196,765 from April 30, 2024, to July 31, 2024, primarily due to increased accumulated depreciation[42] - Depreciation expense for the three months ended July 31, 2024, was $296,722, compared to $101,001 for the same period in 2023[42] Note 9 – Other Long-Term Assets Lists other long-term assets, primarily a SAFE agreement with Firestorm Labs and security deposits Other Long-Term Assets | Asset Type | July 31, 2024 | April 30, 2024 | | :--------------- | :------------ | :------------- | | SAFE agreement | $250,000 | $250,000 | | Security deposits | $43,126 | $43,126 | | Total | $293,126 | $293,126 | - The Company holds a $250,000 SAFE (Simple Agreement for Future Equity) agreement with Firestorm Labs, Inc., which permits participation in a future equity financing or cash/stock payments upon a change in control or public offering[47] Note 10 – Right of Use Assets and Liabilities Summarizes the company's operating lease obligations for real estate and related lease expenses - As of July 31, 2024, the Company had operating leases for real estate with remaining terms up to 6.42 years[48] Operating Lease Supplemental Information | Metric | Three Months Ended July 31, 2024 | | :----------------------------------- | :------------------------------- | | Operating cash paid to settle lease liabilities | $90,951 | | Weighted average remaining lease term (in years) | 5.93 | | Weighted average discount rate | 12% | - Operating lease expense totaled $90,288 for the three months ended July 31, 2024, an increase from $85,252 in the prior year period[48] Note 11 – Debt Obligations Outlines the company's various debt obligations and future annual principal payment commitments - The Company has several debt obligations, including a $1,670,294 loan with Decathlon Capital (balance $230,795 at July 31, 2024), a $350,000 note with Pelion (payable on demand), and financing agreements with Corporate Equity and Ascentium Capital[50][51][52][53] Future Annual Principal Payments (as of July 31, 2024) | Fiscal Year Ended | Amount | | :---------------- | :------- | | 2025 | $599,570 | | Thereafter | $0 | | Total | $599,570 | Note 12 – Common Stock Details the authorized and outstanding common stock, including changes from public offerings and warrant exercises - The Company is authorized to issue 500,000,000 shares of common stock with a par value of $0.001 per share[55] Common Stock Issued Summary | Description of Shares | Shares Issued | | :----------------------------------------------------------------------------------- | :------------ | | Shares outstanding as of April 30, 2023 | 54,568,065 | | Vesting of restricted stock (employees, Board, consultants) | 446,717 | | Conversion of preferred stock | 818,334 | | Issuance through ATM facilities | 53,235 | | Issuance through public offering | 18,400,000 | | Exercise of stock options | 3,000 | | Shares outstanding as of April 30, 2024 | 74,289,351 | | Vesting of restricted stock (employees, Board) | 293,302 | | Exercise of warrants | 307,595 | | Shares outstanding as of July 31, 2024 | 74,890,248 | - In December 2023, a public offering of 18,400,000 common stock shares generated net proceeds of approximately $8.4 million[58] Note 13 – Preferred Stock Describes the Series B Preferred Stock, its conversion terms, and outstanding shares - Series B Preferred Stock is convertible into common stock at a ratio of 0.8334 common shares for each Series B share[59] - As of July 31, 2024, 4,676 shares of Series B Stock were outstanding, convertible into 3,896 shares of common stock[59] Note 14 – Warrants Summarizes the company's outstanding warrants, their exercise prices, and activity during the period - The Company has issued various warrants with exercise prices ranging from $0.625 to $5.625 and terms up to five years[60][61] Warrants Activity Summary | Metric | April 30, 2023 | April 30, 2024 | July 31, 2024 | | :------------------------------------ | :------------- | :------------- | :------------ | | Number of Shares Outstanding | 1,539,999 | 2,275,999 | 1,821,291 | | Weighted-average Exercise Price per Share | $3.38 | $2.49 | $2.96 | | Weighted-average Remaining Contractual Term (in years) | 2.89 | 2.77 | 2.05 | | Aggregate Intrinsic Value | $0 | $0 | $389,589 | - During the period from April 30, 2024, to July 31, 2024, 454,708 warrants were exercised, reducing the outstanding number of warrants[62] Note 15 – Share Based Awards Details the company's equity incentive plan, stock options, restricted stock activity, and compensation expense - The 2019 Equity Incentive Plan allows for awards such as stock options, restricted stock, and restricted stock units, with a maximum of 11,750,000 shares issuable[64] Stock Options Activity Summary | Metric | April 30, 2023 | April 30, 2024 | July 31, 2024 | | :------------------------------------ | :------------- | :------------- | :------------ | | Shares Outstanding | 4,784,809 | 6,779,934 | 7,319,988 | | Weighted-Average Exercise Price | $1.88 | $1.46 | $1.43 | | Weighted-Average Remaining Contractual Term (years) | 8.72 | 8.02 | 7.54 | | Aggregate Intrinsic Value | $74,586 | $2,762,242 | $5,658,470 | | Exercisable Shares (July 31, 2024) | | | 4,444,723 | | Exercisable Weighted-Average Exercise Price (July 31, 2024) | | | $1.65 | | Exercisable Aggregate Intrinsic Value (July 31, 2024) | | | $3,014,807 | Restricted Stock Activity Summary | Metric | April 30, 2023 | April 30, 2024 | July 31, 2024 | | :------------------------------------ | :------------- | :------------- | :------------ | | Unvested and outstanding Shares | 781,060 | 175,130 | 2,202,599 | | Weighted Grant-Date Average Fair Value Per Share | $2.44 | $2.09 | $1.11 | Stock Compensation Expense by Functional Operating Expense | Expense Category | Three Months Ended July 31, 2024 | Three Months Ended July 31, 2023 | | :------------------------------- | :------------------------------- | :------------------------------- | | Research and development | $94,422 | $127,417 | | Sales and marketing | $116,543 | $165,309 | | General and administrative | $1,235,073 | $618,880 | | Total | $1,446,038 | $911,606 | - Total stock compensation expense increased by 59% to $1,446,038 in Q1 2024, with a significant rise in general and administrative expenses[68][91] Note 16 - Related-Party Transactions Identifies the sale of the Consumer segment to Unusual Machines as a related-party transaction - The sale of Rotor Riot and Fat Shark to Unusual Machines (UMAC) in February 2024 is considered a related-party transaction, as UMAC's CEO is a direct relative of a member of the Company's management[69] Note 17 – Commitments and Contingencies Outlines legal proceedings, specifically a complaint against Teal Drones for alleged breach of contract - The Company is involved in a legal proceeding where Autonodyne LLC filed a complaint against Teal Drones, Inc. for alleged breach of a Software Licensing Agreement, seeking $8.25 million in accelerated payments[70][116] - Management denies the claims and is asserting vigorous defenses, including a lawsuit against the complainant for Tortious Interference with Contractual Relations[70] Note 18 – Subsequent Events Reports significant events after the reporting period, including an acquisition and new financing - On September 4, 2024, the Company acquired certain assets from FlightWave Aerospace Systems Corporation for $14 million worth of the Company's common stock, payable in two tranches on September 30, 2024, and December 31, 2024[71][73] - On September 23, 2024, the Company entered into a Securities Purchase Agreement with Lind Global Asset Management X LLC for $8 million in funding, in exchange for a $9,600,000 Senior Secured Convertible Promissory Note and a Common Stock Purchase Warrant for 750,000 shares[74] - The Promissory Note does not accrue interest and is repayable in 18 monthly installments of $533,334, starting six months from issuance, with options for increased payments or conversion into common stock[75][76] ITEM 2. Management's Discussion and Analysis of Financial Condition and Results of Operations This section provides management's perspective on the Company's financial condition and operational results for the three months ended July 31, 2024, compared to the prior year. It highlights the strategic shift to the defense sector, recent acquisitions and financings, and detailed analysis of revenue, expenses, and cash flows, while also addressing liquidity and going concern issues Overview Provides an overview of Red Cat Holdings, Inc.'s business, focusing on drone products and solutions - Red Cat Holdings, Inc. is a technology company focused on developing products, services, and solutions for the drone industry through its subsidiaries Skypersonic, Teal, and Propware[79][84] - The Company expanded its drone activities through a series of acquisitions and financings since 2020, including Rotor Riot, Fat Shark, Skypersonic, and Teal Drones[80][84][85] Recent Developments Highlights key recent events, including a strategic acquisition and new funding arrangements - On September 4, 2024, the Company acquired assets from FlightWave Aerospace Systems Corporation for $14 million in common stock, focusing on long-range, AI-powered UAVs for commercial use[81][82] - On September 23, 2024, the Company secured $8 million in funding from Lind Global Asset Management X LLC, issuing a $9,600,000 Senior Secured Convertible Promissory Note and a Common Stock Purchase Warrant[83] Plan of Operations Describes the company's operational strategy, emphasizing its shift to the defense sector and core subsidiaries - The Company's primary business is providing drone products, services, and solutions through its wholly-owned subsidiaries Skypersonic, Teal, and Propware[84] - The Enterprise segment, now focused on military and government agencies, provides integrated robotic hardware and software for situational awareness and actionable intelligence, emphasizing 'Made in America' products[86][87] - The Consumer segment (Rotor Riot and Fat Shark) was divested on February 16, 2024, to concentrate capital and efforts on the defense sector for long-term shareholder value[88] Results of Operations Analyzes the company's financial performance, including revenue, gross profit, operating expenses, and net loss Revenue Breakdown (YoY) | Revenue Type | Q1 2024 | Q1 2023 | Change ($) | Change (%) | | :------------- | :-------- | :-------- | :--------- | :--------- | | Product revenue | $1,890,095 | $1,437,248 | $452,847 | 32% | | Contract revenue | $886,440 | $310,881 | $575,559 | 185% | | Total Revenues | $2,776,535 | $1,748,129 | $1,028,406 | 59% | - Consolidated gross profit decreased by $658,056 (377%) to a gross loss of $(483,391) in Q1 2024, primarily due to the delivery of final prototypes under a U.S. Army contract, not product sales[90] Operating Expenses (YoY) | Expense Category | Q1 2024 | Q1 2023 | Change ($) | Change (%) | | :----------------------- | :-------- | :-------- | :--------- | :--------- | | Research and development | $1,626,440 | $1,353,551 | $272,889 | 20% | | Sales and marketing | $2,041,511 | $1,288,760 | $752,751 | 58% | | General and administrative | $3,483,095 | $2,863,758 | $619,337 | 22% | | Impairment loss | $93,050 | $0 | $93,050 | N/A | | Total Operating Expenses | $7,244,096 | $5,506,069 | $1,738,027 | 32% | - Other expense increased significantly by over 16 times to $4,688,889 in Q1 2024, primarily due to a $4,008,357 loss on the sale of the equity method investment[92] - Net loss from continuing operations increased by 122% to $(12,416,376) in Q1 2024[92] Cash Flows Examines the company's cash flow activities from operations, investing, and financing for the reporting period - Net cash used in operating activities decreased by 66% to $(2,348,412) in Q1 2024, mainly due to improved timing of accounts receivable receipts[93] - Net cash provided by investing activities decreased by 12% to $4,300,043 in Q1 2024, with proceeds from the sale of an equity method investment ($4.4 million) offsetting other investment activities[95] - Net cash used in financing activities increased to $(286,037) in Q1 2024, compared to $(146,509) in Q1 2023[96] Liquidity and Capital Resources Assesses the company's financial liquidity, working capital, and available cash resources Liquidity Snapshot (July 31, 2024) | Metric | Amount | | :-------------------- | :------------ | | Current assets | $21,470,151 | | Current liabilities | $4,230,512 | | Net working capital | $17,239,639 | | Cash | $7,732,763 | | Inventory related balances | $10,667,676 | Going Concern Addresses the company's ability to continue operations, considering past losses and recent mitigating actions - The Company's history of net losses and cash usage in operating activities raised substantial doubt about its ability to continue as a going concern[98] - Management concluded that recent actions, including a $8.4 million public offering in December 2023, a $4.4 million equity method investment sale in July 2024, and an $8 million financing in September 2024, alleviate this doubt for the next twelve months[99] Critical Accounting Policies and Estimates Discusses key accounting policies and estimates, including impairment assessments and fair value measurements - Significant estimates include purchase price accounting for acquisitions, evaluation of long-term assets (including goodwill) for impairment, and evaluation of other-than-temporary impairment of equity method investments[101] - Goodwill is tested for impairment at least annually at the reporting unit level, using income and/or market approaches, with key assumptions including future cash flows, growth rates, and discount rates[103][104] - Fair value measurements categorize financial assets and liabilities into a three-level hierarchy (Level 1: quoted prices in active markets, Level 2: observable inputs, Level 3: unobservable inputs)[105][106] ITEM 3. Quantitative and Qualitative Disclosures About Market Risk The Company is not required to provide disclosures about market risk as it qualifies as a 'smaller reporting company' under Rule 12b-2 of the Exchange Act - The Company is exempt from providing quantitative and qualitative disclosures about market risk due to its status as a 'smaller reporting company'[108] ITEM 4. Controls and Procedures This section details the evaluation of the Company's disclosure controls and procedures and internal control over financial reporting. Both were deemed ineffective as of July 31, 2024, primarily due to restatements related to derivative liabilities in the prior year, but management is implementing measures to mitigate these weaknesses Evaluation of Disclosure Controls and Procedures Assesses the effectiveness of the company's disclosure controls and procedures as of July 31, 2024 - As of July 31, 2024, the Company's disclosure controls and procedures were deemed not effective, specifically due to restated items related to the removal of derivative liabilities for the quarter ended July 31, 2023[109] Management's Quarterly Report on Internal Control Over Financial Reporting Presents management's conclusion on the effectiveness of internal control over financial reporting and remediation efforts - Management concluded that the internal control over financial reporting was not effective as of July 31, 2024, citing the same restatement issues related to derivative liabilities from the prior year[112] - The Company is formalizing narratives and processes and has hired additional personnel to strengthen the internal control environment to mitigate identified weaknesses[112] Changes In Controls Over Financial Reporting Reports on any material changes in internal control over financial reporting during the quarter - There were no changes in internal control over financial reporting during the three months ended July 31, 2024, that materially affected, or are reasonably likely to materially affect, the Company's internal controls[113] Limitations on Effectiveness of Controls and Procedures Acknowledges inherent limitations in any control system regarding absolute assurance - Management acknowledges that no controls system can provide absolute assurance due to inherent limitations, resource constraints, and the need for judgment in balancing benefits and costs[114] PART II ITEM 1. Legal Proceedings The Company is involved in a legal proceeding where Autonodyne LLC has filed a complaint against Teal Drones, Inc. for alleged breach of a Software Licensing Agreement, seeking $8.25 million in accelerated payments. The Company denies the claims and is vigorously defending the lawsuit - Autonodyne LLC filed a complaint against Teal Drones, Inc. in Delaware Superior Court, alleging breach of a Software Licensing Agreement and seeking $8.25 million in accelerated payments[116] - Teal Drones denies the allegations and plans to vigorously assert defenses, with the outcome of the claim currently undeterminable[116] ITEM 1A. Risk Factors There have been no material changes to the Company's risk factors from those previously disclosed in its Annual Report on Form 10-K for the year ended April 30, 2024. Readers are advised to carefully consider the risks outlined in the Annual Report - No material changes have occurred in the Company's risk factors since those disclosed in the Annual Report on Form 10-K for the year ended April 30, 2024[117] ITEM 2. Unregistered Sales of Equity Securities and Use of Proceeds There were no unregistered sales of equity securities or use of proceeds to report for the period - No unregistered sales of equity securities or use of proceeds occurred during the reporting period[118] ITEM 3. Defaults Upon Senior Securities There were no defaults upon senior securities to report for the period - No defaults upon senior securities occurred during the reporting period[118] ITEM 4. Mine Safety Disclosures This item is not applicable to the Company - Mine safety disclosures are not applicable to the Company[120] ITEM 5. Other Information During the three months ended July 31, 2024, none of the Company's directors or officers adopted or terminated any Rule 10b5-1 trading plans or non-Rule 10b5-1 trading arrangements - No Rule 10b5-1 trading plans or non-Rule 10b5-1 trading arrangements were adopted or terminated by directors or officers during the three months ended July 31, 2024[120] ITEM 6. Exhibits This section lists all exhibits filed with the Quarterly Report on Form 10-Q, including bylaws, employment agreements, promissory notes, exchange agreements, purchase agreements, warrants, security agreements, certifications, and XBRL documents - Exhibits include various agreements such as executive employment agreements, promissory notes, exchange agreements, and a securities purchase agreement[121] - Certifications from the Principal Executive Officer and Principal Financial and Accounting Officer (pursuant to Sections 302 and 906 of Sarbanes-Oxley Act) are included[121] - Inline XBRL documents (Instance, Schema, Calculation, Label, Presentation, Definition) and the Cover Page Interactive Data File are also filed[121] SIGNATURES Formal declaration by the principal executive and financial officers certifying the accuracy of the report - The report is signed by Jeffrey Thompson, Chief Executive Officer (Principal Executive Officer), and Leah Lunger, Chief Financial Officer (Principal Financial and Accounting Officer), on September 23, 2024[123]