Red Cat Holdings, Inc. Fair Value Disclosure
11. Fair Value Measurements
Our financial instruments consist of cash, accounts payable, accrued liabilities, and warrant liability. We do not believe that we are exposed to significant interest, currency, or credit risks arising from these financial instruments. The fair values of the warrants approximates their carrying values using Level 3 inputs. Gains and losses recognized on changes in fair value of the warrants are reported in other income (expense). Our warrant valuation was measured at fair value by applying the Black-Scholes option valuation model, which utilizes Level 3 inputs.
The assumptions used in the Black-Scholes option re-valuation at December 31, 2018 are as follows:
| Risk-free interest rate | Expected life | Volatility | Dividend yield | |||||||||||||
| September 2016 warrants | 2.46% | 2.75 years | 220.747% | 0% | ||||||||||||
| March 2017 warrants | 2.46% | 3.75 years | 228.164% | 0% | ||||||||||||
| March 6, 2018 warrants | 2.51% | 4.75 years | 215.957% | 0% | ||||||||||||
| March 16, 2018 warrants | 2.46% | 2.25 years | 267.010% | 0% | ||||||||||||
| August 2018 warrants | 2.51% | 5.25 years | 211.637% | 0% | ||||||||||||
The following summarizes the Company's financial liabilities that are measured at fair value on a recurring basis at December 31, 2018.
| Level 1 | Level 2 | Level 3 | Total | |||||||||||||
| Liabilities | ||||||||||||||||
| Derivative liabilities | $ | — | $ | — | $ | 79,088 | $ | 79,088 | ||||||||
Historical Timeline
| Fiscal Year | Filed | |
|---|---|---|
| 2018 | Apr 1, 2019 | Showing above |
| 2017 | Apr 9, 2018 | |
| 2016 | Apr 7, 2017 | |
About Fair Value Disclosures
Fair value disclosures classify all assets and liabilities measured at fair value into a three-level hierarchy: Level 1 (quoted market prices), Level 2 (observable inputs like yield curves), and Level 3 (unobservable inputs requiring management estimates). The proportion of Level 3 assets directly reflects how much of the balance sheet depends on internal models rather than market evidence.
Key signals: a growing Level 3 balance relative to total fair-value assets increases valuation uncertainty and earnings volatility risk. Watch for transfers between levels — assets moving from Level 2 to Level 3 often signal deteriorating market liquidity. Unrealized gains and losses on Level 3 positions flow through earnings or other comprehensive income, so large swings deserve scrutiny. For financial institutions, examine the sensitivity disclosures that show how Level 3 valuations change under alternative assumptions. Compare the fair value of debt against its carrying amount to gauge hidden leverage.