What changed in this filing

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Item 1. Financial Statements

2021-03-22 compared with 2020-12-21 · 647 added, 500 removed, 124 unchanged (90% of the section changed)

RED CAT HOLDINGS, INC.

Consolidated Balance Sheets

FINANCIAL STATEMENTS

RED CAT HOLDINGS

Condensed Consolidated Balance

Current Assets

Accounts Receivable, net

Total Current Assets

Intangible assets, net

LIABILITIES AND STOCKHOLDERS' EQUITY

7 unchanged sentences

Total Current Liabilities

Convertible debentures, net of discount of $581,599

Convertible debentures, net

Due to Related Party

Total Long Term Liabilities

Commitments and contingencies

Stockholders' Equity

Series A Preferred Stock - shares authorized 2,200,000;

outstanding 208,704

Series A Preferred Stock - shares

authorized 2,200,000;

outstanding 158,704 and 208,704

Series B Preferred Stock - shares authorized 4,300,000;

outstanding 3,681,623

outstanding 2,726,882 and 3,681,623

Common stock - shares authorized

2 unchanged sentences

Accumulated deficit

(12,663,538 )

Total Stockholders' Equity

1 unchanged sentence

See accompanying notes.

RED CAT HOLDINGS, INC.

Consolidated Statements Of Operations

Three months ended October 31,

Six months ended October 31,

RED CAT HOLDINGS

Condensed Consolidated Statements

Of Operations

Three months ended January 31,

Nine months ended January 31,

Cost of goods sold

3 unchanged sentences

General and administrative

Stock based compensation

Total operating expenses

1 unchanged sentence

Other Expense

Amortization Expense

Derivative Expense

Change in Fair Value of Derivative

Provision for income taxes

Other Expense

$ (8,984,260 )

Loss per share - basic and diluted

Weighted average shares outstanding - basic and

RED CAT HOLDINGS, INC.

Consolidated Statements of Changes in Stockholders'

Preferred Stock

$ (10,089,785 )

Loss per share

- basic and diluted

Weighted average

shares outstanding - basic and diluted

RED CAT HOLDINGS,

Statements of Changes in Stockholders' Equity

Balances, April 30, 2019

6 unchanged sentences

Balances, October 31, 2019

Exercise of warrants

Conversion of Preferred Stock

Merger with Rotor Riot

Stock based compensation

Balances, January 31, 2020

Balances, April 30, 2020

5 unchanged sentences

$ (3,679,278 )

RED CAT HOLDINGS, INC.

Consolidated Statements of Cash Flows

Six months ended October 31,

Cash Flows from Operating Activities

$ (1,105,525 )

Acquisition of Fat Shark

Conversion of Preferred Stock

Stock based compensation

Amortization of debt discount

Derivative expense

Change in fair value of derivative

Adjustments to reconcile net loss to net cash from operations:

Changes in operating assets and liabilities

Prepaid expenses

Other current assets

Customer deposits

Accounts payable

Accrued expense

Net cash used in operating activities

Cash Flows from Investing Activities

Acquired through acquisitions

Net cash provided by investing activities

Cash Flows from Financing Activities

Payments under related party obligations

Proceeds from notes payable

Payments under notes payable

Proceeds from convertible debentures

Common stock to be issued

Net cash provided by financing activities

Net use of Cash

Cash, beginning of period

Cash, end of period

Cash paid for interest and taxes

Noncash transactions

Common stock issued for services

Fair value of shares exchanged in acquisitions

Conversion of Notes into common stock

Conversion of accrued interest into common stock

See accompanying notes.

RED CAT HOLDINGS, INC.

NOTES TO CONSOLIDATED FINANCIAL

October 31, 2020 and 2019

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.

Balances, January 31, 2021

$ (12,663,538 )

RED CAT HOLDINGS,

Consolidated Cash Flows Statements

months ended January 31,

Flows from Operating Activities

$ (10,089,785 )

based compensation

of intangible assets

of debt discount

in fair value of derivative

to reconcile net loss to net cash from operations:

in operating assets and liabilities

cash used in operating activities

Flows from Investing Activities

through acquisitions

for acquisition, net of cash acquired

cash (used in) provided by investing activities

Flows from Financing Activities

from exercise of warrants

from related party obligations

under related party obligations

from notes payable

under notes payable

from convertible debentures

cash provided by financing activities

increase (decrease) Cash

beginning of period

end of period

paid for interest

Cash paid for taxes

stock issued for services

value of shares exchanged in acquisitions

of Note Payable –

Related Party in acquisition

of Notes into common stock

of accrued interest into common stock

accompanying notes.

RED CAT HOLDINGS,

NOTES TO CONSOLIDATED

FINANCIAL STATEMENTS

January 31, 2021

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.

1 - The Business

Company was originally incorporated in February 1984.

The Company’s primary business is to provide products, services and

solutions to the drone industry.

or “Red Cat”), filed with the Securities

and Exchange Commission (“SEC”) on August 13, 2020.

Note 1 - The Business

The Company was originally incorporated in

February 1984.

Since April 2016, the Company’s primary business has been 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.

is focused on the consumer market and sells its products through its e-commerce platform operated at www.rotorriot.com.

is also developing software solutions to provide secure cloud-based analytics, storage and services for the drone industry.

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”

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.

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

Company closed the acquisition of Fat Shark Holdings (“Fat Shark”) on November 6, 2020.

Fat Shark is a leading

provider of headsets and goggles for professional FPV (First Person View) racers and drone pilots and has an estimated 85%

share of its market.

The Company expects that Fat Shark will generate a majority of its revenue over the next 12 months.

acquisition continues the Company’s efforts to become a fully-integrated drone business with a strong supply chain, as

well as a provider of software solutions for the drone industry.

corporate developments include:

Exchange Agreement

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

(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.

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:

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.

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.

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.

The Company closed the acquisition of Fat

Shark Holdings (“Fat Shark”) on November 2, 2020.

Fat Shark is a leading provider of headsets and goggles for professional

FPV (First Person View) racers and drone pilots and has an estimated 85% share of its market.

The Company expects that Fat Shark

will generate a majority of its revenue over the next 12 months.

This acquisition continues the Company’s efforts to become

a fully-integrated drone business with a strong supply chain, as well as a provider of software solutions for the drone industry.

Recent corporate developments include:

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.

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:

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 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 except for shares subject to an ownership limitation.

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 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.

Organizational

July 2019, we changed our name from TimeFire VR Inc.

In July 2019, we changed our name from TimeFire

to Red Cat Holdings, Inc.

August 2019, we changed our fiscal year to April 30 which was the historical fiscal year of Red Cat Propware, Inc.

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.

Agreement with Rotor Riot, LLC

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.

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 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.

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.

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).

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

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.

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.

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 variable

weighted average price (“VWAP”) of the Company’s common stock for the twenty trading days prior to the closing of the

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

4 unchanged sentences

Accounts receivable

Customer Relationships

Total assets acquired

Liabilities Assumed

Accounts Payable and accrued expenses

3 unchanged sentences

Net assets acquired

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.

Shark Acquisition

September 30, 2020, the Company entered into a share purchase agreement (“Share Purchase Agreement”) with Greg French

(“French”), the founder and sole shareholder of Fat Shark Holdings (“Fat Shark”), to acquire all of the

issued and outstanding shares of Fat Shark and its subsidiaries for a purchase price of $7,000,000.

The transaction closed on

November 6, 2020 and was paid through (i) the issuance of 5,227,223 shares of common stock with an agreed value of $5,750,000

(ii) a senior secured promissory note in the original principal amount of $1,000,000 which matures on November 1, 2023, and (iii)

a cash payment of $250,000 in cash.

The Share Purchase Agreement includes indemnification provisions, a two year non-compete agreement,

and registration rights for the shares issued in the transaction.

Note Offering

October 5, 2020, the Company closed a private offering of convertible promissory notes (the “2020 Notes”) in the aggregate

principal amount of $600,000 which included the issuance of five-year warrants to purchase an aggregate of 399,996 shares of common

The 2020 Notes accrue interest at the rate of 12% per annum and are payable two years from the date of issuance.

Notes are convertible into common stock at a conversion price equal to the lower of (i) $1.00 per share or, (ii) at a price equal

to 75% of the price of an offering of common stock that results in the listing for trading on certain stock exchanges (a “Qualified

Offering”).

The 2020 Notes also contain protection from dilution which would lower the conversion price in the event of

a lower priced issuance.

An event of default could also result in a reduction of the conversion price.

Company may prepay any portion of the 2020 Notes, without penalty or premium, upon ten business days’

No conversion

will be completed if it would result in the noteholder, including its affiliates, owning more than 9.99% of the Company’s

outstanding common stock immediately after completing such conversion.

Warrants are exercisable at $1.50 per share.

The exercise price will be reduced to a price equal to 75% of the price per share

of the common stock offered in a Qualified Offering.

2 - Going Concern

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 $1,338,905 at October 31, 2020 and have accumulated losses totaling approximately $3.7 million through

October 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.

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.

3 - Summary of Significant Accounting Policies

of Accounting - The financial statements and accompanying notes are prepared in accordance with GAAP.

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.

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.

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.

At October 31, 2020, we had cash of $480,065 in multiple commercial banks and financial services companies.

not experienced any loss on these accounts and believe they are not exposed to any significant credit risk.

Leases at October 31, 2020 are short term in nature and do not require accounting

under the lease accounting standards.

Goodwill represents the excess of the purchase price of an acquisition over the estimated fair value of identifiable

During the quarter

ended January 31, 2021, the Company adjusted the initial carrying value of Goodwill to reflect the values of other intangible

assets acquired as determined by an independent valuation services firm.

These included Customer Relationships with a value

of $39,000 and Brand Name with a value of $578,000.

Customer relationships are being amortized over 7 years.

The carrying value

of Brand Name will be evaluated on a quarterly basis, including a formal evaluation at year end.

Fat Shark Acquisition

On September 30,

2020, the Company entered into a share purchase agreement (“Share Purchase Agreement”) with Greg French (“French”),

the founder and sole shareholder of Fat Shark Holdings (“Fat Shark”), to acquire all of the issued and outstanding

shares of Fat Shark and its subsidiaries.

The transaction closed on November 2, 2020 and was valued at $8,354,076 based on (i)

the issuance of 5,227,273 shares of common stock with a value of $6,351,076 on the date of closing (ii) a senior secured promissory

note in the original principal amount of $1,753,000 which matures on November 1, 2023, and (iii) a cash payment of $250,000.

Share Purchase Agreement includes indemnification provisions, a two year non-compete agreement, and registration rights for the

shares issued in the transaction.

A summary of the purchase price and initial purchase price allocation is as follows:

Shares issued

Promissory note issued

Total Purchase Price

Price Allocation

Assets Acquired

Accounts receivable

Total assets acquired

Accounts Payable and accrued expenses

Customer Deposits

Total liabilities assumed

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.

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

The foregoing amounts reflect our current

estimates of fair value as of the November 2, 2020 acquisition date.

The Company expects to recognize fair values associated with

the customer relationships acquired, as well as the Fat Shark 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 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.

Convertible Note Offering

On October 5, 2020, the Company closed a private

offering of convertible promissory notes (the “2020 Notes”) in the aggregate principal amount of $600,000 which included

the issuance of five-year warrants to purchase an aggregate of 399,998 shares of common stock.

The 2020 Notes accrue interest

at the rate of 12% per annum and are payable two years from the date of issuance.

The 2020 Notes are convertible into common stock

at a conversion price equal to the lower of (i) $1.00 per share or, (ii) at a price equal to 75% of the price of an offering of

common stock that results in the listing for trading on certain stock exchanges (a “Qualified Offering”).

Notes also contain protection from dilution which would lower the conversion price in the event of a lower priced issuance.

event of default could also result in a reduction of the conversion price.

The Company may prepay any portion of the

2020 Notes, without penalty or premium, upon ten business days’

No conversion will be completed if it would

result in the noteholder, including its affiliates, owning more than 9.99% of the Company’s outstanding common stock

immediately after completing such conversion.

The Warrants are exercisable at $1.50 per share.

The exercise price will be

reduced to a price equal to 75% of the price per share of the common stock offered in a Qualified Offering.

On January 27, 2021, the Company closed a

private offering of convertible promissory notes (the “2021 Notes”) in the aggregate principal amount of $500,000

which included the issuance of five-year warrants to purchase a number of shares of common stock equal to 135% of the dollar

amount of the Note.

The 2021 Notes accrue interest at the rate of 12% per annum and are payable two years from the date of

The 2021 Notes are convertible into common stock at a conversion price equal to the lower of (i) $1.00 per share,

if the conversion occurs prior a Qualified Offering, or (ii) a 25% discount of the price per share of common stock offered in

the Qualified Offering, if the conversion occurs simultaneous with the Qualified Offering.

The Company may prepay any portion

of the 2021 Notes, without penalty or premium, upon ten business days’

The Warrants are exercisable for a

period of five years at a price equal to the lower of (i) $1.50 per share, or (ii) a 25% discount to the price per share of

common stock offered in the Qualified Offering.

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 $8,898,797

at January 31, 2021 and have accumulated losses totaling approximately $12.7 million through January 31, 2021.

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

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., Rotor Riot,

LLC, and Fat Sharking Holdings.

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.

At January 31, 2021, we

had cash of $471,652 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.

Other Assets –

Other Assets at

January 31, 2021 include $473,545 of prepaid inventory, $22,948 of prepaid expenses, and $9,372 of security deposits.

Leases –

Leases at January 31, 2021 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.

Fair Value of Financial instruments

6 unchanged sentences

ASC 820 defines fair value as the price

that would be received to sell an asset or paid to transfer a liability in an orderly transaction between market participants at

the measurement date.

Additionally, ASC 820 requires the use of valuation techniques that maximize the use of observable inputs

and minimize the use of unobservable inputs.

that would be received to sell an asset or paid to transfer a liability in an orderly transaction between market participants

at the measurement date.

Additionally, ASC 820 requires the use of valuation techniques that maximize the use of observable

inputs and minimize the use of unobservable inputs.

These inputs are prioritized below:

Observable inputs such as quoted market prices in active markets for identical assets or liabilities

Observable market-based inputs or unobservable inputs that are corroborated by market data

Unobservable inputs for which there is little or no market data, which require the use of the reporting entity’s own assumptions.

Observable inputs such as quoted market prices in

active markets for identical assets or liabilities

Observable market-based inputs or unobservable inputs that are

corroborated by market data

Unobservable inputs for which there is little or no market data,

which require the use of the reporting entity’s own assumptions.

The Company accounts for its derivative liabilities,

at fair value, on a recurring basis under level 2.

Convertible Securities and Derivatives –

Company estimates the fair values of the debt and warrants, and allocates the proceeds pro rata based on these values.

allocation of proceeds to the warrants results in the debt instrument being recorded at a discount from the face amount of the

debt and the value allocated to the warrant is recorded to additional paid-in capital.

Convertible Securities and Derivatives

The Company estimates the fair values of the debt and warrants, and allocates the proceeds pro rata based

on these values.

The allocation of proceeds to the warrants results in the debt instrument being recorded at a discount

from the face amount of the debt and the value allocated to the warrant is recorded to additional paid-in capital.

When the convertible debt or equity instruments

1 unchanged sentence

convertible host instruments are first allocated to the bifurcated derivative instruments.

The remaining proceeds, if

any, are then allocated to the convertible instruments themselves, resulting in those instruments being recorded at a discount

The remaining proceeds,

if any, are then allocated to the convertible instruments themselves, resulting in those instruments being recorded at a discount

from their face value.

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.

deposits totaled $66,205 and $38,419 at October 31, 2020 and April 30, 2020, respectively.

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.

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.

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

During the three and six months ended October 31, 2020 and 2019, there were no differences between net loss and

comprehensive loss.

Therefore, the consolidated statements of comprehensive loss have been omitted.

Compensation –

We use the estimated grant-date fair value method of accounting in accordance with ASC Topic 718, Compensation

Revenue Recognition –

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 $96,580

and $38,419 at January 31, 2021 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 and nine months ended January 31, 2021 and 2020, there were no differences between net loss and comprehensive loss.

the consolidated statements of comprehensive loss have been omitted.

Stock-Based Compensation –

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

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.

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 4 - Notes Payable

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:

Payable to PayPal

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.

The balance outstanding

at October 31, 2020 was $26,254.

Payable to Shopify Capital

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 retained 17% of daily receipts until a total of $158,200 was retained.

This note was repaid in October 2020.

2020, Rotor Riot entered into a new agreement with Shopify Capital under which it sold $209,050 of Purchased Receivables for total

consideration of $185,000.

Shopify will retain 17% of daily receipts until a total of $209,050 is retained.

Shopify did not begin

withholding amounts under this Note until November 2020 as the prior Note was not repaid until the end of October 2020.

outstanding at October 31, 2020 was $209,050.

Payable to Race Day Quads

2019, Rotor Riot purchased inventory from Race Day Quads (“RDQ”), an online retailer of drone racing parts .

owner of Race Day Quads acquired a Membership Interest in Rotor Riot in March 2019.The balance owed at October 31, 2020 totaled

Payable to Aerocarve

During the three months ended October 31, 2020, the Company received

advances totaling $70,000 from Aerocarve, which is controlled by the Company’s Chief Executive Officer.

The parties agreed

that the funds would bear interest at 5% annually until repaid.

5 - Due to Related Party

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.

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 –

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 13.

4 - Notes Payable

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.

In November 2019, Rotor Riot entered into an agreement with PayPal under which it borrowed

The note was repaid in January 2021.

In January 2021, Rotor Riot borrowed $75,444 from PayPal which is being repaid

through daily payments equal to 20% of the net amount of each customer payment.

The balance outstanding at January 31, 2021 was

Shopify Capital is an affiliate of Shopify,

which provides sales software and services to the Company.

The Company processes customer transactions ordered on the

e-commerce site for Rotor Riot through Shopify.

Shopify Capital has entered into multiple agreements with the Company in

which it has “purchased receivables”

at a discount.

Shopify retains a portion of the Company’s daily receipts

until the purchased receivables have been paid.

The Company recognizes the discount as a finance charge, in full, in the

month in which the agreement is executed.

The Company assumed an existing agreement when it acquired Rotor Riot in January

This agreement was repaid in May 2020.

Since then, the Company has entered into the following agreements with

of Transaction

at January 31, 2021

September 2020

$101,910 Outstanding

Note 5 - Due to Related Party

Note Payable to BRIT,

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.

Payable to BRIT, LLC

the terms of the Merger Agreement, the Company issued a promissory note to BRIT, LLC in the principal amount of $175,000.

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 October 31, 2020 totaled $161,547.

In addition, accrued interest on

the note totaled $6,422 at October 31, 2020.

incurred certain financial obligations in support of the operations of Rotor Riot which the Company assumed responsibility to

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 principal

balance and accrued interest on the note totaled $153,814 and $8,517 at January 31, 2021, respectively.

Obligations of BRIT,

BRIT incurred certain financial

obligations in support of the operations of Rotor Riot which the Company assumed responsibility to pay at the effective time

of the Merger.

These obligations bear interest at annual rates ranging from 7.5% to 21.74%.

The outstanding balance totaled $168,229 at

October, 2020.

6 - Convertible Debentures

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 “2019 Notes”).

In September and October 2020, the entire

$450,000 of 2019 Notes, plus accrued interest totaling $45,204, was converted into 710,445 shares of common stock.

The Notes had

a term of 2 years and accrued interest at an annual rate of 12% through the date of conversion.

October 2020, we closed a Convertible Note financing which generated gross proceeds of $600,000.

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 VWAP 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”).

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.

7 - Income Taxes

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.

The outstanding balance totaled

$167,730 at January 31, 2021.

In August 2020 and December 2020, the Company

received advances totaling $79,000 from Aerocarve, which is controlled by the Company’s Chief Executive Officer.

agreed that the funds would bear interest at 5% annually until repaid.

The balance owed at January 31, 2021 was $74,000.

to Greg French

connection with the acquisition of Fat Shark as of November 2, 2020, the Company issued a secured promissory note in the

amount of One Million Seven Hundred Fifty-Three Thousand Dollars ($1,753,000) to the seller, Greg French, which matures on

November 1, 2023.

The note bears interest at 3% annually .

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 “2019 Notes”).

In September and October 2020, the entire $450,000 of 2019 Notes, plus accrued interest

totaling $45,204, was converted into 710,444 shares of common stock.

The Notes had a term of 2 years and accrued interest at an

annual rate of 12% through the date of conversion.

October 2020, we closed a private offering in which we sold $600,000 of convertible promissory notes (“Promissory Notes”)

and issued warrants to purchase 399,998 shares of common stock.

The Promissory Notes accrue interest at 12% annually, and

the principal and accrued interest is due two (2) years from the date of issuance.

The Promissory Notes are convertible into

shares of our common stock at a price equal to the lower of $1.00, or (b) at a price equal to 75% of the price of securities sold

in a Qualified Offering.

The terms of a Promissory Note will be amended if a holder believes that a security issued, or amended,

after the issuance of the Promissory Note includes any term or provision more favorable than those provided in the Notes.

The warrants are exercisable for five (5) years and entitle the holder to purchase common shares at a price equal to the lower

of (i) $1.50, or (ii) a 25% discount to the price per share of common stock offered in a Qualified Offering.

In March 2021, the Company received notice from 100% of the holders of their intent to convert the entire amount of their Notes,

plus accrued interest, into shares of common stock.

The conversion and issuance had not yet been processed and completed

at the date of the filing of this report on Form 10-Q.

January 2021, we closed a private offering, resulting in gross proceeds of $500,000, of Units consisting of (i) a convertible

note and (ii) a warrant to purchase the number of shares of common stock equal to 135% of the dollar amount of the Note.

The convertible notes (the “Notes”) accrue interest at 12% annually, and the principal and accrued interest is due

two (2) years from the date of issuance.

The Notes are convertible into shares of our common stock at a price equal to the

lower of (a) $1.00, if the conversion occurs prior to a “Qualified Offering”, or (b) a 25% discount of the price per

share of common stock offered in a Qualified Offering.

The Notes may be converted at any time by the holder but will automatically

convert upon the closing of a Qualified Offering.

The terms of a Note will be amended if a holder believes that a security

issued, or amended, after the issuance of the Note includes any term or provision more favorable than those provided in the Notes.

The conversion price of the Notes will be reduced if the Company issues any security at an effective price lower than the conversion

price of the Notes.

The warrants are exercisable for five (5) years and entitle the holder to purchase common shares at

a price equal to the lower of (i) $1.50, or (ii) a 25% discount to the price per share of common stock offered in a Qualified

In March 2021, the Company received notice from 100% of the holders of their intent to convert the entire amount

of their Notes, plus accrued interest, into shares of common stock.

The conversion and issuance had not yet been processed

and completed at the date of the filing of this report on Form 10-Q.

Note 7 - Income Taxes

Our operating subsidiary, Red Cat

Propware, Inc., 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.

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.

October 31, 2020 and April 30, 2020, we had accumulated deficits of approximately $3,500,000 and $2,600,000, respectively.

Deferred tax assets related to the future benefit of these net operating losses for tax purposes totaled approximately

$140,000 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 October 31, 2020 and April 30, 2020.

At January 31, 2021 and April 30, 2020, we

had accumulated deficits of approximately $12,700,000 and $2,600,000, respectively.

Deferred tax assets related to the future

benefit of these net operating losses for tax purposes totaled approximately $508,000 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 January 31, 2021 and April 30, 2020.

Note 8 - Common Stock

common stock has a par value of $0.001 per share.

Our common stock has a par value of $0.001

We are authorized to issue 500,000,000 shares of common stock.

Each share of

common stock is entitled to one vote.

9 - Preferred Stock

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

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:

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.

Conversions of Series

A Stock into Common Stock since August 2019 are as follows:

November 2020

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:

November 2019

December 2019

10 - Warrants

September 2019, we received $152,239 in connection with the exercise of 469,874 warrants which had been issued in May 2019 as

part of the Share Exchange Agreement.

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 10 - Warrants

In September 2019, we received $152,239 in

connection with the exercise of 469,874 warrants which had been issued in May 2019 as part of the Share Exchange Agreement.

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

In October 2020, the Company issued five-year

4 unchanged sentences

The warrants were valued at $267,999 using the multinomial lattice model and are considered derivative liabilities under ASC 815-40.

In January 2021, the Company issued five-year

warrants to purchase a total of 675,000 shares in connection with the issuance

of $500,000 of convertible notes.

The warrants have an initial exercise price of $1.50 which may be reduced to (i) a 25% discount

of the price per share of Common Stock offered in a future qualified offering and also include a ratchet provision .

The warrants were valued at $2,870,666 using the multinomial lattice model and are considered derivative liabilities under ASC

The following table presents the assumptions

used to estimate the fair values of the warrants:

October 31, 2020

January 31, 2021

Expected volatility

3 unchanged sentences

The following table summarizes the changes

in warrants outstanding issued to non-employees of the Company during the six months ended October 31, 2020.

Number of Warrants

Weighted Average Exercise Price

Weighted Average Grant Date Fair Value

Expiration Date (yrs)

Value if Exercised

in warrants outstanding issued to non-employees of the Company during the nine months ended January 31, 2021.

Average Exercise Price

Average Grant Date Fair Value

Balance as of April 30, 2020

Cancelled/Expired

Outstanding as of October 31, 2020

11 - Share Based Awards

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.

2019 Issuances

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 two-year period and expire in October 2029.

Options to purchase 150,000 shares vest ratably over a three-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

as of January 31, 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.

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 two-year period and

expire in October 2029.

Options to purchase 150,000 shares vest ratably over a three-year period and expire in October 2024.

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 –

1 unchanged sentence

1.59% or 1.74%, (iii) expected life –

5 or 10 years, and (iv) expected dividend yield of 0%.

2020 Issuances

January 2020, we issued options to purchase 1,100,000 shares of common stock exercisable at $0.82 vesting quarterly over a three-year

5 or 10 years, and (iv) expected dividend

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 three-year period.

These options were valued at

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:

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

(i) expected volatility –

1 unchanged sentence

1.74%, (iii) expected life –

10 years, and (iv) expected dividend yield of zero.

compensation expense for the three and six months ended October 31, 2020 was as follows:

and (iv) expected dividend yield of zero.

January 2021 Issuances

In January 2021, we issued 1,000,000 shares

of restricted common stock which was valued at $2,690,000 based on our stock price of $2.69 on the date of issuance.

of shares vested immediately with the remaining 750,000 vesting in thirty-six monthly installments subject to acceleration if

certain performance milestones are attained.

In January 2021, we issued options to purchase

100,000 shares of common stock at an exercise price of $2.69 which equaled the stock price on the date of issuance.

options vested immediately with the remaining 50,000 vesting ratably on the first and second anniversary dates.

were valued at $147,581 using the Black Scholes model and the following assumptions:

(i) expected volatility –

(ii) risk free interest rate –

0.38%, (iii) expected life –

5.87 years, and (iv) expected dividend yield of 0%.

Stock compensation expense for the three and

nine months ended January 31, 2021 was as follows:

General and administrative

Research and development

was no compensation expense recognized in the three months ended October 31, 2019.

exercisable as of October 31, 2020 totaled 572,476.

The remaining weighted average contractual term of the options outstanding

at October 31, 2020 was 8.73 years.

The aggregate intrinsic value of outstanding options, representing the excess of the stock

price at October 31, 2020 of $1.21 over the exercise price of each option, was $492,753.

Sales and marketing

Stock compensation expense for the three months

and nine months ended January 31, 2020 was $149,462 and $161,529, respectively.

Options exercisable as of January 31, 2021

totaled 964,143.

The remaining weighted average contractual term of the options outstanding at January 31, 2021 was 6.63 years.

The aggregate intrinsic value of outstanding options, representing the excess of the stock price at January 31, 2021 of $5.00

over the exercise price of each option, was $7,062,446.

Note 12 - Financial Instruments

2 unchanged sentences

totaling $1,100,000 which included a ratchet provision in the conversion price of the lower of $1.00 or 25% discount of the price

per share of Common Stock offered in the Qualified offering and also include a ratchet provision.

Attached to these notes as additional

consideration was 399,998 5-year warrants with a conversion price of the lower of 1.50 or 25% discount of the price per share of

Common Stock offered in the Qualified offering and also include a ratchet provision.

Embedded derivatives are valued separately

from the host instrument and are recognized as derivative liabilities in the Company’s balance sheet.

The Company measures

these instruments at their estimated fair value and recognizes changes in their estimated fair value in results of operations during

the period of change.

The Company has estimated the fair value of these embedded derivatives for convertible debentures and associated

warrants using a multinomial lattice model as of October 31, 2020.

The fair values of the derivative instruments are measured each

quarter, which resulted in a loss of $83,803 and derivative expense of $148,587 during the six and months ended October 31, 2020.

As of October 31, 2020, the fair market value of the derivatives aggregated $812,390, using the following assumptions:

per share of Common Stock offered in a future “Qualified Offering”.

Attached to these notes as additional consideration

was 1,074,998 5-year warrants with a conversion price of the lower of 1.50 or 25% discount of the price per share of Common Stock

offered in the Qualified Offering and also include a ratchet provision.

Embedded derivatives are valued separately from the host

instrument and are recognized as derivative liabilities in the Company’s balance sheet.

The Company measures these instruments

at their estimated fair value and recognizes changes in their estimated fair value in results of operations during the period

The Company has estimated the fair value of these embedded derivatives for convertible debentures and associated warrants

using a multinomial lattice model as of January 31, 2021.

The fair values of the derivative instruments are measured each quarter,

which resulted in a loss of $3,433,938 and derivative expense of $4,630,288 during the nine months ended January 31, 2021.

of January 31, 2021, the fair market value of the derivatives aggregated $9,144,226, using the following assumptions:

1.67-5.00-year term, estimated volatility of 86.74-104.01%, and a discount rate of 0.10-0.41%.

Financial instruments measured at fair value on a recurring basis

at October 31, 2020, are summarized as follows:

Fair value of derivatives

13 - Related-Party Transactions

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.

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.

The same Board member invested $300,000 in the convertible note financing

completed in October 2020.

Financial instruments measured at fair value

on a recurring basis at January 31, 2021, are summarized as follows:

value of derivatives

Note 13 - Related-Party Transactions

Shares Issued for Services –

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

Convertible Note Financing –

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.

The same Board member invested $300,000 and $100,000 in the convertible note financings completed in October

2020 and January 2021, respectively.

Another board member invested $50,000 in the convertible note financing completed in January

See Note 6 for details on the terms of the transaction.

Payable to Aerocarve –

During the three

months ended October 31, 2020, the Company received advances totaling $70,000 from Aerocarve, which is controlled by the

Company’s Chief Executive Officer.

The parties agreed that the funds would bear interest at 5% annually until

14 - Subsequent Events

events have been evaluated through the date of this filing and there are no subsequent events which require disclosure except

as set forth below:

November 6, 2020, the Company completed the acquisition of Fat Shark Holdings which was paid through (i) the issuance of 5,227,223

shares of common stock with an agreed value of $5,750,000 (ii) a senior secured promissory note in the original principal amount

of $1,000,000 which matures on November 1, 2023, and (iii) a cash payment of $250,000 in cash.

The Share Purchase Agreement includes

indemnification provisions, a two year non-compete agreement, and registration rights for the shares issued in the transaction.

In August 2020

and December 2020, the Company received advances totaling $79,000 from Aerocarve, which is controlled by the Company’s Chief

Executive Officer.

The parties agreed that the funds would bear interest at 5% annually until repaid.

During the three months

ended January 31, 2021, the Company made principal repayments of this note totaling $5,000.

Note 14 - Subsequent Events

Subsequent events have been evaluated through

the date of this filing and there are no subsequent events which require disclosure except as set forth below:

On February 11, 2021, the Company and Red

Cat Skypersonic, Inc., a Nevada corporation (“Acquisition Sub”), entered into Share Purchase and Liquidity Event

Agreements (the “Skypersonic Agreements”) with Giuseppe Santangelo the founder and majority shareholder of

Skypersonic, Inc., a Michigan corporation (“Skypersonic”) and the holders of common stock and SAFE agreements

representing 97.46% of Skypersonic (the “Sellers”), pursuant to which, subject to the satisfaction of certain

closing conditions, Acquisition Sub will acquire all of the issued and outstanding share capital of Skypersonic in

consideration for an aggregate of $3,000,000 in shares (the “Share Consideration”) of the Company’s common

stock, based upon the VWAP of the Company’s common stock at closing of the transaction (the “Skypersonic

Transaction”).

Fifty (50%) percent of the Share Consideration (the “Escrow Shares”) is required to be

deposited in an escrow account pursuant to the Skypersonic Agreements for a period of twelve (12) months as security for

indemnification obligations and any purchase price adjustments due to working capital deficiencies and any other claims or

expenses arising under the Skypersonic Agreements.

Under the Skypersonic Agreements, closing date working capital deficits in

excess of $300,000 shall result in a reduction of the Share Consideration on a dollar of dollar basis.

The Company agreed

that in the event that within 12 months following closing of the Acquisition, the Company issues common stock for a price per

share less than $2.50 per share in a public offering of equity or convertible securities in which the Company raises a

minimum of $2,000,000 (“Qualified Offering”), the Company shall issue Sellers additional shares of common stock

equal to the difference between the number of shares issued and the quotient of the purchase price divided by the price of

securities sold in the Qualified Offering.

Santangelo and certain principal shareholders have agreed to indemnification

obligations, on a pro-rata basis, subject to certain limitations, which shall survive for a period of eighteen (18) months

following closing, and which include a basket amount of $25,000 before any claim can be asserted and a cap equal to the value

of the Escrow Shares or the Share Consideration.

For a period of three (3) years following closing, Mr.

Santangelo shall not

engage in a business competing with or providing products, services or solutions to the drone industry, first person view

(“FPV”) business, navigation and software solutions that provide analytics, storage or services for or in

conjunction with the drone industry.

The closing of the Skypersonic Transaction is subject to customary closing conditions

and is expected to close on or before May 14, 2021.

The Company does not deem the Skypersonic financial condition and results

of operations to be material to the overall financial condition and results of operations of the Company on a consolidated

On February 15, 2021, the Company’s

Fat Shark subsidiary agreed to provide a short-term bridge loan to Skypersonic in the amount of $75,000 under a Senior Secured

Promissory Note, due May 14, 2021 (the “Bridge Loan”).

Advances under the Bridge Loan accrue interest at a rate of

six (6%) percent per annum.

The Bridge Loan is secured by shares of Skypersonic common stock pledged as collateral.

In March 2021, holders of $1,100,000 of

Convertible debentures converted their debentures, plus $47,491 of accrued interest into 1,147,491 shares of common stock.

conversions represented 100% of the convertible debentures issued in October 2020 and January 2021, as described in Note 6.

Compared sentence by sentence after normalising whitespace, quotation marks, case and digits, so re-formatting and restated figures do not read as changed language. Wording changes appear as one removal and one addition. The current filing and the prior one are authoritative.

What changed 10-Q

Item 1. Financial Statements