What changed in this filing

/stocks — the workspaceLOADING

Item 7. Management’s Discussion and Analysis

2021-08-12 compared with 2020-08-13 · 393 added, 213 removed, 33 unchanged (95% of the section changed)

MANAGEMENT'S DISCUSSION AND

ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS

MANAGEMENT'S DISCUSSION AND ANALYSIS

OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS

The Management's Discussion and Analysis contains

forward-looking statements that involve risks and uncertainties, such as statements relating to our liquidity, and our plans for

our business focusing on cloud-based analytics, storage, and services for drones.

Any statements that are not statements of historical

fact are forward-looking statements.

forward-looking statements that involve risks and uncertainties, such as statements relating to our liquidity, and our plans for our

business focusing on cloud-based analytics, storage, and services for drones.

Any statements that are not statements of historical fact

are forward-looking statements.

When used, the words “believe,”

5 unchanged sentences

“expect,”

and the like, and/or future-tense or conditional constructions

(“will,”

and the like, and/or future-tense or conditional constructions (“will,”

“may,”

1 unchanged sentence

“should,”

etc.), or similar expressions, identify certain

of these forward-looking statements.

These forward-looking statements are subject to risks and uncertainties that could cause actual

results or events to differ materially from those expressed or implied by the forward-looking statements in this Annual Report

on Form 10-K.

The Company’s actual results and the timing of events could differ materially from those anticipated in these

forward-looking statements as a result of many factors.

All forward-looking statements speak only as of the date on which

they are made.

The Company does not undertake any obligation to update such forward-looking statements to reflect events that occur

or circumstances that exist after the date of this Annual Report on Form 10-K except as required by federal securities law.

etc.), or similar expressions, identify certain of these forward-looking

These forward-looking statements are subject to risks and uncertainties that could cause actual results or events to differ

materially from those expressed or implied by the forward-looking statements in this Annual Report on Form 10-K.

The Company’s

actual results and the timing of events could differ materially from those anticipated in these forward-looking statements as a result

of many factors.

All forward-looking statements speak only as of the

date on which they are made.

The Company does not undertake any obligation to update such forward-looking statements to reflect events

that occur or circumstances that exist after the date of this Annual Report on Form 10-K except as required by federal securities law.

Recent Developments

Acquisition of Red Cat Propware, Inc .

Effective May 15, 2019, we closed a Share

Exchange Agreement (the “Exchange Agreement”) with Red Cat Propware, Inc., a Nevada corporation (“Red Cat Propware”)

and its then current shareholders (the “Acquisition”) pursuant to which we acquired all of the issued and outstanding

capital stock of Red Cat Propware in exchange for our issuance of:

(i) an aggregate of 236,000,000 shares of our common stock,

and (ii) 2,169,068.0554 shares of Series A Preferred Stock (“Series A Stock”) to the Red Cat Propware shareholders

which constituted approximately 83.33% of our issued an outstanding share capital on a fully-diluted basis at such time.

the exception of shares held by our current Chief Executive Officer, Jeffrey Thompson, the convertibility of shares of Series

A Stock is limited such that a holder of Series A Stock may not convert Series A Stock to our common stock to the extent that

the number of shares of common stock to be issued pursuant to such conversion, when aggregated with all other shares of common

stock owned by the holder at such time, would result in the holder beneficially owning more than 4.99% of all of our outstanding

common stock (the “Beneficial Ownership Limit”).

Reverse Stock Split

August 1, 2019, we conducted a 1 for 1,200 reverse split of our common stock which resulted in the automatic conversion of all

Series A Stock to common stock, with exception of certain Series A Stock subject to the Beneficial Ownership Limit.

the reverse split, our remaining shares of Series A Stock are convertible to common stock at a ratio of approximately 8.33 shares

of common stock for each share of Series A Stock.

Merger Agreement with Rotor Riot, LLC

December 31, 2019, the Company entered into an Agreement of Merger (the “Merger Agreement”) with Rotor Riot Acquisition

Corp., a wholly owned Ohio subsidiary of the Company (the “Ohio Acquisition Sub”), Rotor Riot, LLC, an Ohio limited

liability company (“Rotor Riot”), and the three members of Rotor Riot (the “Members”).

Pursuant to the

terms of the Merger Agreement, upon consummation of the merger contemplated by the Merger Agreement (the “Merger”),

the Ohio Acquisition Sub would merge with and into Rotor Riot, with Rotor Riot continuing as the surviving entity and a wholly

owned subsidiary of the Company.

At the effective time of the Merger, the issued and outstanding membership interests of Rotor

Riot held by the Members, which represented 100% of Rotor Riot’s issued and outstanding membership interests, would be converted

into shares of common stock of the Company.

On January 22, 2020, the parties to the Merger Agreement entered into an amendment

to the Merger Agreement, joined in by Rotor Riot Acquisition Corp., a newly formed, wholly owned Delaware subsidiary of the Company

(the “Delaware Acquisition Sub”), pursuant to which, among other things, the Delaware Acquisition Sub replaced the

Ohio Acquisition Sub as the acquisition subsidiary to merge with and into Rotor Riot in connection with the Merger.

The Merger was consummated

as of January 23, 2020 (the “Effective Date”).

At the closing of the Merger, the Company entered into a make whole

agreement with Rotor Riot, Brains Riding in Tanks, LLC, an Ohio limited liability company and the majority owner of Rotor Riot

(“BRIT”), and Chad Kapper, the Chief Executive Officer and Manager of Rotor Riot, and the Chief Executive Officer and

beneficial owner of 100% of the membership interests of BRIT (“Kapper”), pursuant to which the Company agreed to pay

certain financial obligations of Rotor Riot as of the Effective Date.

This included the issuance to BRIT of a promissory note (the

“BRIT Promissory Note”), as of the Effective Date, in the principal amount of $175,000 (the “Principal Amount”),

at an interest rate of 4.75% per annum (“Interest”), with $3,500 of the Principal Amount to be paid monthly, and the

remaining Principal Amount and any accrued and unpaid Interest to be paid on the earlier of (A) twelve months from the date of

issuance, and (B) the closing of an equity offering by the Company of no less than $3,000,000.

On January 23, 2020,

the Effective Date, pursuant to the terms of the Merger Agreement, as amended, the Delaware Acquisition Sub merged with and into

Rotor Riot was the surviving corporation in the Merger and, as a result of the Merger, became a wholly owned subsidiary

of the Company.

Rotor Riot sells products

and services in the drone marketplace, primarily focused on FPV (First Person View), including unmanned aircraft systems, components,

and accessories.

In accordance with the terms of the

Merger Agreement, at the closing of the Merger, 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) the purchase price of $3,700,000, minus, (ii) $915,563 (which

included certain debt and other obligations of Rotor Riot and its Chief Executive Officer that the Company agreed to assume (the

“Assumed Obligations”) divided by (B) the volume weighted average price (“VWAP”) of the Company’s

common stock for the twenty trading days prior to the closing date 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.

Immediately following

the Merger, the Company had 19,148,698 shares of common stock issued and outstanding.

In connection with the Merger, BRIT, received

1,997,684 of the Shares, which represented approximately 10.4% of the Company following the consummation of the Merger.

The Merger was intended

to be treated as a tax-free reorganization under Section 368(a) of the Internal Revenue Code of 1986, as amended.

In January 2020, pursuant to the terms of a merger

agreement, we acquired Rotor Riot, LLC (“Rotor Riot”), in which our subsidiary merged with and into Rotor Riot, resulting

in Rotor Riot being the surviving entity in a merger and a wholly-owned subsidiary of the Company .

Acquisition of Fat Shark

On November 2, 2020, the Company acquired 100% of

Fat Shark’s outstanding equity and issued to the Fat Shark’s sole shareholder consideration totaling (i) 5,227,223 shares

of our common stock, (ii) a cash payment of $250,000, and (iii) a promissory note for $1,753,000.

The promissory note bears interest

at 3%, and the entire principal and accrued interest is due on November 1, 2023.

Underwritten Firm Commitment Underwritten Public

On May 4, 2021, the Company closed its firm commitment

underwritten public offering (the “S-1 Offering”) in which it sold 4,000,000 shares of its common stock, at a public offering

price of $4.00 per share, to ThinkEquity, a division of Fordham Financial Management, Inc., as representative of the underwriters (“ThinkEquity”),

pursuant into an underwriting agreement with Think Equity dated April 29, 2021.

The Company also granted the underwriters a 45-day option

to purchase up to an additional 600,000 shares of its common stock to cover over-allotments in the initial public offering price, less

the underwriting discount.

These shares of common stock in the S-1 Offering were offered and sold by the Company pursuant to a registration

statement on Form S-1, as amended (File No.

333-253491), filed with the SEC, which was declared effective by the Commission

on April 29, 2021 (the “S-1 Registration Statement”).

On July 21, 2021 the Company closed on a firm commitment

underwritten public offering (the “S-3 Offering”) in which it sold an aggregate of 13,333,334 shares of its Common Stock

at a purchase price of $4.50 per share to ThinkEquity, pursuant to an underwriting agreement dated July 18, 2021.

The Company has

also granted the underwriters a 45-day option to purchase up to an additional 2,000,000 shares of its common stock to cover over-allotments,

These shares of common stock in the S-3 Offering were offered and sold by the Company pursuant to a registration statement

on Form S-3, as amended (File No.

333-256216), filed with the SEC, which was declared effective by the SEC on June 14, 2021

and a Supplement to the Prospectus contained in this registration statement filed with the SEC on July 19, 2021.

Plan of Operations

Following the acquisition

of Rotor Riot, we remain focused on providing products and solutions to the drone industry.

Following the acquisition of

Rotor Riot and Fat Shark, we remain focused on providing products and solutions to the drone industry.

We believe that Rotor Riot’s

visibility and presence in the drone marketplace will foster growth in sales through its e*commerce platform and provide an initial

target base of customers for the launch of “Dronebox”.

We are targeting the second half of 2020 for the release of

Dronebox although no assurances can be provided regarding the actual release date.

Dronebox is being designed to provide distributed

data storage, analytics and related services to the drone industry.

The Company plans to utilize blockchain based technologies

and offer its solutions as a Software-as-a-Service platform.

Potential customers include regulators to track and review flight

data, insurance companies for coverage and claims administration, and pilots to maintain compliance with regulations.

visibility and presence in the drone marketplace will foster growth in sales through its e*commerce platform and provide an initial target

base of customers for the launch of “Dronebox”.

Dronebox is being designed to provide distributed data storage, analytics

and related services to the drone industry.

The Company plans to utilize blockchain based technologies and offer its solutions as a Software-as-a-Service

Potential customers include regulators to track and review flight data, insurance companies for coverage and claims administration,

and pilots to maintain compliance with regulations.

The operations of Fat Shark are expected to constitute a significant majority of

our revenue and results of operations and will position us to become a fully-integrated drone business with a strong supply chain while

we continue to develop and promote industry standards through our blockchain-based distributed network that provides secure data storage,

operational analytics, reporting, and SaaS solutions for the drone industry.

We are also developing the means to accurately track, report

and review flight data, which we believe will be the mainstay of future regulatory specifications and insurability.

Results of Operations

Year Ended April 30, 2021 and April 30, 2020

During the year ended April 30, 2020 (or the

“2020 period”), we generated revenues totaling $403,940 compared to zero revenues during the three months ended April

During the year ended April 30, 2021 (or the “2021

period”), we generated revenues totaling $4,999,517 compared to revenues totaling $403,940 during the year ended April 30, 2020

(or the “2020 period”).

On January 23, 2020, we completed a merger with Rotor Riot which sells drone technology

on its e*commerce site located at www.rotorriot.com.

The sales reported in the 2020 period represent those generated on the e*commerce

site from January 24, 2020 through April 30, 2020.

During calendar 2020, we acquired two drone technology companies, Rotor Riot and Fat Shark.

to these transactions, we did not have any revenue generating activities.

During the 2021 period, Rotor Riot and Fat Shark generated

approximately 44% and 56% of our revenues, respectively.

Cost of Goods Sold

During the year ended April 30, 2021, we incurred

cost of goods sold of $3,929,832 compared to $325,379 during the year ended April 30, 2020.

The periods presented are not comparable

as the 2020 period included one quarter of revenues for Rotor Riot as compared to the 2021 period which included a full year of revenues

for Rotor Riot and two quarters of revenues for Fat Shark.

During the year ended April 30, 2021, gross margin was $1,069,685 compared to $78,561 during the year ended April 30, 2020.

presented are not comparable as the 2020 period included one quarter of revenues for Rotor Riot as compared to the 2021 period which

included a full year of revenues for Rotor Riot and two quarters of revenues for Fat Shark.

Operating Expenses

During the year ended April 30, 2021, we incurred

research and development expenses totaling $488,990 compared to $366,590 for the year ended April 30, 2019 resulting in an increase

of $122,400, or 33%.

The increase substantially related to higher payroll costs as the Company’s headcount increased from

five employees to 10 employees following the merger with Rotor Riot.

operating expense of $590,342 compared to zero during the year ended April 30, 2020.

The increase is directly related to the acquisitions

of Rotor Riot in January 2020 and Fat Shark in November 2020.

During the year ended April 30, 2021, we incurred

general and administrative expenses totaling $1,248,717 compared to $384,742 for the year ended April 30, 2019 resulting in an

increase of $863,975, or 225%.

Professional services costs were significantly higher in the 2020 period because the Company is

now a public entity whereas in the 2019 period the Company was still privately owned.

Professional services costs totaled $699,982

during the 2020 period compared to $195,309 representing an increase of $504,673, or 258%.

Other Income totaled $57,215 during the year

ended April 30, 2020 compared to zero for the year ended April 30, 2019.

During the 2020 period, the Company received a loan from

the Small Business Administration which will be forgiven if the Company spends the loan proceeds on certain eligible costs, including

The Company believes that it has complied with the terms of forgiveness, and therefore, has recognized the funds as Other

Net Loss for the year ended April 30, 2020

totaled $1,601,931 compared to $751,332 for the year ended April 30, 2019 resulting in an increase of $850,599, or 113%.

the 2020 period, the Company became a public entity and completed a merger which doubled the number of employees.

These corporate

entity changes resulted in higher operating expenses in the 2020 period compared to the 2019 period.

Most significantly, professional

services costs were $504,673 higher in the 2020 period which represented approximately 60% of the increase in the Net Loss.

research and development expenses totaling $516,084 compared to $488,990 for the year ended April 30, 2020 resulting in an increase of

$27,094, or 6%.

The increase relates to payroll associated with employees hired from Rotor Riot and Fat Shark who are working on the

research and development of new drone technologies.

During the year ended April 30, 2021, we incurred

sales and marketing expenses of $172,182 compared to zero during the year ended April 30, 2020.

Costs incurred in the year ended April

30, 2021 relate to employees hired from Rotor Riot and Fat Shark, and also include sales commissions for referrals.

During the year ended April 30, 2021, we incurred

general and administrative expenses totaling $1,279,471 compared to $949,636 for the year ended April 30, 2020 resulting in an increase

of $329,835, or 35%.

The increase primarily relates to higher general and administrative payroll costs for employees hired from Rotor

Riot and Fat Shark.

Other Expense

Other expense totaled $8,359,565 during the year

ended April 30, 2021, compared to Other Income of $28,029 during the year ended April 30, 2020.

The expense incurred during the year

ended April 30, 2021 related to the Derivative Liability recorded in connection with the Company’s issuance of convertible debentures

and warrants in October 2020 and January 2021.

The significance of the expense is directly correlated to an increase in the Company’s

stock price following the issuance of the convertible debentures and warrants.

Net Loss for the year ended April 30, 2021 totaled

$13,236,175 compared to $1,601,931 for the year ended April 30, 2020 resulting in an increase of $11,634,244, or more than 100%.

Approximately

61% of the increase in Net Loss is directly related to derivative expenses incurred in connection with the issuance of convertible debentures

in October 2020 and January 2021.

These securities were not outstanding during the year ended April 30, 2020.

The remaining

39% of the increase is related to the expansion of the Company’s commercial activities including the hiring of personnel formerly

employed with Rotor Riot and Fat Shark.

Operating Activities

2 unchanged sentences

representing an increase of $587,417, or 72%.

This increase in net cash used primarily related to a net loss, net of non-cash

expenses, which was $446,704 higher in the 2020 period, partially offset by a positive contribution related to changes in operating

assets and liabilities of $316,452 during the 2020 period compared to a negative contribution of $72,056 during the 2019 period.

Net cash used in operations, net of non-cash expenses associated with the derivative liability,

stock-based compensation, and amortization of intangible assets totaled $1,587,946 in the year ended April 30, 2021 compared to $1,128,036

in the year ended April 30, 2020, resulting an increase of $459,910, or 41%.

The increase primarily related to higher net costs associated

with becoming a commercial enterprise through the merger with Rotor Riot in January 2020 and the acquisition of Fat Shark in November

Net cash provided by changes in operating assets and liabilities totaled $188,945 during the year ended April 30, 2021 compared

to net cash provided by operating activities of $316,452 during the year ended April 30, 2020, representing a decrease in cash provided

of $127,507, or 40%.

Changes in operating assets and liabilities can fluctuate significantly from year to year depending upon the timing

and level of multiple factors, including inventory purchases and vendor payments.

Investing Activities

Net cash provided by investing activities was

$46,327 during the year ended April 30, 2020 compared to $0 during the year ended April 30, 2019.

acquired $46,327 of cash in connection with two acquisitions completed in the 2020 period.

Net cash used in investing activities was $48,368

during the year ended April 30, 2021 compared to net cash provided by investing activities of $46,327 during the year ended April 30,

The amounts for both periods related to acquisitions which can vary from one transaction to another.

Financing Activities

Net cash provided by financing activities

totaled $498,487 during the twelve months ended April 30, 2020 compared to $686,500 during the year ended April 30, 2019, representing

a decrease of $188,013, or 27%.

Amounts received in both periods related to capital raised from common stock and debt transactions.

Capital transactions can vary from period to period depending upon market conditions, both at a macro-level and specific to the

Net cash provided by financing activities totaled

$1,488,048 during the year ended April 30, 2021 compared to $498,487 during the year ended April 30, 2020, representing an increase of

$989,561, or 199%.

Financing activities can vary, in nature and amount, from period to period.

During the year ended April 30, 2021,

net cash of $1,080,000 and $201,249 was provided through the issuance of convertible debentures and the exercise of warrants, respectively.

During the year ended April 30, 2020, net cash of $450,000 and $152,239 was provided through the sale of convertible debentures and the

exercise of a warrant, respectively.

Liquidity and Capital Resources

As of April 30, 2020, we had current assets

totaling $318,338 primarily related to cash balances of $236,668.

Current liabilities as of April 30, 2020 totaled $829,266, and

included accounts payable of $249,050, accrued expenses totaling $89,342, notes payable totaling $118,771, and amounts due to a

related party of $333,684.

Our net working capital as of April 30, 2020 was negative $510,928.

Since inception, we have generated less than

$500,000 in revenues and have accumulated losses of approximately $2.6 million.

To date, we have funded our operations through

private offerings of common stock sourced primarily from individual private investors.

We do not have sufficient cash resources

to meet our working capital needs for the next 12 months and will require additional capital in order to execute our business plan.

Such transactions may be insufficient to fund our cash requirements.

In November 2019 we issued a convertible note

in the principal amount of $300,000 to one accredited investor and in December 2019 we issued a convertible note in the principal

amount of $125,000 to a director and a convertible note in the principal amount of $25,000 to our chief executive officer.

(collectively,

the “Notes”).

The Notes have a term of 2 years and bear interest at a rate of 12% which accrues and is payable in full

when the Notes mature.

Interest on the Notes may be paid in cash or in shares of common stock of the Company at the Conversion

Price (as defined below).The Notes are convertible into shares of common stock at the holder’s sole discretion as follows:

(A) prior to consummating an equity financing which generates gross proceeds of not less than $3,000,000 (a “Qualified Offering”),

then at the 30 day volume weighted average of the closing price of a share of our common stock as listed or quoted on the market

in which the shares are then traded or listed, or (B) after we have consummated a Qualified Offering, at 40% of the price per share

of common stock sold in the Qualified Offering (the “Conversion Price”) .

We may, upon 10 business days advance notice,

elect to pre-pay the Note, including all accrued interest, in whole or in part, provided that any such prepayment prior to the

one-year anniversary of the Note issuance shall be at a price equal to 112% of the then outstanding original principal amount.

Upon an event of default, as described in the Notes, the outstanding principal and interest shall become immediately due and payable.

Additionally, under the Note, unless waived by the holder, the holder shall not be entitled to convert the Note if such conversion

would result in beneficial ownership by the holder and its affiliates of more than 9.99% of the outstanding shares of common stock

of the Company on such date.

Until we are able to sustain operations

through the sale of products and services, we will continue to fund operations through equity and/or debt transactions.

can provide no assurance that any future financing will be sufficient to fund our operations until we are

able to sustain operations through the sale of products and services.

In addition, there can be no assurance that such

additional financing will be available to us on acceptable terms, or at all.

As of April 30, 2021, we had current assets totaling

$1,640,010 including cash of $277,347, inventory of $362,072, and accounts receivable of $321,693.

Current liabilities as of April 30,

2021 totaled $4,674,070, and included derivative liability of $2,812,767, accounts payable of $541,903, accrued expenses of $614,050,

notes payable of $269,045, amounts due to a related party of $390,209, and customer deposits of $46,096.

Our net working capital as of

April 30, 2021 was negative $3,034,060.

We have only recently begun generating revenues and

have reported net losses since our inception.

Through fiscal year 2021, we have funded our operations through private offerings of common

stock primarily from individual private investors.

In May 2021, we completed an offering of common stock which raised gross proceeds

of $16 million.

In July 2021, we completed an offering of common stock which raised gross proceeds of $60 million.

2019 Convertible Note Offering

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”).

The 2019 Notes have a two-year term and bear interest at a rate of 12%.

Interest on the 2019 Notes may be

paid in cash or in shares of common stock of the Company at the 2019 Note Conversion Price (as defined below).

The 2019 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 (in this case, 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 (in this case, the “Conversion

Price”).

We may, upon 10 business days prior notice, pre-pay the 2019 Notes, including all accrued interest, in whole or in part,

provided that any such prepayment prior to the one-year anniversary of the 2019 Note issuance will 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

will become immediately due and payable.

Additionally, under the 2019 Note, unless waived by the holder, the holder is not be entitled

to convert the 2019 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.

2020 Convertible Note Offering

On October 5, 2020, the Company closed a private

offering of convertible promissory notes in the aggregate principal amount of $600,000 (the “2020 Notes”) and issued five-year

warrants to purchase an aggregate of 399,998 shares of common stock (the “2020 Warrants”).

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 of $1.00 per share or, upon the consummation of an offering of common stock resulting in the listing for trading on

the NYSE American, the Nasdaq Capital Market, the Nasdaq Global Market, the Nasdaq Global Select Market or the New York Stock Exchange

at a price equal to 75% of the price of the securities sold in such offering (in this case, a “Qualified Offering”).

2020 Notes also contain protection from dilution in the event of a lower priced issuance.

Upon an event of default, as described in the 2020

Note, the conversion price will equal the lower of (i) the thirty-day volume weighted average of the closing price of the Company’s

common stock if the conversion occurs prior to a Qualified Offering, or (ii) 65% multiplied by the lowest closing price of the common

stock during the twenty consecutive trading day period immediately prior to the conversion.

The Company may prepay all or any portion of the

2020 Note, without penalty or premium, upon at least ten business days’

prior notice to the noteholder.

Upon issuance by the Company

of a security, or amendment to a security, that the noteholder reasonably believes is more favorable, such term, at noteholder’s

option, will become a part of the 2020 Note, except for certain exempt issuances.

No conversions under the 2020 Note will be effected

that will result in the noteholder, together with any affiliate, beneficially owning in excess of 9.99% of the Company’s outstanding

common stock immediately after giving effect to such conversion.

The 2020 Warrants are exercisable at a price equal

to the lower of (i) $1.50 per share or (ii) if a Qualified Offering occurs, at a 25% discount to the price per share of the common stock

offered in such Qualified Offering.

The number of shares of common stock for which the 2020 Warrant is exercisable is subject to adjustment

in the event of a stock split or dividend, and similar event or certain corporate events such reorganizations and mergers.

of a reorganization or reclassification of capital stock, the consolidation or merger, or the sale or other disposition of all or substantially

all the property, assets, business, and goodwill of the Company, the warrant holder will be entitled to purchase the kind and amount

of shares of capital stock which the 2020 Warrant entitled the warrant holder to purchase immediately prior to such event.

The 2020 Warrants

also include piggyback registration rights.

Until we are able to sustain operations through the

sale of products and services, we will continue to fund operations through equity and/or debt transactions.

We can provide no assurance

that the financing described above will be sufficient to fund our operations until we are able to sustain operations through the sale

of products and services.

In addition, there can be no assurance that such additional financing, if required, will be available to us

on acceptable terms, or at all.

2021 Convertible Note Offering

On January 27, 2021, the Company closed of a private

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

and issued five-year warrants to purchase an aggregate of 675,000 shares of common stock (the “2021 Warrants”) to six accredited

investors for total offering proceeds of $500,000.

The 2012 Notes accrue interest at the rate of 12% per annum and are payable two years

from the date of issuance.

The 2021 Notes are convertible into common stock

at a conversion price of $1.00 per share or, upon the consummation of an offering of common stock resulting in the listing for trading

on the NYSE American, the Nasdaq Capital Market, the Nasdaq Global Market, the Nasdaq Global Select Market or the New York Stock Exchange

at a price equal to 75% of the price of the securities sold in such offering (in this case, a “Qualified Offering”).

The 2021 Notes may be converted at any time in the

discretion of the holder prior to a Qualified Offering and automatically convert upon the consummation of a Qualified Offering, provided

the note may not convert if as a result of such conversion the holder together with its affiliates would beneficially own in excess of

9.99% of the shares of our common stock outstanding after giving effect to such conversion.

If an event of default occurs, the conversion price

will be reduced to the lower of (i) the thirty-day volume weighted average of the closing price per share of our common stock, if prior

to a Qualified Offering, or (ii) 65% of the lowest closing price of the common stock during the twenty consecutive trading day period

immediately preceding the date of the conversion.

The 2021 Notes also contain protection from dilution

in the event of a lower priced issuance and adjustments if securities are issued with more favorable terms.

The 2021 Warrants are exercisable 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 the Qualified Offering and, if there

is no effective registration statement for the resale the shares subject to the warrant, the warrant may be exercised on a cashless basis.

2021 Underwritten Public Offerings

On May 4, 2021, the Company closed its firm commitment

underwritten public offering (the “S-1 Offering”) in which it sold 4,000,000 shares of its common stock, at a public offering

price of $4.00 per share, to ThinkEquity, a division of Fordham Financial Management, Inc., as representative of the underwriters (“ThinkEquity”),

pursuant into an underwriting agreement with Think Equity dated April 29, 2021.

The Company also granted the underwriters a 45-day option

to purchase up to an additional 600,000 shares of its common stock to cover over-allotments in the initial public offering price, less

the underwriting discount.

These shares of common stock in the S-1 Offering were offered and sold by the Company pursuant to a registration

statement on Form S-1, as amended (File No.

333-253491), filed with the SEC, which was declared effective by the Commission

on April 29, 2021 (the “S-1 Registration Statement”).

The net proceeds to the Company from the Offering,

after deducting the underwriting discount, the underwriters’

fees and expenses and the Company’s estimated Offering expenses,

were approximately $14.6 million .

The Company anticipates using the net proceeds from the Offering to provide funding

for service, sales, and marketing efforts for its Red Cat Drone Services, strategic acquisitions and related expenses, and general working

On July 21, 2021 the Company closed on a firm commitment

underwritten public offering (the “S-3 Offering”) in which it sold an aggregate of 13,333,334 shares of its Common Stock

at a purchase price of $4.50 per share to ThinkEquity, pursuant to an underwriting agreement dated July 18, 2021.

The Company has

also granted the underwriters a 45-day option to purchase up to an additional 2,000,000 shares of its common stock to cover over-allotments,

These shares of common stock in the S-3 Offering were offered and sold by the Company pursuant to a registration statement

on Form S-3, as amended (File No.

333-256216), filed with the SEC, which was declared effective by the SEC on June 14, 2021

and a Supplement to the Prospectus contained in this registration statement filed with the SEC on July 19, 2021.

The net proceeds to the Company from the S-3 Offering,

after deducting the underwriting discount, the underwriters’

fees and expenses and the Company’s estimated expenses related

to this S-3 Offering, were approximately $55.5 million,.

The Company anticipates using the net proceeds from the S-3

Offering to provide funding for services, sales, and marketing efforts for its Red Cat Drone services, strategic acquisitions and related

expenses, and general working capital.

Going Concern

We have experienced losses from operations

since inception.

To date, we have generated less than $500,000 in product sales and have been unable to become cash flow positive.

The success of our business plan during the next 12 months and beyond will be contingent upon generating sufficient revenue to

cover our costs of operations and/or upon obtaining additional financing.

The report from our independent registered public accounting

firm for the fiscal year ended April 30, 2020 includes an explanatory paragraph stating the Company has recurring net losses from

operations, negative operating cash flows, and will need additional working capital for ongoing operations.

These factors, among

others, raise substantial doubt about the Company's ability to continue as a going concern.

If we are unable to obtain sufficient

funding, our business, prospects, financial condition and results of operations will be materially and adversely affected and we

may be unable to continue as a going concern.

We 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.

We only began generating revenues in January 2020

and have reported net losses since our inception.

We expect to report net losses for at least the next twelve months.

The success of

our business plan during the next 12 months and beyond will be contingent upon generating sufficient revenue to cover our operating costs

and/or upon obtaining additional financing.

The report from our independent registered public accounting firm for the fiscal year ended

April 30, 2021 includes an explanatory paragraph stating the Company has recurring net losses from operations, negative operating cash

flows, and will need additional working capital for ongoing operations.

These factors, among others, raise substantial doubt about the

Company's ability to continue as a going concern.

If we are unable to obtain sufficient funding, our business, prospects, financial condition

and results of operations will be materially and adversely affected and we may be unable to continue as a going concern.

As reflected in our accompanying financial statements,

we had negative working capital of $3,034,060 at April 30, 2021 and have accumulated losses totaling approximately $15.8 million through

April 30, 2021.

Management recognizes that these operating results and our financial position raise substantial doubt about our ability

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.

May 2021, we completed an offering of common stock which raised gross proceeds of $16 million.

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 form more than the next twelve months.

Critical Accounting Policies and Estimates

Our financial statements and accompanying notes

have been prepared in accordance with generally accepted accounting principles (“GAAP”) applied on a consistent basis.

The preparation of financial statements in conformity 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 revenues and expenses during the reporting periods.

We regularly evaluate the accounting policies

and estimates that we use to prepare our financial statements.

A complete summary of these policies is included in the notes to

our financial statements.

In general, management’s estimates are based on historical experience, on information from third

party professionals, and on various other assumptions that are believed to be reasonable under the facts and circumstances.

results could differ from those estimates made by management.

Our financial statements and accompanying notes have

been prepared in accordance with GAAP applied on a consistent basis.

The preparation of financial statements in conformity 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 revenues and expenses during the reporting

We regularly evaluate the accounting policies and

estimates that we use to prepare our financial statements.

A complete summary of these policies is included in the notes to our financial

In general, management’s estimates are based on historical experience, on information from third party professionals,

and on various other assumptions that are believed to be reasonable under the facts and circumstances.

Actual results could differ from

those estimates made by management.

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.

Fair Values, Inputs and Valuation Techniques

for Financial Assets and Liabilities and Related Disclosures

The fair value measurements and disclosure guidance

defines fair value and establishes a framework for measuring fair value.

Fair value is defined 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.

In accordance

with this guidance, the Company has categorized its recurring basis financial assets and liabilities into a three-level fair value hierarchy

based on the priority of the inputs to the valuation technique.

The fair value hierarchy gives the highest priority

to quoted prices in active markets for identical assets or liabilities (Level 1) and the lowest priority to unobservable inputs (Level

The inputs used to measure fair value may fall into different levels of the fair value hierarchy.

In such cases, the level in the

fair value hierarchy within which the fair value measurement in its entirety falls has been determined based on the lowest level input

that is significant to the fair value measurement in its entirety.

The Company’s assessment of the significance of a particular

input to the fair value measurement in its entirety requires judgment and considers factors specific to the asset or liability.

The levels of the fair value hierarchy are described

Level 1 inputs

utilize quoted prices (unadjusted) in active markets for identical assets or liabilities that the Company has the ability to access.

Level 2 inputs utilize other than quoted prices included

in Level 1 that are observable for the asset, either directly or indirectly, for substantially the full term of the asset.

2 inputs include quoted prices for similar assets in active markets, quoted prices for identical or similar assets in markets that

are not active and inputs other than quoted prices that are observable in the marketplace for the asset.

The observable inputs are

used in valuation models to calculate the fair value for the asset.

Level 3 inputs are unobservable but are significant to

the fair value measurement for the asset, and include situations where there is little, if any, market activity for the asset.

inputs reflect management’s own assumptions about the assumptions a market participant would use in pricing the asset.

A review of fair value hierarchy classifications

is conducted on a quarterly basis.

Changes in the observability of valuation inputs may result in a reclassification of levels for certain

securities within the fair value hierarchy.

Disclosures for Non-Financial Assets Measured

at Fair Value on a Non-Recurring Basis

The Company’s financial instruments mainly

consist of cash, receivables, current assets, accounts payable and accrued expenses and debt.

The carrying amounts of its cash, receivables,

current asserts, accounts payable, accrued expenses and current debt approximates fair value due to the short-term nature of these instruments.

Convertible Securities and Derivatives - When the Company

issues convertible debt or equity instruments that contain embedded derivative instruments that are to be bifurcated and accounted for

as liabilities, the total proceeds from the convertible host instruments are first allocated to the bifurcated derivative instruments.

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 but no lower than zero.

Any excess amount is recognized as a derivative expense.

Derivative Liabilities - The Company

has financial instruments that are considered derivatives or contain embedded features subject to derivative accounting.

Embedded derivatives

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

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.

In October 2020 and January 2021, the Company entered

into convertible note agreements which included provisions under which the conversion price was equal to the lesser of an initial stated

amount or the conversion price of a future offering.

This variable conversion feature was recognized as a derivative.

Both financings

included the issuance of warrants which contained similar variable conversion features.

The Company values these convertible notes and

warrants using the multinomial lattice method that values the derivative liability within the notes based on a probability weighted discounted

cash flow model.

The resulting liability is valued at each reporting date and the change in the liability is reflected as change in derivative

liability in the statement of operations.

Stock-Based Compensation - We use the estimated

grant-date fair value method of accounting in accordance with ASC Topic 718, Compensation –

Stock Compensation.

Fair value is determined

using the Black-Scholes Model using inputs reflecting our estimates of expected volatility, term and future dividends.

We plan to estimate

the forfeiture rate based on our historical experience but have made no such allowance to date as our first issuances of stock based

awards occurred in October 2019 and we have not experienced any forfeitures to date.

We recognize compensation costs on a straight line

basis over the service period which is generally the vesting term.

Off-Balance Sheet Arrangements

1 unchanged sentence

Recently Issued Accounting Pronouncements

The Company has implemented all new accounting

pronouncements that are in effect.

These pronouncements did not have any material impact on the financial statements unless otherwise

disclosed, and the Company does not believe that there are any other new accounting pronouncements that have been issued that

might have a material impact on its financial position or results of operations.

QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET

As a smaller reporting company, we are not required to provide this

The Company has implemented all new accounting pronouncements

that are in effect.

These pronouncements did not have any material impact on the financial statements unless otherwise disclosed, and

the Company does not believe that there are any other new accounting pronouncements that have been issued that might have a material

impact on its financial position or results of operations.

QUANTITATIVE AND QUALITATIVE DISCLOSURES

ABOUT MARKET RISK

As a smaller reporting company, we are not required

to provide this information.

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-K

Item 7. Management’s Discussion and Analysis