What changed in this filing

/stocks — the workspaceLOADING

Item 8. Financial Statements and Supplementary Data

2021-08-12 compared with 2020-08-13 · 802 added, 472 removed, 111 unchanged (92% of the section changed)

FINANCIAL STATEMENTS AND SUPPLEMENTARY DATA

FINANCIAL STATEMENTS AND SUPPLEMENTARY

RED HAT HOLDINGS, INC.

INDEX TO FINANCIAL STATEMENTS

Report of Independent Registered

Accounting Firm

Balance Sheets as of April

30, 2020 and 2019

Statements of Operations for the

years ended April 30, 2020 and 2019

Report of Independent Registered Accounting Firm

Balance Sheets as of April 30, 2021 and 2020

Statements of Operations for the years ended April 30, 2021 and 2020

Statements of Changes in Shareholders’

Equity for the years ended April 30, 2021 and 2020

Statements of Cash Flows for the

years ended April 30, 2020 and 2019

Statements of Cash Flows for the years ended April 30, 2021 and 2020

Notes to the Financial Statements

Report of Independent Registered Public Accounting

Report of Independent Registered

Public Accounting Firm

To the shareholders and the board

of directors of Red Cat Holdings, Inc.

Report of Independent Registered Public

Accounting Firm

To the shareholders and the board of directors

of Red Cat Holdings

Opinion on the Financial Statements

We have audited the accompanying

consolidated balance sheets of Red Cat Holdings, Inc.

as of April 30, 2020 and 2019, the related statements of operations, stockholders'

equity (deficit), and cash flows for the years then ended, and the related notes (collectively referred to as the "financial

statements").

In our opinion, the financial statements present fairly, in all material respects, the financial position of

the Company as of April 30, 2020 and 2019, and the results of its operations and its cash flows for the years then ended, in conformity

with accounting principles generally accepted in the United States.

Basis for Opinion

These financial statements are the

responsibility of the Company's management.

Our responsibility is to express an opinion on the Company's financial statements based

on our audit.

We are a public accounting firm registered with the Public Company Accounting Oversight Board (United States) ("PCAOB")

and are required to be independent with respect to the Company in accordance with the U.S.

federal securities laws and the applicable

rules and regulations of the Securities and Exchange Commission and the PCAOB.

We conducted our audit in accordance

with the standards of the PCAOB.

Those standards require that we plan and perform the audit to obtain reasonable assurance about

whether the financial statements are free of material misstatement, whether due to error or fraud.

The Company is not required

to have, nor were we engaged to perform, an audit of its internal control over financial reporting.

As part of our audits we are

required to obtain an understanding of internal control over financial reporting but not for the purpose of expressing an opinion

on the effectiveness of the Company’s internal control over financial reporting.

Accordingly, we express no such opinion.

Our audit included performing procedures

to assess the risks of material misstatement of the financial statements, whether due to error or fraud, and performing procedures

that respond to those risks.

Such procedures included examining, on a test basis, evidence regarding the amounts and disclosures

in the financial statements.

Our audit also included evaluating the accounting principles used and significant estimates made by

management, as well as evaluating the overall presentation of the financial statements.

We believe that our audit provides a reasonable

basis for our opinion.

We have audited the accompanying balance

sheets of Red Cat Holdings as of April 30, 2021 and 2020, the related statements of operations, stockholders' equity (deficit), and cash

flows for the years then ended, and the related notes (collectively referred to as the "financial statements").

In our opinion,

the financial statements present fairly, in all material respects, the financial position of the Company as of April 30, 2021 and 2020,

and the results of its operations and its cash flows for the years then ended, in conformity with accounting principles generally accepted

in the United States.

Substantial Doubt about the Company’s

Ability to Continue as a Going Concern

The accompanying financial statements

have been prepared assuming that the Company will continue as a going concern.

As discussed in Note 2 to the financial statements,

the Company has suffered recurring losses from operations and has a significant accumulated deficit.

In addition, the Company continues

to experience negative cash flows from operations.

These factors raise substantial doubt about the Company's ability to continue

as a going concern.

The accompanying financial statements have

been prepared assuming that the Company will continue as a going concern.

As discussed in Note 2 to the financial statements, the Company

has suffered recurring losses from operations and has a significant accumulated deficit.

In addition, the Company continues to experience

negative cash flows from operations.

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

Management's plans in regard to these matters are also described in Note 2.

The financial statements do not

include any adjustments that might result from the outcome of this uncertainty.

The financial statements do not include any adjustments that

might result from the outcome of this uncertainty.

Basis for Opinion

These financial statements are the responsibility

of the Company's management.

Our responsibility is to express an opinion on the Company's financial statements based on our audit.

are a public accounting firm registered with the Public Company Accounting Oversight Board (United States) ("PCAOB") and are

required to be independent with respect to the Company in accordance with the U.S.

federal securities laws and the applicable rules and

regulations of the Securities and Exchange Commission and the PCAOB.

We conducted our audit in accordance with

the standards of the PCAOB.

Those standards require that we plan and perform the audit to obtain reasonable assurance about whether the

financial statements are free of material misstatement, whether due to error or fraud.

The Company is not required to have, nor were we

engaged to perform, an audit of its internal control over financial reporting.

As part of our audits we are required to obtain an understanding

of internal control over financial reporting but not for the purpose of expressing an opinion on the effectiveness of the Company’s

internal control over financial reporting.

Accordingly, we express no such opinion.

Our audit included performing procedures

to assess the risks of material misstatement of the financial statements, whether due to error or fraud, and performing procedures that

respond to those risks.

Such procedures included examining, on a test basis, evidence regarding the amounts and disclosures in the financial

Our audit also included evaluating the accounting principles used and significant estimates made by management, as well as

evaluating the overall presentation of the financial statements.

We believe that our audit provides a reasonable basis for our opinion.

/S/ BF Borgers CPA PC

5 unchanged sentences

Current Assets

Accounts receivable, net

Total Current Assets

Intangible assets, net

LIABILITIES AND STOCKHOLDERS' EQUITY

Current Liabilities

to Related Party

shares to be issued

Accounts payable

Accrued expenses

Notes payable

Due to related party

Customer deposits

Warrant derivative liability

Total Current Liabilities

Convertible debentures

Convertible debentures, net

Note payable to related party

Total Long Term Liabilities

Commitments and contingencies

Stockholders' Equity

Series A Preferred Stock - shares

authorized 2,200,000;

outstanding 208,704 and 0

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

158,704 and 208,704

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

outstanding 3,681,623 and 0

1,968,676 and 3,681,623

Common stock - shares authorized 500,000,000;

outstanding 20,011,091 and 179,292

outstanding 29,431,264

and 20,011,091

Additional paid-in capital

Accumulated deficit

(15,809,928 )

Total Stockholders' Equity

TOTAL LIABILITIES AND STOCKHOLDERS' EQUITY

TOTAL LIABILITIES

AND STOCKHOLDERS' EQUITY

See accompanying notes.

1 unchanged sentence

Consolidated Statements Of Operations

Year ended April

ended April 30,

Cost of goods sold

1 unchanged sentence

Research and development

Sales and marketing

General and administrative

Stock based compensation

Total operating expenses

Operating loss

Provision for income taxes

Net operating income

Other Expense (Income)

Derivative expense

Change in fair value of derivative liability

Interest expense

Other Expense (Income)

$ (13,236,175 )

$ (1,601,931 )

Loss per share - basic and diluted

average shares outstanding - basic and diluted

See accompanying notes.

Weighted average shares outstanding - basic and diluted

RED CAT HOLDINGS

Consolidated Stockholders' Equity Statements

April 30, 2018

Issuance of common stock

Balances, April 30, 2019

1 unchanged sentence

Share Exchange Agreement

Conversion of Preferred

Conversion of Preferred Stock

Exercise of warrants

2 unchanged sentences

Shares Issued for Services

April 30, 2020

Balances, April 30, 2020

$ (2,573,753 )

See accompanying

Conversion of Debt

Conversion of Preferred Stock

Exercise of Warrants

Acquisition of Fat Shark

Stock based compensation

(13,236,175 )

Balances, April 30, 2021

$ (15,809,928 )

RED CAT HOLDINGS

Consolidated Cash Flows

Consolidated Cash Flows Statements

Year ended April 30,

1 unchanged sentence

$ (13,236,175 )

$ (1,601,931 )

Stock based compensation

Common stock issued for services

Amortization of intangible assets

Amortization of debt discount

Derivative expense

Change in fair value of derivative

Adjustments to reconcile net loss to net cash from operations,

net of amounts acquired:

Changes in operating assets and liabilities

Other current assets

Accounts receivable

Customer deposits

Accounts payable

Accrued expense

Accrued expenses

Net cash used in operating activities

Cash Flows from Investing Activities

Acquired through acquisitions

Net cash provided by investing activities

Acquired through acquisition

Payment for acquisition, net of cash acquired

Net cash (used in) provided by investing activities

Cash Flows from Financing Activities

Proceeds from issuance of common stock

Capital to be returned

Proceeds from exercise of warrants

Proceeds from issuance of convertible debentures

Proceeds from related party obligations

Payments under related party obligations

Proceeds from notes payable

Payments under notes payable

Proceeds from convertible debentures

Net cash provided by financing activities

Net use of Cash

Net increase (decrease) in Cash

Cash, beginning of period

Cash, end of period

Cash paid for interest and taxes

Noncash transactions

Cash paid for interest

Cash paid for taxes

Non-cash transactions

Common stock issued for services

Fair value of shares exchanged in acquisitions

See accompanying notes.

Elimination of derivative liability

Issuance of note payable - related party

Conversion of notes into common stock

Conversion of accrued interest into common

RED CAT HOLDINGS, INC.

NOTES TO CONDENSED CONSOLIDATED FINANCIAL

NOTES TO CONSOLIDATED

FINANCIAL STATEMENTS

April 30, 2021 and 2020

Note 1 - The Business

Cat Holdings, Inc.

(“Red Cat”

or the “Company”) was originally incorporated in

February 1984.

The Company’s primary business is to provide products, services and solutions to the drone industry.

in two sectors of the drone industry.

Rotor Riot, a wholly owned subsidiary, designs and sells drones and related components.

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

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

Its initial product candidate is Dronebox, a blockchain technology that records, stores and analyzes flight data and information

from a drone, much like the “black box”

utilized by the airline industry.

The Company plans to offer Dronebox as a

Software-as-a-Service platform.

Recent corporate developments include:

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.

(i) 196,667 shares of our

common stock, (ii) 2,169,068 shares of our newly-designated Series A Preferred Stock, and (iii) 4,212,645 shares of our newly-designated

Series B Preferred Stock.

In total, the common stock, Series A Preferred Stock, and Series B Preferred Stock issued under the SEA

were valued at $117,754.

The transaction was accounted for as a “reverse

acquisition”

as the stockholders of Red Cat possessed majority voting control of the company immediately following the acquisition.

In this reverse merger, the financial results of Red Cat Propware, Inc., (the accounting acquirer), have been presented as the

continuing operations of the Company since inception.

The transaction was accounted for as follows:

The goodwill recognized in connection with

the acquisition is primarily attributable to anticipated synergies and benefits from the combination of the two companies, including

access to the public markets to raise capital, and is expected to be deductible for tax purposes.

Series A Preferred Stock is convertible to

common stock at a ratio of 8.33 shares of common stock for each share of preferred stock held and votes together with the common

stock on an as-converted basis.

The new Series A Preferred Stock converted automatically to common stock upon the effectiveness

of the reverse split of our common stock in August 2019.

This common stock and Series A Preferred Stock issued under the SEA constituted

approximately 83.33% of our issued and outstanding share capital on a fully-diluted basis on the date of issuance.

Series B Preferred Stock is convertible to

common stock at a ratio of 0.83 shares of common stock for each share of preferred stock held, and votes together with the common

stock on an as-converted basis.

The Series B Preferred Stock issued under the SEA constituted approximately 15.64% of our issued

and outstanding share capital on a fully-diluted basis on the date of issuance.

Red Cat Holdings (“Red Cat”

or 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 which it presently does through its four wholly owned subsidiaries.

Fat Shark Holdings is a provider

of First Person View (FPV) video goggles to the drone industry.

Rotor Riot sells FPV drones and equipment, primarily to the consumer marketplace

through its digital storefront located at www.rotorriot.com.

Rotor Riot enjoys high visibility in social media through its Facebook page

and its sponsorship of a professional drone racing team which has won numerous championships.

Skypersonic provides software and hardware

solutions that enable drones to complete inspection services in locations where GPS (global positioning systems) are not available, yet

still record and transmit data even while being operated from thousands of miles away.

Red Cat Propware is developing a software-as-a-solution

(“SaaS”) platform to provide drone flight data analytics and storage, as well as diagnostic products and services.

Corporate developments during the two years ended

April 30, 2021 include:

The Share Exchange

Effective May 15, 2019, the company, then operating

as TimeFireVR, Inc., (“TimeFire”), closed a Share Exchange Agreement (the “SEA”) with Red Cat Propware.

the SEA, Red Cat Propware acquired approximately 83.33% of TimeFire’s outstanding share capital on a fully-diluted basis.

(i) 196,667 shares of common stock, (ii) 2,169,068 shares of newly-designated Series A Preferred Stock, and (iii) 4,212,645 shares

of 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, and resulted in cash acquired of $24,704 and goodwill of $93,050.

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.

Series A Preferred Stock is convertible to common

stock at a ratio of 8.33 shares of common stock for each share and votes together with the common stock on an as-converted basis.

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 and votes together with the common stock on an as-converted basis.

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

In July 2019, we changed our name from TimeFire

In July 2019, we changed our name from TimeFire VR

to Red Cat Holdings, Inc.

In August 2019, we changed our fiscal year

to April 30 which was the historical fiscal year of Red Cat.

In August 2019, we effected a reverse

stock split (the “Reverse Stock Split”) of our outstanding shares of common stock at a ratio of one-for-twelve hundred

(1 for 1,200).

All references in this report to shares of the Company’s common stock, including prices per share of its common

stock, reflect the Reverse Stock Split.

In August 2019, we changed our fiscal year to April

30 which was the historical fiscal year of Red Cat Propware, Inc.

In August 2019, we effected a reverse stock split

(the “Reverse Stock Split”) of our outstanding shares of common stock at a ratio of one-for-twelve hundred (1 for 1,200).

All references in this report to shares of the Company’s common stock, including prices per share of its common stock, reflect

the Reverse Stock Split.

Merger Agreement with Rotor Riot, LLC

On December 31, 2019, the Company entered into

an Agreement of Merger (the “Merger Agreement”) with Rotor Riot and the three members of Rotor Riot.

On January 23,

2020, the Merger was consummated under which Rotor Riot Acquisition Corp, a wholly owned Delaware subsidiary of the Company, merged

with and into Rotor Riot, with Rotor Riot continuing as the surviving entity and a wholly owned subsidiary of Red Cat Holdings.

Under the Merger Agreement, each member of

Rotor Riot received its pro rata portion of the total number of shares of the Company’s common stock issued based on (A)(i)

$3,700,000 minus (ii) $915,563 (which included certain debt and other obligations of Rotor Riot and its Chief Executive Officer

that the Company agreed to assume (the “Assumed Obligations”) divided by (B) the volume weighted average price (“VWAP”)

of the Company’s common stock for the twenty trading days prior to the closing of the Merger.

Based on a share issuance value

of $2,784,437 and a VWAP of $1.25445, the Company issued an aggregate of 2,219,650 shares of common stock to the members of Rotor

Following the closing of the Merger Agreement,

the former members of Rotor Riot owned approximately 10.4% of the Company.

In addition, management of Red Cat Holdings controls

the operating decisions of the combined company.

Accordingly, we have accounted for the transaction as an acquisition of Rotor

Riot by Red Cat.

Based on purchase price accounting, we have recognized the assets and liabilities of Rotor Riot at fair value

with the excess of the purchase price over the net assets acquired recognized as goodwill.

The table below reflects the Company’s

estimates of the acquisition date values of the purchase consideration, assets acquired, and liabilities assumed.

The shares issued

were valued at $1,820,113 (2,219,650 shares issued times $0.82 per share which equaled the closing price of the Company’s

common stock on the date that the merger agreement was consummated).

Purchase Price

an Agreement of Merger (the “Merger Agreement”) with Rotor Riot.

On January 23, 2020, the Merger Agreement was consummated

under which Rotor Riot Acquisition Corp, a wholly owned subsidiary of the Company, merged with and into Rotor Riot, with Rotor Riot continuing

as the surviving entity and a wholly owned subsidiary of the Company.

Under the Merger Agreement, each member of Rotor

Riot received its pro rata portion of the total number of shares of the Company’s common stock issued based on (A)(i) $3,700,000

minus (ii) $915,563 (which included certain debt and other obligations of Rotor Riot and its Chief Executive Officer that the Company

agreed to assume (the “Assumed Obligations”) divided by (B) the volume weighted average price (“VWAP”) of the

Company’s common stock for the twenty trading days prior to the closing of the Merger.

Based on a share issuance value of $2,784,437

and a VWAP of $1.25445, the Company issued an aggregate of 2,219,650 shares of common stock to the members of Rotor Riot.

Following the closing of the Merger Agreement, the

former members of Rotor Riot owned approximately 10.4% of the Company.

In addition, the Company’s management controls the operating

decisions of the combined company.

Accordingly, we have accounted for the transaction as an acquisition of Rotor Riot by the Company.

Based on purchase price accounting, we have recognized the assets and liabilities of Rotor Riot at fair value with the excess of the

purchase price over the net assets acquired recognized as goodwill.

The table below reflects the acquisition date values of the purchase

consideration, assets acquired, and liabilities assumed.

The shares issued were valued at $1,820,113 (2,219,650 shares issued times $0.82

per share which equaled the closing price of the Company’s common stock on the date that the merger agreement was consummated).

Shares issued

1 unchanged sentence

Total Purchase Price

Purchase Price Allocation

Price Allocation

Assets Acquired

Accounts receivable

Customer relationships

Total assets acquired

5 unchanged sentences

Net assets acquired

The foregoing amounts reflect our current estimates

of fair value as of the January 23, 2020 acquisition date.

The Company expects to recognize fair values associated with the customer

relationships acquired, as well as the Rotor Riot brand name, but has not yet accumulated sufficient information to assign such

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.

During the year ended April

30, 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 is not being amortized but

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.

The 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 its related allocation is as follows:

Shares issued

Promissory note issued

Total Purchase Price

Price Allocation

Assets Acquired

Accounts receivable

Proprietary technology

Non-compete agreement

Total assets acquired

Accounts payable and accrued expenses

Customer deposits

Total liabilities assumed

Net assets acquired

The Company initially allocated

the excess of the purchase price above the net assets acquired to goodwill.

The amount allocated to goodwill was subsequently adjusted

based on the values of other intangible assets as determined by an independent valuation services firm.

These intangible assets included

proprietary technology and non-compete agreement which are being amortized over 5 and 3 years, respectively.

The carrying value of Brand

Name is not being amortized but will be reviewed quarterly and formally evaluated at year end.

Skypersonic Acquisition

On February 11, 2021, the Company entered into Share

Purchase and Liquidity Event Agreements (the “Skypersonic Agreements”) with the founder and majority shareholder of Skypersonic,

Inc., (“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, the Company will acquire all of the issued and outstanding

share capital of Skypersonic 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”).

The transaction closed on May 7, 2021 and was paid through the issuance of 747,124 shares of common stock with an agreed value of $3,000,000.

Fifty (50%) percent of the Share Consideration (the “Escrow Shares”) were deposited in an escrow account 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.

The founder 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

subject to a cap equal to the value of the Escrow Shares or the Share Consideration.

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

the founder 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 Company determined that the financial position and results of operations of Skypersonic were not material

to the overall financial condition and results of operations of the Company on a consolidated basis.

Note 2 - Going Concern

The financial statements have been prepared

on a going concern basis which contemplates the realization of assets and the settlement of liabilities and commitments in the

normal course of business.

As reflected in our accompanying financial statements, we have (i) negative working capital of approximately

$500,000 at April 30, 2020, (ii) have generated less than $500,000 in revenues since our inception, and (iii) have accumulated

losses totaling approximately $2.6 million through April 30, 2020.

Management recognizes that these operating results and our financial

position raise substantial doubt about our ability to continue as a going concern.

The financial statements do not include any

adjustments related to the recoverability and classification of recorded asset amounts and the classification of liabilities that

might be necessary should we be unable to continue as a going concern.

We are presently seeking to address these

going concern doubts through a number of actions including efforts to (a) raise capital through the public markets, (b) release

additional commercial products and (c) pursue acquisitions of complementary, revenue generating companies which are accretive to

our operating results.

We can provide no assurance that any of these efforts will be successful or, that even if successful, that

they will alleviate doubts about our ability to continue as a going concern.

Note 3 - Summary of Significant Accounting

Basis of Accounting - The financial

statements and accompanying notes are prepared in accordance with generally accepted accounting principles (“GAAP”).

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

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.

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.

May 2021, we completed an offering of common stock which raised gross proceeds of $16 million and net proceeds of approximately $14.6

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

$55.5 million.

Note 3 - Summary of Significant Accounting Policies

Basis of Accounting - The financial statements

and accompanying notes are prepared in accordance with accounting principles generally accepted in the United States (“GAAP”).

Principles of Consolidation –

Our condensed consolidated financial statements include the accounts of our subsidiaries, Red Cat Propware, Inc.

Our condensed

consolidated financial statements include the accounts of our subsidiaries, Red Cat Propware, Inc., Rotor Riot, 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.

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 April 30, 2020,

our cash balances totaled $236,668 and was held across multiple commercial banks and financial services companies.

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

Leases –

Leases at April 30, 2020 are short term in nature and do not require accounting under the lease accounting standards.

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 April 30, 2021, we had cash

of $277,347 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.

Accounts Receivable, net –

receivable are recorded at the invoiced amount less allowances for doubtful accounts.

The Company’s estimate of the allowance for

doubtful accounts is based on a percentage of sales.

Accounts receivable balances are written off against the allowance when it is probable

that the receivable will not be collected.

Inventory –

Inventory is stated at the

lower of cost or estimated net realizable value with cost determined under the first-in first-out method.

Goodwill –

Goodwill represents

the excess of the purchase price of an acquisition over the estimated fair value of identifiable net assets acquired.

The measurement

periods for the valuation of assets acquired and liabilities assumed ends as soon as information on the facts and circumstances

that existed as of the acquisition date becomes known, not to exceed 12 months.

Adjustments in a purchase price allocation may

require a change in the amounts allocated to goodwill during the periods in which the adjustments are determined.

We plan to perform an impairment test

at the end of each fiscal year, or more frequently if indications of impairment arise.

We have a single reporting unit, and consequently,

evaluate goodwill for impairment based on an evaluation of the fair value of the Company as a whole.

Common Stock –

stock has a par value of $0.001 per share.

Warrants –

In connection

with our Series B Preferred Stock Issuance, we issued warrants to purchase shares of our common stock.

Outstanding warrants are

standalone instruments that are not puttable or mandatorily redeemable by the holder and are classified as equity.

the fair value of the warrants using the Black-Scholes option pricing model.

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 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

1 inputs utilize quoted prices (unadjusted) in active markets for identical assets or liabilities that the Company has the ability

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.

Level 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.

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.

These 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.

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 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.

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.

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.

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 $38,419

and $ 0 at April 30, 2020 and 2019, respectively.

Other Income –

In April 2020,

the Company received $57,215 in connection with a Payment Protection Program loan issued by the Small Business Administration.

Under the terms of the loan, the full amount is eligible to be forgiven if the Company spends the funds for certain operating expenses,

including payroll costs, over a certain period of time after the issuance of the loan.

The Company believes that it has complied

with the terms of the loan and that the entire amount will be forgiven.

Therefore, the full amount has been recognized as Other

Income in the Statement of Operations for the fiscal year ended April 30, 2020.

Research and Development - Research

and development expenses include payroll, employee benefits, and other headcount-related expenses associated with product development.

Research and development expenses also include third-party development and programming costs, as well as a proportionate share

of overhead costs such as rent.

Costs related to software development are included in research and development expense until technological

feasibility is reached, which for our software products, is generally shortly before the products are released to production.

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.

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 –

the years ended April 30, 2020 and 2019, there were no differences between net loss and comprehensive loss.

Therefore, the consolidated

statements of comprehensive loss have been omitted.

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 fulfilled.

Customers pay at the time they order and the Company recognizes revenue upon shipment.

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 $46,096 and $38,419 at April 30, 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 years

ended April 30, 2021 and 2020, there were no differences between net loss and comprehensive loss.

Therefore, 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 –

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

We plan to estimate the forfeiture rate based on our historical experience but have made no such allowance to date as

our first issuances of stock based awards occurred in October 2019.

We recognize compensation costs on a straight line basis over

the service period which is generally the vesting term.

Basic and Diluted Net Loss per Share

Basic and diluted net loss per share has been calculated by dividing net loss by the weighted average number of shares

of common stock outstanding during the period.

Common stock equivalents were excluded from the computation of diluted net loss

per share of common stock because they were anti-dilutive.

The exercise of these common stock equivalents would dilute earnings

per share if we become profitable in the future.

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

We recognize forfeitures as they occur.

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 –

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.

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 14.

Note 4 –

Notes Payable

In connection with the merger agreement with

Rotor Riot, the Company agreed to assume certain financial obligations of Rotor Riot totaling $216,099 in the aggregate.

of these obligations is as follows:

Payable to PayPal

In November 2019, Rotor Riot entered into an

agreement with PayPal under which it borrowed $100,000.

PayPal is an electronic commerce company that facilitates payments between

parties through online funds transfers.

The Company processes certain customer payments ordered on its e-commerce site through

The note is being repaid through 52 weekly payments of $2,056 ending in November 2020, resulting in an effective interest

The balance outstanding at April 30, 2020 was $61,673.

Note Payable to Shopify Capital

In August 2019, Rotor Riot entered into an

agreement with Shopify Capital under which it sold $176,000 of “Purchased Receivables”

for total consideration of $160,000.

Other Current Assets

Other current assets as of April 30, 2021 and 2020

Prepaid inventory

Prepaid expenses

Security deposits

Due from related party

Note 5 - 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.

The Company has entered into multiple agreements under which PayPal provides an advance on customer payments, and then

retains a portion of customer payments until the advance is repaid.

PayPal charges a fee which the Company recognizes in full upon

entering an agreement.

A November 2019 agreement under which PayPal advanced $100,000 and charged a transaction fee of $6,900 was

completed in January 2021.

A January 2021 agreement under which PayPal advanced $75,444 and charged a transaction fee of $2,444

had a remaining balance of $32,461 at April 30, 2021.

Shopify Capital is an affiliate of Shopify, Inc.

which provides sales software and services to the Company.

The Company processes

customer transactions ordered on its e-commerce site through Shopify which will retain 14% of daily receipts until a total of $176,000

The balance outstanding at April 30, 2020 was $7,875.

Note Payable to Race Day Quads

During 2019, Rotor Riot purchased inventory

from Race Day Quads (“RDQ”), an online retailer of drone racing parts .

The owner of Race Day Quads acquired

a Membership Interest in Rotor Riot in March 2019.

In October 2019, RDQ agreed to allow Rotor Riot to pay for $82,141 of inventory

purchases on an installment basis through June 2020.

The balance outstanding at January 31, 2020 was $49,223.

The Company has been

in discussions with RDQ regarding the payment of the remaining balance.

Note 5 –

Due to Related Party

BRIT, LLC, formally known as Brains Riding

in Tanks, LLC, was the largest shareholder of Rotor Riot.

Following the Merger, BRIT is a significant shareholder in the Company.

The controlling shareholder of BRIT is now employed in a management role with the Company.

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 transaction fee, in full, in the month in which the agreement is executed.

The Company assumed an existing agreement when it acquired Rotor Riot in January 2020.

This agreement was repaid in May 2020.

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

of Transaction

at April 30, 2021

Completed –

September 2020

Note 6 - Due to Related Party

Note Payable to BRIT, LLC

Under the terms of the Merger Agreement,

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

The promissory note bears interest at 4.75%

annually and requires $3,500 of the principal amount to be paid monthly.

The outstanding principal amount and all accrued interest

is due on the earlier of (a) January 23, 2021 or (b) the closing of an equity offering by the Company of at least $3,500,000.

balance outstanding at April 30, 2020 totaled $164,234.

In addition, accrued interest totaled $2,232 at April 30, 2020.

BRIT, LLC, formally known as Brains Riding in Tanks,

LLC, was the largest shareholder of Rotor Riot.

Following the Merger Agreement, BRIT is a significant shareholder in the Company.

controlling shareholder of BRIT is now employed in a management role with the Company.

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.

balance outstanding, including accrued interest, totaled $159,679 and $166,466 at April 30, 2021 and 2020, respectively.

repaid $50,000 in May 2021 and began making monthly payments of $3,500 in July 2021.

Obligations of BRIT, LLC

BRIT incurred certain financial obligations

in support of the operations of Rotor Riot which the Company has agreed to assume responsibility to pay.

The total amount assumed

was $167,939 which equals the balance outstanding at January 31, 2020.

These obligations bear interest at annual rates ranging

from 7.5% to 21.74%.

The outstanding balance of these assumed obligations totaled $72,299 at April 30, 2020.

Note 6 –

Convertible Debentures

In November 2019 we issued a convertible note

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

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

the “Notes”).

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

when the Notes mature.

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

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

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

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

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

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

We may, upon 10 business days advance notice,

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

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

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

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

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

of the Company on such date.

Based on the Company’s results since inception, both on an operating and capital raising basis,

we believe that it is more likely than not that the Company will not be able to complete an equity financing of at least $3,000,000

during the term of the Notes.

In addition, we do not believe that the Company will be able to pre-pay the Notes prior to the one

year anniversary of their issuance.

Based on these conclusions, the Company has not recognized a beneficial conversion feature

or a derivative liability in connection with the convertible debentures.

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 5.5% to 11.99%.

The outstanding balance totaled $166,529 at April 30, 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.

The parties agreed that

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

The balance owed at April 30, 2021 was $74,000.

In May 2021, the Company made

a payment of $70,000.

Note Payable to Related

In connection with the acquisition of Fat Shark in

November 2020, the Company issued a secured promissory note in the amount of $1,753,000 to the seller who is now an employee.

bears interest at 3% annually and matures in full in November 2023.

Accrued interest totaled $25,791 at April 30, 2021.

Note 7 - Convertible

In November 2019, the

Company issued a convertible note in the principal amount of $300,000 to one accredited investor and in December 2019, the Company 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 Notes had a term of 2 years and accrued interest at an annual

rate of 12% through the date of conversion.

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.

On October 5, 2020,

the Company closed a private offering of convertible promissory notes (the “2020 Notes”) in the aggregate principal amount

The 2020 Notes accrued interest at 12% annually, had a two year term, and were convertible into common stock at the lower

of $1.00 or a 25% discount of the price per share of Common Stock offered in a future, qualified offering.

The financing also included

the issuance of warrants to purchase 399,998 shares of common stock.

The Warrants are exercisable for a period of five years at a price

equal to the lower of (1) $1.50 per share, or (2) at a price equal to 75% of the price per share of the common stock offered in a future,

qualified offering.

The Company determined

that the provision associated with a potential reduction in the conversion price of the notes and the exercise price of the warrant represented

an embedded derivative financial liability.

The derivative liability was initially valued at $728,587, of which $580,000 was applied

as a debt discount to reduce the initial carrying value of the notes to zero with the remaining $20,000 applied against transaction fees.

The excess of the liability over the net proceeds totaled $148,587 which was recognized as a derivative expense.

The derivative liability

was valued using a multinomial lattice model as further described in Note 13 with $460,588 and $267,999 related to the derivate features

of the notes and warrants, respectively.

In March 2021, the

entire $600,000 of 2020 Notes, plus accrued interest totaling $34,257, were converted into 634,257 shares of common stock at a conversion

price equal to $1.00 per share.

Since the initial accounting had reduced the carrying value of the 2020 Notes to zero, the Company recognized

$600,000 of interest expense in connection with the 2020 Notes.

In addition, since the conversion of the notes resulted in the elimination

of the derivative liability in the notes, the derivative liability was reduced by $2,589,393 with a corresponding increase in additional

paid in capital.

On January 27, 2021,

the Company closed a private offering of convertible promissory notes (the “2021 Notes”) in the aggregate principal amount

The 2021 Notes accrued interest at 12% annually, had a two year term, and were convertible into shares of the Company’s

common stock at the lower of $1.00 or a 25% discount of the price per share of Common Stock offered in a future, qualified offering.

financing also included the issuance of warrants to purchase 675,000 shares of common stock.

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 a future qualified offering.

determined that the provision associated with a potential reduction in the conversion price of the notes and the exercise price of

the warrant represented an embedded derivative financial liability.

The derivative liability was initially valued at $4,981,701, of

which $500,000 was applied as a debt discount to reduce the initial carrying value of the notes to zero.

The excess of the liability

over the net proceeds totaled $4,481,701 which was recognized as a derivative expense.

The derivative liability was valued using a

multinomial lattice model as further described in Note 13 with $2,111,035 and $2,870,666 related to the derivate features of the

notes and warrants, respectively.

In March 2021, the

entire $500,000 of 2021 Notes, plus accrued interest totaling $13,234, were converted into 513,234 shares of common stock at a conversion

price equal to $1.00 per share.

Since the initial accounting had reduced the carrying value of the 2021 Notes to zero, the Company recognized

$500,000 of interest expense in connection with the 2021 Notes.

In addition, since the conversion of the notes resulted in the elimination

of the derivative liability in the notes, the derivative liability was reduced by $2,106,717 with a corresponding increase in additional

paid in capital.

Note 8 - Income Taxes

Our operating subsidiary is incorporated

and based in Puerto Rico which is a commonwealth of the United States.

We are not subject to taxation by the United States as Puerto

Rico has its own taxing authority which passed the Export Services Act, also known as Act 20, in 2012.

Under Act 20, eligible businesses

are subject to a special corporate tax rate of 4%.

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.

current provision for the reporting periods presented in these financial statements consisted of a tax benefit against which we

applied a full valuation allowance, resulting in no current provision for income taxes.

In addition, there was no deferred provision

for any of these reporting periods.

At April 30, 2020 and 2019, we had accumulated

Our current provision for the reporting periods presented in these financial statements consisted of a tax benefit against which we applied

a full valuation allowance, resulting in no current provision for income taxes.

In addition, there was no deferred provision for any

of these reporting periods.

At April 30, 2021 and April 30, 2020, we had accumulated

deficits of approximately $15,800,000 and $2,600,000, respectively.

Deferred tax assets related to the future benefit of these net

operating losses for tax purposes totaled approximately $104,000 and $39,000, respectively, based on the Act 20 rate of 4%.

we focus on projected future taxable income in evaluating whether it is more likely than not that these deferred assets will be

Based on the fact that we have not generated an operating profit since inception, we have applied a full valuation allowance

against our deferred tax assets at January 31, 2020 and April 30, 2019.

Note 8 –

We are authorized to issue 500,000,000 shares

of common stock.

Deferred tax assets related to the future benefit of these net operating

losses for tax purposes totaled approximately $632,000 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 April 30, 2021 and 2020.

Note 9 - Common Stock

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

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

Each share of common stock is entitled to one vote.

Note 9 –

Preferred Stock

Our Series A Preferred Stock (“Series

A Stock”) is convertible to common stock at a ratio of 8.33 shares of common stock for each share of Series A Stock, and

votes together with the common stock on an as-converted basis.

The Series A Preferred Stock was originally issued under the Securities

Exchange Agreement, as further described in Note 1.

The Series A Stock was automatically converted into shares of common stock

upon the effectiveness of our reverse stock split in August 2019, except for 208,704 shares which were subject to a limitation

on the number of shares of common stock that can be held by the holder of those shares of Series A Stock.

Our Series B Preferred Stock (“Series

B Stock”) is convertible into common stock at a ratio of 0.8334 shares of common stock for each share of Series B Stock held

and votes together with the common stock on an as-converted basis.

The Series B Preferred Stock was originally issued under the

Exchange Agreement, as further described in Note 1.

Conversions of Series B Stock into Common Stock are as follows:

November 2019

December 2019

Note 10 - 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-if-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.

Shares outstanding at April 30, 2021 totaled 158,704 which are

convertible into 1,322,004 shares of common stock.

Our Series B Preferred Stock (“Series B Stock”)

is convertible into common stock at a ratio of 0.8334 shares of common stock for each share of Series B Stock held and votes together

with the common stock on an as-if-converted basis.

The Series B Preferred Stock was originally issued under the Exchange Agreement, as

further described in Note 1.

Shares outstanding at April 30, 2021 totaled 1,968,676 which are convertible into 1,640,563 shares

of common stock.

Note 11 - Warrants

In May 2019, as part of the Share Exchange

Agreement, we issued warrants to purchase 469,874 shares of common stock at an exercise price of $0.324 per share of common stock.

The value of these warrants was considered to be a nominal amount at the time of issuance.

In September 2019, we received $152,239

in connection with the exercise of these warrants.

We also assumed a fully vested, restricted stock unit agreement requiring the

issuance of 41,667 shares of common stock in May 2021, as well as a warrant to purchase 5,556 shares of common stock at an exercise

price of $60.00 per share.

This warrant expires in March 2021.

Note 11 –

Share Based Awards

Effective August 2019, shareholders approved

the 2019 Equity Incentive Plan (the “Plan”) which allows us to incentivize key employees, consultants, and directors

with long term compensation awards such as stock options, restricted stock, and restricted stock units (collectively, the “Awards”).

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.

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 expired in March 2021.

In October 2020, the Company issued five-year warrants

to purchase a total of 399,998 shares in connection with the issuance of $600,000 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.

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 815-40.

In March and April 2021, we received $201,249 in

connection with the exercise of 201,666 warrants which had been issued in October 2020 and January 2021 as part of the convertible note

financings described in note 7.

Since these exercises resulted in the elimination of the derivative liability in the warrants, the derivative

liability was reduced by $694,305 with a corresponding increase in additional paid in capital.

The following table presents the assumptions used

to estimate the fair values of the stock warrants granted:

April 30, 2021

Expected volatility

Expected dividends

Expected term

Risk-free interest rate

The following table summarizes the changes in warrants

outstanding issued to non-employees of the Company during the year ended April 30, 2021.

Weighted-average

Exercise Price per Share

Weighted-average

Remaining Contractual Term

Intrinsic Value

as of April 30, 2020 —

as of April 30, 2021 873,332

Note 12 - 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 2 year period and expire

in October 2029.

Options to purchase 150,000 shares vest ratably over a 3 year period and expire in October 2024.

All of the options

were issued at an exercise price of $2.10 which equaled the stock price on the date of issuance.

We used the Black-Scholes Model

to estimate the fair value of the stock options issued using the following assumptions:

(i) expected volatility –

risk free interest rate –

1.59% or 1.74%, (iii) expected life –

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

January 2020 Issuances

In January 2020, we issued options to purchase

1,100,000 shares of common stock exercisable at $0.82 vesting quarterly over a 3 year period.

These options were valued at $707,300.

We also issued options to purchase 147,475 shares of common stock exercisable at $0.82.

These options were valued at $94,826 and

were vested in full upon issuance.

All of these options were issued at an exercise price which equaled the stock price on the date

We used the Black-Scholes Model to estimate the fair value of the stock options issued using the following assumptions:

(i) expected volatility –

75%, (ii) risk free interest rate –

1.74%, (iii) expected life –

10 years, and (iv)

expected dividend yield of zero.

Compensation expense recognized during the

year ended April 30, 2020 was 269,895, of which $213,959 was included in general and administrative expenses and $55,936 was included

in research and development expenses.

There was no compensation expense recognized during the year ended April 30, 2019.

Options exercisable as of January 31, 2020

totaled 339,142.

The remaining weighted average contractual term of the options outstanding at October 31, 2019 was 9.22 years.

The aggregate intrinsic value of outstanding options, representing the excess of the stock price at April 30, 2020 of $1.50 over

the exercise price of each option, was $848,283 at April 30, 2020.

Options exercisable as of April 30, 2021 totaled

The remaining weighted average contractual term of the options outstanding at April 30, 2021 was 8.68 years.

The aggregate

intrinsic value of outstanding options, representing the excess of the stock price at April 30, 2021 of $4.04 over the exercise price

of each option, was $4,943,870.

As of April 30, 2021 and 2020, there was $914,915 and $1,009,731 of unrecognized stock-based compensation

expense related to unvested stock options, net of estimated forfeitures, which is expected to be recognized over the weighted average

period of 1.08 years.

The table below sets forth the assumptions used

on the date of grant for estimating the fair value of options granted during the years ended April 30, 2020 and April

Exercise price

Stock price on date of grant

Risk-free interest rate

0.38% - 1.66 %

1.59 - 1.74 %

Expected term (years)

Dividend yield

A summary of activity under the Plan for the two years

ended April 30, 2021 is as follows:

Weighted-Average Exercise Price

Weighted-Average Remaining Contractual

Aggregate Intrinsic Value

Outstanding as of April 30, 2019

Forfeited or expired

Outstanding as of April 30, 2020

Forfeited or expired

Outstanding as of April 30, 2021

Exercisable as of April 30, 2021

Stock compensation expense for the years ended April

30, 2021 and 2020 was as follows:

General and administrative

Research and development

Sales and marketing

Note 13 –

The Company completed financings in October 2020

and January 2021 which included notes and warrants which contain embedded features subject to derivative accounting.

See Note 7 for a

full description of these financings.

Both the notes and the warrants included provisions which provided for a reduction in the conversion

and exercise prices, respectively, if the Company completed a future qualified offering at a lower price.

These provisions represent

embedded derivatives which are valued separately from the host instrument (meaning the notes and warrants) and recognized as derivative

liabilities on the Company’s balance sheet.

The Company initially measures these financial 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 also measures

these financial instruments on the date of settlement (meaning when the note is converted or the warrant is exercised) at their estimated

fair value and recognizes changes in their estimated fair value in results of operations.

Any discount on the carrying value of the note

is fully amortized on the date of settlement and recognized as interest expense.

estimated the fair value of these embedded derivatives using a multinomial lattice mode1.

The range of underlying assumptions used in

the binomial model to determine the fair value of the derivative warrant liability upon issuance, at the end of each fiscal reporting

quarter, and upon settlement of the derivative liability are set forth below.

In addition, the Company’s stock price on each measurement

date was used in the model.

Risk-free interest rate

Expected dividend yield

Expected term (in years)

Expected volatility

fair value of the derivative liabilities recognized upon the closing of the October 2020 and January 2021 financings exceeded the

net proceeds totaling $1,080,000 from those financings.

Therefore, a derivative expense totaling $4,630,288 was recognized, of which

$148,587 and $4,481,701 related to the October 2020 and January 2021 financings, respectively.

in the derivative liability during the year ended April 30, 2021 were as follows:

Recognized upon closing of October 2020 financing

Recognized upon closing of January 2021 financing

Eliminated upon conversion of notes/exercise of warrants

Changes in fair value from issuance through April 30, 2021

Derivative liability at April 30, 2021

in the fair value of derivates during the fiscal year ended April 30, 2021 resulted in an expense of $2,492,894, and primarily related

to an increase in the Company’s stock price following the closings of the financings.

of April 30, 2021, all of the notes had been converted into common stock and 873,332 of the warrants were outstanding.

The fair value

of the remaining derivatives at April 30, 2021 totaled $2,812,767 using the following assumptions:

Current stock price

Risk-free interest rate

Expected dividend yield

Expected term (in years)

Expected volatility

Note 14 - Related-Party Transactions

Shares Issued for

Services –

In May 2019, we issued 1,570 shares of common stock valued at $70,000 to a shareholder for legal services

provided to us.

In April 2020, we issued 150,000 shares of common stock with a fair market value of $204,000 to a different law

firm for services provided to us.

Office Lease –

space from our Chief Executive Officer during the fiscal year ended April 30, 2019 and made payments totaling $8,100.

Shares Issued for Services –

In May 2019, we

issued 1,570 shares of common stock valued at $70,000 to a shareholder for legal services provided to us.

In April 2020, we issued 150,000

shares of common stock with a fair market value of $204,000 to a different law firm for services provided to us.

Convertible Note Financing –

In December 2019, we completed a convertible note financing with a member of the Board of Directors for $125,000 and with our Chief

Executive Officer for $25,000.

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

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

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 2021.

See Note 7 for

details on the terms of the transaction.

Payable to Aerocarve –

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 year ended April 30, 2021, the Company

made principal repayments of this note totaling $5,000.

Note 15 - Subsequent Events

Subsequent events have been evaluated

through the date of this filing and there are no subsequent events which require disclosure.

CHANGES IN AND DISAGREEMENTS

WITH ACCOUNTANTS ON ACCOUNTING AND FINANCIAL DISCLOSURE.

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:

Common Stock Offering

On May 4, 2021, the Company closed

an offering of 4 million shares of common stock which generated gross proceeds of $16 million and net proceeds of approximately $14.6

On July 21, 2021, the Company

closed an offering of 13,333,334 shares of common stock which generated gross proceeds of $60 million and net proceeds of approximately

$55.5 million.

Closing of Skypersonic Acquisition

On May 7, 2021, we closed on

the acquisition of Skypersonic, as further described in Note 1.

At closing, we acquired all of the issued and outstanding share

capital of Skypersonic in exchange for issuance of $3,000,000 of our common stock, at the Volume Weighted Average Price (VWAP) of $4.0154

per share resulting in the issuance of 857,124 shares of common stock to the Sellers (the “

Share Consideration ”).

Fifty percent of the Share Consideration (the “

Escrow Shares ”) was deposited in an escrow account 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.

If, within 12 months

following closing of the Acquisition, we issue Common Stock for a price of less than $2.50 per share in a Qualified Offering (defined

as a public offering or equity or convertible securities in which the Company raises a minimum of $2 million), we will be required to

issue the Sellers additional shares of our common stock equal to the difference between the number of shares issued and the quotient

of the Purchase Price divided by the Qualified Offering Price.

Signing of Teal Drones Acquisition

On July 13, 2021,

the Company and Teal Acquisition I Corp., (“Acquisition”), a wholly-owned subsidiary, entered into an Agreement and Plan

of Merger (the “Agreement”) with Teal Drones, Inc.

(“Teal”).

Under the terms of the Agreement, subject to the

satisfaction of certain closing conditions, Acquisition will acquire Teal by merger of Acquisition with and into Teal, with Teal as the

surviving corporation (the “Merger”).

At the Effective Time of the Merger.

all of the issued and outstanding share capital

of Teal will be exchanged for an aggregate of Fourteen Million Dollars ($14,000,000) of Company common stock, (the “Common Stock”)

and Series C Convertible Preferred Stock, (the “Series C Preferred”, and together with the Common Stock, the “Share

Consideration”).

The Company will at closing issue such number of shares equal to the Share Consideration divided by the VWAP of

the Company (the “Closing Date VWAP”) which shall be equal to the average of the Daily VWAP for the twenty (20) trading days

ending on and including the Closing Date.

“Daily VWAP”

means, for any trading day, the per share volume-weighted average

price of the Company’s Common Stock as reported by Nasdaq.

Fifteen (15%) percent of the Share Consideration (the “Escrow

Shares”) shall be held in an escrow account for a period of eighteen (18) 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 Agreement.

In addition, the Share

Consideration may be increased upon the achievement of certain milestones (the “Earn-Out Consideration”).

A total of $16

million in Earn Out Consideration will be issued if sales and services of Teal’s Golden Eagle drones (“Teal Sales”)

total $36 million during the 24 month period following the Closing (the “Earn-Out Period”).

A total of $10 million in Earn

Out Consideration will be issued if Teal Sales total at least $24 million but less than $36 million during the Earn-Out Period.

of $4 million in Earn Out Consideration will be issued if Teal Sales total at least $18 million but less than $24 million.

Share Consideration, if earned, is issuable at the VWAP of the Company within thirty (30) days of the determination that Earn-Out Consideration

Under the Agreement,

the Share Consideration to be paid on the Closing Date shall be reduced by any indebtedness of Teal, including up to $2 million of senior

secured debt to be assumed by the Company (the “Assumed Debt”) and any working capital deficit, on a dollar of dollar

In addition, it is anticipated that $1 million of the Share Consideration payable to the shareholders of Teal in connection with

the Merger, has been agreed to be paid to the Assumed Debt holder to secure consent to the Merger and the transactions contemplated thereby.

The closing is subject

to customary closing conditions including (i) stockholder approval by shareholders of both the Company and Teal, (ii) approval by Nasdaq

of the shares issuable to Teal, (iii) approval of the terms of the Assumed Debt by the Company and the lender, and (iv) completion of

audits of Teal and the filing of other information required by Regulation S-X.

It is anticipated that management and employees of the

Company will hold more than 49% of the voting power of the Company and will vote in favor of the Merger.

Related Party Transaction

In July 2021, the Company entered

into a consulting agreement with a director resulting in monthly payments of $6,000.

In addition, the Company issued 150,000 options

to purchase common stock at $2.51 which vest quarterly over the one-year term of the agreement.

IN AND DISAGREEMENTS WITH ACCOUNTANTS ON ACCOUNTING AND FINANCIAL DISCLOSURE

There were no changes in or disagreements with accountants on accounting

and financial disclosure.

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 8. Financial Statements and Supplementary Data