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Item 7. Management’s Discussion and Analysis

2022-07-27 compared with 2021-08-12 · 301 added, 354 removed, 72 unchanged (90% of the section changed)

1 unchanged sentence

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.

When used, the words “believe,”

“plan,”

“intend,”

“anticipate,”

“target,”

“estimate,”

“expect,”

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

“may,”

“could,”

“should,”

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.

Management's Discussion and Analysis contains forward-looking

statements that involve risks and uncertainties, such as statements relating to our business plan to provide products, services and solutions

to the drone industry.

Any statements that are not statements of historical fact are forward-looking statements.

When used, the words

“believe,” “plan,” “intend,” “anticipate,” “target,” “estimate,”

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

“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

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Recent Developments

Merger Agreement with Rotor Riot, LLC

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

Red Cat Holdings has recently completed a series

of acquisitions and financings which have broadened the scope of its activities in the drone industry.

These developments include:

In November 2020, the Company acquired Fat Shark Holdings, which sells consumer

electronics products to the first-person view (“FPV”) sector of the drone industry.

Fat Shark’s flagship products are

headsets with a built in display (or “goggles”) that allow a pilot to see a real-time video feed from a camera mounted on

an aerial platform.

The total purchase price was $8.4 million.

In May 2021, the Company closed a firm commitment underwritten public offering

(the “Underwritten Offering”) resulting in the sale of 4,000,000 shares of common stock at a public offering price of $4.00

per share to underwriters, ThinkEquity, a division of Fordham Financial Management, Inc.

(“ThinkEquity”), 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 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”.

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.

333-253491), filed with the Securities and Exchange Commission (the “Commission”),

which was declared effective on April 29, 2021.

The financing generated gross proceeds of $16.0 million and net proceeds of $14.6 million.

In May 2021, we acquired Skypersonic, Inc., a provider of drone products

and software solutions that enable drone inspection flights that can be executed by pilots anywhere in the world.

Skypersonic powers drones

to “Fly Anywhere” and “Inspect the Impossible”.

Its patented software and hardware solutions allow for inspection

services in restricted spaces where GPS is not allowed or available.

The total purchase price was $2.8 million.

In July 2021, the Company closed an Underwritten Offering resulting in the

sale of 13,333,334 shares of common stock at a public offering price of $4.50 per share to ThinkEquity.

The shares of Common Stock were

offered by the Company pursuant to a registration statement on Form S-3, as amended (File No.

333-256216), filed with the Commission

which was declared effective on June 14, 2021 (the “Registration Statement”).

The financing generated gross proceeds of $60.0

million and net proceeds of approximately $55.5 million.

In August 2021, we closed the acquisition of Teal Drones ("Teal"),

a leader in commercial and government unmanned aerial vehicle ("UAV") technology.

Teal manufactures the Golden Eagle, one of

only five drones approved by the U.S.

Department of Defense for reconnaissance, public safety, and inspection applications.

purchase price was $14 million.

Business Strategy

Red Cat remains focused

on building a portfolio of complementary products and services to support the continued growth and maturation of the drone industry in

both the enterprise and consumer market segments.

Our disciplined acquisition strategy targets companies with advanced product offerings

and unique drone platforms and intellectual property.

After the integration of Teal Drones, we would expect government customers including

defense, public safety, and infrastructure to be our most significant revenue drivers in the fiscal year ending April 30, 2023.

During the second

half of the fiscal year ending on April 30, 2022, the Company focused on integrating and organizing its acquired businesses.

These efforts

including refining the establishment of Enterprise and Consumer segments in order to sharpen the Company's focus on the unique opportunities

in each sector of the drone industry.

The Enterprise segment is focused on opportunities in the commercial sector, including the military.

Enterprise is building the infrastructure to manage drone fleets, fly and provide services remotely, and navigate confined interior spaces

and dangerous military environments.

The Consumer segment is focused on enthusiasts and hobbyists which are expected to increase as drones

become more visible in our daily lives.

Consumer provides a growing revenue base, strong brand visibility for the Company, and is an

excellent source of professional pilots.

Results of Operations

When evaluating its operating results, the Company categorizes its functional

expenses into sub-categories that capture the essence of the hundreds of general ledger accounts that it maintains.

believes this process enables a more insightful understanding of changes in its operating expenses.

Cost of Goods is categorized

into (i) materials, (ii) labor, (iii) overhead, and (iv) freight.

Operations includes (i) payroll and (ii) overhead.

and development is categorized into (i) payroll, (ii) materials, and (iii) overhead.

Sales and marketing includes (i) payroll,

(ii) advertising programs, and (iii) third party services.

General and administrative is categorized into (i) payroll, (ii) facilities,

(iii) professional services, (iv) public company, (v) office, and (vi) insurance and related.

During the fiscal year ended April 30, 2022 (“Fiscal 2022”),

the Company completed the acquisitions of Teal Drones and Skypersonic which effectively doubled the number of operating subsidiaries.

These transactions were the primary reason that the Company’s operating expenses increased to $13,927,801 in Fiscal 2022 compared

to $5,946,295 in Fiscal 2021 (the fiscal year ending April 30, 2021) representing an increase of $7,981,506, or 134%.

During Fiscal 2022,

employee headcount increased from 16 at the beginning of the year to 62 on April 30, 2022.

This increase includes the addition of 15 and

10 employees from Teal and Skypersonic, respectively, that now work for the Company.

Since acquiring Teal, its headcount has doubled from

15 to 30 in connection with its expanded operations.

In addition, we have hired 6 employees to form an internal sales team primarily focused

on our Enterprise segment.

Year Ended April 30, 2022 and April 30, 2021

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”).

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.

During the year ended April 30, 2022 (or the “2022

period”), we generated revenues totaling $6,428,963 compared to revenues totaling $4,999,517 during the year ended April 30, 2021

(or the “2021 period”) representing an increase of $1,429,446 or 29%.

Rotor Riot and Fat Shark revenues comprise the entire

amount for the 2021 period.

During fiscal year 2022, we acquired two additional drone technology companies:

Skypersonic and Teal.

increase in revenue during the 2022 period is directly related to the acquisitions.

The increase is partially offset by a decrease in

both Rotor Riot and Fat Shark revenues of 8% and 9%, respectively.

The decreased sales for Fat Shark primarily related to its primary

product being at the end of its sales cycle.

Fat Shark released its next generation product in June 2022.

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.

During the year ended

April 30, 2022, we incurred cost of goods sold of $5,503,448 compared to $3,929,832 during the year ended April 30, 2021 resulting in

an increase of $1,573,616 or 40%.

The higher dollar amount relates to the increase in revenues, primarily related to the acquisitions

of Skypersonic and Teal .

During the year ended April 30, 2022, gross margin was $925,515 compared to $1,069,685 during the year ended April 30, 2021, resulting

in a decrease of $144,170 or 13%.

Gross margin, as a percentage of sales, totaled 14% in Fiscal 2022 compared to 21% in Fiscal 2021.

The lower level of gross margin was primarily related to Teal whose gross margin of 19% was lower than the consolidated gross margin.

In addition, the gross margin of Fat Shark decreased from 18% to 2% due to pricing discounts associated with the sales of products at

the end of their life cycles.

Operating Expenses

During the year ended April 30, 2021, we incurred

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

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.

Operations expenses totaled $1,353,904 during Fiscal

2022 compared to $590,342 during Fiscal 2021, representing an increase of $763,562, or 129%.

Payroll costs increased to $911,358 in Fiscal

2022 compared to $219,396 in Fiscal 2021, representing an increase of $691,962, or more than 100%.

Higher payroll costs represented 91%

of the total increase in Operations expense.

During the year ended April 30, 2022, 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.

research and development expenses totaling $2,606,141 compared to $516,084 for the year ended April 30, 2021 resulting in an increase

of $2,090,057, or greater than 100%.

Payroll costs totaled $2,211,909 in Fiscal 2022 compared to $510,084 in Fiscal 2021, representing

an increase of $1,701,825, or more than 100%.

Higher payroll costs represented 81% of the total increase in Research and Development expense.

In addition, materials costs totaled $350,372 in Fiscal 2022 compared to $1,449 in Fiscal Year 2021 representing an increase of $348,923.

Higher material costs represented 17% of the year-over-year increase.

During the year ended April 30, 2022, sales and marketing

expenses totaled $1,127,532 compared to $172,182 during the year ended April 30, 2021, resulting in an increase of $955,350 or greater

Payroll costs totaled $764,404 in Fiscal 2022 compared to $90,363 in Fiscal 2021, representing an increase of $674,041, or

more than 100%.

Higher payroll costs represented 71% of the total increase in sales and marketing expense.

In addition, advertising program

costs totaled $256,895 in Fiscal 2022 compared to $61,228 in Fiscal Year 2021 representing an increase of $195,667.

Higher advertising

program costs represented 20% of the year-over-year increase.

During the year ended April 30, 2022, we incurred

general and administrative expenses totaling $5,548,589 compared to $1,279,471 for the year ended April 30, 2021, 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.

of $4,269,118, or greater than 100%.

Payroll costs totaled $1,536,126 in Fiscal 2022 compared to $297,909 in Fiscal 2021, representing

an increase of $1,238,217, or more than 100%.

Higher payroll costs represented 29% of the total increase in general and administrative

In addition, professional services costs totaled $1,004,785 in Fiscal 2022 compared to $418,340 in Fiscal Year 2021 representing

an increase of $586,445, or 140 percent.

Higher professional services costs represented 14% of the year-over-year increase in general

administrative expenses.

Finally, public company costs, including insurance, totaled $1,456,413 in Fiscal 2022 compared to $339,428 in

Fiscal Year 2021 representing an increase of $1,116,985, or more than 100 percent.

Higher public company costs represented 26% of the

year-over-year increase in general and administrative expenses.

The Company uplisted to Nasdaq Capital Market in April 2021 which has

resulted in higher public company costs.

The remaining 30% of the increase in general and administrative expenses occurred across all

functional areas including facilities and office.

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.

Other income totaled $1,313,158 during the year ended

April 30, 2022, compared to other expense of $8,359,565 during the year ended April 30, 2021, resulting in a change that is not comparable.

During Fiscal 2021, the Company recognized $7,123,182 of expenses associated with derivative liabilities related to the issuance of convertible

debentures and warrants in October 2020 and January 2021.

During Fiscal 2022, the Company recognized a benefit of $1,042,129 as a decrease

in the Company’s stock price caused the derivative liability to decrease.

Amounts related to derivatives comprised 85% of the net

expense recognized in Fiscal 2021 and 79% of the net benefit recognized in Fiscal 2022.

Net Loss for the year ended April 30, 2022, 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.

$11,689,128 compared to $13,236,175 for the year ended April 30, 2021 resulting in a decrease of $1,547,047, or 12%.

Higher operating

expenses in Fiscal 2022, primarily related to the 2 acquisitions and a 288% percent increase in headcount, resulted in an operating loss

of $13,002,286 in Fiscal 2022 compared to $4,876,610 in Fiscal 2021, representing an increase of $8,125,676, or 167%.

This increase was

partially offset by a change in the impact of derivative accounting which resulted in a net benefit of $1,042,129 in Fiscal 2022 compared

to a net expense of $7,123,182 in Fiscal 2021 resulting in a net difference of $8,165,401.

Operating Activities

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during the year ended April 30, 2022 compared to net cash used in operating activities of $1,399,001 during the year ended April 30, 2021

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

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.

representing an increase of $14,620,319, or greater than 100%.

Net cash used in operations, net of non-cash expenses, totaled $8,924,419

in the year ended April 30, 2022 compared to $1,587,946 in the year ended April 30, 2021, resulting an increase of $7,336,473, or greater

The increase primarily related to higher operating costs associated with the acquisitions of Teal Drones and Skypersonic.

cash used related to changes in operating assets and liabilities totaled $7,094,901 during the year ended April 30, 2022 compared to net

cash provided by changes in operating assets and liabilities of $188,945 during the year ended April 30, 2021, representing a net increase

in cash used of $7,283,846, or greater than 100%.

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.

During Fiscal 2022, the

Company spent almost $4 million to increase inventory levels, including pre-payments, to minimize the impact of global supply chain issues,

including a shortage of computer chips, on the Company’s operations.

Investing Activities

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during the year ended April 30, 2022 compared to net cash provided by investing activities of $48,368 during the year ended April 30,

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

The increase in net cash used in investing activities primarily related to the purchase of marketable securities, partially offset

by proceeds from maturities during the year ended April 30, 2022.

The Company received proceeds of approximately $70 million from the

issuance of common stock in Fiscal 2022, with a portion of those proceeds invested in a portfolio of marketable securities.

Financing Activities

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%.

$66,430,274 during the year ended April 30, 2022 compared to $1,488,048 during the year ended April 30, 2021, representing an increase

of $64,942,226, or greater than 100%.

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.

During the year ended

April 30, 2022, net proceeds of $70,065,203 were received through the issuance of common stock compared to zero during the year ended

April 30, 2021.

Liquidity and Capital Resources

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.

At April 30, 2022, the Company reported current assets

totaling $55,653,297, current liabilities totaling $5,439,421 and net working capital of $50,213,876.

Cash and marketable securities totaled

$48,875,184 at April 30, 2022 and related to issuances of common stock in 2022 which generated net proceeds of more than $70 million.

As of April 30, 2022, we had inventory related balances, including pre-paid inventory, totaling $5,602,955.

The higher-than-normal inventory

balances related to actions taken to address the global supply chain issues, including a chip shortage.

At April 30, 2022, the Company

was in a strong liquidity and capital position relative to its recent annual operating results.

We have only recently begun generating revenues

and have reported net losses since our inception.

Through fiscal year 2022, we have funded our operations through private and public

offerings of common stock.

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

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.

In October 2020, the Company closed a private offering

of convertible promissory notes (the "2020 Notes") in the aggregate principal amount of $600,000.

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.

As of April 30, 2022, (a) the 2020 Notes were fully

converted into common stock and the related derivative liability eliminated, and (b) 266,666 of the warrants were outstanding with a derivative

liability of $529,383.

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 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.

In January 2021, the Company closed a private offering

of convertible promissory notes (the "2021 Notes") in the aggregate principal amount of $500,000.

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.

The 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.

As of April 30, 2022, (a) the 2021 Notes were fully

converted into common stock and the related derivative liability eliminated, and (b) 540,000 of the warrants were outstanding with a derivative

liability of $1,078,113.

Underwritten Public

On May 4, 2021, the Company

closed a firm commitment underwritten public offering (the "S-1 Offering") in which it sold 4,000,000 shares of 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 an underwriting agreement dated April 29, 2021.

These shares of common stock

were offered to and sold by the Company pursuant to a registration statement on Form S-1, as amended (File No.

filed with the SEC, which was declared effective by the Commission on April 29, 2021 (the "S-1 Registration Statement").

net proceeds to the Company, after deducting the underwriting discount, the underwriters’ fees and expenses and the Company’s

estimated expenses, were approximately $14.6 million.

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

shares of common stock were offered and sold by the Company pursuant to a registration statement on Form S-3, as amended (File No.

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, after deducting the underwriting discount, the underwriters’

fees and expenses, and the Company’s estimated expenses were approximately $55.5 million.

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 the financings 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.

Critical Accounting Policies and Estimates

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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

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

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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.

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those estimates made by management.

Goodwill –

Goodwill represents

Significant estimates reflected in these financial statements include those used to (i) determine

stock based compensation, (ii) complete purchase price accounting for acquisitions, and (iii) accounting for derivatives

Goodwill – Goodwill represents

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

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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

Fair Values, Inputs and Valuation Techniques for

Financial Assets and Liabilities and Related Disclosures

The fair value measurements and disclosure guidance

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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.

sell an asset or paid to transfer a liability (an exit price) in an orderly transaction between market participants at the measurement

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

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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.

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 guidance establishes three levels of the fair

value hierarchy as follows:

Inputs are unadjusted, quoted prices in active markets for identical assets or liabilities at the measurement date;

Inputs are observable, unadjusted quoted prices in active markets for similar assets or liabilities, unadjusted quoted prices for identical

or similar assets or liabilities in markets that are not active, or other inputs that are observable or can be corroborated by observable

market data for substantially the full term of the related assets or liabilities;

Unobservable inputs that are significant to the measurement of the fair value of the assets or liabilities that are supported by

little or no market data.

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, accrued expenses and debt.

The carrying amounts of cash, receivables, current

assets, 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.

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.

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 on 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

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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.

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

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.

Off-Balance Sheet Arrangements

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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.

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

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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