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Item 8. Financial Statements and Supplementary Data

2022-07-27 compared with 2021-08-12 · 871 added, 656 removed, 257 unchanged (86% of the section changed)

1 unchanged sentence

RED HAT HOLDINGS, INC.

INDEX TO FINANCIAL STATEMENTS

INDEX TO CONSOLIDATED FINANCIAL

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, 2021 and 2020

Notes to the Financial Statements

Consolidated Balance Sheets as of April 30, 2022

Consolidated Statements of Operations for the

years ended April 30, 2022 and 2021

Consolidated Statements of Changes in

Shareholders’ Equity for the years ended April 30, 2022 and 2021

Consolidated Statements of Cash Flows for the

years ended April 30, 2022 and 2021

Notes to the Consolidated Financial

Report of Independent Registered Public

3 unchanged sentences

Opinion on the Financial Statements

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.

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.

We have audited the accompanying consolidated

balance sheets of Red Cat Holdings as of April 30, 2022 and 2021, 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").

our opinion, the financial statements present fairly, in all material respects, the financial position of the Company as of April 30,

2022 and 2021, 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

2 unchanged sentences

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.

8 unchanged sentences

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.

7 unchanged sentences

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

Critical Audit Matter

Critical audit matters are

matters arising from the current-period audit of the financial statements that were communicated or required to be communicated to the

audit committee and that (1) relate to accounts or disclosures that are material to the financial statements and (2) involved our especially

challenging, subjective, or complex judgments.

We determined that there

are no critical audit matters.

/S/ BF Borgers CPA PC

BF Borgers CPA PC

We have served as the Company's auditor since 2020

August 12, 2021

July 27, 2022

RED CAT HOLDINGS

Consolidated Balance Sheets

receivable, net

from related party

current assets

Accounts receivable, net

Total Current Assets

Intangible assets, net

LIABILITIES AND STOCKHOLDERS' EQUITY

and equipment, net

lease right-of-use assets

long term assets

AND STOCKHOLDERS' EQUITY

obligations - short term

to related party

lease liabilities

derivative liability

current liabilities

Accounts payable

Accrued expenses

Notes payable

Due to related party

Customer deposits

Warrant derivative liability

Total Current Liabilities

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;

lease liabilities

obligations - long term

payable to related party

long term liabilities

and contingencies

Stockholders'

A preferred stock - shares authorized 2,200,000 ;

0 and 158,704

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

B preferred stock - shares authorized 4,300,000 ;

986,676 and 1,968,676

Common stock - shares authorized 500,000,000;

outstanding 29,431,264

stock - shares authorized 500,000,000 ;

53,748,735 and 29,431,264

Additional paid-in capital

Accumulated deficit

paid-in capital

( 27,499,056 )

Total Stockholders' Equity

TOTAL LIABILITIES

AND STOCKHOLDERS' EQUITY

See accompanying notes.

( 15,809,928 )

other comprehensive income

( 1,470,272 )

stockholders' equity

LIABILITIES AND STOCKHOLDERS' EQUITY

accompanying notes.

RED CAT HOLDINGS

7 unchanged sentences

Stock based compensation

Total operating expenses

Total operating

Operating loss

Other Expense (Income)

( 13,002,286 )

( 4,876,610 )

Other (income) expense

Derivative expense

Change in fair value of derivative liability

( 1,042,129 )

Investment income, net

Interest expense

Other Expense (Income)

Other (income) expense

( 1,313,158 )

$ ( 11,689,128 )

$ ( 13,236,175 )

Loss per share - basic and diluted

Weighted average shares outstanding - basic and diluted

Weighted average shares outstanding -

basic and diluted

accompanying notes.

RED CAT HOLDINGS

Consolidated Stockholders' Equity Statements

Balances, April 30, 2019

Issuance of common stock

Share Exchange Agreement

Consolidated Statements of Stockholders' Equity

Accumulated Other

Comprehensive

April 30, 2020

$ ( 2,573,753 )

Conversion of debt

Conversion of preferred stock

( 1,712,947 )

Exercise of warrants

Merger with Rotor Riot

Acquisition of Fat Shark

Stock based compensation

Shares Issued for Services

Balances, April 30, 2020

of restricted stock units

( 13,236,175 )

Conversion of Debt

( 13,236,175 )

April 30, 2021

$ ( 15,809,928 )

Conversion of preferred stock

Exercise of warrants

Acquisition of Fat Shark

Acquisition of Skypersonic

Acquisition of Teal

Public offerings, net of $ 5,959,800

of issuance costs

Stock based compensation

Exercise of stock options

Vesting of restricted stock units

Shares issued for services

Change in unrealized loss on available-for-sale

( 1,474,294 )

Balances, April 30, 2021

Currency translation adjustments

( 11,689,128 )

April 30, 2022

$ 106,821,384

$ ( 27,499,056 )

$ ( 1,470,272 )

accompanying notes.

RED CAT HOLDINGS

Consolidated Cash Flows Statements

Year ended April 30,

Consolidated Statements of Cash Flows

ended April 30,

Cash Flows from Operating Activities

1 unchanged sentence

$ ( 13,236,175 )

Stock based compensation

Stock based compensation - employees

Stock awards - non-employees

Common stock issued for services

Amortization of intangible assets

Change in fair value of derivative

( 1,042,129 )

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

Accounts receivable

Customer deposits

Accounts payable

Accrued expenses

Changes in operating

assets and liabilities, net of acquisitions

( 2,229,487 )

( 3,634,604 )

lease right-of-use assets and liabilities

( 1,173,472 )

Net cash used in operating activities

( 16,019,320 )

( 1,399,001 )

Cash Flows from Investing Activities

Acquired through acquisition

Payment for acquisition, net of cash acquired

Net cash (used in) provided by investing activities

Cash acquired through acquisitions

Payment for acquisition, net of

cash acquired

Purchases of property and equipment

Proceeds from maturities of marketable

of marketable securities

( 57,619,881 )

Net cash used in investing activities

( 46,603,486 )

Cash Flows from Financing Activities

2 unchanged sentences

Payments under related party obligations

Proceeds from notes payable

Payments under notes payable

( 1,970,757 )

Proceeds from debt obligations

Payments under debt obligations

Proceeds from convertible debentures

Payments of taxes related to restricted

stock vesting

Proceeds from issuance of common

Net cash provided by financing activities

Net increase (decrease) in Cash

Net increase in Cash

Cash, beginning of period

1 unchanged sentence

Cash paid for interest

Cash paid for taxes

Cash paid for income taxes

Non-cash transactions

Common stock issued for services

Fair value of shares exchanged in acquisitions

Fair value of shares issued in acquisitions

Change in unrealized loss on marketable securities available-for-sale

Forgiveness of PPP loan

Shares withheld as payment of note receivable

Elimination of derivative liability

Issuance of note payable - related party

Financed purchases of property and equipment

Indirect payment to related party

Taxes related to net share settlement of equity awards

Conversion of preferred stock into common stock

Issuance of note payable - related party in acquisition

Conversion of notes into common stock

Conversion of accrued interest into common

Conversion of accrued interest into common stock

accompanying notes.

RED CAT HOLDINGS, INC.

NOTES TO CONSOLIDATED

FINANCIAL STATEMENTS

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS

April 30, 2022 and 2021

Note 1 – The Business

Red Cat Holdings (“Red Cat”

or the “Company”)

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.

Teal Drones is a leader in commercial

and government Unmanned Aerial Vehicles (UAV) technology.

Fat Shark is a provider of First Person View (FPV) video goggles to the drone

Rotor Riot sells FPV drones and equipment to the consumer marketplace through its digital storefront located at www.rotorriot.com.

Skypersonic provides software and hardware solutions that enable drones to complete inspection services in locations where GPS (global

positioning systems) is not available, yet still record and transmit data even while being operated from thousands of miles away.

Corporate developments during the two years ended

April 30, 2022 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 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 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.

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).

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 included 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 was as follows:

Shares issued

1 unchanged sentence

Total Purchase Price

Price Allocation

Assets acquired

Accounts receivable

Customer relationships

Proprietary technology

Non-compete agreement

Total assets acquired

1 unchanged sentence

Accounts payable and accrued expenses

Notes payable

Due to related party

Customer deposits

Total liabilities assumed

Net assets acquired

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:

Total fair value of net assets acquired

The Company engaged a valuation

services firm to value the intangible assets acquired and the purchase price allocation is now complete.

Intangible assets included proprietary

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

The carrying value of brand name is

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

The excess of the purchase price above the net assets

acquired was recorded as goodwill which is formally evaluated at year end.

Skypersonic Acquisition

On May 7, 2021, the Company closed the acquisition

of Skypersonic, Inc.("Skypersonic").

Under the terms of the agreement, we acquired all of the outstanding stock of Skypersonic

in exchange for $ 3,000,000 of our common stock.

The number of shares issuable was based on the volume weighted average price ("VWAP")

of our common stock for the 20 trading days ending May 7, 2021.

Based on a VWAP of $4.0154, the Company issued 857,124 shares.

For accounting

purposes, the shares were valued at $ 3,291,356 based on the closing price of our common stock of $ 3.84 on May 7, 2021.

Prior to the closing,

the Company provided $ 75,000 to Skypersonic to fund its operating costs.

This amount was capitalized as part of the purchase price.

October 2021, the Company and Skypersonic agreed to a reduction in the purchase price of $ 601,622 which resulted in the cancellation

of 149,829 shares held in escrow.

The final summary of the purchase price and its related allocation is as follows:

Shares issued

Promissory note issued

Total Purchase Price

Price Allocation

Assets acquired

3 unchanged sentences

Total assets acquired

Liabilities assumed

Accounts payable and accrued expenses

Total liabilities assumed

Total fair value of net assets acquired

The Company engaged a valuation

services firm to value the intangible assets acquired and the purchase price allocation is now complete.

Intangible assets included proprietary

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

The excess of the purchase price above

the net assets acquired was recorded as goodwill which is formally evaluated at year end.

Teal Drones Acquisition

On August 31, 2021, the Company closed the

acquisition of Teal Drones Inc., (“Teal”).

Under the terms of the agreement, the base purchase price of $ 14,000,000 was

reduced by $ 1,670,294 of debt assumed by the Company, as well as a working capital deficit adjustment of $ 1,456,953 .

net amount payable of $ 10,872,753 , and a VWAP of $2.908 for the twenty trading days ending August 31, 2022, the Company issued

3,738,911 of common stock.

For accounting purposes, the shares were valued at $ 10,431,562 based on the closing price of our common

stock of $ 2.79 on August 31, 2021.

In December 2021, the Company and Teal agreed to a reduction in the purchase price of $ 438,058

which resulted in the cancellation of 150,639 shares held in escrow.

The Stock Consideration may be increased if Teal attains

certain revenue levels in the twenty four (24) month period following the closing.

The additional consideration begins at $4

million if sales total at least $18 million and ends at $16 million if sales total $36 million.

A revised summary of the purchase price and its related

allocation is set forth below.

Total Purchase Price – shares issued

Assets acquired

Accounts receivable

Other current assets

Total assets acquired

Liabilities assumed

Accounts payable and accrued expenses

Customer deposits

Notes payable

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

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.

Total fair value of net assets acquired

( 4,283,220 )

The foregoing amounts reflect our current estimates

of fair value as of the August 31, 2021 acquisition date.

The Company has engaged an independent valuation services firm to complete a

formal evaluation of the acquisition.

The Company expects to recognize fair values associated with the customer relationships acquired,

as well as the Teal brand name but has not yet accumulated sufficient information to assign such values.

When the valuation project is

completed, the Company may make adjustments to the opening balance.

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 judgment.

On August 31, 2021, Teal entered into an Amended and

Restated Loan and Security Agreement with Decathlon Alpha IV, L.P.

(“DA4”) (the “Loan Agreement”) in the amount

of $ 1,670,294 (the “Loan”), representing the outstanding principal amount previously due and owing by Teal to DA4.

on the Loan accrues at a rate of ten ( 10 %) percent per annum.

Principal and interest under the term Loan is payable monthly in an amount

equal to $ 49,275 until maturity on December 31, 2024.

The Company assumed the Loan Agreement in connection with the acquisition.

Supplemental Unaudited Pro Forma Financial

Information and Other Information

The following table presents pro forma results for

the year ended April 30, 2022 as if our acquisitions of Skypersonic and Teal had occurred on May 1, 2021:

$ ( 8,604,139 )

$ ( 886,757 )

$ ( 4,201,408 )

$ ( 13,692,304 )

The following table presents pro forma results for

the year ended April 30, 2021 as if our acquisitions of Fat Shark, Skypersonic and Teal had occurred on May 1, 2020:

Net (Loss) Income

$ ( 13,263,942 )

$ ( 906,478 )

$ ( 3,283,309 )

$ ( 17,213,774 )

The unaudited pro forma financial information has been compiled in a manner

consistent with the Company's accounting policies, and includes transaction costs, amortization of the acquired intangible assets, and

other expenses directly related to each respective acquisition.

The unaudited pro forma financial information is based on estimates

and assumptions which the Company believes are reasonable, and are not necessarily indicative of the results that would have been realized

had the acquisitions closed on the dates indicated in the tables, nor are they indicative of results of operations that may occur in

information related to the Company’s acquisitions include:

The purchase price allocation has been finalized for each acquisition except for Teal for which the Company is waiting for the final

report from the valuation services firm that it engages to assist in the identification and valuation of intangible assets acquired.

The fair value of shares issued by the Company as part of the consideration paid is normally based on the volume weighted average price

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

For accounting purposes, the shares

issued are valued based on the closing stock price on the date that the transaction closes.

Goodwill for Fat Shark is attributable to its relationship with manufacturing sources in China and the potential to integrate its goggle

technologies with the Teal Drone.

Goodwill for Skypersonic relates to the future customers expected to leverage its “Fly

Anywhere” technologies in a wide range of commercial environments.

Goodwill for Teal is ascribed to its existing relationship

with a number of U.S.

government agencies including its classification as an approved vendor.

The Company expects that the Goodwill recognized in each transaction will be deductible for tax purposes.

The Company has reported

net losses since its inception and is presently unable to determine when and if the tax benefit of this deduction will be realized.

Note 2 – 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., Rotor Riot, and Fat Sharking Holdings.

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

Principles of Consolidation – Our

consolidated financial statements include the accounts of our operating subsidiaries, Teal Drones, Fat Shark, Rotor Riot, and Skypersonic.

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.

Use of Estimates – The preparation of financial

statements in accordance with GAAP requires management to make estimates and assumptions that affect the reported amounts of assets and

liabilities, the disclosure of contingent assets and liabilities at the date of the financial statements, and the reported amounts of

revenue and expenses during the reporting period.

Actual results could differ from those estimates.

Significant estimates

reflected in these financial statements include those used to (i) determine stock based compensation and (ii) complete purchase price

accounting for acquisitions.

At 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

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.

Cash and Cash Equivalents – At April

30, 2022, we had cash of $ 4,084,815 in multiple commercial banks and financial services companies.

We have not experienced any loss on

these cash balances and believe they are not exposed to any significant credit risk.

Marketable Securities – Our marketable

securities have been classified and accounted for as available-for-sale securities.

These securities are primarily invested in corporate

bonds and are readily saleable, and therefore, we have classified them as short term.

Our available-for-sale securities are carried at

fair value with any unrealized gains and losses reported as a component of comprehensive income (loss).

Once realized, any gains or losses

are recognized in the statement of operations.

We have elected to present accrued interest receivable

separately from marketable securities on our consolidated balance sheets.

Accrued interest receivable was $ 385,730 and $ 0 as of April

30, 2022 and 2021, respectively, and was included in other current assets.

We did not write off any accrued interest receivable during

the fiscal years ended April 30, 2022 and 2021.

Accounts Receivable, net – Accounts 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 multitude of factors, including historical bad debt levels for its customer base, past experience with a specific customer,

the economic environment, and other factors.

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

the receivable will not be collected.

Inventories – Inventories,

which consist of raw materials, work-in-process, and finished goods, are stated at the lower of cost or net realizable value, and are

measured using the first-in, first-out method.

Cost components include direct materials and direct labor, as well as in-bound freight.

At each balance sheet date, the Company evaluates ending inventories for excess quantities and obsolescence.

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 measurement period for

the valuation of assets acquired and liabilities assumed ends as soon as information on the facts and circumstances that existed as of

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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.

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.

Property and equipment – Property and equipment

is stated at cost less accumulated depreciation, and depreciated using the straight-line method over the estimated useful life of the

The estimated useful lives of our property and equipment are generally as follows:

furniture and equipment, seven years;

and other, two to five years;

leasehold improvements, 15 years.

Leases – Effective August 1, 2021, the Company

adopted Accounting Standards Codification (ASC) 842 titled “Leases” which requires the recognition of assets and liabilities

associated with lease agreements.

The Company adopted ASC 842 on a modified retrospective transition basis which means that it did not

restate financial information for any periods prior to August 1, 2021.

Upon adoption, the Company recognized a lease liability obligation

of $ 796,976 and a right-of-use asset for the same amount.

The Company determines if

a contract is a lease or contains a lease at inception.

Operating lease liabilities are measured, on each reporting date, based

on the present value of the future minimum lease payments over the remaining lease term.

The Company's leases do not provide an

implicit rate.

Therefore, the Company uses an effective discount rate of 12% based on its last debt financings.

Operating lease

assets are measured by adjusting the lease liability for lease incentives, initial direct costs incurred and asset impairments.

Lease expense for minimum lease payments is recognized on a straight-line basis over the lease term with the operating lease asset reduced

by the amount of the expense.

Lease terms may include options to extend or terminate a lease when they are reasonably certain to occur.

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 (an exit price) in an orderly transaction between market participants at the measurement date.

In accordance

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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

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.

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

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Embedded derivatives are valued separately from the host instrument

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

and are recognized as derivative liabilities on the Company's balance sheet.

The Company measures these instruments at their estimated

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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.

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.

Revenue Recognition –

recognizes revenue in accordance with ASC 606, “Revenue from Contracts with Customers”, issued by the Financial Accounting

Standards Board (“FASB”).

Revenue Recognition – The Company

recognizes revenue in accordance with ASC 606, “Revenue from Contracts with Customers”, issued by the Financial Accounting

Standards Board (“FASB”).

This standard includes a comprehensive evaluation of factors to be considered regarding revenue

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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.

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

Customer deposits totaled $ 437,930 and $ 46,096 at April 30, 2022 and April 30, 2021, respectively.

Research and Development – Research and development

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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 –

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

Stock Compensation.

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

accompanying consolidated financial statements.

Foreign Currency – The functional currency

of our international subsidiary is the local currency.

For that subsidiary, we translate assets and liabilities to U.S.

dollars using

period-end exchange rates, and average monthly exchange rates for revenues, costs, and expenses.

We record translation gains and losses

in accumulated other comprehensive income.

Comprehensive Loss –

Comprehensive loss consists of net loss and other comprehensive loss.

Other comprehensive loss refers to gains and losses that

are recorded as an element of stockholders' equity and are excluded from net loss.

Our other comprehensive loss is comprised of foreign

currency translation adjustments and unrealized losses on available-for-sale securities.

During the year ended April 30, 2022, comprehensive

loss was $ 1,470,272 higher than net loss, primarily related to unrealized losses on available-for-sale securities totaling $ 1,474,294 ,

partially offset by foreign currency translation adjustments of $ 4,022 .

During the year ended April 30, 2021, there were no differences

between net loss and comprehensive loss.

Stock-Based Compensation – For stock

options, we use the estimated grant-date fair value method of accounting in accordance with ASC Topic 718, Compensation – Stock

Compensation.

Fair value is determined based on 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 –

For restricted stock, we determine the fair value based on our stock

price on the date of grant.

For both stock options and restricted stock, we recognize compensation costs on a straight line basis over

the service period which is 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

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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 –

Parties are considered

The conversion or exercise of these common stock equivalents would dilute earnings per share if we become

profitable in the future.

Outstanding securities not included in the computation

of diluted net loss per share because their effect would have been anti-dilutive included the following at April 30:

Series A Preferred Stock, as converted

Series B Preferred Stock, as converted

Stock Options

Restricted stock

Related Parties – Parties are considered

to be related to us if they have control or significant influence, directly or indirectly, over us, including key management personnel

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Related Party transactions are disclosed in Note 19.

Note 4 –

Other Current Assets

Other current assets as of April 30, 2021 and 2020

Note 3 – Marketable Securities

The following tables set

forth information related to our marketable securities as of April 30, 2022:

Cost, unrealized gains or losses, and fair values

Unrealized Gains (Losses)

Money market funds

Asset-backed securities

Corporate bonds

( 1,442,230 )

$ ( 1,474,294 )

Contractual Maturities

One Year or Less

Over Five Years

Money market funds

Asset-backed securities

Corporate bonds

Fair Value Hierarchy

Money market funds

Asset-backed securities

Corporate bonds

Note 4 – Inventories

Inventories consisted of the following at April 30,

Raw materials

Work-in-process

Finished goods

Inventory purchase orders outstanding totaled approximately

$ 11 million.

The global supply chain for materials required to produce our drones is presently experiencing significant disruptions and

While we have increased our order lead times, we retain the right to cancel or modify these orders prior to their shipment.

Note 5 – Other Current Assets

Other current assets at April 30 included:

Prepaid inventory

Accrued interest income

Prepaid expenses

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Due from related party

Note 5 - Notes Payable

Note 6 – Due From Related Party

In January 2022, the Company determined that an employee

had relocated in 2021 but their compensation had not been subject to the required tax withholding by the new jurisdiction.

subject to taxation included $ 155,624 of cash compensation and $ 1,413,332 of income associated with the vesting of restricted

stock ("Stock Compensation").

In March 2022, the Company entered into a note agreement (the "Note") with the

employee in the amount of $ 510,323 , representing the estimated taxes owed by the employee related to the Stock Compensation.

terms of the Note, 104,166 shares of common stock with a fair value of $ 280,832 , which had vested during calendar 2021, were withheld

by the Company and applied against the Note.

The employee has agreed not to sell or transfer 110,983 shares of common stock

held at the Company's transfer agent until the Note is repaid.

In addition, the employee is scheduled to have 20,833 shares

of restricted stock vest monthly in calendar 2022, of which 3,000 shares will be withheld with the fair value of those shares applied

against the Note.

Any shares issued to the employee in 2022 will be held at the transfer agent until the Note is repaid in full.

Note matures on December 31, 2022 and will be repaid by the employee assigning that number of shares, held at the transfer agent, with

a fair value required to repay the Note in full.

The Company filed amended payroll tax returns on March 16, 2022.

In March and April

2022, the Company made payments totaling $ 712,646 representing $ 510,323 owed by the employee, $ 31,604 owed by the Company, and $ 170,719

of penalties and interest.

The note balance totaled $ 31,853 at April 30, 2022.

The shares held at the transfer agent had a fair

value of $ 296,766 at April 30, 2022.

Note 7 – Intangible Assets

Intangible assets relate to acquisitions completed by the Company, including

those described in Note 1.

Intangible assets as of April 30 were as follows:

April 30, 2022

April 30, 2021

Carrying Amount

Proprietary technology

$ ( 219,267 )

Non-compete agreements

Customer relationships

Total finite-lived assets

Total indefinite-lived assets

Total intangible assets, net

$ ( 261,469 )

As of April 30, 2022, expected amortization expense for the unamortized finite-lived intangible assets for the

next five years is as follows:

Fiscal Year Ended:

Goodwill is a separately stated intangible asset and

represents the excess of the purchase price of acquisitions above the net assets acquired.

The composition of, and changes in goodwill consist

November 2020

Balance at April 30, 2021

Balance at April 30, 2022

Proprietary technology and non-compete

agreements are being amortized over 5 and 3 years, respectively.

Goodwill and Brand name are not amortized but evaluated for

impairment on a quarterly basis.

Note 8 – Property and Equipment

Property and equipment consist of assets with an

estimated useful life greater than one year.

Property and equipment are reported net of accumulated depreciation, and the reported values

are periodically assessed for impairment.

Property and equipment as of April 30 was as follows:

Equipment and other

Leasehold improvements

Furniture and equipment

Accumulated depreciation

Net carrying value

Depreciation expense totaled $ 40,165 and $ 0 for the fiscal years ended

April 30, 2022 and 2021, respectively.

Note 9 – Operating Leases

The Company has operating type leases for real estate.

As of April 30,

2022, the Company had no finance type leases.

The Company’s leases have remaining lease terms of up to 5.08 years, some of which

may include options to extend the leases for up to 5 years.

Operating lease expense totaled $ 254,906 for the year ended April 30, 2022

, including period cost for short-term, cancellable and variable leases, not included in lease liabilities, of $ 41,250 for the year ended

April 30, 2022.

South Salt Lake, Utah

December 2024

Orlando, Florida

San Juan, Puerto Rico

Troy, Michigan

Orlando, Florida

September 2022

Supplemental information related to operating leases

is as follows:

April 30, 2022

Operating cash paid to settle lease liabilities

Right of use asset additions in exchange for lease liabilities

Weighted average remaining lease term (in years)

Weighted average discount rate

Future lease payment

obligations at April 30, 2022 were as follows:

Fiscal Year Ended:

Note 10 – Debt Obligations

Decathlon Capital

In connection with the acquisition

of Teal, Decathlon Capital agreed to restructure the terms of an existing loan agreement with Teal.

Effective August 31, 2021, the principal

amount outstanding of $ 1,670,294 bears interest at 10 % annually and is repayable in monthly payments of $ 49,275 through its December 31,

2024 maturity date.

The balance outstanding at April 30, 2022 totaled $ 1,371,217 .

Convertible Note

In May 2021, Teal entered

into a convertible note agreement totaling $ 350,000 with one of its equity investors.

The note bears interest at the applicable Federal

Rate which was approximately 0.13 % on the date of issuance.

The Company has assumed this obligation which is payable upon demand.

Vendor Settlement

In May 2020, Teal entered

into a settlement agreement with a vendor that had been providing contract manufacturing services.

At August 31, 2021, the Company assumed

the outstanding balance of $ 387,500 which is payable in monthly installments of $ 37,500 with a final payment of $ 12,500 due in July 2022.

The balance outstanding at April 30, 2022 totaled $ 87,500 .

On February 11, 2021, Teal received a Small Business

Administration Paycheck Protection Program (“SBA PPP”) loan in the amount of $ 300,910 .

The loan was unsecured, non-recourse,

and accrued interest at one percent annually.

The loan was used to fund qualifying payroll, rent and utilities, and in February 2022,

the principal balance of $ 300,910 and accrued interest of $ 3,001 were forgiven.

Shopify Capital

Shopify Capital is an affiliate of Shopify, Inc.

which provides sales software and services to the Company.

The Company processes customer transactions ordered on the e-commerce

site for Rotor Riot through Shopify.

Shopify Capital has entered into multiple agreements with the Company in which it has "purchased

receivables" at a discount.

Shopify retains a portion of the Company's daily receipts until the purchased receivables have

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

Corporate Equity

In October 2021, Teal entered into an agreement with

Corporate Equity to fund $ 60,000 of leasehold improvements.

In January 2022, the agreement was amended to include an additional $ 60,000

of leasehold improvements funding.

The loan bears interest at 8.25 % annually and is repayable in monthly payments of $ 3,595 through its

December 2024 maturity date.

The balance outstanding at April 30, 2022 totaled $ 102,599 .

Revenue Financing Arrangement

In April 2021, Teal entered

into an agreement under which it sold future customer payments, at a discount, to Forward Financing.

At August 31, 2021, the Company assumed

the outstanding balance of $ 38,758 .

Repayment of the remaining balance was completed in January 2022.

Ascentium Capital

In September 2021, Teal entered into a financing agreement

with Ascentium Capital to fund the purchase of a fixed asset totaling $ 24,383 .

Monthly payments of $ 656 are payable through October 2024.

The balance outstanding at April 30, 2022 totaled $ 19,288 .

PayPal is an electronic commerce company that facilitates

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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 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

was completed in August 2021.

Outstanding principal payments are due as follows:

Short term – through April 30, 2023

Long term – thereafter

Note 11 – Due to Related Party

Note Payable to BRIT, LLC

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 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

Founder of Fat Shark

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.

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

The note bears interest at 3 % annually

and matures in full in November 2023.

In May 2021, the Company made an initial payment of $ 132,200 by directing a refund from a vendor

based in China to the noteholder who is also based in China.

The remaining balance of $ 1,620,800 plus accrued interest totaling $ 45,129

was paid in September 2021.

In January 2020, in connection with the acquisition

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

The note bears interest at 4.75 %

The entire outstanding balance of $ 85,172 plus accrued interest totaling $ 12,942 was paid in October 2021.

The Company also assumed a line of credit obligation

totaling $ 47,853 which bears interest at 6.67 % annually.

The outstanding balance totaled $ 40,057 and $ 47,922 at April 30, 2022 and April

30, 2021, respectively.

In 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 .

The balance was repaid in full in May 2021.

Note 12 – Convertible Notes

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.

October 2020 Financing

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.

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 using a multinomial lattice model with $ 460,588 and $ 267,999

related to the derivative features of the notes and warrants, respectively.

In addition, $ 580,000 of the proceeds were 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.

of the liability over the net proceeds totaled $ 148,587 which was recognized as a derivative expense in the fiscal year ended April 30,

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 .

January 2021 Financing

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.

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 $ 4,981,701 using a multinomial lattice model with $ 2,111,035 and

$ 2,870,666 related to the derivative features of the notes and warrants, respectively.

In addition, $ 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 in the fiscal year ended April 30, 2021.

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 .

Note 13 – Income Taxes

2 unchanged sentences

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%.

as Puerto Rico has its own taxing authority.

Since inception, we have incurred net losses in each year of operations.

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

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

In addition, there was no deferred provision for any

of these reporting periods.

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

At April 30, 2022 and April 30, 2021, we had accumulated

1 unchanged sentence

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.

losses for tax purposes totaled approximately $ 5,087,500 and $ 2,923,000 , respectively, based on the base Puerto Rico corporate tax rate

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, 2022 and 2021.

Note 14 – Common Stock

2 unchanged sentences

Each share of common stock is entitled to one vote.

During the year ended April 30, 2022, shares of common

stock issued by the Company included:

1,321,996 in connection with the conversion of 158,704 shares of Series A Preferred Stock

818,333 in connection with the conversion of 982,000 shares of Series B Preferred Stock

66,666 due to the exercise of warrants

in connection with the acquisition of Skypersonic which closed on May 7, 2021, as further described in Note 1

3,588,272 in connection with the acquisition of Teal Drones which closed on August 31, 2021, as further described in Note 1

in connection with two closed offerings which generated gross proceeds of $ 76 million and net proceeds of approximately $ 70.1

89,107 due to the exercise of stock options

under restricted stock agreements with employees.

In addition, 225,870 shares which were pending issuance under restricted stock

agreements, were instead applied toward payroll tax obligations on restricted stock and 92,812 shares were applied against the Note

described in Note 6.

under restricted stock agreements with non-employees

for services rendered

Note 15 – 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”)

Series A Preferred Stock outstanding totaled 158,704

at April 30, 2021, and were converted into 1,321,996 shares of common stock on August 10, 2021.

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.

Shares outstanding at April 30, 2022 totaled 986,676 which are convertible into 822,230

shares of common stock.

Note 16 – Warrants

In September 2019, we received $152,239 in connection

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

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.

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 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 multinominal lattice

model and are considered derivative liabilities under ASC 815-40.

The value of the warrants was included in the determination of the

initial accounting for the financing including the calculation of the derivative liability and related expense.

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

to purchase a total of 675,000 shares

in connection with the issuance of $ 500,000

of convertible notes.

warrants have an initial exercise price of $ 1.50

which may be reduced to a 25% discount of the price per share of Common Stock offered in a future qualified offering.

were valued at $ 2,870,666 using the multinominal

lattice model and are considered derivative liabilities under ASC 815-40.

The value of the warrants was included in the determination

of the initial accounting for the financing including the calculation of the derivative liability and related expense.

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 10.

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.

In May 2021, the Company issued warrants to purchase

200,000 shares of common stock to

the placement agent of its common stock offering.

The warrants have a five year term and an exercise price of $ 5.00 .

In June 2021, we received $ 99,999

in connection with the exercise of 66,666

warrants which had been issued in October 2020 as part of the convertible note financings described in Note 11.

Since these exercises

resulted in the elimination of the derivative liability in the warrants, the derivative liability was reduced by $ 163,141

with a corresponding increase in additional paid in capital.

July 2021, the Company issued warrants to purchase 533,333

shares of common stock to the placement

agent of its common stock offering.

The warrants have a five year term and an exercise price of $ 5.625 .

The following table presents the range of assumptions

used to estimate the fair values of the stock warrants granted during the fiscal years ended April 30:

Risk-free interest rate

0.79 – 0.85 %

0.52 – 2.87 %

Expected dividend yield

Expected term (in years)

Expected volatility

222.45 – 223.17 %

211.02 – 292.28 %

The following table summarizes the changes in warrants

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

outstanding since April 30, 2020.

Weighted-average

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Intrinsic Value

as of April 30, 2020 —

as of April 30, 2021 873,332

Balance as of April 30, 2020

Outstanding as of April 30, 2021

Outstanding at April 30, 2022

Note 17 – 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.

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

The 2019 Equity Incentive Plan (the "Plan")

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 .

The table below sets forth the range of assumptions

used to calculate the fair value of options granted during the fiscal years ended April 30:

Exercise Price

$ 1.69 – 2.82

$ 2.01 – 3.95

Stock price on date of grant

2 unchanged sentences

0.38 – 1.66 %

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

Expected term (years)

210.68 – 273.46 %

88.60 – 91.44 %

A summary of options activity under the Plan since

April 30, 2020 is as follows:

Weighted-Average

Exercise Price

Weighted-Average

Remaining Contractual Term

Intrinsic Value

Outstanding as of April

Forfeited or expired

Outstanding as of April

Forfeited or expired

Outstanding as of April

Exercisable as of April 30, 2021

Exercisable as of

April 30, 2022

The aggregate intrinsic value of outstanding options

at April 30, 2022 and 2021 represents the excess of the stock price at April 30, 2022 and 2021 of $2.03 and $4.04, respectively, over

the exercise price of each option.

As of April 30, 2022 and April 30, 2021, there was $ 3,380,467 and $ 645,264 of unrecognized stock-based

compensation expense related to unvested stock options which is expected to be recognized over the weighted average periods of 2.20 and

1.55 years, respectively.

Restricted Stock

A summary of restricted stock activity under the Plan

since April 30, 2020 is as follows:

Restricted Stock

Weighted Average Grant-Date Fair Value Per Share

Unvested and outstanding as of April 30, 2020

Unvested and outstanding as of April 30, 2021

Unvested and outstanding as of April 30, 2022

Stock Compensation

Stock compensation expense for the years ended April

30, 2021 and 2020 was as follows:

30 was as follows:

General and administrative

1 unchanged sentence

Sales and marketing

Note 13 –

Stock compensation expense pertaining to options totaled $ 1,447,115 and

$ 2,547,591 for the year ended April 30, 2022 and 2021, respectively.

Stock compensation expense pertaining to restricted stock units totaled

$ 1,844,520 and $ 840,625 for the year ended April 30, 2022 and 2021, respectively.

Note 18 – Derivatives

The Company completed financings in October

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.

2020 and January 2021 which included notes and warrants containing embedded features subject to derivative accounting.

See Note 12 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.

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 in the carrying value of the note is fully amortized

on the date of settlement and recognized as interest expense.

The Company 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 settlement of the derivative liability and as of April 30, 2022 and 2021 are set forth below.

In addition, the

Company's stock price on each measurement date was used in the model.

April 30, 2022

April 30, 2021

Risk-free interest rate

0.52 – 2.87 %

0.08 – 0.61 %

Expected dividend yield

1 unchanged sentence

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

211.02 – 292.28 %

86.74 – 110.56 %

As of April 30, 2022, all of the notes had been

converted into common stock and 806,666 of the warrants were outstanding.

Changes in the derivative liability during the year ended April

30, 2022 and 2021 were as follows:

Balance, beginning of period

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

( 5,390,415 )

Changes in fair value

( 1,042,129 )

Balance, end of period

Changes in fair value primarily related to changes

in the Company’s stock price during the period with increases in the stock price increasing the liability and decreases in the stock

price reducing the liability.

Note 19 – 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.

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

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.

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.

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 January 2022, the agreement was amended to increase the monthly

payments to $ 10,000 .

In January 2022, the Company entered into a note

agreement with an employee in the principal amount of $ 510,323 ,

as further described in Note 6.

Additional related party transactions are disclosed

Note 20 – Subsequent Events

1 unchanged sentence

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

In May and July 2022, the Company entered into

inventory purchase orders totaling $ 11,175,000 .

The global supply chain for materials required to produce our drones is presently

experiencing significant disruptions and delays.

While we have increased our order lead times, we retain the right to cancel or

modify these orders prior to their shipment.

AND DISAGREEMENTS WITH ACCOUNTANTS ON ACCOUNTING AND FINANCIAL DISCLOSURE

There were no changes in or disagreements with accountants on accounting

1 unchanged sentence

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