Red Cat Holdings, Inc. 10-K

ITEM 8. FINANCIAL STATEMENTS AND SUPPLEMENTARY DATA RED HAT HOLDINGS, INC. INDEX TO CONSOLIDATED FINANCIAL STATEMENTS Page Report of Independent Registered Accounting Firm (PCAOB ID: 5041 ) F-2 Consolidated Balance Sheets as of April 30, 2022 and 2021 F-3 Consolidated Statements of Operations for the years ended April 30, 2022 and 2021 F-4 Consolidated Statements of Changes in Shareholders’ Equity for the years ended April 30, 2022 and 2021 F-5 Consolidated Statements of Cash Flows for the years ended April 30, 2022 and 2021 F-6 Notes to the Consolidated Financial Statements F-7 F- 1 Report of Independent Registered Public Accounting Firm To the shareholders and the board of directors of Red Cat Holdings Opinion on the Financial Statements We have audited the accompanying consolidated balance sheets of Red Cat Holdings 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"). In 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 These financial statements are the responsibility of the Company's management. Our responsibility is to express an opinion on the Company's financial statements based on our audit. We are a public accounting firm registered with the Public Company Accounting Oversight Board (United States) ("PCAOB") and are required to be independent with respect to the Company in accordance with the U.S. federal securities laws and the applicable rules and regulations of the Securities and Exchange Commission and the PCAOB. We conducted our audit in accordance with the standards of the PCAOB. Those standards require that we plan and perform the audit to obtain reasonable assurance about whether the financial statements are free of material misstatement, whether due to error or fraud. The Company is not required to have, nor were we engaged to perform, an audit of its internal control over financial reporting. As part of our audits we are required to obtain an understanding of internal control over financial reporting but not for the purpose of expressing an opinion on the effectiveness of the Company’s internal control over financial reporting. Accordingly, we express no such opinion. Our audit included performing procedures to assess the risks of material misstatement of the financial statements, whether due to error or fraud, and performing procedures that respond to those risks. Such procedures included examining, on a test basis, evidence regarding the amounts and disclosures in the financial statements. Our audit also included evaluating the accounting principles used and significant estimates made by management, as well as evaluating the overall presentation of the financial statements. We believe that our audit provides a reasonable basis for our opinion. 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 We have served as the Company's auditor since 2020 Lakewood, CO July 27, 2022 F- 2 RED CAT HOLDINGS Consolidated Balance Sheets April 30, April 30, 2022 2021 ASSETS Current assets Cash $ 4,084,815 $ 277,347 Marketable securities 44,790,369 — Accounts receivable, net 495,506 321,693 Inventory 3,895,870 362,072 Other 2,354,884 678,898 Due from related party 31,853 — Total current assets 55,653,297 1,640,010 Goodwill 25,138,750 8,017,333 Intangible assets, net 2,698,531 2,032,169 Property and equipment, net 511,690 — Other 57,033 3,853 Operating lease right-of-use assets 1,019,324 — Total long term assets 29,425,328 10,053,355 TOTAL ASSETS $ 85,078,625 $ 11,693,365 LIABILITIES AND STOCKHOLDERS' EQUITY Current liabilities Accounts payable $ 1,018,747 $ 541,903 Accrued expenses 1,084,494 614,050 Debt obligations - short term 956,897 269,045 Due to related party 40,057 390,209 Customer deposits 437,930 46,096 Operating lease liabilities 293,799 — Warrant derivative liability 1,607,497 2,812,767 Total current liabilities 5,439,421 4,674,070 Operating lease liabilities 749,825 — Debt obligations - long term 973,707 — Note payable to related party — 1,753,000 Total long term liabilities 1,723,532 1,753,000 Commitments and contingencies Stockholders' equity Series A preferred stock - shares authorized 2,200,000 ; outstanding 0 and 158,704 — 1,587 Series B preferred stock - shares authorized 4,300,000 ; outstanding 986,676 and 1,968,676 9,867 19,687 Common stock - shares authorized 500,000,000 ; outstanding 53,748,735 and 29,431,264 53,749 29,431 Additional paid-in capital 106,821,384 21,025,518 Accumulated deficit ( 27,499,056 ) ( 15,809,928 ) Accumulated other comprehensive income ( 1,470,272 ) — Total stockholders' equity 77,915,672 5,266,295 TOTAL LIABILITIES AND STOCKHOLDERS' EQUITY $ 85,078,625 $ 11,693,365 See accompanying notes. F- 3 RED CAT HOLDINGS Consolidated Statements of Operations Year ended April 30, 2022 2021 Revenues $ 6,428,963 $ 4,999,517 Cost of goods sold 5,503,448 3,929,832 Gross margin 925,515 1,069,685 Operating expenses Operations 1,353,904 590,342 Research and development 2,606,141 516,084 Sales and marketing 1,127,532 172,182 General and administrative 5,548,589 1,279,471 Stock based compensation 3,291,635 3,388,216 Total operating expenses 13,927,801 5,946,295 Operating loss ( 13,002,286 ) ( 4,876,610 ) Other (income) expense Derivative expense — 4,630,288 Change in fair value of derivative liability ( 1,042,129 ) 2,492,894 Investment income, net ( 355,769 ) — Interest expense 147,724 1,223,767 Other, net ( 62,984 ) 12,616 Other (income) expense ( 1,313,158 ) 8,359,565 Net loss $ ( 11,689,128 ) $ ( 13,236,175 ) Loss per share - basic and diluted $ ( 0.24 ) $ ( 0.56 ) Weighted average shares outstanding - basic and diluted 48,220,265 23,655,743 See accompanying notes. F- 4 RED CAT HOLDINGS Consolidated Statements of Stockholders' Equity Series A Series B Common Stock Additional Accumulated Other Preferred Stock Preferred Stock Paid-in Accumulated Comprehensive Total Shares Amount Shares Amount Shares Amount Capital Deficit Income (Loss) Equity Balances, April 30, 2020 208,704 $ 2,087 3,681,623 $ 36,816 20,011,091 $ 20,011 $ 4,043,837 $ ( 2,573,753 ) — $ 1,528,998 Conversion of debt — — — — 1,857,935 1,858 6,336,768 — — 6,338,626 Conversion of preferred stock ( 50,000 ) ( 500 ) ( 1,712,947 ) ( 17,129 ) 1,843,956 1,844 15,785 — — — Exercise of warrants — — — — 178,509 178 895,376 — — 895,554 Acquisition of Fat Shark — — — — 5,227,273 5,227 6,345,849 — — 6,351,076 Stock based compensation — — — — — — 3,388,216 — — 3,388,216 Vesting of restricted stock units — — — — 312,500 313 ( 313 ) — — — Net Loss — — — — — — — ( 13,236,175 ) — ( 13,236,175 ) Balances, April 30, 2021 158,704 $ 1,587 1,968,676 $ 19,687 29,431,264 $ 29,431 $ 21,025,518 $ ( 15,809,928 ) $ — $ 5,266,295 Conversion of preferred stock ( 158,704 ) ( 1,587 ) ( 982,000 ) ( 9,820 ) 2,140,329 2,140 9,267 — — — Exercise of warrants — — — — 66,666 67 263,073 — — 263,140 Acquisition of Skypersonic — — — — 707,293 707 2,715,305 — — 2,716,012 Acquisition of Teal — — — — 3,588,272 3,588 10,007,691 — — 10,011,279 Public offerings, net of $ 5,959,800 of issuance costs — — — — 17,333,334 17,333 70,022,871 — — 70,040,204 Stock based compensation — — — — — — 3,291,635 — — 3,291,635 Exercise of stock options — — — — 89,107 89 ( 89 ) — — — Vesting of restricted stock units — — — — 280,803 282 ( 764,175 ) — — ( 763,893 ) Shares issued for services — — — — 111,667 112 250,288 — — 250,400 Change in unrealized loss on available-for-sale securities — — — — — — — — ( 1,474,294 ) ( 1,474,294 ) Currency translation adjustments — — — — — — — — 4,022 4,022 Net Loss — — — — — — — ( 11,689,128 ) — ( 11,689,128 ) Balances, April 30, 2022 — $ — 986,676 $ 9,867 53,748,735 $ 53,749 $ 106,821,384 $ ( 27,499,056 ) $ ( 1,470,272 ) $ 77,915,672 See accompanying notes. F- 5 RED CAT HOLDINGS Consolidated Statements of Cash Flows Year ended April 30, 2022 2021 Cash Flows from Operating Activities Net loss $ ( 11,689,128 ) $ ( 13,236,175 ) Stock based compensation - employees 2,789,026 3,388,216 Stock awards - non-employees 502,609 — Common stock issued for services 250,400 — Amortization of intangible assets 224,638 36,831 Depreciation 40,165 — Change in fair value of derivative ( 1,042,129 ) 2,492,894 Amortization of debt discount — 1,100,000 Derivative expense — 4,630,288 Changes in operating assets and liabilities, net of acquisitions Accounts receivable ( 74,317 ) ( 72,534 ) Inventory ( 2,229,487 ) ( 60,042 ) Other ( 3,634,604 ) ( 291,646 ) Operating lease right-of-use assets and liabilities 24,300 — Customer deposits 328,841 ( 17,517 ) Accounts payable ( 1,173,472 ) 13,818 Accrued expenses ( 336,162 ) 616,866 Net cash used in operating activities ( 16,019,320 ) ( 1,399,001 ) Cash Flows from Investing Activities Cash acquired through acquisitions 24,866 — Payment for acquisition, net of cash acquired — ( 48,368 ) Purchases of property and equipment ( 363,689 ) — Proceeds from maturities of marketable securities 11,355,218 — Purchases of marketable securities ( 57,619,881 ) — Net cash used in investing activities ( 46,603,486 ) ( 48,368 ) Cash Flows from Financing Activities Proceeds from exercise of warrants 99,999 201,249 Proceeds from related party obligations — 79,000 Payments under related party obligations ( 1,970,757 ) ( 22,475 ) Proceeds from debt obligations — 660,919 Payments under debt obligations ( 929,952 ) ( 510,645 ) Proceeds from convertible debentures — 1,080,000 Payments of taxes related to restricted stock vesting ( 834,219 ) — Proceeds from issuance of common stock, net 70,065,203 — Net cash provided by financing activities 66,430,274 1,488,048 Net increase in Cash 3,807,468 40,679 Cash, beginning of period 277,347 236,668 Cash, end of period 4,084,815 277,347 Cash paid for interest 164,573 15,835 Cash paid for income taxes — — Non-cash transactions Fair value of shares issued in acquisitions $ 12,727,292 $ 6,351,076 Change in unrealized loss on marketable securities available-for-sale $ 1,474,294 $ — Forgiveness of PPP loan $ 300,910 $ — Shares withheld as payment of note receivable $ 201,873 $ — Elimination of derivative liability $ 163,141 $ 5,390,415 Financed purchases of property and equipment $ 144,383 $ — Indirect payment to related party $ 132,200 $ — Taxes related to net share settlement of equity awards $ 108,969 $ Conversion of preferred stock into common stock $ 11,407 $ — Issuance of note payable - related party in acquisition $ — $ 1,753,000 Conversion of notes into common stock $ — $ 1,550,000 Conversion of accrued interest into common stock $ — $ 92,515 See accompanying notes. F- 6 RED CAT HOLDINGS, INC. NOTES TO CONSOLIDATED FINANCIAL STATEMENTS April 30, 2022 and 2021 Note 1 – The Business 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. 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 industry. 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: A. 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 $ 6,351,076 Promissory note issued 1,753,000 Cash 250,000 Total Purchase Price $ 8,354,076 Assets acquired Cash 201,632 Accounts receivable 249,159 Other assets 384,232 Inventory 223,380 Brand name 1,144,000 Proprietary technology 272,000 Non-compete agreement 16,000 Total assets acquired 2,490,403 Liabilities assumed Accounts payable and accrued expenses 279,393 Customer deposits 25,194 Total liabilities assumed 304,587 Total fair value of net assets acquired 2,185,816 Goodwill $ 6,168,260 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. F- 7 B. 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. In 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 $ 2,716,012 Cash 75,000 Total Purchase Price $ 2,791,012 Assets acquired Cash 13,502 Accounts receivable 51,083 Other assets 12,950 Inventory 50,556 Proprietary technology 826,000 Non-compete agreement 65,000 Total assets acquired 1,019,091 Liabilities assumed Accounts payable and accrued expenses 1,054,997 Total liabilities assumed 1,054,997 Total fair value of net assets acquired ( 35,906 ) Goodwill $ 2,826,918 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. C. 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 . Based on the 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. F- 8 A revised summary of the purchase price and its related allocation is set forth below. Total Purchase Price – shares issued $ 10,011,279 Assets acquired Cash 11,364 Accounts receivable 47,964 Other current assets 15,085 Other assets 48,595 Inventory 1,253,755 Total assets acquired 1,376,763 Liabilities assumed Accounts payable and accrued expenses 1,143,899 Customer deposits 1,766,993 Notes payable 2,749,091 Total liabilities assumed 5,659,983 Total fair value of net assets acquired ( 4,283,220 ) Goodwill $ 14,294,499 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. Interest 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: April 30, 2022 Red Cat Skypersonic Teal Consolidated Revenues $ 4,550,980 $ 312,023 $ 1,878,007 $ 6,741,010 Net Loss $ ( 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: April 30, 2021 Red Cat Fat Shark Skypersonic Teal Consolidated Revenues $ 2,112,042 $ 5,190,970 $ 303,631 $ 979,344 $ 8,585,987 Net (Loss) Income $ ( 13,263,942 ) $ 239,955 $ ( 906,478 ) $ ( 3,283,309 ) $ ( 17,213,774 ) F- 9 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 the future. Other 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 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. Actual results could differ from those estimates. 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. F- 10 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 period for the valuation of assets acquired and liabilities assumed ends as soon as information on the facts and circumstances that existed as of the acquisition date becomes known, not to exceed 12 months. Adjustments in a purchase price allocation may require a change in the amounts allocated to goodwill during the periods in which the adjustments are determined. We perform an impairment test at the end of each fiscal year, or more frequently if indications of impairment arise. We have a single reporting unit, and consequently, evaluate goodwill for impairment based on an evaluation of the fair value of the Company as a whole. 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 asset. The estimated useful lives of our property and equipment are generally as follows: furniture and equipment, seven years; equipment 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 with this guidance, the Company has categorized its recurring basis financial assets and liabilities into a three-level fair value hierarchy based on the priority of the inputs to the valuation technique. The fair value hierarchy gives the highest priority to quoted prices in active markets for identical assets or liabilities (Level 1) and the lowest priority to unobservable inputs (Level 3). The inputs used to measure fair value may fall into different levels of the fair value hierarchy. In such cases, the level in the fair value hierarchy within which the fair value measurement in its entirety falls has been determined based on the lowest level input that is significant to the fair value measurement in its entirety. The Company's assessment of the significance of a particular input to the fair value measurement in its entirety requires judgment and considers factors specific to the asset or liability. The guidance establishes three levels of the fair value hierarchy as follows: Level 1 : Inputs are unadjusted, quoted prices in active markets for identical assets or liabilities at the measurement date; Level 2 : 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; and Level 3 : 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. F- 11 Disclosures for Non-Financial Assets Measured at Fair Value on a Non-Recurring Basis The Company's financial instruments mainly consist of cash, receivables, current assets, accounts payable, accrued expenses and debt. The carrying amounts of cash, receivables, current assets, accounts payable, accrued expenses and current debt approximates fair value due to the short-term nature of these instruments. Convertible Securities and Derivatives When the Company issues convertible debt or equity instruments that contain embedded derivative instruments that are to be bifurcated and accounted for as liabilities, the total proceeds from the convertible host instruments are first allocated to the bifurcated derivative instruments. The remaining proceeds, if any, are then allocated to the convertible instruments themselves, resulting in those instruments being recorded at a discount from their face value but no lower than zero. Any excess amount is recognized as a derivative expense. Derivative Liabilities The Company has financial instruments that are considered derivatives or contain embedded features subject to derivative accounting. Embedded derivatives are valued separately from the host instrument and are recognized as derivative liabilities on the Company's balance sheet. The Company measures these instruments at their estimated fair value and recognizes changes in their estimated fair value in results of operations during the period of change. In October 2020 and January 2021, the Company entered into convertible note agreements which included provisions under which the conversion price was equal to the lesser of an initial stated amount or the conversion price of a future offering. This variable conversion feature was recognized as a derivative. Both financings included the issuance of warrants which contained similar variable conversion features. The Company values these convertible notes and warrants using the multinomial lattice method that values the derivative liability based on a probability weighted discounted cash flow model. The resulting liability is valued at each reporting date and the change in the liability is reflected as change in derivative liability in the statement of operations. Revenue Recognition – The Company recognizes revenue in accordance with ASC 606, “Revenue from Contracts with Customers”, issued by the Financial Accounting Standards Board (“FASB”). This standard includes a comprehensive evaluation of factors to be considered regarding revenue recognition including (i) identifying the promised goods, (ii) evaluating performance obligations, (iii) measuring the transaction price, (iv) allocating the transaction price to the performance obligations if there are multiple components, and (v) recognizing revenue as each obligation is satisfied. The Company’s revenue transactions include a single component, specifically, the shipment of goods to customers as orders are fulfilled. The Company recognizes revenue upon shipment. The timing of the shipment of orders can vary considerably depending upon whether an order is for an item normally maintained in inventory or an order that requires assembly or unique parts. Customer deposits totaled $ 437,930 and $ 46,096 at April 30, 2022 and April 30, 2021, respectively. Research and Development – Research and development expenses include payroll, employee benefits, and other headcount-related expenses associated with product development. Research and development expenses also include third-party development and programming costs, as well as a proportionate share of overhead costs such as rent. Costs related to software development are included in research and development expense until technological feasibility is reached, which for our software products, is generally shortly before the products are released to production. Once technological feasibility is reached, such costs are capitalized and amortized as a cost of revenue over the estimated lives of the products. Income Taxes – Deferred taxes are provided on the liability method, whereby deferred tax assets are recognized for deductible temporary differences and deferred tax liabilities are recognized for taxable temporary differences. Temporary differences are the differences between the reported amounts of assets and liabilities and their tax bases. Deferred tax assets and liabilities are adjusted for the effects of changes in tax laws and rates on the date of enactment. Recent Accounting Pronouncements – Management does not believe that recently issued, but not yet effective accounting pronouncements, if adopted, would have a material effect on the accompanying 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. F- 12 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. 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 outstanding during the period. Common stock equivalents were excluded from the computation of diluted net loss per share of common stock because they were anti-dilutive. The 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: 2022 2021 Series A Preferred Stock, as converted — 1,321,996 Series B Preferred Stock, as converted 822,230 1,640,563 Stock Options 3,694,142 2,197,475 Warrants 1,539,999 873,332 Restricted stock 1,083,675 687,500 Total 7,140,046 6,720,866 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 and members of the Board of Directors. Related Party transactions are disclosed in Note 19. Note 3 – Marketable Securities The following tables set forth information related to our marketable securities as of April 30, 2022: I. Cost, unrealized gains or losses, and fair values Cost Unrealized Gains (Losses) Fair Value Money market funds $ 799,047 $ 889 $ 799,936 Asset-backed securities 2,894,512 ( 32,953 ) 2,861,559 Corporate bonds 42,571,104 ( 1,442,230 ) 41,128,874 Total $ 46,264,663 $ ( 1,474,294 ) $ 44,790,369 II. Contractual Maturities One Year or Less One to Five Years Over Five Years Total Money market funds $ 799,936 $ — $ — $ 799,936 Asset-backed securities — 2,861,559 — 2,861,559 Corporate bonds 21,702,648 18,877,593 548,633 41,128,874 Total $ 22,502,584 $ 21,739,152 $ 548,633 $ 44,790,369 F- 13 III. Fair Value Hierarchy Level 1 Level 2 Level 3 Total Money market funds $ 799,936 $ — $ — $ 799,936 Asset-backed securities — 2,861,559 — 2,861,559 Corporate bonds — 41,128,874 — 41,128,874 Total $ 799,936 $ 43,990,433 $ — $ 44,790,369 Note 4 – Inventories Inventories consisted of the following at April 30, 2022 2021 Raw materials $ 2,831,713 $ — Work-in-process 173,112 — Finished goods 891,045 362,072 Total $ 3,895,870 $ 362,072 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 delays. 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: 2022 2021 Prepaid inventory $ 1,707,085 $ 478,939 Accrued interest income 385,730 — Prepaid expenses 262,069 115,587 Security deposits — 9,372 Due from related party — 75,000 Total $ 2,354,884 $ 678,898 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. The amount 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. Under the 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. The 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. F- 14 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 Gross Carrying Amount Accumulated Amortization Net Carrying Value Gross Carrying Amount Accumulated Amortization Net Carrying Value Proprietary technology $ 1,098,000 $ ( 219,267 ) $ 878,733 $ 272,000 $ ( 27,200 ) $ 244,800 Non-compete agreements 81,000 ( 29,667 ) 51,333 16,000 ( 2,667 ) 13,333 Customer relationships 39,000 ( 12,535 ) 26,465 39,000 ( 6,964 ) 32,036 Total finite-lived assets 1,218,000 ( 261,469 ) 956,531 327,000 ( 36,831 ) 290,169 Brand name 1,722,000 — 1,722,000 1,722,000 — 1,722,000 Trademark 20,000 — 20,000 20,000 — 20,000 Total indefinite-lived assets 1,742,000 — 1,742,000 1,742,000 — 1,742,000 Total intangible assets, net $ 2,960,000 $ ( 261,469 ) $ 2,698,531 $ 2,069,000 $ ( 36,831 ) $ 2,032,169 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: 2023 $ 224,638 2024 221,972 2025 197,638 2026 170,438 2027 141,845 Total $ 956,531 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 of: Date Acquisition Goodwill January 2020 Rotor Riot $ 1,849,073 November 2020 Fat Shark 6,168,260 Balance at April 30, 2021 8,017,333 May 2021 Skypersonic 2,826,918 August 2021 Teal Drones 14,294,499 Balance at April 30, 2022 $ 25,138,750 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: F- 15 2022 2021 Equipment and other $ 509,376 $ — Leasehold improvements 149,330 — Furniture and equipment 42,746 — Accumulated depreciation ( 189,762 ) — Net carrying value $ 511,690 $ — 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. Location Monthly Rent Expiration South Salt Lake, Utah $ 22,000 December 2024 Orlando, Florida $ 4,692 May 2024 San Juan, Puerto Rico $ 2,226 June 2027 Troy, Michigan $ 2,667 May 2022 Orlando, Florida $ 1,690 September 2022 Supplemental information related to operating leases is as follows: Year Ended April 30, 2022 Operating cash paid to settle lease liabilities $ 242,003 Right of use asset additions in exchange for lease liabilities 652,950 Weighted average remaining lease term (in years) 3.28 Weighted average discount rate 12.00 % Future lease payment obligations at April 30, 2022 were as follows: Fiscal Year Ended: 2023 $ 400,092 2024 403,878 2025 304,676 2026 76,619 2027 79,300 Thereafter 6,627 Total $ 1,271,192 Note 10 – Debt Obligations A. 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 . F- 16 B. 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. C. 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 . D. SBA Loan 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. E. 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 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: Date of Transaction Purchased Receivables Payment to Company Transaction Fees Withholding Rate Fully Repaid In May 2020 $ 158,200 $ 140,000 $ 18,200 17 % October 2020 September 2020 $ 209,050 $ 185,000 $ 24,050 17 % May 2021 April 2021 $ 236,500 $ 215,000 $ 21,500 17 % January 2022 F. 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 . G. 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. H. 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 . I. PayPal PayPal is an electronic commerce company that facilitates payments between parties through online funds transfers. The Company processes certain customer payments ordered on its e-commerce site through PayPal. The Company has entered into multiple agreements under which PayPal provides an advance on customer payments, and then retains a portion of customer payments until the advance is repaid. PayPal charges a fee which the Company recognizes in full upon entering an agreement. A November 2019 agreement under which PayPal advanced $ 100,000 and charged a transaction fee of $ 6,900 was completed in January 2021. A January 2021 agreement under which PayPal advanced $ 75,444 and charged a transaction fee of $ 2,444 was completed in August 2021. F- 17 J. Summary Outstanding principal payments are due as follows: Fiscal 2023 $ 956,897 Fiscal 2024 572,139 Fiscal 2025 401,568 Total $ 1,930,604 Short term – through April 30, 2023 $ 956,897 Long term – thereafter $ 973,707 Note 11 – Due to Related Party A. 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. 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. B. BRIT, LLC 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 % annually. 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. C. Aerocarve 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. F- 18 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. The excess of the liability over the net proceeds totaled $ 148,587 which was recognized as a derivative expense in the fiscal year ended April 30, 2021. 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 Our operating subsidiary, Red Cat Propware, Inc., is incorporated and based in Puerto Rico which is a commonwealth of the United States. We are not subject to taxation by the United States as Puerto Rico has its own taxing authority. 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. At April 30, 2022 and April 30, 2021, we had accumulated deficits of approximately $ 27,500,000 and $ 15,800,000 , respectively. Deferred tax assets related to the future benefit of these net operating losses for tax purposes totaled approximately $ 5,087,500 and $ 2,923,000 , respectively, based on the base Puerto Rico corporate tax rate of 18.5%. 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 Our common stock has a par value of $ 0.001 per share. We are authorized to issue 500,000,000 shares of common stock. Each share of common stock is entitled to one vote. 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 F- 19 - 66,666 due to the exercise of warrants - 707,293 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 - 17,333,334 in connection with two closed offerings which generated gross proceeds of $ 76 million and net proceeds of approximately $ 70.1 million - 89,107 due to the exercise of stock options - 225,637 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. - 55,166 under restricted stock agreements with non-employees - 111,667 for services rendered Note 15 – Preferred 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. Shares outstanding at April 30, 2022 totaled 986,676 which are convertible into 822,230 shares of common stock. Note 16 – Warrants 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 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 a 25% discount of the price per share of Common Stock offered in a future qualified offering. The warrants 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 . F- 20 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. In 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: 2022 2021 Risk-free interest rate 0.79 – 0.85 % 0.52 – 2.87 % Expected dividend yield — — Expected term (in years) 5.00 – 5.00 3.42 – 4.50 Expected volatility 222.45 – 223.17 % 211.02 – 292.28 % The following table summarizes the changes in warrants outstanding since April 30, 2020. Number of Shares Weighted-average Exercise Price per Share Weighted-average Remaining Contractual Term (in years) Aggregate Intrinsic Value Balance as of April 30, 2020 — — — — Granted 1,074,998 $ 1.50 Exercised ( 201,666 ) 1.50 Outstanding as of April 30, 2021 873,332 1.50 4.62 $ 2,218,263 Granted 733,333 5.45 Exercised ( 66,666 ) 1.50 Outstanding at April 30, 2022 1,539,999 $ 3.38 3.89 $ 427,533 Note 17 – Share Based Awards 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 . Options 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: 2022 2021 Exercise Price $ 1.69 – 2.82 $ 2.01 – 3.95 Stock price on date of grant 1.69 – 2.82 2.01 – 3.95 Risk-free interest rate 0.47 – 1.91 % 0.38 – 1.66 % Dividend yield — — Expected term (years) 3.75 – 10.00 5.87 – 10.00 Volatility 210.68 – 273.46 % 88.60 – 91.44 % F- 21 A summary of options activity under the Plan since April 30, 2020 is as follows: Options Shares Weighted-Average Exercise Price Weighted-Average Remaining Contractual Term Aggregate Intrinsic Value Outstanding as of April 30, 2020 1,597,475 $ 1.10 Granted 600,000 3.63 Exercised — — Forfeited or expired — — Outstanding as of April 30, 2021 2,197,475 1.79 8.68 4,943,870 Granted 1,681,000 2.58 Exercised ( 150,000 ) 2.49 Forfeited or expired ( 34,333 ) 2.11 Outstanding as of April 30, 2022 3,694,142 2.17 8.56 1,407,545 Exercisable as of April 30, 2022 2,094,642 $ 1.90 7.91 $ 1,058,620 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 Shares Weighted Average Grant-Date Fair Value Per Share Unvested and outstanding as of April 30, 2020 — $ — Granted 1,000,000 2.69 Vested ( 312,500 ) 2.69 Forfeited — — Unvested and outstanding as of April 30, 2021 687,500 2.69 Granted 995,659 2.55 Vested ( 599,484 ) 2.64 Forfeited — — Unvested and outstanding as of April 30, 2022 1,083,675 $ 2.59 Stock Compensation Stock compensation expense for the years ended April 30 was as follows: 2022 2021 General and administrative $ 1,521,951 $ 1,688,025 Research and development 516,456 1,269,987 Operations 783,781 220,048 Sales and marketing 469,447 210,156 Total $ 3,291,635 $ 3,388,216 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. F- 22 Note 18 – Derivatives The Company completed financings in October 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 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 — — Expected term (in years) 3.42 – 4.50 1.54 – 5.00 Expected volatility 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: 2022 2021 Balance, beginning of period $ 2,812,767 $ — Additions — 5,710,288 Eliminated upon conversion of notes/exercise of warrants ( 163,141 ) ( 5,390,415 ) Changes in fair value ( 1,042,129 ) 2,492,894 Balance, end of period $ 1,607,497 $ 2,812,767 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 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 in Note 11. F- 23 Note 20 – Subsequent Events Subsequent events have been evaluated through the date of this filing and there are no subsequent events which require disclosure except as set forth below: 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. F- 24 PART III ITEM 9. CHANGES IN AND DISAGREEMENTS WITH ACCOUNTANTS ON ACCOUNTING AND FINANCIAL DISCLOSURE There were no changes in or disagreements with accountants on accounting and financial disclosure.