Red Cat Holdings, Inc. 10-K/A

ITEM 1. BUSINESS Overview The Company was originally incorporated under the laws of the State of Colorado in 1984 under the name Oravest International, Inc. In November 2016, we changed our name to TimefireVR, Inc. and re-incorporated in Nevada. In May 2019, the Company completed a share exchange agreement with Red Cat Propware (“Propware”) which resulted in the Propware shareholders acquiring an 83% ownership interest, and management control, of the Company. In connection with the share exchange agreement, we changed our name to Red Cat Holdings, Inc. (“Red Cat” or the “Company” or “we”) and changed our operating business from the bitcoin industry to the drone industry. Recent Developments Prior to the share exchange agreement, Propware was focused on the research and development of software solutions that could provide secure cloud-based analytics, storage and services for the drone industry. Following the share exchange agreement and its name change, Red Cat Holdings has completed a series of acquisitions and financings which have broadened the scope of its activities in the drone industry. These developments include: • In January 2020, we acquired Rotor Riot, LLC, a reseller of drones and related parts, primarily to the consumer marketplace through its digital storefront located at www.rotorriot.com . The total purchase price was $2.0 million. • In November 2020, the Company acquired Fat Shark Holdings, which sells consumer electronics products to the first-person view (“FPV”) sector of the drone industry. Fat Shark’s flagship products are headsets with a built-in display (or “goggles”) that allow a pilot to see a real-time video feed from a camera mounted on an aerial platform. The total purchase price was $8.4 million. • In May 2021, the Company closed a firm commitment underwritten public offering (the “Underwritten Offering”) resulting in the sale of 4,000,000 shares of common stock at a public offering price of $4.00 per share to underwriters, ThinkEquity, a division of Fordham Financial Management, Inc. (“ThinkEquity”), pursuant to a registration statement on Form S-1, as amended (File No. 333-253491), filed with the Securities and Exchange Commission (the “Commission”), which was declared effective on April 29, 2021. The financing generated gross proceeds of $16.0 million and net proceeds of $14.6 million. • In May 2021, we acquired Skypersonic, Inc., a provider of drone products and software solutions that enable drone inspection flights that can be executed by pilots anywhere in the world. Skypersonic powers drones to “Fly Anywhere” and “Inspect the Impossible”. Its patented software and hardware solutions allow for inspection services in restricted spaces where GPS is denied or unavailable. The total purchase price was $2.8 million. • In July 2021, the Company closed an Underwritten Offering resulting in the sale of 13,333,334 shares of common stock at a public offering price of $4.50 per share to ThinkEquity. The shares of Common Stock were offered by the Company pursuant to a registration statement on Form S-3, as amended (File No. 333-256216), filed with the Commission which was declared effective on June 14, 2021 (the “Registration Statement”). The financing generated gross proceeds of $60.0 million and net proceeds of approximately $55.5 million. • In August 2021, we closed the acquisition of Teal Drones ("Teal"), a leader in commercial and government unmanned aerial vehicle ("UAV") technology. Teal manufactures the Golden Eagle, one of only five drones approved by the U.S. Department of Defense for reconnaissance, public safety, and inspection applications. The total purchase price was $10.0 million. 4 Business Strategy Red Cat remains focused on building a portfolio of complementary products and services to support the continued growth and maturation of the drone industry in both the enterprise and consumer market segments. Our disciplined acquisition strategy targets companies with advanced product offerings and unique drone platforms and intellectual property. After the integration of Teal Drones, we would expect government customers including defense, public safety, and infrastructure to be our most significant revenue drivers in the fiscal year ending April 30, 2023. During the second half of the fiscal year ending on April 30, 2022, the Company focused on integrating and organizing its acquired businesses. These efforts including refining the establishment of Enterprise and Consumer segments in order to sharpen the Company's focus on the unique opportunities in each sector of the drone industry. The Enterprise segment is focused on opportunities in the commercial sector and the military. Enterprise is building the infrastructure to manage drone fleets, fly and provide services remotely, and navigate confined industrial interior spaces and dangerous military environments. The Consumer segment is focused on enthusiasts and hobbyists which are expected to increase as drones become more visible and useful in our daily lives. Consumer provides a growing revenue base, strong brand visibility for the Company, and is an excellent source of professional pilots. Enterprise Segment The Enterprise Segment will focus on developing a hardware enabled software platform of services and solutions to government and commercial enterprises and the military. Drones enable businesses to complete many tasks and solve problems more efficiently, quicker, and at a lower cost and risk than traditional methods. The Company's Teal and Skypersonic subsidiaries will operate in this segment. The core business theme for the Enterprise segment is "Remotely Flying Drones Anywhere." We have accumulated an array of software solutions which are enabled by our hardware platform of intelligent drones and digital video link. We believe our ability to remotely fly drones anywhere provides our customers with a significant reduction in labor, travel, and training costs when compared with any other enterprise system on the market. The Enterprise Segment plans to engage key products and services from the Consumer Segment to fulfill its mission. In addition to the Fat Shark data link, a roster of professional pilots will be sourced through the large social media presence and network of Rotor Riot. Teal Drones Teal anchors the Enterprise Segment and is expected to drive the segment’s revenues in fiscal 2023 and beyond. Founded by Thiel Fellow, George Matus in 2015, the company’s first products were its Sport and Teal One consumer drones, the first of their kind to be manufactured in the United States. A Utah-based operation, Teal has since migrated to the enterprise and government sectors based on its Golden Eagle, a U.S. Department of Defense government-approved drone designed for reconnaissance, public safety, and inspection applications. After the U.S. Army banned its forces from using Chinese-made quadcopters due to security risks (the drones’ radio controls are unencrypted and the devices could potentially capture and store sensitive information that could be passed to the Chinese government) the U.S. Department of Defense began developing its own alternatives under a defense program known as Blue sUAS. Teal is redefining what unmanned systems can achieve, providing superior aerial surveillance and awareness for inspections and short-range reconnaissance. The Golden Eagle resembles a consumer quadcopter but is made to military standards with secure, encrypted communications and advanced computing. The Golden Eagle also carries a high-quality thermal imaging system made by FLIR, a subsidiary of Teledyne Technologies. Teal's open and modular platform allows a critical mass of applications to be developed and integrated for next-generation capabilities. Partners actively integrating technologies with Teal include Autonodyne, Tomahawk Robotics, and DroneLink. Teal has achieved the following accomplishments since being acquired by Red Cat Holdings in August 2021. 5 Teal opens new manufacturing facility located in Salt Lake City, Utah. In October 2021, Teal moved to a new 13,000+ square foot facility to consolidate its manufacturing and corporate activities. In January 2022, Teal doubled the size of its facility in order to fully scale production capacity to meet the forecasted growth in demand and to house its expanding team of software and technology engineers. Significant Purchase Order Received from Largest U.S. Drone Distributor In August 2021, Teal received a significant purchase order for the Golden Eagle from Drone Nerds, the largest distributor of drones in the United States. To date, approximately 50% of the units have been delivered to Drone Nerds with the remaining 50% expected to be delivered by the end of calendar year 2022. Awarded Customs and Border Protection Contract Worth up to $90 Million over Five Years In December 2021, Teal Drones was one of only five contractors awarded a firm, fixed price, multiple award blanket purchase agreement (BPA) by the United States Customs and Border Protection. The BPA has an estimated value of $90 million in total over a 5-year ordering period. The Department of Homeland Security agencies can place orders through the BPA for unmanned aircraft systems (UAS). The drones will provide supplemental airborne reconnaissance, surveillance, and tracking capability to enhance situational awareness for field commanders and agents in areas that lack nearby traditional surveillance systems or available manned air support. Given the security mandates within the Department of Defense and Federal Government, as well as the recently passed infrastructure bill that has a 'Build America Buy America' mandate, we are confident in our ability to offer domestically sourced drone solutions and services. Selected by U.S. Army for Short Range Reconnaissance Tranche 2 Drone Program In March 2022, Teal was selected by the Department of Defense's (DoD) Defense Innovation Unit (DIU) and U.S. Army to compete in the Short Range Reconnaissance Tranche 2 (SRR T2) Program of Record. The rigorous technical requirements and program objectives of SRR T2 dramatically narrowed the field from over three dozen drone manufacturers to just a handful that were selected by the Army to move forward with the program. Teal was selected to develop a next-generation, small unmanned aerial system (sUAS) designed for surveillance and reconnaissance (S&R) duties, with a focus on autonomous capability, for the U.S. Army. The ultimate goal of the SRR T2 program is to provide a small, rucksack portable sUAS that provides all Army infantry platoons (consisting of 20-50 soldiers) with situational awareness beyond the next terrain. Following a successful demonstration in September 2021, Teal was notified by the U.S. Army's Short Range Reconnaissance Product Office that it would advance to the prototype phase of the SRR T2 program and was awarded a $1.5M prototype contract. Teal will develop a next-generation drone that meets or exceeds the Army's technical system requirements of SRR T2 and competes for the SRR T2 production contract. The SRR Tranche 1 program began in 2020, and Teal was similarly selected for that program with a prototype contract award as part of its selection. The five drones (including Teal's Golden Eagle) developed for SRR Tranche 1 became the five drones named to the Blue sUAS list in August 2020 and were subsequently approved by the Department of Defense (DoD) and other U.S. Federal Departments. The Blue sUAS list was originally developed by the Defense Innovation Unit (DIU), an organization within the DoD organization that is focused on integrating leading commercial technologies into the Government. 6 Purchase Order for Golden Eagle Drone Units from NATO Member Country for Deployment in Ukraine In April 2022, Teal secured an order for 15 Golden Eagle drone units, plus spares and training, from a NATO (North Atlantic Treaty Organization) member country that has committed to deploy them in the Ukraine. The drones are expected to be used for reconnaissance and surveillance on the front lines, thereby lessening the need to utilize troops to perform such dangerous activities. The Company believes that Teal is one of the only drone companies in the world able to provide these types of drones at scale, utilizing its own proprietary technology, manufacturing, and resources, even despite the supply chain issues that have plagued the industry. The Company has seen strong interest in the Teal drone platform from numerous European countries which have increased their defense budgets, not only to support the Ukraine invasion but to also prepare themselves for future geopolitical conflicts. Many countries and military units are recognizing the strategic benefit of having an adequate baseline inventory of drone units that can be invaluable in reconnaissance and surveillance on the front lines. First Commercial Enterprise to Bring Complete Multi-Drone System to Market In May 2022, Teal completed the development and production of a four-drone, multi-vehicle system for defense, government, and public safety markets. Developed in close cooperation with strategic partner Autonodyne, LLC, the multi-vehicle package will be offered in two configurations: 4-Ship and 4-Ship+. Both configurations will allow a single pilot to simultaneously control up to four of Teal’s Golden Eagle units. The 4-Ship is a complete solution that provides operators with actionable information from multiple vehicles at the same time -- including the display of four simultaneous video feeds -- resulting in faster situational awareness and decision-making in today’s complex environments. It also offers a tremendous savings in manpower, the most expensive component of any drone operation, since four pilots are replaced by just one. With 4-Ship, we have successfully integrated the human/machine interface with an embedded autonomy engine that offers additional intelligence and surveillance capabilities from a single pilot and controller. The ease of use and multitude of applications makes the 4-Ship a next-generation drone system. The 4-Ship+ will include two extra Golden Eagle units and an additional linked controller to facilitate handoff of control from one pilot to another. The 4-Ship+ configuration allows a back-up pilot to immediately take over at any time. The additional two drones also allow pilots to bring in units with fresh batteries, while units with drained batteries drop off to be charged – all without breaking up the four-drone flight pattern. This allows for continuous 360-degree surveillance of any target and overcomes the biggest weakness of any drone which is limited battery life. We believe that 4-Ship represents truly disruptive technology that will alter the approach to intelligence, surveillance and reconnaissance. No longer are drone applications limited to a one-pilot/one-drone situation, drastically altering the potential missions for drones due to the ability of a single pilot to be able to control a team of drones. The 4-Ship already provides significant flexibility in applications, from security to agriculture to law enforcement, as well as the expected military applications, for which there is expressed interest. Skypersonic Skypersonic enables drones to "Fly Anywhere". Its Skycopter is a miniature drone in a protective cage which can navigate restricted spaces, such as oil and gas pipes, while recording critical inspection data yet not damaging its environment or the drone. Its Skylogic software system enables the drone to record the inspection data even though GPS communications are not available in such restricted environments. Skyloc is a stand-alone, real time, software system which enables the drone to record and transmit inspection data even while being operated from thousands of miles away. Fat Shark's Shark Byte digital video transmitters provide the downlink technology which is essential to enabling the drone to transmit the data recorded by the Skylogic system to Dronebox. Skylogic and Fat Shark’s digital goggles integrate seamlessly to enable drones to be remotely flown from thousands of miles away. In January 2021, Rotor Riot's President, Drew Camden, controlled a drone flying in Michigan while he was physically located 1,200 miles away in Orlando, Florida. Notable accomplishments since the acquisition, including completion of the third trans-Atlantic flight completed remotely, are set forth below: 7 Awarded NASA Contract In September 2021, Skypersonic was awarded a five-year contract with NASA to provide drone and rover software, hardware and support for NASA’s Simulated Mars mission. NASA is preparing a series of analog missions that will simulate year-long stays on the surface of Mars, each of which will consist of four crew members living in Mars Dune Alpha, an isolated 1,700 square foot habitat. During the mission, the crew will conduct simulated spacewalks and related operations by remote piloting Skypersonic drones and rover in a simulated Martian environment. Skypersonic's real-time transoceanic remote piloting platform will drive the piloting of both the drones and the rover. Two-year Facility Inspection Program completed with General Motors In May 2022, Skypersonic completed a two-year program with General Motors (“GM”) using the Skycopter™ to perform crane rail inspections in all 19 of its North American stamping (metalworking) facilities. The Skycopter was able to capture critical information that is relevant to the maintenance of GM’s facilities and their internal structures in a relatively short amount of time. Information was captured in two to three hours versus what would normally take eight to twelve hours and require shutting the facility down completely, erecting scaffolds, and hoisting personnel in the air and onto the rails for manual inspection. The Skycopter provided an inspection and data collection service that is faster than traditional methods while also providing a much safer work environment for employees. The full inspection program took over two years to complete, including the initial planning and pilot training phases, while the inspection process across all 19 facilities required 14 months. The program consisted of the video recording of 50,000 cumulative feet of crane rails captured from more than 200 flight hours by the Skycopter across all 19 facilities for subsequent analysis by structural engineers. The Skycopter was piloted by General Motors personnel at all times following their completion of an initial pilot training program with Skypersonic. Based on learnings from this initial inspection program, General Motors believes it can materially reduce the next round of crane rail inspections from 14 months for all 19 North American stamping facilities to six months. General Motors is also evaluating the use of the Skycopter in other inspection applications across additional plants and facilities. Trans-Atlantic Inspection of Italian Utility Plant Completed by Pilot Controlling Drone from the United States In June 2022, Skypersonic completed an inspection of a utility plant in Turin, Italy using a drone controlled by a pilot physically located in Orlando, Florida. The drone was controlled relying solely on an internet connection from a normal cellphone. The pilot was Drew Camden, president of our subsidiary, Rotor Riot. Mr. Camden had never visited the plant, nor had he seen any drawings or photos of the floorplan or the layout which included many staircases, ducts, equipment, and other obstacles through which he guided the Skycopter from across the Atlantic. Using the Company’s Skyloc operating system, Mr. Camden was able to pilot the drone without using GPS (Global Positioning System) which is traditionally used for outdoor flights, but which is often not available in closed, restricted environments. The Company believes that Skypersonic can enable companies to complete inspections, monitor operations and complete other business activities in a safer, quicker, and more efficient manner than traditional methods. Traditionally, such activities are completed in a manual manner which can require employees or contractors to travel to the desired location. In addition, a manual process can be inherently dangerous due to the restricted environment, including extreme heights and constrained spaces required to complete the activity. Consumer Segment The Consumer Segment will focus on selling drones and related parts to enthusiasts and hobbyists which will continue growing as drones become more visible in our daily lives. The Company's Fat Shark and Rotor Riot subsidiaries operate in this segment . 8 The Consumer segment focuses on drones piloted with wearable display devices. These are head mounted displays (“HMDs”) for drone pilots. HMDs give pilots “first person view” (“FPV”) perspective to control their drone in flight. This is a unique experience where the pilot is interacting with an aircraft through visual immersion. In this augmented virtual reality, the pilot sees only what the drone sees, as if sitting in the pilot seat. This experience is accomplished by live streaming footage from a camera mounted on the nose of the drone directly into specially designed goggles worn by the pilot. The image is transmitted via radio (traditionally analog but increasingly digital) to the pilot. The drone remote control unit, the drone device, and the FPV goggles are all interconnected via radio. This effect requires sophisticated electronics that transmit visual information with sufficient speed and reliability to allow pilot control over the drone in real-time. Pilots routinely achieve speeds of over 90 mph in racing and other mission critical applications. An FPV pilot must experience a near complete transfer of their visual consciousness into the body of their piloted device. There are three common categories of FPV flight – freestyle flight, racing and aerial photography. In freestyle, the pilot navigates around obstacles focused on acrobatics and exploring the environment around the aircraft through the HMD. This type of flight can be used for utility and crop inspection, as well as package delivery. These drones are often equipped with special equipment such as moisture or heat sensors. FPV racing describes a growing spectator sport where pilots fly their drones in competitions through a series of obstacles, flags, and gates in a racetrack. Aerial photography is the process of viewing and recording a subject matter from the air from the viewpoint of the pilot. We sell FPV flight systems through our Rotor Riot and Fat Shark subsidiaries. We sell flight design cameras, video transmitters, goggles, as well as the mounts, airframes and accessories to build or operate drone aircraft. We design, develop, assemble, and sell each of these FPV components individually and in packages. We believe our products have become favorites in FPV racing and we sponsor several racing teams and pilots. We purchase and resell drones and components from leading manufacturers, including industry leader DJI, and custom design and build our own line of branded products. We market through social media and attract buyers to our ecommerce platforms. We maintain a robust presence on Facebook and YouTube where we sponsor competitions and provide education. Sports networks, and sponsors such as NBC, Sky, Liberty Media, Fox Sports, MGM, Hearst, and Twitter broadcast and sponsor global events where professional pilots and amateurs compete for prizes and sponsorships. Drone racing is a global sport with chapters, leagues, and pilots and established guidelines, rules and regulations for participation adopted by organizations such as MultiGP, Drone Racing League (“DRL”), IUDRO, DR1 Racing, Rotomatch League, FPVR, and Freespace Drone Racing. Pilots specially design their custom-built aircraft, selecting and customizing frames, motors, propellors and controllers for speed and maneuverability from Rotor Riot. Rotor Riot sponsors a team of six of the leading pilots on the competitive FPV racing circuit, including the 2019 and 2018 Drone Racing League champion. Drone pilots and spectators alike experience real-time flight through their own HMD. Fat Shark sponsored its first drone racing championship in 2015. Launch of Innovative Dominator Drone FPV Goggle In May 2022, Fat Shark launched a new FPV (first-person viewer) drone headset – the Dominator. The Dominator is a low latency, 1080p digital goggle with an extended flight range over existing systems. Customers Revenues for the Consumer segment are principally generated through distributors (for Fat Shark) and online (for Rotor Riot through its e-commerce site, www.rotorriot.com ). We currently market our products and services to recreational and professional drone pilots and hobbyists. Competition Rotor Riot competes with a number of significantly larger, better capitalized companies. SZ DJI Technology Company, Ltd., commonly known as DJI, is the dominant market leader in the Customer Segment with a global market share estimated at more than 70%, according to many industry research firms. Other competitors include Parrot and Lumenier. Race Day Quads is a larger, direct competitor in the FPV sector. We compete against these financially stronger companies by leveraging our visibility on the internet through our Facebook page which has more than 33,000 members and our Rotor Riot channel which has more than 192,000 subscribers. The Rotor Riot brand has been at the center of the racing and freestyle culture of drones since registering its domain name in 2015. Rotor Riot sponsors a team of six of the leading FPV pilots on the competitive racing circuit, including the Drone Racing League champion pilot in 2019 and 2018. 9 Fat Shark competes with SZ DJI Technology Company, LtD., commonly known as DJI as the dominant market leader in the consumer segment. Fat Shark also competes with other FPV headset companies that include Skyzone, Orca, and HD Zero. The Fat Shark brand has been synonymous with FPV headsets since the emergence of the market in 2008. Fat Shark continues to compete through partnerships with other FPV companies and a focus on manufacturing and product quality. Suppliers Rotor Riot purchases its inventory from over 60 suppliers. 35% of this inventory is purchased from three vendors. The two most critical components are electronics and frames. 41% of Rotor Riot's electronics and frames are purchased from two vendors. The United States has continuously increased tariffs on the inventory that Rotor Riot purchases from China. Since 2019, tariffs ranging from 2% to 25% have been imposed on 88% of Rotor Riot’s inventory. 68% of Rotor Riot's inventory is purchased directly from Chinese based vendors, all of these items are subject to tariffs. An additional 20% is purchased from vendors that are affected by the tariffs resulting in increase in costs to Rotor Riot. 28% of Rotor Riot’s inventory consists of DJI products which are subject to the highest 25% tariff rate. These tariffs increase the cost of goods which reduces the company’s profit margins. Rotor Riot has been unable to find comparable non-Chinese products and vendors. The Drone Industry The Drone industry continues to expand beyond its military origin to become a powerful business tool and recreational activity. We expect both of these markets to continue to grow. • According to Business Insider Intelligence, commercial use of drones will reach 2.4 million units by 2023, a 66% compounded annual growth rate. Drones will be employed by the agriculture, construction and mining, insurance, and media and telecommunications industries. The drone services market is expected to grow to over $60 billion by 2025, from $4.4 billion in 2018. Consumer drone shipments will reach 29 million by 2021. • Spending on drones is projected to reach more than $16 billion in 2020 and experience a compounded annual growth rate of 33% through 2025 as reported by International Data Corporation. • The small drone market size is projected to increase to $40 billion by 2025 from $13.4 billion in 2018 according to Markets and Markets, • The FAA has forecasted a 300% increase in commercial drones from 2019 to 2023 as per businessinsider.com Drone Industry to Benefit from Passage of Infrastructure Bill In November 2021, Congress passed the infrastructure bill which may provide multiple business opportunities for the drone industry. Drones already play a vital role in many of the programs covered by the bill, including railways, roads and bridges, storm preparation, electrical grid strengthening and sewage maintenance. With more than $280 billion earmarked for these programs alone, the Company believes there is a significant opportunity to expand its existing relationship with the Department of Defense and NASA to include other agencies of the Federal Government. These services include enabling rapid inspections and surveillance to ensure efficiency and identifying potential issues developing on roadways or electrical grids prior to their becoming disabled. Drones also provide the ability to efficiently manage maintenance once improvements have been completed. Congress has also been debating an additional $50 million allocation for both 2022 and 2023 as part of the "Drone Infrastructure Inspection Grant Act" which would provide funding specifically for drone use, thereby adding new opportunities for the Company in the context of the larger bill. In addition, the Company strongly supports the "Build America, Buy America Act" component of the bill which emphasizes the need for infrastructure improvements and maintenance to be completed by American companies for the benefit of U.S. citizens. Specifically, the bill states: "United States taxpayer dollars invested in public infrastructure should not be used to reward companies that have moved their operations, investment dollars, and jobs to foreign countries or foreign factories, particularly those that do not share the commitment of the United States to environmental, worker, and workplace safety protections." 10 Red Cat Holdings was founded as an American company and each of its acquisitions has been completed within the U.S. borders to help strengthen the U.S. economy and provide U.S.-based jobs. With Teal’s new drone manufacturing facility up and running in Utah, the Company is well positioned to provide drones and services to support the needs of these infrastructure programs. Government Regulation and Federal Policy of Drones The Federal Aviation Administration (“FAA”) of the United States Department of Transportation is responsible for the regulation and oversight of civil aviation within the U.S. Its primary mission is to ensure the safety of civil aviation. The FAA has adopted the name “unmanned aircraft” (“UA”) to describe aircraft systems without a flight crew on board. More common names include drone, Unmanned Aerial Vehicle (“UAV”) and remotely operated aircraft. The FAA began issuing regulations governing drones in 2005 with their scope and frequency expanding in recent years with the significant increase in the number of drones sold. In December 2015, the FAA announced that all drones weighing more than 250 grams, or 0.55 pounds, must be registered with the FAA. As of July 2022, the FAA reported the registration of 858,550 drones, of which 318,455 were commercial and 536,482 were recreational. In addition, more than 286,184 remote pilots were certified. In January 2021, the FAA finalized rules requiring that drones be identifiable remotely. These rules are effective for drone manufacturers beginning in September 2022 and for drone pilots in September 2023. The FAA believes that remote ID technologies will enhance safety and security by allowing the FAA, law enforcement, and federal security agencies to identify drones flying in their jurisdiction. These efforts lay the foundation for more complex operations, such as those beyond visual line of sight at low altitudes, as the FAA and the drone industry move toward a traffic management ecosystem for Unmanned Aircraft System flights separate from, but complimentary to, the air traffic management system. The Company believes that the oversight of the FAA is beneficial to the drone industry generally, and the Company specifically. Approximately 10 % of the drones sold by Rotor Riot are below the weight threshold required to register. The remaining 90% have more functionality, are more likely to be used for commercial purposes, and therefore, should be registered. Environmental Considerations While the operations of many businesses have some form of negative impact on the environment, drones have a unique ability to provide a positive contribution. Many of these relate to a drone’s ability to reach places in a more efficient manner, and include such activities as: • aerial mapping and nature monitoring; • maintenance of renewal energy sources such as solar panels and wind turbines; • disaster relief monitoring and relief delivery; and • agricultural sustainability solutions Intellectual Property The company has consolidated the intellectual property into a subsidiary UAVPatent Corp. The subsidiary has 29 issued patents and 13 pending patents. The IP portfolio includes design and utility patents ranging from FPV headsets to the architecture for Skyperonic's Fly Anywhere platform. None of the patents are currently licensed and IP is generated in the general course of doing engineering design. UAVPatent Corp also has the trademarks on the Rotor Riot, Fat Shark, Teal, Skypersonic, and Red Cat brands and logos. Employees As of July 20, 2021, the Company had 70 full-time employees. Research and Development During the years ended April 30, 2022 and 2021, we incurred research and development costs of $2,606,141 and $516,084, respectively, excluding $516,456 and $1,269,987 of stock-based compensation, respectively. 11