What changed in this filing

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Item 1. Business

2023-07-27 compared with 2022-07-27 · 653 added, 460 removed, 22 unchanged (98% of the section changed)

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,

Company was originally incorporated under the laws of the State of Colorado in 1984 under the name Oravest International, Inc.

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.

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.

or the “Company” or “we”) and our operating focus to the drone industry.

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

has completed a series of acquisitions and financings which have broadened the scope of its activities in the drone industry.

These acquisitions included:

In January 2020, we acquired Rotor Riot,

LLC (“Rotor Riot”), 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 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.

In November 2020, the Company acquired Fat

Shark Holdings (“Fat Shark”) 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 typically mounted on an aerial platform or drone.

The total purchase

price was $8.4 million.

In May 2021, we acquired Skypersonic, Inc.

(“Skypersonic”), 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”.

software and hardware solutions allow for inspection services in restricted spaces where GPS is denied or unavailable.

purchase price was $2.8 million.

Business Strategy

Red Cat remains focused on building a portfolio

of complementary products and services to support the continued growth and maturation of the drone industry in both the enterprise and

consumer market segments.

Our disciplined acquisition strategy targets companies with advanced product offerings and unique drone platforms

and intellectual property.

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

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

In August 2021, the

Company acquired Teal Drones ("Teal"), a leader in providing sophisticated and complex unmanned aerial vehicle ("UAV")

technology, primarily drones, to government and commercial enterprises, most notably, the military.

Teal manufactures drones approved

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

The total purchase price was $10.0

Recent Developments

During the second

3 unchanged sentences

in each sector of the drone industry.

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

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.

The Enterprise segment, consisting of Teal and Skypersonic, is focused on opportunities in the

commercial sector and the military.

Enterprise's initial strategy was to provide UAV's, primarily drones, to navigate dangerous military

environments and confined industrial and commercial interior spaces.

The Consumer segment, consisting of Rotor Riot and Fat Shark, is

focused on enthusiasts and hobbyists which are expected to increase as drones become more visible and useful in our daily lives.

provides a growing revenue base, strong brand visibility, and is an excellent source of professional pilots.

the establishment of the Enterprise and Consumer segments in the first quarter of fiscal 2023, management spent much of fiscal 2023 evaluating

and establishing the long term business strategy of each segment.

This resulted in the Enterprise segment narrowing its near term focus

on the military and other government agencies.

It was determined that Skypersonic's technology would be re-focused, for the next few

years, on government applications and that its technology would be consolidated into the operations of Teal Drones.

the fall of calendar 2022, the Company received inquiries and held discussions regarding the potential acquisition of the Consumer segment,

specifically Rotor Riot and Fat Shark.

These discussions culminated in the execution of a Stock Purchase Agreement ("SPA”)

with Unusual Machines in November 2022.

to signing the SPA, the Company completed a comprehensive evaluation of its business segments, including (i) the synergies and challenges

of operating two diverse business segments, (ii) the future operating prospects for each segment including revenues, expenses, profits,

and cash flows, and (iii) the financial impact of a potential sale of the Consumer segment on the Company.

The results of the evaluation

indicated a number of significant operating and financial differences between Enterprise and Consumer including (i) Consumer sources a

substantial portion of its product from China whereas Enterprise is focused on a "Made in America" policy which is very important

government, its primary target customer, (ii) Enterprise is required to meet ITAR export requirements which necessitates

that all employees be U.S.

persons and undergo a background check whereas Consumer does not have such requirements, (iii) Consumer primarily

markets through a social media platform and strategy that focuses on maximizing its public presence whereas Enterprise's marketing efforts

in dealing with its government target market are more discrete and (iv) Consumer is focused on reaching profitability whereas Enterprise

has been investing in a new manufacturing facility and building strong relationships with government agencies.

Collectively, these differences

would require the Company to establish separate departments for many common functions including purchasing, human resources, and sales

and marketing.

Finally, closing of the SPA would strengthen the Company's financial position as it would generate immediate cash and

eliminate the funding required to support Consumer until it reached profitability.

The Company concluded that the long term business

prospects of the Enterprise segment were significantly greater than those of the Consumer segment, and that a sale of Consumer should

be completed.

The closing of the

transaction is contingent upon Unusual Machines completing (i) an initial public offering that raises sufficient capital to close the

transaction, and (ii) listing on a public stock exchange such as the NYSE or Nasdaq.

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

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 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

A Utah-based operation, Teal has since migrated to the enterprise and government sectors based on its Golden Eagle, a U.S.

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.

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

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

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.

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.

The Enterprise segment’s

current business strategy is focused on providing integrated robotic hardware and software for use across a variety of applications.

Its solutions provide critical situational awareness and actionable intelligence to on-the-ground warfighters and battlefield commanders

as well as firefighters and public safety officials.

Its mission is to "Dominate the Night" and constantly provide best in

class thermal imaging capabilities.

Enterprise’s efforts are centered on its Made in America Class 1 drone development program,

particularly its Teal 2, and Four Ship products.

Enterprise has substantially completed construction of a new manufacturing facility

in Salt Lake City and believes that an increased focus by the United States government and American businesses on purchasing products

that are “Made in America” provide Enterprise with a competitive advantage.

Teal is the core of the Enterprise segment

and was founded in 2015 by George Matus, a Thiel fellow.

Its first products were consumer based and the first of their kind to be manufactured

in the United States.

Beginning in October 2018, Teal migrated its business strategy to focus on the government, military, and enterprise

sectors (collectively referred to as “Enterprise”).

Its first product offering, the “Golden Eagle”, was launched

in June 2020.

The Golden Eagle is a U.S.

Department of Defense approved drone designed for reconnaissance, public safety, and inspection

applications.

Key Business Accomplishments during Fiscal 2023 and to date include:

Teal 2, a military-grade sUAS Designed to “Dominate the Night™”

its acquisition by Red Cat in August 2021, Teal accelerated efforts on the development of its next generation Enterprise drone.

efforts culminated in the launch of the Teal 2 in April 2023.

The Teal 2 is the first small, unmanned aircraft system (“sUAS”)

designed to “Dominate the Night”, when most military operations take place, through its enhanced capabilities.

offers the latest intelligence, surveillance, and reconnaissance (“ISR”) technology and delivers time-critical information

that enables the warfighter to make faster and smarter decisions.

Some of the unique features and capabilities of the Teal 2, and the

partners who developed and helped integrate these technologies into the Teal 2, include:

FLIR whose new Hadron 640R sensor provides the highest resolution thermal imaging in a small (Group 1) form factor which is optimal for

nighttime operations.

Robotics whose common control system enables a single operator to simultaneously control up to four Teal 2’s at the same time.

AI, an Artificial Intelligence (“AI”) and computer vision architecture firm.

Its technology enhances target recognition and

battle tracking which enables wartime commanders to make faster battlefield decisions.

Technology whose “Farsight” mapping software enables the automatic combining of imagery from multiple drones to produce high

fidelity 3D maps.

Immervision,

an optical products manufacturer whose navigation camera module is used for surveillance and unmanned systems.

Immervision enhances the

navigation skills of the Teal 2 at night and in other difficult flying conditions such as in fog, beneath bridges, and inside buildings.

Teal 2 is manufactured exclusively at Teal’s new purpose-built factory in Salt Lake City, Utah.

Early-adopter customers included

Customs and Border Protection which ordered 54 units of the Teal 2.

of Teal 2 as Blue UAS received from U.S.

Department of Defense

June 2023, the Teal 2 received clearance from the U.S.

Department of Defense ("DoD") to be designated as a Blue UAS.

defines these drones as NDAA (National Defense Authorization Act) compliant, validated as cyber secure, and safe to fly.

This designation

enables Teal to fill orders from federal, state, and local government agencies subject to oversight by the DoD, including those orders

that were contingent upon receiving certification.

In addition, many governments of allied nations are more likely to purchase Blue UAS

approved drones.

Teal's legacy drone, the Golden Eagle, is also on the cleared list which is believed to number less than 20 in total.

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 provided to the Chinese government), the U.S.

Department of Defense began developing its own alternatives under a defense program known as Blue sUAS.

Blue sUAS is an initiative of

the Defense Innovation Unit (DIU), the only DoD organization focused on accelerating the adoption of commercial and dual use technology

to solve operational challenges at a speed and scale that is faster and higher than normal for government agencies.

Manufacturing Facility Constructed and Scaling Productivity

Fiscal 2023, Teal substantially completed construction of its new manufacturing facility and began to scale production levels.

Teal originally

moved into the facility, located in Salt Lake City, Utah, in October 2021.

In January 2022, Teal doubled the size of the facility, which

now totals approximately 25,000 square feet, in order to fully scale production capacity to meet the forecast growth in demand and to

house its expanding team of software and technology engineers.

At the end of fiscal 2023, production capacity was approximately 100 drones

The Company believes that maximum production capacity for this facility can reach 1,000 drones per month over the next 2 to

3 years, provided that additional capital investments are made and manufacturing efficiencies realized.

Manufacturing in the United States,

“Made in the USA”, is a critical consideration of the U.S.

government and other state and local government agencies.

Increase in Prototype Development Contract under U.S.

Army Tranche 2 Program

June 2023, the Army authorized Teal to complete additional milestones under the terms of a Statement of Work related to its UAS Tranche

Under the terms of the Statement of Work, the Army has agreed to fund certain engineering and material costs incurred by Teal

to build a next generation prototype based on technical requirements and warfighter feedback.

As of June 30, 2023, a total of $2.7 million

has been authorized under the Statement of Work.

Cumulative billings through April 30, 2023 totaled $879,400 and the Company expects

to complete and bill the remaining authorized amount of $1,862,701 in fiscal 2024 as milestones are fulfilled.

The Statement of Work

provides for 15 separate development milestones, of which 9 have been authorized to date.

The Company expects that the Army will authorize

that the remaining 6 milestones be completed at a future date.

May 2023, Teal partnered with Doodle Labs on Teal’s small unmanned aerial system (sUAS) prototype.

By integrating

Doodle Labs’ Helix Mesh Rider Radio, the prototype will be capable of reliably transmitting thermal imagery, encrypted video,

and other high-bandwidth data back to a ground station more than three miles away.

Mesh Rider Radio uses certified encryption to

protect data and flight control functionality, even in contested environments.

Government Contracts and Orders

is focusing on U.S.

federal government agencies, particularly the military branches, as its initial target market.

Its longer term target

customer base includes U.S.

state and local government agencies, as well as governments of foreign allies.

An overview of existing

government contracts and recent developments include:

Army Tranche 2 Drone Program

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 thirty-three drone manufacturers down to three vendors.

The Army has indicated that Tranche 2 and 3 have been

combined and will represent the final tranche of the SRR program.

was selected to develop a next-generation sUAS designed for intelligence, surveillance and reconnaissance

(ISR) duties, with a focus on autonomous capability, for the U.S.

The ultimate goal of the SRR T2 program is to provide a small,

rucksack portable, fully encrypted sUAS that provides all Army infantry platoons (consisting of 20-50 soldiers) with situational awareness

beyond the next terrain.

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 development contract.

The value of this

contract has since been increased to $2.7 million.

SRR Tranche 1 program began in 2020, and Teal was similarly selected for that program with a prototype contract award as part of its

The five drones 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.

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:

The Blue sUAS list was originally developed by the Silicon

Valley-based Defense Innovation Unit (DIU) which is focused on identifying, and integrating leading commercial technologies into the

Border Patrol

Million Purchase Order from U.S.

Border Patrol

October 2022, Teal was awarded a $1,046,806 contract from U.S.

Customs and Border Protection to provide its high-performance Golden Eagle

drones to U.S.

Border Patrol.

The purchase agreement covered the provision of the drone, plus battery packs and chargers, propellers,

gimbal-mounted cameras, carrying cases and operator training sessions, including “train-the-trainer” sessions.

and Border Protection Contract Worth up to $90 Million over Five Years

December 2021, Teal was one of only five contractors designated to participate in 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

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.

for 200 Long-Range, High-Speed Drones for Ukrainian Deployment

May 2023, Red Cat received a purchase order to provide 200 long-range, high-speed FPV (first-person view) drones to Ukrainian drone pilots

engaged in conflict with Russia.

FPV drones were delivered to Ukraine in June.

These drones have the highest power-to-weight ratio in the industry and provide increased

maneuverability, especially when combined with the FPV functionality of the drones.

These drones can also fly in GPS-denied and GPS-jammed

battlefield conditions.

from NATO Member Country for Deployment in Ukraine

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 committed to deploy them in the Ukraine.

The drones were expected to be used for intelligence, surveillance, and reconnaissance

on the front lines, thereby lessening the need to utilize troops to perform such dangerous activities.

European countries 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 inventory

of drone units that can be invaluable in reconnaissance and surveillance on the front lines.

Product Development

development efforts in fiscal 2023 were focused on the development of the Teal 2 which was officially launched in April 2023 at the

Army Aviation Mission Solutions Summit.

Significant resources were also expended developing the prototype under the Army's SRR

Tranche 2 program.

More details on the partners who helped integrate key features into the Teal 2 include:

AI for artificial intelligence and computer vision

March 2023, the Company partnered with Athena AI which will provide computer vision capabilities for the Teal 2.

Athena, an AI-enabled

military decision-support company, has licensed its proprietary computer vision architecture which allows high-speed tracking of objects

and, at slower speeds, in-depth data exploitation.

Athena spent more than three years curating and analyzing military night-fighting

footage, including thermal and low light camera systems, to create computer vision architecture for warfighting after dark.

solution can identify weapons and various other objects at night, as well as Identification Friend or Foe (IFF) markers, such as military

grade light sticks and infrared beacons.

integrating Athena’s technology, the Teal 2 will support dangerous, close fighting, missions at night.

The Forward Line of Own

Troops (FLOT) can be detected, recognized and geolocated in comparison with the enemy, allowing for precision and safe fires on the target.

Athena also supports rapid in-field target-set updates with a turnaround as quickly as 72 hours for new target-detection algorithms.

This allows the warfighter to quickly respond to emerging threats and ensure their drone remains in the fight.

in Modular Unmanned Aerial Systems Company

March 2023, Red Cat invested $250,000 in Firestorm, an American company developing the first completely Modular Unmanned Aerial System

(MUAS) that is 3D printed and payload agnostic.

Firestorm is building a new category of fixed-wing UAS with 30-day product iterations,

a commitment to open-system architectures, and an additive manufacturing approach that allows them to scale production in an elastic

Firestorm’s founding team has deep industry expertise in additive manufacturing, aerospace and defense, and understands

how to build and quickly scale dual-use technology companies.

Enhances Low-Light Navigation

January 2023, Teal partnered with Immervision, a Canadian optical products manufacturer whose latest navigation camera module is used

for surveillance and unmanned systems.

Immervision will enable Teal’s drone to operate effectively in low-light flying conditions.

plans to equip the Teal 2 with two Immervision low-light camera modules.

In addition to enhancing autonomous navigation at night and

in other light-denied situations, such as in fog, beneath bridges and inside buildings, having two cameras provides stereoscopic vision

to Teal’s autonomous pilot system.

This enables the drone to create a 3D map it can use to navigate and locate itself geographically

in low-light situations and in areas where a GPS signal is not available.

camera lens is designed to maximize the concentration of light per pixel on the image sensor to provide the best image quality in low-light

conditions across the complete field of view.

Immervision’s camera module has been designed to address the challenging requirements

of operating safely in low-light conditions where other sensors are inefficient.

It is capable of seeing objects in a dark environment

at “1 lux”, which is equivalent to “deep twilight.”

is integrating the new Immervision camera with its software system to enhance the autonomous flying capabilities of its drones.

include avoiding obstacles and taking off and landing without pilot assistance, as well as automatically generating a 3D map and locating

itself without the benefit of a GPS signal.

Most military operations are conducted at night, and therefore, having a low-light solution

is a key capability.

Robotics Enables Simultaneous Control of Air and Ground Based 4-Ship Multi-Vehicle System

October 2022, Teal enhanced the capabilities of its 4-Ship multi-vehicle system through a partnership with Tomahawk Robotics, the leading

innovator of common control solutions.

This partnership will enable the warfighter in the field to simultaneously control the Teal

2 and other unmanned vehicles, such as rovers and robots on the ground, all within a single application on a single pane of glass.

fighters to coordinate an arsenal of unmanned systems in the air and on the ground gives them a significant advantage in finding and

subduing the enemy.

addition, one operator can hand off control of one or more drones, rovers or robots to another operator without shutting down the operation.

For example, one operator may keep his group of drones focused on surveillance of an enemy location while handing off control of another

drone/robot/rover to pursue an enemy who is leaving the location.

Kinesis control solutions provide the following capabilities:

Multi-vehicle

command and control (multiple Teal drones) and multi-domain command and control (Teal drone

paired with unmanned ground vehicles).

(Android Team Awareness Kit) information sharing for increased battlefield visualization.

of control to a secondary operator.

center field of view coordinates for aided target recognition.

Mission-planner

level of semi-autonomy with human-in-the-loop decision making.

MOSA (Modular Open Systems Approach) framework that delivers AI-enabled capabilities such

as Reveal Technology’s Farsight 3D Mapping software, Athena AI’s Object Detection

Classifiers, and other third- party advanced features.

Development of Multi-Drone System

May 2022, Teal completed the development and production of a four-drone, multi-vehicle system for defense, government, and public safety

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 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.

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.

accomplishments since the acquisition, including completion of the third trans-Atlantic flight completed remotely, are set forth below:

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

Both configurations allow a single pilot

to simultaneously control up to four Teal drones at the same time.

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.

4-Ship+ will include two extra 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 currently fielded drone which is limited battery life.

Sales and Marketing

acquiring Teal in August 2021, the Company has built a sales and marketing team which presently consists of 8 direct and support professionals.

Most of their efforts in fiscal 2023 were focused on developing relationships with the military agencies of the U.S.

Federal Government.

While the sales cycle for government agencies can be extensive and take considerable time and effort to establish, they can often become

a long-term buyer once initial sales are closed.

Key activities in fiscal 2023 related to demonstrating the capabilities of the Teal

Multi-Drone Mapping to US Military

August 2022, Teal demonstrated multi-drone mapping technology that was developed with Reveal Technology.

This demonstration was provided

Army Special Operations Command near Fort Bragg.

Military tactical teams’ ability to quickly produce accurate maps of areas

targeted for military operations can mean the difference between mission success or failure.

Teal teamed with Reveal Technology to enhance

Reveal’s “Farsight” mapping software by automatically combining imagery from multiple unmanned aerial systems (UAS)

to produce high-fidelity 3D maps.

By dramatically increasing the speed of collection, users receive Farsight maps and analytics faster

in May 2022, the 4-Ship allows a single operator to simultaneously control up to four drones, allowing for instant and ongoing 360-degree

surveillance of a target.

Farsight gives military teams virtually real-time access to detailed 3D maps of a target area that can be overlaid

Line-of-sight

analysis which allows a team to choose a route at the target area that is least visible to

analysis and graphing

AI-generated “best route” through a target area based on line-of-sight data,

elevation mapping and terrain analysis

vertical measurement tool for determining the height of buildings and structures that may

be part of an operation

helicopter landing zone survey to quickly identify the best and safest spot to land

combined features demonstrate that multiple, networked drones far outperform a single drone for gathering and analyzing geographic intelligence.

This provides a team with an advanced awareness of the situation as it is on the ground which leads to more successful missions.

to Farsight, military teams in the field were often dependent on overtasked and often separate intelligence organizations which resulted

in slow-moving intelligence analysis that did not match the fast-paced environment on the ground.

Farsight helps overcome this issue

by blending state-of-the-art computer vision, AI and computing “at the edge” – computing in the field on handheld devices.

All processing for Farsight is completed at the edge and therefore, a network connection is not required which eliminates the need for

additional processing capabilities like servers or cloud infrastructure.

This not only speeds up the entire process but it also allows

for the creation of detailed, actionable maps from virtually anywhere on the globe.

Finally, computing at the edge does not increase

the team’s electronic signature to the enemy, which as seen in Ukraine, could attract artillery fire.

Public Demonstration of Multi-Drone Technology

August 2022, Teal was granted a waiver by the Federal Aviation Administration (FAA) allowing a single pilot to simultaneously control

multiple drones for the first public demonstration of the Company’s multi-drone technology.

This event was held in October 2022

at Kane Stadium in New Jersey.

Historically,

few waivers were approved by the FAA for multi-drone operations, and those were only for pre-programmed swarms of light-pixel drones

for firework displays or for limited performance testing applications.

Teal’s waiver allows dynamic re-tasking by the pilot in

Instead of flying a pre-coordinated low-risk display, the pilot is authorized to adjust the trajectory of the drones in real

This minor differentiation has long been a critical missing link needed to implement multi-drone technology in real-world applications

such as infrastructure and public safety inspections.

secured this waiver by working closely with the FAA to validate multi-drone operation and establish the performance criteria to normalize

it by integrating reliability-focused design features and extensive testing of safety-critical components.

This waiver is yet another

milestone in Teal’s goal of making small drones a ubiquitous tool across industries.

This waiver will ideally open the door to

future FAA authorizations that allow for multi-drone technology implementation, thereby reducing the cost and complexity of implementing

drone technology for customers across verticals like critical asset inspections, public safety, and more.

Other Teal Information

purchases inventory from over 35 suppliers.

80% of this inventory is purchased from four vendors.

The most critical components are electronics

Teal's supply chain is NDAA and Blue UAS compliant.

All suppliers are approved based on Teal's strict vendor qualification

primary competitor is DJI.

Though regulation is trending toward further restrictions against Chinese made drones, DJI remains a global

industry leader and continues to serve markets that Teal is focused on.

Domestic competitors of Teal include Vantage Robotics and Skydio.

These companies were selected alongside Teal out of 37 companies to compete in the Short Range Reconnaissance Tranche 2 program.

competitors may include established defense contractors that are better capitalized and resourced to compete in Teal's markets.

competes with a combination of its unique product value propositions (i.e.

nighttime capability, modular platform), and scalable domestic

manufacturing.

enables drones to "Fly Anywhere".

Its Skycopter is a miniature drone in a protective cage which can navigate dangerous military

environments such as a damaged, bombed building while recording critical ISR data yet not damaging its environment or the drone.

Skylogic software system enables the drone to record the inspection or surveillance 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 data

even while being operated from thousands of miles away.

The Company believes that Skypersonic can enable military operators to complete

ISR in a safer, quicker, and more efficient manner.

Traditionally, such activities are completed by soldiers on foot patrol who normally

need to travel into dangerous military environments where the enemy can be waiting to attack.

Additional dangers exist when the soldiers

need to explore extreme heights or constrained spaces, such as bombed buildings, in order to secure the required ISR.

establishment of the Enterprise segment, which includes Skypersonic and Teal, the Company determined to narrow Enterprise's near term

focus on the military and other government agencies.

This decision reflected (i) a decision to exclusively focus the Company's limited

financial resources on its strongest near term business prospects and (ii) recognition of the ability to deploy the Skycopter in dangerous

military environments.

Enterprise intends to expand its sales and marketing efforts to other commercial applications once its military

platform is fully established.

Accomplishments

Drones, Rover, and Piloting Platform to NASA’s Simulated Mars Missions

November 2022, Skypersonic delivered the hardware and software for a rover and drone system that the crew members of NASA’s Simulated

Mars Mission will use to remotely explore Martian-like terrain around Earth – all from their 1,700-square-foot simulated Martian

habitat at the Johnson Space Center in Houston, Texas.

members will spend one year living and working in a habitat designed and built to simulate life on the Red Planet.

The Skypersonic drones

and rover will be taken to an area on Earth that is similar to Martian terrain – such as a desert or mountainous region –

where they will be controlled remotely by crew members in Houston.

The exercise is designed to test the ability of astronauts on Mars

to remotely explore the planet with drones and rovers.

Skypersonic's real-time transoceanic remote piloting platform will drive the piloting

of both the drones and the rover.

personnel trained on piloting the drones with Skypersonic’s Martian Simulator, a computer-simulation of the Martian environment

based on actual photographs and video of the surface of Mars.

was initially awarded a five-year contract with NASA in September 2021.

Technology Platform on an Active Volcano

August 2022, Skypersonic validated its software and hardware on Mt.

Etna, an active volcano in Sicily where the landscape is similar

to Martian geology.

Using its ground-breaking Long Range Real-Time Remote Piloting System, the drone and rover on the active volcano

in Italy were controlled by personnel in Houston, Texas, in real time.

Whereas most drones cannot be piloted without connecting to the

GPS network, Skycopter uses technology that is able to control and track the drone in locations – such as Mars – where GPS

is not available.

Italian Utility Plant with drone piloted from the United States

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 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.

Using the Company’s Skyloc operating system, the drone was piloted without using GPS (Global Positioning System)

which is traditionally used for outdoor flights but which is often not available in closed, restricted environments.

Facility Inspection Program completed with General Motors

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.

1 unchanged sentence

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.

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.

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.

saving not only significant time but also substantial costs.

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.

full inspection program took over two years to complete, including the initial planning and pilot training phases, while the inspection

process 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.

The Skycopter was piloted by General Motors personnel at all times following completion of an initial pilot training

program with Skypersonic.

General Motors is also evaluating the use of the Skycopter in other inspection applications

across additional plants and facilities.

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 .

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

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

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

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.

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

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.

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.

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.

Consumer Segment focuses on selling drones and related parts to enthusiasts and hobbyists.

Fat Shark and Rotor Riot operate in this segment .

Consumer segment focuses on drones piloted with wearable display devices.

These are head mounted displays (“HMDs”), similar

to goggles, for drone pilots.

HMDs give pilots a “first person view” (“FPV”) to control their drone in flight.

This is a unique experience where the pilot is interacting with an aircraft through visual immersion.

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 connected via radio.

This 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.

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.

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.

is working to increase customer adoption of Fat Shark's new digital based headset systems.

The shift from analog to digital is

critical to Fat Shark's strategy for long term product sales.

DJI was first to market with digital FPV headsets for 2 years and

gained a substantial majority market share for this product.

This has slowed the initial sales of Fat Sharks product offerings.

Overcoming this is paramount to preventing DJI from cornering the customer base and securing market position for Fat Shark.

effort, Consumer has coordinated both subsidiaries, Fat Shark and Rotor Riot, to promote sales of Fat Shark digital

has increased targeted paid advertisements on Facebook, Google, and other platforms.

These ads are directed toward both existing FPV

customers as well as acquiring new customers from tangential markets such as photography.

The ads direct sales through the Rotor Riot

online store as well as other vendors of Fat Shark digital products.

Additionally,

Consumer has offered discounted bundles via the Rotor Riot online store.

These bundles combine Fat Shark's digital headsets with ready

to fly drones built by Rotor Riot.

These bundles provide the customer with cost savings and an easier entry point into Fat Shark's digital

Launch of Innovative Dominator Drone FPV Goggle

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.

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 ).

Consumer markets its products and services to recreational and professional

drone pilots and hobbyists.

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 Consumer Segment with a global market share estimated at more than 70%, according to 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.

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

Fat Shark continues to compete through partnerships with other FPV companies and a focus on manufacturing and product quality.

Rotor Riot purchases its inventory from over 60 suppliers.

35% of this inventory is purchased from three vendors.

competes against these financially stronger companies by leveraging its visibility on the internet through its Facebook page which has

more than 37,000 members and its Rotor Riot channel which has more than 267,000 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.

Shark also competes with DJI as well as other FPV headset companies including 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.

Rotor Riot purchases inventory from over

80 suppliers although 44% of this inventory is purchased from four 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.

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 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, and all these items are subject to tariffs.

An additional 20% is purchased from vendors that are affected by the tariffs

resulting in higher costs for 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.

To date, 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

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

Drone industry continues to expand beyond its military origin to become a powerful business tool and recreational activity.

both of these markets to continue to grow.

The global commercial drone market size

was estimated at approximately $30 billion in 2022.

It is anticipated to expand at a compounded annual growth rate of almost 39%

from 2023 to 2030 (grandviewresearch.com).

The military drone market is expected to

reach more than $11 billion by 2024 (dronesourced.com).

The drone services market is expected to

grow to more than $60 billion by 2025 (Insider Intelligence).

Consumer drone market is projected to increase

from $4.3 billion in 2022 to approximately $20 billion by 2030, with a compounded annual growth rate of 20.8% from 2023 to 2030 (snsinsider.com).

Government Regulation and Federal Policy

Federal Aviation Administration

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.

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 2023, the FAA reported the registration of almost 870,000 drones, of which approximately

350,000 were commercial and approximately 520,000 were recreational.

In addition, more than 330,000 remote pilots were certified.

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.

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.

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.

Infrastructure

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.

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

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.

Specifically, the bill states:

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."

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.

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.

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.

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.

Investment and Jobs Act 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.

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.

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.

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."

Cat Holdings was founded as an American company and each of its acquisitions has been completed within the U.S.

borders to help strengthen

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.

Security Drone Act

February 2023, two Congressman introduced the "American Security Drone Act of 2023" which would prohibit the purchase of drones

from countries identified as national security threats such as China.

The basis for the legislation is that purchases from these countries

(i) pose a significant threat to national security, (ii) represent efforts to infiltrate and influence American society, and (iii) risk

the theft of personal and business data.

Specifically, the American Security Drone Act:

federal departments and agencies from procuring certain foreign commercial off-the-shelf

drone or covered unmanned aircraft system manufactured or assembled in countries identified

as national security threats, and provides a timeline to end current use of these drones.

the use of federal funds awarded through certain contracts, grants, or cooperative agreements

to state or local governments from being used to purchase foreign commercial off-the-shelf

drones or covered unmanned aircraft systems manufactured or assembled in a country identified

as a national security threat.

the Comptroller General of the United States to submit a report to Congress detailing the

amount of foreign commercial off-the-shelf drones and covered unmanned aircraft systems procured

by federal departments and agencies from countries identified as national security threats.

Other Corporate Information

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;

agricultural sustainability solutions

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

aerial mapping and

nature monitoring;

maintenance of renewal

energy sources such as solar panels and wind turbines;

disaster relief monitoring

and relief delivery;

agricultural sustainability

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.

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.

As of July 20, 2021, the Company had 70 full-time

company has consolidated its intellectual property into a subsidiary, UAVPatent Corp.

The subsidiary holds 36 issued patents and registered

designs and 16 pending patents and registered designs.

The Intellectual Property (“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.

Corp also has the trademarks on the Rotor Riot, Fat Shark, Teal, Skypersonic, and Red Cat brands and logos.

of June 30, 2023, the Company had 76 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.

the years ended April 30, 2023 and 2022, we incurred research and development costs of $5,248,336 and $2,606,141, respectively, excluding

$692,947 and $516,456 of stock-based compensation, respectively.

Compared sentence by sentence after normalising whitespace, quotation marks, case and digits, so re-formatting and restated figures do not read as changed language. Wording changes appear as one removal and one addition. The current filing and the prior one are authoritative.

What changed 10-K

Item 1. Business