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Item 8. Financial Statements and Supplementary Data

2023-07-27 compared with 2022-07-27 · 817 added, 884 removed, 244 unchanged (87% of the section changed)

FINANCIAL STATEMENTS AND SUPPLEMENTARY

RED HAT HOLDINGS, INC.

INDEX TO CONSOLIDATED FINANCIAL

Report of Independent Registered Accounting Firm

Consolidated Balance Sheets as of April 30, 2022

Consolidated Statements of Operations for the

years ended April 30, 2022 and 2021

Consolidated Statements of Changes in

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

Consolidated Statements of Cash Flows for the

years ended April 30, 2022 and 2021

Notes to the Consolidated Financial

Report of Independent Registered Public

Accounting Firm

To the shareholders and the board of directors

of Red Cat Holdings

FINANCIAL STATEMENTS AND SUPPLEMENTARY DATA

CAT HOLDINGS, INC.

TO CONSOLIDATED FINANCIAL STATEMENTS

Report of Independent

Registered Accounting Firm (PCAOB ID:

Consolidated Balance

Sheets as of April 30, 2023 and 2022

Consolidated Statements

of Operations for the years ended April 30, 2023 and 2022

Consolidated Statements

of Changes in Shareholders’ Equity for the years ended April 30, 2023 and 2022

Consolidated Statements

of Cash Flows for the years ended April 30, 2023 and 2022

Notes to the Consolidated

Financial Statements

of Independent Registered Public Accounting Firm

To the shareholders and the board of directors of

Red Cat Holdings

Opinion on the Financial Statements

5 unchanged sentences

generally accepted in the United States.

Going Concern Matter

The accompanying financial statements

have been prepared assuming that the Company will continue as a going concern.

As discussed in Note 2 to the financial statements, the

Company has suffered recurring losses from operations that raises substantial doubt about its ability to continue as a going concern.

Management's plans in regard to these matters are also described in Note 2.

The financial statements do not include any adjustments that

might result from the outcome of this uncertainty.

Basis for Opinion

30 unchanged sentences

are no critical audit matters.

/S/ BF Borgers CPA PC

We have served as the Company's auditor since 2020

July 27, 2022

RED CAT HOLDINGS

Consolidated Balance Sheets

BF Borgers CPA PC

have served as the Company's auditor since 2020

Balance Sheets

receivable, net

6 unchanged sentences

obligations - short term

to related party

lease liabilities

derivative liability

to related party

current liabilities

1 unchanged sentence

obligations - long term

payable to related party

long term liabilities

1 unchanged sentence

Stockholders'

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

0 and 158,704

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

986,676 and 1,968,676

stock - shares authorized 500,000,000 ;

53,748,735 and 29,431,264

outstanding 986,676

Common stock - shares authorized

500,000,000 ;

outstanding 54,568,065 and

paid-in capital

6 unchanged sentences

accompanying notes.

RED CAT HOLDINGS

Consolidated Statements of Operations

Statements of Operations

ended April 30,

Cost of goods sold

of goods sold

and development

and marketing

and administrative

based compensation

operating expenses

Research and development

Sales and marketing

General and administrative

Stock based compensation

Total operating

Operating loss

( 27,127,061 )

( 13,002,286 )

Other (income) expense

Derivative expense

Change in fair value of derivative liability

(income) expense

in fair value of derivative liability

( 1,019,292 )

Investment income, net

Interest expense

Other (income) expense

( 1,042,129 )

(income) expense

( 1,313,158 )

$ ( 27,087,737 )

Loss per share - basic and diluted

Weighted average shares outstanding -

basic and diluted

$ ( 11,689,128 )

per share - basic and diluted

average shares outstanding - basic

accompanying notes.

RED CAT HOLDINGS

Consolidated Statements of Stockholders' Equity

Accumulated Other

Statements of Stockholders' Equity

Comprehensive

1 unchanged sentence

$ ( 15,809,928 )

Conversion of debt

Conversion of preferred stock

( 1,712,947 )

Exercise of warrants

Acquisition of Fat Shark

Stock based compensation

of restricted stock units

( 13,236,175 )

April 30, 2021

$ ( 15,809,928 )

Conversion of preferred stock

of preferred stock

Exercise of warrants

1 unchanged sentence

Acquisition of Teal

Public offerings, net of $ 5,959,800

Public offerings,

net of $ 5,959,800

of issuance costs

Stock based compensation

Exercise of stock options

Vesting of restricted stock units

Shares issued for services

Change in unrealized loss on available-for-sale

restricted stock units, net of payroll tax withholding

Shares issued

loss on marketable securities

( 1,474,294 )

Currency translation adjustments

Currency translation

( 11,689,128 )

4 unchanged sentences

$ ( 1,470,272 )

restricted stock units, net of payroll tax withholding

Shares issued

gain on marketable securities

Currency translation

( 27,087,737 )

April 30, 2023

$ 109,993,100

$ ( 54,586,793 )

$ ( 861,117 )

accompanying notes.

RED CAT HOLDINGS

Consolidated Statements of Cash Flows

Statements of Cash Flows

ended April 30,

Cash Flows from Operating Activities

Flows from Operating Activities

$ ( 27,087,737 )

$ ( 11,689,128 )

Stock based compensation - employees

Stock awards - non-employees

Common stock issued for services

Amortization of intangible assets

Change in fair value of derivative

to reconcile net loss to net cash from operations:

based compensation

stock issued for services

of intangible assets

loss from sale of marketable securities

in fair value of derivative

( 1,019,292 )

Amortization of debt discount

Derivative expense

Changes in operating

assets and liabilities, net of acquisitions

( 1,042,129 )

in operating assets and liabilities, net of acquisitions

( 8,090,657 )

( 2,229,487 )

( 3,634,604 )

lease right-of-use assets and liabilities

( 1,173,472 )

Net cash used in operating activities

cash used in operating activities

( 29,199,420 )

( 16,019,320 )

Cash Flows from Investing Activities

Cash acquired through acquisitions

Payment for acquisition, net of

cash acquired

Purchases of property and equipment

Proceeds from maturities of marketable

Flows from Investing Activities

acquired through acquisitions

of property and equipment

( 2,450,213 )

from sale of marketable securities

of marketable securities

( 57,619,881 )

Net cash used in investing activities

Investment agreement

cash provided by (used in) investing activities

( 46,603,486 )

Cash Flows from Financing Activities

Proceeds from exercise of warrants

Proceeds from related party obligations

Payments under related party obligations

Flows from Financing Activities

from exercise of warrants

from related party obligations

under related party obligations

( 1,970,757 )

Proceeds from debt obligations

Payments under debt obligations

Proceeds from convertible debentures

Payments of taxes related to restricted

stock vesting

Proceeds from issuance of common

Net cash provided by financing activities

Net increase in Cash

Cash, beginning of period

Cash, end of period

Cash paid for interest

Cash paid for income taxes

Non-cash transactions

Fair value of shares issued in acquisitions

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

Forgiveness of PPP loan

Shares withheld as payment of note receivable

Elimination of derivative liability

Financed purchases of property and equipment

Indirect payment to related party

Taxes related to net share settlement of equity awards

Conversion of preferred stock into common stock

Issuance of note payable - related party in acquisition

Conversion of notes into common stock

Conversion of accrued interest into common stock

under debt obligations

of taxes related to equity awards

from issuance of common stock, net

cash (used in) provided by financing activities

( 1,215,325 )

(decrease) increase in Cash

beginning of period

end of period

paid for interest

paid for income taxes

value of shares

in acquisitions

as payment of note receivable

gain (loss) on marketable securities

$ ( 1,474,294 )

of derivative liability

purchases of property and equipment

payment to related party

related to net share settlement of equity awards

of preferred stock into common stock

accompanying notes.

RED CAT HOLDINGS, INC.

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS

April 30, 2022 and 2021

Note 1 – The Business

Red Cat Holdings (“Red Cat” or the “Company”)

was originally incorporated in February 1984.

Since April 2016, the Company’s primary business has been to provide products, services

and solutions to the drone industry which it presently does through its four wholly owned subsidiaries.

Teal Drones is a leader in commercial

and government Unmanned Aerial Vehicles (UAV) technology.

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

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

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

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

Corporate developments during the two years ended

April 30, 2022 include:

Fat Shark Acquisition

On September 30, 2020, the

Company entered into a share purchase agreement (“Share Purchase Agreement”) with Greg French (“French”), the

founder and sole shareholder of Fat Shark Holdings (“Fat Shark”), to acquire all of the issued and outstanding shares of Fat

Shark and its subsidiaries.

The transaction closed on November 2, 2020 and was valued at $ 8,354,076 based on (i) the issuance of 5,227,273

shares of common stock with a value of $ 6,351,076 on the date of closing (ii) a senior secured promissory note in the original principal

amount of $ 1,753,000 which matures on November 1, 2023, and (iii) a cash payment of $ 250,000 .

CAT HOLDINGS, INC.

TO CONSOLIDATED FINANCIAL STATEMENTS

30, 2023 and 2022

1 – The Business

Cat Holdings (“Red Cat” or the “Company”) was originally incorporated in February 1984.

Since April 2016, the

Company’s primary business has been to provide products, services and solutions to the drone industry which it presently does through

its four wholly owned subsidiaries.

Teal Drones is a leader in commercial and government Unmanned Aerial Vehicles (UAV) technology.

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

Rotor Riot sells FPV drones and equipment to the

consumer marketplace through its digital storefront located at www.rotorriot.com.

Skypersonic provides software and hardware solutions

that enable drones to complete inspection services in locations where GPS (global positioning systems) is not available, yet still record

and transmit data even while being operated from thousands of miles away.

corporate developments include:

Shark Acquisition

September 30, 2020, the Company entered into a share purchase agreement (“Share Purchase Agreement”) with Greg French (“French”),

the founder and sole shareholder of Fat Shark Holdings (“Fat Shark”), to acquire all of the issued and outstanding shares

of Fat Shark and its subsidiaries.

The transaction closed on November 2, 2020 and was valued at $ 8,354,076 based

on (i) the issuance of 5,227,273

shares of common stock with a value of $ 6,351,076 on

the date of closing (ii) a senior secured promissory note in the original principal amount of $ 1,753,000 ,

and (iii) a cash payment of $ 250,000 .

The Share Purchase Agreement included indemnification

provisions, a two year non-compete agreement, and registration rights for the shares issued in the transaction.

A summary of the purchase

price and its related allocation was as follows:

summary of the purchase price and its related allocation was as follows:

Shares issued

Promissory note issued

Total Purchase Price

Total Purchase

Assets acquired

2 unchanged sentences

Non-compete agreement

Total assets acquired

assets acquired

Liabilities assumed

1 unchanged sentence

Customer deposits

Total liabilities assumed

Total fair value of net assets acquired

The Company engaged a valuation

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

Intangible assets included proprietary

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

The carrying value of brand name is

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

The excess of the purchase price above the net assets

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

Skypersonic Acquisition

On May 7, 2021, the Company closed the acquisition

of Skypersonic, Inc.("Skypersonic").

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

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

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

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

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

For accounting

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

Prior to the closing,

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

liabilities assumed

Total fair value

of net assets acquired

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

value of brand name is not being amortized but is reviewed quarterly and formally evaluated at year end.

The excess of the purchase price

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

May 2021, the Company acquired all of the outstanding stock of Skypersonic, Inc.

(“Skypersonic”) in exchange for $3,000,000 of our common stock.

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

for the 20 trading days ending May 7, 2021.

Based on a VWAP of $4.0154, the Company issued 747,124

In addition, the

Company also agreed to issue 110,000

shares of common stock to a shareholder.

For accounting purposes, the 857,124 shares

were valued at $ 3,291,356

based on the closing price of our common stock of $ 3.84

on May 7, 2021.

Prior to the closing, the

Company provided $ 75,000

to Skypersonic to fund its operating costs.

This amount was capitalized as part of the purchase price.

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

of 149,829 shares held in escrow.

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

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

which resulted in the cancellation

shares held in escrow.

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

Shares issued

4 unchanged sentences

Non-compete agreement

Total assets acquired

assets acquired

Liabilities assumed

Accounts payable and accrued expenses

Total liabilities assumed

Total fair value of net assets acquired

The Company engaged a valuation

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

Intangible assets included proprietary

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

The excess of the purchase price above

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

Teal Drones Acquisition

On August 31, 2021, the Company closed the

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

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

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

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

Accounts payable

and accrued expenses

liabilities assumed

Total fair value

of net assets acquired

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

of the purchase price above the net assets acquired was recorded as goodwill which is reviewed quarterly and formally evaluated at year

Drones Acquisition

August 31, 2021, the Company closed the acquisition of Teal Drones Inc., (“Teal”).

Under the terms of the agreement, the

base purchase price of $ 14,000,000 was reduced by $ 1,670,294 of debt assumed by the Company, as well as a working capital deficit

adjustment of $ 1,456,953 .

Based on the net amount payable of $ 10,872,753 , and a VWAP of $2.908 for the twenty trading days ending August

31, 2022, the Company issued

3,738,911 of common stock.

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

stock of $ 2.79 on August 31, 2021.

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

For accounting purposes, the shares were valued at $ 10,431,562 based

on the closing price of our common stock of $ 2.79 on August 31, 2021.

In December 2021, the Company and Teal agreed to a reduction

in the purchase price of $ 438,058

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

The Stock Consideration may be increased if Teal attains

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

The additional consideration begins at $4

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

A revised summary of the purchase price and its related

allocation is set forth below.

Total Purchase Price – shares issued

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

Total Purchase Price – shares

Assets acquired

1 unchanged sentence

Other current assets

Total assets acquired

Proprietary technology

assets acquired

Liabilities assumed

2 unchanged sentences

Notes payable

Total liabilities assumed

Total fair value of net assets acquired

( 4,283,220 )

The foregoing amounts reflect our current estimates

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

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

formal evaluation of the acquisition.

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

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

When the valuation project is

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

The determination of the fair values of the acquired assets and liabilities

assumed (and the related determination of estimated lives of depreciable tangible and intangible assets) requires significant judgment.

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

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

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

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

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

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

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

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

Supplemental Unaudited Pro Forma Financial

Information and Other Information

The following table presents pro forma results for

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

$ ( 8,604,139 )

$ ( 886,757 )

$ ( 4,201,408 )

$ ( 13,692,304 )

The following table presents pro forma results for

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

Net (Loss) Income

$ ( 13,263,942 )

liabilities assumed

Total fair value

of net assets acquired

assets includes proprietary technology which is being amortized over 6 years.

The carrying value of brand name is not being amortized

but is reviewed quarterly and formally evaluated at year end.

The excess of the purchase price above the net assets acquired was recorded

as goodwill which is reviewed quarterly and formally evaluated at year end.

Unaudited Pro Forma Financial Information and Other Information

is no pro forma financial information for the year ended April 30, 2023 because all acquisitions had closed prior to the beginning of

the reporting period.

The following table presents pro forma results as if our acquisition of Teal had occurred on May 1, 2021:

ended April 30, 2022

( 11,689,128 )

1 unchanged sentence

( 13,156,898 )

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

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

other expenses directly related to each respective acquisition.

The unaudited pro forma financial information is based on estimates

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

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

acquisition of Skypersonic was completed on May 7, 2021 and its activities during the period from May 1, 2021 to May 7, 2021 were immaterial

to the consolidated pro forma results.

unaudited pro forma financial information has been compiled in a manner consistent with the Company's accounting policies, and includes

transaction costs, amortization of the acquired intangible assets, and other expenses directly related to the acquisition of Teal.

unaudited pro forma financial information is based on estimates and assumptions which the Company believes are reasonable but not necessarily

indicative of the results that would have been realized had the acquisition closed on the date indicated in the tables, nor are they

indicative of results of operations that may occur in the future.

information related to the Company’s acquisitions include:

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

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

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

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

For accounting purposes, the shares

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

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

technologies with the Teal Drone.

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

Anywhere” technologies in a wide range of commercial environments.

Goodwill for Teal is ascribed to its existing relationship

with a number of U.S.

government agencies including its classification as an approved vendor.

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

The Company has reported

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

Note 2 – Summary of Significant Accounting Policies

Basis of Accounting – The financial statements

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

Principles of Consolidation – Our

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

Intercompany transactions and balances have been eliminated.

Use of Estimates – The preparation of financial

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

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

revenue and expenses during the reporting period.

price allocation has been finalized for each acquisition based on the report from the valuation services firm engaged to assist in

the identification and valuation of intangible assets acquired .

The fair value of shares

issued by the Company as part of the consideration paid is normally based on the volume weighted average price of the Company’s

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

For accounting purposes, the shares issued are valued based

on the closing stock price on the date that the transaction closes.

Goodwill for Rotor Riot

relates to its strong social media presence including more than 200,000 YouTube subscribers.

Goodwill for Fat Shark is attributable

to its relationship with manufacturing sources in China and the potential to integrate its goggle technologies with the Teal drone.

Goodwill for Teal is ascribed to its existing relationship with several U.S.

government agencies including its classification as

an approved vendor.

The Company expects that

the Goodwill recognized in each transaction will be deductible for tax purposes.

The Company has reported net losses since its inception

and is presently unable to determine when and if the tax benefit of this deduction will be realized.

2 – Summary of Significant Accounting Policies

of Accounting – The financial statements and accompanying notes are prepared in accordance with generally accepted accounting

principles in the United States (“GAAP”).

Certain prior period amounts have been restated to conform to the current year

presentation.

of Consolidation – Our consolidated financial statements include the accounts of our wholly owned operating subsidiaries, which

consist of Teal Drones, Fat Shark, Rotor Riot, and Skypersonic, including its wholly owned international subsidiary, Skyset.

transactions and balances have been eliminated.

of Estimates – The preparation of financial statements in accordance with GAAP requires

management to make estimates and assumptions that affect the reported amounts of assets and liabilities, the disclosure of contingent

assets and liabilities at the date of the financial statements, and the reported amounts of revenue and expenses during the reporting

Actual results could differ from those estimates.

Significant estimates reflected in

these financial statements include those used to (i) determine stock-based compensation, (ii) complete purchase price accounting for acquisitions,

and (iii) accounting for derivatives.

Cash and Cash Equivalents – At April

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

We have not experienced any loss on

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

Marketable Securities – Our marketable

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

These securities are primarily invested in corporate

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

Our available-for-sale securities are carried at

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

Once realized, any gains or losses

are recognized in the statement of operations.

We have elected to present accrued interest receivable

separately from marketable securities on our consolidated balance sheets.

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

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

We did not write off any accrued interest receivable during

the fiscal years ended April 30, 2022 and 2021.

Accounts Receivable, net – Accounts receivable

are recorded at the invoiced amount less allowances for doubtful accounts.

The Company's estimate of the allowance for doubtful accounts

is based on a multitude of factors, including historical bad debt levels for its customer base, past experience with a specific customer,

the economic environment, and other factors.

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

the receivable will not be collected.

Significant estimates reflected in these financial statements include those

used to (i) determine stock-based compensation, (ii) complete purchase price accounting for acquisitions, (iii) accounting for derivatives,

(iv) reserves and allowances related to accounts receivable and inventory, and (v) the evaluation of long term assets, including goodwill,

for impairment.

and Cash Equivalents – At April 30, 2023, we had cash of $3,260,305 in multiple commercial banks and financial services companies.

We have not experienced any loss on these cash balances and believe they are not exposed to any significant credit risk.

Securities – Our marketable securities have been classified and accounted for as available-for-sale

These securities are primarily invested in corporate bonds and are readily saleable, and therefore, we have classified them

as short term.

Our available-for-sale securities are carried at fair value with any unrealized gains and losses reported as a component

of comprehensive income (loss).

Once realized, any gains or losses are recognized in the statement of operations.

have elected to present accrued interest income separately from marketable securities on our consolidated balance sheets.

Accrued interest

income was $151,671 and $385,730 as of April 30, 2023 and 2022, respectively,

and was included in other current assets.

We did not write off any accrued interest receivable during the fiscal years ended April 30,

2023 and 2022.

Receivable, net – Accounts receivable are recorded at the invoiced amount less allowances

for doubtful accounts.

The Company's estimate of the allowance for doubtful accounts is based on a multitude of factors, including historical

bad debt levels for its customer base, past experience with a specific customer, the economic environment, and other factors.

receivable balances are written off against the allowance when it is probable that the receivable will not be collected.

Inventories – Inventories,

2 unchanged sentences

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

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

Goodwill – Goodwill represents the excess

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

The measurement period for

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

the acquisition date becomes known, not to exceed 12 months.

Adjustments in a purchase price allocation may require a change in the amounts

allocated to goodwill during the periods in which the adjustments are determined.

We perform an impairment test at the end of each fiscal

year, or more frequently if indications of impairment arise.

We have a single reporting unit, and consequently, evaluate goodwill for

impairment based on an evaluation of the fair value of the Company as a whole.

Property and equipment – Property and equipment

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

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

furniture and equipment, seven years;

and other, two to five years;

leasehold improvements, 15 years.

Leases – Effective August 1, 2021, the Company

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

associated with lease agreements.

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

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

Upon adoption, the Company recognized a lease liability obligation

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

The Company determines if

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

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

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

The Company's leases do not provide an

implicit rate.

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

Operating lease

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

At each balance sheet date, the Company evaluates the net realizable value of its inventory using various reference measures including

current product selling prices, as well as evaluating for excess quantities and obsolescence.

and Long-lived Assets – Goodwill represents the future economic benefit arising from other assets acquired in an acquisition that

are not individually identified and separately recognized.

We test goodwill for impairment in accordance with the provisions of ASC

350, Intangibles – Goodwill and Other, (“ASC 350”).

Goodwill is tested for impairment at least annually at

the reporting unit level or whenever events or changes in circumstances indicate that goodwill might be impaired.

ASC 350 provides that

an entity has the option to first assess qualitative factors to determine whether the existence of events or circumstances leads to a

determination that it is more likely than not that the fair value of a reporting unit is less than its carrying amount.

If, after assessing

the totality of events or circumstances, an entity determines it is not more likely than not that the fair value of a reporting unit

is less than its carrying amount, then additional impairment testing is not required.

However, if an entity concludes otherwise, then

it is required to perform an impairment test.

The impairment test involves comparing the estimated fair value of a reporting unit with

its book value, including goodwill.

If the estimated fair value exceeds book value, goodwill is considered not to be impaired.

the fair value of the reporting unit is less than book value, then an impairment loss is recognized in an amount equal to the amount

that the book value of the reporting unit exceeds its fair value, not to exceed the total amount of goodwill allocated to the reporting

estimate of fair value of a reporting unit is computed using either an income approach, a market approach, or a combination of both.

Under the income approach, we utilize the discounted cash flow method to estimate the fair value of a reporting unit.

Significant assumptions

inherent in estimating the fair values include the estimated future cash flows, growth assumptions for future revenues (including gross

margin, operating expenses, and capital expenditures), and a rate used to discount estimated future cash flow projections to their present

value based on estimated weighted average cost of capital (i.e., the selected discount rate).

Our assumptions our based on historical

data, supplemented by current and anticipated market conditions, estimated growth rates, and management’s plans.

Under the market

approach, fair value is derived from metrics of publicly traded companies or historically completed transactions of comparable businesses.

The selection of comparable businesses is based on the markets in which the reporting units operate and consider risk profiles, size,

geography, and diversity of products and services.

and equipment – Property and equipment is stated at cost less accumulated depreciation

which is calculated using the straight-line method over the estimated useful life of the asset.

The estimated useful lives of our property

and equipment are generally:

(i) furniture and fixtures - seven years, (ii) equipment and related - two to five years, and (iii) leasehold

improvements - 15 years.

– Effective August 1, 2021, the Company adopted Accounting Standards Codification (ASC) 842 titled “Leases” which

requires the recognition of assets and liabilities associated with lease agreements.

The Company adopted ASC 842 on a modified retrospective

transition basis which means that it did not restate financial information for any periods prior to August 1, 2021.

Upon adoption, the

Company recognized a lease liability obligation of $796,976 and a right-of-use asset for the same amount.

Company determines if a contract is a lease or contains a lease at inception.

Operating lease liabilities are measured, on each reporting

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

The Company's leases do not provide

an implicit rate.

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

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

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

1 unchanged sentence

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

Fair Values, Inputs and Valuation Techniques for

Financial Assets and Liabilities and Related Disclosures – The fair value measurements and disclosure guidance defines fair

value and establishes a framework for measuring fair value.

Fair value is defined as the price that would be received to sell an asset

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

In accordance

with this guidance, the Company has categorized its recurring basis financial assets and liabilities into a three-level fair value hierarchy

based on the priority of the inputs to the valuation technique.

The fair value hierarchy gives the highest priority

to quoted prices in active markets for identical assets or liabilities (Level 1) and the lowest priority to unobservable inputs (Level

The inputs used to measure fair value may fall into different levels of the fair value hierarchy.

In such cases, the level in the

fair value hierarchy within which the fair value measurement in its entirety falls has been determined based on the lowest level input

that is significant to the fair value measurement in its entirety.

The Company's assessment of the significance of a particular input

to the fair value measurement in its entirety requires judgment and considers factors specific to the asset or liability.

The guidance establishes

three levels of the fair value hierarchy as follows:

Values, Inputs and Valuation Techniques for Financial Assets and Liabilities and Related Disclosures – The fair value measurements

and disclosure guidance defines fair value and establishes a framework for measuring fair value.

Fair value is defined as the price that

would be received to sell an asset or paid to transfer a liability (an exit price) in an orderly transaction between market participants

at the measurement date.

In accordance with this guidance, the Company has categorized its recurring basis financial assets and liabilities

into a three-level fair value hierarchy based on the priority of the inputs to the valuation technique.

fair value hierarchy gives the highest priority to quoted prices in active markets for identical assets or liabilities (Level 1) and

the lowest priority to unobservable inputs (Level 3).

The inputs used to measure fair value may fall into different levels of the fair

value hierarchy.

In such cases, the level in the fair value hierarchy within which the fair value measurement in its entirety falls has

been determined based on the lowest level input that is significant to the fair value measurement in its entirety.

The Company's assessment

of the significance of a particular input to the fair value measurement in its entirety requires judgment and considers factors specific

to the asset or liability.

guidance establishes three levels of the fair value hierarchy as follows:

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

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

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

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

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

or no market data.

Disclosures for Non-Financial Assets Measured at

Fair Value on a Non-Recurring Basis

The Company's financial instruments mainly consist

of cash, receivables, current assets, accounts payable, accrued expenses and debt.

The carrying amounts of cash, receivables, current

assets, accounts payable, accrued expenses and current debt approximates fair value due to the short-term nature of these instruments.

Convertible Securities and Derivatives

When the Company issues convertible debt or equity

instruments that contain embedded derivative instruments that are to be bifurcated and accounted for as liabilities, the total proceeds

from the convertible host instruments are first allocated to the bifurcated derivative instruments.

The remaining proceeds,

if any, are then allocated to the convertible instruments themselves, resulting in those instruments being recorded at a discount from

their face value but no lower than zero.

Any excess amount is recognized as a derivative expense.

Derivative Liabilities

The Company has financial instruments that are considered

derivatives or contain embedded features subject to derivative accounting.

Embedded derivatives are valued separately from the host instrument

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

The Company measures these instruments at their estimated

fair value and recognizes changes in their estimated fair value in results of operations during the period of change.

In October 2020 and January 2021, the Company entered

into convertible note agreements which included provisions under which the conversion price was equal to the lesser of an initial stated

amount or the conversion price of a future offering.

This variable conversion feature was recognized as a derivative.

Both financings

included the issuance of warrants which contained similar variable conversion features.

The Company values these convertible notes and

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

The resulting liability is valued at each reporting date and the change in the liability is reflected as change in derivative

liability in the statement of operations.

Revenue Recognition – The Company

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

Standards Board (“FASB”).

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

recognition including (i) identifying the promised goods, (ii) evaluating performance obligations, (iii) measuring the transaction price,

(iv) allocating the transaction price to the performance obligations if there are multiple components, and (v) recognizing revenue as

each obligation is satisfied.

The Company’s revenue transactions include a single component, specifically, the shipment of

goods to customers as orders are fulfilled.

The Company recognizes revenue upon shipment.

The timing of the shipment of orders can vary

considerably depending upon whether an order is for an item normally maintained in inventory or an order that requires assembly or unique

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

Research and Development – Research and development

expenses include payroll, employee benefits, and other headcount-related expenses associated with product development.

Research and development

expenses also include third-party development and programming costs, as well as a proportionate share of overhead costs such as rent.

Costs related to software development are included in research and development expense until technological feasibility is reached, which

for our software products, is generally shortly before the products are released to production.

Once technological feasibility is reached,

such costs are capitalized and amortized as a cost of revenue over the estimated lives of the products.

Income Taxes – Deferred taxes are provided

on the liability method, whereby deferred tax assets are recognized for deductible temporary differences and deferred tax liabilities

are recognized for taxable temporary differences.

Temporary differences are the differences between the reported amounts of assets and

liabilities and their tax bases.

Deferred tax assets and liabilities are adjusted for the effects of changes in tax laws and rates on

the date of enactment.

Recent Accounting Pronouncements – Management

does not believe that recently issued, but not yet effective accounting pronouncements, if adopted, would have a material effect on the

accompanying consolidated financial statements.

Foreign Currency – The functional currency

of our international subsidiary is the local currency.

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

dollars using

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

We record translation gains and losses

in accumulated other comprehensive income.

Comprehensive Loss –

Comprehensive loss consists of net loss and other comprehensive loss.

Other comprehensive loss refers to gains and losses that

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

Our other comprehensive loss is comprised of foreign

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

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

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

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

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

by little or no market data.

Company's financial instruments mainly consist of cash, receivables, current assets, accounts payable, accrued expenses and debt.

carrying amounts of cash, receivables, current assets, accounts payable, accrued expenses and current debt approximates fair value due

to the short-term nature of these instruments.

Company has financial instruments that are considered derivatives or contain embedded features subject to derivative accounting.

derivatives are valued separately from the host instrument and are recognized as liabilities on the Company's balance sheet.

measures these instruments at their estimated fair value and recognizes changes in their estimated fair value in results of operations

during the period of change.

October 2020 and January 2021, the Company entered into convertible note agreements which included provisions under which the conversion

price was equal to the lesser of an initial stated amount or the conversion price of a future offering.

This variable conversion feature

was recognized as a derivative.

Both financings included the issuance of warrants which contained similar variable conversion features.

The Company values these convertible notes and warrants using the multinomial lattice method.

The valuation is updated each reporting

date with the change in the liability reflected as a change in derivative liability in the statement of operations.

Recognition – The Company recognizes revenue in accordance with ASC 606, “Revenue

from Contracts with Customers”, issued by the Financial Accounting Standards Board (“FASB”).

This standard includes

a comprehensive evaluation of factors to be considered regarding revenue recognition including (i) identifying the promised goods, (ii)

evaluating performance obligations, (iii) measuring the transaction price, (iv) allocating the transaction price to the performance obligations

if there are multiple components, and (v) recognizing revenue as each obligation is satisfied.

The Company’s revenue transactions

include a single component, specifically, the shipment of goods to customers as orders are fulfilled.

The Company recognizes revenue

upon shipment.

The timing of the shipment of orders can vary considerably depending upon whether an order is for an item normally maintained

in inventory or an order that requires assembly or unique parts.

Customer deposits totaled $400,674 and $437,930 at April 30,

2023 and April 30, 2022, respectively.

and Development – Research and development expenses include payroll, employee benefits, and other headcount-related expenses

associated with product development.

Research and development expenses also include third-party development and programming costs, as

well as a proportionate share of overhead costs such as rent.

Costs related to software development are included in research and development

expense until technological feasibility is reached, which for our software products, is generally shortly before the products are released

to production.

Once technological feasibility is reached, such costs are capitalized and amortized as a cost of revenue over the estimated

lives of the products.

Taxes – Deferred taxes are provided on the liability method whereby deferred tax assets are recognized for deductible temporary

differences and deferred tax liabilities are recognized for taxable temporary differences.

Temporary differences are the differences

between the reported amounts of assets and liabilities and their tax bases.

Deferred tax assets and liabilities are adjusted for the

effects of changes in tax laws and rates on the date of enactment.

Accounting Pronouncements – Management does not believe that recently issued, but not

yet effective accounting pronouncements, if adopted, would have a material effect on the accompanying consolidated financial statements.

Currency – The functional currency of our international subsidiary, Skyset, is the local Italian currency.

For that subsidiary,

we translate assets and liabilities to U.S.

dollars using period-end exchange rates, and average monthly exchange rates for revenues,

costs, and expenses.

We record translation gains and losses in accumulated other comprehensive income.

Comprehensive

Loss – Comprehensive loss consists of net loss and other gains and losses that are recorded

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

The other gains and losses include foreign currency translation

adjustments and unrealized gains or losses on available-for-sale securities.

During the year ended April 30, 2023, comprehensive

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

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

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

between net loss and comprehensive loss.

Stock-Based Compensation – For stock

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

Compensation.

Fair value is determined based on the Black-Scholes Model using inputs reflecting our estimates of expected volatility,

term and future dividends.

loss was $609,155 lower than net loss, primarily related to unrealized gains on available-for-sale securities totaling $610,129, partially

offset by foreign currency translation adjustments of $974.

During the year ended April 30, 2022, comprehensive loss was $1,470,272 higher

than net loss, primarily related to unrealized losses on available-for-sale securities totaling $1,474,294, partially offset by foreign

currency translation adjustments of $4,022.

Compensation – S tock options are valued using the estimated grant-date fair value method

of accounting in accordance with ASC Topic 718, Compensation – Stock Compensation.

Fair value is determined based on the Black-Scholes

Model using inputs reflecting our estimates of expected volatility, term and future dividends.

We recognize forfeitures as they occur.

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

price on the date of grant.

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

the service period which is the vesting term.

Basic and Diluted Net Loss per Share –

Basic and diluted net loss per share has been calculated by dividing net loss by the weighted average number of shares of common stock

outstanding during the period.

Common stock equivalents were excluded from the computation of diluted net loss per share of common stock

because they were anti-dilutive.

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

profitable in the future.

Outstanding securities not included in the computation

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

Series A Preferred Stock, as converted

Series B Preferred Stock, as converted

The fair value of restricted stock is based on our stock price on the date of grant.

Compensation costs is recognized on a straight-line

basis over the service period which is the vesting term.

and Diluted Net Loss per Share – Basic and diluted net loss per share has been calculated by dividing net loss by the weighted

average number of shares of common stock outstanding during the period.

Common stock equivalents were excluded from the computation of

diluted net loss per share of common stock because they were anti-dilutive.

The conversion or exercise of these common stock equivalents

would dilute earnings per share if we become profitable in the future.

Outstanding securities not included in the computation of diluted

net loss per share because their effect would have been anti-dilutive included:

Series B Preferred

Stock, as converted

Stock options

Restricted stock

Related Parties – Parties are considered

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

and members of the Board of Directors.

Parties – Parties are considered to be related if they have control or significant influence, directly or indirectly, over

us, including key management personnel and members of the Board of Directors.

Related Party transactions are disclosed in Note 19.

Note 3 – Marketable Securities

The following tables set

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

Cost, unrealized gains or losses, and fair values

Unrealized Gains (Losses)

Money market funds

Asset-backed securities

Corporate bonds

( 1,442,230 )

$ ( 1,474,294 )

January 2020, we have acquired four separate businesses operating in various aspects of the drone industry.

Following the last acquisition,

the Company established Enterprise and Consumer segments to sharpen the Company’s focus on the unique opportunities in each sector

of the drone industry.

The Enterprise segment, which includes Teal Drones and Skypersonic, is focused on opportunities in the commercial

sector, including 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, which includes Rotor Riot and

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

May 1, 2022, we began to manage our business operations through these business segments.

The reportable segments were identified based

on how our chief operating decision maker (“CODM”), which is a committee comprised of our Chief Executive Officer (“CEO”),

Chief Operating Officer (“COO”) and our Chief Financial Officer (“CFO”), manages our business, makes resource

allocation and operating decisions, and evaluates operating performance.

See “Note 20 - Segment Reporting”.

and Going Concern – The Company has never been profitable and its net losses have been

increasing related to acquisitions, as well as costs incurred to pursue its long-term growth strategy.

During the year ended April 30,

2023, the Company incurred a net loss of $ 27,087,737 and used cash in operating activities of $ 29,199,420 .

As of April 30, 2023,

the Company has working capital of $ 27,414,396 .

While the Company has historically been successful in raising capital to meet its working

capital requirements, the ability to continue raising such capital to enable the Company to continue its growth is not guaranteed.

there is substantial doubt about the Company’s ability to continue as a going concern as the Company will require additional liquidity

to continue its operations and meet its financial obligations for twelve months from the date these consolidated financial statements are issued.

The Company is evaluating strategies to obtain the required funding and exploring opportunities to reduce expenses.

the Company is unable to raise additional capital, there is a risk that the Company could default on additional obligations;

be required to discontinue or significantly reduce the scope of its operations.

The consolidated financial statements do not include

any adjustments relating to the recoverability and classification of recorded asset amounts, or the amount and classification of liabilities

or any other adjustment that might be necessary should the Company be unable to continue as a going concern.

3 – Marketable Securities

securities consisted solely of corporate bonds at April 30, 2023 and were classified at Level 2 in the Fair Value Hierarchy.

cost basis, and unrealized losses totaled $ 12,814,038 , $ 13,678,203 , and $ 864,165 at April 30, 2023, respectively.

Contractual maturities

One Year or Less

Over Five Years

Money market funds

Asset-backed securities

Corporate bonds

Fair Value Hierarchy

Money market funds

Asset-backed securities

Corporate bonds

Note 4 – Inventories

Inventories consisted of the following at April 30,

of one year or less, one to three years and more than three years totaled $ 2,138,088 , $ 10,523,950 and $ 152,000 , respectively.

4 – Inventories

as of April 30 consisted of:

Raw materials

Work-in-process

Finished goods

Inventory purchase orders outstanding totaled approximately

$ 11 million.

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

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

Note 5 – Other Current Assets

Other current assets at April 30 included:

5 – Other Current Assets

current assets as of April 30 consisted of:

Prepaid inventory

Accrued interest income

Prepaid expenses

Security deposits

6 – Due From Related Party

Note 6 – Due From Related Party

In January 2022, the Company determined that an employee

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

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

stock ("Stock Compensation").

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

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

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

by the Company and applied against the Note.

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

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

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

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

against the Note.

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

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

a fair value required to repay the Note in full.

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

In March and April

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

January 2022, the Company determined that a senior executive had relocated in 2021 but their compensation had not been subject to the

income tax withholding required by the new jurisdiction.

The amount subject to taxation included $ 155,624 of cash compensation

and $ 1,413,332 of income associated with the vesting of restricted stock ("Stock Compensation").

In March 2022, the

Company entered into a note agreement (the "Note") with the employee in the amount of $ 510,323 , representing the estimated

taxes owed by the employee related to the Stock Compensation.

Under the terms of the Note, 104,166

shares of common stock with

a fair value of $ 280,832 , which had vested during calendar 2021, were withheld by the Company and applied against the Note.

employee agreed not to sell or transfer 110,983 shares of common stock held at the Company's transfer agent until the Note

In addition, the employee has 20,833 shares of restricted stock vesting monthly in calendar 2022, of which 3,000

were withheld with the fair value of those shares applied against the Note.

Shares issued to the employee in 2022 were held

at the transfer agent until the Note was repaid.

The Note matured on December 31, 2022.

The Company filed amended payroll tax

returns on March 16, 2022.

In March and April 2022, the Company made payments to the relevant tax authorities totaling $ 712,646 representing

owed by the employee, $ 31,604

owed by the Company, and $ 170,719

of penalties and interest.

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

The shares held at the transfer agent had a fair

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

Note 7 – Intangible Assets

Intangible assets relate to acquisitions completed by the Company, including

those described in Note 1.

Intangible assets as of April 30 were as follows:

April 30, 2022

April 30, 2021

The Note was repaid

in full in August 2022.

7 – Intangible Assets

assets relate to acquisitions completed by the Company, as described in Note 1, and were as follows at April 30:

Carrying Amount

Carrying Value

Carrying Amount

Proprietary technology

Carrying Value

$ ( 841,223 )

Non-compete agreements

Customer relationships

Total finite-lived assets

Total indefinite-lived assets

Total intangible assets, net

$ ( 219,267 )

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

next five years is as follows:

relationships

finite-lived assets

indefinite-lived assets

intangible assets, net

$ ( 915,996 )

$ ( 261,469 )

technology and non-compete agreements are being amortized over five to six years and three years, respectively.

Customer relationships

are being amortized over seven years.

Goodwill and Brand name are not amortized but evaluated for impairment on a quarterly basis.

of April 30, 2023, expected amortization expense for finite-lived intangible assets for the next

five years is as follows:

Fiscal Year Ended:

Goodwill is a separately stated intangible asset and

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

The composition of, and changes in goodwill consist

November 2020

Balance at April 30, 2021

Balance at April 30, 2022

Proprietary technology and non-compete

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

Goodwill and Brand name are not amortized but evaluated for

impairment on a quarterly basis.

Note 8 – Property and Equipment

Property and equipment consist of assets with an

estimated useful life greater than one year.

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

are periodically assessed for impairment.

Property and equipment as of April 30 was as follows:

Equipment and other

Leasehold improvements

Furniture and equipment

Accumulated depreciation

Net carrying value

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

April 30, 2022 and 2021, respectively.

Note 9 – Operating Leases

The Company has operating type leases for real estate.

As of April 30,

2022, the Company had no finance type leases.

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

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

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

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

April 30, 2022.

represents the future economic benefit arising from other assets acquired in an acquisition that are not individually identified

and separately recognized.

The composition of, and changes in goodwill, consist of:

at April 30, 2022

( 2,826,918 )

at April 30, 2023

the establishment of the Enterprise and Consumer segments, management evaluated the long term business strategy of each segment.

resulted in the Enterprise segment narrowing its focus on the military and other government agencies.

It was determined that Skypersonic's

technology would be re-focused for the near term on military applications and consolidated into the operations of Teal Drones.

completes a formal evaluation of the carrying value of its intangible assets, including goodwill, at the end of each fiscal year.

on (i) the operating results for Skypersonic since its acquisition in May 2021, (i) its consolidation into Teal, (iii) our current expectations

of its future business conditions and trends, and (iv) our projected revenues, expenses, and cash flows related to Skypersonic, the Company

completed an assessment of the carrying amount of Skypersonic's goodwill and recognized an impairment charge of $ 2,826,918 .

8 – Property and Equipment

and equipment consist of assets with an estimated useful life greater than one year and are reported net of accumulated depreciation.

The reported values are periodically assessed for impairment, and were as follows as of April 30:

and equipment

carrying value

expense totaled $ 311,545 and $ 40,165

for the fiscal years ended April 30, 2023 and 2022, respectively.

9 – Other Long Term Assets

long term assets as of April 30 consisted of:

SAFE agreement

November 2022, the Company entered into a SAFE (Simple Agreement for Future Equity) agreement with Firestorm Labs, Inc.

(“Firestorm”)

under which it made a payment $ 250,000 to Firestorm in exchange for the right to certain shares of Firestorm stock.

The SAFE permits

the Company to participate in a future equity financing of Firestorm by converting the $ 250,000

into shares of Preferred Stock of Firestorm.

If there is a change in control of Firestorm or a public offering of shares of its stock, then the Company shall have the right to receive

cash payments, or shares of stock, whichever has greater value.

The Company’s investment in the SAFE agreement has been recorded

on the cost method of accounting.

The Company plans to evaluate the investment for any indications of impairment in value on a quarterly

No factors indicative of impairment were identified during the fiscal year ended April 30, 2023.

10 – Operating Leases

of April 30, 2023, t he Company had operating type leases for real estate and no finance type leases.

The Company’s leases have remaining lease terms of up to 4.08 years, some of which may include options to extend for up

Operating lease expense totaled $ 395,248 for the year ended April 30, 2023, including period cost for short-term, cancelable,

and variable leases, not included in lease liabilities, of $ 22,475 for the year ended April 30, 2023.

on which the Company made rent payments during the reporting period included:

South Salt Lake, Utah

3 unchanged sentences

Troy, Michigan

Orlando, Florida

September 2022

Supplemental information related to operating leases

is as follows:

April 30, 2022

Operating cash paid to settle lease liabilities

Right of use asset additions in exchange for lease liabilities

information related to operating leases for the year ended April 30, 2023 was:

Operating cash

paid to settle lease liabilities

Weighted average remaining lease term (in years)

Weighted average discount rate

Future lease payment

obligations at April 30, 2022 were as follows:

lease payments at April 30, 2023 were as follows:

Fiscal Year Ended:

Note 10 – Debt Obligations

Decathlon Capital

In connection with the acquisition

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

Effective August 31, 2021, the principal

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

2024 maturity date.

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

Convertible Note

In May 2021, Teal entered

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

The note bears interest at the applicable Federal

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

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

Vendor Settlement

In May 2020, Teal entered

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

At August 31, 2021, the Company assumed

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

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

On February 11, 2021, Teal received a Small Business

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

The loan was unsecured, non-recourse,

and accrued interest at one percent annually.

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

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

Shopify Capital

Shopify Capital is an affiliate of Shopify, Inc.

11 – Debt Obligations

August 31, 2021, Teal entered into an Amended and Restated Loan and Security Agreement with Decathlon Alpha IV, L.P.

(the “Loan Agreement”) in the amount of $ 1,670,294 (the “Loan”), representing the outstanding principal

amount previously due and owing by Teal to DA4.

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

Principal and

interest is payable in monthly installments of $ 49,275 until maturity on December 31, 2024.

The balance outstanding at April 30,

2023 totaled $ 895,709 .

May 2021, Teal entered into a note agreement totaling $ 350,000

is payable upon demand.

The Note bears interest at the applicable Federal Rate as of the date of the Note which was 0.13 %

on the date of issuance.

Accrued interest totaled $ 878

at April 30, 2023.

connection with the acquisition of Teal on August 31, 2021, the Company assumed an obligation with a contract manufacturing firm.

assumed balance of $ 387,500

was repaid in monthly installments of $ 37,500

through July 2022.

February 2021, Teal received a Small Business Administration Paycheck Protection Program (“SBA PPP”) loan in the amount of

The loan was unsecured, non-recourse, and accrued interest at one percent annually.

The loan was used to fund qualifying payroll,

rent and utilities.

In February 2022, the principal balance of $ 300,910 and accrued interest of $ 3,001 were forgiven.

Capital is an affiliate of Shopify, Inc.

which provides sales software and services to the Company.

The Company processes customer transactions ordered on the e-commerce

site for Rotor Riot through Shopify.

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

receivables" at a discount.

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

The Company recognizes the discount as a transaction fee, in full, in the month in which the agreement is executed.

The Company assumed an existing agreement when it acquired Rotor Riot in January 2020.

This agreement was repaid in May 2020.

Since then, the Company has entered into the following agreements with Shopify:

The Company processes customer transactions

ordered on the e-commerce site for Rotor Riot through Shopify.

Shopify Capital has entered into multiple agreements with the Company

in which it has "purchased receivables" at a discount.

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

purchased receivables have been paid.

The Company recognizes the discount as a transaction fee, in full, in the month in which the agreement

Agreements with activity during the two years ended April 30, 2023 included:

of Transaction

Corporate Equity

In October 2021, Teal entered into an agreement with

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

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

of leasehold improvements funding.

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

December 2024 maturity date.

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

Revenue Financing Arrangement

In April 2021, Teal entered

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

At August 31, 2021, the Company assumed

the outstanding balance of $ 38,758 .

in October 2021, and amended in January 2022, Teal financed a total of $ 120,000 of leasehold improvements with Corporate Equity.

The loan bears interest at 8.25 % annually and requires monthly payments of $ 3,595 through December 2024.

The balance outstanding

at April 30, 2023 totaled $ 66,586 .

Financing Arrangement

April 2021, Teal entered into an agreement under which it sold future customer payments, at a discount, to Forward Financing.

31, 2021, the Company assumed the outstanding balance of $ 38,758 .

Repayment of the remaining balance was completed in January 2022.

Ascentium Capital

In September 2021, Teal entered into a financing agreement

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

September 2021, Teal entered into a financing agreement with Ascentium Capital to fund the purchase of a fixed asset totaling $ 24,383 .

Monthly payments of $ 656 are payable through October 2024.

The balance outstanding at April 30, 2023 totaled $ 11,412 .

PayPal is an electronic commerce company that facilitates

payments between parties through online funds transfers.

The Company processes certain customer payments ordered on its e-commerce site

through PayPal.

The Company has entered into multiple agreements under which PayPal provides an advance on customer payments, and then

retains a portion of customer payments until the advance is repaid.

PayPal charges a fee which the Company recognizes in full upon

entering an agreement.

A November 2019 agreement under which PayPal advanced $ 100,000 and charged a transaction fee of $ 6,900 was

completed in January 2021.

A January 2021 agreement under which PayPal advanced $ 75,444 and charged a transaction fee of $ 2,444

is an electronic commerce company that facilitates payments between parties through online funds transfers.

The Company processes certain

customer payments ordered on its e-commerce site through PayPal.

The Company has entered into multiple agreements under which PayPal

provides an advance on customer payments, and then retains a portion of customer payments until the advance is repaid.

PayPal charges

a fee which the Company recognizes in full upon entering an agreement.

A November 2019 agreement under which PayPal advanced $ 100,000 and

charged a transaction fee of $6,900 was completed in January 2021.

A January 2021 agreement under which PayPal advanced $ 75,444 and

charged a transaction fee of $ 2,444

was completed in August 2021.

Outstanding principal payments are due as follows:

principal payments are due as follows:

Short term – through April 30, 2024

Long term – thereafter

Note 11 – Due to Related Party

Founder of Fat Shark

In connection with the acquisition of Fat Shark in

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

The note bears interest at 3 % annually

and matures in full in November 2023.

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

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

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

12 – Due to Related Party

connection with the acquisition of Fat Shark in November 2020, the Company issued a secured promissory note for $ 1,753,000 to the

The note accrued interest at 3 % annually and matured in full in November 2023.

In May 2021, the Company made an initial

payment of $ 132,200 by directing a refund from a vendor based in China to the noteholder who is also based in China.

The remaining

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

was paid in September 2021.

In January 2020, in connection with the acquisition

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

The note bears interest at 4.75 %

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

The Company also assumed a line of credit obligation

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

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

30, 2021, respectively.

In 2020, the Company received advances totaling $ 79,000

January 2020, in connection with the acquisition of Rotor Riot, the Company issued a promissory note for $ 175,000 to the seller,

The note accrued interest at 4.75 %

In October 2021, the outstanding balance of $ 85,172 plus accrued interest

totaling $ 12,942 was paid.

Company also assumed a line of credit obligation totaling $ 47,853 which incurred interest at 6.67 % annually.

The remaining

balance of $ 37,196 plus accrued interest totaling $ 292 was paid in October 2022.

2020, the Company received advances totaling $ 79,000

from Aerocarve which is controlled by the Company's Chief Executive Officer.

1 unchanged sentence

5 % annually until repaid.

The balance owed at April 30, 2021 was $ 74,000 .

The balance was repaid in full in May 2021.

Note 12 – Convertible Notes

In November 2019, the Company issued a convertible

note in the principal amount of $ 300,000 to one accredited investor and in December 2019, the Company issued a convertible note in the

principal amount of $ 125,000 to a director and a convertible note in the principal amount of $ 25,000 to our chief executive officer (collectively,

the “2019 Notes”).

The Notes had a term of 2 years and accrued interest at an annual rate of 12 % through the date of conversion.

In September and October 2020, the entire $ 450,000 of 2019 Notes, plus accrued interest totaling $ 45,204 , was converted into 710,444 shares

of common stock.

October 2020 Financing

In October 2020, the Company closed a private offering

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

The 2020 Notes accrued interest

at 12 % annually, had a two-year term, and were convertible into common stock at the lower of $1.00 or a 25% discount of the price per

share of Common Stock offered in a future, qualified offering.

The financing also included the issuance of warrants to purchase 399,998

shares of common stock.

The Warrants are exercisable for a period of five years at a price equal to the lower of (1) $1.50 per share,

or (2) at a price equal to 75% of the price per share of the common stock offered in a future, qualified offering.

The Company determined that the provision associated

with a potential reduction in the conversion price of the notes and the exercise price of the warrant represented an embedded derivative

financial liability.

The derivative liability was initially valued at $ 728,587 using a multinomial lattice model with $ 460,588 and $ 267,999

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

In addition, $ 580,000 of the proceeds were applied as a debt

discount to reduce the initial carrying value of the notes to zero with the remaining $ 20,000 applied against transaction fees.

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

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

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

liability of $ 529,383 .

January 2021 Financing

In January 2021, the Company closed a private offering

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

The 2021 Notes accrued interest

at 12 % annually, had a two-year term, and were convertible into shares of the Company's common stock at the lower of $1.00 or a 25% discount

of the price per share of Common Stock offered in a future, qualified offering.

The financing also included the issuance of warrants

to purchase 675,000 shares of common stock.

The Warrants are exercisable for a period of five years at a price equal to the lower of

(i) $1.50 per share, or (ii) a 25% discount to the price per share of common stock offered in a future qualified offering.

The Company determined that the provision associated

with a potential reduction in the conversion price of the notes and the exercise price of the warrant represented an embedded derivative

financial liability.

The derivative liability was initially valued at $ 4,981,701 using a multinomial lattice model with $ 2,111,035 and

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

In addition, $ 500,000 was applied as a debt discount

to reduce the initial carrying value of the notes to zero.

The excess of the liability over the net proceeds totaled $ 4,481,701 which

was recognized as a derivative expense in the fiscal year ended April 30, 2021.

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

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

liability of $ 1,078,113 .

Note 13 – Income Taxes

Our operating subsidiary, Red Cat Propware, Inc.,

is incorporated and based in Puerto Rico which is a commonwealth of the United States.

We are not subject to taxation by the United States

as Puerto Rico has its own taxing authority.

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

Our current provision

for the reporting periods presented in these financial statements consisted of a tax benefit against which we applied a full valuation

allowance, resulting in no current provision for income taxes.

In addition, there was no deferred provision for any of these reporting

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

deficits of approximately $ 27,500,000 and $ 15,800,000 , respectively.

Deferred tax assets related to the future benefit of these net operating

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

Currently, we focus on projected future taxable income in evaluating whether it is more likely than not that these deferred

assets will be realized.

Based on the fact that we have not generated an operating profit since inception, we have applied a full valuation

allowance against our deferred tax assets at April 30, 2022 and 2021.

Note 14 – Common Stock

Our common stock has a par value of $ 0.001 per share.

13 – Income Taxes

operating subsidiary, Red Cat Propware, Inc., is incorporated and based in Puerto Rico which is a commonwealth of the United States.

We are not subject to taxation by the United States as Puerto Rico has its own taxing authority.

Since inception, we have incurred net

losses in each year of operations.

Our current provision for the reporting periods presented in these financial statements consisted

of a tax benefit against which we applied a full valuation allowance, resulting in no current provision for income taxes.

there was no deferred provision for any of these reporting periods.

April 30, 2023 and April 30, 2022, we had accumulated deficits of approximately $ 54,600,000

and $ 27,500,000 , respectively.

assets related to the future benefit of these net operating losses for tax purposes totaled approximately $ 10,101,000 and $ 5,087,500 ,

respectively, calculated using the base Puerto Rico corporate tax rate of 18.5%.

Currently, we focus on projected future taxable

income in evaluating whether it is more likely than not that these deferred assets will be realized.

Based on the fact that we have not

generated an operating profit since inception, we have applied a full valuation allowance against our deferred tax assets at April 30,

2023 and 2022.

14 – Common Stock

common stock has a par value of $0.001 per share.

We are authorized to issue 500,000,000 shares of common stock.

Each share of common stock is entitled to one vote.

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

stock issued by the Company included:

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

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

66,666 due to the exercise of warrants

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

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

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

89,107 due to the exercise of stock options

under restricted stock agreements with employees.

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

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

described in Note 6.

under restricted stock agreements with non-employees

for services rendered

Note 15 – Preferred Stock

Series A Preferred Stock outstanding totaled 158,704

share of common stock is entitled to one vote.

A summary of shares of common stock issued by the Company since April 30, 2021 is

Description of Shares

Shares Issued

Shares outstanding as of April 30,

of Series A preferred stock

of Series B preferred stock

Exercise of warrants

of Skypersonic on May 7, 2021, see Note 1

of Teal Drones on August 31, 2021, see Note 1

offerings which generated gross proceeds of $76 million and net proceeds of approximately $70.1 million

Exercise of stock options

of restricted stock to employees, net of 225,869 shares withheld to pay taxes and 92,812 to repay a Note

of restricted stock to Board of Directors

of restricted stock to consultants

issued for services

Shares outstanding as of April 30, 2022

of restricted stock to employees, net of shares withheld of 273,874 to pay taxes and 9,000 to repay a Note

of restricted stock to Board of Directors

of restricted stock to consultants

issued for services

Shares outstanding as

of April 30, 2023

15 – Preferred Stock

A Preferred Stock outstanding totaled 158,704

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

Series B Preferred Stock (“Series B Stock”)

is convertible into common stock at a ratio of 0.8334 shares of common stock for each share of Series B Stock held and votes together

with the common stock on an as-if-converted basis.

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

B Preferred Stock (“Series B Stock”) is convertible into common stock at a ratio of 0.8334 shares of common stock for each

share of Series B Stock held and votes together with the common stock on an as-if-converted basis.

Shares outstanding at April 30, 2023

totaled 986,676 which are convertible into 822,230

shares of common stock.

Note 16 – Warrants

In October 2020, the Company issued five-year warrants

to purchase a total of 399,998

shares in connection with the issuance

of $ 600,000 of

convertible notes.

The warrants have an initial exercise price of $ 1.50

which may be reduced to a 25% discount

of the price per share of Common Stock offered in a future qualified offering.

The warrants were valued at $ 267,999

using the multinominal lattice

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

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

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

In January 2021, the Company issued five-year warrants

to purchase a total of 675,000 shares

in connection with the issuance of $ 500,000

of convertible notes.

warrants have an initial exercise price of $ 1.50

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

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

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

The value of the warrants was included in the determination

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

In March and April 2021, we received $ 201,249

in connection with the exercise of 201,666

warrants which had been issued

in October 2020 and January 2021 as part of the convertible note financings described in note 10.

Since these exercises resulted in the

elimination of the derivative liability in the warrants, the derivative liability was reduced by $ 694,305

with a corresponding increase in

additional paid in capital.

In May 2021, the Company issued warrants to purchase

200,000 shares of common stock to

the placement agent of its common stock offering.

16 – Warrants

company issued five-year warrants in connection with two convertible note financings.

The warrants have an exercise price of

$ 1.50 which may be reduced to a 25%

discount of the price per share of Common Stock offered in a future qualified offering.

warrants were valued using the multinominal lattice model and are considered derivative liabilities under ASC 815-40.

the warrants was included in the determination of the initial accounting for each financing including the calculation of the

derivative liability and related expense.

summary of the warrants issued and their fair values were:

at April 30, 2023

of Transaction

March and April 2021, we received $ 201,249

related to the exercise of 201,666

of the warrants.

Since these exercises resulted

in the elimination of the derivative liability in the warrants, the derivative liability was reduced by $ 694,305

with a corresponding

increase in additional paid in capital.

In June 2021, we received $ 99,999 in connection with the exercise of 66,666 warrants

which resulted in the elimination of $ 163,141 of the derivative liability in the warrants.

May 2021, the Company issued warrants to purchase

200,000 shares of common stock to the placement agent of its common stock

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

In June 2021, we received $ 99,999

in connection with the exercise of 66,666

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

Since these exercises

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

with a corresponding increase in additional paid in capital.

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

shares of common stock to the placement

agent of its common stock offering.

shares of common stock to the placement agent of its common stock

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

The following table presents the range of assumptions

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

following table presents the range of assumptions used to estimate the fair values of warrants granted

during the year ended April 30:

Risk-free interest rate

0.79 – 0.85 %

0.52 – 2.87 %

Expected dividend yield

2 unchanged sentences

222.45 – 223.17 %

211.02 – 292.28 %

The following table summarizes the changes in warrants

outstanding since April 30, 2020.

following table summarizes the changes in warrants outstanding since April 30, 2021.

Weighted-average

6 unchanged sentences

Outstanding at April 30, 2023

Note 17 – Share Based Awards

The 2019 Equity Incentive Plan (the "Plan")

allows us to incentivize key employees, consultants, and directors with long term compensation awards such as stock options, restricted

stock, and restricted stock units (collectively, the "Awards").

The number of shares issuable in connection with Awards under

the Plan may not exceed 8,750,000 .

The table below sets forth the range of assumptions

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

17 – Share Based Awards

2019 Equity Incentive Plan (the "Plan") allows us to incentivize key employees, consultants, and directors with long term compensation

awards such as stock options, restricted stock, and restricted stock units (collectively, the "Awards").

The number of shares

issuable in connection with Awards under the Plan may not exceed 8,750,000 .

range of assumptions used to calculate the fair value of options granted during the year ended April 30 was:

Exercise Price

$ 1.69 – 2.82

$ 2.01 – 3.95

Stock price on date of grant

1 unchanged sentence

0.47 – 1.91 %

0.38 – 1.66 %

Dividend yield

1 unchanged sentence

210.68 – 273.46 %

88.60 – 91.44 %

A summary of options activity under the Plan since

April 30, 2020 is as follows:

summary of options activity under the Plan since April 30, 2021 is as follows:

Weighted-Average

3 unchanged sentences

Intrinsic Value

Outstanding as of April

as of April 30, 2021

Outstanding as of April

Exercisable as of

April 30, 2022

The aggregate intrinsic value of outstanding options

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

the exercise price of each option.

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

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

1.55 years, respectively.

Restricted Stock

A summary of restricted stock activity under the Plan

since April 30, 2020 is as follows:

Restricted Stock

Exercisable as of April

aggregate intrinsic value of outstanding options represents the excess of the stock price at the indicated date over the exercise price

of each option.

As of April 30, 2023 and April 30, 2022, there was $ 2,940,239 and $ 3,357,701 of unrecognized stock-based compensation

expense related to unvested stock options which is expected to be recognized over the weighted average periods of 1.94 and 2.20 years,

respectively.

summary of restricted stock activity under the Plan since April 30, 2021 was:

Weighted Average Grant-Date Fair Value Per Share

1 unchanged sentence

Unvested and outstanding as of April 30, 2022

( 1,062,372 )

Unvested and outstanding as of April 30, 2023

Stock Compensation

Stock compensation expense for the years ended April

30 was as follows:

As of April 30, 2023 and April 30, 2022, there was

and $ 2,544,105 of

unrecognized stock-based compensation expense related to unvested restricted stock units which is expected to be recognized over the

weighted average periods of 1.22

years, respectively.

compensation expense by functional category was:

General and administrative

Research and development

Sales and marketing

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

and marketing

compensation expense pertaining to options totaled $ 1,617,982 and

$ 1,447,115 for the year ended April 30, 2023 and 2022, respectively.

Stock compensation expense pertaining to restricted stock units totaled

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

Note 18 – Derivatives

The Company completed financings in October

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

See Note 12 for

a full description of these financings.

Both the notes and the warrants included provisions which provided for a reduction in the conversion

and exercise prices, respectively, if the Company completed a future qualified offering at a lower price.

These provisions represent embedded

derivatives which are valued separately from the host instrument (meaning the notes and warrants) and recognized as derivative liabilities

on the Company's balance sheet.

The Company initially measures these financial instruments at their estimated fair value and recognizes

changes in their estimated fair value in results of operations during the period of change.

The Company also measures these financial

instruments on the date of settlement (meaning when the note is converted, or the warrant is exercised) at their estimated fair value and

recognizes changes in their estimated fair value in results of operations.

Any discount in the carrying value of the note is fully amortized

on the date of settlement and recognized as interest expense.

The Company estimated the fair value of these embedded derivatives using

a multinomial lattice mode1.

Stock compensation expense pertaining to restricted stock totaled $ 2,038,742 and $ 1,844,520 for the year ended April 30, 2023 and 2022,

respectively.

18 – Derivatives

Company completed financings in October 2020 and January 2021 which included notes and warrants containing embedded features subject

to derivative accounting.

Both the notes and the warrants included provisions which provided for a reduction in the conversion and exercise

prices, respectively, if the Company completed a future qualified offering at a lower price.

These provisions represent embedded derivatives

which are valued separately from the host instrument (meaning the notes and warrants) and recognized as derivative liabilities on the

Company's balance sheet.

The Company initially measures these financial instruments at their estimated fair value and recognizes changes

in their estimated fair value in results of operations during the period of change.

The Company also measures these financial instruments

on the date of settlement (meaning when the note is converted, or the warrant is exercised) at their estimated fair value and recognizes

changes in their estimated fair value in results of operations.

Any discount in the carrying value of the note is fully amortized on

the date of settlement and recognized as interest expense.

The Company estimated the fair value of these embedded derivatives using a

multinomial lattice model.

The range of underlying assumptions used in the binomial model to determine the fair value of the derivative

12 unchanged sentences

211.02 – 292.28 %

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

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

Changes in the derivative liability during the year ended April

30, 2022 and 2021 were as follows:

of April 30, 2023, all of the notes had been converted into common stock and 806,666 of the warrants were outstanding.

Changes in the

derivative liability during the year ended April 30, 2023 and 2022 were as follows:

Balance, beginning of period

Eliminated upon conversion of notes/exercise of warrants

Eliminated upon conversion

of notes/exercise of warrants

in fair value

( 1,019,292 )

Changes in fair value

( 1,042,129 )

Balance, end of period

Changes in fair value primarily related to changes

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

price reducing the liability.

Note 19 – Related-Party Transactions

In November 2019, the Company issued a convertible

note in the principal amount of $ 300,000

to one accredited investor and in December

2019, the Company issued a convertible note in the principal amount of $ 125,000

to a director and a convertible

note in the principal amount of $ 25,000

to our chief executive officer

(collectively, the "2019 Notes").

The Notes had a term of 2

years and accrued interest at an

annual rate of 12 %

through the date of conversion.

In September and October 2020, the entire $ 450,000

of 2019 Notes, plus accrued interest

totaling $ 45,204 ,

was converted into 710,444

shares of common stock.

In July 2021, the Company entered into a consulting

agreement with a director resulting in monthly payments of $ 6,000 .

In addition, the Company issued 150,000

Changes in fair value primarily relate to changes in the Company’s stock price during the

period, with increases in the stock price increasing the liability and decreases in the stock price reducing the liability.

19 – Related-Party Transactions

July 2021, the Company entered into a consulting agreement with a director resulting in monthly payments of $ 6,000 .

In addition, the

Company issued 150,000

options to purchase common stock at $ 2.51

which vest quarterly over the one-year term of the agreement.

In January 2022, the agreement was amended to increase the monthly

payments to $ 10,000 .

In January 2022, the Company entered into a note

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

as further described in Note 6.

Additional related party transactions are disclosed

Note 20 – Subsequent Events

Subsequent events have been evaluated through the

date of this filing and there are no subsequent events which require disclosure except as set forth below:

In May and July 2022, the Company entered into

inventory purchase orders totaling $ 11,175,000 .

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

experiencing significant disruptions and delays.

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

modify these orders prior to their shipment.

AND DISAGREEMENTS WITH ACCOUNTANTS ON ACCOUNTING AND FINANCIAL DISCLOSURE

There were no changes in or disagreements with accountants on accounting

and financial disclosure.

which vested quarterly over the one-year term of the

In January 2022, the agreement was amended to increase the monthly payments to $ 10,000 .

The agreement expired in June 2022.

January 2022, the Company entered into a note agreement with an employee in the principal amount of $510,323, as further described in

related party transactions are disclosed in Note 12.

20 - Segment Reporting

define our segments as those operations whose results are regularly reviewed by our Chief Operating Decision Maker (“CODM”)

to analyze performance and allocate resources.

Therefore, segment information is prepared on the same basis that management reviews financial

information for operational decision-making purposes.

Our CODM is a committee comprised of our CEO, COO, and CFO.

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

Enterprise is building the

infrastructure to manage drone fleets, fly and provide services remotely, and navigate confined industrial interior spaces and

dangerous military environments.

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

CODM allocates resources to and assesses the performance of our two operating segments based on the operating segments’ net sales

and gross profit.

The following table sets forth information by reportable segment for the year ended April 30, 2023.

the year ended April 30, 2023

of goods sold

( 13,177,485 )

( 1,755,305 )

( 12,194,271 )

( 27,127,061 )

expenses, net

$ ( 13,610,302 )

( 1,730,386 )

( 11,747,049 )

( 27,087,737 )

following table sets forth specific asset categories which are reviewed by our CODM in the evaluation of operating segments:

of April 30, 2023

receivable, net

21 - Sale of Consumer Segment

November 21, 2022, the Board of Directors approved a Stock Purchase Agreement (the "SPA") between the Company, Unusual Machines,

(“UM”) and Jeffrey Thompson, the founder and Chief Executive Officer of the Company (the “Principal Stockholder”),

related to the sale of the Company’s consumer business consisting of Rotor Riot, (“RR”), and Fat Shark Holdings

(“FS”), to UM for cash and stock consideration totaling $18 million.

November 21, 2022, the Board of Directors approved the SPA and its submission to shareholders for approval.

On March 8, 2023, shareholders

approved the sale to UM.

April 13, 2023, the SPA was amended (the “Amendment”) and the total purchase price increased to $20 million.

Under the Amendment,

the cash consideration payable at closing was reduced to $3.0 million, as may be adjusted for working capital on the closing date (increased

for positive working capital and decreased for negative working capital), and the non-cash consideration adjusted to provide for payment

of $17 million in shares of UM’s common stock (the “Unusual Common Stock”) issued at the initial public offering price

for the Unusual Common Stock.

All of the Unusual Common Stock will be subject to a lock-up of 180 days and be eligible for registration.

The Company estimates that working capital at closing will range between $2.0 to $4.5 million.

In addition, closing of the SPA is subject

to successful completion of an initial public offering (the “IPO”) by UM in the minimum amount of $5 million, and the listing

of UM’s common stock listing on a public stock exchange such as the NYSE or Nasdaq.

filed a registration statement on Form S-1 for an initial public offering of its Common Stock with the SEC.

UM is required to deposit

$1.0 million cash with the Company upon effectiveness of the registration statement with the SEC.

Note 22 – Commitments and Contingencies

Legal Proceedings

In the ordinary course of business, we may be involved,

at times, in various legal proceedings involving a variety of matters.

We do not believe there are any pending legal proceedings that

will have a material adverse effect on our business, consolidated financial position, results of operations, or cash flows.

outcome of such legal matters is inherently unpredictable and subject to significant uncertainties.

We have not recorded any litigation

reserves as of April 30, 2023.

One pending legal matter is an action filed against

Teal Drones and the Company in a U.S.

District Court in California.

The complaint asserts claims for breach of contract, and the

unlawful conversion and sale of shares of common stock that plaintiff alleges to have purchased in Teal prior to its acquisition by the

The complaint also alleges breach of fiduciary duty and seeks in excess of $1 million in damages.

The Company believes the complaint

is without merit and is vigorously contesting the complaint.

23 - Subsequent Events

July 13, 2023, the parties executed Amendment No.

2 to the Share Purchase Agreement (the "SPA") which extends the term of the

Agreement to September 30, 2023.

On the closing date, the Principal Stockholder, Jeffrey Thompson, will enter into a lock-up agreement

under which he will agree not to sell 100,000 shares of common stock of Unusual Machines for nine months from the effective date of the

UM Registration Statement.

These shares shall provide security for Red Cat's and the Thompson's indemnification obligations under the

In addition, Unusual agrees to register 300,000 shares of Unusual Common Stock that it will issue to Red Cat upon closing

the SPA in a Registration Statement to be filed within 120 days after the Closing.

CHANGES IN AND DISAGREEMENTS WITH ACCOUNTANTS ON ACCOUNTING AND FINANCIAL DISCLOSURE

were no changes in or disagreements with accountants on accounting and financial disclosure.

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

What changed 10-K

Item 8. Financial Statements and Supplementary Data