What changed in this filing

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Item 8. Financial Statements and Supplementary Data

2024-08-08 compared with 2023-07-27 · 889 added, 849 removed, 212 unchanged (89% of the section changed)

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

STATEMENTS AND SUPPLEMENTARY DATA

RED CAT HOLDINGS,

INDEX TO CONSOLIDATED

FINANCIAL STATEMENTS

Report of Independent Registered Accounting Firm

Consolidated Balance Sheets as of April 30, 2024

Consolidated Statements of Operations for the

years ended April 30, 2024 and 2023

Consolidated Statements of Shareholders’

Equity for the years ended April 30, 2024 and 2023

Consolidated Statements of Cash Flows for the

years ended April 30, 2024 and 2023

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

We have audited the accompanying consolidated

balance sheets of Red Cat Holdings as of April 30, 2023 and 2022, the related statements of operations, stockholders' equity (deficit),

and cash flows for the years then ended, and the related notes (collectively referred to as the "financial statements").

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

2023 and 2022, and the results of its operations and its cash flows for the years then ended, in conformity with accounting principles

generally accepted in the United States.

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

These financial statements are the responsibility

of the Company's management.

Our responsibility is to express an opinion on the Company's financial statements based on our audit.

are a public accounting firm registered with the Public Company Accounting Oversight Board (United States) ("PCAOB") and are

required to be independent with respect to the Company in accordance with the U.S.

federal securities laws and the applicable rules and

regulations of the Securities and Exchange Commission and the PCAOB.

We conducted our audit in accordance with

the standards of the PCAOB.

Those standards require that we plan and perform the audit to obtain reasonable assurance about whether the

financial statements are free of material misstatement, whether due to error or fraud.

The Company is not required to have, nor were we

engaged to perform, an audit of its internal control over financial reporting.

As part of our audits we are required to obtain an understanding

of internal control over financial reporting but not for the purpose of expressing an opinion on the effectiveness of the Company’s

internal control over financial reporting.

the Board of Directors and

Stockholders of Red Cat Holdings, Inc.

on the Financial Statements

have audited the accompanying consolidated balance sheets of Red Cat Holdings, Inc.

(the “Company”) as of April 30, 2024

and 2023, and the related consolidated statements of operations, stockholders’ equity, and cash flows for the years then ended,

and the related notes (collectively referred to as the “financial statements”).

In our opinion, the financial statements

present fairly, in all material respects, the financial position of the Company as of April 30, 2024 and 2023, and the results of its

operations and its cash flows for the years then ended, in conformity with accounting principles generally accepted in the United States

financial statements are the responsibility of the Company’s management.

Our responsibility is to express an opinion on the Company’s

financial statements based on our audits.

We are a public accounting firm registered with the Public Company Accounting Oversight Board

(United States) (PCAOB) and are required to be independent with respect to the Company in accordance with the U.S.

federal securities

laws and the applicable rules and regulations of the Securities and Exchange Commission and the PCAOB.

conducted our audits in accordance with the standards of the PCAOB.

Those standards require that we plan and perform the audit to obtain

reasonable assurance about whether the financial statements are free of material misstatement, whether due to error or fraud.

is not required to have, nor were we engaged to perform, an audit of its internal control over financial reporting.

As part of our audits,

we are required to obtain an understanding of internal control over financial reporting, but not for the purpose of expressing an opinion

on the effectiveness of the Company’s internal control over financial reporting.

Accordingly, we express no such opinion.

Our audit included performing procedures

to assess the risks of material misstatement of the financial statements, whether due to error or fraud, and performing procedures that

respond to those risks.

Such procedures included examining, on a test basis, evidence regarding the amounts and disclosures in the financial

Our audit also included evaluating the accounting principles used and significant estimates made by management, as well as

evaluating the overall presentation of the financial statements.

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

Critical Audit Matter

Critical audit matters are

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

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

challenging, subjective, or complex judgments.

We determined that there

are no critical audit matters.

BF Borgers CPA PC

audits included performing procedures to assess the risks of material misstatement of the financial statements, whether due to error

or fraud, and performing procedures that respond to those risks.

Such procedures included examining, on a test basis, evidence regarding

the amounts and disclosures in the financial statements.

Our audits also included evaluating the accounting principles used and significant

estimates made by management, as well as evaluating the overall presentation of the financial statements.

We believe that our audits

provide a reasonable basis for our opinion.

Audit Matters

critical audit matter communicated below is a matter arising from the current period audits of the financial statements that were communicated

or required to be communicated to the audit committee and that:

(1) relate to accounts or disclosures that are material to the financial

statements and (2) involved our especially challenging, subjective, or complex judgments.

The communication of a critical audit matter

does not alter in any way our opinion on the financial statements, taken as a whole, and we are not, by communicating the critical audit

matter below, providing separate opinion on the critical audit matter or on the accounts or disclosures to which they relate.

of Goodwill and Intangibles

discussed in Note 8 to the financial statements, the Company acquired various businesses which resulted in the recording of significant

amounts of goodwill and intangible assets.

The intangible assets management identified consisted of proprietary technology and tradenames.

Management determined the fair value of the intangible assets using a discounted cash flow model.

Key assumptions used the model to determine

fair value were cash flow projections, the discount rate, long-term growth rates, effective tax rate and the estimated periods to be

benefitted of the identifiable intangible assets with definite lives.

identified the valuation of goodwill and intangible assets for the businesses acquired as a critical audit matter because

of the significant assumptions management makes in determining the estimates.

Auditing management’s assumptions involved a high

degree of auditor judgment and increased audit effort, including the use of valuation specialists, as management’s assumptions

are subjective, and changes in these assumptions could have a significant impact on the fair value of the businesses acquired.

Our audit procedures

related to the Company’s valuation of goodwill and intangible assets for the businesses acquired included the following, among

evaluated the reasonableness of management’s cash flow projections by comparing management’s prior forecasts to historical

results for the Company, as well as inquiry of management of the reporting unit regarding the expected future operations, review of publicly

available industry information, and testing the completeness and accuracy of the data used in the projections.

Additionally,

we evaluated the reasonableness of management’s use of various rates and other assumptions by comparing them to comparable companies

and market data.

we evaluated the estimated periods to be benefitted of the identifiable intangible assets with definite lives by comparing to comparable

companies and market data, as well as recalculating the current and accumulated amortization.

have served as the Company’s auditor since 2024.

Balance Sheets

receivable, net

from related party

Beach, California

RED CAT HOLDINGS, INC.

Consolidated Balance Sheets

(As restated)

Current assets

and equipment, net

lease right-of-use assets

long term assets

AND STOCKHOLDERS' EQUITY

obligations - short term

lease liabilities

derivative liability

to related party

Marketable securities

Accounts receivable, net

Current assets of discontinued operations

Total current assets

Intangible assets, net

Equity method investee

Note receivable

Property and equipment, net

Operating lease right-of-use assets

Long-term assets of discontinued operations

Total long-term assets

LIABILITIES AND STOCKHOLDERS' EQUITY

Current liabilities

lease liabilities

obligations - long term

long term liabilities

and contingencies

Stockholders'

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

outstanding 986,676

Accounts payable

Accrued expenses

Debt obligations - short term

Customer deposits

Operating lease liabilities

Current liabilities of discontinued operations

Total current liabilities

Operating lease liabilities

Debt obligations - long term

Long-term liabilities of discontinued operations

Total long-term liabilities

Commitments and contingencies

Stockholders' equity

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

issued and outstanding 4,676 and 986,676

Common stock - shares authorized 500,000,000 ;

issued and outstanding 74,289,351 and 54,568,065

Additional paid-in capital

Accumulated deficit

( 81,130,732 )

outstanding 54,568,065 and

paid-in capital

( 57,078,103 )

Accumulated other comprehensive income (loss)

Total stockholders' equity

TOTAL LIABILITIES AND STOCKHOLDERS' EQUITY

See accompanying notes.

RED CAT HOLDINGS, INC.

Consolidated Statements of Operations

(As restated)

Cost of goods sold

Gross profit (loss)

Operating Expenses

Research and development

Sales and marketing

General and administrative

Impairment loss

Total operating expenses

Operating loss

( 17,876,212 )

other comprehensive income

( 25,371,756 )

stockholders' equity

LIABILITIES AND STOCKHOLDERS' EQUITY

accompanying notes.

Statements of Operations

ended April 30,

of goods sold

and development

and marketing

and administrative

based compensation

operating expenses

Other (income) expense

Gain on divestiture of consumer segment

( 9,642,427 )

Impairment on equity method investment

Equity method loss

Investment loss (income), net

Interest expense

Other (income) expense

Net loss from continuing operations

( 21,526,696 )

(income) expense

in fair value of derivative liability

( 26,376,643 )

Loss from discontinued

( 2,525,933 )

(income) expense

( 1,730,386 )

1 unchanged sentence

$ ( 28,107,029 )

per share - basic and diluted

average shares outstanding - basic

accompanying notes.

Statements of Stockholders' Equity

Loss per share - basic and diluted

Continuing operations

Discontinued operations

Loss per share - basic and diluted

Weighted average shares outstanding - basic and diluted

See accompanying notes.

RED CAT HOLDINGS, INC.

Consolidated Statements of Shareholders’ Equity

Accumulated Other

Preferred Stock

Comprehensive

April 30, 2021

$ ( 15,809,928 )

of preferred stock

Exercise of warrants

Acquisition of Skypersonic

Acquisition of Teal

Public offerings,

net of $ 5,959,800

of issuance costs

Income (Loss)

Balances, April 30, 2022, as restated

Stock based compensation

Vesting of restricted stock units

Shares issued for services

Unrealized gain on marketable securities

Currency translation adjustments

Balances, April 30, 2023, as restated

Stock based compensation

Vesting of restricted stock units

Conversion of preferred stock

Issuance of common stock through ATM facility, net

Exercise of stock options

restricted stock units, net of payroll tax withholding

Shares issued

loss on marketable securities

( 1,474,294 )

Currency translation

( 11,689,128 )

April 30, 2022

$ 106,821,384

$ ( 27,499,056 )

$ ( 1,470,272 )

restricted stock units, net of payroll tax withholding

Shares issued

gain on marketable securities

Currency translation

( 27,087,737 )

Public offering, net of $ 804,400 of issuance costs

Unrealized gain on marketable securities

Currency translation adjustments

Balances, April 30, 2024

See accompanying notes.

RED CAT HOLDINGS, INC.

Consolidated Statements of Cash Flows

Year ended April 30,

Cash Flows from Operating Activities

(As restated)

$ ( 24,052,629 )

April 30, 2023

$ ( 28,107,029 )

Net loss from discontinued operations

( 2,525,933 )

( 1,730,386 )

accompanying notes.

Statements of Cash Flows

ended April 30,

Flows from Operating Activities

Net loss from continuing operations

( 21,526,696 )

( 26,376,643 )

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

Adjustments to reconcile net loss to net cash from operations:

Stock based compensation - options

Stock based compensation - restricted units

Common stock issued for services

Amortization of intangible assets

Realized loss from sale of marketable securities

Gain on divestiture of consumer segment

( 9,642,427 )

Impairment on equity method investment

Equity method loss

Impairment on goodwill and intangible assets

Changes in operating assets and liabilities

Accounts receivable

( 3,641,228 )

in operating assets and liabilities, net of acquisitions

( 5,707,525 )

( 2,688,264 )

Operating lease right-of-use assets and liabilities

Customer deposits

Accounts payable

Accrued expenses

Net cash used in operating activities of continuing operations

( 17,687,063 )

lease right-of-use assets and liabilities

( 24,313,674 )

cash used in operating activities

Cash Flows from Investing Activities

Proceeds from divestiture of consumer segment

Purchases of property and equipment

( 2,450,213 )

Proceeds from sale of marketable securities

Investment in SAFE agreement

Net cash provided by investing activities of continuing operations

Cash Flows from Financing Activities

Proceeds from issuance of common stock:

Public offering, net

ATM facility, net

Payments under debt obligations

Payments of taxes related to equity transactions

Exercise of stock options

Proceeds from related party obligations

Payments under related party obligations

Net cash provided by (used in) financing activities of continuing operations

( 1,215,325 )

Flows from Investing Activities

acquired through acquisitions

of property and equipment

Discontinued operations

Operating activities

( 4,885,746 )

from sale of marketable securities

of marketable securities

Investing activities

Financing activities

Net cash used in discontinued operations

( 4,885,746 )

Investment agreement

cash provided by (used in) investing activities

Net increase (decrease) in Cash

Cash, beginning of period

Cash, end of period

Cash of discontinued operations

Cash of continuing operations, end of period

Cash paid for interest

Cash paid for income taxes

Non-cash transactions

Equity method

investment from divestiture of consumer segment

Note receivable from

divestiture of consumer segment

Unrealized gain on marketable securities

Conversion of preferred stock into common stock

Shares withheld as payment of note receivable

Taxes related to net share settlement of equity awards

See accompanying notes.

RED CAT HOLDINGS, INC.

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS

April 30, 2024 and 2023

Note 1 – The Business

The Company was originally incorporated in February

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 wholly owned operating subsidiaries.

Beginning in January 2020, the Company expanded the scope

of its drone products and services through four acquisitions, including:

In January 2020, the Company acquired Rotor Riot, a provider of First Person View (“FPV”) drones and equipment, primarily to consumers.

The purchase price was $ 1,995,114 .

In November 2020, the Company acquired Fat Shark Holdings (“Fat Shark”), a provider of FPV video goggles to the drone industry.

The purchase price was $ 8,354,076 .

In May 2021, the Company acquired Skypersonic which provided hardware and software solutions that enable drones to complete inspection services in locations where GPS is either denied or not available, yet still record and transmit data even while being operated from thousands of miles away.

The purchase price was $ 2,791,012 .

In August 2021, the Company acquired Teal Drones (“Teal”), a leader in commercial and government Unmanned Aerial Vehicles (“UAV”) technology.

The purchase price was $ 10,011,279 .

Following the Teal acquisition

in August 2021, we concentrated on integrating and organizing these businesses.

Effective May 1, 2022, we established the Enterprise segment

(“Enterprise”) and the Consumer segment (“Consumer”) to focus on the unique opportunities in each sector.

initial strategy was to provide UAVs to commercial enterprises, and the military, to navigate dangerous military environments and confined

industrial and commercial interior spaces.

Subsequently, Enterprise narrowed its near-term attention on the military and other government

Skypersonic's technology has been redirected to military applications and its operations consolidated into Teal.

On December 11, 2023,

the Company completed a firm commitment underwritten public offering with ThinkEquity of 18,400,000 shares of common stock which generated

gross proceeds of $ 9,200,000 and net proceeds of approximately $ 8,400,000 .

On February 16, 2024 ,

we closed the sale of our Consumer segment, consisting of Rotor Riot and Fat Shark, to Unusual Machines.

The sale reflects the Company's

decision to focus its efforts and capital on defense where it believes that there are more opportunities to create long term shareholder

See Note 3 and Note 9.

Note 2 – Summary of Significant Accounting

Basis 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.

Restatement of Previously Issued Consolidated Financial Statements –

The Company’s Consolidated Balance Sheet as of April 30, 2023, Consolidated Statement of Operations, Stockholders’ Equity

and Cash Flows for the year then ended, and its Notes to the Consolidated Financial Statements for the year ended April 30, 2023, which

were originally filed with the U.S.

Securities and Exchange Commission (the “SEC”) on July 27, 2023 (the “Original Form

10-K”), have been restated.

The Company revised its accounting estimate of the life of an operating lease that was previously reported

in its Original Form 10-K.

Upon further evaluation, the Company determined that prior year adjustments were necessary.

These Consolidated

Financial Statements were restated to reflect a change in accounting estimate of the life of the operating lease under FASB ASC Topic

842 from three to nine years.

Additionally, the Company revised its financial statements to remove derivative liabilities due to

erroneously reporting warrants from our convertible note financings, as described in Note 18, as having a derivative component.

The impacts of these restatements are detailed

in the tables below:

Consolidated Balance Sheet

As of April 30, 2023

Operating lease right-of-use assets

Total long-term assets

Operating lease liabilities, current

Warrant derivative liability

Total current liabilities

Operating lease liabilities, long-term

Total long-term liabilities

Additional paid-in capital

Accumulated deficit

( 54,586,793 )

Flows from Financing Activities

from exercise of warrants

from related party obligations

under related party obligations

( 57,078,103 )

under debt obligations

of taxes related to equity awards

from issuance of common stock, net

cash (used in) provided by financing activities

( 2,491,310 )

(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

Total shareholders’ equity

Total liabilities and stockholders’ equity

Consolidated Statement of Operations

For the year ended April 30, 2023

Change in fair value of derivative liability

$ ( 1,019,292 )

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.

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.

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

Shares issued

Promissory note issued

Total Purchase

Assets acquired

Accounts receivable

Proprietary technology

Non-compete agreement

assets acquired

Liabilities assumed

Accounts payable and accrued expenses

Customer deposits

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.

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

Total Purchase Price

Assets acquired

Accounts receivable

Proprietary technology

Non-compete agreement

assets acquired

Liabilities assumed

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

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

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

Total Purchase Price – shares

Assets acquired

Accounts receivable

Other current assets

Proprietary technology

assets acquired

Liabilities assumed

Accounts payable and accrued expenses

Customer deposits

Notes payable

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

$ ( 27,087,737 )

1 unchanged sentence

$ ( 1,019,292 )

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:

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

presented as originally reported as of April 30, 2023 are exclusive of Discontinued Operations with the exception of (i) change in fair

value of derivative liability, (ii) net loss, and (iii) Consolidated Balance Sheet totals.

The Consolidated Statement of Cash Flows is

not presented above as there was no change in net cash used in operating activities of continuing operations.

Principles of Consolidation

– Our consolidated financial statements include the accounts of our wholly owned subsidiaries

which include Teal and Skypersonic as well as Rotor Riot and Fat Shark which were sold on February 16, 2024.

Non-majority owned investments,

including the formerly wholly owned subsidiaries Rotor Riot and Fat Shark, are accounted for using the equity method when the Company

is able to significantly influence the operating policies of the investee.

Intercompany transactions and balances have been eliminated.

Consumer segment businesses are characterized as discontinued operations in these financial statements.

The operating results and

cash flows of discontinued operations are separately stated in those respective financial statements.

Use of Estimates – The

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

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

reported amounts of revenue and expenses during the reporting period.

Actual results could differ from those estimates.

Significant estimates reflected in these financial statements include those

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

Significant estimates

reflected in these financial statements include those used to (i) complete purchase price accounting for acquisitions, (ii) the evaluation of long-term assets, including goodwill, for impairment,

and (iii) the evaluation of other-than-temporary-impairment of equity method investments.

Cash and Cash Equivalents – At April

30, 2024, we had cash of $ 6,067,169 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 were classified and accounted for as available-for-sale securities.

These securities were primarily invested in corporate bonds

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

Our available-for-sale securities were carried at fair

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

Once realized, any gains or losses

were recognized in the statement of operations.

We have elected to present accrued interest income

separately from marketable securities on our consolidated balance sheets.

Accrued interest income was $ 0 and $ 151,671 as of April 30,

2024 and April 30, 2023, respectively, and was included in other current assets.

We did not write off any accrued interest income during

the years ended April 30, 2024 and April 30, 2023.

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, 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.

Concentration

of Credit Risk – Financial instruments, which potentially subject the Company to concentrations of credit risk, include

trade receivables.

In the normal course of business, the Company provides credit terms to its customers.

Accordingly, the Company

performs ongoing credit evaluations of its customers, generally does not require collateral and considers the credit risk profile of

the customer from which the receivable is due in further evaluating collection risk.

Customers that accounted for 10% or greater of

accounts receivable, net as of April 30, 2024 and 2023 were as follows:

* Accounts Receivable was less than 10%

As of April 30, 2024, three customers accounted for equal to or greater

than 10% of total revenue, totaling 28%, 23% and 10%, respectively.

As of April 30, 2023, two customers accounted for equal to or greater

than 10% of total revenue, totaling 22% and 20%, respectively.

Inventories – Inventories,

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

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

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

At each balance sheet date, the Company evaluates 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.

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

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

Cost components include direct materials, direct labor, indirect overhead, as

well as in-bound freight.

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

reference measures including current product selling prices and recent customer demand, as well as evaluating for excess quantities

and obsolescence.

Goodwill 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

15 unchanged sentences

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.

The 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 profit, 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 are 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.

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.

Property 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 – nine to fifteen years.

Equity Method Investment – The

equity method of accounting is applied to investments in which the Company has an ownership interest of between 20% and 50%.

evaluates its equity method investments each reporting period for evidence of a loss in value that is other than a temporary decline.

Evidence of a loss in value might include, but would not necessarily be limited to, absence of an ability to recover the carrying amount

of the investment or the inability of the investee to sustain an earnings capacity that would justify the carrying amount of the investment.

The Company performed this analysis and concluded that its investment in UMAC was other-than-temporarily impaired and recognized an impairment

charge of $ 11,353,875 for the year ended April 30, 2024.

Leases – Accounting Standards Codification

(ASC) 842 requires the recognition of assets and liabilities associated with lease agreements.

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

8 unchanged sentences

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

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:

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:

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.

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.

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 these instruments approximates

fair value due to their short-term nature.

Revenue Recognition – The Company

recognizes revenue in accordance with ASC Topic 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 the shipment of goods to customers as orders are fulfilled, completion

of non-recurring engineering, completion of training, and customer support services.

The Company recognizes revenue upon shipment of product

or prototypes unless otherwise specified in the purchase order or contract.

Customer deposits totaled $ 53,939 and $ 155,986 at April 30,

2024 and April 30, 2023, 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 $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.

From time to time, non-recurring engineering contracts may involve the capitalization of engineering

prototypes, classified as contract assets.

Contract assets totaled $ 1,477,859 and $ 0 at April 30, 2024 and April 30, 2023, respectively.

The following table presents the Company’s

revenue disaggregated by revenue type:

Year Ended April 30,

Contract related

Product related

Research and Development – Research and

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

and development expenses also include third-party development and programming costs, materials, and a proportionate share of overhead

costs such as rent.

Warranty - The Company accrues an estimate of its exposure to warranty claims based upon both current and historical

product sales data and warranty costs incurred.

Product warranty reserves are recorded in current liabilities under accrued

Warranty liability was $ 372,000

and $ 90,000 as of April 30, 2024

and April 30, 2023 respectively.

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

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 former international subsidiary, Skyset, was the local Italian currency.

For that subsidiary, we translated assets and liabilities

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

We recorded 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 but are excluded from net loss.

Our other comprehensive loss is comprised of foreign currency translation adjustments

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

During the year ended April 30, 2024, comprehensive loss was $ 865,738

lower than net loss, related to unrealized gains on available-for-sale securities totaling $ 864,165 and foreign currency translation adjustments

During the year ended April 30, 2023, comprehensive loss was $ 609,155 lower than net loss, related to unrealized gains on available-for-sale

securities totaling $ 610,129 , partially offset by foreign currency translation adjustments of $ 974 .

Stock-Based 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.

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

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

date of grant.

Compensation cost is recognized 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 include:

April 30, 2024

April 30, 2023

Series B Preferred Stock, as converted

Stock options

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.

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 .

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 or are direct relatives of key management personnel of members of the Board of Directors.

Party transactions are disclosed in Note 20.

and Going Concern – The Company has never been profitable and has incurred net losses related to acquisitions, as well as costs

incurred to pursue its long-term growth strategy.

During the year ended April 30, 2024, the Company incurred a net loss from continuing

operations of $ 21,526,696 and used cash in operating activities of continuing operations of $ 17,687,063 .

As of April 30,

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.

2024, working capital for continuing operations totaled $ 18,746,419 .

These financial results and our financial position at April

30, 2024 raise substantial doubt about our ability to continue as a going concern.

However, the Company has recently taken actions

to strengthen its liquidity.

On December 11, 2023, we completed a public offering of 18,400,000 shares of common stock which

generated net proceeds of approximately $8,400,000 as further described in Note 1 and Note 16.

In addition, the Company’s operating

plan for the next twelve months has been updated to reflect recent operating improvements.

Revenues have accelerated and are expected

to continue growing.

The Company’s manufacturing facility is scaling production and gross profits are projected to increase.

If necessary, the Company will seek

to obtain additional debt financing for which there can be no guarantee.

to year end, as further described in Note 22, the Company sold its equity method investment for $4,400,000.

Management has concluded

that these recent positive developments alleviate any substantial doubt about the Company’s ability to continue its operations,

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

3 – Divestiture of Consumer Segment

February 16, 2024, the Company

closed the sale of Rotor Riot and Fat Shark to Unusual Machines.

The sale was conducted pursuant to a Share Purchase Agreement dated November

21, 2022, as amended on April 13, 2023, July 10, 2023, and December 11, 2023 (the “SPA”).

The transaction closed concurrently

with UMAC’s initial public offering and listing on the NYSE American exchange (“IPO”) under the symbol “UMAC.”

The total consideration received

by the Company was valued at $ 20 million and consisted of i) $ 1 million in cash, ii) $ 2 million in a secured promissory note (“Promissory

Note”), iii) $ 17 million in securities of Unusual Machines, and iv) a post-closing adjustment for excess working capital.

Secured Promissory Note

The Promissory Note from

Unusual Machines bears interest at a rate of 8% per year, is due 18 months from the date of issue, and requires monthly payments of interest

due in arrears on the 15th day of each month.

In the event of a Qualified Financing (defined as one or more related debt or equity

financings by UMAC resulting in net proceeds of at least $5 million, other than UMAC’s completed IPO), the Company may require payment

of this Promissory Note in whole or in part upon written notice given within 10 days of the Qualified Financing.

During the occurrence

and continuance of any event of default under the Note, The Company may, at its option, convert the amounts due under the Note to common

stock of UMAC in whole or in part from time to time.

The conversion price will be a 10% discount to the average daily volume weighted

average price for UMAC’s common stock over the 10 days preceding the conversion price.

Conversions under the Note will be limited

such that no conversion may be made to the extent that, after giving effect to the conversion, the Company, together with its affiliates,

would beneficially own in excess of 4.99% of UMAC’s common stock.

This limit may be increased by the Company upon 61 days written

Unusual Machines Securities

The $ 17 million worth of UMAC common stock was valued at the IPO price for UMAC’s common stock of $4.00 per share, resulting in

4,250,000 shares of UMAC common stock being issued to the Company (representing approximately 49% of UMAC’s issued and outstanding

common stock after giving effect to the IPO and to the issuance of common stock to the Company upon closing of the IPO).

Working Capital

purchase price was adjusted for working capital as of the closing date.

Actual working capital excess amounts increased the

principal amount of the Promissory Note dollar for dollar.

Working capital as of closing was

finalized at $ 2 million,

as further described in Note 22.

segment has been classified as Discontinued Operations and reported in accordance with the applicable accounting standards.

below are the results of operations for the Consumer segment for:

Cost of goods sold

Gross (Loss) Profit

Operating Expenses

Research and development

Sales and marketing

General and administrative

Total operating expenses

Operating loss

( 2,503,229 )

( 1,755,305 )

Other expense (income)

Interest expense

Other expense (income)

Net loss from discontinued operations

$ ( 2,525,933 )

$ ( 1,730,386 )

and liabilities for the Consumer segment included:

April 30, 2024

April 30, 2023

Current assets

Accounts receivable, net

Total current assets

Intangible assets, net

Operating lease right-of-use assets

Total long term assets

Current liabilities

Accounts payable

Accrued expenses

Customer deposits

Operating lease liabilities

Total current liabilities

Long term liabilities - Operating lease liabilities

Working capital

4 – 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

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.

were no marketable securities at April 30, 2024.

At April 30, 2023, marketable securities

consisted solely of corporate bonds and were classified at Level 2 in the Fair Value Hierarchy.

Fair value, cost basis, and

unrealized losses totaled $ 12,814,038 ,

$ 13,678,203 , and $ 864,165

at April 30, 2023, respectively.

5 – Inventories

as of April 30 consisted of:

consisted of the following:

April 30, 2024

April 30, 2023

Raw materials

Work-in-process

Finished goods

6 – Other Current Assets

current assets as of April 30 consisted of:

current assets included:

April 30, 2024

April 30, 2023

Contract asset

Prepaid expenses

Grant receivable

Prepaid inventory

3 unchanged sentences

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.

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.

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 agreed not to sell

or transfer 110,983 shares

of common stock held at the Company's transfer agent until the Note was repaid.

In addition, the employee has 20,833 shares

of restricted stock vesting monthly in calendar 2022, of which 3,000

shares 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

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

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

owed by the employee, $ 31,604

1 unchanged sentence

of penalties and interest.

The Note was repaid

in full in August 2022.

repaid in full in August 2022.

8 – 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

Carrying Value

assets relate to acquisitions completed by the Company, including those described in Note 1, and were as follows:

April 30, 2024

April 30, 2023

Accumulated Amortization

Proprietary technology

$ ( 1,917,612 )

$ ( 1,271,112 )

relationships

finite-lived assets

indefinite-lived assets

intangible assets, net

Non-compete agreements

Customer relationships

Total finite-lived assets

( 1,982,612 )

( 1,345,885 )

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.

Total indefinite-lived assets

Total intangible assets, net

$ ( 1,982,612 )

$ ( 1,345,885 )

technology and non-compete agreements are being amortized over 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:

of April 30, 2024, expected amortization expense for finite-lived intangible assets for the next five years is as follows:

Fiscal Year Ended:

2 unchanged sentences

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

at April 30, 2022

November 2020

April 2023 - Impairment loss

( 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 .

Balance at April 30, 2023

February 2024 – Divestiture

Rotor Riot, Fat Shark

( 7,924,282 )

Balance at April 30, 2024

in the amounts presented above is goodwill related to other insignificant transactions.

Following the establishment of the Enterprise

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

This 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.

The Company completes a formal evaluation of the carrying

value of its intangible assets, including goodwill, at the end of each fiscal year.

Based on (i) the operating results for Skypersonic

since its acquisition in May 2021, (ii) its consolidation into Teal, (iii) our current expectations of its future business conditions

and trends, including its projected revenues, expenses, and cash flows, the Company recognized an impairment charge of $ 2,826,918 in April

During FY2024, an impairment change of $ 412,999 was recognized related to Skypersonic’s proprietary technology.

9 – Equity Method Investment

of April 30, 2024, the Company owned a 46% interest in Unusual Machines.

The primary business operations include selling first-person-view

video goggles for drone pilots, drones, parts and related equipment to the consumer marketplace.

UMAC’s financial statements are prepared

in accordance with GAAP.

See Note 3 and Note 22 for additional information.

information for UMAC is derived from UMAC’s Form 10-Q for the quarter ending March 31, 2024 and was as follows:

Current assets

Long-term assets

Current liabilities

Long-term liabilities

$ ( 1,106,001 )

Company’s investments in UMAC have been impacted by the following:

Initial investment, February 16, 2024

Equity method loss

( 11,353,875 )

Investment balance, April 30, 2024

computation of both the initial investment as of February 16, 2024 and investment balance as of April 30, 2024, is based on the fair market

value of UMAC’s common stock.

10 – 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.

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

April 30, 2024

April 30, 2023

Equipment and related

Leasehold improvements

Furniture and fixtures

Accumulated depreciation

Net carrying value

expense totaled $ 568,813 and $ 311,545 for the years ended April 30, 2024 and 2023, respectively.

11 – Other Long-Term Assets

long term assets as of April 30 consisted of:

long-term assets included:

April 30, 2024

April 30, 2023

SAFE agreement

Security deposits

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.

under which it made a payment of $ 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.

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

2 unchanged sentences

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.

The Company evaluates the investment for any indications of impairment in value on a quarterly

No factors indicative of impairment were identified during the year ended April 30, 2024.

12 – Right of Use Assets and Liabilities

of April 30, 2024, the Company had operating type leases for real estate and no finance type leases.

The Company’s leases have remaining

lease terms of up to 6.67 years, including options to extend certain leases for up to six years.

Operating lease expense totaled $351,369

for the year ended April 30, 2024, including period cost for short-term, cancellable, and variable leases, not included in lease liabilities,

of $4,950 for the year ended April 30, 2024.

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

1 unchanged sentence

December 2024

Orlando, Florida

San Juan, Puerto Rico

Troy, Michigan

Grantsville, Utah

December 2026

information related to operating leases for the year ended April 30, 2024 was:

5 unchanged sentences

Fiscal Year Ended:

Imputed interest

Total liability

13 – Debt Obligations

Decathlon Capital

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.

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

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 .

Principal and interest is payable in monthly installments

of $ 49,275 until maturity on December 31, 2024.

The balance outstanding at April 30, 2024 and April 30, 2023 totaled $ 370,537 and $ 895,709 ,

respectively.

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.

which 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 at April 30, 2024 and April 30, 2023

totaled $ 1,334 and $ 878 ,

respectively.

Vendor Agreement

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

1 unchanged sentence

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 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

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.

and paid in full in July 2022.

Corporate Equity

in October 2021, and amended in January 2022, Teal financed a total of $ 120,000

of leasehold improvements with Corporate Equity, LLC.

The loan bears interest at 8.25 %

annually and requires monthly payments of $ 3,595

through December 2024.

The balance outstanding at April 30, 2024 and April 30, 2023 totaled $ 27,495

respectively.

Ascentium Capital

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 .

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.

principal payments are due as follows:

Short term – through April 30, 2024

Long term – thereafter

Monthly payments of $ 656

are payable through October 2024.

The balance outstanding at April 30, 2024 and April 30, 2023 totaled $ 3,538

respectively.

annual principal payments at April 30, 2024 were as follows:

Fiscal Year Ended:

14 – 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.

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.

The parties agreed that the funds would bear interest at

5 % annually until repaid.

The balance was repaid in full in May 2021.

January 2020, in connection with the acquisition of Rotor Riot, the Company assumed a line of credit obligation of the seller, BRIT, LLC,

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

The remaining balance of $ 37,196 plus accrued interest totaling $ 292 was paid

in October 2022.

15 – 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.

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

Since inception, we have incurred net losses

in each year of operations.

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

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

In addition, there was

no deferred provision for any of these reporting periods.

April 30, 2024 and April 30, 2023, we had accumulated deficits of approximately $ 81,100,000

6 unchanged sentences

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

2023 and 2022.

2024 and April 30, 2023.

16 – Common Stock

1 unchanged sentence

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

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

Each share of common

stock is entitled to one vote.

A summary of shares of common stock issued by the Company since April 30, 2022 is as follows:

Shares outstanding as of April 30, 2022

Vesting of restricted

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

Vesting of restricted stock to Board

Vesting of restricted stock to consultants

Shares issued

Shares outstanding as of April 30, 2023

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

Vesting of restricted stock to employees,

net of shares withheld of 27,189 to pay taxes

Vesting of restricted stock to Board

Vesting of restricted stock to consultants

Conversion of preferred stock

Issuance of common

stock through ATM facilities

Issuance of common

stock through public offering

Exercise of stock

Shares outstanding as of April 30, 2024

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

In August 2023,

we entered into a sales agreement (“the 2023 ATM Facility”) with ThinkEquity LLC (“ThinkEquity”), which provides

for the sale, in our sole discretion, of shares of our common stock through ThinkEquity, as our sales agent.

accordance with the terms of the ATM Sales Agreement, the Company may offer and sell shares of our common stock, par value $0.001 per

share, having an aggregate offering price of up to $4,375,000.

The issuance and sale of these

shares by us pursuant to the 2023 ATM Facility are deemed “at the market” offerings as defined in Rule 415 under the Securities

Act of 1933, as amended (the “Securities Act”), and are registered under the Securities Act.

We pay a commission of up to

2.5% of gross sales proceeds of any common stock sold under the 2023 ATM Facility.

the year ended April 30, 2024, we sold an aggregate of 53,235 shares of common stock under the 2023 ATM Facility, at an average price

of $1.07 per share, for gross proceeds of approximately $57,000 and net proceeds of approximately $55,700, after deducting commissions

and other offering expenses payable by us.

Additionally, the Company incurred legal fees of approximately $46,000 establishing the 2023

ATM Facility.

In December 2023, the Prospectus Supplement dated August 8, 2023 was amended to change the aggregate offering price under

the ATM facility to up to $4,375,000.

of April 30, 2024, approximately $4,318,000 of common stock remained available to be sold under the 2023 ATM Facility, subject to certain

conditions as specified in the sales agreement.

December 2023, the Company entered into an underwriting agreement with ThinkEquity LLC, as representative of the underwriters, pursuant

to which the Company agreed to sell to the underwriters in a firm commitment underwritten public offering (the “Offering”)

an aggregate of 16,000,000 shares of the Company’s common stock, par value $0.001 per share (the “Common Stock”), at

a public offering price of $0.50 per share.

The Company also granted the underwriters a 45-day option to purchase up to an additional

2,400,000 shares of Common Stock to cover over-allotments.

Offering closed on December 11, 2023, resulting in the issuance of 18,400,000 shares of Common Stock which generated gross proceeds

of $9,200,000.

Net proceeds to the Company from the Offering, after deducting the underwriting discount,

the underwriters’ fees and expenses and the Company’s estimated Offering expenses, were approximately $8,400,000.

17 – 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,

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

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

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.

982,000 shares of Series B Stock were converted into 818,334 shares of common stock in June 2023.

Shares outstanding

at April 30, 2024 totaled 4,676 which are convertible into 3,896

shares of common stock.

18 – 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.

Company issued 5 year warrants to investors in connection with two convertible note financings.

The warrants have an exercise price

The warrants were

valued using the multinominal lattice The value of the warrants was included in the determination of the initial accounting for each

summary of the warrants issued and their fair values were:

at April 30, 2023

Outstanding at April

of Transaction

March and April 2021, we received $ 201,249

we have received $ 301,248

related to the exercise of 268,332

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

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

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

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

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

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

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

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

during the year ended April 30:

December 2023, the Company issued warrants to purchase 736,000 shares of common stock to the placement agent of its common stock

The warrants have a five-year term and an exercise price of $0.625.

The following table presents the range of assumptions

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

Risk-free interest rate

0.79 – 0.85 %

Expected dividend yield

1 unchanged sentence

Expected volatility

222.45 – 223.17 %

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

The following table summarizes the changes in warrants

outstanding since April 30, 2022.

Weighted-average

20 unchanged sentences

245.57 – 260.06 %

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

summary of options activity under the Plan since April 30, 2022 was:

Weighted-Average

9 unchanged sentences

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.

As of April 30, 2024 and April 30, 2023, there was $ 943,648 and $ 2,940,239 of unrecognized stock-based compensation expense

related to unvested stock options which is expected to be recognized over the weighted average periods of 1.95 and 1.94 years, respectively.

Restricted Stock

summary of restricted stock activity under the Plan since April 30, 2022 was:

1 unchanged sentence

Unvested and outstanding as of April 30, 2022

( 1,062,372 )

Unvested and outstanding as of April 30, 2023

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

Unvested and outstanding as of April 30, 2024

Stock Compensation

compensation expense by functional operating expense was:

Research and development

and marketing

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

Sales and marketing

General and administrative

Stock compensation expense pertaining to options totaled

$ 2,619,501 and

$ 1,617,982 for the year ended April 30, 2024 and 2023, respectively.

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

warrant liability upon settlement of the derivative liability and as of April 30, 2023 and 2022 are set forth below.

In addition, the

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

April 30, 2023

April 30, 2022

Risk-free interest rate

2.83 – 4.51 %

0.52 – 2.87 %

Expected dividend yield

Expected term (in years)

Expected volatility

138.49 – 235.23 %

211.02 – 292.28 %

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

in fair value

( 1,019,292 )

( 1,042,129 )

Balance, end of period

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.

Stock compensation expense pertaining to restricted

stock totaled $ 989,766 and $ 2,038,742 for the year ended April 30, 2024 and 2023, respectively.

20 - 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 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

February 2024, the Company sold Rotor Riot and Fat Shark to Unusual Machines, as further described in Note 3 and Note 9.

Chief Executive Officer is a direct relative of a member of the Company’s management.

related party transactions are disclosed in Note 14.

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.

21 – Commitments and Contingencies

the ordinary course of business, we may be involved, at times, in various legal proceedings involving a variety of matters.

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.

However, the outcome of such legal matters is inherently unpredictable and subject to significant

uncertainties.

We have not recorded any litigation reserves as of April 30, 2024.

legal matter is an action filed against Teal 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 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 Company.

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.

The Company plans to vigorously assert defenses to the complaint.

Another pending legal matter is an action filed against

Teal in a U.S.

District Court in Delaware.

The complaint asserts claims for breach of contract which management denies.

We are asserting

vigorous defenses to the complaint.

Additionally, the Company has filed a lawsuit against the complainant for Tortious Interference with

Contractual Relations and Prospective Contractual Relations.

No discovery or other significant developments in the Lawsuit have occurred.

22 – 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.

Subsequent events have been evaluated

through the date of this filing and there are no subsequent events which require disclosure, except as follows:

As described in Note 3, the SPA pertaining

to the divestiture of the Consumer segment provided that the purchase price was to be increased on a dollar-for-dollar basis by the amount

by which the working capital exceeded the agreed working capital (the “Working Capital Adjustment”).

After negotiations between

the parties, it was determined in July 2024 that UMAC owed the Company $2,000,000 as a Working Capital Adjustment.

As a result, UMAC issued the Company

$4,000,000 of its 8% Promissory Notes due November 30, 2025 (the “New Notes”) reflecting (i) satisfaction and settlement of

working capital adjustments and (ii) a maturity date extension to November 30, 2025.

On July 22, 2024, the Company sold

all of its securities in UMAC to two unaffiliated third-party purchasers (the “Purchasers”).

As part of the transaction,

on July 22, 2024, the Company entered into an Exchange Agreement (the “Exchange Agreement”) with UMAC pursuant to which the

Company exchanged 4,250,000 shares of UMAC’s common stock, par value $0.001 per share, for 4,250 shares of UMAC’s newly designated

Series A Convertible Preferred Stock (the “Series A”).

The Company sold the Series A and the New Notes to the Purchasers

for $4.4 million in cash pursuant to a Purchase Agreement in a transaction that closed on July 22, 2024.

CHANGES IN AND DISAGREEMENTS WITH ACCOUNTANTS ON ACCOUNTING AND FINANCIAL DISCLOSURE

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

There 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