~~N/A~~
(Former Name, Former Address and Former Fiscal Year, if Changed Since Last Report)

Indicate by check mark whether the registrant (1) has filed all reports required to be filed by Section 13 or 15(d) of the Securities Exchange Act of 1934 during the preceding 12 months (or for such shorter period that the registrant was required to file such reports), and (2) has been subject to such filing requirements for the past 90 days. Yes ☑ No ☐

Indicate by check mark whether the registrant has submitted electronically every Interactive Data File required to be submitted pursuant to Rule 405 of Regulation S-T (§232.405 of this chapter) during the preceding 12 months (or for such shorter period that the registrant was required to submit such files). Yes☑ No ☐

Indicate by check mark whether the registrant is a large accelerated filer, an accelerated filer, a non-accelerated filer, smaller reporting company, or an emerging growth company. See definition of ~~“large~~"large accelerated ~~filer”~~filer", ~~“accelerated filer”~~"accelerated filer" and ~~“smaller~~"smaller reporting ~~company”~~company" and ~~“emerging~~"emerging growth ~~company”~~company" in Rule 12b-2 of the Exchange Act.

If an emerging growth company, indicate by check mark if the registrant has elected not to use the extended transition period for complying with any new or revised financial accounting standards provided pursuant to Section 13(a) of the Exchange Act. ☐

Indicate by check mark whether the registrant is a shell company (as defined in Rule 12b-2 of the Exchange Act). Yes ☐No☑

As of ~~March 22,~~December 15, 2021, there were ~~27,460,926~~53,835,579 shares of the ~~registrant’s~~registrant's common stock outstanding.


~~Item 3.~~	~~Defaults Upon Senior Securities~~	30

~~Item 4.~~	~~Mine Safety Disclosures~~	30

~~Item 5.~~	~~Other Information~~	30

~~Item 6.~~	~~Exhibits~~	30

~~SIGNATURES~~

Our unaudited interim condensed consolidated financial statements and accompanying notes are prepared in accordance with accounting principles generally accepted in the United States of America ~~(“GAAP”~~("GAAP"). In the opinion of management, the unaudited interim condensed consolidated financial statements reflect all adjustments of a normal recurring nature that are necessary for a fair presentation of the results for the interim periods presented. Interim results are not necessarily indicative of results for a full year. The information included in this Form 10-Q should be read in conjunction with the financial information included in the Annual Report on Form 10-K for the fiscal year ended April 30, ~~2020~~2021 of Red Cat Holdings, Inc. (the ~~“Company” or “Red Cat”~~"Company"), filed with the Securities and Exchange Commission ~~(“SEC”~~("SEC") on August ~~13, 2020.~~12, 2021.

~~The Company~~Red Cat Holdings ("Red Cat" or the "Company") was originally incorporated in February 1984. Since April 2016, the ~~Company’s~~Company's primary business has been to provide products, services and solutions to the drone ~~industry. It operates in two sectors of the drone industry. Rotor Riot, LLC, an Ohio limited liability company and a~~industry which it presently does through its five wholly owned ~~subsidiary (“Rotor Riot”), designs~~subsidiaries. Teal Drones is a leader in commercial and sells drones and related components. Rotor Riot is focused on the consumer market and sells its products through its e-commerce platform operated at www.rotorriot.com. The Company is also developing software solutions to provide secure cloud-based analytics, storage and services for the drone industry. Its initial product candidate is Dronebox, a blockchain technology that records, stores and analyzes flight data and information from a drone, much like the “black box” utilized by the airline industry. The Company plans to offer Dronebox as a Software-as-a-Service platform.

~~The Company closed the acquisition of~~government UAV technology. Fat Shark Holdings ~~(“Fat Shark”) on November 2, 2020. Fat Shark~~ is a ~~leading~~ provider of ~~headsets~~First Person View (FPV) video goggles. Rotor Riot sells FPV drones and ~~goggles for professional FPV (First Person View) racers~~equipment, primarily to the consumer marketplace. Skypersonic provides software and hardware solutions that enable drones to complete inspection services in locations where GPS (global positioning systems) are not available, yet still record and transmit data even while being operated from thousands of miles away. Red Cat Propware is developing drone ~~pilots~~flight data analytics and has an estimated 85% share of its market. The Company expects that Fat Shark will generate a majority of its revenue over the next 12 months. This acquisition continues the Company’s efforts to become a fully-integrated drone business with a strong supply chain,storage solutions, as well as ~~a provider of software solutions for the drone industry.~~diagnostic products and services.

Effective May 15, 2019, we closed a Share Exchange Agreement (the “SEA”) with TimeFireVR, Inc., (“TimeFire”), a Nevada corporation. Under the SEA, we acquired approximately 83.33% of TimeFire’s outstanding share capital on a fully-diluted basis. We issued: (i) 196,667 shares of our common stock, (ii) 2,169,068 shares of our newly-designated Series A Preferred Stock, and (iii) 4,212,645 shares of our newly-designated Series B Preferred Stock. In ~~total, the common stock, Series A Preferred Stock, and Series B Preferred Stock issued under the SEA were valued at $117,754.~~

The transaction was accounted for as a “reverse acquisition” as the stockholders of Red Cat possessed majority voting control of the company immediately following the acquisition. In this reverse merger, the financial results of Red Cat Propware, Inc., (the accounting acquirer), have been presented as the continuing operations ofJanuary 2020, the Company ~~since inception. The transaction was accounted for as follows:~~

~~Series A Preferred Stock is convertible to common stock at~~consummated a ratio of 8.33 shares of common stock for each share of preferred stock and votes together with the common stock on an as-converted basis. The new Series A Preferred Stock converted automatically to common stock upon the effectiveness of the reverse split of our common stock in August 2019 except for shares subject to an ownership limitation. This common stock and Series A Preferred Stock issued under the SEA constituted approximately 83.33% of our issued and outstanding share capital on a fully-diluted basis on the date of issuance.

Series B Preferred Stock is convertible to common stock at a ratio of 0.83 shares of common stock for each share of preferred stock and votes together with the common stock on an as-converted basis. The Series B Preferred Stock issued under the SEA constituted approximately 15.64% of our issued and outstanding share capital on a fully-diluted basis on the date of issuance.

~~In July 2019, we changed our name from TimeFire VR Inc. to Red Cat Holdings, Inc.~~

~~In August 2019, we changed our fiscal year to April 30 which was the historical fiscal year of Red Cat Propware, Inc.~~

In August 2019, we effected a reverse stock split (the “Reverse Stock Split”) of our outstanding shares of common stock at a ratio of one-for-twelve hundred (1 for 1,200). All references in this report to shares of the Company’s common stock, including prices per share of its common stock, reflect the Reverse Stock Split.

~~On December 31, 2019, the Company entered into an Agreement of Merger (the “Merger Agreement”) with Rotor Riot and the three members of Rotor Riot. On January 23, 2020, the Merger was consummated~~ under which Rotor Riot Acquisition Corp, a wholly owned ~~Delaware~~ subsidiary of the Company, merged with and into Rotor Riot, with Rotor Riot continuing as the surviving entity and a wholly owned subsidiary of the Company.

Under the Merger Agreement, each member of Rotor Riot received its pro rata portion of the total number of shares of the ~~Company’s~~Company's common stock issued based on (A)(i) $3,700,000 minus (ii) $915,563 (which included certain debt and other obligations of Rotor Riot and its Chief Executive Officer that the Company agreed to assume (the ~~“Assumed Obligations”~~"Assumed Obligations") divided by (B) the ~~variable~~volume weighted average price ~~(“VWAP”~~("VWAP") of the ~~Company’s~~Company's common stock for the twenty trading days prior to the closing of the Merger. Based on a share issuance value of ~~$2,784,437~~ $2,784,437 and a VWAP of ~~$1.25445,~~$1.25445, the Company issued an aggregate of 2,219,650 shares of common stock to the members of Rotor Riot.

Following the closing, of the ~~Merger Agreement, the former members of Rotor Riot owned approximately 10.4% of the Company. In addition, the Company’s~~Company's management ~~controls~~controlled the operating decisions of the combined company. Accordingly, we ~~have~~ accounted for the transaction as an acquisition of Rotor Riot by the Company. Based on purchase price accounting, we ~~have~~ recognized the assets and liabilities of Rotor Riot at fair value with the excess of the purchase price over the net assets acquired recognized as goodwill. The table below reflects the ~~Company’s estimates of the~~ acquisition date values of the purchase consideration, assets acquired, and liabilities assumed. The shares issued were valued at ~~$1,820,113 (2,219,650~~ $1,820,114 (2,219,650 shares issued times ~~$0.82~~ $0.82 per share which equaled the closing price of the ~~Company’s~~Company's common stock on the date that the merger agreement was consummated).A summary of the purchase price and its related allocation is as follows:

~~During the quarter ended January 31, 2021, the Company adjusted the initial carrying value of Goodwill to reflect the values of other intangible assets acquired as~~

The final purchase price allocation was determined by an independent valuation services firm. ~~These included~~ Customer Relationships with a value of ~~$39,000 and Brand Name with a value of $578,000. Customer relationships~~ $39,000 are being amortized over 7 years. The carrying value of Brand Name is not being amortized but will be reviewed quarterly and formally evaluated ~~on a quarterly basis, including a formal evaluation~~ at ~~year end.~~the end of each fiscal year.

In November 2020, the Company ~~entered into~~closed a share purchase agreement (“("Share Purchase ~~Agreement”~~Agreement") with ~~Greg French (“French”),~~ the ~~founder and~~ sole shareholder of Fat Shark Holdings (“("Fat ~~Shark”~~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~~$8,354,076 based on (i) the issuance of 5,227,273 shares of common stock with a value of ~~$6,351,076~~$6,351,076 on the date of closing (ii) a senior secured promissory note in the original principal amount of ~~$1,753,000 which matures on November 1, 2023,~~$1,753,000, and (iii) a cash payment of ~~$250,000.~~$250,000. The Share Purchase Agreement includes indemnification provisions, a two year non-compete agreement, and registration rights for the shares issued in the transaction. A summary of the purchase price and ~~initial purchase price~~its related allocation is as follows:

The final purchase price allocation was determined by an independent valuation services firm. Intangible assets included proprietary technology and non-compete agreement which are being amortized over 5 and 3 years, respectively. The carrying value of Brand Name is not being amortized but will be reviewed quarterly and formally evaluated at the end of each fiscal year.

In February 2021, the Company entered into Share Purchase and Liquidity Event Agreements (the "Skypersonic Agreements") with the founder and majority shareholder of Skypersonic, Inc., ("Skypersonic") and the holders of common stock and equity based agreements representing 97.46% of Skypersonic (the "Sellers"), pursuant to which, subject to the satisfaction of certain closing conditions, the Company would acquire all of the issued and outstanding share capital of Skypersonic for an aggregate of $3,000,000 in shares (the "Share Consideration") of the Company's common stock, based upon the VWAP of the Company's common stock at closing of the transaction (the "Skypersonic Transaction"). Prior to the closing, the Company provided $75,000 to fund operating costs of Skypersonic. This amount was capitalized as part of the purchase price. The transaction closed on May 7, 2021 and was paid through the issuance of 857,124 shares of common stock which had a fair market value of $3,291,356. Fifty (50%) percent of the Share Consideration (the "Escrow Shares") was deposited in an escrow account as security for indemnification obligations and any purchase price adjustments due to working capital deficiencies and any other claims or expenses. Under the Skypersonic Agreements, closing date working capital deficits in excess of $300,000 shall result in a reduction of the Share Consideration on a dollar of dollar basis.In October 2021, the Company and Skypersonic agreed to a reduction in the purchase price of $601,622 which resulted in the cancellation of 149,829 shares held in escrow. A revised summary of the purchase price and its related allocation is as follows:

~~II.~~9

~~Purchase Price Allocation~~

Assets Acquired
Cash $ 201,632
Accounts receivable 249,159
Other assets 384,232
Inventory 223,380
Goodwill 7,600,260
Total assets acquired $ 8,658,663

Liabilities Assumed
Accounts Payable and accrued expenses $ 279,393
Customer Deposits 25,194
Total liabilities assumed 304,587
Net assets acquired $ 8,354,076

The foregoing amounts reflect our current estimates of fair value as of the ~~November 2, 2020~~May 7, 2021 acquisition date. The Company expects to recognize fair values associated with the customer relationships acquired, as well as the ~~Fat Shark~~Skypersonic brand name, but has not yet accumulated sufficient information to assign such values. As additional information becomes known regarding the acquired assets and assumed liabilities, management may make adjustments to the opening balance sheet of the acquired company up to the end of the measurement period, which is a one-year period following the acquisition date. The determination of the fair values of the acquired assets and liabilities assumed (and the related determination of estimated lives of depreciable tangible and intangible assets) requires significant ~~judgement.~~judgment.

On ~~October 5, 2020,~~August 31, 2021, the Company closed the acquisition of Teal Drones Inc., (“Teal”). The acquisition of Teal was made pursuant to an Agreement and Plan of Merger by and among Red Cat Holdings, Inc., a ~~private offering~~Nevada corporation (the “Company”), Teal Acquisition I Corp., a Delaware corporation (“Acquisition”) and wholly-owned subsidiary of ~~convertible promissory notes~~the Company, and Teal, as amended and restated August 31, 2021 (the ~~“2020 Notes”~~“Merger Agreement” or “Merger”).

On August 31, 2021, Teal entered into an Amended and Restated Loan and Security Agreement with Decathlon Alpha IV, L.P. (“DA4”) (the “Loan Agreement”) in the ~~aggregate~~amount of $1,670,294 (the “Loan”), representing the outstanding principal amount previously due and owing by Teal to DA4. Interest on the Loan accrues at a rate of ~~$600,000 which included~~ten (10%) percent per annum. Principal and interest under the ~~issuance~~term Loan is payable monthly in an amount equal to $49,275 until maturity on December 31, 2024.

Pursuant to the Merger Agreement, we acquired all of ~~five-year warrants~~the issued and outstanding share capital of Teal in exchange for $14,000,000 of our common stock, par value $0.001 per share (“Common Stock”) at the Volume Weighted Average Price (VWAP) of our Common Stock for the 20 trading days ended August 31, 2021 of $2.908 per share, reduced by the amount of Teal debt assumed consisting of approximately $1.67 million payable to ~~purchase an aggregate~~DA4, and approximately $1,457,000 in working capital deficit, for a net closing date payment of ~~399,998~~$10,872,753. At closing, we issued 3,738,911 shares of ~~common stock. The 2020 Notes accrue interest at the rate~~our Common Stock (the “Stock Consideration”) which had a fair market value of 12% per annum and are payable two years from the date of issuance. The 2020 Notes are convertible into common stock at a conversion price equal to the lower of (i) $1.00 per share or, (ii) at a price equal to 75%$10,431,562. Fifteen (15%) of the Share Consideration (the “Escrow Shares”) was deposited in an escrow account for a period of eighteen (18) months as security for indemnification obligations, any purchase price adjustments due to working capital deficiencies and any other claims or expenses. In December 2021, the Company and Teal agreed to a reduction in the purchase price of ~~an offering of common stock that results~~$438,058 which resulted in the ~~listing for trading on~~cancellation of 150,639 shares held in escrow. The fair market value of the cancelled shares was $420,283. A revised summary of the purchase price and its related allocation is set forth below.

The Stock Consideration payable under the Merger Agreement may be increased upon the achievement of certain ~~stock exchanges (a “Qualified Offering”~~milestones set forth in the Merger Agreement (the “Earn-Out Consideration”). ~~The 2020 Notes also contain protection from dilution which would lower~~Additional shares of Common Stock may become issuable by the ~~conversion price~~Company in the event ~~of a lower priced issuance. An event of default could also result in a reduction~~that within twenty-four (24) months following closing of the ~~conversion price.~~Merger, Teal realizes certain revenue targets. A total of Sixteen Million Dollars ($16,000,000) in additional shares of Common Stock will be issued if sales and services of Teal's Golden Eagle drones equal at least Thirty-six Million Dollars ($36,000,000). A total of Ten Million Dollars ($10,000,000) in additional shares of Common Stock will be issued if sales and services of Teal's Golden Eagle drones equal at least $24 million ($24,000,000) but less than $36 million ($36,000,000). A total of Four Million Dollars ($4,000,000) in additional shares of Common Stock will be issued if sales and services of Teal's Golden Eagle drones equal at least Eighteen Million Dollars ($18,000,000) but less than Twenty-Four Million Dollars ($24,000,000). Additional Share Consideration, if earned, is issuable at the VWAP of the Company within thirty (30) days of the determination that Earn-Out Consideration is payable.

The foregoing amounts reflect our current estimates of fair value as of the August 31, 2021 acquisition date. The Company expects to recognize fair values associated with the customer relationships acquired, as well as the Teal brand name, but has not yet accumulated sufficient information to assign such values. As additional information becomes known regarding the acquired assets and assumed liabilities, management may ~~prepay any portion~~make adjustments to the opening balance sheet of the ~~2020 Notes, without penalty or premium, upon ten business days’ notice. No conversion will be completed if it would result in~~acquired company up to the ~~noteholder, including its affiliates, owning more than 9.99%~~end of the ~~Company’s outstanding common stock immediately after completing such conversion.~~measurement period, which is a one-year period following the acquisition date. The ~~Warrants are exercisable at $1.50 per share. The exercise price will be reduced to a price equal to 75%~~determination of the ~~price per share~~fair values of the ~~common stock offered in a Qualified Offering.~~

On January 27, 2021, the Company closed a private offering of convertible promissory notes (the “2021 Notes”) in the aggregate principal amount of $500,000 which included the issuance of five-year warrants to purchase a number of shares of common stock equal to 135% of the dollar amount of the Note. The 2021 Notes accrue interest at the rate of 12% per annum and are payable two years from the date of issuance. The 2021 Notes are convertible into common stock at a conversion price equal to the lower of (i) $1.00 per share, if the conversion occurs prior a Qualified Offering, or (ii) a 25% discount of the price per share of common stock offered in the Qualified Offering, if the conversion occurs simultaneous with the Qualified Offering. The Company may prepay any portion of the 2021 Notes, without penalty or premium, upon ten business days’ notice. The Warrants are exercisable for a period of five years at a price equal to the lower of (i) $1.50 per share, or (ii) a 25% discount to the price per share of common stock offered in the Qualified Offering.

~~The financial statements have been prepared on a going concern basis which contemplates the realization of~~acquired assets and liabilities assumed (and the ~~settlement~~related determination of ~~liabilities~~estimated lives of depreciable tangible and commitments in the normal course of business. As reflected in our accompanying financial statements, we have negative working capital of $8,898,797 at January 31, 2021 and have accumulated losses totaling approximately $12.7 million through January 31, 2021. Management recognizes that these operating results and our financial position raise substantial doubt about our ability to continue as a going concern. The financial statements do not include any adjustments related to the recoverability and classification of recorded asset amounts and the classification of liabilities that might be necessary should we be unable to continue as a going concern.intangible assets) requires significant judgment.

We are presently seeking to address these going concern doubts through a number of actions including efforts to (a) raise capital through the public markets, (b) release additional commercial products and (c) pursue acquisitions of complementary, revenue generating companies which are accretive to our operating results. We can provide no assurance that any of these efforts will be successful or, that even if successful, that they will alleviate doubts about our ability to continue as a going concern.

Basis of Accounting - The financial statements and accompanying notes are prepared in accordance with ~~GAAP.~~accounting principles generally accepted in the United States ("GAAP").

Principles of Consolidation –- Our condensed consolidated financial statements include the accounts of our operating subsidiaries, Red Cat Propware, Inc., Rotor Riot, ~~LLC, and~~ Fat Sharking ~~Holdings.~~Holdings, Skypersonic, and Teal Drones. Intercompany transactions and balances have been eliminated.

Use of Estimates – - The preparation of financial statements in accordance with GAAP requires management to make estimates and assumptions that affect the reported amounts of assets and liabilities, the disclosure of contingent assets and liabilities at the date of the financial statements, and the reported amounts of revenue and expenses during the reporting period. Actual results could differ from those estimates. Significant estimates reflected in these financial statements include those used to (i) determine stock based compensation, ~~and~~ (ii) complete purchase price accounting for ~~acquisitions.~~acquisitions, and (iii) the accounting for derivatives.

Cash and Cash Equivalents –- At ~~January~~October 31, 2021, we had cash of ~~$471,652~~$11,559,758 in multiple commercial banks and financial services companies. We have not experienced any loss on these accounts and believe they are not exposed to any significant credit risk.

~~Other Assets~~Investments– ~~Other Assets~~Our investments have been classified and accounted for as available-for-sale securities. Our investment manager can sell any of our investment holdings at ~~January~~any time, and therefore, we have classified our investments as short term. Our available-for-sale securities are carried at fair value, with unrealized gains and losses reported within investment income in our consolidated statements of operations.

We have elected to present accrued interest receivable separately from investments on our consolidated balance sheets. Accrued interest receivable was $371,095 as of October 31, 2021 ~~include $473,545 of prepaid inventory, $22,948 of prepaid expenses,~~ and ~~$9,372 of security deposits.~~was recorded as other current assets. We did not write off any accrued interest receivable during the three months ended October 31, 2021.

~~Leases~~~~– Leases at January 31, 2021 are short term in nature and do not require accounting under the lease accounting standards.~~

~~Goodwill~~Accounts Receivable, net - Accounts receivable are recorded at the invoiced amount less allowances for doubtful accounts. The Company's estimate of the allowance for doubtful accounts is based on a multitude of factors, including historical bad debt levels for its customer base, past experience with a specific customer, the economic environment, and other factors. Accounts receivable balances are written off against the allowance when it is probable that the receivable will not be collected.

Inventories – Inventories, which consist of raw materials, work-in-process, and finished goods, are stated at the lower of cost or net realizable value, with cost being determined by the average-cost method, which approximates the first-in, first-out method. Cost components include direct materials and direct labor, as well as in-bound freight. At each balance sheet date, the Company evaluates ending inventories for excess quantities and obsolescence.

Goodwill- Goodwill represents the excess of the purchase price of an acquisition over the estimated fair value of identifiable net assets acquired. The measurement periods for the valuation of assets acquired and liabilities assumed ends as soon as information on the facts and circumstances that existed as of the acquisition date becomes known, not to exceed 12 months. Adjustments in a purchase price allocation may require a change in the amounts allocated to goodwill during the periods in which the adjustments are determined.

We perform an impairment test at the end of each fiscal year, or more frequently if indications of impairment arise. We have a single reporting unit, and consequently, evaluate goodwill for impairment based on an evaluation of the fair value of the Company as a whole.

~~Fair Value~~Leases - Effective August 1, 2021, the Company adopted Accounting Standards Codification (ASC) 842 titled “Leases” which requires the recognition of ~~Financial instruments~~ ~~– FASB ASC 820, “Fair Value Measurements and Disclosures” (“ASC 820”), provides rules for~~ assets and liabilities associated with lease agreements. The Company adopted ASC 842 on a modified retrospective transition basis which means that it will not restate financial information for any periods prior to August 1, 2021. Upon adoption, the Company recognized a lease liability obligation of $796,976 and a right-of-use asset for the same amount.

The Company determines if a contract is a lease or contains a lease at inception. Operating lease liabilities are measured, aton each reporting date, based on the present value of the future minimum lease payments over the remaining lease term. The Company's leases do not provide an implicit rate. Therefore, the Company uses an effective discount rate of 12% based on its recent debt financings. Operating lease assets are measured by adjusting the lease liability for lease incentives, initial direct costs incurred and asset impairments. Lease expense for minimum lease payments is recognized on a straight line basis over the lease term with the operating lease asset reduced by the amount of the expense. Lease terms may include options to extend or terminate a lease when they are reasonably certain to occur.

Fair Values, Inputs and Valuation Techniques for Financial Assets and Liabilities and Related Disclosures

The fair value ~~on a recurring basis. ASC 820 establishes a common definition for~~measurements and disclosure guidance defines fair value ~~to be applied to existing generally accepted accounting principles that require the use of fair value measurements,~~ and establishes a framework for measuring fair value. Fair value ~~and expands disclosure about such fair value measurements.~~

~~ASC 820 defines fair value~~is defined as the price that would be received to sell an asset or paid to transfer a liability in an orderly transaction between market participants at the measurement date. ~~Additionally, ASC 820~~In accordance with this guidance, the Company has categorized its recurring basis financial assets and liabilities into a three-level fair value hierarchy based on the priority of the inputs to the valuation technique.

The fair value hierarchy gives the highest priority to quoted prices in active markets for identical assets or liabilities (Level 1) and the lowest priority to unobservable inputs (Level 3). The inputs used to measure fair value may fall into different levels of the fair value hierarchy. In such cases, the level in the fair value hierarchy within which the fair value measurement in its entirety falls has been determined based on the lowest level input that is significant to the fair value measurement in its entirety. The Company's assessment of the significance of a particular input to the fair value measurement in its entirety requires judgment and considers factors specific to the ~~use~~asset or liability.

The levels of ~~valuation techniques that maximize~~ the ~~use of observable inputs and minimize the use of unobservable inputs. These inputs~~fair value hierarchy are ~~prioritized~~described below:

~~The Company accounts for its derivative liabilities, at~~A review of fair value hierarchy classifications is conducted on a ~~recurring basis under level 2.~~quarterly basis. Changes in the observability of valuation inputs may result in a reclassification of levels for certain securities within the fair value hierarchy.

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 and accrued expenses and debt. The carrying amounts of its cash, receivables, current assets, accounts payable, accrued expenses and current debt approximates fair value due to the short-term nature of these instruments.

When the Company estimates the fair values of the debt and warrants, and allocates the proceeds pro rata based on these values. The allocation of proceeds to the warrants results in the debt instrument being recorded at a discount from the face amount of the debt and the value allocated to the warrant is recorded to additional paid-in capital.

~~When the~~issues convertible debt or equity instruments that contain embedded derivative instruments that are to be bifurcated and accounted for as liabilities, the total proceeds from the convertible host instruments are first allocated to the bifurcated derivative instruments. The remaining proceeds, if any, are then allocated to the convertible instruments themselves, resulting in those instruments being recorded at a discount from their face ~~value.~~value but no lower than zero. Any excess amount is recognized as a derivative expense.

The Company has financial instruments that are considered derivatives or contain embedded features subject to derivative accounting. Embedded derivatives are valued separately from the host instrument and are recognized as derivative liabilities in the Company's balance sheet. The Company measures these instruments at their estimated fair value and recognizes changes in their estimated fair value in results of operations during the period of change.

In October 2020 and January 2021, the Company entered into convertible note agreements which included provisions under which the conversion price was equal to the lesser of an initial stated amount or the conversion price of a future offering. This variable conversion feature was recognized as a derivative. Both financings included the issuance of warrants which contained similar variable conversion features. The Company values these convertible notes and warrants using the multinomial lattice method that values the derivative liability within the notes based on a probability weighted discounted cash flow model. The resulting liability is valued at each reporting date and the change in the liability is reflected as change in derivative liability in the statement of operations.

Revenue Recognition –- The Company recognizes revenue in accordance with ASC 606, ~~“Revenue~~"Revenue from Contracts with ~~Customers”~~Customers", issued by the Financial Accounting Standards Board ~~(“FASB”~~("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~~Company's revenue transactions include a single component, specifically, the shipment of goods to customers as orders are ~~received.~~fulfilled. Customers pay at the time they order and the Company recognizes revenue upon shipment. The timing of the shipment of orders can vary considerably depending upon whether an order is for an item normally maintained in inventory or an order that requires assembly or unique parts. Customer deposits totaled ~~$96,580~~$117,842 and ~~$38,419~~$46,096 at ~~January~~October 31, 2021 and April 30, ~~2020,~~2021, respectively.

Research and Development- Research and development expenses include payroll, employee benefits, and other headcount-related expenses associated with product development. Research and development expenses also include third-party development and programming costs, as well as a proportionate share of overhead costs such as rent. Costs related to software development are included in research and development expense until technological feasibility is reached, which for our software products, is generally shortly before the products are released to production. Once technological feasibility is reached, such costs are capitalized and amortized as a cost of revenue over the estimated lives of the products.

Income Taxes - Deferred taxes are provided on the liability method, whereby deferred tax assets are recognized for deductible temporary differences and deferred tax liabilities are recognized for taxable temporary differences. Temporary differences are the differences between the reported amounts of assets and liabilities and their tax bases. Deferred tax assets and liabilities are adjusted for the effects of changes in tax laws and rates on the date of enactment.

Recent Accounting Pronouncements- Management does not believe that recently issued, but not yet effective accounting pronouncements, if adopted, would have a material effect on the accompanying condensed consolidated financial statements.

Foreign Currency - The functional currency of our international subsidiary is the local currency. For that subsidiary, we translate assets and liabilities to U.S. dollars using period-end exchange rates, and average monthly exchange rates for revenues, costs, and expenses. We record translation gains and losses in accumulated other comprehensive income as a component of stockholders' equity. Net foreign exchange transaction gains and losses resulting from the conversion of the transaction currency to functional currency are recorded in other income, net in the consolidated statements of operations.

Comprehensive Loss ~~–During~~- During the three and ~~nine~~six months ended ~~January~~October 31, 2021, differences between net loss and comprehensive loss totaled $922 and $1,591, respectively, relating to foreign currency translation adjustments. During the three and six months ended October 31, 2020, there were no differences between net loss and comprehensive loss. ~~Therefore, the consolidated statements of comprehensive loss have been omitted.~~

Stock-Based Compensation –- We use the estimated grant-date fair value method of accounting in accordance with ASC Topic 718, Compensation –- Stock Compensation. Fair value is determined using the Black-Scholes Model using inputs reflecting our estimates of expected volatility, term and future dividends. We ~~plan to estimate the forfeiture rate based on our historical experience but have made no such allowance to date~~recognize forfeitures as ~~our first issuances of stock based awards occurred in October 2019 and we have not experienced any forfeitures to date.~~they occur. We recognize compensation costs on a straight line basis over the service period which is generally 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 exercise of these common stock equivalents would dilute earnings per share if we become profitable in the future.

Related Parties –- Parties are considered to be related to us if they have control or significant influence, directly or indirectly, over us, including key management personnel and members of the Board of Directors. Related Party transactions are disclosed in Note ~~13.~~ 17.

We disclose and recognize the fair value of our assets and liabilities using a hierarchy that prioritizes the inputs to valuation techniques used to measure 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. The guidance establishes three levels of the fair value hierarchy as follows:

Level 1: Inputs are unadjusted, quoted prices in active markets for identical assets or liabilities at the measurement date;

Level 2: Inputs are observable, unadjusted quoted prices in active markets for similar assets or liabilities, unadjusted quoted prices for identical or similar assets or liabilities in markets that are not active, or other inputs that are observable or can be corroborated by observable market data for substantially the full term of the related assets or liabilities; and

Level 3: Unobservable inputs that are significant to the measurement of the fair value of the assets or liabilities that are supported by little or no market data.

Our financial instruments consist of cash and cash equivalents, short-term and long-term investments, accounts payable, and accrued liabilities. At October 31, 2021, and April 30, 2021, the carrying values of cash and cash equivalents, accounts payable, and accrued liabilities approximated fair value due to their short-term maturities.

The following tables set forth information related to our available-for-sales investment securities as of October 31, 2021:

Property and equipment consist of assets with an ~~electronic commerce company that facilitates payments between parties through online funds transfers.~~ estimated useful life greater than one year. Property and equipment are reported net of accumulated depreciation and the reported values are periodically assessed for impairment. Property and equipment as of October 31, 2021 was as follows:

The Company ~~processes~~has the following operating leases for real estate locations where it operates:

These lease agreements have remaining terms up to 2.84 years, excluding options to extend certain ~~customer payments ordered on~~leases for up to 5 years. The weighted average remaining lease term as of October 31, 2021 was 2.52 years. The Company used a discount rate of 12% to calculate its ~~e-commerce site through PayPal.~~ lease liability at October 31, 2021. Future lease payment obligations at October 31, 2021 were as follows:

In ~~November 2019, Rotor Riot entered into~~connection with the acquisition of Teal by the Company, Decathlon Capital agreed to restructure the terms of an existing loan agreement with ~~PayPal under which it borrowed $100,000. The note was repaid~~Teal. Effective August 31, 2021, the principal amount outstanding of $1,670,294 bears interest at 10% annually and is repayable in ~~January 2021. In January 2021, Rotor Riot borrowed $75,444 from PayPal which is being repaid~~monthly payments of $49,275 through ~~daily payments equal to 20% of the net amount of each customer payment.~~its December 31, 2024 maturity date. The balance outstanding at ~~January~~October 31, 2021 ~~was $75,369.~~totaled $1,591,988.

In May 2021, Teal entered into a convertible note agreement totaling $350,000 with one of its equity investors. The note bears interest at the applicable Federal Rate which was approximately 0.13% on the date of issuance. The Company has assumed this obligation which is payable upon demand.

In May 2020, Teal entered into a settlement agreement with a vendor that had been providing contract manufacturing services. At August 31, 2021, the Company assumed the outstanding balance of $387,500 which is payable in monthly installments of $37,500 with a final payment of $12,500 due in July 2022. The balance outstanding at October 31, 2021 totaled $350,000.

On February 2, 2021, Teal received a second Small Business Administration Paycheck Protection Program (“SBA PPP”) loan in the amount of $300,910. The loan is unsecured, non-recourse, and accrues interest at one percent annually. All or a portion of the loan is forgivable if used to fund qualifying payroll, rent and utilities. If not forgiven, the loan is payable over five years. Teal used the proceeds for the purposes required and the Company is currently working with the SBA regarding the loan forgiveness process.

Shopify Capital is an affiliate of Shopify, Inc. which provides sales software and services to the Company. The Company processes customer transactions ordered on the e-commerce site for Rotor Riot through Shopify. Shopify Capital has entered into multiple agreements with the Company in which it has ~~“purchased receivables”~~"purchased receivables" at a discount. Shopify retains a portion of the ~~Company’s~~Company's daily receipts until the purchased receivables have been paid. The Company recognizes the discount as a ~~finance charge,~~transaction fee, in full, in the month in which the agreement is executed. The Company assumed an existing agreement when it acquired Rotor Riot in January 2020. This agreement was repaid in May 2020. Since then, the Company has entered into the following agreements with Shopify:

In October 2021, Teal entered into an agreement with Corporate Equity to fund $60,000 of leasehold improvements. The loan bears interest at 8.25% annually and is repayable in monthly payments of $2,005 through its July 2024 maturity date. The balance outstanding at October 31, 2021 totaled $48,671.

In April 2021, Teal entered into an agreement under which it sold future customer payments, at a discount to Forward Financing. At August 31, 2021, the Company assumed the outstanding balance of $38,758. The balance outstanding totaled $25,210 at October 31, 2021. Weekly payments of $2,280 are being remitted to Forward Financing and the Company expects that the remaining balance will be repaid in January 2022.

In September 2021, Teal entered into a financing agreement with Ascentium Capital to fund the purchase of a fixed asset totaling $24,383. Monthly payments of $656 are being remitted to Ascentium Capital and the Company expects that the remaining balance will be repaid in September 2024. The balance outstanding at October 31, 2021 totaled $15,379.

PayPal is an electronic commerce company that facilitates payments between parties through online funds transfers. The Company processes certain customer payments ordered on its e-commerce site through PayPal. The Company has entered into multiple agreements under which PayPal provides an advance on customer payments, and then retains a portion of customer payments until the advance is repaid. PayPal charges a fee which the Company recognizes in full upon entering an agreement. A November 2019 agreement under which PayPal advanced $100,000 and charged a transaction fee of $6,900 was completed in January 2021. A January 2021 agreement under which PayPal advanced $75,444 and charged a transaction fee of $2,444 was completed in August 2021.

Short and long term debt obligations totaled $1,338,030 and $1,431,739 at October 31, 2021, respectively. Outstanding principal payments are due as follows:

Date of Transaction Purchased Receivables Payment to Company Withholding Rate Status at January 31, 2021

May 2020

$158,200

$140,000

17%

Completed – October 2020
September 2020 $209,050 $185,000 17% $101,910 Outstanding

In connection with the acquisition of Fat Shark in November 2020, the Company issued a secured promissory note in the amount of $1,753,000 to the seller who is now an employee. The note bears interest at 3% annually and matures in full in November 2023. In May 2021, the Company directed a refund of $132,200 related to prepaid inventory in China to the seller who is also based in China. The entire outstanding balance of $1,620,800 plus accrued interest totaling $45,129 was paid in September 2021.

~~BRIT, LLC, formally known as Brains Riding~~In January 2020, in ~~Tanks, LLC, was~~connection with the ~~largest shareholder~~acquisition of Rotor ~~Riot. Following the Merger, BRIT is a significant shareholder in the Company. The controlling shareholder of BRIT is now employed in a management role with the Company.~~

~~Under the terms of the Merger Agreement,~~Riot, the Company issued a promissory note ~~to BRIT, LLC~~ in the ~~principal~~ amount of ~~$175,000.~~$175,000 to the seller, BRIT, LLC. The ~~promissory~~ note bears interest at ~~4.75% annually and provides for monthly principal payments~~4.75% annually. The entire outstanding balance of ~~$3,500. The outstanding principal amount and all~~$85,172 plus accrued interest is due on the earlier of (a) January 23, 2021 or (b) the closing of an equity offering by the Company of at least $3,500,000. The principal balance and accrued interest on the note totaled $153,814 and $8,517 at January 31, 2021, respectively.totaling $12,942 was paid in October 2021.

BRIT incurred certain financial obligations in support of the operations of Rotor Riot which the Company assumed responsibility to pay at the effective time of the Merger. These obligations bear interest at annual rates ranging from ~~7.5%~~5.5% to ~~21.74%~~6.42%. The outstanding balance totaled ~~$167,730~~$138,771 and $166,529 at ~~January~~October 31, ~~2021.~~ 2021 and April 30, 2021, respectively.

In ~~August 2020 and December~~ 2020, the Company received advances totaling ~~$79,000~~ $79,000 from Aerocarve, which is controlled by the ~~Company’s~~Company's Chief Executive Officer. The parties agreed that the funds would bear interest at 5%5% annually until repaid. The balance owed at ~~January 31,~~April 30, 2021 was ~~$74,000.~~$74,000. The balance was repaid in full in May 2021.

In connection with the acquisition of Fat Shark as of November 2, 2020, the Company issued a secured promissory note in the amount of One Million Seven Hundred Fifty-Three Thousand Dollars ($1,753,000) to the seller, Greg French, which matures on November 1, 2023. The note bears interest at 3% annually.

In November 2019, wethe Company issued a convertible note in the principal amount of ~~$300,000~~ $300,000 to one accredited investor and in December 2019, wethe Company issued a convertible note in the principal amount of ~~$125,000~~ $125,000 to a director and a convertible note in the principal amount of ~~$25,000~~ $25,000 to our chief executive officer (collectively, the ~~“2019 Notes”~~"2019 Notes"). ~~In September and October 2020, the entire $450,000 of 2019 Notes, plus accrued interest totaling $45,204, was converted into 710,444 shares of common stock.~~ The Notes had a term of 2 yearsand accrued interest at an annual rate of ~~12%~~12% through the date of conversion. In September and October 2020, the entire $450,000 of 2019 Notes, plus accrued interest totaling $45,204, was converted into 710,444 shares of common stock.

In October 2020, wethe Company closed a private offering ~~in which we sold $600,000~~ of convertible promissory notes ~~(“Promissory Notes”~~(the "2020 Notes") in the aggregate principal amount of $600,000. The 2020 Notes accrued interest at 12% annually, had a two yearterm, and ~~issued~~were convertible into common stock at the lower of $1.00 or a 25% discount of the price per share of Common Stock offered in a future, qualified offering. The financing also included the issuance of warrants to purchase 399,998 shares of common stock. The ~~Promissory Notes accrue interest at 12% annually, and the principal and accrued interest is due two (2)~~Warrants are exercisable for a period of five years ~~from the date of issuance. The Promissory Notes are convertible into shares of our common stock~~ at a price equal to the lower of ~~$1.00,~~(1) $1.50 per share, or ~~(b)~~(2) at a price equal to 75% of the price per share of ~~securities sold~~the common stock offered in a ~~Qualified Offering.~~ future, qualified offering.

The ~~terms~~Company determined that the provision associated with a potential reduction in the conversion price of the notes and the exercise price of the warrant represented an embedded derivative financial liability. The derivative liability was initially valued at $728,587, of which $580,000 was applied as a ~~Promissory Note will be amended if~~debt discount to reduce the initial carrying value of the notes to zero with the remaining $20,000 applied against transaction fees. The derivative liability was valued using a ~~holder believes that~~multinomial lattice model with $460,588 and $267,999 related to the derivate features of the notes and warrants, respectively.

As of October 31, 2021, (a) the entire $600,000 of 2020 Notes have been converted into common stock and the related derivative liability eliminated, and (b) 266,666 of the warrants were outstanding with a ~~security issued,~~derivative liability of $783,613.

In January 2021, the Company closed a private offering of convertible promissory notes (the "2021 Notes") in the aggregate principal amount of $500,000. The 2021 Notes accrued interest at 12% annually, had a two year term, and were convertible into shares of the Company's common stock at the lower of $1.00 or ~~amended, after~~a 25% discount of the price per share of Common Stock offered in a future, qualified offering. The financing also included the issuance of ~~the Promissory Note includes any term or provision more favorable than those provided in the Notes.~~warrants to purchase 675,000 shares of common stock. The ~~warrants~~Warrants are exercisable for a period of five ~~(5)~~ years ~~and entitle the holder to purchase common shares~~ at a price equal to the lower of (i) $1.50 per share, or (ii) a 25% discount to the price per share of common stock offered in a ~~Qualified Offering. In March 2021,~~future qualified offering.

The Company determined that the Company received notice from 100% of the holders of their intent to convert the entire amount of their Notes, plus accrued interest, into shares of common stock. The conversion and issuance had not yet been processed and completed at the date of the filing of this report on Form 10-Q.

~~In January 2021, we closed~~provision associated with a ~~private offering, resulting~~potential reduction in gross proceeds of $500,000, of Units consisting of (i) a convertible note and (ii) a warrant to purchase the number of shares of common stock equal to 135% of the dollar amount of the Note. The convertible notes (the “Notes”) accrue interest at 12% annually, and the principal and accrued interest is due two (2) years from the date of issuance. The Notes are convertible into shares of our common stock at a price equal to the lower of (a) $1.00, if the conversion occurs prior to a “Qualified Offering”, or (b) a 25% discount of the price per share of common stock offered in a Qualified Offering. The Notes may be converted at any time by the holder but will automatically convert upon the closing of a Qualified Offering. The terms of a Note will be amended if a holder believes that a security issued, or amended, after the issuance of the Note includes any term or provision more favorable than those provided in the Notes. The conversion price of the Notes will be reduced if the Company issues any security at an effective price lower than the conversion price of the ~~Notes.~~notes and the exercise price of the warrant represented an embedded derivative financial liability. The ~~warrants are exercisable for five (5) years~~derivative liability was initially valued at $4,981,701, of which $500,000 was applied as a debt discount to reduce the initial carrying value of the notes to zero. The derivative liability was valued using a multinomial lattice model with $2,111,035 and ~~entitle the holder to purchase common shares at a price equal~~$2,870,666 related to the ~~lower~~derivative features of ~~(i) $1.50, or (ii) a 25% discount to~~ the ~~price per share~~notes and warrants, respectively.

As of October 31, 2021, (a) the entire $500,000 of 2021 Notes have been converted into common stock ~~offered in a Qualified Offering. In March 2021,~~and the ~~Company received notice from 100%~~related derivative liability eliminated, and (b) 540,000 of the ~~holders~~warrants were outstanding with a derivative liability of their intent to convert the entire amount of their Notes, plus accrued interest, into shares of common stock. The conversion and issuance had not yet been processed and completed at the date of the filing of this report on Form 10-Q.$1,592,952.

Our operating subsidiary, Red Cat Propware, Inc., is incorporated and based in Puerto Rico which is a commonwealth of the United States. We are not subject to taxation by the United States as Puerto Rico has its own taxing authority which passed the Export Services Act, also known as Act 20, in 2012. Under Act 20, eligible businesses are subject to a special corporate tax rate of 4%. Since inception, we have incurred net losses in each year of operations. Our current provision for the reporting periods presented in these financial statements consisted of a tax benefit against which we applied a full valuation allowance, resulting in no current provision for income taxes. In addition, there was no deferred provision for any of these reporting periods.

At ~~January~~October 31, 2021 and April 30, ~~2020,~~2021, we had accumulated deficits of approximately ~~$12,700,000~~$20,100,000 and ~~$2,600,000,~~$15,800,000, respectively. Deferred tax assets related to the future benefit of these net operating losses for tax purposes totaled approximately ~~$508,000~~$804,000 and ~~$104,000,~~$632,000, respectively, based on the Act 20 rate of 4%. Currently, we focus on projected future taxable income in evaluating whether it is more likely than not that these deferred assets will be realized. Based on the fact that we have not generated an operating profit since inception, we have applied a full valuation allowance against our deferred tax assets at ~~January~~October 31, 2021 and April 30, ~~2020.~~2021.

Our common stock has a par value of ~~$0.001~~ $0.001 per share. We are authorized to issue 500,000,000 shares of common stock. Each share of common stock is entitled to one vote.

On May 4, 2021, the Company closed an offering of 4 million shares of common stock which generated gross proceeds of $16 million and net proceeds of approximately $14.6 million.

On May 4, 2021, the Company issued 50,000 shares of common stock for investor relations services rendered.

On May 7, 2021, the Company issued 685,321 shares of common stock in connection with the acquisition of Skypersonic, as further described in Note 91.

On July 21, 2021, the Company closed an offering of 13,333,334 shares of common stock which generated gross proceeds of $60 million and net proceeds of approximately $55.5 million.

During the three months ended July 31, 2021, 62,500 shares of common stock were issued under the terms of a restricted stock agreement with an officer.

On August 10, 2021, the Company issued 1,321,966 shares of common stock in connection with the conversion of 158,704 shares of Series A Preferred Stock.

On August 15, 2021, the Company issued 20,000 shares of common stock for investor relations services rendered.

On August 31, 2021, the Company issued 3,588,272 shares of common stock in connection with the acquisition of Teal Drones, as further described in Note 1.

During the three months ended October 31, 2021, the Company issued 21,972 shares of common stock in connection with working capital adjustments related to the acquisition of Skypersonic, as further described in Note 1.

During the three months ended October 31, 2021, 243,615 shares of common stock were issued as stock based compensation.

Series A Preferred Stock (“("Series A ~~Stock”~~Stock") is convertible to common stock at a ratio of 8.33 shares of common stock for each share of Series A Stock, and votes together with the common stock on an ~~as-converted~~as-if-converted basis. ~~The Series A Preferred Stock was originally issued under the Securities Exchange Agreement, as further described in Note 1.~~ The Series A Stock was automatically converted into shares of common stock upon the effectiveness of our reverse stock split in August 2019, except for 208,704 shares which were subject to a limitation on the number of shares of common stock that can be held by the holder of those shares of Series A Stock. ~~Conversions~~Shares outstanding totaled 158,704 at July 31, 2021, and were converted into 1,321,996 shares of ~~Series A Stock into Common Stock since~~common stock on August ~~2019 are as follows:~~10, 2021.

~~Our~~ Series B Preferred Stock (“("Series B ~~Stock”~~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-converted~~as-if-converted basis. ~~The Series B Preferred Stock was originally issued under the Exchange Agreement, as further described in Note 1. Conversions of Series B Stock~~Shares outstanding at October 31, 2021 totaled 986,676 which are convertible into ~~Common Stock are as follows:~~

In September 2019, we received $152,239 in connection with the exercise of 469,874 warrants which had been issued in May 2019 as part of the Share Exchange Agreement. We also assumed a fully vested, restricted stock unit agreement requiring the issuance of 41,667822,230 shares of common ~~stock in May 2021, as well as a warrant to purchase 5,556 shares of common stock at an exercise price of $60.00 per share. This warrant expires in March 2021.~~stock.

In October 2020, the Company issued five-year warrants to purchase a total of399,998 shares in connection with the issuance of ~~$600,000~~ $600,000of convertible notes. The warrants have an initial exercise price of ~~$1.50~~ $1.50 which may be reduced to ~~(i)~~ a 25% discount of the price per share of Common Stock offered in a future qualified ~~offering and also include a ratchet provision~~.offering. The warrants were valued at $267,999 using the ~~multinomial~~multinominal lattice model and are considered derivative liabilities under ASC 815-40. The value of the warrants was included in the determination of the initial accounting for the financing including the calculation of the derivative liability and related expense.

In January 2021, the Company issued five-year warrants to purchase a total of675,000 shares in connection with the issuance of ~~$500,000~~ $500,000of convertible notes. The warrants have an initial exercise price of ~~$1.50~~$1.50 which may be reduced to ~~(i)~~ a 25% discount of the price per share of Common Stock offered in a future qualified ~~offering and also include a ratchet provision~~.offering. The warrants were valued at $2,870,666 using the ~~multinomial~~multinominal lattice model and are considered derivative liabilities under ASC 815-40.

The ~~following table presents the assumptions used to estimate the fair values~~value of the ~~warrants:~~warrants was included in the determination of the initial accounting for the financing including the calculation of the derivative liability and related expense.

In March and April 2021, we received $201,249 in connection with the exercise of 201,666warrants which had been issued in October 2020 and January 2021 as part of the convertible note financings described in note 10. Since these exercises resulted in the elimination of the derivative liability in the warrants, the derivative liability was reduced by $694,305 with a corresponding increase in additional paid in capital.

In May 2021, the Company issued warrants to purchase 200,000 shares of common stock to the placement agent of its common stock offering. The warrants have a five year term and an exercise price of $5.00.

In June 2021, we received $99,999in connection with the exercise of 66,666 warrants which had been issued in October 2020 as part of the convertible note financings described in Note 6. Since these exercises resulted in the elimination of the derivative liability in the warrants, the derivative liability was reduced by $163,141 with a corresponding increase in additional paid in capital.

In July 2021, the Company issued warrants to purchase 533,333 shares of common stock to the placement agent of its common stock offering. The warrants have a five year term and an exercise price of $5.625.

The following table summarizes the changes in warrants outstanding ~~issued to non-employees of the Company during the nine months ended January 31, 2021.~~ since April 30, 2020.

~~Effective August 2019, shareholders approved the~~The 2019 Equity Incentive Plan (the ~~“Plan”~~"Plan") ~~which~~ allows us to incentivize key employees, consultants, and directors with long term compensation awards such as stock options, restricted stock, and restricted stock units (collectively, the ~~“Awards”~~"Awards"). The number of shares issuable in connection with Awards under the Plan may not exceed ~~8,750,000.~~8,750,000.

In October 2019, we issued options to purchase 350,000 shares of common stock valued at $477,500. Options to purchase 200,000 shares vest ratably over a two-year period and expire in October 2029. Options to purchase 150,000 shares vest ratably over a three-year period and expire in October 2024. All of the options were issued at an exercise price of $2.10 which equaled the stock price on the date of issuance. We used the Black-Scholes Model to estimate the fair value of the stock options issued using the following assumptions: (i) expected volatility – 75%, (ii) risk free interest rate – 1.59% or 1.74%, (iii) expected life – 5 or 10 years, and (iv) expected dividend yield of 0%.

In January 2020, we issued options to purchase 1,100,000 shares of common stock exercisable at $0.82 vesting quarterly over a three-year period. These options were valued at $707,300. We also issued options to purchase 147,475 shares of common stock exercisable at $0.82. These options were valued at $94,826 and were vested in full upon issuance. All of these options were issued at an exercise price which equaled the stock price on the date of issuance. We used the Black-Scholes Model to estimate the fair value of the stock options issued using the following assumptions: (i) expected volatility – 75%, (ii) risk free interest rate – 1.74%, (iii) expected life – 10 years, and (iv) expected dividend yield of zero.

In January 2021, we issued 1,000,000 shares of restricted common stock which was valued at $2,690,000 based on our stock price of $2.69 on the date of issuance. 250,000 of shares vested immediately with the remaining 750,000 vesting in thirty-six monthly installments subject to acceleration if certain performance milestones are attained.

In January 2021, we issued options to purchase 100,000 shares of common stock at an exercise price of $2.69 which equaled the stock price on the date of issuance. 50,000 options vested immediately with the remaining 50,000 vesting ratably on the first and second anniversary dates. The options were valued at $147,581 using the Black Scholes model and the following assumptions: (i) expected volatility – 88.37%, (ii) risk free interest rate – 0.38%, (iii) expected life – 5.87 years, and (iv) expected dividend yield of 0%.

~~Stock compensation expense for the three and nine months ended January 31, 2021 was as follows:~~

~~Stock compensation expense for the three months and nine months ended January 31, 2020 was $149,462 and $161,529, respectively.~~

~~Options exercisable as of January 31, 2021 totaled 964,143. The remaining weighted average contractual term of the options outstanding at January 31, 2021 was 6.63 years.~~ The aggregate intrinsic value of outstanding options ~~representing~~represents the excess of the stock price at ~~January~~October 31, 2021 of ~~$5.00~~$2.96 over the exercise price of each ~~option,~~option. As of October 31, 2021 and April 30, 2021, there was ~~$7,062,446.~~$2,636,693 and $914,915 of unrecognized stock-based compensation expense related to unvested stock options, net of estimated forfeitures, which is expected to be recognized over the weighted average period of 1.31 years.

The table below sets forth the assumptions used to calculate the fair value of options granted during the three months ended October 31, 2021:

The Company ~~has financial instruments that are considered derivatives or contain~~completed financings in October 2020 and January 2021 which included notes and warrants containing embedded features subject to derivative ~~accounting related to~~accounting. See Note 10 ~~convertible~~for a full description of these financings. Both the notes ~~issued totaling $1,100,000~~and the warrants included provisions which ~~included~~provided for a ~~ratchet provision~~reduction in the conversion ~~price of~~and exercise prices, respectively, if the ~~lower of $1.00 or 25% discount of the price per share of Common Stock offered in~~Company completed a future ~~“Qualified Offering”. Attached to these notes as additional consideration was 1,074,998 5-year warrants with~~qualified offering at a ~~conversion price of the~~ lower ~~of 1.50 or 25% discount of the price per share of Common Stock offered in the Qualified Offering and also include a ratchet provision. Embedded~~price. These provisions represent embedded derivatives which are valued separately from the host instrument (meaning the notes and ~~are~~warrants) and recognized as derivative liabilities inon the ~~Company’s~~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 ~~has~~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 ~~for convertible debentures and associated warrants~~ using a multinomial lattice mode1. The range of underlying assumptions used in the binomial model ~~as of January 31, 2021. The~~to determine the fair ~~values~~value of the derivative instruments are measured each quarter, which resulted in a loss of $3,433,938 and derivative expense of $4,630,288 during the nine months ended January 31, 2021. As of January 31, 2021, the fair market valuewarrant liability upon settlement of the ~~derivatives aggregated $9,144,226, using the following assumptions: estimated 1.67-5.00-year term, estimated volatility~~derivative liability and as of ~~86.74-104.01%, and a discount rate of 0.10-0.41%.~~

~~Financial instruments measured at fair value on a recurring basis at January~~October 31, 2021 are ~~summarized~~set forth below. In addition, the Company's stock price on each measurement date was used in the model.

As of October 31, 2021, 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 three and six months ended October 31, 2021 were as follows:

In ~~May~~November 2019, wethe Company issued ~~1,570~~ a convertible note in the principal amount of $300,000 to one accredited investor and in December 2019, the Company issued a convertible note in the principal amount of $125,000 to a director and a convertible note in the principal amount of $25,000 to our chief executive officer (collectively, the "2019 Notes"). The Notes had a term of 2 yearsand accrued interest at an annual rate of 12% through the date of conversion. In September and October 2020, the entire $450,000 of 2019 Notes, plus accrued interest totaling $45,204, was converted into 710,444 shares of common ~~stock valued at $70,000 to a shareholder for legal services provided to us.~~ stock.

In ~~April 2020, we issued 150,000 shares of common stock with a fair market value of $204,000 to a different law firm for services provided to us.~~

Convertible Note Financing – In December 2019, we completed a convertible note financing with a member of the Board of Directors for $125,000 and with our Chief Executive Officer for $25,000. The same Board member invested $300,000 and $100,000 in the convertible note financings completed in October 2020 and January 2021, respectively. Another board member invested $50,000 in the convertible note financing completed in January 2021. See Note 6 for details on the terms of the transaction.

Payable to Aerocarve – In August 2020 and December 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. During the three months ended January 31,July 2021, the Company ~~made principal repayments~~entered into a consulting agreement with a director resulting in monthly payments of ~~this note totaling $5,000.~~$6,000. In addition, the Company issued 150,000 options to purchase common stock at $2.51 which vest quarterly over the one-year term of the agreement.

Subsequent events have been evaluated through the date of this filing and there are no subsequent events which require ~~disclosure except as set forth below:~~disclosure.

On February 11, 2021, the Company and Red Cat Skypersonic, Inc., a Nevada corporation (“Acquisition Sub”), entered into Share Purchase and Liquidity Event Agreements (the “Skypersonic Agreements”) with Giuseppe Santangelo the founder and majority shareholder of Skypersonic, Inc., a Michigan corporation (“Skypersonic”) and the holders of common stock and SAFE agreements representing 97.46% of Skypersonic (the “Sellers”), pursuant to which, subject to the satisfaction of certain closing conditions, Acquisition Sub will acquire all of the issued and outstanding share capital of Skypersonic in consideration for an aggregate of $3,000,000 in shares (the “Share Consideration”) of the Company’s common stock, based upon the VWAP of the Company’s common stock at closing of the transaction (the “Skypersonic Transaction”). Fifty (50%) percent of the Share Consideration (the “Escrow Shares”) is required to be deposited in an escrow account pursuant to the Skypersonic Agreements for a period of twelve (12) months as security for indemnification obligations and any purchase price adjustments due to working capital deficiencies and any other claims or expenses arising under the Skypersonic Agreements. Under the Skypersonic Agreements, closing date working capital deficits in excess of $300,000 shall result in a reduction of the Share Consideration on a dollar of dollar basis. The Company agreed that in the event that within 12 months following closing of the Acquisition, the Company issues common stock for a price per share less than $2.50 per share in a public offering of equity or convertible securities in which the Company raises a minimum of $2,000,000 (“Qualified Offering”), the Company shall issue Sellers additional shares of common stock equal to the difference between the number of shares issued and the quotient of the purchase price divided by the price of securities sold in the Qualified Offering. Mr. Santangelo and certain principal shareholders have agreed to indemnification obligations, on a pro-rata basis, subject to certain limitations, which shall survive for a period of eighteen (18) months following closing, and which include a basket amount of $25,000 before any claim can be asserted and a cap equal to the value of the Escrow Shares or the Share Consideration. For a period of three (3) years following closing, Mr. Santangelo shall not engage in a business competing with or providing products, services or solutions to the drone industry, first person view (“FPV”) business, navigation and software solutions that provide analytics, storage or services for or in conjunction with the drone industry. The closing of the Skypersonic Transaction is subject to customary closing conditions and is expected to close on or before May 14, 2021. The Company does not deem the Skypersonic financial condition and results of operations to be material to the overall financial condition and results of operations of the Company on a consolidated basis.

On February 15, 2021, the Company’s Fat Shark subsidiary agreed to provide a short-term bridge loan to Skypersonic in the amount of $75,000 under a Senior Secured Promissory Note, due May 14, 2021 (the “Bridge Loan”). Advances under the Bridge Loan accrue interest at a rate of six (6%) percent per annum. The Bridge Loan is secured by shares of Skypersonic common stock pledged as collateral.

In March 2021, holders of $1,100,000 of Convertible debentures converted their debentures, plus $47,491 of accrued interest into 1,147,491 shares of common stock. These conversions represented 100% of the convertible debentures issued in October 2020 and January 2021, as described in Note 6.

ITEM 2. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS

The following discussion should be read in conjunction with our unaudited condensed consolidated financial statements and related notes and other financial data included elsewhere in this Quarterly Report on Form 10-Q.

The Management's Discussion and Analysis contains forward-looking statements that involve risks and uncertainties, such as statements relating to our liquidity, and our plans for our business focusing on (i) selling drones and related components, and (ii) cloud-based analytics, storage, and services for drones. Any statements that are not historical fact are forward-looking statements. When used, the words ~~“believe,” “plan,” “intend,” “anticipate,” “target,” “estimate,” “expect,”~~"believe," "plan," "intend," "anticipate," "target," "estimate," "expect," and the like, and/or future-tense or conditional constructions (“("will,~~” “may,” “could,” “should,”~~" "may," "could," "should," etc.), or similar expressions, identify certain of these forward-looking statements. These forward-looking statements are subject to risks and uncertainties that could cause actual results or events to differ materially from those expressed or implied by the forward-looking statements in this Quarterly Report on Form 10-Q. The ~~Company’s~~Company's actual results and the timing of events could differ materially from those anticipated in these forward-looking statements as a result of many factors. Investors should also review the risk factors in the ~~Company’s~~Company's Annual Report on Form 10-K filed with the SEC on August ~~13, 2020.~~12, 2021.

All forward-looking statements speak only as of the date on which they are made. The Company does not undertake any obligation to update such forward-looking statements to reflect events that occur or circumstances that exist after the date of this Quarterly Report on Form 10-Q except as required by federal securities law.

~~Acquisition of Red Cat Propware, Inc~~Underwritten Firm Commitment Underwritten Public Offering.

On May ~~15, 2019, we~~4, 2021, the Company closed a ~~share exchange agreement with Red Cat Propware, Inc., a Nevada corporation (“Red Cat Propware”), and its then current shareholders~~firm commitment underwritten public offering (the ~~“Acquisition”~~"S-1 Offering")~~, pursuant to~~ in which we acquired all of the issued and outstanding capital stock of Red Cat Propware in exchange for our issuance of: (i) an aggregate of 236,000,000 shares of our common stock, and (ii) 2,169,068.0554 shares of our Series A Preferred Stock (“Series A Stock”) to the Red Cat Propware shareholders, which constituted approximately 83.33% of our issued an outstanding share capital on a fully-diluted basis at such time. With the exception of shares held by our current Chief Executive Officer, Jeffrey Thompson, the convertibility of shares of Series A Stock is limited such that a holder of Series A Stock may not convert shares of Series A Stock to shares of our common stock to the extent that the number ofit sold 4,000,000 shares of common stock, at a public offering price of $4.00 per share, to ~~be issued~~ThinkEquity, a division of Fordham Financial Management, Inc., as representative of the underwriters ("ThinkEquity"), pursuant ~~to such conversion, when aggregated with all other~~an underwriting agreement dated April 29, 2021. These shares of common stock ~~owned~~in the S-1 Offering were offered and sold by the ~~holder at such time, would result in~~Company pursuant to a registration statement on Form S-1, as amended (File No. 333-253491), filed with the ~~holder beneficially owning more than 4.99% of all of our outstanding common stock~~SEC, which was declared effective by the Commission on April 29, 2021 (the ~~“Beneficial Ownership Limit”~~"S-1 Registration Statement"). The 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 $14.6 million.

~~Effective August 1, 2019, we conducted~~On July 21, 2021 the Company closed on a ~~1 for 1,200 reverse split~~firm commitment underwritten public offering (the "S-3 Offering") in which it sold an aggregate of our common stock which resulted in the automatic conversion of all Series A Stock to common stock, with exception of certain Series A Stock subject to the Beneficial Ownership Limit. Following the reverse split, our remaining13,333,334 shares of ~~Series A~~Common Stock ~~are convertible to common stock~~ at a ~~ratio~~purchase price of ~~approximately 8.33~~$4.50 per share to ThinkEquity, pursuant to an underwriting agreement dated July 18, 2021. These shares of common stock ~~for each share of Series A Stock.~~

On January 23, 2020, pursuant to the terms of a merger agreement, we acquired Rotor Riot, LLC, and Ohio limited liability company (“Rotor Riot”), in a merger (the “Merger”) in which our subsidiary merged with and into Rotor Riot, with Rotor Riot being the surviving corporation in the ~~Merger. As a result, Rotor Riot became a wholly owned subsidiary of the Company.~~

Each limited liability company member of Rotor Riot received a pro rata portion of the total number of shares of the Company’s common stock issued under the merger agreement based on: (A)(i) the purchase price of $3,700,000, minus, (ii) the aggregate amount of debtS-3 Offering were offered and other payables of Rotor Riot, including those of Brains Riding in Tanks, LLC, an Ohio limited liability company and the majority owner of Rotor Riot (“BRIT”), and Chad Kapper the principal of BRIT, divided by (B) the volume weighted average price (“VWAP”) of the Company’s common stock for the twenty trading days prior to the closing date of the Merger. The aggregate amount of debt and other payables of Rotor Riot was approximately $915,563, and the VWAP of the Company’s common stock for the twenty trading days prior to the effective date was $1.25445 per share. As a result, the Company issued an aggregate of 2,219,650 shares of its common stock.

Pursuant to the terms of a make whole agreement, as of the effective date, the Company agreed to pay all obligations of Rotor Riot, in the aggregate amount of approximately $915,563. This included the issuance or a promissory note, in the principal amount of $175,000 to BRIT. The note bears interest at a rate of 4.75% per annum, requires monthly installment payments in the amount of $3,500, and matures on the earlier of twelve months from the date of issuance, and the closing of an equity offeringsold by the Company pursuant to a registration statement on Form S-3, as amended (File No. 333-256216), filed with the SEC, which was declared effective by the SEC on June 14, 2021 and a Supplement to the Prospectus contained in ~~amount of at least $3,000,000.~~

~~On September 30, 2020,~~this registration statement filed with the SEC on July 19, 2021. The net proceeds to the Company ~~entered into a share purchase agreement (“Share Purchase Agreement”) with Greg French (“French”),~~from the ~~founder~~S-3 Offering, after deducting the underwriting discount, the underwriters’ fees and sole shareholder of Fat Shark Holdings (“Fat Shark”), to acquire all of the issued and outstanding shares of Fat Shark and its subsidiaries. The transaction closed on November 2, 2020 and was valued at $8,354,076 based on (i) the issuance of 5,227,273 shares of common stock with a value of $6,351,076 on the date of closing, (ii) a senior secured promissory note in the original principal amount of $1,753,000 which matures on November 1, 2023, and (iii) a cash payment of $250,000. The Share Purchase Agreement includes indemnification provisions, a two year non-compete agreement, and registration rights for the shares issued in the transaction.

We agreed to register the shares issuable in the transaction under the Securities Act of 1933, as amended (the “Securities Act”) under certain circumstances. At any time following a “Qualified Financing”, defined as a private placement or public offering of debt, equity, or convertible securities in one or more transaction whereby on a cumulative basis on or prior to the three-year anniversary of closing, a minimum of $6,000,000 of gross proceeds has been raised by us for our own account (during which offerings Mr. French also has the right to sell up to $1,000,000 of the shares received). Mr. French has the right to a single demand registration under the Securities Act of all or a portion of the shares, unless our aggregate public offering price (before deducting discounts and commissions) is less than $25,000,000.

Mr. French has agreed to certain restrictions on the disposition of the shares received during for a period of two years following closing (the “Lock-Up Agreement”). Under the Lock-Up Agreement, a limit of up to the greater of 20% or $1,000,000 of the shares received may be sold prior to the 12-month anniversary of the closing in privately negotiated transactions (provided the purchaser enters into a joinder agreement and agrees to be subject to the same restrictions on such shares). Following the first year after closing, up to 10% of the average daily volume of the common stock during the prior 10 trading days may be sold. The Lock-Up Agreement also requires Mr. French sell a pro-rata amount of his common stock and provides for mandatory participation in certain sales by our large shareholders.

~~Agreements for a period of twelve (12) months as security for indemnification obligations and any purchase price adjustments due to working capital deficiencies and any other claims or~~estimated expenses arising under the Skypersonic Agreements. Under the Skypersonic Agreements, closing date working capital deficits in excess of $300,000 shall result in a reduction of the Share Consideration on a dollar of dollar basis. The Company agreed that in the event that within 12 months following closing of the Acquisition, the Company issues common stock for a price per share less than $2.50 per share in a public offering of equity or convertible securities in which the Company raises a minimum of $2,000,000 (“Qualified Offering”), the Company shall issue Sellers additional shares of common stock equal to the difference between the number of shares issued and the quotient of the purchase price divided by the price of securities sold in the Qualified Offering. Mr. Santangelo and certain principal shareholders have agreed to indemnification obligations, on a pro-rata basis, subject to certain limitations, which shall survive for a period of eighteen (18) months following closing, and which include a basket amount of $25,000 before any claim can be asserted and a cap equal to the value of the Escrow Shares or the Share Consideration.

For a period of three (3) years following closing, Mr. Santangelo shall not engage in a business competing with or providing products, services or solutions to the drone industry, first person view (“FPV”) business, navigation and software solutions that provide analytics, storage or services for or in conjunction with the drone industry.

The closing of the Skypersonic Transaction is subject to customary closing conditions and is expected to close on or before May 14, 2021. The Company does not deem the Skypersonic financial condition and results of operations to be material to the overall financial condition and results of operations of the Company on a consolidated basis.

On February 15, 2021. the Company’s Fat Shark subsidiary agreed to provide a short-term bridge loan to Skypersonic in the amount of $75,000 under a Senior Secured Promissory Note, due May 14, 2021 (the “Bridge Loan”). Advances under the Bridge Loan accrue interest at a rate of six (6%) percent per annum. The Bridge Loan is secured by shares of Skypersonic common stock pledged as collateral.

The Company’s primary business is to provide products, services and solutions to the drone industry. It operates in three sectors of the drone industry. Rotor Riot designs and sells drones and related components. Rotor Riot is focused on the consumer market and sells its products through its e-commerce platform operated at www.rotorriot.com. The Company is also developing software solutions to provide secure cloud-based analytics, storage and services for the drone industry. Its initial product candidate is Dronebox, a blockchain technology that records, stores and analyzes flight data and information from a drone, much like the “black box” utilized by the airline industry. The Company plans to offer Dronebox as a Software-as-a-Service platform.

The Company closed the acquisition of Fat Shark on November 2, 2020. Fat Shark is a leading provider of headsets and goggles for professional FPV racers and drone pilots and has an estimated 85% share of its market. The Company expects that Fat Shark will generate a majority of its revenue over the next 12 months. This acquisition continues the Company’s efforts to become a fully-integrated drone business with a strong supply chain, as well as a provider of software solutions for the drone industry.

Operating results for the three months ended January 31, 2021 are significantly different than the three months ended January 31, 2020. This directly relates to the acquisition of Rotor Riot in January 2020 and Fat Shark in November 2020.

During the three months ended January 31, 2021, we generated revenues totaling $2,145,988 compared to $34,538 during the three months ended January 31, 2020 representing an increase of more than 100 percent. During calendar 2020, we acquired two drone technology companies, Rotor Riot and Fat Shark. Prior to these transactions, we did not have any revenue generating activities. During the three months ended January 31, 2021, Rotor Riot and Fat Shark generated approximately 28% and 72% of our Revenues, respectively. We expect that the majority of our Revenues will continue to be generated by Fat Shark for at least the next 12 months.

During the three months ended January 31, 2021, we incurred cost of goods sold of $1,576,265 compared to $16,234 during the three months ended January 31, 2020. The periods presented are not comparable as the 2020 period included one week of revenues for Rotor Riot as compared to the 2021 period which included a full quarter of revenues for both Rotor Riot and Fat Shark.

During the three months ended January 31, 2021, gross margin was $569,723 compared to $18,304 during the three months ended January 31, 2020. The periods presented are not comparable as the 2020 period included one week of revenues for Rotor Riot as compared to the 2021 period which included a full quarter of revenues for both Rotor Riot and Fat Shark.

During the three months ended January 31, 2021, we incurred operating expense of $1,716,576 compared to $456,923 during the three months ended January 31, 2020, representing an increase of $1,259,653, or 276%. The increase is directly related to the ~~acquisitions of Rotor Riot in January 2020 and Fat Shark in November 2020.~~

During the three months ended January 31, 2021, we incurred research and development expenses totaling $167,968 compared to $94,979 for the three months ended January 31, 2020, resulting in an increase of $72,989, or 77%. The increase relates to payroll associated with employees hired from Rotor Riot and Fat Shark who are working on the research and development of new drone technologies.

During the three months ended January 31, 2021, we incurred sales and marketing expenses of $48,719 compared to zero during the three months ended January 31, 2020. Costs incurred in the three months ended January 31, 2021 relate to employees hired from Rotor Riot and Fat Shark, and also include sales commissions for referrals.

During the three months ended January 31, 2021, we incurred general and administrative expenses totaling $499,155 compared to $212,482 for the three months ended January 31, 2020 resulting in an increase of $286,673, or 135%. In addition, professional services costs were significantly higher in the three months ended January 31, 2021, because the Company is now a commercial enterprise with more complex operations compared to the three months ended January 31, 2020, when the Company was primarily still in a developmental stage.

During the three months ended January 31, 2021, we incurred stock based compensation expenses totaling $854,195 compared to $149,462 during the three months ended January 31, 2020, resulting in an increase of $704,733 or greater than 100%.

Other expense totaled $7,837,407 during the three months ended January 31, 2021, compared to $0 during the three months ended January 31, 2020. The expense incurred during the three months ended January 31, 2021 related to the Derivative Liability recorded in connection with the Company’s issuance of convertible debentures and warrants in October 2020 and January 2021. The significance of the expense is directly correlated to an increase in the Company’s stock price following the issuance of the convertible debentures and warrants. There were no such transactions during the three months ended January 31, 2020.

Net Loss during the three months ended January 31, 2021 totaled $8,984,260 compared to a Net Loss of $438,619 during the three months ended January 31, 2020, representing an increase of $8,545,641, or more than 100%. Approximately 92% of the increase in Net Loss is directly related to derivative expenses incurred in connection with the issuance of convertible debentures in October 2020 and January 2021. These securities were not outstanding during the three month period ended January 31, 2020. The remaining 8% of the increase is related to the expansion of the Company’s commercial activities including the hiring of personnel formerly employed with Rotor Riot and Fat Shark.

During the nine months ended January 31, 2021, we generated revenues totaling $3,122,077 compared to $34,538 revenues during the nine months ended January 31, 2020, representing an increase of more than 100 percent. During calendar 2020, we acquired two drone technology companies, Rotor Riot and Fat Shark. Prior to these transactions, we did not have any revenue generating activities. During the nine months ended January 31, 2021, Rotor Riot and Fat Shark generated approximately 51% and 49% of our Revenues, respectively.

~~During the nine months ended January 31, 2021, we incurred cost of goods sold of $2,351,153 compared to $16,234 during the nine months ended January 31, 2020.~~

During the nine months ended January 31, 2021, gross margin was $770,924 compared to $18,304 during the nine months ended January 31, 2020. Gross margin, as a percentage of revenues, was 25% during the 2021 period as compared to 53% during the 2020 period. We presently expect gross margins to range between 25% to 30%.

On August 31, 2021, we closed the acquisition of Teal Drones Inc., ("Teal"). Teal is a leader in commercial and government unmanned aerial vehicle ("UAV") technology and manufactures the Golden Eagle drone, approved by the US Department of Defense for reconnaissance, public safety, and inspection applications.

Pursuant to the Merger Agreement, we acquired all of the issued and outstanding share capital of Teal in exchange for $14,000,000 of our common stock, par value $0.001 per share ("Common Stock") at the Volume Weighted Average Price (VWAP) of our Common Stock on August 31, 2021 of $2.908 per share, reduced by the amount of Teal debt assumed consisting of approximately $1.67 million payable to Decathlon Alpha IV, L.P., ("DA4"), approximately $771,000 payable to other creditors and approximately $686,000 in working capital deficit, for a net closing date payment of $10,872,753. At closing, we issued 3,738,911 shares of our Common Stock (the "Merger Consideration"). On August 31, 2021, the Company, Acquisition, Teal and George Matus, as Shareholder Representative, entered into an Escrow Agreement with Equity Stock Transfer, LLC. Fifteen (15%) percent of the Merger Consideration (the "Escrow Shares") was deposited in an escrow account as security for working capital adjustments and indemnification obligations for a period of eighteen (18) months under the Merger Agreement. The indemnification obligations feature a basket amount of fifty-thousand dollars ($50,000) before any claim can be asserted and is subject to a cap equal to the value of the Escrow Shares. George Matus, founder of Teal, will continue in the role of Chief Executive Officer of Teal pursuant to an employment agreement entered August 31, 2021.

The consideration payable under the Merger Agreement may be increased upon the achievement of certain milestones set forth in the Merger Agreement (the "Earn-Out Consideration"). Additional shares of Common Stock may become issuable by the Company in the event that within twenty-four (24) months following closing of the Merger, Teal realizes certain revenue targets. A total of Sixteen Million Dollars ($16,000,000) in additional shares of Common Stock may become issuable in the event that sales and services of Teal's Golden Eagle drones shall have equaled at least Thirty-six Million Dollars ($36,000,000). A total of Ten Million Dollars ($10,000,000) in additional shares of Common Stock may become issuable in the event that sales and services of Teal's Golden Eagle drones shall have equaled at least $24 million ($24,000,000) but less than $36 million ($36,000,000). A total of Four Million Dollars ($4,000,000) in additional shares of Common Stock may become issuable in the event that sales and services of Teal's Golden Eagle drones shall have equaled at least Eighteen Million Dollars ($18,000,000) but less than Twenty-Four Million Dollars ($24,000,000). Additional Share Consideration, if earned, is issuable at the VWAP of the Company within thirty (30) days of the determination that Earn-Out Consideration is payable.

On August 31, 2021, Teal entered into an Amended and Restated Loan and Security Agreement with DA4 (the "Loan Agreement") in the amount of $1,670,294 (the "Loan"), representing the outstanding principal amount previously due and owing by Teal to DA4. Interest on the Loan accrues at a rate of ten (10%) percent per annum. Principal and interest under the term Loan is payable monthly in an amount equal to $49,275 until maturity on December 31, 2024. Teal may prepay the loan at any time, subject to a prepayment premium of $300,705, less the amount of any prior payments of interest. Under the Loan Agreement, Teal granted DA4 a continuing security interest in substantially all of the assets of Teal. In the event of a default under the loan DA4 may declare the full amount of the Loan immediately due and payable as a secured lender and take additional actions as a secured lender including seeking to foreclose on collateral pledged under the Loan Agreement. The Company agreed to guaranty the obligations of Teal under the Loan pursuant to a Joinder Agreement dated August 31, 2021.

Red Cat Holdings ("Red Cat" or the "Company") was originally incorporated in February 1984. Since April 2016, the Company's primary business has been to provide products, services and solutions to the drone industry which it presently does through its five wholly owned subsidiaries. Beginning in January 2020, the Company has expanded the scope of its drone products and services through a number of acquisitions. Fat Shark Holdings is a provider of First Person View (FPV) video goggles. Rotor Riot sells FPV drones and equipment, primarily to the consumer marketplace. Skypersonic provides software and hardware solutions that enable drones to complete inspection services in locations where GPS (global positioning systems) are not available, yet still record and transmit data even while being operated from thousands of miles away. Red Cat Propware is developing drone flight data analytics and storage solutions, as well as diagnostic products and services. On August 31, 2021, the Company acquired Teal Drones, a leader in commercial and government UAV technology.

During the three months ended October 31, 2021 (or the "2021 period"), we generated revenues totaling $1,863,239 compared to $427,807 during the three months ended October 31, 2020 (or the "2020 period"), representing an increase of $1,435,432, or greater than 100%. The increase in revenues related to acquisitions completed after the end of the 2020 period. In November 2020, we acquired Fat Shark which contributed $898,929, or 48%, of our revenues in the 2021 period. In August 2021, we acquired Teal which contributed $402,227, or 22%, of our revenues in the 2021 period.

During the ~~nine~~three months ended ~~January~~October 31, 2021, we incurred ~~operating~~cost of goods sold of $1,710,657 compared to $328,756 during the three months ended October 31, 2020, representing an increase of $1,381,901 or greater than 100%. The increase related to higher revenues associated with the acquisitions of Fat Shark, Skypersonic, and Teal which were completed after the end of the 2020 period.

During the three months ended October 31, 2021, gross margin was $152,582 compared to $99,051 during the three months ended October 31, 2020, representing an increase of $53,531 or 54%. Gross margin, as a percentage of revenue, decreased from 23% during the 2020 period to 8% during the 2021 period. The lower gross margin during the 2021 period reflects higher product and shipping costs resulting from the impact of COVID-19 on business operations.

During the three months ended October 31, 2021, we incurred operations expense of ~~$2,790,912~~$283,249 compared to ~~$994,546~~$120,210 during the ~~nine months ended January 31, 2020. The~~2020 period, resulting in an increase of $163,039 or 136%. This increase is directly related to our expanded operations following the acquisitions of ~~Rotor Riot in January 2020 and~~ Fat Shark in November ~~2020.~~2020, Skypersonic in May 2021, and Teal in August 2021. Operations expense for Fat Shark, Skypersonic, and Teal in the 2021 period collectively represented 86% of the increase.

During the ~~nine~~three months ended ~~January~~October 31, 2021, we incurred research and development expenses totaling ~~$341,892~~$493,441 compared to ~~$354,146~~$86,614 for the ~~nine~~three months ended ~~January~~October 31, 2020 resulting in ~~a decrease~~an increase of ~~$12,254,~~$406,827, or 3%greater than 100%. ~~The~~This increase ~~relates~~is directly related to ~~payroll associated with employees hired from Rotor Riot and~~our expanded operations following the acquisitions of Fat Shark ~~who are working on the research~~and Teal. Research and development expense for Fat Shark and Teal collectively represented 90% of ~~new drone technologies.~~the increase.

During the ~~nine~~three months ended ~~January~~October 31, 2021, we incurred sales and marketing expenses of ~~$97,534~~$185,385 compared to $0$24,679 during the ~~nine~~three months ended ~~January 31, 2020. Costs incurred in the nine months ended January 31, relate to employees hired from Rotor Riot and Fat Shark, and also include sales commissions for referrals.~~

~~During the nine months ended January 31, 2021, we incurred general and administrative expenses totaling $929,874 compared to $478,871 for the nine months ended January~~October 31, 2020, resulting in an increase of ~~$451,003,~~$160,706 or ~~94%~~greater than 100%. This increase is primarily related to higher payroll and branding costs of $63,455 and $36,000, respectively, in the 2021 period. In addition, ~~professional services costs~~we incurred $14,649 and $24,255 of separate expenses related to Fat Shark and Teal, respectively, which were ~~significantly higher~~not included in the ~~nine months ended January 31, 2021 because the Company is now a commercial enterprise with more complex operations compared to the nine months ended January 31,~~ 2020 ~~when the Company was in a developmental stage.~~period.

During the ~~nine~~three months ended ~~January~~October 31, 2021, we reported general and administrative expenses of $1,050,708 compared to $250,378 for the three months ended October 31, 2020, representing an increase of $800,330, or more than 100%. Much of the increase related to "public company" expenses associated with the Company's listing on the Nasdaq Capital Market in April 2021. This resulted in increased costs associated with Directors' and Officers' insurance, investor relations and other public company expenses which collectively increased by $229,495 in the 2021 period compared to the 2020 period. In addition, auditing fees increased by $67,200 and payroll costs increased by $75,245. In addition, we incurred general and administrative expenses for Fat Shark, Skypersonic, and Teal of $49,296, $111,380, and $133,076, respectively, which were not included in the 2020 period.

During the three months ended October 31, 2021, we incurred stock based compensation ~~expenses~~costs of ~~$1,068,317~~$899,937 compared to ~~$161,529~~$107,061 in the 2020 period, resulting in an increase of $792,876 or greater than 100%. This increase related to expense associated with the issuance of 400,000 restricted stock units and 470,000 options in the 2021 period which were not applicable to the 2020 period.

Other income, net totaled $19,537 during the ~~nine~~three months ended ~~January~~October 31, 2021 compared to Other Expense of $232,390 during the three months ended October 31, 2020 representing a change of $251,927. Changes in the values of the Company's derivative liabilities accounted for most of the change between periods. During the 2020 period, the Company recorded derivative related expenses totaling $232,390 whereas the Company recorded a net benefit related to its derivatives of $118,813 during the 2021 period. The net benefit in the 2021 period was partially offset by interest expense of $46,017. The derivative liability is valued using a multinomial lattice model which utilizes the Company's stock price in its calculation. A decrease in the stock price during the 2021 period resulted in the net benefit.

Net Loss during the three months ended October 31, 2021 totaled $2,740,601 compared to a net loss of $722,281 during the three months ended October 31, 2020, representing an increase of $2,018,320, or greater than 100%. This increase is primarily related to higher operating expenses which increased to $2,912,720 in the 2021 period as compared to $588,942 in the 2020 period, representing an increase of $2,323,778. Approximately $902,412 of the increase, or 39%, related to Fat Shark, Skypersonic, and Teal whose acquisitions were completed after the 2020 period. Higher general and administrative and stock based compensation expense of $1,050,708 and $899,937, respectively, primarily accounted for the balance of the increase.

During the six months ended October 31, 2021 (or the "2021 period"), we generated revenues totaling $3,259,990 compared to $976,089 during the six months ended October 31, 2020 (or the "2020 period"), representing an increase of $2,283,901, or greater than 100%. The increase in revenues related to acquisitions completed after the end of the 2020 period. In November 2020, we acquired Fat Shark which contributed $1,894,496, or 58%, of our revenues in the 2021 period, and represented 83% of the increase.

During the six months ended October 31, 2021, we incurred cost of goods sold of $3,005,004 compared to $774,888 during the six months ended October 31, 2020, representing an increase of $2,230,116 or greater than 100%. The increase related to higher revenues associated with the acquisitions of Fat Shark, Skypersonic, and Teal which were completed after the end of the 2020 period.

During the six months ended October 31, 2021, gross margin was $254,986 compared to $201,201 during the six months ended October 31, 2020, representing an increase of $53,785 or 27%. Gross margin, as a percentage of revenue, decreased from 21% during the 2020 period to 8% during the 2021 period. The lower gross margin during the 2021 period reflects higher product and shipping costs resulting from the impact of COVID-19 on business operations.

During the six months ended October 31, 2021, we incurred operations expense of $460,112 compared to $206,756 during the 2020 period, resulting in an increase of $253,356 or greater than 100%. This increase is directly related to our expanded operations following the acquisitions of Fat Shark in November 2020, Skypersonic in May 2021, and Teal in August 2021. Operations expense for Fat Shark, Skypersonic, and Teal collectively represented 94% of the increase.

During the six months ended October 31, 2021, we incurred research and development expenses totaling $737,695 compared to $173,924 for the six months ended October 31, 2020 resulting in an increase of ~~$906,788~~$563,771 or greater than 100%. This increase is directly related to our expanded operations following the acquisitions of Fat Shark, Skypersonic, and Teal. Research and development expense for Fat Shark, Skypersonic, and Teal collectively represented 100% of the increase.

During the six months ended October 31, 2021, we incurred sales and marketing expenses of $286,018 compared to $48,815 during the six months ended October 31, 2020, resulting in an increase of $237,203 or greater than 100%. This increase is primarily related to higher payroll and marketing event costs of $85,818 and $30,799, respectively, in the 2021 period. In addition, we incurred $62,893 of expenses collectively related to Fat Shark, Skypersonic, and Teal which was included in the 2021 period.

~~Other Expense~~During the six months ended October 31, 2021, we reported general and administrative expenses of $1,926,888 compared to $430,719 for the six months ended October 31, 2020, representing an increase of $1,496,169, or more than 100%. Much of the increase related to "public company" expenses associated with the Company's listing on the Nasdaq Capital Market in April 2021. This resulted in increased costs associated with Directors' and Officers' insurance, investor relations and other public company expenses which collectively increased by $643,324 in the 2021 period compared to the 2020 period. In addition, auditing fees increased by $87,200 and payroll costs increased by $130,545. In addition, we incurred general and administrative expenses for Fat Shark, Skypersonic, and Teal of $100,149, $239,595, and $133,076, respectively, which was included in the 2021 period.

During the six months ended October 31, 2021, we incurred stock based compensation costs of $1,284,023 compared to $214,122 in the 2020 period, resulting in an increase of $1,069,901 or greater than 100%. This increase related to expense associated with the issuance of 775,000 restricted stock units and 919,000 options in the 2021 period which were not applicable to the 2020 period.

Other income, net totaled ~~$8,069,797~~$141,377 during the ~~nine~~six months ended ~~January~~October 31, 2021, compared to $0other expense of $232,390 during the ~~nine~~six months ended ~~January~~October 31, ~~2020. The expense incurred~~2020 representing a change of $373,767. Changes in the values of the Company's derivative liabilities accounted for most of the change between periods. During the 2020 period, the Company recorded derivative related expenses totaling $232,390 whereas the Company recorded a net benefit related to its derivatives of $273,061 during the ~~nine months ended January 31,~~ 2021 ~~related to~~period. The net benefit in the ~~Derivative Liability recorded~~2021 period was partially offset by interest expense of $63,116. The derivative liability is valued using a multinomial lattice model which utilizes the Company's stock price in ~~connection with~~its calculation. A decrease in the ~~Company’s issuance of Convertible Debentures and warrants in October 2020 and January 2021. There were no such transactions~~stock price during the ~~nine months ended January 31, 2020. The significance of the expense is directly correlated to an increase~~2021 period resulted in the ~~Company’s stock price following the issuance of the convertible debentures and warrants. There were no such transactions during the three months ended January 31, 2020~~net benefit.

Net Loss during the ~~nine~~six months ended ~~January~~October 31, 2021 totaled ~~$10,089,785~~$4,298,373 compared to a Net Loss of ~~$976,242~~$1,105,525 during the ~~nine~~six months ended ~~January~~October 31, 2020, representing an increase of ~~$9,113,543,~~$3,192,848, or ~~more~~greater than 100%. This increase is primarily related to higher operating expenses which increased to $4,694,736 in the 2021 period as compared to $1,074,336 in the 2020 period, representing an increase of $3,620,400. Approximately ~~88%~~$1,338,413 of the increase, ~~in Net Loss is directly~~or 37%, related to ~~derivative expenses incurred in connection with~~Fat Shark, Skypersonic, and Teal whose acquisitions were completed after the ~~issuance of convertible debentures in October~~ 2020 period. Higher general and ~~January 2021. These securities were not outstanding during~~administrative and stock based compensation expense totaling $1,926,888 and $1,284,023, respectively, primarily accounted for the ~~three month period ended January 31, 2020. The remaining 12%~~balance of the ~~increase is related to the expansion of the Company’s commercial activities including the hiring of personnel formerly employed with Rotor Riot and Fat Shark.~~increase.

Net cash used in operating activities was ~~$917,016~~$8,569,098 during the ~~nine~~six months ended ~~January~~October 31, 2021 compared to net cash used in operating activities of ~~$704,651~~$568,452 during the ~~nine~~six months ended ~~January~~October 31, 2020 representing an increase of ~~$212,365,~~$8,000,646, or ~~30%~~greater than 100%. Net cash used in operations, net of non-cash expenses ~~associated with the Derivative Liability and stock-based compensation, totaled $872,484~~totaling $1,299,468, equaled $2,998,905 in the ~~nine months ended January 31,~~ 2021 period compared to ~~$814,713~~$640,612 in the ~~nine months ended January 31,~~ 2020 period, resulting in an increase of ~~$57,771,~~$2,358,293, or 7%greater than 100%. The ~~increase primarily related to~~ higher ~~net costs associated with becoming a commercial enterprise through~~operating use of cash in the ~~merger with Rotor Riot in January 2020 and~~2021 period reflected the ~~acquisition~~acquisitions of Fat Shark, ~~in November 2020.~~Skypersonic, and Teal. Net cash used inrelated to changes in operating assets and liabilities totaled ~~$44,532~~$5,570,193 during the ~~nine~~six months ended ~~January~~October 31, 2021 compared to net cash provided bythrough changes in operating ~~activities~~assets and liabilities of ~~$110,062~~$72,160 during the ~~nine~~six months ended ~~January~~October 31, 2020, representing ~~a decrease in cash provided~~an increase of ~~$154,594,~~$5,642,353, or ~~140%~~greater than 100%. Approximately $3,017,267, or 53%, of the increase related to inventory, both higher balances on hand as well as prepaid purchases not yet delivered. Changes in operating assets and liabilities can fluctuate significantly from period to period depending upon the timing and level of multiple factors, including inventory purchases and vendor payments.

Net ~~cash used in investing activities was $48,368 during the nine months ended January 31, 2021 compared to~~ cash provided by investing activities ~~of $46,327~~was $24,866 during the ~~nine~~six months ended ~~January~~October 31, 2021 compared to zero during the six months ended October 31, 2020. The ~~amounts for both periods related to~~Company acquired $24,866 of cash in connection with acquisitions ~~which can vary from one transaction to another.~~completed in the 2021 period.

Net cash used provided by financing activities totaled ~~$1,200,368~~$19,825,052 during the ~~nine~~six months ended ~~January~~October 31, 2021 compared to ~~$597,749~~$811,849 during the ~~nine~~six months ended ~~January~~October 31, ~~2020, representing an increase of $602,619, or 101%.~~2020. Financing activities can vary ~~in nature and amount,~~ from period to ~~period.~~period depending upon market conditions, both at a macro-level and specific to the Company. During the ~~nine months ended January 31,~~ 2021 period, the Company received net ~~cash~~proceeds of ~~$1,080,000 and $58,508~~approximately $70 million in connection with two offerings of common stock, approximately $50 million of which was provided through the issuance of convertible debentures and notes payable, respectively. During the nine months ended January 31, 2020, net cash of $152,239 and $450,000 was provided through the exercise of a warrant and sale of convertible debentures, respectively.used to purchase investments.

As of ~~January~~October 31, 2021, we had current assets totaling ~~$1,997,948,~~$64,629,199, including cash of ~~$471,652~~$11,559,758, investments of $48,122,657, and inventory of ~~$708,017.~~$1,985,507. Current liabilities as of ~~January~~October 31, 2021 totaled ~~$10,896,745~~$5,848,303, including accounts payable of $1,218,005, accrued expenses of $653,233, short term debt obligations of $1,338,030, and derivative liability of ~~$9,144,226, notes payable totaling $177,279, accounts payable totaling $873,312 and amounts due to a related party of $395,544.~~$2,376,565. Our net working capital as of ~~January~~October 31, 2021 was ~~negative $8,898,797.~~$58,780,896.

We ~~have only recently begun generating revenues and~~ have reported net losses since ~~our inception.~~inception and only began generating revenues in January 2020. To date, we have primarily funded our operations through ~~private~~ offerings of common stock primarily from individual private investors. We do not have sufficient cash resources to meet our working capital needs for the next 12 months and will require additional capital in order to execute our business plan.

stock. In ~~November 2019,~~May 2021, we issued a convertible note in the principal amount of $300,000 to one accredited investor and in December 2019 we issued a convertible note in the principal amount of $125,000 to a director and a convertible note in the principal amount of $25,000 to our chief executive officer (collectively, the “2019 Notes”). The 2019 Notes have a two-year term and bear interest at a rate of 12%. Interest on the 2019 Notes may be paid in cash or in sharescompleted an offering of common stock which raised gross proceeds of $16 million. In July 2021, we completed an offering of common stock which raised gross proceeds of $60 million.

On May 4, 2021, the Company ~~at the 2019 Note Conversion Price (as defined below). The 2019 Notes are convertible into~~closed a firm commitment underwritten public offering (the "S-1 Offering") in which it sold 4,000,000 shares of common stock, at ~~the holder’s sole discretion~~a public offering price of $4.00 per share, to ThinkEquity, a division of Fordham Financial Management, Inc., as follows: (A) prior to consummating an equity financing which generates gross proceeds of not less than $3,000,000 (in this case, a “Qualified Offering”), then at the 30-day VWAP of a share of our common stock as listed or quoted on the market in which the shares are then traded or listed, or (B) after we have consummated a Qualified Offering, at 40%representative of the ~~price per share of common stock sold in the Qualified Offering (in this case, the “Conversion Price”~~underwriters ("ThinkEquity")~~. We may, upon 10 business days prior notice, pre-pay the 2019 Notes, including all accrued interest, in whole or in part, provided that any such prepayment prior~~, pursuant to ~~the one-year anniversary of the 2019 Note issuance will be at a price equal to 112% of the then outstanding original principal amount. Upon~~ an event of default, as described in the Notes, the outstanding principal and interest will become immediately due and payable. Additionally, under the 2019 Note, unless waived by the holder, the holder is not be entitled to convert the 2019 Note if such conversion would result in beneficial ownership by the holder and its affiliates of more than 9.99% of the outstandingunderwriting agreement dated April 29, 2021. These shares of common stock ofin the S-1 Offering were offered and sold by the Company pursuant to a registration statement on ~~such date.~~

~~On October 5, 2020,~~Form S-1, as amended (File No. 333-253491), filed with the SEC, which was declared effective by the Commission on April 29, 2021 (the "S-1 Registration Statement"). The net proceeds to the Company closed a private offering of convertible promissory notes in the aggregate principal amount of $600,000 (the “2020 Notes”) and issued five-year warrants to purchase an aggregate of 399,998 shares of common stock (the “2020 Warrants”). The 2020 Notes accrue interest at the rate of 12% per annum and are payable two years from the ~~date of issuance. The 2020 Notes are convertible into common stock at a conversion price of $1.00 per share or, upon~~Offering, after deducting the ~~consummation of an offering of common stock resulting in~~underwriting discount, the ~~listing for trading on~~underwriters' fees and expenses and the NYSE American, the Nasdaq Capital Market, the Nasdaq Global Market, the Nasdaq Global Select Market or the New York Stock Exchange at a price equal to 75% of the price of the securities sold in such offering (in this case, a “Qualified Offering”). The 2020 Notes also contain protection from dilution in the event of a lower priced issuance.Company's estimated Offering expenses, were approximately $14.6 million.

On July 21, 2021 the Company closed on a firm commitment underwritten public offering (the "S-3 Offering") in which it sold an ~~event~~aggregate of ~~default, as described in the 2020 Note, the conversion price will equal the lower~~13,333,334 shares of ~~(i) the thirty-day volume weighted average of the closing~~Common Stock at a purchase price of the Company’s common stock if the conversion occurs prior to a Qualified Offering, or (ii) 65% multiplied by the lowest closing price of the common stock during the twenty consecutive trading day period immediately prior to the conversion.

The Company may prepay all or any portion of the 2020 Note, without penalty or premium, upon at least ten business days’ prior notice to the noteholder. Upon issuance by the Company of a security, or amendment to a security, that the noteholder reasonably believes is more favorable, such term, at noteholder’s option, will become a part of the 2020 Note, except for certain exempt issuances. No conversions under the 2020 Note will be effected that will result in the noteholder, together with any affiliate, beneficially owning in excess of 9.99% of the Company’s outstanding common stock immediately after giving effect to such conversion.

~~The 2020 Warrants are exercisable at a price equal to the lower of (i) $1.50~~$4.50 per share ~~or (ii) if a Qualified Offering occurs, at a 25% discount~~ to ~~the price per share of the common stock offered in such Qualified Offering. The number of~~ThinkEquity, pursuant to an underwriting agreement dated July 18, 2021. These shares of common stock ~~for which the 2020 Warrant is exercisable is subject to adjustment~~ in the ~~event of a stock split or dividend,~~S-3 Offering were offered and similar event or certain corporate events such reorganizations and mergers. In the event of a reorganization or reclassification of capital stock, the consolidation or merger, or the sale or other disposition of all or substantially all the property, assets, business, and goodwill ofsold by the Company pursuant to a registration statement on Form S-3, as amended (File No. 333-256216), filed with the ~~warrant holder will be entitled~~SEC, which was declared effective by the SEC on June 14, 2021 and a Supplement to ~~purchase~~ the ~~kind~~Prospectus contained in this registration statement filed with the SEC on July 19, 2021. The net proceeds to the Company from the S-3 Offering, after deducting the underwriting discount, the underwriters' fees and ~~amount of shares of capital stock which~~expenses and the ~~2020 Warrant entitled the warrant holder~~Company's estimated expenses related to ~~purchase immediately prior to such event. The 2020 Warrants also include piggyback registration rights.~~this S-3 Offering, were approximately $55.5 million.

Until we are able to sustain operations through the sale of products and services, we will continue to fund operations through equity and/or debt transactions. We can provide no assurance that the financing described above will be sufficient to fund our operations until we are able to sustain operations through the sale of products and services. In addition, there can be no assurance that such additional financing, if required, will be available to us on acceptable terms, or at all.

On January 27, 2021, the Company closed of a private offering of Units consisting of convertible promissory notes in the aggregate principal amount of $500,000 (the “2021 Notes”) and issued five-year warrants to purchase an aggregate of 675,000 shares of common stock (the “2021 Warrants”) to six accredited investors for total offering proceeds of $500,000. The 2012 Notes accrue interest at the rate of 12% per annum and are payable two years from the date of issuance.

The 2021 Notes are convertible into common stock at a conversion price of $1.00 per share or, upon the consummation of an offering of common stock resulting in the listing for trading on the NYSE American, the Nasdaq Capital Market, the Nasdaq Global Market, the Nasdaq Global Select Market or the New York Stock Exchange at a price equal to 75% of the price of the securities sold in such offering (in this case, a “Qualified Offering”).

The 2021 Notes may be converted at any time in the discretion of the holder prior to a Qualified Offering and automatically convert upon the consummation of a Qualified Offering, provided the note may not convert if as a result of such conversion the holder together with its affiliates would beneficially own in excess of 9.99% of the shares of our common stock outstanding after giving effect to such conversion.

If an event of default occurs, the conversion price will be reduced to the lower of (i) the thirty-day volume weighted average of the closing price per share of our common stock, if prior to a Qualified Offering, or (ii) 65% of the lowest closing price of the common stock during the twenty consecutive trading day period immediately preceding the date of the conversion.

~~The 2021 Notes also contain protection from dilution in the event of a lower priced issuance and adjustments if securities are issued with more favorable terms.~~

The 2021 Warrants are exercisable at a price equal to the lower of (i) $1.50, or (ii) a 25% discount to the price per share of common stock offered in the Qualified Offering and, if there is no effective registration statement for the resale the shares subject to the warrant, the warrant may be exercised on a cashless basis.

We only began generating revenues in January 2020 and have reported net losses since our inception. We expect to report net losses for at least the next twelve months. The success of our business plan during the next 12 months and beyond will be contingent upon generating sufficient revenue to cover our operating costs and/or upon obtaining additional financing. The report from our independent registered public accounting firm for the fiscal year ended April 30, 2020 includes an explanatory paragraph stating the Company has recurring net losses from operations, negative operating cash flows, does not yet generate revenue from operations and will need additional working capital for ongoing operations. These factors, among others, raise substantial doubt about the Company's ability to continue as a going concern. If we are unable to obtain sufficient funding, our business, prospects, financial condition and results of operations will be materially and adversely affected and we may be unable to continue as a going concern.

We are presently seeking to address these going concerns through efforts to raise capital through the public markets, release our first commercial product and pursue acquisitions of complementary, revenue generating companies which are accretive to our operating results. We can provide no assurance that any of these efforts will be successful or, that even if successful, that they will alleviate doubts about our ability to continue as a going concern.

Our financial statements and accompanying notes have been prepared in accordance with GAAP applied on a consistent basis. The preparation of financial statements in conformity 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 revenues and expenses during the reporting periods.

We regularly evaluate the accounting policies and estimates that we use to prepare our financial statements. A complete summary of these policies is included in the notes to our financial statements. In general, ~~management’s~~management's estimates are based on historical experience, on information from third party professionals, and on various other assumptions that are believed to be reasonable under the facts and circumstances. Actual results could differ from those estimates made by management.

The Company has implemented all new accounting pronouncements that are in effect. These pronouncements did not have any material impact on the financial statements unless otherwise disclosed, and the Company does not believe that there are any other new accounting pronouncements that have been issued that might have a material impact on its financial position or results of operations.

We are a smaller reporting company and are not required to provide this information.

Disclosure controls and procedures ~~are controls and procedures that~~ are designed to ensure that information required to be disclosed in our reports filed under the ~~Securities~~ Exchange Act ~~of 1934, as amended (“Exchange Act”)~~ is recorded, processed, summarized and reported, within the time periods specified in the SEC's rules. Disclosure controls and procedures include, without limitation, controls and procedures designed to ensure that information required to be disclosed by our company in the reports that it files or submits under the Exchange Act is accumulated and communicated to our management, including its principal executive and principal financial officers, or persons performing similar functions, as appropriate to allow timely decisions regarding required disclosure. Our management carried out an evaluation under the supervision and with the participation of our Principal Executive Officer and Principal Financial Officer, of the effectiveness of the design and operation of our disclosure controls and procedures pursuant to Rules 13a-15(e) and 15d-15(e) under the Exchange ~~Act, as of January 31, 2021.~~Act. Based upon that evaluation, our Principal Executive Officer and Principal Financial Officer have concluded that our disclosure controls and procedures were ~~not~~ effective as of ~~January~~October 31, ~~2021.~~

~~Our~~2021, except that our disclosure controls and procedures are not effective for the following reasons:

During the period covered by this report, there were no changes in our internal controls over financial reporting that have materially affected, or are reasonably likely to materially affect, our internal control over financial reporting.

There are no pending legal proceedings to which the Company is a party or in which any director, officer or affiliate of the Company, any owner of record or beneficially of more than 5% of any class of voting securities of the Company, or security holder is a party adverse to the Company or has a material interest adverse to the Company. The Company's property is not the subject of any pending legal proceedings.

We are a smaller reporting company as defined by Rule 12b-2 of the Securities Exchange Act of 1934 (the "Exchange Act") and are not required to provide the information.

~~Except as set forth below there~~There were no sales of equity securities sold during the period covered by this Report that were not registered under the Securities Act and were not previously reported in a Current Report on Form 8-K filed by the Company.

~~On January 11, 2021, the Company issued 1,000,000 shares of Common Stock to Allan Evans under the Company’s 2019 Equity Incentive Plan.~~

On January 27, 2021, we closed a private offering in which we sold Units, consisting of two-year 12% convertible promissory notes in the aggregate principal amount of $500,000 and five-year warrants to purchase an aggregate of 675,000 shares of common stock to six accredited investors in a private offering.

Pursuant to the requirements of the Securities Exchange Act of 1934, the registrant has duly caused this report to be signed on its behalf by the undersigned thereunto duly authorized.

Nevada	86-0490034
(State or other jurisdiction of	(I.R.S. Employer Identification Number)
incorporation or organization)
370 Harbour Drive ~~Palmas del Mar~~
Humacao PR, Puerto Rico	00791
(Address of principal executive offices)	(Zip Code)

Large accelerated filer ☐	Accelerated filer ☐
Non-accelerated filer ☐	Smaller reporting company ☑
Emerging growth company ☐

~~Item 1.~~PART I.	~~Financial Statements:~~FINANCIAL INFORMATION	Page

Item 1.	Financial Statements:	3

	Unaudited Balance Sheet as of ~~January~~October 31, 2021 and Balance Sheet as of April 30, ~~2020~~2021	43

	Unaudited Statements of Operations for the Three and ~~Nine~~Six Months Ended ~~January~~October 31, 2021 and 2020	54

	~~Unaudited Statement of Changes in Shareholders’ Equity for the Three and Nine Months Ended January 31, 2021 and 2020~~	6

	Unaudited Statements of Cash Flows for the ~~Nine~~Six Months Ended ~~January~~October 31, 2021 and 2020	85

	Unaudited Statement of Changes in Shareholders' Equity for the Three and Six Months Ended October 31, 2021 and 2020	6

	Notes to Financial Statements	107

Item 2.	Management's Discussion and Analysis of Financial Condition and Results of Operations	2124

Item 3.	Quantitative and Qualitative Disclosures about Market Risk	2830

Item 4.	Controls and Procedures	2830


RED CAT HOLDINGS
Consolidated Balance Sheets
(Unaudited)

		October 31			April 30,
		2021			2021
ASSETS
Current Assets
Cash	$	11,559,758		$	277,347
Investments		48,122,657			—
Accounts receivable, net		393,738			321,693
Inventory		1,985,507			362,072
Other		2,567,539			678,898
Total Current Assets		64,629,199			1,640,010

Goodwill		26,029,750			8,017,333
Intangible assets, net		1,999,518			2,032,169
Property and equipment, net		142,126			—
Operating lease right-of-use assets		548,641			—
Other		24,907			3,853
Total Long Term Assets		28,744,942			10,053,355
TOTAL ASSETS	$	93,374,141		$	11,693,365

LIABILITIES AND STOCKHOLDERS' EQUITY
Current Liabilities
Accounts payable	$	1,218,005		$	541,903
Accrued expenses		653,233			614,050
Debt obligations - short term		1,338,030			269,045
Due to related party		144,628			390,209
Customer deposits		117,842			46,096
Warrant derivative liability		2,376,565			2,812,767
Total Current Liabilities		5,848,303			4,674,070

Operating lease liabilities		559,528			—
Debt obligations - long term		1,431,739			—
Note payable to related party		—			1,753,000
Total Long Term Liabilities		1,991,267			1,753,000
Commitments and contingencies

Stockholders' Equity
Series A Preferred Stock - shares authorized 2,200,000; outstanding 0 and 158,704		—			1,587
Series B Preferred Stock - shares authorized 4,300,000; outstanding 986,676 and 1,968,676		9,867			19,687
Common stock - shares authorized 500,000,000; outstanding 53,684,910 and 29,431,264		53,685			29,431
Additional paid-in capital		105,577,729			21,025,518
Accumulated deficit		(20,108,301	)		(15,809,928	)
Accumulated other comprehensive income		1,591			—
Total Stockholders' Equity		85,534,571			5,266,295
TOTAL LIABILITIES AND STOCKHOLDERS' EQUITY	$	93,374,141		$	11,693,365


See accompanying notes.


RED CAT HOLDINGS
Consolidated Statements Of Operations
(Unaudited)


	Three months ended October 31,						Six months ended October 31,
	2021			2020			2021			2020
Revenues	$	1,863,239		$	427,807		$	3,259,990		$	976,089

Cost of goods sold		1,710,657			328,756			3,005,004			774,888

Gross Margin		152,582			99,051			254,986			201,201

Operating Expenses
Operations		283,249			120,210			460,112			206,756
Research and development		493,441			86,614			737,695			173,924
Sales and marketing		185,385			24,679			286,018			48,815
General and administrative		1,050,708			250,378			1,926,888			430,719
Stock based compensation		899,937			107,061			1,284,023			214,122
Total operating expenses		2,912,720			588,942			4,694,736			1,074,336
Operating loss		(2,760,138	)		(489,891	)		(4,439,750	)		(873,135	)

Other Expense (Income)
Derivative expense		—			148,587			—			148,587
Change in fair value of derivative liability		(118,813	)		83,803			(273,061	)		83,803
Investment income, net		38,447			—			38,447			—
Interest expense		46,017			—			63,116			—
Other, net		14,812			—			30,121			—
Other Expense (Income)	$	(19,537	)	$	232,390		$	(141,377	)	$	232,390

Net loss	$	(2,740,601	)	$	(722,281	)	$	(4,298,373	)	$	(1,105,525	)

Loss per share - basic and diluted	$	(0.05	)	$	(0.04	)	$	(0.10	)	$	(0.05	)

Weighted average shares outstanding - basic and diluted		52,147,541			20,241,390			43,110,884			20,126,241

	☐	TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934
		For the transition period from ___________ to ___________

PART II.	OTHER INFORMATION

Item 1.	Legal Proceedings	3031

Item 1A.	Risk Factors	3031

Item 2.	Unregistered Sales of Equity Securities and Use of Proceeds	3031

Item 3.	Defaults Upon Senior Securities	31

Item 4.	Mine Safety Disclosures	31

Item 5.	Other Information	31

Item 6.	Exhibits	31

SIGNATURES		32

RED CAT HOLDINGS
Condensed Consolidated Balance Sheets
(Unaudited)

		January 31,			April 30,
		2021			2020
ASSETS
Current Assets
Cash	$	471,652		$	236,668
Accounts Receivable, net		312,414			-
Inventory		708,017			78,650
Other		505,865			3,020
Total Current Assets		1,997,948			318,338

Goodwill		9,449,333			2,466,073
Intangible assets, net		631,429			20,000
Other		3,853			3,853

TOTAL ASSETS		12,082,563			2,808,264

LIABILITIES AND STOCKHOLDERS' EQUITY
Current Liabilities
Accounts payable		873,312			249,050
Accrued Expenses		209,804			89,342
Notes Payable		177,279			118,771
Due to Related Party		395,544			333,684
Customer deposits		96,580			38,419
Derivative liability		9,144,226			-
Total Current Liabilities		10,896,745			829,266

Convertible debentures, net		79,187			450,000
Due to Related Party		1,753,000			-
Total Long Term Liabilities		1,832,187			450,000
Commitments and contingencies

Stockholders' Equity
Series A Preferred Stock - shares authorized 2,200,000; outstanding 158,704 and 208,704		1,587			2,087
Series B Preferred Stock - shares authorized 4,300,000; outstanding 2,726,882 and 3,681,623		27,269			36,816
Common stock - shares authorized 500,000,000; outstanding 27,160,926 and 20,011,091		27,161			20,011
Additional paid-in capital		11,961,152			4,043,837
Accumulated deficit		(12,663,538	)		(2,573,753	)
Total Stockholders' Equity		(646,369	)		1,528,998
TOTAL LIABILITIES AND STOCKHOLDERS' EQUITY	$	12,082,563		$	2,808,264


See accompanying notes.

RED CAT HOLDINGS
Condensed Consolidated Statements Of Operations
(Unaudited)

	Three months ended January 31,						Nine months ended January 31,
	2021			2020			2021			2020

Revenues	$	2,145,988		$	34,538		$	3,122,077		$	34,538

Cost of goods sold		1,576,265			16,234			2,351,153			16,234

Gross Margin		569,723			18,304			770,924			18,304

Operating Expenses
Operations		146,539			-			353,295			-
Research and development		167,968			94,979			341,892			354,146
Sales and marketing		48,719			-			97,534			-
General and administrative		499,155			212,482			929,874			478,871
Stock based compensation		854,195			149,462			1,068,317			161,529
Total operating expenses		1,716,576			456,923			2,790,912			994,546
Operating loss		(1,146,853	)		(438,619	)		(2,019,988	)		(976,242	)

Other Expense
Amortization Expense		5,571			-			5,571			-
Derivative Expense		4,481,701			-			4,630,288			-
Change in Fair Value of Derivative		3,350,135			-			3,433,938			-
Other Expense	$	7,837,407		$	-		$	8,069,797		$	-

Net loss	$	(8,984,260	)	$	(438,619	)	$	(10,089,785	)	$	(976,242	)

Loss per share - basic and diluted	$	(0.34	)	$	(0.02	)	$	(0.46	)	$	(0.08	)

Weighted average shares outstanding - basic and diluted		26,232,755			17,732,298			22,161,745			11,556,950


RED CAT HOLDINGS
Condensed Consolidated Cash Flows Statements
(Unaudited)


	Six months ended October 31,
	2021			2020
Cash Flows from Operating Activities
Net loss	$	(4,298,373	)	$	(1,105,525	)
Stock based compensation		1,284,023			214,122
Common stock issued for services		250,400			—
Amortization of intangible assets		32,651			—
Depreciation		5,455			—
Change in fair value of derivative liability		(273,061	)		83,803
Amortization of debt discount		—			18,401
Derivative expense		—			148,587
Adjustments to reconcile net loss to net cash from operations:
Changes in operating assets and liabilities
Accounts receivable		27,002			—
Inventory		(319,124	)		(91,836	)
Other		(3,814,101	)		3,020
Operating lease right-of-use assets and liabilities		10,887			—
Customer deposits		8,753			27,786
Accounts payable		(976,679	)		106,042
Accrued expenses		(506,931	)		27,148
Net cash used in operating activities		(8,569,098	)		(568,452	)

Cash Flows from Investing Activities
Cash acquired through acquisitions		24,866			—
Net cash provided by investing activities		24,866			—

Cash Flows from Financing Activities
Proceeds from sale of investments		1,855,788			—
Purchases of investments		(49,978,445	)		—
Purchases of property and equipment		(30,147	)		—
Proceeds from exercise of warrants		99,999			—
Payments under related party obligations		(1,866,381	)		(3,907	)
Proceeds from debt obligations		—			419,050
Payments under debt obligations		(320,965	)		(183,294	)
Proceeds from convertible debentures		—			580,000
Proceeds from issuance of common stock, net		70,065,203			—
Net cash provided by financing activities		19,825,052			811,849

Effect of foreign exchange rate changes on cash		1,591			—

Net increase in Cash		11,282,411			243,397
Cash, beginning of period		277,347			236,668
Cash, end of period		11,559,758			480,065

Cash paid for interest		26,175			—
Cash paid for taxes		—			—

Non-cash transactions
Common stock issued for services	$	250,400		$	—
Fair value of shares issued in acquisitions	$	12,727,292		$	—
Indirect payment to related party	$	132,200		$	—
Conversion of derivative liability	$	163,141		$	—
Conversion of preferred stock into common stock	$	11,407		$	—
Conversion of Notes into common stock	$	—		$	450,000
Conversion of accrued interest into common stock	$	—		$	45,024


See accompanying notes.

RED CAT HOLDINGS, INC.
Consolidated Statements of Changes in Stockholders' Equity (Unaudited)

	Series A						Series B						Common Stock				Additional
	Preferred Stock						Preferred Stock										Paid-in		Accumulated			Total
	Shares			Amount			Shares			Amount			Shares		Amount		Capital		Deficit			Equity
Balances, April 30, 2019		-			-			-			-		$	179,292	$	179	$	784,371	$	(971,822	)	$	(187,272	)

Issuance of common stock														15,355		15		684,685					684,699

Share Exchange Agreement		2,169,068			21,691			4,212,645			42,126			196,667		197		53,740					117,754

Conversion of Preferred Stock		(1,960,364	)		(19,604	)		(240,000	)		(2,400	)		16,536,164		16,536		5,467					-

Shares Issued for Services														1,570		2		69,998					70,000

Net Loss																				(321,502	)		(321,502	)

Balances, July 31, 2019		208,704			2,087			3,972,645			39,726			16,929,048		16,929		1,598,261		(1,293,324	)		363,679

Stock based compensation																		12,067					12,067

Net Loss																				(216,121	)		(216,121	)

Balances, October 31, 2019		208,704			2,087			3,972,645			39,726			16,929,048		16,929		1,610,328		(1,509,445	)		159,625

Exercise of warrants														469,874		470		151,769					152,239

Conversion of Preferred Stock								(291,022	)		(2,910	)		242,519		243		2,668					-

Merger with Rotor Riot														2,219,650		2,220		1,817,893					1,820,113

Stock based compensation																		149,462					149,462

Net Loss																				(438,619	)		(438,619	)


RED CAT HOLDINGS
Consolidated Stockholders' Equity Statements
(Unaudited)

	Series A						Series B						Common Stock				Additional					Accumulated Other
	Preferred Stock						Preferred Stock										Paid-in		Accumulated			Comprehensive		Total
	Shares			Amount			Shares			Amount			Shares		Amount		Capital		Deficit			Income (Loss)		Equity
Balances, April 30, 2020		208,704		$	2,087			3,681,623		$	36,816			20,011,091	$	20,011	$	4,043,837	$	(2,573,753	)	$	—	$	1,528,998

Stock based compensation																		107,061							107,061

Net Loss		—			—			—			—			—		—		—		(383,244	)		—		(383,244	)

Balances, July 31, 2020		208,704		$	2,087			3,681,623		$	36,816			20,011,091	$	20,011	$	4,150,898	$	(2,956,997	)	$	—	$	1,252,815

Conversion of Debt														710,444		711		494,314							495,025

Stock based compensation																		107,061							107,061

Net Loss		—			—			—			—			—		—		—		(722,281	)		—		(722,281	)

Balances, October 31, 2020		208,704		$	2,087			3,681,623		$	36,816			20,721,535	$	20,722	$	4,752,273	$	(3,679,278	)	$	—	$	1,132,620

Balances, April 30, 2021		158,704		$	1,587			1,968,676		$	19,687			29,431,264	$	29,431	$	21,025,518	$	(15,809,928	)	$	—	$	5,266,295

Acquisition of Skypersonic														685,321		685		2,630,955							2,631,640

Public offerings, net of $5,959,800 of issuance costs														17,333,334		17,333		70,022,871							70,040,204

Exercise of warrants														66,666		67		263,073							263,140

Conversion of preferred stock								(982,000	)		(9,820	)		818,333		818		9,002							—

Stock based compensation														62,500		63		384,023							384,086

Shares issued for services														91,667		92		191,908							192,000

Currency translation adjustments																							922		922

Net Loss		—			—			—			—			—		—		—		(1,557,772	)		—		(1,557,772	)

Balances, July 31, 2021		158,704		$	1,587			986,676		$	9,867			48,489,085	$	48,489	$	94,527,350	$	(17,367,700	)	$	922	$	77,220,515

Acquisition of Skypersonic														21,972		22		84,350							84,372

Acquisition of Teal														3,588,272		3,588		10,007,691							10,011,279

Conversion of preferred stock		(158,704	)		(1,587	)								1,321,966		1,322		265							—

Stock based compensation														243,615		244		899,693							899,937

Shares issued for services														20,000		20		58,380							58,400

Currency translation adjustments																							669		669

Net Loss		—			—			—			—			—		—		—		(2,740,601	)		—		(2,740,601	)

Balances, October 31, 2021		—		$	—			986,676		$	9,867			53,684,910	$	53,685	$	105,577,729	$	(20,108,301	)	$	1,591	$	85,534,571


Balances, January 31, 2020	208,704			2,087		3,681,623			36,816		19,861,091		19,861		3,732,120		(1,948,064	)		1,842,820

Balances, April 30, 2020	208,704			2,087		3,681,623			36,816		20,011,091		20,011		4,043,837		(2,573,753	)		1,528,998

Stock based compensation															107,061					107,061

Net Loss																	(383,244	)		(383,244	)

Balances, July 31, 2020	208,704			2,087		3,681,623			36,816		20,011,091		20,011		4,150,898		(2,956,997	)		1,252,815

Conversion of Debt											710,444		711		494,314					495,025

Stock based compensation															107,061					107,061

Net Loss																	(722,281	)		(722,281	)

Balances, October 31, 2020	208,704		$	2,087		3,681,623		$	36,816		20,721,535	$	20,722	$	4,752,273	$	(3,679,278	)	$	1,132,620

Acquisition of Fat Shark											5,227,273		5,227		6,345,849					6,351,076

Conversion of Preferred Stock	(50,000	)		(500	)	(954,741	)		(9,547	)	1,212,118		1,212		8,835					-

Stock based compensation															854,195					854,195

Net Loss																	(8,984,260	)		(8,984,260	)

Balances, January 31, 2021	158,704		$	1,587		2,726,882		$	27,269		27,160,926	$	27,161	$	11,961,152	$	(12,663,538	)	$	(646,369	)

Shares issued	$	1,820,114
Promissory note issued	$	175,000
Total Purchase Price	$	1,995,114

Assets Acquired
Cash	$	21,623
Accounts receivable		28,500
Other assets		3,853
Inventory		127,411
Trademark		20,000
Brand Name		578,000
Customer Relationships		39,000
Goodwill		1,756,023
Total assets acquired	$	2,574,410

Liabilities Assumed
Accounts Payable and accrued expenses	$	171,651
Notes payable		209,799
Due to Related Party		197,846
Total liabilities assumed		579,296
Net assets acquired	$	1,995,114

~~PART I.~~	~~FINANCIAL INFORMATION~~	~~Page~~

Assets acquired
Cash		201,632
Accounts receivable		249,159
Other assets		384,232
Inventory		223,380
Brand name		1,144,000
Proprietary technology		272,000
Non-compete agreement		16,000
Total assets acquired		2,490,403
Liabilities assumed
Accounts payable and accrued expenses		279,393
Customer deposits		25,194
Total liabilities assumed		304,587
Total fair value of net assets acquired		2,185,816
Goodwill	$	6,168,260

Shares issued	$	2,716,013
Cash		75,000
Total Purchase Price	$	2,791,013

Assets acquired
Cash		13,502
Accounts receivable		51,083
Other assets		12,950
Inventory		50,556
Total assets acquired		128,091
Liabilities assumed
Accounts payable and accrued expenses		1,054,997
Total liabilities assumed		1,054,997
Total fair value of net assets acquired		(926,906	)
Goodwill	$	3,717,919

Assets acquired
Cash		11,364
Accounts receivable		47,964
Other current assets		15,085
Other assets		48,595
Inventory		1,253,755
Total assets acquired		1,376,763
Liabilities assumed
Accounts payable and accrued expenses		1,143,899
Customer deposits		1,766,993
Notes payable		2,749,091
Total liabilities assumed		5,659,983
Total fair value of net assets acquired		(4,283,220	)
Goodwill	$	14,294,499

	Amortized Cost		Net Unrealized Gains (Losses)			Fair Value
Money market funds	$	1,598,428	$	732		$	1,599,160
Asset-backed securities		3,444,037		(9,081	)		3,434,956
Corporate bonds		43,219,180		(130,639	)		43,088,541
Total	$	48,261,645	$	(138,988	)	$	48,122,657

	One Year or Less		Over One Year		Over Five Years		Total
Money market funds	$	1,599,160	$	—	$	—	$	1,599,160
Asset-backed securities		—		3,434,956		—		3,434,956
Corporate bonds		14,575,236		27,911,550		601,755		43,088,541
Total	$	16,174,396	$	31,346,506	$	601,755	$	48,122,657

	Level 1		Level 2		Level 3		Total
Money market funds	$	1,599,160	$	—	$	—	$	1,599,160
Asset-backed securities		—		3,434,956		—		3,434,956
Corporate bonds		—		43,088,541		—		43,088,541
Total	$	1,599,160	$	46,523,497	$	—	$	48,122,657

	October 2021		April 2021
Raw materials	$	1,033,801	$	—
Work-in-process		176,522		—
Finished goods		775,184		362,072
Total	$	1,985,507	$	362,072

	October 2021		April 2021
Prepaid inventory	$	1,832,406	$	478,939
Accrued interest held in investments		371,095		—
Prepaid insurance		280,364		—
Prepaid expenses		74,302		115,587
Security deposits		9,372		9,372
Due from related party		—		75,000
Total	$	2,567,539	$	678,898

Original cost	$	289,369
Accumulated depreciation		147,243
Net carrying value	$	142,126

Location	Monthly Rent		Expiration
South Salt Lake, Utah	$	11,000		August 2024
Orlando, Florida	$	4,600		May 2024
Cayman Islands	$	3,438		Month to Month
Troy, Michigan	$	2,667		May 2022
Orlando, Florida	$	1,690		September 2022
Torino, Italy	$	1,445		January 2024

Fiscal Year Ended:
2022	$	140,014
2023		251,254
2024		207,727
2025		90,613
Total	$	689,608

Date of Transaction	Purchased Receivables	Payment to Company	Transaction Fees	Withholding Rate	Balance at October 31, 2021
May 2020	$158,200	$140,000	$18,200	17%	Completed in October 2020
September 2020	$209,050	$185,000	$24,050	17%	Completed in May 2021
April 2021	$236,500	$215,000	$21,500	17%	$77,722

Balance of calendar 2021	$	608,894
2022		825,535
2023		609,099
2024		641,729
2025		72,377
2026		12,135
Total	$	2,769,769

Date	Series B	Common Stock
July 2019	240,000	200,000
November 2019	60,000	50,000
December 2019 January 2021	231,022 954,741	192,519 795,618

	~~January 31, 2021~~
~~Expected volatility~~		~~86-104~~	%
~~Expected dividends~~		0	%
~~Expected term~~		~~4.67-5 Years~~
~~Risk-free interest rate~~		~~0.10-0.41~~	%

	Number of Warrants		Weighted Average Exercise Price		Weighted Average Grant Date Fair Value		Expiration Date (yrs)		Value if Exercised
Balance as of April 30, 2020		-		-		-		-	$	-
Granted		1,074,998		1.50		4.17		5.00		1,612,497
Exercised		-		-		-		-		-
Cancelled/Expired		-		-		-		-		-
Outstanding as of January 31, 2021		1,074,998	$	1.50	$	4.17		4.87	$	1,612,497

	Number of Shares		Weighted-average Exercise Price per Share		Weighted-average Remaining Contractual Term (in years)		Aggregate Intrinsic Value
Balance as of April 30, 2020	—			—		—		—
Granted	1,074,998		$	1.50
Exercised	(201,666	)		1.50
Outstanding as of April 30, 2021	873,332			1.50		4.62	$	2,218,263
Granted	733,333			5.45
Exercised	(66,666	)		1.50
Outstanding at October 31, 2021	1,539,999		$	3.38		4.38	$	2,387,731

	3 months		9 months
General and administrative	$	336,301	$	525,559
Research and development		179,157		199,047
Operations		170,612		175,586
Sales and marketing		168,125		168,125
	$	854,195	$	1,068,317

Exercise price			2.61 - 2.82
Stock price on date of grant			2.61 - 2.82
Volatility			271.7% - 273.4%
Risk-free interest rate			0.93% - 1.10%
Expected term (years)			6.56 – 8.25
Dividend yield			—