Note 710 - Warrants

In May 2019, as part of the Share Exchange Agreement, we issued warrants to purchase 469,874 shares of common stock at an exercise price of $0.324 per share of common stock. The value of these warrants was considered to be a nominal amount at the time of issuance. In September 2019, we received $152,239 in connection with the exercise of these warrants. The holder did not provide the required paperwork to complete the exercise until November469,874 warrants which had been issued in May 2019 and the shares are not expected to be issued until December 2019. As a result, the amount received has been reported as Common Stock to be Issued in the liabilities sectionpart of the Balance Sheet at October 31, 2019.Share Exchange Agreement. We also assumed a fully vested, restricted stock unit agreement requiring the issuance of 41,667 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.

In October 2020, the Company issued five-year warrants to purchase a total of 399,998 shares in connection with the issuance of $600,000 of convertible notes. The warrants have an initial exercise price of $1.50 which may be reduced to (i) a 25% discount of the price per share of Common Stock offered in a future qualified offering and also include a ratchet provision. The warrants were valued at $267,999 using the multinomial lattice model and are considered derivative liabilities under ASC 815-40.

The following table presents the assumptions used to estimate the fair values of the warrants:

The following table summarizes the changes in warrants outstanding issued to non-employees of the Company during the six months ended October 31, 2020.

Note 8 –11 - Share Based Awards

Effective August 2019, shareholders approved the 2019 Equity Incentive Plan (the “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”). The number of shares issuable in connection with Awards under the Plan may not exceed 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 of the optionsshares vest ratably over a 2 yeartwo-year period and expire in October 2029. Options to purchase 150,000 of the optionsshares vest ratably over a 3 yearthree-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. None of the options were exercisable as of October 31, 2019. The remaining weighted average contractual term of the options outstanding at October 31, 2019 was 7.80 years. The aggregate intrinsic value of the options, representing the excess of the stock price over the exercise price, was zero at October 31, 2019.

We recognized stock compensation expense of $12,067 during the three months ended October 31, 2019, of which $8,815 was included in general and administrative expenses and $3,252 was included in research and development expenses. 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.

Stock compensation expense for the three and six months ended October 31, 2020 was as follows:

There was no compensation expense recognized in the three months ended October 31, 2019.

Options exercisable as of October 31, 2020 totaled 572,476. The remaining weighted average contractual term of the options outstanding at October 31, 2020 was 8.73 years. The aggregate intrinsic value of outstanding options, representing the excess of the stock price at October 31, 2020 of $1.21 over the exercise price of each option, was $492,753.

Note 12 - Financial Instruments

The Company has financial instruments that are considered derivatives or contain embedded features subject to derivative accounting related to 4 convertible notes issued totaling $600,000 which included a ratchet provision in the conversion price of the lower of 1.00 or 25% discount of the price per share of Common Stock offered in the Qualified offering and also include a ratchet provision. Attached to these notes as additional consideration was 399,998 5-year warrants with 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 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. The Company has estimated the fair value of these embedded derivatives for convertible debentures and associated warrants using a multinomial lattice model as of October 31, 2020. The fair values of the derivative instruments are measured each quarter, which resulted in a loss of $83,803 and derivative expense of $148,587 during the six and months ended October 31, 2020. As of October 31, 2020, the fair market value of the derivatives aggregated $812,390, using the following assumptions: estimated 2.00-5.00-year term, estimated volatility of 88.80-95.11%, and a discount rate of 0.13-0.33%.

Financial instruments measured at fair value on a recurring basis at October 31, 2020, are summarized as follows:

Note 913 - Related-Party Transactions

Shares Issued for Services – In May 2019, we issued 1,570 shares of common stock valued at $70,000 to a shareholder for legal services provided to us. 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.

Office Lease – We rented space from our Chief Executive Officer during parts of the fiscal years ended April 30, 2019 and 2018, and made payments totaling $8,100 and $7,200, respectively.

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 in the convertible note financing completed in October 2020. See Note 116 for details on the terms of the transaction.

Note 10 - Commitments and Contingencies

Office Lease– In December 2018, we entered into a one year lease arrangement for office space in San Juan, Puerto Rico, for $26,638 annually. There are no renewal terms.

Note 1114 - Subsequent Events

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

InOn November 2019 we issued a convertible note in6, 2020, the principal amountCompany completed the acquisition of $300,000 to one accredited investor and in December 2019 we issued a convertible note inFat Shark Holdings which was paid through (i) the principal amountissuance of $125,000 to a director and a convertible note in the principal amount of $25,000 to our chief executive officer (collectively, the “Notes”). The Notes have a term of 2 years and bear interest at a rate of 12% which accrues and is payable in full when the Notes mature. Interest on the Notes may be paid in cash or in5,227,223 shares of common stock with an agreed value of $5,750,000 (ii) a senior secured promissory note in the Company at the Conversion Price (as defined below).The Notes are convertible into sharesoriginal principal amount of common stock at the holder’s sole discretion as follows: (A) prior to consummating an equity financing$1,000,000 which generates gross proceedsmatures on November 1, 2023, and (iii) a cash payment of not less than $3,000,000 (a “Qualified Offering”), then at the 30 day volume weighted average of the closing price of$250,000 in cash. The Share Purchase Agreement includes indemnification provisions, a share of our common stock as listed or quoted on the market in whichtwo year non-compete agreement, and registration rights for the shares are then traded or listed, or (B) after we have consummated a Qualified Offering, at 40% of the price per share of common stock soldissued in the Qualified Offering (the “Conversion Price”) . We may, upon 10 business days advance notice, elect to pre-pay the Note, including all accrued interest, in whole or in part, provided that any such prepayment prior to the one-year anniversary of the Note issuance shall 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 shall become immediately due and payable. Additionally, under the Note, unless waived by the holder, the holder shall not be entitled to convert the Note if such conversion would result in beneficial ownership by the holder and its affiliates of more than 9.99% of the outstanding shares of common stock of the Company on such date.

transaction.

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 Form10-Q. See also the audited financial statements and footnotes in our Current Report Form 8-K/A filed with the SEC on July 31, 2019.10-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 statements of historical fact are forward-looking statements. When used, the words “believe,” “plan,” “intend,” “anticipate,” “target,” “estimate,” “expect,” and the like, and/or future-tense or conditional constructions (“will,” “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 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 CurrentAnnual Report on Form 8-K10-K filed with the SEC on May 16, 2019.August 13, 2020.

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.

Recent Developments

The Share Exchange AgreementAcquisition of Red Cat Propware, Inc.

Effective May 15, 2019, we closed a Share Exchange Agreement (the “SEA”“Exchange Agreement”) with TimeFireVR,Red Cat Propware, Inc., (“TimeFire”), a Nevada corporation. Undercorporation (“Red Cat Propware”) and its then current shareholders (the “Acquisition”) pursuant to which we acquired all of the SEA, we acquiredissued 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 Series A Preferred Stock (“Series A Stock”) to the Red Cat Propware shareholders which constituted approximately 83.33% of TimeFire’sour issued an outstanding share capital on a fully-diluted basis. We issued: (i) 196,667basis 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 Series A Stock to our common stock to the extent that the number of shares of common stock to be issued pursuant to such conversion, when aggregated with all other shares of common stock owned by the holder at such time, would result in the holder beneficially owning more than 4.99% of all of our outstanding common stock (the “Beneficial Ownership Limit”).

Reverse Stock Split

Effective August 1, 2019, we conducted a 1 for 1,200 reverse split of our common stock (ii) 2,169,068which 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 remaining shares of our newly-designated Series A Preferred Stock and (iii) 4,212,645 shares of our newly-designated Series B Preferred Stock.

Our new Series A Preferred Stock isare convertible to common stock at a ratio of approximately 8.33 shares of common stock for each share of preferred stock held, and votes together with the common stock on an as-converted basis. The new Series A Preferred Stock will convert automaticallyStock.

Merger Agreement with Rotor Riot, LLC

On December 31, 2019, the Company entered into an Agreement of Merger (the “Merger Agreement”) with Rotor Riot Acquisition Corp., a wholly owned Ohio subsidiary of the Company (the “Ohio Acquisition Sub”), Rotor Riot, LLC, an Ohio limited liability company (“Rotor Riot”), and the three members of Rotor Riot (the “Members”). Pursuant to common stockthe terms of the Merger Agreement, upon consummation of the effectivenessmerger contemplated by the Merger Agreement (the “Merger”), the Ohio Acquisition Sub merged with and into Rotor Riot, with Rotor Riot continuing as the surviving entity and a wholly owned subsidiary of any future reverse splitthe Company. At the effective time of our common stock. This common stock and Series A Preferred Stock issued under the SEA will constitute approximately 83.33% of ourMerger, the issued and outstanding share capital on a fully-diluted basis.

Our new Series B Preferred Stock is convertible to common stock at a ratiomembership interests of 0.83Rotor Riot held by the Members, which represented 100% of Rotor Riot’s issued and outstanding membership interests, were converted into shares of common stock for each share of preferred stock held, and votes together with the common stock on an as-converted basis. This Series B Preferred Stock issued underCompany. On January 22, 2020, the SEA will constitute approximately 15.64% of our issued and outstanding share capital on a fully-diluted basis.

In total, the common stock, Series A Preferred Stock, and Series B Preferred Stock issued under the SEA are valued at $117,754.

Red Cat Propware, Inc.

On May 15, 2019, we acquired TimeFireVR, Inc., in a $117,754 stock transaction classified as a reverse-merger transaction. The acquisition will provide accessparties to the public markets and supportMerger Agreement entered into an amendment to the development of our product platform. In this reverse merger, the financial results of Red Cat Propware, Inc.Merger Agreement, joined in by Rotor Riot Acquisition Corp., (the accounting acquirer), have been presented as the continuing operationsa newly formed, wholly owned Delaware subsidiary of the Company since inception.

Merger. 

The Merger was consummated as of January 23, 2020 (the “Effective Date”). At the closing of the Merger, the Company entered into a make whole agreement with Rotor Riot, Brains Riding in Tanks, LLC, an Ohio limited liability company and the majority owner of Rotor Riot (“BRIT”), and Chad Kapper, the Chief Executive Officer and Manager of Rotor Riot, and the Chief Executive Officer and beneficial owner of 100% of the membership interests of BRIT (“Kapper”), pursuant to which the Company agreed to pay certain financial obligations of Rotor Riot as of the Effective Date. This included the issuance to BRIT of a promissory note (the “BRIT Promissory Note”), as of the Effective Date, in the principal amount of $175,000 (the “Principal Amount”), at an interest rate of 4.75% per annum (“Interest”), with $3,500 of the Principal Amount to be paid monthly, and the remaining Principal Amount and any accrued and unpaid Interest to be paid on the earlier of (A) twelve months from the date of issuance, and (B) the closing of an equity offering by the Company of no less than $3,000,000.

On January 23, 2020, the Effective Date, pursuant to the terms of the Merger Agreement, as amended, the Delaware Acquisition Sub merged with and into Rotor Riot. Rotor Riot was the surviving corporation in the Merger and, as a result of the Merger, became a wholly owned subsidiary of the Company.

Rotor Riot sells products and services in the drone marketplace, primarily focused on FPV (First Person View), including unmanned aircraft systems, components, and accessories. 

In accordance with the terms of the Merger Agreement, at the closing of the Merger, each Member of Rotor Riot received its pro rata portion of the total number of shares of the Company’s common stock issued based on: (A)(i) the purchase price of $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”) 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. Based on a share issuance value of $2,784,437 and a VWAP of $1.25445, the Company issued an aggregate of 2,219,650 shares of common stock to the members of Rotor Riot.

Immediately following the Merger, the Company had 19,148,698 shares of common stock issued and outstanding. In connection with the Merger, BRIT, received 1,997,684 shares, which represented approximately 10.4% of the Company following the consummation of the Merger.

The Merger was intended to be treated as a tax-free reorganization under Section 368(a) of the Internal Revenue Code of 1986, as amended.

Fat Shark Acquisition

On September 30, 2020, the Company entered into a share purchase agreement (“Share Purchase Agreement”) with Greg French (“French”), the founder and sole shareholder of Fat Shark Holdings, Ltd., (“Fat Shark”), to acquire all of the issued and outstanding shares of Fat Shark and its subsidiaries for an aggregate purchase price of $7,000,000. Pursuant to the Share Purchase Agreement, at the closing on November 6, 2020, $5,750,000 of the purchase price was paid by the Company by the issuance of (i) 5,227,223 shares of common stock (784,091 of which will be held in escrow for up to 18 months to satisfy indemnification obligations of Fat Shark and French and certain working capital adjustments) and (i) a senior secured promissory note in the original principal amount of $1,000,000, subject to a floating charge under Cayman Island law on all of the assets of Fat Shark and its subsidiaries, and $250,000 in cash. The indemnification obligations are subject to certain limitations and survive for two years following closing and require $25,000 in claims before any claim can be asserted.

The Share Purchase Agreement also provides that for two years following closing, neither French nor his affiliates may engage in a business competing with the Company’s drone or FPV goggle business or solicit any of the Company’s customers or suppliers.

The Company agreed to register the shares issuable in the transaction under the Securities Act of 1933, as amended (the “Act”), under certain circumstances and the shares are subject to various restrictions on disposition for a period of two years following closing. At any time following a private or public offering of debt or equity securities of at least $6 million prior to the three year anniversary of closing (“Qualified Financing”) (during which offerings French also has the right to sell up to $1,000,000 of the shares received), French has the right to a single demand registration under the Act of all or a portion of the shares, unless the aggregate public offering price (before deducting discounts and commissions) is less than $25,000,000.

Up to the greater of 20% or $1,000,000 of the shares received by French may be sold prior to the 12 month anniversary of the closing in privately negotiated transactions (provided the purchaser agrees to be subject to the same restrictions on such shares), thereafter for twelve months, up to 10% of the average daily volume of the common stock during the prior 10 trading days may be sold. The Share Purchase Agreement also requires French to sell a pro-rata amount of his common stock and provides for mandatory participation in certain sales by the Company.

In addition, on November 2, 2020, Fat Shark issued a senior note in the amount of $1,500,000 to French based upon an estimated positive working capital adjustment to the note of $500,000 and cancelled approximately $950,000 in indebtedness owed by Fat Shark to French. The note matures on November 1, 2023, subject to partial acceleration and repayment in certain circumstances including from the sale of certain securities by the Company for cash. The note is subject to a floating charge under Cayman law on all of the assets of Holdings and its subsidiaries.

Plan of Operations

FollowingThe Company’s primary business is to provide products, services and solutions to the acquisition, we aredrone 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 business operations of Red Cat whichconsumer market and sells its products through its e-commerce platform operated at www.rotorriot.com. The Company is also developing productssoftware solutions to provide distributedsecure 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 storage, analytics and related services toinformation from a drone, much like the drone“black box” utilized by the airline industry. The Company plans to utilize blockchain based technologies and offer its solutionsDronebox as a Software-as-a-Service platform. Potential customers include regulators to track and review flight data, insurance companies for coverage and claims administration, and pilots to maintain compliance with regulations.

The Company closed the acquisition of Fat Shark Holdings (“Fat Shark”) on November 6, 2020. Fat Shark is targetinga leading provider of headsets and goggles for professional FPV (First Person View) 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 first halfnext 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 2020software solutions for the release of its first product, “Black Box by Red Cat” although no assurances can be provided regarding the actual release date.drone industry. 

Results of Operations

Three Months Ended October 31, 20192020 and October, 31, 20182019

Revenue

WeDuring the three months ended October 31, 2020 (or the “2020 period”), we generated revenues totaling $427,807 compared to zero revenues during the three months ended July 31, 2019 (or the “2019 period”). On January 23, 2020, we completed a merger with Rotor Riot which sells drone technology on its e*commerce site located at www.rotorriot.com. The sales reported in the 2020 period represent those generated on the e*commerce site during the three months ended October 31, 2020. Prior to the merger with Rotor Riot, we did not have not generated any revenues since our inception.revenue generating activities.

Operating Expenses

During the three months ended October 31, 2020, we incurred operations expense of $122,697 compared to zero during the 2019 period. Expenses incurred during the 2020 period related to the core operations of Rotor Riot which began in January 2020 following our merger with Rotor Riot. During the three months ended October 31, 2020, we incurred research and development expenses totaling $76,724$96,559 compared to $112,096$76,724 for the three months ended October 31, 20182019 resulting in a decreaseincrease of $35,372,$19,835, or 32%26%. During the 2018 period, a substantial portion of our activities were focusedThe increase relates to payroll associated with employees hired from Rotor Riot who are working on the research and development of our first product. During the 2019 period, we completed our first fiscal quarter as a publicly traded entity and spent considerable efforts assimilating this change which resulted in a lower percentage allocation of certain operating costs to research and development.new drone technologies. During the three months ended October 31, 2019,2020, we incurred sales and marketing expenses of $24,679 compared to zero during the three months ended October 31, 2019. Costs incurred in the 2020 period related to the Rotor Riot business and included sales commissions for referrals. During the three months ended October 31, 2020, we incurred general and administrative expenses totaling $139,397$345,007 compared to $45,785$139,397 for the three months ended October 31, 20182019 resulting in an increase of $93,612,$205,610, or 204%148%. ProfessionalStock based compensation costs included in general and administrative expenses totaled $94,629 in the 2020 period compared to zero in the 2019 period. In addition, professional services costs were significantly higher in the 2020 period because the Company is now a commercial enterprise with more complex operations compared to the 2019 period whichwhen the Company was in a developmental stage.

Other Expense

Other expense totaled $232,390 during the first full quarter operating as a publicly traded entity.three months ended October 31, 2020 compared to zero during the three months ended October 31, 2019. The expense incurred during the 2020 period related to the Derivative Liability recorded in connection with the Company’s issuance of Convertible debentures and warrants in October 2020. There were no such transactions during the 2019 period.

Net Loss

Since we have not generated any revenues to date, the changes in our Net Loss can be explainedduring the three months ended October 31, 2020 totaled $722,281 compared to a Net Loss of $216,121 during the three months ended October 31, 2019, representing an increase of $506,160, or 234%. Operating expenses totaled $588,942 during the 2020 period compared to $216,121 during the 2019 period, representing an increase of $372,821, or 172%. This increase is attributable to the merger with Rotor Riot in January 2020 and costs associated with operating that business. Other expense totaled $232,390 during the three months ended October 31, 2020 compared to zero during the three months ended October 31, 2019. The expense incurred during the 2020 period related to the Derivative Liability recorded in connection with the Company’s issuance of Convertible debentures and warrants in October 2020. These increases were partially offset by a positive gross margin of $99,051 from operations of the changes in our operating expenses. As we continue to expand our operating activities in preparation forRotor Riot e*commerce site during the launch of our first product, “Black Box by Red Cat”, we expect that operating costs and net losses will continue to increase until we begin generating revenues.2020 period.

Six Months Ended October 31, 20192020 and October, 31, 20182019

Revenue

WeDuring the six months ended October 31, 2020 (or the “2020 period”), we generated revenues totaling $976,089 compared to zero revenues during the six months ended July 31, 2019 (or the “2019 period”). On January 23, 2020, we completed a merger with Rotor Riot which sells drone technology on its e*commerce site located at www.rotorriot.com. The sales reported in the 2020 period represent those generated on the e*commerce site during the six months ended October 31, 2020. Prior to the merger with Rotor Riot, we did not have not generated any revenues since our inception.revenue generating activities.

Operating Expenses

During the six months ended October 31, 2020, we incurred operations expense of $211,730 compared to zero during the 2019 period. Expenses incurred during the 2020 period related to the core operations of Rotor Riot which began in January 2020 following our merger with Rotor Riot. During the six months ended October 31, 2020, we incurred research and development expenses totaling $262,419$193,814 compared to $219,764$262,419 for the six months ended October 31, 2018,2019 resulting in an increasea decrease of $42,655,$68,605, or 19%26%. The increase primarily related to higher payroll costs inDuring the first half of the 2019 period, comparedpersonnel resources were substantially dedicated to the 2018 period.research and development of drone technologies and software. These efforts have decreased, both in absolute dollars and relative to the Company’s overall allocation of its personnel resources, during the 2020 period as the Company’s focus has transitioned to operating a commercial enterprise. During the six months ended October 31, 2019,2020, we incurred sales and marketing expenses of $48,815 compared to zero during the three months ended October 31, 2019. Costs incurred in the 2020 period primarily related to the Rotor Riot business and included sales commissions for referrals. During the six months ended October 31, 2020, we incurred general and administrative expenses totaling $275,204$619,977 compared to $84,567$275,204 for the six months ended October 31, 20182019 resulting in an increase of $190,637,$344,773, or 225%125%. ProfessionalStock based compensation costs included in general and administrative expenses totaled $189,258 in the 2020 period compared to zero in the 2019 period. In addition, professional services costs were significantly higher in the 2020 period because the Company is now a commercial enterprise with more complex operations compared to the 2019 period during which we completedwhen the Company was in a reverse merger transaction and became a publicly traded entity.developmental stage.

Net LossOther Expense

Since we have not generated any revenuesOther expense totaled $232,390 during the six months ended October 31, 2020 compared to date,zero during the changessix months ended October 31, 2019. The expense incurred during the 2020 period related to the Derivative Liability recorded in our Net Loss can be explained byconnection with the changesCompany’s issuance of Convertible debentures and warrants in our operating expenses. As we continue to expand our operating activities in preparation forOctober 2020. There were no such transactions during the launch of our first product, “Black Box by Red Cat”, we expect that operating costs and net losses will continue to increase until we begin generating revenues.2019 period.

Net Loss

Net Loss during the six months ended October 31, 2020 totaled $1,105,525 compared to a Net Loss of $537,623 during the six months ended October 31, 2019, representing an increase of $567,902, or 106%. Operating expenses totaled $1,074,336 during the 2020 period compared to $537,623 during the 2019 period, representing an increase of $536,713, or 100%. This increase is attributable to the merger with Rotor Riot in January 2020 and costs associated with operating that business. Other expense totaled $232,390 during the six months ended October 31, 2020 compared to zero during the six months ended October 31, 2019. The expense incurred during the 2020 period related to the Derivative Liability recorded in connection with the Company’s issuance of Convertible debentures and warrants in October 2020. These increases were partially offset by a positive gross margin of $201,201 from operations of the Rotor Riot e*commerce site during the 2020 period. 

Cash Flows

Operating Activities

Net cash used in operating activities was $415,848$568,452 during the sixthree months ended October 31, 20192020 compared to net cash used in operating activities of $304,433$415,848 during the three months ended October 31, 2019 representing an increase of $111,415,$152,604, or 37%. This increase in netNet cash used primarily relatedin operations, net of non-cash expenses associated with the Derivative Liability and stock based compensation, totaled $640,612 in the 2020 period compared to an operating loss which was $233,792 higher$525,556 in the 2019 period, partially offset byresulting in an increase of 115,056, or 22%. The increase primarily related to higher net costs associated with becoming a positive contribution related tocommercial enterprise through the merger with Rotor Riot in January 2020. Net cash provided through changes in operating assets and liabilities totaled $72,160 during the three months ended October 31, 2020 compared to $109,708 during the three months ended October 31, 2019, representing a decrease of $109,708.$37,548, or 34%. 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.

Investing Activities

NetNo cash was provided by investing activities was $24,704 during the sixthree months ended October 31, 2019 period2020 compared to $0$24,704 during the 2018 sixthree months ended October 31, 2018.2019. The Company acquired $24,704 of cash in connection with a reverse mergeran acquisition completed in the 2019 period.

Financing Activities

Net cash used provided by financing activities totaled $811,849 during the six months ended October 31, 2020 compared to $152,239 during the six months ended October 31, 2019, compared to $50,000 during the six months ended October 31, 2018, representing an increase of $102,239. Amounts received$659,610, or 433%. Financing activities can vary, in both periods related to capital raised from common stock transactions which can varynature and amount, from period to period. During the 2020 period, net cash of $580,000 and $235,756 was provided through the issuance of convertible debentures and notes payable, respectively. During the 2019 period, net cash of $152,239 was provided through the exercise of a warrant.

Liquidity and Capital Resources

As of October 31, 2019,2020, we had current assets totaling $289,533 primarily related to$650,551, including cash balances of $264,533.$480,065 and inventory of $170,486. Current liabilities as of October 31, 20192020 totaled $222,957 consisting$1,989,456 including derivative liability of $812,390, notes payable totaling $354,527, accounts payable totaling $355,092 and amounts due to a related party of $60,895, accrued expenses totaling $9,823, and common stock to be issued of $152,239.$329,777. Our net working capital as of October 31, 20192020 was $66,576.negative $1,388,905.

Since inception, weWe have not generated any revenues.only recently begun generating revenues and have reported net losses since our inception. To date, we have funded our operations through private offerings of common stock sourced 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. Such transactions may be insufficient to fund our cash requirements.

2019 Convertible Note Offering

In November 2019, 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 “Notes”). The Notes have a two-year term of 2 years and bear interest at a rate of 12% which accrues and is payable in full when the Notes mature.. Interest on the Notes may be paid in cash or in shares of common stock of the Company at the Conversion Price (as defined below).The. The Notes are convertible into shares of common stock at the holder’s sole discretion as follows: (A) prior to consummating an equity financing which generates gross proceeds of not less than $3,000,000 (a “Qualified Offering”), then at the 30 day volume weighted average of the closing price 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% of the price per share of common stock sold in the Qualified Offering (the “Conversion Price”) . We may, upon 10 business days advanceprior notice, elect to pre-pay the Note,Notes, including all accrued interest, in whole or in part, provided that any such prepayment prior to the one-year anniversary of the Note issuance shallwill 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 shallwill become immediately due and payable. Additionally, under the Note, unless waived by the holder, the holder shallis not be entitled to convert the Note if such conversion would result in beneficial ownership by the holder and its affiliates of more than 9.99% of the outstanding shares of common stock of the Company on such date.

2020 Convertible Note Offering

On October 5, 2020, the Company closed a private offering of convertible promissory notes in the aggregate principal amount of $600,000 and issued five-year warrants to purchase an aggregate of 399,996 shares of common stock. The notes accrue interest at the rate of 12% per annum and are payable two years from the date of issuance. The 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 (a “Qualified Offering”). The notes also contain protection from dilution in the event of a lower priced issuance.

Upon an event of default, as described in the note, the conversion price will equal the lower of (i) the thirty day volume weighted average of the closing 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 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 note, except for certain exempt issuances. No conversions under the 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 Warrants are exercisable at a price equal to the lower of (i) $1.50 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 shares of common stock for which the Warrant is exercisable is subject to adjustment in the event of a stock split or dividend, 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 of the Company, the warrant holder will be entitled to purchase the kind and amount of shares of capital stock which the Warrant entitled the warrant holder to purchase immediately prior to such event. The Warrants also include piggyback registration rights.

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.

Going Concern

We have experiencedonly recently begun generating revenues and have reported net losses from operations since our inception. To date, we have not been able to generate product sales or to become cash flow positive. 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 of operations and/or upon obtaining additional financing. The report from our independent registered public accounting firm for the fiscal year ended April 30, 20192020 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 concern doubtsconcerns through a number of actions including efforts to (a) raise capital through the public markets, (b) release our first commercial product 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.

Critical Accounting Policies and Estimates

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 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.

Off-Balance Sheet Arrangements

We have no off-balance sheet arrangements.

Recently Issued Accounting Pronouncements

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.

ITEM 3. QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISK

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

ITEM 4. CONTROLS AND PROCEDURES

Evaluation of Disclosure Controls and Procedures

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 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.Act, as of October 31, 2020. 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 October 31, 2019.2020.

Our disclosure controls and procedures are not effective for the following reasons:

In November 2019, we engaged an experienced financial consultant to assist us in reviewing the financial statements for the quarter ended October 31, 2019 to ensure their completeness, consistency and compliance with GAAP including the financial statement presentation and disclosures related thereto.

Changes in Internal Control over Financial Reporting

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.

PART II - OTHER INFORMATION

ITEM 1. LEGAL PROCEEDINGS

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.

ITEM 1A. RISK FACTORS

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.

ITEM 2. RECENT UNREGISTERED SALES OF EQUITY SECURITIES AND USE OF PROCEEDS 

ThereExcept as set forth below 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 September 18, 2020 we issued 209,758 shares of common stock to a director upon the conversion of a promissory note in the principal amount of $125,000 and $11,342 of accrued interest.

On October 5, 2020, we closed a financing which included the issuance of (i) convertible notes to four investors in the aggregate amount of $600,000 and (ii) warrants to purchase an aggregate of 399,998 shares of common stock at an exercise price equal to the lower of $1.50 per share to or at a 25% discount to the price per share of common stock sold in a Qualified Offering. A director of the Company purchased $300,000 of the convertible notes and was issued 200,000 of the warrants.

On October 7, 2020, we issued 471,521 shares of common stock to an investor upon the conversion of a promissory note in the principal amount of $300,000 and $31,266 of accrued interest.

On October 9, 2020, we issued 29,166 shares of common stock to our chief executive officer upon the conversion of a promissory note in the principal amount of $25,000 and $2,416 of accrued interest.

ITEM 3. DEFAULTS UPON SENIOR SECURITIES

None.  

ITEM 4. MINE SAFETY DISCLOSURES

Not applicable 

ITEM 5. OTHER INFORMATION

None.

ITEM 6. EXHIBITS

EXHIBIT INDEX