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 accelerated filer”, “accelerated filer” and “smaller reporting company” and “emerging growth 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 ~~18, 2020,~~22, 2021, there were ~~19,861,091~~27,460,926 shares of the registrant’s common stock outstanding.

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”). 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 ~~8-K/A~~10-K for the fiscal year ended April 30, 2020 of Red Cat Holdings, Inc. (the “Company” or “Red Cat”), filed with the Securities and Exchange Commission (“SEC”) on ~~July 31, 2019.~~August 13, 2020.

~~Following~~ Since April 2016, the ~~acquisition of Rotor Riot, we remain focused on providing~~Company’s primary business has been to provide products, services and solutions to the drone industry. ~~We believe that Rotor Riot’s visibility and presence~~It operates in two sectors of the drone ~~marketplace will foster growth in sales~~industry. Rotor Riot, LLC, an Ohio limited liability company and a wholly owned subsidiary (“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~~e-commerce platform operated at www.rotorriot.com. The Company is also developing software solutions to provide secure cloud-based analytics, storage and ~~provide an initial target base of customers~~services for the ~~launch of “Dronebox”. We are targeting~~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 ~~second half of 2020 for~~“black box” utilized by the release of Dronebox although no assurances can be provided regarding the actual release date. Dronebox is being designed to provide distributed data storage, analytics and related services to the droneairline industry. The Company plans to ~~utilize blockchain based technologies and~~ offer ~~its solutions~~Dronebox 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.~~

~~In July 2019, we changed our name from TimeFire VR Inc. to Red Cat~~The Company closed the acquisition of Fat Shark Holdings ~~Inc.~~

~~In August 2019, we changed our fiscal year to April 30 which was the historical fiscal year~~(“Fat Shark”) on November 2, 2020. Fat Shark is a leading provider of ~~Red Cat.~~

~~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~~headsets and goggles for ~~1,200). All references in this Quarterly Report to shares of the Company’s common stock, including prices per~~professional FPV (First Person View) racers and drone pilots and has an estimated 85% share of its ~~common stock, reflect~~market. The Company expects that Fat Shark will generate a majority of its revenue over the ~~Reverse Stock Split.~~

~~In January 2020, we consummated~~next 12 months. This acquisition continues the Company’s efforts to become a ~~merger agreement~~fully-integrated drone business with ~~Rotor Riot, LLC (“Rotor Riot”),~~ a ~~seller~~strong supply chain, as well as a provider of ~~commercial products in~~software solutions for the drone ~~marketplace, primarily focused on FPV (“first person view”). Rotor Riot primarily sells its products through an e*commerce site located at www.rotorriot.com.~~industry.

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.

Our Series A Preferred Stock is convertible to common stock at a ratio of 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 converted automatically to common stock upon the effectiveness of the reverse split of our common stock in August 2019. 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.

Our 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 held, and votes together with the common stock on an as-converted basis. This 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 total, the common stock, Series A Preferred Stock, and Series B Preferred Stock issued under the SEA were valued at $117,754.

~~On May 15, 2019, we acquired TimeFireVR, Inc., in a $117,754 stock~~The transaction ~~classified~~was accounted for as a ~~reverse-merger transaction. The acquisition will provide access to~~“reverse acquisition” as the ~~public markets and support~~stockholders of Red Cat possessed majority voting control of the ~~development of our product platform.~~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 of the Company since inception. The transaction was accounted for as follows:

~~The goodwill recognized in connection~~Series A Preferred Stock is convertible to common stock at a ratio of 8.33 shares of common stock for each share of preferred stock and votes together with the ~~acquisition is primarily attributable~~common stock on an as-converted basis. The new Series A Preferred Stock converted automatically to ~~anticipated synergies and benefits from~~common stock upon the ~~combination~~effectiveness of the ~~two companies,~~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 ~~access to~~prices per share of its common stock, reflect the ~~public markets to raise capital, and is expected to be deductible for tax purposes.~~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 ~~Red Cat Holdings.~~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 common stock issued based on (A)(i) $3,700,000 minus (ii)~~$915,563~~ $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~~variable weighted average price (“VWAP”) of the 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 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.

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 management ~~of Red Cat Holdings~~ controls the operating decisions of the combined company. Accordingly, we have accounted for the transaction as an acquisition of Rotor Riot by ~~Red Cat.~~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 shares issued times $0.82 per share which equaled the closing price of the Company’s common stock on the date that the merger agreement was consummated).

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 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 are being amortized over 7 years. The carrying value of Brand Name will be evaluated on a quarterly basis, including a formal evaluation at year end.

On September 30, 2020, the Company entered into a share purchase agreement (“Share Purchase Agreement”) with Greg French (“French”), the founder and sole shareholder of Fat Shark Holdings (“Fat Shark”), to acquire all of the issued and outstanding shares of Fat Shark and its subsidiaries. The transaction closed on November 2, 2020 and was valued at $8,354,076 based on (i) the issuance of 5,227,273 shares of common stock with a value of $6,351,076 on the date of closing (ii) a senior secured promissory note in the original principal amount of $1,753,000 which matures on November 1, 2023, and (iii) a cash payment of $250,000. 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 allocation is as follows:

The foregoing amounts reflect our ~~preliminary~~current estimates of fair value as of the ~~January 23,~~November 2, 2020 acquisition date. The Company expects to recognize fair values associated with the customer relationships acquired, as well as the ~~Rotor Riot~~Fat Shark 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.

On October 5, 2020, the Company closed a private offering of convertible promissory notes (the “2020 Notes”) in the aggregate principal amount of $600,000 which included the issuance of five-year warrants to purchase an aggregate of 399,998 shares of common stock. 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 equal to the lower of (i) $1.00 per share or, (ii) at a price equal to 75% of the price of an offering of common stock that results in the listing for trading on certain stock exchanges (a “Qualified Offering”). The 2020 Notes also contain protection from dilution which would lower the conversion price in the event of a lower priced issuance. An event of default could also result in a reduction of the conversion price.

The Company may prepay any portion of the 2020 Notes, without penalty or premium, upon ten business days’ notice. No conversion will be completed if it would result in the noteholder, including its affiliates, owning more than 9.99% of the Company’s outstanding common stock immediately after completing such conversion. The Warrants are exercisable at $1.50 per share. The exercise price will be reduced to a price equal to 75% of the price per share 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 assets and the settlement of liabilities and commitments in the normal course of business. As reflected in our accompanying financial statements, we have ~~generated less than $50,000 in revenues since our inception~~negative working capital of $8,898,797 at January 31, 2021 and have accumulated losses totaling approximately $2$12.7 million through January 31, ~~2020.~~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.

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.

Principles of Consolidation –Our condensed consolidated financial statements include the accounts of our subsidiaries, Red Cat Propware, Inc. ~~and~~, Rotor Riot, ~~LLC.~~LLC, and Fat Sharking Holdings. 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.

Cash– At January 31, ~~2020,~~2021, we ~~held~~had cash of ~~$442,863 with three~~$471,652 in multiple commercial ~~banks.~~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 – Other Assets at January 31, 2021 include $473,545 of prepaid inventory, $22,948 of prepaid expenses, and $9,372 of security deposits.

Leases– Leases at January 31, ~~2020~~2021 are short term in nature and do not require accounting under the lease accounting standards.

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 ~~plan to~~ 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.

~~Common Stock~~Fair Value of Financial instruments – ~~Our~~FASB ASC 820, “Fair Value Measurements and Disclosures” (“ASC 820”), provides rules for assets and liabilities measured at fair value on a recurring basis. ASC 820 establishes a common ~~stock has~~definition for fair value to be applied to existing generally accepted accounting principles that require the use of fair value measurements, and establishes a ~~par~~framework for measuring fair value and expands disclosure about such fair value measurements.

ASC 820 defines fair value 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 requires the use of ~~$0.001 per share.~~valuation techniques that maximize the use of observable inputs and minimize the use of unobservable inputs. These inputs are prioritized below:

The Company accounts for its derivative liabilities, at fair value, on a recurring basis under level 2.

~~Warrants~~Convertible Securities and Derivatives – ~~In connection with our Series B Preferred Stock Issuance, we issued~~ 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 ~~purchase shares~~the warrants results in the debt instrument being recorded at a discount from the face amount of ~~our common stock. Outstanding warrants are standalone~~the debt and the value allocated to the warrant is recorded to additional paid-in capital.

When the convertible debt or equity instruments contain embedded derivative instruments that are ~~not puttable or mandatorily redeemable by~~to be bifurcated and accounted for as liabilities, the ~~holder and~~total proceeds from the convertible host instruments are ~~classified as equity. We measured~~first allocated to the ~~fair value of~~bifurcated derivative instruments. The remaining proceeds, if any, are then allocated to the ~~warrants using the Black-Scholes option pricing model.~~convertible instruments themselves, resulting in those instruments being recorded at a discount from their face value.

Revenue Recognition –The Company recognizes revenue in accordance with ASC 606, “Revenue from Contracts with Customers”, issued by the Financial Accounting Standards Board (“FASB”). This standard includes a comprehensive evaluation of factors to be considered regarding revenue recognition including (i) identifying the promised goods, (ii) evaluating performance obligations, (iii) measuring the transaction price, (iv) allocating the transaction price to the performance obligations if there are multiple components, and (v) recognizing revenue as each obligation is satisfied. The Company’s revenue transactions include a single component, specifically, the shipment of goods to customers as orders are received. Customers pay at the time they order and the Company recognizes revenue upon shipment. The timing of the shipment ~~which occurs quickly after the~~of orders can vary considerably depending upon whether an order is ~~received.~~ for an item normally maintained in inventory or an order that requires assembly or unique parts. Customer deposits totaled $96,580 and $38,419 at January 31, 2021 and April 30, 2020, 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.

Comprehensive Loss –~~During~~ –During the three and nine months ended January 31, ~~2020~~2021 and ~~2019,~~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 as our first issuances of stock based awards occurred ~~during the three months ended~~in October ~~31, 2019.~~2019 and we have not experienced any forfeitures to date. 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 inin Note ~~12.~~13.

In connection with the merger agreement with Rotor Riot, the Company agreed to assume certain financial obligations of Rotor Riot totaling $216,099 in the aggregate. A summary of these obligations is as follows:

~~In November 2019, Rotor Riot entered into an agreement with PayPal under which it borrowed $100,000.~~ 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 note is being repaid through 52 weekly payments of $2,056 ending in~~In November ~~2020, resulting in an effective interest rate of 16%. The balance outstanding at January 31, 2020 was $88,398.~~

~~In August~~ 2019, Rotor Riot entered into an agreement with ~~Shopify Capital~~PayPal under which it ~~sold $176,000~~borrowed $100,000. The note was repaid in January 2021. In January 2021, Rotor Riot borrowed $75,444 from PayPal which is being repaid through daily payments equal to 20% of ~~“Purchased Receivables” for total consideration~~the net amount of ~~$160,000.~~ each customer payment. The balance outstanding at January 31, 2021 was $75,369.

Shopify Capital is an affiliate of Shopify, Inc. which provides sales software and services to the Company. The Company processes customer transactions ordered on ~~its~~the e-commerce site for Rotor Riot through Shopify. Shopify Capital has entered into multiple agreements with the Company in which ~~will retain 14%~~it has “purchased receivables” at a discount. Shopify retains a portion of the Company’s daily receipts until the purchased receivables have been paid. The Company recognizes the discount as a ~~total of $176,000~~finance charge, in full, in the month in which the agreement is ~~retained.~~executed. The ~~balance outstanding at January 31, 2020 was $64,487.~~

~~During 2019, Rotor Riot purchased inventory from Race Day Quads (“RDQ”),~~Company assumed an ~~online retailer of drone racing parts~~.~~The owner of Race Day Quads~~existing agreement when it acquired ~~a Membership Interest in~~ Rotor Riot in ~~March 2019. In October 2019, RDQ agreed to allow Rotor Riot to pay for $82,141 of inventory purchases on an installment basis through June~~January 2020. ~~The balance outstanding at January 31, 2020~~This agreement was ~~$58,724.~~repaid in May 2020. Since then, the Company has entered into the following agreements with Shopify:

BRIT, LLC, formally known as Brains Riding in Tanks, LLC, was the largest shareholder 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, the Company issued a promissory note to BRIT, LLC in the principal amount of $175,000. The promissory note bears interest at 4.75% annually and ~~requires $3,500~~provides for monthly principal payments of ~~the principal amount to be paid monthly.~~$3,500. The outstanding principal amount and all 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 ~~outstanding~~and accrued interest on the note totaled $153,814 and $8,517 at January 31, ~~2020 totaled $175,182, reflecting the addition of accrued interest from the date of issuance through January 31, 2020.~~2021, respectively.

BRIT incurred certain financial obligations in support of the operations of Rotor Riot which the Company ~~has agreed to assume~~assumed responsibility to ~~pay. The total amount assumed was $167,939 which equals~~pay at the ~~balance outstanding at January 31, 2020.~~effective time of the Merger. These obligations bear interest at annual rates ranging from 7.5% to 21.74%. The outstanding balance totaled $167,730 at January 31, 2021.

11III.

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. The balance owed at January 31, 2021 was $74,000.

Long Term

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, 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”~~“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 ~~have~~had a term of 2 years and ~~bear~~accrued interest at aan annual rate of 12% through the date of conversion.

In October 2020, we closed a private offering in which ~~accrues~~we sold $600,000 of convertible promissory notes (“Promissory Notes”) and ~~is payable in full when the Notes mature. Interest on the Notes may be paid in cash or in~~issued warrants to purchase 399,998 shares of common ~~stock~~stock. The Promissory Notes accrue interest at 12% annually, and the principal and accrued interest is due two (2) years from the date of ~~the Company at the Conversion Price (as defined below).The~~issuance. The Promissory Notes are convertible into shares of our common stock at a price equal to the ~~holder’s sole discretion as follows: (A) prior~~lower of $1.00, or (b) at a price equal to ~~consummating an equity financing which generates~~75% of the price of securities sold in a Qualified Offering. The terms of a Promissory Note will be amended if a holder believes that a security issued, or amended, after the issuance of the Promissory Note includes any term or provision more favorable than those provided in the Notes. The warrants are exercisable for five (5) years and entitle the holder to purchase common shares 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 a Qualified Offering. In March 2021, 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 a private offering, resulting in gross proceeds of ~~not less than $3,000,000 (a “Qualified Offering”), then at~~$500,000, of Units consisting of (i) a convertible note and (ii) a warrant to purchase the ~~30 day volume weighted average~~number of shares of common stock equal to 135% of the ~~closing price~~dollar amount of ~~a share~~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 ~~as listed~~at a price equal to the lower of (a) $1.00, if the conversion occurs prior to a “Qualified Offering”, or ~~quoted on the market in which the shares are then traded or listed, or (B) after we have consummated~~(b) a ~~Qualified Offering, at 40%~~25% discount of the price per share of common stock ~~sold~~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 “Conversion Price”) . We may, upon 10 business days advance notice, elect to pre-pay~~Offering. The terms of a Note will be amended if a holder believes that a security issued, or amended, after the ~~Note, including all accrued interest, in whole or in part, provided that any such prepayment prior to the one-year anniversary~~issuance of the Note ~~issuance shall~~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. The warrants are exercisable for five (5) years and entitle the holder to purchase common shares at a price equal to ~~112%~~the lower of (i) $1.50, or (ii) a 25% discount to the price per share of common stock offered in a Qualified Offering. In March 2021, the Company received notice from 100% of the ~~then outstanding original principal amount. Upon an event~~holders 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 entitledtheir intent to convert the ~~Note if such conversion would result in beneficial ownership by the holder and its affiliates~~entire amount of ~~more than 9.99% of the outstanding~~their Notes, plus accrued interest, into shares of common ~~stock~~stock. The conversion and issuance had not yet been processed and completed at the date of the ~~Company~~filing of this report on such date. Based on the Company’s results since inception, both on an operating and capital raising basis, we believe that it is more likely than not that the Company will not be able to complete an equity financing of at least $3,000,000 during the term of the Notes. In addition, we do not believe that the Company will be able to pre-pay the Notes prior to the one year anniversary of their issuance.~~Based on these conclusions, the Company has not recognized a beneficial conversion feature or a derivative liability in connection with the convertible debentures.~~Form 10-Q.

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 31, ~~2020~~2021 and April 30, ~~2019,~~2020, we had accumulated deficits of approximately ~~$1,948,000~~$12,700,000 and ~~$972,000,~~$2,600,000, respectively. Deferred tax assets related to the future benefit of these net operating losses for tax purposes totaled approximately ~~$78,000~~$508,000 and ~~$39,000,~~$104,000, 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 31, ~~2020~~2021 and April 30, ~~2019.~~2020.

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

Our Series A Preferred Stock (“Series A 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 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 of Series A Stock into Common Stock since August 2019 are as follows:

Our Series B Preferred Stock (“Series B Stock”) is convertible into common stock at a ratio of 0.8334 shares of common stock for each share of Series B Stock held and votes together with the common stock on an as-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 into Common Stock are as follows:

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.~~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 41,667 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.

In January 2021, the Company issued five-year warrants to purchase a total of 675,000 shares in connection with the issuance of $500,000 of convertible notes. 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 $2,870,666 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 nine months ended January 31, 2021.

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 shares vest ratably over a ~~2 year~~two-year period and expire in October 2029. Options to purchase 150,000 shares vest ratably over a ~~3 year~~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 ~~3 year~~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.

~~Compensation~~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 ~~recognized in~~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 ~~of which $105,976 was included in general~~ and ~~administrative expenses and $43,486 was included in research and development expenses. Compensation expense recognized in the nine months ended January 31, 2020 was~~ $161,529, of which $114,791 was included in general and administrative expenses and $46,738 was included in research and development expenses. There was no compensation expense recognized in the nine months ended January 31, 2019.respectively.

Options exercisable as of January 31, ~~2020~~2021 totaled ~~$147,475.~~964,143. The remaining weighted average contractual term of the options outstanding at ~~October~~January 31, ~~2019~~2021 was ~~9.47~~6.63 years. The aggregate intrinsic value of outstanding options, representing the excess of the stock price at January 31, ~~2020~~2021 of ~~$1.74~~$5.00 over the exercise price of each option, was ~~$1,147,677 at January 31, 2020.~~$7,062,446.

The Company has financial instruments that are considered derivatives or contain embedded features subject to derivative accounting related to 10 convertible notes issued totaling $1,100,000 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 a future “Qualified Offering”. Attached to these notes as additional consideration was 1,074,998 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 January 31, 2021. The fair values 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 value of the derivatives aggregated $9,144,226, using the following assumptions: estimated 1.67-5.00-year term, estimated volatility 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 31, 2021, are summarized as follows:

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 the fiscal year ended April 30, 2019 and made payments totaling $8,100.~~

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.

~~Note 13 - Commitments~~Payable to Aerocarve – In August 2020 and ~~Contingencies~~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, 2021, the Company made principal repayments of this note totaling $5,000.

~~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.~~

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

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. ~~See also the audited financial statements and footnotes in our Current Report Form 8-K/A filed with the SEC on July 31, 2019.~~

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 ~~Current~~Annual Report on Form ~~8-K~~10-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.

Effective May 15, 2019, we closed a share exchange agreement with Red Cat Propware, Inc., a Nevada corporation (“Red Cat Propware”), and its then current shareholders (the “Acquisition”), pursuant to which we acquired all of the ~~Company entered into~~issued and outstanding capital stock of Red Cat Propware in exchange for our issuance of: (i) an ~~Agreement~~aggregate of ~~Merger~~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 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 ~~“Merger Agreement”~~“Beneficial Ownership Limit”).

Effective August 1, 2019, we conducted a 1 for 1,200 reverse split 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 remaining shares of Series A Stock are convertible to common stock at a ratio of approximately 8.33 shares of common stock for each share of Series A Stock.

On January 23, 2020, pursuant to the terms of a ~~wholly owned Ohio subsidiary of the Company (the “Ohio Acquisition Sub”),~~merger agreement, we acquired Rotor Riot, LLC, anand Ohio limited liability company (“Rotor Riot”), ~~and the three members of Rotor Riot (the “Members”). Pursuant to the terms of the Merger Agreement, upon consummation of the~~in a merger ~~contemplated by the Merger Agreement~~ (the “Merger”)~~, the Ohio Acquisition Sub would merge~~ in which our subsidiary merged with and into Rotor Riot, with Rotor Riot ~~continuing as~~being the surviving ~~entity and~~corporation in the Merger. As a result, Rotor Riot became a wholly owned subsidiary of the Company. ~~At the effective time of the Merger, the issued and outstanding membership interests~~

Each limited liability company member of Rotor Riot ~~held by~~received a pro rata portion of the ~~Members, which represented 100%~~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 debt and other payables of Rotor ~~Riot’s issued and outstanding membership interests, would be converted into shares~~Riot, including those of common stock of the Company. On January 22, 2020, the parties to the Merger Agreement entered into an amendment to the Merger Agreement, joined in by Rotor Riot Acquisition Corp., a newly formed, wholly owned Delaware subsidiary of the Company (the “Delaware Acquisition Sub”), pursuant to which, among other things, the Delaware Acquisition Sub replaced the Ohio Acquisition Sub as the acquisition subsidiary to merge with and into Rotor Riot in connection with the 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~~principal 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~~The aggregate amount of ~~$2,784,437~~debt and aother 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~~stock.

Pursuant to the ~~members~~terms of a make whole agreement, as of the effective date, the Company agreed to pay all obligations of Rotor ~~Riot.~~

~~Immediately following~~Riot, in the ~~Merger,~~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 offering by the Company ~~had 19,148,698~~in amount of at least $3,000,000.

On September 30, 2020, the Company entered into a share purchase agreement (“Share Purchase Agreement”) with Greg French (“French”), the founder and sole shareholder of Fat Shark Holdings (“Fat Shark”), to acquire all of the issued and outstanding shares of Fat Shark and its subsidiaries. The transaction closed on November 2, 2020 and was valued at $8,354,076 based on (i) the issuance of 5,227,273 shares of common stock with a value of $6,351,076 on the date of closing, (ii) a senior secured promissory note in the original principal amount of $1,753,000 which matures on November 1, 2023, and (iii) a cash payment of $250,000. 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 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 ~~Merger, BRIT, received 1,997,684~~drone industry.

The closing of the ~~Shares, which represented approximately 10.4%~~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 ~~following~~on a consolidated basis.

On February 15, 2021. the ~~consummation~~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 ~~Merger.~~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 Merger was intended to be treated as a tax-free reorganization under Section 368(a) of the Internal Revenue Code of 1986, as amended.~~

The Company’s primary business is to provide products, services and solutions to the drone industry. ~~We believe that Rotor Riot’s visibility and presence~~It operates in three sectors of the drone ~~marketplace will foster growth in sales~~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~~e-commerce platform operated at www.rotorriot.com. The Company is also developing software solutions to provide secure cloud-based analytics, storage and ~~provide an initial target base of customers~~services for the ~~launch of “Dronebox”. We are targeting~~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 ~~second half of 2020 for~~“black box” utilized by the release of Dronebox although no assurances can be provided regarding the actual release date. Dronebox is being designed to provide distributed data storage, analytics and related services to the droneairline industry. The Company plans to ~~utilize blockchain based technologies and~~ offer ~~its solutions~~Dronebox as a Software-as-a-Service platform. ~~Potential customers include regulators~~

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 ~~track and review flight data, insurance companies~~become a fully-integrated drone business with a strong supply chain, as well as a provider of software solutions for ~~coverage and claims administration, and pilots to maintain compliance with regulations.~~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, ~~2020 (or the “2020 period”),~~2021, we generated revenues totaling ~~$34,538~~$2,145,988 compared to ~~zero revenues~~$34,538 during the three months ended January 31, ~~2019 (or the “2019 period”). On January 23,~~2020 representing an increase of more than 100 percent. During calendar 2020, we ~~completed a merger with~~acquired two drone technology companies, Rotor Riot ~~which sells drone technology on its e*commerce site located~~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 ~~www.rotorriot.com.~~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 ~~sales reported in~~periods presented are not comparable as the 2020 period ~~represent those generated on~~included one week of revenues for Rotor Riot as compared to the ~~e*commerce site from January 24, 2020 through~~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 ~~$138,465~~$167,968 compared to ~~$107,246~~$94,979 for the three months ended January 31, ~~2019~~2020, resulting in an increase of ~~$31,219,~~$72,989, or ~~29%~~77%. ~~Higher~~The increase relates to payroll ~~costs represented 66%~~associated with employees hired from Rotor Riot and Fat Shark who are working on the research and development of ~~the increase, or $20,697, as they increased to $76,056 in the 2020 period compared to $55,359 in the 2019 period.~~ new drone technologies.

During the three months ended January 31, ~~2020,~~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 ~~$318,458~~$499,155 compared to ~~$219,805~~$212,482 for the three months ended January 31, ~~2019~~2020 resulting in an increase of ~~$98,653,~~$286,673, or ~~45%~~135%. ~~Professional~~In addition, professional services costs were significantly higher in the ~~2020 period~~three months ended January 31, 2021, because the Company is now a ~~public entity whereas in~~commercial enterprise with more complex operations compared to the ~~2019 period~~three months ended January 31, 2020, when the Company was primarily still ~~privately owned.~~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.

~~Since we have only generated very modest revenues to date, the changes in our~~ Net Loss ~~can be explained by~~during the ~~changes~~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 ~~our operating expenses.~~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, ~~2020,~~2021, we generated revenues totaling ~~$34,538~~$3,122,077 compared to ~~zero~~$34,538 revenues during the nine months ended January 31, ~~2019. On January 23,~~2020, representing an increase of more than 100 percent. During calendar 2020, we ~~completed a merger with~~acquired two drone technology companies, Rotor Riot ~~which sells drone technology on its e*commerce site located at www.rotorriot.com. The sales reported in~~and Fat Shark. Prior to these transactions, we did not have any revenue generating activities. During the ~~2020 period represent those~~nine months ended January 31, 2021, Rotor Riot and Fat Shark generated onapproximately 51% and 49% of our Revenues, respectively.

During the ~~e*commerce site from~~nine months ended January ~~24, 2020 through~~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%.

During the nine months ended January 31, 2021, we incurred operating expense of $2,790,912 compared to $994,546 during the nine months ended January 31, 2020. The increase is directly related to the acquisitions of Rotor Riot in January 2020 and Fat Shark in November 2020.

During the nine months ended January 31, 2021, we incurred research and development expenses totaling ~~$400,884~~$341,892 compared to ~~$258,636~~$354,146 for the nine months ended January 31, ~~2019,~~2020 resulting in ~~an increase~~a decrease of ~~$142,248,~~$12,254, or ~~55%~~3%. Payroll expense totaled $214,491 during the 2020 period compared to $183,863 during the 2019 period, representing an increase of $30,628, or 17%. In addition, stock based compensation totaled $46,738 during the 2020 period compared to zero during the 2019 period. The increase inrelates to payroll ~~costs resulted in an increase in overhead~~associated with employees hired from Rotor Riot and ~~administrative costs in~~Fat Shark who are working on the ~~2020 period compared to the 2019 period.~~ research and development of new drone technologies.

During the nine months ended January 31, ~~2020,~~2021, we incurred ~~general~~sales and ~~administrative~~marketing expenses ~~totaling $593,662 compared to $372,745 for the nine months ended January 31, 2019 resulting in an increase~~ of $220,917, or 59%. Professional services costs were significantly higher in the 2020 period during which we completed a reverse merger transaction and became a publicly traded entity. Professional services costs totaled 407,995 during the nine months ending January 31, 2020 compared to $222,244 during the nine months ending January 31, 2019, representing an increase of 185,751, or 84%.

~~Since we have only generated very modest revenues to date, the changes in our Net Loss can be explained by the changes in our operating expenses.~~

Net cash used in operating activities was $704,651 during the nine months ended September 30, 2020 compared to net cash used in operating activities of $637,168 during the nine months ended September 30, 2019 representing an increase of $67,483, or 11%. This increase in net cash used primarily related to an operating loss, net of stock based compensation, which was $183,332 higher in the 2020 period, partially offset by a positive contribution related to changes in operating assets and liabilities of $109,880 during the 2020 period.

~~Net cash provided by investing activities was $46,327 during the nine months ended January 31, 2020~~$97,534 compared to $0 during the nine months ended January 31, ~~2019.~~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 31, 2020 resulting in an increase of $451,003, or 94%. In addition, professional services costs were significantly higher 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.

During the nine months ended January 31, 2021, we incurred stock compensation expenses of $1,068,317 compared to $161,529 during the nine months ended January 31, 2020 resulting in an increase of $906,788 or greater than 100%.

Other expense totaled $8,069,797 during the nine months ended January 31, 2021 compared to $0 during the nine months ended January 31, 2020. The ~~Company acquired $46,327 of cash~~expense incurred during the nine months ended January 31, 2021 related to the Derivative Liability recorded in connection with ~~two acquisitions completed~~the Company’s issuance of Convertible Debentures and warrants in October 2020 and January 2021. There were no such transactions during the nine months ended January 31, 2020. 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 nine months ended January 31, 2021 totaled $10,089,785 compared to a Net Loss of $976,242 during the nine months ended January 31, 2020, ~~period.~~representing an increase of $9,113,543, or more than 100%. Approximately 88% 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 12% 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.

Net cash used in operating activities was $917,016 during the nine months ended January 31, 2021 compared to net cash used in operating activities of $704,651 during the nine months ended January 31, 2020 representing an increase of $212,365, or 30%. Net cash used in operations, net of non-cash expenses associated with the Derivative Liability and stock-based compensation, totaled $872,484 in the nine months ended January 31, 2021 compared to $814,713 in the nine months ended January 31, 2020, resulting an increase of $57,771, or 7%. The increase primarily related to higher net costs associated with becoming a commercial enterprise through the merger with Rotor Riot in January 2020 and the acquisition of Fat Shark in November 2020. Net cash used in changes in operating assets and liabilities totaled $44,532 during the nine months ended January 31, 2021 compared to net cash provided by operating activities of $110,062 during the nine months ended January 31, 2020, representing a decrease in cash provided of $154,594, or 140%. 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 during the nine months ended January 31, 2020. The amounts for both periods related to acquisitions which can vary from one transaction to another.

Net cash ~~used~~ provided by financing activities totaled $1,200,368 during the nine months ended January 31, 2021 compared to $597,749 during the nine months ended January 31, 2020, ~~compared~~representing an increase of $602,619, or 101%. Financing activities can vary, in nature and amount, from period to ~~$469,000 during~~period. During the nine months ended January 31, ~~2019, representing an increase~~2021, net cash of ~~$128,749, or 27%. Amounts received in both periods related to capital raised from common stock~~$1,080,000 and ~~debt transactions. Capital transactions can vary from period to period depending upon market conditions, both at~~$58,508 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 ~~macro-level~~warrant and ~~specific to the Company.~~sale of convertible debentures, respectively.

As of January 31, ~~2020,~~2021, we had current assets totaling ~~$616,999 primarily related to~~$1,997,948, including cash ~~balances~~ of ~~$442,863.~~$471,652 and inventory of $708,017. Current liabilities as of January 31, ~~2020~~2021 totaled ~~$816,932 consisting~~$10,896,745 including derivative liability of ~~accounts payable of $219,133, accrued expenses totaling $43,069,~~$9,144,226, notes payable totaling ~~$211,609,~~$177,279, accounts payable totaling $873,312 and amounts due to a related party of ~~$343,121.~~$395,544. Our net working capital as of January 31, ~~2020~~2021 was negative ~~$199,933.~~$8,898,797.

~~Since inception, we~~We 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.~~

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.~~officer (collectively, the ~~“Notes”~~“2019 Notes”). The 2019 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 2019 Notes may be paid in cash or in shares of common stock of the Company at the 2019 Note Conversion Price (as defined below)~~.The~~. The 2019 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(in this case, a “Qualified Offering”), then at the ~~30 day volume weighted average of the closing price~~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% of the price per share of common stock sold in the Qualified Offering ~~(the~~(in this case, the “Conversion Price”). We may, upon 10 business days ~~advance~~prior notice, ~~elect to~~ pre-pay the ~~Note,~~2019 Notes, including all accrued interest, in whole or in part, provided that any such prepayment prior to the one-year anniversary of the 2019 Note issuance ~~shall~~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 ~~shall~~will become immediately due and payable. Additionally, under the 2019 Note, unless waived by the holder, the holder ~~shall~~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 outstanding shares of common stock of the Company on such date.

On October 5, 2020, 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 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 2020 Notes also contain protection from dilution in the event of a lower priced issuance.

Upon an event of default, as described in the 2020 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 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 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 2020 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 2020 Warrant entitled the warrant holder to purchase immediately prior to such event. The 2020 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.

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 ~~experienced~~reported net losses ~~from operations~~ since our inception. ~~To date, we have not been able~~We expect to ~~generate product sales or to become cash flow positive.~~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 ~~of operations~~ and/or upon obtaining additional financing. The report from our independent registered public accounting firm for the fiscal year ended April 30, ~~2019~~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 ~~concern doubts~~concerns 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.

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.

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.~~Act, as of January 31, 2021. 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 31, ~~2020.~~2021.

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

We did not maintain effective controls to identify and maintain segregation of duties in identifying, authorizing, approving, accounting for, and disclosing significant estimates, related-party transactions, significant unusual transactions, and other non-routine events and transactions. Specifically, one individual, our Chief Executive Officer, initiates non-routine transactions, reviews, evaluates, approves, and records non-routine transactions and initiates journal entries, approves journal entries, and posts journal entries to the general ledger. There is no independent review of any financial duties performed by this individual.

Our management and/or other suitably qualified personnel did not perform an independent review of the financial statements and all related disclosures for completeness, consistency, and compliance with generally accepted accounting principles (“GAAP”) and our accounting and disclosure policies. Specifically, one individual, our CEO, reviews and approves the financial statements, including disclosures.

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. On January 23, 2020, the experienced financial consultant joined the Company as Chief Financial Officer. We expect that the appointment of an experienced financial executive will enable us to strengthen our internal controls including those controls and procedures that we have recognized as not operating effectively.

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.

~~There~~Except 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 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)
~~607 Ponce de Leon Ave, Suite 407~~370 Harbour Drive, Palmas del Mar
~~San Juan,~~Humacao, PR	~~85251~~00791
(Address of principal executive offices)	(Zip Code)

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

PART I.	FINANCIAL INFORMATION	Page

Item 1.	Financial Statements:	3

	Unaudited Balance Sheet as of January 31, ~~2020~~2021 and Balance Sheet as of April 30, ~~2019~~2020	3 4

	Unaudited Statements of Operations for the Three and Nine Months Ended January 31, ~~2020~~2021 and ~~2019~~2020	45

	Unaudited Statement of Changes in Shareholders’ Equity for the Three and Nine Months Ended January 31, ~~2020~~2021 and ~~2019~~2020	56

	Unaudited Statements of Cash Flows for the Nine Months Ended January 31, ~~2020~~2021 and ~~2019~~2020	6 8

	Notes to Financial Statements	710

Item 2.	Management's Discussion and Analysis of Financial Condition and Results of Operations	1521

Item 3.	Quantitative and Qualitative Disclosures about Market Risk	1928

Item 4.	Controls and Procedures	1928

PART II.	OTHER INFORMATION

Item 1.	Legal Proceedings	2030

Item 1A.	Risk Factors	2030

Item 2.	Unregistered Sales of Equity Securities and Use of Proceeds	2030

Item 3.	Defaults Upon Senior Securities	2030

Item 4.	Mine Safety Disclosures	2030

Item 5.	Other Information	2030

Item 6.	Exhibits	2030

SIGNATURES		20

RED CAT HOLDINGS
Condensed Consolidated Balance Sheets
(unaudited)

		January 31,			April 30,
		2020			2019
ASSETS
Current Assets
Cash	$	442,863		$	503,438
Accounts receivable	$	28,500			—
Inventory	$	123,306		$	—
Other current assets		22,330			100,000
Total Current Assets		616,999			603,438

Goodwill		2,468,902			—
Trademark		20,000			—
Other		3,851			—

TOTAL ASSETS	$	3,109,752		$	603,438

LIABILITIES AND STOCKHOLDERS' EQUITY
Current Liabilities
Accounts payable	$	219,133		$	20,894
Accrued Expenses		43,069			15,116
Notes Payable		211,609			—
Due to Related Party		343,121			—
Common shares to be issued		—			754,700
Total Current Liabilities		816,932			790,710

Convertible debentures		450,000
Commitments and contingencies

Stockholders' Equity
Series A Preferred Stock - shares authorized 2,200,000; outstanding 208,704 and 0		2,087			—
Series B Preferred Stock - shares authorized 4,300,000; outstanding 3,681,623 and 0		36,816			—
Common stock - shares authorized 500,000,000; outstanding 19,861,091 and 179,292		19,861			179
Additional paid-in capital		3,732,120			784,371
Accumulated deficit		(1,948,064	)		(971,822	)
Total Stockholders' Equity		1,842,820			(187,272	)
TOTAL LIABILITIES AND STOCKHOLDERS' EQUITY	$	3,109,752		$	603,438


See accompanying notes.

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

RED CAT HOLDINGS
Condensed Consolidated Statements Of Operations
(unaudited)

	Three months ended January 31,						Nine months ended January 31,
	2020			2019			2020			2019
Revenues	$	34,538		$	—		$	34,538		$	—

Cost of goods sold		16,234		$	—			16,234		$	—

Gross Margin		18,304		$	—			18,304		$	—

Operating Expenses
Research and development		138,465			107,246			400,884			258,636
General and administrative		318,458			219,805			593,662			372,745
Total operating expenses		456,923			327,051			994,546			631,381
Operating loss		(438,619	)		(327,051	)		(976,242	)		(631,381	)

Provision for income taxes		0			0			0			0

Net loss	$	(438,619	)	$	(327,051	)	$	(976,242	)	$	(631,381	)

Loss per share - basic and diluted	$	0.02		$	1.82		$	0.08		$	3.56

Weighted average shares outstanding - basic and diluted		17,732,298			179,293			11,556,950			177,440


See accompanying notes.

RED CAT HOLDINGS
Condensed Consolidated Stockholders' Equity Statements
(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, 2018														177,611	$	178	$	734,372	$	(220,490	)	$	514,060

Issuance of common stock														1,681		2		49,998					50,000

Net Loss																				(146,450	)		(146,450	)

Balances, July 31, 2018		—			—			—			—			179,292	$	179	$	784,371	$	(366,940	)	$	417,610

Net Loss																				(157,880	)		(157,880	)

Balances, October 31, 2018		—			—			—			—			179,292	$	179	$	784,371	$	(524,820	)	$	259,730

Net Loss																				(327,051	)		(327,051	)

Balances, January 31, 2019		—			—			—			—			179,292	$	179	$	784,371	$	(851,871	)	$	(67,321	)

Balances, April 30, 2019														179,292	$	179	$	784,371	$	(971,822	)	$	(187,272	)

Issuance of common stock														15,355		15		684,685					684,700

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

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

Conversion of Preferred Stock and Reverse Stock Split		(1,960,364	)		(19,604	)		(240,000	)		(2,400	)		16,536,164		16,536		5,468					—

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

Balances, July 31, 2019		208,704		$	2,087			3,972,645		$	39,726			16,929,048	$	16,929	$	1,598,262	$	(1,293,324	)	$	363,680

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	$	1,610,329	$	(1,509,445	)	$	159,626

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	)

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

RED CAT HOLDINGS
Condensed Consolidated Cash Flows Statements
(unaudited)

	Nine months ended January 31,
	2020			2019
Cash Flows from Operating Activities
Net loss	$	(976,242	)	$	(631,381	)
Stock based compensation		161,529			—
Accrued interest		182			—
Adjustments to reconcile net loss to net cash from operations:
Changes in operating assets and liabilities
Inventory		4,105			—
Other current assets		77,670			—
Accounts payable		38,152			(5,787	)
Accrued expense		(10,047	)		—
Net cash used in operating activities		(704,651	)		(637,168	)

Cash Flows from Investing Activities
Acquired through acquisition		46,327			—
Net cash provided by investing activities		46,327			—

Cash Flows from Financing Activities
Proceeds from issuance of common stock		—			469,000
Proceeds from exercise of Warrants		152,239			—
Proceeds from convertible debentures		450,000			—
Payments under notes payable		(4,490	)		—
Net cash provided by financing activities		597,749			469,000

Net use of Cash		(60,575	)		(168,168	)
Cash, beginning of period		503,438			570,326
Cash, end of period	$	442,863		$	402,158

Cash paid for interest and taxes		—			—

Noncash transactions
Common stock issued for services		70,000			—
Fair value of shares exchanged in acquisitions	$	1,937,867		$	—


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	)

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

Shares issued	$	6,351,076
Promissory note issued		1,753,000
Cash		250,000
Total Purchase Price	$	8,354,076

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

Level 1:	Observable inputs such as quoted market prices in active markets for identical assets or liabilities
Level 2:	Observable market-based inputs or unobservable inputs that are corroborated by market data
Level 3:	Unobservable inputs for which there is little or no market data, which require the use of the reporting entity’s own assumptions.

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

Date	Series B	Common Stock
July 2019	240,000	200,000
November 2019	60,000	50,000
December 2019	231,022	192,519

	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

	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

				Level 1				Level 2				Level 3				Total
	Fair value of derivatives			$	-			$	9,144,226			$	-			$	9,144,226

Date: March ~~23, 2020~~22, 2021		~~Red Cat Holdings, Inc.~~RED CAT HOLDINGS, INC. By:/s/ Jeffrey Thompson
		Jeffrey Thompson Chief Executive Officer (Principal Executive Officer)
Date: March ~~23, 2020~~22, 2021		By:/s/ Joseph P. Hernon
		Joseph Hernon Chief Financial Officer (Principal Financial and Accounting Officer)