UNITED STATES

SECURITIES AND EXCHANGE COMMISSION

Washington, D.C. 20549

FORM 10-Q

~~(Mark One)~~

☑

QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934

For the quarterly period ended ~~January~~July 31, 2022

☐

TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934

For the transition period from ___________ to ___________

Commission File Number: 000-31587

Red Cat Holdings, Inc.

(Exact name of Registrant as specified in its charter)

Nevada		86-0490034
(State or other jurisdiction of incorporation or organization)		(I.R.S. Employer Identification ~~Number)~~No.)
~~incorporation or organization)~~

15 Ave. Munoz Rivera, Ste 2200

San Juan

~~370 Harbour Drive~~

~~Humacao~~, Puerto Rico

~~00791~~00901

(Address of principal executive offices)

(Zip Code)

(833) 373-3228

(Registrant's telephone number, including area code)

~~__________________________________~~

(Former Name, Former Address and Former Fiscal Year, if Changed Since Last Report)

Securities registered pursuant to Section 12(b) of the Act:

Title of Each Class

Trading

Symbol(s)

Name of each exchange on which registered

Common Stock

RCAT

Nasdaq Capital Market

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.

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

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 15,~~September 9, 2022, there were ~~53,671,559~~54,126,244 shares of the registrant's common stock outstanding.

INDEX TO FORM 10-Q

PART I.	FINANCIAL INFORMATION	Page

Item 1.	Financial Statements:	3

	Unaudited Balance Sheet as of ~~January~~July 31, 2022 and ~~Balance Sheet as of~~ April 30, ~~2021~~2022	43

	Unaudited Statements of Operations for the Three ~~and Nine~~ Months Ended ~~January~~July 31, 2022 and 2021	4

	Unaudited Statement of Changes in Shareholders' Equity for the Three Months Ended July 31, 2022 and 2021	5

	Unaudited Statements of Cash Flows for the ~~Nine~~Three Months Ended ~~January~~July 31, 2022 and 2021	6

	~~Unaudited Statement of Changes in Shareholders' Equity for the Three and Nine Months Ended January 31, 2022 and 2021~~	7

	Notes to Financial Statements	87

Item 2.	Management's Discussion and Analysis of Financial Condition and Results of Operations	2526

Item 3.	Quantitative and Qualitative Disclosures about Market Risk	3230

Item 4.	Controls and Procedures	3231

PART II.	OTHER INFORMATION

Item 1.	Legal Proceedings	3331

Item 1A.	Risk Factors	3331

Item 2.	Unregistered Sales of Equity Securities and Use of Proceeds	3331

Item 3.	Defaults Upon Senior Securities	3331

Item 4.	Mine Safety Disclosures	3331

Item 5.	Other Information	3331

Item 6.	Exhibits	3332

SIGNATURES		3432

RED CAT HOLDINGS
Consolidated Balance Sheets
(Unaudited)

July 31, April 30,
2022 2022
ASSETS
Current assets
Cash $ 6,245,426 $ 4,084,815
Marketable securities 36,708,627 44,790,369
Accounts receivable, net 929,872 495,506
Inventory 4,584,836 3,895,870
Other 2,694,273 2,354,884
Due from related party 13,404 31,853
Total current assets 51,176,438 55,653,297

Goodwill 25,138,750 25,138,750
Intangible assets, net 2,642,371 2,698,531
Property and equipment, net 1,028,360 511,690
Other 57,033 57,033
Operating lease right-of-use assets 926,500 1,019,324
Total long term assets 29,793,014 29,425,328

TOTAL ASSETS $ 80,969,452 $ 85,078,625

LIABILITIES AND STOCKHOLDERS' EQUITY
Current liabilities
Accounts payable $ 937,360 $ 1,018,747
Accrued expenses 471,806 1,084,494
Debt obligations - short term 882,096 956,897
Due to related party 37,196 40,057
Customer deposits 233,515 437,930
Operating lease liabilities 292,004 293,799
Warrant derivative liability 1,700,419 1,607,497
Total current liabilities 4,554,396 5,439,421

Operating lease liabilities 669,935 749,825
Debt obligations - long term 835,719 973,707
Total long term liabilities 1,505,654 1,723,532
Commitments and contingencies

Stockholders' equity
Series B preferred stock - shares authorized 4,300,000; outstanding 986,676 and 986,676 9,867 9,867
Common stock - shares authorized 500,000,000; outstanding 53,818,442 and 53,748,735 53,818 53,749
Additional paid-in capital 107,492,710 106,821,384
Accumulated deficit (31,310,655 ) (27,499,056 )
Accumulated other comprehensive income (1,336,338 ) (1,470,272 )
Total stockholders' equity 74,909,402 77,915,672
TOTAL LIABILITIES AND STOCKHOLDERS' EQUITY $ 80,969,452 $ 85,078,625

See accompanying notes.
3

RED CAT HOLDINGS
Consolidated Balance Sheets
(Unaudited)

January 31, April 30,
2022 2021
ASSETS
Current Assets
Cash $ 7,111,527 $ 277,347
Marketable securities 48,446,302 —
Accounts receivable, net 891,505 321,693
Inventory 2,339,680 362,072
Other 2,234,583 678,898
Due from related party 225,539 —
Total Current Assets 61,249,136 1,640,010

Goodwill 26,029,750 8,017,333
Intangible assets, net 1,983,192 2,032,169
Property and equipment, net 262,859 —
Other 35,907 3,853
Operating lease right-of-use assets 823,838 —
Total Long Term Assets 29,135,546 10,053,355

TOTAL ASSETS 90,384,682 11,693,365

LIABILITIES AND STOCKHOLDERS' EQUITY
Current Liabilities
Accounts payable 521,139 541,903
Accrued expenses 1,493,691 614,050
Debt obligations - short term 1,127,596 269,045
Due to related party 41,622 390,209
Customer deposits 336,621 46,096
Operating lease liabilities 261,369 —
Warrant derivative liability 1,350,099 2,812,767
Total Current Liabilities 5,132,137 4,674,070

Operating lease liabilities 573,165 —
Debt obligations - long term 1,339,132 —
Note payable to related party —   1,753,000
Total Long Term Liabilities 1,912,297 1,753,000
Commitments and contingencies

Stockholders' Equity
Series A Preferred Stock - shares authorized 2,200,000; outstanding 0 and 158,704 —   1,587
Series B Preferred Stock - shares authorized 4,300,000; outstanding 986,676 and 1,968,676 9,867 19,687
Common stock - shares authorized 500,000,000; outstanding 53,637,971 and 29,431,264 53,638 29,431
Additional paid-in capital 105,947,703 21,025,518
Accumulated deficit (22,673,118 ) (15,809,928 )
Accumulated other comprehensive income 2,158 —
Total Stockholders' Equity 83,340,248 5,266,295
TOTAL LIABILITIES AND STOCKHOLDERS' EQUITY 90,384,682 11,693,365

See accompanying notes.

RED CAT HOLDINGS
Consolidated Statements of Operations
(Unaudited)

Three months ended July 31,
2022 2021
Revenues $ 3,069,271 $ 1,396,751

Cost of goods sold 2,711,644 1,294,347

Gross margin 357,627 102,404

Operating expenses
Operations 1,048,086 176,863
Research and development 532,770 244,254
Sales and marketing 602,231 100,633
General and administrative 1,117,565 876,180
Stock based compensation 755,471 384,086
Total operating expenses 4,056,123 1,782,016
Operating loss (3,698,496 ) (1,679,612 )

Other expense (income)
Change in fair value of derivative liability 92,922 (154,248 )
Investment income, net (130,296 ) —
Interest expense 35,687 17,099
Other, net 114,790 15,309
Other expense (income) 113,103 (121,840 )

Net loss $ (3,811,599 ) (1,557,772 )

Loss per share - basic and diluted $ (0.07 ) (0.05 )

Weighted average shares outstanding -
basic and diluted 53,778,154 34,074,226

See accompanying notes.

4

RED CAT HOLDINGS
Consolidated Statements Of Operations
(Unaudited)

Three months ended January 31, Nine months ended January 31,
2022 2021 2022 2021
Revenues $ 1,856,751 $ 2,145,988 $ 5,116,741 $ 3,122,077

Cost of goods sold 1,516,970 1,576,265 4,521,974 2,351,153

Gross Margin 339,781 569,723 594,767 770,924

Operating Expenses
Operations 334,278 146,539 794,390 353,295
Research and development 811,288 167,968 1,548,983 341,892
Sales and marketing 238,624 48,719 524,642 97,534
General and administrative 1,337,183 499,155 3,264,071 929,874
Stock based compensation 782,123 854,195 2,066,146 1,068,317
Total operating expenses 3,503,496 1,716,576 8,198,232 2,790,912
Operating loss (3,163,715 ) (1,146,853 ) (7,603,465 ) (2,019,988 )

Other Expense (Income)
Derivative expense —   4,481,701 —   4,630,288
Change in fair value of derivative liability (1,026,466 ) 3,350,135 (1,299,527 ) 3,433,938
Investment income, net 363,760 —   402,207 —
Interest expense 46,596 —   109,712 —
Other, net 17,212 5,571 47,333 5,571
Other Expense (Income) $ (598,898 ) $ 7,837,407 $ (740,275 ) $ 8,069,797

Net loss $ (2,564,817 ) $ (8,984,260 ) $ (6,863,190 ) $ (10,089,785 )

Loss per share - basic and diluted $ (0.05 ) $ (0.34 ) $ (0.15 ) $ (0.46 )

Weighted average shares outstanding - basic and diluted 53,592,927 26,232,755 46,604,898 22,161,745

RED CAT HOLDINGS
Consolidated Statements of Stockholders' Equity
(Unaudited)

Series A Series B Common Stock Additional Accumulated Other
Preferred Stock Preferred Stock Paid-in Accumulated Comprehensive Total
Shares Amount Shares Amount Shares Amount Capital Deficit Income (Loss) Equity
Balances, April 30, 2021 158,704 $ 1,587 1,968,676 $ 19,687 29,431,264 $ 29,431 $ 21,025,518 $ (15,809,928 ) $ —   $ 5,266,295

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

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

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

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

Stock based compensation —   —   —   —   —   —   384,023 —   —   384,023

Vesting of restricted stock —   —   —   —   62,500 63 —   —   —   63

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

Currency translation adjustments —   —   —   —   —   —   —   —   922 922

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

Balances, July 31, 2021 158,704 $ 1,587 968,676 $ 9,867 48,489,085 $ 48,489 $ 94,527,350 $ (17,367,700 ) $ 922 $ 77,220,515

Balances, April 30, 2022 —   $ —   986,676 $ 9,867 53,748,735 $ 53,749 $ 106,821,384 $ (27,499,059 ) $ (1,470,272 ) $ 77,915,672

Stock based compensation —   —   —   —   —   —   755,471 —   —   755,471

Vesting of restricted stock units —   —   —   —   69,707 69 (84,145 ) —   —   (84,076 )

Unrealized gain on marketable securities —   —   —   —   —   —   —   —   133,582 133,582

Currency translation adjustments —   —   —   —   —   —   —   —   352 352

Net Loss —   —   —   —   —   —   —   (3,811,599 ) —   (3,811,599 )

Balances, July 31, 2022 —   $ —   986,676 $ 9,867 53,818,442 $ 53,818 $ 107,492,710 $ (31,310,655 ) $ (1,336,338 ) $ 74,909,402

See accompanying notes.

5

RED CAT HOLDINGS
Condensed Consolidated Cash Flows Statements
(Unaudited)
Consolidated Statements of Cash Flows
(Unaudited)
Consolidated Statements of Cash Flows
(Unaudited)

Nine months ended January 31, Three months ended July 31,
2022 2021 2022 2021
Cash Flows from Operating Activities
Net loss $ (6,863,190 ) $ (10,089,785 ) $ (3,811,599 ) $ (1,557,772 )
Stock based compensation 2,066,146 1,068,317
Stock based compensation - options 458,023 187,494
Stock based compensation - restricted units 297,448 196,592
Common stock issued for services 250,400 —   —   192,000
Amortization of intangible assets 48,978 5,571 56,160 16,326
Realized loss from sale of marketable securities 10,675 —
Depreciation 17,888 —   28,272 —
Change in fair value of derivative (1,299,527 ) 3,433,938 92,922 (154,248 )
Amortization of debt discount —   79,187
Derivative expense —   4,630,288
Adjustments to reconcile net loss to net cash from operations:
Changes in operating assets and liabilities, net of acquisitions
Accounts receivable (470,765 ) (63,255 ) (434,299 ) 105,019
Inventory (673,297 ) (405,987 ) (688,966 ) (472,303 )
Other (3,492,145 ) (118,613 ) (339,356 ) (1,996,858 )
Operating lease right-of-use assets and liabilities 10,696 —   11,139 —
Customer deposits 227,532 32,967 (204,415 ) 62,792
Accounts payable (1,673,545 ) 345,227 (81,335 ) (130,343 )
Accrued expenses (190,444 ) 165,129 (208,484 ) (521,741 )
Net cash used in operating activities (12,041,273 ) (917,016 ) (4,813,815 ) (4,073,042 )

Cash Flows from Investing Activities
Cash acquired through acquisitions 24,866 —   —   13,502
Payment for acquisition, net of cash acquired —   (48,368 )
Purchases of property and equipment (92,581 ) —   (544,942 ) —
Proceeds from sale of marketable securities 6,250,322 —
Proceeds from maturities of marketable securities 9,094,592 —
Purchases of marketable securities (54,696,624 ) —   (889,943 ) —
Net cash used in investing activities (48,514,017 ) (48,368 )
Net cash provided by investing activities 7,659,707 13,502

Cash Flows from Financing Activities
Proceeds from exercise of warrants 99,999 —   —   99,999
Proceeds from related party obligations —   79,000
Payments under related party obligations (1,969,193 ) (17,140 ) (2,861 ) (150,255 )
Proceeds from debt obligations —   424,419
Payments under debt obligations (694,738 ) (365,911 ) (212,789 ) (114,173 )
Proceeds from convertible debentures —   1,080,000
Payments of taxes related to restricted stock vesting (113,959 ) —
Payments of taxes related to equity transactions (469,631 ) —
Proceeds from issuance of common stock, net 70,065,203 —   —   70,065,203
Net cash provided by financing activities 67,387,312 1,200,368

Effect of foreign exchange rate changes on cash 2,158 —
Net cash (used in) provided by financing activities (685,281 ) 69,900,774

Net increase in Cash 6,834,180 234,984 2,160,611 65,841,234
Cash, beginning of period 277,347 236,668 4,084,815 277,347
Cash, end of period 7,111,527 471,652 6,245,426 66,118,581

Cash paid for interest 27,563 —   36,082 2,024
Cash paid for income taxes —   —   —   —

Non-cash transactions
Fair value of shares issued in acquisitions $ 12,727,292 $ 6,351,076 $ —   $ 2,631,640
Taxes related to net shares settlement of equity awards $ 522,628 $ —
Common stock issued for services $ —   $ 192,000
Conversion of derivative liability $ 163,141 $ —   $ —   $ 163,141
Financed purchases of property and equipment $ 144,383 $ —
Unrealized gain on marketable securities $ 133,582 —
Indirect payment to related party $ 132,200 $ —   $ —   $ 132,200
Shares withheld as payment of note receivable $ 18,449 $ —
Taxes related to net share settlement of equity awards $ 15,982 $ —
Conversion of preferred stock into common stock $ 11,407 $ —   $ —   $ 9,820
Shares withheld as payment of note receivable $ 5,100 $ —
Issuance of Note Payable - Related Party in acquisition $ —   $ 1,753,000
Conversion of Notes into common stock $ —   $ 450,000
Conversion of accrued interest into common stock $ —   $ 45,024

See accompanying notes. See accompanying notes. See accompanying notes.

6

RED CAT HOLDINGS
Consolidated Stockholders' Equity Statements
(Unaudited)

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

Stock based compensation 107,061 107,061

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

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

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

Stock based compensation 107,061 107,061

Net loss —   —   —   —    (722,281 ) —   (722,281 )

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

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

Conversion of preferred stock (50,000 ) (500 ) (954,741 ) (9,547 ) 1,212,118 1,212 8,835 —

Stock based compensation 854,195 854,195

Net loss —   —   —   —    (8,984,260 ) —   (8,984,260 )

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

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

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

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

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

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

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

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

Currency translation adjustments 922 922

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

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

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

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

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

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

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

Currency translation adjustments 669 669

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

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

Stock based compensation (46,939 ) (47 ) 369,974 369,927

Currency translation adjustments 567 567

Net loss —   —   —   —    (2,564,817 ) —   (2,564,817 )

Balances, January 31, 2022 —   $ —   986,676 $ 9,867 53,637,971 $ 53,638 $ 105,947,703 $ (22,673,118 ) $ 2,158 $ 83,340,248
7

RED CAT HOLDINGS, INC.
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
~~January~~July 31, 2022 and 2021
(unaudited)

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 10-K for the fiscal year ended April 30, ~~2021~~2022 of Red Cat Holdings, Inc. (the "Company"), filed with the Securities and Exchange Commission ("SEC") on ~~August 12, 2021.~~
July 27, 2022.

Note 1 -– The Business

Red Cat Holdings ("(“Red ~~Cat"~~Cat” or the ~~"Company"~~“Company”) was originally incorporated in February 1984. Since April 2016, the ~~Company's~~Company’s primary business has been to provide products, services and solutions to the drone industry which it presently does through its four wholly owned subsidiaries. Teal Drones is a leader in commercial and government Unmanned Aerial Vehicles (UAV) technology. Fat Shark ~~Holdings~~ is a provider of First Person View (FPV) video ~~goggles.~~goggles to the drone industry. Rotor Riot sells FPV drones and equipment ~~primarily~~ to the consumer ~~marketplace.~~marketplace through its digital storefront located at www.rotorriot.com. Skypersonic provides software and hardware solutions that enable drones to complete inspection services in locations where GPS (global positioning systems) ~~are~~is not available, yet still record and transmit data even while being operated from thousands of miles away.

Corporate developments ~~since January 1, 2020~~during the two years ended July 31, 2022 include:

A. ~~Rotor Riot Acquisition~~
In January 2020, the Company consummated a Merger Agreement under which Rotor Riot Acquisition Corp, a wholly owned subsidiary of the Company, merged with and into Rotor Riot, with Rotor Riot continuing as the surviving entity and a wholly owned subsidiary of the Company. Under the Merger Agreement, each member of Rotor Riot received its pro rata portion of the total number of shares of the Company's common stock issued based on (A)(i) $3,700,000 minus (ii) $915,563 (which included certain debt and other obligations of Rotor Riot and its Chief Executive Officer that the Company agreed to assume (the "Assumed Obligations") divided by (B) the volume 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, the Company's management controlled the operating decisions of the combined company. Accordingly, we accounted for the transaction as an acquisition of Rotor Riot by the Company. Based on purchase price accounting, we 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 acquisition date values of the purchase consideration, assets acquired, and liabilities assumed. The shares issued were valued at $~~1,820,114~~ (~~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). A summary of the purchase price and its related allocation is as follows:
8
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
Total assets acquired 818,387
Liabilities assumed
Accounts payable and accrued expenses 171,651
Notes payable 209,799
Due to related party 197,846
Total liabilities assumed 579,296
Total fair value of net assets acquired 239,091
Goodwill $ 1,756,023
~~The final purchase price allocation was determined by an independent valuation services firm. Customer Relationships with a value of $39,000~~ ~~are being amortized over 7 years. The carrying value of Brand Name is not being amortized but will be reviewed quarterly and formally evaluated at the end of each fiscal year.~~
B. Fat Shark Acquisition

~~In November~~On September 30, 2020, the Company ~~closed~~entered into a share purchase agreement ("(“Share Purchase ~~Agreement"~~Agreement”) with Greg French (“French”), the founder and sole shareholder of Fat Shark Holdings ("(“Fat ~~Shark"~~Shark”), to acquire all of the issued and outstanding shares of Fat Shark and its subsidiaries. The transaction closed on November 2, 2020 and was valued at $8,354,076based on (i) the issuance of 5,227,273shares of common stock with a value of $6,351,076on the date of closing (ii) a senior secured promissory note in the original principal amount of $1,753,000, and (iii) a cash payment of $250,000. The Share Purchase Agreement ~~includes~~included indemnification provisions, a two year non-compete agreement, and registration rights for the shares issued in the transaction.
A summary of the purchase price and its related allocation iswas as follows:

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
Brand name 1,144,000
Proprietary technology 272,000
Non-compete agreement 16,000
Total assets acquired 2,490,403
Liabilities assumed
Accounts payable and accrued expenses 279,393
Customer deposits 25,194
Total liabilities assumed 304,587
Total fair value of net assets acquired 2,185,816
Goodwill $ 6,168,260

97

The ~~final~~Company engaged a valuation services firm to value the intangible assets acquired and the purchase price allocation ~~was determined by an independent valuation services firm.~~is now complete. Intangible assets included proprietary technology and a non-compete agreement which are being amortized over 5 and 3 years, respectively. The carrying value of ~~Brand Name~~brand name is not being amortized but ~~will be~~is reviewed quarterly and formally evaluated at year end. The excess of the ~~end of each fiscal year.~~purchase price above the net assets acquired was recorded as goodwill which is reviewed quarterly and formally evaluated at year end.

C.B. Skypersonic Acquisition

~~In February~~On May 7, 2021, the Company ~~entered into Share Purchase and Liquidity Event Agreements (the "Skypersonic Agreements") with~~closed the ~~founder and majority shareholder~~acquisition of Skypersonic, Inc., ("Skypersonic") ~~and~~. Under the ~~holders~~terms of the agreement, we acquired all of the outstanding stock of Skypersonic in exchange for $3,000,000 of our common stock. The number of shares issuable was based on the volume weighted average price ("VWAP") of our common stock for the 20 trading days ending May 7, 2021. Based on a VWAP of $4.0154, the Company issued 747,124 shares. In addition, the Company also agreed to issue 110,000 shares of common stock ~~and equity~~to a shareholder. For accounting purposes, the 857,124 shares were valued at $3,291,356 based ~~agreements representing 97.46%~~on the closing price of Skypersonic (the "Sellers"), pursuant to which, subject to the satisfaction of certain closing conditions, the Company would acquire all of the issued and outstanding share capital of Skypersonic for an aggregateour common stock of $~~3,000,000~~ 3.84~~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").~~ on May 7, 2021. Prior to the closing, the Company provided $75,000 to Skypersonic to fund its operating ~~costs of Skypersonic.~~costs. This amount was capitalized as part of the purchase price. ~~The transaction closed on May 7, 2021 and was paid through the issuance of~~ ~~857,124~~ ~~shares of common stock which had a fair market value of $3,291,356~~. Fifty (50%) percent of the Share Consideration (the "Escrow Shares") was deposited in an escrow account as security for indemnification obligations and any purchase price adjustments due to working capital deficiencies and any other claims or expenses. Under the Skypersonic Agreements, closing date working capital deficits in excess of $~~300,000~~ ~~resulted in a reduction of the Share Consideration on a dollar of dollar basis.~~ In October 2021, the Company and Skypersonic agreed to a reduction in the purchase price of $601,622which resulted in the cancellation of 149,829shares held in escrow. ~~A revised~~
The final summary of the purchase price and its related allocation is as follows:

Shares issued $ 2,716,013 $ 2,716,012
Cash 75,000 75,000
Total Purchase Price $ 2,791,013 $ 2,791,012

Assets acquired
Cash 13,502 13,502
Accounts receivable 51,083 51,083
Other assets 12,950 12,950
Inventory 50,556 50,556
Proprietary technology 826,000
Non-compete agreement 65,000
Total assets acquired 128,091 1,019,091
Liabilities assumed
Accounts payable and accrued expenses 1,054,997 1,054,997
Total liabilities assumed 1,054,997 1,054,997
Total fair value of net assets acquired (926,906 ) (35,906 )
Goodwill $ 3,717,919 $ 2,826,918

The ~~foregoing amounts reflect our current estimates of fair value as of the May 7, 2021 acquisition date. The~~ Company ~~has~~ engaged ~~an independent~~a valuation services firm to ~~complete~~value the intangible assets acquired and the purchase price allocation is now complete. Intangible assets included proprietary technology and a ~~formal evaluation~~non-compete agreement which are being amortized over 5 and 3 years, respectively. The excess of the ~~acquisition. The Company expects to recognize fair values associated with~~purchase price above the ~~customer relationships~~net assets acquired was recorded as ~~well as the Skypersonic brand name. When the valuation project~~goodwill which is ~~completed, the Company may make adjustments to the opening balance sheet. The determination of the fair values of the acquired assets~~reviewed quarterly and ~~liabilities assumed (and the related determination of estimated lives of depreciable tangible and intangible assets) requires significant judgment.~~formally evaluated at year end.

D.C. Teal Drones Acquisition

On August 31, 2021, the Company closed the acquisition of Teal Drones Inc., (“Teal”) ~~pursuant to an Agreement and Plan~~. Under the terms of ~~Merger~~the agreement, the base purchase price of $14,000,000 was reduced by ~~and among,~~$1,670,294 of debt assumed by the Company, ~~Teal Acquisition I Corp.~~as well as a working capital deficit adjustment of $1,456,953. Based on the net amount payable of $10,872,753, ~~(“Acquisition”)~~ and ~~wholly-owned subsidiary~~a VWAP of $2.908 for the twenty trading days ending August 31, 2022, the Company ~~and Teal, (the “Merger Agreement” or “Merger”).~~
10
~~Pursuant to~~issued 3,738,911 of common stock. For accounting purposes, the ~~Merger Agreement, we acquired all of~~shares were valued at $10,431,562 based on the ~~issued and outstanding share capital of Teal in exchange for $14,000,000~~closing price of our common stock ~~(“Common Stock”) at the Volume Weighted Average Price (VWAP)~~ of ~~our Common Stock for the 20 trading days ended~~$2.79 on August 31, 2021 of $2.908 per share, reduced by the amount of Teal debt assumed consisting of approximately $1.67 million payable to DA4, and approximately $1,457,000 in working capital deficit, for a net closing date payment of $10,872,753. At closing, we issued 3,738,911 shares of Common Stock (the “Stock Consideration”) with a fair market value of $10,431,562. Fifteen (15%) of the Share Consideration (the “Escrow Shares”) was deposited in an escrow account for a period of eighteen (18) months as security for indemnification obligations, any purchase price adjustments due to working capital deficiencies and any other claims or expenses.2021. In December 2021, the Company and Teal agreed to a reduction in the purchase price of ~~$438,058~~$438,058 which resulted in the cancellation of 150,639 shares held in escrow. ~~The fair market value of the cancelled shares was $420,283.~~ The Stock Consideration may be increased if Teal attains certain revenue levels in the ~~twenty four (24)~~24 month period following the closing. The additional consideration begins at $4 million if sales total at least $18 million and ends at $16 million if sales total $36 million.

8
A revised summary of the purchase price and its related allocation is set forth below.

Total Purchase Price -– shares issued $ 10,011,279

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

The foregoing amounts reflect our current estimates of fair value as of the August 31, 2021 acquisition date. The Company has engaged an independent valuation services firm to complete a formal evaluation of the acquisition. The Company expects to recognize fair values associated with the customer relationships acquired, as well as the Teal brand name but has not yet accumulated sufficient information to assign such values. When the valuation project is completed, the Company may make adjustments to the opening balance. The determination of the fair values of the acquired assets and liabilities assumed (and the related determination of estimated lives of depreciable tangible and intangible assets) requires significant judgment.

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

Supplemental Unaudited Pro Forma Financial Information and Other Information

There is no pro forma financial information for the three months ended July 31, 2022 because all acquisitions had closed prior to the beginning of the reporting period.

The following table presents pro forma results for the three months ended July 31, 2021 as if our acquisition of Teal had occurred on May 1, 2021:

July 31, 2021

Red Cat Teal    Consolidated

Revenues $ 1,396,751 $ 312,047 $ 1,708,798

Net Loss $ (1,557,772 ) $ (1,165,987 ) $ (2,723,759 )

The acquisition of Skypersonic was completed on May 7, 2021 and its activities during the period from May 1, 2021 to May 7, 2021 were immaterial to the consolidated pro forma results.

119

The unaudited pro forma financial information has been compiled in a manner consistent with the Company's accounting policies, and includes transaction costs, amortization of the acquired intangible assets, and other expenses directly related to each respective acquisition. The unaudited pro forma financial information is based on estimates and assumptions which the Company believes are reasonable and are not necessarily indicative of the results that would have been realized had the acquisitions closed on the dates indicated in the tables, nor are they indicative of results of operations that may occur in the future.
Other information related to the Company’s acquisitions include:
• The purchase price allocation has been finalized for each acquisition except Teal for which the Company is waiting for the final report from the valuation services firm engaged to assist in the identification and valuation of intangible assets acquired.
• The fair value of shares issued by the Company as part of the consideration paid is normally based on the volume weighted average price of the Company’s common stock for the twenty days prior to the closing of the transaction. For accounting purposes, the shares issued are valued based on the closing stock price on the date that the transaction closes.
• Goodwill for Rotor Riot relates to its strong social media presence including its 253,000 YouTube subscribers. Goodwill for Fat Shark is attributable to its relationship with manufacturing sources in China and the potential to integrate its goggle technologies with the Teal drone. Goodwill for Skypersonic relates to the future customers expected to leverage its “Fly Anywhere” technologies in a wide range of commercial environments. Goodwill for Teal is ascribed to its existing relationship with several of U.S. government agencies including its classification as an approved vendor.
• The Company expects that the Goodwill recognized in each transaction will be deductible for tax purposes. The Company has reported net losses since its inception and is presently unable to determine when and if the tax benefit of this deduction will be realized.
Note 2 -– Summary of Significant Accounting Policies

Basis of Accounting -– The financial statements and accompanying notes are prepared in accordance with generally accepted accounting principles ~~("GAAP"~~in the United States (“GAAP”). Certain prior period amounts have been restated to conform to the current year presentation.

Principles of Consolidation -– Our ~~condensed~~ consolidated financial statements include the accounts of our wholly owned operating subsidiaries, which consist of Teal Drones, Fat ~~Sharking Holdings,~~Shark, Rotor Riot, and Skypersonic. Intercompany transactions and balances have been eliminated.

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

Cash and Cash Equivalents- – At ~~January~~July 31, 2022, we had cash of $~~7,111,527~~6,245,426 in multiple commercial banks and financial services companies. We have not experienced any loss on these ~~accounts~~cash balances and believe they are not exposed to any significant credit risk.

Marketable Securities – Our marketable securities have been classified and accounted for as available-for-sale securities. ~~Our investment manager can sell any of our investment holdings at any time,~~These securities are primarily invested in corporate bonds and are readily saleable, and therefore, we have classified ~~our marketable securities~~them as short term. Our available-for-sale securities are carried at fair value with any unrealized gains and losses reported ~~within investment~~as a component of comprehensive income (loss). Once realized, any gains or losses are recognized in ~~our consolidated statements~~the statement of operations.

We have elected to present accrued interest receivable separately from marketable securities on our consolidated balance sheets. Accrued interest receivable was $~~393,543~~334,654 and $385,730 as of ~~January~~July 31, 2022 and April 30, 2022, respectively, and was included in other current assets. We did not write off any accrued interest receivable during the three months ended ~~January~~July 31, ~~2022.~~2022 and 2021.
10

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

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

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

We perform an impairment test at the end of each fiscal year, or more frequently if indications of impairment arise. We have ~~a single reporting unit,~~two business segments and ~~consequently,~~ evaluate goodwill for impairment based on an evaluation of the fair value of each business segment individually.
Property and equipment – Property and equipment is stated at cost less accumulated depreciation, and depreciated using the ~~Company as a whole.~~ straight-line method over the estimated useful life of the asset. The estimated useful lives of our property and equipment are generally: (i) furniture and fixtures - seven years, (ii) equipment and related - two to five years, and (iii) leasehold improvements - 15 years.

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

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

Fair Values, Inputs and Valuation Techniques for Financial Assets and Liabilities, and Related Disclosures
– The fair value measurements and disclosure guidance defines fair value and establishes a framework for measuring fair value. Fair value is defined as the price that would be received to sell an asset or paid to transfer a liability (an exit price) in an orderly transaction between market participants at the measurement date. In accordance with this guidance, the Company has categorized its recurring basis financial assets and liabilities into a three-level fair value hierarchy based on the priority of the inputs to the valuation technique.

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

We disclose and recognize the fair value of our assets and liabilities using a hierarchy that prioritizes the inputs to valuation techniques used to measure fair value. Fair value is defined as the price that would be received to sell an asset or paid to transfer a liability (an exit price) in an orderly transaction between market participants at the measurement date.
11
The guidance establishes three levels of the fair value hierarchy as follows:

Level 1: Inputs are unadjusted, quoted prices in active markets for identical assets or liabilities at the measurement date;
Level 2: Inputs are observable, unadjusted quoted prices in active markets for similar assets or liabilities, unadjusted quoted prices for identical or similar assets or liabilities in markets that are not active, or other inputs that are observable or can be corroborated by observable market data for substantially the full term of the related assets or liabilities; and
Level 3: Unobservable inputs that are significant to the measurement of the fair value of the assets or liabilities that are supported by little or no market data.

Disclosures for Non-Financial Assets Measured at Fair Value on a Non-Recurring Basis

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

Convertible Securities and Derivatives

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

Derivative Liabilities

The Company has financial instruments that are considered derivatives or contain embedded features subject to derivative accounting. Embedded derivatives are valued separately from the host instrument and are recognized as ~~derivative~~ liabilities inon 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.

13
In October 2020 and January 2021, the Company entered into convertible note agreements which included provisions under which the conversion price was equal to the lesser of an initial stated amount or the conversion price of a future offering. This variable conversion feature was recognized as a derivative. Both financings included the issuance of warrants which contained similar variable conversion features. The Company values these convertible notes and warrants using the multinomial lattice method that values the derivative liability ~~within the notes~~ based on a probability weighted discounted cash flow model. The resulting liability is valued at each reporting date and the change in the liability is reflected as change in derivative liability in the statement of operations.

Revenue Recognition- – The Company recognizes revenue in accordance with ASC 606, ~~"Revenue~~“Revenue from Contracts with ~~Customers"~~Customers”, issued by the Financial Accounting Standards Board ~~("FASB"~~(“FASB”). This standard includes a comprehensive evaluation of factors to be considered regarding revenue recognition including (i) identifying the promised goods, (ii) evaluating performance obligations, (iii) measuring the transaction price, (iv) allocating the transaction price to the performance obligations if there are multiple components, and (v) recognizing revenue as each obligation is satisfied. The ~~Company's~~Company’s revenue transactions include a single component, specifically, the shipment of goods to customers as orders are fulfilled. ~~Most customers pay at the time they order and the~~The Company recognizes revenue upon shipment. The timing of the shipment of orders can vary considerably depending upon whether an order is for an item normally maintained in inventory or an order that requires assembly or unique parts. Customer deposits totaled $~~336,621~~233,515 and $~~46,096~~437,930 at ~~January~~July 31, 2022 and April 30, ~~2021,~~2022, respectively.

12
Research and Development- – Research and development expenses include payroll, employee benefits, and other headcount-related expenses associated with product development. Research and development expenses also include third-party development and programming costs, as well as a proportionate share of overhead costs such as rent. Costs related to software development are included in research and development expense until technological feasibility is reached, which for our software products, is generally shortly before the products are released to production. Once technological feasibility is reached, such costs are capitalized and amortized as a cost of revenue over the estimated lives of the products.

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

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

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

Comprehensive Loss-– Comprehensive loss consists of net loss and other comprehensive loss. Other comprehensive loss refers to gains and losses that are recorded as an element of stockholders' equity and are excluded from net loss. Our other comprehensive loss is comprised of foreign currency translation adjustments and unrealized gains or losses on available-for-sale securities. During the three ~~and nine~~ months ended ~~January~~July 31, 2022 ~~differences between~~and July 31, 2021, comprehensive loss was $1,336,338 higher and $922 lower than net loss, ~~and comprehensive loss totaled~~respectively, related to unrealized losses on available-for-sale securities totaling $~~567~~1,340,712 and $~~2,158~~0, respectively, ~~relating to~~partially offset by foreign currency translation ~~adjustments.~~adjustments of $352 and $922.

Stock-Based Compensation~~- We~~ – For stock options, we use the estimated grant-date fair value method of accounting in accordance with ASC Topic 718, Compensation -– Stock Compensation. Fair value is determined ~~using~~based on the Black-Scholes Model using inputs reflecting our estimates of expected volatility, term and future dividends. We recognize forfeitures as they occur. WeFor restricted stock, we determine the fair value based on our stock price on the date of grant. For both stock options and restricted stock, we recognize compensation costs on a ~~straight line~~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 conversion or exercise of these common stock equivalents would dilute earnings per share if we become profitable in the future.

Outstanding securities not included in the computation of diluted net loss per share because their effect would have been anti-dilutive included the following:
July 31, 2022 April 30, 2022
Series B Preferred Stock, as converted 822,230 822,230
Stock options 3,634,142 3,694,142
Warrants 1,539,999 1,539,999
Restricted stock 971,701 1,083,675
Total 6,968,072 7,140,046
Related Parties -– Parties are considered to be related to us if they have control or significant influence, directly or indirectly, over us, including key management personnel and members of the Board of Directors. Related Party transactions are disclosed in Note ~~18.~~
19.

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Segment Reporting
Since January 2020, we have acquired four separate businesses operating in various aspects of the drone industry. Following the most recent acquisition, the Company focused on integrating and organizing its acquired businesses. These efforts included refining the establishment of Enterprise and Consumer segments in order to sharpen the Company’s focus on the unique opportunities in each sector of the drone industry. The Enterprise segment, which includes Teal Drones and Skypersonic, is focused on opportunities in the commercial sector, including military. Enterprise is building the infrastructure to manage drone fleets, fly and provide services remotely, and navigate confined industrial interior spaces and dangerous military environments. The Consumer segment, which includes Rotor Riot and Fat Shark, is focused on enthusiasts and hobbyists which are expected to increase as drones become more visible in our daily lives. Effective May 1, 2022, we began to manage our business operations through these business segments. The reportable segments were identified based on how our chief operating decision maker (“CODM”), which is a committee comprised of our Chief Executive Officer (“CEO”), Chief Operating Officer (“COO”) and our Chief Financial Officer (“CFO”), manages our business, makes resource allocation and operating decisions, and evaluates operating performance. See “Note 20 - Segment Reporting”.
Note 3 – Marketable Securities

The following tables set forth information related to our marketable securities as of ~~January~~July 31, 2022:

I. ~~Amortized cost, net~~Cost, unrealized gains or losses, and fair values

Amortized Cost Net Unrealized Gains (Losses) Fair Value Cost Unrealized Gains (Losses) Fair Value
Money market funds $ 1,598,428 $ 1,108 $ 1,599,536
Asset-backed securities 3,113,823 (21,984 ) 3,091,839 $ 2,504,563 $ (35,324 ) $ 2,469,239
Corporate bonds 44,387,966 (633,039 ) 43,754,927 35,544,776 (1,305,388 ) 34,239,388
Total $ 49,100,217 $ (653,915 ) $ 48,446,302 $ 38,049,339 $ (1,340,712 ) $ 36,708,627

II. Contractual Maturities

One Year or Less One to
Five Years Over Five Years Total One Year or Less One to
Five Years Over Five Years Total
Money market funds $ 1,599,536 $ —   $ —   $ 1,599,536
Asset-backed securities —   3,091,839 —   3,091,839 $ —   $ 2,469,239 $ —   $ 2,469,239
Corporate bonds 19,808,158 23,366,723 580,046 43,754,927 16,876,795 16,804,473 558,120 34,239,388
Total $ 21,407,694 $ 26,458,562 $ 580,046 $ 48,446,302 $ 16,876,795 $ 19,273,712 $ 558,120 $ 36,708,627

III. Fair Value Hierarchy

Level 1 Level 2 Level 3 Total Level 1 Level 2 Level 3 Total
Money market funds $ 1,599,536 $ —   $ —   $ 1,599,536
Asset-backed securities —   3,091,839 —   3,091,839 $ —   $ 2,469,239 $ —   $ 2,469,239
Corporate bonds —   43,754,927 —   43,754,927 —   34,239,388 —   34,239,388
Total $ 1,599,536 $ 46,846,766 $ —   $ 48,446,302 $ —   $ 36,708,627 $ —   $ 36,708,627

Note 4 – Inventories

Inventories consisted of the following:

January
2022

April
2021
July 31, 2022 April 30, 2022
Raw materials $ 1,370,380 $ —   $ 2,396,265 $ 2,831,713
Work-in-process 39,153 —   524,811 173,112
Finished goods 930,147 362,072 1,663,760 891,045
Total $ 2,339,680 $ 362,072 $ 4,584,836 $ 3,895,870

Inventory purchase ~~commitments~~orders outstanding totaled approximately $~~14,539,895~~31.9 ~~at January 31, 2022.~~million. The global supply chain for materials required to produce our drones is presently experiencing significant ~~delays~~disruptions and ~~disruptions. As a result,~~delays. While we have ~~been required to significantly increase~~increased our order lead times, ~~for~~we retain the ~~components of our drones.~~
right to cancel or modify these orders prior to their shipment.
1514

Note 5 -– Other Current Assets

Other current assets included:

January
2022

April
2021
July 31, 2022 April 30, 2022
Prepaid inventory $ 1,539,479 $ 478,939 $ 1,804,539 $ 1,707,085
Accrued interest income 393,549 —   334,654 385,730
Prepaid insurance 140,182 —
Prepaid expenses 152,001 115,587 555,080 262,069
Security deposits 9,372 9,372
Due from related party —   75,000
Total $ 2,234,583 $ 678,898 $ 2,694,273 $ 2,354,884

Note 6 – Due From Related Party

In January 2022, the Company determined that an employee had relocated in 2021 but their compensation had not been subject to the required tax withholding by the new jurisdiction. The amount subject to taxation included ~~$155,624~~$155,624 of cash compensation and ~~$1,413,332~~$1,413,332 of income associated with the vesting of restricted stock ("Stock Compensation"). In March 2022, the Company entered into a note agreement (the "Note") with the employee in the amount of ~~$510,323,~~$510,323, representing the estimated taxes owed by the employee related to the Stock Compensation. Under the terms of the Note, 104,166 shares of common stock with a fair value of ~~$280,832,~~$280,832, which had vested during calendar 2021, were withheld by the Company and applied against the Note. The employee ~~has~~ agreed not to sell or transfer 110,983 shares of common stock held at the Company's transfer agent until the Note is repaid. In addition, the employee ~~is scheduled to have~~ has 20,833 shares of restricted stock ~~vest~~vesting monthly in calendar 2022, of which 3,000 shares will be withheld with the fair value of those shares applied against the Note. Any shares issued to the employee in 2022 will be held at the transfer agent until the Note is repaid in full. The Note matures on December 31, ~~2022 and will be repaid by the employee assigning that number of shares, held at the transfer agent, with a fair value required to repay the Note in full.~~2022. The Company ~~accrued~~filed amended payroll ~~taxes of $596,120 at January 31,~~tax returns on March 16, 2022. In March and April 2022, the Company made payments totaling $712,646representing ~~$510,323~~$510,323 owed by the employee, ~~$31,604~~$31,604 owed by the Company, and ~~$54,193~~$170,719 of ~~estimated~~ penalties and interest. The note balance totaled ~~$225,539~~$13,404 at ~~January~~July 31, 2022. The shares held at the transfer agent had a fair value of ~~$206,684~~$393,356 at ~~January~~July 31, 2022. The note was repaid in full in August 2022.
Note 7 – Intangible Assets
Intangible assets relate to acquisitions completed by the Company, ~~filed amended payroll tax returns, which included~~including those described in Note 1. Intangible assets were as follows:

July 31, 2022 April 30, 2022
Gross Value Accumulated Amortization Net Value Accumulated Amortization Net Value
Proprietary technology $ 1,098,000 (267,284 ) $ 830,716 $ (219,267 ) $ 878,733
Non-compete agreements 81,000 (36,417 ) 44,583 (29,667 ) 51,333
Customer relationships 39,000 (13,928 ) 25,072 (12,535 ) 26,465
Total finite-lived assets 1,218,000 (317,629 ) 900,371 (261,469 ) 956,531
Brand name 1,722,000 —   1,722,000 —   1,722,000
Trademark 20,000 —   20,000 —   20,000
Total indefinite-lived assets 1,742,000 —   1,742,000 —   1,742,000
Total intangible assets, net $ 2,960,000 (317,629 ) $ 2,642,371 $ (261,469 ) $ 2,698,531
Proprietary technology and non-compete agreements are being amortized over 5 and 3 years, respectively. Customer relationships is being amortized over 7 years. Goodwill and Brand name are not amortized but evaluated for impairment on a ~~payment~~quarterly basis.
15
As of ~~$544,057, on March 16, 2022.~~July 31, 2022, expected amortization expense for finite-lived intangible assets for the next five years is as follows:
Fiscal Year Ended:
2023 $ 168,478
2024 221,972
2025 197,638
2026 170,438
2027 141,845
Total $ 900,371
Goodwill is a separately stated intangible asset and represents the excess of the purchase price of acquisitions above the net assets acquired. The composition of, and changes in goodwill, consist of:
Date Acquisition Goodwill
January 2020 Rotor Riot $ 1,849,073
November 2020 Fat Shark 6,168,260
Balance at April 30, 2021 8,017,333
May 2021 Skypersonic 2,826,918
August 2021 Teal Drones 14,294,499
Balance at April 30, 2022 and July 31, 2022 $ 25,138,750

Note 78 – Property and Equipment

Property and equipment consist of assets with an estimated useful life greater than one ~~year. Property~~year, and ~~equipment~~ are reported net of accumulated ~~depreciation, and the~~depreciation. The reported values are periodically assessed for ~~impairment. Property~~impairment, and ~~equipment~~were as ~~of January~~follows:
July 31, 2022 April 30, 2022
Equipment and related $ 630,448 $ 509,376
Leasehold improvements 567,404 149,330
Furniture and fixtures 54,254 42,746
Accumulated depreciation (223,746 ) (189,762 )
Net carrying value $ 1,028,360 $ 511,690
Depreciation expense totaled $28,272 and $0 for the three months ended July 31, 2022 ~~was as follows:~~and 2021, respectively.
Original cost $ 423,588
Accumulated depreciation 160,729
Net carrying value $ 262,859

Note 89 – Operating Leases

~~The~~As of July 31, 2022, the Company ~~has the following~~had operating type leases for real estate ~~locations where it operates:~~and no finance type leases. The Company’s leases have remaining lease terms of up to 4.83 years, some of which may include options to extend for up to 5 years. Operating lease expense totaled $121,506 for the three months ended July 31, 2022, including period cost for short-term, cancellable and variable leases, not included in lease liabilities, of $7,946 for the three months ended July 31, 2022.

Location Monthly Rent Expiration Monthly Rent Expiration
South Salt Lake, Utah $ 22,000 December 2024 $ 22,000 December 2024
Orlando, Florida $ 4,600 May 2024 $ 4,692 May 2024
Cayman Islands $ 3,438 Month to Month
San Juan, Puerto Rico $ 2,226 June 2027
Troy, Michigan $ 2,667 May 2022 $ 2,667 May 2022
Orlando, Florida $ 1,690 September 2022 $ 1,690 September 2022

16

~~These lease agreements have remaining terms up~~Supplemental information related to ~~2.92 years, excluding options to extend certain~~operating leases for ~~up to 5 years. The weighted average remaining lease term as of January~~the three months ended July 31, 2022 ~~was 2.86 years. The Company used a discount rate of 12% to calculate its lease liability at January 31, 2022.~~ was:
Operating cash paid to settle lease liabilities $94,491
Weighted average remaining lease term (in years) 3.05
Weighted average discount rate 12%
Future lease ~~payment obligations~~payments at ~~January~~July 31, 2022 were as follows:

Fiscal Year Ended:
2022 $ 98,896
2023 336,257
2024 332,356
2025 230,653
Total $ 998,162
Fiscal Year Ended:
2023 $ 291,405
2024 403,878
2025 304,676
2026 76,619
2027 79,300
Thereafter 6,627
Total $ 1,162,505

Note 910 – Debt Obligations

A. Decathlon Capital
In ~~connection with the acquisition of~~August 2021, Teal ~~Decathlon Capital agreed to restructure the terms of an existing~~restructured its loan agreement with ~~Teal. Effective August 31, 2021, the~~Decathlon Capital. The principal amount ~~outstanding~~ of $1,670,294 bears interest at 10% ~~annually~~ and is ~~repayable~~payable in monthly ~~payments~~installments of $49,275 through its December 31, 2024 maturity date. The balance outstanding at ~~January~~July 31, 2022 totaled $~~1,483,383~~1,256,632.

B. ~~Convertible~~Pelion Note
In May 2021, Teal entered into a ~~convertible~~ note agreement totaling $350,000 ~~with one of its equity investors.~~which is payable upon demand. The note bears interest at the applicable Federal Rate as of the date of the Note which was ~~approximately~~ 0.13% on the date of issuance. ~~The Company has assumed this obligation which is payable upon demand.~~Accrued interest totaled $537 at July 31, 2022.

C. Vendor Settlement
In May 2020, Teal entered into a settlement agreement with a vendor that had been providing contract manufacturing services. At August 31, 2021, the Company assumed the outstanding balance of $387,500 which is payable in monthly installments of $37,500 with a final payment of $12,500 ~~due~~that was paid in July 2022. ~~The balance outstanding at January 31, 2022 totaled $200,000~~.

D. SBA Loan
On February 11, 2021, Teal received a Small Business Administration Paycheck Protection Program (“SBA PPP”) loan in the amount of $300,910. The loan was unsecured, non-recourse, and accrued interest at one percent annually. The loan ~~is forgivable if~~was used to fund qualifying payroll, rent and ~~utilities. The~~utilities, and in February 2022, the principal balance of $300,910 and accrued interest of $3,001 were ~~forgiven on February 16, 2022.~~forgiven.

E. Shopify Capital
Shopify Capital is an affiliate of Shopify, Inc. which provides sales software and services to the Company. The Company processes customer transactions ordered on the e-commerce site for Rotor Riot through Shopify. Shopify Capital has entered into multiple agreements with the Company in which it has "purchased receivables" at a discount. Shopify retains a portion of the Company's daily receipts until the purchased receivables have been paid. The Company recognizes the discount as a transaction fee, in full, in the month in which the agreement is executed. ~~The Company assumed an existing agreement when it acquired Rotor Riot in January 2020. This agreement was repaid in May 2020. Since then,~~Agreements with activity during the ~~Company has entered into the following agreements with Shopify:~~two years ended July 31, 2022 included:
Date of Transaction Purchased Receivables Payment to Company Transaction Fees Withholding Rate Fully Repaid In
May 2020 $158,200 $140,000 $18,200 17% October 2020
September 2020 $209,050 $185,000 $24,050 17% May 2021
April 2021 $236,500 $215,000 $21,500 17% January 2022

17

Date of Transaction Purchased Receivables Payment to Company Transaction Fees Withholding Rate Fully Repaid In
May 2020 $158,200 $140,000 $18,200 17% October 2020
September 2020 $209,050 $185,000 $24,050 17% May 2021
April 2021 $236,500 $215,000 $21,500 17% January 2022
F. Corporate Equity
InBeginning in October 2021, ~~Teal entered into an agreement with Corporate Equity to fund $60,000~~ ~~of leasehold improvements. In~~and amended in January 2022, ~~the agreement was amended to include an additional~~Teal financed a total of $~~60,000~~120,000 of leasehold improvements ~~funding.~~with Corporate Equity. The loan bears interest at 8.25% annually and ~~is repayable in~~requires monthly payments of $3,595 through ~~its~~ December ~~2024 maturity date.~~2024. The balance outstanding at ~~January~~July 31, 2022 and April 30, 2022 totaled $~~111,180~~93,864. and $102,599 respectively.

G. Revenue Financing Arrangement
In April 2021, Teal entered into an agreement under which it sold future customer payments, at a discount, to Forward Financing. At August 31, 2021, the Company assumed the outstanding balance of $38,758. Repayment of the remaining balance was completed in January 2022.

H. Ascentium Capital
In September 2021, Teal entered into a financing agreement with Ascentium Capital to fund the purchase of a fixed asset totaling $24,383. Monthly payments of $656 are payable through October 2024. The balance outstanding at ~~January~~July 31, 2022 totaled $~~21,255~~17,317.

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

J. Summary
Outstanding principal payments on debt obligations are due as follows:

Balance of fiscal year 2022 $ 600,683
2023 680,308
2024 646,287
2025 476,462
2026 62,988
Total $ 2,466,728
Short term – through January 31, 2023 $ 1,127,596
Long term – thereafter $ 1,339,132
Fiscal 2023 $ 744,108
Fiscal 2024 572,139
Fiscal 2025 401,568
Total $ 1,717,815
Short term – through July 31, 2023 $ 882,096
Long term – thereafter $ 835,719

Note ~~10 -~~11 – Due to Related Party

A. Founder of Fat Shark

In connection with the acquisition of Fat Shark in November 2020, the Company issued a secured promissory note ~~in the amount of~~for $1,753,000 to the ~~seller who is now an employee.~~seller. The note ~~bears~~accrued interest at 3% annually and ~~matures~~matured in full in November 2023. In May 2021, the Company made an initial payment of $132,200 by directing a refund from a vendor based in China to the noteholder who is also based in China. The remaining balance of $1,620,800 plus accrued interest totaling $45,129 was paid in September 2021.

18

B. BRIT, LLC

In January 2020, in connection with the acquisition of Rotor Riot, the Company issued a promissory note ~~in the amount of~~for $175,000 to the seller, BRIT, LLC. The note ~~bears~~accrued interest at 4.75% annually. The entire outstanding balance of $85,172 plus accrued interest totaling $12,942 was paid in October 2021.

The Company also assumed a line of credit obligation totaling $47,853 which bears interest at ~~6.42~~6.67% annually. The outstanding balance totaled $~~41,622~~37,196 and $~~47,922~~40,057 at ~~January~~July 31, 2022 and April 30, ~~2021,~~2022, respectively.

C. Aerocarve

In 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 April 30, 2021 was $74,000. The balance~~ was repaid in full in May 2021.

Note ~~11 -~~12 – Convertible Notes

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

October 2020 Financing

In October 2020, the Company closed a private offering of convertible promissory notes (the "2020 Notes") in the aggregate principal amount of $600,000. The 2020 Notes accrued interest at 12% annually, had a ~~two year~~two-year term, and were convertible into common stock at the lower of $1.00 or a 25% discount of the price per share of Common Stock offered in a future, qualified offering. The financing also included the issuance of warrants to purchase 399,998shares of common stock. The Warrants are exercisable for a period of five years at a price equal to the lower of (1) $1.50 per share, or (2) at a price equal to 75% of the price per share of the ~~common stock offered in a future, qualified offering.~~
The Company determined that the provision associated with a potential reduction in the conversion price of the notes and the exercise price of the warrant represented an embedded derivative financial liability. The derivative liability was initially valued at $~~728,587, of which $580,000~~ ~~of the proceeds were applied as a debt discount to reduce the initial carrying value of the notes to zero with the remaining $20,000~~ ~~applied against transaction fees. The derivative liability was valued using a multinomial lattice model with $460,588~~ ~~and $267,999~~ ~~related to the derivative features of the notes and warrants, respectively.~~
~~As of January 31, 2022, (a) the 2020 Notes were fully converted into common stock and the related derivative liability eliminated, and (b)~~ ~~266,666~~ ~~of the warrants were outstanding with a derivative liability of $445,709~~.
~~January 2021 Financing~~
~~In January 2021, the Company closed a private offering of convertible promissory notes (the "2021 Notes") in the aggregate principal amount of $500,000. The 2021 Notes accrued interest at~~ 12~~% annually, had a~~ ~~two year~~ term, and were convertible into shares of the Company's common stock at the lower of $1.00 or a 25% discount of the price per share of Common Stock offered in a future, qualified offering. The financing also included the issuance of warrants to purchase ~~675,000~~ ~~shares of common stock. The Warrants are exercisable for a period of five years at a price equal to the lower of (i) $1.50 per share, or (ii) a 25% discount to the price per share of~~ common stock offered in a future, qualified offering.

The Company determined that the provision associated with a potential reduction in the conversion price of the notes and the exercise price of the warrant represented an embedded derivative financial liability. The derivative liability was initially valued at $~~4,981,701~~728,587, using a multinomial lattice model with $460,588 and $267,999 related to the derivative features of the notes and warrants, respectively. In addition, $580,000 of the proceeds were applied as a debt discount to reduce the initial carrying value of the notes to zero with the remaining $20,000 applied against transaction fees. The excess of the liability over the net proceeds totaled $148,587which was recognized as a derivative expense in the fiscal year ended April 30, 2021.
As of July 31, 2022, (a) the 2020 Notes were fully converted into common stock and the related derivative liability eliminated, and (b) 266,666 of the warrants were outstanding with a derivative liability of $557,297.
January 2021 Financing
In January 2021, the Company closed a private offering of convertible promissory notes (the "2021 Notes") in the aggregate principal amount of $500,000. The 2021 Notes accrued interest at 12% annually, had a two-year term, and were convertible into shares of the Company's common stock at the lower of $1.00 or a 25% discount of the price per share of Common Stock offered in a future, qualified offering. The financing also included the issuance of warrants to purchase 675,000 shares of common stock. The Warrants are exercisable for a period of five years at a price equal to the lower of (i) $1.50 per share, or (ii) a 25% discount to the price per share of common stock offered in a future qualified offering.
19
The Company determined that the provision associated with a potential reduction in the conversion price of the notes and the exercise price of the warrant represented an embedded derivative financial liability. The derivative liability was initially valued at $4,981,701 using a multinomial lattice model with $2,111,035 and $2,870,666 related to the derivative features of the notes and warrants, respectively. In addition, $500,000was applied as a debt discount to reduce the initial carrying value of the notes to zero. The ~~derivative liability was valued using a multinomial lattice model with $2,111,035~~ ~~and $2,870,666~~ ~~related to the derivative features~~excess of the ~~notes and warrants, respectively.~~liability over the net proceeds totaled $4,481,701 which was recognized as a derivative expense in the fiscal year ended April 30, 2021.

19
As of ~~January~~July 31, 2022, (a) the 2021 Notes were fully converted into common stock and the related derivative liability eliminated, and (b) 540,000 of the warrants were outstanding with a derivative liability of $~~904,390~~1,143,122.

Note ~~12 -~~13 – Income Taxes

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

At ~~January~~July 31, 2022 and April 30, ~~2021,~~2022, we had accumulated deficits of approximately $~~22,700,000~~31,300,000 and $~~15,800,000~~27,500,000, respectively. Deferred tax assets related to the future benefit of these net operating losses for tax purposes totaled approximately $~~908,000~~5,790,500 and $~~632,000~~5,087,500, respectively, ~~based on~~calculated using the ~~Act 20~~base Puerto Rico corporate tax rate of 4%18.5%. Currently, we focus on projected future taxable income in evaluating whether it is more likely than not that these deferred assets will be realized. Based on the fact that we have not generated an operating profit since inception, we have applied a full valuation allowance against our deferred tax assets at ~~January~~July 31, 2022 and April 30, ~~2021.~~2022.

Note ~~13 -~~14 – Common Stock

Our common stock has a par value of $0.001per share. We are authorized to issue 500,000,000shares of common stock. Each share of common stock is entitled to one vote.
~~On May 4, 2021, the Company closed an offering~~A summary of4 ~~million shares of common stock which generated gross proceeds of $~~16 ~~million and net proceeds of approximately $14.6~~ ~~million.~~
~~On May 4, 2021, the Company issued~~ ~~50,000~~ ~~shares of common stock for investor relations services rendered.~~
~~On May 7, 2021, the Company issued~~ ~~685,321~~ ~~shares of common stock in connection with the acquisition of Skypersonic, as further described in Note 1.~~
~~On July 21, 2021, the Company closed an offering of~~ ~~13,333,334~~ ~~shares of common stock which generated gross proceeds of $~~60 ~~million and net proceeds of approximately $55.5~~ ~~million.~~
~~During the three months ended July 31, 2021,~~ ~~62,500~~ ~~shares of common stock were issued under the terms of a restricted stock agreement with an officer.~~
~~On August 10, 2021, the Company issued~~ ~~1,321,966~~ ~~shares of common stock in connection with the conversion of~~ ~~158,704~~ ~~shares of Series A Preferred Stock.~~
~~On August 15, 2021, the Company issued~~ ~~20,000~~ ~~shares of common stock for investor relations services rendered.~~
~~On August 31, 2021, the Company issued~~ ~~3,588,272~~ ~~shares of common stock in connection with the acquisition of Teal Drones, as further described in Note 1.~~
~~During the three months ended October 31, 2021, the Company issued~~ ~~21,972~~ ~~shares of common stock in connection with working capital adjustments related to the acquisition of Skypersonic, as further described in Note 1.~~
~~During the three months ended October 31, 2021,~~ shares of common stock issued ~~under~~by the ~~terms of restricted stock agreements with officers totaled~~ ~~162,500~~.Company since April 30, 2021 is as follows:
Description of Shares Shares Issued
Shares outstanding as of April 30, 2021 29,431,264
Conversion of Series A preferred stock 1,321,996
Conversion of Series B preferred stock 818,333
Exercise of warrants 66,666
Acquisition of Skypersonic on May 7, 2021, see Note 1 707,293
Acquisition of Teal Drones on August 31, 2021, see Note 1 3,588,272
Public offerings which generated gross proceeds of $76 million and net proceeds of approximately $70.1 million 17,333,334
Exercise of stock options 89,107
Vesting of restricted stock units to employees, net of shares withheld of 225,869 to pay taxes and 92,812 to repay a Note 225,637
Vesting of restricted stock units to Board of Directors 48,124
Vesting of restricted stock units to consultants 7,042
Shares issued for services 111,667
Shares outstanding as of April 30, 2022 53,748,735
Vesting of restricted stock units to employees, net of shares withheld of 33,267 to pay taxes and 9,000 to repay a Note 55,915
Vesting of restricted stock units to Board of Directors 12,032
Vesting of restricted stock units to consultants 1,760
Share outstanding as of July 31, 2022 53,818,442

~~During the three months ended October 31, 2021, shares of common stock issued due to the exercise of stock options totaled~~ ~~81,115~~.
~~During the three months ended January 31, 2022, shares of common stock issued under restricted stock agreements totaled~~ ~~45,044. In addition,~~ ~~62,500~~ ~~shares which were pending issuance under restricted stock agreements, were instead applied against the Note described in footnote 6 and~~ ~~29,483~~ ~~shares were applied toward payroll tax obligations on restricted stock.~~
20

Note ~~14 -~~15 – Preferred Stock

Series A Preferred Stock outstanding totaled 158,704 at April 30, 2021, and were converted into ~~1,321,966~~1,321,996 shares of common stock on August 10, 2021.

Series B Preferred Stock ("(“Series B ~~Stock"~~Stock”) is convertible into common stock at a ratio of 0.8334 shares of common stock for each share of Series B Stock held and votes together with the common stock on an as-if-converted basis. Shares outstanding at ~~January~~July 31, 2022 totaled 986,676 which are convertible into 822,230 shares of common stock.

Note ~~15 -~~16 – Warrants

~~In October 2020, the Company~~The company issued five-year warrants ~~to purchase a total of~~ ~~399,998~~ ~~shares~~ in connection with ~~the issuance of $600,000~~oftwo convertible ~~notes.~~note financings. The warrants have an initial exercise price of $1.50which may be reduced to a 25% discount of the price per share of Common Stock offered in a future qualified offering. The warrants were valued ~~at $267,999~~ using the multinominal lattice model and are considered derivative liabilities under ASC 815-40. The value of the warrants was included in the determination of the initial accounting for ~~the~~each financing including the calculation of the derivative liability and related expense.

~~In January 2021, the Company issued five-year warrants to purchase a total of~~ ~~675,000~~ ~~shares in connection with the issuance of $500,000of convertible notes.~~ ~~The warrants have an initial exercise price of $1.50~~ ~~which may be reduced to a 25% discount of the price per share of Common Stock offered in a future qualified offering. The warrants were valued at $2,870,666~~ ~~using the multinominal lattice model and are considered derivative liabilities under ASC 815-40. The value~~A summary of the warrants ~~was included in the determination of the initial accounting for the financing including the calculation of the derivative liability~~issued and ~~related expense.~~their fair values were:
Upon Issuance July 31, 2022
Date of Transaction Number of Warrants Initial Fair Value Number of Warrants Fair Value
October 2020 399,998 $ 267,999 266,666 $ 557,297
January 2021 675,000 $ 2,870,666 540,000 $ 1,143,122

In March and April 2021, we received $201,249 ~~in connection with~~related to the exercise of 201,666 ~~warrants which had been issued in October 2020 and January 2021 as part~~ of the ~~convertible note financings described in note 10.~~warrants. Since these exercises resulted in the elimination of the derivative liability in the warrants, the derivative liability was reduced by $694,305 with a corresponding increase in additional paid in capital. In June 2021, we received $99,999 in connection with the exercise of 66,666 additional warrants which resulted in the elimination of an additional $163,141 of the derivative liability in the warrants.

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

In ~~June 2021, we received $99,999~~ ~~in connection with the exercise of~~ ~~66,666~~ warrants which had been issued in October 2020 as part of the convertible note financings described in Note 11. Since these exercises resulted in the elimination of the derivative liability in the warrants, the derivative liability was reduced by $~~163,141~~ ~~with a corresponding increase in additional paid in capital.~~
In July 2021, the Company issued warrants to purchase 533,333 shares of common stock to the placement agent of its common stock offering. The warrants have a ~~five year~~five-year term and an exercise price of $5.625.

The following table ~~summarizes~~presents the ~~changes in~~range of assumptions used to estimate the fair values of warrants ~~outstanding since April 30, 2020.~~granted during the three months ended July 31:

Number of Shares

Weighted-average Exercise Price per Share

Weighted-average Remaining Contractual Term
(in years)

Aggregate Intrinsic Value
Balance as of April 30, 2020 —   —   —   —
Granted 1,074,998 $ 1.50
Exercised (201,666 ) 1.50
Outstanding as of April 30, 2021 873,332 1.50 4.62 $ 2,218,263
Granted 733,333 5.45
Exercised (66,666 ) 1.50
Outstanding at January 31, 2022 1,539,999 $ 3.38 4.13 $ 1,371,332
2022 2021
Risk-free interest rate —   0.79 – 0.85%
Expected dividend yield —   —
Expected term (in years) —   5.00 – 5.00
Expected volatility —   222.45 – 223.17%

21

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

Number of Shares

Weighted-average Exercise Price per Share

Weighted-average Remaining Contractual Term
(in years)

Aggregate Intrinsic Value
Balance as of April 30, 2021 873,332 1.50 4.62 2,218,263
Granted 733,333 $ 5.45
Exercised (66,666 ) 1.50
Outstanding as of April 30, 2022 1,539,999 3.38 3.89 $ 427,533
Granted —
Exercised —
Outstanding at July 31, 2022 1,539,999 $ 3.38 3.63 $ 540,466

Note ~~16 -~~17 – Share Based Awards

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

Options
The table below sets forth the range of assumptions used to calculate the fair value of options granted during the three months ended July 31:
2022 2021
Exercise Price —   $ 2.41 – 2.60
Stock price on date of grant —   2.41 – 2.60
Risk-free interest rate —   0.47 – 1.57%
Dividend yield —   —
Expected term (years) —   3.75 – 10.00
Volatility —   210.68 – 214.17%
A summary of options activity under the Plan since April 30, 2021 is as follows:
Options Shares Weighted-Average Exercise Price Weighted-Average Remaining Contractual Term Aggregate Intrinsic Value
Outstanding as of April 30, 2021 2,197,475 $ 1.79 8.68 4,943,870
Granted 1,681,000 2.58
Exercised (150,000 ) 2.49
Forfeited or expired (34,333 ) 2.11
Outstanding as of April 30, 2022 3,694,142 2.17 8.56 1,407,545
Granted —
Exercised —
Forfeited or expired (60,000 ) 2.55
Outstanding as of July 31, 2022 3,634,142 2.16 8.31 1,608,791
Exercisable as of July 31, 2022 2,312,975 $ 1.89 7.68 $ 1,334,291
The aggregate intrinsic value of outstanding options represents the excess of the stock price at ~~January 31, 2022 of $1.70~~the indicated date over the exercise price of each option. As of ~~January~~July 31, 2022 and ~~April 30,~~July 31, 2021, there was $~~3,762,636~~2,760,989 and $~~914,915~~1,592,188 of unrecognized stock-based compensation expense related to unvested stock options which is expected to be recognized over the weighted average ~~period~~periods of ~~1.64 years.~~
~~The table below sets forth the assumptions used to calculate the fair value of options granted during the three months ended January 31, 2022:~~
~~Exercise price~~ ~~1.69~~ - ~~2.52~~
~~Stock price on date of grant~~ ~~1.69~~ - ~~2.33~~
~~Volatility~~ ~~268.51% -~~ ~~270.18~~%
~~Risk-free interest rate~~ ~~1.50% -~~ ~~1.74~~%
~~Expected term (years)~~ ~~8.25~~ – ~~8.25~~
~~Dividend yield~~ —
~~A summary of activity under the Plan since April 30, 2020 is as follows:~~
Options Shares Weighted-Average Exercise Price Weighted-Average Remaining Contractual Term Aggregate Intrinsic Value

Outstanding as of April 30, 2020 1,597,475 $ 1.10
Granted 600,000 3.63
Exercised —   —
Forfeited or expired —   —
Outstanding as of April 30, 2021 2,197,475 1.79
Granted 1,656,000 2.59
Exercised (112,500 ) 0.96
Forfeited or expired (26,000 ) 2.12
Outstanding as of January 31, 2022 3,714,975 2.17 8.72 $ 1,010,178
Exercisable as of January 31, 2022 1,897,142 $ 2.13 8.01 $ 687,111
~~Stock compensation expense was as follows:~~

Three months ended
January 31,

Nine months ended
January 31,
2022 2021 2022 2021
General and administrative $ 343,549 $ 336,301 $ 952,899 $ 525,559
Research and development 143,279 179,157 284,511 199,047
Operations 182,320 170,612 556,928 175,586
Sales and marketing 112,975 168,125 271,808 168,125
Total $ 782,123 $ 854,195 $ 2,066,146 $ 1,068,317
2.10 and 1.61 years, respectively.
22

Restricted Stock
A summary of restricted stock activity under the plan since April 30, 2021 is as follows:
Restricted Stock Shares Weighted Average Grant-Date Fair Value Per Share
Unvested and outstanding as of April 30, 2021 687,500 $ 2.69
Granted 995,659 2.55
Vested (599,484 ) 2.64
Forfeited —   —
Unvested and outstanding as of April 30, 2022 1,083,675 2.59
Granted —   —
Vested (111,974 ) 2.57
Forfeited —   —
Unvested and outstanding as of July 31, 2022 971,701 $ 2.59
Stock Compensation
Stock compensation expense for the three months ended July 31 was as follows:
2022 2021
General and administrative $ 345,168 $ 219,601
Research and development 144,798 56,480
Operations 158,431 63,261
Sales and marketing 107,074 44,744
Total $ 755,471 $ 384,086
Stock compensation expense pertaining to options totaled $458,023 and $187,494 for the three months ended July 31, 2022 and 2021, respectively. Stock compensation expense pertaining to restricted stock units totaled $297,448 and $196,592 for the three months ended July 31, 2022 and 2021, respectively.
Note ~~17 -~~18 – Derivatives

The Company completed financings in October 2020 and January 2021 which included notes and warrants containing embedded features subject to derivative accounting. See Note 1112 for a full description of these financings. Both the notes and the warrants included provisions which provided for a reduction in the conversion and exercise prices, respectively, if the Company completed a future qualified offering at a lower price. These provisions represent embedded derivatives which are valued separately from the host instrument (meaning the notes and warrants) and recognized as derivative liabilities on the Company's balance sheet. The Company initially measures these financial instruments at their estimated fair value and recognizes changes in their estimated fair value in results of operations during the period of change. The Company also measures these financial instruments on the date of settlement (meaning when the note is converted, or the warrant is exercised) at their estimated fair value and recognizes changes in their estimated fair value in results of operations. Any discount in the carrying value of the note is fully amortized on the date of settlement and recognized as interest expense. The Company estimated the fair value of these embedded derivatives using a multinomial lattice ~~mode1.~~model. The range of underlying assumptions used in the binomial model to determine the fair value of the derivative warrant liability upon settlement of the derivative liability and as of ~~January~~July 31, 2022 and April 30, 2022 are set forth below. In addition, the Company's stock price on each measurement date was used in the model.

July 31, 2022 April 30, 2022
Risk-free interest rate ~~1.39~~2.83% 0.52 – ~~1.39~~2.87%
Expected dividend yield —
~~Expected term (in years)~~ ~~3.67~~—  – ~~3.99~~
Expected ~~volatility~~term (in years) 3.17 – 3.50 ~~245.10~~3.42 – 4.50
Expected volatility 225.77 – ~~249.99~~235.23% 211.02 – 292.28%

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As of ~~January~~July 31, 2022 all of the notes had been converted into common stock and 806,666 of the warrants were outstanding. Changes in the derivative liability during the three ~~and nine~~ months ended ~~January~~July 31, 2022 and ~~2021~~the year ended April 30, 2022 were as follows:

Three months ended
January 31,

Nine months ended
January 31,
2022 2021 2022 2021
Balance, beginning of period $ 2,376,565 $ 812,390 $ 2,812,767 $ —
Additions 4,981,701 5,710,288
Eliminated upon exercise of warrants — — (163,141) —
Changes in fair value (1,026,466) 3,350,135 (1,299,527) 3,433,938
Balance, end of period $ 1,350,099 $ 9,144,226 $ 1,350,099 $ 9,144,226
July 31, 2022 April 30, 2022
Balance, beginning of period $ 1,607,497 $ 2,812,767
Additions —   —
Eliminated upon conversion of notes/exercise of warrants —   (163,141 )
Changes in fair value 92,922 (1,042,129 )
Balance, end of period $ 1,700,419 $ 1,607,497

Changes in fair value primarily ~~related~~relate to changes in the Company’s stock price during the period with increases in the stock price increasing the liability and decreases in the stock price reducing the liability.

Note 1819 - Related-Party Transactions
~~In November 2019, the Company issued a convertible note in the principal amount of $300,000~~ ~~to one accredited investor and in December 2019, the Company issued a convertible note in the principal amount of $125,000~~ ~~to a director and a convertible note in the principal amount of $25,000~~ ~~to our chief executive officer (collectively, the "2019 Notes"). The Notes had a term of~~ ~~2 yearsand accrued interest at an annual rate of~~ 12~~% through the date of conversion. In September and October 2020, the entire $450,000~~ ~~of 2019 Notes, plus accrued interest totaling $45,204, was converted into~~ ~~710,444~~ ~~shares of common stock.~~

In July 2021, the Company entered into a consulting agreement with a director resulting in monthly payments of $6,000. In addition, the Company issued 150,000 options to purchase common stock at $2.51 which vest quarterly over the one-year term of the agreement. In January 2022, the agreement was amended to increase the monthly payments to $10,000. The agreement expired in June 2022.

In January 2022, the Company entered into a note agreement with an employee in the principal amount of $510,323, as further described in Note 6.

Additional related party transactions are disclosed in Note ~~10.~~11.
Note 20 - Segment Reporting
We define our segments as those operations whose results are regularly reviewed by our CODM to analyze performance and allocate resources. Therefore, segment information is prepared on the same basis that management reviews financial information for operational decision-making purposes. Our CODM is a committee comprised of our CEO, COO, and CFO.
The Enterprise segment is focused on opportunities in the commercial sector, including military. Enterprise is building the infrastructure to manage drone fleets, fly and provide services remotely, and navigate confined industrial interior spaces and dangerous military environments.
The Consumer segment is focused on enthusiasts and hobbyists which are expected to increase as drones become more visible in our daily lives.
Our CODM allocates resources to and assesses the performance of our two operating segments based on the operating segments’ net sales and gross profit. The following table sets forth information by reportable segment for the three months ended July 31, 2022 and 2021, respectively.

For the three months ended July 31, 2022
Enterprise Consumer Corporate Total
Revenues $ 1,126,551 $ 1,942,720 $ —   $ 3,069,271
Cost of goods sold 1,044,431 1,667,213 —   2,711,644
Gross margin 82,120 275,507 —   357,627

Operating expenses 1,661,363 495,028 1,899,732 4,056,123
Operating loss (1,579,243 ) (219,521 ) (1,899,732 ) (3,698,496 )

Other expenses, net 63,229 (124 ) 49,998 113,103
Net loss $ (1,642,472 ) $ (219,397 ) $ (1,949,730 ) $ (3,811,599 )

2324

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

For the three months ended July 31, 2022
Enterprise Consumer Corporate Total
Accounts receivable, net $ 688,244 $ 241,628 $ —   $ 929,872
Inventory, net 3,486,487 1,098,349 —   4,584,836
Inventory deposits $ 1,158,195 $ 646,344 $ —   $ 1,804,539
Note ~~19 -~~21 – Subsequent Events

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

In August and September 2022, the Company entered into inventory purchase orders totaling $3.1 million. The ~~SBA PPP loan principal balance of $300,910~~global supply chain for materials required to produce our drones is presently experiencing significant disruptions and ~~accrued interest of $3,001~~ ~~were forgiven on February 16, 2022.~~delays. While we have increased our order lead times, we retain the right to cancel or modify these orders prior to their shipment.

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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.

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~~providing products, services and ~~related components, and (ii) cloud-based analytics, storage, and services for drones.~~solutions to the drone industry. Any statements that are not 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 Annual Report on Form 10-K filed with the SEC on ~~August 12, 2021.~~July 27, 2022.

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

Recent Developments
Corporate developments since May 1, 2021 include:

~~Firm Commitment Underwritten Public Offerings~~Capital Transactions
S-1 Offering

On May 4, 2021, the Company closed a firm commitment underwritten public offering (the "S-1 Offering") in which it sold 4,000,000 shares of its common stock, at a public offering price of $4.00 per share, to ThinkEquity, a division of Fordham Financial Management, Inc., as representative of the underwriters ("ThinkEquity"), pursuant to an underwriting agreement ~~dated April 29, 2021.~~with Think Equity. These shares of common stock were ~~offered to and~~ sold by the Company pursuant to a registration statement on Form S-1, as amended (File No. 333-253491), filed with the SEC, which was declared effective by the Commission on April 29, 2021 (the "S-1 Registration Statement"). ~~The net proceeds to the Company, after deducting the underwriting discount, the underwriters’ fees and expenses and the Company’s estimated expenses, were approximately $14.6 million.~~

S-3 Offering

On July 21, 2021 the Company closed on a firm commitment underwritten public offering (the "S-3 Offering") in which it sold an aggregate of 13,333,334 shares of its Common Stock at a purchase price of $4.50 per share to ~~ThinkEquity, pursuant to an underwriting agreement dated July 18, 2021.~~ThinkEquity. These shares of common stock were ~~offered~~sold by the Company pursuant to a registration statement on Form S-3, as amended (File No. 333-256216), filed with the SEC, which was declared effective by the SEC on June 14, 2021 and a Supplement to the Prospectus contained in this registration statement filed with the SEC on July 19, 2021.
Acquisitions
The Company has completed a number of acquisitions since May 2020. A full description of these acquisitions is set forth in Note 1 of the financial statements. A brief summary of these acquisitions is as follows:
In September 2020, the Company acquired Fat Shark Holdings, a provider of First Person View (FPV) video goggles to the drone industry. The purchase price was $8,354,076.
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In May 2021, the Company acquired Skypersonic which provides hardware and software solutions that enable drones to complete inspection services in locations where GPS is not available, yet still record and transmit data even while being operated from thousands of miles away. The purchase price was $2,791,012.

In August 2021, the Company acquired Teal Drones, a leader in commercial and government UAV (Unmanned Aerial Vehicles) technology. The purchase price was $10,011,279.
Plan of Operations
Since April 2016, the Company's primary business has been to provide products, services and solutions to the drone industry which it presently does through its four wholly owned subsidiaries. Beginning in January 2020, the Company has expanded the scope of its drone products and services through a number of acquisitions. Fat Shark Holdings is a provider of First Person View (FPV) video goggles to the drone industry. Rotor Riot sells FPV drones and equipment, primarily to the consumer marketplace through its digital storefront located at www.rotorriot.com. Skypersonic provides software and hardware solutions that enable drones to complete inspection services in locations where GPS (global positioning systems) are not available, yet still record and transmit data even while being operated from thousands of miles away. Teal Drones is a leader in commercial and government UAV technology.
Results of Operations
The analysis of the Company's results of operations for the three months ended July 31, 2022 compared to the three months ended July 31, 2021 is significantly impacted by the acquisition of Teal Drones in August 31, 2021. The timing of the acquisition resulted in there being no financial information related to Teal included in the Company's financial statements for the three months ended July 31, 2021. Conversely, Teal was the largest operating subsidiary during the three months ended July 31, 2022. Since acquiring Teal, the Company has tripled the number of employees and significantly expanded its facilities. As a result, the comparison of the three months ended July 31, 2022 to the three months ended July 31, 2021 yields more significant changes than might normally occur.
Three Months Ended July 31, 2022 and July 31, 2021
Revenue
During the three months ended July 31, 2022 (or the "2022 period"), we generated revenues of $3,069,271 compared to $1,396,751 for the three months ended July 31, 2021 (or the "2021 period"), representing an increase of $1,672,520, or 120%. Consumer revenues totaled $1,942,720 during the 2022 period compared to $1,355,675 during the 2021 period, resulting in an increase of $587,045, or 43%. Approximately $371,000, or 63%, of the increase is attributed to higher revenues for Fat Shark which launched its newest product release, the Dominator, in the first quarter. Enterprise revenues totaled $1,126,551 during the 2022 period compared to $41,076 during the 2021 period, resulting in an increase of $1,085,475, or greater than 100%. This increase is due to the acquisition of Teal that occurred after the 2021 period which accounted for 98% of Enterprise revenues during the 2022 period.
Cost of Goods Sold
Cost of Goods totaled $2,711,644 in the 2022 period compared to $1,294,347 in the 2021 period, representing an increase of $1,417,297, or 109%. The increase directly related to higher revenues which increased by 120% in the 2022 period compared to the 2021 period.
Gross Margin
Gross margin totaled $357,627 during the three months ended July 31, 2022 compared to $102,404 during the three months ended July 31, 2021, representing an increase of $255,223, or approximately 250%. On a percentage basis, gross margin was 11.7% during the 2022 period compared to 7.3% during the 2021 period. The percentage basis increase primarily related to Fat Shark which realized higher margins in the 2022 period related to the launch of its Dominator goggles compared to the 2021 period when it lowered prices to expedite the sale of products near the end of their life cycle. These changes in product offerings increased gross margin for Fat Shark from 12% in the 2021 period to 16% in the 2022 period.
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Operating Expenses
Operations expense totaled $1,048,086 during the 2022 period compared to $176,863 during the 2021 period, resulting in an increase of $871,223, or almost five times. Approximately 89% of the increase, or $777,550, related to Teal which was not acquired until August 2021, and therefore, had no expenses during the 2021 period. Approximately 62% of Teal's costs related to payroll with the balance spread ratably across numerous categories including office, overhead, and information technology.
Research and development expenses totaled $532,770 during the three months ended July 31, 2022 compared to $244,254 during the three months ended July 31, 2021, representing an increase of $288,516, or 118%. The entire increase related to expenses incurred at Teal which was acquired on August 31, 2021, and therefore had no expenses in the 2021 period. Approximately 69% of Teal's expenses related to payroll with 25% related to office.
Sales and marketing costs totaled $602,231 during the 2022 period compared to $100,633 during the 2021 period, resulting in an increase of $501,598, or almost five times. Payroll costs totaled $217,520 in the 2022 period compared to $50,080 resulting in an increase of $167,440 which represented 33% of the total increase in sales and marketing costs. Professional services costs totaled $150,259 in the 2022 period compared to $5,071 resulting in an increase of $145,188 which represented 29% of the total increase. In addition, higher travel and related costs represented 18% of the increase while advertising costs accounted for 17%.
General and administrative expenses totaled $1,117,565 during the three months ended July 31, 2022 compared to $876,180 during the three months ended July 31, 2021, representing an increase of $241,385, or 28%. Payroll costs totaled $360,133 in the 2022 period compared to $197,435 in the 2021 period resulting in an increase of $162,698, or 67% of the total increase in general and administrative expenses. Information technology services costs increased by $72,988 representing 30% of the total increase.
During the three months ended July 31, 2022, we incurred stock-based compensation costs of $755,471 compared to $384,086 in the 2021 period, resulting in an increase of $371,385 or 97%. Since the 2021 period, the Company has issued 1,232,000 additional options which resulted in incremental stock based compensation costs of $270,529 in the 2022 period. In addition, costs related to restricted stock awards totaled $297,448 during the 2022 period compared to $196,592 during the 2021 period.
Other Income
Other Income (Expense) totaled other expense of $113,103 during the 2022 period compared to other income of $121,840 during the 2021 period, representing a change of $234,943. The largest component change was the recognition of an expense of $92,922 during the 2022 period related to the change in the fair value of derivative liability compared to income of $154,248 during the 2021 period, representing a change of $247,170. Changes in the fair value of the derivative liability are most significantly impacted by changes in the Company's stock price. An increase in the stock price during the 2022 period resulted in expense whereas a decrease in the stock price during the 2021 period resulted in income. In addition, the Company recognized net investment income of $130,296 in the 2022 period compared to zero during the 2021 period. Early in fiscal 2022, the Company completed two offerings of common stock which generated net proceeds of approximately $70 million. These funds were primarily invested in high quality, corporate debt which generated investment income during the 2022 period. Depreciation and amortization expense, included in other, totaled $84,432 in the 2022 period compared to $16,326 in the 2021 period, resulting in an increase of $68,106, or more than 100%.
Net Loss
Net Loss totaled $3,811,599 during the three months ended July 31, 2022 compared to $1,557,772 during the three months ended July 31, 2021, representing an increase of $2,253,827, or approximately 145%. The acquisition of Teal Drones in August 2021 accounted for the majority of the increase as it was fully operational in the 2022 period but was acquired after the end of the 2021 period. Teal's operating loss for the three months ended July 31, 2022 was approximately $1,309,000 which equals approximately 36% of the consolidated net loss for the 2022 period. Since acquiring Teal, we have tripled its headcount and significantly expanded its facilities.
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Cash Flows
Operating Activities
Net cash used in operating activities was $4,813,815 during the three months ended July 31, 2022, compared to net cash used in operating activities of $4,073,042 during the three months ended July 31, 2021 representing an increase of $740,773, or 18%. Net cash used in operations, net of non-cash expenses totaling $943,500, equaled $2,868,099 in the 2022 period compared to $1,119,608 in the 2021 period, resulting in an increase of $1,748,491, or greater than 100%. The higher use of cash primarily related to the acquisition of Teal Drones in August 2021 which resulted in a full quarter of operations in the 2022 period but no activity in the 2021 period. Teal incurred an operating loss of $1,309,219 in the 2022 period which approximates the net cash used.  Net cash used related to changes in operating assets and liabilities totaled $1,945,716 during the three months ended July 31, 2022, compared to $2,953,434 during the three months ended July 31, 2021, representing a decrease of $1,007,718, or 34%. Changes in operating assets and liabilities can fluctuate significantly from period to period depending upon the timing and level of multiple factors, including inventory purchases and vendor payments. During the 2021 period, the Company made deposits to purchase inventory totaling $1,519,598 in response to worldwide supply chain issues.
Investing Activities
Net cash provided by investing activities was $7,659,707 during the three months ended July 31, 2022 compared to $13,502 during the three months ended July 31, 2021 resulting in an increase of $7,646,205. The increase is primarily due to net proceeds of $8,204,649 from maturities of marketable securities which were used to fund operations, partially offset by purchases of property and equipment of $544,942 primarily related to the expansion of the manufacturing facilities for Teal.
Financing Activities
Net cash used in financing activities totaled $685,281 during the three months ended July 31, 2022 compared to net cash provided by financing activities of $69,900,774 during the three months ended July 31, 2021. Financing activities can vary from period to period depending upon market conditions, both at a macro-level and specific to the Company. During the 2022 period, the Company received net proceeds of approximately $70.1 million in connection with two offerings of common stock.
Liquidity and Capital Resources
At July 31, 2022, the Company reported current assets totaling $51,176,438, current liabilities totaling $4,554,396 and net working capital of $46,622,042. Cash and marketable securities totaled $42,954,053 at July 31, 2022. Inventory related balances, including pre-paid inventory, totaled $6,389,375. We continue to maintain higher-than-normal inventory balances related to the global supply chain issues, including chip shortages, which have been ongoing for more than a year. At July 31, 2022, the Company was in a strong liquidity and capital position relative to its operating results for the quarter ended July 31, 2022 and its expected cash requirements for the next twelve months.
Capital Transactions
S-1 Offering
On May 4, 2021, the Company closed a firm commitment underwritten public offering (the “S-1 Offering”) in which it sold 4,000,000 shares of its common stock, at a public offering price of $4.00 per share, to ThinkEquity, a division of Fordham Financial Management, Inc., as representative of the underwriters (“ThinkEquity”), pursuant to an underwriting agreement with Think Equity. These shares of common stock were sold by the Company pursuant to a registration statement on Form S-1, as amended (File No. 333-253491), filed with the SEC, which was declared effective by the Commission on April 29, 2021 (the “S-1 Registration Statement”). The net proceeds to the Company from the Offering, after deducting the underwriting discount, the underwriters' fees and expenses and the Company's estimated Offering expenses, were approximately $14.6 million.
29
S-3 Offering
On July 21, 2021 the Company closed a firm commitment underwritten public offering (the "S-3 Offering") in which it sold an aggregate of 13,333,334 shares of its Common Stock at a purchase price of $4.50 per share to ThinkEquity. These shares of common stock were sold by the Company pursuant to a registration statement on Form S-3, as amended (File No. 333-256216), filed with the SEC, which was declared effective by the SEC on June 14, 2021 and a Supplement to the Prospectus contained in this registration statement filed with the SEC on July 19, 2021. The net proceeds to the Company from the S-3 Offering, after deducting the underwriting discount, the ~~underwriters’~~underwriters' fees and expenses and the ~~Company’s~~Company's estimated expenses related to this S-3 Offering, were approximately $55.5 million.

~~Acquisition of Teal Drones~~
On August 31, 2021, we closed the acquisition of Teal Drones Inc., ("Teal"). Teal is a leader in commercial and government unmanned aerial vehicle ("UAV") technology and manufactures the Golden Eagle drone, approved by the US Department of Defense for reconnaissance, public safety, and inspection applications.
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Pursuant to the Merger Agreement, we acquired all of the issued and outstanding share capital of Teal in exchange for $14,000,000 of our common stock (“Common Stock”) at the Volume Weighted Average Price (VWAP) of our Common Stock for the 20 trading days ended August 31, 2021 of $2.908 per share, reduced by the amount of Teal debt assumed consisting of approximately $1.67 million payable to DA4, and approximately $1,457,000 in working capital deficit, for a net closing date payment of $10,872,753. At closing, we issued 3,738,911 shares of Common Stock (the “Stock Consideration”) with a fair market value of $10,431,562. Fifteen (15%) of the Share Consideration (the “Escrow Shares”) was deposited in an escrow account for a period of eighteen (18) months as security for indemnification obligations, any purchase price adjustments due to working capital deficiencies and any other claims or expenses. In December 2021, the Company and Teal agreed to a reduction in the purchase price of $438,058 which resulted in the cancellation of 150,639 shares held in escrow. The fair market value of the cancelled shares was $420,283. The Stock Consideration may be increased if Teal attains certain revenue levels in the twenty four (24) month period following the closing. The additional consideration begins at $4 million if sales total at least $18 million and ends at $16 million if sales total $36 million.
On August 31, 2021, Teal entered into an Amended and Restated Loan and Security Agreement with DA4 (the "Loan Agreement") in the amount of $1,670,294 (the "Loan"), representing the outstanding principal amount previously due and owed by Teal. Interest accrues at a rate of ten (10%) percent per annum. Principal and interest is payable monthly in an amount equal to $49,275 until maturity on December 31, 2024. Teal may prepay the loan at any time, subject to a prepayment premium of $300,705, less the amount of any prior payments of interest. Under the Loan Agreement, Teal granted DA4 a continuing security interest in substantially all of the assets of Teal. In the event of a default, DA4 may declare the full amount of the Loan immediately due and payable and take additional actions including seeking to foreclose on collateral pledged under the Loan Agreement. The Company agreed to guaranty the obligations of Teal under the Loan pursuant to a Joinder Agreement dated August 31, 2021.
~~Plan of Operations~~
Red Cat Holdings ("Red Cat" or the "Company") was originally incorporated in February 1984. Since April 2016, the Company's primary business has been to provide products, services and solutions to the drone industry. Beginning in January 2020, the Company expanded the scope of its drone products and services through a number of acquisitions. Teal Drones is a leader in commercial and government Unmanned Aerial Vehicles (UAV) technology. Fat Shark Holdings is a provider of First Person View (FPV) video goggles. Rotor Riot sells FPV drones and equipment, primarily to the consumer marketplace. Skypersonic provides software and hardware solutions that enable drones to complete inspection services in locations where GPS (global positioning systems) are not available, yet still record and transmit data even while being operated from thousands of miles away. Red Cat Propware is developing drone flight data analytics and storage solutions, as well as diagnostic products and services.
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~~Results of Operations~~
~~Three Months Ended January 31, 2022 and January 31, 2021~~
~~Revenue~~
During the three months ended January 31, 2022 (or the "2022 period"), revenues totaled $1,856,751 compared to $2,145,988 during the three months ended January 31, 2021 (or the "2021 period"), representing a decrease of $289,237 or 13%. The decrease in revenues primarily related to lower sales of Fat Shark’s products at the end of their lifecycles. This decrease was partially offset by the addition of revenues from Skypersonic and Teal which were not included in the 2021 period.
~~Cost of Goods Sold~~
During the three months ended January 31, 2022, we incurred cost of goods sold of $1,516,970 compared to $1,576,265 during the three months ended January 31, 2021, representing a decrease of $59,295 or 4%. The decrease corresponds to the decrease in revenues.
~~Gross Margin~~
During the three months ended January 31, 2022, gross margin was $339,781 compared to $569,723 during the three months ended January 31, 2021, representing a decrease of $229,942 or 40%. Gross margin, as a percentage of revenue, decreased from 27% during the 2021 period to 18% during the 2022 period. The lower gross margin during the 2022 period reflects higher product and shipping costs resulting from the impact of global supply chain shortages. Additionally, Fat Shark’s gross margin, as a percentage of revenue, decreased from 23% during the 2021 period to 8% during the 2022 period partially due to inventory mark downs for products at the end of their lifecycles.
~~Operating Expenses~~
During the three months ended January 31, 2022, operations expense totaled $334,278 compared to $146,539 during the 2021 period, resulting in an increase of $187,739 or greater than 100%. This increase is related to our expanded operations following the acquisitions of Skypersonic in May 2021 and Teal in August 2021. Operations expense for Skypersonic and Teal in the 2021 period collectively represented 40% of the increase.
During the three months ended January 31, 2022, research and development expenses totaled $811,288 compared to $167,968 for the three months ended January 31, 2021 resulting in an increase of $643,320 or greater than 100%. This increase directly related to our expanded operations following the acquisitions of Skypersonic and Teal. Research and development expense for Skypersonic and Teal collectively represented 92% of the increase.
During the three months ended January 31, 2022, sales and marketing expenses totaled $238,624 compared to $48,719 during the three months ended January 31, 2021, resulting in an increase of $189,905 or greater than 100%. This increase is primarily related to higher payroll costs of $144,781 associated with new hires in the 2022 period.
During the three months ended January 31, 2022, general and administrative expenses totaled $1,337,183 compared to $499,155 for the three months ended January 31, 2021, representing an increase of $838,028, or more than 100%. The Company listed on the Nasdaq Capital Market in April 2021 which has resulted in higher “public company” expenses including directors' and officers' insurance, investor relations and other public company expenses which collectively increased by $167,346 in the 2022 period compared to the 2021 period. Additionally, payroll costs increased by $174,265, travel costs increased by $84,208 and office related expenses increased by $33,421. Finally, we incurred general and administrative expenses for Skypersonic and Teal of $127,728 and $171,270, respectively, which were not included in the 2021 period.
During the three months ended January 31, 2022, we incurred stock based compensation costs of $782,123 compared to $854,195 in the 2021 period, resulting in a decrease of $72,072 or 8%. Stock based compensation expense can vary from period to period depending upon the number of options and restricted stock issued in a period, and the related vesting terms. The 2021 period included a significant charge related to restricted stock granted to a newly hired officer.
27
~~Other Expense (Income)~~
Other income, net totaled $598,898 during the three months ended January 31, 2022 compared to Other Expense of $7,837,407 during the three months ended January 31, 2021 representing a change of $8,436,305. Changes in the values of the Company's derivative liabilities accounted for most of the change between periods. During the 2021 period, the Company recorded derivative related expenses totaling $7,831,836 whereas the Company recorded a net benefit related to its derivatives of $1,026,466 during the 2022 period. The net benefit in the 2022 period was partially offset by investment losses of $363,760. The derivative liability is valued using a multinomial lattice model which utilizes the Company's stock price in its calculation. A decrease in the stock price during the 2022 period resulted in the net benefit.
~~Net Loss~~
Net Loss during the three months ended January 31, 2022 totaled $2,564,817 compared to a net loss of $8,984,260 during the three months ended January 31, 2021, representing a decrease of $6,419,443, or 71%. This decrease is primarily related to changes in the values of the Company's derivative liabilities. A decrease in the stock price during the 2022 period resulted in the net benefit. The decrease in derivative related expenses is offset by higher operating expenses which increased to $3,503,496 in the 2022 period as compared to $1,716,576 in the 2021 period, representing an increase of $1,786,920. Approximately $1,039,453 of the increase, or 58%, related to Skypersonic and Teal whose acquisitions were completed after the 2021 period.
~~Results of Operations~~
~~Nine Months Ended January 31, 2022 and January 31, 2021~~
~~Revenue~~
During the nine months ended January 31, 2022 (or the "2022 period"), we generated revenues totaling $5,116,741 compared to $3,122,077 during the nine months ended January 31, 2021 (or the "2021 period"), representing an increase of $1,994,664 or 64%. The increase in revenues related to acquisitions, including Teal, that were completed during and after the close of the 2021 period. Revenues for Fat Shark increased to $2,327,025 in the 2022 period compared to $1,538,795 in the 2021 period, representing an increase of $788,230 which represents 40% of the overall increase. Teal revenues of $1,098,532 during the 2022 period represented 55% of the increase.
~~Costs of Goods Sold~~
During the nine months ended January 31, 2022, we incurred cost of goods sold of $4,521,974 compared to $2,351,153 during the nine months ended January 31, 2021 representing an increase of $2,170,821 or 92%. The increase related to higher revenues associated with the acquisitions of Fat Shark and Teal which were completed in November 2020 and August 2021, respectively.
~~Gross Margin~~
During the nine months ended January 31, 2022, gross margin was $594,767 compared to $770,924 during the nine months ended January 31, 2021, representing a decrease of $176,157 or 23%. Gross margin, as a percentage of revenue, decreased from 25% during the 2021 period to 12% during the 2022 period. The lower gross margin during the 2022 period reflects higher product and shipping costs resulting from the impact of global supply chain shortages. Additionally, Fat Shark’s gross margin, as a percentage of revenue, decreased from 23% during the 2021 period to 2% during the 2022 period primarily related to inventory mark downs for products at the end of their lifecycles.
~~Operating Expenses~~
During the nine months ended January 31, 2022, operations expense totaled $794,390 compared to $353,295 during the 2021 period, resulting in an increase of $441,095 or greater than 100%. This increase is directly related to our expanded operations following the acquisitions of Fat Shark in November 2020, Skypersonic in May 2021, and Teal in August 2021. Increases in operations expense for Fat Shark and the addition of operations expense for Skypersonic and Teal collectively represented 83% of the increase.
28
During the nine months ended January 31, 2022, research and development expenses totaled $1,548,983 compared to $341,892 for the nine months ended January 31, 2021 resulting in an increase of $1,207,091 or greater than 100%. This increase is directly related to our expanded operations following the acquisitions of Fat Shark, Skypersonic, and Teal. Increases in research and development expense for Fat Shark, and the addition of research and development expense for Skypersonic and Teal collectively represented 98% of the increase.
During the nine months ended January 31, 2022, sales and marketing expenses totaled $524,642 compared to $97,534 during the nine months ended January 31, 2021, resulting in an increase of $427,108 or greater than 100%. This increase is primarily related to higher payroll costs of $262,899 associated with new hires in the 2022 period. In addition, we incurred branding and marketing event costs of $50,500 and $30,799, respectively, in the 2022 period.
During the nine months ended January 31, 2022, general and administrative expenses totaled $3,264,071 compared to $929,874 for the nine months ended January 31, 2021, representing an increase of $2,334,197, or more than 100%. Much of the increase related to "public company" expenses associated with the Company's listing on the Nasdaq Capital Market in April 2021. This resulted in increased costs associated with Directors' and Officers' insurance, investor relations and other public company expenses which collectively increased by $810,670 in the 2022 period compared to the 2021 period. Additionally, payroll costs increased by $304,810, travel costs increased by $143,730, and office related expenses increased by $47,629. In addition, we incurred general and administrative expenses for Skypersonic and Teal of $367,323 and $304,346, respectively, which was included in the 2022 period.
During the nine months ended January 31, 2022, stock based compensation costs totaled $2,066,146 compared to $1,068,317 in the 2021 period, resulting in an increase of $997,829 or 93%. This increase related to expense associated with the issuance of 775,000 restricted stock units and 1,656,000 options in the 2022 period which were not applicable to the 2021 period.
~~Other Expense (Income)~~
Other income, net totaled $740,275 during the nine months ended January 31, 2022, compared to other expense of $8,069,797 during the nine months ended January 31, 2021 representing a change of $8,810,072. Changes in the values of the Company's derivative liabilities accounted for most of the change between periods. During the 2021 period, the Company recorded derivative related expenses totaling $8,064,226 whereas the Company recorded a net benefit related to its derivatives of $1,299,527 during the 2022 period. The net benefit in the 2022 period was partially offset by investment losses of $402,207. The derivative liability is valued using a multinomial lattice model which utilizes the Company's stock price in its calculation. A decrease in the stock price during the 2022 period resulted in the net benefit.
~~Net Loss~~
Net Loss during the nine months ended January 31, 2022 totaled $6,863,190 compared to a Net Loss of $10,089,785 during the nine months ended January 31, 2021, representing a decrease of $3,226,595, or 32%. This decrease is primarily related to changes in the values of the Company's derivative liabilities. The derivative liability is valued using a multinomial lattice model which utilizes the Company's stock price in its calculation. A decrease in the stock price during the 2022 period resulted in the net benefit. The decrease in derivative related expenses is offset by higher operating expenses which increased to $8,198,232 in the 2022 period as compared to $2,790,912 in the 2021 period, representing an increase of $5,407,320. Approximately $1,888,475 of the increase, or 35%, related to Skypersonic and Teal whose acquisitions were completed after the 2021 period. Approximately $452,783 of the increase, or 8%, related to increased operating expenses for Fat Shark whose activity in the 2021 period included only 3 months. Higher general and administrative and stock based compensation expense totaling $3,264,071 and $2,066,146 respectively, primarily accounted for the balance of the increase.
29
~~Cash Flows~~
~~Operating Activities~~
Net cash used in operating activities was $12,041,273 during the nine months ended January 31, 2022 compared to net cash used in operating activities of $917,016 during the nine months ended January 31, 2021 representing an increase of $11,124,257, or greater than 100%. Net cash used in operations, net of non-cash expenses totaling $1,083,885, equaled $5,779,305 in the 2022 period compared to $872,484 in the 2021 period, resulting in an increase of $4,906,821, or greater than 100%. The higher operating use of cash in the 2022 period reflected the acquisitions of Fat Shark, Skypersonic, and Teal. Net cash used related to changes in operating assets and liabilities totaled $6,261,968 during the nine months ended January 31, 2022 compared to net cash provided through changes in operating assets and liabilities of $44,532 during the nine months ended January 31, 2021, representing an increase of $6,217,436, or greater than 100%. Approximately $2,067,436, or 33%, of the increase related to inventory, both higher balances on hand as well as prepaid purchases not yet delivered. Approximately $2,018,772, or 32%, of the increase related to accounts payable. Changes in operating assets and liabilities can fluctuate significantly from period to period depending upon the timing and level of multiple factors, including inventory purchases and vendor payments.
~~Investing Activities~~Going Concern

Net cash used in investing activities was $48,514,017 during the nine months ended January 31, 2022 compared to $48,368 during the nine months ended January 31, 2021, representing an increase of $48,465,649. The increase primarily related to the purchase of marketable securities during the 2022 period.
~~Financing Activities~~
Net cash provided by financing activities totaled $67,387,312 during the nine months ended January 31, 2022 compared to $1,200,368 during the nine months ended January 31, 2021. Financing activities can vary from period to period depending upon market conditions, both at a macro-level and specific to the Company. During the 2022 period, the Company received net proceeds of approximately $70 million in connection with two offerings of common stock.
~~Liquidity and Capital Resources~~
As of January 31, 2022, we had current assets totaling $61,249,136, including cash of $7,111,527, marketable securities of $48,446,302, and inventory of $2,339,680. Current liabilities as of January 31, 2022 totaled $5,132,137, including accounts payable of $521,139, accrued expenses of $1,493,691, and short term debt obligations of $1,127,596. Our net working capital as of January 31, 2022 was $56,116,999.
We ~~have reported net losses since inception and~~ only began generating revenues in January ~~2020.~~2020 and have reported net losses since inception. We expect to report net losses for at least the next twelve months. To date, we have ~~primarily~~ funded our operations through ~~offerings of common stock.~~debt and equity transactions. In May ~~2021, we completed an offering of common stock which raised gross proceeds of $16 million. In~~and July 2021, we completed ~~an offering of~~ common stock offerings which ~~raised~~generated gross proceeds of ~~$60~~approximately $70 million.
~~Underwritten Public Offerings~~
~~S-1 Offering~~
~~On May 4, 2021, the Company closed a firm commitment underwritten public offering (the "S-1 Offering") in which it sold 4,000,000 shares~~ At July 31, 2022, we reported cash and investment balances of ~~common stock, at a public offering price of $4.00 per share,~~approximately $43 million. We expect these financial resources to ThinkEquity, a division of Fordham Financial Management, Inc., as representative of the underwriters ("ThinkEquity"), pursuant an underwriting agreement dated April 29, 2021. These shares of common stock were offered to and sold by the Company pursuant to a registration statement on Form S-1, as amended (File No. 333-253491), filed with the SEC, which was declared effective by the Commission on April 29, 2021 (the "S-1 Registration Statement"). The net proceeds to the Company, after deducting the underwriting discount, the underwriters’ fees and expenses and the Company’s estimated expenses, were approximately $14.6 million.
30
~~S-3 Offering~~
On July 21, 2021, the Company closed on a firm commitment underwritten public offering (the "S-3 Offering") in which it sold an aggregate of 13,333,334 shares of Common Stock at a purchase price of $4.50 per share to ThinkEquity, pursuant to an underwriting agreement dated July 18, 2021. These shares of common stock were offered and sold by the Company pursuant to a registration statement on Form S-3, as amended (File No. 333-256216), filed with the SEC, which was declared effective by the SEC on June 14, 2021 and a Supplement to the Prospectus contained in this registration statement filed with the SEC on July 19, 2021. The net proceeds to the Company, after deducting the underwriting discount, the underwriters’ fees and expenses, and the Company’s estimated expenses were approximately $55.5 million.
~~Until we are able to sustain operations through the sale of products and services, we will continue~~be sufficient to fund our operations ~~through equity and/or debt transactions. We~~for at least the next twelve months. However, we can provide no assurance that ~~the financings described above~~these financial resources will be sufficient to fund our operations until we reach profitability. If we are ~~able~~unable to ~~sustain operations~~become profitable before expending our current financial resources, we will need to raise additional capital through ~~the sale of products and services. In addition, there~~equity or debt transactions. We can beprovide no assurance that such additional financing, if required, will be available to us on acceptable terms, or at all. If we are unable to become profitable or 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.

Critical Accounting Policies and Estimates

Our financial statements and accompanying notes have been prepared in accordance with ~~Generally Accepted Accounting Principles (“GAAP”)~~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.
Significant estimates reflected in these financial statements include those used to (i) determine stock-based compensation, (ii) complete purchase price accounting for acquisitions, and (iii) accounting for derivatives.

Off-Balance Sheet Arrangements

We have no off-balance sheet arrangements.

Recently Issued Accounting Pronouncements

The Company has implemented all new accounting pronouncements that are in effect. These pronouncements did not have any material impact on the financial statements unless otherwise disclosed, and the Company does not believe that there are any other new accounting pronouncements that have been issued that might have a material impact on its financial position or results of operations.
31
ITEM 3. QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISK

We are a smaller reporting company and are not required to provide this information.
30
ITEM 4. CONTROLS AND PROCEDURES

Evaluation of Disclosure Controls and Procedures

Disclosure controls and procedures are controls and procedures that are designed to ensure that information required to be disclosed in our reports filed under the Exchange Act is recorded, processed, summarized and reported, within the time periods specified in the SEC's rules. Disclosure controls and procedures include, without limitation, controls and procedures designed to ensure that information required to be disclosed by our company in the reports that it files or submits under the Exchange Act is accumulated and communicated to our management, including its principal executive and principal financial officers, or persons performing similar functions, as appropriate to allow timely decisions regarding required disclosure. Our management carried out an evaluation under the supervision and with the participation of our Principal Executive Officer and Principal Financial Officer, of the effectiveness of the design and operation of our disclosure controls and procedures pursuant to Rules 13a-15(e) and 15d-15(e) under the Exchange Act. Based upon that evaluation, our Principal Executive Officer and Principal Financial Officer have concluded that our disclosure controls and procedures were effective as of ~~January~~July 31, ~~2022, except that our disclosure controls and procedures are not effective for the following reasons:~~2022.
• We did not maintain effective controls regarding the timely financial reporting of accounting transactions. Specifically, certain individuals did not provide reporting on a timely basis regarding certain corporate banking accounts which they managed. The failure to comply with the Company's internal reporting deadlines increases the risk that (i) transactions are not properly accounted for, and (ii) adequate documentation is not obtained. Both risks can adversely impact the accuracy of our financial reporting. The Company is presently evaluating how to remedy this internal control weakness.

Changes in Internal Control over Financial Reporting

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


32
PART II - OTHER INFORMATION

ITEM 1. LEGAL PROCEEDINGS

~~There are no pending legal proceedings~~On March 15, 2022, Robert Stang filed an action against Teal Drones, Inc. and George Matus in the United States District Court for the Northern District of California, Robert Stang v. Teal Drones, Inc. and George Matus (No. 22-cv-01586-JSC). The complaint asserts claims for breach of contract and unlawful conversion and sale of shares of common stock that plaintiff alleges 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 adversehave purchased from Teal Drones, Inc. prior to the ~~Company or has a material interest adverse to~~acquisition by the Company. The ~~Company's property~~Complaint also alleges breach of fiduciary duty against Mr. Matus and seeks in excess of $1 million in damages. The Company has filed an Answer to the Complaint and the litigation is ~~not the subject of any pending legal proceedings.~~ongoing.

ITEM 1A. RISK FACTORS

We are a smaller reporting company as defined by Rule 12b-2 of the Securities Exchange Act of 1934 (the "Exchange Act") and are not required to provide the information. Our most recent risk factor disclosures may be review in our Annual Report on Form 10-K for the year ended April 30, 2022, as filed with the SEC on July 27, 2022.

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

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 except as set forth below:~~Company.
During the quarter ended January 31, 2022, pursuant to our 2019 Equity Incentive Plan, we issued options to purchase a total of 737,000 shares of our common stock at prices ranging from $1.69 to $2.52 per share.

ITEM 3. DEFAULTS UPON SENIOR SECURITIES

None.

ITEM 4. MINE SAFETY DISCLOSURES

Not applicable

ITEM 5. OTHER INFORMATION

None.
31

ITEM 6. EXHIBITS

Exhibit Description
~~10.1~~31.1 ~~Promissory Note issued to Allan Evans, dated as of March 11, 2022~~
~~31.1~~ Certification of Principal Executive Officer pursuant to Exchange Act Rules 13a-14(a) and 15d-14(a), as adopted pursuant to Section 302 of the Sarbanes-Oxley Act of 2002
31.2 Certification of Principal Financial and accounting Officer pursuant to Exchange Act Rules 13a-14(a) and 15d-14(a), as adopted pursuant to Section 302 of the Sarbanes-Oxley Act of 2002
32.1 Certification of Chief Executive Officer pursuant to 18 U.S.C. Section 1350, as adopted pursuant to Section 906 of the Sarbanes-Oxley Act of 2002
32.2 Certification of Chief Financial Officer pursuant to 18 U.S.C. Section 1350, as adopted pursuant to Section 906 of the Sarbanes-Oxley Act of 2002
101.INS XBRL Instance Document
101.SCH XBRL Taxonomy Extension Schema Document
101.CAL XBRL Taxonomy Extension Calculation Linkbase Document
101.DEF XBRL Taxonomy Extension Definition Linkbase Document
101.LAB XBRL Taxonomy Extension Label Linkbase Document
101.PRE XBRL Taxonomy Extension Presentation Linkbase Document
-------
33

SIGNATURES

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.

Date: ~~March 17,~~September 12, 2022
Red Cat Holdings, Inc.
By: /s/ Jeffrey Thompson
Jeffrey Thompson
Chief Executive Officer
(Principal Executive Officer)
~~Date: March 17, 2022~~
Date: September 12, 2022
By: /s/ Joseph P. Hernon
Joseph Hernon
Chief Financial Officer
(Principal Financial and Accounting Officer)

3432


RED CAT HOLDINGS
Consolidated Balance Sheets
(Unaudited)

		July 31,			April 30,
		2022			2022
ASSETS
Current assets
Cash	$	6,245,426		$	4,084,815
Marketable securities		36,708,627			44,790,369
Accounts receivable, net		929,872			495,506
Inventory		4,584,836			3,895,870
Other		2,694,273			2,354,884
Due from related party		13,404			31,853
Total current assets		51,176,438			55,653,297

Goodwill		25,138,750			25,138,750
Intangible assets, net		2,642,371			2,698,531
Property and equipment, net		1,028,360			511,690
Other		57,033			57,033
Operating lease right-of-use assets		926,500			1,019,324
Total long term assets		29,793,014			29,425,328

TOTAL ASSETS	$	80,969,452		$	85,078,625

LIABILITIES AND STOCKHOLDERS' EQUITY
Current liabilities
Accounts payable	$	937,360		$	1,018,747
Accrued expenses		471,806			1,084,494
Debt obligations - short term		882,096			956,897
Due to related party		37,196			40,057
Customer deposits		233,515			437,930
Operating lease liabilities		292,004			293,799
Warrant derivative liability		1,700,419			1,607,497
Total current liabilities		4,554,396			5,439,421

Operating lease liabilities		669,935			749,825
Debt obligations - long term		835,719			973,707
Total long term liabilities		1,505,654			1,723,532
Commitments and contingencies

Stockholders' equity
Series B preferred stock - shares authorized 4,300,000; outstanding 986,676 and 986,676		9,867			9,867
Common stock - shares authorized 500,000,000; outstanding 53,818,442 and 53,748,735		53,818			53,749
Additional paid-in capital		107,492,710			106,821,384
Accumulated deficit		(31,310,655	)		(27,499,056	)
Accumulated other comprehensive income		(1,336,338	)		(1,470,272	)
Total stockholders' equity		74,909,402			77,915,672
TOTAL LIABILITIES AND STOCKHOLDERS' EQUITY	$	80,969,452		$	85,078,625


See accompanying notes.


RED CAT HOLDINGS
Consolidated Statements of Operations
(Unaudited)

	Three months ended July 31,
	2022			2021
Revenues	$	3,069,271		$	1,396,751

Cost of goods sold		2,711,644			1,294,347

Gross margin		357,627			102,404

Operating expenses
Operations		1,048,086			176,863
Research and development		532,770			244,254
Sales and marketing		602,231			100,633
General and administrative		1,117,565			876,180
Stock based compensation		755,471			384,086
Total operating expenses		4,056,123			1,782,016
Operating loss		(3,698,496	)		(1,679,612	)

Other expense (income)
Change in fair value of derivative liability		92,922			(154,248	)
Investment income, net		(130,296	)		—
Interest expense		35,687			17,099
Other, net		114,790			15,309
Other expense (income)		113,103			(121,840	)

Net loss	$	(3,811,599	)		(1,557,772	)

Loss per share - basic and diluted	$	(0.07	)		(0.05	)

Weighted average shares outstanding -
basic and diluted		53,778,154			34,074,226


See accompanying notes.


RED CAT HOLDINGS
Consolidated Statements of Stockholders' Equity
(Unaudited)


	Series A				Series B						Common Stock				Additional						Accumulated Other
	Preferred Stock				Preferred Stock										Paid-in			Accumulated			Comprehensive			Total
	Shares		Amount		Shares			Amount			Shares		Amount		Capital			Deficit			Income (Loss)			Equity
Balances, April 30, 2021		158,704	$	1,587		1,968,676		$	19,687			29,431,264	$	29,431	$	21,025,518		$	(15,809,928	)	$	—		$	5,266,295

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

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

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

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

Stock based compensation		—		—		—			—			—		—		384,023			—			—			384,023

Vesting of restricted stock		—		—		—			—			62,500		63		—			—			—			63

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

Currency translation adjustments		—		—		—			—			—		—		—			—			922			922

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

Balances, July 31, 2021		158,704	$	1,587		968,676		$	9,867			48,489,085	$	48,489	$	94,527,350		$	(17,367,700	)	$	922		$	77,220,515

Balances, April 30, 2022		—	$	—		986,676		$	9,867			53,748,735	$	53,749	$	106,821,384		$	(27,499,059	)	$	(1,470,272	)	$	77,915,672

Stock based compensation		—		—		—			—			—		—		755,471			—			—			755,471

Vesting of restricted stock units		—		—		—			—			69,707		69		(84,145	)		—			—			(84,076	)

Unrealized gain on marketable securities		—		—		—			—			—		—		—			—			133,582			133,582

Currency translation adjustments		—		—		—			—			—		—		—			—			352			352

Net Loss		—		—		—			—			—		—		—			(3,811,599	)		—			(3,811,599	)

Balances, July 31, 2022		—	$	—		986,676		$	9,867			53,818,442	$	53,818	$	107,492,710		$	(31,310,655	)	$	(1,336,338	)	$	74,909,402


See accompanying notes.


RED CAT HOLDINGS
Condensed Consolidated Cash Flows Statements
(Unaudited)
Consolidated Statements of Cash Flows (Unaudited)								Consolidated Statements of Cash Flows (Unaudited)

		Nine months ended January 31,							Three months ended July 31,
		2022			2021				2022			2021
Cash Flows from Operating Activities
Net loss		$	(6,863,190	)	$	(10,089,785	)		$	(3,811,599	)	$	(1,557,772	)
Stock based compensation			2,066,146			1,068,317
Stock based compensation - options										458,023			187,494
Stock based compensation - restricted units										297,448			196,592
Common stock issued for services			250,400			—				—			192,000
Amortization of intangible assets			48,978			5,571				56,160			16,326
Realized loss from sale of marketable securities										10,675			—
Depreciation			17,888			—				28,272			—
Change in fair value of derivative			(1,299,527	)		3,433,938				92,922			(154,248	)
Amortization of debt discount			—			79,187
Derivative expense			—			4,630,288
Adjustments to reconcile net loss to net cash from operations:
Changes in operating assets and liabilities, net of acquisitions
Accounts receivable			(470,765	)		(63,255	)			(434,299	)		105,019
Inventory			(673,297	)		(405,987	)			(688,966	)		(472,303	)
Other			(3,492,145	)		(118,613	)			(339,356	)		(1,996,858	)
Operating lease right-of-use assets and liabilities			10,696			—				11,139			—
Customer deposits			227,532			32,967				(204,415	)		62,792
Accounts payable			(1,673,545	)		345,227				(81,335	)		(130,343	)
Accrued expenses			(190,444	)		165,129				(208,484	)		(521,741	)
Net cash used in operating activities			(12,041,273	)		(917,016	)			(4,813,815	)		(4,073,042	)

Cash Flows from Investing Activities
Cash acquired through acquisitions			24,866			—				—			13,502
Payment for acquisition, net of cash acquired			—			(48,368	)
Purchases of property and equipment			(92,581	)		—				(544,942	)		—
Proceeds from sale of marketable securities			6,250,322			—
Proceeds from maturities of marketable securities										9,094,592			—
Purchases of marketable securities			(54,696,624	)		—				(889,943	)		—
Net cash used in investing activities			(48,514,017	)		(48,368	)
Net cash provided by investing activities										7,659,707			13,502

Cash Flows from Financing Activities
Proceeds from exercise of warrants			99,999			—				—			99,999
Proceeds from related party obligations			—			79,000
Payments under related party obligations			(1,969,193	)		(17,140	)			(2,861	)		(150,255	)
Proceeds from debt obligations			—			424,419
Payments under debt obligations			(694,738	)		(365,911	)			(212,789	)		(114,173	)
Proceeds from convertible debentures			—			1,080,000
Payments of taxes related to restricted stock vesting			(113,959	)		—
Payments of taxes related to equity transactions										(469,631	)		—
Proceeds from issuance of common stock, net			70,065,203			—				—			70,065,203
Net cash provided by financing activities			67,387,312			1,200,368

Effect of foreign exchange rate changes on cash			2,158			—
Net cash (used in) provided by financing activities										(685,281	)		69,900,774

Net increase in Cash			6,834,180			234,984				2,160,611			65,841,234
Cash, beginning of period			277,347			236,668				4,084,815			277,347
Cash, end of period			7,111,527			471,652				6,245,426			66,118,581

Cash paid for interest			27,563			—				36,082			2,024
Cash paid for income taxes			—			—				—			—

Non-cash transactions
Fair value of shares issued in acquisitions		$	12,727,292		$	6,351,076			$	—		$	2,631,640
Taxes related to net shares settlement of equity awards		$	522,628		$	—
Common stock issued for services									$	—		$	192,000
Conversion of derivative liability		$	163,141		$	—			$	—		$	163,141
Financed purchases of property and equipment		$	144,383		$	—
Unrealized gain on marketable securities									$	133,582			—
Indirect payment to related party		$	132,200		$	—			$	—		$	132,200
Shares withheld as payment of note receivable									$	18,449		$	—
Taxes related to net share settlement of equity awards									$	15,982		$	—
Conversion of preferred stock into common stock		$	11,407		$	—			$	—		$	9,820
Shares withheld as payment of note receivable		$	5,100		$	—
Issuance of Note Payable - Related Party in acquisition		$	—		$	1,753,000
Conversion of Notes into common stock		$	—		$	450,000
Conversion of accrued interest into common stock		$	—		$	45,024


See accompanying notes.	See accompanying notes.							See accompanying notes.


RED CAT HOLDINGS
Consolidated Stockholders' Equity Statements
(Unaudited)

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

Stock based compensation																				107,061							107,061

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

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

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

Stock based compensation																				107,061							107,061

Net loss					—						—						—			—		(722,281	)		—		(722,281	)

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

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

Conversion of preferred stock		(50,000	)		(500	)		(954,741	)		(9,547	)		1,212,118			1,212			8,835							—

Stock based compensation																				854,195							854,195

Net loss					—						—						—			—		(8,984,260	)		—		(8,984,260	)

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

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

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

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

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

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

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

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

Currency translation adjustments																									922		922

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

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

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

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

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

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

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

Currency translation adjustments																									669		669

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

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

Stock based compensation														(46,939	)		(47	)		369,974							369,927

Currency translation adjustments																									567		567

Net loss					—						—						—			—		(2,564,817	)		—		(2,564,817	)

Balances, January 31, 2022		—		$	—			986,676		$	9,867			53,637,971		$	53,638		$	105,947,703	$	(22,673,118	)	$	2,158	$	83,340,248

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
Total assets acquired		818,387
Liabilities assumed
Accounts payable and accrued expenses		171,651
Notes payable		209,799
Due to related party		197,846
Total liabilities assumed		579,296
Total fair value of net assets acquired		239,091
Goodwill	$	1,756,023

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

Shares issued	$	2,716,013	$	2,716,012
Cash		75,000		75,000
Total Purchase Price	$	2,791,013	$	2,791,012

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


	July 31, 2021

		Red Cat			Teal			Consolidated

Revenues	$	1,396,751		$	312,047		$	1,708,798

Net Loss	$	(1,557,772	)	$	(1,165,987	)	$	(2,723,759	)

	July 31, 2022		April 30, 2022
Series B Preferred Stock, as converted		822,230		822,230
Stock options		3,634,142		3,694,142
Warrants		1,539,999		1,539,999
Restricted stock		971,701		1,083,675
Total		6,968,072		7,140,046

	Amortized Cost		Net Unrealized Gains (Losses)			Fair Value		Cost		Unrealized Gains (Losses)			Fair Value
Money market funds	$	1,598,428	$	1,108		$	1,599,536
Asset-backed securities		3,113,823		(21,984	)		3,091,839	$	2,504,563	$	(35,324	)	$	2,469,239
Corporate bonds		44,387,966		(633,039	)		43,754,927		35,544,776		(1,305,388	)		34,239,388
Total	$	49,100,217	$	(653,915	)	$	48,446,302	$	38,049,339	$	(1,340,712	)	$	36,708,627

	One Year or Less		One to Five Years		Over Five Years		Total		One Year or Less		One to Five Years		Over Five Years		Total
Money market funds	$	1,599,536	$	—	$	—	$	1,599,536
Asset-backed securities		—		3,091,839		—		3,091,839	$	—	$	2,469,239	$	—	$	2,469,239
Corporate bonds		19,808,158		23,366,723		580,046		43,754,927		16,876,795		16,804,473		558,120		34,239,388
Total	$	21,407,694	$	26,458,562	$	580,046	$	48,446,302	$	16,876,795	$	19,273,712	$	558,120	$	36,708,627

	Level 1		Level 2		Level 3		Total		Level 1		Level 2		Level 3		Total
Money market funds	$	1,599,536	$	—	$	—	$	1,599,536
Asset-backed securities		—		3,091,839		—		3,091,839	$	—	$	2,469,239	$	—	$	2,469,239
Corporate bonds		—		43,754,927		—		43,754,927		—		34,239,388		—		34,239,388
Total	$	1,599,536	$	46,846,766	$	—	$	48,446,302	$	—	$	36,708,627	$	—	$	36,708,627

	January 2022		April 2021		July 31, 2022		April 30, 2022
Raw materials	$	1,370,380	$	—	$	2,396,265	$	2,831,713
Work-in-process		39,153		—		524,811		173,112
Finished goods		930,147		362,072		1,663,760		891,045
Total	$	2,339,680	$	362,072	$	4,584,836	$	3,895,870


			July 31, 2022					April 30, 2022
	Gross Value		Accumulated Amortization			Net Value		Accumulated Amortization			Net Value
Proprietary technology	$	1,098,000		(267,284	)	$	830,716	$	(219,267	)	$	878,733
Non-compete agreements		81,000		(36,417	)		44,583		(29,667	)		51,333
Customer relationships		39,000		(13,928	)		25,072		(12,535	)		26,465
Total finite-lived assets		1,218,000		(317,629	)		900,371		(261,469	)		956,531
Brand name		1,722,000		—			1,722,000		—			1,722,000
Trademark		20,000		—			20,000		—			20,000
Total indefinite-lived assets		1,742,000		—			1,742,000		—			1,742,000
Total intangible assets, net	$	2,960,000		(317,629	)	$	2,642,371	$	(261,469	)	$	2,698,531

Fiscal Year Ended:
	2023	$	168,478
	2024		221,972
	2025		197,638
	2026		170,438
	2027		141,845
	Total	$	900,371

Date	Acquisition	Goodwill
January 2020	Rotor Riot	$	1,849,073
November 2020	Fat Shark		6,168,260
Balance at April 30, 2021			8,017,333
May 2021	Skypersonic		2,826,918
August 2021	Teal Drones		14,294,499
Balance at April 30, 2022 and July 31, 2022		$	25,138,750

	July 31, 2022			April 30, 2022
Equipment and related	$	630,448		$	509,376
Leasehold improvements		567,404			149,330
Furniture and fixtures		54,254			42,746
Accumulated depreciation		(223,746	)		(189,762	)
Net carrying value	$	1,028,360		$	511,690

Original cost	$	423,588
Accumulated depreciation		160,729
Net carrying value	$	262,859

Location	Monthly Rent		Expiration		Monthly Rent		Expiration
South Salt Lake, Utah	$	22,000		December 2024	$	22,000		December 2024
Orlando, Florida	$	4,600		May 2024	$	4,692		May 2024
Cayman Islands	$	3,438		Month to Month
San Juan, Puerto Rico					$	2,226		June 2027
Troy, Michigan	$	2,667		May 2022	$	2,667		May 2022
Orlando, Florida	$	1,690		September 2022	$	1,690		September 2022


Operating cash paid to settle lease liabilities			$94,491
Weighted average remaining lease term (in years)			3.05
Weighted average discount rate			12%

Fiscal Year Ended:
2022	$	98,896
2023		336,257
2024		332,356
2025		230,653
Total	$	998,162

Fiscal Year Ended:
	2023	$	291,405
	2024		403,878
	2025		304,676
	2026		76,619
	2027		79,300
	Thereafter		6,627
	Total	$	1,162,505

Date of Transaction	Purchased Receivables	Payment to Company	Transaction Fees	Withholding Rate	Fully Repaid In
May 2020	$158,200	$140,000	$18,200	17%	October 2020
September 2020	$209,050	$185,000	$24,050	17%	May 2021
April 2021	$236,500	$215,000	$21,500	17%	January 2022

Balance of fiscal year 2022	$	600,683
2023		680,308
2024		646,287
2025		476,462
2026		62,988
Total	$	2,466,728
Short term – through January 31, 2023	$	1,127,596
Long term – thereafter	$	1,339,132

Fiscal 2023	$	744,108
Fiscal 2024		572,139
Fiscal 2025		401,568
Total	$	1,717,815
Short term – through July 31, 2023	$	882,096
Long term – thereafter	$	835,719

Description of Shares	Shares Issued
Shares outstanding as of April 30, 2021		29,431,264
Conversion of Series A preferred stock		1,321,996
Conversion of Series B preferred stock		818,333
Exercise of warrants		66,666
Acquisition of Skypersonic on May 7, 2021, see Note 1		707,293
Acquisition of Teal Drones on August 31, 2021, see Note 1		3,588,272
Public offerings which generated gross proceeds of $76 million and net proceeds of approximately $70.1 million		17,333,334
Exercise of stock options		89,107
Vesting of restricted stock units to employees, net of shares withheld of 225,869 to pay taxes and 92,812 to repay a Note		225,637
Vesting of restricted stock units to Board of Directors		48,124
Vesting of restricted stock units to consultants		7,042
Shares issued for services		111,667
Shares outstanding as of April 30, 2022		53,748,735
Vesting of restricted stock units to employees, net of shares withheld of 33,267 to pay taxes and 9,000 to repay a Note		55,915
Vesting of restricted stock units to Board of Directors		12,032
Vesting of restricted stock units to consultants		1,760
Share outstanding as of July 31, 2022		53,818,442

		Upon Issuance				July 31, 2022
Date of Transaction		Number of Warrants		Initial Fair Value		Number of Warrants		Fair Value
	October 2020		399,998	$	267,999		266,666	$	557,297
	January 2021		675,000	$	2,870,666		540,000	$	1,143,122