UNITED STATES

SECURITIES AND EXCHANGE COMMISSION

Washington, D.C. 20549

FORM 10-Q

☑

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

For the quarterly period ended ~~January~~July 31, 2023

☐

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~~88-0490034
(State or other jurisdiction of incorporation or organization)		(I.R.S. Employer Identification No.)

15 Ave. Munoz Rivera, Ste 2200

San Juan, Puerto Rico

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, a smaller reporting company, or an emerging growth company. See ~~definition~~the definitions of "large accelerated ~~filer",~~filer," "accelerated ~~filer" and~~filer," "smaller reporting ~~company"~~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 6,~~September 18, 2023, there were ~~54,453,397~~55,642,006 shares of the registrant's common stock outstanding.

~~INDEX TO FORM~~Red Cat Holdings, Inc.

Form 10-Q

For the Quarterly Period Ended July 31, 2023

TABLE OF CONTENTS

PART II.	OTHER INFORMATION


Item 1.	Legal Proceedings	30
	35
Item 1A.	Risk Factors	30
~~Item 1A.~~	~~Risk Factors~~	35

Item 2.	Unregistered Sales of Equity Securities, ~~and~~ Use of Proceeds, and Issuer Purchases of Equity Securities	30
	35

Item 3.	Defaults Upon Senior Securities	30
	35

Item 4.	Mine Safety Disclosures	31
	35
Item 5.	Other Information	31
~~Item 5.~~	~~Other Information~~	35
Item 6.	Exhibits	31
~~Item 6.~~	~~Exhibits~~	36

SIGNATURES		3632

RED CAT HOLDINGS

Consolidated Balance Sheets

(Unaudited)


	July 31,			April 30,
	2023			2023
ASSETS
Current assets
Cash	$	937,756		$	3,173,649
Marketable securities		7,922,392			12,814,038
Accounts receivable, net		720,642			719,862
Inventory		9,376,444			8,920,573
Other		3,020,708			1,263,735
Current assets of discontinued operations		4,545,370			5,283,155
Total current assets		26,523,312			32,175,012

Goodwill		17,012,832			17,012,832
Intangible assets, net		7,105,636			7,323,004
Property and equipment, net		2,554,411			2,650,358
Other		303,180			303,180
Operating lease right-of-use assets		554,064			620,307
Long-term assets of discontinued operations		97,443			108,397
Total long-term assets		27,627,566			28,018,078

TOTAL ASSETS	$	54,150,878		$	60,193,090

LIABILITIES AND STOCKHOLDERS' EQUITY
Current liabilities
Accounts payable	$	822,674		$	1,392,550
Accrued expenses		448,229			409,439
Debt obligations - short term		936,150			922,138
Customer deposits		45,123			155,986
Operating lease liabilities		292,852			281,797
Warrant derivative liability		561,685			588,205
Current liabilities of discontinued operations		471,199			1,010,501
Total current liabilities		3,577,912			4,760,616

Operating lease liabilities		301,710			379,466
Debt obligations - long term		249,568			401,569
Long-term liabilities of discontinued operations		28,290			41,814
Total long-term liabilities		579,568			822,849
Commitments and contingencies

Stockholders' equity
Series B preferred stock - shares authorized 4,300,000; outstanding 4,676 and 986,676		47			9,867
Common stock - shares authorized 500,000,000; outstanding 55,541,875 and 54,568,065		55,541			54,568
Additional paid-in capital		110,905,033			109,993,100
Accumulated deficit		(60,397,141	)		(54,586,793	)
Accumulated other comprehensive loss		(570,082	)		(861,117	)
Total stockholders' equity		49,993,398			54,609,625
TOTAL LIABILITIES AND STOCKHOLDERS' EQUITY	$	54,150,878		$	60,193,090

January 31, April 30,
2023 2022
ASSETS
Current assets
Cash $ 3,893,162 $ 4,084,815
Marketable securities 20,730,033 44,790,369
Accounts receivable, net 2,063,872 495,506
Inventory 9,294,253 3,895,870
Other 4,546,553 2,354,884
Due from related party — 31,853
Total current assets 40,527,873 55,653,297

Goodwill 19,839,750 25,138,750
Intangible assets, net 7,560,374 2,698,531
Property and equipment, net 2,077,824 511,690
Other 307,033 57,033
Operating lease right-of-use assets 779,734 1,019,324
Total long term assets 30,564,715 29,425,328

TOTAL ASSETS $ 71,092,588 $ 85,078,625

LIABILITIES AND STOCKHOLDERS' EQUITY
Current liabilities
Accounts payable $ 2,444,962 $ 1,018,747
Accrued expenses 392,457 1,084,494
Debt obligations - short term 908,746 956,897
Due to related party — 40,057
Customer deposits 219,148 437,930
Operating lease liabilities 318,805 293,799
Warrant derivative liability 856,100 1,607,497
Total current liabilities 5,140,218 5,439,421

Operating lease liabilities 509,468 749,825
Debt obligations - long term 549,935 973,707
Total long term liabilities 1,059,403 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 54,385,461 and 53,748,735 54,385 53,749
Additional paid-in capital 109,191,895 106,821,384
Accumulated deficit (43,221,134 ) (27,499,056 )
Accumulated other comprehensive income (1,142,046 ) (1,470,272 )
Total stockholders' equity 64,892,967 77,915,672
TOTAL LIABILITIES AND STOCKHOLDERS' EQUITY $ 71,092,588 $ 85,078,625

See accompanying notes.

RED CAT HOLDINGS

Consolidated Statements Of Operations

(Unaudited)


	Three months ended January 31,						Nine months ended January 31,
	2023			2022			2023			2022			Three months ended July 31,
													2023			2022
Revenues	$	3,106,644		$	1,856,751		$	7,706,377		$	5,116,741		$	1,748,129		$	1,126,551

Cost of goods sold		3,004,032			1,516,970			7,012,483			4,521,974			1,573,464			1,044,431

Gross Margin		102,612			339,781			693,894			594,767
Gross margin														174,665			82,120

Operating Expenses
Operating expenses
Operations		815,170			334,278			3,616,129			794,390			707,903			886,303
Research and development		1,302,008			811,288			3,189,692			1,548,983			1,138,127			449,964
Sales and marketing		1,208,037			238,624			2,542,037			524,642			986,908			406,953
General and administrative		1,514,504			1,337,183			4,551,706			3,264,071			1,443,156			1,062,404
Stock based compensation		788,691			782,123			2,790,958			2,066,146			911,606			755,471
Total operating expenses		5,628,410			3,503,496			16,690,522			8,198,232			5,187,700			3,561,095
Operating loss		(5,525,798	)		(3,163,715	)		(15,996,628	)		(7,603,465	)		(5,013,035	)		(3,478,975	)

Other Expense (Income)
Other (income) expense
Change in fair value of derivative liability		(157,575	)		(1,026,466	)		(751,397	)		(1,299,527	)		(26,520	)		92,922
Investment income, net		(23,131	)		(151,165	)		(257,244	)		(251,708	)
Investment loss (income), net														239,490			(130,296	)
Interest expense		28,667			46,596			96,839			109,712			21,857			35,687
Other, net		292,243			532,137			637,252			701,248			319,913			114,914
Other Expense (Income)	$	140,204		$	(598,898	)	$	(274,550	)	$	(740,275	)
Other (income) expense														554,740			113,227

Net loss from continuing operations													$	(5,567,775	)	$	(3,592,202	)

Loss from discontinued operations														(242,573	)		(219,397	)
Net loss	$	(5,666,002	)	$	(2,564,817	)	$	(15,722,078	)	$	(6,863,190	)	$	(5,810,348	)	$	(3,811,599	)

Loss per share - basic and diluted	$	(0.10	)	$	(0.05	)	$	(0.29	)	$	(0.15	)
Continuing operations													$	(0.11	)	$	(0.07	)
Discontinued operations														—			—
Loss per share - basic and diluted													$	(0.11	)	$	(0.07	)

Weighted average shares outstanding - basic and diluted		54,294,116			53,592,927			54,050,127			46,604,898			54,935,339			53,778,154

See accompanying notes.

RED CAT HOLDINGS

Consolidated Statements of Stockholders’ Equity

For the three months ended ~~January~~July 31, 2023 and ~~January~~July 31, 2022

(Unaudited)


	Series A				Series B										Additional						Accumulated Other						Series A Preferred				Series B Preferred										Additional						Accumulated Other
	Preferred Stock				Preferred Stock				Common Stock						Paid-in			Accumulated			Comprehensive			Total			Stock				Stock						Common Stock				Paid-in			Accumulated			Comprehensive			Total
	Shares		Amount		Shares		Amount		Shares			Amount			Capital			Deficit			Income (Loss)			Equity			Shares		Amount		Shares			Amount			Shares		Amount		Capital			Deficit			Income (Loss)			Equity
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

Balances, October 31, 2022		—	$	—		986,676	$	9,867		54,229,539		$	54,229		$	108,406,712		$	(37,555,132	)	$	(1,688,405	)	$	69,227,271
Balances, April 30, 2022																												—	$	—		986,676		$	9,867			53,748,735	$	53,749	$	106,821,384		$	(27,499,056	)	$	(1,470,272	)	$	77,915,672

Stock based compensation		—		—		—		—		—			—			788,691			—			—			788,691			—		—		—			—			—		—		755,471			—			—			755,471

Vesting of restricted stock units		—		—		—		—		155,922			156			(3,508	)		—			—			(3,352	)		—		—		—			—			69,707		69		(84,145	)		—			—			(84,076	)

Unrealized gain on marketable securities		—		—		—		—		—			—			—			—			545,235			545,235			—		—		—			—			—		—		—			—			133,582			133,582

Currency translation adjustments		—		—		—		—		—			—			—			—			1,124			1,124			—		—		—			—			—		—		—			—			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

Balances, April 30, 2023																												—	$	—		986,676		$	9,867			54,568,065	$	54,568	$	109,993,100		$	(54,586,793	)	$	(861,117	)	$	54,609,625

Stock based compensation																												—		—		—			—			—		—		911,606			—			—			911,606

Vesting of restricted stock units																												—		—		—			—			155,476		155		(8,675	)		—			—			(8,520	)

Conversion of preferred stock																												—		—		(982,000	)		(9,820	)		818,334		818		9,002			—			—			—

Unrealized gain on marketable securities																												—		—		—			—			—		—		—			—			289,389			289,389

Currency translation adjustments																												—		—		—			—			—		—		—			—			1,646			1,646

Net loss		—		—		—		—		—			—			—			(5,666,002	)		—			(5,666,002	)		—		—		—			—			—		—		—			(5,810,348	)		—			(5,810,348	)

Balances, January 31, 2023		—	$	—		986,676	$	9,867		54,385,461		$	54,385		$	109,191,895		$	(43,221,134	)	$	(1,142,046	)	$	64,892,967
Balances, July 31, 2023																												—	$	—		4,676		$	47			55,541,875	$	55,541	$	110,905,033		$	(60,397,141	)	$	(570,082	)	$	49,993,398

See accompanying notes.

RED CAT HOLDINGS

Consolidated Statements of ~~Stockholders’ Equity~~Cash Flows

~~For the nine months ended January 31, 2023 and January 31, 2022~~

(Unaudited)

Series A Series B Additional Accumulated Other
Preferred Stock Preferred Stock Common 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 —   —   —   —   707,293 707 2,715,305 —   —   2,716,012

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

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 (158,704 ) (1,587 ) (982,000 ) (9,820 ) 2,140,299 2,140 9,267 —   —   —

Stock based compensation —   —   —   —   259,176 260 1,269,667 —   —   1,269,927

Vesting of restricted stock units —   —   —   —   —   —   384,023 —   —   384,023

Shares issued for services —   —   —   —   111,667 112 250,288 —   —   250,400

Currency translation adjustments —   —   —   —   —   —   —   —   2,158 2,158

Net loss —   —   —   —   —   —   —   (6,863,190 ) —   (6,863,190 )

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

Balances, April 30, 2022 —   $ —   986,676 $ 9,867 53,748,735 $ 53,749 $ 106,821,384 $ (27,499,056 ) $ (1,470,272 ) $ 77,915,672

Stock based compensation —   —   —   —   —   —   2,790,958 —   —   2,790,958

Vesting of restricted stock units —   —   —   —   636,726 636 (420,447 ) —   —   (419,811 )

Unrealized gain on marketable securities —   —   —   —   —   —   —   —   328,006 328,006

Currency translation adjustments —   —   —   —   —   —   —   —   220 220

Net loss —   —   —   —   —   —   —   (15,722,078 ) —   (15,722,078 )

Balances, January 31, 2023 —   $ —   986,676 $ 9,867 54,385,461 $ 54,385 $ 109,191,895 $ (43,221,134 ) $ (1,142,046 ) $ 64,892,967


	Three months ended July 31,
	2023			2022
Cash Flows from Operating Activities
Net loss	$	(5,810,348	)	$	(3,811,599	)
Net loss from discontinued operations		(242,573	)		(219,397	)
Net loss from continuing operations		(5,567,775	)		(3,592,202	)
Adjustments to reconcile net loss to net cash from operations:
Stock based compensation - options		629,426			458,023
Stock based compensation - restricted units		282,180			297,448
Amortization of intangible assets		217,368			56,160
Realized loss from sale of marketable securities		292,636			10,675
Depreciation		101,001			28,272
Change in fair value of derivative		(26,520	)		92,922
Changes in operating assets and liabilities
Accounts receivable		(780	)		(257,301	)
Inventory		(455,871	)		(273,439	)
Other, principally inventory deposits		(1,756,973	)		(214,316	)
Operating lease right-of-use assets and liabilities		(458	)		11,139
Customer deposits		(110,863	)		(116,237	)
Accounts payable		(569,876	)		(154,139	)
Accrued expenses		40,436			(161,767	)
Net cash used in operating activities		(6,926,069	)		(3,814,762	)

Cash Flows from Investing Activities
Purchases of property and equipment		(5,054	)		(544,942	)
Proceeds from sale of marketable securities		4,888,399			9,094,592
Purchases of marketable securities		—			(889,943	)
Net cash provided by investing activities of continuing operations		4,883,345			7,659,707

Cash Flows from Financing Activities
Payments under related party obligations		—			(2,861	)
Payments under debt obligations		(137,989	)		(212,789	)
Payments of taxes related to equity awards		(8,520	)		(469,631	)
Net cash used in financing activities of continuing operations		(146,509	)		(685,281	)

Discontinued operations
Operating activities		(356,109	)		(999,053	)
Investing activities		—			—
Financing activities		237,814			—
Net cash used in discontinued operations		(118,295	)		(999,053	)

Net (decrease) increase in Cash		(2,307,528	)		2,160,611
Cash, beginning of period		3,260,305			4,084,815
Cash, end of period		952,777			6,245,426

Cash paid for interest		22,590			36,082
Cash paid for income taxes		—			—

Non-cash transactions
Unrealized gain on marketable securities	$	289,389		$	133,582
Conversion of preferred stock into common stock	$	9,820		$	—
Shares withheld as payment of note receivable	$	—		$	18,449
Taxes related to net share settlement of equity awards	$	—		$	15,982

See accompanying notes.

~~RED CAT HOLDINGS~~

~~Consolidated Statements of Cash Flows~~

~~(Unaudited)~~

Nine months ended January 31,
2023 2022
Cash Flows from Operating Activities
Net loss $ (15,722,078 ) $ (6,863,190 )
Stock based compensation - options 1,308,768 974,019
Stock based compensation - restricted units 1,482,190 1,092,127
Common stock issued for services —   250,400
Amortization of intangible assets 437,157 48,978
Realized loss from sale of marketable securities 106,225 —
Depreciation 169,748 17,888
Change in fair value of derivative (751,397 ) (1,299,527 )
Changes in operating assets and liabilities, net of acquisitions
Accounts receivable (1,568,366 ) (470,765 )
Inventory (5,398,383 ) (673,297 )
Other (2,191,669 ) (3,492,145 )
Operating lease right-of-use assets and liabilities 24,239 10,696
Customer deposits (218,782 ) 227,532
Accounts payable 1,426,215 (1,673,545 )
Accrued expenses (498,725 ) (188,286 )
Net cash used in operating activities (21,394,858 ) (12,039,115 )

Cash Flows from Investing Activities
Cash acquired through acquisitions —   24,866
Purchases of property and equipment (1,735,882 ) (92,581 )
Proceeds from maturities of marketable securities 24,282,117 6,250,322
Purchases of marketable securities —   (54,696,624 )
Investment in SAFE agreement (250,000 ) —
Net cash provided by (used in) investing activities 22,296,235 (48,514,017 )

Cash Flows from Financing Activities
Proceeds from exercise of warrants —   99,999
Proceeds from related party obligations 13,404 —
Payments under related party obligations (40,057 ) (1,969,193 )
Payments under debt obligations (471,923 ) (694,738 )
Payments of taxes related to equity transactions (594,454 ) (113,959 )
Proceeds from issuance of common stock, net —   70,065,203
Net cash (used in) provided by financing activities (1,093,030 ) 67,387,312

Net (decrease) increase in Cash (191,653 ) 6,834,180
Cash, beginning of period 4,084,815 277,347
Cash, end of period 3,893,162 7,111,527

Cash paid for interest 97,005 27,563
Cash paid for income taxes —   —

Non-cash transactions
Fair value of shares issued in acquisitions $ —   $ 12,727,292
Taxes related to net share settlement of equity awards $ 11,682 $ 522,628
Unrealized gain on marketable securities $ 328,006 $ —
Elimination of derivative liability $ —   $ 163,141
Financed purchases of property and equipment $ —   $ 144,383
Indirect payment to related party $ —   $ 132,200
Shares withheld as payment of note receivable $ 18,449 $ 5,100
Conversion of preferred stock into common stock $ —   $ 11,407

~~See accompanying notes.~~

RED CAT HOLDINGS, INC.

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS

~~January 31, 2023 and 2022~~(Unaudited)

~~(unaudited)~~

Our unaudited interim 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 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, ~~2022~~2023 of Red Cat Holdings, Inc. (the "Company"), filed with the Securities and Exchange Commission ("SEC") on July 27, ~~2022.~~2023.

Note 1 – The Business

Red Cat Holdings (“Red Cat” or the “Company”) was originally incorporated in February 1984. Since April 2016, the Company’s primary business has been to provide products, services and solutions to the drone industry which it presently does through its four wholly owned subsidiaries. ~~Teal Drones is a leader~~Beginning in ~~commercial~~January 2020, the Company expanded the scope of its drone products and government Unmanned Aerial Vehicles (UAV) technology. Fat Shark is a provider of First Person View (FPV) video goggles to the drone industry. Rotor Riot sells FPV drones and equipment to the consumer marketplaceservices through its digital storefront located at www.rotorriot.com. Skypersonic provides software and hardware solutions that enable drones to complete inspection services in locations where GPS (global positioning systems) is not available, yet still record and transmit data even while being operated from thousands of miles away.four acquisitions, including:

~~Corporate developments since May 1, 2021 include:~~

In January 2020, the Company acquired Rotor Riot, a provider of First Person View (FPV) drones and equipment, primarily to the consumer marketplace. The purchase price was $1,995,114.

In November 2020, the Company acquired Fat Shark ~~Acquisition~~Holdings, a provider of FPV video goggles to the drone industry. The purchase price was $8,354,076.

In May 2021, the Company acquired Skypersonic which 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.

~~On September 30, 2020,~~Following the ~~Company entered~~Teal acquisition in August 2021, we focused on integrating and organizing these businesses. Effective May 1, 2022, we established the Enterprise and Consumer segments in order to sharpen our focus on the unique opportunities in each sector. Enterprise's initial strategy was to provide UAV's, primarily drones, to commercial enterprises, including the military, to navigate dangerous military environments and confined industrial and commercial interior spaces. Subsequently, Enterprise narrowed its near-term focus on the military and other government agencies. Skypersonic's technology has been re-focused on military applications and its operations consolidated into a share purchase agreement (“Share Purchase Agreement”) with Greg French (“French”), the founder and sole shareholder of Fat Shark Holdings (“Fat Shark”), to acquire all of the issued and outstanding shares ofTeal. The Consumer segment, which includes Fat Shark and ~~its subsidiaries.~~Rotor Riot, is focused on hobbyists and enthusiasts which are expected to increase as drones become more visible in our daily lives. The ~~transaction closed on November 2, 2020 and was valued at $8,354,076~~reportable segments were established 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 21 - Segment Reporting”.

In November 2022, we entered into an agreement to sell our Consumer segment to Unusual Machines, Inc. (or “Unusual Machines” or “UM”). The adjusted sale price is $20 million, including $3 million in cash, at closing, and $17 million in securities of Unusual Machines. The agreement reflects the Company's decision to focus its efforts and capital on military and defense where it believes that there are more opportunities to create long term shareholder value. The closing of the transaction is contingent upon Unusual Machines completing (i) an initial public offering that raises sufficient capital to close the ~~issuance of~~ ~~5,227,273~~ ~~shares of common stock with a value of $6,351,076~~ ~~on the date of closing~~transaction, and (ii) a ~~senior secured promissory note in~~listing on a public stock exchange such as the ~~original principal amount of $1,753,000, and (iii) a cash payment of $250,000. The Share Purchase Agreement included indemnification provisions, a two year non-compete agreement, and registration rights for the shares issued in the transaction.~~NYSE or Nasdaq.

~~A summary of the purchase price and its related allocation was 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

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 is not being amortized but is reviewed quarterly and formally evaluated at year end. The excess of the purchase price above the net assets acquired was recorded as goodwill which is reviewed quarterly and formally evaluated at year end.

~~Skypersonic Acquisition~~

In May 2021, the Company acquired all of the outstanding stock of Skypersonic, Inc. (“Skypersonic”) in exchange for $3,000,000 of our common stock. The number of shares issuable was based on the volume weighted average price ("VWAP") of our common stock for the 20 trading days ending May 7, 2021. Based on a VWAP of $4.0154, the Company issued ~~747,124~~ ~~shares. In addition, the Company also agreed to issue~~ ~~110,000~~ ~~shares of common stock to a shareholder. For accounting purposes, the~~ ~~857,124~~ ~~shares were valued at $3,291,356~~ ~~based on the closing price of our common stock of $3.84~~ ~~on May 7, 2021. Prior to the closing, the Company provided $75,000~~ ~~to Skypersonic to fund its operating costs. This amount was capitalized as part of the purchase price. In October 2021, the Company and Skypersonic agreed to a reduction in the purchase price of $601,622~~ ~~which resulted in the cancellation of~~ ~~149,829~~ ~~shares held in escrow.~~

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

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

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

Intangible assets included proprietary technology and a non-compete agreement which are being amortized over 5 and 3 years, respectively. The excess of the purchase price above the net assets acquired was recorded as goodwill which is reviewed quarterly and formally evaluated at year end.

~~Teal Drones Acquisition~~

~~On August 31, 2021, the Company closed the acquisition of Teal Drones Inc., (“Teal”). Under the terms of the agreement, the base purchase price of $14,000,000~~ ~~was reduced by $1,670,294~~ ~~of debt assumed by the Company, as well as a working capital deficit adjustment of $1,456,953. Based on the net amount payable of $10,872,753, and a VWAP of $2.908 for the twenty trading days ending August 31, 2022, the Company issued~~ ~~3,738,911~~ ~~of common stock. For accounting purposes, the shares were valued at $10,431,562~~ ~~based on the closing price of our common stock of $2.79~~ ~~on August 31, 2021. In December 2021, the Company and Teal agreed to a reduction in the purchase price of $438,058~~ ~~which resulted in the cancellation of~~ ~~150,639~~ shares held in escrow. The Stock Consideration may be increased if Teal attains certain revenue levels in the 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.

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

~~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
Brand name 1,430,000
Proprietary technology 3,869,000
Total assets acquired 6,675,763
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 1,015,780
Goodwill $ 8,995,499

Intangible assets included proprietary technology which is being amortized over 6 years. The carrying value of brand name is not being amortized but is reviewed quarterly and formally evaluated at year end. The excess of the purchase price above the net assets acquired was recorded as goodwill which is reviewed quarterly and formally evaluated at year end.

~~Supplemental Unaudited Pro Forma Financial and Other Information~~

There is no pro forma financial information for the nine months ended January 31, 2023 because all acquisitions had closed prior to the beginning of the reporting period. The following table presents pro forma results as if our acquisition of Teal had occurred on May 1, 2021:

Nine months ended January 31, 2022
Red Cat Teal Consolidated
Revenues $ 5,116,741 $ 416,063 $ 5,532,804

Net Loss (6,863,190 ) (1,467,770 ) (8,330,960 )

~~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.~~

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 based on the report from the valuation services firm engaged to assist in the identification and valuation of intangible assets acquired.

•

The fair value of shares issued by the Company as part of the consideration paid is normally based on the volume weighted average price of the Company’s common stock for the twenty days prior to the closing of the transaction. For accounting purposes, the shares issued are valued based on the closing stock price on the date that the transaction closes.

•

Goodwill for Rotor Riot relates to its strong social media presence including more than 200,000 YouTube subscribers. Goodwill for Fat Shark is attributable to its relationship with manufacturing sources in China and the potential to integrate its goggle technologies with the Teal drone. Goodwill for 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 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 in the United States (“GAAP”). Certain prior period amounts have been restated to conform to the current year presentation.

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

As further described in Note 3, we presently expect to sell our Consumer segment, which includes Rotor Riot and Fat Shark, within the next twelve months. Accordingly, the Consumer segment businesses are characterized as Discontinued Operations in these financial statements. The assets and liabilities of these entities have been presented separately in the Consolidated Balance Sheet as discontinued operations. Similarly, the operating results and cash flows of discontinued operations are separately stated in those respective financial statements.

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

Cash and Cash Equivalents– At ~~January~~July 31, 2023, we had cash of ~~$3,893,162~~$937,756 in multiple commercial banks and financial services companies. We have not experienced any loss on these cash balances and believe they are not exposed to any significant credit risk.

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

We have elected to present accrued interest income separately from marketable securities on our consolidated balance sheets. Accrued interest income was ~~$233,471~~$82,318 and ~~$385,730~~$151,671 as of ~~January~~July 31, 2023 and April 30, ~~2022,~~2023, respectively, and was included in other current assets. We did not write off any accrued interest income during the ~~nine~~three months ended ~~January~~July 31, 2023 and 2022.

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, 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~~the net realizable value of its inventory using various reference measures including current product selling prices, as well as evaluating for excess quantities and obsolescence.

118

Goodwill and Long-lived Assets– Goodwill represents the ~~excess of the purchase price of~~future economic benefit arising from other assets acquired in an acquisition ~~over~~that are not individually identified and separately recognized. We test goodwill for impairment in accordance with the provisions of ASC 350, Intangibles – Goodwill and Other, (“ASC 350”). Goodwill is tested for impairment at least annually at the reporting unit level or whenever events or changes in circumstances indicate that goodwill might be impaired. ASC 350 provides that an entity has the option to first assess qualitative factors to determine whether the existence of events or circumstances leads to a determination that it is more likely than not that the fair value of a reporting unit is less than its carrying amount. If, after assessing the totality of events or circumstances, an entity determines it is not more likely than not that the fair value of a reporting unit is less than its carrying amount, then additional impairment testing is not required. However, if an entity concludes otherwise, then it is required to perform an impairment test. The impairment test involves comparing the estimated fair value of ~~identifiable net assets acquired. The measurement period for~~a reporting unit with its book value, including goodwill. If 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,~~estimated fair value exceeds book value, goodwill is considered 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 an adjustment is determined.~~

We perform an impairment test at the end of each fiscal year, or more frequently if indications of impairment arise. We have two business segments and evaluate goodwill for impairment based on an evaluation ofbe impaired. If, however, the fair value of the reporting unit is less than book value, then an impairment loss is recognized in an amount equal to the amount that the book value of the reporting unit exceeds its fair value, not to exceed the total amount of goodwill allocated to the reporting unit.

The estimate of fair value of a reporting unit is computed using either an income approach, a market approach, or a combination of both. Under the income approach, we utilize the discounted cash flow method to estimate the fair value of a reporting unit. Significant assumptions inherent in estimating the fair values include the estimated future cash flows, growth assumptions for future revenues (including gross margin, operating expenses, and capital expenditures), and a rate used to discount estimated future cash flow projections to their present value based on estimated weighted average cost of capital (i.e., the selected discount rate). Our assumptions are based on historical data, supplemented by current and anticipated market conditions, estimated growth rates, and management’s plans. Under the market approach, fair value is derived from metrics of publicly traded companies or historically completed transactions of comparable businesses. The selection of comparable businesses is based on the markets in which the reporting units operate and consider risk profiles, size, geography, and diversity of products and services.

Goodwill for Rotor Riot relates to its strong social media presence including more than 200,000 YouTube subscribers. Goodwill for Fat Shark is attributable to its relationship with manufacturing sources in China and the potential to integrate its goggle technologies with the Teal drone. Goodwill for Teal is ascribed to its existing relationship with several U.S. government agencies including its classification as an approved vendor. The Company expects that the Goodwill recognized in each ~~business segment individually.~~transaction will be deductible for tax purposes. The Company has reported net losses since its inception and is presently unable to determine when and if the tax benefit of this deduction will be realized.

Property and equipment – Property and equipment is stated at cost less accumulated depreciation ~~and depreciated~~which is calculated using the straight-line method over the estimated useful life of the asset. The estimated useful lives of our property and equipment are generally: (i) furniture and fixtures - seven years, (ii) equipment and related - two to five years, and (iii) leasehold improvements - 15 years.

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 did not restate financial information for any periods prior to August 1, 2021. Upon adoption, the Company recognized a lease liability obligation of $796,976 and a right-of-use asset for the same amount.

The 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 last debt financing. Operating lease assets are measured by adjusting the lease liability for lease incentives, initial direct costs incurred and asset impairments. Lease expense for minimum lease payments is recognized on a straight-line basis over the lease term with the operating lease asset reduced by the amount of the expense. Lease terms may include options to extend or terminate a lease when they are reasonably certain to occur.

Fair Values, Inputs and Valuation Techniques for Financial Assets and Liabilities, and Related Disclosures – The fair value 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.

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

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 liabilities on the Company's balance sheet. The Company measures these instruments at their estimated fair value and recognizes changes in their estimated fair value in results of operations during the period of change.

In October 2020 and January 2021, the Company entered into convertible note agreements which included provisions under which the conversion price was equal to the lesser of an initial stated amount or the conversion price of a future offering. This variable conversion feature was recognized as a derivative. Both financings included the issuance of warrants which contained similar variable conversion features. The Company values these convertible notes and warrants using the multinomial lattice method that values the derivative liability 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 from Contracts with Customers”, issued by the Financial Accounting Standards Board (“FASB”). This standard includes a comprehensive evaluation of factors to be considered regarding revenue recognition including (i) identifying the promised goods, (ii) evaluating performance obligations, (iii) measuring the transaction price, (iv) allocating the transaction price to the performance obligations if there are multiple components, and (v) recognizing revenue as each obligation is satisfied. The Company’s revenue transactions include a single component, specifically, the shipment of goods to customers as orders are fulfilled. The Company recognizes revenue upon shipment. The timing of the shipment of orders can vary considerably depending upon whether an order is for an item normally maintained in inventory or an order that requires assembly or unique parts. Customer deposits totaled ~~$219,148~~$45,123 and ~~$437,930~~$155,986 at ~~January~~July 31, 2023 and April 30, ~~2022,~~2023, respectively.

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

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

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

Foreign Currency – The functional currency of our international subsidiary, Skyset, is the local Italian currency. For that subsidiary, we translate assets and liabilities to U.S. dollars using period-end exchange rates, and average monthly exchange rates for revenues, costs, and expenses. We record translation gains and losses in accumulated other comprehensive income.

Comprehensive Loss– Comprehensive loss consists of net loss and other 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 ~~nine~~three months ended ~~January~~July 31, 2023 and ~~January~~July 31, 2022, comprehensive loss was ~~$328,226 lower~~$291,035 and ~~$2,158~~$133,934 lower than net loss, respectively, related to unrealized gains on available-for-sale securities totaling ~~$328,006~~$289,389 and ~~$0,~~$133,582, respectively, ~~as well as by~~and foreign currency translation adjustments of ~~$220~~$1,646 and ~~$2,158.~~$352.

Stock-Based Compensation– ~~For stock~~Stock options ~~we use~~are valued using the estimated grant-date fair value method of accounting in accordance with ASC Topic 718, Compensation – Stock Compensation. Fair value is determined based on the Black-Scholes Model using inputs reflecting our estimates of expected volatility, term and future dividends. We recognize forfeitures as they occur. ~~For~~The fair value of restricted stock ~~we determine the fair value~~is based on our stock price on the date of grant. ~~For both stock options and restricted stock, we recognize compensation~~Compensation costs is recognized on a straight-line basis over the service period which is the vesting term.

Basic and Diluted Net Loss per Share – Basic and diluted net loss per share has been calculated by dividing net loss by the weighted average number of shares of common stock outstanding during the period. Common stock equivalents were excluded from the computation of diluted net loss per share of common stock because they were anti-dilutive. The conversion or exercise of these common stock equivalents would dilute earnings per share if we become profitable in the future.

Outstanding securities not included in the computation of diluted net loss per share because their effect would have been anti-dilutive ~~included the following:~~included:

	January 31, 2023		April 30, 2022		July 31, 2023		April 30, 2023
Series B Preferred Stock, as converted		822,230		822,230		3,896		822,230
Stock options		4,165,142		3,694,142		6,884,017		4,784,809
Warrants		1,539,999		1,539,999		1,539,999		1,539,999
Restricted stock		984,841		1,083,675		842,701		781,060
Total		7,512,212		7,140,046		9,270,613		7,928,098

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 20.

Segment Reporting

Since January 2020, we have acquired four separate businesses operating in various aspects of the drone industry. Following the ~~most recent~~Teal acquisition ~~the Company~~in August 2021, we focused on integrating and organizing ~~its acquired~~these businesses. ~~These efforts included refining~~Effective May 1, 2022, we established the ~~establishment of~~ Enterprise and Consumer segments in order to sharpen ~~the Company’s~~our focus on the unique opportunities in each ~~sector of~~sector. Enterprise's initial strategy was to provide UAV's, primarily drones, to commercial enterprises, including the ~~drone industry. The Enterprise segment, which includes Teal Drones~~military, to navigate dangerous military environments 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 and commercial interior ~~spaces~~spaces. Subsequently, Enterprise narrowed its near-term focus on the military and ~~dangerous~~other government agencies. Skypersonic's technology has been re-focused on military ~~environments.~~applications and its operations consolidated into Teal. The Consumer segment, which includes Fat Shark and Rotor Riot, ~~and Fat Shark,~~ is focused on ~~enthusiasts~~hobbyists and ~~hobbyists~~enthusiasts 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~~established 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 21 - Segment Reporting”.

Liquidity and Going Concern – The Company has never been profitable and its net losses have been increasing related to acquisitions, as well as costs incurred to pursue its long-term growth strategy. During the three months ended July 31, 2023, the Company incurred a net loss of $5,810,348 and used cash in operating activities of $6,926,069. As of July 31, 2023, the Company has working capital of $22,945,400. While the Company has historically been successful in raising capital to meet its working capital requirements, the ability to continue raising such capital to enable the Company to continue its growth is not guaranteed. Therefore, there is substantial doubt about the Company’s ability to continue as a going concern as the Company will require additional liquidity to continue its operations and meet its financial obligations for twelve months from the date these consolidated financial statements are issued.

Note 3 – Discontinued Operations – Sale of Consumer Segment

In November 2022, the Company agreed to the sale of its consumer segment consisting of Rotor Riot, (“RR”), and Fat Shark Holdings (“FS”). The closing of the transaction is subject to the successful initial public offering by the buyer, Unusual Machines, Inc. The Company has concluded that the transaction is presently likely to close within the next twelve months. Accordingly, the Consumer segment has been classified as Discontinued Operations and reported in accordance with the applicable accounting standards. See Note 22 for additional information regarding the transaction. Set forth below are the results of operations for:


	Three months ended July 31,
	2023			2022
Revenues	$	1,869,219		$	1,942,720

Cost of goods sold		1,385,116			1,667,213

Gross margin		484,103			275,507

Operating expenses
Operations		209,980			161,783
Research and development		46,249			82,806
Sales and marketing		404,104			195,278
General and administrative		43,606			55,161
Total operating expenses		703,939			495,028
Operating loss		(219,836	)		(219,521	)

Other (income) expense
Interest expense		22,856			—
Other, net		(119	)		(124	)
Other (income) expense		22,737			(124	)

Net loss from discontinued operations	$	(242,573	)	$	(219,397	)

1412

Assets and liabilities for the Consumer Segment included:

	July 31, 2023		April 30, 2023
Current assets
Cash	$	15,021	$	86,656
Accounts receivable, net		106,649		61,107
Inventory		2,921,262		3,065,954
Other		1,502,438		2,069,438
Total current assets		4,545,370		5,283,155

Intangible assets, net		20,000		20,000
Other		3,853		3,853
Operating lease right-of-use assets		73,590		84,544
Total long term assets		97,443		108,397

Current liabilities
Accounts payable	$	65,058	$	606,872
Accrued expenses		89,014		109,480
Debt obligations - short term		237,814		—
Customer deposits		28,079		244,688
Operating lease liabilities		51,234		49,461
Total current liabilities		471,199		1,010,501

Long term liabilities - Operating lease liabilities		28,290		41,814

Working capital	$	4,074,171	$	4,272,654

Note 34 – Marketable Securities

~~The following tables set forth information related~~Marketable securities consisted solely of corporate bonds at July 31, 2023 and were classified at Level 2 in the Fair Value Hierarchy. Fair value, cost basis, and unrealized losses totaled $7,922,392, $8,497,168, and $574,776 at July 31, 2023, respectively. Contractual maturities of one to ~~our marketable securities as of January 31, 2023:~~ three years totaled $7,922,392.

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

Cost Unrealized Gains (Losses) Fair Value
Asset-backed securities $ 924,509 $ (14,218 ) $ 910,291
Corporate bonds 20,951,812 (1,132,070 ) 19,819,742
Total $ 21,876,321 $ (1,146,288 ) $ 20,730,033

~~II.~~

~~Contractual Maturities~~

One Year or Less One to Three Years Three to Five Years Total
Asset-backed securities $ — $ 910,291 $ — $ 910,291
Corporate bonds 6,494,035 12,744,060 581,647 19,819,742
Total $ 6,494,035 $ 13,654,351 $ 581,647 $ 20,730,033

~~III.~~

~~Fair Value Hierarchy~~

Level 1 Level 2 Level 3 Total
Asset-backed securities $ —   $ 910,291 $ —   $ 910,291
Corporate bonds —   19,819,742 —   19,819,742
Total $ —   $ 20,730,033 $ —   $ 20,730,033

Note 45 – Inventories

Inventories consisted of the following:

	July 31, 2023		April 30, 2023
Raw materials	$	7,721,211	$	8,132,196
Work-in-process		1,611,283		509,381
Finished goods		43,950		278,996
Total	$	9,376,444	$	8,920,573

January 31, 2023 April 30, 2022
Raw materials $ 5,608,584 $ 2,831,713
Work-in-process 192,166 173,112
Finished goods 3,493,503 891,045
Total $ 9,294,253 $ 3,895,870

Inventory purchase orders outstanding totaled approximately $26 million. The global supply chain for materials required to produce our drones continues to experience significant disruptions and delays. While we have increased our order lead times and quantities, we retain the right to cancel or modify these orders prior to their shipment.

Note 56 – Other Current Assets

Other current assets included:

January 31, 2023 April 30, 2022
Prepaid inventory $ 3,308,315 $ 1,707,085
Accrued interest income 233,471 385,730
Prepaid expenses 1,004,767 262,069
Total $ 4,546,553 $ 2,354,884

	July 31, 2023		April 30, 2023
Prepaid inventory	$	1,708,515	$	359,500
Prepaid expenses		1,229,875		752,564
Accrued interest income		82,318		151,671
Total	$	3,020,708	$	1,263,735

Note 67 – Due From Related Party

In January 2022, the Company determined that ~~an employee~~a senior executive had relocated in 2021 but their compensation had not been subject to the income tax withholding required by the new jurisdiction. The amount subject to taxation included $155,624 of cash compensation and $1,413,332 of income associated with the vesting of restricted stock ("Stock Compensation"). In March 2022, the Company entered into a note agreement (the "Note") with the employee in the amount of $510,323, representing the estimated taxes owed by the employee related to the Stock Compensation. Under the terms of the Note, 104,166 shares of common stock with a fair value of $280,832, which had vested during calendar 2021, were withheld by the Company and applied against the Note. The employee agreed not to sell or transfer 110,983 shares of common stock held at the Company's transfer agent until the Note was repaid. In addition, the employee has 20,833 shares of restricted stock vesting monthly in calendar 2022, of which 3,000 shares ~~will be~~were withheld with the fair value of those shares applied against the Note. ~~Any shares~~Shares issued to the employee in 2022 ~~will be~~were held at the transfer agent until the Note ~~is repaid in full.~~was repaid. The Note ~~matures~~matured on December 31, 2022. The Company filed amended payroll tax returns on March 16, 2022. In March and April 2022, the Company made payments to the relevant tax authorities totaling $712,646 representing $510,323 owed by the employee, $31,604 owed by the Company, and $170,719 of penalties and interest. The Note was repaid in full in August 2022.

Note 78 – Intangible Assets

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


	July 31, 2023							April 30, 2023
	Gross Value		Accumulated Amortization			Net Value		Gross Value		Accumulated Amortization			Net Value
Proprietary technology	$	4,967,000	$	(1,050,448	)	$	3,916,552	$	4,967,000	$	(841,223	)	$	4,125,777
Non-compete agreements		81,000		(63,417	)		17,583		81,000		(56,667	)		24,333
Customer relationships		39,000		(19,499	)		19,501		39,000		(18,106	)		20,894
Total finite-lived assets		5,087,000		(1,133,364	)		3,953,636		5,087,000		(915,996	)		4,171,004
Brand name		3,152,000		—			3,152,000		3,152,000		—			3,152,000
Total indefinite-lived assets		3,152,000		—			3,152,000		3,152,000		—			3,152,000
Total intangible assets, net	$	8,239,000	$	(1,133,364	)	$	7,105,636	$	8,239,000	$	(915,996	)	$	7,323,004

January 31, 2023 April 30, 2022
Gross Value Accumulated Amortization Net Value
Gross
Value
Accumulated Amortization Net Value
Proprietary technology $ 4,967,000 $ (631,997 ) $ 4,335,003 $ 1,098,000 $ (219,267 ) $ 878,733
Non-compete agreements 81,000 (49,916 ) 31,084 81,000 (29,667 ) 51,333
Customer relationships 39,000 (16,713 ) 22,287 39,000 (12,535 ) 26,465
Total finite-lived assets 5,087,000 (698,626 ) 4,388,374 1,218,000 (261,469 ) 956,531
Brand name 3,152,000 —   3,152,000 1,722,000 —   1,722,000
Trademark 20,000 —   20,000 20,000 —   20,000
Total indefinite-lived assets 3,172,000 —   3,172,000 1,742,000 —   1,742,000
Total intangible assets, net $ 8,259,000 $ (698,626 ) $ 7,560,374 $ 2,960,000 $ (261,469 ) $ 2,698,531

Proprietary technology and non-compete agreements are being amortized over five to six years and three years, respectively. Customer relationships isare being amortized over seven years. Goodwill and Brand name are not amortized but evaluated for impairment on a quarterly basis.

As of ~~January~~July 31, 2023, expected amortization expense for finite-lived intangible assets for the next five years is as follows:

Fiscal Year Ended:
2023 $ 217,371
2024 866,805
2025 842,471
2026 815,271
2027 786,679
Thereafter 859,777
Total $ 4,388,374

Fiscal Year Ended:
	2024	$	649,437
	2025		842,471
	2026		815,271
	2027		786,679
	2028		644,833
	Thereafter		214,945
	Total	$	3,953,636

Goodwill ~~is a separately stated intangible asset and~~ represents the ~~excess of the purchase price of acquisitions above the net~~future economic benefit arising from other assets ~~acquired.~~acquired in an acquisition that are not individually identified and separately recognized. 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 8,995,499
Balance at April 30, 2022 and January 31, 2023 $ 19,839,750

Date	Acquisition	Goodwill
January 2020	Rotor Riot	$	1,849,073
November 2020	Fat Shark		6,168,260
May 2021	Skypersonic		2,826,918
August 2021	Teal Drones		8,995,499
April 2023 - Impairment loss	Skypersonic		(2,826,918	)
Balance at April 30, 2023 and July 31, 2023		$	17,012,832

Following the establishment of the Enterprise and Consumer segments, management evaluated the long-term business strategy of each segment. This resulted in the Enterprise segment narrowing its focus on the military and other government agencies. It was determined that Skypersonic's technology would be re-focused for the near term on military applications and consolidated into the operations of Teal Drones. The Company completes a formal evaluation of the carrying value of its intangible assets, including goodwill, at the end of each fiscal year. Based on (i) the operating results for Skypersonic since its acquisition in May 2021, (ii) its consolidation into Teal, (iii) our current expectations of its future business conditions and trends, including its projected revenues, expenses, and cash flows, the Company recognized an impairment charge of $2,826,918 in April 2023.

Note 89 – Property and Equipment

Property and equipment consist of assets with an estimated useful life greater than one year and are reported net of accumulated depreciation. The reported values are periodically assessed for impairment, and were as follows:

	January 31, 2023			April 30, 2022			July 31, 2023			April 30, 2023
Equipment and related	$	1,195,675		$	509,376		$	1,340,237		$	1,386,373
Leasehold improvements		1,207,357			149,330			1,517,199			1,473,890
Furniture and fixtures		54,254			42,746			132,752			132,752
Accumulated depreciation		(379,462	)		(189,762	)		(435,777	)		(342,657	)
Net carrying value	$	2,077,824		$	511,690		$	2,554,411		$	2,650,358

Depreciation expense totaled $~~169,748~~101,001 and $~~17,888~~28,272 for the ~~nine~~three months ended ~~January~~July 31, 2023 and 2022, respectively.

Note 910 – Other ~~Long Term~~Long-Term Assets

Other long-term assets included:

	July 31, 2023		April 30, 2023
SAFE agreement	$	250,000	$	250,000
Security deposits		53,180		53,180
Total	$	303,180	$	303,180

~~Other long term assets included:~~

January 31, 2023 April 30, 2022
SAFE agreement $ 250,000 $ —
Security deposits 57,033 57,033
Total $ 307,033 $ 57,033

In November 2022, the Company entered into a SAFE (Simple Agreement for Future Equity) agreement with Firestorm Labs, Inc. (“Firestorm”) under which it made a payment of $250,000 to Firestorm in exchange for the right to certain shares of Firestorm stock. The SAFE permits the Company to participate in a future equity financing of Firestorm by converting the $250,000 into shares of Preferred Stock of Firestorm. If there is a change in control of Firestorm or a public offering of shares of its stock, then the Company shall have the right to receive cash payments, or shares of stock, whichever has greater value. The Company’s investment in the SAFE agreement has been recorded on the cost method of accounting. The Company plans to evaluate the investment for any indications of impairment in value on a quarterly basis. No factors indicative of impairment were identified during the three months ended ~~January~~July 31, 2023.

Note 1011 – Operating Leases

As of ~~January~~July 31, 2023, the Company had operating type leases for real estate and no finance type leases. The Company’s leases have remaining lease terms of up to ~~4.33~~3.83 years, some of which may include options to extend for up to 5 years. Operating lease expense totaled $~~296,436~~85,252 for the ~~nine~~three months ended ~~January~~July 31, 2023, including period cost for short-term, cancellable, and variable leases, not included in lease liabilities, of $~~21,375~~1,650 for the ~~nine~~three months ended ~~January~~July 31, 2023.

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

Location Monthly Rent Expiration
South Salt Lake, Utah $ 22,000 December 2024
Orlando, Florida $ 4,692 January 2025
San Juan, Puerto Rico $ 5,775 June 2027
Troy, Michigan $ 2,667 May 2022
Orlando, Florida $ 1,690 September 2022

Location	Monthly Rent		Expiration
South Salt Lake, Utah	$	22,667		December 2024
San Juan, Puerto Rico	$	5,647		June 2027
Troy, Michigan	$	550		May 2022

Supplemental information related to operating leases for the ~~nine~~three months ended ~~January~~July 31, 2023 was:


Operating cash paid to settle lease liabilities			$~~271,568~~85,709
Weighted average remaining lease term (in years)			~~2.62~~2.30
Weighted average discount rate			12%

Future lease payments at ~~January~~July 31, 2023 were as follows:

Fiscal Year Ended:
2023 $ 99,662
2024 403,878
2025 304,676
2026 76,619
2027 79,300
Thereafter 6,627
Total $ 970,762

Fiscal Year Ended:
	2024		260,453
	2025		260,743
	2026		76,619
	2027		79,300
	2028		6,627
	Total	$	683,742

Note 1112 – Debt Obligations

Decathlon Capital

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 (the “Loan”), representing the outstanding principal amount previously due and owing by Teal to DA4. Interest on the Loan accrues at a rate of ten (10%) percent per annum. Principal and interest is payable in monthly installments of $49,275 until maturity on December 31, 2024. The balance outstanding at ~~January~~July 31, 2023 totaled $~~1,019,409~~769,170.

Pelion Note

In May 2021, Teal entered into a note agreement totaling $350,000 which is payable upon demand. The Note bears interest at the applicable Federal Rate as of the date of the Note which was 0.13% on the date of issuance. Accrued interest totaled $~~767~~992 at ~~January~~July 31, 2023.

Vendor Agreement

In connection with the acquisition of Teal on August 31, 2021, the Company assumed an obligation with a contract manufacturing firm. The assumed balance of $387,500 was repaid in monthly installments of $37,500 and paid in full in July 2022.

SBA Loan

In February 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 was used to fund qualifying payroll, rent and utilities. In February 2022, the principal balance of $300,910 and accrued interest of $3,001 were forgiven.

~~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. Agreements with activity during the two years ended January 31, 2023 included:

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

Corporate Equity

Beginning in October 2021, and amended in January 2022, Teal financed a total of $120,000 of leasehold improvements with Corporate Equity. The loan bears interest at 8.25% annually and requires monthly payments of $3,595 through December 2024. The balance outstanding at ~~January~~July 31, 2023 and April 30, ~~2022~~2023 totaled $~~75,890~~57,106 and $~~102,599~~66,586 respectively.

G.F.

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.G.

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, 2023 and April 30, 2023 totaled $~~13,382~~9,442. and $11,412 respectively.

~~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 $~~100,000~~ ~~and charged a transaction fee of $6,900~~ ~~was completed in January 2021. A January 2021 agreement under which PayPal advanced $75,444~~ ~~and charged a transaction fee of $2,444~~ ~~was completed in August 2021.~~

J.H.

Summary

Outstanding principal payments on debt obligations are due as follows:

Fiscal 2023 $ 484,974
Fiscal 2024 572,139
Fiscal 2025 401,568
Total $ 1,458,681
Short term – through January 31, 2024 $ 908,746
Long term – thereafter $ 549,935

Fiscal 2024		784,149
Fiscal 2025		401,569
Total	$	1,185,718
Short term – through July 31, 2024	$	936,150
Long term – thereafter	$	249,568

Note 1213 – Due to Related Party

Founder of Fat Shark

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

BRIT, LLC

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

The Company also assumed a line of credit obligation totaling $47,853 which bears interest at 6.67% annually. The remaining balance of $37,196 plus accrued interest totaling $292 was paid in October 2022.

~~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 was repaid in full in May 2021.~~

~~Note 13 – Convertible Notes~~

~~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 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 ~~399,998~~ shares 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~~ ~~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 2020 Notes to zero with the remaining $20,000~~ ~~applied against transaction fees. The excess of the liability over the net proceeds totaled $148,587~~ ~~which was recognized as a derivative expense in the fiscal year ended April 30, 2021.~~

~~As of January 31, 2023, (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 $273,196~~.

~~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.

2017

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, $500,000~~ ~~was applied as a debt discount to reduce the initial carrying value of the 2021 notes to zero. The excess of the liability over the net proceeds totaled $4,481,701~~ ~~which was recognized as a derivative expense in the fiscal year ended April 30, 2021.~~

~~As of January 31, 2023, (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 $582,904~~.

Note 14 – 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. 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, 2023 and April 30, ~~2022,~~2023, we had accumulated deficits of approximately $~~43,000,000~~60,397,000 and $~~27,500,000~~54,600,000, respectively. Deferred tax assets related to the future benefit of these net operating losses for tax purposes totaled approximately $~~7,955,000~~11,173,000 and $~~5,087,500~~10,101,000, respectively, calculated using the base Puerto Rico corporate tax rate of 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, 2023 and April 30, ~~2022.~~2023.

Note 15 – Common Stock

Our common stock has a par value of $~~0.001~~$0.001 per share. We are authorized to issue 500,000,000 shares of common stock. Each share of common stock is entitled to one vote. A summary of shares of common stock issued by the Company since April 30, ~~2021~~2022 is as follows:

Description of Shares	Shares Issued
Shares outstanding as of April 30, ~~2021~~2022		~~29,431,264~~53,748,735
~~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 542,151~~273,874 to pay taxes and 9,000 to repay a Note		~~534,318~~653,308
Vesting of restricted stock ~~units~~ to Board of Directors		~~95,366~~116,507
Vesting of restricted stock ~~units~~ to consultants		~~7,042~~9,683
Shares issued for services		39,832
Shares outstanding as of ~~January~~April 30, 2023		54,568,065
Vesting of restricted stock to employees, net of shares withheld of 10,870 to pay taxes		44,130
Vesting of restricted stock to Board of Directors		109,585
Vesting of restricted stock to consultants		1,761
Conversion of preferred stock		818,334
Shares outstanding as of July 31, 2023		~~54,385,461~~55,541,875

Note 16 – Preferred Stock

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

Series B Preferred Stock (“Series B Stock”) is convertible into common stock at a ratio of 0.8334 shares of common stock for each share of Series B Stock held and votes together with the common stock on an as-if-converted basis. 982,000 shares of Series B Stock were converted into 818,334 shares of common stock in June 2023. Shares outstanding at ~~January~~July 31, 2023 totaled ~~986,676~~4,676 which are convertible into ~~822,230~~3,896 shares of common stock.

Note 17 – Warrants

The ~~company~~Company issued five-year warrants in connection with two convertible note financings. 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 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 each financing including the calculation of the derivative liability and related expense.

A summary of the warrants issued and their fair values were:


		Upon Issuance				Outstanding at July 31, 2023
Date of Transaction		Number of Warrants		Initial Fair Value		Number of Warrants		Fair Value
	October 2020		399,998	$	267,999		266,666	$	179,982
	January 2021		675,000	$	2,870,666		540,000	$	381,703

Upon Issuance Outstanding at January 31, 2022
Date of Transaction Number of Warrants Initial Fair Value Number of Warrants Fair Value
October 2020 399,998 $ 267,999 266,666 $ 273,196
January 2021 675,000 $ 2,870,666 540,000 $ 582,904

In March and April 2021, we received $201,249 related to the exercise of 201,666 of the warrants. Since these exercises resulted in the elimination of the derivative liability in the warrants, the derivative liability was reduced by $694,305 with a corresponding increase in additional paid in capital. In June 2021, we received $99,999 in connection with the exercise of 66,666 warrants which resulted in the elimination of $163,141 of the derivative liability in the warrants.

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

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

~~The following table presents the range of assumptions used to estimate the fair values of warrants granted during the nine months ended January 31:~~

2023 2022
Risk-free interest rate —   0.79 – 0.85%
Expected dividend yield —   —
Expected term (in years) —   5.00
Expected volatility —   222.45 – 223.17%

The following table summarizes the changes in warrants outstanding since April 30, ~~2021.~~2022.

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 January 31, 2022 1,539,999 $ 3.38 3.13 $ —

	Number of Shares	Weighted-average Exercise Price per Share		Weighted-average Remaining Contractual Term (in years)		Aggregate Intrinsic Value
Balance as of April 30, 2022	1,539,999		3.38		3.89	$	427,533
Granted	—
Exercised	—
Outstanding as of April 30, 2023	1,539,999		3.38		2.89	$	—
Granted	—
Exercised	—
Outstanding at July 31, 2023	1,539,999		3.38		2.63	$	—

Note 18 – 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 range of assumptions used to calculate the fair value of options granted during the ~~nine~~three months ended ~~January~~July 31 was:

		2023		2022
Exercise Price	$	1.06 – 1.12	$	—
Stock price on date of grant		1.06 – 1.12		—
Risk-free interest rate		3.47 – 4.07%		—
Dividend yield		—		—
Expected term (years)		6.00 – 6.25		—
Volatility		257.25 – 260.22%		—

2023 2022
Exercise Price $ 1.06 – 2.38 $ 1.69 – 2.82
Stock price on date of grant 1.06 – 2.38 1.69 – 2.82
Risk-free interest rate 3.34 – 7.52% 0.47 – 1.57%
Dividend yield — —
Expected term (years) 8.25 3.75 – 10.00
Volatility 253.52 – 513.58% 210.68 – 270.18%

A summary of options activity under the Plan since April 30, ~~2021~~2022 was:

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 598,000 1.94
Exercised — —
Forfeited or expired (127,000 ) 2.45
Outstanding as of January 31, 2023 4,165,142 2.13 8.11 477,665
Exercisable as of January 31, 2023 2,797,226 $ 2.04 7.30 $ 447,515

	Shares			Weighted-Average Exercise Price		Weighted-Average Remaining Contractual Term		Aggregate Intrinsic Value
Outstanding as of April 30, 2022		3,694,142		$	2.17		8.56		1,407,545
Granted		1,503,500			1.40
Exercised		—			—
Forfeited or expired		(412,833	)		2.67
Outstanding as of April 30, 2023		4,784,809			1.88		8.72		74,586
Granted		2,401,042			1.07
Exercised		—			—
Forfeited or expired		(301,834	)		2.55
Outstanding as of July 31, 2023		6,884,017			1.57		8.58		298,615
Exercisable as of July 31, 2023		3,157,975		$	2.00		6.63	$	241,274

The aggregate intrinsic value of outstanding options represents the excess of the stock price at the indicated date over the exercise price of each option. As of ~~January~~July 31, 2023 and ~~January~~July 31, 2022, there was $~~3,052,603~~5,918,668 and $~~3,762,636~~2,760,989 of unrecognized stock-based compensation expense related to unvested stock options which is expected to be recognized over the weighted average periods of ~~2.22~~2.24 and ~~1.64~~2.1 years, respectively.

Restricted Stock

A summary of restricted stock activity under the Plan since April 30, ~~2021~~2022 was:

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 746,000 2.20
Vested (823,707 ) 2.45
Forfeited (21,127 ) 2.13
Unvested and outstanding as of January 31, 2023 984,841 $ 2.20

	Shares			Weighted Average Grant-Date Fair Value Per Share
Unvested and outstanding as of April 30, 2022		1,083,675		$	2.59
Granted		780,884			2.14
Vested		(1,062,372	)		2.42
Forfeited		(21,127	)		2.13
Unvested and outstanding as of April 30, 2023		781,060			2.44
Granted		298,643			1.06
Vested		(166,346	)		1.70
Forfeited		(70,656	)		1.25
Unvested and outstanding as of July 31, 2023		842,701		$	2.14

Stock Compensation

Stock compensation expense ~~by functional category was:~~

Three months ended
January 31,

Nine months ended
January 31,
2023 2022 2023 2022
Operations $ 181,908 $ 182,320 $ 566,218 $ 556,928
Research and development 170,579 143,279 524,874 284,511
Sales and marketing 120,733 112,975 390,076 271,808
General and administrative 315,471 343,549 1,309,790 952,899
Total $ 788,691 $ 782,123 $ 2,790,958 $ 2,066,146

for the three months ended July 31 was as follows:

	2023		2022
General and administrative	$	427,781	$	345,168
Research and development		127,417		144,798
Operations		191,099		158,431
Sales and marketing		165,309		107,074
Total	$	911,606	$	755,471

Stock compensation expense pertaining to options totaled $~~1,308,768~~629,426 and $~~974,019~~458,023 for the ~~nine~~three months ended ~~January~~July 31, 2023 and 2022, respectively. Stock compensation expense pertaining to restricted stock units totaled $~~1,482,190~~282,180 and $~~1,092,127~~297,448 for the ~~nine~~three months ended ~~January~~July 31, 2023 and 2022, respectively.

Note 19 – 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 13 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 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, 2023 and April 30, ~~2022~~2023 are set forth below. In addition, the Company's stock price on each measurement date was used in the model.

	~~January~~July 31, 2023	April 30, ~~2022~~2023
Risk-free interest rate	~~2.83 –~~ ~~4.51~~4.88%	~~0.52~~2.83 – ~~2.87~~4.51%
Expected dividend yield	—	—
Expected term (in years)	~~2.67~~2.17 – ~~3.50~~2.50	~~3.42~~2.42 – ~~4.50~~3.50
Expected volatility	~~161.40~~107.27 – ~~235.23~~107.90%	~~211.02~~138.49 – ~~292.28~~235.23%

As of ~~January~~July 31, 2023, all of the notes had been converted into common stock and 806,666 of the warrants were outstanding. Changes in the derivative liability during the ~~nine~~three months ended ~~January~~July 31, 2023 and the year ended April 30, ~~2022~~2023 were as follows:

	January 31, 2023			April 30, 2022			July 31, 2023			April 30, 2023
Balance, beginning of period	$	1,607,497		$	2,812,767		$	588,205		$	1,607,497
Additions		—			—			—			—
Eliminated upon conversion of notes/exercise of warrants		—			(163,141	)		—			—
Changes in fair value		(751,397	)		(1,042,129	)		(26,520	)		(1,019,292	)
Balance, end of period	$	856,100		$	1,607,497		$	561,685		$	588,205

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

Note 20 - Related-Party Transactions

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 vested 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 6.7.

Additional related party transactions are disclosed in Note ~~12.~~13.

Note 21 - 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~~key operating data and ~~nine months ended January 31, 2023, respectively.~~

For the three months ended January 31, 2023
Enterprise Consumer Corporate Total
Revenues $ 1,667,683 $ 1,438,961 $ —   $ 3,106,644
Cost of goods sold 1,764,612 1,239,420 —   3,004,032
Gross margin (96,929 ) 199,541 —   102,612

Operating expenses 2,981,826 541,234 2,105,350 5,628,410
Operating loss (3,078,755 ) (341,693 ) (2,105,350 ) (5,525,798 )

Other expenses, net 106,611 (11,614 ) 45,207 140,204
Net loss $ (3,185,366 ) $ (330,079 ) $ (2,150,557 ) $ (5,666,002 )

For the nine months ended January 31, 2023
Enterprise Consumer Corporate Total
Revenues $ 3,541,846 $ 4,164,531 $ —   $ 7,706,377
Cost of goods sold 3,432,804 3,579,679 —   7,012,483
Gross margin 109,042 584,852 —   693,894

Operating expenses 8,041,686 1,567,611 7,081,225 16,690,522
Operating loss (7,932,644 ) (982,759 ) (7,081,225 ) (15,996,628 )

Other expenses, net 265,855 (19,788 ) (520,617 ) (274,550 )
Net loss $ (8,198,499 ) $ (962,971 ) $ (6,560,608 ) $ (15,722,078 )

~~The following table sets forth specific~~ asset categories which are reviewed by our CODM in evaluating the ~~evaluation~~operating performance of ~~operating~~ each segment:

~~segments:~~

As of January 31, 2023
Enterprise Consumer Corporate Total
Accounts receivable, net $ 2,054,022 $ 9,850 $ —   $ 2,063,872
Inventory, net 6,456,158 2,838,095 —   9,294,253
Inventory deposits $ 712,104 $ 2,596,211 $ —   $ 3,308,315


	For the three months ended July 31, 2023
	Enterprise			Consumer			Corporate			Total
Revenues	$	1,748,129		$	1,869,219		$	—		$	3,617,348
Cost of goods sold		1,573,464			1,385,116			—			2,958,580
Gross margin		174,665			484,103			—			658,768

Operating expenses		3,153,405			703,939			2,034,295			5,891,639
Operating loss		(2,978,740	)		(219,836	)		(2,034,295	)		(5,232,871	)

Other expenses, net		122,858			22,737			431,882			577,477
Net loss	$	(3,101,598	)	$	(242,573	)	$	(2,466,177	)	$	(5,810,348	)


	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	)


	As of July 31, 2023
	Enterprise		Consumer		Corporate		Total
Accounts receivable, net	$	720,642	$	106,649	$	—	$	827,291
Inventory, net		9,376,444		2,921,262		—		12,297,706
Inventory deposits	$	1,708,515	$	1,502,438	$	—	$	3,210,953


	As of April 30, 2023
	Enterprise		Consumer		Corporate		Total
Accounts receivable, net	$	719,862	$	61,107	$	—	$	780,969
Inventory, net		8,920,573		3,065,954		—		11,986,527
Inventory deposits	$	359,500	$	2,062,038	$	—	$	2,421,538

Note 22 - Sale of Consumer Segment

In November 2022, the Board of Directors approved a Stock Purchase Agreement (the "SPA") between the Company, Unusual Machines and Jeffrey Thompson, the founder and Chief Executive Officer of the Company (the “Principal Stockholder”), related to the sale of the Company’s consumer segment consisting of Rotor Riot, (“RR”), and Fat Shark Holdings (“FS”), to UM. In March 2023, shareholders approved the sale.

The final, amended purchase price of $20 million includes $3 million in cash, payable at closing, with the remaining $17 million consisting of shares of common stock of Unusual Machines. The purchase price will be adjusted for working capital on the closing date (increased for positive working capital and decreased for negative working capital). The Company estimates that working capital at closing will range between $3.0 to $4.5 million. The number of shares of UM’s common stock (the “Unusual Common Stock”) to be issued will be based on the initial public offering price for the Unusual Common Stock. All of the Unusual Common Stock will be subject to a lock-up of 180 days and be eligible for registration. The closing of the SPA is subject to the successful completion of an initial public offering (the “IPO”) by UM in the minimum amount of $5 million, and the listing of UM’s common stock on a public stock exchange such as the NYSE or Nasdaq. UM filed a registration statement on Form S-1 for an initial public offering of its Common Stock with the SEC. UM is required to deposit $1.0 million cash with the Company upon effectiveness of the registration statement with the SEC.

Note 23 – Commitments and Contingencies

Legal Proceedings

In the ordinary course of business, we may be involved, at times, in various legal proceedings involving a variety of matters. We do not believe there are any pending legal proceedings that will have a material adverse effect on our business, consolidated financial position, results of operations, or cash flows. However, the outcome of such legal matters is inherently unpredictable and subject to significant uncertainties. We have not recorded any litigation reserves as of April 30, 2023.

One pending legal matter is an action filed against Teal Drones and the Company in a U.S. District Court in California. The complaint asserts claims for breach of contract, and the unlawful conversion and sale of shares of common stock that plaintiff alleges to have purchased in Teal prior to its acquisition by the Company. The complaint also alleges breach of fiduciary duty and seeks in excess of $1 million in damages. The Company is asserting vigorous defenses to the complaint.

Note 2224 – 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:~~disclosure.

~~Sale of Consumer Segment~~

On November 21, 2022, the Company entered into a Stock Purchase Agreement (the "SPA") with Unusual Machines, Inc. (“UM”) and Jeffrey Thompson, the founder and Chief Executive Officer of the Company (the “Principal Stockholder”), related to the sale of the Company’s consumer business consisting of Rotor Riot, (“RR”), and Fat Shark Holdings (“FS”), for $18 million in cash and securities of UM.

2623

The purchase price consists of (i) $5 million in cash (as increased for positive working capital and decreased for negative working capital at closing) plus (ii) $2.5 million in a convertible senior note of UM (the “Senior Note”) plus (iii) $10.5 million in Series A convertible preferred stock of UM (the “Series A Stock”). The Senior Note and Series A Stock will be convertible into Common Stock at the lesser of $4.00 per share or the IPO price of UM. The Senior Note and Series A Stock shall contain beneficial ownership blockers under which conversion shall be limited to 4.99% and/or 9.99% of the total voting power of UM, and may be further subject to limitations on voting and conversion required in order to conform with requirements of NASDAQ related to the issuance of more than 19.99% of the outstanding Common Stock in accordance with NASDAQ Rule 5635(d). The Senior Note and Series A Stock will include anti-dilution protection in the case of issuances by UM at a price lower than the then applicable conversion price for so long as the Senior Note or Series A Stock remains outstanding under which the conversion price will be reduced to such lower price.

Under the terms of the SPA the Principal Stockholder and UM have agreed to indemnification obligations which shall survive for a period of 9 months, subject to certain limitations, which includes a basket of $250,000 before any claim can be asserted and a cap equal to the value of the escrow shares, other than in cases involving fraud. The Principal Stockholder agreed to deposit 450,000 shares of UM common stock owned to secure any indemnification obligations.

The closing of the SPA, is subject to customary conditions including shareholder approval by a majority of the disinterested shareholders of the Company. The Principal Stockholder, who holds approximately 24% of the voting power of the Company, shall abstain from the vote on approval of the SPA. On November 21, 2022, the Board of Directors of the Company approved the SPA and its submission to shareholders for approval. In addition, closing of the SPA is subject to successful completion of an initial public offering (the “IPO”) by UM in the minimum amount of $15 million, and the listing of UM’s common stock on NASDAQ. The SPA requires the Company to cooperate with UM in connection with the IPO and to deliver audited financial statements of RR and FS. UM has agreed to register all of the common stock for which the Senior Note is convertible in the IPO for resale by the Company, or to pay the note in full with proceeds of the offering at closing, at UM’s election. In addition, UM has agreed to enter into a registration rights agreement for 100% of the common stock for which the Series A Stock may be converted and to use its best efforts to file and have declared effective such registration statement, on demand and on a piggy-back basis in connection with any other registration statements filed by UM.

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 providing products, services and 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 July 27, ~~2022.~~2023.

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

~~Recent Developments~~

Corporate developments during the two years ended ~~January~~July 31, 2023 include:

Capital Transactions

~~S-1 Offering~~

~~On May 4, 2021,~~During the first quarter of fiscal 2022, the Company ~~closed a~~completed two firm commitment underwritten public ~~offering (the "S-1 Offering") for the sale of 4,000,000 shares of common stock, at a public offering price of $4.00 per share, to~~offerings with ThinkEquity, a division of Fordham Financial ~~Management, Inc., as representative of the underwriters ("ThinkEquity"), pursuant to an underwriting agreement with Think Equity.~~Management. The ~~shares were sold 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,~~first offering, in May 2021, ~~(the "S-1 Registration Statement"). The S-1 offering~~ generated gross ~~proceeds of $16 million~~ and net proceeds of ~~approximately~~$16 and $14.6 ~~million.~~

~~S-3 Offering~~

Onmillion, respectively. The second offering, in July ~~21,~~ 2021, the Company closed a firm commitment underwritten public offering (the "S-3 Offering") for the sale of 13,333,334 shares of common stock at a purchase price of $4.50 per share to ThinkEquity. The shares were sold 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 a registration statement filed with the SEC on July 19, 2021. The S-3 offering generated gross ~~proceeds of $60 million~~ and net proceeds of ~~approximately~~$60 and $55.5 ~~million.~~ million, respectively.

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

In January 2020, the Company acquired Rotor Riot, a provider of First Person View (FPV) drones and equipment, primarily to the consumer marketplace. The purchase price was $1,995,114.

In November 2020, the Company acquired Fat Shark Holdings, a provider of FPV video goggles to the drone industry. The purchase price was $8,354,076.

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.

Following the Teal acquisition, we focused on integrating and organizing these businesses. Effective May 1, 2022, we established the Enterprise and Consumer segments in order to sharpen our focus on the unique opportunities in each sector. ~~The Enterprise segment, which includes Teal Drones~~Enterprise's initial strategy was to provide UAV's, primarily drones, to commercial enterprises, and ~~Skypersonic, is focused on opportunities in~~government agencies including the ~~commercial sector, including military. Enterprise is building the infrastructure~~military, to ~~manage drone fleets, fly~~navigate dangerous military environments and ~~provide services remotely, and navigate~~ confined industrial and commercial interior ~~spaces~~spaces. Subsequently, Enterprise narrowed its near-term focus on the military and ~~dangerous~~other government agencies. Skypersonic's technology has been re-focused on military ~~environments.~~applications and its operations consolidated into Teal. The Consumer segment, which includes Fat Shark and Rotor Riot, is focused on hobbyists and enthusiasts which are expected to increase as drones become more visible and useful in our daily lives.

In November ~~2021,~~2022, we entered into an agreement to sell our Consumer segment to Unusual ~~Machines for total consideration of $18~~Machines. The adjusted sale price is $20 million, including $5$3 million in cash, at closing, and ~~$13~~$17 million in securities of Unusual Machines. The ~~Company has determined~~agreement reflects the Company's decision to focus its efforts and capital on military and defense where it believes that there are more opportunities to create long term shareholder value. The ~~transaction is expected to close in~~closing of the ~~first half of calendar 2023 but~~transaction is contingent upon Unusual Machines completing (i) an initial public offering that raises sufficient capital to close the transaction, and (ii) a listing ~~of its common~~on a public stock onexchange such as the NYSE or Nasdaq. ~~There can be no assurances that the transaction will successfully close.~~

Results of Operations - Continuing Operations

The analysis of the Company's results of continuing operations for the three ~~and nine~~ months ended ~~January~~July 31, 2023 compared to the three ~~and nine~~ months ended ~~January~~July 31, 2022 ~~is significantly impacted by~~includes only the ~~acquisition~~Company's Enterprise Segment which includes Teal Drones and Skypersonic. During Fiscal 2023, the operations of Skypersonic were consolidated into Teal. The following discussion and analysis describes the operating results of Teal ~~Drones~~and Skypersonic on ~~August 31, 2021.~~a consolidated basis with Teal ~~is the Company’s largest operating subsidiary. Since acquiring Teal, the Company has~~representing more than ~~tripled the number of employees and significantly expanded its facilities. As a result, the comparison~~90% of the ~~three~~operating activities of the Enterprise Segment.

Discussion and ~~nine months ended January~~Analysis of the Three Months Ended July 31, 2023 compared to the ~~three and nine months ended January 31, 2022 yields more significant changes than might normally occur.~~

Three Months Ended ~~January 31, 2023 and January~~July 31, 2022

Revenues

Revenues totaled ~~$3,106,644~~$1,748,129 during the three months ended ~~January~~July 31, 2023 (or the "2023 period") compared to ~~$1,856,751 for~~$1,126,551 during the three months ended ~~January~~July 31, 2022 (or the "2022 period"), representing an increase of ~~$1,249,893,~~$621,578, or ~~67%~~55%. ~~Consumer~~The increase related exclusively to higher product sales related to the launch of the Teal 2 in April 2023. Product sales totaled $1,413,127 during the three months ended July 31, 2023 compared to $700,214 during the three months ended July 31, 2022 representing an increase of $712,913, or more than 100%. The increase in product sales was partially offset by lower contract revenues during the 2023 period. Contract revenues totaled ~~$1,438,961~~$310,881 during the 2023 period compared to ~~$1,026,978~~$398,499 during the 2022 period, ~~resulting in an increase~~representing a decrease of ~~$411,983,~~$87,618, or ~~40%~~22%. ~~Fat Shark launched its newest product,~~Contract revenues are primarily sourced through government agencies and can fluctuate from period to period based on the ~~Dominator, in the first fiscal quarter during which the Consumer segment generated record quarterly revenues. Fat Shark revenues~~timing of awards and amendments.

Gross Margin

Gross margin totaled ~~$529,394~~$174,665 during the 2023 period compared to ~~$432,529~~$82,120 during the 2022 period, resulting in an increase of $96,865, or 22%. Enterprise revenues totaled $1,667,683 during the 2023 period compared to $829,773 during the 2022 period, resulting in an increase of $837,910, or 101%. This increase primarily related to Teal, which launched the Teal 2 during the 2023 period. Teal accounted for nearly 100% of Enterprise revenues during the 2023 period.

~~Cost of Goods Sold~~

~~Cost of Goods totaled $3,004,032 in the 2023 period compared to $1,516,970 in~~ the 2022 period representing an increase of ~~$1,487,062,~~$92,545, or ~~98%. The increase directly related to higher revenues which increased by 67% in the 2023 period compared to the 2022 period.~~

~~Gross Margin~~

Gross margin totaled $102,612 during the three months ended January 31, 2023 compared to $339,781 during the three months ended January 31, 2022, representing a decrease of $237,169, or approximately 70%more than 100%. On a percentage basis, gross margin was 3%10.0% during the 2023 period compared to ~~18%~~7.3% during the 2022 period. The percentage basis ~~decrease primarily related to Teal which realized lower margins~~increase in gross margin in the 2023 period was primarily related to ~~the launch~~lower relative labor costs as recently hired manufacturing operators replaced higher compensated engineers in performing many production activities. Our manufacturing facility is presently producing drones at a lower level than it is designed for, and these lower production levels, combined with higher overhead costs, continue to result in lower than targeted gross margins. As production levels increase, our fixed overhead costs, including labor, will be allocated to a greater number of ~~the Teal 2~~drones which will drive our per-drone production costs lower and ~~corresponding disposal of obsolete inventory used exclusively for the Golden Eagle.~~increase gross margins.

Operating Expenses

Operations ~~expense~~expenses totaled ~~$815,170~~$707,903 during the 2023 period compared to ~~$334,278~~$886,303 during the 2022 period, resulting in ~~an increase~~a decrease of ~~$480,892,~~$178,400, or ~~greater than 100%~~20%. ~~Approximately 98% of the increase, or $469,212,~~This decrease is primarily due to lower payroll costs, controlled spending on manufacturing supplies, and lower office expenses related to Teal which was acquired on August 31, 2021. Since acquiring Teal, we have more than tripled its headcount and expanded its facilities. Approximately 45% of Teal's costs related to payroll, 16% to employee-related office expenses, 21% to professional fees withfewer new hires in the ~~balance spread ratably across numerous categories including travel, meals, overhead, and information technology.~~2023 period.

Research and development expenses totaled ~~$1,302,008~~$1,138,127 during the three months ended ~~January~~July 31, 2023 compared to ~~$811,288~~$449,964 during the three months ended ~~January~~July 31, 2022, representing an increase of ~~490,720,~~$688,163, or ~~60%. Substantially all~~more than 100% Payroll expense totaled $699,385 in the 2023 period compared to $316,223 in the 2022 period. This increase of $383,162, or more than 100%, primarily related to increased efforts in developing new products and represented 58% of the total increase in research and development costs. Higher professional services fees and increased office costs represented 22% and 16% of the increase, related to Teal which was acquired on August 31, 2021. Since acquiring Teal, we have more than tripled its headcount and expanded its facilities. Approximately 24% of Teal's expenses related to payroll with 36% related to office, and 32% related to professional fees.respectively.

Sales and marketing costs totaled ~~$1,208,037~~$986,908 during the 2023 period compared to ~~$238,624~~$406,953 during the 2022 period, representing an increase of $579,955 or more than 100%. Headcount for sales, customer service, and marketing totaled 11 at the end of the 2023 period compared to 5 at the end of the 2022 period, resulting in ~~an increase~~total payroll expense of ~~$969,413, or greater than 100%. Payroll costs totaled $417,810~~$428,464 in the 2023 period compared to ~~$164,326 resulting~~$187,732 in anthe 2022 period. This increase of ~~$253,484 which~~$240,732, or more than 100%, represented ~~26%~~42% of the total increase in sales and marketing costs. ~~Advertising~~Higher office and ~~Show Production~~travel-related expenses represented 32% and 19% of the increase, respectively.

General and administrative expenses totaled ~~$348,508~~$1,443,156 during the three months ended July 31, 2023 compared to $1,062,404 during the three months ended July 31, 2022, representing an increase of $380,752 or 36%. Higher costs at the corporate level represented 57% of the increase. Corporate includes executive compensation and other administrative costs associated with operating a publicly traded company including departments such as finance, human resources, and administration. Other significant costs include professional services fees (legal, audit, and board compensation), Nasdaq listing fees and filing costs, and corporate insurance. Specific increases in costs included payroll which totaled $534,764 in the 2023 period compared to $61,978 resulting in an increase of $286,530 which represented 30% of the total increase. Professional Fees totaled $280,061 in the 2023 period compared to $6,642 resulting in an increase of $273,419 which represented 28% of the total increase.

General and administrative expenses totaled $1,514,504 during the three months ended January 31, 2023 compared to $1,337,183 during the three months ended January 31, 2022, representing an increase of $177,321, or 13%. Payroll costs totaled $515,883 in the 2023 period compared to $410,640$353,135 in the 2022 period resulting in an increase of ~~$105,243~~$181,629 or ~~59%~~48% of the total increase in general and administrative expenses. Legal and lobbying services costs ~~increased by $121,381~~totaled $281,587 in the 2023 period compared to $89,739, representing ~~68%~~an increase of $191,848, or 50% of the total increase.

During the three months ended ~~January~~July 31, 2023, we incurred stock-based compensation costs of ~~$788,691~~$911,606 compared to ~~$782,123~~$755,471 in the 2022 period, resulting in an increase of ~~6,568~~$156,135 or 1%21%. Since the 2022 period, the Company ~~has~~ issued ~~623,000~~3,900,542 additional options and 298,643 additional RSUs which resulted in incremental ~~stock based~~stock-based compensation costs of ~~$99,706~~$442,639 and $93,749, respectively. This increase was partially offset by an RSU award that fully vested since the 2022 period, resulting in ~~the 2023 period. In addition, costs related to restricted stock awards~~decremental stock-based compensation expense of $336,252.

Other (Income) Expense

Other expense totaled ~~$370,634~~$554,740 during the 2023 period compared to ~~$313,925~~$113,227 during the 2022 period, representing an increase of ~~$56,709,~~$441,513 or ~~18%~~greater than 100%.

~~Other Income~~

~~Other~~ This increase in other expense was primarily related to higher depreciation and amortization expense which totaled ~~$140,204~~$101,001 and $217,368, respectively, during the 2023 period compared to ~~other income of $598,898~~$28,272 and $56,160, respectively during the 2022 period ~~representing~~resulting in an increase of ~~$739,102, which~~$72,729 and $161,208, respectively, collectively representing 53% of the total increase in other expense. Higher depreciation expense related to approximately $2 million in capital expenditures since the 2022 period, primarily related to the ~~change~~construction of the new manufacturing facility in Salt Lake City, Utah. Higher amortization expense related to amortization of intangible assets acquired through acquisitions, especially Teal.

Investment income totaled $130,296 during the three months ended July 31, 2022 compared to an investment loss of $239,490 during the three months ended July 31, 2023. During the 2023 period, the Company sold certain investment grade securities in order to fund operations. The fair value of ~~derivative liability.~~these securities had been adversely impacted by the sharp increase in interest rates since the securities were acquired. Changes in the fair value of the derivative liability ~~are most significantly impacted by changes in the Company's stock price. A decrease in the stock price during both the 2023 and 2022 periods~~ resulted in ~~a decrease in the carrying value~~an expense of ~~the liability, and therefore, the recognition of income. Income of $157,575 was recognized~~$92,922 during the ~~2023~~2022 period compared to income of ~~$1,026,466~~$26,520 during the 2023 period, representing a net beneficial difference of $119,442.

Net Loss from Continuing Operations

Net loss from continuing operations totaled $5,567,775 for the three months ended July 31, 2023, compared to $3,592,202 for the three months ended July 31, 2022, resulting in an increase of $1,975,573 or 55%. Total operating expenses totaled $5,187,700, or 93% of net loss from continuing operations. Higher operating expenses represented 82% of the total increase in the net loss and were driven by an increase in headcount from 63 at the end of the 2022 period to 74 at the end of the 2023 period which was an increase of 17%. Other expenses totaled $554,740 during the three months ended July 31, 2023, compared to $113,227 for the three months ended July 31, 2022, representing an increase of $441,513, or more than 100%. The increase in other expenses represented 22% of the total increase in the net loss and were driven by a $369,786 decrease in investment income as the Company was forced to sell certain investment grade securities at a loss which were adversely impacted by a sharp increase in interest rates.

Results of Discontinued Operations

Revenue from discontinued operations totaled $1,869,219 for the three months ended July 31, 2023, compared to $1,942,720 for the three months ended July 31, 2022, representing a decrease of $73,501 or 4%. During the 2023 period, Rotor Riot generated revenues totaling $1,243,907 compared to $888,419 during the 2022 period, representing an increase of $355,488 or 40%. During the 2023 period, Rotor Riot’s higher revenues were generated by a significant increase in digital marketing spending. During the 2023 period, Fat Shark generated revenues totaling $625,312 compared to $1,054,301 during the 2022 period, representing a decrease of ~~$868,891.~~

$428,989 or 41%. Lower revenues for the 2023 period related to its newest product, the Dominator, which was launched at the beginning of Fiscal 2023, and while it generated strong initial sales in the first quarter, sales declined significantly since the 2022 period.

3026

~~Net Loss~~

~~Net Loss~~Gross margin from discontinued operations totaled $5,666,002 during the three months ended January 31, 2023 compared to $2,564,817 during the three months ended January 31, 2022, representing an increase of $3,101,185, or greater than 100%. The acquisition of Teal Drones on August 31, 2021 accounted for the majority of the increase. Since acquiring Teal, we have more than tripled its headcount and significantly expanded its facilities. Net loss for Teal$484,103 during the 2023 period ~~totaled $2,901,938~~ compared to ~~$781,233 for~~$275,507 during the 2022 period representing an increase of ~~$2,120,705,~~$208,596, or ~~greater than 100%~~76%. ~~The higher net loss for Teal represented 68% of the increase in the consolidated net loss.~~

~~Nine Months Ended January 31, 2023 and January 31, 2022~~

~~Revenues~~

Revenues during the nine months ended January 31, 2023 (or the "2023 period") totaled $7,706,377 compared to $5,116,741 for the nine months ended January 31, 2022 (or the "2022 period"), representing an increase of $2,589,636, or 51%. Consumer revenues totaled $4,164,531On a percentage basis, gross margin from discontinued operations was 26% during the 2023 period compared to ~~$3,737,460~~14% during the 2022 period. The percentage basis increase in gross margin in the 2023 period primarily related to successful efforts to reduce tariff expenses for Rotor Riot’s inventory purchases.

Operating expenses totaled $703.939 during the 2023 period compared to $495.028 during the 2022 period, resulting in an increase of ~~$427,071,~~$208,911, or 11%. Fat Shark revenues totaled $1,703,045 during the 2023 period compared to $2,228,552 during the 2022 period, resulting in a decrease of $525,507, or 24%. Enterprise revenues totaled $3,541,846 during the 2023 period compared to $1,379,281 during the 2022 period, resulting in an increase of $2,162,565, or greater than 100%42%. This increase is primarily ~~related~~due to ~~Teal, which launched its latest product, the Teal 2, during the 2023 period. Teal accounted for 95% of Enterprise revenues during~~increased advertising expenses in the 2023 period.

~~Cost of Goods Sold~~

~~Cost of Goods~~Net loss from discontinued operations totaled ~~$7,012,483 in~~$242,573 for the 2023 period compared to $4,521,974 in the 2022 period, representing an increase of $2,490,509, or 55%. The increase directly related to higher revenues which increased by 51% in the 2023 period compared to the 2022 period.

~~Gross Margin~~

~~Gross margin totaled $693,894 during the nine~~three months ended ~~January~~July 31, 2023, compared to ~~$594,767 during~~$219,397 for the ~~nine~~three months ended ~~January~~July 31, 2022, representing an increase of ~~$99,127,~~$23,176, or ~~17%~~11%. On a percentage basis, gross margin was 9% during the 2023 period compared to 12% during the 2022 period. The percentage basis decrease primarily related to Teal which realized lower margins in the 2023 period related to the launch of the Teal 2 and corresponding disposal of obsolete inventory used exclusively for the Golden Eagle. This obsolete inventory decreased gross margin for Teal from 8% in the 2022 period to 2% in the 2023 period. The percentage basis decrease was partially offset by Fat Shark which realized higher margins in the 2023 period related to the launch of its Dominator goggles compared to the 2022 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 2% in the 2022 period to 15% in the 2023 period.

~~Operating Expenses~~

Operations expense totaled $3,616,129 during the 2023 period compared to $794,390 during the 2022 period, resulting in an increase of $2,821,739, or greater than 100%. Approximately 94% of the increase, or $2,645,431, related to Teal which was acquired on August 31, 2021. Since its acquisition, we have more than tripled Teal's headcount and doubled the size of its facilities. Approximately 48% of Teal's costs related to payroll, 22% to employee-related office expenses, and 11% to overhead expenses with the balance spread ratably across numerous categories including information technology, facilities, professional fees, and travel.

Research and development expenses totaled $3,189,692 during the nine months ended January 31, 2023 compared to $1,548,983 during the nine months ended January 31, 2022, representing an increase of $1,640,709, or greater than 100%. The entire increase can be attributed to Teal, with approximately 41% its expenses related to payroll, 30% related to office, and 23% related to professional fees.

Sales and marketing costs totaled $2,542,037 during the 2023 period compared to $524,642 during the 2022 period, resulting in an increase of $2,017,395 or almost four times. Payroll costs, related to hiring at Teal, totaled $553,972 in the 2023 period compared to $19,993 during the 2022 period, resulting in an increase of $533,979 which represented 26% of the total increase in sales and marketing costs. Travel and related costs totaled $369,901 in the 2023 period compared to $2,356 resulting in an increase of $367,545 which represented 18% of the total increase. In addition, higher advertising and show production costs represented 22% of the increase while professional fees accounted for 19%.

General and administrative expenses totaled $4,551,706 during the nine months ended January 31, 2023 compared to $3,264,071 during the nine months ended January 31, 2022, representing an increase of $1,287,635, or 39%. Payroll costs totaled $1,638,765 in the 2023 period compared to $820,027 in the 2022 period resulting in an increase of $818,738 or 64% of the total increase in general and administrative expenses. Legal and lobbying services costs increased by $388,204 representing 30% of the total increase.

During the nine months ended January 31, 2023, we incurred stock-based compensation costs of $2,790,958 compared to $2,066,146 in the 2022 period, resulting in an increase of $724,812 or 35%. Since the 2022 period, the Company has issued 623,000 additional options which resulted in incremental stock-based compensation costs of $192,128 in the 2023 period. In addition, costs related to restricted stock awards totaled $1,482,190 during the 2023 period compared to $1,092,127 during the 2022 period, resulting in an increase of $390,063 or 54% of the total increase in stock-based compensation costs.

~~Other Income~~

Other income totaled $274,550 during the 2023 period compared to $740,275 during the 2022 period, representing a decrease of $465,725, which primarily related to the change in fair value of derivative liability. Changes in the fair value of the derivative liability are most significantly impacted by changes in the Company's stock price. A decrease in the stock price during both the 2023 and 2022 periods resulted in a decrease in the carrying value of the liability, and therefore, the recognition of income. Income of $751,397 was recognized during the 2023 period compared to income of $1,299,527 during the 2022 period, representing a decrease of $548,130.

~~Net Loss~~

Net Loss totaled $15,722,078 during the nine months ended January 31, 2023 compared to $6,863,190 during the nine months ended January 31, 2022, representing an increase of $8,858,888, or greater than 100%. The acquisition of Teal Drones in August 2021 accounted for the majority of the increase. Since acquiring Teal, we have more than tripled its headcount and significantly expanded its facilities. Net loss for Teal during the 2023 period totaled $7,497,605 compared to $1,222,351 for the 2022 period, representing an increase of $6,275,254, or almost five times. The higher net loss for Teal represented 71% of the increase in the consolidated net loss.

Cash Flows

Operating Activities

Net cash used in operating activities was ~~$21,394,858~~$6,926,069 during the ~~nine~~three months ended ~~January~~July 31, 2023, compared to net cash used in operating activities of ~~$12,039,115~~$3,814,762 during the ~~nine~~three months ended ~~January~~July 31, 2022, representing an increase of ~~$9,355,743,~~$3,111,307 or ~~78%~~82%. Net cash used in operations, net of non-cash expenses, ~~totaling $2,752,691, equaled $12,969,387 in~~totaled $4,071,684 during the three months ended July 31, 2023, ~~period~~ compared to ~~$5,779,305, net of non-cash expenses totaling $1,083,885 in~~$2,648,702 during the three months ended July 31, 2022, ~~period,~~ resulting in an increase of ~~$7,190,082,~~$1,422,982, or ~~greater than 100%~~54%. The higher use of cash primarily related to the ~~acquisition~~expansion of the Teal Drones operations since its acquisition in August ~~2021 which resulted in a full nine months~~2021. Headcount at Teal increased from 47 at the end of ~~operations in~~the 2022 period to 60 at the end of the 2023 period ~~compared to five months~~which was an increase of ~~operations in the 2022 period.~~28%. Net cash used related to changes in operating assets and liabilities totaled ~~$8,425,471~~$2,854,385 during the ~~nine~~three months ended ~~January~~July 31, 2023, compared to ~~$6,259,810~~$1,166,060 during the ~~nine~~three months ended ~~January~~July 31, 2022, representing an increase of ~~$2,165,661~~$1,688,325 or ~~35%~~more than 100%. Changes in operating assets and liabilities can fluctuate significantly from period to period depending upon the timing and level of multiple factors, including inventory purchases and vendor payments. Net payments related to inventory, including deposits, totaled $1,804,886 in the 2023 period compared to $227,516 in the 2022 period, representing an increase of $1,577,370, or more than 100%. This increase represented 93% of the total increase in operating assets and liabilities.

Investing Activities

Net cash provided by investing activities was ~~$22,296,235~~$4,883,345 during the ~~nine~~three months ended ~~January~~July 31, 2023, compared to net cash provided by investing activities of $7,659,707 during the three months ended July 31, 2022 resulting in a decrease of $2,776,362 or 36%. During the 2023 period, proceeds of $4,888,399 from the sale of marketable securities were used to fund operations. During the 2022 period, proceeds from the sale of marketable securities, net of purchases of marketable securities, totaled $8,204,649. During the 2023 period, the Company was spending the proceeds from the 2022 period stock offerings to support operations for the full year, whereas in the 2022 period the proceeds from the stock offerings were invested in marketable securities and also used to support operations for the second half of the 2022 period.

Financing Activities

Net cash used in financing activities totaled $146,509 during the three months ended July 31, 2023, compared to net cash used in investing activities of $48,514,017 during the nine months ended January 31, 2022 resulting in an increase of $70,810,252 or greater than 100%. During the 2023 period, net proceeds of $24,282,117 from the maturities of marketable securities were used to fund operations, and $1,735,882 was used to purchase property and equipment, primarily related to the expansion of the manufacturing facilities for Teal. During the 2022 period, $54,696,624 of proceeds from stock offerings were invested in marketable securities.

~~Financing Activities~~

~~Net cash used in financing activities totaled $1,093,030 during the nine months ended January 31, 2023, compared to net cash provided by~~ financing activities of ~~$67,387,312~~$685,281 during the ~~nine~~three months ended ~~January~~July 31, 2022. 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~~2023 period, the Company ~~received net proceeds~~made payments of ~~approximately $70 million~~$8,520 related to payroll taxes on equity awards compared to payments of $469,631 during the 2022 period, resulting in ~~connection with two offerings~~a decrease of ~~common stock.~~$461,111. This decrease represented 86% of the total decrease. The lower payments related to lower equity award vesting in the 2023 period compared to the 2022 period.

Liquidity and Capital Resources

At ~~January~~July 31, 2023, the Company reported current assets totaling ~~$40,527,873~~$26,523,312, current liabilities totaling ~~$5,140,218~~$3,577,912 and net working capital of ~~$35,387,655.~~$22,945,400. Cash and marketable securities totaled ~~$24,623,195~~$8,875,169 at ~~January~~July 31, 2023. Inventory related balances, including pre-paid inventory, totaled ~~$12,602,568.~~$15,508,659. We continue to maintain higher-than-normal inventory balances related to the global supply chain issues, including chip shortages, which continue to impact the timing of our purchase decisions.

Going Concern

The Company has never been profitable, and its net losses have been ~~ongoing for more than a year. At January~~increasing related to acquisitions, as well as costs incurred to pursue its long-term growth strategy. During the three months ended July 31, 2023, the Company ~~was~~incurred net losses of $5,567,775 from continuing operations and $242,573 from discontinued operations and used cash in ~~a strong liquidity~~operating activities of $6,926,069 from continuing operations and ~~capital position relative to its operating results for the quarter ended January~~$356,109 from discontinued operations. As of July 31, 2023, the Company has working capital of $22,945,400. While the Company has historically been successful in raising capital to meet its working capital requirements, the ability to continue raising such capital to enable the Company to continue its growth is not guaranteed. Therefore, there is substantial doubt about the Company’s ability to continue as a going concern as the Company will require additional liquidity to continue its operations and meet its ~~expected cash requirements~~financial obligations for twelve months from the ~~next twelve months.~~date these consolidated financial statements are issued.

~~Going Concern~~

~~We only began generating revenues in January 2020 and have reported net losses since inception. We expect to report net losses for at least~~If the next twelve months. To date, we have funded our operations through debt and equity transactions. In May and July 2021, we completed common stock offerings which generated gross proceeds of approximately $70 million. At January 31, 2023, we reported cash and investment balances of approximately $24.6 million. We expect these financial resources to be sufficient to fund our operations for at least the next twelve months. However, we can provide no assurance that these financial resources will be sufficient to fund our operations until we reach profitability. If we areCompany is unable ~~to become profitable before expending our current financial resources, we will need~~ to raise additional capital, ~~through equity~~there is a risk that the Company could default on its financial obligations and could be required to discontinue or ~~debt transactions. We can provide no assurance~~significantly reduce the scope of its operations. The consolidated financial statements do not include any adjustments relating to the recoverability and classification of recorded asset amounts, or the amount and classification of liabilities or any other adjustment that ~~such additional financing, if required, will~~might 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 maynecessary should the Company 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 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, 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, (iii) accounting for derivatives, and (iv) reserves and allowances related to accounts receivable and inventory.

Goodwill and Long-lived Assets – Goodwill represents the future economic benefit arising from other assets acquired in an acquisition that are not individually identified and separately recognized. We test goodwill for impairment in accordance with the provisions of ASC 350, Intangibles – Goodwill and Other, (“ASC 350”). Goodwill is tested for impairment at least annually at the reporting unit level or whenever events or changes in circumstances indicate that goodwill might be impaired. ASC 350 provides that an entity has the option to first assess qualitative factors to determine whether the existence of events or circumstances leads to a determination that it is more likely than not that the fair value of a reporting unit is less than its carrying amount. If, after assessing the totality of events or circumstances, an entity determines it is not more likely than not that the fair value of a reporting unit is less than its carrying amount, then additional impairment testing is not required. However, if an entity concludes otherwise, then it is required to perform an impairment test. The impairment test involves comparing the estimated fair value of a reporting unit with its book value, including goodwill. If the estimated fair value exceeds book value, goodwill is considered not to be impaired. If, however, the fair value of the reporting unit is less than book value, then an impairment loss is recognized in an amount equal to the amount that the book value of the reporting unit exceeds its fair value, not to exceed the total amount of goodwill allocated to the reporting unit.

The estimate of fair value of a reporting unit is computed using either an income approach, a market approach, or a combination of both. Under the income approach, we utilize the discounted cash flow method to estimate the fair value of a reporting unit. Significant assumptions inherent in estimating the fair values include the estimated future cash flows, growth assumptions for future revenues (including gross margin, operating expenses, and capital expenditures), and a rate used to discount estimated future cash flow projections to their present value based on estimated weighted average cost of capital (i.e., the selected discount rate). Our assumptions our based on historical data, supplemented by current and anticipated market conditions, estimated growth rates, and management’s plans. Under the market approach, fair value is derived from metrics of publicly traded companies or historically completed transactions of comparable businesses. The selection of comparable businesses is based on the markets in which the reporting units operate and consider risk profiles, size, geography, and diversity of products and services.

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 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 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.

Financial Instruments

Derivative Liabilities

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. The valuation is updated each reporting date with the change in the liability reflected as a change in derivative liability in the statement of operations.

Off-Balance Sheet Arrangements

We have no off-balance sheet arrangements.

Recently Issued Accounting Pronouncements

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

ITEM 3. QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISK

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

ITEM 4. CONTROLS AND PROCEDURES

~~Evaluation of~~ Disclosure Controls and ~~Procedures~~Procedures.

~~Disclosure~~Our management, with the participation of our CEO and CFO, has evaluated the effectiveness of the Company’s disclosure controls and procedures, ~~are~~as defined in Rule 13a-15(e) and 15d-15(e) of the Exchange Act, as of July 31, 2023.

The term “disclosure controls and procedures” as defined in Rules 13a-15(e) and 15d-15(e) means controls and other procedures of the Company that are designed to ensure that information required to be disclosed by a company in ~~our~~ reports, ~~filed~~such as this report, that it files or submits under the Exchange Act is recorded, processed, summarized and reported within the time periods specified in the ~~SEC's rules.~~SEC rules and forms. Disclosure controls and procedures include, without limitation, controls and procedures designed to ensure that information required to be disclosed by ~~our~~a company in the reports that it files or submits under the Exchange Act is accumulated and communicated to ~~our~~the company’s 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 disclosureManagement recognizes that any controls and procedures, ~~pursuant to Rules 13a-15(e)~~no matter how well designed and ~~15d-15(e) under~~operated, can provide only reasonable assurance of achieving their objectives, and management necessarily applies its judgment in evaluating the ~~Exchange Act.~~ cost-benefit relationship of possible controls and procedures.

Based ~~upon~~on that evaluation, our ~~Principal Executive Officer~~CEO and ~~Principal Financial Officer have~~CFO concluded that our disclosure controls and procedures were effective as of ~~January~~July 31, 2023.

Changes inIn Internal Control ~~over~~Over Financial ~~Reporting~~Reporting.

~~During the period covered by this report, there~~There were no changes in our internal ~~controls~~control over financial reporting (as defined in Rule 13a-15(f) of the Exchange Act) that occurred during the three months ended July 31, 2023 that have materially affected, or are reasonably likely to materially affect, our internal control over financial reporting.

PART II - OTHER INFORMATION

ITEM 1. LEGAL PROCEEDINGS

~~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) and on September 15, 2022 filed a First Amended Complaint naming our subsidiary’s former director Benjamin Lambert as an additional defendant. The complaint asserts claims for breach of contract and unlawful conversion and sale of shares of common stock that plaintiff alleges to have purchased. The Complaint also alleges breach of fiduciary duty and seeks in excess of $1 million in damages. In connection with the action the Company believes it has a right to indemnification and has notified the sellers of Teal of its intention to pursue indemnification claims under the Teal acquisition agreement and escrow.

On December 5, 2022 the Company and Teal filed a First Amended Complaint in an action brought against Autonodyne LLC and its founder Daniel Schwinn in the Court of Chancery of the State of Delaware alleging, among other things, breach of an exclusive license agreement by Autonodyne, LLC dated May 23, 2022 and tortious interference by Mr. Schwinn. ~~Red Cat Holdings, Inc. and Teal Drones, Inc. v. Autonodyne LLC and Daniel Schwinn~~ ~~(No. 2022-0878-NAC). Defendants filed a motion to dismiss which is pending.~~None.

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.~~information required by this Item. Our most recent risk factor disclosures may be ~~review~~reviewed in our Annual Report on Form 10-K for the year ended April 30, ~~2022,~~2023, as filed with the SEC on July 27, ~~2022.~~2023.

ITEM 2. ~~RECENT~~ UNREGISTERED SALES OF EQUITY SECURITIES, ~~AND~~ USE OF PROCEEDS, AND ISSUER PURCHASES OF EQUITY SECURITIES

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.None.

ITEM 3. DEFAULTS UPON SENIOR SECURITIES

None.

~~None.~~

ITEM 4. MINE SAFETY DISCLOSURES

Not applicable

ITEM 5. OTHER INFORMATION

Rule 10b5-1 Trading Plans

~~None.~~During the fiscal quarter ended July 31, 2023, none of the Company’s directors or executive officers adopted or terminated any contract, instruction or written plan for the purchase or sale of Company securities that was intended to satisfy the affirmative defense conditions of Rule 10b5-1(c) or any “non-Rule 10b5-1 trading arrangement.”

ITEM 6. EXHIBITS

Exhibit		Description
~~31.1~~10.1		First Amendment to Executive Employment Agreement with Jeffrey Thompson (incorporated by reference to Exhibit 10.1 to the Company’s Current Report on Form 8-K filed with the Securities and Exchange Commission on May 22, 2023)
10.2		First Amendment to Executive Employment Agreement with Allan Evans (incorporated by reference to Exhibit 10.2 to the Company’s Current Report on Form 8-K filed with the Securities and Exchange Commission on May 22, 2023)
10.3		Amendment No. 2 to Share Purchase Agreement Amendment dated March 31, 2023 (incorporated by reference to Exhibit 10.1 to the Company’s Current Report on Form 8-K filed with the Securities and Exchange Commission on July 14, 2023)
10.4		Form of Registration Rights Agreement (incorporated by reference to Exhibit 10.2 to the Company’s Current Report on Form 8-K filed with the Securities and Exchange Commission on July 14, 2023)
10.5*		Addendum to Executive Employment Agreement with Joseph Hernon
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~~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~~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~~101.INS*		Inline XBRL Instance Document (the instance document does not appear in the Interactive Data File because its XBRL tags are embedded within the Inline XBRL document)
~~101.SCH~~101.SCH*		Inline XBRL Taxonomy Extension Schema Document
~~101.CAL~~101.CAL*		Inline XBRL Taxonomy Extension Calculation Linkbase Document
~~101.DEF~~101.DEF*		Inline XBRL Taxonomy Extension Definition Linkbase Document
~~101.LAB~~101.LAB*		Inline XBRL Taxonomy Extension ~~Label~~Labels Linkbase Document
~~101.PRE~~101.PRE*		Inline XBRL Taxonomy Extension Presentation Linkbase Document
104*	Cover Page Interactive Data File (formatted as inline XBRL and contained in Exhibit 101)

~~-------~~

Filed herewith.

This certification is deemed not filed for purposes of Section 18 of the Exchange Act, or otherwise subject to the liability of that section, nor shall it be deemed incorporated by reference into any filing under the Securities Act.

~~SIGNATURES~~

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 7,~~September 19, 2023		Red Cat Holdings, Inc. By: /s/ Jeffrey Thompson Jeffrey Thompson Chief Executive Officer (Principal Executive Officer)

Date: ~~March 7,~~September 19, 2023		By: /s/ Joseph P. Hernon
		Joseph Hernon Chief Financial Officer (Principal Financial and Accounting Officer)

3632

PART I.	FINANCIAL INFORMATION	Page

Item 1.	Financial Statements (unaudited)	3
~~Item 1.~~	~~Financial Statements:~~	3

	~~Unaudited~~Consolidated Balance Sheets as of ~~January~~July 31, 2023 and April 30, ~~2022~~2023	3
	3

	~~Unaudited~~Consolidated Statements of Operations for the Three ~~and Nine~~ Months Ended ~~January~~July 31, 2023 and 2022	4
	4

	~~Unaudited~~Consolidated Statements ~~of Changes in Shareholders'~~Stockholders' Equity for the Three ~~and Nine~~ Months Ended ~~January~~July 31, 2023 and 2022	5
	5

	~~Unaudited~~Consolidated Statements of Cash Flows for the ~~Nine~~Three Months Ended ~~January~~July 31, 2023 and 2022	76

	Notes to Consolidated Financial Statements	7
	8

Item 2.	Management's Discussion and Analysis of Financial Condition and Results of Operations	24
	28

Item 3.	Quantitative and Qualitative Disclosures about Market Risk	30
	34

Item 4.	Controls and Procedures	3430

	January 31,			April 30,
	2023			2022
ASSETS
Current assets
Cash	$	3,893,162		$	4,084,815
Marketable securities		20,730,033			44,790,369
Accounts receivable, net		2,063,872			495,506
Inventory		9,294,253			3,895,870
Other		4,546,553			2,354,884
Due from related party		—			31,853
Total current assets		40,527,873			55,653,297

Goodwill		19,839,750			25,138,750
Intangible assets, net		7,560,374			2,698,531
Property and equipment, net		2,077,824			511,690
Other		307,033			57,033
Operating lease right-of-use assets		779,734			1,019,324
Total long term assets		30,564,715			29,425,328

TOTAL ASSETS	$	71,092,588		$	85,078,625

LIABILITIES AND STOCKHOLDERS' EQUITY
Current liabilities
Accounts payable	$	2,444,962		$	1,018,747
Accrued expenses		392,457			1,084,494
Debt obligations - short term		908,746			956,897
Due to related party		—			40,057
Customer deposits		219,148			437,930
Operating lease liabilities		318,805			293,799
Warrant derivative liability		856,100			1,607,497
Total current liabilities		5,140,218			5,439,421

Operating lease liabilities		509,468			749,825
Debt obligations - long term		549,935			973,707
Total long term liabilities		1,059,403			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 54,385,461 and 53,748,735		54,385			53,749
Additional paid-in capital		109,191,895			106,821,384
Accumulated deficit		(43,221,134	)		(27,499,056	)
Accumulated other comprehensive income		(1,142,046	)		(1,470,272	)
Total stockholders' equity		64,892,967			77,915,672
TOTAL LIABILITIES AND STOCKHOLDERS' EQUITY	$	71,092,588		$	85,078,625

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

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

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

Assets acquired
Cash		11,364
Accounts receivable		47,964
Other current assets		15,085
Other assets		48,595
Inventory		1,253,755
Brand name		1,430,000
Proprietary technology		3,869,000
Total assets acquired		6,675,763
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		1,015,780
Goodwill	$	8,995,499


	Nine months ended January 31, 2022
	Red Cat			Teal			Consolidated
Revenues	$	5,116,741		$	416,063		$	5,532,804

Net Loss		(6,863,190	)		(1,467,770	)		(8,330,960	)

	Cost		Unrealized Gains (Losses)			Fair Value
Asset-backed securities	$	924,509	$	(14,218	)	$	910,291
Corporate bonds		20,951,812		(1,132,070	)		19,819,742
Total	$	21,876,321	$	(1,146,288	)	$	20,730,033

	One Year or Less		One to Three Years		Three to Five Years		Total
Asset-backed securities	$	—	$	910,291	$	—	$	910,291
Corporate bonds		6,494,035		12,744,060		581,647		19,819,742
Total	$	6,494,035	$	13,654,351	$	581,647	$	20,730,033

	Level 1		Level 2		Level 3		Total
Asset-backed securities	$	—	$	910,291	$	—	$	910,291
Corporate bonds		—		19,819,742		—		19,819,742
Total	$	—	$	20,730,033	$	—	$	20,730,033

Fiscal Year Ended:
	2023	$	217,371
	2024		866,805
	2025		842,471
	2026		815,271
	2027		786,679
	Thereafter		859,777
	Total	$	4,388,374

Fiscal Year Ended:
	2023	$	99,662
	2024		403,878
	2025		304,676
	2026		76,619
	2027		79,300
	Thereafter		6,627
	Total	$	970,762

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

Fiscal 2023	$	484,974
Fiscal 2024		572,139
Fiscal 2025		401,568
Total	$	1,458,681
Short term – through January 31, 2024	$	908,746
Long term – thereafter	$	549,935

		Upon Issuance				Outstanding at January 31, 2022
Date of Transaction		Number of Warrants		Initial Fair Value		Number of Warrants		Fair Value
	October 2020		399,998	$	267,999		266,666	$	273,196
	January 2021		675,000	$	2,870,666		540,000	$	582,904


	Three months ended January 31,				Nine months ended January 31,
	2023		2022		2023		2022
Operations	$	181,908	$	182,320	$	566,218	$	556,928
Research and development		170,579		143,279		524,874		284,511
Sales and marketing		120,733		112,975		390,076		271,808
General and administrative		315,471		343,549		1,309,790		952,899
Total	$	788,691	$	782,123	$	2,790,958	$	2,066,146


	As of January 31, 2023
	Enterprise		Consumer		Corporate		Total
Accounts receivable, net	$	2,054,022	$	9,850	$	—	$	2,063,872
Inventory, net		6,456,158		2,838,095		—		9,294,253
Inventory deposits	$	712,104	$	2,596,211	$	—	$	3,308,315