Red Cat Holdings, Inc. (RCAT)

ITEM 7. MANAGEMENT'S
DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS

The following discussion
should be read in conjunction with our audited consolidated financial statements and related notes and other financial data included
elsewhere in this Annual Report on Form 10-K. In addition to our historical consolidated financial information, the following discussion
contains forward-looking statements that reflect our plans, estimates, and beliefs. Our actual results could differ materially from those
discussed in the forward-looking statements. For more information regarding forward-looking statements, please refer to the discussion
above under the heading “Forward-Looking Statements.”

Recent Developments

Corporate developments
during the two years ended April 30, 2024 include:

Capital
Transactions

During
the first quarter of fiscal 2022, the Company completed two firm commitment underwritten public offerings with ThinkEquity, a division
of Fordham Financial Management. The first offering, in May 2021, generated gross and net proceeds of $16 and $14.6 million, respectively.
The second offering, in July 2021, generated gross and net proceeds of $60 and $55.5 million, respectively.

On
December 11, 2023, the Company completed a firm commitment underwritten public offering with ThinkEquity of 18,400,000 shares of common
stock which generated gross and net proceeds of $9.2 and $8.4 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:

Following the Teal
acquisition in August 2021, we concentrated on integrating and organizing these businesses. Effective May 1, 2022, we established the
Enterprise segment and the Consumer segment to focus on the unique opportunities in each sector. The Enterprise segment’s initial
strategy was to provide UAVs to commercial enterprises, and the military, to navigate dangerous military environments and confined industrial
and commercial interior spaces. Subsequently, the segment narrowed its near-term attention on the military and other government agencies.
Skypersonic's technology has been redirected to military applications and its operations consolidated into Teal.

The Enterprise segment’s
current business strategy is focused on providing integrated robotic hardware and software for use across a variety of applications.
Its solutions provide critical situational awareness and actionable intelligence to on-the-ground warfighters and battlefield commanders
as well as firefighters and public safety officials. Our Enterprise segment’s efforts are centered on developing and scaling an
American made family of systems. We have since completed construction of a manufacturing facility in Salt Lake City and believe that
an increased focus by the United States government and American businesses on purchasing products that are “Made in America”
provide our Enterprise segment with a competitive advantage.

On February 16, 2024,
we closed the sale of our Consumer segment, consisting of Rotor Riot and Fat Shark, to Unusual Machines. The sale reflects our decision
to focus our efforts and capital on defense where we believe there are more opportunities to create long term shareholder value.

Results of Operations

The
analysis of the Company's results of operations for the year ended April 30, 2024 ("Fiscal 2024") compared to the year ended
April 30, 2023 ("Fiscal 2023") includes only the Company’s Enterprise segment as our Consumer segment was divested in
February 2024. At the end of Fiscal 2023, the Company recognized an impairment loss of $2,826,918 related to Skypersonic goodwill which
was written down to zero. In addition, its operations were consolidated into Teal. Skypersonic's operating results represented 0% and
2% of consolidated revenues and operating loss for Fiscal 2024. Based on its immateriality, Skypersonic is not included in the operating
analysis set forth below.

Discussion and
Analysis of Fiscal 2024 compared to Fiscal 2023

Revenues

Consolidated
revenues totaled $17,836,382 during the year ended April 30, 2024 (or the "2024 period") compared to $4,620,834 during the
year ended April 30, 2023 (or the "2023 period") representing an increase of $13,215,548, or 286%. The increase primarily related
to higher product revenue related to the launch of the Teal 2 in April 2023. Product revenue totaled $13,588,372 during the year
ended April 30, 2024 compared to $3,012,470 during the year ended April 30, 2023 representing an increase of $10,575,902, or 351%.
The increase in revenue also partially related to increased contract revenues during the 2024 period. Contract revenues totaled $4,173,005
during the 2024 period compared to $1,312,427 during the 2023 period, representing an increase of $2,860,578, or 218%. Contract
revenues are primarily sourced through government agencies and can fluctuate from period to period based on the timing of award deliverables
and amendments.

Gross Profit

Consolidated
gross profit totaled $3,680,546 during the 2024 period compared to negative $834,311 during the 2023 period representing an increase
of $4,514,857, or 541%. On a percentage basis, gross profit was 21% during the 2024 period compared to negative 18% during the 2023 period.
The percentage basis increase in gross profit in the 2024 period primarily related to obsolete inventory write-offs that occurred during
the 2023 period. Additionally, lower manufacturing levels in the 2023 period resulted in higher relative overhead costs compared to the
2024 period. 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 profits. As production levels increase,
our fixed overhead costs, including labor, are expected to be allocated to a greater number of drones which is expected to drive our
per-drone production costs lower and increase gross profits.

Operating Expenses

Research and development
expenses totaled $5,896,037 during the 2024 period compared to $5,595,281 during the 2023 period, representing an increase of $300,756,
or 5%. Supplies and materials expense totaled $2,017,979 in the 2024 period compared to $1,444,051 in the 2023 period. This increase
of $573,928, or 40%, primarily related to increased efforts in developing new products and represented substantially all of the total
increase in research and development costs.

Sales and marketing
costs totaled $4,568,617 during the 2024 period compared to $3,731,776 during the 2023 period, representing an increase of $836,841 or
22%. The increase was driven by higher payroll expenses to support increased sales efforts of the Teal 2.

General and administrative
expenses totaled $10,679,105 during the 2024 period compared to $12,383,470 during the 2023 period, representing a decrease of $1,704,365
or 14%. The decrease primarily related to lower professional fees.

During the 2024 period,
we incurred stock-based compensation costs of $3,609,267 compared to $3,656,724 in the 2023 period, resulting in a decrease of $47,457
or 1%.

Other Income

Other expense totaled
$3,650,484 during the 2024 period compared to $1,004,887 during the 2023 period, representing a decrease of $2,645,597 or 263%. During
the 2024 period, the divestiture of the Consumer segment resulted in a gain of $9,642,427, impairment of $11,353,875, and an equity method
loss of $503,625. Additionally, during the 2024 period, the Company was awarded a manufacturing modernization grant from the State
of Utah for $750,000 of which $675,000 is attributable to the 2024 period.

Net Loss from Continuing
Operations

Net loss from continuing
operations totaled $21,526,696 for the 2024 period compared to $26,376,643 for the 2023 period, resulting in a decrease of $4,849,947
or 18%. Total operating expenses totaled $21,556,758 for the 2024 period compared to $24,537,445 for the 2023 period. The decrease in
operating expenses was offset by the increase in other expense. Higher gross profit is attributable to the decrease in net loss from
continuing operations.

Results of Discontinued
Operations

Net loss from discontinued
operations totaled $2,525,933 for the 2024 period compared to $1,730,386 for the 2023 period, representing an increase of $795,547, or
46%. Net loss for Fat Shark totaled $1,365,707 for the 2024 period, compared to $543,962 for the 2023 period, representing an increase
of $821,745 or 151%, and represents 103% of the total increase in net loss from discontinued operations. Fat Shark’s results were
adversely impacted by a charge of $1,244,920 during the 2024 period related to the write-off of excess quantities of Dominator inventory
based on sales volumes. Net loss for Rotor Riot totaled $1,160,226 for the 2024 period compared to $1,186,424 for the 2023 period, representing
a decrease of $26,198 or 2%.

Cash Flows

Operating Activities

Net cash used in operating
activities was $17,687,063 during the 2024 period compared to net cash used in operating activities of $24,313,674 during the 2023 period,
representing a decrease of $6,626,611 or 27%. The decreased use of cash primarily related to timing of accounts receivable receipts for
government customers. Net cash used in operations, net of non-cash expenses, totaled $8,512,449 during the 2024 period, compared to $7,784,364
during the 2023 period, resulting in an increase of $728,085, or 9%. Net cash used related to changes in operating assets and liabilities
totaled $4,672,816 during the 2024 period, compared to $5,721,395 during the 2023 period, representing a decrease of $1,048,579 or 18%.
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, vendor payments, and customer collections.

Investing Activities

Net cash provided by investing activities was $13,567,078
during the 2024 period compared to net cash provided by investing activities of $29,590,235 during the 2023 period, resulting in a decrease
of $16,023,157 or 54%. Proceeds of $12,826,217 and $32,290,448 from the sale of marketable securities were used to fund operations during
the 2024 period and the 2023 period, respectively.

Financing Activities

Net cash provided by
financing activities totaled $7,802,076 during the 2024 period compared to net cash used in financing activities of $1,215,325 during
the 2023 period. Financing activities can vary from period to period depending upon market conditions, both at a macro-level and specific
to the Company. During the fiscal 2024 period, the company received net proceeds from issuance of common stock of $8,395,600.

Liquidity and
Capital Resources

At April 30, 2024,
the Company reported current assets totaling $22,397,549, current liabilities totaling $3,651,130 and net working capital of $18,746,419.
Cash totaled $6,067,169 at April 30, 2024. Inventory related balances, including pre-paid inventory, totaled
$8,610,125.

Going Concern

The
Company has never been profitable and has incurred net losses related to acquisitions, as well as costs incurred to pursue its long-term
growth strategy. During the year ended April 30, 2024, the Company incurred a net loss from continuing operations of $21,526,696
and used cash in operating activities of continuing operations of $17,687,063.
As of April 30, 2024, working capital for continuing operations totaled $18,746,419. These
financial results and our financial position at April 30, 2024 raise substantial doubt about our ability to continue as a going
concern. However, the Company has recently taken actions to strengthen its liquidity. On December 11, 2023, we completed a public
offering of 18,400,000 shares of common stock which generated net proceeds of approximately $8,400,000. Subsequent to year end, the Company
sold its equity method investment for $4,400,000. In addition, the Company’s operating plan for the next twelve months has been
updated to reflect recent operating improvements.  Revenues have accelerated and are expected to continue growing. The Company’s
manufacturing facility is scaling production and gross profits are projected to increase. If necessary, the Company will seek to
obtain additional debt financing for which there can be no guarantee. Management has concluded that these recent positive developments
alleviate any substantial doubt about the Company’s ability to continue its operations, and meet its financial obligations,
for twelve months from the date these consolidated financial statements are issued.

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) complete purchase price accounting for acquisitions, (ii) the evaluation of long-term assets, including
goodwill, for impairment, and (iii) the evaluation of other-than-temporary-impairment of equity method investments.

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
profit, 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.

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.

Financial Instruments

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.

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

The
following discussion should be read in conjunction with our audited consolidated financial statements and related notes and other financial
data included elsewhere in this Annual Report on Form 10-K.

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 Annual Report on
Form 10-K. 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.

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 Annual Report on
Form 10-K except as required by federal securities law.

Recent
Developments

Corporate
developments during the two years ended April 31, 2023 include:

Capital
Transactions

S-1
Offering

On
May 4, 2021, the Company closed a 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 ThinkEquity, a division of Fordham Financial Management, Inc.,
as representative of the underwriters ("ThinkEquity"), pursuant to an underwriting agreement with Think Equity. 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, 2021 (the "S-1 Registration Statement"). The S-1 offering generated
gross proceeds of $16 million and net proceeds of approximately $14.6 million.

S-3
Offering

On
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 $55.5 million.

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:

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. 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 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 in our daily lives.

In
November 2022, we entered into an agreement to sell our Consumer segment to Unusual Machines. 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 transaction, and (ii) a listing on a public stock exchange such as the NYSE or Nasdaq.

Results
of Operations

The
analysis of the Company's results of operations for the year ended April 30, 2023 ("Fiscal 2023") compared to the year ended
April 30, 2022 ("Fiscal 2022") includes its wholly owned subsidiaries including Teal Drones, Rotor Riot, Fat Shark, and Skypersonic.
The results for both periods is significantly impacted by the acquisition of Teal Drones on August 31, 2021. Teal is the Company’s
largest operating subsidiary, and its operating results include 8 months for Fiscal 2022 and 12 months for Fiscal 2023. Since acquiring
Teal, the Company has more than tripled the number of Teal employees and significantly expanded its facilities. As a result, the comparison
of the year ended April 30, 2023 to the year ended April 30, 2022 yields more significant changes than might normally occur.

At
the end of Fiscal 2023, the Company recognized an impairment loss of $2,826,918 related to Skypersonic goodwill which was written down
to zero. In addition, its operations were consolidated into Teal. Skypersonic's operating results represented 2% and 4% of consolidated
revenues and operating loss for Fiscal 2023. Based on its immateriality, Skypersonic is not included in the operating analysis set forth
below.

A summary comparison
of Fiscal 2023 operating results compared to Fiscal 2022 is as follows:

Discussion
and Analysis of Fiscal 2023 compared to Fiscal 2022

Revenues

Consolidated revenues totaled
$9,911,780 during the year ended April 30, 2023 ("Fiscal 2023") compared to $6,428,963 during the year ended April 30, 2022
("Fiscal 2022") representing an increase of $3,482,817, or 54%. Revenue growth for Teal and Rotor Riot represented $2,854,413
and $1,345,972 of the dollar increase, or 82% and 39%, of the percentage increase, respectively, which was partially offset by Fat Shark’s
decrease of $606,006 or 17%. Revenue growth for Teal benefitted from a full year of operations in Fiscal 2023 compared to only eight
months in Fiscal 2023. Higher revenues for Rotor Riot were generated by a significant increase in digital marketing spending. Lower revenues
for Fat Shark 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 over the remaining quarters in Fiscal 2023.

Revenues for the Enterprise
Segment totaled $4,620,834 in Fiscal 2023 compared to $1,877,983 for Fiscal 2022, representing an increase of $2,742,851, or greater than
100%. This revenue growth was entirely attributable to Teal which recognized product sales of $3,051,348 in Fiscal 2023 and $904,600 of
revenue under the SRR Tranche II program. Revenues for the Consumer Segment totaled $5,290,946 in Fiscal 2023 compared to $4,550,980 for
Fiscal 2022, representing an increase of $739,966, or 16%. This revenue growth was entirely attributable to Rotor Riot whose revenues
increased by $1,345,972, more than offsetting a $606,006 decrease for Fat Shark.

Gross
Margin

Consolidated
gross margin totaled negative $336,795 during Fiscal 2023 compared to $925,515 during Fiscal 2022 representing a decrease of $1,262,310,
or 136%. Gross margin dollar contribution for Teal, Rotor Riot, and Fat Shark totaled negative $857,721, positive $431,751, and positive
$158,285, respectively. The reported gross margin of negative 19% for Teal was adversely impacted by a charge of $1,405,807 related to
the write off of obsolete inventory related to its legacy drone, the Golden Eagle. Excluding this charge, core gross margin for Teal
was 12% in Fiscal 2023 compared to 19% in Fiscal 2022. The lower core gross margin in Fiscal 2023 reflects a significant investment by
the Company to build and scale a new manufacturing facility in Salt Lake City, Utah. Our manufacturing facility is presently producing
drones at a lower level than it is designed for, and these lower production levels, combined with higher labor and overhead costs, are
adversely impacting core gross margins at Teal. As production levels increase, our fixed overhead costs, including labor, will be allocated
to a greater number of drones which will drive our per-drone production costs lower and increase gross margins. The core operating margin
for Fat Shark was 15% in Fiscal 2023 compared to 2% in Fiscal 2022. The lower gross margin in Fiscal 2022 related to price reductions
of the prior digital goggle as the Company prepared for the launch of the Dominator in early Fiscal 2023. Separately, Fat Shark recorded
a charge of $182,845 related to the write-off of excess quantities of Dominator inventory based on sales volumes during the second half
of Fiscal 2023. This charge reduced gross margin from 15% to 7%. The core operating margin for Rotor Riot was 13% in Fiscal 2023 compared
to 21% in Fiscal 2022. The decrease related to higher product and shipping costs.

Operating
Expenses

Operations
expenses totaled $4,411,685 during the 2023 period compared to $1,353,904 during the 2022 period, resulting in an increase of $3,057,781,
or greater than 100%. Higher costs for Teal represented $2,934,250 or 96% of the percentage increase. Since its acquisition, we have
more than tripled Teal's headcount and doubled the size of its facilities. Approximately 49% of Teal's costs related to payroll, 21%
to employee-related office expenses, and 9% to overhead expenses with the balance spread ratably across numerous categories including
information technology, facilities, professional fees, and travel.

Research
and development expenses totaled $5,248,336 during the year ended April 30, 2023 compared to $2,606,141 during the year ended April 30,
2022, representing an increase of $2,642,195, or approximately 100%. The entire increase can be attributed to Teal, with approximately
43% of its expenses related to payroll, 33% related to office, 21% related to professional fees, and 3% related to information technology.

Sales
and marketing costs totaled $4,028,007 during the 2023 period compared to $1,127,532 during the 2022 period, resulting in an increase
of $2,900,475 or more than 100%. Higher costs for Teal and Rotor Riot represented $2,487,331 and $572,891 of the dollar increase and
86% and 20% of the percentage increase. Payroll costs, related to hiring at Teal, totaled $887,891 in the 2023 period compared to $24,428
during the 2022 period, resulting in an increase of $863,463 which represented 30% of the total increase in sales and marketing costs.
Travel and related costs totaled $567,307 in the 2023 period compared to $22,539 in the 2022 period resulting in an increase of $544,768
which represented 19% of the total increase. In addition, higher advertising and show production costs represented 27% of the increase
while professional fees accounted for 15% of the increase.

General
and administrative expenses totaled $6,618,596 during the year ended April 30, 2023 compared to $5,548,589 during the year ended April
30, 2022, representing an increase of $1,070,007 or 19%. Higher costs at the Corporate level essentially represented 100% 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 $2,283,639 in the 2023 period compared to $1,536,125 in the 2022 period resulting in an increase of $747,514 or 70% of
the total increase in general and administrative expenses. Legal and lobbying services costs totaled $928,621 in Fiscal 2023 compared
to $312,367, representing an increase of $616,254, or 58% of the total increase. These higher costs were partially offset by decreases
in facilities costs of $140,634 and travel costs of $139,778.

During
the year ended April 30, 2023, we incurred stock-based compensation costs of $3,656,724 compared to $3,291,635 in the 2022 period, resulting
in an increase of $365,089 or 11%. During the 2023 period, the Company issued 1,503,500 additional options which resulted in incremental
stock-based compensation costs of $322,215.

Other
Income

Other
income totaled $39,324 during the 2023 period compared to $1,313,158 during the 2022 period, representing a decrease of $1,273,834. This
decrease in other income was principally related to higher depreciation and amortization expense which totaled $966,072 during the 2023
period compared to $264,803 during the 2022 period resulting in an increase of $701,269 and representing 55% of the total decrease in
other income. Higher depreciation expense related to approximately $2.5 million in capital expenditures in Fiscal 2023, primarily related
to the construction of the new manufacturing facility in Salt Lake City, Utah. Higher amortization expense related to a full year of
amortization of intangible assets acquired through acquisitions, especially Teal.

Net
Loss

Net
Loss totaled $27,087,737 during the year ended April 30, 2023, compared to $11,689,128 during the year ended April 30, 2022, representing
an increase of $15,398,609, or greater than 100%. Net Loss for Teal, Rotor Riot and Fat Shark totaled $12,554,652, $1,204,175, and $526,211,
or 46%, 4%, and 2% of the consolidated net loss. The acquisition of Teal Drones in August 2021 accounted for most 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 $12,554,652 compared to $2,198,232 for the 2022 period, representing an increase of $10,356,420, or almost 5 times. The
higher net loss for Teal represented 67% of the increase in the consolidated net loss. Corporate costs totaled $11,747,049 in the
2023 period compared to $6,978,663 in the 2022 period resulting in an increase of $4,768,386 or 68%. The increase represented 31%
of the increase in the consolidated loss.

Cash
Flows

Operating
Activities

Net
cash used in operating activities was $29,199,420 during the year ended April 30, 2023, compared to net cash used in operating activities
of $16,019,320 during the year ended April 30, 2022, representing an increase of $13,180,100 or 82%. Net cash used in operations, net
of non-cash expenses, totaled $20,322,665 during the year ended April 30, 2023, compared to 8,924,419 during the year ended April 30,
2022, resulting in an increase of $11,398,246, or greater than 100%. The higher use of cash primarily related to the acquisition of Teal
Drones in August 2021, and the subsequent expansion of its operations, as well the inclusion of a full year of operations in the 2023
period compared to eight months of operations in the 2022 period. Net cash used related to changes in operating assets and liabilities
totaled $8,876,755 during the year ended April 30, 2023, compared to $7,094,901 during the year ended April 30, 2022, representing an
increase of $1,781,854 or 25%. 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 inventory purchases, including
deposits, totaled $8,805,110 and $3,457,633 in fiscal 2023 and fiscal 2022, respectively.

Investing
Activities

Net
cash provided by investing activities was $29,590,235 during the year ended April 30, 2023, compared to net cash used in investing activities
of $46,603,486 during the year ended April 30, 2022 resulting in a decrease of $76,193,721 or greater than 100%. During the 2023 period,
net proceeds of $32,290,448 from the maturities of marketable securities were used to fund operations, and $2,450,213 was used to purchase
property and equipment, primarily related to the expansion of the manufacturing facilities for Teal. During the 2022 period, purchases
of marketable securities, net of proceeds from sales of marketable securities, totaled $46,264,663. During Fiscal 2023, the Company was
spending the proceeds from the Fiscal 2022 stock offerings to support operations for the full year, whereas in Fiscal 2022 the proceeds
from the stock offerings were invested in marketable securities and also used to support operations for the second half of Fiscal 2022.

Financing
Activities

Net
cash used in financing activities totaled $1,215,325 during the year ended April 30, 2023, compared to net cash provided by financing
activities of $66,430,274 during the year ended April 30, 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 period, the Company received net proceeds of approximately
$70 million in connection with two offerings of common stock and made payments under debt obligations totaling $2,900,709. Debt payments
totaled $646,954 during the 2023 period.

Liquidity
and Capital Resources

At
April 30, 2023, the Company reported current assets totaling $32,175,012, current liabilities totaling $4,760,616 and net working capital
of $27,414,396. Cash and marketable securities totaled $16,074,343 at April 30, 2023. Inventory related balances, including pre-paid
inventory, totaled $14,408,065. 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 increasing related to acquisitions, as well as costs incurred to pursue
its long-term growth strategy. During the year ended April 30, 2023, the Company incurred a net loss of $27,087,737 and used cash
in operating activities of $29,199,420. As of April 30, 2023, the Company has working capital of $27,414,396. 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. The Company is evaluating strategies to obtain
the required funding and exploring opportunities to reduce expenses.

If
the Company is unable to raise additional capital, there is a risk that the Company could default on its financial obligations and could
be required to discontinue or 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 might be necessary 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, (iv) reserves and allowances related to accounts receivable and inventory, and (v) the evaluation of long
term assets, including goodwill, for impairment.

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
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.

Financial
Instruments

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.

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

Management's Discussion and Analysis contains forward-looking
statements that involve risks and uncertainties, such as statements relating to our business plan to provide products, services and solutions
to the drone industry. Any statements that are not statements of historical fact are forward-looking statements. When used, the words
“believe,” “plan,” “intend,” “anticipate,” “target,” “estimate,”
“expect,” and the like, and/or future-tense or conditional constructions (“will,” “may,” “could,”
“should,” etc.), or similar expressions, identify certain of these forward-looking statements. These forward-looking statements
are subject to risks and uncertainties that could cause actual results or events to differ materially from those expressed or implied
by the forward-looking statements in this Annual Report on Form 10-K. 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.

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 Annual Report on Form 10-K except as required by federal securities law.

Recent Developments

Red Cat Holdings has recently completed a series
of acquisitions and financings which have broadened the scope of its activities in the drone industry. These developments include:

Business Strategy

Red Cat remains focused
on building a portfolio of complementary products and services to support the continued growth and maturation of the drone industry in
both the enterprise and consumer market segments. Our disciplined acquisition strategy targets companies with advanced product offerings
and unique drone platforms and intellectual property. After the integration of Teal Drones, we would expect government customers including
defense, public safety, and infrastructure to be our most significant revenue drivers in the fiscal year ending April 30, 2023.

During the second
half of the fiscal year ending on April 30, 2022, the Company focused on integrating and organizing its acquired businesses. These efforts
including refining the establishment of Enterprise and Consumer segments in order to sharpen the Company's focus on the unique opportunities
in each sector of the drone industry. The Enterprise segment is focused on opportunities in the commercial sector, including the military.
Enterprise is building the infrastructure to manage drone fleets, fly and provide services remotely, and navigate confined 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. Consumer provides a growing revenue base, strong brand visibility for the Company, and is an
excellent source of professional pilots.

Results of Operations

When evaluating its operating results, the Company categorizes its functional
expenses into sub-categories that capture the essence of the hundreds of general ledger accounts that it maintains.  The Company
believes this process enables a more insightful understanding of changes in its operating expenses.  Cost of Goods is categorized
into (i) materials, (ii) labor, (iii) overhead, and (iv) freight.  Operations includes (i) payroll and (ii) overhead.  Research
and development is categorized into (i) payroll, (ii) materials, and (iii) overhead.  Sales and marketing includes (i) payroll,
(ii) advertising programs, and (iii) third party services.  General and administrative is categorized into (i) payroll, (ii) facilities,
(iii) professional services, (iv) public company, (v) office, and (vi) insurance and related.

During the fiscal year ended April 30, 2022 (“Fiscal 2022”),
the Company completed the acquisitions of Teal Drones and Skypersonic which effectively doubled the number of operating subsidiaries.
These transactions were the primary reason that the Company’s operating expenses increased to $13,927,801 in Fiscal 2022 compared
to $5,946,295 in Fiscal 2021 (the fiscal year ending April 30, 2021) representing an increase of $7,981,506, or 134%. During Fiscal 2022,
employee headcount increased from 16 at the beginning of the year to 62 on April 30, 2022. This increase includes the addition of 15 and
10 employees from Teal and Skypersonic, respectively, that now work for the Company. Since acquiring Teal, its headcount has doubled from
15 to 30 in connection with its expanded operations. In addition, we have hired 6 employees to form an internal sales team primarily focused
on our Enterprise segment.

Year Ended April 30, 2022 and April 30, 2021

Revenue

During the year ended April 30, 2022 (or the “2022
period”), we generated revenues totaling $6,428,963 compared to revenues totaling $4,999,517 during the year ended April 30, 2021
(or the “2021 period”) representing an increase of $1,429,446 or 29%. Rotor Riot and Fat Shark revenues comprise the entire
amount for the 2021 period. During fiscal year 2022, we acquired two additional drone technology companies: Skypersonic and Teal. The
increase in revenue during the 2022 period is directly related to the acquisitions. The increase is partially offset by a decrease in
both Rotor Riot and Fat Shark revenues of 8% and 9%, respectively. The decreased sales for Fat Shark primarily related to its primary
product being at the end of its sales cycle. Fat Shark released its next generation product in June 2022.

Cost of Goods Sold

During the year ended
April 30, 2022, we incurred cost of goods sold of $5,503,448 compared to $3,929,832 during the year ended April 30, 2021 resulting in
an increase of $1,573,616 or 40%. The higher dollar amount relates to the increase in revenues, primarily related to the acquisitions
of Skypersonic and Teal.

Gross Margin

During the year ended April 30, 2022, gross margin was $925,515 compared to $1,069,685 during the year ended April 30, 2021, resulting
in a decrease of $144,170 or 13%. Gross margin, as a percentage of sales, totaled 14% in Fiscal 2022 compared to 21% in Fiscal 2021.
The lower level of gross margin was primarily related to Teal whose gross margin of 19% was lower than the consolidated gross margin.
In addition, the gross margin of Fat Shark decreased from 18% to 2% due to pricing discounts associated with the sales of products at
the end of their life cycles.

Operating Expenses

Operations expenses totaled $1,353,904 during Fiscal
2022 compared to $590,342 during Fiscal 2021, representing an increase of $763,562, or 129%. Payroll costs increased to $911,358 in Fiscal
2022 compared to $219,396 in Fiscal 2021, representing an increase of $691,962, or more than 100%. Higher payroll costs represented 91%
of the total increase in Operations expense.

During the year ended April 30, 2022, we incurred
research and development expenses totaling $2,606,141 compared to $516,084 for the year ended April 30, 2021 resulting in an increase
of $2,090,057, or greater than 100%. Payroll costs totaled $2,211,909 in Fiscal 2022 compared to $510,084 in Fiscal 2021, representing
an increase of $1,701,825, or more than 100%. Higher payroll costs represented 81% of the total increase in Research and Development expense.
In addition, materials costs totaled $350,372 in Fiscal 2022 compared to $1,449 in Fiscal Year 2021 representing an increase of $348,923.
Higher material costs represented 17% of the year-over-year increase.

During the year ended April 30, 2022, sales and marketing
expenses totaled $1,127,532 compared to $172,182 during the year ended April 30, 2021, resulting in an increase of $955,350 or greater
than 100%. Payroll costs totaled $764,404 in Fiscal 2022 compared to $90,363 in Fiscal 2021, representing an increase of $674,041, or
more than 100%. Higher payroll costs represented 71% of the total increase in sales and marketing expense. In addition, advertising program
costs totaled $256,895 in Fiscal 2022 compared to $61,228 in Fiscal Year 2021 representing an increase of $195,667. Higher advertising
program costs represented 20% of the year-over-year increase.

During the year ended April 30, 2022, we incurred
general and administrative expenses totaling $5,548,589 compared to $1,279,471 for the year ended April 30, 2021, resulting in an increase
of $4,269,118, or greater than 100%. Payroll costs totaled $1,536,126 in Fiscal 2022 compared to $297,909 in Fiscal 2021, representing
an increase of $1,238,217, or more than 100%. Higher payroll costs represented 29% of the total increase in general and administrative
expense. In addition, professional services costs totaled $1,004,785 in Fiscal 2022 compared to $418,340 in Fiscal Year 2021 representing
an increase of $586,445, or 140 percent. Higher professional services costs represented 14% of the year-over-year increase in general
administrative expenses. Finally, public company costs, including insurance, totaled $1,456,413 in Fiscal 2022 compared to $339,428 in
Fiscal Year 2021 representing an increase of $1,116,985, or more than 100 percent. Higher public company costs represented 26% of the
year-over-year increase in general and administrative expenses. The Company uplisted to Nasdaq Capital Market in April 2021 which has
resulted in higher public company costs. The remaining 30% of the increase in general and administrative expenses occurred across all
functional areas including facilities and office.

Other Expense

Other income totaled $1,313,158 during the year ended
April 30, 2022, compared to other expense of $8,359,565 during the year ended April 30, 2021, resulting in a change that is not comparable.
During Fiscal 2021, the Company recognized $7,123,182 of expenses associated with derivative liabilities related to the issuance of convertible
debentures and warrants in October 2020 and January 2021. During Fiscal 2022, the Company recognized a benefit of $1,042,129 as a decrease
in the Company’s stock price caused the derivative liability to decrease. Amounts related to derivatives comprised 85% of the net
expense recognized in Fiscal 2021 and 79% of the net benefit recognized in Fiscal 2022.

Net Loss

Net Loss for the year ended April 30, 2022, totaled
$11,689,128 compared to $13,236,175 for the year ended April 30, 2021 resulting in a decrease of $1,547,047, or 12%. Higher operating
expenses in Fiscal 2022, primarily related to the 2 acquisitions and a 288% percent increase in headcount, resulted in an operating loss
of $13,002,286 in Fiscal 2022 compared to $4,876,610 in Fiscal 2021, representing an increase of $8,125,676, or 167%. This increase was
partially offset by a change in the impact of derivative accounting which resulted in a net benefit of $1,042,129 in Fiscal 2022 compared
to a net expense of $7,123,182 in Fiscal 2021 resulting in a net difference of $8,165,401.

Cash Flows

Operating Activities

Net cash used in operating activities was $16,019,320
during the year ended April 30, 2022 compared to net cash used in operating activities of $1,399,001 during the year ended April 30, 2021
representing an increase of $14,620,319, or greater than 100%. Net cash used in operations, net of non-cash expenses, totaled $8,924,419
in the year ended April 30, 2022 compared to $1,587,946 in the year ended April 30, 2021, resulting an increase of $7,336,473, or greater
than 100%. The increase primarily related to higher operating costs associated with the acquisitions of Teal Drones and Skypersonic. Net
cash used related to changes in operating assets and liabilities totaled $7,094,901 during the year ended April 30, 2022 compared to net
cash provided by changes in operating assets and liabilities of $188,945 during the year ended April 30, 2021, representing a net increase
in cash used of $7,283,846, or greater than 100%. Changes in operating assets and liabilities can fluctuate significantly from year to
year depending upon the timing and level of multiple factors, including inventory purchases and vendor payments. During Fiscal 2022, the
Company spent almost $4 million to increase inventory levels, including pre-payments, to minimize the impact of global supply chain issues,
including a shortage of computer chips, on the Company’s operations.

Investing Activities

Net cash used in investing activities was $46,603,486
during the year ended April 30, 2022 compared to net cash provided by investing activities of $48,368 during the year ended April 30,
2021. The increase in net cash used in investing activities primarily related to the purchase of marketable securities, partially offset
by proceeds from maturities during the year ended April 30, 2022. The Company received proceeds of approximately $70 million from the
issuance of common stock in Fiscal 2022, with a portion of those proceeds invested in a portfolio of marketable securities.

Financing Activities

Net cash provided by financing activities totaled
$66,430,274 during the year ended April 30, 2022 compared to $1,488,048 during the year ended April 30, 2021, representing an increase
of $64,942,226, or greater than 100%. Financing activities can vary, in nature and amount, from period to period. During the year ended
April 30, 2022, net proceeds of $70,065,203 were received through the issuance of common stock compared to zero during the year ended
April 30, 2021.

Liquidity and Capital Resources

At April 30, 2022, the Company reported current assets
totaling $55,653,297, current liabilities totaling $5,439,421 and net working capital of $50,213,876. Cash and marketable securities totaled
$48,875,184 at April 30, 2022 and related to issuances of common stock in 2022 which generated net proceeds of more than $70 million.
As of April 30, 2022, we had inventory related balances, including pre-paid inventory, totaling $5,602,955. The higher-than-normal inventory
balances related to actions taken to address the global supply chain issues, including a chip shortage. At April 30, 2022, the Company
was in a strong liquidity and capital position relative to its recent annual operating results.

We have only recently begun generating revenues
and have reported net losses since our inception. Through fiscal year 2022, we have funded our operations through private and public
offerings of common stock. In May 2021, we completed an offering of common stock which
raised gross proceeds of $16 million. In July 2021, we completed an offering of common stock which raised gross proceeds of $60
million.

2020 Convertible Note Offering

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.

As of April 30, 2022, (a) the 2020 Notes were fully
converted into common stock and the related derivative liability eliminated, and (b) 266,666 of the warrants were outstanding with a derivative
liability of $529,383.

2021 Convertible Note Offering

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.

As of April 30, 2022, (a) the 2021 Notes were fully
converted into common stock and the related derivative liability eliminated, and (b) 540,000 of the warrants were outstanding with a derivative
liability of $1,078,113.

Underwritten Public
Offerings

S-1 Offering

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

S-3 Offering

On July 21, 2021, the Company
closed on a firm commitment underwritten public offering (the "S-3 Offering") in which it sold an aggregate of 13,333,334 shares
of Common Stock at a purchase price of $4.50 per share to ThinkEquity, pursuant to an underwriting agreement dated July 18, 2021. These
shares of common stock were offered and sold by the Company pursuant to a registration statement on Form S-3, as amended (File No. 333-256216),
filed with the SEC, which was declared effective by the SEC on June 14, 2021 and a Supplement to the Prospectus contained in this registration
statement filed with the SEC on July 19, 2021. The net proceeds to the Company, after deducting the underwriting discount, the underwriters’
fees and expenses, and the Company’s estimated expenses were approximately $55.5 million.

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

Critical Accounting Policies and Estimates

Our financial statements and accompanying notes have
been prepared in accordance with GAAP applied on a consistent basis. The preparation of financial statements in conformity with GAAP requires
management to make estimates and assumptions that affect the reported amounts of assets and liabilities, the disclosure of contingent
assets and liabilities at the date of the financial statements, and the reported amounts of revenues and expenses during the reporting
periods.

We regularly evaluate the accounting policies and
estimates that we use to prepare our financial statements. A complete summary of these policies is included in the notes to our financial
statements. In general, management’s estimates are based on historical experience, on information from third party professionals,
and on various other assumptions that are believed to be reasonable under the facts and circumstances. Actual results could differ from
those estimates made by management.  Significant estimates reflected in these financial statements include those used to (i) determine
stock based compensation, (ii) complete purchase price accounting for acquisitions, and (iii) accounting for derivatives

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

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 derivative 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.

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

The Management's Discussion and Analysis contains
forward-looking statements that involve risks and uncertainties, such as statements relating to our liquidity, and our plans for our
business focusing on cloud-based analytics, storage, and services for drones. Any statements that are not statements of historical fact
are forward-looking statements. When used, the words “believe,” “plan,” “intend,” “anticipate,”
“target,” “estimate,” “expect,” and the like, and/or future-tense or conditional constructions (“will,”
“may,” “could,” “should,” etc.), or similar expressions, identify certain of these forward-looking
statements. These forward-looking statements are subject to risks and uncertainties that could cause actual results or events to differ
materially from those expressed or implied by the forward-looking statements in this Annual Report on Form 10-K. 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.

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 Annual Report on Form 10-K except as required by federal securities law.

Recent Developments

Merger Agreement with Rotor Riot, LLC

In January 2020, pursuant to the terms of a merger
agreement, we acquired Rotor Riot, LLC (“Rotor Riot”), in which our subsidiary merged with and into Rotor Riot, resulting
in Rotor Riot being the surviving entity in a merger and a wholly-owned subsidiary of the Company.

Acquisition of Fat Shark

On November 2, 2020, the Company acquired 100% of
Fat Shark’s outstanding equity and issued to the Fat Shark’s sole shareholder consideration totaling (i) 5,227,223 shares
of our common stock, (ii) a cash payment of $250,000, and (iii) a promissory note for $1,753,000. The promissory note bears interest
at 3%, and the entire principal and accrued interest is due on November 1, 2023.

Underwritten Firm Commitment Underwritten Public
Offering.

S-1 Offering

On May 4, 2021, the Company closed its firm commitment
underwritten public offering (the “S-1 Offering”) in which it sold 4,000,000 shares of its common stock, at a public offering
price of $4.00 per share, to ThinkEquity, a division of Fordham Financial Management, Inc., as representative of the underwriters (“ThinkEquity”),
pursuant into an underwriting agreement with Think Equity dated April 29, 2021. The Company also granted the underwriters a 45-day option
to purchase up to an additional 600,000 shares of its common stock to cover over-allotments in the initial public offering price, less
the underwriting discount. These shares of common stock in the S-1 Offering were offered and sold by the Company pursuant to a registration
statement on Form S-1, as amended (File No. 333-253491), filed with the SEC, which was declared effective by the Commission
on April 29, 2021 (the “S-1 Registration Statement”).

S-3 Offering

On July 21, 2021 the Company closed on a firm commitment
underwritten public offering (the “S-3 Offering”) in which it sold an aggregate of 13,333,334 shares of its Common Stock
at a purchase price of $4.50 per share to ThinkEquity, pursuant to an underwriting agreement dated July 18, 2021. The Company has
also granted the underwriters a 45-day option to purchase up to an additional 2,000,000 shares of its common stock to cover over-allotments,
if any.  These shares of common stock in the S-3 Offering were offered and sold by the Company pursuant to a registration statement
on Form S-3, as amended (File No. 333-256216), filed with the SEC, which was declared effective by the SEC on June 14, 2021
and a Supplement to the Prospectus contained in this registration statement filed with the SEC on July 19, 2021.

Plan of Operations

Following the acquisition of
Rotor Riot and Fat Shark, we remain focused on providing products and solutions to the drone industry. We believe that Rotor Riot’s
visibility and presence in the drone marketplace will foster growth in sales through its e*commerce platform and provide an initial target
base of customers for the launch of “Dronebox”. Dronebox is being designed to provide distributed data storage, analytics
and related services to the drone industry. The Company plans to utilize blockchain based technologies and offer its solutions as a Software-as-a-Service
platform. Potential customers include regulators to track and review flight data, insurance companies for coverage and claims administration,
and pilots to maintain compliance with regulations. The operations of Fat Shark are expected to constitute a significant majority of
our revenue and results of operations and will position us to become a fully-integrated drone business with a strong supply chain while
we continue to develop and promote industry standards through our blockchain-based distributed network that provides secure data storage,
operational analytics, reporting, and SaaS solutions for the drone industry. We are also developing the means to accurately track, report
and review flight data, which we believe will be the mainstay of future regulatory specifications and insurability.

Results of Operations

Year Ended April 30, 2021 and April 30, 2020

Revenue

During the year ended April 30, 2021 (or the “2021
period”), we generated revenues totaling $4,999,517 compared to revenues totaling $403,940 during the year ended April 30, 2020
(or the “2020 period”). During calendar 2020, we acquired two drone technology companies, Rotor Riot and Fat Shark. Prior
to these transactions, we did not have any revenue generating activities. During the 2021 period, Rotor Riot and Fat Shark generated
approximately 44% and 56% of our revenues, respectively.

Cost of Goods Sold

During the year ended April 30, 2021, we incurred
cost of goods sold of $3,929,832 compared to $325,379 during the year ended April 30, 2020. The periods presented are not comparable
as the 2020 period included one quarter of revenues for Rotor Riot as compared to the 2021 period which included a full year of revenues
for Rotor Riot and two quarters of revenues for Fat Shark.

Gross Margin

During the year ended April 30, 2021, gross margin was $1,069,685 compared to $78,561 during the year ended April 30, 2020. The periods
presented are not comparable as the 2020 period included one quarter of revenues for Rotor Riot as compared to the 2021 period which
included a full year of revenues for Rotor Riot and two quarters of revenues for Fat Shark.

Operating Expenses

During the year ended April 30, 2021, we incurred
operating expense of $590,342 compared to zero during the year ended April 30, 2020. The increase is directly related to the acquisitions
of Rotor Riot in January 2020 and Fat Shark in November 2020.

During the year ended April 30, 2021, we incurred
research and development expenses totaling $516,084 compared to $488,990 for the year ended April 30, 2020 resulting in an increase of
$27,094, or 6%. The increase relates to payroll associated with employees hired from Rotor Riot and Fat Shark who are working on the
research and development of new drone technologies.

During the year ended April 30, 2021, we incurred
sales and marketing expenses of $172,182 compared to zero during the year ended April 30, 2020. Costs incurred in the year ended April
30, 2021 relate to employees hired from Rotor Riot and Fat Shark, and also include sales commissions for referrals.

During the year ended April 30, 2021, we incurred
general and administrative expenses totaling $1,279,471 compared to $949,636 for the year ended April 30, 2020 resulting in an increase
of $329,835, or 35%. The increase primarily relates to higher general and administrative payroll costs for employees hired from Rotor
Riot and Fat Shark.

Other Expense

Other expense totaled $8,359,565 during the year
ended April 30, 2021, compared to Other Income of $28,029 during the year ended April 30, 2020. The expense incurred during the year
ended April 30, 2021 related to the Derivative Liability recorded in connection with the Company’s issuance of convertible debentures
and warrants in October 2020 and January 2021. The significance of the expense is directly correlated to an increase in the Company’s
stock price following the issuance of the convertible debentures and warrants.

Net Loss

Net Loss for the year ended April 30, 2021 totaled
$13,236,175 compared to $1,601,931 for the year ended April 30, 2020 resulting in an increase of $11,634,244, or more than 100%. Approximately
61% of the increase in Net Loss is directly related to derivative expenses incurred in connection with the issuance of convertible debentures
in October 2020 and January 2021.  These securities were not outstanding during the year ended April 30, 2020.  The remaining
39% of the increase is related to the expansion of the Company’s commercial activities including the hiring of personnel formerly
employed with Rotor Riot and Fat Shark.

Cash Flows

Operating Activities

Net cash used in operating activities was $1,399,001
during the year ended April 30, 2021 compared to net cash used in operating activities of $811,584 during the year ended April 30, 2020
representing an increase of $587,417, or 72%. Net cash used in operations, net of non-cash expenses associated with the derivative liability,
stock-based compensation, and amortization of intangible assets totaled $1,587,946 in the year ended April 30, 2021 compared to $1,128,036
in the year ended April 30, 2020, resulting an increase of $459,910, or 41%. The increase primarily related to higher net costs associated
with becoming a commercial enterprise through the merger with Rotor Riot in January 2020 and the acquisition of Fat Shark in November
2020. Net cash provided by changes in operating assets and liabilities totaled $188,945 during the year ended April 30, 2021 compared
to net cash provided by operating activities of $316,452 during the year ended April 30, 2020, representing a decrease in cash provided
of $127,507, or 40%. Changes in operating assets and liabilities can fluctuate significantly from year to year depending upon the timing
and level of multiple factors, including inventory purchases and vendor payments.

Investing Activities

Net cash used in investing activities was $48,368
during the year ended April 30, 2021 compared to net cash provided by investing activities of $46,327 during the year ended April 30,
2020. The amounts for both periods related to acquisitions which can vary from one transaction to another.

Financing Activities

Net cash provided by financing activities totaled
$1,488,048 during the year ended April 30, 2021 compared to $498,487 during the year ended April 30, 2020, representing an increase of
$989,561, or 199%. Financing activities can vary, in nature and amount, from period to period. During the year ended April 30, 2021,
net cash of $1,080,000 and $201,249 was provided through the issuance of convertible debentures and the exercise of warrants, respectively.
During the year ended April 30, 2020, net cash of $450,000 and $152,239 was provided through the sale of convertible debentures and the
exercise of a warrant, respectively.

Liquidity and Capital Resources

As of April 30, 2021, we had current assets totaling
$1,640,010 including cash of $277,347, inventory of $362,072, and accounts receivable of $321,693. Current liabilities as of April 30,
2021 totaled $4,674,070, and included derivative liability of $2,812,767, accounts payable of $541,903, accrued expenses of $614,050,
notes payable of $269,045, amounts due to a related party of $390,209, and customer deposits of $46,096. Our net working capital as of
April 30, 2021 was negative $3,034,060.

We have only recently begun generating revenues and
have reported net losses since our inception. Through fiscal year 2021, we have funded our operations through private offerings of common
stock primarily from individual private investors. In May 2021, we completed an offering of common stock which raised gross proceeds
of $16 million. In July 2021, we completed an offering of common stock which raised gross proceeds of $60 million.

2019 Convertible Note Offering

In November 2019, we issued a convertible note in
the principal amount of $300,000 to one accredited investor and in December 2019 we issued a convertible note in the principal amount
of $125,000 to a director and a convertible note in the principal amount of $25,000 to our chief executive officer (collectively, the
“2019 Notes”). The 2019 Notes have a two-year term and bear interest at a rate of 12%. Interest on the 2019 Notes may be
paid in cash or in shares of common stock of the Company at the 2019 Note Conversion Price (as defined below). The 2019 Notes are convertible
into shares of common stock at the holder’s sole discretion as follows: (A) prior to consummating an equity financing which generates
gross proceeds of not less than $3,000,000 (in this case, a “Qualified Offering”), then at the 30-day VWAP of a share of
our common stock as listed or quoted on the market in which the shares are then traded or listed, or (B) after we have consummated a
Qualified Offering, at 40% of the price per share of common stock sold in the Qualified Offering (in this case, the “Conversion
Price”). We may, upon 10 business days prior notice, pre-pay the 2019 Notes, including all accrued interest, in whole or in part,
provided that any such prepayment prior to the one-year anniversary of the 2019 Note issuance will be at a price equal to 112% of the
then outstanding original principal amount. Upon an event of default, as described in the Notes, the outstanding principal and interest
will become immediately due and payable. Additionally, under the 2019 Note, unless waived by the holder, the holder is not be entitled
to convert the 2019 Note if such conversion would result in beneficial ownership by the holder and its affiliates of more than 9.99%
of the outstanding shares of common stock of the Company on such date.

2020 Convertible Note Offering

On October 5, 2020, the Company closed a private
offering of convertible promissory notes in the aggregate principal amount of $600,000 (the “2020 Notes”) and issued five-year
warrants to purchase an aggregate of 399,998 shares of common stock (the “2020 Warrants”). The 2020 Notes accrue interest
at the rate of 12% per annum and are payable two years from the date of issuance. The 2020 Notes are convertible into common stock at
a conversion price of $1.00 per share or, upon the consummation of an offering of common stock resulting in the listing for trading on
the NYSE American, the Nasdaq Capital Market, the Nasdaq Global Market, the Nasdaq Global Select Market or the New York Stock Exchange
at a price equal to 75% of the price of the securities sold in such offering (in this case, a “Qualified Offering”). The
2020 Notes also contain protection from dilution in the event of a lower priced issuance.

Upon an event of default, as described in the 2020
Note, the conversion price will equal the lower of (i) the thirty-day volume weighted average of the closing price of the Company’s
common stock if the conversion occurs prior to a Qualified Offering, or (ii) 65% multiplied by the lowest closing price of the common
stock during the twenty consecutive trading day period immediately prior to the conversion.

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

The 2020 Warrants are exercisable at a price equal
to the lower of (i) $1.50 per share or (ii) if a Qualified Offering occurs, at a 25% discount to the price per share of the common stock
offered in such Qualified Offering. The number of shares of common stock for which the 2020 Warrant is exercisable is subject to adjustment
in the event of a stock split or dividend, and similar event or certain corporate events such reorganizations and mergers. In the event
of a reorganization or reclassification of capital stock, the consolidation or merger, or the sale or other disposition of all or substantially
all the property, assets, business, and goodwill of the Company, the warrant holder will be entitled to purchase the kind and amount
of shares of capital stock which the 2020 Warrant entitled the warrant holder to purchase immediately prior to such event. The 2020 Warrants
also include piggyback registration rights.

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

2021 Convertible Note Offering

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

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

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

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

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

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

2021 Underwritten Public Offerings

S-1 Offering

On May 4, 2021, the Company closed its firm commitment
underwritten public offering (the “S-1 Offering”) in which it sold 4,000,000 shares of its common stock, at a public offering
price of $4.00 per share, to ThinkEquity, a division of Fordham Financial Management, Inc., as representative of the underwriters (“ThinkEquity”),
pursuant into an underwriting agreement with Think Equity dated April 29, 2021. The Company also granted the underwriters a 45-day option
to purchase up to an additional 600,000 shares of its common stock to cover over-allotments in the initial public offering price, less
the underwriting discount. These shares of common stock in the S-1 Offering were offered and sold by the Company pursuant to a registration
statement on Form S-1, as amended (File No. 333-253491), filed with the SEC, which was declared effective by the Commission
on April 29, 2021 (the “S-1 Registration Statement”).

The net proceeds to the Company from the Offering,
after deducting the underwriting discount, the underwriters’ fees and expenses and the Company’s estimated Offering expenses,
were approximately $14.6 million . The Company anticipates using the net proceeds from the Offering to provide funding
for service, sales, and marketing efforts for its Red Cat Drone Services, strategic acquisitions and related expenses, and general working
capital.

S-3 Offering

On July 21, 2021 the Company closed on a firm commitment
underwritten public offering (the “S-3 Offering”) in which it sold an aggregate of 13,333,334 shares of its Common Stock
at a purchase price of $4.50 per share to ThinkEquity, pursuant to an underwriting agreement dated July 18, 2021. The Company has
also granted the underwriters a 45-day option to purchase up to an additional 2,000,000 shares of its common stock to cover over-allotments,
if any.  These shares of common stock in the S-3 Offering were offered and sold by the Company pursuant to a registration statement
on Form S-3, as amended (File No. 333-256216), filed with the SEC, which was declared effective by the SEC on June 14, 2021
and a Supplement to the Prospectus contained in this registration statement filed with the SEC on July 19, 2021.

The net proceeds to the Company from the S-3 Offering,
after deducting the underwriting discount, the underwriters’ fees and expenses and the Company’s estimated expenses related
to this S-3 Offering, were approximately $55.5 million,. The Company anticipates using the net proceeds from the S-3
Offering to provide funding for services, sales, and marketing efforts for its Red Cat Drone services, strategic acquisitions and related
expenses, and general working capital.

Going Concern

We only began generating revenues in January 2020
and have reported net losses since our inception. We expect to report net losses for at least the next twelve months. The success of
our business plan during the next 12 months and beyond will be contingent upon generating sufficient revenue to cover our operating costs
and/or upon obtaining additional financing. The report from our independent registered public accounting firm for the fiscal year ended
April 30, 2021 includes an explanatory paragraph stating the Company has recurring net losses from operations, negative operating cash
flows, and will need additional working capital for ongoing operations. These factors, among others, raise substantial doubt about the
Company's ability to continue as a going concern. If we are unable to obtain sufficient funding, our business, prospects, financial condition
and results of operations will be materially and adversely affected and we may be unable to continue as a going concern.

As reflected in our accompanying financial statements,
we had negative working capital of $3,034,060 at April 30, 2021 and have accumulated losses totaling approximately $15.8 million through
April 30, 2021. Management recognizes that these operating results and our financial position raise substantial doubt about our ability
to continue as a going concern.

We are presently seeking to address these going concern
doubts through a number of actions including efforts to (a) raise capital through the public markets, (b) release additional commercial
products and (c) pursue acquisitions of complementary, revenue generating companies which are accretive to our operating results. In
May 2021, we completed an offering of common stock which raised gross proceeds of $16 million. We can provide no assurance that any of
these efforts will be successful or, that even if successful, that they will alleviate doubts about our ability to continue as a going
concern form more than the next twelve months.

Critical Accounting Policies and Estimates
use theirs

Our financial statements and accompanying notes have
been prepared in accordance with GAAP applied on a consistent basis. The preparation of financial statements in conformity with GAAP
requires management to make estimates and assumptions that affect the reported amounts of assets and liabilities, the disclosure of contingent
assets and liabilities at the date of the financial statements and the reported amounts of revenues and expenses during the reporting
periods.

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

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

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 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 levels of the fair value hierarchy are described
below:

A review of fair value hierarchy classifications
is conducted on a quarterly basis. Changes in the observability of valuation inputs may result in a reclassification of levels for certain
securities within the fair value hierarchy.

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

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

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

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

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

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

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.