21526696 17687063

 2826918 412999
 81130732 57078103

 2023-10-31

 2024-08-05

 us-gaap: SeriesBPreferredStockMember

 us-gaap: SeriesBPreferredStockMember

 RCAT:BusinessAcquisition1Member

 2019-05-01
 2020-04-30

 RCAT:BusinessAcquisition2Member

 2020-05-01
 2021-04-30

 RCAT:BusinessAcquisition3Member

 RCAT:BusinessAcquisition4Member

 RCAT:RestatementImpactOriginallyReportedMember

 RCAT:RestatementImpactAsRestatedMember

 RCAT:RestatementImpactChangeMember

 RCAT:RestatementImpactOriginallyReportedMember

 RCAT:RestatementImpactAsRestatedMember

 RCAT:RestatementImpactChangeMember

 RCAT:CustomerConcentrationRisk1Member

 RCAT:CustomerConcentrationRisk1Member

 RCAT:CustomerConcentrationRisk2Member

 RCAT:CustomerConcentrationRisk3Member

 RCAT:CustomerConcentrationRisk4Member

 RCAT:CustomerConcentrationRisk5Member

 2024-02-16

 2023-01-01

 2023-03-01

 RCAT:IntangibleAssetsGrossCarryingAmountMember

 RCAT:IntangibleAssetsAccumulatedAmortizationMember

 RCAT:IntangibleAssetsNetCarryingValueMember

 RCAT:IntangibleAssetsGrossCarryingAmountMember

 RCAT:IntangibleAssetsAccumulatedAmortizationMember

 RCAT:IntangibleAssetsNetCarryingValueMember

 2020-01-01

 2020-11-01

 2021-08-01

 2023-04-01

 2024-02-01

 2023-04-01

 2024-04-01

 us-gaap: EquityMethodInvestmentNonconsolidatedInvesteeOtherMember

 2024-03-31

 us-gaap: EquityMethodInvestmentNonconsolidatedInvesteeOtherMember

 2024-01-01
 2024-03-31

 us-gaap: EquityMethodInvestmentNonconsolidatedInvesteeOtherMember

 us-gaap: EquityMethodInvestmentNonconsolidatedInvesteeOtherMember

 2022-11-01
 2022-11-30

 RCAT:OperatingLeaseLocation1Member

 RCAT:OperatingLeaseLocation3Member

 RCAT:OperatingLeaseLocation4Member

 RCAT:DebtObligation1Member

 2022-08-31

 RCAT:DebtObligation1Member

 2022-09-01

 RCAT:DebtObligation1Member

 2022-08-01

 RCAT:DebtObligation2Member

 RCAT:DebtObligation2Member

 RCAT:DebtObligation2Member

 RCAT:DebtObligation2Member

 RCAT:DebtObligation3Member

 2021-08-31

 2021-08-01
 2022-07-31

 RCAT:DebtObligation6Member

 2023-07-01

 RCAT:DebtObligation6Member

 2022-10-01

 RCAT:DebtObligation6Member

 RCAT:DebtObligation6Member

 RCAT:DebtObligation8Member

 2022-09-01
 2022-09-30

 RCAT:DebtObligation8Member

 2022-09-01

 RCAT:DebtObligation8Member

 RCAT:DebtObligation8Member

 RCAT:DueToRelatedParty2Member

 2021-01-01

 RCAT:DueToRelatedParty2Member

 RCAT:DueToRelatedParty2Member

 2024-04-01

 RCAT:SeriesAPreferredStock2Member

 2022-04-01

 2022-03-01

 2022-05-31

 2020-10-01
 2020-10-31

 2021-04-01
 2021-04-30

 RCAT:WarrantAssumptionsUsedMember

 RCAT:WarrantAssumptionsUsedMember

 RCAT:OptionsAssumptionsUsedMember

 RCAT:OptionsAssumptionsUsedMember

 RCAT:OptionsAssumptionsUsedMember

 RCAT:OptionsAssumptionsUsedMember

 2021-04-30

 UNITED
STATES

 SECURITIES
AND EXCHANGE COMMISSION

 WASHINGTON,
D.C. 20549

 FORM

 (Mark One)

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

 For
the fiscal year ended April 30, 2024

 or

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

 For
the transition period from ________ to _________

 Commission
File Number: 001-40202

 Red
Cat Holdings, Inc.

 (Exact
name of registrant as specified in its charter)

 Nevada

 88-0490034

 (State or other jurisdiction
 of incorporation or organization)

 (I.R.S. Employer Identification
 No.)

 15 Ave. Munoz Rivera,
 Ste 2200

 San Juan, PR

 00901

 (Address of principal executive
 offices)

 (Zip Code)

 Registrant's
telephone number, including area code: (833) 373-3228

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

 Title
 of each class

 Trading
 Symbol(s)

 Name
 of each exchange on which registered

 Common
 stock, par value $0.001

 RCAT

 Nasdaq
 Capital Market

 Securities registered
pursuant to Section 12(g) of the Act: None.

if the registrant is a well-known seasoned issuer, as defined in Rule 405 of the Securities Act. Yes
 No

if the registrant is not required to file reports pursuant to Section 13 or Section 15(d) of the Act. Yes
 No

whether the registrant (1) has filed all reports required to be filed by Section 13 or 15(d) of the Securities Exchange Act of 1934 during
the preceding 12 months (or for such shorter period that the registrant was required to file such reports), and (2) has been subject
to such filing requirements for the past 90 days. Yes No

whether the registrant has submitted electronically every Interactive Data File required to be submitted pursuant to Rule 405 of Regulation
S-T (§ 232.405 of this chapter) during the preceding 12 months (or for such shorter period that the registrant was required
to submit such files). Yes No

whether the registrant is a large accelerated filer, an accelerated filer, a non-accelerated filer, a smaller reporting company, or an
emerging growth company. See the definitions of "large accelerated filer," "accelerated filer," "smaller
reporting company," and "emerging growth company" in Rule 12b-2 of the Exchange Act.

 Large accelerated filer

 Accelerated filer

 Non-accelerated filer

 Smaller reporting company

 Emerging growth company

 If an emerging growth
company, indicate by check mark if the registrant has elected not to use the extended transition period for complying with any new or
revised financial accounting standards provided pursuant to Section 13(a) of the Exchange Act.

whether the registrant has filed a report on and attestation to its management's assessment of the effectiveness of its internal
control over financial reporting under Section 404(b) of the Sarbanes-Oxley Act (15 U.S.C. 7262(b)) by the registered public accounting
firm that prepared or issued its audit report.

 If securities are registered
pursuant to Section 12(b) of the Act, indicate by check mark whether the financial statements of the registrant included in the filing
reflect the correction of an error to previously issued financial statements.

whether any of those error corrections are restatements that required a recovery analysis of incentive-based compensation received by
any of the registrant's executive officers during the relevant recovery period pursuant to §240.10D-1(b).

whether the registrant is a shell company (as defined in Rule 12b-2 of the Exchange Act). Yes
 No

 The aggregate market
value of the voting and non-voting common equity held by non-affiliates computed by reference to the price at which the common equity
was last sold, or the average bid and asked price of such common equity, as of the last business day of the registrant's most recently
completed second fiscal quarter was $ 50,844,411.

 As of August 5, 2024,
there were 74,600,737 shares of the registrant's common stock outstanding.

 DOCUMENTS INCORPORATED
BY REFERENCE

 Portions
of the registrant's definitive proxy statement for the 2024 Annual Meeting of Stockholders are incorporated herein by reference
in Part III of this annual report on Form 10-K to the extent stated herein. Such proxy statement will be filed with the Securities and
Exchange Commission pursuant to Regulation 14A not later than 120 days after the close of the registrant's fiscal year.

 Page

 PART
 I

 Item 1.

 Business

 Item 1A.

 Risk Factors

 Item 1B.

 Unresolved Staff Comments

 Item 1C.

 Cybersecurity

 Item 2.

 Properties

 Item 3.

 Legal Proceedings

 Item 4

 Mine Safety Disclosures

 PART
 II

 Item 5.

 Market for Registrant's
 Common Equity, Related Stockholder Matters and Issuer Purchases of Equity Securities

 Item 6.

 Reserved

 Item 7.

 Management's Discussion
 and Analysis of Financial Condition and Results of Operations

 Item 7A.

 Quantitative and Qualitative
 Disclosures About Market Risk

 Item 8.

 Financial Statements
 and Supplementary Data

 Item 9.

 Changes in and Disagreements
 with Accountants on Accounting and Financial Disclosure

 Item 9A.

 Controls and Procedures

 Item 9B.

 Other Information

 Item 9C.

 Disclosure Regarding
 Foreign Jurisdictions that Prevent Inspections

 PART
 III

 Item 10.

 Directors, Executive
 Officers, and Corporate Governance

 Item 11.

 Executive Compensation

 Item 12.

 Security Ownership of
 Certain Beneficial Owners and Management and Related Stockholder Matters

 Item 13.

 Certain Relationships
 and Related Transactions, and Director Independence

 Item 14.

 Principal Accountant
 Fees and Services

 PART
 IV

 Item 15.

 Exhibits and Financial
 Statement Schedules

 Item 16.

 Form 10-K Summary

 Signatures

 FORWARD-LOOKING
STATEMENTS

 This Annual Report
contains forward-looking statements within the meaning of Section 27A of the Securities Act of 1933, as amended (the "Securities
Act") and Section 21E of the Securities Exchange Act of 1934, as amended (the "Exchange Act"). Such forward-looking statements
include, among others, those statements including the words "believes", "anticipates", "expects", "intends",
"estimates", "plans" and words of similar import. Such forward-looking statements involve known and unknown risks,
uncertainties and other factors that may cause our actual results, performance or achievements, or industry results, to be materially
different from any future results, performance or achievements expressed or implied by such forward-looking statements.

 Forward-looking statements
are based on our current expectations and assumptions regarding our business, potential target businesses, the economy, and other future
conditions. Because forward-looking statements relate to the future, by their nature, they are subject to inherent uncertainties, risks
and changes in circumstances that are difficult to predict. Our actual results may differ materially from those contemplated by the forward-looking
statements. Therefore, we caution you that you should not rely on any of these forward-looking statements as statements of historical
fact or as guarantees or assurances of future performance. Important factors that could cause actual results to differ materially from
those in the forward-looking statements include (i) the market and sales success of our existing and any new products, (ii) our ability
to raise capital when needed and on acceptable terms, (iii) our ability to make acquisitions and integrate acquired businesses into our
company, (iv) our ability to attract and retain management, (v) the intensity of competition, (vi) changes in the political and regulatory
environment and in business and economic conditions in the United States and globally, (vii) geopolitical conflicts throughout the world,
including those in Ukraine and Israel. These risks and others described under the section "Risk Factors" below are not exhaustive.

 Given these uncertainties,
readers of this Annual Report are cautioned not to place undue reliance on such forward-looking statements. We disclaim any obligation
to update any such factors or to publicly announce the result of any revisions to any of the forward-looking statements contained herein
to reflect future events or developments.

 All references in this
Annual Report to the "Company", "we", "us", or "our", are to Red Cat Holdings, Inc., a Nevada
corporation, including its wholly owned consolidated subsidiaries Skypersonic, Inc. ("Skypersonic"), Teal Drones, Inc. ("Teal"),
and Red Cat Propware, Inc. ("Propware"), as well as Rotor Riot LLC ("Rotor Riot"), Fat Shark Holdings, Ltd. ("Fat
Shark"), which were wholly owned subsidiaries until February 16, 2024.

 ITEM 1. BUSINESS

 Overview

 The Company was originally incorporated under the
laws of the State of Colorado in 1984 under the name Oravest International, Inc. In November 2016, we changed our name to TimefireVR,
Inc. and re-incorporated in Nevada. In May 2019, the Company completed a share exchange agreement with Propware which resulted in the
Propware shareholders acquiring an 83% ownership interest, and management control, of the Company. In connection with the share exchange
agreement, we changed our name to Red Cat Holdings, Inc. ("Red Cat" or the "Company" or "we") and
our operating focus to the drone industry.

 Prior to the share exchange agreement, Propware was
focused on the research and development of software solutions that could provide secure cloud-based analytics, storage and services for
the drone industry. Following the share exchange agreement and its name change, Red Cat has completed a series of acquisitions and financings
which have broadened the scope of its activities in the drone industry. These acquisitions included:

 •

 In January 2020, we acquired Rotor Riot, a reseller of drones and related parts, primarily to the consumer marketplace through its digital storefront located at www.rotorriot.com. The total purchase price was $2.0 million.

 •

 In November 2020, the Company acquired Fat Shark which sells consumer electronics products to the first-person view ("FPV") sector of the drone industry. Fat Shark's flagship products are headsets with a built-in display (or "goggles") that allow a pilot to see a real-time video feed from a camera typically mounted on an aerial platform or drone. The total purchase price was $8.4 million.

 •

 In May 2021, we acquired Skypersonic, a provider of drone products and software solutions that enable drone inspection flights that can be executed by pilots anywhere in the world. Skypersonic powers drones to "Fly Anywhere" and "Inspect the Impossible". Its patented software and hardware solutions allow for inspection services in restricted spaces where GPS is denied or unavailable. The total purchase price was $2.8 million.

 •

 In August 2021, the Company acquired Teal, a leader in providing sophisticated and complex unmanned aerial vehicle ("UAV") technology, primarily drones, to government and commercial enterprises, most notably, the military. Teal manufactures drones approved by the U.S. Department of Defense for reconnaissance, public safety, and inspection applications. The total purchase price was $10.0 million.

 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, Inc. (or "Unusual Machines"
or "UMAC"). 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.

 Key Business
Accomplishments during Fiscal 2024 and to date include:

 Scaling
Teal 2, a military-grade sUAS Designed to "Dominate the Night "

 Following its acquisition
by Red Cat in August 2021, Teal accelerated efforts on the development of its next generation drone for our Enterprise segment. These
efforts culminated in the launch of the Teal 2 in April 2023. The Teal 2 is the first small, unmanned aircraft system ("sUAS")
designed to "Dominate the Night", when most combat operations take place, through its enhanced capabilities. The Teal 2 offers
the latest intelligence, surveillance, and reconnaissance ("ISR") technology and delivers time-critical information that enables
the warfighter to make faster and smarter decisions.

 The Teal 2 is manufactured
exclusively at Teal's purpose-built factory in Salt Lake City, Utah. Teal originally moved into the facility in October 2021. In
January 2022, Teal doubled the size of the facility, which now totals approximately 22,000 square feet, to fully scale production capacity
to meet the forecast growth in demand and to house its expanding team of software and technology engineers. We believe that maximum production
capacity for this facility can reach 5,000 or more drones per month over the next few years, provided that additional capital investments
are made and manufacturing efficiencies realized. Manufacturing in the United States, "Made in the USA," is a critical consideration
of the U.S. government and other state and local government agencies.

 During
Fiscal 2024, Teal continued to scale the manufacturing facility, including dedicated teams for production and assembly, manufacturing
engineering, supply chain and logistics, warranty and returns, as well as a flight operations team that is focused on manufacturing and
quality assurance and quality control.

 Designation of Teal
2 as Blue UAS received from U.S. Department of Defense

 In June 2023, the Teal 2 received clearance from
the U.S. Department of Defense ("DoD") to be designated as a Blue UAS. The DoD defines these drones as NDAA (National Defense
Authorization Act) compliant, validated as cyber secure, and safe to fly. This designation enables Teal to fill orders from federal, state,
and local government agencies subject to oversight by the DoD, including those orders that were contingent upon receiving certification.
In addition, many governments of allied nations are more likely to purchase Blue UAS approved drones. Teal's legacy drone, the Golden
Eagle, is also on the cleared list.

 After the U.S. Army banned its forces from using
Chinese-made quadcopters due to security risks (the radio controls of the drone are unencrypted and the devices could potentially capture,
store and upload sensitive information to the Chinese government), the DoD began developing its own alternatives under a defense program
known as Blue sUAS. Blue sUAS is an initiative of the Defense Innovation Unit ("DIU"), the only DoD organization focused on accelerating
the adoption of commercial and dual use technology to solve operational challenges at a speed and scale that is faster and higher than
normal for government agencies.

 Red Cat Futures Initiative

 In May 2024, we announced the formation of the
Red Cat Futures Initiative (RFI). RFI is an independent, industry-wide consortium of robotics and autonomous systems (RAS) partners dedicated
to putting the most advanced and interoperable uncrewed aircraft systems into the hands of warfighters. Anchored by Red Cat's Teal
Drones, the RFI unites the world's most innovative UAS hardware and software companies focused on AI/ML, swarming, FPV, command
and control, and payloads.

 Founding members include Ocean Power Technologies
(NYSE: OPTT), Sentien Robotics, Primordial Labs, Athena AI, Unusual Machines, Reach Power, Doodle Labs, and MMS Products. The shared goal
is advocacy, integrations and co-marketing that bridges considerable technology gaps through modular open architecture.

 Government Contracts and Orders

 The Enterprise segment is focused on U.S. federal
government agencies, particularly the DoD, as its initial target market. Its longer term target customer base includes U.S. state
and local government agencies, as well as governments of foreign allies. An overview of existing government contracts and recent
developments include:

 Finalist for Short Range Reconnaissance Program
of Record

 In March 2022, Teal was selected by the DoD's
DIU and the U.S. Army to compete in the Short Range Reconnaissance Tranche 2 (SRR T2) Program of Record. The rigorous technical requirements
and program objectives of SRR T2 dramatically narrowed the field from 37 drone manufacturers down to two vendors. The Army has
indicated that Tranche 2 and 3 have been combined and will represent the final tranche of the SRR program.

 Teal was selected to develop a next-generation
sUAS designed for intelligence, surveillance and reconnaissance (ISR) duties, with a focus on autonomous capability, for the U.S. Army.
The ultimate goal of the SRR T2 program is to provide a small, rucksack portable, fully encrypted sUAS that provides all Army infantry
platoons (consisting of 20-50 soldiers) with situational awareness beyond the next terrain.

 As of May 2024, Teal has completed all milestones
in its SRR T2 contract, whose value totaled $5.7 million. Teal expects the Army to announce vendor selection of a production award by
the fourth quarter of calendar 2024.

 U.S. Border Patrol

 $1.8 Million Purchase Order from U.S. Border
Patrol

 In September 2023, Teal was awarded a $1.8 million
contract from U.S. Customs and Border Protection to provide Teal 2 systems to U.S. Border Patrol. The U.S. Border Patrol is using the
Teal 2 to provide supplemental airborne reconnaissance, surveillance and tracking capability, enhancing situational awareness for U.S.
field commanders and agents.

 Customs and Border Protection Contract Worth
up to $90 Million over Five Years

 In December 2021, Teal was one of only five contractors
designated to participate in a firm, fixed price, multiple award blanket purchase agreement (BPA) by the United States Customs and Border
Protection. The BPA has an estimated value of $90 million in total over a 5-year period.

 The Department of Homeland Security agencies
can place orders through the BPA for unmanned aircraft systems (UAS). The drones will provide supplemental airborne reconnaissance, surveillance,
and tracking capability to enhance situational awareness for field commanders and agents in areas that lack nearby traditional surveillance
systems or available manned air support.

 U.S. Defense Logistics Agency

 In August 2023, Teal received two purchase orders
totaling $5.2 million from the U.S. Defense Logistics Agency (DLA). Both orders were requested by U.S. Air Force Security Forces, whose
role is to defend Air Force bases and installations.

 The procurements were sourced by global
operations support company Noble Supply & Logistics, LLC (NOBLE) as part of the DLA's Special Operational
Equipment Tailored Logistics Support ("SOE TLS Program"). NOBLE is a DLA-designated provider for the SOE TLS Program. This 10-year
program, capped at $33 billion, covers the delivery of logistics support to federal agencies, military bases and
other DLA customers worldwide, helping them meet their special operational equipment requirements.

 NATO Allied Countries

 In March 2024, Teal received $2.5 million in
new contract awards with two NATO allied countries. As part of our expanded global sales strategy, the contract delivery featured Teal
2 drone systems, training, and accessories.

 Product
Development

 Product
development efforts in fiscal 2024 were focused on the scaling of the Teal 2 which was officially launched in April 2023 at the Army
Aviation Mission Solutions Summit. Significant resources were also expended developing the next generation system under the Army's SRR
Tranche 2 program.

 Sales
and Marketing

 Since
acquiring Teal in August 2021, we have built a sales and marketing team which presently consists of 16 direct and support professionals.
Most of their efforts in fiscal 2024 were focused on developing relationships with the military agencies of the U.S. Federal Government.
While the sales cycle for government agencies can be extensive and take considerable time and effort to establish, they can often become
a long-term buyer once initial sales are closed.

 During fiscal 2024,
we continued global expansion efforts among U.S. allies. In December 2023, the team showcased the Teal 2 drone at Expodefensa 2023 in
Latin America. Expodefensa 2023 is a main hub for security and defense in Latin America, allowing international exhibitors to present
their systems and products in response to a growing regional demand. The aim of the event was to help governments and armed forces face
their operational and capability challenges while playing a role in building a safer Latin America.

 In February 2024, the
team showcased the Teal 2 drone at the World Defense Show in Saudi Arabia. The World Defense Show provided a unique platform for the
world's defense industry to network, partner, share knowledge, and discover new innovations and capabilities across all defense
domains. The World Defense Show attracted key defense figures, government officials, decision-makers, and thought leaders across all
levels of the supply chain.

 Other Teal Information

 Suppliers

 Teal purchases inventory
from over 35 suppliers. Approximately 80% of this inventory is purchased from four vendors. The most critical components are electronics
and cameras. Teal's supply chain is NDAA and Blue UAS compliant. All suppliers are approved based on Teal's strict vendor qualification
process.

 Competition

 Teal's primary competitor is Shenzhen Da-Jiang Innovations
Sciences and Technologies Company Limited ("DJI"), headquartered in Shenzhen, China. Though regulation is trending toward
further restrictions against Chinese made drones, DJI remains a global industry leader and continues to serve markets on which Teal is
focused. Teal's primary domestic competitor is Skydio Inc. This company was selected alongside Teal out of 37 companies to compete
in the Short Range Reconnaissance Tranche 2 program. Future competitors may include established defense contractors that are better capitalized
and resourced to compete in Teal's markets. Teal competes with a combination of its unique product value propositions (i.e., nighttime
capability, modular platform), and scalable, low-cost, domestic manufacturing.

 The Drone Industry

 The drone industry
continues to expand to become a powerful business tool and recreational activity, with growth occurring broadly and across our targeted
industries. According to Drone Industry Insights, the global drone market is expected to grow to $54.6 billion by 2030, with the commercial
market growing at a 7.7% compound annual growth rate ("CAGR"). According to Vantage Market Research, the global military
drone market is projected to reach a value of $34.9 billion by 2030 at a CAGR of 11.6%.

 Government Regulation
and Federal Policy

 The Federal Aviation
Administration

 The Federal Aviation Administration (the "FAA")
of the United States Department of Transportation is responsible for the regulation and oversight of civil aviation within the U.S. Its
primary mission is to ensure the safety of civil aviation. The FAA has adopted the name "unmanned aircraft systems" ("UAS")
to describe aircraft systems without a flight crew on board. More common names include drone, UAV and remotely operated aircraft.

 The FAA began issuing conditional approvals allowing
the operation of drones as early 2005 with their scope and frequency expanding in recent years with the significant increase in the number
of drones sold. In December 2015, the FAA announced that all drones weighing more than 250 grams, or 0.55 pounds, must be registered with
the FAA. In June 2016, the FAA released a new section under title 14 of the Code of Federal Regulations (Part 107) defining a regulatory
framework for the commercial, industrial and public safety use of drones, establishing a licensing program for drone pilots, and issuing
Remote Pilot certificates to qualified pilots. As of July 2023, the FAA reported the registration of almost 870,000 drones, of which approximately
350,000 were commercial and approximately 520,000 were recreational. In addition, more than 330,000 remote pilots were certified. This
data strongly suggests drones represent the largest share of commercial aviation in the United States by number of pilots, aircraft, and
flights.

 In January 2021, the
FAA finalized rules requiring that drones be identifiable remotely. These rules became effective for drone manufacturers in September
2022 and for drone pilots in September 2023. The FAA believes that remote ID technologies enhance safety and security by allowing the
FAA, law enforcement, and federal security agencies to identify drones flying in their jurisdiction. These efforts lay the foundation
for more complex operations, such as those beyond visual line of sight at low altitudes, as the FAA and the drone industry move toward
a unified air traffic management ecosystem as drone operations become a routine fixture in the National Airspace System (the "NAS").

 In May of 2023, the
FAA began soliciting recommendations from the industry regarding rule making supporting the implementation of Beyond Visual Line of Sight
(BVLOS) operations. This rulemaking would support standard implementation of routine flights over the horizon, and potentially multiple
miles from a drone's control station and pilot. This rulemaking would free drone pilots and operators from restrictive and labor-intensive conditional approval petitions, and would improve the economies of scale for drones to tackle larger mission sets, such as
surveying miles of power lines or railroad tracks, or securing miles of rural border.

 In July 2023, the FAA
released a notice of proposed rulemaking for another regulation that would ease the integration of UAS into the NAS. This rule, known
as Modernization of Special Purpose Airworthiness Certificates, seeks to modernize the manner in which the FAA performs safety assessment
of the design of certain aircraft, including UAS. As a result, the testing and evaluation burden on manufacturers is greatly decreased,
and the cost of development of UAS may be dramatically reduced.

 American Security
Drone Act

 In February 2023, two
Congressman introduced the American Security Drone Act (ASDA) which would prohibit the purchase and operation of drones from countries
identified as national security threats such as China. The basis for the legislation is that purchases from these countries (i) pose
a significant threat to national security, (ii) represent efforts to infiltrate and influence American society, and (iii) risk the theft
of personal and business data. Specifically, the American Security Drone Act:

 •

 Prohibits federal departments and agencies from procuring
 certain foreign commercial off-the-shelf drone or covered unmanned aircraft system manufactured or assembled in countries identified
 as national security threats and provides a timeline to end current use of these drones.

 •

 Prohibits the use of federal funds awarded through certain
 contracts, grants, or cooperative agreements to state or local governments from being used to purchase foreign commercial off-the-shelf
 drones or covered unmanned aircraft systems manufactured or assembled in a country identified as a national security threat.

 •

 Requires the Comptroller General of the United States to
 submit a report to Congress detailing the amount of foreign commercial off-the-shelf drones and covered unmanned aircraft systems
 procured by federal departments and agencies from countries identified as national security threats.

 In
December 2023, the ASDA was officially passed into law as part of the National Defense Authorization Act.

 Other Corporate
Information

 Environmental
Considerations

 While the
operations of many businesses have some form of negative impact on the environment, drones have a unique ability to provide a positive
contribution. Many of these relate to a drone's ability to reach places in a more efficient manner, and include such activities
as:

 •

 Aerial mapping
 and nature monitoring

 •

 Maintenance
 of renewable energy sources and infrastructure

 •

 Disaster relief
 monitoring

 •

 Agriculture
 sustainability

 •

 Wildlife conservation

 Intellectual
Property

 The
Company has consolidated its intellectual property ("IP") into a subsidiary, UAVPatent Corp. The subsidiary holds 22 issued
patents and registered designs and 8 pending patents and registered designs. The IP portfolio includes design and utility patents ranging
from modular architectures to autonomous capabilities. None of the patents are currently licensed and IP is generated in the general
course of engineering design.

 UAVPatent
Corp also has the trademarks on the Teal, Skypersonic, and Red Cat brands and logos.

 Employees

 As of June 30, 2024,
the Company had 89 full-time employees.

 Research and
Development

 During the years ended
April 30, 2024 and 2023, we incurred research and development costs of $5,500,932 and $4,902,334, respectively, excluding $395,105 and
$692,947 of stock-based compensation, respectively.

 Item
1A. RISK FACTORS

 Risk Factor Summary

 Risks Related
to our Financial Results and Condition

 •

 We have incurred net losses
 since inception.

 •

 We may need additional capital
 to fund our expanding operations until we reach profitability, and if we are not able to obtain sufficient capital, we may be forced
 to limit or curtail our operations.

 •

 Lack of long-term purchase
 orders and commitments from customers may lead to a rapid decline in sales.

 •

 Our products require a continuing
 investment in research and development, and may experience technical problems or delays, which could lead the business to fail.

 •

 The nature of our business
 involves significant risks and uncertainties that may not be covered by insurance or indemnity.

 •

 Product quality issues and
 a higher-than-expected number of warranty claims or returns could harm our business and operating results.

 •

 Our products may experience
 declining unit prices and we may not be able to offset that decline with production cost decreases or higher unit sales.

 •

 Our operating results may be
 adversely impacted by worldwide political, economic and public health uncertainties and specific conditions in the markets we address.

 •

 Acquisitions could divert the
 attention of key personnel, be difficult to integrate, dilute our existing shareholders and adversely impact our financial results.

 •

 Our failure to effectively
 manage growth could harm our business.

 •

 Our products are subject to
 lengthy development cycles.

 •

 We expect to incur substantial
 research and development costs related to identifying and commercializing new products and services which may never result in revenues.

 Risks Related
to our Operations

 •

 Our operations may be adversely
 affected if we lose our rights under third-party technology licenses.

 •

 If our customers are not satisfied
 with our technical support, firmware or software updates, they may choose not to purchase our products which would adversely impact
 business and operating results.

 •

 Our use of open-source software
 could negatively affect our ability to sell our products and could subject us to possible litigation.

 •

 We must recruit and retain
 highly trained and experienced employees, especially engineers, in order to succeed in our business.

 •

 Our facilities and information
 systems and those of our key suppliers could be damaged as a result of disasters or unpredictable events which could have an adverse
 effect on our business operations.

 •

 We rely on third-party suppliers,
 some of which are sole-source suppliers, to provide components for our products which may lead to supply shortages, long lead times
 for components, and supply changes, any of which could disrupt our supply chain, increase our costs, and adversely impact our operating
 results.

 •

 Several steps of our manufacturing
 processes are dependent upon certain critical machines and tools which could result in delivery interruptions and foregone revenues.

 •

 We depend on third parties
 to provide integrated circuit chip sets and other critical components for use in our products.

 Risks
Related to our Industry

 •

 We operate in an emerging and rapidly growing industry which makes it difficult
to evaluate our current business and prospects.

 •

 We face competition from larger
 companies that have substantially greater resources which challenges our ability to establish market share, grow our business segments,
 and reach profitability.

 •

 We may not be able to keep
 pace with technological advances in the drone industry.

 •

 Cybersecurity risks could adversely
 affect our business and disrupt our operations.

 Risks Related
to Our Enterprise Segment

 •

 U.S. government contracts are
 generally not fully funded at inception and may include provisions that are not favorable to us which could adversely impact our
 cash flows and results of operations.

 •

 A decline in U.S. government
 budgets, changes in spending priorities, or delays in contract awards could adversely affect the revenues of our Teal subsidiary.

 •

 Our work for the U.S. government
 could expose us to security risks.

 •

 We are subject to extensive
 government regulation and our failure to comply with these regulations could subject us to penalties that may adversely impact our
 ability to operate our business.

 Risks Related to Our Common
Stock

 •

 Our management has voting control
 of the Company.

 •

 Our failure to maintain effective
 internal controls over financial reporting could have an adverse impact on the Company.

 •

 We have never paid dividends
 and we do not expect to pay dividends for the foreseeable future.

 •

 The listing of our securities
 on Nasdaq subject us to additional regulations and compliance requirements.

 •

 Our Board of Directors may
 authorize and issue shares of new classes of stock that could adversely affect current holders of our common stock.

 •

 Our shares will be subordinate
 to all of our debts and liabilities which increases the risk that investors could lose their entire investment.

 •

 The market price of our shares
 of common stock is subject to fluctuation.

 •

 Future capital raises may dilute
 our existing stockholders' ownership and adversely impact the fair value of their investment.

 Risks Related to Regulatory Matters

 •

 The drone industry is subject
 to various laws and government regulations which could complicate and delay our ability to introduce products, maintain compliance,
 and avoid violations which could negatively impact our financial condition and results of operations.

 •

 Our business and products are
 subject to government regulation, and we may incur additional compliance costs or be forced to suspend or cease operations if we
 fail to comply.

 •

 Our results of operations may
 suffer if we are not able to successfully manage our exposure to foreign exchange rate risks.

 •

 Our international operations,
 including the use of foreign contract manufacturers, subjects us to international operational, financial, legal, political and public
 health risks which could harm our operating results.

 •

 We could be adversely affected
 by violations of the U.S. Foreign Corrupt Practices Act or similar anti-bribery laws in other jurisdictions in which we operate.

 •

 We are subject to governmental
 export and import controls, and economic sanctions laws that could subject us to liability and impair our ability to compete in international
 markets.

 •

 Changes in trade policy in
 the United States and other countries may have adverse impacts on our business, results of operations and financial condition.

 •

 We may collect, store, process
 and use the personal information of our customers which subjects us to governmental regulation related to privacy, information security
 and data protection. Any cybersecurity breaches or our failure to comply with such legal obligations by us, or by our third-party
 service providers or partners, could harm our business.

 Risks
Related to Intellectual Property

 •

 Our products could infringe
 on the intellectual property rights of others.

 •

 Our intellectual property rights
 and proprietary rights may not adequately protect our products.

 Risks
Related to our Financial Results and Condition

 We
have incurred net losses since inception.

 We
have never been profitable and reported an accumulated deficit of approximately $81,100,000 at April 30, 2024. These losses have had
an adverse effect on our financial condition, stockholders' equity and working capital. We will need to generate higher revenues,
improve profit margins, and control operating costs in order to attain profitability. We can provide no assurances that we will be able
to reach profitability.

 We
may need additional capital to fund our expanding operations until we reach profitability, and if we are not able to obtain sufficient
capital, we may be forced to limit or curtail our operations.

 If
additional equity and/or debt financing is not available, then we may not be able to continue to develop our business activities, and
we will have to modify our business plan. These factors could have a material adverse effect on our future operating results and our
financial condition. If we are unable to raise additional funds, we could be forced to cease our business activities and dissolve. In
such an event, we may incur additional financial obligations, including the accelerated maturity of debt obligations, lease termination
fees, employee severance payments, and other creditor and dissolution-related obligations.

 Our
ability to raise financing through sales of equity and/or debt securities depends on general market conditions and the demand for our
common stock and/or debt securities. We may be unable to raise adequate capital through sales of equity and/or debt securities, and if
our stock has a low market price at the time of such sales, our existing stockholders could experience substantial dilution. If adequate
financing is not available or unavailable on acceptable terms, we may find we are unable to fund expansion, continue offering products
and services, take advantage of acquisition opportunities, develop or enhance services or products, or to respond to competitive pressures
in the industry which may jeopardize our ability to continue operations.

 Lack
of long-term purchase orders and commitments from customers may lead to a rapid decline in sales.

 Our
customers issue purchase orders solely at their own discretion. Customers are generally able to cancel orders (without penalty) or delay
the delivery of products on relatively short notice. In addition, current customers may decide not to purchase products for any reason.
If our customers do not continue to purchase our products, then our sales volume could decline rapidly with little or no warning.

 We
cannot rely on long-term purchase orders or commitments to protect us from the negative financial effects of a decline in demand for
our products. The uncertainty of product orders makes it difficult to forecast sales and allocate resources in a manner consistent with
actual sales. Moreover, expense levels and the amounts invested in capital equipment and new product development costs are based in part
on expectations of future sales and, if expectations regarding future sales are inaccurate, we may be unable to reduce costs in a timely
manner to adjust for sales shortfalls. As a result of lack of long-term purchase orders and purchase commitments, we may experience a
rapid decline in sales.

 Our
products require a continuing investment in research and development, and may experience technical problems or delays, which could lead
the business to fail.

 Our
research and development efforts remain subject to all the risks associated with the development of new products based on emerging and
innovative technologies. This includes, for example, unexpected technical problems or the possible insufficiency of funds for completing
development of these products. If technical problems or delays arise, further improvements in products and the introduction of future
products could be adversely impacted, and we could incur significant additional expenses, an inability to increase revenues and increasing
operating losses.

 The
nature of our business involves significant risks and uncertainties that may not be covered by insurance or indemnity.

 We
develop and sell products where insurance or indemnification may not be available, including (i) those using advanced and unproven technologies
and drones, and (ii) those that collect, distribute and analyze various types of information.

 Failure
of certain of our products could result in loss of life or property damage. Certain products may raise questions with respect to issues
of civil liberties, intellectual property, trespass, conversion and similar concepts. Indemnification to cover potential claims or liabilities
resulting from a failure of technologies developed or deployed may be available in certain circumstances but not in others. We do
not and are not able to maintain insurance to protect against our risks and uncertainties. Substantial claims resulting from an accident,
failure of our product, or liability arising from our products in excess of any indemnity or insurance coverage (or for which indemnity
or insurance is not available or was not obtained) could harm our financial condition, cash flows, and operating results. Any accident,
even if fully covered or insured, could negatively affect our reputation among our customers and the public, and make it more difficult
for us to compete effectively.

 Product
quality issues and a higher-than-expected number of warranty claims or returns could harm our business and operating results.

 The
products that we sell could contain defects in design or manufacture. Defects could also occur in the products or components that are
supplied to us. There can be no assurance we will be able to detect and remedy all defects in the hardware and software we sell which
could result in product recalls, product redesign efforts, loss of revenue, reputational damage and significant warranty and other remediation
expenses. If we determine that a product does not meet product quality standards or may contain a defect, the launch of such product
could be delayed until we remedy the quality issue or defect. The costs associated with any protracted delay necessary to remedy a quality
issue or defect in a new product could be substantial.

 We
generally provide a one-year warranty on all of our products. The occurrence of any material defects in our products could expose us
to liability for damages and warranty claims in excess of our current reserves, and we could incur significant costs to correct any defects,
warranty claims or other problems. In addition, if any of our product designs are defective or are alleged to be defective, we may be
required to participate in a recall campaign. In part due to the terms of our warranty policy, any failure rate of our products that
exceeds our expectations may result in unanticipated losses. Any negative publicity related to the perceived quality of our products
could affect our brand image and decrease retailer, distributor and consumer confidence and demand, which could adversely affect our
operating results and financial condition. Further, accidental damage coverage and extended warranties are regulated in the United States
at the state level and are treated differently within each state. Additionally, outside of the United States, regulations for extended
warranties and accidental damage vary from country to country. Changes in interpretation of the regulations concerning extended warranties
and accidental damage coverage on a federal, state, local or international level may cause us to incur costs or have additional regulatory
requirements to meet in the future in order to continue to offer our support services. Our failure to comply with past, present and future
similar laws could result in reduced sales of our products, reputational damage, penalties and other sanctions, which could harm our
business and financial condition.

 Our
products may experience declining unit prices and we may not be able to offset that decline with production cost decreases or higher
unit sales.

 Prices
of established enterprise electronics, displays, personal computers, and mobile products tend to decline significantly over time or as
new enhanced versions are introduced, frequently every 12 to 24 months in the markets in which we compete. In order to maintain adequate
product profit margins over the long term, we believe that we will need to continuously develop product enhancements and new technologies
that will either slow price declines of our products or reduce the cost of producing and delivering our products. While we anticipate
opportunities to reduce production costs over time, we may not be able to reduce our component costs. We expect to attempt to offset
the anticipated decrease in our average selling price by introducing new products, increasing our sales volumes, or adjusting our product
mix. If we fail to do so, our results of operations will be materially and adversely affected.

 Our
operating results may be adversely impacted by worldwide political, economic and public health uncertainties and specific conditions
in the markets we address.

 A
deterioration in global economic, financial, and/or public health conditions, including global pandemics, economic recessions and political
turmoil could materially adversely affect (i) our ability to raise, or the terms of needed capital; (ii) demand for our current and future
products; and (iii) the supply of components for our products. We cannot predict the timing, strength, or duration of any economic slowdown
or subsequent economic recovery, worldwide, or in the drone industry.

 Acquisitions
could divert the attention of key personnel, be difficult to integrate, dilute our existing shareholders and adversely impact our financial
results.

 Since
January 2020, we have completed four acquisitions which have significantly increased the scope of our operations and our employee headcount.
Acquisitions include a wide range of risks, any of which could hurt our business, including the following:

 •

 difficulties in integrating the operations of a newly acquired company
 including existing products and contracts, differences in corporate culture, operating systems and other integration issues;

 •

 challenges supporting and transitioning the customers of acquired companies
 and the loss of any acquired customers will adversely impact our revenues and operating results;

 •

 assumption of known and unknown operating problems and our potential
 inability to address them in a timely and efficient manner;

 •

 risks of entering new geographic markets where we have no prior experience
 and are required to gain an understanding of the legal, regulatory, labor and business laws of these new markets;

 In
addition, there are many financial risks associated with the cost of acquisitions. If we finance the cost of an acquisition using common
stock, then our existing shareholders will be diluted and our stock price could decrease. If we finance the cost of an acquisition using
debt, such financing could include restrictive covenants that restrict our operating and financial flexibility. If the stock market perceives
that we overpaid for the acquisition, then our stock price could decrease.

 Our failure
to effectively manage growth could harm our business.

 We
intend to expand the number and types of products we sell. We will need to replace and regularly introduce on a timely basis new products
and technologies, enhance existing products, and effectively stimulate customer demand for new products and upgraded or enhanced versions
of our existing products.

 The
replacement and expansion of our products places a significant strain on our management, operations and engineering resources. Specifically,
the areas that are strained most by these activities include the following:

 •

 New Product
 Launches: With the changes in and growth of our product portfolio, we will experience increased complexity in coordinating
 product development, manufacturing, and shipping. As this complexity increases, it places a strain on our ability to accurately coordinate
 the commercial launch of our products with adequate supply to meet anticipated customer demand and effectively market to stimulate
 demand and market acceptance. We have experienced delays in the past. If we are unable to scale and improve our product launch coordination,
 we could frustrate our customers and lose possible retail shelf space and product sales;

 •

 Existing
 Products Impacted by New Introductions: The introduction of new products or product enhancements may shorten the life
 cycle of our existing products, or replace sales of some of our current products, thereby offsetting the benefit of a successful
 product introduction and may cause customers to defer purchasing our existing products in anticipation of the new products. These
 occurrences could potentially lead to challenges in managing inventory of existing products. We may also provide price protection
 to some of our retailers as a result of new product introductions and reduce the prices of existing products. If we fail to effectively
 manage new product introductions, our revenue and profitability may be harmed; and

 •

 Forecasting,
 Planning and Supply Chain Logistics: With the changes in and growth of our product portfolio, we will experience increased
 complexity in forecasting customer demand, in planning for production, and in transportation and logistics management. If we are
 unable to scale and improve our forecasting, planning, production, and logistics management, we could frustrate our customers, lose
 product sales or accumulate excess inventory.

 Our
products are subject to lengthy development cycles.

 Our
products are subject to lengthy product development cycles. The time elapsed between initial sampling of our products, the custom design
of our products to meet specific product requirements, and the ultimate incorporation of our products into salable products is significant,
often with a duration of more than one year. If our products fail to meet our customers' cost, performance, or technical requirements
or if unexpected technical challenges arise in the integration of our products into enterprise markets, then our operating results could
be significantly and adversely affected. Long delays in achieving customer qualification and incorporation of our products also could
adversely affect our business. Many head-mounted display companies are introducing digital head-mounted displays which could create shortages
of components and provide an opportunity for companies with significantly greater resources than us to accelerate migration to digital
products in a manner or timeline which we cannot meet, which could cause us to lose market share and harm our business and prospects.
These same risks exist in our Enterprise sector where our competitors include some of the largest defense companies in the world.

 We expect
to incur substantial research and development costs related to identifying and commercializing new products and services which may never
result in revenues.

 Our future growth
depends on expanding into new markets, adapting existing products to new applications, and introducing new products and services that
achieve market acceptance. We plan to incur substantial research and development costs as part of these efforts. We spent $5,896,037
million, or 33% of our revenue, in our fiscal year ended April 30, 2024, on internal research and development activities. We believe
that there are significant investment opportunities in a number of business areas. Because we account for internal research and development
as an operating expense, these expenditures will adversely affect our earnings in the future. Further, our research and development programs
may not produce successful results, and our new products and services may not achieve market acceptance, generate revenue or cash flow,
which could adversely impact our financial results and liquidity.

 Risks Related
to our Operations

 Our
operations may be adversely affected if we lose our rights under third-party technology licenses.

 Our
business relies on technology rights and software licensed from third parties. We could lose our exclusivity or other rights to use the
technology if we fail to comply with the terms and performance requirements of the licenses. In addition, certain licensors may terminate
a license upon our breach and have the right to consent to sublicense arrangements. If we were to lose our rights under any of these
licenses, or if we were unable to obtain required consents to future sublicenses, we could lose a competitive advantage in the market,
and may even lose the ability to commercialize certain products or technologies.

 If
our customers are not satisfied with our technical support, firmware or software updates, they may choose not to purchase our products
which would adversely impact business and operating results.

 Our
business relies on our customers' satisfaction with the technical support, firmware, software and security updates we provide to
support our products. If we fail to provide technical support services and necessary updates that are (i) responsive, (ii) satisfy our
customers' expectations and (iii) resolve issues that they encounter with our products, then customers may choose not to purchase
additional products and we may face brand and reputational harm which could adversely affect our operating results.

 Our
use of open-source software could negatively affect our ability to sell our products and could subject us to possible litigation.

 We
incorporate open-source software into our products. Open-source software is generally licensed by its authors or other third parties
under open-source licenses. Some of these licenses contain requirements that we make available source code for modifications or derivative
works we create based upon the open-source software, and that we license such modifications or derivative works under the terms of a
particular open-source license or other license granting third parties certain rights of further use. Additionally, if a third-party
software provider has incorporated open-source software into software that we license from such provider, we could be required to disclose
any of our source code that incorporates or is a modification of our licensed software. If an author or other third-party that distributes
open-source software that we use or license were to allege that we had not complied with the conditions of the applicable license, we
could incur significant legal expenses defending against those allegations and could be subject to significant damages, enjoined from
offering or selling our products that contained the open-source software and be required to comply with the foregoing conditions. Any
of the foregoing could disrupt and harm our business and financial condition.

 We
must recruit and retain highly trained and experienced employees, especially engineers, in order to succeed in our business.

 We
will need to hire and retain highly skilled technical personnel as employees and as independent contractors in order to develop our products
and grow our business. The competition for highly skilled technical, managerial, and other personnel can be intense. Our recruiting and
retention success is substantially dependent upon our ability to offer competitive salaries and benefits to our employees. We must compete
with companies that possess greater financial and other resources than we do and that may be more attractive to potential employees and
contractors. To be competitive, we may have to increase the compensation, bonuses, stock options and other fringe benefits we offer to
employees in order to attract and retain such personnel. The costs of retaining or attracting new personnel may have a material adverse
effect on our business and operating results. If we fail to attract and retain the technical and managerial personnel required to be
successful, our business, operating results and financial condition could be materially adversely affected.

 Our
facilities and information systems and those of our key suppliers could be damaged as a result of disasters or unpredictable events which
could have an adverse effect on our business operations.

 Our
manufacturing facility is located in Salt Lake City, Utah. We also rely on third-party manufacturing plants in the US, Asia and other
parts of the world to provide key components for our products and services. If major disasters such as earthquakes, hurricanes, tropical
storms pandemics, fires, floods, wars, terrorist attacks, computer viruses, transportation disasters or other events occur in any of
these locations, or the effect of climate change on any of these factors or our locations, or our information systems or communications
network or those of any of our key component suppliers breaks down or operates improperly as a result of such events, our facilities
or those of our key suppliers may be seriously damaged, and we may have to stop or delay production and shipment of our products. We
may also incur expenses relating to such damages. If production or shipment of our products or components is stopped or delayed or if
we incur any increased expenses as a result of damage to our facilities, our business, operating results and financial condition could
be materially adversely affected.

 We
rely on third-party suppliers, some of which are sole-source suppliers, to provide components for our products which may lead to supply
shortages, long lead times for components, and supply changes, any of which could disrupt our supply chain, increase our costs, and adversely
impact our operating results

 Our
ability to meet customer demand depends on our ability to obtain timely and adequate delivery of components for our products. All of
the components that go into our products are sourced from third-party suppliers. Some of the key components used to manufacture our products
come from a limited or single source of supply or by a supplier that could potentially become a competitor. Our contract manufacturers
generally purchase these components on our behalf from approved suppliers. We are subject to the risk of shortages and long lead times
in the supply of these components and the risk that our suppliers discontinue or modify components used in our products. In addition,
the lead times associated with certain components are lengthy and preclude rapid changes in quantities and delivery schedules. We have
experienced component shortages and the availability of these components may be unpredictable in the future.

 If
we lose access to or experience a significant disruption in the supply of products and components from a supplier, we may be unable to
locate alternative suppliers of comparable quality at an acceptable price, or at all, and our business could be materially and adversely
affected. In addition, if we experience a significant increase in demand for our products, our suppliers might not have the capacity
or elect not to meet our needs as they allocate components to other customers. Developing suitable alternate sources of supply for these
components may be time-consuming, difficult and costly, and we may not be able to source these components on terms that are acceptable
to us, or at all, which may adversely affect our ability to fulfill our orders in a timely or cost-effective manner. Identifying a suitable
supplier is an involved process that requires us to become satisfied with the supplier's quality control, responsiveness and service,
financial stability, labor and other ethical practices. If we seek to source materials from new suppliers, there can be no assurance
that we could do so in a manner that does not disrupt the manufacture and sale of our products.

 Our
reliance on single source, or a small number of suppliers involves a number of additional risks, including risks related to supplier
capacity constraints, price increases, timely delivery, component quality, failure of a key supplier to remain in business and adjust
to market conditions, as well as natural disasters, fire, acts of terrorism or other catastrophic events, including global pandemics.

 Several
steps of our manufacturing processes are dependent upon certain critical machines and tools which could result in delivery interruptions
and foregone revenues.

 We
currently have little equipment redundancy in manufacturing locales. If we experience any significant disruption in manufacturing or
a serious failure of a critical piece of equipment, we may be unable to supply products to our customers in a timely manner. Interruptions
in our manufacturing could be caused by equipment problems, the introduction of new equipment into the manufacturing process or delays
in the delivery of new manufacturing equipment. Lead-time for delivery, installation, testing, repair and maintenance of manufacturing
equipment can be extensive. We have experienced production interruptions in the past and no assurance can be given that we will not lose
potential sales or be able to meet production orders due to future production interruptions in our manufacturing lines.

 We
depend on third parties to provide integrated circuit chip sets and other critical components for use in our products.

 We
do not manufacture the integrated circuit chip sets, optics, micro-displays, backlights, projection engines, printed circuit boards or
other electronic components which are used in our products. Instead, we purchase them from third-party suppliers or rely on third-party
independent contractors for these integrated circuit chip sets and other critical components, some of which are customized, or custom
made for us. We also may use third parties to assemble all or portions of our products. Some of these third-party contractors and suppliers
are small companies with limited financial resources. If any of these third-party contractors or suppliers were unable or unwilling to
supply these components, our sales and operating results would be adversely impacted. As the availability of components decreases, the
cost of acquiring those components ordinarily increases. High growth product categories have experienced chronic shortages of components
during periods of exceptionally high demand. If we do not properly anticipate the need for or procure critical components, we may pay
higher prices for those components, our gross profits may decrease and we may be unable to meet the demands of our customers and end-users
which could reduce our competitiveness, cause a decline in our market share and have a material adverse effect on our results of operations.

 Risks Related to
our Industry

 We operate in an emerging
and rapidly growing industry which makes it difficult to evaluate our current business and prospects.

 The drone industry is relatively
new and is growing rapidly. As a result, it is difficult to evaluate our business and prospects. We cannot accurately predict whether,
and even when, demand for our products will increase, if at all. The risks, uncertainties and challenges encountered by companies operating
in emerging and rapidly growing industries include:

 •

 Generating sufficient
 revenue to cover operating costs and sustain operations;

 •

 Acquiring and
 maintaining market share;

 •

 Attracting and
 retaining qualified personnel, especially engineers with the requisite technical skills;

 •

 Successfully
 developing and commercially marketing new products:

 •

 Accessing the
 capital markets to raise additional capital, on reasonable terms, if and when required to sustain operations or to grow the business.

 We
face competition from larger companies that have substantially greater resources which challenges our ability to establish market share,
grow our business segments, and reach profitability.

 The
drone industry is attracting a wide range of significantly larger companies which have substantially greater financial, management, research
and marketing resources than us. Competitors in the Enterprise segment include transportation companies like United Parcel Service, Federal
Express and Amazon, as well as defense companies such as Lockheed Martin Corporation, Northrop Grumman Corporation, and AeroVironment.
Our competitors may be able to provide customers with different or greater capabilities than we can provide, including technical qualifications,
pricing, and key technical support. Many of our competitors may utilize their greater resources to (i) develop competing products and
technologies, (ii) leverage their financial strength to utilize economies of scale and offer lower pricing, and (iii) hire more qualified
personnel by offering more generous compensation packages. In order to secure orders and contracts, we may have to offer comparable products
and services at lower pricing which could adversely affect our operating margins. Our inability to compete effectively against these
larger companies could have a material adverse effect on our business, financial condition, and operating results.

 We
may not be able to keep pace with technological advances in the drone industry.

 The
drone industry continues to undergo significant changes, primarily related to technological developments. The rapid growth of technology
makes it impossible to predict the overall effect these factors could have on the drone industry. If we are not able to keep pace with
these technological advances, then our revenues, profitability and results from operations may be materially adversely affected.

 Cybersecurity
risks could adversely affect our business and disrupt our operations.

 The
threats to network and data security are increasingly diverse and sophisticated. Despite our efforts and processes to prevent breaches,
our devices, as well as our servers, computer systems, and those of third parties that we use in our operations are vulnerable to cybersecurity
risks. These risks include cyber-attacks such as viruses and worms, phishing attacks, denial-of-service attacks, physical or electronic
break-ins, employee theft or misuse, and similar disruptions from unauthorized tampering with our servers and computer systems or those
of third parties that we use in our operations. The occurrence of any of these events could lead to interruptions, delays, loss of critical
data, unauthorized access to user data, and loss of consumer confidence. In addition, we may be the target of email scams that attempt
to acquire personal information or company assets. Despite our efforts to create security barriers to such threats, we may not be able
to entirely mitigate these risks. Any cyber-attack that attempts to obtain our data and assets, disrupt our service, or otherwise access
our systems, or those of third parties we use, if successful, could adversely affect our business, operating results, and financial condition.
A cyber attack would be expensive to remedy and could damage our reputation. In addition, any such breaches may result in negative publicity,
adversely affect our brand, decrease demand for our products and services, and adversely affect our operating results and financial condition.

 Risks Related to
Our Enterprise Segment

 U.S. government
contracts are generally not fully funded at inception and may include provisions that are not favorable to us which could adversely impact
our cash flows and results of operations.

 US government contracts
often have long lead times for design and development and can be subject to significant changes in delivery timelines. Congress normally
appropriates funds on its fiscal year basis, and it may not fully fund a program in the same fiscal year. Depending upon the results
of political elections, the actions of Congress can change from one fiscal year to the next. As a result, we may be required to expend
funds to fulfill existing orders, but subsequently have the delivery timeline extended or the order cancelled. Such results would have
an adverse impact on our financial position and results of operations.

 A decline
in U.S. government budgets, changes in spending priorities, or delays in contract awards could adversely affect the revenues of our Teal
subsidiary.

 We presently expect
that much of our future revenue growth will be generated by our wholly owned subsidiary, Teal Drones, and that their primary customer
is likely to be the U.S. government and its agencies. As a result, our business may be adversely impacted due to changes in the political
environment, including those related to changes in the leadership of the current and or future administrations. We cannot provide assurance
that the current levels of congressional funding, for defense in general, and for drones specifically, will continue at their current
levels or decrease in the future. If annual budget appropriations are not enacted on a timely basis, we could encounter government shutdowns
which could adversely impact any existing programs including the timely payment of prior shipments, as well as the receipt of future
orders.

 Our
work for the U.S. government could expose us to security risks.

 We
expect that an increasing percentage of our revenues will come from the U.S. government and its agencies. This may expose us to numerous
security threats, including cyber security attacks on our information technology infrastructure as well as threats to the physical safety
of our facilities and our employees. We utilize numerous controls and procedures to monitor and prevent these threats, however, we can
provide no assurance that they will be effective. Any improper use of our data, information technology systems or facilities could adversely
impact our operations and operating results.

 We
are subject to extensive government regulation and our failure to comply with these regulations could subject us to penalties that may
adversely impact our ability to operate our business.

 As
a vendor to the U.S. government and other state and local agencies, we are subject to and must comply with numerous government regulations
which impact how we operate our business. These regulations could adversely affect our revenues, operating costs and profit margins.
Some of the regulations to which we are subject, and the federal agencies which administer these regulations, include:

 •

 Federal Aviation
 Administration, which regulates the use of airspace for all aircraft, including UAS such as drones

 •

 The Truth in
 Negotiations Act, which requires certification and disclosure of all factual pricing and cost data in contract negotiations

 •

 The Federal
 Acquisition Regulations, which govern the formation and administration, as well as the performance, under government contracts

 •

 The False Statements
 Act and The False Claims Act which imposes penalties on payments made on the basis of facts provided to the government

 •

 The Federal
 Communications Commission which regulates the wireless spectrum upon which drones depend for data transmission

 It
is expensive and time consuming to comply with the regulations and requirements of these federal government agencies. The costs incurred
to maintain compliance will adversely impact our operating costs and could delay our ability to operate profitably in the future, if
at all.

 Risks Related to
Our Common Stock

 Our management
has voting control of the Company.

 Jeffrey Thompson, our Chairman and Chief Executive
Officer, owns approximately 17% of our common stock, and our current officers and directors currently own approximately 21% of our common
stock. If they act together, they will be able to influence the outcome of all corporate actions requiring approval of our shareholders,
including the election of directors and approval of significant corporate transactions which may result in corporate actions that other
stockholders do not agree with. This concentration of ownership may have the effect of delaying or preventing a change in control and
may adversely affect the market price of our common stock.

 Our failure to maintain effective internal
controls over financial reporting could have an adverse impact on the Company.

 We are required to establish and maintain appropriate
internal controls over financial reporting. Failure to establish and maintain those controls could adversely impact public disclosures
regarding our business, financial condition or results of operations. In addition, management's assessment of internal controls
over financial reporting may identify weaknesses and conditions that need to be addressed which may raise concerns for investors. Any
actual or perceived weaknesses and conditions that need to be addressed in our internal controls over financial reporting, disclosure
of management's assessment of our internal controls, or disclosure of our public accounting firm's attestation to our internal
controls over financial reporting may have an adverse impact on the price of our common stock.

 We have never
paid dividends and we do not expect to pay dividends for the foreseeable future.

 We have reported net
losses every year since inception. We intend to retain future earnings, if any, to finance the growth and development of our business.
If we ever become profitable, we do not expect to pay cash dividends on shares of our common stock in the foreseeable future. The payment
of future cash dividends, if any, depend upon, among other things, conditions then existing including earnings, financial condition and
capital requirements, restrictions in financing agreements, business opportunities and other factors. As a result, capital appreciation,
if any, of our common stock, will be the sole source of gain for investors for the foreseeable future.

 The listing of our
securities on Nasdaq subjects us to additional regulations and compliance requirements.

 We are required to maintain compliance with the continued
listing standards of Nasdaq. These include certain financial and liquidity criteria to maintain such listing. If we fail to meet any of
Nasdaq's listing standards, our securities may be delisted. Nasdaq requires that the trading price of its listed stocks remain above
one dollar for the stock to remain listed. If a listed stock trades below one dollar for more than 30 consecutive trading days, then it
is subject to delisting from Nasdaq.

 While our stock has
been trading above $1 per share, the stock price may trade below $1 per share in the future. In addition, we must satisfy minimum
financial and other continued listing requirements and standards, including those regarding director and committee independence requirements,
minimum stockholders' equity, and certain corporate governance requirements. If we are unable to satisfy these requirements or
standards, we could be subject to delisting which would have a negative effect on the price of our common stock and would impair an investor's
ability to sell or purchase our common stock. In the event of a delisting, we would expect to take actions to restore our compliance
with the listing requirements, but we can provide no assurance that any such action would allow our common stock to become listed again,
stabilize the market price, improve the liquidity of our common stock, or prevent future non-compliance with the listing requirements.
A delisting of our securities from Nasdaq may materially impair our stockholders' ability to buy and sell our securities and could
have an adverse effect on the market price of, and the efficiency of the trading market for, our securities.

 Our Board of
Directors may authorize and issue shares of new classes of stock that could adversely affect current holders of our common stock.

 Our Board of Directors
has the power to authorize and issue shares of classes of stock, including preferred stock that have voting powers, designations, preferences,
limitations and special rights, including preferred distribution rights, conversion rights, redemption rights and liquidation rights
without further shareholder approval. These powers could adversely affect the rights of the holders of our common stock. In addition,
our board could authorize the issuance of a series of preferred stock that has greater voting power than our common stock or that is
convertible into our common stock, which could decrease the relative voting power of our common stock or result in dilution to our existing
common stockholders.

 Any of these actions
could significantly adversely affect the investment made by holders of our common stock. In addition, holders of our common stock could
receive less proceeds in connection with any future sale of the Company, in liquidation or on any other basis.

 Our shares will
be subordinate to all of our debts and liabilities which increases the risk that investors could lose their entire investment.

 Our shares of common
stock are equity interests that will be subordinate to all of our current and future indebtedness with respect to claims on our assets.
In any liquidation, all of our debts and liabilities must be paid before any payment is made to our shareholders.

 The market price
of our shares of common stock is subject to fluctuation.

 The market prices of
our shares may fluctuate significantly in response to a wide range of factors, many of which are beyond our control, including:

 •

 The announcement
 and release of new products by our competitors

 •

 Developments in our industry
 or target markets

 •

 General market conditions
 including factors unrelated to our operating performance

 •

 National or international
 economic or political events which result in a material effect on the stock market

 The stock market has,
from time to time, experienced extreme price and volume fluctuations. Continued market fluctuations could result in extreme market volatility
in the price of our shares of common stock which could cause a decline in the value of our shares.

 Future capital
raises may dilute our existing stockholders' ownership and adversely impact the fair value of their investment.

 If we raise additional
capital by issuing equity securities, our existing stockholders' percentage ownership may decrease, and these stockholders may
experience substantial dilution. If we raise additional funds by issuing debt instruments, these debt instruments could impose significant
restrictions on our operations including liens on our assets. If we raise additional funds through collaborations and licensing arrangements,
we may be required to relinquish some rights to our technologies or products, or to grant licenses on terms that are not favorable to
us or could diminish the rights of our stockholders. Any of these developments could adversely impact our stock price.

 Risks
Related to Regulatory Matters

 The
drone industry is subject to various laws and government regulations which could complicate and delay our ability to introduce products,
maintain compliance, and avoid violations which could negatively impact our financial condition and results of operations.

 We
operate in the drone industry which is a highly regulated environment in the US and international markets. Federal, state, and local
governmental entities and foreign governments may regulate aspects of the industry, including the production or distribution of our products,
software or services. These regulations may include accounting standards, taxation requirements, product safety, trade restrictions,
environmental regulations, products directed toward children or hobbyists, and other administrative and regulatory restrictions. While
we endeavor to take all the steps necessary to comply with these laws and regulations, there can be no assurance that we can maintain
compliance on a continuing basis. Failure to comply could result in monetary liabilities and other sanctions which could increase our
costs or decrease our revenue resulting in a negative impact on our business, financial condition and results of operations.

 Our
business and products are subject to government regulation, and we may incur additional compliance costs or be forced to suspend or cease
operations if we fail to comply.

 We
must comply with a wide variety of laws, regulations, standards and other requirements governing, among other things, electrical safety,
wireless emissions, health and safety, e-commerce, consumer protection, export and import requirements, hazardous materials usage, product-related
energy consumption, packaging, recycling and environmental matters. Compliance with these laws, regulations, standards, and other requirements
may be onerous and expensive, and they may be inconsistent from jurisdiction to jurisdiction (including from country to country), further
increasing the cost of compliance and doing business. Our products may require regulatory approvals or satisfaction of other regulatory
concerns in the various jurisdictions in which they are manufactured, sold or both. These requirements create procurement and design
challenges that require us to incur additional costs identifying suppliers and manufacturers who can obtain and produce compliant materials,
parts and products. Failure to comply with such requirements can subject us to liability, additional costs, and reputational harm and,
in extreme cases, force us to recall products or prevent us from selling our products in certain jurisdictions. If there is a new regulation,
or change to an existing regulation that significantly increases our costs of manufacturing or causes us to significantly alter the way
that we manufacture our products, this would have a material adverse effect on our business, financial condition and results of operations.
Additionally, while we have implemented policies and procedures designed to ensure compliance with applicable laws and regulations, there
can be no assurance that our employees, contractors, and agents will not violate such laws and regulations or our policies and procedures.

 Our
products must comply with certain requirements of the U.S. Federal Communications Commission ("FCC") regulating
electromagnetic radiation in order to be sold in the United States and with comparable requirements of the regulatory authorities of
the European Union ("EU"), Japan, China and other jurisdictions. Our first-person view products include wireless radios
and receivers which require additional emission testing. We are also subject to various environmental laws and governmental
regulations related to toxic, volatile, and other hazardous chemicals used in the third-party components incorporated into our
products, including the Restriction of Certain Hazardous Substances Directive (the "RoHS Directive") and the EU Waste Electrical
and Electronic Equipment Directive (the "WEEE Directive"), as well as the implementing legislation of the EU member
states. This directive restricts the distribution of products within the EU that exceed very low maximum concentration amounts of
certain substances, including lead. Similar laws and regulations have been passed or are pending in China, Japan, and numerous
countries around the world and may be enacted in other regions, including in the United States. We are, or may in the future be,
subject to these laws and regulations.

 Our
products may be subject to new domestic and international requirements. Compliance with regulations enacted in the future could substantially
increase our cost of doing business or otherwise have a material adverse effect on our results of operations and our business. Failure
to comply with regulations in the future could result in the imposition of fines or in the suspension or cessation of our operations
or sales in the applicable jurisdictions. Any such failure to comply with regulations may also result in our not being permitted, or
limit our ability, to ship our products which would adversely affect our revenue and ability to achieve or maintain profitability.

 Although
we encourage our contract manufacturers and major component suppliers to comply with the supply chain transparency requirements, such
as the RoHS Directive, we cannot provide assurance that our manufacturers and suppliers consistently comply with these requirements.
In addition, if there are changes to these or other laws or if new related laws are passed in other jurisdictions, we may be required
to re-engineer our products to use components compatible with these regulations. This re-engineering and component substitution could
result in additional costs or disrupt our operations or logistics.

 The
WEEE Directive requires electronic goods producers to be responsible for the collection, recycling and treatment of such products. Changes
in interpretation of the directive may cause us to incur costs or have additional regulatory requirements to meet in the future in order
to comply with this directive, or with any similar laws adopted in other jurisdictions. Our failure to comply with past, present, and
future similar laws could result in reduced sales of our products, substantial product inventory write-offs, reputational damage, penalties
and other sanctions which could harm our business and financial condition. We also expect that our products will be affected by new environmental
laws and regulations on an ongoing basis. To date, our expenditures for environmental compliance have not had a material impact on our
results of operations or cash flows. Although we cannot predict the future impact of such laws or regulations, they will likely result
in additional costs and may require us to change the content of our products or how they are manufactured. These developments could have
a material adverse effect on our business and financial condition.

 Our
results of operations may suffer if we are not able to successfully manage our exposure to foreign exchange rate risks.

 A
substantial majority of our sales and cost of components are denominated in U.S. dollars. As our business grows, more of our sales and
production costs may be denominated in other currencies. Where such sales or production costs are denominated in other currencies, they
are converted to U.S. dollars for the purpose of calculating any sales or costs to us. Our sales may decrease as a result of any appreciation
of the U.S. dollar against these other currencies.

 Most
of our current expenditures are incurred in U.S. dollars and many of our components come from countries that currently base their currency
against the U.S. dollar. If the exchange rates change adversely or are allowed to increase, then additional U.S. dollars will be required
to fund our purchases of these components.

 Although
we do not currently enter into currency option contracts or engage in other hedging activities, we may do so in the future. There is
no assurance that we will undertake any such hedging activities or that, if we do so, they will be successful in reducing the risks associated
with our exposure to foreign currency fluctuations.

 Our
international operations, including the use of foreign contract manufacturers, subjects us to international operational, financial, legal,
political and public health risks which could harm our operating results.

 A
substantial part of our operations, including manufacturing of certain components used in our products, are outside of the United States
and many of our customers and suppliers have some or all of their operations in countries other than the United States. Risks associated
with conducting business outside of the United States include:

 •

 compliance burdens
 and costs associated with a wide variety of foreign laws and regulations, particularly labor and environmental, that govern our operations
 in those countries;

 •

 legal uncertainties
 regarding foreign taxes, tariffs, border taxes, quotas, and export controls,

 •

 export licenses,
 import controls and other trade barriers;

 •

 economic instability
 and high levels of inflation in certain countries where our suppliers are located and

 •

 customers, particularly
 in the Asia-Pacific region, causing delays or reductions in orders for their products and therefore our sales;

 •

 political or
 public health instability, including global pandemics, in the countries in which our suppliers operate;

 •

 changes or volatility
 in currency exchange rates;

 •

 difficulties
 in collecting accounts receivable and longer accounts receivable payment cycles; and

 •

 Any of these
 factors could harm our own, our suppliers' and our customers' international operations and businesses and impair our
 and/or their ability to continue expanding into international markets.

 We
could be adversely affected by violations of the U.S. Foreign Corrupt Practices Act or similar anti-bribery laws in other jurisdictions
in which we operate.

 The
global nature of our business creates various domestic and local regulatory challenges and subject us to risks associated with our international
operations. We operate in areas of the world that experience corruption by government officials to some degree and, in certain circumstances,
compliance with anti-bribery and anticorruption laws may conflict with local customs and practices. Our global operations require us
to import from several countries which geographically expands our compliance obligations. In addition, changes in such laws could result
in increased regulatory requirements and compliance costs which could adversely affect our business, financial condition, and results
of operations.

 The
U.S. Foreign Corrupt Practices Act (FCPA) and similar anti-bribery and anticorruption laws in other jurisdictions prohibit U.S.-based
companies and their intermediaries from making improper payments to non-U.S. officials for the purpose of obtaining or retaining business,
directing business to another, or securing an advantage. In addition, U.S. public companies are required to maintain records that accurately
and fairly represent their transactions and have an adequate system of internal accounting controls. Under the FCPA, U.S. companies may
be held liable for the corrupt actions taken by directors, officers, employees, agents, or other strategic or local partners or representatives.
As a result, if we or our intermediaries fail to comply with the requirements of the FCPA or similar legislation, governmental authorities
in the United States and elsewhere could seek to impose substantial civil and/or criminal fines and penalties which could have a material
adverse effect on our business, reputation, operating results and financial condition.

 We
are subject to governmental export and import controls, and economic sanctions laws that could subject us to liability and impair our
ability to compete in international markets.

 The
U.S. and various foreign governments have imposed controls, export license requirements and restrictions on the import or export of some
technologies. Our products are subject to U.S. export controls, including the Commerce Department's Export Administration Regulations
and various economic and trade sanction regulations established by the Treasury Department's Office of Foreign Assets Controls.
Exports of our products must be made in compliance with these laws. Furthermore, U.S. export control laws and economic sanctions prohibit
the provision of products and services to countries, governments, and persons targeted by U.S. sanctions. Even though we take precautions
to prevent our products from being provided to targets of U.S. sanctions, our products could be provided to those targets or provided
by our customers despite such precautions. Any such provision could have negative consequences, including government investigations,
penalties, and reputational harm. Our failure to obtain required import or export approval for our products could harm our international
and domestic sales and adversely affect our revenue.

 Changes
in trade policy in the United States and other countries may have adverse impacts on our business, results of operations and financial
condition.

 The
U.S. government has indicated its intent to alter its approach to international trade policy through the renegotiation, and potential
termination, of certain trade agreements and treaties with China, countries in EMEA and other countries. These changes could include
the imposition of additional tariffs on a wide range of products. Policy changes in the United States or other countries, such as the
tariffs already proposed, implemented, and threatened, present risks for us. Tariffs already announced and implemented are having an
adverse effect on certain of our products, tariffs announced but not yet implemented may have an adverse effect on many of our products,
and threatened tariffs could adversely affect more or all of our products. There are also risks associated with retaliatory tariffs and
resulting trade wars. We cannot predict future trade policy, the terms of any renegotiated trade agreements or treaties, or tariffs and
their impact on our business. A trade war could have a significant adverse effect on world trade and the world economy. To the extent
that trade tariffs and other restrictions imposed by the United States or other countries increase the price of, or limit the amount
of, our products or components or materials used in our products imported into the United States or other countries, or create adverse
tax consequences, the sales, cost or gross profit of our products may be adversely affected and the demand from our customers for products
and services may be diminished. Uncertainty surrounding international trade policy and disputes and protectionist measures could also
have an adverse effect on consumer confidence and spending. If we deem it necessary to alter all or a portion of our activities or operations
in response to such policies, agreements or tariffs, our capital and operating costs may increase. Our ongoing efforts to address these
risks may not be effective and may have long-term adverse effects on our operations and operating results that we may not be able to
reverse. Such efforts may also take time to implement or to have an effect, and may result in adverse quarterly financial results or
fluctuations in our quarterly financial results. As a result, changes in international trade policy, changes in trade agreements and
tariffs could adversely affect our business, results of operations and financial condition.

 We
may collect, store, process and use the personal information of our customers which subjects us to governmental regulation related to
privacy, information security and data protection. Any cybersecurity breaches or our failure to comply with such legal obligations by
us, or by our third-party service providers or partners, could harm our business.

 We
may collect, store, process and use the personally identifiable information of our customers and other data in our transactions with
them. We also rely on third parties that are not directly under our control to do so as well. While we take reasonable measures to protect
the security, integrity and confidentiality of the personal information and other sensitive information we collect, store or transmit,
we cannot guarantee that inadvertent or unauthorized use or disclosure will not occur, or that third parties will not gain unauthorized
access to this information. While our privacy policies currently prohibit such activities, our third-party service providers or partners
may engage in such activity without our knowledge or consent. If we or our third- party service providers were to experience a breach,
disruption or failure of systems compromising our customers' data, or if one of our third-party service providers or partners were
to access our customers' personal data without our authorization, our brand and reputation could be adversely affected, use of
our products could decrease, and we could be exposed to a risk of loss, litigation and regulatory proceedings.

 Regulatory
scrutiny of privacy, data collection, use of data and data protection is intensifying globally, and the personal information and other
data we collect, store, process and use is increasingly subject to legislation and regulations in numerous jurisdictions around the world,
especially in Europe. These laws often develop in ways we cannot predict and may materially increase our cost of doing business, particularly
as we expand the nature and types of products we offer.

 Data
protection legislation is becoming increasingly common in the United States at both the federal and state level. For example, in 2020,
the State of California implemented the California Consumer Privacy Act of 2018 (the "CCPA"). The CCPA requires companies that
process information on California residents to make new disclosures to consumers about their data collection, use and sharing practices,
allows consumers to opt out of certain data sharing with third parties and provides a new cause of action for data breaches. Additionally,
the Federal Trade Commission and many state attorneys general are interpreting federal and state consumer protection laws to impose standards
for the online collection, use, dissemination and security of data. The burdens of compliance imposed by the CCPA (and other similar
laws that may be enacted at the federal and state level) may require us to modify our data processing practices and policies and/or to
incur substantial expenditures.

 Risks
Related to Intellectual Property

 Our
products could infringe on the intellectual property rights of others.

 Companies
in the electronics, wireless communications, semiconductor, IT, and display industries steadfastly pursue and protect intellectual property
rights, often resulting in considerable and costly litigation to determine the validity of patents and claims by third parties of infringement
of patents or other intellectual property rights. Our products could be found to infringe on the intellectual property rights of others.
Other companies may hold or obtain patents or inventions or other proprietary rights in technology necessary for our business. Periodically,
other companies inquire about our products and technology in their attempts to assess whether we violate their intellectual property
rights. If we are forced to defend against infringement claims, we may face costly litigation, diversion of technical and management
personnel, and product shipment delays, even if the allegations of infringement are unwarranted. If there is a successful claim of infringement
against us and we are unable to develop non-infringing technology or license the infringed or similar technology on a timely basis, or
if we are required to cease using one or more of our business or product names due to a successful trademark infringement claim against
us, it could adversely affect our business.

 Our
intellectual property rights and proprietary rights may not adequately protect our products.

 Our
commercial success will depend substantially on the ability to obtain patents and other intellectual property rights and maintain adequate
legal protection for products in the United States and other countries. We will be able to protect our intellectual property from unauthorized
use by third parties only to the extent that these assets are covered by valid and enforceable patents, trademarks, copyrights or other
intellectual property rights, or are effectively maintained as trade secrets. As of the date of this filing, we own 36 granted United
States and foreign patents and 16 pending United States and foreign patent applications. The U.S. patents and patent applications include
claims to, among other things, a drone, a printed circuit board, and head-mounted display technology. We apply for patents covering
our products, services, technologies, and designs as we deem appropriate. We may fail to apply for patents on important products, services,
technologies or designs in a timely fashion, or at all. We do not know whether any of our patent applications will result in the issuance
of any patents. Even if patents are issued, they may not be sufficient to protect our products, services, technologies, or designs. Our
existing and future patents may not be sufficiently broad to prevent others from developing competing products, services technologies,
or designs. Intellectual property protection and patent rights outside of the United States are even less predictable. As a result, the
validity and enforceability of patents cannot be predicted with certainty. Moreover, we cannot be certain whether:

 •

 we were the
 first to conceive, reduce to practice, invent, or file the inventions covered by each of our issued patents and pending patent applications;

 •

 others will
 independently develop similar or alternative products, technologies, services or designs or duplicate any of our products, technologies,
 services or designs;

 •

 any patents
 issued to us will provide us with any competitive advantages, or will be challenged by third parties;

 •

 we will develop
 additional proprietary products, services, technologies or designs that are patentable; or

 •

 the patents
 of others will have an adverse effect on our business.

 ITEM 1B. UNRESOLVED
STAFF COMMENTS

 Not applicable.

 ITEM 1C. CYBERSECURITY

 We recognize the importance
of assessing, identifying, and managing material risks associated with cybersecurity threats, as such term is defined in Item 106(a)
of Regulation S-K. These risks include, among other things: operational risks, intellectual property theft, fraud, extortion, harm
to employees or customers and violation of data privacy or security laws. To mitigate the threat to our business, we take a comprehensive
approach to cybersecurity risk management. The Company's Board of Directors as well as its Chief Technology Officer, Chief Information
Security Officer, and Chief Financial Officer are actively involved in the oversight of our risk management program, of which cybersecurity
represents an important component. We have established policies, standards, processes, and practices for assessing, identifying, managing
and mitigating material risks from cybersecurity threats.

 Risk Assessment
and Management

 We
rely on a multidisciplinary team, including our information security function, management, and third-party service
providers to identify, assess, remediate and manage cybersecurity threats and risks. We identify and assess risks from cybersecurity
threats by monitoring and evaluating our threat environment and our risk profile using various methods including, for example, manual
and automated tools, subscribing to reports and services that identify cybersecurity threats, analyzing reports of threats and threat
actors, conducting scans of the threat environment, utilizing internal and external audits, and conducting threat and vulnerability assessments.

 At
least annually, we review our security controls and address information security vulnerabilities, conduct security testing, and assess
our external sources for their security risk (e.g., security incidents, data security, security controls, third parties, etc.). The results
of the assessment are used to drive alignment and prioritization of initiatives to enhance our security posture, improve security processes,
and to manage a broader enterprise-level risk program that is presented to the Board of Directors, the Audit Committee, and members of
management.

 The
Company maintains various technical, physical, and organizational measures, processes, standards, and policies designed to manage and
mitigate material risks from cybersecurity threats against our information systems and data. These include:

 •
 incident
 detection and response

 •
 vulnerability
 management

 •
 disaster
 recovery plans

 •
 internal
 controls within our accounting and financial reporting functions

 •
 encryption
 of data

 •
 network
 security controls

 •
 access
 controls

 •
 physical
 security

 •
 asset
 management

 •
 systems
 monitoring

 •
 vendor
 risk management program

 •
 employee
 training.

 Notwithstanding
the approach we take to cybersecurity, we may not be successful in preventing or mitigating a cybersecurity incident that could have
a material adverse effect on the Company. Refer to Item 1A for a discussion of cybersecurity risks.

 Governance

 Our Board of Directors
is responsible for overseeing our enterprise risk management activities, and each of our Board committees assists the Board in the role
of risk oversight. The full Board receives an update on the Company's risk management process and the risk trends related to cybersecurity
at least annually. The Audit Committee specifically assists the Board of Directors in its oversight of risks related to cybersecurity.

 ITEM 2. PROPERTIES

 We lease all properties where our business is operated. We believe
that these properties are adequate for the purposes for which they are used. All leases are with unaffiliated third parties. We believe
that the loss of any lease would not have a material adverse effect on our operations, as we believe that we could identify and lease
comparable facilities upon approximately equivalent terms. The Company has the following operating leases for real estate locations where
it operates:

 Location

 Monthly Rent

 Expiration

 South Salt Lake, Utah

 $

 22,667

 December 2030

 San Juan, Puerto Rico

 $

 5,647

 June 2027

 Grantsville, Utah

 $

 1,000

 December 2026

 The South Salt Lake, Utah facility
has approximately 22,000 square feet and is used for our manufacturing. The San Juan, Puerto Rico facility has approximately 3,600 square
feet and is used for administrative purposes. The Grantsville, Utah property is approximately one acre and is used for drone flight operations
and testing.

 These lease agreements
have remaining terms up to 6.67 years, including options to extend certain leases for up to six years.

 The weighted average
remaining lease term as of April 30, 2024 was 6.16 years. The Company used a discount rate of 12% to calculate its lease liability at
April 30, 2024. Future lease payment obligations at April 30, 2024 were as follows:

 Fiscal Year Ended:

 2025

 $

 366,853

 2026

 372,449

 2027

 372,880

 2028

 293,334

 2029

 280,080

 Thereafter

 443,460

 Total

 $

 2,129,056

 ITEM 3. LEGAL PROCEEDINGS

 On September 29, 2022, we, and our wholly owned
subsidiary Teal Drones, Inc., initiated a legal proceeding (the "Lawsuit") against Autonodyne LLC ("Autonodyne")
and its principal equity owner Daniel Schwinn ("Schwinn"), in Delaware Chancery Court. The case is captioned as Red Cat Holdings,
Inc., et al. v. Autonodyne LLC, et al., C.A. No. 2022-0878. The case arises from Autonodyne's unilateral purported termination of
a software licensing agreement entered between Teal Drones and Autonodyne in May 2022. Before the defendants answered, we filed a First
Amended Complaint on December 5, 2022, which the defendants moved to dismiss. The court partially granted that motion, dismissing
the claims asserted against Autonodyne, but not against Schwinn. For jurisdictional reasons, the case subsequently was transferred to
Delaware Superior Court. The Lawsuit alleges a cause of action against Schwinn for Tortious Interference with Contractual Relations and
Prospective Contractual Relations, concerning a Software Licensing Agreement between Teal Drones and Autonodyne. No discovery or other
significant developments in the Lawsuit have occurred.

 On May 9, 2024, Autonodyne
LLC filed a complaint against wholly-owned Red Cat subsidiary Teal Drones, Inc. in the Superior Court of the State of Delaware. The Complaint
alleges a single cause of action, asserting that Teal breached a Software Licensing Agreement between it and Autonodyne (the "SLA")
by disclosing confidential information contained in the SLA. Autonodyne alleges that it rightfully terminated the SLA, and at that point
it became entitled to $8.25 million of accelerated payments, pursuant to section 14.4(e) of the SLA. Teal Drones has answered the Complaint,
but no discovery has been served yet. As any litigation is subject to many uncertainties, it is not possible to predict the ultimate outcome
of this claim or to estimate the loss, if any, which may result. Accordingly, the outcome of the claim is not yet determinable, and the
extent to which an outflow of funds may be required to settle this possible obligation cannot be reliably determined. The Company plans
to vigorously assert defenses to the complaint.

 ITEM 4. MINE SAFETY
DISCLOSURES

 Not applicable.

 ITEM 5. MARKET FOR
REGISTRANT'S COMMON EQUITY, RELATED STOCKHOLDER MATTERS AND ISSUER PURCHASES OF EQUITY SECURITIES

 Market Information

 Our common stock has
been listed on the Nasdaq Capital Market ("Nasdaq") since April 30, 2021 under the symbol "RCAT".

 The last reported sales
price of our common stock on August 5, 2024 was $1.98.

 Holders

 As of August 5, 2024,
there were 127 stockholders of record of our common stock.

 Dividends

 The Company has never
paid dividends on its common stock and does not anticipate that it will pay dividends in the foreseeable future. It intends to use any
future earnings for the expansion of its business. Any future determination of applicable dividends will be made at the discretion of
the Board of Directors and will depend on the results of operations, financial condition, capital requirements and other factors deemed
relevant.

 Recent Sales of
Unregistered Securities

 There
were no sales of equity securities during the period covered by this Annual Report that were not registered under the Securities Act
and were not previously reported in a Quarterly Report on Form 10-Q or a Current Report on Form 8-K filed by the Company.

 Purchase of Equity
Securities by the Issuer and Affiliated Purchasers

 We
did not repurchase any securities in the fourth quarter of the fiscal year covered by this Annual Report.

 ITEM 6. RESERVED

 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:

 A.

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

 B.

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

 C.

 In May 2021, the Company acquired Skypersonic which provides hardware
 and software solutions that enable drones to complete inspection services in locations where GPS is not available, yet still record
 and transmit data even while being operated from thousands of miles away. The purchase price was $2,791,012.

 D.

 In August 2021,
 the Company acquired Teal Drones, a leader in commercial and government UAV (Unmanned Aerial Vehicles) technology. The purchase price
 was $10,011,279.

 Following the Teal
acquisition 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 7A. QUANTITATIVE
AND QUALITATIVE DISCLOSURES ABOUT MARKET RISK

 As a smaller reporting
company, we are not required to provide this information.

 ITEM 8. FINANCIAL
STATEMENTS AND SUPPLEMENTARY DATA

 RED CAT HOLDINGS,
INC.

 INDEX TO CONSOLIDATED
FINANCIAL STATEMENTS

 Page

 Report of Independent Registered Accounting Firm
 (PCAOB ID: 3501)

 Consolidated Balance Sheets as of April 30, 2024
 and 2023

 Consolidated Statements of Operations for the
 years ended April 30, 2024 and 2023

 Consolidated Statements of Shareholders'
 Equity for the years ended April 30, 2024 and 2023

 Consolidated Statements of Cash Flows for the
 years ended April 30, 2024 and 2023

 Notes to the Consolidated Financial Statements

 REPORT
OF INDEPENDENT REGISTERED PUBLIC ACCOUNTING FIRM

 To
the Board of Directors and

Stockholders of Red Cat Holdings, Inc.

 Opinion
on the Financial Statements

 We
have audited the accompanying consolidated balance sheets of Red Cat Holdings, Inc. (the "Company") as of April 30, 2024
and 2023, and the related consolidated statements of operations, stockholders' equity, and cash flows for the years then ended,
and the related notes (collectively referred to as the "financial statements"). In our opinion, the financial statements
present fairly, in all material respects, the financial position of the Company as of April 30, 2024 and 2023, and the results of its
operations and its cash flows for the years then ended, in conformity with accounting principles generally accepted in the United States
of America.

 Basis
for Opinion

 These
financial statements are the responsibility of the Company's management. Our responsibility is to express an opinion on the Company's
financial statements based on our audits. We are a public accounting firm registered with the Public Company Accounting Oversight Board
(United States) (PCAOB) and are required to be independent with respect to the Company in accordance with the U.S. federal securities
laws and the applicable rules and regulations of the Securities and Exchange Commission and the PCAOB.

 We
conducted our audits in accordance with the standards of the PCAOB. Those standards require that we plan and perform the audit to obtain
reasonable assurance about whether the financial statements are free of material misstatement, whether due to error or fraud. The Company
is not required to have, nor were we engaged to perform, an audit of its internal control over financial reporting. As part of our audits,
we are required to obtain an understanding of internal control over financial reporting, but not for the purpose of expressing an opinion
on the effectiveness of the Company's internal control over financial reporting. Accordingly, we express no such opinion.

 Our
audits included performing procedures to assess the risks of material misstatement of the financial statements, whether due to error
or fraud, and performing procedures that respond to those risks. Such procedures included examining, on a test basis, evidence regarding
the amounts and disclosures in the financial statements. Our audits also included evaluating the accounting principles used and significant
estimates made by management, as well as evaluating the overall presentation of the financial statements. We believe that our audits
provide a reasonable basis for our opinion.

 Critical
Audit Matters

 The
critical audit matter communicated below is a matter arising from the current period audits of the financial statements that were communicated
or required to be communicated to the audit committee and that: (1) relate to accounts or disclosures that are material to the financial
statements and (2) involved our especially challenging, subjective, or complex judgments. The communication of a critical audit matter
does not alter in any way our opinion on the financial statements, taken as a whole, and we are not, by communicating the critical audit
matter below, providing separate opinion on the critical audit matter or on the accounts or disclosures to which they relate.

 Valuation
of Goodwill and Intangibles

 As
discussed in Note 8 to the financial statements, the Company acquired various businesses which resulted in the recording of significant
amounts of goodwill and intangible assets. The intangible assets management identified consisted of proprietary technology and tradenames.
Management determined the fair value of the intangible assets using a discounted cash flow model. Key assumptions used the model to determine
fair value were cash flow projections, the discount rate, long-term growth rates, effective tax rate and the estimated periods to be
benefitted of the identifiable intangible assets with definite lives.

 We
identified the valuation of goodwill and intangible assets for the businesses acquired as a critical audit matter because
of the significant assumptions management makes in determining the estimates. Auditing management's assumptions involved a high
degree of auditor judgment and increased audit effort, including the use of valuation specialists, as management's assumptions
are subjective, and changes in these assumptions could have a significant impact on the fair value of the businesses acquired.

 Our audit procedures
related to the Company's valuation of goodwill and intangible assets for the businesses acquired included the following, among
others:

 We
evaluated the reasonableness of management's cash flow projections by comparing management's prior forecasts to historical
results for the Company, as well as inquiry of management of the reporting unit regarding the expected future operations, review of publicly
available industry information, and testing the completeness and accuracy of the data used in the projections.

 Additionally,
we evaluated the reasonableness of management's use of various rates and other assumptions by comparing them to comparable companies
and market data.

 Finally,
we evaluated the estimated periods to be benefitted of the identifiable intangible assets with definite lives by comparing to comparable
companies and market data, as well as recalculating the current and accumulated amortization.

 /s/
 dbbmckennon

 We
have served as the Company's auditor since 2024.

 Newport
Beach, California

 August
8, 2024

 F- 2

 Consolidated Balance Sheets

 2024

 2023

 ASSETS

 (As restated)

 Current assets

 Cash

 $
 6,067,169

 $
 3,173,649

 Marketable securities

 —

 12,814,038

 Accounts receivable, net

 4,361,090

 719,862

 Inventory

 8,007,237

 8,920,573

 Other

 3,962,053

 1,263,735

 Current assets of discontinued operations

 —

 5,283,155

 Total current assets

 22,397,549

 32,175,012

 Goodwill

 9,088,550

 17,012,832

 Intangible assets, net

 3,794,389

 6,893,115

 Equity method investee

 5,142,500

 —

 Note receivable

 4,000,000

 —

 Property and equipment, net

 2,340,684

 2,650,358

 Other

 293,126

 303,180

 Operating lease right-of-use assets

 1,480,814

 1,600,434

 Long-term assets of discontinued operations

 —

 108,397

 Total long-term assets

 26,140,063

 28,568,316

 TOTAL ASSETS

 $
 48,537,612

 $
 60,743,328

 LIABILITIES AND STOCKHOLDERS' EQUITY

 Current liabilities

 Accounts payable

 $
 1,580,422

 $
 1,392,550

 Accrued expenses

 1,069,561

 409,439

 Debt obligations - short term

 751,570

 922,138

 Customer deposits

 53,939

 155,986

 Operating lease liabilities

 195,638

 159,423

 Current liabilities of discontinued operations

 —

 1,010,501

 Total current liabilities

 3,651,130

 4,050,037

 Operating lease liabilities

 1,321,952

 1,481,967

 Debt obligations - long term

 —

 401,569

 Long-term liabilities of discontinued operations

 —

 41,814

 Total long-term liabilities

 1,321,952

 1,925,350

 Commitments and contingencies

 Stockholders' equity

 Series B preferred stock - shares authorized 4,300,000; issued and outstanding 4,676 and 986,676

 9,867

 Common stock - shares authorized 500,000,000; issued and outstanding 74,289,351 and 54,568,065

 74,289

 54,568

 Additional paid-in capital

 124,616,305

 112,642,726

 Accumulated deficit

 ( 81,130,732
)

 ( 57,078,103
)

 Accumulated other comprehensive income (loss)

 4,621

 ( 861,117
)

 Total stockholders' equity

 43,564,530

 54,767,941

 TOTAL LIABILITIES AND STOCKHOLDERS' EQUITY

 $
 48,537,612

 $
 60,743,328

 See accompanying notes.

 F- 3

 Consolidated Statements of Operations

 Year ended

 2024

 2023

 (As restated)

 Revenues

 $
 17,836,382

 $
 4,620,834

 Cost of goods sold

 14,155,836

 5,455,145

 Gross profit (loss)

 3,680,546

 ( 834,311
)

 Operating Expenses

 Research and development

 5,896,037

 5,595,281

 Sales and marketing

 4,568,617

 3,731,776

 General and administrative

 10,679,105

 12,383,470

 Impairment loss

 412,999

 2,826,918

 Total operating expenses

 21,556,758

 24,537,445

 Operating loss

 ( 17,876,212
)

 ( 25,371,756
)

 Other (income) expense

 Gain on divestiture of consumer segment

 ( 9,642,427
)

 —

 Impairment on equity method investment

 11,353,875

 —

 Equity method loss

 503,625

 —

 Investment loss (income), net

 651,943

 ( 82,798
)

 Interest expense

 68,609

 122,004

 Other, net

 714,859

 965,681

 Other (income) expense

 3,650,484

 1,004,887

 Net loss from continuing operations

 ( 21,526,696
)

 ( 26,376,643
)

 Loss from discontinued
 operations

 ( 2,525,933
)

 ( 1,730,386
)

 $
 ( 24,052,629
)

 $
)

 Loss per share - basic and diluted

 Continuing operations

 $
 ( 0.36
)

 $
 ( 0.49
)

 Discontinued operations

 ( 0.04
)

 ( 0.03
)

 Loss per share - basic and diluted

 $
 ( 0.40
)

 $
 ( 0.52
)

 Weighted average shares outstanding - basic and diluted

 60,118,675

 53,860,199

 See accompanying notes.

 F- 4

 Consolidated Statements of Shareholders' Equity

 Series B

 Additional

 Accumulated Other

 Preferred Stock

 Common Stock

 Paid-in

 Accumulated

 Comprehensive

 Total

 Amount

 Amount

 Capital

 Deficit

 Income (Loss)

 Equity

 Balances, April 30, 2022, as restated

 986,676

 $

 9,867

 53,748,735

 $

 53,749

 $

 109,471,010

 $

 ( 28,971,074

)

 $

 ( 1,470,272

)

 $

 79,093,280

 Stock based compensation

 —

 —

 —

 —

 3,656,724

 —

 —

 3,656,724

 Vesting of restricted stock units

 —

 —

 779,498

 ( 523,606

)

 —

 —

 ( 522,827

)

 Shares issued for services

 —

 —

 39,832

 38,598

 —

 —

 38,638

 Unrealized gain on marketable securities

 —

 —

 —

 —

 —

 —

 610,129

 610,129

 Currency translation adjustments

 —

 —

 —

 —

 —

 —

 ( 974

)

 ( 974

)

 —

 —

 —

 —

 —

)

 —

)

 Balances, April 30, 2023, as restated

 986,676

 $

 9,867

 54,568,065

 $

 54,568

 $

 112,642,726

 $

 ( 57,078,103

)

 $ ( 861,117

)

 $

 54,767,941

 Stock based compensation

 —

 —

 —

 —

 3,609,267

 —

 —

 3,609,267

 Vesting of restricted stock units

 —

 —

 446,717

 ( 33,701

)

 —

 —

 ( 33,254

)

 Conversion of preferred stock

 ( 982,000

)

 ( 9,820

)

 818,334

 9,002

 —

 —

 —

 Issuance of common stock through ATM facility, net

 —

 —

 53,235

 9,159

 —

 —

 9,212

 Exercise of stock options

 —

 —

 3,000

 2,652

 —

 —

 2,655

 Public offering, net of $ 804,400 of issuance costs

 —

 —

 18,400,000

 18,400

 8,377,200

 —

 —

 8,395,600

 Unrealized gain on marketable securities

 —

 —

 —

 —

 —

 —

 864,165

 864,165

 Currency translation adjustments

 —

 —

 —

 —

 —

 —

 1,573

 1,573

 —

 —

 —

 —

 —

 ( 24,052,629

)

 —

 ( 24,052,629

)

 Balances, April 30, 2024

 4,676

 $

 74,289,351

 $

 74,289

 $

 124,616,305

 $

 ( 81,130,732

)

 $

 4,621

 $

 43,564,530

 See accompanying notes.

 F- 5

 Consolidated Statements of Cash Flows

 Year ended April 30,

 2024

 2023

 Cash Flows from Operating Activities

 (As restated)

 $
 ( 24,052,629
)

 $
)

 Net loss from discontinued operations

 ( 2,525,933
)

 ( 1,730,386
)

 Net loss from continuing operations

 ( 21,526,696
)

 ( 26,376,643
)

 Adjustments to reconcile net loss to net cash from operations:

 Stock based compensation - options

 2,619,501

 1,617,982

 Stock based compensation - restricted units

 989,766

 2,038,742

 Common stock issued for services

 —

 38,638

 Amortization of intangible assets

 854,311

 654,527

 Realized loss from sale of marketable securities

 851,986

 296,012

 Depreciation

 568,813

 311,545

 Gain on divestiture of consumer segment

 ( 9,642,427
)

 —

 Impairment on equity method investment

 11,353,875

 —

 Equity method loss

 503,625

 —

 Impairment on goodwill and intangible assets

 412,999

 2,826,918

 Changes in operating assets and liabilities

 Accounts receivable

 ( 3,641,228
)

 ( 288,986
)

 Inventory

 913,336

 ( 5,707,525
)

 Other

 ( 2,688,264
)

 559,660

 Operating lease right-of-use assets and liabilities

 ( 4,180
)

 25,733

 Customer deposits

 ( 102,047
)

 ( 136,628
)

 Accounts payable

 187,872

 434,803

 Accrued expenses

 661,695

 ( 608,452
)

 Net cash used in operating activities of continuing operations

 ( 17,687,063
)

 ( 24,313,674
)

 Cash Flows from Investing Activities

 Proceeds from divestiture of consumer segment

 1,000,000

 —

 Purchases of property and equipment

 ( 259,139
)

 ( 2,450,213
)

 Proceeds from sale of marketable securities

 12,826,217

 32,290,448

 Investment in SAFE agreement

 —

 ( 250,000
)

 Net cash provided by investing activities of continuing operations

 13,567,078

 29,590,235

 Cash Flows from Financing Activities

 Proceeds from issuance of common stock:

 Public offering, net

 8,395,600

 —

 ATM facility, net

 9,212

 —

 Payments under debt obligations

 ( 572,137
)

 ( 606,897
)

 Payments of taxes related to equity transactions

 ( 33,254
)

 ( 581,775
)

 Exercise of stock options

 2,655

 —

 Proceeds from related party obligations

 —

 13,404

 Payments under related party obligations

 —

 ( 40,057
)

 Net cash provided by (used in) financing activities of continuing operations

 7,802,076

 ( 1,215,325
)

 Discontinued operations

 Operating activities

 ( 875,227
)

 ( 4,885,746
)

 Investing activities

 —

 —

 Financing activities

 —

 —

 Net cash used in discontinued operations

 ( 875,227
)

 ( 4,885,746
)

 Net increase (decrease) in Cash

 2,806,864

 ( 824,510
)

 Cash, beginning of period

 3,260,305

 4,084,815

 Cash, end of period

 6,067,169

 3,260,305

 Less: Cash of discontinued operations

 —

 ( 86,656
)

 Cash of continuing operations, end of period

 6,067,169

 3,173,649

 Cash paid for interest

 70,177

 122,103

 Cash paid for income taxes

 —

 —

 Non-cash transactions

 Equity method
 investment from divestiture of consumer segment

 $
 17,000,000

 $
 —

 Note receivable from
 divestiture of consumer segment

 $
 4,000,000

 $
 —

 Unrealized gain on marketable securities

 $
 864,165

 $
 610,129

 Conversion of preferred stock into common stock

 $
 9,820

 $
 —

 Shares withheld as payment of note receivable

 $
 —

 $
 18,449

 Taxes related to net share settlement of equity awards

 $
 —

 $
 32,468

 See accompanying notes.

 F- 6

 NOTES TO CONSOLIDATED FINANCIAL STATEMENTS

 April 30, 2024 and 2023

 Note 1 – The Business

 The Company was originally incorporated in February
1984. Since April 2016, the Company's primary business has been to provide products, services, and solutions to the drone industry
which it presently does through its wholly owned operating subsidiaries. Beginning in January 2020, the Company expanded the scope
of its drone products and services through four acquisitions, including:

 A.

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

 B.

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

 C.

 In May 2021, the Company acquired Skypersonic which provided hardware and software solutions that enable drones to complete inspection services in locations where GPS is either denied or not available, yet still record and transmit data even while being operated from thousands of miles away. The purchase price was $ 2,791,012.

 D.

 In August 2021, the Company acquired Teal Drones ("Teal"), a leader in commercial and government Unmanned Aerial Vehicles ("UAV") technology. The purchase price was $ 10,011,279.

 Following the Teal acquisition
in August 2021, we concentrated on integrating and organizing these businesses. Effective May 1, 2022, we established the Enterprise segment
("Enterprise") and the Consumer segment ("Consumer") to focus on the unique opportunities in each sector. Enterprise'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, Enterprise 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.

 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 proceeds of $ 9,200,000 and net proceeds of approximately $ 8,400,000.

 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 the Company's
decision to focus its efforts and capital on defense where it believes that there are more opportunities to create long term shareholder
value. See Note 3 and Note 9.

 Note 2 – Summary of Significant Accounting
Policies

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

 Restatement of Previously Issued Consolidated Financial Statements –
The Company's Consolidated Balance Sheet as of April 30, 2023, Consolidated Statement of Operations, Stockholders' Equity
and Cash Flows for the year then ended, and its Notes to the Consolidated Financial Statements for the year ended April 30, 2023, which
were originally filed with the U.S. Securities and Exchange Commission (the "SEC") on July 27, 2023 (the "Original Form
10-K"), have been restated. The Company revised its accounting estimate of the life of an operating lease that was previously reported
in its Original Form 10-K. Upon further evaluation, the Company determined that prior year adjustments were necessary. These Consolidated
Financial Statements were restated to reflect a change in accounting estimate of the life of the operating lease under FASB ASC Topic
842 from three to nine years. Additionally, the Company revised its financial statements to remove derivative liabilities due to
erroneously reporting warrants from our convertible note financings, as described in Note 18, as having a derivative component.

 F- 7

 The impacts of these restatements are detailed
in the tables below:

 Consolidated Balance Sheet
 As of April 30, 2023

 Originally
 Reported

 As
 Restated

 Change

 Operating lease right-of-use assets

 $
 620,307

 $
 1,600,434

 $
 980,127

 Total long-term assets

 28,018,078

 28,568,316

 550,238

 Operating lease liabilities, current

 281,797

 159,423

 ( 122,374
)

 Warrant derivative liability

 588,205

 —

 ( 588,205
)

 Total current liabilities

 4,760,616

 4,050,037

 ( 710,579
)

 Operating lease liabilities, long-term

 379,466

 1,481,967

 1,102,501

 Total long-term liabilities

 822,849

 1,925,350

 1,102,501

 Additional paid-in capital

 109,993,100

 112,642,726

 2,649,626

 Accumulated deficit

 ( 54,586,793
)

 ( 57,078,103
)

 ( 2,491,310
)

 Total shareholders' equity

 54,609,625

 54,767,941

 158,316

 Total liabilities and stockholders' equity

 $
 60,193,090

 $
 60,743,328

 $
 550,238

 Consolidated Statement of Operations
 For the year ended April 30, 2023

 Originally
 Reported

 As
 Restated

 Change

 Change in fair value of derivative liability

 $
 ( 1,019,292
)

 $
 —

 $
 1,019,292

 $
 ( 27,087,737
)

 $
)

 $
 ( 1,019,292
)

 Amounts
presented as originally reported as of April 30, 2023 are exclusive of Discontinued Operations with the exception of (i) change in fair
value of derivative liability, (ii) net loss, and (iii) Consolidated Balance Sheet totals. The Consolidated Statement of Cash Flows is
not presented above as there was no change in net cash used in operating activities of continuing operations.

 Principles of Consolidation
– Our consolidated financial statements include the accounts of our wholly owned subsidiaries
which include Teal and Skypersonic as well as Rotor Riot and Fat Shark which were sold on February 16, 2024. Non-majority owned investments,
including the formerly wholly owned subsidiaries Rotor Riot and Fat Shark, are accounted for using the equity method when the Company
is able to significantly influence the operating policies of the investee. Intercompany transactions and balances have been eliminated.

 The
Consumer segment businesses are characterized as discontinued operations in these financial statements. The operating results and
cash flows of discontinued operations are separately stated in those respective financial statements. See Note 3.

 Use of Estimates – The
preparation of financial statements in accordance with GAAP requires management to make estimates and assumptions that affect the reported
amounts of assets and liabilities, the disclosure of contingent assets and liabilities at the date of the financial statements, and the
reported amounts of revenue and expenses during the reporting period. Actual results could differ from those estimates. Significant estimates
reflected in these financial statements include those used to (i) 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.

 Cash and Cash Equivalents – At April
30, 2024, we had cash of $ 6,067,169 in multiple commercial banks and financial services companies. We have not experienced any loss on
these cash balances and believe they are not exposed to any significant credit risk.

 F- 8

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

 We have elected to present accrued interest income
separately from marketable securities on our consolidated balance sheets. Accrued interest income was $ 0 and $ 151,671 as of April 30,
2024 and April 30, 2023, respectively, and was included in other current assets. We did not write off any accrued interest income during
the years ended April 30, 2024 and April 30, 2023.

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

 Concentration
of Credit Risk – Financial instruments, which potentially subject the Company to concentrations of credit risk, include
trade receivables. In the normal course of business, the Company provides credit terms to its customers. Accordingly, the Company
performs ongoing credit evaluations of its customers, generally does not require collateral and considers the credit risk profile of
the customer from which the receivable is due in further evaluating collection risk. Customers that accounted for 10% or greater of
accounts receivable, net as of April 30, 2024 and 2023 were as follows:

 2024

 2023

 Customer A

 %

 %

 Customer B

 %

 *

 Customer C

 *

 %

 Customer D

 *

 %

 Customer E

 *

 %

 * Accounts Receivable was less than 10%

 As of April 30, 2024, three customers accounted for equal to or greater
than 10% of total revenue, totaling 28%, 23% and 10%, respectively. As of April 30, 2023, two customers accounted for equal to or greater
than 10% of total revenue, totaling 22% and 20%, respectively.

 Inventories – Inventories,
which consist of raw materials, work-in-process, and finished goods, are stated at the lower of cost or net realizable value, and
are measured using the first-in, first-out method. Cost components include direct materials, direct labor, indirect overhead, as
well as in-bound freight. At each balance sheet date, the Company evaluates the net realizable value of its inventory using various
reference measures including current product selling prices and recent customer demand, as well as evaluating for excess quantities
and obsolescence.

 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.

 F- 9

 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.

 Goodwill for Teal is ascribed
to its existing relationship with several U.S. government agencies including its classification as an approved vendor. The Company expects
that the Goodwill recognized in each transaction will be deductible for tax purposes. The Company has reported net losses since
its inception and is presently unable to determine when and if the tax benefit of this deduction will be realized.

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

 Equity Method Investment – The
equity method of accounting is applied to investments in which the Company has an ownership interest of between 20% and 50%. The Company
evaluates its equity method investments each reporting period for evidence of a loss in value that is other than a temporary decline.
Evidence of a loss in value might include, but would not necessarily be limited to, absence of an ability to recover the carrying amount
of the investment or the inability of the investee to sustain an earnings capacity that would justify the carrying amount of the investment.
The Company performed this analysis and concluded that its investment in UMAC was other-than-temporarily impaired and recognized an impairment
charge of $ 11,353,875 for the year ended April 30, 2024.

 Leases – Accounting Standards Codification
(ASC) 842 requires the recognition of assets and liabilities associated with lease agreements. The
Company determines if a contract is a lease or contains a lease at inception. Operating lease liabilities are measured, on each reporting
date, based on the present value of the future minimum lease payments over the remaining lease term. The Company's leases do not provide
an implicit rate. Therefore, the Company uses an effective discount rate of 12% based on its last debt financing. Operating
lease assets are measured by adjusting the lease liability for lease incentives, initial direct costs incurred and asset impairments.
Lease expense for minimum lease payments is recognized on a straight-line basis over the lease term with the operating lease asset reduced
by the amount of the expense. Lease terms may include options to extend or terminate a lease when they are reasonably certain to occur.

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

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

 The guidance establishes
three levels of the fair value hierarchy as follows:

 Level 1:
Inputs are unadjusted, quoted prices in active markets for identical assets or liabilities at the measurement date;

 Level 2:
Inputs are observable, unadjusted quoted prices in active markets for similar assets or liabilities, unadjusted quoted prices for identical
or similar assets or liabilities in markets that are not active, or other inputs that are observable or can be corroborated by observable
market data for substantially the full term of the related assets or liabilities; and

 F- 10

 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 these instruments approximates
fair value due to their short-term nature.

 Revenue Recognition – The Company
recognizes revenue in accordance with ASC Topic 606 - Revenue from Contracts with Customers, issued by the Financial Accounting Standards
Board ("FASB"). This standard includes a comprehensive evaluation of factors to be considered regarding revenue recognition
including (i) identifying the promised goods, (ii) evaluating performance obligations, (iii) measuring the transaction price, (iv) allocating
the transaction price to the performance obligations if there are multiple components, and (v) recognizing revenue as each obligation
is satisfied. The Company's revenue transactions include the shipment of goods to customers as orders are fulfilled, completion
of non-recurring engineering, completion of training, and customer support services. The Company recognizes revenue upon shipment of product
or prototypes unless otherwise specified in the purchase order or contract. Customer deposits totaled $ 53,939 and $ 155,986 at April 30,
2024 and April 30, 2023, respectively. From time to time, non-recurring engineering contracts may involve the capitalization of engineering
prototypes, classified as contract assets. Contract assets totaled $ 1,477,859 and $ 0 at April 30, 2024 and April 30, 2023, respectively.

 The following table presents the Company's
revenue disaggregated by revenue type:

 Year Ended April 30,

 2024

 2023

 Contract related

 $
 4,173,005

 $
 1,312,427

 Product related

 13,663,377

 3,308,407

 Total

 $
 17,836,382

 $
 4,620,834

 Research and Development – Research and
development expenses include payroll, employee benefits, and other headcount-related expenses associated with product development. Research
and development expenses also include third-party development and programming costs, materials, and a proportionate share of overhead
costs such as rent.

 Product
Warranty - The Company accrues an estimate of its exposure to warranty claims based upon both current and historical
product sales data and warranty costs incurred. Product warranty reserves are recorded in current liabilities under accrued
expenses. Warranty liability was $ 372,000
and $ 90,000 as of April 30, 2024
and April 30, 2023 respectively.

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

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

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

 Comprehensive Loss – Comprehensive loss
consists of net loss and other comprehensive loss. Other comprehensive loss refers to gains and losses that are recorded as an element
of stockholders' equity but are excluded from net loss. Our other comprehensive loss is comprised of foreign currency translation adjustments
and unrealized gains or losses on available-for-sale securities. During the year ended April 30, 2024, comprehensive loss was $ 865,738
lower than net loss, related to unrealized gains on available-for-sale securities totaling $ 864,165 and foreign currency translation adjustments
of $ 1,573. During the year ended April 30, 2023, comprehensive loss was $ 609,155 lower than net loss, related to unrealized gains on available-for-sale
securities totaling $ 610,129, partially offset by foreign currency translation adjustments of $ 974.

 F- 11

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

 Basic and Diluted Net Loss per Share –
Basic and diluted net loss per share has been calculated by dividing net loss by the weighted average number of shares of common stock
outstanding during the period. Common stock equivalents were excluded from the computation of diluted net loss per share of common stock
because they were anti-dilutive. The conversion or exercise of these common stock equivalents would dilute earnings per share if we become
profitable in the future. Outstanding securities not included in the computation of diluted net loss per share because their effect would
have been anti-dilutive include:

 Series B Preferred Stock, as converted

 3,896

 822,230

 Stock options

 6,779,934

 4,784,809

 Warrants

 2,275,999

 1,539,999

 Restricted stock

 175,130

 781,060

 Total

 9,234,959

 7,928,098

 Related Parties – Parties are considered
to be related to us if they have control or significant influence, directly or indirectly, over us, including key management personnel
and members of the Board of Directors or are direct relatives of key management personnel of members of the Board of Directors. Related
Party transactions are disclosed in Note 20.

 Liquidity
and 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 as further described in Note 1 and Note 16. 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. Subsequent
to year end, as further described in Note 22, the Company sold its equity method investment for $4,400,000. 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.

 Note
3 – Divestiture of Consumer Segment

 On
February 16, 2024, the Company
closed the sale of Rotor Riot and Fat Shark to Unusual Machines. The sale was conducted pursuant to a Share Purchase Agreement dated November
21, 2022, as amended on April 13, 2023, July 10, 2023, and December 11, 2023 (the "SPA"). The transaction closed concurrently
with UMAC's initial public offering and listing on the NYSE American exchange ("IPO") under the symbol "UMAC."

 The total consideration received
by the Company was valued at $ 20 million and consisted of i) $ 1 million in cash, ii) $ 2 million in a secured promissory note ("Promissory
Note"), iii) $ 17 million in securities of Unusual Machines, and iv) a post-closing adjustment for excess working capital.

 F- 13

 Secured Promissory Note

 The Promissory Note from
Unusual Machines bears interest at a rate of 8% per year, is due 18 months from the date of issue, and requires monthly payments of interest
due in arrears on the 15th day of each month. In the event of a Qualified Financing (defined as one or more related debt or equity
financings by UMAC resulting in net proceeds of at least $5 million, other than UMAC's completed IPO), the Company may require payment
of this Promissory Note in whole or in part upon written notice given within 10 days of the Qualified Financing. During the occurrence
and continuance of any event of default under the Note, The Company may, at its option, convert the amounts due under the Note to common
stock of UMAC in whole or in part from time to time. The conversion price will be a 10% discount to the average daily volume weighted
average price for UMAC's common stock over the 10 days preceding the conversion price. Conversions under the Note will be limited
such that no conversion may be made to the extent that, after giving effect to the conversion, the Company, together with its affiliates,
would beneficially own in excess of 4.99% of UMAC's common stock. This limit may be increased by the Company upon 61 days written
notice.

 Unusual Machines Securities

The $ 17 million worth of UMAC common stock was valued at the IPO price for UMAC's common stock of $4.00 per share, resulting in
 4,250,000 shares of UMAC common stock being issued to the Company (representing approximately 49% of UMAC's issued and outstanding
common stock after giving effect to the IPO and to the issuance of common stock to the Company upon closing of the IPO).

 Working Capital

 The
purchase price was adjusted for working capital as of the closing date. Actual working capital excess amounts increased the
principal amount of the Promissory Note dollar for dollar. Working capital as of closing was
finalized at $ 2 million,
as further described in Note 22.

 The Consumer
segment has been classified as Discontinued Operations and reported in accordance with the applicable accounting standards. Set forth
below are the results of operations for the Consumer segment for:

 Year ended

 2024

 2023

 Revenues

 $
 4,213,653

 $
 5,290,946

 Cost of goods sold

 4,577,980

 4,793,430

 Gross (Loss) Profit

 ( 364,327
)

 497,516

 Operating Expenses

 Research and development

 118,093

 346,002

 Sales and marketing

 1,157,448

 862,384

 General and administrative

 863,361

 1,044,435

 Total operating expenses

 2,138,902

 2,252,821

 Operating loss

 ( 2,503,229
)

 ( 1,755,305
)

 Other expense (income)

 Interest expense

 22,856

 —

 Other, net

 ( 152
)

 ( 24,919
)

 Other expense (income)

 22,704

 ( 24,919
)

 Net loss from discontinued operations

 $
 ( 2,525,933
)

 $
 ( 1,730,386
)

 F- 14

 Assets
and liabilities for the Consumer segment included:

 Current assets

 Cash

 $
 —

 $
 86,656

 Accounts receivable, net

 —

 61,107

 Inventory

 —

 3,065,954

 Other

 —

 2,069,438

 Total current assets

 —

 5,283,155

 Intangible assets, net

 —

 20,000

 Other

 —

 3,853

 Operating lease right-of-use assets

 —

 84,544

 Total long term assets

 —

 108,397

 Current liabilities

 Accounts payable

 $
 —

 $
 606,872

 Accrued expenses

 —

 109,480

 Customer deposits

 —

 244,688

 Operating lease liabilities

 —

 49,461

 Total current liabilities

 —

 1,010,501

 Long term liabilities - Operating lease liabilities

 —

 41,814

 Working capital

 $
 —

 $
 4,272,654

 Note
4 – Marketable Securities

 There
were no marketable securities at April 30, 2024.

 At April 30, 2023, marketable securities
consisted solely of corporate bonds and were classified at Level 2 in the Fair Value Hierarchy. Fair value, cost basis, and
unrealized losses totaled $ 12,814,038,
$ 13,678,203, and $ 864,165
at April 30, 2023, respectively.

 Note
5 – Inventories

 Inventories
consisted of the following:

 Raw materials

 $
 5,750,324

 $
 8,132,196

 Work-in-process

 1,289,997

 509,381

 Finished goods

 966,916

 278,996

 Total

 $
 8,007,237

 $
 8,920,573

 F- 15

 Note
6 – Other Current Assets

 Other
current assets included:

 Contract asset

 $
 1,477,859

 $
 —

 Prepaid expenses

 1,206,306

 752,564

 Grant receivable

 675,000

 —

 Prepaid inventory

 602,888

 359,500

 Accrued interest income

 —

 151,671

 Total

 $
 3,962,053

 $
 1,263,735

 Note
7 – Due From Related Party

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

 Note
8 – Intangible Assets

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

 Gross Value

 Accumulated Amortization

 Net Value

 Gross
 Value

 Accumulated Amortization

 Net Value

 Proprietary technology

 $
 4,282,001

 $
 ( 1,917,612
)

 $
 2,364,389

 $
 4,967,000

 $
 ( 1,271,112
)

 $
 3,695,888

 Non-compete agreements

 65,000

 ( 65,000
)

 —

 81,000

 ( 56,667
)

 24,333

 Customer relationships

 —

 —

 —

 39,000

 ( 18,106
)

 20,894

 Total finite-lived assets

 4,347,001

 ( 1,982,612
)

 2,364,389

 5,087,000

 ( 1,345,885
)

 3,741,115

 Brand name

 1,430,000

 —

 1,430,000

 3,152,000

 —

 3,152,000

 Total indefinite-lived assets

 1,430,000

 —

 1,430,000

 3,152,000

 —

 3,152,000

 Total intangible assets, net

 $
 5,777,001

 $
 ( 1,982,612
)

 $
 3,794,389

 $
 8,239,000

 $
 ( 1,345,885
)

 $
 6,893,115

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

 F- 16

 As
of April 30, 2024, expected amortization expense for finite-lived intangible assets for the next five years is as follows:

 Fiscal Year Ended:

 2025

 $
 709,316

 2026

 709,316

 2027

 709,316

 2028

 236,441

 2029

 —

 Thereafter

 —

 Total

 $
 2,364,389

 Goodwill
represents the future economic benefit arising from other assets acquired in an acquisition that are not individually identified
and separately recognized. The composition of, and changes in goodwill, consist of:

 Date

 Entity

 Goodwill

 January 2020

 Rotor Riot

 $
 1,849,073

 November 2020

 Fat Shark

 6,168,260

 May 2021

 Skypersonic

 2,826,918

 August 2021

 Teal Drones

 8,995,499

 April 2023 - Impairment loss

 Skypersonic

 ( 2,826,918
)

 Balance at April 30, 2023

 $
 17,012,832

 February 2024 – Divestiture

 Rotor Riot, Fat Shark

 ( 7,924,282
)

 Balance at April 30, 2024

 $
 9,088,550

 Included
in the amounts presented above is goodwill related to other insignificant transactions. Following the establishment of the Enterprise
and Consumer segments, management evaluated the long-term business strategy of each segment. This resulted in the Enterprise segment narrowing
its focus on the military and other government agencies. It was determined that Skypersonic's technology would be re-focused for the near
term on military applications and consolidated into the operations of Teal. The Company completes a formal evaluation of the carrying
value of its intangible assets, including goodwill, at the end of each fiscal year. Based on (i) the operating results for Skypersonic
since its acquisition in May 2021, (ii) its consolidation into Teal, (iii) our current expectations of its future business conditions
and trends, including its projected revenues, expenses, and cash flows, the Company recognized an impairment charge of $ 2,826,918 in April
2023. During FY2024, an impairment change of $ 412,999 was recognized related to Skypersonic's proprietary technology.

 Note
9 – Equity Method Investment

 As
of April 30, 2024, the Company owned a 46% interest in Unusual Machines. The primary business operations include selling first-person-view
video goggles for drone pilots, drones, parts and related equipment to the consumer marketplace. UMAC's financial statements are prepared
in accordance with GAAP. See Note 3 and Note 22 for additional information.

 Financial
information for UMAC is derived from UMAC's Form 10-Q for the quarter ending March 31, 2024 and was as follows:

 Current assets

 $
 6,128,890

 Long-term assets

 18,099,802

 Current liabilities

 691,978

 Long-term liabilities

 2,313,896

 Revenues

 618,915

 Gross profit

 204,167

 $
 ( 1,106,001
)

 F- 17

 The
Company's investments in UMAC have been impacted by the following:

 Initial investment, February 16, 2024

 $
 17,000,000

 Equity method loss

 ( 503,625
)

 Impairment

 ( 11,353,875
)

 Investment balance, April 30, 2024

 $
 5,142,500

 The
computation of both the initial investment as of February 16, 2024 and investment balance as of April 30, 2024, is based on the fair market
value of UMAC's common stock.

 Note
10 – Property and Equipment

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

 Equipment and related

 $
 1,540,888

 $
 1,386,373

 Leasehold improvements

 1,547,976

 1,473,890

 Furniture and fixtures

 163,290

 132,752

 Accumulated depreciation

 ( 911,470
)

 ( 342,657
)

 Net carrying value

 $
 2,340,684

 $
 2,650,358

 Depreciation
expense totaled $ 568,813 and $ 311,545 for the years ended April 30, 2024 and 2023, respectively.

 Note
11 – Other Long-Term Assets

 Other
long-term assets included:

 SAFE agreement

 $
 250,000

 $
 250,000

 Security deposits

 43,126

 53,180

 Total

 $
 293,126

 $
 303,180

 In
November 2022, the Company entered into a SAFE (Simple Agreement for Future Equity) agreement with Firestorm Labs, Inc. ("Firestorm")
under which it made a payment of $ 250,000 to Firestorm in exchange for the right to certain shares of Firestorm stock. The SAFE permits
the Company to participate in a future equity financing of Firestorm by converting the $ 250,000 into shares of Preferred Stock of Firestorm.
If there is a change in control of Firestorm or a public offering of shares of its stock, then the Company shall have the right to receive
cash payments, or shares of stock, whichever has greater value. The Company's investment in the SAFE agreement has been recorded
on the cost method of accounting. The Company evaluates the investment for any indications of impairment in value on a quarterly
basis. No factors indicative of impairment were identified during the year ended April 30, 2024.

 F- 18

 Note
12 – Right of Use Assets and Liabilities

 As
of April 30, 2024, the Company had operating type leases for real estate and no finance type leases. The Company's leases have remaining
lease terms of up to 6.67 years, including options to extend certain leases for up to six years. Operating lease expense totaled $351,369
for the year ended April 30, 2024, including period cost for short-term, cancellable, and variable leases, not included in lease liabilities,
of $4,950 for the year ended April 30, 2024.

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

 Location

 Monthly Rent

 Expiration

 South Salt Lake, Utah

 $
 22,667

 December 2024

 San Juan, Puerto Rico

 $
 5,647

 June 2027

 Grantsville, Utah

 $
 1,000

 December 2026

 Supplemental
information related to operating leases for the year ended April 30, 2024 was:

 Operating cash
 paid to settle lease liabilities

 $ $ 350,162

 Weighted average remaining lease term (in years)

 2.16

 Weighted average discount rate

 12 %

 Future
lease payments at April 30, 2024 were as follows:

 Fiscal Year Ended:

 2025

 $
 366,853

 2026

 372,449

 2027

 372,880

 2028

 293,334

 2029

 280,080

 Thereafter

 443,460

 Total

 2,129,056

 Imputed interest

 ( 611,466
)

 Total liability

 $
 1,517,590

 Note
13 – Debt Obligations

 A.

 Decathlon Capital

 On
August 31, 2021, Teal entered into an Amended and Restated Loan and Security Agreement with Decathlon Alpha IV, L.P. ("DA4")
in the amount of $ 1,670,294 (the "Loan"), representing the outstanding principal amount previously due and owing by Teal to
DA4. Interest on the Loan accrues at a rate of ten ( 10 %) percent per annum. Principal and interest is payable in monthly installments
of $ 49,275 until maturity on December 31, 2024. The balance outstanding at April 30, 2024 and April 30, 2023 totaled $ 370,537 and $ 895,709,
respectively.

 B.

 Pelion Note

 In
May 2021, Teal entered into a note agreement totaling $ 350,000
which is payable upon demand. The Note bears interest at the applicable
Federal Rate as of the date of the Note which was 0.13 % on the date of issuance. Accrued interest at April 30, 2024 and April 30, 2023
totaled $ 1,334 and $ 878,
respectively.

 C.

 Vendor Agreement

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

 F- 19

 D.

 Corporate Equity

 Beginning
in October 2021, and amended in January 2022, Teal financed a total of $ 120,000
of leasehold improvements with Corporate Equity, LLC. The loan bears interest at 8.25 %
annually and requires monthly payments of $ 3,595
through December 2024. The balance outstanding at April 30, 2024 and April 30, 2023 totaled $ 27,495
and $ 66,586
respectively.

 E.

 Ascentium Capital

 In
September 2021, Teal entered into a financing agreement with Ascentium Capital to fund the purchase of a fixed asset totaling $ 24,383.
Monthly payments of $ 656
are payable through October 2024. The balance outstanding at April 30, 2024 and April 30, 2023 totaled $ 3,538
and $ 11,412
respectively.

 F.

 Summary

 Future
annual principal payments at April 30, 2024 were as follows:

 Fiscal Year Ended:

 2025

 751,570

 Thereafter

 —

 Total

 $
 751,570

 Note
14 – Due to Related Party

 In
January 2020, in connection with the acquisition of Rotor Riot, the Company assumed a line of credit obligation of the seller, BRIT, LLC,
totaling $ 47,853 which bore interest at 6.67 % annually. The remaining balance of $ 37,196 plus accrued interest totaling $ 292 was paid
in October 2022.

 Note
15 – Income Taxes

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

 At
April 30, 2024 and April 30, 2023, we had accumulated deficits of approximately $ 81,100,000
and $ 54,600,000, respectively. Deferred tax
assets related to the future benefit of these net operating losses for tax purposes totaled approximately $ 15,004,000 and $ 10,101,000,
respectively, calculated using the base Puerto Rico corporate tax rate of 18.5%. Currently, we focus on projected future taxable
income in evaluating whether it is more likely than not that these deferred assets will be realized. Based on the fact that we have not
generated an operating profit since inception, we have applied a full valuation allowance against our deferred tax assets at April 30,
2024 and April 30, 2023.

 F- 20

 Note
16 – Common Stock

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

 Description
 of Shares

 Issued

 Shares outstanding as of April 30, 2022

 53,748,735

 Vesting of restricted
 stock to employees, net of shares withheld of 273,874 to pay taxes and 9,000 to repay a Note

 653,308

 Vesting of restricted stock to Board
 of Directors

 116,507

 Vesting of restricted stock to consultants

 9,683

 Shares issued
 for services

 39,832

 Shares outstanding as of April 30, 2023

 54,568,065

 Vesting of restricted stock to employees,
 net of shares withheld of 27,189 to pay taxes

 192,742

 Vesting of restricted stock to Board
 of Directors

 252,214

 Vesting of restricted stock to consultants

 1,761

 Conversion of preferred stock

 818,334

 Issuance of common
 stock through ATM facilities

 53,235

 Issuance of common
 stock through public offering

 18,400,000

 Exercise of stock
 options

 3,000

 Shares outstanding as of April 30, 2024

 74,289,351

 ATM Facility

 In August 2023,
we entered into a sales agreement ("the 2023 ATM Facility") with ThinkEquity LLC ("ThinkEquity"), which provides
for the sale, in our sole discretion, of shares of our common stock through ThinkEquity, as our sales agent. In
accordance with the terms of the ATM Sales Agreement, the Company may offer and sell shares of our common stock, par value $0.001 per
share, having an aggregate offering price of up to $4,375,000. The issuance and sale of these
shares by us pursuant to the 2023 ATM Facility are deemed "at the market" offerings as defined in Rule 415 under the Securities
Act of 1933, as amended (the "Securities Act"), and are registered under the Securities Act. We pay a commission of up to
2.5% of gross sales proceeds of any common stock sold under the 2023 ATM Facility.

 During
the year ended April 30, 2024, we sold an aggregate of 53,235 shares of common stock under the 2023 ATM Facility, at an average price
of $1.07 per share, for gross proceeds of approximately $57,000 and net proceeds of approximately $55,700, after deducting commissions
and other offering expenses payable by us. Additionally, the Company incurred legal fees of approximately $46,000 establishing the 2023
ATM Facility. In December 2023, the Prospectus Supplement dated August 8, 2023 was amended to change the aggregate offering price under
the ATM facility to up to $4,375,000.

 As
of April 30, 2024, approximately $4,318,000 of common stock remained available to be sold under the 2023 ATM Facility, subject to certain
conditions as specified in the sales agreement.

 Public
Offering

 In
December 2023, the Company entered into an underwriting agreement with ThinkEquity LLC, as representative of the underwriters, pursuant
to which the Company agreed to sell to the underwriters in a firm commitment underwritten public offering (the "Offering")
an aggregate of 16,000,000 shares of the Company's common stock, par value $0.001 per share (the "Common Stock"), at
a public offering price of $0.50 per share. The Company also granted the underwriters a 45-day option to purchase up to an additional
2,400,000 shares of Common Stock to cover over-allotments.

 The
Offering closed on December 11, 2023, resulting in the issuance of 18,400,000 shares of Common Stock which generated gross proceeds
of $9,200,000. 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 $8,400,000.

 F- 21

 Note
17 – Preferred Stock

 Our
preferred stock has a par value of $0.001 per share. Series B Preferred Stock ("Series B Stock") is convertible into common
stock at a ratio of 0.8334 shares of common stock for each share of Series B Stock held and votes together with the common stock on an
as-if-converted basis. 982,000 shares of Series B Stock were converted into 818,334 shares of common stock in June 2023. Shares outstanding
at April 30, 2024 totaled 4,676 which are convertible into 3,896
shares of common stock.

 Note
18 – Warrants

 The
Company issued 5 year warrants to investors in connection with two convertible note financings. The warrants have an exercise price
of $ 1.50. The warrants were
valued using the multinominal lattice The value of the warrants was included in the determination of the initial accounting for each
financing.

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

 Upon
 Issuance

 Outstanding at April
 30, 2024

 Date
 of Transaction

 Number
 of Warrants

 Initial
 Fair Value

 Number
 of Warrants

 Fair
 Value

 October
 2020

 399,998

 $
 267,999

 266,666

 $
 209,938

 January
 2021

 675,000

 $
 2,870,666

 540,000

 $
 443,242

 To date,
we have received $ 301,248
related to the exercise of 268,332
 warrants.

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

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

 In
December 2023, the Company issued warrants to purchase 736,000 shares of common stock to the placement agent of its common stock
offering. The warrants have a five-year term and an exercise price of $0.625.

 The following table presents the range of assumptions
used to estimate the fair values of the stock warrants granted during the fiscal years ended April 30:

 2024

 2023

 Risk-free interest rate

 4.25
 %

 —

 Expected dividend yield

 —

 —

 Expected term (in years)

 5.00

 —

 Expected volatility

 205.50
 %

 —

 F- 22

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

 Number
 of Shares

 Weighted-average
 Exercise Price per Share

 Weighted-average
 Remaining Contractual Term

 (in
 years)

 Aggregate
 Intrinsic Value

 Balance as of April 30, 2022

 1,539,999

 3.38

 3.89

 $

 427,533

 —

 $

 —

 Exercised

 —

 —

 Outstanding as of April 30, 2023

 1,539,999

 3.38

 2.89

 $

 —

 736,000

 0.63

 Exercised

 —

 —

 Outstanding at April 30, 2024

 2,275,999

 $

 2.49

 2.77

 $

 666,080

 Note
19 – Share Based Awards

 The
2019 Equity Incentive Plan (the "Plan") allows us to incentivize key employees, consultants, and directors with long term compensation
awards such as stock options, restricted stock, and restricted stock units (collectively, the "Awards"). The number of shares
issuable in connection with Awards under the Plan may not exceed 11,750,000.

 A.

 Options

 The
range of assumptions used to calculate the fair value of options granted during the year ended April 30 was:

 2024

 2025

 Exercise Price

 $
 0.72
 – 1.12

 $
 0.89 – 2.38

 Stock price on date of grant

 0.70
 – 1.12

 0.89 – 2.38

 Risk-free interest rate

 3.46
 – 4.41 %

 3.34 – 4.18 %

 Dividend yield

 —

 —

 Expected term (years)

 5.28
 – 8.25

 6.25 – 8.25

 Volatility

 206.99
 – 262.07 %

 245.57 – 260.06 %

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

 Weighted-Average
 Exercise Price

 Weighted-Average
 Remaining Contractual Term

 Aggregate
 Intrinsic Value

 Outstanding
 as of April 30, 2022

 3,694,142

 $

 2.17

 8.56

 1,407,545

 1,503,500

 1.40

 Exercised

 —

 —

 Forfeited
 or expired

 ( 412,833

)

 2.67

 Outstanding as of April
 30, 2023

 4,784,809

 1.88

 8.72

 74,586

 2,903,542

 1.02

 Exercised

 ( 3,000

)

 0.89

 Forfeited
 or expired

 ( 905,417

)

 2.27

 Outstanding as of April
 30, 2024

 6,779,934

 1.46

 8.02

 2,762,242

 Exercisable as of April
 30, 2024

 3,578,756

 $

 1.78

 6.77

 $

 1,246,497

 F- 23

 The
aggregate intrinsic value of outstanding options represents the excess of the stock price at the indicated date over the exercise price
of each option. As of April 30, 2024 and April 30, 2023, there was $ 943,648 and $ 2,940,239 of unrecognized stock-based compensation expense
related to unvested stock options which is expected to be recognized over the weighted average periods of 1.95 and 1.94 years, respectively.

 B.

 Restricted Stock

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

 Weighted Average Grant-Date Fair Value Per Share

 Unvested and outstanding as of April 30, 2022

 1,083,675

 $
 2.59

 780,884

 2.14

 Vested

 ( 1,062,372
)

 2.42

 Forfeited

 ( 21,127
)

 2.13

 Unvested and outstanding as of April 30, 2023

 781,060

 2.44

 298,643

 1.06

 Vested

 ( 485,024
)

 1.92

 Forfeited

 ( 419,549
)

 2.09

 Unvested and outstanding as of April 30, 2024

 175,130

 $
 2.09

 C.

 Stock Compensation

 Stock
compensation expense by functional operating expense was:

 2024

 2023

 Research and development

 $
 395,105

 $
 692,947

 Sales and marketing

 562,110

 566,153

 General and administrative

 2,652,052

 2,397,624

 Total

 $
 3,609,267

 $
 3,656,724

 Stock compensation expense pertaining to options totaled
$ 2,619,501 and
$ 1,617,982 for the year ended April 30, 2024 and 2023, respectively. Stock compensation expense pertaining to restricted
stock totaled $ 989,766 and $ 2,038,742 for the year ended April 30, 2024 and 2023, respectively.

 Note
20 - Related-Party Transactions

 In
January 2022, the Company entered into a note agreement with an employee in the principal amount of $510,323, as further described in
Note 7.

 In
February 2024, the Company sold Rotor Riot and Fat Shark to Unusual Machines, as further described in Note 3 and Note 9. UMAC's
Chief Executive Officer is a direct relative of a member of the Company's management.

 Additional
related party transactions are disclosed in Note 14.

 F- 24

 Note
21 – Commitments and Contingencies

 Legal
Proceedings

 In
the ordinary course of business, we may be involved, at times, in various legal proceedings involving a variety of matters. We do not
believe there are any pending legal proceedings that will have a material adverse effect on our business, consolidated financial position,
results of operations, or cash flows. However, the outcome of such legal matters is inherently unpredictable and subject to significant
uncertainties. We have not recorded any litigation reserves as of April 30, 2024.

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

 Another pending legal matter is an action filed against
Teal in a U.S. District Court in Delaware. The complaint asserts claims for breach of contract which management denies. We are asserting
vigorous defenses to the complaint. Additionally, the Company has filed a lawsuit against the complainant for Tortious Interference with
Contractual Relations and Prospective Contractual Relations. No discovery or other significant developments in the Lawsuit have occurred.

 Note
22 – Subsequent Events

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

 As described in Note 3, the SPA pertaining
to the divestiture of the Consumer segment provided that the purchase price was to be increased on a dollar-for-dollar basis by the amount
by which the working capital exceeded the agreed working capital (the "Working Capital Adjustment"). After negotiations between
the parties, it was determined in July 2024 that UMAC owed the Company $2,000,000 as a Working Capital Adjustment.

 As a result, UMAC issued the Company
$4,000,000 of its 8% Promissory Notes due November 30, 2025 (the "New Notes") reflecting (i) satisfaction and settlement of
working capital adjustments and (ii) a maturity date extension to November 30, 2025.

 On July 22, 2024, the Company sold
all of its securities in UMAC to two unaffiliated third-party purchasers (the "Purchasers"). As part of the transaction,
on July 22, 2024, the Company entered into an Exchange Agreement (the "Exchange Agreement") with UMAC pursuant to which the
Company exchanged 4,250,000 shares of UMAC's common stock, par value $0.001 per share, for 4,250 shares of UMAC's newly designated
Series A Convertible Preferred Stock (the "Series A"). The Company sold the Series A and the New Notes to the Purchasers
for $4.4 million in cash pursuant to a Purchase Agreement in a transaction that closed on July 22, 2024.

 F- 25

 ITEM 9.
CHANGES IN AND DISAGREEMENTS WITH ACCOUNTANTS ON ACCOUNTING AND FINANCIAL DISCLOSURE

 There were no changes in or disagreements with accountants
on accounting and financial disclosure.

 ITEM 9A.
CONTROLS AND PROCEDURES

 Disclosure Controls and Procedures.

 Our management, with the participation of our CEO
(principal executive officer) and CFO (principal financial officer), has evaluated the effectiveness of the Company's disclosure
controls and procedures, as defined in Rule 13a-15(e) and 15d-15(e) of the Exchange Act, as of April 30, 2024.

 The term "disclosure controls and procedures"
as defined in Rules 13a-15(e) and 15d-15(e) means controls and other procedures of the Company that are designed to ensure that information
required to be disclosed by the Company in reports, such as this report, that it files or submits under the Exchange Act is recorded,
processed, summarized and reported within the time periods specified in the SEC's rules and forms. Disclosure controls and procedures
include, without limitation, controls and procedures designed to ensure that information required to be disclosed by the Company in the
reports that it files or submits under the Exchange Act is accumulated and communicated to the Company's management, including its
principal executive and principal financial officers, or persons performing similar functions, as appropriate to allow timely decisions
regarding required disclosure. Management recognizes that any controls and procedures, no matter how well designed and operated, can provide
only reasonable assurance of achieving their objectives, and management necessarily applies its judgment in evaluating the cost-benefit
relationship of possible controls and procedures.

 Based on that evaluation,
our CEO and CFO concluded that our disclosure controls and procedures were effective as of April 30, 2024.

 Management's annual report on internal control
over financial reporting.

 Our management is responsible for establishing and
maintaining adequate internal control over financial reporting. Our internal control over financial reporting is designed to provide reasonable
assurances regarding the reliability of financial reporting and the preparation of our consolidated financial statements in accordance
with GAAP. Our accounting policies and internal controls over financial reporting, established and maintained by management, are under
the general oversight of the Board's audit committee.

 Our internal control over financial reporting includes
those policies and procedures that:

 •

 pertain to the maintenance of records that, in reasonable detail, accurately and fairly reflect the transactions and dispositions of our assets;

 •

 provide reasonable assurance that transactions are recorded as necessary to permit preparation of financial statements in accordance with GAAP, and that receipts and expenditures are being made only in accordance with authorizations of our management and directors; and

 •

 provide reasonable assurance regarding prevention or timely detection of unauthorized acquisition, use or disposition of assets that could have a material effect on the financial statements.

 Because of its inherent limitations, internal control
over financial reporting may not prevent or detect misstatements. Also, projections of any evaluation of effectiveness to future periods
are subject to the risk that controls may become inadequate because of changes in conditions, or that the degree or compliance with the
policies or procedures may deteriorate.

 Management assessed our internal control over financial
reporting as of April 30, 2024. The standard measures adopted by management in making its evaluation are the measures in the Internal-Control
Integrated Framework published by the Committee of Sponsoring Organizations ("COSO") of the Treadway Commission.

 Based on management's assessment using the
COSO criteria, our CEO and CFO concluded that our internal control over financial reporting was not effective, specifically
pertaining to the year ended April 30, 2023 for which we restated items related to right of use assets and liabilities as well as
the removal of the derivative liabilities. The Company is currently in the process of formalizing narratives and processes which are
expected to mitigate these weaknesses, and has hired additional personnel to strengthen the internal control environment.

 Attestation Report of the Registered Public Accounting
Firm.

 Because the Company is a non-accelerated filer, this
annual report does not include an attestation report of our registered public accounting firm regarding internal control over financial
reporting. Management's report was not subject to attestation by our registered public accounting firm pursuant to rules of the
SEC where registrants that are non-accelerated filers are not required to provide the auditor attestation report.

 Changes In Controls Over Financial Reporting.

 There were no changes
in our internal control over financial reporting (as defined in Rule 13a-15(f) of the Exchange Act) that occurred during the year ended
April 30, 2024, that have materially affected, or are reasonably likely to materially affect, our internal controls over financial reporting.

 ITEM 9B.
OTHER INFORMATION

 During the fiscal
quarter ended April 30, 2024, none of our directors or executive officers adopted or terminated any contract, instruction
or written plan for the purchase or sale of Company securities that was intended to satisfy the affirmative defense conditions of Rule
10b5-1(c) or any "non-Rule 10b5-1 trading arrangement."

 ITEM 9C. DISCLOSURE REGARDING FOREIGN JURISDICTIONS
THAT PREVENT INSPECTIONS

 Not applicable.

 ITEM 10.
DIRECTORS, EXECUTIVE OFFICERS AND CORPORATE GOVERNANCE

 The information required
by this Item 10 will be included under the captions "Board of Directors and Corporate Governance," "Executive Officers,"
and "Delinquent Section 16(a) Reports" in our definitive Proxy Statement for the 2024 Annual Meeting of Stockholders to be
filed with the SEC within 120 days after the end of our fiscal year (the "Proxy Statement") and is incorporated herein by
reference.

 We have adopted a Corporate
Code of Conduct and Ethics applicable to our directors, officers and employees which is designed to deter wrongdoing and to promote:

 •
 honest and ethical conduct;

 •
 full, fair, accurate, timely and understandable disclosure in reports and
documents that we file with the SEC and in our other public communications;

 •
 compliance with applicable laws, rules and regulations, including insider
trading compliance; and

 •
 accountability for adherence to the code and prompt internal reporting of
violations of the code, including illegal or unethical behavior regarding accounting or auditing practices.

 You may obtain a copy of
our Corporate Code of Conduct and Ethics on our website at www.redcat.red under Company — Investor Relations — Governance
— Governance Documents. The Compliance Committee, which is composed of our Chief Executive Officer and Chief Financial Officer,
is responsible for reviewing the Corporate Code of Conduct and Ethics and amending as necessary. Any amendments will be disclosed on our
website.

 ITEM 11. EXECUTIVE COMPENSATION

 The information required
by this Item 11 will be included under the captions "Director Compensation Table," "Non-Employee Director Compensation
Arrangements," and "Executive Compensation" in the Proxy Statement and is incorporated herein by reference.

 ITEM 12. SECURITY OWNERSHIP OF CERTAIN BENEFICIAL
OWNERS AND MANAGEMENT AND RELATED STOCKHOLDER MATTERS

 The information
required by this Item 12 will be included under the captions "Security Ownership of Certain Beneficial Owners and Management"
and "2019 Equity Incentive Plan" in the Proxy Statement and is incorporated herein by reference.

 ITEM 13. CERTAIN RELATIONSHIPS AND RELATED TRANSACTIONS,
AND DIRECTOR INDEPENDENCE

 The information
required by this Item 13 will be included under the captions "Certain Relationships and Related Transactions, and Director Independence,"
 "Director Compensation Table," "Non-Employee Director Compensation Arrangements," and "Executive
Compensation" in the Proxy Statement and is incorporated herein by reference.

 ITEM 14. PRINCIPAL ACCOUNTING FEES AND SERVICES

 The information required by this
Item 14 will be included under the caption "Fees Paid to Auditors" in the Proxy Statement and is incorporated herein by reference.

 PART
IV

 ITEM 15.
EXHIBITS, FINANCIAL STATEMENTS SCHEDULES.

 Exhibit
 No.

 Description

 3.1

 Amended
 and Restated Articles of Incorporation, dated July 17, 2019 (incorporated by reference to Exhibit B to the Company's Schedule
 14C Information Statement filed with the SEC on July 2, 2019)

 3.2

 Bylaws
 (incorporated by reference to Exhibit 3.2 to the Company's Registration Statement on Form S-1 filed with the SEC on February
 8, 2017)

 3.3

 of Designation of Series A Preferred Stock (incorporated by reference to Exhibit 3.1 to the Company's Current Report on Form
 8-K filed with the SEC on December 12, 2018)

 3.4

 of Designation of Series E Convertible Preferred Stock (incorporated by reference to Exhibit 3.1 to the Company's Current Report
 on Form 8-K filed with the SEC on December 12, 2018)

 3.5

 Amendment
 No. 1 to Certification of Designation of Series E Convertible Preferred Stock (incorporated by reference to Exhibit 3.2 to the Company's
 Current Report on Form 8-K filed with the SEC on December 12, 2018)

 3.6

 Certificate
 of Withdrawal, dated May 13, 2019 of Certification of Designation of the Series A Preferred Stock, dated December 6, 2018, Series
 E Convertible Preferred Stock, dated January 3, 2018 and the Amendment to the Certification of Designation of the Series E Convertible
 Preferred Stock, dated January 3, 2018 (incorporated by reference to Exhibit 3.1 to the Company's Current Report on Form 8-K
 filed with the SEC on May 16, 2019)

 3.7

 of Designation of Series A Preferred Stock, dated May 10, 2019 (incorporated by reference to Exhibit 3.2 to the Company's Current
 Report on Form 8-K filed with the SEC on May 16, 2019)

 3.8

 of Designation of Series B Preferred Stock, dated May 10, 2019 (incorporated by reference to Exhibit 3.3 to the Company's Current
 Report on Form 8-K filed with the SEC on May 16, 2019)

 4.1

 Description
 of Capital Stock (incorporated by reference to Exhibit 4.2 to the Company's Annual Report on Form 10-K filed with the SEC on
 August 13, 2020)

 4.2#*

 Form
 of Stock Option Agreement

 4.3#*

 Form
 of Restricted Share Unit Award Agreement

 10.1#*

 2019
Equity Incentive Plan

 10.2#

 First
 Amendment to Executive Employment Agreement with Jeffrey Thompson (incorporated by reference to Exhibit 10.1 to the Company's
 Current Report on Form 8-K filed with the SEC on May 22, 2023).

 10.3#

 First
 Amendment to Executive Employment Agreement with Allan Evans (incorporated by reference to Exhibit 10.2 to the Company's Current
 Report on Form 8-K filed with the SEC on May 22, 2023).

 10.4

 Amendment
 No. 2 to Share Purchase Agreement Amendment dated March 31, 2023 (incorporated by reference to Exhibit 10.1 to the Company's
 Current Report on Form 8-K filed with the SEC on July 14, 2023).

 10.5

 Form
 of Registration Rights Agreement (incorporated by reference to Exhibit 10.2 to the Company's Current Report on Form 8-K filed
 with the SEC on July 14, 2023).

 10.6

 ATM
 Sales Agreement with ThinkEquity LLC (incorporated by reference to Exhibit 10.1 to the Company's Current Report on Form 8-K
 filed with the SEC on August 8, 2023).

 10.7

 Underwriting
 Agreement (incorporated by reference to Exhibit 1.1 to the Company's Current Report on Form 8-K filed with the SEC on December
 8, 2023).

 10.8

 Amendment
 No. 3 to Share Purchase Agreement dated September 18, 2023 (incorporated by reference to Exhibit 10.3 to the Company's Quarterly
 Report on Form 10-Q filed with the SEC on December 15, 2023)

 10.9

 Amendment
 No. 4 to Share Purchase Agreement with Unusual Machines, Inc. (incorporated by reference to Exhibit 10.1 to the Company's Current
 Report on Form 8-K filed with the SEC on December 15, 2023)

 10.10

 Form
 of 8% Promissory Note from Unusual Machines, Inc. (incorporated by reference to Exhibit 10.2 to the Company's Current Report
 on Form 8-K filed with the SEC on December 15, 2023)

 10.11

 8%
Promissory Note from Unusual Machines, Inc. (incorporated by reference to Exhibit 10.1 to the Company's Current Report on Form
8-K filed with the SEC on February 22, 2024)

 10.12

 Form
 of Registration Rights Agreement with Unusual Machines, Inc. (incorporated by reference to Exhibit 10.3 to the Company's Current
 Report on Form 8-K filed with the SEC on December 15, 2023)

 10.13

 Registration
 Rights Agreement with Unusual Machines, Inc. (incorporated by reference to Exhibit 10.2 to the Company's Current Report on
 Form 8-K filed with the SEC on February 22, 2024)

 10.14

 Non-Competition
 Agreement with Unusual Machines, Inc., Rotor Riot, LLC, and Fat Shark Holdings, Ltd. (incorporated by reference to Exhibit 10.3 to
 the Company's Current Report on Form 8-K filed with the SEC on February 22, 2024)

 10.15

 Non-Compete
 agreement with Allan Evans (incorporated by reference to Exhibit 10.4 to the Company's Current Report on Form 8-K filed with
 the SEC on February 22, 2024)

 10.16#

 Addendum
 to Executive Employment Agreement with Joseph Hernon (incorporated by reference to Exhibit 10.1 to the Company's Quarterly
 Report on Form 10-Q filed with the SEC on March 18, 2024)

 10.17#

 Addendum
 #2 to Executive Employment Agreement, between Joseph Hernon and the Company, dated March 15, 2024 (incorporated by reference
 to Exhibit 10.1 to the Company's Current Report on Form 8-K filed with the SEC on March 18, 2024)

 10.18#

 Consulting
Services Agreement, between Joseph Hernon and the Company, dated March 15, 2024 (incorporated by reference to Exhibit 10.2 to the Company's
Current Report on Form 8-K filed with the SEC on March 18, 2024)

 21.1*

 List
 of Subsidiaries

 23.1

 Consent
 of The Crone Law Group, P.C. (incorporated by reference to Exhibit 23.1 to the Company's Current Report on Form 8-K filed with
 the SEC on August 8, 2023)

 23.2*

 Consent
 of dbbmckennon

 31.1*

 of Principal Executive Officer pursuant to Exchange Act Rules 13a-14(a) and 15d-14(a), as adopted pursuant to Section 302 of the
 Sarbanes-Oxley Act of 2002

 31.2*

 of Principal Financial and Accounting Officer pursuant to Exchange Act Rules 13a-14(a) and 15d-14(a), as adopted pursuant to Section
 302 of the Sarbanes-Oxley Act of 2002

 32.1**

 of Chief Executive Officer pursuant to 18 U.S.C. Section 1350, as adopted pursuant to Section 906 of the Sarbanes-Oxley Act of 2002

 32.2**

 of Chief Financial Officer pursuant to 18 U.S.C. Section 1350, as adopted pursuant to Section 906 of the Sarbanes-Oxley Act of 2002

 97.1*

 Clawback
Policy

 101.INS*

 101.SCH*

 101.CAL*

 101.LAB*

 101.PRE*

 101.DEF*

 104*

 Cover

 * Filed herewith.

 ** Furnished
herewith.

 # Indicates
management contract or compensatory plan.

 ITEM 16. FORM 10-K SUMMARY

 Not applicable.

 SIGNATURES

 Pursuant to the requirements of Section 13 or 15(d)
of the Securities Exchange Act of 1934, the registrant has duly caused this report to be signed on its behalf by the undersigned thereunder
duly authorized.

 Red Cat Holdings, Inc.

 Dated: August 8, 2024

 By:

 / s/ Jeffrey Thompson

 Jeffrey Thompson

 Chief Executive Officer and President

 (Principal Executive Officer)

 Pursuant to the requirements of the Securities Exchange
Act of 1934, this report has been signed below by the following persons on behalf of the registrant and in the capacities and on the dates
indicated.

 Name

 Title

 Date

 /s/ Jeffrey M. Thompson

 Chief Executive Officer, President and Director

 Jeffrey M. Thompson

 (Principal Executive Officer)

 /s/ Leah Lunger

 Chief Financial Officer, Treasurer and Secretary

 Leah Lunger

 (Principal Financial and Accounting Officer)

 /s/ Nicholas Liuzza, Jr.

 Director

 Nicolas Liuzza, Jr.

 /s/ Christopher Moe

 Director

 Christopher Moe

 /s/ Joseph Freedman

 Director

 Joseph Freedman

 /s/ Paul Edward Funk II

 Director

 Paul Edward Funk II