Unusual Machines, Inc. 10-Q

Item 1. Financial Statements Unusual Machines, Inc. Consolidated Condensed Balance Sheets March 31, 2024 December 31, 2023 (Unaudited) ASSETS Current assets: Cash and cash equivalents $ 3,208,606 $ 894,773 Accounts receivable 1,933 – Inventory 1,641,839 – Prepaid inventory 998,254 – Deferred offering costs – 512,758 Other current assets 278,258 120,631 Total current assets 6,128,890 1,528,162 Non-current assets: Property and equipment, net 1,083 1,254 Operating lease right-of-use assets 373,131 – Goodwill and intangible assets 17,666,162 – Other non-current assets 59,426 – Total non-current assets 18,099,802 1,254 Total assets $ 24,228,692 $ 1,529,416 LIABILITIES AND STOCKHOLDERS' EQUITY Current liabilities Accounts payable and accrued expenses $ 455,764 $ 114,497 Operating lease liabilities 59,946 – Deferred revenue 176,268 – Total current liabilities 691,978 114,497 Long-term liabilities Convertible note 2,000,000 – Operating lease liabilities – long term 313,896 – Total liabilities 3,005,875 114,497 Commitments and contingencies (See note 12) – – Stockholders’ equity: Series B preferred stock - $ 0.01 par value, 10,000,000 authorized and 70 and 190 shares issued and outstanding at March 31, 2024 and December 31, 2023, respectively 1 2 Common stock - $ 0.01 par value, 500,000,000 authorized and 9,333,341 and 3,217,255 shares issued and outstanding at March 31, 2024 and December 31, 2023, respectively 93,334 32,173 Additional paid in capital 25,568,529 4,715,790 Accumulated deficit ( 4,439,047 ) ( 3,333,046 ) Total stockholders’ equity 21,222,817 1,414,919 Total liabilities and stockholders’ equity $ 24,228,692 $ 1,529,416 See accompanying condensed unaudited notes to the consolidated condensed financial statements. 4 Unusual Machines, Inc. Consolidated Condensed Statement of Operations For the Three Months Ended March 31, 2024 and 2023 (Unaudited) Three Months Ended March 31, 2024 2023 Sales $ 618,915 $ – Cost of goods sold 414,748 – Gross profit 204,167 – Operating expenses: Operations 112,322 – Research and development 16,796 – Selling and marketing 157,058 – General and administrative 998,874 588,516 Depreciation and amortization 5,470 381 Total operating expenses 1,290,519 588,897 Loss from operations ( 1,086,352 ) ( 588,897 ) Other income and (expense): Interest expense ( 19,649 ) – Total other income and (expense) ( 19,649 ) – Net loss before income tax ( 1,106,001 ) ( 588,897 ) Income tax benefit (expense) – – Net loss $ ( 1,106,001 ) $ ( 588,897 ) Net loss per share attributable to common stockholders Basic and diluted $ ( 0.18 ) $ ( 0.17 ) Weighted average common shares outstanding Basic and diluted 6,065,857 3,412,255 See accompanying condensed unaudited notes to the consolidated condensed financial statements. 5 Unusual Machines, Inc. Consolidated Condensed Statement of Changes in Stockholders’ Equity For the Three Months Ended March 31, 2024 and 2023 (Unaudited) Three Months Ended March 31, 2023 Series B, Preferred Stock Common Stock Additional Paid-In Accumulated Total Stockholders’ Shares Value Shares Value Capital Deficit Equity Balance, December 31, 2022 140 $ 1 3,392,250 $ 33,923 $ 4,714,041 $ ( 1,538,591 ) $ 3,209,374 Issuance of common shares – – 75,000 750 ( 750 ) – – Net loss – – – – – ( 588,897 ) ( 588,897 ) Balance, March 31, 2023 140 $ 1 3,467,250 $ 34,673 $ 4,713,291 $ ( 2,127,488 ) $ 2,620,477 Three Months Ended March 31, 2024 Series B, Preferred Stock Common Stock Additional Paid-In Accumulated Total Stockholders’ Shares Value Shares Value Capital Deficit Equity Balance, December 31, 2023 190 $ 2 3,217,255 $ 32,173 $ 4,715,790 $ ( 3,333,046 ) $ 1,414,919 Issuance of common shares as settlement – – 16,086 161 64,183 – 64,344 Issuance of common shares, initial public offering, net of offering costs – – 1,250,000 12,500 3,837,055 – 3,849,555 Issuance of common shares, business combination – – 4,250,000 42,500 16,957,500 – 17,000,000 Conversion of preferred shares ( 120 ) ( 1 ) 600,000 6,000 ( 5,999 ) – – Net loss – – – – – ( 1,106,001 ) ( 1,106,001 ) Balance, March 31, 2024 70 $ 1 9,333,341 $ 93,334 $ 25,568,529 $ ( 4,439,047 ) $ 21,222,817 See accompanying condensed unaudited notes to the consolidated condensed financial statements. 6 Unusual Machines, Inc. Consolidated Condensed Statement of Cash Flows For the Three Months Ended March 31, 2024 and 2023 (Unaudited) Three Months Ended March 31, 2024 2023 Cash flows from operating activities: Net loss $ ( 1,106,001 ) $ ( 588,897 ) Depreciation and amortization 5,470 381 Share-based compensation expense 64,344 – Change in assets and liabilities: Accounts receivable 4,865 – Inventory 148,765 – Prepaid inventory ( 377,144 ) – Deferred offering costs – ( 70,268 ) Other assets ( 46,866 ) 11,250 Accounts payable and accrued expenses 53,722 105,086 Operating lease liabilities ( 4,586 ) – Customer deposits and other current liabilities 61,827 – Net cash used in operating activities ( 1,195,604 ) ( 542,448 ) Cash flows from investing activities Cash portion of consideration paid for acquisition of businesses, net of cash received ( 852,876 ) – Net cash used in investing activities ( 852,876 ) – Cash flows from financing activities: Proceeds from issuance of common shares 5,000,000 – Common share issuance offering costs ( 637,687 ) – Net cash provided by financing activities 4,362,313 – Net increase (decrease) in cash 2,313,833 ( 542,448 ) Cash, beginning of period 894,773 3,099,422 Cash, end of period $ 3,208,606 $ 2,556,974 Supplemental disclosures of cash flow information: Non-cash consideration paid for assets acquired and liabilities assumed $ 19,000,000 $ – Deferred acquisition costs $ 100,000 $ – Deferred offering costs recorded as reduction of proceeds $ 512,758 $ – See accompanying condensed unaudited notes to the consolidated condensed financial statements. 7 Unusual Machines, Inc. Notes to Consolidated Condensed Financial Statements For the Period Ended March 31, 2024 Note 1 – Organization and nature of business Unusual Machines, Inc. (“the Company”) is a Nevada corporation engaged in the commercial drone industry. The Company was originally formed as a limited liability company registered with the Department of State under the laws of the Commonwealth of Puerto Rico on July 11, 2019. On April 22, 2024, the Company reincorporated as a Nevada corporation. On February 16, 2024, the Company closed its Initial Public Offering (the “IPO”) of 1,250,000 shares of common stock at a public offering price of $ 4.00 per share (“IPO Price”). The shares are traded on NYSE American. Simultaneous with the closing of the IPO, the Company acquired Fat Shark Holdings Ltd. (“Fat Shark”) and Rotor Riot, LLC (“Rotor Riot”) from Red Cat Holdings, Inc. (“Red Cat”). (See Note 3). Note 2 – Summary of significant accounting policies Principles of Consolidation The consolidated financial statements include accounts of the Company and its wholly owned subsidiaries, Fat Shark and Rotor Riot since the acquisitions on February 16, 2024. Intercompany transactions and balances have been eliminated upon consolidation. Unaudited interim financial information The consolidated condensed financial statements of the Company included herein have been prepared, without audit, pursuant to the rules and regulations of the Securities and Exchange Commission (the “SEC”). Certain information and footnote disclosures normally included in financial statements prepared in accordance with GAAP have been condensed or omitted from this Quarterly Report, as is permitted by such rules and regulations. Accordingly, these condensed financial statements should be read in conjunction with the financial statements and notes thereto included in the Company’s Annual Report on Form 10-K. The results for any interim period are not necessarily indicative of results for any future period. Use of Estimates 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, disclosures of contingent assets and liabilities at the date of the financial statements, and the reported amounts of revenues and expenses during the reporting period. Accordingly, actual results could differ from those estimates, and such results could be material. The financial statements include some amounts that are based on management's best estimates and judgments. Significant estimates reflected in these financial statements include those used to (i) determine stock-based compensation, (ii) the fair value of assets acquired and liabilities assumed in business combinations and the value of shares issued as consideration, (iii) reserves and allowances related to accounts receivable, inventory and sales, (iv) the evaluation of long-term assets, including goodwill, for impairment, (v) the fair value of lease liabilities and related right of use assets, and (vi) the warranty liability. 8 Cash and Cash Equivalents The Company considers all highly liquid debt instruments and other short-term investments with maturities of three months or less, when purchased, to be cash equivalents. The Company maintains cash deposits in multiple commercial banks and financial services companies. These financial institutions are insured by the Federal Deposit Insurance Corporation up to $ 250,000 . The Company’s cash balance may at times exceed these limits. At March 31, 2024 and December 31, 2023, the Company had approximately $ 2.8 million and $ 0.6 million, respectively, in excess of federally insured limits. The Company continually monitors its positions with, and the credit quality of the financial institutions with which it invests. Accounts Receivable, net The Company carries its accounts receivable at invoiced amounts. Upon the closing of the acquisitions in February 2024 when we acquired accounts receivable, the Company adopted ASC 326, Financial Instruments – Credit Losses, which the Company evaluates all credit losses as of the reporting date. On a periodic basis, the Company evaluates its accounts receivable and establishes an allowance for doubtful accounts based on a history of past write-offs and collections and current credit conditions. Accounts are written-off as uncollectible at the discretion of management. At March 31, 2024 and December 31, 2023, the Company considers accounts receivable to be fully collectible; accordingly, no allowance for doubtful accounts has been established. Inventory Inventories, which consist of finished goods, are stated at the lower of cost or net realizable value, and are measured using the first-in, first-out method. Cost components include direct materials and direct labor, as well as in-bound freight. At each balance sheet date, the Company evaluates the net realizable value of its inventory using various reference measures including current product selling prices, as well as evaluating for excess quantities and obsolescence. Deferred offering costs The Company deferred direct incremental costs associated with its IPO. The Company capitalized $ 127,687 and $ 70,268 during the three months ended March 31, 2024 and 2023, respectively and the deferred offering costs were $ 512,758 as of December 31, 2023. Deferred offering costs consist of primarily legal, advisory, and consulting fees incurred in connection with the formation and preparation of the IPO. After consummation of the IPO, total deferred offering costs of $ 640,445 were recorded as a reduction to additional paid-in capital generated as a result of the offering. Property and equipment, net Property and equipment is stated at cost, net of accumulated depreciation. Depreciation is provided utilizing the straight-line method over the estimated useful lives for owned assets, ranging from two to five years . Leases The Company has adopted Accounting Standards Codification (ASC) 842, “Leases” which requires the recognition of assets and liabilities associated with lease agreements. As of February 16, 2024, the date of the acquisition, the Company recognized a lease liability obligation of $ 378,430 and a right-of-use asset for the same amount related to the lease in Orlando, FL. 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 used an effective discount rate of 11.49 % based on its last debt financings. Operating lease assets are measured by adjusting the lease liability for lease incentives, initial direct costs incurred and asset impairments. Lease expense for minimum lease payments is recognized on a straight-line 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. 9 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. The Company tests goodwill for impairment in accordance with the provisions of ASC 350, Intangibles – Goodwill and Other, (“ASC 350”). Goodwill is tested for impairment at least annually at the reporting unit level or whenever events or changes in circumstances indicate that goodwill might be impaired. ASC 350 provides that an entity has the option to first assess qualitative factors to determine whether the existence of events or circumstances leads to a determination that it is more likely than not that the fair value of a reporting unit is less than its carrying amount. If, after assessing the totality of events or circumstances, an entity determines it is not more likely than not that the fair value of a reporting unit is less than its carrying amount, then additional impairment testing is not required. However, if an entity concludes otherwise, then it is required to perform an impairment test. The impairment test involves comparing the estimated fair value of a reporting unit with its book value, including goodwill. If the estimated fair value exceeds book value, goodwill is considered not to be impaired. If, however, the fair value of the reporting unit is less than book value, then an impairment loss is recognized in an amount equal to the amount that the book value of the reporting unit exceeds its fair value, not to exceed the total amount of goodwill allocated to the reporting unit. The estimate of fair value of a reporting unit is computed using either an income approach, a market approach, or a combination of both. Under the income approach, we utilize the discounted cash flow method to estimate the fair value of a reporting unit. Significant assumptions inherent in estimating the fair values include the estimated future cash flows, growth assumptions for future revenues (including gross margin, operating expenses, and capital expenditures), and a rate used to discount estimated future cash flow projections to their present value based on estimated weighted average cost of capital (i.e., the selected discount rate). Management’s 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. The Company reviews long-lived assets, including tangible assets and other intangible assets with definitive lives, for impairment whenever events or changes in circumstances indicate that the asset’s carrying amount may not be recoverable. The Company conducts its long-lived asset impairment analyses in accordance with ASC 360, “Impairment or Disposal of Long-Lived Assets”. ASC 360 requires the Company to group assets and liabilities at the lowest level for which identifiable cash flows are largely independent of the cash flows of other assets and liabilities and evaluate the asset group against the sum of the undiscounted future cash flows. If the undiscounted cash flows do not indicate the carrying amount of the asset group is recoverable, an impairment charge is measured as the amount by which the carrying amount of the asset group exceeds its fair value based on discounted cash flow analysis or appraisals. 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. 10 The guidance establishes three levels of the fair value hierarchy as follows: Level 1 : Inputs are unadjusted, quoted prices in active markets for identical assets or liabilities at the measurement date; Level 2 : Inputs are observable, unadjusted quoted prices in active markets for similar assets or liabilities, unadjusted quoted prices for identical or similar assets or liabilities in markets that are not active, or other inputs that are observable or can be corroborated by observable market data for substantially the full term of the related assets or liabilities; and Level 3 : Unobservable inputs that are significant to the measurement of the fair value of the assets or liabilities that are supported by little or no market data. Disclosures for Non-Financial Assets Measured at Fair Value on a Non-Recurring Basis The Company's financial instruments mainly consist of cash, receivables, current assets, accounts payable, accrued expenses and debt. The carrying amounts of cash, receivables, current assets, accounts payable, accrued expenses and current debt approximates fair value due to the short-term nature of these instruments. Warranty Liability Fat Shark products are warranted against defects in materials and workmanship for a period of two years from the date of shipment. If a defect arises during the warranty period, Fat Shark will either (i) repair the affected product at no charge using new parts or parts that are equivalent to new in performance and reliability; (ii) exchange the affected product with a functionally equivalent product; or (iii) refund the original purchase price for the affected product . Allowances for estimated warranty costs are recorded during the period of sale. The determination of such allowances requires the Company to make estimates of product warranty claim rates and expected costs to repair or to replace the products under warranty. The Company currently establishes warranty reserves based on historical warranty costs for each product line combined with liability estimates based on the prior 24 months’ sales activities. If actual return rates and/or repair and replacement costs differ significantly from the Company’s estimates, adjustments to recognize additional cost of sales may be required in future periods. Historically the warranty accrual and the expense amounts have been immaterial. The warranty liability is included in accrued expenses on the accompanying consolidated balance sheets and amounted $ 66,025 as of March 31, 2024, which was acquired as a part of the acquisitions in February 2024. Rotor Riot does not provide any warranty of any kind for any of the equipment it sells or otherwise distributes. Consumers assume all risk for any products purchased or received from Rotor Riot. Revenue Recognition The Company recognizes revenue in accordance with ASC 606, “Revenue from Contracts with Customers”, issued by the Financial Accounting Standards Board (“FASB”). This standard includes a comprehensive evaluation of factors to be considered regarding revenue recognition including: Step 1: Identify the contract with a customer; Step 2: Identify the performance obligations in the contract; Step 3: Determine the transaction price; Step 4: Allocate the transaction price to the performance obligations in the contract; and Step 5: Recognize revenue when (or as) the Company satisfies a performance obligation at a point in time. The Company receives revenues from the sale of products from both retail distributers and individual consumers. Sales revenue is recognized when the products are shipped and the price is fixed or determinable, no other significant obligations of the Company exist and collectability is probable. Revenue is recognized when the title to the products has been passed to the customer, which is the date the products are shipped to the customer. This is the date the performance obligation has been met. Deferred Revenue Deferred revenue relates to (i) orders placed, but not yet fulfilled and (ii) customer tickets purchased related to the Company’s Rampage event, in which tickets are sold in advance and recognized when the event takes place. All deferred revenue is expected to be recognized within one year. Deferred revenue related to orders placed, but not yet fulfilled totaled $ 82,943 and $ 0 as of March 31, 2024 and December 31, 2023, respectively. Deferred revenue related to the Company’s Rampage event totaled $ 93,325 and $ 0 as of March 31, 2024 and December 31, 2023, respectively. 11 Cost of Goods Sold Cost of goods sold includes inventory costs, direct packaging costs and production related depreciation, if any. Shipping and Handling Costs Shipping and handling costs incurred for product shipped to customers are included in general and administrative expenses and amounted to $ 23,475 since February 16, 2024, the date of the acquisition, through March 31, 2024. The Company did no t incur and shipping and handling costs in the three months ended March 31, 2023. Shipping and handling costs charged to customers are included in sales. 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 costs, materials, and a proportionate share of overhead costs. Income Taxes The Company accounts for income taxes using an asset and liability approach, which requires recognition of deferred tax assets and liabilities for the expected future tax consequences of events. A valuation allowance is established to reduce deferred tax assets to their estimated realizable value when, in the opinion of management, it is more likely than not that some portion or all of the deferred income tax assets will not be realizable in the future. The Company recognizes benefits of uncertain tax positions if it is more likely than not that such positions will be sustained upon examination based solely on their technical merits, as the largest amount of benefit that is more likely than not to be realized upon the ultimate settlement. The Company’s policy is to recognize interest and penalties related to unrecognized tax benefits as a part of income tax expense. The Company’s current provision for the three months ending March 31, 2024 and 2023 consisted of a tax benefit against which we applied a full valuation allowance, resulting in no current provision for income taxes. Since the Company has not generated an operating profit since inception, there are no deferred tax assets as of March 31, 2024 and December 31, 2023. Stock-Based Compensation Stock 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. The Company recognizes forfeitures as they occur. The fair value of restricted stock is based on our quoted 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. Warrants The Company accounts for warrants to purchase shares of its common stock in accordance with the guidance in ASC 480, Distinguishing Liabilities from Equity (“ASC 480”) and ASC 815, Derivatives and Hedging (“ASC 815”). The Company classifies warrants issued for the purchase of shares of its common stock as either equity or liability instruments based on an assessment of the specific terms and conditions of each respective contract. The assessment considers whether the warrants are freestanding financial instruments or embedded in a host instrument, whether the warrants meet the definition of a liability pursuant to ASC 480, whether the warrants meet the definition of a derivative under ASC 815, and whether the warrants meet all of the requirements for equity classification under ASC 815. This assessment, which requires the use of professional judgment, is conducted at the time of warrant issuance and as of each subsequent quarterly period end date while the warrants are outstanding. 12 For issued or modified warrants that meet all of the criteria for equity classification, the warrants are required to be recorded as a component of equity at the time of issuance. For issued or modified warrants that do not meet all the criteria for equity classification, the warrants are required to be recorded as liabilities at their initial fair value on the date of issuance, and each balance sheet date thereafter. Changes in the estimated fair value of the warrants classified as liabilities are recognized as a non-cash gain or loss in the consolidated statements of operations and comprehensive loss. Net Loss per Share Basic and diluted net loss per share is calculated based on the weighted-average of common shares outstanding in accordance with FASB ASC Topic 260, Earnings per Share . Diluted net loss per share is calculated based on the weighted-average number of common shares outstanding plus the effect of dilutive potential common shares. When the Company reports a net loss, the calculation of diluted net loss per share excludes potential common shares as the effect would be anti-dilutive. Segment Reporting Since the acquisitions of Fat Shark and Rotor Riot, the Company operates with one reportable segment. The Company bases its reportable segment based on how our Chief Operating Decision Maker manages the business, makes resource allocations and operating decisions, and evaluates operating performance. Recent Accounting Pronouncements In November 2023, new accounting guidance was issued that updates reportable segment disclosure requirements by requiring disclosures of significant reportable segment expenses that are regularly provided to the Chief Operating Decision Maker (the “CODM”) and included within each reported measure of a segment's profit or loss. This new guidance also requires disclosure of the title and position of the individual identified as the CODM and an explanation of how the CODM uses the reported measures of a segment’s profit or loss in assessing segment performance and deciding how to allocate resources. The new guidance is effective for annual periods beginning after December 15, 2023, and interim periods within fiscal years beginning after December 15, 2024. The new guidance is required to be applied retrospectively to all prior periods presented in the financial statements. Early adoption is also permitted. On January 1, 2024, the Company adopted ASC 280, Segment Reporting. The Company currently operates a single segment and the Company does not anticipate any net effect related to the adoption. In December 2023, new accounting guidance was issued related to income tax disclosures. The new guidance requires disaggregated information about a reporting entity’s effective tax rate reconciliation as well as additional information on income taxes paid. The new guidance is effective on a prospective basis for annual periods beginning after December 15, 2024. Early adoption is also permitted for annual financial statements that have not yet been issued or made available for issuance. This new guidance will likely not result in additional required disclosures when adopted. Note 3 – Acquisitions Fat Shark and Rotor Riot On February 16, 2024, the Company closed on the acquisitions of both Fat Shark and Rotor Riot from Red Cat and Jeffrey Thompson, the founder and Chief Executive Officer of Red Cat (the “Business Combination”) (See Note 11 – Related Party Transactions for additional information). Fat Shark and Rotor Riot are in the business of designing and marketing consumer drones and first-person-view (“FPV”) goggles. Rotor Riot is also a licensed authorized reseller of consumer drones manufactured by third-parties. 13 The Company specializes in the production and sale of small drones and essential components and with the acquisitions of Fat Shark and Rotor Riot, it brings brand recognition and a strong curated retail channel in the FPV drone market segment. This Business Combination is a realization of the Company’s strategy to build its business both organically and through strategic acquisitions that leverage our retail business to onshore production of critical drone components. With the transition to onshoring production of drone components, the Company intends to expand into B2B channels for customers that require a domestic supply chain. The Business Combination was based on a share purchase agreement (the “Purchase Agreement”) that was executed on November 21, 2022. From November 21, 2022 to February 16, 2024, the Purchase Agreement was subject to several amendments. Under the terms of the Purchase Agreement, as amended, the consideration paid for the acquired assets consisted of (i) $ 1 .0 million in cash and a cash deposit of $ 0.1 million made in 2022, (ii) issuance of a $ 2 .0 million 18 month promissory note to Red Cat (see Note 8 “Debt” for further details), and (iii) the issuance of 4,250,000 shares of the Company’s common stock, which represented approximately 48.66% of the outstanding common stock of the Company on February 16, 2024, after the effect of the issued shares (collectively the “Consideration Paid”). The Company has currently valued the Red Cat common stock at $ 4.00 per share which represents the IPO price of the Company’s common stock on February 15, 2024. Accordingly, the value of the Consideration Paid is equal to $ 20,100,000 . The acquisitions met the definition of a business combination under ASC 805, Business Combinations, and therefore the assets acquired and liabilities assumed are accounted for at fair value. The Company has not completed its evaluation of the fair value of assets acquired and liabilities assumed of Fat Shark and Rotor Riot for the purpose of its 2024 fiscal year financial reporting and as such has not fully determined the unallocated purchase price between goodwill and other intangible assets. Such amounts are subject to adjustment during the one-year measurement period and the purchase price may be subject to a working capital adjustment (See Note 12). The following represents the fair value allocation of Fat Shark and Rotor Riot Purchase Price: Schedule of fair value allocation Cash $ 147,124 Accounts receivable (approximates contractual value) 6,798 Inventories (on hand and prepaid) 2,611,583 Other current assets 10,892 Right of use asset - operating 378,430 Other long-term assets 59,426 Goodwill and intangible assets (unallocated purchase price) 17,666,162 Total assets 20,880,415 Accounts payable and accrued liabilities 287,544 Customer deposits 114,441 Operating lease liability – current and long-term 378,430 Total liabilities 780,415 Total purchase price $ 20,100,000 Initial goodwill and intangible assets relate to Fat Shark and Rotor Riot being FPV market leaders and their well-known and established brands within the industry. Combining these entities and their existing customer base along with Unusual Machines strategy of extending to B2B sales of drone components will provide strategic advantage. The Company will evaluate the amount of goodwill and intangibles that are expected to be deductible for tax purposes once the unallocated purchase price is finalized. 14 The results of Fat Shark and Rotor Riot have been included in the Consolidated Financial Statements from the date of acquisition. The table below presents the results as reported by the Company and unaudited pro forma results of the Company, assuming that the acquisition of Fat Shark and Rotor Riot at the beginning of each period are as follows. The unaudited pro forma results are not necessarily indicative of what actually would have occurred had the acquisitions been in effect for the periods presented (in thousands, except per share data): Schedule of unaudited pro forma results March 31, 2024 March 31, 2023 As Reported Proforma (unaudited) As Reported Proforma (unaudited) Revenue $ 619 $ 1,114 $ – $ 1,343 Gross profit/(loss) 204 236 – 407 Loss from operations ( 1,086 ) ( 1,130 ) ( 589 ) ( 1,201 ) Other expense 20 20 – 3 Net loss $ ( 1,106 ) $ ( 1,150 ) $ ( 589 ) $ ( 1,204 ) Net earnings per share: Basic $ ( 0.18 ) $ ( 0.13 ) $ ( 0.17 ) $ ( 0.14 ) This unaudited consolidated pro forma financial information is presented for informational purposes only. The unaudited consolidated pro forma adjustments are based on preliminary estimates, information available and certain assumptions, and may be revised as additional information becomes available. In addition, the unaudited pro forma financial information does not reflect any adjustments for non-recurring items or anticipated synergies resulting from the acquisition. The unaudited pro forma financial information from the beginning of the periods presented until the acquisition date includes adjustments to: 1) eliminate intercompany revenue and associated cost of sales for sales of product from Fat Shark to Rotor Riot, 2) to adjust fair value for certain Fat Shark inventory as if the acquisition had occurred as of the beginning of the respective periods and 3) to include acquisition related expenses in the Q1 ’23 that were incurred in Q1 ’24. Note 4 – Inventories Inventories, consisting solely of finished goods, totaled $ 1,641,839 and $ 0 as of March 31, 2024 and December 31, 2023, respectively. In addition, the Company had prepaid and deposits for inventory totaling $ 998,254 and $ 0 as of March 31, 2024 and December 31, 2023, respectively. Note 5 – Other Current Assets Other current assets included as of: Schedule of other current assets March 31, 2024 December 31, 2023 Deposit related to Rotor Riot, LLC and Fat Shark, Ltd. acquisitions $ – $ 100,000 Prepaid insurance 220,500 20,631 Other receivables 19,644 – Other prepaid expenses 38,114 – Total other current assets $ 278,258 $ 120,631 15 Note 6 – Property and Equipment, net Property and equipment consist of assets with an estimated useful life greater than one year. Property and equipment are reported net of accumulated depreciation, and the reported values are periodically assessed for impairment. Property and equipment as of: Schedule of property and equipment March 31, 2024 December 31, 2023 Computer equipment $ 7,738 $ 7,738 Accumulated depreciation ( 6,655 ) ( 6,484 ) Total property and equipment, net $ 1,083 $ 1,254 Depreciation expense totaled $ 171 and $ 381 for the three months ended March 31, 2024 and 2023, respectively. Note 7 – Operating Leases As identified in Note 3 “Acquisition”, the acquired businesses, specifically Rotor Riot, has entered into a five-year operating lease for approximately 6,900 square feet of warehouse and office space in Orlando, Florida. The lease commenced in November 2023 and expires in October 2028. The Company has valued the ROUA and the associated liability, as of February 15, 2024, at $ 378,430 . The Company has no finance leases. Operating lease expense totaled $ 13,143 from the date of acquisition through the period ended March 31, 2024. The following is a summary of future lease payments required under the five-year lease agreement: Schedule of lease maturity payments Year Future Lease Payments Operating Lease Discount Operating Lease Liability 2024 $ 73,094 $ ( 29,242 ) $ 43,852 2025 101,133 ( 33,313 ) 67,820 2026 105,178 ( 25,468 ) 79,710 2027 109,037 ( 15,985 ) 93,052 2028 94,185 ( 4,776 ) 89,409 Total $ 482,627 $ ( 108,784 ) $ 373,843 Supplemental Information Weighted average remaining lease term (in years) 4.58 Weighted average discount rate 11.49 % Note 8 – Debt In conjunction with the acquisition of Fat Shark and Rotor Riot, as discussed in Note 3, the Company issued a convertible promissory note (“Promissory Note”) with Red Cat Holdings, Inc. for $ 2 .0 million. The note bears interest at 8 % annually and matures in full on August 16, 2025 , subject to certain conditions. In the Event of Default as defined in the Promissory Note, the seller has the right to convert the Promissory Note including any accrued and unpaid interest, in whole or in part, into common stock. The conversion price is calculated at a 10 % discount of the average three-day volume-weighted average price (VWAP) prior to the conversion date. As of March 31, 2024, the outstanding balance on the note payable was $ 2 .0 million. Interest expense for the three months ended March 31, 2024 was $ 19,649 . 16 Note 9 – Earnings Per Share and Stockholders’ Equity Earnings per Share Basic net loss per share is computed by dividing net loss, which is allocated based upon the proportionate amount of weighted average shares outstanding, to each class of stockholder’s stock outstanding during the period. For the calculation of diluted net loss per share, net loss per share attributable to common stockholders for basic net loss per share is adjusted by the effect of dilutive securities, including awards under our equity compensation plans. Outstanding securities not included in the computation of diluted net loss per share because their effect would have been anti-dilutive include 350,000 and 700,000 shares of Series B Preferred Stock, as converted as of March 31, 2024 and 2023, respectively, the 62,500 of common stock representative warrants issued to the underwriter associated with the February 2024 IPO and 1,120,832 shares of common stock, as converted, associated with the Promissory Note discussed in Note 8 “Debt”. Preferred Stock The preferred stock par value is $ 0.01 . The Series B preferred stock is convertible into common stock at a ratio of 5,000 shares of common stock for each share of Series B stock held, subject to certain limitations. Series B preferred shares are not entitled to vote on any matters submitted to shareholders of the Company. Subsequent to the IPO but prior to March 31, 2024, certain shareholders converted 120 shares of Series B preferred shares into 600,000 shares of common stock. The Company canceled the 120 shares of Series B preferred shares upon the conversion. On June 1, 2023, the Company issued an additional 50 Series B preferred shares in connection with the cancellation of 500,000 shares of common stock. Series B preferred shares outstanding at March 31, 2024 totaled 70 which are convertible into 350,000 shares of common stock. Common Stock The common stock par value is $ 0.01 . 2024 Transactions On January 2, 2024, the Company issued 16,086 shares of common stock to its prior Chief Executive Officer as a part of a separation agreement and recognized compensation expense of $ 64,344 , which is $4 per share, the last valuation of the Company’s private placement and the value of the IPO in February 2024. On February 16, 2024 the Company completed its IPO and issued 1,250,000 shares of common stock at the IPO Price for total net proceeds of $ 3,849,555 . The Company incurred $ 510,000 direct deduction from proceeds, $ 127,687 in cash disbursements related to offering costs in the three months ended March 31, 2024 and $ 512,758 in prior year paid and deferred offering costs as of December 31, 2023 for a total of $ 1,150,445 offering costs, associated with IPO which consisted of underwriter, legal, accounting, and other associated filing fees. These costs have been recorded as a reduction of the gross proceeds from the IPO in stockholder’s equity. The Company also incurred additional costs related to warrants to purchase 62,500 shares of common stock issued to the underwriters as partial compensation for services rendered in connection with the IPO, which is preliminarily valued at $ 250,000 as of the date of the IPO using the IPO Price of $4 per share. The Company is planning to value the warrants using a Black-Scholes valuation model but has not completed this workflow. Any change to the fair value of the warrants would have no change to the Company’s financial statements since the value of the warrants would only impact the “offering costs” and thus entry would be to adjust “Additional Paid-In Capital – Common Stock” and “Additional Paid-In Capital – Warrants”. The warrants are exercisable for common stock at a price of $ 5.00 per share (125% of the IPO Price) at any time beginning on August 15, 2024 through and including February 16, 2029, the expiration date. Simultaneously with its IPO and as a part of the Purchase Agreement as discussed in Note 3, the Company issued Red Cat 4,250,000 shares of common stock as consideration of the business combination. As agreed in the Purchase Agreement, $ 17 .0 million of the purchase price would be issued in common stock based on the IPO price of $4.00 per share. 17 Subsequent to the IPO and prior to March 31, 2024, the Company issued 600,000 shares of common stock related to certain shareholders converting 120 of Series B shares into common stock. 2023 Transactions On March 7, 2023, the Company issued 75,000 shares of common stock to the investors in the July 2022 private placement. The shares were issued as consideration for its agreement with Revere Securities to modify its engagement letter with the Company. See Note 12 “Subsequent Events” for more information. Note 10 – Share Based Awards Warrants The following table presents the activity for warrants outstanding as of March 31, 2024: Schedule of warrant activity Weighted Warrants Average Outstanding Exercise Price Outstanding - December 31, 2023 – $ – Granted 62,500 5.00 Forfeited/cancelled/restored – – Exercised – – Outstanding - March 31, 2024 62,500 $ 5.00 As discussed in Note 9, “Earnings Per Share and Stockholders’ Equity”, in connection with the IPO, the Company issued 62,500 representative warrants to its underwriters to purchase shares of common stock. The representative warrants have an exercise price of $5.00 or can be exercised through a cashless exercise feature. All warrants outstanding have a weighted average remaining contractual life of approximately 4.88 years as of March 31, 2024. Note 11 – Related Party Transactions In November 2022, the Company entered into the Purchase Agreement, as amended with Red Cat and Jeffrey Thompson, the Company’s former Chief Executive Officer and President and current director and also the current Chief Executive Officer of Red Cat, pursuant to which, among other things, Mr. Thompson and the Company have agreed to indemnification obligations, which shall survive for a period of nine months from February 16, 2024, subject to certain limitations, which includes a basket of $250,000 before any claim can be asserted and a cap equal to the value of 100,000 shares of our common stock owned by him to secure any indemnification obligations, which stock is our sole remedy, except for fraud. Our prior Chief Executive Officer, Mr. Brandon Torres Declet, negotiated the terms of the Purchase Agreement on an arms’ length basis with Joe Freedman who was the head of Red Cat’s Special Committee. The transaction was ultimately approved by the Company’s and Red Cat’s board of directors. On March 8, 2023, a majority of the disinterested Red Cat shareholders approved the transactions contemplated in the Purchase Agreement in a special meeting. Mr. Thompson recused himself from such vote. 18 In February 2024, the Company completed the acquisitions to purchase Fat Shark and Rotor Riot from Red Cat. Jeffrey Thompson is the founder and current Chief Executive Officer of Red Cat. Mr. Thompson is also the founder, prior Chief Executive Officer and current member on the Board of Directors of Unusual Machines. Prior to the acquisition, Mr. Thompson held 328,500 shares of common stock in Unusual Machines, which represented approximately 10% prior to the acquisition and IPO. Note 12 – Commitments and Contingencies As a part of the Purchase Agreement, the Company agreed to a working capital adjustment with Red Cat related to the acquisitions of Fat Shark and Rotor Riot. The Company is uncertain as to how much this adjustment will be. However, between the fair value of Fat Shark and Rotor Riot inventory, cash and prepaid assets, offset by accounts payable and other accrued expenses, the Company expects the adjustment to Red Cat for working capital will be material. The adjustment to working capital could be settled in cash, an adjustment to the convertible note, or a combination thereof. The Company and Red Cat agreed to have a preliminary calculation of the working capital adjustment by May 17, 2024, however, with the determination of fair value of assets acquired and liabilities assumed still being determined, this calculation may be deferred. Note 13 – Subsequent Events On April 19, 2024, the Company entered into an Agreement and Plan of Merger with its wholly owned subsidiary, Unusual Machines, Inc., a Nevada corporation (“UMAC Nevada”), pursuant to which the Company agreed to merge with and into UMAC Nevada with UMAC Nevada continuing as the surviving corporation in the merger. The merger was consummated on April 22, 2024. As a result, the Company reincorporated from Puerto Rico to Nevada. On April 30, 2024 (“Grant Date”), the Company’s board of directors approved the Company entering into a two-year Management Services Agreement (the “Agreement”) with 8 Consulting LLC (the “Consultant”) for the services of our Chief Executive Officer, Dr. Allan Evans, whereby the Consultant will cause Dr. Evans to perform his services as the Company’s Chief Executive Officer and the Consultant will be compensated on behalf of Dr. Evans by the Company in connection with his performance of such services. The Agreement allows Dr. Evans to receive favorable tax benefits as a resident of the Commonwealth of Puerto Rico who will perform such services in Puerto Rico. Pursuant to the Agreement, Dr. Evans will perform the duties and responsibilities that are customary for a chief executive officer of a public company that either have revenues similar to the Company on a pro forma basis as reflected in the Prospectus filed with the SEC on February 15, 2024, or if pre-revenues, are an active and on-going business that are performing pre-revenue activities. The Consultant will cause Dr. Evans, as Chief Executive Officer, (i) to undertake primary responsibility for managing all aspects of the Company and overseeing the preparation of all reports, registration statements and other filings required filed by the Company with the SEC and executing the certifications required the Sarbanes Oxley Act of 2002 and the rules of the SEC as the principal executive officer of the Company; (ii) attend investor meetings and road shows in connection with the Company’s fundraising and investor relations activities; (iii) to report to the Company’s board of directors; (iv) to perform services for such subsidiaries of the Company as may be necessary. The Consultant will receive a $250,000 fee per year payable in monthly installments. In addition, the Consultant was granted 488,000 fully vested shares of restricted common stock. The fair value of the shares was based on the quoted trading price on the Grant Date and will be recognized over the service period (see below). The grant of restricted common stock was made under the Company’s 2022 Equity Incentive Plan. The shares of restricted common stock are subject to pro rata forfeiture from February 14, 2024 until February 14, 2025, in the event that Dr. Evans is terminated or ends his services to the Company for any reason other than death or disability, as defined in the Internal Revenue Code. The Company and Dr. Evans previously entered into an Offer Letter dated November 27, 2023, under which he would serve as the Company’s Chief Executive Officer effective as of December 4, 2023. The Agreement terminates and replaces the Offer Letter dated November 27, 2023. 19 On April 30, 2024, the Board of the Company approved the grant of restricted shares of common stock to the following executive officers of the Company set forth on the table below in such amounts and with vesting set forth opposite their respective names. The shares of restricted common stock were granted under the Company’s 2022 Equity Incentive Plan. The shares of restricted stock are subject to pro rata forfeiture from February 14, 2024 until February 14, 2025, in the event that any executive officer is terminated or ends his services to the Company for any reason other than death or disability, as defined in the Internal Revenue Code. On May 2, 2024, the Board of the Company approved another grant of restricted shares of common stock to Mr. Evans (through 8 Consulting LLC) in exchange for a $50,000 per year fee reduction. The fee disclosed above is after the $50,000 credit. The fair value per share was based on the quoted trading price as of the close of the market as of the different grant dates and the value will be recognized over the period the shares are subject to forfeiture (see below). Executive Officer Amount of Restricted Common Stock Vesting Fair Value Per Share Aggregate Fair Value Allan Evans through 8 Consulting LLC 488,000 Fully vested $1.20 $585,600 Allan Evans through 8 Consulting LLC 40,650 Fully vested $1.23 $50,000 Brian Hoff 293,000 50% vested and 50% vests on January 1, 2025 $1.20 $351,600 Andrew Camden 50,000 Fully vested $1.20 $60,000 In addition, on April 30, 2024, the Board of the Company approved the grant of fully vested restricted shares of common stock to the following directors of the Company set forth on the table below, in such amounts set forth opposite their respective names, for their services as a director and, where applicable, as a Committee Chair. The shares of restricted common stock were granted under the Company’s 2022 Equity Incentive Plan. The fair value per share was based on the quoted trading price as of the close of the market as of the grant date. Director Fair Value Per Share Amount of Restricted Common Stock Aggregate Fair Value Cristina Colón $1.20 27,083 $32,500 Robert Lowry $1.20 27,083 $32,500 Sanford Rich $1.20 27,083 $32,500 Jeffrey Thompson $1.20 25,000 $30,000 20