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Item 1. Financial Statements

2024-08-14 compared with 2024-05-15 · 668 added, 467 removed, 322 unchanged (78% of the section changed)

2 unchanged sentences

Consolidated Condensed Balance Sheets

December 31, 2023

Current assets:

Cash and cash equivalents

Accounts receivable

Prepaid inventory

Deferred offering costs

Other current assets

2 unchanged sentences

Property and equipment, net

Deferred offering costs

Operating lease right-of-use assets

9 unchanged sentences

Long-term liabilities

Convertible note

Promissory note

Operating lease liabilities – long term

2 unchanged sentences

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

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

Series B preferred stock - $ 0.01 par value, 10,000,000 authorized and 50 and 190 shares issued and outstanding at June 30, 2024 and December 31, 2023, respectively

Common stock - $ 0.01 par value, 500,000,000 authorized and 10,411,240 and 3,217,255 shares issued and outstanding at June 30, 2024 and December 31, 2023, respectively

Additional paid in capital

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Total liabilities and stockholders’ equity

See accompanying condensed unaudited notes to the

consolidated condensed financial statements.

See accompanying condensed unaudited notes to the consolidated

condensed financial statements.

Unusual Machines, Inc.

Condensed Statement of Operations

For the Three Months Ended March 31, 2024 and

Three Months Ended March 31,

Consolidated Condensed Statement of Operations

For the Three and Six Months Ended June 30, 2024

Three months ended June 30,

Six months ended June 30,

Cost of goods sold

1 unchanged sentence

Research and development

Selling and marketing

Sales and marketing

General and administrative

1 unchanged sentence

Total operating expenses

Loss from operations

Operating loss

( 1,571,704 )

Other income and (expense):

( 2,658,057 )

( 1,613,202 )

Other Expense

Interest expense

Total other income and (expense)

Net loss before income tax

Other Expense

$ ( 1,612,238 )

Income tax benefit (expense)

$ ( 435,298 )

$ ( 2,718,240 )

$ ( 1,613,202 )

Net loss per share attributable to common stockholders

2 unchanged sentences

Basic and diluted

See accompanying condensed unaudited notes to the

consolidated condensed financial statements.

See accompanying condensed unaudited notes to the consolidated

condensed financial statements.

Unusual Machines, Inc.

Condensed Statement of Changes in Stockholders’ Equity

For the Three Months Ended March 31, 2024 and

Three Months Ended March 31, 2023

Consolidated Condensed Statement of Changes in Stockholders’

For the Six Months Ended June 30, 2024 and 2023

Six Months Ended June 30, 2023 (Restated – Note 13)

Series B, Preferred Stock

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$ ( 1,549,584 )

Issuance of common shares

Issuance of common shares for services

( 1,177,904 )

Balance, March 31, 2023

$ ( 2,727,488 )

Three Months Ended March 31, 2024

Conversion of preferred stock

Balance, June 30, 2023

$ ( 3,162,786 )

Six Months Ended June 30, 2024

Series B, Preferred Stock

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$ ( 5,039,048 )

See accompanying condensed unaudited notes to the

consolidated condensed financial statements.

Conversion of preferred shares

Issuance of common shares, equity incentive plan

Stock compensation expense - vested stock

Stock option compensation expense

( 1,612,238 )

Balance, June 30, 2024

$ ( 6,651,286 )

See accompanying condensed unaudited notes to the consolidated

condensed financial statements.

Unusual Machines, Inc.

Condensed Statement of Cash Flows

For the Three Months Ended March 31, 2024 and

Three Months Ended March 31,

Consolidated Condensed Statement of Cash Flows

For the Six Months Ended June 30, 2024 and 2023

Six Months Ended June 30,

Cash flows from operating activities:

2 unchanged sentences

Depreciation and amortization

Share-based compensation expense

Stock compensation expense as settlement

Stock compensation expense

Change in assets and liabilities:

1 unchanged sentence

Prepaid inventory

Deferred offering costs

Accounts payable and accrued expenses

3 unchanged sentences

( 2,181,840 )

( 1,022,861 )

Cash flows from investing activities

4 unchanged sentences

Common share issuance offering costs

Net cash provided by financing activities

Net cash provided by (used in) financing activities

Net increase (decrease) in cash

( 1,246,440 )

Cash, beginning of period

4 unchanged sentences

Deferred offering costs recorded as reduction of proceeds

See accompanying condensed unaudited notes to the

consolidated condensed financial statements.

See accompanying condensed unaudited notes to the consolidated

condensed financial statements.

Unusual Machines, Inc.

Consolidated Condensed Financial Statements

For the Period Ended March 31, 2024

Notes to Consolidated Condensed Financial Statements

For the Period Ended June 30, 2024

Note 1 – Organization and nature of business

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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 Company reincorporated from Puerto Rico to Nevada on April 22, 2024.

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

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,

(See Note 3).

Simultaneous with the closing of the IPO, the Company acquired Fat Shark Holdings

(“Fat Shark”) and Rotor Riot, LLC (“Rotor Riot”) from Red Cat Holdings, Inc.

(“Red Cat”) (See

Note 2 – Summary of significant accounting policies

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.

transactions and balances have been eliminated upon consolidation.

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.

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.

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

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/A, for the year ended December 31, 2023.

The results for any interim period are not necessarily indicative

of results for any future period.

Use of Estimates

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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.

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.

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.

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 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.

At June 30, 2024 and December

31, 2023, the Company had approximately $ 1.7 million and $ 0.6 million, respectively, in excess of federally insured limits.

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.

The Company carries its accounts receivable at invoiced

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.

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.

2024 and December 31, 2023, the Company considers accounts receivable to be fully collectible;

accordingly, no

allowance for doubtful accounts has been established.

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.

At June 30, 2024 and December

31, 2023, the Company considers accounts receivable to be fully collectible;

accordingly, no allowance for doubtful accounts has been

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

The Company deferred direct incremental costs associated

with its IPO.

The Company capitalized $ 127,687 and $ 70,268 during the six months ended June 30, 2024 and 2023 prior to the IPO, respectively

and the deferred offering costs were $ 512,758 as of December 31, 2023.

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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 .

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 .

The Company has adopted Accounting Standards Codification

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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

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.

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.

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.

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”).

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.

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

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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 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.

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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:

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

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;

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 guidance establishes three levels of the fair

value hierarchy as follows:

Inputs are unadjusted, quoted

prices in active markets for identical assets or liabilities at the measurement date;

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;

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

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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 .

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

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.

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.

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

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 June 30, 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

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Identify the contract with a customer;

Identify the performance obligations in

the contract;

Identify the performance obligations in the

Determine the transaction price;

3 unchanged sentences

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.

date the performance obligation has been met.

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.

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.

Deferred revenue related

to orders placed, but not yet fulfilled totaled $ 82,120 and $ 0 as of June 30, 2024 and December 31, 2023, respectively.

Cost of Goods Sold

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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.

Shipping and handling costs incurred for product shipped

to customers are included in general and administrative expenses and amounted to $ 74,634 since February 16, 2024, the date of the acquisition,

through June 30, 2024.

The Company did no t incur and shipping and handling costs in the six months ended June 30, 2023.

Shipping and handling

costs charged to customers are included in sales.

Research and Development

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third-party development costs, materials, and a proportionate share of overhead costs.

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

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.

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

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 six

months ending June 30, 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

other than a net operating loss carryforward offset by a valuation allowance as of June 30, 2024 and December 31, 2023.

Stock-Based Compensation

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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.

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”)

The fair value of restricted stock is based on our quoted stock price or other fair value indicators on the

date of grant.

Compensation cost is recognized on a straight-line basis over the service period which is typically the vesting term.

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”).

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warrants are outstanding.

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.

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.

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

Net Loss per Share

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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.

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.

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.

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

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

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

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.

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.

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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.

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:

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.

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 and subject to certain working capital adjustments.

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 $ 4 .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 $ 22,100,000 .

See Note 14, Subsequent Events,

related to the working capital adjustment.

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

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.

The following represents the fair value allocation of Fat Shark and Rotor

Riot Purchase Price:

Schedule of fair value allocation

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Total purchase price

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.

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.

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):

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

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.

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

For the Six Months Ended

June 30, 2024

June 30, 2023

Proforma (unaudited)

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Net earnings per share:

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

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.

totaled $ 1,638,038 and $ 0 as of June 30, 2024 and December 31, 2023, respectively.

In addition, the Company had prepaid and deposits for

inventory totaling $ 1,074,403 and $ 0 as of June 30, 2024 and December 31, 2023, respectively.

Note 5 – Other Current Assets

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Schedule of other current assets

March 31, 2024

June 30, 2024

December 31, 2023

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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 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

June 30, 2024

December 31, 2023

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Total property and equipment, net

Depreciation expense totaled $ 171 and $ 381 for the three months ended

March 31, 2024 and 2023, respectively.

Depreciation expense totaled $ 342 and $ 762 for the six months ended June

30, 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 .

As identified in Note 3 “Acquisitions”,

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

Operating lease expense

totaled $ 39,429 from the date of acquisition through the period ended June 30, 2024.

The following is a summary of future lease payments

required under the five-year lease agreement:

Schedule of future lease payments

Operating Lease

$ ( 108,784 )

Schedule of supplemental information

Supplemental Information

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Weighted average discount rate

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.

$ 2 .0 million.

The note bears interest at 8 % annually and matures in full on August 16, 2025 , subject to certain conditions.

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 .

8 – Promissory Note

In conjunction with the acquisition of Fat Shark

and Rotor Riot, as discussed in Note 3, the Company issued a promissory note (“Note”) with Red Cat Holdings, Inc.

(“Red Cat”) for $ 2 .0

In July 2024, the Company finalized its working capital adjustment with Red Cat which increased the overall purchase price

by an additional $ 2 .0

The additional $ 2 .0

million was added to the existing Note and was reflected as an adjustment to the opening purchase price and was included in the

opening balance sheet as of February 16, 2024 as an increase to goodwill and intangible assets.

Accordingly, the Note was amended to

increase to $ 4 .0

In conjunction with a private sale of Red Cat’s common stock and its promissory note to two investors, the Company

issued new notes to such investors (the “New Notes”).

The New Notes bear interest at 8 %

In conjunction with the finalization of the working capital adjustment, the maturity date of the New Notes was extended to

be due in full on November 30, 2025, subject to certain conditions.

In the Event of Default as defined in the Promissory Note, the

investors each have the right to convert the New Notes including any accrued and unpaid interest, in whole or in part, into common

The conversion price is calculated at a 10%

discount of the average three-day volume-weighted average price (VWAP) prior to the conversion date.

The balance of the Note payable

was $4.0 million as of June

Interest expense for the six months ended June 30, 2024 was $ 60,183

and the Company had accrued interest of $ 6,677

as of June 30, 2024.

See Note 14, Subsequent Events for additional information.

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 250,000 and 950,000 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”.

Stock, as converted as of June 30, 2024 and 2023, respectively, the 310,000 of stock options issued to employees as of June 30, 2024,

the 62,500 of common stock representative warrants issued to the underwriter associated with the February 2024 IPO and 3,418,803 shares

of common stock, as converted, associated with the Note discussed in Note 8 “Debt”.

Preferred Stock

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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,

Subsequent to the IPO but prior to June 30, 2024,

certain shareholders converted 140 shares of Series B preferred shares into 700,000 shares of common stock.

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50 Series B preferred shares in connection with the cancellation of 250,000 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.

Series B preferred shares outstanding at June 30,

2024 totaled 50 which are convertible into 250,000 shares of common stock.

Series B preferred shares outstanding at December 31, 2023

totaled 190 which are convertible into 950,000 shares of common stock.

See Note 14, Subsequent Events, for more information

regarding the Company’s Series A Convertible Preferred 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

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

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 .

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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 cash disbursements related to offering costs in the six months ended June 30, 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.

have been recorded as a reduction of the gross proceeds from the IPO in stockholder’s equity.

offering costs, associated with the IPO which consisted of underwriter, legal, accounting, and other associated filing fees.

costs have been recorded as a reduction of the gross proceeds from the IPO in stockholder’s equity.

The Company also incurred

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per share (125% of the IPO Price) at any time beginning on August 15, 2024 through and including February 16, 2029, the expiration

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.

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.

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

Subsequent to the IPO and prior to June 30, 2024,

the Company issued 700,000 shares of common stock related to certain shareholders converting 140 of Series B shares into common stock.

On April 30, 2024, the Company issued 937,249 restricted

shares of common stock to executive officers and board members of the Company.

The shares of restricted stock were granted under the Company’s

2022 Equity Incentive Plan.

The restricted shares issued to executive officers are subject to pro rata forfeiture through February 14,

On May 2, 2024, the Company issued an additional 40,650

of restricted shares of common stock to Allan Evans, the Company’s CEO related to an agreed upon reduction of salary.

of restricted stock were granted under the Company’s 2022 Equity Incentive Plan.

The April 30, 2024 and May 2, 2024 shares were

valued at $ 1.20

per share, respectively for a total of $ 1,174,698

to be recognized pro-rata over the vesting period which is the forfeiture period.

Stock compensation expense of $ 346,854

was recognized during the three months ended June 30, 2024.

See Note 14, Subsequent Events, for additional information.

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.

of common stock to an investment banking firm (“Revere”) as a fee for the termination of the January 2023 engagement with

These shares were allocated by Revere to some of the Company’s existing shareholders.

The Company recorded $ 600,000 of stock

compensation expense related to the issuance of the shares valued at $ 8.00 per share, which was based on the most recent private sale

of common stock for the Company.

On July 10, 2023, the Company’s Board of Directors

approved a 1-for-2 reverse stock split of our issued and outstanding shares of common stock.

In accordance with Staff Accounting Bulletin

Topic 4.C, the Company has given retroactive effect to reverse stock split.

In addition and in accordance with FASB ASC 260, Earnings

Per Share , the Company has retroactively adjusted the computations of basic and diluted share calculations.

Note 10 – Share Based Awards

The following table presents the activity for warrants outstanding

as of March 31, 2024:

Stock Options

The Company’s 2022 Equity Incentive Plan (the “Plan”)

allows the Company to incentivize key employees and directors with long term compensation awards such as stock options, restricted stock,

and other similar types of awards.

The Plan is authorized to issue 1,461,876 of awards and has an “evergreen” provision, pursuant

to which the number of shares of common stock reserved for issuance pursuant to awards under such plan shall be increased on the first

day of each year beginning in 2025 and ending in 2032 equal to the lesser of (a) five percent (5%) of the shares of stock outstanding

(on an as converted basis) on the last day of the immediately preceding fiscal year and (b) such smaller number of shares of stock as

determined by our board of directors.

On April 30, 2024, the Company’s board of

directors approved the grant of 310,000 stock options under the Plan to certain employees.

The stock options are subject to certain

vesting provisions.

The following table presents the activity for stock

options outstanding:

Schedule of stock option activity

Weighted Average

Non-Qualified

Exercise Price

Contractual Term

Intrinsic Value

Outstanding - December 31, 2023

Forfeited/canceled

Outstanding – June 30, 2024

The range of assumptions used to calculate the fair value of options granted

during the six months ended June 30, 2024 was:

Schedule of stock options assumptions

Exercise Price

Stock Price on date of grant

Risk-free interest rate

Dividend yield

Expected term (years)

The Company recognized $ 14,389 in stock-based compensation expense related

to stock options during the six months ended June 30, 2024.

As of June 30, 2024, there was $ 325,371 of unrecognized stock-based compensation

expense related to unvested stock options to be recognized over the remaining vesting term through 2028.

Restricted Stock

The following table presents the activity for stock

options outstanding:

Schedule of restricted stock activity

Outstanding - December 31, 2023

Forfeited/canceled

Outstanding – June 30, 2024

The Company recognized $ 346,854 in stock-based compensation expense related

to restricted stock during the six months ended June 30, 2024.

As of June 30, 2024, there was $ 827,844 of unrecognized stock-based compensation

expense related to unvested restricted stock to be recognized over the remaining vesting term through February 15, 2025.

The following table presents the activity for warrants outstanding as of

June 30, 2024:

Schedule of warrant activity

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Forfeited/cancelled/restored

Outstanding - March 31, 2024

Outstanding – June 30, 2024

As discussed in Note 9, “Earnings Per Share

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exercise feature.

All warrants outstanding have a weighted average remaining contractual life of approximately 4.88 years as of March

All warrants outstanding have a weighted average remaining contractual life of approximately 4.63 years as of June 30,

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,

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.

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.

On March 8, 2023, a majority of the disinterested Red Cat shareholders approved the transactions contemplated in the

Purchase Agreement in a special meeting.

Thompson recused himself from such vote.

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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

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

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.

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.

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

Allan Evans, whereby the Consultant agreed to 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.

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;

to report to the Company’s board of directors;

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 agreed to 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.

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 Consultant receives

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 $ 585,600 based on the $1.20 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.

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.

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

Fair Value Per Share

Aggregate Fair Value

Allan Evans through 8 Consulting LLC

50% vested and 50% vests on January 1, 2025

Andrew Camden

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.

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.

Note 12 – Commitments and Contingencies

As part of the business combination that occurred on February 14, 2024,

the Company acquired 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.

See Note 7 – Operating Leases for additional information.

Note 13 – Restatement of Previously Issued Financial Statements

On April 16, 2024, the Company changed their

independent PCAOB-registered accounting firm and terminated its engagement with their prior auditor.

On May 3, 2024, the Securities

and Exchange Commission (“SEC”) issued an order that instituted a cease-and-desist against the Company’s previous

auditor, which required the Company to obtain new auditors and re-audit its financial statements for the years ended December 31,

2023 and 2022.

The Company engaged a new, an independent and registered

accounting firm, to re-audit the Company’s previously issued financial statements.

During the Company’s re-audits, it was

noted that certain transactions were not recorded in the correct period, stock compensation expense of $600,000 related to the March 7,

2023 common stock issuance was not recorded and deferred offering costs were classified as an operating activity rather than a financing

Expenses totaling $10,993 were originally recorded in 2023 but related to 2022 expenses.

With this restatement, the transactions previously

recorded in the incorrect period have been updated to the correct period, classifications on the statements of cash flow have been corrected

and the stock compensation previously not recorded has been properly recorded.

The following presents reconciliations of the impacted

financial statement line items as filed to the restated amounts as of June 30, 2023 and for the periods then ended.

The previously reported

amounts reflect those included in the registration statements the Company filed with the Securities and Exchange Commission on September

These amounts are labeled “As Filed” in the tables below.

The amounts labeled “Restatement Adjustments”

represent the effects of these restatements due to the timing differences and stock compensation expense.

Schedule of restatement adjustments in financial statements

Statement of Operations for the Six Months Ended June 30, 2023

Restatement Adjustments

Cost of goods sold

Operating expenses:

Research and development

General and administrative

Depreciation and amortization

Total operating expenses

Loss from operations

Other income:

Interest income

Total other income

Net loss before income tax

Income tax benefit (expense)

Net loss per share attributable to common stockholders

Basic and diluted

Weighted average common shares outstanding

Basic and diluted

Statements of Changes in Stockholders’ Equity – As Filed – For the Six Months Ended June 30, 2023

Series B, Preferred Stock

Additional Paid-In

Balance, December 31, 2022

$ ( 1,538,591 )

Issuance of common shares

Conversion to preferred shares

( 1,024,195 )

Balance, June 30, 2023

$ ( 2,562,786 )

Statements of Changes in Stockholders’ Equity – Restatement Adjustments – For the Six Months Ended June 30, 2023

Series B, Preferred Stock

Additional Paid-In

Balance, December 31, 2022

Issuance of common shares

Conversion to preferred shares

Balance, June 30, 2023

$ ( 600,000 )

Statements of Changes in Stockholders’ Equity – As Restated – For the Six Months Ended June 30, 2023

Series B, Preferred Stock

Additional Paid-In

Balance, December 31, 2022

$ ( 1,549,584 )

Issuance of common shares

Conversion to preferred shares

( 1,613,202 )

Balance, June 30, 2023

$ ( 3,162,786 )

Statement of Cash Flows for the Six Months Ended June 30, 2023

Restatement Adjustments

Cash flows from operating activities:

$ ( 1,024,195 )

$ ( 589,007 )

$ ( 1,613,202 )

Stock compensation expense

Change in assets and liabilities:

Accounts receivable

Deferred offering costs

Other current assets

Accounts payable and accrued expenses

Net cash used in operating activities

( 1,246,440 )

( 1,022,861 )

Cash flows from investing activities

Purchases of property and equipment

Net cash used in investing activities

Cash flows from financing activities:

Deferred offering costs

Net cash provided by financing activities

Net increase (decrease) in cash

( 1,246,440 )

Cash, beginning of period

Cash, end of period

Supplemental disclosures of cash flow information:

Cash paid for interest

Cash paid for income tax

Note 14 – Subsequent Events

Amendments to Articles of Incorporation

On July 17, 2024, following approval by the Board of Directors, the Company

filed a Certificate of Designations, Preferences, and Rights of the Series A Convertible Preferred Stock (the "COD”) with the

Nevada Secretary of State.

The COD designated 4,250 shares of Series A Convertible Preferred Stock (the “Series A”).

A ranks senior to both the Company’s common stock and any other series of preferred stock with respect to the preferences as to

dividends, distributions, and payments, upon the liquidation, dissolution, and winding up of the Company.

Each share of Series A may be

converted into 1,000 shares of the Company’s common stock.

The Series A preferred shares have a conversion beneficial ownership limitation

of 4.99%, or 9.99% upon election of the holder upon at least 61 days written notice to the Company.

The Series A preferred shares have

no voting rights, except as required by law and as expressly provided in the COD.

Working Capital Adjustment Agreement

On July 22, 2024, the Company and Red Cat finalized the working capital

adjustment related to the acquisitions of Fat Shark and Rotor Riot pursuant to the Purchase Agreement.

The Purchase Agreement 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 that the Company

owed Red Cat $2.0 million as a Working Capital Adjustment.

The original Note payable for $2.0 million was reissued to Red Cat with

(i) an increased aggregate principal amount of $4,000,000 to give effect to the working capital adjustments discussed above, and (ii)

extend the maturity date of the new Note to November 30, 2025.

Red Cat Holdings, Inc.’s Sale of Securities

On July 22, 2024, the Company’s principal shareholder, Red Cat sold

all of its securities in the Company to two unaffiliated third-party investors (the "Investors”).

As part of the transaction,

Red Cat entered into an Exchange Agreement with the Company pursuant to which Red Cat exchanged 4,250,000 shares of the Company’s

common stock, par value $0.01 per share for 4,250 shares of the Company’s newly designated Series A Convertible Preferred Stock

(the "Series A”).

Red Cat then sold the Series A and the New Note Payable, to the Investors

on July 22, 2024.

Quarterly Grants to our Board of Directors

On July 30, 2024, the Company issued non-employee

directors listed in the table below the equity portion of their quarterly compensation.

Each of the directors received a vested restricted

stock grant for services as a director (and where applicable, committee member) during the quarter ended June 30, 2024.

The shares of

restricted common stock were granted under the Company’s 2022 Equity Incentive Plan and was subject to each director executing the

Company’s standard Restricted Stock Agreement, which occurred on July 29, 2024.

The fair value per share was based on the quoted

trading price as of the close of the market as of July 17, 2024.

Fair Value Per Share

1 unchanged sentence

Aggregate Fair Value

Cristina Colón

Cristina Colon

Jeffrey Thompson

Compared sentence by sentence after normalising whitespace, quotation marks, case and digits, so re-formatting and restated figures do not read as changed language. Wording changes appear as one removal and one addition. The current filing and the prior one are authoritative.

What changed 10-Q

Item 1. Financial Statements