What changed in this filing

/stocks — the workspaceLOADING

Item 2. Management’s Discussion and Analysis

2024-08-14 compared with 2024-05-15 · 230 added, 160 removed, 56 unchanged (87% of the section changed)

1 unchanged sentence

Condition and Results of Operations

The following discussion and analysis should

be read in conjunction with the unaudited condensed financial statements and related notes included elsewhere in this Quarterly Report

and our audited financial statements and related notes thereto included in our Annual Report on Form 10-K for the year ended December

The following discussion and analysis should be

read in conjunction with the unaudited condensed financial statements and related notes included elsewhere in this Quarterly Report and

our audited financial statements and related notes thereto included in our Annual Report on Form 10-K for the year ended December 31,

2023, which was filed with the SEC on March 22, 2024.

The following discussion contains forward-looking statements that are subject

to risks and uncertainties.

See “Special Note Regarding Forward-Looking Statements” for a discussion of the uncertainties,

risks, and assumptions associated with those statements.

Actual results could differ materially from those discussed in or implied by

forward-looking statements as a result of various factors, including those discussed below and elsewhere in this Quarterly Report and

of our Annual Report on Form 10-K for the year ended December 31, 2023, particularly in the section entitled “Risk Factors.”

Unless we state otherwise or the context otherwise requires, the terms “we,” “us,” “our” and the “Company”

refer to Unusual Machines, Inc.

The following discussion contains forward-looking statements that are subject to

risks and uncertainties.

See “Special Note Regarding Forward-Looking Statements” for a discussion of the uncertainties, risks,

and assumptions associated with those statements.

Actual results could differ materially from those discussed in or implied by forward-looking

statements as a result of various factors, including those discussed below and elsewhere in this Quarterly Report and of our Annual Report

on Form 10-K for the year ended December 31, 2023, particularly in the section entitled “Risk Factors.” Unless we state otherwise

or the context otherwise requires, the terms “we,” “us,” “our” and the “Company” refer

to Unusual Machines, Inc.

and its subsidiaries.

All amounts presented in tables, other than per share amounts, are in thousands

unless otherwise noted.

All amounts presented in tables, other than per share amounts, are in thousands unless

otherwise noted.

Recent Developments

Initial Public

On February 16, 2024,

we closed our initial public offering (“IPO”) for the sale of 1,250,000 shares of common stock, at a public offering price

of $4.00 per share.

Initial Public Offering

On February 16, 2024, we

closed our initial public offering (“IPO”) for the sale of 1,250,000 shares of common stock, at a public offering price of

$4.00 per share.

The IPO generated gross proceeds of $5.0 million and net proceeds of approximately $4.5 million.

We incurred and paid

additional direct offering costs prior to the close of the IPO of $0.1 million during the three months ended March 31, 2024, and $0.5

million during the year ended December 31, 2023.

We used $1.0 million of proceeds to pay for the acquisition of Fat Shark and Rotor Riot

as discussed below.

additional direct offering costs prior to the close of the IPO of $0.1 million during the six months ended June 30, 2024, and $0.5 million

during the year ended December 31, 2023.

We used $1.0 million of proceeds to pay for the acquisition of Fat Shark and Rotor Riot as discussed

Acquisition of Fat Shark and Rotor Riot

7 unchanged sentences

Rotor Riot is also a licensed authorized reseller of consumer drones manufactured by third-parties.

Under the terms of the Purchase Agreement, as

amended, the Company purchased from Red Cat its Rotor Riot and Fat Shark subsidiaries for $20.1 million comprised of (i) $1.1 million

in cash, (ii) a $2.0 million promissory note issued by the Company to Red Cat, and (iii) $17.0 million of the Company’s common stock

or 4,250,000 shares of common stock.

Under the terms of the Purchase Agreement, as amended,

the Company purchased from Red Cat its Rotor Riot and Fat Shark subsidiaries for $20.1 million comprised of (i) $1.1 million in cash,

(ii) a $2.0 million promissory note issued by the Company to Red Cat, and (iii) $17.0 million of the Company’s common stock or 4,250,000

shares of common stock.

Simultaneous with the closing of our IPO, on February

16, 2024, we closed the acquisitions of Fat Shark and Rotor Riot.

We agreed to a working capital adjustment with

Red Cat related to the acquisitions of Fat Shark and Rotor Riot.

We are uncertain as to how much this adjustment will be.

between the fair value of Fat Shark inventory, Rotor Riot inventory, cash and prepaid assets, offset by accounts payable and other accrued

expenses, we expect 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.

We 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

be determined, this calculation may be deferred.

Nevada Reincorporation

On April 22, 2024, we completed the change of

incorporation from a Puerto Rico Corporation to a Nevada Corporation.

Results of operations

During the three months ended March 31, 2024 we

generated revenues totaling $618,915 compared to $0 during the three months ended March 31, 2023, representing an increase of $618,915

On April 22, 2024, we completed the change of incorporation

from a Puerto Rico Corporation to a Nevada Corporation.

Finalization of Working Capital Adjustment

On July 22, 2024, we finalized the working capital

adjustment as stipulated in the Purchase Agreement, which resulted in an increase in the overall purchase price by an additional $2.0

We agreed to increase the principal amount of the original note for the working capital adjustment, which increased the total

Note Payable to $4.0 million.

In addition, we agreed to extend the maturity date of the promissory note to November 30, 2025.

Results of Operations – Three Months

Ended June 30, 2024 compared to the Three Months Ended June 30, 2023

During the three months ended June 30, 2024 we generated

revenues totaling $1,411,124 compared to $0 during the three months ended June 30, 2023, representing an increase of $1,411,124 or 100%.

We did not generate any revenues until the closing of the acquisitions of Fat Shark and Rotor Riot on February 16, 2024.

relate to completed and fulfilled product sales during the period through our Rotor Riot retail channel and from our B2B wholesale through

of our revenue during the quarter relates to completed and fulfilled product sales during the period through our Rotor Riot retail channel

and from our B2B wholesale through Fat Shark.

We also generated $112,500 related to our Rampage event, which is an annual event held in

Cost of Goods Sold

During the three months ended March 31, 2024,

we incurred cost of goods sold of $414,748 compared to $0 during the three months ended March 31, 2023, resulting in an increase of $414,748

During the three months ended June 30, 2024, we incurred

cost of goods sold of $1,022,684 compared to $0 during the three months ended June 30, 2023, resulting in an increase of $1,022,684 or

Similar to revenues, we did not incur any cost of goods sold until the closing of the acquisitions on February 16, 2024.

of goods sold primarily relate to product costs from our sales, but also include certain shipping and other direct product costs.

During the three months ended March 31, 2024,

our gross margin was $204,167 compared to $0 during the three months ended March 31, 2023, resulting in an increase of $204,167 or 100%.

Our gross margin, as a percentage of sales, totaled 33.0% during the three months ended March 31, 2024, compared to 0.0% during the three

months ended March 31, 2023.

We anticipate our gross margin to fluctuate period to period depending on certain promotions and products

that are sold during the period.

goods sold primarily relate to product costs from our sales, but also include certain shipping and other direct product costs.

During the three months ended June 30, 2024, our gross

margin was $388,440 compared to $0 during the three months ended June 30, 2023, resulting in an increase of $388,440 or 100%.

margin, as a percentage of sales, totaled 28% during the three months ended June 30, 2024, compared to 0% during the three months ended

June 30, 2023.

We anticipate our gross margin to fluctuate period to period depending on certain promotions and products that are sold

during the period and the margins we generated during the quarter are in line with our expectations and normal operating margins.

Operating Expenses

During the three months ended March 31, 2024,

operations expenses totaled $112,322 compared to $0 during the three months ended March 31, 2023, resulting in an increase of $112,322

Prior to the closing of the acquisitions in February 2024, we did not have any operations expenses.

Operations expenses primarily

relate to our direct operations including our warehouse personnel and warehouse expenses.

During the three months ended March 31, 2024,

research and development expenses totaled $16,796 compared to $0 for the three months ended March 31, 2023, resulting in an increase of

$16,796 or 100%.

During the three months ended June 30, 2024, operations

expenses totaled $213,772 compared to $0 during the three months ended June 30, 2023, resulting in an increase of $213,772 or 100%.

to the closing of the acquisitions in February 2024, we did not have any operations expenses.

Operations expenses primarily relate to

our direct operations including our warehouse personnel and warehouse expenses.

During the three months ended June 30, 2024, research

and development expenses totaled $10,282 compared to $0 for the three months ended June 30, 2023, resulting in an increase of $10,282

Prior to the closing of the acquisitions in February 2024, we did not have any research and development expenses during 2023.

Research and development expense primarily relates to new product development.

During the three months ended March 31, 2024,

sales and marketing expenses totaled $157,058 compared to $0 for the three months ended March 31, 2023, resulting in an increase of $157,058

Research and development expense primarily relates to new product development as we continue to partner with manufacturers to bring drone

component manufacturing to the United States.

During the three months ended June 30, 2024, sales

and marketing expenses totaled $386,332 compared to $0 for the three months ended June 30, 2023, resulting in an increase of $386,332

Prior to the closing of the acquisitions in February 2024, we did not have any sales and marketing expenses.

1 unchanged sentence

expenses primarily relate to advertising spend related to Rotor Riot and payroll expenses.

During the three months ended March 31, 2024,

general and administrative expenses totaling $998,874 compared to $588,516 for the three months ended March 31, 2023, resulting in an

increase of $410,358 or 69.7%.

The increase relates to increased expenses related to closing the IPO including legal and accounting fees,

additional transition and integration related expenses, and the costs related to operating Fat Shark and Rotor Riot.

Our net loss for the three months ended March

31, 2024, totaled $1,106,001 compared to $588,897 for the three months ended March 31, 2023, resulting in an increase in net loss of $517,104

This increase in net loss relates to the increase in general and administrative expenses related to closing the IPO and the

increased operations and sales and marketing expenses we incurred since the acquisition from Fat Shark and Rotor Riot.

This was partially

offset by generating gross margin related to the revenue and cost of goods sold from sales for Fat Shark and Rotor Riot.

In addition, we incurred approximately $143,000

in expenses related to our Rampage event, which is an annual event held in May.

During the three months ended June 30, 2024, general

and administrative expenses totaling $1,349,587 compared to $434,917 for the three months ended June 30, 2023, resulting in an increase

of $914,670 or 210%.

The increase relates to stock compensation expense during quarter that we did not have in the previous year, increase

in expenses related to closing the IPO including legal and accounting fees, additional transition and integration related expenses, and

the costs related to operating Fat Shark and Rotor Riot.

Our net loss for the three months ended June 30,

2024, totaled $1,612,238 compared to $435,298 for the three months ended June 30, 2023, resulting in an increase in net loss of $1,176,940

The increase in net loss primarily relates to stock compensation expense taken during the period, in addition to the increase

in general and administrative expenses related to closing the IPO and the increased operations and sales and marketing expenses we incurred

since the acquisition from Fat Shark and Rotor Riot.

This was partially offset by generating gross margin related to the revenue and cost

of goods sold from sales for Fat Shark and Rotor Riot.

In the third quarter of 2024, we expect that we may begin to amortize our intangibles,

which will result in a non-cash charge going forward.

Until we do a valuation, the amount is uncertain and the future charge may or may

not be material.

Results of Operations – Six Months Ended

June 30, 2024 compared to the Six Months Ended June 30, 2023

During the six months ended June 30, 2024 we generated

revenues totaling $2,030,039 compared to $0 during the six months ended June 30, 2023, representing an increase of $2,030,039 or 100%.

We did not generate any revenues until the closing of the acquisitions of Fat Shark and Rotor Riot on February 16, 2024.

Revenues relate

to completed and fulfilled product sales during the period through our Rotor Riot retail channel and from our B2B wholesale through Fat

We also generated $112,500 related to our Rampage event, which is an annual event held in May.

Cost of Goods Sold

During the six months ended June 30, 2024, we incurred

cost of goods sold of $1,437,432 compared to $0 during the six months ended June 30, 2023, resulting in an increase of $1,437,432 or 100%.

Similar to revenues, we did not incur any cost of goods sold until the closing of the acquisitions on February 16, 2024.

Cost of goods

sold primarily relate to product costs from our sales, but also include certain shipping and other direct product costs.

During the six months ended June 30, 2024, our gross

margin was $592,607 compared to $0 during the six months ended June 30, 2023, resulting in an increase of $592,607 or 100%.

margin, as a percentage of sales, totaled 29% during the six months ended June 30, 2024, compared to 0% during the six months ended June

We anticipate our gross margin to fluctuate period to period depending on certain promotions and products that are sold during

the period and the margins we generated during the quarter are in line with our expectations and normal operating margins.

Operating Expenses

During the six months ended June 30, 2024, operations

expenses totaled $326,094 compared to $0 during the six months ended June 30, 2023, resulting in an increase of $326,094 or 100%.

to the closing of the acquisitions in February 2024, we did not have any operations expenses.

Operations expenses primarily relate to

our direct operations including our warehouse personnel and warehouse expenses.

During the six months ended June 30, 2024, research

and development expenses totaled $27,078 compared to $0 for the six months ended June 30, 2023, resulting in an increase of $27,078 or

Prior to the closing of the acquisitions in February 2024, we did not have any research and development expenses during 2023.

and development expense primarily relates to new product development as we continue to partner with manufacturers to bring drone component

manufacturing to the United States.

During the six months ended June 30, 2024, sales and

marketing expenses totaled $543,390 compared to $0 for the six months ended June 30, 2023, resulting in an increase of $543,390 or 100%.

Prior to the closing of the acquisitions in February 2024, we did not have any sales and marketing expenses.

Sales and marketing expenses

primarily relate to advertising spend related to Rotor Riot and payroll expenses.

In addition, we incurred approximately $143,000 in expenses

related to our Rampage event, which is an annual event held in May.

During the six months ended June 30, 2024, general

and administrative expenses totaling $2,353,761 compared to $1,612,440 for the six months ended June 30, 2023, resulting in an increase

of $741,321 or 46%.

The increase relates to increased expenses related to closing the IPO including legal and accounting fees, additional

transition and integration related expenses, and the costs related to operating Fat Shark and Rotor Riot.

Our net loss for the six months ended June 30,

2024, totaled $2,718,240 compared to $1,613,202 for the six months ended June 30, 2023, resulting in an increase in net loss of $1,105,038

The increase in net loss primarily relates the increase in general and administrative expenses related to closing the IPO with

additional increase in expenses for operations and sales and marketing expenses we incurred since the acquisition from Fat Shark and Rotor

This was partially offset by generating gross margin related to the revenue and cost of goods sold from sales for Fat Shark and

In the third quarter of 2024, we expect that we may begin to amortize our intangibles, which will result in a non-cash charge

going forward.

Until we do a valuation, the amount is uncertain and the future charge may or may not be material.

Cash Flow Analysis

Prior to the closing

of our IPO and the acquisitions of Fat Shark and Rotor Riot, we did not have any cashflow from normal operations and we only had cash

used from operating activities preparing for our IPO.

Our future cash flows from operating activities will be significantly impacted by

revenues received, our investment in sales and marketing to drive growth, and general and administrative expenses related to operating

a public company.

Our ability to meet future liquidity needs will be driven by our operating performance and the extent of continued investment

in our operations.

Failure to generate sufficient revenues and related cash flows could have a material adverse effect on our ability

to meet our liquidity needs and achieve our business objectives.

Prior to the closing of our

IPO and the acquisitions of Fat Shark and Rotor Riot, we did not have any cash inflows from operations and all cash outflows related to

our activities related to our IPO.

Our future cash flows from operating activities will be significantly impacted by revenues received,

our investment in sales and marketing to drive growth, and general and administrative expenses related to operating a public company.

Our ability to meet future liquidity needs will be driven by our operating performance and the extent of continued investment in our operations.

Failure to generate sufficient revenues and related cash flows could have a material adverse effect on our ability to meet our liquidity

needs and achieve our business objectives.

Operating Activities

Net cash used in operating activities was $2,181,840

during the three months ended March 31, 2024, compared to net cash used in operating activities of $542,448 during the three months ended

March 31, 2023, representing an increase of $653,156 or 120.4%.

during the six months ended June 30, 2024, compared to net cash used in operating activities of $1,022,861 during the six months ended

June 30, 2023, representing an increase of $1,158,979 or 113%.

This increase in net cash used primarily resulted from our increase in

net loss of $517,104 and an increase in prepaid expenses of $377,144, offset by decrease in inventory of $148,765, change in working capital

of $22,894 offset by non-cash expenses of $69,433.

net loss of $1,105,038 and an increase in prepaid expenses of $253,424, other assets of $173,054 and non-cash expenses of $158,206, offset

by a decrease in inventory of $152,566 and an increase in accounts payable and accrued expenses of $417,478.

Investing Activities

Net cash used in investing activities was $852,801

during the three months ended March 31, 2024 compared to net cash used in operating activities of $0 during the three months ended March

during the six months ended June 30, 2024 compared to net cash used in investing activities of $4,837 during the six months ended June

30, 2023, representing an increase of $847,964 or 100%.

This increase in net cash used related to the $1,000,000 of cash used in the Purchase

Agreement related to Fat Shark and Rotor Riot, offset by $147,124 in cash acquired.

Agreement related to Fat Shark and Rotor Riot, offset by $147,199 in cash acquired as compared to $4,837 used for purchase of computer

equipment during 2023.

Financing Activities

Net cash provided by financing activities totaled

$4,362,313 during the three months ended March 31, 2024, compared to $0 during the three months ended March 31, 2023, resulting in an

increase in net cash provided by financing activities of $4,362,313 or 100%.

The increase is entirely related to proceeds received from

our IPO of $5,000,000, offset by deferred offering costs and other IPO related expenses of $637,687.

$4,362,313 during the six months ended June 30, 2024, compared to net cash used in financing activities of $223,579 during the six months

ended June 30, 2023, resulting in an increase in net cash provided by financing activities of $4,585,892.

The increase primarily relates

to proceeds received from our IPO of $5,000,000, offset by change in deferred offering costs and other IPO related expenses of $414,108.

Liquidity and Capital

As of March 31, 2024, we had current assets totaling

As of June 30, 2024, we had current assets totaling

$5,116,963 primarily consisting of cash balances of $2,222,445, inventory of $1,638,038 and prepaid expenses and deposits for inventory

Our current liabilities as of March 31, 2024 totaled $691,978, primarily consisting of accounts payable and accrued expenses

of $1,074,403.

Our current liabilities as of June 30, 2024 totaled $931,200, primarily consisting of accounts payable and accrued expenses

of $786,598 and customer deposits and other current liabilities of $144,602.

Our net working capital as of March 31, 2024 was $5,436,912.

On February 16, 2024, we completed our IPO for

the sale of 1,250,000 shares of common stock at a public offering price of $4.00 per share for gross proceeds of $5.0 million.

Our net working capital as of June 30, 2024 was $4,185,763.

On February 16, 2024, we completed our IPO for the

sale of 1,250,000 shares of common stock at a public offering price of $4.00 per share for gross proceeds of $5.0 million.

certain underwriting discounts and commissions, business combination cash payment and other expenses related to the IPO, we retained approximately

$2.9 million in net proceeds.

Our cash balance as of the date of this Report was approximately $2.6 million.

Prior to our IPO in February 2024, our operations

were funded exclusively by exempt private offerings of our common stock.

In September 2021, we closed a private offering of 4,552,000

shares of common stock at a price of $0.50 per share for total proceeds of $2,276,000.

On December 31, 2021, we closed an additional private

offering of 482,500 shares of common stock at a price of $4.00 per share for total gross proceeds of $1,930,000, of which we received

net proceeds of $1,842,000 after fees and other expenses.

On July 25, 2022, we closed an additional private offering of 150,000 shares

of common stock at a price of $4.00 per share for total proceeds of $600,000.

We believe that the net proceeds from our February

2024 IPO and existing cash balances will be sufficient to fund our current operating plans through at least the next 12 months.

based these estimates, however, on assumptions that may prove to be wrong, and we could spend our available financial resources much faster

than we currently expect and need to raise additional funds sooner than we anticipate.

If we are unable to raise capital when needed or

on acceptable terms, we may be forced to delay, reduce or eliminate certain operational efforts.

We do not anticipate any significant

cost increases post the Fat Shark and Rotor Riot acquisitions and with consideration of the combined companies’ net loss and cash

position, we expect we will have sufficient working capital to support our operations for at least 12 months.

As of August 14, 2024, we have approximately $1.8

million in cash.

We believe that the net proceeds from our February 2024 IPO and existing cash balances will be sufficient to fund our

current operating plans through at least the next 12 months.

We have based these estimates, however, on assumptions that may prove to

be wrong, and we could spend our available financial resources much faster than we currently expect and need to raise additional funds

sooner than we anticipate.

We do not anticipate any significant cost increases post the Fat Shark and Rotor Riot and with consideration

of the combined companies’ net low and cash position, we expect we will have sufficient working capital to support our operations

for at least 12 months.

As described in Note 14 of our financial statements,

we issued the New Notes following our agreement with Red Cat on the Working Capital Adjustment.

We will need to either (a) raise additional

capital, (b) refinance the New Notes, (c) seek an extension of the maturity date of the Notes, or (d) explore the conversion or exchange

of the New Notes into equity, which will result in dilution to our shareholders.

If we are unable to raise capital or explore such other

options when needed or on acceptable terms, we may default under the obligation pursuant to the New Notes, or be forced to delay, reduce

or eliminate certain operational efforts.

Critical Accounting Policies and Estimates

Our financial statements and accompanying notes

have been prepared in accordance with GAAP applied on a consistent basis.

The preparation of financial statements in conformity with GAAP

requires management to make estimates and assumptions that affect the reported amounts of assets and liabilities, the disclosure of contingent

Our financial statements and accompanying notes have

been prepared in accordance with GAAP applied on a consistent basis.

The preparation of financial statements in conformity with GAAP requires

management to make estimates and assumptions that affect the reported amounts of assets and liabilities, the disclosure of contingent

assets and liabilities at the date of the financial statements and the reported amounts of revenues and expenses during the reporting

We regularly evaluate the accounting policies

and estimates that we use to prepare our financial statements.

We regularly evaluate the accounting policies and

estimates that we use to prepare our financial statements.

A complete summary of these policies is included in the notes to our financial

3 unchanged sentences

those estimates made by management.

Significant estimates reflected in these financial

statements include those used to (i) purchase price accounting for acquisitions and (ii) reserves and fair value related to inventory.

Fair value of assets acquired and liabilities assumed in business

The Fat Shark and Rotor Riot acquisitions are

accounted for as a business combination under ASC 805.

We recognized the assets acquired and liabilities assumed at fair value as of the

date of acquisition.

We have not yet completed our evaluation of the fair value for determining the unallocated purchase price between

goodwill and other intangible assets.

Such amounts are subject to adjustment during the one-year measurement period.

The fair value will

be determined based on assumptions used in valuations and estimates determined by management, which are subjective.

Impairment of goodwill and long-lived assets

Goodwill represents the future economic benefit

arising from other assets acquired in an acquisition that are not individually identified and separately recognized.

We test goodwill

for impairment in accordance with the provisions of ASC 350, Intangibles – Goodwill and Other, (“ASC 350”).

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

cash flow method to estimate the fair value of a reporting unit.

Significant assumptions inherent in estimating the fair values include

the estimated future cash flows, growth assumptions for future revenues (including gross margin, operating expenses, and capital expenditures),

and a rate used to discount estimated future cash flow projections to their present value based on estimated weighted average cost of

capital (i.e., the selected discount rate).

Our assumptions are based on historical data, supplemented by current and anticipated market

conditions, estimated growth rates, and management’s plans.

Under the market approach, fair value is derived from metrics of publicly

traded companies or historically completed transactions of comparable businesses.

The selection of comparable businesses is based on the

markets in which the reporting units operate and consider risk profiles, size, geography, and diversity of products and services.

Goodwill represents

costs in excess of fair values assigned to the underlying identifiable net assets of acquired businesses.

Intangible assets from acquired

business are recognized at fair value on the acquisition date.

We are continuing our evaluation of the fair value of the assets acquired

and liabilities assumed from the Fat Shark and Rotor Riot acquisition, and we have not yet determined the unallocated purchase price between

goodwill and other intangible assets.

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.

Valuation of Inventory

Our policy for valuation of inventory requires us to evaluate the net

realizable value of our inventory using various reference measures including current product selling prices, as well as evaluating for

excess quantities and obsolescence.

We may be required to record inventory write-downs if actual inventory values are less favorable than

those estimates by management.

Stock Based Compensation

Certain employees have received grants of common shares

in our company.

These awards are accounted for in accordance with guidance prescribed for accounting for equity-based compensation.

on this guidance and the terms of the awards, the awards are equity classified.

The fair value of each award is determined using the

Black-Scholes option-pricing model which values options based on the stock price at the grant date, the expected life of the option, the

estimated volatility of the stock, and the risk-free interest rate over the expected life of the option.

The expected volatility was determined

considering comparable companies historical stock prices as a peer group for the fiscal year the grant occurred and prior fiscal years

for a period equal to the expected life of the option.

The risk-free interest rate was the rate available from the St.

Louis Federal Reserve

Bank with a term equal to the expected life of the option.

The expected life of the option was estimated based on a mid-point method calculation.

In addition, the Company issued shares of our common

stock in 2023 to consultants for services performed.

Prior to our IPO in February 2024, we were a private company with no active public

market for our common stock.

Therefore, we have periodically determined the overall value of our company and the estimated per share fair

value of our common equity at their various dates and valuations based on a per share valuation using the private funding transactions

as an estimate.

These values and estimates are subjective.

Recently Issued Accounting Pronouncements

The Company has implemented all new accounting pronouncements that

are in effect.

The Company has implemented all new accounting pronouncements that are

These pronouncements did not have any material impact on the financial statements unless otherwise disclosed, and the Company

2 unchanged sentences

Quantitative and Qualitative Disclosures about Market Risk

We are a smaller reporting company as defined by Rule 12b-2

of the Exchange Act and are not required to provide the information required under this item.

We are a smaller reporting company as defined

by Rule 12b-2 of the Exchange Act and are not required to provide the information required under this item.

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 2. Management’s Discussion and Analysis