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Item 2. Management’s Discussion and Analysis

2024-11-14 compared with 2024-08-14 · 261 added, 230 removed, 56 unchanged (90% of the section changed)

Management’s Discussion and Analysis of Financial

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 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.

Management’s Discussion and Analysis of Financial 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/A for the year ended December

31, 2023, which was filed with the SEC on August 9, 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 final prospectus filed with the SEC on October 25, 2024, 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 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 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

On November 21, 2022, we entered into the Purchase

Agreement with Red Cat Holdings, Inc.

(“Red Cat”) and Jeffrey Thompson, the founder and Chief Executive Officer of Red Cat

and also director of our Company, pursuant to which we agreed to purchase Red Cat’s consumer business consisting of Fat Shark Holdings

(“Fat Shark”) and Rotor Riot LLC (“Rotor Riot”).

Fat Shark and Rotor Riot are in the business of designing

and marketing consumer drones and FPV goggles.

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.

Simultaneous with the closing of our IPO, on February

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

Nevada Reincorporation

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.

Private Placement

On October 29, 2024 (the “Closing Date”),

we entered into Securities Purchase Agreements (the "SPA”) with accredited investors (each, an "Investor” and together

the "Investors”) for a private placement offering ("Private Placement”), for aggregate gross proceeds of $1.95 million

before deducting fees to the placement agent and other expenses payable by us in connection with the Private Placement.

to use the net proceeds of the Offering for working capital and general corporate purposes.

As part of the Private Placement, we issued

an aggregate of 1,286,184 units at a per unit purchase price of $1.52 per unit.

Each unit consisted of one share of common stock, par

value $0.01 per share (the "Common Stock”) and one warrant to purchase one share of the Company’s Common Stock (each

an "Investor Warrant”) and collectively, the Investor Warrants”).

The Investor Warrants have a term of five and a half

years from the Closing Date and may not be exercised for 180 days after the Closing Date and are exercisable at $1.99 per share, subject

to certain limitations and adjustments set forth in the Investor Warrants.

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.

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

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

During the three months ended September 30, 2024

we generated revenues totaling $1,531,264 compared to $0 during the three months ended September 30, 2023, representing an increase of

$1,531,264 or 100%.

We did not generate any revenues until the closing of the acquisitions of Fat Shark Holdings Ltd.

(“Fat Shark”)

and Rotor Riot LLC (“Rotor Riot”) on February 16, 2024.

The majority 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.

Cost of Goods Sold

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

During the three months ended September 30, 2024,

we incurred cost of goods sold of $1,131,777 compared to $0 during the three months ended September 30, 2023, resulting in an increase

of $1,131,777 or 100%.

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

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.

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

During the three months ended September 30, 2024,

our gross margin was $399,487 compared to $0 during the three months ended September 30, 2023, resulting in an increase of $399,487 or

Our gross margin, as a percentage of sales, totaled 26% during the three months ended September 30, 2024, compared to 0% during

the three months ended September 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 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

During the three months ended September 30, 2024,

operations expenses totaled $218,126 compared to $0 during the three months ended September 30, 2023, resulting in an increase of $218,126

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 September 30, 2024,

research and development expenses was $15,000 compared to $0 for the three months ended September 30, 2023, resulting in an increase

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

1 unchanged sentence

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.

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 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

During the three months ended September 30, 2024,

sales and marketing expenses totaled $252,253 compared to $0 for the three months ended September 30, 2023, resulting in an increase

of $252,253 or 100%.

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%.

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

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

During the three months ended September 30, 2024,

general and administrative expenses totaling $1,374,989 compared to $353,029 for the three months ended September 30, 2023, resulting

in an increase of $1,021,960 or 289%.

The increase primarily relates to stock compensation expense during quarter that we did not have

in the previous year, an 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

September 30, 2024, totaled $2,144,250 compared to $353,674 for the three months ended September 30, 2023, resulting in an increase

in net loss of $1,790,576 or 506%.

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

the $685,151 loss on debt extinguishment, of which $663,250 was non-cash, in connection with the $1.0 million debt exchange for

Series C preferred shares.

In addition, the increase in general and administrative expenses related to closing the initial public

offering (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 fourth quarter of 2024 we expect to complete our valuation and

identification of any intangible assets related to the acquisitions of Fat Shark and Rotor Riot.

For any identified intangibles, we will

begin to amortize during the fourth quarter which will result in a non-cash charge going forward.

However, and until we complete our valuation

on intangibles, the amount is uncertain, and the future amortization may or may not be material.

After the identification and valuation

of intangibles is complete, we will complete our impairment analysis on goodwill and the identified intangibles during the fourth quarter.

While the amount is uncertain, we expect that our goodwill impairment could be material.

Results of Operations – Nine months

Ended September 30, 2024 compared to the Nine months Ended September 30, 2023

During the nine months ended September 30, 2024

we generated revenues totaling $3,561,303 compared to $0 during the nine months ended September 30, 2023, representing an increase of

$3,561,303 or 100%.

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

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.

Accordingly, our revenues for the nine months ending September 30, 2024 are affected by not having any revenues for half of the

first quarter.

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

our B2B wholesale through Fat Shark.

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%.

During the nine months ended September 30, 2024,

we incurred cost of goods sold of $2,569,209 compared to $0 during the nine months ended September 30, 2023, resulting in an increase

of $2,569,209 or 100%.

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

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.

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

During the nine months ended September 30, 2024,

our gross margin was $992,094 compared to $0 during the nine months ended September 30, 2023, resulting in an increase of $992,094 or

Our gross margin, as a percentage of sales, totaled 28% during the nine months ended September 30, 2024, compared to 0% during

the nine months ended September 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 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%.

During the nine months ended September 30, 2024,

operations expenses totaled $544,220 compared to $0 during the nine months ended September 30, 2023, resulting in an increase of $544,220

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 nine months ended September 30, 2024,

research and development expenses totaled $42,078 compared to $0 for the nine months ended September 30, 2023, resulting in an increase

of $42,078 or 100%.

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

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 nine months ended September 30, 2024,

sales and marketing expenses totaled $795,643 compared to $0 for the nine months ended September 30, 2023, resulting in an increase of

$795,643 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

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

During the nine months ended September 30, 2024,

general and administrative expenses totaling $3,728,749 compared to $1,965,469 for the nine months ended September 30, 2023, resulting

in an increase of $1,763,280 or 90%.

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 nine months ended September

30, 2024, totaled $4,862,490 compared to $1,966,876 for the nine months ended September 30, 2023, resulting in an increase in net loss

of $2,895,614 or 147%.

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.

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, sales and marketing expenses we incurred since the acquisition from Fat Shark

and Rotor Riot, and other expenses of $743,381 related to interest expense and a large non-cash loss on debt extinguishment

during the period.

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 fourth quarter of 2024 we expect to complete our valuation and identification of any intangible assets related

to the acquisitions of Fat Shark and Rotor Riot.

For any identified intangibles, we will begin to amortize during the fourth quarter which

will result in a non-cash charge going forward.

However, and until we complete our valuation on intangibles, the amount is uncertain,

and the future amortization may or may not be material.

After the identification and valuation of intangibles is complete, we will complete

our impairment analysis on goodwill and the identified intangibles during the fourth quarter.

While the amount is uncertain, we expect

that our goodwill impairment could 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 cash inflows from operations and all cash outflows related to

our activities related to our IPO.

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.

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

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 $2,718,513

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 $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.

during the nine months ended September 30, 2024, compared to net cash used in operating activities of $1,382,538 during the nine months

ended September 30, 2023, representing an increase of $1,335,975 or 97%.

This increase in net cash used primarily resulted from our increase

in net loss of $2,895,614 and an increase in prepaid expenses of $319,532, accounts receivable of $73,109, other assets of $62,850, offset

by a decrease in inventory of $337,562, an increase in accounts payable and accrued expenses of $681,414, other liabilities of $153,020

and non-cash expenses of $1,378,790.

Investing Activities

Net cash used in investing activities was $852,801

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 $147,199 in cash acquired as compared to $4,837 used for purchase of computer

equipment during 2023.

during the nine months ended September 30, 2024 compared to net cash used in investing activities of $3,164 during the nine months ended

September 30, 2023, representing an increase of $849,637.

This increase in net cash used related to the $1,000,000 we paid to purchase

Fat Shark and Rotor Riot, offset by $147,199 in cash acquired as compared to $3,164 used for purchase of computer equipment during 2023.

Financing Activities

Net cash provided by financing activities totaled

$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.

$4,362,313 during the nine months ended September 30, 2024, compared to net cash used in financing activities of $376,702 during the

nine months ended September 30, 2023, resulting in an increase in net cash provided by financing activities of $4,739,015.

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 $260,985.

Liquidity and Capital

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

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 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

As of September 30, 2024, we had current assets

totaling $4,517,325 primarily consisting of cash balances of $1,685,772, inventory of $1,453,042 and prepaid deposits for inventory of

Our current liabilities as of September 30, 2024 totaled $2,018,255, primarily consisting of accounts payable and accrued

expenses of $1,032,637 and customer deposits and other current liabilities of $985,618.

Our net working capital as of September 30, 2024

was $2,499,070.

On October 29, 2024, we completed a private placement

offering for the sale of 1,286,184 shares of common stock at a price of $1.52 per share for aggregate gross proceeds of $1.95 million

before deducting fees to the placement agent and other expenses payable by us in connection with the private placement.

We retained approximately

$1.7 million in net proceeds.

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

As of November 13, 2024, we have approximately

$2.4 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.

We believe that the net proceeds from our 2024 financings and revenues, October 2024 private placement 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 acquisitions 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 8 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.

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

Once the August Notes mature in November

2025, we will need to either (a) raise additional capital, (b) refinance the August 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 the August Notes have not been converted or paid in full prior to the maturity date.

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

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.

Our financial statements and accompanying notes

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

The preparation of financial statements in conformity with

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

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

the reporting periods.

We regularly evaluate the accounting policies

and estimates that we use to prepare our financial statements.

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

6 unchanged sentences

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 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

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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.

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.

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.

Certain employees and directors have received

grants of restricted common shares in our company.

Other employees received grants of stock options in our Company.

These awards are accounted

for in accordance with guidance prescribed for accounting for equity-based compensation.

Based on this guidance and the terms of the awards,

the awards are equity classified.

The fair value of restricted stock awards is based

on the fair value of the Company’s common stock on the date of grant and expensed over the vesting period.

The fair value of each stock option 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.

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.

Warrant Classification and Fair Value

The Company classifies warrants issued for the

purchase of shares of its common stock as either equity or liability instruments based on an assessment of the specific terms and conditions

of each respective contract.

The assessment considers whether the warrants are freestanding financial instruments or embedded in a host

instrument, whether the warrants meet the definition of a liability pursuant to ASC 480, whether the warrants meet the definition of

a derivative under ASC 815, and whether the warrants meet all of the requirements for equity classification under ASC 815.

This assessment,

which requires the use of professional judgment, is conducted at the time of warrant issuance and as of each subsequent quarterly period

end date while the warrants are outstanding.

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 fair value.

The fair value of the warrant liability is determined using the binomial option pricing model the

binomial option pricing model which values the liability on the stock price at the grant date, the estimate volatility of the stock, the

expected term until exercise, the risk-free interest rate over the expected term, certain estimates and probabilities of different outcomes.

Recently Issued Accounting Pronouncements

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

does not believe that there are any other new accounting pronouncements that have been issued that might have a material impact on its

financial position or results of operations.

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.

The Company has implemented all new accounting pronouncements that

are in effect.

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

Company does not believe that there are any other new accounting pronouncements that have been issued that might have a material impact

on its financial position or results of operations.

Quantitative and Qualitative Disclosures about

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