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Item 1A. Risk Factors

2025-03-27 compared with 2024-03-22 · 919 added, 1340 removed, 496 unchanged (82% of the section changed)

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of important factors that could affect our business, operating results, financial condition and the trading price of our securities.

This discussion should be read in conjunction with the other information in this Annual Report on Form 10-K, including our financial

statements and the related notes and “ Management’s Discussion and Analysis of Financial Condition and Results

of Operations .” The occurrence of any of the events or developments described below could have a material adverse effect on

our business, results of operations, financial condition, prospects and securities trading prices.

Additional risks and uncertainties

not presently known to us or that we currently deem immaterial may also impair our business operations.

discussion should be read in conjunction with the other information in this Annual Report on Form 10-K, including our financial statements

and the related notes and “Management’s Discussion and Analysis of Financial Condition and Results of Operations.” The

occurrence of any of the events or developments described below could have a material adverse effect on our business, results of operations,

financial condition, prospects and securities trading prices.

Additional risks and uncertainties not presently known to us or that we

currently deem immaterial may also impair our business operations.

Risk Factors Summary

Our business and an

investment in our common stock are subject to numerous risks and uncertainties, including those highlighted in this “ Risk

Factors ” section below.

Our business and an investment

in our Common Stock are subject to numerous risks and uncertainties, including those highlighted in this “ Risk Factors ” section

Some of these risks include:

Risks Related to

our Business and Financial Condition

Fat Shark and Rotor Riot’s auditors have qualified their reports on a going concern

basis and with our history of losses, we may not be able to continue operating as a going

· Because the Company had a very limited

operating history prior to its acquisition of Fat Shark and Rotor Riot, any investment in

us is highly speculative.

· The Company may be unable to repay indebtedness.

· Fat Shark and Rotor Riot have incurred

net losses since their acquisition by Red Cat and may fail to achieve or maintain profitability.

· If the proceeds of the recent initial

public offering (the “IPO”) are insufficient to meet our working capital needs,

and if we are then not able to obtain sufficient capital, we may be forced to limit the scope

of our operations.

· If we lose key personnel, it may adversely

affect our business.

· Conflicts of interest involving our

Board and other parties could materially harm our business.

· If we are unable to attract new customers

or maintain and grow Fat Shark and Rotor Riot existing customer relationships in a manner

that is cost-effective, our revenue growth could be slower than we expect and our business

may be harmed.

· Future operating results and key metrics

may fluctuate significantly from period-to-period due to a wide range of factors, which makes

our future results difficult to predict.

· Any failures of or damage to, attack

on or unauthorized access to our information technology systems or facilities or disruptions

to our continuous operations, including the systems, facilities or operations of third parties

with which we do business, such as resulting from cyber-attacks, could result in significant

costs, reputational damage and limits on our ability to conduct our business activities.

· Our failure to effectively manage our

growth could harm our business.

· If we are unable to attract, integrate

and retain additional qualified personnel, including top technical talent, our business could

be adversely affected.

Risks Related to our

Business and Financial Condition

Because the Company had a very limited operating history prior to its acquisition of Fat Shark and Rotor Riot, any investment in us is highly speculative.

Fat Shark and Rotor Riot incurred net losses since their acquisition by Red Cat and may fail to achieve or maintain profitability.

Rising threats of

international tariffs, including tariffs applied to goods between the United States and China may materially and adversely affect our

If the proceeds of the prior IPO and subsequent capital raises are insufficient to meet our working capital needs, and if we are then not able to obtain sufficient capital, we may be forced to limit the scope of our operations.

If we lose key personnel, it may adversely affect our business.

Conflicts of interest involving our board of directors (“Board”) and other parties could materially harm our business.

If we are unable to attract new customers or maintain and grow our existing customer relationships in a manner that is cost-effective, our revenue growth could be slower than we expect and our business may be harmed.

Future operating results and key metrics may fluctuate significantly from period-to-period due to a wide range of factors, which makes our future results difficult to predict.

Any failures of or damage to, attack on or unauthorized access to our information technology systems or facilities or disruptions to our continuous operations, including the systems, facilities or operations of third parties with which we do business, such as resulting from cyber-attacks, could result in significant costs, reputational damage and limits on our ability to conduct our business activities.

Our failure to effectively manage our growth could harm our business.

If we are unable to attract, integrate and retain additional qualified personnel, including top technical talent, our business could be adversely affected.

If we are successful in consummating the Merger, the integration of our business and the Aloft business may disrupt or have a negative impact on our business.

Risks Related to Our Sale of Drone-Related Products and Operations

in the Drone Industry

· We operate in an emerging

and rapidly evolving industry which makes it difficult to evaluate our business and future

· We face competition

from larger companies that have substantially greater resources which challenges our ability

to establish market share, grow the business, and reach profitability.

· The development and

manufacture of FPV goggles encompasses several complex processes and several steps of our

production processes are dependent upon third party vendors, supply chains, the availability

of printed circuit boards (PCBs), optics, and certain chips.

Any change in availability of

these components, manufacturing or design partners could result in delivery interruptions,

which could adversely affect our operating results.

· Several steps of our

production processes are dependent upon certain critical machines and tools which could result

in delivery interruptions and foregone revenues.

· We may not be able to

procure necessary key components for our products or may produce or purchase too much inventory.

· We may not be able to

keep pace with technological advances;

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

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

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

We may not be able to procure necessary key components for our products or may produce or purchase too much inventory.

We may not be able to keep pace with technological advances;

and we depend on advances in technology by other companies.

· Lack of long-term purchase

orders and commitments from customers may lead to a rapid decline in sales.

· Our products require

ongoing research and development and may experience technical problems or delays, which could

lead the business to fail.

· If we are involved in

litigation, it could harm our business or otherwise distract management.

· Our business is highly

dependent upon our brand recognition and reputation, and the failure to maintain or enhance

our brand recognition or reputation, including due to our high reliance on online and social

media platforms, would likely adversely affect our business and operating results.

· Future growth and ability

to generate and grow revenue and achieve or maintain profitability may be adversely affected

if our marketing initiatives are not effective in generating sufficient levels of brand awareness.

· Future acquisitions

could disrupt our business and adversely affect our operating results, financial condition

and cash flows.

· If we incur any future

impairment in the carrying value of our goodwill asset or write-off of our general intangibles,

it could depress our stock price.

· Product quality issues

and a higher-than-expected number of warranty claims or returns could harm our business and

operating results.

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

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

If we are involved in litigation, it could harm our business or otherwise distract management.

Our business is highly dependent upon our brand recognition and reputation, and the failure to maintain or enhance our brand recognition or reputation, including due to our high reliance on online and social media platforms, would likely adversely affect our business and operating results.

Future growth and ability to generate and grow revenue and achieve or maintain profitability may be adversely affected if our marketing initiatives are not effective in generating sufficient levels of brand awareness.

Future acquisitions could disrupt our business and adversely affect our operating results, financial condition and cash flows.

If we incur any future impairment in the carrying value of our goodwill asset or write-off of our general intangibles, it could depress our stock price.

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

Risks Related to Intellectual Property Protection

· If third-party intellectual

property infringement claims are asserted against us, it may prevent or delay our product

development and commercialization efforts and have a material adverse effect on our business

and future prospects.

· We may depend on intellectual

property rights including patent rights that have not yet been and may not be obtained by

us, and our intellectual property rights and proprietary rights may not adequately protect

our products.

· If we lose our rights

under our third-party technology licenses, our operations could be adversely affected.

· Significant inflation

could adversely affect our business and financial results.

If third-party intellectual property infringement claims are asserted against us, it may prevent or delay our product development and commercialization efforts and have a material adverse effect on our business and future prospects.

We may depend on intellectual property rights including patent rights that have not yet been and may not be obtained by us, and our intellectual property rights and proprietary rights may not adequately protect our products.

If we lose our rights under our third-party technology licenses, our operations could be adversely affected.

Significant inflation could adversely affect our business and financial results.

Risks Related to Government Regulation of Our Operations and Industry

· Failure to obtain necessary

regulatory approvals from the FAA or other governmental agencies by us, our customers, or

others who use our products, or limitations put on the use of unmanned aircraft systems,

or “UAS,” in response to public privacy or safety concerns, may prevent us from

expanding the sales of our drone solutions in the United States.

· Rising threats of international

tariffs, including tariffs applied to goods between the U.S.

and China, may materially and

adversely affect our business.

· We are or may become

subject to governmental export and import controls, economic sanctions and other laws and

regulations that could subject us to liability and impair our ability to compete in international

· If the courts uphold the SEC’s climate change rules, we will

incur additional costs which may materially and adversely affect our operating results and

financial condition.

· If we fail to comply

and foreign laws related to privacy, data security, and data protection, it could

adversely affect our operating results and financial condition.

Failure to obtain

necessary regulatory approvals from the DIU, FAA or other governmental agencies by us, our customers, or others who use our

products, or limitations put on the use of unmanned aircraft systems, or “UAS,” in response to public privacy or safety

concerns, may prevent us from expanding the sales of our drone solutions in the United States.

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

If the courts uphold the SEC’s climate change rules, we will incur additional costs which may materially and adversely affect our operating results and financial condition.

If we fail to comply with

United States and foreign laws related to privacy, data security, and data protection, it could adversely affect our operating results

and financial condition.

Risks Related to Our Common Stock

· Because Red Cat and

our Principal Stockholder own 46.79% and 3.62% of our outstanding common stock after the

IPO, the voting power of other stockholders is limited and Red Cat will likely be able to

control our business, elect our Board of Directors and otherwise control the Company which

control may place their interests ahead of our stockholders’ interests.

· Because the Purchase

Price for Fat Shark and Rotor Riot exceeded an independent valuation that Red Cat received

for the enterprise value of the target companies, you may lose all or part of your investment.

· The market price of

our shares of common stock is subject to fluctuation.

· Our stock price may

be and has been volatile, which could result in substantial losses to investors.

· An active trading market

for our common stock may not develop.

· Because our sole remedy

under the Purchase Agreement in the event of any breaches of representations and warranties

is to cancel some or all of the 125,000 shares of our common stock, the value of such shares

may be an insufficient remedy.

· We are incurring significant

additional costs as a result of being a public company, and our management will be required

to devote substantial time to compliance with our public company responsibilities and corporate

governance practices.

· Our failure to maintain

effective disclosure controls and internal controls over financial reporting could have an

adverse impact on us.

· Our Auditor and Red

Cat’s auditor recently was subjected to certain significant enforcement actions in

If its ability to perform audits for public companies in the United States is restricted

it could have material adverse consequences on the Company and our investors.

· Because our common stock

is listed on NYSE American, we are subject to additional regulations and continued requirements.

· Our Board of Directors

may authorize and issue shares of new classes of stock that could be superior to or adversely

affect current holders of our common stock.

· If we raise capital

in the future, it may dilute our existing stockholders’ ownership and/or have other

adverse effects on us, our securities or our operations.

· Common stock eligible

for future sale may adversely affect the market.

· If securities or industry

analysts do not publish research or reports about our business, or if they adversely change

their recommendations regarding our common stock, the market price for our common stock and

trading volume could decline.

· We and our investors

face the implications of our status as an emerging growth company under the federal securities

laws and regulations.

· We have never paid dividends

and we do not expect to pay dividends for the foreseeable future.

· Our Certificate of Incorporation

contains certain provisions which may result in difficulty in bringing stockholder actions

against or on behalf of the Company or its affiliates.

The market price of our shares of Common Stock is subject to fluctuation.

Our stock price may be and has been volatile, which could result in substantial losses to investors.

We are incurring significant additional costs as a result of being a public company, and our management will be required to devote substantial time to compliance with our public company responsibilities and corporate governance practices.

Our failure to maintain effective disclosure controls and internal controls over financial reporting could have an adverse impact on us.

Because our Common Stock is listed on NYSE American, we are subject to additional regulations and continued requirements.

Our Board of Directors may authorize and issue shares of new classes of stock that could be superior to or adversely affect current holders of our Common Stock.

If we raise capital in the future, it may dilute our existing stockholders’ ownership and/or have other adverse effects on us, our securities or our operations.

Common stock eligible for future sale may adversely affect the market.

If securities or industry analysts do not publish research or reports about our business, or if they adversely change their recommendations regarding our Common Stock, the market price for our Common Stock and trading volume could decline.

We and our investors face the implications of our status as an emerging growth company under the federal securities laws and regulations.

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

Our Certificate of Incorporation contains certain provisions which may result in difficulty in bringing stockholder actions against or on behalf of the Company or its affiliates.

Investing in our Common Stock involves a high

degree of risk.

Investors should carefully consider the following Risk Factors before deciding whether to invest in the Company.

risks and uncertainties not presently known to us, or that we currently deem immaterial, may also impair our business operations or our

financial condition.

If any of the events discussed in the Risk Factors below occur, our business, consolidated financial condition, results

of operations or prospects could be materially and adversely affected.

In such case, the value and marketability of our securities could

Risks Related to our Business and Financial

Because Fat Shark and Rotor Riot’s auditors

have qualified their reports on a going concern basis and with our history of losses, we may not be able to continue operating as a going

We have experienced losses from operations since

inception and have never generated positive cash flow.

The success of our business plan during the next 12 months and beyond will be

contingent upon generating sufficient revenue to cover our operating costs.

The reports from Fat Shark and Rotor Riot’s independent

registered public accounting firm for the fiscal year ended April 30, 2023 and prior years include an explanatory paragraph stating Fat

Shark and Rotor Riot have each recurring net losses from operations, negative operating cash flows, and will need additional working

capital for ongoing operations.

These factors, among others, raise substantial doubt about each of our ability to continue as a going

We believe that the net proceeds from our recent IPO in February 2024 and our existing cash 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.

Because the Company

had a very limited operating history prior to its acquisition of Fat Shark and Rotor Riot, any investment in us is highly speculative.

had a limited operating history prior to its acquisition of Fat Shark and Rotor Riot, any investment in us is highly speculative.

We completed our acquisitions

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acquisitions, were operated by Red Cat since their acquisition by Red Cat in 2020.

While the management of each company is expected to

remain, no Red Cat officer, other than Dr.

Allan Evans who became our Chief Executive Officer in December 2023, is joining us.

Our management

team will be headed by our executive officers including Adrew Camden, our new Chief Operating Officer who joined us from Rotor Riot together

with individuals from Fat Shark and Rotor Riot, and our operations going forward are therefore subject to ordinary integration risks

where two companies and two cultures are combined.

Further, we may not accurately forecast customer behavior and recognize or respond

to emerging trends, changing preferences or competitive factors facing us, and, therefore, we may fail to make accurate financial forecasts.

Our current and future expense levels are based largely on our budgeted plans and estimates of future revenue.

Similarly, if we are able

to raise additional funds in future financing transactions, we may use a portion of those proceeds to acquire other operating businesses

in our industry or in related industries to facilitate strategic growth and build our market presence and revenue potential.

acquire one or more businesses in the future, we may be unable to adjust our spending in a timely manner to compensate for any unexpected

revenue shortfall, which could then force us to curtail our business operations or plan of operations or acquisitions.

Additionally, our current

revenue projections are based largely on customer and partner relationships and contracts that are still the subject of negotiation,

the results of which remain uncertain.

In addition to having no experience as a public company, our new operations will be subject to

the risk of a lack of diversification, as today we are limited to drone products designed for consumer or recreational use rather than

military or industrial applications.

In the future, we may diversify our products beyond the consumer and recreational use but the timeline

and success of those efforts are uncertain.

Our new subsidiaries will lack the support they previously had in terms of their product

development and production efforts, as they can no longer access the more vertically integrated resources that were available to them

The risk of this occurring will intensify if a recession occurs in the U.S.

or global economy, as our future business is

aimed at consumers whose spending patterns will likely decline as a result of inflation and the prospect of an economic downturn.

Fat Shark and Rotor

Riot must be considered in light of the uncertainties, risks, expenses, and difficulties frequently encountered by companies in their

early stages of operations, integration and growth process.

Due to these contingencies, we may be unable to achieve or maintain profitability

in some or all of our business segments in a timely manner or at all.

The Company may be

unable to repay indebtedness

As part of the acquisition

Purchase Price, we issued a $2.0 million Note to Red Cat.

The Note bears interest

Interest is payable monthly in arrears on the 15th day of each month commencing on March 15, 2024.

The principal amount of the

note is payable in a lump sum on August 16, 2025.

In the event of a qualified financing of debt or equity where the Company receives

net proceeds of $5.0 million in one or more related transactions, Red Cat may require the Company to repay the Note with accrued interest

thereon in cash.

Upon an event of default, Red Cat may require the Company to convert the Note into shares of our common stock, subject

to beneficial ownership limitations set forth in the Note, at a conversion price equal to an amount of the 10 day average VWAP, as defined

in the Note prior to the conversion date.

On the closing date

of the consummation of the acquisition, the parties to the agreed to defer the requirement to provide the Estimated Working Capital Statement

(as defined in the Purchase Agreement) and the calculations of the Estimated Working Capital (as defined in the Purchase Agreement),

and as applicable, the Estimated Working Capital Excess Amount (as defined in the Purchase Agreement) or the Estimated Working Capital

Deficiency Amount (as defined in the Purchase Agreement) required by Section 2.04(a) of the Purchase Agreement.

Rather, the parties agreed

that their respective financial teams will deliver estimated or agreed upon actual calculations of the foregoing (based on the book value

of physical inventory and fair value of any transition inventory in accordance with Generally Accepted Accounting Principles) on or before

May 17, 2024 (the “Calculation Date”).

Any disputes with respect to any calculations including the failure to agree on such

calculations by the Calculation Date (unless the Parties shall agree to an extension of the Calculation Date in writing) shall be resolved

by an Independent Accounting Firm and the mechanics set forth in Section 2.04(c) of Purchase Agreement.

No payments or adjustments related

to Working Capital was made on the Closing Date.

In the event that after determining the actual Working Capital calculation, any actual

Working Capital Excess Amount, at Red Cat’s option, will be paid in cash or will increase the principal amount of the Note and

any actual Working Capital Deficiency Amount will, at Red Cat’s option, will be paid in cash or will reduce the principal amount

of the Note dollar for dollar.

This potentially can adversely impact our liquidity or increase the amount of our indebtedness.

In order to repay the

Note we will need to expend proceeds, obtain additional debt financing, or refinance the Note.

There is no guarantee that any refinancing

or debt financing will be successful or on favorable terms.

Any additional convertible debt or equity financings may be dilutive to our

stockholders, and such dilution may be significant based upon the size of such financing.

Further, because of our lack of operating history,

we may be unable to generate enough capital to fulfill the obligations under the Note issued to Red Cat.

If we fail to repay the Note,

Red Cat may exercise all rights and remedies owed to it under the Note, including conversion of the Note.

If Red Cat converts the Note,

our stockholders will experience dilution.

While the management of each company remained as employees,

no Red Cat officer, other than Dr.

Allan Evans who became our Chief Executive Officer in December 2023, and our Chief Operating Officer

in March 2024, respectively, joined us.

Our management team is headed by our executive officers together with individuals from Fat Shark

and Rotor Riot, and our operations going forward are therefore subject to ordinary integration risks where two companies and two cultures

are combined.

Further, we may not accurately forecast customer behavior and recognize or respond to emerging trends, changing preferences

or competitive factors facing us, and, therefore, we may fail to make accurate financial forecasts.

Our current and future expense levels

are based largely on our budgeted plans and estimates of future revenue.

Similarly, if we are able to raise additional funds in future

financing transactions, we may use a portion of those proceeds to acquire other operating businesses in our industry or in related industries

to facilitate strategic growth and build our market presence and revenue potential.

If we do acquire one or more businesses in the future,

we may be unable to adjust our spending in a timely manner to compensate for any unexpected revenue shortfall, which could then force

us to curtail our business operations or plan of operations or acquisitions.

Unusual Machines must

be considered in light of the uncertainties, risks, expenses, and difficulties frequently encountered by companies in their early stages

of operations, and growth process.

For all these reasons, we may be unable to achieve or maintain profitability in some or all of our

business segments in a timely manner or at all.

Fat Shark and Rotor Riot have incurred net

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Since their acquisition by Red Cat in 2020, Fat

Shark and Rotor Riot incurred net losses for each reported quarter with the exception of Fat Shark which reported a small net income

in the quarter ended July 31, 2022.

Further, Unusual Machines was formed in July 2019 and has not conducted any active business.

our acquisition of Fat Shark and Rotor Riot, their operations constitutes our business.

Further, Fat Shark had lower revenues in fiscal

year 2023 compared to fiscal year 2022, and Rotor Riot had higher net losses in fiscal year 2023 compared to fiscal year 2022, and generally

experiences fluctuating revenue as a result of recurring seasonal sales cycles.

We will need to generate higher revenues and control

operating costs in order to attain profitability.

Shark and Rotor Riot incurred net losses for each reported quarter with the exception of Fat Shark which reported a small net income in

the quarter ended July 31, 2022.

Further, Unusual Machines was formed in July 2019 did not conduct any operational business activities

until February 2024 after the completion of our IPO and acquisitions of Fat Shark and Rotor Riot.

Following our acquisition of Fat Shark

and Rotor Riot, their operations constitute our business.

Further, Fat Shark had lower revenues in fiscal year 2023 compared to fiscal

year 2022, and Rotor Riot had higher net losses in fiscal year 2023 compared to fiscal year 2022, and generally experiences fluctuating

revenue as a result of recurring seasonal sales cycles.

We will need to generate higher revenues and control operating costs in order

to attain profitability.

There can be no assurances that we will be able to do so or to reach profitability.

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other things:

expanding into the B2B channel;

opening a manufacturing facility;

researching, developing, producing and distributing new products;

sales and marketing, which will require time before these investments

generate sales results;

general and administrative expenditures, including significantly increasing

expenses in accounting and legal fees related to the increase in the sophistication and resources required for public company compliance

and other needs arising from the growth and maturity of the Company;

competing with other companies that are currently in, or may in the

future enter, the markets in which we compete;

maintaining high customer satisfaction and ensuring product and service

sales and marketing, which will require time before these investments generate sales results;

general and administrative expenditures, including significantly increasing expenses in accounting and legal fees related to the increase in the sophistication and resources required for public company compliance and other needs arising from the growth and maturity of the Company;

competing with other companies that are currently in, or may in the future enter, the markets in which we compete;

maintaining high customer satisfaction and ensuring product and service quality;

developing our indirect sales channels and strategic partner network;

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establishing and increasing market awareness of our Company and enhancing our brand;

maintaining compliance with applicable governmental regulations and

other legal obligations, including those related to intellectual property and drones;

consummating and integrating acquisitions;

maintaining compliance with applicable governmental regulations and other legal obligations, including those related to intellectual property and drones;

attracting and retaining top talent in a competitive labor market.

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affected and the market price of our Common Stock could be adversely affected.

If the proceeds from the IPO are insufficient

to meet our working capital needs, and if we are then not able to obtain sufficient capital, we may be forced to limit the scope of our

We expect that our existing cash and net proceeds

received from our recent IPO will be sufficient to meet our working capital needs for at least 12 months.

However, our future business

is aimed at consumers who face inflation and the possibility of a recession.

Accordingly, we may require substantial additional working

Rising threats of international tariffs, including tariffs applied

to goods between the United States and China, may materially and adversely affect our business.

Our B2C business has historically been dependent

on Chinese imports for our products and operations.

For example, a majority of our products are manufactured, directly and indirectly,

using Chinese vendors.

We do not have any written agreements with our other suppliers in China.

We rely only on purchase orders.

are inherent risks and uncertainties regarding the enforcement of our rights with respect to our oral agreements and purchase orders.

Should our suppliers in China fail to honor our oral agreements and purchase orders we will not have any recourse against such suppliers

under Chinese law.

The legal system in China and the enforcement of laws, rules and regulations in China can change quickly and the Chinese

government may intervene or influence the operations of our suppliers which would adversely impact our business insofar as we would have

to seek other suppliers outside of China and such suppliers would most likely charge us more for our products.

As a result of the recent

United States presidential election, President Trump has imposed steep and additional tariffs on the importation from China of goods including

the drones we use in our B2C business.

This increase in tariffs imposed could materially and adversely affect our business and results

of operations.

These tariffs apply to the vast majority of our respective inventory, and we have historically increased prices and may

in the future be forced to implement additional price increases to adjust to the higher costs of inventory, which imposes the risk of

reduced demand for such products and lower sales and resulting revenue.

In addition, additional tariffs have been instituted on Chinese

products and could see potential additional tariffs in the future.

Under the current Trump administration, the imposition of additional

tariffs fluctuates dramatically and have created uncertainty in the global markets.

Future tariffs or any further costs or restrictions

imposed on products that we import, could require us to raise our prices on our B2C products, which may result in the loss of customers

and harm our business, particularly since we rely on consumer spending and our products are typically considered non-essential, and purchases

are therefore highly price sensitive.

In addition, changes in political conditions in

China and changes in the state of China-United States relations, including any tensions relating to potential military conflict between

China and Taiwan, are difficult to predict and could adversely affect the operations or financial condition of the Company.

because of our B2C involvement in the Chinese market, any deterioration in political or trade relations might cause a public perception

in the United States or elsewhere that might cause that business to become less attractive.

Such an impact could adversely affect our

revenues and cash flows.

In addition to Chinese tariffs, one of our first B2B customers was a European company.

If the European Union

and other European countries react to the United States tariffs by imposing tariffs on United States made product including our drones,

the trade war may make our B2B drone part too expensive.

If the tariffs or other factors result in increased

inflation and a recession, our business may be materially harmed .

A direct impact from rising tariffs on our business

will be increases in the prices of inventory we acquire and, most likely, an increase in our selling prices.

Further, due to the tariffs

and possibly large cuts in the size of the government, there may be increased unemployment and other economic factors which result in

In such event, our B2C business may be materially and adversely affected.

Further, our B2B business including our proposed

manufacturing of drones in the United States may also be adversely affected by a recessionary economy and inflation.

If our existing cash

is insufficient to meet our working capital needs, and if we are then not able to obtain sufficient capital, we may be forced to limit

the scope of our operations.

We expect that our existing cash will be sufficient

to meet our working capital needs for at least 12 months.

However, due to our continued negative cash flow we may require substantial

additional working capital.

There can be no assurance that our businesses

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a material adverse effect on our future operating results and our financial condition.

Our ability to raise financing through sales

of equity linked securities depends on general market conditions and the demand for our common stock.

Our ability to raise financing through sales of

equity linked securities depends on general market conditions and the demand for our Common Stock.

To the extent that we raise additional

5 unchanged sentences

Further, if adequate financing is not available

or is unavailable on acceptable terms, we may find we are unable to fund our planned expansion, continue offering the Fat Shark and Rotor

Riot products, take advantage of acquisition opportunities, develop or enhance or products, or to respond to competitive pressures in

the industry which may jeopardize our ability to continue operations.

or is unavailable on acceptable terms, we may find we are unable to fund our planned expansion, take advantage of acquisition opportunities,

develop or enhance our products, or respond to competitive pressures in the industry which may jeopardize our ability to continue operations.

If we lose key personnel, it may adversely

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Our executive officers, senior management and key personnel are all employed

on an at-will basis, which means that they could terminate their employment with us at any time, for any reason and without notice.

on an at-will basis, which means that they could terminate their services with us at any time, for any reason and without notice.

loss of any of our key management personnel could significantly delay or prevent the achievement of our development and strategic objectives

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heavily depend are or may become involved in other endeavors giving rise to conflicts of interests that are adverse to the Company.

“ Part III, Item 10.

Directors, Executive Officers, and Corporate Governance.

Jeffrey Thompson,

a member of our Board of Directors, also has significant roles and interests in the drone industry outside our Company.

These arrangements

could cause him to be unable or decline to devote sufficient time and attention to our Company at the expense of these other ventures,

and/or to face a conflict of interest, financial or otherwise, adverse to us and in favor of these other ventures.

Accordingly, from

time-to-time our directors may not devote sufficient time and attention to our affairs, which could have a material adverse effect on

our operating results, and there can be no assurance that other conflicts of interest will not arise from their other business ventures,

any of which could materially and adversely impact our business.

In addition, the primary

contract manufacturer for Fat Shark headsets is Shenzhen Fat Shark Co Ltd.

(the “Supplier”), a company located in China which

is majority-owned by Molly Mo, who is the wife of Greg French, founder and former owner of Fat Shark prior to its acquisition by Red

French is no longer affiliated with Fat Shark.

“Management” and “Corporate Governance.” Mr.

Jeffrey Thompson, a member of our Board is the Chief Executive Officer

of Red Cat, a drone company with which we partner on some of our B2B business.

These arrangements could cause him to be unable or decline

to devote sufficient time and attention to our Company and favor Red Cat, and/or to face a conflict of interest, financial or otherwise,

adverse to us and in favor of Red Cat.

Accordingly, from time-to-time our directors may not devote sufficient time and attention to our

affairs, which could have a material adverse effect on our operating results, and there can be no assurance that other conflicts of interest

will not arise from their other business ventures, any of which could materially and adversely impact our business.

Finally, Rotor Riot offers a variety of drone

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While these relationships

have enabled us to generate revenue, by virtue of their involvement in the sale of drones and drone-related products these customers

also have interests that are adverse to ours, and may determine to reduce their expenditures on our products in the future and/or to

vertically integrate their operations to reduce or eliminate their reliance on our products.

have enabled us to generate revenue, by virtue of their involvement in the sale of drones and drone-related products these customers also

have interests that are adverse to ours, and may determine to reduce their expenditures on our products in the future and/or to vertically

integrate their operations to reduce or eliminate their reliance on our products.

Any of the foregoing developments could result

in materially adverse consequences to our Company, results of operations and financial condition.

If we are unable to attract new customers

or maintain and grow Fat Shark and Rotor Riot existing customer relationships in a manner that is cost-effective, our revenue growth

could be slower than we expect and our business may be harmed.

To increase our revenue following the acquisition

of Fat Shark and Rotor Riot, we must add new customers, upsell to our existing customers, enhance our products with features that set

us apart from our competitors, and effectively develop and market new products that enable us to maintain and expand our brand and market

Demand for our products is affected by a number of factors, many of which are beyond our control.

Additionally, the projections

and estimates about the future success and growth of the drone industry and demand for drone-related products such as ours, could prove

to be incorrect, in which case our results of operations and prospects will decline.

For example, if a recession occurs in the U.S.

global economy, we expect that consumer spending, particularly for non-essential goods such as our drone products which are largely focused

on recreational uses, may decline, limiting our ability to attract or maintain a sufficient customer base to achieve or maintain the

revenue we seek in the development and sale of our products.

Even if we do attract customers, the cost of new customer acquisition may

prove so high as to prevent us from achieving or sustaining profitability.

If we are unable to attract new customers or

maintain and grow our existing customer relationships in a manner that is cost-effective, our revenue growth could be slower than we expect

and our business may be harmed.

To increase our revenue, we must add new customers,

upsell to our existing customers, enhance our products with features that set us apart from our competitors, and effectively develop and

market new products including our B2B products that enable us to maintain and expand our brand and market share.

Demand for our products

is affected by a number of factors, many of which are beyond our control.

Additionally, the projections and estimates about the future

success and growth of the drone industry and demand for drone-related products such as ours, could prove to be incorrect, in which case

our results of operations and prospects will decline.

For example, if a recession occurs in the United States or global economy, we expect

that consumer spending, particularly for non-essential goods such as our drone products which are largely focused on recreational uses,

may decline, limiting our ability to attract or maintain a sufficient customer base to achieve or maintain the revenue we seek in the

development and sale of our products.

Even if we do attract customers, the cost of new customer acquisition may prove so high as to prevent

us from achieving or sustaining profitability.

Our future success also depends on our ability

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While we believe there

is a significant opportunity to further expand within Fat Shark and Rotor Riot’s existing customer base, including due to our planned

employment of a “land-and-expand” business model in which we plan to establish relationships with new customers and grow

those relationships over time by providing high quality products and services, our growth prospects depend on our ability to persuade

customers to buy more product, and if we fail to do so, our business goals and prospects may not be achieved to the extent sought or

anticipated or at all.

is a significant opportunity to further expand within our existing customer base, including due to our planned employment of a “land-and-expand”

business model in which we plan to establish relationships with new customers and grow those relationships over time by providing high

quality products and services.

Our growth prospects depend on our ability to persuade customers to buy more product, and if we fail to

do so, our business goals and prospects may not be achieved to the extent sought or anticipated or at all.

Future operating results and key metrics may

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significantly from quarter-to-quarter as a result of various factors, some of which are outside of our control, including:

the expansion or contraction of our customer base and the amount of

product ordered;

the size, duration and terms of our contracts with both existing and

new customers, including distributors we contract with particularly as to Fat Shark’s sale of FPV goggles;

seasonality of sales at Rotor Riot which generally has experienced

higher sales volumes in October – December than in other three-month periods as a result of holiday purchases and its e-commerce

sales cycles which fluctuate and often include delays between the end

of one product or solution’s cycle and the launch of a new product or solution to replace or supplement the prior offering,

which for example significantly impacts Fat Shark’s sales as it improves upon and launches new products and shifts focus away

from older products;

the introduction of products and product enhancements by competitors,

and changes in pricing for products offered by us or our competitors;

customers delaying purchasing decisions in anticipation of new products

or product enhancements by us or our competitors or otherwise;

delays in the receipt of orders from customers that are dependent on government orders;

the effect that tariffs, a trade war and a potential recession may have on our business;

delays in getting Blue List approval for additional drone components that we develop;

the expansion or contraction of our customer base and the amount of products ordered;

the size, duration and terms of our contracts with both existing and new customers, including distributors we contract with;

seasonality of sales at Rotor Riot which generally has experienced higher sales volumes in October – December than in other three-month periods as a result of holiday purchases and its e-commerce focus;

sales cycles which fluctuate and often include delays between the end of one product or solution’s cycle and the launch of a new product or solution to replace or supplement the prior offering;

the introduction of products and product enhancements by competitors, and changes in pricing for products offered by us or our competitors;

customers delaying purchasing decisions in anticipation of new products or product enhancements by us or our competitors or otherwise;

changes in customers’ budgets;

the amount and timing of payment for expenses, including infrastructure,

research and development, sales and marketing expenses, employee benefit and stock-based compensation expenses;

the amount and timing of payment for expenses, including infrastructure, research and development, sales and marketing expenses, employee benefit and stock-based compensation expenses;

costs related to the hiring, training and maintenance of our employees;

any future impact from COVID-19, including any long-term or pervasive

effects of the virus;

any future impact from the ongoing geopolitical military conflict (including

the war in Israel, the Russian war in Ukraine, tensions between China and Taiwan, and other unrest in the Middle East);

supply chain issues particularly with the current COVID-19 resurgence

in China and Fat Shark’s reliance on one related party Chinese supplier;

any future impact from the ongoing geopolitical military conflicts (including the war in Israel, the war in Ukraine, and tensions between China and Taiwan;

supply chain issues;

political unrest affecting our relationship with China and future tariffs;

our lack of a long-term agreement with our suppliers which can affect

the availability of parts and future costs ;

changes in laws and regulations or other regulatory developments that

impact our business;

our lack of a long-term agreement with our suppliers which can affect the availability of parts and future costs ;

changes in laws and regulations or other regulatory developments that impact our business;

the timing and extent of the growth of our business;

general economic and political conditions, both domestically and internationally,

as well as economic conditions specifically affecting industries in which our customers operate.

general economic and political conditions, both domestically and internationally, as well as economic conditions specifically affecting industries in which our customers operate.

Any one of these or other factors discussed elsewhere

in this Annual Report on Form 10-K may result in fluctuations in our operating results, meaning that quarter-to-quarter comparisons may

not necessarily be indicative of our future performance.

in this Annual Report may result in fluctuations in our operating results, meaning that quarter-to-quarter comparisons may not necessarily

be indicative of our future performance.

Any failures of or damage to, attack on or

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improve and adapt such systems and measures as such threats evolve and advance in their ability to avoid detection.

A cyber-security incident, or a failure

to protect our technology infrastructure, systems and information and our customers, suppliers and others’ information against

cyber-security threats, could result in the theft, loss, unauthorized access to, disclosure, misuse or alteration of information,

system failures or outages or loss of access to information.

The expectations of our customers and regulators with respect to the resiliency

of our systems and the adequacy of our control environment with respect to such systems may increase as the risk of cyber-attacks, and

the consequences of those attacks become more pronounced.

We may not be successful in meeting those expectations or in our efforts to

identify, detect, prevent, mitigate and respond to such cyber-incidents or for our systems to recover in a manner that does not

disrupt our ability to provide products and services to our customers or product personal, private or sensitive information about our

business, customers or other third parties.

In July 2023, the SEC approved final rules requiring

public companies to report material cybersecurity incidents and disclose their cybersecurity risk management, strategy and governance.

The new rules will require us to enhance our cybersecurity compliance efforts and have the effect of causing us to expend funds to prevent

material cybersecurity incidents and begin making cybersecurity-related periodic and annual disclosures.

A cyber-security incident, or a failure to

protect our technology infrastructure, systems and information and our customers, suppliers and others’ information against cyber-security threats,

could result in the theft, loss, unauthorized access to, disclosure, misuse or alteration of information, system failures or outages or

loss of access to information.

The expectations of our customers and regulators with respect to the resiliency of our systems and the

adequacy of our control environment with respect to such systems may increase as the risk of cyber-attacks, and the consequences of those

attacks become more pronounced.

We may not be successful in meeting those expectations or in our efforts to identify, detect, prevent,

mitigate and respond to such cyber-incidents or for our systems to recover in a manner that does not disrupt our ability to provide

products and services to our customers or product personal, private or sensitive information about our business, customers or other third

In July 2023, the Securities and Exchange Commission

(the “SEC”) approved final rules requiring public companies to report material cybersecurity incidents and disclose their

cybersecurity risk management, strategy and governance.

The new rules required us to enhance our cybersecurity compliance efforts and

have the effect of causing us to expend funds to prevent material cybersecurity incidents and begin making cybersecurity-related periodic

and annual disclosures.

Specifically, the new rules impose a new Form

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Finally we must describe

our board of directors’ oversight of risks from cybersecurity threats and management’s role in assessing and managing these

We expect to incur material additional compliance and reporting costs, including monitoring, collecting, and analyzing data concerning

cyber-security incidents and evaluating and preparing the required disclosure.

We may also be required to incur third party compliance

The failure to maintain an adequate technology

infrastructure and applications with effective cyber-security controls could impact operations, adversely affect our financial results,

result in loss of business, damage our reputation or impact our ability to comply with regulatory obligations, leading to regulatory

fines and sanctions.

We may be required to expend significant additional resources to modify, investigate or remediate vulnerabilities

or other exposures arising from cyber-security threats.

Failing to prevent or properly respond to a cyber-attack could expose

us to regulatory fees or civil liability, cause us to lose customers or suppliers, prevent us from offering our products including due

to resulting regulatory action, impair our ability to maintain continuous operations, and inhibit our ability to meet regulatory requirements.

our Board’s oversight of risks from cybersecurity threats and management’s role in assessing and managing these risks.

expect to incur material additional compliance and reporting costs, including monitoring, collecting, and analyzing data concerning cyber-security

incidents and evaluating and preparing the required disclosure.

We may also be required to incur third party compliance costs.

The failure to maintain an adequate

technology infrastructure and applications with effective cyber-security controls could impact operations, adversely affect our

financial results, result in loss of business, damage our reputation or impact our ability to comply with regulatory obligations,

leading to regulatory fines and sanctions.

We may be required to expend significant additional resources to modify,

investigate or remediate vulnerabilities or other exposures arising from cyber-security threats.

Failing to prevent or properly

respond to a cyber-attack could expose us to regulatory fees or civil liability, cause us to lose customers or suppliers,

prevent us from offering our products including due to resulting regulatory action, impair our ability to maintain continuous

operations, and inhibit our ability to meet regulatory requirements.

Our failure to effectively manage our growth

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These challenges are exacerbated in circumstances such

as ours following a recent acquisition of operating businesses.

We intend to expand the number and types of products we sell as we grow,

if and as capital becomes available.

Further, because of our reliance on consumer spending which depends on novelty and social trends,

and the rapid and constant technologically advancements that characterize our industry, we are subject to periodic sales cycles, and

we will therefore need to replace and regularly introduce on a timely basis new products and technologies, enhance existing products,

and effectively stimulate customer demand for new products and upgraded or enhanced versions of our existing products.

Similarly, because

our product offerings are largely dependent on others’ drone-related products and activities, we may need to adjust or update as

third parties advance or alter their technology and activities.

If we are able to successfully develop, produce and market our products,

we will likely need to incur additional expenditures and expand our personnel with additional employees and consultants who are capable

of providing the necessary support.

We cannot assure you that our management will be able to manage our growth effectively or successfully.

as ours following our acquisition of operating businesses and will be continued if we close any acquisitions including the Aloft Merger.

We intend to expand the number and types of products we sell as we grow, if and as capital becomes available.

Further, because of our

reliance on consumer spending which depends on novelty and social trends, and the rapid and constant technologically advancements that

characterize our industry, we are subject to periodic sales cycles.

We will need to replace and regularly introduce on a timely basis

new products and technologies, enhance existing products, and effectively stimulate customer demand for new products and upgraded or enhanced

versions of our existing products.

Similarly, because our product offerings are largely dependent on others’ drone-related products

and activities, we may need to adjust or update as third parties advance or alter their technology and activities.

If we are able to successfully

develop, produce and market our products and initiate our planned manufacturing business, we will likely need to incur additional expenditures

and expand our personnel with additional employees and consultants who are capable of providing the necessary support.

We cannot assure

you that our management will be able to manage our growth effectively or successfully.

The replacement and expansion of our products

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New Product Launches:

With the changes in

and growth of our product portfolio, we will experience increased complexity in coordinating product development, manufacturing,

and shipping.

As this complexity increases, it places a strain on our ability to accurately coordinate the commercial launch of our

products with adequate supply to meet anticipated customer demand and effectively market to stimulate demand and market acceptance.

With the changes in and growth of our product portfolio, we will experience increased complexity in coordinating product development, manufacturing, and shipping.

As this complexity increases, it places a strain on our ability to accurately coordinate the commercial launch of our products with adequate supply to meet anticipated customer demand and effectively market to stimulate demand and market acceptance.

We may experience delays in our operations or product development or production efforts.

If we are unable to scale and improve our

product launch coordination, we could frustrate our customers and reduce or delay product sales;

If we are unable to scale and improve our product launch coordination, we could frustrate our customers and reduce or delay product sales;

Existing Products Impacted by New Introductions :

introduction of new products or product enhancements may shorten the life cycle of our existing products, or replace sales of some

of our current products, thereby offsetting the benefit of even a successful product introduction and may cause customers to defer

purchasing our existing products in anticipation of the new products and potentially lead to challenges in managing inventory of

existing products.

We may also provide price protection to some of our retailers as a result of our new product introductions and

reduce the prices of existing products.

Granting these rights exposes us to greater risk of operational losses, as they limit our

ability to react and adapt to changing economic conditions, such as rising costs caused by supply chain shortages.

If we fail to

effectively manage new product introductions, our revenue and ability to become profitable may be harmed;

The introduction of new products or product enhancements may shorten the life cycle of our existing products, or replace sales of some of our current products, thereby offsetting the benefit of even a successful product introduction and may cause customers to defer purchasing our existing products in anticipation of the new products and potentially lead to challenges in managing inventory of existing products.

We may also provide price protection to some of our retailers as a result of our new product introductions and reduce the prices of existing products.

Granting these rights exposes us to greater risk of operational losses, as they limit our ability to react and adapt to changing economic conditions, such as rising costs caused by supply chain shortages.

If we fail to effectively manage new product introductions, our revenue and ability to become profitable may be harmed;

Forecasting, Planning and Supply Chain Logistics :

the changes in and growth of our product portfolio, we will experience increased complexity in forecasting customer demand, in planning

for production, and in transportation and logistics management.

If we are unable to scale and improve our forecasting, planning,

production, and logistics management, we could frustrate our customers, lose product sales or accumulate excess inventory.

The drone industry relies on limited sources

to supply certain components and materials used in the manufacturing of drones.

Our intention is to purchase certain components from

suppliers based in the United States, which may lead us to pay higher prices, or select parts from a more limited number of suppliers

With the changes in and growth of our product portfolio, we will experience increased complexity in forecasting customer demand, in planning for production, and in transportation and logistics management.

If we are unable to scale and improve our forecasting, planning, production, and logistics management, we could frustrate our customers, lose product sales or accumulate excess inventory.

Because we rely on a limited number of suppliers, including one

key supplier, for our component parts our business may be adversely affected .

The drone industry relies on limited sources to

supply certain components and materials used in the manufacturing of drones.

Our intention is to purchase certain components or sub-components

from suppliers based in the United States, which may lead us to pay higher prices, or select parts from a more limited number of suppliers

relative to our competitors, which would adversely impact our gross margin and operating results.

Our operating results could be materially

adversely impacted if our suppliers do not provide the critical components used to assemble our products on a timely basis, at a reasonable

price, and in sufficient quantities.

Our ability to meet customer demand depends,

in part, on our ability to obtain timely and adequate delivery of components for our products.

All of the components that go into the

manufacturing are sourced from third-party suppliers.

In addition, the imposition of tariffs

by the United States and a trade war with China will significantly increase the cost of our component parts.

We will also be forced to

increase prices to our customers which could result in decreased sales, especially if there is an economic recession.

Our operating results

could be materially adversely impacted if our suppliers do not provide the critical components used to assemble our products on a timely

basis, at a reasonable price, and in sufficient quantities.

Our ability to meet customer demand depends, in

part, on our ability to obtain timely and adequate delivery of components for our products.

Some of the key components used to manufacture

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manufacturers generally purchase these components on our behalf from approved suppliers.

We are subject to the risk of shortages and

long lead times in the supply of these components and the risk that our suppliers discontinue or modify components used in our products.

In addition, the lead times associated with certain components are lengthy and preclude rapid changes in quantities and delivery schedules.

We are subject to the risk of shortages and long

lead times in the supply of these components and the risk that our suppliers discontinue or modify components used in our products.

addition, the lead times associated with certain components are lengthy and preclude rapid changes in quantities and delivery schedules.

If we lose access to components from a particular

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locate alternative suppliers of comparable quality at an acceptable price, or at all, and our business could be materially and adversely

In addition, if we experience a significant increase in demand for our products, our suppliers might not have the capacity

or elect not to meet our needs as they allocate components to other customers.

In addition, if we experience a significant increase in demand for our products, our suppliers might not have the capacity or

elect not to meet our needs as they allocate components to other customers.

Developing suitable alternate sources of supply for these

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Identifying a suitable supplier is an involved process that requires us to become satisfied with the supplier’s quality

control, responsiveness and service, financial stability, labor and other ethical practices, and if we seek to source materials from

new suppliers, there can be no assurance that we could do so in a manner that does not disrupt the manufacture and sale of our products.

control, responsiveness and service, financial stability, labor and other ethical practices, and if we seek to source materials from new

suppliers, there can be no assurance that we could do so in a manner that does not disrupt the manufacture and sale of our products.

Our reliance on single source, or a small number

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provide adequate supply or acceptable pricing to us on a long-term basis.

These suppliers could discontinue sourcing merchandise for

us at any time.

If any of these suppliers were to discontinue its relationship with us, or discontinue providing specific products to

us, and we are unable to contract with a new supplier that can meet our requirements, or if they or such other supplier were to suffer

a disruption in their production, we could experience disruption of our inventory flow, a decrease in sales and the possible need to

re-design our products.

Any such event could disrupt our operations and have an adverse effect on our business, financial condition and

results of operations.

These suppliers could discontinue sourcing merchandise for us

If any of these suppliers were to discontinue its relationship with us, or discontinue providing specific products to us,

and we are unable to contract with a new supplier that can meet our requirements, or if they or such other supplier were to suffer a disruption

in their production, we could experience disruption of our inventory flow, a decrease in sales and the possible need to re-design our

Any such event could disrupt our operations and have an adverse effect on our business, financial condition and results of operations.

Several new and alternative suppliers have begun offering components suitable for use in our products.

tooling and electronics, any one of these alternative components could be incorporated into our products but our costs could be higher,

they may offer less performance, and, as a result, make our products too costly and less desirable.

With new tooling and electronics,

any one of these alternative components could be incorporated into our products but our costs could be higher, they may offer less performance,

and, as a result, make our products too costly and less desirable.

If we are unable to attract, integrate and

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addition, new hires often require significant training and, in many cases, take significant time before they achieve full productivity.

We may incur significant costs to attract and retain qualified personnel, including significant expenditures related to salaries and

benefits and compensation expenses related to equity awards, and we may lose new employees to competitors or other companies before we

realize the benefit of our investment in recruiting and training them.

Moreover, new employees may not be or become as productive as

we expect, as we may face challenges in adequately or appropriately integrating them into our workforce and culture.

In addition, as

we move into new geographies, we will need to attract and recruit skilled personnel in those areas.

We have limited experience with recruiting

in geographic areas outside of the United States, and may face additional challenges in attracting, integrating and retaining international

If we are unable to attract, integrate and retain suitably qualified individuals who are capable of meeting our growing technical,

operational and managerial requirements, on a timely basis or at all, our business will be adversely affected.

Additionally, the Company

will operate out of multiple locations including Florida and Puerto Rico subjecting it to local labor market conditions.

We may incur significant costs to attract and retain qualified personnel, including significant expenditures related to salaries and benefits

and compensation expenses related to equity awards, and we may lose new employees to competitors or other companies before we realize

the benefit of our investment in recruiting and training them.

Moreover, new employees may not be or become as productive as we expect,

as we may face challenges in adequately or appropriately integrating them into our workforce and culture.

In addition, if we move into

new geographies, we will need to attract and recruit skilled personnel in those areas.

We have limited experience with recruiting in geographic

areas outside of the United States, and may face additional challenges in attracting, integrating and retaining international employees.

If we are unable to attract, integrate and retain suitably qualified individuals who are capable of meeting our growing technical, operational

and managerial requirements, on a timely basis or at all, our business will be adversely affected.

Our new manufacturing

business has inherent risks that may adversely impact us.

The Company has hired

a vice president of manufacturing whose role is to head up the Company’s proposed drone component manufacturing business.

also plans to lease an additional facility near its headquarters office in Orlando, Florida, at which it will manufacture NDAA compliant

drone motors.

There are inherent risks in connection with launching our component manufacturing business, which include:

· the need to expend working capital to purchase manufacturing equipment;

rent a facility and to hire personnel

with the requisite skills to fabricate our drones which could initially have an adverse effect on our working capital;

· to the extent that there are delays in receiving the requisite equipment necessary to manufacture our

drones and component parts, our customers for our products may seek alternative manufacturers and our manufacturing business could be

adversely affected;

· to the extent that any of the equipment that we purchase is sourced overseas, we may be impacted by tariffs

imposed by the current administration;

· the manufacturing equipment that we acquire may have bugs or may not be in sound working order and the

products we manufacture may not be manufactured in accordance with our or our customers specifications, which result in conflicts with

customers, the loss of revenues or damage to our reputation.

Risks Related to Our Sale of Drone-Related

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and rapidly growing industries include:

generating sufficient revenue to cover operating costs and sustain

generating sufficient revenue to cover operating costs and sustain operations;

acquiring and maintaining market share;

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successfully developing and commercially marketing new products;

complying with development regulatory requirements;

the possibility that favorable estimates or projections prove to be

responding effectively to changing technology, evolving industry standards,

and changing customer needs or requirements;

accessing the capital markets to raise additional capital, on reasonable

terms, if and when required to sustain operations or to grow the business.

complying with challenging supply chain issues which may arise;

complying with developing regulatory requirements;

the possibility that favorable estimates or projections prove to be incorrect;

responding effectively to changing technology, evolving industry standards, and changing customer needs or requirements;

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

As such, our current expectations and projects

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successfully, our business, financial condition, results of operations, and prospects may be adversely affected by such failure.

We face competition from larger companies

that have substantially greater resources which challenges our ability to establish market share, grow the business, and reach profitability.

The drone industry is attracting a wide range

of significantly larger companies which have substantially greater financial, management, research and marketing resources than we have.

The drone hardware and parts and components spaces are dominated by larger Chinese companies such as SZ DJI Technology Company, Ltd and

With respect to our FPV products, current and potential future competitors also include a variety of established, well-known

diversified consumer electronics manufacturers such as Samsung, Sony, LG Electronics (LGE), HTC, Lenovo, Epson, Yuneec, Boscam, Eachine,

Walkera, SkyZone, MicroLED and large software and other products companies such as Alphabet Inc.

We face competition from larger companies that

have substantially greater resources which challenges our ability to establish market share, grow the business, and reach profitability.

industry is attracting a wide range of significantly larger companies which have substantially greater financial, management, research

and marketing resources than we have.

The drone hardware and parts and components spaces are dominated by larger Chinese companies such

as SZ DJI Technology Company, Ltd and T-Motor.

With respect to our FPV products, current and potential future competitors also include

a variety of established, well-known diversified consumer electronics manufacturers such as Samsung, Sony, LG Electronics (LGE), HTC,

Lenovo, Epson, Yuneec, Boscam, Eachine, Walkera, SkyZone, MicroLED and large software and other products companies such as Alphabet Inc.

(Google), Microsoft, Facebook and Snap.

The large number of smaller and/or private companies focused on drone solutions also have competitive advantages over us which we may

struggle to overcome, particularly as we seek to further establish and grow our customer base.

Our competitors may be able to provide

customers with different or greater capabilities than we can provide, including technical qualifications, pricing, and key technical

Many of our competitors may utilize their greater resources to develop competing products and technologies, leverage their financial

strength to utilize economies of scale and offer lower pricing, and hire more qualified personnel by offering more generous compensation

On the other hand, other small business competitors may be able to offer more cost competitive solutions or may be able to

adapt more quickly to market developments due to lower overhead costs, leveraging of their professional relationships and networks, geographic

or specialty focuses or greater flexibility inherent in smaller operations and a lower number of personnel.

The large number of smaller and/or private companies focused on drone solutions also have competitive

advantages over us which we may struggle to overcome, particularly as we seek to further establish and grow our customer base.

Our competitors

may be able to provide customers with different or greater capabilities than we can provide, including technical qualifications, pricing,

and key technical support.

Many of our competitors may utilize their greater resources to develop competing products and technologies,

leverage their financial strength to utilize economies of scale and offer lower pricing, and hire more qualified personnel by offering

more generous compensation packages.

On the other hand, other small business competitors may be able to offer more cost competitive solutions

or may be able to adapt more quickly to market developments due to lower overhead costs, leveraging of their professional relationships

and networks, geographic or specialty focuses or greater flexibility inherent in smaller operations and a lower number of personnel.

Among product and service features that drive

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The Company’s ability to compete effectively

will depend on, among other things, the Company’s pricing models, quality of customer service, development of new and enhanced

products and services in response to customer demands and changing technology, reach and quality of sales and distribution channels and

capital resources.

Competition could lead to an inability to sustain sales levels, a reduction in the rate at which the Company adds

new customers, a decrease in the size of the Company’s market share and a decline in its customers and revenue.

In order to secure

sales, we may have to offer comparable products and services at lower pricing, which could adversely affect our operating margins.

inability to compete effectively against these larger companies could have a material adverse effect on our business, financial condition

and operating results.

will depend on, among other things, the Company’s pricing models, quality of customer service, development of new and enhanced products

and services in response to customer demands and changing technology, reach and quality of sales and distribution channels and capital

Competition could lead to an inability to sustain sales levels, a reduction in the rate at which the Company adds new customers,

a decrease in the size of the Company’s market share and a decline in its customers and revenue.

In order to secure sales, we may

have to offer comparable products and services at lower pricing, which could adversely affect our operating margins.

Our inability to

compete effectively against these larger companies could have a material adverse effect on our business, financial condition and operating

The development and manufacture of FPV goggles

encompasses several complex processes and several steps of our production processes are dependent upon third party vendors, supply chains,

the availability of printed circuit boards (PCBs), optics, and certain chips.

Any change in availability of these components, manufacturing

or design partners could result in delivery interruptions, which could adversely affect our operating results.

the availability of PCBs, optics, and certain chips.

Any change in availability of these components, manufacturing or design partners

could result in delivery interruptions, which could adversely affect our operating results.

As we continue to develop our products, we must

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continue to rely on such parties when we reach the manufacturing and marketing stages.

Our reliance on third-party manufacturers and

service providers will entail risks to which we may not be subject if our future operations were more vertically integrated, including:

the ongoing supply chain shortages, and any future supply chain and

logistics challenges that we or our vendors may face in the future, including due to the reliance on lithium-ion batteries and other

materials for our products;

the inability to meet any product specifications and quality requirements

consistently;

a delay or inability to procure or expand sufficient manufacturing

Our reliance on third-party manufacturers and service

providers will entail risks to which we may not be subject if our future operations were more vertically integrated, including:

the ongoing supply chain shortages, and any future supply chain and logistics challenges that we or our vendors may face in the future, including due to the reliance on lithium-ion batteries and other materials for our products;

the inability to meet any product specifications and quality requirements consistently;

the impact of tariffs, the availability of United States supply sources

and the impact of higher prices;

discontinuation or recall of products or component parts;

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costs and validation of new equipment and facilities required for scale-up;

a failure to comply with applicable regulatory and safety standards

and foreign markets in which we or our collaborators operate;

the inability to negotiate manufacturing and service agreements with

third parties under commercially reasonable terms;

the possibility of breach or termination or nonrenewal of agreements

with third parties in a manner that is costly or damaging to us;

we do not always execute definitive written agreements with our vendors,

particularly those located in China, which exposes us to possible disputes concerning the existence or terms of our agreements and

our intellectual property rights;

the reliance on a few sources, and sometimes, single sources for raw

materials and components, such that if we cannot secure a sufficient supply of these product components, we cannot manufacture and

sell products in a timely fashion, in sufficient quantities or under acceptable terms;

the lack of qualified backup suppliers for any raw materials currently

purchased from a small number of source suppliers;

operations of our third-party manufacturers, suppliers or service providers

could be disrupted by conditions unrelated to our business or operations, including the bankruptcy of the party;

a failure to comply with

applicable regulatory and safety standards in the United States and foreign markets in which we or our collaborators

the inability to negotiate manufacturing and service agreements with third parties under commercially reasonable terms;

the possibility of breach or termination or nonrenewal of agreements with third parties in a manner that is costly or damaging to us;

we do not always execute definitive written agreements with our vendors, particularly those located in China, which exposes us to possible disputes concerning the existence or terms of our agreements and our intellectual property rights;

the reliance on a few sources, and sometimes, single sources for raw materials and components, such that if we cannot secure a sufficient supply of these product components, we cannot manufacture and sell products in a timely fashion, in sufficient quantities or under acceptable terms;

operations of our third-party manufacturers, suppliers or service providers could be disrupted by conditions unrelated to our business or operations, including the bankruptcy of the party;

carrier disruptions or increased costs beyond our control;

possible misappropriation of our proprietary technology;

failing to deliver products under specified storage conditions and

in a timely manner.

Given our early stages, our product technology

and manufacturing processes are evolving, which can result in production challenges and difficulties.

We may be unable to produce our

products in sufficient quantity and quality to maintain existing customers and attract new customers.

In addition, we may experience

manufacturing problems which could result in delays in delivery of orders or product introductions.

Any of these events could lead to

production and marketing delays or failure or impact on our ability to successfully commercialize our products.

If we fail to contract

with third parties on favorable terms, coordinate with and supervise their services and contributions to our processes, and leverage

those relationships to deliver quality products in a timely manner to customers, we could experience reductions or delays in revenue,

reputational harm and diminished brand recognition, higher than expected expenses, or other adverse developments that would materially

harm our business.

Several steps of our production processes

are dependent upon certain critical machines and tools which could result in delivery interruptions and foregone revenues.

failing to deliver products under specified storage conditions and in a timely manner.

Our product technology and manufacturing processes

are evolving, which can result in production challenges and difficulties.

We may be unable to produce our products in sufficient quantity

and quality to maintain existing customers and attract new customers.

In addition, we may experience manufacturing problems which could

result in delays in delivery of orders or product introductions.

Any of these events could lead to production and marketing delays or

failure or impact on our ability to successfully commercialize our products.

If we fail to contract with third parties on favorable terms,

coordinate with and supervise their services and contributions to our processes, and leverage those relationships to deliver quality products

in a timely manner to customers, we could experience reductions or delays in revenue, reputational harm and diminished brand recognition,

higher than expected expenses, or other adverse developments that would materially harm our business.

Several steps of our production processes are

dependent upon certain critical machines and tools which could result in delivery interruptions and foregone revenues.

Fat Shark currently has no equipment redundancy

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and assembly processes.

Rotor Riot is limited by the number of personnel it has on staff to assemble custom drones.

This may, among other

things, delay delivery timelines or reduce our revenue and accounts receivable, and/or force us to rely more heavily on third parties

to meet customer deadlines or volume demands, either of which will adversely affect our results of operation and ability to achieve and

maintain profitability.

If we experience any significant disruption in manufacturing, a serious failure of a critical piece of equipment,

or an inability to hire personnel, we may be unable to supply products to our customers in a timely manner.

Interruptions in our manufacturing

could be caused by us or our partners including but not limited to equipment problems, the introduction of new equipment into the manufacturing

process or delays in the delivery of new manufacturing equipment.

Lead-time for delivery, installation, testing, repair and maintenance

of manufacturing equipment can be extensive.

We can provide no assurances that we will not lose potential sales or be able to meet production

orders due to future production interruptions in our manufacturing lines.

Rotor Riot is limited by the number of personnel it has on staff to assemble drones and drone parts.

among other things, delay delivery timelines or reduce our revenue and accounts receivable, and/or force us to rely more heavily on third

parties to meet customer deadlines or volume demands, either of which will adversely affect our results of operation and ability to achieve

and maintain profitability.

If we experience any significant disruption in assembling, a failure of a critical piece of equipment, or

an inability to hire personnel, we may be unable to supply products to our customers in a timely manner.

Interruptions could be caused

by us or our partners including but not limited to equipment problems, the introduction of new equipment into the manufacturing process

or delays in the delivery of new equipment.

Lead-time for delivery, installation, testing, repair and maintenance of equipment can be

We can provide no assurances that we will not lose potential sales or be able to meet production orders due to future production

interruptions in our manufacturing lines.

When we commence manufacturing drones, the same risks will apply.

We may not be able

to procure necessary key components for our products or may produce or purchase too much inventory.

The drone industry,

and the electronics industry as a whole, can be subject to business cycles.

During periods of growth and high demand for products, we

may not have adequate supplies of inventory on hand to satisfy customers’ needs.

Furthermore, during these periods of growth, our

suppliers may also experience high demand and, therefore, may not have adequate levels of the components and other materials that the

Company requires to manufacture products so that it can meet customers’ needs.

Our inability to secure sufficient components to

produce products for customers, or similar challenges faced by the drone manufacturers we serve, could negatively impact our sales and

operating results.

We may choose to mitigate this risk by increasing the levels of inventory for certain key components assuming we have

available cash resources.

Increased inventory levels can increase the potential risk for excess and obsolescence should our forecasts

fail to materialize or if there are negative factors impacting our customers’ end markets.

Such a risk becomes especially prevalent

during a recession and market downturn.

If we purchase too much inventory, we may have to record additional inventory reserves or write-off the

inventory, which could have a material adverse effect on our gross margins and on our results of operations.

We may not be able to keep pace with technological

and we depend on advances in technology by other companies.

The drone industry in general, and the market

for the sale of drone hardware and component parts in particular, continues to undergo significant changes, primarily due to technological

developments.

Because of the rapid growth and advancement of technology, shifting consumer tastes and the popularity and availability

of other forms of activities, it is impossible to predict the overall effect these factors could have on potential revenue from, and

profitability of the drone industry.

The development of both drone-related software and hardware is a costly, complex and time-consuming

process, and investments in product development often involve a long wait until a return, if any, can be achieved on such investment.

We might face difficulties or delays in the development process that will result in our inability to timely offer products that satisfy

the market, which might allow competing products to emerge during the development and certification process.

We anticipate making significant

investments in research and development relating to our products and technology, but such investments are inherently speculative and

require substantial capital expenditures.

Any unforeseen technical obstacles and challenges that we encounter in the research and development

process could result in delays in or the abandonment of product commercialization, may substantially increase development costs, and

may negatively affect our results of operations.

In the time it takes to develop or improve upon a product, that product may become obsolete.

It is impossible to predict the overall effect

these factors could have on our ability to compete effectively in a changing market, and if we are not able to keep pace with these technological

advances, then our revenues, profitability and results from operations may be materially adversely affected.

It is impossible to predict

the overall effect these factors could have on our ability to compete effectively in a changing market, and if we are not able to keep

pace with these technological advances, then our revenues, profitability and results of operations may be materially adversely affected.

However, if we struggle to adapt to an industry-shifting technological advancement or competitor offerings that render our products relatively

less attractive or obsolete, including due to competitive pressures we face relative to other drone companies, it could have a material

adverse effect on our business.

Further, we rely on and will continue to rely

on components of our products that are developed and produced by other companies over which we have limited control.

The commercial success

of certain of our planned future products will depend in part on advances in these and other technologies by other companies, and our

ability to procure them from such third parties in a timely manner and on economically feasible terms.

We may, from time-to-time, contract

with and support companies developing key technologies in order to accelerate the development of such products for our specific uses.

Such activities might not result in useful technologies or components for us.

The drone industry, and

the electronics industry as a whole, can be subject to business cycles.

During periods of growth and high demand for products, we may

not have adequate supplies of inventory on hand to satisfy customers’ needs.

The imposition of tariffs and a trade war may also

impact our supply chain for component parts from China.

Furthermore, during these periods of growth, our suppliers may also experience

high demand and, therefore, may not have adequate levels of the components and other materials that the Company requires to manufacture

products so that it can meet customers’ needs.

Our inability to secure sufficient components to produce products for customers,

or similar challenges faced by the drone manufacturers we serve, could negatively impact our sales and operating results.

We may choose

to mitigate this risk by increasing the levels of inventory for certain key components assuming we have available cash resources.

inventory levels can increase the potential risk for excess and obsolescence should our forecasts fail to materialize or if there are

negative factors impacting our customers’ end markets.

Such a risk becomes especially prevalent during a recession and market downturn.

If we purchase too much inventory, we may have to record additional inventory reserves or write-off the inventory, which could

have a material adverse effect on our gross margins and on our results of operations.

Lack of long-term purchase orders and commitments

from customers may lead to a rapid decline in sales.

Customers issue purchase orders or use our e-commerce

site solely at their own discretion, often shortly before the requested date of shipment.

Both our distributor relationships through

Fat Shark and our online sales through Rotor Riot entail short-term contracts under which customers are generally able to cancel orders

(without penalty) or delay the delivery of products on relatively short notice, regardless of whether or not we are in default under

our agreements.

The online business involves retail customers who are not likely to be repeat customers unless a need arises for updated

hardware or software solutions offered by us, which may not occur on a frequent basis, resulting in lack of reliable recurring revenue

in that part of our business.

from customers in our B2C business may lead to a rapid decline in sales.

Our B2C customers issue purchase orders or use

our e-commerce site solely at their own discretion, often shortly before the requested date of shipment.

Both our distributor relationships

and our online sales through Rotor Riot entail short-term contracts under which customers are generally able to cancel orders (without

penalty) or delay the delivery of products on relatively short notice, regardless of whether or not we are in default under our agreements.

The online business involves retail customers who are not likely to be repeat customers unless a need arises for updated hardware or software

solutions offered by us, which may not occur on a frequent basis, resulting in lack of reliable recurring revenue in that part of our

In addition, current customers may decide not to purchase products for any reason.

If those customers do

not continue to purchase products, sales volume could decline rapidly with little or no warning.

If those customers do not continue to purchase

products, sales volume could decline rapidly with little or no warning.

We cannot rely on long-term purchase orders or

commitments to protect from the negative financial effects of a decline in demand for products.

Fat Shark and Rotor Riot typically plan

production and inventory levels based on internal forecasts of customer demand, which are highly unpredictable and can fluctuate substantially.

Fat Shark resellers issue purchase orders but they have options to reschedule or pay cancellation fees.

The uncertainty of product orders

makes it difficult to forecast sales and allocate resources in a manner consistent with actual sales.

Moreover, expense levels and the

amounts invested in capital equipment and new product development costs are based in part on expectations of future sales and, if expectations

Unusual Machines typically plans production

and inventory levels based on internal forecasts of customer demand, which are unpredictable and can fluctuate substantially.

resellers issue purchase orders but they have options to reschedule or pay cancellation fees.

The uncertainty of product orders makes

it difficult to forecast sales and allocate resources in a manner consistent with actual sales.

Moreover, expense levels and the amounts

invested in capital equipment and new product development costs are based in part on expectations of future sales and, if expectations

regarding future sales are inaccurate, we may be unable to reduce costs in a timely manner to adjust for sales shortfalls.

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should not rely on revenues and operating results for any one quarter or year as an indication of future revenues or operating results.

If quarterly revenues or results of operations fall below expectations of investors or public market analysts, the price of our common

stock could fall substantially.

Our products require ongoing research and

development and may experience technical problems or delays, which could lead the business to fail.

Further, our B2C business is seasonal with retail sales peaking in the fourth quarter.

If quarterly revenues or results of operations

fall below expectations of investors or public market analysts, the price of our Common Stock could fall substantially.

Our products require ongoing research and development

and may experience technical problems or delays, which could lead the business to fail.

Our future research and development efforts will

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materially adversely affect our financial condition.

This is an acute risk given the relatively new and evolving nature of the drone

industry, and constant entrance of new market participants attempting to compete with us.

Similarly, if we invest in product research

and development efforts and a competitor brings a similar product to market before us, or alleges an infringement of their intellectual

property, our ability to market the product or compete effectively could be lost.

This is an acute risk given the relatively new and evolving nature of the drone industry,

and constant entrance of new market participants attempting to compete with us.

Similarly, if we invest in product research and development

efforts and a competitor brings a similar product to market before us, or alleges an infringement of their intellectual property, our

ability to market the product or compete effectively could be lost.

Any such development could materially harm our business.

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While disputes from time-to-time

are not uncommon, we may not be able to resolve such disputes on terms favorable to us which could have a material adverse impact on

our results of operations and financial condition.

are not uncommon, we may not be able to resolve such disputes on terms favorable to us which could have a material adverse impact on our

results of operations and financial condition.

Among other things, claims could be brought against

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occur, even absent a defect.

Additionally, because Fat Shark’s products are used as ancillary or supplemental components of a drone’s

functions, we may become involved in disputes arising from a third party’s actions or products that utilize its technology, even

if we were not the direct cause of the issue.

Any claims against us, regardless of their merit, could severely harm our financial condition,

strain our management and other resources.

Additionally, because our products are used as ancillary or supplemental components of a drone’s functions,

we may become involved in disputes arising from a third party’s actions or products that utilize its technology, even if we were

not the direct cause of the issue.

Any claims against us, regardless of their merit, could severely harm our financial condition, strain

our management and other resources.

Product liability claims might be brought against

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impairment of our business reputation;

costs due to related litigation especially since we do not have product

liability insurance;

costs due to related litigation especially since we do not have product liability insurance;

distraction of management’s attention from our primary business;

substantial monetary awards to claimants or civil penalties imposed

by governments;

regulatory scrutiny and product recalls, withdrawals or labeling, marketing

or promotional restrictions;

substantial monetary awards to claimants or civil penalties imposed by governments;

regulatory scrutiny and product recalls, withdrawals or labeling, marketing or promotional restrictions;

decreased demand for our products.

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results of operations and business.

Our business is highly dependent upon our

brand recognition and reputation, and the failure to maintain or enhance our brand recognition or reputation, including due to our high

reliance on online and social media platforms, would likely adversely affect our business and operating results.

Our business is highly dependent upon our brand

recognition and reputation, and the failure to maintain or enhance our brand recognition or reputation, including due to our high reliance

on online and social media platforms, would likely adversely affect our business and operating results.

We believe that maintaining and enhancing Fat

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will continue to increase as competition in our market continues to develop.

Our success in this area will depend on a wide range of

factors, some of which are beyond our control, including the following:

Our success in this area will depend on a wide range of factors,

some of which are beyond our control, including the following:

the efficacy of our marketing efforts;

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the quality and perceived value of our products;

our ability to obtain, maintain and enforce patents and trademarks

and other indicia of origin, including those we expect to obtain through the acquisition of Fat Shark and Rotor Riot, will be critical

to our business plan;

our ability to obtain,

maintain and enforce patents and trademarks and other indicia of origin, will be critical to our business plan;

our ability to successfully differentiate from competitors’ products;

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Each of these platforms requires that users adhere to strict terms and conditions

governing content, communications and other activities on their platform, which are generally heightened for commercial uses such as

If we or third parties such as drone pilots who Rotor Riot uses to market our products online fail to adhere to these requirements,

we could be limited, restricted or banned from some or all uses, which would materially adversely affect our business.

Future growth and ability to generate and

grow revenue and achieve or maintain profitability may be adversely affected if our marketing initiatives are not effective in generating

sufficient levels of brand awareness.

governing content, communications and other activities on their platform, which are generally heightened for commercial uses such as ours.

If we or third parties such as drone pilots who Rotor Riot uses to market our products online fail to adhere to these requirements, we

could be limited, restricted or banned from some or all uses, which would materially adversely affect our business.

Future growth and ability to generate and grow

revenue and achieve or maintain profitability may be adversely affected if our marketing initiatives are not effective in generating sufficient

levels of brand awareness.

Our future growth and profitability will depend

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convert awareness into actual product purchases;

effectively manage marketing costs (including creative and media) in

order to maintain acceptable operating margins and return on marketing investment;

successfully offer to sell products or license technology to third-party

companies for sale.

effectively manage marketing costs (including creative and media) in order to maintain acceptable operating margins and return on marketing investment;

successfully offer to sell products or license technology to third-party companies for sale.

Planned marketing expenditures are unknown and

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marketing expenditures on a cost-effective basis.

Future acquisitions could disrupt our business

and adversely affect our operating results, financial condition and cash flows.

We may make acquisitions that could be material

to our business, operating results, financial condition and cash flows.

Our ability as an organization to successfully acquire and integrate

technologies or businesses is unproven.

Acquisitions involve many risks, including the following:

an acquisition may negatively affect our operating results, financial

condition or cash flows because it may require us to incur charges or assume substantial debt or other liabilities, may cause adverse

tax consequences or unfavorable accounting treatment, may expose us to claims and disputes by third parties, including intellectual

property claims and disputes, or may not generate sufficient financial return to offset additional costs and expenses related to

the acquisition;

We may incur substantial costs and deploy a significant amount of time

and other resources towards a prospective transaction that does not close, either of which could materially harm our financial condition;

we may encounter difficulties or unforeseen expenditures in integrating

the business, technologies, products, contracts, personnel or operations of any company that we acquire, particularly if key personnel

of the acquired company decide not to work for us;

an acquisition may disrupt our ongoing business, divert resources,

increase our expenses and distract our management;

an acquisition may result in a delay or reduction of customer purchases

for both us and the company we acquired due to customer uncertainty about continuity and effectiveness of service from either company;

we may encounter difficulties in, or may be unable to, successfully

sell any acquired products;

an acquisition may involve the entry into geographic or business markets

in which we have little or no prior experience or where competitors have stronger market positions;

the potential strain on our financial and managerial controls and reporting

systems and procedures;

potential known and unknown liabilities associated with an acquired

company, including due to a non-disclosure or failure to identify such liabilities during the due diligence process prior to closing

an acquisition;

if we incur debt to fund such acquisitions, such debt may subject us

to material restrictions on our ability to conduct our business as well as financial maintenance covenants;

the risk of impairment charges related to potential write-downs of

acquired assets or goodwill in future acquisitions;

to the extent that we issue a significant amount of equity or convertible

debt securities in connection with future acquisitions, existing stockholders may be diluted and earnings per share may decrease;

managing the varying intellectual property protection strategies and other activities of an acquired

We may not succeed in addressing these or other

risks or any other problems encountered in connection with the integration of any acquired business.

The inability to successfully integrate

the business, technologies, products, personnel or operations of any acquired business, or any significant delay in achieving integration,

could have a material adverse effect on our business, operating results, financial condition and cash flows.

If we incur any future impairment in the carrying

value of our goodwill asset or write-off of our general intangibles, it could depress our stock price.

On a combined pro forma

basis, as of December 31, 2023, we had $14,793,080 of estimated goodwill and $1,252,888 of intangible assets on our balance sheet.

and intangible assets must be evaluated for impairment annually or more frequently if events indicate it is warranted.

If the carrying

value of a reporting unit asset exceeds its current fair value, the goodwill asset is considered impaired.

Events and conditions that

could result in impairment in the value of our goodwill and intangible assets include, but are not limited to, significant negative industry

or economic trends, significant decline in the Company’s stock price for a sustained period of time, significant decline in market

capitalization relative to net book value, limited funding that could delay development efforts, significant changes in the manner of

use of the assets or the strategy for the Company’s overall business, or safety issues that surface during development efforts,

or the end of our product life cycles that will result in impairment of good will.

We may in the future be required to record impairment

charges to write-off goodwill and intangible assets which is also related to our acquisition of Fat Shark and Rotor Riot.

Our stock price

could be negatively impacted should future impairments of our goodwill and/or intangible assets occur.

A valuation will be performed

related to the closing of the Business Combination based on final assets acquired and liabilities assumed and final amounts of goodwill

and other intangibles will be determined.

To the extent that we may be required to write-off the value of our goodwill and/or our intangibles

assets, our stock price could be adversely affected.

Product quality issues and a higher-than-expected

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Any such defect could result in harm to property or in personal injury.

If we determine that a product does not meet product quality

standards or may contain a defect, the launch of such product could be delayed until we remedy the quality issue or defect.

associated with any protracted delay necessary to remedy a quality issue or defect in a new product could be substantial.

Fat Shark and Rotor Riot generally provide a

one-year warranty on all of our products, except in certain European countries where it can be two years for some consumer-focused products.

The occurrence of any material defects in our products could expose us to liability for damages and warranty claims in excess of our

current reserves, and we could incur significant costs to correct any defects, warranty claims or other problems.

In addition, if any

of our product designs are defective or are alleged to be defective, we may be required to participate in a recall campaign.

due to the terms of our warranty policy, any failure rate of our products that exceeds our expectations may result in unanticipated losses.

Any negative publicity related to the perceived quality of our products could affect our brand image and decrease retailer, distributor

and consumer confidence and demand, which could adversely affect our operating results and financial condition.

Further, accidental damage

coverage and extended warranties are regulated in the United States at the state level and are treated differently within each state.

Additionally, outside of the United States, regulations for extended warranties and accidental damage vary from country-to-country.

in interpretation of the regulations concerning extended warranties and accidental damage coverage on a federal, state, local or international

level may cause us to incur costs or have additional regulatory requirements to meet in the future in order to continue to offer our

support services.

Our failure to comply with past, present and future similar laws could result in reduced sales of our products, reputational

damage, penalties and other sanctions, which could harm our business and financial condition.

If we determine that a product does not meet product quality standards

or may contain a defect, the launch of such product could be delayed until we remedy the quality issue or defect.

The costs associated

with any protracted delay necessary to remedy a quality issue or defect in a new product could be substantial.

We generally provide a one-year warranty on all

of our Fat Shark products, except in certain European countries where it can be two years for some consumer-focused products.

The occurrence

of any material defects in our products could expose us to liability for damages and warranty claims in excess of our current reserves,

and we could incur significant costs to correct any defects, warranty claims or other problems.

In addition, if any of our product designs

are defective or are alleged to be defective, we may be required to participate in a recall campaign.

In part due to the terms of our

warranty policy, any failure rate of our products that exceeds our expectations may result in unanticipated losses.

Any negative publicity

related to the perceived quality of our products could affect our brand image and decrease retailer, distributor and consumer confidence

and demand, which could adversely affect our operating results and financial condition.

Further, accidental damage coverage and extended

warranties are regulated in the United States at the state level and are treated differently within each state.

Additionally, outside

of the United States, regulations for extended warranties and accidental damage vary from country-to-country.

Changes in interpretation

of the regulations concerning extended warranties and accidental damage coverage on a federal, state, local or international level may

cause us to incur costs or have additional regulatory requirements to meet in the future in order to continue to offer our support services.

Our failure to comply with past, present and future similar laws could result in reduced sales of our products, reputational damage, penalties

and other sanctions, which could harm our business and financial condition.

Estimated future product

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other contingencies, these estimates could prove to be incorrect, such that our warranty obligations are higher than anticipated.

warranty obligations may be affected by product failure rates, claims levels, material usage and product re-integration and handling

Should actual product failure rates, claims levels, material usage, product re-integration and handling costs, defects, errors,

bugs or other issues differ from original estimates, we could end up incurring materially higher warranty or recall expenses than we

anticipate, which would materially adversely affect our business.

Risks Related to Intellectual Property

warranty obligations may be affected by product failure rates, claims levels, material usage and product re-integration and handling costs.

Should actual product failure rates, claims levels, material usage, product re-integration and handling costs, defects, errors, bugs or

other issues differ from original estimates, we could end up incurring materially higher warranty or recall expenses than we anticipate,

which would materially adversely affect our business.

Risks Related to Acquisitions

Because Aloft may not meet closing conditions we may not be successful

in consummating the Merger

On February 1, 2025, the Company entered into

a Merger Agreement to acquire Aloft.

The merger is for $14.5 million payable, almost entirely in the Company’s Common Stock with

the issuance of approximately 1,204,319 shares of Common Stock and approximately $100,000 in cash.

Customary closing conditions by the

parties must be completed before closing the merger which include Aloft obtaining stockholder approval, the delivery by Aloft of its audited

financial statements acceptable to the Company, and the receipt of certain third-party consents.

There can be no assurances that the Aloft

merger will close.

If we are successful in consummating the Merger,

the integration of our business and the Aloft business may disrupt or have a negative impact on our business.

Achieving the anticipated benefits of the Merger

will depend in significant part upon whether we are able to integrate our combined business in an efficient and effective manner.

actual integration may result in additional and unforeseen expenses, and the anticipated benefits of the integration plan may not be realized.

The companies may not be able to accomplish the integration process smoothly, successfully or on a timely basis.

The necessity of coordinating

geographically separated organizations, managements, systems of controls, and facilities and addressing possible differences in business

backgrounds, corporate cultures and management philosophies may increase the difficulties of integration.

We and Aloft operate numerous

systems and controls, including those involving management information, purchasing, accounting and finance, sales, billing, employee benefits,

payroll and regulatory compliance.

The integration of operations following the Merger and future acquisitions will continue to require

the dedication of significant management and external resources, which may distract management’s attention from the day-to-day business

of the Company and be costly.

Employee uncertainty and lack of focus during the integration process may also disrupt our business.

inability of management to successfully and timely integrate the operations of the two companies could have a material adverse effect

on our business and results of operations.

In addition, for the year ended December 31, 2024, Aloft had a net loss of $841,112 and net

cash used in operating activities was negative $419,591.

Accordingly, the Merger could have a negative impact on our cash flow.

Future acquisitions could disrupt our business

and adversely affect our operating results, financial condition and cash flows.

We may make acquisitions that could be material

to our business, operating results, financial condition and cash flows.

Our ability as an organization to successfully acquire and integrate

technologies or businesses is unproven.

Acquisitions involve many risks, including the following:

an acquisition may negatively affect our operating results, financial condition or cash flows because it may require us to incur charges or assume substantial debt or other liabilities, may cause adverse tax consequences or unfavorable accounting treatment, may expose us to claims and disputes by third parties, including intellectual property claims and disputes, or may not generate sufficient financial return to offset additional costs and expenses related to the acquisition;

We may incur substantial costs and deploy a significant amount of time and other resources towards a prospective transaction that does not close, either of which could materially harm our financial condition;

we may encounter difficulties or unforeseen expenditures in integrating the business, technologies, products, contracts, personnel or operations of any company that we acquire, particularly if key personnel of the acquired company decide not to work for us;

an acquisition may disrupt our ongoing business, divert resources, increase our expenses and distract our management;

an acquisition may result in a delay or reduction of customer purchases for both us and the company we acquired due to customer uncertainty about continuity and effectiveness of service from either company;

we may encounter difficulties in, or may be unable to, successfully sell any acquired products;

an acquisition may involve the entry into geographic or business markets in which we have little or no prior experience or where competitors have stronger market positions;

the potential strain on our financial and managerial controls and reporting systems and procedures;

potential known and unknown liabilities associated with an acquired company, including due to a non-disclosure or failure to identify such liabilities during the due diligence process prior to closing an acquisition;

if we incur debt to fund such acquisitions, such debt may subject us to material restrictions on our ability to conduct our business as well as financial maintenance covenants;

the risk of impairment charges related to potential write-downs of acquired assets or goodwill in future acquisitions;

to the extent that we issue a significant amount of equity or convertible debt securities in connection with future acquisitions, existing stockholders may be diluted and earnings per share may decrease;

managing the varying intellectual property protection strategies and other activities of an acquired company.

We may not succeed in addressing these or other

risks or any other problems encountered in connection with the integration of any acquired business.

The inability to successfully integrate

the business, technologies, products, personnel or operations of any acquired business, or any significant delay in achieving integration,

could have a material adverse effect on our business, operating results, financial condition and cash flows.

Risks Related to Intellectual Property Protection

If third-party intellectual property infringement

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Companies in the consumer electronics, wireless

communications, semiconductor, AI, IT, and display industries steadfastly pursue and protect intellectual property rights, often times

resulting in considerable and costly litigation to determine the validity of patents and claims by third parties of infringement of patents

or other intellectual property rights.

Other companies may hold or obtain patents or inventions or other proprietary rights in technology

necessary for our business.

If we are forced to defend against infringement claims, we may face costly litigation, diversion of technical

and management personnel, and product shipment delays, even if the allegations of infringement are unwarranted.

Numerous U.S.

and foreign issued patents and

pending patent applications, which are owned by third parties, exist in the fields in which we are pursuing product development and sales.

As the consumer electronics and drone industries expand and more patents are issued, the risk increases that our current and future products

may be subject to claims of infringement of the patent rights of third parties.

Third parties may assert that we are employing their

proprietary technology without authorization.

There may be third-party patents or patent applications with claims to inventions, materials,

engineering designs, or methods of manufacture related to the design, use or manufacture of our products.

communications, semiconductor, artificial intelligence, information technology, and display industries steadfastly pursue and protect

intellectual property rights, often times resulting in considerable and costly litigation to determine the validity of patents and claims

by third parties of infringement of patents or other intellectual property rights.

Other companies may hold or obtain patents or inventions

or other proprietary rights in technology necessary for our business.

If we are forced to defend against infringement claims, we may face

costly litigation, diversion of technical and management personnel, and product shipment delays, even if the allegations of infringement

are unwarranted.

Intellectual property litigation is often extremely expensive and entails high legal fees and costs of expert witnesses.

Numerous United States and foreign issued patents

and pending patent applications, which are owned by third parties, exist in the fields in which we are pursuing product development and

As the consumer electronics and drone industries expand and more patents are issued, the risk increases that our current and future

products may be subject to claims of infringement of the patent rights of third parties.

Third parties may assert that we are employing

their proprietary technology without authorization.

There may be third-party patents or patent applications with claims to inventions,

materials, engineering designs, or methods of manufacture related to the design, use or manufacture of our products.

Because patent applications

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attention from our business.

If we are unsuccessful in defending against patent

infringement claims in any jurisdiction where such a dispute arises, our products could be found to infringe on the intellectual property

rights of others.

If a claim of infringement against us succeeds, we may have to pay substantial damages, possibly including treble damages

and attorneys’ fees for willful infringement, pay royalties, redesign our infringing products or obtain one or more licenses from

third parties, which may be impossible or require substantial time and monetary expenditure.

The financial harm caused by any such development

with respect to intellectual property disputes and litigation will be heightened to the extent we do not possess, acquire or maintain

adequate insurance coverage for these contingencies now or in the future.

Further, if there is a successful claim of infringement against

us and we are unable to develop non-infringing technology or license the infringed or similar technology on a timely basis, or if we

are required to cease using one or more of our business or product names due to a successful trademark infringement claim against us,

it could materially adversely affect our business.

If a claim of patent infringement against us succeeds,

we may have to pay substantial damages, possibly including treble damages and attorneys’ fees for willful infringement, pay royalties,

redesign our infringing products or obtain one or more licenses from third parties, which may be impossible or require substantial time

and monetary expenditure.

The financial harm caused by any such development with respect to intellectual property disputes and litigation

will be heightened to the extent we do not possess, acquire or maintain adequate insurance coverage for these contingencies now or in

Further, if there is a successful claim of infringement against us and we are unable to develop non-infringing technology

or license the infringed or similar technology on a timely basis, or if we are required to cease using one or more of our business or

product names due to a successful trademark infringement claim against us, it could materially adversely affect our business.

We may depend on intellectual property rights

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We will be able to protect our intellectual property from unauthorized use by third parties only to the extent

that these assets are covered by valid and enforceable patents, trademarks, copyrights or other intellectual property rights, or are

effectively maintained as trade secrets.

With the closing of our IPO in February 2024, we have 12 issued patents, including four issued

in the United States, and nine pending patent Applications, including two pending in the United States which were assigned to a wholly-owned

subsidiary of the Company by UAV Patent Corp.

(“UAV”) a wholly-owned subsidiary of Red Cat, in each case with a non-exclusive,

non-sublicensable royalty free perpetual license back to UAV for Red Cat and its present and future subsidiaries to make, use and sell

products subject to such assigned patents and applications solely with respect to military and defense drone applications.

that these assets are covered by valid and enforceable patents, trademarks, copyrights or other intellectual property rights, or are effectively

maintained as trade secrets.

We currently have 26 issued patents, including five issued in the United States, and three pending patent

applications.

Certain patents were assigned to a wholly-owned subsidiary of the Company by UAV Patent Corp.

(“UAV”) a wholly-owned

subsidiary of Red Cat, in each case with a non-exclusive, non-sublicensable royalty free perpetual license back to UAV for Red Cat to

make, use and sell products subject to such assigned patents and applications solely with respect to military and defense drone applications.

We will apply for patents covering our products,

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Moreover, we cannot be certain whether:

we were the first to conceive, reduce to practice, invent, or file

the inventions covered by each of our issued patents and pending patent applications;

others will independently develop similar or alternative products,

technologies, services or designs or duplicate any of our products, technologies, services or designs;

any patents issued to us will provide us with any competitive advantages,

or will be challenged by third parties;

we will develop additional proprietary products, services, technologies

or designs that are patentable;

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

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

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

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

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

The patents we own or license and those that

may be issued to us in the future may be challenged, invalidated, rendered unenforceable or circumvented, and the rights granted under

any issued patents may not provide us with proprietary protection or competitive advantages.

Moreover, third parties could practice our

inventions in territories where we do not have patent protection or in territories where they could obtain a compulsory license to our

technology where patented.

Such third parties may then try to import products made using our inventions into the United States or other

We cannot ensure that any of our pending patent applications will result in issued patents, or even if issued, predict the

breadth, validity and enforceability of the claims upheld in our and other companies’ patents.

Further, patents have a limited

In the United States, the natural expiration of a patent is 20 years after it is filed, although various extensions may be

The life of a patent, and the protection it affords, is limited.

When the patent life has expired for a product, we will become

vulnerable to competition from competitors attempting to replicate the technology that was formerly patent protected.

Further, if we

encounter delays such as due to regulatory approvals, the time during which we will be able to market and commercialize a product under

patent protection could be reduced.

The patents we own or license and those that may

be issued to us in the future may be challenged, invalidated, rendered unenforceable or circumvented, and the rights granted under any

issued patents may not provide us with proprietary protection or competitive advantages.

Moreover, third parties could practice our inventions

in territories where we do not have patent protection or in territories where they could obtain a compulsory license to our technology

where patented.

Such third parties may then try to import products made using our inventions into the United States or other territories.

We cannot ensure that any of our pending patent applications will result in issued patents, or even if issued, predict the breadth, validity

and enforceability of the claims upheld in our and other companies’ patents.

Further, patents have a limited lifespan.

In the United

States, the natural expiration of a patent is 20 years after it is filed, although various extensions may be available.

The life of a

patent, and the protection it affords, is limited.

When the patent life has expired for a product, we will become vulnerable to competition

from competitors attempting to replicate the technology that was formerly patent protected.

Further, if we encounter delays such as due

to regulatory approvals, the time during which we will be able to market and commercialize a product under patent protection could be

Unauthorized parties may attempt to copy or otherwise

use aspects of our processes and products that we regard as proprietary.

While we plan to enter into written agreements with certain

of our employees and consultants with terms designed to protect our intellectual property rights, there cannot be any assurance that

these provisions will provide us with the protection sought.

Further, any third parties with whom we do not execute such agreements,

such as certain of our suppliers, could attempt to dispute our intellectual property rights or misappropriate our technology or trade

Policing unauthorized use of our proprietary information and technology is difficult and can be costly, and our efforts to do

so may not prevent misappropriation of our technologies.

We may become engaged in litigation to protect or enforce our patent and other

intellectual property rights or in International Trade Commission proceedings to abate the importation of goods that would compete unfairly

with our products and, if unsuccessful, these actions could result in the loss of patent or other intellectual property rights protection

for the key technologies on which our business strategy depends.

While we plan to enter into written agreements with certain of

our employees and consultants with terms designed to protect our intellectual property rights, there cannot be any assurance that these

provisions will provide us with the protection sought.

Further, any third parties with whom we do not execute such agreements, such as

certain of our suppliers, could attempt to dispute our intellectual property rights or misappropriate our technology or trade secrets.

Policing unauthorized use of our proprietary information and technology is difficult and can be costly, and our efforts to do so may not

prevent misappropriation of our technologies.

We may become engaged in litigation to protect or enforce our patent and other intellectual

property rights or in International Trade Commission proceedings to abate the importation of goods that would compete unfairly with our

products and, if unsuccessful, these actions could result in the loss of patent or other intellectual property rights protection for the

key technologies on which our business strategy depends.

We also rely in part on unpatented proprietary

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We plan to require employees, contractors, consultants, financial advisors, suppliers, and strategic partners to enter into confidentiality

and intellectual property assignment agreements (as appropriate), but these agreements may not provide sufficient protection for our

trade secrets, know-how or other proprietary information.

The laws of certain countries do not protect

intellectual property and proprietary rights to the same extent as the laws of the United States and, therefore, in certain jurisdictions

including China, we may be unable to protect our products, services, technologies and designs adequately against unauthorized third-party

copying, infringement or use, which could adversely affect our competitive position.

To protect or enforce our intellectual property

rights, we may initiate proceedings or litigation against third parties.

Such proceedings or litigation may be necessary to protect our

trade secrets or know-how, products, technologies, designs, brands, reputation, likeness, authorship works or other intellectual property

Such proceedings or litigation also may be necessary to determine the enforceability, scope and validity of the proprietary rights

Any proceedings or lawsuits that we initiate could be expensive, take significant time and divert management’s attention

from other business concerns.

Additionally, we may provoke third parties to assert claims against us, which could invalidate or narrow

the scope of our own intellectual property rights.

We may not prevail in any proceedings or lawsuits that we initiate and the damages

or other remedies awarded, if any, may be significant.

The occurrence of any of these events may adversely affect our business, financial

condition and operating results.

and intellectual property assignment agreements (as appropriate), but these agreements may not provide sufficient protection for our trade

secrets, know-how or other proprietary information.

The laws of certain countries do not protect intellectual

property and proprietary rights to the same extent as the laws of the United States and, therefore, in certain jurisdictions including

China, we may be unable to protect our products, services, technologies and designs adequately against unauthorized third-party copying,

infringement or use, which could adversely affect our competitive position.

To protect or enforce our intellectual property rights, we

may initiate proceedings or litigation against third parties.

Such proceedings or litigation may be necessary to protect our trade secrets

or know-how, products, technologies, designs, brands, reputation, likeness, authorship works or other intellectual property rights.

proceedings or litigation also may be necessary to determine the enforceability, scope and validity of the proprietary rights of others.

Any proceedings or lawsuits that we initiate could be expensive, take significant time and divert management’s attention from other

business concerns.

Additionally, we may provoke third parties to assert claims against us, which could invalidate or narrow the scope

of our own intellectual property rights.

We may not prevail in any proceedings or lawsuits that we initiate and the damages or other remedies

awarded, if any, may be significant.

The occurrence of any of these events may adversely affect our business, financial condition and

operating results.

We will register for certain of our trademarks

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If we are not successful in arguing that there is no likelihood

of confusion between our marks and the marks that are the subject of the other applications or registrations owned by third parties,

our applications may be denied, preventing us from obtaining trademark registrations and adequate protection for our marks in the relevant

of confusion between our marks and the marks that are the subject of the other applications or registrations owned by third parties, our

applications may be denied, preventing us from obtaining trademark registrations and adequate protection for our marks in the relevant

jurisdictions, which could impact our ability to build our brand identity and market our products and services in those jurisdictions.

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and prevent consumer confusion.

If we lose our rights under our third-party

technology licenses, our operations could be adversely affected.

Our current or future products may depend in

part on technology rights licensed from third parties.

We could lose our exclusivity or other rights to use the technology under our

licenses if we fail to comply with the terms and performance requirements of the licenses.

In addition, certain licensors may terminate

a license upon our breach and have the right to consent to sublicense arrangements.

If we were to lose our rights under any of these

licenses, or if we were unable to obtain required consents to future sublicenses, we could lose a competitive advantage in the market,

and may even lose the ability to commercialize certain products or technologies completely.

Either of these results could substantially

decrease our revenues.

Further, to the extent

we need to obtain licenses from third parties to advance our research and development efforts or commercialize or improve upon our products,

we may fail to obtain these licenses at a reasonable cost or on reasonable terms, if at all.

In that event, we would be unable to further

develop and commercialize those products, which could harm our business significantly.

The licensing and acquisition of third-party

intellectual property rights is a competitive practice, and companies that may be more established, or have greater resources than we

do, may also be pursuing strategies to license or acquire third-party intellectual property rights that we may consider necessary or

attractive in order to develop and commercialize our products.

More established companies may have a competitive advantage over us due

to their larger size and cash resources or greater hardware or software development, production and commercialization capabilities.

may not be able to successfully complete such negotiations and ultimately acquire the rights to the intellectual property surrounding

product candidates that we may seek to acquire, in which case our business could be harmed.

Significant inflation could adversely affect our business and financial

The high rate of inflation and resulting pressures

on costs and pricing of business such as ours focused on the manufacture and sale of electronics products could adversely impact our

business and financial results.

While inflation has created some salary pressure with our employees who wish to mitigate the impact of

inflation, we have not yet suffered inflationary pressures in procurement.

on costs and pricing of business such as ours focused on the manufacture and sale of electronics products could adversely impact our business

and financial results.

While inflation has created some salary pressure with our employees who wish to mitigate the impact of inflation,

we have not yet suffered inflationary pressures in procurement of our products.

A rise in inflation can adversely affect us by increasing

our operating costs, including by increasing the costs of materials, freight and labor, which have already been under pressure due to

supply chain constraints and the effects of the COVID-19 pandemic and the shortage of chips.

The Company has not identified, planned

or taken any actions to mitigate inflationary pressures.

Further, in the U.S.

the Federal Reserve has responded by increasing interest

our operating costs, including by increasing the costs of materials, freight and labor.

The Company has not identified, planned or taken

any actions to mitigate inflationary pressures.

Further, in the United States, the Federal Reserve has responded by increasing interest

rates to combat inflation, however such increases may result in a reduced demand for our products and/or an economic downturn.

inflationary environment, or any recession or economic downturn that may result, we may be unable to adjust our business is a manner

that adequately addresses these challenges, and these developments could materially adversely affect our business, results of operations

and financial condition.

Risks Related to Government Regulation

of Our Operations and Industry

Failure to obtain necessary regulatory approvals

inflationary environment, or any recession or economic downturn that may result, we may be unable to adjust our business is a manner that

adequately addresses these challenges, and these developments could materially adversely affect our business, results of operations and

financial condition.

Risks Related to Government Regulation of

Our Operations and Industry

If we fail to have other drone products approved

for the Department of Defense’s Blue Framework, our future results of operations may be materially and adversely affected.

We have had multiple United States made drone products that have been

approved and added to the Department of Defense’s Blue Framework.

By virtue of being on the Blue Framework, it enables us to receive

orders from agencies of the United States federal government.

It also provides credibility to potential B2B customers who might be interested

in purchasing drone components from us.

We are seeking to add additional products to the Blue List.

If these additional products are not

added to the Blue Framework, our future results of operations may be materially and adversely affected.

If we fail to obtain necessary regulatory approvals

from the FAA or other governmental agencies by us, our customers, or others who use our products, or limitations put on the use of unmanned

aircraft systems, or “UAS,” in response to public privacy or safety concerns, may prevent us from expanding the sales of

our drone solutions in the United States.

aircraft systems, or UAS in response to public privacy or safety concerns, may prevent us from expanding the sales of our drone solutions

in the United States.

The regulation of UAS

and drone solutions and component parts such as those we offer is subject to substantial change, with regulators including potential

alterations, enhancements and additions to existing laws and regulations, and the ultimate treatment is uncertain.

A substantial majority

of our products are subject to drone-related regulations enforced by the FAA, either directly or due to their inclusion in UAS offered

by third parties.

Further, even if some of our operations or products are not directly subject to such regulations, Fat Shark’s

customers’ operations of UAS that includes our products and technology are subject to those regulations, and their failure to comply

will adversely affect our ability to sell to them in the future.

Further, adverse regulatory actions such as enforcement proceedings

affecting customers and other third parties with which we do business can also adversely affect us, even if the violation or harm alleged

did not arise from our conduct or products.

Generally, under current FAA regulations the failure to register a UAS, including model aircraft,

in accordance with these rules may result in regulatory and criminal sanctions.

and drone solutions and component parts such as those we offer is subject to substantial change, with regulators including potential alterations,

enhancements and additions to existing laws and regulations, and the ultimate treatment is uncertain.

A substantial majority of our products

are subject to drone-related regulations enforced by the FAA, either directly or due to their inclusion in UAS offered by third parties.

Further, adverse regulatory actions such as enforcement proceedings affecting customers and other third parties with which we do business

can also adversely affect us, even if the violation or harm alleged did not arise from our conduct or products.

Generally, under current

FAA regulations the failure to register a UAS, including model aircraft, in accordance with these rules may result in regulatory and criminal

The FAA may assess civil penalties up to $33,333.

penalties include fines of up to $250,000 and/or imprisonment for up to three years.

However, the FAA and other government bodies and

agencies are considering changes to address the drone industry, which is relatively new and rapidly evolving.

In addition, there exists

public concern regarding the privacy and safety implications of the use of UAS.

This concern has included calls to develop explicit written

policies and procedures establishing usage limitations.

We cannot assure you that the response from regulatory agencies, customers and

privacy advocates to these concerns will not delay or restrict the adoption of UAS and related products and technologies in certain markets.

These developments, and any additional regulatory or other burdens imposed on our business and industry due to public health and safety

or other concerns presently faced by the drone industry, could harm us and our customers and suppliers by increasing compliance costs

and restricting our operations and product offerings and uses, which could materially adversely affect us.

Rising threats of international tariffs, including

tariffs applied to goods between the U.S.

and China, may materially and adversely affect our business.

We are heavily dependent on Chinese imports for

our products and operations.

For example, a substantial majority of Rotor Riot’s products are manufactured, directly and indirectly,

using Chinese vendors.

Fat Shark’s primary contract manufacturer is Shenzhen Fat Shark Technology Ltd.

(“Supplier”),

which is located in Shenzhen, China and provides product manufacturing services, including raw material procurement.

The majority owner

of this entity is the wife of Fat Shark’s founder.

We do not have any written agreements with the Supplier and rely only on purchase

In addition, Fat Shark’s principal contract manufacturer is located in China.

We do not have any written agreements with

our other suppliers in China.

We rely only on purchase orders.

There are inherent risks and uncertainties regarding the enforcement of

our rights with respect to our oral agreements and purchase orders.

Should our suppliers in China fail to honor our oral agreements and

purchase orders we will not have any recourse against such suppliers under Chinese law.

The legal system in China and the enforcement

of laws, rules and regulations in China can change quickly and the Chinese government may intervene or influence the operations of our

suppliers which would adversely impact our business insofar as we would have to seek other suppliers outside of China and such suppliers

would most likely charge us more for our products.

Rising threats of international tariffs, including tariffs applied to goods traded

between the U.S.

and China, could materially and adversely affect our business and results of operations.

Since the beginning of 2018,

there has been increasing rhetoric, in some cases coupled with legislative or executive action, from several U.S.

and foreign leaders

regarding the possibility of instituting tariffs on the foreign imports of certain materials and products.

During this trend, the U.S.

and China imposed tariffs or announced proposed tariffs to be applied in the future to certain of each other’s exports.

in 2019, the Trump administration imposed tariffs on imports of electronics products, including drones and component parts, of up to

These tariffs apply to the vast majority of Rotor Riot’s and Fat Shark’s respective inventory, and Rotor Riot has in

the past been, and either or both entities may in the future be, forced to implement price increases to adjust to the higher costs of

production and sale, which imposes the risk of reduced demand for such products and lower sales and resulting revenue.

Further, we do

not know if the Biden administration or any subsequent administration will implement any, or alter current tariffs, in a manner adverse

These tariffs or any further costs or restrictions imposed on products that we import, could require us to raise our prices, which

may result in the loss of customers and harm our business, particularly since we rely on consumer spending and our products are typically

considered non-essential, and purchases are therefore highly price sensitive.

In addition, changes in political conditions

in China and changes in the state of China-U.S.

relations, including any tensions relating to potential military conflict between China

and Taiwan, are difficult to predict and could adversely affect the operations or financial condition of the Company.

In addition, because

of our involvement in the Chinese market, any deterioration in political or trade relations might cause a public perception in the U.S.

or elsewhere that might cause our business to become less attractive.

Such an impact could adversely affect our revenues and cash flows.

Criminal penalties include fines of up to $250,000 and/or imprisonment for

up to three years.

However, the FAA and other government bodies and agencies are considering changes to address the drone industry, which

is relatively new and rapidly evolving.

In addition, there exists public concern regarding the privacy and safety implications of the

This concern has included calls to develop explicit written policies and procedures establishing usage limitations.

assure you that the response from regulatory agencies, customers and privacy advocates to these concerns will not delay or restrict the

adoption of UAS and related products and technologies in certain markets.

These developments, and any additional regulatory or other burdens

imposed on our business and industry due to public health and safety or other concerns presently faced by the drone industry, could harm

us and our customers and suppliers by increasing compliance costs and restricting our operations and product offerings and uses, which

could materially adversely affect us.

We are subject to a number of supply risks

concerning our Blue UAS products which could adversely impact our ability to deliver such products to the United States Department of

Defense and commercial customers.

We purchase certain Blue UAS products from a privately-held

United States based manufacturer pursuant to purchase orders.

We are subject to a number of risks including:

We do not have a supply agreement requiring the manufacturer to produce a specified volume per year;

The manufacturer expects to deliver product quantities to us over a pre-determined period which increases the likelihood we may be unable to meet a large order from one or more customers;

Beyond the initial purchase orders, we have no assurances on future pricing which means future costs could adversely affect our marketing and future gross margins;

Because we have no non-compete from the manufacturer,

it could manufacture the same products for our competitors;

We have no representations from the manufacturer on its intellectual property ownership of our products;

Because we are not the manufacturer, we are subject to a number of risks including timely deliveries and quality control.

We are or may become subject to governmental

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to compete in international markets.

While we understand Fat Shark and/or Rotor Riot

have had minimal sales outside of the U.S., we expect to seek to market our products outside of the U.S.

and various foreign

governments have imposed controls, export license requirements and restrictions on the import or export of some technologies.

are subject to U.S.

export controls, including the Commerce Department’s Export Administration Regulations and various economic

and trade sanctions regulations established by the Treasury Department’s Office of Foreign Assets Controls, and exports of our

products must be made in compliance with these laws.

Furthermore, U.S.

export control laws and economic sanctions prohibit the provision

of products and services to countries, governments, and persons targeted by U.S.

Even though we take precautions to prevent

our products from being provided to targets of U.S.

sanctions, our products, including our firmware updates, could be provided to those

targets or provided by our customers despite such precautions.

While we understand we have had minimal sales

outside of the United States, we expect to seek to market our products outside of the United States.

During 2024, we commenced sales of

our Blue UAS products including to a European customer as part of a larger order.

The United States and various foreign governments have

imposed controls, export license requirements and restrictions on the import or export of some technologies.

Our products are subject

to United States export controls, including the Commerce Department’s Export Administration Regulations and various economic and

trade sanctions regulations established by the Treasury Department’s Office of Foreign Assets Controls, and exports of our products

must be made in compliance with these laws.

Furthermore, United States export control laws and economic sanctions prohibit the provision

of products and services to countries, governments, and persons targeted by United States sanctions.

Even though we take precautions to

prevent our products from being provided to targets of United Staets sanctions, our products, including our firmware updates, could be

provided to those targets or provided by our customers despite such precautions.

Further, the manufacture and sale of our products

in certain states and countries may subject us to environmental and other regulations.

For example, many of Fat Shark and Rotor Riot’s

products rely on electricity generated by lithium-ion batteries, which implicate a variety of environmental and other regulations designed

to control the production, use, and transportation of hazardous materials such as lithium and other components and minerals deployed

in these batteries.

In addition, the increasing global focus on climate change, including greenhouse gas (“GHG”) emissions,

has resulted in legislative and regulatory efforts to address the causes and impacts of climate change, and any new and more strict laws

and regulations to reduce GHG emissions and address other aspects of climate change, including carbon taxes, cap and trade programs,

GHG reduction requirements, requirements for the use of green energy, and changes in procurement requirements, may result in increased

operational and compliance obligations, which could adversely affect our financial condition and results of operations.

For example, many of our products rely on electricity

generated by lithium-ion batteries, which implicate a variety of environmental and other regulations designed to control the production,

use, and transportation of hazardous materials such as lithium and other components and minerals deployed in these batteries.

the global focus on climate change, including greenhouse gas (“GHG”) emissions, has resulted in legislative and regulatory

efforts to address the causes and impacts of climate change, and any new and more strict laws and regulations to reduce GHG emissions

and address other aspects of climate change, including carbon taxes, cap and trade programs, GHG reduction requirements, requirements

for the use of green energy, and changes in procurement requirements, may result in increased operational and compliance obligations,

which could adversely affect our financial condition and results of operations.

Our failure to obtain required import or export

approval or to comply with other applicable domestic or international laws and regulations for our products or operations could harm

our international and domestic sales and adversely affect our revenue, or could subject us to costly proceedings, penalties or damages

and negative publicity.

If the courts uphold the SEC’s climate

change rules, we will incur additional costs which may materially and adversely affect our operating results and financial condition.

In March 2024, the SEC enacted comprehensive

Climate Change Rules.

Third parties immediately filed a lawsuit challenging the legality of these Rules and a federal Court of Appeals

has issued a stay which means the SEC cannot presently enforce these Rules.

If ultimately the Courts uphold these Rules, compliance will

require us to spend material sums to be able to comply once they become applicable to us.

Because of our small size, the additional costs

may have a material adverse effect upon our future operating results and financial condition.

If we fail to comply with U.S.

laws related to privacy, data security, and data protection, it could adversely affect our operating results and financial condition.

approval or to comply with other applicable domestic or international laws and regulations for our products or operations could harm our

international and domestic sales and adversely affect our revenue, or could subject us to costly proceedings, penalties or damages and

negative publicity.

If we fail to comply with United States and

foreign laws related to privacy, data security, and data protection, it could adversely affect our operating results and financial condition.

We, either directly or through our customers,

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The application of these laws and regulations

can arise from our e-commerce platform, social media activities, drone technology and applications, relationships with third parties

and their operations, or from other activities we undertake now or that we may undertake in the future.

can arise from our e-commerce platform, social media activities, drone technology and applications, relationships with third parties and

their operations, or from other activities we undertake now or that we may undertake in the future.

Data privacy and protection regulations

are frequently broad in terms of scope of the information protected, activities affected, and geographic reach.

In particular, there are numerous U.S.

state, and local laws and regulations and foreign laws and regulations regarding privacy and the collection, sharing, use, processing,

In particular, there are numerous United States

federal, state, and local laws and regulations and foreign laws and regulations regarding privacy and the collection, sharing, use, processing,

disclosure, and protection of personal data.

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The CCPA requires

covered companies to provide California consumers with new disclosures and will expand the rights afforded consumers regarding their

covered companies to provide California consumers with new disclosures and will expand the rights afforded consumers regarding their data.

Fines for noncompliance may be up to $7,500 per violation.

The costs of compliance with, and other burdens imposed by, the GDPR,

CCPA, and similar laws may limit the use and adoption of our products and services and/or require us to incur substantial compliance

costs, which could have an adverse impact on our business.

The costs of compliance with, and other burdens imposed by, the GDPR, CCPA,

and similar laws may limit the use and adoption of our products and services and/or require us to incur substantial compliance costs,

which could have an adverse impact on our business.

Since the CCPA was enacted,

currently has at least 15 states – California, Colorado, Connecticut, Delaware, Florida, Indiana, Iowa, Montana,

New Hampshire, New Jersey, Oregon, Tennessee, Texas, Utah and Virginia, that have comprehensive data privacy laws in place, or enacted

comprehensive data privacy laws set to soon take effect.

An additional seven states have enacted narrower privacy laws – Maine,

Michigan, Minnesota, Nevada, New York, Vermont, and Washington.

So far during the 2023-24 legislative cycle, at least 15 states have

introduced privacy bills that address a range of issues, including protecting biometric identifiers and health data, or governing the

activities of specific entiteis.

However, this patchwork approach to privacy legislation could pose compliance and liability risks for

companies that have multistate operations.

Proposed bills in various states have similar rights in preexisting privacy legislation but

differ in implementation and enforcement.

Additionally, in June 2022 the American Data Privacy and Protection Act was introduced in the

House of Representatives but has not yet been adopted.

As introduced this proposed legislation would establish requirements for

how companies handle personal data by, among other things, limiting the collection, processing, and transfer of personal data to that

which is reasonably necessary to provide a requested product or service, prohibiting companies from transferring individuals’ personal

data without their affirmative express consent, establishing a right to access, correct, and delete personal data, requiring companies

to provide individuals with a means to “opt out” of advertising, requiring companies to implement security practices aimed

at protecting personal data, and imposing enforcement actions and the possibility of civil proceedings for violations.

Proposed federal

legislation, like the American Data Privacy and Protection Act, will likely continue to be debated and, at some point, may be enacted

in some form.

the United States currently has at least 20 states – California, Colorado, Connecticut, Delaware, Indiana, Iowa, Kentucky, Maryland,

Minnesota, Montana, Nebraska, New Hampshire, New Jersey, Oregon, Rhode Island, Tennessee, Texas, Utah and Virginia, that have comprehensive

data privacy laws in place, or enacted comprehensive data privacy laws set to soon take effect.

An additional seven states have enacted

narrower privacy laws – Florida, Maine, Michigan, Nevada, New York, Vermont, Washington and Wisconsin.

During the 2024 legislative

cycle, at least six states have introduced comprehensive privacy bills that address a range of issues, including protecting biometric

identifiers and health data, or governing the activities of specific entities.

However, this patchwork approach to privacy legislation

could pose compliance and liability risks for companies that have multistate operations.

Proposed and enacted bills in various states

have similar rights in preexisting privacy legislation but differ in implementation and enforcement.

In June 2024, the American Privacy

Rights Act of 2024 was introduced in the United States House of Representatives and was subsequently referred to the House Committee on

Energy and Commerce has and is not yet adopted.

As introduced, this proposed legislation would establish requirements for how companies

handle personal data by, among other things, limiting the collection, processing, and transfer of personal data, prohibiting companies

from transferring individuals’ personal data without their affirmative express consent, establishing a right to access, correct,

and delete personal data, requiring companies to provide individuals with a means to “opt out” of the transfer of non-sensitive

covered data and the right to opt out of the user of their personal information for targeted advertising, requiring companies to implement

security practices aimed at protecting personal data, and imposing enforcement actions and the possibility of civil proceedings for violations.

Proposed federal legislation, will likely continue to be debated and, at some point, may be enacted in some form.

We intend to strive to comply with all applicable

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in a manner that is inconsistent from one jurisdiction to another and may conflict with other rules or our practices.

Any failure or

perceived failure by us, customers, or third-party vendors or end-users involved with our products to comply with our privacy or security

policies or privacy-related legal obligations, or any compromise of security that results in the unauthorized release or transfer of

personal data, may result in governmental enforcement actions, litigation, or negative publicity, and could have an adverse effect on

our operating results and financial condition.

Any failure or perceived

failure by us, customers, or third-party vendors or end-users involved with our products to comply with our privacy or security policies

or privacy-related legal obligations, or any compromise of security that results in the unauthorized release or transfer of personal data,

may result in governmental enforcement actions, litigation, or negative publicity, and could have an adverse effect on our operating results

and financial condition.

Governments are continuing to focus on privacy

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Risks Related To Our Common Stock

Because Red Cat and

our Principal Stockholder own 46.79% and 3.62% of our outstanding common stock after the IPO, the voting power of other stockholders

is limited and Red Cat will likely be able to control our business, elect our Board of Directors and otherwise control the Company which

control may place their interests ahead of our stockholders’ interests.

With the consummation

of the IPO in February 2024 and partial conversions of Series B preferred shares to common shares, Red Cat owns 46.79% of our outstanding

common stock and Mr.

Jeffrey Thompson, the Chief Executive Officer of Red Cat, owns 3.62% of our common stock.

Thompson does not

have any power to vote the Red Cat shares of our common stock.

Red Cat has delegated the voting power to a special committee of its Board

of Directors on which Mr.

Thompson is not a member, although the voting power could be changed in the future.

Because of Red Cat’s

ownership it is clear even without Mr.

Thompson voting with them that they can control the Company for the foreseeable future.

has the ability to have a substantial influence on matters submitted to our stockholders for approval, including the election and removal

of directors and the approval of any merger, consolidation or sale of all or substantially all of our assets.

As a result, our other

stockholders including our management and Board of Directors may have little or no influence over matters submitted for stockholder approval.

In addition, the ownership of such stockholders could preclude any unsolicited acquisition of us, and consequently, adversely affect

the price of our common stock.

Red Cat may make decisions that favor Red Cat and are adverse to your interests.

Further, it is possible

that if we filed an indemnification claim, Red Cat and Mr.

Thompson acting together could simply remove our Board of Directors and dismiss

the indemnification claim or lawsuit.

Because the Purchase Price for Fat Shark and

Rotor Riot exceeds an independent valuation that Red Cat received for the enterprise value of the target companies, you may lose

all or part of your investment.

In connection with the acquisition, we paid Red

Cat the Purchase Price of $20.0 million to acquire Fat Shark and Rotor Riot comprised of (i) $1.0 million in cash, (ii) the $2.0 million

Note issued by the Company to Red Cat, and (iii) $17.0 million of the Company’s common stock.

In November 2020, Red Cat acquired

Fat Shark for a purchase price of $8.4 million and in January 2020, Red Cat acquired Rotor Riot for a total purchase price of $2.0 million.

In connection with the transaction, Red Cat received a valuation from a valuation expert engaged by Red Cat that estimated that Fat Shark

and Rotor Riot had a combined enterprise value range of $5.1 million to $5.7 million, as of November 30, 2022.

While the Purchase Price

was negotiated in good faith between our Chief Executive Officer at that time and an independent special committee of the Red Cat board

of directors, the Company does not intend to obtain an independent valuation on the assets and liabilities assumed.

We anticipate to

perform a valuation during the second quarter of 2024 based on final assets acquired and liabilities assumed and final amounts of goodwill

and other intangibles.

See also the “ Risk Factors – If we incur any future impairment in the carrying

value of our goodwill asset or write-off our general intangibles, it could depress our stock price.” Accordingly, if the Company’s

management is unsuccessful in implementing its growth strategy to grow its business to justify what it is paying for the Purchase Price,

it is possible that an investor may lose all or part of its investment.

The market price of our shares of Common Stock

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may fluctuate and has fluctuated significantly in response to factors, some of which are beyond our control, including:

our ability to integrate the operations of Fat Shark and Red Cat;

the conversion of formerly outstanding preferred stock and exercise

of warrants and the sales of Common Stock issued under such instruments;

our ability to generate material sales in the B2B sector;

the announcement of new products by our competitors;

our ability to obtain patents for our products and defend our intellectual property from misappropriation

and competitive use;

our ability to obtain patents for our products and defend our intellectual property from misappropriation and competitive use;

progress and publications of the commercial acceptance of similar technologies to those we utilize;

our ability to grow the revenues of Fat Shark and Red Cat and achieve consistent profitability;

our ability to execute our business plan;

our ability to grow revenues and achieve consistent profitability;

actual or anticipated variations in operating results;

additions or departures of key personnel including our executive officers;

business disruptions caused by natural disasters and uncontrollable events such as severe weather

conditions or geopolitical turmoil;

cyber security attacks or data privacy issues involving our products or operations;

announcements by us or our competitors of significant acquisitions,

strategic partnerships, joint ventures, capital commitments, significant contracts, or other material developments that may affect

our prospects;

business disruptions caused by natural disasters and uncontrollable events such as severe weather conditions or geopolitical turmoil;

disclosure of cyber security attacks or data privacy issues involving our products or operations;

announcements by us or our competitors of significant acquisitions, strategic partnerships, joint ventures, capital commitments, significant contracts, or other material developments that may affect our prospects;

adverse regulatory developments;

the possibility of a recession or market down-turn;

the possibility of a recession or market down-turn or inflation;

general market conditions including factors unrelated to our operating performance

Recently, the stock market, in general, has experienced

extreme price and volume fluctuations due to, among other factors, concerns involving inflation, the Federal Reserve interest rate increases,

supply chain shortages, recession fears, and geopolitical turmoil including the war in Ukraine and Israel.

The current prolonged delay

in providing new aid to Ukraine and Israel are evidence of the political uncertainties.

Continued market fluctuations could result in

extreme market volatility in the price of our common stock which could cause a decline in the value of our common stock below the Offering

Recently, following the announcement of the imposition

of tariffs and substantial planned reductions in the size of the federal government, the stock market, has experienced extreme price fluctuations

and a major sell off involving United States.

Continued market fluctuations could result in extreme market volatility in the price of

our Common Stock which could cause a decline in the value of our Common Stock below its recent price.

Our stock price may be volatile, which could

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In addition to changes to market prices based

on our results of operations and the factors discussed elsewhere in this “ Risk Factors ” section, the

market price of and trading volume for our common stock (including any stock-run ups or price declines) may change for a variety of other

reasons, not necessarily related to our actual operating performance.

The capital markets have experienced extreme volatility particularly

with small public companies with relatively smaller public floats that has often been unrelated to the operating performance of particular

These broad market fluctuations may adversely affect the trading price of our common stock.

In addition, the average daily

trading volume of the securities of small companies can be very low, which may contribute to future volatility.

Factors that could cause the market price of

our common stock to fluctuate significantly include:

the results of operating and financial performance and prospects of

other companies in our industry;

strategic actions by us or our competitors, such as acquisitions or

restructurings;

announcements of innovations, increased service capabilities, new or

terminated customers or new, amended or terminated contracts by our competitors;

the public’s reaction to our press releases, other public announcements,

and filings with the SEC;

lack of securities analyst coverage or speculation in the press or

investment community about us or market opportunities in the drone industry;

changes in government policies in the United States and, as our international

business increases, in other foreign countries;

changes in earnings estimates or recommendations by securities or research

analysts who track our common stock or failure of our actual results of operations to meet those expectations;

market and industry perception of our success, or lack thereof, in

pursuing our growth strategy;

changes in accounting standards, policies, guidance, interpretations

or principles;

on our results of operations and the factors discussed elsewhere in this “Risk Factors” section, the market price of and trading

volume for our Common Stock (including any stock-run ups or price declines) may change for a variety of other reasons, not necessarily

related to our actual operating performance.

The capital markets have experienced extreme volatility particularly with small public companies

with relatively smaller public floats that has often been unrelated to the operating performance of particular companies.

market fluctuations may adversely affect the trading price of our Common Stock.

In addition, the average daily trading volume of the securities

of small companies can be very low, which may contribute to future volatility.

Factors that could cause the market price of our

Common Stock to fluctuate significantly include:

the results of operating and financial performance and prospects of other companies in our industry;

strategic actions by us or our competitors, such as acquisitions or restructurings;

announcements of innovations, increased service capabilities, new or terminated customers or new, amended or terminated contracts by our competitors;

the public’s reaction to our press releases, other public announcements, and filings with the SEC;

lack of securities analyst coverage or speculation in the press or investment community about us or market opportunities in the drone industry;

changes in government policies in the United States and, as our international business increases, in other foreign countries;

changes in earnings estimates or recommendations by securities or research analysts who track our Common Stock or failure of our actual results of operations to meet those expectations;

market and industry perception of our success, or lack thereof, in pursuing our growth strategy;

changes in accounting standards, policies, guidance, interpretations or principles;

any lawsuit involving us or our products;

arrival and departure of key personnel;

sales of common stock by us, our investors or members of our management

changes in general market, economic and political conditions in the

United States and global economies or financial markets, including those resulting from natural or man-made disasters.

sales of Common Stock by us, our investors or members of our management team;

changes in general market, economic and political conditions in the United States and global economies or financial markets, including those resulting from natural or man-made disasters.

Any of these factors, as well as broader market

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affect our business, financial condition, results of operations and prospects.

An active trading

market for our common stock may not develop.

Prior to the IPO, there

was no public market for our common stock.

The IPO price for our common stock was determined through negotiations with the underwriters.

Although we have received approval for the trading of our common stock on the NYSE American, an active trading market for our shares

may never develop or be sustained following this IPO.

If an active market for our common stock does not develop, it may be difficult

to sell our securities without depressing the market price for the shares, or at all.

Because our sole remedy under the Purchase

Agreement in the event of any breaches of representations and warranties is to cancel some or all of the 100,000 shares of our common

stock, the value of such shares may be an insufficient remedy.

The Purchase Agreement contains representations

and warranties made by Red Cat and Mr.

Jeffrey Thompson, Red Cat’s Chief Executive Officer.

Based upon negotiations with Red Cat

and its counsel, we agreed that Mr.

Thompson, one of our founders, our largest stockholder and a member of our Board, will backstop Red

Cat’s indemnification obligations under the Purchase Agreement in the event we claim Red Cat and/or Mr.

Thompson have breached

any of their respective representations and warranties contained in the Purchase Agreement, as amended, with 125,000 shares of our common

stock (after giving effect to the 1-for-2 reverse stock split).

Such shares will not be placed into escrow.

Red Cat has no liability

for such breaches by it.

That means if the value of such shares held by Mr.

Thompson is not at least equal to our damages, we will not

have a remedy sufficient to permit us to recoup all of our damages.

The only exception is fraud.

Although we negotiated this limited

remedy in good faith, it is possible that the shares held by Mr.

Thompson may not be sufficient in which case such breach may adversely

and materially affect our common stock price.

We will incur significant additional costs

We are incurring significant additional costs

as a result of being a public company, and our management will be required to devote substantial time to compliance with our public company

responsibilities and corporate governance practices.

With the completion of our IPO, we expect to

incur increased costs associated with corporate governance requirements that will become applicable to us as a public company, including

rules and regulations of the SEC, under the Sarbanes-Oxley Act, the Dodd-Frank Wall Street Reform and Customer Protection Act

of 2010, and the Exchange Act, as well as the rules of NYSE American.

These rules and regulations are expected to significantly increase

our accounting, legal and financial compliance costs and make some activities more time consuming, including due to increased training

of our current employees, additional hiring of new employees, and increased assistance from consultants.

The SEC’s new cybersecurity

rules will increase our compliance costs.

We also expect these rules and regulations to make it more expensive for us to maintain directors’

and officers’ liability insurance.

As a result, it may be more difficult for us to attract and retain qualified persons to serve

on our Board or as executive officers.

Furthermore, these rules and regulations will increase our legal and financial compliance costs

and will make some activities more time-consuming and costly.

We cannot predict or estimate the amount of additional costs we will

incur as a public company or the timing of such costs.

In addition, our management team will need to devote substantial attention to

interacting with the investment community and complying with the increasingly complex laws pertaining to public companies, which may

divert attention away from the day-to-day management of our business, including operational, research and development and sales

and marketing activities.

Increases in costs incurred or diversion of management’s attention as a result of becoming a publicly

traded company may adversely affect our business, prospects, financial condition, results of operations, and cash flows.

We are incurring increased costs associated with

corporate governance requirements that will become applicable to us as a public company, including rules and regulations of the SEC under

the Sarbanes-Oxley Act, the Dodd-Frank Wall Street Reform and Customer Protection Act of 2010, and the Securities Exchange Act

of 1934 (the “Exchange Act”), as well as the rules of the NYSE American.

These rules and regulations have increased our accounting,

legal and financial compliance costs and make some activities more time consuming, including due to increased training of our current

employees, additional hiring of new employees, and increased assistance from consultants.

The SEC’s cybersecurity rules will increase

our compliance costs.

We also expect these rules and regulations to make it more expensive for us to maintain directors’ and officers’

liability insurance.

As a result, it may be more difficult for us to attract and retain qualified persons to serve on our Board or as

executive officers.

Furthermore, these rules and regulations will increase our legal and financial compliance costs and will make some

activities more time-consuming and costly.

We cannot predict or estimate the amount of additional costs we will incur as a public

company or the timing of such costs.

In addition, our management team will need to devote substantial attention to interacting with the

investment community and complying with the increasingly complex laws pertaining to public companies, which may divert attention away

from the day-to-day management of our business, including operational, research and development and sales and marketing activities.

Increases in costs incurred or diversion of management’s attention as a result of becoming a publicly traded company may adversely

affect our business, prospects, financial condition, results of operations, and cash flows.

Our failure to maintain effective disclosure

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once established, could adversely impact our public disclosures regarding our business, financial condition or results of operations.

In addition, management’s assessment of internal controls over financial reporting may identify weaknesses and conditions that

need to be addressed or other matters that may raise concerns for investors.

Any actual or perceived weaknesses and conditions that need

to be addressed in our internal control over financial reporting, disclosure of management’s assessment of our internal controls

over financial reporting may have an adverse impact on the price of our common stock.

Our Auditor and Red Cat’s auditor recently

was subjected to certain significant enforcement actions in Canada.

If its ability to perform audits for public companies in the United

States is restricted it could have material adverse consequences on the Company and our investors.

In December 2023, the Canadian Public Accountability

Board imposed significant restrictions on our auditors (the “Firm”) who also audited the financial statements of Fat Shark

and Rotor Riot which are contained in this annual report.

The sanctions were imposed as a result of a finding of 19 significant inspection

findings relating to Canadian auditing rules occurring with two public companies whose audits the regulator reviewed.

As a result, the

regulator imposed certain sanctions which included:

(a) prohibiting the Firm from accepting Canadian reporting issuer clients including

those resulting from initial public offerings, reverse takeovers or other transactions (including an existing private company audit client

seeking to become a reporting issuer through initial public offering, reverse takeover or other transaction which is considered a new

reporting issuer) and (b) prohibiting the Firm from assigning one of its partners to audits of financial statements of reporting issuers

in any Canadian jurisdiction in which such partner is not properly licensed to provide public accounting services by the relevant provincial

Chartered Professional Accountant regulatory body.

The Firm is also subject to oversight by the

Public Accounting Oversight Board (the “PCAOB”) in the United States.

The PCAOB was established by Congress to oversee the

audits of public companies in order to protect investors and further the public interest in the preparation of informative, accurate,

and independent audit reports.

The PCAOB oversees auditors' compliance with the Sarbanes-Oxley Act, provisions of the securities laws

relating to auditing, professional standards, and PCAOB and SEC accounting rules.

In May 2022 the PCAOB previously barred a former

director and nonequity partner of the Firm for violations of PCAOB rules and standards as part of four audits across three public companies.

In the event that the PCAOB or the SEC were to

impose material enforcement actions against the Firm including barring it from issuing audit opinions for companies that file reports

or registration statements with the SEC, the Company and our investors could be materially and adversely affected.

For example, if was

determined that our previous and current financial statements (or the financial statements of Fat Shark and Rotor Riot) that were audited

or reviewed by the Firm can no longer be relied upon due to auditing errors, we would be required to restate such financial statements.

To the extent that the Firm was banned from representing public companies, we would be required to retain new auditors and have such

financial statements re-audited, which could result in material additional auditing costs and could adversely affect our stock price

and investor confidence in our company.

In addition, if the Firm was to be forced to cease its operations, there can be no assurance

that the SEC would grant a waiver to issuers like the Company who are unable to use prior audit reports in annual reports on Form 10-K

or amendments to the Registration Statement.

Furthermore, in the event that PCAOB or SEC sanctions were to result in the Firm ceasing

to audit public companies that file reports with the SEC, our shareholders may not be able to recover damages against the Firm on claims

in connection with a material misstatement or omission in our financial statements that were audited or reviewed by the Firm.

In addition, management’s assessment of internal controls over financial reporting may identify weaknesses and conditions that need

to be addressed or other matters that may raise concerns for investors.

Any actual or perceived weaknesses and conditions that need to

be addressed in our internal control over financial reporting, disclosure of management’s assessment of our internal controls over

financial reporting may have an adverse impact on the price of our Common Stock.

In our Form 10-K for the year ended December 31, 2024,

we reported that we did not maintain effective disclosure controls or internal controls over financial reporting and that we had not remediated

those material weaknesses.

Investors may not purchase or hold our Common Stock as a result of these failures, which may result in lower

Because our Common Stock is listed on NYSE

American, we are subject to additional regulations and continued requirements.

With the completion of our IPO in February 2024,

Because our Common Stock trades on the NYSE American,

we are required to meet the continued listing standards for NYSE American.

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our Common Stock may be delisted.

NYSE American requires that the average closing price of its listed common stock remain above $1.00

The NYSE American requires that the average closing price of its listed common stock remain above $1.00

over a 30 consecutive day period, in order to remain listed.

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would impair your ability to sell our Common Stock when you wish to do so.

Our Board of Directors may authorize and issue

shares of new classes of stock that could be superior to or adversely affect current holders of our common stock.

Our Board of Directors has the power to authorize

and issue shares of classes of stock, including preferred stock that have voting powers, designations, preferences, limitations and special

rights, including preferred distribution rights, conversion rights, redemption rights and liquidation rights without further shareholder

approval which could adversely affect the rights of the holders of our common stock.

In addition, our Board could authorize the issuance

of a series of preferred stock that has greater voting power than our common stock or that is convertible into our common stock, which

could decrease the relative voting power of our common stock or result in dilution to our existing common stockholders.

Our Board may authorize and issue shares of

new series of preferred stock that could be superior to or adversely affect current holders of our Common Stock.

Our Board has the power to authorize and issue

shares of classes of stock, including preferred stock that have voting powers, designations, preferences, limitations and special rights,

including preferred distribution rights, conversion rights, redemption rights and liquidation rights without further stockholder approval

which could adversely affect the rights of the holders of our Common Stock.

In addition, our Board could authorize the issuance of a series

of preferred stock that has greater voting power than our Common Stock or that is convertible into our Common Stock, which could decrease

the relative voting power of our Common Stock or result in dilution to our existing common stockholders.

Any of these actions could significantly adversely

affect the investment made by holders of our Common Stock.

Holders of common stock could potentially not receive dividends that they

might otherwise have received.

In addition, holders of our common stock could receive less proceeds in connection with any future sale

of the Company, in liquidation or on any other basis.

If we raise capital in the future, it may

dilute our existing stockholders’ ownership and/or have other adverse effects on us, our securities or our operations.

Holders of Common Stock could potentially not receive dividends that they might

otherwise have received.

In addition, holders of our Common Stock could receive less proceeds in connection with any future sale of the

Company, in liquidation or on any other basis.

If we raise capital in the future, it may dilute

our existing stockholders’ ownership and/or have other adverse effects on us, our securities or our operations.

If we are required to raise additional capital

by issuing equity securities, our existing stockholders’ percentage ownership may decrease, and these stockholders may experience

by issuing equity securities, our existing stockholders’ percentage ownership will decrease, and these stockholders may experience

substantial dilution.

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transactions or corporate actions that may have the effect of limiting our ability to pursue our business strategy and growth objectives.

Common stock eligible for future sale may

adversely affect the market.

We have agreed to enter into a registration rights

agreement for the registration of 500,000 shares of our common stock that we will issue to Red Cat in connection with the Business Combination

and to use our best efforts to file a registration statement 120 days after the consummation of the Offering and have such registration

statement declared effective within 180 days.

Upon registration and expiration of the 180-day lockup for Red Cat, Red Cat’s common

stock will be freely-tradable.

The following discussion refers to the public sale of our common stock by our other stockholders beginning

after expiration of the lockup agreement all of our officers, directors and 5% shareholders have entered into.

From time-to-time after

the expiration of the lock-up period, our stockholders may be eligible to sell all or some of their common stock by means of ordinary

brokerage transactions in the open market pursuant to Rule 144 promulgated under the Securities Act of 1933 (the “Securities Act”),

subject to certain limitations.

In general, Rule 144 provides that any non-affiliate of the Company who has held restricted common stock

for at least six months, is entitled to publicly sell their restricted stock, provided that the Company stays current in its SEC filings.

Affiliates, which would include an officer, director or other person in control of the Company may sell after a six month holding

period from the date of purchase) with the following restrictions:

(i) the Company is current in its SEC filings, (ii) the holders comply

with certain manner of sale provisions, (iii) the holders file a Form 144, and (iv) the holders comply with volume limitations limiting

the sale of shares within any three-month period to the greater of (1) a number of shares that does not exceed 1% of the total number

of outstanding shares, or (2) the average weekly trading volume computed over a four week period.

A person who has ceased to be an affiliate

at least three months immediately preceding the applicable sale and who has owned such shares of common stock for at least six months

may sell the shares under Rule 144 without regard to any of the limitations described above except for the current public information

Common Stock eligible for future sale may adversely

affect the market.

We have in the past consummated private placements

to accredited investors whereby we were obligated to enter into a registration rights agreement with each selling stockholder.

in the future enter into similar agreements in connection with our fundraising efforts.

Future sales of substantial amounts of our Common

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that these sales may occur.

If securities or industry analysts do not

publish research or reports about our business, or if they adversely change their recommendations regarding our common stock, the market

price for our common stock and trading volume could decline.

The trading market for our common stock will

be influenced by research or reports that industry or securities analysts publish about our business.

If securities or industry analysts do not publish

research or reports about our business, or if they adversely change their recommendations regarding our Common Stock, the market price

for our Common Stock and trading volume could decline.

The trading market for our Common Stock will be

influenced by research or reports that industry or securities analysts publish about our business.

We do not currently have any analysts

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pursuant to the Jumpstart Our Business Startups Act of 2012, or the JOBS Act.

As an emerging growth company, we have elected to take

advantage of specified reduced reporting and other requirements compared to those that are otherwise applicable generally to public companies.

These provisions include but are not limited to:

reduced disclosure obligations regarding executive compensation in periodic reports,

proxy statements and registration statements;

and exemptions from the requirements of holding a nonbinding advisory vote on executive

compensation and shareholder approval of any golden parachute payments not previously approved.

As an emerging growth company, we have elected to take advantage

of specified reduced reporting and other requirements compared to those that are otherwise applicable generally to public companies.

provisions include but are not limited to:

reduced disclosure obligations regarding executive compensation in periodic reports, proxy

statements and registration statements;

and exemptions from the requirements of holding a nonbinding advisory vote on executive compensation

and stockholder approval of any golden parachute payments not previously approved.

We will remain an emerging growth company until

the earliest of (a) the last day of the fiscal year during which we have total annual gross revenues of at least $1.235 billion;

the last day of our fiscal year following the fifth anniversary of the completion of this Offering;

the preceding three-year period, issued more than $1.0 billion in non-convertible debt;

or (d) the date on which we are deemed to be

a “large accelerated filer” under the Exchange Act, which would occur as of the end of any fiscal year if the market value

of our common stock that are held by non-affiliates exceeds $700 million as of the last business day of our most recently completed second

fiscal quarter.

Once we cease to be an emerging growth company, we will not be entitled to the exemptions provided in the JOBS Act discussed

last day of our fiscal year following February 16, 2029;

more than $1.0 billion in non-convertible debt;

or (d) the date on which we are deemed to be a “large accelerated filer” under

the Exchange Act, which would occur as of the end of any fiscal year if the market value of our Common Stock that are held by non-affiliates

exceeds $700 million as of the last business day of our most recently completed second fiscal quarter.

Once we cease to be an emerging

growth company, we will not be entitled to the exemptions provided in the JOBS Act discussed above.

We have never paid dividends and we do not

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appreciation, if any, of our Common Stock, will be your sole source of gain for the foreseeable future.

Our Certificate of

Incorporation contains certain provisions which may result in difficulty in bringing stockholder actions against or on behalf of the

Company or its affiliates.

Section 7 of our Certificate

of Incorporation provides that the internal affairs of the Company, including stockholder derivative actions, shall be brought exclusively

in commonwealth courts located in Puerto Rico.

To the extent that any such action asserts a claim under the Exchange Act, that provision

must be brought in federal court.

Section 7 also provides that the United States federal courts generally shall have exclusive jurisdiction

over claims brought under the Securities Act, the effect of which is that an action under the Securities Act with respect to the Company

may only be brought in the federal courts, whereas absent such provision the federal and commonwealth courts would otherwise have concurrent

Our Articles of Incorporation

contains certain provisions which may result in difficulty in bringing actions against or on behalf of the Company or its affiliates.

Section 7 of our Articles

of Incorporation provides that the internal affairs of the Company, including derivative actions, shall be brought exclusively in the

courts located in Clark County, Nevada.

To the extent that any such action asserts a claim under the Exchange Act, that claim must be

brought in federal court.

Section 7 also provides that the United States federal courts generally shall have exclusive jurisdiction over

claims brought under the Securities Act, the effect of which is that an action under the Securities Act with respect to the Company may

only be brought in the federal courts, whereas absent such provision the federal and commonwealth courts would otherwise have concurrent

jurisdiction over such a matter.

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Further, Section

7 also provides for the United States District Court for the District of Puerto Rico as the exclusive venue for any cause of action under

either the Securities Act or the Exchange Act, meaning such federal court is the only court in which such a case may be brought and heard.

These provisions may have the effect of precluding stockholders from bringing suit in their forum or venue of choice.

Further, these

provisions may give rise to a potential ambiguity as to which courts – commonwealth or federal – should preside over certain

cases such as cases with overlapping claims under both Puerto Rican corporate law and the Securities Act and the rules and regulations

While the Supreme Court of Delaware has upheld a charter provision designating federal courts as the exclusive forum for

actions brought under the Securities Act, it is unclear how a court in another jurisdiction, including Puerto Rico, might rule.

an investor seeking to bring a claim against or on behalf of the Company or its affiliates under Puerto Rico law or the federal securities

laws may be forced to litigate their case in a court which poses geographic or other hardships, and could face uncertainty as to which

jurisdiction and venue the case will ultimately be heard in, which may delay, prevent or impose additional obstacles on the investor

in such litigation.

Investors cannot waive compliance with the federal securities laws and the rules and regulations thereunder, and

there is uncertainty as to whether a state or federal court would enforce this charter provision.

Assuming we proceed with our reincorporation

in Nevada, the Nevada Articles of Incorporation have similar provisions except requiring litigation in Las Vegas, Nevada courts.

7 also provides for the United States District Court for the District of Nevada as the exclusive venue for any cause of action under either

the Securities Act or the Exchange Act, meaning such federal court is the only court in which such a case may be brought and heard.

provisions may have the effect of precluding stockholders from bringing suit in their forum or venue of choice.

Further, these provisions

may give rise to a potential ambiguity as to which courts – state or federal – should preside over certain cases such as cases

with overlapping claims under both Nevada corporate law and the Securities Act and the rules and regulations thereunder.

While the Supreme

Court of Delaware has upheld a charter provision designating federal courts as the exclusive forum for actions brought under the Securities

Act, it is unclear how a court in Nevada, might rule.

Therefore, an investor seeking to bring a claim against or on behalf of the Company

or its affiliates under Nevada law or the federal securities laws may be forced to litigate their case in a court which poses geographic

or other hardships, and could face uncertainty as to which jurisdiction and venue the case will ultimately be heard in, which may delay,

prevent or impose additional obstacles on the investor in such litigation.

Investors cannot waive compliance with the federal securities

laws and the rules and regulations thereunder, and there is uncertainty as to whether a state or federal court would enforce this charter

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-K

Item 1A. Risk Factors