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Item 7. Management’s Discussion and Analysis

2025-03-27 compared with 2024-03-22 · 267 added, 361 removed, 39 unchanged (94% of the section changed)

Management’s Discussion and Analysis of Financial Condition and Results

of Operations

Management’s Discussion and Analysis of Financial Condition and Results of Operations

You should read the

following discussion and analysis of our financial condition and results of operations in conjunction with the audited and unaudited

financial statements (prepared in accordance with accounting principles generally accepted in the United States (“U.S.

and related notes included elsewhere in this Annual Report on Form 10-K (this “Form 10-K”).

The following discussion contains

forward-looking statements that are subject to risks and uncertainties.

See “ Special Note Regarding Forward-Looking

Statements ” for a discussion of the uncertainties, risks, and assumptions associated with those statements.

Actual results

could differ materially from those discussed in or implied by forward-looking statements as a result of various factors, including those

discussed below and elsewhere in this Form 10-K, particularly in the section entitled “ Risk Factors .”

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

“Company” refer to Unusual Machines, Inc.

following discussion and analysis of our financial condition and results of operations in conjunction with the audited financial

statements (prepared in accordance with accounting principles generally accepted in the United States (“U.S.

GAAP”)) and related

notes included elsewhere in this Annual Report on Form 10-K (this “Form 10-K”).

The following discussion contains forward-looking

statements that are subject to risks and uncertainties.

See “Special Note Regarding Forward-Looking Statements” for a discussion

of the uncertainties, risks, and assumptions associated with those statements.

Actual results could differ materially from those discussed

in or implied by forward-looking statements as a result of various factors, including those discussed below and elsewhere in this Form

10-K, particularly in the section entitled “Risk Factors.” Unless we state otherwise or the context otherwise requires, the

terms “we,” “us,” “our” and the “Company” refer to Unusual Machines, Inc.

and its subsidiaries.

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

are in thousands unless otherwise noted.

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

Recent Developments

Initial Public

Private Placement

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

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

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

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

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

As part of the Private Placement, we issued

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

Each unit consisted of one share of Common Stock and one

warrant to purchase one share of the Company’s Common Stock (each an "Investor Warrant”) and collectively, the Investor

The Investor Warrants have a term of five and a half years from the Closing Date and may not be exercised for 180 days

after the Closing Date and are exercisable at $1.99 per share, subject to certain limitations and adjustments set forth in the Investor

On February 25, 2025, the 2025 Special Meeting of the Company was held.

At the 2025 Special Meeting, the Company’s stockholders

voted and approved on a waiver of the provision that certain warrants are only exercisable 180 days after issuance.

On February 26, 2025,

the Company closed the IPO for the sale of 1,250,000 shares of common stock, at a public offering price of $4.00 per share.

The IPO generated

gross proceeds of $5.0 million and net proceeds of approximately $3.5 million.

Acquisition of Fat Shark and Rotor Riot

On November 21, 2022, the Company entered into

the Purchase Agreement with Red Cat and Jeffrey Thompson, the founder and Chief Executive Officer of Red Cat, pursuant to which we agreed

to purchase Red Cat’s consumer business consisting of Fat Shark and Rotor Riot.

Fat Shark and Rotor Riot are in the business of

designing and marketing consumer drones and FPV goggles.

Rotor Riot is also a licensed authorized reseller of consumer drones manufactured

by third-parties.

Under the terms of the Purchase Agreement, as

amended, the Company purchased from Red Cat its Rotor Riot and Fat Shark subsidiaries for $20.0 million comprised of (i) $1.0 million

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

stock or 4,250,000 shares of common stock.

Unusual Machines Results of Operations

the Company issued 1,224,606 shares of Common Stock to various warrant holders who exercised their warrants at an exercise price of $1.99.

The Company received gross proceeds in the aggregate amount of $2,436,966 as a result of the warrant exercises.

The shares of common stock

issued are fully registered under the Registration Statement on Form S-1 (SEC Registration Number 333-283494).

All of the Investor Warrants

were exercised other than Investor Warrants held by Allan Evans, our Chief Executive Officer, Sanford Rich and Robert Lowry, who are

each members of our Board.

Potential Aloft Acquisition

On February 1, 2025, we entered into a Merger

Agreement to acquire drone software company, Aloft.

We believe that Aloft is a leader in the drone fleet and airspace management sector,

powering more than 70% of all FAA-approved Low Altitude Authorization and Notification Capability airspace authorizations in the United

Aloft has provided more than 1.6 million authorizations in total with 400,000 authorizations provided in 2024.

The acquisition

is for $14.5 million, almost entirely in the Company’s Common Stock.

Customary closing conditions by the parties must be met before

closing the merger.

For more information, see Risk Factors – Risks Related to our Business and Financial Condition” we may

not be successful in consummating the merger if certain closing conditions are not met.

Results of Operations

We acquired Fat Shark and Rotor Riot on February 16, 2024 and generated

no revenue from 2023 through the date of acquisition.

For pro forma information unaudited result of operations reflecting our performance

if we had owned these subsidiaries as of January 1, 2023, See Note 3 to our Consolidated Financial Statements.

Years Ended December 31, 2024 and 2023

During the years ended December 31, 2023 and

2022, we did not generate any revenues and as such did not incur any cost of goods sold.

Operating Expenses

During the year ended December 31, 2023, we incurred

general and administrative expenses totaling $1,794,455 compared to $1,242,732 for the year ended December 31, 2022, resulting in an

increase of $551,723 or 44.4%.

The increase primarily relates to increased legal expenses and professional fees related to the business

combination and for preparation of becoming a public company.

Net loss for the year ended December 31, 2023,

totaled $1,794,455 compared to $1,242,584 for the year ended December 31, 2022, resulting in an increase of $551,871 or 44.4%.

in net loss is almost entirely related to the increase in general and administrative expenses as we start to build out our operations

for the business combination and becoming a public company.

Fat Shark Results of Operations

Nine Months Ended January 31, 2024 and

During the nine months ended January 31, 2024

(or the “2024 period”), Fat Shark generated revenues totaling $1,379,391 compared to $2,060,594 during the nine months ended

January 31, 2023 (or the “2023 period”), representing a decrease of $681,203 or 33.1%.

Revenues can fluctuate from period

to period and are generally reflective of normal changes as the life cycles of the company’s products mature.

Lower revenues for

the 2024 period related to its newest product, the Dominator, which was launched at the beginning of the 2023 period, and while it generated

strong initial sales in the first quarter, sales declined significantly since the 2023 period.

Cost of Goods Sold

During the nine months ended January 31, 2024,

Fat Shark incurred cost of goods sold of $2,557,379 compared to $1,753,695 during the nine months ended January 31, 2023;

an increase of $803,684 or 45.8%.

The increase primarily related to an inventory impairment charge of $1,244,920 related to the Dominator

goggles during the 2024 period.

During the nine months ended January 31, 2024,

Fat Shark’s gross margin was ($1,177,988) compared to $306,899 during the nine months ended January 31, 2023, resulting in a decrease

of $1,484,887 or 483.8%.

Fat Shark’s gross margin, as a percentage of sales, totaled (85.4%) during the nine months ended January

31, 2024, compared to 14.9% during the nine months ended January 31, 2023.

The reported gross margin was adversely impacted by an impairment

charge of $1,244,920 related to the write-down of Dominator inventory based on sales volumes and product discounts.

Operating Expenses

During the nine months ended January 31, 2024,

Fat Shark’s operations expenses totaled $111,204 compared to $180,805 during the nine months ended January 31, 2023, resulting

in a decrease of $69,601 or 38.5%.

The decrease during the 2024 period reflects lower professional services fees compared to the 2023

During the nine months ended January 31, 2024,

Fat Shark incurred research and development expenses totaling $35,669 compared to $208,107 for the nine months ended January 31, 2023,

resulting in a decrease of $172,438 or 82.9%.

The decrease during the 2024 period reflects lower payroll costs compared to the 2023 period.

During the nine months ended January 31, 2024,

Fat Shark’s sales and marketing expenses totaled $159 compared to $13,837 for the nine months ended January 31, 2023, resulting

in a decrease of $13,678 or 98.9%.

Sales and marketing expenses were higher during the 2023 period as the Company was preparing for the

launch of the Dominator.

During the nine months ended January 31, 2024,

Fat Shark incurred general and administrative expenses totaling $14,816 compared to $66,193 for the nine months ended January 31, 2023,

resulting in a decrease of $51,377 or 77.6%.

The decrease primarily relates to lower office and insurance costs compared to the 2023

Fat Shark’s net loss for the nine months

ended January 31, 2024, totaled $1,401,934 compared to $221,530 for the nine months ended January 31, 2023, resulting in an increase

in net loss of $1,180,404 or 532.8%.

This increase in net loss relates to the impairment charge related to the Dominator inventory resulting

in lower gross margins during the 2024 period.

This was partially offset by lower operating expenses compared to the 2023 period.

release of Fat Shark’s new generation product, the Dominator, took place during the 2023 period which resulted in higher revenues

and gross margins in the 2023 period.

Fat Shark Results of Operations

Years Ended April 30, 2023 and 2022

During the year ended April 30, 2023 (or the

“2023 period”), Fat Shark generated revenues totaling $2,317,444 compared to $2,627,792 during the year ended April 30, 2022

(or the “2022 period”), representing a decrease of $310,348 or 11.8%.

Revenues can fluctuate from period to period and are

generally reflective of normal changes as the life cycles the company’s products mature.

Lower revenues for the 2023 period related

to its newest product, the Dominator, which was launched at the beginning of the 2022 period, and while it generated strong initial sales

in the first quarter, sales declined significantly over the remaining quarters in Fiscal 2023.

Cost of Goods Sold

During the year ended April 30, 2023, Fat Shark’s

incurred cost of goods sold of $2,159,159 compared to $2,569,307 during the year ended April 30, 2022;

resulting in a decrease of $410,148

The decrease related to lower revenues during the 2023 period.

During the year ended April 30, 2023, Fat Shark

gross margin was $158,285 compared to $58,485 during the year ended April 30, 2022, resulting in an increase of $99,800 or 170.6%.

Shark’s gross margin, as a percentage of sales, totaled 6.8% during the year ended April 30, 2023 compared to 2.2% during the year

ended April 30, 2022.

The lower gross margin in the 2022 period related to price reductions of the prior digital goggle as Fat Shark

prepared for the launch of the Dominator early in the 2023 period.

Separately, Fat Shark recorded a charge of $182,845 related to the

write-off of excess quantities of Dominator inventory based on sales volumes during the second half of the year ended April 30, 2023.

Operating Expenses

During the year ended April 30, 2023, Fat Shark’s

operations expenses totaled $240,945 compared to $252,545 during the year ended April 30, 2022, resulting in a decrease of $11,600 or

The decrease during the 2023 period reflects lower professional services fees compared to the 2022 period.

During the year ended April 30, 2023, Fat Shark

incurred research and development expenses totaling $280,515 compared to $407,881 for the year ended April 30, 2022, resulting in a decrease

of $127,366 or 31.2%.

The decrease during the 2023 period reflects lower payroll and material costs compared to the 2022 period.

the 2022 period, Fat Shark incurred higher payroll and material costs related to its next generation product release.

During the year ended April 30, 2023, Fat Shark’s

sales and marketing expenses totaled $16,858 compared to $60,616 for the year ended April 30, 2022, resulting in a decrease of $43,758

Sales and marketing expenses were higher during the 2022 period as the Company was preparing for the launch of the Dominator.

During the year ended April 30, 2023, Fat Shark

incurred general and administrative expenses totaling $88,277 compared to $169,096 for the year ended April 30, 2022, resulting in a

decrease of $80,819 or 47.8%.

The decrease primarily relates to lower payroll, facilities, and business travel costs compared to the

Fat Shark’s net loss for the year ended

April 30, 2023 totaled $546,121 compared to $910,723 for the year ended April 30, 2022, resulting in a decrease of $364,602.

This decrease

relates to improved gross margins and lower operating expenses during the 2023 period.

During the 2022 period, Fat Shark’s gross

margin was lower related to pricing discounts on end-of-life cycle products and higher research and development expenses related to the

release of the new generation product, the Dominator.

Rotor Riot Results of Operations

Nine Months Ended January 31, 2024 and

During the nine months ended January 31, 2024

(or the “2024 period”), Rotor Riot generated revenues totaling $3,122,673 compared to $2,534,514 during the nine months ended

January 31, 2023 (or the “2023 period”), representing an increase of $588,159 or 23.2%.

Revenues can fluctuate from period

to period and are generally reflective of normal changes through the life cycles of the products that the company sells.

During the 2024

period, higher revenues were generated by a significant increase in digital marketing spending.

Cost of Goods Sold

During the nine months ended January 31, 2024,

Rotor Riot incurred cost of goods sold of $2,186,039 compared to $2,170,151 during the nine months ended January 31, 2023, resulting

in a decrease of $15,888 or 0.7%.

The decrease related to higher revenues during the 2024 period.

During the nine months ended January 31, 2024,

Rotor Riot’s gross margin was $936,634 compared to $364,363 during the nine months ended January 31, 2023, resulting in an increase

of $572,271 or 157.1%.

Gross margin, as a percentage of sales, totaled 30.0% during the nine months ended January 31, 2024, compared

to 14.4% during the nine months ended January 31, 2023.

The higher level of gross margin is primarily related to successful efforts to

reduce tariff expenses for inventory purchases.

Operating Expenses

During the nine months ended January 31, 2024,

Rotor Riot incurred operations expense totaling $560,660 compared to $303,535 during the nine months ended January 31, 2023, resulting

in an increase of $257,125 or 84.7% primarily related to increased payroll costs.

Payroll expenses totaled $303,064 in the 2024 period

compared to $207,929 in the 2023 period, resulting in an increase of $95,135 or 46%.

This increase represented 37.0% of the total increase

in operations expenses.

The remaining increase is primarily attributable to increased office costs and professional fees.

During the nine months ended January 31, 2024,

Rotor Riot incurred research and development expenses totaling $78,013 compared to $42,927 for the nine months ended January 31, 2023,

resulting in an increase of $35,086 or 81.7%.

The increase was entirely due to increased payroll costs.

During the nine months ended January 31, 2024,

Rotor Riot incurred sales and marketing expenses totaling $978,276 compared to $542,079 for the nine months ended January 31, 2023, resulting

in an increase of $436,197 or 80.5%.

The increase primarily relates to an increase in payroll and advertising program costs for Rotor

Payroll expenses totaled $297,515 in the 2024 period compared to $190,553 in the 2023 period, resulting in an increase of $106,962

Advertising expenses totaled $476,637 in the 2024 period compared to $316,237 in the 2023 period, resulting in an increase of

During the year ended December 31, 2024 we

generated revenues totaling $5,565,319 compared to $0 during the year ended December 31, 2023, representing an increase of

$5,565,319 or 100%.

The increases in payroll and advertising expenses represented 25% and 37%, respectively, of the total increase in sales

and marketing expenses.

During the nine months ended January 31, 2024,

Rotor Riot incurred general and administrative expenses totaling $81,796 compared to $210,128 for the nine months ended January 31, 2023,

resulting in a decrease of $128,332 or 61.1%.

The decrease is primarily related to lower banking fees and meals, travel, and training

in the 2024 period.

Rotor Riot’s net loss for the nine months

ended January 31, 2024, totaled $929,018 compared to $876,551 for the nine months ended January 31, 2023, resulting in a decrease in

net loss of $52,467 or 6.0%.

The decrease in net loss is primarily related to improved gross margins during the 2024 period.

Rotor Riot Results of Operations

Year Ended April 30, 2023 and 2022

During the year ended April 30, 2023 (or the

“2023 period”), Rotor Riot generated revenues totaling $3,447,149 compared to $2,028,149 during the year ended April 30,

2022 (or the “2022 period”), representing an increase of $1,419,000 or 70.0%.

Revenues can fluctuate from period to period

and are generally reflective of normal changes through the life cycles of the products that the company sells.

During the 2023 period,

higher revenues were generated by a significant increase in digital marketing spending.

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

Accordingly, our revenues for the year ended December 31, 2024 are affected by not having any revenues for half of the

first quarter.

Prior to our acquisition, Fat Shark and Rotor Riot had pro forma revenues for the year ended December 31, 2023 of

approximately $4.68 million.

Revenues almost entirely relate to completed and fulfilled product sales during the year through our

Rotor Riot retail channel and from B2B enterprise sales of our Fat Shark and Blue UAS products.

Cost of Goods Sold

During the year ended April 30, 2023, Rotor Riot

incurred cost of goods sold of $3,015,398 compared to $1,587,674 during the year ended April 30, 2022, resulting in an increase of $1,427,724

The increase related to higher revenues during the 2023 period.

During the year ended April 30, 2023, Rotor Riot’s

gross margin was $431,751 compared to $440,475 during the year ended April 30, 2022, resulting in a decrease of $8,724 or 2.0%.

margin, as a percentage of sales, totaled 12.5% during the year ended April 30, 2023 compared to 21.7% during the year ended April 30,

The lower level of gross margin is primarily related to higher costs of products being sold including increases in material costs

due to the global supply chain issues.

During the year ended December 31, 2024, we incurred

cost of goods sold of $4,019,068 compared to $0 during the year ended December 31, 2023, resulting in an increase of $4,019,068 or 100%.

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

acquisition, Fat Shark and Rotor Riot had pro-forma cost of goods sold for the year ended December 31, 2023 of approximately $4.13 million.

Cost of goods sold primarily relate to product costs from our sales but also include certain shipping and tariff costs.

During the year ended December 31, 2024, our gross

margin was $1,546,251 compared to $0 during the year ended December 31, 2023, resulting in an increase of $1,546,251 or 100%.

margin, as a percentage of sales, totaled 28% during the year ended December 31, 2024, compared to 0% during the year ended December 31,

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

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

Operating Expenses

During the year ended April 30, 2023, Rotor Riot

incurred operations expense totaling $403,912 compared to $372,473 during the year ended April 30, 2022, resulting in an increase of

$31,439 or 8.4% primarily related to increased payroll costs.

During the year ended April 30, 2023, Rotor Riot

incurred research and development expenses totaling $65,487 compared to $58,719 for the year ended April 30, 2022, resulting in an increase

of $6,768 or 11.5%.

The increase primarily relates to increased payroll costs.

During the year ended April 30, 2023, Rotor Riot

incurred sales and marketing expenses totaling $845,526 compared to $220,007 for the year ended April 30, 2022, resulting in an increase

During the year ended December 31, 2024, operations

expenses totaled $959,740 compared to $0 during the year ended December 31, 2023, resulting in an increase of $959,740 or 100%.

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

Operations expenses primarily relate to

our direct operations including our warehouse personnel and warehouse expenses.

During the year ended December 31, 2024, research

and development expenses totaled $90,584 compared to $0 for the year ended December 31, 2023, resulting in an increase of $90,584 or 100%.

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

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

manufacturing to the United States and include expenses incurred related to our Blue UAS products.

During the year ended December 31, 2024, sales

and marketing expenses totaled $1,091,268 compared to $0 for the year ended December 31, 2023, resulting in an increase of $1,091,268

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

Sales and marketing

expenses primarily relate to advertising spend related to Rotor Riot, costs related to our Rotor Riot show production and payroll expenses

for our marketing personnel.

During the year ended December 31, 2024, general

and administrative expenses totaling $6,250,939 compared to $2,377,862 for the year ended December 31, 2023, resulting in an increase

of $3,873,077 or 163%.

The increase primarily relates to an increase in payroll and advertising program costs for Rotor Riot.

During the year ended April 30, 2023, Rotor Riot

incurred general and administrative expenses totaling $311,301 compared to $220,366 for the year ended April 30, 2022, resulting in an

increase of $90,935 or 41.3%.

The increase is primarily related to increased information technology costs associated with the implementation

of more sophisticated software systems.

Additionally, payroll, office, travel and professional fees also increased.

Rotor Riot’s net loss for the year ended

April 30, 2023 totaled $1,387,866 compared to $596,878 for the year ended April 30, 2022, resulting in an increase of $790,988 or 132.5%.

The increase in net loss is primarily related to increased stock compensation, general and administrative, and sales and marketing expenses.

Unusual Machines Cash Flows

Years Ended December 31, 2023 and 2022

General and administrative expenses incurred during 2024 include expenses related to operations for a public company

including legal and other professional fees, public company insurance expense, and other costs associated with being public.

we also incurred $2,320,206 in non-cash stock compensation expense.

General and administrative expenses incurred during 2023 primarily

related to expenses incurred as we operated as a management company to acquire Fat Shark and Rotor Riot and take the Company public.

incurred $600,000 of non-cash stock compensation expenses in 2023.

The increase relates to increased expenses related to closing the IPO

including legal and accounting fees, additional transition and integration related expenses, higher stock compensation expense, and costs

related to operating Fat Shark and Rotor Riot.

During the year ended December 31, 2024, we recognized a loss on impairment

of goodwill of $10,073,326 compared to $0 for the year ended December 31, 2023, resulting in an increase of $10,073,326 or 100%.

on goodwill impairment relates to the difference in the fair value calculation of goodwill from the acquisitions of Rotor Riot and Fat

Shark as compared to the carrying value as of the measurement date.

We did not have any goodwill in the prior year as the acquisitions

had not yet been completed.

Other Expenses

During the year ended December 31, 2024,

other expenses totaled $15,002,061 compared to $0 during the year ended December 31, 2023, resulting in an increase of

$15,002,061 or 100%.

Other expenses mostly consists of non-cash related charges including $16,146,205 for the change in fair value

from our derivatives including the conversional option feature on the note payable and the warrant liability.

It is offset by a

non-cash gain on debt extinguishment of $1,259,979.

Finally, other expenses included $116,981 for interest expense that the Company

paid in relation to its Note Payable during the year and interest income of $1,146.

We did incur these same costs in 2023 as we did

not have operational activities until after our IPO and the completion of the acquisitions.

Our net loss for the year ended December 31, 2024,

totaled $31,980,468 including non-cash charges of approximately $26.7 million.

This compared to $2,383,462 for the year ended December

31, 2023, resulting in an increase in net loss of $29,597,006.

The increase in net loss primarily relates to a change in fair value of

derivatives and warrant liabilities of $16,146,205, a loss on impairment of goodwill of $10,073,326, the increase in general and administrative

expenses related to closing the IPO and stock compensation expense with additional increase in expenses for operations, sales and marketing

expenses we incurred since the acquisition from Fat Shark and Rotor Riot, and interest expense of $116,981.

Interest expense is from our

debt incurred from our IPO that was converted to equity in August and December 2024.

This was partially offset by generating gross margin

related to the revenue and cost of goods sold from sales for Fat Shark and Rotor Riot, a gain on debt extinguishment of $1,259,979, and

income tax benefit of $13,360.

Prior to the closing

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

to our activities related to our IPO.

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

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

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

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

needs and achieve our business objectives.

Operating Activities

2 unchanged sentences

31, 2023, representing an increase of $2,219,815 or 125%.

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

of $551,871, increase in deferred offering costs of $337,108 and working capital of $84,482 offset by non-cash expenses of $4,715.

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

of $29,597,006 and an increase in prepaid expenses of $83,749 and accounts receivable of $59,777, offset by a decrease in inventory of

$455,101, an increase in other assets of $36,196, an increase in accounts payable and accrued expenses of $284,124, other liabilities

of $34,238 and non-cash expenses of $26,711,058which is primarily from a loss on impairment of goodwill and a change in fair value of

Investing Activities

Net cash used in investing activities was $852,801

during the year ended December 31, 2023 compared to net cash used in operating activities of $4,575 during the year ended December 31,

2022, representing a decrease of $1,411 or 30.8%.

This decrease in net cash used related to timing of purchasing additional computer

during the year ended December 31, 2024 compared to net cash used in investing activities of $3,164 during the year ended December 31,

2023, representing an increase of $849,637.

This change in net cash used in investing activities related to the $1,000,000 we paid to

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

Financing Activities

Net cash provided by financing activities totaled

$0 during the year ended December 31, 2023 compared to $549,900 during the year ended December 31, 2023, resulting in a decrease in net

cash provided by financing activities of $549,900 or 100%.

The decrease is entirely related to proceeds received from exempt private

offerings of our common stock.

Fat Shark Cash Flows

Nine Months Ended January 31, 2024 and

Operating Activities

Fat Shark net cash provided by operating activities

was $420,974 during the nine months ended January 31, 2024, compared to net cash used in operating activities of $3,515,745 during the

nine months ended January 31, 2023, representing an increase of $3,936,539 or 112.0% in net cash provided by operating activities.

increase in net cash provided by operating activities primarily resulted from Fat Shark’s change in inventory, other assets which

consists primarily of prepaid inventory, and accounts receivable totaling $6,069,286, offset by a decrease in net loss of $1,180,404

which includes an inventory impairment charge of $927,765, non-cash expenses of $8,973 and changes in working capital of $943,370.

Financing Activities

Fat Shark net cash used in financing activities

totaled $475,318 during the nine months ended January 31, 2024, compared to net cash provided by financing activities of $3,429,027 during

the nine months ended January 31, 2023.

The cash used in financing activities in 2024 consisted entirely of payments under debt obligations.

The cash provided by financing activities in 2023 consisted entirely of proceeds from a related party.

Fat Shark Cash Flows

Years Ended April 30, 2023 and 2022

Operating Activities

Fat Shark net cash used in operating activities

was $3,688,211 during the year ended April 30, 2023 compared to net cash used in operating activities of $783,810 during the year ended

April 30, 2022, representing an increase of $2,904,401 or 370.5%.

This increase in net cash used primarily resulted from Fat Shark’s

increase in inventory and other assets which consists primarily of prepaid inventory of $3,607,636 offset by a decrease in net loss of

$364,602, non-cash expenses of $19,341 and changes in working capital of $319,292.

Financing Activities

Fat Shark net cash provided by financing activities

totaled $3,664,732 during the year ended April 30, 2023 compared to $848,195 during the year ended April 30, 2022.

The cash provided

by financing activities in 2023 consisted entirely of proceeds from a related party.

The cash provided by financing activities in 2022

consisted of $2,468,995 of proceeds from a related party offset by $1,620,880 payments on debt obligations.

Rotor Riot Cash Flows

Nine Months Ended January 31, 2024 and

Operating Activities

Rotor Riot net cash used in operating activities

was $1,202,275 during the nine months ended January 31, 2024, compared to net cash used in operating activities of $1,287,238 during

the nine months ended January 31, 2023, representing a decrease of $84,963 or 6.6%.

This decrease in net cash used primarily resulted

from Rotor Riot’s decrease in net loss of $52,467, an increase in non-cash related expenses of $46,944, offset by an increase in

changes in working capital of $90,486.

Financing Activities

Rotor Riot net cash provided by financing activities

totaled $1,296,914 during the nine months ended January 31, 2024, compared to $1,328,750 during the nine months ended January 31, 2023.

The cash provided by financing activities in 2024 consisted of proceeds from a related party of $1,198,473, and proceeds from debt obligations

of $262,856, offset by payments on debt obligations of $164,415.

Cash provided by financing activities in 2023 consisted of $1,328,750

of proceeds from a related party.

Rotor Riot Cash Flows

Years Ended April 30, 2023 and 2022

Operating Activities

Rotor Riot net cash used in operating activities

was $1,358,620 during the year ended April 30, 2023 compared to net cash used in operating activities of $678,206 during the year ended

April 30, 2022, representing an increase of $680,414 or 100.3%.

This increase in net cash used primarily resulted from Rotor Riot’s

increase in net loss of $790,988 offset by non-cash expense of $40,355 and changes in working capital of $70,219.

Financing Activities

Rotor Riot net cash provided by financing activities

totaled $1,339,491 during the year ended April 30, 2023 compared to $591,339 during the year ended April 30, 2022.

The cash provided

by financing activities in 2023 consisted entirely of proceeds from a related party of $1,339,491.

Cash provided by financing activities

in 2022 consisted of $860,384 of proceeds from a related party offset by payments on debt obligations of $269,045.

Unusual Machines Liquidity and Capital Resources

$7,711,718 during the year ended December 31, 2024, compared to net cash used in financing activities of $424,933 during the year ended

December 31, 2023, resulting in an increase in net cash provided by financing activities of $8,136,651.

The change relates to proceeds

received from multiple activities during 2024 including our IPO in February 2024 of $5,000,000, the Private Placement in October 2024

of $2,047,105 and warrant exercises in December 2024 of $1,523,700 offset by change in offering costs of $434,154.

Liquidity and Capital Resources

As of December 31, 2024, we had current assets

totaling $1,528,162 primarily consisting of cash balances of $894,773 and deferred offering costs of $512,758.

Our current liabilities

as of December 31, 2023 totaled $114,497, consisting entirely of accounts payable and accrued expenses.

Our net working capital as of

December 31, 2023 was $1,413,665.

On February 16, 2024, we completed our IPO for

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

paying certain underwriting discounts and commissions, business combination expenses and other expenses related to the IPO, we received

approximately $3.5 million in net proceeds.

Our cash balance as of March 21, 2024 was approximately $3.2 million.

To date, our operations have been funded exclusively

by exempt private offerings of our common stock.

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

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

On December 31, 2021, we closed an additional private offering of 482,500

shares of common stock at a price of $4.00 per share for total gross proceeds of $1,930,000, of which we received net proceeds of $1,842,000

after fees and other expenses.

On July 25, 2022, we closed an additional private offering of 150,000 shares of common stock at a price

of $4.00 per share for total proceeds of $600,000.

We believe that the net proceeds from our February

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

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

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

If we are unable to raise capital when

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

We do not anticipate any significant

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

we expect we will have sufficient working capital to support our operations for at least 12 months following the closing of the IPO.

Going Concern

The reports from the independent registered public

accounting firm for the fiscal year ended April 30, 2023 for Fat Shark Holdings Ltd.

and for the fiscal year ended April 30, 2023 for

Rotor Riot, LLC, includes an explanatory paragraph stating each company has recurring net losses from operations, has negative operating

cash flows, does not yet generate revenue from operations and will need additional working capital for ongoing operations.

These factors,

among others, raise substantial doubt about each company's ability to continue as a going concern.

With the closing of our IPO in February

2024, we expect each will no longer operate as a going concern.

totaling $6,095,629 primarily consisting of cash balances of $3,757,323, inventory of $1,335,503 and prepaid deposits for inventory of

Our current liabilities as of December 31, 2024 totaled $933,669, primarily consisting of accounts payable and accrued expenses

of $668,732 and customer deposits and other current liabilities of $264,937.

Our net working capital as of December 31, 2024 was $5,161,960.

On October 29, 2024, we completed a private placement

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

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

We retained approximately

$1.8 million in net proceeds.

In December 2024, two investors and note holders

exercised their option to convert $3,000,000 of the then outstanding Convertible Note into 1,507,538 shares of Common Stock at a price

of $1.99 per share.

After the conversion and as of December 31, 2024, we no longer have any debt outstanding.

In December 2024, we also had several investors

exercise 684,000 warrants with cash and we issued 684,000 shares of our Common Stock for total cash proceeds of $1,523,700.

On February 26, 2025, multiple investors exercised

1,224,606 warrants at $1.99 per warrant from the October 2024 Private Placement and we issued 1,224,606 shares of our Common Stock and

received cash proceeds of $2,436,966.

As of March 25, 2025, we have approximately $5.0

million in cash.

We believe that the net proceeds from our 2024 financings, warrant exercises, revenues, and existing cash balances will

be sufficient to fund our current operating plans through at least the next 12 months.

We have based these estimates, however, on assumptions

that may prove to be wrong, and we could spend our available financial resources much faster than we currently expect and need to raise

additional funds sooner than we anticipate.

Critical Accounting Policies and Estimates

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

The preparation of financial statements in conformity with

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

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

the reporting periods.

The preparation of financial statements in conformity with GAAP

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

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

We regularly evaluate the accounting policies

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those estimates made by management.

Property and equipment are stated at cost.

and amortization are computed using straight-line methods over the estimated useful lives of the related assets.

When property and equipment

is retired or otherwise disposed of, the related cost and accumulated depreciation are removed from the respective accounts, and any

resulting gain or loss on disposition is reflected in operations.

Repairs and maintenance are expensed as incurred;

expenditures for

additions, improvements and replacements are capitalized.

The various classes of fixed assets are depreciated over their estimated useful

lives as follows:

Computer equipment – 3 years

Goodwill represents the excess of the purchase

price of an acquisition over the estimated fair value of identifiable net assets acquired.

The measurement periods for the valuation

of assets acquired and liabilities assumed ends as soon as information on the facts and circumstances that existed as of the acquisition

date becomes known, not to exceed 12 months.

Adjustments in a purchase price allocation may require a change in the amounts allocated

to goodwill during the periods in which the adjustments are determined.

Business Combinations

The Fat Shark and Rotor Riot acquisitions are

accounted for as a business combination under ASC 805.

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

date of acquisition.

The fair value is determined based on assumptions used in valuations and estimates determined by management, which

are subjective.

Impairment of goodwill and long-lived assets

Goodwill represents the future economic benefit

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

Goodwill represents

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

Intangible assets from acquired

business are recognized at fair value on the acquisition date.

Goodwill is tested for impairment at least annually at the reporting unit

level or whenever events or changes in circumstances indicate that goodwill might be impaired.

Valuation of Inventory

Our policy for valuation of inventory requires

us to evaluate the net realizable value of our inventory using various reference measures including current product selling prices, as

well as evaluating for excess quantities and obsolescence.

We may be required to record inventory write-downs if actual inventory values

are less favorable than those estimates by management.

Accounts Receivable

We carry our accounts receivable at invoiced amounts.

We evaluate our accounts receivable on a periodic basis and establish an allowance for credit losses based on a history of past write-offs

and collections and current credit conditions.

Accounts are written-off as uncollectible at the discretion of management.

Revenue Recognition

We receive revenues from the sale of products

from both retail distributers and individual consumers.

Sales revenue is recognized when the products are shipped and the price is fixed

or determinable, no other significant obligations of the Company exist and collectability is probable.

Revenue is recognized when the

title to the products has been passed to the customer, which is the date the products are shipped to the customer.

This is the date the

performance obligation has been met.

Stock Based Compensation

Certain employees and directors have received

grants of restricted common shares in our company.

Other employees received grants of stock options in our Company.

These awards are accounted

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

Based on this guidance and the terms of the awards,

the awards are equity classified.

The fair value of restricted stock awards is based

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

The fair value of each stock option award is determined

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

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

The expected volatility

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

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

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

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

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

method calculation.

In addition, the Company issued shares of our

Common Stock in 2023 to consultants for services performed.

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

public market for our Common Stock.

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

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

as an estimate.

These values and estimates are subjective.

Derivatives and Fair Value

The fair value of our derivative liabilities are

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

of the stock, the estimate of the expected term, the risk-free interest rate over the expected term, and certain estimates and probabilities

of different outcomes.

Management performed an assessment on the convertible

option feature included in the note payable to determine if the optional conversion feature should be bifurcated from the host contract

and accounted for separately as a liability pursuant to ASC 815.

This assessment includes judgment from management to determine if the

derivative is clearly and closely related to the debt and if it meets certain definitions of a derivative.

The Company classifies warrants issued for the

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

of each respective contract.

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

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

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

This assessment,

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

end date while the warrants are outstanding.

For issued or modified warrants that meet all

of the criteria for equity classification, the warrants are required to be recorded as a component of equity at the time of issuance.

For issued or modified warrants that do not meet all the criteria for equity classification, the warrants are required to be recorded

as liabilities at their fair value.

Off-Balance Sheet Arrangements

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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 7. Management’s Discussion and Analysis