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Item 8. Financial Statements and Supplementary Data

2025-03-27 compared with 2024-03-22 · 1212 added, 2095 removed, 158 unchanged (95% of the section changed)

2 unchanged sentences

INDEX TO FINANCIAL STATEMENTS

Unaudited ProForma Condensed Combined Financial Statements

Explanatory Note

Balance Sheet at December 31, 2023

Statement of Operations for the year ended December 31, 2023

Notes to Unaudited ProForma Condensed Combined Financial Statements

Unusual Machines, Inc.

Financial Statements

Report of Independent Registered Public Accounting Firm

Balance Sheets at December 31, 2023 and 2022

Statement of Operations for the years ended December 31, 2023 and 2022

Statement of Changes in Stockholders’ Equity for the years ended December

31, 2023 and 2022

Statement of Cash Flows for the years ended December 31, 2023 and 2022

Notes to Financial Statements

Fat Shark Holdings, Ltd.

Unaudited Interim Financial Statements

Balance Sheets at January 31, 2023 and April 30, 2023

Statement of Operations for the three and nine months ended January 31, 2024 and

Statement of Changes in Stockholders’ Equity for the nine months ended January

31, 2024 and 2023

Statement of Cash Flows for the nine months ended January 31, 2024 and 2023

Notes to Financial Statements

Fat Shark Holdings, Ltd.

Audited Financial Statements

Report of Independent Registered Public Accounting Firm

Balance Sheets at April 30, 2023 and 2022

Statements of Operations for the years ended April 30, 2023 and 2022

Statement of Stockholders’ Equity for the years ended April 30,

2023 and 2022

Statement of Cash Flows for the years ended April 30, 2023 and 2022

Notes to Financial Statements

Rotor Riot, LLC Unaudited Interim Financial Statements

Balance Sheets at January 31, 2024 and April 30, 2023

Statement of Operations for the three and nine months ended January 31, 2024 and

Statement of Changes in Stockholders’ Equity for the nine months ended January

31, 2024 and 2023

Statement of Cash Flows for the nine months ended January 31, 2024 and 2023

Notes to Financial Statements

Rotor Riot, LLC Audited Financial Statements

Report of Independent Registered Public Accounting Firm

Balance Sheets at April 30, 2023 and 2022

Statements of Operations for the years ended April 30, 2023 and 2022

Statement of Members’ Equity for the years ended April 30, 2023

Statement of Cash Flows for the years ended April 30, 2023 and 2022

Notes to Financial Statements

UNAUDITED PRO FORMA

CONDENSED COMBINED

FINANCIAL STATEMENTS

The pro forma adjustments

related to the Share Purchase Agreement and Initial Public Offering are described in the notes to the unaudited pro forma combined financial

information and principally include the following:

Pro forma adjustment to eliminate intercompany

transactions between Fat Shark and Rotor Riot

Pro forma adjustment to eliminate the Fat Shark

and Rotor Riot goodwill, liabilities and owners’ equity not acquired as a part of the Share Purchase Agreement

Pro forma adjustment to record the business combination

of Fat Shark and Rotor Riot which closed on February 16, 2024

Pro forma adjustment to record proceeds and costs

related to our Initial Public Offering closed on February 16, 2024

The adjustments to fair

value and the other estimates reflected in the accompanying unaudited pro forma condensed consolidated financial statements may be materially

different from those reflected in the combined company’s consolidated financial statements subsequent to the Share Purchase.

addition, the unaudited pro forma condensed combined financial statements do not purport to project the future financial position or

results of operations of the combined companies.

Reclassifications and adjustments may be required if changes to Fat Shark’s and

Rotor Riot’s financial presentation are needed to conform Fat Shark’s and Rotor Riot’s accounting policies to the accounting

policies of Unusual Machines, Inc.

These unaudited pro

forma condensed combined financial statements do not give effect to any anticipated synergies, operating efficiencies or cost savings

that may be associated with the Share Purchase Agreement or Initial Public Offering.

These financial statements also do not include any

integration costs the companies may incur related to the transactions as part of combining the operations of the companies.

UNAUDITED PRO FORMA CONDENSED COMBINED BALANCE

Rotor Riot Historical

Pro Forma Combining Adjustments

Current Assets

Accounts receivable, net

Inventories, net

Deferred offering costs

Other current assets

Total Current Assets

Right-of-use asset

Other non-current asset

Intangible assets, net

Liabilities and Stockholders’ Equity (Deficit)

Accounts payable and accrued expenses

Customer deposits

Debt obligations

Due to related party

(10,323,647 )

Operating lease liability – current

Total Current Liabilities

(10,323,647 )

Convertible note

Operating lease liability - non-current

Total Liabilities

Stockholders’ Equity (Deficit)

Preferred stock

Additional paid-in capital

Accumulated deficit

Total Stockholders’ Equity (Deficit)

Total Liabilities and Stockholders’ Equity

Gross cash proceeds of $5,000,000

from our Offering, completed in February 2024, less estimated underwriter fees of $375,000, $50,000 in underwriter non-accountable

expense allowance, $125,000 in additional underwriting expenses, $600,000 in other acquisition and offering related costs, $125,000

in a bonus payment to the CFO in accordance with his employment agreement and $1.0 million cash payment related to the purchase of

Fat Shark and Rotor Riot.

Eliminated intercompany accounts receivable between

Fat Shark and Rotor Riot

Inventory cost adjustment related to intercompany

sales between Fat Shark and Rotor Riot

Eliminate current deferred offering costs against

additional paid in capital related to the closing of the Offering.

Goodwill recognized according to Accounting Standards

Codification (“ASC”) 805, Business Combinations.

Adjustment eliminates non-acquired Fat Shark goodwill of $6,168,260

and recognizes goodwill on the share purchase agreement of $14,793,080.

Goodwill is based on management’s estimate and will

be finalized upon closing of the share purchase agreement based on final assets acquired and liabilities assumed.

Reference Note

3 — Purchase Price Allocation and Goodwill for management’s estimation of goodwill.

Eliminated intercompany accounts payable between

Fat Shark and Rotor Riot.

Per the terms of the share purchase agreement,

Red Cat eliminated any and all indebtedness, relating to Fat Shark and Rotor Riot

Per the terms of the amended share purchase agreement,

Unusual Machines issued a $2.0 million Note to Red Cat in February 2024 in conjunction with closing the Business Combination and

The principal and any accrued and unpaid interest is due in full at 18 months from the date of issuance.

In the event of

default and in lieu of Unusual Machines repaying the Note, Red Cat may convert the Note into shares of common stock at the option

The Note is subject to other terms and conditions as agreed upon by both parties.

Per the terms of the share purchase agreement,

Unusual Machines issued $17.0 million in Unusual Machines common stock in February 2024 at a price of $4.00 per share, or 4,250,000

common shares which are subject to certain lock up requirements.

In addition and as a part of the Offering,

Unusual Machines issued common stock for gross proceeds of $5.0 million in February 2024 at $4.00 per share price, or 1,250,000 common

Unusual Common Stock issued above par value as

a part of the share purchase agreement and Common Stock issued above par value as a part of our Offering, offset by elimination of

Fat Shark and Rotor Riot equity acquired and expenses related to the Offering.

Fat Shark and Rotor Riot accumulated deficit and

adjustments related to the Unaudited Pro Forma Condensed Combined Statement of Operations.

UNAUDITED PRO FORMA CONDENSED COMBINED STATEMENT

OF OPERATIONS

For the nine months ended

Unusual Historical

Rotor Riot Historical

Cost of revenues

Operating expenses:

Research and development

Selling and marketing

General and administrative

Stock based compensation

Total operating expenses

Operating loss

Other income (expenses)

Interest income

Interest expense

Loss before taxes

Provision for taxes

$ (1,794,455 )

$ (1,277,559 )

$ (4,471,599 )

Net loss per share attributable to common shareholders

Basic and diluted

Weighted average common shares outstanding

Basic and diluted

Elimination of intercompany revenues

between Fat Shark and Rotor Riot.

Fat Shark sells products to Rotor Riot, which is included in total revenue for Fat Shark and have

been eliminated in the combined pro forma presentation.

Elimination of intercompany cost of revenues between

Rotor Riot and Fat Shark.

Rotor Riot purchases inventory from Fat Shark, which is included in total cost of revenues for Rotor Riot

and have been eliminated in the combined pro forma presentation.

Estimated expenses of $350,000 incurred related

to the business combination of Rotor Riot and Fat Shark and $125,000 related to anticipated bonus to be paid to the CFO as per the

terms of his employment agreement.

Notes to Unaudited Pro Forma

Condensed Combined Financial Statements

Note 1 — Basis of Presentation

On November 21, 2022, Unusual Machines, Inc.

(the “Company”) entered into a Share Purchase Agreement (the “Agreement”) with Red Cat Holdings, Inc., a Nevada

Corporation (“Red Cat”) for the purchase and sale of Fat Shark Holdings, Ltd., a Nevada Corporation (“Fat Shark”)

and Rotor Riot, LLC, an Ohio limited liability Company (“Rotor Riot”).

Under the terms of the Agreement, as amended,

provides that the Company will acquire all of the outstanding shares of capital stock of Fat Shark and Rotor Riot in exchange for a purchase

price of $20.0 million (“Purchase Price”) comprised of (i) $1.0 million in cash, (ii) a $2.0 million Note, and (iii) $17.0

million of the Company’s common stock.

The Purchase Price is subject to potential adjustments.

The consummation of the transactions

contemplated by the Agreement are subject to certain closing conditions including, without limitation, the Company completing their initial

public offering (the “Offering”) and the commencement of trading on NYSE American simultaneously with the consummation of

the Offering.

On February 16, 2024, the Company completed their

Offering of 1,250,000 shares of common stock at a public offering price of $4.00 per share.

The shares are traded on the NYSE American.

Simultaneous with the closing of the Offering, the Company completed the acquisitions of Fat Shark and Rotor Riot while also issuing

Red Cat 4,250,000 shares of common stock of the Company.

Accounting Standards Codification (“ASC”)

805, Business Combinations , reflects the overall principle that when an entity (the “Acquirer”) takes control of another

entity (the “Target”), the fair value of the underlying exchange transaction should be used to establish a new accounting

basis of the acquired entity.

In accordance with this ASC, the Share Purchase Agreement will be accounted for as an acquisition of Fat

Shark and Rotor Riot by the Company.

In addition, because obtaining control leaves the acquirer responsible and accountable for all of

the acquiree’s assets, liabilities, and operations, the acquirer should recognize and measure the assets acquired and liabilities

assumed at their full fair values with limited exceptions as of the date control is obtained.

Authoritative guidance

ASC 805, Business Combinations (“ASC

ASC 820, Fair Value Measurements and Disclosures

ASC 350, Intangibles — Goodwill and

Other (“ASC 350”)

ASC 360, Property, Plant, and Equipment

ASC 260, Earnings per Share (“ASC

The unaudited pro forma condensed combined financial

statements are based on the Company’s audited and unaudited interim historical consolidated financial statements and Fat Shark

and Rotor Riot’s audited and unaudited interim historical combined financial statements as adjusted to give effect to the Company’s

acquisition by Unusual Machines.

The allocation of the purchase price used in

the unaudited pro forma financial statements is based upon management’s estimate of the fair values of the assets and liabilities

A final allocation of the purchase price will be determined upon closing of the Share Purchase Agreement with the assistance

of a third-party valuation firm.

The Unaudited Pro Forma Condensed Combined Financial Statements are provided for informational purpose

only and are not necessarily indicative of what the combined company’s financial position and results of operations would have

actually been had the transactions been completed on the dates used to prepare these pro forma financial statements.

The adjustments

to fair value and the other estimates reflected in the accompanying unaudited pro forma condensed combined financial statements may be

materially different from those reflected in the combined company’s consolidated financial statements subsequent to the transactions.

In addition, the Unaudited Pro Forma Condensed Combined Financial Statements do not purport to project the future financial position

or results of operations of the combined companies.

These unaudited pro forma condensed combined

financial statements do not give effect to any anticipated synergies, operating efficiencies or cost savings that may be associated with

the transactions.

These financial statements also do not include any integration costs the companies may incur related to the transactions

as part of combining the operations of the companies.

Note 2 — Summary of Significant Accounting

The unaudited pro forma condensed combined balance

sheet as of December 31, 2023, gives pro forma effect to both the completed business combination and Offering as if they had been consummated

as of December 31, 2023.

The unaudited proforma condensed combined statements of operations for the year ended December 31, 2023 give

pro forma effect to both the business combination and Offering as if they had been consummated as of December 31, 2023.

The unaudited

pro forma condensed combined financial statements have been prepared in a manner consistent with the accounting policies adopted by the

The accounting policies followed for financial reporting on a pro forma basis are the same as those disclosed in the audited

financial statements.

The unaudited pro forma condensed combined financial statements do not assume any differences in accounting policies

among the Company and Fat Shark and Rotor Riot.

Note 3 — Purchase Price Allocation and Goodwill

As discussed in Note

1 – Basis of Presentation, the Company entered into the Agreement with Red Cat to acquire all of the capital stock of Fat Shark

and Rotor Riot.

A summary of management’s

estimated purchase price and related allocation was as follows as of December 31, 2023.

Per the Agreement, the final purchase price allocation

will be agreed upon after closing.

In addition, final fair values of assets acquired, including the valuation of any intangible assets,

and liabilities assumed will be determined after closing.

Convertible note

Total Purchase Price

Estimated purchase price allocation

Estimated assets acquired

Accounts receivable

Other current assets

Estimated intangible assets

Operating lease right-of-use assets

Total estimated assets acquired

Estimated liabilities assumed

Accounts payable and accrued expenses

Customer deposits

Operating lease liabilities

Total estimated liabilities assumed

Total estimated fair value of net assets acquired

Estimated goodwill

The Company will engage

a valuation services firm to value the intangible assets acquired once the final balances as of the closing date are provided.

The allocation

of the purchase price used in the unaudited pro forma financial statements is based upon management’s estimate of the fair values

of the assets and liabilities determined.

To the extent that the parties do not agree on the final allocation of the purchase price,

a final allocation of the purchase price will be determined in accordance with Section 2.01 of Agreement with the assistance of a nationally-recognized

accounting firm that is reasonably acceptable to Unusual and Red Cat.

The Unaudited Pro Forma Condensed Combined Financial Statements

and estimated goodwill are provided for informational purpose only and are not necessarily indicative of what the combined company’s

financial position and results of operations would have actually been had the transactions been completed on the dates used to prepare

these pro forma financial statements.

Note 4 — Pro Forma Transaction Accounting Adjustments

The pro forma transaction accounting adjustments

are based on the Company’s preliminary estimates, valuations, and assumptions that are subject to change.

Note 5 – Related Party Transactions

Fat Shark Ltd.

sells products to Rotor Riot,

LLC which is included in revenue for Fat Shark and cost of goods sold for Rotor Riot.

Sales totaled $493,540 during the pro forma year

ended December 31, 2023.

Cost of goods sold totaled $462,921 during the pro forma year ended December 31, 2023.

These transactions have

been eliminated as a part of the unaudited pro forma condensed combined statement of operations.

Note 6 – Reconciliation of Target Company Interim Statement

of Operations to Pro Forma Statement of Operations

The following statement of operations provides

a reconciliation between the Fat Shark unaudited interim statement of operations for the period ending January 31, 2024 to the Fat Shark

unaudited pro forma statement of operations for the twelve months ended December 31, 2023 to conform the target company’s interim

period end to the Company’s year end period ending December 31, 2023.

Nine Months Ended

January 31, 2024

January through April

12 Months Ended

December 31, 2023

Cost of revenues

Operating expenses:

Research and development

Selling and marketing

General and administrative

Stock based compensation

Total operating expenses

Operating income (loss)

Other income (expenses)

Interest income

Interest expense

Income (loss) before taxes

Provision for taxes

Net income (loss)

The following statement of operations provides

a reconciliation between the Rotor Riot unaudited interim statement of operations for the period ending January 31, 2024 to the Rotor

Riot unaudited pro forma statement of operations for the twelve months ended December 31, 2023 to conform the target company’s

interim period end to the Company’s year ending December 31, 2023.

Nine Months Ended

January 31, 2024

January through April

12 Months Ended

December 31, 2023

Cost of revenues

Operating expenses:

Research and development

Selling and marketing

General and administrative

Stock based compensation

Total operating expenses

Operating income (loss)

Other income (expenses)

Interest expense

Income (loss) before taxes

Provision for taxes

Net income (loss)

Report of Independent Registered Public Accounting

To the shareholders and the board of directors

of Unusual Machines, Inc.

Opinion on the Financial Statements

Report of Independent Registered

Public Accounting Firm (PCAOB Firm ID 106 )

Consolidated Balance Sheets at December 31, 2024 and 2023

Consolidated Statement of Operations for the years ended December 31, 2024 and 2023

Consolidated Statement of Changes in Stockholders’ Equity for the years ended December 31, 2024 and 202 3

Consolidated Statement of Cash Flows for the years ended December 31, 2024 and 2023

Consolidated Notes to Financial Statements

of Independent Registered Public Accounting Firm

To the Board of Directors and Stockholders of:

Unusual Machines, Inc.

on the Financial Statements

We have audited the accompanying consolidated

balance sheets of Unusual Machines, Inc.

as of December 31, 2023 and 2022, the related statements of operations, stockholders' equity

(deficit), and cash flows for the years then ended, and the related notes (collectively referred to as the "financial statements").

In our opinion, the financial statements present fairly, in all material respects, the financial position of the Company as of December

31, 2023 and 2022, and the results of its operations and its cash flows for the years then ended, in conformity with accounting principles

generally accepted in the United States.

Basis for Opinion

These financial statements are the responsibility

of the Company's management.

Our responsibility is to express an opinion on the Company's financial statements based on our audit.

are a public accounting firm registered with the Public Company Accounting Oversight Board (United States) ("PCAOB") and are

required to be independent with respect to the Company in accordance with the U.S.

federal securities laws and the applicable rules and

regulations of the Securities and Exchange Commission and the PCAOB.

We conducted our audit in accordance with the

(the “Company”) as of December 31, 2024 and 2023, the related consolidated statements

of operations, changes in stockholders’ equity, and cash flows, for each of the two years in the period ended December 31, 2024,

and the related notes (collectively referred to as the “consolidated financial statements”).

In our opinion, the consolidated

financial statements present fairly, in all material respects, the consolidated financial position of the Company as of December 31, 2024

and 2023, and the consolidated results of its operations and its cash flows for each of the two years in the period ended December 31,

2024, in conformity with accounting principles generally accepted in the United States of America.

These consolidated financial statements are the

responsibility of the Company’s management.

Our responsibility is to express an opinion on the Company’s consolidated financial

statements based on our audits.

We are a public accounting firm registered with the Public Company Accounting Oversight Board (United

States) (“PCAOB”) and are required to be independent with respect to the Company in accordance with the U.S.

federal securities

laws and the applicable rules and regulations of the Securities and Exchange Commission and the PCAOB.

We conducted our audits in accordance with the

standards of the PCAOB.

Those standards require that we plan and perform the audit to obtain reasonable assurance about whether the financial

statements are free of material misstatement, whether due to error or fraud.

The Company is not required to have, nor were we engaged

to perform, an audit of its internal control over financial reporting.

Those standards require that we plan and perform the audits to obtain reasonable assurance about whether the consolidated

financial statements are free of material misstatement, whether due to error or fraud.

The Company is not required to have, nor were we

engaged to perform, an audit of internal control over financial reporting.

As part of our audits, we are required to obtain an understanding

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Accordingly, we express no such opinion.

Our audit included performing procedures to assess

the risks of material misstatement of the financial statements, whether due to error or fraud, and performing procedures that respond

to those risks.

Such procedures included examining, on a test basis, evidence regarding the amounts and disclosures in the financial

Our audit also included evaluating the accounting principles used and significant estimates made by management, as well as

evaluating the overall presentation of the financial statements.

We believe that our audit provides a reasonable basis for our opinion.

Borgers CPA PC

BF Borgers CPA PC (PCAOB ID 5041 )

We have served as the Company's auditor since

Our audits included performing procedures to assess

the risks of material misstatement of the consolidated financial statements, whether due to error or fraud, and performing procedures

that respond to those risks.

Such procedures included examining, on a test basis, evidence regarding the amounts and disclosures in the

consolidated financial statements.

Our audits also included evaluating the accounting principles used and significant estimates made by

management, as well as evaluating the overall presentation of the consolidated financial statements.

We believe that our audits provide

a reasonable basis for our opinion.

Audit Matters

The critical audit matters communicated below

are matters arising from the current period audit of the consolidated financial statements that were communicated or required to be communicated

to the audit committee and that:

(1) relate to accounts or disclosures that are material to the consolidated financial statements and

(2) involved our especially challenging, subjective, or complex judgments.

The communication of critical audit matters does not alter

in any way our opinion on the consolidated financial statements, taken as a whole, and we are not, by communicating the critical audit

matters below, providing separate opinions on the critical audit matters or on the accounts or disclosures to which they relate.

2295 NW Corporate

Blvd., Suite 240 • Boca Raton, FL 33431-7326

995-8270 • Toll Free:

(866) CPA-8500 • Fax:

(561) 995-1920

www.salbergco.com

• info@salbergco.com

National Association of Certified Valuation Analysts • Registered with the PCAOB

CPAConnect with Affiliated Offices Worldwide • Member AICPA Center for Audit Quality

Business Acquisitions

As described in footnote 3 “Acquisitions”,

to the consolidated financial statements, the Company closed on the acquisitions of both Fat Shark and Rotor Riot from Red Cat in February

The determination of fair values for assets acquired and liabilities assumed, and equity-based purchase consideration required management

to make significant estimates and assumptions such as those related to forecasts of future revenues, gross margins, operating expenses,

discount and other rates, and equity values.

Changes in these assumptions could have a significant impact on the fair values.

We identified business combinations as a critical

audit matter.

Auditing management’s judgments regarding the above estimates involved a high degree of subjectivity.

The primary procedures we performed to address

this critical audit matter included (a) gained an understanding of management’s process to determine the valuations, (b) assessed

the competence, independence, qualifications, experience, and capabilities of the third-party valuation specialist, (c) evaluated if the

valuation methods used by management was appropriate, (d) evaluated the reasonableness of management’s forecasts by comparing them

to historical information, year to date current information and/or other supporting contracts or information, (e) assessed the reasonableness

of the discount and other rates used by evaluating each component, (f) assessed the reasonableness of the stock price used to value the

equity consideration paid, and (g) recomputed the valuation estimates.

We agreed with management’s conclusions.

Goodwill and Intangible Assets Impairment Assessment

As described in footnote 2 “Goodwill and

long-lived assets”, to the consolidated financial statements, the Company is required to test the carrying amount of goodwill at

least annually, or more frequently upon the occurrence of certain trigger events.

The Company is also required to assess the recoverability

of its intangible assets whenever certain events occur, or circumstances change that may be indicators of impairment, but at least annually.

We identified Goodwill and Intangible Assets Impairment

Assessment as a critical audit matter because auditing the annual goodwill impairment test and the evaluation of the recovery and/or fair

value of intangible assets required significant judgment regarding the evaluation of qualitative and/or quantitative factors, including

The primary audit procedures we performed to address

this critical audit matter included, (a) gained an understanding of management’s process to conduct qualitative evaluations of intangible

assets based on the criteria in authoritative literature, (b) evaluated management’s evaluation of potential indicators of impairment

of intangible assets, (c) compared management’s qualitative evaluation of intangible assets impairment to relevant and reliable

data, , (d) assessed the competence, independence, qualifications, experience, and capabilities of the third-party valuation specialist

who conducted the quantitative test for goodwill impairment, (e) evaluated if the quantitative test valuation method used by the specialist

was appropriate, (f) evaluated the reasonableness of management’s forecasts by comparing them to historical information, year to

date current information and/or other supporting contracts or information, (g) assessed the reasonableness of the discount and other rates

used by evaluating each component.

We agreed with management’s conclusions.

/s/ Salberg & Company, P.A.

SALBERG & COMPANY, P.A.

We have served as the Company’s auditor

Boca Raton, Florida

March 27, 2025

2 unchanged sentences

Current assets:

Cash and cash equivalents

Deferred offering costs

Cash & cash equivalents

Accounts receivable

Prepaid inventory

Other current assets

1 unchanged sentence

Property and equipment, net

Deferred offering costs

Operating lease right-of-use assets

Intangible assets, net

Total non-current assets

2 unchanged sentences

Accounts payable and accrued expenses

Deferred revenue

Operating lease liability

Total current liabilities

Long-term liabilities

Deferred tax liability

Operating lease liability – long term

Total liabilities

Commitments and contingencies (Note 15)

Stockholders’ equity:

Series B preferred stock - $ 0.01

par value, 10,000,000 authorized

and 190 and 140

shares issued and outstanding at December 31, 2023 and 2022, respectively

Common stock - $ 0.01

par value, 500,000,000 authorized

and 3,217,255 and 3,392,250

shares issued and outstanding at December 31, 2023 and 2022, respectively

Series A preferred stock - $ 0.01 par value, 4,250 authorized and 0 and 0 shares issued and outstanding at December 31, 2024 and 2023, respectively

Series B preferred stock - $ 0.01 par value, 10,000,000 authorized and 0 and 190 shares issued and outstanding at December 31, 2024 and 2023, respectively

Series C preferred stock - $ 0.01 par value, 3,000 authorized and 0 and 0 shares issued and outstanding at December 31, 2024 and 2023, respectively

Common stock - $ 0.01 par value, 500,000,000 authorized and 15,122,018 and 3,217,255 shares issued and outstanding at December 31, 2024 and 2023, respectively

Additional paid in capital

6 unchanged sentences

and notes to the financial statements.

Machines, Inc.

Statement of Operations

For the Years Ended December

31, 2023 and 2022

Unusual Machines, Inc.

Statements of Operations

Year Ended December 31,

2 unchanged sentences

Research and development

Sales and marketing

General and administrative

Loss on impairment of goodwill

Depreciation and amortization

3 unchanged sentences

( 2,383,462 )

Other income:

Other income (expense):

Interest income

Total other income

Interest expense

Gain on debt extinguishment

Change in fair value of derivatives and warrant liabilities

( 16,146,205 )

Total other income (expense)

( 15,002,061 )

Net loss before income tax

10 unchanged sentences

and notes to financial statements.

Machines, Inc.

Statement of Changes

in Stockholders’ Equity

For the Years Ended December

31, 2023 and 2022

Unusual Machines, Inc.

Statements of Changes in Stockholders’

For the Years Ended December 31, 2024 and 2023

Series A, Preferred Stock

Series B, Preferred Stock

Series C, Preferred Stock

Additional Paid-In

Total Stockholders’

Balance, December 31, 2022

$ ( 1,549,584 )

Issuance of common stock

( 1,892,065 )

Conversion to preferred stock

Issuance of common shares for services

Conversion to preferred shares

( 2,383,462 )

2 unchanged sentences

$ ( 3,933,046 )

Issuance of common shares

Conversion to preferred shares

Issuance of common shares as settlement

Issuance of common shares, initial public offering, net of offering costs

Issuance of common shares, business combination

Issuance of common shares, equity incentive plan

Issuance of common shares, private placement, net

Exchange of common shares for Series A preferred

( 4,250,000 )

Exchange of convertible note for Series C preferred

Conversion of preferred shares to common shares

Cash exercise of warrants

Convertible note conversion

Stock compensation expense - vested stock

Stock option compensation expense

( 31,980,468 )

Balance, December 31, 2024

2 unchanged sentences

and notes to financial statements.

Machines, Inc.

Statement of Cash Flows

For the Years Ended December

31, 2023 and 2022

Unusual Machines, Inc.

Statements of Cash Flows

Year Ended December 31,

2 unchanged sentences

$ ( 2,383,462 )

Depreciation and amortization

Stock compensation expense as settlement

Stock compensation expense

Loss on impairment on goodwill

Change in fair value of derivatives and warrant liabilities

Gain on debt extinguishment

( 1,281,880 )

Income tax benefit

Change in assets and liabilities:

Accounts receivable

Deferred offering costs

Other current assets

Prepaid inventory

Accounts payable and accrued expenses

Operating lease liabilities

Customer deposits and other current liabilities

Net cash used in operating activities

2 unchanged sentences

Cash flows from investing activities

Cash portion of consideration paid for acquisition of businesses, net of cash received

Purchases of property and equipment

1 unchanged sentence

Cash flows from financing activities:

Issuance of common stock

Net cash provided by financing activities

Proceeds from issuance of common shares, IPO

Proceeds from issuance of common shares, private placement

Proceeds from issuance of common shares, warrant exercises

Common share issuance offering costs

Net cash provided by (used in) financing activities

Net increase (decrease) in cash

3 unchanged sentences

Supplemental disclosures of cash flow information:

Cash paid for interest

Cash paid for income tax

Non-cash consideration paid for assets acquired and liabilities assumed

Deferred acquisitions costs

Deferred offering costs recorded as a reduction of proceeds

See accompanying independent auditor’s report

and notes to financial statements.

Machines, Inc.

Unusual Machines, Inc.

Notes to Financial Statements

For the Year Ended December

1 – Organization and nature of business

Unusual Machines, Inc., formerly AerocarveUS

Corporation, (“the Company”) is a corporation engaged in the commercial drone industry.

The Company was originally formed

as a limited liability company registered with the Department of State under the laws of the Commonwealth of Puerto Rico on July 11,

2 – Summary of significant accounting policies

of Accounting

For the Years Ended December 31, 2024 and 2023

Note 1 – Organization and nature of business

Unusual Machines, Inc.

(“the Company”)

is a Nevada corporation engaged in the commercial drone industry.

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

On February 16, 2024, the Company closed its Initial

Public Offering (the “IPO”) of 1,250,000 shares of common stock at a public offering price of $ 4.00 per share (“IPO

The shares are traded on NYSE American.

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

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

(“Red Cat”) (See

Note 2 – Summary of significant accounting policies

Basis of Accounting

The accompanying financial statements have been

prepared in accordance with accounting principles generally accepted in the United States of America (“GAAP”).

Principles of Consolidation

The consolidated financial statements include

accounts of the Company and its wholly owned subsidiaries, Fat Shark and Rotor Riot since the acquisitions on February 16, 2024.

transactions and balances have been eliminated upon consolidation.

Use of Estimates

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Accordingly, actual results could differ from those estimates, and such results could be material.

The Company considers all highly liquid debt

instruments purchased with an original maturity of three months or less to be cash equivalents.

The Company had no cash equivalents at December 31, 2023 or December 31, 2022.

The financial statements include some

amounts that are based on management's best estimates and judgments.

Significant estimates reflected in these financial statements

include those used to (i) determine stock-based compensation, (ii) the fair value of assets acquired and liabilities assumed in

business combinations and the value of shares issued as consideration, (iii) reserves and allowances related to accounts receivable,

and inventory, (iv) the evaluation of long-lived assets, including intangibles and goodwill, for impairment, (v) the fair value of

lease liabilities and related right of use assets, (vi) the warranty liability reserve (vii) the fair value of embedded conversion

option and warrant derivative liabilities and (viii) the deferred tax asset valuation allowance.

The Company has never been profitable and has incurred net losses related

to its operations and acquisitions.

During the year ended December 31, 2024, the Company incurred a net loss from operations of $ 16,991,767 ,

which includes a non-cash charge related to the impairment loss on goodwill of $ 10,073,326 and non-cash stock compensation expense of

$ 2,320,206 .

Cash used in operating activities was $ 3,996,367 .

As discussed in Note 9, the Company converted all outstanding notes payable

as of December 31, 2024 and has no other debt.

The Company is continuing to see additional growth in revenue as it expands further into

enterprise business.

In addition and subsequent to year end and as discussed in Note 16, the Company received an additional $2.4 million

in cash proceeds from warrant exercises.

Management has concluded that these recent events alleviate any substantial doubt about the Company’s

ability to continue its operations and meet its financial obligations, for twelve months from the date these consolidated financial statements

Cash and Cash Equivalents

The Company considers all highly liquid debt instruments

purchased with an original maturity of three months or less to be cash equivalents.

The Company maintains cash deposits at a financial

institution that is insured by the Federal Deposit Insurance Corporation up to $ 250,000 .

The Company’s cash balance may at times exceed these limits.

At December 31, 2023 and December 31, 2022, the Company had approximately

$ 0.6 million and $ 2.8

million , respectively, in excess of federally insured limits.

The Company continually monitors its positions with, and the credit

quality of the financial institutions with which it invests.

Receivable, net

The Company carries its accounts receivable.

On a periodic basis, the Company evaluates its accounts receivable and establishes an allowance for doubtful accounts based on a history

of past write-offs and collections and current credit conditions.

The Company’s cash balance may at times

exceed these limits.

At December 31, 2024 and 2023, the Company had approximately $ 3 .0 million and $ 0.6 million, respectively, in excess

of federally insured limits.

The Company continually monitors its positions with, and the credit quality of the financial institutions

with which it invests.

Accounts Receivable

The Company carries its accounts receivable at

invoiced amounts.

Upon the closing of the acquisitions in February 2024 when we acquired accounts receivable, the Company adopted ASC

326, Financial Instruments – Credit Losses, which the Company evaluates all credit losses as of the reporting date.

On a periodic

basis, the Company evaluates its accounts receivable and establishes 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.

At December 31, 2023 and 2022, the Company considers accounts receivable to be fully collectible;

accordingly, no allowance for doubtful accounts has been established.

offering costs

The Company deferred direct incremental costs

associated with its ongoing initial public offering (“IPO”).

The Company capitalized $ 424,933

during the years ended December 31, 2023 and 2022, respectively.

These deferred offering costs will be netted against IPO proceeds

upon successful completion of the IPO.

Deferred offering costs consist of primarily legal, advisory, and consulting fees incurred in

connection with the formation and preparation of the IPO.

During the fiscal year ended December 31, 2021

and 2020, the Company made multiple unsecured and demand loans to Rotor Riot, LLC for a total of $ 115,222

to be used for general operating expenses.

The notes do not bear interest.

The note receivable was fully repaid during the year

ended December 31, 2022.

and equipment, net

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

accordingly, no allowance for credit

losses has been established.

Inventories, which consist of finished goods,

are stated at the lower of cost or net realizable value, and are measured using the first-in, first-out method.

Cost components include

direct materials and direct labor, as well as in-bound freight.

At each balance sheet date, the Company evaluates the net realizable value

of its inventory using various reference measures including current product selling prices, as well as evaluating for excess quantities

and obsolescence.

Deferred offering costs

The Company previously deferred direct

incremental costs associated with its ongoing initial public offering (“IPO”).

The Company capitalized $ 424,933 during

the year ended December 31, 2023 and $ 87,825 in

Deferred offering costs consist primarily of legal, advisory, and consulting fees incurred in connection with the formation

and preparation of the IPO.

After consummation of the IPO in February 2024, total deferred offering costs of $ 512,758 and

additional offering costs of $ 127,687 were

recorded as a reduction to additional paid-in capital generated as a result of the offering.

Property and equipment, net

Property and equipment is stated at cost, net

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Depreciation is provided utilizing the straight-line method over the estimated useful lives for owned assets

ranging from two to five years .

The Company recognizes revenue in accordance

of three years .

The Company has adopted Accounting Standards

Codification (ASC) 842, “Leases” which requires the recognition of assets and liabilities associated with lease agreements.

The Company recognized a lease liability obligation and a right-of-use asset for the facilities lease in Orlando, FL.

The Company determines if a contract is a lease

or contains a lease at inception.

Operating lease liabilities are measured, on each reporting date, based on the present value of the

future minimum lease payments over the remaining lease term.

The Company's leases do not provide an implicit rate.

Therefore, the Company

used an effective discount rate of 11.49% based on its last debt financings.

Operating lease assets are measured by adjusting the lease

liability for lease incentives, initial direct costs incurred and asset impairments.

Lease expense for minimum lease payments is recognized

on a straight-line basis over the lease term with the operating lease asset reduced by the amount of the expense.

The Company has elected

to account for lease and non-lease components together as a single lease component for all underlying assets.

Lease terms do not include

an option to renew.

Business Combinations

The Company accounts for business combinations under ASC 805 using

the acquisition method of accounting where the assets acquired and liabilities assumed are recognized based on their respective estimated

The excess of the purchase price over the estimated fair values of the net assets acquired is recorded as goodwill.

the fair value of certain acquired assets and liabilities is subjective in nature and often involves the use of significant estimates

and assumptions used in valuations and estimates determined by management.

Business acquisitions are included in the Company’s consolidated

financial statements as of the date of the acquisition.

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.

Company tests goodwill for impairment in accordance with the provisions of ASC 350, Intangibles – Goodwill and Other,

Goodwill is tested for impairment at least annually at the reporting unit level or whenever events or

changes in circumstances indicate that goodwill might be impaired.

ASC 350 provides that an entity has the option to first assess

qualitative factors to determine whether the existence of events or circumstances leads to a determination that it is more likely

than not that the fair value of a reporting unit is less than its carrying amount.

If, after assessing the totality of events or

circumstances, an entity determines it is not more likely than not that the fair value of a reporting unit is less than its carrying

amount, then additional impairment testing is not required.

However, if an entity concludes otherwise, then it is required to

perform an impairment test.

The impairment test involves comparing the estimated fair value of a reporting unit with its book value,

including goodwill.

If the estimated fair value exceeds book value, goodwill is considered not to be impaired.

If, however, the fair

value of the reporting unit is less than book value, then an impairment loss is recognized in an amount equal to the amount that the

book value of the reporting unit exceeds its fair value, not to exceed the total amount of goodwill allocated to the reporting unit.

The Company recorded an impairment loss on goodwill of $ 10,073,326

in 2024 based on the Company’s future net cash flows from the acquisitions.

The estimate of fair value of a reporting unit is computed using either

an income approach, a market approach, or a combination of both.

Under the income approach, we utilize the discounted cash flow method

to estimate the fair value of a reporting unit.

Significant assumptions inherent in estimating the fair values include the estimated future

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

used to discount estimated future cash flow projections to their present value based on estimated weighted average cost of capital (i.e.,

the selected discount rate).

Management’s assumptions are based on historical data, supplemented by current and anticipated market

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

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

traded companies or historically completed transactions of comparable businesses.

The selection of comparable businesses is based on the

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

The Company reviews long-lived assets, including

tangible assets and other intangible assets with definitive lives, for impairment whenever events or changes in circumstances indicate

that the asset’s carrying amount may not be recoverable.

The Company conducts its long-lived asset impairment analyses in accordance

with ASC 360-10-35, “Impairment or Disposal of Long-Lived Assets”.

ASC 360 requires the Company to group assets and liabilities

at the lowest level for which identifiable cash flows are largely independent of the cash flows of other assets and liabilities and evaluate

the asset group against the sum of the undiscounted future cash flows.

Amortizable intangible assets are assessed for impairment upon

triggering events that indicate that the carrying value of an asset may not be recovered.

Recoverability is measured by a comparison of

the carrying amount to future net undiscounted cash flows expected to be generated by the associated asset.

If such assets are determined

to be impaired, the impairment to be recognized is measured by the amount by which the carrying amount exceeds the fair market value of

the intangible assets.

No impairment charges were recorded by the Company as of December 31, 2024.

The Company has indefinite-lived trademark assets

that are reviewed for impairment by first performing a qualitative analysis in accordance with ASC 350-30 to determine whether it is more

likely than not that the fair value of the indefinite-lived asset is less than its carrying value.

If based on this assessment, management

determines that impairment is not more than likely, then no further quantitative testing is required.

However, if performing a qualitative

analysis determines that is more likely than not that the fair value is less than its carrying value, then a quantitative analysis is

performed in accordance with ASC 350-30-35, which occurs annually in the fourth quarter, or whenever events or changes in circumstances

indicate that the carrying value of an asset may not be recoverable.

Recoverability is measured by a comparison of the carrying amount

to future net undiscounted cash flows expected to be generated by the associated asset.

If such assets are determined to be impaired,

the impairment to be recognized is measured by the amount by which the carrying amount exceeds the fair market value of the assets.

Company utilized the relief-from-royalty method, which is a form of the income approach and requires us to make significant estimates

and assumptions including preparation of forecasted revenue, selection of a royalty rate and discount rate and estimate of the terminal

year revenue growth rate.

The Company did not record an impairment as of December 31, 2024, related to the indefinite-lived assets.

Fair Values, Inputs and Valuation Techniques for Financial Assets

and Liabilities, and Related Disclosures

The fair value measurements and disclosure guidance

defines fair value and establishes a framework for measuring fair value.

Fair value is defined as the price that would be received to

sell an asset or paid to transfer a liability (an exit price) in an orderly transaction between market participants at the measurement

In accordance with this guidance, the Company has categorized its recurring basis financial assets and liabilities into a three-level

fair value hierarchy based on the priority of the inputs to the valuation technique.

The fair value hierarchy gives the highest priority

to quoted prices in active markets for identical assets or liabilities (Level 1) and the lowest priority to unobservable inputs (Level

The inputs used to measure fair value may fall into different levels of the fair value hierarchy.

In such cases, the level in the

fair value hierarchy within which the fair value measurement in its entirety falls has been determined based on the lowest level input

that is significant to the fair value measurement in its entirety.

The Company's assessment of the significance of a particular input

to the fair value measurement in its entirety requires judgment and considers factors specific to the asset or liability.

The guidance establishes three levels of the fair

value hierarchy as follows:

Inputs are unadjusted,

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

Inputs are observable,

unadjusted quoted prices in active markets for similar assets or liabilities, unadjusted quoted prices for identical or similar assets

or liabilities in markets that are not active, or other inputs that are observable or can be corroborated by observable market data for

substantially the full term of the related assets or liabilities;

Unobservable inputs

that are significant to the measurement of the fair value of the assets or liabilities that are supported by little or no market data.

The following table details the fair value measurements

of the Company’s financial liabilities as of December 31, 2024:

Schedule of fair value measurements of financial liabilities

Warrant liabilities

Derivative liability – convertible note conversion option

Changes in Level 3 financial instruments are

Schedule of level 3 financial instruments

Warrant Liabilities

Derivative Liability – Convertible Note

Balance, December 31, 2023

Changes in Fair Value

( 16,503,923 )

( 16,809,455 )

Balance, December 31, 2024

The Company's financial instruments mainly consist

of cash, current assets, accounts payable and accrued expenses.

The carrying amounts of cash, receivables, current assets, accounts payable

and accrued expenses approximates fair value due to the short-term nature of these instruments.

Accrued Warranty

Fat Shark products are warranted against defects

in materials and workmanship for a period of two years from the date of shipment.

If a defect arises during the warranty period, Fat Shark

will either (i) repair the affected product at no charge using new parts or parts that are equivalent to new in performance and reliability;

(ii) exchange the affected product with a functionally equivalent product;

or (iii) refund the original purchase price for the affected

Allowances for estimated warranty costs are recorded during the period of sale.

The determination of such allowances requires

the Company to make estimates of product warranty claim rates and expected costs to repair or to replace the products under warranty.

The Company currently establishes warranty reserves based on historical warranty costs for each product line combined with liability estimates

based on the prior 24 months’ sales activities.

If actual return rates and/or repair and replacement costs differ significantly

from the Company’s estimates, adjustments to recognize the additional cost of sales may be required in future periods.

the warranty accrual and the expense amounts have been immaterial.

The warranty liability is included in accrued expenses on the accompanying

consolidated balance sheets and amounted to $ 28,944 and $ 0 as of December 31, 2024 and December 31, 2023, respectively.

Rotor Riot does not provide any warranty of any

kind for any of the equipment it sells or otherwise distributes.

Consumers assume all risk for any products purchased or received from

Revenue Recognition

The Company will recognize revenue in accordance

with ASC 606, “Revenue from Contracts with Customers”, issued by the Financial Accounting Standards Board (“FASB”).

4 unchanged sentences

Determine the transaction price;

Allocate the transaction price to the

performance obligations in the contract;

Allocate the transaction price to the performance

obligations in the contract;

Recognize revenue when (or as) the Company

1 unchanged sentence

The Company receives revenues from the sale of

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 reasonably assured.

Revenue is recognized when the title to the products has been passed to

the customer, which is the date the products are delivered to the designated locations and the previously discussed requirements are

products from both retail distributers and individual consumers.

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

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

Revenue is recognized

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

date the performance obligation has been met.

Deferred Revenue

Deferred revenue relates to orders placed and payment received, but

not yet fulfilled.

All deferred revenue is expected to be recognized within one year.

Deferred revenue related

to orders placed, but not yet fulfilled totaled $ 197,117 and $ 0 as of December 31, 2024 and December 31, 2023, respectively.

Cost of Goods Sold

Cost of goods sold includes inventory costs, direct

packaging costs and production related depreciation, if any.

Shipping and Handling Costs

Shipping and handling costs incurred for products

shipped to customers are included in general and administrative expenses and amounted to $ 226,621 for the year ended December 31, 2024.

The Company did no t incur shipping and handling costs for the year ended December 31, 2023.

Shipping and handling costs charged to customers

are included in sales.

Research and Development

Research and development expenses include payroll,

employee benefits, and other headcount-related expenses associated with product development.

Research and development expenses also include

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

The Company accounts for income taxes using an

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of management, it is more likely than not that some portion or all of the deferred income tax assets will not be realizable in the future.

The Company recognizes benefits of uncertain

tax positions if it is more likely than not that such positions will be sustained upon examination based solely on their technical merits,

The Company recognizes benefits of uncertain tax

positions if it is more likely than not that such positions will be sustained upon examination based solely on their technical merits,

as the largest amount of benefit that is more likely than not to be realized upon the ultimate settlement.

1 unchanged sentence

is to recognize interest and penalties related to unrecognized tax benefits as a part of income tax expense.

The Company’s current provision for the

years ending December 31, 2023 and 2022 consisted of a tax benefit against which we applied a full valuation allowance, resulting in

no current provision for income taxes.

Since the Company has not generated an operating profit since inception, there are no deferred tax assets as of December 31, 2023 and 2022.

Loss per Share

Stock-Based Compensation

Stock options are valued using the estimated grant-date

fair value method of accounting in accordance with ASC Topic 718, Compensation – Stock Compensation.

Fair value is determined based

on the Black-Scholes Model using inputs reflecting our estimates of expected volatility based on comparative companies, expected term

using the simplified method and future dividends.

The Company recognizes forfeitures as they occur.

The fair value of stock grants is

based on our stock price on the date of grant.

Compensation costs are recognized on a straight-line basis over the requisite service period

which is the vesting term.

The Company accounts for warrants to purchase

shares of its common stock in accordance with the guidance in ASC 480, Distinguishing Liabilities from Equity (“ASC 480”)

and ASC 815, Derivatives and Hedging (“ASC 815”).

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

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 initial fair value on the date of issuance, and each balance sheet date thereafter.

Changes in the estimated fair

value of the warrants classified as liabilities are recognized as a non-cash gain or loss in the consolidated statements of operations

and comprehensive loss.

Embedded Conversion Option Derivative

The Company accounts for embedded debt conversion

features in accordance with the guidance in ASC 815, Derivatives and Hedging (“ASC 815”).

If the embedded debt conversion

feature is not clearly and closely related to the debt host, then it is required to be bifurcated from the host contract and accounted

for separately as a derivative liability.

The derivative liability is required to be recorded at its initial fair value on the date of

issuance, and each balance sheet date, thereafter.

Changes in the estimated fair value of the derivative are recognized as a non-cash

gain or loss in the consolidated statements of operations and comprehensive loss.

This assessment, which requires the use of professional

judgment, is conducted at the time of Note issuance and as of each subsequent quarterly period end date while the Note is outstanding.

Net Loss per Share

Basic and diluted net loss per share is calculated

based on the weighted-average of common shares outstanding in accordance with FASB ASC Topic 260, Earnings per Share .

net loss per share is calculated based on the weighted-average number of common shares outstanding plus the effect of dilutive potential

common shares.

When the Company reports a net loss, the calculation of diluted net loss per share excludes potential common shares as

the effect would be anti-dilutive.

Outstanding securities not included in the computation

of diluted net loss per share because their effect would have been anti-dilutive include 950,000

shares of Series B Preferred Stock, as converted as of December 31, 2023 and 2022, respectively.

loss per share is calculated based on the weighted-average number of common shares outstanding plus the effect of dilutive potential common

When the Company reports a net loss, the calculation of diluted net loss per share excludes potential common shares as the effect

would be anti-dilutive.

Segment Reporting

Operating segments are defined as components of

an enterprise for which separate financial information is available that is evaluated regularly by the chief operating decision maker,

or decision making group, in deciding how to allocate resources and in assessing performance.

Unusual Machines, which sells drones and

drone-related components, operates as a single reportable segment entity.

Our chief operating decision maker, our Chief Executive Officer,

reviews financial information presented on a consolidated basis for purposes of making operating decisions and assessing financial performance.

The Chief Executive Officer is regularly provided with consolidated revenue and expenses consistent with those presented in the consolidated

statements of operations.

Recent Accounting Pronouncements

In December 2023, new accounting guidance was

issued related to income tax disclosures.

The new guidance requires disaggregated information about a reporting entity’s effective

tax rate reconciliation as well as additional information on income taxes paid.

The new guidance is effective on a prospective basis for

annual periods beginning after December 15, 2024.

Early adoption is also permitted for annual financial statements that have not yet been

issued or made available for issuance.

This new guidance will likely not result in additional required disclosures when adopted.

In November 2024, the FASB issued ASU No.

“Disaggregation of Income Statement Expenses” which requires disaggregated disclosure of income statement expenses into specified

categories in disclosures within the footnotes to the financial statements.

The standard is effective for annual reporting periods beginning

after December 15, 2026.

The Company is currently evaluating the effect of this ASU on the consolidated financial statements and disclosures.

Note 3 – Acquisitions

Fat Shark and Rotor Riot

On February 16, 2024, the Company closed on the

acquisitions of both Fat Shark and Rotor Riot from Red Cat and Jeffrey Thompson, the founder and Chief Executive Officer of Red Cat (the

“Business Combination”) (See Note 13 – Related Party Transactions for additional information).

Fat Shark and Rotor Riot

are in the business of designing and marketing consumer drones and first-person-view (“FPV”) goggles.

Rotor Riot is also a

licensed authorized reseller of consumer drones manufactured by third parties.

The Company specializes in the production and

sale of small drones and essential components and with the acquisitions of Fat Shark and Rotor Riot, it brings brand recognition and a

strong curated retail channel in the FPV drone market segment.

This Business Combination is a realization of the Company’s strategy

to build its business both organically and through strategic acquisitions that leverage our retail business to onshore production of critical

drone components.

With the transition to onshoring production of drone components, the Company intends to expand into B2B channels for

customers that require a domestic supply chain.

The Business Combination was based on a

share purchase agreement (the “Purchase Agreement”) that was executed on November 21, 2022.

From November 21, 2022 to

February 16, 2024, the Purchase Agreement was subject to several amendments and subject to certain working capital adjustments.

Under the terms of the Purchase Agreement, as amended, the consideration paid for the acquired assets consisted of (i) $ 1 .0

million in cash and a cash deposit of $ 0.1

million made in 2022, (ii) issuance of a $ 4 .0

million 18 month promissory note to Red Cat (see Note 9 “Promissory and Convertible Notes” for further details), and

(iii) the issuance of 4,250,000

shares of the Company’s common stock, which represented approximately 48.66% of the outstanding common stock of the Company on

February 16, 2024, after the effect of the issued shares (collectively the “Consideration Paid”).

The Company valued the

Red Cat common stock at $ 4.00

per share for $ 17,000,000 which represents the IPO price of the Company’s common stock on February 15, 2024.

Accordingly, the

value of the Consideration Paid is equal to $ 22,100,000 .

The acquisitions met the definition of a business

combination under ASC 805, Business Combinations, and therefore the assets acquired, and liabilities assumed are accounted for at fair

The following represents the fair value allocation of Fat Shark and

Rotor Riot Purchase Price:

Schedule of fair value allocation

Accounts receivable (approximates contractual value)

Inventories (on hand and prepaid)

Other current assets

Other current assets at December 31 included:

Right of use asset – operating

Other long-term assets

Intangible assets

Accounts payable and accrued liabilities

Customer deposits

Deferred tax liability

Operating lease liability – current and long-term

Total liabilities

Total purchase price

On December 31, 2024, the Company recorded a measurement period adjustment

to the above fair value allocation to report a deferred tax liability of $107,153 and increase goodwill by the same amount.

Goodwill and intangible assets relate to Fat Shark

and Rotor Riot being FPV market leaders and their well-known and established brands within the industry and related patents.

these entities and their existing customer base along with Unusual Machines’ strategy of extending to B2B sales of drone components

will provide a strategic advantage.

The results of Fat Shark and Rotor Riot have

been included in the Consolidated Financial Statements from the date of acquisition of February 16, 2024.

The table below presents the

results as reported by the Company and unaudited pro forma results of the Company, assuming that the acquisition of Fat Shark and

Rotor Riot occurred at the beginning of each period are as follows.

The unaudited pro forma results are not necessarily indicative

of what actually would have occurred had the acquisitions been in effect for the periods presented (in thousands, except per share

Schedule of unaudited pro forma results

For the Year Ended

December 31, 2024

December 31, 2023

Gross profit/(loss)

Loss from operations

Other expense and income taxes

Net earnings per share:

This unaudited consolidated pro forma financial

information is presented for informational purposes only.

The unaudited consolidated pro forma adjustments are based on preliminary estimates,

information available and certain assumptions, and may be revised as additional information becomes available.

In addition, the unaudited

pro forma financial information does not reflect any adjustments for non-recurring items or anticipated synergies resulting from the acquisition.

The unaudited pro forma financial information

from the beginning of the periods presented until the acquisition date includes adjustments to:

1) eliminate intercompany revenue and

associated cost of sales for sales of product from Fat Shark to Rotor Riot, 2) to adjust fair value for certain Fat Shark inventory as

if the acquisition had occurred as of the beginning of the respective periods and 3) to include acquisition related expenses in the Q1

’23 that were incurred in Q1 ’24.

Note 4 – Inventories

Inventories, consisting solely of finished goods,

totaled $ 1,335,503 and $ 0 as of December 31, 2024 and 2023, respectively.

In addition, the Company had prepaid deposits for inventory

totaling $ 904,728 and $ 0 as of December 31, 2024 and 2023, respectively.

Note 5 – Other Assets

Other current assets included as of:

Schedule of other current assets

December 31, 2024

December 31, 2023

Deposit related to Rotor Riot, LLC and Fat Shark, Ltd.

1 unchanged sentence

Total other current assets

4 – Property and Equipment, net

Non-current other assets include a rent deposit of $ 59,426

related to the operating lease for the Orlando, FL facility as of December 31, 2024.

The Company did not have any non-current other assets

as of December 31, 2023.

Note 6 – Property and Equipment, net

Property and equipment consist of assets with

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values are periodically assessed for impairment.

Property and equipment as of December 31 was as follows:

Property and equipment as of:

Schedule of property and equipment

December 31, 2024

December 31, 2023

Computer equipment

1 unchanged sentence

Total property and equipment, net

Depreciation expense totaled $ 5,600

and $ 885 for the year ended December 31, 2023

Depreciation expense totaled $ 684 and $ 5,600 for the year ended December

31, 2024 and 2023, respectively.

5 – Common Stock

The Company issued 632,500

shares of common stock during the year ended December 31, 2022 for gross proceeds of $ 2,530,000 ,

of which the Company received net proceeds of $ 2,442,000 ,

due to fees and other expenses.

The Company received $1,892,065 of these proceeds in advance of the shares being issued during the year

ended December 31, 2021 and recorded stocks to be issued for these proceeds received in advance.

The Company issued 7,552,000

shares of common stock during the year ended December 31, 2021 for total proceeds of $ 2,306,000 .

$250,000 of proceeds were received in advance and recorded as stocks to be issued.

On December 13, 2022, the Company cancelled 1,400,000

common shares and converted these shares into Series B preferred stock.

On December 14, 2022, the Company amended its

Articles of Incorporation to, among other things, increase the number of authorized shares of common stock from 90,000,000

to 500,000,000 .

On March 7, 2023, the Company issued 150,000

shares of common stock to the investors in the July 2022 private placement.

The shares were issued as consideration for its agreement

with Revere Securities to modify its engagement letter with the Company.

On June 1, 2023, the Company cancelled 500,000

common shares and converted these shares into Series B preferred stock.

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

Directors approved a 1-for-2 reverse

stock split of our issued and outstanding shares of common stock.

In accordance with Staff Accounting Bulletin Topic 4.C, the

Company has given retroactive effect to reverse stock split.

In addition and in accordance with FASB ASC 260, Earnings Per Share ,

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

The common stock par value is $0.01.

6 – Preferred Stock

On December 13, 2022, the Company issued 140

Series B preferred shares in connection with the cancellation of 1,400,000

shares of common stock.

On June 1, 2023, the Company issued an additional

Series B preferred shares in connection with the cancellation of 500,000

shares of common stock.

Series B preferred stock is convertible into common stock at a ratio of 5,000 shares of common stock for each share of Series B stock

held, subject to certain limitations.

Series B preferred shares are not entitled to vote on any matters submitted to shareholders of

Shares outstanding at December 31, 2023 totaled

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

The preferred stock par value is $0.01.

7 – Business Combination

On November 21, 2022,

the Company entered into a Share Purchase Agreement (the “Purchase Agreement”) with Red Cat Holdings, Inc.

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 Holdings, Ltd.

(“Fat Shark”) and Rotor Riot, LLC (“Rotor Riot”) (the “Business

Combination”).

Fat Shark and Rotor Riot are in the business of designing and marketing consumer drones and first-person-view (“FPV”)

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

The Purchase Agreement was amended on March 31,

Under the terms of the Purchase Agreement, as amended, upon satisfaction of closing conditions, the Company will purchase from

Red Cat its Rotor Riot and Fat Shark subsidiaries for $20 million (the “Purchase Price”) comprised of (i) $1.0 million in

cash, (ii) a $2.0 million promissory note (referred to in this Prospectus as the “Note”) issued by the Company to Red Cat,

and (iii) $17.0 million of the Company’s common stock.

On July 10, 2023, the Company entered into Amendment

2 to SPA (the “Second Amendment”).

Under the Second Amendment the parties agreed to extend the termination date of the

Purchase Agreement until September 30, 2023 and remove the requirement that the Principal Stockholder escrow shares of our common stock

On September 18, 2023, the Company entered into

Amendment No.

3 to the SPA (the “Third Amendment”).

Under the Third Amendment, the parties agreed to extend the termination

date of the Purchase Agreement until October 31, 2023.

On December 11, 2023, the Company entered into

Amendment No.

4 to the SPA (the “Fourth Amendment”).

Under the Fourth Amendment the parties agreed to (a) revise the components

of the Purchase Price set forth in Section 2.01 of the Purchase Agreement to reduce the total cash paid to $1.0 million, eliminate the

need to deposit $1.0 million of cash on hand into escrow prior to closing, and include the $2.0 million Note as part of the Purchase

Price, (b) revise the minimum Offering amount from $10.0 million to $5.0 million, (c) replace Dr.

Allan Evans for Brandon Torres Declet

in Section 10.01(d) and (d) extend the End Date (as defined in the Purchase Agreement) from October 31, 2023 to May 31, 2024 as provided

in Section 11.02(a) of the Purchase Agreement, as amended.

In addition, the Company

agreed to use its best efforts to prepare and file a registration statement with respect to 500,000 shares of our common stock to be

issued to Red Cat, and to cause such registration statement to be filed within 120 days and declared effective within 180 days of closing.

Red Cat agreed to execute a lock-up agreement effective for 180 days following the closing, or such lesser period as may be agreed upon

by the managing underwriter and Red Cat under which Red Cat agreed not to transfer or sell any of its shares of our common stock during

such period, subject to certain exceptions.

The Company has also agreed to reimburse Red Cat up to $100,000 for documented legal and

out-of-pocket expenses incurred in connection with the transaction.

8 – Subsequent Events

The Company has evaluated events through the

date of this filing, which is the date the financial statements were available to be issued.

There were no material subsequent events that

require recognition or disclosure in these financial statements.

The Company has evaluated all subsequent events

after December 31, 2023, and there were no material subsequent events requiring disclosure, except the following.

On February 16, 2024, the Company completed the

acquisitions of Fat Shark and Rotor Riot as discussed in Note 7.

On February 16, 2024, the Company completed its

initial public offering of 1,250,000 shares of common stock at a price of $4.00 per share.

The Company received net proceeds of approximately

$3.75 million, after deducting underwriters commissions and expenses and paying $1.0 million to Red Cat as discussed in Note 7 related

to the acquisitions of Fat Shark and Rotor Riot.

The Company’s total consideration paid

for the acquisition of Fat Shark and Rotor Riot was $20.0 million, comprising of the $17.0 million in Company shares, the $1.0 million

cash outlay and the $2.0 million 8% promissory note due in eighteen-months with the principal due at maturity.

The Company has not completed

its evaluation of the full impact of the consolidation of Fat Shark and Rotor Riot for the purpose of its 2024 fiscal year financial

Shark Holdings, Ltd.

Current assets

Accounts receivable, net

Total current assets

Intangible assets, net

LIABILITIES AND STOCKHOLDERS' EQUITY

Current liabilities

Accounts payable

Accrued expenses

Customer deposits

Due to related party

Total current liabilities

Commitments and contingencies

Stockholders’ equity

Additional paid-in capital

Accumulated deficit

Total stockholders' equity

TOTAL LIABILITIES AND STOCKHOLDERS' EQUITY

See accompanying notes.

Shark Holdings, Ltd.

Of Operations

Three months ended January 31,

Nine months ended January 31,

Cost of goods sold

Operating Expenses

Research and development

Sales and marketing

General and administrative

Stock based compensation

Total operating expenses

Operating loss

Other Expense (Income)

$ (1,401,934 )

See accompanying notes.

Fat Shark Holdings, Ltd.

Statements of Stockholders’

Balances, April 30, 2022

Balances, January 31, 2023

$ (1,160,143 )

Balances, April 30, 2023

$ (1,484,734 )

Balances, January 31, 2024

$ (2,886,668 )

See accompanying notes.

Shark Holdings, Ltd.

Flows Statements

Nine months ended January 31,

Cash flows from operating activities

Note 7 – Operating Leases

Company has assumed in the business combination a five-year

operating lease for approximately 6,900 square feet of warehouse and office space in Orlando, Florida.

The lease commenced in

November 2023 and expires in October 2028 .

The Company has valued the ROUA and the associated liability, as of February 16,

2024, at $ 378,430 .

The Company has no finance leases.

Operating lease expense totaled $ 92,002

from the date of acquisition through the period ended December 31, 2024.

The following is a summary of the operating lease

right-of-use asset and liability:

Schedule of operating lease right-of-use

FL Operating Lease

Operating lease right-of-use assets

accumulated amortization

Operating lease right-of-use assets, as of December 31, 2024

Operating lease liability

accumulated reduction

Operating lease liability, as of December 31, 2024

Current operating lease liability

Non-current operating lease liability

Total operating lease liability

The following is a summary of future lease payments

required under the five-year lease agreement:

Schedule of future lease payments

Operating Lease

Schedule of supplemental information

Supplemental Information

Weighted average remaining lease term (in years)

Weighted average discount rate

8 – Goodwill and Intangible Assets

Changes in the carrying amount of goodwill were as follows:

Schedule of goodwill

Goodwill as of December 31, 2023

Fat Shark and Rotor Riot acquisitions

Impairment loss on goodwill during the year ended December 31, 2024

( 10,073,326 )

Stock based compensation

Amortization of intangible assets

Changes in operating assets and liabilities

Accounts receivable

Customer deposits

Accounts payable

Accrued expenses

Net cash provided by (used in) operating activities

Cash flows from financing activities

(Payments under) Proceeds from related party obligations

Net cash (used in) provided by financing activities

Net decrease in Cash

Cash, beginning of period

Cash, end of period

Cash paid for interest

Cash paid for income taxes

See accompanying notes.

Fat Shark Holdings, Ltd.

NOTES TO FINANCIAL STATEMENTS

Note 1 – The Business

Originally founded in September 2020 as FS Acquisition

(“FSA” or the “Company”), the company was formed by Red Cat Holdings, Inc., its wholly owned parent, to

complete the acquisition of Fat Shark Holdings, LTD (“Holdings”).

As further described in Note 3, the acquisition closed

on November 2, 2020.

In April 2022, the Company re-incorporated in Nevada, United States and formally changed its name to Fat Shark

Holdings, Ltd.

The Company sells consumer electronics products to the first-person view (“FPV”) sector of the drone industry.

Note 2 – Basis of Accounting and Going Concern

These financial statements reflect the operating

results of the Company for the two years ended January 31, 2024, including the financial support received from its Parent.

These financial

statements may not be indicative of the company’s operating results if it had operated without financial support from its Parent.

The financial statements have been prepared on

a going concern basis which contemplates the realization of assets and the settlement of liabilities and commitments in the normal course

As reflected in the financial statements, the Company has incurred net losses totaling $2,886,668 since its inception, and

reported negative working capital of $3,941,717 at January 31, 2024.

Management recognizes that these operating results and our financial

position raise substantial doubt about our ability to continue as a going concern.

The financial statements do not include any adjustments

related to the recoverability and classification of recorded asset amounts and the classification of liabilities that might be necessary

should we be unable to continue as a going concern.

Note 3 – Acquisition of Fat Shark Holdings,

In September 2020, the Company entered into a

share purchase agreement (“Share Purchase Agreement”) with Greg French (“French”), the founder and sole shareholder

of Holdings to acquire all of the issued and outstanding shares of Holdings and its wholly owned subsidiaries, Fat Shark Tech, LTD and

Fat Shark Technology SEZC.

The transaction closed on November 2, 2020.

At closing, the Parent delivered to the Seller, on behalf of the

Company, 5,227,273 shares of the Parent's common stock with a fair value of $6,351,076.

The Company recognized the shares issued on its

behalf by the Parent as an additional capital investment.

In addition, a senior secured promissory note was issued to the Seller which

was recorded on the Company's balance sheet.

Finally, the Seller received a cash payment of $250,000, which was funded by the Parent,

and recognized by the Company due to related party.

A summary of the purchase price and its related

allocation was as follows:

Shares issued

Promissory note issued

Total Purchase Price

Assets acquired

Accounts receivable

Proprietary technology

Non-compete agreement

Total assets acquired

Liabilities assumed

Accounts payable and accrued expenses

Customer deposits

Total liabilities assumed

Total fair value of net assets acquired

The Company engaged

a valuation services firm to value the intangible assets acquired and the purchase price allocation is now complete.

Goodwill as of December 31, 2024

Accumulated impairment losses as of December 31, 2024 were $10,073,326.

Intangible Assets

included proprietary technology and a non-compete agreement which are being amortized over 5 and 3 years, respectively.

value of brand name is not being amortized but is reviewed quarterly and formally evaluated at year end.

The excess of the purchase price

above the net assets acquired was recorded as goodwill which is reviewed quarterly and formally evaluated at year end.

Note 4 – Summary of Significant Accounting

Basis of Accounting – The financial

statements and accompanying notes are prepared in accordance with generally accepted accounting principles in the United States (“GAAP”).

Certain prior period amounts have been restated to conform to the current year presentation.

Use of Estimates – The preparation

of financial statements in accordance 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 revenue and expenses during the reporting period.

Actual results could differ from those estimates.

Significant estimates

reflected in these financial statements include those used to (i) determine stock-based compensation, (ii) complete purchase price accounting

for acquisitions, and (iii) accounting for derivatives.

Cash and Cash Equivalents – At January

31, 2024 and April 30, 2023, we held cash of $31,220 and $85,744, respectively, in multiple commercial banks and financial services companies.

We have not experienced any loss on these cash balances and believe they are not exposed to any significant credit risk.

Fair Values, Inputs and Valuation Techniques

for Financial Assets and Liabilities, and Related Disclosures – The fair value measurements and disclosure guidance defines

fair value and establishes a framework for measuring fair value.

Fair value is defined as the price that would be received to sell an

asset or paid to transfer a liability (an exit price) in an orderly transaction between market participants at the measurement date.

In accordance with this guidance, the Company has categorized its recurring basis financial assets and liabilities into a three-level

fair value hierarchy based on the priority of the inputs to the valuation technique.

The fair value hierarchy gives the highest priority

to quoted prices in active markets for identical assets or liabilities (Level 1) and the lowest priority to unobservable inputs (Level

The inputs used to measure fair value may fall into different levels of the fair value hierarchy.

In such cases, the level in the

fair value hierarchy within which the fair value measurement in its entirety falls has been determined based on the lowest level input

that is significant to the fair value measurement in its entirety.

The Company's assessment of the significance of a particular input

to the fair value measurement in its entirety requires judgment and considers factors specific to the asset or liability.

The guidance establishes

three levels of the fair value hierarchy as follows:

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

Inputs are observable, unadjusted quoted prices in active markets for similar assets or liabilities, unadjusted quoted prices for identical

or similar assets or liabilities in markets that are not active, or other inputs that are observable or can be corroborated by observable

market data for substantially the full term of the related assets or liabilities;

Unobservable inputs that are significant to the measurement of the fair value of the assets or liabilities that are supported by little

or no market data.

Disclosures for Non-Financial Assets Measured

at Fair Value on a Non-Recurring Basis

The Company's financial instruments mainly consist

of cash, receivables, current assets, accounts payable, accrued expenses and debt.

The carrying amounts of cash, receivables, current

assets, accounts payable, accrued expenses and current debt approximates fair value due to the short-term nature of these instruments.

Revenue Recognition – The Company

recognizes revenue in accordance with ASC 606, “Revenue from Contracts with Customers”, issued by the Financial Accounting

Standards Board (“FASB”).

This standard includes a comprehensive evaluation of factors to be considered regarding revenue

recognition including (i) identifying the promised goods, (ii) evaluating performance obligations, (iii) measuring the transaction price,

(iv) allocating the transaction price to the performance obligations if there are multiple components, and (v) recognizing revenue as

each obligation is satisfied.

The Company’s revenue transactions include a single component, specifically, the shipment of

goods to customers as orders are fulfilled.

The Company recognizes revenue upon shipment.

The timing of the shipment of orders can vary

considerably depending upon whether an order is for an item normally maintained in inventory or an order that requires assembly or unique

Customer deposits totaled $35,842 and $25,340 at January 31, 2024 and April 30, 2023, respectively.

Research and Development – Research

and development expenses include payroll, employee benefits, and other headcount-related expenses associated with product development.

Research and development expenses also include third-party development and programming costs, as well as a proportionate share of overhead

costs such as rent.

Costs related to software development are included in research and development expense until technological feasibility

is reached, which for our software products, is generally shortly before the products are released to production.

Once technological

feasibility is reached, such costs are capitalized and amortized as a cost of revenue over the estimated lives of the products.

Income Taxes – Deferred taxes are

provided on the liability method, whereby deferred tax assets are recognized for deductible temporary differences and deferred tax liabilities

are recognized for taxable temporary differences.

Temporary differences are the differences between the reported amounts of assets and

liabilities and their tax bases.

Deferred tax assets and liabilities are adjusted for the effects of changes in tax laws and rates on

the date of enactment.

Recent Accounting Pronouncements –

Management does not believe that recently issued, but not yet effective accounting pronouncements, if adopted, would have a material

effect on the accompanying consolidated financial statements.

Stock-Based Compensation – For stock

options, we use the estimated grant-date fair value method of accounting in accordance with ASC Topic 718, Compensation – Stock

Compensation.

Fair value is determined based on the Black-Scholes Model using inputs reflecting our estimates of expected volatility,

term and future dividends.

We recognize forfeitures as they occur.

For restricted stock, we determine the fair value based on our stock

price on the date of grant.

For both stock options and restricted stock, we recognize compensation costs on a straight-line basis over

the service period which is the vesting term.

Related Parties – Parties are considered

to be related to us if they have control or significant influence, directly or indirectly, over us, including key management personnel

and members of the Board of Directors.

Related Party transactions are disclosed in Note 12.

Note 5 – Inventories

Inventories, consisting solely of finished goods,

totaled $408,109 and $2,307,070 at January 31, 2024 and April 30, 2023, respectively.

Note 6 – Other Assets

Other assets, short term, included:

January 31, 2024

April 30, 2023

Prepaid inventory

Note 7 – Intangible Assets

Intangible assets relate to acquisitions completed

by the Company, including those described in Note 3.

Intangible assets were as follows:

January 31, 2024

April 30, 2023

Gross Carrying Amount

Accumulated Amortization

Net Carrying Value

Gross Carrying Amount

As of December 31, 2024, the balances of intangible assets were as

Schedule of intangible assets

Accumulated Amortization

Net Carrying Value

Proprietary technology

Non-compete agreements

Total finite-lived

Indefinite-lived– Brand name

As of January 31, 2024, expected amortization expense for the next

five years is as follows:

Fiscal Year Ended:

Proprietary technology and non-compete agreements

are being amortized over 5 and 3 years, respectively.

Goodwill and Brand name are not amortized but evaluated for impairment on a quarterly

Goodwill is a separately stated intangible asset

and represents the excess of the purchase price of acquisitions above the net assets acquired.

The balance was $6,168,260 as of January

31, 2024 and April 30, 2023.

Note 8 – Debt Obligations

In connection with the acquisition of Holdings

in November 2020, the Company issued a secured promissory note in the amount of $1,753,000 to the seller.

The note bore interest at 3%

annually and was scheduled to mature in full in November 2023.

In May 2021, the Company made an initial payment of $132,200 by directing

a refund from a vendor based in China to the noteholder who is also based in China.

The remaining balance of $1,620,800 plus accrued

interest totaling $45,129 was paid in September 2021.

Note 9 – Income Taxes

The Company was originally founded in November

2020 as an entity based in the Cayman Islands.

While based in the Cayman Islands, the Company qualified as a Caymans Island Exempted

Company which qualified it as a tax exempt entity.

In April 2022, the Company changed its name to Fat Shark Holdings, Ltd.

reincorporated in Nevada, United States.

Since incorporating in the United States, the Company has incurred net losses through

January 31, 2024.

Our current provision for the reporting periods presented in these financial statements consisted of a tax benefit

against which we applied a full valuation allowance, resulting in no current provision for income taxes.

In addition, there was no deferred

provision for any of these reporting periods.

Currently, we focus on projected future taxable income in evaluating whether it is more

likely than not that these deferred assets will be realized.

Based on the fact that we have not generated an operating profit since incorporating

in the United States, we have applied a full valuation allowance against our deferred tax assets at January 31, 2024.

Note 10 – Share Based Awards

Red Cat has established the 2019 Equity Incentive

Plan (the “Plan”) to incentive key employees, consultants, and directors with long term compensation awards such as stock

options, restricted stock, and restricted stock units (collectively, the “Awards”).

The Company recognized stock based compensation

expense in connect with Awards to its employees.

A summary of options activity under the Plan

since April 30, 2022 is as follows:

Weighted-Average Exercise Price

Weighted-Average Remaining Contractual Term

Aggregate Intrinsic Value

Outstanding as of April 30, 2022

Forfeited or expired

Outstanding as of April 30, 2023

Forfeited or expired

Outstanding as of January 31, 2024

Exercisable as of January 31, 2024

The aggregate intrinsic value of outstanding

options represents the excess of the stock price at the indicated date over the exercise price of each option.

As of January 31, 2024

and 2023, there was $0 and $61,084 of unrecognized stock-based compensation expense related to unvested stock options which is expected

to be recognized over the weighted average periods of 0 and 1.80 years, respectively.

Stock Compensation

Stock compensation expense for the three and

nine months ended January 31, 2024 and 2023 was as follows:

Research and development

Sales and marketing

General and administrative

Note 11 – Statement of Stockholders’

The Company is authorized to issue 3,000 shares

of common stock having a par value of $0.001 per share.

Upon its formation, the Company issued 1,000 shares of common stock to its

Parent for $1.00.

In connection with its acquisition of Holdings

in November 2020, the Company's parent, Red Cat Holdings, issued 5,227,273 of its shares with a fair value of $6,351,076 to the seller

The Company recognized the fair value of the capital provided as additional paid in capital.

In April 2022, the Company sold Fat Shark Technology

SEZC to French for $1.

SEZC was a duly registered company in the Cayman Islands but had no assets or liabilities, and was basically

a dormant entity.

Note 12 - Related-Party Transactions

The Company sells product to Rotor Riot LLC (“Rotor

Riot”) which is also wholly owned by Red Cat.

Sales totaled $430,577 and $357,549 during the nine months ended January 31, 2024

and 2023, respectively.

Since its founding in November 2020, the Company

has received funding from its Parent to support its operations.

The Company received net funding of $3,455,451 during the nine months

ended January 31, 2023.

The balance due to Red Cat at January 31, 2023 totaled $6,190,051.

The Company repaid $475,868 during the nine

months ended January 31, 2024.

The balance due to Red Cat at January 31, 2024 totaled $5,976,410.

Note 13 – Sale of Consumer Segment

In November 2022, the

Company’s sole shareholder, Red Cat Holdings, Inc.

(“Red Cat”) approved a Stock Purchase Agreement (the “SPA”)

between Red Cat, Unusual Machines, Inc.

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

related to the sale of the Red Cat’s consumer business consisting of Rotor Riot, (“RR”), and Fat Shark Holdings

(“FS”), to UM.

Under the terms of the Purchase Agreement, as

amended, the UM will purchase from Red Cat its Rotor Riot and Fat Shark subsidiaries for $20.0 million (the “Purchase Price”)

comprised of (i) $1.0 million in cash, (ii) a $2.0 million promissory note (the “Note”) issued by UM to Red Cat, and (iii)

$17.0 million of UM common stock based on the value at its initial public offering.

On February 16, 2024 UM completed their initial

public offering and subsequently Red Cat and UM completed the sale of Rotor Riot and Fat Shark.

Note 14 – Subsequent Events

Subsequent events have been evaluated through

the date of this filing and there are no subsequent events which require disclosure except as noted below.

As noted in Note 13, on February 16, 2024, Unusual

Machines closed its Initial Public Offering of 1,250,000 shares of common stock at a public offering price of $4.00 per share.

will be traded on the New York Stock Exchange American.

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

Rotor Riot from Red Cat while also issuing Red Cat 4,250,000 shares of common stock in Unusual Machines.

Report of Independent

Registered Public Accounting Firm

To the shareholders and the board of directors

of Fat Shark Holdings, Ltd.

Opinion on the Financial Statements

We have audited the accompanying balance sheets

of Fat Shark Holdings, Ltd.

as of April 30, 2023 and April 30, 2022, the related statements of operations, stockholders' equity (deficit),

and cash flows for the years then ended, and the related notes (collectively referred to as the “financial statements”).

In our opinion, the financial statements present fairly, in all material respects, the financial position of the Company as of April

30, 2023 and April 30, 2022, and the results of its operations and its cash flows for the years then ended, in conformity with accounting

principles generally accepted in the United States.

Substantial Doubt about the Company’s

Ability to Continue as a Going Concern

The accompanying financial statements have been

prepared assuming that the Company will continue as a going concern.

As discussed in Note 2 to the financial statements, the Company’s

Liabilities exceeding Assets raise substantial doubt about its ability to continue as a going concern.

The financial statements do not

include any adjustments that might result from the outcome of this uncertainty.

Basis for Opinion

These financial statements are the responsibility

of the Company's management.

Our responsibility is to express an opinion on the Company's financial statements based on our audit.

are a public accounting firm registered with the Public Company Accounting Oversight Board (United States) (“PCAOB”) and

are required to be independent with respect to the Company in accordance with the U.S.

federal securities laws and the applicable rules

and regulations of the Securities and Exchange Commission and the PCAOB.

We conducted our audit in accordance with the

standards of the PCAOB.

Those standards require that we plan and perform the audit to obtain reasonable assurance about whether the financial

statements are free of material misstatement, whether due to error or fraud.

The Company is not required to have, nor were we engaged

to perform, an audit of its internal control over financial reporting.

As part of our audits we are required to obtain an understanding

of internal control over financial reporting but not for the purpose of expressing an opinion on the effectiveness of the Company’s

internal control over financial reporting.

Accordingly, we express no such opinion.

Our audit included performing procedures to assess

the risks of material misstatement of the financial statements, whether due to error or fraud, and performing procedures that respond

to those risks.

Such procedures included examining, on a test basis, evidence regarding the amounts and disclosures in the financial

Our audit also included evaluating the accounting principles used and significant estimates made by management, as well as

evaluating the overall presentation of the financial statements.

We believe that our audit provides a reasonable basis for our opinion.

/S/ BF Borgers CPA PC

BF Borgers CPA PC (PCAOB ID 5041)

We have served as the Company's auditor since

August 7, 2023

Fat Shark Holdings, Ltd.

Balance Sheets

Current assets

Accounts receivable, net

Total current assets

Intangible assets, net

LIABILITIES AND STOCKHOLDERS' EQUITY

Current liabilities

Accounts payable

Accrued expenses

Customer deposits

Due to related party

Total current liabilities

Commitments and contingencies

Stockholders’ equity

Additional paid-in capital

Accumulated deficit

Total stockholders' equity

TOTAL LIABILITIES AND STOCKHOLDERS' EQUITY

See accompanying notes.

Fat Shark Holdings, Ltd.

Statements of Operations

Year ended April 30,

Cost of goods sold

Operating expenses

Research and development

Sales and marketing

General and administrative

Stock based compensation

Total operating expenses

Operating (loss) income

Other expense

Interest expense

Other expense

See accompanying notes.

Fat Shark Holdings, Ltd.

Statements of Stockholders’ Equity

Balances, April 30, 2021

Balances, April 30, 2022

Balances, April 30, 2023

Indefinite-lived

Total intangible assets, net

Patents and intellectual property relate to the

patents and technology know-how from the acquisition of Fat Shark in February 2024.

Patents are amortized over 10 years.

Trademarks relate

to the brand name and recognition of Rotor Riot from the acquisition in February 2024.

The Company did no t have any intangible assets

as of December 31, 2023.

Note 9 – Promissory and Convertible Notes

In February 2024 and in conjunction with the acquisition

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

(“Red Cat”) for $ 2 .0 million.

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

the overall purchase price by an additional $ 2 .0 million.

In accordance with ASC 470, Debt, the additional $2.0 million was treated as

a modification that was not treated as a debt extinguishment and expenses related to the debt were expensed as incurred.

The additional

$2.0 million was added to the existing Note and was reflected as an adjustment to the opening purchase price and was included in the opening

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

Accordingly, the Note was amended to increase

the principal amount of the Note to $ 4 .0 million.

Subsequently and in July 2024, in conjunction

with a private sale of Red Cat’s common stock and its promissory note to two accredited investors (“Investors”), the

Company issued new notes to the new Investors (the “July Notes”) and cancelled the original Note.

The July Notes contained

8% per annum interest.

In addition, the maturity date of the July Notes was extended to November 30, 2025, subject to certain conditions.

On August 21, 2024, the Company entered into two

exchange agreements with the Investors, under which the Investors exchanged their respective 8% July Notes for new 4% Convertible Notes

(the “August Notes”).

Pursuant to the exchange agreements, the Investors exchanged the $ 4,000,000 of July Notes for an aggregate

of (i) $ 3,000,000 for the August Notes, (ii) 210 shares of Series C preferred stock, which converts into 630,000 shares of the Company’s

common stock, and (iii) 630,000 warrants with a five-year term and an exercise price of $1.99 per share, subject to certain adjustments.

The July Notes were cancelled as a part of the exchange agreement.

In accordance with ASC 470, since the August Notes were considered

a greater than 10% change from the July Notes and a substantive conversion option was added to the August Notes, this exchange was treated

as a debt extinguishment.

The August Notes bear interest at 4 % annually with interest payable monthly and the principal due on November

The August Notes are convertible into common stock at a fixed $1.99 per share, except in the Event of Default as defined in

the August Notes, which the conversion price for an Event of Default Conversion is calculated at a 10% discount of the average three-day

volume-weighted average price prior to the conversion date.

During the third quarter 2024, the Company recognized

a loss on debt extinguishment of $ 685,151

related to the exchange agreement discussed above.

The loss on extinguishment related to the August Notes included $ 315,303

fair value related to the warrant liability issued, $ 347,947

fair value related to the optional conversion feature derivative liability of the remaining principal balance, and $ 21,901

cash fees paid for legal costs related to the August Notes.

The Company used the binomial option pricing method for calculating the derivative

fair value related to the warrants and optional conversion feature (see Note 10 – Derivative Liabilities).

In December 2024, the Investors exercised

their conversion option to convert the remaining $ 3,000,000 in

August Notes to Common Stock at a fixed $ 1.99 conversion

As a result, the Company issued 1,507,538 shares

of common stock, cancelled the $3,000,000 in August Notes, and recorded $ 17,864,325

to common stock and additional paid in capital related to the conversion of the August Notes to Common Stock.

This value is based on

the closing price of the Company’s common stock on December 3, 2024 of $11.85 per share.

This resulted in a loss on debt

extinguishment of $ 14,864,325 .

The settlement of the related conversion option derivative resulted in a gain on extinguishment of $ 16,503,923

(see Note 10).

The net gain was $ 1,639,598 .

A reconciliation of the net gain on debt extinguishment

during the year ended December 31, 2024 is as follows:

Schedule of extinguishment of debt

December 31, 2024

Loss from August Notes modification

$ ( 685,151 )

See accompanying notes.

Shark Holdings, Ltd.

Cash Flows Statements

Year ended April 30,

Cash flows from operating activities

Stock based compensation

Amortization of intangible assets

Changes in operating assets and liabilities

Accounts receivable

Customer deposits

Accounts payable

Accrued expenses

Net cash used in operating activities

Cash flows from financing activities

Cash acquired through acquisition

Proceeds from related party obligations

Payments under debt obligations

Net cash provided by financing activities

Net (decrease) increase in Cash

Cash, beginning of period

Cash, end of period

Cash paid for interest

Cash paid for income taxes

Non-cash transactions

Indirect payment of debt obligation

accompanying notes.

Fat Shark Holdings, Ltd.

NOTES TO FINANCIAL STATEMENTS

April 30, 2023 and 2022

Note 1 – The Business

Originally founded in September 2020 as FS Acquisition

(“FSA” or the “Company”), the company was formed by Red Cat Holdings, Inc., its wholly owned parent, to

complete the acquisition of Fat Shark Holdings, LTD (“Holdings”).

As further described in Note 3, the acquisition closed

on November 2, 2020.

In April 2022, the Company re-incorporated in Nevada, United States and formally changed its name to Fat Shark Holdings,

The Company sells consumer electronics products to the first-person view (“FPV”) sector of the drone industry.

Note 2 – Basis of Accounting and Going

These financial statements reflect the operating

results of the Company for the two years ended April 30, 2023, including the financial support received from its Parent.

These financial

statements may not be indicative of the company’s operating results if it had operated without financial support from its Parent.

The financial statements have been prepared on

a going concern basis which contemplates the realization of assets and the settlement of liabilities and commitments in the normal course

As reflected in the financial statements, the Company has incurred net losses totaling $1,484,734 since its inception, and

reported negative working capital of $2,584,584 at April 30, 2023.

Management recognizes that these operating results and our financial

position raise substantial doubt about our ability to continue as a going concern.

The financial statements do not include any adjustments

related to the recoverability and classification of recorded asset amounts and the classification of liabilities that might be necessary

should we be unable to continue as a going concern.

Note 3 – Acquisition of Fat Shark Holdings,

In September 2020, the

Company entered into a share purchase agreement (“Share Purchase Agreement”) with Greg French (“French”), the

founder and sole shareholder of Holdings to acquire all of the issued and outstanding shares of Holdings and its wholly owned subsidiaries,

Fat Shark Tech, LTD and Fat Shark Technology SEZC.

The transaction closed on November 2, 2020.

At closing, the Parent delivered

to the Seller, on behalf of the Company, 5,227,273 shares of the Parent's common stock with a fair value of $6,351,076.

recognized the shares issued on its behalf by the Parent as an additional capital investment.

In addition, a senior secured promissory

note was issued to the Seller which was recorded on the Company's balance sheet.

Finally, the Seller received a cash payment of

$250,000, which was funded by the Parent, and recognized by the Company due to related party.

A summary of the purchase

price and its related allocation was as follows:

Shares issued

Promissory note issued

Total Purchase Price

Assets acquired

Accounts receivable

Proprietary technology

Non-compete agreement

Total assets acquired

Liabilities assumed

Accounts payable and accrued expenses

Customer deposits

Total liabilities assumed

Total fair value of net assets acquired

The Company engaged a valuation

services firm to value the intangible assets acquired and the purchase price allocation is now complete.

Intangible assets included proprietary

technology and a non-compete agreement which are being amortized over 5 and 3 years, respectively.

The carrying value of brand name is

not being amortized but is reviewed quarterly and formally evaluated at year end.

The excess of the purchase price above the net assets

acquired was recorded as goodwill which is reviewed quarterly and formally evaluated at year end.

Note 4 – Summary of Significant Accounting

Basis of Accounting – The financial

statements and accompanying notes are prepared in accordance with generally accepted accounting principles in the United States (“GAAP”).

Certain prior period amounts have been restated to conform to the current year presentation.

Use of Estimates – The preparation of

financial statements in accordance 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 revenue and expenses during the reporting period.

Actual results could differ from those estimates.

Significant estimates

reflected in these financial statements include those used to (i) determine stock-based compensation, (ii) complete purchase price accounting

for acquisitions, and (iii) accounting for derivatives.

Cash and Cash Equivalents – At April

30, 2023 and 2022, we held cash of $85,744 and $109,223, respectively, in multiple commercial banks and financial services companies.

We have not experienced any loss on these cash balances and believe they are not exposed to any significant credit risk.

Fair Values, Inputs and Valuation Techniques for

Financial Assets and Liabilities, and Related Disclosures – The fair value measurements and disclosure guidance defines fair

value and establishes a framework for measuring fair value.

Fair value is defined as the price that would be received to sell an asset

or paid to transfer a liability (an exit price) in an orderly transaction between market participants at the measurement date.

In accordance

with this guidance, the Company has categorized its recurring basis financial assets and liabilities into a three-level fair value hierarchy

based on the priority of the inputs to the valuation technique.

The fair value hierarchy gives the highest priority

to quoted prices in active markets for identical assets or liabilities (Level 1) and the lowest priority to unobservable inputs (Level

The inputs used to measure fair value may fall into different levels of the fair value hierarchy.

In such cases, the level in the

fair value hierarchy within which the fair value measurement in its entirety falls has been determined based on the lowest level input

that is significant to the fair value measurement in its entirety.

The Company's assessment of the significance of a particular input

to the fair value measurement in its entirety requires judgment and considers factors specific to the asset or liability.

The guidance establishes

three levels of the fair value hierarchy as follows:

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

Inputs are observable, unadjusted quoted prices in active markets for similar assets or liabilities, unadjusted quoted prices for identical

or similar assets or liabilities in markets that are not active, or other inputs that are observable or can be corroborated by observable

market data for substantially the full term of the related assets or liabilities;

Unobservable inputs that are significant to the measurement of the fair value of the assets or liabilities that are supported by little

or no market data.

Disclosures for Non-Financial Assets Measured

at Fair Value on a Non-Recurring Basis

The Company's financial instruments mainly consist

of cash, receivables, current assets, accounts payable, accrued expenses and debt.

The carrying amounts of cash, receivables, current

assets, accounts payable, accrued expenses and current debt approximates fair value due to the short-term nature of these instruments.

Revenue Recognition – The Company recognizes

revenue in accordance with ASC 606, “Revenue from Contracts with Customers”, issued by the Financial Accounting Standards

Board (“FASB”).

This standard includes a comprehensive evaluation of factors to be considered regarding revenue recognition

including (i) identifying the promised goods, (ii) evaluating performance obligations, (iii) measuring the transaction price, (iv) allocating

the transaction price to the performance obligations if there are multiple components, and (v) recognizing revenue as each obligation

is satisfied.

The Company’s revenue transactions include a single component, specifically, the shipment of goods to customers

as orders are fulfilled.

The Company recognizes revenue upon shipment.

The timing of the shipment of orders can vary considerably depending

upon whether an order is for an item normally maintained in inventory or an order that requires assembly or unique parts.

Customer deposits

totaled $25,340 and $9,119 at April 30, 2023 and 2022, respectively.

Research and Development – Research

and development expenses include payroll, employee benefits, and other headcount-related expenses associated with product development.

Research and development expenses also include third-party development and programming costs, as well as a proportionate share of overhead

costs such as rent.

Costs related to software development are included in research and development expense until technological feasibility

is reached, which for our software products, is generally shortly before the products are released to production.

Once technological

feasibility is reached, such costs are capitalized and amortized as a cost of revenue over the estimated lives of the products.

Income Taxes – Deferred taxes are provided

on the liability method, whereby deferred tax assets are recognized for deductible temporary differences and deferred tax liabilities

are recognized for taxable temporary differences.

Temporary differences are the differences between the reported amounts of assets and

liabilities and their tax bases.

Deferred tax assets and liabilities are adjusted for the effects of changes in tax laws and rates on

the date of enactment.

Recent Accounting Pronouncements – Management

does not believe that recently issued, but not yet effective accounting pronouncements, if adopted, would have a material effect on the

accompanying consolidated financial statements.

Stock-Based Compensation – For stock

options, we use the estimated grant-date fair value method of accounting in accordance with ASC Topic 718, Compensation – Stock

Compensation.

Fair value is determined based on the Black-Scholes Model using inputs reflecting our estimates of expected volatility,

term and future dividends.

We recognize forfeitures as they occur.

For restricted stock, we determine the fair value based on our stock

price on the date of grant.

For both stock options and restricted stock, we recognize compensation costs on a straight-line basis over

the service period which is the vesting term.

Related Parties – Parties are considered

to be related to us if they have control or significant influence, directly or indirectly, over us, including key management personnel

and members of the Board of Directors.

Related Party transactions are disclosed in Note 12.

Note 5 – Inventories

Inventories, consisting solely of finished goods,

totaled $2,307,070 and $317,556 at April 30, 2023 and 2022, respectively.

Note 6 – Other Assets

Other assets, short term, included.

April 30, 2023

April 30, 2022

Prepaid inventory

Prepaid expenses

Note 7 – Intangible Assets

Intangible assets relate to acquisitions completed

by the Company, including those described in Note 3.

Intangible assets as of April 30 were as follows:

April 30, 2023

April 30, 2022

Gross Carrying Amount

Accumulated Amortization

Net Carrying Value

Gross Carrying Amount

Accumulated Amortization

Net Carrying Value

Proprietary technology

Non-compete agreements

Total finite-lived

Indefinite-lived– Brand name

As of April 30, 2023, expected amortization expense for the next five

years is as follows:

Fiscal Year Ended:

Proprietary technology and non-compete agreements

are being amortized over 5 and 3 years, respectively.

Goodwill and Brand name are not amortized but evaluated for impairment on a quarterly

Goodwill is a separately stated intangible asset

and represents the excess of the purchase price of acquisitions above the net assets acquired.

The balance was $6,168,260 as of April

30, 2023 and 2022.

Note 8 – Debt Obligations

In connection with the acquisition of Holdings in

November 2020, the Company issued a secured promissory note in the amount of $1,753,000 to the seller.

The note bore interest at 3% annually

and was scheduled to mature in full in November 2023.

In May 2021, the Company made an initial payment of $132,200 by directing a refund

from a vendor based in China to the noteholder who is also based in China.

The remaining balance of $1,620,800 plus accrued interest

totaling $45,129 was paid in September 2021.

Note 9 – Income Taxes

The Company was originally founded in November 2020

as an entity based in the Cayman Islands.

While based in the Cayman Islands, the Company qualified as a Caymans Island Exempted

Company which qualified it as a tax exempt entity.

In April 2022, the Company changed its name to Fat Shark Holdings, Ltd.

reincorporated in Nevada, United States.

Since incorporating in the United States, the Company has incurred net losses through

April 30, 2023.

Our current provision for the reporting periods presented in these financial statements consisted of a tax benefit

against which we applied a full valuation allowance, resulting in no current provision for income taxes.

In addition, there was no deferred

provision for any of these reporting periods.

Currently, we focus on projected future taxable income in evaluating whether it is more

likely than not that these deferred assets will be realized.

Based on the fact that we have not generated an operating profit since incorporating

in the United States, we have applied a full valuation allowance against our deferred tax assets at April 30, 2023.

Loss from conversion of debt to common stock

( 14,864,325 )

Gain from settlement of conversion option

Gain from settlement of warrant liability

Net gain on debt extinguishment

Total interest expense for the year ended December

31, 2024 was $ 116,981 .

Note 10 – Derivative Liabilities

The fair value of the 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 risk-free interest rate over the expected term, and certain estimates and probabilities of different outcomes.

in the fair value of the derivative is recorded in the income statement in other income and expense on a quarterly basis.

Derivative liability – conversion option

In August 2024 and in conjunction with the

issuance of the August Notes as discussed in Note 9 – Promissory and Convertible Notes, the Company recorded a derivative

liability related to the optional conversion feature (“Conversion Derivative”) in accordance with ASC 815 as it is not

clearly and closely related to the host contract and the embedded debt conversion feature meets the definition of a liability due to

a potential variable amount of shares that may be issued upon conversion.

The initial fair value on August 21, 2024 for the

Conversion Derivative was $ 347,947 .

On December 3, 2024, the holders of the Convertible

Note exercised their conversion option to convert the remaining $ 3,000,000

of the convertible note into 1,507,538

shares of common stock.

As a result, the Company recorded an increase in fair value of the derivative liability conversion option

of $ 16,155,976 .

The Conversion Derivative fair value as of December 31, 2024 was $0 given the conversion feature was exercised and is no longer outstanding.

Warrant Liability

In August 2024 and in conjunction with the

issuance of the August Notes as discussed in Note 9 – Promissory and Convertible Notes, the Company issued warrants that include

specific provisions and obligations including a fundamental transaction provision that may require a cash payment to the holder upon

a triggering event, that in accordance with ASC 815, require the warrants to be classified as a liability.

The initial fair value on

August 21, 2024 for the Warrant Liability was $ 315,303 .

On December 3, 2024, the warrant holders exercised

630,000 warrants (which is included in the 684,000

of total warrant exercises as noted in Note 11) at $ 1.99

per shares related to the August Notes and the Company received cash proceeds of $ 1,253,700

related to the warrants.

The Company recognized a decrease in the fair value of the warrant liability of $ 9,771 .

The warrant liability fair value as of December 31, 2024 was $0 since the warrants were exercised and are no longer outstanding.

The assumptions used related to the fair value

of the derivative liability – conversion option and warrant liability is as follows:

Significant Assumptions

Initial Period

Subsequent Period

Risk free interest rate

Expected life

Dividend yield

Note 11 – Earnings Per Share and Stockholders’ Equity

Earnings per Share

Outstanding securities not included in the

computation of diluted net loss per share because their effect would have been anti-dilutive include 330,000

of stock options issued to employees as of December 31, 2024, 8,500

of common stock representative warrants issued to the underwriter associated with the February 2024 IPO, and 1,389,079

warrants issued related to the October 2024 private placement.

Preferred Stock

The Series A is convertible into common stock

at a ratio of 1,000 shares of common stock for each share of Series A stock held, subject to certain limitations.

The Series A shares

are not entitled to vote on any matters submitted to shareholders of the Company.

The Series B is convertible into common stock

at a ratio of 5,000 shares of common stock for each share of Series B stock held, subject to certain limitations.

The Series B shares

are not entitled to vote on any matters submitted to shareholders of the Company.

The Series C is convertible into common stock

at a ratio of 3,000 shares of common stock for each share of Series C stock held, subject to certain limitations.

The Series C shares

are not entitled to vote on any matters submitted to shareholders of the Company.

2024 Transactions

On July 22, 2024, the Company’s principal

shareholder, Red Cat sold all of its securities in the Company to the two unaffiliated third-party Investors.

As part of the transaction, Red Cat entered into an Exchange Agreement with the Company pursuant to which Red Cat exchanged 4,250,000

shares of the Company’s common stock for 4,250 shares of the Company’s Series A.

The Series A shares can be convertible back

into the same amount of shares of common stock as of the date of the original exchange, and as a result the Company did not recognize

any gain or loss related to the exchange.

On August 21, 2024, the Company entered into two

exchange agreements with the Investors, under which each investor exchanged an aggregate of $ 1,000,000 of their Notes for an aggregate

of 210 shares of the Company’s Series C and 630,000 warrants (see Note 12 – Share Based Awards).

In November and December 2024, the two Investors

converted 4,250 shares of Series A into 4,250,000 shares of common stock.

The Company canceled the 4,250 shares of Series A upon the conversion

and as of December 31, 2024, there were no shares of Series A preferred stock outstanding

During 2024, shareholders converted 190 shares

of Series B into 950,000 shares of common stock.

The Company canceled the 190 shares of Series B upon the conversion and as of December

31, 2024, there were no shares of Series B preferred stock outstanding.

In December 2024, the two Investors converted

210 shares of Series C into 630,000 shares of common stock.

The Company canceled the 210 shares of Series C upon the conversion and as

of December 31, 2024, there were no shares of Series C preferred stock outstanding.

2023 Transactions

On June 1, 2023, the Company issued an additional

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

2024 Transactions

On January 2, 2024, the Company issued 16,086

shares of common stock to its prior Chief Executive Officer as a part of a separation agreement and recognized compensation expense of

$ 64,344 or $4 per share, the value of the IPO in February 2024.

On February 16, 2024 the Company completed

its IPO and issued 1,250,000 shares

of common stock at the IPO Price for total net proceeds of $ 3,849,555 .

The Company incurred $ 510,000 direct

deduction from proceeds, $ 127,687 in

cash disbursements related to offering costs and $ 512,758 in

prior year paid and deferred offering costs as of December 31, 2023 for a total of $ 1,150,445 offering

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

These costs have

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

The 62,500 of representative warrants

are exercisable for common stock at a price of $ 5.00 per

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

Simultaneously with its IPO and as a part of the

Purchase Agreement as discussed in Note 3, the Company issued Red Cat 4,250,000 shares of common stock as consideration of the business

These were subsequently exchanged into 4,250 Series A preferred shares as discussed above.

As agreed in the Purchase Agreement,

$ 17 .0 million of the purchase price would be issued in common stock based on the IPO price of $4.00 per share.

During 2024, the Company issued 950,000 shares

of common stock related to certain shareholders converting 190 Series B shares into common stock.

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

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

The shares of restricted stock were granted

under the Company’s 2022 Equity Incentive Plan.

The restricted shares issued to executive officers are subject to pro rata forfeiture

through February 14, 2025.

On May 2, 2024, the Company issued an additional

40,650 of restricted shares of common stock to Allan Evans, the Company’s CEO related to an agreed upon reduction of compensation.

The shares of restricted stock were granted under the Company’s 2022 Equity Incentive Plan (the “Plan”).

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

valued at $ 1.20 and $ 1.23 per share, respectively for a total of $ 1,174,698 to be recognized pro-rata over the vesting period through

February 14, 2025 which is the forfeiture period.

Stock compensation expense of $ 1,009,218 was recognized during the year ended December

Unrecognized stock compensation expense related to these shares is $ 165,480 as of December 31, 2024.

On July 22, 2024, Red Cat sold all of its securities

in the Company to two accredited investors in a private transaction.

As part of the transaction, Red Cat entered into an Exchange Agreement

with the Company pursuant to which Red Cat exchanged 4,250,000 shares of the Company’s common stock for 4,250 shares of the Company’s

There was no gain or loss on this exchange as both the common and preferred shares were determined to have the same fair value

as of the exchange date.

On July 30, 2024, the Company issued 23,743 immediately

vested restricted shares of common stock to non-employee directors of the Company.

The shares of restricted stock were granted under the

The shares were valued at $ 1.79 per share, which was the value of the Company’s common stock on the date of grant, respectively

for a total of $ 42,500 to be recognized as stock compensation expense during the year ended December 31, 2024.

On October 22, 2024, the Company issued 29,313

immediately vested restricted shares of common stock to non-employee directors of the Company.

The shares of restricted stock were granted

under the Plan.

The shares were valued at $ 1.45 per share, which was the value the Company’s common stock on the date of grant,

respectively for a total of $ 42,500 to be recognized as stock compensation expense during the year ended December 31, 2024.

On October 29, 2024 (the “Closing

Date”), the Company 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 the Company in connection with the Private

The Company intends to use the net proceeds of approximately $ 1.8

million of the Private Placement for working capital and general corporate purposes.

As part of the Private Placement, the Company

issued an aggregate of 1,286,184

units at a per unit purchase price of $ 1.52

Each unit consists of one share of common stock, par value $0.01 per share (the “Common Stock”) and one

warrant to purchase one share of the Company’s Common Stock at an exercise price of $1.99 per share (each an “Investor

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

The Investor Warrants have a term of five and a half years from the

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

limitations and adjustments set forth in the Investor Warrants.

Allan Evans, the Company’s Chief Executive Officer and Sanford

Rich and Robert Lowry, each a member of the Company’s board of directors (and the three combined, the “Insiders”),

invested an aggregate of $ 250,000

in the Private Placement on identical terms to the other Investors.

Subsequently and in order to comply with New York Stock Exchange

American rules, the Insiders were required to pay an additional $ 92,105

to the Company related to the greater of book or market value for the warrants.

On November 5, 2024, the Board of Directors

of the Company awarded each of the Company’s Chief Executive Officer, Chief Financial Officer and Chief Operation Officer 50,000

restricted shares of the Company’s Common Stock under the Plan as bonuses related to the Private Placement.

The restricted

shares are valued at $ 1.96

per share, the closing price of our common stock as of the date of the grant, for a total value of $ 98,000

that was recognized immediately based on the vesting of the awards for each of the Company’s Officers.

The bonuses are subject

to the Company’s clawback Policy.

On November 22, 2024, the Company issued 150,000

shares of common stock related to vested restricted stock units for our advisory board members.

The restricted stock units are

valued at $4.40 per share, the closing price of our common stock as of the date of the grant, for a total value of $ 660,000 .

In November and December 2024, the Company

issued 4,250,000

shares of common stock related to the Investors holding the Series A preferred stock and converted their 4,250

shares of Series A into common stock.

In November and December 2024, the Company issued

684,000 shares of common stock related to warrant holders exercising their warrants.

The Company received gross proceeds of $ 1,523,700

related to the warrant exercises.

The Company cancelled the 684,000 warrants upon issuance of the common shares.

On December 3, 2024, the Company issued 1,507,538

shares of common stock related to the Investors exercising their conversion option of the convertible note payable.

of the conversion, the Company cancelled the August Notes as discussed in Note 9 – Promissory and Convertible Notes.

– Promissory and Convertible Notes for additional information related to the conversion.

In December 2024, the Company issued 630,000

shares of common stock related to the Investors holding the Series C preferred stock and converted their 210

shares of Series C into common stock.

2023 Transactions

On March 7, 2023, the Company issued 75,000 shares

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

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

The Company recorded $ 600,000 of stock

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

of common stock for the Company.

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

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

In accordance with Staff Accounting

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

In addition, and in accordance with FASB ASC 260,

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

Note 12 – Share Based Awards

Red Cat has established the 2019 Equity Incentive

Plan (the “Plan”) to incentive key employees, consultants, and directors with long term compensation awards such as stock

options, restricted stock, and restricted stock units (collectively, the “Awards”).

The Company recognized stock based compensation

expense in connect with Awards to its employees.

The range of assumptions used to calculate the fair

value of options granted during the year ended April 30 was:

Stock Options

The 2022 Equity Incentive Plan (the “Plan”) allows the Company to incentivize key

employees and directors with long term compensation awards such as stock options, restricted stock, and other similar types of awards.

The Plan is authorized to issue up to 15% of the outstanding shares on a fully diluted basis giving effect to the exercise and conversion

of all outstanding common stock equivalents issued outside of the Plan.

In addition, the Plan has an “evergreen” provision,

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

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

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

determined by our board of directors.

As of December 31, 2024, the Plan is authorized to issue up to 2,278,296 of awards.

During the year ended December 31, 2024, the Company’s

board of directors approved the grant of 330,000 stock options under the Plan to certain employees.

The stock options are subject to certain

vesting provisions.

The following table presents the activity for

stock options outstanding:

Schedule of stock option activity

Non-Qualified

Exercise Price

Contractual Term

Intrinsic Value

Outstanding - December 31, 2023

Forfeited/canceled

Outstanding – December 31, 2024

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

granted during the year ended December 31, 2024 was:

Schedule of stock options assumptions

Exercise Price

Stock Price on date of grant

Risk-free interest rate

4.080 - 4.71 %

Dividend yield

Expected term (years)

A summary of options activity under the Plan since

April 30, 2021 is as follows:

Weighted-Average Exercise Price

Weighted-Average Remaining Contractual Term

Aggregate Intrinsic Value

Outstanding as of April 30, 2021

Forfeited or expired

Outstanding as of April 30, 2022

Forfeited or expired

Outstanding as of April 30, 2023

Exercisable as of April 30, 2023

The aggregate intrinsic value of outstanding options

represents the excess of the stock price at the indicated date over the exercise price of each option.

As of April 30, 2023 and April

30, 2022, there was $54,287 and $89,233 of unrecognized stock-based compensation expense related to unvested stock options which

is expected to be recognized over the weighted average periods of 1.56 and 2.56 years, respectively.

Stock Compensation

Stock compensation expense for the years ended April

30, 2023 and 2022 was as follows:

General and administrative

Research and development

Sales and marketing

Note 11 – Statement of Stockholders’

The Company is authorized to issue 3,000 shares of

common stock having a par value of $0.001 per share.

Upon its formation, the Company issued 1,000 shares of common stock to its Parent

In connection with its acquisition of Holdings

in November 2020, the Company's parent, Red Cat Holdings, issued 5,227,273 of its shares with a fair value of $6,351,076 to the seller

The Company recognized the fair value of the capital provided as additional paid in capital.

In April 2022, the Company sold Fat Shark Technology

SEZC to French for $1.

SEZC was a duly registered company in the Cayman Islands but had no assets or liabilities, and was basically

a dormant entity.

Note 12 - Related-Party Transactions

The Company sells product to Rotor Riot LLC (“Rotor

Riot”) which is also wholly owned by Red Cat.

Sales totaled $400,619 and $104,961 during the fiscal years ended April 30, 2023

and 2022, respectively.

Since its founding in November 2020, the Company

has received funding from its Parent to support its operations.

The Company received net funding of $2,484,601 during the fiscal

year ended April 30, 2022.

The balance due to Red Cat at April 30, 2022 totaled $2,734,600.

The Company received net funding of $3,699,678

during the fiscal year ended April 30, 2023, primarily related to inventory deposits and purchases and a net loss of $546,121.

balance due to Red Cat at April 30, 2023 totaled $6,434,278.

Note 13 – Sale of Consumer Segment

On November 21, 2022, the

Company’s sole shareholder, Red Cat Holdings, Inc.

(“Red Cat”) approved a Stock Purchase Agreement (the "SPA")

between Red Cat, Unusual Machines, Inc.

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

related to the sale of the Red Cat’s consumer business consisting of Rotor Riot, (“RR”), and Fat Shark Holdings

(“FS”), to UM for cash and stock consideration totaling $18 million.

On November 21, 2022, Red Cat approved the SPA and

its submission to shareholders for approval.

On March 8, 2023, shareholders approved the sale to UM.

On April 13, 2023, the SPA was amended (the “Amendment”)

and the total purchase price increased to $20 million.

Under the Amendment, the cash consideration payable at closing was reduced to

$3.0 million, as may be adjusted for working capital on the closing date (increased for positive working capital and decreased for negative

working capital), and the non-cash consideration adjusted to provide for payment of $17 million in shares of UM’s common stock

(the “Unusual Common Stock”) issued at the initial public offering price for the Unusual Common Stock.

All of the Unusual

Common Stock will be subject to a lock-up of 180 days and be eligible for registration.

The Company estimates that working capital at

closing will range between $2.0 to $4.5 million.

In addition, closing of the SPA is subject to successful completion of an initial public

offering (the “IPO”) by UM in the minimum amount of $10 million, and the listing of UM’s common stock on Nasdaq or

UM filed a registration statement on Form S-1 for

an initial public offering of its Common Stock with the SEC.

Note 14 – Subsequent Events

Subsequent events have been evaluated through the

date of this filing and there are no subsequent events which require disclosure.

Current assets

Total current assets

Operating lease right-of-use assets

Intangible assets, net

Total long term assets

LIABILITIES AND STOCKHOLDERS' EQUITY

Current liabilities

Accounts payable

Accrued expenses

Due to related party

Customer deposits

Debt obligations

Operating lease liabilities

Total current liabilities

Operating lease liabilities – long term

Commitments and contingencies

Members’ equity

Cumulative contributions

Cumulative deficit

Cumulative distributions

Total members' equity

TOTAL LIABILITIES AND STOCKHOLDERS' EQUITY

See accompanying notes.

Of Operations

Three months ended January

Nine months ended January

Cost of goods sold

Operating Expenses

Research and development

Sales and marketing

General and administrative

Stock based compensation

Total operating expenses

Operating loss

Other Expense (Income)

Interest expense

Other Expense (Income)

See accompanying notes.

Rotor Riot, LLC

Statements of Members’

Contributions

Distributions

Balances, April 30, 2022

129.45 – 143.46 %

Balances, January 31, 2023

$ (1,717,299 )

$ (1,966,622 )

Balances, April 30, 2023

$ (2,228,614 )

$ (2,477,937 )

Balances, January 31, 2024

$ (3,157,632 )

$ (3,406,955 )

See accompanying notes.

Flows Statements

Nine months ended January 31,

Cash flows from operating activities

Stock based compensation

Changes in operating assets and liabilities

Accounts receivable

Operating lease right-of-use assets and liabilities

Customer deposits

Accounts payable

Accrued expenses

Net cash used in operating activities

Cash flows from financing activities

Proceeds from related party obligations

Proceeds from debt obligations

Payments under debt obligations

Net cash provided by financing activities

Net (decrease) increase in Cash

Cash, beginning of period

Cash, end of period

Cash paid for interest

Cash paid for income taxes

See accompanying notes.

Rotor Riot, LLC

NOTES TO FINANCIAL STATEMENTS

Note 1 – The Business

Originally founded in 2016, Rotor Riot, LLC (“Rotor

Riot” or the “Company”) was acquired by and became a wholly owned subsidiary of Red Cat Holdings (“Red Cat”

or the “Parent”) in January 2020.

The Company sells drones, parts and related equipment to the consumer marketplace through

its digital storefront located at www.rotorriot.com.

Note 2 – Going Concern

The Company has incurred net losses since its

acquisition by Red Cat which has provided funding to enable the company to continue to operate.

These financial statements reflect the

operating results of the Company for the two years ended January 31, 2024, including the financial support received from its Parent.

These financial statements may not be indicative of the company’s operating results if it had operated without financial support

from its Parent.

The financial statements have been prepared on

a going concern basis which contemplates the realization of assets and the settlement of liabilities and commitments in the normal course

As reflected in our accompanying financial statements, we had negative working capital of $3,541,361 at January 31, 2024

and have accumulated losses totaling $3,157,632 through January 31, 2024.

Management recognizes that these operating results and our

financial position raise substantial doubt about our ability to continue as a going concern.

The financial statements do not include

any adjustments related to the recoverability and classification of recorded asset amounts and the classification of liabilities that

might be necessary should we be unable to continue as a going concern.

Note 3 – Summary of Significant Accounting

Basis of Accounting – The financial

statements and accompanying notes are prepared in accordance with generally accepted accounting principles in the United States (“GAAP”).

Certain prior period amounts have been restated to conform to the current year presentation.

Use of Estimates – The preparation

of financial statements in accordance 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 revenue and expenses during the reporting period.

Actual results could differ from those estimates.

Significant estimates

reflected in these financial statements include those used to (i) determine stock-based compensation, (ii) complete purchase price accounting

for acquisitions, and (iii) accounting for derivatives.

Cash and Cash Equivalents – At January

31, 2024 and April 30, 2023, we held cash of $95,551 and $912, respectively, in multiple commercial banks and financial services companies.

We have not experienced any loss on these cash balances and believe they are not exposed to any significant credit risk.

Leases – Effective August 1, 2021,

the Company adopted Accounting Standards Codification (ASC) 842 titled “Leases” which requires the recognition of assets

and liabilities associated with lease agreements.

The Company adopted ASC 842 on a modified retrospective transition basis which means

that it did not restate financial information for any periods prior to August 1, 2021.

Upon adoption, the Company recognized a lease

liability obligation of $260,305 and a right-of-use asset for the same amount.

This lease was terminated in October 2023 when the Company

moved locations.

In November 2023, the Company recognized a lease liability obligation of $391,766 and a right-of-use asset for the same

amount related to a new lease.

The Company determines

if a contract is a lease or contains a lease at inception.

Operating lease liabilities are measured, on each reporting date, based

on the present value of the future minimum lease payments over the remaining lease term.

The Company's leases do not provide an

implicit rate.

Therefore, the Company uses an effective discount rate of 12% based on its last debt financings.

Operating lease

assets are measured by adjusting the lease liability for lease incentives, initial direct costs incurred and asset impairments.

Lease expense for minimum lease payments is recognized on a straight-line basis over the lease term with the operating lease asset reduced

by the amount of the expense.

Lease terms may include options to extend or terminate a lease when they are reasonably certain to occur.

Fair Values, Inputs and Valuation Techniques

for Financial Assets and Liabilities, and Related Disclosures – The fair value measurements and disclosure guidance defines

fair value and establishes a framework for measuring fair value.

Fair value is defined as the price that would be received to sell an

asset or paid to transfer a liability (an exit price) in an orderly transaction between market participants at the measurement date.

In accordance with this guidance, the Company has categorized its recurring basis financial assets and liabilities into a three-level

fair value hierarchy based on the priority of the inputs to the valuation technique.

The fair value hierarchy gives the highest priority

to quoted prices in active markets for identical assets or liabilities (Level 1) and the lowest priority to unobservable inputs (Level

The inputs used to measure fair value may fall into different levels of the fair value hierarchy.

In such cases, the level in the

fair value hierarchy within which the fair value measurement in its entirety falls has been determined based on the lowest level input

that is significant to the fair value measurement in its entirety.

The Company's assessment of the significance of a particular input

to the fair value measurement in its entirety requires judgment and considers factors specific to the asset or liability.

The guidance establishes

three levels of the fair value hierarchy as follows:

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

Inputs are observable, unadjusted quoted prices in active markets for similar assets or liabilities, unadjusted quoted prices for identical

or similar assets or liabilities in markets that are not active, or other inputs that are observable or can be corroborated by observable

market data for substantially the full term of the related assets or liabilities;

Unobservable inputs that are significant to the measurement of the fair value of the assets or liabilities that are supported by little

or no market data.

Disclosures for Non-Financial Assets Measured

at Fair Value on a Non-Recurring Basis

The Company's financial instruments mainly consist

of cash, receivables, current assets, accounts payable, accrued expenses and debt.

The carrying amounts of cash, receivables, current

assets, accounts payable, accrued expenses and current debt approximates fair value due to the short-term nature of these instruments.

Revenue Recognition – The Company

recognizes revenue in accordance with ASC 606, “Revenue from Contracts with Customers”, issued by the Financial Accounting

Standards Board (“FASB”).

This standard includes a comprehensive evaluation of factors to be considered regarding revenue

recognition including (i) identifying the promised goods, (ii) evaluating performance obligations, (iii) measuring the transaction price,

(iv) allocating the transaction price to the performance obligations if there are multiple components, and (v) recognizing revenue as

each obligation is satisfied.

The Company’s revenue transactions include a single component, specifically, the shipment of

goods to customers as orders are fulfilled.

The Company recognizes revenue upon shipment.

The timing of the shipment of orders can vary

considerably depending upon whether an order is for an item normally maintained in inventory or an order that requires assembly or unique

Customer deposits totaled $9,949 and $227,460 at January 31, 2024 and April 30, 2023, respectively.

Research and Development – Research

and development expenses include payroll, employee benefits, and other headcount-related expenses associated with product development.

Research and development expenses also include third-party development and programming costs, as well as a proportionate share of overhead

costs such as rent.

Costs related to software development are included in research and development expense until technological feasibility

is reached, which for our software products, is generally shortly before the products are released to production.

Once technological

feasibility is reached, such costs are capitalized and amortized as a cost of revenue over the estimated lives of the products.

Income Taxes – Deferred taxes are

provided on the liability method, whereby deferred tax assets are recognized for deductible temporary differences and deferred tax liabilities

are recognized for taxable temporary differences.

Temporary differences are the differences between the reported amounts of assets and

liabilities and their tax bases.

Deferred tax assets and liabilities are adjusted for the effects of changes in tax laws and rates on

the date of enactment.

Recent Accounting Pronouncements –

Management does not believe that recently issued, but not yet effective accounting pronouncements, if adopted, would have a material

effect on the accompanying consolidated financial statements.

Stock-Based Compensation – For stock

options, we use the estimated grant-date fair value method of accounting in accordance with ASC Topic 718, Compensation – Stock

Compensation.

Fair value is determined based on the Black-Scholes Model using inputs reflecting our estimates of expected volatility,

term and future dividends.

We recognize forfeitures as they occur.

For restricted stock, we determine the fair value based on our stock

price on the date of grant.

For both stock options and restricted stock, we recognize compensation costs on a straight-line basis over

the service period which is the vesting term.

Related Parties – Parties are considered

to be related to us if they have control or significant influence, directly or indirectly, over us, including key management personnel

and members of the Board of Directors.

Related Party transactions are disclosed in Note 12.

Note 4 – Inventories

Inventories, consisting solely of finished goods,

totaled $1,257,021 and $861,708 at January 31, 2024 and April 30, 2023, respectively.

Note 5 – Other Assets

Other assets, short term, included:

January 31, 2024

April 30, 2023

Prepaid inventory

Prepaid expenses

Other assets, long term, represented security deposits at January

31, 2024 and April 30, 2023.

Note 6 – Intangible Assets

Intangible assets relate solely to trademarks

acquired in an acquisition completed in 2016.

Note 7 – Operating Leases

In October 2023, the Company entered into a new

five-year operating lease for approximately 6,900 square feet of warehouse and office space commencing November 2023.

The Company had

no finance leases.

The Company’s leases have remaining lease terms of up to 4.75 years.

Operating lease expense totaled $53,263

for the nine months ended January 31, 2024.

2028 & Beyond

Orlando, Florida

Nine Months Ended

Supplemental Information

January 31, 2024

Operating cash paid to settle lease liabilities

Right of use asset additions in exchange for lease liabilities

Weighted average remaining lease term (in years)

Weighted average discount rate

Note 8 – Debt Obligations

Shopify Capital

Shopify Capital is an affiliate of Shopify, Inc.

which provides sales software and services to the Company.

The Company processes customer transactions ordered on the e-commerce site

for Rotor Riot through Shopify.

Shopify Capital has entered into multiple agreements with the Company in which it has “purchased

receivables” at a discount.

Shopify retains a portion of the Company's daily receipts until the purchased receivables have been

The Company recognizes the discount as a transaction fee, in full, in the month in which the agreement is executed.

with activity during the two years ended January 31, 2024 included:

Date of Transaction

Purchased Receivables

Payment to Company

Transaction Fees

Withholding Rate

Fully Repaid In

September 2020

PayPal is an electronic commerce company that

facilitates payments between parties through online funds transfers.

The Company processes certain customer payments ordered on its e-commerce

site through PayPal.

The Company has entered into multiple agreements under which PayPal provides an advance on customer payments, and

then retains a portion of customer payments until the advance is repaid.

PayPal charges a fee which the Company recognizes in full

upon entering an agreement.

A November 2019 agreement under which PayPal advanced $100,000 and charged interest expense of $6,900

was completed in January 2021.

A January 2021 agreement under which PayPal advanced $75,444 and charged interest expense of $2,444

was completed in August 2021.

A June 2023 agreement under which PayPal advanced $262,856 and charged interest expense of $22,856.

balance outstanding at January 31, 2024 totaled $98,441.

Repayment of the remaining balance was completed in February 2024.

Note 9 – Income Taxes

Rotor Riot is an LLC based in the United States

and files its annual income tax return on a Form 1120.

Since inception, we have incurred net losses in each year of operations.

provision for the reporting periods presented in these financial statements consisted of a tax benefit against which we applied a full

valuation allowance, resulting in no current provision for income taxes.

In addition, there was no deferred provision for any of these

reporting periods.

At January 31, 2024 and April 30, 2023, we had

accumulated deficits of approximately $3,157,000 and $2,229,000, respectively.

Deferred tax assets related to the future benefit of these

net operating losses for tax purposes totaled approximately $474,000 and $334,000, respectively, calculated using the minimum U.S.

tax rate of 15%.

Currently, we focus on projected future taxable income in evaluating whether it is more likely than not that these deferred

assets will be realized.

Based on the fact that we have not generated an operating profit since inception, we have applied a full valuation

allowance against our deferred tax assets at January 31, 2024 and April 30, 2023.

Note 10 – Members’ Equity

In January 2020, Red Cat Holdings acquired 8,000,001

Membership Interests, representing 100% ownership of the Company.

Note 11 – Share Based Awards

Red Cat has established the 2019 Equity Incentive

Plan (the “Plan”) to incentive key employees, consultants, and directors with long term compensation awards such as stock

options, restricted stock, and restricted stock units (collectively, the “Awards”).

The Company recognized stock based compensation

expense in connect with Awards to its employees.

A summary of options activity under the Plan

since April 30, 2022 is as follows:

Weighted-Average Exercise Price

Weighted-Average Remaining Contractual Term

Aggregate Intrinsic Value

Outstanding as of April 30, 2022

Forfeited or expired

Outstanding as of April 30, 2023

Forfeited or expired

Outstanding as of January 31, 2024

Exercisable as of January 31, 2024

The aggregate intrinsic value of outstanding

options represents the excess of the stock price at the indicated date over the exercise price of each option.

As of January 31, 2024

and 2023, there was $87,153 and $416,956 of unrecognized stock-based compensation expense related to unvested stock options which is

expected to be recognized over the weighted average periods of 1.01 and 1.79 years, respectively.

Stock Compensation

Stock compensation expense for the three and

nine months ended January 31, 2024 and 2023 was as follows:

Research and development

Sales and marketing

General and administrative

The total value of stock options granted

during the year ended December 31, 2024 is $ 373,160 .

The Company recognized $ 60,924

in stock-based compensation expense related to stock options during the year ended December 31, 2024.

As of December 31, 2024, there

was $ 312,236

of unrecognized stock-based compensation expense related to unvested stock options to be recognized over the remaining vesting term

through 2028.

Restricted Stock

The following table presents the activity for

restricted stock outstanding:

Schedule of restricted stock activity

Outstanding - December 31, 2023

Forfeited/canceled

Outstanding – December 31, 2024

The total value of restricted stock and restricted

stock units granted during the year ended December 31, 2024 is $ 2,875,364 .

The Company recognized $ 2,194,938

in stock-based compensation expense related to restricted stock during the year ended December 31, 2024.

As of December 31, 2024, there

was $ 680,426

of unrecognized stock-based compensation expense related to unvested restricted stock to be recognized over the remaining vesting term

through May 2025.

The following table presents the activity for warrants outstanding

as of December 31, 2024:

Schedule of warrant activity

Exercise Price

Outstanding - December 31, 2023

Forfeited/cancelled/restored

Outstanding – December 31, 2024

As discussed in Note 11, “Earnings Per Share

and Stockholders’ Equity”, in connection with the IPO, the Company issued 62,500 representative warrants to its underwriters

to purchase shares of common stock.

The representative warrants have an exercise price of $5.00 or can be exercised through a cashless

exercise feature.

The warrant holders exercised 54,000 warrants during the year ended December 31, 2024.

As discussed in Note 9, “Promissory

and Convertible Notes”, in connection with the exchange of the $ 1,000,000

of the Note Payable balance, the Company issued 630,000

warrants to the Investors to purchase shares of common stock.

The warrants have an exercise price of $ 1.99 .

These 630,000 warrants were subsequently exercised (see Notes 10 and 11).

As Discussed in Note 11, “Earnings Per Share

and Stockholders’ Equity”, in connection with the Private Placement, the Company issued 1,286,184 warrants and an additional

102,895 warrants to the underwriter related to the Private Placement for a total of 1,389,079 warrants.

The warrants have an exercise

price of $ 1.99 .

All warrants outstanding have a weighted average

remaining contractual life of approximately 5.32

years as of December 31, 2024.

The aggregate intrinsic value of the warrants at December 31, 2024 is $ 20,700,512 .

Note 13 – Related Party Transactions

The Company purchases product from Fat Shark

Holdings, Ltd, which is also wholly owned by Red Cat Holdings.

Purchases from Fat Shark totaled $430,577 and $357,549 during

the nine months ended January 31, 2024 and 2023, respectively.

Since becoming a wholly owned subsidiary of Red

Cat, the Company has received funding from its Parent to support its operations.

During the nine months ended January 31, 2023, the Company

received net funding of $1,328,750.

The balance due to Red Cat at January 31, 2023 totaled $2,955,228.

During the nine months ended January

31, 2024, the Company received net funding of $1,198,473.

The balance due to Red Cat at January 31, 2024 totaled $4,412,828.

Note 13 – Sale of Consumer Segment

In November 2022, the

Company’s sole shareholder, Red Cat Holdings, Inc.

(“Red Cat”) approved a Stock Purchase Agreement (the “SPA”)

between Red Cat, Unusual Machines, Inc.

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

related to the sale of the Red Cat’s consumer business consisting of Rotor Riot, (“RR”), and Fat Shark Holdings

(“FS”), to UM.

Under the terms of the Purchase Agreement, as

amended, the UM will purchase from Red Cat its Rotor Riot and Fat Shark subsidiaries for $20.0 million (the “Purchase Price”)

comprised of (i) $1.0 million in cash, (ii) a $2.0 million promissory note (the “Note”) issued by UM to Red Cat, and (iii)

$17.0 million of UM common stock based on the value at its initial public offering.

On February 16, 2024, UM completed their initial

public offering and subsequently Red Cat and UM completed the sale of Rotor Riot and Fat Shark.

Note 14 – Subsequent Events

Subsequent events have been evaluated through

the date of this filing and there are no subsequent events which require disclosure except as noted below.

As noted in Note 13, on February 16, 2024, Unusual

Machines closed its Initial Public Offering of 1,250,000 shares of common stock at a public offering price of $4.00 per share.

will be traded on the New York Stock Exchange American.

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

Rotor Riot from Red Cat while also issuing Red Cat 4,250,000 shares of common stock in Unusual Machines.

Report of Independent

Registered Public Accounting Firm

To the shareholders and the board of directors

of Rotor Riot, LLC

Opinion on the Financial Statements

We have audited the accompanying balance sheets

of Rotor Riot, LLC as of April 30, 2023 and April 30, 2022, the related statements of operations, stockholders' equity (deficit), and

cash flows for the years then ended, and the related notes (collectively referred to as the “financial statements”).

opinion, the financial statements present fairly, in all material respects, the financial position of the Company as of April 30, 2023

and April 30, 2022, and the results of its operations and its cash flows for the years then ended, in conformity with accounting principles

generally accepted in the United States.

Substantial Doubt about the Company’s

Ability to Continue as a Going Concern

The accompanying financial statements have been

prepared assuming that the Company will continue as a going concern.

As discussed in Note 2 to the financial statements, the Company’s

Liabilities exceeding Assets raise substantial doubt about its ability to continue as a going concern.

The financial statements do not

include any adjustments that might result from the outcome of this uncertainty.

Basis for Opinion

These financial statements are the responsibility

of the Company's management.

Our responsibility is to express an opinion on the Company's financial statements based on our audit.

are a public accounting firm registered with the Public Company Accounting Oversight Board (United States) (“PCAOB”) and

are required to be independent with respect to the Company in accordance with the U.S.

federal securities laws and the applicable rules

and regulations of the Securities and Exchange Commission and the PCAOB.

We conducted our audit in accordance with the

standards of the PCAOB.

Those standards require that we plan and perform the audit to obtain reasonable assurance about whether the financial

statements are free of material misstatement, whether due to error or fraud.

The Company is not required to have, nor were we engaged

to perform, an audit of its internal control over financial reporting.

As part of our audits we are required to obtain an understanding

of internal control over financial reporting but not for the purpose of expressing an opinion on the effectiveness of the Company’s

internal control over financial reporting.

Accordingly, we express no such opinion.

Our audit included performing procedures to assess

the risks of material misstatement of the financial statements, whether due to error or fraud, and performing procedures that respond

to those risks.

Such procedures included examining, on a test basis, evidence regarding the amounts and disclosures in the financial

Our audit also included evaluating the accounting principles used and significant estimates made by management, as well as

evaluating the overall presentation of the financial statements.

We believe that our audit provides a reasonable basis for our opinion.

/S/ BF Borgers CPA PC

BF Borgers CPA PC (PCAOB ID 5041)

We have served as the Company's auditor since

August 7, 2023

Current assets

Total current assets

Operating lease right-of-use assets

Intangible assets, net

Total long term assets

LIABILITIES AND STOCKHOLDERS' EQUITY

Current liabilities

Accounts payable

Accrued expenses

Due to related party

Customer deposits

Operating lease liabilities

Total current liabilities

Operating lease liabilities – long term

Commitments and contingencies

Members’ equity

Cumulative contributions

Cumulative deficit

Cumulative distributions

Total members' equity

TOTAL LIABILITIES AND STOCKHOLDERS' EQUITY

accompanying notes.

of Operations

Year ended April 30,

Cost of goods sold

Operating expenses

Research and development

Sales and marketing

General and administrative

Stock based compensation

Total operating expenses

Operating loss

Other expense (income)

Interest expense

Other expense (income)

$ (1,387,866 )

accompanying notes.

Rotor Riot, LLC

Statements of Members’

Cumulative Contributions

Cumulative Distributions

Total Members’ Equity

Balances, April 30, 2021

Balances, April 30, 2022

In November 2022, the Company entered into the

Purchase Agreement, as amended with Red Cat and Jeffrey Thompson, the Company’s former Chief Executive Officer and President and

current director and also the current Chief Executive Officer of Red Cat, pursuant to which, among other things, Mr.

Thompson and the

Company have agreed to indemnification obligations, which shall survive for a period of nine months from February 16, 2024, subject to

certain limitations, which includes a basket of $250,000 before any claim can be asserted and a cap equal to the value of 100,000 shares

of our common stock owned by him to secure any indemnification obligations, which stock is our sole remedy, except for fraud.

Chief Executive Officer, Mr.

Brandon Torres Declet, negotiated the terms of the Purchase Agreement on an arms’ length basis with

Joe Freedman who was the head of Red Cat’s Special Committee.

The transaction was ultimately approved by the Company’s and

Red Cat’s board of directors.

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

in the Purchase Agreement in a special meeting.

Thompson recused himself from such vote.

In February 2024, the Company completed the acquisitions

to purchase Fat Shark and Rotor Riot from Red Cat.

Jeffrey Thompson is the founder and current Chief Executive Officer of Red Cat.

Thompson is also the founder, prior Chief Executive Officer and current member on the Board of Directors of Unusual Machines.

the acquisition, Mr.

Thompson held 328,500 shares of common stock in Unusual Machines, which represented approximately 10% prior to the

acquisition and IPO.

On April 30, 2024 (“Grant

Date”), the Company’s board of directors approved the Company entering into a two-year Management Services Agreement (the

“Agreement”) with 8 Consulting LLC (the “Consultant”) for the services of our Chief Executive Officer, Dr.

Evans, whereby the Consultant agreed to cause Dr.

Evans to perform his services as the Company’s Chief Executive Officer and the

Consultant will be compensated on behalf of Dr.

Evans by the Company in connection with his performance of such services.

The Agreement

Evans to receive favorable tax benefits as a resident of the Commonwealth of Puerto Rico who will perform such services in

Pursuant to the Agreement, Dr.

Evans will perform the duties and responsibilities that are customary for a chief executive

officer of a public company that either have revenues similar to the Company on a pro forma basis as reflected in the Prospectus filed

with the SEC on February 15, 2024, or if pre-revenues, are an active and on-going business that are performing pre-revenue activities.

The Consultant agreed to cause Dr.

Evans, as Chief Executive Officer, (i) to undertake primary responsibility for managing all aspects

of the Company and overseeing the preparation of all reports, registration statements and other filings required filed by the Company

with the SEC and executing the certifications required the Sarbanes Oxley Act of 2002 and the rules of the SEC as the principal executive

officer of the Company;

(ii) attend investor meetings and road shows in connection with the Company’s fundraising and investor relations

(iii) to report to the Company’s board of directors;

(iv) to perform services for such subsidiaries of the Company as

may be necessary.

The Consultant receives

a $ 250,000 fee per year payable in monthly installments.

In addition, the Consultant was granted 488,000 fully vested shares of restricted

common stock.

The fair value of the shares was $ 585,600 based on the $1.20 quoted trading price on the Grant Date and will be recognized

over the service period (see below).

The grant of restricted common stock was made under the Company’s 2022 Equity Incentive Plan.

The shares of restricted common stock are subject to pro rata forfeiture from February 14, 2024 until February 14, 2025, in the event

Evans is terminated or ends his services to the Company for any reason other than death or disability, as defined in the Internal

Revenue Code.

The Company and Dr.

Evans previously entered into an Offer Letter dated November 27,

2023, under which he would serve as the Company’s Chief Executive Officer effective as of December 4, 2023.

The Agreement terminates

and replaces the Offer Letter dated November 27, 2023.

In October 2024, in relation to the Private Placement

as described in more detail in Note 11, “Earnings Per Share and Stockholders’ Equity”, the Company’s CEO and two

directors (combined “Insiders”) invested $ 250,000 in the Private Placement on identical terms to the other Investors.

the Insiders were required to pay an additional $ 92,105 to the Company related to the greater of book or market value for the warrants.

In November 2024, the Company entered into and

received a purchase order with Teal Drones, Inc.

a wholly owned subsidiary of Red Cat to provide goods and services to a customer in

which Teal Drones is a prime contractor and the Company is a subcontractor.

Red Cat is a related party as Jeff Thompson is the Chief

Executive Officer of Red Cat and is also on the Board of Directors of Unusual Machines.

The Company recognized $ 155,000 in revenue related

to the related party contract.

The total value of the contract between Unusual Machines and Red Cat is $ 250,000 .

14 – Income Taxes

The components of income (loss) before income

tax expense (benefit) consist of the following as of December 31, 2024 and 2023:

Schedule of income (loss) before income tax expense (benefit)

$ ( 31,150,444 )

Balances, April 30, 2023

( 2,383,462 )

Pretax income (loss) from operations

$ ( 31,993,828 )

accompanying notes.

Rotor Riot, LLC

Cash Flows Statements

Year ended April 30,

Cash flows from operating activities

$ ( 2,383,462 )

Stock based compensation

Changes in operating assets and liabilities

Operating lease right-of-use assets and liabilities

Customer deposits

Accounts payable

Accrued expenses

Net cash used in operating activities

Cash flows from financing activities

Proceeds from related party obligations

Payments under debt obligations

Net cash provided by financing activities

Net decrease in Cash

Cash, beginning of period

Cash, end of period

Cash paid for interest

Cash paid for income taxes

See accompanying notes.

Rotor Riot, LLC

NOTES TO FINANCIAL STATEMENTS

April 30, 2023 and 2022

Note 1 – The Business

Originally founded in 2016, Rotor Riot, LLC (“Rotor

Riot” or the “Company”) was acquired by and became a wholly owned subsidiary of Red Cat Holdings (“Red Cat”

or the “Parent”) in January 2020.

The Company sells drones, parts and related equipment to the consumer marketplace through

its digital storefront located at www.rotorriot.com.

Note 2 – Going Concern

The Company has incurred net losses since its acquisition

by Red Cat which has provided funding to enable the company to continue to operate.

These financial statements reflect the operating

results of the Company for the two years ended April 30, 2023, including the financial support received from its Parent.

These financial

statements may not be indicative of the company’s operating results if it had operated without financial support from its Parent.

The financial statements have been prepared on a

going concern basis which contemplates the realization of assets and the settlement of liabilities and commitments in the normal course

As reflected in our accompanying financial statements, we had negative working capital of $2,544,520 at April 30, 2023 and

have accumulated losses totaling $2,228,614 through April 30, 2023.

Management recognizes that these operating results and our financial

position raise substantial doubt about our ability to continue as a going concern.

The financial statements do not include any adjustments

related to the recoverability and classification of recorded asset amounts and the classification of liabilities that might be necessary

should we be unable to continue as a going concern.

Note 3 – Summary of Significant Accounting

Basis of Accounting – The financial

statements and accompanying notes are prepared in accordance with generally accepted accounting principles in the United States (“GAAP”).

Certain prior period amounts have been restated to conform to the current year presentation.

Use of Estimates – The preparation of

financial statements in accordance 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 revenue and expenses during the reporting period.

Actual results could differ from those estimates.

Significant estimates

reflected in these financial statements include those used to (i) determine stock-based compensation, (ii) complete purchase price accounting

for acquisitions, and (iii) accounting for derivatives.

Cash and Cash Equivalents – At April

30, 2023 and 2022, we held cash of $912 and $20,041, respectively, in multiple commercial banks and financial services companies.

have not experienced any loss on these cash balances and believe they are not exposed to any significant credit risk.

Leases – Effective August 1, 2021, the

Company adopted Accounting Standards Codification (ASC) 842 titled “Leases” which requires the recognition of assets and

liabilities associated with lease agreements.

The Company adopted ASC 842 on a modified retrospective transition basis which means that

it did not restate financial information for any periods prior to August 1, 2021.

Upon adoption, the Company recognized a lease liability

obligation of $260,305 and a right-of-use asset for the same amount.

The Company determines if

a contract is a lease or contains a lease at inception.

Operating lease liabilities are measured, on each reporting date, based

on the present value of the future minimum lease payments over the remaining lease term.

The Company's leases do not provide an

implicit rate.

Therefore, the Company uses an effective discount rate of 12% based on its last debt financings.

Operating lease

assets are measured by adjusting the lease liability for lease incentives, initial direct costs incurred and asset impairments.

Lease expense for minimum lease payments is recognized on a straight-line basis over the lease term with the operating lease asset reduced

by the amount of the expense.

Lease terms may include options to extend or terminate a lease when they are reasonably certain to occur.

Fair Values, Inputs and Valuation Techniques for

Financial Assets and Liabilities, and Related Disclosures – The fair value measurements and disclosure guidance defines fair

value and establishes a framework for measuring fair value.

Fair value is defined as the price that would be received to sell an asset

or paid to transfer a liability (an exit price) in an orderly transaction between market participants at the measurement date.

In accordance

with this guidance, the Company has categorized its recurring basis financial assets and liabilities into a three-level fair value hierarchy

based on the priority of the inputs to the valuation technique.

The fair value hierarchy gives the highest priority

to quoted prices in active markets for identical assets or liabilities (Level 1) and the lowest priority to unobservable inputs (Level

The inputs used to measure fair value may fall into different levels of the fair value hierarchy.

In such cases, the level in the

fair value hierarchy within which the fair value measurement in its entirety falls has been determined based on the lowest level input

that is significant to the fair value measurement in its entirety.

The Company's assessment of the significance of a particular input

to the fair value measurement in its entirety requires judgment and considers factors specific to the asset or liability.

The guidance establishes

three levels of the fair value hierarchy as follows:

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

Inputs are observable, unadjusted quoted prices in active markets for similar assets or liabilities, unadjusted quoted prices for identical

or similar assets or liabilities in markets that are not active, or other inputs that are observable or can be corroborated by observable

market data for substantially the full term of the related assets or liabilities;

Unobservable inputs that are significant to the measurement of the fair value of the assets or liabilities that are supported by little

or no market data.

Disclosures for Non-Financial Assets Measured

at Fair Value on a Non-Recurring Basis

The Company's financial instruments mainly consist

of cash, receivables, current assets, accounts payable, accrued expenses and debt.

The carrying amounts of cash, receivables, current

assets, accounts payable, accrued expenses and current debt approximates fair value due to the short-term nature of these instruments.

Revenue Recognition – The Company recognizes

revenue in accordance with ASC 606, “Revenue from Contracts with Customers”, issued by the Financial Accounting Standards

Board (“FASB”).

This standard includes a comprehensive evaluation of factors to be considered regarding revenue recognition

including (i) identifying the promised goods, (ii) evaluating performance obligations, (iii) measuring the transaction price, (iv) allocating

the transaction price to the performance obligations if there are multiple components, and (v) recognizing revenue as each obligation

is satisfied.

The Company’s revenue transactions include a single component, specifically, the shipment of goods to customers

as orders are fulfilled.

The Company recognizes revenue upon shipment.

The timing of the shipment of orders can vary considerably depending

upon whether an order is for an item normally maintained in inventory or an order that requires assembly or unique parts.

Customer deposits

totaled $227,460 and $136,197 at April 30, 2023 and 2022, respectively.

Research and Development – Research

and development expenses include payroll, employee benefits, and other headcount-related expenses associated with product development.

Research and development expenses also include third-party development and programming costs, as well as a proportionate share of overhead

costs such as rent.

Costs related to software development are included in research and development expense until technological feasibility

is reached, which for our software products, is generally shortly before the products are released to production.

Once technological

feasibility is reached, such costs are capitalized and amortized as a cost of revenue over the estimated lives of the products.

Income Taxes – Deferred taxes are provided

on the liability method, whereby deferred tax assets are recognized for deductible temporary differences and deferred tax liabilities

are recognized for taxable temporary differences.

Temporary differences are the differences between the reported amounts of assets and

liabilities and their tax bases.

Deferred tax assets and liabilities are adjusted for the effects of changes in tax laws and rates on

the date of enactment.

Recent Accounting Pronouncements – Management

does not believe that recently issued, but not yet effective accounting pronouncements, if adopted, would have a material effect on the

accompanying consolidated financial statements.

Stock-Based Compensation – For stock

options, we use the estimated grant-date fair value method of accounting in accordance with ASC Topic 718, Compensation – Stock

Compensation.

Fair value is determined based on the Black-Scholes Model using inputs reflecting our estimates of expected volatility,

term and future dividends.

We recognize forfeitures as they occur.

For restricted stock, we determine the fair value based on our stock

price on the date of grant.

For both stock options and restricted stock, we recognize compensation costs on a straight-line basis over

the service period which is the vesting term.

Related Parties – Parties are considered

to be related to us if they have control or significant influence, directly or indirectly, over us, including key management personnel

and members of the Board of Directors.

Related Party transactions are disclosed in Note 12.

Note 4 – Inventories

Inventories, consisting solely of finished goods,

totaled $861,708 and $375,570 at April 30, 2023 and 2022, respectively.

Note 5 – Other Assets

Other assets, short term, included.

April 30, 2023

April 30, 2022

Prepaid inventory

Prepaid expenses

Other assets, long term, represented security deposits at April 30,

2023 and 2022.

Note 6 – Intangible Assets

Intangible assets relate solely to trademarks acquired

in an acquisition completed in 2016.

Note 7 – Operating Leases

As of April 30, 2023, the Company had operating type

leases for real estate and no finance type leases.

The Company’s leases have remaining lease terms of up to 1.75 years.

lease expense totaled $54,238 for the fiscal year ended April 30, 2023.

|-Future Lease Payments-|

Orlando, Florida

Supplemental Information

April 30, 2023

Operating cash paid to settle lease liabilities

Right of use asset additions in exchange for lease liabilities

Weighted average remaining lease term (in years)

Weighted average discount rate

Note 8 – Debt Obligations

Shopify Capital

Shopify Capital is an affiliate of Shopify, Inc.

which provides sales software and services to the Company.

The Company processes customer transactions ordered on the e-commerce

site for Rotor Riot through Shopify.

Shopify Capital has entered into multiple agreements with the Company in which it has “purchased

receivables” at a discount.

Shopify retains a portion of the Company's daily receipts until the purchased receivables have been

The Company recognizes the discount as a transaction fee, in full, in the month in which the agreement is executed.

Agreements with activity during the two years ended April 30, 2023 included:

of Transaction

September 2020

PayPal is an electronic commerce company that facilitates

payments between parties through online funds transfers.

The Company processes certain customer payments ordered on its e-commerce site

through PayPal.

The Company has entered into multiple agreements under which PayPal provides an advance on customer payments, and then

retains a portion of customer payments until the advance is repaid.

PayPal charges a fee which the Company recognizes in full upon entering

an agreement.

A November 2019 agreement under which PayPal advanced $100,000 and charged a transaction fee of $6,900 was completed in

January 2021.

A January 2021 agreement under which PayPal advanced $75,444 and charged a transaction fee of $2,444 was completed in August

Note 9 – Income Taxes

Rotor Riot is an LLC based in the United States and

files its annual income tax return on a Form 1120.

Since inception, we have incurred net losses in each year of operations.

provision for the reporting periods presented in these financial statements consisted of a tax benefit against which we applied a full

valuation allowance, resulting in no current provision for income taxes.

In addition, there was no deferred provision for any of these

reporting periods.

At April 30, 2023 and 2022, we had accumulated deficits

of approximately $2,230,000 and $841,000, respectively.

Deferred tax assets related to the future benefit of these net operating losses

for tax purposes totaled approximately $334,500 and $126,150, respectively, calculated using the minimum U.S.

corporate tax rate of 15%.

Currently, we focus on projected future taxable income in evaluating whether it is more likely than not that these deferred assets will

Based on the fact that we have not generated an operating profit since inception, we have applied a full valuation allowance

against our deferred tax assets at April 30, 2023 and 2022.

Note 10 – Members’ Equity

In January 2020, Red Cat Holdings acquired 8,000,001

Membership Interests, representing 100% ownership of the Company.

Note 11 – Share Based Awards

Red Cat has established the 2019 Equity Incentive

Plan (the “Plan”) to incentive key employees, consultants, and directors with long term compensation awards such as stock

options, restricted stock, and restricted stock units (collectively, the “Awards”).

The Company recognized stock based compensation

expense in connect with Awards to its employees.

The range of assumptions used to calculate the fair

value of options granted during the year ended April 30 was:

Exercise Price

Stock price on date of grant

Risk-free interest rate

Dividend yield

Expected term (years)

The components of income tax expense (benefit)

as of December 31, 2024 and 2023 are:

Schedule of income (loss) income tax expense (benefit)

State and local

Current income tax expense (benefit)

State and local

Deferred income tax expense (benefit)

Total income tax expense (benefit)

Significant components of the Company’s

deferred tax assets and liabilities as of December 31, 2024 and 2023 are:

Schedule of deferred tax assets and liabilities

Deferred tax assets:

Net operating losses and credit carryforwards

Stock compensation

Accruals and reserves

Deferred interest carryforward

Lease liability

Total deferred tax assets

Deferred tax liabilities:

Intangible assets

Right of use asset

Valuation allowance

( 3,135,343 )

Deferred income tax expense (benefit)

( 3,781,325 )

A summary of options activity under the Plan since

April 30, 2021 is as follows:

Weighted-Average Exercise Price

Weighted-Average Remaining Contractual Term

Aggregate Intrinsic Value

Outstanding as of April 30, 2021

Forfeited or expired

Outstanding as of April 30, 2022

Forfeited or expired

Outstanding as of April 30, 2023

Exercisable as of April 30, 2023

The aggregate intrinsic value of outstanding options

represents the excess of the stock price at the indicated date over the exercise price of each option.

As of April 30, 2023 and April

30, 2022, there was $207,986 and $405,863 of unrecognized stock-based compensation expense related to unvested stock options which is

expected to be recognized over the weighted average periods of 1.58 and 1.44 years, respectively.

Stock Compensation

Stock compensation expense for the years ended April

30, 2023 and 2022 was as follows:

General and administrative

Research and development

Sales and marketing

Note 12 – Related-Party Transactions

The Company purchases drones from Fat Shark Holdings,

Ltd, which is also wholly owned by Red Cat Holdings.

Purchases from Fat Shark totaled $400,619 and $104,961 during the fiscal

years ended April 30, 2023 and 2022, respectively.

Since becoming a wholly owned subsidiary of Red Cat,

the Company has received funding from its Parent to support its operations.

During the fiscal year ended April 30, 2022, the Company

received net funding of $1,021,471 primarily related to inventory which increased $398,318, payments of accounts payable and accrued

expenses of $269,045, and a net loss of $596,878.

The balance due to Red Cat at April 30, 2022 totaled $1,529,371.

During the fiscal

year ended April 30, 2023, the Company received net funding of $1,540,933 primarily related to increased inventory purchases and a net

loss of $1,387,866.

The balance due to Red Cat at April 30, 2023 totaled $3,070,304.

Note 13 – Sale of Consumer Segment

On November 21, 2022, the

Company’s sole shareholder, Red Cat Holdings, Inc.

(“Red Cat”) approved a Stock Purchase Agreement (the "SPA")

between Red Cat, Unusual Machines, Inc.

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

related to the sale of the Red Cat’s consumer business consisting of Rotor Riot, (“RR”), and Fat Shark Holdings

(“FS”), to UM for cash and stock consideration totaling $18 million.

On November 21, 2022, Red Cat approved the SPA and

its submission to shareholders for approval.

On March 8, 2023, shareholders approved the sale to UM.

On April 13, 2023, the SPA was amended (the “Amendment”)

and the total purchase price increased to $20 million.

Under the Amendment, the cash consideration payable at closing was reduced to

$3.0 million, as may be adjusted for working capital on the closing date (increased for positive working capital and decreased for negative

working capital), and the non-cash consideration adjusted to provide for payment of $17 million in shares of UM’s common stock

(the “Unusual Common Stock”) issued at the initial public offering price for the Unusual Common Stock.

All of the Unusual

Common Stock will be subject to a lock-up of 180 days and be eligible for registration.

The Company estimates that working capital at

closing will range between $2.0 to $4.5 million.

In addition, closing of the SPA is subject to successful completion of an initial public

offering (the “IPO”) by UM in the minimum amount of $10 million, and the listing of UM’s common stock on Nasdaq or

UM filed a registration statement on Form S-1 for

an initial public offering of its Common Stock with the SEC.

Net deferred tax liability

The components of the Company’s effective

tax rate consist of the following as of December 31, 2024 and 2023 are:

statutory rate

State taxes, net of federal benefit

Other permanent differences

Foreign statutory rate difference

Change in valuation allowance - federal

Change in valuation allowance – state

Income tax expense

As of December 31, 2024, the Company has U.S.

federal and state net operating loss carryforwards of $ 9,518,428 and foreign net operating loss carryforwards of $ 4,743,384 .

federal net losses can be carried forward indefinitely and are generally deductible against 80% of taxable income on an annual basis.

It is not anticipated that the foreign net operating losses will ever be used.

In assessing the realizability of deferred tax

assets, a determination is made as to whether it is more likely than not that some portion or all the deferred tax assets will not be

The ultimate realization of deferred tax assets is dependent upon the generation of future taxable income during the periods

in which those temporary differences become deductible.

As the Company was incorporated in the current year and has no history of earnings,

the Company has provided a full valuation allowance on its federal, foreign, and state deferred tax assets.

The Company is subject to income taxes in the

United States;

and various state jurisdictions.

Tax regulations within each jurisdiction are subject to the interpretation

of the related tax laws and regulations and require significant judgment to apply.

The Company is not currently under examination by any

taxing authorities.

The 2022 through 2024 tax years are open to examination by the tax authorities.

ASC 740 provides detailed guidance for the consolidated

financial statement recognition, measurement, and disclosure of uncertain tax positions recognized in the consolidated financial statements.

Tax positions must meet a more-likely-than-not recognition threshold before a benefit is recognized in the consolidated financial statements.

As of December 31, 2024, the Company has no uncertain tax positions.

The Company recognizes interest and penalties related to uncertain

tax positions as a component of income tax expense in the accompanying consolidated statements of operations.

No interest and penalties

related to uncertain tax positions were accrued as of December 31, 2024.

Note 15 – Commitments and Contingencies

part of the business combination that occurred on February 14, 2024, the Company acquired a five-year operating lease for approximately

6,900 square feet of warehouse and office space in Orlando, Florida.

The lease commenced in November 2023 and expires in October 2028.

See Note 7 – Operating Leases for additional information.

Note 16 – Subsequent Events

Subsequent events have been evaluated through the

date of this filing and there are no subsequent events which require disclosure except as set forth below:

In June 2023, the Company entered into an agreement

with PayPal under which PayPal provides an advance on customer payments of $240,000, and then retains a portion of customer payments

until the advance is repaid.

PayPal charges a transaction fee of $22,856 which the Company recognized in full upon entering the agreement.

Equity Grants to Board of Directors

On January 14, 2025, the Company issued the non-employee directors

listed in the table below the equity of their quarterly compensation for services as a director during the quarter ended December 31,

The shares of restricted common stock are fully vested, granted under the Company’s 2022 Equity Incentive Plan and are subject

to each director executing the Company’s standard Restricted Stock Agreement.

The amount of restricted common stock issued was based

on the quoted trading price as of the close of the market as of January 14, 2025.

Amount of Restricted Common Stock

Cristina Colon

Jeffrey Thompson

Aloft Material Definitive Agreement

On February 1, 2025, the Company entered into

an Agreement and Plan of Merger and Reorganization (the "Agreement”) with Aloft Technologies, Inc., a Delaware corporation

("Aloft”), and UMAC Merger Sub, Inc.

a Delaware corporation and wholly owned subsidiary of the Company ("Merger Sub”).

Aloft is a leader in the drone fleet and airspace management sector, powering a majority of all FAA-approved Low Altitude Authorization

and Notification Capability airspace authorizations in the United States and the related software is complimentary to the Company’s

overall position to provide drone related components and drone services made in the United States.

Under the terms of the Agreement and subject

to customary closing conditions and a working capital adjustment, on the closing date of the Agreement Aloft will merge into Merger

Sub, and Merger Sub will continue as a wholly owned subsidiary of the Company.

In addition, each issued and outstanding share of

Aloft capital stock that is not a dissenting share will be cancelled and each Aloft Stockholder (as defined in the Agreement)

receive their pro rata share of the merger consideration payable by the Company as provided for in the Agreement.

consideration of $14.5 million consists of 1,204,319 shares of common stock of the Company and expected not to exceed $100,000 in

cash payable to unaccredited investors.

Customary closing conditions by the parties must

be met before being able to close the merger.

Equity Grants to Executive Officers

On February 3, 2025, the Company issued the Company’s

executive officers listed in the table below shares of restricted common stock.

The shares of restricted common stock vest in equal quarterly

increments over a one-year period, with the first two quarters vesting on May 19, 2025.

The shares of restricted common stock were granted

under the Company’s 2022 Equity Incentive Plan, as amended, and are subject to each officer executing the Company’s standard

Restricted Stock Agreement.

Amount of Restricted Common Stock

Allan Evans (1)

Andrew Camden

(1) Shares issued to 8 Consulting LLC, an entity

Allan Evans, the Company’s Chief Executive Officer, is the sole owner with voting and dispositive power

Equity Grants to employees

On February 3, 2025, the Company issued 80,000 shares of restricted

common stock to certain employees.

The shares of restricted common stock vest quarterly over a four-year period, in which no shares

vest over the first two quarters.

The shares of restricted common stock were granted under the Company’s 2022 Equity Incentive Plan,

Exercise of Warrants from Private Placement

On February 26, 2025, the Company issued

1,224,606 shares of common stock to various warrant holders who exercised their warrants from the October 2024 Private Placement 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

Changes and Disagreements with Accountants on Accounting and Financial Disclosure

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 8. Financial Statements and Supplementary Data