Unusual Machines, Inc. 10-K

Item 8. Financial Statements and Supplementary Data 46 UNUSUAL MACHINES, INC. INDEX TO FINANCIAL STATEMENTS Page Unusual Machines, Inc. Financial Statements Report of Independent Registered Public Accounting Firm (PCAOB Firm ID 106 ) F-2 Consolidated Balance Sheets at December 31, 2024 and 2023 F-4 Consolidated Statement of Operations for the years ended December 31, 2024 and 2023 F- 5 Consolidated Statement of Changes in Stockholders’ Equity for the years ended December 31, 2024 and 202 3 F-6 Consolidated Statement of Cash Flows for the years ended December 31, 2024 and 2023 F-7 Consolidated Notes to Financial Statements F-8 F- 1 Report of Independent Registered Public Accounting Firm To the Board of Directors and Stockholders of: Unusual Machines, Inc. Opinion on the Financial Statements We have audited the accompanying consolidated balance sheets of Unusual Machines, Inc. (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. Basis for Opinion 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 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 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 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. Critical 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 Phone: (561) 995-8270 • Toll Free: (866) CPA-8500 • Fax: (561) 995-1920 www.salbergco.com • info@salbergco.com Member National Association of Certified Valuation Analysts • Registered with the PCAOB Member CPAConnect with Affiliated Offices Worldwide • Member AICPA Center for Audit Quality F- 2 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 2024. 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 estimates. 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 since 2024 Boca Raton, Florida March 27, 2025 F- 3 Unusual Machines, Inc. Balance Sheets December 31, 2024 2023 ASSETS Current assets: Cash & cash equivalents $ 3,757,323 $ 894,773 Accounts receivable 66,575 – Inventories 1,335,503 – Prepaid inventory 904,728 – Other current assets 31,500 120,631 Total current assets 6,095,629 1,015,404 Property and equipment, net 570 1,254 Deferred offering costs – 512,758 Operating lease right-of-use assets 323,514 – Other assets 59,426 – Goodwill 7,402,906 – Intangible assets, net 2,225,530 – Total non-current assets 10,011,946 514,012 Total assets $ 16,107,575 $ 1,529,416 LIABILITIES AND STOCKHOLDERS' EQUITY Current liabilities Accounts payable and accrued expenses $ 668,732 $ 114,497 Deferred revenue 197,117 – Operating lease liability 67,820 – Total current liabilities 933,669 114,497 Long-term liabilities Deferred tax liability 93,793 – Operating lease liability – long term 262,171 – Total liabilities 1,289,633 114,497 Commitments and contingencies (Note 15) – – Stockholders’ equity: 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 – 2 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 151,221 32,173 Additional paid in capital 50,580,235 5,315,790 Accumulated deficit ( 35,913,514 ) ( 3,933,046 ) Total stockholders’ equity 14,817,942 1,414,919 Total liabilities and stockholders’ equity $ 16,107,575 $ 1,529,416 See accompanying independent auditor’s report and notes to the financial statements. F- 4 Unusual Machines, Inc. Statements of Operations Year Ended December 31, 2024 2023 Revenue $ 5,565,319 $ – Cost of goods sold 4,019,068 – Gross profit 1,546,251 – Operating expenses: Operations 959,740 – Research and development 90,584 – Sales and marketing 1,091,268 – General and administrative 6,250,939 2,377,862 Loss on impairment of goodwill 10,073,326 – Depreciation and amortization 72,161 5,600 Total operating expenses 18,538,018 2,383,462 Loss from operations ( 16,991,767 ) ( 2,383,462 ) Other income (expense): Interest income 1,146 – Interest expense ( 116,981 ) – Gain on debt extinguishment 1,259,979 – Change in fair value of derivatives and warrant liabilities ( 16,146,205 ) – Total other income (expense) ( 15,002,061 ) – Net loss before income tax ( 31,993,828 ) ( 2,383,462 ) Income tax benefit (expense) 13,360 – Net loss $ ( 31,980,468 ) $ ( 2,383,462 ) Net loss per share attributable to common stockholders Basic and diluted $ ( 3.84 ) $ ( 0.72 ) Weighted average common shares outstanding Basic and diluted 8,325,128 3,307,118 See accompanying independent auditor’s report and notes to financial statements. F- 5 Unusual Machines, Inc. Statements of Changes in Stockholders’ Equity For the Years Ended December 31, 2024 and 2023 Series A, Preferred Stock Series B, Preferred Stock Series C, Preferred Stock Common Stock Additional Paid-In Accumulated Total Stockholders’ Shares Value Shares Value Shares Value Shares Value Capital Deficit Equity Balance, December 31, 2022 – $ – 140 $ 1 – $ – 3,392,250 $ 33,923 $ 4,714,041 $ ( 1,549,584 ) $ 3,198,381 Issuance of common shares for services – – – – – – 75,005 750 599,250 – 600,000 Conversion to preferred shares – – 50 1 – – ( 250,000 ) ( 2,500 ) 2,499 – – Net loss – – – – – – – – – ( 2,383,462 ) ( 2,383,462 ) Balance, December 31, 2023 – $ – 190 $ 2 – $ – 3,217,255 $ 32,173 $ 5,315,790 $ ( 3,933,046 ) $ 1,414,919 Issuance of common shares as settlement – – – – – – 16,086 161 64,183 – 64,344 Issuance of common shares, initial public offering, net of offering costs – – – – – – 1,250,000 12,500 3,837,055 – 3,849,555 Issuance of common shares, business combination – – – – – – 4,250,000 42,500 16,957,500 – 17,000,000 Issuance of common shares, equity incentive plan – – – – – – 1,330,955 13,310 ( 13,310 ) – – Issuance of common shares, private placement, net – – – – – – 1,286,184 12,862 1,812,842 – 1,825,704 Exchange of common shares for Series A preferred 4,250 43 – – – – ( 4,250,000 ) ( 42,500 ) 42,457 – – Exchange of convertible note for Series C preferred – – – – 210 2 – – 999,998 – 1,000,000 Conversion of preferred shares to common shares ( 4,250 ) ( 43 ) ( 190 ) ( 2 ) ( 210 ) ( 2 ) 5,830,000 58,300 ( 58,253 ) – – Cash exercise of warrants – – – – – – 684,000 6,840 1,516,860 – 1,523,700 Convertible note conversion – – – – – – 1,507,538 15,075 17,849,250 – 17,864,325 Stock compensation expense - vested stock – – – – – – – – 2,194,938 – 2,194,938 Stock option compensation expense – – – – – – – – 60,925 – 60,925 Net loss – – – – – – – – – ( 31,980,468 ) ( 31,980,468 ) Balance, December 31, 2024 – $ – – $ – – $ – 15,122,018 $ 151,221 $ 50,580,235 $ ( 35,913,514 ) $ 14,817,942 See accompanying independent auditor’s report and notes to financial statements. F- 6 Unusual Machines, Inc. Statements of Cash Flows Year Ended December 31, 2024 2023 Cash flows from operating activities: Net loss $ ( 31,980,468 ) $ ( 2,383,462 ) Depreciation and amortization 72,161 5,600 Stock compensation expense as settlement 64,344 – Stock compensation expense 2,255,862 600,000 Loss on impairment on goodwill 10,073,326 – Change in fair value of derivatives and warrant liabilities 16,146,205 – Gain on debt extinguishment ( 1,281,880 ) – Income tax benefit ( 13,360 ) – Change in assets and liabilities: Accounts receivable ( 59,777 ) – Inventory 455,101 – Prepaid inventory ( 83,749 ) – Other assets 54,940 18,744 Accounts payable and accrued expenses 266,690 ( 17,434 ) Operating lease liabilities ( 48,438 ) – Customer deposits and other current liabilities 82,676 – Net cash used in operating activities ( 3,996,367 ) ( 1,776,552 ) Cash flows from investing activities Cash portion of consideration paid for acquisition of businesses, net of cash received ( 852,801 ) – Purchases of property and equipment – ( 3,164 ) Net cash used in investing activities ( 852,801 ) ( 3,164 ) Cash flows from financing activities: Proceeds from issuance of common shares, IPO 5,000,000 – Proceeds from issuance of common shares, private placement 2,047,105 – Proceeds from issuance of common shares, warrant exercises 1,523,700 – Common share issuance offering costs ( 859,087 ) ( 424,933 ) Net cash provided by (used in) financing activities 7,711,718 ( 424,933 ) Net increase (decrease) in cash 2,862,550 ( 2,204,649 ) Cash, beginning of year 894,773 3,099,422 Cash, end of year $ 3,757,323 $ 894,773 Supplemental disclosures of cash flow information: Non-cash consideration paid for assets acquired and liabilities assumed $ 21,000,000 $ – Deferred acquisitions costs $ 100,000 $ – Deferred offering costs recorded as a reduction of proceeds $ 512,758 $ – See accompanying independent auditor’s report and notes to financial statements. F- 7 Unusual Machines, Inc. Notes to Financial Statements 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 Price”). The shares are traded on NYSE American. Simultaneous with the closing of the IPO, the Company acquired Fat Shark Holdings Ltd. (“Fat Shark”) and Rotor Riot, LLC (“Rotor Riot”) from Red Cat Holdings, Inc. (“Red Cat”) (See Note 3). 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. Intercompany transactions and balances have been eliminated upon consolidation. Use of Estimates The preparation of financial statements in conformity with GAAP requires management to make estimates and assumptions that affect the reported amounts of assets and liabilities, disclosures of contingent assets and liabilities at the date of the financial statements, and the reported amounts of revenues and expenses during the reporting period. Accordingly, actual results could differ from those estimates, and such results could be material. 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. Liquidity 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 are issued. F- 8 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, 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, 2024 and December 31, 2023, the Company considers accounts receivable to be fully collectible; accordingly, no allowance for credit losses has been established. Inventory 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 2022. 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 of accumulated depreciation. Depreciation is provided utilizing the straight-line method over the estimated useful lives for owned assets of three years . Leases 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. F- 9 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 fair values. The excess of the purchase price over the estimated fair values of the net assets acquired is recorded as goodwill. Determining 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. The Company tests goodwill for impairment in accordance with the provisions of ASC 350, Intangibles – Goodwill and Other, (“ASC 350”). 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. The 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. F- 10 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 3). 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: Level 1 : Inputs are unadjusted, quoted prices in active markets for identical assets or liabilities at the measurement date; Level 2 : 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; and Level 3 : 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 Total Level 1 Level 2 Level 3 Warrant liabilities $ – $ – $ – $ – Derivative liability – convertible note conversion option – – – – Total $ – $ – $ – $ – Changes in Level 3 financial instruments are as follows: Schedule of level 3 financial instruments Warrant Liabilities Derivative Liability – Convertible Note Total Balance, December 31, 2023 $ – $ – $ – Additions 315,303 347,947 663,250 Changes in Fair Value ( 9,771 ) 16,155,976 16,146,205 Settlements ( 305,532 ) ( 16,503,923 ) ( 16,809,455 ) Balance, December 31, 2024 $ – $ – $ – Financial Instruments 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. F- 11 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 product. 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. Historically 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 Rotor Riot. 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”). This standard includes a comprehensive evaluation of factors to be considered regarding revenue recognition including: Step 1: Identify the contract with a customer; Step 2: Identify the performance obligations in the contract; Step 3: Determine the transaction price; Step 4: Allocate the transaction price to the performance obligations in the contract; and Step 5: Recognize revenue when (or as) the Company satisfies a performance obligation at a point in time. The Company receives revenues from the sale of products from both retail distributers and individual consumers. Sales revenue is recognized when the products are shipped and the price is fixed or determinable, no other significant obligations of the Company exist and collectability is probable. Revenue is recognized when the title to the products has been passed to the customer, which is the date the products are shipped to the customer. This is the date the performance obligation has been met. 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. F- 12 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. Income Taxes The Company accounts for income taxes using an asset and liability approach, which requires recognition of deferred tax assets and liabilities for the expected future tax consequences of events. A valuation allowance is established to reduce deferred tax assets to their estimated realizable value when, in the opinion 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, as the largest amount of benefit that is more likely than not to be realized upon the ultimate settlement. The Company’s policy is to recognize interest and penalties related to unrecognized tax benefits as a part of income tax expense. 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. Warrants 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 contract. The assessment considers whether the warrants are freestanding financial instruments or embedded in a host instrument, whether the warrants meet the definition of a liability pursuant to ASC 480, whether the warrants meet the definition of a derivative under ASC 815, and whether the warrants meet all of the requirements for equity classification under ASC 815. This assessment, which requires the use of professional judgment, is conducted at the time of warrant issuance and as of each subsequent quarterly period end date while the warrants are outstanding. For issued or modified warrants that meet all of the criteria for equity classification, the warrants are required to be recorded as a component of equity at the time of issuance. For issued or modified warrants that do not meet all the criteria for equity classification, the warrants are required to be recorded as liabilities at their 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. F- 13 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 . Diluted 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. 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. 2024-03, “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. F- 14 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 value. The following represents the fair value allocation of Fat Shark and Rotor Riot Purchase Price: Schedule of fair value allocation Cash $ 147,200 Accounts receivable (approximates contractual value) 6,798 Inventories (on hand and prepaid) 2,611,583 Other current assets 10,892 Right of use asset – operating 378,430 Other long-term assets 59,426 Goodwill 17,476,232 Intangible assets 2,297,007 Total assets 22,987,568 Accounts payable and accrued liabilities 287,544 Customer deposits 114,441 Deferred tax liability 107,153 Operating lease liability – current and long-term 378,430 Total liabilities 887,568 Total purchase price $ 22,100,000 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. F- 15 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. Combining 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 data): Schedule of unaudited pro forma results For the Year Ended For the Year Ended December 31, 2024 December 31, 2023 As Reported Proforma (unaudited) As Reported Proforma (unaudited) Revenue $ 5,565 $ 6,060 $ – $ 4,682 Gross profit/(loss) 1,546 1,578 – 550 Loss from operations ( 6,918 ) ( 6,962 ) ( 2,383 ) ( 5,005 ) Other expense and income taxes ( 25,062 ) ( 25,062 ) – ( 56 ) Net loss $ ( 31,980 ) $ ( 32,024 ) $ ( 2,383 ) $ ( 5,061 ) Net earnings per share: Basic $ ( 3.84 ) $ ( 3.85 ) $ ( 0.72 ) $ ( 0.58 ) 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. F- 16 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. acquisitions $ – $ 100,000 Prepaid insurance 31,500 20,631 Total other current assets $ 31,500 $ 120,631 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 an estimated useful life greater than one year. Property and equipment are reported net of accumulated depreciation, and the reported values are periodically assessed for impairment. Property and equipment as of: Schedule of property and equipment December 31, 2024 December 31, 2023 Computer equipment $ 7,738 $ 7,738 Accumulated depreciation ( 7,168 ) ( 6,484 ) Total property and equipment, net $ 570 $ 1,254 Depreciation expense totaled $ 684 and $ 5,600 for the year ended December 31, 2024 and 2023, respectively. Note 7 – Operating Leases The 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 Orlando, FL Operating Lease Operating lease right-of-use assets $ 378,430 Less: accumulated amortization ( 54,916 ) Operating lease right-of-use assets, as of December 31, 2024 $ 323,514 Operating lease liability $ 378,430 Less: accumulated reduction ( 48,439 ) Operating lease liability, as of December 31, 2024 $ 329,991 Current operating lease liability $ 67,820 Non-current operating lease liability 262,171 Total operating lease liability $ 329,991 F- 17 The following is a summary of future lease payments required under the five-year lease agreement: Schedule of future lease payments Year Future Lease Payments Operating Lease Discount Operating Lease Liability 2025 $ 101,133 $ ( 33,313 ) $ 67,820 2026 105,177 ( 25,468 ) 79,709 2027 109,037 ( 15,985 ) 93,052 2028 94,185 ( 4,776 ) 89,409 Total $ 409,533 $ ( 79,542 ) $ 329,991 Schedule of supplemental information Supplemental Information Weighted average remaining lease term (in years) 3.83 Weighted average discount rate 11.49 % Note 8 – Goodwill and Intangible Assets Goodwill Changes in the carrying amount of goodwill were as follows: Schedule of goodwill Total Goodwill as of December 31, 2023 $ – Fat Shark and Rotor Riot acquisitions 17,476,232 Impairment loss on goodwill during the year ended December 31, 2024 ( 10,073,326 ) Goodwill as of December 31, 2024 $ 7,402,906 Accumulated impairment losses as of December 31, 2024 were $10,073,326. F- 18 Intangible Assets As of December 31, 2024, the balances of intangible assets were as follows: Schedule of intangible assets Type Gross Value Accumulated Amortization Net Value Patents/IP Finite-lived $ 816,877 $ ( 71,477 ) $ 745,400 Trademark Indefinite-lived 1,480,130 – 1,480,130 Total intangible assets, net $ 2,297,007 $ ( 71,477 ) $ 2,225,530 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, Inc. (“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 30, 2025 . 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). F- 19 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 price. 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 ) Loss from conversion of debt to common stock ( 14,864,325 ) Gain from settlement of conversion option 16,503,923 Gain from settlement of warrant liability 305,532 Net gain on debt extinguishment $ 1,259,979 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. Changes 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. F- 20 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 Volatility 91.4% 100.90% Risk free interest rate 3.6% 4.13% Expected life 3.5 years 3.5 years Dividend yield 0% 0% 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. F- 21 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. 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 date. 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 combination. 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 31, 2024. 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 Series A. 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 Plan. 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. F- 22 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 Placement. 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 per unit. 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. As a part of the conversion, the Company cancelled the August Notes as discussed in Note 9 – Promissory and Convertible Notes. See Note 9 – 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 Revere. 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. F- 23 Note 12 – Share Based Awards 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 Options Weighted Average Exercise Price Weighted Average Remaining Contractual Term Aggregate Intrinsic Value Outstanding - December 31, 2023 – $ – – $ – Granted 330,000 1.24 9.34 5,142,800 Forfeited/canceled – – – – Exercised – – – – Outstanding – December 31, 2024 330,000 $ 1.24 9.34 $ 5,142,800 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 $ 1.20 – 1.79 Stock Price on date of grant $ 1.20 – 1.79 Risk-free interest rate 4.080 - 4.71 % Dividend yield – Expected term (years) 6.11 Volatility 129.45 – 143.46 % 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 Restricted Awards Awards Stock Vested Unvested Outstanding - December 31, 2023 – – – Granted 1,480,955 1,103,232 377,723 Forfeited/canceled – – – Outstanding – December 31, 2024 1,480,955 1,103,232 377,723 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. F- 24 Warrants The following table presents the activity for warrants outstanding as of December 31, 2024: Schedule of warrant activity Weighted Warrants Average Outstanding Exercise Price Outstanding - December 31, 2023 – $ – Granted 2,081,579 2.08 Forfeited/cancelled/restored – – Exercised ( 684,000 ) – Outstanding – December 31, 2024 1,397,579 $ 2.01 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 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. Our prior 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. Mr. 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. Mr. Thompson is also the founder, prior Chief Executive Officer and current member on the Board of Directors of Unusual Machines. Prior to the acquisition, Mr. Thompson held 328,500 shares of common stock in Unusual Machines, which represented approximately 10% prior to the acquisition and IPO. F- 25 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. Allan 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 allows Dr. Evans to receive favorable tax benefits as a resident of the Commonwealth of Puerto Rico who will perform such services in Puerto Rico. 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 activities; (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 that Dr. 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. In addition, 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 . Note 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) December 31, December 31, 2024 2023 US $ ( 31,150,444 ) $ – Foreign ( 843,384 ) ( 2,383,462 ) Pretax income (loss) from operations $ ( 31,993,828 ) $ ( 2,383,462 ) The components of income tax expense (benefit) as of December 31, 2024 and 2023 are: Schedule of income (loss) income tax expense (benefit) December 31, December 31, 2024 2023 Current: Federal $ – $ – Foreign – – State and local – – Current income tax expense (benefit) – – Deferred: Federal ( 11,069 ) – Foreign – – State and local ( 2,290 ) – Deferred income tax expense (benefit) ( 13,360 ) – Total income tax expense (benefit) $ ( 13,360 ) $ – F- 26 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 December 31, December 31, 2024 2023 Deferred tax assets: Net operating losses and credit carryforwards $ 3,268,472 $ 727,382 Stock compensation 54,821 – Inventory 248,599 – Accruals and reserves 7,336 – Deferred interest carryforward 24,669 – Lease liability 83,636 – Total deferred tax assets 3,687,532 727,382 Deferred tax liabilities: Intangible assets ( 564,061 ) – Right of use asset ( 81,995 ) – Other 74 – Valuation allowance ( 3,135,343 ) ( 727,382 ) Deferred income tax expense (benefit) ( 3,781,325 ) ( 727,382 ) Net deferred tax liability $ ( 93,793 ) $ – The components of the Company’s effective tax rate consist of the following as of December 31, 2024 and 2023 are: December 31, December 31, 2024 2023 Tax at U.S. statutory rate 21.0 % 21.0 % State taxes, net of federal benefit 1.0 % – % Other permanent differences ( 16.4 ) % – % Foreign statutory rate difference ( 0.2 ) % ( 0.2 ) % Change in valuation allowance - federal ( 4.4 ) % ( 20.8 ) % Change in valuation allowance – state ( 0.9 ) % – % Income tax expense ( 0.0 ) % – % 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 . The U.S. 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 realized. 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. F- 27 The Company is subject to income taxes in the United States; Puerto Rico; 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 As 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 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, 2024. 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. Director Amount of Restricted Common Stock Cristina Colon 904 Sanford Rich 904 Robert Lowry 904 Jeffrey Thompson 834 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. F- 28 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. The merger 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. Officer Amount of Restricted Common Stock Allan Evans (1) 200,000 Brian Hoff 100,000 Andrew Camden 100,000 (1) Shares issued to 8 Consulting LLC, an entity of which Dr. 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, as amended. 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 exercises. F- 29 Item 9. Changes and Disagreements with Accountants on Accounting and Financial Disclosure None.