What changed in this filing

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Item 2. Management’s Discussion and Analysis

2025-05-08 compared with 2024-11-14 · 173 added, 280 removed, 37 unchanged (92% of the section changed)

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

Management’s Discussion

and Analysis of Financial Condition and Results of Operations

The following discussion and analysis should

be read in conjunction with the unaudited condensed financial statements and related notes included elsewhere in this Quarterly Report

and our audited financial statements and related notes thereto included in our Annual Report on Form 10-K/A for the year ended December

31, 2023, which was filed with the SEC on August 9, 2024.

and our audited financial statements and related notes thereto included in our Annual Report on Form 10-K for the year ended December

31, 2024, which was filed with the SEC on March 27, 2025.

The following discussion contains forward-looking statements that are subject

4 unchanged sentences

forward-looking statements as a result of various factors, including those discussed below and elsewhere in this Quarterly Report and

of our final prospectus filed with the SEC on October 25, 2024, particularly in the section entitled “Risk Factors.” Unless

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

of our Annual Report on Form 10-K for the year ended December 31, 2024, particularly in the section entitled “Risk Factors.”

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

refer to Unusual Machines, Inc.

2 unchanged sentences

unless otherwise noted.

Recent Developments

Private Placement

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

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

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

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

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

As part of the Private Placement, we issued

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

Each unit consisted of one share of common stock, par

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

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

The Investor Warrants have a term of five and a half

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

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

Results of Operations – Three Months

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

During the three months ended September 30, 2024

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

Company Overview

We are a Nevada corporation with our principal

place of business in Orlando, Florida.

We sell and manufacture drones and drone components across a diversified brand portfolio, which

includes Fat Shark, the leader in FPV (first-person view) ultra-low latency video goggles for drone pilots.

We also retail small, acrobatic

FPV drones and equipment directly to consumers through the curated Rotor Riot e-commerce store.

Beginning in the second half of 2024,

we launched our business-to-business channel selling drone parts to commercial customers.

With a changing regulatory environment, we seek

to be a dominant Tier-1 parts supplier to the fast-growing multi-billion-dollar U.S.

drone industry.

Recent Developments, Challenges and Uncertainties

With the funds received from our recent public

offering, we are focusing on growing both our retail and enterprise revenue channels and investing in drone component manufacturing in

the United States.

During the first quarter of 2025, we added both the Rotor Riot Brave 55A ESC (electronic speed controller), and the

Fat Shark Aura FPV (first-person view) Camera to the U.S.

Department of Defense Innovation Units Blue UAS Framework.

While we continued

to see top line revenue growth during the first quarter of 2025, our continued future plans for retail revenue growth and margins are

subject to uncertainties outside of our control, including changes to trade policy with respect to tariffs and other impacts to our global

supply chain cost structure.

We are continually evaluating the tariff landscape and working to find reliable and high quality suppliers

in multiple countries including the United States and Taiwan that we anticipate will have the least amount of impact to our retail costs

and overall margin.

On February 1, 2025, we entered into a Merger

Agreement to acquire drone software company, Aloft.

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

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

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

The acquisition

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

Customary closing conditions by the parties including Aloft

shareholder approval must be met before closing the merger.

On May 6, 2025, the Company and Aloft executed an Amendment and Waiver to

the Merger Agreement (the “Aloft Amendment”) which (i) waives the exclusivity provision in the Agreement, (ii) extends the

end date in the Agreement from April 30, 2025 to August 31, 2025, (iii) adds a $100,000 breakup fee in the event Aloft consummates an

alternative transaction while the Agreement remains in effect, and (iv) permits the Company to terminate the Agreement at any time upon

written notice, however, the Company will forfeit the breakup fee.

A copy of the Aloft Amendment is furnished as Exhibit 10.9 and is incorporated

herein by reference.

The foregoing description of the terms of the Aloft Amendment does not purport to be complete and is subject to,

and qualified in its entirety by reference, to the Aloft Amendment.

Results of operations

Three Months Ended March 31, 2025 and 2024

During the three months ended March 31, 2025 we

generated revenues totaling $2,042,300 compared to $618,915 during the three months ended March 31, 2024, representing an increase of

$1,423,385 or 230%.

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

(“Fat Shark”)

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

The majority of our revenue during the quarter relates to completed

and fulfilled product sales during the period through our Rotor Riot retail channel and from our B2B wholesale through Fat Shark.

We did not have any revenue prior to the completion of the acquisitions of Fat Shark and Rotor Riot (the “Acquisitions”)

in February 2024.

Pro forma revenues if the Acquisitions were completed for the full quarter for the three months ended March 31, 2024,

were approximately $1.1 million.

The growth in revenue is driven both in our existing retail channel and our expanding enterprise channel

as we are manufacturing additional Blue UAS products.

Cost of Goods Sold

During the three months ended September 30, 2024,

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

of $1,131,777 or 100%.

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

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

During the three months ended September 30, 2024,

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

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

the three months ended September 30, 2023.

We anticipate our gross margin to fluctuate period to period depending on certain promotions

and products that are sold during the period and the margins we generated during the quarter are in line with our expectations and normal

operating margins.

During the three months ended March 31, 2025,

our gross profit was $496,807 compared to $204,167 during the three months ended March 31, 2024, resulting in an increase of $292,640

Pro forma gross margin as if the Acquisitions were completed for the full quarter for the three months ended March 31, 2024 were

approximately $0.3 million.

Our gross margin, as a percentage of sales, totaled 24.3% during the three months ended March 31, 2025, compared

to pro forma gross margin of approximately 21% during the three months ended March 31, 2024.

We try and maintain margins in the 20% -

30% range on majority of our products and anticipate our gross profit to fluctuate period to period depending on certain promotions and

products that are sold during the period.

Our gross margin is also subject to additional fluctuations based on the increased tariffs being

imposed on certain products.

We have started passing these additional costs to customers, however, this would have an impact on our overall

gross profit percentage.

We expect that in the three months ended June 30, 2025, our cost of goods sold will experience an increase from

the tariffs and increase in inventory costs as we source inventory from countries outside of China including the United States and Taiwan.

During the three months ended March 31, 2025,

our gross profit was $496,807 compared to $204,167 during the three months ended March 31, 2024, resulting in an increase of $292,640

Pro forma gross margin as if the Acquisitions were completed for the full quarter for the three months ended March 31, 2024 were

approximately $0.3 million.

Our gross margin, as a percentage of sales, totaled 24.3% during the three months ended March 31, 2025, compared

to pro forma gross margin of approximately 25% during the three months ended March 31, 2024.

We try and maintain margins in the 20% -

30% range on majority of our products and anticipate our gross profit to fluctuate period to period depending on certain promotions and

products that are sold during the period.

Our gross margin is also subject to additional fluctuations based on the increased tariffs being

imposed on certain products.

We have started passing these additional costs to customers, however, this would have an impact on our overall

gross profit percentage.

Operating Expenses

During the three months ended September 30, 2024,

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

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

Operations expenses primarily

relate to our direct operations including our warehouse personnel and warehouse expenses.

During the three months ended September 30, 2024,

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

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

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

component manufacturing to the United States.

During the three months ended September 30, 2024,

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

of $252,253 or 100%.

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

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

During the three months ended September 30, 2024,

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

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

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

in the previous year, an increase in expenses related to closing the IPO including legal and accounting fees, additional transition and

integration related expenses, and the costs related to operating Fat Shark and Rotor Riot.

Our net loss for the three months ended

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

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

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

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

Series C preferred shares.

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

offering (the “IPO”) and the increased operations and sales and marketing expenses we incurred since the acquisition

from Fat Shark and Rotor Riot.

This was partially offset by generating gross margin related to the revenue and cost of goods sold

from sales for Fat Shark and Rotor Riot.

In the fourth quarter of 2024 we expect to complete our valuation and

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

For any identified intangibles, we will

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

However, and until we complete our valuation

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

After the identification and valuation

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

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

Results of Operations – Nine months

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

During the nine months ended September 30, 2024

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

$3,561,303 or 100%.

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

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

first quarter.

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

our B2B wholesale through Fat Shark.

Cost of Goods Sold

During the nine months ended September 30, 2024,

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

During the three months ended March 31, 2025,

operations expenses totaled $302,602 compared to $112,322 during the three months ended March 31, 2024, resulting in an increase of $190,280

Operations expense relate to expenses incurred for fulfilling orders and warehouse related expenditures including our warehouse

personnel, supplies, and shipping expenses.

Pro forma operations expense as if the Acquisitions were completed for the full quarter for

the three months ended March 31, 2024 were approximately $245,000 which is approximately a 23% increase.

This increase is primarily related

to increase in shipping expenses included in operating expenses from product sales.

During the three months ended March 31, 2025,

research and development expenses totaled $7,903 compared to $16,796 for the three months ended March 31, 2024, resulting in a decrease

of $8,893 or 53%.

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

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

During the nine months ended September 30, 2024,

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

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

the nine months ended September 30, 2023.

We anticipate our gross margin to fluctuate period to period depending on certain promotions

and products that are sold during the period and the margins we generated during the quarter are in line with our expectations and normal

operating margins.

Operating Expenses

During the nine months ended September 30, 2024,

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

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

Operations expenses primarily

relate to our direct operations including our warehouse personnel and warehouse expenses.

During the nine months ended September 30, 2024,

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

Research and development expense primarily relates to new product development and is subject to fluctuations based on

specific research and development projects ongoing during the period.

During the three months ended March 31, 2025,

selling and marketing expenses totaled $207,616 compared to $157,058 for the three months ended March 31, 2024, resulting in an increase

of $50,558 or 32%.

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

Research and development expense primarily relates to new product development as we continue to partner with manufacturers

to bring drone component manufacturing to the United States.

During the nine months ended September 30, 2024,

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

Pro forma selling and marketing expense as if the Acquisitions were completed for the full quarter for the three months

ended March 31, 2024 were approximately $435,000 which is approximately a 53% decrease.

We continue to work to optimize our selling and

marketing and in particular our advertising spend.

We expect to continue to see significant selling and marketing expenses, especially

for ad spend as it relates to retail sales.

During the three months ended March 31, 2025,

general and administrative expenses totaling $3,225,904 compared to $1,004,173 for the three months ended March 31, 2024, resulting in

an increase of $2,221,731 or 221%.

The increase primarily relates to the increase in non-cash stock compensation expense of approximately

$1.8 million and increase in professional fees and operating as a public company.

Our net loss for the three months ended March

31, 2025, totaled $3,266,279 compared to $1,106,001 for the three months ended March 31, 2024, resulting in an increase in net loss of

$2,160,278 or 195%.

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

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

During the nine months ended September 30, 2024,

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

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

The increase relates to increased expenses related to closing the IPO including legal and accounting

fees, additional transition and integration related expenses, and the costs related to operating Fat Shark and Rotor Riot.

Our net loss for the nine months ended September

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

of $2,895,614 or 147%.

The increase in net loss primarily relates the increase in general and administrative expenses related to closing

the IPO with additional increase in expenses for operations, sales and marketing expenses we incurred since the acquisition from Fat Shark

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

during the period.

This was partially offset by generating gross margin related to the revenue and cost of goods sold from sales for Fat

Shark and Rotor Riot.

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

to the acquisitions of Fat Shark and Rotor Riot.

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

will result in a non-cash charge going forward.

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

and the future amortization may or may not be material.

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

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

While the amount is uncertain, we expect

that our goodwill impairment could be material.

This increase in net loss relates to the increase in general and administrative expenses which was primarily driven

by the increase in non-cash stock compensation expense.

We also saw additional increases in operations expense and selling and marketing

as we had a full quarter of operations since we didn’t complete the Acquisitions in 2024 until mid-way through the first quarter

This was partially offset by generating higher gross profit related to the increase in revenue and cost of goods sold.

Cash Flow Analysis

Prior to the closing

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

to our activities related to our IPO.

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

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

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

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

our liquidity needs and achieve our business objectives.

Our future cash flows

from operating activities will be significantly impacted by revenues received, our investment in sales and marketing to drive growth,

and general and administrative expenses related to operating a public company.

Our ability to meet future liquidity needs will be driven

by our operating performance and the extent of continued investment in our operations.

Failure to generate sufficient revenues and related

cash flows could have a material adverse effect on our ability to meet our liquidity needs and achieve our business objectives.

Operating Activities

Net cash used in operating activities was $1,193,628

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

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

This increase in net cash used primarily resulted from our increase

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

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

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

during the three months ended March 31, 2025, compared to net cash used in operating activities of $1,195,604 during the three months

ended March 31, 2024, representing a decrease of $1,976 or 0.2%.

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

net loss of $2,160,278, changes in inventory of $27,552, other assets of $114,816, and other liabilities of $153,282.

These were offset

by changes in non-cash expenses of $1,862,451, changes in prepaid expenses of $446,593, accounts payable and accrued expenses of $138,100

and accounts receivable of $10,760.

Investing Activities

Net cash used in investing activities was $852,801

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

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

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

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

Net cash used in investing activities was $0 during

the three months ended March 31, 2025 compared to net cash used in operating activities of $852,876 during the three months ended March

31, 2024, representing a decrease of $852,876 or 100%.

This decrease in net cash used related to the $1,000,000 of cash paid pursuant

to the Purchase Agreement related to Fat Shark and Rotor Riot, offset by $147,124 in cash acquired that was completed in the first quarter

Financing Activities

Net cash provided by financing activities totaled

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

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

primarily relates to proceeds received from our IPO of $5,000,000, offset by change in deferred offering costs and other IPO related

expenses of $260,985.

$2,436,966 during the three months ended March 31, 2025, compared to $4,362,313 during the three months ended March 31, 2024, resulting

in a decrease in net cash provided by financing activities of $1,925,347 or 44.1%.

Our first quarter 2025 proceeds are from cash warrant

exercises from certain investors exercising their warrants that we issued in our October 2024 private placement.

Our first quarter 2024

proceeds were from our IPO of $5,000,000, offset by deferred offering costs and other IPO related expenses of $637,687.

Liquidity and capital

As of September 30, 2024, we had current assets

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

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

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

Our net working capital as of September 30, 2024

was $2,499,070.

As of March 31, 2025, we had current assets totaling

$7,306,327 primarily consisting of cash balances of $5,000,661, inventory of $1,214,290 and other assets and deposits for inventory of

Our current liabilities as of March 31, 2025 totaled $1,048,379, primarily consisting of accounts payable and accrued expenses

of $860,554 and deferred revenue and current operating lease liability of $187,825.

Our net working capital as of March 31, 2025 was $6,257,948.

On February 26, 2025, multiple investors exercised

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

received cash proceeds of $2,436,966.

In December 2024, two investors and note holders

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

of $1.99 per share.

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

In December 2024, we also had several investors

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

On October 29, 2024, we completed a private placement

3 unchanged sentences

$1.8 million in net proceeds.

As of November 13, 2024, we have approximately

As of May 7, 2025, we have approximately $40.1

million in cash.

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

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

We have based these estimates,

however, on assumptions that may prove to be wrong, and we could spend our available financial resources much faster than we currently

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

We do not anticipate any significant cost increases post the Fat

Shark and Rotor Riot acquisitions and with consideration of the combined companies’ net low and cash position, we expect we will

have sufficient working capital to support our operations for at least 12 months.

As described in Note 8 of our financial statements,

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

Once the August Notes mature in November

2025, we will need to either (a) raise additional capital, (b) refinance the August Notes, (c) seek an extension of the maturity date

of the Notes, or (d) explore the conversion or exchange of the New Notes into equity, which will result in dilution to our shareholders,

if the August Notes have not been converted or paid in full prior to the maturity date.

If we are unable to raise capital or explore such

other options when needed or on acceptable terms, we may default under the obligation pursuant to the New Notes, or be forced to delay,

reduce or eliminate certain operational efforts.

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

sufficient to fund our current operating plans through more than the next 12 months.

With the approximately $36.6 million of net proceeds

we received on May 7, 2025, we have substantial liquidity to support our business.

Critical Accounting Policies and Estimates

Our financial statements and accompanying notes

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

The preparation of financial statements in conformity with

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

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

the reporting periods.

We regularly evaluate the accounting policies

and estimates that we use to prepare our financial statements.

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

In general, management’s estimates are based on historical experience, on information from third party professionals,

and on various other assumptions that are believed to be reasonable under the facts and circumstances.

Actual results could differ from

those estimates made by management.

Fair value of assets acquired and liabilities assumed in business

The Fat Shark and Rotor Riot acquisitions are

accounted for as a business combination under ASC 805.

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

the date of acquisition.

We have not yet completed our evaluation of the fair value for determining the unallocated purchase price between

goodwill and other intangible assets.

Such amounts are subject to adjustment during the one-year measurement period.

The fair value will

be determined based on assumptions used in valuations and estimates determined by management, which are subjective.

Impairment of goodwill and long-lived assets

Goodwill represents the future economic benefit

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

Goodwill represents

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

Intangible assets from acquired

business are recognized at fair value on the acquisition date.

We are continuing our evaluation of the fair value of the assets acquired

and liabilities assumed from the Fat Shark and Rotor Riot acquisition, and we have not yet determined the unallocated purchase price

between goodwill and other intangible assets.

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

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

Valuation of Inventory

Our policy for valuation of inventory requires

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

well as evaluating for excess quantities and obsolescence.

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

are less favorable than those estimates by management.

Stock Based Compensation

Certain employees and directors have received

grants of restricted common shares in our company.

Other employees received grants of stock options in our Company.

These awards are accounted

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

Based on this guidance and the terms of the awards,

the awards are equity classified.

The fair value of restricted stock awards is based

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

The fair value of each stock option award is determined

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

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

The expected volatility

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

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

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

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

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

method calculation.

In addition, the Company issued shares of our

common stock in 2023 to consultants for services performed.

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

public market for our common stock.

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

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

transactions as an estimate.

These values and estimates are subjective.

Warrant Classification and Fair Value

The Company classifies warrants issued for the

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

of each respective contract.

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

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

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

This assessment,

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

end date while the warrants are outstanding.

For issued or modified warrants that meet all

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

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

as liabilities at their fair value.

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

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

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

For a description of our critical accounting policies

and estimates, refer to Part II, Item 7, Critical Accounting Policies and Estimates in our Annual Report on Form 10-K for the year

ended December 31, 2024.

There have been no material changes to our critical accounting policies and estimates since our Annual Report

on Form 10-K for the year ended December 31, 2024.

Recently Issued Accounting Pronouncements

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are in effect.

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

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

on its financial position or results of operations.

Quantitative and Qualitative Disclosures about

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

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

financial position or results of operations.

Quantitative and Qualitative Disclosures about Market Risk

We are a smaller reporting company as

1 unchanged sentence

Compared sentence by sentence after normalising whitespace, quotation marks, case and digits, so re-formatting and restated figures do not read as changed language. Wording changes appear as one removal and one addition. The current filing and the prior one are authoritative.

What changed 10-Q

Item 2. Management’s Discussion and Analysis