What changed in this filing

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Item 2. Management’s Discussion and Analysis

2025-08-14 compared with 2025-05-08 · 182 added, 146 removed, 64 unchanged (84% 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

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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.

On July 14, 2025, we entered into a securities

purchase agreement with certain investors for the purchase and sale of 5,000,000 shares of common stock in a registered direct offering

at a public offering price of $9.70 per share.

On July 15, 2025, the offering closed and we received aggregate gross proceeds of $48.5

million before deducting placement agent fees and other related expenses.

The Company intends to use the proceeds of this offering for

the purchase of our drone motor manufacturing equipment which we estimate to be approximately $4.0 million, general corporate purposes

and working capital

With the funds received from our recent offerings,

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

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 (“DIU Blue Framework”).

In addition, in July 2025, we added the Fat Shark Aura Video Transmitter (VTX) to the DIU Blue Framework.

In furtherance of our B2B business,

we have entered into a new lease of a 17,000 square foot facility in Orlando, Florida effectively August 1, 2025, where we plan to open

a drone motor manufacturing plant.

See Note 8 to Consolidated Financial Statements.

While we continued to see top line revenue growth

during the first half 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.

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.

the tariff uncertainties, we cannot predict the impact tariff policies in the United Staes and other countries will have on our business.

But our B2C business relies heavily on China so retaliatory tariffs can adversely affect us especially our B2C business.

1A – Risk Factors” for more information on the risks associated with the uncertainty of the imposition of tariffs on our business.

On June 12, 2025, we entered into a Share Purchase

Agreement (“SPA”) to acquire 100% of the capital stock of Rotor Lab Pty Ltd., an Australian company (“Rotor Lab”)

from its existing shareholders.

We agreed to issue the sellers a total of $4,000,000 of shares of our common stock, plus additional earnout

consideration of up to $3,000,000 worth of shares of our common stock.

$800,000 of the initial consideration will be restricted and subject

to forfeiture in the event of a breach of representations and warranties and indemnification.

The terms of the SPA are subject to standard

closing conditions, in addition to receiving required regulatory approvals from the Australian Foreign Investment Review Board.

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 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 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.

Three Months Ended June 30, 2025 and 2024

During the three months ended June 30, 2025 we generated revenues totaling $2,123,970 compared to $1,411,124 during the

three months ended June 30, 2024, representing an increase of $712,846 or 51%.

The growth in revenue is driven from growth in our existing

retail channel and expanding our enterprise channel as we are manufacturing additional Blue UAS products.

Cost of Goods Sold & Gross Profit

During the three months ended June 30, 2025, our

cost of goods sold was 1,329,291 compared to $1,022,684 during the three months ended June 30, 2024, resulting in an increase of $306,607

Our gross margin, as a percentage of sales, totaled 37.4% during the three months ended June 30, 2025, compared to gross margin

of 27.5% during the three months ended June 30, 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

and the mix of retail and enterprise sales 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 and will

have an impact on our overall gross profit percentage.

We expect that in the three months ended September 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.

See “Item 1A – Risk Factors” for more information on the risks associated with

the uncertainty of the imposition of tariffs on our business.

During the three months ended June 30, 2025, our gross profit was

$794,679 compared to $388,440 during the three months ended June 30, 2024, resulting in an increase of $406,239 or 105%.

Our gross margin,

as a percentage of sales, totaled 37.4% during the three months ended June 30, 2025, compared to gross margin of approximately 27.5%

during the three months ended June 30, 2024.

Operating Expenses

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

During the three months ended June 30, 2025,

operations expenses totaled $404,277 compared to $213,772 during the three months ended June 30, 2024, resulting in an increase of $190,505

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%.

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

The increase primarily relates to additional costs incurred related to our motor factory

operations that we are putting in place along with additional shipping costs from the increase in revenue.

During the three months ended June 30, 2025, research

and development expenses totaled $62,731 compared to $10,282 for the three months ended June 30, 2024, resulting in a increase of $52,449

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 June 30, 2025, sales

and marketing expenses totaled $302,358 compared to $386,332 for the three months ended June 30, 2024, resulting in a decrease of $83,974

The decrease primarily relates to additional costs incurred during the second quarter of 2024 related to our Rampage marketing

event that is expected to occur during the fourth quarter of this year.

Other sales and marketing expenses increased slightly based on

the increase in revenue and ad spend during the period.

During the three months ended June 30, 2025, general

and administrative expenses totaling $7,195,193 compared to $1,349,587 for the three months ended June 30, 2024, resulting in an increase

of $5,845,606 or 433%.

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

The increase primarily relates to the increase in non-cash stock compensation expense of approximately $5.5 million

and increase in professional fees and operating as a public company.

Our net loss for the three months ended June 30,

2025, totaled $6,964,739 compared to $1,612,238 for the three months ended June 30, 2024, resulting in an increase in net loss of $5,352,501

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, which was $5,513,328 for the second quarter of 2025.

Results of Operations – Six Months

Ended June 30, 2025 compared to the Six Months Ended June 30, 2024

During the six months ended June 30, 2025 we generated

revenues totaling $4,166,270 compared to $2,030,039 during the six months ended June 30, 2024, representing an increase of $2,136,231

The growth in revenue is driven from growth in our existing retail channel and expanding our enterprise channel as we are manufacturing

additional Blue UAS products.

Cost of Goods Sold

During the six months ended June 30, 2025, we

incurred cost of goods sold of $2,874,784 compared to $1,437,432 during the six months ended June 30, 2024, resulting in an increase of

$1,437,352 or 100%.

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.

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

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

The increase in cost of goods sold is driven entirely by the increase in our revenue.

During the six months ended June 30, 2025, our

gross margin was $1,291,486 compared to $592,607 during the six months ended June 30, 2024, resulting in an increase of $698,879 or 118%.

Our gross margin, as a percentage of sales, totaled 31% during the six months ended June 30, 2025, compared to 29% during the six months

ended June 30, 2024.

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

sold during the period and the mix of retail and enterprise sales during the period.

The margins we generated during the quarter are in

line with our expectations and normal operating margins.

Operating Expenses

During the six months ended June 30, 2025, operations

expenses totaled $706,879 compared to $326,094 during the six months ended June 30, 2024, resulting in an increase of $380,785 or 117%.

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

Operations expenses primarily relate to our

direct operations including our warehouse personnel and warehouse expenses.

In addition, we have started incurring additional operations

related expenses as we start incurring costs related to our motor production facility during the second quarter of 2025.

During the six months ended June 30, 2025, research

and development expenses totaled $70,633 compared to $27,078 for the six months ended June 30, 2024, resulting in an increase of $43,555

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 six months ended June 30, 2025, sales

and marketing expenses totaled $509,975 compared to $543,390 for the six months ended June 30, 2024, resulting in a decrease of $33,415

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

The decrease relates

to additional costs incurred during the second quarter of 2024 related to our Rampage marketing event, which was then offset by additional

ad spend and other sales related expenses from our increase in revenue and sales.

During the six months ended June 30, 2025, general

and administrative expenses totaling $10,421,097 compared to $2,353,761 for the six months ended June 30, 2024, resulting in an increase

of $8,067,336 or 343%.

The increase relates primarily to increased non-cash expenses totaling $7,419,701 related to stock based compensation

expense and the additional increase is from increase in professional fees and other public company related expenses.

Our net loss for the six months ended June 30,

2025, totaled $10,231,018 compared to $2,718,240 for the six months ended June 30, 2024, resulting in an increase in net loss of $7,419,701

The increase primarily relates to increased non-cash expenses related to stock based compensation expense discussed in the above

Cash Flow Analysis

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.

Prior to the closing

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

to our activities related to our IPO.

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

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

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

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

needs and achieve our business objectives.

Operating Activities

Net cash used in operating activities was $3,862,349

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.

during the six months ended June 30, 2025, compared to net cash used in operating activities of $2,181,840 during the six months ended

June 30, 2024, representing an increase of $1,680,509 or 77%.

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

receivable of $125,757, inventory of $426,180, prepaid expenses of $156,440, accounts payable and accrued expenses of $444,594 and changes

in other operating assets and liabilities of $61,864.

This was offset by the change in non-cash stock based compensation of $6,994,114

and changes in other non-cash related expenses of $52,990.

Investing Activities

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

Net cash used in investing activities was $262,751

during the six months ended June 30, 2025 compared to net cash used in investing activities of $852,201 during the six months ended June

30, 2024, representing a decrease of $590,050 or 69%.

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

The cash used in investing activities during the six months ended June 30, 2025

related to the purchasing of equipment related to our motor factory while the cash used in investing activities during the six months

ended June 30, 2024 related to our acquisitions of Rotor Riot and Fat Shark.

Financing Activities

Net cash provided by financing activities totaled

$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 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.

$39,300,836 during the six months ended June 30, 2025, compared to net cash provided by financing activities of $4,362,313 during the

six months ended June 30, 2024, resulting in an increase in net cash provided by financing activities of $34,938,523.

The increase primarily

relates to proceeds received from our public offering of $36,496,000 in May 2025, proceeds from warrant exercises of $2,436,966, and employee

stock option exercises of $367,780 during the period.

and capital resources

As of June 30, 2025, we had current assets totaling

$42,222,934 primarily consisting of cash balances of $38,933,059, inventory of $1,609,117 and other current assets of $192,778 and deposits

for inventory of $1,314,592.

Our current liabilities as of June 30, 2025 totaled $821,698, primarily consisting of accounts payable and

accrued expenses of $608,694 and deferred revenue of $139,435 and current operating lease liability of $73,569.

Our net working capital

as of June 30, 2025 was $41,399,236.

On July 15, 2025, we completed a registered direct

offering in which we sold 5,000,000 shares of our common stock at $9.70 per share and after deducting underwriting discounts and expenses,

we received approximately $44.9 million in net cash proceeds.

On May 7, 2025, we completed a confidentially

marketed public offering in which we sold 8,000,000 shares of our common stock at $5.00 per share and after deducting underwriting discounts

and expenses, we received approximately $36.5 million in cash proceeds.

On February 26, 2025, multiple investors exercised

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$1.8 million in net proceeds.

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

million in cash.

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.

14, 2025, we have approximately $81 million in cash .

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

$45 million of net proceeds we received on July 15, 2025 and our existing cash balances, we have substantial liquidity to support our

Critical Accounting Policies and Estimates

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Recently Issued Accounting Pronouncements

The Company has implemented all new accounting pronouncements that

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.

The Company has implemented all new accounting

pronouncements that 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 Market Risk

We are a smaller reporting company as

defined by Rule 12b-2 of the Exchange Act and are not required to provide the information required under this item.

We are a smaller reporting company as defined

by Rule 12b-2 of the Exchange Act and are not required to provide the information required under this item.

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