What changed in this filing

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Item 7. Management’s Discussion and Analysis

2026-03-12 compared with 2025-03-27 · 259 added, 171 removed, 135 unchanged (76% of the section changed)

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

You should read the

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

You should read

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

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

GAAP”)) and related

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

The following discussion contains forward-looking

statements that are subject to risks and uncertainties.

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

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

Actual results could differ materially from those discussed

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

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

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

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

The following discussion

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

See “Special Note Regarding Forward-Looking

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

Actual results

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

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

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

Machines,” and the “Company” refer to Unusual Machines, Inc.

and its subsidiaries.

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

All amounts presented in

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

Recent Developments

Private Placement

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

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

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

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

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

As part of the Private Placement, we issued

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

Each unit consisted of one share of Common Stock and one

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

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

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

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

At the 2025 Special Meeting, the Company’s stockholders

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

On February 26, 2025,

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

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

The shares of common stock

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

All of the Investor Warrants

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

each members of our Board.

Potential Aloft Acquisition

On February 1, 2025, we entered into a Merger

Agreement to acquire drone software company, Aloft.

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

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

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

The acquisition

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

Customary closing conditions by the parties must be met before

closing the merger.

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

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

At the Market Agreement

On August 28, 2025, we entered into a Capital

on Demand Sales Agreement (the "Sales Agreement”) with Jones Trading Institutional Services LLC ("Jones”), pursuant

to which we may issue and sell over time and from time to time up to $300,000,000 worth of shares of our common stock (the "Shares”).

Sales of the Shares, if any, may be made by any method permitted by law deemed to be an "at the market” offering as defined

in Rule 415 of the Securities Act of 1933 (the "Securities Act”), including without limitation sales made directly on or through

the NYSE American, the trading market for the Company’s common stock, or any other existing trading market in the United States

for the Company’s common stock, sales made to or through a dealer other than on an exchange or otherwise, sales made directly to

Jones as principal in negotiated transactions at market prices prevailing at the time of sale or at prices related to such prevailing

market prices, and/or in any other method permitted by law.

Jones will use commercially reasonable efforts to sell on behalf of us all

the Shares requested to be sold by us, consistent with its normal trading and sales practices, subject to the terms of the Sales Agreement.

Under the Agreement, Jones will be entitled to

compensation of 3.0% of the gross proceeds from the sales of the Shares sold under the Sales Agreement.

In addition, we have agreed to

reimburse Jones for the fees and disbursements of its counsel, in an amount not to exceed $55,000.

In addition, we shall reimburse Jones

for legal fees of its counsel up to $3,750 for each quarterly due diligence update.

The Shares are being offered and sold pursuant to

a prospectus supplement filed with the Securities and Exchange Commission (the “SEC”).

During the month of October 2025, we sold 4,666,600

shares of common stock at an average price of $15.46 per share under the Agreement for total gross proceeds of approximately $72.1 million.

We paid Jones approximately $2.2 million related to the sales of common stock under the Sales Agreement.

Recent Customer Purchase Orders

On January 15, 2026, we secured a $2.1 million

order from a customer for domestically assembled drone systems for defense and government applications which includes Rotor Riot Brave

flight controllers and ESCs, Fat Shark Aura analog cameras and video transmitters, HDO+ headsets and Unusual Machines motors.

is expected to be fulfilled over the first two quarters of 2026.

On December 22, 2025, we secured a $3.75 million

order from Performance Drone Works (“PDW”) to support the scaling of PDW’s FPV program.

The order includes FPV headsets

as the Company continues to expand and scale their U.S.

based manufacturing including domestic motors and other components.

On October 15, 2025, we secured an order from

Army’s 101 st Airborne Division for 3,500 NDAA-compliance motors produced at our new U.S.

based manufacturing

The motors will support the Division’s deployment of the new Attritable Battlefield Enabler V1.01 drones.

also indicated plans to expand procurement, targeting an additional order of 20,000 components including motors from us in 2026.

On October 3, 2025, we secured an $800,000 purchase

order for high-performance drone components from Red Cat.

The order includes several of our Blue UAS products and motors that will be

integrated into Red Cat’s FANG™ drones, supporting ongoing demand for U.S.

made, NDAA compliant systems in defense, public

safety, and other government agency applications.

Recent Investments

During the first quarter of 2026, we have entered

into and made several key investments with three different private drone related companies.

We invested a total $17.5 million between

the three different companies, all of which will include registration rights upon completion of their initial public offering or merger

with a publicly traded company.

These investments are ancillary to our core drone

components business and were made because we believe the investments will provide future drone related revenues.

In all cases, we also

believed that apart from the future sales benefits, each investment potential outweighed the risks.

On February 2, 2026, we appointed Chadd Cole as

Vice President of FP&A.

Cole has more than 12 years of experience in financial planning and analysis roles at Verizon, Electronic

Arts (EA) and most recently was the Director of FP&A at Carrier.

Cole led the financial planning and analysis function including

budgeting, planning and financial reporting through automation and technology.

On January 1, 2026, we promoted Stacy Wright to

Chief Revenue Officer.

Wright joined Rotor Riot in 2020 as Vice President and was promoted to President in 2024 following its acquisition

by Unusual Machines.

She has been instrumental in scaling operations evolve the business from a community-driven e-commerce platform into

a diversified revenue operation service enterprise and defense customers.

Results of Operations

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

no revenue from 2023 through the date of acquisition.

For pro forma information unaudited result of operations reflecting our performance

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

no revenue from January 1, 2024 through the date of acquisition.

For pro forma information unaudited result of operations reflecting our

performance if we had owned these subsidiaries as of January 1, 2024, See Note 3 to our Consolidated Financial Statements.

Years Ended December 31, 2025 and 2024

During the year ended December 31, 2024 we

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

$5,565,319 or 100%.

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

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

first quarter.

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

approximately $4.68 million.

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

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

During the year ended December 31, 2025 we generated

revenues totaling $11,199,217 compared to $5,565,319 during the year ended December 31, 2024, representing an increase of $5,633,898 or

Our revenues during 2024 consisted primarily of retail revenue in our B2C business line.

The increase in revenue during 2025 primarily

relates to the increase and establishment of our B2B business and revenue related to our NDAA and Blue UAS products.

During the fourth

quarter of 2025, we started manufacturing production on certain products including drone motors and we continue to see increased interest

and demand in our manufactured products heading into 2026.

We expect our revenue to continue to grow quarterly in 2026 as we continue

to build out our capacity including our manufacturing facilities and products as well increasing our staffing to handle additional demand

from the market.

Cost of Goods Sold

During the year ended December 31, 2025, we incurred

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

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

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

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

cost of goods sold of $7,292,370 compared to $4,019,068 during the year ended December 31, 2024, resulting in an increase of $3,273,302

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

costs including tariffs.

During the fourth quarter of 2025, cost of goods sold also include direct payroll costs, a portion of rent expense

and depreciation expense related to our manufactured products.

The increase in cost of goods sold is primarily driven by the increase

in our revenue and growth in B2B sales along with the increase in tariffs during 2025.

We expect our total cost of goods sold to increase

in 2026 in conjunction with our revenue increases as we sell additional product.

During the year ended December 31, 2025, our gross

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

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

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

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

profit was $3,906,847 compared to $1,546,251 during the year ended December 31, 2024, resulting in an increase of $2,360,596 or 153%.

Our gross margin, as a percentage of sales, totaled 35% during the year ended December 31, 2025, compared to 28% during the year ended

December 31, 2024.

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

sold during the year including the mix between retail and enterprise sales.

The increase in gross margin during the year was based on

our larger mix of enterprise orders during 2025.

While the margins we generated during the year are in line with our expectations and

normal operating margins, we do anticipate continued fluctuations in our manufactured products into 2026 as we continue to improve our

manufacturing process and become more efficient.

We anticipate our gross margins to have fluctuations in 2026 as we start scaling our

manufacturing process.

We anticipate our gross margins will have a decline in the first two quarters of 2026 as we bring on and train

our staff, work to scale production, increase to multiple shifts, and build out efficiencies.

We anticipate our margins will improve in

the second half of 2026 as we have more trained staff and efficient processes and as we bring on our highly-automated production line

Operating Expenses

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expenses totaled $3,234,706 compared to $959,740 during the year ended December 31, 2024, resulting in an increase of $2,274,966 or 237%.

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.

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 non-product costs related to our motor production

and headset facilities.

We expect our operations expense to increase as we continue to hire additional staff to support our operations

including engineering staff to help improve process and gain efficiencies.

We are also setting up our headset factory and anticipate building

out a battery facility and camera facility in the second half of 2026.

During the year ended December 31, 2025, research

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

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

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

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

and development expenses totaled $202,585 compared to $90,584 for the year ended December 31, 2024, resulting in an increase of $112,001

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.

We expect our research and development expenses to increase some as we continue

to build out our products, however, we do not anticipate a significant growth as compared to revenue and other costs.

During the year ended December 31, 2025, sales

and marketing expenses totaled $1,581,716 compared to $1,091,268 for the year ended December 31, 2024, resulting in an increase of $490,448

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

Sales and marketing

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

for our marketing personnel.

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

for our sales and marketing team.

The increase relates mainly to adding additional staffing to our sales and marketing team.

We anticipate

our sales and marketing costs to increase in 2026 related to building out our enterprise sales team, however, we expect these increases

to be at a lower rate than our revenue and other expenses as our enterprise sales are more dedicated efforts, while our retail revenue

is driven off of advertising sales.

During the year ended December 31, 2025, general

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

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

General and administrative expenses incurred during 2023 primarily

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

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

The increase relates to increased expenses related to closing the IPO

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

related to operating Fat Shark and Rotor Riot.

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

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

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

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

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

had not yet been completed.

Other Expenses

During the year ended December 31, 2024,

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

$15,002,061 or 100%.

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

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

It is offset by a

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

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

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

We did incur these same costs in 2023 as we did

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

also increased our headcount to support our growth which includes building out our accounting, HR, and facilities staff.

The above amount

includes $15,619,929 in non-cash stock compensation expense during 2025 as compared to $2,309,531 during 2024.

We expect our general and

administrative expenses to increase during 2026 as we continue to build out our infrastructure with additional hires and systems.

anticipate things like professional fees and other expenses related to being a public company to increase.

In addition, we anticipate

our non-cash stock compensation expense to be higher in 2026.

We do not anticipate the increase in our general and administrative expenses

to increase at the same rate as our revenue as we start to gain operational efficiencies at scale.

During the year ended December 31, 2025, we recognized

a loss on impairment of goodwill of $0 compared to $10,073,326 for the year ended December 31, 2024, resulting in a decrease of $10,073,326

The loss on goodwill impairment in 2024 relates to the difference in the fair value calculation of goodwill from the acquisitions

of Rotor Riot and Fat Shark as compared to the carrying value as of December 31, 2024.

We did not have any goodwill impairment in 2025.

Other Income (Expense)

During the year ended December 31, 2025, other

income and expense totaled $5,922,191 compared to ($15,002,061) during the year ended December 31, 2024.

During 2025, we generated $1,830,944

in interest income from our preferred savings account related to our cash balances.

We also generated $1,623,317 in realized gains from

our investments and an additional $2,469,908 in unrealized gains from our investments in the drone industry.

During 2024, other income

and expenses mostly consisted of non-cash related charges including $16,146,205 for the change in fair value from our derivatives including

the conversional option feature on the note payable and the warrant liability.

It was offset by a non-cash gain on debt extinguishment

of $1,259,979.

Finally, other expenses included $116,981 for interest expense that the Company paid in relation to its note payable during

the year and interest income of $1,146.

Our net loss for the year ended December 31, 2025,

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

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

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

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

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

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

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

Interest expense is from our

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

This was partially offset by generating gross margin

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

income tax benefit of $13,360.

Prior to the closing

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

to our activities related to our IPO.

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

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

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

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

needs and achieve our business objectives.

totaled $19,193,617.

This compared to $31,980,468 for the year ended December 31, 2024, resulting in a decrease in net loss of $12,786,851.

The change in net loss primarily consists of an increase in our revenue, offset by a large increase in G&A expenses, mainly from non-cash

stock compensation expense of $15.6 million and the net change in other income and expense during the year based on our interest income

and realized and unrealized gains from investments during the year.

We anticipate our net loss position to improve during 2026 as we start

scaling our revenue and gain some operational efficiencies on the general and administrative expenses.

This will partially be offset by

anticipated fluctuations in our margins during the first half of the year.

Operating Activities

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31, 2024, representing an increase of $17,181,252 or 433%.

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

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

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

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

This change in net cash used in operating activities includes a net impact

of non-cash adjustments to reconcile our net loss to net cash used in operating activities of $15,666,817 primarily driven by not having

an impairment charge on goodwill and change in fair value of derivatives during 2025 and offset by the increase in stock based compensation

expense during the year.

The net impact of non-cash activities was offset by an increase in our net loss this year of $12,786,852.

change in assets and liabilities was the other primary driver of the change in net cash used in operating activities with the primarily

impact being a result from an increase in prepaid inventory of $8,760,006, inventory of $4,399,358, and accounts receivable of $1,538,774.

This was offset by an increase in operating lease liabilities of $2,288,458 with the addition of our additional facilities and increase

in our accounts payable and accrued expenses of $479,259.

Investing Activities

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2024, representing an increase of $36,238,009.

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

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

This change in net cash used in investing activities is related to the $38,550,000 used

for short-term investments in other drone related companies during the year and $2,062,181 related to purchase of property and equipment

for our motor and headset factories which was offset by proceeds from the sale of short-term investments of $3,428,317.

Financing Activities

Net cash provided by financing activities totaled

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

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

The change relates to proceeds

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

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

$157,769,034 during the year ended December 31, 2025, compared to net cash provided by financing activities of $7,711,718 during the year

ended December 31, 2024, resulting in an increase in net cash provided by financing activities of $150,057,316.

The change relates to

proceeds received from multiple financings during 2025 including our confidentially marketed public offering of $40,000,000 in May 2025,

our registered direct offering of $48,500,000 in July 2025, and our at-the-market offering of $72,145,636 in October 2025.

$5,000,000 related to our IPO in 2024 and an additional $2,047,105 from a private placement in October 2024.

We also had $5,744,927 related

to cash proceeds received during 2025 for warrant exercises as compared to $1,523,700 during 2024.

This was all offset by fees related

to our financings of $9,268,101 in 2025 and $859,087 in 2024.

Liquidity and Capital Resources

As of December 31, 2025, we had current assets

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

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

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

totaling $159,511,482 primarily consisting of cash balances of $103,261,397, trading security investments of $39,214,909, accounts receivable

of $1,779,423, inventory of $5,316,648 and prepaid deposits for inventory of $9,748,483, and other current assets of $190,622.

liabilities as of December 31, 2025 totaled $2,601,347, primarily consisting of accounts payable and accrued expenses of $1,506,793, operating

lease liabilities of $456,429 and customer deposits of $638,125.

Our net working capital as of December 31, 2025 was $156,910,135.

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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

exercised their option to convert $3.0 million of the then outstanding Convertible Note into 1,507,538 shares of Common Stock at a price

of $1.99 per share.

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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.

exercise 684,000 warrants with cash and we issued 684,000 shares of our Common Stock for total cash proceeds of approximately $1.5 million.

On February 26, 2025, multiple investors exercised

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

received cash proceeds of $2,436,966.

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

million in cash.

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

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

We have based these estimates, however, on assumptions

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

additional funds sooner than we anticipate.

received cash proceeds of approximately $2.4 million.

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 net cash proceeds.

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.

We received net cash proceeds of approximately $44.9 million.

During the month of October 2025, we sold a total

of 4,666,600 shares of common stock at an average price of $15.46 per share under our Sales Agreement and after deducting fees and other

expenses, we received approximately $69.9 million in net cash proceeds.

On November 5, 2025, warrant holders exercised

640,000 warrants at $5.00 per warrant in connection with the May 2025 confidentially marketed public offering and the Company issued 640,000

shares of Common Stock.

The Company received cash proceeds of $3.2 million in relation to the exercise.

March 6, 2026, we have approximately $90 million in cash and $27 million in inventory and prepaid inventory.

that the net proceeds from our 2025 financings, warrant exercises, revenues, and existing cash balances will be sufficient to fund our

current operating plans through at least the next 12 months.

We have based these estimates, however, on assumptions that may prove to

be wrong, and we could spend our available financial resources much faster than we currently expect and need to raise additional funds

sooner than we anticipate.

Critical Accounting Policies and Estimates

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Business Combinations

The Fat Shark and Rotor Riot acquisitions are

accounted for as a business combination under ASC 805.

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

date of acquisition.

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

are subjective.

The Fat Shark, Rotor Riot, and Rotor Lab acquisitions

were accounted for as a business combination under ASC 805.

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

of the date of acquisition.

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

which are subjective.

The Rotor Lab acquisition included a contingent

consideration of up to $3.0 million based on the Company producing and recognizing revenue, dollar for dollar related to internally manufactured

motors during the first two years after the acquisition closing date.

The fair value of contingent consideration is determined using the

Monte-Carlo variable scenario model which values the liability at the measurement date using certain assumptions including the expected

revenue over the calculation period, a discount rate related to revenue projections, the risk-free interest rate over the earnout period

and certain estimates and probabilities of different outcomes.

Impairment of goodwill and long-lived assets

19 unchanged sentences

Revenue Recognition

We receive revenues from the sale of products

from both retail distributers and individual consumers.

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

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

Revenue is recognized when the

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

This is the date the

performance obligation has been met.

We receive revenues from the sale of drone and

drone parts from enterprise customers and distributers (enterprise revenue) and individual consumers (retail revenue).

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.

We have several short-term investments in other

publicly traded drone and drone related companies.

Since the investments are not part of the company’s primary business, the Investments

are valued under ASC 820 – Fair Value Measurement.

Common stock, preferred stock and warrants are both measured at Fair Value each

quarter, with changes recognized through net income each reporting period.

We value the fair value of preferred stock based on the conversion

calculation of preferred shares into common shares outlined in the certificate of designation into a common stock equivalent multiplied

by the quoted trading price of the common stock as of the close of market on the reporting period.

Due to the warrants being non-tradable,

we estimate fair value using a Black-Scholes model based on the current stock price, the exercise price of the warrant, the estimated

volatility of the stock, the risk-free interest rate, and the expected life of the warrant.

Stock Based Compensation

18 unchanged sentences

method calculation.

In addition, the Company issued shares of our

Common Stock in 2023 to consultants for services performed.

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

public market for our Common Stock.

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

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

as an estimate.

These values and estimates are subjective.

Derivatives and Fair Value

33 unchanged sentences

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

What changed 10-K

Item 7. Management’s Discussion and Analysis