What changed in this filing

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Item 8. Financial Statements and Supplementary Data

2026-03-12 compared with 2025-03-27 · 1072 added, 615 removed, 755 unchanged (69% of the section changed)

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Financial Statements

Report of Independent Registered

Public Accounting Firm (PCAOB Firm ID 106 )

Report of Independent Registered Public Accounting Firm (PCAOB Firm ID 106 )

Consolidated Balance Sheets at December 31, 2025 and 2024

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

Consolidated Statement of Operations

and comprehensive income (loss) for the years ended December 31, 2025 and 202 4

Consolidated Statement of Changes in Stockholders’ Equity for the years ended December 31, 2025 and 202 4

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Unusual Machines, Inc.

on the Financial Statements

Opinion on the Financial Statements

We have audited the accompanying consolidated

balance sheets of Unusual Machines, Inc.

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

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

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

In our opinion, the consolidated

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

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

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

and Subsidiaries (the “Company”) as of December 31, 2025 and 2024, the related consolidated

statements of operations and comprehensive income (loss), changes in stockholders’ equity, and cash flows, for each of the two years

in the period ended December 31, 2025, and the related notes (collectively referred to as the “consolidated financial statements”).

In our opinion, the consolidated financial statements present fairly, in all material respects, the consolidated financial position of

the Company as of December 31, 2025 and 2024, and the consolidated results of its operations and its cash flows for each of the two years

in the period ended December 31, 2025, in conformity with accounting principles generally accepted in the United States of America.

Basis for Opinion

These consolidated financial statements are the

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Accordingly, we express no such opinion.

Our audits included performing procedures to assess

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

Our audits included performing procedures to

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

that respond to those risks.

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consolidated financial statements.

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

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

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

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

We believe that our audits provide

a reasonable basis for our opinion.

Audit Matters

The critical audit matters communicated below

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

to the audit committee and that:

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

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

The communication of critical audit matters does not alter

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

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

2295 NW Corporate

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

995-8270 • Toll Free:

(866) CPA-8500 • Fax:

(561) 995-1920

www.salbergco.com

• info@salbergco.com

National Association of Certified Valuation Analysts • Registered with the PCAOB

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

Business Acquisitions

As described in footnote 3 “Acquisitions”,

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

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

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

discount and other rates, and equity values.

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

We identified business combinations as a critical

audit matter.

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

The primary procedures we performed to address

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

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

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

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

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

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

We agreed with management’s conclusions.

Goodwill and Intangible Assets Impairment Assessment

As described in footnote 2 “Goodwill and

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

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

The Company is also required to assess the recoverability

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

We identified Goodwill and Intangible Assets Impairment

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

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

The primary audit procedures we performed to address

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

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

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

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

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

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

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

used by evaluating each component.

We agreed with management’s conclusions.

/s/ Salberg & Company, P.A.

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Unusual Machines, Inc.

Balance Sheets

Consolidated Balance

Current assets:

Cash & cash equivalents

Cash and cash equivalents

Short-term investments

Accounts receivable

Related party accounts receivable

Prepaid inventory

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Property and equipment, net

Deferred offering costs

Operating lease right-of-use assets

Operating lease right-of-use assets, net

Intangible assets, net

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Operating lease liability – long term

Contingent consideration

Total liabilities

Commitments and contingencies (Note 15)

Stockholders’ equity:

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

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

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

Common stock - $ 0.01 par value, 500,000,000 authorized and 37,759,911 and 15,122,018 shares issued and outstanding at December 31, 2025 and 2024, respectively

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Accumulated deficit

( 35,913,514 )

( 3,933,046 )

Accumulated other comprehensive income

Total stockholders’ equity

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Unusual Machines, Inc.

Statements of Operations

Statements of Operations and Comprehensive Income (Loss)

Year Ended December 31,

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( 16,146,205 )

Unrealized gain from short-term investments

Realized gain from short-term investments

Gain (Loss) from foreign currency transactions

Total other income (expense)

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( 31,993,828 )

Income tax benefit (expense)

Income tax benefit

$ ( 19,193,617 )

$ ( 31,980,468 )

Net loss per share attributable to common stockholders

Comprehensive Income (Loss):

$ ( 19,193,617 )

$ ( 31,980,468 )

Other comprehensive income (loss):

Gain from foreign currency translation

Comprehensive loss

$ ( 19,190,147 )

$ ( 31,980,468 )

Net loss per share

Basic and diluted

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Unusual Machines, Inc.

Statements of Changes in Stockholders’

Statements of Changes in Stockholders’ Equity

For the Years Ended December 31, 2025 and 2024

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$ ( 3,933,046 ) –

Issuance of common shares for services

Conversion to preferred shares

( 2,383,462 )

Balance, December 31, 2023

$ ( 3,933,046 )

Issuance of common shares as settlement

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$ ( 35,913,514 ) –

Series A, Preferred Stock

Series B, Preferred Stock

Series C, Preferred Stock

Additional Paid-In

Accumulated Other Comprehensive

Total Stockholders’

Balance, December 31, 2024

$ ( 35,913,514 )

Issuance of common shares, Management/BOD

Issuance of common shares, option exercises

Issuance of common shares, consulting services

Issuance of common shares, advisory board

Issuance of common shares for exercise of warrants

Issuance of common shares, confidentially marketed public offering

Issuance of common shares, registered direct offering

Issuance of common shares, at-the-market, net of offering costs

Issuance of common shares, Rotor Lab acquisition

Stock compensation expense

Stock compensation expense - vested stock

( 19,193,617 )

Foreign currency translation gain

Balance, December 31, 2025

$ 229,665,734

$ ( 55,107,131 )

$ 174,939,669

See accompanying independent auditor’s report

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Stock compensation expense

Unrealized gain on short-term investments

( 2,469,908 )

Realized gain on sale of short-term investments

( 1,623,317 )

Loss on impairment on goodwill

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( 1,281,880 )

Credit loss provision

Income tax benefit

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Accounts receivable

( 1,598,551 )

( 3,944,257 )

Prepaid inventory

( 8,843,755 )

Right of use asset

( 2,353,311 )

Accounts payable and accrued expenses

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

Cash paid for short-term investments

( 38,550,000 )

Proceeds from sale of short-term investments

Purchases of property and equipment

( 2,062,181 )

Net cash used in investing activities

( 37,090,810 )

Cash flows from financing activities:

Proceeds from issuance of common shares, IPO

Proceeds from issuance of common shares, public offering

Proceeds from issuance of common shares, registered direct offering

Proceeds from issuance of common shares, at the market

Proceeds from option exercises

Proceeds from issuance of common shares, private placement

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Common share issuance offering costs

( 9,268,101 )

Net cash provided by (used in) financing activities

Net increase (decrease) in cash

( 2,204,649 )

Effect of exchange rate changes on cash

Cash, beginning of year

Cash, end of year

$ 103,261,397

Supplemental disclosures of cash flow information:

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Unusual Machines, Inc.

Notes to Financial Statements

Consolidated Notes to

Financial Statements

For the Years Ended December 31, 2025 and 2024

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(“Red Cat”) (See

On September 3, 2025, the Company acquired Rotor

Ltd., an Australian company (“Rotor Lab).

See Note 3 for additional information.

Note 2 – Summary of significant accounting policies

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The consolidated financial statements include

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

transactions and balances have been eliminated upon consolidation.

accounts of the Company and its wholly owned subsidiaries including UMAC IP Holdings Corp., Fat Shark and Rotor Riot since acquired on

February 16, 2024 and Rotor Lab since acquired on September 3, 2025.

Intercompany transactions and balances have been eliminated upon

consolidation.

Use of Estimates

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

The financial statements include some

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

Significant estimates reflected in these financial statements

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

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

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

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

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

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

to its operations and acquisitions.

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

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

$ 2,320,206 .

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

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

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

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

enterprise business.

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

in cash proceeds from warrant exercises.

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

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

financial statements include some amounts that are based on management's best estimates and judgments.

Significant estimates reflected

in these consolidated financial statements include those used to (i) determine stock-based compensation, (ii) the fair value of assets

acquired and liabilities assumed in business combinations, the fair value of shares issued as consideration and the fair value of contingent

consideration in business combinations, (iii) reserves and allowances related to accounts receivable, and inventory, (iv) the evaluation

of long-lived assets, including intangibles and goodwill, for impairment, (v) the fair value of lease liabilities and related right of

use assets, (vi) the fair value of short-term investments including the value of unexercised warrants received, (vi) the warranty liability

and sales returns reserves, (vii) the fair value of embedded conversion option and warrant derivative liabilities and (viii) the deferred tax asset valuation

Cash and Cash Equivalents

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with which it invests.

Accounts Receivable

Accounts Receivable, net

The Company carries its accounts receivable at

invoiced amounts.

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

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

On a periodic

basis, the Company evaluates its accounts receivable and establishes an allowance for credit losses based on a history of past write-offs

and collections and current credit conditions.

The Company follows ASC 326, Financial Instruments – Credit Losses and has early adopted in fiscal year

2025, ASU 2025-05, under which the Company evaluates all credit losses as of the reporting date.

On a periodic basis, the Company

evaluates its accounts receivable and establishes an allowance for credit losses based on a history of past write-offs and

collections and current credit conditions.

Accounts are written-off as uncollectible at the discretion of management.

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

accordingly, no allowance for credit

losses has been established.

Inventories, which consist of finished goods,

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

Cost components include

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

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

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

and obsolescence.

Deferred offering costs

The Company previously deferred direct

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

The Company capitalized $ 424,933 during

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

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

and preparation of the IPO.

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

additional offering costs of $ 127,687 were

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

31, 2025 and 2024, the Company considers accounts receivable to be fully collectible;

accordingly, no allowance for credit losses

has been established.

The Company had total credit losses of $ 18,122

for the years ended December 31, 2025 and 2024, respectively.

Short-Term Equity Investments

The Company measures

its investments in marketable equity securities, preferred stock, and non-public warrants at fair value with changes in value recognized

in net income (loss) per ASC 321.

During the year ended December 31, 2025, the Company made multiple short-term investments totaling

$ 38.6 million.

For the year ended December 31, 2025 the realized gain from short-term investments was approximately $ 1.6 million and

unrealized gain from short-term investments was approximately $ 2.5 million.

The Company holds less than a 5% equity interest in each

of the companies it invested in as of December 31, 2025.

Inventories, which consist of finished goods and

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

Cost components

include direct materials, direct labor, an allocation of rent expense and depreciation for manufactured products, as well as in-bound

At each balance sheet date, the Company evaluates the net realizable value of its inventory using various reference measures

including current product selling prices, as well as evaluating for excess quantities and obsolescence.

Property and equipment, net

Property and equipment is stated at cost, net

of accumulated depreciation.

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

of three years .

The Company has adopted Accounting Standards

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

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

Property and equipment is stated at cost, net of accumulated

depreciation.

Depreciation is provided utilizing the straight-line method over the estimated useful lives which includes computer equipment

of three to five years , motor production equipment of ten to fifteen years and tenant improvements of five to fifteen years.

The Company applies Accounting Standards Codification

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

recognized a lease liability obligation and a right-of-use asset for the facilities leases in Orlando, FL and for the Canberra Australia

related to the Rotor Lab acquisition as discussed in Note 3.

The Company determines if a contract is a lease

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Business Combinations

The Company accounts for business combinations under ASC 805 using

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

The Company accounts for business combinations under

ASC 805 using the acquisition method of accounting where the assets acquired and liabilities assumed are recognized based on their respective

estimated fair values.

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

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

and assumptions used in valuations and estimates determined by management.

Business acquisitions are included in the Company’s consolidated

financial statements as of the date of the acquisition.

Determining the fair value of certain acquired assets and liabilities and certain purchase price components is subjective in nature and

often involves the use of significant estimates and assumptions used in valuations and estimates determined by management.

Business acquisitions

are included in the Company’s consolidated financial statements as of the date of the acquisition.

Goodwill and Long-lived Assets

Goodwill represents the future economic

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

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

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

changes in circumstances indicate that goodwill might be impaired.

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

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

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

If, after assessing the totality of events or

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

amount, then additional impairment testing is not required.

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

perform an impairment test.

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

including goodwill.

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

If, however, the fair

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

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

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

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

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

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

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

to estimate the fair value of a reporting unit.

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

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

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

the selected discount rate).

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

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

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

traded companies or historically completed transactions of comparable businesses.

The selection of comparable businesses is based on the

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

The Company reviews long-lived assets, including

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

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

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

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

Goodwill represents the future economic benefit

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

The Company tests

goodwill for impairment in accordance with the provisions of ASC 350, Intangibles – Goodwill and Other, (“ASC 350”).

Goodwill is tested for impairment at least annually at the reporting unit level or whenever events or changes in circumstances indicate

that goodwill might be impaired.

ASC 350 provides that an entity has the option to first assess qualitative factors to determine whether

the existence of events or circumstances leads to a determination that it is more likely than not that the fair value of a reporting unit

is less than its carrying amount.

If, after assessing the totality of events or circumstances, an entity determines it is not more likely

than not that the fair value of a reporting unit is less than its carrying amount, then additional impairment testing is not required.

However, if an entity concludes otherwise, then it is required to perform an impairment test.

The impairment test involves comparing the

estimated fair value of a reporting unit with its book value, including goodwill.

If the estimated fair value exceeds book value, goodwill

is considered not to be impaired.

If, however, the fair value of the reporting unit is less than book value, then an impairment loss is

recognized in an amount equal to the amount that the book value of the reporting unit exceeds its fair value, not to exceed the total

amount of goodwill allocated to the reporting unit.

The Company recorded an impairment loss on goodwill of $ 10,073,326 in 2024 based on

the Company’s future net cash flows from the acquisitions.

No impairment loss on goodwill was recognized in 2025.

The estimate of fair value of a reporting unit

is computed using either an income approach, a market approach, or a combination of both.

Under the income approach, we utilize the discounted

cash flow method to estimate the fair value of a reporting unit.

Significant assumptions inherent in estimating the fair values include

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

and a rate used to discount estimated future cash flow projections to their present value based on estimated weighted average cost of

capital (i.e., the selected discount rate).

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

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

Under the market approach, fair value is derived from metrics

of publicly traded companies or historically completed transactions of comparable businesses.

The selection of comparable businesses is

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

The Company reviews long-lived assets, including tangible

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

asset’s carrying amount may not be recoverable.

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

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

ASC 360 requires the Company to group assets and liabilities

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the intangible assets.

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

The Company has indefinite-lived trademark assets

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

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

If based on this assessment, management

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

However, if performing a qualitative

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

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

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

Recoverability is measured by a comparison of the carrying amount

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

No impairment charges were recorded by the Company as of December 31, 2025 and 2024.

The Company has certain indefinite-lived trademark

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

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

If based on this assessment,

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

However, if performing

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

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

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

Recoverability is measured by a comparison of the carrying

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

If such assets are determined to be impaired,

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

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

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

year revenue growth rate.

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

Fair Values, Inputs and Valuation Techniques for Financial Assets

and Liabilities, and Related Disclosures

The fair value measurements and disclosure guidance

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

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

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

Company performed only a qualitative analysis for 2025.

The Company performed a qualitative and quantitative analysis for 2024.

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

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

rate for the quantitative analysis for 2024.

The Company did not record an impairment as of December 31, 2025 and 2024,related to the

indefinite-lived assets.

Fair Value Measurements, Fair Value of Financial Instruments

and Short-Term Investments

The fair value measurements and disclosure

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

Fair value is defined as the price that would be received

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

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

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The following table details the fair value measurements

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

Schedule of fair value measurements of financial liabilities

of the Company’s financial assets and liabilities as of December 31, 2025 and 2024:

Schedule of financial assets and liabilities

Short term investments – assets:

Preferred stock

Total short-term investments – assets

Contingent consideration from Rotor Lab acquisition

Warrant liabilities

Derivative liability – convertible note conversion option

The Company calculated the fair value for

common stock for short-term investments based on the quoted trading price as of the close of the market multiplied by the total

shares held by the Company as of December 31, 2025.

The fair value for preferred stock for short-term investments is 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 December 31, 2025.

The fair value

of the non-public warrants investment in 2025 was determined using a Black-Scholes pricing model which values the warrants based on

the stock price at the valuation date, the expected life of the warrant, the estimated volatility of the stock of the investee, and the risk-free interest rate over the expected life of the warrant.

The Company used the following inputs

related to the warrant fair value as of the investment acquisition date and December 31, 2025:

Schedule of assumptions used

Supplemental Information

Non-public Warrants

Expected life of the warrants (years)

$ 3.78 - 4.16

Warrant strike price

Risk free interest rate

3.475 – 4.30%

124.16 - 146.22%

The contingent consideration from the Rotor Lab

acquisition is based on managements estimate of $ 2,847,000 , which is based on 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 applied to revenue projections, the risk-free interest rate over the earnout

period and certain estimates and probabilities of different outcomes.

See Note 3 for additional information.

Changes in Level 3 financial instruments are

Schedule of level 3 financial instruments

Issuances and

Non-public warrants investment

Contingent consideration from Rotor Lab acquisition

Issuances and

Warrant liabilities

Derivative liability – Convertible note

Balance, December 31, 2023

Changes in Fair Value

( 16,155,976 )

$ ( 16,146,205 )

Balance, December 31, 2024

The Company's financial instruments mainly consist

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

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

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

The Company's financial instruments mainly

consist of cash, receivables, short-term investments, other current assets, accounts payable, and accrued expenses.

The carrying amounts

of cash, receivables, other current assets, accounts payable, and accrued expenses approximate fair value due to the short-term nature

of these instruments.

Our short-term investments consisted of the following

as of December 31, 2025:

Schedule of cash and short-term investments

Gross Unrealized Gains (Losses)

Short-term investments

Accrued Warranty

Fat Shark products are warranted against defects

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

If a defect arises during the warranty period, Fat Shark

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

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

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

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

The determination of such allowances requires

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

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

Fat Shark generally provides a one-year

warranty on all of its products, except in certain European countries where it can be two years for some consumer-focused products

from the date of shipment.

If a defect arises during the warranty period, Fat Shark will either (i) repair the affected product at

no charge using new parts or parts that are equivalent to new in performance and reliability;

(ii) exchange the affected product

with a functionally equivalent product;

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

Allowances for

estimated warranty costs are recorded during the period of sale.

The determination of such allowances requires the Company to make

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

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

based on the prior 24 months’ sales activities.

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

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

the warranty accrual and the expense amounts have been immaterial.

The warranty liability is included in accrued expenses on the accompanying

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

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

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

Historically the warranty accrual and the expense amounts have been immaterial.

The warranty liability is included in

accrued expenses on the accompanying consolidated balance sheets and amounted to $ 19,602

and $ 28,944 as of December 31, 2025 and

December 31, 2024, respectively.

Rotor Riot does not provide any warranty of any

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Consumers assume all risk for any products purchased or received from

Rotor Lab does not provide any warranty, but does provide for a seven

day defect period.

Rotor Lab has not had any material defects for products sold.

Effective September 2025, Unusual Machines, the

parent company which manufactures motors, has a limited warranty in which it warrants to customers that their products will be free from

defects in material and workmanship under normal use and service for up to 90 days.

The limited warranty covers manufacturing defects

and premature failures and extends only to the original customer and is non-transferrable.

The Company did not have any warranty claims

as of December 31, 2025.

Revenue Recognition

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satisfies a performance obligation at a point in time.

The Company receives revenues from the sale of

products from both retail distributers and individual consumers.

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

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

Revenue is recognized

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

The Company receives revenues from the sale

of drone and drone parts to enterprise customers and distributors (“Enterprise Revenue”) and individual consumers

(“Retail Revenue”).

Sales revenue is recognized at a point in time when the products are shipped and the price is fixed

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

Revenue is recognized when

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

date the performance obligation has been met.

The Company’s retail return policy allows for certain non-custom or

built-to-order products to be returned up to 15 days after the original order is placed so long as it meets specific requirements as

outlined in its return policy.

The Company’s enterprise return policy allows for returns related to defective product so long

as it meets the requirements in its policy.

The historical sales returns for retail customers is de minimis and the Company does not

have a specific sales return allowance for retail orders.

The Company does not have any historical returns for enterprise orders and

as such has not recorded a sales returns allowance.

Disaggregation of Revenue

The following table presents the Company’s

revenue disaggregated by revenue type for the years ended:

Schedule of disaggregated by revenue

Retail Revenue

Enterprise Revenue

Total revenue

The Company had sales outside the United States

of approximately $ 0.6 million and $ 0.4 million for the years ended December 31, 2025 and 2024, respectively.

Deferred Revenue

Deferred revenue relates to orders placed and payment received, but

not yet fulfilled.

Deferred revenue relates to

orders placed and payment received, but not yet fulfilled.

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

Deferred revenue related

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

revenue related to orders placed, but not yet fulfilled totaled $ 638,125 and $ 197,117 as of December 31, 2025 and December 31, 2024,

respectively.

The Company did not have any deferred revenue as of December 31, 2023.

The Company has recognized $ 197,117 of deferred

revenue during 2025 that was outstanding as of December 31, 2024 during the year ended December 31, 2025.

The increase in deferred revenue

relates to current year orders that have not yet been fulfilled, most of which were received during the third and fourth quarter of 2025

and expected to be delivered in the first and second quarter of 2026.

Significant Concentrations

The Company’s revenue included significant

concentration from a limited number of customers.

For the year ended December 31, 2025, Customer A and Customer B accounted for approximately

16.7 % and 15.9 % of the Company’s total revenues, respectively.

Customer A did no t have any outstanding accounts receivable as of

December 31, 2025, and Customer B had approximately 62.6 % of the total accounts receivable balance as of December 31, 2025.

All of Customer

B’s accounts receivable has been collected in 2026.

Cost of Goods Sold

Cost of goods sold includes inventory costs, direct

Cost of goods sold includes inventory costs which includes an allocation for labor and rent for our manufactured products, direct

packaging costs and production related depreciation, if any.

Depreciation included in cost of goods sold for the years ended December

31, 2025 and 2024 was $ 18,916 and $ 0 , respectively.

Shipping and Handling Costs

Shipping and handling costs incurred for products

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

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

Shipping and handling costs charged to customers

are included in sales.

shipped to customers are included in general and administrative expenses and amounted to $ 377,827 and $ 226,621 for the years ended December

31, 2025 and December 31, 2024, respectively.

Shipping and handling costs charged to customers are included in sales.

Research and Development

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

Foreign Currency

The Company’s wholly owned subsidiary’s

functional currency is the Australia dollar (AUD).

For financial reporting purposes, the Australia dollar has been translated into the

Company’s reporting currency, which is the United States dollar (USD).

Assets and liabilities are translated at the exchange rate

in effect at the balance sheet date.

Revenue and expenses are translated at the average rate of exchange prevailing during the reporting

Equity transactions are translated at each historical transaction date

Translation adjustments arising from the use of different exchange rates from period to period are included as a component

of stockholders’ equity (deficit) as “Accumulated other comprehensive income (loss).” Gains and losses resulting from

foreign currency translations are included in the statement of operations and comprehensive income (loss) as a component of other comprehensive

income (loss).

There have no significant fluctuations in the exchange rate for the conversion of Australian dollars to USD after the balance

Transaction gains and losses from transactions denominated in a foreign currency are recognized in other income (expense)

in the statement of operations.

Changes in the cumulative translation adjustments were as follows:

Schedule of cumulative translation adjustments

Balance as of December 31, 2024

Foreign currency translation adjustment related to Rotor Lab

Balance as of December 31, 2025

Net Loss per Share

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

statements of operations.

statements of operations and is provided with consolidated assets and liabilities consistent

with those presented in the consolidated balance sheets.

Recent Accounting Pronouncements

In December 2023, new accounting guidance was

issued related to income tax disclosures.

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

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

The new guidance is effective on a prospective basis for

annual periods beginning after December 15, 2024.

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

issued or made available for issuance.

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

In November 2024, the FASB issued ASU No.

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

In May 2025, the FASB issued ASU No.

2025-4, “Compensation – Stock Compensation and Revenue

From Contracts With Customers” which provides clarifications to share-based consideration payable to a customer.

The standard is

effective for annual reporting periods beginning after December 15, 2026.

The Company is currently evaluating the effect of this ASU

on the consolidated financial statements and disclosures.

Note 3 – Acquisitions

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Fat Shark and Rotor Riot

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

Rotor Riot is also a

licensed authorized reseller of consumer drones manufactured by third parties.

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

Rotor Riot is also

a licensed authorized reseller of consumer drones manufactured by third parties.

The Company specializes in the production and

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customers that require a domestic supply chain.

The Business Combination was based on a

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

From November 21, 2022 to

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

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

million in cash and a cash deposit of $ 0.1

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

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

(iii) the issuance of 4,250,000

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

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

The Company valued the

Red Cat common stock at $ 4.00

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

Accordingly, the

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

The Business Combination was based on a share

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

From November 21, 2022 to February 16,

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

Under the terms of

the Purchase Agreement, as amended, the consideration paid for the acquired assets consisted of (i) $ 1 .0 million in cash and a cash deposit

of $ 0.1 million made in 2022, (ii) issuance of a $ 4 .0 million 18 month promissory note to Red Cat (see Note 9 “Promissory and Convertible

Notes” for further details), and (iii) the issuance of 4,250,000 shares of the Company’s common stock, which represented approximately

48.66% of the outstanding common stock of the Company on February 16, 2024, after the effect of the issued shares (collectively the “Consideration

The Company valued the Red Cat common stock at $4.00 per share for $ 17,000,000 which represents the IPO price of the Company’s

common stock on February 15, 2024.

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

The acquisitions met the definition of a business

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Rotor Riot Purchase Price:

Schedule of fair value allocation

Schedule of purchase fair value allocation

Accounts receivable (approximates contractual value)

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Total purchase price

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

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

On December 31, 2024, the Company recorded a measurement

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

Goodwill and intangible assets relate to Fat Shark

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will provide a strategic advantage.

The results of Fat Shark and Rotor Riot have

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

The table below presents the

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

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

The unaudited pro forma results are not necessarily indicative

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

The acquisitions were treated as stock acquisitions for U.S.

income tax purposes, and no election was made to treat the transactions

as asset acquisitions.

Accordingly, the tax bases of the acquired assets and liabilities carried over, and the goodwill recorded for

financial reporting purposes is not deductible for income tax purposes.

Deferred tax liabilities were recorded for book-tax differences

related primarily to intangible assets recognized in purchase accounting.

Goodwill for tax purposes will be amortized over 15 years.

The results of

Fat Shark and Rotor Riot have been included in the Consolidated Financial Statements from the date of acquisition of February 16, 2024.

The table below presents the results as reported by the Company and unaudited pro forma results of the Company, assuming that the acquisition

of Fat Shark and Rotor Riot occurred at the beginning of the year ended 2024 are as follows.

The unaudited pro forma results are not

necessarily indicative of what actually would have occurred had the acquisitions been in effect for the periods presented (in thousands,

except per share data):

Schedule of unaudited pro forma results

For the Year Ended

December 31, 2024

Gross profit/(loss)

Loss from operations

Other expense and income taxes

Net earnings per share:

This unaudited consolidated pro forma financial information

is presented for informational purposes only.

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

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

In addition, the unaudited pro forma

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

The unaudited pro forma financial information from the beginning of the

periods presented until the acquisition date includes adjustments to:

1) eliminate intercompany revenue and associated cost of sales for

sales of product from Fat Shark to Rotor Riot, 2) to adjust fair value for certain Fat Shark inventory as if the acquisition had occurred

as of the beginning of the respective periods and 3) to include acquisition related expenses in the Q1 ’23 that were incurred in

On September 3, 2025, the Company closed on the

acquisition of Rotor Lab.

Rotor Lab is an Australian developer and manufacturer of electric motors and propulsion systems for unmanned

aerial systems (“UAS”).

Its product line includes precision-wound electric motors across multiple classes, from sub-400W units

for small UAS to high-power motors supporting large rotary and fixed wing platforms.

In addition to the motor production facility in Australia, the Company built out a motor production facility in Orlando, FL

and started producing motors for drones in the fourth quarter of 2025.

The Company and Rotor Lab have been working together prior to

the acquisition on co-developing several motor designs and sizes.

The acquisition helps the Company accelerate their goals of building

a resilient drone supply chain through their team and technology.

In addition, Rotor Lab will continue to serve as the engineering center

for the Company’s motor design, prototyping, and low to medium volume production of orders.

The Business Combination was based on a share purchase

agreement (the “Rotor Lab Purchase Agreement”) that was executed on June 12, 2025, subject to customary closing conditions

and was completed on September 3, 2025.

Under the terms of the Rotor Lab Purchase Agreement, the consideration paid for the acquired assets

consisted of (i) the issuance of common stock for a value of $ 4 .0 million based on the preceding 20 day average Volume Weighted Average

Price (“VWAP”) of the Company’s stock from the date of the signing the Rotor Lab Purchase Agreement in June 2025, and

(ii) the issuance of common stock (“Contingent Shares”) for up to a total value of an additional $ 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 Contingent Shares will be calculated and issued based on the Company’s VWAP for the preceding

20 days on each anniversary date of the closing of the transaction.

The acquisition met the definition of a business combination under ASC 805, Business Combinations, and therefore

the assets acquired, and liabilities assumed are accounted for at fair value.

The Company issued 656,642 shares of its common stock based

on the formula as noted above, which resulted in an initial purchase price of $ 5,922,911 based on the Company’s stock price of

$ 9.02 on September 3, 2025, which was the closing date of the acquisition.

The contingent purchase price has been initially recorded

at $ 2,847,000 .

The fair value of contingent consideration was 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

applied to revenue projections, the risk-free interest rate over the earnout period and certain estimates and probabilities of different

Such fair value amounts are subject to adjustment

during the one-year measurement period.

The following represents the fair value allocation of Rotor Lab Purchase

Schedule of purchase fair value allocation

Accounts receivable

Prepaid expenses

Property and equipment

Right of use asset – operating

Other current assets

Customer Relationships

Non-Compete Agreements

Accounts payable and accrued liabilities

Deferred revenue

Deferred tax liability

Operating lease liability – current and long-term

Total liabilities

Initial consideration

Contingent consideration

Total purchase price

On September 3, 2025, the Company acquired 100 %

of the issued shares of Rotor Lab.

federal income tax purposes, the acquisition is treated as a stock purchase.

The Company did

not make an election under Section 338 of the Internal Revenue Code.

As a result, the tax bases of Rotor Lab’s assets and liabilities

carry over from their historical amounts, and no step-up in tax basis was recorded for U.S.

tax purposes.

Goodwill for tax purposes will

be amortized over 15 years.

The results of Rotor Lab have been included in

the Consolidated Financial Statements from the date of acquisition.

Revenue was $ 183,481 and net loss was $ 80,581 from the date of acquisition

through December 31, 2025 in the consolidated statement of operations.

The table below presents the results as reported by the Company

and unaudited pro forma results of the Company, assuming that the acquisition of Rotor Lab occurred at the beginning of each period.

The unaudited pro forma results are not necessarily indicative of what actually would have occurred had the acquisition been in effect

for the periods presented (in thousands, except per share data):

Schedule of unaudited pro forma results

For the Year Ended

December 31, 2025

2 unchanged sentences

Loss from operations

Other expense and income taxes

Other expense

Net earnings per share:

This unaudited consolidated pro forma financial

The unaudited consolidated pro forma financial

information is presented for informational purposes only.

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

The unaudited pro forma financial information

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

1) eliminate intercompany revenue and

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

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

’23 that were incurred in Q1 ’24.

Note 4 – Inventories

Inventories, consisting solely of finished goods,

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

In addition, the Company had prepaid deposits for inventory

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

Inventories, which consist solely of raw materials

and finished goods was as follows as of December 31, 2025 and December 31, 2024, respectively.

Schedule of inventories

Raw materials

Finished goods

Total inventory

In addition, the Company had prepaid deposits for inventory totaling

$ 9,748,483 and $ 904,728 as of December 31, 2025 and December 31, 2024, respectively.

Note 5 – Other Assets

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December 31, 2024

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

Prepaid insurance

Prepaid benefits

Total other current assets

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

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

The Company did not have any non-current other assets

as of December 31, 2023.

Non-current other assets include rent security deposits of $ 197,785

related to the operating leases for the Orlando, FL facilities and the Rotor Lab facility in Australia as of December 31, 2025.

Note 6 – Property and Equipment, net

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Schedule of property and equipment

December 31, 2024

December 31, 2023

Computer equipment

Motor production equipment

Tenant improvements

Total Property and Equipment

Accumulated depreciation

Total property and equipment, net

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

31, 2024 and 2023, respectively.

Depreciation expense totaled $ 27,548 and $ 684 for the year ended

December 31, 2025 and 2024, respectively.

A total of $ 18,916 and $ 0 of depreciation expense was recorded to cost of goods sold in related

to the production of motors for the years ended December 31, 2025 and 2024, respectively.

The Company has open commitments of approximately

$ 2.63 million related to the purchase of motor production equipment and $ 0.9 million related to tenant improvements.

These assets are

expected to be placed into service during the second quarter of 2026.

Note 7 – Operating Leases

Company has assumed in the business combination a five-year

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

The lease commenced in

November 2023 and expires in October 2028 .

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

2024, at $ 378,430 .

The Company has assumed in the February 2024 business

combination of Rotor Riot, a five-year operating lease for approximately 6,900 square feet of warehouse and office space in Orlando, Florida.

The lease commenced in November 2023 and expires in October 2028.

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

February 16, 2024, at $ 378,430 .

Operating lease expense totaled $ 105,145 and $ 92,002 , respectively for the years ended December 31, 2025

In June 2025, Unusual Machines signed a lease

agreement for an additional 17,000 square feet of warehouse/office space in Orlando, FL.

This space will be used primarily for motor production.

The lease commencement date is August 1, 2025 and currently runs through August 21, 2030.

The Company has valued the ROUA and the associated

liability, as of August 1, 2025, at $ 973,443 .

Operating lease expense totaled $ 105,719 and $ 0 , respectively for the years ended December

31, 2025 and 2024.

In October 2025, Unusual Machines signed a lease

agreement for an additional 25,000 square feet of warehouse/office space in Orlando, FL.

This space will be used primarily for order fulfillment

and inventory storage.

The lease commencement date is December 1, 2025 and currently runs through December 31, 2030.

The Company has valued

the ROUA and the associated liability, as of December 1, 2025, at $ 1,430,522 .

Operating lease expense totaled $ 31,071 and $ 0 , respectively

for the years ended December 31, 2025 and 2024.

The Company has assumed in the acquisition of

Rotor Lab on September 3, 2025, a three-year operating lease of warehouse and office space in Canberra, Australia.

The leased commenced

in May 2024 and expires in April 2027.

The Company has valued the ROUA and the associated liability, as of September 3, 2025, at $ 58,524 .

Operating lease expense totaled $ 10,527 and $ 0 , respectively for the years ended December 31, 2025 and 2024.

The Company has no finance leases.

Operating lease expense totaled $ 92,002

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

The following is a summary of the operating lease

right-of-use asset and liability:

The following is a summary of the operating lease right-of-use assets and

liabilities at December 31, 2025 and December 31, 2024:

Schedule of operating lease right-of-use

FL Operating Lease

Operating lease right-of-use assets

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The following is a summary of future lease payments

required under the five-year lease agreement:

required under the lease agreement:

Schedule of future lease payments

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Operating Lease

$ ( 791,908 )

Schedule of supplemental information

2 unchanged sentences

Weighted average discount rate

8 – Goodwill and Intangible Assets

Note 8 – Goodwill and Intangible Assets

Changes in the carrying amount of goodwill were as follows:

Schedule of goodwill

Schedule of carrying amount of goodwill

Goodwill as of December 31, 2023

3 unchanged sentences

Goodwill as of December 31, 2024

Rotor Lab acquisitions

Goodwill as of December 31, 2025

Accumulated impairment losses as of December 31, 2025 were $ 10,073,326 .

No impairment loss was recognized during the year ending December 31, 2025.

Intangible Assets

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Accumulated Amortization

Patents/IP – Fat Shark

Trademark – Rotor Riot

Indefinite-lived

Trade name – Rotor Lab

Customer relationships – Rotor Lab

Non-Compete Agreements – Rotor Lab

Total intangible assets, net

Patents and intellectual property relate to the

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

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

Accumulated Amortization

Indefinite-lived

Total intangible assets, net

Patents and intellectual property relate to the patents

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

Patents are amortized over 10 years.

Trademarks relate

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

The Company did no t have any intangible assets

as of December 31, 2023.

Trademarks relate to

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

Trade name for Rotor Lab is amortized over 5 years,

customer relationships are amortized over 7 years and non-compete agreements are amortized over 2 years.

Amortization expense for the year ended December

31, 2025 and 2024 was $ 132,635 and $ 71,477 , respectively.

Note 9 – Promissory and Convertible Notes

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During the third quarter 2024, the Company recognized

a loss on debt extinguishment of $ 685,151

related to the exchange agreement discussed above.

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

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

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

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

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

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

In December 2024, the Investors exercised

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

August Notes to Common Stock at a fixed $ 1.99 conversion

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

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

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

This value is based on

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

This resulted in a loss on debt

extinguishment of $ 14,864,325 .

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

(see Note 10).

The net gain was $ 1,639,598 .

a loss on debt extinguishment of $ 685,151 related to the exchange agreement discussed above.

The loss on extinguishment related to the

August Notes included $ 315,303 fair value related to the warrant liability issued, $ 347,947 fair value related to the optional conversion

feature derivative liability of the remaining principal balance, and $ 21,901 cash fees paid for legal costs related to the August Notes.

The Company used the binomial option pricing method for calculating the derivative fair value related to the warrants and optional conversion

feature (see Note 10 – Derivative Liabilities).

In December 2024, the Investors exercised their

conversion option to convert the remaining $ 3,000,000 in August Notes to Common Stock at a fixed $ 1.99 conversion price.

the Company issued 1,507,538 shares of common stock, cancelled the $3,000,000 in August Notes, and recorded $ 17,864,325 to common stock

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

This value is based on the closing price

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

This resulted in a loss on debt extinguishment of $ 14,864,325 .

The settlement of the related conversion option derivative resulted in a gain on extinguishment of $ 16,503,923 (see Note 10).

gain was $ 1,639,598 .

A reconciliation of the net gain on debt extinguishment

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Net gain on debt extinguishment

Total interest expense for the year ended December

31, 2024 was $ 116,981 .

Total interest expense for the years ended December

31, 2025 and December 31, 2024 was $ 0 and $ 116,981 , respectively.

Note 10 – Derivative Liabilities

The fair value of the derivative liabilities are

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

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

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

The fair value of the derivative liabilities

are determined using the binomial option pricing model which values the liability on the stock price at the grant date, the estimated

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

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

Derivative liability – conversion option

In August 2024 and in conjunction with the

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

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

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

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

The initial fair value on August 21, 2024 for the

Conversion Derivative was $ 347,947 .

In August 2024 and in conjunction with the issuance

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

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

to the host contract and the embedded debt conversion feature meets the definition of a liability due to a potential variable amount of

shares that may be issued upon conversion.

The initial fair value on August 21, 2024 for the Conversion Derivative was $ 347,947 .

On December 3, 2024, the holders of the Convertible

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

of the convertible note into 1,507,538

shares of common stock.

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

of $ 16,155,976 .

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

Note exercised their conversion option to convert the remaining $ 3,000,000 of the convertible note into 1,507,538 shares of common stock.

As a result, the Company recorded an increase in fair value of the derivative liability conversion option of $ 16,155,976 .

The Conversion

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

Warrant Liability

In August 2024 and in conjunction with the

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

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

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

The initial fair value on

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

In August 2024 and in conjunction with the issuance

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

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

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

The initial fair value on August 21, 2024

for the Warrant Liability was $ 315,303 .

On December 3, 2024, the warrant holders exercised

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

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

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

related to the warrants.

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

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

630,000 warrants (which is included in the 684,000 of total warrant exercises as noted in Note 11) at $ 1.99 per shares related to the

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

The Company recognized a decrease in the fair

value of the warrant liability of $ 9,771 .

The warrant liability fair value as of December 31, 2024 was $0 since the warrants were exercised

and are no longer outstanding.

The assumptions used related to the fair value

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

Schedule of fair value

of the derivative liability

Significant Assumptions

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Earnings per Share

Outstanding securities not included in the

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

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

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

warrants issued related to the October 2024 private placement.

Outstanding securities not included in the computation

of diluted net loss per share because their effect would have been anti-dilutive include as of December 31:

of diluted net loss per share

Stock options issued to employees

Warrants issued and outstanding related to July 2025 registered direct offering

Warrants issued and outstanding related to our February 2024 IPO

Warrants issued and outstanding related to our October 2024 private placement

Total outstanding securities not included in the computation of diluted net loss per share

Preferred Stock

The Series A is convertible into common stock

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

The Series A shares

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

The Series B is convertible into common stock

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

The Series B shares

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

The Series C is convertible into common stock

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

The Series C shares

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

2024 Transactions

As of December 31, 2025 and December 31, 2024, there

are no issued and outstanding Series A, B, and C Preferred Stock.

On April 10, 2025, the Company withdrew the Certificates of Designation

for the Series A, Series B and Series C Preferred Stock with the State of Nevada and no shares of preferred stock remain authorized.

The Series A was convertible into common stock at

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

The Series A shares were

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

The Series B was convertible into common stock at

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

The Series B shares were

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

The Series C was convertible into common stock at

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

The Series C shares were

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

2024 Preferred Stock Transactions

On July 22, 2024, the Company’s principal

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

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

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

The Series A shares can be convertible back

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

any gain or loss related to the exchange.

As part of the transaction,

Red Cat entered into an Exchange Agreement with the Company pursuant to which Red Cat exchanged 4,250,000 shares of the Company’s

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

The Series A shares can be convertible back into the same amount of shares

of common stock as of the date of the original exchange, and as a result the Company did not recognize any gain or loss related to the

On August 21, 2024, the Company entered into two

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2025 Transactions

On June 1, 2023, the Company issued an additional

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

On January 14, 2025, the Company issued 3,546 immediately

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

The shares of restricted stock were granted under the

2022 Equity Incentive Plan.

The shares were valued at $11.99 per share, which was the value the Company’s common stock on the date

of grant, respectively for a total of $ 42,517 to be recognized as stock compensation expense on the grant date.

On February 3, 2025, the Company issued 480,000 restricted

shares of common stock to executive officers and certain employees of the Company.

The shares of restricted stock were granted under the

Company’s 2022 Equity Incentive Plan.

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

December 31, 2025.

The restricted shares issued to certain employees are subject to pro-rata forfeiture over a four-year period.

were valued at $12.00 per share, which was the value of the Company’s common stock on the date of grant, respectively for a total

of $ 5,760,000 to be recognized as stock compensation expense pro-rata over the vesting period.

Stock compensation expense of $ 5,007,742

was recognized during the year ended December 31, 2025.

In February 2025, the Company issued 1,224,606

shares of common stock related to warrant holders exercising their warrants at an exercise price of $ 1.99 .

The Company received gross

proceeds of $ 2,436,966 related to the warrant exercises.

The Company cancelled the 1,224,606 warrants upon issuance of the common shares.

On May 7, 2025, in a confidentially marketed public

offering the Company sold 8,000,000 shares of common stock at $5.00 per share resulting in gross proceeds of $ 40,000,000 , prior to payment

of placement agent fees of $ 3,200,000 and $ 304,000 of other offering expenses resulting in net proceeds of $ 36,496,000 .

Dominari Securities,

LLC acted as the sole placement agent and also received a warrant to purchase 640,000 shares of the Company’s common stock at $5.00

per share over a two-year period expiring on May 6, 2027.

On May 19, 2025, the Company issued 33,336 immediately

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

The shares of restricted stock were granted under the

2022 Equity Incentive Plan.

The shares were valued at $5.40 per share, which was the value the Company’s common stock on the date

of grant, respectively for a total of approximately $ 180,000 to be recognized as stock compensation expense on the grant date.

On May 19, 2025, the Company issued 4,630 immediately

vested shares of common stock to a consultant of the Company related to services provided.

The shares of common stock were granted under

the 2022 Equity Incentive Plan.

The shares were valued at $5.40 per share, which was the value the Company’s common stock on the

date of grant, respectively for a total of approximately $ 25,000 to be recognized as stock compensation expense on the grant date.

On May 22, 2025, the Company issued 150,000 shares

of common stock related to vested restricted stock units for our advisory board members.

The restricted stock units are valued at $4.40

per share, the closing price of our common stock as of the date of the grant, for a total value of $ 660,000 .

On June 30, 2025, the Board of Directors of the

Company awarded the Company’s Chief Executive Officer 175,000 restricted shares of the Company’s common stock under the 2022

Equity Incentive Plan as a bonus related to the May 2025 public offering.

The restricted shares are valued at $8.57 per share, the closing

price of our common stock as of the date of the grant, for a total value of $ 1,499,750 that was recognized immediately based on the vesting

of the awards for each of the Company’s Officers.

The shares are subject to the Company’s clawback policy.

On July 15, 2025, in a registered direct offering

the Company sold 5,000,000 shares of common stock at $9.70 per share resulting in gross proceeds of $ 48,500,000 , prior to the payment

of placement fees of $ 3,395,000 and $ 204,000 of other offering expenses resulting in net proceeds of $ 44,901,000 .

Dominari Securities,

LLC acted as the sole placement agent and also received a warrant to purchase 350,000 shares of the Company’s common stock at $9.70

per share over a two-year period expiring on May 6, 2027 .

On August 1, 2025, the Company issued 150,000

shares of common stock related to the delivery of vested restricted stock units under the 2022 Equity Incentive Plan to certain executives

of the Company as a bonus related to the May 2025 public offering.

The shares were valued at $ 1,285,500 based on the $8.57 based on the

quoted trading price on grant date.

The shares are subject to the Company’s clawback policy.

On August 7, 2025, the Company issued 100,000 restricted

shares of common stock to certain employees of the Company.

The shares of restricted stock were granted under the Company’s 2022

Equity Incentive Plan.

The restricted shares issued to employees are subject to pro-rata forfeiture over a four-year period.

were valued at $9.59 per share, which was the quoted trading price of the Company’s common stock on the date of grant, respectively

for a total of $ 959,000 to be recognized as stock compensation expense pro-rata over the vesting period.

Stock compensation expense of

$ 95,252 was recognized during the year ended December 31, 2025.

On August 19, 2025, the Company issued 9,232 immediately

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

The shares of restricted stock were granted under the

2022 Equity Incentive Plan.

The shares were valued at $9.75 per share, which was the quoted trading price the Company’s common stock

on the date of grant, respectively, for a total of approximately $ 90,000 to be recognized as stock compensation expense on the grant date.

On August 19, 2025, the Company issued 1,727 immediately

vested shares of common stock to a consultant of the Company related to services provided.

The shares of common stock were granted under

the 2022 Equity Incentive Plan.

The shares were valued at $9.75 per share, which was the quoted trading price the Company’s common

stock on the date of grant, respectively for a total of approximately $ 15,000 which is recognized as stock compensation expense on the

grant date and included in stock compensation expense – vested stock on the statement of stockholder’s equity.

On September 2, 2025, the Company issued 280,000 restricted shares of common

stock to certain employees of the Company.

The shares of restricted stock were granted under the Company’s 2022 Equity Incentive

The restricted shares issued to employees are subject to pro-rata forfeiture over a four-year period.

The shares were valued at

$9.16 per share, which was the value of the Company’s common stock on the date of grant, respectively for a total of $2,564,800

to be recognized as stock compensation expense pro-rata over the vesting period.

Stock compensation expense of $ 213,146 was recognized

during the year ended December 31, 2025.

On September 3, 2025, the Company issued 656,642

of common stock related to the closing of the Rotor Lab acquisition (see Note 3).

The shares were valued at $9.02 per shares which was

the closing trading price of the Company’s common stock on September 3, 2025, the closing date of the acquisition, resulting in

an aggregate value of $ 5,922,911 .

On September 24, 2025, the Company issued 8,500

shares of common stock related to warrant holders exercising their warrants.

The Company received gross proceeds of $ 42,500 related to

the warrant exercises.

The Company cancelled the 8,500 warrants upon issuance of the common shares.

In September 2025, the Company issued 50,000 shares

of common stock related to the vesting of certain employee restricted stock units in which the Company issued 50,000 shares of common

stock related to the vesting of these restricted stock units.

In October 2025, the Company utilized its at-the-market

(“ATM”) equity program to sell an aggregate of 4,666,600 shares of common stock at an average price of $ 15.46 per share, resulting

in gross proceeds of approximately $ 72.1 million and offering costs of approximately $ 2.16 million.

On November 6, 2025, the Company issued 640,000

shares of common stock related to warrant holders exercising their warrants at an exercise price of $ 5.00 .

The Company received gross

proceeds of $ 3.2 million related to the warrant exercises.

The Company cancelled the 640,000 warrants upon issuance of the common shares.

On November 13, 2025, the Company issued 80,000

restricted shares of common stock to certain employees of the Company.

The shares of restricted stock were granted under the Company’s

2022 Equity Incentive Plan.

The restricted shares issued to employees are subject to pro-rata forfeiture over a four-year period.

shares were valued at $9.65 per share, which was the value of the Company’s common stock on the date of grant, respectively for

a total of $ 772,000 to be recognized as stock compensation expense pro-rata over the vesting period.

On November 19, 2025, the Company issued 1,727 immediately

vested shares of common stock to a consultant of the Company related to services provided.

The shares of common stock were granted under

the 2022 Equity Incentive Plan.

The shares were valued at $8.69 per share, which was the quoted trading price the Company’s common

stock on the date of grant, respectively for a total of $ 15,008 which is recognized as stock compensation expense on the grant date and

included in stock compensation expense – vested stock on the statement of stockholder’s equity.

On November 20, 2025, the Company issued 500,000

shares of common stock related to the delivery of vested restricted stock units under the 2022 Equity Incentive Plan to certain executives

of the Company.

The shares were valued at $ 3,880,000 based on the $7.76 quoted trading price on grant date and expensed on the grant date.

On November 24, 2025, the Company issued 108,000

shares of common stock related to vested restricted stock units for our advisory board members.

The restricted stock units are valued

at $8.49 per share, the closing price of our common stock as of the date of the grant, for a total value of $ 916,920 and expensed on the

On December 29, 2025, the Company issued 142,299

shares of common stock to our CEO and two board members related to exercising of 164,473 warrants of the October 2024 private placement.

131,578 of these warrants were exercised on a cashless basis using the calculation as defined in the warrant agreement at a volume-weighted

average price of $ 11.81 and issuing a total of 109,404 shares of common stock for the cashless exercise.

32,895 of these warrants were

exercised for cash proceeds of $ 65,461 and issuing a total of 32,895 shares of common stock.

The Company cancelled the 164,473 warrants

related to these exercises upon issuance of the common stock.

On December 31, 2025, the Company issued 9,420 immediately

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

The shares of restricted stock were granted

under the 2022 Equity Incentive Plan.

The shares were valued at $12.74 per share, which was the quoted trading price the Company’s

common stock on the date of grant, respectively, for a total of approximately $ 120,000 to be recognized as stock compensation expense

on the grant date.

During the year ended December 31, 2025, several

employees of the Company exercised 162,816 of their vested stock options in which the Company issued 162,816 shares of common stock related

to these exercises.

The Company received total cash proceeds of $ 646,572 related to the exercise of the stock options.

2024 Transactions

2 unchanged sentences

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

On February 16, 2024 the Company completed

its IPO and issued 1,250,000 shares

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

On February 16, 2024 the Company completed its

IPO and issued 1,250,000 shares of common stock at the IPO Price for total net proceeds of $ 3,849,555 .

The Company incurred $ 510,000 direct

deduction from proceeds, $ 127,687 in

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

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

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

These costs have

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

The 62,500 of representative warrants

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

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

deduction from proceeds, $ 127,687 in cash disbursements related to offering costs and $ 512,758 in prior year paid and deferred offering

costs as of December 31, 2023 for a total of $ 1,150,445 offering costs, associated with the IPO which consisted of underwriter, legal,

accounting, and other associated filing fees.

These costs have been recorded as a reduction of the gross proceeds from the IPO in stockholder’s

The 62,500 of representative warrants are exercisable for common stock at a price of $5.00 per share (125% of the IPO Price) at

any time beginning on August 15, 2024 through and including February 16, 2029, the expiration date.

Simultaneously with its IPO and as a part of the

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

On October 29, 2024 (the “Closing

Date”), the Company entered into Securities Purchase Agreements (the “SPA”) with accredited investors (each, an

“Investor” and together the "Investors”) for a private placement offering (“Private Placement”),

for aggregate gross proceeds of $ 1.95

million before deducting fees to the placement agent and other expenses payable by the Company in connection with the Private

The Company intends to use the net proceeds of approximately $ 1.8

million of the Private Placement for working capital and general corporate purposes.

As part of the Private Placement, the Company

issued an aggregate of 1,286,184

units at a per unit purchase price of $ 1.52

Each unit consists of one share of common stock, par value $0.01 per share (the “Common Stock”) and one

warrant to purchase one share of the Company’s Common Stock at an exercise price of $1.99 per share (each an “Investor

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

the Company entered into Securities Purchase Agreements (the “SPA”) with accredited investors (each, an “Investor”

and together the "Investors”) for a private placement offering (“Private Placement”), for aggregate gross proceeds

of $ 1.95 million before deducting fees to the placement agent and other expenses payable by the Company in connection with the Private

The Company intends to use the net proceeds of approximately $ 1.8 million of the Private Placement for working capital and

general corporate purposes.

As part of the Private Placement, the Company issued an aggregate of 1,286,184 units at a per unit purchase

price of $ 1.52 per unit.

Each unit consists of one share of common stock, par value $0.01 per share (the “Common Stock”) and

one warrant to purchase one share of the Company’s Common Stock at an exercise price of $1.99 per share (each an “Investor

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

The Investor Warrants have a term of five and a half years from the

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

limitations and adjustments set forth in the Investor Warrants.

Allan Evans, the Company’s Chief Executive Officer and Sanford

Rich and Robert Lowry, each a member of the Company’s board of directors (and the three combined, the “Insiders”),

invested an aggregate of $ 250,000

in the Private Placement on identical terms to the other Investors.

Subsequently and in order to comply with New York Stock Exchange

American rules, the Insiders were required to pay an additional $ 92,105

to the Company related to the greater of book or market value for the warrants.

On November 5, 2024, the Board of Directors

of the Company awarded each of the Company’s Chief Executive Officer, Chief Financial Officer and Chief Operation Officer 50,000

restricted shares of the Company’s Common Stock under the Plan as bonuses related to the Private Placement.

The restricted

shares are valued at $ 1.96

per share, the closing price of our common stock as of the date of the grant, for a total value of $ 98,000

that was recognized immediately based on the vesting of the awards for each of the Company’s Officers.

The bonuses are subject

to the Company’s clawback Policy.

The Investor Warrants have a term of five and a half years from the Closing

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

and adjustments set forth in the Investor Warrants.

Allan Evans, the Company’s Chief Executive Officer and Sanford Rich and Robert

Lowry, each a member of the Company’s board of directors (and the three combined, the “Insiders”), invested an aggregate

of $ 250,000 in the Private Placement on identical terms to the other Investors.

Subsequently and in order to comply with New York Stock

Exchange American rules, the Insiders were required to pay an additional $ 92,105 to the Company related to the greater of book or market

value for the warrants.

On November 5, 2024, the Board of Directors of

the Company awarded each of the Company’s Chief Executive Officer, Chief Financial Officer and Chief Operation Officer 50,000 restricted

shares of the Company’s Common Stock under the Plan as bonuses related to the Private Placement.

The restricted shares are valued

at $ 1.96 per share, the closing price of our common stock as of the date of the grant, for a total value of $ 98,000 that was recognized

immediately based on the vesting of the awards for each of the Company’s Officers.

The bonuses are subject to the Company’s

clawback Policy.

On November 22, 2024, the Company issued 150,000

shares of common stock related to vested restricted stock units for our advisory board members.

The restricted stock units are

valued at $4.40 per share, the closing price of our common stock as of the date of the grant, for a total value of $ 660,000 .

In November and December 2024, the Company

issued 4,250,000

shares of common stock related to the Investors holding the Series A preferred stock and converted their 4,250

shares of Series A into common stock.

The restricted stock units are valued

at $4.40 per share, the closing price of our common stock as of the date of the grant, for a total value of $ 660,000 .

In November and December 2024, the Company issued

4,250,000 shares of common stock related to the Investors holding the Series A preferred stock and converted their 4,250 shares of Series

A into common stock.

In November and December 2024, the Company issued

684,000 shares of common stock related to warrant holders exercising their warrants.

4 unchanged sentences

shares of common stock related to the Investors exercising their conversion option of the convertible note payable.

of the conversion, the Company cancelled the August Notes as discussed in Note 9 – Promissory and Convertible Notes.

– Promissory and Convertible Notes for additional information related to the conversion.

In December 2024, the Company issued 630,000

shares of common stock related to the Investors holding the Series C preferred stock and converted their 210

shares of Series C into common stock.

2023 Transactions

On March 7, 2023, the Company issued 75,000 shares

of common stock to an investment banking firm (“Revere”) as a fee for the termination of the January 2023 engagement with

These shares were allocated by Revere to some of the Company’s existing shareholders.

The Company recorded $ 600,000 of stock

compensation expense related to the issuance of the shares valued at $ 8.00 per share, which was based on the most recent private sale

of common stock for the Company.

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

Directors approved a 1-for-2 reverse stock split of our issued and outstanding shares of common stock.

In accordance with Staff Accounting

Bulletin Topic 4.C, the Company has given retroactive effect to reverse stock split.

In addition, and in accordance with FASB ASC 260,

Earnings Per Share , the Company has retroactively adjusted the computations of basic and diluted share calculations.

As a part of the conversion,

the Company cancelled the August Notes as discussed in Note 9 – Promissory and Convertible Notes.

See Note 9 – Promissory

and Convertible Notes for additional information related to the conversion.

In December 2024, the Company issued 630,000 shares

of common stock related to the Investors holding the Series C preferred stock and converted their 210 shares of Series C into common stock.

Note 12 – Share Based Awards

The Company’s Board of Directors has delegated authority to

the Chief Executive Officer to grant stock options.

Any issuance of restricted stock awards or restricted stock units must be approved

by the Company’s compensation committee.

Stock options are granted for employees on a monthly to quarterly basis.

Restricted stock

awards and restricted stock units are granted on a quarterly basis.

All stock awards which have been granted to individuals who do no t

have possession of material non-public information at the time of grant.

Stock Options

The 2022 Equity Incentive Plan (the “Plan”) allows the Company to incentivize key

employees and directors with long term compensation awards such as stock options, restricted stock, and other similar types of awards.

The Plan is authorized to issue up to 15% of the outstanding shares on a fully diluted basis giving effect to the exercise and conversion

of all outstanding common stock equivalents issued outside of the Plan.

In addition, the Plan has an “evergreen” provision,

pursuant to which the number of shares of common stock reserved for issuance pursuant to awards under such plan shall be increased on

the first day of each year beginning in 2025 and ending in 2032 equal to the lesser of (a) five percent (5%) of the shares of stock outstanding

(on an as converted basis) on the last day of the immediately preceding fiscal year and (b) such smaller number of shares of stock as

determined by our board of directors.

The 2022 Equity Incentive Plan (the “Plan”)

allows the Company to incentivize key employees and directors with long term compensation awards such as stock options, restricted stock,

and other similar types of awards.

The Plan is authorized to issue up to 15% of the outstanding shares on a fully diluted basis giving

effect to the exercise and conversion of all outstanding common stock equivalents issued outside of the Plan.

In addition, the Plan has

an “evergreen” provision, pursuant to which the number of shares of common stock reserved for issuance pursuant to awards

under such plan shall be increased on the first day of each year beginning in 2025 and ending in 2032 equal to the lesser of (a) five

percent (5%) of the shares of stock outstanding (on an as converted basis) on the last day of the immediately preceding fiscal year and

(b) such smaller number of shares of stock as determined by our board of directors.

The Plan allows for awards to be issued up to a contractual

maximum term of 10 years from the grant date.

As of December 31, 2025, the Plan is authorized to issue up to 5,934,715 of awards.

During the year ended December 31, 2024, the Company’s

board of directors approved the grant of 330,000 stock options under the Plan to certain employees.

The stock options are subject to certain

vesting provisions.

During the year ended December 31, 2025 and 2024,

the Company’s board of directors approved the grant of 627,500 and 330,000 , respectively of stock options under the Plan to certain

The stock options are subject to certain vesting provisions.

Standard vesting on stock options have a six month cliff vesting

and quarterly from over four years, however, certain stock options may have immediate vesting or shorter periods as approved.

Stock options

contractual term range from 5 to 10 years.

The following table presents the activity for

8 unchanged sentences

Outstanding - December 31, 2024

Forfeited/canceled

Outstanding – December 31, 2025

Exercisable – December 31, 2025

The range of assumptions used to calculate the fair value of options

2 unchanged sentences

Exercise Price

$ 5.08 – 9.65

$ 1.20 – 1.79

Stock Price on date of grant

$ 5.08 – 9.65

$ 1.20 – 1.79

Risk-free interest rate

3.58 - 4.10 %

4.080 - 4.71 %

Dividend yield

1 unchanged sentence

107.44 – 132.35 %

The total value of stock options granted

during the year ended December 31, 2024 is $ 373,160 .

The Company recognized $ 60,924

in stock-based compensation expense related to stock options during the year ended December 31, 2024.

As of December 31, 2024, there

was $ 312,236

of unrecognized stock-based compensation expense related to unvested stock options to be recognized over the remaining vesting term

through 2028.

129.45 – 143.46 %

The total value of stock options granted was $ 3,849,430 and $ 373,160 during the years ended December 31, 2025 and 2024, respectively.

The Company recognized $ 927,643 and $ 60,924 in stock-based compensation expense related to stock options during the years ended December

31, 2025 and 2024, respectively.

As of December 31, 2025, there was $ 3,110,863 of unrecognized stock-based compensation expense related

to unvested stock options to be recognized over the remaining vesting term through 2029.

Restricted Stock

The following table presents the activity for

restricted stock outstanding:

Restricted stock awards are equity grants in which

the Company issues restricted common stock awards as of the grant date and are subject to certain vesting and clawback provision.

stock units are equity grants in which the Company issues a restricted stock unit subject to vesting requirements and common stock is

not issued until the vesting requirements have been met.

The following table presents the activity for restricted stock awards and restricted

stock units outstanding:

Schedule of restricted stock activity

Outstanding - December 31, 2023

Restricted Stock

Fair Value - RSA

Fair Value - RSU

Unvested - December 31, 2023

Forfeited/canceled

Outstanding – December 31, 2024

The total value of restricted stock and restricted

stock units granted during the year ended December 31, 2024 is $ 2,875,364 .

The Company recognized $ 2,194,938

in stock-based compensation expense related to restricted stock during the year ended December 31, 2024.

As of December 31, 2024, there

was $ 680,426

of unrecognized stock-based compensation expense related to unvested restricted stock to be recognized over the remaining vesting term

through May 2025.

Unvested - December 31, 2024

Forfeited/canceled

( 1,381,153 )

Unvested – December 31, 2025

The total value of restricted stock and restricted stock units was $ 18,725,539 and $ 2,875,364 granted during

the years ended December 31, 2025 and 2024, respectively.

The Company recognized $ 14,692,285 and $ 2,194,938 in stock-based compensation

expense related to restricted stock and restricted stock units during the years ended December 31, 2025 and 2024, respectively.

December 31, 2025, there was $ 4,713,679 of unrecognized stock-based compensation expense related to unvested restricted stock to be recognized

over the remaining vesting term through 2029.

The following table presents the activity for warrants outstanding

5 unchanged sentences

Outstanding - December 31, 2024

As discussed in Note 11, “Earnings Per Share

and Stockholders’ Equity”, in connection with the IPO, the Company issued 62,500 representative warrants to its underwriters

to purchase shares of common stock.

The representative warrants have an exercise price of $5.00 or can be exercised through a cashless

exercise feature.

Forfeited/cancelled/restored

( 2,037,579 )

Outstanding – December 31, 2025

As discussed in Note 11, “Earnings Per

Share and Stockholders’ Equity”, in connection with the IPO in 2024, the Company issued 62,500 representative warrants to

its underwriters to purchase shares of common stock.

The representative warrants have an exercise price of $5.00 or can be exercised

through a cashless exercise feature.

The warrant holders exercised 54,000 warrants during the year ended December 31, 2024.

As discussed in Note 9, “Promissory

and Convertible Notes”, in connection with the exchange of the $ 1,000,000

of the Note Payable balance, the Company issued 630,000

warrants to the Investors to purchase shares of common stock.

As discussed in Note 9, “Promissory and Convertible

Notes”, in connection with the exchange of the $ 1,000,000 of the Note Payable balance in 2024, the Company issued 630,000 warrants

to the Investors to purchase shares of common stock.

The warrants have an exercise price of $ 1.99 .

These 630,000 warrants were subsequently exercised (see Notes 10 and 11).

These 630,000 warrants were subsequently

exercised (see Notes 10 and 11).

As Discussed in Note 11, “Earnings Per Share

and Stockholders’ Equity”, in connection with the Private Placement, the Company issued 1,286,184 warrants and an additional

102,895 warrants to the underwriter related to the Private Placement for a total of 1,389,079 warrants.

The warrants have an exercise

price of $ 1.99 .

and Stockholders’ Equity”, in connection with the Private Placement in 2024, the Company issued 1,286,184 warrants and an

additional 102,895 warrants to the underwriter related to the Private Placement for a total of 1,389,079 warrants.

The warrants have an

exercise price of $ 1.99 .

As Discussed in Note 11, “Earnings Per Share

and Stockholders’ Equity”, in connection with the May 2025 public offering and July 2025 registered direct offering, the Company

issued 990,000 warrants to the underwriter.

The warrants have an average exercise price of $ 6.66 .

All warrants outstanding have a weighted average

remaining contractual life of approximately 5.32

years as of December 31, 2024.

The aggregate intrinsic value of the warrants at December 31, 2024 is $ 20,700,512 .

remaining contractual life of approximately 1.54 years as of December 31, 2025.

The aggregate intrinsic value of the warrants at December

31, 2025 is $ 1,064,000 .

Note 13 – Related Party Transactions

43 unchanged sentences

may be necessary.

The Consultant receives

a $ 250,000 fee per year payable in monthly installments.

In addition, the Consultant was granted 488,000 fully vested shares of restricted

common stock.

The fair value of the shares was $ 585,600 based on the $1.20 quoted trading price on the Grant Date and will be recognized

over the service period (see below).

The grant of restricted common stock was made under the Company’s 2022 Equity Incentive Plan.

The shares of restricted common stock are subject to pro rata forfeiture from February 14, 2024 until February 14, 2025, in the event

Evans is terminated or ends his services to the Company for any reason other than death or disability, as defined in the Internal

Revenue Code.

The Company and Dr.

Evans previously entered into an Offer Letter dated November 27,

2023, under which he would serve as the Company’s Chief Executive Officer effective as of December 4, 2023.

The Agreement terminates

and replaces the Offer Letter dated November 27, 2023.

The Consultant

receives a $ 250,000

fee per year payable in monthly installments.

On September 30, 2025, the Company amended the agreement increasing the

Consultant’s annual fee to $ 300,000 .

In addition, the Consultant was granted 488,000

fully vested shares of restricted common stock.

The fair value of the shares was $ 585,600

based on the $1.20 quoted trading price on the Grant Date and will be recognized over the service period (see below).

restricted common stock was made under the Company’s 2022 Equity Incentive Plan.

The shares of restricted common stock are

subject to pro rata forfeiture from February 14, 2024 until February 14, 2025, in the event that Dr.

Evans is terminated or ends his

services to the Company for any reason other than death or disability, as defined in the Internal Revenue Code.

Company and Dr.

Evans previously entered into an Offer Letter dated November 27, 2023, under which he would serve as the

Company’s Chief Executive Officer effective as of December 4, 2023.

The Agreement terminates and replaces the Offer Letter

dated November 27, 2023.

In October 2024, in relation to the Private Placement

4 unchanged sentences

received a purchase order with Teal Drones, Inc.

a wholly owned subsidiary of Red Cat to provide goods and services to a customer in

which Teal Drones is a prime contractor and the Company is a subcontractor.

Red Cat is a related party as Jeff Thompson is the Chief

Executive Officer of Red Cat and is also on the Board of Directors of Unusual Machines.

The Company recognized $ 155,000 in revenue related

to the related party contract.

The total value of the contract between Unusual Machines and Red Cat is $ 250,000 .

14 – Income Taxes

a wholly owned subsidiary of Red Cat to provide goods and services to a customer in which

Teal Drones is a prime contractor and the Company is a subcontractor.

Red Cat is a related party as Jeff Thompson is the Chief Executive

Officer of Red Cat and is also on the Board of Directors of Unusual Machines.

The Company recognized $ 95,000 and $ 155,000 in revenue related

to the related party contract for the years ended December 31, 2025 and 2024, respectively.

The total value of the contract between Unusual

Machines and Red Cat is $ 250,000 .

In May 2025, in relation to the confidentially marketed

public offering as described in more detail in Note 10, “Earnings Per Share and Stockholders’ Equity”, the Company’s

CEO and three directors invested $ 420,000 in the offering on identical terms to the other Investors and received a total of 80,000 shares

of common stock.

In October 2025, the Company received a $ 0.8

million order from Teal Drones, which is a subsidiary of Red Cat.

Red Cat is a related party as Jeff Thompson is the Chief Executive

Officer of Red Cat and is also on the Board of Directors of Unusual Machines.

The Company recognized approximately $ 0.2

million in revenue for the year ended December 31, 2025.

The Company had related party receivables of $ 0.2 million as of December

The order includes several different drone components manufactured and sourced from the Company.

On December 29, 2025, the Company issued 142,299 shares

of common stock to our CEO and two board members related to exercising of 164,473 warrants of the October 2024 private placement.

of these warrants were exercised on a cashless basis using the calculation as defined in the warrant agreement at a volume-weighted average

price of $ 11.81 and issuing a total of 109,404 shares of common stock for the cashless exercise.

32,895 of these warrants were exercised

for cash proceeds of $ 65,461 and issuing a total of 32,895 shares of common stock.

On December 31, 2025, the Company paid $ 43,474 to

its investment committee, which includes the CEO and two independent Directors of the Company.

The payment is based on a 1 % per committee

member based on the realized gains during the previous quarter.

In January 2026, the Company received a $ 2.1 million

order from Teal Drones, which is a subsidiary of Red Cat.

Red Cat is a related party as Jeff Thompson is the Chief Executive Officer of

Red Cat and is also on the Board of Directors of Unusual Machines.

The order is expected to be delivered in the first half of 2026 and

includes several different drone components manufactured and sourced from the Company.

Note 14 – Income Taxes

The components of income (loss) before income

1 unchanged sentence

Schedule of income (loss) before income tax expense (benefit)

$ ( 31,150,444 )

( 2,383,462 )

Pretax income (loss) from operations

$ ( 31,993,828 )

$ ( 2,383,462 )

The components of income tax expense (benefit)

18 unchanged sentences

Intangible assets

Property and equipment

Right of use asset

1 unchanged sentence

( 5,815,224 )

( 3,135,343 )

Deferred income tax expense (benefit)

( 7,958,225 )

( 3,781,325 )

Net deferred tax liability

The components of the Company’s effective

tax rate consist of the following as of December 31, 2024 and 2023 are:

statutory rate

State taxes, net of federal benefit

Other permanent differences

Foreign statutory rate difference

Change in valuation allowance - federal

Change in valuation allowance – state

Income tax expense

$ ( 146,772 )

A reconciliation of the provision for income taxes

to the amount computed by applying the 21% statutory U.S.

federal income tax rate to income before income taxes after the adoption of

ASU 2023-09 is as follows:

Schedule of reconciliation of provision for income taxes

federal statutory tax rate

( 4,038,272 )

( 6,718,704 )

State and local income taxes, net of federal income tax effect

Foreign tax effects:

Other foreign jurisdictions

Effect of changes in tax laws or rates enacted in the current period

Effect of cross-border tax laws:

taxation of foreign earnings

Research and development credits

Changes in valuation allowance

Nontaxable or nondeductible items:

162m limitation

Changes in unrecognized tax benefits

Effective rate

The Company adopted ASU 2023-09 on a prospective

basis for the year ended December 31, 2025 and have included the following table as a result of the adoption, which presents income taxes

paid (net of refunds received) for the year ended December 31, 2025:

Schedule of income taxes

paid net of refunds received

state and local

As of December 31, 2025, the Company has U.S.

federal and state net operating loss carryforwards of $ 9,518,428 and foreign net operating loss carryforwards of $ 4,743,384 .

federal net losses can be carried forward indefinitely and are generally deductible against 80% of taxable income on an annual basis.

It is not anticipated that the foreign net operating losses will ever be used.

federal and state net operating loss carryforwards of approximately $ 23.5 million and foreign net operating loss carryforwards of approximately

$ 4.9 million of which $ 4.6 million will never be utilized.

federal net losses can be carried forward indefinitely and are generally

deductible against 80% of taxable income on an annual basis.

In assessing the realizability of deferred tax

2 unchanged sentences

in which those temporary differences become deductible.

As the Company was incorporated in the current year and has no history of earnings,

The Company has provided a full valuation allowance on its federal, foreign, and state deferred tax assets.

14 unchanged sentences

No interest and penalties

related to uncertain tax positions were accrued as of December 31, 2024.

related to uncertain tax positions were accrued as of December 31, 2025 associated with uncertain tax positions.

Note 15 – Commitments and Contingencies

part of the business combination that occurred on February 14, 2024, the Company acquired a five-year operating lease for approximately

6,900 square feet of warehouse and office space in Orlando, Florida.

As part of the business combination that occurred

on February 14, 2024, the Company acquired a five-year operating lease for approximately 6,900 square feet of warehouse and office space

in Orlando, Florida.

The lease commenced in November 2023 and expires in October 2028.

See Note 7 – Operating Leases for additional

On June 4, 2025, the Company entered into a five

-year operating lease agreement for approximately 17,000 square feet of space for the Company’s drone motor manufacturing facility

in Orlando, Florida.

The lease commenced on August 1, 2025 and expires in August 2030.

See Note 7 – Operating

Leases for additional information.

As a part of the business combination that occurred on September 3,

2025 with Rotor Lab, the Company acquired a three-year operating lease of warehouse and office space in Canberra Australia.

commenced in May 2024 and expires in April 2027.

See Note 7 – Operating Leases for additional information.

On October 30, 2025, the Company entered into

a five-year operating lease agreement for an additional 25,000 square feet of warehouse/office space in Orlando, FL.

The lease commencement

date is December 1, 2025 and expires in December 2030.

On December 10, 2025, the Company entered into

a three-year operating lease agreement for an additional 9,125 square feet of space in Orlando, FL.

This space will be used as the Company’s

corporate headquarters.

The lease will commence on February 1, 2026 and expires in February 2029.

On December 15, 2025, the Company entered into

a three-year operating lease agreement for an additional 4,500 square feet of space in Orlando, FL.

This space will be used for headset

The lease commenced on January 1, 2026 and expires in December 2028.

Note 16 – Subsequent Events

Equity Grants to Board of Directors

On January 14, 2025, the Company issued the non-employee directors

listed in the table below the equity of their quarterly compensation for services as a director during the quarter ended December 31,

The shares of restricted common stock are fully vested, granted under the Company’s 2022 Equity Incentive Plan and are subject

to each director executing the Company’s standard Restricted Stock Agreement.

The amount of restricted common stock issued was based

on the quoted trading price as of the close of the market as of January 14, 2025.

Amount of Restricted Common Stock

Cristina Colon

Jeffrey Thompson

Aloft Material Definitive Agreement

On February 1, 2025, the Company entered into

an Agreement and Plan of Merger and Reorganization (the "Agreement”) with Aloft Technologies, Inc., a Delaware corporation

("Aloft”), and UMAC Merger Sub, Inc.

a Delaware corporation and wholly owned subsidiary of the Company ("Merger Sub”).

Aloft is a leader in the drone fleet and airspace management sector, powering a majority of all FAA-approved Low Altitude Authorization

and Notification Capability airspace authorizations in the United States and the related software is complimentary to the Company’s

overall position to provide drone related components and drone services made in the United States.

Under the terms of the Agreement and subject

to customary closing conditions and a working capital adjustment, on the closing date of the Agreement Aloft will merge into Merger

Sub, and Merger Sub will continue as a wholly owned subsidiary of the Company.

In addition, each issued and outstanding share of

Aloft capital stock that is not a dissenting share will be cancelled and each Aloft Stockholder (as defined in the Agreement)

receive their pro rata share of the merger consideration payable by the Company as provided for in the Agreement.

consideration of $14.5 million consists of 1,204,319 shares of common stock of the Company and expected not to exceed $100,000 in

cash payable to unaccredited investors.

Customary closing conditions by the parties must

be met before being able to close the merger.

Warrants Exercise

On January 9, 2026, warrant holders exercised

350,000 warrants at $9.70 per warrant in connection with the July 2025 registered direct offering and the Company issued 350,000 shares

of common stock.

The Company received cash proceeds of approximately $3.4 million in relation to the exercise.

Equity Grants to Executive Officers

On February 3, 2025, the Company issued the Company’s

On January 23, 2026, the Company issued the Company’s

executive officers listed in the table below shares of restricted common stock.

The shares of restricted common stock vest in equal quarterly

increments over a one-year period, with the first two quarters vesting on May 19, 2025.

increments over a one-year period, with the first quarter vesting on March 15, 2026.

The shares of restricted common stock were granted

6 unchanged sentences

Allan Evans, the Company’s Chief Executive Officer, is the sole owner with voting and dispositive power.

Equity Grants to employees

On February 3, 2025, the Company issued 80,000 shares of restricted

common stock to certain employees.

The shares of restricted common stock vest quarterly over a four-year period, in which no shares

vest over the first two quarters.

The shares of restricted common stock were granted under the Company’s 2022 Equity Incentive Plan,

Exercise of Warrants from Private Placement

On February 26, 2025, the Company issued

1,224,606 shares of common stock to various warrant holders who exercised their warrants from the October 2024 Private Placement at

an exercise price of $1.99.

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

Equity Grants to Employees & Consultants

In January 2026, the Company issued certain employees

shares of restricted common stock and stock options.

The Company issued a total of 190,000 shares of restricted common stock and 90,000

stock options to employees.

All shares and options vest in quarterly installments over a four-year period starting from the grant date.

In January 2026, the Company issued a consultant 40,000 shares of restricted

common stock that vest in monthly installments over a two-year period starting from the grant date.

On December 10, 2025, the Company entered into

a three-year operating lease agreement for an additional 9,125 square feet of space in Orlando, FL.

This space will be used as the Company’s

corporate headquarters.

The lease will commence on February 1, 2026 and expires in February 2029.

On December 15, 2025, the Company entered into

a three-year operating lease agreement for an additional 4,500 square feet of space in Orlando, FL.

This space will be used for headset

The lease commenced on January 1, 2026 and expires in December 2028.

Changes and Disagreements with Accountants on Accounting and Financial Disclosure

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

What changed 10-K

Item 8. Financial Statements and Supplementary Data