Unusual Machines, Inc. Form 10-K

 false 2024 FY 0001956955

 2024-06-30

 2025-03-25

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 2024-10-01

 UNITED STATES

 SECURITIES AND EXCHANGE COMMISSION

 WASHINGTON, D.C. 20549

 FORM 10-K

 ANNUAL REPORT PURSUANT TO SECTION 13 OR
15(d) OF THE SECURITIES EXCHANGE ACT OF 1934

 For the fiscal year ended December 31, 2024

 TRANSITION REPORT PURSUANT TO SECTION 13
OR 15(d) OF THE SECURITIES EXCHANGE ACT

 For the transition period from ________
to _________

 Commission File Number: 001-41961

 (Exact name of registrant as specified in its charter)

 Nevada

 66-0927642

 (State or other jurisdiction of incorporation or organization)

 (I.R.S. Employer Identification No.)

 4667 LB McLeod Rd

 Suite J

 Orlando, FL

 32811

 (Address of principal executive offices)

 (Zip Code)

 Registrant's telephone number, including
area code: ( 720) 383-8983

 Securities registered pursuant to Section 12(b)
of the Act:

 Title of each class

 Trading Symbol(s)

 Name of each exchange on which registered

 Common stock, par value $0.01

 UMAC

 NYSE American

 Securities registered pursuant to Section 12(g)
of the Act: Common Stock, par value $0.01 per share: None

 Indicate by check mark if the registrant is a
well-known seasoned issuer, as defined in Rule 405 of the Securities Act. Yes No

 Indicate by check mark if the registrant is not
required to file reports pursuant to Section 13 or Section 15(d) of the Act. Yes No

(1) filed all reports required to be filed by Section 13 or 15(d) of the Securities Exchange Act of 1934 during the preceding 12 months
(or for such shorter period that the registrant was required to file such reports), and (2) has been subject to such filing requirements
for the past 90 days. Yes No

has submitted electronically every Interactive Data File required to be submitted pursuant to Rule 405 of Regulation S-T (§ 232.405
of this chapter) during the preceding 12 months (or for such shorter period that the registrant was required to submit such files). Yes
 No

is a large accelerated filer, an accelerated filer, a non-accelerated filer, smaller reporting company, or an emerging growth company.
See the definitions of "large accelerated filer," "accelerated filer," "smaller reporting company,"
and "emerging growth company" in Rule 12b-2 of the Exchange Act.

 Large accelerated filer

 Accelerated filer

 Non-accelerated filer

 Smaller reporting company

 Emerging growth company

 If an emerging growth company, indicate by check
mark if the registrant has elected not to use the extended transition period for complying with any new or revised financial accounting
standards provided pursuant to Section 13(a) of the Exchange Act.

has filed a report on and attestation to its management's assessment of the effectiveness of its internal control over financial
reporting under Section 404(b) of the Sarbanes-Oxley Act (15 U.S.C. 7262(b)) by the registered public accounting firm that prepared or
issued its audit report.

 If securities are registered pursuant to Section
12(b) of the Act, indicate by check mark whether the financial statements of the registrant included in the filing reflect the correction
of an error to previously issued financial statements.

 Indicate by check mark whether any of those error
corrections are restatements that required a recovery analysis of incentive-based compensation received by any of the registrant's
executive officers during the relevant recovery period pursuant to §240.10D-1(b).

is a shell company (as defined in Rule 12b-2 of the Exchange Act). Yes No

 As of June 30, 2024, the last business day of
the registrant's most recently completed second fiscal quarter, the common stock of the registrant is listed on the New York Stock
Exchange American ("NYSE American"). The aggregate market value of the registrant's common stock held by non-affiliates
of the registrant was approximately $ 4,854,841 as of June
30, 2024 (based on the closing sale price of $1.30 as quoted by the NYSE American as of June 28, 2024).

 As of March 25, 2025, there were 16,830,170
shares of the registrant's common stock outstanding.

 Page

 Item 1.

 Business

 Item 1A.

 Risk Factors

 Item 1B.

 Unresolved Staff Comments

 Item 1C.

 Cybersecurity

 Item 2.

 Properties

 Item 3.

 Legal Proceedings

 Item 4.

 Mine Safety Disclosures

 Item 5.

 Market for Registrant's Common Equity, Related Stockholder Matters and Issuer Purchases of Equity Securities

 Item 6.

 Selected Financial Data

 Item 7.

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

 Item 7A.

 Quantitative and Qualitative Disclosures About Market Risk

 Item 8.

 Financial Statements and Supplementary Data

 Item 9.

 Changes in and Disagreements with Accountants on Accounting and Financial Disclosure

 Item 9A.

 Controls and Procedures

 Item 9B.

 Other Information

 Item 9C.

 Disclosure Regarding Foreign Jurisdictions that Prevent Inspections

 Item 10.

 Directors, Executive Officers, and Corporate Governance

 Item 11.

 Executive Compensation

 Item 12.

 Security Ownership of Certain Beneficial Owners and Management and Related Stockholder Matters

 Item 13.

 Certain Relationships and Related Transactions, and Director Independence

 Item 14.

 Principal Accounting Fees and Services

 Item 15.

 Exhibits, Financial Statement Schedules

 Item 16.

 Form 10-K Summary

 Signatures

 i

 Unless we state otherwise or the context otherwise requires, the
terms "Unusual Machines," "we," "us," "our" and the "Company" refer to Unusual
Machines, Inc., a Nevada corporation.

 SPECIAL NOTE REGARDING FORWARD-LOOKING STATEMENTS

 This Annual Report on
Form 10-K, or Annual Report, contains forward-looking statements that involve risks and uncertainties. We make such forward-looking statements
pursuant to the safe harbor provisions of the Private Securities Litigation Reform Act of 1995 and other federal securities laws. All
statements other than statements of historical facts contained in this Annual Report are forward-looking statements. In some cases, you
can identify forward-looking statements by terminology such as "may", "will", "should", "expects",
"intends", "plans", "anticipates", "believes", "estimates", "predicts",
"potential", "continue" or the negative of these terms or other comparable terminology.

 Forward-looking statements
are neither historical facts nor assurances of future performance, and are based only on our current beliefs, expectations and assumptions
regarding the future of our business, future plans and strategies, projections, anticipated events and trends, the economy and other future
conditions. Because forward-looking statements relate to the future, they are subject to inherent uncertainties, risks and changes in
circumstances that are difficult to predict and many of which are outside of our control. Therefore, you should not rely on any of these
forward-looking statements. Important factors that could cause our actual results and financial condition to differ materially from those
indicated in the forward-looking statements include, among others, the following:

 The market and sales success of our existing and any new products;

 our ability to raise capital when needed and on acceptable terms;

 the impact of the imposition of tariffs, trade wars and a potential recession may have on our business;

 our ability to make acquisitions and integrate acquired businesses into our company;

 our ability to successfully launch our manufacturing business;

 our limited operating history;

 our ability to attract and retain qualified employees and key personnel;

 our ability to manage our rapid growth and organizational change effectively;

 changes in the political and regulatory environment and in business and economic conditions in the United States and globally;

 geopolitical conflicts in Ukraine and Israel;

 our ability to develop and maintain our brand cost-effectively; and

 the other factors set forth in Part I, Item 1A, " Risk Factors " of this Form 10-K.

 These forward-looking statements speak only
as of the date of this Form 10-K and are subject to business and economic risks. We do not undertake any obligation to update or revise
the forward-looking statements to reflect events that occur or circumstances that exist after the date on which such statements were made,
except to the extent required by law.

 ii

 Item 1.

 Business

 Background of Unusual Machines

 Unusual Machines, Inc. ("Unusual Machines"
or the "Company") is a Nevada corporation engaged in the commercial drone industry with our principal place of business in
Orlando, Florida. The Company reincorporated from Puerto Rico to Nevada on April 22, 2024.

 Initial Public Offering

 On February 16, 2024, the Company closed its Initial
Public Offering (the "IPO") of 1,250,000 shares of common stock at a public offering price of $4.00 per share. The shares
are traded on the New York Stock Exchange American ("NYSE American"). Simultaneous with the closing of the IPO, the Company
acquired Fat Shark Ltd. ("Fat Shark") and Rotor Riot, LLC ("Rotor Riot") from Red Cat Holdings, Inc. ("Red
Cat").

 The Business Combination & Business Overview

 On November 21, 2022, the Company entered into
a Share Purchase Agreement (the "Purchase Agreement") with Red Cat and Jeffrey Thompson, the founder and Chief Executive Officer
of Red Cat, pursuant to which we agreed to purchase Red Cat's consumer business consisting of Fat Shark and Rotor Riot (the "Business
Combination"). Under the terms of the Purchase Agreement, as amended, the Company purchased Rotor Riot and Fat Shark subsidiaries
for $22.1 million (the "Purchase Price") comprised of (i) $1.1 million in cash, (ii) a $4.0 million promissory note (the "Note")
issued by the Company to Red Cat, and (iii) $17.0 million of the Company's Common Stock or 4,250,000 shares of Common Stock at the
$4.00 per share IPO price.

 Unusual Machines specializes in the production
and sale of small drones and essential components through B2B sales and a curated retail channel. There is strong brand recognition of
the Rotor Riot and Fat Shark brands particularly in the FPV sub-segment of the drone market. Unusual Machines intends to build its business
both organically and through strategic acquisitions while onshoring production of critical drone components. With the transition to onshoring
production of drone components, the Company is expanding into B2B channels for customers that require a non-Chinese supply chain.

 A major factor in Unusual Machines' component
production is the validation of the new supply chains. The Defense Innovation Unit (DIU) audits new drone components for supply chain
and cyber security risks. Components that pass the audit can then be put on the actively maintained Blue Framework list. Since August
of 2024, Unusual Machines has developed three components (and variants) that have been approved and placed on the Blue Framework. This
includes a flight controller, a motor controller, and a camera. The company intends to continue to develop and certify new components
through this process to ease the acquisition requirements on domestic drone manufacturers that are ultimately significant customers.

 The Drone Industry

 The drone industry continues to expand to become
a powerful business tool and recreational activity, with growth occurring broadly and across our targeted industries. According to Drone
Industry Insights, the global drone market is expected to grow to $57.8 billion by 2030, with the commercial market growing at a 7.9%
compound annual growth rate ("CAGR"). According to Allied Market Research, the drone component industry is likewise expanding.
The drone flight controller market, valued at $6.6 billion in 2022 is expected to reach $13.8 billion by 2032. The drone motor market,
valued at $2.6 billion in 2021 is projected to reach $9.9 billion by 2031.

 Unusual Machines intends to pursue strategic acquisition
targets that are cash flow positive and either sell drone parts or allow us to integrate drone parts and software services. The Company
believes that very promising, private companies (such as Aloft Technologies, Inc. as discussed below) are in many instances underfunded
and missing out on the ability to go public and bring their innovative products and solutions to a larger set of customers globally. We
believe that unlocking this potential will be key to industry consolidation and breaking the dominance of China in the drone industry.

 First Person View (FPV) Market Segment

 Unusual Machines principally operates in the FPV
segment of the drone industry. This segment focuses on drones piloted with wearable display devices or screens that show a first-person
view of the camera mounted on the drone. This is a unique experience where the pilot is interacting with an aircraft through visual immersion.
This experience is accomplished by live streaming footage from a camera mounted on the nose of the drone directly to the pilot with as
little latency as possible. The image is transmitted via radio (traditionally analog but increasingly digital) to the pilot. The drone
remote control unit, the drone, and the pilot display are all interconnected via radio. This effect requires sophisticated electronics
that transmit visual information with sufficient speed and reliability to allow pilot control over the drone in real-time. Pilots routinely
achieve speeds of over 90 mph in racing and other mission critical applications.

 There are four common categories of FPV flight
– freestyle flight, racing, cinema photography, and defense. In freestyle, the pilot navigates around obstacles focused on acrobatics
and exploring the environment around the aircraft through the HMD. FPV racing describes a spectator sport where pilots fly their drones
in competitions through a series of obstacles, flags, and gates in a racetrack. Cinema photography is the process of viewing and recording
a subject matter from the air from the viewpoint of the pilot. Defense is a market segment characterized by the use cases demonstrated
in the Ukrainian conflict and is the largest segment of the market with over 5 million FPV drones expected to be built in 2025.

 Potential Aloft Acquisition

 On February 1, 2025, the Company entered
into a Merger Agreement to acquire a drone software company, Aloft Technologies, Inc. ("Aloft"). We believe that Aloft
is a leader in the drone fleet and airspace management sector, powering more than 70% of all FAA-approved Low Altitude Authorization
and Notification Capability ("LAANC") airspace authorizations in the United States, according to Aloft.
According to Aloft, Aloft has provided more than 1.6 million authorizations in total with 400,000 authorizations provided in 2024.
The acquisition is for $14.5 million payable, almost entirely in the Company's Common Stock with the issuance of 1,204,319
shares of Common Stock and approximately $100,000 in cash. In addition, customary closing conditions by the parties must be
completed before closing the merger. There can be no assurances that the Aloft merger will close. See Item 1A. " Risk Factors."

 Plans for Growth, Development, and Expansion

 Unusual Machine's plans to strengthen its
market position through continued organic revenue growth. In parallel, the Company intends to aggressively invest in the extension of
their B2B sales of drone components. Unusual Machine's business strategy includes (i) increasing its overall customer base with
its products and rapid adoption; (ii) investing in new hardware products, (iii) expanding and growing Unusual Machine's customer
base and revenue streams from its existing customer base using a "land-and-expand" model that establishes initial relationships
and grows those relationships through the provision of high quality products and services, and (iv) expanding into new segments like SaaS
through acquisitions like Aloft.

 Customers

 Historically, revenues for Unusual Machines has
primarily generated online through its e-commerce site, www.rotorriot.com and the Company continues to see continued growth through its
retail store. As Unusual Machines continues to expand its B2B component business and with potential acquisitions, the Company expects
to rapidly grow an enterprise customer base primarily of drone manufacturers.

 Competition

 Unusual Machines competes with a number of significantly
larger, better capitalized companies. SZ DJI Technology Co., Ltd., commonly known as DJI, is the dominant market leader with a global
market share estimated at more than 70%, according to industry research firms. The primary retail competitor is GetFPV. Unusual Machines
competes against these competitors by leveraging its visibility on the internet through its Rotor Riot Facebook page which has more than
38,000 followers and its Rotor Riot YouTube channel which has more than 272,000 subscribers. The Company believes that the Rotor Riot
brand has been at the center of the racing and freestyle culture of drones since registering its domain name in 2015.

 With the Company's expansion into the drone
component market, additional competitors include T-Motor, Orqa, Modal AI, ARK Electronics. Unusual Machines differentiates from these
competitors by being price competitive and having their products approved by the Defense Innovation Unity Blue Framework for their enterprise
components, which allows them to be sold within Federal guidelines. Unusual Machines maintains price competitiveness and is an emerging
leader in the value segment of the non-Chinese components market.

 The Company's Drone Manufacturing

 The Company hired a vice president of manufacturing
in January 2025 whose role is to head up the Company's proposed drone motor manufacturing business. The Company plans to lease
an additional facility near its headquarters office in Orlando, Florida, at which it will manufacture NDAA compliant drone motors. The
Company expects that it will be in a position to commence manufacturing during the second quarter of 2025. We believe that by bringing
manufacturing in house, it can reduce our costs of motor inventory. See "Item 1A. Risk Factors."

 Suppliers

 Unusual Machines purchases inventory from approximately
50 suppliers, much of which could be subject to varying tariffs. The United States has continuously increased tariffs since 2019, which
Unusual Machines is currently subject to and range from 2% to 25%. In addition, in Q1 2025, additional tariffs have been instituted on
Chinese products and could see potential changes to tariffs in the future. These tariffs increase the cost of goods which reduces the
company's profit margins or increases the total price to our customers. For more information, See Risk Factors – Risks Related
to our Business and Financial Condition "Rising threats of international tariffs, including tariffs applied to goods between the
U.S. and China, may materially and adversely affect our business."

 Unusual Machines retail competitors are subject
to the same tariffs and have supply chains that include a greater mix of products sourced from China. The Company can use its domestically
manufactured parts to improve both relative margin and price relative to the other domestic retailers. In this way, tariffs may be a driver
for revenue and margin growth. Additionally, tariffs have caused domestic drone manufacturers to prioritize domestic producers. This has
created preference for components from companies, like Unusual Machines, that are actively onshoring.

 Government Regulation
and Federal Policy

 National Defense Authorization
Act and American Security Drone Act

 In December 2023, Congress passed the National
Defense Authorization Act ("NDAA"), which includes the American Security Drones Act ("ASDA"). The bill prohibits,
starting in January 2026, federal agencies and federally funded programs from purchasing or using drones manufactured in countries that
are viewed as threats to U.S. national security, such as China. The basis for the legislation is that purchases from these countries (i)
pose a significant threat to national security, (ii) represent efforts to infiltrate and influence American society, and (iii) risk the
theft of personal and business data. Specifically, the American Security Drone Act:

 Prohibits federal departments and agencies from procuring and operating certain foreign commercial off-the-shelf drone or covered unmanned aircraft system manufactured or assembled in countries identified as national security threats, and provides a timeline to end current use of these drones.

 Prohibits the use of federal funds awarded through certain contracts, grants, or cooperative agreements to state or local governments from being used (1) to procure a covered unmanned aircraft system that is manufactured or assembled by a covered foreign entity or (2) in connection with the operation of such a drone or unmanned aircraft system.

 Requires the Comptroller General of the United States to submit a report to Congress no later than 275 days after the enactment of the NDAA detailing the amount of foreign commercial off-the-shelf drones and covered unmanned aircraft systems procured by federal departments and agencies from countries identified as national security threats.

 Federal Aviation Administration

 The Federal Aviation Administration ("FAA")
of the United States Department of Transportation is responsible for the regulation and oversight of civil aviation within the United
States. Its primary mission is to ensure the safety of civil aviation. The FAA has adopted the name "unmanned aircraft" ("UA")
to describe aircraft systems without a flight crew on board. More common names include drone, Unmanned Aerial Vehicle ("UAV")
and remotely operated aircraft.

 The FAA began issuing regulations governing drones
in 2005 with their scope and frequency expanding in recent years with the significant increase in the number of drones sold. In December
2015, the FAA announced that all drones weighing more than 250 grams, or 0.55 pounds, must be registered with the FAA. As of December
2023, the FAA reported the registration of almost 791,000 drones, of which approximately 370,000 were commercial and approximately 416,000
were recreational. In addition, more than 370,000 remote pilots were certified.

 In January 2021, the FAA finalized rules requiring
that drones be identifiable remotely. These rules are effective for drone manufacturers beginning in September 2022 and for drone pilots
in September 2023. The FAA believes that remote ID technologies will enhance safety and security by allowing the FAA, law enforcement,
and federal security agencies to identify drones flying in their jurisdiction. These efforts lay the foundation for more complex operations,
such as those beyond visual line of sight at low altitudes, as the FAA and the drone industry move toward a traffic management ecosystem
for Unmanned Aircraft System flights separate from, but complimentary to, the air traffic management system.

 The Company believes that the oversight of the
FAA is beneficial to the drone industry generally, and the Company specifically. Approximately 70% of all FAA LAANC authorization are
already done using the Aloft product.

 Countering Chinese
Communist Party Drone Act

 In December 2025, Section 1709 was passed into
law as part of the National Defense Authorization Act. Section 1709 is commonly referred to as the Countering Chinese Communist Party
(CCCP) Drone Act. The law mandates that within one year, a security review of the two largest Chinese drone companies (DJI and Autel)
must be conducted and if it is not (or they fail to pass), the FCC will no longer grant licenses to operate within the United States.
The Company believes that this is functionally a ban on all new DJI and Autel products (similar to a previous ban of Huawei). This ban
will impact consumers as well as enterprises and the Company believes this will open the entire U.S. drone market up to domestic competition.

 Environmental Considerations

 Compliance with applicable environmental laws
since inception has not had a material effect upon the Company's capital expenditures, earnings or competitive position. However,
drones are battery operated which use electricity for charging. To that extent, except for users who use solar and other non-electrical
power to charge drones, users of drones the company sells burn carbon which negatively affects the environment. Further, the SEC's
climate change rules, when passed, will likely increase our compliance costs.

 Employees and Human Capital Resources

 As of March 25, 2025, the Company had sixteen
full-time employees and two full-time contractors, including our Chief Executive Officer, whose services are performed on behalf of a
consulting agreement.

 Property

 The Company's headquarters
are in Orlando, Florida under a lease which expires in October 2028. At this facility, the Company maintains its executive offices and
a warehouse from which it holds inventory and ships inventory to customers. As stated above, the Company plans to initiate a manufacturing
facility and believes that there are available locations near its current facility.

 Intellectual Property

 The Company has consolidated
its IP into a subsidiary, UMAC IP Holdings Corp. The IP portfolio primarily includes design and utility patents related to FPV headsets.
None of the patents are currently licensed and IP is generated in the general course of doing engineering design.

 The following table summarizes currently issued
patents (indicated by "Issued") including the grant dates thereof, and patent applications (indicated by "Pending or
Published"). As the chart indicates, some of these patents are in the U.S., where when issued the patent protection generally applies
for 20 years from the date the patent application was made (subject to potential extension, if applied for and granted). In general, patent
protection provides the patent holder with a monopoly on the invention within its scope for the duration of the patent.

 Country

 Status

 Patent No

 Application Date

 Grant Date

 Title

 D825,381

 7/13/2017

 8/14/2018

 UNMANNED AERIAL VEHICLE (Design

 179088

 1/10/2018

 5/30/2019

 China

 CN304757327S

 1/9/2018

 8/3/2019

 EU

 004665040

 GB

 90046650400001

 Korea

 30-963991

 1/11/2018

 7/3/2018

 10,179,647

 8/23/2017

 1/15/2019

 Abandoned

 3009413

 6/26/2018

 China

 201810895541.3

 8/8/2018

 3/12/2024

 France

 3446974

 6/25/2018

 11/6/2024

 Germany

 602018076194.2

 6/25/2018

 11/6/2024

 Switzerland

 3446974

 6/25/2018

 11/6/2024

 United Kingdom

 3446974

 6/25/2018

 11/6/2024

 D848,383

 7/13/2017

 5/14/2019

 179089

 1/10/2018

 5/30/2019

 China

 304758049S

 1/9/2018

 8/3/2018

 EU

 004665032

 United Kingdom

 90046650320001

 Korea

 30-965570

 1/11/2018

 7/13/2018

 China

 201810324925.X

 4/12/2018

 11/19/2021

 SINGLE-PANEL HEAD-MOUNTED DISPLAY (Utility)

 EU

 Pending

 19159958.8

 2/28/2019

 SINGLE-PANEL HEAD-MOUNTED DISPLAY (Utility)

 10,819,973

 6/7/2018

 10/27/2020

 SINGLE-PANEL HEAD-MOUNTED DISPLAY (Utility)

 China

 Pending

 202010150301.8

 3/6/2020

 APPARATUS FOR ATTACHING ACCESSORIES TO A FIRST-PERSON VIEW HEADSET (Utility)

 Allowed

 17/187,838

 2/28/2021

 APPARATUS FOR ATTACHING ACCESSORIES TO A FIRST-PERSON VIEW HEADSET (Utility)

 D991,255

 5/17/2021

 7/4/2023

 China

 CN308594144S

 11/11/2021

 4/19/2024

 VR GLASSES (Design)

 DM/218 069

 EU

 DM/218 069

 Japan

 DM/218 069

 GB

 DM/218 069

 Trademark Portfolio

 The following table summarizes current registered
trademarks (indicated by "Registered") including the registration dates. As the chart indicates, these trademarks are registered
in the United States and abroad.

 Country

 Status

 Trademark

 Reg. No.

 Reg. Date.

 App. No.

 App. Date.

 Classes

 Next Deadline

 US

 5,175,159

 4/4/2017

 87/074,341

 6/16/16

 Renewal due 4/4/2027

 Australia

 1814854

 4/18/2017

 1814854

 12/9/16

 Renewal due 12/9/2026

 TMA1013525

 1/22/2019

 1813182

 12/8/16

 Renewal due 1/22/2034

 EU

 016152688

 5/14/2017

 016152688

 12/12/16

 Renewal due 12/12/2026

 UK

 UK00916152688

 5/14/2017

 UK00916152688

 12/12/16

 Renewal due 12/12/2026

 US

 5,175,160

 4/4/2017

 87/074,378

 6/16/16

 Renewal due 4/4/2027

 Australia

 1814855

 4/18/2017

 1814855

 12/9/16

 Renewal due 12/9/2026

 TMA1013624

 1/22/2019

 1813183

 12/8/16

 Renewal due 1/22/2034

 EU

 016152837

 5/14/2017

 016152837

 12/12/16

 Renewal due 12/12/2026

 UK

 UK00916152837

 5/14/2017

 UK00916152837

 12/12/16

 Renewal due 12/12/2026

 US

 BYTE FROST

 6,318,131

 4/13/2021

 88/574,951

 8/12/19

 AOU due 4/13/2027

 US

 DOMINATOR

 5,446,501

 4/17/2018

 87/513,286

 6/30/17

 Renewal due 4/17/2028

 US

 6,037,513

 4/21/2020

 87/513,291

 6/30/17

 9, 12

 AOU due 4/21/2026

 Australia

 1892862

 7/18/2018

 1892862

 7/12/17

 9, 12

 Renewal due 7/12/2027

 UK

 UK00917653122

 6/12/2018

 UK00917653122

 12/27/17

 9, 12

 Renewal due 12/28/2027

 EU

 17653122

 6/12/2018

 17653122

 12/28/17

 9, 12

 Renewal due 12/28/2027

 (continued)

 Country

 Status

 Trademark

 Reg. No.

 Reg. Date.

 App. No.

 App. Date.

 Classes

 Next Deadline

 China

 28347095

 3/7/2019

 28347095

 12/27/17

 Renewal due 3/6/2029

 China

 28347096

 12/7/2018

 28347096

 12/27/17

 Renewal due 12/6/2028

 S. Korea

 40-1429232

 12/20/2018

 40-20170165133

 12/22/17

 9, 12

 Renewal due 12/20/2028

 Japan

 6128494

 3/8/2019

 2017162207

 12/11/17

 9, 12, 28

 Renewal due 3/8/2029

 US

 5,921,613

 11/26/2019

 87/792,917

 2/10/18

 9, 25

 AOU due 11/26/2025

 UK

 UK00917938426

 12/26/2018

 UK00917938426

 7/31/18

 9, 12, 25

 Renewal due 7/31/2028

 EU

 17938426

 12/26/2018

 17938426

 7/31/18

 9, 12, 25

 Renewal due 7/31/2028

 China

 32458836

 4/7/2019

 3248836

 7/25/18

 Renewal due 4/6/2029

 China

 32458835

 4/7/2019

 32458835

 7/25/18

 Renewal due 4/6/2029

 China

 32458837

 4/7/2019

 32458837

 7/25/18

 Renewal due 4/6/2029

 US

 SHARK BYTE

 6,631,683

 2/1/2022

 90/337,500

 11/23/20

 AOU due 2/1/2028

 UK

 SHARK BYTE

 UK00003597165

 9/3/2021

 UK00003597165

 2/18/21

 Renewal due 2/18/2031

 EU

 SHARK BYTE

 018402699

 11/5/2021

 018402699

 2/19/21

 Renewal due 2/19/2031

 China

 SHARK BYTE

 53741813

 10/14/2022

 53741813

 2/20/21

 Renewal due 10/27/2031

 Unusual Machines has
recently filed for a trademark on our logo.

 Research and Development

 Research and development activities are part of
Unusual Machine's business, and the Company will follow a disciplined approach to investing capital and resources to create new
drone technologies and solutions. Research and development costs were approximately $90,584 and 0, for the years ended December 31, 2024
and 2023, respectively and primarily related to developing NDAA compliant products including our Brave F7 flight controller, Brave 55A
ESC and the Fat Shark Aura FPV Camera. A fundamental part of this approach is a well-defined screening process that helps us identify
commercial opportunities that support desired technological capabilities in the markets we serve.

 Item 1A.

 Risk Factors

 This Annual Report
on Form 10-K contains forward-looking information based on our current expectations. Because our business is subject to many risks and
our actual results may differ materially from any forward-looking statements made by or on behalf of us, this section includes a discussion
of important factors that could affect our business, operating results, financial condition and the trading price of our securities. This
discussion should be read in conjunction with the other information in this Annual Report on Form 10-K, including our financial statements
and the related notes and "Management's Discussion and Analysis of Financial Condition and Results of Operations." The
occurrence of any of the events or developments described below could have a material adverse effect on our business, results of operations,
financial condition, prospects and securities trading prices. Additional risks and uncertainties not presently known to us or that we
currently deem immaterial may also impair our business operations.

 Risk Factors Summary

 Our business and an investment
in our Common Stock are subject to numerous risks and uncertainties, including those highlighted in this " Risk Factors " section
below. Some of these risks include:

 Risks Related to our
Business and Financial Condition

 Because the Company had a very limited operating history prior to its acquisition of Fat Shark and Rotor Riot, any investment in us is highly speculative.

 Fat Shark and Rotor Riot incurred net losses since their acquisition by Red Cat and may fail to achieve or maintain profitability.

 Rising threats of
 international tariffs, including tariffs applied to goods between the United States and China may materially and adversely affect our
 business.

 If the proceeds of the prior IPO and subsequent capital raises are insufficient to meet our working capital needs, and if we are then not able to obtain sufficient capital, we may be forced to limit the scope of our operations.

 If we lose key personnel, it may adversely affect our business.

 Conflicts of interest involving our board of directors ("Board") and other parties could materially harm our business.

 If we are unable to attract new customers or maintain and grow our existing customer relationships in a manner that is cost-effective, our revenue growth could be slower than we expect and our business may be harmed.

 Future operating results and key metrics may fluctuate significantly from period-to-period due to a wide range of factors, which makes our future results difficult to predict.

 Any failures of or damage to, attack on or unauthorized access to our information technology systems or facilities or disruptions to our continuous operations, including the systems, facilities or operations of third parties with which we do business, such as resulting from cyber-attacks, could result in significant costs, reputational damage and limits on our ability to conduct our business activities.

 Our failure to effectively manage our growth could harm our business.

 If we are unable to attract, integrate and retain additional qualified personnel, including top technical talent, our business could be adversely affected.

 If we are successful in consummating the Merger, the integration of our business and the Aloft business may disrupt or have a negative impact on our business.

 Risks Related to Our Sale of Drone-Related Products and Operations
in the Drone Industry

 We operate in an emerging and rapidly evolving industry which makes it difficult to evaluate our business and future prospects.

 We face competition from larger companies that have substantially greater resources which challenges our ability to establish market share, grow the business, and reach profitability.

 Several steps of our production processes are dependent upon certain critical machines and tools which could result in delivery interruptions and foregone revenues.

 We may not be able to procure necessary key components for our products or may produce or purchase too much inventory.

 We may not be able to keep pace with technological advances; and we depend on advances in technology by other companies.

 Lack of long-term purchase orders and commitments from customers may lead to a rapid decline in sales.

 Our products require ongoing research and development and may experience technical problems or delays, which could lead the business to fail.

 If we are involved in litigation, it could harm our business or otherwise distract management.

 Our business is highly dependent upon our brand recognition and reputation, and the failure to maintain or enhance our brand recognition or reputation, including due to our high reliance on online and social media platforms, would likely adversely affect our business and operating results.

 Future growth and ability to generate and grow revenue and achieve or maintain profitability may be adversely affected if our marketing initiatives are not effective in generating sufficient levels of brand awareness.

 Future acquisitions could disrupt our business and adversely affect our operating results, financial condition and cash flows.

 If we incur any future impairment in the carrying value of our goodwill asset or write-off of our general intangibles, it could depress our stock price.

 Product quality issues and a higher-than-expected number of warranty claims or returns could harm our business and operating results.

 Risks Related to Intellectual Property Protection

 If third-party intellectual property infringement claims are asserted against us, it may prevent or delay our product development and commercialization efforts and have a material adverse effect on our business and future prospects.

 We may depend on intellectual property rights including patent rights that have not yet been and may not be obtained by us, and our intellectual property rights and proprietary rights may not adequately protect our products.

 If we lose our rights under our third-party technology licenses, our operations could be adversely affected.

 Significant inflation could adversely affect our business and financial results.

 Risks Related to Government Regulation of Our Operations and Industry

 Failure to obtain
 necessary regulatory approvals from the DIU, FAA or other governmental agencies by us, our customers, or others who use our
 products, or limitations put on the use of unmanned aircraft systems, or "UAS," in response to public privacy or safety
 concerns, may prevent us from expanding the sales of our drone solutions in the United States.

 We are or may become subject to governmental export and import controls, economic sanctions and other laws and regulations that could subject us to liability and impair our ability to compete in international markets.

 If the courts uphold the SEC's climate change rules, we will incur additional costs which may materially and adversely affect our operating results and financial condition.

 If we fail to comply with
 United States and foreign laws related to privacy, data security, and data protection, it could adversely affect our operating results
 and financial condition.

 Risks Related to Our Common Stock

 The market price of our shares of Common Stock is subject to fluctuation.

 Our stock price may be and has been volatile, which could result in substantial losses to investors.

 We are incurring significant additional costs as a result of being a public company, and our management will be required to devote substantial time to compliance with our public company responsibilities and corporate governance practices.

 Our failure to maintain effective disclosure controls and internal controls over financial reporting could have an adverse impact on us.

 Because our Common Stock is listed on NYSE American, we are subject to additional regulations and continued requirements.

 Our Board of Directors may authorize and issue shares of new classes of stock that could be superior to or adversely affect current holders of our Common Stock.

 If we raise capital in the future, it may dilute our existing stockholders' ownership and/or have other adverse effects on us, our securities or our operations.

 Common stock eligible for future sale may adversely affect the market.

 If securities or industry analysts do not publish research or reports about our business, or if they adversely change their recommendations regarding our Common Stock, the market price for our Common Stock and trading volume could decline.

 We and our investors face the implications of our status as an emerging growth company under the federal securities laws and regulations.

 We have never paid dividends and we do not expect to pay dividends for the foreseeable future.

 Our Certificate of Incorporation contains certain provisions which may result in difficulty in bringing stockholder actions against or on behalf of the Company or its affiliates.

 RISK FACTORS

 Investing in our Common Stock involves a high
degree of risk. Investors should carefully consider the following Risk Factors before deciding whether to invest in the Company. Additional
risks and uncertainties not presently known to us, or that we currently deem immaterial, may also impair our business operations or our
financial condition. If any of the events discussed in the Risk Factors below occur, our business, consolidated financial condition, results
of operations or prospects could be materially and adversely affected. In such case, the value and marketability of our securities could
decline.

 Risks Related to our Business and Financial
Condition

 Because the Company
had a limited operating history prior to its acquisition of Fat Shark and Rotor Riot, any investment in us is highly speculative.

 We completed our acquisitions
of Fat Shark and Rotor Riot simultaneously with the closing of our IPO in February 2024. Both companies, prior to the completion of the
acquisitions, were operated by Red Cat since their acquisition by Red Cat in 2020. While the management of each company remained as employees,
no Red Cat officer, other than Dr. Allan Evans who became our Chief Executive Officer in December 2023, and our Chief Operating Officer
in March 2024, respectively, joined us. Our management team is headed by our executive officers together with individuals from Fat Shark
and Rotor Riot, and our operations going forward are therefore subject to ordinary integration risks where two companies and two cultures
are combined. Further, we may not accurately forecast customer behavior and recognize or respond to emerging trends, changing preferences
or competitive factors facing us, and, therefore, we may fail to make accurate financial forecasts. Our current and future expense levels
are based largely on our budgeted plans and estimates of future revenue. Similarly, if we are able to raise additional funds in future
financing transactions, we may use a portion of those proceeds to acquire other operating businesses in our industry or in related industries
to facilitate strategic growth and build our market presence and revenue potential. If we do acquire one or more businesses in the future,
we may be unable to adjust our spending in a timely manner to compensate for any unexpected revenue shortfall, which could then force
us to curtail our business operations or plan of operations or acquisitions.

 Unusual Machines must
be considered in light of the uncertainties, risks, expenses, and difficulties frequently encountered by companies in their early stages
of operations, and growth process. For all these reasons, we may be unable to achieve or maintain profitability in some or all of our
business segments in a timely manner or at all.

 Fat Shark and Rotor Riot have incurred net
losses since their acquisition by Red Cat and may fail to achieve or maintain profitability.

 Since their acquisition by Red Cat in 2020, Fat
Shark and Rotor Riot incurred net losses for each reported quarter with the exception of Fat Shark which reported a small net income in
the quarter ended July 31, 2022. Further, Unusual Machines was formed in July 2019 did not conduct any operational business activities
until February 2024 after the completion of our IPO and acquisitions of Fat Shark and Rotor Riot. Following our acquisition of Fat Shark
and Rotor Riot, their operations constitute our business. Further, Fat Shark had lower revenues in fiscal year 2023 compared to fiscal
year 2022, and Rotor Riot had higher net losses in fiscal year 2023 compared to fiscal year 2022, and generally experiences fluctuating
revenue as a result of recurring seasonal sales cycles. We will need to generate higher revenues and control operating costs in order
to attain profitability. There can be no assurances that we will be able to do so or to reach profitability.

 We expect to continue to incur losses for the
foreseeable future and we expect costs to increase in future periods as we expend substantial financial and other resources on, among
other things:

 expanding into the B2B channel;

 opening a manufacturing facility;

 researching, developing, producing and distributing new products;

 sales and marketing, which will require time before these investments generate sales results;

 general and administrative expenditures, including significantly increasing expenses in accounting and legal fees related to the increase in the sophistication and resources required for public company compliance and other needs arising from the growth and maturity of the Company;

 competing with other companies that are currently in, or may in the future enter, the markets in which we compete;

 maintaining high customer satisfaction and ensuring product and service quality;

 developing our indirect sales channels and strategic partner network;

 maintaining the quality of our technology infrastructure;

 establishing and increasing market awareness of our Company and enhancing our brand;

 consummating and integrating acquisitions;

 maintaining compliance with applicable governmental regulations and other legal obligations, including those related to intellectual property and drones; and

 attracting and retaining top talent in a competitive labor market.

 These expenditures may not result in additional
revenue or the growth of our business in the manner or to the extent anticipated or intended or at all. If we fail to grow revenue or
to achieve or sustain profitability, our business, financial condition, results of operations, and prospects could be materially adversely
affected and the market price of our Common Stock could be adversely affected.

 Rising threats of international tariffs, including tariffs applied
to goods between the United States and China, may materially and adversely affect our business.

 Our B2C business has historically been dependent
on Chinese imports for our products and operations. For example, a majority of our products are manufactured, directly and indirectly,
using Chinese vendors. We do not have any written agreements with our other suppliers in China. We rely only on purchase orders. There
are inherent risks and uncertainties regarding the enforcement of our rights with respect to our oral agreements and purchase orders.
Should our suppliers in China fail to honor our oral agreements and purchase orders we will not have any recourse against such suppliers
under Chinese law. The legal system in China and the enforcement of laws, rules and regulations in China can change quickly and the Chinese
government may intervene or influence the operations of our suppliers which would adversely impact our business insofar as we would have
to seek other suppliers outside of China and such suppliers would most likely charge us more for our products. As a result of the recent
United States presidential election, President Trump has imposed steep and additional tariffs on the importation from China of goods including
the drones we use in our B2C business. This increase in tariffs imposed could materially and adversely affect our business and results
of operations. These tariffs apply to the vast majority of our respective inventory, and we have historically increased prices and may
in the future be forced to implement additional price increases to adjust to the higher costs of inventory, which imposes the risk of
reduced demand for such products and lower sales and resulting revenue. In addition, additional tariffs have been instituted on Chinese
products and could see potential additional tariffs in the future. Under the current Trump administration, the imposition of additional
tariffs fluctuates dramatically and have created uncertainty in the global markets. Future tariffs or any further costs or restrictions
imposed on products that we import, could require us to raise our prices on our B2C products, which may result in the loss of customers
and harm our business, particularly since we rely on consumer spending and our products are typically considered non-essential, and purchases
are therefore highly price sensitive.

 In addition, changes in political conditions in
China and changes in the state of China-United States relations, including any tensions relating to potential military conflict between
China and Taiwan, are difficult to predict and could adversely affect the operations or financial condition of the Company. In addition,
because of our B2C involvement in the Chinese market, any deterioration in political or trade relations might cause a public perception
in the United States or elsewhere that might cause that business to become less attractive. Such an impact could adversely affect our
revenues and cash flows. In addition to Chinese tariffs, one of our first B2B customers was a European company. If the European Union
and other European countries react to the United States tariffs by imposing tariffs on United States made product including our drones,
the trade war may make our B2B drone part too expensive.

 If the tariffs or other factors result in increased
inflation and a recession, our business may be materially harmed.

 A direct impact from rising tariffs on our business
will be increases in the prices of inventory we acquire and, most likely, an increase in our selling prices. Further, due to the tariffs
and possibly large cuts in the size of the government, there may be increased unemployment and other economic factors which result in
recession. In such event, our B2C business may be materially and adversely affected. Further, our B2B business including our proposed
manufacturing of drones in the United States may also be adversely affected by a recessionary economy and inflation.

 If our existing cash
is insufficient to meet our working capital needs, and if we are then not able to obtain sufficient capital, we may be forced to limit
the scope of our operations.

 We expect that our existing cash will be sufficient
to meet our working capital needs for at least 12 months. However, due to our continued negative cash flow we may require substantial
additional working capital.

 There can be no assurance that our businesses
will reach profitability. If adequate additional debt and/or equity financing is not available on reasonable terms or at all, then we
may not be able to continue to develop our business activities, and we will have to modify our business plan. These factors could have
a material adverse effect on our future operating results and our financial condition.

 Our ability to raise financing through sales of
equity linked securities depends on general market conditions and the demand for our Common Stock. To the extent that we raise additional
capital through the sale of equity or convertible debt securities, the ownership interest of stockholders will be diluted, and the terms
may include liquidation or other preferences that adversely affect the rights of existing stockholders. Debt transactions often include
restrictive covenants that could limit our ability to engage in strategic transactions, acquire complimentary businesses, or adjust to
changing market environments as quickly or efficiently as we otherwise would or at all. Further, if adequate financing is not available
or is unavailable on acceptable terms, we may find we are unable to fund our planned expansion, take advantage of acquisition opportunities,
develop or enhance our products, or respond to competitive pressures in the industry which may jeopardize our ability to continue operations.

 If we lose key personnel, it may adversely
affect our business.

 Our future success depends in large part on the
continued contributions of our executive officers, members of senior management and other key personnel, particularly Dr. Allan Evans,
our Chief Executive Officer. Dr. Evans' leadership, knowledge and experience in the drone industry is expected to be crucial to
our business plan and any future successes and progress we experience. The loss of Dr. Evans' services would therefore materially
adversely affect our business and prospects. As a condition to the consummation of the IPO, we obtained "key person" insurance
for Dr. Evans but not for any other officers or employees. Our executive officers, senior management and key personnel are all employed
on an at-will basis, which means that they could terminate their services with us at any time, for any reason and without notice. The
loss of any of our key management personnel could significantly delay or prevent the achievement of our development and strategic objectives
and adversely affect our business.

 Conflicts of interest
involving our Board and other parties could materially harm our business.

 Our Board on which we
heavily depend are or may become involved in other endeavors giving rise to conflicts of interests that are adverse to the Company. See
"Management" and "Corporate Governance." Mr. Jeffrey Thompson, a member of our Board is the Chief Executive Officer
of Red Cat, a drone company with which we partner on some of our B2B business. These arrangements could cause him to be unable or decline
to devote sufficient time and attention to our Company and favor Red Cat, and/or to face a conflict of interest, financial or otherwise,
adverse to us and in favor of Red Cat. Accordingly, from time-to-time our directors may not devote sufficient time and attention to our
affairs, which could have a material adverse effect on our operating results, and there can be no assurance that other conflicts of interest
will not arise from their other business ventures, any of which could materially and adversely impact our business.

 Finally, Rotor Riot offers a variety of drone
products through its website, which includes a number of product offerings from competitors in the drone industry. While these relationships
have enabled us to generate revenue, by virtue of their involvement in the sale of drones and drone-related products these customers also
have interests that are adverse to ours, and may determine to reduce their expenditures on our products in the future and/or to vertically
integrate their operations to reduce or eliminate their reliance on our products.

 Any of the foregoing developments could result
in materially adverse consequences to our Company, results of operations and financial condition.

 If we are unable to attract new customers or
maintain and grow our existing customer relationships in a manner that is cost-effective, our revenue growth could be slower than we expect
and our business may be harmed.

 To increase our revenue, we must add new customers,
upsell to our existing customers, enhance our products with features that set us apart from our competitors, and effectively develop and
market new products including our B2B products that enable us to maintain and expand our brand and market share. Demand for our products
is affected by a number of factors, many of which are beyond our control. Additionally, the projections and estimates about the future
success and growth of the drone industry and demand for drone-related products such as ours, could prove to be incorrect, in which case
our results of operations and prospects will decline. For example, if a recession occurs in the United States or global economy, we expect
that consumer spending, particularly for non-essential goods such as our drone products which are largely focused on recreational uses,
may decline, limiting our ability to attract or maintain a sufficient customer base to achieve or maintain the revenue we seek in the
development and sale of our products. Even if we do attract customers, the cost of new customer acquisition may prove so high as to prevent
us from achieving or sustaining profitability.

 Our future success also depends on our ability
to increase the use of our products and solutions within and across our existing customers and future customers. While we believe there
is a significant opportunity to further expand within our existing customer base, including due to our planned employment of a "land-and-expand"
business model in which we plan to establish relationships with new customers and grow those relationships over time by providing high
quality products and services. Our growth prospects depend on our ability to persuade customers to buy more product, and if we fail to
do so, our business goals and prospects may not be achieved to the extent sought or anticipated or at all.

 Future operating results and key metrics may
fluctuate significantly from period-to-period due to a wide range of factors, which makes our future results difficult to predict.

 Our operating results and key metrics could vary
significantly from quarter-to-quarter as a result of various factors, some of which are outside of our control, including:

 delays in the receipt of orders from customers that are dependent on government orders;

 the effect that tariffs, a trade war and a potential recession may have on our business;

 delays in getting Blue List approval for additional drone components that we develop;

 the expansion or contraction of our customer base and the amount of products ordered;

 the size, duration and terms of our contracts with both existing and new customers, including distributors we contract with;

 seasonality of sales at Rotor Riot which generally has experienced higher sales volumes in October – December than in other three-month periods as a result of holiday purchases and its e-commerce focus;

 sales cycles which fluctuate and often include delays between the end of one product or solution's cycle and the launch of a new product or solution to replace or supplement the prior offering;

 the introduction of products and product enhancements by competitors, and changes in pricing for products offered by us or our competitors;

 customers delaying purchasing decisions in anticipation of new products or product enhancements by us or our competitors or otherwise;

 changes in customers' budgets;

 the amount and timing of payment for expenses, including infrastructure, research and development, sales and marketing expenses, employee benefit and stock-based compensation expenses;

 costs related to the hiring, training and maintenance of our employees;

 any future impact from the ongoing geopolitical military conflicts (including the war in Israel, the war in Ukraine, and tensions between China and Taiwan;

 supply chain issues;

 political unrest affecting our relationship with China and future tariffs;

 our lack of a long-term agreement with our suppliers which can affect the availability of parts and future costs;

 changes in laws and regulations or other regulatory developments that impact our business;

 the timing and extent of the growth of our business; and

 general economic and political conditions, both domestically and internationally, as well as economic conditions specifically affecting industries in which our customers operate.

 Any one of these or other factors discussed elsewhere
in this Annual Report may result in fluctuations in our operating results, meaning that quarter-to-quarter comparisons may not necessarily
be indicative of our future performance.

 Any failures of or damage to, attack on or
unauthorized access to our information technology systems or facilities or disruptions to our continuous operations, including the systems,
facilities or operations of third parties with which we do business, such as resulting from cyber-attacks, could result in significant
costs, reputational damage and limits on our ability to conduct our business activities.

 Our operations will depend on information technology
infrastructure and computer systems, both internal and external, to, among other things, record and process customer and supplier data,
marketing activities and other data and functions and to maintain that data and information securely. In recent years, several organizations
have suffered successful cyber-attacks launched both domestically and from abroad, resulting in the disruption of services to customers,
loss or misappropriation of sensitive or private data and reputational harm. If we are subject to a cyber-attack, we could suffer a similar
breach or suspension in the future. Further, we may be unaware of a prior attack and the damage caused thereby until a future time when
remedial actions cannot be taken. Cyber-threats are often sophisticated and are continually evolving. We may not implement effective
systems and other measures to effectively identify, detect, prevent, mitigate, recover from or remediate the full diversity of cyber-threats or
improve and adapt such systems and measures as such threats evolve and advance in their ability to avoid detection.

 A cyber-security incident, or a failure to
protect our technology infrastructure, systems and information and our customers, suppliers and others' information against cyber-security threats,
could result in the theft, loss, unauthorized access to, disclosure, misuse or alteration of information, system failures or outages or
loss of access to information. The expectations of our customers and regulators with respect to the resiliency of our systems and the
adequacy of our control environment with respect to such systems may increase as the risk of cyber-attacks, and the consequences of those
attacks become more pronounced. We may not be successful in meeting those expectations or in our efforts to identify, detect, prevent,
mitigate and respond to such cyber-incidents or for our systems to recover in a manner that does not disrupt our ability to provide
products and services to our customers or product personal, private or sensitive information about our business, customers or other third
parties.

 In July 2023, the Securities and Exchange Commission
(the "SEC") approved final rules requiring public companies to report material cybersecurity incidents and disclose their
cybersecurity risk management, strategy and governance. The new rules required us to enhance our cybersecurity compliance efforts and
have the effect of causing us to expend funds to prevent material cybersecurity incidents and begin making cybersecurity-related periodic
and annual disclosures.

 Specifically, the new rules impose a new Form
8-K disclosure requirement about material cybersecurity incidents within four business days after we determine that a cybersecurity is
material. Annually we will be required to disclose in our 10-K our processes, if any, to assess, identify and manage material risks from
cybersecurity threats including whether we have hired third parties in connection with the processes. We also will be required to disclose
whether any risks from cybersecurity threats have or are materially reasonably likely to materially affect us. Finally we must describe
our Board's oversight of risks from cybersecurity threats and management's role in assessing and managing these risks. We
expect to incur material additional compliance and reporting costs, including monitoring, collecting, and analyzing data concerning cyber-security
incidents and evaluating and preparing the required disclosure. We may also be required to incur third party compliance costs.

 The failure to maintain an adequate
technology infrastructure and applications with effective cyber-security controls could impact operations, adversely affect our
financial results, result in loss of business, damage our reputation or impact our ability to comply with regulatory obligations,
leading to regulatory fines and sanctions. We may be required to expend significant additional resources to modify,
investigate or remediate vulnerabilities or other exposures arising from cyber-security threats. Failing to prevent or properly
respond to a cyber-attack could expose us to regulatory fees or civil liability, cause us to lose customers or suppliers,
prevent us from offering our products including due to resulting regulatory action, impair our ability to maintain continuous
operations, and inhibit our ability to meet regulatory requirements.

 Our failure to effectively manage our growth
could harm our business.

 Businesses, including development stage companies
such as ours which often grow rapidly, may have difficulty managing their growth. These challenges are exacerbated in circumstances such
as ours following our acquisition of operating businesses and will be continued if we close any acquisitions including the Aloft Merger.
We intend to expand the number and types of products we sell as we grow, if and as capital becomes available. Further, because of our
reliance on consumer spending which depends on novelty and social trends, and the rapid and constant technologically advancements that
characterize our industry, we are subject to periodic sales cycles. We will need to replace and regularly introduce on a timely basis
new products and technologies, enhance existing products, and effectively stimulate customer demand for new products and upgraded or enhanced
versions of our existing products. Similarly, because our product offerings are largely dependent on others' drone-related products
and activities, we may need to adjust or update as third parties advance or alter their technology and activities. If we are able to successfully
develop, produce and market our products and initiate our planned manufacturing business, we will likely need to incur additional expenditures
and expand our personnel with additional employees and consultants who are capable of providing the necessary support. We cannot assure
you that our management will be able to manage our growth effectively or successfully.

 The replacement and expansion of our products
is expected to place a significant strain on our management, operations and engineering resources. Specifically, the areas that are strained
most by these activities include the following:

 New Product Launches: With the changes in and growth of our product portfolio, we will experience increased complexity in coordinating product development, manufacturing, and shipping. As this complexity increases, it places a strain on our ability to accurately coordinate the commercial launch of our products with adequate supply to meet anticipated customer demand and effectively market to stimulate demand and market acceptance. We may experience delays in our operations or product development or production efforts. If we are unable to scale and improve our product launch coordination, we could frustrate our customers and reduce or delay product sales;

 Existing Products Impacted by New Introductions: The introduction of new products or product enhancements may shorten the life cycle of our existing products, or replace sales of some of our current products, thereby offsetting the benefit of even a successful product introduction and may cause customers to defer purchasing our existing products in anticipation of the new products and potentially lead to challenges in managing inventory of existing products. We may also provide price protection to some of our retailers as a result of our new product introductions and reduce the prices of existing products. Granting these rights exposes us to greater risk of operational losses, as they limit our ability to react and adapt to changing economic conditions, such as rising costs caused by supply chain shortages. If we fail to effectively manage new product introductions, our revenue and ability to become profitable may be harmed; and

 Forecasting, Planning and Supply Chain Logistics: With the changes in and growth of our product portfolio, we will experience increased complexity in forecasting customer demand, in planning for production, and in transportation and logistics management. If we are unable to scale and improve our forecasting, planning, production, and logistics management, we could frustrate our customers, lose product sales or accumulate excess inventory.

 Because we rely on a limited number of suppliers, including one
key supplier, for our component parts our business may be adversely affected.

 The drone industry relies on limited sources to
supply certain components and materials used in the manufacturing of drones. Our intention is to purchase certain components or sub-components
from suppliers based in the United States, which may lead us to pay higher prices, or select parts from a more limited number of suppliers
relative to our competitors, which would adversely impact our gross margin and operating results. In addition, the imposition of tariffs
by the United States and a trade war with China will significantly increase the cost of our component parts. We will also be forced to
increase prices to our customers which could result in decreased sales, especially if there is an economic recession. Our operating results
could be materially adversely impacted if our suppliers do not provide the critical components used to assemble our products on a timely
basis, at a reasonable price, and in sufficient quantities.

 Our ability to meet customer demand depends, in
part, on our ability to obtain timely and adequate delivery of components for our products.

 Some of the key components used to manufacture
our products come from a limited or single source of supply, or by a supplier that could potentially become a competitor. Our contract
manufacturers generally purchase these components on our behalf from approved suppliers. We are subject to the risk of shortages and long
lead times in the supply of these components and the risk that our suppliers discontinue or modify components used in our products. In
addition, the lead times associated with certain components are lengthy and preclude rapid changes in quantities and delivery schedules.

 If we lose access to components from a particular
supplier or experience a significant disruption in the supply of products and components from a current supplier, we may be unable to
locate alternative suppliers of comparable quality at an acceptable price, or at all, and our business could be materially and adversely
affected. In addition, if we experience a significant increase in demand for our products, our suppliers might not have the capacity or
elect not to meet our needs as they allocate components to other customers. Developing suitable alternate sources of supply for these
components may be time-consuming, difficult and costly, and we may not be able to source these components on terms that are acceptable
to us, or at all, which may adversely affect our ability to meet our development requirements or to fill our orders in a timely or cost-effective
manner. Identifying a suitable supplier is an involved process that requires us to become satisfied with the supplier's quality
control, responsiveness and service, financial stability, labor and other ethical practices, and if we seek to source materials from new
suppliers, there can be no assurance that we could do so in a manner that does not disrupt the manufacture and sale of our products.

 Our reliance on single source, or a small number
of suppliers involves a number of additional risks, including risks related to supplier capacity constraints, price increases, timely
delivery, component quality, failure of a key supplier to remain in business and adjust to market conditions, delays in, or the inability
to execute on, a supplier roadmap for components and technologies; and natural disasters, fire, acts of terrorism or other catastrophic
events, including global pandemics.

 Certain components and services necessary for
the manufacture of our products are available from only a limited number of sources, and other components and services are only available
from a single source. Our relationship generally is on a purchase order basis and these firms do not have a contractual obligation to
provide adequate supply or acceptable pricing to us on a long-term basis. These suppliers could discontinue sourcing merchandise for us
at any time. If any of these suppliers were to discontinue its relationship with us, or discontinue providing specific products to us,
and we are unable to contract with a new supplier that can meet our requirements, or if they or such other supplier were to suffer a disruption
in their production, we could experience disruption of our inventory flow, a decrease in sales and the possible need to re-design our
products. Any such event could disrupt our operations and have an adverse effect on our business, financial condition and results of operations.
Several new and alternative suppliers have begun offering components suitable for use in our products. With new tooling and electronics,
any one of these alternative components could be incorporated into our products but our costs could be higher, they may offer less performance,
and, as a result, make our products too costly and less desirable.

 If we are unable to attract, integrate and
retain additional qualified personnel, including top technical talent, our business could be adversely affected.

 Our future success depends in part on our ability
to identify, attract, integrate and retain highly skilled technical, managerial, sales and other personnel, particularly as we attempt
to expand our operations and further develop and market our products. We face intense competition for a limited number of qualified individuals
with the requisite skills and experience from numerous other companies, including other software and technology companies, many of whom
have greater financial and other resources than we do. These companies also may provide more diverse opportunities and better chances
for career advancement. Some of these characteristics may be more appealing to high-quality candidates than those we have to offer. In
addition, new hires often require significant training and, in many cases, take significant time before they achieve full productivity.
We may incur significant costs to attract and retain qualified personnel, including significant expenditures related to salaries and benefits
and compensation expenses related to equity awards, and we may lose new employees to competitors or other companies before we realize
the benefit of our investment in recruiting and training them. Moreover, new employees may not be or become as productive as we expect,
as we may face challenges in adequately or appropriately integrating them into our workforce and culture. In addition, if we move into
new geographies, we will need to attract and recruit skilled personnel in those areas. We have limited experience with recruiting in geographic
areas outside of the United States, and may face additional challenges in attracting, integrating and retaining international employees.
If we are unable to attract, integrate and retain suitably qualified individuals who are capable of meeting our growing technical, operational
and managerial requirements, on a timely basis or at all, our business will be adversely affected.

 Our new manufacturing
business has inherent risks that may adversely impact us.

 The Company has hired
a vice president of manufacturing whose role is to head up the Company's proposed drone component manufacturing business. The Company
also plans to lease an additional facility near its headquarters office in Orlando, Florida, at which it will manufacture NDAA compliant
drone motors. There are inherent risks in connection with launching our component manufacturing business, which include:

 the need to expend working capital to purchase manufacturing equipment; rent a facility and to hire personnel
with the requisite skills to fabricate our drones which could initially have an adverse effect on our working capital;

 to the extent that there are delays in receiving the requisite equipment necessary to manufacture our
drones and component parts, our customers for our products may seek alternative manufacturers and our manufacturing business could be
adversely affected;

 to the extent that any of the equipment that we purchase is sourced overseas, we may be impacted by tariffs
imposed by the current administration; and

 the manufacturing equipment that we acquire may have bugs or may not be in sound working order and the
products we manufacture may not be manufactured in accordance with our or our customers specifications, which result in conflicts with
customers, the loss of revenues or damage to our reputation.

 Risks Related to Our Sale of Drone-Related
Products and Operations in the Drone Industry.

 We operate in an emerging and rapidly evolving
industry which makes it difficult to evaluate our business and future prospects.

 The drone industry is relatively new and is growing
rapidly. As a result, it is difficult to evaluate our business and future prospects. We cannot accurately predict whether, and even when,
demand for our products will increase, if at all. The risks, uncertainties and challenges encountered by companies operating in emerging
and rapidly growing industries include:

 generating sufficient revenue to cover operating costs and sustain operations;

 acquiring and maintaining market share;

 attracting and retaining qualified personnel;

 successfully developing and commercially marketing new products;

 complying with challenging supply chain issues which may arise;

 complying with developing regulatory requirements;

 the possibility that favorable estimates or projections prove to be incorrect;

 responding effectively to changing technology, evolving industry standards, and changing customer needs or requirements; and

 accessing the capital markets to raise additional capital, on reasonable terms, if and when required to sustain operations or to grow the business.

 As such, our current expectations and projects
about future events and trends may be different from the actual results. Furthermore, if we are unable to address any of the above challenges
successfully, our business, financial condition, results of operations, and prospects may be adversely affected by such failure.

 We face competition from larger companies that
have substantially greater resources which challenges our ability to establish market share, grow the business, and reach profitability.

 The drone
industry is attracting a wide range of significantly larger companies which have substantially greater financial, management, research
and marketing resources than we have. The drone hardware and parts and components spaces are dominated by larger Chinese companies such
as SZ DJI Technology Company, Ltd and T-Motor. With respect to our FPV products, current and potential future competitors also include
a variety of established, well-known diversified consumer electronics manufacturers such as Samsung, Sony, LG Electronics (LGE), HTC,
Lenovo, Epson, Yuneec, Boscam, Eachine, Walkera, SkyZone, MicroLED and large software and other products companies such as Alphabet Inc.
(Google), Microsoft, Facebook and Snap. The large number of smaller and/or private companies focused on drone solutions also have competitive
advantages over us which we may struggle to overcome, particularly as we seek to further establish and grow our customer base. Our competitors
may be able to provide customers with different or greater capabilities than we can provide, including technical qualifications, pricing,
and key technical support. Many of our competitors may utilize their greater resources to develop competing products and technologies,
leverage their financial strength to utilize economies of scale and offer lower pricing, and hire more qualified personnel by offering
more generous compensation packages. On the other hand, other small business competitors may be able to offer more cost competitive solutions
or may be able to adapt more quickly to market developments due to lower overhead costs, leveraging of their professional relationships
and networks, geographic or specialty focuses or greater flexibility inherent in smaller operations and a lower number of personnel.

 Among product and service features that drive
competition in our industry are breadth of product line, quality and durability of products, stability, reliability and reputation of
the provider, along with cost. Quantity discounts, price erosion, and rapid product obsolescence due to technological improvements are
therefore common in our industry as competitors strive to retain or expand market share. The Company's ability to compete effectively
will depend on, among other things, the Company's pricing models, quality of customer service, development of new and enhanced products
and services in response to customer demands and changing technology, reach and quality of sales and distribution channels and capital
resources. Competition could lead to an inability to sustain sales levels, a reduction in the rate at which the Company adds new customers,
a decrease in the size of the Company's market share and a decline in its customers and revenue. In order to secure sales, we may
have to offer comparable products and services at lower pricing, which could adversely affect our operating margins. Our inability to
compete effectively against these larger companies could have a material adverse effect on our business, financial condition and operating
results.

 The development and manufacture of FPV goggles
encompasses several complex processes and several steps of our production processes are dependent upon third party vendors, supply chains,
the availability of PCBs, optics, and certain chips. Any change in availability of these components, manufacturing or design partners
could result in delivery interruptions, which could adversely affect our operating results.

 As we continue to develop our products, we must
progress through the complex and challenging processes involved in the technology and designs on which Fat Shark and Rotor Riot products
are founded. Fat Shark and Rotor Riot rely on third party suppliers for the resources needed to navigate these processes and expect to
continue to rely on such parties when we reach the manufacturing and marketing stages. Our reliance on third-party manufacturers and service
providers will entail risks to which we may not be subject if our future operations were more vertically integrated, including:

 the ongoing supply chain shortages, and any future supply chain and logistics challenges that we or our vendors may face in the future, including due to the reliance on lithium-ion batteries and other materials for our products;

 the inability to meet any product specifications and quality requirements consistently;

 the impact of tariffs, the availability of United States supply sources
and the impact of higher prices;

 discontinuation or recall of products or component parts;

 manufacturing and product quality issues related to scale-up of manufacturing;

 costs and validation of new equipment and facilities required for scale-up;

 a failure to comply with
 applicable regulatory and safety standards in the United States and foreign markets in which we or our collaborators
 operate;

 the inability to negotiate manufacturing and service agreements with third parties under commercially reasonable terms;

 the possibility of breach or termination or nonrenewal of agreements with third parties in a manner that is costly or damaging to us;

 we do not always execute definitive written agreements with our vendors, particularly those located in China, which exposes us to possible disputes concerning the existence or terms of our agreements and our intellectual property rights;

 the reliance on a few sources, and sometimes, single sources for raw materials and components, such that if we cannot secure a sufficient supply of these product components, we cannot manufacture and sell products in a timely fashion, in sufficient quantities or under acceptable terms;

 operations of our third-party manufacturers, suppliers or service providers could be disrupted by conditions unrelated to our business or operations, including the bankruptcy of the party;

 carrier disruptions or increased costs beyond our control;

 possible misappropriation of our proprietary technology; and

 failing to deliver products under specified storage conditions and in a timely manner.

 Our product technology and manufacturing processes
are evolving, which can result in production challenges and difficulties. We may be unable to produce our products in sufficient quantity
and quality to maintain existing customers and attract new customers. In addition, we may experience manufacturing problems which could
result in delays in delivery of orders or product introductions. Any of these events could lead to production and marketing delays or
failure or impact on our ability to successfully commercialize our products. If we fail to contract with third parties on favorable terms,
coordinate with and supervise their services and contributions to our processes, and leverage those relationships to deliver quality products
in a timely manner to customers, we could experience reductions or delays in revenue, reputational harm and diminished brand recognition,
higher than expected expenses, or other adverse developments that would materially harm our business.

 Several steps of our production processes are
dependent upon certain critical machines and tools which could result in delivery interruptions and foregone revenues.

 Fat Shark currently has no equipment redundancy
to manufacture its products, meaning we will rely on a limited number of machines to perform a large quantity of steps in the manufacturing
and assembly processes. Rotor Riot is limited by the number of personnel it has on staff to assemble drones and drone parts. This may,
among other things, delay delivery timelines or reduce our revenue and accounts receivable, and/or force us to rely more heavily on third
parties to meet customer deadlines or volume demands, either of which will adversely affect our results of operation and ability to achieve
and maintain profitability. If we experience any significant disruption in assembling, a failure of a critical piece of equipment, or
an inability to hire personnel, we may be unable to supply products to our customers in a timely manner. Interruptions could be caused
by us or our partners including but not limited to equipment problems, the introduction of new equipment into the manufacturing process
or delays in the delivery of new equipment. Lead-time for delivery, installation, testing, repair and maintenance of equipment can be
extensive. We can provide no assurances that we will not lose potential sales or be able to meet production orders due to future production
interruptions in our manufacturing lines. When we commence manufacturing drones, the same risks will apply.

 We may not be able
to procure necessary key components for our products or may produce or purchase too much inventory.

 The drone industry, and
the electronics industry as a whole, can be subject to business cycles. During periods of growth and high demand for products, we may
not have adequate supplies of inventory on hand to satisfy customers' needs. The imposition of tariffs and a trade war may also
impact our supply chain for component parts from China. Furthermore, during these periods of growth, our suppliers may also experience
high demand and, therefore, may not have adequate levels of the components and other materials that the Company requires to manufacture
products so that it can meet customers' needs. Our inability to secure sufficient components to produce products for customers,
or similar challenges faced by the drone manufacturers we serve, could negatively impact our sales and operating results. We may choose
to mitigate this risk by increasing the levels of inventory for certain key components assuming we have available cash resources. Increased
inventory levels can increase the potential risk for excess and obsolescence should our forecasts fail to materialize or if there are
negative factors impacting our customers' end markets. Such a risk becomes especially prevalent during a recession and market downturn.
If we purchase too much inventory, we may have to record additional inventory reserves or write-off the inventory, which could
have a material adverse effect on our gross margins and on our results of operations.

 Lack of long-term purchase orders and commitments
from customers in our B2C business may lead to a rapid decline in sales.

 Our B2C customers issue purchase orders or use
our e-commerce site solely at their own discretion, often shortly before the requested date of shipment. Both our distributor relationships
and our online sales through Rotor Riot entail short-term contracts under which customers are generally able to cancel orders (without
penalty) or delay the delivery of products on relatively short notice, regardless of whether or not we are in default under our agreements.
The online business involves retail customers who are not likely to be repeat customers unless a need arises for updated hardware or software
solutions offered by us, which may not occur on a frequent basis, resulting in lack of reliable recurring revenue in that part of our
business. In addition, current customers may decide not to purchase products for any reason. If those customers do not continue to purchase
products, sales volume could decline rapidly with little or no warning.

 We cannot rely on long-term purchase orders or
commitments to protect from the negative financial effects of a decline in demand for products. Unusual Machines typically plans production
and inventory levels based on internal forecasts of customer demand, which are unpredictable and can fluctuate substantially. Component
resellers issue purchase orders but they have options to reschedule or pay cancellation fees. The uncertainty of product orders makes
it difficult to forecast sales and allocate resources in a manner consistent with actual sales. Moreover, expense levels and the amounts
invested in capital equipment and new product development costs are based in part on expectations of future sales and, if expectations
regarding future sales are inaccurate, we may be unable to reduce costs in a timely manner to adjust for sales shortfalls. As a result
of lack of long-term purchase orders and purchase commitments, and long product development lead times, we may experience a rapid decline
in sales.

 As a result of these and other factors, investors
should not rely on revenues and operating results for any one quarter or year as an indication of future revenues or operating results.
Further, our B2C business is seasonal with retail sales peaking in the fourth quarter. If quarterly revenues or results of operations
fall below expectations of investors or public market analysts, the price of our Common Stock could fall substantially.

 Our products require ongoing research and development
and may experience technical problems or delays, which could lead the business to fail.

 Our future research and development efforts will
remain subject to all of the risks associated with the development of new products based on emerging and innovative technologies, including,
for example, unexpected technical problems or the possible insufficiency of funds for completing development of these products. If technical
problems or delays arise, further improvements in products and the introduction of future products could be adversely impacted, and we
could incur significant additional expenses and the business may fail. Additionally, we may deploy significant capital or human resources
towards developing or improving upon a product, only for such efforts fail to yield the results we hoped for or intended, which would
materially adversely affect our financial condition. This is an acute risk given the relatively new and evolving nature of the drone industry,
and constant entrance of new market participants attempting to compete with us. Similarly, if we invest in product research and development
efforts and a competitor brings a similar product to market before us, or alleges an infringement of their intellectual property, our
ability to market the product or compete effectively could be lost. Any such development could materially harm our business.

 If we are involved in litigation, it could
harm our business or otherwise distract management.

 If we become a party to a substantial, complex
or extended litigation, it could cause us to incur large expenditures and could distract management. For example, lawsuits by licensors,
consumers, employees or stockholders or litigation with federal, state or local governments or regulatory bodies could be very costly
and disrupt business. As described elsewhere in these Risk Factors, our operations and products, as well as those of our customers, collaborators
and product end-users, come with the inherent possibility of lawsuits arising from product liability, property damage and personal injury,
breach of contract and product warranty claims, intellectual property infringement, regulatory violations and sanctions, and data privacy
issues, any of which can result in costly and time-consuming litigation which would divert our limited human and capital resources and
could cause other adverse impacts on our business such as reputational harm and loss of future business. While disputes from time-to-time
are not uncommon, we may not be able to resolve such disputes on terms favorable to us which could have a material adverse impact on our
results of operations and financial condition.

 Among other things, claims could be brought against
us if use and misuse of our products causes personal injury or death. If a consumer causes damage to a person or property using our drone,
we as a reseller of the drone could be sued for selling an allegedly defective product. The possibility that the foregoing events occur
from events involving our products is particularly high, because we supply technology used in the operation of drones which is relatively
novel and are frequently operated at high speeds and altitudes, and often in densely populated areas and/or by individuals who lack a
high level of experience operating them. These characteristics increase the probability that injury or damage to personal property might
occur, even absent a defect. Additionally, because our products are used as ancillary or supplemental components of a drone's functions,
we may become involved in disputes arising from a third party's actions or products that utilize its technology, even if we were
not the direct cause of the issue. Any claims against us, regardless of their merit, could severely harm our financial condition, strain
our management and other resources.

 Product liability claims might be brought against
us by customers, civilians or private entities or others using or otherwise coming into contact with our products. If we cannot successfully
defend against product liability claims, we could incur substantial liability and costs. Regardless of merit or eventual outcome, product
liability claims may cause:

 impairment of our business reputation;

 costs due to related litigation especially since we do not have product liability insurance;

 distraction of management's attention from our primary business;

 substantial monetary awards to claimants or civil penalties imposed by governments;

 regulatory scrutiny and product recalls, withdrawals or labeling, marketing or promotional restrictions; and

 decreased demand for our products.

 We anticipate the risk of product liability and
other claims related to our products and their uses will grow as our products begin to be used. We are unable to predict if we will be
able to obtain or maintain insurance for such claims. Insurance coverage is becoming increasingly expensive. We do not have such insurance
and we may not be able to obtain it at a reasonable cost or in sufficient amounts to protect us against losses due to liability. A successful
product liability claim or series of claims brought against us could cause our stock price to decline and, would adversely affect our
results of operations and business.

 Our business is highly dependent upon our brand
recognition and reputation, and the failure to maintain or enhance our brand recognition or reputation, including due to our high reliance
on online and social media platforms, would likely adversely affect our business and operating results.

 We believe that maintaining and enhancing Fat
Shark and Rotor Riot brand identity, and our reputation are critical to our relationships with customers and strategic partners and to
our ability to attract new customers and strategic partners. We also believe that the importance of our brand recognition and reputation
will continue to increase as competition in our market continues to develop. Our success in this area will depend on a wide range of factors,
some of which are beyond our control, including the following:

 the efficacy of our marketing efforts;

 our ability to obtain new customers and retain and/or expand sales or upsell to existing customers;

 our ability to maintain high customer satisfaction;

 the quality and perceived value of our products;

 our ability to obtain,
 maintain and enforce patents and trademarks and other indicia of origin, will be critical to our business plan;

 our ability to successfully differentiate from competitors' products;

 actions of competitors and other third parties;

 our ability to provide customer support and professional services;

 positive or negative publicity;

 litigation or regulatory related developments.

 Any of the foregoing developments or an inability
to navigate these or other challenges to establish and grow our brand recognition and current and future product popularity could materially
adversely affect us.

 In addition, particularly with respect to Rotor
Riot, we are highly dependent on online social media platforms such as Facebook, Instagram and YouTube to advertise our products, market
our brand and develop and maintain customer loyalty. Each of these platforms requires that users adhere to strict terms and conditions
governing content, communications and other activities on their platform, which are generally heightened for commercial uses such as ours.
If we or third parties such as drone pilots who Rotor Riot uses to market our products online fail to adhere to these requirements, we
could be limited, restricted or banned from some or all uses, which would materially adversely affect our business.

 Future growth and ability to generate and grow
revenue and achieve or maintain profitability may be adversely affected if our marketing initiatives are not effective in generating sufficient
levels of brand awareness.

 Our future growth and profitability will depend
in large part upon the effectiveness and efficiency of our marketing efforts, including our ability to:

 create awareness of brands and products;

 convert awareness into actual product purchases;

 effectively manage marketing costs (including creative and media) in order to maintain acceptable operating margins and return on marketing investment; and

 successfully offer to sell products or license technology to third-party companies for sale.

 Planned marketing expenditures are unknown and
may not result in increased total sales or generate sufficient levels of product and brand name awareness. We may not be able to manage
marketing expenditures on a cost-effective basis.

 Product quality issues and a higher-than-expected
number of warranty claims or returns could harm our business and operating results.

 The products that we sell could contain defects
in design or manufacture. There can be no assurance we will be able to detect and remedy all defects in the hardware we sell, which could
result in product recalls, product redesign efforts, loss of revenue, reputational damage and significant warranty and other remediation
expenses. Similar to other mobile and consumer electronics, our products have a risk of overheating in the course of usage or upon malfunction.
Any such defect could result in harm to property or in personal injury. If we determine that a product does not meet product quality standards
or may contain a defect, the launch of such product could be delayed until we remedy the quality issue or defect. The costs associated
with any protracted delay necessary to remedy a quality issue or defect in a new product could be substantial.

 We generally provide a one-year warranty on all
of our Fat Shark products, except in certain European countries where it can be two years for some consumer-focused products. The occurrence
of any material defects in our products could expose us to liability for damages and warranty claims in excess of our current reserves,
and we could incur significant costs to correct any defects, warranty claims or other problems. In addition, if any of our product designs
are defective or are alleged to be defective, we may be required to participate in a recall campaign. In part due to the terms of our
warranty policy, any failure rate of our products that exceeds our expectations may result in unanticipated losses. Any negative publicity
related to the perceived quality of our products could affect our brand image and decrease retailer, distributor and consumer confidence
and demand, which could adversely affect our operating results and financial condition. Further, accidental damage coverage and extended
warranties are regulated in the United States at the state level and are treated differently within each state. Additionally, outside
of the United States, regulations for extended warranties and accidental damage vary from country-to-country. Changes in interpretation
of the regulations concerning extended warranties and accidental damage coverage on a federal, state, local or international level may
cause us to incur costs or have additional regulatory requirements to meet in the future in order to continue to offer our support services.
Our failure to comply with past, present and future similar laws could result in reduced sales of our products, reputational damage, penalties
and other sanctions, which could harm our business and financial condition.

 Estimated future product
warranty claims may be based on a variety of factors including the expected number of field failures over the warranty commitment period,
the term of the product warranty period, and the costs for repair, replacement and other associated costs. Because of the foregoing or
other contingencies, these estimates could prove to be incorrect, such that our warranty obligations are higher than anticipated. Our
warranty obligations may be affected by product failure rates, claims levels, material usage and product re-integration and handling costs.
Should actual product failure rates, claims levels, material usage, product re-integration and handling costs, defects, errors, bugs or
other issues differ from original estimates, we could end up incurring materially higher warranty or recall expenses than we anticipate,
which would materially adversely affect our business.

 Risks Related to Acquisitions

 Because Aloft may not meet closing conditions we may not be successful
in consummating the Merger

 On February 1, 2025, the Company entered into
a Merger Agreement to acquire Aloft. The merger is for $14.5 million payable, almost entirely in the Company's Common Stock with
the issuance of approximately 1,204,319 shares of Common Stock and approximately $100,000 in cash. Customary closing conditions by the
parties must be completed before closing the merger which include Aloft obtaining stockholder approval, the delivery by Aloft of its audited
financial statements acceptable to the Company, and the receipt of certain third-party consents. There can be no assurances that the Aloft
merger will close.

 If we are successful in consummating the Merger,
the integration of our business and the Aloft business may disrupt or have a negative impact on our business.

 Achieving the anticipated benefits of the Merger
will depend in significant part upon whether we are able to integrate our combined business in an efficient and effective manner. The
actual integration may result in additional and unforeseen expenses, and the anticipated benefits of the integration plan may not be realized.
The companies may not be able to accomplish the integration process smoothly, successfully or on a timely basis. The necessity of coordinating
geographically separated organizations, managements, systems of controls, and facilities and addressing possible differences in business
backgrounds, corporate cultures and management philosophies may increase the difficulties of integration. We and Aloft operate numerous
systems and controls, including those involving management information, purchasing, accounting and finance, sales, billing, employee benefits,
payroll and regulatory compliance. The integration of operations following the Merger and future acquisitions will continue to require
the dedication of significant management and external resources, which may distract management's attention from the day-to-day business
of the Company and be costly. Employee uncertainty and lack of focus during the integration process may also disrupt our business. Any
inability of management to successfully and timely integrate the operations of the two companies could have a material adverse effect
on our business and results of operations. In addition, for the year ended December 31, 2024, Aloft had a net loss of $841,112 and net
cash used in operating activities was negative $419,591. Accordingly, the Merger could have a negative impact on our cash flow.

 Future acquisitions could disrupt our business
and adversely affect our operating results, financial condition and cash flows.

 We may make acquisitions that could be material
to our business, operating results, financial condition and cash flows. Our ability as an organization to successfully acquire and integrate
technologies or businesses is unproven. Acquisitions involve many risks, including the following:

 an acquisition may negatively affect our operating results, financial condition or cash flows because it may require us to incur charges or assume substantial debt or other liabilities, may cause adverse tax consequences or unfavorable accounting treatment, may expose us to claims and disputes by third parties, including intellectual property claims and disputes, or may not generate sufficient financial return to offset additional costs and expenses related to the acquisition;

 We may incur substantial costs and deploy a significant amount of time and other resources towards a prospective transaction that does not close, either of which could materially harm our financial condition;

 we may encounter difficulties or unforeseen expenditures in integrating the business, technologies, products, contracts, personnel or operations of any company that we acquire, particularly if key personnel of the acquired company decide not to work for us;

 an acquisition may disrupt our ongoing business, divert resources, increase our expenses and distract our management;

 an acquisition may result in a delay or reduction of customer purchases for both us and the company we acquired due to customer uncertainty about continuity and effectiveness of service from either company;

 we may encounter difficulties in, or may be unable to, successfully sell any acquired products;

 an acquisition may involve the entry into geographic or business markets in which we have little or no prior experience or where competitors have stronger market positions;

 the potential strain on our financial and managerial controls and reporting systems and procedures;

 potential known and unknown liabilities associated with an acquired company, including due to a non-disclosure or failure to identify such liabilities during the due diligence process prior to closing an acquisition;

 if we incur debt to fund such acquisitions, such debt may subject us to material restrictions on our ability to conduct our business as well as financial maintenance covenants;

 the risk of impairment charges related to potential write-downs of acquired assets or goodwill in future acquisitions;

 to the extent that we issue a significant amount of equity or convertible debt securities in connection with future acquisitions, existing stockholders may be diluted and earnings per share may decrease; and

 managing the varying intellectual property protection strategies and other activities of an acquired company.

 We may not succeed in addressing these or other
risks or any other problems encountered in connection with the integration of any acquired business. The inability to successfully integrate
the business, technologies, products, personnel or operations of any acquired business, or any significant delay in achieving integration,
could have a material adverse effect on our business, operating results, financial condition and cash flows.

 Risks Related to Intellectual Property Protection

 If third-party intellectual property infringement
claims are asserted against us, it may prevent or delay our product development and commercialization efforts and have a material adverse
effect on our business and future prospects.

 Companies in the consumer electronics, wireless
communications, semiconductor, artificial intelligence, information technology, and display industries steadfastly pursue and protect
intellectual property rights, often times resulting in considerable and costly litigation to determine the validity of patents and claims
by third parties of infringement of patents or other intellectual property rights. Other companies may hold or obtain patents or inventions
or other proprietary rights in technology necessary for our business. If we are forced to defend against infringement claims, we may face
costly litigation, diversion of technical and management personnel, and product shipment delays, even if the allegations of infringement
are unwarranted. Intellectual property litigation is often extremely expensive and entails high legal fees and costs of expert witnesses.

 Numerous United States and foreign issued patents
and pending patent applications, which are owned by third parties, exist in the fields in which we are pursuing product development and
sales. As the consumer electronics and drone industries expand and more patents are issued, the risk increases that our current and future
products may be subject to claims of infringement of the patent rights of third parties. Third parties may assert that we are employing
their proprietary technology without authorization. There may be third-party patents or patent applications with claims to inventions,
materials, engineering designs, or methods of manufacture related to the design, use or manufacture of our products. Because patent applications
can take many years to issue, there may be patent applications currently pending that may later result in patents that our products may
infringe upon. Third parties may obtain patents in the future and claim that use of our technologies or those of third parties with which
our technologies are integrated infringes on these patents. If any third-party patents were to be held by a court to cover the manufacturing
process of any of our products, or any of the characteristics or related components thereof, the holders of any such patents may be able
to block our ability to commercialize such product unless we obtained a license under the applicable patents, or until such patents expire.
Similarly, if any third-party patents were to be held by a court to cover aspects of our or our customers' or strategic partners'
products or processes, the holders of any such patents may be able to block our ability to develop and commercialize the applicable product
unless we obtained a license or until such patent expires. In either case, such a license may not be available on commercially reasonable
terms or at all.

 Parties making intellectual property claims against
us may obtain injunctive or other equitable relief, which could block our ability to further develop and commercialize one or more of
our products. Defense of these claims, regardless of their merit, involves substantial litigation expense and diversion of our management's
attention from our business.

 If a claim of patent infringement against us succeeds,
we may have to pay substantial damages, possibly including treble damages and attorneys' fees for willful infringement, pay royalties,
redesign our infringing products or obtain one or more licenses from third parties, which may be impossible or require substantial time
and monetary expenditure. The financial harm caused by any such development with respect to intellectual property disputes and litigation
will be heightened to the extent we do not possess, acquire or maintain adequate insurance coverage for these contingencies now or in
the future. Further, if there is a successful claim of infringement against us and we are unable to develop non-infringing technology
or license the infringed or similar technology on a timely basis, or if we are required to cease using one or more of our business or
product names due to a successful trademark infringement claim against us, it could materially adversely affect our business.

 We may depend on intellectual property rights
including patent rights that have not yet been and may not be obtained by us, and our intellectual property rights and proprietary rights
may not adequately protect our products.

 Our commercial success will depend substantially
on the ability to obtain patents and other intellectual property rights and maintain adequate legal protection for products in the United
States and other countries. We will be able to protect our intellectual property from unauthorized use by third parties only to the extent
that these assets are covered by valid and enforceable patents, trademarks, copyrights or other intellectual property rights, or are effectively
maintained as trade secrets. We currently have 26 issued patents, including five issued in the United States, and three pending patent
applications. Certain patents were assigned to a wholly-owned subsidiary of the Company by UAV Patent Corp. ("UAV") a wholly-owned
subsidiary of Red Cat, in each case with a non-exclusive, non-sublicensable royalty free perpetual license back to UAV for Red Cat to
make, use and sell products subject to such assigned patents and applications solely with respect to military and defense drone applications.

 We will apply for patents covering our products,
services, technologies, and designs, as we deem appropriate. We may fail to apply for patents on important products, services, technologies
or designs in a timely fashion, or at all. We do not know whether, and there can be no assurance that, any of our patent applications
will result in the issuance of any patents. Even if patents are issued, they may not be sufficient to protect our products, technologies,
or designs. Our existing and future patents may not be sufficiently broad to prevent others from developing competing products, technologies,
or designs. Intellectual property protection and patent rights outside of the United States, particularly in China, are even less predictable.
As a result, the validity and enforceability of patents cannot be predicted with certainty. Moreover, we cannot be certain whether:

 we were the first to conceive, reduce to practice, invent, or file the inventions covered by each of our issued patents and pending patent applications;

 others will independently develop similar or alternative products, technologies, services or designs or duplicate any of our products, technologies, services or designs;

 any patents issued to us will provide us with any competitive advantages, or will be challenged by third parties;

 we will develop additional proprietary products, services, technologies or designs that are patentable; or

 the patents of others will have an adverse effect on our business.

 The patents we own or license and those that may
be issued to us in the future may be challenged, invalidated, rendered unenforceable or circumvented, and the rights granted under any
issued patents may not provide us with proprietary protection or competitive advantages. Moreover, third parties could practice our inventions
in territories where we do not have patent protection or in territories where they could obtain a compulsory license to our technology
where patented. Such third parties may then try to import products made using our inventions into the United States or other territories.
We cannot ensure that any of our pending patent applications will result in issued patents, or even if issued, predict the breadth, validity
and enforceability of the claims upheld in our and other companies' patents. Further, patents have a limited lifespan. In the United
States, the natural expiration of a patent is 20 years after it is filed, although various extensions may be available. The life of a
patent, and the protection it affords, is limited. When the patent life has expired for a product, we will become vulnerable to competition
from competitors attempting to replicate the technology that was formerly patent protected. Further, if we encounter delays such as due
to regulatory approvals, the time during which we will be able to market and commercialize a product under patent protection could be
reduced.

 Unauthorized parties may attempt to copy or otherwise
use aspects of our processes and products that we regard as proprietary. While we plan to enter into written agreements with certain of
our employees and consultants with terms designed to protect our intellectual property rights, there cannot be any assurance that these
provisions will provide us with the protection sought. Further, any third parties with whom we do not execute such agreements, such as
certain of our suppliers, could attempt to dispute our intellectual property rights or misappropriate our technology or trade secrets.
Policing unauthorized use of our proprietary information and technology is difficult and can be costly, and our efforts to do so may not
prevent misappropriation of our technologies. We may become engaged in litigation to protect or enforce our patent and other intellectual
property rights or in International Trade Commission proceedings to abate the importation of goods that would compete unfairly with our
products and, if unsuccessful, these actions could result in the loss of patent or other intellectual property rights protection for the
key technologies on which our business strategy depends.

 We also rely in part on unpatented proprietary
technology, and others may independently develop the same or similar technology or otherwise obtain access to our unpatented technology.
We plan to require employees, contractors, consultants, financial advisors, suppliers, and strategic partners to enter into confidentiality
and intellectual property assignment agreements (as appropriate), but these agreements may not provide sufficient protection for our trade
secrets, know-how or other proprietary information.

 The laws of certain countries do not protect intellectual
property and proprietary rights to the same extent as the laws of the United States and, therefore, in certain jurisdictions including
China, we may be unable to protect our products, services, technologies and designs adequately against unauthorized third-party copying,
infringement or use, which could adversely affect our competitive position. To protect or enforce our intellectual property rights, we
may initiate proceedings or litigation against third parties. Such proceedings or litigation may be necessary to protect our trade secrets
or know-how, products, technologies, designs, brands, reputation, likeness, authorship works or other intellectual property rights. Such
proceedings or litigation also may be necessary to determine the enforceability, scope and validity of the proprietary rights of others.
Any proceedings or lawsuits that we initiate could be expensive, take significant time and divert management's attention from other
business concerns. Additionally, we may provoke third parties to assert claims against us, which could invalidate or narrow the scope
of our own intellectual property rights. We may not prevail in any proceedings or lawsuits that we initiate and the damages or other remedies
awarded, if any, may be significant. The occurrence of any of these events may adversely affect our business, financial condition and
operating results.

 We will register for certain of our trademarks
in several jurisdictions worldwide. In some jurisdictions where we will apply to register our trademarks, other applications or registrations
may exist for the same, similar, or otherwise related products or services. If we are not successful in arguing that there is no likelihood
of confusion between our marks and the marks that are the subject of the other applications or registrations owned by third parties, our
applications may be denied, preventing us from obtaining trademark registrations and adequate protection for our marks in the relevant
jurisdictions, which could impact our ability to build our brand identity and market our products and services in those jurisdictions.
Whether or not our application is denied, third parties may claim that our trademarks infringe their rights. As a result, we could be
forced to pay significant settlement costs or cease the use of these trademarks and associated elements of our brand in the United States
or other jurisdictions.

 Even in those jurisdictions where we are able
to register our trademarks, competitors may adopt or apply to register similar trademarks to ours, may register domain names that mimic
ours or incorporate our trademarks, or may purchase keywords that are identical or confusingly similar to our brand names as terms in
Internet search engine advertising programs, which could impede our ability to build our brand identity and lead to confusion among potential
customers of our products and services. If we are not successful in proving that we have prior rights in our marks and arguing that there
is a likelihood of confusion between our marks and the marks of these third parties, our inability to prevent these third parties from
using our marks may negatively impact the strength, value and effectiveness of our brand names and our ability to market our products
and prevent consumer confusion.

 Significant inflation could adversely affect our business and financial
results.

 The high rate of inflation and resulting pressures
on costs and pricing of business such as ours focused on the manufacture and sale of electronics products could adversely impact our business
and financial results. While inflation has created some salary pressure with our employees who wish to mitigate the impact of inflation,
we have not yet suffered inflationary pressures in procurement of our products. A rise in inflation can adversely affect us by increasing
our operating costs, including by increasing the costs of materials, freight and labor. The Company has not identified, planned or taken
any actions to mitigate inflationary pressures. Further, in the United States, the Federal Reserve has responded by increasing interest
rates to combat inflation, however such increases may result in a reduced demand for our products and/or an economic downturn. In a highly
inflationary environment, or any recession or economic downturn that may result, we may be unable to adjust our business is a manner that
adequately addresses these challenges, and these developments could materially adversely affect our business, results of operations and
financial condition.

 Risks Related to Government Regulation of
Our Operations and Industry

 If we fail to have other drone products approved
for the Department of Defense's Blue Framework, our future results of operations may be materially and adversely affected.

 We have had multiple United States made drone products that have been
approved and added to the Department of Defense's Blue Framework. By virtue of being on the Blue Framework, it enables us to receive
orders from agencies of the United States federal government. It also provides credibility to potential B2B customers who might be interested
in purchasing drone components from us. We are seeking to add additional products to the Blue List. If these additional products are not
added to the Blue Framework, our future results of operations may be materially and adversely affected.

 If we fail to obtain necessary regulatory approvals
from the FAA or other governmental agencies by us, our customers, or others who use our products, or limitations put on the use of unmanned
aircraft systems, or UAS in response to public privacy or safety concerns, may prevent us from expanding the sales of our drone solutions
in the United States.

 The regulation of UAS
and drone solutions and component parts such as those we offer is subject to substantial change, with regulators including potential alterations,
enhancements and additions to existing laws and regulations, and the ultimate treatment is uncertain. A substantial majority of our products
are subject to drone-related regulations enforced by the FAA, either directly or due to their inclusion in UAS offered by third parties.
Further, adverse regulatory actions such as enforcement proceedings affecting customers and other third parties with which we do business
can also adversely affect us, even if the violation or harm alleged did not arise from our conduct or products. Generally, under current
FAA regulations the failure to register a UAS, including model aircraft, in accordance with these rules may result in regulatory and criminal
sanctions. The FAA may assess civil penalties up to $33,333. Criminal penalties include fines of up to $250,000 and/or imprisonment for
up to three years. However, the FAA and other government bodies and agencies are considering changes to address the drone industry, which
is relatively new and rapidly evolving. In addition, there exists public concern regarding the privacy and safety implications of the
use of UAS. This concern has included calls to develop explicit written policies and procedures establishing usage limitations. We cannot
assure you that the response from regulatory agencies, customers and privacy advocates to these concerns will not delay or restrict the
adoption of UAS and related products and technologies in certain markets. These developments, and any additional regulatory or other burdens
imposed on our business and industry due to public health and safety or other concerns presently faced by the drone industry, could harm
us and our customers and suppliers by increasing compliance costs and restricting our operations and product offerings and uses, which
could materially adversely affect us.

 We are subject to a number of supply risks
concerning our Blue UAS products which could adversely impact our ability to deliver such products to the United States Department of
Defense and commercial customers.

 We purchase certain Blue UAS products from a privately-held
United States based manufacturer pursuant to purchase orders. We are subject to a number of risks including:

 We do not have a supply agreement requiring the manufacturer to produce a specified volume per year;

 The manufacturer expects to deliver product quantities to us over a pre-determined period which increases the likelihood we may be unable to meet a large order from one or more customers;

 Beyond the initial purchase orders, we have no assurances on future pricing which means future costs could adversely affect our marketing and future gross margins;

 Because we have no non-compete from the manufacturer,
it could manufacture the same products for our competitors;

 We have no representations from the manufacturer on its intellectual property ownership of our products; and

 Because we are not the manufacturer, we are subject to a number of risks including timely deliveries and quality control.

 We are or may become subject to governmental
export and import controls, economic sanctions and other laws and regulations that could subject us to liability and impair our ability
to compete in international markets.

 While we understand we have had minimal sales
outside of the United States, we expect to seek to market our products outside of the United States. During 2024, we commenced sales of
our Blue UAS products including to a European customer as part of a larger order. The United States and various foreign governments have
imposed controls, export license requirements and restrictions on the import or export of some technologies. Our products are subject
to United States export controls, including the Commerce Department's Export Administration Regulations and various economic and
trade sanctions regulations established by the Treasury Department's Office of Foreign Assets Controls, and exports of our products
must be made in compliance with these laws. Furthermore, United States export control laws and economic sanctions prohibit the provision
of products and services to countries, governments, and persons targeted by United States sanctions. Even though we take precautions to
prevent our products from being provided to targets of United Staets sanctions, our products, including our firmware updates, could be
provided to those targets or provided by our customers despite such precautions.

 Further, the manufacture and sale of our products
in certain states and countries may subject us to environmental and other regulations. For example, many of our products rely on electricity
generated by lithium-ion batteries, which implicate a variety of environmental and other regulations designed to control the production,
use, and transportation of hazardous materials such as lithium and other components and minerals deployed in these batteries. In addition,
the global focus on climate change, including greenhouse gas ("GHG") emissions, has resulted in legislative and regulatory
efforts to address the causes and impacts of climate change, and any new and more strict laws and regulations to reduce GHG emissions
and address other aspects of climate change, including carbon taxes, cap and trade programs, GHG reduction requirements, requirements
for the use of green energy, and changes in procurement requirements, may result in increased operational and compliance obligations,
which could adversely affect our financial condition and results of operations.

 Our failure to obtain required import or export
approval or to comply with other applicable domestic or international laws and regulations for our products or operations could harm our
international and domestic sales and adversely affect our revenue, or could subject us to costly proceedings, penalties or damages and
negative publicity.

 If we fail to comply with United States and
foreign laws related to privacy, data security, and data protection, it could adversely affect our operating results and financial condition.

 We, either directly or through our customers,
collaborators or end-users of our products, are or may become subject to a variety of laws and regulations regarding privacy, data protection,
and data security. This includes the European Union's ("EU") General Data Protection Regulation (the "EU GDPR")
and the United Kingdom's General Data Protection Regulations (the "UK GDPR") as a result of our sales in the EU. These
laws and regulations are continuously evolving and developing. The scope and interpretation of the laws that are or may be applicable
to us are often uncertain and may be conflicting, particularly with respect to foreign laws. The application of these laws and regulations
can arise from our e-commerce platform, social media activities, drone technology and applications, relationships with third parties and
their operations, or from other activities we undertake now or that we may undertake in the future. Data privacy and protection regulations
are frequently broad in terms of scope of the information protected, activities affected, and geographic reach.

 In particular, there are numerous United States
federal, state, and local laws and regulations and foreign laws and regulations regarding privacy and the collection, sharing, use, processing,
disclosure, and protection of personal data. Such laws and regulations often vary in scope, may be subject to differing interpretations,
and may be inconsistent among different jurisdictions. For example, the GDPR includes operational requirements for companies that receive
or process personal data of residents of the EU that are broader and more stringent than those previously in place in the EU and in most
other jurisdictions around the world. The GDPR includes significant penalties for non-compliance, including fines of up to 20 million
or 4% of total worldwide revenue. Additionally, in June 2018, California enacted the California Consumer Privacy Act (the "CCPA").
In November 2020, the CCPA was amended by Proposition 24, the California Consumer Privacy Act, which extends the CCPA. The CCPA requires
covered companies to provide California consumers with new disclosures and will expand the rights afforded consumers regarding their data.
Fines for noncompliance may be up to $7,500 per violation. The costs of compliance with, and other burdens imposed by, the GDPR, CCPA,
and similar laws may limit the use and adoption of our products and services and/or require us to incur substantial compliance costs,
which could have an adverse impact on our business.

 Since the CCPA was enacted,
the United States currently has at least 20 states – California, Colorado, Connecticut, Delaware, Indiana, Iowa, Kentucky, Maryland,
Minnesota, Montana, Nebraska, New Hampshire, New Jersey, Oregon, Rhode Island, Tennessee, Texas, Utah and Virginia, that have comprehensive
data privacy laws in place, or enacted comprehensive data privacy laws set to soon take effect. An additional seven states have enacted
narrower privacy laws – Florida, Maine, Michigan, Nevada, New York, Vermont, Washington and Wisconsin. During the 2024 legislative
cycle, at least six states have introduced comprehensive privacy bills that address a range of issues, including protecting biometric
identifiers and health data, or governing the activities of specific entities. However, this patchwork approach to privacy legislation
could pose compliance and liability risks for companies that have multistate operations. Proposed and enacted bills in various states
have similar rights in preexisting privacy legislation but differ in implementation and enforcement. In June 2024, the American Privacy
Rights Act of 2024 was introduced in the United States House of Representatives and was subsequently referred to the House Committee on
Energy and Commerce has and is not yet adopted. As introduced, this proposed legislation would establish requirements for how companies
handle personal data by, among other things, limiting the collection, processing, and transfer of personal data, prohibiting companies
from transferring individuals' personal data without their affirmative express consent, establishing a right to access, correct,
and delete personal data, requiring companies to provide individuals with a means to "opt out" of the transfer of non-sensitive
covered data and the right to opt out of the user of their personal information for targeted advertising, requiring companies to implement
security practices aimed at protecting personal data, and imposing enforcement actions and the possibility of civil proceedings for violations.
Proposed federal legislation, will likely continue to be debated and, at some point, may be enacted in some form.

 We intend to strive to comply with all applicable
laws, policies, legal obligations, and industry codes of conduct relating to privacy, data security, and data protection. Our limited
resources may adversely affect our compliance effort. Given that the scope, interpretation, and application of these laws and regulations
are often uncertain and may be in conflict across jurisdictions, it is possible that these obligations may be interpreted and applied
in a manner that is inconsistent from one jurisdiction to another and may conflict with other rules or our practices. Any failure or perceived
failure by us, customers, or third-party vendors or end-users involved with our products to comply with our privacy or security policies
or privacy-related legal obligations, or any compromise of security that results in the unauthorized release or transfer of personal data,
may result in governmental enforcement actions, litigation, or negative publicity, and could have an adverse effect on our operating results
and financial condition.

 Governments are continuing to focus on privacy
and data security, and it is possible that new privacy or data security laws will be passed or existing laws will be amended in a way
that is material to our business. Any significant change to applicable laws, regulations, or industry practices regarding the personal
data of our employees, agents or customers could require us to modify our practices and may limit our ability to expand or sustain our
salesforce or bring our products to market. Changes to applicable laws and regulations in this area could subject us to additional regulation
and oversight, any of which could significantly increase our operating costs and materially affect our operating results and financial
condition.

 Risks Related To Our Common Stock

 The market price of our shares of Common Stock
is subject to fluctuation.

 The market price of shares of our Common Stock
may fluctuate and has fluctuated significantly in response to factors, some of which are beyond our control, including:

 the conversion of formerly outstanding preferred stock and exercise
of warrants and the sales of Common Stock issued under such instruments;

 our ability to generate material sales in the B2B sector;

 the announcement of new products by our competitors;

 our ability to obtain patents for our products and defend our intellectual property from misappropriation and competitive use;

 progress and publications of the commercial acceptance of similar technologies to those we utilize;

 our ability to grow revenues and achieve consistent profitability;

 actual or anticipated variations in operating results;

 additions or departures of key personnel including our executive officers;

 business disruptions caused by natural disasters and uncontrollable events such as severe weather conditions or geopolitical turmoil;

 disclosure of cyber security attacks or data privacy issues involving our products or operations;

 announcements by us or our competitors of significant acquisitions, strategic partnerships, joint ventures, capital commitments, significant contracts, or other material developments that may affect our prospects;

 adverse regulatory developments;

 the possibility of a recession or market down-turn or inflation; or

 general market conditions including factors unrelated to our operating performance

 Recently, following the announcement of the imposition
of tariffs and substantial planned reductions in the size of the federal government, the stock market, has experienced extreme price fluctuations
and a major sell off involving United States. Continued market fluctuations could result in extreme market volatility in the price of
our Common Stock which could cause a decline in the value of our Common Stock below its recent price.

 Our stock price may be volatile, which could
result in substantial losses to investors.

 In addition to changes to market prices based
on our results of operations and the factors discussed elsewhere in this "Risk Factors" section, the market price of and trading
volume for our Common Stock (including any stock-run ups or price declines) may change for a variety of other reasons, not necessarily
related to our actual operating performance. The capital markets have experienced extreme volatility particularly with small public companies
with relatively smaller public floats that has often been unrelated to the operating performance of particular companies. These broad
market fluctuations may adversely affect the trading price of our Common Stock. In addition, the average daily trading volume of the securities
of small companies can be very low, which may contribute to future volatility.

 Factors that could cause the market price of our
Common Stock to fluctuate significantly include:

 the results of operating and financial performance and prospects of other companies in our industry;

 strategic actions by us or our competitors, such as acquisitions or restructurings;

 announcements of innovations, increased service capabilities, new or terminated customers or new, amended or terminated contracts by our competitors;

 the public's reaction to our press releases, other public announcements, and filings with the SEC;

 lack of securities analyst coverage or speculation in the press or investment community about us or market opportunities in the drone industry;

 changes in government policies in the United States and, as our international business increases, in other foreign countries;

 changes in earnings estimates or recommendations by securities or research analysts who track our Common Stock or failure of our actual results of operations to meet those expectations;

 market and industry perception of our success, or lack thereof, in pursuing our growth strategy;

 changes in accounting standards, policies, guidance, interpretations or principles;

 any lawsuit involving us or our products;

 arrival and departure of key personnel;

 sales of Common Stock by us, our investors or members of our management team; and

 changes in general market, economic and political conditions in the United States and global economies or financial markets, including those resulting from natural or man-made disasters.

 Any of these factors, as well as broader market
and industry factors, may result in large and sudden changes in the trading volume of our Common Stock (including stock run ups or price
declines) and could seriously harm the market price of our Common Stock, regardless of our operating performance. This may prevent you
from being able to sell your shares at or above the price you paid for your shares, if at all. In addition, following periods of volatility
in the market price of a company's shares, shareholders often institute securities class action litigation against that company.
Our involvement in any class action suit or other legal proceeding could divert our senior management's attention and could adversely
affect our business, financial condition, results of operations and prospects.

 We are incurring significant additional costs
as a result of being a public company, and our management will be required to devote substantial time to compliance with our public company
responsibilities and corporate governance practices.

 We are incurring increased costs associated with
corporate governance requirements that will become applicable to us as a public company, including rules and regulations of the SEC under
the Sarbanes-Oxley Act, the Dodd-Frank Wall Street Reform and Customer Protection Act of 2010, and the Securities Exchange Act
of 1934 (the "Exchange Act"), as well as the rules of the NYSE American. These rules and regulations have increased our accounting,
legal and financial compliance costs and make some activities more time consuming, including due to increased training of our current
employees, additional hiring of new employees, and increased assistance from consultants. The SEC's cybersecurity rules will increase
our compliance costs. We also expect these rules and regulations to make it more expensive for us to maintain directors' and officers'
liability insurance. As a result, it may be more difficult for us to attract and retain qualified persons to serve on our Board or as
executive officers. Furthermore, these rules and regulations will increase our legal and financial compliance costs and will make some
activities more time-consuming and costly. We cannot predict or estimate the amount of additional costs we will incur as a public
company or the timing of such costs. In addition, our management team will need to devote substantial attention to interacting with the
investment community and complying with the increasingly complex laws pertaining to public companies, which may divert attention away
from the day-to-day management of our business, including operational, research and development and sales and marketing activities.
Increases in costs incurred or diversion of management's attention as a result of becoming a publicly traded company may adversely
affect our business, prospects, financial condition, results of operations, and cash flows.

 Our failure to maintain effective disclosure
controls and internal controls over financial reporting could have an adverse impact on us.

 We are required to establish and maintain appropriate
disclosure controls and internal controls over financial reporting. Failure to establish those controls, or any failure of those controls
once established, could adversely impact our public disclosures regarding our business, financial condition or results of operations.
In addition, management's assessment of internal controls over financial reporting may identify weaknesses and conditions that need
to be addressed or other matters that may raise concerns for investors. Any actual or perceived weaknesses and conditions that need to
be addressed in our internal control over financial reporting, disclosure of management's assessment of our internal controls over
financial reporting may have an adverse impact on the price of our Common Stock. In our Form 10-K for the year ended December 31, 2024,
we reported that we did not maintain effective disclosure controls or internal controls over financial reporting and that we had not remediated
those material weaknesses. Investors may not purchase or hold our Common Stock as a result of these failures, which may result in lower
prices.

 Because our Common Stock is listed on NYSE
American, we are subject to additional regulations and continued requirements.

 Because our Common Stock trades on the NYSE American,
we are required to meet the continued listing standards for NYSE American. If we fail to meet NYSE American's listing standards,
our Common Stock may be delisted. The NYSE American requires that the average closing price of its listed common stock remain above $1.00
over a 30 consecutive day period, in order to remain listed. In addition, to maintain a listing on NYSE American, we must satisfy minimum
financial and other continued listing requirements and standards, including those regarding director independence and independent committee
requirements, minimum stockholders' equity, and certain corporate governance requirements. If we are unable to satisfy these requirements
standards, our Common Stock could be subject to delisting. Delisting would have a negative effect on the price of our Common Stock and
would impair your ability to sell our Common Stock when you wish to do so.

 Our Board may authorize and issue shares of
new series of preferred stock that could be superior to or adversely affect current holders of our Common Stock.

 Our Board has the power to authorize and issue
shares of classes of stock, including preferred stock that have voting powers, designations, preferences, limitations and special rights,
including preferred distribution rights, conversion rights, redemption rights and liquidation rights without further stockholder approval
which could adversely affect the rights of the holders of our Common Stock. In addition, our Board could authorize the issuance of a series
of preferred stock that has greater voting power than our Common Stock or that is convertible into our Common Stock, which could decrease
the relative voting power of our Common Stock or result in dilution to our existing common stockholders.

 Any of these actions could significantly adversely
affect the investment made by holders of our Common Stock. Holders of Common Stock could potentially not receive dividends that they might
otherwise have received. In addition, holders of our Common Stock could receive less proceeds in connection with any future sale of the
Company, in liquidation or on any other basis.

 If we raise capital in the future, it may dilute
our existing stockholders' ownership and/or have other adverse effects on us, our securities or our operations.

 If we are required to raise additional capital
by issuing equity securities, our existing stockholders' percentage ownership will decrease, and these stockholders may experience
substantial dilution. Additionally, the issuance of additional shares of Common Stock or other securities could result in a decline in
our stock price. Further, if we are required to raise additional funds by issuing debt instruments, these debt instruments could impose
significant restrictions on our operations, including liens on our assets and negative covenants prohibiting us from engaging in certain
transactions or corporate actions that may have the effect of limiting our ability to pursue our business strategy and growth objectives.

 Common Stock eligible for future sale may adversely
affect the market.

 We have in the past consummated private placements
to accredited investors whereby we were obligated to enter into a registration rights agreement with each selling stockholder. We may
in the future enter into similar agreements in connection with our fundraising efforts. Future sales of substantial amounts of our Common
Stock in the public market, or the anticipation of these sales, could materially and adversely affect market prices prevailing from time-to-time,
and could impair our ability to raise capital through sales of equity or equity-related securities. In addition, the market price
of our Common Stock could decline as a result of sales of a large number of shares of our Common Stock in the market or the perception
that these sales may occur.

 If securities or industry analysts do not publish
research or reports about our business, or if they adversely change their recommendations regarding our Common Stock, the market price
for our Common Stock and trading volume could decline.

 The trading market for our Common Stock will be
influenced by research or reports that industry or securities analysts publish about our business. We do not currently have any analysts
publish research reports about us, and we cannot assure you that any will. If analysts do, and one or more analysts who cover us downgrade
our Common Stock, the market price for our Common Stock would likely decline.

 We and our investors face the implications
of our status as an emerging growth company under the federal securities laws and regulations.

 We qualify as an "emerging growth company"
pursuant to the Jumpstart Our Business Startups Act of 2012, or the JOBS Act. As an emerging growth company, we have elected to take advantage
of specified reduced reporting and other requirements compared to those that are otherwise applicable generally to public companies. These
provisions include but are not limited to: reduced disclosure obligations regarding executive compensation in periodic reports, proxy
statements and registration statements; and exemptions from the requirements of holding a nonbinding advisory vote on executive compensation
and stockholder approval of any golden parachute payments not previously approved.

 We will remain an emerging growth company until
the earliest of (a) the last day of the fiscal year during which we have total annual gross revenues of at least $1.235 billion; (b) the
last day of our fiscal year following February 16, 2029; (c) the date on which we have, during the preceding three-year period, issued
more than $1.0 billion in non-convertible debt; or (d) the date on which we are deemed to be a "large accelerated filer" under
the Exchange Act, which would occur as of the end of any fiscal year if the market value of our Common Stock that are held by non-affiliates
exceeds $700 million as of the last business day of our most recently completed second fiscal quarter. Once we cease to be an emerging
growth company, we will not be entitled to the exemptions provided in the JOBS Act discussed above.

 We have never paid dividends and we do not
expect to pay dividends for the foreseeable future.

 We intend to retain earnings, if any, to finance
the growth and development of our business and do not intend to pay cash dividends on shares of our Common Stock in the foreseeable future.
The payment of future cash dividends, if any, depend upon, among other things, conditions then existing including earnings, financial
condition and capital requirements, restrictions in financing agreements, business opportunities and other factors. As a result, capital
appreciation, if any, of our Common Stock, will be your sole source of gain for the foreseeable future.

 Our Articles of Incorporation
contains certain provisions which may result in difficulty in bringing actions against or on behalf of the Company or its affiliates.

 Section 7 of our Articles
of Incorporation provides that the internal affairs of the Company, including derivative actions, shall be brought exclusively in the
courts located in Clark County, Nevada. To the extent that any such action asserts a claim under the Exchange Act, that claim must be
brought in federal court. Section 7 also provides that the United States federal courts generally shall have exclusive jurisdiction over
claims brought under the Securities Act, the effect of which is that an action under the Securities Act with respect to the Company may
only be brought in the federal courts, whereas absent such provision the federal and commonwealth courts would otherwise have concurrent
jurisdiction over such a matter. Any claim seeking relief under the Exchange Act may only be brought in federal court. Further, Section
7 also provides for the United States District Court for the District of Nevada as the exclusive venue for any cause of action under either
the Securities Act or the Exchange Act, meaning such federal court is the only court in which such a case may be brought and heard. These
provisions may have the effect of precluding stockholders from bringing suit in their forum or venue of choice. Further, these provisions
may give rise to a potential ambiguity as to which courts – state or federal – should preside over certain cases such as cases
with overlapping claims under both Nevada corporate law and the Securities Act and the rules and regulations thereunder. While the Supreme
Court of Delaware has upheld a charter provision designating federal courts as the exclusive forum for actions brought under the Securities
Act, it is unclear how a court in Nevada, might rule. Therefore, an investor seeking to bring a claim against or on behalf of the Company
or its affiliates under Nevada law or the federal securities laws may be forced to litigate their case in a court which poses geographic
or other hardships, and could face uncertainty as to which jurisdiction and venue the case will ultimately be heard in, which may delay,
prevent or impose additional obstacles on the investor in such litigation. Investors cannot waive compliance with the federal securities
laws and the rules and regulations thereunder, and there is uncertainty as to whether a state or federal court would enforce this charter
provision.

 Item 1B.

 Unresolved Staff Comments

 None.

 Item 1C.

 Cybersecurity

 Risk
Management and Strategy

 Like
 all companies that utilize technology, we are subject to threats of breaches of our technology
 systems. To mitigate the threat to our business, we will take a comprehensive approach to
 cybersecurity risk management. Our management actively oversees our risk management program,
 including the management of cybersecurity risks. We intend to establish policies, standards,
 processes and practices for assessing, identifying, and managing material risks from cybersecurity
 threats, including those discussed in our Risk Factors. We intend to devote financial and
 personnel resources to implement and maintain security measures to meet regulatory requirements
 and stakeholder expectations, and we intend to continue to make investments to maintain the
 security of our data and cybersecurity infrastructure. We intend to establish and maintain
 a Cybersecurity Maturity Model Certification ("CMMC") compliance program and
 will work to meet all applicable deadlines. While there can be no guarantee that our policies
 and procedures will be properly followed in every instance or that those policies and procedures
 will be effective, we believe that the Company's investment in people and technologies
 will contribute to a culture of continuous improvement that will put the Company
 in a position to protect against potential compromises and we do not believe that risks from
 prior cybersecurity threats have materially affected our business to date. We can provide
 no assurance that there will not be incidents in the future or that past or future attacks
 will not materially
 affect us, including our business strategy, results of operations, or financial condition.

 Item 2.

 Properties.

 Our principal place of business is located in Orlando, Florida at the
Rotor Riot facility. In October 2023, Rotor Riot signed a five-year lease for a 6,900 sq. foot facility in Orlando, FL. We currently anticipate
that the current leased space will be sufficient to support our current and future needs, except to support our new drone component manufacturing
business. We expect we can lease a suitable facility near our executive offices with comparable costs per square foot. In addition, we
have an executive office located at 15 Ave. Mu oz Rivera, Suite2200, San Juan, Puerto Rico 00901 which we sublet from Red Cat on
month-to-month basis.

 Item 3.

 Legal Proceedings.

 From time to time, we
may be involved in various disputes, claims, suits, investigations, and legal proceedings arising in the ordinary course of business.
For additional information, see "Note 15. Commitments and Contingencies" to our financial statements included in this Form
10-K.

 Item 4.

 Mine Safety Disclosures

 None.

 Item 5.

 Market for Registrants Common Equity, Related Stockholder Matters and Issuer Purchases of Equity Securities

 Market Information

 Our Common Stock has
been traded on the NYSE American under the symbol "UMAC" since our IPO on February 14, 2024.

 The last reported sales
price of our Common Stock on March 25, 2025 was $7.23.

 Holders

 As of February 25, 2025, there were approximately
1,523 holders of record of our Common Stock. These numbers are based on the actual number of holders registered at such date and
does not include holders whose shares are held in "street name" by brokers and other nominees.

 Dividends

 The Company has never paid dividends on its Common
Stock and does not anticipate that it will pay dividends in the foreseeable future. It intends to use any future earnings for the expansion
of its business. Any future determination of applicable dividends will be made at the discretion of the Board of Directors and will depend
on the results of operations, financial condition, capital requirements and other factors deemed relevant.

 Securities Authorized for Issuance Under Equity
Compensation Plan

 The following table provides information regarding
our equity compensation plans as of December 31, 2024:

 Equity Compensation Plan Information

 Plan category

 Number of securities to be issued upon exercise of outstanding options, warrants, and vesting of restricted stock

 Weighted-average exercise price of outstanding options and warrants

 Number of securities remaining available for future issuance under equity compensation plans

 Equity compensation plans approved by security holders

 480,000

 $
 0.85

 617,341

 Equity compensation plans not approved by security holders

 –

 $
 –

 –

 The Company's 2022 Equity Incentive Plan
(the "Plan") currently has 693,227 shares of Common Stock available for issuance as of the date of this Annual Report on Form
10-K which includes the increase in total authorized shares for the 5% evergreen provision as of January 1, 2025 and the reduction of
total authorized shares related to additional issuances since December 31, 2024.

 The Plan contains 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) 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.

 Use of Proceeds

 On February 13, 2024, the SEC declared effective
our registration statement on Form S-1 (File No. 333-270519), as amended, filed in connection with our IPO. On February 16, 2024, we closed
our IPO in which we sold 1,250,000 shares of our Common Stock, resulting in net proceeds of $3,849,555 after deducting offering costs,
underwriting discounts, and other commissions.

 There was no material change in the planned use
of proceeds from our IPO from that described in the prospectus dated February 16, 2024, filed with the SEC pursuant to Rule 424(b)(1)
under the Securities Act. As described in such prospectus, we have used IPO proceeds to pay $1.0 million to Red Cat related to the business
combination and acquisition of Fat Shark and Rotor Riot and the remaining amount will be used for working capital and general corporate
purposes.

 Item 6.

 Selected Financial Data

 As a smaller reporting company, we are not required
to provide this information.

 Item 7.

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

 You should read the
following discussion and analysis of our financial condition and results of operations in conjunction with the audited financial
statements (prepared in accordance with accounting principles generally accepted in the United States ("U.S. GAAP")) and related
notes included elsewhere in this Annual Report on Form 10-K (this "Form 10-K"). The following discussion contains forward-looking
statements that are subject to risks and uncertainties. See "Special Note Regarding Forward-Looking Statements" for a discussion
of the uncertainties, risks, and assumptions associated with those statements. Actual results could differ materially from those discussed
in or implied by forward-looking statements as a result of various factors, including those discussed below and elsewhere in this Form
10-K, particularly in the section entitled "Risk Factors." Unless we state otherwise or the context otherwise requires, the
terms "we," "us," "our" and the "Company" refer to Unusual Machines, Inc. and its subsidiaries.
All amounts presented in tables, other than per share amounts, are in thousands unless otherwise noted.

 Recent Developments

 Private Placement

 On October 29, 2024 (the "Closing Date"),
we entered into Securities Purchase Agreements (the "SPA") with accredited investors (each, an "Investor" and together
the "Investors") for a private placement offering ("Private Placement"), for aggregate gross proceeds of $1.95 million
before deducting fees to the placement agent and other expenses payable by us in connection with the Private Placement. We intend
to use the net proceeds of the Offering for working capital and general corporate purposes. As part of the Private Placement, we issued
an aggregate of 1,286,184 units at a per unit purchase price of $1.52 per unit. Each unit consisted of one share of Common Stock and one
warrant to purchase one share of the Company's Common Stock (each an "Investor Warrant") and collectively, the Investor
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. On February 25, 2025, the 2025 Special Meeting of the Company was held. At the 2025 Special Meeting, the Company's stockholders
voted and approved on a waiver of the provision that certain warrants are only exercisable 180 days after issuance. On February 26, 2025,
the Company issued 1,224,606 shares of Common Stock to various warrant holders who exercised their warrants at an exercise price of $1.99.
The Company received gross proceeds in the aggregate amount of $2,436,966 as a result of the warrant exercises. The shares of common stock
issued are fully registered under the Registration Statement on Form S-1 (SEC Registration Number 333-283494). All of the Investor Warrants
were exercised other than Investor Warrants held by Allan Evans, our Chief Executive Officer, Sanford Rich and Robert Lowry, who are
each members of our Board.

 Potential Aloft Acquisition

 On February 1, 2025, we entered into a Merger
Agreement to acquire drone software company, Aloft. We believe that Aloft is a leader in the drone fleet and airspace management sector,
powering more than 70% of all FAA-approved Low Altitude Authorization and Notification Capability airspace authorizations in the United
States. Aloft has provided more than 1.6 million authorizations in total with 400,000 authorizations provided in 2024. The acquisition
is for $14.5 million, almost entirely in the Company's Common Stock. Customary closing conditions by the parties must be met before
closing the merger. For more information, see Risk Factors – Risks Related to our Business and Financial Condition" we may
not be successful in consummating the merger if certain closing conditions are not met.

 Results of Operations

 We acquired Fat Shark and Rotor Riot on February 16, 2024 and generated
no revenue from 2023 through the date of acquisition. For pro forma information unaudited result of operations reflecting our performance
if we had owned these subsidiaries as of January 1, 2023, See Note 3 to our Consolidated Financial Statements.

 Years Ended December 31, 2024 and 2023

 Revenue

 During the year ended December 31, 2024 we
generated revenues totaling $5,565,319 compared to $0 during the year ended December 31, 2023, representing an increase of
$5,565,319 or 100%. We did not generate any revenues until the closing of the acquisitions of Fat Shark and Rotor Riot on February
16, 2024. Accordingly, our revenues for the year ended December 31, 2024 are affected by not having any revenues for half of the
first quarter. Prior to our acquisition, Fat Shark and Rotor Riot had pro forma revenues for the year ended December 31, 2023 of
approximately $4.68 million. Revenues almost entirely relate to completed and fulfilled product sales during the year through our
Rotor Riot retail channel and from B2B enterprise sales of our Fat Shark and Blue UAS products.

 Cost of Goods Sold

 During the year ended December 31, 2024, we incurred
cost of goods sold of $4,019,068 compared to $0 during the year ended December 31, 2023, resulting in an increase of $4,019,068 or 100%.
Similar to revenues, we did not incur any cost of goods sold until the closing of the acquisitions on February 16, 2024. Prior to our
acquisition, Fat Shark and Rotor Riot had pro-forma cost of goods sold for the year ended December 31, 2023 of approximately $4.13 million.
Cost of goods sold primarily relate to product costs from our sales but also include certain shipping and tariff costs.

 Gross Margin

 During the year ended December 31, 2024, our gross
margin was $1,546,251 compared to $0 during the year ended December 31, 2023, resulting in an increase of $1,546,251 or 100%. Our gross
margin, as a percentage of sales, totaled 28% during the year ended December 31, 2024, compared to 0% during the year ended December 31,
2023. We anticipate our gross margin to fluctuate period to period depending on certain promotions and products that are sold during the
period and the margins we generated during the quarter are in line with our expectations and normal operating margins.

 Operating Expenses

 During the year ended December 31, 2024, operations
expenses totaled $959,740 compared to $0 during the year ended December 31, 2023, resulting in an increase of $959,740 or 100%. Prior
to the closing of the acquisitions in February 2024, we did not have any operations expenses. Operations expenses primarily relate to
our direct operations including our warehouse personnel and warehouse expenses.

 During the year ended December 31, 2024, research
and development expenses totaled $90,584 compared to $0 for the year ended December 31, 2023, resulting in an increase of $90,584 or 100%.
Prior to the closing of the acquisitions in February 2024, we did not have any research and development expenses during 2023. Research
and development expense primarily relates to new product development as we continue to partner with manufacturers to bring drone component
manufacturing to the United States and include expenses incurred related to our Blue UAS products.

 During the year ended December 31, 2024, sales
and marketing expenses totaled $1,091,268 compared to $0 for the year ended December 31, 2023, resulting in an increase of $1,091,268
or 100%. Prior to the closing of the acquisitions in February 2024, we did not have any sales and marketing expenses. Sales and marketing
expenses primarily relate to advertising spend related to Rotor Riot, costs related to our Rotor Riot show production and payroll expenses
for our marketing personnel.

 During the year ended December 31, 2024, general
and administrative expenses totaling $6,250,939 compared to $2,377,862 for the year ended December 31, 2023, resulting in an increase
of $3,873,077 or 163%. General and administrative expenses incurred during 2024 include expenses related to operations for a public company
including legal and other professional fees, public company insurance expense, and other costs associated with being public. In addition,
we also incurred $2,320,206 in non-cash stock compensation expense. General and administrative expenses incurred during 2023 primarily
related to expenses incurred as we operated as a management company to acquire Fat Shark and Rotor Riot and take the Company public. We
incurred $600,000 of non-cash stock compensation expenses in 2023. The increase relates to increased expenses related to closing the IPO
including legal and accounting fees, additional transition and integration related expenses, higher stock compensation expense, and costs
related to operating Fat Shark and Rotor Riot.

 During the year ended December 31, 2024, we recognized a loss on impairment
of goodwill of $10,073,326 compared to $0 for the year ended December 31, 2023, resulting in an increase of $10,073,326 or 100%. The loss
on goodwill impairment relates to the difference in the fair value calculation of goodwill from the acquisitions of Rotor Riot and Fat
Shark as compared to the carrying value as of the measurement date. We did not have any goodwill in the prior year as the acquisitions
had not yet been completed.

 Other Expenses

 During the year ended December 31, 2024,
other expenses totaled $15,002,061 compared to $0 during the year ended December 31, 2023, resulting in an increase of
$15,002,061 or 100%. Other expenses mostly consists of non-cash related charges including $16,146,205 for the change in fair value
from our derivatives including the conversional option feature on the note payable and the warrant liability. It is offset by a
non-cash gain on debt extinguishment of $1,259,979. Finally, other expenses included $116,981 for interest expense that the Company
paid in relation to its Note Payable during the year and interest income of $1,146. We did incur these same costs in 2023 as we did
not have operational activities until after our IPO and the completion of the acquisitions.

 Net Loss

 Our net loss for the year ended December 31, 2024,
totaled $31,980,468 including non-cash charges of approximately $26.7 million. This compared to $2,383,462 for the year ended December
31, 2023, resulting in an increase in net loss of $29,597,006. The increase in net loss primarily relates to a change in fair value of
derivatives and warrant liabilities of $16,146,205, a loss on impairment of goodwill of $10,073,326, the increase in general and administrative
expenses related to closing the IPO and stock compensation expense with additional increase in expenses for operations, sales and marketing
expenses we incurred since the acquisition from Fat Shark and Rotor Riot, and interest expense of $116,981. Interest expense is from our
debt incurred from our IPO that was converted to equity in August and December 2024. This was partially offset by generating gross margin
related to the revenue and cost of goods sold from sales for Fat Shark and Rotor Riot, a gain on debt extinguishment of $1,259,979, and
income tax benefit of $13,360.

 Cash Flows

 Prior to the closing
of our IPO and the acquisitions of Fat Shark and Rotor Riot, we did not have any cash inflows from operations and all cash outflows related
to our activities related to our IPO. Our future cash flows from operating activities will be significantly impacted by revenues received,
our investment in sales and marketing to drive growth, and general and administrative expenses related to operating a public company.
Our ability to meet future liquidity needs will be driven by our operating performance and the extent of continued investment in our operations.
Failure to generate sufficient revenues and related cash flows could have a material adverse effect on our ability to meet our liquidity
needs and achieve our business objectives.

 Operating Activities

 Net cash used in operating activities was $3,996,367
during the year ended December 31, 2024, compared to net cash used in operating activities of $1,776,552 during the year ended December
31, 2023, representing an increase of $2,219,815 or 125%. This change in net cash used primarily resulted from our increase in net loss
of $29,597,006 and an increase in prepaid expenses of $83,749 and accounts receivable of $59,777, offset by a decrease in inventory of
$455,101, an increase in other assets of $36,196, an increase in accounts payable and accrued expenses of $284,124, other liabilities
of $34,238 and non-cash expenses of $26,711,058which is primarily from a loss on impairment of goodwill and a change in fair value of
derivatives.

 Investing Activities

 Net cash used in investing activities was $852,801
during the year ended December 31, 2024 compared to net cash used in investing activities of $3,164 during the year ended December 31,
2023, representing an increase of $849,637. This change in net cash used in investing activities related to the $1,000,000 we paid to
purchase Fat Shark and Rotor Riot, offset by $147,199 in cash acquired as compared to $3,164 used for purchase of computer equipment during
2023.

 Financing Activities

 Net cash provided by financing activities totaled
$7,711,718 during the year ended December 31, 2024, compared to net cash used in financing activities of $424,933 during the year ended
December 31, 2023, resulting in an increase in net cash provided by financing activities of $8,136,651. The change relates to proceeds
received from multiple activities during 2024 including our IPO in February 2024 of $5,000,000, the Private Placement in October 2024
of $2,047,105 and warrant exercises in December 2024 of $1,523,700 offset by change in offering costs of $434,154.

 Liquidity and Capital Resources

 As of December 31, 2024, we had current assets
totaling $6,095,629 primarily consisting of cash balances of $3,757,323, inventory of $1,335,503 and prepaid deposits for inventory of
$904,728. Our current liabilities as of December 31, 2024 totaled $933,669, primarily consisting of accounts payable and accrued expenses
of $668,732 and customer deposits and other current liabilities of $264,937. Our net working capital as of December 31, 2024 was $5,161,960.

 On October 29, 2024, we completed a private placement
offering for the sale of 1,286,184 shares of Common Stock at a price of $1.52 per share for aggregate gross proceeds of $1.95 million
before deducting fees to the placement agent and other expenses payable by us in connection with the private placement. We retained approximately
$1.8 million in net proceeds.

 In December 2024, two investors and note holders
exercised their option to convert $3,000,000 of the then outstanding Convertible Note into 1,507,538 shares of Common Stock at a price
of $1.99 per share. After the conversion and as of December 31, 2024, we no longer have any debt outstanding.

 In December 2024, we also had several investors
exercise 684,000 warrants with cash and we issued 684,000 shares of our Common Stock for total cash proceeds of $1,523,700.

 On February 26, 2025, multiple investors exercised
1,224,606 warrants at $1.99 per warrant from the October 2024 Private Placement and we issued 1,224,606 shares of our Common Stock and
received cash proceeds of $2,436,966.

 As of March 25, 2025, we have approximately $5.0
million in cash. We believe that the net proceeds from our 2024 financings, warrant exercises, revenues, and existing cash balances will
be sufficient to fund our current operating plans through at least the next 12 months. We have based these estimates, however, on assumptions
that may prove to be wrong, and we could spend our available financial resources much faster than we currently expect and need to raise
additional funds sooner than we anticipate.

 Critical Accounting Policies and Estimates

 Our financial statements and accompanying notes
have been prepared in accordance with GAAP applied on a consistent basis. The preparation of financial statements in conformity with GAAP
requires management to make estimates and assumptions that affect the reported amounts of assets and liabilities, the disclosure of contingent
assets and liabilities at the date of the financial statements and the reported amounts of revenues and expenses during the reporting
periods.

 We regularly evaluate the accounting policies
and estimates that we use to prepare our financial statements. A complete summary of these policies is included in the notes to our financial
statements. In general, management's estimates are based on historical experience, on information from third party professionals,
and on various other assumptions that are believed to be reasonable under the facts and circumstances. Actual results could differ from
those estimates made by management.

 Business Combinations

 The Fat Shark and Rotor Riot acquisitions are
accounted for as a business combination under ASC 805. We recognized the assets acquired and liabilities assumed at fair value as of the
date of acquisition. The fair value is determined based on assumptions used in valuations and estimates determined by management, which
are subjective.

 Impairment of goodwill and long-lived assets

 Goodwill represents the future economic benefit
arising from other assets acquired in an acquisition that are not individually identified and separately recognized. Goodwill represents
costs in excess of fair values assigned to the underlying identifiable net assets of acquired businesses. Intangible assets from acquired
business are recognized at fair value on the acquisition date. Goodwill is tested for impairment at least annually at the reporting unit
level or whenever events or changes in circumstances indicate that goodwill might be impaired.

 Valuation of Inventory

 Our policy for valuation of inventory requires
us to evaluate the net realizable value of our inventory using various reference measures including current product selling prices, as
well as evaluating for excess quantities and obsolescence. We may be required to record inventory write-downs if actual inventory values
are less favorable than those estimates by management.

 Accounts Receivable

 We carry our accounts receivable at invoiced amounts.
We evaluate our accounts receivable on a periodic basis and establish 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.

 Revenue Recognition

 We receive revenues from the sale of products
from both retail distributers and individual consumers. Sales revenue is recognized when the products are shipped and the price is fixed
or determinable, no other significant obligations of the Company exist and collectability is probable. Revenue is recognized when the
title to the products has been passed to the customer, which is the date the products are shipped to the customer. This is the date the
performance obligation has been met.

 Stock Based Compensation

 Certain employees and directors have received
grants of restricted common shares in our company. Other employees received grants of stock options in our Company. These awards are accounted
for in accordance with guidance prescribed for accounting for equity-based compensation. Based on this guidance and the terms of the awards,
the awards are equity classified.

 The fair value of restricted stock awards is based
on the fair value of the Company's Common Stock on the date of grant and expensed over the vesting period.

 The fair value of each stock option award is determined
using the Black-Scholes option-pricing model which values options based on the stock price at the grant date, the expected life of the
option, the estimated volatility of the stock, and the risk-free interest rate over the expected life of the option. The expected volatility
was determined considering comparable companies historical stock prices as a peer group for the fiscal year the grant occurred and prior
fiscal years for a period equal to the expected life of the option. The risk-free interest rate was the rate available from the St. Louis
Federal Reserve Bank with a term equal to the expected life of the option. The expected life of the option was estimated based on a mid-point
method calculation.

 In addition, the Company issued shares of our
Common Stock in 2023 to consultants for services performed. Prior to our IPO in February 2024, we were a private company with no active
public market for our Common Stock. Therefore, we have periodically determined the overall value of our company and the estimated per
share fair value of our common equity at their various dates and valuations based on a per share valuation using the private funding transactions
as an estimate. These values and estimates are subjective.

 Derivatives and Fair Value

 The fair value of our 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 estimate of the expected term, the risk-free interest rate over the expected term, and certain estimates and probabilities
of different outcomes.

 Management performed an assessment on the convertible
option feature included in the note payable to determine if the optional conversion feature should be bifurcated from the host contract
and accounted for separately as a liability pursuant to ASC 815. This assessment includes judgment from management to determine if the
derivative is clearly and closely related to the debt and if it meets certain definitions of a derivative.

 The Company classifies warrants issued for the
purchase of shares of its common stock as either equity or liability instruments based on an assessment of the specific terms and conditions
of each respective contract. The assessment considers whether the warrants are freestanding financial instruments or embedded in a host
instrument, whether the warrants meet the definition of a liability pursuant to ASC 480, whether the warrants meet the definition of a
derivative under ASC 815, and whether the warrants meet all of the requirements for equity classification under ASC 815. This assessment,
which requires the use of professional judgment, is conducted at the time of warrant issuance and as of each subsequent quarterly period
end date while the warrants are outstanding.

 For issued or modified warrants that meet all
of the criteria for equity classification, the warrants are required to be recorded as a component of equity at the time of issuance.
For issued or modified warrants that do not meet all the criteria for equity classification, the warrants are required to be recorded
as liabilities at their fair value.

 Off-Balance Sheet Arrangements

 We have no off-balance sheet arrangements.

 Recently Issued Accounting Pronouncements

 The Company has implemented all new accounting
pronouncements that are in effect. These pronouncements did not have any material impact on the financial statements unless otherwise
disclosed, and the Company does not believe that there are any other new accounting pronouncements that have been issued that might have
a material impact on its financial position or results of operations.

 Item 7A.

 Quantitative and Qualitative Disclosures about Market Risk

 As a smaller reporting company, we are not required
to provide this information.

 Item 8.

 Financial Statements and Supplementary Data

 UNUSUAL MACHINES, INC.

 INDEX TO FINANCIAL STATEMENTS

 Page

 Unusual Machines, Inc. Financial Statements

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

 Consolidated Balance Sheets at December 31, 2024 and 2023

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

 F- 5

 Consolidated Statement of Changes in Stockholders' Equity for the years ended December 31, 2024 and 202 3

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

 Consolidated Notes to Financial Statements

 F- 1

 Report
of Independent Registered Public Accounting Firm

 To the Board of Directors and Stockholders of:

 Opinion
on the Financial Statements

 We have audited the accompanying consolidated
balance sheets of Unusual Machines, Inc. (the "Company") as of December 31, 2024 and 2023, the related consolidated statements
of operations, changes in stockholders' equity, and cash flows, for each of the two years in the period ended December 31, 2024,
and the related notes (collectively referred to as the "consolidated financial statements"). In our opinion, the consolidated
financial statements present fairly, in all material respects, the consolidated financial position of the Company as of December 31, 2024
and 2023, and the consolidated results of its operations and its cash flows for each of the two years in the period ended December 31,
2024, in conformity with accounting principles generally accepted in the United States of America.

 Basis
for Opinion

 These consolidated financial statements are the
responsibility of the Company's management. Our responsibility is to express an opinion on the Company's consolidated financial
statements based on our audits. We are a public accounting firm registered with the Public Company Accounting Oversight Board (United
States) ("PCAOB") and are required to be independent with respect to the Company in accordance with the U.S. federal securities
laws and the applicable rules and regulations of the Securities and Exchange Commission and the PCAOB.

 We conducted our audits in accordance with the
standards of the PCAOB. Those standards require that we plan and perform the audits to obtain reasonable assurance about whether the consolidated
financial statements are free of material misstatement, whether due to error or fraud. The Company is not required to have, nor were we
engaged to perform, an audit of internal control over financial reporting. As part of our audits, we are required to obtain an understanding
of internal control over financial reporting but not for the purpose of expressing an opinion on the effectiveness of the Company's
internal control over financial reporting. Accordingly, we express no such opinion.

 Our audits included performing procedures to assess
the risks of material misstatement of the consolidated financial statements, whether due to error or fraud, and performing procedures
that respond to those risks. Such procedures included examining, on a test basis, evidence regarding the amounts and disclosures in the
consolidated financial statements. Our audits also included evaluating the accounting principles used and significant estimates made by
management, as well as evaluating the overall presentation of the consolidated financial statements. We believe that our audits provide
a reasonable basis for our opinion.

 Critical
Audit Matters

 The critical audit matters communicated below
are matters arising from the current period audit of the consolidated financial statements that were communicated or required to be communicated
to the audit committee and that: (1) relate to accounts or disclosures that are material to the consolidated financial statements and
(2) involved our especially challenging, subjective, or complex judgments. The communication of critical audit matters does not alter
in any way our opinion on the consolidated financial statements, taken as a whole, and we are not, by communicating the critical audit
matters below, providing separate opinions on the critical audit matters or on the accounts or disclosures to which they relate.

 2295 NW Corporate
Blvd., Suite 240 • Boca Raton, FL 33431-7326

 Phone: (561)
995-8270 • Toll Free: (866) CPA-8500 • Fax: (561) 995-1920

 www.salbergco.com
• info@salbergco.com

 Member
National Association of Certified Valuation Analysts • Registered with the PCAOB

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

 F- 2

 Business Acquisitions

 As described in footnote 3 "Acquisitions",
to the consolidated financial statements, the Company closed on the acquisitions of both Fat Shark and Rotor Riot from Red Cat in February
2024. The determination of fair values for assets acquired and liabilities assumed, and equity-based purchase consideration required management
to make significant estimates and assumptions such as those related to forecasts of future revenues, gross margins, operating expenses,
discount and other rates, and equity values. Changes in these assumptions could have a significant impact on the fair values.

 We identified business combinations as a critical
audit matter. Auditing management's judgments regarding the above estimates involved a high degree of subjectivity.

 The primary procedures we performed to address
this critical audit matter included (a) gained an understanding of management's process to determine the valuations, (b) assessed
the competence, independence, qualifications, experience, and capabilities of the third-party valuation specialist, (c) evaluated if the
valuation methods used by management was appropriate, (d) evaluated the reasonableness of management's forecasts by comparing them
to historical information, year to date current information and/or other supporting contracts or information, (e) assessed the reasonableness
of the discount and other rates used by evaluating each component, (f) assessed the reasonableness of the stock price used to value the
equity consideration paid, and (g) recomputed the valuation estimates. We agreed with management's conclusions.

 Goodwill and Intangible Assets Impairment Assessment

 As described in footnote 2 "Goodwill and
long-lived assets", to the consolidated financial statements, the Company is required to test the carrying amount of goodwill at
least annually, or more frequently upon the occurrence of certain trigger events. The Company is also required to assess the recoverability
of its intangible assets whenever certain events occur, or circumstances change that may be indicators of impairment, but at least annually.

 We identified Goodwill and Intangible Assets Impairment
Assessment as a critical audit matter because auditing the annual goodwill impairment test and the evaluation of the recovery and/or fair
value of intangible assets required significant judgment regarding the evaluation of qualitative and/or quantitative factors, including
estimates.

 The primary audit procedures we performed to address
this critical audit matter included, (a) gained an understanding of management's process to conduct qualitative evaluations of intangible
assets based on the criteria in authoritative literature, (b) evaluated management's evaluation of potential indicators of impairment
of intangible assets, (c) compared management's qualitative evaluation of intangible assets impairment to relevant and reliable
data,, (d) assessed the competence, independence, qualifications, experience, and capabilities of the third-party valuation specialist
who conducted the quantitative test for goodwill impairment, (e) evaluated if the quantitative test valuation method used by the specialist
was appropriate, (f) evaluated the reasonableness of management's forecasts by comparing them to historical information, year to
date current information and/or other supporting contracts or information, (g) assessed the reasonableness of the discount and other rates
used by evaluating each component. We agreed with management's conclusions.

 /s/ Salberg & Company, P.A.

 SALBERG & COMPANY, P.A.

 We have served as the Company's auditor
since 2024

 Boca Raton, Florida

 F- 3

 Balance Sheets

 2024

 2023

 ASSETS

 Current assets:

 Cash & cash equivalents

 $
 3,757,323

 $
 894,773

 Accounts receivable

 66,575

 –

 Inventories

 1,335,503

 –

 Prepaid inventory

 904,728

 –

 Other current assets

 31,500

 120,631

 Total current assets

 6,095,629

 1,015,404

 Property and equipment, net

 1,254

 Deferred offering costs

 –

 512,758

 Operating lease right-of-use assets

 323,514

 –

 Other assets

 59,426

 –

 Goodwill

 7,402,906

 –

 Intangible assets, net

 2,225,530

 –

 Total non-current assets

 10,011,946

 514,012

 Total assets

 $
 16,107,575

 $
 1,529,416

 LIABILITIES AND STOCKHOLDERS' EQUITY

 Current liabilities

 Accounts payable and accrued expenses

 $
 668,732

 $
 114,497

 Deferred revenue

 197,117

 –

 Operating lease liability

 67,820

 –

 Total current liabilities

 933,669

 114,497

 Long-term liabilities

 Deferred tax liability

 93,793

 –

 Operating lease liability – long term

 262,171

 –

 Total liabilities

 1,289,633

 114,497

 Commitments and contingencies (Note 15)

 –

 –

 Stockholders' equity:

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

 –

 –

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

 –

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

 –

 –

 Common stock - $ 0.01 par value, 500,000,000 authorized and 15,122,018 and 3,217,255 shares issued and outstanding at December 31, 2024 and 2023, respectively

 151,221

 32,173

 Additional paid in capital

 50,580,235

 5,315,790

 Accumulated deficit

 ( 35,913,514
)

 ( 3,933,046
)

 Total stockholders' equity

 14,817,942

 1,414,919

 Total liabilities and stockholders' equity

 $
 16,107,575

 $
 1,529,416

 See accompanying independent auditor's report
and notes to the financial statements.

 F- 4

 Statements of Operations

 Year Ended December 31,

 2024

 2023

 Revenue

 $
 5,565,319

 $
 –

 Cost of goods sold

 4,019,068

 –

 Gross profit

 1,546,251

 –

 Operating expenses:

 Operations

 959,740

 –

 Research and development

 90,584

 –

 Sales and marketing

 1,091,268

 –

 General and administrative

 6,250,939

 2,377,862

 Loss on impairment of goodwill

 10,073,326

 –

 Depreciation and amortization

 72,161

 5,600

 Total operating expenses

 18,538,018

 2,383,462

 Loss from operations

 ( 16,991,767
)

)

 Other income (expense):

 Interest income

 1,146

 –

 Interest expense

 ( 116,981
)

 –

 Gain on debt extinguishment

 1,259,979

 –

 Change in fair value of derivatives and warrant liabilities

 ( 16,146,205
)

 –

 Total other income (expense)

 ( 15,002,061
)

 –

 Net loss before income tax

 ( 31,993,828
)

)

 Income tax benefit (expense)

 13,360

 –

 $
 ( 31,980,468
)

 $
)

 Net loss per share attributable to common stockholders

 Basic and diluted

 $
 ( 3.84
)

 $
 ( 0.72
)

 Weighted average common shares outstanding

 Basic and diluted

 8,325,128

 3,307,118

 See accompanying independent auditor's report
and notes to financial statements.

 F- 5

 Statements of Changes in Stockholders'
Equity

 For the Years Ended December 31, 2024 and 2023

 Series A, Preferred Stock

 Series B, Preferred Stock

 Series C, Preferred Stock

 Additional Paid-In

 Accumulated

 Total Stockholders'

 Shares

 Value

 Shares

 Value

 Shares

 Value

 Shares

 Value

 Capital

 Deficit

 Equity

 Balance, December 31, 2022

 –

 $
 –

 $

 –

 $
 –

 3,392,250

 $
 33,923

 $
 4,714,041

 $
 ( 1,549,584
)

 $
 3,198,381

 Issuance of common shares for services

 –

 –

 –

 –

 –

 –

 75,005

 599,250

 –

 600,000

 Conversion to preferred shares

 –

 –

 –

 –

 ( 250,000
)

 ( 2,500
)

 2,499

 –

 –

 –

 –

 –

 –

 –

 –

 –

 –

 –

)

)

 Balance, December 31, 2023

 –

 $
 –

 $

 –

 $
 –

 3,217,255

 $
 32,173

 $
 5,315,790

 $
 ( 3,933,046
)

 $
 1,414,919

 Issuance of common shares as settlement

 –

 –

 –

 –

 –

 –

 16,086

 64,183

 –

 64,344

 Issuance of common shares, initial public offering, net of offering costs

 –

 –

 –

 –

 –

 –

 1,250,000

 12,500

 3,837,055

 –

 3,849,555

 Issuance of common shares, business combination

 –

 –

 –

 –

 –

 –

 4,250,000

 42,500

 16,957,500

 –

 17,000,000

 Issuance of common shares, equity incentive plan

 –

 –

 –

 –

 –

 –

 1,330,955

 13,310

 ( 13,310
)

 –

 –

 Issuance of common shares, private placement, net

 –

 –

 –

 –

 –

 –

 1,286,184

 12,862

 1,812,842

 –

 1,825,704

 Exchange of common shares for Series A preferred

 4,250

 –

 –

 –

 –

 ( 4,250,000
)

 ( 42,500
)

 42,457

 –

 –

 Exchange of convertible note for Series C preferred

 –

 –

 –

 –

 –

 –

 999,998

 –

 1,000,000

 Conversion of preferred shares to common shares

 ( 4,250
)

 ( 43
)

 ( 190
)

 ( 2
)

 ( 210
)

 ( 2
)

 5,830,000

 58,300

 ( 58,253
)

 –

 –

 Cash exercise of warrants

 –

 –

 –

 –

 –

 –

 684,000

 6,840

 1,516,860

 –

 1,523,700

 Convertible note conversion

 –

 –

 –

 –

 –

 –

 1,507,538

 15,075

 17,849,250

 –

 17,864,325

 Stock compensation expense - vested stock

 –

 –

 –

 –

 –

 –

 –

 –

 2,194,938

 –

 2,194,938

 Stock option compensation expense

 –

 –

 –

 –

 –

 –

 –

 –

 60,925

 –

 60,925

 –

 –

 –

 –

 –

 –

 –

 –

 –

 ( 31,980,468
)

 ( 31,980,468
)

 Balance, December 31, 2024

 –

 $
 –

 –

 $
 –

 –

 $
 –

 15,122,018

 $
 151,221

 $
 50,580,235

 $
 ( 35,913,514
)

 $
 14,817,942

 See accompanying independent auditor's report
and notes to financial statements.

 F- 6

 Statements of Cash Flows

 Year Ended December 31,

 2024

 2023

 Cash flows from operating activities:

 $
 ( 31,980,468
)

 $
)

 Depreciation and amortization

 72,161

 5,600

 Stock compensation expense as settlement

 64,344

 –

 Stock compensation expense

 2,255,862

 600,000

 Loss on impairment on goodwill

 10,073,326

 –

 Change in fair value of derivatives and warrant liabilities

 16,146,205

 –

 Gain on debt extinguishment

 ( 1,281,880
)

 –

 Income tax benefit

 ( 13,360
)

 –

 Change in assets and liabilities:

 Accounts receivable

 ( 59,777
)

 –

 Inventory

 455,101

 –

 Prepaid inventory

 ( 83,749
)

 –

 Other assets

 54,940

 18,744

 Accounts payable and accrued expenses

 266,690

 ( 17,434
)

 Operating lease liabilities

 ( 48,438
)

 –

 Customer deposits and other current liabilities

 82,676

 –

 Net cash used in operating activities

 ( 3,996,367
)

 ( 1,776,552
)

 Cash flows from investing activities

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

 ( 852,801
)

 –

 Purchases of property and equipment

 –

 ( 3,164
)

 Net cash used in investing activities

 ( 852,801
)

 ( 3,164
)

 Cash flows from financing activities:

 Proceeds from issuance of common shares, IPO

 5,000,000

 –

 Proceeds from issuance of common shares, private placement

 2,047,105

 –

 Proceeds from issuance of common shares, warrant exercises

 1,523,700

 –

 Common share issuance offering costs

 ( 859,087
)

 ( 424,933
)

 Net cash provided by (used in) financing activities

 7,711,718

 ( 424,933
)

 Net increase (decrease) in cash

 2,862,550

 ( 2,204,649
)

 Cash, beginning of year

 894,773

 3,099,422

 Cash, end of year

 $
 3,757,323

 $
 894,773

 Supplemental disclosures of cash flow information:

 Non-cash consideration paid for assets acquired and liabilities assumed

 $
 21,000,000

 $
 –

 Deferred acquisitions costs

 $
 100,000

 $
 –

 Deferred offering costs recorded as a reduction of proceeds

 $
 512,758

 $
 –

 See accompanying independent auditor's report
and notes to financial statements.

 F- 7

 Notes to Financial Statements

 For the Years Ended December 31, 2024 and 2023

 Note 1 – Organization and nature of business

 Unusual Machines, Inc. ("the Company")
is a Nevada corporation engaged in the commercial drone industry. The Company reincorporated from Puerto Rico to Nevada on April 22, 2024.

 On February 16, 2024, the Company closed its Initial
Public Offering (the "IPO") of 1,250,000 shares of common stock at a public offering price of $ 4.00 per share ("IPO
Price"). The shares are traded on NYSE American. Simultaneous with the closing of the IPO, the Company acquired Fat Shark Holdings
Ltd. ("Fat Shark") and Rotor Riot, LLC ("Rotor Riot") from Red Cat Holdings, Inc. ("Red Cat") (See
Note 3).

 Note 2 – Summary of significant accounting policies

 Basis of Accounting

 The accompanying financial statements have been
prepared in accordance with accounting principles generally accepted in the United States of America ("GAAP").

 Principles of Consolidation

 The consolidated financial statements include
accounts of the Company and its wholly owned subsidiaries, Fat Shark and Rotor Riot since the acquisitions on February 16, 2024. Intercompany
transactions and balances have been eliminated upon consolidation.

 Use of Estimates

 The preparation of financial statements in conformity
with GAAP requires management to make estimates and assumptions that affect the reported amounts of assets and liabilities, disclosures
of contingent assets and liabilities at the date of the financial statements, and the reported amounts of revenues and expenses during
the reporting period. Accordingly, actual results could differ from those estimates, and such results could be material.

 The financial statements include some
amounts that are based on management's best estimates and judgments. Significant estimates reflected in these financial statements
include those used to (i) determine stock-based compensation, (ii) the fair value of assets acquired and liabilities assumed in
business combinations and the value of shares issued as consideration, (iii) reserves and allowances related to accounts receivable,
and inventory, (iv) the evaluation of long-lived assets, including intangibles and goodwill, for impairment, (v) the fair value of
lease liabilities and related right of use assets, (vi) the warranty liability reserve (vii) the fair value of embedded conversion
option and warrant derivative liabilities and (viii) the deferred tax asset valuation allowance.

 Liquidity

 The Company has never been profitable and has incurred net losses related
to its operations and acquisitions. During the year ended December 31, 2024, the Company incurred a net loss from operations of $ 16,991,767,
which includes a non-cash charge related to the impairment loss on goodwill of $ 10,073,326 and non-cash stock compensation expense of
$ 2,320,206. Cash used in operating activities was $ 3,996,367. As discussed in Note 9, the Company converted all outstanding notes payable
as of December 31, 2024 and has no other debt. The Company is continuing to see additional growth in revenue as it expands further into
enterprise business. In addition and subsequent to year end and as discussed in Note 16, the Company received an additional $2.4 million
in cash proceeds from warrant exercises. Management has concluded that these recent events alleviate any substantial doubt about the Company's
ability to continue its operations and meet its financial obligations, for twelve months from the date these consolidated financial statements
are issued.

 F- 8

 Cash and Cash Equivalents

 The Company considers all highly liquid debt instruments
purchased with an original maturity of three months or less to be cash equivalents. The Company maintains cash deposits at a financial
institution that is insured by the Federal Deposit Insurance Corporation up to $ 250,000. The Company's cash balance may at times
exceed these limits. At December 31, 2024 and 2023, the Company had approximately $ 3.0 million and $ 0.6 million, respectively, in excess
of federally insured limits. The Company continually monitors its positions with, and the credit quality of the financial institutions
with which it invests.

 Accounts Receivable

 The Company carries its accounts receivable at
invoiced amounts. Upon the closing of the acquisitions in February 2024 when we acquired accounts receivable, the Company adopted ASC
326, Financial Instruments – Credit Losses, which the Company evaluates all credit losses as of the reporting date. On a periodic
basis, the Company evaluates its accounts receivable and establishes an allowance for credit losses based on a history of past write-offs
and collections and current credit conditions. Accounts are written-off as uncollectible at the discretion of management. At December
31, 2024 and December 31, 2023, the Company considers accounts receivable to be fully collectible; accordingly, no allowance for credit
losses has been established.

 Inventory

 Inventories, which consist of finished goods,
are stated at the lower of cost or net realizable value, and are measured using the first-in, first-out method. Cost components include
direct materials and direct labor, as well as in-bound freight. At each balance sheet date, the Company evaluates the net realizable value
of its inventory using various reference measures including current product selling prices, as well as evaluating for excess quantities
and obsolescence.

 Deferred offering costs

 The Company previously deferred direct
incremental costs associated with its ongoing initial public offering ("IPO"). The Company capitalized $ 424,933 during
the year ended December 31, 2023 and $ 87,825 in
2022. Deferred offering costs consist primarily of legal, advisory, and consulting fees incurred in connection with the formation
and preparation of the IPO. After consummation of the IPO in February 2024, total deferred offering costs of $ 512,758 and
additional offering costs of $ 127,687 were
recorded as a reduction to additional paid-in capital generated as a result of the offering.

 Property and equipment, net

 Property and equipment is stated at cost, net
of accumulated depreciation. Depreciation is provided utilizing the straight-line method over the estimated useful lives for owned assets
of three years.

 Leases

 The Company has adopted Accounting Standards
Codification (ASC) 842, "Leases" which requires the recognition of assets and liabilities associated with lease agreements.
The Company recognized a lease liability obligation and a right-of-use asset for the facilities lease in Orlando, FL.

 The Company determines if a contract is a lease
or contains a lease at inception. Operating lease liabilities are measured, on each reporting date, based on the present value of the
future minimum lease payments over the remaining lease term. The Company's leases do not provide an implicit rate. Therefore, the Company
used an effective discount rate of 11.49% based on its last debt financings. Operating lease assets are measured by adjusting the lease
liability for lease incentives, initial direct costs incurred and asset impairments. Lease expense for minimum lease payments is recognized
on a straight-line basis over the lease term with the operating lease asset reduced by the amount of the expense. The Company has elected
to account for lease and non-lease components together as a single lease component for all underlying assets. Lease terms do not include
an option to renew.

 F- 9

 Business Combinations

 The Company accounts for business combinations under ASC 805 using
the acquisition method of accounting where the assets acquired and liabilities assumed are recognized based on their respective estimated
fair values. The excess of the purchase price over the estimated fair values of the net assets acquired is recorded as goodwill. Determining
the fair value of certain acquired assets and liabilities is subjective in nature and often involves the use of significant estimates
and assumptions used in valuations and estimates determined by management. Business acquisitions are included in the Company's consolidated
financial statements as of the date of the acquisition.

 Goodwill and Long-lived Assets

 Goodwill represents the future economic
benefit arising from other assets acquired in an acquisition that are not individually identified and separately recognized. The
Company tests goodwill for impairment in accordance with the provisions of ASC 350, Intangibles – Goodwill and Other,
("ASC 350"). Goodwill is tested for impairment at least annually at the reporting unit level or whenever events or
changes in circumstances indicate that goodwill might be impaired. ASC 350 provides that an entity has the option to first assess
qualitative factors to determine whether the existence of events or circumstances leads to a determination that it is more likely
than not that the fair value of a reporting unit is less than its carrying amount. If, after assessing the totality of events or
circumstances, an entity determines it is not more likely than not that the fair value of a reporting unit is less than its carrying
amount, then additional impairment testing is not required. However, if an entity concludes otherwise, then it is required to
perform an impairment test. The impairment test involves comparing the estimated fair value of a reporting unit with its book value,
including goodwill. If the estimated fair value exceeds book value, goodwill is considered not to be impaired. If, however, the fair
value of the reporting unit is less than book value, then an impairment loss is recognized in an amount equal to the amount that the
book value of the reporting unit exceeds its fair value, not to exceed the total amount of goodwill allocated to the reporting unit.
The Company recorded an impairment loss on goodwill of $ 10,073,326
in 2024 based on the Company's future net cash flows from the acquisitions.

 The estimate of fair value of a reporting unit is computed using either
an income approach, a market approach, or a combination of both. Under the income approach, we utilize the discounted cash flow method
to estimate the fair value of a reporting unit. Significant assumptions inherent in estimating the fair values include the estimated future
cash flows, growth assumptions for future revenues (including gross margin, operating expenses, and capital expenditures), and a rate
used to discount estimated future cash flow projections to their present value based on estimated weighted average cost of capital (i.e.,
the selected discount rate). Management's assumptions are based on historical data, supplemented by current and anticipated market
conditions, estimated growth rates, and management's plans. Under the market approach, fair value is derived from metrics of publicly
traded companies or historically completed transactions of comparable businesses. The selection of comparable businesses is based on the
markets in which the reporting units operate and consider risk profiles, size, geography, and diversity of products and services.

 The Company reviews long-lived assets, including
tangible assets and other intangible assets with definitive lives, for impairment whenever events or changes in circumstances indicate
that the asset's carrying amount may not be recoverable. The Company conducts its long-lived asset impairment analyses in accordance
with ASC 360-10-35, "Impairment or Disposal of Long-Lived Assets". ASC 360 requires the Company to group assets and liabilities
at the lowest level for which identifiable cash flows are largely independent of the cash flows of other assets and liabilities and evaluate
the asset group against the sum of the undiscounted future cash flows. Amortizable intangible assets are assessed for impairment upon
triggering events that indicate that the carrying value of an asset may not be recovered. Recoverability is measured by a comparison of
the carrying amount to future net undiscounted cash flows expected to be generated by the associated asset. If such assets are determined
to be impaired, the impairment to be recognized is measured by the amount by which the carrying amount exceeds the fair market value of
the intangible assets. No impairment charges were recorded by the Company as of December 31, 2024.

 The Company has indefinite-lived trademark assets
that are reviewed for impairment by first performing a qualitative analysis in accordance with ASC 350-30 to determine whether it is more
likely than not that the fair value of the indefinite-lived asset is less than its carrying value. If based on this assessment, management
determines that impairment is not more than likely, then no further quantitative testing is required. However, if performing a qualitative
analysis determines that is more likely than not that the fair value is less than its carrying value, then a quantitative analysis is
performed in accordance with ASC 350-30-35, which occurs annually in the fourth quarter, or whenever events or changes in circumstances
indicate that the carrying value of an asset may not be recoverable. Recoverability is measured by a comparison of the carrying amount
to future net undiscounted cash flows expected to be generated by the associated asset. If such assets are determined to be impaired,
the impairment to be recognized is measured by the amount by which the carrying amount exceeds the fair market value of the assets. The
Company utilized the relief-from-royalty method, which is a form of the income approach and requires us to make significant estimates
and assumptions including preparation of forecasted revenue, selection of a royalty rate and discount rate and estimate of the terminal
year revenue growth rate. The Company did not record an impairment as of December 31, 2024, related to the indefinite-lived assets.

 F- 10

 Fair Values, Inputs and Valuation Techniques for Financial Assets
and Liabilities, and Related Disclosures

 The fair value measurements and disclosure guidance
defines fair value and establishes a framework for measuring fair value. Fair value is defined as the price that would be received to
sell an asset or paid to transfer a liability (an exit price) in an orderly transaction between market participants at the measurement
date. In accordance with this guidance, the Company has categorized its recurring basis financial assets and liabilities into a three-level
fair value hierarchy based on the priority of the inputs to the valuation technique.

 The fair value hierarchy gives the highest priority
to quoted prices in active markets for identical assets or liabilities (Level 1) and the lowest priority to unobservable inputs (Level
3). The inputs used to measure fair value may fall into different levels of the fair value hierarchy. In such cases, the level in the
fair value hierarchy within which the fair value measurement in its entirety falls has been determined based on the lowest level input
that is significant to the fair value measurement in its entirety. The Company's assessment of the significance of a particular input
to the fair value measurement in its entirety requires judgment and considers factors specific to the asset or liability.

 The guidance establishes three levels of the fair
value hierarchy as follows:

 Level 1: Inputs are unadjusted,
quoted prices in active markets for identical assets or liabilities at the measurement date;

 Level 2: Inputs are observable,
unadjusted quoted prices in active markets for similar assets or liabilities, unadjusted quoted prices for identical or similar assets
or liabilities in markets that are not active, or other inputs that are observable or can be corroborated by observable market data for
substantially the full term of the related assets or liabilities; and

 Level 3: Unobservable inputs
that are significant to the measurement of the fair value of the assets or liabilities that are supported by little or no market data.

 The following table details the fair value measurements
of the Company's financial liabilities as of December 31, 2024:

 Schedule of fair value measurements of financial liabilities

 Total

 Level 1

 Level 2

 Level 3

 Warrant liabilities

 $
 –

 $
 –

 $
 –

 $
 –

 Derivative liability – convertible note conversion option

 –

 –

 –

 –

 Total

 $
 –

 $
 –

 $
 –

 $
 –

 Changes in Level 3 financial instruments are
as follows:

 Schedule of level 3 financial instruments

 Warrant Liabilities

 Derivative Liability – Convertible Note

 Total

 Balance, December 31, 2023

 $
 –

 $
 –

 $
 –

 Additions

 315,303

 347,947

 663,250

 Changes in Fair Value

 ( 9,771
)

 16,155,976

 16,146,205

 Settlements

 ( 305,532
)

 ( 16,503,923
)

 ( 16,809,455
)

 Balance, December 31, 2024

 $
 –

 $
 –

 $
 –

 Financial
Instruments

 The Company's financial instruments mainly consist
of cash, current assets, accounts payable and accrued expenses. The carrying amounts of cash, receivables, current assets, accounts payable
and accrued expenses approximates fair value due to the short-term nature of these instruments.

 F- 11

 Accrued Warranty

 Fat Shark products are warranted against defects
in materials and workmanship for a period of two years from the date of shipment. If a defect arises during the warranty period, Fat Shark
will either (i) repair the affected product at no charge using new parts or parts that are equivalent to new in performance and reliability;
(ii) exchange the affected product with a functionally equivalent product; or (iii) refund the original purchase price for the affected
product. Allowances for estimated warranty costs are recorded during the period of sale. The determination of such allowances requires
the Company to make estimates of product warranty claim rates and expected costs to repair or to replace the products under warranty.
The Company currently establishes warranty reserves based on historical warranty costs for each product line combined with liability estimates
based on the prior 24 months' sales activities. If actual return rates and/or repair and replacement costs differ significantly
from the Company's estimates, adjustments to recognize the additional cost of sales may be required in future periods. Historically
the warranty accrual and the expense amounts have been immaterial. The warranty liability is included in accrued expenses on the accompanying
consolidated balance sheets and amounted to $ 28,944 and $ 0 as of December 31, 2024 and December 31, 2023, respectively.

 Rotor Riot does not provide any warranty of any
kind for any of the equipment it sells or otherwise distributes. Consumers assume all risk for any products purchased or received from
Rotor Riot.

 Revenue Recognition

 The Company will recognize revenue in accordance
with ASC 606, "Revenue from Contracts with Customers", issued by the Financial Accounting Standards Board ("FASB").
This standard includes a comprehensive evaluation of factors to be considered regarding revenue recognition including:

 Step 1: Identify the contract with a customer;

 Step 2: Identify the performance obligations in
the contract;

 Step 3: Determine the transaction price;

 Step 4: Allocate the transaction price to the performance
obligations in the contract; and

 Step 5: Recognize revenue when (or as) the Company
satisfies a performance obligation at a point in time.

 The Company receives revenues from the sale of
products from both retail distributers and individual consumers. Sales revenue is recognized when the products are shipped and the price
is fixed or determinable, no other significant obligations of the Company exist and collectability is probable. Revenue is recognized
when the title to the products has been passed to the customer, which is the date the products are shipped to the customer. This is the
date the performance obligation has been met.

 Deferred Revenue

 Deferred revenue relates to orders placed and payment received, but
not yet fulfilled. All deferred revenue is expected to be recognized within one year. Deferred revenue related
to orders placed, but not yet fulfilled totaled $ 197,117 and $ 0 as of December 31, 2024 and December 31, 2023, respectively.

 Cost of Goods Sold

 Cost of goods sold includes inventory costs, direct
packaging costs and production related depreciation, if any.

 F- 12

 Shipping and Handling Costs

 Shipping and handling costs incurred for products
shipped to customers are included in general and administrative expenses and amounted to $ 226,621 for the year ended December 31, 2024.
The Company did no t incur shipping and handling costs for the year ended December 31, 2023. Shipping and handling costs charged to customers
are included in sales.

 Research and Development

 Research and development expenses include payroll,
employee benefits, and other headcount-related expenses associated with product development. Research and development expenses also include
third-party development costs, materials, and a proportionate share of overhead costs.

 Income Taxes

 The Company accounts for income taxes using an
asset and liability approach, which requires recognition of deferred tax assets and liabilities for the expected future tax consequences
of events. A valuation allowance is established to reduce deferred tax assets to their estimated realizable value when, in the opinion
of management, it is more likely than not that some portion or all of the deferred income tax assets will not be realizable in the future.

 The Company recognizes benefits of uncertain tax
positions if it is more likely than not that such positions will be sustained upon examination based solely on their technical merits,
as the largest amount of benefit that is more likely than not to be realized upon the ultimate settlement. The Company's policy
is to recognize interest and penalties related to unrecognized tax benefits as a part of income tax expense.

 Stock-Based Compensation

 Stock options are valued using the estimated grant-date
fair value method of accounting in accordance with ASC Topic 718, Compensation – Stock Compensation. Fair value is determined based
on the Black-Scholes Model using inputs reflecting our estimates of expected volatility based on comparative companies, expected term
using the simplified method and future dividends. The Company recognizes forfeitures as they occur. The fair value of stock grants is
based on our stock price on the date of grant. Compensation costs are recognized on a straight-line basis over the requisite service period
which is the vesting term.

 Warrants

 The Company accounts for warrants to purchase
shares of its common stock in accordance with the guidance in ASC 480, Distinguishing Liabilities from Equity ("ASC 480")
and ASC 815, Derivatives and Hedging ("ASC 815"). The Company classifies warrants issued for the purchase of shares of its
common stock as either equity or liability instruments based on an assessment of the specific terms and conditions of each respective
contract. The assessment considers whether the warrants are freestanding financial instruments or embedded in a host instrument, whether
the warrants meet the definition of a liability pursuant to ASC 480, whether the warrants meet the definition of a derivative under ASC
815, and whether the warrants meet all of the requirements for equity classification under ASC 815. This assessment, which requires the
use of professional judgment, is conducted at the time of warrant issuance and as of each subsequent quarterly period end date while the
warrants are outstanding.

 For issued or modified warrants that meet all
of the criteria for equity classification, the warrants are required to be recorded as a component of equity at the time of issuance.
For issued or modified warrants that do not meet all the criteria for equity classification, the warrants are required to be recorded
as liabilities at their initial fair value on the date of issuance, and each balance sheet date thereafter. Changes in the estimated fair
value of the warrants classified as liabilities are recognized as a non-cash gain or loss in the consolidated statements of operations
and comprehensive loss.

 F- 13

 Embedded Conversion Option Derivative

 The Company accounts for embedded debt conversion
features in accordance with the guidance in ASC 815, Derivatives and Hedging ("ASC 815"). If the embedded debt conversion
feature is not clearly and closely related to the debt host, then it is required to be bifurcated from the host contract and accounted
for separately as a derivative liability. The derivative liability is required to be recorded at its initial fair value on the date of
issuance, and each balance sheet date, thereafter. Changes in the estimated fair value of the derivative are recognized as a non-cash
gain or loss in the consolidated statements of operations and comprehensive loss. This assessment, which requires the use of professional
judgment, is conducted at the time of Note issuance and as of each subsequent quarterly period end date while the Note is outstanding.

 Net Loss per Share

 Basic and diluted net loss per share is calculated
based on the weighted-average of common shares outstanding in accordance with FASB ASC Topic 260, Earnings per Share. Diluted net
loss per share is calculated based on the weighted-average number of common shares outstanding plus the effect of dilutive potential common
shares. When the Company reports a net loss, the calculation of diluted net loss per share excludes potential common shares as the effect
would be anti-dilutive.

 Segment Reporting

 Operating segments are defined as components of
an enterprise for which separate financial information is available that is evaluated regularly by the chief operating decision maker,
or decision making group, in deciding how to allocate resources and in assessing performance. Unusual Machines, which sells drones and
drone-related components, operates as a single reportable segment entity. Our chief operating decision maker, our Chief Executive Officer,
reviews financial information presented on a consolidated basis for purposes of making operating decisions and assessing financial performance.
The Chief Executive Officer is regularly provided with consolidated revenue and expenses consistent with those presented in the consolidated
statements of operations.

 Recent Accounting Pronouncements

 In December 2023, new accounting guidance was
issued related to income tax disclosures. The new guidance requires disaggregated information about a reporting entity's effective
tax rate reconciliation as well as additional information on income taxes paid. The new guidance is effective on a prospective basis for
annual periods beginning after December 15, 2024. Early adoption is also permitted for annual financial statements that have not yet been
issued or made available for issuance. This new guidance will likely not result in additional required disclosures when adopted.

 In November 2024, the FASB issued ASU No. 2024-03,
"Disaggregation of Income Statement Expenses" which requires disaggregated disclosure of income statement expenses into specified
categories in disclosures within the footnotes to the financial statements. The standard is effective for annual reporting periods beginning
after December 15, 2026. The Company is currently evaluating the effect of this ASU on the consolidated financial statements and disclosures.

 F- 14

 Note 3 – Acquisitions

 Fat Shark and Rotor Riot

 On February 16, 2024, the Company closed on the
acquisitions of both Fat Shark and Rotor Riot from Red Cat and Jeffrey Thompson, the founder and Chief Executive Officer of Red Cat (the
"Business Combination") (See Note 13 – Related Party Transactions for additional information). Fat Shark and Rotor Riot
are in the business of designing and marketing consumer drones and first-person-view ("FPV") goggles. Rotor Riot is also a
licensed authorized reseller of consumer drones manufactured by third parties.

 The Company specializes in the production and
sale of small drones and essential components and with the acquisitions of Fat Shark and Rotor Riot, it brings brand recognition and a
strong curated retail channel in the FPV drone market segment. This Business Combination is a realization of the Company's strategy
to build its business both organically and through strategic acquisitions that leverage our retail business to onshore production of critical
drone components. With the transition to onshoring production of drone components, the Company intends to expand into B2B channels for
customers that require a domestic supply chain.

 The Business Combination was based on a
share purchase agreement (the "Purchase Agreement") that was executed on November 21, 2022. From November 21, 2022 to
February 16, 2024, the Purchase Agreement was subject to several amendments and subject to certain working capital adjustments.
Under the terms of the Purchase Agreement, as amended, the consideration paid for the acquired assets consisted of (i) $ 1.0
million in cash and a cash deposit of $ 0.1
million made in 2022, (ii) issuance of a $ 4.0
million 18 month promissory note to Red Cat (see Note 9 "Promissory and Convertible Notes" for further details), and
(iii) the issuance of 4,250,000
shares of the Company's common stock, which represented approximately 48.66% of the outstanding common stock of the Company on
February 16, 2024, after the effect of the issued shares (collectively the "Consideration Paid"). The Company valued the
Red Cat common stock at $ 4.00
per share for $ 17,000,000 which represents the IPO price of the Company's common stock on February 15, 2024. Accordingly, the
value of the Consideration Paid is equal to $ 22,100,000.

 The acquisitions met the definition of a business
combination under ASC 805, Business Combinations, and therefore the assets acquired, and liabilities assumed are accounted for at fair
value.

 The following represents the fair value allocation of Fat Shark and
Rotor Riot Purchase Price:

 Schedule of fair value allocation

 Cash

 $
 147,200

 Accounts receivable (approximates contractual value)

 6,798

 Inventories (on hand and prepaid)

 2,611,583

 Other current assets

 10,892

 Right of use asset – operating

 378,430

 Other long-term assets

 59,426

 Goodwill

 17,476,232

 Intangible assets

 2,297,007

 Total assets

 22,987,568

 Accounts payable and accrued liabilities

 287,544

 Customer deposits

 114,441

 Deferred tax liability

 107,153

 Operating lease liability – current and long-term

 378,430

 Total liabilities

 887,568

 Total purchase price

 $
 22,100,000

 On December 31, 2024, the Company recorded a measurement period adjustment
to the above fair value allocation to report a deferred tax liability of $107,153 and increase goodwill by the same amount.

 F- 15

 Goodwill and intangible assets relate to Fat Shark
and Rotor Riot being FPV market leaders and their well-known and established brands within the industry and related patents. Combining
these entities and their existing customer base along with Unusual Machines' strategy of extending to B2B sales of drone components
will provide a strategic advantage.

 The results of Fat Shark and Rotor Riot have
been included in the Consolidated Financial Statements from the date of acquisition of February 16, 2024. The table below presents the
results as reported by the Company and unaudited pro forma results of the Company, assuming that the acquisition of Fat Shark and
Rotor Riot occurred at the beginning of each period are as follows. The unaudited pro forma results are not necessarily indicative
of what actually would have occurred had the acquisitions been in effect for the periods presented (in thousands, except per share
data):

 Schedule of unaudited pro forma results

 For the Year Ended

 For the Year Ended

 December 31, 2024

 December 31, 2023

 As Reported

 Proforma
 (unaudited)

 As Reported

 Proforma
 (unaudited)

 Revenue

 $
 5,565

 $
 6,060

 $
 –

 $
 4,682

 Gross profit/(loss)

 1,546

 1,578

 –

 Loss from operations

 ( 6,918
)

 ( 6,962
)

 ( 2,383
)

 ( 5,005
)

 Other expense and income taxes

 ( 25,062
)

 ( 25,062
)

 –

 ( 56
)

 $
 ( 31,980
)

 $
 ( 32,024
)

 $
 ( 2,383
)

 $
 ( 5,061
)

 Net earnings per share:

 Basic

 $
 ( 3.84
)

 $
 ( 3.85
)

 $
 ( 0.72
)

 $
 ( 0.58
)

 This unaudited consolidated pro forma financial
information is presented for informational purposes only. The unaudited consolidated pro forma adjustments are based on preliminary estimates,
information available and certain assumptions, and may be revised as additional information becomes available. In addition, the unaudited
pro forma financial information does not reflect any adjustments for non-recurring items or anticipated synergies resulting from the acquisition.

 The unaudited pro forma financial information
from the beginning of the periods presented until the acquisition date includes adjustments to: 1) eliminate intercompany revenue and
associated cost of sales for sales of product from Fat Shark to Rotor Riot, 2) to adjust fair value for certain Fat Shark inventory as
if the acquisition had occurred as of the beginning of the respective periods and 3) to include acquisition related expenses in the Q1
'23 that were incurred in Q1 '24.

 Note 4 – Inventories

 Inventories, consisting solely of finished goods,
totaled $ 1,335,503 and $ 0 as of December 31, 2024 and 2023, respectively. In addition, the Company had prepaid deposits for inventory
totaling $ 904,728 and $ 0 as of December 31, 2024 and 2023, respectively.

 F- 16

 Note 5 – Other Assets

 Other current assets included as of:

 Schedule of other current assets

 December 31, 2024

 December 31, 2023

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

 $
 –

 $
 100,000

 Prepaid insurance

 31,500

 20,631

 Total other current assets

 $
 31,500

 $
 120,631

 Non-current other assets include a rent deposit of $ 59,426
related to the operating lease for the Orlando, FL facility as of December 31, 2024. The Company did not have any non-current other assets
as of December 31, 2023.

 Note 6 – Property and Equipment, net

 Property and equipment consist of assets with
an estimated useful life greater than one year. Property and equipment are reported net of accumulated depreciation, and the reported
values are periodically assessed for impairment. Property and equipment as of:

 Schedule of property and equipment

 December 31, 2024

 December 31, 2023

 Computer equipment

 $
 7,738

 $
 7,738

 Accumulated depreciation

 ( 7,168
)

 ( 6,484
)

 Total property and equipment, net

 $

 $
 1,254

 Depreciation expense totaled $ 684 and $ 5,600 for the year ended December
31, 2024 and 2023, respectively.

 Note 7 – Operating Leases

 The
Company has assumed in the business combination a five-year
operating lease for approximately 6,900 square feet of warehouse and office space in Orlando, Florida. The lease commenced in
November 2023 and expires in October 2028. The Company has valued the ROUA and the associated liability, as of February 16,
2024, at $ 378,430.
The Company has no finance leases. Operating lease expense totaled $ 92,002
from the date of acquisition through the period ended December 31, 2024.

 The following is a summary of the operating lease
right-of-use asset and liability:

 Schedule of operating lease right-of-use

 Orlando,
 FL Operating Lease

 Operating lease right-of-use assets

 $
 378,430

 Less: accumulated amortization

 ( 54,916
)

 Operating lease right-of-use assets, as of December 31, 2024

 $
 323,514

 Operating lease liability

 $
 378,430

 Less: accumulated reduction

 ( 48,439
)

 Operating lease liability, as of December 31, 2024

 $
 329,991

 Current operating lease liability

 $
 67,820

 Non-current operating lease liability

 262,171

 Total operating lease liability

 $
 329,991

 F- 17

 The following is a summary of future lease payments
required under the five-year lease agreement:

 Schedule of future lease payments

 Year

 Future Lease
 Payments

 Operating Lease
 Discount

 Operating Lease
 Liability

 2025

 $
 101,133

 $
 ( 33,313
)

 $
 67,820

 2026

 105,177

 ( 25,468
)

 79,709

 2027

 109,037

 ( 15,985
)

 93,052

 2028

 94,185

 ( 4,776
)

 89,409

 Total

 $
 409,533

 $
 ( 79,542
)

 $
 329,991

 Schedule of supplemental information

 Supplemental Information

 Weighted average remaining lease term (in years)

 3.83

 Weighted average discount rate

 11.49 %

 Note
8 – Goodwill and Intangible Assets

 Goodwill

 Changes in the carrying amount of goodwill were as follows:

 Schedule of goodwill

 Total

 Goodwill as of December 31, 2023

 $
 –

 Fat Shark and Rotor Riot acquisitions

 17,476,232

 Impairment loss on goodwill during the year ended December 31, 2024

 ( 10,073,326
)

 Goodwill as of December 31, 2024

 $
 7,402,906

 Accumulated impairment losses as of December 31, 2024 were $10,073,326.

 F- 18

 Intangible Assets

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

 Schedule of intangible assets

 Type

 Gross Value

 Accumulated Amortization

 Net Value

 Patents/IP

 Finite-lived

 $

 816,877

 $

 ( 71,477

)

 $

 745,400

 Trademark

 Indefinite-lived

 1,480,130

 –

 1,480,130

 Total intangible assets, net

 $

 2,297,007

 $

 ( 71,477

)

 $

 2,225,530

 Patents and intellectual property relate to the
patents and technology know-how from the acquisition of Fat Shark in February 2024. Patents are amortized over 10 years. Trademarks relate
to the brand name and recognition of Rotor Riot from the acquisition in February 2024. The Company did no t have any intangible assets
as of December 31, 2023.

 Note 9 – Promissory and Convertible Notes

 In February 2024 and in conjunction with the acquisition
of Fat Shark and Rotor Riot, as discussed in Note 3, the Company issued a promissory note ("Note") with Red Cat Holdings,
Inc. ("Red Cat") for $ 2.0 million. In July 2024, the Company finalized its working capital adjustment with Red Cat which increased
the overall purchase price by an additional $ 2.0 million. In accordance with ASC 470, Debt, the additional $2.0 million was treated as
a modification that was not treated as a debt extinguishment and expenses related to the debt were expensed as incurred. The additional
$2.0 million was added to the existing Note and was reflected as an adjustment to the opening purchase price and was included in the opening
balance sheet as of February 16, 2024 as an increase to goodwill and intangible assets. Accordingly, the Note was amended to increase
the principal amount of the Note to $ 4.0 million.

 Subsequently and in July 2024, in conjunction
with a private sale of Red Cat's common stock and its promissory note to two accredited investors ("Investors"), the
Company issued new notes to the new Investors (the "July Notes") and cancelled the original Note. The July Notes contained
8% per annum interest. In addition, the maturity date of the July Notes was extended to November 30, 2025, subject to certain conditions.

 On August 21, 2024, the Company entered into two
exchange agreements with the Investors, under which the Investors exchanged their respective 8% July Notes for new 4% Convertible Notes
(the "August Notes"). Pursuant to the exchange agreements, the Investors exchanged the $ 4,000,000 of July Notes for an aggregate
of (i) $ 3,000,000 for the August Notes, (ii) 210 shares of Series C preferred stock, which converts into 630,000 shares of the Company's
common stock, and (iii) 630,000 warrants with a five-year term and an exercise price of $1.99 per share, subject to certain adjustments.
The July Notes were cancelled as a part of the exchange agreement. In accordance with ASC 470, since the August Notes were considered
a greater than 10% change from the July Notes and a substantive conversion option was added to the August Notes, this exchange was treated
as a debt extinguishment. The August Notes bear interest at 4 % annually with interest payable monthly and the principal due on November
30, 2025. The August Notes are convertible into common stock at a fixed $1.99 per share, except in the Event of Default as defined in
the August Notes, which the conversion price for an Event of Default Conversion is calculated at a 10% discount of the average three-day
volume-weighted average price prior to the conversion date.

 During the third quarter 2024, the Company recognized
a loss on debt extinguishment of $ 685,151
related to the exchange agreement discussed above. The loss on extinguishment related to the August Notes included $ 315,303
fair value related to the warrant liability issued, $ 347,947
fair value related to the optional conversion feature derivative liability of the remaining principal balance, and $ 21,901
cash fees paid for legal costs related to the August Notes. The Company used the binomial option pricing method for calculating the derivative
fair value related to the warrants and optional conversion feature (see Note 10 – Derivative Liabilities).

 F- 19

 In December 2024, the Investors exercised
their conversion option to convert the remaining $ 3,000,000 in
August Notes to Common Stock at a fixed $ 1.99 conversion
price. As a result, the Company issued 1,507,538 shares
of common stock, cancelled the $3,000,000 in August Notes, and recorded $ 17,864,325
to common stock and additional paid in capital related to the conversion of the August Notes to Common Stock. This value is based on
the closing price of the Company's common stock on December 3, 2024 of $11.85 per share. This resulted in a loss on debt
extinguishment of $ 14,864,325.
The settlement of the related conversion option derivative resulted in a gain on extinguishment of $ 16,503,923
(see Note 10). The net gain was $ 1,639,598.

 A reconciliation of the net gain on debt extinguishment
during the year ended December 31, 2024 is as follows:

 Schedule of extinguishment of debt

 December 31, 2024

 Loss from August Notes modification

 $
 ( 685,151
)

 Loss from conversion of debt to common stock

 ( 14,864,325
)

 Gain from settlement of conversion option

 16,503,923

 Gain from settlement of warrant liability

 305,532

 Net gain on debt extinguishment

 $
 1,259,979

 Total interest expense for the year ended December
31, 2024 was $ 116,981.

 Note 10 – Derivative Liabilities

 The fair value of the derivative liabilities are
determined using the binomial option pricing model which values the liability on the stock price at the grant date, the estimate volatility
of the stock, the risk-free interest rate over the expected term, and certain estimates and probabilities of different outcomes. Changes
in the fair value of the derivative is recorded in the income statement in other income and expense on a quarterly basis.

 Derivative liability – conversion option

 In August 2024 and in conjunction with the
issuance of the August Notes as discussed in Note 9 – Promissory and Convertible Notes, the Company recorded a derivative
liability related to the optional conversion feature ("Conversion Derivative") in accordance with ASC 815 as it is not
clearly and closely related to the host contract and the embedded debt conversion feature meets the definition of a liability due to
a potential variable amount of shares that may be issued upon conversion. The initial fair value on August 21, 2024 for the
Conversion Derivative was $ 347,947.

 On December 3, 2024, the holders of the Convertible
Note exercised their conversion option to convert the remaining $ 3,000,000
 of the convertible note into 1,507,538
 shares of common stock. As a result, the Company recorded an increase in fair value of the derivative liability conversion option
of $ 16,155,976.
The Conversion Derivative fair value as of December 31, 2024 was $0 given the conversion feature was exercised and is no longer outstanding.

 F- 20

 Warrant Liability

 In August 2024 and in conjunction with the
issuance of the August Notes as discussed in Note 9 – Promissory and Convertible Notes, the Company issued warrants that include
specific provisions and obligations including a fundamental transaction provision that may require a cash payment to the holder upon
a triggering event, that in accordance with ASC 815, require the warrants to be classified as a liability. The initial fair value on
August 21, 2024 for the Warrant Liability was $ 315,303.

 On December 3, 2024, the warrant holders exercised
 630,000 warrants (which is included in the 684,000
of total warrant exercises as noted in Note 11) at $ 1.99
 per shares related to the August Notes and the Company received cash proceeds of $ 1,253,700
 related to the warrants. The Company recognized a decrease in the fair value of the warrant liability of $ 9,771.
The warrant liability fair value as of December 31, 2024 was $0 since the warrants were exercised and are no longer outstanding.

 The assumptions used related to the fair value
of the derivative liability – conversion option and warrant liability is as follows:

 Significant Assumptions

 Initial Period

 Subsequent Period

 Volatility

 91.4%

 100.90%

 Risk free interest rate

 3.6%

 4.13%

 Expected life

 3.5 years

 3.5 years

 Dividend yield

 0%

 0%

 Note 11 – Earnings Per Share and Stockholders' Equity

 Earnings per Share

 Outstanding securities not included in the
computation of diluted net loss per share because their effect would have been anti-dilutive include 330,000
of stock options issued to employees as of December 31, 2024, 8,500
of common stock representative warrants issued to the underwriter associated with the February 2024 IPO, and 1,389,079
warrants issued related to the October 2024 private placement.

 Preferred Stock

 The Series A is convertible into common stock
at a ratio of 1,000 shares of common stock for each share of Series A stock held, subject to certain limitations. The Series A shares
are not entitled to vote on any matters submitted to shareholders of the Company.

 The Series B is convertible into common stock
at a ratio of 5,000 shares of common stock for each share of Series B stock held, subject to certain limitations. The Series B shares
are not entitled to vote on any matters submitted to shareholders of the Company.

 The Series C is convertible into common stock
at a ratio of 3,000 shares of common stock for each share of Series C stock held, subject to certain limitations. The Series C shares
are not entitled to vote on any matters submitted to shareholders of the Company.

 2024 Transactions

 On July 22, 2024, the Company's principal
shareholder, Red Cat sold all of its securities in the Company to the two unaffiliated third-party Investors. As part of the transaction, Red Cat entered into an Exchange Agreement with the Company pursuant to which Red Cat exchanged 4,250,000
shares of the Company's common stock for 4,250 shares of the Company's Series A. The Series A shares can be convertible back
into the same amount of shares of common stock as of the date of the original exchange, and as a result the Company did not recognize
any gain or loss related to the exchange.

 On August 21, 2024, the Company entered into two
exchange agreements with the Investors, under which each investor exchanged an aggregate of $ 1,000,000 of their Notes for an aggregate
of 210 shares of the Company's Series C and 630,000 warrants (see Note 12 – Share Based Awards).

 In November and December 2024, the two Investors
converted 4,250 shares of Series A into 4,250,000 shares of common stock. The Company canceled the 4,250 shares of Series A upon the conversion
and as of December 31, 2024, there were no shares of Series A preferred stock outstanding

 During 2024, shareholders converted 190 shares
of Series B into 950,000 shares of common stock. The Company canceled the 190 shares of Series B upon the conversion and as of December
31, 2024, there were no shares of Series B preferred stock outstanding.

 F- 21

 In December 2024, the two Investors converted
 210 shares of Series C into 630,000 shares of common stock. The Company canceled the 210 shares of Series C upon the conversion and as
of December 31, 2024, there were no shares of Series C preferred stock outstanding.

 2023 Transactions

 On June 1, 2023, the Company issued an additional
 50 Series B shares in connection with the cancellation of 250,000 shares of common stock.

 2024 Transactions

 On January 2, 2024, the Company issued 16,086
shares of common stock to its prior Chief Executive Officer as a part of a separation agreement and recognized compensation expense of
$ 64,344 or $4 per share, the value of the IPO in February 2024.

 On February 16, 2024 the Company completed
its IPO and issued 1,250,000 shares
of common stock at the IPO Price for total net proceeds of $ 3,849,555.
The Company incurred $ 510,000 direct
deduction from proceeds, $ 127,687 in
cash disbursements related to offering costs and $ 512,758 in
prior year paid and deferred offering costs as of December 31, 2023 for a total of $ 1,150,445 offering
costs, associated with the IPO which consisted of underwriter, legal, accounting, and other associated filing fees. These costs have
been recorded as a reduction of the gross proceeds from the IPO in stockholder's equity. The 62,500 of representative warrants
are exercisable for common stock at a price of $ 5.00 per
share (125% of the IPO Price) at any time beginning on August 15, 2024 through and including February 16, 2029, the expiration
date.

 Simultaneously with its IPO and as a part of the
Purchase Agreement as discussed in Note 3, the Company issued Red Cat 4,250,000 shares of common stock as consideration of the business
combination. These were subsequently exchanged into 4,250 Series A preferred shares as discussed above. As agreed in the Purchase Agreement,
$ 17.0 million of the purchase price would be issued in common stock based on the IPO price of $4.00 per share.

 During 2024, the Company issued 950,000 shares
of common stock related to certain shareholders converting 190 Series B shares into common stock.

 On April 30, 2024, the Company issued 937,249
restricted shares of common stock to executive officers and board members of the Company. The shares of restricted stock were granted
under the Company's 2022 Equity Incentive Plan. The restricted shares issued to executive officers are subject to pro rata forfeiture
through February 14, 2025.

 On May 2, 2024, the Company issued an additional
 40,650 of restricted shares of common stock to Allan Evans, the Company's CEO related to an agreed upon reduction of compensation.
The shares of restricted stock were granted under the Company's 2022 Equity Incentive Plan (the "Plan").

 The April 30, 2024 and May 2, 2024 shares were
valued at $ 1.20 and $ 1.23 per share, respectively for a total of $ 1,174,698 to be recognized pro-rata over the vesting period through
February 14, 2025 which is the forfeiture period. Stock compensation expense of $ 1,009,218 was recognized during the year ended December
31, 2024. Unrecognized stock compensation expense related to these shares is $ 165,480 as of December 31, 2024.

 On July 22, 2024, Red Cat sold all of its securities
in the Company to two accredited investors in a private transaction. As part of the transaction, Red Cat entered into an Exchange Agreement
with the Company pursuant to which Red Cat exchanged 4,250,000 shares of the Company's common stock for 4,250 shares of the Company's
Series A. There was no gain or loss on this exchange as both the common and preferred shares were determined to have the same fair value
as of the exchange date.

 On July 30, 2024, the Company issued 23,743 immediately
vested restricted shares of common stock to non-employee directors of the Company. The shares of restricted stock were granted under the
Plan. The shares were valued at $ 1.79 per share, which was the value of the Company's common stock on the date of grant, respectively
for a total of $ 42,500 to be recognized as stock compensation expense during the year ended December 31, 2024.

 F- 22

 On October 22, 2024, the Company issued 29,313
immediately vested restricted shares of common stock to non-employee directors of the Company. The shares of restricted stock were granted
under the Plan. The shares were valued at $ 1.45 per share, which was the value the Company's common stock on the date of grant,
respectively for a total of $ 42,500 to be recognized as stock compensation expense during the year ended December 31, 2024.

 On October 29, 2024 (the "Closing
Date"), the Company entered into Securities Purchase Agreements (the "SPA") with accredited investors (each, an
"Investor" and together the "Investors") for a private placement offering ("Private Placement"),
for aggregate gross proceeds of $ 1.95
million before deducting fees to the placement agent and other expenses payable by the Company in connection with the Private
Placement. The Company intends to use the net proceeds of approximately $ 1.8
million of the Private Placement for working capital and general corporate purposes. As part of the Private Placement, the Company
issued an aggregate of 1,286,184
units at a per unit purchase price of $ 1.52
per unit. Each unit consists of one share of common stock, par value $0.01 per share (the "Common Stock") and one
warrant to purchase one share of the Company's Common Stock at an exercise price of $1.99 per share (each an "Investor
Warrant") and collectively, the Investor Warrants"). The Investor Warrants have a term of five and a half years from the
Closing Date and may not be exercised for 180 days after the Closing Date and are exercisable at $1.99 per share, subject to certain
limitations and adjustments set forth in the Investor Warrants. Allan Evans, the Company's Chief Executive Officer and Sanford
Rich and Robert Lowry, each a member of the Company's board of directors (and the three combined, the "Insiders"),
invested an aggregate of $ 250,000
in the Private Placement on identical terms to the other Investors. Subsequently and in order to comply with New York Stock Exchange
American rules, the Insiders were required to pay an additional $ 92,105
to the Company related to the greater of book or market value for the warrants.

 On November 5, 2024, the Board of Directors
of the Company awarded each of the Company's Chief Executive Officer, Chief Financial Officer and Chief Operation Officer 50,000
restricted shares of the Company's Common Stock under the Plan as bonuses related to the Private Placement. The restricted
shares are valued at $ 1.96
per share, the closing price of our common stock as of the date of the grant, for a total value of $ 98,000
that was recognized immediately based on the vesting of the awards for each of the Company's Officers. The bonuses are subject
to the Company's clawback Policy.

 On November 22, 2024, the Company issued 150,000
 shares of common stock related to vested restricted stock units for our advisory board members. The restricted stock units are
valued at $4.40 per share, the closing price of our common stock as of the date of the grant, for a total value of $ 660,000.

 In November and December 2024, the Company
issued 4,250,000
shares of common stock related to the Investors holding the Series A preferred stock and converted their 4,250
shares of Series A into common stock.

 In November and December 2024, the Company issued
 684,000 shares of common stock related to warrant holders exercising their warrants. The Company received gross proceeds of $ 1,523,700
related to the warrant exercises. The Company cancelled the 684,000 warrants upon issuance of the common shares.

 On December 3, 2024, the Company issued 1,507,538
 shares of common stock related to the Investors exercising their conversion option of the convertible note payable. As a part
of the conversion, the Company cancelled the August Notes as discussed in Note 9 – Promissory and Convertible Notes. See Note 9
– Promissory and Convertible Notes for additional information related to the conversion.

 In December 2024, the Company issued 630,000
shares of common stock related to the Investors holding the Series C preferred stock and converted their 210
shares of Series C into common stock.

 2023 Transactions

 On March 7, 2023, the Company issued 75,000 shares
of common stock to an investment banking firm ("Revere") as a fee for the termination of the January 2023 engagement with
Revere. These shares were allocated by Revere to some of the Company's existing shareholders. The Company recorded $ 600,000 of stock
compensation expense related to the issuance of the shares valued at $ 8.00 per share, which was based on the most recent private sale
of common stock for the Company.

 On July 10, 2023, the Company's Board of
Directors approved a 1-for-2 reverse stock split of our issued and outstanding shares of common stock. In accordance with Staff Accounting
Bulletin Topic 4.C, the Company has given retroactive effect to reverse stock split. In addition, and in accordance with FASB ASC 260,
 Earnings Per Share, the Company has retroactively adjusted the computations of basic and diluted share calculations.

 F- 23

 Note 12 – Share Based Awards

 Stock Options

 The 2022 Equity Incentive Plan (the "Plan") allows the Company to incentivize key
employees and directors with long term compensation awards such as stock options, restricted stock, and other similar types of awards.
The Plan is authorized to issue up to 15% of the outstanding shares on a fully diluted basis giving effect to the exercise and conversion
of all outstanding common stock equivalents issued outside of the Plan. In addition, the Plan has an "evergreen" provision,
pursuant to which the number of shares of common stock reserved for issuance pursuant to awards under such plan shall be increased on
the first day of each year beginning in 2025 and ending in 2032 equal to the lesser of (a) five percent (5%) of the shares of stock outstanding
(on an as converted basis) on the last day of the immediately preceding fiscal year and (b) such smaller number of shares of stock as
determined by our board of directors. As of December 31, 2024, the Plan is authorized to issue up to 2,278,296 of awards.

 During the year ended December 31, 2024, the Company's
board of directors approved the grant of 330,000 stock options under the Plan to certain employees. The stock options are subject to certain
vesting provisions.

 The following table presents the activity for
stock options outstanding:

 Schedule of stock option activity

 Non-Qualified
 Options

 Weighted
 Average
 Exercise Price

 Weighted
 Average
 Remaining
 Contractual Term

 Aggregate
 Intrinsic Value

 Outstanding - December 31, 2023

 –

 $
 –

 –

 $
 –

 Granted

 330,000

 1.24

 9.34

 5,142,800

 Forfeited/canceled

 –

 –

 –

 –

 Exercised

 –

 –

 –

 –

 Outstanding – December 31, 2024

 330,000

 $
 1.24

 9.34

 $
 5,142,800

 The range of assumptions used to calculate the fair value of options
granted during the year ended December 31, 2024 was:

 Schedule of stock options assumptions

 Exercise Price

 $

 1.20 – 1.79

 Stock Price on date of grant

 $

 1.20 – 1.79

 Risk-free interest rate

 4.080 - 4.71 %

 Dividend yield

 –

 Expected term (years)

 6.11

 Volatility

 129.45 – 143.46 %

 The total value of stock options granted
during the year ended December 31, 2024 is $ 373,160. The Company recognized $ 60,924
in stock-based compensation expense related to stock options during the year ended December 31, 2024. As of December 31, 2024, there
was $ 312,236
of unrecognized stock-based compensation expense related to unvested stock options to be recognized over the remaining vesting term
through 2028.

 Restricted Stock

 The following table presents the activity for
restricted stock outstanding:

 Schedule of restricted stock activity

 Restricted

 Awards

 Awards

 Stock

 Vested

 Unvested

 Outstanding - December 31, 2023

 –

 –

 –

 Granted

 1,480,955

 1,103,232

 377,723

 Forfeited/canceled

 –

 –

 –

 Outstanding – December 31, 2024

 1,480,955

 1,103,232

 377,723

 The total value of restricted stock and restricted
stock units granted during the year ended December 31, 2024 is $ 2,875,364.
The Company recognized $ 2,194,938
in stock-based compensation expense related to restricted stock during the year ended December 31, 2024. As of December 31, 2024, there
was $ 680,426
of unrecognized stock-based compensation expense related to unvested restricted stock to be recognized over the remaining vesting term
through May 2025.

 F- 24

 Warrants

 The following table presents the activity for warrants outstanding
as of December 31, 2024:

 Schedule of warrant activity

 Weighted

 Warrants

 Average

 Outstanding

 Exercise Price

 Outstanding - December 31, 2023

 –

 $
 –

 Granted

 2,081,579

 2.08

 Forfeited/cancelled/restored

 –

 –

 Exercised

 ( 684,000
)

 –

 Outstanding – December 31, 2024

 1,397,579

 $
 2.01

 As discussed in Note 11, "Earnings Per Share
and Stockholders' Equity", in connection with the IPO, the Company issued 62,500 representative warrants to its underwriters
to purchase shares of common stock. The representative warrants have an exercise price of $5.00 or can be exercised through a cashless
exercise feature. The warrant holders exercised 54,000 warrants during the year ended December 31, 2024.

 As discussed in Note 9, "Promissory
and Convertible Notes", in connection with the exchange of the $ 1,000,000
of the Note Payable balance, the Company issued 630,000
warrants to the Investors to purchase shares of common stock. The warrants have an exercise price of $ 1.99. These 630,000 warrants were subsequently exercised (see Notes 10 and 11).

 As Discussed in Note 11, "Earnings Per Share
and Stockholders' Equity", in connection with the Private Placement, the Company issued 1,286,184 warrants and an additional
 102,895 warrants to the underwriter related to the Private Placement for a total of 1,389,079 warrants. The warrants have an exercise
price of $ 1.99.

 All warrants outstanding have a weighted average
remaining contractual life of approximately 5.32
 years as of December 31, 2024. The aggregate intrinsic value of the warrants at December 31, 2024 is $ 20,700,512.

 Note 13 – Related Party Transactions

 In November 2022, the Company entered into the
Purchase Agreement, as amended with Red Cat and Jeffrey Thompson, the Company's former Chief Executive Officer and President and
current director and also the current Chief Executive Officer of Red Cat, pursuant to which, among other things, Mr. Thompson and the
Company have agreed to indemnification obligations, which shall survive for a period of nine months from February 16, 2024, subject to
certain limitations, which includes a basket of $250,000 before any claim can be asserted and a cap equal to the value of 100,000 shares
of our common stock owned by him to secure any indemnification obligations, which stock is our sole remedy, except for fraud. Our prior
Chief Executive Officer, Mr. Brandon Torres Declet, negotiated the terms of the Purchase Agreement on an arms' length basis with
Joe Freedman who was the head of Red Cat's Special Committee. The transaction was ultimately approved by the Company's and
Red Cat's board of directors. On March 8, 2023, a majority of the disinterested Red Cat shareholders approved the transactions contemplated
in the Purchase Agreement in a special meeting. Mr. Thompson recused himself from such vote.

 In February 2024, the Company completed the acquisitions
to purchase Fat Shark and Rotor Riot from Red Cat. Jeffrey Thompson is the founder and current Chief Executive Officer of Red Cat. Mr.
Thompson is also the founder, prior Chief Executive Officer and current member on the Board of Directors of Unusual Machines. Prior to
the acquisition, Mr. Thompson held 328,500 shares of common stock in Unusual Machines, which represented approximately 10% prior to the
acquisition and IPO.

 F- 25

 On April 30, 2024 ("Grant
Date"), the Company's board of directors approved the Company entering into a two-year Management Services Agreement (the
"Agreement") with 8 Consulting LLC (the "Consultant") for the services of our Chief Executive Officer, Dr. Allan
Evans, whereby the Consultant agreed to cause Dr. Evans to perform his services as the Company's Chief Executive Officer and the
Consultant will be compensated on behalf of Dr. Evans by the Company in connection with his performance of such services. The Agreement
allows Dr. Evans to receive favorable tax benefits as a resident of the Commonwealth of Puerto Rico who will perform such services in
Puerto Rico. Pursuant to the Agreement, Dr. Evans will perform the duties and responsibilities that are customary for a chief executive
officer of a public company that either have revenues similar to the Company on a pro forma basis as reflected in the Prospectus filed
with the SEC on February 15, 2024, or if pre-revenues, are an active and on-going business that are performing pre-revenue activities.
The Consultant agreed to cause Dr. Evans, as Chief Executive Officer, (i) to undertake primary responsibility for managing all aspects
of the Company and overseeing the preparation of all reports, registration statements and other filings required filed by the Company
with the SEC and executing the certifications required the Sarbanes Oxley Act of 2002 and the rules of the SEC as the principal executive
officer of the Company; (ii) attend investor meetings and road shows in connection with the Company's fundraising and investor relations
activities; (iii) to report to the Company's board of directors; (iv) to perform services for such subsidiaries of the Company as
may be necessary.

 The Consultant receives
a $ 250,000 fee per year payable in monthly installments. In addition, the Consultant was granted 488,000 fully vested shares of restricted
common stock. The fair value of the shares was $ 585,600 based on the $1.20 quoted trading price on the Grant Date and will be recognized
over the service period (see below). The grant of restricted common stock was made under the Company's 2022 Equity Incentive Plan.
The shares of restricted common stock are subject to pro rata forfeiture from February 14, 2024 until February 14, 2025, in the event
that Dr. Evans is terminated or ends his services to the Company for any reason other than death or disability, as defined in the Internal
Revenue Code. The Company and Dr. Evans previously entered into an Offer Letter dated November 27,
2023, under which he would serve as the Company's Chief Executive Officer effective as of December 4, 2023. The Agreement terminates
and replaces the Offer Letter dated November 27, 2023.

 In October 2024, in relation to the Private Placement
as described in more detail in Note 11, "Earnings Per Share and Stockholders' Equity", the Company's CEO and two
directors (combined "Insiders") invested $ 250,000 in the Private Placement on identical terms to the other Investors. In addition,
the Insiders were required to pay an additional $ 92,105 to the Company related to the greater of book or market value for the warrants.

 In November 2024, the Company entered into and
received a purchase order with Teal Drones, Inc. a wholly owned subsidiary of Red Cat to provide goods and services to a customer in
which Teal Drones is a prime contractor and the Company is a subcontractor. Red Cat is a related party as Jeff Thompson is the Chief
Executive Officer of Red Cat and is also on the Board of Directors of Unusual Machines. The Company recognized $ 155,000 in revenue related
to the related party contract. The total value of the contract between Unusual Machines and Red Cat is $ 250,000.

 Note
14 – Income Taxes

 The components of income (loss) before income
tax expense (benefit) consist of the following as of December 31, 2024 and 2023:

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

 2024

 2023

 US

 $
 ( 31,150,444
)

 $
 –

 Foreign

 ( 843,384
)

)

 Pretax income (loss) from operations

 $
 ( 31,993,828
)

 $
)

 The components of income tax expense (benefit)
as of December 31, 2024 and 2023 are:

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

 2024

 2023

 Current:

 Federal

 $
 –

 $
 –

 Foreign

 –

 –

 State and local

 –

 –

 Current income tax expense (benefit)

 –

 –

 Deferred:

 Federal

 ( 11,069
)

 –

 Foreign

 –

 –

 State and local

 ( 2,290
)

 –

 Deferred income tax expense (benefit)

 ( 13,360
)

 –

 Total income tax expense (benefit)

 $
 ( 13,360
)

 $
 –

 F- 26

 Significant components of the Company's
deferred tax assets and liabilities as of December 31, 2024 and 2023 are:

 Schedule of deferred tax assets and liabilities

 2024

 2023

 Deferred tax assets:

 Net operating losses and credit carryforwards

 $
 3,268,472

 $
 727,382

 Stock compensation

 54,821

 –

 Inventory

 248,599

 –

 Accruals and reserves

 7,336

 –

 Deferred interest carryforward

 24,669

 –

 Lease liability

 83,636

 –

 Total deferred tax assets

 3,687,532

 727,382

 Deferred tax liabilities:

 Intangible assets

 ( 564,061
)

 –

 Right of use asset

 ( 81,995
)

 –

 Other

 –

 Valuation allowance

 ( 3,135,343
)

 ( 727,382
)

 Deferred income tax expense (benefit)

 ( 3,781,325
)

 ( 727,382
)

 Net deferred tax liability

 $
 ( 93,793
)

 $
 –

 The components of the Company's effective
tax rate consist of the following as of December 31, 2024 and 2023 are:

 2024

 2023

 Tax at U.S. statutory rate

 21.0 %

 21.0 %

 State taxes, net of federal benefit

 1.0 %

 – %

 Other permanent differences

 ( 16.4) %

 – %

 Foreign statutory rate difference

 ( 0.2) %

 ( 0.2) %

 Change in valuation allowance - federal

 ( 4.4) %

 ( 20.8) %

 Change in valuation allowance – state

 ( 0.9) %

 – %

 Income tax expense

 ( 0.0) %

 – %

 As of December 31, 2024, the Company has U.S.
federal and state net operating loss carryforwards of $ 9,518,428 and foreign net operating loss carryforwards of $ 4,743,384. The U.S.
federal net losses can be carried forward indefinitely and are generally deductible against 80% of taxable income on an annual basis.
It is not anticipated that the foreign net operating losses will ever be used.

 In assessing the realizability of deferred tax
assets, a determination is made as to whether it is more likely than not that some portion or all the deferred tax assets will not be
realized. The ultimate realization of deferred tax assets is dependent upon the generation of future taxable income during the periods
in which those temporary differences become deductible. As the Company was incorporated in the current year and has no history of earnings,
the Company has provided a full valuation allowance on its federal, foreign, and state deferred tax assets.

 F- 27

 The Company is subject to income taxes in the
United States; Puerto Rico; and various state jurisdictions. Tax regulations within each jurisdiction are subject to the interpretation
of the related tax laws and regulations and require significant judgment to apply. The Company is not currently under examination by any
taxing authorities. The 2022 through 2024 tax years are open to examination by the tax authorities.

 ASC 740 provides detailed guidance for the consolidated
financial statement recognition, measurement, and disclosure of uncertain tax positions recognized in the consolidated financial statements.
Tax positions must meet a more-likely-than-not recognition threshold before a benefit is recognized in the consolidated financial statements.
As of December 31, 2024, the Company has no uncertain tax positions. The Company recognizes interest and penalties related to uncertain
tax positions as a component of income tax expense in the accompanying consolidated statements of operations. No interest and penalties
related to uncertain tax positions were accrued as of December 31, 2024.

 Note 15 – Commitments and Contingencies

 As
part of the business combination that occurred on February 14, 2024, the Company acquired a five-year operating lease for approximately
6,900 square feet of warehouse and office space in Orlando, Florida. The lease commenced in November 2023 and expires in October 2028.
 See Note 7 – Operating Leases for additional information.

 Note 16 – Subsequent Events

 Equity Grants to Board of Directors

 On January 14, 2025, the Company issued the non-employee directors
listed in the table below the equity of their quarterly compensation for services as a director during the quarter ended December 31,
2024. The shares of restricted common stock are fully vested, granted under the Company's 2022 Equity Incentive Plan and are subject
to each director executing the Company's standard Restricted Stock Agreement. The amount of restricted common stock issued was based
on the quoted trading price as of the close of the market as of January 14, 2025.

 Amount of Restricted Common Stock

 Cristina Colon

 Sanford Rich

 Robert Lowry

 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.

 F- 28

 Under the terms of the Agreement and subject
to customary closing conditions and a working capital adjustment, on the closing date of the Agreement Aloft will merge into Merger
Sub, and Merger Sub will continue as a wholly owned subsidiary of the Company. In addition, each issued and outstanding share of
Aloft capital stock that is not a dissenting share will be cancelled and each Aloft Stockholder (as defined in the Agreement)
receive their pro rata share of the merger consideration payable by the Company as provided for in the Agreement. The merger
consideration of $14.5 million consists of 1,204,319 shares of common stock of the Company and expected not to exceed $100,000 in
cash payable to unaccredited investors.

 Customary closing conditions by the parties must
be met before being able to close the merger.

 Equity Grants to Executive Officers

 On February 3, 2025, the Company issued the Company's
executive officers listed in the table below shares of restricted common stock. The shares of restricted common stock vest in equal quarterly
increments over a one-year period, with the first two quarters vesting on May 19, 2025. The shares of restricted common stock were granted
under the Company's 2022 Equity Incentive Plan, as amended, and are subject to each officer executing the Company's standard
Restricted Stock Agreement.

 Officer

 Amount of Restricted Common Stock

 Allan Evans (1)

 200,000

 100,000

 100,000

 (1) Shares issued to 8 Consulting LLC, an entity
of which Dr. Allan Evans, the Company's Chief Executive Officer, is the sole owner with voting and dispositive power

 Equity Grants to employees

 On February 3, 2025, the Company issued 80,000 shares of restricted
common stock to certain employees. The shares of restricted common stock vest quarterly over a four-year period, in which no shares
vest over the first two quarters. The shares of restricted common stock were granted under the Company's 2022 Equity Incentive Plan,
as amended.

 Exercise of Warrants from Private Placement

 On February 26, 2025, the Company issued
1,224,606 shares of common stock to various warrant holders who exercised their warrants from the October 2024 Private Placement at
an exercise price of $1.99. The Company received gross proceeds in the aggregate amount of $2,436,966 as a result of the warrant
exercises.

 F- 29

 Item 9.

 Changes and Disagreements with Accountants on Accounting and Financial Disclosure

 None.

 Item 9A.

 Controls and Procedures

 Evaluation of Disclosure Controls and Procedures

 We carried out an evaluation, under the supervision
and with the participation of our management, including our Principal Executive Officer and Principal Financial Officer, of the effectiveness
of our disclosure controls and procedures, as defined in Rules 13a-15(e) and 15d-15(e) of the Securities Exchange Act of 1934 (the "Exchange
Act") as of the end of the period covered by this report. Based on that evaluation, our Principal Executive Officer and Principal
Financial Officer have concluded that our disclosure controls and procedures as of December 31, 2024, were not effective to ensure that
information required to be disclosed by us in reports that we file or submit under the Exchange Act is recorded, processed, summarized
and reported within the time periods specified in the SEC's rules and forms because of a material weakness in the Company's
internal control over financial reporting as noted below.

 Management's Report on Internal Control
Over Financial Reporting

 Our management is responsible for establishing
and maintaining adequate internal control over financial reporting as defined in Rules 13a-15(f) and 15d-15(f) under the Exchange Act.
Our internal control over financial reporting is designed to provide reasonable assurance regarding the reliability of financial reporting
and the preparation of financial statements for external purposes in accordance with generally accepted accounting principles. Our internal
control over financial reporting includes those policies and procedures that:

 pertain to the maintenance of records that, in reasonable detail, accurately and fairly reflect the transactions and dispositions of our assets;

 provide reasonable assurance that transactions are recorded as necessary to permit preparation of financial statements in accordance with generally accepted accounting principles, and that our receipts and expenditures are being made only in accordance with authorizations of our management and directors; and

 provide reasonable assurance regarding prevention or timely detection of unauthorized acquisition, use or disposition of our assets that could have a material effect on the financial statements.

 Because of its inherent limitations, internal
control over financial reporting may not prevent or detect misstatements. Also, projections of any evaluation of effectiveness to future
periods are subject to the risk that controls may become inadequate because of changes in conditions, or that the degree of compliance
with policies or procedures may deteriorate.

 Our management assessed the effectiveness of our
internal control over financial reporting based on the parameters set forth above and has concluded that as of December 31, 2024, our
internal control over financial reporting was not effective to provide reasonable assurance regarding the reliability of financial reporting
and the preparation of financial statements for external purposes in accordance with U.S. generally accepted accounting principles ("US
GAAP") as a result of the following material weaknesses:

 The Company does not have sufficient segregation of duties within accounting functions.

 The Company does not have written documentation of our internal controls policies and procedures.

 While the Company has implemented and operating
effectively with internal controls, we have not yet documented and tested our internal control plan. We plan to rectify these weaknesses
by establishing a control framework including a risk assessment, written policies and procedures for our internal control of financial
reporting and hiring additional accounting personnel at such time as we raise sufficient capital to do so.

 Changes
In Controls Over Financial Reporting

 During the year ended December 31, 2024, the Company
continued to strengthen its internal controls including the implementation of NetSuite financials for its financial and transaction reporting.
This includes certain segregation of duties including the creation of purchase orders by our purchasing team that is approved in accordance
with our authorization matrix, the receipt of inventory in NetSuite by our operations team in Orlando, FL, and dual approvals of all outgoing
cash payments. As the implementation of NetSuite occurred, we experienced changes to our processes and procedures which in turn, resulted
in changes to our internal control over financial reporting. We expect NetSuite to strengthen our internal financial controls. Management
will continue to evaluate and monitor our internal controls as processes and procedures in each of the affected areas evolve and plan
to document our internal control framework and related activities.

 Other
than as discussed above, there have been no changes in our internal control over financial reporting (as defined in Rule 13a-15(f) of
the Exchange Act) that occurred during the year ended December 31, 2024 that have materially affected, or are reasonably likely to materially
affect, our internal controls over financial reporting.

 Item 9B.

 Other Information.

 During the fourth quarter ended December 31, 2024,
none of our directors and officers (as defined in Rule 16a-1(f) under the Securities Exchange Act of 1934, as amended, (the "Exchange
Act")) adopted or terminated a "Rule 10b5-1 trading arrangement" or "non-Rule 10b5-1 trading arrangement,"
as those terms are defined in Item 408 of Regulation S-K, except as described in the table below:

 Name and Title

 Action

 Applicable Date

 Duration of Trade Arrangements

 10b5-1 Trading Arrangement?

(Y/N)*

 Aggregate Number of Securities Subject to Trading Arrangement

 Dr. Allan Evans

Chief Executive Officer and Director

 Adopt

 May 2025 through December 2025

 Y

 Up to 30,000 shares of Common Stock from May vesting for tax purposes

 Dr. Allan Evans

Chief Executive Officer and Director

 Adopt

 August 2025 through December 2025

 Y

 Up to 15,000 shares of Common Stock from August vesting for tax purposes

 Dr. Allan Evans

Chief Executive Officer and Director

 Adopt

 November 2025 through December 2025

 Y

 Up to 15,000 shares of Common Stock from November vesting for tax purposes

 Adopt

 April 2025 through December 2025

 Y

 Up to 83,775 shares of Common Stock for tax purposes

 Adopt

 May 2025 through December 2025

 Y

 Up to 17,500 shares of Common Stock from May vesting for tax purposes

 Adopt

 August 2025 through December 2025

 Y

 Up to 8,750 shares of Common Stock from August vesting for tax purposes

 Adopt

 November 2025 through December 2025

 Y

 Up to 8,750 shares of Common Stock from November vesting for tax purposes

 Adopt

 May 2025 through December 2025

 Y

 Up to 17,500 shares of Common Stock from May vesting for tax purposes

 Adopt

 August 2025 through December 2025

 Y

 Up to 8,750 shares of Common Stock from August vesting for tax purposes

 Adopt

 November 2025 through December 2025

 Y

 Up to 8,750 shares of Common Stock from November vesting for tax purposes

 *Denotes whether the trading plan is intended,
when adopted, to satisfy the affirmative defense of Rule 10b5-1(c).

 Item 9C.

 Disclosure Regarding Foreign Jurisdictions that Prevent Inspections.

 Not applicable.

 Item 10.

 Directors, Executive Officers, and Corporate Governance

 The following table sets forth information regarding
our current directors and executive officers:

 Name

 Age

 Position

 Dr. Allan Evans

 Chief Executive Officer and Director

 Robert Lowry

 Sanford Rich

 Jeffrey Thompson

 Cristina A. Col n, Esq.

 Biographies

 Dr. Allan Evans, Chief
Executive Officer and Chairman of the Board of Directors

 Dr. Allan Evans was appointed to serve as the
Chief Executive Officer and a director of the Company effective December 4, 2023. Prior to becoming our Chief Executive Officer, Dr. Evans
was the Chief Operating Officer of Red Cat from January 2021 to November 2023 and was the Chief Executive Officer of Fat Shark. Dr. Evans
is a serial entrepreneur with a history of founding and leading technological innovation. He has extensive experience in overseeing different
emerging technologies. From August 2017 to October 2020, Dr. Evans served as a board member for Ballast Technologies, a company that specialized
in technology for location-based entertainment. In November 2012, he co-founded Avegant, a technology company focused on developing next
generation display technology to enable previously impossible augmented reality experiences. He led design, development, and initial production
of the Glyph head mounted display and oversaw technology research and patent strategy while serving as Chief Technology Officer of Avegant
until 2016. Dr. Evans has 47 pending or issued patents that cover a range of technologies from implantable medical devices to mixed reality
headsets. Academically, his work has an h-index of 15, an i-index of 28, and has been cited in more than 1,000 publications. He has extensive
experience with new technologies, engineering, business development, and corporate strategy, and his expertise in these areas strengthens
the Company's collective knowledge and capabilities.

 Dr. Evans' management and public company
experience, his experience in the drone business and his role as Chief Executive Officer of the Company, led to his appointment as a director.

 Brian Hoff, Chief Financial Officer

 Mr. Hoff has served as the Company's Chief
Financial Officer since November 2022. Prior to that, he served as the Chief Financial Officer of Auddia, Inc. (Nasdaq: AUUD), a technology
company focused on audio media, from April 2021 to October 2022. He served as Vice President and Controller at STACK Infrastructure, a
digital infrastructure company, from October 2019 to April 2021, and as Controller at Coalfire, a cybersecurity company, from November
2011 until October 2019.

 Andrew Camden, Chief Operation Officer

 Mr. Camden, who became our Chief Operating Officer
on March 4, 2024, has been President of Rotor Riot since 2018. Prior to that, he worked for four years as an Engineer for General Motors.

 Cristina A. Col n, Esq., Director

 Ms. Col n has a served as a director of
the Company since August 2022. Ms. Col n has been the owner of Cinmarc & Associates LLC, a public housing consulting firm,
since 2018 and has served as its President since August 2021. Ms. Col n has also been the owner/operator Caf de La Plaza,
a restaurant located in Palmas del Mar, Puerto Rico, since 2009. From 2019 to 2021, Ms. Col n served as an investor relations specialist
at OptimizeRX, a medical technology company. Ms. Col n's experience as an entrepreneur and her marketing and investor relations
experience led to her appointment as a director. Ms. Colon is also a lawyer in Puerto Rico and Florida.

 Robert Lowry, Director

 Mr. Lowry has served as a director of the Company
since August 2022. Mr. Lowry has been the owner of Sebring Assisted Living Facility since 1998, and the owner of Homestead Assisted Living
Facility since 2007. Mr. Lowry's experience as a business entrepreneur and his experience in operational finance led to his appointment
as a director.

 Sanford Rich, Director

 Mr. Rich serves as director and Audit Committee
member of the Company since January 31, 2024. Since March 2012, Mr. Rich has served as a director of Aspen Group, Inc. and since November
29, 2019, as Audit Committee Chairman. From August 2, 2017 to June 23, 2019, Aspen Group, Inc. had its common stock listed on the Nasdaq
Capital Market and from June 24, 2019 to March 23, 2023, Aspen Group, Inc. had its common stock listed on Nasdaq Global Market, after
which it voluntarily withdrew to focus on its core business and save money. Since January 2016, Mr. Rich has served as the Executive Director
of the New York City Board of Education Retirement System. Mr. Rich also serves as a member of the Investor Advisory Group of the PCAOB
for a term from June 1, 2022 to December 31, 2026. From November 2012 to January 2016, Mr. Rich served as the Chief of Negotiations and
Restructuring for the Pension Benefit Guaranty Corporation (a United States Government Agency). Mr. Rich was selected as a director for
his 40 years of experience in the financial sector and his experience serving on the audit committees of public companies.

 Jeffrey Thompson, Director

 Mr. Thompson has served as a director of the Company
since inception in 2019. He served as the Company's principal executive officer from inception until April 2022. Mr. Thompson has
been President and Chief Executive Officer of Red Cat since May 15, 2019. In 2016, Mr. Thompson founded Red Cat Propware Inc., a provider
of cloud-based analytics, storage, and services for drone aircraft, and served as its Chief Executive Officer until May 15, 2019 when
it was acquired by Red Cat. Mr. Thompson's management and public company experience, his experience in the drone business and his
role as President and Chief Executive Officer of Red Cat, led to his appointment as a director.

 Composition of our Board of Directors

 Our Board of Directors currently consists of five
members. Our directors hold office until their successors have been elected and qualified or until the earlier of their death, resignation
or removal. There are no family relationships among any of our directors or executive officers.

 Director Independence

 Our Board has determined that all of our present
directors are independent, in accordance with standards under the NYSE Listing Rules, other than Dr. Evans and Mr. Thompson. Our Board
determined that, under the NYSE Listing Rules, Dr. Evans is not an independent director because he is the Chief Executive Officer of the
Company. It has also been determined that Mr. Thompson is not an independent director, having previously been Chief Executive Officer
of the Company in the last three years.

 Our Board has determined that Mr. Lowry, Mr. Rich,
and Ms. Col n are independent under the NYSE Listing Rules' independence standards for Audit Committee members. Our Board
has also determined that they are independent under the NYSE Listing Rules independence standards for Compensation Committee members and
for Governance and Nominating committee members.

 Committees of the Board of Directors

 Audit Committee

 The Audit Committee currently
consists of Mr. Rich (Chair), Mr. Lowry, and Ms. Col n. Each member of the Audit Committee is an independent director as defined
by the rules of the SEC and NYSE American. The Audit Committee has the sole authority and responsibility to select, evaluate and engage
independent auditors for the Company. The Audit Committee reviews with the auditors and with the Company's financial management
all matters relating to the annual audit of the Company.

 The Audit Committee monitors
the integrity of our financial statements, monitors the independent registered public accounting firm's qualifications and independence,
monitors the performance of our internal audit function and the auditors, and monitors our compliance with legal and regulatory requirements.
The Audit Committee also meets with our auditors to review the results of their audit and review of our annual and interim financial statements.

 The Audit Committee plans
to meet at least on a quarterly basis to discuss with management the annual audited financial statements and quarterly financial statements
and meets from time to time to discuss general corporate matters.

 Audit Committee Financial
Expert

 Our Board determined
that Mr. Rich is qualified as an Audit Committee Financial Expert, as that term is defined by the rules of the SEC, in compliance with
the Sarbanes-Oxley Act of 2002.

 Compensation Committee

 The Compensation Committee
currently consists of Mr. Lowry (Chair), Ms. Col n, and Mr. Rich each of whom are independent directors. Among other things, the
Compensation Committee reviews, recommends and approves salaries and other compensation of the Company's executive officers, and
administers the Company's Equity Incentive Plan (including reviewing, recommending and approving stock option and other equity incentive
grants to executive officers).

 In addition, subject
to existing agreements, the Compensation Committee is authorized to determine the salaries, bonuses, and other matters relating to compensation
of the executive officers of the Company using similar parameters. It may set performance targets for determining periodic bonuses payable
to executive officers. It is also authorized to review and make recommendations to the Board regarding executive and employee compensation
and benefit plans and programs generally, including employee bonus and retirement plans and programs (except to the extent specifically
delegated to a Board appointed committee with authority to administer a particular plan). In addition, the Compensation Committee approves
the compensation of non-employee directors and reports it to the full Board.

 The Compensation Committee
also reviews and makes recommendations with respect to shareholder proposals related to compensation matters.

 The Compensation Committee
may, in its sole discretion and at the Company's cost, retain or obtain the advice of a compensation consultant, legal counsel or
other adviser. The Compensation Committee is directly responsible for the appointment, compensation and oversight of the work of any compensation
consultant, legal counsel and other adviser retained by the committee.

 Corporate Governance
and Nominating Committee

 The Corporate Governance
and Nominating Committee (the "Nominating Committee") consists of Ms. Col n (Chair), Mr. Lowry, and Mr. Rich, each
of whom meets the independence requirements of all other applicable laws, rules and regulations governing director independence, as determined
by the Board.

 The Nominating Committee has the authority to
identify individuals qualified to become members of the Board, consistent with criteria approved by the Board; recommend to the Board
the director nominees for the next annual meeting of shareholders at which directors are to be elected; recommend to the Board candidates
to fill any vacancies on the Board; develops, recommend to the Board, and reviews the corporate governance guidelines applicable to the
Company; and oversees the evaluation of the Board and management.

 It is authorized to consider
and recruit candidates to fill positions on the Board, including as a result of the removal, resignation or retirement of any director,
an increase in the size of the Board or otherwise. The Nominating Committee has the authority to conduct, subject to applicable law, any
and all inquiries into the background and qualifications of any candidate for the Board and such candidate's compliance with the
independence and other qualification requirements established by the Nominating Committee.

 In selecting and recommending
candidates for election to the Board or appointment to any committee of the Board, the Nominating Committee does not believe that it is
appropriate to select nominees through mechanical application of specified criteria. Rather, the Nominating Committee shall consider such
factors at it deems appropriate, including, without limitation, the following: personal and professional integrity, ethics and values;
experience in corporate management, such as serving as an officer or former officer of a publicly-held company; experience in the Company's
industry; experience as a board member of another publicly-held company; diversity as required by the NYSE Rules; diversity of expertise
and experience in substantive matters pertaining to the Company's business relative to other directors of the Company; practical
and mature business judgment; and composition of the Board (including its size and structure).

 The Nominating Committee
will develop and recommend to the Board a policy regarding the consideration of director candidates recommended by the Company's
shareholders and procedures for submission by shareholders of director nominee recommendations.

 The Nominating Committee
oversees the evaluation of the Board and management. It also develops and recommends to the Board a set of corporate governance guidelines
applicable to the Company, which the Nominating Committee shall periodically review and revise as appropriate. In discharging its oversight
role, the Nominating Committee is empowered to investigate any matter brought to its attention.

 Board Leadership Structure

 Allan Evans serves as
the Chairman of the Board and actively interfaces with management, the Board and counsel regularly. We believe that Dr. Evans's
experience as an entrepreneur and Chief Executive Officer of a drone company will help the Company with the challenges faced by us at
this stage as well as implementing our business and marketing plans, integrating acquisitions, continuing and managing our growth. We
believe that Dr. Evans, Mr. Thompson and the other members of the Board will assist the Company's management with both the operational
aspects as well as the strategic aspects of our business.

 Board Risk Oversight

 The Company's risk
management function is overseen by the Board. The Company's management keeps the Board apprised of material risks and provides its
directors access to all information necessary for them to understand and evaluate how these risks interrelate, how they affect us, and
how management addresses those risks. Allan Evans, Chairman of the Board, works closely together with the other members of the Board when
material risks are identified on how to best address such risks. If the identified risk poses an actual or potential conflict with management,
the Company's independent directors may conduct the assessment. Presently, the primary risks affecting us are our liquidity and
continued revenue growth to obtain positive cash flow.

 Family Relationships

 There are no family relationships
among any of our officers or directors.

 Involvement in Legal
Proceedings

 We are not aware of any
of our directors or officers being involved in any legal proceedings in the past 10 years relating to any matters in bankruptcy, insolvency,
criminal proceedings (other than traffic and other minor offenses) or being subject to any of the items set forth under Item 401(f) of
Regulation S-K of the SEC.

 Code of Ethics

 The Board has adopted a Code of Business Conduct
and Ethics (the "Code of Ethics") that applies to all of the Company's employees, including the Company's Chief
Executive Officer and Chief Financial Officer. Although not required, the Code of Ethics also applies to the Company's directors.
The Code of Ethics provides written standards that we believe are reasonably designed to deter wrongdoing and promote honest and ethical
conduct, including the ethical handling of actual or apparent conflicts of interest between personal and professional relationships, full,
fair, accurate, timely and understandable disclosure and compliance with laws, rules and regulations and the prompt reporting of illegal
or unethical behavior, and accountability for adherence to the Code of Ethics. We will provide a copy, without charge, to anyone
that requests a copy of our Code of Ethics in writing by contacting 4677 LB McLeod Road, Suite J, Orlando, FL 32811, Attention: Corporate
Secretary.

 Insider Trading Arrangements and Policies

 We are committed to promoting high standards of
ethical business conduct and compliance with applicable laws, rules, and regulations. As part of this commitment, we have adopted our
Insider Trading Policy governing the purchase, sale, and/or other dispositions of our securities by our directors, officers, and employees
that we believe is reasonably designed to promote compliance with insider trading laws, rules and regulations, and the exchange listing
standards applicable to us. A copy of our Insider Trading Policy is filed as Exhibit 19.1 to this Annual Report on Form 10-K for the year
ended December 31, 2024.

 Hedging

 Under the Company's Insider Trading Policy,
all officers, directors and certain identified employees are prohibited from engaging in hedging transactions.

 Clawback Policy

 Our Board has adopted a policy relating to recovery
of erroneously awarded compensation (a "Clawback Policy") in accordance with the rules of the New York Stock Exchange, to
recoup "excess" incentive compensation, if any, earned by current and former executive officers during a three year look back
period in the event of a financial restatement due to material noncompliance with any financial reporting requirement under the securities
laws (with no fault required). Our Clawback Policy is filed as Exhibit 97.1 to the Annual Report
on Form 10-K for the year ended December 31, 2023.

 Item 11.

 Executive Compensation.

 Executive Compensation Overview

 This section provides
an overview of the compensation awarded to, earned by, or paid to each individual who served as our principal executive officer during
2024. Our named executive officers, or the Named Executive Officers, for the year ended December 31, 2024, are:

 Allan Evans, our Chief Executive Officer;

 Brandon Torres Declet, our former Chief Executive Officer; and

 Brian Hoff, our Chief Financial Officer

 Andrew Camden, our Chief Operating Officer

 Unusual Machines Summary
Compensation Table Years Ended December 31, 2024 and 2023

 The following table contains
information about the compensation paid to or earned by each Named Executive Officer for the two most recently completed fiscal years.

 Name and Principal Position

 Year

 Salary

($)

 Bonus

($)

 Stock

Awards

($)(5)

 Option

Awards

($)(6)

 All Other

Compensation

($)

 Total

($)

 Allan Evans (1)

 2024

 250,000

 131,000

 733,600

 –

 –

 1,114,600

 Chief Executive Officer

 2023

 20,833

 –

 –

 –

 –

 20,833

 Brandon Torres Declet (2)

 2024

 –

 –

 –

 –

 –

 –

 Former Chief Executive Officer

 2023

 229,167

 –

 64,344

 –

 62,500

 356,011

 Brian Hoff (3)

 2024

 250,000

 121,220

 449,600

 –

 –

 820,820

 2023

 250,000

 –

 –

 –

 –

 250,000

 Andrew Camden (4)

 2024

 167,094

 6,678

 158,000

 –

 –

 331,772

 2023

 90,000

 –

 –

 –

 –

 90,000

 ________________________

 (1)

 Dr. Evans was appointed Chief Executive Officer in December 2023. On
April 30, 2024, Dr. Evans consulting company, 8 Consulting, LLC entered into a two-year Management Services Agreement to serve as the
Company's Chief Executive Officer.

 (2)

 Mr. Declet was appointed Chief Executive Officer in May 2022 and resigned from the Board and as Chief Executive Officer in November 2023. Mr. Declet executed a termination agreement pursuant to which he received three months of salary as severance and three months of medical and insurance premiums. Mr. Declet received 16,086 shares of our Common Stock with a value of $4 per share.

 (3)

 Mr. Hoff was appointed Chief Financial Officer in November 2022.

 (4)

 Mr. Camden was appointed Chief Operating Officer in March 2024. Prior to that, Mr. Camden was the President of Rotor Riot and his 2023 compensation is based on his employment with Red Cat and Rotor Riot prior to the completion of our IPO and acquisitions in February 2024.

 (5)

 Amounts reflect the aggregate grant date fair value of restricted share
grants computed in accordance with FASB ASC Topic 718. Assumptions used in the calculation of these amounts are included in Note 10 included
in our consolidated financial statements. There can be no assurance that unvested awards will vest.

 (6)

 Option awards are valued in accordance with ASC 718, Compensation – Stock Compensation. Fair value is determined based on the Black-Scholes Model using inputs reflecting our estimates of expected volatility, term, discount rates, and dividend expectations. Compensation expense is recognized based on the vesting terms of the award.

 Outstanding Equity
Awards at December 31, 2024

 The table below summarizes outstanding equity awards held by our Named
Executive Officers at December 31, 2024. All of the below awards were issued under the Plan.

 Stock Awards

 Name

 Grant Date

 Number of Shares or Units of Stock That Have Not Yet Vested (#)

 Market Value of Shares or Units of Stock That Have Not Vested ($)(1)

 Allan Evans*

 4/30/2024

 77,089

 $
 1,296,637

 05/02/2024

 6,466

 108,758

 11/05/2024

 –

 –

 04/30/2024

 46,248

 $
 777,891

 11/05/2024

 –

 –

 4/30/2024

 7,899

 $
 132,861

 11/05/2024

 –

 –

 ____________________

 *
 Awarded to 8 Consulting, LLC

 (1)
 The market value of shares or units of stock that have not yet vested is based on our stock price as of December 31, 2024.

 Employment Agreements

 Employment Agreement relating to Dr. Allan
Evans, Chief Executive Officer

 On November 27, 2023, the Company and Dr. Allan
Evans entered into an Offer Letter (the "Offer Letter") under which Dr. Evans agreed to serve as the Company's Chief
Executive Officer effective December 4, 2023.

 On April 30, 2024, the
Company's Board approved the Company entering into a two-year Management Services Agreement (the "Agreement") with 8
Consulting LLC (the "Consultant") for the services of our Chief Executive Officer, Dr. Allan Evans, whereby the Consultant
agreed to cause Dr. Evans to perform his services as the Company's Chief Executive Officer and the Consultant will be compensated
on behalf of Dr. Evans by the Company in connection with his performance of such services. The Agreement allows Dr. Evans to receive favorable
tax benefits as a resident of the Commonwealth of Puerto Rico who will perform such services in Puerto Rico. Pursuant to the Agreement,
Dr. Evans will perform the duties and responsibilities that are customary for a chief executive officer of a public company that either
have revenues similar to the Company on a pro forma basis as reflected in the Prospectus filed with the SEC on February 15, 2024, or if
pre-revenues, are an active and on-going business that are performing pre-revenue activities. The Consultant agreed to cause Dr. Evans,
as Chief Executive Officer, (i) to undertake primary responsibility for managing all aspects of the Company and overseeing the preparation
of all reports, registration statements and other filings required filed by the Company with the SEC and executing the certifications
required the Sarbanes Oxley Act of 2002 and the rules of the SEC as the principal executive officer of the Company; (ii) attend investor
meetings and road shows in connection with the Company's fundraising and investor relations activities; (iii) to report to the Company's
Board; (iv) to perform services for such subsidiaries of the Company as may be necessary.

 The Consultant receives
a $250,000 fee per year payable in monthly installments. In addition, the Consultant was granted 488,000 fully vested shares of restricted
Common Stock. The fair value of the shares was $585,600 based on the $1.20 quoted trading price on the Grant Date and will be recognized
over the service period (see below). The grant of restricted common stock was made under the Company's 2022 Equity Incentive Plan.
 The 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.

 Employment Agreement with Brian Hoff, Chief
Financial Officer

 The Employment Agreement with Mr. Hoff effective
November 1, 2022 provides that he will serve as the Chief Financial Officer of the Company on an at will basis. In August 2023, the Employment
Agreement was amended (the "First Hoff Amendment") to increase the percentage of RSUs from 1% to 3% (as discussed below).
Pursuant to his Employment Agreement, Mr. Hoff receives an annual base salary of $250,000. In addition, Mr. Hoff's Employment Agreement
entitles him to the following:

 Eligibility to earn an annual bonus of 50% of his annual base salary based on key performance indicators, as set forth in a bonus plan that is to be established, approved, administered and determined by the Board and the Chief Executive Officer.

 A cash and/or equity bonus of up to $125,000 including the bonus he received following the acquisition of Fat Shark and Rotor Riot.

 A cash bonus and/or equity bonus equal to up to $125,000 upon the completion of a capital raise event, defined as a second offering, a private placement offering, an at-the-market offering, a private investment in public equity offering.

 A grant of RSUs equal to 3% of the outstanding Common Stock of the Company (after giving effect to the First Hoff Amendment). The RSUs vested following the Closing of the IPO.

 Additionally, under his Employment Agreement,
if Mr. Hoff is terminated by the Company without Cause or terminates his employment for Good Reason, he will be entitled to six months'
annual base salary and COBRA premiums, as well as accelerated vesting of 100% of the then unvested RSUs, if applicable.

 For this purpose, Good Reason is generally defined
as (i) any reduction in his base salary, (ii) any material diminution of his authorities, titles or offices, (iii) being required to report
to anyone other than the Chief Executive Officer, (iv) a request by the Company to relocate, or (v) material breach of his Employment
Agreement without cure after 30 days' written notice.

 Cause is generally defined as (i) failure to perform
his material duties under the Employment Agreement, following 30 days' written notice without cure, (ii) willful misconduct or gross
negligence or breach of a fiduciary duty owed to the Company, (iii) conviction of our guilty pleas to a felony or other criminal offense
involving moral turpitude, (iv) any act or omission involving dishonesty, disloyalty, or fraud causing or reasonably expected to cause
significant economic harm to the Company, or (v) material breach of his Employment Agreement without cure after 30 days' written
notice.

 E mployment arrangement with Andrew Camden,

 Our Board appointed Mr. Camden, Chief Operating
Officer on March 4, 2024, and agreed to pay him a salary of $150,000 per year. In September 2024, the Compensation Committee approved
increasing Mr. Camden's salary to $200,000.

 Non-Employee Director Compensation

 Our non-employee directors
did not receive any cash or equity compensation from the Company for the year ended December 31, 2023.

 Following our February
2024 IPO, our Board approved compensation for our non-employee directors. Our non-employee directors will receive annual aggregate compensation
of $60,000 for service on the Board comprised of cash and equity grants. Additional compensation for the chairperson members as set forth
below. All cash payments and equity grants will be made semi-annual in arrears.

 Audit Committee Chair: $5,000

 Compensation Committee Chair: $5,000

 Nominating and Governance Committee Chair: $5,000

 All equity grants issued
to our non-employee directors will be granted under our Plan.

 On February 3, 2025,
the Board determined that for 2025 non-employee directors will be granted $90,000 payable in restricted Common Stock with the number
of shares determined based upon the closing price of the Company's Common Stock during each open window period with the first grant
equal to two-quarters of compensation on May 19, 2025 using the May 19 th closing price to determine the number of shares,
the second quarter grant equal to 25% of the total using the August 19, 2025 closing price and the final grant of restricted stock using
the November 19, 2025 closing price with all grants vested and the grants subject to continued service as of the grant date and execution
of the Company's standard Restricted Stock Agreement.

 Item 12.

 Security Ownership of Certain Beneficial Owners and Management and Related Stockholder Matters

 The following table sets forth information regarding
the beneficial ownership of our Common Stock as of March 25, 2025 by (i) each person,
entity or group (as that term is used in Section 13(d)(3) of the Exchange Act known to the Company to be the beneficial owner of more
than 5% of the outstanding Common Stock; (ii) each of our directors; (iii) each of our Named Executive Officers; and (iv) all executive
officers and directors as a group.

 Information relating to beneficial ownership of
Common Stock by our principal stockholders and management is based upon information furnished by each person using "beneficial ownership"
concepts under the rules of the SEC. Under these rules, a person is deemed to be a beneficial owner of a security if that person directly
or indirectly has or shares voting power, which includes the power to vote or direct the voting of the security, or investment power,
which includes the power to dispose or direct the disposition of the security. The person is also deemed to be a beneficial owner of any
security of which that person has a right to acquire beneficial ownership within 60 days. Under the SEC rules, more than one person may
be deemed to be a beneficial owner of the same securities, and a person may be deemed to be a beneficial owner of securities as to which
he or she may not have any pecuniary interest. Except as noted below, each person has sole voting and investment power with respect to
the shares beneficially owned and each stockholder's address is c/o Unusual Machines, Inc., 4677 LB McLeod Rd., Suite J, Orlando Florida,
32811.

 The percentages below are calculated based on
16,830,170 shares of Common Stock issued and outstanding as of March 25, 2025.

 Name and Address of Beneficial Owner

 Title of Class

 Amount of Shares Beneficially Owned (1)

 Percentage of Beneficial Ownership

 Named Executive Officers and Directors:

 Allan Evans

 869,439

 5.17%

 443,000

 2.63%

 201,000

 1.19%

 Jeffrey Thompson (2)

 326,818

 1.94%

 Sanford Rich

 119,600

 0.71%

 Robert Lowry

 74,406

 0.44%

 Cristina Col n

 46,338

 0.28%

 All executive officers and directors as a group (6 persons)

 1,879,601

 11.17%

 Other 5% Holders

 N/A

 –

 –%

 (1)

 The numbers and percentages outstanding in these columns,
 exclude:

 a.

 693,227 shares of our Common Stock available for future issuance under
 the Company's Plan, which includes shares of Common Stock deliverable under grants of RSUs since the underlying Common Stock
 cannot be delivered within 60 days of the date of this Form 10-K to our executives;

 b.

 8,500 shares of our Common Stock issuable upon the exercise of warrants to an underwriter of our IPO (the "Representative's Warrants"). The Representative's Warrants can be exercised at any time, and from time to time, in whole or in part, during the five-year period commencing 180 days following February 16, 2024.

 c.

 164,473 shares of our Common Stock issuable upon the exercise of warrants from the October 2024 Private Placement. The warrants can be exercised at any time, and from time-to-time, in whole or in part, during the five and a half year period from February 25, 2025. On February 26, 2025, the Company issued 1,224,606 shares of Common Stock to various warrant holders who exercised their warrants at an exercise price of $1.99. The Company received gross proceeds in the aggregate amount of $2,436,966 as a result of the warrant exercises. The shares of common stock issued are fully registered under the Registration Statement on Form S-1 (SEC Registration Number 333-283494). All such warrants were exercised other than such warrants held by Allan Evans, our Chief Executive Officer, Sanford Rich and Robert Lowry, who are each members of our Board.

 (2)

 Address is 15 Ave. Munoz Rivera Ste 2200, San Juan, PR 00901.

 Item 13.

 Certain Relationships and Related Party Transactions and Director Independence

 The following is a description of transactions
since January 1, 2022, to which we were a party or will be party, in which the amount involved exceeded or will exceed the lesser of $120,000
or 1% of the average of our total assets at year-end for the last two completed fiscal years, and any of our directors, executive officers
or holders of more than 5% of our outstanding capital stock, or any immediate family member of, or person sharing the household with,
any of these individuals or entities, had or will have a direct or indirect material interest. As permitted by the SEC rules, discussion
of employment relationships or transactions involving the Company's executive officers and directors, and compensation solely resulting
from such employment relationships or transactions, or service as a director of the Company, as the case may be, has been omitted to the
extent disclosed in the Executive Compensation or the Director Compensation section of this annual report, as applicable.

 In November 2024, the Company entered into and received a purchase
order with Teal Drones, Inc. a wholly owned subsidiary of Red Cat to provide goods and services to a customer in which Teal Drones is
a prime contractor and the Company is a subcontractor. Red Cat is a related party as Jeff Thompson is the Chief Executive Officer of Red
Cat and is also on the Board of Directors of Unusual Machines. The Company recognized $155,000 in revenue related to the related party
contract during the year ended December 31, 2024. The total value of the contract between Unusual Machines and Red Cat is $250,000.

 On October 30, 2024, Allan Evans, the Company's
Chief Executive Officer and Sanford Rich and Robert Lowry, each a member of the Company's Board, invested an aggregate of $250,000
in the Private Placement on identical terms to the other Investors.

 On April 30, 2024 ("Grant Date"),
the Company's Board approved the Company entering into a two-year Consulting Agreement with the Consultant for the services of our
Chief Executive Officer, Dr. Allan Evans, whereby the Consultant agreed to cause Dr. Evans to perform his services as the Company's
Chief Executive Officer and the Consultant is compensated on behalf of Dr. Evans by the Company in connection with his performance of
such services. See "Executive Compensation – Employment Agreements." The Agreement allows Dr. Evans to receive favorable
tax benefits as a resident of the Commonwealth of Puerto Rico who will perform such services in Puerto Rico.

 In February 2024, the Company completed the acquisitions
to purchase Fat Shark and Rotor Riot from Red Cat. Jeffrey Thompson is the founder and current Chief Executive Officer of Red Cat. Mr.
Thompson is also the founder, prior Chief Executive Officer and current member on the Board of Unusual Machines. Prior to the acquisition,
Mr. Thompson held 328,500 shares of Common Stock in Unusual Machines, which represented approximately 10% prior to the acquisition and
IPO.

 On December 8, 2023, our former Chief Executive
Officer, Brandon Torres Declet, and the Company executed a termination agreement (the "Termination Agreement") pursuant to
which Mr. Declet received three months of salary severance and three months of medical and insurance premiums. In lieu of 603,208 RSUs
that Mr. Declet was to be granted post IPO, Mr. Declet received 16,086 shares of our Common Stock in January 2024.

 In November 2022, we entered into the Purchase
Agreement, as amended with Red Cat and Jeffrey Thompson, the Company's former Chief Executive Officer and President and current
director, pursuant to which, among other things, Mr. Thompson and the Company agreed to indemnification obligations, which shall survive
for a period of nine months, subject to certain limitations, which includes a basket of $250,000 before any claim can be asserted and
a cap equal to the value of 100,000 shares of our Common Stock owned by him to secure any indemnification obligations, which stock is
our sole remedy, except for fraud. Our then Chief Executive Officer negotiated the terms of the Purchase Agreement on an arms' length
basis with Joe Freedman who was the head of Red Cat's Special Committee. The transaction was ultimately approved by the Company's
and Red Cat's Board. On March 8, 2023, a majority of the disinterested Red Cat shareholders approved the transactions contemplated
in the Purchase Agreement in a special meeting. Mr. Thompson recused himself from such vote.

 Item 14.

 Principal Accountant Fees and Services

 Salberg & Company, P.A. audited our financial
statements for the fiscal year ended December 31, 2024 and 2023.

 Independent Registered Public Accounting
Firm Fees

 The following is a summary and description
of fees incurred by Salberg & Company, P.A. for the fiscal years ended December 31, 2024 and 2023. ($ in '000s)

 2024

 2023

 Audit fees (1)

 $

 $

 Tax fees

 –

 –

 All other fees (2)

 –

 Total fees

 $

 $

 ________________________

 (1)
 Audit fees consist of fees for the audit of our annual financial statements and the quarterly reviews
of our interim financial statements.

 (2)
 All other fees consist of fees related to reviews of our registration statements during the year.

 Audit Committee Pre-approval Policy and
Procedures

 Our Audit Committee has
adopted policies and procedures relating to the approval of all audit and non-audit services that are to be performed by our independent
registered public accounting firm. This policy provides that we will not engage our independent registered public accounting firm to render
audit or non-audit services unless the service is specifically approved in advance by our Audit Committee or the engagement is entered
into pursuant to the pre-approval procedure described below.

 From time to time, our
Audit Committee may pre-approve specified types of services that are expected to be provided to us by our independent registered public
accounting firm during the next 12 months. Any such pre-approval details the particular service or type of services to be provided and
is also generally subject to a maximum dollar amount.

 Item 15.

 Exhibits and Financial Statement Schedules

 (a) 1. Financial
Statements

 For a list of the
financial statements included herein, see Index to the Financial Statements on page F-1 of this Annual Report, incorporated into
this Item by reference.

 2. Financial
Statement Schedules

 Financial statement schedules
have been omitted because they are either not required or not applicable or the information is included in the financial statements or
the notes thereto.

 (b) Exhibits

 The exhibits required
by Item 601 of Regulation S-K and Item 15(b) of this Annual Report are listed in the Exhibit Index below. The exhibits listed
in the Exhibit Index are incorporated by reference herein.

 EXHIBIT

 Incorporated by Reference

 Exhibit

 No.

 Description

 Filed/Furnished

 Herewith

 Form

 Exhibit

 No.

 Filing

 Date

 1.1

 Form of Underwriting Agreement, dated February 14, 2024, by and between Unusual Machines, Inc. and Dominari Securities, LLC +

 1.1

 2/16/24

 2.1

 Agreement and Plan of Merger by and between Unusual machines, Inc., a Puerto Rico corporation and Unusual machines, Inc., a Nevada corporation

 2.1

 4/23/24

 3.1

 Articles of Incorporation

 3.1

 4/23/24

 3.2

 Amended and Restated Bylaws

 3.1

 10/8/24

 3.2(a)

 Amendment No. to Amended and Restated Bylaws

 3.1

 2/5/25

 3.3

 Certificate of Designations, Preferences and Rights of Series A Convertible Preferred Stock

 3.1

 7/22/24

 3.4

 Certificate of Designation of Series B Convertible Preferred Stock

 3.3

 4/23/24

 3.5

 Certificate of Designations, Preferences and Rights of Series C Convertible Preferred Stock

 3.1

 8/22/24

 4.1

 Form of 8% Promissory Note +

 4.1

 7/22/24

 4.2

 Revised Form of Representatives Warrant

 S-1/A

 10.7

 2/1/24

 4.4

 Description of Securities

 4.7

 3/22/24

 10.1

 Share Purchase Agreement +

 S-1

 10.1

 3/14/23

 10.1(a)

 Amended and Restated Amendment No. 1 to Share Purchase Agreement

 S-1/A

 10.2

 5/3/23

 10.1(b)

 Amendment No. 2 to Share Purchase Agreement

 S-1/A

 10.3

 10.1(c)

 Amendment No. 3 to Share Purchase Agreement

 S-1/A

 10.4

 9/19/23

 10.1(d)

 Amendment No. 4 to Share Purchase Agreement

 S-1/A

 10.5

 12/15/23

 10.2

 Security Agreement

 S-1

 10.3

 3/14/23

 10.3

 Employment Agreement with Brian Hoff #+

 S-1

 10.6

 3/14/23

 10.3(a)

 Form of Amendment No. 1 to the Employment Agreement with Brian Hoff #

 S-1/A

 10.11A

 10.4

 Form of Patent Assignment

 S-1/A

 10.6

 10.5

 Form of Trademark Assignment

 S-1/A

 10.7

 10.6

 Form of Restricted Stock Unit Agreement

 S-1/A

 10.18

 10.7

 Amended 2022 Equity Incentive Plan #

 S-1/A

 10.11

 12/15/23

 10.8

 Employment Offer Letter with Dr. Allan Evans #

 S-1/A

 10.21

 12/15/23

 10.9

 Brandon Torres Declet Termination and Release Agreement

 S-1/A

 10.22

 12/15/23

 10.10

 Form of Lock-up Agreement

 S-1/A

 10.14

 2/1/24

 10.11

 Form of Lock-up Agreement – Jeffrey Thompson

 S-1/A

 10.15

 2/1/24

 10.12

 Allan Evans Non-Compete Agreement

 10.9

 2/22/24

 10.13

 Management Services Agreement #

 10.1

 5/6/24

 10.14

 10.2

 5/6/24

 10.15

 Form of Exchange Agreement +

 10.1

 7/22/24

 10.16

 Form of Closing Date working Capital Agreement and Consent +

 10.2

 7/22/24

 10.17

 10.1

 7/31/24

 10.18

 4% Convertible Promissory Note – Titan Multi-Strategy Fund I, Ltd.

 S-1

 10.20

 10.19

 4% Convertible Promissory Note – Eleven Ventures LLC +

 S-1

 10.21

 10.20

 Common Stock Purchase Warrant – Titan Multi-Strategy Fund I, Ltd. +

 S-1

 10.22

 10.21

 Common Stock Purchase Warrant - Eleven Ventures LLC +

 S-1

 10.23

 10.22

 Exchange Agreement – Titan Multi-Strategy Fund I, Ltd. +

 S-1

 10.24

 10.23

 Exchange Agreement – Eleven Ventures LLC +

 S-1

 10.25

 10.24

 Registration Rights Agreement – Titan Multi-Strategy Fund I, Ltd. +

 S-1

 10.26

 10.25

 Registration Rights Agreement – Eleven Ventures LLC +

 S-1

 10.27

 10.26

 Letter Agreement - Titan Multi-Strategy Fund I, Ltd.

 10.1

 10/8/24

 10.27

 Letter Agreement - Eleven Ventures LLC

 10.2

 10/8/24

 10.28

 Amendment No.1 to 2022 Equity Incentive Plan, as amended #

 10.3

 10/8/24

 10.29

 10.1

 10/24/24

 10.30

 Form of Securities Purchase Agreement

 10.1

 10.31

 Placement Agency Agreement

 10.2

 10.32

 Registration Rights Agreement

 10.3

 10.33

 Form of Common Stock Purchase Warrant

 10.4

 10.34

 Form of Placement Agent Warrant

 10.5

 10.35

 Form of Lock-up Agreement

 10.6

 10.36

 10.1

 11/7/24

 10.37

 Form of Advisory Agreement

 S-1

 10.28

 11/27/24

 10.38

 10.1

 1/16/25

 10.39

 Agreement and Plan of Merger and Reorganization dated February 1, 2025

 10.1

 2/4/25

 14.1

 Code of Ethics

 S-1/A

 10.17

 16.1

 Letter from Salberg & Company, P.A.

 8-K/A

 7.1

 8/15/24

 19.1

 Insider Trading Policy

 19.1

 3/22/24

 21.1

 List of Subsidiaries

 10-K/A

 21.1

 8/9/24

 31.1

 Certification of the Principal Executive Officer pursuant to Rules 13a-14(a) and 15d-14(a), as adopted pursuant to Section 302 of the Sarbanes-Oxley Act of 2002.

 (1)

 31.2

 Certification of the Principal Financial Officer pursuant to Rules 13a-14(a) and 15d-14(a), as adopted pursuant to Section 302 of the Sarbanes-Oxley Act of 2002.

 (1)

 32.1

 Certification of the Principal Executive Officer pursuant to 18 U.S.C Section 1350, as adopted pursuant to Section 906 of the Sarbanes-Oxley Act of 2002.

 (3)

 32.2

 Certification of the Principal Financial Officer pursuant to 18 U.S.C Section 1350, as adopted pursuant to Section 906 of the Sarbanes-Oxley Act of 2002.

 (3)

 97.1

 Clawback Policy

 97.1

 3/22/24

 101.INS

 (1)

 101.SCH

 (1)

 101.CAL

 (1)

 101.DEF

 (1)

 101.LAB

 (1)

 101.PRE

 (1)

 (1)

 +

 Certain
schedules, appendices and exhibits to this agreement have been omitted in accordance with Item 601(b)(2) of Regulation S-K.
A copy of any omitted schedule and/or exhibit will be furnished supplementally to the SEC Staff upon request.

 #

 Indicates
 management contract or compensatory plan, contract or agreement.

 (1)

 Filed herein

 (3)

 Furnished herein.

 Item 16.

 Form 10-K Summary

 The Company has elected not to include summary
information.

 SIGNATURES

 Pursuant to the requirements of Section 13 or
15(d) of the Securities Exchange Act of 1934, the registrant has duly caused this report to be signed on its behalf by the undersigned
thereunder duly authorized.

 By:

 / s/ Allan Evans

 Allan Evans

 Chief Executive Officer, President and Director

 (Principal Executive Officer)

 By:

 / s/ Brian Hoff

 Date: March
27, 2025

 Pursuant to the requirements
of the Securities Exchange Act of 1934, this report has been signed below by the following persons on behalf of the registrant
and in the capacities and on the dates indicated.

 SIGNATURE

 TITLE

 DATE

 /s/ Allan Evans

 Chief Executive Officer, President and Director

 Allan Evans

 (Principal Executive Officer)

 /s/ Brian Hoff

 (Principal Financial and Accounting Officer)

 /s/ Cristina Col n

 Cristina Col n

 /s/ Robert Lowry

 Robert Lowry

 /s/ Sanford Rich

 Sanford Rich

 /s/ Jeffrey Thompson

 Jeffrey Thompson