Unusual Machines, Inc. 10-K

Table of Contents

UNITED STATES

SECURITIES AND EXCHANGE COMMISSION

WASHINGTON, D.C. 20549

FORM 10-K/A

(Amendment No. 1)

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

For the fiscal year ended December 31, 2023

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

For the transition period from ________ to _________

Commission File Number: 333-270519

Unusual Machines, Inc.

(Exact name of registrant as specified in its charter)

Puerto Rico		66-0927642
(State or other jurisdiction of incorporation or organization)		(I.R.S. Employer Identification No.)

4667 1 B McLeod Rd

Suite J

Orlando, FL

32811

(Address of principal executive offices)

(Zip Code)

Registrant’s telephone number, including area code: (855) 921-4600

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 ☒

Indicate by check mark whether the registrant (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 ☐

Indicate by check mark whether the registrant 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 ☐

Indicate by check mark whether the registrant 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. ☐

Indicate by check mark whether the registrant 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). ☐

Indicate by check mark whether the registrant is a shell company (as defined in Rule 12b-2 of the Exchange Act). Yes ☐ No ☒

As of June 30, 2023, the last business day of the registrant’s most recently completed second fiscal quarter, the common stock of the registrant was not listed on any securities exchange or quoted on any automated quotation system. Accordingly, the aggregate market value of the registrant’s common stock held by non-affiliates cannot be calculated as of such date. The aggregate market value of the registrant’s common stock held by non-affiliates of the registrant was approximately $9.7 million as of August 8, 2024 (based on the closing sale price of $2.00 as quoted by the NYSE American as of such date).

As of August 8, 2024, there were 6,184,983 shares of the registrant’s common stock outstanding.

EXPLANATORY NOTE

Unusual Machines, Inc. (the “Company”) is filing this Amendment No. 1 on Form 10-K/A to amend the Company’s Annual Report on Form 10-K for the fiscal year ended December 31, 2023, which was filed with the Securities and Exchange Commission (“SEC”) on March 22, 2024 (the “Original Form 10-K”). This Amendment No. 1 on Form 10-K/A is being filed (i) to include re-audited financial statements for the fiscal years ended December 31, 2022 (“FY 2022”), and December 31, 2023 (“FY 2023”), due to our previous auditor’s suspension by the SEC; and (ii) include certain corresponding changes in Item 7 – Management’s Discussion and Analysis of Financial Condition and Results of Operations (the “MD&A”) resulting from the re-audited financial statements for FY 2022 and FY 2023.

Except as described above, no other amendments are being made to the Original Form 10-K. The Original Form 10-K continues to speak as of the filing date of the Original Form 10-K, and we have not updated the disclosures contained therein to reflect any events which occurred at a date subsequent to the filing of the Original Form 10-K except as expressly indicated in this Amendment No. 1 on Form 10-K/A.

The financial statements of Fat Shark Ltd. and Rotor Riot, LLC are not contained in the financial statements for FY 2022 and FY 2023 because the Company did not own either entity as of FY 2022 and FY 2023 and is therefore not required to include either entity’s financial statements in the re-audited financial statements for FY 2022 and FY 2023 contained herein.

TABLE OF CONTENTS

		Page
	PART II
Item 7.	Management’s Discussion and Analysis of Financial Condition and Results of Operations		1
Item 8.	Financial Statements and Supplementary Data		4


	PART IV
Item 15.	Exhibits, Financial Statement Schedules		5
	Signatures		7

PART II

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/A (this “Form 10-K/A”). The following discussion contains forward-looking statements that are subject to risks and uncertainties. See “Special Note Regarding Forward-Looking Statements” contained in the Original Form 10-K 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 in our Original Form 10-K filed with the SEC on March 22, 2024, particularly in the section entitled “Risk Factors.” Unless we state otherwise or the context otherwise requires, the terms “we,” “us,” “our” and the “Company” refer to Unusual Machines, Inc. and its subsidiaries. All amounts presented in tables, other than per share amounts, are in thousands unless otherwise noted.

Recent Developments

Initial Public Offering

On February 16, 2024, we closed our initial public offering (“IPO”) for the sale of 1,250,000 shares of common stock, at a public offering price of $4.00 per share. The IPO generated gross proceeds of $5.0 million and net proceeds of approximately $4.5 million. We incurred and paid additional direct offering costs prior to the close of the IPO of $0.1 million during the six months ended June 30, 2024, and $0.5 million during the year ended December 31, 2023. We used $1.0 million of proceeds to pay for the acquisition of Fat Shark and Rotor Riot as discussed below.

Acquisition of Fat Shark and Rotor Riot

On November 21, 2022, we entered into the Purchase Agreement with Red Cat Holdings, Inc. (“Red Cat”) and Jeffrey Thompson, the founder and Chief Executive Officer of Red Cat and also director of our Company, pursuant to which we agreed to purchase Red Cat’s consumer business consisting of Fat Shark Holdings Ltd. (“Fat Shark”) and Rotor Riot LLC (“Rotor Riot”). Fat Shark and Rotor Riot are in the business of designing and marketing consumer drones and FPV goggles. Rotor Riot is also a licensed authorized reseller of consumer drones manufactured by third-parties.

Under the terms of the Purchase Agreement, as amended, the Company purchased from Red Cat its Rotor Riot and Fat Shark subsidiaries for $20.1 million comprised of (i) $1.1 million in cash, (ii) a $2.0 million promissory note issued by the Company to Red Cat (the “Note”), and (iii) $17.0 million of the Company’s common stock or 4,250,000 shares of common stock.

Simultaneous with the closing of our IPO, on February 16, 2024, we closed the acquisitions of Fat Shark and Rotor Riot.

On July 22, 2024, we finalized the working capital adjustment as stipulated in the Purchase Agreement, which resulted in an increase in the overall purchase price by an additional $2.0 million. We agreed to increase the principal amount of the original note for the working capital adjustment, which increased the total Note payable to $4.0 million. In addition, we agreed to extend the maturity date of the Note to November 30, 2025. That Note was then exchanged for two Notes (the “New Notes”).

Series A Convertible Preferred Stock

Effective July 16, 2024, we filed a Certificate of Designations, Preferences and Rights of the Series A Convertible Stock with the Nevada Secretary of State. On July 22, 2024, 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, par value $0.01 per share for 4,250 shares of the Company’s newly designated Series A Convertible Preferred Stock (the “Series A”). Red Cat then sold the Series A and the New Notes to two investors on July 22, 2024.

Nevada Reincorporation

On April 22, 2024, we completed the change of our place of incorporation from Puerto Rico to Nevada.

Unusual Machines Results of Operations

Years Ended December 31, 2023 and 2022

Revenue

During the years ended December 31, 2023 and 2022, we did not generate any revenues and as such did not incur any cost of goods sold.

Operating Expenses

During the year ended December 31, 2023, we incurred research and development expenses totaling $0 compared to $91,325 for the year ended December 31, 2022, resulting in a decrease of $91,325 or 100%. Prior to the acquisition targets of Rotor Riot and Fat Shark, our primary focus was to create a US made camera sensor, which we no longer pursued after we signed our purchase agreement to acquire Rotor Riot and Fat Shark.

During the year ended December 31, 2023, we incurred general and administrative expenses totaling $2,377,862 compared to $1,079,715 for the year ended December 31, 2022, resulting in an increase of $1,298,147 or 120.2%. The increase primarily relates to stock compensation expense of $600,000 related to shares issued for services during 2023 and increased legal expenses and professional fees related to the business combination and for preparation of becoming a public company.

Net Loss

Net loss for the year ended December 31, 2023, totaled $2,383,462 compared to $1,171,777 for the year ended December 31, 2022, resulting in an increase of $1,211,685 or 103%. The increase in net loss relates to $600,000 in stock compensation expense and the increase in general and administrative expenses as we start to build out our operations for the business combination and becoming a public company.

Unusual Machines Cash Flows

Years Ended December 31, 2023 and 2022

Operating Activities

Net cash used in operating activities was $1,776,552 during the year ended December 31, 2023 compared to net cash used in operating activities of $1,189,191 during the year ended December 31, 2022, representing an increase of $587,361 or 49.4%. This increase in net cash used primarily resulted from our increase in net loss of $1,211,685, changes in other working capital of $20,554 offset by non-cash expenses of $604,715.

Investing Activities

Net cash used in investing activities was $3,164 during the year ended December 31, 2023 compared to net cash provided by investing activities of $40,647 during the year ended December 31, 2022, representing an overall decrease of $43,811 or 108%. The cash used in investing activities during 2023 related to purchasing computer equipment. The cash provided by investing activities during 2022 primarily related to a related party receivable for $45,222 being paid back, offset by the purchase of computer equipment of $4,575 during the year.

Financing Activities

Net cash used in financing activities totaled $424,933 during the year ended December 31, 2023 compared to net cash provided by $462,075 during the year ended December 31, 2022, resulting in a decrease in a change in net cash by financing activities of $887,008 or 192%. The decrease is related to proceeds received from exempt private offerings of our common stock in 2022 that were not received in 2023 and the change in deferred offering costs related to our IPO of $337,108.

Unusual Machines Liquidity and Capital Resources

As of December 31, 2023, we had current assets totaling $1,015,404 primarily consisting of cash balances of $894,773 and other current assets of $120,631. Our current liabilities as of December 31, 2023 totaled $114,497, consisting entirely of accounts payable and accrued expenses. Our net working capital as of December 31, 2023 was $900,907.

On February 16, 2024, we completed our IPO for the sale of 1,250,000 shares of common stock at a public offering price of $4.00 per share for gross proceeds of $5.0 million. After paying certain underwriting discounts and commissions, business combination expenses and other expenses related to the IPO, we received approximately $3.8 million in net proceeds.

To date, our operations have been funded exclusively by exempt private offerings of our common stock. In September of 2021, we closed a private offering of 2,276,000 shares of common stock at a price of $1.00 per share for total proceeds of $2,276,000. In December 2021, we closed an additional private offering of 260,000 shares of common stock at a price of $8.00 per share for total gross proceeds of $2,080,800, of which we received net proceeds of $1,992,000 after fees and other expenses. In 2022, we closed an additional private offering of 56,250 shares of common stock at a price of $8.00 per share for total proceeds of $450,000.

We believe that the net proceeds from our February 2024 IPO 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. If we are unable to raise capital when needed or on acceptable terms, we may be forced to delay, reduce or eliminate certain operational efforts. We do not anticipate any significant cost increases post Fat Shark and Rotor Riot acquisitions and with consideration of the combined companies’ net loss and cash position, we expect we will have sufficient working capital to support our operations for at least 12 months from the filing of this Form 10-K/A.

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.

Stock Based Compensation

The Company issued shares of our common stock 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.

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 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 ID #106)	F-1
Balance Sheets at December 31, 2023 and 2022	F-2
Statements of Operations for the years ended December 31, 2023 and 2022	F-3
Statements of Changes in Stockholders’ Equity for the years ended December 31, 2023 and 2022	F-4
Statements of Cash Flows for the years ended December 31, 2023 and 2022	F-5
Notes to Financial Statements	F-6

Report of Independent Registered Public Accounting Firm

To the Board of Directors and Stockholders of:

Unusual Machines, Inc.

Opinion on the Financial Statements

We have audited the accompanying balance sheets of Unusual Machines, Inc. (the “Company”) as of December 31, 2023 and 2022, the related statements of operations, changes in stockholders’ equity, and cash flows, for each of the two years in the period ended December 31, 2023, and the related notes (collectively referred to as the “financial statements”). In our opinion, the financial statements present fairly, in all material respects, the financial position of the Company as of December 31, 2023 and 2022, and the results of its operations and its cash flows for each of the two years in the period ended December 31, 2023, in conformity with accounting principles generally accepted in the United States of America.

Restatement

As discussed in Note 9 to the financial statements, the 2023 and 2022 financial statements, as originally audited by a predecessor auditor, have been restated to correct certain errors.

Basis for Opinion

These financial statements are the responsibility of the Company’s management. Our responsibility is to express an opinion on the Company’s 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 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 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 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 financial statements. We believe that our audits provide a reasonable basis for our opinion.

Critical Audit Matters

The critical audit matters are matters arising from the current period audit of the 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 financial statements and (2) involved our especially challenging, subjective, or complex judgments. We determined there were no critical audit matters.

/s/ Salberg & Company, P.A.

SALBERG & COMPANY, P.A.

We have served as the Company’s auditor since 2024

Boca Raton, Florida

August 9, 2024

F-1

Unusual Machines, Inc.

Balance Sheets


	December 31,
	2023			2022
	(As restated – Note 9)			(As restated – Note 9)
ASSETS
Current assets:
Cash	$	894,773		$	3,099,422
Other current assets		120,631			39,375
Total current assets		1,015,404			3,138,797

Property and equipment, net		1,254			3,690
Deferred offering costs		512,758			87,825
Other assets		–			100,000
Total non-current assets		514,012			191,515

Total assets	$	1,529,416		$	3,330,312

LIABILITIES AND STOCKHOLDERS' EQUITY
Current liabilities
Accounts payable and accrued expenses	$	114,497		$	131,931
Total current liabilities		114,497			131,931

Stockholders’ equity:
Series B preferred stock - $0.01 par value, 10,000,000 authorized and 190 and 140 shares issued and outstanding at December 31, 2023 and 2022, respectively		2			1
Common stock - $0.01 par value, 500,000,000 authorized and 3,217,255 and 3,392,250 shares issued and outstanding at December 31, 2023 and 2022, respectively		32,173			33,923
Additional paid in capital		5,315,790			4,714,041
Accumulated deficit		(3,933,046	)		(1,549,584	)
Total stockholders’ equity		1,414,919			3,198,381

Total liabilities and stockholders’ equity	$	1,529,416		$	3,330,312

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

F-2

Unusual Machines, Inc.

Statements of Operations


	Year Ended December 31,
	2023			2022
	(As restated – Note 9)			(As restated ‐ Note 9)

Revenue	$	–		$	–

Cost of goods sold		–			–

Gross profit		–			–

Operating expenses:
Research and development		–			91,325
General and administrative		2,377,862			1,079,715
Depreciation and amortization		5,600			885
Total operating expenses		2,383,462			1,171,925

Loss from operations		(2,383,462	)		(1,171,925	)

Other income:
Interest income		–			148
Total other income		–			148

Net loss before income tax		(2,383,462	)		(1,171,777	)

Income tax benefit (expense)		–			–

Net loss	$	(2,383,462	)	$	(1,171,777	)

Net loss per share attributable to common stockholders
Basic and diluted	$	(0.72	)	$	(0.29	)

Weighted average common shares outstanding
Basic and diluted		3,307,118			4,051,205

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

F-3

Unusual Machines, Inc.

Statements of Changes in Stockholders’ Equity (As restated – Note 9)

For the Years Ended December 31, 2023 and 2022


	Series B, Preferred Stock				Common Stock						Additional Paid-In		Accumulated
	Shares		Value		Shares			Value			Capital		Deficit			Total
Balance, December 31, 2021		–	$	–		4,036,000		$	40,360		$	4,257,605	$	(377,807	)	$	3,920,158

Issuance of common stock for cash		–		–		56,250			563			449,437		–			450,000
Conversion to preferred stock		140		1		(700,000	)		(7,000	)		6,999		–			–
Net loss		–		–		–			–			–		(1,171,777	)		(1,171,777	)

Balance, December 31, 2022		140	$	1		3,392,250		$	33,923		$	4,714,041	$	(1,549,584	)	$	3,198,381

Issuance of common shares for services		–		–		75,005			750			599,250		–			600,000
Conversion to preferred shares		50		1		(250,000	)		(2,500	)		2,499		–			–
Net loss		–		–		–			–			–		(2,383,462	)		(2,383,462	)

Balance, December 31, 2023		190	$	2		3,217,255		$	32,173		$	5,315,790	$	(3,933,046	)	$	1,414,919

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

F-4

Unusual Machines, Inc.

Statements of Cash Flows


	Year Ended December 31,
	2023			2022
	(As restated – Note 9)			(As restated – Note 9)

Cash flows from operating activities:
Net loss	$	(2,383,462	)	$	(1,171,777	)
Depreciation		5,600			885
Stock compensation expense		600,000			–
Change in assets and liabilities:
Accounts receivable		–			945
Other assets		18,744			(139,375	)
Accounts payable and accrued expenses		(17,434	)		120,131
Net cash used in operating activities		(1,776,552	)		(1,189,191	)

Cash flows from investing activities
Related party receivable		–			45,222
Purchases of property and equipment		(3,164	)		(4,575	)
Net cash provided by (used in) investing activities		(3,164	)		40,647

Cash flows from financing activities:
Proceeds from common stock receivable		–			99,900
Issuance of common stock		–			450,000
Deferred offering costs		(424,933	)		(87,825	)
Net cash provided by (used in) financing activities		(424,933	)		462,075

Net increase (decrease) in cash		(2,204,649	)		(686,469	)

Cash, beginning of year		3,099,422			3,785,891

Cash, end of year	$	894,773		$	3,099,422

Supplemental disclosures of cash flow information:
Cash paid for interest	$	–		$	–
Cash paid for income tax	$	–		$	–

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

F-5

Unusual Machines, Inc.

Notes to Financial Statements

For the Years Ended December 31, 2023 and 2022

Note 1 – Organization and nature of business

Unusual Machines, Inc. (“the Company”) is a Nevada corporation engaged in the commercial drone industry. The Company was a Puerto Rican corporation when it closed its IPO, as defined below. On April 22, 2024, the Company reincorporated as a Nevada corporation.

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 8 for additional details.

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”).

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 in 2023 and 2022 include stock compensation and deferred tax assets.

Cash

The Company considers all highly liquid debt instruments purchased with an original maturity of three months or less to be cash equivalents. The Company had no cash equivalents at December 31, 2023 or December 31, 2022.

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, 2023 and December 31, 2022, the Company had approximately $0.6 million and $2.8 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.

Deferred offering costs

The Company deferred direct incremental costs associated with its ongoing initial public offering (“IPO”). The Company capitalized $424,933 and $87,825 during the years ended December 31, 2023 and 2022, respectively. Total deferred offering costs were $512,758 as of December 31, 2023. Deferred offering costs consist of primarily 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 $640,445 were recorded as a reduction to additional paid-in capital generated as a result of the offering.

F-6

Note Receivable

At December 31, 2021, the Company had a loan receivable due from Rotor Riot LLC, a related party, of $45,222. The loan did not bear interest. The amount was fully repaid in 2022.

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.

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.

Disclosures for Non-Financial Assets Measured at Fair Value on a Non-Recurring Basis

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

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 did not have any revenue during the years ended December 31, 2023 and 2022.

F-7

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, term 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 service period which is the vesting term.

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.

Recent Accounting Pronouncements

In November 2023, new accounting guidance was issued that updates reportable segment disclosure requirements by requiring disclosures of significant reportable segment expenses that are regularly provided to the Chief Operating Decision Maker (the “CODM”) and included within each reported measure of a segment's profit or loss. This new guidance also requires disclosure of the title and position of the individual identified as the CODM and an explanation of how the CODM uses the reported measures of a segment’s profit or loss in assessing segment performance and deciding how to allocate resources. The new guidance is effective for annual periods beginning after December 15, 2023, and interim periods within fiscal years beginning after December 15, 2024. The new guidance is required to be applied retrospectively to all prior periods presented in the financial statements. Early adoption is also permitted. On January 1, 2024, the Company adopted ASC 280, Segment Reporting. The Company currently operates a single segment and the Company does not anticipate any net effect related to the adoption.

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.

F-8

Note 3 – Other Assets

Other current and non-current assets at December 31 included:

Schedule of other assets	2023		2022
Current assets:
Prepaid insurance	$	20,631	$	39,375
Deposit related to Rotor Riot, LLC and Fat Shark, Ltd. acquisitions		100,000		–
Total current assets	$	120,631	$	39,375

Non-current assets:
Deposit related to Rotor Riot, LLC and Fat Shark, Ltd. acquisitions	$	–	$	100,000
Total non-current assets	$	–	$	100,000

Note 4 – 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 December 31 was as follows:

Schedule of property and equipment	2023			2022
Computer equipment	$	7,738		$	4,575
Accumulated depreciation		(6,484	)		(885	)
Total property and equipment, net	$	1,254		$	3,690

Depreciation expense totaled $5,600 and $885 for the year ended December 31, 2023 and 2022, respectively.

Note 5 – Earnings Per Share and Stockholders’ Equity

Earnings per Share

Basic net loss per share is computed by dividing net loss, which is allocated based upon the proportionate amount of weighted average shares outstanding, to each class of stockholder’s stock outstanding during the period. For the calculation of diluted net loss per share, net loss per share attributable to common stockholders for basic net loss per share is adjusted by the effect of dilutive securities, including awards under our equity compensation plans.

Outstanding securities not included in the computation of diluted net loss per share because their effect would have been anti-dilutive include 950,000 and 700,000 shares of Series B Preferred Stock, as converted as of December 31, 2023 and 2022, respectively.

Preferred Stock

The preferred stock par value is $0.01. The Series B preferred stock 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. Series B preferred shares are not entitled to vote on any matters submitted to shareholders of the Company.

F-9

On December 13, 2022, the Company issued 140 Series B preferred shares in connection with the cancellation of 700,000 shares of common stock.

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

Series B preferred shares outstanding at December 31, 2023 totaled 190 which are convertible into 950,000 shares of common stock.

Series B preferred shares outstanding at December 31, 2022 totaled 140 which are convertible into 700,000 shares of common stock.

Common Stock

The common stock par value is $0.01.

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.

2022 Transactions

The Company issued 56,250 shares of common stock during the year ended December 31, 2022 for gross proceeds of $450,000.

The Company received $99,900 of proceeds in 2022 related to stocks issued as of December 31, 2021, which was recorded as a subscription receivable asset at December 31, 2021.

On December 14, 2022, the Company amended its Articles of Incorporation to, among other things, increase the number of authorized shares of common stock from 90,000,000 to 500,000,000.

Note 6 – Business Combination

Fat Shark and Rotor Riot

On November 21, 2022, the Company entered into a Share Purchase Agreement (the “Purchase Agreement”), as amended, with Red Cat Holdings, Inc. (“Red Cat,”) and Jeffrey Thompson, the founder and Chief Executive Officer of Red Cat, pursuant to which the Company agreed to purchase Red Cat’s consumer business consisting of Fat Shark Holdings, Ltd. (“Fat Shark”) and Rotor Riot, LLC (“Rotor Riot”) (the “Business Combination”) for a total of $20.1 million (the “Purchase Price”). 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 Purchase Price was comprised of (i) $1.1 million in cash, (ii) a $2.0 million promissory note issued by the Company to Red Cat, and (iii) $17.0 million of the Company’s common stock and subject to certain working capital adjustments. See Note 10 – Subsequent Events for additional information.

F-10

Note 7 – 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.

Note 8 – Income Taxes

The Company was incorporated and based in Puerto Rico, as of and for the years ended December 31, 2023 and 2022. As such, the Company is not subject to taxation by the United States as Puerto Rico has its own taxing authority. Since inception, the Company has incurred net losses in each year of operations. The current provision for the reporting periods presented in these financial statements consisted of a tax benefit against which the Company applied a full valuation allowance, resulting in no current provision for income taxes.

As of December 31, 2023 and 2022, the Company had gross net operating losses of approximately $3.9 million and $1.5 million, respectively. Deferred tax assets related to the future benefit of these net operating losses for tax purposes totaled approximately $0.7 million and $0.3 million, respectively, calculated using the base Puerto Rico corporate tax rate of 18.5%. Since the Company has not generated revenue or operating profit since inception, the Company has applied a full valuation allowance against our deferred tax assets as of December 31, 2023 and 2022. Since the Company has reincorporated as a Nevada corporation in April 2024, the use of net operating losses may be limited. A reconciliation of income taxes at the effective statutory rate and the provision for income taxes was as follows:

Effective income tax rate	2023		2022
Puerto Rico statutory rate		18.5%		18.5%
Effects of:
State and local taxes		–%		–%
Change in valuation allowance		(18.5)%		(18.5)%
Effective rate		–%		–%

The Company continuously monitors its current and prior filing positions in order to determine if any unrecognized tax positions should be recorded. The analysis involves considerable judgement and is based on the best information available. For the periods ended December 31, 2023 and 2022, the Company is not aware of any positions which require an uncertain tax position liability.

F-11

Note 9 – Restatement of Previously Issued Financial Statements

On April 16, 2024, the Company changed their independent PCAOB-registered accounting firm and terminated its engagement with their prior auditor. On May 3, 2024, the Securities and Exchange Commission (“SEC”) issued an order that instituted a cease-and-desist against the Company’s previous auditor, which stated that all necessary Exchange Act Filings presented must be audited by a qualified, independent, PCAOB-registered public accountant. As a result, the Company’s previously issued financial statements for the years ended December 31, 2023 and 2022 were required to be re-audited.

The Company engaged a new, an independent and registered accounting firm, to re-audit the Company’s previously issued financial statements. During the Company’s re-audits, it was noted that certain transactions were not recorded in the correct period, certain accounts should have been classified as a non-current asset rather than a current asset, stock compensation expense of $600,000 related to the March 7, 2023 common stock issuance was not recorded and deferred offering costs were classified as an operating activity rather than a financing activity. Expenses totaling $81,800 were originally recorded in 2022 but related to 2021 expenses and expenses totaling $10,993 were originally recorded in 2023 but related to 2022 expenses.

With this restatement, the transactions previously recorded in the incorrect period have been updated to the correct period, classifications on the balance sheet and cash flow statement have been corrected and the stock compensation previously not recorded has been properly recorded.

The following presents reconciliations of the impacted financial statement line items as filed to the restated amounts as of December 31, 2023 and 2022 and for the years then ended. The previously reported amounts reflect those included in the Original Filing of our Annual Report on Form 10-K as of and for the years ended December 31, 2023 filed with the SEC on March 22, 2024. These amounts are labeled “As Filed” in the tables below. The amounts labeled “Restatement Adjustments” represent the effects of these restatements due to the timing differences, balance sheet reclassifications and stock compensation expense.

F-12

Restatement schedules

Balance Sheet as of December 31, 2023
	As Filed			Restatement Adjustments			As Restated
ASSETS
Current assets:
Cash and cash equivalents	$	894,773		$	–		$	894,773
Deferred offering costs		512,758			(512,758	)		–
Other current assets		120,631			–			120,631
Total current assets		1,528,162			(512,758	)		1,015,404

Non-current assets:
Property and equipment, net		1,254			–			1,254
Deferred offering costs		–			512,758			512,758
Other assets		–			–			–
Total non-current assets		1,254			512,758			514,012

Total assets	$	1,529,416		$	–		$	1,529,416

LIABILITIES AND STOCKHOLDERS' EQUITY
Current liabilities
Accounts payable and accrued expenses	$	114,497		$	–		$	114,497
Total current liabilities		114,497			–			114,497

Stockholders’ equity:
Series B preferred stock , par		2			–			2
Common stock, par		32,173			–			32,173
Additional paid in capital		4,715,790			600,000			5,315,790
Accumulated deficit		(3,333,046	)		(600,000	)		(3,933,046	)
Total stockholders’ equity		1,414,919			–			1,414,919

Total liabilities and stockholders’ equity	$	1,529,416		$	–		$	1,529,416

F-13

Statement of Operations for the Year Ended December 31, 2023
	As Filed			Restatement Adjustments			As Restated

Revenue	$	–		$	–		$	–

Cost of goods sold		–			–			–

Gross profit		–			–			–

Operating expenses:
Research and development		–			–			–
General and administrative		1,788,855			589,007			2,377,862
Depreciation and amortization		5,600			–			5,600
Total operating expenses		1,794,455			589,007			2,383,462

Loss from operations		(1,794,455	)		(589,007	)		(2,383,462	)

Other income:
Interest income		–			–			–
Total other income		–			–			–

Net loss before income tax		(1,794,455	)		(589,007	)		(2,383,462	)

Income tax benefit (expense)		–			–			–

Net loss	$	(1,794,455	)		(589,007	)	$	(2,383,462	)

Net loss per share attributable to common stockholders
Basic and diluted	$	(0.54	)		(0.18	)	$	(0.72	)

Weighted average common shares outstanding
Basic and diluted		3,307,118			–			3,307,118

F-14

Statements of Changes in Stockholders’ Equity – As Filed – For the Year Ended December 31, 2023

	Series B, Preferred Stock				Common Stock						Additional Paid-In			Stocks to be		Accumulated
	Shares		Value		Shares			Value			Capital			Issued		Deficit			Total
Balance, December 31, 2022		140	$	1		3,392,250		$	33,923		$	4,714,041		$	–	$	(1,538,591	)	$	3,209,374

Issuance of common shares for services		–		–		75,005			750			(750	)		–		–			–
Conversion to preferred shares		50		1		(250,000	)		(2,500	)		2,499			–		–			–
Net loss		–		–		–			–			–			–		(1,794,455	)		(1,794,455	)

Balance, December 31, 2023		190	$	2		3,217,255		$	32,173		$	4,715,790		$	–	$	(3,333,046	)	$	1,414,919

Statements of Changes in Stockholders’ Equity – Restatement Adjustments – For the Year Ended December 31, 2023

Series B, Preferred Stock

Common Stock

Additional Paid-In

Stocks to be

Accumulated

Value

Capital

Issued

Deficit

Total

Balance, December 31, 2022

–

(10,993

)

(10,993

)

Issuance of common shares for services

–

600,000

–

600,000

Conversion to preferred shares

–

Net loss

–

(589,007

)

(589,007

)

Balance, December 31, 2023

–

600,000

–

(600,000

)

–

Statements of Changes in Stockholders’ Equity – As Restated – For the Year Ended December 31, 2023

	Series B, Preferred Stock				Common Stock						Additional Paid-In		Stocks to be		Accumulated
	Shares		Value		Shares			Value			Capital		Issued		Deficit			Total
Balance, December 31, 2022		140	$	1		3,392,250		$	33,923		$	4,714,041	$	–	$	(1,549,584	)	$	3,198,381

Issuance of common shares for services		–		–		75,005			750			599,250		–		–			600,000
Conversion to preferred shares		50		1		(250,000	)		(2,500	)		2,499		–		–			–
Net loss		–		–		–			–			–		–		(2,383,462	)		(2,383,462	)

Balance, December 31, 2023		190	$	2		3,217,255		$	32,173		$	5,315,790	$	–	$	(3,933,046	)	$	1,414,919

F-15

Statement of Cash Flows for the Year Ended December 31, 2023
	As Filed			Restatement Adjustments			As Restated

Cash flows from operating activities:
Net loss	$	(1,794,455	)	$	(589,007	)	$	(2,383,462	)
Depreciation		5,600			–			5,600
Stock compensation expense		–			600,000			600,000
Change in assets and liabilities:
Accounts receivable		–			–			–
Deferred offering costs		(424,933	)		424,933			–
Other current assets		18,744			–			18,744
Accounts payable and accrued expenses		(6,441	)		(10,993	)		(17,434	)
Net cash used in operating activities		(2,201,485	)		424,933			(1,776,552	)

Cash flows from investing activities
Purchases of property and equipment		(3,164	)		–			(3,164	)
Net cash used in investing activities		(3,164	)		–			(3,164	)

Cash flows from financing activities:
Deferred offering costs		–			(424,933	)		(424,933	)
Net cash used in financing activities		–			(424,933	)		(424,933	)

Net increase (decrease) in cash		(2,204,649	)		–			(2,204,649	)

Cash, beginning of year		3,099,422			–			3,099,422

Cash, end of year	$	894,773		$	–		$	894,773

Supplemental disclosures of cash flow information:
Cash paid for interest	$	–		$	–		$	–
Cash paid for income tax	$	–		$	–		$	–

In addition, amounts were restated in the following footnote:

Note 5 – Earnings Per Share and Stockholders’ Equity

F-16

Balance Sheet as of December 31, 2022
	As Filed			Restatement Adjustments			As Restated

ASSETS
Current assets:
Cash and cash equivalents	$	3,099,422		$	–		$	3,099,422
Deferred offering costs		87,825			(87,825	)		–
Other current assets		139,375			(100,000	)		39,375
Total current assets		3,326,622			(187,825	)		3,138,797

Non-current assets:
Property and equipment, net		3,690			–			3,690
Deferred offering costs		–			87,825			87,825
Other assets		–			100,000			100,000
Total non-current assets		3,690			187,825			191,515

Total assets	$	3,330,312		$	–		$	3,330,312

LIABILITIES AND STOCKHOLDERS' EQUITY
Current liabilities
Accounts payable and accrued expenses	$	120,938		$	10,993		$	131,931
Total current liabilities		120,938			10,993			131,931

Stockholders’ equity:
Series B preferred stock , par		1			–			1
Common stock, par		33,923			–			33,923
Additional paid in capital		4,714,041			–			4,714,041
Accumulated deficit		(1,538,591	)		(10,993	)		(1,549,584	)
Total stockholders’ equity		3,209,374			(10,993	)		3,198,381

Total liabilities and stockholders’ equity	$	3,330,312		$	–		$	3,330,312

F-17

Statement of Operations for the Year Ended December 31, 2022
	As Filed			Restatement Adjustments			As Restated

Revenue	$	–		$	–		$	–

Cost of goods sold		–			–			–

Gross profit		–			–			–

Operating expenses:
Research and development		91,325			–			91,325
General and administrative		1,150,522			(70,807	)		1,079,715
Depreciation and amortization		885			–			885
Total operating expenses		1,242,732			(70,807	)		1,171,925

Loss from operations		(1,272,732	)		70,807			(1,171,925	)

Other income:
Interest income		148			–			148
Total other income		148			–			148

Net loss before income tax		(1,242,584	)		70,807			(1,171,777	)

Income tax benefit (expense)		–			–			–

Net loss	$	(1,242,584	)	$	70,807		$	(1,171,777	)

Net loss per share attributable to common stockholders
Basic and diluted	$	(0.31	)	$	0.02		$	(0.29	)

Weighted average common shares outstanding
Basic and diluted		4,006,007			45,198			4,051,205

F-18

Statements of Changes in Stockholders’ Equity – As Filed – For the Year Ended December 31, 2022

	Series B, Preferred Stock				Common Stock				Additional Paid-In		Stocks to be		Accumulated
	Shares		Value		Shares		Value		Capital		Issued		Deficit			Total
Balance, December 31, 2021		–	$	–		3,776,000	$	37,760	$	2,268,240	$	1,892,065	$	(296,007	)	$	3,902,058

Issuance of common stock for cash		–		–		316,250		3,163		2,438,802

Amendment: SEC Form 10-K/A filed by Unusual Machines Inc.