Unusual Machines Inc

Notes to Unaudited Pro Forma

Condensed Combined Financial Statements

Note 1 — Basis of Presentation

On November 21, 2022, Unusual Machines, Inc. (the “Company”) entered into a Share Purchase Agreement (the “Agreement”) with Red Cat Holdings, Inc., a Nevada Corporation (“Red Cat”) for the purchase and sale of Fat Shark Holdings, Ltd., a Nevada Corporation (“Fat Shark”) and Rotor Riot, LLC, an Ohio limited liability Company (“Rotor Riot”).

Under the terms of the Agreement, as amended, provides that the Company will acquire all of the outstanding shares of capital stock of Fat Shark and Rotor Riot in exchange for a purchase price of $20.0 million (“Purchase Price”) comprised of (i) $1.0 million in cash, (ii) a $2.0 million Note, and (iii) $17.0 million of the Company’s common stock. The Purchase Price is subject to potential adjustments. The consummation of the transactions contemplated by the Agreement are subject to certain closing conditions including, without limitation, the Company completing their initial public offering (the “Offering”) and the commencement of trading on NYSE American simultaneously with the consummation of the Offering.

On February 16, 2024, the Company completed their Offering of 1,250,000 shares of common stock at a public offering price of $4.00 per share. The shares are traded on the NYSE American. Simultaneous with the closing of the Offering, the Company completed the acquisitions of Fat Shark and Rotor Riot while also issuing Red Cat 4,250,000 shares of common stock of the Company.

Accounting Standards Codification (“ASC”) 805,Business Combinations, reflects the overall principle that when an entity (the “Acquirer”) takes control of another entity (the “Target”), the fair value of the underlying exchange transaction should be used to establish a new accounting basis of the acquired entity. In accordance with this ASC, the Share Purchase Agreement will be accounted for as an acquisition of Fat Shark and Rotor Riot by the Company. In addition, because obtaining control leaves the acquirer responsible and accountable for all of the acquiree’s assets, liabilities, and operations, the acquirer should recognize and measure the assets acquired and liabilities assumed at their full fair values with limited exceptions as of the date control is obtained.

Authoritative guidance

1. ASC 805,Business Combinations (“ASC 805”)

2. ASC 820,Fair Value Measurements and Disclosures(“ASC 820”)

3. ASC 350,Intangibles — Goodwill and Other (“ASC 350”)

4. ASC 360,Property, Plant, and Equipment(“ASC 360”)

5. ASC 260,Earnings per Share (“ASC 260”)

The unaudited pro forma condensed combined financial statements are based on the Company’s audited and unaudited interim historical consolidated financial statements and Fat Shark and Rotor Riot’s audited and unaudited interim historical combined financial statements as adjusted to give effect to the Company’s acquisition by Unusual Machines.

The allocation of the purchase price used in the unaudited pro forma financial statements is based upon management’s estimate of the fair values of the assets and liabilities determined. A final allocation of the purchase price will be determined upon closing of the Share Purchase Agreement with the assistance of a third-party valuation firm. The Unaudited Pro Forma Condensed Combined Financial Statements are provided for informational purpose only and are not necessarily indicative of what the combined company’s financial position and results of operations would have actually been had the transactions been completed on the dates used to prepare these pro forma financial statements. The adjustments to fair value and the other estimates reflected in the accompanying unaudited pro forma condensed combined financial statements may be materially different from those reflected in the combined company’s consolidated financial statements subsequent to the transactions. In addition, the Unaudited Pro Forma Condensed Combined Financial Statements do not purport to project the future financial position or results of operations of the combined companies.

These unaudited pro forma condensed combined financial statements do not give effect to any anticipated synergies, operating efficiencies or cost savings that may be associated with the transactions. These financial statements also do not include any integration costs the companies may incur related to the transactions as part of combining the operations of the companies.

Note 2 — Summary of Significant Accounting Policies

The unaudited pro forma condensed combined balance sheet as of December 31, 2023, gives pro forma effect to both the completed business combination and Offering as if they had been consummated as of December 31, 2023. The unaudited proforma condensed combined statements of operations for the year ended December 31, 2023 give pro forma effect to both the business combination and Offering as if they had been consummated as of December 31, 2023. The unaudited pro forma condensed combined financial statements have been prepared in a manner consistent with the accounting policies adopted by the Company. The accounting policies followed for financial reporting on a pro forma basis are the same as those disclosed in the audited financial statements. The unaudited pro forma condensed combined financial statements do not assume any differences in accounting policies among the Company and Fat Shark and Rotor Riot.

Note 3 — Purchase Price Allocation and Goodwill

As discussed in Note 1 – Basis of Presentation, the Company entered into the Agreement with Red Cat to acquire all of the capital stock of Fat Shark and Rotor Riot.

A summary of management’s estimated purchase price and related allocation was as follows as of December 31, 2023. Per the Agreement, the final purchase price allocation will be agreed upon after closing. In addition, final fair values of assets acquired, including the valuation of any intangible assets, and liabilities assumed will be determined after closing.

The Company will engage a valuation services firm to value the intangible assets acquired once the final balances as of the closing date are provided. The allocation of the purchase price used in the unaudited pro forma financial statements is based upon management’s estimate of the fair values of the assets and liabilities determined. To the extent that the parties do not agree on the final allocation of the purchase price, a final allocation of the purchase price will be determined in accordance with Section 2.01 of Agreement with the assistance of a nationally-recognized accounting firm that is reasonably acceptable to Unusual and Red Cat. The Unaudited Pro Forma Condensed Combined Financial Statements and estimated goodwill are provided for informational purpose only and are not necessarily indicative of what the combined company’s financial position and results of operations would have actually been had the transactions been completed on the dates used to prepare these pro forma financial statements.

Note 4 — Pro Forma Transaction Accounting Adjustments

The pro forma transaction accounting adjustments are based on the Company’s preliminary estimates, valuations, and assumptions that are subject to change.

Note 5 – Related Party Transactions

Fat Shark Ltd. sells products to Rotor Riot, LLC which is included in revenue for Fat Shark and cost of goods sold for Rotor Riot. Sales totaled $493,540 during the pro forma year ended December 31, 2023. Cost of goods sold totaled $462,921 during the pro forma year ended December 31, 2023. These transactions have been eliminated as a part of the unaudited pro forma condensed combined statement of operations.

Note 6 – Reconciliation of Target Company Interim Statement of Operations to Pro Forma Statement of Operations

The following statement of operations provides a reconciliation between the Fat Shark unaudited interim statement of operations for the period ending January 31, 2024 to the Fat Shark unaudited pro forma statement of operations for the twelve months ended December 31, 2023 to conform the target company’s interim period end to the Company’s year end period ending December 31, 2023.

The following statement of operations provides a reconciliation between the Rotor Riot unaudited interim statement of operations for the period ending January 31, 2024 to the Rotor Riot unaudited pro forma statement of operations for the twelve months ended December 31, 2023 to conform the target company’s interim period end to the Company’s year ending December 31, 2023.