EDGAR 10-K Filing

Company CIK: 1956955
Filing Year: 2025
Filename: 1956955_10-K_2025_0001683168-25-001929.json

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ITEM 1. BUSINESS
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
United States Issued D825,381 7/13/2017 8/14/2018 UNMANNED AERIAL VEHICLE (Design
Canada Issued 1/10/2018 5/30/2019 UNMANNED AERIAL VEHICLE (Design)
China Issued CN304757327S 1/9/2018 8/3/2019 UNMANNED AERIAL VEHICLE (Design)
EU Issued 1/12/2018 1/12/2018 UNMANNED AERIAL VEHICLE (Design)
GB Issued 1/12/2018 1/12/2018 UNMANNED AERIAL VEHICLE (Design)
Korea Issued 30-963991 1/11/2018 7/3/2018 UNMANNED AERIAL VEHICLE (Design)
United States Issued 10,179,647 8/23/2017 1/15/2019 UNMANNED AERIAL VEHICLE (Utility)
Canada Abandoned 6/26/2018
UNMANNED AERIAL VEHICLE (Utility)
China Issued 201810895541.3 8/8/2018 3/12/2024 UNMANNED AERIAL VEHICLE (Utility)
France Issued 6/25/2018 11/6/2024 UNMANNED AERIAL VEHICLE (Utility)
Germany Issued 602018076194.2 6/25/2018 11/6/2024 UNMANNED AERIAL VEHICLE (Utility)
Switzerland Issued 6/25/2018 11/6/2024 UNMANNED AERIAL VEHICLE (Utility)
United Kingdom Issued 6/25/2018 11/6/2024 UNMANNED AERIAL VEHICLE (Utility)
United States Issued D848,383 7/13/2017 5/14/2019 PRINTED CIRCUIT BOARD (Design)
Canada Issued 1/10/2018 5/30/2019 PRINTED CIRCUIT BOARD (Design)
China Issued 304758049S 1/9/2018 8/3/2018 PRINTED CIRCUIT BOARD (Design)
EU Issued 1/12/2018 1/12/2018 PRINTED CIRCUIT BOARD (Design)
United Kingdom Issued 1/12/2018 1/12/2018 PRINTED CIRCUIT BOARD (Design)
Korea Issued 30-965570 1/11/2018 7/13/2018 PRINTED CIRCUIT BOARD (Design)
China Issued 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)
United States Issued 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)
United States Allowed 17/187,838 2/28/2021
APPARATUS FOR ATTACHING ACCESSORIES TO A FIRST-PERSON VIEW HEADSET (Utility)
United States Issued D991,255 5/17/2021 7/4/2023 HEADSET (Design)
China Issued CN308594144S 11/11/2021 4/19/2024 VR GLASSES (Design)
Canada Issued DM/218 069 11/9/2021 11/9/2021 HEADSET (Design)
EU Issued DM/218 069 11/9/2021 11/9/2021 HEADSET (Design)
Japan Issued DM/218 069 11/9/2021 11/9/2021 HEADSET (Design)
GB Issued DM/218 069 11/9/2021 11/9/2021 HEADSET (Design)
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 Registered ROTOR RIOT 5,175,159 4/4/2017 87/074,341 6/16/16 16, 25, 35, 41 Renewal due 4/4/2027
Australia Registered ROTOR RIOT 4/18/2017 12/9/16 16, 25, 35, 41 Renewal due 12/9/2026
Canada Registered ROTOR RIOT TMA1013525 1/22/2019 12/8/16 16, 25, 35, 41 Renewal due 1/22/2034
EU Registered ROTOR RIOT 5/14/2017 12/12/16 16, 25, 35, 41 Renewal due 12/12/2026
UK Registered ROTOR RIOT UK00916152688 5/14/2017 UK00916152688 12/12/16 16, 25, 35, 41 Renewal due 12/12/2026
US Registered Rotor Riot Logo 5,175,160 4/4/2017 87/074,378 6/16/16 16, 25, 35, 41 Renewal due 4/4/2027
Australia Registered Rotor Riot Logo 4/18/2017 12/9/16 16, 25, 35, 41 Renewal due 12/9/2026
Canada Registered Rotor Riot Logo TMA1013624 1/22/2019 12/8/16 16, 25, 35, 41 Renewal due 1/22/2034
EU Registered Rotor Riot Logo 5/14/2017 12/12/16 16, 25, 35, 41 Renewal due 12/12/2026
UK Registered Rotor Riot Logo UK00916152837 5/14/2017 UK00916152837 12/12/16 16, 25, 35, 41 Renewal due 12/12/2026
US Registered BYTE FROST 6,318,131 4/13/2021 88/574,951 8/12/19 AOU due 4/13/2027
US Registered DOMINATOR 5,446,501 4/17/2018 87/513,286 6/30/17 Renewal due 4/17/2028
US Registered FAT SHARK 6,037,513 4/21/2020 87/513,291 6/30/17 9, 12 AOU due 4/21/2026
Australia Registered FAT SHARK 7/18/2018 7/12/17 9, 12 Renewal due 7/12/2027
UK Registered FAT SHARK UK00917653122 6/12/2018 UK00917653122 12/27/17 9, 12 Renewal due 12/28/2027
EU Registered FAT SHARK 6/12/2018 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 Registered FAT SHARK 3/7/2019 12/27/17 Renewal due 3/6/2029
China Registered FAT SHARK 12/7/2018 12/27/17 Renewal due 12/6/2028
S. Korea Registered FAT SHARK 40-1429232 12/20/2018 40-20170165133 12/22/17 9, 12 Renewal due 12/20/2028
Japan Registered FAT SHARK 3/8/2019 12/11/17 9, 12, 28 Renewal due 3/8/2029
US Registered Shark Head Logo 5,921,613 11/26/2019 87/792,917 2/10/18 9, 25 AOU due 11/26/2025
UK Registered Shark Head Logo UK00917938426 12/26/2018 UK00917938426 7/31/18 9, 12, 25 Renewal due 7/31/2028
EU Registered Shark Head Logo 12/26/2018 7/31/18 9, 12, 25 Renewal due 7/31/2028
China Registered Shark Head Logo 4/7/2019 7/25/18 Renewal due 4/6/2029
China Registered Shark Head Logo 4/7/2019 7/25/18 Renewal due 4/6/2029
China Registered Shark Head Logo 4/7/2019 7/25/18 Renewal due 4/6/2029
US Registered SHARK BYTE 6,631,683 2/1/2022 90/337,500 11/23/20 AOU due 2/1/2028
UK Registered SHARK BYTE UK00003597165 9/3/2021 UK00003597165 2/18/21 Renewal due 2/18/2031
EU Registered SHARK BYTE 11/5/2021 2/19/21 Renewal due 2/19/2031
China Registered SHARK BYTE 10/14/2022 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 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.

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ITEM 1A. RISK FACTORS
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.

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ITEM 1B. UNRESOLVED STAFF COMMENTS
Item 1B. Unresolved Staff Comments
None.

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ITEM 2. PROPERTIES
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. Muñoz Rivera, Suite2200, San Juan, Puerto Rico 00901 which we sublet from Red Cat on month-to-month basis.

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ITEM 3. LEGAL PROCEEDINGS
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.

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ITEM 4. MINE SAFETY DISCLOSURE
Item 4. Mine Safety Disclosures
None.
PART II

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ITEM 5. MARKET FOR REGISTRANT'S COMMON EQUITY
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.

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ITEM 6. SELECTED FINANCIAL DATA
Item 6. Selected Financial Data
As a smaller reporting company, we are not required to provide this information.

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ITEM 7. MANAGEMENT'S DISCUSSION AND ANALYSIS
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.

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ITEM 7A. QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISK
Item 7A. Quantitative and Qualitative Disclosures about Market Risk
As a smaller reporting company, we are not required to provide this information.

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ITEM 8. FINANCIAL STATEMENTS AND SUPPLEMENTARY DATA
Item 8. Financial Statements and Supplementary Data
UNUSUAL MACHINES, INC.
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
Consolidated Statement of Changes in Stockholders’ Equity for the years ended December 31, 2024 and 2023
Consolidated Statement of Cash Flows for the years ended December 31, 2024 and 2023
Consolidated Notes to Financial Statements
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 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
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
March 27, 2025
Unusual Machines, Inc.
Balance Sheets
December 31,
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.
Unusual Machines, Inc.
Statements of Operations
Year Ended December 31,
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 ) (2,383,462 )
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 ) (2,383,462 )
Income tax benefit (expense) 13,360 -
Net loss $ (31,980,468 ) $ (2,383,462 )
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.
Unusual Machines, Inc.
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 Common Stock Additional Paid-In Accumulated Total Stockholders’
Shares Value Shares Value Shares Value Shares Value Capital Deficit Equity
Balance, December 31, 2022 - $ - $ 1 - $ - 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 - -
Net loss - - - - - - - - - (2,383,462 ) (2,383,462 )
Balance, December 31, 2023 - $ - $ 2 - $ - 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
Net loss - - - - - - - - - (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.
Unusual Machines, Inc.
Statements of Cash Flows
Year Ended December 31,
Cash flows from operating activities:
Net loss $ (31,980,468 ) $ (2,383,462 )
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.
Unusual Machines, Inc.
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.
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.
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.
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.
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.
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 not 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.
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.
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.
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 )
Net loss $ (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.
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 $ 570 $ 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
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
$ 101,133 $ (33,313 ) $ 67,820
105,177 (25,468 ) 79,709
109,037 (15,985 ) 93,052
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.
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 not 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).
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.
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.
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.
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.
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.
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.
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.
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)
December 31, December 31,
US $ (31,150,444 ) $ -
Foreign (843,384 ) (2,383,462 )
Pretax income (loss) from operations $ (31,993,828 ) $ (2,383,462 )
The components of income tax expense (benefit) as of December 31, 2024 and 2023 are:
Schedule of income (loss) income tax expense (benefit)
December 31, December 31,
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 ) $ -
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
December 31, December 31,
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:
December 31, December 31,
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.
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.
Director
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.
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
Brian Hoff 100,000
Andrew Camden 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.

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ITEM 9. CHANGES IN AND DISAGREEMENTS WITH ACCOUNTANTS
Item 9. Changes and Disagreements with Accountants on Accounting and Financial Disclosure
None.

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ITEM 9A. CONTROLS AND PROCEDURES
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.

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ITEM 9B. OTHER INFORMATION
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
December 13, 2024
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
December 13, 2024
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
December 13, 2024
November 2025 through December 2025
Y
Up to 15,000 shares of Common Stock from November vesting for tax purposes
Brian Hoff
Chief Financial Officer
Adopt
December 13, 2024
April 2025 through December 2025
Y
Up to 83,775 shares of Common Stock for tax purposes
Brian Hoff
Chief Financial Officer
Adopt
December 13, 2024
May 2025 through December 2025
Y
Up to 17,500 shares of Common Stock from May vesting for tax purposes
Brian Hoff
Chief Financial Officer
Adopt
December 13, 2024
August 2025 through December 2025
Y
Up to 8,750 shares of Common Stock from August vesting for tax purposes
Brian Hoff
Chief Financial Officer
Adopt
December 13, 2024
November 2025 through December 2025
Y
Up to 8,750 shares of Common Stock from November vesting for tax purposes
Andrew Camden
Chief Operating Officer
Adopt
December 13, 2024
May 2025 through December 2025
Y
Up to 17,500 shares of Common Stock from May vesting for tax purposes
Andrew Camden
Chief Operating Officer
Adopt
December 13, 2024
August 2025 through December 2025
Y
Up to 8,750 shares of Common Stock from August vesting for tax purposes
Andrew Camden
Chief Operating Officer
Adopt
December 13, 2024
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).

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ITEM 10. DIRECTORS, EXECUTIVE OFFICERS AND CORPORATE GOVERNANCE
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
Brian Hoff Chief Financial Officer
Andrew Camden Chief Operating Officer
Robert Lowry Director
Sanford Rich Director
Jeffrey Thompson Director
Cristina A. Colón, Esq. Director
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. Colón, Esq., Director
Ms. Colón has a served as a director of the Company since August 2022. Ms. Colón 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. Colón has also been the owner/operator Café de La Plaza, a restaurant located in Palmas del Mar, Puerto Rico, since 2009. From 2019 to 2021, Ms. Colón served as an investor relations specialist at OptimizeRX, a medical technology company. Ms. Colón’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. Colón 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. Colón. 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. Colón, 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. Colón (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.

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ITEM 11. EXECUTIVE COMPENSATION
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)
250,000
131,000
733,600
-
-
1,114,600
Chief Executive Officer
20,833
-
-
-
-
20,833
Brandon Torres Declet (2)
-
-
-
-
-
-
Former Chief Executive Officer
229,167
-
64,344
-
62,500
356,011
Brian Hoff (3)
250,000
121,220
449,600
-
-
820,820
Chief Financial Officer
250,000
-
-
-
-
250,000
Andrew Camden (4)
167,094
6,678
158,000
-
-
331,772
Chief Operating Officer
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 - -
Brian Hoff 04/30/2024 46,248 $ 777,891
11/05/2024 - -
Andrew Camden 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.
Employment arrangement with Andrew Camden, Chief Operating Officer
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 19th 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.

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ITEM 12. SECURITY OWNERSHIP OF CERTAIN BENEFICIAL OWNERS
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
Common Stock
869,439
5.17%
Brian Hoff
Common Stock
443,000
2.63%
Andrew Camden
Common Stock
201,000
1.19%
Jeffrey Thompson (2)
Common Stock
326,818
1.94%
Sanford Rich
Common Stock
119,600
0.71%
Robert Lowry
Common Stock
74,406
0.44%
Cristina Colón
Common Stock
46,338
0.28%
All executive officers and directors as a group (6 persons)
Common Stock
1,879,601
11.17%
Other 5% Holders
N/A
Common Stock
-
-%
(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.

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ITEM 13. CERTAIN RELATIONSHIPS AND RELATED TRANSACTIONS
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.

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ITEM 14. PRINCIPAL ACCOUNTING FEES AND SERVICES
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)
Audit fees(1) $ 155 $ 62
Tax fees - -
All other fees(2) -
Total fees $ 176 $ 62
________________________
(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.
PART IV

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ITEM 15. EXHIBITS, FINANCIAL STATEMENT SCHEDULES
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 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 INDEX
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 +
8-K
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
8-K
2.1
4/23/24
3.1
Articles of Incorporation
8-K
3.1
4/23/24
3.2
Amended and Restated Bylaws
8-K
3.1
10/8/24
3.2(a)
Amendment No. to Amended and Restated Bylaws
8-K
3.1
2/5/25
3.3
Certificate of Designations, Preferences and Rights of Series A Convertible Preferred Stock
8-K
3.1
7/22/24
3.4
Certificate of Designation of Series B Convertible Preferred Stock
8-K
3.3
4/23/24
3.5
Certificate of Designations, Preferences and Rights of Series C Convertible Preferred Stock
8-K
3.1
8/22/24
4.1
Form of 8% Promissory Note +
8-K
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
10-K
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
8/7/23
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
8/7/23
10.4
Form of Patent Assignment
S-1/A
10.6
8/7/23
10.5
Form of Trademark Assignment
S-1/A
10.7
8/7/23
10.6
Form of Restricted Stock Unit Agreement
S-1/A
10.18
8/7/23
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
8-K
10.9
2/22/24
10.13
Management Services Agreement #
8-K
10.1
5/6/24
10.14
Form of Restricted Stock Agreement
8-K
10.2
5/6/24
10.15
Form of Exchange Agreement +
8-K
10.1
7/22/24
10.16
Form of Closing Date working Capital Agreement and Consent +
8-K
10.2
7/22/24
10.17
Form of Restricted Stock Agreement
8-K
10.1
7/31/24
10.18
4% Convertible Promissory Note - Titan Multi-Strategy Fund I, Ltd.
S-1
10.20
9/11/24
10.19
4% Convertible Promissory Note - Eleven Ventures LLC +
S-1
10.21
9/11/24
10.20
Common Stock Purchase Warrant - Titan Multi-Strategy Fund I, Ltd. +
S-1
10.22
9/11/24
10.21
Common Stock Purchase Warrant - Eleven Ventures LLC +
S-1
10.23
9/11/24
10.22
Exchange Agreement - Titan Multi-Strategy Fund I, Ltd. +
S-1
10.24
9/11/24
10.23
Exchange Agreement - Eleven Ventures LLC +
S-1
10.25
9/11/24
10.24
Registration Rights Agreement - Titan Multi-Strategy Fund I, Ltd. +
S-1
10.26
9/11/24
10.25
Registration Rights Agreement - Eleven Ventures LLC +
S-1
10.27
9/11/24
10.26
Letter Agreement - Titan Multi-Strategy Fund I, Ltd.
8-K
10.1
10/8/24
10.27
Letter Agreement - Eleven Ventures LLC
8-K
10.2
10/8/24
10.28
Amendment No.1 to 2022 Equity Incentive Plan, as amended #
8-K
10.3
10/8/24
10.29
Form of Restricted Stock Agreement
8-K
10.1
10/24/24
10.30
Form of Securities Purchase Agreement
8-K
10.1
10/30/24
10.31
Placement Agency Agreement
8-K
10.2
10/30/24
10.32
Registration Rights Agreement
8-K
10.3
10/30/24
10.33
Form of Common Stock Purchase Warrant
8-K
10.4
10/30/24
10.34
Form of Placement Agent Warrant
8-K
10.5
10/30/24
10.35
Form of Lock-up Agreement
8-K
10.6
10/30/24
10.36
Form of Restricted Stock Agreement
8-K
10.1
11/7/24
10.37
Form of Advisory Agreement
S-1
10.28
11/27/24
10.38
Form of Restricted Stock Agreement
8-K
10.1
1/16/25
10.39
Agreement and Plan of Merger and Reorganization dated February 1, 2025
8-K
10.1
2/4/25
14.1
Code of Ethics
S-1/A
10.17
8/7/23
16.1
Letter from Salberg & Company, P.A.
8-K/A
7.1
8/15/24
19.1
Insider Trading Policy
10-K
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
10-K
97.1
3/22/24
101.INS
Inline XBRL Instance Document
(1)
101.SCH
Inline XBRL Taxonomy Extension Schema
(1)
101.CAL
Inline XBRL Taxonomy Extension Calculation Linkbase
(1)
101.DEF
Inline XBRL Taxonomy Extension Definition Linkbase
(1)
101.LAB
Inline XBRL Taxonomy Extension Label Linkbase
(1)
101.PRE
Inline XBRL Taxonomy Extension Presentation Linkbase
(1)
Cover Page Interactive Data File (formatted as inline XBRL and contained in Exhibit 101).
(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.