Table of Contents

As filed with the Securities and Exchange Commissionon November 27, 2024

 

Registration No. 333-_______

 

UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549

 

 

FORM S-1
REGISTRATION STATEMENT

UNDER THE SECURITIES ACT OF 1933

Unusual Machines, Inc.

(Exact name of Registrant as specified in itscharter)

 

Nevada		3663		66-0927642
(State or other jurisdiction of incorporation or organization)		(Primary Standard Industrial Classification Code Number)		(I.R.S. Employer Identification Number)

 

4677 L B McLeod Rd

Suite J

Orlando, FL 32811

(855) 921-4600

(Address, including zip code, and telephonenumber, including area code, of Registrant’s principal executive offices)

 

Allan Evans
Chief Executive Officer
Unusual Machines, Inc.

4677 L B McLeod Rd

Suite J

Orlando, FL 32811

(855) 921-4600

(Name, address, including zip code, and telephonenumber, including area code, of agent for service)

 

Copies to:

Michael Harris, Esq.
Edward Schauder, Esq.

Briana Reed, Esq.

Nason, Yeager, Gerson, Harris & Fumero, P.A.
3001 PGA Boulevard, Suite 305
Palm Beach Gardens, Florida 33410
(561) 686-3307

 

Approximate date of commencement of proposedsale to the public: As soon as practicable after the effective date of this registration statement.

 

If any of the securities being registered on thisForm are to be offered on a delayed or continuous basis pursuant to Rule 415 under the Securities Act of 1933, check the following box.☒

 

If this Form is filed to register additional securitiesfor an offering pursuant to Rule 462(b) under the Securities Act of 1933, check the following box and list the Securities Act registrationstatement number of the earlier effective registration statement for the same offering. ☐

 

If this Form is a post-effective amendment filedpursuant to Rule 462(c) under the Securities Act of 1933, check the following box and list the Securities Act registration statement numberof the earlier effective registration statement for the same offering. ☐

 

If this Form is a post-effective amendment filedpursuant to Rule 462(d) under the Securities Act of 1933, check the following box and list the Securities Act registration statement numberof the earlier effective registration statement for the same offering. ☐

 

Indicate by check mark whether the Registrantis a large accelerated filer, an accelerated filer, a non-accelerated filer, a smaller reporting company, or an emerging growth company.See the definitions of “large accelerated filer,” “accelerated filer”, “smaller reporting company”and “emerging growth company” in Rule 12b-2 of the Exchange Act of 1934.

 

Large accelerated filer	☐	Accelerated filer	☐
Non-accelerated filer	☒	Smaller reporting company	☒
		Emerging growth company	☒

 

If an emerging growth company, indicate by checkmark if the registrant has elected not to use the extended transition period for complying with any new or revised financial accountingstandards provided pursuant to Section 7(a)(2)(B) of the Securities Act. ☐

 

The Registrant hereby amends this RegistrationStatement on such date or dates as may be necessary to delay its effective date until the Registrant shall file a further amendment whichspecifically states that this Registration Statement shall thereafter become effective in accordance with Section 8(a) of the SecuritiesAct of 1933, or until the Registration Statement shall become effective on such date as the Securities and Exchange Commission, actingpursuant to Section 8(a), may determine.

 

The information in this Prospectus is not completeand may be changed. The Selling Stockholders may not sell these securities until the Registration Statement filed with the Securitiesand Exchange Commission is declared effective. This Prospectus is not an offer to sell these securities and it is not soliciting an offerto buy these securities in any state where the offer or sale is not permitted.

 

 

 

SUBJECT TO COMPLETION,DATED November 27, 2024

 

UNUSUAL MACHINES, INC.

PROSPECTUS

 

3,577,568 Shares of Common stock

 

On October 30, 2024,Unusual Machines, Inc. (the “Company” or “Unusual Machines”) closed a financing in which it received gross proceedsof $1,955,000 before deducting fees to the placement agent and other offering expenses payable by the Company (the “Private Placement).In the Private Placement, the Company executed a Securities Purchase Agreements (the “Purchase Agreement”) with accreditedinvestors (each, an “Investor” and together the “Investors”), under which the Investors purchased an aggregateof 1,286,184 units at a per unit purchase price of $1.52 per unit. Each unit consisted of one share of common stock, par value $0.01 pershare (the “Common Stock”) and one warrant to purchase one share of the Company’s Common Stock at an exercise priceof $1.99 per share (each an “Investor Warrant”) and collectively, the Investor Warrants”).

 

Allan Evans, the Company’s Chief ExecutiveOfficer and Sanford Rich and Robert Lowry, each a member of the Company’s Board of Directors, invested an aggregate of $250,000in the Private Placement on identical terms to the other Investors. Subsequently, in accordance with the Rules of the NYSE American, thesethree directors increased their purchase price. See “The Private Placement”.

 

On October 29, 2024,as required by the Purchase Agreement, the Company also entered into a Placement Agency Agreement (the “PA Agreement”) withDominari Securities LLC (the “Placement Agent”) to serve as the Placement Agent for the Offering.

 

Pursuant to the PA Agreement,the Company paid the Placement Agent, a cash fee equal to 8% of the gross proceeds raised in the Private Placement or $156,400 and warrantsto purchase 102,895 shares of our Common Stock equal to 8% of the aggregate number of shares of Common Stock sold in the Offering (the“Placement Agent Warrants,” and together with the Investor Warrants, collectively, the “Warrants”). The PlacementAgent Warrants have the same terms as the Investor Warrants.

 

In this Prospectus, we refer to each Investor,the Placement Agent and two of the Company’s officers as a “Selling Stockholder” and collectively, the “SellingStockholders”.

 

This Prospectus relates to the offering and resaleby the Selling Stockholders, of 3,577,568 shares of our Common Stock (the “Shares”) comprised of (i) 1,286,184 shares of ourCommon Stock from the Private Placement (ii) 602,305 shares of our Common Stock owned by the Company’s officers and directors, (iii)1,389,079 shares issuable upon the full exercise of the Warrants from the Private Placement, and (iv) 300,000 shares of our common stockissued to three advisors of the Company pursuant to advisory agreements.

 

We are obligated to register the Shares and Warrantssold in the Private Placement pursuant to a Registration Rights Agreement that we entered into the holders of these securities on October30, 2024. We are also registering the Shares offered by the Company’s officers and directors to permit them to pay income taxesstemming from grants of Shares and certain shares of our advisors in relation to a consulting agreement.

 

We refer to the Shares and Warrants together asthe “Securities.” For a detailed description of each of the transactions in which the Selling Stockholders obtained the Securitiesbeing registered in the Prospectus and the terms of such Securities.

 

The Company is not selling any securities in thisoffering, and therefore will not receive any proceeds from the sale of the Securities by the Selling Stockholders. To the extent thatShares are issued upon a cash exercise of the Warrants, we will receive the proceeds. See “Use of Proceeds.”

 

We have agreed to pay the expenses of the registrationof the Shares offered and sold under the Registration Statement by the Selling Stockholders. Each Selling Stockholder will pay any commissionsor discounts applicable to the Shares it sells.

 

Our Common Stock is traded on the NYSE Americanunder the symbol “UMAC.” On November 25, 2024, the last reported sale price of our Common Stock on the NYSE American was$5.91.

 

Investing in our securities involves variousrisks. See “Risk Factors” beginning on page 6 of this Prospectus for a discussion of information that should be consideredin connection with an investment in our securities.

 

Neither the Securities and Exchange Commissionnor any state securities commission has approved or disapproved of these securities or determined if this Prospectus is truthful or complete.Any representation to the contrary is a criminal offense.

 

The date of this Prospectus is ___________ __,2024

 

 

 

Table of Contents

 

	Page
CAUTIONARY NOTE REGARDING FORWARD-LOOKING STATEMENTS	ii
PROSPECTUS SUMMARY	1
THE OFFERING	3
RISK FACTORS	6
USE OF PROCEEDS	35
DIVIDEND POLICY	35
DETERMINATION OF OFFERING PRICE	35
CAPITALIZATION	36
THE PRIVATE PLACEMENT	37
SELLING STOCKHOLDERS	38
PLAN OF DISTRIBUTION	41
BUSINESS	43
MANAGEMENT’S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS	49
MANAGEMENT	57
CORPORATE GOVERNANCE	59
EXECUTIVE COMPENSATION	63
MARKET FOR REGISTRANT’S COMMON EQUITY AND RELATED STOCKHOLDER MATTERS	67
RELATED PARTY TRANSACTIONS	68
PRINCIPAL STOCKHOLDERS	69
DESCRIPTION OF OUR SECURITIES	70
LEGAL MATTERS	73
EXPERTS	73
WHERE YOU CAN FIND MORE INFORMATION	73
INDEX TO FINANCIAL STATEMENTS	74

 

You should rely only on information containedin this Prospectus. We have not authorized anyone to provide you with information that is different from that contained in this Prospectus.The Selling Stockholders are not offering to sell or seeking offers to buy securities in jurisdictions where offers and sales are notpermitted. We are responsible for updating this Prospectus to ensure that all material information is included and will update this Prospectusto the extent required by law.

 

 

 

 

 

CAUTIONARY NOTE REGARDING FORWARD-LOOKING STATEMENTS

 

This Prospectus, containsforward-looking statements that involve risks and uncertainties. We make such forward-looking statements pursuant to the safe harbor provisionsof the Private Securities Litigation Reform Act of 1995 and other federal securities laws. All statements other than statements of historicalfacts contained in this Prospectus are forward-looking statements. In some cases, you can identify forward-looking statements by terminologysuch as “may”, “will”, “should”, “expects”, “intends”, “plans”,“anticipates”, “believes”, “estimates”, “predicts”, “potential”, “continue”or the negative of these terms or other comparable terminology.

 

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

 

	·	our ability to manage our rapid growth and organizational change effectively;
	·	changes in the political and regulatory environment and in business and economic conditions in the United States and globally;
	·	our ability to list products on the U.S. Department of Defense’s Blue UAS Framework;
	·	any failure of the United States to impose taxes on Chinese drones and drone parts;
	·	the failure of our partnership with a drone manufacturer to produce orders;
	·	The market and sales success of our existing and any new products;
	·	our ability to raise capital when needed and on acceptable terms;
	·	the sufficiency of our existing cash and cash equivalents to meet our working capital and capital expenditure needs over the next 12 months;
	·	our ability to make acquisitions and integrate acquired businesses into our company;
	·	our limited operating history;
	·	our ability to attract and retain qualified employees and key personnel;
	·	geopolitical conflicts in Ukraine and Israel;
	·	our ability to develop and maintain our brand cost-effectively; and
	·	the other factors set forth in “Risk Factors” beginning on page 6 of this Prospectus.

 

You should read this Prospectus and the documentswe have filed as exhibits to the Registration Statement, of which this Prospectus is a part, completely and with the understanding thatour actual future results may be materially different from what we expect. You should not assume that the information contained in thisProspectus or any prospectus supplement is accurate as of any date other than the date on the front cover of those documents.

 

Risks, uncertainties and other factors that maycause our actual results, performance or achievements to be different from those expressed or implied in our written or oral forward-lookingstatements may be found in this Prospectus under the heading “Risk Factors.”

 

Forward-looking statements speak only as of thedate they are made. You should not put undue reliance on any forward-looking statements. We assume no obligation to update forward-lookingstatements to reflect actual results, changes in assumptions or changes in other factors affecting forward-looking information, exceptto the extent required by applicable securities laws. If we do update one or more forward-looking statements, no inference should be drawnthat we will make additional updates with respect to those or other forward-looking statements. New factors emerge from time to time,and it is not possible for us to predict which factors will arise. In addition, we cannot assess the impact of each factor on our businessor the extent to which any factor, or combination of factors, may cause actual results to differ materially from those contained in anyforward-looking statements. We qualify all of the information presented in this Prospectus particularly our forward-looking statements,by these cautionary statements.

 

 

 

 

 

PROSPECTUS SUMMARY

 

Background of Unusual Machines

 

Unusual Machines is a Nevada corporation originallyincorporated in Puerto Rico with our principal place of business in Orlando, Florida. The Company reincorporated from Puerto Rico to Nevadaon April 22, 2024.

 

Initial Public Offering

 

On February 16, 2024, the Company closed its initialpublic offering (the “IPO”) of 1,250,000 shares of Common Stock at a public offering price of $4.00 per share. The sharesof Common Stock are traded on the NYSE American. Simultaneous with the closing of the IPO, the Company acquired Fat Shark Holdings Ltd.(“Fat Shark”) and Rotor Riot LLC (the “Rotor Riot”) from Red Cat.

 

The Business Combination and Business Overview

 

Under the terms of Share Purchase Agreement withRed Cat, (the “Purchase Agreement”), the Company purchased Rotor Riot and Fat Shark subsidiaries for $22.1 million (the “PurchasePrice”) comprised of (i) $1.1 million in cash, (ii) a $2.0 million promissory note (the “Original Note”) issued by theCompany 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 shareIPO price. On July 22, 2024, the Company finalized the working capital adjustment as stipulated in the Purchase Agreement, which resultedin an increase in the overall purchase price by an additional $2.0 million. The Company agreed to increase the principal amount of theOriginal Note for the working capital adjustment, which increased the total Note Payable to $4.0 million.

 

Fat Shark is a leader in designing and manufacturingultra-low latency first-person-view (“FPV”) video goggles for drone pilots, which it markets towards retail distributors includingRotor Riot.

 

Rotor Riot is a rapidly growing e-commerce marketplace,backed by the largest community of FPV drone pilots in the world and retails FPV drones and goggles, parts, tools, drone components, andaccessories manufactured by third-parties.

 

Unusual Machines specializes in the productionand sale of small drones and essential components and with the acquisitions of Fat Shark and Rotor Riot, it brings brand recognition anda strong curated retail channel in the FPV drone market segment. Unusual Machines intends to build its business both organically and throughstrategic acquisitions that leverage our retail business to onshore production of critical drone components. With the transition to onshoringproduction of drone components, the Company is expanding its business to sell drone parts to other businesses for customers that requirea domestic supply chain including the United States Department of Defense. In this Prospectus, we refer to that business as “B2B.”

 

The Drone Industry

 

The drone industry continues to expand to becomea powerful business tool and recreational activity, with growth occurring broadly and across our targeted industries. According to DroneIndustry Insights, the global drone market is expected to grow to $54.6 billion by 2030, with the commercial market growing at a 7.7%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 acquisitiontargets that are cash flow positive and either sell drone parts or allow us to vertically integrate the production of drone parts. TheCompany believes that very promising, private companies (such as those the company will likely target) are in many instances underfundedand missing out on the ability to go public and bring their innovative products and solutions to a larger set of customers globally. Webelieve 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

 

Fat Shark and Rotor Riot principally operate inthe FPV segment of the drone industry. This segment focuses on drones piloted with wearable display devices. These are head mounted displays(“HMDs”) or goggles for drone pilots. These goggles give pilots FPV perspective to control their drone in flight. This isa unique experience where the pilot is interacting with an aircraft through visual immersion. This experience is accomplished by livestreaming footage from a camera mounted on the nose of the drone directly into specially designed goggles worn by the pilot. The imageis transmitted via radio (traditionally analog but increasingly digital) to the pilot. The drone remote control unit, the drone, and theFPV goggles are all interconnected via radio. This effect requires sophisticated electronics that transmit visual information with sufficientspeed and reliability to allow pilot control over the drone in real-time. Pilots routinely achieve speeds of over 90 mph in racing andother 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 acrobaticsand exploring the environment around the aircraft through the HMD. FPV racing describes a spectator sport where pilots fly their dronesin competitions through a series of obstacles, flags, and gates in a racetrack. Cinema photography is the process of viewing and recordinga subject matter from the air from the viewpoint of the pilot. Defense is a newer market segment characterized by the use cases emergingin the Ukrainian conflict.

 

Plans for Growth, Development, and Expansion

 

The Company’s initial revenues have beengenerated from sales to consumers or what we call “B2C.” In the quarter ended September 30, 2024, the Company generated itsinitial B2B sales to a European customer.

 

Unusual Machines plans to strengthen its marketposition through continued organic revenue growth. In parallel, the Company intends to aggressively invest in the extension of their businessfrom just B2C sales to B2B sales of drone components.

 

On August 7, 2024, Unusual Machines’ Brave7 controller became listed on the United States Department of Defense’s Blue UAS Framework (the “Blue List”) for droneparts. Following that key achievement, Unusual Machines launched commercial sales of its Brave F7 Flight Controller which was the firstflight controller for first-person view drones to be listed. As of October 11, 2024, we had purchase orders for approximately 7,000 Brave7s including 6,600 from a European customer. We expect that one or two additional drone components may be added to the Blue List thisquarter.

 

Unusual Machines’ business strategy includes(i) accelerating its B2B business, (ii) increasing its overall customer base with its products and rapid adoption; (iii) investing innew products and IP, starting with the Fat Shark and Rotor Riot acquisitions that were completed with our IPO; (iv) expanding and growingUnusual Machine’s customer base and revenue streams from its existing customer base using a “land-and-expand” modelthat establishes initial relationships and grows those relationships through the provision of high quality products and services; (v)enhancing the Company’s products to improve the integration of third-party solutions; and (vi) seeking strategic partnerships andsponsorships with companies that want access to the FPV community.

 

For more information, see “Business”beginning on page 43 of this Prospectus.

 

 

 

 

THE OFFERING

 

Issuer		Unusual Machines, Inc., a Nevada corporation
Securities offered by the Selling Stockholders		A total of 3,577,568 shares of our Common Stock. This includes (i) 1,286,184 shares of our Common Stock from the Private Placement and presently outstanding, (ii) 1,389,079 shares issuable upon the full exercise of the Warrants from the Private Placement, (iii) 602,305 shares of our Common Stock owned by the Company’s officers and directors, and (iv) 300,000 shares of our common stock issuable to three advisors of the Company pursuant to advisory agreements. See “Selling Stockholders” beginning on page 38 for more information.
Total Common Stock outstanding after this offering(1)		9,289,559 shares of Common Stock.
Use of Proceeds		We will not receive any proceeds from the sale of the Securities covered by this Prospectus, except from the exercise of the warrants. We intend to use any proceeds from the exercise of warrants for working capital and general corporate purposes.
Risk Factors		Investing in our Common Stock involves a high degree of risk. For a discussion of factors to consider before deciding to invest in our Common Stock, you should carefully review and consider the “Risk Factors” beginning on page 6 of this Prospectus.

 

(1)

The number of shares of our Common Stock to be outstanding after this offering assumes 6,184,983 outstanding as of September 30, 2024 (notwithstanding any beneficial ownership limitations) and (i) 1,286,184 shares of common stock from the Private Placement, (ii) 1,389,079 Shares are issued upon the full exercise of the Warrants from the Private Placement, (iii) 129,313 shares of common stock issued to Executive Officers and Directors after September 30, 2024 and included in this offering, and (iv) 300,000 shares of common stock related to compensation for advisor agreements (the “Advisory Shares”). The Advisory Shares vest 50% upon November 22, 2024 and 50% upon May 22,2024. Excludes the following:

 

	·	4,250,000 shares of our Common Stock issuable upon conversion of outstanding Series A preferred stock (the “Series A”);
	·	250,000 shares of our Common Stock issuable upon conversion of outstanding Series B preferred stock (the “Series B”);
	·	630,000 shares of our Common Stock issuable upon conversion of outstanding Series C preferred stock (the “Series C”);
	·	692,500 shares issuable upon the full exercise of other warrants from our IPO and Series C;
	·	1,507,538 shares issuable upon the full conversion of the New Notes;
	·	330,000 shares issuable upon the full exercise of stock options issued to employees under our 2022 Equity Incentive Plan;
	·	50,000 shares issued to our Chief Executive Officer in October 2024 not included in this offering; and
	·	Future equity grants to our officers and independent directors. See “Executive Compensation”.

 

Summary Risk Factors

 

Our business and aninvestment 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 ourBusiness 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.
	·	The Company may be unable to repay its indebtedness.
	·	We will begin to amortize our intangibles, which will result in a non-cash charge going forward and until we do a valuation, the amount is uncertain and the future charge may or may not be material.

 

 

 

 

	·	Further we have substantial goodwill on our balance sheet and expect that for the fourth quarter of 2024 we will impair our goodwill, which impairment could be material.
	·	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 Fat Shark and Rotor Riot 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.

  

Risks Related to Our Sale of Drone-Related Products and Operationsin 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.
	·	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 printed circuit boards (“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.
	·	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 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.
	·	Failure to have our drone components added to the Blue List will materially and adversely affect our B2B business.
	·	Rising threats of international tariffs, including tariffs applied to our U.S. made drone components by European countries, may materially and adversely affect our business.
	·	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 we fail to comply with U.S. 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

 

	·	Because the Purchase Price for Fat Shark and Rotor Riot exceeded an independent valuation that Red Cat received for the enterprise value of the target companies, you may lose all or part of your investment.
	·	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.
	·	An active trading market for our Common Stock may not develop.
	·	Because our sole remedy under the Purchase Agreement in the event of any breaches of representations and warranties is to cancel some or all of the 125,000 shares of our Common Stock held by Mr. Jeffrey Thompson, the value of such shares may be an insufficient remedy.
	·	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 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.
	·	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 price.
	·	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 Articles of Incorporation contains certain provisions which may result in difficulty in bringing actions against or on behalf of the Company or its affiliates.

 

 

 

 

RISK FACTORS

 

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

 

Risks Related to our Business and FinancialCondition

 

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

 

We completed our acquisitionsof Fat Shark and Rotor Riot simultaneously with the closing of our IPO in February 2024. Both companies, prior to the completion of theacquisitions, 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, is joining us. Our managementteam will be headed by our executive officers including Andrew Camden, our new Chief Operating Officer who joined us from Rotor Riot togetherwith individuals from Fat Shark and Rotor Riot, and our operations going forward are therefore subject to ordinary integration risks wheretwo companies and two cultures are combined. Further, we may not accurately forecast customer behavior and recognize or respond to emergingtrends, changing preferences or competitive factors facing us, and, therefore, we may fail to make accurate financial forecasts. Our currentand future expense levels are based largely on our budgeted plans and estimates of future revenue. Similarly, if we are able to raiseadditional funds in future financing transactions, we may use a portion of those proceeds to acquire other operating businesses in ourindustry or in related industries to facilitate strategic growth and build our market presence and revenue potential. If we do acquireone or more businesses in the future, we may be unable to adjust our spending in a timely manner to compensate for any unexpected revenueshortfall, which could then force us to curtail our business operations or plan of operations or acquisitions.

 

Additionally, our currentrevenue projections are based largely on customer and partner relationships and contracts that are still the subject of negotiation, theresults of which remain uncertain. In addition to having no experience as a public company, our new operations will be subject to therisk of a lack of diversification, as today we are limited to drone products designed for consumer or recreational use rather than militaryor industrial applications. In the future, we may diversify our products beyond the consumer and recreational use but the timeline andsuccess of those efforts are uncertain. Our new subsidiaries will lack the support they previously had in terms of their product developmentand production efforts, as they can no longer access the more vertically integrated resources that were available to them at Red Cat.The risk of this occurring will intensify if a recession occurs in the U.S. or global economy, as our future business is aimed at consumerswhose spending patterns will likely decline as a result of inflation and the prospect of an economic downturn.

 

Fat Shark and Rotor Riotmust be considered in light of the uncertainties, risks, expenses, and difficulties frequently encountered by companies in their earlystages of operations, integration and growth process. Due to these contingencies, we may be unable to achieve or maintain profitabilityin some or all of our business segments in a timely manner or at all.

 

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

 

Since their acquisition by Red Cat in 2020, FatShark and Rotor Riot incurred net losses for each reported quarter with the exception of Fat Shark which reported a small net income inthe quarter ended July 31, 2022. Further, Unusual Machines was formed in July 2019 and has not conducted any active business. Followingour acquisition of Fat Shark and Rotor Riot, their operations constitute our business. Further, Fat Shark had lower revenues in fiscalyear 2023 compared to fiscal year 2022, and Rotor Riot had higher net losses in fiscal year 2023 compared to fiscal year 2022, and generallyexperiences fluctuating revenue as a result of recurring seasonal sales cycles. We will need to generate higher revenues and control operatingcosts 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 theforeseeable future and we expect costs to increase in future periods as we expend substantial financial and other resources on, amongother things:

 

	·	expanding into the B2B sector;
	·	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;
	·	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 additionalrevenue 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 orto achieve or sustain profitability, our business, financial condition, results of operations, and prospects could be materially adverselyaffected and the market price of our Common Stock could be adversely affected.

 

The Company may beunable to repay its indebtedness

 

On August 21, 2024, theCompany entered into two Exchange Agreements with investors, under which each investor exchanged their respective Old Notes for the NewNotes, with an aggregate principal amount of $3,000,000. Each New Note bears interest at 4% annually with interest payable monthly andthe principal due on November 30, 2025. In the event of a qualified financing of debt or equity where the Company receives net proceedsof $5.0 million in one or more related transactions, the Investors may require the Company to repay the New Notes with accrued interestthereon in cash. The New Notes are convertible at any time by the holder into common stock at $1.99 per share (125% of the closing bidprice on August 20, 2024). Upon an event of default, the Investors may require the Company to convert the New Notes into shares of ourCommon Stock, subject to beneficial ownership limitations set forth in the New Notes, at a conversion price equal to the 10% discountof the average three day VWAP, as defined in the New Notes, prior to the conversion date.

 

 

 

 

In order to repay theNew Notes we will need to expend proceeds, obtain additional debt financing, or refinance the New Notes. Although we consummated the PrivatePlacement on the Closing Date and received approximately $1.7 million of net proceeds, there is no guarantee that any additional refinancingor debt financing will be successful or on favorable terms. Any additional convertible debt or equity financings may be dilutive to ourstockholders, and such dilution may be significant based upon the size of such financing. Further, because of our lack of operating history,we may be unable to generate enough capital to fulfill the obligations under the New Notes issued to the two holders of the New Notes.If we fail to repay the New Notes, each Note holder may exercise all rights and remedies owed to it under their New Note, including conversionof their New Note. If any such investor converts their New Note, our stockholders will experience dilution.

 

If our existing cash is insufficient to meetour 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 and net proceedsreceived from the Private Placement will be sufficient to meet our working capital needs for at least 12 months from November 14, 2024.However, due to our continued negative cash flow and the need to pay the New Notes which are due on November 30, 2025, we may requiresubstantial additional working capital.

 

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

 

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

 

If we lose key personnel, it may adverselyaffect our business.

 

Our future success depends in large part on thecontinued 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 toour business plan and any future successes and progress we experience. The loss of Dr. Evans’ services would therefore materiallyadversely affect our business and prospects. As a condition to the consummation of the IPO, we obtained “key person” insurancefor Dr. Evans but not for any other officers or employees. Our executive officers, senior management and key personnel are all employedon an at-will basis, which means that they could terminate their employment with us at any time, for any reason and without notice. Theloss of any of our key management personnel could significantly delay or prevent the achievement of our development and strategic objectivesand adversely affect our business.

 

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

 

Our Board on which weheavily 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 Officerof Red Cat, a drone company with which we expect to partner on some of our B2B business. These arrangements could cause him to be unableor decline to devote sufficient time and attention to our Company and favor Red Cat, and/or to face a conflict of interest, financialor otherwise, adverse to us and in favor of Red Cat. Accordingly, from time-to-time our directors may not devote sufficient time and attentionto our affairs, which could have a material adverse effect on our operating results, and there can be no assurance that other conflictsof 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 droneproducts through its website, which includes a number of product offerings from competitors in the drone industry. While these relationshipshave enabled us to generate revenue, by virtue of their involvement in the sale of drones and drone-related products these customers alsohave interests that are adverse to ours, and may determine to reduce their expenditures on our products in the future and/or to verticallyintegrate their operations to reduce or eliminate their reliance on our products.

 

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

 

If we are unable to attract new customers ormaintain and grow Fat Shark and Rotor Riot existing customer relationships in a manner that is cost-effective, our revenue growth couldbe slower than we expect and our business may be harmed.

 

To increase our revenue following the acquisitionof Fat Shark and Rotor Riot, we must add new customers, upsell to our existing customers, enhance our products with features that setus apart from our competitors, and effectively develop and market new products that enable us to maintain and expand our brand and marketshare. Demand for our products is affected by a number of factors, many of which are beyond our control. Additionally, the projectionsand estimates about the future success and growth of the drone industry and demand for drone-related products such as ours, could proveto be incorrect, in which case our results of operations and prospects will decline. For example, if a recession occurs in the U.S. orglobal economy, we expect that consumer spending, particularly for non-essential goods such as our drone products which are largely focusedon recreational uses, may decline, limiting our ability to attract or maintain a sufficient customer base to achieve or maintain the revenuewe seek in the development and sale of our products. Even if we do attract customers, the cost of new customer acquisition may prove sohigh as to prevent us from achieving or sustaining profitability.

 

Our future success also depends on our abilityto increase the use of our products and solutions within and across our existing customers and future customers. While we believe thereis a significant opportunity to further expand within Fat Shark and Rotor Riot’s existing customer base, including due to our plannedemployment of a “land-and-expand” business model in which we plan to establish relationships with new customers and grow thoserelationships over time by providing high quality products and services, our growth prospects depend on our ability to persuade customersto buy more product, and if we fail to do so, our business goals and prospects may not be achieved to the extent sought or anticipatedor at all.

 

Future operating results and key metrics mayfluctuate 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 varysignificantly 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 the Department of Defense;
	·	delays in getting Blue List approval for other drone components;
	·	the expansion or contraction of our customer base and the amount of product ordered;
	·	the size, duration and terms of our contracts with both existing and new customers, including distributors we contract with particularly as to Fat Shark’s sale of FPV goggles;
	·	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, which for example significantly impacts Fat Shark’s sales as it improves upon and launches new products and shifts focus away from older products;
	·	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 conflict (including the war in Israel, the Russian war in Ukraine, and tensions between China and Taiwan;
	·	supply chain issues particularly due to Fat Shark’s reliance on one related party Chinese supplier;
	·	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 elsewherein this Prospectus may result in fluctuations in our operating results, meaning that quarter-to-quarter comparisons may not necessarilybe indicative of our future performance.

 

Any failures of or damage to, attack on orunauthorized 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 significantcosts, reputational damage and limits on our ability to conduct our business activities.

 

Our operations will depend on information technologyinfrastructure 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 organizationshave 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 similarbreach or suspension in the future. Further, we may be unaware of a prior attack and the damage caused thereby until a future time whenremedial actions cannot be taken. Cyber-threats are often sophisticated and are continually evolving. We may not implement effectivesystems and other measures to effectively identify, detect, prevent, mitigate, recover from or remediate the full diversity of cyber-threats orimprove 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 toprotect 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 orloss of access to information. The expectations of our customers and regulators with respect to the resiliency of our systems and theadequacy of our control environment with respect to such systems may increase as the risk of cyber-attacks, and the consequences of thoseattacks 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 provideproducts and services to our customers or product personal, private or sensitive information about our business, customers or other thirdparties.

 

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

 

Specifically, the new rules impose a new Form8-K disclosure requirement about material cybersecurity incidents within four business days after we determine that a cybersecurity ismaterial. Annually we will be required to disclose in our 10-K our processes, if any, to assess, identify and manage material risks fromcybersecurity threats including whether we have hired third parties in connection with the processes. We also will be required to disclosewhether any risks from cybersecurity threats have or are materially reasonably likely to materially affect us. Finally we must describeour Board’s oversight of risks from cybersecurity threats and management’s role in assessing and managing these risks. Weexpect to incur material additional compliance and reporting costs, including monitoring, collecting, and analyzing data concerning cyber-securityincidents and evaluating and preparing the required disclosure. We may also be required to incur third party compliance costs.

 

The failure to maintain an adequate technologyinfrastructure 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 finesand sanctions. We may be required to expend significant additional resources to modify, investigate or remediate vulnerabilitiesor other exposures arising from cyber-security threats. Failing to prevent or properly respond to a cyber-attack could exposeus to regulatory fees or civil liability, cause us to lose customers or suppliers, prevent us from offering our products including dueto resulting regulatory action, impair our ability to maintain continuous operations, and inhibit our ability to meet regulatory requirements.

 

Our failure to effectively manage our growthcould harm our business.

 

Businesses, including development stage companiessuch as ours which often grow rapidly, may have difficulty managing their growth. These challenges are exacerbated in circumstances suchas ours following a recent acquisition of operating businesses. 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, and wewill therefore need to replace and regularly introduce on a timely basis new products and technologies, enhance existing products, andeffectively stimulate customer demand for new products and upgraded or enhanced versions of our existing products. Similarly, becauseour product offerings are largely dependent on others’ drone-related products and activities, we may need to adjust or update asthird parties advance or alter their technology and activities. If we are able to successfully develop, produce and market our products,we will likely need to incur additional expenditures and expand our personnel with additional employees and consultants who are capableof 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 productsis expected to place a significant strain on our management, operations and engineering resources. Specifically, the areas that are strainedmost 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.

 

The drone industry relies on limited sources tosupply certain components and materials used in the manufacturing of drones. Our intention is to purchase certain components from suppliersbased in the United States, which may lead us to pay higher prices, or select parts from a more limited number of suppliers relative toour competitors, which would adversely impact our gross margin and operating results. Our operating results could be materially adverselyimpacted 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, inpart, on our ability to obtain timely and adequate delivery of components for our products. All of the components that go into the manufacturingare sourced from third-party suppliers.

 

Some of the key components used to manufactureour products come from a limited or single source of supply, or by a supplier that could potentially become a competitor. Our contractmanufacturers generally purchase these components on our behalf from approved suppliers. We are subject to the risk of shortages and longlead times in the supply of these components and the risk that our suppliers discontinue or modify components used in our products. Inaddition, 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 particularsupplier or experience a significant disruption in the supply of products and components from a current supplier, we may be unable tolocate alternative suppliers of comparable quality at an acceptable price, or at all, and our business could be materially and adverselyaffected. In addition, if we experience a significant increase in demand for our products, our suppliers might not have the capacityor elect not to meet our needs as they allocate components to other customers. Developing suitable alternate sources of supply for thesecomponents may be time-consuming, difficult and costly, and we may not be able to source these components on terms that are acceptableto 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-effectivemanner. Identifying a suitable supplier is an involved process that requires us to become satisfied with the supplier’s qualitycontrol, responsiveness and service, financial stability, labor and other ethical practices, and if we seek to source materials fromnew 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 numberof suppliers involves a number of additional risks, including risks related to supplier capacity constraints, price increases, timelydelivery, component quality, failure of a key supplier to remain in business and adjust to market conditions, delays in, or the inabilityto execute on, a supplier roadmap for components and technologies; and natural disasters, fire, acts of terrorism or other catastrophicevents, including global pandemics.

 

Certain components and services necessary forthe manufacture of our products are available from only a limited number of sources, and other components and services are only availablefrom a single source. Our relationship generally is on a purchase order basis and these firms do not have a contractual obligation toprovide adequate supply or acceptable pricing to us on a long-term basis. These suppliers could discontinue sourcing merchandise for usat 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 disruptionin their production, we could experience disruption of our inventory flow, a decrease in sales and the possible need to re-design ourproducts. 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 andretain additional qualified personnel, including top technical talent, our business could be adversely affected.

 

Our future success depends in part on our abilityto identify, attract, integrate and retain highly skilled technical, managerial, sales and other personnel, particularly as we attemptto expand our operations and further develop and market our products. We face intense competition for a limited number of qualified individualswith the requisite skills and experience from numerous other companies, including other software and technology companies, many of whomhave greater financial and other resources than we do. These companies also may provide more diverse opportunities and better chancesfor career advancement. Some of these characteristics may be more appealing to high-quality candidates than those we have to offer. Inaddition, 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 benefitsand compensation expenses related to equity awards, and we may lose new employees to competitors or other companies before we realizethe 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 intonew geographies, we will need to attract and recruit skilled personnel in those areas. We have limited experience with recruiting in geographicareas 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, operationaland managerial requirements, on a timely basis or at all, our business will be adversely affected.

 

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

 

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

 

The drone industry is relatively new and is growingrapidly. 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 emergingand 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 development 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 projectsabout future events and trends may be different from the actual results. Furthermore, if we are unable to address any of the above challengessuccessfully, our business, financial condition, results of operations, and prospects may be adversely affected by such failure.

 

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

 

The drone industry is attracting a wide rangeof 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 andT-Motor. With respect to our FPV products, current and potential future competitors also include a variety of established, well-knowndiversified 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 maystruggle to overcome, particularly as we seek to further establish and grow our customer base. Our competitors may be able to providecustomers 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 strengthto 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 morequickly to market developments due to lower overhead costs, leveraging of their professional relationships and networks, geographic orspecialty focuses or greater flexibility inherent in smaller operations and a lower number of personnel.

 

Among product and service features that drivecompetition in our industry are breadth of product line, quality and durability of products, stability, reliability and reputation ofthe provider, along with cost. Quantity discounts, price erosion, and rapid product obsolescence due to technological improvements aretherefore common in our industry as competitors strive to retain or expand market share. The Company’s ability to compete effectivelywill depend on, among other things, the Company’s pricing models, quality of customer service, development of new and enhanced productsand services in response to customer demands and changing technology, reach and quality of sales and distribution channels and capitalresources. 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 mayhave to offer comparable products and services at lower pricing, which could adversely affect our operating margins. Our inability tocompete effectively against these larger companies could have a material adverse effect on our business, financial condition and operatingresults.

 

 

 

 

The development and manufacture of FPV gogglesencompasses 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 partnerscould result in delivery interruptions, which could adversely affect our operating results.

 

As we continue to develop our products, we mustprogress through the complex and challenging processes involved in the technology and designs on which Fat Shark and Rotor Riot productsare founded. Fat Shark and Rotor Riot rely on third party suppliers for the resources needed to navigate these processes and expect tocontinue to rely on such parties when we reach the manufacturing and marketing stages. Our reliance on third-party manufacturers and serviceproviders 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;
	·	a delay or inability to procure or expand sufficient manufacturing capacity;
	·	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 U.S. 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;
	·	the lack of qualified backup suppliers for any raw materials currently purchased from a small number of source suppliers;
	·	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.

 

 

 

 

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

 

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

 

Fat Shark currently has no equipment redundancyto manufacture its products, meaning we will rely on a limited number of machines to perform a large quantity of steps in the manufacturingand assembly processes. Rotor Riot is limited by the number of personnel it has on staff to assemble custom drones. This may, among otherthings, delay delivery timelines or reduce our revenue and accounts receivable, and/or force us to rely more heavily on third partiesto meet customer deadlines or volume demands, either of which will adversely affect our results of operation and ability to achieve andmaintain profitability. If we experience any significant disruption in manufacturing, a serious 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 in our manufacturingcould be caused by us or our partners including but not limited to equipment problems, the introduction of new equipment into the manufacturingprocess or delays in the delivery of new manufacturing equipment. Lead-time for delivery, installation, testing, repair and maintenanceof manufacturing equipment can be extensive. We can provide no assurances that we will not lose potential sales or be able to meet productionorders due to future production interruptions in our manufacturing lines.

 

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

 

The drone industry, andthe electronics industry as a whole, can be subject to business cycles. During periods of growth and high demand for products, we maynot have adequate supplies of inventory on hand to satisfy customers’ needs. Furthermore, during these periods of growth, our suppliersmay also experience high demand and, therefore, may not have adequate levels of the components and other materials that the Company requiresto manufacture products so that it can meet customers’ needs. Our inability to secure sufficient components to produce productsfor 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 ifthere are negative factors impacting our customers’ end markets. Such a risk becomes especially prevalent during a recession andmarket 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.

 

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

 

The drone industry in general, and the marketfor the sale of drone hardware and component parts in particular, continues to undergo significant changes, primarily due to technologicaldevelopments. Because of the rapid growth and advancement of technology, shifting consumer tastes and the popularity and availabilityof other forms of activities, it is impossible to predict the overall effect these factors could have on potential revenue from, and profitabilityof the drone industry. The development of both drone-related software and hardware is a costly, complex and time-consuming process, andinvestments in product development often involve a long wait until a return, if any, can be achieved on such investment. We might facedifficulties or delays in the development process that will result in our inability to timely offer products that satisfy the market,which might allow competing products to emerge during the development and certification process. We anticipate making significant investmentsin research and development relating to our products and technology, but such investments are inherently speculative and require substantialcapital expenditures. Any unforeseen technical obstacles and challenges that we encounter in the research and development process couldresult in delays in or the abandonment of product commercialization, may substantially increase development costs, and may negativelyaffect our results of operations. In the time it takes to develop or improve upon a product, that product may become obsolete.

 

 

 

 

It is impossible to predict the overall effectthese factors could have on our ability to compete effectively in a changing market, and if we are not able to keep pace with these technologicaladvances, then our revenues, profitability and results from operations may be materially adversely affected. It is impossible to predictthe overall effect these factors could have on our ability to compete effectively in a changing market, and if we are not able to keeppace with these technological advances, then our revenues, profitability and results of operations may be materially adversely affected.However, if we struggle to adapt to an industry-shifting technological advancement or competitor offerings that render our products relativelyless attractive or obsolete, including due to competitive pressures we face relative to other drone companies, it could have a materialadverse effect on our business.

 

Further, we rely on and will continue to relyon components of our products that are developed and produced by other companies over which we have limited control. The commercial successof certain of our planned future products will depend in part on advances in these and other technologies by other companies, and ourability to procure them from such third parties in a timely manner and on economically feasible terms. We may, from time-to-time, contractwith and support companies developing key technologies in order to accelerate the development of such products for our specific uses.Such activities might not result in useful technologies or components for us.

 

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

 

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

 

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

 

As a result of these and other factors, investorsshould not rely on revenues and operating results for any one quarter or year as an indication of future revenues or operating results.If quarterly revenues or results of operations fall below expectations of investors or public market analysts, the price of our CommonStock could fall substantially.

 

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

 

Our future research and development efforts willremain 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 technicalproblems or delays arise, further improvements in products and the introduction of future products could be adversely impacted, and wecould incur significant additional expenses and the business may fail. Additionally, we may deploy significant capital or human resourcestowards developing or improving upon a product, only for such efforts fail to yield the results we hoped for or intended, which wouldmaterially 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 developmentefforts and a competitor brings a similar product to market before us, or alleges an infringement of their intellectual property, ourability 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 couldharm our business or otherwise distract management.

 

If we become a party to a substantial, complexor 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 costlyand disrupt business. As described elsewhere in these Risk Factors, our operations and products, as well as those of our customers, collaboratorsand 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 privacyissues, any of which can result in costly and time-consuming litigation which would divert our limited human and capital resources andcould cause other adverse impacts on our business such as reputational harm and loss of future business. While disputes from time-to-timeare not uncommon, we may not be able to resolve such disputes on terms favorable to us which could have a material adverse impact on ourresults of operations and financial condition.

 

Among other things, claims could be brought againstus 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 occurfrom events involving our products is particularly high, because we supply technology used in the operation of drones which is relativelynovel and are frequently operated at high speeds and altitudes, and often in densely populated areas and/or by individuals who lack ahigh level of experience operating them. These characteristics increase the probability that injury or damage to personal property mightoccur, even absent a defect. Additionally, because Fat Shark’s products are used as ancillary or supplemental components of a drone’sfunctions, we may become involved in disputes arising from a third party’s actions or products that utilize its technology, evenif 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 againstus by customers, civilians or private entities or others using or otherwise coming into contact with our products. If we cannot successfullydefend against product liability claims, we could incur substantial liability and costs. Regardless of merit or eventual outcome, productliability 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 andother 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 beable to obtain or maintain insurance for such claims. Insurance coverage is becoming increasingly expensive. We do not have such insuranceand 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 successfulproduct liability claim or series of claims brought against us could cause our stock price to decline and, would adversely affect ourresults of operations and business.

 

 

 

 

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

 

We believe that maintaining and enhancing FatShark and Rotor Riot brand identity, and our reputation are critical to our relationships with customers and strategic partners and toour ability to attract new customers and strategic partners. We also believe that the importance of our brand recognition and reputationwill 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, including those we expect to obtain through the acquisition of Fat Shark and Rotor Riot, 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 inabilityto navigate these or other challenges to establish and grow our brand recognition and current and future product popularity could materiallyadversely affect us.

 

In addition, particularly with respect to RotorRiot, we are highly dependent on online social media platforms such as Facebook, Instagram and YouTube to advertise our products, marketour brand and develop and maintain customer loyalty. Each of these platforms requires that users adhere to strict terms and conditionsgoverning 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, wecould be limited, restricted or banned from some or all uses, which would materially adversely affect our business.

 

 

 

 

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

 

Our future growth and profitability will dependin 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 andmay not result in increased total sales or generate sufficient levels of product and brand name awareness. We may not be able to managemarketing expenditures on a cost-effective basis.

 

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

 

We may make acquisitions that could be materialto our business, operating results, financial condition and cash flows. Our ability as an organization to successfully acquire and integratetechnologies 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 otherrisks or any other problems encountered in connection with the integration of any acquired business. The inability to successfully integratethe 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.

 

Because we will incur impairment in the carryingvalue of our goodwill assets and begin to write-off of our general intangibles, the costs could depress our stock price.

 

As of September 30, 2024, we had $19,666,086 ofestimated goodwill and intangible assets on our balance sheet. In the fourth quarter of 2024, we may begin to amortize our intangibles,which will result in a non-cash charge going forward. Until we do a valuation, which will occur in the fourth quarter, the amount of futureamortization charges is uncertain, and the future charge may or may not be material. Moreover, we expect to incur a goodwill impairmentcharge in the fourth quarter which could be material. Goodwill and intangible assets must be evaluated for impairment annually or morefrequently if events indicate it is warranted. If the carrying value of a reporting unit asset exceeds its current fair value, the goodwillasset is considered impaired. Events and conditions that could result in impairment in the value of our goodwill and intangible assetsinclude, but are not limited to, significant negative industry or economic trends, significant decline in the Company’s stock pricefor a sustained period of time, significant decline in market capitalization relative to net book value, limited funding that could delaydevelopment efforts, significant changes in the manner of use of the assets or the strategy for the Company’s overall business,or safety issues that surface during development efforts, or the end of our product life cycles that will result in impairment of goodwill.Our stock price could be negatively impacted should future impairments of our goodwill and/or intangible assets occur. A valuation willbe performed related to the closing of the Business Combination based on final assets acquired and liabilities assumed and final amountsof goodwill and other intangibles will be determined. These changes could depress our stock price.

 

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

 

The products that we sell could contain defectsin design or manufacture. There can be no assurance we will be able to detect and remedy all defects in the hardware we sell, which couldresult in product recalls, product redesign efforts, loss of revenue, reputational damage and significant warranty and other remediationexpenses. 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 standardsor may contain a defect, the launch of such product could be delayed until we remedy the quality issue or defect. The costs associatedwith any protracted delay necessary to remedy a quality issue or defect in a new product could be substantial.

 

 

 

 

Fat Shark and Rotor Riot generally provide a one-yearwarranty on all of our products, except in certain European countries where it can be two years for some consumer-focused products. Theoccurrence of any material defects in our products could expose us to liability for damages and warranty claims in excess of our currentreserves, and we could incur significant costs to correct any defects, warranty claims or other problems. In addition, if any of our productdesigns are defective or are alleged to be defective, we may be required to participate in a recall campaign. In part due to the termsof our warranty policy, any failure rate of our products that exceeds our expectations may result in unanticipated losses. Any negativepublicity related to the perceived quality of our products could affect our brand image and decrease retailer, distributor and consumerconfidence and demand, which could adversely affect our operating results and financial condition. Further, accidental damage coverageand 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 interpretationof the regulations concerning extended warranties and accidental damage coverage on a federal, state, local or international level maycause 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, penaltiesand other sanctions, which could harm our business and financial condition.

 

Estimated future productwarranty 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 orother contingencies, these estimates could prove to be incorrect, such that our warranty obligations are higher than anticipated. Ourwarranty 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 orother 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 Intellectual Property Protection

 

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

 

Companies in the consumer electronics, wirelesscommunications, semiconductor, AI, IT, and display industries steadfastly pursue and protect intellectual property rights, often timesresulting in considerable and costly litigation to determine the validity of patents and claims by third parties of infringement of patentsor other intellectual property rights. Other companies may hold or obtain patents or inventions or other proprietary rights in technologynecessary for our business. If we are forced to defend against infringement claims, we may face costly litigation, diversion of technicaland management personnel, and product shipment delays, even if the allegations of infringement are unwarranted.

 

Numerous U.S. and foreign issued patents and pendingpatent applications, which are owned by third parties, exist in the fields in which we are pursuing product development and sales. Asthe consumer electronics and drone industries expand and more patents are issued, the risk increases that our current and future productsmay be subject to claims of infringement of the patent rights of third parties. Third parties may assert that we are employing their proprietarytechnology without authorization. There may be third-party patents or patent applications with claims to inventions, materials, engineeringdesigns, or methods of manufacture related to the design, use or manufacture of our products. Because patent applications can take manyyears 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 technologiesare integrated infringes on these patents. If any third-party patents were to be held by a court to cover the manufacturing process ofany of our products, or any of the characteristics or related components thereof, the holders of any such patents may be able to blockour 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’ productsor processes, the holders of any such patents may be able to block our ability to develop and commercialize the applicable product unlesswe obtained a license or until such patent expires. In either case, such a license may not be available on commercially reasonable termsor at all.

 

 

 

 

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

 

If we are unsuccessful in defending against patentinfringement claims in any jurisdiction where such a dispute arises, our products could be found to infringe on the intellectual propertyrights of others. If a claim of infringement against us succeeds, we may have to pay substantial damages, possibly including treble damagesand attorneys’ fees for willful infringement, pay royalties, redesign our infringing products or obtain one or more licenses fromthird parties, which may be impossible or require substantial time and monetary expenditure. The financial harm caused by any such developmentwith respect to intellectual property disputes and litigation will be heightened to the extent we do not possess, acquire or maintainadequate insurance coverage for these contingencies now or in the future. Further, if there is a successful claim of infringement againstus and we are unable to develop non-infringing technology or license the infringed or similar technology on a timely basis, or if we arerequired to cease using one or more of our business or product names due to a successful trademark infringement claim against us, it couldmaterially adversely affect our business.

 

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

 

Our commercial success will depend substantiallyon the ability to obtain patents and other intellectual property rights and maintain adequate legal protection for products in the UnitedStates and other countries. We will be able to protect our intellectual property from unauthorized use by third parties only to the extentthat these assets are covered by valid and enforceable patents, trademarks, copyrights or other intellectual property rights, or are effectivelymaintained as trade secrets. With the closing of our IPO in February 2024, we have 12 issued patents, including four issued in the UnitedStates, and nine pending patent Applications, including two pending in the United States which were assigned to a wholly-owned subsidiaryof the Company by UAV Patent Corp. (“UAV”) a wholly-owned subsidiary of Red Cat, in each case with a non-exclusive, non-sublicensableroyalty free perpetual license back to UAV for Red Cat and its present and future subsidiaries to make, use and sell products subjectto 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, technologiesor designs in a timely fashion, or at all. We do not know whether, and there can be no assurance that, any of our patent applicationswill 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 maybe issued to us in the future may be challenged, invalidated, rendered unenforceable or circumvented, and the rights granted under anyissued patents may not provide us with proprietary protection or competitive advantages. Moreover, third parties could practice our inventionsin territories where we do not have patent protection or in territories where they could obtain a compulsory license to our technologywhere 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, validityand enforceability of the claims upheld in our and other companies’ patents. Further, patents have a limited lifespan. In the UnitedStates, the natural expiration of a patent is 20 years after it is filed, although various extensions may be available. The life of apatent, and the protection it affords, is limited. When the patent life has expired for a product, we will become vulnerable to competitionfrom competitors attempting to replicate the technology that was formerly patent protected. Further, if we encounter delays such as dueto regulatory approvals, the time during which we will be able to market and commercialize a product under patent protection could bereduced.

 

Unauthorized parties may attempt to copy or otherwiseuse aspects of our processes and products that we regard as proprietary. While we plan to enter into written agreements with certain ofour employees and consultants with terms designed to protect our intellectual property rights, there cannot be any assurance that theseprovisions will provide us with the protection sought. Further, any third parties with whom we do not execute such agreements, such ascertain 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 notprevent misappropriation of our technologies. We may become engaged in litigation to protect or enforce our patent and other intellectualproperty rights or in International Trade Commission proceedings to abate the importation of goods that would compete unfairly with ourproducts and, if unsuccessful, these actions could result in the loss of patent or other intellectual property rights protection for thekey technologies on which our business strategy depends.

 

We also rely in part on unpatented proprietarytechnology, 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 confidentialityand intellectual property assignment agreements (as appropriate), but these agreements may not provide sufficient protection for our tradesecrets, know-how or other proprietary information.

 

The laws of certain countries do not protect intellectualproperty and proprietary rights to the same extent as the laws of the United States and, therefore, in certain jurisdictions includingChina, 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, wemay initiate proceedings or litigation against third parties. Such proceedings or litigation may be necessary to protect our trade secretsor know-how, products, technologies, designs, brands, reputation, likeness, authorship works or other intellectual property rights. Suchproceedings 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 otherbusiness concerns. Additionally, we may provoke third parties to assert claims against us, which could invalidate or narrow the scopeof our own intellectual property rights. We may not prevail in any proceedings or lawsuits that we initiate and the damages or other remediesawarded, if any, may be significant. The occurrence of any of these events may adversely affect our business, financial condition andoperating results.

 

We will register for certain of our trademarksin several jurisdictions worldwide. In some jurisdictions where we will apply to register our trademarks, other applications or registrationsmay exist for the same, similar, or otherwise related products or services. If we are not successful in arguing that there is no likelihoodof confusion between our marks and the marks that are the subject of the other applications or registrations owned by third parties, ourapplications may be denied, preventing us from obtaining trademark registrations and adequate protection for our marks in the relevantjurisdictions, 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 beforced to pay significant settlement costs or cease the use of these trademarks and associated elements of our brand in the United Statesor other jurisdictions.

 

 

 

 

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

 

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

 

Our current or future products may depend in parton technology rights licensed from third parties. We could lose our exclusivity or other rights to use the technology under our licensesif we fail to comply with the terms and performance requirements of the licenses. In addition, certain licensors may terminate a licenseupon our breach and have the right to consent to sublicense arrangements. If we were to lose our rights under any of these licenses, orif we were unable to obtain required consents to future sublicenses, we could lose a competitive advantage in the market, and may evenlose the ability to commercialize certain products or technologies completely. Either of these results could substantially decrease ourrevenues.

 

Further, to the extentwe need to obtain licenses from third parties to advance our research and development efforts or commercialize or improve upon our products,we may fail to obtain these licenses at a reasonable cost or on reasonable terms, if at all. In that event, we would be unable to furtherdevelop and commercialize those products, which could harm our business significantly.

 

The licensing and acquisition of third-party intellectualproperty rights is a competitive practice, and companies that may be more established, or have greater resources than we do, may alsobe pursuing strategies to license or acquire third-party intellectual property rights that we may consider necessary or attractive inorder to develop and commercialize our products. More established companies may have a competitive advantage over us due to their largersize and cash resources or greater hardware or software development, production and commercialization capabilities. We may not be ableto successfully complete such negotiations and ultimately acquire the rights to the intellectual property surrounding product candidatesthat we may seek to acquire, in which case our business could be harmed.

 

Significant inflation could adversely affect our business and financialresults.

 

The high rate of inflation and resulting pressureson costs and pricing of business such as ours focused on the manufacture and sale of electronics products could adversely impact our businessand 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. A rise in inflation can adversely affect us by increasing our operatingcosts, including by increasing the costs of materials, freight and labor, which have already been under pressure due to supply chain constraintsand the effects of the COVID-19 pandemic and the shortage of chips. The Company has not identified, planned or taken any actions to mitigateinflationary pressures. Further, in the U.S. the Federal Reserve has responded by increasing interest rates to combat inflation, howeversuch increases may result in a reduced demand for our products and/or an economic downturn. In a highly inflationary environment, or anyrecession 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 ofOur Operations and Industry

 

If we fail to have other drone products approvedfor the Department of Defense’s Blue List, our future results of operations may be materially and adversely affected.

 

During the summer of 2024, our first United Statesmade drone product was approved and added to the Department of Defense’s Blue List. By virtue of being on the Blue List, it enablesus to receive orders from agencies of the United States federal government. It also provides credibility to potential B2B customers whomight be interested in purchasing drone components from us. We are seeking to add additional products to the Blue List. If these additionalproducts are not added to the Blue List, our future results of operations may be materially and adversely affected.

 

 

 

 

Failure to obtain necessary regulatory approvalsfrom the FAA or other governmental agencies by us, our customers, or others who use our products, or limitations put on the use of unmannedaircraft systems, or “UAS,” in response to public privacy or safety concerns, may prevent us from expanding the sales of ourdrone solutions in the United States.

 

The regulation of UASand 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 productsare subject to drone-related regulations enforced by the FAA, either directly or due to their inclusion in UAS offered by third parties.Further, even if some of our operations or products are not directly subject to such regulations, Fat Shark’s customers’ operationsof UAS that includes our products and technology are subject to those regulations, and their failure to comply will adversely affect ourability to sell to them in the future. Further, adverse regulatory actions such as enforcement proceedings affecting customers and otherthird parties with which we do business can also adversely affect us, even if the violation or harm alleged did not arise from our conductor products. Generally, under current FAA regulations the failure to register a UAS, including model aircraft, in accordance with theserules may result in regulatory and criminal sanctions. The FAA may assess civil penalties up to $33,333. Criminal penalties include finesof up to $250,000 and/or imprisonment for up to three years. However, the FAA and other government bodies and agencies are consideringchanges to address the drone industry, which is relatively new and rapidly evolving. In addition, there exists public concern regardingthe privacy and safety implications of the use of UAS. This concern has included calls to develop explicit written policies and proceduresestablishing usage limitations. We cannot assure you that the response from regulatory agencies, customers and privacy advocates to theseconcerns 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 concernspresently faced by the drone industry, could harm us and our customers and suppliers by increasing compliance costs and restricting ouroperations and product offerings and uses, which could materially adversely affect us.

 

Rising threats of international tariffs, includingtariffs applied to goods between the U.S. and China, may materially and adversely affect our business.

 

Our B2C business has been heavily dependent onChinese imports for our products and operations. For example, a substantial majority of Rotor Riot’s products are manufactured,directly and indirectly, using Chinese vendors. Fat Shark’s primary contract manufacturer is Shenzhen Fat Shark Technology Ltd.(the “Supplier”), which is located in Shenzhen, China and provides product manufacturing services, including raw materialprocurement. The majority owner of this entity is the wife of Fat Shark’s founder. We do not have any written agreements with theSupplier and rely only on purchase orders. In addition, Fat Shark’s principal contract manufacturer is located in China. We do nothave any written agreements with our other suppliers in China. We rely only on purchase orders. There are inherent risks and uncertaintiesregarding the enforcement of our rights with respect to our oral agreements and purchase orders. Should our suppliers in China fail tohonor our oral agreements and purchase orders we will not have any recourse against such suppliers under Chinese law. The legal systemin China and the enforcement of laws, rules and regulations in China can change quickly and the Chinese government may intervene or influencethe operations of our suppliers which would adversely impact our business insofar as we would have to seek other suppliers outside ofChina and such suppliers would most likely charge us more for our products. As a result of the recent United States presidential election,President-elect Trump is expected to threaten to and may impose steep tariffs on the importation from China of goods including the droneswe use in our B2C business. If there are increased tariffs imposed, it could materially and adversely affect our business and resultsof operations. Since the beginning of 2018, there has been increasing rhetoric, in some cases coupled with legislative or executive action,from several U.S. and foreign leaders regarding the possibility of instituting tariffs on the foreign imports of certain materials andproducts. During this trend, the U.S. and China imposed tariffs or announced proposed tariffs to be applied in the future to certain ofeach other’s exports. Beginning in 2019, first the Trump administration imposed tariffs on imports of electronics products, includingdrones and component parts, of up to 25%. These tariffs apply to the vast majority of Rotor Riot’s and Fat Shark’s respectiveinventory, and Rotor Riot has in the past been, and either or both entities may in the future be, forced to implement price increasesto adjust to the higher costs of production and sale, which imposes the risk of reduced demand for such products and lower sales and resultingrevenue. Future tariffs or any further costs or restrictions imposed on products that we import, could require us to raise our priceson our B2C products, which may result in the loss of customers and harm our business, particularly since we rely on consumer spendingand our products are typically considered non-essential, and purchases are therefore highly price sensitive.

 

 

 

 

In addition, changes in political conditions inChina and changes in the state of China-U.S. relations, including any tensions relating to potential military conflict between China andTaiwan, are difficult to predict and could adversely affect the operations or financial condition of the Company. In addition, becauseof our B2C involvement in the Chinese market, any deterioration in political or trade relations might cause a public perception in theU.S. or elsewhere that might cause that business to become less attractive. Such an impact could adversely affect our revenues and cashflows.

 

We are subject to a number of supply risksconcerning our Brave7 Flight Controller which could adversely impact our ability to deliver such products to the United States Departmentof Defense and commercial customers.

 

We purchase our Brave7 Flight Controllers froma privately-held United States based manufacturer pursuant to a purchase order for the initial order of 10,000 units. We are subject toa 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 the 10,000 controllers to us over a seven-month period which increases the likelihood we may be unable to meet a large order from one or more customers;
	·	Beyond the 10,000 units, 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 controllers for our competitors;
	·	We have no representations from the manufacturer on its intellectual property ownership of the controllers; 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 governmentalexport and import controls, economic sanctions and other laws and regulations that could subject us to liability and impair our abilityto compete in international markets.

 

While we understand Fat Shark and/or Rotor Riothave had minimal sales outside of the U.S., we expect to seek to market our products outside of the U.S. During the quarter ended September30, 2024, we commenced sales of our Brave7 Flight Controller to a European customer as part of a larger order. The U.S. and various foreigngovernments have imposed controls, export license requirements and restrictions on the import or export of some technologies. Our productsare subject to U.S. export controls, including the Commerce Department’s Export Administration Regulations and various economicand trade sanctions regulations established by the Treasury Department’s Office of Foreign Assets Controls, and exports of our productsmust be made in compliance with these laws. Furthermore, U.S. export control laws and economic sanctions prohibit the provision of productsand services to countries, governments, and persons targeted by U.S. sanctions. Even though we take precautions to prevent our productsfrom being provided to targets of U.S. sanctions, our products, including our firmware updates, could be provided to those targets orprovided by our customers despite such precautions.

 

Further, the manufacture and sale of our productsin certain states and countries may subject us to environmental and other regulations. For example, many of Fat Shark and Rotor Riot’sproducts rely on electricity generated by lithium-ion batteries, which implicate a variety of environmental and other regulations designedto control the production, use, and transportation of hazardous materials such as lithium and other components and minerals deployed inthese batteries. In addition, the increasing global focus on climate change, including greenhouse gas (“GHG”) emissions, hasresulted in legislative and regulatory efforts to address the causes and impacts of climate change, and any new and more strict laws andregulations to reduce GHG emissions and address other aspects of climate change, including carbon taxes, cap and trade programs, GHG reductionrequirements, requirements for the use of green energy, and changes in procurement requirements, may result in increased operational andcompliance obligations, which could adversely affect our financial condition and results of operations.

 

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

 

 

 

 

If we fail to comply with U.S. and foreignlaws 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. Theselaws and regulations are continuously evolving and developing. The scope and interpretation of the laws that are or may be applicableto us are often uncertain and may be conflicting, particularly with respect to foreign laws. The application of these laws and regulationscan arise from our e-commerce platform, social media activities, drone technology and applications, relationships with third parties andtheir operations, or from other activities we undertake now or that we may undertake in the future. Data privacy and protection regulationsare frequently broad in terms of scope of the information protected, activities affected, and geographic reach.

 

In particular, there are numerous U.S. 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 receiveor process personal data of residents of the EU that are broader and more stringent than those previously in place in the EU and in mostother jurisdictions around the world. The GDPR includes significant penalties for non-compliance, including fines of up to €20 millionor 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 requirescovered 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 U.S. 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 dataprivacy laws in place, or enacted comprehensive data privacy laws set to soon take effect. An additional seven states have enacted narrowerprivacy laws – Florida, Maine, Michigan, Nevada, New York, Vermont, and Washington. So far during the 2024 legislative cycle, atleast four states have introduced comprehensive privacy bills that address a range of issues, including protecting biometric identifiersand health data, or governing the activities of specific entities. However, this patchwork approach to privacy legislation could posecompliance and liability risks for companies that have multistate operations. Proposed and enacted bills in various states have similarrights in preexisting privacy legislation but differ in implementation and enforcement. In June 2024, the American Privacy Rights Actof 2024 was introduced in the U.S. House of Representatives and was subsequently referred to the House Committee on Energy and Commercehas and is not yet adopted. As introduced, this proposed legislation would establish requirements for how companies handle personal databy, 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, requiringcompanies to provide individuals with a means to “opt out” of the transfer of non-sensitive covered data and the right toopt out of the user of their personal information for targeted advertising, requiring companies to implement security practices aimedat protecting personal data, and imposing enforcement actions and the possibility of civil proceedings for violations. Proposed federallegislation, like the American Privacy Rights Act of 2024, will likely continue to be debated and, at some point, may be enacted in someform.

 

We intend to strive to comply with all applicablelaws, policies, legal obligations, and industry codes of conduct relating to privacy, data security, and data protection. Our limitedresources may adversely affect our compliance effort. Given that the scope, interpretation, and application of these laws and regulationsare often uncertain and may be in conflict across jurisdictions, it is possible that these obligations may be interpreted and appliedin a manner that is inconsistent from one jurisdiction to another and may conflict with other rules or our practices. Any failure or perceivedfailure by us, customers, or third-party vendors or end-users involved with our products to comply with our privacy or security policiesor 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 resultsand financial condition.

 

 

 

 

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

 

Risks Related To Our Common Stock

 

Because the Purchase Price for Fat Shark andRotor Riot exceeds an independent valuation that Red Cat received for the enterprise value of the target companies, you may loseall or part of your investment.

 

In connection with the acquisition, we paid RedCat the Purchase Price of $22.1 million to acquire Fat Shark and Rotor Riot comprised of (i) $1.1 million in cash, (ii) the $4.0 millionNote issued by the Company to Red Cat after the working capital adjustment, and (iii) $17.0 million of the Company’s Common Stock.In November 2020, Red Cat acquired Fat Shark for a purchase price of $8.4 million and in January 2020, Red Cat acquired Rotor Riot fora total purchase price of $2.0 million. In connection with the transaction, Red Cat received a valuation from a valuation expert engagedby Red Cat that estimated that Fat Shark and Rotor Riot had a combined enterprise value range of $5.1 million to $5.7 million, as of November30, 2022. While the Purchase Price was negotiated in good faith between our Chief Executive Officer at that time and an independent specialcommittee of the Red Cat Board, the Company does not intend to obtain an independent valuation on the assets and liabilities assumed.We anticipate to perform a valuation during the fourth quarter of 2024 based on final assets acquired and liabilities assumed to determinethe final amounts of goodwill and other intangibles. See also the “Risk Factors – If we incur any future impairment in thecarrying value of our goodwill asset or write-off our general intangibles, it could depress our stock price.” Accordingly, if theCompany’s management is unsuccessful in implementing its growth strategy to grow its business to justify what it is paid for thePurchase Price, it is possible that an investor may lose all or part of its investment.

 

The market price of our shares of Common Stockis subject to fluctuation.

 

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

 

	·	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 the revenues of Fat Shark and Rotor Riot and achieve consistent profitability;
	·	our ability to execute our business plan;
	·	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;
	·	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
	·	general market conditions including factors unrelated to our operating performance

 

Recently, the stock market, in general, has experiencedextreme price and volume fluctuations due to, among other factors, concerns involving the U.S. presidential election, inflation, the FederalReserve interest rate increases or decreases, supply chain shortages, recession fears, and geopolitical turmoil including the war in Ukraineand Israel. The current prolonged delay in providing new aid to Ukraine and Israel are evidence of the political uncertainties. Continuedmarket fluctuations could result in extreme market volatility in the price of our Common Stock which could cause a decline in the valueof our Common Stock below its recent price.

 

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

 

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

 

Factors that could cause the market price of ourCommon 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 marketand industry factors, may result in large and sudden changes in the trading volume of our Common Stock (including stock run ups or pricedeclines) and could seriously harm the market price of our Common Stock, regardless of our operating performance. This may prevent youfrom being able to sell your shares at or above the price you paid for your shares, if at all. In addition, following periods of volatilityin 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 adverselyaffect our business, financial condition, results of operations and prospects.

 

An active tradingmarket for our Common Stock may not develop.

 

Prior to the IPO, therewas no public market for our Common Stock. The IPO price for our Common Stock was determined through negotiations with the underwriters.Although our Common Stock trades on the NYSE American, an active trading market for our shares may never develop or be sustained followingthis IPO. If an active market for our Common Stock does not develop, it may be difficult to sell our Common Stock without depressing themarket price for the Common Stock, or at all.

 

Because our sole remedy under the PurchaseAgreement in the event of any breaches of representations and warranties is to cancel some or all of the 125,000 shares of our CommonStock held by Mr. Jeffrey Thompson, the value of such shares may be an insufficient remedy.

 

The Purchase Agreement contains representationsand warranties made by Red Cat and Mr. Jeffrey Thompson, Red Cat’s Chief Executive Officer. Based upon negotiations with Red Catand its counsel, we agreed that Mr. Thompson, one of our founders, and a member of our Board, will backstop Red Cat’s indemnificationobligations under the Purchase Agreement in the event we claim Red Cat and/or Mr. Thompson have breached any of their respective representationsand warranties contained in the Purchase Agreement, as amended, with 125,000 shares of our Common Stock held by Mr. Jeffrey Thompson (aftergiving effect to the 1-for-2 reverse stock split). Such shares will not be placed into escrow. Red Cat has no liability for such breachesby it. That means if the value of such shares held by Mr. Thompson is not at least equal to our damages, we will not have a remedy sufficientto permit us to recoup all of our damages. The only exception is fraud. Although we negotiated this limited remedy in good faith, it ispossible that the shares held by Mr. Thompson may not be sufficient in which case such breach may adversely and materially affect ourCommon Stock price.

 

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

 

With the completion of our IPO, we are incurringincreased costs associated with corporate governance requirements that will become applicable to us as a public company, including rulesand 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 NYSE American. These rules and regulationsare expected to significantly increase 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 new cybersecurity rules and if upheld the new climate change rules will increase our compliance costs. We also expectthese rules and regulations to make it more expensive for us to maintain directors’ and officers’ liability insurance. Asa 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 andcostly. We cannot predict or estimate the amount of additional costs we will incur as a public company or the timing of such costs. Inaddition, our management team will need to devote substantial attention to interacting with the investment community and complying withthe increasingly complex laws pertaining to public companies, which may divert attention away from the day-to-day management of ourbusiness, including operational, research and development and sales and marketing activities. Increases in costs incurred or diversionof management’s attention as a result of becoming a publicly traded company may adversely affect our business, prospects, financialcondition, results of operations, and cash flows.

 

 

 

 

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

 

We are required to establish and maintain appropriatedisclosure controls and internal controls over financial reporting. Failure to establish those controls, or any failure of those controlsonce 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 needto be addressed or other matters that may raise concerns for investors. Any actual or perceived weaknesses and conditions that need tobe addressed in our internal control over financial reporting, disclosure of management’s assessment of our internal controls overfinancial reporting may have an adverse impact on the price of our Common Stock. In our Form 10-K for the year ended December 31, 2023,we reported that we did not maintain effective disclosure controls or internal controls over financial reporting and in our Form 10-Qfor the nine months ended September 30, 2024, we reported that we had not remediated those material weaknesses. Investors may not purchaseor hold our Common Stock as a result of these failures, which may result in lower prices.

 

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

 

With the completion of our IPO in February 2024,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. NYSE American requires that the average closing price of its listed common stock remain above $1.00over a 30 consecutive day period, in order to remain listed. In addition, to maintain a listing on NYSE American, we must satisfy minimumfinancial and other continued listing requirements and standards, including those regarding director independence and independent committeerequirements, minimum stockholders’ equity, and certain corporate governance requirements. If we are unable to satisfy these requirementsstandards, our Common Stock could be subject to delisting. Delisting would have a negative effect on the price of our Common Stock andwould impair your ability to sell our Common Stock when you wish to do so.

 

Our Board may authorize and issue shares ofnew 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 issueshares 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 approvalwhich could adversely affect the rights of the holders of our Common Stock. In addition, our Board could authorize the issuance of a seriesof preferred stock that has greater voting power than our Common Stock or that is convertible into our Common Stock, which could decreasethe relative voting power of our Common Stock or result in dilution to our existing common stockholders.

 

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

 

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

 

If we are required to raise additional capitalby issuing equity securities, our existing stockholders’ percentage ownership will decrease, and these stockholders may experiencesubstantial dilution. Additionally, the issuance of additional shares of Common Stock or other securities could result in a decline inour stock price. Further, if we are required to raise additional funds by issuing debt instruments, these debt instruments could imposesignificant restrictions on our operations, including liens on our assets and negative covenants prohibiting us from engaging in certaintransactions 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 adverselyaffect the market.

 

We entered into a Registration Rights Agreementwith each Selling Stockholder under which the Company agreed to file a Registration Statement on Form S-1 to register the Common Stock,within 30 days of October 30, 2024 and to use its commercially reasonable efforts to have such registration statement declared effective60 days (or 75 days if such registration statement is reviewed by the SEC) after filing the registration statement. This RegistrationStatement covers the sale of 3,577,568 shares of our Common Stock. This includes (i) 2,188,489 shares of our Common Stock, and (ii) 1,389,079shares issuable upon the full exercise of the Warrants as well as certain other shares (collectively, the “Registrable Securities”).

 

Upon registration, the Registrable Securities,subject to certain beneficial ownership limitations, will be freely-tradable. The following discussion refers to the public sale of ourCommon Stock by our other stockholders beginning after expiration of the lock-up agreement all of our officers, directors and 5% shareholdershave entered into. From time-to-time after the expiration of the lock-up period, our stockholders may be eligible to sell all or someof their Common Stock by means of ordinary brokerage transactions in the open market pursuant to Rule 144 promulgated under the SecuritiesAct of 1933 (the “Securities Act”), subject to certain limitations. In general, Rule 144 provides that any non-affiliate ofthe Company who has held restricted Common Stock for at least six months, is entitled to publicly sell their restricted stock, providedthat the Company stays current in its SEC filings. Affiliates, which would include an officer, director or other person in control ofthe Company may sell after a six month holding period from the date of purchase) with the following restrictions: (i) the Company is currentin its SEC filings, (ii) the holders comply with certain manner of sale provisions, (iii) the holders file a Form 144, and (iv) the holderscomply with volume limitations limiting the sale of shares within any three-month period to the greater of (1) a number of shares thatdoes not exceed 1% of the total number of outstanding shares, or (2) the average weekly trading volume computed over a four week period.A person who has ceased to be an affiliate at least three months immediately preceding the applicable sale and who has owned suchshares of Common Stock for at least six months may sell the shares under Rule 144 without regard to any of the limitations describedabove except for the current public information requirement.

 

Future sales of substantial amounts of our CommonStock 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 priceof 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 perceptionthat these sales may occur.

 

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

 

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

 

We and our investors face the implicationsof 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 advantageof specified reduced reporting and other requirements compared to those that are otherwise applicable generally to public companies. Theseprovisions include but are not limited to: reduced disclosure obligations regarding executive compensation in periodic reports, proxystatements and registration statements; and exemptions from the requirements of holding a nonbinding advisory vote on executive compensationand stockholder approval of any golden parachute payments not previously approved.

 

 

 

 

We will remain an emerging growth company untilthe 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) thelast day of our fiscal year following February 16, 2029; (c) the date on which we have, during the preceding three-year period, issuedmore than $1.0 billion in non-convertible debt; or (d) the date on which we are deemed to be a “large accelerated filer” underthe 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-affiliatesexceeds $700 million as of the last business day of our most recently completed second fiscal quarter. Once we cease to be an emerginggrowth company, we will not be entitled to the exemptions provided in the JOBS Act discussed above.

 

We have never paid dividends and we do notexpect to pay dividends for the foreseeable future.

 

We intend to retain earnings, if any, to financethe 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, financialcondition and capital requirements, restrictions in financing agreements, business opportunities and other factors. As a result, capitalappreciation, if any, of our Common Stock, will be your sole source of gain for the foreseeable future.

 

Our Articles of Incorporationcontains certain provisions which may result in difficulty in bringing actions against or on behalf of the Company or itsaffiliates.

 

Section 7 of our Articlesof Incorporation provides that the internal affairs of the Company, including derivative actions, shall be brought exclusivelyin the courts located in Clark County, Nevada. To the extent that any such action asserts a claim under the Exchange Act, that claim mustbe brought in federal court. Section 7 also provides that the United States federal courts generally shall have exclusive jurisdictionover claims brought under the Securities Act, the effect of which is that an action under the Securities Act with respect to the Companymay only be brought in the federal courts, whereas absent such provision the federal and commonwealth courts would otherwise have concurrentjurisdiction over such a matter. Any claim seeking relief under the Exchange Act may only be brought in federal court. Further, Section7 also provides for the United States District Court for the District of Nevada as the exclusive venue for any cause of action under eitherthe Securities Act or the Exchange Act, meaning such federal court is the only court in which such a case may be brought and heard. Theseprovisions may have the effect of precluding stockholders from bringing suit in their forum or venue of choice. Further, these provisionsmay give rise to a potential ambiguity as to which courts – state or federal – should preside over certain cases such as caseswith overlapping claims under both Nevada corporate law and the Securities Act and the rules and regulations thereunder. While the SupremeCourt of Delaware has upheld a charter provision designating federal courts as the exclusive forum for actions brought under the SecuritiesAct, it is unclear how a court in Nevada, might rule. Therefore, an investor seeking to bring a claim against or on behalf of the Companyor its affiliates under Nevada law or the federal securities laws may be forced to litigate their case in a court which poses geographicor 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 securitieslaws and the rules and regulations thereunder, and there is uncertainty as to whether a state or federal court would enforce this charterprovision.

 

 

 

 

USE OF PROCEEDS

 

This Prospectus relates to the Shares thatmay be offered and sold from time-to-time by the Selling Stockholders. We will not receive any proceeds upon the sale of the CommonStock by the Selling Stockholders in this offering See “Plan of Distribution” elsewhere in thisProspectus for more information, except that if all of the Warrants are exercised for cash, we will receive approximately $2.7million. We will use any proceeds for working capital and general corporate purposes including expansion of our B2B business.

 

 

DIVIDEND POLICY

 

We have never declared nor paid any cash dividendson our Common Stock, and currently intend to retain all our cash and any earnings for use in our business and, therefore, do not anticipatepaying any cash dividends in the foreseeable future. Any future determination to pay cash dividends on our Common Stock will be at thediscretion of the Board and will be dependent upon our consolidated financial condition, results of operations, capital requirements andsuch other factors as the Board deems relevant.

 

 

DETERMINATION OF OFFERING PRICE

 

Each Selling Stockholder will determine at whatprice(s) such Selling Stockholder may sell the Securities, and such sales may be made at prevailing market prices, or at privately negotiatedprices.

 

 

 

 

 

 

 

CAPITALIZATION

 

 

The following table sets forth our capitalization as of September 30,2024:

 

	·	on an actual basis;
	·	on a pro forma basis to give effect to (i) the issuance of 1,715,497 shares of common stock issued after September 30, 2024 (ii) the issuance of 1,389,079 shares of Common Stock upon the full exercise of Warrants, (iii) the gross proceeds of $1,955,000 related to the additional paid in capital received from the Common Stock and the proceeds assuming full exercise of Warrants of $2,764,267 related to the Private Placement, and (iv) stock compensation expense of $1.4 million related to the 300,000 shares granted from our advisory agreements.

 

The pro forma and pro forma as adjusted informationbelow is illustrative only and our capitalization following the adjustments outlined above are subject to change. You should read thistable in conjunction with “Management’s Discussion and Analysis of Financial Condition and Results of Operations-Recent Developments”on page 48 of this Prospectus and our consolidated financial statements and related notes included elsewhere in this Prospectus.

 

		As of September 30, 2024 (Presented in $ except for share numbers)
		Actual				Pro Forma
Long term debt		$	3,000,000			$	3,000,000
Series A Convertible Preferred Stock, 4,250 shares issued and outstanding as of September 30, 2024			43				43
Series B Convertible Preferred Stock, 50 shares issued and outstanding as of September 30, 2024			1				1
Series C Convertible Preferred Stock, 210 shares issued and outstanding as of September 30, 2024			2				2
Common stock, 6,184,983 shares issued and outstanding as of September 30, 2024 and 9,289,559 shares pro forma			61,850				92,896
Additional paid in capital			27,959,642				32,647,863
Accumulated deficit			(8,795,536	)			(10,223,536	)
Total stockholders’ equity		$	19,226,002			$	22,517,269
Total capitalization		$	22,226,002			$	25,517,269

 

 

 

 

 

 

THE PRIVATE PLACEMENT

 

On October 30, 2024,Unusual Machines closed a financing in which it received gross proceeds of $1,955,000 before deducting fees to the placement agent andother offering expenses payable by the Company. In the Private Placement, the Company entered into a Securities Purchase Agreement withaccredited investors, under which the investors purchased 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 or Common Stock and one Warrant to purchase one share of the Company’s Common Stock at an exerciseprice of $1.99 per share.

 

Allan Evans, the Company’s Chief ExecutiveOfficer and Sanford Rich and Robert Lowry, each a member of the Company’s Board of Directors, initially invested an aggregate of$250,000 in the Private Placement on identical terms to the other Investors. Subsequently, in order to comply with NYSE American rules,Mr. Evans, Mr. Rich and Mr. Lowry each agreed to pay an additional $36,842, $36,842, and $18,421, respectively, to the Company.

 

On October 29, 2024,as required by the Securities Purchase Agreement, the Company also entered into a Placement Agency Agreement with a broker-dealer (the“Placement Agent”) to serve as the Placement Agent for the Private Placement. Pursuant to the Placement Agency Agreement,the Company paid the Placement Agent, 8% of the gross proceeds raised in the Private Placement or $156,400 and issued the Placement AgentWarrants to purchase 102,895 shares of our Common Stock equal to 8% of the aggregate number of shares of Common Stock sold in the PrivatePlacement. The Placement Agent Warrants have the same terms as the Investor Warrants. We refer to the Warrants issued in the Private Placementand the Placement Agent Warrants together as the “Warrants”.

 

The Company issued the Selling Stockholders afive and a half year Warrant exercisable for an aggregate of 1,389,079 shares of the Company’s Common Stock. The Warrants have aterm of five and a half years from the Closing Date and may not be exercised for 180 days after the Closing Date (the “ExerciseDate”) and, subject to certain limited adjustments, are exercisable at $1.99 per share, subject to certain adjustments set forthin the Warrants. If at any time after the Exercise Date, there is no effective registration statement registering, or the Prospectus containedtherein is not available for the resale of the Warrant Shares (as defined in the Investor Warrants) by the Investor, then the InvestorWarrant may also be exercised, in whole or in part, at such time by means of a “cashless exercise.” The Warrants contain beneficialownership limitations preventing the holders from owning in excess of 4.99% or 9.99% of outstanding shares of Common Stock at any giventime and, subject to stockholder approval, 19.99% of all current outstanding Common Stock currently outstanding or such lesser percentagerequired by the NYSE American without first obtaining approval in accordance with the NYSE American rules.

 

 

 

 

 

 

 

 

SELLING STOCKHOLDERS

 

We are registering theShares in order to permit the Selling Stockholders to offer the Shares for resale from time-to-time. Except for the ownership of oursecurities, and as otherwise provided below, the Selling Stockholders have not had any material relationship with us within the pastthree years. However, the Selling Stockholders also consist of our executive officers and directors; three of the Selling Stockholdersare directors who purchased units in the Private Placement; in addition, two executive officers, certain advisory board members and ournon-employee directors have received stock grants and are offering their Common Stock for sale as Selling Stockholders.

 

The table below liststhe Selling Stockholders and other information regarding the beneficial ownership of the shares of Common Stock by each of the SellingStockholders. The second column lists the number of shares of Common Stock beneficially owned by each of the Selling Stockholders, basedon its ownership of the shares of Common Stock immediately prior to this offering.

 

The third column alsolists the Shares being registered by this Prospectus for resale by the Selling Stockholders.

 

The Selling Stockholdersmay sell all, some or none of the offered Shares in this offering. See “Plan of Distribution.”

 

Name of Selling Stockholders		Shares of Common Stock Beneficially Owned prior to this Offering				Shares Offered by this Prospectus				Shares of Common Stock Beneficially Owned After this Offering				Percentage of Shares of Common Stock Beneficially Owned After this Offering (1)
Dominari Securities LLC (2)			148,095				102,895	(3)			45,250				*
Kyle Wool & Soo Yu (4)			223,684				223,684	(5)			_				–%
Donald J. Trump Jr. (6)			331,580				331,580	(7)			_				–%
Sanford Rich, IRA(8)			184,485				172,185	(9)			12,300				*
Robert P. Lowry (10)			106,397				106,397	(11)			_				–%
AVFunds LLC (12)			131,580				131,580	(13)			_				–%
The Steven Scopellite 2021 Irrv Trust DTD 02/24/2021 (14)			328,948				328,948	(15)			_				–%
Paul Mann (16)			131,580				131,580	(17)			_				–%
George S. Gavallas (18)			197,368				197,368	(19)			_				–%
James McCabe (20)			328,948				328,948	(21)			_				–%
Atwater Consulting LLC (22)			65,790				65,790	(23)			_				–%
Joe Giamichael (24)			32,894				32,894	(25)			_				–%
Reimer Family Partnership, LP (26)			32,894				32,894	(27)			_				–%
Michael Anthony Schiavello (28)			32,894				32,894	(29)			_				–%
Importing Exporting LLC (30)			32,894				32,894	(31)			_				–%
Joshua Lipman and Jo-Ann Lipman (32)			32,894				32,894	(33)			_				–%
Jennifer Wool Cottone and Michael Cottone (34)			65,790				65,790	(35)			_				–%
Paul Prasarn (36)			32,894				32,894	(37)			_				–%
Christopher F. Devall (38)			19,738				19,738	(39)			_				–%
Erica Groussman (40)			65,790				65,790	(41)			_				–%
Allan Evans (42)			735,228				131,578	(43)			603,650				*

 

 

 

 

AKAA Family LLLP (44)			223,684				223,684	(45)			_				–%
Brett Borgersen (46)			32,894				32,894	(47)			_				–%
Simon Becker (48)			65,790				65,790	(49)			_				–%
Colin Bristow (50)			32,894				32,894	(51)			_				–%
Brian Hoff (52)			343,000				343,000	(53)			_				–%
Andrew Camden (54)			100,000				100,000	(55)			_				–%
Cristina Colon (56)			45,434				40,607	(57)			4,827				*
Jeffrey Thompson (58)			365,984				37,484	(59)			328,500				3.8%
Alexco Consulting, LLC (60)			50,000				50,000	(61)			_				–%
Guilford Enterprises Limited (62)			50,000				50,000	(63)			_				–%

 

*	Less than 1%
(1)	Percentages are based on 8,575,480 shares of Common Stock outstanding as of the date of this Prospectus and assumes the Selling Stockholders’ Shares offered by this Prospectus are sold.
(2)	Dominari Securities LLC is managed by CEO, Kyle Wool with a business address of 725 Fifth Avenue, 23rd Floor, New York, NY 10022. Dominari Securities, LLC was the underwriter of the Company’s IPO and Placement Agent for its Private Placement.
(3)	Represents 102,895 Shares issuable upon the exercise of the Warrants.
(4)	The principal address of the Selling Stockholders is 25 Rady Ln., East Quogue, NY 11942.
(5)	Includes 111,842 Shares issuable upon exercise of the Warrants.
(6)	The principal address of the Selling Stockholder is 725 Fifth Avenue, 23rd Floor, New York, NY 10022. The Selling Stockholder is an advisor to the Company.
(7)	Includes 65,790 Shares issuable upon exercise of the Warrants. Also includes200,000 shares of common stock issuable pursuant to a restricted stock unit agreement and advisory agreement. The restricted stock unitsvest 50% upon November 22, 2024 and 50% upon May 22, 2024.
(8)	The principal address of the Selling Stockholder is 26 Beach Drive, Darien, CT 06820. Mr. Rich is a director of the Company.
(9)	Includes 65,789 Shares issuable upon exercise of the Warrants.
(10)	The principal address of the Selling Stockholder is 20 Surfside, Humacao, PR 00791. Mr. Lowry is a director of the Company.
(11)	Includes 32,895 Shares issuable upon exercise of the Warrants.
(12)	AVFunds LLC is managed by Mitchell Casper with a principal address of 1521 Alton Rd., Ste. 643, Miami, FL 33139.
(13)	Includes 65,790 Shares issuable upon exercise of the Warrants.
(14)	The trustee for The Steven Scopellite 2021 Irrevocable Trust DTD 02/24/2021 is Michael Canarick. The principal address of the Selling Stockholder is 510 Bald Eagle Dr., Jupiter, FL 33477.
(15)	Includes 164,474 Shares issuable upon exercise of the Warrants.
(16)	The principal address of the Selling Stockholder is The Old Rectory Church Lane, Suffolk, IP13 6DS.
(17)	Includes 65,790 Shares issuable upon exercise of the Warrants.
(18)\	The principal address of the Selling Stockholder is 617 White Pelican Way, Jupiter, FL 33477.
(19)	Includes 98,684 Shares issuable upon exercise of the Warrants.
(20)	The principal address of the Selling Stockholder is 68 Fiesta Way, Ft. Lauderdale, FL 33301.
(21)	Includes 164,474 Shares issuable upon exercise of the Warrants.
(22)	Atwater Consulting LLC is managed by Anthony Hayes with a principal address of 3009 John Vaughan Rd., Williamsburg, VA 23185.
(23)	Includes 32,895 Shares issuable upon exercise of the Warrants.
(24)	The principal address of the Selling Stockholder is 144 Hillside Village, Rio Grande, PR 00745.
(25)	Includes 16,447 Shares issuable upon exercise of the Warrants.
(26)	The general partner of Reimer Family Partnership, LP is David Reimer with a principal address of 1995 NE 118th Rd., Miami, FL 33181.
(27)	Includes 16,447 Shares issuable upon exercise of the Warrants.

 

 

 

(28)	The principal address of the Selling Stockholder is 19 Sterling Lane, Sands Point, NY 11050.
(29)	Includes 16,447 Shares issuable upon exercise of the Warrants.
(30)	Importing Exporting LLC is managed by Josh Shipley with a principal address of 154 Clinton Rd., New Hartford, NY 13413.
(31) (32)	Includes 16,447 Shares issuable upon exercise of the Warrants. The principal address of the Selling Stockholder is 3 Sweetgrass Rd., Westhampton, NY 11977.
(33)	Includes 16,447 Shares issuable upon exercise of the Warrants.
(34)	The principal address of the Selling Stockholder is 24 Teal Dr., Fairport, NY 14450.
(35)	Includes 32,895 Shares issuable upon exercise of the Warrants.
(36)	The principal address of the Selling Stockholder is 615 Owego Road, Candor, NY 13743.
(37)	Includes 16,447 Shares issuable upon exercise of the Warrants.
(38)	The principal address of the Selling Stockholder is 2504 General Forrest Circle, Virginia Beach, VA 23454.
(39)	Includes 9,868 Shares issuable upon exercise of the Warrants.
(40)	The principal address of the Selling Stockholder is 6203 Laguna Path, North Miami Beach, FL 33141.
(41)	Includes 32,895 Shares issuable upon exercise of the Warrants.
(42)	The principal address of the Selling Stockholder is 1511 Ponce de Leon Ave., Unit 948, San Juan, PR 00909. Dr. Allan Evans is the Chief Executive Office and Chairman of the Board. The numbers in columns 1 and 3 include Common Stock held by an entity controlled by Dr. Evans.
(43)	Includes (i) 578,650 shares held by Consulting LLC, an entity managed by the Selling Stockholder and (ii) 65,789 Shares issuable upon exercise of the Warrants.
(44)	AKAA Family LLLP is managed by Douglas A. Perera Jr. with a principal address of P.O. Box 291676, Davie, FL 33329.
(45)	Includes 111,842 Shares issuable upon exercise of the Warrants.
(46)	The principal address of the Selling Stockholder is 255 Evernia Street, Apt. 506, West Palm Beach, FL 33401.
(47)	Includes 16,447 Shares issuable upon exercise of the Warrants.
(48)	The principal address of the Selling Stockholder is 103 Jasmine Ct., Franklin Lakes, NJ 07417.
(49)	Includes 32,895 Shares issuable upon exercise of the Warrants.
(50)	The principal address of the Selling Stockholder is 96 Evergreen Avenue, Rye, NY 10580.
(51)	Includes 16,447 Shares issuable upon exercise of the Warrants.
(52)	The principal address of the Selling Stockholder is 4677 LB Mcleod Road, Suite J, Orlando, FL 32811. The Selling Stockholder is the Chief Financial Officer of the Company.
(53)	Includes shares of restricted stock that were granted under the Company’s 2022 Equity Incentive Plan.
(54)	The principal address of the Selling Stockholder is 4677 LB Mcleod Road, Suite J, Orlando, FL 32811. The Selling Stockholder is the Chief Operating Officer of the Company.
(55)	Includes shares of restricted stock that were granted under the Company’s 2022 Equity Incentive Plan.
(56)	The principal address of the Selling Stockholder is 4677 LB Mcleod Road, Suite J, Orlando, FL 32811. Ms. Colon is a director of the Company.
(57)	Includes shares of restricted stock that were granted under the Company’s 2022 Equity Incentive Plan.
(58)	The principal address of the Selling Stockholder is 4677 LB Mcleod Road, Suite J, Orlando, FL 32811. Mr. Thompson is a director of the Company.
(59)	Includes shares of restricted stock that were granted under the Company’s 2022 Equity Incentive Plan.
(60)	Alexco Consulting, LLC is managed by Larry Glick with a principal address of 12154 Arbordale Way, Palm Beach Gardens, FL 33412. The Selling Stockholder is an advisor to the Company.
(61)	Includes 50,000 shares of common stock issuable pursuant to a restricted  stock unit agreement and advisory agreement. The restricted stock units vest 50% on November 22, 2024 and 50% on May 22, 2024.
(62)	Guilford Enterprises Limited is managed by JP Yoo with a principal address of #13-01, 36 Robinson Road, City House, Singapore 06887. The Selling Stockholder is an advisor to the Company.
(63)	Includes 50,000 shares of common stock issuable pursuant to a restricted stock unit agreement and advisory agreement. The restricted stock units vest 50% on November 22, 2024 and 50% on May 22, 2024.

 

 

 

PLAN OF DISTRIBUTION

 

Each Selling Stockholder of the Securities andany of their pledgees, assignees and successors-in-interest may, from time to time, sell any or all of their securities covered herebyon the principal trading market or any other stock exchange, market or trading facility on which the securities are traded or in privatetransactions. These sales may be at fixed or negotiated prices. A Selling Stockholder may use any one or more of the following methodswhen selling securities:

 

	·	ordinary brokerage transactions and transactions in which the broker-dealer solicits purchasers;
	·	block trades in which the broker-dealer will attempt to sell the securities as agent but may position and resell a portion of the block as principal to facilitate the transaction;
	·	purchases by a broker-dealer as principal and resale by the broker-dealer for its account;
	·	an exchange distribution in accordance with the rules of the applicable exchange;
	·	privately negotiated transactions;
	·	settlement of short sales;
	·	in transactions through broker-dealers that agree with the Selling Stockholders to sell a specified number of such securities at a stipulated price per security;
	·	through the writing or settlement of options or other hedging transactions, whether through an options exchange or otherwise;
	·	a combination of any such methods of sale; or
	·	any other method permitted pursuant to applicable law.

 

The Selling Stockholders may also sell securitiesunder Rule 144 or any other exemption from registration under the Securities Act, if available, rather than under this prospectus.

 

Broker-dealers engaged by the Selling Stockholdersmay arrange for other brokers-dealers to participate in sales. Broker-dealers may receive commissions or discounts from the Selling Stockholders(or, if any broker-dealer acts as agent for the purchaser of securities, from the purchaser) in amounts to be negotiated, but, exceptas set forth in a supplement to this Prospectus, in the case of an agency transaction not in excess of a customary brokerage commissionin compliance with FINRA Rule 2440; and in the case of a principal transaction a markup or markdown in compliance with FINRA IM-2440.The Selling Stockholders may not sell the Shares to a broker-dealer acting as a principal, since this would constitute a material changeto this Plan of Distribution, unless we file a post-effective amendment to the Registration Statement containing this Prospectus.

 

 

 

 

In connection with the sale of the securitiesor interests therein, the Selling Stockholders may enter into hedging transactions with broker-dealers or other financial institutions,which may in turn engage in short sales of the securities in the course of hedging the positions they assume. The Selling Stockholdersmay also sell securities short and deliver these securities to close out their short positions, or loan or pledge the securities to broker-dealersthat in turn may sell these securities. The Selling Stockholders may also enter into option or other transactions with broker-dealersor other financial institutions or create one or more derivative securities which require the delivery to such broker-dealer or otherfinancial institution of securities offered by this prospectus, which securities such broker-dealer or other financial institution mayresell pursuant to this prospectus (as supplemented or amended to reflect such transaction).

 

The Selling Stockholders and any broker-dealersor agents that are involved in selling the securities may be deemed to be “underwriters” within the meaning of the SecuritiesAct in connection with such sales. In such event, any commissions received by such broker-dealers or agents and any profit on the resaleof the securities purchased by them may be deemed to be underwriting commissions or discounts under the Securities Act. Each Selling Stockholderhas informed the Company that it does not have any written or oral agreement or understanding, directly or indirectly, with any personto distribute the securities.

 

The Company is required to pay certain fees andexpenses incurred by the Company incident to the registration of the securities. The Company has agreed to indemnify the Selling Stockholdersagainst certain losses, claims, damages and liabilities, including liabilities under the Securities Act.

 

We agreed to keep this prospectus effective untilthe earlier of (i) the date on which the securities may be resold by the Selling Stockholders without registration and without regardto any volume or manner-of-sale limitations by reason of Rule 144, without the requirement for the Company to be in compliance with thecurrent public information under Rule 144 under the Securities Act or any other rule of similar effect or (ii) all of the securities havebeen sold pursuant to this prospectus or Rule 144 under the Securities Act or any other rule of similar effect. The resale securitieswill be sold only through registered or licensed brokers or dealers if required under applicable state securities laws. In addition, incertain states, the resale securities covered hereby may not be sold unless they have been registered or qualified for sale in the applicablestate or an exemption from the registration or qualification requirement is available and is complied with.

 

Under applicable rules and regulations under theExchange Act, any person engaged in the distribution of the resale securities may not simultaneously engage in market making activitieswith respect to the Common Stock for the applicable restricted period, as defined in Regulation M, prior to the commencement of the distribution.In addition, the Selling Stockholders will be subject to applicable provisions of the Exchange Act and the rules and regulations thereunder,including Regulation M, which may limit the timing of purchases and sales of the Common Stock by the Selling Stockholders or any otherperson. We will make copies of this prospectus available to the Selling Stockholders and have informed them of the need to deliver a copyof this prospectus to each purchaser at or prior to the time of the sale (including by compliance with Rule 172 under the Securities Act).

 

 

 

 

 

BUSINESS

 

Background of Unusual Machines

 

Unusual Machines is a Nevada corporation, withour principal place of business in Orlando, Florida. The Company was originally incorporated in Puerto Rico and reincorporated as a Nevadacorporation on April 22, 2024.

 

Initial Public Offering

 

On February 16, 2024, we closed our IPO for thesale of 1,250,000 shares of Common Stock, at a public offering price of $4.00 per share. The IPO generated gross proceeds of $5.0 millionand net proceeds of approximately $4.5 million. We incurred and paid additional direct offering costs prior to the close of the IPO of$0.1 million during the nine months ended September 30, 2024, and $0.5 million during the year ended December 31, 2023. We used $1.0 millionof proceeds to pay for the acquisition of Fat Shark and Rotor Riot as discussed below.

 

Acquisition of Fat Shark and Rotor Riot

 

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

 

Simultaneous with the closing of our IPO, on February16, 2024, we closed the acquisitions of Fat Shark and Rotor Riot.

 

On July 22, 2024, we finalized the working capitaladjustment as stipulated in the Purchase Agreement, which resulted in an increase in the overall purchase price by an additional $2.0million. We agreed to increase the principal amount of the original note for the working capital adjustment, which increased the totalNote Payable to $4.0 million. In addition, we agreed to extend the maturity date of the promissory note to November 30, 2025.

 

The Drone Industry

 

The drone industry continues to expand to becomea powerful business tool and recreational activity, with growth occurring broadly and across our targeted industries. According to DroneIndustry Insights, the global drone market is expected to grow to $54.6 billion by 2030, with the commercial market growing at a 7.7%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.

 

Until our Brave 7 Flight Controller was addedto the Department of Defense’s Blue List in the summer of 2024, all of our revenues were generated from B2C sales. Following theaddition to the Blue List, we sold 6,600 Brave 7s to a European customer and the end of the third quarter began shipments. An importantpart of our focus is now the B2B market. In addition to future sales of the Brave 7 Flight Controller, we are seeking to get additionaldrone parts added to the Blue List. Upon approval, our goal is to monetize these products and continue to expand our B2B business. Becauseour B2B business is focused upon manufacturing of drones and drone parts in the United States and as a result of the recent United Statespresidential election, we are hopeful that our United States made drone products will generate material sales in the future.

 

 

 

 

Unusual Machines intends to pursue strategic acquisitiontargets that are cash flow positive and either sell drone parts or allow us to vertically integrate the production of drone parts. TheCompany believes that very promising, private companies (such as those the company will likely target) are in many instances underfundedand missing out on the ability to go public and bring their innovative products and solutions to a larger set of customers globally. Webelieve 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

 

Fat Shark and Rotor Riot principally operate inthe FPV segment of the drone industry. This segment focuses on drones piloted with wearable display devices. These are head mounted displays(“HMDs”) or goggles for drone pilots. These goggles give pilots FPV perspective to control their drone in flight. This isa unique experience where the pilot is interacting with an aircraft through visual immersion. This experience is accomplished by livestreaming footage from a camera mounted on the nose of the drone directly into specially designed goggles worn by the pilot. The imageis transmitted via radio (traditionally analog but increasingly digital) to the pilot. The drone remote control unit, the drone, and theFPV goggles are all interconnected via radio. This effect requires sophisticated electronics that transmit visual information with sufficientspeed and reliability to allow pilot control over the drone in real-time. Pilots routinely achieve speeds of over 90 mph in racing andother 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 acrobaticsand exploring the environment around the aircraft through the HMD. FPV racing describes a spectator sport where pilots fly their dronesin competitions through a series of obstacles, flags, and gates in a racetrack. Cinema photography is the process of viewing and recordinga subject matter from the air from the viewpoint of the pilot. Defense is a newer market segment characterized by the uses of drones inthe wars in Ukraine and Israel.

 

Plans for Growth, Development, and Expansion

 

Unusual Machine’s plans to strengthen itsmarket position through continued organic revenue growth. In parallel, the Company intends to aggressively invest in the extension oftheir business from just B2C sales to B2B sales of drone components. Unusual Machine’s business strategy includes (i) increasingits overall customer base with its products and rapid adoption; (ii) investing in new products and IP, starting with the Fat Shark andRotor Riot acquisitions that were completed with our IPO, (iii) expanding and growing Unusual Machine’s customer base and revenuestreams from its existing customer base using a “land-and-expand” model that establishes initial relationships and grows thoserelationships through the provision of high quality products and services, (iv) enhancing the company’s products to improve theintegration of third-party solutions, and (v) seeking strategic partnerships and sponsorships with companies that want access to the FPVcommunity.

 

As discussed above, the approval of our Brave7Flight Controller to the Blue UAS Framework marked a key step for Unusual Machines to expand into the B2B sector. Following that approvalin August 2024, we agreed to sell 6,600 units to an overseas customer.

 

Customers

 

Revenues for Fat Shark are principally generatedthrough distributors and for Rotor Riot online through its e-commerce site, www.rotorriot.com. Both Fat Shark and Rotor Riot market theirproducts and services to recreational and professional drone pilots and hobbyists.

 

 

 

 

Competition

 

Rotor Riot competes with a number of significantlylarger, better capitalized companies. SZ DJI Technology Co., Ltd., commonly known as DJI, is the dominant market leader with a globalmarket share estimated at more than 70%, according to industry research firms. Other competitors include GetFPV and Lumenier. Race DayQuads is a larger, direct competitor in the FPV sector. Rotor Riot competes against these competitors by leveraging its visibility onthe internet through its Facebook page which has more than 43,000 followers and its Rotor Riot YouTube channel which has more than 277,000subscribers. We believe that the Rotor Riot brand has been at the center of the racing and freestyle culture of drones since registeringits domain name in 2015.

 

Fat Shark also competes with DJI along with otherFPV headset companies including Skyzone FPV, Orqa, and HD Zero. The Fat Shark brand has been synonymous with FPV headsets since the emergenceof the market in 2008. Fat Shark continues to compete through partnerships with other FPV companies and a focus on manufacturing and productquality.

 

Suppliers

 

Rotor Riot purchases inventory from approximately50 suppliers although 57% of this inventory is purchased from four vendors. The two most critical components are electronics and frames.Approximately 95% of Rotor Riot’s inventory is purchased directly from Chinese vendors, all of which could be subject to varyingtariffs. The United States has continuously increased tariffs since 2019, which Rotor Riot is currently subject to and range from 2% to25%. These tariffs increase the cost of goods which reduces the company’s profit margins.

 

Fat Shark has sources over 90% of its componentsand inventory from a single Chinese supplier, Shenzhen Fatshark Co. Ltd. See “Related Party Transactions” for additional information.We source our Brave7 Flight Controller from a U.S. based manufacturer. See “Risk Factors” at page 6.

 

Government Regulationand Federal Policy

 

National Defense AuthorizationAct and American Security Drone Act

 

In December 2023, Congress passed the NationalDefense Authorization Act (“NDAA”), which includes the American Security Drone Act (“ASDA”). The bill prohibits,starting in December 2025, federal agencies and federally funded programs from purchasing or using drones manufactured in countries thatare 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 thetheft 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 U.S. Itsprimary 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 dronesin 2005 with their scope and frequency expanding in recent years with the significant increase in the number of drones sold. In December2015, the FAA announced that all drones weighing more than 250 grams, or 0.55 pounds, must be registered with the FAA. As of December2023, the FAA reported the registration of almost 791,000 drones, of which approximately 370,000 were commercial and approximately 416,000were recreational. In addition, more than 370,000 remote pilots were certified.

 

In January 2021, the FAA finalized rules requiringthat drones be identifiable remotely. These rules are effective for drone manufacturers beginning in September 2022 and for drone pilotsin 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 ecosystemfor Unmanned Aircraft System flights separate from, but complimentary to, the air traffic management system.

 

The Company believes that the oversight of theFAA is beneficial to the drone industry generally, and the Company specifically. Approximately 10 % of the drones sold by Rotor Riot arebelow the weight threshold required to register. The remaining 90% have more functionality, are more likely to be used for commercialpurposes, and therefore, should be registered.

 

Environmental Considerations

 

Compliance with applicable environmental lawssince 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-electricalpower to charge drones, users of drones the Company sells burn carbon which negatively affects the environment. Further, the SEC’snew climate change rules will likely increase our compliance costs.

 

Employees and Human Capital Resources

 

As of the date of this Prospectus, the Companyhas 15 full-time employees. In addition, our Chief Executive Officer is a full-time consultant through an entity he controls.

 

Intellectual Property

 

The Company has consolidatedits 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 Company owns theintellectual property and all rights associated with them.

 

 

 

 

The following table summarizes currently issuedpatents (indicated by “Issued”) including the grant dates thereof, and patent applications (indicated by “Pending orPublished”). As the chart indicates, some of these patents are in the U.S., where when issued the patent protection generally appliesfor 20 years from the date the patent application was made (subject to potential extension, if applied for and granted). In general, patentprotection 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	29/610,543	7/13/2017		UNMANNED AERIAL VEHICLE
Canada	Issued	179088	1/11/2018		UNMANNED AERIAL VEHICLE
China	Issued	201830008387.4	1/11/2018		UNMANNED AERIAL VEHICLE
EU	Issued	4665040	1/12/2018		UNMANNED AERIAL VEHICLE
Korea	Issued	30-2018-1689	1/11/2018		UNMANNED AERIAL VEHICLE
United States	Issued	15/684,814	8/23/2017		UNMANNED AERIAL VEHICLE
Canada	Abandoned	3009413	6/26/2018		UNMANNED AERIAL VEHICLE
China	Pending	201810895541.3	8/8/2018		UNMANNED AERIAL VEHICLE
EU	Pending	EP18179512.1	6/25/2018		UNMANNED AERIAL VEHICLE
United States	Issued	29/610,554	7/13/2017		PRINTED CIRCUIT BOARD
Canada	Issued	179089	1/11/2018		PRINTED CIRCUIT BOARD
China	Issued	201830008494.7	1/11/2018		PRINTED CIRCUIT BOARD
EU	Issued	4665032	1/12/2018		PRINTED CIRCUIT BOARD
Korea	Issued	30-2018-1690	1/11/2018		PRINTED CIRCUIT BOARD
China	Pending	201810324925.X	4/12/2018		SINGLE-PANEL HEAD-MOUNTED DISPLAY
EU	Pending	19159958.8	3/4/2019		SINGLE-PANEL HEAD-MOUNTED DISPLAY
United States	Issued	16/002,200	6/7/2018		SINGLE-PANEL HEAD-MOUNTED DISPLAY
China	Pending	202010150301.8	3/6/2020		APPARATUS FOR ATTACHING ACCESSORIES TO A FIRST-PERSON VIEW HEADSET
United States	Published	17/187,838	2/28/2021		APPARATUS FOR ATTACHING ACCESSORIES TO A FIRST-PERSON VIEW HEADSET
United States	Pending	29/783,966	5/17/2021		HEADSET
China	Pending	202130741102.X	11/11/2021		VR GLASSES
Canada, European Union Countries, Japan, United Kingdom	Pending	Not yet assigned	11/12/2021		HEADSET

 

 

 

 

Trademark Portfolio

 

The following table summarizes current registeredtrademarks (indicated by “Registered”) including the registration dates. As the chart indicates, these trademarks are registeredin the U.S. and abroad.

 

Country	Status	Trademark	Reg. No.	Reg. Date.	App. No.	App. Date.	Class	Next Deadline
US	Registered	ROTOR RIOT	5,175,159	4/4/2017	87/074,341	6/16/2016	16, 25, 35, 41	AOU due 4/4/2023
Australia	Registered	ROTOR RIOT	1814854	4/18/2017	1814854	12/9/2016	16, 25, 35, 41	Renewal due 12/9/2026
Canada	Registered	ROTOR RIOT	TMA1013525	1/22/2019	1813182	12/8/2016	16, 25, 35, 41	Renewal due 1/22/2034
EU	Registered	ROTOR RIOT	016152688	5/14/2017	016152688	12/12/2016	16, 25, 35, 41	Renewal due 12/12/2026
UK	Registered	ROTOR RIOT	UK00916152688	5/14/2017	UK00916152688	12/12/2016	16, 25, 35, 41	Renewal due 12/12/2026
US	Registered	Rotor Riot Logo	5,175,160	4/4/2017	87/074,378	6/16/2016	16, 25, 35, 41	AOU due 4/4/2023
Australia	Registered	Rotor Riot Logo	1814855	4/18/2017	1814855	12/9/2016	16, 25, 35, 41	Renewal due 12/9/2026
Canada	Registered	Rotor Riot Logo	TMA1013624	1/22/2019	1813183	12/8/2016	16, 25, 35, 41	Renewal due 1/22/2034
EU	Registered	Rotor Riot Logo	016152837	5/14/2017	016152837	12/12/2016	16, 25, 35, 41	Renewal due 12/12/2026
UK	Registered	Rotor Riot Logo	UK00916152837	5/14/2017	UK00916152837	12/12/2016	16, 25, 35, 41	Renewal due 12/12/2026

 

Unusual Machines hasrecently filed for a trademark on our logo.

 

Research and Development

 

Research and development activities are part ofUnusual Machine’s business, and the Company will follow a disciplined approach to investing our resources to create new drone technologiesand solutions. A fundamental part of this approach is a well-defined screening process that helps us identify commercial opportunitiesthat support desired technological capabilities in the markets we serve.

 

Legal Proceedings

 

The Company and its subsidiaries are not defendants(or the equivalents) in any pending litigation.

 

Properties

 

We own no real estateproperties. With the closing of our IPO, our principal place of business is located in Orlando, Florida at the Rotor Riot facility. InOctober 2023, Rotor Riot signed a five-year lease for a 6,900 sq. foot facility in Orlando, FL. We currently anticipate that the currentleased space will be sufficient to support our current and future needs. In addition, we have an executive office located at 15 Ave. MuñozRivera, Suite 2200, San Juan, Puerto Rico 00901 which we sublet from Red Cat on month-to-month basis.

 

 

 

 

MANAGEMENT’S DISCUSSION AND ANALYSIS OFFINANCIAL

CONDITION AND RESULTS OF OPERATIONS

 

You should read thefollowing discussion and analysis of our financial condition and results of operations in conjunctionwith the audited and unaudited financial statements (prepared in accordancewith accounting principles generally accepted in the United States (“U.S. GAAP”)) and related notes included elsewherein this Prospectus. The following discussion contains forward-looking statements that are subjectto 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 materiallyfrom those discussed in or implied by forward-looking statements as a result of various factors, including those discussed below andelsewhere in this Prospectus, 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 shareamounts, are in thousands unless otherwise noted.

 

Recent Developments

 

Private Placement

 

On October 29, 2024 we entered into SecuritiesPurchase Agreements with the Selling Stockholders for a Private Placement for aggregate gross proceeds of $1.95 million before deductingfees to the Placement Agent and other expenses payable by us in connection with the Private Placement. We intend to use the net proceedsof the Private Placement for working capital and general corporate purposes. As part of the Private Placement, we issued an aggregateof 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 topurchase one share of the Company’s Common Stock. The Warrants have a term of five and a half years from the Closing Date and maynot be exercised for 180 days after the Closing Date and are exercisable at $1.99 per share, subject to certain limitations and adjustmentsset forth in the Investor Warrants.

 

Results of Operations

 

Years Ended December 31, 2023 and 2022

 

Revenue

 

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

 

Operating Expenses

 

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

 

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

 

 

 

 

Net Loss

 

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

 

Unusual Machines Cash Flows

 

Years Ended December 31, 2023 and 2022

 

Operating Activities

 

Net cash used in operating activities was $1,776,552during the year ended December 31, 2023 compared to net cash used in operating activities of $1,189,191 during the year ended December31, 2022, representing an increase of $587,361 or 49.4%. This increase in net cash used primarily resulted from our increase in net lossof $1,211,685, changes in other working capital of $20,554 offset by non-cash expenses of $604,715.

 

Investing Activities

 

Net cash used in investing activities was $3,164during the year ended December 31, 2023 compared to net cash provided by investing activities of $40,647 during the year ended December31, 2022, representing an overall decrease of $43,811 or 108%. The cash used in investing activities during 2023 related to purchasingcomputer equipment. The cash provided by investing activities during 2022 primarily related to a related party receivable for $45,222being paid back, offset by the purchase of computer equipment of $4,575 during the year.

 

Financing Activities

 

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

 

Three Months Ended September 30, 2024 comparedto the Three Months Ended September 30, 2023

 

Revenue

 

During the three months ended September 30, 2024we generated revenues totaling $1,531,264 compared to $0 during the three months ended September 30, 2023, representing an increase of$1,531,264 or 100%. We did not generate any revenues until the closing of the acquisitions of Fat Shark and Rotor Riot on February 16,2024. The majority of our revenue during the quarter relates to completed and fulfilled product sales during the period through our RotorRiot retail channel and from our B2B wholesale through Fat Shark.

 

Cost of Goods Sold

 

During the three months ended September 30, 2024,we incurred cost of goods sold of $1,131,777 compared to $0 during the three months ended September 30, 2023, resulting in an increaseof $1,131,777 or 100%. Similar to revenues, we did not incur any cost of goods sold until the closing of the acquisitions on February16, 2024. Cost of goods sold primarily relate to product costs from our sales, but also include certain shipping and other direct productcosts.

 

 

 

 

Gross Margin

 

During the three months ended September 30, 2024,our gross margin was $399,487 compared to $0 during the three months ended September 30, 2023, resulting in an increase of $399,487 or100%. Our gross margin, as a percentage of sales, totaled 26% during the three months ended September 30, 2024, compared to 0% duringthe three months ended September 30, 2023. We anticipate our gross margin to fluctuate period to period depending on certain promotionsand products that are sold during the period and the margins we generated during the quarter are in line with our expectations and normaloperating margins.

 

Operating Expenses

 

During the three months ended September 30, 2024,operations expenses totaled $218,126 compared to $0 during the three months ended September 30, 2023, resulting in an increase of $218,126or 100%. Prior to the closing of the acquisitions in February 2024, we did not have any operations expenses. Operations expenses primarilyrelate to our direct operations including our warehouse personnel and warehouse expenses.

 

During the three months ended September 30, 2024,research and development expenses was $15,000 compared to $0 for the three months ended September 30, 2023, resulting in an increase of$15,000. 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 dronecomponent manufacturing to the United States.

 

During the three months ended September 30, 2024,sales and marketing expenses totaled $252,253 compared to $0 for the three months ended September 30, 2023, resulting in an increase of$252,253 or 100%. Prior to the closing of the acquisitions in February 2024, we did not have any sales and marketing expenses. Sales andmarketing expenses primarily relate to advertising spend related to Rotor Riot and payroll expenses.

 

During the three months ended September 30, 2024,general and administrative expenses totaling $1,374,989 compared to $353,029 for the three months ended September 30, 2023, resultingin an increase of $1,021,960 or 289%. The increase primarily relates to stock compensation expense during quarter that we did not havein the previous year, an increase in expenses related to closing the IPO including legal and accounting fees, additional transition andintegration related expenses, and the costs related to operating Fat Shark and Rotor Riot.

 

Net Loss

 

Our net loss for the three months ended September30, 2024, totaled $2,144,250 compared to $353,674 for the three months ended September 30, 2023, resulting in an increase in net lossof $1,790,576 or 506%. The increase in net loss primarily relates to stock compensation expense taken during the period, the $685,151loss on debt extinguishment, of which $663,250 was non-cash, in connection with the $1.0 million debt exchange for Series C preferredshares. In addition, the increase in general and administrative expenses related to closing the initial public offering (the “IPO”)and the increased operations and sales and marketing expenses we incurred since the acquisition from Fat Shark and Rotor Riot. This waspartially offset by generating gross margin related to the revenue and cost of goods sold from sales for Fat Shark and Rotor Riot. Inthe fourth quarter of 2024 we expect to complete our valuation and identification of any intangible assets related to the acquisitionsof Fat Shark and Rotor Riot. For any identified intangibles, we will begin to amortize during the fourth quarter which will result ina non-cash charge going forward. However, and until we complete our valuation on intangibles, the amount is uncertain, and the futureamortization may or may not be material. After the identification and valuation of intangibles is complete, we will complete our impairmentanalysis on goodwill and the identified intangibles during the fourth quarter. While the amount is uncertain, we expect that our goodwillimpairment could be material.

 

 

 

 

Results of Operations – Nine monthsEnded September 30, 2024 compared to the Nine months Ended September 30, 2023

 

Revenue

 

During the nine months ended September 30, 2024we generated revenues totaling $3,561,303 compared to $0 during the nine months ended September 30, 2023, representing an increase of$3,561,303 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 nine months ending September 30, 2024 are affected by not having any revenues for half of thefirst quarter. Revenues relate to completed and fulfilled product sales during the period through our Rotor Riot retail channel and fromour B2B wholesale through Fat Shark.

 

Cost of Goods Sold

 

During the nine months ended September 30, 2024,we incurred cost of goods sold of $2,569,209 compared to $0 during the nine months ended September 30, 2023, resulting in an increaseof $2,569,209 or 100%. Similar to revenues, we did not incur any cost of goods sold until the closing of the acquisitions on February16, 2024. Cost of goods sold primarily relate to product costs from our sales, but also include certain shipping and other direct productcosts.

 

Gross Margin

 

During the nine months ended September 30, 2024,our gross margin was $992,094 compared to $0 during the nine months ended September 30, 2023, resulting in an increase of $992,094 or100%. Our gross margin, as a percentage of sales, totaled 28% during the nine months ended September 30, 2024, compared to 0% during thenine months ended September 30, 2023. We anticipate our gross margin to fluctuate period to period depending on certain promotions andproducts that are sold during the period and the margins we generated during the quarter are in line with our expectations and normaloperating margins.

 

Operating Expenses

 

During the nine months ended September 30, 2024,operations expenses totaled $544,220 compared to $0 during the nine months ended September 30, 2023, resulting in an increase of $544,220or 100%. Prior to the closing of the acquisitions in February 2024, we did not have any operations expenses. Operations expenses primarilyrelate to our direct operations including our warehouse personnel and warehouse expenses.

 

During the nine months ended September 30, 2024,research and development expenses totaled $42,078 compared to $0 for the nine months ended September 30, 2023, resulting in an increaseof $42,078 or 100%. Prior to the closing of the acquisitions in February 2024, we did not have any research and development expenses during2023. Research and development expense primarily relates to new product development as we continue to partner with manufacturers to bringdrone component manufacturing to the United States.

 

During the nine months ended September 30, 2024,sales and marketing expenses totaled $795,643 compared to $0 for the nine months ended September 30, 2023, resulting in an increase of$795,643 or 100%. Prior to the closing of the acquisitions in February 2024, we did not have any sales and marketing expenses. Sales andmarketing expenses primarily relate to advertising spend related to Rotor Riot and payroll expenses.

 

During the nine months ended September 30, 2024,general and administrative expenses totaling $3,728,749 compared to $1,965,469 for the nine months ended September 30, 2023, resultingin an increase of $1,763,280 or 90%. The increase relates to increased expenses related to closing the IPO including legal and accountingfees, additional transition and integration related expenses, and the costs related to operating Fat Shark and Rotor Riot.

 

 

 

 

Net Loss

 

Our net loss for the nine months ended September30, 2024, totaled $4,862,490 compared to $1,966,876 for the nine months ended September 30, 2023, resulting in an increase in net lossof $2,895,614 or 147%. The increase in net loss primarily relates the increase in general and administrative expenses related to closingthe IPO with additional increase in expenses for operations, sales and marketing expenses we incurred since the acquisition from Fat Sharkand Rotor Riot, and other expenses of $743,381 related to interest expense and a large non-cash loss on debt extinguishment during theperiod. This was partially offset by generating gross margin related to the revenue and cost of goods sold from sales for Fat Shark andRotor Riot. In the fourth quarter of 2024 we expect to complete our valuation and identification of any intangible assets related to theacquisitions of Fat Shark and Rotor Riot. For any identified intangibles, we will begin to amortize during the fourth quarter which willresult in a non-cash charge going forward. However, and until we complete our valuation on intangibles, the amount is uncertain, and thefuture amortization may or may not be material. After the identification and valuation of intangibles is complete, we will complete ourimpairment analysis on goodwill and the identified intangibles during the fourth quarter. While the amount is uncertain, we expect thatour goodwill impairment could be material.

 

Cash Flow Analysis

 

Prior to the closingof our IPO and the acquisitions of Fat Shark and Rotor Riot, we did not have any cash inflows from operations and all cash outflows relatedto 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 liquidityneeds and achieve our business objectives.

 

Operating Activities

 

Net cash used in operating activities was $2,718,513during the nine months ended September 30, 2024, compared to net cash used in operating activities of $1,382,538 during the nine monthsended September 30, 2023, representing an increase of $1,335,975 or 97%. This increase in net cash used primarily resulted from our increasein net loss of $2,895,614 and an increase in prepaid expenses of $319,532, accounts receivable of $73,109, other assets of $62,850, offsetby a decrease in inventory of $337,562, an increase in accounts payable and accrued expenses of $681,414, other liabilities of $153,020and non-cash expenses of $1,378,790.

 

Investing Activities

 

Net cash used in investing activities was $852,801during the nine months ended September 30, 2024 compared to net cash used in investing activities of $3,164 during the nine months endedSeptember 30, 2023, representing an increase of $849,637. This increase in net cash used related to the $1,000,000 we paid to purchaseFat 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$4,362,313 during the nine months ended September 30, 2024, compared to net cash used in financing activities of $376,702 during the ninemonths ended September 30, 2023, resulting in an increase in net cash provided by financing activities of $4,739,015. The increase primarilyrelates to proceeds received from our IPO of $5,000,000, offset by change in deferred offering costs and other IPO related expenses of$260,985.

 

 

 

 

Liquidity and CapitalResources

 

As of September 30, 2024, we had current assetstotaling $4,517,325 primarily consisting of cash balances of $1,685,772, inventory of $1,453,042 and prepaid deposits for inventory of$1,140,511. Our current liabilities as of September 30, 2024 totaled $2,018,255, primarily consisting of accounts payable and accruedexpenses of $1,032,637 and customer deposits and other current liabilities of $985,618. Our net working capital as of September 30, 2024was $2,499,070.

 

On October 29, 2024, we completed a Private Placementfor 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 deductingfees to the Placement Agent and other expenses payable by us in connection with the Private Placement. We retained approximately $1.7million in net proceeds.

 

As of November 13, 2024, we have approximately$2.4 million in cash. We believe that the net proceeds from our 2024 financings and revenues, the Private Placement and existing cashbalances 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 andneed to raise additional funds sooner than we anticipate. We do not anticipate any significant cost increases post the Fat Shark and RotorRiot acquisitions and with consideration of the combined companies’ net low and cash position, we expect we will have sufficientworking capital to support our operations for at least 12 months.

 

As described in Note 8 of our financial statements,we issued the New Notes following our agreement with Red Cat on the Working Capital Adjustment. Once the New Notes mature in November2025, we will need to either (a) raise additional capital, (b) refinance the New Notes, (c) seek an extension of the maturity date ofthe Notes, or (d) explore the conversion or exchange of the New Notes into equity, which will result in dilution to our shareholders,if the New Notes have not been converted or paid in full prior to the maturity date. If we are unable to raise capital or explore suchother options when needed or on acceptable terms, we may default under the obligation pursuant to the New Notes, or be forced to delay,reduce or eliminate certain operational efforts.

 

Critical Accounting Policies and Estimates

 

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

 

We regularly evaluate the accounting policiesand estimates that we use to prepare our financial statements. A complete summary of these policies is included in the notes to our financialstatements. 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 fromthose estimates made by management.

 

Fair value of assets acquired and liabilities assumed in businesscombination

 

The Fat Shark and Rotor Riot acquisitions areaccounted for as a business combination under ASC 805. We recognized the assets acquired and liabilities assumed at fair value as of thedate of acquisition. We have not yet completed our evaluation of the fair value for determining the unallocated purchase price betweengoodwill and other intangible assets. Such amounts are subject to adjustment during the one-year measurement period. The fair value willbe 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 benefitarising from other assets acquired in an acquisition that are not individually identified and separately recognized. Goodwill representscosts in excess of fair values assigned to the underlying identifiable net assets of acquired businesses. Intangible assets from acquiredbusiness are recognized at fair value on the acquisition date. We are continuing our evaluation of the fair value of the assets acquiredand liabilities assumed from the Fat Shark and Rotor Riot acquisition, and we have not yet determined the unallocated purchase price betweengoodwill and other intangible assets. Goodwill is tested for impairment at least annually at the reporting unit level or whenever eventsor changes in circumstances indicate that goodwill might be impaired.

 

Valuation of Inventory

 

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

 

Stock Based Compensation

 

Certain employees and directors have receivedgrants of restricted Common Stock in our company. Other employees received grants of stock options in our Company. These awards are accountedfor 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 basedon 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 determinedusing the Black-Scholes option-pricing model which values options based on the stock price at the grant date, the expected life of theoption, the estimated volatility of the stock, and the risk-free interest rate over the expected life of the option. The expected volatilitywas determined considering comparable companies historical stock prices as a peer group for the fiscal year the grant occurred and priorfiscal years for a period equal to the expected life of the option. The risk-free interest rate was the rate available from the St. LouisFederal 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-pointmethod calculation.

 

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

 

Warrant Classification and Fair Value

 

The Company classifies warrants issued for thepurchase of shares of its Common Stock as either equity or liability instruments based on an assessment of the specific terms and conditionsof each respective contract. The assessment considers whether the warrants are freestanding financial instruments or embedded in a hostinstrument, whether the warrants meet the definition of a liability pursuant to ASC 480, whether the warrants meet the definition of aderivative 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 periodend date while the warrants are outstanding.

 

 

 

 

For issued or modified warrants that meet allof 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 recordedas liabilities at their fair value. The fair value of the warrant liability is determined using the binomial option pricing model thebinomial option pricing model which values the liability on the stock price at the grant date, the estimate volatility of the stock, theexpected term until exercise, the risk-free interest rate over the expected term, certain estimates and probabilities of different outcomes.

 

Recently Issued Accounting Pronouncements

 

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

 

 

 

 

 

 

 

 

 

MANAGEMENT

 

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

 

Name		Age		Position
Dr. Allan Evans		41		Chief Executive Officer and Director
Brian Hoff		38		Chief Financial Officer
Andrew Camden		33		Chief Operating Officer
Robert Lowry		65		Director
Sanford Rich		66		Director
Jeffrey Thompson		59		Director
Cristina A. Colón, Esq.		37		Director

 

Biographies

 

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

 

Dr. Allan Evans was appointed to serve as theChief Executive Officer and a director of the Company effective December 4, 2023. Prior to becoming our Chief Executive Officer, Dr. Evanswas the Chief Operating Officer of Red Cat from January 2021 to November 2023 and was the Chief Executive Officer of Fat Shark. As partof his compensation package with Red Cat, Dr. Evans beneficially owns 1,443,395 shares of Common Stock and 875,000 unvested options inRed Cat. Dr. Evans is a serial entrepreneur with a history of founding and leading technological innovation. He has extensive experiencein 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 companyfocused 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 servingas Chief Technology Officer of Avegant until 2016. Dr. Evans has 47 pending or issued patents that cover a range of technologies fromimplantable medical devices to mixed reality headsets. Academically, his work has an h-index of 15, an i-index of 28, and has been citedin 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 companyexperience, 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 ChiefFinancial Officer since November 2022. Prior to that, he served as the Chief Financial Officer of Auddia, Inc. (Nasdaq: AUUD), a technologycompany focused on audio media, from April 2021 to October 2022. He served as Vice President and Controller at STACK Infrastructure, adigital infrastructure company, from October 2019 to April 2021, and as Controller at Coalfire, a cybersecurity company, from November2011 until October 2019.

 

 

 

 

Andrew Camden, Chief Operation Officer

 

Mr. Camden, who became our Chief Operating Officeron 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 served as a director of theCompany since August 2022. Ms. Colón has been the owner of Cinmarc & Associates LLC, a public housing consulting firm, since2018 and has served as its President since August 2021. Ms. Colón has also been the owner/operator Café de La Plaza, a restaurantlocated in Palmas del Mar, Puerto Rico, since 2009. From 2019 to 2021, Ms. Colón served as an investor relations specialist atOptimizeRX, a medical technology company. Ms. Colón’s experience as an entrepreneur and her marketing and investor relationsexperience 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 Companysince August 2022. Mr. Lowry has been the owner of Sebring Assisted Living Facility since 1998, and the owner of Homestead Assisted LivingFacility since 2007. Mr. Lowry’s experience as a business entrepreneur and his experience in operational finance led to his appointmentas a director.

 

Sanford Rich, Director

 

Mr. Rich serves as director and Audit Committeemember of the Company since January 31, 2024. Since March 2012, Mr. Rich has served as a director of Aspen Group, Inc. and since November29, 2019, as Audit Committee Chairman. From August 2, 2017 to June 23, 2019, Aspen Group, Inc. had its common stock listed on the NasdaqCapital Market and from June 24, 2019 to March 23, 2023, Aspen Group, Inc. had its common stock listed on Nasdaq Global Market, afterwhich it voluntarily withdrew to focus on its core business and save money. Since January 2016, Mr. Rich has served as the Executive Directorof the New York City Board of Education Retirement System. Mr. Rich also served as a member of the Investor Advisory Group of the PCAOBfor a term from June 1, 2022 to December 31, 2023. From November 2012 to January 2016, Mr. Rich served as the Chief of Negotiations andRestructuring for the Pension Benefit Guaranty Corporation (a United States Government Agency). Mr. Rich was selected as a director forhis 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 Companysince inception in 2019. He served as the Company’s principal executive officer from inception until April 2022. Mr. Thompson hasbeen President and Chief Executive Officer of Red Cat since May 15, 2019. Mr. Thompson was a director of Panacea Life Sciences Holdings,Inc. (OTCQB:PLSH), a producer and marketer of products made from industrial hemp (CBD), from January 2019 until April 2020. In 2016, Mr.Thompson founded Red Cat Propware Inc., a provider of cloud-based analytics, storage, and services for drone aircraft, and served as itsChief 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.

 

 

 

 

CORPORATE GOVERNANCE

 

Composition of our Board

 

Our Board 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 presentdirectors are independent, in accordance with standards under the NYSE Listing Rules, other than Dr. Evans and Mr. Thompson. Our Boarddetermined that, under the NYSE Listing Rules, Dr. Evans is not an independent director because he is the Chief Executive Officer of theCompany. It has also been determined that Mr. Thompson is not an independent director, having previously been Chief Executive Officerof 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 Boardhas also determined that they are independent under the NYSE Listing Rules independence standards for Compensation Committee members andfor Governance and Nominating committee members.

 

Committees of the Board

 

Audit Committee

 

The Audit Committee currentlyconsists of Mr. Rich (Chair), Mr. Lowry, and Ms. Colón. Each member of the Audit Committee is an independent director as definedby the rules of the SEC and NYSE American. The Audit Committee has the sole authority and responsibility to select, evaluate and engageindependent auditors for the Company. The Audit Committee reviews with the auditors and with the Company’s financial managementall matters relating to the annual audit of the Company.

 

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

 

Audit Committee FinancialExpert

 

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

 

Compensation Committee

 

The Compensation Committeecurrently consists of Mr. Lowry (Chair), Ms. Colón, and Mr. Rich each of whom are independent directors. Among other things, theCompensation Committee reviews, recommends and approves salaries and other compensation of the Company’s executive officers, andadministers the Company’s Equity Incentive Plan (including reviewing, recommending and approving stock option and other equity incentivegrants to executive officers).

 

 

 

 

The Compensation Committeewill meet in executive session to determine the compensation of the Chief Executive Officer of the Company. In determining the amount,form, and terms of such compensation, the Committee will consider the annual performance evaluation of the Chief Executive Officer conductedby the Board in light of company goals and objectives relevant to Chief Executive Officer compensation, competitive market data pertainingto Chief Executive Officer compensation at comparable companies, and such other factors as it deems relevant, and is guided by, and seeksto promote, the best interests of the Company and its shareholders.

 

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

 

The Compensation Committeealso reviews and makes recommendations with respect to stockholder proposals related to compensation matters.

 

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

 

Corporate Governanceand Nominating Committee

 

The Corporate Governanceand Nominating Committee (the “Nominating Committee”) consists of Ms. Colón (Chair), Mr. Lowry, and Mr. Rich, eachof whom meets the independence requirements of all other applicable laws, rules and regulations governing director independence, as determinedby the Board.

 

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

 

It is authorized to considerand 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, anyand all inquiries into the background and qualifications of any candidate for the Board and such candidate’s compliance with theindependence and other qualification requirements established by the Nominating Committee.

 

In selecting and recommendingcandidates for election to the Board or appointment to any committee of the Board, the Nominating Committee does not believe that it isappropriate to select nominees through mechanical application of specified criteria. Rather, the Nominating Committee shall consider suchfactors 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’sindustry; experience as a board member of another publicly-held company; diversity as required by the NYSE Rules; diversity of expertiseand experience in substantive matters pertaining to the Company’s business relative to other directors of the Company; practicaland mature business judgment; and composition of the Board (including its size and structure).

 

The Nominating Committeewill develop and recommend to the Board a policy regarding the consideration of director candidates recommended by the Company’sshareholders and procedures for submission by shareholders of director nominee recommendations.

 

 

 

 

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

 

Board Diversity

 

While we do not havea formal policy on diversity, the Board considers diversity to include race, ethnicity, gender as well as the skill set, background, reputation,type and length of business experience of the Board members as well as a particular nominee’s contributions to that mix. The Boardbelieves that diversity brings a variety of ideas, judgments and considerations that benefit the Company and its shareholders. Althoughthere are many other factors, the Board seeks individuals with experience on operating and growing businesses.

 

Board Leadership Structure

 

Allan Evans serves asthe Chairman of the Board and actively interfaces with management, the Board and counsel regularly. We believe that Dr. Evans’sexperience as an entrepreneur and Chief Executive Officer of a drone company will help the Company with the challenges faced by us atthis stage – seeking to expand the B2B business, implementing our business and marketing plans, and continuing and managing ourgrowth. We believe that Mr. Evans, Mr. Thompson, and the other members of the Board will assist the Company’s management with boththe operational aspects as well as the strategic aspects of our business. We believe the Company’s partnership with Red Cat canbe enhanced with Dr. Evans and Mr. Thompson as the Chief Executive Officer of each respective company.

 

Board Risk Oversight

 

The Company’s riskmanagement function is overseen by the Board. The Company’s management keeps the Board apprised of material risks and provides itsdirectors access to all information necessary for them to understand and evaluate how these risks interrelate, how they affect us, andhow management addresses those risks. Allan Evans, Chairman of the Board, works closely together with the other members of the Board whenmaterial 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 andthe lack of revenue.

 

Family Relationships

 

There are no family relationshipsamong any of our officers or directors. Dr. Evans’ sister is the Chief Financial Officer of Red Cat.

 

Code of Ethics

 

The Board has adopted a Code of Business Conductand Ethics (the “Code of Ethics”) that applies to all of the Company’s employees, including the Company’s ChiefExecutive 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 ethicalconduct, 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 illegalor unethical behavior, and accountability for adherence to the Code of Ethics. We will provide a copy, without charge, to anyonethat requests a copy of our Code of Ethics in writing by contacting 4677 L B McLeod Rd, Suite J, Orlando, FL 32811, Attention: CorporateSecretary.

 

 

 

 

 

Insider Trading Arrangements and Policies

 

We are committed to promoting high standards ofethical business conduct and compliance with applicable laws, rules, and regulations. As part of this commitment, we have adopted ourInsider Trading Policy governing the purchase, sale, and/or other dispositions of our securities by our directors, officers, and employeesthat we believe is reasonably designed to promote compliance with insider trading laws, rules and regulations, and the exchange listingstandards applicable to us.

 

Hedging

 

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

 

Clawback Policy

 

Additionally, our Board has adopted a policy relatingto recovery of erroneously awarded compensation (a “Clawback Policy”) in accordance with the rules of the NYSE American, torecoup “excess” incentive compensation, if any, earned by current and former executive officers as determined by the Boardin accordance with the definition in Section 10Dof the Exchange Act during a three year look back period in the event of a financial restatementdue to material noncompliance with any financial reporting requirement under the securities laws (with no fault required).

 

In addition, under our 2022 EquityIncentive Plan (the “Plan”) we generally grant equity awards to our officers, employees and independent directors which providefor clawback of profits and cancellation of awards in the event the grantee engages in certain wrongful conduct

  

 

 

 

 

EXECUTIVE COMPENSATION

 

Executive Compensation Overview

 

As an “emerginggrowth company,” we have opted to comply with the executive compensation disclosure rules applicable to “smaller reportingcompanies,” as such term is defined in the rules promulgated under the Securities Act.

 

This section providesan overview of the compensation awarded to, earned by, or paid to each individual who served as our principal executive officer duringour fiscal year 2023. Our named executive officers, or the Named Executive Officers, for the year ended December 31, 2023, are:

 

	·	Allan Evans, our Chief Executive Officer;
	·	Brandon Torres Declet, our former Chief Executive Officer; and
	·	Brian Hoff, our Chief Financial Officer

 

Unusual Machines SummaryCompensation Table Year Ended December 31, 2023

 

The following table containsinformation about the compensation paid to or earned by each Officer (each a “Named Executive Officer”) with during the twomost recently completed fiscal years.

 

Name and Principal Position

Year

Salary ($)

Bonus ($)

Stock Awards ($) (2)

All Other Compensation ($) (2)

Total ($)

Allan Evans (1)

2023

20,833

–

–

–

20,833

Chief Executive Officer

2022

–

–

–

–

–

Brandon Torres Declet (2)

2023

229,167

–

64,344

62,500

356,011

Former Chief Executive Officer

2022

80,000

–

–

–

80,000

Brian Hoff (3)

2023

250,000

–

–

–

250,000

Chief Financial Officer

2022

41,667

–

–

–

41,667

________________________

(1)	Mr. Evans was appointed Chief Executive Officer in December 2023 and did not serve during the 2022 fiscal year.
(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 also received 16,086 shares of our Common Stock.
(3)	Mr. Hoff was appointed Chief Financial Officer in November 2022.

 

 

 

 

Fat Shark and Rotor Riot Summary CompensationInformation

 

Set forth below is summary compensation informationsimilar to that set forth above, but reflecting amounts paid, payable or allocable to Fat Shark or Rotor Riot for executive officers ofone or both of those entities who exceeded the enumerated threshold and which the Company anticipates hiring as an executive officer ofthe Company (directly or through Fat Shark or Rotor Riot) in connection with the acquisition of those entities in the Business Combination(the “Business Combination Officers”). The compensation information relates to the fiscal year end April 30, 2023 and 2022,respectively. Mr. Camden was appointed our Chief Operating Officer on March 4, 2024.

 

Name and Principal Position(1)

Year

Salary ($)

Bonus ($)

Stock Awards ($)

Option Awards ($)

Total ($)

Andrew Camden

2023

90,000

–

–

–

90,000

President of Rotor Riot

2022

72,500

–

–

259,483

(2)

331,983

_________________

(1)	Represents principal position(s) held at Red Cat, Fat Shark and/or Rotor Riot.
(2)	Represents the aggregate grant date fair value computed in accordance with FASB ASC Topic 718 of 10-year options to purchase 100,000 shares of Red Cat common stock at an exercise price of $2.60, which become fully vested on June 7, 2024.

 

Outstanding EquityAwards at December 31, 2023

 

There were no outstanding equity awards held by our Named ExecutiveOfficers as of December 31, 2023.

 

On April 30, 2024, the Company issued 937,249restricted shares of Common Stock to executive officers and board members of the Company. The shares of restricted stock were grantedunder the Company’s Plan. The restricted shares issued to executive officers are subject to pro rata forfeiture through February14, 2025.

 

On May 2, 2024, the Company issued an additional40,650 of restricted shares of Common Stock to Allan Evans, the Company’s CEO related to an agreed upon reduction of cash compensation.The shares of restricted stock were granted under the Company’s Plan.

 

On November 5, 2024, the Board of the Companyawarded each of the Company’s Chief Executive Officer, Chief Financial Officer and Chief Operating Officer 50,000 restricted sharesof the Company’s Common Stock under the Plan as bonuses following the improvement in our liquidity resulting from the Private Placement.The bonuses are subject to clawback pursuant to the Company’s Clawback Policy.

 

Employment Agreements

 

Consulting Agreement for the Services of Dr.Allan Evans, Chief Executive Officer

 

On December 4, 2023,the Board appointed Allan Evans as the Company’s Chief Executive Officer. On April 30, 2024, the Board approved the Company enteringinto a two-year Management Services Agreement (the “Consulting Agreement”) with 8 Consulting LLC (the “Consultant”)for the services of Mr. Evans, whereby the Consultant will cause Mr. Evans to perform his services as the Company’s Chief ExecutiveOfficer and the Consultant will be compensated on behalf of Mr. Evans by the Company in connection with his performance of such services.The Consulting Agreement allows Mr. Evans to receive favorable tax benefits as a resident of the Commonwealth of Puerto Rico who willperform such services in Puerto Rico. Pursuant to the Consulting Agreement, Mr. Evans will perform the duties and responsibilities thatare customary for a chief executive officer of a public company that either have revenues similar to the Company on a pro forma basisas reflected in the Prospectus filed with the SEC on February 15, 2024, or if pre-revenues, are an active and on-going business that areperforming pre-revenue activities similar to a biotech company which is engaged in active research and/or the overseeing of clinical trials.The Consultant will cause Mr. Evans, as Chief Executive Officer, (i) to undertake primary responsibility for managing all aspects of theCompany and overseeing the preparation of all reports, registration statements and other filings required filed by the Company with theSEC and executing the certifications required the Sarbanes Oxley Act of 2002 and the rules of the SEC as the principal executive officerof the Company; (ii) attend investor meetings and road shows in connection with the Company’s fundraising and investor relationsactivities; (iii) to report to the Board; (iv) to perform services for such subsidiaries of the Company as may be necessary.

 

 

 

 

The Consultant receivesa $250,000 fee per year payable in monthly installments. In addition, the Consultant was granted 488,000 fully vested shares of restrictedCommon Stock, which Mr. Evans is deemed to beneficially own indirectly. The grant of restricted Common Stock was made under the Company’sPlan. The shares of restricted Common Stock are subject to pro rata forfeiture from February 14, 2024 until February 14, 2025, in theevent that Mr. Evans is terminated or ends his services to the Company for any reason other than death or disability, as defined in theInternal Revenue Code. The Company and Mr. Evans previously entered into an Offer Letter dated November 27, 2023, under which he wouldserve as the Company’s Chief Executive Officer effective as of December 4, 2023. The Consulting Agreement terminates and replacesthe Offer Letter dated November 27, 2023.

 

The primary differenceswill be that we will not withhold federal income taxes from Dr. Evan’s compensation but will report his compensation on Form 1099rather than W-2. He also will not participate in our health insurance plan or receive other benefits limited to employees. Both the Consultantand Dr. Evans are domiciled in Puerto Rico.

 

Employment Agreement with Brian Hoff, ChiefFinancial Officer

 

The Employment Agreement with Mr. Hoff effectiveNovember 1, 2022 provides that he will serve as the Chief Financial Officer of the Company on an at will basis. In August 2023, the EmploymentAgreement 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 Agreemententitles 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 upon the closing of each successful acquisition. With the closing of the IPO, he received a $125,000 bonus.
	·	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 will vest on the earlier of (i) a secondary offering, (ii) a Change of Control event as defined in Treasury Regulation Section 1.409A-3(i)(5), or (iii) the one-year anniversary of the consummation of the Offering. Although the grant was to become effective 30 days following the closing of the Fat Shark and Rotor Riot acquisition, no grant has occurred.

 

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 definedas (i) any reduction in his base salary, (ii) any material diminution of his authorities, titles or offices, (iii) being required to reportto anyone other than the Chief Executive Officer, (iv) a request by the Company to relocate, or (v) material breach of his EmploymentAgreement without cure after 30 days’ written notice.

 

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

 

 

 

 

Employment arrangement with Andrew Camden,Chief Operating Officer

 

Our Board appointed Mr. Camden, Chief OperatingOfficer on March 4, 2024, and agreed to pay him a salary of $150,000 per year pursuant to an oral agreement. His base salary was increasedto $200,000 per year effective September 1, 2024.

 

Non-Employee Director Compensation

 

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

 

OnApril 30, 2024, the Company issued the non-employee directors listed in the table below restricted shares of our Common Stock under theCompany’s Plan. The shares are fully vested and were granted for services as a member of the Board and, where applicable, committeechair or committee membership. The directors also received a cash grant during the quarter of $16,250 for committee members and $15,000for non-committee members.

 

Director	Amount of Restricted Common Stock
Cristina Colon	27,083
Sanford Rich	27,083
Robert Lowry	27,083
Jeffrey Thompson	25,000

 

On July 30, 2024, under the Company’s Planthe Company issued the non-employee directors listed in the table below the equity portion of their quarterly compensation. Each of thedirectors received a vested restricted stock grant for services as a director (and where applicable, committee member) during the quarterended June 30, 2024. The shares of restricted Common Stock were subject to each director executing the Company’s standard RestrictedStock Agreement, which occurred on July 29, 2024.

 

Director	Amount of Restricted Common Stock
Cristina Colon	6,052
Sanford Rich	6,052
Robert Lowry	6,052
Jeffrey Thompson	5,587

 

The directors also received a cash grant for the quarter of $5,416.67for committee members and $5,000 for non-committee members.

 

On October 22, 2024, the Company issued thenon-employee directors listed in the table below the equity and cash portions of their quarterly compensation for services as a directorduring the quarter ended September 30, 2024. The shares of restricted Common Stock are fully vested and were granted under the Company’sPlan. The amount of restricted Common Stock issued was based on the quoted trading price as of the close of the market as of October 22,2024.

 

Director	Amount of Restricted Common Stock	Amount of Cash
Cristina Colón	7,472	$5,416.67
Sanford Rich	7,472	$5,416.67
Robert Lowry	7,472	$5,416.67
Jeffrey Thompson	6,897	$5,000

 

 

 

 

MARKET FOR REGISTRANT’S COMMON EQUITYAND RELATED STOCKHOLDER MATTERS

 

Market Information

 

Our Common Stock issued is quoted on the NYSEAmerican under the symbol “UMAC.” On November 25, 2024, the last reported sale price of our Common Stock on the NYSE Americanwas $5.91.

 

Stockholders

 

As of October 7, 2024, there were approximately953 holders of record of our Common Stock. These numbers are based on the actual number of holders registered at such date and does notinclude holders whose shares are held in “street name” by brokers and other nominees.

 

Dividends

 

We have never paid a cash dividend on our CommonStock since inception. The payment of dividends may be made at the discretion of our Board, and will depend upon, but not limited to,our operations, capital requirements, and overall financial condition.

 

We do not anticipate paying cash dividends onour Common Stock in the foreseeable future. The payment of dividends on our Common Stock will depend on earnings, financial conditionand other business and economic factors affecting it at such time as the Board may consider relevant. We intend to follow a policy ofretaining all of our earnings to finance the development and execution of our strategy and the expansion of our business. If we do notpay dividends, our Common Stock may be less valuable because a return on your investment will occur only if our stock price appreciates.

 

 

 

 

 

 

 

RELATED PARTY TRANSACTIONS

 

The following is a description of transactionssince 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 $120,000or 1% of the average of our total assets at year-end for the last two completed fiscal years, and any of our directors, executive officersor 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, discussionof employment relationships or transactions involving the Company’s executive officers and directors, and compensation solely resultingfrom such employment relationships or transactions, or service as a director of the Company, as the case may be, has been omitted to theextent disclosed in the Executive Compensation or the Director Compensation section of this annual report, as applicable.

 

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

 

On April 30, 2024 (“Grant Date”),the Company’s board of directors approved the Company entering into a two-year Consulting Agreement with the Consultant for theservices of our Chief Executive Officer, Dr. Allan Evans, whereby the Consultant agreed to cause Dr. Evans to perform his services asthe Company’s Chief Executive Officer and the Consultant will be compensated on behalf of Dr. Evans by the Company in connectionwith 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 acquisitionsto 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 andIPO.

 

On December 8, 2023, our former Chief ExecutiveOfficer, Brandon Torres Declet, and the Company executed a termination agreement (the “Termination Agreement”) pursuant towhich Mr. Declet received three months of salary severance and three months of medical and insurance premiums. In lieu of 603,208 RSUsthat 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 PurchaseAgreement, as amended with Red Cat and Jeffrey Thompson, the Company’s former Chief Executive Officer and President and currentdirector, pursuant to which, among other things, Mr. Thompson and the Company agreed to indemnification obligations, which shall survivefor a period of nine months, subject to certain limitations, which includes a basket of $250,000 before any claim can be asserted anda cap equal to the value of 100,000 shares of our Common Stock owned by him to secure any indemnification obligations, which stock isour sole remedy, except for fraud. Our then Chief Executive Officer negotiated the terms of the Purchase Agreement on an arms’ lengthbasis with Joe Freedman who was the head of Red Cat’s Special Committee. The transaction was ultimately approved by the Company’sand Red Cat’s Board. On March 8, 2023, a majority of the disinterested Red Cat shareholders approved the transactions contemplatedin the Purchase Agreement in a special meeting. Mr. Thompson recused himself from such vote.

 

Related Party Transaction Policy

 

Pursuant to our Audit Committee Charter, as amendedon October 3, 2024, our Audit Committee reviews all transactions on an ongoing basis for any potential conflicts of interest, and approves,if appropriate, all “Related Party Transactions” of the Company which are required to be disclosed under Item 404 of SEC RegulationS-K.

 

 

 

 

PRINCIPAL STOCKHOLDERS

 

The following table sets forth informationregarding the beneficial ownership of our Common Stock as of November 25, 2024 by (i) each person, entity or group (as that term isused in Section 13(d)(3) of the Exchange Act) known to the Company to be the beneficial owner of more than 5% of the outstandingCommon Stock; (ii) each of our directors; (iii) each of our Named Executive Officers; and (iv) all executive officers and directorsas a group.

 

Information relating to beneficial ownership ofCommon 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 directlyor 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 anysecurity of which that person has a right to acquire beneficial ownership within 60 days. Under the SEC rules, more than one person maybe 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 whichhe or she may not have any pecuniary interest. Except as noted below, each person has sole voting and investment power with respect tothe shares beneficially owned and each stockholder’s address is c/o Unusual Machines, Inc., 4677 L B McLeod Rd., Suite J, OrlandoFlorida, 32811.

 

The percentages below are calculated based on8,575,480 shares of Common Stock issued and outstanding.

 

Name and Address of Beneficial Owner		Title of Class		Amount of Shares Beneficially Owned (1)(2)				Percentage of Beneficial Ownership (1)(2)
Named Executive Officers and Directors:
Allan Evans (3)		Common Stock			735,228				8.6%
Brian Hoff		Common Stock			343,000				4.0%
Jeffrey Thompson		Common Stock			365,984				4.3%
Sanford Rich (4)		Common Stock			184,485				2.2%
Robert Lowry (5)		Common Stock			106,397				1.2%
Cristina Colón		Common Stock			45,434				0.5%
All executive officers and directors as a group (7 persons)		Common Stock			1,780,528				20.8%

 

(1)	Based upon the Company’s stock transfer records and Form 4s filed by the Named Executive Officers and directors with the SEC.
(2)	The numbers and percentages outstanding in these columns, exclude:

	·	62,500 shares of our Common Stock issuable upon the full exercise of warrants to Dominari Securities LLC (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.
	·	3,575,000 shares of our Common Stock, issuable upon full conversion of Series A Convertible Preferred Stock (the “Series A”). The Series A can be converted to Common Stock upon written notice to the Company subject to certain ownership blockers.
	·	630,000 shares of our Common Stock, issuable upon the full conversion of Series C Convertible Preferred Stock (the “Series C”). The Series C  can be converted to Common Stock upon written notice to the Company.
	·	630,000 shares of our Common Stock, issuable upon the full exercise of warrants to the Principal Stockholders.
	·	1,507,538 shares issuable upon the full conversion of the New Notes.
	·	1,121,710 shares issuable upon the full exercise of the Warrants issued to the Selling Stockholders except for the Principal Stockholders

(3)	Includes 65,789 underlying shares of Common Stock upon exercise of the Warrants.
(4)	Includes 65,789 underlying shares of Common Stock upon exercise of the Warrants.
(5)	Includes 32,895 underlying shares of Common Stock upon exercise of the Warrants.

 

 

 

 

 

DESCRIPTION OF OUR SECURITIES

 

Our authorized capital stock consists of 500,000,000shares of Common Stock, par value $0.01 per share, of which 8,575,480 shares are outstanding as of November 25, 2024, and 10,000,000 sharesof “blank check” preferred stock, par value $0.01 per share, of which no shares are outstanding, other than the Series A,and Series C, described below, as of the date of this Prospectus.

 

The following description summarizes the materialterms of our securities, which does not purport to be complete and is qualified in its entirety by reference to our Articles of Incorporation,and the Certificates of Designation setting forth the terms of our Series A and Series C, each of which are filed as an exhibit to theRegistration Statement of which this Prospectus is a part, and to the applicable provisions of Nevada law, including the Nevada RevisedStatutes.

 

Common Stock

 

The holders of our Common Stock are entitled toone vote for each share held of record on all matters submitted to a vote of the stockholders and do not have cumulative voting rights.Accordingly, holders of a majority of the shares of outstanding Common Stock entitled to vote in any election of directors may elect allof the directors standing for election, subject to any voting rights of any preferred stock. Subject to preferences that may be applicableto any outstanding shares of preferred stock, the holders of Common Stock are entitled to receive ratably such dividends as may be declaredby the Board out of funds legally available therefor. Upon the liquidation, dissolution or winding up of the Company, holders of our CommonStock are entitled to share ratably in all assets remaining after payment of liabilities and the liquidation preferences of any outstandingshares of preferred stock. Holders of Common Stock have no preemptive rights and no right to convert their Common Stock into any othersecurities. Our Common Stock has no redemption or sinking fund provisions. The rights, preferences and privileges of the holders of theCommon Stock are subject to, and may be adversely affected by, the rights of the holders of shares of any series of our preferred stockthat the Board may designate and issue in the future. All outstanding shares of Common Stock are fully paid and non-assessable.

 

“Blank Check” Preferred Stock

 

Pursuant to our Articles of Incorporation, ourBoard has the authority, without further action by the stockholders, to issue up to 10,000,000 shares of preferred stock, in one or moreseries. Our Articles of Incorporation provide that our Board has the authority, without further action by the shareholders, to designateand issue shares of preferred stock in one or more series and to fix the rights, preferences, privileges and restrictions granted to orimposed upon the preferred stock. Preferred stock may be designated and issued without authorization of shareholders unless such authorizationis required by applicable law, the rules of the principal market or other securities exchange on which our stock is then listed or admittedto trading.

 

Our Board may authorize the issuance of preferredstock with voting or conversion rights that could adversely affect the voting power or other rights of the holders of Common Stock. Theissuance of preferred stock, while providing flexibility in connection with possible acquisitions and other corporate purposes could,under some circumstances, have the effect of delaying, deferring or preventing a change in control of the Company.

 

Series A Convertible Preferred Stock

 

As of September 30, 2024, we had 4,250 sharesof Series A. After September 30, 2024, 675 shares of Series A were converted into 675,000 shares of common stock and as of the date ofthis prospectus we have 3,575 outstanding shares of Series A. Each share of Series A is convertible into 1,000 shares of our Common Stockat the election of the holder The Series A ranks senior to both the Company’s Common Stock and any other series of preferred stockwith respect to the preferences as to dividends, distributions, and payments, upon the liquidation, dissolution, and winding up of theCompany. Each share of Series A may be converted into 1,000 shares of the Company’s Common Stock. The Series A has a conversionbeneficial ownership limitation of 4.99%, or 9.99% upon election of the holder upon at least 61 days written notice to the Company. TheSeries A has no voting rights and has no other special rights other than the conversion feature.

 

 

 

 

Series B Convertible PreferredStock

 

As of September 30, 2024, we had 50 shares ofSeries B. After September 30, 2024, 50 shares of Series B were converted into 250,000 shares of common stock and as of the date of thisprospectus we did not have any Series B shares outstanding.

 

Series C Convertible Preferred Stock

 

We have 210 outstandingshares of Series C as of the date of this prospectus. Each share of Series C is convertible into 3,000 shares of our Common Stock atthe election of the holder. The Series C has a beneficial ownership limitation of 4.99%, or 9.99% upon election of the holder of theSeries C upon at least 61 days written notice. The terms of the Certificate of Designations, Preferences, and Rights of the Series C(the “Series C COD”) prohibit the Company from effectuating any conversion of the Series C to the extent such Series C holdersor any of their affiliates would beneficially own over 19.9% of the Company’s Common Stock outstanding as of August 21, 2024, orsuch lesser percentage as determined by the NYSE American, until the Company receives approval. The Series C has no voting rights, exceptas required by law and as expressly provided in the Series C COD.

 

Anti-Takeover Effects of Provisions of ourArticles of Incorporation, our Bylaws, and Nevada Law

 

Certain provisions in our Articles of Incorporationand Bylaws summarized below may be deemed to have an anti-takeover effect and may delay, deter or prevent a tender offer or takeover attemptthat a stockholder might consider to be in its best interests, including attempts that might result in a premium being paid over the marketprice for the shares held by stockholders.

 

Advance Notice Requirements for Director Nominations.

 

Our Bylaws will provide that stockholders seekingto nominate candidates for election as directors at an annual meeting of stockholders, must provide timely notice thereof in writing.To be timely, a notice generally must be delivered to and received at our principal executive offices not less than 90 days nor more than120 days prior to the first anniversary of the preceding year’s annual meeting; provided, that, in the event that the date of suchmeeting is advanced more than 30 days prior to the anniversary of the preceding year’s annual meeting of our stockholders, a noticeto be timely must be so delivered not later than the close of business 10 days following the earlier of (i) the day on which notice ofthe date of the annual meeting was mailed or (i) the day public disclosure of the date of the annual meeting was made. In the case ofa special meeting of the stockholders called for the purpose of electing directors, a notice to be timely must be so delivered not laterthan the close of business 10 days following the day on which notice of the date of the special meeting was mailed or public disclosureof the date of the special meeting was made, whichever first occurs. Our Bylaws also will specify certain requirements as to the formand content of a notice. These provisions may preclude stockholders from bringing matters before an annual meeting of stockholders orfrom making nominations for directors at an annual meeting of stockholders.

 

Special Meeting Limitations

 

Under our Bylaws, unless otherwise provided bylaw or our Articles of Incorporation, special meetings of the stockholders may be called only by (i) the Chairman of our Board; (ii) ourChief Executive Officer or President; or (iii) a majority of our Board.

 

 

 

 

 

 

Jurisdiction and Venue

 

Section 7(a) of our Articlesof Incorporation provides that lawsuits involving the Company and its internal affairs, including derivative actions brought on behalfof the Company by its stockholders under Nevada law, be governed by the laws of Nevada and providing that resulting proceedings be heardexclusively in the courts located in Clark County, Nevada, which may make actions against or on behalf of the Company more difficult tolitigate by stockholders. Similarly, Section 7(b) of our Articles of Incorporation provide the United States federal courts with exclusivejurisdiction over claims brought under the Securities Act. The effect of this provision is that an action under the Securities Act withrespect to the Company may only be brought in the federal courts, whereas absent such provision the federal state courts would otherwisehave concurrent jurisdiction over such a matter. Further, Section 7(c) provides for the United States District Court for the Districtof Nevada as the exclusive venue for any cause of action under either the Securities Act or the Exchange Act, meaning such federal courtis the only court in which such a case may be brought and heard.

 

These provisions, togetherwith provisions of the Nevada Revised Statutes, could have the effect of delaying, deferring or preventing an attempted takeover or changeof control of the Company, or making such an attempt more difficult. Additionally, while the Delaware Supreme Court has upheld a similarprovision, it remains unclear how a Nevada court would interpret and whether it would enforce some of these provisions, resulting in addeduncertainty. Section 22 of the Securities Act creates concurrent jurisdiction for federal and state courts over all suits brought to enforceany duty or liability created by the Securities Act or the rules and regulations thereunder. Investors cannot waive compliance with thefederal securities laws and the rules and regulations thereunder, and that there is uncertainty as to whether a state or federal courtwould enforce these charter provisions.

 

Transfer Agent and Registrar

 

The transfer agent and registrar for our CommonStock is Equity Stock Transfer whose address is 237 West 37th Street, Suite 602, New York, New York 10018, and whose telephone numberis (212) 575-5757.

 

 

 

 

 

 

LEGAL MATTERS

 

The validity of the securities being offered bythis Prospectus will be passed upon for us by Nason, Yeager, Gerson, Harris & Fumero, P.A.

 

 

EXPERTS

 

The consolidated financial statements of the Companyas of December 31, 2023 and 2022 included in this Prospectus have been so included in reliance on the report of Salberg & Company,P.A. an independent registered public accounting firm, which includes an explanatory paragraph about the Company’s ability to continueas a going concern, given on the authority of said firm as experts in auditing and accounting.

 

 

WHERE YOU CAN FIND MORE INFORMATION

 

We have filed with the SEC this Registration Statementon Form S-1 under the Securities Act with respect to the shares of Common Stock being offered by this Prospectus. This Prospectus, whichconstitutes a part of this Registration Statement, does not contain all of the information in this registration statement and its exhibits.For further information with respect to us and the Common Stock offered by this Prospectus, you should refer to this Registration Statementand the exhibits filed as part of that document. Statements contained in this Prospectus as to the contents of any contract or any otherdocument referred to are not necessarily complete, and in each instance, we refer you to the copy of the contract or other document filedas an exhibit to this registration statement. Each of these statements is qualified in all respects by this reference.

 

We are subject to the informational requirementsof the Exchange Act and file annual, quarterly and current reports, proxy statements and other information with the SEC. You canread our SEC filings, including the registration statement, at the SEC’s website at www.sec.gov. We also maintain awebsite at https://unusualmachines.com/investors and you may access, free of charge, our annual reports on Form 10-K, quarterlyreports on Form 10-Q, current reports on Form 8-K and any amendments to those reports, as soon as reasonably practicable after suchmaterial is electronically filed with, or furnished to, the SEC. The information contained on, or that can be accessed through, ourwebsite is not a part of this Prospectus. You may also request a copy of these filings, at no cost, by writing or telephoning us at: UnusualMachines, Inc., 4677 LB McLeod Rd., Suite J, Orlando, FL 32811 or contacting us at +1 855-921-4600.

 

 

 

 

 

 

 

 

 

 

 

 

UNUSUAL MACHINES, INC.

INDEX TO FINANCIAL STATEMENTS

 

 

Page

 

Unusual Machines, Inc. Financial Statements
Report of Independent Registered Public Accounting Firm (PCAOB ID #106)	F-1
Balance Sheets at December 31, 2023 and 2022	F-2
Statement of Operations for the years ended December 31, 2023 and 2022	F-3
Statement of Changes in Stockholders’ Equity for the years ended December 31, 2023 and 2022	F-4
Statement of Cash Flows for the years ended December 31, 2023 and 2022	F-5
Notes to Financial Statements	F-6

 

Unusual Machines, Inc. Unaudited Interim Financial Statements
Consolidated Condensed Balance Sheets at September 30, 2024 and December 31, 2023	F-25
Unaudited Consolidated Condensed Statements of Operations for the three and nine months ended September 30, 2024 and 2023	F-26
Unaudited Consolidated Condensed Statements of Changes in Stockholders’ Equity for the nine months ended September 30, 2024 and 2023	F-27
Unaudited Consolidated Condensed Statements of Cash Flows for the nine months ended September 30, 2024 and 2023	F-29
Notes to Unaudited Consolidated Condensed Financial Statements	F-30

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Report of Independent Registered Public AccountingFirm

 

To the Board of Directors and Stockholders of:

Unusual Machines, Inc.

 

Opinion on the Financial Statements

 

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

 

Restatement

 

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

 

Basis for Opinion

 

These financial statements are the responsibilityof the Company’s management. Our responsibility is to express an opinion on the Company’s financial statements based on ouraudits. 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 applicablerules and regulations of the Securities and Exchange Commission and the PCAOB.

 

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

 

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

 

Critical Audit Matters

 

The critical audit matters are matters arisingfrom the current period audit of the financial statements that were communicated or required to be communicated to the audit committeeand that: (1) relate to accounts or disclosures that are material to the financial statements and (2) involved our especially challenging,subjective, or complex judgments. We determined there were no critical audit matters.

 

 

 

/s/ Salberg & Company, P.A.

 

SALBERG & COMPANY, P.A.

We have served as the Company’s auditorsince 2024

Boca Raton, Florida

August 9, 2024

 

  

 

Unusual Machines, Inc.

Balance Sheets

 

		December 31,
		2023				2022
		(As restated – Note 9)				(As restated – Note 9)
ASSETS
Current assets:
Cash		$	894,773			$	3,099,422
Other current assets			120,631				39,375
Total current assets			1,015,404				3,138,797
Property and equipment, net			1,254				3,690
Deferred offering costs			512,758				87,825
Other assets			–				100,000
Total non-current assets			514,012				191,515
Total assets		$	1,529,416			$	3,330,312
LIABILITIES AND STOCKHOLDERS' EQUITY
Current liabilities
Accounts payable and accrued expenses		$	114,497			$	131,931
Total current liabilities			114,497				131,931
Stockholders’ equity:
Series B preferred stock - $0.01 par value, 10,000,000 authorized and 190 and 140 shares issued and outstanding at December 31, 2023 and 2022, respectively			2				1
Common stock - $0.01 par value, 500,000,000 authorized and 3,217,255 and 3,392,250 shares issued and outstanding at December 31, 2023 and 2022, respectively			32,173				33,923
Additional paid in capital			5,315,790				4,714,041
Accumulated deficit			(3,933,046	)			(1,549,584	)
Total stockholders’ equity			1,414,919				3,198,381
Total liabilities and stockholders’ equity		$	1,529,416			$	3,330,312

 

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

 

 

 

 

 

 

 

 

 

 

Unusual Machines, Inc.

Statements of Operations

 

 

		Year Ended December 31,
		2023				2022
		(As restated – Note 9)				(As restated ‐ Note 9)
Revenue		$	–			$	–
Cost of goods sold			–				–
Gross profit			–				–
Operating expenses:
Research and development			–				91,325
General and administrative			2,377,862				1,079,715
Depreciation and amortization			5,600				885
Total operating expenses			2,383,462				1,171,925
Loss from operations			(2,383,462	)			(1,171,925	)
Other income:
Interest income			–				148
Total other income			–				148
Net loss before income tax			(2,383,462	)			(1,171,777	)
Income tax benefit (expense)			–				–
Net loss		$	(2,383,462	)		$	(1,171,777	)
Net loss per share attributable to common stockholders
Basic and diluted		$	(0.72	)		$	(0.29	)
Weighted average common shares outstanding
Basic and diluted			3,307,118				4,051,205

 

 

See accompanying independent auditor’s reportand notes to financial statements.

 

 

 

 

 

Unusual Machines, Inc.

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

For the Years Ended December31, 2023 and 2022

 

		Series B, Preferred Stock								Common Stock								Additional Paid-In				Accumulated
		Shares				Value				Shares				Value				Capital				Deficit				Total
Balance, December 31, 2021			–			$	–				4,036,000			$	40,360			$	4,257,605			$	(377,807	)		$	3,920,158
Issuance of common stock for cash			–				–				56,250				563				449,437				–				450,000
Conversion to preferred stock			140				1				(700,000	)			(7,000	)			6,999				–				–
Net loss			–				–				–				–				–				(1,171,777	)			(1,171,777	)
Balance, December 31, 2022			140			$	1				3,392,250			$	33,923			$	4,714,041			$	(1,549,584	)		$	3,198,381
Issuance of common shares for services			–				–				75,005				750				599,250				–				600,000
Conversion to preferred shares			50				1				(250,000	)			(2,500	)			2,499				–				–
Net loss			–				–				–				–				–				(2,383,462	)			(2,383,462	)
Balance, December 31, 2023			190			$	2				3,217,255			$	32,173			$	5,315,790			$	(3,933,046	)		$	1,414,919

 

 

See accompanying independent auditor’s reportand notes to financial statements.

 

 

 

 

 

Unusual Machines, Inc.

Statements of Cash Flows

 

		Year Ended December 31,
		2023				2022
		(As restated – Note 9)				(As restated – Note 9)
Cash flows from operating activities:
Net loss		$	(2,383,462	)		$	(1,171,777	)
Depreciation			5,600				885
Stock compensation expense			600,000				–
Change in assets and liabilities:
Accounts receivable			–				945
Other assets			18,744				(139,375	)
Accounts payable and accrued expenses			(17,434	)			120,131
Net cash used in operating activities			(1,776,552	)			(1,189,191	)
Cash flows from investing activities
Related party receivable			–				45,222
Purchases of property and equipment			(3,164	)			(4,575	)
Net cash provided by (used in) investing activities			(3,164	)			40,647
Cash flows from financing activities:
Proceeds from common stock receivable			–				99,900
Issuance of common stock			–				450,000
Deferred offering costs			(424,933	)			(87,825	)
Net cash provided by (used in) financing activities			(424,933	)			462,075
Net increase (decrease) in cash			(2,204,649	)			(686,469	)
Cash, beginning of year			3,099,422				3,785,891
Cash, end of year		$	894,773			$	3,099,422
Supplemental disclosures of cash flow information:
Cash paid for interest		$	–			$	–
Cash paid for income tax		$	–			$	–

 

 

See accompanying independent auditor’s reportand notes to financial statements.

 

 

 

 

Unusual Machines, Inc.

Notes to Financial Statements

For the Years Ended December31, 2023 and 2022

 

 

Note1 – Organization and nature of business

 

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

 

On February 16, 2024, the Company closed itsInitial Public Offering (the “IPO”) of 1,250,000 shares of common stock at a public offering price of $4.00 per share (“IPOPrice”). The shares are traded on NYSE American. Simultaneous with the closing of the IPO, the Company acquired Fat Shark HoldingsLtd. (“Fat Shark”) and Rotor Riot, LLC (“Rotor Riot”) from Red Cat Holdings, Inc. (“Red Cat”). SeeNote 8 for additional details.

 

Note2 – Summary of significant accounting policies

 

Basisof Accounting

 

The accompanying financial statements have beenprepared in accordance with accounting principles generally accepted in the United States of America (“GAAP”).

 

Use of Estimates

 

The preparation of financial statements in conformitywith GAAP requires management to make estimates and assumptions that affect the reported amounts of assets and liabilities, disclosuresof contingent assets and liabilities at the date of the financial statements, and the reported amounts of revenues and expenses duringthe 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. Significantestimates in 2023 and 2022 include stock compensation and deferred tax assets.

 

Cash

 

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

 

The Company maintains cash deposits at a financialinstitution that is insured by the Federal Deposit Insurance Corporation up to $250,000.The Company’s cash balance may at times exceed these limits. At December 31, 2023 and December 31, 2022, the Company had approximately$0.6 million and $2.8million, respectively, in excess of federally insured limits. The Company continually monitors its positions with, and the creditquality of the financial institutions with which it invests.

 

Deferredoffering costs

 

The Company deferred direct incremental costsassociated with its ongoing initial public offering (“IPO”). The Company capitalized $424,933and $87,825during the years ended December 31, 2023 and 2022, respectively. Total deferred offering costs were $512,758 as of December 31,2023. Deferred offering costs consist of primarily legal, advisory, and consulting fees incurred in connection with the formation andpreparation of the IPO. After consummation of the IPO in February 2024, total deferred offering costs of $640,445 were recorded as areduction to additional paid-in capital generated as a result of the offering.

 

 

 

 

NoteReceivable

 

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

 

Propertyand equipment, net

 

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

 

Fair Values, Inputs and Valuation Techniquesfor Financial Assets and Liabilities, and Related Disclosures

 

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

  

The fair value hierarchy gives the highest priorityto quoted prices in active markets for identical assets or liabilities (Level 1) and the lowest priority to unobservable inputs (Level3). The inputs used to measure fair value may fall into different levels of the fair value hierarchy. In such cases, the level in thefair value hierarchy within which the fair value measurement in its entirety falls has been determined based on the lowest level inputthat is significant to the fair value measurement in its entirety. The Company's assessment of the significance of a particular inputto 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 fairvalue 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 assetsor liabilities in markets that are not active, or other inputs that are observable or can be corroborated by observable market data forsubstantially the full term of the related assets or liabilities; and

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

 

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

 

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

 

RevenueRecognition

 

The Company will recognize revenue inaccordance 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 recognitionincluding:

 

Step 1: Identify the contract with a customer;

Step 2: Identify the performance obligations inthe contract;

Step 3: Determine the transaction price;

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

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

 

The Company did not have any revenue during theyears ended December 31, 2023 and 2022.

 

 

 

 

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 includethird-party development costs, materials, and a proportionate share of overhead costs.

 

IncomeTaxes

 

The Company accounts for income taxes using anasset and liability approach, which requires recognition of deferred tax assets and liabilities for the expected future tax consequencesof events. A valuation allowance is established to reduce deferred tax assets to their estimated realizable value when, in the opinionof 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 taxpositions 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 policyis 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-datefair value method of accounting in accordance with ASC Topic 718, Compensation – Stock Compensation. Fair value is determined basedon the Black-Scholes Model using inputs reflecting our estimates of expected volatility, term and future dividends. The Company recognizesforfeitures as they occur. The fair value of stock grants is based on our stock price on the date of grant. Compensation costs are recognizedon a straight-line basis over the service period which is the vesting term.

 

NetLoss per Share

 

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

 

Recent Accounting Pronouncements

 

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

 

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

 

 

 

 

 

Note3 – Other Assets

 

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

 

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

 

Note4 – Property and equipment, net

 

Property and equipment consist of assets withan estimated useful life greater than one year. Property and equipment are reported net of accumulated depreciation, and the reportedvalues are periodically assessed for impairment. Property and equipment as of December 31 was as follows:

 

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

 

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

 

Note 5 – Earnings Per Share and Stockholders’ Equity

 

Earnings per Share

 

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

 

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

 

Preferred Stock

 

The preferred stock par value is $0.01. The SeriesB preferred stock is convertible into common stock at a ratio of 5,000 shares of common stock for each share of Series B stock held, subjectto certain limitations. Series B preferred shares are not entitled to vote on any matters submitted to shareholders of the Company.

 

 

 

 

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

 

On June 1, 2023, the Company issued an additional50 Series B preferred shares in connection with the cancellation of 250,000 shares of common stock.

 

Series B preferred shares outstanding at December 31, 2023 totaled190 which are convertible into 950,000 shares of common stock.

 

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

 

Common Stock

 

The common stock par value is $0.01.

 

2023 Transactions

 

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

 

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

 

2022 Transactions

 

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

 

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

 

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

 

Note6 – Business Combination

 

Fat Shark and Rotor Riot

 

On November 21, 2022,the Company entered into a Share Purchase Agreement (the “Purchase Agreement”), as amended, with Red Cat Holdings, Inc. (“RedCat,”) and Jeffrey Thompson, the founder and Chief Executive Officer of Red Cat, pursuant to which the Company agreed to purchaseRed Cat’s consumer business consisting of Fat Shark Holdings, Ltd. (“Fat Shark”) and Rotor Riot, LLC (“Rotor Riot”)(the “Business Combination”) for a total of $20.1 million (the “Purchase Price”). Fat Shark and Rotor Riot arein the business of designing and marketing consumer drones and first-person-view (“FPV”) goggles. Rotor Riot is also a licensedauthorized reseller of consumer drones manufactured by third-parties. The Purchase Price was comprised of (i) $1.1 million in cash, (ii)a $2.0 million promissory note issued by the Company to Red Cat, and (iii) $17.0 million of the Company’s common stock and subjectto certain working capital adjustments. See Note 10 – Subsequent Events for additional information.

 

 

 

 

Note 7 – Related Party Transactions

 

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

 

In February 2024, the Company completed the acquisitionsto 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 tothe acquisition, Mr. Thompson held 328,500 shares of common stock in Unusual Machines, which represented approximately 10% prior to theacquisition and IPO.

 

Note 8 – Income Taxes

 

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

 

As of December 31, 2023 and 2022, theCompany had gross net operating losses of approximately $3.9million and $1.5 million,respectively. Deferred tax assets related to the future benefit of these net operating losses for tax purposes totaled approximately$0.7 million and$0.3 million,respectively, calculated using the base Puerto Rico corporate tax rate of 18.5%. Since the Company has not generated revenue oroperating profit since incep