SEC Form 10-Q filed by Unusual Machines Inc.
UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549
FORM
| Quarterly REPORT pursuant to Section 13 or 15(d) of the Securities Exchange Act of 1934 | |
| For the quarterly period ended | |
| Or | |
| Transition report pursuant to Section 13 or 15(d) of the Securities Exchange Act of 1934 | |
| For the transition period from _____________ to _____________ | |
Commission File No.
(Exact Name of Registrant as Specified in Its Charter)
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(I.R.S. Employer Identification No.) |
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| Address of Principal Executive Offices | Zip Code |
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(Registrant’s telephone number, including area code)
Securities registered pursuant to Section 12(b) of the Act:
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Indicate by check mark whether the registrant:
(1) filed all reports required to be filed by Section 13 or 15(d) of the Securities Exchange Act of 1934 during the preceding 12 months
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for the past 90 days.
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of this chapter) during the preceding 12 months (or for such shorter period that the registrant was required to submit such files).
Indicate by check mark whether the registrant is a large accelerated filer, an accelerated filer, a non-accelerated filer, a smaller reporting company or an emerging growth company. See definitions of “large accelerated filer,” “accelerated filer,” “smaller reporting company” and “emerging growth company” in Rule 12b-2 of the Exchange Act.
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| Smaller Reporting Company | |
| Emerging Growth Company |
If an emerging growth company, indicate by check
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As of November 13, 2024, shares of the registrant’s common stock, $0.01 par value per share, were outstanding.
UNUSUAL MACHINES, INC.
2024 QUARTERLY REPORT ON FORM 10-Q
TABLE OF CONTENTS
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Unless we state otherwise or the context otherwise requires, the terms “Unusual Machines,” “we,” “us,” “our” and the “Company” refer to Unusual Machines, Inc., a Nevada corporation.
SPECIAL NOTE REGARDING FORWARD-LOOKING STATEMENTS
This Quarterly Report on Form 10-Q, or Quarterly Report, contains forward-looking statements that involve risks and uncertainties. We make such forward-looking statements pursuant to the safe harbor provisions of the Private Securities Litigation Reform Act of 1995 and other federal securities laws. All statements other than statements of historical facts contained in this Quarterly Report are forward-looking statements. In some cases, you can identify forward-looking statements by terminology such as “may”, “will”, “should”, “expects”, “intends”, “plans”, “anticipates”, “believes”, “estimates”, “predicts”, “potential”, “continue” or the negative of these terms or other comparable terminology.
Forward-looking statements are neither historical facts nor assurances of future performance, and are based only on our current beliefs, expectations and assumptions regarding the future of our business, our ability to raise additional capital to meet our liquidity needs, future plans and strategies, projections, anticipated events and trends, the uncertainty of the amount of amortization of certain intangibles, the economy and other future conditions. Because forward-looking statements relate to the future, they are subject to inherent uncertainties, risks and changes in circumstances that are difficult to predict and many of which are outside of our control. Therefore, you should not rely on any of these forward-looking statements. Important factors that could cause our actual results and financial condition to differ materially from those indicated in the forward-looking are described more fully in the Section entitled “Risk Factors” contained in our final Prospectus filed with the Securities and Exchange Commission on October 25, 2024.
These forward-looking statements speak only as of the date of this Form 10-Q and are subject to business and economic risks. We do not undertake any obligation to update or revise the forward-looking statements to reflect events that occur or circumstances that exist after the date on which such statements were made, except to the extent required by law.
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PART I – FINANCIAL INFORMATION
| Item 1. | Financial Statements |
Unusual Machines, Inc.
Consolidated Condensed Balance Sheets
September 30, 2024 | December 31, 2023 | |||||||
| (Unaudited) | ||||||||
| ASSETS | ||||||||
| Current assets: | ||||||||
| Cash and cash equivalents | $ | $ | ||||||
| Accounts Receivable | ||||||||
| Inventory | ||||||||
| Prepaid inventory | ||||||||
| Other current assets | ||||||||
| Total current assets | ||||||||
| Non-current assets: | ||||||||
| Property and equipment, net | ||||||||
| Deferred offering costs | ||||||||
| Operating lease right-of-use assets | ||||||||
| Goodwill and intangible assets | ||||||||
| Total non-current assets | ||||||||
| Total assets | $ | $ | ||||||
| LIABILITIES AND STOCKHOLDERS' EQUITY | ||||||||
| Current liabilities | ||||||||
| Accounts payable and accrued expenses | $ | $ | ||||||
| Operating lease liabilities | ||||||||
| Deferred revenue | ||||||||
| Warrant liabilities | ||||||||
| Derivative liability – convertible note conversion option | ||||||||
| Total current liabilities | ||||||||
| Long-term liabilities | ||||||||
| Convertible note | ||||||||
| Operating lease liabilities – long term | ||||||||
| Total liabilities | ||||||||
| Commitments and contingencies (See note 13) | ||||||||
| Stockholders’ equity: | ||||||||
| Series A preferred stock - $ par value, authorized and and shares issued and outstanding on September 30, 2024 and December 31, 2023, respectively | ||||||||
| Series B preferred stock - $ par value, authorized and and shares issued and outstanding on September 30, 2024 and December 31, 2023, respectively | ||||||||
| Series C preferred stock - $ par value, authorized and and shares issued and outstanding on September 30, 2024 and December 31, 2023, respectively | ||||||||
| Common stock - $ par value, authorized and and shares issued and outstanding at September 30, 2024 and December 31, 2023, respectively | ||||||||
| Additional paid in capital | ||||||||
| Accumulated deficit | ( | ) | ( | ) | ||||
| Total stockholders’ equity | ||||||||
| Total liabilities and stockholders’ equity | $ | $ | ||||||
See accompanying condensed unaudited notes to the consolidated condensed financial statements.
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Unusual Machines, Inc.
Consolidated Condensed Statement of Operations
For the Three and Nine months Ended September 30, 2024 and 2023
(Unaudited)
| Three months ended September 30, | Nine months ended September 30, | |||||||||||||||
| 2024 | 2023 | 2024 | 2023 | |||||||||||||
|
(Restated – Note 14) |
||||||||||||||||
| Revenues | $ | $ | $ | $ | ||||||||||||
| Cost of goods sold | ||||||||||||||||
| Gross profit | ||||||||||||||||
| Operating Expenses | ||||||||||||||||
| Operations | ||||||||||||||||
| Research and development | ||||||||||||||||
| Sales and marketing | ||||||||||||||||
| General and administrative | ||||||||||||||||
| Depreciation and amortization | ||||||||||||||||
| Total operating expenses | ||||||||||||||||
| Operating loss | ( | ) | ( | ) | ( | ) | ( | ) | ||||||||
| Other Income (Expense) | ||||||||||||||||
| Interest income | ||||||||||||||||
| Interest expense | ( | ) | ( | ) | ||||||||||||
| Loss on debt extinguishment | ( | ) | ( | ) | ||||||||||||
| Change in fair value of derivatives and warrant liabilities | ||||||||||||||||
| Other (Income) Expense | ( | ) | ( | ) | ||||||||||||
| Net loss | $ | ( | ) | $ | ( | ) | $ | ( | ) | $ | ( | ) | ||||
| Net loss per share attributable to common stockholders | ||||||||||||||||
| Basic and diluted | $ | ) | $ | ) | $ | ) | $ | ) | ||||||||
| Weighted average common shares outstanding | ||||||||||||||||
| Basic and diluted | ||||||||||||||||
See accompanying condensed unaudited notes to the consolidated condensed financial statements.
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Unusual Machines, Inc.
Consolidated Condensed Statement of Changes in Stockholders’ Equity
For the Nine months Ended September 30, 2024 and 2023
(Unaudited)
Nine months Ended September 30, 2023 (Restated – Note 14)
| Series A, Preferred Stock | Series B, Preferred Stock | Series C, Preferred Stock | Common Stock | Additional Paid-In | Accumulated | Total Stockholders’ | ||||||||||||||||||||||||||||||||||
| Shares | Value | Shares | Value | Shares | Value | Shares | Value | Capital | Deficit | Equity | ||||||||||||||||||||||||||||||
| Balance, December 31, 2022 | $ | $ | $ | $ | $ | $ | ( | ) | $ | |||||||||||||||||||||||||||||||
| Issuance of common shares for services | – | – | – | |||||||||||||||||||||||||||||||||||||
| Net loss | – | – | – | – | ( | ) | ( | ) | ||||||||||||||||||||||||||||||||
| Balance, March 31, 2023 | $ | $ | $ | $ | $ | $ | ( | ) | $ | |||||||||||||||||||||||||||||||
| Conversion of preferred stock | – | – | ( | ) | ( | ) | ||||||||||||||||||||||||||||||||||
| Net loss | – | – | – | – | ( | ) | ( | ) | ||||||||||||||||||||||||||||||||
| Balance, June 30, 2023 | $ | $ | $ | $ | $ | $ | ( | ) | $ | |||||||||||||||||||||||||||||||
| Net loss | – | – | – | – | ( | ) | ( | ) | ||||||||||||||||||||||||||||||||
| Balance, September 30, 2023 | $ | $ | $ | $ | $ | $ | ( | ) | $ | |||||||||||||||||||||||||||||||
continued
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Nine months Ended September 30, 2024
| Series A, Preferred Stock | Series B, Preferred Stock | Series C, Preferred Stock | Common Stock | Additional Paid-In | Accumulated | Total Stockholders’ | ||||||||||||||||||||||||||||||||||
| Shares | Value | Shares | Value | Shares | Value | Shares | Value | Capital | Deficit | Equity | ||||||||||||||||||||||||||||||
| Balance, December 31, 2023 | $ | $ | $ | $ | $ | $ | ( | ) | $ | |||||||||||||||||||||||||||||||
| Issuance of common shares as settlement | – | – | – | |||||||||||||||||||||||||||||||||||||
| Issuance of common shares, initial public offering, net of offering costs | – | – | – | |||||||||||||||||||||||||||||||||||||
| Issuance of common shares, business combination | – | – | – | |||||||||||||||||||||||||||||||||||||
| Conversion of preferred shares | – | ( | ) | ( | ) | – | ( | ) | ||||||||||||||||||||||||||||||||
| Net loss | – | – | – | – | ( | ) | ( | ) | ||||||||||||||||||||||||||||||||
| Balance, March 31, 2024 | $ | $ | $ | $ | $ | $ | ( | ) | $ | |||||||||||||||||||||||||||||||
| Conversion of preferred shares | – | ( | ) | – | ( | ) | ||||||||||||||||||||||||||||||||||
| Issuance of common shares, equity incentive plan | – | – | – | ( | ) | |||||||||||||||||||||||||||||||||||
| Stock compensation expense - vested stock | – | – | – | – | ||||||||||||||||||||||||||||||||||||
| Stock option compensation expense | – | – | – | – | ||||||||||||||||||||||||||||||||||||
| Net loss | – | – | – | – | ( | ) | ( | ) | ||||||||||||||||||||||||||||||||
| Balance, June 30, 2024 | $ | $ | $ | $ | $ | $ | ( | ) | $ | |||||||||||||||||||||||||||||||
| Issuance of common shares, equity incentive plan | – | – | – | ( | ) | |||||||||||||||||||||||||||||||||||
| Exchange of common shares for Series A preferred | – | – | ( | ) | ( | ) | ||||||||||||||||||||||||||||||||||
| Exchange of convertible note for Series C preferred | – | – | – | |||||||||||||||||||||||||||||||||||||
| Stock compensation expense – vested stock | – | – | – | – | ||||||||||||||||||||||||||||||||||||
| Stock option compensation expense | – | – | – | – | ||||||||||||||||||||||||||||||||||||
| Net loss | – | – | – | – | ( | ) | ( | ) | ||||||||||||||||||||||||||||||||
| Balance, September 30, 2024 | $ | $ | $ | $ | $ | $ | ( | ) | $ | |||||||||||||||||||||||||||||||
See accompanying condensed unaudited notes to the consolidated condensed financial statements.
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Unusual Machines, Inc.
Consolidated Condensed Statement of Cash Flows
For the Nine months Ended September 30, 2024 and 2023
(Unaudited)
| Nine months Ended September 30, | ||||||||
| 2024 | 2023 | |||||||
| (Restated – Note 14) | ||||||||
| Cash flows from operating activities: | ||||||||
| Net loss | $ | ( | ) | $ | ( | ) | ||
| Depreciation | ||||||||
| Stock compensation expense as settlement | ||||||||
| Stock compensation expense | ||||||||
| Change in fair value for warrant and derivative liabilities | ( | ) | ||||||
| Loss on debt extinguishment, non-cash component | ||||||||
| Change in assets and liabilities: | ||||||||
| Accounts receivable | ( | ) | ||||||
| Inventory | ||||||||
| Prepaid inventory | ( | ) | ||||||
| Other assets | ( | ) | ||||||
| Accounts payable and accrued expenses | ( | ) | ||||||
| Operating lease liabilities | ( | ) | ||||||
| Customer deposits and other current liabilities | ||||||||
| Net cash used in operating activities | ( | ) | ( | ) | ||||
| Cash flows from investing activities | ||||||||
| Cash portion of consideration paid for acquisition of businesses; net of cash received | ( | ) | ||||||
| Purchase of property & equipment | ( | ) | ||||||
| Net cash used in investing activities | ( | ) | ( | ) | ||||
| Cash flows from financing activities: | ||||||||
| Proceeds from issuance of common shares | ||||||||
| Common share issuance offering costs | ( | ) | ( | ) | ||||
| Net cash provided by (used in) financing activities | ( | ) | ||||||
| Net increase (decrease) in cash | ( | ) | ||||||
| Cash, beginning of period | ||||||||
| Cash, end of period | $ | $ | ||||||
| Supplemental disclosures of cash flow information: | ||||||||
| Non-cash consideration paid for assets acquired and liabilities assumed | $ | $ | ||||||
| Deferred acquisition costs | $ | $ | ||||||
| Deferred offering costs recorded as reduction of proceeds | $ | $ | ||||||
See accompanying condensed unaudited notes to the consolidated condensed financial statements.
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Unusual Machines, Inc.
Notes to Consolidated Condensed Financial Statements
For the Period Ended September 30, 2024
Note 1 – Organization and nature of business
Unusual Machines, Inc. (“the Company”) is a Nevada corporation engaged in the commercial drone industry. The Company reincorporated from Puerto Rico to Nevada on April 22, 2024.
On February 16, 2024, the Company closed its Initial Public Offering (the “IPO”) of shares of common stock at a public offering price of $ per share (“IPO Price”). The shares are traded on NYSE American. Simultaneous with the closing of the IPO, the Company acquired Fat Shark Holdings Ltd. (“Fat Shark”) and Rotor Riot, LLC (“Rotor Riot”) from Red Cat Holdings, Inc. (“Red Cat”) (See Note 3).
Note 2 – Summary of significant accounting policies
Principles of Consolidation
The consolidated financial statements include accounts of the Company and its wholly owned subsidiaries, Fat Shark and Rotor Riot since the acquisitions on February 16, 2024. Intercompany transactions and balances have been eliminated upon consolidation.
Unaudited interim financial information
The consolidated condensed financial statements of the Company included herein have been prepared, without audit, pursuant to the rules and regulations of the Securities and Exchange Commission (the “SEC”). Certain information and footnote disclosures normally included in financial statements prepared in accordance with GAAP have been condensed or omitted from this Quarterly Report, as is permitted by such rules and regulations. Accordingly, these condensed financial statements should be read in conjunction with the financial statements and notes thereto included in the Company’s Annual Report on Form 10-K/A, for the year ended December 31, 2023. The results for any interim period are not necessarily indicative of results for any future period.
Use of Estimates
The preparation of financial statements in conformity with GAAP requires management to make estimates and assumptions that affect the reported amounts of assets and liabilities, disclosures of contingent assets and liabilities at the date of the financial statements, and the reported amounts of revenues and expenses during the reporting period. Accordingly, actual results could differ from those estimates, and such results could be material.
The financial statements include some amounts that are based on management's best estimates and judgments. Significant estimates reflected in these financial statements include those used to (i) determine stock-based compensation, (ii) the fair value of assets acquired and liabilities assumed in business combinations and the value of shares issued as consideration, (iii) reserves and allowances related to accounts receivable, inventory and sales, (iv) the evaluation of long-term assets, including goodwill, for impairment, (v) the fair value of lease liabilities and related right of use assets, the fair value of embedded conversion option derivatives and warrant liabilities, and (vi) the warranty liability reserve.
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Cash and Cash Equivalents
The Company considers all highly liquid debt instruments
and other short-term investments with maturities of three months or less, when purchased, to be cash equivalents. The Company maintains
cash deposits in multiple commercial banks and financial services companies. These financial institutions are insured by the Federal Deposit
Insurance Corporation up to $
Accounts Receivable, net
The Company carries its accounts receivable at
invoiced amounts. Upon the closing of the acquisitions in February 2024 when we acquired accounts receivable, the Company adopted ASC
326, Financial Instruments – Credit Losses, which the Company evaluates all credit losses as of the reporting date. On a periodic
basis, the Company evaluates its accounts receivable and establishes an allowance for doubtful accounts based on a history of past write-offs
and collections and current credit conditions. Accounts are written-off as uncollectible at the discretion of management. At September
30, 2024 and December 31, 2023, the Company considers accounts receivable to be fully collectible; accordingly,
Inventory
Inventories, which consist of finished goods, are stated at the lower of cost or net realizable value, and are measured using the first-in, first-out method. Cost components include direct materials and direct labor, as well as in-bound freight. At each balance sheet date, the Company evaluates the net realizable value of its inventory using various reference measures including current product selling prices, as well as evaluating for excess quantities and obsolescence.
Deferred offering costs
The Company deferred direct incremental costs
associated with its IPO. The Company capitalized $
Property and equipment, net
Property and equipment is stated at cost, net
of accumulated depreciation. Depreciation is provided utilizing the straight-line method over the estimated useful lives for owned assets,
ranging from
Leases
The Company has adopted Accounting Standards Codification
(ASC) 842, “Leases” which requires the recognition of assets and liabilities associated with lease agreements. As of February
16, 2024, the date of the acquisition, the Company recognized a lease liability obligation of $
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The Company determines if a contract is a lease
or contains a lease at inception. Operating lease liabilities are measured, on each reporting date, based on the present value of the
future minimum lease payments over the remaining lease term. The Company's leases do not provide an implicit rate. Therefore, the Company
used an effective discount rate of
Goodwill and Long-lived Assets
Goodwill represents the future economic benefit arising from other assets acquired in an acquisition that are not individually identified and separately recognized. The Company tests goodwill for impairment in accordance with the provisions of ASC 350, Intangibles – Goodwill and Other, (“ASC 350”). Goodwill is tested for impairment at least annually at the reporting unit level or whenever events or changes in circumstances indicate that goodwill might be impaired. ASC 350 provides that an entity has the option to first assess qualitative factors to determine whether the existence of events or circumstances leads to a determination that it is more likely than not that the fair value of a reporting unit is less than its carrying amount. If, after assessing the totality of events or circumstances, an entity determines it is not more likely than not that the fair value of a reporting unit is less than its carrying amount, then additional impairment testing is not required. However, if an entity concludes otherwise, then it is required to perform an impairment test. The impairment test involves comparing the estimated fair value of a reporting unit with its book value, including goodwill. If the estimated fair value exceeds book value, goodwill is considered not to be impaired. If, however, the fair value of the reporting unit is less than book value, then an impairment loss is recognized in an amount equal to the amount that the book value of the reporting unit exceeds its fair value, not to exceed the total amount of goodwill allocated to the reporting unit.
The estimate of fair value of a reporting unit is computed using either an income approach, a market approach, or a combination of both. Under the income approach, we utilize the discounted cash flow method to estimate the fair value of a reporting unit. Significant assumptions inherent in estimating the fair values include the estimated future cash flows, growth assumptions for future revenues (including gross margin, operating expenses, and capital expenditures), and a rate used to discount estimated future cash flow projections to their present value based on estimated weighted average cost of capital (i.e., the selected discount rate). Management’s assumptions are based on historical data, supplemented by current and anticipated market conditions, estimated growth rates, and management’s plans. Under the market approach, fair value is derived from metrics of publicly traded companies or historically completed transactions of comparable businesses. The selection of comparable businesses is based on the markets in which the reporting units operate and consider risk profiles, size, geography, and diversity of products and services.
The Company reviews long-lived assets, including tangible assets and other intangible assets with definitive lives, for impairment whenever events or changes in circumstances indicate that the asset’s carrying amount may not be recoverable. The Company conducts its long-lived asset impairment analyses in accordance with ASC 360, “Impairment or Disposal of Long-Lived Assets”. ASC 360 requires the Company to group assets and liabilities at the lowest level for which identifiable cash flows are largely independent of the cash flows of other assets and liabilities and evaluate the asset group against the sum of the undiscounted future cash flows. If the undiscounted cash flows do not indicate the carrying amount of the asset group is recoverable, an impairment charge is measured as the amount by which the carrying amount of the asset group exceeds its fair value based on discounted cash flow analysis or appraisals.
Fair Values, Inputs and Valuation Techniques for Financial Assets and Liabilities, and Related Disclosures
The fair value measurements and disclosure guidance defines fair value and establishes a framework for measuring fair value. Fair value is defined as the price that would be received to sell an asset or paid to transfer a liability (an exit price) in an orderly transaction between market participants at the measurement date. In accordance with this guidance, the Company has categorized its recurring basis financial assets and liabilities into a three-level fair value hierarchy based on the priority of the inputs to the valuation technique.
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The fair value hierarchy gives the highest priority to quoted prices in active markets for identical assets or liabilities (Level 1) and the lowest priority to unobservable inputs (Level 3). The inputs used to measure fair value may fall into different levels of the fair value hierarchy. In such cases, the level in the fair value hierarchy within which the fair value measurement in its entirety falls has been determined based on the lowest level input that is significant to the fair value measurement in its entirety. The Company's assessment of the significance of a particular input to the fair value measurement in its entirety requires judgment and considers factors specific to the asset or liability.
The guidance establishes three levels of the fair value hierarchy as follows:
Level 1: Inputs are unadjusted, quoted prices in active markets for identical assets or liabilities at the measurement date;
Level 2: Inputs are observable, unadjusted quoted prices in active markets for similar assets or liabilities, unadjusted quoted prices for identical or similar assets or liabilities in markets that are not active, or other inputs that are observable or can be corroborated by observable market data for substantially the full term of the related assets or liabilities; and
Level 3: Unobservable inputs that are significant to the measurement of the fair value of the assets or liabilities that are supported by little or no market data.
The following table details the fair value measurements of the Company’s financial liabilities as of September 30, 2024:
| Total | Level 1 | Level 2 | Level 3 | |||||||||||||
| Warrant liabilities | $ | $ | $ | $ | ||||||||||||
| Derivative liability – convertible note conversion option | ||||||||||||||||
| Total | $ | $ | $ | $ | ||||||||||||
Changes in Level 3 financial instruments are as follows:
| December 31, | Purchases, Issuances and | Change in | September 30, | |||||||||||||
| 2023 | Settlements | Fair Value | 2024 | |||||||||||||
| Warrant liabilities | $ | $ | $ | ( | ) | $ | ||||||||||
| Derivative liability – convertible note conversion option | ( | ) | ||||||||||||||
| Total | $ | $ | $ | ( | ) | $ | ||||||||||
Disclosures for Non-Financial Assets Measured at Fair Value on a Non-Recurring Basis
The Company's financial instruments mainly consist of cash, receivables, current assets, accounts payable, accrued expenses, debt, and derivative liabilities. The carrying amounts of cash, receivables, current assets, accounts payable, accrued expenses and current debt approximates fair value due to the short-term nature of these instruments.
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Accrued Warranty
Fat Shark products are warranted against defects
in materials and workmanship for a period of two years from the date of shipment. If a defect arises during the warranty period, Fat Shark
will either (i) repair the affected product at no charge using new parts or parts that are equivalent to new in performance and reliability;
(ii) exchange the affected product with a functionally equivalent product; or (iii) refund the original purchase price for the affected
product. Allowances for estimated warranty costs are recorded during the period of sale. The determination of such allowances requires
the Company to make estimates of product warranty claim rates and expected costs to repair or to replace the products under warranty.
The Company currently establishes warranty reserves based on historical warranty costs for each product line combined with liability estimates
based on the prior 24 months’ sales activities. If actual return rates and/or repair and replacement costs differ significantly
from the Company’s estimates, adjustments to recognize the additional cost of sales may be required in future periods. Historically
the warranty accrual and the expense amounts have been immaterial. The warranty liability is included in accrued expenses on the accompanying
consolidated balance sheets and amounted to $
Rotor Riot does not provide any warranty of any kind for any of the equipment it sells or otherwise distributes. Consumers assume all risk for any products purchased or received from Rotor Riot.
Revenue Recognition
The Company recognizes revenue in accordance with ASC 606, “Revenue from Contracts with Customers”, issued by the Financial Accounting Standards Board (“FASB”). This standard includes a comprehensive evaluation of factors to be considered regarding revenue recognition including:
Step 1: Identify the contract with a customer;
Step 2: Identify the performance obligations in the contract;
Step 3: Determine the transaction price;
Step 4: Allocate the transaction price to the performance obligations in the contract; and
Step 5: Recognize revenue when (or as) the Company satisfies a performance obligation at a point in time.
The Company receives revenues from the sale of products from both retail distributers and individual consumers. Sales revenue is recognized when the products are shipped and the price is fixed or determinable, no other significant obligations of the Company exist and collectability is probable. Revenue is recognized when the title to the products has been passed to the customer, which is the date the products are shipped to the customer. This is the date the performance obligation has been met.
Deferred Revenue
Deferred revenue relates to (i) orders placed,
but not yet fulfilled and (ii) customer tickets purchased related to the Company’s Rampage event, in which tickets are sold in advance
and recognized when the event takes place. All deferred revenue is expected to be recognized within one year. Deferred revenue related
to orders placed, but not yet fulfilled totaled $
Cost of Goods Sold
Cost of goods sold includes inventory costs, direct packaging costs and production related depreciation, if any.
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Shipping and Handling Costs
Shipping and handling costs incurred for products
shipped to customers are included in general and administrative expenses and amounted to $
Research and Development
Research and development expenses include payroll, employee benefits, and other headcount-related expenses associated with product development. Research and development expenses also include third-party development costs, materials, and a proportionate share of overhead costs.
Income Taxes
The Company accounts for income taxes using an asset and liability approach, which requires recognition of deferred tax assets and liabilities for the expected future tax consequences of events. A valuation allowance is established to reduce deferred tax assets to their estimated realizable value when, in the opinion of management, it is more likely than not that some portion or all of the deferred income tax assets will not be realizable in the future.
The Company recognizes benefits of uncertain tax positions if it is more likely than not that such positions will be sustained upon examination based solely on their technical merits, as the largest amount of benefit that is more likely than not to be realized upon the ultimate settlement. The Company’s policy is to recognize interest and penalties related to unrecognized tax benefits as a part of income tax expense.
The Company’s current provision for the
nine months ending September 30, 2024 and 2023 consisted of a tax benefit against which we applied a full valuation allowance, resulting
in no current provision for income taxes. Since the Company has not generated an operating profit since inception, there are
Stock options are valued using the estimated grant-date fair value method of accounting in accordance with ASC Topic 718, Compensation – Stock Compensation. Fair value is determined based on the Black-Scholes Model using inputs reflecting our estimates of expected volatility, expected term and future dividends. The Company recognizes forfeitures as they occur. The fair value of restricted stock is based on our quoted stock price or other fair value indicators on the date of grant. Compensation cost is recognized on a straight-line basis over the service period which is typically the vesting term.
Warrants
The Company accounts for warrants to purchase shares of its common stock in accordance with the guidance in ASC 480, Distinguishing Liabilities from Equity (“ASC 480”) and ASC 815, Derivatives and Hedging (“ASC 815”). The Company classifies warrants issued for the purchase of shares of its common stock as either equity or liability instruments based on an assessment of the specific terms and conditions of each respective contract. The assessment considers whether the warrants are freestanding financial instruments or embedded in a host instrument, whether the warrants meet the definition of a liability pursuant to ASC 480, whether the warrants meet the definition of a derivative under ASC 815, and whether the warrants meet all of the requirements for equity classification under ASC 815. This assessment, which requires the use of professional judgment, is conducted at the time of warrant issuance and as of each subsequent quarterly period end date while the warrants are outstanding.
| 14 |
For issued or modified warrants that meet all of the criteria for equity classification, the warrants are required to be recorded as a component of equity at the time of issuance. For issued or modified warrants that do not meet all the criteria for equity classification, the warrants are required to be recorded as liabilities at their initial fair value on the date of issuance, and each balance sheet date thereafter. Changes in the estimated fair value of the warrants classified as liabilities are recognized as a non-cash gain or loss in the consolidated statements of operations and comprehensive loss.
Embedded Conversion Option Derivative
The Company accounts for embedded debt conversion features in accordance with the guidance in ASC 815, Derivatives and Hedging (“ASC 815”). If the embedded debt conversion feature is not clearly and closely related to the debt host, then it is required to be bifurcated from the host contract and accounted for separately as a derivative liability. The derivative liability is required to be recorded at its initial fair value on the date of issuance, and each balance sheet date, thereafter. Changes in the estimated fair value of the derivative are recognized as a non-cash gain or loss in the consolidated statements of operations and comprehensive loss. This assessment, which requires the use of professional judgment, is conducted at the time of Note issuance and as of each subsequent quarterly period end date while the Note is outstanding.
Basic and diluted net loss per share is calculated based on the weighted-average of common shares outstanding in accordance with FASB ASC Topic 260, Earnings per Share. Diluted net loss per share is calculated based on the weighted-average number of common shares outstanding plus the effect of dilutive potential common shares. When the Company reports a net loss, the calculation of diluted net loss per share excludes potential common shares as the effect would be anti-dilutive.
Segment Reporting
Since the acquisitions of Fat Shark and Rotor Riot, the Company operates with one reportable segment. The Company bases its reportable segment based on how our Chief Operating Decision Maker manages the business, makes resource allocations and operating decisions, and evaluates operating performance.
Recent Accounting Pronouncements
In November 2023, new accounting guidance was issued that updates reportable segment disclosure requirements by requiring disclosures of significant reportable segment expenses that are regularly provided to the Chief Operating Decision Maker (the “CODM”) and included within each reported measure of a segment's profit or loss. This new guidance also requires disclosure of the title and position of the individual identified as the CODM and an explanation of how the CODM uses the reported measures of a segment’s profit or loss in assessing segment performance and deciding how to allocate resources. The new guidance is effective for annual periods beginning after December 15, 2023, and interim periods within fiscal years beginning after December 15, 2024. The new guidance is required to be applied retrospectively to all prior periods presented in the financial statements. Early adoption is also permitted. On January 1, 2024, the Company adopted ASC 280, Segment Reporting. The Company currently operates a single segment and the Company does not anticipate any net effect related to the adoption.
In December 2023, new accounting guidance was issued related to income tax disclosures. The new guidance requires disaggregated information about a reporting entity’s effective tax rate reconciliation as well as additional information on income taxes paid. The new guidance is effective on a prospective basis for annual periods beginning after December 15, 2024. Early adoption is also permitted for annual financial statements that have not yet been issued or made available for issuance. This new guidance will likely not result in additional required disclosures when adopted.
| 15 |
Note 3 – Acquisitions
Fat Shark and Rotor Riot
On February 16, 2024, the Company closed on the acquisitions of both Fat Shark and Rotor Riot from Red Cat and Jeffrey Thompson, the founder and Chief Executive Officer of Red Cat (the “Business Combination”) (See Note 12 – Related Party Transactions for additional information). Fat Shark and Rotor Riot are in the business of designing and marketing consumer drones and first-person-view (“FPV”) goggles. Rotor Riot is also a licensed authorized reseller of consumer drones manufactured by third parties.
The Company specializes in the production and sale of small drones and essential components and with the acquisitions of Fat Shark and Rotor Riot, it brings brand recognition and a strong curated retail channel in the FPV drone market segment. This Business Combination is a realization of the Company’s strategy to build its business both organically and through strategic acquisitions that leverage our retail business to onshore production of critical drone components. With the transition to onshoring production of drone components, the Company intends to expand into B2B channels for customers that require a domestic supply chain.
The Business Combination was based on a share
purchase agreement (the “Purchase Agreement”) that was executed on November 21, 2022. From November 21, 2022 to February 16,
2024, the Purchase Agreement was subject to several amendments and subject to certain working capital adjustments. Under the terms of
the Purchase Agreement, as amended, the consideration paid for the acquired assets consisted of (i) $
The acquisitions met the definition of a business combination under ASC 805, Business Combinations, and therefore the assets acquired, and liabilities assumed are accounted for at fair value. The Company has not completed its evaluation of the fair value of assets acquired and liabilities assumed of Fat Shark and Rotor Riot for the purpose of its 2024 fiscal year financial reporting and as such has not fully determined the unallocated purchase price between goodwill and other intangible assets. Such amounts are subject to adjustment during the one-year measurement period.
The following represents the fair value allocation of Fat Shark and Rotor Riot Purchase Price:
| Cash | $ | |||
| Accounts receivable (approximates contractual value) | ||||
| Inventories (on hand and prepaid) | ||||
| Other current assets | ||||
| Right of use asset – operating | ||||
| Other long-term assets | ||||
| Goodwill and intangible assets (unallocated purchase price) | ||||
| Total assets | ||||
| Accounts payable and accrued liabilities | ||||
| Customer deposits | ||||
| Operating lease liability – current and long-term | ||||
| Total liabilities | ||||
| Total purchase price | $ | |||
| 16 |
Initial goodwill and intangible assets relate to Fat Shark and Rotor Riot being FPV market leaders and their well-known and established brands within the industry. Combining these entities and their existing customer base along with Unusual Machines’ strategy of extending to B2B sales of drone components will provide a strategic advantage. The Company will evaluate the amount of goodwill and intangibles that are expected to be deductible for tax purposes once the unallocated purchase price is finalized.
The results of Fat Shark and Rotor Riot have been included in the Consolidated Financial Statements from the date of acquisition. The table below presents the results as reported by the Company and unaudited pro forma results of the Company, assuming that the acquisition of Fat Shark and Rotor Riot at the beginning of each period are as follows. The unaudited pro forma results are not necessarily indicative of what actually would have occurred had the acquisitions been in effect for the periods presented (in thousands, except per share data):
| For the Nine months Ended | For the Nine months Ended | |||||||||||||||
| September 30, 2024 | September 30, 2023 | |||||||||||||||
| As Reported | Proforma (unaudited) | As Reported | Proforma (unaudited) | |||||||||||||
| Revenue | $ | $ | $ | $ | ||||||||||||
| Gross profit/(loss) | ||||||||||||||||
| Loss from operations | ( | ) | ( | ) | ( | ) | ( | ) | ||||||||
| Other expense | ( | ) | ( | ) | ||||||||||||
| Net loss | $ | ( | ) | $ | ( | ) | $ | ( | ) | $ | ( | ) | ||||
| Net earnings per share: | ||||||||||||||||
| Basic | $ | ( | ) | $ | ( | ) | $ | ( | ) | $ | ( | ) | ||||
This unaudited consolidated pro forma financial information is presented for informational purposes only. The unaudited consolidated pro forma adjustments are based on preliminary estimates, information available and certain assumptions, and may be revised as additional information becomes available. In addition, the unaudited pro forma financial information does not reflect any adjustments for non-recurring items or anticipated synergies resulting from the acquisition.
The unaudited pro forma financial information from the beginning of the periods presented until the acquisition date includes adjustments to: 1) eliminate intercompany revenue and associated cost of sales for sales of product from Fat Shark to Rotor Riot, 2) to adjust fair value for certain Fat Shark inventory as if the acquisition had occurred as of the beginning of the respective periods and 3) to include acquisition related expenses in the Q1 ’23 that were incurred in Q1 ’24.
Note 4 – Inventories
Inventories, consisting solely of finished goods,
totaled $
Note 5 – Other Current Assets
Other current assets included as of:
| September 30, 2024 | December 31, 2023 | |||||||
| Deposit related to Rotor Riot, LLC and Fat Shark, Ltd. acquisitions | $ | $ | ||||||
| Prepaid insurance | ||||||||
| Rent deposit | ||||||||
| Other prepaid expenses | ||||||||
| Total other current assets | $ | $ | ||||||
| 17 |
Note 6 – Property and Equipment, net
Property and equipment consist of assets with an estimated useful life greater than one year. Property and equipment are reported net of accumulated depreciation, and the reported values are periodically assessed for impairment. Property and equipment as of:
| September 30, 2024 | December 31, 2023 | |||||||
| Computer equipment | $ | $ | ||||||
| Accumulated depreciation | ( | ) | ( | ) | ||||
| Total property and equipment, net | $ | $ | ||||||
Depreciation expense totaled $
Note 7 – Operating Leases
| Year | Future Lease Payments | Operating Lease Discount | Operating Lease Liability | |||||||||
| 2024 | $ | $ | ( | ) | $ | |||||||
| 2025 | ( | ) | ||||||||||
| 2026 | ( | ) | ||||||||||
| 2027 | ( | ) | ||||||||||
| 2028 | ( | ) | ||||||||||
| Total | $ | $ | ( | ) | $ | |||||||
| Supplemental Information | ||||
| Weighted average remaining lease term (in years) | ||||
| Weighted average discount rate | ||||
Note 8 – Promissory and Convertible Notes
In February 2024 and in conjunction with the acquisition
of Fat Shark and Rotor Riot, as discussed in Note 3, the Company issued a promissory note (“Note”) with Red Cat Holdings,
Inc. (“Red Cat”) for $
| 18 |
Subsequently and in July 2024, in conjunction
with a private sale of Red Cat’s common stock and its promissory note to two accredited investors (“Investors”), the
Company issued new notes to the Investors (the “July Notes”) and cancelled the original Note. The July Notes contained
On August 21, 2024, the Company entered into two
exchange agreements with the Investors, under which the Investors exchanged their respective
The August Notes bear interest at
Total interest expense for the nine months ended
September 30, 2024 was $
Note 9 – Derivative Liabilities
The fair value of the derivative liabilities are determined using the binomial option pricing model which values the liability on the stock price at the grant date, the estimate volatility of the stock, the risk-free interest rate over the expected term, and certain estimates and probabilities of different outcomes. Changes in the fair value of the derivative is recorded in the income statement in other income and expense on a quarterly basis.
Derivative liability – conversion option
In August 2024 and in conjunction with the issuance
of the August Notes as discussed in Note 8 – Convertible Note, the Company recorded a derivative liability related to the optional
conversion feature (“Conversion Derivative”) in accordance with ASC 815 as it is not clearly and closely related to the host
contract and the embedded debt conversion feature meets the definition of a liability due to a potential variable amount of shares that
may be issued upon conversion. The initial fair value on August 21, 2024 for the Conversion Derivative was $
Warrant Liability
In August 2024 and in conjunction with the issuance
of the August Notes as discussed in Note 8 – Convertible Note, the Company issued warrants that include specific provisions and
obligations including a fundamental transaction provision that may require a cash payment to the holder upon a triggering event, that
in accordance with ASC 815, require the warrants to be classified as a liability. The initial fair value on August 21, 2024 for the Warrant
Liability was $
| 19 |
Earnings per Share
Outstanding securities not included in the computation of diluted net loss per share because their effect would have been anti-dilutive include and shares of Series A Convertible Preferred Stock (the “Series A”), as converted as of September 30, 2024 and 2023, respectively. and shares of Series B Convertible Preferred Stock (the “Series B”), as converted as of September 30, 2024 and 2023, respectively. and shares of Series C Convertible Preferred Stock (the “Series C”), as converted as of September 30, 2024 and 2023, respectively. of stock options issued to employees as of September 30, 2024, of common stock representative warrants issued to the underwriter associated with the February 2024 IPO, warrants issued related to the debt conversion, and shares of common stock, as converted, associated with the Note discussed in Note 8 “Convertible Note”.
Preferred Stock
The preferred stock par value is $.
The Series A is convertible into common stock at a ratio of 1,000 shares of common stock for each share of Series A stock held, subject to certain limitations. The Series A shares are not entitled to vote on any matters submitted to shareholders of the Company.
The Series B is convertible into common stock at a ratio of 5,000 shares of common stock for each share of Series B stock held, subject to certain limitations. The Series B shares are not entitled to vote on any matters submitted to shareholders of the Company.
The Series C is convertible into common stock at a ratio of 3,000 shares of common stock for each share of Series C stock held, subject to certain limitations. The Series C shares are not entitled to vote on any matters submitted to shareholders of the Company.
On July 22, 2024, the Company’s principal shareholder, Red Cat sold all of its securities in the Company to the two unaffiliated third-party Investors. As part of the transaction and just prior to the above sale, Red Cat entered into an Exchange Agreement with the Company pursuant to which Red Cat exchanged shares of the Company’s common stock for shares of the Company’s Series A. The Series A shares can be convertible back into the same amount of shares of common stock as of the date of the original exchange, and as a result the Company did not recognize any gain or loss related to the exchange.
On August 21, 2024, the Company entered into two
exchange agreements with the Investors, under which each investor exchanged an aggregate of $
| 20 |
Subsequent to the IPO but prior to September 30, 2024, certain shareholders converted shares of Series B into shares of common stock. The Company canceled the shares of Series B upon the conversion.
On June 1, 2023, the Company issued an additional Series B shares in connection with the cancellation of shares of common stock.
Preferred shares outstanding at September 30, 2024 and December 31, 2023 were as follows:
| Preferred Series | Shares as of September 30, 2024 | Shares as converted, as of September 30, 2024 | Shares as of December 31, 2023 | Shares, as converted, as of December 31, 2023 | ||||||||||||
| Series A | ||||||||||||||||
| Series B | ||||||||||||||||
| Series C | ||||||||||||||||
Common Stock
The common stock par value is $.
2024 Transactions
On January 2, 2024, the Company issued shares of common stock to its prior Chief Executive Officer as a part of a separation agreement and recognized compensation expense of $ or $4 per share, the value of the IPO in February 2024.
On February 16, 2024 the Company completed its
IPO and issued shares of common stock at the IPO Price for total net proceeds of $
Simultaneously with its IPO and as a part of
the Purchase Agreement as discussed in Note 3, the Company issued Red Cat shares of common stock as consideration of the
business combination. These were subsequently exchanged into Series A preferred shares as discussed above. As agreed in the
Purchase Agreement, $
Subsequent to the IPO and prior to September 30, 2024, the Company issued shares of common stock related to certain shareholders converting Series B shares into common stock.
On April 30, 2024, the Company issued restricted shares of common stock to executive officers and board members of the Company. The shares of restricted stock were granted under the Company’s 2022 Equity Incentive Plan. The restricted shares issued to executive officers are subject to pro rata forfeiture through February 14, 2025.
On May 2, 2024, the Company issued an additional of restricted shares of common stock to Allan Evans, the Company’s CEO related to an agreed upon reduction of compensation. The shares of restricted stock were granted under the Company’s 2022 Equity Incentive Plan (the “Plan”).
| 21 |
The April 30, 2024 and May 2, 2024 shares were
valued at $ and $ per share, respectively for a total of $
On July 22, 2024, Red Cat sold all of its securities in the Company to two accredited investors in a private transaction. As part of the transaction, Red Cat entered into an Exchange Agreement with the Company pursuant to which Red Cat exchanged shares of the Company’s common stock for shares of the Company’s Series A. There was no gain or loss on this exchange as both the common and preferred shares were determined to have the same fair value as of the exchange date.
On July 30, 2024, the Company issued immediately vested restricted shares of common stock to board members of the Company. The shares of restricted stock were granted under the Plan. The shares were valued at $ per share, which was the value of the Company’s common stock on the date of grant, respectively for a total of $ to be recognized as stock compensation expense during the three months ended September 30, 2024.
2023 Transactions
On March 7, 2023, the Company issued shares of common stock to an investment banking firm (“Revere”) as a fee for the termination of the January 2023 engagement with Revere. These shares were allocated by Revere to some of the Company’s existing shareholders. The Company recorded $ of stock compensation expense related to the issuance of the shares valued at $ per share, which was based on the most recent private sale of common stock for the Company.
On July 10, 2023, the Company’s Board of
Directors approved a
Stock Options
The Plan allows the Company to incentivize key employees and directors with long term compensation awards such as stock options, restricted stock, and other similar types of awards. The Plan is authorized to issue of awards and has an “evergreen” provision, pursuant to which the number of shares of common stock reserved for issuance pursuant to awards under such plan shall be increased on the first day of each year beginning in 2025 and ending in 2032 equal to the lesser of (a) five percent (5%) of the shares of stock outstanding (on an as converted basis) on the last day of the immediately preceding fiscal year and (b) such smaller number of shares of stock as determined by our board of directors.
During the nine months ended September 30, 2024, the Company’s board of directors approved the grant of stock options under the Plan to certain employees. The stock options are subject to certain vesting provisions.
The following table presents the activity for stock options outstanding:
Non-Qualified Options | Weighted Average Exercise Price | Weighted Average Remaining Contractual Term | Aggregate Intrinsic Value | |||||||||||||
| Outstanding - December 31, 2023 | $ | – | ||||||||||||||
| Granted | $ | |||||||||||||||
| Forfeited/canceled | – | – | ||||||||||||||
| Exercised | – | – | ||||||||||||||
| Outstanding – September 30, 2024 | $ | $ | ||||||||||||||
| 22 |
The range of assumptions used to calculate the fair value of options granted during the nine months ended September 30, 2024 was:
| Exercise Price | $ | – | ||
| Stock Price on date of grant | $ | – | ||
| Risk-free interest rate | - % | |||
| Dividend yield | ||||
| Expected term (years) | ||||
| Volatility | – % | |||
The Company recognized $ in stock-based compensation expense related to stock options during the nine months ended September 30, 2024. As of September 30, 2024, there was $ of unrecognized stock-based compensation expense related to unvested stock options to be recognized over the remaining vesting term through 2028.
Restricted Stock
The following table presents the activity for restricted stock outstanding:
| Restricted | Awards | Awards | ||||||||||
| Stock | Vested | Unvested | ||||||||||
| Outstanding - December 31, 2023 | ||||||||||||
| Granted | ||||||||||||
| Forfeited/canceled | ||||||||||||
| Outstanding – September 30, 2024 | ||||||||||||
The Company recognized $ in stock-based compensation expense related to restricted stock during the nine months ended September 30, 2024. As of September 30, 2024, there was $ of unrecognized stock-based compensation expense related to unvested restricted stock to be recognized over the remaining vesting term through February 15, 2025.
Warrants
The following table presents the activity for warrants outstanding as of September 30, 2024:
| Weighted | ||||||||
| Warrants | Average | |||||||
| Outstanding | Exercise Price | |||||||
| Outstanding - December 31, 2023 | $ | |||||||
| Granted | ||||||||
| Forfeited/cancelled/restored | ||||||||
| Exercised | ||||||||
| Outstanding – September 30, 2024 | $ | |||||||
As discussed in Note 10, “Earnings Per Share and Stockholders’ Equity”, in connection with the IPO, the Company issued representative warrants to its underwriters to purchase shares of common stock. The representative warrants have an exercise price of $5.00 or can be exercised through a cashless exercise feature.
| 23 |
As discussed in Note 8, “Convertible Note”,
in connection with the exchange of the $
All warrants outstanding have a weighted average remaining contractual life of approximately years as of September 30, 2024. The intrinsic value of the warrants at September 30, 2024 is $ as the share price of the Company’s common stock is lower than the strike price of the warrants.
Note 12 – Related Party Transactions
In November 2022, the Company entered into the Purchase Agreement, as amended with Red Cat and Jeffrey Thompson, the Company’s former Chief Executive Officer and President and current director and also the current Chief Executive Officer of Red Cat, pursuant to which, among other things, Mr. Thompson and the Company have agreed to indemnification obligations, which shall survive for a period of nine months from February 16, 2024, subject to certain limitations, which includes a basket of $250,000 before any claim can be asserted and a cap equal to the value of 100,000 shares of our common stock owned by him to secure any indemnification obligations, which stock is our sole remedy, except for fraud. Our prior Chief Executive Officer, Mr. Brandon Torres Declet, negotiated the terms of the Purchase Agreement on an arms’ length basis with Joe Freedman who was the head of Red Cat’s Special Committee. The transaction was ultimately approved by the Company’s and Red Cat’s board of directors. On March 8, 2023, a majority of the disinterested Red Cat shareholders approved the transactions contemplated in the Purchase Agreement in a special meeting. Mr. Thompson recused himself from such vote.
In February 2024, the Company completed the acquisitions to purchase Fat Shark and Rotor Riot from Red Cat. Jeffrey Thompson is the founder and current Chief Executive Officer of Red Cat. Mr. Thompson is also the founder, prior Chief Executive Officer and current member on the Board of Directors of Unusual Machines. Prior to the acquisition, Mr. Thompson held 328,500 shares of common stock in Unusual Machines, which represented approximately 10% prior to the acquisition and IPO.
On April 30, 2024 (“Grant Date”), the Company’s board of directors approved the Company entering into a two-year Management Services Agreement (the “Agreement”) with 8 Consulting LLC (the “Consultant”) for the services of our Chief Executive Officer, Dr. Allan Evans, whereby the Consultant agreed to cause Dr. Evans to perform his services as the Company’s Chief Executive Officer and the Consultant will be compensated on behalf of Dr. Evans by the Company in connection with his performance of such services. The Agreement allows Dr. Evans to receive favorable tax benefits as a resident of the Commonwealth of Puerto Rico who will perform such services in Puerto Rico. Pursuant to the Agreement, Dr. Evans will perform the duties and responsibilities that are customary for a chief executive officer of a public company that either have revenues similar to the Company on a pro forma basis as reflected in the Prospectus filed with the SEC on February 15, 2024, or if pre-revenues, are an active and on-going business that are performing pre-revenue activities. The Consultant agreed to cause Dr. Evans, as Chief Executive Officer, (i) to undertake primary responsibility for managing all aspects of the Company and overseeing the preparation of all reports, registration statements and other filings required filed by the Company with the SEC and executing the certifications required the Sarbanes Oxley Act of 2002 and the rules of the SEC as the principal executive officer of the Company; (ii) attend investor meetings and road shows in connection with the Company’s fundraising and investor relations activities; (iii) to report to the Company’s board of directors; (iv) to perform services for such subsidiaries of the Company as may be necessary.
The Consultant receives
a $
Note 13 – Commitments and Contingencies
Note 14 – Restatement of Previously Issued Financial Statements
On April 16, 2024, the Company changed their independent PCAOB-registered accounting firm and terminated its engagement with their prior auditor. On May 3, 2024, the Securities and Exchange Commission (“SEC”) issued an order that instituted a cease-and-desist against the Company’s previous auditor, which required the Company to obtain new auditors and re-audit its financial statements for the years ended December 31, 2023 and 2022.
| 24 |
The Company engaged a new, an independent and registered accounting firm, to re-audit the Company’s previously issued financial statements. During the Company’s re-audits, it was noted that certain transactions were not recorded in the correct period, stock compensation expense of $600,000 related to the March 7, 2023 common stock issuance was not recorded and deferred offering costs were classified as an operating activity rather than a financing activity. Expenses totaling $10,993 were originally recorded in 2023 but related to 2022 expenses.
With this restatement, the transactions previously recorded in the incorrect period have been updated to the correct period, classifications on the statements of cash flow have been corrected and the stock compensation previously not recorded has been properly recorded.
The following presents reconciliations of the impacted financial statement line items as filed to the restated amounts as of September 30, 2023 and for the periods then ended. The previously reported amounts reflect those included in the registration statements the Company filed with the Securities and Exchange Commission on February 1, 2024. These amounts are labeled “As Filed” in the tables below. The amounts labeled “Restatement Adjustments” represent the effects of these restatements due to the timing differences and stock compensation expense.
| Statement of Operations for the Nine months Ended September 30, 2023 | ||||||||||||
| As Filed | Restatement Adjustments | As Restated | ||||||||||
| Revenue | $ | $ | $ | |||||||||
| Cost of goods sold | ||||||||||||
| Gross profit | ||||||||||||
| Operating expenses: | ||||||||||||
| Research and development | ||||||||||||
| General and administrative | ||||||||||||
| Depreciation and amortization | ||||||||||||
| Total operating expenses | ||||||||||||
| Loss from operations | ( | ) | ( | ) | ( | ) | ||||||
| Other income: | ||||||||||||
| Interest income | ||||||||||||
| Total other income | ||||||||||||
| Net loss before income tax | ( | ) | ( | ) | ( | ) | ||||||
| Income tax benefit (expense) | ||||||||||||
| Net loss | $ | ( | ) | $ | ( | ) | $ | ( | ) | |||
| Net loss per share attributable to common stockholders | ||||||||||||
| Basic and diluted | $ | ) | $ | ) | $ | ) | ||||||
| Weighted average common shares outstanding | ||||||||||||
| Basic and diluted | ||||||||||||
| 25 |
Statements of Changes in Stockholders’ Equity – As Filed – For the Nine months Ended September 30, 2023
| Series B, Preferred Stock | Common Stock | Additional Paid-In | Stocks to be | Accumulated | ||||||||||||||||||||||||||||
| Shares | Value | Shares | Value | Capital | Issued | Deficit | Total | |||||||||||||||||||||||||
| Balance, December 31, 2022 | $ | $ | $ | $ | $ | ( | ) | $ | ||||||||||||||||||||||||
| Issuance of common shares | – | – | ( | ) | – | – | – | |||||||||||||||||||||||||
| Conversion to preferred shares | ( | ) | ( | ) | – | – | – | |||||||||||||||||||||||||
| Net loss | – | – | – | – | – | – | ( | ) | ( | ) | ||||||||||||||||||||||
| Balance, September 30, 2023 | $ | $ | $ | $ | $ | ( | ) | $ | ||||||||||||||||||||||||
Statements of Changes in Stockholders’ Equity – Restatement Adjustments – For the Nine months Ended September 30, 2023
| Series B, Preferred Stock | Common Stock | Additional Paid-In | Stocks to be | Accumulated | ||||||||||||||||||||||||||||
| Shares | Value | Shares | Value | Capital | Issued | Deficit | Total | |||||||||||||||||||||||||
| Balance, December 31, 2022 | $ | $ | $ | $ | $ | ( | ) | $ | ( | ) | ||||||||||||||||||||||
| Issuance of common shares | – | – | – | – | – | – | ||||||||||||||||||||||||||
| Conversion to preferred shares | – | – | – | – | – | – | – | – | ||||||||||||||||||||||||
| Net loss | – | – | – | – | – | – | ( | ) | ( | ) | ||||||||||||||||||||||
| Balance, September 30, 2023 | $ | $ | $ | $ | $ | ( | ) | $ | ||||||||||||||||||||||||
Statements of Changes in Stockholders’ Equity – As Restated – For the Nine months Ended September 30, 2023
| Series B, Preferred Stock | Common Stock | Additional Paid-In | Stocks to be | Accumulated | ||||||||||||||||||||||||||||
| Shares | Value | Shares | Value | Capital | Issued | Deficit | Total | |||||||||||||||||||||||||
| Balance, December 31, 2022 | $ | $ | $ | $ | $ | ( | ) | $ | ||||||||||||||||||||||||
| Issuance of common shares | – | – | – | – | ||||||||||||||||||||||||||||
| Conversion to preferred shares | ( | ) | ( | ) | – | – | – | |||||||||||||||||||||||||
| Net loss | – | – | – | – | – | – | ( | ) | ( | ) | ||||||||||||||||||||||
| Balance, September 30, 2023 | $ | $ | $ | $ | $ | ( | ) | $ | ||||||||||||||||||||||||
| 26 |
Statement of Cash Flows for the Nine months Ended September 30, 2023
| As Filed | Restatement Adjustments | As Restated | ||||||||||
| Cash flows from operating activities: | ||||||||||||
| Net loss | $ | ( | ) | $ | ( | ) | $ | ( | ) | |||
| Depreciation | ||||||||||||
| Stock compensation expense | ||||||||||||
| Change in assets and liabilities: | ||||||||||||
| Accounts receivable | ||||||||||||
| Deferred offering costs | ( | ) | ||||||||||
| Other current assets | ||||||||||||
| Accounts payable and accrued expenses | ( | ) | ( | ) | ( | ) | ||||||
| Net cash used in operating activities | ( | ) | ( | ) | ||||||||
| Cash flows from investing activities | ||||||||||||
| Purchases of property and equipment | ( | ) | ( | ) | ||||||||
| Net cash used in investing activities | ( | ) | ( | ) | ||||||||
| Cash flows from financing activities: | ||||||||||||
| Deferred offering costs | ( | ) | ( | )) | ||||||||
| Net cash provided by financing activities | ( | ) | ( | )) | ||||||||
| Net increase (decrease) in cash | ( | ) | ( | ) | ||||||||
| Cash, beginning of period | ||||||||||||
| Cash, end of period | $ | $ | $ | |||||||||
| Supplemental disclosures of cash flow information: | ||||||||||||
| Cash paid for interest | $ | $ | $ | |||||||||
| Cash paid for income tax | $ | $ | $ | |||||||||
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Note 15 – Subsequent Events
Quarterly Grants to our Board of Directors
On October 22, 2024, the Company issued non-employee directors listed in the table below the equity portion of their quarterly compensation. Each of the directors received a vested restricted stock grant for services as a director (and where applicable, committee member) during the quarter ended September 30, 2024. The shares of restricted common stock were granted under the Company’s 2022 Equity Incentive Plan and was subject to each director executing the Company’s standard Restricted Stock Agreement. The fair value per share was based on the quoted trading price as of the close of the market as of October 22, 2024.
| Director | Fair Value Per Share | Amount of Restricted Common Stock | Aggregate Fair Value |
| Cristina Colon | $1.45 | 7,472 | $10,833 |
| Sanford Rich | $1.45 | 7,472 | $10,833 |
| Robert Lowry | $1.45 | 7,472 | $10,833 |
| Jeffrey Thompson | $1.45 | 6,897 | $10,000 |
Private Placement Agreement
On October 29, 2024 (the “Closing Date”), the Company entered into Securities Purchase Agreements (the "SPA”) with accredited investors (each, an "Investor” and together the "Investors”) for a private placement offering ("Private Placement”), for aggregate gross proceeds of $1.95 million before deducting fees to the placement agent and other expenses payable by the Company in connection with the Private Placement. The Company intends to use the net proceeds of approximately $1.7 million of the Private Placement for working capital and general corporate purposes. As part of the Private Placement, the Company issued an aggregate of 1,286,184 units at a per unit purchase price of $1.52 per unit. Each unit consists of one share of common stock, par value $0.01 per share (the "Common Stock”) and one warrant to purchase one share of the Company’s Common Stock at an exercise price of $1.99 per share (each an "Investor Warrant”) and collectively, the Investor Warrants”). The Investor Warrants have a term of five and a half years from the Closing Date and may not be exercised for 180 days after the Closing Date and are exercisable at $1.99 per share, subject to certain limitations and adjustments set forth in the Investor Warrants. Allan Evans, the Company’s Chief Executive Officer and Sanford Rich and Robert Lowry, each a member of the Company’s board of directors, invested an aggregate of $250,000 in the Private Placement on identical terms to the other Investors.
On November 5, 2024, the Board of Directors of the Company awarded each of the Company’s Chief Executive Officer, Chief Financial Officer and Chief Operation Officer 50,000 restricted shares of the Company’s Common Stock under the Plan as bonuses related to the Private Placement. The restricted shares are valued at $1.96 per share, the closing price of our common stock as of the date of the grant, for a total value of $98,000 for each of the Company’s Officers. The bonuses are subject to the Company’s clawback Policy.
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| Item 2. | Management’s Discussion and Analysis of Financial Condition and Results of Operations |
The following discussion and analysis should be read in conjunction with the unaudited condensed financial statements and related notes included elsewhere in this Quarterly Report and our audited financial statements and related notes thereto included in our Annual Report on Form 10-K/A for the year ended December 31, 2023, which was filed with the SEC on August 9, 2024. The following discussion contains forward-looking statements that are subject to risks and uncertainties. See “Special Note Regarding Forward-Looking Statements” for a discussion of the uncertainties, risks, and assumptions associated with those statements. Actual results could differ materially from those discussed in or implied by forward-looking statements as a result of various factors, including those discussed below and elsewhere in this Quarterly Report and of our final prospectus filed with the SEC on October 25, 2024, particularly in the section entitled “Risk Factors.” Unless we state otherwise or the context otherwise requires, the terms “we,” “us,” “our” and the “Company” refer to Unusual Machines, Inc. and its subsidiaries. All amounts presented in tables, other than per share amounts, are in thousands unless otherwise noted.
Recent Developments
Private Placement
On October 29, 2024 (the “Closing Date”), we entered into Securities Purchase Agreements (the "SPA”) with accredited investors (each, an "Investor” and together the "Investors”) for a private placement offering ("Private Placement”), for aggregate gross proceeds of $1.95 million before deducting fees to the placement agent and other expenses payable by us in connection with the Private Placement. We intend to use the net proceeds of the Offering for working capital and general corporate purposes. As part of the Private Placement, we issued an aggregate of 1,286,184 units at a per unit purchase price of $1.52 per unit. Each unit consisted of one share of common stock, par value $0.01 per share (the "Common Stock”) and one warrant to purchase one share of the Company’s Common Stock (each an "Investor Warrant”) and collectively, the Investor Warrants”). The Investor Warrants have a term of five and a half years from the Closing Date and may not be exercised for 180 days after the Closing Date and are exercisable at $1.99 per share, subject to certain limitations and adjustments set forth in the Investor Warrants.
Results of Operations – Three Months Ended September 30, 2024 compared to the Three Months Ended September 30, 2023
Revenue
During the three months ended September 30, 2024 we 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 Holdings Ltd. (“Fat Shark”) and Rotor Riot LLC (“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 Rotor Riot 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 increase of $1,131,777 or 100%. Similar to revenues, we did not incur any cost of goods sold until the closing of the acquisitions on February 16, 2024. Cost of goods sold primarily relate to product costs from our sales, but also include certain shipping and other direct product costs.
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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 or 100%. Our gross margin, as a percentage of sales, totaled 26% during the three months ended September 30, 2024, compared to 0% during the three months ended September 30, 2023. We anticipate our gross margin to fluctuate period to period depending on certain promotions and products that are sold during the period and the margins we generated during the quarter are in line with our expectations and normal operating margins.
Operating Expenses
During the 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 $218,126 or 100%. Prior to the closing of the acquisitions in February 2024, we did not have any operations expenses. Operations expenses primarily relate to our direct operations including our warehouse personnel and warehouse expenses.
During the 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 drone component 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 and marketing 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, resulting in an increase of $1,021,960 or 289%. The increase primarily relates to stock compensation expense during quarter that we did not have in the previous year, an increase in expenses related to closing the IPO including legal and accounting fees, additional transition and integration related expenses, and the costs related to operating Fat Shark and Rotor Riot.
Net Loss
Our net loss for the three months ended September 30, 2024, totaled $2,144,250 compared to $353,674 for the three months ended September 30, 2023, resulting in an increase in net loss of $1,790,576 or 506%. The increase in net loss primarily relates to stock compensation expense taken during the period, the $685,151 loss on debt extinguishment, of which $663,250 was non-cash, in connection with the $1.0 million debt exchange for Series C preferred shares. 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 was partially offset by generating gross margin related to the revenue and cost of goods sold from sales for Fat Shark and Rotor Riot. In the fourth quarter of 2024 we expect to complete our valuation and identification of any intangible assets related to the acquisitions of Fat Shark and Rotor Riot. For any identified intangibles, we will begin to amortize during the fourth quarter which will result in a non-cash charge going forward. However, and until we complete our valuation on intangibles, the amount is uncertain, and the future amortization may or may not be material. After the identification and valuation of intangibles is complete, we will complete our impairment analysis on goodwill and the identified intangibles during the fourth quarter. While the amount is uncertain, we expect that our goodwill impairment could be material.
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Results of Operations – Nine months Ended September 30, 2024 compared to the Nine months Ended September 30, 2023
Revenue
During the nine months ended September 30, 2024 we 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 the first quarter. Revenues relate to completed and fulfilled product sales during the period through our Rotor Riot retail channel and from our 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 increase of $2,569,209 or 100%. Similar to revenues, we did not incur any cost of goods sold until the closing of the acquisitions on February 16, 2024. Cost of goods sold primarily relate to product costs from our sales, but also include certain shipping and other direct product costs.
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 or 100%. Our gross margin, as a percentage of sales, totaled 28% during the nine months ended September 30, 2024, compared to 0% during the nine months ended September 30, 2023. We anticipate our gross margin to fluctuate period to period depending on certain promotions and products that are sold during the period and the margins we generated during the quarter are in line with our expectations and normal operating margins.
Operating Expenses
During the 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 $544,220 or 100%. Prior to the closing of the acquisitions in February 2024, we did not have any operations expenses. Operations expenses primarily relate to our direct operations including our warehouse personnel and warehouse expenses.
During the 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 increase of $42,078 or 100%. Prior to the closing of the acquisitions in February 2024, we did not have any research and development expenses during 2023. Research and development expense primarily relates to new product development as we continue to partner with manufacturers to bring drone component manufacturing to the United States.
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 and marketing 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, resulting in an increase of $1,763,280 or 90%. The increase relates to increased expenses related to closing the IPO including legal and accounting fees, additional transition and integration related expenses, and the costs related to operating Fat Shark and Rotor Riot.
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Net Loss
Our net loss for the nine months ended September 30, 2024, totaled $4,862,490 compared to $1,966,876 for the nine months ended September 30, 2023, resulting in an increase in net loss of $2,895,614 or 147%. The increase in net loss primarily relates the increase in general and administrative expenses related to closing the IPO with additional increase in expenses for operations, sales and marketing expenses we incurred since the acquisition from Fat Shark and Rotor Riot, and other expenses of $743,381 related to interest expense and a large non-cash loss on debt extinguishment during the period. This was partially offset by generating gross margin related to the revenue and cost of goods sold from sales for Fat Shark and Rotor Riot. In the fourth quarter of 2024 we expect to complete our valuation and identification of any intangible assets related to the acquisitions of Fat Shark and Rotor Riot. For any identified intangibles, we will begin to amortize during the fourth quarter which will result in a non-cash charge going forward. However, and until we complete our valuation on intangibles, the amount is uncertain, and the future amortization may or may not be material. After the identification and valuation of intangibles is complete, we will complete our impairment analysis on goodwill and the identified intangibles during the fourth quarter. While the amount is uncertain, we expect that our goodwill impairment could be material.
Cash Flow Analysis
Prior to the closing of our IPO and the acquisitions of Fat Shark and Rotor Riot, we did not have any cash inflows from operations and all cash outflows related to our activities related to our IPO. Our future cash flows from operating activities will be significantly impacted by revenues received, our investment in sales and marketing to drive growth, and general and administrative expenses related to operating a public company. Our ability to meet future liquidity needs will be driven by our operating performance and the extent of continued investment in our operations. Failure to generate sufficient revenues and related cash flows could have a material adverse effect on our ability to meet our liquidity needs and achieve our business objectives.
Operating Activities
Net cash used in operating activities was $2,718,513 during the nine months ended September 30, 2024, compared to net cash used in operating activities of $1,382,538 during the nine months ended September 30, 2023, representing an increase of $1,335,975 or 97%. This increase in net cash used primarily resulted from our increase in 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, offset by a decrease in inventory of $337,562, an increase in accounts payable and accrued expenses of $681,414, other liabilities of $153,020 and non-cash expenses of $1,378,790.
Investing Activities
Net cash used in investing activities was $852,801 during the nine months ended September 30, 2024 compared to net cash used in investing activities of $3,164 during the nine months ended September 30, 2023, representing an increase of $849,637. This increase in net cash used related to the $1,000,000 we paid to purchase Fat Shark and Rotor Riot, offset by $147,199 in cash acquired as compared to $3,164 used for purchase of computer equipment during 2023.
Financing Activities
Net cash provided by financing activities totaled $4,362,313 during the nine months ended September 30, 2024, compared to net cash used in financing activities of $376,702 during the nine months ended September 30, 2023, resulting in an increase in net cash provided by financing activities of $4,739,015. The increase primarily relates 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.
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Liquidity and Capital Resources
As of September 30, 2024, we had current assets totaling $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 accrued expenses of $1,032,637 and customer deposits and other current liabilities of $985,618. Our net working capital as of September 30, 2024 was $2,499,070.
On October 29, 2024, we completed a private placement offering for the sale of 1,286,184 shares of common stock at a price of $1.52 per share for aggregate gross proceeds of $1.95 million before deducting fees to the placement agent and other expenses payable by us in connection with the private placement. We retained approximately $1.7 million 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, October 2024 private placement and existing cash balances will be sufficient to fund our current operating plans through at least the next 12 months. We have based these estimates, however, on assumptions that may prove to be wrong, and we could spend our available financial resources much faster than we currently expect and need to raise additional funds sooner than we anticipate. We do not anticipate any significant cost increases post the Fat Shark and Rotor Riot acquisitions and with consideration of the combined companies’ net low and cash position, we expect we will have sufficient working capital to support our operations for at least 12 months.
As described in Note 8 of our financial statements, we issued the August Notes following our agreement with Red Cat on the Working Capital Adjustment. Once the August Notes mature in November 2025, we will need to either (a) raise additional capital, (b) refinance the August Notes, (c) seek an extension of the maturity date of the Notes, or (d) explore the conversion or exchange of the New Notes into equity, which will result in dilution to our shareholders, if the August Notes have not been converted or paid in full prior to the maturity date. If we are unable to raise capital or explore such other 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 notes have been prepared in accordance with GAAP applied on a consistent basis. The preparation of financial statements in conformity with GAAP requires management to make estimates and assumptions that affect the reported amounts of assets and liabilities, the disclosure of contingent assets and liabilities at the date of the financial statements and the reported amounts of revenues and expenses during the reporting periods.
We regularly evaluate the accounting policies and estimates that we use to prepare our financial statements. A complete summary of these policies is included in the notes to our financial statements. In general, management’s estimates are based on historical experience, on information from third party professionals, and on various other assumptions that are believed to be reasonable under the facts and circumstances. Actual results could differ from those estimates made by management.
Fair value of assets acquired and liabilities assumed in business combination
The Fat Shark and Rotor Riot acquisitions are accounted for as a business combination under ASC 805. We recognized the assets acquired and liabilities assumed at fair value as of the date of acquisition. We have not yet completed our evaluation of the fair value for determining the unallocated purchase price between goodwill and other intangible assets. Such amounts are subject to adjustment during the one-year measurement period. The fair value will be determined based on assumptions used in valuations and estimates determined by management, which are subjective.
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Impairment of goodwill and long-lived assets
Goodwill represents the future economic benefit arising from other assets acquired in an acquisition that are not individually identified and separately recognized. Goodwill represents costs in excess of fair values assigned to the underlying identifiable net assets of acquired businesses. Intangible assets from acquired business are recognized at fair value on the acquisition date. We are continuing our evaluation of the fair value of the assets acquired and liabilities assumed from the Fat Shark and Rotor Riot acquisition, and we have not yet determined the unallocated purchase price between goodwill and other intangible assets. Goodwill is tested for impairment at least annually at the reporting unit level or whenever events or changes in circumstances indicate that goodwill might be impaired.
Valuation of Inventory
Our policy for valuation of inventory requires us to evaluate the net realizable value of our inventory using various reference measures including current product selling prices, as well as evaluating for excess quantities and obsolescence. We may be required to record inventory write-downs if actual inventory values are less favorable than those estimates by management.
Stock Based Compensation
Certain employees and directors have received grants of restricted common shares in our company. Other employees received grants of stock options in our Company. These awards are accounted for in accordance with guidance prescribed for accounting for equity-based compensation. Based on this guidance and the terms of the awards, the awards are equity classified.
The fair value of restricted stock awards is based on the fair value of the Company’s common stock on the date of grant and expensed over the vesting period.
The fair value of each stock option award is determined using the Black-Scholes option-pricing model which values options based on the stock price at the grant date, the expected life of the option, the estimated volatility of the stock, and the risk-free interest rate over the expected life of the option. The expected volatility was determined considering comparable companies historical stock prices as a peer group for the fiscal year the grant occurred and prior fiscal years for a period equal to the expected life of the option. The risk-free interest rate was the rate available from the St. Louis Federal Reserve Bank with a term equal to the expected life of the option. The expected life of the option was estimated based on a mid-point method calculation.
In addition, the Company issued shares of our common stock in 2023 to consultants for services performed. Prior to our IPO in February 2024, we were a private company with no active public market for our common stock. Therefore, we have periodically determined the overall value of our company and the estimated per share fair value of our common equity at their various dates and valuations based on a per share valuation using the private funding transactions as an estimate. These values and estimates are subjective.
Warrant Classification and Fair Value
The Company classifies warrants issued for the purchase of shares of its common stock as either equity or liability instruments based on an assessment of the specific terms and conditions of each respective contract. The assessment considers whether the warrants are freestanding financial instruments or embedded in a host instrument, whether the warrants meet the definition of a liability pursuant to ASC 480, whether the warrants meet the definition of a derivative under ASC 815, and whether the warrants meet all of the requirements for equity classification under ASC 815. This assessment, which requires the use of professional judgment, is conducted at the time of warrant issuance and as of each subsequent quarterly period end date while the warrants are outstanding.
For issued or modified warrants that meet all of the criteria for equity classification, the warrants are required to be recorded as a component of equity at the time of issuance. For issued or modified warrants that do not meet all the criteria for equity classification, the warrants are required to be recorded as liabilities at their fair value. The fair value of the warrant liability is determined using the binomial option pricing model the binomial option pricing model which values the liability on the stock price at the grant date, the estimate volatility of the stock, the expected term until exercise, the risk-free interest rate over the expected term, certain estimates and probabilities of different outcomes.
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Recently Issued Accounting Pronouncements
The Company has implemented all new accounting pronouncements that are in effect. These pronouncements did not have any material impact on the financial statements unless otherwise disclosed, and the Company does not believe that there are any other new accounting pronouncements that have been issued that might have a material impact on its financial position or results of operations.
| Item 3. | Quantitative and Qualitative Disclosures about Market Risk |
We are a smaller reporting company as defined by Rule 12b-2 of the Exchange Act and are not required to provide the information required under this item.
| Item 4. | Controls and Procedures |
Evaluation of Disclosure Controls and Procedures
We carried out an evaluation, under the supervision and with the participation of our management, including our Principal Executive Officer and Principal Financial Officer, of the effectiveness of our disclosure controls and procedures, as defined in Rules 13a-15(e) and 15d-15(e) of the Securities Exchange Act of 1934 (the “Exchange Act”) as of the end of the period covered by this report. Based on that evaluation, our Principal Executive Officer and Principal Financial Officer have concluded that our disclosure controls and procedures as of September 30, 2024, were not effective to ensure that information required to be disclosed by us in reports that we file or submit under the Exchange Act is recorded, processed, summarized, and reported within the time periods specified in the SEC’s rules and forms because of a material weakness in the Company’s internal control over financial reporting. Specifically, the Company did not maintain effective controls, segregation of duties, and procedures to support the identification of, accounting for, and the evaluation and disclosure of certain transactions, as limited individuals, either the Principal Executive Officer or Principal Financial Officer, initiates all transactions and they also review, evaluate, and approve these same transactions.
Changes in Internal Control Over Financial Reporting
During the nine months ended September 30, 2024, we have:
| · | Continued to strengthen our internal policies, processes, and reviews, including drafting of related documentation thereof; | |
| · | Engaged outside consultants to ensure that appropriate level of knowledge and experience is applied based on the risk and complexity of the transactions and tasks under review; | |
| · | Hired additional accounting staff to provide additional segregation of duties within accounting functions; | |
| · | Started internal control documentation along with the engagement of outside consultants to assist in the design, implementation, and documentation of internal controls to address relevant risks; | |
| · | Implemented the initial phase of an ERP and financial accounting system and added additional systematic internal controls and timely recording of transactions. We will continue to build out and expand the functionality of our ERP system and build in additional automation and controls. |
The process of implementing an effective financial reporting system is a continuous effort that requires us to anticipate and react to changes in our business and the economic and regulatory environments and to expend significant resources to maintain a financial reporting system that is adequate to satisfy our reporting obligations. As we continue to evaluate and take actions to improve our internal control over financial reporting, we may take additional actions to address control deficiencies or modify certain of the remediation measures described above.
While progress has been made to enhance our internal control over financial reporting, we are still in the process of implementing these processes, procedures and controls. Additional time is required to complete implementation and to assess and ensure the sustainability of these procedures. There have been no changes in our internal control over financial reporting (as defined in Rules 13a-15(f) and 15d-15(f) of the Exchange Act) during the nine months ended September 30, 2024 that have materially affected, or are reasonably likely to materially affect, our internal control over financial reporting, other than the activities described above.
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PART II – OTHER INFORMATION
| Item 1. | Legal Proceedings |
From time to time, we may become involved in legal proceedings arising in the ordinary course of our business. We are not currently aware of any such proceedings or claims that we believe will have, individually or in the aggregate, a material adverse effect on our business, financial condition or results of operations.
| Item 1A. | Risk Factors |
In addition to the information set forth in this Form 10-Q, you should carefully consider the risk factors disclosed under the heading “Risk Factors” in Part I, Item 1A of our Annual Report on Form 10-K for the year ended December 31, 2023.
| Item 2. | Unregistered Sales of Equity Securities and Use of Proceeds |
All recent sales of unregistered securities have previously been reported.
Use of Proceeds
On February 13, 2024, the SEC declared effective our registration statement on Form S-1 (File No. 333-270519), as amended, filed in connection with our IPO. On February 16, 2024, we closed our IPO in which we sold 1,250,000 shares of our common stock, par value $0.01 per share (the “Shares”) at a public offering price of $4.00 per share, resulting in net proceeds of $4.5 million after deducting offering costs, underwriting discounts, and other commissions. 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 million of proceeds to pay for the acquisition of Fat Shark and Rotor Riot.
There has been no material change in the planned use of proceeds from our IPO from that described in the prospectus dated February 16, 2024, filed with the SEC pursuant to Rule 424(b)(1) under the Securities Act. As described in such prospectus, we have used IPO proceeds to pay $1.0 million to Red Cat related to the business combination and acquisition of Fat Shark and Rotor Riot and the remaining amount will be used for working capital and general corporate purposes.
The Company shall use the net proceeds from the sale of the securities issued in the October 2024 private placement for general corporate purposes (which for the avoidance of doubt may include acquisitions, in the Company’s discretion), including working capital.
Issuer Purchases of Equity Securities
We did not repurchase any of our equity securities during the nine months ended September 30, 2024.
| Item 3. | Defaults Upon Senior Securities |
None.
| Item 4. | Mine Safety Disclosures |
None.
| Item 5. | Other Information |
During the quarter ended September 30, 2024,
no director or officer
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| Item 6. | Exhibits |
The exhibits required by Item 601 of Regulation S-K and Item 15(b) of this Report are listed in the Exhibit Index below. The exhibits listed in the Exhibit Index are incorporated by reference herein.
EXHIBIT INDEX
| + | Certain schedules, appendices and exhibits to this agreement have been omitted in accordance with Item 601(b)(2) of Regulation S-K. A copy of any omitted schedule and/or exhibit will be furnished supplementally to the SEC Staff upon request. |
| # | Indicates management contract or compensatory plan, contract or agreement. |
| * | This exhibit is being furnished rather than filed and shall not be deemed incorporated by reference into any filing, in accordance with Item 601 of Regulation S-K. |
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SIGNATURES
Pursuant to the requirements of Section 13 or 15(d) of the Securities Exchange Act of 1934, the registrant has duly caused this report to be signed on its behalf by the undersigned, thereunto duly authorized.
| Unusual Machines, Inc. | ||
| By: | /s/ Allan Evans | |
Allan Evans (Principal Executive Officer) | ||
| By: | /s/ Brian Hoff | |
| Brian Hoff Chief Financial Officer | ||
Date: November 14, 2024
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