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 | |
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| Or | |
| Transition report pursuant to Section 13 or 15(d) of the Securities Exchange Act of 1934 | |
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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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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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As of May 7, 2025, shares of the registrant’s common stock, $0.01 par value per share, were outstanding.
UNUSUAL MACHINES, INC.
2025 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, future plans and strategies, projections, anticipated events and trends, 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 statements include the factors set forth in Part I, Item 1A, “Risk Factors” of our Annual Report on Form 10-K for the year ended December 31, 2024 and Part II, Other Information, Item 1A, “Risk Factors” of this Quarterly Report on Form 10-Q for the quarter ended March 31, 2025.
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
March 31, 2025 | December 31, 2024 | |||||||
| (Unaudited) | ||||||||
| ASSETS | ||||||||
| Current assets: | ||||||||
| Cash and cash equivalents | $ | $ | ||||||
| Accounts receivable | ||||||||
| Inventories | ||||||||
| Prepaid inventory | ||||||||
| Other current assets | ||||||||
| Total current assets | ||||||||
| Non-current assets: | ||||||||
| Property and equipment, net | ||||||||
| Operating lease right-of-use assets | ||||||||
| Other assets | ||||||||
| Goodwill | ||||||||
| Intangible assets, net | ||||||||
| Total non-current assets | ||||||||
| Total assets | $ | $ | ||||||
| LIABILITIES AND STOCKHOLDERS' EQUITY | ||||||||
| Current liabilities | ||||||||
| Accounts payable and accrued expenses | $ | $ | ||||||
| Operating lease liability | ||||||||
| Deferred revenue | ||||||||
| Total current liabilities | ||||||||
| Long-term liabilities | ||||||||
| Deferred tax liability | ||||||||
| Operating lease liability – long term | ||||||||
| Total liabilities | ||||||||
| Commitments and contingencies (See note 13) | ||||||||
| Stockholders’ equity: | ||||||||
| Preferred stock - $ par value, authorized | ||||||||
| Series A preferred stock - $ par value, designated and and shares issued and outstanding at March 31, 2025 and December 31, 2024, respectively | ||||||||
| Series B preferred stock - $ par value, designated and and shares issued and outstanding at March 31, 2025 and December 31, 2024, respectively | ||||||||
| Series C preferred stock - $ par value, designated and and shares issued and outstanding at March 31, 2025 and December 31, 2024, respectively | ||||||||
| Common stock - $ par value, authorized and and shares issued and outstanding at March 31, 2025 and December 31, 2024, 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 Months Ended March 31, 2025 and 2024
(Unaudited)
| Three Months Ended March 31, | ||||||||
| 2025 | 2024 | |||||||
| Sales | $ | $ | ||||||
| Cost of goods sold | ||||||||
| Gross profit | ||||||||
| Operating expenses: | ||||||||
| Operations | ||||||||
| Research and development | ||||||||
| Selling and marketing | ||||||||
| General and administrative | ||||||||
| Depreciation and amortization | ||||||||
| Total operating expenses | ||||||||
| Loss from operations | ( | ) | ( | ) | ||||
| Other income and (expense): | ||||||||
| Interest income | ||||||||
| Interest expense | ( | ) | ||||||
| Total other income and (expense) | ( | ) | ||||||
| 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 | ||||||||
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 Three Months Ended March 31, 2025 and 2024
(Unaudited)
Three Months Ended March 31, 2024
| Series B, Preferred Stock | Common Stock | Additional Paid-In | Accumulated | Total Stockholders’ | ||||||||||||||||||||||
| Shares | Value | Shares | Value | Capital | Deficit | Equity | ||||||||||||||||||||
| Balance, December 31, 2023 | $ | $ | $ | $ | ( | ) | $ | |||||||||||||||||||
| Issuance of common stock 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 | $ | $ | $ | $ | ( | ) | $ | |||||||||||||||||||
Three Months Ended March 31, 2025
| 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, 2024 | $ | $ | $ | $ | $ | $ | ( | ) | $ | ||||||||||||||||||||||||||||||
| Issuance of restricted common stock, equity incentive plan | – | – | – | ( | ) | ||||||||||||||||||||||||||||||||||
| Cash exercise of warrants | – | – | – | ||||||||||||||||||||||||||||||||||||
| Stock compensation expense - vested stock | – | – | – | – | |||||||||||||||||||||||||||||||||||
| Stock option compensation expense | – | – | – | – | |||||||||||||||||||||||||||||||||||
| Net loss | – | – | – | – | ( | ) | ( | ) | |||||||||||||||||||||||||||||||
| Balance, March 31, 2025 | $ | $ | $ | $ | $ | $ | ( | ) | $ | ||||||||||||||||||||||||||||||
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 Three Months Ended March 31, 2025 and 2024
(Unaudited)
| Three Months Ended March 31, | ||||||||
| 2025 | 2024 | |||||||
| Cash flows from operating activities: | ||||||||
| Net loss | $ | ( | ) | $ | ( | ) | ||
| Depreciation and amortization | ||||||||
| Share-based compensation expense | ||||||||
| Change in assets and liabilities: | ||||||||
| Accounts receivable | ||||||||
| Inventory | ||||||||
| Prepaid inventory | ( | ) | ||||||
| Other assets | ( | ) | ( | ) | ||||
| Accounts payable and accrued expenses | ||||||||
| Operating lease liabilities | ( | ) | ( | ) | ||||
| Deferred revenue 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 | ( | ) | ||||||
| Net cash used in investing activities | ( | ) | ||||||
| Cash flows from financing activities: | ||||||||
| Proceeds from issuance of common shares | ||||||||
| Proceeds from issuance of common shares, warrant exercises | ||||||||
| Common share issuance offering costs | ( | ) | ||||||
| Net cash provided by financing activities | ||||||||
| Net increase in cash | ||||||||
| Cash and cash equivalents, beginning of period | ||||||||
| Cash and cash equivalents, 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 March 31, 2025
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.
Basis of Presentation
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 consolidated financial statements and notes thereto included in the Company’s Annual Report on Form 10-K filed with the SEC on March 27, 2025. 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 condensed consolidated financial statements include some amounts that are based on management's best estimates and judgments. Significant estimates reflected in these consolidated financial statements include those used to (i) determine stock-based compensation, (ii) the fair value of assets acquired and liabilities assumed in business combinations and the value of shares issued as consideration, (iii) reserves and allowances related to accounts receivable, and inventory, (iv) the evaluation of long-lived assets, including intangibles and goodwill, for impairment, (v) the fair value of lease liabilities and related right of use assets, and (vi) the deferred tax asset valuation allowance.
Reclassification
In the condensed consolidated financial statements, the Company has reclassified $5,470 for the three months ended March 31, 2024 from depreciation and amortization to general and administrative expense to conform to the current period presentation. This reclassification did not affect previously reported total operating expenses, loss before income taxes, or net loss in the condensed consolidated statements of operations.
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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 credit losses based on a history of past write-offs and collections and current credit conditions. Accounts are written-off as uncollectible at the discretion of management. At March 31, 2025 and December 31, 2024, the Company considers accounts receivable to be fully collectible; accordingly, no allowance for credit losses has been established.
Inventories
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, 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.
Property and equipment, net
Property and equipment is stated at cost, net of accumulated depreciation. Depreciation is provided utilizing the straight-line method over the estimated useful lives for owned assets of three years.
Leases
The Company has adopted Accounting Standards Codification (ASC) 842, “Leases” which requires the recognition of assets and liabilities associated with lease agreements. The Company recognized a lease liability obligation and a right-of-use asset for the facilities lease in Orlando, FL.
The Company determines if a contract is a lease or contains a lease at inception. Operating lease liabilities are measured, on each reporting date, based on the present value of the future minimum lease payments over the remaining lease term. The Company's leases do not provide an implicit rate. Therefore, the Company used an effective discount rate of 11.49% based on its last debt financings. Operating lease assets are measured by adjusting the lease liability for lease incentives, initial direct costs incurred and asset impairments. Lease expense for minimum lease payments is recognized on a straight-line basis over the lease term with the operating lease asset reduced by the amount of the expense. The Company has elected to account for lease and non-lease components together as a single lease component for all underlying assets. Lease terms do not include an option to renew.
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Business Combinations
The Company accounts for business combinations under ASC 805 using the acquisition method of accounting where the assets acquired and liabilities assumed are recognized based on their respective estimated fair values. The excess of the purchase price over the estimated fair values of the net assets acquired is recorded as goodwill. Determining the fair value of certain acquired assets and liabilities is subjective in nature and often involves the use of significant estimates and assumptions used in valuations and estimates determined by management. Business acquisitions are included in the Company’s consolidated financial statements as of the date of the acquisition.
Goodwill and Long-lived Assets
Goodwill represents the future economic benefit
arising from other assets acquired in an acquisition that are not individually identified and separately recognized. The Company tests
goodwill for impairment in accordance with the provisions of ASC 350, Intangibles – Goodwill and Other, (“ASC 350”).
Goodwill is tested for impairment at least annually at the reporting unit level or whenever events or changes in circumstances indicate
that goodwill might be impaired. ASC 350 provides that an entity has the option to first assess qualitative factors to determine whether
the existence of events or circumstances leads to a determination that it is more likely than not that the fair value of a reporting unit
is less than its carrying amount. If, after assessing the totality of events or circumstances, an entity determines it is not more likely
than not that the fair value of a reporting unit is less than its carrying amount, then additional impairment testing is not required.
However, if an entity concludes otherwise, then it is required to perform an impairment test. The impairment test involves comparing the
estimated fair value of a reporting unit with its book value, including goodwill. If the estimated fair value exceeds book value, goodwill
is considered not to be impaired. If, however, the fair value of the reporting unit is less than book value, then an impairment loss is
recognized in an amount equal to the amount that the book value of the reporting unit exceeds its fair value, not to exceed the total
amount of goodwill allocated to the reporting unit. The Company recorded an impairment loss on goodwill of $
The estimate of fair value of a reporting unit is computed using either an income approach, a market approach, or a combination of both. Under the income approach, we utilize the discounted cash flow method to estimate the fair value of a reporting unit. Significant assumptions inherent in estimating the fair values include the estimated future cash flows, growth assumptions for future revenues (including gross margin, operating expenses, and capital expenditures), and a rate used to discount estimated future cash flow projections to their present value based on estimated weighted average cost of capital (i.e., the selected discount rate). Management’s assumptions are based on historical data, supplemented by current and anticipated market conditions, estimated growth rates, and management’s plans. Under the market approach, fair value is derived from metrics of publicly traded companies or historically completed transactions of comparable businesses. The selection of comparable businesses is based on the markets in which the reporting units operate and consider risk profiles, size, geography, and diversity of products and services.
The Company reviews long-lived assets, including tangible assets and other intangible assets with definitive lives, for impairment whenever events or changes in circumstances indicate that the asset’s carrying amount may not be recoverable. The Company conducts its long-lived asset impairment analyses in accordance with ASC 360-10-35, “Impairment or Disposal of Long-Lived Assets”. ASC 360 requires the Company to group assets and liabilities at the lowest level for which identifiable cash flows are largely independent of the cash flows of other assets and liabilities and evaluate the asset group against the sum of the undiscounted future cash flows. Amortizable intangible assets are assessed for impairment upon triggering events that indicate that the carrying value of an asset may not be recovered. Recoverability is measured by a comparison of the carrying amount to future net undiscounted cash flows expected to be generated by the associated asset. If such assets are determined to be impaired, the impairment to be recognized is measured by the amount by which the carrying amount exceeds the fair market value of the intangible assets. No impairment charges were recorded by the Company as of March 31, 2025.
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The Company has indefinite-lived trademark assets that are reviewed for impairment by first performing a qualitative analysis in accordance with ASC 350-30 to determine whether it is more likely than not that the fair value of the indefinite-lived asset is less than its carrying value. If based on this assessment, management determines that impairment is not more than likely, then no further quantitative testing is required. However, if performing a qualitative analysis determines that is more likely than not that the fair value is less than its carrying value, then a quantitative analysis is performed in accordance with ASC 350-30-35, which occurs annually in the fourth quarter, or whenever events or changes in circumstances indicate that the carrying value of an asset may not be recoverable. Recoverability is measured by a comparison of the carrying amount to future net undiscounted cash flows expected to be generated by the associated asset. If such assets are determined to be impaired, the impairment to be recognized is measured by the amount by which the carrying amount exceeds the fair market value of the assets. If a quantitative analysis is required, the Company utilizes the relief-from-royalty method, which is a form of the income approach and requires us to make significant estimates and assumptions including preparation of forecasted revenue, selection of a royalty rate and discount rate and estimate of the terminal year revenue growth rate. The Company did not record an impairment as of March 31, 2025, related to the indefinite-lived assets.
Fair Values, Inputs and Valuation Techniques for Financial Assets and Liabilities, and Related Disclosures
The fair value measurements and disclosure guidance defines fair value and establishes a framework for measuring fair value. Fair value is defined as the price that would be received to sell an asset or paid to transfer a liability (an exit price) in an orderly transaction between market participants at the measurement date. In accordance with this guidance, the Company has categorized its recurring basis financial assets and liabilities into a three-level fair value hierarchy based on the priority of the inputs to the valuation technique.
The fair value hierarchy gives the highest priority to quoted prices in active markets for identical assets or liabilities (Level 1) and the lowest priority to unobservable inputs (Level 3). The inputs used to measure fair value may fall into different levels of the fair value hierarchy. In such cases, the level in the fair value hierarchy within which the fair value measurement in its entirety falls has been determined based on the lowest level input that is significant to the fair value measurement in its entirety. The Company's assessment of the significance of a particular input to the fair value measurement in its entirety requires judgment and considers factors specific to the asset or liability.
The guidance establishes three levels of the fair value hierarchy as follows:
Level 1: Inputs are unadjusted, quoted prices in active markets for identical assets or liabilities at the measurement date;
Level 2: Inputs are observable, unadjusted quoted prices in active markets for similar assets or liabilities, unadjusted quoted prices for identical or similar assets or liabilities in markets that are not active, or other inputs that are observable or can be corroborated by observable market data for substantially the full term of the related assets or liabilities; and
Level 3: Unobservable inputs that are significant to the measurement of the fair value of the assets or liabilities that are supported by little or no market data.
Disclosures for Non-Financial Assets Measured at Fair Value on a Non-Recurring Basis
The Company's financial instruments mainly consist of cash and cash equivalents, receivables, current assets, accounts payable and accrued expenses. The carrying amounts of cash, receivables, current assets, accounts payable and accrued expenses approximates fair value due to the short-term nature of these instruments.
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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 will recognize revenue in accordance with ASC 606, “Revenue from Contracts with Customers”, issued by the Financial Accounting Standards Board (“FASB”). This standard includes a comprehensive evaluation of factors to be considered regarding revenue recognition including:
Step 1: Identify the contract with a customer;
Step 2: Identify the performance obligations in the contract;
Step 3: Determine the transaction price;
Step 4: Allocate the transaction price to the performance obligations in the contract; and
Step 5: Recognize revenue when (or as) the Company satisfies a performance obligation at a point in time.
The Company receives revenues from the sale of products from both retail distributers and individual consumers. Sales revenue is recognized when the products are shipped and the price is fixed or determinable, no other significant obligations of the Company exist and collectability is probable. Revenue is recognized when the title to the products has been passed to the customer, which is the date the products are shipped to the customer. This is the date the performance obligation has been met.
Deferred Revenue
Deferred revenue relates to orders placed and
payment received, but not yet fulfilled. All deferred revenue is expected to be recognized within one year. Deferred revenue related to
orders placed, but not yet fulfilled totaled $
Cost of Goods Sold
Cost of goods sold includes inventory costs, direct packaging costs and production related depreciation, if any.
Operations Expense
Operations expense relates to expenses incurred for fulfilling orders and warehouse related expenditures including our warehouse personnel, supplies, and shipping and handling costs.
Shipping and Handling Costs
Shipping and handling costs incurred for products
shipped to customers are included in operations expenses and amounted to $
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Research and Development
Research and development expenses include payroll, employee benefits, and other headcount-related expenses associated with product development. Research and development expenses also include third-party development costs, materials, and a proportionate share of overhead costs.
Income Taxes
The Company accounts for income taxes using an asset and liability approach, which requires recognition of deferred tax assets and liabilities for the expected future tax consequences of events. A valuation allowance is established to reduce deferred tax assets to their estimated realizable value when, in the opinion of management, it is more likely than not that some portion or all of the deferred income tax assets will not be realizable in the future.
The Company recognizes benefits of uncertain tax positions if it is more likely than not that such positions will be sustained upon examination based solely on their technical merits, as the largest amount of benefit that is more likely than not to be realized upon the ultimate settlement. The Company’s policy is to recognize interest and penalties related to unrecognized tax benefits as a part of income tax expense.
Stock options are valued using the estimated grant-date fair value method of accounting in accordance with ASC Topic 718, Compensation – Stock Compensation. Fair value is determined based on the Black-Scholes Model using inputs reflecting our estimates of expected volatility based on comparative companies, expected term using the simplified method and future dividends. The Company recognizes forfeitures as they occur. The fair value of stock grants is based on our stock price on the date of grant. Compensation costs are recognized on a straight-line basis over the requisite service period which is the vesting term.
Warrants
The Company accounts for warrants to purchase shares of its common stock in accordance with the guidance in ASC 480, Distinguishing Liabilities from Equity (“ASC 480”) and ASC 815, Derivatives and Hedging (“ASC 815”). The Company classifies warrants issued for the purchase of shares of its common stock as either equity or liability instruments based on an assessment of the specific terms and conditions of each respective contract. The assessment considers whether the warrants are freestanding financial instruments or embedded in a host instrument, whether the warrants meet the definition of a liability pursuant to ASC 480, whether the warrants meet the definition of a derivative under ASC 815, and whether the warrants meet all of the requirements for equity classification under ASC 815. This assessment, which requires the use of professional judgment, is conducted at the time of warrant issuance and as of each subsequent quarterly period end date while the warrants are outstanding.
For issued or modified warrants that meet all of the criteria for equity classification, the warrants are required to be recorded as a component of equity at the time of issuance. For issued or modified warrants that do not meet all the criteria for equity classification, the warrants are required to be recorded as liabilities at their initial fair value on the date of issuance, and each balance sheet date thereafter. Changes in the estimated fair value of the warrants classified as liabilities are recognized as a non-cash gain or loss in the consolidated statements of operations and comprehensive loss.
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Basic and diluted net loss per share is calculated based on the weighted-average of common shares outstanding in accordance with FASB ASC Topic 260, Earnings per Share. Diluted net loss per share is calculated based on the weighted-average number of common shares outstanding plus the effect of dilutive potential common shares. When the Company reports a net loss, the calculation of diluted net loss per share excludes potential common shares as the effect would be anti-dilutive.
Segment Reporting
Operating segments are defined as components of an enterprise for which separate financial information is available that is evaluated regularly by the chief operating decision maker, or decision making group, in deciding how to allocate resources and in assessing performance. Unusual Machines, which sells drones and drone-related components, operates as a single reportable segment entity. Our chief operating decision maker, our Chief Executive Officer, reviews financial information presented on a consolidated basis for purposes of making operating decisions and assessing financial performance. The Chief Executive Officer is regularly provided with consolidated revenue and expenses consistent with those presented in the consolidated statements of operations and assets and liabilities consistent with those presented in the consolidated balance sheets
Recent Accounting Pronouncements
In December 2023, new accounting guidance was issued related to income tax disclosures. The new guidance requires disaggregated information about a reporting entity’s effective tax rate reconciliation as well as additional information on income taxes paid. The new guidance is effective on a prospective basis for annual periods beginning after December 15, 2024. Early adoption is also permitted for annual financial statements that have not yet been issued or made available for issuance. This new guidance will likely not result in additional required disclosures when adopted.
In November 2024, the FASB issued ASU No. 2024-03, “Disaggregation of Income Statement Expenses” which requires disaggregated disclosure of income statement expenses into specified categories in disclosures within the footnotes to the financial statements. The standard is effective for annual reporting periods beginning after December 15, 2026. The Company is currently evaluating the effect of this ASU on the consolidated financial statements and disclosures.
Note 3 – Acquisitions
Fat Shark and Rotor Riot
On February 16, 2024, the Company closed on the acquisitions of both Fat Shark and Rotor Riot from Red Cat and Jeffrey Thompson, the founder and Chief Executive Officer of Red Cat (the “Business Combination”) (See Note 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.
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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 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 | ||||
| Intangible assets | ||||
| Total assets | ||||
| Accounts payable and accrued liabilities | ||||
| Deferred revenue | ||||
| Deferred tax liability | ||||
| Operating lease liability – current and long-term | ||||
| Total liabilities | ||||
| Total purchase price | $ | |||
On December 31, 2024, the Company recorded a measurement
period adjustment to the above fair value allocation to report a deferred tax liability of $
Goodwill and intangible assets relate to Fat Shark and Rotor Riot being FPV market leaders and their well-known and established brands within the industry and related patents. Combining these entities and their existing customer base along with Unusual Machines’ strategy of extending to B2B sales of drone components will provide a strategic advantage.
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The results of Fat Shark and Rotor Riot have been included in the Consolidated Financial Statements from the date of acquisition of February 16, 2024. The table below presents the results as reported by the Company and unaudited pro forma results of the Company, assuming that the acquisition of Fat Shark and Rotor Riot occurred at the beginning of each period are as follows. The unaudited pro forma results are not necessarily indicative of what actually would have occurred had the acquisitions been in effect for the periods presented (in thousands, except per share data):
| Schedule of pro forma results | ||||||||||||||||
| For the Year Ended | For the Year Ended | |||||||||||||||
| December 31, 2024 | December 31, 2023 | |||||||||||||||
As Reported | Proforma (unaudited) | As Reported | Proforma (unaudited) | |||||||||||||
| Revenue | $ | $ | $ | $ | ||||||||||||
| Gross profit/(loss) | ||||||||||||||||
| Loss from operations | ( | ) | ( | ) | ( | ) | ( | ) | ||||||||
| Other (expense) and income taxes | ( | ) | ( | ) | ( | ) | ||||||||||
| 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 Assets
Other current assets included as of:
| March 31, 2025 | December 31, 2024 | |||||||
| Prepaid insurance | $ | $ | ||||||
| Total other current assets | $ | $ | ||||||
Non-current other assets include a rent deposit of $
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:
| March 31, 2025 | December 31, 2024 | |||||||
| Computer equipment | $ | $ | ||||||
| Accumulated depreciation | ( | ) | ( | ) | ||||
| Total property and equipment, net | $ | $ | ||||||
Depreciation expense totaled $
Note 7 – Operating Leases
The following is a summary of the operating lease right-of-use asset and liability:
| Orlando, FL Operating Lease | ||||
| Operating lease right-of-use assets | $ | |||
| Less: accumulated amortization | ( | ) | ||
| Operating lease right-of-use assets, as of March 31, 2025 | $ | |||
| Operating lease liability | $ | |||
| Less: accumulated reduction | ( | ) | ||
| Operating lease liability, as of March 31, 2025 | $ | |||
| Current operating lease liability | $ | |||
| Non-current operating lease liability | ||||
| Total operating lease liability | $ | |||
The following is a summary of future lease payments required under the five-year lease agreement:
| Year | Future Lease Payments | Operating Lease Discount | Operating Lease Liability | |||||||||
| 2025 | $ | $ | ( | ) | $ | |||||||
| 2026 | ( | ) | ||||||||||
| 2027 | ( | ) | ||||||||||
| 2028 | ( | ) | ||||||||||
| Total | $ | $ | ( | ) | $ | |||||||
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| Supplemental Information | ||||
| Weighted average remaining lease term (in years) | ||||
| Weighted average discount rate | ||||
Note 8 – Goodwill and Intangible Assets
Goodwill
There were no changes in the carrying amount of goodwill during the
three months ended March 31, 2025. The carrying value of goodwill was $
Intangible Assets
As of March 31, 2025, the balances of intangible assets were as follows:
| Type | Gross Value | Accumulated Amortization | Net Value | |||||||||||
| Patents/IP | Finite-lived | $ | $ | ( |
) | $ | ||||||||
| Trademark | Indefinite-lived | – | ||||||||||||
| Total intangible assets, net | $ | $ | ( |
) | $ | |||||||||
Patents and intellectual property relate to the
patents and technology know-how from the acquisition of Fat Shark in February 2024. Patents are amortized over
Note 9 – Promissory and Convertible Notes
In February 2024 and in conjunction with the acquisition
of Fat Shark and Rotor Riot, as discussed in Note 3, the Company issued a promissory note (“Note”) with Red Cat Holdings,
Inc. (“Red Cat”) for $
Subsequently and in July 2024, in conjunction with a private sale of Red Cat’s common stock and its promissory note to two accredited investors (“Investors”), the Company issued new notes to the new Investors (the “July Notes”) and cancelled the original Note. The July Notes contained 8% per annum interest. In addition, the maturity date of the July Notes was extended to November 30, 2025, subject to certain conditions.
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On August 21, 2024, the Company entered into two
exchange agreements with the Investors, under which the Investors exchanged their respective 8% July Notes for new 4% Convertible Notes
(the “August Notes”). Pursuant to the exchange agreements, the Investors exchanged the $
During the third quarter 2024, the Company recognized
a loss on debt extinguishment of $
In December 2024, the Investors exercised their
conversion option to convert the remaining $
Total interest expense for the three months ended
March 31, 2025 and 2024 was $
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 of stock options issued to employees as of March 31, 2025, unvested restricted stock units, of common stock representative warrants issued to the underwriter associated with the February 2024 IPO, and warrants issued related to the October 2024 private placement.
Preferred Stock
The Series A is convertible into common stock at a ratio of 1,000 shares of common stock for each share of Series A stock held, subject to certain limitations. The Series A shares are not entitled to vote on any matters submitted to shareholders of the Company.
The Series B is convertible into common stock at a ratio of 5,000 shares of common stock for each share of Series B stock held, subject to certain limitations. The Series B shares are not entitled to vote on any matters submitted to shareholders of the Company.
The Series C is convertible into common stock at a ratio of 3,000 shares of common stock for each share of Series C stock held, subject to certain limitations. The Series C shares are not entitled to vote on any matters submitted to shareholders of the Company.
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2024 Preferred Stock Transactions
During the three months ended March 31, 2024, shareholders converted shares of Series B into shares of common stock. The Company cancelled the 120 shares of Series B upon the conversion.
Common Stock
2025 Transactions
On January 14, 2025, the Company issued immediately vested restricted shares of common stock to non-employee directors of the Company. The shares of restricted stock were granted under the 2022 Equity Incentive Plan. The shares were valued at $11.99 per share, which was the value 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 March 31, 2025.
On February 3, 2025, the Company issued
restricted shares of common stock to executive officers and certain employees 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 December 31, 2025. The restricted shares issued to certain employees are subject to pro-rata forfeiture over a four-year period.
The shares were valued at $12.00 per share, which was the value of the Company’s common stock on the date of grant, respectively
for a total of $
In February 2025, the Company issued
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,
$
During the three months ended March 31, 2024, the Company issued shares of common stock related to certain shareholders converting Series B shares into common stock.
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Stock Options
The 2022 Equity Incentive Plan (the “Plan”) allows the Company to incentivize key employees and directors with long term compensation awards such as stock options, restricted stock, and other similar types of awards. The Plan is authorized to issue up to 15% of the outstanding shares on a fully diluted basis giving effect to the exercise and conversion of all outstanding common stock equivalents issued outside of the Plan. In addition, the Plan has an “evergreen” provision, pursuant to which the number of shares of common stock reserved for issuance pursuant to awards under such plan shall be increased on the first day of each year beginning in 2025 and ending in 2032 equal to the lesser of (a) five percent (5%) of the shares of stock outstanding (on an as converted basis) on the last day of the immediately preceding fiscal year and (b) such smaller number of shares of stock as determined by our board of directors. As of March 31, 2025, the Plan is authorized to issue up to of awards after the 5% increase on January 1, 2025.
The following table presents the activity for stock options outstanding as of March 31, 2025:
Non-Qualified Options | Weighted Average Exercise Price | Weighted Average Remaining Contractual Term | Aggregate Intrinsic Value | |||||||||||||
| Outstanding - December 31, 2024 | $ | $ | ||||||||||||||
| Granted | ||||||||||||||||
| Forfeited/canceled | ||||||||||||||||
| Exercised | ||||||||||||||||
| Outstanding – March 31, 2025 | $ | $ | ||||||||||||||
| Exercisable – March 31, 2025 | ||||||||||||||||
The Company recognized $ in stock-based compensation expense related to stock options during the three months ended March 31, 2025. As of March 31, 2025, 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 Stock Awards | Restricted Stock Units | |||||||
| Unvested - December 31, 2024 | ||||||||
| Granted | ||||||||
| Forfeited/canceled | ||||||||
| Vested | ( | ) | ||||||
| Unvested – March 31, 2025 | ||||||||
Restricted stock awards are equity grants to officers, directors and employees of the Company in which restricted common stock is issued on the grant date subject to vesting and claw-back provisions. Restricted stock units are equity grants to employees and advisors of the Company in which common stock is issued upon meeting certain vesting requirements.
The total value of restricted stock and restricted
stock units granted during the three months ended March 31, 2025 is $
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Warrants
The following table presents the activity for warrants outstanding as of March 31, 2025:
| Weighted | ||||||||
| Warrants | Average | |||||||
| Outstanding | Exercise Price | |||||||
| Outstanding - December 31, 2024 | $ | |||||||
| Granted | ||||||||
| Forfeited/cancelled/restored | ||||||||
| Exercised | ( | ) | ||||||
| Outstanding – March 31, 2025 | $ | |||||||
As Discussed in Note 10, “Earnings Per Share
and Stockholders’ Equity”, in connection with the Private Placement, the Company issued warrants and an additional
warrants to the underwriter related to the Private Placement for a total of warrants. The warrants have an exercise
price of $
All warrants outstanding have a weighted average remaining contractual life of approximately years as of March 31, 2025. The aggregate intrinsic value of the warrants at March 31, 2025 is $.
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.
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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 $
In October 2024, in relation to the Private Placement
as described in more detail in Note 10, “Earnings Per Share and Stockholders’ Equity”, the Company’s CEO and two
directors (combined “Insiders”) invested $
Note 13 – Commitments and Contingencies
Orlando Lease
Aloft Material Definitive Agreement
On February 1, 2025, the Company entered into an Agreement and Plan of Merger and Reorganization (the "Agreement”) with Aloft Technologies, Inc., a Delaware corporation ("Aloft”), and UMAC Merger Sub, Inc. a Delaware corporation and wholly owned subsidiary of the Company ("Merger Sub”). Aloft is a leader in the drone fleet and airspace management sector, powering a majority of all FAA-approved Low Altitude Authorization and Notification Capability airspace authorizations in the United States and the related software is complimentary to the Company’s overall position to provide drone related components and drone services made in the United States.
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Under the terms of the Agreement and subject
to customary closing conditions and a working capital adjustment, on the closing date of the Agreement Aloft will merge into Merger
Sub, and Merger Sub will continue as a wholly owned subsidiary of the Company. In addition, each issued and outstanding share of
Aloft capital stock that is not a dissenting share will be cancelled and each Aloft Stockholder (as defined in the Agreement) will
receive their pro rata share of the merger consideration payable by the Company as provided for in the Agreement. The merger
consideration of $
Customary closing conditions by the parties including Aloft shareholder approval must be met before being able to close the merger.
On May 6, 2025, the Company and Aloft executed an Amendment and Waiver to the Merger Agreement (the “Aloft Amendment”) which (i) waives the exclusivity provision in the Agreement, (ii) extends the end date in the Agreement from April 30, 2025 to August 31, 2025, (iii) adds a $100,000 breakup fee in the event Aloft consummates an alternative transaction while the Agreement remains in effect, and (iv) permits the Company to terminate the Agreement at any time upon written notice, however, the Company will forfeit the breakup fee.
Note 14 – Subsequent Events
Confidentially Marketed Public Offering
On May 6, 2025, in a confidentially marketed public offering the Company sold 8,000,000 shares of common stock at $5.00 per share resulting in gross proceeds of $40,000,000, prior to payment of placement agent fees of $3,200,000 and other offering expenses. Dominari Securities, LLC acted as the sole placement agent and also received a warrant to purchase 640,000 shares of the Company’s common stock at $5.00 per share over a two-year period expiring on May 6, 2027.
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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 for the year ended December 31, 2024, which was filed with the SEC on March 27, 2025. 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 Annual Report on Form 10-K for the year ended December 31, 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.
Company Overview
We are a Nevada corporation with our principal place of business in Orlando, Florida. We sell and manufacture drones and drone components across a diversified brand portfolio, which includes Fat Shark, the leader in FPV (first-person view) ultra-low latency video goggles for drone pilots. We also retail small, acrobatic FPV drones and equipment directly to consumers through the curated Rotor Riot e-commerce store. Beginning in the second half of 2024, we launched our business-to-business channel selling drone parts to commercial customers. With a changing regulatory environment, we seek to be a dominant Tier-1 parts supplier to the fast-growing multi-billion-dollar U.S. drone industry.
Recent Developments, Challenges and Uncertainties
With the funds received from our recent public offering, we are focusing on growing both our retail and enterprise revenue channels and investing in drone component manufacturing in the United States. During the first quarter of 2025, we added both the Rotor Riot Brave 55A ESC (electronic speed controller), and the Fat Shark Aura FPV (first-person view) Camera to the U.S. Department of Defense Innovation Units Blue UAS Framework. While we continued to see top line revenue growth during the first quarter of 2025, our continued future plans for retail revenue growth and margins are subject to uncertainties outside of our control, including changes to trade policy with respect to tariffs and other impacts to our global supply chain cost structure. We are continually evaluating the tariff landscape and working to find reliable and high quality suppliers in multiple countries including the United States and Taiwan that we anticipate will have the least amount of impact to our retail costs and overall margin.
On February 1, 2025, we entered into a Merger Agreement to acquire drone software company, Aloft. We believe that Aloft is a leader in the drone fleet and airspace management sector, powering more than 70% of all FAA-approved Low Altitude Authorization and Notification Capability airspace authorizations in the United States. Aloft has provided more than 1.6 million authorizations in total with 400,000 authorizations provided in 2024. The acquisition is for $14.5 million, almost entirely in the Company’s Common Stock. Customary closing conditions by the parties including Aloft shareholder approval must be met before closing the merger. On May 6, 2025, the Company and Aloft executed an Amendment and Waiver to the Merger Agreement (the “Aloft Amendment”) which (i) waives the exclusivity provision in the Agreement, (ii) extends the end date in the Agreement from April 30, 2025 to August 31, 2025, (iii) adds a $100,000 breakup fee in the event Aloft consummates an alternative transaction while the Agreement remains in effect, and (iv) permits the Company to terminate the Agreement at any time upon written notice, however, the Company will forfeit the breakup fee. A copy of the Aloft Amendment is furnished as Exhibit 10.9 and is incorporated herein by reference. The foregoing description of the terms of the Aloft Amendment does not purport to be complete and is subject to, and qualified in its entirety by reference, to the Aloft Amendment.
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Results of operations
Three Months Ended March 31, 2025 and 2024
Revenue
During the three months ended March 31, 2025 we generated revenues totaling $2,042,300 compared to $618,915 during the three months ended March 31, 2024, representing an increase of $1,423,385 or 230%. We did not have any revenue prior to the completion of the acquisitions of Fat Shark and Rotor Riot (the “Acquisitions”) in February 2024. Pro forma revenues if the Acquisitions were completed for the full quarter for the three months ended March 31, 2024, were approximately $1.1 million. The growth in revenue is driven both in our existing retail channel and our expanding enterprise channel as we are manufacturing additional Blue UAS products.
Cost of Goods Sold
During the three months ended March 31, 2025, our gross profit was $496,807 compared to $204,167 during the three months ended March 31, 2024, resulting in an increase of $292,640 or 143%. Pro forma gross margin as if the Acquisitions were completed for the full quarter for the three months ended March 31, 2024 were approximately $0.3 million. Our gross margin, as a percentage of sales, totaled 24.3% during the three months ended March 31, 2025, compared to pro forma gross margin of approximately 21% during the three months ended March 31, 2024. We try and maintain margins in the 20% - 30% range on majority of our products and anticipate our gross profit to fluctuate period to period depending on certain promotions and products that are sold during the period. Our gross margin is also subject to additional fluctuations based on the increased tariffs being imposed on certain products. We have started passing these additional costs to customers, however, this would have an impact on our overall gross profit percentage. We expect that in the three months ended June 30, 2025, our cost of goods sold will experience an increase from the tariffs and increase in inventory costs as we source inventory from countries outside of China including the United States and Taiwan.
Gross Profit
During the three months ended March 31, 2025, our gross profit was $496,807 compared to $204,167 during the three months ended March 31, 2024, resulting in an increase of $292,640 or 143%. Pro forma gross margin as if the Acquisitions were completed for the full quarter for the three months ended March 31, 2024 were approximately $0.3 million. Our gross margin, as a percentage of sales, totaled 24.3% during the three months ended March 31, 2025, compared to pro forma gross margin of approximately 25% during the three months ended March 31, 2024. We try and maintain margins in the 20% - 30% range on majority of our products and anticipate our gross profit to fluctuate period to period depending on certain promotions and products that are sold during the period. Our gross margin is also subject to additional fluctuations based on the increased tariffs being imposed on certain products. We have started passing these additional costs to customers, however, this would have an impact on our overall gross profit percentage.
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Operating Expenses
During the three months ended March 31, 2025, operations expenses totaled $302,602 compared to $112,322 during the three months ended March 31, 2024, resulting in an increase of $190,280 or 169%. Operations expense relate to expenses incurred for fulfilling orders and warehouse related expenditures including our warehouse personnel, supplies, and shipping expenses. Pro forma operations expense as if the Acquisitions were completed for the full quarter for the three months ended March 31, 2024 were approximately $245,000 which is approximately a 23% increase. This increase is primarily related to increase in shipping expenses included in operating expenses from product sales.
During the three months ended March 31, 2025, research and development expenses totaled $7,903 compared to $16,796 for the three months ended March 31, 2024, resulting in a decrease of $8,893 or 53%. Research and development expense primarily relates to new product development and is subject to fluctuations based on specific research and development projects ongoing during the period.
During the three months ended March 31, 2025, selling and marketing expenses totaled $207,616 compared to $157,058 for the three months ended March 31, 2024, resulting in an increase of $50,558 or 32%. Pro forma selling and marketing expense as if the Acquisitions were completed for the full quarter for the three months ended March 31, 2024 were approximately $435,000 which is approximately a 53% decrease. We continue to work to optimize our selling and marketing and in particular our advertising spend. We expect to continue to see significant selling and marketing expenses, especially for ad spend as it relates to retail sales.
During the three months ended March 31, 2025, general and administrative expenses totaling $3,225,904 compared to $1,004,173 for the three months ended March 31, 2024, resulting in an increase of $2,221,731 or 221%. The increase primarily relates to the increase in non-cash stock compensation expense of approximately $1.8 million and increase in professional fees and operating as a public company.
Net Loss
Our net loss for the three months ended March 31, 2025, totaled $3,266,279 compared to $1,106,001 for the three months ended March 31, 2024, resulting in an increase in net loss of $2,160,278 or 195%. This increase in net loss relates to the increase in general and administrative expenses which was primarily driven by the increase in non-cash stock compensation expense. We also saw additional increases in operations expense and selling and marketing as we had a full quarter of operations since we didn’t complete the Acquisitions in 2024 until mid-way through the first quarter of 2024. This was partially offset by generating higher gross profit related to the increase in revenue and cost of goods sold.
Cash Flow Analysis
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.
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Operating Activities
Net cash used in operating activities was $1,193,628 during the three months ended March 31, 2025, compared to net cash used in operating activities of $1,195,604 during the three months ended March 31, 2024, representing a decrease of $1,976 or 0.2%. This decrease in net cash used primarily resulted from our increase in net loss of $2,160,278, changes in inventory of $27,552, other assets of $114,816, and other liabilities of $153,282. These were offset by changes in non-cash expenses of $1,862,451, changes in prepaid expenses of $446,593, accounts payable and accrued expenses of $138,100 and accounts receivable of $10,760.
Investing Activities
Net cash used in investing activities was $0 during the three months ended March 31, 2025 compared to net cash used in operating activities of $852,876 during the three months ended March 31, 2024, representing a decrease of $852,876 or 100%. This decrease in net cash used related to the $1,000,000 of cash paid pursuant to the Purchase Agreement related to Fat Shark and Rotor Riot, offset by $147,124 in cash acquired that was completed in the first quarter of 2024.
Financing Activities
Net cash provided by financing activities totaled $2,436,966 during the three months ended March 31, 2025, compared to $4,362,313 during the three months ended March 31, 2024, resulting in a decrease in net cash provided by financing activities of $1,925,347 or 44.1%. Our first quarter 2025 proceeds are from cash warrant exercises from certain investors exercising their warrants that we issued in our October 2024 private placement. Our first quarter 2024 proceeds were from our IPO of $5,000,000, offset by deferred offering costs and other IPO related expenses of $637,687.
Liquidity and capital resources
As of March 31, 2025, we had current assets totaling $7,306,327 primarily consisting of cash balances of $5,000,661, inventory of $1,214,290 and other assets and deposits for inventory of $1,040,426. Our current liabilities as of March 31, 2025 totaled $1,048,379, primarily consisting of accounts payable and accrued expenses of $860,554 and deferred revenue and current operating lease liability of $187,825. Our net working capital as of March 31, 2025 was $6,257,948.
On February 26, 2025, multiple investors exercised 1,224,606 warrants at $1.99 per warrant from the October 2024 Private Placement and we issued 1,224,606 shares of our Common Stock and received cash proceeds of $2,436,966.
In December 2024, two investors and note holders exercised their option to convert $3,000,000 of the then outstanding Convertible Note into 1,507,538 shares of Common Stock at a price of $1.99 per share. After the conversion and as of December 31, 2024, we no longer have any debt outstanding.
In December 2024, we also had several investors exercise 684,000 warrants with cash and we issued 684,000 shares of our Common Stock for total cash proceeds of $1,523,700.
On October 29, 2024, we completed a private placement offering for the sale of 1,286,184 shares of Common Stock at a price of $1.52 per share for aggregate gross proceeds of $1.95 million before deducting fees to the placement agent and other expenses payable by us in connection with the private placement. We retained approximately $1.8 million in net proceeds.
As of May 7, 2025, we have approximately $40.1 million in cash. We believe that the net proceeds from our financings, warrant exercises, revenues, and existing cash balances will be sufficient to fund our current operating plans through more than the next 12 months. With the approximately $36.6 million of net proceeds we received on May 7, 2025, we have substantial liquidity to support our business.
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Critical Accounting Policies and Estimates
For a description of our critical accounting policies and estimates, refer to Part II, Item 7, Critical Accounting Policies and Estimates in our Annual Report on Form 10-K for the year ended December 31, 2024. There have been no material changes to our critical accounting policies and estimates since our Annual Report on Form 10-K for the year ended December 31, 2024.
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 March 31, 2025, 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 three months ended March 31, 2025, we have continued to strengthen our internal controls including the implementation of NetSuite financials for our financial and transaction reporting. This includes certain segregation of duties including the creation of purchase orders by our purchasing team that is approved in accordance with our authorization matrix, the receipt of inventory in NetSuite by our operations team in Orlando, FL, and dual approvals of all outgoing cash payments. As the implementation of NetSuite occurred, we experienced changes to our processes and procedures which in turn, resulted in changes to our internal control over financial reporting. We expect NetSuite to strengthen our internal financial controls. Management will continue to evaluate and monitor our internal controls as processes and procedures in each of the affected areas evolve and plan to document our internal control framework and related activities.
Other than as discussed above, there have been no changes in our internal control over financial reporting (as defined in Rule 13a-15(f) of the Exchange Act) that occurred during the three months ended March 31, 2025 that have materially affected, or are reasonably likely to materially affect, our internal controls over financial reporting. In addition, we have an ongoing search for a controller to support our finance and accounting team.
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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, 2024 and the following additional Risk Factors.
Rising threats of international tariffs, including tariffs applied to goods between the United States and China, may materially and adversely affect our business.
Our B2C business has historically been dependent on Chinese imports for our products and operations. For example, a majority of our products were manufactured, directly and indirectly, using Chinese vendors. In contrast, our B2B business we instituted in the second half of 2024 employs a made in the United States model. Recently, the current administration has imposed steep and additional tariffs on the importation from China and other countries (paused for 90 days) of goods including the drone components we use in our B2C business. As a result, we have begun sourcing components from other countries including the United States and Taiwan. This creates several issues including increased costs and potential inventory shipment delays. This increase in tariffs imposed could materially and adversely affect our business and results of operations. These tariffs apply to the vast majority of our consumer inventory for our B2C segment, and except for our Unusual Machines branded products we have increased prices and may in the future be forced to implement additional price increases to adjust to the higher costs of inventory. This in turn imposes the risk of reduced demand for such products and lower sales and resulting revenue. While to date, we appear to have not seen resistance based on increases in sales, that may not continue and future increases which we attempt to pass on to our customers may not work. Future inventory increases may require us to increase the prices of our branded products, which may result in decreased sales, particularly since we rely on consumer spending and our B2C products are typically considered non-essential, and purchases are therefore highly price sensitive.
Changes in the state of China-United States relations, including any tensions relating to potential military conflict between China and Taiwan, are difficult to predict and could adversely affect the operations or financial condition of the Company given that we are shifting inventory for our B2C business to Taiwan. In addition to Chinese tariffs, one of our first B2B customers was a European company. After the 90-day United States tariff pause, if the European Union and other European countries react to the United States tariffs by imposing tariffs on United States made product including our drones, the trade war may make our B2B drone parts too expensive.
If the tariffs or other factors result in increased inflation and a recession, our business may be materially harmed.
A direct impact from rising tariffs on our business has been increases in the prices of inventory we acquire and an increase in our selling prices (with one exception described in the prior Risk Factor). Further, due to the tariffs and possibly large cuts in the size of the government, there may be increased unemployment and other economic factors which result in recession. According to a Wall Street Journal article published on April 24, 2025, in March of 2025, the rate of sales of existing homes in the United States fell 5.9% from the prior month and is another indicator of a potential recession. In such event, our B2C business may be materially and adversely affected. Further, our B2B business including our proposed manufacturing of drones in the United States may also be adversely affected by a recessionary economy and inflation.
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| Item 2. | Unregistered Sales of Equity Securities and Use of Proceeds |
On February 26, 2025, the Company issued 1,224,606 shares of the Company’s Common Stock in connection with the exercise of 1,224,606 warrants by various shareholders. The issuance was exempt from registration under Section 3(a)(9) of the Securities Act.
Issuer Purchases of Equity Securities
We did not repurchase any of our equity securities during the three months ended March 31, 2025.
| Item 3. | Defaults Upon Senior Securities |
| None. |
| Item 4. | Mine Safety Disclosures |
None.
| Item 5. | Other Information |
During the quarter ended March 31, 2025, no director
or officer
| 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
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+
# |
Certain schedules, appendices and exhibits to this agreement have been omitted in accordance with Item 601(b)(2) of Regulation S-K. A copy of any omitted schedule and/or exhibit will be furnished supplementally to the SEC Staff upon request. Indicates management contract or compensatory plan, contract or agreement. |
| (1) | Filed herein |
| (3) | Furnished herein. |
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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: May 8, 2025
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