Unusual Machines, Inc.: Form 10-K/A for the period ended Dec 31, 2023

You should read the following discussion and analysis of our financial condition and results of operations in conjunction with the audited financial statements (prepared in accordance with accounting principles generally accepted in the United States (“U.S. GAAP”)) and related notes included elsewhere in this Annual Report on Form 10-K/A (this “Form 10-K/A”). The following discussion contains forward-looking statements that are subject to risks and uncertainties. See “Special Note Regarding Forward-Looking Statements” contained in the Original Form 10-K 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 in our Original Form 10-K filed with the SEC on March 22, 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

Initial Public Offering

On February 16, 2024, we closed our initial public offering (“IPO”) for the sale of 1,250,000 shares of common stock, at a public offering price of $4.00 per share. The IPO generated gross proceeds of $5.0 million and net proceeds of approximately $4.5 million. We incurred and paid additional direct offering costs prior to the close of the IPO of $0.1 million during the six months ended June 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 as discussed below.

Acquisition of Fat Shark and Rotor Riot

On November 21, 2022, we entered into the Purchase Agreement with Red Cat Holdings, Inc. (“Red Cat”) and Jeffrey Thompson, the founder and Chief Executive Officer of Red Cat and also director of our Company, pursuant to which we agreed to purchase Red Cat’s consumer business consisting of Fat Shark Holdings Ltd. (“Fat Shark”) and Rotor Riot LLC (“Rotor Riot”). Fat Shark and Rotor Riot are in the business of designing and marketing consumer drones and FPV goggles. Rotor Riot is also a licensed authorized reseller of consumer drones manufactured by third-parties.

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

Simultaneous with the closing of our IPO, on February 16, 2024, we closed the acquisitions of Fat Shark and Rotor Riot.

On July 22, 2024, we finalized the working capital adjustment as stipulated in the Purchase Agreement, which resulted in an increase in the overall purchase price by an additional $2.0 million. We agreed to increase the principal amount of the original note for the working capital adjustment, which increased the total Note payable to $4.0 million. In addition, we agreed to extend the maturity date of the Note to November 30, 2025. That Note was then exchanged for two Notes (the “New Notes”).

Series A Convertible Preferred Stock

Effective July 16, 2024, we filed a Certificate of Designations, Preferences and Rights of the Series A Convertible Stock with the Nevada Secretary of State. On July 22, 2024, Red Cat entered into an Exchange Agreement with the Company pursuant to which Red Cat exchanged 4,250,000 shares of the Company’s common stock, par value $0.01 per share for 4,250 shares of the Company’s newly designated Series A Convertible Preferred Stock (the “Series A”). Red Cat then sold the Series A and the New Notes to two investors on July 22, 2024.

Nevada Reincorporation

On April 22, 2024, we completed the change of our place of incorporation from Puerto Rico to Nevada.

Unusual Machines Results of Operations

Years Ended December 31, 2023 and 2022

Revenue

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

Operating Expenses

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

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

Net Loss

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

Unusual Machines Cash Flows

Years Ended December 31, 2023 and 2022

Operating Activities

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

Investing Activities

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

Financing Activities

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

Unusual Machines Liquidity and Capital Resources

As of December 31, 2023, we had current assets totaling $1,015,404 primarily consisting of cash balances of $894,773 and other current assets of $120,631. Our current liabilities as of December 31, 2023 totaled $114,497, consisting entirely of accounts payable and accrued expenses. Our net working capital as of December 31, 2023 was $900,907.

On February 16, 2024, we completed our IPO for the sale of 1,250,000 shares of common stock at a public offering price of $4.00 per share for gross proceeds of $5.0 million. After paying certain underwriting discounts and commissions, business combination expenses and other expenses related to the IPO, we received approximately $3.8 million in net proceeds.

To date, our operations have been funded exclusively by exempt private offerings of our common stock. In September of 2021, we closed a private offering of 2,276,000 shares of common stock at a price of $1.00 per share for total proceeds of $2,276,000. In December 2021, we closed an additional private offering of 260,000 shares of common stock at a price of $8.00 per share for total gross proceeds of $2,080,800, of which we received net proceeds of $1,992,000 after fees and other expenses. In 2022, we closed an additional private offering of 56,250 shares of common stock at a price of $8.00 per share for total proceeds of $450,000.

We believe that the net proceeds from our February 2024 IPO 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. If we are unable to raise capital when needed or on acceptable terms, we may be forced to delay, reduce or eliminate certain operational efforts. We do not anticipate any significant cost increases post Fat Shark and Rotor Riot acquisitions and with consideration of the combined companies’ net loss and cash position, we expect we will have sufficient working capital to support our operations for at least 12 months from the filing of this Form 10-K/A.

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.

Stock Based Compensation

The Company issued shares of our common stock 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.

Off-Balance Sheet Arrangements

We have no off-balance sheet arrangements.

Recently Issued Accounting Pronouncements

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