Unusual Machines, Inc.: Form 10-Q for the period ended Mar 31, 2025

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.

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.

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.

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.

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.

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.

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.

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.