Unusual Machines, Inc.: Form 10-Q for the period ended Jun 30, 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

On July 14, 2025, we entered into a securities purchase agreement with certain investors for the purchase and sale of 5,000,000 shares of common stock in a registered direct offering at a public offering price of $9.70 per share. On July 15, 2025, the offering closed and we received aggregate gross proceeds of $48.5 million before deducting placement agent fees and other related expenses. The Company intends to use the proceeds of this offering for the purchase of our drone motor manufacturing equipment which we estimate to be approximately $4.0 million, general corporate purposes and working capital

With the funds received from our recent offerings, 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 (“DIU Blue Framework”). In addition, in July 2025, we added the Fat Shark Aura Video Transmitter (VTX) to the DIU Blue Framework. In furtherance of our B2B business, we have entered into a new lease of a 17,000 square foot facility in Orlando, Florida effectively August 1, 2025, where we plan to open a drone motor manufacturing plant. See Note 8 to Consolidated Financial Statements. While we continued to see top line revenue growth during the first half 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. Because of the tariff uncertainties, we cannot predict the impact tariff policies in the United Staes and other countries will have on our business. But our B2C business relies heavily on China so retaliatory tariffs can adversely affect us especially our B2C business. See “Item 1A – Risk Factors” for more information on the risks associated with the uncertainty of the imposition of tariffs on our business.

On June 12, 2025, we entered into a Share Purchase Agreement (“SPA”) to acquire 100% of the capital stock of Rotor Lab Pty Ltd., an Australian company (“Rotor Lab”) from its existing shareholders. We agreed to issue the sellers a total of $4,000,000 of shares of our common stock, plus additional earnout consideration of up to $3,000,000 worth of shares of our common stock. $800,000 of the initial consideration will be restricted and subject to forfeiture in the event of a breach of representations and warranties and indemnification. The terms of the SPA are subject to standard closing conditions, in addition to receiving required regulatory approvals from the Australian Foreign Investment Review Board.

Results of operations

Three Months Ended June 30, 2025 and 2024

Revenue

During the three months ended June 30, 2025 we generated revenues totaling $2,123,970 compared to $1,411,124 during the three months ended June 30, 2024, representing an increase of $712,846 or 51%. The growth in revenue is driven from growth in our existing retail channel and expanding our enterprise channel as we are manufacturing additional Blue UAS products.

Cost of Goods Sold & Gross Profit

During the three months ended June 30, 2025, our cost of goods sold was 1,329,291 compared to $1,022,684 during the three months ended June 30, 2024, resulting in an increase of $306,607 or 30%. Our gross margin, as a percentage of sales, totaled 37.4% during the three months ended June 30, 2025, compared to gross margin of 27.5% during the three months ended June 30, 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 and the mix of retail and enterprise sales 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 and will have an impact on our overall gross profit percentage. We expect that in the three months ended September 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. See “Item 1A – Risk Factors” for more information on the risks associated with the uncertainty of the imposition of tariffs on our business.

During the three months ended June 30, 2025, our gross profit was $794,679 compared to $388,440 during the three months ended June 30, 2024, resulting in an increase of $406,239 or 105%. Our gross margin, as a percentage of sales, totaled 37.4% during the three months ended June 30, 2025, compared to gross margin of approximately 27.5% during the three months ended June 30, 2024.

Operating Expenses

During the three months ended June 30, 2025, operations expenses totaled $404,277 compared to $213,772 during the three months ended June 30, 2024, resulting in an increase of $190,505 or 89%. Operations expense relate to expenses incurred for fulfilling orders and warehouse related expenditures including our warehouse personnel, supplies, and shipping expenses. The increase primarily relates to additional costs incurred related to our motor factory operations that we are putting in place along with additional shipping costs from the increase in revenue.

During the three months ended June 30, 2025, research and development expenses totaled $62,731 compared to $10,282 for the three months ended June 30, 2024, resulting in a increase of $52,449 or 510%. 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 June 30, 2025, sales and marketing expenses totaled $302,358 compared to $386,332 for the three months ended June 30, 2024, resulting in a decrease of $83,974 or 22%. The decrease primarily relates to additional costs incurred during the second quarter of 2024 related to our Rampage marketing event that is expected to occur during the fourth quarter of this year. Other sales and marketing expenses increased slightly based on the increase in revenue and ad spend during the period.

During the three months ended June 30, 2025, general and administrative expenses totaling $7,195,193 compared to $1,349,587 for the three months ended June 30, 2024, resulting in an increase of $5,845,606 or 433%. The increase primarily relates to the increase in non-cash stock compensation expense of approximately $5.5 million and increase in professional fees and operating as a public company.

Net Loss

Our net loss for the three months ended June 30, 2025, totaled $6,964,739 compared to $1,612,238 for the three months ended June 30, 2024, resulting in an increase in net loss of $5,352,501 or 332%. 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, which was $5,513,328 for the second quarter of 2025.

Results of Operations – Six Months Ended June 30, 2025 compared to the Six Months Ended June 30, 2024

Revenue

During the six months ended June 30, 2025 we generated revenues totaling $4,166,270 compared to $2,030,039 during the six months ended June 30, 2024, representing an increase of $2,136,231 or 105%. The growth in revenue is driven from growth in our existing retail channel and expanding our enterprise channel as we are manufacturing additional Blue UAS products.

Cost of Goods Sold

During the six months ended June 30, 2025, we incurred cost of goods sold of $2,874,784 compared to $1,437,432 during the six months ended June 30, 2024, resulting in an increase of $1,437,352 or 100%. Similar to revenues, we did not incur any cost of goods sold until the closing of the acquisitions on February 16, 2024. Cost of goods sold primarily relate to product costs from our sales, but also include certain shipping and other direct product costs. The increase in cost of goods sold is driven entirely by the increase in our revenue.

Gross Margin

During the six months ended June 30, 2025, our gross margin was $1,291,486 compared to $592,607 during the six months ended June 30, 2024, resulting in an increase of $698,879 or 118%. Our gross margin, as a percentage of sales, totaled 31% during the six months ended June 30, 2025, compared to 29% during the six months ended June 30, 2024. We anticipate our gross margin to fluctuate period to period depending on certain promotions and products that are sold during the period and the mix of retail and enterprise sales during the period. The margins we generated during the quarter are in line with our expectations and normal operating margins.

Operating Expenses

During the six months ended June 30, 2025, operations expenses totaled $706,879 compared to $326,094 during the six months ended June 30, 2024, resulting in an increase of $380,785 or 117%. Prior to the closing of the acquisitions in February 2024, we did not have any operations. Operations expenses primarily relate to our direct operations including our warehouse personnel and warehouse expenses. In addition, we have started incurring additional operations related expenses as we start incurring costs related to our motor production facility during the second quarter of 2025.

During the six months ended June 30, 2025, research and development expenses totaled $70,633 compared to $27,078 for the six months ended June 30, 2024, resulting in an increase of $43,555 or 161%. Research and development expense primarily relates to new product development as we continue to partner with manufacturers to bring drone component manufacturing to the United States.

During the six months ended June 30, 2025, sales and marketing expenses totaled $509,975 compared to $543,390 for the six months ended June 30, 2024, resulting in a decrease of $33,415 or 6%. Sales and marketing expenses primarily relate to advertising spend related to Rotor Riot and payroll expenses. The decrease relates to additional costs incurred during the second quarter of 2024 related to our Rampage marketing event, which was then offset by additional ad spend and other sales related expenses from our increase in revenue and sales.

During the six months ended June 30, 2025, general and administrative expenses totaling $10,421,097 compared to $2,353,761 for the six months ended June 30, 2024, resulting in an increase of $8,067,336 or 343%. The increase relates primarily to increased non-cash expenses totaling $7,419,701 related to stock based compensation expense and the additional increase is from increase in professional fees and other public company related expenses.

Net Loss

Our net loss for the six months ended June 30, 2025, totaled $10,231,018 compared to $2,718,240 for the six months ended June 30, 2024, resulting in an increase in net loss of $7,419,701 or 276%. The increase primarily relates to increased non-cash expenses related to stock based compensation expense discussed in the above paragraph.

Cash Flow Analysis

Prior to the closing of our IPO and the acquisitions of Fat Shark and Rotor Riot, we did not have any cash inflows from operations and all cash outflows related to our activities related to our IPO. Our future cash flows from operating activities will be significantly impacted by revenues received, our investment in sales and marketing to drive growth, and general and administrative expenses related to operating a public company. Our ability to meet future liquidity needs will be driven by our operating performance and the extent of continued investment in our operations. Failure to generate sufficient revenues and related cash flows could have a material adverse effect on our ability to meet our liquidity needs and achieve our business objectives.

Operating Activities

Net cash used in operating activities was $3,862,349 during the six months ended June 30, 2025, compared to net cash used in operating activities of $2,181,840 during the six months ended June 30, 2024, representing an increase of $1,680,509 or 77%. This increase in net cash used primarily resulted from our increase in accounts receivable of $125,757, inventory of $426,180, prepaid expenses of $156,440, accounts payable and accrued expenses of $444,594 and changes in other operating assets and liabilities of $61,864. This was offset by the change in non-cash stock based compensation of $6,994,114 and changes in other non-cash related expenses of $52,990.

Investing Activities

Net cash used in investing activities was $262,751 during the six months ended June 30, 2025 compared to net cash used in investing activities of $852,201 during the six months ended June 30, 2024, representing a decrease of $590,050 or 69%. The cash used in investing activities during the six months ended June 30, 2025 related to the purchasing of equipment related to our motor factory while the cash used in investing activities during the six months ended June 30, 2024 related to our acquisitions of Rotor Riot and Fat Shark.

Financing Activities

Net cash provided by financing activities totaled $39,300,836 during the six months ended June 30, 2025, compared to net cash provided by financing activities of $4,362,313 during the six months ended June 30, 2024, resulting in an increase in net cash provided by financing activities of $34,938,523. The increase primarily relates to proceeds received from our public offering of $36,496,000 in May 2025, proceeds from warrant exercises of $2,436,966, and employee stock option exercises of $367,780 during the period.

Liquidity and capital resources

As of June 30, 2025, we had current assets totaling $42,222,934 primarily consisting of cash balances of $38,933,059, inventory of $1,609,117 and other current assets of $192,778 and deposits for inventory of $1,314,592. Our current liabilities as of June 30, 2025 totaled $821,698, primarily consisting of accounts payable and accrued expenses of $608,694 and deferred revenue of $139,435 and current operating lease liability of $73,569. Our net working capital as of June 30, 2025 was $41,399,236.

On July 15, 2025, we completed a registered direct offering in which we sold 5,000,000 shares of our common stock at $9.70 per share and after deducting underwriting discounts and expenses, we received approximately $44.9 million in net cash proceeds.

On May 7, 2025, we completed a confidentially marketed public offering in which we sold 8,000,000 shares of our common stock at $5.00 per share and after deducting underwriting discounts and expenses, we received approximately $36.5 million in cash proceeds.

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 August 14, 2025, we have approximately $81 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 $45 million of net proceeds we received on July 15, 2025 and our existing cash balances, 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 six months ended June 30, 2025, we have continued to strengthen our internal controls including hiring of a Controller that will help provide additional segregation of duties, additional process related to our financial reporting, and start the documentation of our internal control process. This includes certain segregation of duties including the recording of financial records in NetSuite, 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 six months ended June 30, 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 a 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 in addition to experiencing some increased tariff-related costs including from products that use rare earths.

If critical components or raw materials used to manufacture our products or used in our development programs become scarce or unavailable, then we may incur delays in manufacturing and delivery of our products and in completing our development programs, which could damage our business.

Our ability to meet customers’ demands depends, in part, on our ability to obtain timely and adequate delivery of high-quality materials, components and subsystems, many of which are obtained from a select group of specialized suppliers, including some sole-source providers. In order to mitigate potential disruptions, we maintain long-term, non-binding agreements with several key suppliers that help stabilize pricing, reduce lead times and enhance planning accuracy. We do not have long-term agreements with all suppliers that obligate them to continue to sell components, products required to build our systems or products to us. Our reliance on suppliers without long-term binding contracts involves significant risks and uncertainties, including whether our suppliers will provide an adequate supply of required components or products of sufficient quality, will increase prices for the components or products and will perform their obligations on a timely basis.

If any of our supplier’s face capacity constraints, financial instability, or an unwillingness to provide raw materials or components to us, we may need to seek alternative suppliers or revise our designs, particularly because some of our components are sourced from foreign countries. Locating alternative sources may take significant time, and even then, we may encounter significant delays in manufacturing and shipping. Additionally, credit constraints among key suppliers could impact our cash flow. We have also experienced rising costs for components, shipping, tariffs, warehousing, and inventory. Our domestic suppliers have experienced increased demand for their products due to tariffs, which could impact the availability or price of our components. The permanence of these cost increases remains uncertain, and obtaining replacement components within our required time frames may prove challenging. Shortages could lead to excess inventory and potential obsolescence risks.

In addition, certain raw materials and components used in the manufacture of our products and in our development programs, are periodically subject to supply shortages, and our business is subject to the risks of price increases and periodic delays in delivery.

Because our new manufacturing business has inherent risks, such risks may adversely impact us.

We recently hired a vice president of manufacturing whose role is to head up our proposed drone motor manufacturing business. The Company has leased an additional 17,000 square foot facility near our headquarters office in Orlando, Florida, at which we will manufacture NDAA compliant drone motors. The lease begins August 1, 2025. There are inherent risks in connection with launching our component manufacturing business, which include:

• the need to expend working capital to purchase manufacturing equipment, rent a facility and to hire personnel with the requisite skills to fabricate our drones which could initially have an adverse effect on our working capital;
• the manufacturing equipment that we acquire may have bugs or may not be in sound working order and the products we manufacture may not be manufactured in accordance with our or our customers specifications, which result in conflicts with customers, the loss of revenues or damage to our reputation; and
• We may encounter cost overruns for a variety of reasons which due to fixed priced customer orders leads to operating losses.

Our products, including motors, batteries, and other advanced components, rely on rare earth metals for their manufacturing, of which a significant majority are sourced from China. Any disruption in the supply of these metals could adversely affect our ability to produce and deliver our products. Factors that might lead to such disruptions include geopolitical tensions, trade restrictions, supply chain bottlenecks, and environmental regulations affecting mining operations. A limited supply or increased cost of rare earth metals could lead to higher production costs, delays in manufacturing schedules, and potential inability to meet customer demand, thereby impacting our revenue and growth plans. Managing these risks necessitates close monitoring of supply chains, diversification of suppliers, and the pursuit of alternative materials or technologies where possible.

Escalating restrictions between the U.S. and China contribute to supply chain complexities. Some of our components sourced from foreign countries, including China, are at risk of further sanctions and other trade restrictive actions, and any escalation in global trade tensions or trade restrictions may hinder our ability to obtain these components from new suppliers. Restrictions on semiconductor manufacturing equipment and raw materials could lead to higher material costs, material unavailability, and transportation uncertainty.

If our facilities and information systems and those of our key suppliers could be damaged as a result of disasters or unpredictable events which could have an adverse effect on our business operations.

Our new drone motor manufacturing facility is located in Orlando, Florida. We also rely on third-party manufacturing plants in the U.S., Asia and other parts of the world to provide key components for our products and services. If major disasters such as hurricanes, tropical storms pandemics, earthquakes, fires, floods, wars, terrorist attacks, computer viruses, transportation disasters or other events occur in any of these locations, or the effect of climate change on any of these factors or our locations, or our information systems or communications network or those of any of our key component suppliers breaks down or operates improperly as a result of such events, our facilities or those of our key suppliers may be seriously damaged, and we may have to stop or delay production and shipment of our products. We may also incur expenses relating to such damages. If production or shipment of our products or components is stopped or delayed or if we incur any increased expenses as a result of damage to our facilities, our business, operating results and financial condition could be materially adversely affected.

If we fail to respond to commercial industry cycles in terms of our cost structure, manufacturing capacity, and/or personnel needs, our business could be seriously harmed.

The timing, length, and severity of the up-and-down cycles in the commercial and defense industries are difficult to predict. This cyclical nature of the industries in which we operate affects our ability to accurately predict future revenue, and in some cases, future expense levels. During down cycles in our industry, the financial results of our customers may be negatively impacted, which could result not only in a decrease in orders but also a weakening of their financial condition that could impair our ability to recognize revenue or to collect on outstanding receivables. When cyclical fluctuations result in lower than expected revenue levels, operating results may be adversely affected and cost reduction measures may be necessary in order for us to remain competitive and financially sound. We must be in a position to adjust our cost and expense structure to reflect prevailing market conditions and to continue to motivate and retain our key employees. If we fail to respond to fluctuating market conditions our business could be seriously harmed. In addition, during periods of rapid growth, we must be able to increase engineering and manufacturing capacity and personnel to meet customer demand. We can provide no assurance that these objectives can be met in a timely manner in response to industry cycles. Each of these factors could adversely impact our operating results and financial condition.

Our ability to stay competitive within our markets may be dependent upon increasing manufacturing capacity to support anticipated growth and achieving cost reductions and projected economies of scale from increasing manufacturing quantities of our products. Failing to adequately increase production capacity and achieve such reductions in manufacturing costs and projected economies of scale could materially adversely affect our business.

Our future growth depends on increasing manufacturing capacity of our drone motors, and our failure to adequately increase such capacity could have a material adverse impact on our business and financial results. We do not know whether or when we will be able to develop efficient, low-cost manufacturing capabilities and processes that will enable us to manufacture (or contract for the manufacture of) our drone motors in commercial quantities while meeting the volume, speed, quality, price, engineering, design and production standards required to successfully market our products. Our failure to develop such manufacturing processes and capabilities in locations that can efficiently service our clients and markets could have a material adverse effect on our business, financial condition, results of operations and prospects. Our ability to remain competitive is, in part, dependent upon achieving increased savings from volume purchases of raw materials and component parts, achieving acceptable manufacturing yield and capitalizing on machinery efficiencies. We expect our suppliers to experience a sharp increase in demand for their products.

We face significant risks in the management of our inventory, and failure to effectively manage our inventory levels may result in supply imbalances that could harm our business.

We maintain a variety of parts and components in inventory which are subject to obsolescence and expiration. Due to the long-lead time for obtaining certain product components, including in response to procurement issues caused by shortages in the supply chain for such components, and the manufacturing cycles, we need to make forecasts of demand and commit significant resources towards manufacturing our products. As such, we are subject to significant risks in managing the inventory needs of our business during the year, including estimating the appropriate demand for our products. Should orders and market conditions differ significantly from our estimates, our future results of operations could be materially adversely affected. In the future, we may be required to record write-downs of finished products and materials on-hand and/or additional charges for excess purchase commitments as a result of future changes in our sales forecasts or customer orders. We may hold material amounts of inventory at third parties which are subject to separate management processes. Additionally, our failure to manage inventory effectively, including in response to the effects of shortages of our components, could expose us to losses.

Additionally, shortages of components may result in increased inventory of unfinished products and significant quantities of other unused components remaining in inventory, which could expose us to increased risks of obsolescence and losses which may not be covered by insurance.