UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549
FORM
| Quarterly REPORT pursuant to Section 13 or 15(d) of the Securities Exchange Act of 1934 | |
| For the quarterly period ended | |
| Or | |
| Transition report pursuant to Section 13 or 15(d) of the Securities Exchange Act of 1934 | |
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UNUSUAL MACHINES, INC.
2024 QUARTERLY REPORT ON FORM 10-Q
TABLE OF CONTENTS
| 2 |
Unless we state otherwise or the context otherwise requires, the terms “Unusual Machines,” “we,” “us,” “our” and the “Company” refer to Unusual Machines, Inc., a Nevada corporation.
SPECIAL NOTE REGARDING FORWARD-LOOKING STATEMENTS
This Quarterly Report on Form 10-Q, or Quarterly Report, contains forward-looking statements that involve risks and uncertainties. We make such forward-looking statements pursuant to the safe harbor provisions of the Private Securities Litigation Reform Act of 1995 and other federal securities laws. All statements other than statements of historical facts contained in this Quarterly Report are forward-looking statements. In some cases, you can identify forward-looking statements by terminology such as “may”, “will”, “should”, “expects”, “intends”, “plans”, “anticipates”, “believes”, “estimates”, “predicts”, “potential”, “continue” or the negative of these terms or other comparable terminology.
Forward-looking statements are neither historical facts nor assurances of future performance, and are based only on our current beliefs, expectations and assumptions regarding the future of our business, our ability to raise additional capital to meet our liquidity needs, future plans and strategies, projections, anticipated events and trends, the economy and other future conditions. Because forward-looking statements relate to the future, they are subject to inherent uncertainties, risks and changes in circumstances that are difficult to predict and many of which are outside of our control. Therefore, you should not rely on any of these forward-looking statements. Important factors that could cause our actual results and financial condition to differ materially from those indicated in the forward-looking are described more fully in the Section entitled “Risk Factors” contained in our final Prospectus filed with the Securities and Exchange Commission on April 19, 2024.
These forward-looking statements speak only as of the date of this Form 10-Q and are subject to business and economic risks. We do not undertake any obligation to update or revise the forward-looking statements to reflect events that occur or circumstances that exist after the date on which such statements were made, except to the extent required by law.
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PART I – FINANCIAL INFORMATION
| Item 1. | Financial Statements |
Unusual Machines, Inc.
Consolidated Condensed Balance Sheets
June 30, 2024 | December 31, 2023 | |||||||
| (Unaudited) | ||||||||
| ASSETS | ||||||||
| Current assets: | ||||||||
| Cash and cash equivalents | $ | $ | ||||||
| Inventory | ||||||||
| Prepaid inventory | ||||||||
| Other current assets | ||||||||
| Total current assets | ||||||||
| Non-current assets: | ||||||||
| Property and equipment, net | ||||||||
| Deferred offering costs | ||||||||
| Operating lease right-of-use assets | ||||||||
| Goodwill and intangible assets | ||||||||
| Other non-current assets | ||||||||
| Total non-current assets | ||||||||
| Total assets | $ | $ | ||||||
| LIABILITIES AND STOCKHOLDERS' EQUITY | ||||||||
| Current liabilities | ||||||||
| Accounts payable and accrued expenses | $ | $ | ||||||
| Operating lease liabilities | ||||||||
| Deferred revenue | ||||||||
| Total current liabilities | ||||||||
| Long-term liabilities | ||||||||
| Promissory note | ||||||||
| Operating lease liabilities – long term | ||||||||
| Total liabilities | ||||||||
| Commitments and contingencies (See note 12) | ||||||||
| Stockholders’ equity: | ||||||||
| Series B preferred stock - $ par value, authorized and and shares issued and outstanding at June 30, 2024 and December 31, 2023, respectively | ||||||||
| Common stock - $ par value, authorized and and shares issued and outstanding at June 30, 2024 and December 31, 2023, respectively | ||||||||
| Additional paid in capital | ||||||||
| Accumulated deficit | ( | ) | ( | ) | ||||
| Total stockholders’ equity | ||||||||
| Total liabilities and stockholders’ equity | $ | $ | ||||||
See accompanying condensed unaudited notes to the consolidated condensed financial statements.
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Unusual Machines, Inc.
Consolidated Condensed Statement of Operations
For the Three and Six Months Ended June 30, 2024 and 2023
(Unaudited)
| Three months ended June 30, | Six months ended June 30, | |||||||||||||||
| 2024 | 2023 | 2024 | 2023 | |||||||||||||
(Restated – Note 13) | ||||||||||||||||
| Revenues | $ | $ | $ | $ | ||||||||||||
| Cost of goods sold | ||||||||||||||||
| Gross Margin | ||||||||||||||||
| Operating Expenses | ||||||||||||||||
| Operations | ||||||||||||||||
| Research and development | ||||||||||||||||
| Sales and marketing | ||||||||||||||||
| General and administrative | ||||||||||||||||
| Depreciation and amortization | ||||||||||||||||
| Total operating expenses | ||||||||||||||||
| Operating loss | ( | ) | ( | ) | ( | ) | ( | ) | ||||||||
| Other Expense | ||||||||||||||||
| Interest expense | ||||||||||||||||
| Other 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 Six Months Ended June 30, 2024 and 2023
(Unaudited)
Six Months Ended June 30, 2023 (Restated – Note 13)
| Series B, Preferred Stock | Common Stock | Additional Paid-In | Accumulated | Total Stockholders’ | ||||||||||||||||||||||||
| Shares | Value | Shares | Value | Capital | Deficit | Equity | ||||||||||||||||||||||
| Balance, December 31, 2022 | $ | $ | $ | $ | ( | ) | $ | |||||||||||||||||||||
| Issuance of common shares for services | – | |||||||||||||||||||||||||||
| Net loss | – | – | ( | ) | ( | ) | ||||||||||||||||||||||
| Balance, March 31, 2023 | $ | $ | $ | $ | ( | ) | $ | |||||||||||||||||||||
| Conversion of preferred stock | ( | ) | ( | ) | ||||||||||||||||||||||||
| Net loss | – | – | ( | ) | ( | ) | ||||||||||||||||||||||
| Balance, June 30, 2023 | $ | $ | $ | $ | ( | ) | $ | |||||||||||||||||||||
Six Months Ended June 30, 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 shares as settlement | – | |||||||||||||||||||||||||||
| Issuance of common shares, initial public offering, net of offering costs | – | |||||||||||||||||||||||||||
| Issuance of common shares, business combination | – | |||||||||||||||||||||||||||
| Conversion of preferred shares | ( | ) | ( | ) | ( | ) | ||||||||||||||||||||||
| Net loss | – | – | ( | ) | ( | ) | ||||||||||||||||||||||
| Balance, March 31, 2024 | $ | $ | $ | $ | ( | ) | $ | |||||||||||||||||||||
| Conversion of preferred shares | ( | ) | ( | ) | ||||||||||||||||||||||||
| Issuance of common shares, equity incentive plan | – | ( | ) | |||||||||||||||||||||||||
| Stock compensation expense - vested stock | – | – | ||||||||||||||||||||||||||
| Stock option compensation expense | – | – | ||||||||||||||||||||||||||
| Net loss | – | – | ( | ) | ( | ) | ||||||||||||||||||||||
| Balance, June 30, 2024 | $ | $ | $ | $ | ( | ) | $ | |||||||||||||||||||||
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 Six Months Ended June 30, 2024 and 2023
(Unaudited)
| Six Months Ended June 30, | ||||||||
| 2024 | 2023 | |||||||
(Restated – Note 13) | ||||||||
| Cash flows from operating activities: | ||||||||
| Net loss | $ | ( | ) | $ | ( | ) | ||
| Depreciation and amortization | ||||||||
| Stock compensation expense as settlement | ||||||||
| Stock compensation expense | ||||||||
| Change in assets and liabilities: | ||||||||
| Accounts receivable | ||||||||
| Inventory | ||||||||
| Prepaid inventory | ( | ) | ||||||
| Other assets | ( | ) | ||||||
| Accounts payable and accrued expenses | ( | ) | ||||||
| Operating lease liabilities | ( | ) | ||||||
| Customer deposits and other current liabilities | ( | ) | ||||||
| Net cash used in operating activities | ( | ) | ( | ) | ||||
| Cash flows from investing activities | ||||||||
| Cash portion of consideration paid for acquisition of businesses, net of cash received | ( | ) | ||||||
| Net cash used in investing activities | ( | ) | ||||||
| Cash flows from financing activities: | ||||||||
| Proceeds from issuance of common shares | ||||||||
| Common share issuance offering costs | ( | ) | ( | ) | ||||
| Net cash provided by (used in) financing activities | ( | ) | ||||||
| Net increase (decrease) in cash | ( | ) | ||||||
| Cash, beginning of period | ||||||||
| Cash, end of period | $ | $ | ||||||
| Supplemental disclosures of cash flow information: | ||||||||
| Non-cash consideration paid for assets acquired and liabilities assumed | $ | $ | ||||||
| Deferred acquisition costs | $ | $ | ||||||
| Deferred offering costs recorded as reduction of proceeds | $ | $ | ||||||
See accompanying condensed unaudited notes to the consolidated condensed financial statements.
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Unusual Machines, Inc.
Notes to Consolidated Condensed Financial Statements
For the Period Ended June 30, 2024
Note 1 – Organization and nature of business
Unusual Machines, Inc. (“the Company”) is a Nevada corporation engaged in the commercial drone industry. The Company reincorporated from Puerto Rico to Nevada on April 22, 2024.
On February 16, 2024, the Company closed its Initial Public Offering (the “IPO”) of shares of common stock at a public offering price of $ per share (“IPO Price”). The shares are traded on NYSE American. Simultaneous with the closing of the IPO, the Company acquired Fat Shark Holdings Ltd. (“Fat Shark”) and Rotor Riot, LLC (“Rotor Riot”) from Red Cat Holdings, Inc. (“Red Cat”) (See Note 3).
Note 2 – Summary of significant accounting policies
Principles of Consolidation
The consolidated financial statements include accounts of the Company and its wholly owned subsidiaries, Fat Shark and Rotor Riot since the acquisitions on February 16, 2024. Intercompany transactions and balances have been eliminated upon consolidation.
Unaudited interim financial information
The consolidated condensed financial statements of the Company included herein have been prepared, without audit, pursuant to the rules and regulations of the Securities and Exchange Commission (the “SEC”). Certain information and footnote disclosures normally included in financial statements prepared in accordance with GAAP have been condensed or omitted from this Quarterly Report, as is permitted by such rules and regulations. Accordingly, these condensed financial statements should be read in conjunction with the financial statements and notes thereto included in the Company’s Annual Report on Form 10-K/A, for the year ended December 31, 2023. The results for any interim period are not necessarily indicative of results for any future period.
Use of Estimates
The preparation of financial statements in conformity with GAAP requires management to make estimates and assumptions that affect the reported amounts of assets and liabilities, disclosures of contingent assets and liabilities at the date of the financial statements, and the reported amounts of revenues and expenses during the reporting period. Accordingly, actual results could differ from those estimates, and such results could be material.
The financial statements include some amounts that are based on management's best estimates and judgments. Significant estimates reflected in these financial statements include those used to (i) determine stock-based compensation, (ii) the fair value of assets acquired and liabilities assumed in business combinations and the value of shares issued as consideration, (iii) reserves and allowances related to accounts receivable, inventory and sales, (iv) the evaluation of long-term assets, including goodwill, for impairment, (v) the fair value of lease liabilities and related right of use assets, and (vi) the warranty liability.
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Cash and Cash Equivalents
The Company considers all highly liquid debt instruments
and other short-term investments with maturities of three months or less, when purchased, to be cash equivalents. The Company maintains
cash deposits in multiple commercial banks and financial services companies. These financial institutions are insured by the Federal Deposit
Insurance Corporation up to $
Accounts Receivable, net
The Company carries its accounts receivable at invoiced
amounts. Upon the closing of the acquisitions in February 2024 when we acquired accounts receivable, the Company adopted ASC 326, Financial
Instruments – Credit Losses, which the Company evaluates all credit losses as of the reporting date. On a periodic basis, the Company
evaluates its accounts receivable and establishes an allowance for doubtful accounts based on a history of past write-offs and collections
and current credit conditions. Accounts are written-off as uncollectible at the discretion of management. At June 30, 2024 and December
31, 2023, the Company considers accounts receivable to be fully collectible; accordingly,
Inventory
Inventories, which consist of finished goods, are stated at the lower of cost or net realizable value, and are measured using the first-in, first-out method. Cost components include direct materials and direct labor, as well as in-bound freight. At each balance sheet date, the Company evaluates the net realizable value of its inventory using various reference measures including current product selling prices, as well as evaluating for excess quantities and obsolescence.
Deferred offering costs
The Company deferred direct incremental costs associated
with its IPO. The Company capitalized $
Property and equipment, net
Property and equipment is stated at cost, net of accumulated
depreciation. Depreciation is provided utilizing the straight-line method over the estimated useful lives for owned assets, ranging from
Leases
The Company has adopted Accounting Standards Codification
(ASC) 842, “Leases” which requires the recognition of assets and liabilities associated with lease agreements. As of February
16, 2024, the date of the acquisition, the Company recognized a lease liability obligation of $
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
| 9 |
Goodwill and Long-lived Assets
Goodwill represents the future economic benefit arising from other assets acquired in an acquisition that are not individually identified and separately recognized. The Company tests goodwill for impairment in accordance with the provisions of ASC 350, Intangibles – Goodwill and Other, (“ASC 350”). Goodwill is tested for impairment at least annually at the reporting unit level or whenever events or changes in circumstances indicate that goodwill might be impaired. ASC 350 provides that an entity has the option to first assess qualitative factors to determine whether the existence of events or circumstances leads to a determination that it is more likely than not that the fair value of a reporting unit is less than its carrying amount. If, after assessing the totality of events or circumstances, an entity determines it is not more likely than not that the fair value of a reporting unit is less than its carrying amount, then additional impairment testing is not required. However, if an entity concludes otherwise, then it is required to perform an impairment test. The impairment test involves comparing the estimated fair value of a reporting unit with its book value, including goodwill. If the estimated fair value exceeds book value, goodwill is considered not to be impaired. If, however, the fair value of the reporting unit is less than book value, then an impairment loss is recognized in an amount equal to the amount that the book value of the reporting unit exceeds its fair value, not to exceed the total amount of goodwill allocated to the reporting unit.
The estimate of fair value of a reporting unit is computed using either an income approach, a market approach, or a combination of both. Under the income approach, we utilize the discounted cash flow method to estimate the fair value of a reporting unit. Significant assumptions inherent in estimating the fair values include the estimated future cash flows, growth assumptions for future revenues (including gross margin, operating expenses, and capital expenditures), and a rate used to discount estimated future cash flow projections to their present value based on estimated weighted average cost of capital (i.e., the selected discount rate). Management’s assumptions are based on historical data, supplemented by current and anticipated market conditions, estimated growth rates, and management’s plans. Under the market approach, fair value is derived from metrics of publicly traded companies or historically completed transactions of comparable businesses. The selection of comparable businesses is based on the markets in which the reporting units operate and consider risk profiles, size, geography, and diversity of products and services.
The Company reviews long-lived assets, including tangible assets and other intangible assets with definitive lives, for impairment whenever events or changes in circumstances indicate that the asset’s carrying amount may not be recoverable. The Company conducts its long-lived asset impairment analyses in accordance with ASC 360, “Impairment or Disposal of Long-Lived Assets”. ASC 360 requires the Company to group assets and liabilities at the lowest level for which identifiable cash flows are largely independent of the cash flows of other assets and liabilities and evaluate the asset group against the sum of the undiscounted future cash flows. If the undiscounted cash flows do not indicate the carrying amount of the asset group is recoverable, an impairment charge is measured as the amount by which the carrying amount of the asset group exceeds its fair value based on discounted cash flow analysis or appraisals.
Fair Values, Inputs and Valuation Techniques for Financial Assets and Liabilities, and Related Disclosures
The fair value measurements and disclosure guidance defines fair value and establishes a framework for measuring fair value. Fair value is defined as the price that would be received to sell an asset or paid to transfer a liability (an exit price) in an orderly transaction between market participants at the measurement date. In accordance with this guidance, the Company has categorized its recurring basis financial assets and liabilities into a three-level fair value hierarchy based on the priority of the inputs to the valuation technique.
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.
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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, receivables, current assets, accounts payable, accrued expenses and debt. The carrying amounts of cash, receivables, current assets, accounts payable, accrued expenses and current debt approximates fair value due to the short-term nature of these instruments.
Warranty Liability
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 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 $
Rotor Riot does not provide any warranty of any kind for any of the equipment it sells or otherwise distributes. Consumers assume all risk for any products purchased or received from Rotor Riot.
Revenue Recognition
The Company recognizes revenue in accordance with ASC 606, “Revenue from Contracts with Customers”, issued by the Financial Accounting Standards Board (“FASB”). This standard includes a comprehensive evaluation of factors to be considered regarding revenue recognition including:
Step 1: Identify the contract with a customer;
Step 2: Identify the performance obligations in the contract;
Step 3: Determine the transaction price;
Step 4: Allocate the transaction price to the performance obligations in the contract; and
Step 5: Recognize revenue when (or as) the Company satisfies a performance obligation at a point in time.
| 11 |
The Company receives revenues from the sale of products from both retail distributers and individual consumers. Sales revenue is recognized when the products are shipped and the price is fixed or determinable, no other significant obligations of the Company exist and collectability is probable. Revenue is recognized when the title to the products has been passed to the customer, which is the date the products are shipped to the customer. This is the date the performance obligation has been met.
Deferred Revenue
Deferred revenue relates to (i) orders placed, but
not yet fulfilled and (ii) customer tickets purchased related to the Company’s Rampage event, in which tickets are sold in advance
and recognized when the event takes place. All deferred revenue is expected to be recognized within one year. Deferred revenue related
to orders placed, but not yet fulfilled totaled $
Cost of Goods Sold
Cost of goods sold includes inventory costs, direct packaging costs and production related depreciation, if any.
Shipping and Handling Costs
Shipping and handling costs incurred for product shipped
to customers are included in general and administrative expenses and amounted to $
Research and Development
Research and development expenses include payroll, employee benefits, and other headcount-related expenses associated with product development. Research and development expenses also include third-party development costs, materials, and a proportionate share of overhead costs.
Income Taxes
The Company accounts for income taxes using an asset and liability approach, which requires recognition of deferred tax assets and liabilities for the expected future tax consequences of events. A valuation allowance is established to reduce deferred tax assets to their estimated realizable value when, in the opinion of management, it is more likely than not that some portion or all of the deferred income tax assets will not be realizable in the future.
The Company recognizes benefits of uncertain tax positions if it is more likely than not that such positions will be sustained upon examination based solely on their technical merits, as the largest amount of benefit that is more likely than not to be realized upon the ultimate settlement. The Company’s policy is to recognize interest and penalties related to unrecognized tax benefits as a part of income tax expense.
The Company’s current provision for the six
months ending June 30, 2024 and 2023 consisted of a tax benefit against which we applied a full valuation allowance, resulting in no current
provision for income taxes. Since the Company has not generated an operating profit since inception, there are
| 12 |
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, term and future dividends. The Company recognizes forfeitures as they occur. The fair value of restricted stock is based on our quoted stock price or other fair value indicators on the date of grant. Compensation cost is recognized on a straight-line basis over the service period which is typically the vesting term.
Warrants
The Company accounts for warrants to purchase shares of its common stock in accordance with the guidance in ASC 480, Distinguishing Liabilities from Equity (“ASC 480”) and ASC 815, Derivatives and Hedging (“ASC 815”). The Company classifies warrants issued for the purchase of shares of its common stock as either equity or liability instruments based on an assessment of the specific terms and conditions of each respective contract. The assessment considers whether the warrants are freestanding financial instruments or embedded in a host instrument, whether the warrants meet the definition of a liability pursuant to ASC 480, whether the warrants meet the definition of a derivative under ASC 815, and whether the warrants meet all of the requirements for equity classification under ASC 815. This assessment, which requires the use of professional judgment, is conducted at the time of warrant issuance and as of each subsequent quarterly period end date while the warrants are outstanding.
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.
Basic and diluted net loss per share is calculated based on the weighted-average of common shares outstanding in accordance with FASB ASC Topic 260, Earnings per Share. Diluted net loss per share is calculated based on the weighted-average number of common shares outstanding plus the effect of dilutive potential common shares. When the Company reports a net loss, the calculation of diluted net loss per share excludes potential common shares as the effect would be anti-dilutive.
Segment Reporting
Since the acquisitions of Fat Shark and Rotor Riot, the Company operates with one reportable segment. The Company bases its reportable segment based on how our Chief Operating Decision Maker manages the business, makes resource allocations and operating decisions, and evaluates operating performance.
Recent Accounting Pronouncements
In November 2023, new accounting guidance was issued that updates reportable segment disclosure requirements by requiring disclosures of significant reportable segment expenses that are regularly provided to the Chief Operating Decision Maker (the “CODM”) and included within each reported measure of a segment's profit or loss. This new guidance also requires disclosure of the title and position of the individual identified as the CODM and an explanation of how the CODM uses the reported measures of a segment’s profit or loss in assessing segment performance and deciding how to allocate resources. The new guidance is effective for annual periods beginning after December 15, 2023, and interim periods within fiscal years beginning after December 15, 2024. The new guidance is required to be applied retrospectively to all prior periods presented in the financial statements. Early adoption is also permitted. On January 1, 2024, the Company adopted ASC 280, Segment Reporting. The Company currently operates a single segment and the Company does not anticipate any net effect related to the adoption.
| 13 |
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.
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 11 – Related Party Transactions for additional information). Fat Shark and Rotor Riot are in the business of designing and marketing consumer drones and first-person-view (“FPV”) goggles. Rotor Riot is also a licensed authorized reseller of consumer drones manufactured by third-parties.
The Company specializes in the production and sale of small drones and essential components and with the acquisitions of Fat Shark and Rotor Riot, it brings brand recognition and a strong curated retail channel in the FPV drone market segment. This Business Combination is a realization of the Company’s strategy to build its business both organically and through strategic acquisitions that leverage our retail business to onshore production of critical drone components. With the transition to onshoring production of drone components, the Company intends to expand into B2B channels for customers that require a domestic supply chain.
The Business Combination was based on a share purchase
agreement (the “Purchase Agreement”) that was executed on November 21, 2022. From November 21, 2022 to February 16, 2024,
the Purchase Agreement was subject to several amendments and subject to certain working capital adjustments. Under the terms of the Purchase
Agreement, as amended, the consideration paid for the acquired assets consisted of (i) $
The acquisitions met the definition of a business combination under ASC 805, Business Combinations, and therefore the assets acquired and liabilities assumed are accounted for at fair value. The Company has not completed its evaluation of the fair value of assets acquired and liabilities assumed of Fat Shark and Rotor Riot for the purpose of its 2024 fiscal year financial reporting and as such has not fully determined the unallocated purchase price between goodwill and other intangible assets. Such amounts are subject to adjustment during the one-year measurement period.
| 14 |
The following represents the fair value allocation of Fat Shark and Rotor Riot Purchase Price:
| Cash | $ | |||
| Accounts receivable (approximates contractual value) | ||||
| Inventories (on hand and prepaid) | ||||
| Other current assets | ||||
| Right of use asset - operating | ||||
| Other long-term assets | ||||
| Goodwill and intangible assets (unallocated purchase price) | ||||
| Total assets | ||||
| Accounts payable and accrued liabilities | ||||
| Customer deposits | ||||
| Operating lease liability – current and long-term | ||||
| Total liabilities | ||||
| Total purchase price | $ | |||
Initial goodwill and intangible assets relate to Fat Shark and Rotor Riot being FPV market leaders and their well-known and established brands within the industry. Combining these entities and their existing customer base along with Unusual Machines’ strategy of extending to B2B sales of drone components will provide strategic advantage. The Company will evaluate the amount of goodwill and intangibles that are expected to be deductible for tax purposes once the unallocated purchase price is finalized.
The results of Fat Shark and Rotor Riot have been included in the Consolidated Financial Statements from the date of acquisition. The table below presents the results as reported by the Company and unaudited pro forma results of the Company, assuming that the acquisition of Fat Shark and Rotor Riot at the beginning of each period are as follows. The unaudited pro forma results are not necessarily indicative of what actually would have occurred had the acquisitions been in effect for the periods presented (in thousands, except per share data):
| For the Six Months Ended | For the Six Months Ended | |||||||||||||||
| June 30, 2024 | June 30, 2023 | |||||||||||||||
| As Reported | Proforma (unaudited) | As Reported | Proforma (unaudited) | |||||||||||||
| Revenue | $ | $ | $ | $ | ||||||||||||
| Gross profit/(loss) | ||||||||||||||||
| Loss from operations | ( | ) | ( | ) | ( | ) | ( | ) | ||||||||
| Other expense | ||||||||||||||||
| Net loss | $ | ( | ) | $ | ( | ) | $ | ( | ) | $ | ( | ) | ||||
| Net earnings per share: | ||||||||||||||||
| Basic | $ | ( | ) | $ | ( | ) | $ | ( | ) | $ | ( | ) | ||||
| 15 |
This unaudited consolidated pro forma financial information is presented for informational purposes only. The unaudited consolidated pro forma adjustments are based on preliminary estimates, information available and certain assumptions, and may be revised as additional information becomes available. In addition, the unaudited pro forma financial information does not reflect any adjustments for non-recurring items or anticipated synergies resulting from the acquisition.
The unaudited pro forma financial information from the beginning of the periods presented until the acquisition date includes adjustments to: 1) eliminate intercompany revenue and associated cost of sales for sales of product from Fat Shark to Rotor Riot, 2) to adjust fair value for certain Fat Shark inventory as if the acquisition had occurred as of the beginning of the respective periods and 3) to include acquisition related expenses in the Q1 ’23 that were incurred in Q1 ’24.
Note 4 – Inventories
Inventories, consisting solely of finished goods,
totaled $
Note 5 – Other Current Assets
Other current assets included as of::
| June 30, 2024 | December 31, 2023 | |||||||
| Deposit related to Rotor Riot, LLC and Fat Shark, Ltd. acquisitions | $ | $ | ||||||
| Prepaid insurance | ||||||||
| Other receivables | ||||||||
| Other prepaid expenses | ||||||||
| Total other current assets | $ | $ | ||||||
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:
| June 30, 2024 | December 31, 2023 | |||||||
| Computer equipment | $ | $ | ||||||
| Accumulated depreciation | ( | ) | ( | ) | ||||
| Total property and equipment, net | $ | $ | ||||||
Depreciation expense totaled $
| 16 |
Note 7 – Operating Leases
| Year | Future Lease Payments | Operating Lease Discount | Operating Lease Liability | |||||||||
| 2024 | $ | $ | ( | ) | $ | |||||||
| 2025 | ( | ) | ||||||||||
| 2026 | ( | ) | ||||||||||
| 2027 | ( | ) | ||||||||||
| 2028 | ( | ) | ||||||||||
| Total | $ | $ | ( | ) | $ | |||||||
| Supplemental Information | ||||
| Weighted average remaining lease term (in years) | ||||
| Weighted average discount rate | ||||
Note 8 – Promissory Note
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 $
Earnings per Share
Outstanding securities not included in the computation of diluted net loss per share because their effect would have been anti-dilutive include and shares of Series B Preferred Stock, as converted as of June 30, 2024 and 2023, respectively, the of stock options issued to employees as of June 30, 2024, the of common stock representative warrants issued to the underwriter associated with the February 2024 IPO and shares of common stock, as converted, associated with the Note discussed in Note 8 “Debt”.
| 17 |
Preferred Stock
The preferred stock par value is $. The Series B preferred stock 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. Series B preferred shares are not entitled to vote on any matters submitted to shareholders of the Company.
Subsequent to the IPO but prior to June 30, 2024, certain shareholders converted shares of Series B preferred shares into shares of common stock. The Company canceled the shares of Series B preferred shares upon the conversion.
On June 1, 2023, the Company issued an additional 50 Series B preferred shares in connection with the cancellation of 250,000 shares of common stock.
Series B preferred shares outstanding at June 30, 2024 totaled which are convertible into shares of common stock. Series B preferred shares outstanding at December 31, 2023 totaled which are convertible into shares of common stock.
See Note 14, Subsequent Events, for more information regarding the Company’s Series A Convertible Preferred Stock.
Common Stock
The common stock par value is $.
2024 Transactions
On January 2, 2024, the Company issued shares of common stock to its prior Chief Executive Officer as a part of a separation agreement and recognized compensation expense of $, which is $4 per share, the last valuation of the Company’s private placement and 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.
As agreed in the Purchase Agreement, $
Subsequent to the IPO and prior to June 30, 2024, the Company issued shares of common stock related to certain shareholders converting 140 of Series B shares into common stock.
| 18 |
On April 30, 2024, the Company issued restricted shares of common stock to executive officers and board members of the Company. The shares of restricted stock were granted under the Company’s 2022 Equity Incentive Plan. The restricted shares issued to executive officers are subject to pro rata forfeiture through February 14, 2025.
On May 2, 2024, the Company issued an additional of restricted shares of common stock to Allan Evans, the Company’s CEO related to an agreed upon reduction of salary. The shares of restricted stock were granted under the Company’s 2022 Equity Incentive Plan.
The April 30, 2024 and May 2, 2024 shares were
valued at $
and $
per share, respectively for a total of $
See Note 14, Subsequent Events, for additional information.
2023 Transactions
On March 7, 2023, the Company issued shares
of common stock to an investment banking firm (“Revere”) as a fee for the termination of the January 2023 engagement with
Revere. These shares were allocated by Revere to some of the Company’s existing shareholders. The Company recorded $
On July 10, 2023, the Company’s Board of Directors
approved a
Stock Options
The Company’s 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 of awards and has an “evergreen” provision, pursuant to which the number of shares of common stock reserved for issuance pursuant to awards under such plan shall be increased on the first day of each year beginning in 2025 and ending in 2032 equal to the lesser of (a) five percent (5%) of the shares of stock outstanding (on an as converted basis) on the last day of the immediately preceding fiscal year and (b) such smaller number of shares of stock as determined by our board of directors.
On April 30, 2024, the Company’s board of directors approved the grant of stock options under the Plan to certain employees. The stock options are subject to certain vesting provisions.
The following table presents the activity for stock options outstanding:
| Weighted | Weighted Average | |||||||||||||||
| Non-Qualified | Average | Remaining | Aggregate | |||||||||||||
| Options | Exercise Price | Contractual Term | Intrinsic Value | |||||||||||||
| Outstanding - December 31, 2023 | $ | – | ||||||||||||||
| Granted | $ | |||||||||||||||
| Forfeited/canceled | – | – | ||||||||||||||
| Exercised | – | – | ||||||||||||||
| Outstanding – June 30, 2024 | $ | $ | ||||||||||||||
| 19 |
The range of assumptions used to calculate the fair value of options granted during the six months ended June 30, 2024 was:
| Exercise Price | $ | |||
| Stock Price on date of grant | $ | |||
| Risk-free interest rate | % | |||
| Dividend yield | ||||
| Expected term (years) | ||||
| Volatility | % |
The Company recognized $ in stock-based compensation expense related to stock options during the six months ended June 30, 2024. As of June 30, 2024, there was $ of unrecognized stock-based compensation expense related to unvested stock options to be recognized over the remaining vesting term through 2028.
Restricted Stock
The following table presents the activity for stock options outstanding:
| Restricted | Awards | Awards | ||||||||||
| Stock | Vested | Unvested | ||||||||||
| Outstanding - December 31, 2023 | ||||||||||||
| Granted | ||||||||||||
| Forfeited/canceled | – | – | ||||||||||
| Exercised | – | – | ||||||||||
| Outstanding – June 30, 2024 | ||||||||||||
The Company recognized $ in stock-based compensation expense related to restricted stock during the six months ended June 30, 2024. As of June 30, 2024, there was $ of unrecognized stock-based compensation expense related to unvested restricted stock to be recognized over the remaining vesting term through February 15, 2025.
Warrants
The following table presents the activity for warrants outstanding as of June 30, 2024:
| Weighted | ||||||||
| Warrants | Average | |||||||
| Outstanding | Exercise Price | |||||||
| Outstanding - December 31, 2023 | $ | |||||||
| Granted | ||||||||
| Forfeited/cancelled/restored | ||||||||
| Exercised | ||||||||
| Outstanding – June 30, 2024 | $ | |||||||
| 20 |
As discussed in Note 9, “Earnings Per Share and Stockholders’ Equity”, in connection with the IPO, the Company issued 62,500 representative warrants to its underwriters to purchase shares of common stock. The representative warrants have an exercise price of $5.00 or can be exercised through a cashless exercise feature. All warrants outstanding have a weighted average remaining contractual life of approximately years as of June 30, 2024.
Note 11 – Related Party Transactions
In November 2022, the Company entered into the Purchase Agreement, as amended with Red Cat and Jeffrey Thompson, the Company’s former Chief Executive Officer and President and current director and also the current Chief Executive Officer of Red Cat, pursuant to which, among other things, Mr. Thompson and the Company have agreed to indemnification obligations, which shall survive for a period of nine months from February 16, 2024, subject to certain limitations, which includes a basket of $250,000 before any claim can be asserted and a cap equal to the value of 100,000 shares of our common stock owned by him to secure any indemnification obligations, which stock is our sole remedy, except for fraud. Our prior Chief Executive Officer, Mr. Brandon Torres Declet, negotiated the terms of the Purchase Agreement on an arms’ length basis with Joe Freedman who was the head of Red Cat’s Special Committee. The transaction was ultimately approved by the Company’s and Red Cat’s board of directors. On March 8, 2023, a majority of the disinterested Red Cat shareholders approved the transactions contemplated in the Purchase Agreement in a special meeting. Mr. Thompson recused himself from such vote.
In February 2024, the Company completed the acquisitions to purchase Fat Shark and Rotor Riot from Red Cat. Jeffrey Thompson is the founder and current Chief Executive Officer of Red Cat. Mr. Thompson is also the founder, prior Chief Executive Officer and current member on the Board of Directors of Unusual Machines. Prior to the acquisition, Mr. Thompson held 328,500 shares of common stock in Unusual Machines, which represented approximately 10% prior to the acquisition and IPO.
On April 30, 2024 (“Grant Date”), the Company’s board of directors approved the Company entering into a two-year Management Services Agreement (the “Agreement”) with 8 Consulting LLC (the “Consultant”) for the services of our Chief Executive Officer, Dr. Allan Evans, whereby the Consultant agreed to cause Dr. Evans to perform his services as the Company’s Chief Executive Officer and the Consultant will be compensated on behalf of Dr. Evans by the Company in connection with his performance of such services. The Agreement allows Dr. Evans to receive favorable tax benefits as a resident of the Commonwealth of Puerto Rico who will perform such services in Puerto Rico. Pursuant to the Agreement, Dr. Evans will perform the duties and responsibilities that are customary for a chief executive officer of a public company that either have revenues similar to the Company on a pro forma basis as reflected in the Prospectus filed with the SEC on February 15, 2024, or if pre-revenues, are an active and on-going business that are performing pre-revenue activities. The Consultant agreed to cause Dr. Evans, as Chief Executive Officer, (i) to undertake primary responsibility for managing all aspects of the Company and overseeing the preparation of all reports, registration statements and other filings required filed by the Company with the SEC and executing the certifications required the Sarbanes Oxley Act of 2002 and the rules of the SEC as the principal executive officer of the Company; (ii) attend investor meetings and road shows in connection with the Company’s fundraising and investor relations activities; (iii) to report to the Company’s board of directors; (iv) to perform services for such subsidiaries of the Company as may be necessary.
The Consultant receives
a $
| 21 |
Note 12 – Commitments and Contingencies
Note 13 – Restatement of Previously Issued Financial Statements
On April 16, 2024, the Company changed their independent PCAOB-registered accounting firm and terminated its engagement with their prior auditor. On May 3, 2024, the Securities and Exchange Commission (“SEC”) issued an order that instituted a cease-and-desist against the Company’s previous auditor, which required the Company to obtain new auditors and re-audit its financial statements for the years ended December 31, 2023 and 2022.
The Company engaged a new, an independent and registered accounting firm, to re-audit the Company’s previously issued financial statements. During the Company’s re-audits, it was noted that certain transactions were not recorded in the correct period, stock compensation expense of $600,000 related to the March 7, 2023 common stock issuance was not recorded and deferred offering costs were classified as an operating activity rather than a financing activity. Expenses totaling $10,993 were originally recorded in 2023 but related to 2022 expenses.
With this restatement, the transactions previously recorded in the incorrect period have been updated to the correct period, classifications on the statements of cash flow have been corrected and the stock compensation previously not recorded has been properly recorded.
The following presents reconciliations of the impacted financial statement line items as filed to the restated amounts as of June 30, 2023 and for the periods then ended. The previously reported amounts reflect those included in the registration statements the Company filed with the Securities and Exchange Commission on September 19, 2023. These amounts are labeled “As Filed” in the tables below. The amounts labeled “Restatement Adjustments” represent the effects of these restatements due to the timing differences and stock compensation expense.
| 22 |
| Statement of Operations for the Six Months Ended June 30, 2023 | ||||||||||||
| As Filed | Restatement Adjustments | As Restated | ||||||||||
| Revenue | $ | $ | $ | |||||||||
| Cost of goods sold | ||||||||||||
| Gross profit | ||||||||||||
| Operating expenses: | ||||||||||||
| Research and development | ||||||||||||
| General and administrative | ||||||||||||
| Depreciation and amortization | ||||||||||||
| Total operating expenses | ||||||||||||
| Loss from operations | ( |
) | ( |
) | ( |
) | ||||||
| Other income: | ||||||||||||
| Interest income | ||||||||||||
| Total other income | ||||||||||||
| Net loss before income tax | ( |
) | ( |
) | ( |
) | ||||||
| Income tax benefit (expense) | ||||||||||||
| Net loss | $ | ( |
) | $ | ( |
) | $ | ( |
) | |||
| Net loss per share attributable to common stockholders | ||||||||||||
| Basic and diluted | $ | ) | $ | ) | $ | ) | ||||||
| Weighted average common shares outstanding | ||||||||||||
| Basic and diluted | ||||||||||||
| 23 |
Statements of Changes in Stockholders’ Equity – As Filed – For the Six Months Ended June 30, 2023
| Series B, Preferred Stock | Common Stock | Additional Paid-In | Stocks to be | Accumulated | ||||||||||||||||||||||||||||
| Shares | Value | Shares | Value | Capital | Issued | Deficit | Total | |||||||||||||||||||||||||
| Balance, December 31, 2022 | $ | $ | $ | $ | $ | ( | ) | $ | ||||||||||||||||||||||||
| Issuance of common shares | – | – | ( | ) | – | – | – | |||||||||||||||||||||||||
| Conversion to preferred shares | ( | ) | ( | ) | – | – | – | |||||||||||||||||||||||||
| Net loss | – | – | – | – | – | – | ( | ) | ( | ) | ||||||||||||||||||||||
| Balance, June 30, 2023 | $ | $ | $ | $ | $ | ( | ) | $ | ||||||||||||||||||||||||
Statements of Changes in Stockholders’ Equity – Restatement Adjustments – For the Six Months Ended June 30, 2023
| Series B, Preferred Stock | Common Stock | Additional Paid-In | Stocks to be | Accumulated | ||||||||||||||||||||||||||||
| Shares | Value | Shares | Value | Capital | Issued | Deficit | Total | |||||||||||||||||||||||||
| Balance, December 31, 2022 | $ | $ | $ | $ | $ | ( | ) | $ | ( | ) | ||||||||||||||||||||||
| Issuance of common shares | – | – | – | – | – | – | ||||||||||||||||||||||||||
| Conversion to preferred shares | – | – | – | – | – | – | – | – | ||||||||||||||||||||||||
| Net loss | – | – | – | – | – | – | ( | ) | ( | ) | ||||||||||||||||||||||
| Balance, June 30, 2023 | $ | $ | $ | $ | $ | ( | ) | $ | ||||||||||||||||||||||||
Statements of Changes in Stockholders’ Equity – As Restated – For the Six Months Ended June 30, 2023
| Series B, Preferred Stock | Common Stock | Additional Paid-In | Stocks to be | Accumulated | ||||||||||||||||||||||||||||
| Shares | Value | Shares | Value | Capital | Issued | Deficit | Total | |||||||||||||||||||||||||
| Balance, December 31, 2022 | $ | $ | $ | $ | $ | ( | ) | $ | ||||||||||||||||||||||||
| Issuance of common shares | – | – | – | – | ||||||||||||||||||||||||||||
| Conversion to preferred shares | ( | ) | ( | ) | – | – | – | |||||||||||||||||||||||||
| Net loss | – | – | – | – | – | – | ( | ) | ( | ) | ||||||||||||||||||||||
| Balance, June 30, 2023 | $ | $ | $ | $ | $ | ( | ) | $ | ||||||||||||||||||||||||
| 24 |
Statement of Cash Flows for the Six Months Ended June 30, 2023
| As Filed | Restatement Adjustments | As Restated | ||||||||||
| Cash flows from operating activities: | ||||||||||||
| Net loss | $ | ( | ) | $ | ( | ) | $ | ( | ) | |||
| Depreciation | ||||||||||||
| Stock compensation expense | ||||||||||||
| Change in assets and liabilities: | ||||||||||||
| Accounts receivable | ||||||||||||
| Deferred offering costs | ( | ) | ||||||||||
| Other current assets | ||||||||||||
| Accounts payable and accrued expenses | ( | ) | ( | ) | ( | ) | ||||||
| Net cash used in operating activities | ( | ) | ( | ) | ||||||||
| Cash flows from investing activities | ||||||||||||
| Purchases of property and equipment | ||||||||||||
| Net cash used in investing activities | ||||||||||||
| Cash flows from financing activities: | ||||||||||||
| Deferred offering costs | ( | ) | ( | ) | ||||||||
| Net cash provided by financing activities | ( | ) | ( | ) | ||||||||
| Net increase (decrease) in cash | ( | ) | ( | ) | ||||||||
| Cash, beginning of period | ||||||||||||
| Cash, end of period | $ | $ | $ | |||||||||
| Supplemental disclosures of cash flow information: | ||||||||||||
| Cash paid for interest | $ | $ | $ | |||||||||
| Cash paid for income tax | $ | $ | $ | |||||||||
| 25 |
Note 14 – Subsequent Events
Amendments to Articles of Incorporation
On July 17, 2024, following approval by the Board of Directors, the Company filed a Certificate of Designations, Preferences, and Rights of the Series A Convertible Preferred Stock (the "COD”) with the Nevada Secretary of State. The COD designated 4,250 shares of Series A Convertible Preferred Stock (the “Series A”). The Series A ranks senior to both the Company’s common stock and any other series of preferred stock with respect to the preferences as to dividends, distributions, and payments, upon the liquidation, dissolution, and winding up of the Company. Each share of Series A may be converted into 1,000 shares of the Company’s common stock.
The Series A preferred shares have a conversion beneficial ownership limitation of 4.99%, or 9.99% upon election of the holder upon at least 61 days written notice to the Company. The Series A preferred shares have no voting rights, except as required by law and as expressly provided in the COD.
Working Capital Adjustment Agreement
On July 22, 2024, the Company and Red Cat finalized the working capital adjustment related to the acquisitions of Fat Shark and Rotor Riot pursuant to the Purchase Agreement. The Purchase Agreement provided that the purchase price was to be increased on a dollar-for-dollar basis by the amount by which the working capital exceeded the agreed working capital (the "Working Capital Adjustment”). After negotiations between the parties, it was determined that the Company owed Red Cat $2.0 million as a Working Capital Adjustment.
The original Note payable for $2.0 million was reissued to Red Cat with (i) an increased aggregate principal amount of $4,000,000 to give effect to the working capital adjustments discussed above, and (ii) extend the maturity date of the new Note to November 30, 2025.
Red Cat Holdings, Inc.’s Sale of Securities
On July 22, 2024, the Company’s principal shareholder, Red Cat sold all of its securities in the Company to two unaffiliated third-party investors (the "Investors”). As part of the transaction, 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 Note Payable, to the Investors on July 22, 2024.
Quarterly Grants to our Board of Directors
On July 30, 2024, the Company issued non-employee directors listed in the table below the equity portion of their quarterly compensation. Each of the directors received a vested restricted stock grant for services as a director (and where applicable, committee member) during the quarter ended June 30, 2024. The shares of restricted common stock were granted under the Company’s 2022 Equity Incentive Plan and was subject to each director executing the Company’s standard Restricted Stock Agreement, which occurred on July 29, 2024. The fair value per share was based on the quoted trading price as of the close of the market as of July 17, 2024.
| Director | Fair Value Per Share | Amount of Restricted Common Stock | Aggregate Fair Value |
| Cristina Colon | $1.79 | 6,052 | $10,833 |
| Sanford Rich | $1.79 | 6,052 | $10,833 |
| Robert Lowry | $1.79 | 6,052 | $10,833 |
| Jeffrey Thompson | $1.79 | 5,587 | $10,000 |
| 26 |
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, 2023, which was filed with the SEC on March 22, 2024. The following discussion contains forward-looking statements that are subject to risks and uncertainties. See “Special Note Regarding Forward-Looking Statements” for a discussion of the uncertainties, risks, and assumptions associated with those statements. Actual results could differ materially from those discussed in or implied by forward-looking statements as a result of various factors, including those discussed below and elsewhere in this Quarterly Report and of our Annual Report on Form 10-K for the year ended December 31, 2023, 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, 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.
Nevada Reincorporation
On April 22, 2024, we completed the change of incorporation from a Puerto Rico Corporation to a Nevada Corporation.
Finalization of Working Capital Adjustment
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 promissory note to November 30, 2025.
| 27 |
Results of Operations – Three Months Ended June 30, 2024 compared to the Three Months Ended June 30, 2023
Revenue
During the three months ended June 30, 2024 we generated revenues totaling $1,411,124 compared to $0 during the three months ended June 30, 2023, representing an increase of $1,411,124 or 100%. We did not generate any revenues until the closing of the acquisitions of Fat Shark and Rotor Riot on February 16, 2024. The majority of our revenue during the quarter relates to completed and fulfilled product sales during the period through our Rotor Riot retail channel and from our B2B wholesale through Fat Shark. We also generated $112,500 related to our Rampage event, which is an annual event held in May.
Cost of Goods Sold
During the three months ended June 30, 2024, we incurred cost of goods sold of $1,022,684 compared to $0 during the three months ended June 30, 2023, resulting in an increase of $1,022,684 or 100%. Similar to revenues, we did not incur any cost of goods sold until the closing of the acquisitions on February 16, 2024. Cost of goods sold primarily relate to product costs from our sales, but also include certain shipping and other direct product costs.
Gross Margin
During the three months ended June 30, 2024, our gross margin was $388,440 compared to $0 during the three months ended June 30, 2023, resulting in an increase of $388,440 or 100%. Our gross margin, as a percentage of sales, totaled 28% during the three months ended June 30, 2024, compared to 0% during the three months ended June 30, 2023. We anticipate our gross margin to fluctuate period to period depending on certain promotions and products that are sold during the period and the margins we generated during the quarter are in line with our expectations and normal operating margins.
Operating Expenses
During the three months ended June 30, 2024, operations expenses totaled $213,772 compared to $0 during the three months ended June 30, 2023, resulting in an increase of $213,772 or 100%. Prior to the closing of the acquisitions in February 2024, we did not have any operations expenses. Operations expenses primarily relate to our direct operations including our warehouse personnel and warehouse expenses.
During the three months ended June 30, 2024, research and development expenses totaled $10,282 compared to $0 for the three months ended June 30, 2023, resulting in an increase of $10,282 or 100%. Prior to the closing of the acquisitions in February 2024, we did not have any research and development expenses during 2023. Research and development expense primarily relates to new product development as we continue to partner with manufacturers to bring drone component manufacturing to the United States.
During the three months ended June 30, 2024, sales and marketing expenses totaled $386,332 compared to $0 for the three months ended June 30, 2023, resulting in an increase of $386,332 or 100%. Prior to the closing of the acquisitions in February 2024, we did not have any sales and marketing expenses. Sales and marketing expenses primarily relate to advertising spend related to Rotor Riot and payroll expenses. In addition, we incurred approximately $143,000 in expenses related to our Rampage event, which is an annual event held in May.
During the three months ended June 30, 2024, general and administrative expenses totaling $1,349,587 compared to $434,917 for the three months ended June 30, 2023, resulting in an increase of $914,670 or 210%. The increase relates to stock compensation expense during quarter that we did not have in the previous year, increase in expenses related to closing the IPO including legal and accounting fees, additional transition and integration related expenses, and the costs related to operating Fat Shark and Rotor Riot.
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Net Loss
Our net loss for the three months ended June 30, 2024, totaled $1,612,238 compared to $435,298 for the three months ended June 30, 2023, resulting in an increase in net loss of $1,176,940 or 270%. The increase in net loss primarily relates to stock compensation expense taken during the period, in addition to the increase in general and administrative expenses related to closing the IPO and the increased operations and sales and marketing expenses we incurred since the acquisition from Fat Shark and Rotor Riot. This was partially offset by generating gross margin related to the revenue and cost of goods sold from sales for Fat Shark and Rotor Riot. In the third quarter of 2024, we expect that we may begin to amortize our intangibles, which will result in a non-cash charge going forward. Until we do a valuation, the amount is uncertain and the future charge may or may not be material.
Results of Operations – Six Months Ended June 30, 2024 compared to the Six Months Ended June 30, 2023
Revenue
During the six months ended June 30, 2024 we generated revenues totaling $2,030,039 compared to $0 during the six months ended June 30, 2023, representing an increase of $2,030,039 or 100%. We did not generate any revenues until the closing of the acquisitions of Fat Shark and Rotor Riot on February 16, 2024. Revenues relate to completed and fulfilled product sales during the period through our Rotor Riot retail channel and from our B2B wholesale through Fat Shark. We also generated $112,500 related to our Rampage event, which is an annual event held in May.
Cost of Goods Sold
During the six months ended June 30, 2024, we incurred cost of goods sold of $1,437,432 compared to $0 during the six months ended June 30, 2023, resulting in an increase of $1,437,432 or 100%. Similar to revenues, we did not incur any cost of goods sold until the closing of the acquisitions on February 16, 2024. Cost of goods sold primarily relate to product costs from our sales, but also include certain shipping and other direct product costs.
Gross Margin
During the six months ended June 30, 2024, our gross margin was $592,607 compared to $0 during the six months ended June 30, 2023, resulting in an increase of $592,607 or 100%. Our gross margin, as a percentage of sales, totaled 29% during the six months ended June 30, 2024, compared to 0% during the six months ended June 30, 2023. We anticipate our gross margin to fluctuate period to period depending on certain promotions and products that are sold during the period and the margins we generated during the quarter are in line with our expectations and normal operating margins.
Operating Expenses
During the six months ended June 30, 2024, operations expenses totaled $326,094 compared to $0 during the six months ended June 30, 2023, resulting in an increase of $326,094 or 100%. Prior to the closing of the acquisitions in February 2024, we did not have any operations expenses. Operations expenses primarily relate to our direct operations including our warehouse personnel and warehouse expenses.
During the six months ended June 30, 2024, research and development expenses totaled $27,078 compared to $0 for the six months ended June 30, 2023, resulting in an increase of $27,078 or 100%. Prior to the closing of the acquisitions in February 2024, we did not have any research and development expenses during 2023. Research and development expense primarily relates to new product development as we continue to partner with manufacturers to bring drone component manufacturing to the United States.
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During the six months ended June 30, 2024, sales and marketing expenses totaled $543,390 compared to $0 for the six months ended June 30, 2023, resulting in an increase of $543,390 or 100%. Prior to the closing of the acquisitions in February 2024, we did not have any sales and marketing expenses. Sales and marketing expenses primarily relate to advertising spend related to Rotor Riot and payroll expenses. In addition, we incurred approximately $143,000 in expenses related to our Rampage event, which is an annual event held in May.
During the six months ended June 30, 2024, general and administrative expenses totaling $2,353,761 compared to $1,612,440 for the six months ended June 30, 2023, resulting in an increase of $741,321 or 46%. The increase relates to increased expenses related to closing the IPO including legal and accounting fees, additional transition and integration related expenses, and the costs related to operating Fat Shark and Rotor Riot.
Net Loss
Our net loss for the six months ended June 30, 2024, totaled $2,718,240 compared to $1,613,202 for the six months ended June 30, 2023, resulting in an increase in net loss of $1,105,038 or 69%. The increase in net loss primarily relates the increase in general and administrative expenses related to closing the IPO with additional increase in expenses for operations and sales and marketing expenses we incurred since the acquisition from Fat Shark and Rotor Riot. This was partially offset by generating gross margin related to the revenue and cost of goods sold from sales for Fat Shark and Rotor Riot. In the third quarter of 2024, we expect that we may begin to amortize our intangibles, which will result in a non-cash charge going forward. Until we do a valuation, the amount is uncertain and the future charge may or may not be material.
Cash Flow Analysis
Prior to the closing of our IPO and the acquisitions of Fat Shark and Rotor Riot, we did not have any cash inflows from operations and all cash outflows related to our activities related to our IPO. Our future cash flows from operating activities will be significantly impacted by revenues received, our investment in sales and marketing to drive growth, and general and administrative expenses related to operating a public company. Our ability to meet future liquidity needs will be driven by our operating performance and the extent of continued investment in our operations. Failure to generate sufficient revenues and related cash flows could have a material adverse effect on our ability to meet our liquidity needs and achieve our business objectives.
Operating Activities
Net cash used in operating activities was $2,181,840 during the six months ended June 30, 2024, compared to net cash used in operating activities of $1,022,861 during the six months ended June 30, 2023, representing an increase of $1,158,979 or 113%. This increase in net cash used primarily resulted from our increase in net loss of $1,105,038 and an increase in prepaid expenses of $253,424, other assets of $173,054 and non-cash expenses of $158,206, offset by a decrease in inventory of $152,566 and an increase in accounts payable and accrued expenses of $417,478.
Investing Activities
Net cash used in investing activities was $852,801 during the six months ended June 30, 2024 compared to net cash used in investing activities of $4,837 during the six months ended June 30, 2023, representing an increase of $847,964 or 100%. This increase in net cash used related to the $1,000,000 of cash used in the Purchase Agreement related to Fat Shark and Rotor Riot, offset by $147,199 in cash acquired as compared to $4,837 used for purchase of computer equipment during 2023.
Financing Activities
Net cash provided by financing activities totaled $4,362,313 during the six months ended June 30, 2024, compared to net cash used in financing activities of $223,579 during the six months ended June 30, 2023, resulting in an increase in net cash provided by financing activities of $4,585,892. The increase primarily relates to proceeds received from our IPO of $5,000,000, offset by change in deferred offering costs and other IPO related expenses of $414,108.
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Liquidity and Capital Resources
As of June 30, 2024, we had current assets totaling $5,116,963 primarily consisting of cash balances of $2,222,445, inventory of $1,638,038 and prepaid expenses and deposits for inventory of $1,074,403. Our current liabilities as of June 30, 2024 totaled $931,200, primarily consisting of accounts payable and accrued expenses of $786,598 and customer deposits and other current liabilities of $144,602. Our net working capital as of June 30, 2024 was $4,185,763.
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 cash payment and other expenses related to the IPO, we retained approximately $2.9 million in net proceeds.
As of August 14, 2024, we have approximately $1.8 million in cash. 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. We do not anticipate any significant cost increases post the Fat Shark and Rotor Riot and with consideration of the combined companies’ net low and cash position, we expect we will have sufficient working capital to support our operations for at least 12 months.
As described in Note 14 of our financial statements, we issued the New Notes following our agreement with Red Cat on the Working Capital Adjustment. We will need to either (a) raise additional capital, (b) refinance the New Notes, (c) seek an extension of the maturity date of the Notes, or (d) explore the conversion or exchange of the New Notes into equity, which will result in dilution to our shareholders. If we are unable to raise capital or explore such other options when needed or on acceptable terms, we may default under the obligation pursuant to the New Notes, or be forced to delay, reduce or eliminate certain operational efforts.
Critical Accounting Policies and Estimates
Our financial statements and accompanying notes have been prepared in accordance with GAAP applied on a consistent basis. The preparation of financial statements in conformity with GAAP requires management to make estimates and assumptions that affect the reported amounts of assets and liabilities, the disclosure of contingent assets and liabilities at the date of the financial statements and the reported amounts of revenues and expenses during the reporting periods.
We regularly evaluate the accounting policies and estimates that we use to prepare our financial statements. A complete summary of these policies is included in the notes to our financial statements. In general, management’s estimates are based on historical experience, on information from third party professionals, and on various other assumptions that are believed to be reasonable under the facts and circumstances. Actual results could differ from those estimates made by management.
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Fair value of assets acquired and liabilities assumed in business combination
The Fat Shark and Rotor Riot acquisitions are accounted for as a business combination under ASC 805. We recognized the assets acquired and liabilities assumed at fair value as of the date of acquisition. We have not yet completed our evaluation of the fair value for determining the unallocated purchase price between goodwill and other intangible assets. Such amounts are subject to adjustment during the one-year measurement period. The fair value will be determined based on assumptions used in valuations and estimates determined by management, which are subjective.
Impairment of goodwill and long-lived assets
Goodwill represents the future economic benefit arising from other assets acquired in an acquisition that are not individually identified and separately recognized. Goodwill represents costs in excess of fair values assigned to the underlying identifiable net assets of acquired businesses. Intangible assets from acquired business are recognized at fair value on the acquisition date. We are continuing our evaluation of the fair value of the assets acquired and liabilities assumed from the Fat Shark and Rotor Riot acquisition, and we have not yet determined the unallocated purchase price between goodwill and other intangible assets. Goodwill is tested for impairment at least annually at the reporting unit level or whenever events or changes in circumstances indicate that goodwill might be impaired.
Valuation of Inventory
Our policy for valuation of inventory requires us to evaluate the net realizable value of our inventory using various reference measures including current product selling prices, as well as evaluating for excess quantities and obsolescence. We may be required to record inventory write-downs if actual inventory values are less favorable than those estimates by management.
Stock Based Compensation
Certain employees have received grants of common shares in our company. These awards are accounted for in accordance with guidance prescribed for accounting for equity-based compensation. Based on this guidance and the terms of the awards, the awards are equity classified.
The fair value of each award is determined using the Black-Scholes option-pricing model which values options based on the stock price at the grant date, the expected life of the option, the estimated volatility of the stock, and the risk-free interest rate over the expected life of the option. The expected volatility was determined considering comparable companies historical stock prices as a peer group for the fiscal year the grant occurred and prior fiscal years for a period equal to the expected life of the option. The risk-free interest rate was the rate available from the St. Louis Federal Reserve Bank with a term equal to the expected life of the option. The expected life of the option was estimated based on a mid-point method calculation.
In addition, the Company issued shares of our common stock in 2023 to consultants for services performed. Prior to our IPO in February 2024, we were a private company with no active public market for our common stock. Therefore, we have periodically determined the overall value of our company and the estimated per share fair value of our common equity at their various dates and valuations based on a per share valuation using the private funding transactions as an estimate. These values and estimates are subjective.
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.
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| 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 June 30, 2024, were not effective to ensure that information required to be disclosed by us in reports that we file or submit under the Exchange Act is recorded, processed, summarized, and reported within the time periods specified in the SEC’s rules and forms because of a material weakness in the Company’s internal control over financial reporting. Specifically, the Company did not maintain effective controls, segregation of duties, and procedures to support the identification of, accounting for, and the evaluation and disclosure of certain transactions, as limited individuals, either the Principal Executive Officer or Principal Financial Officer, initiates all transactions and they also review, evaluate, and approve these same transactions.
Changes in Internal Control Over Financial Reporting
During the six months ended June 30, 2024, we have:
| · | Continued to strengthen our internal policies, processes, and reviews, including drafting of related documentation thereof; | |
| · | Engaged outside consultants to ensure that appropriate level of knowledge and experience is applied based on the risk and complexity of the transactions and tasks under review; | |
| · | Hired additional accounting staff to provide additional segregation of duties within accounting functions; | |
| · | Started internal control documentation along with the engagement of outside consultants to assist in the design, implementation, and documentation of internal controls to address relevant risks; | |
| · | Implemented the initial phase of an ERP and financial accounting system and added additional systematic internal controls and timely recording of transactions. We will continue to build out and expand the functionality of our ERP system and build in additional automation and controls. |
The process of implementing an effective financial reporting system is a continuous effort that requires us to anticipate and react to changes in our business and the economic and regulatory environments and to expend significant resources to maintain a financial reporting system that is adequate to satisfy our reporting obligations. As we continue to evaluate and take actions to improve our internal control over financial reporting, we may take additional actions to address control deficiencies or modify certain of the remediation measures described above.
While progress has been made to enhance our internal control over financial reporting, we are still in the process of implementing these processes, procedures and controls. Additional time is required to complete implementation and to assess and ensure the sustainability of these procedures. There have been no changes in our internal control over financial reporting (as defined in Rules 13a-15(f) and 15d-15(f) of the Exchange Act) during the six months ended June 30, 2024 that have materially affected, or are reasonably likely to materially affect, our internal control over financial reporting, other than the activities described above.
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PART II – OTHER INFORMATION
| Item 1. | Legal Proceedings |
From time to time, we may become involved in legal proceedings arising in the ordinary course of our business. We are not currently aware of any such proceedings or claims that we believe will have, individually or in the aggregate, a material adverse effect on our business, financial condition or results of operations.
| Item 1A. | Risk Factors |
In addition to the information set forth in this Form 10-Q, you should carefully consider the risk factors disclosed under the heading “Risk Factors” in Part I, Item 1A of our Annual Report on Form 10-K for the year ended December 31, 2023.
| Item 2. | Unregistered Sales of Equity Securities and Use of Proceeds |
On April 30, 2024, the Company issued 937,249 of restricted shares of our common stock to our executive officers and board members under our 2022 Equity Incentive Plan. The issuance was exempt from registration under Section 3(a)(9) of the Securities Act and Rule 506(b) thereunder.
On May 2, 2024, the Company issued 40,650 of restricted shares of our common stock to our chief executive officer under our 2022 Equity Incentive Plan. The issuance was exempt from registration under Section 3(a)(9) of the Securities Act. We do not anticipate any significant cost increases post the
On May 17, 2024, the Company issued 75,000 shares of our common stock to an accredited investor in connection with a conversion of 15 shares of our Series B Convertible Preferred Stock. The issuance was exempt from registration under Section 3(a)(9) of the Securities Act.
On June 13, 2024, the Company issued 25,000 shares of our common stock to an accredited investor in connection with a conversion of 5 shares of our Series B Convertible Preferred Stock. The issuance was exempt from registration under Section 3(a)(9) of the Securities Act.
Use of Proceeds
On February 13, 2024, the SEC declared effective our registration statement on Form S-1 (File No. 333-270519), as amended, filed in connection with our IPO. On February 16, 2024, we closed our IPO in which we sold 1,250,000 shares of our common stock, par value $0.01 per share (the “Shares”) at a public offering price of $4.00 per share, resulting in net proceeds of $4.5 million after deducting offering costs, underwriting discounts, and other commissions. We incurred and paid additional direct offering costs prior to the close of the IPO of $0.1 million during the 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.
There has been no material change in the planned use of proceeds from our IPO from that described in the prospectus dated February 16, 2024, filed with the SEC pursuant to Rule 424(b)(1) under the Securities Act. As described in such prospectus, we have used IPO proceeds to pay $1.0 million to Red Cat related to the business combination and acquisition of Fat Shark and Rotor Riot and the remaining amount will be used for working capital and general corporate purposes.
Issuer Purchases of Equity Securities
We did not repurchase any of our equity securities during the six months ended June 30, 2024.
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| Item 3. | Defaults Upon Senior Securities |
| None. |
| Item 4. | Mine Safety Disclosures |
None.
| Item 5. | Other Information |
During the quarter ended June 30, 2024, 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
| Incorporated by Reference | ||||||||||
|
Exhibit No. |
Description |
Filed/Furnished Herewith |
Form |
Exhibit No. |
Filing Date | |||||
| 1.1 | Form of Underwriting Agreement, dated February 14, 2024, by and between Unusual Machines, Inc. and Dominari Securities, LLC + | 8-K | 1.1 | 2/16/24 | ||||||
| 2.1 | Agreement and Plan of Merger by and between Unusual Machines, Inc., a Puerto Rico corporation and Unusual Machines, Inc., a Nevada corporation | 8-K | 2.1 | 4/23/24 | ||||||
| 3.1 | Articles of Incorporation | 8-K | 3.1 | 4/23/24 | ||||||
| 3.1(a) | Certificate of Designations, Preferences and Rights of the Series A Convertible Preferred Stock | 8-K | 3.1 | 7/22/24 | ||||||
| 3.2 | Bylaws | 8-K | 3.2 | 4/23/24 | ||||||
| 3.3 | Certificate of Designation of Series B Convertible Preferred Stock | 8-K | 3.3 | 4/23/24 | ||||||
| 3.4 | Form of Common Stock Certificate | 8-K | 3.4 | 4/23/24 | ||||||
| 4.1 | Form of 8% Promissory Note + | 8-K | 4.1 | 7/22/24 | ||||||
| 10.1 | Management Services Agreement # | 8-K | 10.1 | 5/6/24 | ||||||
| 10.2 | Form of Restricted Stock Agreement | 8-K | 10.2 | 5/6/24 | ||||||
| 10.3 | Form of Exchange Agreement + | 8-K | 10.1 | 7/22/24 | ||||||
| 10.4 | Form of Closing Date working Capital Agreement and Consent + | 8-K | 10.2 | 7/22/24 | ||||||
| 31.1 | Certification of Principal Executive Officer (302) | Filed | ||||||||
| 31.2 | Certification of Principal Financial Officer (302) | Filed | ||||||||
| 32.1 | Certification of Principal Executive Officer (906) | Furnished* | ||||||||
| 32.2 | Certification of Principal Financial Officer (906) | Furnished* | ||||||||
| 101.INS | Inline XBRL Instance Document | Filed | ||||||||
| 101.SCH | Inline XBRL Taxonomy Extension Schema | Filed | ||||||||
| 101.CAL | Inline XBRL Taxonomy Extension Calculation Linkbase | Filed | ||||||||
| 101.DEF | Inline XBRL Taxonomy Extension Definition Linkbase | Filed | ||||||||
| 101.LAB | Inline XBRL Taxonomy Extension Label Linkbase | Filed | ||||||||
| 101.PRE | Inline XBRL Taxonomy Extension Presentation Linkbase | Filed | ||||||||
| 104 | Cover Page Interactive Data File (formatted as inline XBRL and contained in Exhibit 101) | Filed | ||||||||
| + | Certain schedules, appendices and exhibits to this agreement have been omitted in accordance with Item 601(b)(2) of Regulation S-K. A copy of any omitted schedule and/or exhibit will be furnished supplementally to the SEC Staff upon request. |
| # | Indicates management contract or compensatory plan, contract or agreement. |
| * | This exhibit is being furnished rather than filed and shall not be deemed incorporated by reference into any filing, in accordance with Item 601 of Regulation S-K. |
| 35 |
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: August 14, 2024
| 36 |
Exhibit 31.1
CERTIFICATION OF PRINCIPAL EXECUTIVE OFFICER
PURSUANT TO RULES 13a-14(a) OR 15D-14(a)
UNDER THE SECURITIES EXCHANGE ACT OF 1934,
AS ADOPTED PURSUANT TO SECTION 302 OF
THE SARBANES-OXLEY ACT OF 2002
I, Allan Evans, certify that:
1. I have reviewed this Quarterly Report on Form 10-Q for the period ended June 30, 2024 of Unusual Machines, Inc.
2. Based on my knowledge, this report does not contain any untrue statement of a material fact or omit to state a material fact necessary to make the statements made, in light of the circumstances under which such statements were made, not misleading with respect to the period covered by this report;
3. Based on my knowledge, the financial statements, and other financial information included in this report, fairly present in all material respects the financial condition, results of operations and cash flows of the registrant as of, and for, the periods presented in this report;
4. The registrant's other certifying officer(s) and I are responsible for establishing and maintaining disclosure controls and procedures (as defined in Exchange Act Rules 13a-15(e) and 15d-15(e)) and internal control over financial reporting (as defined in Exchange Act Rules 13a-15(f) and 15d-15(f)) for the registrant and have:
a) Designed such disclosure controls and procedures, or caused such disclosure controls and procedures to be designed under our supervision, to ensure that material information relating to the registrant, including its subsidiaries, is made known to us by others within those entities, particularly during the period in which this report is being prepared;
b) (Paragraph omitted pursuant to SEC Release Nos. 33-8238/34-47986 and 33-8392/34-49313);
c) Evaluated the effectiveness of the registrant's disclosure controls and procedures and presented in this report our conclusions about the effectiveness of the disclosure controls and procedures, as of the end of the period covered by this report based on such evaluation; and
d) Disclosed in this report any change in the registrant's internal control over financial reporting that occurred during the registrant's most recent fiscal quarter (the registrant's fourth fiscal quarter in the case of an annual report) that has materially affected, or is reasonably likely to materially affect, the registrant's internal control over financial reporting.
5. The registrant's other certifying officer(s) and I have disclosed, based on our most recent evaluation of internal control over financial reporting, to the registrant's auditors and the audit committee of the registrant's board of directors (or persons performing the equivalent functions):
a) All significant deficiencies and material weaknesses in the design or operation of internal control over financial reporting which are reasonably likely to adversely affect the registrant's ability to record, process, summarize and report financial information; and
b) Any fraud, whether or not material, that involves management or other employees who have a significant role in the registrant's internal control over financial reporting.
August 14, 2024
/s/ Allan Evans
Allan Evans
Chief Executive Officer
(Principal Executive Officer)
Exhibit 31.2
CERTIFICATION OF PRINCIPAL FINANCIAL OFFICER
PURSUANT TO RULES 13a-14(a) OR 15D-14(a)
UNDER THE SECURITIES EXCHANGE ACT OF 1934,
AS ADOPTED PURSUANT TO SECTION 302 OF
THE SARBANES-OXLEY ACT OF 2002
I, Brian Hoff, certify that:
1. I have reviewed this Quarterly Report on Form 10-Q for the period ended June 30, 2024 of Unusual Machines, Inc.
2. Based on my knowledge, this report does not contain any untrue statement of a material fact or omit to state a material fact necessary to make the statements made, in light of the circumstances under which such statements were made, not misleading with respect to the period covered by this report;
3. Based on my knowledge, the financial statements, and other financial information included in this report, fairly present in all material respects the financial condition, results of operations and cash flows of the registrant as of, and for, the periods presented in this report;
4. The registrant's other certifying officer(s) and I are responsible for establishing and maintaining disclosure controls and procedures (as defined in Exchange Act Rules 13a-15(e) and 15d-15(e)) and internal control over financial reporting (as defined in Exchange Act Rules 13a-15(f) and 15d-15(f)) for the registrant and have:
a) Designed such disclosure controls and procedures, or caused such disclosure controls and procedures to be designed under our supervision, to ensure that material information relating to the registrant, including its subsidiaries, is made known to us by others within those entities, particularly during the period in which this report is being prepared;
b) (Paragraph omitted pursuant to SEC Release Nos. 33-8238/34-47986 and 33-8392/34-49313);
c) Evaluated the effectiveness of the registrant's disclosure controls and procedures and presented in this report our conclusions about the effectiveness of the disclosure controls and procedures, as of the end of the period covered by this report based on such evaluation; and
d) Disclosed in this report any change in the registrant's internal control over financial reporting that occurred during the registrant's most recent fiscal quarter (the registrant's fourth fiscal quarter in the case of an annual report) that has materially affected, or is reasonably likely to materially affect, the registrant's internal control over financial reporting.
5. The registrant's other certifying officer(s) and I have disclosed, based on our most recent evaluation of internal control over financial reporting, to the registrant's auditors and the audit committee of the registrant's board of directors (or persons performing the equivalent functions):
a) All significant deficiencies and material weaknesses in the design or operation of internal control over financial reporting which are reasonably likely to adversely affect the registrant's ability to record, process, summarize and report financial information; and
b) Any fraud, whether or not material, that involves management or other employees who have a significant role in the registrant's internal control over financial reporting.
August 14, 2024
/s/ Brian Hoff
Brian Hoff
Chief Financial Officer
(Principal Financial Officer)
Exhibit 32.1
CERTIFICATION PURSUANT TO 18 U.S.C. SECTION 1350,
AS ADOPTED PURSUANT TO SECTION 906
OF THE SARBANES-OXLEY ACT OF 2002
In connection with the Quarterly Report of Unusual Machines, Inc. (the “Company”) on Form 10-Q, for the period ended June 30, 2024, as filed with the Securities and Exchange Commission, I, Allan Evans, Chief Executive Officer of the Company, certify, pursuant to 18 U.S.C. Section 1350, as adopted pursuant to Section 906 of the Sarbanes-Oxley Act of 2002, that:
(1)The Quarterly Report fully complies with the requirements of section 13(a) or 15(d) of the Securities Exchange Act of 1934; and
(2)The information contained in the Report fairly presents, in all material respects, the financial condition and result of operations of the Company.
August 14, 2024
/s/ Allan Evans
Allan Evans
Chief Executive Officer
(Principal Executive Officer)
Exhibit 32.2
CERTIFICATION PURSUANT TO 18 U.S.C. SECTION 1350,
AS ADOPTED PURSUANT TO SECTION 906
OF THE SARBANES-OXLEY ACT OF 2002
In connection with the Quarterly Report of Unusual Machines, Inc. (the “Company”) on Form 10-Q, for the period ended June 30, 2024, as filed with the Securities and Exchange Commission, I, Brian Hoff, Chief Financial Officer of the Company, certify, pursuant to 18 U.S.C. Section 1350, as adopted pursuant to Section 906 of the Sarbanes-Oxley Act of 2002, that:
(1)The Quarterly Report fully complies with the requirements of section 13(a) or 15(d) of the Securities Exchange Act of 1934; and
(2)The information contained in the Report fairly presents, in all material respects, the financial condition and result of operations of the Company.
August 14, 2024
/s/ Brian Hoff
Brian Hoff
Chief Financial Officer
(Principal Financial Officer)
Consolidated Condensed Balance Sheets (Parenthetical) - $ / shares |
Jun. 30, 2024 |
Dec. 31, 2023 |
|---|---|---|
| Common stock, par value | $ 0.01 | $ 0.01 |
| Common stock, shares authorized | 500,000,000 | 500,000,000 |
| Common stock, shares issued | 10,411,240 | 3,217,255 |
| Common stock, shares outstanding | 10,411,240 | 3,217,255 |
| Series B Preferred Stock [Member] | ||
| Preferred stock, par value | $ 0.01 | $ 0.01 |
| Preferred stock, shares authorized | 10,000,000 | 10,000,000 |
| Preferred stock, shares Issued | 50 | 190 |
| Preferred stock, shares outstanding | 50 | 190 |
Consolidated Condensed Statement of Operations (Unaudited) - USD ($) |
3 Months Ended | 6 Months Ended | ||
|---|---|---|---|---|
Jun. 30, 2024 |
Jun. 30, 2023 |
Jun. 30, 2024 |
Jun. 30, 2023 |
|
| Income Statement [Abstract] | ||||
| Revenues | $ 1,411,124 | $ 0 | $ 2,030,039 | $ 0 |
| Cost of goods sold | 1,022,684 | 0 | 1,437,432 | 0 |
| Gross Margin | 388,440 | 0 | 592,607 | 0 |
| Operating Expenses | ||||
| Operations | 213,772 | 0 | 326,094 | 0 |
| Research and development | 10,282 | 0 | 27,078 | 0 |
| Sales and marketing | 386,332 | 0 | 543,390 | 0 |
| General and administrative | 1,349,587 | 434,917 | 2,353,761 | 1,612,439 |
| Depreciation and amortization | 171 | 381 | 342 | 763 |
| Total operating expenses | 1,960,144 | 435,298 | 3,250,664 | 1,613,202 |
| Operating loss | (1,571,704) | (435,298) | (2,658,057) | (1,613,202) |
| Other Expense | ||||
| Interest expense | 40,534 | 0 | 60,183 | 0 |
| Other Expense | 40,534 | 0 | 60,183 | 0 |
| Net loss | $ (1,612,238) | $ (435,298) | $ (2,718,240) | $ (1,613,202) |
| Net loss per share attributable to common stockholders | ||||
| Basic | $ (0.16) | $ (0.13) | $ (0.34) | $ (0.47) |
| Diluted | $ (0.16) | $ (0.13) | $ (0.34) | $ (0.47) |
| Weighted average common shares outstanding | ||||
| Basic | 10,040,741 | 3,384,837 | 8,053,299 | 3,398,470 |
| Diluted | 10,040,741 | 3,384,837 | 8,053,299 | 3,398,470 |
Pay vs Performance Disclosure - USD ($) |
3 Months Ended | 6 Months Ended | ||||
|---|---|---|---|---|---|---|
Jun. 30, 2024 |
Mar. 31, 2024 |
Jun. 30, 2023 |
Mar. 31, 2023 |
Jun. 30, 2024 |
Jun. 30, 2023 |
|
| Pay vs Performance Disclosure [Table] | ||||||
| Net Income (Loss) | $ (1,612,238) | $ (1,106,002) | $ (435,298) | $ (1,177,904) | $ (2,718,240) | $ (1,613,202) |
Insider Trading Arrangements |
3 Months Ended |
|---|---|
Jun. 30, 2024 | |
| Insider Trading Arrangements [Line Items] | |
| Rule 10b5-1 Arrangement Adopted [Flag] | false |
| Non-Rule 10b5-1 Arrangement Adopted [Flag] | false |
| Rule 10b5-1 Arrangement Terminated [Flag] | false |
| Non-Rule 10b5-1 Arrangement Terminated [Flag] | false |
Organization and nature of business |
6 Months Ended |
|---|---|
Jun. 30, 2024 | |
| Organization, Consolidation and Presentation of Financial Statements [Abstract] | |
| Organization and nature of business | 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).
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Summary of significant accounting policies |
6 Months Ended |
|---|---|
Jun. 30, 2024 | |
| Accounting Policies [Abstract] | |
| Summary of significant accounting policies | Note 2 – Summary of significant accounting policies
Principles of Consolidation
The consolidated financial statements include accounts of the Company and its wholly owned subsidiaries, Fat Shark and Rotor Riot since the acquisitions on February 16, 2024. Intercompany transactions and balances have been eliminated upon consolidation.
Unaudited interim financial information
The consolidated condensed financial statements of the Company included herein have been prepared, without audit, pursuant to the rules and regulations of the Securities and Exchange Commission (the “SEC”). Certain information and footnote disclosures normally included in financial statements prepared in accordance with GAAP have been condensed or omitted from this Quarterly Report, as is permitted by such rules and regulations. Accordingly, these condensed financial statements should be read in conjunction with the financial statements and notes thereto included in the Company’s Annual Report on Form 10-K/A, for the year ended December 31, 2023. The results for any interim period are not necessarily indicative of results for any future period.
Use of Estimates
The preparation of financial statements in conformity with GAAP requires management to make estimates and assumptions that affect the reported amounts of assets and liabilities, disclosures of contingent assets and liabilities at the date of the financial statements, and the reported amounts of revenues and expenses during the reporting period. Accordingly, actual results could differ from those estimates, and such results could be material.
The financial statements include some amounts that are based on management's best estimates and judgments. Significant estimates reflected in these financial statements include those used to (i) determine stock-based compensation, (ii) the fair value of assets acquired and liabilities assumed in business combinations and the value of shares issued as consideration, (iii) reserves and allowances related to accounts receivable, inventory and sales, (iv) the evaluation of long-term assets, including goodwill, for impairment, (v) the fair value of lease liabilities and related right of use assets, and (vi) the warranty liability.
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 $250,000. The Company’s cash balance may at times exceed these limits. At June 30, 2024 and December 31, 2023, the Company had approximately $1.7 million and $0.6 million, respectively, in excess of federally insured limits. The Company continually monitors its positions with, and the credit quality of the financial institutions with which it invests.
Accounts Receivable, net
The Company carries its accounts receivable at invoiced amounts. Upon the closing of the acquisitions in February 2024 when we acquired accounts receivable, the Company adopted ASC 326, Financial Instruments – Credit Losses, which the Company evaluates all credit losses as of the reporting date. On a periodic basis, the Company evaluates its accounts receivable and establishes an allowance for doubtful accounts based on a history of past write-offs and collections and current credit conditions. Accounts are written-off as uncollectible at the discretion of management. At June 30, 2024 and December 31, 2023, the Company considers accounts receivable to be fully collectible; accordingly, no allowance for doubtful accounts has been established.
Inventory
Inventories, which consist of finished goods, are stated at the lower of cost or net realizable value, and are measured using the first-in, first-out method. Cost components include direct materials and direct labor, as well as in-bound freight. At each balance sheet date, the Company evaluates the net realizable value of its inventory using various reference measures including current product selling prices, as well as evaluating for excess quantities and obsolescence.
Deferred offering costs
The Company deferred direct incremental costs associated with its IPO. The Company capitalized $127,687 and $70,268 during the six months ended June 30, 2024 and 2023 prior to the IPO, respectively and the deferred offering costs were $512,758 as of December 31, 2023. Deferred offering costs consist of primarily legal, advisory, and consulting fees incurred in connection with the formation and preparation of the IPO. After consummation of the IPO, total deferred offering costs of $640,445 were recorded as a reduction to additional paid-in capital generated as a result of the offering.
Property and equipment, net
Property and equipment is stated at cost, net of accumulated depreciation. Depreciation is provided utilizing the straight-line method over the estimated useful lives for owned assets, ranging from two to five years.
Leases
The Company has adopted Accounting Standards Codification (ASC) 842, “Leases” which requires the recognition of assets and liabilities associated with lease agreements. As of February 16, 2024, the date of the acquisition, the Company recognized a lease liability obligation of $378,430 and a right-of-use asset for the same amount related to the 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. Lease terms may include options to extend or terminate a lease when they are reasonably certain to occur.
Goodwill and Long-lived Assets
Goodwill represents the future economic benefit arising from other assets acquired in an acquisition that are not individually identified and separately recognized. The Company tests goodwill for impairment in accordance with the provisions of ASC 350, Intangibles – Goodwill and Other, (“ASC 350”). Goodwill is tested for impairment at least annually at the reporting unit level or whenever events or changes in circumstances indicate that goodwill might be impaired. ASC 350 provides that an entity has the option to first assess qualitative factors to determine whether the existence of events or circumstances leads to a determination that it is more likely than not that the fair value of a reporting unit is less than its carrying amount. If, after assessing the totality of events or circumstances, an entity determines it is not more likely than not that the fair value of a reporting unit is less than its carrying amount, then additional impairment testing is not required. However, if an entity concludes otherwise, then it is required to perform an impairment test. The impairment test involves comparing the estimated fair value of a reporting unit with its book value, including goodwill. If the estimated fair value exceeds book value, goodwill is considered not to be impaired. If, however, the fair value of the reporting unit is less than book value, then an impairment loss is recognized in an amount equal to the amount that the book value of the reporting unit exceeds its fair value, not to exceed the total amount of goodwill allocated to the reporting unit.
The estimate of fair value of a reporting unit is computed using either an income approach, a market approach, or a combination of both. Under the income approach, we utilize the discounted cash flow method to estimate the fair value of a reporting unit. Significant assumptions inherent in estimating the fair values include the estimated future cash flows, growth assumptions for future revenues (including gross margin, operating expenses, and capital expenditures), and a rate used to discount estimated future cash flow projections to their present value based on estimated weighted average cost of capital (i.e., the selected discount rate). Management’s assumptions are based on historical data, supplemented by current and anticipated market conditions, estimated growth rates, and management’s plans. Under the market approach, fair value is derived from metrics of publicly traded companies or historically completed transactions of comparable businesses. The selection of comparable businesses is based on the markets in which the reporting units operate and consider risk profiles, size, geography, and diversity of products and services.
The Company reviews long-lived assets, including tangible assets and other intangible assets with definitive lives, for impairment whenever events or changes in circumstances indicate that the asset’s carrying amount may not be recoverable. The Company conducts its long-lived asset impairment analyses in accordance with ASC 360, “Impairment or Disposal of Long-Lived Assets”. ASC 360 requires the Company to group assets and liabilities at the lowest level for which identifiable cash flows are largely independent of the cash flows of other assets and liabilities and evaluate the asset group against the sum of the undiscounted future cash flows. If the undiscounted cash flows do not indicate the carrying amount of the asset group is recoverable, an impairment charge is measured as the amount by which the carrying amount of the asset group exceeds its fair value based on discounted cash flow analysis or appraisals.
Fair Values, Inputs and Valuation Techniques for Financial Assets and Liabilities, and Related Disclosures
The fair value measurements and disclosure guidance defines fair value and establishes a framework for measuring fair value. Fair value is defined as the price that would be received to sell an asset or paid to transfer a liability (an exit price) in an orderly transaction between market participants at the measurement date. In accordance with this guidance, the Company has categorized its recurring basis financial assets and liabilities into a three-level fair value hierarchy based on the priority of the inputs to the valuation technique.
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, receivables, current assets, accounts payable, accrued expenses and debt. The carrying amounts of cash, receivables, current assets, accounts payable, accrued expenses and current debt approximates fair value due to the short-term nature of these instruments.
Warranty Liability
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 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 $66,025 as of June 30, 2024, which was acquired as a part of the acquisitions in February 2024.
Rotor Riot does not provide any warranty of any kind for any of the equipment it sells or otherwise distributes. Consumers assume all risk for any products purchased or received from Rotor Riot.
Revenue Recognition
The Company recognizes revenue in accordance with ASC 606, “Revenue from Contracts with Customers”, issued by the Financial Accounting Standards Board (“FASB”). This standard includes a comprehensive evaluation of factors to be considered regarding revenue recognition including:
Step 1: Identify the contract with a customer; Step 2: Identify the performance obligations in the contract; Step 3: Determine the transaction price; Step 4: Allocate the transaction price to the performance obligations in the contract; and Step 5: Recognize revenue when (or as) the Company satisfies a performance obligation at a point in time.
The Company receives revenues from the sale of products from both retail distributers and individual consumers. Sales revenue is recognized when the products are shipped and the price is fixed or determinable, no other significant obligations of the Company exist and collectability is probable. Revenue is recognized when the title to the products has been passed to the customer, which is the date the products are shipped to the customer. This is the date the performance obligation has been met.
Deferred Revenue
Deferred revenue relates to (i) orders placed, but not yet fulfilled and (ii) customer tickets purchased related to the Company’s Rampage event, in which tickets are sold in advance and recognized when the event takes place. All deferred revenue is expected to be recognized within one year. Deferred revenue related to orders placed, but not yet fulfilled totaled $82,120 and $0 as of June 30, 2024 and December 31, 2023, respectively.
Cost of Goods Sold
Cost of goods sold includes inventory costs, direct packaging costs and production related depreciation, if any.
Shipping and Handling Costs
Shipping and handling costs incurred for product shipped to customers are included in general and administrative expenses and amounted to $74,634 since February 16, 2024, the date of the acquisition, through June 30, 2024. The Company did not incur and shipping and handling costs in the six months ended June 30, 2023. Shipping and handling costs charged to customers are included in sales.
Research and Development
Research and development expenses include payroll, employee benefits, and other headcount-related expenses associated with product development. Research and development expenses also include third-party development costs, materials, and a proportionate share of overhead costs.
Income Taxes
The Company accounts for income taxes using an asset and liability approach, which requires recognition of deferred tax assets and liabilities for the expected future tax consequences of events. A valuation allowance is established to reduce deferred tax assets to their estimated realizable value when, in the opinion of management, it is more likely than not that some portion or all of the deferred income tax assets will not be realizable in the future.
The Company recognizes benefits of uncertain tax positions if it is more likely than not that such positions will be sustained upon examination based solely on their technical merits, as the largest amount of benefit that is more likely than not to be realized upon the ultimate settlement. The Company’s policy is to recognize interest and penalties related to unrecognized tax benefits as a part of income tax expense.
The Company’s current provision for the six months ending June 30, 2024 and 2023 consisted of a tax benefit against which we applied a full valuation allowance, resulting in no current provision for income taxes. Since the Company has not generated an operating profit since inception, there are no deferred tax assets other than a net operating loss carryforward offset by a valuation allowance as of June 30, 2024 and December 31, 2023.
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, term and future dividends. The Company recognizes forfeitures as they occur. The fair value of restricted stock is based on our quoted stock price or other fair value indicators on the date of grant. Compensation cost is recognized on a straight-line basis over the service period which is typically the vesting term.
Warrants
The Company accounts for warrants to purchase shares of its common stock in accordance with the guidance in ASC 480, Distinguishing Liabilities from Equity (“ASC 480”) and ASC 815, Derivatives and Hedging (“ASC 815”). The Company classifies warrants issued for the purchase of shares of its common stock as either equity or liability instruments based on an assessment of the specific terms and conditions of each respective contract. The assessment considers whether the warrants are freestanding financial instruments or embedded in a host instrument, whether the warrants meet the definition of a liability pursuant to ASC 480, whether the warrants meet the definition of a derivative under ASC 815, and whether the warrants meet all of the requirements for equity classification under ASC 815. This assessment, which requires the use of professional judgment, is conducted at the time of warrant issuance and as of each subsequent quarterly period end date while the warrants are outstanding.
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.
Basic and diluted net loss per share is calculated based on the weighted-average of common shares outstanding in accordance with FASB ASC Topic 260, Earnings per Share. Diluted net loss per share is calculated based on the weighted-average number of common shares outstanding plus the effect of dilutive potential common shares. When the Company reports a net loss, the calculation of diluted net loss per share excludes potential common shares as the effect would be anti-dilutive.
Segment Reporting
Since the acquisitions of Fat Shark and Rotor Riot, the Company operates with one reportable segment. The Company bases its reportable segment based on how our Chief Operating Decision Maker manages the business, makes resource allocations and operating decisions, and evaluates operating performance.
Recent Accounting Pronouncements
In November 2023, new accounting guidance was issued that updates reportable segment disclosure requirements by requiring disclosures of significant reportable segment expenses that are regularly provided to the Chief Operating Decision Maker (the “CODM”) and included within each reported measure of a segment's profit or loss. This new guidance also requires disclosure of the title and position of the individual identified as the CODM and an explanation of how the CODM uses the reported measures of a segment’s profit or loss in assessing segment performance and deciding how to allocate resources. The new guidance is effective for annual periods beginning after December 15, 2023, and interim periods within fiscal years beginning after December 15, 2024. The new guidance is required to be applied retrospectively to all prior periods presented in the financial statements. Early adoption is also permitted. On January 1, 2024, the Company adopted ASC 280, Segment Reporting. The Company currently operates a single segment and the Company does not anticipate any net effect related to the adoption.
In December 2023, new accounting guidance was issued related to income tax disclosures. The new guidance requires disaggregated information about a reporting entity’s effective tax rate reconciliation as well as additional information on income taxes paid. The new guidance is effective on a prospective basis for annual periods beginning after December 15, 2024. Early adoption is also permitted for annual financial statements that have not yet been issued or made available for issuance. This new guidance will likely not result in additional required disclosures when adopted.
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Acquisitions |
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| Business Combination, Asset Acquisition, and Joint Venture Formation [Abstract] | |||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||
| Acquisitions | 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 11 – Related Party Transactions for additional information). Fat Shark and Rotor Riot are in the business of designing and marketing consumer drones and first-person-view (“FPV”) goggles. Rotor Riot is also a licensed authorized reseller of consumer drones manufactured by third-parties.
The Company specializes in the production and sale of small drones and essential components and with the acquisitions of Fat Shark and Rotor Riot, it brings brand recognition and a strong curated retail channel in the FPV drone market segment. This Business Combination is a realization of the Company’s strategy to build its business both organically and through strategic acquisitions that leverage our retail business to onshore production of critical drone components. With the transition to onshoring production of drone components, the Company intends to expand into B2B channels for customers that require a domestic supply chain.
The Business Combination was based on a share purchase agreement (the “Purchase Agreement”) that was executed on November 21, 2022. From November 21, 2022 to February 16, 2024, the Purchase Agreement was subject to several amendments and subject to certain working capital adjustments. Under the terms of the Purchase Agreement, as amended, the consideration paid for the acquired assets consisted of (i) $1.0 million in cash and a cash deposit of $0.1 million made in 2022, (ii) issuance of a $4.0 million 18 month promissory note to Red Cat (see Note 8 “Debt” for further details), and (iii) the issuance of shares of the Company’s common stock, which represented approximately 48.66% of the outstanding common stock of the Company on February 16, 2024, after the effect of the issued shares (collectively the “Consideration Paid”). The Company has currently valued the Red Cat common stock at $ per share which represents the IPO price of the Company’s common stock on February 15, 2024. Accordingly, the value of the Consideration Paid is equal to $22,100,000. See Note 14, Subsequent Events, related to the working capital adjustment.
The acquisitions met the definition of a business combination under ASC 805, Business Combinations, and therefore the assets acquired and liabilities assumed are accounted for at fair value. The Company has not completed its evaluation of the fair value of assets acquired and liabilities assumed of Fat Shark and Rotor Riot for the purpose of its 2024 fiscal year financial reporting and as such has not fully determined the unallocated purchase price between goodwill and other intangible assets. Such amounts are subject to adjustment during the one-year measurement period.
The following represents the fair value allocation of Fat Shark and Rotor Riot Purchase Price:
Initial goodwill and intangible assets relate to Fat Shark and Rotor Riot being FPV market leaders and their well-known and established brands within the industry. Combining these entities and their existing customer base along with Unusual Machines’ strategy of extending to B2B sales of drone components will provide strategic advantage. The Company will evaluate the amount of goodwill and intangibles that are expected to be deductible for tax purposes once the unallocated purchase price is finalized.
The results of Fat Shark and Rotor Riot have been included in the Consolidated Financial Statements from the date of acquisition. The table below presents the results as reported by the Company and unaudited pro forma results of the Company, assuming that the acquisition of Fat Shark and Rotor Riot at the beginning of each period are as follows. The unaudited pro forma results are not necessarily indicative of what actually would have occurred had the acquisitions been in effect for the periods presented (in thousands, except per share data):
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.
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Inventories |
6 Months Ended |
|---|---|
Jun. 30, 2024 | |
| Inventory Disclosure [Abstract] | |
| Inventories | Note 4 – Inventories
Inventories, consisting solely of finished goods, totaled $1,638,038 and $0 as of June 30, 2024 and December 31, 2023, respectively. In addition, the Company had prepaid and deposits for inventory totaling $1,074,403 and $0 as of June 30, 2024 and December 31, 2023, respectively.
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Other Current Assets |
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Jun. 30, 2024 | ||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||
| Deferred Costs, Capitalized, Prepaid, and Other Assets Disclosure [Abstract] | ||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||
| Other Current Assets | Note 5 – Other Current Assets
Other current assets included as of::
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Property and Equipment, net |
6 Months Ended | |||||||||||||||||||||||||||||||||||||||||||||
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Jun. 30, 2024 | ||||||||||||||||||||||||||||||||||||||||||||||
| Property, Plant and Equipment [Abstract] | ||||||||||||||||||||||||||||||||||||||||||||||
| Property and Equipment, net | 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:
Depreciation expense totaled $342 and $762 for the six months ended June 30, 2024 and 2023, respectively.
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Operating Leases |
6 Months Ended | ||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||
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| Operating Leases | |||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||
| Operating Leases | Note 7 – Operating Leases
As identified in Note 3 “Acquisitions”, the acquired businesses, specifically Rotor Riot, has entered into a five-year operating lease for approximately 6,900 square feet of warehouse and office space in Orlando, Florida. The lease commenced in November 2023 and expires in October 2028. The Company has valued the ROUA and the associated liability, as of February 15, 2024, at $378,430. The Company has no finance leases. Operating lease expense totaled $39,429 from the date of acquisition through the period ended June 30, 2024. The following is a summary of future lease payments required under the five-year lease agreement:
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Promissory Note |
6 Months Ended |
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Jun. 30, 2024 | |
| Debt Disclosure [Abstract] | |
| Promissory Note | Note 8 – Promissory Note
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 $2.0 million. In July 2024, the Company finalized its working capital adjustment with Red Cat which increased the overall purchase price by an additional $2.0 million. The additional $2.0 million was added to the existing Note and was reflected as an adjustment to the opening purchase price and was included in the opening balance sheet as of February 16, 2024 as an increase to goodwill and intangible assets. Accordingly, the Note was amended to increase to $4.0 million. In conjunction with a private sale of Red Cat’s common stock and its promissory note to two investors, the Company issued new notes to such investors (the “New Notes”). The New Notes bear interest at 8% annually. In conjunction with the finalization of the working capital adjustment, the maturity date of the New Notes was extended to be due in full on November 30, 2025, subject to certain conditions. In the Event of Default as defined in the Promissory Note, the investors each have the right to convert the New Notes including any accrued and unpaid interest, in whole or in part, into common stock. The conversion price is calculated at a 10% discount of the average three-day volume-weighted average price (VWAP) prior to the conversion date. The balance of the Note payable was $4.0 million as of June 30, 2024. Interest expense for the six months ended June 30, 2024 was $60,183 and the Company had accrued interest of $6,677 as of June 30, 2024. See Note 14, Subsequent Events for additional information.
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Earnings Per Share and Stockholders’ Equity |
6 Months Ended |
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Jun. 30, 2024 | |
| Earnings Per Share And Stockholders Equity | |
| Earnings Per Share and Stockholders’ Equity |
Earnings per Share
Outstanding securities not included in the computation of diluted net loss per share because their effect would have been anti-dilutive include and shares of Series B Preferred Stock, as converted as of June 30, 2024 and 2023, respectively, the of stock options issued to employees as of June 30, 2024, the of common stock representative warrants issued to the underwriter associated with the February 2024 IPO and shares of common stock, as converted, associated with the Note discussed in Note 8 “Debt”.
Preferred Stock
The preferred stock par value is $. The Series B preferred stock 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. Series B preferred shares are not entitled to vote on any matters submitted to shareholders of the Company.
Subsequent to the IPO but prior to June 30, 2024, certain shareholders converted shares of Series B preferred shares into shares of common stock. The Company canceled the shares of Series B preferred shares upon the conversion.
On June 1, 2023, the Company issued an additional 50 Series B preferred shares in connection with the cancellation of 250,000 shares of common stock.
Series B preferred shares outstanding at June 30, 2024 totaled which are convertible into shares of common stock. Series B preferred shares outstanding at December 31, 2023 totaled which are convertible into shares of common stock.
See Note 14, Subsequent Events, for more information regarding the Company’s Series A Convertible Preferred Stock.
Common Stock
The common stock par value is $.
2024 Transactions
On January 2, 2024, the Company issued shares of common stock to its prior Chief Executive Officer as a part of a separation agreement and recognized compensation expense of $, which is $4 per share, the last valuation of the Company’s private placement and 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 $3,849,555. The Company incurred $510,000 direct deduction from proceeds, $127,687 in cash disbursements related to offering costs in the six months ended June 30, 2024 and $512,758 in prior year paid and deferred offering costs as of December 31, 2023 for a total of $1,150,445 offering costs, associated with the IPO which consisted of underwriter, legal, accounting, and other associated filing fees. These costs have been recorded as a reduction of the gross proceeds from the IPO in stockholder’s equity. The Company also incurred additional costs related to warrants to purchase shares of common stock issued to the underwriters as partial compensation for services rendered in connection with the IPO, which is preliminarily valued at $250,000 as of the date of the IPO using the IPO Price of $4 per share. The Company is planning to value the warrants using a Black-Scholes valuation model but has not completed this workflow. Any change to the fair value of the warrants would have no change to the Company’s financial statements since the value of the warrants would only impact the “offering costs” and thus entry would be to adjust “Additional Paid-In Capital – Common Stock” and “Additional Paid-In Capital – Warrants”. The warrants are exercisable for common stock at a price of $5.00 per share (125% of the IPO Price) at any time beginning on August 15, 2024 through and including February 16, 2029, the expiration date.
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. As agreed in the Purchase Agreement, $17.0 million of the purchase price would be issued in common stock based on the IPO price of $4.00 per share.
Subsequent to the IPO and prior to June 30, 2024, the Company issued shares of common stock related to certain shareholders converting 140 of Series B shares into common stock.
On April 30, 2024, the Company issued restricted shares of common stock to executive officers and board members of the Company. The shares of restricted stock were granted under the Company’s 2022 Equity Incentive Plan. The restricted shares issued to executive officers are subject to pro rata forfeiture through February 14, 2025.
On May 2, 2024, the Company issued an additional of restricted shares of common stock to Allan Evans, the Company’s CEO related to an agreed upon reduction of salary. The shares of restricted stock were granted under the Company’s 2022 Equity Incentive Plan.
The April 30, 2024 and May 2, 2024 shares were valued at $ and $ per share, respectively for a total of $1,174,698 to be recognized pro-rata over the vesting period which is the forfeiture period. Stock compensation expense of $346,854 was recognized during the three months ended June 30, 2024.
See Note 14, Subsequent Events, for additional information.
2023 Transactions
On March 7, 2023, the Company issued shares of common stock to an investment banking firm (“Revere”) as a fee for the termination of the January 2023 engagement with Revere. These shares were allocated by Revere to some of the Company’s existing shareholders. The Company recorded $600,000 of stock compensation expense related to the issuance of the shares valued at $ per share, which was based on the most recent private sale of common stock for the Company.
On July 10, 2023, the Company’s Board of Directors approved a 1-for-2 reverse stock split of our issued and outstanding shares of common stock. In accordance with Staff Accounting Bulletin Topic 4.C, the Company has given retroactive effect to reverse stock split. In addition and in accordance with FASB ASC 260, Earnings Per Share, the Company has retroactively adjusted the computations of basic and diluted share calculations.
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Share Based Awards |
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| Equity [Abstract] | ||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||
| Share Based Awards |
Stock Options
The Company’s 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 of awards and has an “evergreen” provision, pursuant to which the number of shares of common stock reserved for issuance pursuant to awards under such plan shall be increased on the first day of each year beginning in 2025 and ending in 2032 equal to the lesser of (a) five percent (5%) of the shares of stock outstanding (on an as converted basis) on the last day of the immediately preceding fiscal year and (b) such smaller number of shares of stock as determined by our board of directors.
On April 30, 2024, the Company’s board of directors approved the grant of stock options under the Plan to certain employees. The stock options are subject to certain vesting provisions.
The following table presents the activity for stock options outstanding:
The range of assumptions used to calculate the fair value of options granted during the six months ended June 30, 2024 was:
The Company recognized $ in stock-based compensation expense related to stock options during the six months ended June 30, 2024. As of June 30, 2024, there was $ of unrecognized stock-based compensation expense related to unvested stock options to be recognized over the remaining vesting term through 2028.
Restricted Stock
The following table presents the activity for stock options outstanding:
The Company recognized $ in stock-based compensation expense related to restricted stock during the six months ended June 30, 2024. As of June 30, 2024, there was $ of unrecognized stock-based compensation expense related to unvested restricted stock to be recognized over the remaining vesting term through February 15, 2025.
Warrants
The following table presents the activity for warrants outstanding as of June 30, 2024:
As discussed in Note 9, “Earnings Per Share and Stockholders’ Equity”, in connection with the IPO, the Company issued 62,500 representative warrants to its underwriters to purchase shares of common stock. The representative warrants have an exercise price of $5.00 or can be exercised through a cashless exercise feature. All warrants outstanding have a weighted average remaining contractual life of approximately years as of June 30, 2024.
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Related Party Transactions |
6 Months Ended |
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Jun. 30, 2024 | |
| Related Party Transactions [Abstract] | |
| Related Party Transactions | Note 11 – Related Party Transactions
In November 2022, the Company entered into the Purchase Agreement, as amended with Red Cat and Jeffrey Thompson, the Company’s former Chief Executive Officer and President and current director and also the current Chief Executive Officer of Red Cat, pursuant to which, among other things, Mr. Thompson and the Company have agreed to indemnification obligations, which shall survive for a period of nine months from February 16, 2024, subject to certain limitations, which includes a basket of $250,000 before any claim can be asserted and a cap equal to the value of 100,000 shares of our common stock owned by him to secure any indemnification obligations, which stock is our sole remedy, except for fraud. Our prior Chief Executive Officer, Mr. Brandon Torres Declet, negotiated the terms of the Purchase Agreement on an arms’ length basis with Joe Freedman who was the head of Red Cat’s Special Committee. The transaction was ultimately approved by the Company’s and Red Cat’s board of directors. On March 8, 2023, a majority of the disinterested Red Cat shareholders approved the transactions contemplated in the Purchase Agreement in a special meeting. Mr. Thompson recused himself from such vote.
In February 2024, the Company completed the acquisitions to purchase Fat Shark and Rotor Riot from Red Cat. Jeffrey Thompson is the founder and current Chief Executive Officer of Red Cat. Mr. Thompson is also the founder, prior Chief Executive Officer and current member on the Board of Directors of Unusual Machines. Prior to the acquisition, Mr. Thompson held 328,500 shares of common stock in Unusual Machines, which represented approximately 10% prior to the acquisition and IPO.
On April 30, 2024 (“Grant Date”), the Company’s board of directors approved the Company entering into a two-year Management Services Agreement (the “Agreement”) with 8 Consulting LLC (the “Consultant”) for the services of our Chief Executive Officer, Dr. Allan Evans, whereby the Consultant agreed to cause Dr. Evans to perform his services as the Company’s Chief Executive Officer and the Consultant will be compensated on behalf of Dr. Evans by the Company in connection with his performance of such services. The Agreement allows Dr. Evans to receive favorable tax benefits as a resident of the Commonwealth of Puerto Rico who will perform such services in Puerto Rico. Pursuant to the Agreement, Dr. Evans will perform the duties and responsibilities that are customary for a chief executive officer of a public company that either have revenues similar to the Company on a pro forma basis as reflected in the Prospectus filed with the SEC on February 15, 2024, or if pre-revenues, are an active and on-going business that are performing pre-revenue activities. The Consultant agreed to cause Dr. Evans, as Chief Executive Officer, (i) to undertake primary responsibility for managing all aspects of the Company and overseeing the preparation of all reports, registration statements and other filings required filed by the Company with the SEC and executing the certifications required the Sarbanes Oxley Act of 2002 and the rules of the SEC as the principal executive officer of the Company; (ii) attend investor meetings and road shows in connection with the Company’s fundraising and investor relations activities; (iii) to report to the Company’s board of directors; (iv) to perform services for such subsidiaries of the Company as may be necessary.
The Consultant receives a $250,000 fee per year payable in monthly installments. In addition, the Consultant was granted fully vested shares of restricted common stock. The fair value of the shares was $ based on the $1.20 quoted trading price on the Grant Date and will be recognized over the service period (see below). The grant of restricted common stock was made under the Company’s 2022 Equity Incentive Plan. The shares of restricted common stock are subject to pro rata forfeiture from February 14, 2024 until February 14, 2025, in the event that Dr. Evans is terminated or ends his services to the Company for any reason other than death or disability, as defined in the Internal Revenue Code. The Company and Dr. Evans previously entered into an Offer Letter dated November 27, 2023, under which he would serve as the Company’s Chief Executive Officer effective as of December 4, 2023. The Agreement terminates and replaces the Offer Letter dated November 27, 2023.
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Commitments and Contingencies |
6 Months Ended |
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Jun. 30, 2024 | |
| Commitments and Contingencies Disclosure [Abstract] | |
| Commitments and Contingencies | Note 12 – Commitments and Contingencies
As part of the business combination that occurred on February 14, 2024, the Company acquired a five-year operating lease for approximately 6,900 square feet of warehouse and office space in Orlando, Florida. The lease commenced in November 2023 and expires in October 2028. See Note 7 – Operating Leases for additional information.
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Restatement of Previously Issued Financial Statements |
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| Accounting Changes and Error Corrections [Abstract] | |||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||
| Restatement of Previously Issued Financial Statements | Note 13 – Restatement of Previously Issued Financial Statements
On April 16, 2024, the Company changed their independent PCAOB-registered accounting firm and terminated its engagement with their prior auditor. On May 3, 2024, the Securities and Exchange Commission (“SEC”) issued an order that instituted a cease-and-desist against the Company’s previous auditor, which required the Company to obtain new auditors and re-audit its financial statements for the years ended December 31, 2023 and 2022.
The Company engaged a new, an independent and registered accounting firm, to re-audit the Company’s previously issued financial statements. During the Company’s re-audits, it was noted that certain transactions were not recorded in the correct period, stock compensation expense of $600,000 related to the March 7, 2023 common stock issuance was not recorded and deferred offering costs were classified as an operating activity rather than a financing activity. Expenses totaling $10,993 were originally recorded in 2023 but related to 2022 expenses.
With this restatement, the transactions previously recorded in the incorrect period have been updated to the correct period, classifications on the statements of cash flow have been corrected and the stock compensation previously not recorded has been properly recorded.
The following presents reconciliations of the impacted financial statement line items as filed to the restated amounts as of June 30, 2023 and for the periods then ended. The previously reported amounts reflect those included in the registration statements the Company filed with the Securities and Exchange Commission on September 19, 2023. These amounts are labeled “As Filed” in the tables below. The amounts labeled “Restatement Adjustments” represent the effects of these restatements due to the timing differences and stock compensation expense.
Statements of Changes in Stockholders’ Equity – As Filed – For the Six Months Ended June 30, 2023
Statements of Changes in Stockholders’ Equity – Restatement Adjustments – For the Six Months Ended June 30, 2023
Statements of Changes in Stockholders’ Equity – As Restated – For the Six Months Ended June 30, 2023
Statement of Cash Flows for the Six Months Ended June 30, 2023
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Subsequent Events |
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| Subsequent Events [Abstract] | |||||||||||||||||||||
| Subsequent Events | Note 14 – Subsequent Events
Amendments to Articles of Incorporation
On July 17, 2024, following approval by the Board of Directors, the Company filed a Certificate of Designations, Preferences, and Rights of the Series A Convertible Preferred Stock (the "COD”) with the Nevada Secretary of State. The COD designated 4,250 shares of Series A Convertible Preferred Stock (the “Series A”). The Series A ranks senior to both the Company’s common stock and any other series of preferred stock with respect to the preferences as to dividends, distributions, and payments, upon the liquidation, dissolution, and winding up of the Company. Each share of Series A may be converted into 1,000 shares of the Company’s common stock.
The Series A preferred shares have a conversion beneficial ownership limitation of 4.99%, or 9.99% upon election of the holder upon at least 61 days written notice to the Company. The Series A preferred shares have no voting rights, except as required by law and as expressly provided in the COD.
Working Capital Adjustment Agreement
On July 22, 2024, the Company and Red Cat finalized the working capital adjustment related to the acquisitions of Fat Shark and Rotor Riot pursuant to the Purchase Agreement. The Purchase Agreement provided that the purchase price was to be increased on a dollar-for-dollar basis by the amount by which the working capital exceeded the agreed working capital (the "Working Capital Adjustment”). After negotiations between the parties, it was determined that the Company owed Red Cat $2.0 million as a Working Capital Adjustment.
The original Note payable for $2.0 million was reissued to Red Cat with (i) an increased aggregate principal amount of $4,000,000 to give effect to the working capital adjustments discussed above, and (ii) extend the maturity date of the new Note to November 30, 2025.
Red Cat Holdings, Inc.’s Sale of Securities
On July 22, 2024, the Company’s principal shareholder, Red Cat sold all of its securities in the Company to two unaffiliated third-party investors (the "Investors”). As part of the transaction, 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 Note Payable, to the Investors on July 22, 2024.
Quarterly Grants to our Board of Directors
On July 30, 2024, the Company issued non-employee directors listed in the table below the equity portion of their quarterly compensation. Each of the directors received a vested restricted stock grant for services as a director (and where applicable, committee member) during the quarter ended June 30, 2024. The shares of restricted common stock were granted under the Company’s 2022 Equity Incentive Plan and was subject to each director executing the Company’s standard Restricted Stock Agreement, which occurred on July 29, 2024. The fair value per share was based on the quoted trading price as of the close of the market as of July 17, 2024.
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Summary of significant accounting policies (Policies) |
6 Months Ended |
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Jun. 30, 2024 | |
| Accounting Policies [Abstract] | |
| Principles of Consolidation | 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.
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| Unaudited interim financial information | Unaudited interim financial information
The consolidated condensed financial statements of the Company included herein have been prepared, without audit, pursuant to the rules and regulations of the Securities and Exchange Commission (the “SEC”). Certain information and footnote disclosures normally included in financial statements prepared in accordance with GAAP have been condensed or omitted from this Quarterly Report, as is permitted by such rules and regulations. Accordingly, these condensed financial statements should be read in conjunction with the financial statements and notes thereto included in the Company’s Annual Report on Form 10-K/A, for the year ended December 31, 2023. The results for any interim period are not necessarily indicative of results for any future period.
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| Use of Estimates | Use of Estimates
The preparation of financial statements in conformity with GAAP requires management to make estimates and assumptions that affect the reported amounts of assets and liabilities, disclosures of contingent assets and liabilities at the date of the financial statements, and the reported amounts of revenues and expenses during the reporting period. Accordingly, actual results could differ from those estimates, and such results could be material.
The financial statements include some amounts that are based on management's best estimates and judgments. Significant estimates reflected in these financial statements include those used to (i) determine stock-based compensation, (ii) the fair value of assets acquired and liabilities assumed in business combinations and the value of shares issued as consideration, (iii) reserves and allowances related to accounts receivable, inventory and sales, (iv) the evaluation of long-term assets, including goodwill, for impairment, (v) the fair value of lease liabilities and related right of use assets, and (vi) the warranty liability.
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| Cash and Cash Equivalents | 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 $250,000. The Company’s cash balance may at times exceed these limits. At June 30, 2024 and December 31, 2023, the Company had approximately $1.7 million and $0.6 million, respectively, in excess of federally insured limits. The Company continually monitors its positions with, and the credit quality of the financial institutions with which it invests.
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| Accounts Receivable, net | Accounts Receivable, net
The Company carries its accounts receivable at invoiced amounts. Upon the closing of the acquisitions in February 2024 when we acquired accounts receivable, the Company adopted ASC 326, Financial Instruments – Credit Losses, which the Company evaluates all credit losses as of the reporting date. On a periodic basis, the Company evaluates its accounts receivable and establishes an allowance for doubtful accounts based on a history of past write-offs and collections and current credit conditions. Accounts are written-off as uncollectible at the discretion of management. At June 30, 2024 and December 31, 2023, the Company considers accounts receivable to be fully collectible; accordingly, no allowance for doubtful accounts has been established.
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| Inventory | Inventory
Inventories, which consist of finished goods, are stated at the lower of cost or net realizable value, and are measured using the first-in, first-out method. Cost components include direct materials and direct labor, as well as in-bound freight. At each balance sheet date, the Company evaluates the net realizable value of its inventory using various reference measures including current product selling prices, as well as evaluating for excess quantities and obsolescence.
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| Deferred offering costs | Deferred offering costs
The Company deferred direct incremental costs associated with its IPO. The Company capitalized $127,687 and $70,268 during the six months ended June 30, 2024 and 2023 prior to the IPO, respectively and the deferred offering costs were $512,758 as of December 31, 2023. Deferred offering costs consist of primarily legal, advisory, and consulting fees incurred in connection with the formation and preparation of the IPO. After consummation of the IPO, total deferred offering costs of $640,445 were recorded as a reduction to additional paid-in capital generated as a result of the offering.
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| Property and equipment, net | Property and equipment, net
Property and equipment is stated at cost, net of accumulated depreciation. Depreciation is provided utilizing the straight-line method over the estimated useful lives for owned assets, ranging from two to five years.
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| Leases | Leases
The Company has adopted Accounting Standards Codification (ASC) 842, “Leases” which requires the recognition of assets and liabilities associated with lease agreements. As of February 16, 2024, the date of the acquisition, the Company recognized a lease liability obligation of $378,430 and a right-of-use asset for the same amount related to the 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. Lease terms may include options to extend or terminate a lease when they are reasonably certain to occur.
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| Goodwill and Long-lived Assets | Goodwill and Long-lived Assets
Goodwill represents the future economic benefit arising from other assets acquired in an acquisition that are not individually identified and separately recognized. The Company tests goodwill for impairment in accordance with the provisions of ASC 350, Intangibles – Goodwill and Other, (“ASC 350”). Goodwill is tested for impairment at least annually at the reporting unit level or whenever events or changes in circumstances indicate that goodwill might be impaired. ASC 350 provides that an entity has the option to first assess qualitative factors to determine whether the existence of events or circumstances leads to a determination that it is more likely than not that the fair value of a reporting unit is less than its carrying amount. If, after assessing the totality of events or circumstances, an entity determines it is not more likely than not that the fair value of a reporting unit is less than its carrying amount, then additional impairment testing is not required. However, if an entity concludes otherwise, then it is required to perform an impairment test. The impairment test involves comparing the estimated fair value of a reporting unit with its book value, including goodwill. If the estimated fair value exceeds book value, goodwill is considered not to be impaired. If, however, the fair value of the reporting unit is less than book value, then an impairment loss is recognized in an amount equal to the amount that the book value of the reporting unit exceeds its fair value, not to exceed the total amount of goodwill allocated to the reporting unit.
The estimate of fair value of a reporting unit is computed using either an income approach, a market approach, or a combination of both. Under the income approach, we utilize the discounted cash flow method to estimate the fair value of a reporting unit. Significant assumptions inherent in estimating the fair values include the estimated future cash flows, growth assumptions for future revenues (including gross margin, operating expenses, and capital expenditures), and a rate used to discount estimated future cash flow projections to their present value based on estimated weighted average cost of capital (i.e., the selected discount rate). Management’s assumptions are based on historical data, supplemented by current and anticipated market conditions, estimated growth rates, and management’s plans. Under the market approach, fair value is derived from metrics of publicly traded companies or historically completed transactions of comparable businesses. The selection of comparable businesses is based on the markets in which the reporting units operate and consider risk profiles, size, geography, and diversity of products and services.
The Company reviews long-lived assets, including tangible assets and other intangible assets with definitive lives, for impairment whenever events or changes in circumstances indicate that the asset’s carrying amount may not be recoverable. The Company conducts its long-lived asset impairment analyses in accordance with ASC 360, “Impairment or Disposal of Long-Lived Assets”. ASC 360 requires the Company to group assets and liabilities at the lowest level for which identifiable cash flows are largely independent of the cash flows of other assets and liabilities and evaluate the asset group against the sum of the undiscounted future cash flows. If the undiscounted cash flows do not indicate the carrying amount of the asset group is recoverable, an impairment charge is measured as the amount by which the carrying amount of the asset group exceeds its fair value based on discounted cash flow analysis or appraisals.
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| Fair Values, Inputs and Valuation Techniques for Financial Assets and Liabilities, and Related Disclosures | 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, receivables, current assets, accounts payable, accrued expenses and debt. The carrying amounts of cash, receivables, current assets, accounts payable, accrued expenses and current debt approximates fair value due to the short-term nature of these instruments.
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| Warranty Liability | Warranty Liability
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 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 $66,025 as of June 30, 2024, which was acquired as a part of the acquisitions in February 2024.
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.
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| Revenue Recognition | Revenue Recognition
The Company recognizes revenue in accordance with ASC 606, “Revenue from Contracts with Customers”, issued by the Financial Accounting Standards Board (“FASB”). This standard includes a comprehensive evaluation of factors to be considered regarding revenue recognition including:
Step 1: Identify the contract with a customer; Step 2: Identify the performance obligations in the contract; Step 3: Determine the transaction price; Step 4: Allocate the transaction price to the performance obligations in the contract; and Step 5: Recognize revenue when (or as) the Company satisfies a performance obligation at a point in time.
The Company receives revenues from the sale of products from both retail distributers and individual consumers. Sales revenue is recognized when the products are shipped and the price is fixed or determinable, no other significant obligations of the Company exist and collectability is probable. Revenue is recognized when the title to the products has been passed to the customer, which is the date the products are shipped to the customer. This is the date the performance obligation has been met.
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| Deferred Revenue | Deferred Revenue
Deferred revenue relates to (i) orders placed, but not yet fulfilled and (ii) customer tickets purchased related to the Company’s Rampage event, in which tickets are sold in advance and recognized when the event takes place. All deferred revenue is expected to be recognized within one year. Deferred revenue related to orders placed, but not yet fulfilled totaled $82,120 and $0 as of June 30, 2024 and December 31, 2023, respectively.
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| Cost of Goods Sold | Cost of Goods Sold
Cost of goods sold includes inventory costs, direct packaging costs and production related depreciation, if any.
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| Shipping and Handling Costs | Shipping and Handling Costs
Shipping and handling costs incurred for product shipped to customers are included in general and administrative expenses and amounted to $74,634 since February 16, 2024, the date of the acquisition, through June 30, 2024. The Company did not incur and shipping and handling costs in the six months ended June 30, 2023. Shipping and handling costs charged to customers are included in sales.
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| Research and Development | 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.
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| Income Taxes | Income Taxes
The Company accounts for income taxes using an asset and liability approach, which requires recognition of deferred tax assets and liabilities for the expected future tax consequences of events. A valuation allowance is established to reduce deferred tax assets to their estimated realizable value when, in the opinion of management, it is more likely than not that some portion or all of the deferred income tax assets will not be realizable in the future.
The Company recognizes benefits of uncertain tax positions if it is more likely than not that such positions will be sustained upon examination based solely on their technical merits, as the largest amount of benefit that is more likely than not to be realized upon the ultimate settlement. The Company’s policy is to recognize interest and penalties related to unrecognized tax benefits as a part of income tax expense.
The Company’s current provision for the six months ending June 30, 2024 and 2023 consisted of a tax benefit against which we applied a full valuation allowance, resulting in no current provision for income taxes. Since the Company has not generated an operating profit since inception, there are no deferred tax assets other than a net operating loss carryforward offset by a valuation allowance as of June 30, 2024 and December 31, 2023.
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| Stock-Based Compensation |
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, term and future dividends. The Company recognizes forfeitures as they occur. The fair value of restricted stock is based on our quoted stock price or other fair value indicators on the date of grant. Compensation cost is recognized on a straight-line basis over the service period which is typically the vesting term.
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| Warrants | 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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| Net Loss per Share |
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.
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| Segment Reporting | Segment Reporting
Since the acquisitions of Fat Shark and Rotor Riot, the Company operates with one reportable segment. The Company bases its reportable segment based on how our Chief Operating Decision Maker manages the business, makes resource allocations and operating decisions, and evaluates operating performance.
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| Recent Accounting Pronouncements | Recent Accounting Pronouncements
In November 2023, new accounting guidance was issued that updates reportable segment disclosure requirements by requiring disclosures of significant reportable segment expenses that are regularly provided to the Chief Operating Decision Maker (the “CODM”) and included within each reported measure of a segment's profit or loss. This new guidance also requires disclosure of the title and position of the individual identified as the CODM and an explanation of how the CODM uses the reported measures of a segment’s profit or loss in assessing segment performance and deciding how to allocate resources. The new guidance is effective for annual periods beginning after December 15, 2023, and interim periods within fiscal years beginning after December 15, 2024. The new guidance is required to be applied retrospectively to all prior periods presented in the financial statements. Early adoption is also permitted. On January 1, 2024, the Company adopted ASC 280, Segment Reporting. The Company currently operates a single segment and the Company does not anticipate any net effect related to the adoption.
In December 2023, new accounting guidance was issued related to income tax disclosures. The new guidance requires disaggregated information about a reporting entity’s effective tax rate reconciliation as well as additional information on income taxes paid. The new guidance is effective on a prospective basis for annual periods beginning after December 15, 2024. Early adoption is also permitted for annual financial statements that have not yet been issued or made available for issuance. This new guidance will likely not result in additional required disclosures when adopted.
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Acquisitions (Tables) - Fat Shark And Rotor Riot [Member] |
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| Schedule of fair value allocation |
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| Schedule of unaudited pro forma results |
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Other Current Assets (Tables) |
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| Deferred Costs, Capitalized, Prepaid, and Other Assets Disclosure [Abstract] | ||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||
| Schedule of other current assets |
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Property and Equipment, net (Tables) |
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Jun. 30, 2024 | ||||||||||||||||||||||||||||||||||||||||||||||
| Property, Plant and Equipment [Abstract] | ||||||||||||||||||||||||||||||||||||||||||||||
| Schedule of property and equipment |
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Operating Leases (Tables) |
6 Months Ended | ||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||
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Jun. 30, 2024 | |||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||
| Operating Leases | |||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||
| Schedule of future lease payments |
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| Schedule of supplemental information |
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Share Based Awards (Tables) |
6 Months Ended | |||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||
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| Equity [Abstract] | ||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||
| Schedule of stock option activity |
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| Schedule of stock options assumptions |
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| Schedule of restricted stock activity |
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| Schedule of warrant activity |
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Restatement of Previously Issued Financial Statements (Tables) |
6 Months Ended | ||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||
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| Accounting Changes and Error Corrections [Abstract] | |||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||
| Schedule of restatement adjustments in financial statements |
Statements of Changes in Stockholders’ Equity – As Filed – For the Six Months Ended June 30, 2023
Statements of Changes in Stockholders’ Equity – Restatement Adjustments – For the Six Months Ended June 30, 2023
Statements of Changes in Stockholders’ Equity – As Restated – For the Six Months Ended June 30, 2023
Statement of Cash Flows for the Six Months Ended June 30, 2023
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Organization and nature of business (Details Narrative) - IPO [Member] |
Feb. 16, 2024
$ / shares
shares
|
|---|---|
| Subsidiary, Sale of Stock [Line Items] | |
| Stock issued new, shares | shares | 1,250,000 |
| Public offering price | $ / shares | $ 4.00 |
Summary of significant accounting policies (Details Narrative) - USD ($) |
6 Months Ended | |||
|---|---|---|---|---|
Jun. 30, 2024 |
Jun. 30, 2023 |
Feb. 16, 2024 |
Dec. 31, 2023 |
|
| Federal deposit insurance corporation | $ 250,000 | |||
| Cash uninsured amount | 1,700,000 | $ 600,000 | ||
| Allowance for doubtful accounts | 0 | 0 | ||
| Deferred offering costs | $ 0 | 512,758 | ||
| Estimated useful lives | two to five years | |||
| Lease liability | $ 359,813 | |||
| Right-of-use asset | $ 356,965 | 0 | ||
| Effective discount rate | 11.49% | |||
| Accrued expenses | $ 66,025 | |||
| Deferred revenue | 82,120 | 0 | ||
| Deferred tax assets | 0 | 0 | ||
| General and Administrative Expense [Member] | ||||
| Shipping and handling costs | 74,634 | $ 0 | ||
| Orlando, FL [Member] | Rotor Riot [Member] | ||||
| Lease liability | $ 378,430 | |||
| Right-of-use asset | $ 378,430 | |||
| IPO [Member] | ||||
| Amortization of deferred offering costs | 127,687 | $ 70,268 | ||
| Deferred offering costs | $ 1,150,445 | |||
| Adjustment to APIC for deferred offering costs | $ 640,445 | |||
Acquisitions (Details - Fair value allocation) - Fat Shark And Rotor Riot [Member] |
Feb. 16, 2024
USD ($)
|
|---|---|
| Business Acquisition [Line Items] | |
| Cash | $ 147,200 |
| Accounts receivable (approximates contractual value) | 6,798 |
| Inventories (on hand and prepaid) | 2,611,583 |
| Other current assets | 10,892 |
| Right of use asset - operating | 378,430 |
| Other long-term assets | 59,426 |
| Goodwill and intangible assets (unallocated purchase price) | 19,666,086 |
| Total assets | 22,880,415 |
| Accounts payable and accrued liabilities | 287,544 |
| Customer deposits | 114,441 |
| Operating lease liability – current and long-term | 378,430 |
| Total liabilities | 780,415 |
| Total purchase price | $ 22,100,000 |
Acquisitions (Details - Pro Forma Info) - Fat Shark And Rotor Riot [Member] - USD ($) $ / shares in Units, $ in Thousands |
6 Months Ended | |
|---|---|---|
Jun. 30, 2024 |
Jun. 30, 2023 |
|
| Business Acquisition [Line Items] | ||
| Revenue | $ 2,030 | $ 0 |
| Gross profit/(loss) | 593 | 0 |
| Loss from operations | (2,658) | (1,613) |
| Other expense | 60 | 0 |
| Net loss | $ (2,718) | $ (1,613) |
| Net earnings per share: | ||
| Basic | $ (0.34) | $ (0.47) |
| Pro Forma [Member] | ||
| Business Acquisition [Line Items] | ||
| Revenue | $ 2,525 | $ 2,663 |
| Gross profit/(loss) | 624 | 362 |
| Loss from operations | (3,347) | (3,876) |
| Other expense | 39 | 36 |
| Net loss | $ (3,386) | $ (3,912) |
| Net earnings per share: | ||
| Basic | $ (0.34) | $ (0.44) |
Acquisitions (Details Narrative) |
Feb. 16, 2024
USD ($)
$ / shares
shares
|
|---|---|
| IPO [Member] | |
| Business Acquisition [Line Items] | |
| Share price of Red Cat | $ / shares | $ 4.00 |
| Fat Shark And Rotor Riot [Member] | |
| Business Acquisition [Line Items] | |
| Payments to acquire business | $ 1,000,000 |
| Cash deposit | 100,000 |
| Issuance of promissory note | $ 4,000,000 |
| Issuance of common stock under acquisition | shares | 4,250,000 |
| Consideration paid | $ 22,100,000 |
Inventories (Details Narrative) - USD ($) |
Jun. 30, 2024 |
Dec. 31, 2023 |
|---|---|---|
| Inventory Disclosure [Abstract] | ||
| Inventory | $ 1,638,038 | $ 0 |
| Prepaid and deposits for inventory | $ 1,074,403 | $ 0 |
Other Current Assets (Details) - USD ($) |
Jun. 30, 2024 |
Dec. 31, 2023 |
|---|---|---|
| Restructuring Cost and Reserve [Line Items] | ||
| Prepaid insurance | $ 157,500 | $ 20,631 |
| Other receivables | 10,000 | 0 |
| Other prepaid expenses | 14,577 | 0 |
| Total other current assets | 182,077 | 120,631 |
| Fat Shark And Rotor Riot [Member] | ||
| Restructuring Cost and Reserve [Line Items] | ||
| Deposit related to Rotor Riot, LLC and Fat Shark, Ltd. acquisitions | $ 0 | $ 100,000 |
Property and Equipment, net (Details) - USD ($) |
Jun. 30, 2024 |
Dec. 31, 2023 |
|---|---|---|
| Property, Plant and Equipment [Abstract] | ||
| Computer equipment | $ 7,738 | $ 7,738 |
| Accumulated depreciation | (6,826) | (6,484) |
| Total property and equipment, net | $ 912 | $ 1,254 |
Property and Equipment, net (Details Narrative) - USD ($) |
6 Months Ended | |
|---|---|---|
Jun. 30, 2024 |
Jun. 30, 2023 |
|
| Property, Plant and Equipment [Abstract] | ||
| Depreciation expense | $ 342 | $ 762 |
Operating Leases (Details - Lease supplemental information) |
Jun. 30, 2024 |
|---|---|
| Operating Leases | |
| Weighted average remaining lease term (in years) | 4 years 3 months 29 days |
| Weighted average discount rate | 11.49% |
Operating Leases (Details Narrative) - USD ($) |
4 Months Ended | 6 Months Ended | ||
|---|---|---|---|---|
Jun. 30, 2024 |
Jun. 30, 2024 |
Feb. 16, 2024 |
Dec. 31, 2023 |
|
| Operating lease right-of-use asset | $ 356,965 | $ 356,965 | $ 0 | |
| Orlando, FL [Member] | Rotor Riot [Member] | ||||
| Operating lease right-of-use asset | $ 378,430 | |||
| Operating lease expense | $ 39,429 | |||
| Rotor Riot Lease [Member] | ||||
| Lease description | As identified in Note 3 “Acquisitions”, the acquired businesses, specifically Rotor Riot, has entered into a five-year operating lease for approximately 6,900 square feet of warehouse and office space in Orlando, Florida. The lease commenced in November 2023 and expires in October 2028. |
Promissory Note (Details Narrative) - USD ($) |
1 Months Ended | 6 Months Ended | |
|---|---|---|---|
Jul. 31, 2024 |
Jun. 30, 2024 |
Dec. 31, 2023 |
|
| Short-Term Debt [Line Items] | |||
| Note payable | $ 4,000,000 | $ 0 | |
| Interest expense | 60,183 | ||
| Accrued interest | 6,677 | ||
| Red Cat Holdings, Inc [Member] | Promissory Note [Member] | |||
| Short-Term Debt [Line Items] | |||
| Note payable | 4,000,000 | ||
| Red Cat Holdings, Inc [Member] | Subsequent Event [Member] | |||
| Short-Term Debt [Line Items] | |||
| Additional purchase price | $ 2,000,000 | ||
| Red Cat Holdings, Inc [Member] | Subsequent Event [Member] | Promissory Note [Member] | |||
| Short-Term Debt [Line Items] | |||
| Increase in debt | $ 2,000,000 | ||
| Interest rate | 8.00% | ||
| Fat Shark And Rotor Riot [Member] | |||
| Short-Term Debt [Line Items] | |||
| Issuance of convertible promissory note | $ 2,000,000 |
Share Based Awards (Details - Stock options assumptions) - Equity Option [Member] |
6 Months Ended |
|---|---|
|
Jun. 30, 2024
$ / shares
| |
| Share-Based Compensation Arrangement by Share-Based Payment Award [Line Items] | |
| Exercise Price | $ 1.20 |
| Stock Price on date of grant | $ 1.20 |
| Risk-free interest rate | 4.71% |
| Dividend yield | 0.00% |
| Expected term (years) | 6 years 1 month 9 days |
| Volatility | 129.45% |
Share Based Awards (Details - Warrant activity) |
6 Months Ended |
|---|---|
|
Jun. 30, 2024
$ / shares
shares
| |
| Equity [Abstract] | |
| Warrants outstanding | shares | 0 |
| Warrants outstanding, weighted average exercise price | $ / shares | $ 0 |
| Warrants granted | shares | 62,500 |
| Warrants granted, weighted average exercise price | $ / shares | $ 5.00 |
| Warrants forfeited/cancelled/restored | shares | 0 |
| Warrants forfeited/cancelled/restored, weighted average exercise price | $ / shares | $ 0 |
| Warrants exercised | shares | 0 |
| Warrants exercised, weighted average exercise price | $ / shares | $ 0 |
| Warrants outstanding | shares | 62,500 |
| Warrants outstanding, weighted average exercise price | $ / shares | $ 5.00 |
Related Party Transactions (Details Narrative) - Management Services Agreement [Member] - Consultant [Member] - USD ($) |
Apr. 30, 2024 |
Jun. 30, 2024 |
|---|---|---|
| Related Party Transaction [Line Items] | ||
| Consultant obligation | $ 250,000 | |
| Restricted Common Stock [Member] | ||
| Related Party Transaction [Line Items] | ||
| Granted fully vested shares of restricted common stock | 488,000 | |
| Granted fully vested shares of restricted common stock, value | $ 585,600 |
Commitments and Contingencies (Details Narrative) |
6 Months Ended |
|---|---|
Jun. 30, 2024 | |
| Rotor Riot Lease 1 [Member] | |
| Lease description | As part of the business combination that occurred on February 14, 2024, the Company acquired a five-year operating lease for approximately 6,900 square feet of warehouse and office space in Orlando, Florida. The lease commenced in November 2023 and expires in October 2028. |