Unusual Machines Inc

Previous wording

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 three months ended March 31, 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.

Current wording

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.

Previous wording

During the three months ended March 31, 2024, we incurred cost of goods sold of $414,748 compared to $0 during the three months ended March 31, 2023, resulting in an increase of $414,748 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.

Current wording

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.

Previous wording

During the three months ended March 31, 2024, our gross margin was $204,167 compared to $0 during the three months ended March 31, 2023, resulting in an increase of $204,167 or 100%. Our gross margin, as a percentage of sales, totaled 33.0% during the three months ended March 31, 2024, compared to 0.0% during the three months ended March 31, 2023. We anticipate our gross margin to fluctuate period to period depending on certain promotions and products that are sold during the period.

Current wording

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.

Previous wording

During the three months ended March 31, 2024, operations expenses totaled $112,322 compared to $0 during the three months ended March 31, 2023, resulting in an increase of $112,322 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.

Current wording

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.

Previous wording

During the three months ended March 31, 2024, research and development expenses totaled $16,796 compared to $0 for the three months ended March 31, 2023, resulting in an increase of $16,796 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.

Current wording

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.

Previous wording

During the three months ended March 31, 2024, sales and marketing expenses totaled $157,058 compared to $0 for the three months ended March 31, 2023, resulting in an increase of $157,058 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.

Current wording

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.

Previous wording

Our net loss for the three months ended March 31, 2024, totaled $1,106,001 compared to $588,897 for the three months ended March 31, 2023, resulting in an increase in net loss of $517,104 or 87.8%. This increase in net loss relates 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.

Current wording

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.

Previous wording

During the three months ended March 31, 2024 we generated revenues totaling $618,915 compared to $0 during the three months ended March 31, 2023, representing an increase of $618,915 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.

Current wording

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.

Previous wording

During the three months ended March 31, 2024, general and administrative expenses totaling $998,874 compared to $588,516 for the three months ended March 31, 2023, resulting in an increase of $410,358 or 69.7%. 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.

Current wording

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.

Previous wording

Prior to the closing of our IPO and the acquisitions of Fat Shark and Rotor Riot, we did not have any cashflow from normal operations and we only had cash used from operating activities preparing for 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.

Current wording

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.

Previous wording

Net cash used in operating activities was $1,195,604 during the three months ended March 31, 2024, compared to net cash used in operating activities of $542,448 during the three months ended March 31, 2023, representing an increase of $653,156 or 120.4%. This increase in net cash used primarily resulted from our increase in net loss of $517,104 and an increase in prepaid expenses of $377,144, offset by decrease in inventory of $148,765, change in working capital of $22,894 offset by non-cash expenses of $69,433.

Current wording

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.

Previous wording

Net cash used in investing activities was $852,876 during the three months ended March 31, 2024 compared to net cash used in operating activities of $0 during the three months ended March 31, 2023, representing an increase of $852,876 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 $147,124 in cash acquired.

Current wording

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.

Previous wording

Net cash provided by financing activities totaled $4,362,313 during the three months ended March 31, 2024, compared to $0 during the three months ended March 31, 2023, resulting in an increase in net cash provided by financing activities of $4,362,313 or 100%. The increase is entirely related to proceeds received from our IPO of $5,000,000, offset by deferred offering costs and other IPO related expenses of $637,687.

Current wording

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.

Previous wording

As of March 31, 2024, we had current assets totaling $6,128,890 primarily consisting of cash balances of $3,208,606, inventory of $1,641,839 and prepaid expenses and deposits for inventory of $998,254. Our current liabilities as of March 31, 2024 totaled $691,978, primarily consisting of accounts payable and accrued expenses of $455,764 and customer deposits and other current liabilities of $176,268. Our net working capital as of March 31, 2024 was $5,436,912.

Current wording

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.

Previous wording

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. Our cash balance as of the date of this Report was approximately $2.6 million.

Current wording

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.

Previous wording

We believe that the net proceeds from our February 2024 IPO and existing cash balances will be sufficient to fund our current operating plans through at least the next 12 months. We have based these estimates, however, on assumptions that may prove to be wrong, and we could spend our available financial resources much faster than we currently expect and need to raise additional funds sooner than we anticipate. If we are unable to raise capital when needed or on acceptable terms, we may be forced to delay, reduce or eliminate certain operational efforts. We do not anticipate any significant cost increases post the Fat Shark and Rotor Riot acquisitions and with consideration of the combined companies’ net loss and cash position, we expect we will have sufficient working capital to support our operations for at least 12 months.

Current wording

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.

Previous wording

We agreed to a working capital adjustment with Red Cat related to the acquisitions of Fat Shark and Rotor Riot. We are uncertain as to how much this adjustment will be. However, between the fair value of Fat Shark inventory, Rotor Riot inventory, cash and prepaid assets, offset by accounts payable and other accrued expenses, we expect the adjustment to Red Cat for working capital will be material. The adjustment to working capital could be settled in cash, an adjustment to the convertible note, or a combination thereof. We and Red Cat agreed to have a preliminary calculation of the working capital adjustment by May 17, 2024, however, with the determination of fair value of assets acquired and liabilities assumed still be determined, this calculation may be deferred.

Current wording

Fair value of assets acquired and liabilities assumed in business combination

Previous wording

Goodwill represents the future economic benefit arising from other assets acquired in an acquisition that are not individually identified and separately recognized. We test 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.

Current wording

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.