Item 9A. Controls and Procedures
Item 9A.
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 December 31, 2023, 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 Securities and Exchange Commission’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.
Management’s Report on Internal Control
Over Financial Reporting
Our management is responsible for establishing
and maintaining adequate internal control over financial reporting as defined in Rules 13a-15(f) and 15d-15(f) under the Exchange Act.
Our internal control over financial reporting is designed to provide reasonable assurance regarding the reliability of financial reporting
and the preparation of financial statements for external purposes in accordance with generally accepted accounting principles. Our internal
control over financial reporting includes those policies and procedures that:
· pertain
to the maintenance of records that, in reasonable detail, accurately and fairly reflect the
transactions and dispositions of our assets;
· provide
reasonable assurance that transactions are recorded as necessary to permit preparation of
financial statements in accordance with generally accepted accounting principles, and that
our receipts and expenditures are being made only in accordance with authorizations of our
management and directors; and
· provide
reasonable assurance regarding prevention or timely detection of unauthorized acquisition,
use or disposition of our assets that could have a material effect on the financial statements.
Because of its inherent limitations, internal
control over financial reporting may not prevent or detect misstatements. Also, projections of any evaluation of effectiveness to future
periods are subject to the risk that controls may become inadequate because of changes in conditions, or that the degree of compliance
with policies or procedures may deteriorate.
Our management assessed the effectiveness of
our internal control over financial reporting based on the parameters set forth above and has concluded that as of December 31, 2023,
our internal control over financial reporting was not effective to provide reasonable assurance regarding the reliability of financial
reporting and the preparation of financial statements for external purposes in accordance with U.S. generally accepted accounting principles
(“US GAAP”) as a result of the following material weaknesses:
· The
Company does not have sufficient segregation of duties within accounting functions.
· The
Company does not have written documentation of our internal controls policies and procedures.
· A
substantial portion of the Company’s financial reporting is carried out by an outside
accounting firm.
· The
Company’s human resources, processes and systems are not sufficient to enable the production
of timely and accurate financial statements in accordance with US GAAP.
We plan to rectify these weaknesses by establishing
written policies and procedures for our internal control of financial reporting and hiring additional accounting personnel at such time
as we raise sufficient capital to do so.
51
Changes In Controls Over Financial Reporting
There have been no changes in our internal control
over financial reporting (as defined in Rule 13a-15(f) of the Exchange Act) that occurred during the year ended December 31, 2023 that
have materially affected, or are reasonably likely to materially affect, our internal controls over financial reporting.
Item 9B.
Other Information.
During the quarter
ended December 31, 2023, no director or officer of the Company adopted
or terminated a “Rule 10b5-1
trading arrangement” or “non-Rule 10b5-1 trading arrangement,” as each term is defined in Item 408(a) of Regulation
S-K.
Item 9C.
Disclosure Regarding Foreign Jurisdictions that Prevent Inspections.
Not applicable.
52
PART III
Item 10.
Directors, Executive Officers, and Corporate Governance
The following table sets forth information regarding
our current directors and executive officers:
Name
Age
Position
Dr. Allan Evans
40
Chief Executive Officer and Director
Brian Hoff
38
Chief Financial Officer
Andrew Camden
33
Chief Operating Officer
Robert Lowry
65
Director
Sanford Rich
66
Director
Jeffrey Thompson
59
Director
Cristina A. Colón, Esq.
36
Director
Biographies
Dr. Allan Evans, Chief
Executive Officer and Chairman of the Board of Directors
Dr. Allan Evans was appointed to serve as the
Chief Executive Officer and a director of the Company effective December 4, 2023. Prior to becoming our Chief Executive Officer, Dr.
Evans was the Chief Operating Officer of Red Cat from January 2021 to November 2023 and was the Chief Executive Officer of Fat Shark.
As part of his compensation package with Red Cat, Dr. Evans beneficially owns 1,443,395 shares of common stock and 875,000 unvested options
in Red Cat. Dr. Evans is a serial entrepreneur with a history of founding and leading technological innovation. He has extensive experience
in overseeing different emerging technologies. From August 2017 to October 2020, Dr. Evans served as a board member for Ballast Technologies,
a company that specialized in technology for location-based entertainment. In November 2012, he co-founded Avegant, a technology company
focused on developing next generation display technology to enable previously impossible augmented reality experiences. He led design,
development, and initial production of the Glyph head mounted display and oversaw technology research and patent strategy while serving
as Chief Technology Officer of Avegant until 2016. Dr. Evans has 47 pending or issued patents that cover a range of technologies from
implantable medical devices to mixed reality headsets. Academically, his work has an h-index of 15, an i-index of 28, and has been cited
in more than 1,000 publications. He has extensive experience with new technologies, engineering, business development, and corporate
strategy, and his expertise in these areas strengthens the Company’s collective knowledge and capabilities.
Dr. Evans’ management and public company
experience, his experience in the drone business and his role as President and Chief Executive Officer of the Company, led to his appointment
as a director.
53
Brian Hoff, Chief Financial Officer
Mr. Hoff has served as the Company’s Chief
Financial Officer since November 2022. Prior to that, he served as the Chief Financial Officer of Auddia, Inc. (Nasdaq: AUUD), a technology
company focused on audio media, from April 2021 to October 2022. He served as Vice President and Controller at STACK Infrastructure,
a digital infrastructure company, from October 2019 to April 2021, and as Controller at Coalfire, a cybersecurity company, from November
2011 until October 2019.
Andrew Camden, Chief Operation Officer
Mr. Camden, who became our Chief Operating Officer
on March 4, 2024, has been President of Rotor Riot since 2018. Prior to that, he worked for four years as an Engineer for General Motors.
Cristina A. Colón, Esq., Director
Ms. Colón has a served as a director of
the Company since August 2022. Ms. Colón has been the owner of Cinmarc & Associates LLC, a public housing consulting firm, since
2018 and has served as its President since August 2021. Ms. Colón has also been the owner/operator Café de La Plaza, a restaurant
located in Palmas del Mar, Puerto Rico, since 2009. From 2019 to 2021, Ms. Colón served as an investor relations specialist at OptimizeRX,
a medical technology company. Ms. Colón’s experience as an entrepreneur and her marketing and investor relations experience
led to her appointment as a director. Ms. Colon is also a lawyer in Puerto Rico and Florida.
Robert Lowry, Director
Mr. Lowry has served as a director of the Company
since August 2022. Mr. Lowry has been the owner of Sebring Assisted Living Facility since 1998, and the owner of Homestead Assisted Living
Facility since 2007. Mr. Lowry’s experience as a business entrepreneur and his experience in operational finance led to his appointment
as a director.
Sanford Rich, Director
Mr. Rich serves as director and Audit Committee
member of the Company since January 31, 2024. Since March 2012, Mr. Rich has served as a director of Aspen Group, Inc. and since November
29, 2019, as Audit Committee Chairman. From August 2, 2017 to June 23, 2019, Aspen Group, Inc. had its common stock listed on the Nasdaq
Capital Market and from June 24, 2019 to March 23, 2023, Aspen Group, Inc. had its common stock listed on Nasdaq Global Market, after
which it voluntarily withdrew to focus on its core business and save money. Since January 2016, Mr. Rich has served as the Executive
Director of the New York City Board of Education Retirement System. Mr. Rich also served as a member of the Investor Advisory Group of
the PCAOB for a term from June 1, 2022 to December 31, 2023. From November 2012 to January 2016, Mr. Rich served as the Chief of Negotiations
and Restructuring for the Pension Benefit Guaranty Corporation (a United States Government Agency). Mr. Rich was selected as a director
for his 40 years of experience in the financial sector and his experience serving on the audit committees of public companies.
Jeffrey Thompson, Director
Mr. Thompson has served as a director of the
Company since inception in 2019. He served as the Company’s principal executive officer from inception until April 2022. Mr. Thompson
has been President and Chief Executive Officer of Red Cat since May 15, 2019. Mr. Thompson was a director of Panacea Life Sciences Holdings,
Inc. (OTCQB:PLSH), a producer and marketer of products made from industrial hemp (CBD), from January 2019 until April 2020. In 2016,
Mr. Thompson founded Red Cat Propware Inc., a provider of cloud-based analytics, storage, and services for drone aircraft, and served
as its Chief Executive Officer until May 15, 2019 when it was acquired by Red Cat. Mr. Thompson’s management and public company
experience, his experience in the drone business and his role as President and Chief Executive Officer of Red Cat, led to his appointment
as a director.
54
Composition of our Board of Directors
Our Board of Directors currently consists of
five members. Our directors hold office until their successors have been elected and qualified or until the earlier of their death, resignation
or removal. There are no family relationships among any of our directors or executive officers.
Director Independence
Our Board has determined that all of our present
directors are independent, in accordance with standards under the NYSE Listing Rules, other than Dr. Evans and Mr. Thompson. Our Board
determined that, under the NYSE Listing Rules, Dr. Evans is not an independent director because he is the Chief Executive Officer of
the Company. It has also been determined that Mr. Thompson is not an independent director, having previously been Chief Executive Officer
of the Company in the last three years.
Our Board has determined that Mr. Lowry, Mr.
Rich, and Ms. Colón are independent under the NYSE Listing Rules’ independence standards for Audit Committee members. Our
Board has also determined that they are independent under the NYSE Listing Rules independence standards for Compensation Committee members
and for Governance and Nominating committee members.
Committees of the Board of Directors
Audit Committee
The Audit Committee
currently consists of Mr. Rich (Chair), Mr. Lowry, and Ms. Colón. Each member of the Audit Committee is an independent director
as defined by the rules of the SEC and NYSE American. The Audit Committee has the sole authority and responsibility to select, evaluate
and engage independent auditors for the Company. The Audit Committee reviews with the auditors and with the Company’s financial
management all matters relating to the annual audit of the Company.
The Audit Committee
monitors the integrity of our financial statements, monitors the independent registered public accounting firm’s qualifications
and independence, monitors the performance of our internal audit function and the auditors, and monitors our compliance with legal and
regulatory requirements. The Audit Committee also meets with our auditors to review the results of their audit and review of our annual
and interim financial statements.
The Audit Committee
plans to meet at least on a quarterly basis to discuss with management the annual audited financial statements and quarterly financial
statements and meets from time to time to discuss general corporate matters.
Audit Committee Financial
Expert
Our Board determined
that Mr. Rich is qualified as an Audit Committee Financial Expert, as that term is defined by the rules of the SEC, in compliance with
the Sarbanes-Oxley Act of 2002.
55
Compensation Committee
The Compensation Committee
currently consists of Mr. Lowry (Chair), Ms. Colón, and Mr. Rich each of whom are independent directors. Among other things, the
Compensation Committee reviews, recommends and approves salaries and other compensation of the Company’s executive officers, and
administers the Company’s Equity Incentive Plan (including reviewing, recommending and approving stock option and other equity
incentive grants to executive officers).
The Compensation Committee
will meet in executive session to determine the compensation of the Chief Executive Officer of the Company. In determining the amount,
form, and terms of such compensation, the Committee will consider the annual performance evaluation of the Chief Executive Officer conducted
by the Board in light of company goals and objectives relevant to Chief Executive Officer compensation, competitive market data pertaining
to Chief Executive Officer compensation at comparable companies, and such other factors as it deems relevant, and is guided by, and seeks
to promote, the best interests of the Company and its shareholders.
In addition, subject
to existing agreements, the Compensation Committee is authorized to determine the salaries, bonuses, and other matters relating to compensation
of the executive officers of the Company using similar parameters. It may set performance targets for determining periodic bonuses payable
to executive officers. It is also authorized to review and make recommendations to the Board regarding executive and employee compensation
and benefit plans and programs generally, including employee bonus and retirement plans and programs (except to the extent specifically
delegated to a Board appointed committee with authority to administer a particular plan). In addition, the Compensation Committee approves
the compensation of non-employee directors and reports it to the full Board.
The Compensation Committee
also reviews and makes recommendations with respect to shareholder proposals related to compensation matters.
The Compensation Committee
may, in its sole discretion and at the Company’s cost, retain or obtain the advice of a compensation consultant, legal counsel
or other adviser. The Compensation Committee is directly responsible for the appointment, compensation and oversight of the work of any
compensation consultant, legal counsel and other adviser retained by the committee.
Corporate Governance
and Nominating Committee
The Corporate Governance
and Nominating Committee (the “Nominating Committee”) consists of Ms. Colón (Chair), Mr. Lowry, and Mr. Rich, each of
whom meets the independence requirements of all other applicable laws, rules and regulations governing director independence, as determined
by the Board.
The Nominating Committee has the authority to
identify individuals qualified to become members of the Board, consistent with criteria approved by the Board; recommend to the Board
the director nominees for the next annual meeting of shareholders at which directors are to be elected; recommend to the Board candidates
to fill any vacancies on the Board; develops, recommend to the Board, and reviews the corporate governance guidelines applicable to the
Company; and oversees the evaluation of the Board and management.
It is authorized to
consider and recruit candidates to fill positions on the Board, including as a result of the removal, resignation or retirement of any
director, an increase in the size of the Board or otherwise. The Nominating Committee has the authority to conduct, subject to applicable
law, any and all inquiries into the background and qualifications of any candidate for the Board and such candidate’s compliance
with the independence and other qualification requirements established by the Nominating Committee.
56
In selecting and recommending
candidates for election to the Board or appointment to any committee of the Board, the Nominating Committee does not believe that it
is appropriate to select nominees through mechanical application of specified criteria. Rather, the Nominating Committee shall consider
such factors at it deems appropriate, including, without limitation, the following: personal and professional integrity, ethics and values;
experience in corporate management, such as serving as an officer or former officer of a publicly-held company; experience in the Company’s
industry; experience as a board member of another publicly-held company; diversity as required by the NYSE Rules; diversity of expertise
and experience in substantive matters pertaining to the Company’s business relative to other directors of the Company; practical
and mature business judgment; and composition of the Board (including its size and structure).
The Nominating Committee
will develop and recommend to the Board a policy regarding the consideration of director candidates recommended by the Company’s
shareholders and procedures for submission by shareholders of director nominee recommendations.
The Nominating Committee
oversees the evaluation of the Board and management. It also develops and recommends to the Board a set of corporate governance guidelines
applicable to the Company, which the Nominating Committee shall periodically review and revise as appropriate. In discharging its oversight
role, the Nominating Committee is empowered to investigate any matter brought to its attention.
Board Diversity
While we do not have
a formal policy on diversity, the Board considers diversity to include race, ethnicity, gender as well as the skill set, background,
reputation, type and length of business experience of the Board members as well as a particular nominee’s contributions to that
mix. The Board believes that diversity brings a variety of ideas, judgments and considerations that benefit the Company and its shareholders.
Although there are many other factors, the Board seeks individuals with experience on operating and growing businesses.
Board Leadership
Structure
Allan Evans serves as
the Chairman of the Board and actively interfaces with management, the Board and counsel regularly. We believe that Mr. Evans’s
experience as an entrepreneur and Chief Executive Officer of a drone company will help the Company with the challenges faced by us at
this stage – closing the acquisition of Fat Shark and Rotor Riot and this Offering as well as implementing our business and marketing
plans, integrating the acquisitions, continuing and managing our growth. We believe that Mr. Evans, Mr. Thompson and the other members
of the Board will assist the Company’s management with both the operational aspects as well as the strategic aspects of our business.
Board Risk Oversight
The Company’s
risk management function is overseen by the Board. The Company’s management keeps the Board apprised of material risks and provides
its directors access to all information necessary for them to understand and evaluate how these risks interrelate, how they affect us,
and how management addresses those risks. Allan Evans, Chairman of the Board, works closely together with the other members of the Board
when material risks are identified on how to best address such risks. If the identified risk poses an actual or potential conflict with
management, the Company’s independent directors may conduct the assessment. Presently, the primary risks affecting us are our liquidity
and the lack of revenue.
Family Relationships
There are no family
relationships among any of our officers or directors.
57
Involvement in Legal
Proceedings
We are not aware of
any of our directors or officers being involved in any legal proceedings in the past 10 years relating to any matters in bankruptcy,
insolvency, criminal proceedings (other than traffic and other minor offenses) or being subject to any of the items set forth under Item
401(f) of Regulation S-K of the SEC.
Code of Ethics
The Board has adopted a Code of Business Conduct
and Ethics (the “Code of Ethics”) that applies to all of the Company’s employees, including the Company’s Chief
Executive Officer and Chief Financial Officer. Although not required, the Code of Ethics also applies to the Company’s directors.
The Code of Ethics provides written standards that we believe are reasonably designed to deter wrongdoing and promote honest and ethical
conduct, including the ethical handling of actual or apparent conflicts of interest between personal and professional relationships,
full, fair, accurate, timely and understandable disclosure and compliance with laws, rules and regulations and the prompt reporting of
illegal or unethical behavior, and accountability for adherence to the Code of Ethics. We will provide a copy, without charge, to
anyone that requests a copy of our Code of Ethics in writing by contacting 151 Calle De San Francisco, Ste 200 PMB 2106, San Juan, Puerto
Rico, 00901-1607, Attention: Corporate Secretary.
Insider Trading Arrangements and Policies
We are committed to promoting high standards
of ethical business conduct and compliance with applicable laws, rules, and regulations. As part of this commitment, we have adopted
our Insider Trading Compliance Policy governing the purchase, sale, and/or other dispositions of our securities by our directors, officers,
and employees that we believe is reasonably designed to promote compliance with insider trading laws, rules and regulations, and the
exchange listing standards applicable to us. A copy of our Insider Trading Compliance Policy is filed as Exhibit 19.1 to this Annual
Report on Form 10-K for the year ended December 31, 2023.
Hedging
Under the Company’s Insider Trading Policy,
all officers, directors and certain identified employees are prohibited from engaging in hedging transactions.
Clawback Policy
Additionally, our Board has adopted a policy
relating to recovery of erroneously awarded compensation (a “Clawback Policy”) in accordance with the rules of the NYSE,
to recoup “excess” incentive compensation, if any, earned by current and former executive officers during a three year look
back period in the event of a financial restatement due to material noncompliance with any financial reporting requirement under the
securities laws (with no fault required). Our Clawback Policy is filed as Exhibit 97.1 to this Annual Report on Form 10-K for the year
ended December 31, 2023.
Item 11.
Executive Compensation.
Executive Compensation Overview
As an “emerging
growth company,” we have opted to comply with the executive compensation disclosure rules applicable to “smaller reporting
companies,” as such term is defined in the rules promulgated under the Securities Act.
58
This section provides
an overview of the compensation awarded to, earned by, or paid to each individual who served as our principal executive officer during
our fiscal year 2023. Our named executive officers, or the Named Executive Officers, for the year ended December 31, 2023, are:
·
Allan Evans, our Chief Executive Officer;
·
Brandon Torres Declet, our former Chief Executive
Officer; and
·
Brian Hoff, our Chief Financial Officer
Unusual Machines Summary
Compensation Table Year Ended December 31, 2023
The following table
contains information about the compensation paid to or earned by each Officer (each a “Named Executive Officer”) with during
the two most recently completed fiscal years.
Name and Principal Position
Year
Salary
($)
Bonus
($)
Stock
Awards
($) (2)
Option
Awards
($)
All Other
Compensation
($)
(2)
Total
($)
Allan Evans (1)
2023
20,833
–
–
–
–
20,833
Chief Executive Officer
2022
–
–
–
–
–
–
Brandon Torres Declet (2)
2023
229,167
–
64,344
–
62,500
356,011
Former Chief Executive Officer
2022
80,000
–
–
–
–
80,000
Brian Hoff (3)
2023
250,000
–
–
–
–
250,000
Chief Financial Officer
2022
41,667
–
–
–
–
41,667
________________________
(1)
Mr. Evans was appointed Chief Executive Officer in December
2023 and did not serve during the 2022 fiscal year.
(2)
Mr. Declet was appointed Chief Executive Officer in May 2022 and resigned
from the Board and as Chief Executive Officer in November 2023. Mr. Declet did not serve during the 2021 fiscal year. Mr. Declet
executed a termination agreement pursuant to which he received three months of salary as severance and three months of medical and
insurance premiums. Mr. Declet received 16,086 shares of our common stock.
(3)
Mr. Hoff was appointed Chief Financial Officer in November 2022.
59
Fat Shark and Rotor Riot Summary Compensation
Information
Set forth below is summary compensation information
similar to that set forth above, but reflecting amounts paid, payable or allocable to Fat Shark or Rotor Riot for executive officers
of one or both of those entities who exceeded the enumerated threshold and which the Company anticipates hiring as an executive officer
of the Company (directly or through Fat Shark or Rotor Riot) in connection with the acquisition of those entities in the Business Combination
(the “Business Combination Officers”). The compensation information relates to the fiscal year end April 30, 2023 and 2022,
respectively. Mr. Camden was appointed our Chief Operating Officer on March 4, 2024.
Name and
Principal Position(1)
Year
Salary
($)
Bonus
($)
Stock
Awards
($)
Option
Awards
($)
Non-
equity
incentive
plan
compensation
($)
All Other
Compensation
($)
Total
($)
Andrew Camden
2023
90,000
–
–
–
–
–
90,000
President of Rotor Riot
2022
72,500
–
–
259,483
(2)
–
–
331,983
_________________
(1)
Represents principal position(s) held at Red Cat, Fat Shark and/or Rotor Riot.
(2)
Represents the aggregate grant date fair value computed in accordance with FASB ASC Topic 718 of
10-year options to purchase 100,000 shares of Red Cat common stock at an exercise price of $2.60, which become fully vested on June
7, 2024.
Outstanding Equity
Awards at December 31, 2023
There were no outstanding equity awards held by our Named Executive
Officers as of December 31, 2023.
Employment Agreements
Employment Agreement with Dr. Allan Evans,
Chief Executive Officer
On November 27, 2023, the Company and Dr. Allan
Evans entered into an Offer Letter (the “Offer Letter”) under which Dr. Evans serves as the Company’s Chief Executive
Officer effective December 4, 2023. The Offer Letter provides that Dr. Evans receives: (i) an annual base salary of $250,000, subject
to annual review; (ii) eligibility to earn an annual bonus at the sole discretion of the Company’s Board; (iii) a grant of restricted
stock units (“RSUs”) equal to 5% of the outstanding common stock of the Company, vesting on the earlier of (a) a secondary
offering, (b) a Change of Control event as defined in Treasury Regulation Section 1.409A-3(i)(5), or (c) the one year anniversary of
the signing of the Offer Letter; and (iv) eligibility to participate in employee benefit plans and programs.
The Company and Dr. Evans have agreed to negotiate
an acceptable Employment Agreement consistent with the terms of the Offer Letter. The Employment Agreement (“Employment Agreement”)
shall be for a term of at least two years. The Employment Agreement will contain a non-compete provision that for a period of 12 months
after Dr. Evans is no longer employed by the Company, he will not, directly or indirectly, either as proprietor, stockholder, partner,
officer, employee or otherwise, distribute, sell, offer to sell, or solicit any orders for the purchase or distribution of any products
or services which are similar to those distributed, sold or provided by the Company during the 12 months preceding his termination of
employment with the Company, to or from any person, firm or entity which was a customer of the Company during the 12 months preceding
such termination of employment. This section in his Employment Agreement may not be waived by the Company without the consent of Red
Cat.
60
Employment Agreement with Brian Hoff, Chief
Financial Officer
The Employment Agreement with Mr. Hoff effective
November 1, 2022 provides that he will serve as the Chief Financial Officer of the Company on an at will basis. In August 2023, the Employment
Agreement was amended (the “First Hoff Amendment”) to increase the percentage of RSUs from 1% to 3% (as discussed below).
Pursuant to his Employment Agreement, Mr. Hoff receives an annual base salary of $250,000. In addition, Mr. Hoff’s Employment Agreement
entitles him to the following:
·
Eligibility to earn an annual bonus of 50% of his annual base salary
based on key performance indicators, as set forth in a bonus plan that is to be established, approved, administered and determined
by the Board and the Chief Executive Officer.
·
A cash and/or equity bonus of up to $125,000 upon the closing of each
successful acquisition with the closing of this Offering, he will receive a $125,000 bonus.
·
A cash bonus and/or equity bonus equal to up to $125,000 upon the completion
of a capital raise event, defined as a second offering, a private placement offering, an at-the-market offering, a private investment
in public equity offering.
·
A grant of RSUs equal to 3% of the outstanding common stock of the
Company (after giving effect to the First Hoff Amendment). The RSUs will vest on the earlier of (i) a secondary offering, (ii) a
Change of Control event as defined in Treasury Regulation Section 1.409A-3(i)(5), or (iii) the one year anniversary of the consummation
of the Offering. This grant becomes effective upon the earlier to occur of 30 days following (i) the closing of the Fat Shark and
Rotor Riot acquisition and (ii) the date on which the Company reasonably determines not to proceed with the acquisition.
Additionally, under his Employment Agreement,
if Mr. Hoff is terminated by the Company without Cause or terminates his employment for Good Reason, he will be entitled to six months’
annual base salary and COBRA premiums, as well as accelerated vesting of 100% of the then unvested RSUs, if applicable.
For this purpose, Good Reason is generally defined
as (i) any reduction in his base salary, (ii) any material diminution of his authorities, titles or offices, (iii) being required to
report to anyone other than the Chief Executive Officer, (iv) a request by the Company to relocate, or (v) material breach of his Employment
Agreement without cure after 30 days’ written notice.
Cause is generally defined as (i) failure to
perform his material duties under the Employment Agreement, following 30 days’ written notice without cure, (ii) willful misconduct
or gross negligence or breach of a fiduciary duty owed to the Company, (iii) conviction of our guilty pleas to a felony or other criminal
offense involving moral turpitude, (iv) any act or omission involving dishonesty, disloyalty, or fraud causing or reasonably expected
to cause significant economic harm to the Company, or (v) material breach of his Employment Agreement without cure after 30 days’
written notice.
E mployment arrangement with Andrew Camden,
Chief Operating Officer
Our Board of Directors appointed Mr. Camden,
Chief Operating Officer on March 4, 2024, and agreed to pay him a salary of $150,000 per year.
Non-Employee Director Compensation
Our non-employee directors
did not receive any cash or equity compensation from the Company for the year ended December 31, 2023.
Following our February
2024 IPO, our board of directors approved compensation for our non-employee directors. Our non-employee directors will receive annual
aggregate compensation of $60,000 for service on the board which will be comprised of cash and equity grants. Additional compensation
for the chairperson members as set forth below. All cash payments and equity grants will be made semi-annual in arrears.
·
Audit Committee Chair: $5,000
·
Compensation Committee Chair: $5,000
·
Nominating and Governance Committee Chair: $5,000
All equity grants issued
to our non-employee directors will be granted under our 2022 Equity Incentive Plan.
61
Item 12.
Security Ownership of Certain Beneficial Owners and Management and Related
Stockholder Matters
The following table sets forth information regarding
the beneficial ownership of our common stock as of March 21, 2024 by (i) each person, entity or group (as that term is used in Section
13(d)(3) of the Securities Exchange Act of 1934) known to the Company to be the beneficial owner of more than 5% of the outstanding common
stock; (ii) each of our directors; (iii) each of our Named Executive Officers; and (iv) all executive officers and directors as a group.
Information relating to beneficial ownership
of common stock by our principal stockholders and management is based upon information furnished by each person using “beneficial
ownership” concepts under the rules of the SEC. Under these rules, a person is deemed to be a beneficial owner of a security if
that person directly or indirectly has or shares voting power, which includes the power to vote or direct the voting of the security,
or investment power, which includes the power to dispose or direct the disposition of the security. The person is also deemed to be a
beneficial owner of any security of which that person has a right to acquire beneficial ownership within 60 days. Under the SEC rules,
more than one person may be deemed to be a beneficial owner of the same securities, and a person may be deemed to be a beneficial owner
of securities as to which he or she may not have any pecuniary interest. Except as noted below, each person has sole voting and investment
power with respect to the shares beneficially owned and each stockholder's address is c/o Unusual Machines, Inc., 4667 LB McLeod Rd.,
Suite J, Orlando Florida, 32811.
The percentages below are calculated based on
9,083,341 shares of common stock issued and outstanding as of March 21, 2024.
Name and Address of Beneficial Owner
Title
of Class
Amount of Shares Beneficially Owned
(2)
Percentage of Beneficial Ownership
Named Executive Officers and Directors:
Allan Evans
Common Stock
–
–%
Brian Hoff
Common Stock
–
–%
Jeffrey Thompson
Common Stock
328,500
3.62%
Sanford Rich
Common Stock
–
–%
Robert Lowry
Common Stock
–
–%
Cristina Colón
Common Stock
–
–%
All executive officers and directors as a group (6 persons)
Common Stock
328,500
3.62%
Other 5% Holders
Red Cat Holdings (1)
Common Stock
4,250,000
46.79%
(1) Mr. Thompson is the Chief Executive Officer of
Red Cat. We have been informed by Red Cat’s counsel that Mr. Thompson is not deemed to be the beneficial
owner of the shares beneficially owned by Red Cat and that the Red Cat board of directors will have voting
power and investment power for the shares that will be held by Red Cat. Address is 15 Ave. Munoz Rivera
Ste 2200, San Juan, PR 00901. As of the date of this Annual Report, the Red Cat board of directors is
comprised of Jeffrey Thompson, Joseph Freedman, Christopher Moe, and Nicholas Liuzza.
(2) The numbers and percentages outstanding in these columns, exclude:
a. 1,461,876 shares
of our common stock available for future issuance under the Company’s 2022 Equity Incentive
Plan, which includes shares of common stock deliverable under grants of Restricted Stock
Units since the underlying common stock cannot be delivered within 60 days of the date of
this Information Statement to our executives;
b. 62,500 shares of
our common stock issuable upon the exercise of warrants to Dominari Securities LLC (the “Representative’s
Warrants”). The Representative’s Warrants can be exercised at any time, and from
time to time, in whole or in part, during the five-year period commencing 180 days following
February 16, 2024.
c. 600,000 shares,
issuable upon conversion of Series B preferred stock. The Series B preferred stock can be
converted to common stock upon written notice to the Company.
62
Item 13.
Certain Relationships and Related Party Transactions and Director Independence
The following is a description of transactions
since January 1, 2020, to which we were a party or will be party, in which the amount involved exceeded or will exceed the lesser of
$120,000 or 1% of the average of our total assets at year-end for the last two completed fiscal years, and any of our directors, executive
officers or holders of more than 5% of our outstanding capital stock, or any immediate family member of, or person sharing the household
with, any of these individuals or entities, had or will have a direct or indirect material interest. As permitted by the SEC rules, discussion
of employment relationships or transactions involving the Company’s executive officers and directors, and compensation solely resulting
from such employment relationships or transactions, or service as a director of the Company, as the case may be, has been omitted to
the extent disclosed in the Executive Compensation or the Director Compensation section of this annual report, as applicable.
On December 8, 2023, our former Chief Executive
Officer, Brandon Torres Declet, and the Company executed a termination agreement (the “Termination Agreement”) pursuant to
which Mr. Declet received three months of salary severance and three months of medical and insurance premiums. In lieu of 603,208 RSUs
that Mr. Declet was to be granted post IPO, Mr. Declet received 16,086 shares of our common stock in January 2024.
On September 10, 2021, our founder and former
Chief Executive Officer Jeffrey Thompson subscribed for 2,400,000 shares of our common stock for a total subscription price of $24,000.
Mr. Thompson subsequently subscribed for an additional 52,000 shares of our common stock on September 14, 2021 for an additional $26,000.
In November 2022, we 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, 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, 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. Mr. 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 November 2020, Red Cat acquired Fat Shark
Holdings for a total purchase price of $8.4 million. In January 2020, Red Cat acquired Rotor Riot for a total purchase price of $2.0
million.
Since July 2017, Fat Shark has used Shenzhen
Fatshark Co, Ltd., referred to herein as the “Supplier,” a drone manufacturing company located in Shenzhen, China, as its
primary contract manufacturer for Fat Shark’s drone products. In exchange for the Supplier’s manufacturing services with
respect to these products, Fat Shark pays the Supplier amounts equal to 115% of the sum of the bill of material and the labor costs for
such production. Ms. Molly Mo, a majority owner of the Supplier, is the wife of Greg French, the founder of Fat Shark. Since January
1, 2020, Fat Shark has paid or accrued a total of $12,503,126 in purchase orders to the Supplier. As of December 31, 2023, Fat Shark
owed the related party Supplier $66,815, which does not include unfilled purchase orders of approximately $1.29 million. The unfilled
purchase orders relate to anticipated inventory purchases and the timing of fulfilling those purchase orders depends on sales and inventory
levels.
Item 14.
Principal Accountant Fees and Services
BF Borgers, CPA, PC audited our financial statements
for the fiscal year ended December 31, 2023, in addition to the stand alone financial statement audits for Fat Shark and Rotor Riot in
connection with our IPO.
63
Independent Registered Public Accounting
Firm Fees
The following is a summary and description
of fees incurred by BF Borgers, CPA, PC for the fiscal year ended December 31, 2023 and 2022.
2023
2022
Audit fees (1)
$ 390,500
$ 27,500
Tax fees
–
–
All other fees
–
–
Total fees
$ 390,500
$ 27,500
________________________
(1) Audit fees consist
of fees for the audit of our annual financial statements and the quarterly reviews of our interim financial statements in connection
with our IPO, in addition, it consists of the stand alone audits related to Fat Shark and Rotor Riot annual financial statements and
the stand alone quarterly reviews of Fat Shark and Rotor Riot financial statements in connection with our IPO. We expect these fees to
be reduced now that we have consummated our IPO and will provide consolidated annual financial statement audits and quarterly interim
reviews.
Audit Committee Pre-approval Policy and
Procedures
Our audit committee
has adopted policies and procedures relating to the approval of all audit and non-audit services that are to be performed by our independent
registered public accounting firm. This policy provides that we will not engage our independent registered public accounting firm to
render audit or non-audit services unless the service is specifically approved in advance by our audit committee or the engagement is
entered into pursuant to the pre-approval procedure described below.
From time to time, our
audit committee may pre-approve specified types of services that are expected to be provided to us by our independent registered public
accounting firm during the next 12 months. Any such pre-approval details the particular service or type of services to be provided and
is also generally subject to a maximum dollar amount.
64
PART IV
Item 15.
Exhibits and Financial Statement Schedules
(a) 1. Financial
Statements
For a list of the financial
statements included herein, see Index to the Financial Statements on page 51 of this Annual Report, incorporated
into this Item by reference.
2. Financial
Statement Schedules
Financial statement
schedules have been omitted because they are either not required or not applicable or the information is included in the financial statements
or the notes thereto.
(b) Exhibits
The exhibits required
by Item 601 of Regulation S-K and Item 15(b) of this Annual 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
3.1
Articles
of Incorporation
S-1/A
3.1
6/14/23
3.1(a)
Certificate
of Amendment – Reverse Stock Split
S-1/A
3.1
8/7/23
3.2
Bylaws
S-1/A
3.2
6/14/23
4.1
Senior
Secured Convertible Promissory Note
S-1
4.1
3/14/23
4.2
Certificate
of Designation of Series A Convertible Preferred Stock
S-1
4.2
3/14/23
4.3
Certificate
of Designation of Series B Convertible Preferred Stock
S-1
4.3
3/14/23
4.4
Form
of Promissory Note
S-1/A
4.3
12/15/23
4.5
Revised
Form of Representatives Warrant
S-1/A
10.7
2/1/24
4.6
Form
of Representatives Warrant
8-K
4.1
2/16/24
4.7
Description of Securities
(1)
10.1
Share
Purchase Agreement +
S-1
10.1
3/14/23
10.1(a)
Amended
and Restated Amendment No. 1 to Share Purchase Agreement
S-1/A
10.2
5/3/23
10.1(b)
Amendment
No. 2 to Share Purchase Agreement
S-1/A
10.3
8/7/23
10.1(c)
Amendment
No. 3 to Share Purchase Agreement
S-1/A
10.4
9/19/23
10.1(d)
Amendment
No. 4 to Share Purchase Agreement
S-1/A
10.5
12/15/23
10.2
Security
Agreement
S-1
10.3
3/14/23
10.3
Employment
Agreement with Brian Hoff #+
S-1
10.6
3/14/23
10.3(a)
Form
of Amendment No. 1 to the to Employment Agreement with Brian Hoff #
S-1/A
10.11A
8/7/23
10.4
Form
of Patent Assignment
S-1/A
10.6
8/7/23
10.5
Form
of Trademark Assignment
S-1/A
10.7
8/7/23
65
Incorporated
by Reference
Exhibit
No.
Description
Filed/Furnished
Herewith
Form
Exhibit
No.
Filing
Date
10.6
Form
of Non-Compete Agreement
S-1/A
10.8
8/7/23
10.7
Form
of Restricted Stock Unit Agreement
S-1/A
10.18
8/7/23
10.8
Revised
Form of Registration Rights Agreement
S-1/A
10.6
12/15/23
10.9
Amended
2022 Equity Incentive Plan #
S-1/A
10.11
12/15/23
10.10
Employment
Offer Letter with Dr. Allan Evans
S-1/A
10.21
12/15/23
10.11
Brandon
Torres Declet Termination and Release Agreement
S-1/A
10.22
12/15/23
10.12
Form
of Lock-up Agreement
S-1/A
10.14
2/1/24
10.13
Form
of Lock-up Agreement – Jeffrey Thompson
S-1/A
10.15
2/1/24
10.14
Allan
Evans Non-Compete Agreement
8-K
10.9
2/22/24
14.1
Code
of Ethics
S-1/A
10.17
8/7/23
19.1
Insider Trading Compliance Policy
(1)
21.1
List
of Subsidiaries
S-1/A
21.1
5/3/23
31.1
Certification of the Principal Executive Officer pursuant to Rules
13a-14(a) and 15d-14(a), as adopted pursuant to Section 302 of the Sarbanes-Oxley Act of 2002.
(1)
31.2
Certification of the Principal Financial Officer pursuant to Rules
13a-14(a) and 15d-14(a), as adopted pursuant to Section 302 of the Sarbanes-Oxley Act of 2002.
(1)
32.1
Certification of the Principal Executive Officer pursuant to 18 U.S.C
Section 1350, as adopted pursuant to Section 906 of the Sarbanes-Oxley Act of 2002.
(3)
32.2
Certification of the Principal Financial Officer pursuant to 18 U.S.C Section 1350, as adopted pursuant
to Section 906 of the Sarbanes-Oxley Act of 2002.
(3)
97.1
Clawback Policy
(1)
101.INS
Inline XBRL Instance Document
(1)
101.SCH
Inline XBRL Taxonomy Extension Schema
(1)
101.CAL
Inline XBRL Taxonomy Extension Calculation Linkbase
(1)
101.DEF
Inline XBRL Taxonomy Extension Definition Linkbase
(1)
101.LAB
Inline XBRL Taxonomy Extension Label Linkbase
(1)
101.PRE
Inline XBRL Taxonomy Extension Presentation Linkbase
(1)
104
Cover Page Interactive Data File (formatted as inline XBRL and contained in Exhibit 101).
(1)
+
#
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.
(1)
Filed herein
(3)
Furnished herein.
Item 16.
Form 10-K Summary
The Company has elected not to include summary
information.
66
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
thereunder duly authorized.
Unusual Machines, Inc.
By:
/ s/
Allan Evans
Allan Evans
Chief Executive Officer, President and Director
(Principal Executive Officer)
By:
/ s/
Brian Hoff
Brian Hoff
Chief Financial Officer
Date: March 22, 2024
Pursuant to the requirements
of the Securities Exchange Act of 1934, as amended, this report has been signed below by the following persons on behalf of the registrant
and in the capacities and on the dates indicated
SIGNATURE
TITLE
DATE
/s/ Allan Evans
Chief Executive Officer, President and Director
March 22, 2024
Allan Evans
(Principal Executive Officer)
/s/ Brian Hoff
Chief Financial Officer
March 22, 2024
Brian Hoff
(Principal Financial and Accounting Officer)
/s/ Cristina Colón
Director
March 22, 2024
Cristina Colón
/s/ Robert Lowry
Director
March 22, 2024
Robert Lowry
/s/ Sanford Rich
Director
March 22, 2024
Sanford Rich
/s/
Director
March 22, 2024
Jeffrey Thompson
67