Unusual Machines, Inc. 10-K

Item 1. Business Background of Unusual Machines Unusual Machines, Inc. (“Unusual Machines” or the “Company”) is a Nevada corporation engaged in the commercial drone industry with our principal place of business in Orlando, Florida. The Company reincorporated from Puerto Rico to Nevada on April 22, 2024. Initial Public Offering On February 16, 2024, the Company closed its Initial Public Offering (the “IPO”) of 1,250,000 shares of common stock at a public offering price of $4.00 per share. The shares are traded on the New York Stock Exchange American (“NYSE American”). Simultaneous with the closing of the IPO, the Company acquired Fat Shark Ltd. (“Fat Shark”) and Rotor Riot, LLC (“Rotor Riot”) from Red Cat Holdings, Inc. (“Red Cat”). The Business Combination & Business Overview On November 21, 2022, the Company entered into a Share Purchase Agreement (the “Purchase Agreement”) with Red Cat and Jeffrey Thompson, the founder and Chief Executive Officer of Red Cat, pursuant to which we agreed to purchase Red Cat’s consumer business consisting of Fat Shark and Rotor Riot (the “Business Combination”). Under the terms of the Purchase Agreement, as amended, the Company purchased Rotor Riot and Fat Shark subsidiaries for $22.1 million (the “Purchase Price”) comprised of (i) $1.1 million in cash, (ii) a $4.0 million promissory note (the “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 at the $4.00 per share IPO price. Unusual Machines specializes in the production and sale of small drones and essential components through B2B sales and a curated retail channel. There is strong brand recognition of the Rotor Riot and Fat Shark brands particularly in the FPV sub-segment of the drone market. Unusual Machines intends to build its business both organically and through strategic acquisitions while onshoring production of critical drone components. With the transition to onshoring production of drone components, the Company is expanding into B2B channels for customers that require a non-Chinese supply chain. A major factor in Unusual Machines’ component production is the validation of the new supply chains. The Defense Innovation Unit (DIU) audits new drone components for supply chain and cyber security risks. Components that pass the audit can then be put on the actively maintained Blue Framework list. Since August of 2024, Unusual Machines has developed three components (and variants) that have been approved and placed on the Blue Framework. This includes a flight controller, a motor controller, and a camera. The company intends to continue to develop and certify new components through this process to ease the acquisition requirements on domestic drone manufacturers that are ultimately significant customers. The Drone Industry The drone industry continues to expand to become a powerful business tool and recreational activity, with growth occurring broadly and across our targeted industries. According to Drone Industry Insights, the global drone market is expected to grow to $57.8 billion by 2030, with the commercial market growing at a 7.9% compound annual growth rate (“CAGR”). According to Allied Market Research, the drone component industry is likewise expanding. The drone flight controller market, valued at $6.6 billion in 2022 is expected to reach $13.8 billion by 2032. The drone motor market, valued at $2.6 billion in 2021 is projected to reach $9.9 billion by 2031. Unusual Machines intends to pursue strategic acquisition targets that are cash flow positive and either sell drone parts or allow us to integrate drone parts and software services. The Company believes that very promising, private companies (such as Aloft Technologies, Inc. as discussed below) are in many instances underfunded and missing out on the ability to go public and bring their innovative products and solutions to a larger set of customers globally. We believe that unlocking this potential will be key to industry consolidation and breaking the dominance of China in the drone industry. 1 First Person View (FPV) Market Segment Unusual Machines principally operates in the FPV segment of the drone industry. This segment focuses on drones piloted with wearable display devices or screens that show a first-person view of the camera mounted on the drone. This is a unique experience where the pilot is interacting with an aircraft through visual immersion. This experience is accomplished by live streaming footage from a camera mounted on the nose of the drone directly to the pilot with as little latency as possible. The image is transmitted via radio (traditionally analog but increasingly digital) to the pilot. The drone remote control unit, the drone, and the pilot display are all interconnected via radio. This effect requires sophisticated electronics that transmit visual information with sufficient speed and reliability to allow pilot control over the drone in real-time. Pilots routinely achieve speeds of over 90 mph in racing and other mission critical applications. There are four common categories of FPV flight – freestyle flight, racing, cinema photography, and defense. In freestyle, the pilot navigates around obstacles focused on acrobatics and exploring the environment around the aircraft through the HMD. FPV racing describes a spectator sport where pilots fly their drones in competitions through a series of obstacles, flags, and gates in a racetrack. Cinema photography is the process of viewing and recording a subject matter from the air from the viewpoint of the pilot. Defense is a market segment characterized by the use cases demonstrated in the Ukrainian conflict and is the largest segment of the market with over 5 million FPV drones expected to be built in 2025. Potential Aloft Acquisition On February 1, 2025, the Company entered into a Merger Agreement to acquire a drone software company, Aloft Technologies, Inc. (“Aloft”). We believe that Aloft is a leader in the drone fleet and airspace management sector, powering more than 70% of all FAA-approved Low Altitude Authorization and Notification Capability (“LAANC”) airspace authorizations in the United States, according to Aloft. According to Aloft, Aloft has provided more than 1.6 million authorizations in total with 400,000 authorizations provided in 2024. The acquisition is for $14.5 million payable, almost entirely in the Company’s Common Stock with the issuance of 1,204,319 shares of Common Stock and approximately $100,000 in cash. In addition, customary closing conditions by the parties must be completed before closing the merger. There can be no assurances that the Aloft merger will close. See Item 1A. “ Risk Factors .” Plans for Growth, Development, and Expansion Unusual Machine’s plans to strengthen its market position through continued organic revenue growth. In parallel, the Company intends to aggressively invest in the extension of their B2B sales of drone components. Unusual Machine’s business strategy includes (i) increasing its overall customer base with its products and rapid adoption; (ii) investing in new hardware products, (iii) expanding and growing Unusual Machine’s customer base and revenue streams from its existing customer base using a “land-and-expand” model that establishes initial relationships and grows those relationships through the provision of high quality products and services, and (iv) expanding into new segments like SaaS through acquisitions like Aloft. Customers Historically, revenues for Unusual Machines has primarily generated online through its e-commerce site, www.rotorriot.com and the Company continues to see continued growth through its retail store. As Unusual Machines continues to expand its B2B component business and with potential acquisitions, the Company expects to rapidly grow an enterprise customer base primarily of drone manufacturers. Competition Unusual Machines competes with a number of significantly larger, better capitalized companies. SZ DJI Technology Co., Ltd., commonly known as DJI, is the dominant market leader with a global market share estimated at more than 70%, according to industry research firms. The primary retail competitor is GetFPV. Unusual Machines competes against these competitors by leveraging its visibility on the internet through its Rotor Riot Facebook page which has more than 38,000 followers and its Rotor Riot YouTube channel which has more than 272,000 subscribers. The Company believes that the Rotor Riot brand has been at the center of the racing and freestyle culture of drones since registering its domain name in 2015. With the Company’s expansion into the drone component market, additional competitors include T-Motor, Orqa, Modal AI, ARK Electronics. Unusual Machines differentiates from these competitors by being price competitive and having their products approved by the Defense Innovation Unity Blue Framework for their enterprise components, which allows them to be sold within Federal guidelines. Unusual Machines maintains price competitiveness and is an emerging leader in the value segment of the non-Chinese components market. 2 The Company’s Drone Manufacturing The Company hired a vice president of manufacturing in January 2025 whose role is to head up the Company’s proposed drone motor manufacturing business. The Company plans to lease an additional facility near its headquarters office in Orlando, Florida, at which it will manufacture NDAA compliant drone motors. The Company expects that it will be in a position to commence manufacturing during the second quarter of 2025. We believe that by bringing manufacturing in house, it can reduce our costs of motor inventory. See “Item 1A. Risk Factors .” Suppliers Unusual Machines purchases inventory from approximately 50 suppliers, much of which could be subject to varying tariffs. The United States has continuously increased tariffs since 2019, which Unusual Machines is currently subject to and range from 2% to 25%. In addition, in Q1 2025, additional tariffs have been instituted on Chinese products and could see potential changes to tariffs in the future. These tariffs increase the cost of goods which reduces the company’s profit margins or increases the total price to our customers. For more information, See Risk Factors – Risks Related to our Business and Financial Condition “Rising threats of international tariffs, including tariffs applied to goods between the U.S. and China, may materially and adversely affect our business.” Unusual Machines retail competitors are subject to the same tariffs and have supply chains that include a greater mix of products sourced from China. The Company can use its domestically manufactured parts to improve both relative margin and price relative to the other domestic retailers. In this way, tariffs may be a driver for revenue and margin growth. Additionally, tariffs have caused domestic drone manufacturers to prioritize domestic producers. This has created preference for components from companies, like Unusual Machines, that are actively onshoring. Government Regulation and Federal Policy National Defense Authorization Act and American Security Drone Act In December 2023, Congress passed the National Defense Authorization Act (“NDAA”), which includes the American Security Drones Act (“ASDA”). The bill prohibits, starting in January 2026, federal agencies and federally funded programs from purchasing or using drones manufactured in countries that are viewed as threats to U.S. national security, such as China. The basis for the legislation is that purchases from these countries (i) pose a significant threat to national security, (ii) represent efforts to infiltrate and influence American society, and (iii) risk the theft of personal and business data. Specifically, the American Security Drone Act: · Prohibits federal departments and agencies from procuring and operating certain foreign commercial off-the-shelf drone or covered unmanned aircraft system manufactured or assembled in countries identified as national security threats, and provides a timeline to end current use of these drones. · Prohibits the use of federal funds awarded through certain contracts, grants, or cooperative agreements to state or local governments from being used (1) to procure a covered unmanned aircraft system that is manufactured or assembled by a covered foreign entity or (2) in connection with the operation of such a drone or unmanned aircraft system. · Requires the Comptroller General of the United States to submit a report to Congress no later than 275 days after the enactment of the NDAA detailing the amount of foreign commercial off-the-shelf drones and covered unmanned aircraft systems procured by federal departments and agencies from countries identified as national security threats. 3 Federal Aviation Administration The Federal Aviation Administration (“FAA”) of the United States Department of Transportation is responsible for the regulation and oversight of civil aviation within the United States. Its primary mission is to ensure the safety of civil aviation. The FAA has adopted the name “unmanned aircraft” (“UA”) to describe aircraft systems without a flight crew on board. More common names include drone, Unmanned Aerial Vehicle (“UAV”) and remotely operated aircraft. The FAA began issuing regulations governing drones in 2005 with their scope and frequency expanding in recent years with the significant increase in the number of drones sold. In December 2015, the FAA announced that all drones weighing more than 250 grams, or 0.55 pounds, must be registered with the FAA. As of December 2023, the FAA reported the registration of almost 791,000 drones, of which approximately 370,000 were commercial and approximately 416,000 were recreational. In addition, more than 370,000 remote pilots were certified. In January 2021, the FAA finalized rules requiring that drones be identifiable remotely. These rules are effective for drone manufacturers beginning in September 2022 and for drone pilots in September 2023. The FAA believes that remote ID technologies will enhance safety and security by allowing the FAA, law enforcement, and federal security agencies to identify drones flying in their jurisdiction. These efforts lay the foundation for more complex operations, such as those beyond visual line of sight at low altitudes, as the FAA and the drone industry move toward a traffic management ecosystem for Unmanned Aircraft System flights separate from, but complimentary to, the air traffic management system. The Company believes that the oversight of the FAA is beneficial to the drone industry generally, and the Company specifically. Approximately 70% of all FAA LAANC authorization are already done using the Aloft product. Countering Chinese Communist Party Drone Act In December 2025, Section 1709 was passed into law as part of the National Defense Authorization Act. Section 1709 is commonly referred to as the Countering Chinese Communist Party (CCCP) Drone Act. The law mandates that within one year, a security review of the two largest Chinese drone companies (DJI and Autel) must be conducted and if it is not (or they fail to pass), the FCC will no longer grant licenses to operate within the United States. The Company believes that this is functionally a ban on all new DJI and Autel products (similar to a previous ban of Huawei). This ban will impact consumers as well as enterprises and the Company believes this will open the entire U.S. drone market up to domestic competition. Environmental Considerations Compliance with applicable environmental laws since inception has not had a material effect upon the Company’s capital expenditures, earnings or competitive position. However, drones are battery operated which use electricity for charging. To that extent, except for users who use solar and other non-electrical power to charge drones, users of drones the company sells burn carbon which negatively affects the environment. Further, the SEC’s climate change rules, when passed, will likely increase our compliance costs. Employees and Human Capital Resources As of March 25, 2025, the Company had sixteen full-time employees and two full-time contractors, including our Chief Executive Officer, whose services are performed on behalf of a consulting agreement. Property The Company’s headquarters are in Orlando, Florida under a lease which expires in October 2028. At this facility, the Company maintains its executive offices and a warehouse from which it holds inventory and ships inventory to customers. As stated above, the Company plans to initiate a manufacturing facility and believes that there are available locations near its current facility. 4 Intellectual Property The Company has consolidated its IP into a subsidiary, UMAC IP Holdings Corp. The IP portfolio primarily includes design and utility patents related to FPV headsets. None of the patents are currently licensed and IP is generated in the general course of doing engineering design. The following table summarizes currently issued patents (indicated by “Issued”) including the grant dates thereof, and patent applications (indicated by “Pending or Published”). As the chart indicates, some of these patents are in the U.S., where when issued the patent protection generally applies for 20 years from the date the patent application was made (subject to potential extension, if applied for and granted). In general, patent protection provides the patent holder with a monopoly on the invention within its scope for the duration of the patent. Country Status Patent No Application Date Grant Date Title United States Issued D825,381 7/13/2017 8/14/2018 UNMANNED AERIAL VEHICLE (Design Canada Issued 179088 1/10/2018 5/30/2019 UNMANNED AERIAL VEHICLE (Design) China Issued CN304757327S 1/9/2018 8/3/2019 UNMANNED AERIAL VEHICLE (Design) EU Issued 004665040 1/12/2018 1/12/2018 UNMANNED AERIAL VEHICLE (Design) GB Issued 90046650400001 1/12/2018 1/12/2018 UNMANNED AERIAL VEHICLE (Design) Korea Issued 30-963991 1/11/2018 7/3/2018 UNMANNED AERIAL VEHICLE (Design) United States Issued 10,179,647 8/23/2017 1/15/2019 UNMANNED AERIAL VEHICLE (Utility) Canada Abandoned 3009413 6/26/2018 UNMANNED AERIAL VEHICLE (Utility) China Issued 201810895541.3 8/8/2018 3/12/2024 UNMANNED AERIAL VEHICLE (Utility) France Issued 3446974 6/25/2018 11/6/2024 UNMANNED AERIAL VEHICLE (Utility) Germany Issued 602018076194.2 6/25/2018 11/6/2024 UNMANNED AERIAL VEHICLE (Utility) Switzerland Issued 3446974 6/25/2018 11/6/2024 UNMANNED AERIAL VEHICLE (Utility) United Kingdom Issued 3446974 6/25/2018 11/6/2024 UNMANNED AERIAL VEHICLE (Utility) United States Issued D848,383 7/13/2017 5/14/2019 PRINTED CIRCUIT BOARD (Design) Canada Issued 179089 1/10/2018 5/30/2019 PRINTED CIRCUIT BOARD (Design) China Issued 304758049S 1/9/2018 8/3/2018 PRINTED CIRCUIT BOARD (Design) EU Issued 004665032 1/12/2018 1/12/2018 PRINTED CIRCUIT BOARD (Design) United Kingdom Issued 90046650320001 1/12/2018 1/12/2018 PRINTED CIRCUIT BOARD (Design) Korea Issued 30-965570 1/11/2018 7/13/2018 PRINTED CIRCUIT BOARD (Design) China Issued 201810324925.X 4/12/2018 11/19/2021 SINGLE-PANEL HEAD-MOUNTED DISPLAY (Utility) EU Pending 19159958.8 2/28/2019 SINGLE-PANEL HEAD-MOUNTED DISPLAY (Utility) United States Issued 10,819,973 6/7/2018 10/27/2020 SINGLE-PANEL HEAD-MOUNTED DISPLAY (Utility) China Pending 202010150301.8 3/6/2020 APPARATUS FOR ATTACHING ACCESSORIES TO A FIRST-PERSON VIEW HEADSET (Utility) United States Allowed 17/187,838 2/28/2021 APPARATUS FOR ATTACHING ACCESSORIES TO A FIRST-PERSON VIEW HEADSET (Utility) United States Issued D991,255 5/17/2021 7/4/2023 HEADSET (Design) China Issued CN308594144S 11/11/2021 4/19/2024 VR GLASSES (Design) Canada Issued DM/218 069 11/9/2021 11/9/2021 HEADSET (Design) EU Issued DM/218 069 11/9/2021 11/9/2021 HEADSET (Design) Japan Issued DM/218 069 11/9/2021 11/9/2021 HEADSET (Design) GB Issued DM/218 069 11/9/2021 11/9/2021 HEADSET (Design) 5 Trademark Portfolio The following table summarizes current registered trademarks (indicated by “Registered”) including the registration dates. As the chart indicates, these trademarks are registered in the United States and abroad. Country Status Trademark Reg. No. Reg. Date. App. No. App. Date. Classes Next Deadline US Registered ROTOR RIOT 5,175,159 4/4/2017 87/074,341 6/16/16 16, 25, 35, 41 Renewal due 4/4/2027 Australia Registered ROTOR RIOT 1814854 4/18/2017 1814854 12/9/16 16, 25, 35, 41 Renewal due 12/9/2026 Canada Registered ROTOR RIOT TMA1013525 1/22/2019 1813182 12/8/16 16, 25, 35, 41 Renewal due 1/22/2034 EU Registered ROTOR RIOT 016152688 5/14/2017 016152688 12/12/16 16, 25, 35, 41 Renewal due 12/12/2026 UK Registered ROTOR RIOT UK00916152688 5/14/2017 UK00916152688 12/12/16 16, 25, 35, 41 Renewal due 12/12/2026 US Registered Rotor Riot Logo 5,175,160 4/4/2017 87/074,378 6/16/16 16, 25, 35, 41 Renewal due 4/4/2027 Australia Registered Rotor Riot Logo 1814855 4/18/2017 1814855 12/9/16 16, 25, 35, 41 Renewal due 12/9/2026 Canada Registered Rotor Riot Logo TMA1013624 1/22/2019 1813183 12/8/16 16, 25, 35, 41 Renewal due 1/22/2034 EU Registered Rotor Riot Logo 016152837 5/14/2017 016152837 12/12/16 16, 25, 35, 41 Renewal due 12/12/2026 UK Registered Rotor Riot Logo UK00916152837 5/14/2017 UK00916152837 12/12/16 16, 25, 35, 41 Renewal due 12/12/2026 US Registered BYTE FROST 6,318,131 4/13/2021 88/574,951 8/12/19 9 AOU due 4/13/2027 US Registered DOMINATOR 5,446,501 4/17/2018 87/513,286 6/30/17 9 Renewal due 4/17/2028 US Registered FAT SHARK 6,037,513 4/21/2020 87/513,291 6/30/17 9, 12 AOU due 4/21/2026 Australia Registered FAT SHARK 1892862 7/18/2018 1892862 7/12/17 9, 12 Renewal due 7/12/2027 UK Registered FAT SHARK UK00917653122 6/12/2018 UK00917653122 12/27/17 9, 12 Renewal due 12/28/2027 EU Registered FAT SHARK 17653122 6/12/2018 17653122 12/28/17 9, 12 Renewal due 12/28/2027 (continued) 6 Country Status Trademark Reg. No. Reg. Date. App. No. App. Date. Classes Next Deadline China Registered FAT SHARK 28347095 3/7/2019 28347095 12/27/17 9 Renewal due 3/6/2029 China Registered FAT SHARK 28347096 12/7/2018 28347096 12/27/17 12 Renewal due 12/6/2028 S. Korea Registered FAT SHARK 40-1429232 12/20/2018 40-20170165133 12/22/17 9, 12 Renewal due 12/20/2028 Japan Registered FAT SHARK 6128494 3/8/2019 2017162207 12/11/17 9, 12, 28 Renewal due 3/8/2029 US Registered Shark Head Logo 5,921,613 11/26/2019 87/792,917 2/10/18 9, 25 AOU due 11/26/2025 UK Registered Shark Head Logo UK00917938426 12/26/2018 UK00917938426 7/31/18 9, 12, 25 Renewal due 7/31/2028 EU Registered Shark Head Logo 17938426 12/26/2018 17938426 7/31/18 9, 12, 25 Renewal due 7/31/2028 China Registered Shark Head Logo 32458836 4/7/2019 3248836 7/25/18 9 Renewal due 4/6/2029 China Registered Shark Head Logo 32458835 4/7/2019 32458835 7/25/18 12 Renewal due 4/6/2029 China Registered Shark Head Logo 32458837 4/7/2019 32458837 7/25/18 25 Renewal due 4/6/2029 US Registered SHARK BYTE 6,631,683 2/1/2022 90/337,500 11/23/20 9 AOU due 2/1/2028 UK Registered SHARK BYTE UK00003597165 9/3/2021 UK00003597165 2/18/21 9 Renewal due 2/18/2031 EU Registered SHARK BYTE 018402699 11/5/2021 018402699 2/19/21 9 Renewal due 2/19/2031 China Registered SHARK BYTE 53741813 10/14/2022 53741813 2/20/21 9 Renewal due 10/27/2031 Unusual Machines has recently filed for a trademark on our logo. Research and Development Research and development activities are part of Unusual Machine’s business, and the Company will follow a disciplined approach to investing capital and resources to create new drone technologies and solutions. Research and development costs were approximately $90,584 and 0, for the years ended December 31, 2024 and 2023, respectively and primarily related to developing NDAA compliant products including our Brave F7 flight controller, Brave 55A ESC and the Fat Shark Aura FPV Camera. A fundamental part of this approach is a well-defined screening process that helps us identify commercial opportunities that support desired technological capabilities in the markets we serve. 7