What changed in this filing

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Item 1A. Risk Factors

2025-11-06 compared with 2025-08-14 · 88 added, 171 removed, 6 unchanged (98% of the section changed)

In addition to the information

set forth in this Form 10-Q, you should carefully consider the risk factors disclosed under the heading “Risk Factors” in

Part I, Item 1A of our Annual Report on Form 10-K for the year ended December 31, 2024 and the following additional Risk Factors.

In addition to the information set forth in this

Form 10-Q, you should carefully consider the risk factors disclosed under the heading “Risk Factors” in Part I, Item 1A of

our Annual Report on Form 10-K for the year ended December 31, 2024, filed with the SEC on March 27, 2025, Part II, Item 1A, “Risk

Factors” in our Quarterly Report on Form 10-Q for the quarterly period ended June 30, 2025, filed with the SEC on August 14, 2025

and our Prospectus Supplement dated September 2, 2025, and in our subsequent filings with the SEC, in each case and the following additional

Risk Factors.

Because of our dependence on a few significant

customers, our failure to generate revenue from such customers may impair our ability to achieve our projected financial results.

On October 15, 2025, we announced an order from

Army’s 101st Airborne Division for 3,500 NDAA-compliant motors produced at the company’s new U.S.-based manufacturing

The motors will support the Division’s deployment of the new Attritable Battlefield Enabler (A.B.E.) V1.01 drones.

addition to motors, the order includes U.S.-made, NDAA-compliant, and BLUE UAS-listed components:

the Aura Analog Camera, Aura VTX, Brave

Flight Controller, and Brave ESC.

Together, these components ensure that the drones meet stringent compliance standards.

also indicated plans to expand procurement, targeting an additional order of 20,000 components, including motors, from us in 2026.

On October 3, 2025, we secured an $800,000 purchase

order for high-performance drone components from Red Cat.

The order includes our BLUE UAS listed Aura Analog Camera, Aura VTX, Brave Flight

Controller, Brave ESC, HDO+ Goggles, and motors, that will be integrated into Red Cat's FANG™ drones, supporting ongoing demand

for U.S.-made, NDAA-compliant systems in defense, public safety, and other government agency applications.

On September 30, 2025 we announced a $12.8 million

purchase order for components supplying Strategic Logix’s (“SL”) Rapid Reconfigurable Systems Line.

There is no formal

contract backstopping this purchase order.

This purchase order represents the largest order that we have received to date and would account

for more than our entire revenue over the nine months ending September 30, 2025.

We are dependent on fulfilling our backlog to

a small number of customers, and SL in particular, to generate a significant portion of our B2B revenue, and these customers may change

periodically.

As a result, our financial results may be adversely affected if purchase orders from new or existing or future customers

do not meet its assumptions or, if there is a default in payment by SL or any of our other customers.

Furthermore, to the extent that

any one customer or more accounts for a large percentage of our revenue, the loss of such customers, or changes in their buying patterns

or decisions, could materially affect our financial results.

If our customers experience financial difficulties or business reversals,

or lose orders or anticipated orders, which may reduce or eliminate the need for the products which they ordered from us, they may be

unable or unwilling to fulfill their contracts with us.

There is also a risk that SL or our other customers

will attempt to impose new or additional requirements on us that reduce the profitability of the orders placed by those customers with

Further, even if the orders are not changed, these orders may not generate margins equal to our recent historical or targeted results.

If we do not book more orders with existing customers, or develop relationships with new customers, we may not be able to increase, or

even maintain, our revenue, and our financial condition, results of operations, business and/or prospects may be materially adversely

Our failure to effectively manage our growth

could harm its business.

Businesses which grow rapidly may have difficulty

managing their growth.

With our recent B2B orders and commencement of manufacturing, we are experiencing significant growth.

motor manufacturing facility has recently opened and is operational.

Further, we expect to open our headset manufacturing facility later

in 2025 or in the first quarter of 2026.

In addition, we have increased our headcount from 18 employees as of March 31, 2025, to 38 employees

as of September 30, 2025, and we anticipate our headcount to continue to increase to over 75 before the end of the year.

With our limited

executive management team, we may be unable to effectively manage the growth, oversee our manufacturing facilities, integrate our new

hires into our company culture and effectively deal with any human resource issues that may arise, which could have a material adverse

effect on our business and future result of operations.

In addition, with our rapid growth, we need to retain an OSHA consultant to identify,

evaluate and control potential workplace hazards to prevent injuries, illnesses and fatalities We intend to retain a consultant to conduct

such an assessment but there can be no assurance that any workplace hazards, injuries, illnesses and fatalities may occur which could

have a material adverse effect on our business and future result of operations.

Rising threats of international tariffs, including

4 unchanged sentences

using Chinese vendors.

In contrast, our B2B business we instituted in the second half of 2024 employs a made in the United States model.

Recently, the current administration has imposed steep and additional tariffs on the importation from China and other countries (paused

for 90 days) of goods including the drone components we use in our B2C business.

As a result, we have begun sourcing components from other

countries including the United States and Taiwan.

This creates several issues including increased costs and potential inventory shipment

This increase in tariffs imposed could materially and adversely affect our business and results of operations.

These tariffs apply

to the vast majority of our consumer inventory for our B2C segment, and except for our Unusual Machines branded products we have increased

prices and may in the future be forced to implement additional price increases to adjust to the higher costs of inventory.

imposes the risk of reduced demand for such products and lower sales and resulting revenue.

While to date, we appear to have not seen

resistance based on increases in sales, that may not continue and future increases which we attempt to pass on to our customers may not

Future inventory increases may require us to increase the prices of our branded products, which may result in decreased sales, particularly

since we rely on consumer spending and our B2C products are typically considered non-essential, and purchases are therefore highly price

Changes in the state of China-United States relations,

including any tensions relating to potential military conflict between China and Taiwan, are difficult to predict and could adversely

affect the operations or financial condition of the Company given that we are shifting inventory for our B2C business to Taiwan.

to Chinese tariffs, one of our first B2B customers was a European company.

After the 90-day United States tariff pause, if the European

Union and other European countries react to the United States tariffs by imposing tariffs on United States made product including our

drones, the trade war may make our B2B drone parts too expensive.

If the tariffs or other factors result in increased

inflation and a recession, our business may be materially harmed .

A direct impact from rising tariffs on our business

has been increases in the prices of inventory we acquire and an increase in our selling prices (with one exception described in the prior

Risk Factor).

Further, due to the tariffs and possibly large cuts in the size of the government, there may be increased unemployment and

other economic factors which result in a recession..

In such event, our B2C business may be materially and adversely affected.

our B2B business including our proposed manufacturing of drones in the United States may also be adversely affected by a recessionary

economy and inflation in addition to experiencing some increased tariff-related costs including from products that use rare earths.

If critical components

or raw materials used to manufacture our products or used in our development programs become scarce or unavailable, then we may incur

delays in manufacturing and delivery of our products and in completing our development programs, which could damage our business.

Our ability to meet customers’

demands depends, in part, on our ability to obtain timely and adequate delivery of high-quality materials, components and subsystems,

many of which are obtained from a select group of specialized suppliers, including some sole-source providers.

In order to mitigate potential

disruptions, we maintain long-term, non-binding agreements with several key suppliers that help stabilize pricing, reduce lead times and

enhance planning accuracy.

We do not have long-term agreements with all suppliers that obligate them to continue to sell components, products

required to build our systems or products to us.

Our reliance on suppliers without long-term binding contracts involves significant risks

and uncertainties, including whether our suppliers will provide an adequate supply of required components or products of sufficient quality,

will increase prices for the components or products and will perform their obligations on a timely basis.

If any of our supplier’s

face capacity constraints, financial instability, or an unwillingness to provide raw materials or components to us, we may need to seek

alternative suppliers or revise our designs, particularly because some of our components are sourced from foreign countries.

alternative sources may take significant time, and even then, we may encounter significant delays in manufacturing and shipping.

Additionally,

credit constraints among key suppliers could impact our cash flow.

We have also experienced rising costs for components, shipping, tariffs,

warehousing, and inventory.

Our domestic suppliers have experienced increased demand for their products due to tariffs, which could impact

the availability or price of our components.

The permanence of these cost increases remains uncertain, and obtaining replacement components

within our required time frames may prove challenging.

Shortages could lead to excess inventory and potential obsolescence risks.

In addition, certain

raw materials and components used in the manufacture of our products and in our development programs, are periodically subject to supply

shortages, and our business is subject to the risks of price increases and periodic delays in delivery.

Because our new manufacturing business

has inherent risks, such risks may adversely impact us.

We recently hired a

vice president of manufacturing whose role is to head up our proposed drone motor manufacturing business.

The Company has leased an additional 17,000 square foot facility near our headquarters office in Orlando, Florida, at which we

will manufacture NDAA compliant drone motors.

The lease begins August 1, 2025.

There are inherent risks in connection with

launching our component manufacturing business, which include:

the need to expend working capital to purchase manufacturing equipment, rent a facility and to hire personnel with the requisite skills to fabricate our drones which could initially have an adverse effect on our working capital;

the manufacturing equipment that we acquire may have bugs or may not be in sound working order and the products we manufacture may not be manufactured in accordance with our or our customers specifications, which result in conflicts with customers, the loss of revenues or damage to our reputation;

We may encounter cost overruns for a variety of reasons which due to fixed priced customer orders leads to operating losses.

Our products, including

motors, batteries, and other advanced components, rely on rare earth metals for their manufacturing, of which a significant majority are

sourced from China.

Any disruption in the supply of these metals could adversely affect our ability to produce and deliver our products.

Factors that might lead to such disruptions include geopolitical tensions, trade restrictions, supply chain bottlenecks, and environmental

regulations affecting mining operations.

A limited supply or increased cost of rare earth metals could lead to higher production costs,

delays in manufacturing schedules, and potential inability to meet customer demand, thereby impacting our revenue and growth plans.

these risks necessitates close monitoring of supply chains, diversification of suppliers, and the pursuit of alternative materials or

technologies where possible.

Escalating restrictions

between the U.S.

and China contribute to supply chain complexities.

Some of our components sourced from foreign countries, including China,

are at risk of further sanctions and other trade restrictive actions, and any escalation in global trade tensions or trade restrictions

may hinder our ability to obtain these components from new suppliers.

Restrictions on semiconductor manufacturing equipment and raw materials

could lead to higher material costs, material unavailability, and transportation uncertainty.

If our facilities

and information systems and those of our key suppliers could be damaged as a result of disasters or unpredictable events which could have

an adverse effect on our business operations.

Our new drone motor manufacturing

facility is located in Orlando, Florida.

We also rely on third-party manufacturing plants in the U.S., Asia and other parts of the world

to provide key components for our products and services.

If major disasters such as hurricanes, tropical storms pandemics, earthquakes,

fires, floods, wars, terrorist attacks, computer viruses, transportation disasters or other events occur in any of these locations, or

the effect of climate change on any of these factors or our locations, or our information systems or communications network or those of

any of our key component suppliers breaks down or operates improperly as a result of such events, our facilities or those of our key suppliers

may be seriously damaged, and we may have to stop or delay production and shipment of our products.

We may also incur expenses relating

to such damages.

If production or shipment of our products or components is stopped or delayed or if we incur any increased expenses as

a result of damage to our facilities, our business, operating results and financial condition could be materially adversely affected.

If we fail to respond

to commercial industry cycles in terms of our cost structure, manufacturing capacity, and/or personnel needs, our business could be seriously

The timing, length, and

severity of the up-and-down cycles in the commercial and defense industries are difficult to predict.

This cyclical nature of the industries

in which we operate affects our ability to accurately predict future revenue, and in some cases, future expense levels.

During down cycles

in our industry, the financial results of our customers may be negatively impacted, which could result not only in a decrease in orders

but also a weakening of their financial condition that could impair our ability to recognize revenue or to collect on outstanding receivables.

When cyclical fluctuations result in lower than expected revenue levels, operating results may be adversely affected and cost reduction

measures may be necessary in order for us to remain competitive and financially sound.

We must be in a position to adjust our cost and

expense structure to reflect prevailing market conditions and to continue to motivate and retain our key employees.

If we fail to respond

to fluctuating market conditions our business could be seriously harmed.

In addition, during periods of rapid growth, we must be able

to increase engineering and manufacturing capacity and personnel to meet customer demand.

We can provide no assurance that these objectives

can be met in a timely manner in response to industry cycles.

Each of these factors could adversely impact our operating results and financial

Our ability to stay

competitive within our markets may be dependent upon increasing manufacturing capacity to support anticipated growth and achieving cost

reductions and projected economies of scale from increasing manufacturing quantities of our products.

Failing to adequately increase production

capacity and achieve such reductions in manufacturing costs and projected economies of scale could materially adversely affect our business.

Our future growth depends

on increasing manufacturing capacity of our drone motors, and our failure to adequately increase such capacity could have a material adverse

impact on our business and financial results.

We do not know whether or when we will be able to develop efficient, low-cost manufacturing

capabilities and processes that will enable us to manufacture (or contract for the manufacture of) our drone motors in commercial quantities

while meeting the volume, speed, quality, price, engineering, design and production standards required to successfully market our products.

Our failure to develop such manufacturing processes and capabilities in locations that can efficiently service our clients and markets

could have a material adverse effect on our business, financial condition, results of operations and prospects.

Our ability to remain

competitive is, in part, dependent upon achieving increased savings from volume purchases of raw materials and component parts, achieving

acceptable manufacturing yield and capitalizing on machinery efficiencies.

We expect our suppliers to experience a sharp increase in demand

for their products.

We face significant

risks in the management of our inventory, and failure to effectively manage our inventory levels may result in supply imbalances that

could harm our business.

We maintain a variety

of parts and components in inventory which are subject to obsolescence and expiration.

Due to the long-lead time for obtaining certain

product components, including in response to procurement issues caused by shortages in the supply chain for such components, and the manufacturing

cycles, we need to make forecasts of demand and commit significant resources towards manufacturing our products.

As such, we are subject

to significant risks in managing the inventory needs of our business during the year, including estimating the appropriate demand for

our products.

Should orders and market conditions differ significantly from our estimates, our future results of operations could be materially

adversely affected.

In the future, we may be required to record write-downs of finished products and materials on-hand and/or additional

charges for excess purchase commitments as a result of future changes in our sales forecasts or customer orders.

We may hold material

amounts of inventory at third parties which are subject to separate management processes.

Additionally, our failure to manage inventory

effectively, including in response to the effects of shortages of our components, could expose us to losses.

Additionally, shortages

of components may result in increased inventory of unfinished products and significant quantities of other unused components remaining

in inventory, which could expose us to increased risks of obsolescence and losses which may not be covered by insurance.

However, our B2B business we instituted in the second half of 2024 employs a made in the United States model.

the United States has imposed steep and additional tariffs on the importation from China and other countries of goods including the drone

components we use in our B2C business.

As a result, we have begun sourcing components from other countries including the United States

This creates several issues including increased costs and potential inventory shipment delays.

This increase in tariffs imposed

could materially and adversely affect our business and results of operations.

These tariffs apply to the vast majority of our consumer

inventory that we previously sourced for our B2C business.

Except for our Unusual Machines branded products we have increased prices and

may in the future be forced to implement additional price increases to adjust to the higher costs of inventory.

This in turn creates the

risk of reduced demand for such products and lower revenue.

While to date, we appear to have not seen resistance based on increases in

sales, that may not continue and future increases which we attempt to pass on to our customers may not work.

Future inventory increases

may require us to increase the prices of our branded products, which may result in decreased sales, particularly since we rely on consumer

spending in our B2C channel and our B2C products are typically considered non-essential, and purchases are therefore highly price sensitive.

The current status of tariffs remains uncertain and is subject ultimately to a United States Supreme Court ruling on the current administrations

authority to impose tariffs.

In addition, changes in the state of China-United

States relations, including any tensions relating to potential military conflict between China and Taiwan, are difficult to predict and

could adversely affect the operations or financial condition of the Company given that we are shifting inventory for our B2C business

to the United States and Taiwan.

In addition to Chinese tariffs, one of our first B2B customers was a European company.

While the United

States and China have an agreement which sets tariffs on Chinese imports at 10%, that agreement is set to expire on November 10, 2025.

Compared sentence by sentence after normalising whitespace, quotation marks, case and digits, so re-formatting and restated figures do not read as changed language. Wording changes appear as one removal and one addition. The current filing and the prior one are authoritative.

What changed 10-Q

Item 1A. Risk Factors