Unusual Machines, Inc. 10-Q

Item 1A. Risk Factors In addition to the information set forth in this Form 10-Q, you should carefully consider the risk factors disclosed under the heading “Risk Factors” in Part I, Item 1A of our Annual Report on Form 10-K for the year ended December 31, 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 the U.S. Army’s 101st Airborne Division for 3,500 NDAA-compliant motors produced at the company’s new U.S.-based manufacturing facility. The motors will support the Division’s deployment of the new Attritable Battlefield Enabler (A.B.E.) V1.01 drones. In 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. The Army has 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 us. 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 affected 40 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. Our drone 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 tariffs applied to goods between the United States and China, may materially and adversely affect our business. Our B2C business has historically been dependent on Chinese imports for our products and operations. For example, a majority of our products were manufactured, directly and indirectly, using Chinese vendors. However, our B2B business we instituted in the second half of 2024 employs a made in the United States model. Recently, 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 and Taiwan. 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.